## 1kgzea2021001

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### Recent impact of COVID-19 and 2020 outcomes
- Output contracted by 8.6 percent in 2020 due to significant contraction in exports, gold mining, industry, tourism, transport, and construction.
- Headline inflation rose to 9.7 percent in 2020, primarily because of imported food price inflation and the exchange rate pass-through.
- Public debt increased by 16.5 percent of GDP to 68 percent.
- The som depreciated by 19 percent against the US$.
- Unemployment and poverty increased in 2020.
- Authorities’ crisis-mitigating measures amounted to 7.2 percent of GDP and included emergency health spending, a food security program, temporary tax deferrals and subsidized loans to small and medium enterprises, liquidity support to banks, deferrals of loan payments, and temporary relaxation of capital and loan provisioning norms.

### Crisis response and emergency measures (details)
- Crisis-mitigating measures: 7.2 percent of GDP.
- Emergency health spending: $16 million (0.2 percent of GDP) for training, PPE, tests, and communications.
- Initial anti-crisis package: $15 million (0.2 percent of GDP) including postponement of tax payments, time-bound exemptions of property and land taxes, and temporary price controls on 11 essential food items.
- Follow-up measures: about $540 million (7 percent of GDP), including temporary tax exemptions for SMEs, a food security program, and subsidized loans to SMEs amounting to $133 million (1.8 percent of GDP).
- NBKR policy actions:
  - Raised its policy rate three times by a cumulative 225 bps to 6.5 percent between early 2020 and April 2021.
  - Injected KGS 4 billion in banks for liquidity support.
  - Allowed a 6-month loan repayment extension for businesses and households.
  - Temporarily relaxed capital and loan provisioning norms and eased macroprudential requirements, including:
    - reducing the monthly liquidity ratio from 45 of 30 percent;
    - removing daily and weekly liquidity ratio requirements;
    - reducing the minimum threshold for mandatory reserve requirements from 80 to 70 percent;
    - reducing risk-weights of corporate and retail loans in FX from 150 to 100 percent;
    - increasing the overdue threshold from 90 to 270 days for creating loan-loss reserves for overdue accrued interest.
  - Supervisory measure: allowed not to downgrade loan classifications if deterioration caused by COVID-induced weakening of borrowers’ financial conditions.

### Outlook and risks
- Growth projections:
  - 2021: 3.8 percent
  - 2022: 6.4 percent
  - Medium term: growth should gradually converge to a potential of 4 percent.
- Current account and reserves:
  - Current account deficit projected at about 6 percent of GDP in 2021 and in the medium term.
  - Gross reserves projected to decline to 3 months of imports by 2025 (text reports decline to about 5 months in 2021 and to 2.8 months by 2026 in other tables).
- Inflation:
  - Annual inflation expected to remain elevated in the coming months; decline to about 7.4 percent by end-2021 and return to central bank’s target range of 5–7 percent thereafter.
- Key downside risks:
  - Slow rollout of vaccines or emergence of new COVID-19 variants could delay recovery to 2022 or beyond.
  - Lower gold prices or weaker remittances could weaken the balance of payments.
  - More depreciation due to external pressures would further raise public debt.
  - Financing constraints could limit fiscal room for countercyclical policies.
  - A rise in nonperforming loans (NPLs) may constrain credit and reduce investment.
- Contingency responses if risks materialize: maintain accommodative macroeconomic policies longer, increase health and social spending, identify contingency financing and expenditure measures, and secure vaccines as soon as possible.

