IMF Executive Board Concludes 2006 Article IV Consultation with the Kyrgyz Republic

Public Information Notice (PIN) No. 07/3
January 8, 2007

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On November 3, 2006, the Executive Board of the International Monetary Fund (IMF) concluded the 2006 Article IV consultation with the Kyrgyz Republic1


The authorities have maintained macroeconomic discipline in recent years, despite a challenging political environment. The overall fiscal deficit of the general government has declined from 5 percent of GDP in 2003 to 3.9 percent in 2005 and it is targeted to decline further to 3.2 percent of GDP in 2006. The external current account deficit has widened over the past two years, to an estimated 11 percent of GDP in 2006, despite a surge in workers' remittances. The deficit is being financed by a rise in the net capital and financial account balance, resulting in a healthy buildup in gross official reserves to about 4.3 months of projected 2007 imports of goods and services at present.

Economic activity is rebounding in 2006, with year-on-year real GDP growth of 3.2 percent through September, after a slight contraction in 2005; output growth excluding the Kumtor gold mine (which suffered a serious accident) exceeded 6 percent, led by the construction and services sectors. From 2003 to 2005, per capita GDP in U.S. dollar terms rose by one-fourth and the poverty rate fell from 50 percent of the population to 44 percent.

Despite the 2005 rescheduling of the Kyrgyz Republic's debt by the Paris Club of official creditors, the country's external debt burden remains high. Debt relief under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative is expected to alleviate that burden and create fiscal space in the coming years for scaling up poverty-reducing outlays, to assist in meeting the Millennium Development Goals. Social spending has already increased from 14 percent of GDP in 2003 to an estimated 15½ percent in 2006.

Inflation, which has remained in the 3-5 percent range in recent years, is projected to rise slightly to just under 6 percent during 2006. Remonetization has gathered pace in recent years, but the financial system remains relatively shallow by international standards. Comprehensive financial reforms are under way and are slated to gain momentum under the Fund-supported program. The Kyrgyz Republic continues to maintain a managed exchange rate float. Active unsterilized central bank intervention in the foreign exchange market since early 2006 in response to a surge in workers' remittances and short-term capital inflows has fanned monetary expansion, and the authorities will need to tighten monetary policy in the period ahead to keep inflation in check.

Executive Board Assessment

Directors commended the Kyrgyz government for maintaining economic stability and pressing ahead with reforms, despite the challenging political environment. Directors welcomed the government's commitment to build further on these achievements under the economic program for 2007. This will involve continued prudent fiscal and monetary policies and structural reforms to improve the climate for private sector-led growth and poverty reduction.

Directors welcomed the progress made in updating the Country Development Strategy (CDS) with ample civil society participation, and extending it to 2010. They considered the reform agenda outlined in the CDS as a good roadmap to achieve the Millennium Development Goals and exploit fully the promising growth potential in a low-inflation environment. They urged the authorities to work toward the steadfast implementation of these reforms, building on intensive outreach to domestic stakeholders and with support from the international community.

Directors noted that, while fiscal prudence has become entrenched, further improvements in tax administration will be essential to underpin fiscal consolidation. In particular, it will be important to complete the 2006 tax reform, secure prompt passage of the tax code before parliament, and resist pressures to dilute the programmed reforms in the tax administration agencies. Directors encouraged the authorities to continue enhancing public financial management, especially the budgetary process and the tracking and targeting of pro-poor spending within a context of overall expenditure restraint. They took positive note of the authorities' intention to phase in the planned fiscal decentralization carefully and build local government capacity, in order to forestall a loss of fiscal control.

Directors welcomed the programmed payroll tax cuts, which would foster job creation and legalization of the informal economy. However, Directors expressed concern about the adverse fiscal consequences of the proposed reduction in the retirement age. They called on the authorities to forge a broad consensus in favor of a comprehensive pension reform aimed at safeguarding fiscal stability and promoting domestic savings.

Directors took note of the joint Fund/World Bank debt sustainability analysis, which highlights the Kyrgyz Republic's heavy external debt burden. They noted that debt relief under the HIPC Initiative and Multilateral Debt Relief Initiative is expected to create fiscal space for scaling-up poverty-reducing outlays, while underpinning debt sustainability. Directors, however, also underscored that the government should persevere in its efforts to improve debt management, continue refraining from nonconcessional borrowing, avoid the accumulation of contingent liabilities, and ensure that externally funded investments are of the highest caliber. They also underlined the need to align carefully any additional spending financed by asset sales or new external loans with the program's macroeconomic framework to help safeguard macroeconomic stability and debt sustainability.

