Program note
Kyrgyz Republic
Last Updated: July 10, 2009
Current IMF-Supported Program
18-month US$100 million arrangement under the Exogenous Shocks Facility (ESF), approved by the IMF’s Executive Board on December 10, 2008. The Board completed the first review of the program on May 22, 2009.
Background
The Kyrgyz economy enjoyed a period of robust economic growth between 2006 and 2008, averaging more than 6 percent. During this period, poverty rates fell, with much of the decline coming from a drop in extreme poverty. Over the past year and a half, however, a number of external shocks have worsened economic conditions. The sharp rise in international food and energy prices contributed to a surge in inflation, which reached a high of over 30 percent in mid-2008. This was followed by the adverse effects of the global crisis on Russia and Kazakhstan—the Kyrgyz Republic's main trading partners and source of remittances. With both Russia and Kazakhstan in severe recession, growth in the Kyrgyz Republic is expected to come to a near halt in 2009 before recovering modestly in 2010. As a result of the crisis, recent gains in poverty reduction are at risk, and vulnerability in the population is on the rise in part due to a decline in remittances. The country also faces the challenge of absorbing returning migrant workers.
The government has been actively engaged in overcoming the effects of these shocks. Fiscal policy is providing a significant stimulus in 2009, equivalent to 5½ percent of GDP, made possible by donor support, including from Russia. On the monetary front, the central bank continues to aim its policies at maintaining financial sector stability and ensuring that inflation remains on a downward path. With the decline in global commodity prices and the slowdown in domestic demand, inflation is expected to ease to around 5 percent by end-2009.
The banking sector has thus far weathered the crisis, but with the weakening economic activity, non-performing loans have been rising. The authorities have taken the necessary measures to enhance preparedness in the face of financial sector difficulties, including by strengthening commercial bank oversight and formulating contingency plans to safeguard the stability of the system.
Role of the IMF
During these challenging times, the Fund has maintained its support to the Kyrgyz Republic through financial and technical assistance, as well as policy advice. In May 2008, in connection with the final review of a three-year (2005-08) arrangement supported by the Poverty Reduction and Growth Facility, the IMF augmented resources disbursed to the Kyrgyz Republic by US$14.4 million to help the country respond to the surge in food and energy prices. Subsequently, in December 2008, the IMF’s Board approved US$100 million in financial support under the Exogenous Shocks Facility to reinforce the government’s program to manage the impact of external shocks. Key objectives of this program are to boost growth, reduce inflation, protect the poor, and maintain an adequate level of reserves.
Given the large capacity-building challenges that the Kyrgyz Republic faces, the Fund has also been active in providing technical assistance in a number of areas, including tax administration, national accounts, government finance statistics, debt management, and development of government securities market.
The Challenges Ahead
In the period ahead, dealing with the aftershocks of the global economic and financial crisis will be challenging. There is a risk of negative financial spillovers to the Kyrgyz Republic, particularly from Kazakhstan’s stressed banking sector. And, if recessions in Russia and Kazakhstan are deeper or more protracted than currently expected, the decline in remittance inflows and exports may be sharper than expected, putting further downward pressure on economic activity and the external balance. A key concern in such a case would be to ensure sufficient support to the poor, including through the help of further donor assistance. This would also put a premium on ensuring medium-term fiscal sustainability, including by adhering to a prudent debt management strategy.