### Executive Board / Directors’ assessment and policy recommendations
- Immediate priorities:
  - Secure vaccines as soon as possible to contain the pandemic and revive economic activity.
  - Maintain accommodative policies in the near term supported by medium-term fiscal consolidation.
- Fiscal guidance:
  - Support the economy in the near term but aim to reduce public debt to below 60 percent of GDP by 2025.
  - To achieve consolidation, reduce the wage bill, goods and services spending, and energy subsidies; improve revenue mobilization and public financial management.
  - If financing becomes a constraint, additional expenditure cuts would be necessary while protecting social spending.
  - Demonstrated commitment to reforms could engender additional concessional donor financing.
- Monetary and financial sector guidance:
  - Monetary policy should remain focused on price stability.
  - Directors welcomed NBKR’s decision to raise the policy rate and stated further tightening would be warranted if second-round inflation pressures emerged.
  - Welcome intention to adopt an inflation targeting framework over the medium term and maintain exchange rate flexibility as a shock absorber.
  - NBKR should remain vigilant to ensure financial sector stability given a possible rise in NPLs; strengthen institutional and operational independence of the central bank.
- Structural reforms and governance:
  - Urged ambitious implementation of structural reforms to achieve higher and more inclusive private sector-led growth.
  - Priorities: strengthen governance including transparency of emergency spending, reduce perceptions of corruption, restore financial viability of the energy sector, improve access to finance, reduce non-tariff trade barriers, improve human capital and female labor force participation, and strengthen the AML/CFT framework.
  - Speedy and transparent resolution of the ongoing commercial dispute with the largest foreign investor is critical to ensure uninterrupted gold production while protecting the environment.

### Fiscal policy: restoring stability and creating fiscal space
- Immediate objective: restore macroeconomic stability by balancing support for the economy and rebuilding buffers to strengthen resilience.
- Medium-term priority: reduce public debt while creating fiscal space for health, education, social assistance, and infrastructure.
- Debt target and consolidation needs:
  - Staff recommended anchoring medium-term fiscal policy to reducing public debt to below 60 percent of GDP by 2025.
  - To meet this target, consolidation measures of about 1 percent of GDP would be needed if taken in 2022 to reduce the overall fiscal deficit to about 3 percent of GDP by 2025; more consolidation would be needed if delayed.
- Priority expenditure measures:
  (i) Reducing the wage bill:
    - General government wage bill is almost 13 percent of GDP and accounts for about 30 percent of government expenditure.
    - Recommended: limit nominal wage growth below inflation; allow headcount reduction through attrition; reform compensation and employment systems; enhance payroll systems; adopt unified wage grid; implement HR module in IFMIS.
  (ii) Streamlining goods and services spending:
    - Containing growth rates to inflation could generate additional savings of 0.4 percent of GDP in 5 years.
  (iii) Reducing energy subsidies:
    - Electricity sector subsidies estimated at about 3 percent of GDP per year (direct and indirect).
    - World Bank estimates sector’s debt to central government about 20 percent of GDP.
    - Recommended: develop medium-term reform plan to optimize costs, strengthen governance, improve revenue generation, and gradually raise residential tariffs paired with targeted social assistance.
  (iv) Raising tax revenue:
    - Revenue loss estimated at about 3.5 percent of GDP due to inefficient tax system, incentives, and exemptions.
    - Recommended: improve VAT refund mechanism, reduce tax exemptions, strengthen tax administration (e-filing, taxpayer registration, risk-based auditing); planned gradual increases of excises on tobacco and petroleum could mobilize further revenue.
- Financing assumptions and contingency:
  - About 40 percent of budget financing assumed from concessional external sources, and 60 percent domestically.
  - If external concessional financing is insufficient, identify non-priority expenditure cuts while preserving health and social spending and high-return public investment; renewed engagement with international partners to mobilize concessional resources.

### Debt dynamics, DSA findings and recommendations
- Public debt developments:
  - Public debt increased sharply in 2020 to 68 percent of GDP (16.4 percentage points higher than in 2019).
  - Drivers in 2020: GDP in US$ declined by 13 percent; KGS depreciated by 19 percent; general government deficit 3.3 percent of GDP.
- DSA indicators:
  - Composite Indicator (CI) index: 3.12 (above threshold of 3.05 for strong debt-carrying capacity).
  - PV of total public debt benchmark: 70 (percent of GDP).
  - Public debt projected to remain around 65 percent of GDP over the medium term.
  - Under a growth shock, PV of debt-to-GDP reaches 70 percent by 2023 and rises thereafter.
  - Debt service-to-revenue (including grants) averages 24 percent in the next five years and is projected to rise in medium term due to more expensive domestic financing.
- External DSA:
  - External PPG debt was 58 percent of GDP at end-2020; private external debt another 29.5 percentage points.
  - PV of PPG external debt increased to 36 percent of GDP in 2020 and projected to decline to about 28 percent by 2026.
  - Stress tests show PV of debt-to-exports breaches threshold during 2023-2028 under extreme export shock.
- Policy recommendations:
  - Maintain fiscal discipline; reduce deficit to under 3.5 percent of GDP in medium term after recovery.
  - Keep new borrowing on concessional terms and strengthen public debt management.
  - Improve public investment management to contain contingent liabilities.
  - Raise spending efficiency via expenditure prioritization and tax administration reforms.
  - Strengthen donor engagement to mobilize concessional financing.

