Kyrgyz Republic and the IMF

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Kyrgyz Republic—Letter of Intent,
Memorandum of Economic Policies,
Technical Memorandum of Understanding

Bishkek, Kyrgyz Republic, November 16, 2001

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.

Mr. Horst Köhler
Managing Director
International Monetary Fund
700 19th Street, N.W.
Washington, D.C.  20431

Dear Mr. Köhler,

1.  On behalf of the government of the Kyrgyz Republic, we are pleased to transmit herewith our request for the three-year arrangement under the Poverty Reduction and Growth Facility (PRGF). In this context, we prepared an Interim National Strategy for Poverty Reduction (I-NSPR), which sets forth the main elements of our approach to poverty reduction and macroeconomic policies and structural reforms supporting it. The I-NSPR was submitted to you on June 13, 2001. We have also prepared a NSPR Preparation Status Report describing our progress toward the full NSPR. The Status Report will be forwarded to you under a separate cover.

2.  The attached Memorandum of Economic Policies (MEP) describes in detail the objectives, policies, and measures for the three-year program covering the period October 1, 2001-September 30, 2004. In support of this program, the Kyrgyz Republic requests approval of the three-year PRGF arrangement, in an amount equivalent to SDR 73.4 million (82.6 percent of quota).

3.  We believe that the policies and measures set forth in the Memorandum are adequate to achieve the objectives of our 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,

Kurmanbek Bakiev   Ulan Sarbanov
Prime Minister   Chairman
Kyrgyz Republic   National Bank of the Kyrgyz Republic


Memorandum of Economic Policies (MEP) for the Period
October 1, 2001–September 30, 2002/2004

I.  Introduction

1.  The Kyrgyz Republic has been implementing economic reforms under financial support from the International Monetary Fund (IMF) since 1993. More recently, such reforms were supported under a three-year arrangement under the Poverty Reduction and Growth Facility (PRGF) approved on June 26, 1998. This three-year arrangement expired on July 26, 2001 after the implementation of the first and second annual arrangements. We have now designed a new three-year program to support our macroeconomic and structural reforms incorporated in the Interim National Strategy for Poverty Reduction (I-NSPR). The I-NSPR was submitted to the IMF's and World Bank's Boards in May 2001. We have prepared this Memorandum to outline our policy objectives for 2001-04 with special focus on those policies that are crucial for the period October 1, 2001-September 30, 2002.

2.  Admittedly, our policy implementation was uneven during the previous PRGF-supported program as slippages in fiscal policy led to non-observance of key budgetary and monetary policy targets. While tax revenue were in line with program targets, weaknesses in expenditure control, including higher-than-programmed spending under the Public Investment Program (PIP) and factors that were either temporary or outside our control, led to an overrun of expenditure and accumulation of pension and external arrears. As a result, our economic program went off track and the last two reviews under the second year PRGF arrangement were not concluded.

3.  Regarding structural reforms, we made progress in a number of areas, including the removal of the moratorium on land sales, the drafting of a new law on state debt, the regular auditing of the NBKR's foreign reserves, the adoption of several bank restructuring measures, as well as measures to control free economic zones. Nevertheless, progress was slow toward the privatization of large strategic enterprises, the development of the property tax system, and the streamlining of the PIP.

4.  In the first eight months of 2001, our policy implementation has improved significantly. We have successfully met all the track record targets agreed with the Fund staff for key fiscal and monetary policy variables for the period February-June 2001. We have not incurred any new external, wage, or pension arrears and all payments to KyrgyzEnergo have been made on time. Although the republican budget accumulated some social transfer arrears, these will be eliminated in due course. To improve the financial conditions of KyrgyzEnergo, we increased electricity tariffs by 57 percent last spring. To offset temporary adverse effects on the poor from the increase in energy tariffs, we adjusted pensions benefits by 20 percent and raised other social benefits and allowances. Parliament approved the revised state budget for 2001 in June in line with the understandings reached with the Fund staff. The government has also adopted a comprehensive external debt strategy.

5.  On the structural side, we initiated the restructuring of government administration by reducing the number of ministries and state committees and have reduced the size of the central administration so far during 2001 by 10 percent. With technical assistance from the Asian Development Bank (AsDB), we finalized a review of the PIP and are strengthening the capacity of the Ministry of Finance to prioritize these projects. In addition, the NBKR initiated the liquidation of four problem banks and ensured the recapitalization by its owners of the remaining fifth problem bank. Finally, we settled external debt arrears to Bankgesellschaft Berlin AG ("Berliner Bank") and Aventis Crop Science company.

6.  Our macroeconomic performance has improved significantly in 2001. Most notably, real GDP growth accelerated to 7.4 percent in the first eight months of the year, and the 12-month inflation declined to 6.4 percent in August. At the same time, our national currency, the som, has remained stable, and nominal as well as real interest rates have declined significantly. The trade balance was in a surplus in the first half of the year and the current account balance improved significantly although it still remained in deficit. We are also encouraged by the most recent indicators of poverty. Although poverty rates in 2000 were still higher than in 1996, the decline in these rates since 1998 suggests that the steady growth of output and real incomes since 1996 are beginning to reduce poverty.

7.  We believe that these achievements demonstrate our commitment to and ownership of further reforms. To continue on this path, this memorandum details the measures that are essential for maintaining macroeconomic stability and growth, reducing our external debt, and strengthening structural reforms. In the latter area, we welcome the initiative to streamline Fund conditionality to cover only those structural measures that are critical for the success of our program. However, to provide a fuller picture of our economic policy strategy, we also want to outline our broader structural policy agenda in this memorandum.

II.  Program Objectives and Policies

8.  Our macroeconomic program aims at maintaining economic growth at about 4-5 percent in 2002-2004 and reducing inflation to 5 percent by 2004. Achievement of these goals is a necessary condition to attain further gains in poverty reduction. In addition, the implementation of the policies detailed in the I-NSPR will ensure that the benefits from growth will accrue also to the poor. The key policy parameter in our medium-term program is a decline in the overall fiscal deficit in order to bring about the balance of payment adjustment which will support our debt reduction strategy. Our program aims to reduce the general government deficit from 9.7 percent of GDP in 2000 to 6.0 percent in 2001, to 4.9 percent in 2002, and further to 2½ percent by 2004. The bulk of the fiscal adjustment will come from restraining the foreign financed PIP while at the same time achieving an increase in the state budget primary fiscal surplus (excluding the PIP) from 0.3 percent of GDP in 2000 to 3½ percent by 2004. To sustain this adjustment, we intend to increase tax revenue of the state budget from 13.0 percent of GDP in 2001 to more than 15 percent by 2004. The targeted balance of payments adjustment will be supported by the continuation of a tight monetary policy.

9.  The principal goal of the first-year program is to sustain the current rate of economic growth at around 5 percent in 2001 and 2002. At the same time, inflation should decline to 7 percent during 2001 and to 6 percent during 2002. With a sustained stability in the foreign exchange market, these developments would lead to an improvement in GDP per capita (in U.S. dollar terms) by around 23 percent from 2000 to 2002 which would help alleviate poverty. On the external side, we expect the import cover of official reserves to remain above 3½ months during the program period.

10.  Our first-year program will be based on a significant fiscal adjustment, a continuation of a tight monetary policy, and more focused structural reforms. To demonstrate our ownership of the new program we will implement the following prior actions before the scheduled Executive Board meeting in late November 2001:

  • First, we will implement monetary and fiscal policies so as to achieve the end-October financial policy targets as specified in Table 1.
  • Second, we recognize that the adoption by parliament of the 2002 general government budget as agreed with Fund staff (including the tax measures as specified in paragraph 12 and 13), is a precondition for the Executive Board approval of the new program.
  • Third, the government and the NBKR will adopt and publish in the mass media the new Regulatory Response Policy (RRP) as agreed with the recent IMF MAE mission.
  • Fourth, a Presidential decree will be issued to establish an Economic Policy Council (as specified in paragraph 38) to enhance coordination, transparency, and effectiveness in the government's economic policy making.
  • Fifth, we will ensure that there are no pending official external arrears.

