For more information, see Kyrgyz Republic and the IMF

The following item is a Letter of Intent of the government of Kyrgyz Republic, which describes the policies that Kyrgyz Republic intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Kyrgyz Republic, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.

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Bishkek, Kyrgyz Republic
January 22, 2000

Mr. Michel Camdessus
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Camdessus:

1.  On behalf of the government of the Kyrgyz Republic, we are pleased to transmit herewith our request for the second annual arrangement under the successor three-year arrangement under the Poverty Reduction and Growth Facility (PRGF) In this context, in close collaboration with the staffs of the International Monetary Fund and the World Bank, we have updated the Policy Framework Paper (PFP), which sets forth the government's economic and financial objectives for the period 2000-2002, and the macroeconomic and structural adjustment policies designed to achieve them. The PFP is being forwarded to you today under separate cover.

2.  The attached Memorandum on Economic and Financial Policies (MEFP), which is based on the above-mentioned PFP, describes in detail the objectives, policies, and measures for the second-year program which covers the period January 1-December 31, 2000. In support of this program, the Kyrgyz Republic requests approval of the second annual arrangement under the successor three-year arrangement under the PRGF, in an amount equivalent to SDR 21.5 million (24.19 percent of quota).

3.  We believe that the policies and measures set forth in the attached memorandum are adequate to achieve the objectives of the second-year program, and we stand ready to take any additional measures that may become necessary for this purpose in consultation with the Fund staff. The government will provide the Fund with such information as the Fund requests in connection with the Kyrgyz Republic's policies and developments under the program.

Yours sincerely

 

/s/
Amangeldi Muraliev
Prime Minister
Kyrgyz Republic
  /s/
Ulan Sarbanov
Chairman
National Bank of the Kyrgyz Republic

Attachment

Memorandum of Economic and Financial Policies of the Government
and the National Bank of the Kyrgyz Republic for 2000

I.  Introduction

1.  The external shock caused by the onset of the Russian crisis in August 1998 and subsequent developments in neighboring countries have had severe repercussions on the Kyrgyz Republic's economy and slowed down the macroeconomic stabilization and structural adjustment that we had successfully begun under the first three-year ESAF arrangement. Responding to the adverse external environment, we adopted a number of difficult measures in late 1998 to regain the momentum of macroeconomic stabilization and structural reform in order to launch an economic recovery driven by the private sector. Further steps were taken in 1999 including the adoption of a revised budget, adherence to a generally tight monetary policy, and additional structural policy measures.

2.  Despite these steps, macroeconomic and financial developments in 1998 and in 1999 were less favorable than envisaged under the program. Real GDP in 1998 grew by about 2 percent, compared with 10 percent in 1997, and about the same rate of growth is expected for 1999. Notwithstanding a sharp decline in monetary growth rates, end-of-period inflation reached 18 percent in 1998, compared to a target of 12 percent; during the first 10 months of 1999 cumulative inflation reached 36 percent. Inflation was partly fueled by a large depreciation of the som, which fell by over 50 percent in dollar terms between end-August 1998 and end-June 1999, and by significant increases in prices of grain and flour. Due to increasing trade difficulties and a slowdown of economic activity in trading partner countries, the external current account deficit more than doubled to almost 20 percent in 1998, while import coverage of reserves dropped from 3 months at end-1997 to 2.4 months at end-1998. Fiscal developments were also less favorable due to unforeseen expenditures in 1998, lower-than-expected revenues in the first half of 1999, and the drying up of the domestic treasury bill market, which, coupled with difficulties in expenditure control, led to the accumulation of large expenditure arrears. Most of these arrears were eliminated in July/August, but unforeseen expenditures related to an incursion of foreign terrorists in the south of the country and continued lower-than-projected revenues made attainment of our fiscal targets impossible. On the structural side, progress was made in a number of areas, including the launching of a comprehensive pension reform, introduction of private ownership of land, and issuance of a call for tenders for the privatization of Kyrgyz Telecom. Nevertheless, we experienced delays in our efforts to improve corporate governance, apply the enhanced legal and regulatory framework, and bring other large state monopolies to the point of sale. Difficulties in the banking system have forced us to close or restructure several banks.

II.  Program Objectives and Macroeconomic Outlook

3.  The principal goal of the program will be to continue our efforts to lay the basis for sustainable economic growth and establish a fully-fledged market economy. To achieve these goals, the government and the National Bank of the Kyrgyz Republic (NBKR) will pursue a three-pronged strategy: (i) a significant fiscal adjustment, with a view to reduce gradually our reliance on external financing and place our debt on a sustainable path; (ii) appropriately tight monetary policy in order to reduce inflation and stabilize the exchange rate; and (iii) a set of microeconomic reform policies that aim to eliminate structural imbalances, boost public confidence in the banking system, and create an environment conducive to private sector-led growth.