### Social assistance, poverty and targeting
- Poverty increased by 11 percentage points to 31 percent in 2020 as incomes declined.
- Social spending is relatively high at 3.6 percent of GDP but suffers from weak targeting, low coverage, and limited adequacy.
- Key coverage and adequacy metrics (household survey data):
  - Coverage of the lowest income quintile: 17.4 percent (34 percentage points below regional median).
  - Adequacy for bottom quintile: 11.4 percent (regional average 21.6 percent).
  - Bottom three income deciles receive 20.5 percent of total transfers vs. 45.2 percent allocated to top three deciles.
- Policy recommendations:
  - Broaden coverage of social assistance.
  - Shift from categorical to income-based targeting (means-tested).
  - Consolidate social assistance programs to eliminate duplication.

### Monetary policy, exchange rate and central bank governance
- Monetary policy stance:
  - Price stability remains the main objective.
  - NBKR raised policy rate by 50 bps in February 2021 and by another 100 bps in April 2021 (total 150 bps); earlier cumulative 225 bps to 6.5 percent between early 2020 and April 2021.
  - Headline inflation: 9.7 percent in 2020; 10.2 percent in March 2021; 8.7 percent in April 2021 (year-on-year).
  - NBKR will monitor prices, wages, remittances, credit and import growth, prepared to tighten further if inflation continues to increase.
  - Continue providing selective liquidity support to banks if temporary pressures emerge.
- Exchange rate and reserves:
  - Som depreciated by 19 percent against the US$ since March 2020.
  - NBKR sold about $519.7 million during 2020 and another $208 million in 2021 (other figures report $520 million and $208 million sales).
  - Gross international reserves: 2,628 (millions of U.S. dollars) in 2020; projected declines in coming years (e.g., 2,384 in 2021 proj., 2,302 in 2022 proj.; months of imports: 6.2 in 2020; 4.9 in 2021 proj.; 4.5 in 2022 proj.; projected further to 3.3 months by 2025 in some tables).
- Transition to inflation targeting and liquidity management reforms:
  - Staff supported NBKR’s intention to adopt inflation targeting in the medium term.
  - Preconditions: strengthen legal and operational autonomy, build analytical capacity, develop money markets, strengthen bank resolution framework, improve communication, phase out interest rate caps.
  - Technical recommendations: reduce daily limit for reserve requirements, use 7-day note as main liquidity absorption instrument, introduce short-term repos, enhance standing lending facility usage with adequate collateral, and communicate policy clearly.
- Central bank governance reforms:
  - Following 2021 Safeguards Assessment: introduce majority of non-executive Directors on Board; strengthen audit committee composition; wind down non-core operations (divest Keremet Bank and the Guarantee Fund; discontinue lending to non-supervised entities); introduce statutory recapitalization mechanisms.
  - NBKR progress: building internal audit capacity, strengthening foreign reserves operations, establishing unit for enterprise-wide operational risk management.

