Second Regional Economic Development Project

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The Kyrgyz Republic remains one of the poorest countries in Central Asia and COVID-19 has created a further set of challenges. Due to the COVID-19 pandemic and policies to limit its spread, the Kyrgyz economy remains in a deep recession following a contraction of8.6 percent in 2020. The Gross National Income per capita was US$1,160 in 2020, which is slightly above the threshold for Lower Middle‐Income Country status. The country has a population of about 6.6 million with over 60 percent living in rural areas. The COVID-19 crisis threatens to undo the gains in poverty reduction achieved over the past few years, and a high proportion of the population risks falling back into poverty. The COVID-19 crisis has adversely impacted labor income and remittances, and this, combined with inflation, leaves large segments of the population exposed to the economic consequences of the pandemic. The poverty rate was 20 percent in 2019, and a further 65 percent of the population was considered vulnerable to poverty. The poverty rate in the Kyrgyz Republic increased by 11 percentage points from 20.1 percent in 2019 to 31 percent in 2020, pushing an additional 700,000 people into poverty – a very large absolute increase for a population of 6.6 million. The country is going through a third wave of the COVID-19 pandemic. With a slow rate of mass vaccination (14.5 percent of the total population since the start of vaccination) and a failure to follow stringently social distancing and sanitary requirements by the majority of the population, the daily cases of newly infected have started to increase since March 2021 (around 45 cases, measured as a 7-day moving average) and peaked to 353 cases in May 2021. The total number of infected people since the outbreak of the pandemic has reached 105,111 and death tolled 1,815 people as of May 31, 2021. Global economic factors and especially the economic slowdown in Kazakhstan and Russia will exacerbate the economic shock from COVID-19 to the Kyrgyz economy. The pandemic has already affected food prices, the availability of medicines and medical supplies, employment and the remittance flow. This latter point is particularly important given the economy’s dependence on remittances (27 percent of the Gross Domestic Product (GDP)).The regional and spatial analysis report, prepared by the Bank in 2019, has identified southern regions as the most lagging in the country. The country’s large urban‐rural and intraregional disparities in the incidence of poverty highlight the economic dualism in the country and remote and mountainous regions bearing the highest-burden of poverty. To help the Government address the issues of regional disparities, in March 2020, the Bank approved US$60 million of International Development Association (IDA) financing for the Regional Economic Development Project (RED-1) designed to support one of the country’s key lagging regions – Osh – and to enhance its economic development through targeted interventions in the selected economic sectors. The selection of Osh as the pilot region for the first regional economic development operation was based on a regional and spatial analysis, which showed Osh as one of the key lagging regions despite its abundant assets and potential. This same analysis also identified the Batken region as the second lagging region characterized by high poverty and vulnerability. Batken’s Gross Regional Product per capita in 2019 was only 40 percent of the national average and only neighboring Osh oblast was lower. The unemployment rate at the regional level remains the highest in the country at 10 percent and is expected to grow in 2021 due to the COVID-19 pandemic, as more migrants are expected to return to their homes. Infrastructure and the provision of basic municipal services also put Batken among the poorest regions. As of 2019, out of the country’s seven regions, Batken had the country’s highest poverty rate amounting to 32.6 percent, while the national average was 20.1 percent. Batken’s already high poverty level would be even higher without remittances. As a 2019 study showed, remittances have provided an essential safety net in Batken, as the regional poverty rate would be around 50 percent without remittances. This confirms the population's extreme vulnerability to poverty and heavy dependence on remittances. More sustainable poverty reduction will require local economic growth which results in sustainable and socially inclusive development. The poor need greater access to services, water and sanitation, employment, credit, and markets for produce. Batken is facing similar challenges as the Osh region, including low skilled labor, low level of enterprise development, low market accessibility, and low level of development of relevant economic institutions, infrastructure, and services. As of 2019, nearly 80 percent of households lack access to safe drinking water and almost the entire population lacked access to safe sewage systems. Other public services, such as schools and kindergartens also remained a challenge. Analysis of accessibility shows that the main cities - Isfana, Batken, and Kadamjay - are isolated from, rather than integrated with each other, thus limiting the positive role they can play in terms of linking to rural areas, linking to each other, and linking to the rest of the country.The growing population in the region offers a great opportunity for development, but it also signifies increased demand for employment, infrastructure, and basic urban services. The demand for infrastructure and services is further challenged by the aging infrastructure inherited from the old Sovie t system, low capacity of the current service delivery system to keep up with the growth, energy inefficiencies, and high costs in relation to housing, public buildings, and municipal services, low level of tariffs and cost recovery, heavy reliance on public funds and limited capacity to leverage public investments to mobilize private capital. A lack of reliable municipal services and infrastructure is one of the main obstacles to nurturing private sector development.Batken is part of the Ferghana Valley whose agri-food products have considerable market potential. Fresh fruits and vegetables are the most common Kyrgyz agricultural exports, comprising around 14 and 41 percent respectively of the US$260 million agri-food exports of the country. There has been increased demand for high-value agricultural products and food, driven by rising population incomes in Kazakhstan, China, and Russia. However, most Kyrgyz agri-food enterprises are small-scale producers (many informal), including those that export. They are generally not competitive, struggle to access markets and technology, and face difficulties in attracting investments and creating jobs. Hence, three key strategies to improve the situation are expanding markets, linking farmers with markets, and creating an enabling environment.The proposed Second Regional Economic Development (RED-2) project is aligned with the World Bank Group’s twin goals of eliminating extreme poverty and boosting shared prosperity as well as with the current Country Partnership Framework (CPF) for 2019-2022. The project will improve infrastructure and livability, diversification of economic opportunities, increase border trade and exports, and enhance regional and local potential, thereby contributing towards reducing poverty and shared prosperity. The project is aligned with the CPF under Focus Area 3: enhance economic opportunities and resilience. The objectives of Focus Area 3 are: (i) develop human capital (objective 7); (ii) support regional development (objective 8); and (iii) enhance resilience to climate change and disaster risks (objective 9). This is expected to be achieved under the Project by supporting the government (i) to enhance regional and spatial analysis to inform their policies and interventions, and (ii) implement regional development init