## 1kgzea2019001

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### Background and macroeconomic context
- Political timeline:
  - President Jeenbekov elected for a single six-year term in October 2017.
  - New prime minister appointed in April 2018.
  - Parliamentary elections scheduled for September 2020.
- Program engagement:
  - Eight successive Fund-supported programs; latest three-year ECF arrangement ended April 2018.
- Growth, inflation, fiscal and external context:
  - Real GDP growth averaged 4.0 percent over the past decade.
  - Average inflation reduced to 1.5 percent in 2018.
  - General government budget deficit averaged 3.7 percent of GDP over the last five years.
  - Public debt was 56 percent of GDP in 2018.
  - Current account deficit averaged 12 percent of GDP over the last five years.
  - Remittances equal 29 percent of GDP.
  - Gold accounted for 37 percent of exports of goods and 9 percent of GDP.
  - Public debt mostly foreign currency–denominated: 79 percent.
  - KGS broadly stable against the dollar since mid-2016, supported by significant and transparent FX interventions.
- Structural constraints:
  - Potential output growth estimated at 4 percent per year.
  - Binding constraints: large infrastructure gaps, governance and rule of law weaknesses, high cost of finance.
  - Other challenges: low quality of education, onerous regulations; oversized civil service; untargeted social transfers and energy subsidies; below-cost-recovery residential energy tariffs.
- Implementation of past IMF advice (Annex 1): mixed progress
  - Progress: reducing budget deficit and inflation; strengthening monetary and fiscal frameworks.
  - Little action: reduce tax exemptions; implement comprehensive FMIS; improve wage bill and public investment management; raise energy tariffs; strengthen banking law; liquidate insolvent banks.

### Recent economic developments (2018–early 2019)
- Output and inflation:
  - GDP growth decelerated from 4.7 percent in 2017 to 3.5 percent in 2018.
  - Core inflation: 4.5 percent (y/y) in December 2017 → 2.9 percent at end-2018 → 1.2 percent in March 2019.
  - Headline inflation averaged 1.5 percent in 2018 (headline -0.7 percent y/y in March 2019).
- External sector:
  - Current account deficit widened from 6.2 percent of GDP in 2017 to 8.7 percent of GDP in 2018.
  - Exports declined by 4.7 percent in volume; imports increased by 1.2 percent.
  - Remittances growth decelerated in H2 2018 due to ruble depreciation vs. dollar.
  - Real effective appreciation of KGS: 4 percent on average in 2018.
  - External Sector Assessment: external position weaker than implied by fundamentals; gross official FX reserves adequate by reserve adequacy metrics.
- Fiscal developments:
  - General government deficit declined to 1.3 percent of GDP in 2018 (lower than 3.4 percent of GDP approved in supplementary budget).
  - Staff vs. authorities deficit measurement: staff records on-lending to energy SOEs as capital transfers above-the-line, creating higher staff-measured deficit by 1.2 percent of GDP in 2017 and 0.4 percent of GDP in 2018.
- Monetary and financial:
  - NBKR policy rate: 5.0 percent → 4.75 percent (May 2018) → 4.5 percent (February 2019).
  - Credit to the economy grew by double digits in 2018 for second year, from a low base.
  - Dollarization fell: FX deposits share and FX loans share reduced by about one-third over three years to 45 percent and 38 percent, respectively.
- Banking sector health:
  - Aggregate capital adequacy ratio: 23.7 percent at end-2018 (minimum required 12 percent).
  - Non-performing loan ratio: 7.5 percent at end-2018.
  - Liquidity ratio: 67 percent.
  - Return on assets: 1.4 percent.
  - Indirect FX risk: about 25 percent of total loans are to borrowers earning revenue in KGS but carrying debt in dollars; they constitute two thirds of FX loans.
  - Bank resolution weaknesses: liquidation of four insolvent banks not concluded; NBKR acquired 72 percent (then increased to 85 percent) of a mid-sized problem bank after taking shares as collateral for emergency liquidity assistance.
- Stress-test highlights (NBKR results):
  - Credit risk shock (increase in NPLs that would bring CAR below 12 percent): 57 (banking system), 36 (large banks), 80 (medium-sized banks), 100 (small banks).
  - Interest rate risk shock (decrease in weighted average interest rate on loans that would bring CAR below 12 percent): 16 (banking system), 11 (large), 16 (medium), 28 (small).
  - Exchange rate risk (depreciation of KGS vis-à-vis USD that would bring CAR below 12 percent): 100 percent across categories.
  - Liquidity risk (outflow of deposits that would bring liquidity ratio below 45 percent): 30 (banking system), 32 (large), 29 (medium), 28 (small).
  - NBKR assessment: banking system resilient to substantial credit, exchange rate, and liquidity shocks given high capitalization, small net FX liability ($19 million, or 4 percent of bank capital at end-2018), and ample liquidity; low profitability makes system vulnerable to small reductions in loan interest rates.

### Medium-term outlook and projections
- Growth projections (selected series, percent):
  - Real GDP growth: 2017: 4.3; 2018: 4.7; 2019: 3.5; 2020: 3.8; 2021: 3.4; 2022: 3.8; 2023: 4.6; 2024: 3.4.
  - Nongold real GDP growth: 2017: 4.3; 2018: 5.1; 2019: 3.5; 2020: 3.7; 2021: 3.6; 2022: 3.8; 2023: 4.3; 2024: 4.4.
  - Consumer prices (12-month percent change, average): 2017: 0.4; 2018: 3.2; 2019: 1.5; 2020: 2.2; 2021: 4.9; 2022: 5.0; 2023: 5.0; 2024: 5.0.
- Fiscal rule and public debt:
  - Draft fiscal rule considered by parliament caps debt at 70 percent of GDP and budget deficit at 3 percent of GDP.
  - Under projections, general government fiscal deficit projected to widen to 3.3 percent of GDP in 2019, but thereafter not to exceed 3 percent of GDP, stabilizing public debt at 54 percent of GDP in 2024.
- External position and reserves:
  - Current account should strengthen short term due to increase in gold exports, but return to 9 percent of GDP over medium term as gold exports decline.
  - Gross official FX reserves projected to fall to 3.0 months of imports in 2024 (just adequate under Fund reserve adequacy metric).
- Long-run caveats:
  - Total public debt should remain sustainable provided government implements the fiscal rule and other exports are developed to replace the main gold mine, which will cease production by 2026.

### Key statistics and indicators (selected exact figures)
- Remittances: 29 percent of GDP.
- Gold: 37 percent of exports of goods; 9 percent of GDP.
- Public debt (2018): 56 percent of GDP.
- Public debt composition: 79 percent foreign currency–denominated.
- Budget deficit (five-year average): 3.7 percent of GDP.
- Current account deficit (five-year average): 12 percent of GDP.
- Credit to the economy: 23 percent of GDP in 2018.
- Average lending rate in real terms: 14 percent.
- Aggregate capital adequacy ratio (end-2018): 23.7 percent.
- Non-performing loan ratio (end-2018): 7.5 percent.
- Liquidity ratio: 67 percent.
- Return on assets: 1.4 percent.
- NBKR net FX exposure (net liability): $19 million (4 percent of bank capital at end-2018).
- NBKR policy rate: 5.0 percent → 4.75 percent (May 2018) → 4.5 percent (February 2019).
- General government deficit (2018): 1.3 percent of GDP (staff measure).
- Supplementary budget approved deficit: 3.4 percent of GDP.
- Gross international reserves (2018): 1,971 million U.S. dollars.
- Gross reserves (months of next year imports, eop, 2018): 4.3 months.
- Real effective exchange rate appreciation since end-2015: +15 percent.
- Potential output growth: 4 percent per year.

### Risks to the outlook (Annex 3)
- Downside risks:
  - Weaker-than-expected global growth due to rising protectionism.
  - Slowdown in Russia and Kazakhstan due to lower oil prices.
  - Slowdown in China due to trade tensions.
  - Dampening of external demand, remittances, FDI, and aid.
  - Sharp tightening of global financial conditions and potential strengthening of the dollar.
  - Fiscal pressures pre-2020 parliamentary election and possible loss of reform momentum.
  - Gold production or prices might be lower than expected.
  - Reliance on nested correspondent banking relationships (CBR) weakens USD access.
- Upside risks:
  - Expanded trade with the Eurasian Economic Union (EEU) and Uzbekistan.
  - Increased trade with, and investment from, China.
- Policy responses recommended in RAM (selected):
  - Diversify trade, FDI and aid; build up financial buffers.
  - Allow two-way exchange rate flexibility; undertake fiscal adjustment; implement de-dollarization strategy; strengthen bank supervisory and resolution framework.
  - Gradually phase-out subsidized lending; improve regulation of financial markets; implement AML/CFT law; NBKR should get out of owning and managing commercial banks.

### Policy discussions — A. Cementing Macroeconomic and Financial Sector Stability
- Monetary and exchange rate policy:
  - Authorities and staff agreed stance appropriate; headline and core inflation well below target range; output about one percent below potential.
  - NBKR should be prepared to tighten if upward food prices or excise tax increases spill into core inflation.
  - Recommended NBKR actions:
    - (i) decrease dollarization by prudential rules and FX-hedging instruments;
    - (ii) reduce excess liquidity;
    - (iii) narrow interest rate corridor and bring short-term money market rates closer to policy rate;
    - (iv) develop a domestic security market with the Ministry of Finance.
  - Staff saw merit in allowing more exchange rate flexibility while acknowledging authorities’ emphasis on exchange rate stability given: weight of imported goods in CPI: 35 percent; still high dollarization; high share of FX-denominated public debt.
  - Reserves composition risk: share of gold in gross FX reserves increased from 13 percent at end-2017 to 21 percent at end-2018.
- Fiscal policy:
  - 2019 budget approved with deficit of 2.5 percent of GDP (including on-lending to loss-making energy sector companies—1.2 percent of GDP—above the line).
  - Staff projects general government budget deficit, including a $30 million budget grant from Russia, to reach 3.3 percent of GDP in 2019.
  - Medium-term recommendation: keep general government deficit not higher than 2.5 percent of GDP in 2020 and medium term; measures include reducing tax exemptions, better capturing imports, improving public financial management.
  - Closure of main gold mine by 2026 represents loss of fiscal revenue of about 1 percent of GDP annually.
  - Fiscal rule: staff recommended deficit measured per GFSM (include on-lending as transfers) and capping debt at 60-65 percent of GDP (authorities preferred 70 percent).
- Financial stability and problem bank resolution:
  - NBKR should continue risk-based supervision; monitor indirect FX exposure.
  - Staff recommended NBKR sell the problem bank to state property fund based on independent valuation to remove conflict of interest.
  - Staff recommended amending banking law: strengthen NBKR vetting of shareholders; prevent NBKR from acquiring shares in commercial banks; strengthen NBKR Board independence; ensure judicial review framework accounts for financial stability.
  - Fiscal code amendments recommended to allow state guarantee of emergency liquidity assistance by NBKR, or NBKR lending to Deposit Protection Agency in systemic crisis.
  - Quasi-fiscal activities: staff recommended NBKR wind down lending to RKDF and credit auctions for directed lending and transfer them to the government budget.

### Policy discussions — B. Creating Fiscal Space for Development Needs
- Financing development needs:
  - Need to increase domestic revenue and expenditure efficiency; limited room to take on more debt.
- Fiscal space priorities and estimates:
  - Tax ratio: 20.7 percent of GDP in 2018; tax exemptions 3.8 percent of GDP in 2018.
  - Public wage bill: 10.2 percent of GDP in 2018.
  - Social assistance: 3 percent of GDP in 2017.
  - Raising non-residential energy tariffs above cost could free about 2 percent of GDP per year.
  - Strengthening public investment management, implementing FMIS including a wage module, and SOE control could yield additional savings.
- Authorities’ response:
  - Broad agreement with fiscal space identified but noted implementation difficulties: some exemptions important for growth; average public sector wage low relative to peers and may need increases in health and education.

### Policy discussions — C. Removing Obstacles to Private-Sector-Led Growth
- Financial deepening — findings:
  - Credit to private sector: 23 percent of GDP in 2018, lags peers.
  - Lending interest rate—14 percent in real terms—and lending-deposit spread—10 percentage points—among highest in world.
  - Banks provide highly collateralized credit; collateral requirements often exceed loan value.
  - Decomposition of interest spreads (2018, percent, annualized):
    - Interest earned on loans 14.7
    - Interest paid on interest bearing liabilities 4.5
    - Spread 10.2
    - Operating costs/loans 9.1
    - Loan loss provisions/loans 1.1
    - Interest paid to cover required reserves 0.4
- Staff recommendations to promote financial deepening:
  - (i) identify and remedy reasons for high operating costs at commercial banks;
  - (ii) foster greater competition: encourage entry of new banks and exit of failed ones, improve bank resolution process, address constraints to capital markets;
  - (iii) mitigate credit risks by strengthening the rule of law;
  - (iv) reduce information asymmetries: develop local ratings and expand credit registry coverage;
  - (v) develop collateral framework legal, financial, and infrastructural arrangements;
  - (vi) facilitate mobile payments to increase financial inclusion.
- Authorities’ response on financial sector reforms:
  - Broad agreement; noted high operating costs due to branch network; work underway to improve credit registries, borrower scoring, corporate ratings, and extend collateral beyond real estate assets.
- Subsidized lending:
  - RKDF capital of $500 million or 7 percent of GDP, of which about 60 percent has been lent; RKDF and NBKR credit auctions and government subsidized mortgage lending provide credit at about one third of market interest rates.
  - Staff cautioned subsidized credit risks: weakening bank profitability and concentrating credit risks.

### Reforming the Energy Sector — findings and recommendations
- Findings:
  - Chronic residential tariffs below cost caused structural cash shortfalls of about 2 percent of GDP per year, leading to under-maintenance and under-investment; 45 percent of generation capacity beyond useful life.
  - Rehabilitation needs alone estimated at $865 million, or 11 percent of 2018 GDP.
  - Difficulty in getting electricity is a stringent constraint to doing business.
- Staff recommendation:
  - Gradually increase residential tariffs while compensating the poor with cash transfers.
  - Adopt and communicate reform strategy; decrease operating costs and reduce losses; staff supports World Bank recommendation to increase residential electricity and heating tariffs by, respectively, 10 and 15 percent every two years to achieve full cost recovery in 10 years.
- Authorities’ stance:
  - Recognized need to increase residential tariffs but considered such an increase not socially acceptable soon given political cycle and governance perceptions.