Fiscal policy

11.  A strong fiscal adjustment is needed to address our medium-term balance of payments and external debt problem. We are therefore resolutely implementing the revised state budget for 2001, which targets a surplus in the primary fiscal balance (excluding the PIP) of 2.1 percent of GDP with the overall cash deficit amounting to 6 percent of GDP, down from 9.7 percent in 2000.1 This deficit will be financed primarily through external assistance on concessional terms, with only a small amount (0.4 percent of GDP) covered by privatization receipts. The draft 2002 budget, which was presented to parliament in October, is a further step towards fiscal consolidation as it targets a surplus in the primary fiscal balance (excluding the PIP) of 2.6 percent of GDP with the overall cash deficit declining to 4.9 percent of GDP. This deficit will be financed mainly through external donor assistance on concessional terms. However, due to high external debt service obligations, there remains a financing gap of 2.4 percent of GDP. We hope that this gap can be closed through Paris Club debt reschedulings on Naples terms.

12.  Strong tax revenue performance will be critical to achieve the programmed fiscal adjustment. The new measures included in the revised 2001 budget are projected to increase tax revenues by around 0.7 percentage point of GDP to 13.0 percent. We recognize that the reductions of income tax rates and the excise tax rate on vodka approved in July 2001 should not derail our earlier revenue targets for 2002 and over the medium-term. Therefore, we are willing to revise our earlier tax rate decisions. In addition to the 10 percent individual income tax rate, we will introduce another tax bracket at a rate of 20 percent for high-income individuals. To support especially low income families, we will increase the general basic income tax deduction by the equivalent of som 3000 per annum. We will also increase the profit tax rate to 20 percent and maintain a 30 percent rate for natural monopolies in 2002, in order to ensure sufficient tax collection. We believe that reducing taxes on labor from the current high levels would further decrease incentives to operate in the underground economy. Therefore, we will lower employers' social security contributions by 4 percentage points to 25 percent and compensate the Social Fund for the projected revenue loss through a state budget transfer of som 310 million in 2002. Such a transfer mechanism will be maintained in future years to ensure that the Social Fund revenue are sufficient to meet its benefit commitments. The appropriate medium-term level of social security contribution will be assessed in the context of the World Bank's upcoming assessment of the financial viability of the Social Fund. A quarterly reporting and monitoring mechanism will be established for profit and payroll taxes, and if tax collection fails to achieve the projected levels, the level of appropriate profit and payroll tax rates will be reassessed for the 2003 budget.

13.  These tax rate reductions will be accompanied by a broadening of the tax base--including by removing several tax exemptions--and by improvements in tax and customs administration. The 2002 budget proposal contains new tax measures to compensate for the tax rate reductions and reduce tax arbitrage opportunities by: (i) allowing interest rate deductibility and raising withholding tax on interest income from 5 to 10 percent in corporate income taxation; (ii) imposing a tax on interest income at 10 percent and eliminating interest expense exemptions in personal income taxation; (iii) reducing VAT exemptions on agricultural produce and processed agricultural products by lowering the tax credit rate from 10-12 percent to 5-7 percent; (iv) imposing a patent tax on selected businesses on a pilot basis; 2 (v) introducing a simplified tax regime for small enterprises; (vi) eliminating VAT exemptions on imports of fixed assets; (vii) eliminating VAT exemptions on residential housing and school materials, and the tax exemption for profit from the sale of renovated houses; (viii) increasing the retail sales tax rate from 3 to 4 percent; (ix) increasing the tax on non-agricultural land from som 0.17 to som 1; (x) improving the accuracy in assessing the tax liability of the construction sector; and (xi) strengthening the collection of VAT and excises on gasoline. We will also take the following measures to limit abuse in Free Economic Zones (FEZs): (i) complete the fencing of all FEZs and put their borders under Customs control; (ii) exclude all retail trade and services such as banking and dentistry from the FEZs; (iii) prohibit the export of goods into the domestic market unless there has been at least 30 percent value added within the FEZ; and (iv) limit domestic shipments to 30 percent of production. While tax offsets have been eliminated at the central government level, some offsets remain at the local government level, but they will be eliminated as of January 1, 2002. In addition, during the program period we will not introduce any new tax exemptions for either domestic or foreign investors. As a result of these measures and expected improvements in tax administration, the state tax revenue to GDP ratio is expected to increase to 13.8 percent of GDP in 2002. We believe that our tax projections, aiming at an increase in general government gross tax ratio by 3 percentage points of GDP in 2001-2004, are realistic but, if deviations occur, we stand ready to introduce corrective actions to ensure achievement of the program's revenue targets.

14.  Stronger tax collection efforts are crucial to achieve the revenue targets of our fiscal program. We intend to implement a number of measures during the program period to enhance efficiency of tax administration, including by strengthening the operations of the Large Taxpayer Unit, introducing cash registers for better compliance control, regularizing the data exchange between the STI and SCC, and initiating the integration of tax collection agencies. We expect the upcoming technical assistance mission from the Fund to help us specify our plans in this area. The recommendations of the FAD mission will be included in the program at the time of the first review.

15.  Over the medium term, the tax reform will contain the following actions. With assistance from USAID, we are drafting the enabling legislation for the introduction of a new local tax on real property. We expect to present the draft in parliament by end-2001 and will accelerate our work in property registration and value assessment so as to start implementation by end-September 2002. During the program period we also intend to strengthen mineral resource taxation, review the taxation of financial institutions and transactions(e.g., insurance companies, leasing companies, private pension funds) as well as capital gain taxation (e.g., appreciation of securities and properties). These and other measures to strengthen the tax base will be investigated during the upcoming FAD mission and incorporated in the program during forthcoming reviews.

16.  On the expenditure side, the revised budget includes a reduction of the PIP from $92 million in 2000 to $85 million in 2001. As part of our debt reduction and medium-term fiscal strategy, the 2002 budget targets a reduction in PIP spending to 5.5 percent of GDP and to 3 percent of GDP by 2005. This amount could be higher to the extent that we can attract grants instead of loans to finance the PIP. We have started intensive co-operation with international donors to conduct project-specific reviews in order to control the efficiency in project implementation and to make the volume of the PIP consistent with our debt service capacity. By end-2001, we will also establish clear guidelines for prioritizing alternative investments on the basis of their likely impact on growth, export potential, and poverty reduction. The three year rolling PIP plan will be updated annually with the quantitative target for the following year to be decided in close cooperation with the Fund staff before end-August each year. The streamlining of existing projects and inclusion of new projects under the PIP will also take into account our ability to carry the maintenance costs once these investments mature. In September this year, we held a meeting with donors to review the draft 2002 PIP plan and prioritize available external assistance. In this context, we continue to appeal to international donors to look into options for converting existing or new loans into grants which would make an important contribution to our poverty alleviation strategy.

