## cr17143 ## Source details **Canonical URL:** [cr17143](https://www.imf.org/-/media/files/publications/cr/2017/cr17143.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr17143.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr17143.pdf.json) --- ### Consumption and Poverty - Regional recovery weak with negative output gaps, subdued consumption and low investment constraining domestic and external demand. - Remittances picked up; pressures on the som subsided; regional economies expected to grow at a slower pace for longer. - Poverty and consumption implications: - Poverty rate (2015): 32.1. - Near-term consumption constrained by weak growth and limited fiscal space. ### Growth and Inflation - Growth (first nine months of 2016): - Overall growth: 2 percent y-o-y. - Non-gold growth: 3.1 percent y-o-y. - Sector contribution: trade, construction and agriculture; consumption boosted before September Nomad Games. - Non-gold growth projection for 2016: 2.4 percent. - Potential growth conditionality: reaching 5 percent over the medium term contingent on appropriate policies and recovery of trading partners’ growth. - Inflation: - Headline inflation: - 0.3 percent y-o-y (September). - Core inflation: about 6 percent (within NBKR’s 5-7 percent target range). - Downward drivers: subdued growth, appreciating som, declining domestic food prices, limited exports to the EEU. ### Monetary and Exchange Rate Developments - NBKR policy and actions: - By end-September 2016 policy rate cut by 400 basis points to 6 percent. - Policy Rate (5/ As of end-September 2016): 10.5; 10.0 (another entry reported). - NBKR purchased in net terms about US$61 million. - Reserve money and broad money: - Reserve money (percent change, eop): 2016: 13.5; 2017 (Proj.): 27.7; 2018 (Proj.): 9.7. - Broad money (percent change, eop): 2016: 14.0; 2017 (Proj.): 16.1. - Exchange rate and reserves: - Som appreciated by about 9.5 percent against the U.S. dollar over first 10 months of 2016 (also reported as about 10.5 percent during first nine months). - REER appreciated by 4.2 percent; NEER appreciated by 10.5 percent over first nine months of 2016. - Gross International reserves (in millions of U.S. dollars): 2016: 1,621; 2017 (Proj.): 1,680; 2018 (Proj.): 1,745. ### External Sector, Remittances and Trade - Trade flows (end-August 2016): - Exports dropped by 12 percent y-o-y by end-August 2016 (also reported: exports dropped by 24 percent y-o-y by end-June). - Imports declined by 7.6 percent over same period (also reported: imports shrank by 8 percent by end-June). - Remittances: - Picked up in US$ and RUB terms as Kyrgyz citizens benefited from easier access to EEU labor markets, but remained well below pre-crisis levels. - Current account balance (percent of GDP): - 2016: -15.2; 2017 (2nd review): -10.0; 2018 (Proj.): -13.6. ### Financial Sector Trends and Stability - Credit and dollarization: - Overall credit to the private sector contracted by 2 percent during first three quarters of 2016. - Som-denominated loans grew by 21 percent; dollar-denominated loans fell by 21 percent. - Deposit dollarization: 54 percent (end-September). - Loan dollarization: 43 percent. - Asset quality and capital: - NPLs at 9.0 percent; loans under watch over 24 percent. - Return on equity: Mar-16: -1.6; Jun-16: 0.1; Sep-16: 1.9. - Regulatory capital to risk weighted assets: Sep-16: 24.5. - All banks have met new capital requirements of som 400 million. - Vulnerabilities and supervisory actions: - Banking sector remains vulnerable due to high dollarization and credit risk. - NBKR measures: regular stress tests, improved monitoring of NPLs, collecting additional data on individual NPLs, improving asset classification regulations, ensuring adequate provisioning, established Financial Stability Council, developed Crisis Preparedness Framework. - Bank liquidations under DEBRA: court ordered liquidation of “Bishkek”, “Adil”, “Kurulush” and “Mercury” banks; liquidation of remaining banks under DEBRA underway. ### Fiscal Performance, Policy and Program Measures - H1 2016 fiscal outcome: - Deficit limited to 2.5 percent of GDP (first half); reported overall fiscal deficit for first half reached 2.2 percent of GDP (Letter of Intent). - Revenue developments: taxes exceeded projections mostly due to higher-than-expected customs revenue after strengthened customs payments and collection. - Expenditure developments: current expenditures slightly higher; capital expenditures lower due to delays in some domestically financed projects. - H2 2016 spending pressures and risks: - Goods and services and domestically financed capital expenditures expected to exceed second review projections by 1.3 and 2 percentage points of GDP, respectively. - Contributors: hosting three international events in H2 (higher spending: 1 percentage point of GDP); spending of revenue collected in 2015 by public agencies but not spent (1.2 percentage points of GDP); building law enforcement housing and schools (1.1 percentage points of GDP). - Absent corrective measures, headline deficit could exceed 7 percent of GDP. - Fiscal targets and commitments: - Authorities committed to deficit target of 4.5 percent of GDP for 2016. - For 2017, government initially submitted a draft budget with deficit of 4.7 percent; agreed to relax target to 3 percent of GDP (LOI, ¶11). - Measures to achieve 2017 target include implementing fiscal measures from second review, reducing the wage bill, cutting goods and services to 2015 level in percent of GDP, refraining from populist measures before presidential election. - Cyclically-adjusted balance expected to improve by 1.7 percentage points of GDP even with slightly looser target. - Revenue and expenditure reforms: - Revenue-side: review natural resources taxation; reverse VAT exemption on import of grains and sale of flour. - Expenditure-side: streamline subsidies after review; improve targeting of social benefits; refrain from quasi-fiscal activities with budgetary implications. - Tax administration: strengthen State Tax Services (STS), reduce informal economy, introduce cash registries and encourage e-filing. - Wage bill reform: - Objective: reduce wage bill by 1.4 percentage points of GDP to reach 8.7 percent of GDP by 2018. - Implementation: action plan started in Q4 2016; plan to reduce wage bill by 0.4 and 1 percentage point of GDP in 2017 and 2018, respectively. - Memo items: 2016 projected wage bill 10.1; 2016 projected wage bill with TA GDP 9.7; 2016 projected wage bill at the time o 9.4; Total effort1.4 C=A+B; 2018 revised target 8.7 D=E-C. - Public Financial Management (PFM) priorities: - Revisit budgetary process; develop a fiscal rule including limits on external debt and fiscal balance; continue FMIS implementation—FMIS terms of reference signing postponed by three months (SB new deadline, May 2017); sign contract with IT provider (SB, September 2017); continue accounting reforms and include fiscal risks in budget framework. ### Debt Sustainability and DSA Findings - External public and publicly guaranteed debt: - Projected to drop to 60.7 percent of GDP in 2016, compared to 64.6 percent in 2015. - External public debt (in percent of GDP): 2016: 71.8; 2017 (Proj.): 60.7; 2018 (Proj.): 63.0; 2019 (Proj.): 64.4; 2020 (Proj.): 63.1; 2021 (Proj.): 61.1; 2022 (Proj.): 59.4. - Public debt (total, in percent of GDP): 2016: 73.1; 2017 (Proj.): 62.1; 2018 (Proj.): 64.2; 2019 (Proj.): 65.5; 2020 (Proj.): 64.2; 2021 (Proj.): 62.0; 2022 (Proj.): 60.3. - DSA assessment: - Kyrgyz Republic remains at moderate risk of debt distress (no longer a high-moderate borderline case). - Vulnerabilities persist to large external shocks, sizable exchange rate depreciation and/or massive scaling-up of public investments. - Stress tests: PV of debt-to-GDP+remittances breaches thresholds under five of six stress tests, especially one standard deviation shock to exports and a 30 percent exchange rate shock. - Investment scenario risks: - A permanent 4 percentage point increase in public investment to GDP, combined with a 1 percent increase in borrowing costs and a temporary 30 percent nominal depreciation, results in a non-stabilizing external debt path. - Highlighted need to ensure prioritization and sufficient profitability of public investment projects. - Policy implications: - Remain cautious when contracting and guaranteeing new debt; refrain from non-concessional borrowing. - Continue fiscal consolidation and strengthen debt monitoring and PIM efficiency (implement PIMA recommendations). - Prudence in selecting new infrastructure projects. ### Program Modalities, Monitoring and Financing - Program review and approval: - Staff supports completing the third review of the ECF arrangement and modifying QPCs and ITs through end-December 2017. - Program monitored semi-annually. - Financing: - Financing needs for 2016 and 2017 are covered by IMF and multilateral and bilateral partners. - Proposed ECF disbursements schedule (SDR 9.514 million each disbursement except final SDR 9.516 million) totaling SDR 66.600 million (100.0 percent). - Capacity to repay the Fund (selected): - Fund principal obligations (in millions of SDRs): 2016: 5.7; 2017: 18.3; 2018: 20.7; 2019: 17.5; 2020: 18.7; 2021: 17.1. - Outstanding Fund credit (in millions of SDRs): 2016: 139.9; 2017: 140.6; 2018: 129.5; 2019: 112.0; 2020: 93.2; 2021: 76.1. - Outstanding Fund credit in percent of gross international reserves: 2016: 11.6; 2017: 11.4; 2018: 9.9; 2019: 7.7; 2020: 6.0; 2021: 4.7. - Quantitative performance criteria and indicative targets (selected ITs/QPCs and outcomes): - Floor on net international reserves (NBKR) ITs: March: 1,235; June: 1,288; September: 1,425. Status: Met. Actual series entries include: 1,164; 1,110; 1,418; 1,346; 1,347; 1,329; 1,347. - Ceiling on net domestic assets (NBKR) ITs: March: -22,625; June: -24,625; September: -28,090. Status: Met. Actuals include: -23,688; -18,523; -9,587; -7,546; -5,388; -5,746; -5,199. - Ceiling on cumulative overall deficit of general government (cumulative): March: 12,108; June: 11,609; September: 9,582. Status: Met. Actuals include: 15,602; 20,492; 20,156; 9,691; 17,549; 17,032; 14,480. - Ceiling on accumulation of new external payment arrears (continuous): 0. Status: Met. - Attachment I — Fiscal measures to close the gap (estimated contributions, percent of GDP): - Memo: 2016 Nominal GDP (billions of soms): 452.0; 2017 Nominal GDP (billions of soms): 486.2. - Aggregate estimated contribution totals: 2016: 2.6; 2017: 2.3. - Notable lines: Tax policy total: 0.1 (2016); 0.6 (2017). Tax administration total: 0.4 (2016); 0.7 (2017). Expenditure total: 1.7 (2016); 0.9 (2017). Nontax revenues total: 0.3 (2016); 0.1 (2017). ### Structural Benchmarks, Prior Actions and Conditionality - Prior actions and SBs (selected): - Prior Action: Unify foreign exchange collateral requirements for NBKR loans. Timing/status: 5 business days prior to board meeting. - Sign FMIS terms of reference: End-May, 2017 (new; delayed from earlier). - Finalize review and action plan to reduce subsidies: End-July, 2017 (New). - Wage bill reduction target: reduce to 8.7 percent of GDP by 2018 (SB, end-May 2017). - Banking Law: enacted November 30 (reported), with missing/diluted provisions; authorities committed to prepare amendments by April (SB) and submit to Parliament in July (SB) and enact by end-December, 2017 (New). - DEBRA liquidations: several banks liquidation requests met; further liquidations scheduled. - Program conditionality focuses on macro-critical areas: financial sector reforms, fiscal consolidation, PFM reforms and monitoring. ### Governance, AML/CFT and Structural Reform Priorities - Governance and corruption: - Transparency International: corruption perception remains high; governance indicators deteriorating. - Timely adoption of AML/CFT law by Parliament should contribute to positive EAG assessment; staff encouraged addressing shortcomings, especially to prevent laundering of proceeds from corruption. - Staff cautioned against amending recently enacted procurement law and warned suspension of e-procurement would be regressive. - Structural reform priorities: - Improve business climate and competitiveness within the EEU: financial inclusion, trading across borders, insolvency regime, access to electricity, contract enforcement. - Productivity-boosting reforms and large infrastructure program to improve competitiveness. - Importance of constructive and fair resolution of the dispute with Centerra for investment climate stability. ### Annexes — Selected Modeling and Special Topics - Annex I — Spillovers from Lower Oil Prices: - Model: IMF’s MCDMOD. - Shock simulated: permanent 50% drop in global oil prices and 100 basis-points increase in Kyrgyz sovereign risk premium. - Model prediction: GDP growth to slow to 3 percent by 2016; staff projection for non-gold GDP growth at 2.4 percent. - Limitations: model does not incorporate EEU accession effects; upside risk from EEU membership not captured. - Annex II — Kumtor Gold Mine: - Kumtor operations and facts: - Discovery: 1978; commercial production started in 1997. - Initial 1992 agreement allocated 67 percent of profit to Kyrgyz Republic; 2009 agreement gave Kyrgyz Republic a 33 percent share in Centerra Corporation in exchange for 100 percent of the Kumtor mine. - Kyrgyz Republic has three of 11 board members; receives a 13 percent tax on gross revenues plus 1 percent to regional development fund. - Recent acquisition by Centerra dilutes Kyrgyz stake from 32.75 percent to 29.43 percent. - Economic contribution and risks: - Kumtor contributes between 6 and 10 percent of GDP per year to growth. - On average since 2009 Kumtor contributed about 6 percent of total tax revenues. - Since 2009 gold accounted for average 30 percent of total exports. - Employment: workforce more than 2,500 people. - Kumtor increases GDP volatility; suspension of operations would have negative economic, social, environmental consequences and undermine investor confidence. - Annex III — Linkages with China: - Trade and investment channels: - Trade with China ~ one-fifth of external trade turnover and one-quarter of imports in 2015. - Since independence >10 public investment agreements with China worth more than $1.8 billion (excluding grants). - Chinese inward FDI exceeded $ 1.2 billion over past few years, averaging 30 percent of all FDI inflows. - Kara-Balta oil refinery (“Dzhunda”) received about $350 million from Chinese partners. - Risks: monitor project profitability and debt implications given concentration of Chinese financing in infrastructure and energy. ### Staff Appraisal: Recommendations and Risks - Macroeconomic policy recommendations: - Fiscal: resume consolidation, improve public investment framework, prioritize growth-friendly consolidation (boost tax revenue, reduce wage bill, streamline goods and services), avoid reliance on grants and one-offs, adopt fiscal rule. - Monetary: maintain neutral stance; monitor som appreciation and low food prices; improve monetary transmission before moving to inflation targeting; NBKR to maintain flexible exchange rate with two-way intervention policy. - Financial sector: strengthen resilience, restore diluted provisions of Banking Law, develop strategic supervision plan, finalize liquidation of DEBRA banks, strengthen crisis preparedness. - Structural: implement bold reforms to improve competitiveness, PFM reforms to enhance efficiency and accountability, simplify cross-border trade, improve insolvency and contract enforcement. - Main risks: - Downside: lower commodity prices and/or slower growth in Russia and Kazakhstan, delayed EEU benefits, escalation of Kumtor dispute, domestic political tensions and populist spending ahead of elections. - Upside: strengthening ties with China, RKDF-financed projects, larger-than-expected impact from EEU membership. *Source: IMF staff and Kyrgyz authorities, cr17143 (IMF country report material provided).