### Banking sector health, financial access and reform priorities
- Banking sector indicators (Dec-20):
  - NPLs: 10.5 percent (up from 8.3 percent since March 2020).
  - Capital adequacy (regulatory capital to RWA): 24.9 (Dec-20).
  - Loan-loss provisioning/NPLs: 58.9 (Dec-20).
  - Return on equity: 5.5 (Dec-20).
  - Loans/deposits: 95.9 (Dec-20).
  - Loan dollarization: 33.0 (Dec-20); deposit dollarization: 43.4 (Dec-20).
- Access to finance constraints:
  - Credit to the economy: 28 percent of GDP in 2020.
  - Access of firms to bank loans: 25.8 percent.
  - Share of investment financed by banks: 7.2 percent.
  - Proportion of loans requiring collateral: 93.6 percent; collateral-to-loan ratio: 244 percent.
  - Interest rate spreads remain high (~10 percentage points).
  - Policy recommendations:
    - Expand eligible collateral assets and allow non-property guarantees.
    - Strengthen legal framework for collateral enforcement and rule of law.
    - Improve coverage of credit bureaus and adopt new credit scoring technologies.
    - Facilitate entry of new banks and exit of failed ones; improve bank resolution framework.
    - Develop capital markets, fintech, mobile banking and e-wallets to lower costs and spreads.
    - Strengthen deposit insurance and develop hedging instruments to lower FX funding costs.
    - Prepare comprehensive NPL resolution strategy and allow banks time to restore capital if impaired.

### Structural reforms and medium-term growth agenda
- Overarching medium-term objective:
  - Achieve higher and more inclusive growth to absorb the rapidly growing labor force and transition from remittance and aid dependency to a diversified, private sector-led economy underpinned by investment and exports.
- Key bottlenecks and reform priorities:
  - Strengthen governance and reduce corruption; improve transparency (including emergency spending disclosure) and rule of law.
  - Restore financial viability of the energy sector; improve electricity sector performance and cost recovery.
  - Improve access to finance and reduce high collateral requirements.
  - Reduce non-tariff trade barriers; digitalize and simplify customs; improve quality and phytosanitary controls; introduce e-commerce legislation.
  - Improve human capital: raise education quality, reprioritize education spending away from wages toward quality-improving outlays; support female labor force participation and youth employment.
  - Strengthen AML/CFT framework and beneficial ownership transparency.
- Estimated growth impact:
  - Improving business environment and tackling corruption could increase per-capita GDP growth by 0.8 percent a year.
  - Closing 10 percent of the gap in electricity sector performance with median of 81-country sample could raise per capita GDP the following year by 1.1 percent.
  - Improving access to finance, education quality, and energy reforms could boost potential growth by at least two percentage points.

### Key statistics (selected, as reported)
- Population (2021): 6.6 (millions)
- GINI Index (2019): 0.36
- Life expectancy at birth (2019): 71.5 (years)
- Poverty rate (2019, national definition): 20.1 (percent)
- Per capita GDP (2019, U.S. dollars): 1,430
- Nominal GDP (millions of U.S. dollars): 7,701 (2017); 8,276 (2018); 8,870 (2019); 7,741 (2020); 8,027 (2021 proj.); 8,723 (2022 proj.)
- Real GDP growth (percent): 4.7 (2017); 3.8 (2018); 4.6 (2019); -8.6 (2020); 3.8 (2021 proj.); 6.4 (2022 proj.)
- Consumer prices (12-month percent change, eop): 3.7 (2017); 0.5 (2018); 3.1 (2019); 9.7 (2020); 7.4 (2021 proj.); 5.6 (2022 proj.)
- Investment (percent of GDP): 30.7 (2017); 27.7 (2018); 26.4 (2019); 18.7 (2020); 25.2 (2021 proj.); 25.6 (2022 proj.)
- Savings (percent of GDP): 24.5 (2017); 15.7 (2018); 14.3 (2019); 23.2 (2020); 19.4 (2021 proj.); 19.4 (2022 proj.)
- Overall fiscal balance (percent of GDP): -3.7 (2017); -0.6 (2018); -0.1 (2019); -3.3 (2020); -4.2 (2021 proj.); -4.0 (2022 proj.)
- Total state government debt (percent of GDP): 58.8 (2017); 54.8 (2018); 51.6 (2019); 68.0 (2020); 67.1 (2021 proj.); 65.1 (2022 proj.)
- Current account balance (percent of GDP): -6.2 (2017); -12.1 (2018); -12.1 (2019); 4.5 (2020); -5.8 (2021 proj.); -6.2 (2022 proj.)
- Exports of goods and services (millions of U.S. dollars): 2,638 (2017); 2,746 (2018); 3,126 (2019); 2,432 (2020); 2,572 (2021 proj.); 3,216 (2022 proj.)
- Imports of goods and services (millions of U.S. dollars): 5,113 (2017); 5,913 (2018); 5,690 (2019); 4,000 (2020); 5,113 (2021 proj.); 5,819 (2022 proj.)
- Gross international reserves (millions of U.S. dollars): 1,971 (2017); 1,919 (2018); 2,176 (2019); 2,628 (2020); 2,384 (2021 proj.); 2,302 (2022 proj.)
- Gross reserves (months of next year imports, eop): 4.0 (2017); 4.0 (2018); 6.5 (2019); 6.2 (2020); 4.9 (2021 proj.); 4.5 (2022 proj.)