4.  Specifically, the economic program for 2000, to be supported by the second annual arrangement under the successor PRGF arrangement, aims at achieving real GDP growth of about 2½ percent in 2000, reducing annual inflation from about 40 percent in 1999 to 20 percent in 2000, and maintaining reserve cover at close to 3 months of imports. Reserve money is expected to grow by 10 percent in 2000. As exports recover and cautious demand management helps constrain import growth in 2000, the current account deficit is expected to decline to 13 percent of GDP compared to about 15 percent of GDP in 1999.

5.  Based on these targets, the balance of payments is projected to show a gross financing requirement of $346 million for 2000, which is expected to be fully covered through disbursements by the Fund ($27 million), the World Bank ($58 million), the Asian Development Bank ($74 million); official transfers from the European Union and bilateral donors ($55 million); and other sources ($133 million).

Fiscal policy and budget management

6.  The centerpiece of the year 2000 program will be a significant fiscal adjustment. To this end, we aim to achieve a primary surplus (excluding the foreign-financed public investment program, PIP) of about 2 percent of GDP in 2000. To better monitor our fiscal progress and taking into account the need to closely control new debt flows, performance criteria will apply to the overall level of the fiscal deficit of the general government, which is targeted at about 7½ percent of GDP. The target will be adjusted automatically downward/upward for shortfalls/excesses of foreign financing related to the investment program with a cap on the adjustment for excesses equivalent to 0.5 percent of GDP. These performance criteria will replace the previous targets on credit to the government.

7.  Revenue efforts will be key to achieving our fiscal targets. Despite modest output growth, we will aim to achieve an overall tax revenue target of about 14 percent of GDP in 2000, with the implementation of a number of measures that will offset the loss resulting from several improvements in the tax system that were introduced in the second half of 1999. The most important of these measures are: (i) an increase in the retail sales tax rate from 2 percent to 5 percent; (ii) a significant increase in land taxes; and (iii) by June 2000, the inclusion of all customs duties, excises and other duties in the VAT base. Other measures that will be introduced to improve the efficiency of the tax system are specified in the PFP policy matrix. We also will also aim to reduce the share of tax offsets from about 15 percent in 1999 to 10 percent in 2000.

8.  The revenue targets also hinge on well-targeted improvements in the tax and customs administration. We are in the process of introducing a range of measures to strengthen the operations of the State Tax Inspectorate (STI), both at the administrative level and on the legal front. These measures include: (i) creation of a list of regular exporters to facilitate the VAT refund process, in conjunction with the introduction of annual audits by the STI of enterprises that receive refunds; (ii) amendments to the Law on Free Economic Zones (FEZs) extending the authority of the STI and the State Customs Inspectorate (SCI) to FEZs; and (iii) unification of the information base, paper trail and procedures of the STI and the SCI. The SCI will be reformed. As a first step, we have established a steering committee to oversee the reforms and to draw up a plan of action in cooperation with the Fund and other donors. This will be combined with changes in customs procedures (e.g., a reduction in the personal exemption, improvements in verification procedures) and amendments to the customs code to make it more transparent and accessible to both customs agents and importers. A detailed list of the measures and their timing is included in the PFP matrix.

9.  To achieve our fiscal targets and at the same time prevent the emergence of new arrears, we will take a range of measures to strengthen budgetary management. We made good progress in reducing budgetary arrears in 1999, and all of the remaining arrears will be eliminated in 2000. Expenditures will be strictly contained and control mechanisms strengthened to prevent the emergence of new arrears. No increase in the minimum wage, to which most public sector wages are linked, will be granted during 2000. We will determine the timing and the specifics of future wage adjustments and targets for reducing public sector employment in close cooperation with the UNDP and Fund staff. In the meantime, by end-March 2000 we will finalize the revision of the remuneration and incentive system for civil servants and implement the Civil Service Law throughout the government. The budgetary impact of the scheduled changes in tariffs for electricity, gas and heating will be largely offset through energy savings and expenditure cuts elsewhere. To improve expenditure management: (i) the public investment program (PIP) is now fully consolidated into the budget and PIP disbursements will be included in the budget execution reports; (ii) a unit has been established at the MOF that will monitor the PIP and co-sign disbursement documents; (iii) a reporting system from ministries to Goskominvest and to the MOF for project preparation and execution will be developed; (iv) control mechanisms for expenditure commitment will be established in line with Fund recommendations; and (v) treasury cash management will be improved by enforcing penalties for delays in settlement and transactions.

10.  We will take a range of measures to improve fiscal transparency. We will ensure that all dividends and other payments received from the Kumtor gold mine will be transferred to the budget. In January 2000, we will also start implementing the Minimum Standard on Fiscal Transparency, based on the IMF's Code on Fiscal Transparency and, in particular, begin monthly financial plans and set monthly cash limits, with a view to comply fully with the Code by end-2001.