### Strengthening Governance — vulnerabilities and priorities
- Priority areas:
  - Fiscal governance: modernize tax and customs administration, publish and streamline tax exemptions, implement procurement code, implement computerized FMIS.
  - Financial sector oversight: amend banking and other laws to make bank resolution effective.
  - Central bank governance: amend banking law to strengthen independence of central bank.
  - Market regulation: ensure simplicity, transparency, predictability of import licensing; eliminate licensors’ discretion.
  - AML/CFT: implement measures related to politically-exposed persons and beneficial ownership transparency; strengthen risk-based supervision.
  - Rule of law: make judiciary more independent and publish court statistics.
  - Anti-corruption: align domestic laws with UN Convention against Corruption; strengthen asset declaration regimes and publish verification results and sanctions.
- Progress and authorities’ actions:
  - Tax administration modernization with World Bank assistance.
  - Court proceedings effectiveness improved with European Union assistance.
  - AML/CFT legislation strengthened with IMF assistance; implementation by NBKR and FIU started.
  - Legal amendments to improve asset declaration verification process being prepared.
- Box 1 — Rule of law observations and priorities (selected exact findings):
  - Case inflow in tax enforcement dropped from 215 cases in 2015 to 115 in 2018.
  - Report indicates that 96 percent of people who find themselves in a court (both civil and criminal) receive a guilty verdict, unless they are state officials.
  - Tax Chamber win-loss rate for taxpayers shifted from 54-46 percent in favor of taxpayers to 2-98 percent in favor of the state between 2010 and 2018.
  - Suggested steps: give judiciary controlling majority in selecting and disciplining judges; abolish probationary period of judges; uphold statutory deadlines; publish regular statistics with breakdowns.

### Staff appraisal — macro outlook and policy guidance (selected)
- Macroeconomic status:
  - Stability improved, but economy vulnerable to external shocks and not growing enough to make further inroads into poverty.
  - Dependence on remittances and gold, current account deficit, and public debt composition are vulnerabilities.
- Growth and risks:
  - Growth expected to moderately rise in 2019 owing to gold production and fiscal expansion and reach about 4 percent in the medium term.
  - Risks tilted to the downside, mainly from trade tensions.
- Monetary policy:
  - Monetary policy on track to keep inflation within target over next 12 to 18 months.
  - NBKR should maintain two-way exchange rate flexibility and limit interventions to smoothing excessive fluctuations.
- Fiscal policy:
  - Expansionary 2019 budget appropriate; GFSM-defined general government budget deficit should stay within 3.3 percent of GDP in 2019.
  - In 2020 and medium term, general government deficit should not exceed 2.5 percent of GDP.
  - Need to build buffers given elevated public debt and unknown cost of NBKR’s takeover of a problem bank.
- Banking sector and NBKR:
  - NBKR should transfer the problem bank it acquired to the state as soon as possible.
  - NBKR should continue risk-based supervision and work with government to strengthen bank resolution framework.
  - NBKR’s quasi-fiscal activities should be transferred to the budget.
- Fiscal space and public finance:
  - Fiscal space should come from reducing tax exemptions, the high public-sector wage bill, and energy subsidies; implement FMIS and improve public financial management.
- Final recommendation:
  - Steadfast implementation of reforms needed: increase financial sector development, unleash energy sector growth potential, and improve governance. Measures include reducing banks’ high operating costs, fostering competition, decreasing information asymmetries, strengthening rule of law, and gradually increasing residential tariffs with cash transfers to compensate the poor.

### Debt sustainability, external assessment, and FSIs (selected figures and findings)
- External Sector Assessment summary:
  - External position weaker than implied by fundamentals.
  - NIIP estimated at -92 percent of GDP in 2018.
  - Gross assets estimated at 53 percent of GDP; gross liabilities 145 percent of GDP.
  - Current account deficit widened to 8.7 percent of GDP in 2018.
  - REER overvaluation indicated by CA model (12 percent), IRRER model (20 percent), and ES approach (17 percent).
  - Elasticity of current account to REER: -0.34.
- Debt Sustainability Analysis (joint WB/IMF) — overall judgment:
  - Moderate risk of debt distress for external and overall public debt.
  - Public debt decreased from 67.1 percent of GDP in 2015 to 56.0 percent of GDP in 2018.
  - Combined contingent liability shock of 7 percent of GDP applied (2 percent SOE risk; 5 percent financial crisis default cost).
  - Total public debt expected to hover around 55 percent of GDP over the medium term under baseline.
  - External PPG debt projected to decline from 35 percent of GDP in PV terms in 2018 to below 30 percent over long term.
- External debt-carrying capacity thresholds (as presented):
  - PV external debt-to-exports threshold: 240 percent.
  - PV external debt-to-GDP threshold: 55 percent.
  - External debt service-to-exports threshold: 21 percent.
  - External debt service-to-revenue threshold: 23 percent.
  - PV total public debt-to-GDP benchmark: 70 percent.
- Public DSA stress tests:
  - PV of debt-to-GDP ratio breaches threshold under shocks to real GDP growth over medium and long term.
  - Selected public and PPG indicators (Current DSA):
    - PPG debt to GDP ratio (2018): 48.0.
    - Public debt to GDP ratio (2018): 56.0.
    - External debt (nominal) percent of GDP (2018): 85.0.
- Recommendations:
  - Strict adherence to fiscal rule under Parliament consideration.
  - Caution when contracting or guaranteeing new debt; strengthen public debt and public investment management.
  - Improve business environment to support export diversification to replace main gold mine closing in 2026.

### SDG costing and infrastructure needs (Annex IV and Electricity)
- Preliminary SDG costing summary:
  - Total financing need: over 100 percent of 2018 GDP during 2019–30.
  - Around 40 percent of additional spending on human resources in health and education.
- Sectoral SDG costing (percent of 2018 GDP, cumulative/stock as presented):
  - Health: 17.7
  - Education: 24.6
  - Road: 40.7
  - Water and Sanitation: 11.8
  - Electricity (rehabilitation cost): 10.7
  - Total: 105.5
- Electricity sector:
  - Universal access almost achieved.
  - Rehabilitation needs estimated at $865 million, or 11 percent of 2018 GDP.
  - Staff supports World Bank recommendation for tariff increases (see energy sector recommendations above).

### Statistical and institutional notes, surveillance, and technical assistance
- Article IV consultation cycle: 12-month cycle; next Article IV proposed on standard 12-month cycle.
- FSAP update: July 2013; FSSA discussed December 2013 (not published).
- ROSC and TA history: fiscal ROSC (2001), data ROSC (2002), fiscal reassessment (2007); extensive IMF technical assistance January 2014–March 2019 across public finance, monetary, banking supervision, AML/CFT, statistics.
- Statistical issues:
  - Four institutions compile macro statistics: NSC, Ministry of Economy, Ministry of Finance, NBKR.
  - Quarterly GDP discrete estimates finalized for 2010–17 in November 2018; NSC planned to disseminate discrete quarterly estimates by June 2019.
  - Government Finance Statistics compiled per GFSM 2014; on-lending to energy SOEs misclassified below the line (issue noted).
  - NBKR reports SRFs and core/additional FSIs quarterly; loan and deposit dollarization figures provided.

_International Monetary Fund—Kyrgyz Republic staff report excerpts (content unit: 1kgzea2019001)._

### 1.    Challenges and Reform Priorities for Respect of the Rule of Law ______________________________ 19

### 1.    Challenges and Reform Priorities for Respect of the Rule of Law

### Background and macroeconomic context
- Political timeline:
  - President Jeenbekov elected for a single six-year term in October 2017.
  - New prime minister appointed in April 2018.
  - Parliamentary elections scheduled for September 2020.
- Historical program engagement:
  - Eight successive Fund-supported programs; latest three-year ECF arrangement ended April 2018.
- Growth, inflation, and fiscal context:
  - Real GDP growth averaged 4.0 percent over the past decade.
  - Average inflation was reduced to 1.5 percent in 2018.
  - General government budget deficit averaged 3.7 percent of GDP over the last five years.
  - Public debt was 56 percent of GDP in 2018.
  - Current account deficit averaged 12 percent of GDP over the last five years.
- External and structural vulnerabilities:
  - Remittances equal 29 percent of GDP.
  - Gold accounted for 37 percent of exports of goods and 9 percent of GDP.
  - Public debt mostly foreign currency–denominated: 79 percent.
  - KGS broadly stable against the dollar since mid-2016, supported by significant and transparent FX interventions.
- Structural constraints to higher growth:
  - Potential output growth estimated at 4 percent per year, supported by increased gold production mainly financed by FDI.
  - Binding constraints: large infrastructure gaps, governance and rule of law weaknesses, high cost of finance.
  - Other challenges: low quality of education, onerous regulations; oversized civil service; untargeted social transfers and energy subsidies; below-cost-recovery residential energy tariffs.
- Implementation of past IMF advice (Annex 1): mixed progress
  - Progress: reducing budget deficit and inflation; strengthening monetary and fiscal frameworks.
  - Little action: reduce tax exemptions; implement comprehensive FMIS; improve wage bill and public investment management; raise energy tariffs; strengthen banking law; liquidate insolvent banks.

### Recent economic developments (2018–early 2019)
- Output and inflation:
  - GDP growth decelerated from 4.7 percent in 2017 to 3.5 percent in 2018.
  - Core inflation: 4.5 percent (y/y) in December 2017 → 2.9 percent at end-2018 → 1.2 percent in March 2019.
  - Headline inflation averaged 1.5 percent in 2018 (headline -0.7 percent y/y in March 2019).
- External sector:
  - Current account deficit widened from 6.2 percent of GDP in 2017 to 8.7 percent of GDP in 2018.
  - Exports declined by 4.7 percent in volume; imports increased by 1.2 percent.
  - Remittances growth decelerated in H2 2018 due to ruble depreciation vs. dollar.
  - Real effective appreciation of KGS: 4 percent on average in 2018 (contribution from KGS/USD stability).
  - External Sector Assessment (Annex 2): external position weaker than implied by fundamentals and desirable policy settings; gross official FX reserves adequate by reserve adequacy metrics.
- Fiscal developments:
  - General government deficit declined to 1.3 percent of GDP in 2018 (lower than 3.4 percent of GDP approved in supplementary budget).
  - Drivers: lower-than-budgeted spending on investment and goods and services; overall revenue declined by 0.5 percent of GDP despite strong tax revenue performance (notably improved VAT collection).
  - Staff vs. authorities deficit measurement: staff records on-lending to energy SOEs as capital transfers above-the-line, creating higher staff-measured deficit by 1.2 percent of GDP in 2017 and 0.4 percent of GDP in 2018.
- Monetary and financial sector:
  - NBKR lowered policy rate: 5.0 → 4.75 percent in May 2018 → 4.5 percent in February 2019.
  - Credit to the economy grew by double digits in 2018 for second year, from a low base.
  - Surplus liquidity reduced; interest corridor width reduced; interbank rate remained at bottom of corridor.
  - Dollarization fell: share of FX deposits in total deposits and FX loans in total loans reduced by about one-third over three years to 45 percent and 38 percent, respectively.
- Banking sector health and risks:
  - Aggregate capital adequacy ratio: 23.7 percent at end-2018 (minimum required 12 percent).
  - Non-performing loan ratio: 7.5 percent at end-2018.
  - Liquidity ratio: 67 percent.
  - Return on assets: 1.4 percent.
  - Indirect FX risk: about 25 percent of total loans are to borrowers earning revenue in KGS but carrying debt in dollars; they constitute two thirds of FX loans.
  - Bank resolution weaknesses: liquidation of four insolvent banks not concluded; NBKR acquired 72 percent (then increased to 85 percent) of a mid-sized problem bank after taking shares as collateral for emergency liquidity assistance.
- Resilience assessment (stress-test highlights, NBKR results):
  - Credit risk shock (increase in NPLs that would bring CAR below 12 percent): 57 (banking system), 36 (large banks), 80 (medium-sized banks), 100 (small banks).
  - Interest rate risk shock (decrease in weighted average interest rate on loans that would bring CAR below 12 percent): 16 (banking system), 11 (large), 16 (medium), 28 (small).
  - Exchange rate risk (depreciation of KGS vis-à-vis USD that would bring CAR below 12 percent): 100 percent across categories.
  - Liquidity risk (outflow of deposits that would bring liquidity ratio below 45 percent): 30 (banking system), 32 (large), 29 (medium), 28 (small).
  - NBKR’s assessment: banking system resilient to substantial credit, exchange rate, and liquidity shocks given high capitalization, small net FX liability ($19 million, or 4 percent of bank capital at end-2018), and ample liquidity; low profitability makes system vulnerable to small reductions in loan interest rates.

### Medium-term outlook and projections
- Growth projections:
  - Non-gold real GDP growth should gradually pick up to potential; gold GDP growth should slow as the largest mine declines.
  - Table of selected projections (2017–24; key figures extracted):
    - Real GDP (growth in percent): 2017: 4.3; 2018: 4.7; 2019: 3.5; 2020: 3.8; 2021: 3.4; 2022: 3.8; 2023: 4.6; 2024: 3.4.
    - Nongold real GDP (growth in percent): 2017: 4.3; 2018: 5.1; 2019: 3.5; 2020: 3.7; 2021: 3.6; 2022: 3.8; 2023: 4.3; 2024: 4.4.
    - Consumer prices (12-month percent change, average): 2017: 0.4; 2018: 3.2; 2019: 1.5; 2020: 2.2; 2021–2024: 4.9, 5.0, 5.0, 5.0, 5.0 respectively (note: table shows a sequence ending in 5.0).
    - Public Revenue (in percent of GDP): 2017: 33.1; 2018: 33.4; 2019: 32.8; 2020: 34.5; 2021: 32.5; 2022: 32.6; 2023: 32.5; 2024: 32.3; 2024 (alternate cell): 32.0.
    - Tax revenue (in percent of GDP): 2017: 19.5; 2018: 19.3; 2019: 20.7; 2020: 21.9; 2021: 21.8; 2022: 21.8; 2023: 21.7; 2024: 21.5; (another 2024 cell) 21.2.
    - Public current expense (in percent of GDP): 2017: 31.8; 2018: 30.1; 2019: 28.9; 2020: 31.0; 2021: 30.9; 2022: 29.6; 2023: 29.6; 2024: 29.6; 29.7 (table has multiple columns).
    - Net acquisition of nonfinancial assets (in percent of GDP): 2017: 7.7; 2018: 7.8; 2019: 5.2; 2020: 6.9; 2021: 4.6; 2022: 6.0; 2023: 5.9; 2024: 5.7; 5.2.
    - Overall balance (net lending/borrowing, in percent of GDP): 2017: -6.4; 2018: -4.6; 2019: -1.3; 2020: -3.3; 2021: -3.0; 2022: -3.0; 2023: -3.0; 2024: -3.0.
    - Total public debt: 2017: 59.1; 2018: 58.8; 2019: 56.0; 2020: 56.1; 2021: 55.5; 2022: 55.3; 2023: 54.5; 2024: 54.4; 54.4.
    - Current account balance (in percent of GDP): 2017: -11.6; 2018: -6.2; 2019: -8.7; 2020: -9.6; 2021: -7.7; 2022: -7.1; 2023: -6.8; 2024: -8.4; -8.7.
    - Gross international reserves (in millions of U.S. dollars): 2017: 1,773; 2018: 1,971; 2019: 1,919; 2020: 1,854; 2021: 1,873; 2022: 1,930; 2023: 2,084; 2024: 2,012; 1,862.
    - Gross reserves (months of next year imports, eop): 2017: 4.2; 2018: 4.3; 2019: 4.0; 2020: 3.8; 2021: 3.6; 2022: 3.5; 2023: 3.6; 2024: 3.4; 3.0.
- Fiscal rule and public debt trajectory:
  - Draft fiscal rule considered by parliament caps debt at 70 percent of GDP and budget deficit at 3 percent of GDP.
  - Under projections, general government fiscal deficit projected to widen to 3.3 percent of GDP in 2019, but thereafter not to exceed 3 percent of GDP, stabilizing public debt at 54 percent of GDP in 2024.
- External position and reserves:
  - Current account should strengthen short term due to increase in gold exports, but return to 9 percent of GDP over medium term as gold exports decline.
  - Gross official FX reserves projected to fall to 3.0 months of imports in 2024 (just adequate under Fund reserve adequacy metric, Annex 2).
- Long-run sustainability caveats:
  - Total public debt should remain sustainable provided government implements the fiscal rule and other exports are developed to replace the main gold mine, which will cease production by 2026.