17.  The current low level of public sector wages, on average $24 per month (around 20 percent lower than the average economy-wide wage), is an obstacle to retaining high quality personnel while providing potential incentives for corruption. In 2002, we intend to increase the average annual salary of general government employees in line with the projected economy wide pay increases by limiting the average increase to the expected productivity growth in the economy (4½ percent) plus compensation for inflation (7 percent). The new wage rates could become effective as of January 1, 2002. With a view of making expenditure adjustments sustainable in the medium term, while improving efficiency in the civil service, we will develop a plan by end-December 2001 to reduce general government employment by 5 percent in 2002 compared to 2001. In so far as there is evidence that budgetary savings are being generated during 2002 by employment reductions, we will grant additional salary increases for key personnel. The room for such additional pay increases, as well as for raising benefits for non-working pensioners, will be reviewed with the Fund staff in May 2002.

18.  Taking account of the projected increase in the tax-to-GDP ratio, the reduction in interest payments due to the debt reschedulings agreed in 2001, and the targeted streamlining in capital expenditures, non-interest current expenditures could remain broadly unchanged in real terms in 2002. However, with expected interest payment reschedulings by Paris Club, such spending could grow 4-5 percent in real terms in 2002. More importantly, priority spending on education, health, and social security could grow by about 6 percent in real terms in 2001-2002. A government's priority in 2001-2002 will continue to be timely payment of pensions, central government wages and transfers to local governments for wage payments, central government transfers to the Social Fund, and energy bills. Ceilings on the stock of arrears on these payments are included among the program's performance criteria as specified in Table 1 and Technical Annex. We intend to clear all central government arrears on transfers to the Social Fund before November 15, 2001, and on allowances to poor families by end-March 2002. By this date, we will also develop amendments to improve the targeting of these allowances.

19.  The attainment of high-quality expenditure and fiscal management systems is an essential component of our effort to sustain fiscal consolidation in the medium-term. With this objective in mind, during the first-year program, with technical assistance from the Fund we will develop action plans and concrete measures in the following two areas. First, we will proceed to the next stage of treasury reform by establishing a commitment control and arrears tracking system and initiating the consolidation of the extrabudgetary funds in the treasury system. The substantial data management requirements of such a system will necessitate the computerization of the treasury, which we plan to undertake provided financing from international donors is available on a grant or highly concessional basis. We will develop a more specific treasury development plan by the time of the first review. Second, we intend to restructure the Ministry of Finance with the aim of further strengthening its position in the control and implementation of fiscal policy. In this context, we plan to enhance the role of the Budget Department in the preparation, execution, and monitoring of the budget. In addition, we will review the budgetary process to improve coordination between different ministries and improve their accountability on their spending plans. A presidential decree on the restructuring of the Ministry of Finance will be prepared in close cooperation with the Fund staff and it will be adopted by end-March, 2002.

Monetary and exchange rate policies

20.  The challenge for monetary policy is to strike a balance between the economy's liquidity demands and the need to further reduce inflation. This requires an appropriately tight monetary stance characterized by the programmed increase in som broad money by 13½ percent during the program period. In view of the expected further decline in inflation and continued growth of real GDP, we expect that the demand for real balances will increase. Thus, som money velocity is projected to decline somewhat during the program period. We expect net international reserves to increase from $15 million at end-2000 to $23.8 million at end-2001, and to decrease to $20 million by end-2002 provided that the expected official balance of payments support materializes. With NDA of the NBKR programmed to increase from som 4,873 million at end-September 2001 to som 5,367 million at end-September 2002, reserve money is projected to expand by 8 percent during this period. In line with the expected improvement in financial intermediation stemming from structural reforms in the banking system, the money multiplier is projected to increase slightly.

21.  The NBKR will continue its policy of a de facto flexible exchange rate, and will intervene in the foreign exchange market only to smooth temporary market fluctuations and to accumulate reserves. In the event of unexpected private capital inflows, and if there are signs that money demand strengthens more than projected, the NBKR would build-up reserves beyond the program targets. If unanticipated foreign exchange outflows threaten observance of the program's foreign reserve targets, the NBKR will not resist a depreciation of the som but will tighten financial policies to restore stability in the foreign exchange market. The NBKR stands ready to avoid an excessive squeeze of money supply which may result from heavy debt service by increasing its reliance on open market operations. We are prepared to adjust the monetary targets, in close consultation with the Fund staff, should any of the assumptions underlying the monetary program change during the program period.

22.  We will ensure that the NBKR's decision-making and operations continue to be independent from outside interference while at the same time increasing its accountability and transparency. In order to improve accountability, we will consider introducing staggered terms of office for the Board members. In order to strengthen transparency, we will institute bi-annual reports to parliament from the Chairman of the NBKR on monetary developments and the conduct of monetary policy. These reports would be supplemented by oral statements of the Chairman in parliament where he would also answer questions from people's representatives. In addition, we intend to increase the amount of information available to the public. In 2002, the NBKR will place on its website its audited financial statements and conclusions of the external auditor.

23.  We will regularize the financial relations between the NBKR and the Ministry of Finance before end-March 2002 and request technical assistance from the Fund for this effort. All non-interest bearing government bonds currently held by the NBKR will be converted into long-term bonds that bear a positive real rate of interest. At the same time, the NBKR will start paying interest on all government deposits. NBKR profits will be transferred to the budget, while ensuring sufficient capital for the NBKR.

External sector policies

24.  An open foreign trade system is essential to reap the benefits from globalization. Our external policies will aim at maintaining a liberal trading system by refraining from introducing any new export taxes or nontariff barriers. In the 2002 budget, we will reduce the tariff bands from six to four by moving all the items currently taxed at 20 percent to the 17.5 percent bracket and moving all the items taxed at 6.5 percent to the 5 percent bracket. We will aim at reducing the maximum rate to 10 percent by the end of 2004.

25.  In addition, we will eliminate delays in refunding VAT and excise taxes paid on imported inputs. We will also review existing tariff exemptions with the aim of reducing their volume and value limits, and will grant no new exemptions. In order to reduce transportation costs of trade by road, we will attempt to negotiate single transit fees with Kazakhstan and other neighboring countries.

26.  During the three-year period of the arrangement under the PRGF, 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.

Debt strategy

27.  We are acutely aware that the current high level of external debt poses a serious risk for macroeconomic stability in the medium-term. We are strengthening our debt management capacity by developing transparent procedures and control mechanisms for repaying, contracting, or guaranteeing public external debt. In spring 2001, we also concluded rescheduling agreements for all debt to Turkey and for one-third of the debt to Russia. More importantly, as a prior action to the planned Board meeting on the third annual arrangement, the government had issued a special resolution on a comprehensive debt strategy comprising the following six elements:

  • A medium-term fiscal strategy that leads to a primary fiscal surplus (excluding the PIP) of 3.5 percent of GDP by 2005. This strategy will be based on increasing the state budget's tax revenue-to-GDP ratio by 2.6 percentage points of GDP in 2001-2005, and on seeking grants, rather than foreign borrowing, for poverty alleviation. Given the overall objective of alleviating poverty, social spending will be increased in real terms; if needed, at the expense of other spending.
  • Streamlining the PIP from 7.1 percent of GDP in 2000 to 3 percent of GDP by 2005 as discussed in paragraph 16.
  • Privatization of large state-owned strategic enterprises, with the special objective to privatize KyrgyzTelecom, Kyrgyz Airlines, KyrgyzGaz, and the four power distribution companies spun off from KyrgyzEnergo before 2005. These privatization receipts will be deposited into a special Privatization Account in the NBKR. At least 75 percent of these funds will be available for debt reduction only, with the remaining amounts being allocated for restructuring of other to-be-privatized enterprises, the development of the irrigation sector, and counterpart funding of foreign-financed investment projects. Starting from 2002, privatization receipts from other sources will also be accumulated in this account.
  • Repaying non-concessional government debts ahead of schedule (provided that resources exist), in order to avoid penalties and to eliminate the high cost of carrying such debt.
  • Not contracting any new public or publicly guaranteed nonconcessional debt. At the same time, the required level of concessionality will be increased so that the grant element will be at least 45 percent, unless new loans are committed for replacing old debt originally contracted at less favorable terms.
  • Seeking debt-for-equity swaps for enterprises other than the above mentioned strategic enterprises.