*Source: KYRGYZ REPUBLIC STAFF REPORT FOR THE 2021 ARTICLE IV CONSULTATION.*

### 8.6 percent in 2020 due to significant contraction in exports, gold mining, industry, tourism,

### 1kgzea2021001 - 8.6 percent in 2020 due to significant contraction in exports, gold mining, industry, tourism,

### Recent impact of COVID-19 and 2020 outcomes
- Output contracted by 8.6 percent in 2020 due to significant contraction in exports, gold mining, industry, tourism, transport, and construction.
- Headline inflation rose to 9.7 percent in 2020, primarily because of imported food price inflation and the exchange rate pass-through.
- Public debt increased by 16.5 percent of GDP to 68 percent.
- The som depreciated by 19 percent against the US$.
- Unemployment and poverty increased in 2020.
- Authorities’ crisis-mitigating measures amounted to 7.2 percent of GDP and included:
  - emergency health spending,
  - a food security program,
  - temporary tax deferrals and subsidized loans to small and medium enterprises,
  - liquidity support to banks,
  - deferrals of loan payments,
  - temporary relaxation of capital and loan provisioning norms.

### Outlook and risks
- Growth projections:
  - 2021: 3.8 percent
  - 2022: 6.4 percent
  - Medium term: current account deficit projected at about 6 percent of GDP in 2021 and in the medium term.
- Recovery drivers: more favorable global outlook, higher gold production, gradual rebound in tourism, transportation and related services.
- Inflation: annual inflation will remain elevated in the coming months but gradually return to the central bank’s target range of 5–7 percent.
- Key downside risks:
  - slow rollout of vaccines or emergence of new COVID-19 variants could delay the recovery to 2022 or beyond,
  - lower gold prices or weaker remittances could weaken the balance of payments,
  - more depreciation due to external pressures would further raise public debt,
  - financing constraints could limit fiscal room for countercyclical policies.
- With macroeconomic buffers largely exhausted in 2020, policymakers will face tighter constraints and less room for policy flexibility.

### Executive Board and Directors’ assessment and recommendations
- Immediate priorities:
  - Secure vaccines as soon as possible to contain the pandemic and revive economic activity.
  - Maintain accommodative policies in the near term supported by medium-term fiscal consolidation.
- Fiscal policy guidance:
  - Support the economy in the near term but aim to reduce public debt to below 60 percent of GDP by 2025.
  - To achieve consolidation, reduce the wage bill, goods and services spending, and energy subsidies; improve revenue mobilization and public financial management.
  - If financing becomes a constraint, additional expenditure cuts would be necessary while protecting social spending.
  - Demonstrated commitment to reforms could engender additional concessional donor financing.
- Monetary and financial sector guidance:
  - Monetary policy should remain focused on price stability.
  - Given the recent increase in inflation, Directors welcomed the National Bank of Kyrgyz’s decision to raise the policy rate and stated further tightening would be warranted if second-round inflation pressures emerged.
  - Welcome intention to adopt an inflation targeting framework over the medium term and maintain exchange rate flexibility as a shock absorber.
  - NBKR should remain vigilant to ensure financial sector stability given a possible rise in NPLs; strengthen institutional and operational independence of the central bank.
- Structural reforms and governance:
  - Urged ambitious implementation of structural reforms to achieve higher and more inclusive private sector-led growth.
  - Priorities: strengthen governance including transparency of emergency spending, reduce perceptions of corruption, restore financial viability of the energy sector, improve access to finance, reduce non-tariff trade barriers, improve human capital and female labor force participation, and strengthen the AML/CFT framework.
  - Political stability, policy predictability, and a market-friendly business environment are critical.
  - Speedy and transparent resolution of the ongoing commercial dispute with the largest foreign investor is critical to ensure uninterrupted gold production while protecting the environment.