### Key statistics and indicators (selected exact figures referenced)
- Remittances: 29 percent of GDP.
- Gold: 37 percent of exports of goods; 9 percent of GDP.
- Public debt (2018): 56 percent of GDP.
- Public debt composition: 79 percent foreign currency–denominated.
- Budget deficit (five-year average): 3.7 percent of GDP.
- Current account deficit (five-year average): 12 percent of GDP.
- Credit to the economy: 23 percent of GDP in 2018.
- Average lending rate in real terms: 14 percent.
- Aggregate capital adequacy ratio (end-2018): 23.7 percent.
- Non-performing loan ratio (end-2018): 7.5 percent.
- Liquidity ratio: 67 percent.
- Return on assets: 1.4 percent.
- NBKR net FX exposure (net liability): $19 million (4 percent of bank capital at end-2018).
- NBKR policy rate: 5.0 percent → 4.75 percent (May 2018) → 4.5 percent (February 2019).
- General government deficit (2018): 1.3 percent of GDP (staff measure).
- Supplementary budget approved deficit: 3.4 percent of GDP.
- Gross international reserves (2018): 1,971 million U.S. dollars.
- Gross reserves (months of next year imports, eop, 2018): 4.3 months.
- Real effective exchange rate appreciation since end-2015: +15 percent (Figure commentary).
- Potential output growth: 4 percent per year.

### Reform priorities and policy implications (as presented)
- Required broad structural reforms to raise growth:
  - Address gaps in skills, infrastructure, and institutions.
  - Improve business environment and governance to attract investment beyond gold sector.
- Public finance and service delivery reforms:
  - Implement comprehensive Financial Management Information System (FMIS).
  - Improve wage bill management and public investment management.
  - Reduce tax exemptions.
  - Better target social transfers and energy subsidies.
  - Raise residential energy tariffs toward cost recovery to allow adequate maintenance and development of energy capacity.
- Financial sector reforms:
  - Strengthen banking law and improve bank resolution framework to conclude liquidation of insolvent banks.
  - Address low profitability of banks to reduce vulnerability to interest rate shocks.
- Fiscal policy framework:
  - Implement fiscal rule under consideration (cap debt at 70 percent of GDP and budget deficit at 3 percent of GDP) to stabilize public debt.
- External sector and diversification:
  - Develop exports beyond gold to mitigate risks from anticipated decline in main gold mine production (ceasing by 2026).

*International Monetary Fund staff summary based on the Kyrgyz Republic staff report excerpt (chapter 1).*

### 14.      Risks to the outlook are tilted to the downside ( Annex 3). Weaker-than-expected global

### 14.      Risks to the outlook are tilted to the downside ( Annex 3). Weaker-than-expected global

### Downside and upside risks to the outlook
- Downside risks:
  - Weaker-than-expected global growth due to rising protectionism.
  - Slowdown in Russia and Kazakhstan due to lower oil prices.
  - Slowdown in China due to trade tensions.
  - Dampening of external demand, remittances, FDI, and aid.
  - Sharp tightening of global financial conditions and potential strengthening of the dollar would increase debt and banking sector vulnerabilities.
  - Fiscal pressures could build up and structural reforms lose momentum in the run up to the 2020 parliamentary election.
  - Gold production or prices might be lower than expected.
  - Exclusive reliance on nested correspondent banking relationships (CBR) weakens the reliability of access to US dollars.
- Upside risks:
  - Expanded trade with the Eurasian Economic Union (EEU) and Uzbekistan.
  - Increased trade with, and investment from, China.

### Authorities’ views on outlook and risks
- The authorities broadly shared staff’s views on recent developments, outlook, and risks, although they were slightly more optimistic about medium-term growth prospects.
- Reduced output in the largest goldmine could be compensated by other mines.
- Fiscal discipline should not falter before the parliamentary elections because of the government’s conservative fiscal plans and the expected approval of the fiscal rule.

### Policy discussions — A. Cementing Macroeconomic and Financial Sector Stability
#### Monetary and exchange rate policy
- Assessment and stance:
  - Authorities and staff agreed the monetary policy stance is appropriate.
  - Both headline and core inflation are well below the inflation target range.
  - Output is estimated to be about one percent below potential.
  - Projected inflation is on track to stay within the target range over the next 12 to 18 months.
  - NBKR should be prepared to tighten the stance if upward food prices or the gradual increase in excise taxes to the EEU levels threaten to spill out to core inflation.
- Strengthening monetary policy framework (recommended NBKR actions):
  - (i) decrease dollarization by implementing prudential rules and developing foreign exchange rate risk-hedging instruments;
  - (ii) reduce excess liquidity;
  - (iii) narrow the interest rate corridor while bringing short-term money market rates closer to the policy rate;
  - (iv) develop a domestic security market with the Ministry of Finance.
- Promote financial sector deepening by reducing banks’ high operating costs, fostering greater competition, reducing information asymmetries, and strengthening the rule of law to strengthen monetary policy transmission.
- Exchange rate flexibility:
  - Staff saw merit in allowing more exchange rate flexibility while acknowledging authorities’ emphasis on exchange rate stability given:
    - weight of imported goods in the consumer price index: 35 percent;
    - still high dollarization;
    - high share of foreign exchange-denominated debt in total public debt.
  - Limiting interventions solely to smoothing excessive fluctuations would help adjustment, correct the currency’s overvaluation (Annex 2), and foster export diversification.
  - NBKR reduced the frequency of interventions sharply in the last couple of years; interventions aim to smooth excessive fluctuations in reaction to sudden shocks (e.g., sanctions against Russia, trade tensions between the USA and China in early 2018, U.S. monetary tightening, weakening oil prices end-2018).
- Reserves composition risk:
  - Share of gold in gross foreign exchange reserves increased from 13 percent at end-2017 to 21 percent at end-2018.
  - Staff highlighted risk that further increasing the share of gold would increase exposure to gold price volatility through export and reserve channels.
  - NBKR explained increase in monetary gold motivated by reducing exposure to reserve currency volatility during trade tensions.

#### Fiscal policy
- 2019 budget and stance:
  - Parliament approved a general government budget for 2019 with a deficit of 2.5 percent of GDP (including on-lending to loss-making energy sector companies—1.2 percent of GDP—above the line), with higher spending on goods and services and capital expenditure partly offset by continued improvement in tax collection and higher projected external budget support.
  - Staff projects the general government budget deficit, including a $30 million budget grant for additional investment announced by Russia in March, to reach 3.3 percent of GDP in 2019 because of more conservative tax revenue projections, notably VAT revenue.
  - The expansionary fiscal stance in 2019 is appropriate in view of the output gap and the unexpectedly tight stance in 2018.
- Medium-term recommendation:
  - For 2020 and the medium term, staff recommended keeping the general government deficit not higher than 2.5 percent of GDP.
  - Measures to bring the deficit to that path should include reducing tax exemptions, better capturing imports, and identifying expenditure savings through improvement in public financial management.
- Fiscal buffers and risks:
  - Need to build buffers given relatively high public debt, downside risks, and unknown cost of NBKR’s takeover of a problem bank.
  - Closure of the main gold mine by 2026 will represent a loss of fiscal revenue of about one percent of GDP annually, which can be recouped with tax or expenditure reforms.
- Fiscal rule discussion:
  - Authorities and staff agreed the fiscal rule should set a budget deficit ceiling of 3 percent of GDP but differed on deficit measurement, public debt ceiling level, and modalities for modifying the budget.
  - Staff recommended deficit recorded in line with GFSM (including on-lending to loss-making SOEs as capital grants contributing to the deficit).
  - Staff recommended capping debt at 60-65 rather than 70 percent of GDP; authorities preferred 70 percent of GDP.
  - Staff recommended additional spending approved ex-ante in a supplementary budget rather than allowed by a sub-committee of Parliament and regularized ex-post.
- Agreement on fiscal discipline:
  - Authorities and staff agreed continued fiscal discipline and progress in public investment management and the business environment are needed to maintain debt sustainability.
  - Public debt, mostly on concessional terms, remains at a moderate risk of debt distress.
  - Authorities plan to remain cautious when contracting and guaranteeing new debt, strengthen fiscal discipline, improve public investment management, and continue improving the business environment to maintain export potential after the main gold mine closes.

#### Financial stability
- Risk-based supervision and banking sector stability:
  - Authorities and staff agreed NBKR should continue to implement risk-based supervision.
  - Banking sector stability is improving thanks to NBKR’s implementation of prudential norms, comprehensive monitoring and stress-testing, and gradual implementation of risk-based supervision.
  - NBKR plans to continue closely monitoring banks’ indirect exposure to foreign exchange risk.
  - On AML/CFT, NBKR plans to update regulations to the 2018 AML/CFT legislation and step up implementation of risk-based supervision, including enhanced monitoring of cross-border financial flows.
- Problem bank resolution and NBKR balance sheet:
  - Authorities and staff agreed on need to remove the problem bank from NBKR balance sheet but differed on timeline and modalities.
  - Staff recommended NBKR sell the problem bank to the state property fund as soon as possible, based on an independent expert valuation, to determine whether the bank should be closed; this would end NBKR’s conflict of interest, restore level playing field, minimize NBKR’s financial exposure, and strengthen financial sector stability.
  - NBKR planned to maintain ownership to restructure the problem bank and list it on a foreign stock exchange in about a year; NBKR proposed creating a new department separate from banking supervision to manage its share.
  - NBKR showed openness to cede the problem bank to the state sooner if the government agreed; government not interested in taking over until it becomes profitable.
- Bank resolution framework:
  - Staff recommended amending the banking law to strengthen NBKR vetting of shareholders; prevent NBKR from acquiring shares in commercial banks; strengthen independence of NBKR Board; ensure judicial review framework adequately takes into account financial stability considerations.
  - Fiscal code amendments recommended to allow state guarantee of emergency liquidity assistance by NBKR, or NBKR lending to Deposit Protection Agency (DPA) in case of systemic crisis.
  - Shares of intervened banks should be excluded from eligible collateral for NBKR emergency liquidity assistance.
  - Authorities agreed with some but not all recommendations: constitutionality concerns about limiting judicial review; concern that amending fiscal code to allow government guarantees of bank/DPA debt to NBKR could open door to guarantees of other SOE debt.
- Quasi-fiscal activities:
  - Staff recommended NBKR gradually wind down lending to Russian Kyrgyz Development Fund (RKDF) and credit auctions for directed commercial bank lending subsidized by the government and transfer them to the government budget.
  - Quasi-fiscal activities distract NBKR from central tasks and are counterproductive for banking sector development; Banking Law should be amended to eliminate NBKR lending to non-supervised entities.
  - NBKR emphasized the Banking Law allows lending to RKDF to facilitate development and views credit auctions as a relevant monetary policy tool.

### Policy discussions — B. Creating Fiscal Space for Development Needs
- Financing development needs:
  - To finance large development needs and meet the Sustainable Development Goals in health, education, water/sanitation, electricity, and infrastructure, the authorities need to increase domestic revenue and expenditure efficiency.
  - Limited room to take on more debt; fiscal space must come from revenue mobilization and expenditure efficiency gains.
- Identified fiscal space priorities (staff and technical assistance of IMF and World Bank):
  - At 20.7 percent of GDP in 2018, the tax ratio is above peer levels, with room to increase it by better capturing imports from China and reducing tax exemptions (3.8 percent of GDP in 2018).
  - Public wage bill at 10.2 percent of GDP in 2018 is much higher than peers; potential gradual reduction through attrition, creating central public sector employee registry, updating norms for staff positions, automatizing routine tasks, conducting functional reviews, and reforming wage-setting framework.
  - Social assistance at 3 percent of GDP in 2017 is relatively high; coverage of needy could be improved by moving from category- to income-based transfers.
  - Raising non-residential energy tariffs above cost could free about 2 percent of GDP per year (¶34).
  - Health expenditures appear relatively efficient but education spending efficiency could be increased.
  - Strengthening public investment management, implementing FMIS including a wage module, and further progress by the State Property Fund in controlling SOEs could yield additional expenditure savings.
- Authorities’ response:
  - Broad agreement with fiscal space identified but highlighted difficulties: some tax exemptions important for growth and employment and their removal requires careful study; average public sector wage is low relative to peers and may need to be increased to attract competent staff in health and education.
  - Additional technical assistance to implement FMIS, including a wage module, would be welcome.

### Policy discussions — C. Removing Obstacles to Private-Sector-Led Growth
#### Deepening financial sector development
- Credit and financial inclusion:
  - At 23 percent of GDP in 2018, credit to the private sector lags peers and has barely improved in recent years; financial inclusion for firms and individuals is low.
  - Lending interest rate—14 percent in real terms—and lending-deposit spread—10 percentage points—are among the highest in the world, due to high bank operating costs and insufficient competition.
  - Banks provide highly collateralized credit, constraining finance access for asset-light SMEs (Annex 5).
- Subsidized lending interventions:
  - RKDF (capital of $500 million or 7 percent of GDP, of which about 60 percent has been lent) and authorities, through NBKR credit auctions for agricultural and other-directed lending and government subsidized mortgage lending, have been providing credit at about one third of market interest rates.

_Italic source attribution: Kyrgyz Republic — IMF staff report excerpts (content unit: 1kgzea2019001)._

### 32.      To promote financial deepening, staff recommended reducing banks’ high operating

### 32.      To promote financial deepening, staff recommended reducing banks’ high operating costs, fostering greater competition, reducing information asymmetries, and strengthening the rule of law.

