1. Background and relevance of the study
This chapter outlines the background to the OECD’s study and the household survey. It describes how the National Bank of the Kyrgyz Republic expressed interest in working with the OECD to source new evidence on the extent to which households access and use (green) financial products and services. It describes how the Kyrgyz National Sustainable Development Strategy for 2018-2040 and the Green Economy Program contain targets on sustainable finance. Finally, the chapter presents the socio-economic context of the Kyrgyz Republic, and outlines how the banking sector could help the country achieve its sustainable development goals.
In 2018, the Kyrgyz Republic adopted the National Sustainable Development Strategy for 2018-2040 and the Development Program of Kyrgyzstan for 2018-2022. The Strategy and the Program commit to implementing and facilitating actions needed for economic development that is green and inclusive. The Ministry of Economy worked with the United Nations Development Programme (UNDP) and other actors under the Partnership for Action on Green Economy (PAGE)1 to promote greening of the Kyrgyz economy. Together, they developed the Green Economy Program for 2019-2023, which outlines specific actions towards the goal of a green and inclusive transition.
Sustainable finance features prominently in those strategies and programme as a core means to implement green policy priorities in sectors such as energy, farming, industry and transport. Green finance or sustainable finance (used interchangeably in this report) refer to monetary flows into climate adaptation or climate mitigation activities. The steps in promoting sustainable finance in the Green Economy Program include the following:
Identify the potential demand and needs of the banking sector to implement the principles of Green Finance.
Prepare the banking and microfinance sectors for the International Finance Corporation Preparedness Standard.
Implement systems for assessing, monitoring, controlling and supporting green economy activities of financial institutions.
Train employees and customers of Kyrgyz commercial banks and microfinance institutions.
Implement sustainable financing in the banking and microfinance sector.
The National Bank of the Kyrgyz Republic expressed interest to work with the OECD on a detailed diagnostic study that would help implement the country’s Green Economy Program. This report presents findings from a household survey that explores aspects related to the demand side of the financial system. The research sought to identify needs and demand from potential and existing clients of Kyrgyz financial institutions for financial instruments and solutions to promote activities contributing to sustainable development. The study results will be used to implement the National Sustainable Development Strategy of the Kyrgyz Republic 2018-2040 and help inform the main directions of the banking system and medium-term strategy documents for 2022-2025.
The Kyrgyz Republic (Kyrgyzstan) is a lower middle-income country with a small, open economy reliant on trade partners, notably the People’s Republic of China, the Russian Federation (hereafter “Russia”) and Kazakhstan (World Bank Group, 2020[1]; EIU Country Analysis, 2020[2]). Exports, especially gold, and household spending were the main drivers of economic growth in 2018 and 2019. This resulted in an increase of real gross domestic product (GDP) by 4.5% year on year in 2019 (EIU Country Analysis, 2019[3]; EIU Country Analysis, 2020[2]). The gold mine Kumtor contributes around 10% of GDP (World Bank Group, 2020[1]). Remittances, i.e. direct financial or in-kind transfers to families or communities from people who have migrated abroad to work (OECD, 2019[4]), account for more than 30% of GDP (EIU Country Analysis, 2020[2]). Most Kyrgyz migrant workers are employed in Russia (EIU Country Analysis, 2020[2]).
Kyrgyzstan remains vulnerable to cyclical macroeconomic factors. These include changes in gold prices and a downturn in its major trade partners due to its dependence on gold exports and reliance on remittances (EIU Country Analysis, 2020[2]). The Kyrgyz banking sector would be indirectly impacted if macroeconomic changes or currency risks negatively impact the financial performance of banking sector clients. A highly volatile national currency exchange rate, for example, could worsen the financial condition of borrowers of service loans in foreign currency. Movements in the Russian rouble also impact the Kyrgyz currency, Kyrgyz som (KGS), as Russia is a leading trade partner and a major source of remittance inflows (EIU Country Analysis, 2020[2]).