11.  Rapid accumulation of external debt during the last few years has developed into a serious constraint on macroeconomic management. Therefore, we will pursue a careful external borrowing strategy, prioritization of the PIP, and the strengthening of external debt management. We will refrain from any borrowing on nonconcessional terms and avoid taking recourse to the Turkish and Russian commercial credit lines. We will accumulate the domestic counterpart of all external financing in excess of the currently projected $66 million and all privatization receipts beyond the currently projected som 360 million in a special account to help us start reducing our debt. Moreover, in consultation with Fund staff and with financial support from the Swiss authorities and other donors, we will improve our external debt database and establish a debt monitoring system at the Ministry of Finance and the NBKR. By end-June 2000, we will submit to parliament the Law on State Debt, which, inter alia, will establish new authorization procedures. We will ensure that no external payments arrears emerge during the program period.

12.  Continued implementation of the reform of the public pension system, as agreed with the World Bank, will be an important objective during the program period. Parliament recently adopted several changes to the law on pensions, including the removal of the link between base pensions and the minimum wage and the adoption of an actuarially fair k-coefficient. By November 2000 we will adopt a transparent indexation policy for pensions. We will refrain from increasing the budgetary subsidy to the Social Fund beyond som 150 million in 2000, in line with understandings with the World Bank.

Monetary and exchange rate policies

13.  We realize the need to maintain a tight monetary policy in order to achieve our program targets for inflation and to stabilize the exchange rate. Consistent with the program objectives, we are targeting growth rates of broad and reserve money at about 12 percent and 10 percent, respectively, in 2000. In view of our heavy debt service burden, net international reserves are expected to decline by about $5 million in 2000. This is an ambitious target that we intend to revisit at the time of the mid-term review in light of developments in the foreign exchange market. Our monetary and credit policies will be conducted in such a way so as to ensure the observance of (i) the quarterly benchmarks on net international reserves and the net domestic assets of the NBKR, and (ii) the quarterly indicative ceilings on reserve money and the net domestic assets of the banking system, as specified in Table 2 attached to this Memorandum.

14.  We will continue to modernize our set of monetary policy instruments in line with Fund staff recommendations. The NBKR will not extend any credit to the government and will work closely with the Ministry of Finance to strengthen liquidity forecasting and coordinate the issuance of treasury bills; to this end, the Ministry of Finance will provide the NBKR in advance with weekly revenue and expenditure forecasts. Furthermore, to help us manage liquidity in the banking system, National Bank bills will be introduced by end-June 2000. These steps will help us avoid the large fluctuations in monetary expansion that have characterized monetary policy for most of 1999. We will enforce banks' compliance with reserve requirements and strictly apply the penalty rates for noncompliance, raise minimum capital requirements, and introduce further improvements to the payments system as specified in Table 1 of the PFP.

15.  The NBKR will maintain its flexible exchange rate policy. Intervention will be limited to smoothing seasonal pressures while keeping international reserves at an appropriate level. The NBKR will build up reserves beyond program targets in the event of unexpected private capital inflows if there are signs that money demand has strengthened. Nonetheless, the som will be allowed to appreciate in the event of large unexpected long-term capital inflows which are not deemed associated with a stronger demand for money and which could jeopardize our inflation objective. In the event of foreign currency outflows that threaten observance of the program's foreign reserves target, the NBKR will tighten financial conditions and will not resist a depreciation of the som. To ensure the quality of the NBKR's international reserves we will conduct quarterly audits by an internationally reputable firm, the first of which should be completed no later than June 2000.

16.  We will devote our utmost attention to resolving the crisis in the banking system. We will immediately review the high level banking reform committee with representatives from the NBKR, the Ministry of Finance, the Ministry of Justice, and other relevant agencies, which, in close consultation with the Fund and the Asian Development Bank, will develop a comprehensive restructuring strategy by end-March 2000. In this context, a timetable for bank inspections has been established: Inspections of 2 banks will be completed by end-March and of 5 additional ones by end-June. Furthermore, international audits of 8 banks, financed by the AsDB, will be commissioned and completed by mid-2000. In the meantime, measures (Table 1 of the PFP) that we are already implementing include: (i) adoption of a plan to recapitalize Bishkek Bank; (ii) completion of the review of prudential regulations and introduction of appropriate changes; and (iii) establishment of a program of divestiture of Maksat Bank. We already have adopted amendments to the Tax Code that will allow full tax deductibility of loan loss provisioning. The minimum capital requirement for new banks was raised to som 300 million, and capital requirements for existing banks will be raised to som 50 million as of August 1, 2000. While the NBKR has so far shouldered the brunt of the costs of bank rescue operations, the Ministry of Finance is now taking an active part in the process. We have resolved the issue of government bonds that had served as collateral for loans to KyrgyzGasMunaizat and replacement bonds have been issued.

17.  We intend to continue strengthening banking supervision. By end-January 2000, we will (i) implement the reorganization of the NBKR's banking supervision department and complete the review of internal policies and procedures; (ii) finalize the necessary revisions to relevant legislation to ensure that the NBKR has sufficient enforcement powers, including the ability to withdraw the license of insolvent banks and levy meaningful fines; and (iii) adopt a plan for on-site inspections to ensure that each bank is inspected at least once a year.