### Financial deepening — findings and risks
- Provision of subsidized credit runs the risk of weakening banks’ profitability and increasing the concentration of banks’ credit risks if large customers move to the RKDF because of cost considerations; this could slow down financial sector development.
- High operating costs at commercial banks are a primary constraint to financial intermediation.
- Interest rate spreads and the cost of credit are relatively high.
- Collateral requirements exceed loan value.
- The deposit base is low and maturities are short.
- Kyrgyz Republic: Decomposition of Interest Spreads, 2018 (In percent, annualized)
  - Interest earned on loans 14.7
  - Interest paid on interest bearing liabilities 4.5
  - Spread 10.2
  - Operating costs/loans 9.1
  - Loan loss provisions/loans 1.1
  - Interest paid to cover required reserves 0.4

### Financial deepening — staff recommendations
- Address root causes of low financial intermediation by:
  - (i) identifying and remedying the reasons for high operating costs at commercial banks;
  - (ii) fostering greater competition by: actively encouraging the entry of new banks and the exit of failed ones, through improving the bank resolution process; and identifying and addressing constraints to the development of capital markets;
  - (iii) mitigating credit risks by strengthening the rule of law;
  - (iv) reducing information asymmetries by developing the infrastructure for local ratings and expanding the coverage of credit registries;
  - (v) developing legal, financial, and infrastructural arrangements for a collateral framework; and
  - (vi) facilitating the development of mobile payments to increase financial inclusion.

### Authorities’ response on financial sector reforms
- Authorities broadly agreed with staff’s recommendations but highlighted implementation difficulties:
  - Bank operating costs are high because of the branch network.
  - High lending rates reflect the high cost of funding and high credit risk.
  - Work is being done to improve the coverage of credit registries, the scoring of borrowers, and corporate ratings, and to extend collateral beyond real estate assets.

---

### Reforming the Energy Sector — findings and recommendations
- Chronic residential tariffs below cost have stymied growth and export potential of the hydro-power energy sector.
- Structural cash shortfalls of about 2 percent of GDP per year have led to chronic under-maintenance and under-investment; power outages and infrastructure decay (45 percent of the generation capacity is beyond its useful life).
- Difficulty in getting electricity is among the most stringent constraints to doing business.
- Staff recommendation:
  - Start gradually increasing residential tariffs while compensating the poor with cash transfers.
  - Adopt and communicate a reform strategy to stakeholders, explaining challenges, progress made to decrease operating costs and reduce distribution and commercial losses, and the need to gradually increase residential tariffs above cost to make the sector financially self-sustained.
  - Staff supports the World Bank’s recommendation to increase residential electricity and heating tariffs by, respectively, 10 and 15 percent every two years, which would achieve full cost recovery in 10 years.
  - The strategy should include cash transfers to compensate the poor, as part of the overall reform of social assistance.
- Authorities’ stance:
  - Recognized the need to increase residential tariffs but considered such an increase not socially acceptable anytime soon given the political cycle and perception of pervasive governance problems in the sector.

---

### Strengthening Governance — vulnerabilities and priorities
- Strengthening the fiscal framework, financial sector oversight, anti-corruption and AML/CFT efforts, and the rule of law would help reduce vulnerabilities to corruption.
- As part of the Framework for Enhanced Fund Engagement in Governance, staff encouraged further action in the following areas:
  - (i) Fiscal governance: modernize tax and custom administration, publish and streamline tax exemptions, implement the procurement code including for SOEs, and implement a computerized FMIS (¶29).
  - (ii) Financial sector oversight: amend the banking and other laws to make bank resolution effective (¶26).
  - (iii) Central bank governance and operations: amend the banking law to strengthen the independence of the central bank (¶26).
  - (iv) Market regulation: ensure simplicity, transparency, and predictability of the import licensing process, and eliminate licensors’ discretion.
  - (v) AML/CFT: ensure effective implementation of measures related to politically-exposed persons and transparency of beneficial ownerships, and strengthen risk-based supervision.
  - (vi) Rule of law: take steps to make the judiciary more independent and publish statistics on court proceedings (Box 1).
  - (vii) Anti-corruption: ensure compliance of domestic laws with the obligations under the United Nations Convention against Corruption and strengthen the asset declaration regimes by publishing comprehensive declarations of high-level public officials, investigating illicit enrichment, and publishing the results of verifications and sanctions imposed.

### Progress and authorities’ actions
- Authorities broadly agreed and noted ongoing progress:
  - Tax administration is being modernized with World Bank assistance.
  - Effectiveness of court proceedings is being improved with European Union assistance.
  - AML/CFT legislation has been strengthened with IMF assistance, and implementation by the NBKR and the Financial Intelligence Unit has started.
  - Legal amendments are being prepared to improve the effectiveness of the asset declaration verification process.

### Box 1 — Rule of law: key observations and reform priorities
- Comparative indicators (Worldwide Governance Indicator, World Bank Doing Business Index, World Economic Forum survey, World Justice Project – Rule of Law) indicate low performance on respect for the rule of law.
- Evidence of low trust in courts and enforcement:
  - Case inflow in tax enforcement dropped from 215 cases in 2015 to 115 in 2018 (Interview Tax Chamber of the Kyrgyz Republic).
  - Loan portfolios are heavily directed toward secured lending with mandatory arbitration clauses cutting out the courts.
  - The Kyrgyz Republic has almost the same number of international arbitration cases as other countries in the region with significantly larger populations and economies.
  - A report indicates that 96 percent of people who find themselves in a court (both civil and criminal) receive a guilty verdict, unless they are state officials.
  - Tax Chamber reports the win-loss rate for taxpayers shifted from 54-46 percent in favor of taxpayers to 2-98 percent in favor of the state between 2010 and 2018.
- Suggested steps to improve judicial independence and transparency:
  - Give the judiciary a controlling majority in selecting and disciplining judges.
  - Abolish the probationary period of judges.
  - Uphold statutory deadlines.
  - Publish regular statistics, including on the inflow and outflow of cases, with a break-down per court and per case type and the outcome.

---

### Staff appraisal — macroeconomic outlook and policy guidance
- Macroeconomic status and vulnerabilities:
  - Macroeconomic and financial stability has improved, but the economy is still vulnerable to external shocks and not growing enough to make further inroads into poverty.
  - The economy is growing steadily, benefiting from a benign regional environment.
  - Low inflation, a small fiscal deficit in 2018, and a stable banking sector point to the success of stabilization policies.
  - Vulnerabilities arise from dependence on remittances, gold, the level of its current account deficit, and the level and composition of its public debt.
  - Economic growth has been insufficient to significantly raise living standards and reduce poverty.
- Growth projections and risks:
  - Growth is expected to moderately rise in 2019 owing to gold production and fiscal expansion and reach about 4 percent in the medium term.
  - Risks are tilted to the downside mainly because of the impact of trade tensions on the regional economic environment.
- Monetary policy:
  - The announced monetary policy is on track to keep inflation within the target range over the next 12 to 18 months.
  - To help the transition toward inflation targeting, the NBKR should maintain two-way exchange rate flexibility and limit interventions solely to smoothing excessive fluctuations.
- Fiscal policy:
  - The expansionary fiscal stance implied by the 2019 budget approved by Parliament is appropriate.
  - The (GFSM-defined) general government budget deficit should stay within 3.3 percent of GDP in 2019.
  - In 2020 and the medium term, the general government deficit should not exceed 2.5 percent of GDP.
  - Building buffers is needed considering the relatively elevated level of public debt, downside risks, and the unknown cost of the NBKR’s take-over of a problem bank.
- Banking sector and NBKR recommendations:
  - The NBKR should transfer the problem bank it recently acquired to the state as soon as possible to eliminate conflict of interest, maintain a level playing field, and protect the NBKR balance sheet.
  - NBKR should focus on continuing to implement risk-based supervision and work with the government to strengthen the bank resolution framework.
  - NBKR’s other quasi-fiscal activities should gradually be transferred to the budget.
- Fiscal space and public finance:
  - Given limited scope to further increase debt, fiscal space should be sought by gradually reducing tax exemptions, the relatively high public-sector wage bill, and energy sector subsidies.
  - Implementing a computerized FMIS and improving public financial management should help achieve additional expenditure savings.
- Final recommendation:
  - Steadfast implementation of reforms is needed to increase financial sector development, unleash the growth potential of the energy sector, and improve governance. Reducing banks’ high operating costs, fostering greater competition, decreasing information asymmetries, strengthening the rule of law, and gradually increasing residential tariffs with cash transfers to compensate the poor are essential measures.

*International Monetary Fund—Kyrgyz Republic staff report.*

### 46.      It is proposed that the next Article IV consultation takes place according to the standard 12-

### 1kgzea2019001 - 46. It is proposed that the next Article IV consultation takes place according to the standard 12-month cycle.

### Social and Demographic Indicators
- Population (in millions, 2017): 6.3
- GINI Index (2017): 27.3
- Unemployment rate (official, in percent, 2017): 6.9
- Life expectancy at birth in years (2017): 71.0
- Poverty rate (in percent, national definition, 2016): 25.6
- Adult literacy rate (percent of popul., 2015): 99.5
- GNI per capita (2017, Atlas method, U.S. dollars): 1,130
- Under-five mortality (per 1000 live births, 2017): 20

### Real Sector — Levels and Projections (2017–24)
- Nominal GDP (in billions of soms): 476.35 (2017), 530.55 (2018), 557.15 (2019), 590.86 (2020), 640.66 (2021), 697.97 (2022), 766.08 (2023), 830.99 (2024), 901.2 (Est.)
- Nominal GDP (in millions of U.S. dollars): 6,813 (2017), 7,703 (2018), 8,093 (2019), 8,334 (2020), 8,781 (2021), 9,288 (2022), 9,897 (2023), 10,423 (2024), 10,976 (Est.)
- Real GDP growth (percent): 4.3 (2017), 4.7 (2018), 3.5 (2019), 3.8 (2020), 3.4 (2021), 3.8 (2022), 4.6 (2023), 3.4 (2024), 3.4 (Est.)
- Nongold real GDP growth (percent): 4.3 (2017), 5.1 (2018), 3.5 (2019), 3.7 (2020), 3.6 (2021), 3.8 (2022), 4.3 (2023), 4.4 (2024), 4.4 (Est.)
- GDP per capita (in U.S. dollars): 1,110 (2017), 1,231 (2018), 1,268 (2019), 1,280 (2020), 1,324 (2021), 1,373 (2022), 1,434 (2023), 1,482 (2024), 1,530 (Est.)
- Consumer prices (12-month percent change, eop): -0.5 (2017), 3.7 (2018), 0.5 (2019), 4.7 (2020), 5.1 (2021), 5.0 (2022), 5.0 (2023), 5.0 (2024), 5.0 (Est.)
- Consumer prices (12-month percent change, average): 0.4 (2017), 3.2 (2018), 1.5 (2019), 2.2 (2020), 4.9 (2021), 5.0 (2022), 5.0 (2023), 5.0 (2024), 5.0 (Est.)

### Investment and Savings (percent of GDP)
- Investment: 31.6 (2017), 30.7 (2018), 28.3 (2019), 28.0 (2020), 28.1 (2021), 28.2 (2022), 27.9 (2023), 26.5 (2024), 26.1 (Est.)
- Public investment: 10.1 (2017), 9.7 (2018), 6.0 (2019), 8.9 (2020), 6.9 (2021), 8.0 (2022), 7.8 (2023), 7.5 (2024), 8.3 (Est.)
- Private investment: 21.5 (2017), 21.0 (2018), 22.3 (2019), 19.1 (2020), 21.2 (2021), 20.1 (2022), 20.1 (2023), 18.9 (2024), 19.0 (Est.)
- Savings: 20.0 (2017), 24.5 (2018), 19.6 (2019), 18.4 (2020), 20.4 (2021), 21.1 (2022), 21.2 (2023), 18.1 (2024), 17.3 (Est.)
- Savings-investment balance: -11.6 (2017), -6.2 (2018), -8.7 (2019), -9.6 (2020), -7.7 (2021), -7.1 (2022), -6.8 (2023), -8.4 (2024), -8.7 (Est.)

### General Government Finances (percent of GDP) — Key Aggregates
- Revenue: 33.1 (2017), 33.4 (2018), 32.8 (2019), 34.5 (2020), 32.5 (2021), 32.6 (2022), 32.5 (2023), 32.3 (2024), 32.0 (Est.)
- Tax revenue (of which): 19.5 (2017), 19.3 (2018), 20.7 (2019), 21.9 (2020), 21.8 (2021), 21.8 (2022), 21.7 (2023), 21.5 (2024), 21.2 (Est.)
- Expense: 31.8 (2017), 30.1 (2018), 28.9 (2019), 31.0 (2020), 30.9 (2021), 29.6 (2022), 29.6 (2023), 29.6 (2024), 29.7 (Est.)
- Gross operating balance: 1.3 (2017), 3.2 (2018), 3.9 (2019), 3.5 (2020), 1.6 (2021), 3.0 (2022), 2.9 (2023), 2.7 (2024), 2.2 (Est.)
- Net acquisition of nonfinancial assets: 7.7 (2017), 7.8 (2018), 5.2 (2019), 6.9 (2020), 4.6 (2021), 6.0 (2022), 5.9 (2023), 5.7 (2024), 5.2 (Est.)
- Overall balance (net lending/borrowing): -6.4 (2017), -4.6 (2018), -1.3 (2019), -3.3 (2020), -3.0 (2021), -3.0 (2022), -3.0 (2023), -3.0 (2024), -3.0 (Est.)
- Primary net lending/borrowing: -5.3 (2017), -3.5 (2018), 0.0 (2019), -1.8 (2020), -1.6 (2021), -1.6 (2022), -1.5 (2023), -1.4 (2024), -1.3 (Est.)
- Total state government debt (percent of GDP): 59.1 (2017), 58.8 (2018), 56.0 (2019), 56.1 (2020), 55.5 (2021), 55.3 (2022), 54.5 (2023), 54.4 (2024), 54.4 (Est.)
- Of which domestic debt (percent of GDP): 4.7 (2017), 5.8 (2018), 8.0 (2019), 8.2 (2020), 8.8 (2021), 9.9 (2022), 10.5 (2023), 11.2 (2024), 11.7 (Est.)