We will refine this strategy in three respects. First, to ensure that our three-year program is fully financed, we intend to seek Paris Club debt reschedulings on Naples terms. Second, as typically requested by the Paris Club, we will ensure comparability of treatment of creditors when repaying debt early. Finally, we will further improve the Ministry of Finance's external debt management capacity through the ongoing Swiss-financed technical assistance program. We are also strengthening the PIP unit of the Ministry of Finance and, by end-2001, we will (i) produce the first 5-year rolling plan; (ii) evaluate the impact on growth and export potential of projects; and (iii) approve a priority list of specific projects with the view of strengthening the country's export potential.

Structural reforms

28.  We believe that strengthening structural reforms is essential for maintaining economic growth and alleviating poverty. This requires better conditions for private sector development and less government intervention in the economy. Although reforms are required across a number of areas, four core areas appear critical for sustained growth, low inflation, external debt reduction, and poverty alleviation. These are banking sector reform, privatization of strategic enterprises, energy sector reform, and good governance. Our broader agenda of structural reforms outside Fund conditionality is discussed in section III below.

29.  A healthy banking sector is essential for establishing efficient financial intermediation and mobilizing domestic savings to finance investment. In addition, bolstering confidence in banks should reduce dollarization and thus enhance the efficacy of monetary policy and resource allocation. Under the new program, we want to move decisively to (i) ensure that all banks are adequately capitalized; (ii) complete the restructuring of Kairat Bank; (iii) strengthen the legislative and institutional arrangements within the banking sector; (iv) enhance the debt recovery capacity of the Debt Recovery Agency (DEBRA); and (v) resolve the development options for the Saving and Settlement Company (SSC).

30.  To improve the soundness of our banking system, in mid-2001 the NBKR closed four insolvent banks. The fifth problem bank, Asia Universal (AUB), has been recapitalized by its private shareholders. The bank has not provided, however, supporting documentation on the quality of some of its assets and financial operations. To solve this matter, the NBKR has required AUB to provide this additional information and should the bank financial standing prove unsatisfactory, the NBKR will require: (i) AUB to make the appropriate provisions or capital reductions; and (ii) its private shareholders to recapitalize the bank if these adjustments make the bank insolvent. The NBKR should place the bank under temporary administration if it does not comply with capital adequacy requirements by end-2001. Regarding capital requirements more generally, the NBKR will issue a regulation requiring all banks to maintain a minimum level of own capital (Tier I capital minus at least the cross ownership of shares) of som 25 millions starting from April 1, 2002. Capital requirements for 2003 will be set in the context of the first review The application of this new capital requirement will be a structural benchmark for end-March 2002. In March-April 2001, we capitalized Kairat Bank by issuing government bonds to replace its non-performing assets, transferred its ownership from the National Bank to the government, and strengthened its management. We are taking actions to ensure its return to profitability by restructuring its organization and branch network and strengthening its financial condition on the basis of a plan agreed with the Asian Development Bank in the context of the Financial Intermediation and Resource Mobilization loan.

31.  To prevent the re-emergence of problem banks, we will enhance banking supervision and modify existing legislation and institutional arrangements, in particular, the NBKR will not introduce the requirement to keep the capital of commercial banks in foreign currency. While the Banking Act and the National Bank Law establish a framework for concluding effective banking supervision, we will make the NBKR's regulatory enforcement powers more effective. To this effect, the government and the NBKR will adopt a Regulatory Response Policy (RRP) as specified by the recent MAE mission. The adoption of the RRP is a prior action for Executive Board consideration of the new program. The policy will clarify the timing and amount of minimum action that the NBKR will take under different circumstances. The publication of the RRP in the mass media, will make all stakeholders aware that the rules and practices are supported at the highest levels of government.

32.  Furthermore, with a view to streamlining the courts' examination of appeals against NBKR's regulatory actions, we will submit to parliament amendments to existing legislation to provide that: (i) individuals who appeal against the NBKR bankruptcy sanctions must do so in the court of arbitration which has jurisdiction over matters involving legal entities; (ii) the NBKR sanctions are binding and effective until all appeals and court proceedings have been resolved; and (iii) the arbitration court will make a final decision on a case rather than remand such case to a lower court thereby creating an endless loop of appeals.

33.  We intend to enhance DEBRA's debt recovery capacity. To this end, we have already transferred its control from the NBKR to the Ministry of Finance. In addition, (i) we will submit to parliament proposed amendments to existing legislation so that the legal entity DEBRA will become the sole and exclusive liquidator of failed banks; and (ii) we will eliminate obstacles to debt recovery and realization on debt collateral by DEBRA and, more generally, by all banks, by submitting to parliament amendments to eliminate conflicts in existing legislation (in the Law on Pledges and in the Civil Code) to facilitate the process of execution of pledges. The implementation of these two measures will be structural benchmarks under the program for end-December, 2001. We will also to improve bank governance to raise public confidence in the banking system. With this objective in mind, DEBRA will establish an asset recovery program that would include negotiations with debtors, recovery from former shareholders, and sales of noncore assets of liquidated banks. DEBRA will also initiate inquiries, prepare cases, and make criminal referrals to the Ministry of Interior for all transactions involving malfeasance, mismanagement, or fraud by officials of the banks under liquidation. The government will fully support DEBRA in these endeavors, including through public statements.

34.  We will prepare a development plan for the SSC in close consultation with Fund staff. We will analyze two options. Under the first option, the SSC would be sold to an investor through a tender. Under the second option, the SSC would be developed into a postal giro system. Under both options, ways have to be found to ensure the maintenance of the payment system and the availability of banking services in remote areas. Should we choose the second option, we would ensure that the privatization strategy is transparent and provides equal access to the process for foreign and domestic investors. The deadline for approval by the NBKR of this development plan is end-March, 2002.

35.   Privatization of the large state monopolies (KyrgyzAir, KyrgyzTelecom, four power distribution companies spun off from the break-up of KyrgyzEnergo, and KyrgyzGaz) is deemed critical for the success of the medium-term program. These enterprises account for a relatively large share of economic activity, and their poor performance places a significant drag on potential output growth. Moreover, the sale of these assets would make an important contribution to debt reduction. As the sale of these assets is likely to take time, we will continue our restructuring efforts of these enterprises while preparing them for privatization. In this regard, we will ensure that tariff policies and bill collection rates generate adequate revenue for these enterprises and that the management of these resources becomes more efficient and transparent, including through unbundling the KyrgyzEnergo's distribution, transmission, and power generation operations. To underscore the importance we associate with this privatization objective, we have agreed to include as a performance criterion under the program the issuance, by end-December 2001, of a government resolution specifying the time schedule for specific and monitorable steps for privatization of these enterprises by 2005. This resolution will provide transparent privatization procedures and equal access for domestic and foreign investors. As a minimum, the resolution will specify the expected dates for the selection of financial advisors, the completion of due diligence, and for holding the tender of each enterprise. In addition, the resolution will outline our restructuring plans for these enterprises, including targets for tariff and bill collection rates over the period of the arrangement. The privatization timeline for the four strategic enterprises will be advertised through the media, including the State Property Fund website. Of course, the specific timing of the implementation schedule will have to take into account actual market conditions.