### Key statistics (selected, as reported)
- Population (2021): 6.6 (millions)
- GINI Index (2019): 0.36
- Life expectancy at birth (2019): 71.5 (years)
- Poverty rate (2019, national definition): 20.1 (percent)
- Per capita GDP (2019, U.S. dollars): 1,430
- Nominal GDP (in millions of U.S. dollars): 7,701 (2017); 8,276 (2018); 8,870 (2019); 7,741 (2020); 8,027 (2021 proj.); 8,723 (2022 proj.)
- Real GDP growth (percent): 4.7 (2017); 3.8 (2018); 4.6 (2019); -8.6 (2020); 3.8 (2021 proj.); 6.4 (2022 proj.)
- Consumer prices (12-month percent change, eop): 3.7 (2017); 0.5 (2018); 3.1 (2019); 9.7 (2020); 7.4 (2021 proj.); 5.6 (2022 proj.)
- Investment (percent of GDP): 30.7 (2017); 27.7 (2018); 26.4 (2019); 18.7 (2020); 25.2 (2021 proj.); 25.6 (2022 proj.)
- Savings (percent of GDP): 24.5 (2017); 15.7 (2018); 14.3 (2019); 23.2 (2020); 19.4 (2021 proj.); 19.4 (2022 proj.)
- Overall fiscal balance (net lending/borrowing, percent of GDP): -3.7 (2017); -0.6 (2018); -0.1 (2019); -3.3 (2020); -4.2 (2021 proj.); -4.0 (2022 proj.)
- Total state government debt (percent of GDP): 58.8 (2017); 54.8 (2018); 51.6 (2019); 68.0 (2020); 67.1 (2021 proj.); 65.1 (2022 proj.)
- Current account balance (percent of GDP): -6.2 (2017); -12.1 (2018); -12.1 (2019); 4.5 (2020); -5.8 (2021 proj.); -6.2 (2022 proj.)
- Exports of goods and services (millions of U.S. dollars): 2,638 (2017); 2,746 (2018); 3,126 (2019); 2,432 (2020); 2,572 (2021 proj.); 3,216 (2022 proj.)
- Imports of goods and services (millions of U.S. dollars): 5,113 (2017); 5,913 (2018); 5,690 (2019); 4,000 (2020); 5,113 (2021 proj.); 5,819 (2022 proj.)
- Gross international reserves (millions of U.S. dollars): 1,971 (2017); 1,919 (2018); 2,176 (2019); 2,628 (2020); 2,384 (2021 proj.); 2,302 (2022 proj.)
- Gross reserves (months of next year imports, eop): 4.0 (2017); 4.0 (2018); 6.5 (2019); 6.2 (2020); 4.9 (2021 proj.); 4.5 (2022 proj.)