### External Sector and Balance of Payments (2016–24)
- Current account balance (in percent of GDP): -11.6 (2016), -6.2 (2017), -8.7 (2018), -9.6 (2019), -7.7 (2020), -7.1 (2021), -6.8 (2022), -8.4 (2023), -8.7 (2024 Est.)
- Current account balance (in millions of U.S. dollars): -792 (2016), -477 (2017), -702 (2018), -794 (2019), -669 (2020), -654 (2021), -666 (2022), -870 (2023), -955 (2024 Est.)
- Excluding transfers (in millions of U.S. dollars): -2,696 (2016), -2,847 (2017), -3,123 (2018), -3,279 (2019), -3,391 (2020), -3,614 (2021), -3,845 (2022), -4,174 (2023), -4,369 (2024 Est.)
- Trade balance (in millions of U.S. dollars): -2,137 (2016), -2,383 (2017), -2,779 (2018), -2,888 (2019), -2,997 (2020), -3,199 (2021), -3,383 (2022), -3,723 (2023), -3,924 (2024 Est.)
- Exports, fob (in millions of U.S. dollars): 1,608 (2016), 1,814 (2017), 1,815 (2018), 1,901 (2019), 1,944 (2020), 2,040 (2021), 2,193 (2022), 2,130 (2023), 2,091 (2024 Est.)
  - Of which: Gold (in millions of U.S. dollars): 702 (2016), 700 (2017), 664 (2018), 729 (2019), 742 (2020), 788 (2021), 890 (2022), 769 (2023), 667 (2024 Est.)
- Imports, fob (in millions of U.S. dollars): 3,744 (2016), 4,197 (2017), 4,594 (2018), 4,789 (2019), 4,941 (2020), 5,239 (2021), 5,576 (2022), 5,853 (2023), 6,015 (2024 Est.)
- Gross international reserves (in millions of U.S. dollars): 1,773 (2016), 1,971 (2017), 1,919 (2018), 1,854 (2019), 1,873 (2020), 1,930 (2021), 2,084 (2022), 2,012 (2023), 1,862 (2024 Est.)
- Gross reserves (months of next year imports, eop): 4.2 (2016), 4.3 (2017), 4.0 (2018), 3.8 (2019), 3.6 (2020), 3.5 (2021), 3.6 (2022), 3.4 (2023), 3.0 (2024 Est.)
- External public debt outstanding (in percent of GDP): 54.4 (2016), 53.0 (2017), 48.0 (2018), 47.9 (2019), 46.7 (2020), 45.4 (2021), 44.0 (2022), 43.2 (2023), 42.7 (2024 Est.)
- External public debt service-to-export ratio (in percent): 5.9 (2016), 7.1 (2017), 6.9 (2018), 7.7 (2019), 7.1 (2020), 8.0 (2021), 7.9 (2022), 8.2 (2023), 7.9 (2024 Est.)

### Monetary Sector and NBKR Accounts
- Reserve money (percent change, eop): 27.6 (2017), 16.9 (2018), 6.3 (2019), 5.5 (2020), 11.2 (2021), 13.7 (2022), 15.8 (2023), 8.9 (2024), 10.9 (Est.)
- Broad money (percent change, eop): 14.6 (2017), 17.9 (2018), 5.5 (2019), 8.8 (2020), 11.8 (2021), 14.2 (2022), 16.4 (2023), 9.4 (2024), 10.9 (Est.)
- Credit to private sector (percent change, eop): -1.0 (2017), 15.7 (2018), 18.2 (2019), 6.7 (2020), 9.1 (2021), 9.6 (2022), 10.9 (2023), 10.5 (2024), 10.3 (Est.)
- Credit to private sector (in percent of GDP): 20.0 (2017), 20.8 (2018), 23.4 (2019), 23.6 (2020), 23.7 (2021), 23.9 (2022), 24.1 (2023), 24.6 (2024), 25.0 (Est.)
- Velocity of broad money: 2.9 (2017), 2.7 (2018), 2.7 (2019), 2.7 (2020), 2.6 (2021), 2.5 (2022), 2.3 (2023), 2.3 (2024), 2.3 (Est.)
- Policy Rate: 5.0 (2017), 5.0 (2018), 4.8 (2019), 4.5 (2020), ... (no further values published in the table)

NBKR (end-period, in millions of soms and U.S. dollars)
- Net foreign assets (in soms): 126,837 (2016), 140,889 (2017), 142,089 (2018), 141,338 (2019)
- Net international reserves (in soms): 121,250 (2016), 134,783 (2017), 134,078 (2018), 133,327 (2019)
- Reserve money (in soms): 85,584 (2016), 100,019 (2017), 106,347 (2018), 112,235 (2019)
- Gross International Reserves (in millions of U.S. dollars): 1,773 (2016), 1,971 (2017), 1,919 (2018), 1,818 (2019)
- Net international reserves (in millions of U.S. dollars): 1,751 (2016), 1,958 (2017), 1,920 (2018), 1,854 (2019)
- Exchange rate, som per U.S. dollar, end of period: 69.2 (2016), 68.8 (2017), 69.9 (2018), ... (2019 not listed)

### Monetary Survey (Selected, 2016–19)
- Net foreign assets (in soms): 136,028 (2016), 152,811 (2017), 150,112 (2018), 149,361 (2019)
- Broad money (M2X, in soms): 164,017 (2016), 193,391 (2017), 204,071 (2018), 222,114 (2019)
- Broad money (M2X) (12-month change, in percent): 14.6 (2016), 17.9 (2017), 5.5 (2018), 8.8 (2019)
- Credit to the rest of the economy (12-month change, in percent): -1.0 (2016), 15.7 (2017), 18.2 (2018), 6.7 (2019)
- Loan dollarization: 43.7 (2016), 37.8 (2017), 37.6 (2018), 37.6 (2019)
- Deposit dollarization: 51.3 (2016), 46.4 (2017), 41.5 (2018), 41.5 (2019)

### State Government Finances (2016–24, in millions of soms and percent of GDP)
- Revenues (in millions of soms): 130,791 (2016), 147,857 (2017), 151,472 (2018), 170,460 (2019), 169,474 (2020), 171,859 (2021), 188,032 (2022), 205,325 (2023), 220,565 (2024), 236,269 (Est.)
- Expenses (in millions of soms): 125,602 (2016), 131,243 (2017), 130,985 (2018), 149,598 (2019), 150,287 (2020), 162,130 (2021), 167,473 (2022), 183,256 (2023), 198,908 (2024), 216,564 (Est.)
- Net lending/borrowing (overall balance, in millions of soms): -31,253 (2016), -24,511 (2017), -8,261 (2018), -17,264 (2019), -20,994 (2020), -19,223 (2021), -20,946 (2022), -22,983 (2023), -24,934 (2024), -27,064 (Est.)
- Domestically financed capital expenditure (in millions of soms): 22,278 (2016), 22,373 (2017), 17,819 (2018), 16,463 (2019), 18,590 (2020), 13,145 (2021), 20,320 (2022), 20,153 (2023), 19,560 (2024), 17,517 (Est.)
- Foreign loan financed PIP (in millions of soms): 11,417 (2016), 14,762 (2017), 6,439 (2018), 13,980 (2019), 13,980 (2020), 11,071 (2021), 16,051 (2022), 19,194 (2023), 20,820 (2024), 22,584 (Est.)
- Transfers to Social Fund and Mandatory Health Insurance Fund (in millions of soms): 25,402 (2016), 26,933 (2017), 30,173 (2018), 31,891 (2019), 31,891 (2020), 32,529 (2021), 33,896 (2022), 36,707 (2023), 39,435 (2024), 42,549 (Est.)

### General Government Finances (GFSM 2001 Presentation) — Selected Aggregates
- Revenue (in millions of soms): 157,664 (2016), 176,918 (2017), 182,740 (2018), 205,053 (2019), 203,199 (2020), 207,906 (2021), 227,562 (2022), 248,962 (2023), 268,138 (2024), 287,948 (Est.)
- Expense (in millions of soms): 151,569 (2016), 159,883 (2017), 160,992 (2018), 181,609 (2019), 182,325 (2020), 197,828 (2021), 206,629 (2022), 226,481 (2023), 246,034 (2024), 267,758 (Est.)
- Net lending/borrowing (in millions of soms): -30,599 (2016), -24,352 (2017), -7,304 (2018), -15,007 (2019), -19,635 (2020), -19,223 (2021), -20,946 (2022), -22,983 (2023), -24,934 (2024), -27,064 (Est.)
- Net incurrence of liabilities (in millions of soms): 21,412 (2016), 19,733 (2017), 3,603 (2018), n.a. (2019), 13,002 (2020), 17,660 (2021), 22,897 (2022), 24,060 (2023), 26,132 (2024), 28,393 (Est.)

### Financial Soundness Indicators (Selected, 2016–18)
- Regulatory capital to risk weighted assets: 24.8 (Dec-16), 25.1 (Mar-17), 24.0 (Jun-17), 23.8 (Sep-17), 24.2 (Dec-17), 24.2 (Mar-18), 24.0 (Jun-18), 23.5 (Sep-18), 23.7 (Dec-18)
- Nonperforming loans/total loans: 8.8 (Dec-16), 8.6 (Mar-17), 8.4 (Jun-17), 8.1 (Sep-17), 7.6 (Dec-17), 7.9 (Mar-18), 7.4 (Jun-18), 7.4 (Sep-18), 7.5 (Dec-18)
- Loan-loss provisioning/nonperforming loans: 56.9 (Dec-16), 56.5 (Mar-17), 55.3 (Jun-17), 54.6 (Sep-17), 58.4 (Dec-17), 56.6 (Mar-18), 55.6 (Jun-18), 55.6 (Sep-18), 54.3 (Dec-18)
- Return on equity: 3.3 (Dec-16), 2.5 (Mar-17), 4.5 (Jun-17), 7.2 (Sep-17), 7.6 (Dec-17), 7.1 (Mar-18), 8.3 (Jun-18), 9.2 (Sep-18), 9.5 (Dec-18)
- Loans/deposits: 95.0 (Dec-16), 93.6 (Mar-17), 98.2 (Jun-17), 96.5 (Sep-17), 94.6 (Dec-17), 90.3 (Mar-18), 97.7 (Jun-18), 101.7 (Sep-18), 100.5 (Dec-18)
- Share of foreign currency deposits in total deposits: 53.4 (Dec-16), 52.7 (Mar-17), 50.5 (Jun-17), 49.8 (Sep-17), 48.7 (Dec-17), 48.6 (Mar-18), 45.9 (Jun-18), 47.0 (Sep-18), 44.5 (Dec-18)

### Inclusive Growth Indicators — Selected Comparisons with EMDE Averages
- GDP per capita growth (percent; 2015-18 average): 2.1 (Kyrgyz Republic), 3.1 (EMDE Average)
- Poverty headcount ratio at $3.20/day (percent of population; 2016): 19.1 (Kyrgyz Republic), 32.9 (EMDE Average)
- GINI Index (2016): 26.8 (Kyrgyz Republic), 39.6 (EMDE Average)
- Human Development Index (2017): 0.70 (Kyrgyz Republic), 0.6 (EMDE Average)
- Access to electricity (% of population, 2016): 100.0 (Kyrgyz Republic), 78.4 (EMDE Average)
- Account at a financial institution (% age 15+, 2017): 38.3 (Kyrgyz Republic), 43.0 (EMDE Average)
- Domestic credit to private sector (% GDP, 2017): 21.7 (Kyrgyz Republic), 39.8 (EMDE Average)
- Female seats in Parliament (share of total seats, 2018): 19.0 (Kyrgyz Republic), 19.5 (EMDE Average)

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

### Annex I. Implementation of 2017 Article IV Consultation’s Key

### Annex I. Implementation of 2017 Article IV Consultation’s Key Recommendations

### Fiscal Policy
- Staff advice: Pursue growth-friendly fiscal consolidation to maintain debt sustainability and promote inclusive growth.
- Implementation assessment:
  - Fiscal consolidation is ahead of the path recommended but little progress has been made to tilt the composition of expenditure towards investment.
  - Progress was made to better capture imports but no headway in reducing tax exemptions.
  - The objective of reducing the wage bill is clear but concrete measures to implement it are lacking.
  - No progress on energy tariff reforms or on moving away from category- to income-based social transfers.
  - Little progress in public investment and wage bill management and implementation of a comprehensive computerized Financial Management Information System (FMIS).
- Specific policy guidance on fiscal framework:
  - The fiscal rule proposed to Parliament is a crucial step forward, but it should:
    - measure the deficit in line with the IMF Government Finance Statistics Manual (GFSM), that is including on-lending to loss-making SOEs as capital grants contributing to the deficit rather than as a financing item;
    - cap the debt ceiling at 60-65 rather than 70 percent of GDP;
    - eliminate the possibility of extra-budgetary spending without prior approval of a supplementary budget.

### Monetary/Exchange Rate and Financial Policies
- Staff advice: Maintain price stability, enhance the monetary policy framework to transition to an inflation targeting (IT) regime, including by pursuing a flexible exchange rate policy and by reducing dollarization. Strengthen central bank governance. Strengthen financial stability and reduce subsidized lending.
- Implementation assessment:
  - Continuous progress made in the transition to IT and reducing the dollarization of the economy.
  - KGS/$ exchange rate has been remarkably stable since mid-2016.
  - The NBKR still lacks a board with a majority of non-executive directors.
  - Mixed progress on financial stability:
    - Continuous progress on financial soundness indicators due to NBKR’s implementation of prudential norms, comprehensive monitoring and stress-testing of both bank and non-bank financial institutions, and gradual implementation of risk-based supervision.
    - The recent takeover by the NBKR of a medium-sized bank undermined the credibility of the central bank as supervisor and exposed it to unnecessary financial risks.
    - No progress in the reduction of subsidized lending.

### Structural reforms
- Staff advice: Improve governance and accelerate structural reforms to support inclusive growth.
- Implementation assessment:
  - Mixed progress.
  - Measures to address corruption include implementing an electronic asset declaration system for civil servants.
  - Further efforts needed to strengthen the rule of law and enhance transparency.
  - Below-cost electricity and heating residential tariffs have led to further energy sector decay.
  - Continuous contract renegotiation with the largest foreign investor has sent a negative signal to potential foreign investors.
  - Adoption of an AML/CFT law is welcome but supporting regulations and steadfast implementation are needed to address laundering of corruption proceeds.
  - Areas needing improvement: paying taxes, enforcement of contracts, and trading across borders.

*Source: Annex I. Implementation of 2017 Article IV Consultation’s Key Recommendations (IMF).*

### Annex II. External Sector Assessment

### Summary finding
- The Kyrgyz Republic’s external position is weaker than implied by fundamentals.
- Gross official foreign exchange reserves are above adequate levels indicated by IMF reserve adequacy metrics.

### Net international investment position (NIIP) and external liabilities (2018)
- NIIP estimated at -92 percent of GDP in 2018.
- Gross assets estimated at 53 percent of GDP, comprising:
  - international reserves: 24 percent of GDP
  - foreign direct investment (FDI) assets: 8 percent of GDP
  - other assets: 21 percent of GDP
- Gross liabilities amounted to 145 percent of GDP, comprising:
  - external public and publicly guaranteed debt: around 48 percent of GDP
  - private external debt: around 30 percent of GDP
  - FDI liabilities: around 66 percent of GDP
- External public debt is contracted at concessional terms, which, together with limited short-term volatile capital inflows, mitigates risks.

