January 2006
MANILA, PHILIPPINES - An ADB loan of US$15.5 million will support the development of the Kyrgyz Republic's banking sector and capital markets.
The project will support a second round of financial sector reforms, advancing the agenda of the 1999 Financial Intermediation and Resource Mobilization Program and building upon the achievements made under the 2001 Corporate Governance and Enterprise Reform Program II.
The project aims to enable the country's financial sector to effectively mobilize savings and provide alternative sources of funding for productive investment and job creation.
In particular, the program will help enforce banking legislation and regulation, close banking sector regulatory gaps, and promote competition. It will also strengthen the supervision of the securities market to improve market transparency, protect investors, and remove policy distortions.
"Despite significant reforms in the country's financial sector, particularly in the move toward market-orientation, much remains to be done to foster the sector's sustainable development," says Jurgen Conrad, an ADB Economist.
Central and commercial banking laws have yet to be adequately enforced, key aspects of both banking and nonbanking supervision have yet to be put in place, and policy distortions continue to undermine the development of the financial sector.
While the Kyrgyz economy has overcome the negative effects of the Russian crisis of 1998-1999, the country's debt burden remains high. Given the underdevelopment of the domestic securities market and lack of government access to international capital markets, the budget deficit will have to be financed mainly through official development assistance.
Banking dominates the country's financial sector. Securities markets, on the other hand, play only a negligible role in corporate finance, while the insurance business remains nascent.
A $600,000 technical assistance (TA) grant from ADB's Japan Special Fund, financed by the Government of Japan, accompanies the loan to help the Government implement the program's reforms.
ADB's loan comes from its concessional Asian Development Fund. It carries a 24-year term, including a grace period of 8 years, with interest charged at 1% per annum during the grace period, and 1.5% per annum thereafter.
The Ministry of Finance is the executing agency for the project, which will be carried out over three years.