External policies

18.  Our external policies will aim at maintaining our liberal trading system and eliminating some loopholes. Export duties on wheat and flour have been eliminated and we will refrain from introducing any new export taxes or nontariff barriers. We will also reduce the maximum import tariff rate from 20 percent to 15 percent by end-2000, while ensuring that the simple average tariff rate does not increase above 5.2 percent. We will tighten control of the free economic zones by completing the fencing of the zones. By June 2000 we will review progress in improving the operations of the free economic zones in Naryn and Karakul, and, if unsuccessful, submit legislation for their closure.

Structural policies

19.  The structural reform agenda under the program will focus on measures that will contribute to the restoration of growth and underpin a full transition to a market economy. In addition to pension and civil service reform, the restoration of the soundness of the banking system, and the reinforcement of external debt management, we intend to concentrate on (i) accelerating the privatization program--especially of the large state enterprises; (ii) improving corporate governance and the business climate; (iii) implementing the sectoral strategies for the energy and agricultural sectors; (iv) strengthening the legal and regulatory framework; (v) speeding up the public administration reform; (vi) developing a comprehensive poverty reduction strategy, building on elements of a program that is already in place; and (vii) bringing our statistics in line with international standards.

Privatization, governance and enterprise reform

20.  To expose companies to market pressures and promote the necessary restructuring of the economy, we are committed to move ahead with our privatization efforts. Our efforts will focus first and foremost on the completion of the privatization of a significant block of shares in Kyrgyz Telekom, an initial tender for which was issued in mid-1999. We expect to complete the sale of 40 percent of shares by September 2000. Three other state monopolies that will be privatized are: KyrgyzEnergo, Kyrgyz Airlines, and Kyrgyzgas. In line with the government's restructuring plan for KyrgyzEnergo supported by international donors, we will offer for sale at least one power distribution company by December 2000 and the remaining ones in the following year. As regards Kyrgyz Airlines, parliament has now adopted a program to restructure and privatize the company. This restructuring will include the spin-off of landing and navigation systems, the transfer of the local airports to local authorities, and the separation of the operation of domestic and international flights. We will also issue an international tender for the international air routes of Kyrgyz Airlines by end-2000. A tender for international audits of KyrgyzGasMunaizat, Munai, Kyrgyzgas, and other successor companies will be issued by March 2000. We expect to complete such audits by end-2000. Kyrgyzgas will be prepared for future privatization by developing a restructuring plan, which will include a timetable for increased metering and tariff increases. Furthermore, during 2000 we intend to offer for sale a majority of shares of at least 50 smaller companies, and sell the government's minority share in an additional 60 enterprises.

21.  We will also make special efforts to improve corporate governance. In particular, we will implement the Asian Development Bank-supported program on enterprise accounting, reporting and disclosure procedures. To improve the business climate and reduce opportunities for corruption, we have already reduced the number of activities subject to licensing from 60 to 30 and by June 2000 we will adopt changes to regulations that will eliminate sublicensing, create standard procedures for review, granting and monitoring of licensing, and remove conflicts of interest in enterprises/agencies that issue licenses and engage in competing commercial activities. By that date, we will also take steps to drastically reduce the number of business inspections. Finally, we will identify and start to eliminate obstacles to exporting and importing.

Energy sector

22.  We will take immediate steps to put the energy sector on a sounder financial footing. Closely linked to the restructuring of KyrgyzEnergo and KyrgyzGas, we will strive to rationalize domestic energy use, improve billing and collection performance, and encourage private investment in the energy sector. We will initiate work to prepare a plan to denationalize and privatize Kyrgyzgas, which we hope to finalize in 2001. To improve the financial situation of enterprises in the energy sector, we will implement electricity, gas and heating tariff increases to reach cost recovery in line with the time schedule agreed with the World Bank. We will ensure that the poorest households will be protected against these energy price increases. We will install meters and upgrade equipment to reduce the average technical and commercial losses of KyrgyzEnergo from an average of 28 percent of production in 1999 to 22 percent by end-2000. We will also establish procedures to ensure that utility services are only provided to budgetary institutions in line with their budgetary allocations.

Agriculture

23.  We recognize the importance of developing private agriculture as an important engine of future growth. Following the implementation of the recently passed land laws that provide the legal and regulatory framework for private ownership, by November 2000 we will: (i) take steps, agreed with the World Bank to lift the moratorium on land sales by end-2000; (ii) finalize an action plan to auction the land under the Land Redistribution Fund, which currently administers about 25 percent of all arable land; and (iii) adopt a plan to eliminate the state monopoly on seed production and improve competition in the seed market. Pilot projects are underway to establish a nationwide land registry. In order to improve farmers' access to financing, we will strengthen the role played by the Kyrgyz Agricultural Finance Corporation (KAFC). We will further pursue the establishment of rural credit unions and outreach lending under the respective projects supported by the World Bank and the Asian Development Bank.