### Current account and outlook
- The current account deficit widened to 8.7 percent of GDP in 2018, driven by a slowdown in remittance growth and an improvement in import capture by the Customs Administration.
- Projection: A further increase in the current account deficit in 2019 due to weak remittances following the depreciation of the ruble vis-à-vis the $ in 2018; a temporary improvement in 2020-22 on the back of a recovery in remittances and an increase in gold production; medium-term offset by scaling-up of public investments and a substantial decline in gold production and exports starting in 2023.

### Exchange rate and reserves
- The KGS bilateral exchange rate vis-à-vis the USD has been stable since mid-2016.
- The real effective exchange rate (REER) has appreciated by 15 percent since late-2015, notwithstanding a slight depreciation at the end of 2018.
- Foreign exchange reserves:
  - 4.0 months of imports at end-2018, above the Fund’s reserve adequacy metrics for credit constrained economies and the standard metric of 3 months of imports.
  - Projected reserves coverage of imports: decrease to 3.6 months in 2022 and three months in 2024 (the minimum level indicated by the standard reserve adequacy metric).

### External assessment model results
- External Balance Assessment Current Account (CA) model:
  - Identifies a negative current account gap of 4.2 percent of GDP and an overvaluation of the REER by 12 percent.
  - The policy gap reduces the current account gap by 1.2 percent of GDP (in absolute terms), primarily because of the excessively tight fiscal stance in 2018.
- Index REER (IRRER) model:
  - Identifies an overvaluation of the REER by 20 percent compared to its fitted value.
- External Sustainability (ES) balance-sheet approach:
  - Indicates an overvaluation of the REER by 17 percent, based on the assumption that the NIIP is stabilized at its 2018 level.
- Memorandum item:
  - Elasticity of current account to REER: -0.34
- Given results of CA, IREER and ES models, the external position is assessed to be weaker than implied by fundamentals.
- External risks associated with the level of the NIIP are mitigated by:
  - high share of FDI liabilities (almost half of total external liabilities),
  - low integration with global financial markets and limited exposure to volatile portfolio flows,
  - concessional nature of public sector borrowing.

*Source: Annex II. External Sector Assessment (IMF).*

### Annex III. Risk Assessment Matrix (February 2019)

### Overview
- The RAM lists events that could materially alter the baseline path and provides staff subjective assessments of relative likelihood and possible impact, with policy responses.

### Selected global risks, likelihoods, impacts, and policy responses
- Rising protectionism and retreat from multilateralism
  - Relative likelihood: High
  - Staff assessment: Medium
  - Possible impact: Shock could transmit through trade, FDI and aid from affected countries.
  - Policy response: Diversify trade, FDI and aid. Build up financial buffers.
- Sharp tightening of global financial conditions
  - Relative likelihood: Low/Medium
  - Staff assessment: Medium
  - Possible impact: Could weaken KGS exchange rate, increase public debt, worsen balance sheets, reduce banks’ profitability and asset quality, increase debt distress.
  - Policy response: Allow two-way exchange rate flexibility, undertake fiscal adjustment, implement de-dollarization strategy, strengthen bank supervisory and resolution framework.
- Weaker-than-expected global growth
  - Relative likelihood: Medium/High/Medium
  - Staff assessment: Medium
  - Possible impact: Effects through trade, FDI and aid.
  - Policy response: Continue fiscal adjustment to build financial buffers and diversify trade, FDI and aid.
- Large swings in energy prices affecting Russia and Kazakhstan
  - Relative likelihood: Medium
  - Staff assessment: High
  - Possible impact: Transmit through remittances, oil imports, exchange rate, external demand, investment and aid flows.
  - Policy response: Allow two-way exchange rate flexibility, implement de-dollarization strategy, strengthen supervisory and resolution framework, build up financial buffers.
- Cyber-attacks on critical infrastructure
  - Relative likelihood: Medium
  - Staff assessment: Medium
  - Possible impact: Reduce confidence and growth.
  - Policy response: Implement policies to protect critical financial, transport, communication or energy infrastructure.

### Selected country-specific risks, likelihoods, impacts, and policy responses
- Delays and setback in reforms (e.g., run-up to 2020 parliamentary elections)
  - Relative likelihood: Medium
  - Staff assessment: Medium
  - Possible impact: Fiscal discipline could falter; ad hoc spending initiatives could undermine fiscal consolidation.
  - Policy response: Make best effort to pass amendments to the Budget Code to adopt fiscal rule capping debt at 60-65 percent of GDP and eliminating extra-budgetary spending. Implement fiscal consolidation.
- Lower gold production or prices
  - Relative likelihood: Medium
  - Staff assessment: Medium
  - Possible impact: Lower growth, budgetary revenue and less FDI.
  - Policy response: Resolve disputes with main foreign investor in a timely and mutually satisfactory manner. Allow two-way exchange rate flexibility. Build up financial buffers.
- Build-up of risks in the financial sector (including subsidized lending and NBKR takeover of a bank)
  - Relative likelihood: Medium
  - Staff assessment: Medium
  - Possible impact: Slow progress in financial sector stability and development.
  - Policy response: Gradually phase-out subsidized lending. Improve regulation of financial markets to reduce cost of credit. Implement AML/CFT law and strengthen monitoring of cross-border financial flows. The NBKR should get out of owning and managing commercial banks. Improve bank resolution framework.

*Source: Annex III. Risk Assessment Matrix (IMF).*

### Annex IV. Preliminary Costing of Achieving Selected Sustainable Development Goals

### Summary finding
- Preliminary costing of five major SDGs suggests a total financing need amounting to over 100 percent of 2018 GDP during 2019–30.
- Around 40 percent of the additional spending would be on human resources in health and education; the remainder for new investment or rehabilitation in road, water and sanitation, and electricity sectors.
- Authorities are encouraged to undertake deeper analysis for more accurate costing.

### Sectoral estimates and assumptions
- Overall:
  - Costing estimate: over 100 percent of 2018 GDP during 2019–30.
- Health:
  - Assumptions:
    - constant ratio of doctors: 1.9 doctors per 1000 population;
    - decline for other medical staff from 6.6 per 1000 population in 2018 to 5.4 in 2030;
    - convergence in doctors’ wage ratio to per capita GDP from 5.8 to 8.1 during the period (closing half of the wage gap with high-pay good performers);
    - demand for health services follows UN population projections.
  - Result: cumulative 18 percent of 2018 GDP additional spending needed to meet growing demand up to 2030, relative to baseline where country spends a constant share of GDP on wages.
- Education:
  - Baseline and targets:
    - current average enrollment: 58 percent;
    - target: gradual improvement to the Caucasus and Central Asia (CCA) average of 69 percent during 2019–30.
  - Assumptions:
    - student-teacher ratio: 15.1 (constant);
    - teachers’ wages to per capita GDP ratio: 3 (constant).
  - Result: additional spending amounts to around 25 percent of 2018 GDP to keep up with expected expansion of student-age population and facilitate higher enrollment.
- Road:
  - Methodology: estimate length of new road based on targeted improvement in rural access index and predicted economic and population growth.
  - Assumption: improve rural access index from 76 percent to 81 percent (average for emerging and developing Europe).
  - Result: extra 1900 kilometers of road needed with an estimated cost of 40 percent of 2018 GDP.
- Water:
  - Methodology: World Bank approach measuring infrastructure needs for affordable, safe, and sustainable access to water and sanitation.
  - Result: estimated investment needs of around $955 million, or 12 percent of 2018 GDP.

*Source: Annex IV. Preliminary Costing of Achieving Selected Sustainable Development Goals (IMF).*

### 6.      Electricity. The Kyrgyz Republic enjoys almost universal access to electricity and stands well

### 1kgzea2019001 - 6. Electricity. The Kyrgyz Republic enjoys almost universal access to electricity and stands well

### Sector overview and key finding
- The Kyrgyz Republic has achieved almost universal access to electricity and "stands well regarding SDG on electricity."
- The electricity sector is in financial distress and suffers from under-maintenance and under-investment.
- To keep the sector running, the rehabilitation needs alone are estimated at $865 million, or 11 percent of 2018 GDP.

### SDG costing and related indicators (as presented)
- The SDG costing exercise includes cumulative additional spending during 2019-30 for health and education, stock of new investment for road, water and sanitation without considering depreciation, and rehabilitation cost for electricity.
- For the Kyrgyz Republic, because universal access to electricity has been achieved and a high share is produced by hydropower, only rehabilitation cost is included in the SDG costing.

- Costing of Selected SDGs (In percent of 2018 GDP):
  - Health 2/17.7
  - Education 2/24.6
  - Road 40.7
  - Water and Sanitation 11.8
  - Electricity 3/10.7
  - Total 105.5

- Notes accompanying the SDG costing:
  - "1/ The table presents cumulative additional spending during 2019-30 for health and education, stock of new investment for road, water and sanitation without considering depreciation, and rehabilitation cost for electricity."
  - "2/ Includes only additional spending on human resource."
  - "3/ The Kyrgyz Republic has achieved universal access to electricity and has a high share produced by hydropower. Therefore, only rehabilitation cost is included in the SDG costing."

### Contextual references and data sources cited in the text
- Rehabilitation needs estimate source: World Bank, Power Sector Policy Note for the Kyrgyz Republic, April 2014.
- SDG Index and Dashboards Report 2018 cited as basis for SDG Index calculations (Sachs, J., Schmidt-Traub, G., Kroll, C., Durand-Delacre, D., and Teksoz, K. (2017)).
- Figure and table sources noted as "Source: IMF staff calculations" and "Source: IMF staff."

*Source: IMF staff.*

### 2018. The authorities intend to continue to use the official exchange rate for government

### 2018. The authorities intend to continue to use the official exchange rate for government transactions.

### Exchange system and restrictions
- The Kyrgyz Republic maintains an exchange system that is free of restrictions on the making of payments and transfers for current international transactions, except for the MCP discussed above.
- Exchange and financial transaction restrictions are maintained for security reasons relating to the restriction of financial transactions and the freeze of accounts of certain individuals or organizations associated with terrorism pursuant to (i) relevant U.N. Security Council resolutions; and (ii) the list of current terrorist organizations designated by the U.S. Secretary of State. The authorities notified these measures to the Fund in May 2007.

### Fund surveillance, consultations, and representation
- The Kyrgyz Republic is on a 12-month Article IV consultation cycle.
  - The 2017 Article IV consultation discussions were held in April 2017 and completed by the Executive Board in October 2017.
- The eleventh resident representative of the Fund in the Kyrgyz Republic, Mr. Poghosyan, took his post in Bishkek in March 2019.
- The country subscribed to the SDDS in February 2004.

### FSAP, ROSC, and technical assistance history
- FSAP update mission: July 2013; Board discussed the Financial System Stability Assessment (FSSA) and fifth ECF review in December 2013. The FSSA was not published.
- ROSC missions and publications:
  - Fiscal ROSC mission: March 2001; ROSC Fiscal Transparency Module published March 13, 2002.
  - Data ROSC mission: November 2002; ROSC Data Module published November 2003.
  - Fiscal ROSC reassessment: September 2007.
- Technical assistance provided by the Fund (January 2014–March 2019) covered multiple areas, including:
  - Public Finance Management, Treasury and Accounting Reform, Fiscal risk disclosure, Public Investment Management Assessment, Managing Government Wage Expenditure, A Rules-Based Fiscal Framework, Financial Management Information System Strategy, Incorporation of Fiscal Rules in the Budget Code.
  - Monetary and banking topics: Operational Advice on Improving the Monetary Policy Framework; Strengthening Near-Term Modeling and Forecasting Capacities; Strengthening Banking Supervision; Monetary Policy and Inflation Targeting Framework; IFRS 9 Training for NBKR Banking Supervisors; Cyber Security; Legal Frameworks for Bank Resolution.
  - AML/CFT: multiple follow-ups (February 2014–October 2018), risk-based supervision, IT workflow procedures, and legal drafting assistance.
  - Statistics: Price Statistics; External Sector Statistics; Monetary and Financial Statistics; Quarterly National Accounts; Government Finance Statistics; National Accounts EDDI2.
- List of resident advisors (selected entries and tenures):
  - FD Banking Supervision/Restructuring Advisor Mr. Svartsman January 2004–January 2005.
  - MFD Public Debt Policy and Management Mr. Azarbayejani December 2002–December 2004.
  - MCM Debt Management and Development of Government Securities Management Mr. Riecke August 2006–June 2011.
  - MCD Macroeconomic Analysis and Forecasting Mr. Petkov January 2010–January 2011.
  - MCM Banking Supervision/Restructuring Advisor Ms. Sonbul Iskender January 2016–present.

### Statistical issues and data dissemination
- Four institutions collect and compile macroeconomic statistics: National Statistics Committee (NSC), Ministry of Economy, Ministry of Finance, National Bank of the Kyrgyz Republic (NBKR).
- NSC maintains a comprehensive and regularly updated website: http://www.stat.kg.
- National Accounts:
  - Quarterly GDP estimates previously derived from cumulative data; discrete quarterly estimates finalized for 2010–17 in November 2018.
  - NSC planned to disseminate discrete quarterly estimates of GDP by June 2019.
  - Problems persist with source data quality and estimating underreporting in the private sector.
- Price and Labor Market Statistics:
  - CPI published since January 1995; covers urban resident households but needs to cover rural households.
  - PPI published since October 1996; coverage needs improvement and expected to expand.
- Trade and external statistics:
  - Progress in unit value indices; problems due to customs administration and outdated software causing incomplete coverage of trade.
  - Further improvements needed for shuttle trade and remittances estimation, direct investment coverage (including investment income), cross-border gold mining transactions, and adjustment for Eurasian Economic Union (EAEU) requirements.
- Government Finance Statistics:
  - Since 2018, the Ministry of Finance compiles and disseminates annual GFS for the whole general government, extended coverage with balance sheet and functional classification.
  - Starting in Q1 2018, quarterly general government data began being reported for publication in the IFS.
  - Data are compiled using the GFSM 2014 analytical framework.
  - An on-lending classification issue: on-lending to loss-making energy SOEs incorrectly classified as accumulation of financial assets below the line rather than as transfers above the line (inconsistent with GFSM Manual).
  - In May 2018, the Kyrgyz Republic started reporting debt securities and loans to the common WB / IMF quarterly PSDS database.
  - Ministry of Finance priorities: i) reconciling the deficit and financing data; ii) compiling quarterly data and metadata for all PSDS instruments; iii) reconciling all macroeconomic statistics.
- Monetary and Financial Statistics:
  - NBKR reports using IMF Standardized Report Forms (SRFs): SRF 1SR, SRF 2SR, SRF 4SR.
  - NBKR needs to expand OFC survey coverage to include insurance corporations, pension funds, and investment funds.
  - NBKR reports some Financial Access Survey (FAS) indicators and Financial Soundness Indicators (FSIs) on a regular quarterly basis; all core and additional FSIs relevant for the Kyrgyz Republic are reported.
- External Sector Statistics:
  - Starting with 2017, quarterly balance of payments and IIP compiled and disseminated on BPM6 basis.
  - Kyrgyz Republic participates in the IMF’s Coordinated Direct Investment Survey (CDIS).
  - External Debt Division of the Ministry of Finance monitors public sector external debt and submits gross external debt statistics (GEDS) to the World Bank’s QEDS database in collaboration with NBKR.