36.  We will place great emphasis on reforming the energy sector with a view to reducing its large quasi-fiscal deficit, which stems primarily from pricing energy below cost in the domestic market. Eliminating this deficit would significantly improve the allocative efficiency of the economy to spur growth of real incomes. We are working closely with the World Bank in this area and, under Bank conditionality, we are in the process of specifying measures aiming at achieving full cost recovery by end-2003, and restructuring and privatization of enterprises operating in this sector. We will also place particular attention to reducing commercial losses of energy enterprises. To further improve collection ratios of energy bills, we continue to include a zero ceiling on the stock of government agencies' arrears to KyrgyzEnergo as a continuous quantitative performance criterion under Fund conditionality. In addition, as a structural benchmark for end-December 2001, we will submit to parliament a new law which will reduce by at least 20 percent the number of energy users eligible for special privileges under the existing electricity tariff structure. At the same time, all incomes should be included in the assessment of eligibility under income criteria, and social cash benefits for first and second category invalids will be increased by som 20  per month but they will not be included among the users with privileged electricity tariffs.

37.  We have approved a significant number of laws, decrees, resolutions, and decisions to improve the legal, regulatory, and administrative systems to improve business environment. The business community, however, still regards poor governance as a major impediment for improving productivity and economic growth. Furthermore, at times lack of coordination in economic policy making has resulted in contradictory policy choices. The government is highly committed to improve governance. We will make every effort to enhance transparency and accountability of government operations and improve decision-making. In the paragraphs below, we have identified a set of key areas and measures that we believe are important for better governance.

38.  We are aware of the need to strengthen our economic policy making mechanism to increase coordination, transparency, and efficiency. With this objective in mind, we will establish an Economic Policy Council (EPC) within the government consisting of the Prime Minister and key economic ministers. All economic policy issues, including program monitoring, will be discussed in the weekly meetings of this body. The Chairman of the NBKR will be a non-voting, independent member of the EPC. All matters for EPC consideration will be prepared by a permanent Secretariat consisting of representatives from the President's and PM's offices and the Ministry of Finance. The chairpersons of the key Parliamentary committees will be invited regularly for discussions with the EPC. To ensure that the donor community is kept abreast of our policy choices, the resident representatives of the IFIs could be invited to meetings as observers, as necessary.

39.  In parallel with our ambitious privatization program, we intend to remove major public sector impediments to private sector development by simplifying the relations between the government and the users of government services. In the fiscal area, we aim to move forward with reforms in tax and customs administration. In particular, we intend to make abuse in tax inspections subject to penalties under the criminal code and revise the protocols for tax inspections. In addition, by end-March 2002 we will develop guidelines that will restrict the interference of law enforcement and other supervisory agencies in the operations of private enterprises. In the area of tax administration, we will eliminate the backlog in VAT refunds for imported intermediate goods. We will also approve new streamlined regulations to simplify access to claims without compromising their validation. In the context of the ongoing customs modernization project, we are drafting a new Customs Code and we are considering hiring a pre-shipment inspection company. Such measure is expected to reduce misreporting by importers and customs officers, as well as increase tax and customs revenue. To engage the stakeholders on a discussion of reform proposals, the planned State Customs Services Working Group will publish its first review of administrative constraints in customs administration.

40.  We also plan to reduce the scope and size of the public sector and enhance its efficiency. To pursue this objective, we have already completed a reduction in the number of government ministries and state agencies by 20 percent and their employees by 10 percent and we have agreed to further reduce employment in the general government by 5 percent in 2002. We will also restructure the Ministry of Finance and push ahead with the next phase of treasury reform. In these latter two areas, we will rely on the recommendations of the forthcoming FAD mission. We will also further reform the public administration based on the review of the ongoing and planned functional reviews of key ministries, including the Ministry of Finance, the Ministry of Justice, the Ministry of Labor and Social Protection, and the Ministry of Agriculture, which we intend to complete during the first program year.

41.  We will monitor closely the impact that these and other reforms will have on the efficiency of government operations. To achieve this, in cooperation with the World Bank, we will complete: (i) a household survey evaluating public services; (ii) an enterprise survey to collect information on business environment; and (iii) a public officials' survey to elicit information on the internal processes of the public administration. We intend to publish the results of these surveys during the first program year.

42.  To enhance public sector accountability and performance through better management of public resources, policy formulation, and delivery of public services, we will implement the following measures. In the 2002 cycle of budget documents, we will start: (i) reporting on the general government, which consists of the consolidated state and Social Fund budgets; (ii) including in the budget documents the underlying macroeconomic framework and data on public debt and tax and expenditure arrears in the previous period; (iii) publishing a quarterly fiscal bulletin reporting on budget execution including PIP, tax and expenditure arrears, use of privatization proceeds, and the budget execution of the Social Fund; and (v) broadening the coverage of the public information on the budget to extrabudgetary funds. The publication of the quarterly fiscal bulletin will be a structural benchmark for end-March 2002. As part of the 2002 budget submission to parliament, we will also report the new borrowing of state owned enterprises. We will also include in the 2003 budget documents a three-year fiscal plan. The latter will identify medium-term sector strategies that will form the basis for expenditure allocations each year. Starting in 2002, we will publish the Chamber of Accounts' audits of state finances.

III.  The Government's Broader Reform Agenda

43.  The reforms that we have incorporated as structural conditionality in the Fund-supported economic program are essential for achieving macroeconomic stability and ensuring the successful implementation of the program. However, our reform agenda encompasses a wider range of structural measures, many of which are covered by programs agreed to with other International Financial Institutions and donors. In May 2001, we completed an interim National Strategy for Poverty Reduction (I-NSPR), with assistance from the Fund, the World Bank, and the Asian Development Bank, and through a consultative process involving political parties, local authorities, NGOs, the media, and bilateral donors. While we intend to develop a full-fledged National Strategy for Poverty Reduction in the second half of 2002, the I-NSPR is an important tool providing a general macroeconomic framework and establishing key areas for structural reform and focusing external assistance. The I-NSPR sets out the main elements of our three-year approach to broader structural reforms and poverty reduction and it is consistent with the economic program supported by the Fund under the PRGF. The I-NSPR sets out additional reform initiatives in, among others, the following areas: infrastructure, agriculture, small and medium size enterprise development, and social protection.

44.  Infrastructure development is essential for promoting economic growth. While part of development is supported by our PIP within the overall budgetary framework, we will also work to create favorable conditions for attracting private investment in infrastructure, including through deregulation and privatization. In particular, in the telecommunication sector we intend to pursue a medium-term tariff policy to achieve full cost recovery. Agricultural reform will include, among others, the design of a plan to auction land through the Land Redistribution Fund and the implementation of a program to increase capacity of the Agricultural Finance Corporation (KAFC) to appraise and supervise loans while maintaining positive real interest rates in lending. The reform efforts in this area are supported by the World Bank and the AsDB.

45.  Fostering domestic and foreign private investment is essential for the success of our macroeconomic program and it is high on the government agenda. We are developing numerous initiatives to establish a more favorable environment for private investment. Most notably, a presidential task force was recently established consisting of representatives of the government, international, and business community, with the objective of eliminating formal and informal barriers for private sector development and to improve the investment climate.

46.  Support of small and medium sized enterprises (SME) has significant potential for employment generation. In this area, we will aim at improving access to financing, simplifying the taxation of SMEs, and to streamline state regulations and fight corruption, reducing licensing and inspections to a minimum by developing inspection codes.

47.  The system of social protection needs to be revamped. We will enhance the financial stability of the Social Fund by broadening the base of social insurance contributions, further extending the system of individual social security identification numbers, raise the collection level of social security contributions, including through enforcement action, and reducing further in-kind payments to the Social Fund. We will also reduce early retirement privileges while ensuring that the base pension is at least 12 percent of the average wage.