* ### 1. Consumption and Poverty ______________________________________________________________________ 4 ### 1. Consumption and Poverty ### Context and Recent Developments - The regional economic recovery remains weak with negative output gaps, subdued consumption and low investment, constraining domestic and external demand and limiting growth prospects. - Remittances have picked up and pressures on the som have subsided, but regional economies are expected to grow at a slower pace for longer, leaving the Kyrgyz economy on a lower-growth trajectory with limited fiscal space. ### Growth - For the first nine months of 2016: - Overall growth: 2 percent y-o-y. - Non-gold growth: 3.1 percent y-o-y. - Consumption was boosted in the run-up to the September Nomad Games. - Sectors contributing most to growth: trade, construction and agriculture. - Non-gold growth is projected at 2.4 percent in 2016. - Reaching potential growth of 5 percent over the medium term is contingent on appropriate policies and recovery of trading partners’ growth. ### Inflation - Headline inflation turned negative in September: - 0.3 percent y-o-y. - Core inflation remains at about 6 percent, within the NBKR’s 5-7 percent target range. - Downward drivers of inflation: subdued growth, appreciating som, declining domestic food prices due to a good agriculture harvest and limited exports to the EEU on account of non-tariff barriers. ### Monetary Developments - By end-September 2016 the NBKR cut the policy rate by 400 basis points to 6 percent. - The som appreciated by about 9.5 percent against the U.S. dollar over the first 10 months of 2016. - NBKR purchased in net terms about US$61 million. - Reserve money picked up due to the NBKR’s unsterilized FX purchases. - Despite monetary policy relaxation, interest rates on som-denominated loans remain high. ### Exchange Rates and Remittances - Exports dropped by 12 percent y-o-y by end-August 2016; imports declined by 7.6 percent over the same period. - REER appreciated by 4.2 percent and NEER appreciated by 10.5 percent over the first nine months of 2016. - Remittance inflows picked up in US$ and RUB terms as Kyrgyz citizens benefited from easier access to EEU labor markets, but remained well below pre-crisis levels. - Strong inflows on the financial account (FDIs related to the Russia Kyrgyz Development Fund and capital and commercial banks’ flows) and the som appreciation resulted in an increase in reserves. ### Financial Sector Trends - Overall credit to the private sector contracted by 2 percent during the first three quarters of 2016. - Som-denominated loans grew by 21 percent; dollar-denominated loans fell by 21 percent. - Deposit dollarization dropped to 54 percent; loan dollarization dropped to 43 percent. - Loan portfolio deterioration: - NPLs at 9.0 percent. - Loans under watch over 24 percent. - Continued high incidence of loan restructuring and prolonging. - Capital adequacy is high; all banks have met the new capital requirements of som 400 million. - Despite strong capital buffers and falling dollarization, the banking sector remains vulnerable. ### Outlook and Risks - Near-term outlook has worsened; medium-term prospects should improve. - Inflation in 2016 is expected to be lower than previously projected and will gradually pick up as economic activity recovers. - Current account deficit will narrow in 2016 due to rescheduling of PIPs, widen in 2017/18, and gradually moderate thereafter as remittances recover and public investment tempers. - Downside risks dominate: - Regional developments: lower-than-projected commodity prices and/or slower growth in key trading partners (particularly Russia and Kazakhstan). - Delayed realization of positive effects from EEU accession due to weak activity within the union, lack of full compliance with EEU regulations, and trade diversion. - Escalation of disputes with Centerra over the Kumtor mine. - Domestic political tensions related to proposed constitutional amendments and upcoming elections. - Upside risks: - Strengthening of economic ties with China. - Projects financed by the Russia Kyrgyz Development Fund (RKDF). - Larger-than-expected impact from EEU membership. ### Program Issues — Resuming Fiscal Consolidation - H1 2016 fiscal performance was in line with the program; deficit limited to 2.5 percent of GDP. - Revenue developments: - Taxes exceeded projections mostly due to higher-than-expected customs revenue following measures strengthening customs’ payments and collection. - Expenditure developments: - Current expenditures slightly higher than expected. - Capital expenditures lower due to delays in some domestically financed projects. - H2 2016 spending pressures risk jeopardizing end-year fiscal targets: - Tax revenues expected slightly below projections due to recently introduced VAT exemption on the import of grains and the sale of flour. - Non-tax revenues expected to exceed projections due to higher-than-expected dividends from SOEs and the NBKR. - Goods and services and domestically financed capital expenditures are expected to exceed the second review projections by 1.3 and 2 percentage points of GDP, respectively. - Contributors include hosting three international events in H2 (incurring higher spending than budgeted: 1 percentage point of GDP); larger-than-expected spending of revenue collected in 2015 by public agencies but not spent (1.2 percentage points of GDP); and building law enforcement housing and schools (1.1 percentage points of GDP). - Absent corrective measures, the headline deficit could exceed 7 percent of GDP. *Source: IMF staff and Kyrgyz authorities, "1. Consumption and Poverty" (cr17143).* ### 15. Despite the above anticipated slippages, the authorities remain committed to a deficit ### cr17143 - 15. Despite the above anticipated slippages, the authorities remain committed to a deficit ### Fiscal stance and 2016–2017 budget - Authorities remain committed to a deficit target of 4.5 percent of GDP for 2016. - Implementation plans: - Implement tax policy and administration measures identified at the time of the second review (LOI, Attachment I). - Only about half of these measures will be implemented this year (0.5 percentage point of GDP) because some require legislation and may only be implemented next year. - On the expenditure side, authorities will resort to rephasing foreign financed capital expenditures to close the gap and reach the deficit target. - 2017 budget negotiations and outcome: - Government initially submitted a draft budget with a deficit of 4.7 percent of GDP versus a commitment at the time of the second review of 2.4 percent of GDP. - Authorities and staff agreed to relax the deficit for 2017 to 3 percent of GDP (LOI, ¶11). - Measures to achieve the 2017 target: - (i) implement all the fiscal measures identified at the time of second review; - (ii) reduce the wage bill; - (iii) bring down goods and services to the 2015 level in percent of GDP through an across-the-board cut in non-priority spending; - (iv) refrain from populist measures in the run-up to next year’s presidential election. - Even with the slightly looser target, the cyclically-adjusted balance would still significantly improve by 1.7 percentage points of GDP. ### Revenue and expenditure reforms (commitments and measures) - Revenue-side commitments: - Review natural resources taxation. - Reverse the VAT exemption on the import of grains and the sale of flour. - Expenditure-side commitments: - Streamline subsidies once the ongoing review is completed (LOI, ¶11), (SB, July 2017). - Improve targeting of social benefits. - Refrain from potential quasi-fiscal activities that may have budgetary implications. - Tax administration commitments: - Strengthen the State Tax Services (STS) to smooth the transition to the EEU and gradually expand STS functions. - Reduce the size of the informal economy and limit corruption by introducing cash registries and encouraging e-filing for individual and corporate taxes. ### Wage bill reform - Objective: rationalize staffing and reduce the wage bill by 1.4 percentage points of GDP to reach a wage bill of 8.7 percent of GDP by 2018 (LOI, ¶11). - Implementation timeline and pledges: - Authorities started to implement the action plan in 2016: Q4. - Plan to reduce the wage bill by 0.4 and 1 percentage point of GDP in 2017 and 2018, respectively. - Staff preference noted: a more evenly balanced reduction over the next two years. - Authorities committed to identify specific quantitative measures to reach the targeted reduction—(SB, May 2017). - Memo items from Text Table 3: - 2016 projected wage bill 10.1 - 2016 projected wage bill with TA GDP 9.7 - 2016 projected wage bill at the time o 9.4 - Total effort1.4 C=A+B - 2018 revised target 8.7 D=E-C ### Public financial management (PFM) priorities - Authorities will: - Revisit the budgetary process to enhance cooperation among the ministry of finance (MoF), the ministry of economy (MoE), and the prime minister’s office. - Develop a fiscal rule, which will include limits on external debt and the fiscal balance (Annex IV). - Continue implementing the financial management information system (FMIS) to improve expenditure monitoring and oversight of budget operations—signing the FMIS’ terms of reference was postponed by three months at the donor’s request (SB new deadline, May 2017). - Sign the contract with the IT provider (SB, September 2017). - Continue accounting reforms to improve reporting and transparency. - Work on including fiscal risks into the budget framework. ### Preserving debt sustainability - External public and publicly guaranteed debt projections: - Projected to drop to 60.7 percent of GDP in 2016, compared to 64.6 percent in 2015. - Debt vulnerability assessment: - According to the latest DSA, external debt remains at a moderate risk of debt distress, and is no longer considered a high-moderate borderline case. - Vulnerabilities to large external shocks persist, particularly to a sizable depreciation of the exchange rate and/or a massive scaling-up of public investments. - Non-profitable public investment projects combined with potentially higher borrowing costs could push debt to an unsustainable path (Annex V). - Authorities’ commitments to safeguard sustainability: - (i) pursue fiscal consolidation efforts over the medium term; - (ii) refrain from non-concessional borrowing; - (iii) improve debt monitoring; - (iv) minimize fiscal risk stemming from SOEs; - (v) ensure sufficient profitability of public investment projects; - (vi) enhance efficiency of public sector investments by implementing the PIMA recommendations. - A government decree was issued to clarify the respective roles of the MoE and MoF in decision-making; staff encouraged expeditious updating of the PIP guidelines. ### Monetary and exchange rate policy - Policy stance and rationale: - A neutral monetary stance is appropriate; key causes of low inflation are exogenous and do not warrant further relaxation. - The current level of the policy rate at 5.5 percent is adequate. - The NBKR stands ready to fine-tune policy in line with emerging market pressures (LOI, ¶13). - Monetary transmission and institutional reforms: - Agreed priorities to enhance transmission (Annex VI): - (i) gradually narrow the corridor around the policy rate and make it more symmetric; - (ii) improve coordination between the NBKR, MoF, and the RKDF to facilitate liquidity forecasting; - (iii) enhance the forward-looking component of the NBKR’s communication policy. - Once policy rate traction becomes more effective, the NBKR aims to gradually transition to inflation targeting (LOI, ¶14). - Exchange rate policy: - NBKR reiterated commitment to allow the exchange rate to be market determined with limited intervention. - Staff emphasized careful balance in foreign exchange intervention policy and the importance of a two-way intervention policy (LOI, ¶15). ### Reserves and external vulnerabilities - Reserves coverage: - Authorities committed to maintain reserves at an adequate level given the economy’s vulnerability to shocks and high dollarization. - Reserve coverage is described as adequate and provides a cushion in case of an unexpected drop in remittances or exchange rate pressures. - Real and nominal exchange rate developments: - After overvaluation in previous years, significant depreciation of the som vis-à-vis the U.S. dollar brought the real effective exchange rate broadly in line with fundamentals by end-2015. - The nominal exchange rate appreciation since the beginning of the year has partly offset gains in competitiveness. ### Financial stability and banking sector - Key vulnerabilities: - High dollarization and credit risk due to the economic slowdown remain key vulnerabilities. - NBKR measures and supervisory actions: - Regular stress tests and improved monitoring of the non-performing loan portfolio. - Collecting additional data on individual NPLs and improving regulations for classification of assets (LOI, ¶16). - Staff urged NBKR to ensure adequate provisioning for NPLs. - Established a high-level Financial Stability Council and developed a Crisis Preparedness Framework (LOI, ¶18). - Finalizing strategic plan for supervision and completed risk-based supervision of five banks (LOI, ¶17). - Banking Law developments and follow-up: - Banking Law passed on November 30 with key provisions missing or diluted; it nevertheless brings several improvements and a basis for further enhancements. - Shortcomings noted include limitations to the scope of judicial review, possible infringement on NBKR autonomy, framework for early intervention and resolution, and NBKR Board composition. - Authorities agreed to seek amendments to the Law; amendments to be prepared by April (SB) and submitted to Parliament in July (SB), after the Law comes into force—six months after its enactment—taking political economy considerations into account. - Bank liquidations: - Liquidation of banks under DEBRA is underway; the court has already ordered the liquidation of “Bishkek”, “Adil”, “Kurulush” and “Mercury” banks. - Authorities and staff agreed on the importance of timely liquidation of all remaining banks under DEBRA’s management. ### Structural reforms and competitiveness - Recognized priorities to improve business climate and competitiveness within the EEU: - Financial inclusion, trading across borders, the insolvency regime, access to electricity, and contract enforcement. - Importance of reforms: - Productivity-boosting reforms combined with the large infrastructure investment program will help improve competitiveness within the EEU. - Staff emphasized the importance of a constructive and fair resolution of the dispute with Centerra for a stable and predictable investment climate. *Source: cr17143 - 15. Despite the above anticipated slippages, the authorities remain committed to a deficit (IMF PDF).