Kyrgyz Republic—Supplementary Letter of Intent, February 14, 2003

Press Release: IMF Completes in Principle Second Review Under the Three-Year Poverty Reduction and Growth Facility Arrangement and Approves Request for Waiver of Performance Criterion for the Kyrgyz Republic

Kyrgyz Republic and the IMF

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Kyrgyz RepublicLetter of Intent, Memorandum of Economic Policies, and Technical Memorandum of Understanding

Bishkek, Kyrgyz Republic, January 31, 2003

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
Washington, D.C. 20431


Dear Mr. Köhler:

The Kyrgyz authorities held discussions with Fund staff in October/November 2002 for the second review under the PRGF arrangement. Based on these discussions, the attached Second-year Memorandum of Economic Policies (SMEP) reviews economic developments and policy implementation through September 2002, updates the macroeconomic framework, and discusses the financial policies and structural reform program for the second-year program (October 1, 2002–September 30, 2003). It supplements the MEP dated November 16, 2002, as well as the supplementary MEP dated June 13, 2002. It also proposes quantitative performance criteria, as well as structural performance criteria and benchmarks, for end-March 2003.

All performance criteria for end-September 2002 were met, except for the continuous performance criterion on the non-accumulation of external payments arrears. The arrear was cleared in early January 2003, and we request a waiver for the non-observance of this performance criterion.

On the basis of the performance up to September 2002 and the policies set out in the attached memorandum, the government also requests the completion of the second review. We expect the third, fourth, fifth, and sixth reviews under the arrangement to be completed after the test dates of end-March 2003, end-September 2003, end-March 2004, and end-September 2004, respectively.

International experts have completed quarterly audits of the reserves of the National Bank of the Kyrgyz Republic (NBKR) following the IMF Board meeting on February 9, 2000, when Executive Directors discussed remedial actions in connection with an earlier misreporting of reserves. The auditors have since confirmed the correctness of the data that has been transmitted to the Fund. We therefore intend to move from a quarterly to annual audits of reserves to reduce the operational costs of the NBKR.

We prepared a National Poverty Reduction Strategy (NPRS), which sets forth the main elements of our approach to poverty reduction and macroeconomic policies and structural reforms supporting it. The NPRS was submitted to the Fund on December 9, 2002.

We believe that the policies and measures set forth in the memorandum are adequate to achieve the objectives of our program. At the same time, 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/

Nikolai Tanaev
Prime Minister
Kyrgyz Republic

/s/

Ulan Sarbanov
Chairman
National Bank of the
Kyrgyz Republic


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Second-Year Memorandum of Economic Policies
For the period October 1, 2002–September 30, 2003

I. Introduction

1. This Second-year Memorandum of Economic Policies (SMEP) supplements our Memorandum of Economic Policies dated November 16, 2001, and the Supplementary Memorandum of Economic Policies dated June 13, 2002. These documents describe the economic policies supported by the International Monetary Fund (IMF) under a three-year Poverty Reduction and Growth Facility arrangement (PRGF). The SMEP reviews our policy performance during the first-year program (October 1, 2001–September 30, 2002) and describes the policies for the period October 1, 2002–September 30, 2003. These policies are consistent with the National Poverty Reduction Strategy (NPRS) we submitted on December 9, 2002 for the IMF and World Bank endorsement.

II. Performance Under the Program

2. Because of a landslide in the Kumtor gold mine, lower energy exports, and a delayed harvest, real GDP declined by 2.6 percent in the first nine months of 2002. Excluding gold production, however, growth was positive (1.1 percent). Stabilization continued with the 12-month inflation falling from 5.3 percent at the beginning of the first-year program to 3.5 percent in September 2002. The nominal exchange rate appreciated by 3.6 percent during this period and nominal and real interest rates declined. Confidence in economic policies improved as indicated by narrower interest rate differentials between domestic and foreign government securities.

3. We also made progress in poverty reduction. A study conducted with the World Bank staff confirms that, since 1998, poverty has decreased by almost 20 percent. Income differentials narrowed and poverty declined in all regions—more in rural than in urban areas. Unfortunately, the poorest region—the mountainous area of Naryn—benefited only a little. Nevertheless, poverty reduction remains our first priority as 47 percent of the population were still poor at end-2001.