### Debt Sustainability Analysis (Joint World Bank/IMF DSA for 2019 Article IV Consultation)
- Overall judgment:
  - Results indicate moderate risk of debt distress for both external and overall public debt.
  - The debt outlook remains vulnerable to deceleration in real GDP and exports growth and depreciation of the KGS.
- Public debt coverage and contingent liabilities:
  - Public sector debt comprises state government debt (central and local), state guarantees, and the debt of the central bank towards the IMF.
  - Almost all public sector debt is central government debt; local governments have no external debt and negligible domestic debt vis-à-vis non-governmental entities.
  - According to the 2019 budget, there is no outstanding state guarantee (budget code prevents state guarantees since 2007, except obligations within membership in international/inter-governmental organizations).
  - SOEs have no external debt; domestic debt vis-à-vis non-governmental entities limited to short-term borrowing from commercial banks and is not significant.
  - The social security fund has no debt.
  - A combined contingent liability shock of 7 percent of GDP was applied:
    - 2 percent of GDP reflecting risks around operation of SOEs (structural cash shortfall of loss-making energy sector SOEs).
    - 5 percent of GDP representing the default value average cost to the government during a financial crisis.
- Historical and recent debt dynamics:
  - Public debt decreased from 67.1 percent of GDP in 2015 to 56.0 percent of GDP in 2018.
    - Decline driven by external debt falling by 16 percent of GDP due to appreciation of the KGS and debt relief from Russia.
  - Domestic debt rose from 3.6 to 8.0 percent of GDP; its share in total debt increased from 5 to 14 percent.
  - Domestic public debt composed of treasury bills and bonds mostly held by commercial banks (50 percent) and the social security fund (30 percent).
- Underlying projections and assumptions:
  - Economic growth projected in the Current DSA (Real GDP growth percent): 2016 4.3, 2017 4.7, 2018 3.5, 2019 3.8, 2020 3.4, 2021 3.8, 2022 4.6, 2023 3.4, 2024 3.4.
  - Overall fiscal balance (percent of GDP) - Current DSA: 2016 -6.4, 2017 -4.6, 2018 -1.3, 2019 -3.3, 2020 -3.0, 2021 -3.0, 2022 -3.0, 2023 -3.0, 2024 -3.0.
  - Current account balance (percent of GDP) - Current DSA: 2016 -11.6, 2017 -6.2, 2018 -8.7, 2019 -9.6, 2020 -7.7, 2021 -7.1, 2022 -6.8, 2023 -8.4, 2024 -8.8.
  - PIP Disbursements (millions of US$) - Current DSA: 2016 311, 2017 323, 2018 131, 2019 278, 2020 263, 2021 316, 2022 340, 2023 358, 2024 377.
- Medium- and long-term outlook and risks:
  - Current account deficit expected to narrow between 2020-22 due to recovery of remittances and slight increase in gold exports.
  - Over the medium term, current account deficit projected to increase owing to decline in gold production and exports starting in 2023.
  - The main gold mine accounted for 37 percent of exports in 2018 and is projected to cease operations in 2026.
  - Over the long term, other exports (new gold mines, other minerals, or hydropower) and FDI are projected to partially replace lost exports; exports projected to settle around 5 percent of GDP over the projection horizon.
  - Fiscal policy assumptions: a moderate fiscal loosening in 2019 to close the output gap followed by strict adherence to a fiscal rule under parliamentary consideration that caps debt at 70 percent of GDP and the budget deficit at 3 percent of GDP over the medium and long term.
  - Budget recording note: the budget deficit should be recorded in line with IMF GFSM, i.e., including on-lending to loss-making SOEs as capital grants contributing to the deficit rather than as a financing item.
  - Grants projection: current grants around 0.4% of GDP and capital grants around 1% of GDP projected to continue over the medium term; inclusion does not change the risk rating.
- Debt outlook and composition:
  - Total public debt expected to hover around 55 percent of GDP over the medium term.
  - Composition shift: increased reliance on domestic debt issuance; domestic debt expected to double from 8 percent of GDP in 2018 to 16 percent of GDP in the long term, with commercial banks expected to subscribe to the increase.

*Prepared by staffs of the International Monetary Fund and the International Development Association. May 21, 2019.*

### 3.05 for strong debt-carrying capacity (Text Table 4). This translates into the following external

### 1kgzea2019001 - 3.05 for strong debt-carrying capacity (Text Table 4). This translates into the following external

### External debt-carrying capacity thresholds and benchmarks
- External debt burden thresholds and public debt benchmark:
  - 240 percent for the present value (PV) of external debt-to-exports ratio
  - 55 percent for the PV of external debt-to-GDP ratio
  - 21 percent for the external debt service-to-exports ratio
  - 23 percent for the external debt service-to-revenue ratio
  - 70 percent for the PV of total public debt-to-GDP ratio

### External DSA — outlook and stress-test results
- Recent debt dynamics:
  - External public and publicly guaranteed (PPG) debt declined to 48.0 percent of GDP in 2018 from 53.0 percent in 2017 (write-off of Russian debt cited).
  - Total external debt decreased from 91.0 percent of GDP in 2017 to 85.0 percent of GDP in 2018 and will decline further towards 75 percent in the medium term.
- Risk assessment:
  - External debt remains at moderate risk of distress.
  - PPG external debt in PV terms is estimated to decline from 35 percent of GDP in 2018 to below 30 percent of GDP over the long term.
  - Most external debt burden indicators remain below their indicative sustainability thresholds under shock scenarios and suggest limited rollover risks.
  - The debt service-to-exports ratios breach its threshold in the medium term in the case of a shock to exports, indicating moderate risk of debt distress.
  - The PV of debt-to-exports also breaches its threshold, albeit for only a year.
- Factors informing the assessment:
  - Overvaluation of the exchange rate highlighted by the External Sector Assessment.
  - Need for continued fiscal discipline in strict adherence to the draft fiscal rule.
  - Expectations of continuing external concessional financing.
  - Large dependence on remittances and gold exports.
- Shock absorption capacity:
  - The Kyrgyz Republic is assessed to have some space to absorb shocks given the gap between debt burden indicators and their respective thresholds.
  - The external PPG debt outlook remains vulnerable to large external shocks, to a decline in exports and other flows, the depreciation of the KGS as well as combined external shocks.

### Public DSA — outlook and stress-test results
- Recent public debt dynamics:
  - Public debt (external plus domestic) decreased from 58.8 percent of GDP in 2017 to 56.0 percent of GDP in 2018.
  - Total public debt is expected to be manageable in the medium and long term but remains sensitive to shocks.
- Stress-test results and vulnerabilities:
  - The PV of debt-to-GDP ratio breaches its sustainability threshold in the case of shocks to real GDP growth over the medium and long term.
  - Rollover risks associated with public debt are expected to remain modest in the years ahead, albeit increasing over the long term.

### Authorities’ views
- The authorities agreed with the overall assessment.
- They noted that the fiscal rule being considered by Parliament will help keeping the overall public debt sustainable.
- Footnote: This implies that private external debt (for example, debt of commercial banks) would be in the range of 20-40 percent of GDP in the medium term.

### Conclusion
- Both external and overall public debt remains at moderate risk of distress.
- Results of stress tests and country-specific circumstances point toward moderate risk of external debt distress.
- At least one indicator breaches the threshold under the public debt stress tests; given this and the external assessment, overall public debt is also assessed to have moderate risk of debt distress.

*Source: 1kgzea2019001 - 3.05 for strong debt-carrying capacity (Text Table 4). This translates into the following external*

### 13.      The authorities need to maintain fiscal discipline, remain cautious when contracting

### 13.      The authorities need to maintain fiscal discipline, remain cautious when contracting or guaranteeing new debt and continue to improve the business climate.

### Fiscal discipline and debt sustainability
- To keep public debt sustainable, the authorities will need to strictly adhere to the fiscal rule considered by Parliament.
- Externally-financed public investments, while necessary to fill the large infrastructure gap, could undermine debt sustainability if not managed carefully.
- Further efforts are needed to strengthen public debt and public investment management to ensure that potential gains from externally financed public investment projects are fully realized.

### Business climate and export risk
- The authorities should keep improving the business environment to maintain the country’s export beyond the closure of the main gold mine.
- An attractive business environment is crucial to generate new exports to replace those of the main gold mine that will close in 2026.

### Key public and publically guaranteed (PPG) debt indicators (current DSA)
- PPGE debt to GDP ratio (Current DSA)
  - 2016: 54.4
  - 2017: 53.0
  - 2018: 48.0
  - 2019: 47.9
  - 2020: 46.7
  - 2021: 45.4
  - 2022: 44.0
  - 2023: 43.2
  - 2024: 42.7
  - Long Term (2028): 37.8
- Public debt to GDP ratio (Current DSA)
  - 2016: 59.1
  - 2017: 58.8
  - 2018: 56.0
  - 2019: 56.1
  - 2020: 55.5
  - 2021: 55.3
  - 2022: 54.5
  - 2023: 54.4
  - 2024: 54.4
  - Long Term (2028): 54.0

### External debt and macro assumptions (select baseline figures)
- External debt (nominal) as percent of GDP (selected years)
  - 2015: 109.4
  - 2016: 99.7
  - 2017: 91.0
  - 2018: 85.0
  - 2019: 84.7
  - 2020: 82.3
  - 2021: 79.7
  - 2022: 77.1
  - 2023: 75.4
  - 2028: 64.6
  - 2038: 88.3
- Of which: public and publicly guaranteed (PPG) external debt (percent of GDP)
  - 2015: 63.5
  - 2016: 54.4
  - 2017: 53.0
  - 2018: 48.0
  - 2019: 47.9
  - 2020: 46.7
  - 2021: 45.4
  - 2022: 44.0
  - 2023: 43.2
  - 2028: 37.8
  - 2038: 43.3
- Gross external financing need (Million of U.S. dollars)
  - 2015: 680.4
  - 2016: 783.8
  - 2017: 1,052.7
  - 2018: 1,320.4
  - 2019: 853.3
  - 2020: 720.3
  - 2021: 760.1
  - 2022: 766.7
  - 2023: 1,039.6
  - 2028: 1,123.3
  - 2038: 2,069.6
- Real GDP growth (in percent) (baseline)
  - 2015: 3.9
  - 2016: 4.3
  - 2017: 4.7
  - 2018: 3.5
  - 2019: 3.8
  - 2020: 3.4
  - 2021: 3.8
  - 2022: 4.6
  - 2023: 3.4
  - 2028: 4.4
  - 2038: 3.9
- Net FDI (negative = inflow) (percent of GDP)
  - 2015: -15.1
  - 2016: -8.5
  - 2017: 1.0
  - 2018: -0.6
  - 2019: -4.6
  - 2020: -4.5
  - 2021: -4.6
  - 2022: -4.7
  - 2023: -4.2
  - 2028: -5.5
  - 2038: -4.4

### Public sector debt framework (select baseline figures)
- Public sector debt (percent of GDP)
  - 2015: 67.1
  - 2016: 59.1
  - 2017: 58.8
  - 2018: 56.0
  - 2019: 56.1
  - 2020: 55.5
  - 2021: 55.5
  - 2022: 55.3
  - 2023: 54.5
  - 2028: 54.0
  - 2038: 54.8
- Primary deficit (percent of GDP)
  - 2015: 1.8
  - 2016: 5.4
  - 2017: 3.5
  - 2018: 0.0
  - 2019: 1.9
  - 2020: 1.6
  - 2021: 1.6
  - 2022: 1.5
  - 2023: 1.4
  - 2028: 0.9
  - 2038: 1.3
- Revenue and grants (percent of GDP)
  - 2015: 35.6
  - 2016: 33.1
  - 2017: 33.4
  - 2018: 32.8
  - 2019: 34.5
  - 2020: 32.5
  - 2021: 32.6
  - 2022: 32.5
  - 2023: 32.3
  - 2028: 31.4
  - 2038: 33.3

### Stress tests, scenarios, and sensitivity
- Figures and tables present alternative scenarios, bound tests, and tailored tests for 2018–28, including:
  - Historical scenario produces more favorable debt dynamics than baseline due in part to higher historical average FDI inflows.
  - Stress tests include shocks such as Real GDP growth, Primary balance, Exports, Other flows, One-time 30 percent nominal depreciation, and combinations (B6).
- Selected stress-test outcomes (PV of PPG external debt-to-GDP ratio, percent)
  - Baseline 2018: 35.5; 2028: 28.0
  - A1 (historical averages) 2028: 10.2
  - B5 (one-time 30 percent nominal depreciation) 2028: 29.3
  - B6 (combination) 2028: 37.3
- Debt service and vulnerability indicators (selected)
  - PPG debt service-to-exports ratio (various years): 4.6, 5.4, 6.1, 18.9, 8.6, 7.9, 8.8, 8.6, 9.1, 10.8, 8.4
  - PPG debt service-to-revenue ratio (various years): 5.1, 6.2, 6.7, 19.9, 8.7, 8.0, 8.9, 8.7, 8.6, 10.3, 7.5

### Recommendations (policy actions highlighted in the content)
- Strictly adhere to the fiscal rule considered by Parliament to maintain public debt sustainability.
- Remain cautious when contracting or guaranteeing new debt, especially externally-financed public investments.
- Strengthen public debt management and public investment management to ensure realization of potential gains from externally financed projects.
- Continue to improve the business environment to support export diversification and compensate for the closure of the main gold mine in 2026.

*Source: Kyrgyz authorities and IMF staff estimates (from the provided IMF country DSA content).*

### 1990. The size of 3-year adjustment from program inception is found on the horizontal axis; the

### KYRGYZ REPUBLIC — STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION — SUPPLEMENTARY INFORMATION

### Debt sustainability and classification
- Qualification of the Moderate Category, 2018-2028: thresholds for PV debt/GDP and PV debt/exports use x = 20 percent and y = 40 percent; for debt service/Exports and debt service/revenue thresholds, x = 12 percent and y = 35 percent.
- Space categories shown: Some space, Substantial space, Limited space, Threshold, Baseline.
- Debt service-to-revenue ratio, PV of debt-to-exports ratio, PV of debt-to-GDP ratio, and debt service-to-exports ratio are tracked for 2018–2028 with Baseline, Historical, Projected (Prev. DSA), Projected (Curr. DSA) series represented.