* ### 31. Staff underscored the need to address governance issues to improve the economy’s ### Staff underscored the need to address governance issues to improve the economy’s efficiency. ### Governance and Corruption - Transparency International: corruption perception remains high; governance indicators are deteriorating. - Timely adoption of the AML/CFT law by Parliament should contribute to a positive assessment of technical compliance with the FATF standard by the Eurasian Group on Combating Money Laundering and Financing of Terrorism later this year. - Staff encouraged authorities to address remaining shortcomings of the draft AML/CFT law, particularly by bringing the framework for preventing officials from laundering the proceeds from corruption in line with the FATF standard. - Staff cautioned authorities against amending the recently enacted procurement law and warned that the suspension of the e-procurement system would be a step backward. - Figures and comparative indicators included: - Cross-Country Comparison of Ease of Doing Business (Rank, 2017): visual data listing countries including Latvia, Georgia, Lithuania, Kazakhstan, Armenia, Russian Federation, Moldova, Azerbaijan, Kyrgyz Republic, Uzbekistan, Tajikistan (source: Doing Business database). - Global Competitiveness of EEU Member States (Scale of 1–7 for each indicator, 7 being best) with pillars 1 through 12 listed (source: World Economic Forum Global Competitiveness Report, 2016–17). - Corruption Perception Index (Rank, 2015): visual ranking including Lithuania through Somalia (source: Transparency International data). - Governance Indicators (In percentile rank): visual series 2002, 2007, 2015 for AZE ARM GEO KAZ KGZ TJT KMU ZB (source: Worldwide Governance Indicators). ### Program Modalities - Program design and modification of performance criteria: - Revised QPCs for December 2016 and new QPCs for June and December 2017: floor on NIR, ceiling on NDA, ceiling on cumulative overall deficit of the general government, and present value on new external debt contracted or guaranteed. - Indicative targets (ITs): ceiling on reserve money, cumulative state government tax collections, non-concessional borrowing, and a new IT on introduction of new or extension of the existing tax exemptions. - Structural conditionality will focus on macro-critical areas, particularly in the financial sector and reforms to support fiscal consolidation. - The program will continue to be monitored on a semi-annual basis. ### Financing Needs and Safeguards - Financing needs for 2016 and 2017 are covered: the IMF, along with multilateral and bilateral partners, is expected to cover the country's financing gap for this year and 2017. - Despite downside risks, the Kyrgyz Republic's capacity to repay the Fund is expected to remain adequate. - An updated safeguards assessment completed in October 2015 concluded that legal amendments were needed to strengthen governance and autonomy at the central bank. Timely passage of necessary amendments to the Banking Law will strengthen the independence of the NBKR. - Text Table 5. Kyrgyz Republic: Balance of Payments Financing, 2016–18 (selected figures preserved as presented): - Memo item: GDP (in millions of U.S. dollars): 6,554; 6,768; 7,085. - Financing Gap 2016–2018 (visual/tabular formatting in source): Financing Gap11873.788.9; Available financing91.047.175.6. - Identified budget support: 91.047.125.6. - World Bank21.815.91.4. - European Union26.724.224.2. - Other grants42.57.00.0. - Unidentified budget support0.00.050.0. - IMF ECF disbursement26.626.613.3. - Financing gap1.81.11.3. - Available financing1.40.71.1. - Identified budget support1.40.70.4. - World Bank0.30.20.0. - European Union0.40.40.3. - Other grants0.60.10.0. - Unidentified budget support0.00.00.7. - IMF ECF disbursement0.40.40.2. - Sources: Kyrgyz authorities and IMF staff estimates and projections. ### Staff Appraisal: Policy Recommendations and Risks - Macroeconomic context: - The subdued external environment (slump in oil prices, depressed conditions in Russia, slowdown in China) has amplified domestic vulnerabilities and contributed to sluggish growth below potential. - Large external borrowing has significantly increased debt levels; past som depreciation, recently reversed, elevated financial and debt vulnerabilities. - Fiscal policy: - Fiscal consolidation and improvement of the public investment framework are necessary to ensure public debt sustainability. - The large slippage in non-priority outlays this year necessitates cuts in much-needed investment to reach the budget deficit target. - Reliance on grants, one-off revenues, and ad hoc expenditure cuts should not substitute for permanent measures. - Growth-friendly consolidation should pursue: boosting tax revenues, reducing the wage bill, streamlining goods and services, and improving the public investment framework. - Prudence advised in selecting new infrastructure projects and in contracting and guarantying new public debt. - Strengthening coordination among government agencies for an efficient budget process will be critical. - Adopting a fiscal rule is essential to guide fiscal policy-making over the medium term. - Monetary policy: - A neutral monetary stance is warranted in the current deflationary environment. - The som’s appreciation and low food prices are likely to keep inflation low. - The NBKR should monitor developments and inflationary expectations carefully and adjust monetary policy as needed. - NBKR should intensify work on improving the monetary transmission mechanism before transitioning to inflation targeting. - The NBKR’s commitment to a flexible exchange rate policy is welcome; a two-way FX intervention policy is critical to balance financial sector stability and external competitiveness. - Financial sector: - Continued efforts are needed to strengthen resilience of the financial sector. - Staff regrets dilution of some key provisions of the Banking Law during parliamentary deliberations and Office of the President’s amendments, but notes the Law still brings several improvements. - Authorities need stronger commitment to swiftly reintroduce diluted key provisions to align with international best practices. - Recommended: develop a strategic plan for banking supervision, improve quality of prudential regulation, and put in place a crisis preparedness framework. - Finalizing liquidation of banks under DEBRA and winding down DEBRA's activities are important to enhance confidence in the banking sector. - Structural reforms: - Bold structural reforms are necessary to improve competitiveness: improve business climate, address infrastructure bottlenecks, foster financial inclusion, and tackle corruption. - Speeding up PFM reforms will improve public sector efficiency and accountability. - Simplifying cross-border trade, better enforcement of contracts, and faster resolution of insolvency will help the Kyrgyz Republic be competitive within the EEU. - Risks to program: - Significant external and domestic risks remain. - A further drop in oil prices and/or slower-than-anticipated growth in key trading partners could delay recovery. - Political resistance to reforms and populist policies ahead of the presidential elections could reverse reforms and heighten fiscal and financial vulnerabilities. - Continued dialogue with the Fund and commitment to adjust policies as needed are essential for program success. *Source: IMF staff report excerpt provided in the content unit.* ### 41. Staff supports completing the third review of the authorities' program under the ECF ### 41. Staff supports completing the third review of the authorities' program under the ECF arrangement ### Program endorsement and conditionality - Staff supports completing the third review of the authorities' program under the ECF arrangement. - Staff supports the authorities’ request to modify the end-December 2016 and set new end-March, end-June, end-September, and end-December 2017 QPCs and ITs. - The policies outlined in the attached LOI are adequate to achieve the program's goals. ### Key macroeconomic projections and indicators (selected) - Population (in millions, 2015): 5.9 - GINI Index (2012): 27.37 - Unemployment rate (official, 2013): 8 - Life expectancy at birth in years (2014): 70.4 - Poverty rate (2015): 32.1 - Adult literacy rate (percent of population): 99 - GNI per capita (2015, Atlas method, U.S. dollars): 1,170 - Under-five mortality (per 1000 live births) (2015): 21 - Nominal GDP (in billions of soms): - 2014: 400.74 - 2015: 430.54 - 2016 (Act.): 455.44 - 2017 (2nd review): 452.04 - 2018 (Proj.): 486.25 - 2019 (Proj.): 518.55 - 2020 (Proj.): 569.96 - 2021 (Proj.): 622.76 - 2022 (Proj.): 674.7 - Nominal GDP (in millions of U.S. dollars): - 2014: 7,465 - 2015: 6,758 - 2016: 5,882 - 2017 (2nd review): 6,554 - 2018: 6,768 - 2019: 7,085 - 2020: 7,560 - 2021: 8,021 - 2022: 8,437 - Real GDP (growth in percent): - 2014: 4.0 - 2015: 3.5 - 2016: 3.0 - 2017 (2nd review): 2.6 - 2018 (Proj.): 2.3 - 2019 (Proj.): 2.9 - 2020 (Proj.): 5.9 - 2021 (Proj.): 5.3 - 2022 (Proj.): 4.3 - Nongold real GDP (growth in percent): 2014: 5.0; 2015: 4.5; 2016: 2.9; 2017: 2.4; 2018: 2.8; 2019: 3.5; 2020: 3.9; 2021: 4.5; 2022: 5.0 - Consumer prices (12-month percent change, eop): - 2014: 10.5 - 2015: 3.4 - 2016: 5.8 - 2017 (2nd review): 1.5 - 2018 (Proj.): 4.7 - 2019 (Proj.): 5.5 - 2020 (Proj.): 5.2 - 2021 (Proj.): 5.1 - 2022 (Proj.): 5.0 ### External sector and reserves - Current account balance (in percent of GDP): - 2014: -16.0 - 2015: -10.9 - 2016: -15.2 - 2017 (2nd review): -10.0 - 2018 (Proj.): -13.6 - 2019 (Proj.): -13.8 - 2020 (Proj.): -11.9 - 2021 (Proj.): -11.7 - 2022 (Proj.): -11.5 - Exports of goods and services (in millions of U.S. dollars): - 2014: 3,383 - 2015: 2,656 - 2016: 2,539 - 2017 (Proj.): 2,653 - 2018 (Proj.): 2,812 - 2019 (Proj.): 2,969 - 2020 (Proj.): 3,392 - 2021 (Proj.): 3,741 - 2022 (Proj.): 3,918 - Imports of goods and services (in millions of U.S. dollars): - 2014: 6,521 - 2015: 4,755 - 2016: 4,763 - 2017 (Proj.): 4,753 - 2018 (Proj.): 5,249 - 2019 (Proj.): 5,545 - 2020 (Proj.): 5,877 - 2021 (Proj.): 6,222 - 2022 (Proj.): 6,485 - Gross International reserves (in millions of U.S. dollars): - 2014: 1,856 - 2015: 1,468 - 2016: 1,621 - 2017 (Proj.): 1,680 - 2018 (Proj.): 1,745 - 2019 (Proj.): 1,856 - 2020 (Proj.): 2,069 - 2021 (Proj.): 2,196 - 2022 (Proj.): 2,320 - Gross reserves (months of next year imports, eop): - 2014: 4.7 - 2015: 3.7 - 2016: 3.8 - 2017 (Proj.): 3.8 - 2018 (Proj.): 3.8 - 2019 (Proj.): 3.8 - 2020 (Proj.): 4.0 - 2021 (Proj.): 4.1 - 2022 (Proj.): 4.1 - External public debt outstanding (in percent of GDP): - 2014: 50.6 - 2015: 63.6 - 2016: 71.8 - 2017 (Proj.): 60.7 - 2018 (Proj.): 63.0 - 2019 (Proj.): 64.4 - 2020 (Proj.): 63.1 - 2021 (Proj.): 61.1 - 2022 (Proj.): 59.4 ### Public finances (selected) - Revenue (in percent of GDP): - 2014: 35.3 - 2015: 35.6 - 2016: 37.9 - 2017 (2nd review): 38.0 - 2018 (Proj.): 36.3 - 2019 (Proj.): 35.4 - 2020 (Proj.): 35.1 - 2021 (Proj.): 35.0 - 2022 (Proj.): 35.2 - Expense (in percent of GDP): - 2014: 29.7 - 2015: 30.1 - 2016: 30.9 - 2017 (2nd review): 32.5 - 2018 (Proj.): 30.5 - 2019 (Proj.): 29.7 - 2020 (Proj.): 29.3 - 2021 (Proj.): 28.9 - 2022 (Proj.): 28.9 - Overall balance (net lending/borrowing, in percent of GDP): - 2014: 1.0 - 2015: -1.2 - 2016: -4.5 - 2017 (2nd review): -4.5 - 2018 (Proj.): -3.0 - 2019 (Proj.): -1.6 - 2020 (Proj.): -1.5 - 2021 (Proj.): -1.5 - 2022 (Proj.): -1.5 - Overall balance excluding foreign financed PIP loans (in percent of GDP): - 2014: 3.5 - 2015: 1.3 - 2016: 4.2 - 2017 (2nd review): 0.8 - 2018 (Proj.): 3.1 - 2019 (Proj.): 2.6 - 2020 (Proj.): 2.7 - 2021 (Proj.): 3.7 - 2022 (Proj.): 2.9 - Total public debt (in percent of GDP): - 2014: 52.3 - 2015: 65.0 - 2016: 73.1 - 2017 (Proj.): 62.1 - 2018 (Proj.): 64.2 - 2019 (Proj.): 65.5 - 2020 (Proj.): 64.2 - 2021 (Proj.): 62.0 - 2022 (Proj.): 60.3 ### Monetary and banking sector (selected) - Reserve money (percent change, eop): - 2014: -11.9 - 2015: 4.0 - 2016: 13.5 - 2017 (Proj.): 27.7 - 2018 (Proj.): 9.7 - 2019 (Proj.): 8.6 - 2020 (Proj.): 8.1 - 2021 (Proj.): 7.8 - Broad money (percent change, eop): - 2014: 3.0 - 2015: 14.9 - 2016: 14.0 - 2017 (Proj.): 16.1 - 2018 (Proj.): 12.5 - 2019 (Proj.): 10.9 - 2020 (Proj.): 10.8 - 2021 (Proj.): 9.7 - 2022 (Proj.): 8.8 - Credit to private sector (percent change, eop): - 2014: 43.6 - 2015: 17.2 - 2016: 10.4 - 2017 (Proj.): 1.5 - 2018 (Proj.): 1.2 - 2019 (Proj.): 14.1 - 2020 (Proj.): 14.4 - 2021 (Proj.): 11.4 - 2022 (Proj.): 10.4 - Credit to private sector (in percent of GDP): - 2014: 20.5 - 2015: 22.4 - 2016: 23.3 - 2017 (Proj.): 21.6 - 2018 (Proj.): 22.3 - 2019 (Proj.): 23.9 - 2020 (Proj.): 24.9 - 2021 (Proj.): 25.4 - 2022 (Proj.): 25.8 - Policy Rate (5/ As of end-September 2016): 10.5; 10.0 (another entry) ### Fiscal and debt financing under the ECF - Proposed ECF disbursements (Table 8): - On April 8, 2015: First disbursement SDR 9.514 million (14.3 percent) - On December 4, 2015: Second disbursement SDR 9.514 million (14.3 percent) - On June 17, 2016: Third disbursement SDR 9.514 million (14.3 percent) - On October 5, 2016: Fourth disbursement SDR 9.514 million (14.3 percent) - On April 4, 2017: Fifth disbursement SDR 9.514 million (14.3 percent) - On October 3, 2017: Sixth disbursement SDR 9.514 million (14.3 percent) - On April 2, 2018: Seventh disbursement SDR 9.516 million (14.3 percent) - Total SDR 66.600 million (100.0 percent) ### Capacity to repay the Fund (selected, Table 9) - Fund obligations based on existing credit — principal (in millions of SDRs): - 2016: 5.7 - 2017: 18.3 - 2018: 20.7 - 2019: 17.5 - 2020: 18.7 - 2021: 17.1 - In millions of U.S. dollars (principal): - 2016: 8.0 - 2017: 25.7 - 2018: 29.2 - 2019: 25.1 - 2020: 26.7 - 2021: 24.4 - Principal in percent of gross international reserves: - 2016: 0.5 - 2017: 1.5 - 2018: 1.6 - 2019: 1.2 - 2020: 1.2 - 2021: 1.1 - Outstanding Fund credit (in millions of SDRs): - 2016: 139.9 - 2017: 140.6 - 2018: 129.5 - 2019: 112.0 - 2020: 93.2 - 2021: 76.1 - Outstanding Fund credit in percent of gross international reserves: - 2016: 11.6 - 2017: 11.4 - 2018: 9.9 - 2019: 7.7 - 2020: 6.0 - 2021: 4.7 ### Selected financial soundness indicators (Table 7, snapshots) - Regulatory capital to risk weighted assets: Mar-14: 23.9; Jun-14: 22.1; Sep-14: 22.5; Dec-14: 21.8; Mar-16: 24.5; Jun-16: 24.5; Sep-16: 24.5 - Nonperforming loans/total loans: Mar-14: 5.4; Jun-14: 4.6; Sep-14: 4.2; Dec-14: 4.5; Mar-15: 5.4; Jun-15: 5.2; Sep-15: 6.0; Dec-15: 7.1; Mar-16: 8.5; Jun-16: 9.0; Sep-16: 9.0 - Return on equity: Mar-14: 15.7; Jun-14: 16.0; Sep-14: 18.6; Dec-14: 18.7; Mar-16: -1.6; Jun-16: 0.1; Sep-16: 1.9 ### Fiscal operations (selected tables) - General government revenue (in millions of soms, 2016 actual): 153,045; 2017 (Prel./Proj. year): 171,789; 2018 (Proj. year): 176,295; 2018 (Full year projection in Table 6): Revenue 35.4 percent of GDP - Taxes (2016 actual, in millions of soms): 82,234; Taxes (percent of GDP, 2016 actual): 19.1 - Social contributions (2016 actual, in millions of soms): 24,106; (percent of GDP): 5.6 - Grants (2016 actual, in millions of soms): 8,975; (percent of GDP): 2.1 - Expense (2016 actual, in millions of soms): 129,467; (percent of GDP): 30.1 - Social benefits (2016 actual, in millions of soms): 51,524; (percent of GDP): 12.0 - Net acquisition of nonfinancial assets (2016 actual, in millions of soms): 28,532; (percent of GDP): 6.6 *Source: IMF staff and Kyrgyz authorities (extracted from the IMF country report tables and text).