48.  We are also actively working with other international financial institutions to improve governance. The World Bank's ongoing Consolidated Structural Adjustment Credit includes measures to reduce excessive inspections and licensing procedures. In addition, the World Bank's three-year Governance SAC (GSAC), currently under discussion, is expected to include reform measures to enhance governance in the areas of public expenditure management, public administration and civil service. Structural conditionality under the AsDB's Corporate Governance Loan (CGL), currently under discussion, is expected to include measures aimed at: (i) promoting corporate governance standards; (ii) introducing international accounting, auditing, and valuation standards; (iii) strengthening governance of commercial banks and the legal framework to enhance creditors' rights; (iv) launching legal and judicial reforms; and (v) restructuring the enterprise sector.

IV.  Program Monitoring

49.  The first-year program will be monitored through two reviews by the Fund's Executive Board based on semi-annual performance criteria (end-March 2002 and end-September 2002), indicative targets (end-December 2001 and end-June 2002), and structural benchmarks. The program will cover the period October 1, 2001-September 30, 2002. Quantitative performance criteria and indicative targets for the program are specified in Table 1. The quantitative performance criteria for end-March 2001 are: (i) a floor on net international reserves in convertible currencies of the NBKR; (ii) a ceiling on net domestic assets of the NBKR; (iii) a ceiling on the cumulative fiscal deficit of the state budget; (iv) a floor on cumulative tax collections in cash; (v) a ceiling on the stock of budget arrears of the central government as defined in Table 1 and Technical Annex; (vi) a zero ceiling on the stock of pension arrears; (viii) a zero ceiling on contracting or guaranteeing external debt of less than one year, excluding normal import credits; (ix) ceilings on contracting or guaranteeing new non-concessional debt (with a grant element lower than 45 percent over a maturity of one year); and (x) a zero ceiling on new external arrears. Box 1 contains one structural performance criterion and the six structural benchmarks under the program. The Technical Annex to this Memorandum defines the quantitative targets of Table 1 and specifies reporting requirements. The first review of the program will take place on or after May 15, 2002, based on performance as of end-March 2002. At the time of the first review, quantitative and structural performance criteria as well as structural benchmarks will be established for end-September 2002.

50.  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. However, in consultation with the Fund staff we will take any further measures, that may be needed to assure the success of the program. These consultations can be initiated by the government or whenever the Managing Director requests consultations.

Box 1. Structural Performance Criterion and Benchmarks

Structural performance criterion

By end-December, 2001

  • Issue a government resolution specifying an action plan and time schedule for the privatization of KyrgyzAirlines, KyrgyzTelecom, the four power distribution companies of the former KyrgyzEnergo, and KyrgyzGaz.

Structural benchmarks

By end-December 2001

  • Submit to parliament a new law on Energy Use Privileges to reduce the number of privileged energy users by at least 20 percent.
  • Strengthen the debt recovery capacity of DEBRA as defined in paragraph 33.
  • Submit to parliament amendments to conflicting legislation in the Law on Pledges and in the Civil Code to facilitate the execution of pledges.

By end-March 2002

  • Publish a quarterly fiscal bulletin reporting on budget execution including PIP, tax and expenditure arrears, and use of privatization proceeds. The bulletin should also include Social Fund budget execution.
  • Introduce new minimum capital requirements on own capital (Tier I capital minus at least the cross ownership of shares) of som 25 million for all banks.
  • Regularize the financial relations between the NBKR and the Ministry of Finance in line with recommendation of the IMF Safeguards Assessment mission.

Table 1. Kyrgyz Republic: Quantitative Program Targets
(In millions of soms, unless otherwise indicated, e.o.p.)

I. Performance criteria                
  1. Floor on net international
    reserves of the NBKR in
    convertible currencies
    (eop stock, in millions of
    U.S. dollars)3
-4.3 6.5 7.7 20.3 23.8 15.0 7.6 30.8
  2. Ceiling on net domestic
    assets of the NBKR
    (eop stock)4
2,626 1,725 2,371 1,779 1631 1,853 3,368 2,865
  3. Ceiling on cumulative
    fiscal deficit of the state
1,217 918 2,271 n.a 1,264 2,364 3,622 4,848
  4. Cumulative floor on state
    government tax
    collections in cash6
2,121 2,161 4,456 850 2,787 4,942 7,440 10,316
  5. Ceiling on the stock of
    central government
    budget arrears7
0 0 208 9 0 0 0 0
  6. Ceiling on the stock of
    Social Fund pension
0 0 0 0 0 0 0 0
  7. Ceiling on contracting or
    guaranteeing new external
    debt of less than one year8
    (in millions of U.S. dollars)
0 0 0 0 0 0 0 0
  8. Ceiling on contracting or
    guaranteeing of new
    nonconcessional external
    debt9 (cumulative, in
    millions of U.S. dollars)
12 12 0 0 0 0 0 0
  9. Ceiling on new external
    arrears (in millions of
    U.S. dollars)10
0 0 0 0 0 0 0 0
II. Indicative targets                
  1. Ceiling on reserve money
    (NBKR liabilities)
4,579 4,240 5,010 5,037 5,058 4,853 4,775 5,409

Sources: Data provided by the Kyrgyz authorities; and Fund staff estimates and projections.
1Targets under the earlier planned third year program under the second PRGF arrangement. Foreign exchange components valued at the exchange rate US$1 = som 50.5, gold holdings valued at US$275 per ounce, SDR valued at SDR 1 = US$1.306. Targets exclude claims and liabilities to BRO countries.

2Foreign exchange components valued at the exchange rate US$1 = som 49, gold holdings valued at US$265 per ounce, SDR valued at SDR 1 = US$1.259. Targets exclude claims and liabilities to BRO countries. To the extent that the actual data for end-September 2001 deviates from the preliminary values, the program targets will be adjusted accordingly.

3Excludes swaps and international reserves of NBKR that are pledged or blocked.
4Excludes counterpart of the loan by the Eximbank of Turkey and the EBRD/IDA enterprise loan which are channeled through the NBKR. Starting September 2001 NDA do not include commercial banks' forex deposits with the NBKR.

5For June and September 2001, cumulative beginning as of April 1, 2001. From December onwards, cumulative beginning as of October 1, 2001. State government comprises central and local government finances.

6For June and September 2001, cumulative beginning as of April 1, 2001. From October onwards, cumulative beginning as of October 1, 2001. Includes collection of tax arrears but excludes tax offsets.

7Central government budget arrears comprise wages, payroll contributions and mandatory transfers to the Social Fund, categorical grants, and payments to KyrgyzEnergo.
8As specified in the Technical Memorandum of Understanding (TMU), external debt is defined as in Executive Board's Decision no. 12274 (00/85) of August 24, 2000. Includes leases and other instruments giving rise to external debt.

9As specified in the TMU, external debt is defined as in Executive Board's Decision no. 12274 (00/85) of August 24, 2000. A debt is classified as concessional if its grant element is at least 45 percent, calculated using a discount rate based on the 10-year average of OECD commercial interest reference rates (CIRR), for debts of maturity greater than 15 years; for debts of maturity 15 years or less, the discount rate should be based on the six month average of the OECD CIRR. The ceilings include loans, leases, supplier's credits and other instruments giving rise to external debt on nonconcessional terms. IMF lending is excluded from the ceiling on new nonconcessional borrowing.
10On a continuous basis.

