Press Release No. 00/8

Press Release: IMF Approves Second Annual PRGF Loan for Kyrgyz Republic

February 9, 2000

The International Monetary Fund (IMF) today approved the second-year program for the Kyrgyz Republic under the Poverty Reduction and Growth Facility (PRGF)¹ in an amount equivalent to SDR 21.5 million (about US$29.0 million) to support the government's economic program from January 1 - December 31, 2000. The country's three-year PRGF, originally under ESAF, was first approved on June 26, 1998 (see Press Release 98/27), in an amount equivalent to SDR 73.38 million (about US$99.1 million), of which SDR 30.38 million (about US$41.0 million) has been disbursed. Today's decision triggers release of an additional SDR 4.7 million (about US$6.3 million).

"In considering the program presented by the Kyrgyz Republic for approval under the PRGF, Executive Directors welcomed the authorities' renewed commitment to macroeconomic stabilization and to the acceleration of their structural reform agenda. They stressed that strict adherence to these policies should create the appropriate framework for the resumption of private sector led growth.

"The recent approval by parliament of an ambitious budget for 2000 represents a significant and necessary step toward achieving fiscal sustainability over the medium term. Significant efforts on the revenue side and steps to prevent the reemergence of budgetary arrears would be required to realize the authorities' fiscal objectives. In this regard it was important to improve tax and customs administration, contain expenditure and strengthen control mechanisms. The authorities' intention to improve targeting and efficiency in the provision of essential social services was a welcome step. Directors looked forward to the completion of the review of social spending undertaken with the assistance of the World Bank and to the preparation of a full PRSP.

"The urgency of strictly limiting the contracting of new debt and of prioritizing new and existing projects, taking due account of the rate of return on these projects and the country's implementation capacity was emphasized. The authorities were also urged to further improve their external debt management procedures.

"The authorities' intention to develop a comprehensive approach and strategy to resolve the crisis in the banking system is a critical step to restore confidence and stabilize the economy. There is a need to strengthen bank supervision and adopt relevant legislation to ensure that the NBKR had sufficient enforcement powers over banking activities.

"Directors deeply regretted the authorities' failure to inform the Fund about the pledging of a significant part of the Kyrgyz Republic's international reserves in 1996 and 1997. They were encouraged by the current full cooperation of the authorities and urged them to adhere strictly to the regular auditing of the reserves and to ensure full and timely disclosure in the future of any financial information relevant to the program," Aninat said.

ANNEX

The Kyrgyz Republic achieved strong real growth in 1997 and in the first half of 1998, however in the second half of 1998 and in 1999 growth performance deteriorated, reflecting mainly the impact of the Russian financial crisis in August 1998. Real GDP growth in 1999 was about 3.5%, as buoyant agricultural production partly offset ongoing difficulties in the industrial sector. Consumer price inflation rose sharply in 1999, reaching about 40% by year-end.

The medium-term program aims to raise real GDP growth to 4-5% per year and to stabilize inflation at around 5% on an end-year basis by 2003. These projections are consistent with continued fiscal consolidation to reduce the cash fiscal deficit to about 3% of GDP in 2003 from about 11% of GDP in 1999, together with a gradual accumulation of international reserves.

To support these objectives, fiscal policy under the program aims to for a primary surplus of about 2% of GDP, which is ambitious but necessary to re-establish macroeconomic stability. The overall level of the fiscal deficit of the state government is targeted at about 7 ½ % of GDP in 2000, compared with 11% of GDP in 1999. On the revenue side, efforts in 2000 will focus on raising receipts by one percentage point to about 14% of GDP. On the expenditure side there are several measures to prevent the emergence of new arrears. Public sector wages will be contained and civil service reform will be implemented.

The structural reforms under the program involve reducing state intervention in decision-making to enhance economic efficiency; accelerating the restructuring and privatization of state enterprises, particularly the state monopolies in the energy and gas sectors; and rapidly creating the legal and regulatory framework needed to implement the electorate's decision to allow private land ownership. The structural agenda also involves civil service and pension reform, restructuring of the banking system, external debt management, improved statistics, and modernization of the legal and regulatory framework. A number of initiatives aim to improve encourage private sector development and the removal of opportunities for corruption.

The overall poverty reduction objective, for which the authorities are developing a Poverty Reduction Strategy Paper in discussion with the IMF and World Bank, will be to halve the current poverty level in the Kyrgyz Republic, in line with the goals set by the international community. In the health field, policy objectives will center on cost control, improving efficiency, an reinforcing primary health services. Education reform will include the introduction of block funding and rationalization of funding over the medium term.

Kyrgyz Republic joined the IMF on May 8, 1992; its quota² is SDR 88.80 million (about US$119.9 million). Kyrgyz Republic's outstanding use of IMF credit totals SDR 138.7 million (about US$187.3 million).