* ### 1. Floor on net international reserves of the NBKR 1,235 ### 1. Floor on net international reserves of the NBKR 1,235 ### Monetary and Fiscal Performance Targets (selected items) - 1. Floor on net international reserves of the NBKR (eop stock, in millions of U.S. dollars): 1,2881,425Met1,1641,1101,4181,3461,3471,3291,347 - 2. Ceiling on net domestic assets of the NBKR (eop stock): -22,625-24,625-28,090Met-23,688-18,523-9,587-7,546-5,388-5,746-5,199 - 3. Ceiling on cumulative overall deficit of the general government (cumulative from the beginning of the year): 12,10811,6099,582Met15,60220,49220,1569,69117,54917,03214,480 - 3. (alternate line) 220138Met220220287311311311311 - 5. Ceiling on accumulation of new external payment arrears (continuous, in millions of U.S. dollars): 00Met0000000 ### Indicative Targets (selected) - 1. Ceiling on reserve money: 75,91575,897Met74,21376,09285,65686,37691,32992,31293,968 - 2. Cumulative floor on state government tax collections (cumulative from the beginning of the year): 41,73943,046Met67,86299,15397,78320,03143,05171,142106,653 - 3. Floor on cumulative state government spending on targeted social assistance, Unified Monthly Benefit and Monthly Social Benefit programs (cumulative from the beginning of the year): 2,3772,729Met3,6155,4175,3221,3392,6784,0175,557 - 4. Ceiling on new nonconcessional external debt contracted or guaranteed by public sector (continuous, in millions of U.S. dollars) 3/: 00Met0000000 - 5. Ceiling on introducing new and renewal of existing tax exemptions: ......na......00000 ### Footnotes and definitions (preserve original references) - Sources: Kyrgyz authorities and IMF staff estimates and projections. - 1/ As defined in the TMU. - 2/ Cumulative from the beginning of the year. - 3/ External debt contracted or guaranteed with a grant element of less than 35 percent. - 4/ Includes mineral development fees. --- ### Prior Actions and Structural Benchmarks (Selected measures and status) - Prior Action: Unify foreign exchange collateral requirements for the loans of the NBKR for all entities using NBKR's credit facilities. Timing/status: 5 business days prior to the board meeting. - I. FISCAL POLICY (selected) - Undertake a review of the public investment framework in cooperation with development partners and line ministries to identify gaps and then define an action plan. Timing/status: End-April, 2016 Met - Draw an action plan for the reform of public sector personnel and remuneration policy to reduce the wage bill as a share of GDP. Timing/status: End-May, 2016 Met - Review the methodology for setting power tariffs to ensure economic soundness and adjust accordingly the roadmap for increasing tariffs. Timing/status: End-June, 2016 Met - Sign a Memorandum of Co-operation with TIKA to develop new Financial Management Information System. Timing/status: End-June, 2016 Met - Revise the MDTS in light of the outcome of the new DSA. Timing/status: End-July Met - Conduct a review of all subsidies and draw up an action plan to reduce them. Timing/status: End-September, 2016 Not met - Modify through government decree the decision making process for the selection of public investment projects by formalizing gate keeping roles of the MoE and MoF. Timing/status: End-December, 2016 Met - Set up a comprehensive register of all employees of the general government. Timing/status: End-March, 2017 - Relying on the action plan to reform personnel and remuneration policy, identify quantitative measures to reduce the wages bill to 8.7 percent of GDP in 2018. Timing/status: End-May, 2017 - New: Sign the FMIS terms of reference. Timing/status: End-May, 2017 - New: Finalize the review and the action plan to reduce subsidies. Timing/status: End-July, 2017 - Introduce a standardized framework for project monitoring for all projects exceeding KGS 50 million. Timing/status: End-June, 2017 - New: Sign the contract with the IT provider for the FMIS project. Timing/status: End-September, 2017 - II. FINANCIAL SECTOR (selected) - Enact and publish in the Official Gazette the Banking Law and the supporting law on "enactment of the Banking Law". Timing/status: End-September, 2016 Not met - DEBRA to submit to the courts requests for liquidating: “Bishkek”, “Mercury”, “Kurulush-bank”, and “Adil”. Timing/status: End-September, 2016 Met - Develop a crisis preparedness framework including establishing a high-level financial stability council. Timing/status: End-September, 2016 Met - Develop a strategic plan for supervision with components on personnel policy, training, risk-based supervision, and regulatory strengthening. Timing/status: End-December, 2016 - Approve by the NBKR Board regulations for (i) classifying restructured loans and (ii) refinancing of classified loans. Timing/status: End-March, 2017 New - DEBRA to submit to the courts requests for liquidating: “Kyrgyzagroprombank”, “Manas”, “Issyk-Kul”, and “AUB”. Timing/status: End-March, 2017 - Circulate to ministries for review amendments to the Banking Law to reintroduce missing provisions. Timing/status: End-April, 2017 New - Revise and enact regulations to preserve the main requirement for lending to related parties. Timing/status: End-May, 2017 New - Submit to Parliament amendments to the Banking Law to reintroduce missing provisions. Timing/status: End-July, 2017 New - Enact and publish in the official gazette amendments to the Banking Law to reintroduce missing provisions. Timing/status: End-December, 2017 New --- ### External Borrowing: Actual and Projected (selected figures) - Table 12a/12b (January 1–September 30, 2016): Concessional debt: 223.9 USD million (100 percent); Multilateral debt: 223.9 USD million (100 percent); PV of new debt in 2016 (program purposes) and other memo items listed with exact numbers in the source. - Uses of debt financing (January 1–September 30, 2016): Infrastructure 173.9 USD million; Budget Financing 50.0 USD million. - Table 12c/12d (January 1–December 31, 2016 projected): By sources of debt financing 539.7 USD million (100 percent); Multilateral 539.7 USD million; Uses of debt financing 539.7 USD million; Fixed Interest Rate 433.5; Variable Interest Rate 106.3; USD denominated loans 203.8; Loans denominated in other currency 336.0. - Table 12e/12f (January 1–December 31, 2017 projected): By sources of debt financing 513.0 USD million (100 percent) and 311.1 USD million (100 percent) entries; Uses of debt financing 513.0 USD million / 311.1 USD million; Infrastructure 506.4 / 99.3; Other 6.6 / 1.3 / 3.1 / 1.0 (as reported); Fixed Interest Rate 426.5; Variable Interest Rate 86.5; USD denominated loans 268.4; Loans denominated in other currency 244.6. --- ### Annex I — The Spillovers from Lower Oil Prices on the Kyrgyz Economy (modeling and findings) - Model setup and shock: - Model: IMF’s MCDMOD (version of the IMF’s Flexible System of Global Models). - Shock simulated: permanent 50% drop in global oil prices and a 100 basis-points increase in the Kyrgyz sovereign risk premium. - The combined shock is applied as a historical scenario starting from 2014. - Transmission channels identified: - Initial positive impact due to lower oil import costs: increased real disposable income, boosting consumption and output. - Adverse spillovers via trade and remittances as demand in large oil-exporting neighbors (Russia and Kazakhstan) weakens. - Decline in remittances dampens consumption; deteriorating exports hamper private investment. - Resulting depreciation of the som increases FX public debt level, elevating credit risks and raising borrowing costs for households, corporations, and government. - Policy rules in the model assume expansionary monetary and fiscal responses to the slowdown in growth and inflation. - Magnitude and projection highlights: - The model predicts GDP growth to slow to 3 percent by 2016 compared to staff’s projection of non-gold GDP growth at 2.4 percent. - Looking ahead, under model assumptions of limited policy space, GDP growth is predicted to pick up only gradually and remain below the potential growth rate of 5 percent in the medium-term. - Upside risk noted: model cannot capture potentially positive impact of EEU membership, which could yield faster recovery in remittances and exports. - Additional model notes: - The model is less accurate in replicating the current account partly because it does not incorporate the impact of EEU accession (which negatively impacted imports and positively impacted remittances). - Fiscal policy in the model: combined policy rule ensuring long-run debt-to-GDP stability and short-term countercyclical stabilization. - Monetary policy in the model: forward looking inflation targeting with weights on lagged interest rate, inflation gap, and output gap. --- ### Annex II — Impact of the Kumtor Gold Mine on the Economy (key points and figures) - Background and ownership: - Kumtor is an open-pit mine in the Issyk-Kul region, operations above 4000m (second-highest gold mine in the world). - Discovery: 1978; commercial production started in 1997. - Initial 1992 agreement allocated 67 percent of profit to the Kyrgyz Republic. - 2009 agreement: Kyrgyz Republic received a 33 percent share in Centerra Corporation in exchange for 100 percent of the Kumtor mine. - Kyrgyz Republic has three of the corporation’s 11 board members and receives a 13 percent tax on the mine’s gross revenues; a further 1 percent of gross revenues goes to the regional development fund. - 2014 negotiations initiated to exchange the Kyrgyz Republic’s share in Centerra Inc. for a 50 percent stake in Kumtor; negotiations ongoing. - Recent acquisition by Centerra will dilute Kyrgyz Republic’s stake in Centerra Inc. from 32.75 percent to 29.43 percent. - Economic contribution and risks (numeric and qualitative): - Kumtor adds to GDP volatility: standard deviation of overall GDP growth is almost twice that of non-gold GDP growth. - Mean of overall GDP growth (105.3941) is very close to GDP growth adjusted for gold (105.2000). - Kumtor's contribution to growth: between 6 and 10 percent of GDP per year. - Fiscal contributions: on average since 2009, Kumtor has contributed about 6 percent of the country’s total tax revenues. - Trade contributions: since 2009, gold has accounted for an average of 30 percent of the country’s total exports. - Employment: Kumtor is one of the largest private sector employers with a total workforce of more than 2,500 people. - Environmental considerations: operations affect adjacent glaciers; long-term environmental impact is mixed, and a sudden suspension of operations would likely have negative environmental effects. - Suspension risks: a complete suspension would have negative economic, social, and environmental consequences; would undermine investor confidence and eliminate budget contributions, export revenues, and employment related to Kumtor. - Spillovers to rest of economy are limited due to the enclave nature of the project; Kumtor remains a barometer for the investment climate in the Kyrgyz Republic. *Sources: Kyrgyz authorities and IMF staff estimates and projections.* ### Annex III. Linkages with China ### Annex III. Linkages with China ### Key channels and policy frameworks - The key channels linking the Kyrgyz and Chinese economies are trade and investment. - Authorities on both sides have prioritized deepening these channels through multilateral arrangements including the Shanghai Cooperation Organization (SCO), the Program of Cooperation between Kyrgyzstan and China 2015-2025 and the cross-border cooperation program 2015-2020. ### Trade linkages and patterns - Trade with China accounted for approximately one-fifth of the Kyrgyz Republic’s external trade turnover and one-quarter of imports in 2015. - External trade turnover with China grew every year between 2005-2013. - In 2014, imports from China fell sharply, due mainly to the onset of the economic crisis, uncertainty related to EEU accession, and slowdown in the execution of infrastructure projects financed by China. - While continuing to fall in absolute terms, the share of China’s imports remains the same. - Exports to China are insignificant; therefore, the rebalancing from investment to consumption in China is unlikely to have much of an effect on the Kyrgyz Republic in terms of trade activity. ### Lending and public investment financing - Since independence, the Kyrgyz Republic has signed more than 10 public investment agreements with China worth more than $1.8 billion (excluding grants). - Chinese financing is mostly concentrated in transport infrastructure and energy, and on concessional terms. - One of the largest Chinese investments in the Kyrgyz Republic went toward the construction of the Kara-Balta oil refinery, known as “Dzhunda,” which received investments from Chinese partners of about $350 million. ### Foreign direct investment (FDI) flows - Inward FDI from China has exceeded $ 1.2 billion over the past few years, accounting for an average of 30 percent of all FDI inflows over that period. - The sharp fluctuation in FDI flows from China is attributable to the timing of project completion and, to some degree, to uncertainty regarding the consequences of accession to the EEU; however, the overall trend remains positive. - Outward FDI from the Kyrgyz Republic to China amounted to $175.5 million (36.6 percent of all FDI outflows) in 2014 and $113.5 million (26.3 percent of all FDI outflows) in 2015. ### Business presence and industrial production - There are large numbers of registered business entities with Chinese capital, but only about 10 percent are operating. - The number of enterprises and their output are increasing. - The level of production of industrial goods by these enterprises increased significantly in 2014 and 2015, largely explained by the launch of the Kara-Balta oil refinery. - Structure of industrial goods produced by Chinese and joint enterprises includes production of leather, leather goods and footwear; production of basic metals, finished metal articles excluding machines and equipment; production of rubber and plastics items, other non-metallic mineral products; production of refined petroleum products; production of food products; mining and quarrying; and others. ### Potential areas of cooperation and risks - Other potential areas of cooperation include the Economic Belt of the Silk Road (EBSR), a transport and infrastructure project initiated by China, and the Asian Infrastructure Investment Bank (AIIB). - Continued reliance on Chinese financing—largely concentrated in infrastructure and energy—implies monitoring project profitability and debt implications given the scale of public investment agreements and FDI. *Prepared by Lilia Kadyrberdieva.* ### Appendix I. Letter of Intent ### Appendix I. Letter of Intent ### Request and program status - Request completion of the third review and disbursement in the amount of SDR 9.514 million ([US$12.88] million). - Ask that the disbursements under the ECF arrangement be channeled to the budget. - All end-June quantitative performance criteria (PCs) and indicative targets (ITs) were met. Two structural benchmarks (SB), the Banking Law and subsidy review, have not been met. - Government agrees to publication of this letter, the Technical Memorandum of Understanding (TMU), and the Debt Sustainability Analysis. *December 5, 2016* ### Recent economic developments - Overall non-gold growth reached 1.2 percent by end-June compared to 3.8 for the same period in 2015. - By end-September, non-gold growth accelerated to 3.1 percent. - Inflation remained consistently below the target range, venturing into deflation in April, and again in September (-0.3 percent). Core inflation is at about 6 percent. - The som appreciated by about 10.5 percent against the dollar during the first nine months of the year. - NBKR lowered the policy rate to 6 percent and intervened by purchasing about US$61 million in net terms. - Exports dropped by 24 percent y-o-y by end-June; imports shrank by 8 percent over the same period. - Overall fiscal deficit for the first half of 2016 reached 2.2 percent of GDP, in line with the program target. - Public external debt continued to rise, reflecting continued borrowing linked to the public investment program and slowing GDP. - Dollar loans shrank 22 percent during the first nine months; som denominated loans grew 21 percent. Overall credit growth shrank by 1.9 percent (y-o-y, end-September). NPLs rose to 9 percent (end-September). Deposit dollarization declined to 54 percent at end-September. All banks have met the new capital requirements of som 400 million. ### Outlook and risks - Annual growth expected to remain weak at around 2.5 percent in 2016. - Medium-term: economy should improve as trading partners’ growth recover but remain below potential. - Inflation expected to pick up somewhat as food and fuel prices stabilize and domestic demand recovers. - Current account deficit will narrow this year due to rescheduling of the PIP program but is expected to widen over the next two years and gradually moderate thereafter. - Main risks: developments in commodity markets and economic dynamics in Russia and Kazakhstan; budgetary pressures in the run-up to next year’s elections; continued weak economic activity within the EEU and trade diversion; exchange rate volatility impacting public debt and the banking sector. - Upside risks: strengthening ties with China and projects financed by the RKDF. ### Policies for remainder of 2016 and 2017 — overview - Adopt a supplementary budget in line with program commitments. - Continue consolidation efforts in the 2017 budget. - Undertake efforts to enact the current Law on Banks and Banking Activity and re-introduce key elements through amendments once the Law becomes effective. - Continue interventions in the foreign exchange market to smooth excessive volatility while balancing financial sector stability and external competitiveness. ### Fiscal policy - Committed to a fiscal deficit target of 4.5 percent of GDP in 2016. - Actions to meet 2016 target: - Implement the additional fiscal measures identified in the June LOI. - Submit to parliament a proposal to eliminate the VAT exemption on flour by the end of 2016. - Monitor implementation of the public investment program to ensure debt sustainability and avoid tipping public debt into high risk of debt distress. - Refrain from non-budgeted spending. - Cut the development budget if fiscal measures do not yield expected results on time and use any additional revenues including grants to reduce the deficit. - 2017 fiscal consolidation: - Reduce the deficit to 3 percent of