Legal and regulatory framework

24.  Notwithstanding the progress made in creating a legal and regulatory framework that is consistent with a market economy, we realize that the ability of the judiciary system to apply fair and effective rule of law is still insufficient. To address these implementation difficulties and make the judiciary system capable of implementing laws in a transparent and predictable manner throughout the country, we will allocate adequate budgetary resources and initiate professional training of judges and other legal experts, with the assistance of USAID and the EU. With a view to modernizing the labor market, by end-June 2000 we will submit to parliament a revised labor code, which will seek to address shortcomings of the current system.

Poverty alleviation and social safety net

25.  It is our firm intention that all segments of the population benefit from the economic recovery and the move towards a market economy. To this end, we will continue to improve the targeting and the efficiency in the provision of essential social services. To better address poverty issues, we intend to work with the donor community, multilateral organizations, and civil society to develop a comprehensive poverty reduction strategy. In this context, by March 2000 we will develop a program to monitor poverty. At the beginning of 2000, we will introduce the system of National Health Accounts, and will start implementing the reorganization plan for hospitals, as stipulated in the National Health Plan. By June 2000 we will introduce a law on health insurance policy. We will continue to implement the education reforms, as agreed with the AsDB. Additional reforms and the appropriate level of future spending in the areas of health and education will depend on the outcome of a comprehensive review that is currently being conducted together with the World Bank. This review will also cover our social spending to determine the best use of our scarce resources. For now, we will maintain sufficient funding for the Unified Monthly Benefit and ensure that spending on health and education other than wages and salaries be kept at least constant in real terms, while concentrating our efforts on improving the quality of provided health and education services.

Statistics

26.  We realize the importance of compiling and reporting statistical data of high quality. To this end, we will continue our efforts to improve the statistical data base and the methodologies applied. In particular, with Fund assistance, we will move from universal to sample-based data collection for all sectors of economic activity; finalize the preparation of export and import price indices; enhance our employment database; improve our reporting of fiscal data to the Fund for publication; and address problems in the compilation of balance of payments data.

III. Prior Actions and Program Monitoring

27.  The program will be monitored on the basis of quarterly performance criteria and three semi-annual reviews by the Fund's Executive Board, consistent with the economic policy targets described above. The program will cover the period January 1-December 31, 2000. Table 1 attached to this memorandum describes the prior actions for the issuance of the papers and for consideration by the Executive Board of the IMF of this second annual arrangement, which are deemed essential to achieve the objectives of the program. Quantitative performance criteria and indicative targets for the program period are specified in Table 2, while Table 3 contains the structural performance criteria and benchmarks under the 2000 program. The Technical Annex to this Memorandum defines the quantitative targets of Table 2 and specifies reporting requirements. A first review of the program supported by the second annual arrangement will take place before end-June 2000. This review will focus on the fiscal situation and progress in addressing the banking problems. A mid-term review will take place before end-September 2000, based on performance as of end-June 2000. At the time of this review, quantitative and structural performance criteria will be established for end-September and end-December 2000. A third review will take place in early February 2001, based on performance at end-December 2000.

28.  During the period of the second annual arrangement, the government and the NBKR will not, without Fund approval, introduce new or intensify existing restrictions on payments and transfers for current international transactions, nor introduce any multiple currency practices, conclude any bilateral payments agreements that are inconsistent with Article VIII of the Fund's Articles, nor introduce or intensify import restrictions for balance of payments reasons.

29.  The government and the NBKR believe that the policies and measures set forth in this Memorandum are adequate to achieve the objectives of the program, but will take any further measures, in consultation with the Fund staff, that may be appropriate, at the initiative of the government or whenever the Managing Director requests such a consultation. Moreover, after the period of the second annual arrangement and while the Kyrgyz Republic has outstanding financial obligations to the Fund arising from loans under the arrangement, the government and the NBKR will consult with the Fund staff from time to time at the initiative of the government, or whenever the Managing Director requests such a consultation on the Kyrgyz Republic's economic and financial policies.

Technical Annex

1.  The Kyrgyz Republic's performance under the second annual arrangement under the second PRGF-supported program will be assessed by the IMF on the basis of observance of quantitative and structural performance criteria and benchmarks. This annex and the tables attached to the Memorandum outline and define the prior actions (Table 1), the quantitative benchmarks, performance criteria, and indicative targets (Table 2), the structural benchmarks and performance criteria (Table 3), as well as the monitoring requirements. It is essential for the success of the PRGF program to develop and maintain a timely monitoring system--as described in the final section of this annex--to meet the reporting requirements under the program.

I.  Quantitative Targets

2.  Quantitative targets are summarized in Table 2 of the Memorandum and defined below. Quantitative performance criteria are set for end-March and end-June 2000, while the targets for end-September and end-December 2000 are indicative. At the time of the first review, quantitative and structural performance criteria will be set for end-September and end-December 2000.