### Key social and economic indicators (selected, 2016–24)
- Population (in millions, 2017): 6.3
- GINI Index (2017): 27.3
- Unemployment rate (official, in percent, 2017): 6.9
- Life expectancy at birth in years (2017): 71.0
- Poverty rate (in percent, national definition, 2016): 25.6
- Adult literacy rate (percent of popul., 2015): 99.5
- GNI per capita (2017, Atlas method, U.S. dollars): 1,130
- Under-five mortality (per 1000 live births, 2017): 20

### Real sector (selected series, levels and rates preserved exactly)
- Nominal GDP (in billions of soms): 2017: 476.35; 2018: 530.55; 2019: 557.15; 2020: 590.86; 2021: 640.66; 2022: 697.97; 2023: 766.08; 2024: 830.99; 2024 (end row): 901.2
- Nominal GDP (in millions of U.S. dollars): 2017: 6,813; 2018: 7,703; 2019: 8,093; 2020: 8,334; 2021: 8,781; 2022: 9,288; 2023: 9,897; 2024: 10,423; later: 10,976
- Real GDP (growth in percent): 2017: 4.3; 2018: 4.7; 2019: 3.5; 2020: 3.8; 2021: 3.4; 2022: 3.8; 2023: 4.6; 2024: 3.4; following: 3.4
- Nongold real GDP (growth in percent): 2017: 4.3; 2018: 5.1; 2019: 3.5; 2020: 3.7; 2021: 3.6; 2022: 3.8; 2023: 4.3; 2024: 4.4; following: 4.4
- GDP per capita (in U.S. dollars): 2017: 1,132; 2018: 1,255; 2019: 1,293; 2020: 1,305; 2021: 1,347; 2022: 1,399; 2023: 1,460; 2024: 1,507; later: 1,557

### Prices, investment, savings, and fiscal balances
- Consumer prices (12-month percent change, eop): 2017: -0.5; 2018: 3.7; 2019: 0.5; 2020: 4.7; 2021: 5.1; 2022: 5.0; 2023: 5.0; 2024: 5.0; following: 5.0
- Investment (in percent of GDP): 2017: 31.6; 2018: 30.7; 2019: 28.3; 2020: 28.0; 2021: 28.1; 2022: 28.2; 2023: 27.9; 2024: 26.5; later: 26.1
- Savings (in percent of GDP): 2017: 20.0; 2018: 24.5; 2019: 19.6; 2020: 18.4; 2021: 20.4; 2022: 21.1; 2023: 21.2; 2024: 18.1; later: 17.3
- General government revenue (in percent of GDP): 2017: 33.1; 2018: 33.4; 2019: 32.8; 2020: 34.5; 2021: 32.5; 2022: 32.6; 2023: 32.5; 2024: 32.3; later: 32.0
- Of which: Tax revenue (percent of GDP): 2017: 19.5; 2018: 19.3; 2019: 20.7; 2020: 21.9; 2021: 21.8; 2022: 21.8; 2023: 21.7; 2024: 21.5; later: 21.2
- Expense (in percent of GDP): 2017: 31.8; 2018: 30.1; 2019: 28.9; 2020: 31.0; 2021: 30.9; 2022: 29.6; 2023: 29.6; 2024: 29.6; later: 29.7
- Overall balance (net lending/borrowing, percent of GDP): 2017: -6.4; 2018: -4.6; 2019: -1.3; 2020: -3.3; 2021: -3.0; 2022: -3.0; 2023: -3.0; 2024: -3.0; later: -3.0
- Primary net lending/borrowing (percent of GDP): 2017: -5.3; 2018: -3.5; 2019: 0.0; 2020: -1.8; 2021: -1.6; 2022: -1.6; 2023: -1.5; 2024: -1.4; later: -1.3
- Total state government debt (percent of GDP): 2017: 59.1; 2018: 58.8; 2019: 56.0; 2020: 56.1; 2021: 55.5; 2022: 55.3; 2023: 54.5; 2024: 54.4; later: 54.4
- Of which domestic debt (percent of GDP): 2017: 4.7; 2018: 5.8; 2019: 8.0; 2020: 8.2; 2021: 8.8; 2022: 9.9; 2023: 10.5; 2024: 11.2; later: 11.7

### Monetary and external sector indicators
- Reserve money (percent change, eop): 2017: 27.6; 2018: 16.9; 2019: 6.3; 2020: 5.5; 2021: 11.2; 2022: 13.7; 2023: 15.8; 2024: 8.9; later: 10.9
- Broad money (percent change, eop): 2017: 14.6; 2018: 17.9; 2019: 5.5; 2020: 8.8; 2021: 11.8; 2022: 14.2; 2023: 16.4; 2024: 9.4; later: 10.9
- Credit to private sector (percent change, eop): 2017: -1.0; 2018: 15.7; 2019: 18.2; 2020: 6.7; 2021: 9.1; 2022: 9.6; 2023: 10.9; 2024: 10.5; later: 10.3
- Gross international reserves (in millions of U.S. dollars): 2017: 1,773; 2018: 1,971; 2019: 1,919; 2020: 1,854; 2021: 1,873; 2022: 1,930; 2023: 2,084; 2024: 2,012; later: 1,862
- Gross reserves (months of next year imports, eop): 2017: 4.2; 2018: 4.3; 2019: 4.0; 2020: 3.8; 2021: 3.6; 2022: 3.5; 2023: 3.6; 2024: 3.4; later: 3.0
- External public debt outstanding (percent of GDP): 2017: 54.4; 2018: 53.0; 2019: 48.0; 2020: 47.9; 2021: 46.7; 2022: 45.4; 2023: 44.0; 2024: 43.2; later: 42.7
- External public debt service-to-export ratio (percent): 2017: 5.9; 2018: 7.1; 2019: 6.9; 2020: 7.7; 2021: 7.1; 2022: 8.0; 2023: 7.9; 2024: 8.2; later: 7.9

### External debt sustainability framework — baseline (selected rows, 2015–38; percent of GDP unless noted)
- External debt (nominal) 2015: 109.4; 2016: 99.7; 2017: 91.0; 2018: 85.0; 2019: 84.7; 2020: 82.3; 2021: 79.7; 2022: 77.1; 2023: 75.4; 2028: 64.6; 2038: 56.6; later rows: 88.3; 75.4
- Public and publicly guaranteed (PPG) external debt: 2015: 63.5; 2016: 54.4; 2017: 53.0; 2018: 48.0; 2019: 47.9; 2020: 46.7; 2021: 45.4; 2022: 44.0; 2023: 43.2; 2028: 37.8; 2038: 37.0; later: 51.2; 43.3
- Change in external debt: 2015: 19.7; 2016: -9.7; 2017: -8.7; 2018: -5.9; 2019: -0.4; 2020: -2.3; 2021: -2.7; 2022: -2.6; 2023: -1.7; 2028: -2.0; 2038: -0.6
- Identified net debt-creating flows: 2015: 11.3; 2016: 1.0; 2017: -4.3; 2018: 5.1; 2019: 1.8; 2020: 0.4; 2021: -0.4; 2022: -1.4; 2023: 1.7; 2028: -1.2; 2038: 0.9; 2027: -1.5; 2028: 0.8
- Non-interest current account deficit: 2015: 14.9; 2016: 10.6; 2017: 5.2; 2018: 7.7; 2019: 8.5; 2020: 6.6; 2021: 6.1; 2022: 5.7; 2023: 7.3; 2028: 6.1; 2038: 7.3; later: 10.4; 7.0
- Exports (percent of GDP): 2015: 37.0; 2016: 35.9; 2017: 34.2; 2018: 32.7; 2019: 32.8; 2020: 31.9; 2021: 31.5; 2022: 31.5; 2023: 29.4; 2028: 28.8; 2038: 27.4
- Imports (percent of GDP): 2015: 73.4; 2016: 70.3; 2017: 66.4; 2018: 68.7; 2019: 68.7; 2020: 67.2; 2021: 67.1; 2022: 66.8; 2023: 66.5; 2028: 63.3; 2038: 64.2
- Net current transfers (negative = inflow): 2015: -24.4; 2016: -27.9; 2017: -30.8; 2018: -29.9; 2019: -29.8; 2020: -30.9; 2021: -31.8; 2022: -32.1; 2023: -31.7; 2028: -30.5; 2038: -31.0; later: -28.7; -30.9
- Net FDI (negative = inflow): 2015: -15.1; 2016: -8.5; 2017: 1.0; 2018: -0.6; 2019: -4.6; 2020: -4.5; 2021: -4.6; 2022: -4.7; 2023: -4.2; 2028: -5.5; 2038: -5.1; later: -7.0; -4.4
- Endogenous debt dynamics contribution: 2015: 11.6; 2016: -1.2; 2017: -10.5; 2018: -2.1; 2019: -2.0; 2020: -1.6; 2021: -1.9; 2022: -2.4; 2023: -1.4; 2028: -1.7; 2038: -1.3
- Residual: 2015: 8.3; 2016: -10.7; 2017: -4.4; 2018: -11.0; 2019: -2.2; 2020: -2.7; 2021: -2.3; 2022: -1.2; 2023: -3.4; 2028: -0.8; 2038: -1.6; later: 1.4; -3.2

### Sustainability indicators (baseline)
- PV of PPG external debt-to-GDP ratio (selected years): 2018: 40.1; 2019: 35.5; 2020: 35.5; 2021: 34.8; 2022: 34.0; 2023: 33.0; 2024: 32.5; 2028: 28.0; 2038: 27.1
- PV of PPG external debt-to-exports ratio (selected years): 2018: 117.2; 2019: 108.3; 2020: 108.3; 2021: 109.2; 2022: 108.0; 2023: 104.9; 2024: 110.4; 2028: 97.2; 2038: 98.8
- PPG debt service-to-exports ratio (percent): 2018: 4.6; 2019: 5.4; 2020: 6.1; 2021: 18.9; 2022: 8.6; 2023: 7.9; 2024: 8.8; 2028: 6.8; 2038: 9.1
- PPG debt service-to-revenue ratio (percent): 2018: 5.1; 2019: 6.2; 2020: 6.7; 2021: 19.9; 2022: 8.7; 2023: 8.0; 2024: 8.9; 2028: 8.7; 2038: 6.8
- Gross external financing need (Million of U.S. dollars): 2018: 670.4; 2019: 784.2; 2020: 1,049.9; 2021: 1,320.4; 2022: 853.3; 2023: 720.3; 2024: 760.1; 2028: 766.7; 2038: 1,039.6; later: 1,123.3; 2,069.6

### Key macroeconomic assumptions (selected)
- Real GDP growth (in percent): 2015: 3.9; 2016: 4.3; 2017: 4.7; 2018: 3.5; 2019: 3.8; 2020: 3.4; 2021: 3.8; 2022: 4.6; 2023: 3.4; 2028: 4.4; 2038: 4.3; later: 3.9
- GDP deflator in US dollar terms (change in percent): 2015: -13.9; 2016: -2.2; 2017: 7.9; 2018: 1.5; 2019: -0.7; 2020: 1.9; 2021: 1.9; 2022: 1.9; 2023: 1.9; 2028: 1.0; 2038: 1.0; later: 3.5; 1.4
- Effective interest rate (percent) 4/: 2015: 1.0; 2016: 0.9; 2017: 1.1; 2018: 1.1; 2019: 1.3; 2020: 1.3; 2021: 1.3; 2022: 1.4; 2023: 1.5; 2028: 1.6; 2038: 1.8; later: 1.0; 1.4
- Growth of exports of G&S (US dollar terms, in percent): 2015: -26.9; 2016: -0.9; 2017: 7.7; 2018: 0.4; 2019: 3.2; 2020: 2.5; 2021: 4.4; 2022: 6.5; 2023: -1.5; 2028: 7.6; 2038: 6.6; later: 4.5; 3.8
- Growth of imports of G&S (US dollar terms, in percent): 2015: -24.8; 2016: -2.3; 2017: 6.8; 2018: 8.8; 2019: 2.9; 2020: 3.0; 2021: 5.6; 2022: 6.1; 2023: 4.7; 2028: 5.0; 2038: 5.9; later: 7.1; 4.9
- Grant element of new public sector borrowing (in percent): 2018–2024 entries include 34.9, 35.0, 35.0, 35.0, 35.0, 35.0, 34.9, 33.0, 33.3, and 34.7 in later year(s) as shown.

### Aid and financing (selected)
- Aid flows (in Million of US dollars): 2015: 143.7; 2016: 144.4; 2017: 171.8; 2018: 222.7; 2019: 326.9; 2020: 212.7; 2021: 282.1; 2022: 291.5; 2023: 300.9; 2028: 357.8; 2038: 530.7
- Grant-equivalent financing (in percent of GDP) (selected): entries include 2.5, 3.4, 1.9, 2.5, 2.5, 2.4, 2.3, 2.2, 2.5, 2.5 (as displayed)
- Grant-equivalent financing (in percent of external financing) (selected): entries include 60.7, 61.0, 49.9, 53.0, 52.4, 52.2, 50.5, 48.8, 53.2 (as displayed)

### Projections and stress testing (selected outcomes)
- Figure 1 and accompanying notes indicate that historical scenario revisions to balance of payments for 2009–13 were incorporated; those revisions did not alter DSA conclusions.
- Stress test results (Figure 1 and Table 3) identify "Most extreme shock is Exports" for PV of debt-to-exports, PV of debt-to-GDP, debt service-to-exports, and debt service-to-revenue in the 2018–28 horizon in presented charts and captions.
- Table 3 sensitivity analysis (PV of PPG external debt-to-GDP baseline and scenarios):
  - Baseline PV of PPG external debt-to-GDP: 2018: 35.5; 2019: 35.5; 2020: 34.8; 2021: 34.0; 2022: 33.0; 2023: 32.5; 2024: 32.2; 2025: 31.1; 2026: 30.0; 2027: 28.9; 2028: 28.0
  - Bound tests and tailored tests present scenario outcomes including B3 (Exports) where PV ratios can rise to 152.3, 230.5, 228.4, 222.4, 234.2, 245.5, 236.9, 224.0, 213.6, 200.5 in various years as shown.
- Table 3 includes debt service-to-exports, debt service-to-revenue, PV of debt-to-exports, and PV of debt-to-GDP panels with baseline, alternative scenarios (A1), bound tests (B1–B6), and tailored tests (C1–C4) entries preserved as presented (including many "n.a." entries where tests do not apply).

### Data revisions and scope of supplement
- Supplement provides information available since issuance of staff report; revisions include:
  - New population data leading to revised historical estimates and projections of GDP per head in Table 1.
  - Revised historical balance of payments data for 2009–13 leading to revised historical scenario in the DSA (revised Figure 1 and Tables 1 and 3 attached).
- The supplement states these revisions did not alter the thrust of staff appraisal or the assessment of debt sustainability.

*Prepared by Middle East and Central Asia Department; June 6, 2019 — Sources: Country authorities; and staff estimates and projections.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1kgzea2019001.pdf_