GDP. - Ensure legislation needed for remaining measures is part of the 2017 budget law. - Implement action plan to reform public sector personnel and remuneration policy. - Adhere to action plan on public investment management, especially rationalizing domestically financed capital expenditure. - 2017 budget criteria: - Revenue side: increase taxes by 0.3 percentage point of GDP; review exemptions and refrain from extending expiring exemptions or granting new ones (continuous IT); harmonize excise tax rates on alcohol and tobacco with EEU countries; introduce control stamps for domestically produced goods; submit proposal for a luxury tax for properties; plan to review taxation of natural resources with an international expert; strengthen VAT administration. - Expenditure side: reduce current expenditures and domestically financed capital spending by 4 percentage points of GDP; allow PIPs to increase by about 1 percentage point of GDP; optimize public sector headcount to reduce the wage bill in line with the action plan for 2016-2019; commit to reducing the wage bill by 1.4 percentage points of GDP to 8.7 percent of GDP in 2018 (SB, end-May 2017); reduce spending on goods and services to the 2015 level in percent of GDP; refrain from quasi-fiscal activities with budgetary implications; adhere to medium-term tariff strategy for electricity sector sustainability; improve targeting of social benefits to avoid duplication. - Finalize review and action plan to reduce subsidies by July 2017 (SB). - Additional debt-sustainability actions: - Continue consolidation efforts over the medium term. - Refrain from non-concessional borrowing including by SOEs. - Improve debt monitoring, including for SOEs. - Enhance efficiency of public sector investments by implementing PIMA recommendations. ### Monetary and exchange rate policies - Relax monetary policy in response to deflationary pressures while balancing fiscal and exchange rate risks. - Continue close market monitoring and adjust the policy rate in line with emerging market pressures. - Enhance the monetary transmission mechanism and gradually move toward inflation targeting: - Consider narrowing the corridor around the policy rate and make it more symmetric. - Deepen the interbank market by (i) allowing NBKR notes to be used as collateral in the interbank market; and (ii) maintaining liquidity at a level that ensures effective functioning of the interbank market. - Include forward looking guidance in regular communications. - Exchange rate policy: - Maintain exchange rate flexibility as the anchor. - Conduct interventions to smooth excessive fluctuations while ensuring two-way flexibility. - Consider introducing new monetary and hedging instruments to maintain adequate reserves. ### Financial sector policies - Revise, submit for public discussions, and approve by end of the first quarter of 2017 (SB, end-March 2017) regulations for: - Classifying restructured loans, abolishing the prolonged loans category. - Refinancing of classified loans. - Continue aligning asset classification regulations with international best practice. - Unify foreign exchange collateral requirements for loans of the NBKR for all entities using NBKR's credit facilities (prior action). - When revising regulations under the Banking Law, adopt measures to preserve main requirements for lending to related parties (SB, end-May 2017). - Strengthen and modernize banking supervision framework: - Finalize the strategic plan for supervision by end of the year and adopt it as planned. - Improve crisis preparedness and coordination among NBKR, MoF, and DPA; conducted a crisis simulation exercise with the World Bank in October 2016. - Banking Law actions: - The Banking Law will be published in the Official Gazette (Erkin Too) by end-December 2016. - Prepare amendments to reintroduce missing provisions regarding (i) governance and oversight, including the NBKR’s Board composition; (ii) judicial review and nonsuspension of NBKR’s decisions; (iii) powers of the NBKR in resolution and liquidation; and (iv) lending to non-supervised institutions. NBKR will circulate these amendments to ministries for review (SB, end-April 2017). - Following the Law’s entry into force — six months after publication — submit to Parliament (SB, end-July 2017) and exert best efforts to enact and publish these amendments by Parliament (SB, end-December 2017). - Bank liquidations: - Continue efforts to liquidate all banks under DEBRA’s management. Obtained court orders for liquidation of “Bishkek”, “Adil” and “Kurulush” banks and submitted request for liquidation of “Mercury” bank. Aim to submit requests for liquidation of remaining banks by end-March 2017. - AML/CFT: - Submitted to Parliament a draft law on combating legalization (laundering) of proceeds from crime, financing of terrorist and extremist activities, incorporating IMF recommendations. Timely adoption, publication and effective implementation should contribute to a positive EAG assessment during 2016-2017. ### Institutional and structural reforms to ensure broad-based growth - Focus on improving business environment to withstand external shocks, attract investment, and generate inclusive growth. Key areas of action: - Reduce the number of activities subject to licensing and streamline the licensing process. - Streamline tax and other inspection regimes. - Streamline property registration. - Establish a unified and transparent procedure for access to utilities including the power grid. - Continue tax regime improvements to reduce the shadow economy. - Seek constructive resolution of the dispute with Centerra to avoid disruptions in gold production. - Developed an anti-crisis action plan to counter weak outlook and external shocks. ### Public Financial Management (PFM) reforms - Multi Donor Trust Fund arrangement to support PFM reforms; implement FMIS to speed up treasury single account implementation. Structural Benchmark on FMIS terms of reference delayed by three months (end-May 2017) at donor’s request. Expect to sign contract with IT provider (SB, end-September 2017). Commit to extend treasury coverage to the Social Fund. Budget Code coming into force January 2017 forms basis for 2018 Budget Law and includes a fiscal risk assessment. - Develop a credible, transparent and enforceable fiscal rule next year, including limits on external debt and the fiscal balance. Note: Law on External Public Debt, which sets external debt limit of 60 percent to GDP, will lapse with coming into force of the Budget Code. - Carry out analysis to revise institutional framework for fiscal policy to increase effectiveness; consider transferring tax policy to the MoF and improving coordination among MoF, STS, SCS and the Social Fund. - Safeguard recently introduced E-procurement framework to preserve savings, reduce misuse of public funds and increase transparency. *Appendix I. Letter of Intent, December 5, 2016* ### 24. The ECF-supported program will continue to be monitored through prior actions, ### 24. The ECF-supported program will continue to be monitored through prior actions, ### Program monitoring framework and review schedule - Monitoring instruments: - Prior actions - Quantitative performance criteria (QPC) - Continuous performance criteria - Indicative targets (IT) - Structural benchmarks - Review frequency and timing: - Program reviews conducted semi-annually, based on end-June and end-December test dates. - The fifth review is expected to be completed before December 31, 2017 based on continuous and end-June 2017 QPC. - The sixth review is expected to be completed before June 30, 2018 based on continuous and end-December 2017 QPC. - Technical specification: - Quantitative performance criteria and structural benchmarks and reporting requirements are further specified in the attached Technical Memorandum of Understanding (TMU). ### Quantitative performance criteria and indicative targets (Table 1) — selected items and reported outcomes - General note: Table 1 values are presented in millions of soms; unless otherwise indicated; eop. - Quantitative performance criteria (examples shown with ITs, QPCs, and status where reported): - 1. Floor on net international reserves of the NBKR (eop stock, in millions of U.S. dollars) - IT (March): 1,235 - IT (June): 1,288 - IT (September): 1,425 - Status: Met - Actual series entries include: 1,164; 1,110; 1,418; 1,346; 1,347; 1,329; 1,347 - 2. Ceiling on net domestic assets of the NBKR (eop stock) - IT (March): -22,625 - IT (June): -24,625 - IT (September): -28,090 - Status: Met - Actual series entries include: -23,688; -18,523; -9,587; -7,546; -5,388; -5,746; -5,199 - 3. Ceiling on cumulative overall deficit of the general government (cumulative from the beginning of the year) - IT (March): 12,108 - IT (June): 11,609 - IT (September): 9,582 - Status: Met - Actual series entries include: 15,602; 20,492; 20,156; 9,691; 17,549; 17,032; 14,480 - 4. Present value of new external debt contracted or guaranteed (continuous, in millions of U.S. dollars) — referenced but numeric table fragmentary in excerpt - 5. Ceiling on accumulation of new external payment arrears (continuous, in millions of U.S. dollars) - IT (March): 0 - IT (June): 0 - Status: Met - Actual series entries: 0; 0; 0; 0; 0; 0; 0 - Indicative targets (examples shown with ITs and selected actuals): - 1. Ceiling on reserve money - IT (March): 75,915 - IT (June): 75,897 - Status: Met - Actual series entries include: 74,213; 76,092; 85,656; 86,376; 91,329; 92,312; 93,968 - 2. Cumulative floor on state government tax collections (cumulative from the beginning of the year) - IT (March): 41,739 - IT (June): 43,046 - Status: Met - Actual series entries include: 67,862; 99,153; 97,783; 20,031; 43,051; 71,142; 106,653 - 3. Floor on cumulative state government spending on targeted social assistance, Unified Monthly Benefit and Monthly Social Benefit programs - IT (March): 2,377 - IT (June): 2,729 - Status: Met - Actual series entries include: 3,615; 5,417; 5,322; 1,339; 2,678; 4,017; 5,557 - 4. Ceiling on new nonconcessional external debt contracted or guaranteed by public sector (continuous, in millions of U.S. dollars) - IT (March): 0 - IT (June): 0 - Status: Met - Actual series entries: 0; 0; 0; 0; 0; 0; 0 - Sources for Table 1 data: Kyrgyz authorities and IMF staff estimates and projections. - Footnotes included in table excerpt: - 1/ As defined in the TMU. - 2/ Cumulative from the beginning of the year. - 3/ External debt contracted or guaranteed with a grant element of less than 35 percent. ### Prior actions and structural benchmarks (Table 2) — selected measures, timings, and status - Prior action: - Unify foreign exchange collateral requirements for the loans of the NBKR for all entities using NBKR's credit facilities. - Timing: 5 business days prior to the board meeting - I. Fiscal policy — selected measures: - Undertake a review of the public investment framework in cooperation with development partners and line ministries to identify gaps and then define an action plan. - Timing: End-April, 2016 - Status: Met - Draw an action plan for the reform of public sector personnel and remuneration policy to reduce the wage bill as a share of GDP. - Timing: End-May, 2016 - Status: Met - Review the methodology for setting power tariffs to ensure economic soundness and adjust accordingly the roadmap for increasing tariffs. - Timing: End-June, 2016 - Status: Met - Sign a Memorandum of Co-operation with TIKA, the Turkish Cooperation and Coordination Agency, to develop new Financial Management Information System. - Timing: End-June, 2016 - Status: Met - Revise the MDTS in light of the outcome of the new DSA. - Timing: End-July - Status: Met - Conduct a review of all subsidies and draw up an action plan to reduce them. - Timing: End-September, 2016 - Status: Not met - Modify through government decree the decision making process for the selection of public investment projects by formalizing gate keeping roles of the MoE on evaluation, including economic assessment and project efficiency, and MoF on financing respectively. The PIP guidelines will be updated accordingly. - Timing: End-December, 2016 - Status: Met - Set up a comprehensive register of all employees of the general government. - Timing: End-March, 2017 - Status: (no status indicated in excerpt) - Relying on the action plan to reform personnel and remuneration policy, identify quantitative measures to reduce the wages bill to 8.7 percent of GDP in 2018. - Timing: End-May, 2017 - Status: New - Sign the FMIS terms of reference. - Timing: End-May, 2017 - Status: (no status indicated in excerpt) - Finalize the review and the action plan to reduce subsidies. - Timing: End-July, 2017 - Status: New - Introduce a standardized framework for project monitoring of physical and financial performance for all projects exceeding KGS 50 million. - Timing: End-June, 2017 - Status: (no status indicated in excerpt) - Sign the contract with the IT provider for the FMIS project. - Timing: End-September, 2017 - Status: New - II. Financial sector — selected measures: - DEBRA to submit to the courts requests for liquidating the following banks: “Bishkek”, “Mercury”, “Kurulush-bank”, and “Adil” banks. - Timing: End-September, 2016 - Status: Met - Develop a crisis preparedness framework, including establishing a high-level financial stability council comprised of representatives of the NBKR, DPA, ministry of finance, and prime minister’s office. - Timing: End-September, 2016 - Status: Met - Develop a strategic plan for supervision with components including personnel policy, training, risk-based supervision, and strengthening the regulatory framework. - Timing: End-December, 2016 - Status: (no status indicated in excerpt) - Approve by the NBKR Board regulations for (i) classifying restructured loans, which will result in abolishing the prolonged loans category; (ii) refinancing of classified loans. - Timing: End-March, 2017 - Status: New - DEBRA to submit to the courts requests for liquidating the following banks: “Kyrgyzagroprombank”, “Manas”, “Issyk-Kul”, and “AUB” banks. - Timing: End-March, 2017 - Status: (no status indicated in excerpt) - Circulate to ministries for review amendments to the Banking Law to reintroduce provisions on governance and oversight, judicial review and nonsuspension of the NBKR’s decisions, powers of the NBKR in the resolution and liquidation processes, and lending to non-supervised institutions. - Timing: End-April, 2017 - Status: New - Revise and enact regulations to preserve the main requirement for lending to related parties. - Timing: End-May, 2017 - Status: New - Submit to Parliament amendments to the Banking Law to reintroduce the missing provisions described above. - Timing: End-July, 2017 - Status: New - Enact and publish in the official gazette amendments to the Banking Law to reintroduce the missing provisions described above. - Timing: End-December, 2017 - Status: New - Structural Benchmarks: listed in Table 2 (specific items and timings included above). ### Attachment I — Fiscal measures to close the gap (estimated contribution, in percent of GDP) - Memo item: - 2016 Nominal GDP (in billions of soms): 452.0 - 2017 Nominal GDP (in billions of soms): 486.2 - Estimated contributions by measure category (selected lines shown as percent of GDP for 2016 and 2017): - Tax policy total: 0.1 (2016); 0.6 (2017) - Revise VAT applicable to certain types of exports: 0.000 (2016); 0.06 (2017) - Establishment of rates for export customs duties for shell limestones and harmonize of FEZ with EEU: 0.03 (2016); 0.05 (2017) - Raise excise labeling rate for beer: 0.000 (2016); 0.00 (2017) - Establishment of minimal retail prices for cigarettes: 0.01 (2016); 0.04 (2017) - Introduce a minimum level of target prices for imports from EEU: 0.03 (2016); 0.13 (2017) - Cancel tax exemptions in the context of the harmonization with the EEU: 0.000 (2016); 0.18 (2017) - Remove prohibition of tires imports from third countries: 0.02 (2016); 0.09 (2017) - Revision of property taxation: 0.000 (2016); 0.05 (2017) - Tax administration total: 0.4 (2016); 0.7 (2017) - Improve customs payments through harmonization procedure, closer relationships with third countries and better information system: 0.24 (2016); 0.27 (2017) - Fight against violation of customs duties and illegal imports of goods and vehicles, and collection of arrears: 0.03 (2016); 0.07 (2017) - Improve administration of tax and non tax payments by increasing scheduled and non scheduled audits: 0.06 (2016); 0.07 (2017) - Speed up litigation cases: 0.01 (2016); 0.21 (2017) - Speed up the collection of tax arrears: 0.07 (2016); 0.07 (2017) - PFM total: 0.0 (2016); 0.0 (2017) - Improve efficiency of the payment system through savings in procurement operations: 0.03 (2016); 0.00 (2017) - Expenditure total: 1.7 (2016); 0.9 (2017) - Streamlining of non priority goods and services: 0.23 (2016); 0.77 (2017) - Reducing domestically financed capital expenditure: 0.23 (2016); 0.00 (2017) - Reducing externally financed capital expenditure: 1.24 (2016); 0.11 (2017) - Nontax revenues total: 0.3 (2016); 0.1 (2017) - Higher profits from the NBKR (already received): 0.18 (2016); 0.00 (2017) - Increase in proceeds from the leasing of state property and dividends: 0.04 (2016); 0.04 (2017) - Reimbursement of taxes from criminal procedures and fraud: 0.12 (2016); 0.04 (2017) - Aggregate estimated contribution totals shown: 2.6 (2016); 2.3 (2017) - Sources: Authorities data and IMF staff calculations. ### Attachment II - Title present: Kyrgyz Republic: Technical Memorandum of Understanding - Date shown at top of attachment: December 5, 2016 *Source: Kyrgyz authorities and IMF staff estimates and projections.