Floor on cumulative tax collections

3.  The floor on cumulative tax collections (including collections of tax arrears) will be based on quarterly targets for tax collections. Only cash collections will be taken into account; tax offsets will be excluded. Tax revenues correspond to the line "IV. Tax Receipts" in the Treasury Report and comprise the following categories: 1.0 Taxes on income and profits; 4.0 Taxes on property; 5.1 VAT on domestic and imported products; 5.1.1.0 Retail sales tax; 5.2 Excises on domestic and imported products; 5.4 Specific taxes on services; 5.5 Taxes on use of goods and services; 5.6 Taxes on use of natural resources; 6.0 Taxes on international trade; 7.0 Other taxes. Thus defined, tax collections amounted to som 3,940 million as of October 31, 1999. The floors for cumulative end-March, end-June, end-September, and end-December 2000 are specified in Table 2.

Floor on net international reserves of the NBKR in convertible currency

4.  The program contains a floor on the minimum amount for the stock of net official international reserves of the NBKR in convertible currencies. This floor will be calculated as the difference between total gross international reserves in convertible currencies at the NBKR and total official reserve liabilities of the NBKR in convertible currencies.

5.  Total gross official international reserves of the NBKR shall be defined as the NBKR holdings of monetary gold, excluding amounts pledged as collateral or in swaps; holdings of SDRs; any reserve position in the IMF; and any holdings of convertible currencies in cash, debt instruments or with foreign banks. Capital subscriptions in foreign financial institutions and non-liquid assets of the NBKR are excluded. For program monitoring purposes, official international reserves shall be valued at a fixed program exchange rate of som 48 per U.S. dollar and US$1.407 per SDR. Official gold holdings shall be valued at US$292.4 per troy ounce.

6.  Official reserve liabilities of the NBKR in convertible currencies shall be defined as outstanding liabilities to the IMF, and other convertible currency liabilities of the NBKR to non-residents with an original maturity of up to and including one year. However, net claims on other BRO countries are excluded from the ceiling.

7.  Thus calculated, the stock of net official international reserves in convertible currencies amounted to US$-34.7 million as of October 31, 1999. The minimum stocks of net international reserves in convertible currencies for end-March, end-June, end-September, as well as end-December 2000, and the adjusters that apply to these limits, are specified in Table 2.

Ceiling on the net domestic assets of the NBKR

8.  Net domestic assets of the NBKR are defined as reserve money of the NBKR (defined below) minus the NBKR's net foreign assets1 minus the medium- and long-term NBKR obligations (MLT) minus the counterpart of the loan by the Eximbank of Turkey minus the counterpart of the EBRD enterprise loan (see equation 1 below). Thus defined, the NBKR's net domestic assets consist of: (a) gross credit to the central government from the NBKR minus deposits of the central government with the NBKR minus the counterpart of the loan by the Eximbank of Turkey; (b) gross credit to subnational governments from the NBKR minus deposits of subnational governments with the NBKR; (c) gross outstanding credit to domestic banks by the NBKR minus the counterpart of the EBRD enterprise loan; and (d) all other net assets of the NBKR (other items net). Thus defined, and valued as specified in paragraph 5 of this Annex, where appropriate, the stock of the NBKR's net domestic assets amounted to som 2,454 million on October 31, 1999. The limits for end-March, end-June, end-September, as well as end-December 2000, and the adjusters that apply to these limits, are specified in Table 2.

    NDA = RM - NFA – MLT – Turkish Loan – EBRD Enterprise Loan                                                       (1)

Ceiling on the overall state government fiscal deficit

9.  The ceiling on the overall state government fiscal balance is defined as the negative sum of: (i) the change in the stock of net claims of the domestic banking system and nonfinancial institutions and households on the state government; (ii) the change in the stock of net claims of foreign banking system and nonfinancial institutions and households on the state government; (iii) net privatization receipts; (iv) net foreign loans disbursed to the state government for budgetary support; and (v) net foreign loans disbursed to the state government for project financing. The fiscal balance will be measured excluding valuation gains and losses on all foreign currency denominated assets and liabilities arising from exchange rate fluctuations. The minimum stocks of overall state government fiscal deficit for end-March, end-June, end-September as well as end-December 2000, as well as the adjusters that apply to these limits, are specified in Table 2.

10.  The change in the stock of net claims of the domestic and foreign banking systems on the state government are defined as the change in the stock of net claims of these banking systems on the state government less the change in the stock of all deposits of the state government with these banking systems. The claims of these banking systems on the state government include: (i) bank loans to state government; (ii) securities or bills issued by the state government held by banks with the exception of those issued in relation with bank rescue operations; and (iii) overdrafts on the current accounts of the state government with banks.

Ceiling on the outstanding stock of wage and pension arrears and arrears to KyrgyzEnergo

11.  For the purposes of the program, arrears are defined as an overdue payment obligation of the Republican budget related to: (i) wages; (ii) Social Fund contributions; (iii) pensions supplements; (iv) Social Fund subsidies; (v) categorical grants; (vi) payments to KyrgyzEnergo; and as well as (vii) pension payments by the Social Fund. A payment is defined to be overdue if it remains unpaid after its due date for (iii), (iv) and (v); for 30 days after its due date for (i), (ii) and (vii); and 60 days after its due date for (vi). As of October 31, 1999, the stock of budgetary arrears for the above categories was som 174 million and of pension arrears som 184 million. No new budgetary arrears are to be incurred prior to the commencement of and during the period of the second annual arrangement. The limits for end-March, end-June, end September, and end-December 2000, are specified in Table 2.