The som was expected to be relatively stable in 2020/21 (EIU Country Analysis, 2020[2]) and the banking sector expected to withstand macroeconomic shocks (National Bank of the Kyrgyz Republic, 2018[5]). The consequences of the COVID-19 pandemic, however, have led to a decrease of the som against the US dollar (USD) in March 2020. They have also opened a balance of payments gap estimated at USD 400 million (around KGS 30 billion2); international financial institutions have released funds to support the Kyrgyz state budget (Reuters, 2020[6]).
GDP per head (in purchasing-power-parity terms) stood at USD 4 000 in 2018 (compared with USD 27 458 for Kazakhstan) (EIU Country Analysis, 2020[2]). According to UNICEF (2016[7]), around 40% of children were living in poverty in the Kyrgyz Republic in 2015. This means they have poor access to quality social services and protection, miss out on education and health care, and face malnutrition. Nearly all of the country is vulnerable to frequent earthquakes, avalanches, floods, mudflows and landslides (UNICEF, 2016[7]). The impacts of climate change will likely exacerbate the situation without preventative measures and investments (UNICEF, 2016[7]). The Kyrgyz government is increasingly prioritising social support measures to reduce poverty as part of its National Sustainable Development Strategy for 2018-2040 (UNICEF, 2016[7]; Government of the Kyrgyz Republic, 2018[8]).
Electricity tariffs are one of the lowest in the world. This leads to underinvestment in existing and new assets, unreliable supply and one of the highest energy intensities in the region (Holzhacker and Skakova, 2019[9]). All of the Kyrgyz population has access to electricity (World Bank, 2020[10]). However, quality and reliability of the electricity supply are much lower compared to other countries in the region and remain issues that need to be tackled (World Bank, 2017[11]). This is especially the case during the winter when the risk of network failure is highest due to increased demand (World Bank, 2017[11]).
Greater quality and reliability of electricity would ensure that households and businesses have undisrupted access to electricity and heat. Reliable heat and electricity supply increases the comfort and health of people and guarantees that businesses can operate smoothly. The Kyrgyz government can also do more to harness sources of hydropower, such as its rivers, to allow for electricity exports since the country uses less than 1% of its renewable energy potential (Holzhacker and Skakova, 2019[9]).
Cleaner sources of electricity and heat would also prevent people from dying of, or living with, the consequences of respiratory illnesses in those households not connected to the grid or district heating (World Bank, 2020[12]). Indeed, 90% of these households use solid fuels such as coal, dung or wood. This increases their exposure to ambient and indoor air pollution, which in turn substantially increases their risk of lung diseases (Gordon et al., 2014[13]; Cragg, Williams and Chavannes, 2016[14]; World Bank, 2020[12]). Substantive reforms of the electricity sector are needed to unlock the large financial resources required to invest in new low-carbon energy sources, power and electricity grids, as well as energy efficiency. The returns would come in the form of increased productivity of businesses and people, and improved health and well-being.
State capacity remains weak, however, to carry out structural reforms and corruption is pervasive (EIU Country Analysis, 2020[2]). The large shadow economy, estimated to make up almost 25% of GDP (National Statistical Committee of the Kyrgyz Republic, 2020[15]), and low administrative capacities make it difficult to collect taxes (EIU Country Analysis, 2019[3]). The government needs an adequate fiscal base to carry out economic reforms; to provide public goods to increase the standard of living and well-being; and to employ well-trained officials. One priority of the government will therefore be to improve tax collectability. The banking sector can play a role here by bringing informal flows of money into official channels. This sector can also help mobilise additional finance for green investments. To that end, it could develop green financial products and services, invest in capabilities and infrastructure to deliver them, scale up green finance practices, aggregate demand for green finance and measure progress.
References
[14] Cragg, L., S. Williams and N. Chavannes (2016), “FRESH AIR: An implementation research project funded through Horizon 2020 exploring the prevention, diagnosis and treatment of chronic respiratory diseases in low-resource settings”, NPJ Primary Care Respiratory Medicine, Vol. 26/16035, https://doi.org/10.1038/npjpcrm.2016.35.