* ### Introduction ### Introduction ### Purpose and Scope - Defines quantitative performance criteria, indicative targets, and adjustors, and establishes the content and frequency of data to be provided to IMF staff for program monitoring related to the economic program supported by an arrangement under the Extended Credit Facility (ECF). - Indicators presented in Table 1 of the Letter of Intent dated December 5, 2016 reflect understandings between the authorities of the Kyrgyz Republic and IMF staff. ### A. Definitions and Concepts - Test dates: - Quantitative performance criteria are set semi-annually starting June 30, 2015 through December 31, 2018, and are to be met at the end of each period. - National Bank of the Kyrgyz Republic (NBKR): - The NBKR is the central bank; for program purposes includes all its central and regional offices. - Public sector (program definition): - Comprises the general government, the NBKR, the 10 largest nonfinancial public enterprises (enterprises and agencies in which the government owns more than 50 percent of the shares, but which are not consolidated in the budget, as listed in Table 1), and any other newly created public development institution. - The State budget comprises central and local government budgets. The general government budget includes the State and Social Fund budgets. - Foreign-financed Public Investment Program (PIP) loans and grants: - Program of investments in infrastructure and social sectors agreed by the general government and donors; the PIP is fully financed by related grants and loans. - Program loans and grants: - Loans and grants received by the general government for direct budget support from external donors and not related to PIP financing. - Stock of external payment arrears (program monitoring definition): - End-of-period amount of external debt service due and not paid within the grace period specified in the relevant debt contract, including contractual and late interest; creditor must claim payment; amounts in dispute are not considered arrears. Arrears covered by a clearance framework/rescheduling or restructuring are not considered arrears for program monitoring, except unpaid debt service under such agreements would be program arrears. - Concessional and nonconcessional debt: - Concessional debt: debt with a grant element equivalent of 35 percent or more. - Grant element = (PV of the debt subtracted from nominal value) expressed as percent of nominal value. - PV calculated by discounting future debt service at a discount rate of 5 percent. - Calculation accounts for maturity, grace period, payment schedule, upfront commissions, and management fees; performed by authorities and verified by IMF staff. - Variable interest rate: - For variable rates of form benchmark rate plus fixed spread, PV calculated using program reference rate plus fixed spread. - Program reference rate for the six-month USD LIBOR is 3.34 percent and will remain fixed for the duration of the program. - Spreads of six-month LIBOR over six-month USD LIBOR: - Euro: -250 basis points - JPY: -300 basis points - GBP: -100 basis points - For currencies other than Euro, JPY, and GBP: -200 basis points - Where variable rate is linked to a benchmark other than six-month USD LIBOR, a spread reflecting the difference will be added (rounded to the nearest 50 bps). - Valuation changes (program exchange rates): - U.S. dollar–denominated components of the NBKR’s balance sheets valued at program exchange rates. - Program exchange rate of the KGS to the U.S. dollar is set as of February 17 of 2015: KGS 60.7523 = US$1. - Corresponding cross exchange rates and program gold price for the duration of the program are provided in Table 2. ### B. Quantitative Performance Criteria - Floor on net international reserves (NIR) of the NBKR: - NIR = total international reserve assets minus total international reserve liabilities of the NBKR in convertible currencies. - Total international reserve assets: NBKR holdings of monetary gold, SDRs, reserve position in the IMF, holdings of convertible foreign currencies in cash or with foreign banks, and liquid debt instruments issued by nonresidents. - Convertible foreign currencies for program purposes: U.S. dollar, Euro, British Pound, Japanese Yen, Swiss Franc, Australian Dollar, and Canadian Dollar. - Exclusions from reserve assets: pledged/encumbered reserve assets, capital subscriptions in foreign financial institutions, deposits of resident financial institutions in foreign currency, and illiquid assets of the NBKR. - Net forward positions excluded. - Total international reserve liabilities: sum of Kyrgyz Republic’s outstanding liabilities to the IMF and other convertible currency liabilities to nonresidents with original maturity up to and including one year. - NIR is not affected when foreign assets are received by NBKR through foreign currency swaps with resident and non-resident financial institutions; total international reserves and NIR decline with provision of foreign assets by NBKR through swaps with resident financial institutions. - Program valuation rule: total international reserve assets and liabilities will be valued at program exchange rates. - Calculated stock of NIR in convertible currencies amounted to US$ 1,425 million on June 30, 2016. - Net foreign assets (NFA) of the NBKR: - NFA consist of net international reserve assets plus other net foreign assets, including other net claims on CIS countries, reserve assets pledged as collateral or otherwise encumbered, capital subscriptions in foreign financial institutions, illiquid assets, and obligations of the NBKR on SDR allocation. - For program monitoring, other NFA will be valued at program exchange rates. - Adjustors for NIR: - The floor on NIR will be adjusted upward/downward to the full extent of any excess/shortfall in program and other grants and program loans as given in Table 3, and upward/downward to the full extent that amortization and interest payments of public external debt is less/more than the amortization and interest payments given in Table 3. - Ceiling on net domestic assets (NDA) of the NBKR: - NDA = reserve money of the NBKR minus NFA (items in foreign currencies valued at program exchange rates). - NDA components: (a) net claims to the general government from the NBKR; (b) net claims to other depositary corporations; (c) net claims on other financial corporations; (d) other items net. - Stock of NDA amounted to minus KGS 28,090 million on June 30, 2016. - Adjustors for NDA: - Ceiling on NDA will be adjusted downward/upward to the full extent of any excess/shortfall in program and other grants and program loans as given in Table 3; downward/upward to the full extent that amortization and interest payments of public external debt is less/more than Table 3; adjusted downward/upward to the full extent of any excess/shortfall of the Russia-Kyrgyz Development Fund net flows given in Table 3a. - Ceiling on cumulative overall cash deficit of the general government budget: - Measured from the financing side as net cash inflow from financing activities = net incurrence of liabilities minus net acquisition of financial assets other than cash; measured at current exchange rates. - Financing-side components include: - Change in stock of net claims of the domestic banking system and nonfinancial institutions and households on the general government (change in banking system claims on general government less change in all deposits of general government with banking system). Banking system claims include bank loans to general government; any securities issued by the general government and held by domestic banks; overdrafts on current accounts. - Change in stock of net claims of foreign governments, banking systems, and nonfinancial institutions and households on the general government. - Net transactions in equity (new sales net of purchases of shares). - Net foreign loans disbursed to general government for budgetary support. - Net foreign loans disbursed to general government for PIP financing. - Fiscal balance quantitative performance criteria are calculated on the projected exchange rate; reporting and adjustments will be made using current exchange rates. - Adjustors for cumulative overall cash deficit: - Ceiling adjusted downward to the full extent of any excess in program grants (Table 3). - Ceiling adjusted downward to full extent of any shortfall in program loans (Table 3). - Ceiling adjusted upward/downward to the full extent that PIP loans are more/less than PIP loans given in Table 3. - Ceiling on PV of new external debt contracted or guaranteed, and accumulation of new external payment arrears (continuous criteria): - Debt definition follows Executive Board Decision No. 6230–(79/140), as amended by Decision No. 15688–(14/107), point 8 (adopted December 5, 2014). Debt understood as noncontingent liability created under contractual arrangement requiring future payments; includes loans, suppliers’ credits, leases (PV of lease payments at inception), arrears, penalties, judicially awarded damages arising from failure to make payment under contractual obligation that constitutes debt. - External debt defined by residency of the creditor. - Performance criterion applies to PV of new external debt contracted or guaranteed by public sector with original maturities of one year or more; applies to debt contracted or guaranteed for which value has not yet been received, including private debt with official guarantees. - Adjustor to external debt ceiling: - Up to 5 percent of the external debt ceiling in PV terms applies if deviations are prompted by a change in financing terms (interest, maturity, grace period, payment schedule, upfront commissions, management fees). Adjustor cannot be applied when deviations are prompted by increase in nominal amount of total debt contracted or guaranteed. - Exclusions from external debt limits: - Disbursements by the IMF are excluded. - Contracting or guaranteeing of new external debt that is a rescheduling/refinancing of existing external debt on terms more favorable to the debtor is excluded. - Guarantees: - Guarantee arises from any explicit legal obligation of the public sector to service a debt in event of nonpayment, or from any implicit legal or contractual obligation of the public sector to finance partially or fully a shortfall incurred by the debtor. - New external payments arrears: - Ceiling on accumulation of new external payments arrears is a continuous quantitative performance criterion. ### C. Indicative Targets - Ceiling on reserve money: - Reserve money = NBKR’s national currency liabilities to the economy (currency issued and liabilities to other depositary corporations). - Cumulative floor on state government tax collections: - Tax collections in cash correspond to “Tax Receipts” in the Treasury Report and comprise: tax on income and profits; taxes on goods and services; specific taxes on services; turnover taxes; taxes on property; taxes on international trade; and other taxes. - Tax collections include collections of tax arrears but exclude tax offsets. - Cumulative floor on state government spending on targeted social assistance: - Comprises state government spending on Unified Monthly Benefit (UMB) and Monthly Social Benefit (MSB) programs. - Ceiling on new nonconcessional external debt contracted or guaranteed: - Indicative target applies to contracting or guaranteeing by public sector of nonconcessional external debt (grant element of less than 35 percent), except normal short-term import-related credits and NBKR international reserve liabilities. - Ceiling on introducing new and renewal of existing tax exemptions: - Indicative target applies to any change in law or regulation that expands eligibility for, or value of, existing tax deductions, exemptions, or credits; introduces new tax deductions, exemptions, or credits; reduces tax rates; or reduces number of taxpayers subject to tax. ### Reporting Requirements Under the Arrangement - General: - Government and NBKR to provide IMF with necessary economic and financial statistical data to monitor developments and quantitative targets (see Table 4). - D. Analytical Balance Sheet of the NBKR: - NBKR to provide analytical balance sheet daily, clearly identifying: net foreign assets; net international reserves; total reserve assets and liabilities; net domestic assets; net credit from NBKR to general government disaggregated by state government and special funds; net credit from NBKR to other depositary corporations and other financial corporations (including Russia-Kyrgyz Development Fund); other items net; reserve money. - Balance sheet provided using both actual and program exchange rates; transmitted to IMF Resident Representative and/or by e-mail. - E. Monetary Survey: - Monthly monetary surveys of banking sector and other depository corporations reported within 16 days of end of month, identifying: net foreign assets and net domestic assets of banking system; net credit from banking system to general government disaggregated by state government and social fund; net claims to rest of economy; other items net; broad money. Provided using both program and actual exchange rates. - NBKR to provide monthly within seven days after month-end holdings of treasury bills, treasury bonds and other securities issued by state government, differentiated by holder categories and provided in both book (nominal) value and actual value where applicable. - F. International Reserves and Key Financial Indicators: - NBKR to provide monthly data within 20 days from end of month on gross and net international reserves within IMF’s SDDS framework. - Report on foreign assets and liabilities by currency to be provided 20 days after quarter-end. - Data provided at two alternative sets of exchange rates/gold price: (1) those used to derive NFA in NBKR accounts; (2) those specified in the program. - NBKR to provide net foreign financing flows including disbursements of program loans and grants, amortization, interest payments on external debt, interest income on reserves, other direct foreign currency payments by government and NBKR. - Daily reports: nominal exchange rates (official and interbank), foreign exchange interbank market turnover, volume of NBKR foreign exchange sales and purchases in domestic interbank market and with other parties. - Weekly reports every Monday: treasury bill yields and amount of treasury bill sales and redemptions. - On the twenty-fifth day of the month following the reference month: indicators of financial soundness of banking system, including ratios of regulatory capital to risk-weighted assets, nonperforming loans to total loans, NPLs by sector and by currency, restructured and prolonged loans by sector and by currency, return on