Ceilings on contracting or guaranteeing of new concessional external debt by the government or the NBKR

12.  External debt limits apply to new medium- and long-term external borrowing with original maturities of one year and more which are contracted or guaranteed by the state government, as defined in paragraph 9 of this Annex, or by the NBKR, with a zero sublimit on such debt with maturities of one year and more up to and including ten years. In addition, there is a zero limit on short-term external debt contracted or guaranteed by the state government or the NBKR; all obligations with original maturities of less than one year fall under this limit, except normal import-related credits and NBKR reserve liabilities.

13.  Excluded from the limits are sales of treasury bills to non-residents, provided the sales involve no exchange rate guarantees. For program purposes, a loan is considered concessional if the grant element is at least 35 percent, calculated by using a discount rate based on the Commercial Interest Reference Rates (CIRRs) published by the OECD plus margins depending on the loan maturity. The average of the CIRRs over the last 10 years will be used for loans with a maturity of at least 15 years and the average CIRR of the preceding six months will be used for shorter maturities. For the purpose of monitoring compliance with these targets, all agreements concluded in respect of rescheduling or refinancing of existing debt shall be excluded from the limits. The limits for end-March, end-June, end-September, as well as end-December 2000, are specified in Table 2.

Ceiling on the stock of external arrears

14.  For the purposes of the program, external arrears of the state government or the NBKR will consist of all overdue debt-service obligations (i.e., payments of principal and interest) arising in respect of loans contracted or guaranteed by the state government or the NBKR since the Kyrgyz Republic's independence, unpaid penalties or interest charges associated with these arrears, and overdue payments owed by the state government or the NBKR on imports received subsequent to independence, unless these debt-service obligations are under active negotiation for rescheduling or in the view of the parties involved are not to be regarded as arrears for the purposes of the program. No such new arrears shall be incurred prior to the commencement of the second annual arrangement or during the period of the arrangement. The limits for end-March, end-June, end-September, as well as end-December 2000, are specified in Table 2.

Floor on budgetary expenditures on health and education

15.  For the purposes of the program, spending on education and health corresponds to the following line in the Treasury Report: IV. Education total. Spending on health corresponds to the following line in the Treasury Report: V. Health care total. These amounts are reduced by the amounts of wages and Social Fund contributions in each of the sectors, as reported by the Ministry of Finance. Thus defined, budgetary expenditures on health and education amounted to som 387 million and som 457 million, respectively, as of October 31, 1999. The cumulative floors for this spending for end-March, end-June, end-September, and end-December 2000, are specified in Table 2.

Floor on repayment of budgetary loans

16.  For the purposes of the program, repayment of budgetary loans corresponds to the following lines in the Treasury Report: XIV. Other Expenditures, subcategory 14.3.2.0., lines 8.2.2.2 and 8.2.2.3. The cumulative floors for the repayment of budgetary loans for end-March, end-June, end-September, and end-December 2000, are specified in Table 2.

Ceiling on reserve money

17.  For the purposes of the program, reserve money consists of currency issued by the NBKR and balances on commercial banks' correspondent accounts with the NBKR. The stock of reserve money amounted to som 3,827 million as of October 31, 1999. The indicative limits for end-March, end-June, end-September, as well as end-December 2000 are specified in Table 2.

Ceiling on net domestic assets of the banking system

18.  Net domestic assets of the banking system are defined as broad money minus the net foreign assets of commercial banks minus their medium-term NBKR obligations minus the counterpart of the loan by the Eximbank of Turkey minus the counterpart of the EBRD enterprise loan. Thus defined, the banking system's net domestic assets consist of: (a) gross credit to the central government minus deposits of the central government minus the counterpart of the loan by the Eximbank of Turkey; (b) gross credit to subnational governments minus deposits of subnational governments; (c) gross credit to private entities and public entities other than the government as defined under (a) and (b), minus the counterpart of the EBRD enterprise loan; and (d) all other net assets of the banking system (other items net). Thus defined, and valued as specified in paragraph 5 of this Annex, where appropriate, the stock of the banking system's net domestic assets amounted to som 4,672 million on October 31, 1999. The limits for end-March, end-June, end-September, and end- December 2000, and the adjusters that apply to these limits, are specified in Table 2.

II.  Disbursements Under the Program

19.  The second annual ESAF arrangement envisages five loan disbursements: the first, equivalent to SDR 4.77 million (5.3 percent of quota), upon approval of the arrangement; the second, equivalent to SDR 4.77 million, upon meeting the end-March 2000 performance criteria and completion of the first review; the third, equivalent to SDR4.77 million, upon completion of the mid-term review under the arrangement and observance of the performance criteria at end-June 2000 established in the arrangement; the fourth disbursement, equivalent to SDR 4.77 million upon meeting the end-September 2000 performance criteria; and the fifth disbursement, equivalent to SDR 2.42million (2.72 percent of quota) upon completion of the third review under the arrangement and observance of the performance criteria at end-December 2000.