1. The floor on net international reserves of the NBKR will be adjusted: (i) upward/downward by 100 percent for excesses/shortfalls of the use of net foreign financing of the state budget and cash grants; (ii) upward/downward by 100 percent for excess/shortfall of cash privatization receipts. The adjustment for shortfalls in adjustors (i) and (ii) is limited to US$ 15 million each.
2. The ceiling on net domestic assets of the NBKR will be adjusted: (i) downward/upward by 100 percent for excesses/shortfalls of the use of net foreign financing of the state budget and cash grants; (ii) downward/upward by 100 percent for excess/shortfall of cash privatization receipts. The adjustment for shortfalls in adjustors (i) and (ii) is limited to US$ 15 million each valued at the program exchange rate.

1The State budget covers local and central government finances, while the general government, when the concept is used, also includes extrabudgetary funds (most notably the Social Fund).
2 The patent system will be established on a pilot basis in 2002 for six hard-to-tax economic activities. Enterprises under the patent system will be required to submit their financial reports to the State Tax Inspectorate (STI). We will assess the results of the pilot in 2003 on the basis of the reports collected by STI. 


Technical Memorandum of Understanding

1.  The Kyrgyz Republic's performance under the PRGF-supported program will be assessed by the IMF on the basis of the observance of quantitative and structural performance criteria and benchmarks. This annex and the tables attached to the Memorandum of Economic Policies (MEP) define the quantitative performance criteria and indicative targets, the structural benchmarks and performance criteria (Box 1 attached to the MEP), as well as the monitoring requirements.

V.  Quantitative Targets

2.  Quantitative targets are summarized in Table 1 of the MEP and defined below. This annex sets quantitative prior actions for end-October 2001, quantitative benchmarks for end-December 2001, quantitative performance criteria for end-March 2002, and indicative targets for end-June 2002 and end-September 2002. At the time of the first review, quantitative performance criteria will be set for end-September 2002.

Floor on net international reserves of the NBKR in convertible currency

3.  The program contains a floor on the minimum amount of 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.

4.  Total gross official international reserves of the NBKR shall be defined as the NBKR holdings of monetary gold, holdings of SDRs; any reserve position in the IMF; and any holdings of convertible currencies in cash, debt instruments or with foreign banks. Amounts pledged as collateral or in swaps or otherwise blocked, and capital subscriptions in foreign financial institutions and non-liquid assets of the NBKR are excluded. Excluded are also net forward positions, defined as the difference between the face value of foreign currency denominated NBKR off-balance sheet claims on non-residents and foreign currency obligations to both residents and non-residents. For program monitoring purposes, official international reserves shall be valued at a fixed program exchange rate of som 49 per U.S. dollar and $1.259 per SDR. Official gold holdings shall be valued at $265 per troy ounce. Program cross exchange rates are listed in Table 8.

5.  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. The change in NIR will be calculated as the sum of program loan disbursements and cash grants net of external debt service payment due by the NBKR and the government of the Kyrgyz Republic excluding payments due on pledged loans. Thus calculated, the stock of net official international reserves in convertible currencies amounted to $7.7 million as of September 30, 2001.

6.  The floors on the NIR of the NBKR in convertible currencies during the program period are reported in Table 1 below.

Table 1. Floors on NIR of the NBKR in Convertible Currencies1

(In million of U.S. dollars)

October 31 (prior action)


December 31, 2001 (indicative target)


March 31, 2002 (performance criterion)


June 30, 2002 (indicative target)


September 30, 2002 (indicative target)


1End-of-period stocks.

7.  The floor on net international reserves of the NBKR will be adjusted: (i) upward/downward by 100 percent for any excess/shortfall in net foreign financing and cash grants; and (ii) upward/downward by 100 percent for any excess/shortfall in cash privatization receipts. The adjustment for shortfalls in adjustors (i) and (ii) is to be limited to $15 million each.

8.  Net foreign financing is defined as balance of payment support loans plus cash grants minus amortization payments by the Ministry of Finance and NBKR (excluding repayments to the Fund). This definition applies to the adjustors to NIR and NDA. The cumulative net foreign financing for the program period is as follows:

Table 2. Projected Net Foreign Financing and Cash Grants1

(In millions of soms)

October 30, 2001    846.7
December 31, 2001 1,425.3
March 31, 2002 1,391.8
June 30, 2002    105.9
September 30, 2002 1,125.0

1Cumulative from October 1, 2001. Based on accounting exchange rate of som 49=$1

Ceiling on the net domestic assets of the NBKR

9.  Net domestic assets of the NBKR are defined as reserve money of the NBKR (defined below) minus the NBKR's net foreign assets3 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).

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

10.  Thus defined, the NBKR's net domestic assets consist of: (a) gross credit to the State government from the NBKR minus deposits of the State government with the NBKR4 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, the stock of the NBKR's net domestic assets amounted to som 2,371 million on September 30, 2001.

11.  The ceilings on the net domestic assets of the NBKR during the program period are reported in Table 3 below.

Table 3. Ceilings on the Net Domestic Assets of the NBKR1
  (In millions of soms)

October 31, 2001 (prior action) 1,779
December 31, 2001 (indicative target) 1,631
March 31, 2002 (performance criterion) 1,853
June 30, 2002 (indicative target) 3,368
September 30, 2002 (indicative target) 2,865

1End-of-period stocks. 

12.  The ceiling on net domestic assets of the NBKR will be adjusted: (i) downward/upward by 100 percent of the excess/shortfall in net foreign financing and cash grants; and (ii) downward/upward by 100 percent of the excess/shortfall of cash privatization receipts. The adjustment for shortfalls in adjustors (i) and (ii) is to be limited to $15 million each valued at the program exchange rate

Ceiling on the cumulative fiscal deficit of the state government5

13.  The ceiling on the state government fiscal deficit is defined as the negative sum of: (i) the change in the stock of net claims of the domestic banking system and nonfinancial institutions--including state-owned enterprises and public companies--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.

14.  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 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.

15.  The ceilings on the cumulative fiscal deficit of the state government during the program period are reported in Table 4 below.

Table 4. Ceilings on the Cumulative Fiscal Deficit of
the State Government1

  (In millions of soms)

December 31, 2001 (indicative target) 1,264
March 31, 2002 (performance criterion) 2,364
June 30, 2002 (indicative target) 3,622
September 30, 2002 (indicative target) 4,848

1Cumulative beginning from October 1, 2001.

Floor on cumulative tax collections in cash

16.  Cumulative tax collections in cash 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; 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, cumulative tax collections in cash since January 1, 2001 amounted to som 6,112 million as of September 30, 2001. Cumulative tax collections in cash include collections of tax arrears but exclude tax offsets.

17.  The floors for the cumulative tax collection in cash during the program period are reported in Table 5 below.

Table 5. Cumulative Floors on Tax Collections in Cash1
  (In millions of soms )

October 31, 2001 (prior action)      850
December 31, 2001 (indicative target)   2,787
March 31, 2002 (performance criterion)   4,942
June 30, 2002 (indicative target)   7,440
September 30, 2002 (indicative target) 10,316

1Cumulative from October 1, 2001.

Ceiling on the stock of central government budget arrears

18.  For the purposes of the program, central government budget arrears are defined as an overdue payment obligation of the Republican budget related to: (i) wages; (ii) Social Fund payroll contributions; (iii) mandatory transfers to the Social Fund; (iv) categorical grants; and (v) payments to KyrgyzEnergo. A payment is defined to be overdue if it remains unpaid after its due date for (iii) and (iv); for 30 days after its due date for (i) and (ii); and 60 days after its due date for (v). As of September 30, 2001, the stock of thus defined central government budgetary arrears was som 207.7 million.

19.  The ceilings on the stock of central government budget arrears during the program period are reported in Table 6 below.