*Source: KYRGYZ REPUBLIC STAFF REPORT FOR THE 2021 ARTICLE IV CONSULTATION.*

### 4.      The authorities made significant efforts to protect  public health and the economy

### 4.      The authorities made significant efforts to protect public health and the economy

### Crisis response and emergency measures
- Crisis-mitigating measures amounted to 7.2 percent of GDP, including emergency health spending, stepped-up food security program for the vulnerable, and temporary tax deferrals and subsidized loans to support small and medium enterprises (SMEs).
- Emergency health spending was $16 million (0.2 percent of GDP) to provide training for health-care workers, procure personal protective equipment and medical tests, and launch a communication plan on virus containment.
- An initial anti-crisis package of $15 million (0.2 percent of GDP) included postponement of tax payments, time-bound exemptions of property and land taxes, and temporary price controls on 11 essential food items.
- Follow-up measures totaled about $540 million (7 percent of GDP), including:
  - Temporary tax exemptions for SMEs.
  - A food security program to support vulnerable groups.
  - Subsidized loans to SMEs amounting to $133 million (1.8 percent of GDP).
- The National Bank of the Kyrgyz Republic (NBKR) policy actions:
  - Raised its policy rate three times by a cumulative 225 bps to 6.5 percent between early 2020 and April 2021.
  - Injected KGS 4 billion in banks to provide liquidity support.
  - Allowed a 6-month loan repayment extension for businesses and households.
  - Temporarily relaxed capital and loan provisioning norms and eased macroprudential requirements, including:
    - reducing the monthly liquidity ratio from 45 of 30 percent;
    - removing daily and weekly liquidity ratio requirements;
    - reducing the minimum threshold for mandatory reserve requirements from 80 to 70 percent;
    - reducing risk-weights of corporate and retail loans in FX from 150 to 100 percent;
    - increasing the overdue threshold from 90 to 270 days for creating loan-loss reserves for overdue accrued interest.
  - Other supervisory measures: allowing not to downgrade loan classifications if caused by COVID-induced weakening of borrowers’ financial conditions.

### Impact on activity, prices, external sector, and public finances
- Output contracted by 8.6 percent in 2020 after about 4 percent annual growth in the preceding two years.
- Sectoral declines: exports, gold mining, industry, tourism, transport and construction.
- Headline inflation rose to 9.7 percent in 2020 from 3.1 percent in 2019, primarily due to imported food price inflation and exchange rate pass-through.
- Public debt increased by 16.5 percent of GDP to 68 percent of GDP.
- Fiscal balance and financing in 2020:
  - Fiscal deficit was 3.3 percent of GDP in 2020 compared to 0.1 percent of GDP in 2019.
  - Donor financing fell short by 2.4 percent of GDP; domestic financing fell short by 2.4 percent of GDP due to high costs after political events in October.
- Balance of payments and external sector:
  - Overall balance of payments worsened from a $47 million surplus in 2019 to a $126 million deficit in 2020.
  - Non-gold exports declined by 14 percent; tourism declined by 77 percent.
  - Remittances fell sharply early in the crisis but subsequently recovered and exceeded the 2019 level.
  - Imports contracted by 27 percent.
  - Current account moved to a surplus of 4.5 percent of GDP in 2020.
  - Gross international reserves declined marginally from 6.5 to 6.2 months of prospective imports.

### Projections and medium-term outlook
- Growth projections:
  - Projected growth of 3.8 percent in 2021 and 6.4 percent in 2022, barring a resurgence of the pandemic.
  - Growth should gradually converge to a potential of 4 percent in the medium term.
- Inflation:
  - Annual inflation expected to remain elevated in the coming months due to base effects, decline to about 7.4 percent by end-2021, and return to the central bank’s target range of 5–7 percent thereafter.
- External and reserve outlook:
  - Current account deficit projected at about 6 percent of GDP in 2021 and should remain at that level over the medium term.
  - Gross reserves projected to decline to 3 months of imports by 2025.
- Fiscal outlook:
  - Automatic stabilizers and phasing out of emergency spending expected to reduce the overall budget deficit to about 3.2 percent of GDP by 2025, bringing public debt to about 64 percent of GDP.
  - The projected general government budget deficit of 4.2 percent of GDP in the near term will reduce public debt by about 1 percent of GDP while maintaining fiscal stimulus.
  - About 40 percent of budget financing is assumed to be mobilized from concessional external sources, and 60 percent domestically.
  - Government paper currently accounts for 8 percent of banking sector assets.

### Risks and contingency considerations
- Key downside risks outlined:
  - Slower than expected vaccine rollout or emergence of new COVID-19 variants could delay recovery to 2022 or beyond.
  - Lower gold prices or weaker remittances could weaken the balance of payments.
  - More depreciation due to external pressures would further raise public debt.
  - Financing constraints could limit fiscal room for countercyclical policies.
  - A rise in nonperforming loans (NPLs) may constrain credit and reduce investment.
- If risks materialize, recommended responses include maintaining accommodative macroeconomic policies longer, increasing health and social spending, and identifying contingency measures to address financing constraints.
- Importance of securing vaccines as soon as possible emphasized.