4. Despite the drop of fiscal revenue from Kumtor, we have achieved all end-September 2002 quantitative targets under the program (Table 1). The net international reserves (NIR) target was met with a wide margin as confidence in domestic currency improved and currency substitution decreased. Net domestic assets (NDA) of the central bank (NBKR) remained below the program ceiling by 6.3 percent of reserve money. The targets for fiscal deficit and tax collection were also met and there were no budgetary arrears under the program as the earlier small pension arrears were cleared in September. The two structural performance criteria for end-September 2002 were observed as well. Legislative amendments to ensure that courts use only the NBKR-confirmed financial accounts as a basis for bank liquidation cases were submitted to parliament on September 30 and a government resolution was issued to reform the Large Taxpayer Unit (LTU) to make it fully responsible for tax collection from large enterprises in 2003.

5. Regarding the banking sector, amendments to the Law on Licensing were sent to parliament. With these amendments, the licensing of financial institution has been made the responsibility of the NBKR alone (a structural benchmark for end-September). We have also drafted a banking sector reform program (a structural benchmark for end-September) based on the IMF/World Bank Financial Sector Assessment Program (FSAP) recommendations. In the fiscal area, a government resolution was issued on the restructuring of the Ministry of Finance (a structural benchmark for end-September). This includes introducing permanent secretary posts for the highest level of civil service in the ministry to ensure quality and continuity in administration. A Financial Planning Division within the Treasury was established and it has produced the first cash revenue and expenditure forecast for the remainder of 2002.

6. Because of a commercial dispute related to the failed Kyrgyz Telekom privatization, we temporarily incurred in a small amount of external arrears. An international arbitration tribunal in Stockholm awarded Raiffeisen, our privatization consultant, fees for $1.5 million on July 12, 2002. We have now cleared these arrears and request a waiver for non-observance of the relevant continuous performance criteria. We also intend to change the schedule of the audits of the NBKR's net international reserves from quarterly to annual audits.

7. We are grateful to our creditors who in March 2002, at the Paris Club, granted a flow rescheduling of our debt for 2002–2004. Since then, we have met with our creditors to finalize the bilateral agreements. We have obtained reschedulings from France, Germany, Denmark, Japan, Turkey, and Russia. Unfortunately, a rescheduling agreement could not be reached with Union Bank of Switzerland (UBS) on a guaranteed debt which we thus repaid in May 2002. Negotiations are being concluded with South Korea and India, while they are still proceeding with the Kuwait Fund and China. By end-2002, Pakistan and Uzbekistan had not responded to our requests for discussions.

III. Program for the Period October 2002–September 2003

8. The second-year program sets forward policies to achieve our medium term goals under three constraints: the projected decline in gold production, the high external debt, and the need to reduce poverty. To offset the negative impact of the declining gold production on growth and the balance of payments, other industries should fill the gap. This will call for strong cost competitiveness and structural reforms to improve productivity. At the same time, the poverty reduction objectives should not lead to higher fiscal deficits. Excessive deficits could trigger macroeconomic imbalances through rekindling inflation, depreciating nominal exchange rate, and increasing external debt. It is essential that we devise and preserve a right balance of policies to avoid slow growth, unsustainable external debt, and persisting high poverty levels. The high dependency on a few export commodities calls for diversification of the economy and we need to direct our policies toward this goal already now.

9. We will focus on strengthening structural policies, especially in governance and banking, to increase economic efficiency. Containing the growth of unit labor costs relative to trade partners will be critical for maintaining the competitive edge of Kyrgyz exports. At the same time, financial policies will need to contain consumer price inflation.

10. In view of our currently weak fiscal position, we will mainly rely on economic growth to reduce poverty and avoid higher fiscal deficits to finance social spending. For targeted poverty reduction programs, we will seek grants instead of loans including under the CIS7 Initiative. To generate resources for social spending, we will follow a three-pronged approach. We will expand the tax base, improve tax administration, and reallocate public resources from nonproductive uses to social spending.

11. Private investment should be the driving force of capital accumulation. The externally financed Public Investment Program (PIP) will be streamlined from 5.1 percent of GDP in 2002 to 3.5 percent by 2005 and reduced to 3 percent thereafter. In 2003–2006 the increase in national savings by 3 percentage points of GDP would reflect further fiscal adjustment and improving enterprise profitability through productivity gains. The use of foreign savings to finance investment would increase by 1.3 percentage points in the same period.

12. For the period October 1, 2002–September 30, 2003, we have revised the macroeconomic framework, introduced new quantitative and structural program targets, and specified further our intentions in fiscal, monetary, external, and structural policies. In the latter area, in particular, we will strengthen governance and move to the next stage of the banking sector reform.

13. The landslide at the Kumtor mine and the reduction in energy production has led to a downward revision of real GDP growth from 4.3 percent to 0.8 percent in 2002. Growth will rebound next year as gold production returns to a higher level in the second half of 2003. Year on year, we project real GDP to grow by 5.2 percent in 2003. Building on the recent gains in price stabilization, we expect the 12-month inflation to remain low—at 3.6 percent—in 2002. For 2003, our inflation target is 4.4 percent, somewhat higher than in 2002 reflecting higher administered prices and indirect taxes. With the sustained stability in the foreign exchange market, these developments would lead to an increase in GDP per capita (in U.S. dollar terms) by 17 percent during 2002–2003. The current account deficit for 2002 is now projected at only 2.8 percent of GDP—smaller than projected earlier (3.8 percent). The reduction in gold exports are more than compensated thanks to higher gold prices, lower PIP related imports, and a sharp increase of service revenues including from the international military base. For 2003, the program target is to contain the external current account deficit to 4.2 percent and increase official gross reserves to $271 million by end-2002 and further to $307 million, or 4.7 months of imports by end-2003.

Fiscal policies

14. In 2002, the fiscal (cash) deficit is now projected to increase to 5.6 percent of GDP from 5.0 percent in 2001. This weakening of the fiscal balance reflects the lower-than-expected growth and the related revenue shortfall from the Kumtor gold mine. However, for 2003, when output recovers, the program aims at strong fiscal adjustment. The deficit will be reduced to 4.7 percent of GDP. This will be achieved mainly through an increase in state budget revenue from the projected 13.4 percent of GDP in 2002 to 14.6 percent in 2003. We expect that the recovery of revenue from Kumtor and the extension of VAT to large agricultural producers will account for most of it, while the rest will come from the full-year effect of recent eliminations of various VAT exemptions. We intend to reach the NPRS's target of 15 percent central government tax ratio in 2005. This goal can be achieved only by broadening the tax base significantly in the coming years. Since agriculture accounts for 40 percent of GDP but only 5 percent of tax revenue, it is necessary to extend VAT within agriculture to cover large producers' direct sales to the domestic market in the 2003 budget as of April 1, 2003. With respect to other tax measures, we have already submitted to Parliament for approval a new tax on real property. It will improve the financial position of local governments and promote fiscal decentralization. In addition, we will increase the excise tax on liquor from som 15 to som 18 per liter. Mineral resource taxation will be amended by end-June 2003 (as recommended by the World Bank) to make it comparable with international standards. We will introduce a unified environmental tax by end-2003 in lieu of the existing system of fees. Finally, to reduce smuggling, we have exempted medicines from the VAT as of January 1, 2003.

15. On tax rates, no further adjustments will be introduced during the second-year program. Indeed, following the profit tax rate reduction in the beginning of 2002, profit tax collections excluding KyrgyzEnergo remained constant in January–September compared to the same period in the previous year, only thanks to significant efforts in collection. This suggests extreme caution in tax rate reductions. However, by end-March 2003 we will study the possibility of reducing the high payroll tax rate in the medium term provided that we can compensate the potential revenue loss by other means. By end-March, 2003, we will prepare proposals on the taxation of capital gains for discussion with the Fund staff during the third review of the PRGF supported program. We are finalizing our plan to move to a funded pension scheme in close cooperation with the World Bank staff and discuss the short- and medium term fiscal implications with the IMF staff before proposing any adjustments in payroll tax rates. On trade taxes, we raised the custom tariffs on flour and grain from 0 to 20 percent temporarily until end-December 2002 in part for fiscal reasons and in part in response to Kazakhstan's similar measures earlier in 2002. We will not repeat such protective tax measures next year but instead try to involve our neighbors in a mutually beneficial trade liberalization policy consistent with the WTO best practices. An interministerial task force is studying the possibility of reducing the excise tax on gasoline. The results of the analysis will be discussed at the time of the Fund mission next February.

16. Tax administration also needs to be improved. Implementation of the government resolution on reforming the Large Taxpayer Unit (LTU) is our number one priority in this area. A detailed action plan has been approved (Annex I) and tax collection by the central LTU from the first 60 large enterprises will start in early 2003. We have requested technical assistance from the IMF to ensure effective implementation of this reform. Regarding Free Economic Zones, no new FEZs or similar tax exemption arrangements will be introduced. Of the total stock of som 106 million of claims on VAT refunding accumulated before 2002, we will clear the som 53 million stock of VAT refunding claims to large enterprises by end-March 2003.

17. We will introduce new performance criteria on payroll tax collection in cash and the Social Fund's transfer to the Medical Insurance Fund (MIF). Compliance with the floor on payroll tax collections will require that republican and local government spending agencies are current with their payroll contributions to the Social Fund and that monthly transfers are effected on the 25th day of each month. Meanwhile, post-January 1, 2002 arrears of the Social Fund to the MIF, excluding arrears on medical insurance of the unemployed and pensioners will be reduced from som 77 million at end-September 2002 to som 50 million by year-end, and som 40 million at end-March 2003. All arrears will be cleared by end-2003. No new arrears to the Medical Insurance Fund will be accumulated beginning October 2002 and all current transfers to the MIF and transfers to clear post-January 1, 2002 arrears will be in cash (no offsets or in-kind payments).

18. On the expenditure side, in line with our poverty reduction strategy, we will increase social spending by 0.3 percentage point of GDP, to 11.9 percent in 2003. In compensation for the extension of VAT on large producers' direct sales to domestic market, the 2003 budget incorporates an 8.0 percent average increase in government wages and old-age pensions from April 1, 2003. The specific amount of the increase in old-age pensions will be determined during the February mission depending on the financial position of the Social Fund. At the same time, the Unified Monthly Benefit will be increased on average by 20 percent to compensate poor households for the expansion of the VAT coverage. On public investment, we will continue our work to establish clear guidelines for prioritizing the PIP on the basis of its likely impact on growth, export potential, and poverty reduction. Draft guidelines were submitted for the IMF, World Bank, and ADB staff comments at end-December, 2002. In 2003, we expect that $82 million donor financing will be disbursed to finance the PIP. We have been able to reduce counterpart financing arrears from som 189 million to som 135 million at end-October 2002 and plan to clear the rest by end-January 2003. Fiscal performance criteria under the program will be cash tax collection, cash deficit, avoidance of arrears in wages, pensions, categorical grants, mandatory transfers to the Social Fund, energy bills to KyrgyzEnergo, allowances to poor families, and the performance criteria on payroll tax collection and the Social Fund's transfers to the Medical Insurance Fund as described above.

19. To improve efficiency in administering public finances, we will complete the Ministry of Finance restructuring according to the time schedule indicated in Annex II. To improve the budgetary process, we will issue a time schedule for the preparation of the 2004 budget by end-January 2003. The Treasury has started quarterly cash forecasting and these forecasts will be shared with the Fund staff on a regular basis. Pending the computerization of the Treasury, we will develop a temporary commitment control and arrears tracking system on a manual basis. The first such report will be shared with the Fund staff by end-March 2003. Finally, to provide an accurate presentation of overall public finances, we will present to parliament consolidated general government accounts in the context of the 2003 State Budget. A Medium-Term Fiscal Framework for 2004–2006 to be designed to achieve real GDP growth of 5 percent and inflation of not more than 4 percent will be approved and published by the Economic Policy Council by end-March 2003.

Monetary and exchange rate policy

20. Our economic strategy is based on cautious monetary policy to keep inflation low to minimize pressure on the exchange rate and to ensure cost competitiveness of Kyrgyz exports. Broad money has increased substantially since the beginning of the program to accommodate a strong demand for money as evidenced by a stable and slightly appreciating nominal exchange rate. However, the NBKR stands ready to use open market operations to reduce liquidity in case we perceive any sign of rekindling inflation. We expect the demand for real balances to increase by 6 percent during 2003 which implies continuing remonetization of the economy and a further decline in currency substitution. The structural measures on the banking sector reforms detailed below are expected to improve financial intermediation and raise the money multiplier, albeit only slightly in the short term. Consistent with these trends, and with our growth and inflation targets, reserve money is programmed to grow by 6.5 percent during 2003 down from a projected 39 percent increase during 2002. This implies for 2003 a 15 percent growth of som broad money, down from a currently projected 30 percent during 2002. Our new performance criteria on NIR and NDA of the NBKR have been set against the backdrop of the better-than-expected balance of payments outcome and reversed currency substitution. Although the current account deficit is expected to widen somewhat in 2003, the continuing strengthening of confidence in the som and continued BOP support should make an increase of NIR by $23.4 million feasible during October 1, 2002–March 31, 2003. As we expect a surplus in the primary fiscal balance (excluding the foreign financed component of the PIP), NDA should decline further by som 199 million between October1, 2002 and March 30, 2003. In daily monetary operations, the NBKR will increasingly rely on using treasury bills as the market gains depth. T-bills issued in December, 2002, as part of the normalization of financial relations between the Ministry of Finance and the NBKR will provide the necessary instruments.

21. The NBKR will continue its exchange rate policy of managed floating. It will intervene on the foreign exchange market to smooth temporary variations of the nominal exchange rate and to strengthen the official foreign reserve position. In our medium term strategy, we believe that the tradable goods sector's competitiveness is better served by containing the growth of unit labor costs rather than by a nominal exchange rate depreciation.

External sector policies

22. We are actively pursuing our debt reduction strategy primarily through further fiscal adjustment. By 2005, we intend to reduce the general government primary fiscal deficit to 1.4 percent of GDP from the projected 3.8 percent in 2002. The streamlining of the PIP is underway and these expenditures will decline to 3.5 percent of GDP by 2005. We have also issued a tender for KyrgyzTelekom and, if successful, 75 percent of those receipts will be deposited in a special account at the NBKR to be used later for external debt reduction. We have limited the contracting of new public or publicly guaranteed debt to loans with grant element of at least 45 percent. Consistent with the Paris Club agreement, we continue pursuing with interested foreign investors debt-for-equity and debt-for-nature swaps.

23. In trade policy, our main problem is regional trade restrictions. As a member of the WTO and in the context of the CIS7 initiative, we plan to approach our neighboring countries with specific proposals to alleviate these restrictions starting with fees imposed on road transportation. On our part, we will maintain a free trade and exchange regime and refrain from introducing new seasonal tariffs or non-tariff barriers on agricultural or other imports. By end-January 2003, we will develop an action plan to help farmers to improve their access to the world market. We will also investigate the feasibility of moving from barter to cash in our energy trade with the neighboring countries in the medium term. A feasibility report will be submitted to the Economic Policy Council by end-March 2003.

24. More generally, we will honor the program's continuous performance criterion on not imposing or intensifying restrictions on payments and transfers for current international transactions, introducing multiple currency practices, concluding bilateral payments agreements that are inconsistent with the IMF's Article VIII, or imposing or intensifying imports restrictions for balance of payments reasons.

Structural policies

25. In the second-year program, the emphasis of our structural policies will be in two areas: governance reform and further restructuring of the banking sector. Reforms in these areas are necessary to improve the business and investment climate, mobilize domestic resources to finance investment, and improve access to credit. On banking reform, we will follow the advice of the recent FSAP mission to reduce commercial banks' vulnerabilities. The reform effort will concentrate on further enhancing bank supervision, improving the regulatory framework, divesting state-owned banks, strengthening DEBRA, and accelerating the computerization of the payment system. The specific measures and implementation schedule are presented in Box 1.

26. The general perception of corruption in public institutions limits the efficiency of the government. We will pursue vigorously our new action plan to tackle the governance problem. This plan combines the main features of the work done under the PRGF-supported program, the ADB's Corporate Governance and Enterprise Reforms Program, the ADB's Custom Modernization Project, and the World Bank's Governance Structural Adjustment Credit. We will concentrate on five areas: (i) institution building for good governance; (ii) promoting public awareness; (iii) improving efficiency in public administration; (iv) strengthening of corporate governance; and (v) reforming the judiciary. The specific steps toward good governance are presented in Box 2. This box also indicates which measures will be specifically monitored under the IMF, World Bank, and AsDB-supported programs.

IV. Prior actions and Program Monitoring

27. We recognize that the adoption by parliament of the 2003 State and Social Fund Budgets as discussed with the Fund staff is a precondition for the IMF Executive Board approval of the second-year program and completion of the second review under the three-year PRGF arrangement.

28. To monitor policy implementation under the second-year program through end-March 2003, we set out several quantitative and structural performance criteria and benchmarks shown in Table 1 and Box 3 of this Memorandum. In particular, we have added two performance criteria for program performance: a floor on payroll tax collections and a ceiling on the stock of Social Fund arrears to the Medical Insurance Fund (MIF). Detailed definitions of the quantitative targets appear in the revised Technical Memorandum of Understanding (TMU, Annex III).

29. The government of the Kyrgyz Republic and the NBKR believe that the policies and measures set forth in this SMEP 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 ensure the success of the program. These consultations can be initiated by the government or whenever the Managing Director requests them.

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Technical Memorandum of Understanding

1. The Kyrgyz Republic's performance under the second-year 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 SMEP define the quantitative performance criteria and indicative targets, the structural benchmarks and performance criteria (Box 3 attached to the SMEP), as well as the monitoring requirements.1

I. Quantitative Targets

2. Quantitative targets are summarized in Table 1 of the SMEP and defined below. This annex sets out the quantitative benchmarks for end-December 2002, quantitative performance criteria for end-March 2003, and indicative targets for end-June and end-September 2003. At the time of the third review, quantitative performance criteria will be set for end-September 2003.

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 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 international reserve liabilities of the NBKR in convertible currencies.

4. Total gross 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 (including accrued interest) or with foreign banks. Amounts pledged as collateral or in swaps or otherwise blocked, 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. However, net claims on other BRO countries are excluded from the ceiling. For program monitoring purposes, gross international reserves shall be valued at a fixed program exchange rate of som 47 per U.S. dollar and $1.3186 per SDR. Official gold holdings shall be valued at $322.4 per troy ounce. Program cross exchange rates are listed in Table 10.

5. Total international 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. For program monitoring purposes, total international reserve liabilities shall be valued at the program exchange rates. Thus calculated, the stock of net international reserves in convertible currencies amounted to $80.7 million as of September 30, 2002.

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 millions of U.S. dollars)

December 31, 2002 (benchmark) 96.1
March 31, 2003 (performance criterion) 104.2
June 30, 2003 (indicative target) 104.6
September 30, 2003 (indicative target) 113.8
December 31, 2003 (benchmark) 119.9

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. In the case of a release of the NBKR's pledged foreign reserves, the NIR floor will be adjusted upward by 100 percent of the net effect of the releases and related amortization payments.

8. Net foreign financing is defined as balance of payment support loans plus cash grants to the state government budget 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 Grants
Cumulative from October 1, 2002

  (In millions of U.S. dollars)

December 31, 2002 13.1
March 31, 2003 22.3
June 30, 2003 21.4
September 30, 2003 25.5
December 31, 2003 24.1

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 assets2 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 and IDA enterprise loans (see equation 1 below).

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

10. Thus defined, the NBKR's net domestic assets consist of: (a) gross credit to the general government from the NBKR minus deposits of the general government with the NBKR minus the counterpart of the loan by the Eximbank of Turkey; (b) gross credit to domestic banks by the NBKR minus the counterpart of the EBRD and IDA enterprise loans; and (c) all other net assets of the NBKR (other items net). Thus defined, the stock of the NBKR's net domestic assets amounted to som 2,003 million on September 30, 2002.

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)

December 31, 2002 (benchmark) 1,920
March 31, 2003 (performance criterion) 1,804
June 30, 2003 (indicative target) 1,883
September 30, 2003 (indicative target) 1,560
December 31, 2003 (benchmark) 1,308

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 excluding the amortization payments for the release of the NBKR's pledged foreign reserves.

Ceiling on the cumulative fiscal deficit of the state government

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 the 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; (v) net foreign loans disbursed to the state government for project financing; and (vi) rescheduling of bilateral debt (principal and interest payments), following the Paris Club agreement. The fiscal balance will be measured at the program exchange rate, 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 is 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, 2002 (benchmark)

1,548

March 31, 2003 (performance criterion)

2,713

June 30, 2003 (indicative target)

3,705

September 30, 2003 (indicative target)

4,396

December 31, 2003 (benchmark) 2/

1,130


1Cumulative beginning from October 1, 2002.
2Cumulative beginning from October 1, 2003.

Floor on cumulative tax collections in cash by the state government

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; 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, cumulative tax collections in cash since October amounted to som 10,359 million as of September 30, 2002. 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)

December 31, 2002 (benchmark) 3,025
March 31, 2003 (performance criterion) 5,303
June 30, 2003 (benchmark) 8,240
September 30, 2003 (indicative target) 11,619
December 31, 2003 (benchmark) 2/ 3,876

1Cumulative from October 1, 2002.
2Cumulative fromOctober 1, 2003.

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; (v) payments to Kyrgyz Energo; and (vi) allowances for poor families. 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); 60 days after its due date for (v); and 40 days after its due date for (vi). As of September 30, 2002, the stock of thus defined central government budgetary arrears was zero.

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)

December 31, 2002 (benchmark) 0
March 31, 2003 (performance criterion) 0
June 30, 2003 (indicative target) 0
September 30, 2003 (indicative target) 0
December 31, 2003 (benchmark) 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, 2002, the stock of pension arrears was zero.

Floor on the payroll tax collections of the Social Fund

21. Cumulative payroll tax collections in cash correspond to the total contributions collected by the Social Fund from both employers and employees for a given period.

22. The floor for the cumulative tax collection in cash during the program period are reported in Table 7 below.

Table 7. Cumulative Floor on Payroll Tax Collections in Cash1

  (In millions of soms)

December 31, 2002 (benchmark) 975
March 31, 2003 (performance criterion) 1,715
June 30, 2003 (indicative target) 2,515
September 30, 2003 (indicative target) 3,389
December 31, 2003 (benchmark) 2/ 1,102

1Cumulative from October 1, 2002.
2Cumulative from October 1, 2003.

Ceiling on the stock of Social Fund arrears to the Medical Insurance Fund

23. Social Fund arrears to the Medical Insurance Fund are defined as overdue transfer obligations of the former to the latter as defined by law and refer only to arrears incurred starting January 1, 2002. A transfer is defined to be overdue if it remains unpaid after its due date.

24. The ceiling on the cumulative stock of Social Fund arrears to the Medical Insurance Fund during the program period are reported in Table 8 below. As of end-September 2002, total arrears of the Social Fund to the Medical Insurance Fund amounted to soms 77.1 million. No new arrears will be accumulated to the Medical Insurance Fund starting October 1, 2002.

Table 8. Cumulative Ceiling on the Stock of Social Fund Arrears to the
Medical Insrurance Fund

  (In millions of soms)

December 31, 2002 (benchmark) 50
March 31, 2003 (performance criteria) 40
June 30, 2003 (indicative target) 20
September 30, 2003 (indicative target) 10
December 31, 2003 (benchmark) 0

Ceilings on contracting or guaranteeing of new external debt by the state government of the Kyrgyz Republic or the NBKR or any other agency acting on behalf of the state government

25. In connection with the contracting or guaranteeing of external debt by the state government of the Kyrgyz Republic, the NBKR, or any other agency acting on behalf of the state government of the Kyrgyz Republic, `debt' is understood to have the meaning set out in point 9 of the Guidelines on Performance Criteria with respect to External Debt in Fund arrangements (Decision No. 12274-00/85, dated August 24, 2000).3

26. External debt ceilings apply to (i) the contracting or guaranteeing of short term external debt (i.e. external debt with an original maturity of less than one year, except normal import-related credits and NBKR reserve liabilities); and to (ii) contracting or guaranteeing of nonconcessional medium- and long-term external debt (i.e., external debt with an original maturity of one year or more). Disbursements by the Fund from the PRGF Trust are excluded from the ceilings on external debt. Also excluded from these external debt ceilings is the contracting or guaranteeing of new external debt that constitutes a rescheduling or refinancing of existing external debt at terms more favorable to the debtor. The limit on the contracting or guaranteeing of short-term external debt is zero on a continuous basis throughout the period of the arrangement. The limit on the contracting or guaranteeing of medium- and long-term external debt is zero as specified in Table 1 of the SMEP.

27. 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. A lower grant element will be considered only for new debt 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 payments arrears

28. For the purposes of the program, external payments arrears will consist of all debt-service obligations (i.e., payments of principal and interest) arising in respect of any debt contracted or guaranteed or assumed by the state government of the Kyrgyz Republic, or the NBKR, or any agency acting on behalf of the state government of the Kyrgyz Republic since the Kyrgyz Republic's independence, including, without limitations, unpaid penalties or interest charges associated with these arrears owed by the state government of the Kyrgyz Republic, or the NBKR, or any agency acting on behalf of the state government of the Kyrgyz Republic, on imports received subsequent to independence. The ceiling on new external payments arrears shall apply on a continuous basis throughout the period of the arrangement. It shall not apply to external payments arrears arising from external debt being renegotiated with external creditors, including Paris Club creditors; more specifically, to external payments arrears in respect of which a creditor has agreed that no payment needs to be made pending negotiations.

Ceiling on reserve money

29. 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 6,786 million as of end-September, 2002. The indicative limits for the program periods are reported in Table 9 below.

Table 9. Ceilings on Reserve Money1

(In millions of soms)

December 31, 2002 (benchmark) 7,432
March 30, 2003 (indicative target) 7,677
June 30, 2003 (indicative target) 7,784
September 30, 2003 (indicative target) 7,874
December 31, 2003 (benchmark) 7,916

1End-of-period stocks.

II. Reporting Requirements Under the Program

30. 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:4

The balance sheet of the NBKR

31. 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 of the NBKR; medium- and long-term liabilities; the net domestic assets of the NBKR; net credit from the NBKR to the general government; net credit from the NBKR 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

32. 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 government, 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.

33. 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

34. 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

35. 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

36. 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 the 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

37. 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

38. 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

39. 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 10. Program Cross Exchange Rates

  Currency Names National Currency/US$ US$/National Currency

GBP UK pound sterling 0.6429                  1.555399518
DKK Danish krone 7.5922                  0.131714072
EUR Euro 1.0222                  0.978300189
INR Indian rupee 48.3655                  0.020675907
CAD Canadian dollar 1.5760                  0.634518395
CNY Chinese yuan 8.2772                  0.120814167
KRW South Korean won 1,226.6773                  0.000815210
NOK Norwegian krone 7.4841                  0.133616229
TRL Turkish lira 1,660,664.2599                  0.000000602
SEK Swedish krona 9.3470                  0.106986026
CHF Swiss franc 1.4999                  0.666733333
JPY Japanese yen 122.4359                  0.008167538
AZM Azerbaijani manat 4,897.9844                  0.000204166
AMD Armenian dram 557.9864                  0.001792158
BYR Belarusian rubel 1,864.0246                  0.000536474
KZT Kazakh tenge 154.4674                  0.006473857
LVL Latvian lats 0.6070                  1.647446544
LTL Lithuanian litas 4.0000                  0.250000000
MDL Moldavian lei 13.5746                  0.073666751
RUR Russian ruble 31.6350                  0.031610595
TJS Tajik somoni 2.8730                  0.348068712
UZS Uzbek sum 808.4429                  0.001236946
UAH Ukrainian hryvnia 5.3295                  0.187635325
EEK Estonian kroon 15.9935                  0.062525543


1Central government and Republican government are synonymous in this memorandum. State government comprises central and local governments. General government comprises state government and Social Fund finances.
2The 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 BRO countries.
3External debt 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 lessor 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.
4Any correction or revisions to the data previously reported should be clearly indicated and documented as to the reasons for revision.
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