equity, liquidity, earning and profitability, loans and deposits ratios in domestic and foreign currency, foreign currency exposure and dollarization, data on bank deposits and loans by maturity and sector, and bank deposit and lending rates by maturity. - On the twentieth day of the month following the reference quarter: data on nonperforming loans for micro-finance organizations and credit unions. - G. External Debt: - Ministry of Finance, together with NBKR, to provide monthly information on disbursements, principal and interest payment—both actual and falling due—on contracting and guaranteeing of medium- and long-term external loans by state government, nonfinancial public enterprises, and NBKR; and any stock of outstanding arrears on external debt service payments within 21 days of end of each month. - Ministry of Finance to report total amount of outstanding government guarantees and external arrears monthly. - NBKR to provide debt service payment data on private debt; Ministry of Finance to provide data on debt service on public and publicly guaranteed loans. - H. Budgetary and Extra Budgetary Data: - Social Fund to report monthly on its operations within 26 days from end of each reference month. - Ministry of Finance to provide monthly reports on disbursements and use under public investment program and budgetary grants with one-month time lag, and amount of tax exemptions. - I. Balance of Payments Data: - NBKR to provide current account and capital account data (foreign trade, services, official and private transfers, foreign investment, disbursements of public and private loans) quarterly with at most a three-month lag. - NBKR to provide monthly foreign trade data with a two-month lag. - J. Other General Economic Information: - National Statistics Committee to notify IMF of monthly Consumer Price Index by category by the fifteenth business day of the following month, and convey monthly GDP estimates within 30 days of the end of each month. ### Key Tables and Program Numbers (as presented) - Table 1: Ten Largest SOEs (listed by name in the source; included in public sector). - Table 2: Program Cross Exchange Rates and Gold (selected entries): - AUDAustralian Dollar 1.2926 / 0.7736 - JPYJapanese Yen 119.0568 / 0.0084 - KGSKyrgyz Som 60.7523... - EUREuro 0.8757 / 1.1420 - XAUGold (US$/troy ounce) 1,229.2500... - SDRSDR 0.7096 / 1.4092 - Table 3: Projected Budget Support, PIP and Amortization (In millions of U.S. dollars) — selected entries (columns by date: December 2016, March 2017, June 2017, September 2017, December 2017): - Program grants: 40.8 / 1.8 / 13.9 / 4.3 / 27.2 - Program loans: 25.7 / 0.0 / 11.0 / 1.7 / 24.2 - Grants in-kind: 28.8 / 21.3 / 21.3 / 21.3 / 21.3 - PIP grants excl. grants in-kind: 38.2 / 32.7 / 32.7 / 32.7 / 32.7 - PIP grants incl. grants in-kind: 67.0 / 54.0 / 54.0 / 54.0 / 54.0 - PIP loans: 61.0 / 96.4 / 96.4 / 96.4 / 96.4 - PIP loans, excl. onlending: 2.7 / 56.1 / 56.1 / 56.1 / 56.1 - Amortization of public external debt: 23.8 / 19.3 / 19.3 / 19.3 / 19.3 - Interest payments: 12.0 / 13.3 / 13.3 / 13.3 / 13.3 - Table 3a: Projected flows of the Russia-Kyrgyz Fund (In millions of U.S. dollars) — selected entries: - Inflows (Dec 2016, Mar 2017, Jun 2017, Sep 2017, Dec 2017): 15.0 / 100.0 / 80.0 / 80.0 / 40.0 - Lending: 65.0 / 50.0 / 35.0 / 40.0 / 40.0 - Net: -50.0 / 50.0 / 45.0 / 40.0 / 0.0 - Table 4: Reporting Requirements and Frequency (selected items): - NBKR analytical balance sheet: Daily — the following working day - NBKR monetary surveys: Monthly — Within 16 days of the end of each month - NBKR holdings of treasury securities: Monthly — Within 7 days of the end of each month - NBKR gross and net international reserves; net foreign financing flows: Monthly — Within 20 days of the end of each month - NBKR reserve composition by currency/instrument: Quarterly — Within 10 days of the end of each quarter - Daily FX market and NBKR operations: Daily — The following working day - Weekly treasury bill yields and T-bill sales/redemptions: Weekly — Every Monday - NBKR banking sector aggregated balance sheet and key loan portfolio factors: Monthly — Within 25 days of the end of each month - MOF external debt disbursements, principal, interest, contracting/guaranteeing: Monthly — Within 21 days of the end of each month - Social Fund budget execution report: Monthly — Within 30 days of the end of each month - NBKR current account and capital account: Quarterly — Within 90 days of the end of each quarter - NBKR foreign trade data: Monthly — Within 60 days of the end of each month - NBKR remittances by country/currency: Monthly — Within 45 days of the end of each month - NSC Consumer Price Index by category: Monthly — Within 15 days of the end of each month - NSC GDP: Monthly — Within 30 days of the end of each month *Source: “Introduction,” cr17143 - Introduction (Letter of Intent and TMU material).* ### 2015. The COBP 2017–2019 is to be approved by the end of 2016. ### cr17143 - 2015. The COBP 2017–2019 is to be approved by the end of 2016. ### Asian Development Bank (ADB) operations and resource allocation - Kyrgyz Republic is a Group A developing member with access to Asian Development Fund (ADF) resources and concessional ordinary capital resources (OCR). - Indicative ADF and concessional OCR resource allocation for 2016–2018: US$283.8 million. - Includes US$60.0 million from sub-regional pool (US$30.00 million loan and US$30.00 million grant), secured for the Toktogul Rehabilitation Project, Phase 3 (approved in September 2016). - Includes US$157.00 million in co-financing for Toktogul Rehabilitation Project, Phase 3 and CAREC Corridors 1 and 3 Connector and Road Maintenance Project, Phase 1 (approved in September 2016). - 2016 allocation noted as US$217.61 (text: "Thus, the 2016 allocation ($217.61) is going to be the highest since start of the operations in the Kyrgyz Republic in 1994"). - Final allocation contingent on available ADF resources, concessional OCR, and country performance assessments. - In accordance with the ADF grants framework, country to receive 50 percent of its country allocation in grants during 2015–16, subject to a 20 percent volume discount of the grant portion of the country allocation. - Nonlending program includes US$5.85 million of technical assistance grants for 2016–2019. ### ADB portfolio and 2016 approvals - As of 30 November 2016, cumulative ADB disbursements to the country: US$1,655.9 million consisting of: - 41 loans for US$1,082.6 million - 37 grants for US$601.8 million - Including two nonsovereign loans for US$20.0 million and 8 Japan Fund for Poverty Reduction grants for US$8.5 million. - About 22 percent (US$324.0 million) of total funding resources provided through thirteen program operations. - Total portfolio as of 30 November 2016: 16 projects totaling US$867.15 million (net amount) implemented through: - 14 ADF loans: US$510.3 million - 15 ADF grants: US$355.3 million - One Japan Fund for Poverty Reduction grant: US$1.5 million - Sector concentration: Transport and energy account for about 70 percent of the total active portfolio. - Projects approved in 2016: - Second Investment Climate Improvement Program (Subprogram 2): US$25 million (US$12.5 million loan and US$12.5 million grant). - Toktogul Rehabilitation Phase 3 Project: US$110 million (US$60 million loan and US$50 million grant). - Central Asia Regional Economic Cooperation Corridors 1 and 3 Connector Road Project: US$95.1 (SDR41.905 million loan and US$36.720 million grant). - ADB provided 90 technical assistance (TA) projects amounting to US$51.9 million to date (as of reporting). - Two TAs approved in 2015: - Advisory TA (PATA) for Accession to the Eurasian Economic Union—Capturing the Opportunities and Addressing the Risks: US$0.5 million. - Preparatory TA (PPTA) Central Asia Regional Economic Cooperation Corridors 1 and 3 Connector Road: US$1 million. - Year-end portfolio performance in 2016: 90 percent projects on track. - Contract awards and disbursements as of 30 November 2016: US$22.4 million and US$29.4 million (22 percent and 78 percent of year’s projections), respectively. - Cumulative direct value-added official co-financing for the Kyrgyz Republic since 1997 (by end-2015): - Investment projects: US$216.6 million for eleven investment projects - Technical assistance projects: US$4.13 million for eight technical assistance projects ### ADB private sector and trade finance - ADB private sector operations began in 2012 with a US$10 million SME loan to Kyrgyz Investment and Credit Bank. - ADB's Trade Finance Program (TFP) operates through over 200 partner banks; three Kyrgyz banks signed TFP agreements in December 2012 (Demir Kyrgyz International Bank, Kyrgyz Investment and Credit CJSC, and RSK Bank OJSC). - In 2015, US$10 million Senior Unsecured Loan to Bai Tushum Bank for Broadening Access to Finance was approved. ### Regional cooperation and CAREC - Kyrgyz Republic is an active participant in the Central Asia Regional Economic Cooperation (CAREC) Program. - CAREC initiatives support reconstructed roads for safer and faster year-round travel to Kazakh, Tajik, and Chinese borders. - CAREC transport and trade facilitation projects expected to support government goal of developing external trade activities. - ADB assistance includes development of procedures and technical tools to enhance land acquisition and resettlement practices. ### European Bank for Reconstruction and Development (EBRD) relations and activities (as of November 1, 2016) - EBRD activity since 1995 through end-September 2016: 145 projects with net cumulative business volume of €637 million. - Portfolio amounted to €241 million in 65 active projects; current private sector portfolio ratio is 65 percent. - New country strategy approved on 25 February 2015 covering next four years; key strategic priorities: - (i) fostering sustainable growth by strengthening regional cross-border linkages; - (ii) enabling SMEs to scale-up and bolster competitiveness; - (iii) promoting sustainability of public utilities through commercialization and private sector participation. - SME and local financial sector support: - In 2015 and Jan–September 2016 the Bank signed eight corporate sector projects with local SMEs. - Jan–September 2016: eight new loan agreements with local banks and MFIs. - Kyrgyz Sustainable Energy Efficiency Facility II (KyrSEFF II): US$35 million facility with participating institutions (KICB, Bai Tushum and First Micro Credit Company) and expected inclusion of Demirbank, Kompanion and Optima before year-end. - EBRD has undertaken 63 projects in Kyrgyz Republic with companies in manufacturing, ICT, tourism, and agriculture; total donor commitment for advisory projects approximately €3.6 million. - As of 1 November 2016, EBRD undertaken 1083 projects with 239 local consultants; more than 65 percent of enterprises assisted located outside main cities. Post-project outcomes: turnover increased in nearly 66 percent of beneficiary companies; 57 beneficiaries secured external investments totaling €31 million. - Public utilities and municipal infrastructure: - October 2016: EBRD signed EUR 4 million loan to JSC Oshelectro distribution company, complemented by EUR 1 million grant from EU /Investment Fund for Central Asia (IFCA). - Implemented €20 million framework to improve water supply and wastewater treatment, fully utilized by end-2014; extended in 2015 by new €20 million for additional sub-projects in named cities. - 2015 new water/wastewater loans: total €5.5 million (€2.0 million Tokmok, €2.0 million Naryn, €1.5 million Batken) co-financed by capital grants totaling €8.8 million (€3.1 million Tokmok, €3.2 million Naryn, €2.5 million Batken) from EU IFCA, SECO, and EBRD SSF. - 2015: EBRD declared effective €11 million loan for Bishkek solid waste investments, co-financed by €3 million SSF grant and €8 million EU IFCA. - Bishkek Public Transport project: 79 new trolleybuses delivered by end-2014; new loan of €5.7 million for Osh public transport in same year, co-financed by €3.1 million SSF grant. Planned additional loans by end-2015: €3.5 million for Osh and Jalal-Abad; co-financing by €7 million from EIB and €9 million capital grants from EU IFCA. Planned second phase Bishkek Public Transport loan: €5 million, co-financed by €3.4 million SSF grant. - Policy dialogue and sectoral support: - Continued engagement on public procurement improvement under EBRD–UNCITRAL project and support for GPA accession. - Support for capital markets development, mining sector reform, renewable energy framework, and pilot mini-hydro financing. - Engagement on employment, HR practices, and gender inclusion in utilities and public transport; initial study on women’s employment in mining produced. - Climate finance and PPCR (since October 2015): - EBRD leading role in implementing Climate Investment Funds’ Pilot Program for Climate Resilience (PPCR) in Kyrgyz Republic. - PPCR provided US$1.5 million technical assistance grant to mainstream climate change into development planning and design a Strategic Programme for Climate Resilience. - EBRD implementing TC to assess capacities to manage climate finance and develop frameworks for financeable investments aligned with IMF debt sustainability principles. ### IMF technical assistance (February 2003–September 2016) — selected highlights - Wide range of Fund TA missions covering tax administration, public financial management, treasury and accounting reform, public investment management assessment, and others spanning February 2003–September 2016. - Monetary and financial sector TA included payments system, bank supervision and regulation, FSAP updates, reserve management, operational advice on monetary policy framework, strengthening banking supervision, and stress testing. - Extensive AML/CFT engagement with repeated follow-up missions (2006–2016) involving National Bank of the Kyrgyz Republic and State Financial Intelligence Service. - Statistics TA covered SDDS subscription (February 2004), balance of payments, monetary and financial statistics, national accounts, price statistics, external sector statistics, and quarterly national accounts among others. - List of resident advisers includes positions in banking supervision, public debt policy and management, macroeconomic analysis and forecasting, and others with specific tenures. ### Statistical issues and data quality - Data provision assessed as adequate for surveillance; four institutions (NSC, Ministry of Economy and Industry, Ministry of Finance, NBKR) support statistical quality. - NSC maintains comprehensive website with data largely incorporating international methodological recommendations (http://www.stat.kg). Kyrgyz Republic subscribed to SDDS in February 2004. - National accounts: - Dissemination generally timely; technical assistance from IMF, EUROSTAT, OECD, World Bank and bilateral donors. - Ongoing issues: quality of source data due to tight collection deadlines, need to improve source data for quarterly GDP estimates, reliance on cumulative data for quarterly estimates, difficulties estimating underreporting in private sector. - Measures: introduction of sampling procedures, establishment of a division of sample surveys, new enterprise survey report forms. - November 2008 STA mission recommendations noted; April 2016 STA mission found deficiencies in quarterly discrete data. - Price and labor market statistics: - CPI concepts broadly consistent with international standards; CPI covers urban households but needs to cover rural households. - PPI compiled broadly in accordance with international standards; coverage needs improvement. - Progress on unit value indices for trade; problems persist due to customs administration issues and outdated customs software affecting trade valuation and coverage. - Problems in average wage compilation (payments in kind, private sector coverage) and employment data comparability. - Government finance statistics: - Central government scope excludes Social Fund data (published separately); some discrepancies between deficit and financing data. - Revenue and expenditure broadly accord with GFSM 2001 though deficiencies remain. - April 2016 GFS TA provided bridging table for transition to GFSM 2014. - Monthly