Table 6. Stock of Central Government Budget Arrears
  (In millions of soms )

October 31, (prior action) 9
December 31, 2001 (indicative target) 0
March 31, 2002 (performance criterion) 0
June 30, 2002 (indicative target) 0
September 30, 2002 (indicative target) 0

Ceiling on the outstanding stock of Social Fund pension arrears

20.  A pension payment by the Social Fund is defined as overdue if it remains unpaid for 30 days after its due date. As of September 30, 2001, the stock of pension arrears was zero.

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

21.  The contracting or guaranteeing of external debt by the government of the Kyrgyz Republic, the NBKR, or any other agency acting on behalf of the government, is understood to mean a current, i.e., not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debts can take a number of forms, the primary ones being as follows: (i) loans, i.e., advances of money to the obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans and buyers' credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements); (ii) suppliers' credits, i.e., contracts where the supplier permits the obligor to defer payments until some time after the date on which the goods are delivered or services are provided; and (iii) leases, i.e., arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the less or retains the title to the property. For the purpose of the guideline, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement excluding those payments that cover the operation, repair or maintenance of the property.6

22.  Under the definition of debt above, arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.

23.  External debt limits apply to the contracting or guaranteeing of short term external debt (with an original maturity of less than one year, except normal import-related credits and NBKR reserve liabilities); and contracting or guaranteeing of nonconcessional medium- and long-term external debt (with original maturities of one year or more). Disbursements under the Fund's PRGF are excluded from the ceilings on external debt. The limit on the contracting or guaranteeing of short-term external debt is zero throughout the program period. Excluded from these external debt limits is the contracting or guaranteeing of new external debt that constitutes a rescheduling or refinancing of existing debt at terms more favorable to the debtor.

24.  For program purposes, a debt is considered concessional if the grant element is at least 45 percent, calculated by using currency specific discount rates based on the Commercial Interest Reference Rates (CIRRs) published by the OECD plus margins depending on the debt maturity. A lower grant element will be considered only for new loans committed to replace old debt originally contracted at less favorable terms. The average of the CIRRs over the last 10 years will be used for debts with a maturity of at least 15 years and the average CIRR of the preceding six months will be used for shorter maturities.

Ceiling on new external arrears

25.  For the purposes of the program, external arrears of the government of the Kyrgyz Republic 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 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 three year arrangement or during the period of the arrangement.

Ceiling on reserve money

26.  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 5,010 million as of end-September, 2001. The indicative limits for the program periods are reported in Table 7 below.

Table 7. Ceilings on Reserve Money1
  (In millions of soms)

October 30, 2001 (indicative target) 5,037
December 31, 2001 (indicative target) 5,058
March 30, 2002 (indicative target) 4,853
June 30, 2002 (indicative target) 4,775
September 30, 2002 (indicative target) 5,409

1End-of-period stocks.  

VI.  Disbursements Under the Program

27.  The tree-year PRGF arrangement envisages seven loan disbursements: the first, equivalent to SDR 11.72 million (13.2 percent of quota), upon approval of the arrangement; the second, equivalent to SDR 11.72 million (13.2 percent of quota), on completion of the first review based on the end-March 2002 performance criteria; the third, equivalent to SDR 11.72 million (13.2 percent of quota), on completion of the second review based on the performance criteria at end-September 2002; the fourth, equivalent to SDR 9.56 million (10.1 percent of quota), on completion of the third review based on end-March 2003 performance criteria; the fifth, equivalent to SDR 9.56 million (10.1 of quota), upon completion of the fourth review based on end-September 2003 performance criteria; the sixth, equivalent to SDR 9.55 million (10.1 percent of quota), on completion of the fifth review based on end-March 2004 performance criteria; and the seventh, equivalent to SDR 9.55 million (10.1 percent of quota) on completion of the sixth review based on end-September 2004 performance criteria. The end-September 2002 performance criteria will be established at the time of the first review. Performance criteria beyond September 2002 will be established in successive reviews.

VII.  Reporting Requirements Under the Program

28.  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:7

The balance sheet of the NBKR

29.  The NBKR will provide to the Fund its balance sheet every Monday. 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 Section I. The above information should be provided to the IMF Resident Representative and/or transmitted by e-mail to the Fund.

Monetary survey

30.  Monthly banking system data, in the form of a monetary survey, will be reported to the Fund by the NBKR within 14 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 Section I.

31.  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

32.  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 (Section I). 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

33.  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

34.  The Ministry of Finance, together with the NBKR, will provide monthly information on the disbursements, principal and interest payment--both actual and falling due; on contracting and guaranteeing of medium- and long-term external loans by the state government and 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 also report the total amount of outstanding government guarantees and external arrears on a monthly basis. While NBKR will provide the debt service payment data on private debt, the Ministry of Finance will provide data on debt service on public and publicly guaranteed loans.

Budgetary and extrabudgetary data

35.  In addition to the monthly treasury report, the Ministry of Finance and the Social Fund will report monthly on all their recorded expenditure arrears, in particular on those defined above in this Annex. This information will be provided to the Fund staff within 26 days from the end of each reference month. The Ministry of Finance will also provide monthly reports on the disbursements and use under the public investment program and budgetary grants with a one-month time lag.

Balance of payments data

36.  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

37.  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.

Table 8. Program Cross Exchange Rates

Currency Names



ATS Austrian schilling 16.2219 0.06164506
GBP UK pound sterling 0.7105 1.407459536
BEF Belgium franc 47.5566 0.021027576
DKK Danish krone 8.7845 0.113836872
EUR euro 1.1788 0.848320326
INR Indian rupee 47.04 0.021258503
ITL Italian lira 2282.6645 0.000438085
CAD Canadian dollar 1.5233 0.656469507
CNY Chinese yuan 8.277 0.120816721
KRW South Korean won 1299.9 0.00076929
DEM Deutschemark 2.3057 0.433707768
NLG Dutch guilder 2.5979 0.384926287
NOK Norwegian krone 9.2985 0.107544228
PTE Portuguese escudo 236.3478 0.004231053
TRL Turkish lira 1259000 0.000000794
FIM Finnish markka 7.0094 0.142665563
FRF French franc 7.7331 0.129314247
SEK Swedish krona 10.8441 0.092216044
CHF Swiss franc 1.7947 0.557196189
JPY Japanese yen 124.3054 0.008044703
AZM Azerbaijani manat 4648 0.000215146
AMD Armenian dram 554.11 0.001804696
BYR Beylorussian ruble 1380 0.000724638
KZT Kazakh tenge 146.5 0.006825939
LVL Latvian lats 0.639 1.564945227
LTL Lithuanian litas 4 0.25
MDL Moldavian lei 12.9102 0.077458134
RUR Russian ruble 29.1098 0.034352692
TJS Tajik somoni 2.35 0.425531915
UZS Uzbek sum 375.77 0.002661202
UAH Ukrainian hryvnia 5.3828 0.185776919
EEK Estonian kroon 18.4458 0.054212883

3The NBKR's net foreign assets consist of net international reserves, as defined in this Annex, plus other foreign assets plus the net claims on other CIS countries. The value of the latter is kept constant at som -51 million for program monitoring purposes.
4Deposits of the State government include the special account to accommodate the expected Paris Club debt-relief on principal repayments. Counterpart entry is recorded in other items net of the NBKR. Cumulative deposits in this fund during the program period are projected to be: som 938 million (December 31, 2001); som 1,030 million (March 31, 2002); som 2,018 million (June 30, 2002); som 2,119 million (September 30, 2002); and som 2,556 million (December 31, 2002).
5State government comprises central government and local government finances. Central government and Republican government are synonymous in this memorandum.
6Executive Board's Decision No. 12274 (00/85) August 24, 2000.
7Any correction or revisions to the data previously reported should be clearly indicated and documented as to the reasons for revision.