[2] EIU Country Analysis (2020), Country Report: Kyrgyz Republic, The Economist Intelligence Unit, https://store.eiu.com/product/country-report/kyrgyz-republic.
[3] EIU Country Analysis (2019), Country Report Kyrgyzstan 3rd Quarter, 11 August, The Economist Intelligence Unit, http://www.alacrastore.com/eiu-economic-data-analysis/Country-Report-Kyrgyzstan-3rd-Quarter-2020-CR_CRKG_MAIN_20200811T000000_0000%3E.
[13] Gordon, S. et al. (2014), “Respiratory risks from household air pollution in low and middle income countries”, The Lancet Respiratory Medicine, Vol. 2/10, pp. 823-860, https://doi.org/10.1016/S2213-2600(14)70168-7.
[8] Government of the Kyrgyz Republic (2018), National Development Strategy of the Kyrgyz Republic for 2018 to 2040, Government of the Kyrgyz Republic, Bishkek, http://donors.kg/images/National_Development_Strategy_of_KR_2018-2040_final_ENG.docx.
[9] Holzhacker, H. and D. Skakova (2019), Kyrgyz Republic Diagnostic, European Bank for Reconstruction and Development, London, https://www.ebrd.com/documents/policy/country-diagnostic-paper-kyrgyz-republic.pdf?blobnocache=true.
[5] National Bank of the Kyrgyz Republic (2018), The Financial Sector Stability Report of the Kyrgyz Republic, December 2018, National Bank of the Kyrgyz Republic, Bishkek, https://www.nbkr.kg/DOC/11022019/000000000051647.pdf.
[15] National Statistical Committee of the Kyrgyz Republic (2020), “Unobserved economy in 2018”, 24 January, News, National Statistical Committee of the Kyrgyz Republic, Bishkek, http://www.stat.kg/ru/news/nenablyudaemaya-ekonomika-v-2018-godu/.
[4] OECD (2019), Financial Literacy Needs of Migrants and their Families in the Commonwealth of Independent States, Paris, http://www.oecd.org/daf/fin/financial-education/financial-education.htm.
[6] Reuters (2020), “IMF approves $120.9 million disbursement for Kyrgyzstan to fight coronavirus”, 27 March, Reuters, https://www.reuters.com/article/us-health-coronavirus-imf-kyrgyzstan/imf-approves-1209-million-disbursement-for-kyrgyzstan-to-fight-coronavirus-idUSKBN21E0DN.
[7] UNICEF (2016), Children in Kyrgyzstan, webpage, https://www.unicef.org/kyrgyzstan/children-kyrgyzstan (accessed on 24 October 2020).
[10] World Bank (2020), Access to electricity (% of population) - Kyrgyz Republic, (database), https://data.worldbank.org/indicator/EG.ELC.ACCS.ZS?locations=KG (accessed on 25 November 2020).
[12] World Bank (2020), Fueling Kyrgyzstan’s Transition to Clean Household Heating Solutions, World Bank, Washington, DC, http://documents1.worldbank.org/curated/en/164771590727056929/pdf/Fueling-Kyrgyzstan-s-Transition-to-Clean-Household-Heating-Solutions.pdf.
[11] World Bank (2017), “Analysis of the Kyrgyz Republic’s Energy Sector”, Working Paper, No. 122080, World Bank, Washington, DC, http://documents.worldbank.org/curated/en/370411513356783137/Analysis-of-the-Kyrgyz-Republics-Energy-Sector.
[1] World Bank Group (2020), “The World Bank in the Kyrgyz Republic”, webpage, https://www.worldbank.org/en/country/kyrgyzrepublic/overview (accessed on 17 April 2020).
Notes
← 1. PAGE brings together five UN agencies – UN Environment, International Labour Organization, UN Development Programme, UN Industrial Development Organization and UN Institute for Training and Research – to co-ordinate UN action on green economy and to assist countries in achieving and monitoring the emerging Sustainable Development Goals, especially SDG 8: "Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all.”
← 2. Conversion rate in this report at USD 1 ~ KGS 83, KGS 1 ~ USD 0.012.