GFS data reported to STA; latest yearbook data reported were for 2012 covering general government using GFSM 2001. - External and monetary statistics: - External debt service data provision improved; External Debt Division now solely responsible for monitoring external debt with on-site training and database computerization. - MFS: April 2015 TA assisted NBKR in migrating to IMF SRFs with pilot SRF 1SR and SRF 2SR submitted; classification and sectorization issues identified by STA. April 2016 MFS TA focused on extending SRF 2SR coverage and developing SRF 4SR. - FSIs: NBKR submitted pilot FSIs to STA; work ongoing to align compilation with FSIs Compilation Guide. - External sector statistics: quarterly balance of payments and IIP compiled and disseminated; SECO-financed project support; BPM6 implemented experimentally for 2015 Q1–Q2; further improvements needed in FDI, shuttle trade estimation, and remittances. Need to reconcile customs declarations for trade with Custom Union members (joined 2015). ### Key data and indicators (as presented in Table of Common Indicators; as of December 5, 2016) - Exchange Rates: 12/01/16 (date of latest observation and date received: 12/01/16) - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: 11/30/16 (date of latest observation); 12/01/16 (date received) - Reserve/Base Money: 12/01/16 (date of latest observation and date received) - Broad Money: 10/31/16 (date of latest observation); 11/18/16 (date received) - Consolidated Balance Sheet of the Banking System: 10/31/16 (date of latest observation); 11/18/16 (date received) - Interest Rates: 09/30/16 (date of latest observation); 10/28/16 (date received) - Consumer Price Index: 10/31/16 (date of latest observation); 11/10/16 (date received) - Revenue, Expenditure, Balance, and Composition of Financing—General Government: 10/31/16 (date of latest observation); 12/04/16 (date received) - Revenue, Expenditure, Balance, and Composition of Financing—Central Government: 10/31/16 (date of latest observation); 12/04/16 (date received) - Stocks of Central Government and Central Government-Guaranteed Debt: 9/30/16 (date of latest observation); 11/04/16 (date received) - External Current Account Balance: 6/30/16 (date of latest observation); 12/02/16 (date received) - Exports and Imports of Goods and Services: 6/30/16 (date of latest observation); 12/02/16 (date received) - GDP/GNP: 10/31/16 (date of latest observation); 11/11/15 (date received) - Gross External Debt: 9/30/16 (date of latest observation); 11/04/16 (date received) - International Investment Position: 06/30/16 (date of latest observation); 11/02/16 (date received) ### Debt sustainability outlook snippet - Statement: "Due to the appreciation of the som and re-prioritization of public investment projects, the outlook for debt sustainability in the Kyrgyz Republic has improved significantly." - External public debt projection cited: expected to decline to 60.7 percent of GDP in 2016 from (sentence truncated in source). *International Monetary Fund — cr17143 PDF (2017) — Kyrgyz Republic country report content provided* ### 64.6 percent in the previous year, and the DSA assesses the Kyrgyz Republic to remain at ### cr17143 - 64.6 percent in the previous year, and the DSA assesses the Kyrgyz Republic to remain at ### UNDERLYING ASSUMPTIONS - The current DSA takes into account the revised macroeconomic assumptions compared to the second review. - Based on economic developments in the first nine months of the year, 2016 economic growth is now expected to be weaker than at the time of the second review. - Due to weak imports driven by sluggish economic activity and the scaling back of public investment projects, the current account deficit will decline further. - Following the steady appreciation of the Kyrgyz som in the beginning of the year, the exchange rate has stabilized in recent months and most likely will remain stronger than expected in the medium-term. - The postponement of some of the externally financed public investment projects resulted in an improved fiscal balance (including on-lending) in 2016, but some deterioration in the medium-term. - The updated CPIA score of Kyrgyz is 3.58, which is an average of the 2013-15 period, maintaining the classification of the Kyrgyz Republic as a medium policy performer. - Approved By Juha Kähkönen and Zeine Zeidane (IMF) and John Panzer (IDA) - Prepared by staffs of the International Monetary Fund and the International Development Association - December 5, 2016 ### EXTERNAL DSA — FINDINGS AND SCENARIOS - The debt outlook has improved, but remains vulnerable to external and domestic shocks. - Driven by the som appreciation and the postponement of some public investment projects by the authorities, external public and publicly guaranteed debt is projected to decrease to 60.7 percent of GDP in 2016, compared to 64.6 percent in 2015. - The 2016 external debt ratio had been revised down by 9.5 percentage points from the previous DSA due to the stronger than anticipated exchange rate and the authorities’ decision to re-prioritize some externally financed public investment projects. - The external debt-to-GDP ratio is also revised down over the medium term, mainly on the account of the stronger exchange rate projection, which is only partly offset by the weaker GDP forecast. - External PPG-debt is now expected to level off at around 64 percent in 2018 and gradually decline afterwards. - External public and publicly guaranteed debt includes the debt of the 19 largest SOEs. - Key projection table (as presented): - Real GDP growth - Current DSA: 2.6 2.3 2.9 5.9 5.3 - Previous DSA (Second Review): 3.0 3.0 5.2 4.6 5.7 - Overall fiscal balance (percent of GDP)* (Including onlending) - Current DSA: -7.9 -6.2 -4.0 -3.0 -1.5 - Previous DSA (Second Review): -8.8 -5.2 -2.8 -2.0 -0.5 - Current account balance (percent of GDP) - Current DSA: -10.0 -13.6 -13.8 -11.9 -11.7 - Previous DSA (Second Review): -15.2 -15.3 -12.6 -12.2 -10.1 - PIP Disbursements - Current DSA: 366 406 356 350 323 - Previous DSA (Second Review): 497 385 310 312 298 - Sources: Authorities data and IMF staff calculations. - The Kyrgyz Republic remains at moderate risk of debt distress, but it is no longer considered a borderline case. - Public and publicly guaranteed external debt is estimated to remain well-below 36 percent of GDP and remittances in present value (PV) terms under baseline conditions over the projection period. - Other indicators of debt sustainability also remain below their indicative thresholds and suggest, in particular, limited liquidity risks. - The external PPG debt outlook remains vulnerable to large external shocks, in particular to a falloff in exports, and sizeable depreciation of the exchange rate. - The PV of the debt to GDP plus remittances ratio rises above the relevant indicative thresholds over the medium term under five of the six stress tests (one standard deviation shock to exports, the most severe of these scenarios, and net debt creating flows, U.S. dollar GDP deflator below historical average, a combined shock, and a 30 percent exchange rate shock). - The breach of threshold under the export shock is large and protracted, and sufficient to assess the country's external risk of debt distress as moderate. ### INVESTMENT SCENARIO RISKS - While externally financed public investments are necessary to close the country’s sizeable infrastructure gap, a massive scaling-up of public investments could undermine debt sustainability. - Adverse fiscal scenario assumptions (as described): - An 0.7 multiplier of public investments (reflecting Kyrgyz’s low public investment efficiency). - A 1 percent increase in the cost of new public borrowing (due to the increased reliance on Chinese loans). - A 4 percentage point permanent increase in the public investment to GDP ratio would result in a non-stabilizing external debt path. - The adverse scenario also assumes a temporary 30 percent drop in the USD nominal exchange rate, which has a direct impact on the external debt to GDP ratio. - Given that the baseline scenario of this exercise is the 2014 October WEO forecast, a permanent 4 percentage points public investment to GDP shock corresponds to PIPs running around USD 500 million in the coming years. - This finding underlines the risks associated with a debt-financed investment-based growth model in the Kyrgyz Republic and the need for ensuring prioritiziation and sufficient profitability of public investment projects. ### PUBLIC DSA — FINDINGS AND RISKS - The public debt outlook has also improved significantly compared to the previous DSA, mainly driven by the factors affecting external debt. - Public debt (external plus domestic) is expected to reach 62.1 percent of GDP in 2016, a 3 percentage points drop compared to 2015. - Total public debt is expected to be manageable in the medium and long term, but remains highly sensitive to shocks that reduce real GDP growth or failure to reduce the primary deficit over the medium term. - Liquidity risks associated with the servicing of public debt are expected to increase in the years ahead and reach 30 percent of revenues by 3036. - The increase in liquidity risks is due to the rising share of domestic debt in total public debt, which is serviced at higher domestic interest rates. - Rising liquidity risks underline the importance of continued fiscal consolidation. ### CONCLUSION — POLICY IMPLICATIONS AND RECOMMENDATIONS - The debt outlook remains vulnerable, in particular to a sizeable exchange rate depreciation or scaling-up of public investment, which could tilt the assessment to high risk of debt distress. - In order to avoid this adverse development, the authorities need to remain cautious when contracting and guaranteeing new debt and continue fiscal consolidation. - Ensure prioritization and sufficient profitability of public investment projects to mitigate risks from a debt-financed investment-based growth model. - Continued fiscal consolidation is important to address rising liquidity risks from a higher share of domestic debt. *Prepared by staffs of the International Monetary Fund and the International Development Association; December 5, 2016.* ### 7. The authorities need to remain cautious when contracting and guaranteeing new debt, and ### 7. The authorities need to remain cautious when contracting and guaranteeing new debt, and should resume fiscal consolidation. ### Fiscal stance and immediate concern - The primary fiscal deficit in 2017 is expected to be 2.5 percentage points higher than the debt-stabilizing level. - This shortfall results in an increase in the public debt ratio. - Externally financed public investments, while necessary to fill the large infrastructure gap, could undermine debt sustainability given limited absorption capacity. ### Public and publicly guaranteed (PPG) debt indicators (selected figures as reported) - PPGE debt to GDP ratio (Current DSA): 60.7, 63.0, 64.4, 63.1, 61.2, 49.0 - Previous DSA (Second Review) PPGE: 70.2, 69.6, 67.0, 64.8, 61.4, 47.5 - Public debt to GDP ratio (Current DSA): 62.1, 64.2, 65.5, 64.2, 62.2, 56.9 - Previous DSA (Second Review) public debt: 72.0, 71.2, 68.5, 66.1, 62.6, 57.7 ### External debt and balance dynamics (selected series and indicators) - External debt (nominal) (historical/projection series as reported): 78.5, 66.3, 90.9, 73.6, 89.9, 93.2, 76.9, 80.2, 72.9, 80.5, 94.5, 92.6, 91.8, 90.9, 88.9, 87.3, 85.4, 70.4, 50.0 - Of which: public and publicly guaranteed (PPG) (series as reported): 78.5, 66.3, 51.7, 44.5, 54.2, 55.9, 45.6, 46.3, 43.7, 50.6, 63.6, 60.7, 63.0, 64.4, 63.1, 61.2, 59.4, 46.0, 31.9 - Non-interest current account deficit (series as reported): -5.3, 1.8, 4.4, 13.8, -1.8, 1.4, 2.3, -4.5, 0.2, 14.9, 10.0, 4.3, 6.5, 7.8, 12.4, 12.5, 10.1, 9.5, 9.1, 4.9, 4.8, 5.1 - Net FDI (negative = inflow) (series as reported): -1.7, -6.4, -5.5, -8.0, -4.0, -9.1, -11.2, -4.4, -8.5, -3.1, -14.9, -7.5, 3.6, -8.1, -7.2, -7.3, -7.3, -7.2, -7.1, -5.8, -5.6, -5.9 - PV of external debt (selected reported values): 71.7, 71.3, 69.8, 68.5, 66.9, 66.5, 65.7, 55.8, 39.4 - PV of PPG external debt (reported series): 40.7, 39.4, 41.0, 41.9, 41.2, 40.4, 39.7, 31.5, 21.4 ### Debt-service and financing need indicators (selected) - Debt service-to-exports ratio (in percent) (selected points reported): 11.9, 5.7, 11.3, 14.4, 29.9, 18.7, 9.4, 11.1, 17.7, 15.1, 26.5, 24.0, 19.5, 18.3, 17.5, 19.0, 20.7, 22.6, 17.1 - PPG debt service-to-exports ratio (in percent) (selected): 10.7, 4.7, 3.4, 2.7, 3.6, 3.7, 3.1, 3.8, 6.8, 3.5, 4.9, 5.4, 5.5, 6.1, 5.9, 5.7, 6.0, 6.3, 6.0 - Total gross financing need (Billions of U.S. dollars) (reported series): 0.4, 0.1, -0.2, -0.1, 0.2, 1.4, 0.4, 0.6, 0.9, 0.9, 0.8, 0.9, 1.0, 1.1, 1.5 ### Key macroeconomic assumptions (selected series) - Real GDP growth (in percent) (series as reported): -0.2, 3.1, 8.5, 7.6, 2.9, -0.5, 6.0, -0.9, 10.9, 4.0, 3.5, 4.5, 3.8, 2.6, 2.3, 2.9, 5.9, 5.3, 4.3, 3.9, 5.8, 5.1, 5.0 - GDP deflator in US dollar terms (change in percent) (selected): 11.3, 11.8, 23.7, 25.3, -11.3, 3.1, 21.7, 7.5, 0.1, -2.1, -12.5, 6.7, 13.8, -5.5, 1.0, 1.8, 0.7, 0.8, 0.8, -0.1, 1.0, 1.0, 1.0 - Effective interest rate (percent) (selected): 1.8, 1.0, 1.2, 0.8, 1.2, 0.9, 0.9, 1.0, 1.3, 1.5, 1.2, 1.1, 0.2, 2.5, 1.4, 1.5, 2.2, 2.7, 2.9, 2.2, 3.5, 4.4, 3.8 ### Grant-equivalent and aid flows (selected) - Grant element of new public sector borrowing (in percent) (selected): 37.5, 40.5, 45.3, 43.6, 41.4, 39.4, 41.3, 36.3, 23.8, 31.6 - Grant-equivalent financing (in percent of GDP) (selected): 6.8, 6.4, 5.0, 3.8, 2.3, 2.0, 1.6, 1.2, 1.5 - Aid flows (in Billions of US dollars) (selected): 0.1, 0.1, 0.1, 0.1, 0.3, 0.3, 0.4, 0.3, 0.3, 0.3, 0.2, 0.4, 0.4, 0.4, 0.3, 0.2, 0.1, 0.2, 0.3 ### Stress tests and sensitivity analysis (high-level outcomes) - Table 2: PV of debt-to-GDP+remittances — Baseline: 31.4, 32.7, 33.3, 33.0, 32.6, 32.0, 25.9, 18.2 - Table 2: PV of debt-to-exports+remittances — Baseline (selected): 60, 61, 62, 59, 57, 56, 44, 33, 1/ (series as reported) - Table 2: PV of debt-to-revenue ratio — Baseline (selected): 117, 127, 128, 123, 119, 116, 95, 72 - Figure notes: The most extreme stress tests correspond to: - Exports shock for several indicators (Figures b., c., e.) - One-time depreciation shock for other indicators (Figures d., f.) - Table 2 sensitivity outcomes (selected examples): - A2 (new public sector loans on less favorable terms): PV of debt-to-GDP+remittances increases in the scenario series to values such as 23, 133.8, 35.3, 35.8, 35.8, 35.7, 32, 31 (as reported in table layout). - B6 (one-time 30 percent nominal depreciation relative to baseline in 2017): PV of debt-to-GDP+remittances in the scenario series reported as 31.4, 42.7, 43.2, 42.7, 42.3, 41.5, 33.5, 23.7 ### Public sector debt framework (selected) - Public sector debt (percent of GDP) (reported series): 46.1, 52.3, 65.0, 62.1, 64.2, 65.5, 64.2, 62.2, 60.3, 55.2 - Of which: foreign-currency denominated (reported series): 43.7, 50.6, 63.6, 60.7, 63.0, 64.4, 63.1, 61.2, 59.4, 46.0 - Change in public sector debt (reported): -2.9, 6.2, 12.7, -2.9, 2.1, 1.3, -1.3, -2.0, -2.0, -1.6, -0.6 - Primary deficit (reported snapshot series): 2.7, 2.8, 2.3, 3.0, 2.0, 6.8, 4.9, 2.9, 2.1, 0.7, 0.7 - Revenue and grants (in percent of GDP) (selected): 34.4, 35.3, 35.6, 38.0, 36.3, 35.4, 35.1, 35.0, 35.2, 33.7 - Gross financing need (reported series): 7.7, 6.0, 5.2, 10.1, 8.3, 6.3, 5.4, 3.9, 3.9, 9.4, 5.2 - PV of public sector debt (selected): 1.7, 42.1, 40.7, 42.3, 42.2, 41.4, 40.6, 40.0, 40.7, 35.9 ### Policy implications and recommended focus - The authorities need to remain cautious when contracting and guaranteeing new debt. - Fiscal consolidation should be resumed to reduce the primary deficit and stabilize public debt. - Strengthen public debt management and public investment management to ensure that potential gains from externally financed public investment projects are fully realized. - Monitor absorption capacity carefully when scaling up public investment given the limited absorption capacity of the Kyrgyz economy. *Source: IMF staff estimates and projections as reported in the Kyrgyz Republic Debt Sustainability Analysis (cr17143).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17143.pdf_