III.  Reporting Requirements Under the Program

20.  The government and the NBKR will provide the Fund with the necessary economic and financial statistical data to monitor economic developments and the quantitative targets. In particular, the government and the NBKR will provide the following specific information:2

The balance sheet of the NBKR

21.  The NBKR will provide to the Fund its balance sheet within seven days of the end of each month. The information provided will clearly identify the following items in the definitions specified above: the net foreign assets of the NBKR; the net international reserves; medium- and long-term liabilities; the net domestic assets of the NBKR; net credit from the NBKR to the general and other governments; net credit provided to commercial banks, other items net; and reserve money. The balance sheet will be provided valued at the actual exchange rate as well as according to the valuation applied under the program, as specified in paragraph 5. The above information should be provided to the IMF Resident Representative and/or transmitted by e-mail to the Fund.

Monetary survey

22.  Monthly banking system data, in the form of a monetary survey, will be reported to the Fund by the NBKR within 25 days of the end of the month. The information provided should clearly identify the following items: Net foreign assets and net domestic assets of the banking system, medium- and long-term liabilities, net credit from the banking system to the general and other governments, financing provided to the rest of the economy, other items net, and broad money. The monetary survey will be provided valued at the actual exchange rate as well as according to the valuation applied under the program, as specified in paragraph 5.

23.  The NBKR will provide monthly data to the Fund within seven days after the end of the month on the amount of holdings of treasury bills, GKOs, state obligations, state bonds, and other securities issued by the state government, differentiated by the following categories of holders: the NBKR, resident banks, resident nonbanks, and nonresidents. The information will be provided in both the book (nominal) value and the actual value, where applicable.

International reserves and key financial indicators

24.  The NBKR will provide detailed monthly data within 14 days from the end of the month on the composition of both its gross and net international reserves in convertible currencies and holdings of monetary gold. These data will be provided at two alternative sets of the exchange rates and the gold price: first, at those used to derive the NFA position in the NBKR accounts; second, at those specified in the program (paragraph 5). In addition, weekly reports should be sent to the Fund every Monday on: (a) exchange rates (including the official and interbank exchange rates), foreign exchange interbank market turnover, and the volume of NBKR foreign exchange sales and purchases in the interbank market and with other parties; and (b) treasury bill yields and the amount of treasury bill sales and redemptions. On the 25th day of the month following the reference month, the NBKR will provide data on bank deposit and lending rates by maturity.

Banking system data

25.  The NBKR will provide detailed bank-by-bank data within 14 days of the end of the month on commercial banks' compliance with: (a) prudential requirements; and (b) reserve requirements, as well as any penalties, sanctions and other administrative actions imposed on banks.

External debt

26.  The Ministry of Finance, together with the NBKR, will provide monthly information on the net disbursements and the outstanding stock of short-term external debt; on contracting and guaranteeing and the outstanding stocks of medium-and long-term external debt of the state government and of the NBKR; and any stock of outstanding arrears on external debt service payments within 21 days of the end of each month. In addition, the Ministry of Finance will report the total amount of outstanding government guarantees and external arrears.

Budgetary and extrabudgetary data

27.  Monthly data will be reported to the Fund by the Ministry of Finance, the State Property Fund, and the Social Fund within 21 days of the end of each reference month. All receipts (tax and nontax revenues), all cash expenditures (including debt-service payments), privatization receipts, and external and domestic borrowing operations will be part of this report. Information on taxes will be provided with a breakdown by tax category and differentiated between cash and noncash receipts. Expenditure data will be provided according to both economic and functional classifications, consistent with GFS methodology. The Ministry of Finance will report monthly on all expenditure and tax arrears, in particular arrears as defined in paragraph 10 of this Annex, and the Social Fund will report monthly on arrears for pension payments. The Ministry will also provide monthly reports on the disbursements under the public investment program with a one-month time lag. Quarterly reports will be provided on the 15 enterprises with the largest tax arrears; on DEBRA's operation statements; on in-kind collections, tax offsets, budget loans and repayments, and subsidies.

Balance of payments data

28.  The NBKR will provide current account and capital account data, including data on foreign trade, services, official and private transfers, foreign investment, and disbursements of public and private loans, on a quarterly basis, with at most a two-month lag. The NBKR will also provide monthly foreign trade data with a two-month lag.

Other general economic information

29.  The National Statistics Committee will notify the Fund of the monthly Consumer Price Index by category by the 5th business day of the following month, and convey quarterly GDP estimates within two months of the end of each quarter.


1The NBKR's net foreign assets consist of net international reserves, as defined in paragraphs 4 to 7 of this Annex, plus the net claims on other CIS countries. The value of the latter is kept constant at som -51 million for program monitoring purposes.
2Any correction or revisions to the data previously reported should be clearly indicated and documented as to the reasons for revision.

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