### Fiscal policy: restoring stability and creating fiscal space
- Immediate objective: restore macroeconomic stability by balancing support for the economy and rebuilding buffers to strengthen resilience.
- Medium-term priority: reduce public debt while creating fiscal space for health, education, social assistance, and infrastructure.
- Debt sustainability and targets:
  - Staff’s updated DSA: public debt remains sustainable with a moderate risk of distress.
  - Public debt at 68 percent of GDP leaves limited room for future downturn response.
  - Staff recommended anchoring medium-term fiscal policy to reducing public debt to below 60 percent of GDP by 2025.
  - To meet this target, consolidation measures of about 1 percent of GDP would be needed if taken in 2022 to reduce the overall fiscal deficit to about 3 percent of GDP by 2025. More consolidation would be needed if delayed.
- Policy options and recommendations (priority given to expenditure measures):
  (i) Reducing the wage bill:
    - General government wage bill is almost 13 percent of GDP and accounts for about 30 percent of government expenditure.
    - Recommended actions: limit nominal wage growth below inflation, allow headcount reduction through attrition, reform public sector compensation and employment system, enhance public sector payroll system, adopt a unified wage grid, modernize legal framework for public service remuneration, set up a comprehensive public employment and compensation database, implement a human resource management module in IFMIS.
    - The Fund will provide technical assistance on rationalizing the wage bill and strengthening PFM.
  (ii) Streamlining goods and services spending:
    - Containing growth rates of spending on goods and services to inflation could generate additional savings of 0.4 percent of GDP in 5 years.
  (iii) Reducing energy subsidies:
    - Electricity sector subsidies are estimated at about 3 percent of GDP per year (direct and indirect).
    - World Bank estimates the sector’s debt to the central government amounts to about 20 percent of GDP.
    - Residential tariffs are well below cost-recovery; commercial tariffs are above cost-recovery.
    - Recommended: develop a medium-term reform plan (with World Bank support) to optimize costs, strengthen governance and accountability, improve revenue generation, and gradually raise residential tariffs paired with targeted social assistance. Address losses in the heating sector.
  (iv) Raising tax revenue:
    - Revenue loss estimated at about 3.5 percent of GDP, mainly due to an inefficient tax system, incentives, and exemptions.
    - Recommended measures: improve the VAT refund mechanism, improve taxpayer segmentation, reduce tax exemptions, strengthen tax administration (e-filing, taxpayer registration, risk-based auditing).
    - Planned gradual increases of excises on tobacco and petroleum could mobilize further revenue.
    - Consideration of improving sales tax and VAT as part of tax code modernization.
    - Authorities have requested IMF technical assistance to support tax modernization and compliance efforts.
- Financing risks and priorities if external concessional financing is insufficient:
  - Identify non-priority expenditure cuts while preserving health and social spending, and public investment projects with the highest expected social and economic returns.
  - Renewed engagement with international partners to demonstrate credible commitment to reforms would help mobilize concessional resources, as higher domestic financing may increase borrowing costs and crowd out private credit.

*Source: 1kgzea2021001 - 4.      The authorities made significant efforts to protect public health and the economy (IMF).*

### 12.      The authorities and staff agreed that social assistance needs to be strengthened.

### 12.      The authorities and staff agreed that social assistance needs to be strengthened.

### Social assistance: findings and weaknesses
- Poverty increased by 11 percentage points to 31 percent in 2020 as incomes declined.
- Unemployment rose and may increase further this year.
- Social spending is relatively high at 3.6 percent of GDP but does not translate into better social and poverty outcomes due to:
  - weak targeting,
  - low coverage,
  - limited adequacy.
- Coverage and adequacy metrics (household survey data):
  - Coverage of the lowest income quintile is 17.4 percent, 34 percentage points below the regional median.
  - Adequacy for the bottom quintile is 11.4 percent, compared to the regional average of 21.6 percent.
  - The bottom three income deciles receive 20.5 percent of the total, compared to 45.2 percent allocated to the top three deciles.
- Overlaps between various social programs result in resource misallocation and administrative burdens.

### