Kyrgyz Republic: Statement of the IMF Mission
March 18, 2009
Describes the preliminary findings of IMF staff at the conclusion of certain missions (official staff visits, in most cases to member countries). Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, and as part of other staff reviews of economic developments.
1. An International Monetary Fund (IMF) mission visited Bishkek during March 4–18, 2009 to hold discussions for the first review of the Kyrgyz Republic’s arrangement under the Exogenous Shocks Facility (ESF) and the 2009 Article IV consultation. In this context, the mission discussed with the authorities the economic outlook for 2009 and the policy response to the ongoing global economic crisis. The mission thanks the authorities for their hospitality and the open and informative discussions. The following statement reflects the views of the mission.1
As the global economic crisis spreads, 2009 will be a very difficult year for the Kyrgyz economy.
2. The outlook for the Kyrgyz economy has worsened as countries in the Caucasus and Central Asia region are increasingly being swept up by the global economic crisis. Russia and Kazakhstan remain key trading partners of the Kyrgyz Republic and a major source of remittances. The regional economic slowdown is hurting the Kyrgyz economy via trade and remittance channels, spilling over to domestic demand. As a result, economic growth in the Kyrgyz Republic is expected to slow sharply, from 7½ percent in 2008 to less than 1 percent in 2009, before recovering modestly in 2010. Risks are clearly on the downside. Reflecting effective policy actions of the authorities, declining international commodity prices, and slowing demand, inflation has come down sharply since spiking at over 30 percent in mid-2008. Inflation fell to 16.7 percent in February 2009 and is expected to continue to ease.
3. The spreading economic crisis is putting pressure on the Kyrgyz balance of payments and government finances. The current account deficit widened substantially in 2008 due to higher import prices for food and fuel, mitigated by higher exports and remittances. In 2009, the current account deficit is expected to remain high as the reversal in food and fuel prices will be more than offset by a drop in exports and remittances. The slowdown in economic growth, especially in trade, is causing government revenues to fall sharply.
Proactive government policies and large international support will help the Kyrgyz Republic weather the economic crisis.
4. The authorities’ macroeconomic policies are helping to mitigate the impact of the large external shocks on the economy. In addition, the sizable and timely support that is being offered by the Russian Federation, including a substantial amount in concessional budget support, will help to cushion the impact of the crisis. The Kyrgyz authorities intend to use this budget support in a medium-term fiscal framework, with part of this used to finance the 2009 budget.
5. The donor assistance will provide substantial support to economic growth. It will allow fiscal policy to accommodate the large shortfall in government revenues expected this year, while creating some room for an increase in spending. The government plans to raise capital spending, which will improve medium-term growth prospects, but also to increase social support. The decline in economic activity combined with the expected decline in remittances will result in a reduction in disposable household incomes that threatens to reverse much of the gains in poverty reduction achieved in recent years. To mitigate the effects on the poor, the government will further increase the Unified Monthly Benefit, in addition to the increase in the benefit level introduced last year. With the new tax code having just come into effect and the economic outlook uncertain, it will be important that the government closely monitors revenue collection in the coming months, to determine whether measures are needed to boost revenues.
6. The National Bank of the Kyrgyz Republic (NBKR) continues to aim its policies at further reducing inflation and maintaining financial sector stability. With interest rates at positive real levels and international price pressures easing, inflation is projected to fall to close to 10 percent by year-end, despite the impact of higher utility prices and the depreciating som. The NBKR is appropriately allowing continued exchange rate flexibility to absorb the large external shocks, maintain competitiveness, and limit foreign exchange reserve losses. Provided that inflation continues on a downward path and exchange rate pressures ease, interest rates could be gradually reduced, to help stimulate economic growth.
7. Banks have held up well to the global financial crisis. Bank capitalization and liquidity remain high and linkages to the international financial system have so far been broadly maintained without disruption. Credit growth, however, has come to a halt, as demand for financing has weakened and banks have become more cautious. Non-performing loans have started to rise and are likely to increase further as the economy slows. Deposits have fallen and new funding from external sources has been drying up. In this more challenging financial environment, strong supervisory vigilance over the banking sector continues to be needed, to detect and address the emergence of any potential liquidity or solvency issues early on. The NBKR has taken a proactive approach and is monitoring banks closely. The authorities have prepared contingency plans that envisage emergency liquidity support by the NBKR, and possible capital injections by the government for systemic banks in the event that they should be needed. The recent decision to make the deposit insurance scheme operational by the mid-2009 and to increase its coverage will help improve confidence in the banking sector.
8. Based on the Kyrgyz authorities’ policy performance in the last half of 2008 and their policy intentions for 2009, the mission will recommend completion of the first review of the ESF arrangement. The IMF’s Executive Board is expected to consider this recommendation in May.
1 This statement represents the views of the mission team, and not necessarily those of the IMF.