Directors commended the authorities' success in keeping inflationary pressures in check, but expected that a tightening of the monetary stance would be necessary to avert a spike in inflation, in light of the recent easing in liquidity conditions and the envisaged hikes in utility tariffs. They considered it appropriate for the central bank to maintain the managed exchange rate float, while allowing for greater nominal exchange rate flexibility if the trend toward a further real appreciation of the som persists. Directors saw scope for additional increases in policy interest rates and a further broadening of monetary control instruments to keep liquidity expansion in check.

Directors welcomed the resilience of the Kyrgyz financial system to external shocks, and the authorities' plans to deepen financial sector reforms, building on the findings of the recent Financial Sector Assessment Program update. They encouraged the National Bank to continue strengthening banking supervision, especially in light of the rapid credit growth. Directors looked forward to the prompt passage of the pending bill to increase the National Bank's autonomy as a key step to bolster confidence and the credibility of monetary policy.

Directors supported the authorities' intention to resolve governance weaknesses and discourage rent-seeking behavior, both of which have diverted scarce resources and depressed productivity growth over the years. In this context, they cautioned that an active industrial policy could hamper the efforts in this area, and weaken the tax effort as well. Directors stressed the need to improve the business climate to nurture private sector-led growth—including by streamlining the regulatory framework, simplifying licensing and other administrative procedures, and fostering regional integration. They urged the authorities to implement steadfastly the energy sector plan to reduce the sector's large quasi-fiscal deficits and provide reliable power supplies for the domestic and export markets. Directors stressed that progress on structural reforms will also remain key to strengthening and diversifying the export base, thereby reducing the vulnerability to external shocks.

Kyrgyz Republic: Selected Economic Indicators, 2001-06

  2001 2002 2003 2004 2005 2006
  Actual Actual Actual Actual Actual Proj.

Real GDP (growth in percent)

5.3 0.0 7.0 7.0 -0.6 4.0

GDP per capita (in U.S. dollars)

308 322 381 435 473 528

Consumer prices (percent change, eop)

3.7 2.3 5.6 2.8 4.9 5.7

Unemployment rate

7.8 8.6 8.9 9.0 9.7 ...

Poverty rate (consumption approach)

56 55 50 46 44 ...

General government finances (in percent of GDP) 1/


Total revenue and grants

20.4 22.8 22.2 23.1 24.3 24.9

Total expenditure (including net lending)

26.0 28.1 27.0 27.5 28.2 28.1

Overall fiscal balance (cash basis)

-5.2 -5.6 -4.9 -4.5 -3.9 -3.2

Primary balance excluding grants

-4.4 -5.1 -3.9 -3.9 -2.8 -2.9

Banking sector 2/


Broad money (percent change, eop)

12.2 35.1 34.5 33.6 25.5 35.1

Credit to private sector (in percent of GDP)

3.8 4.0 4.7 7.0 8.0 10.5

Reserve money (percentage change)

32.5 42.9 31.6 22.9 24.9 27.0

Interest rate 3/

33.2 24.8 23.0 24.3 25.7 ...

External sector


Current account balance (in percent of GDP)

-1.5 -5.0 -4.1 -3.4 -8.3 -11.0

Export growth (percent change)

-2.1 14.2 16.4 26.6 -0.1 16.9

Import growth (percent change)

-9.9 28.0 15.7 28.8 23.9 27.9

Gross official reserves (million USD) 4/

230 317 359 544 609 721

Gross reserves (months of imports, eop)

3.6 4.3 3.8 4.7 4.1 4.2

External public debt outstanding (in percent of GDP) 5/

100 82 98 88 79 72

Exchange rates


Exchange rate (soms per U.S. dollar, average)

48.4 46.9 43.7 42.6 41.0 ...

Real effective exchange rate Index (1995=100) (percentage change) 6/

0.0 1.8 -0.6 -3.2 1.2 ...

Sources: Kyrgyz authorities; and IMF staff estimates and projections.

1/ General government comprises state government and Social Fund finances. State government comprises central and local governments.

2/ Projections are based on program exchange rates specified in the TMU.

3/ Weighted average interest rate on som-denominated loans.

4/ Gross reserves exclude international reserves of the NBKR that are pledged or blocked.

5/ Excluding obligations of the Kumtor gold mine.

6/ A positive sign indicates appreciation.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.


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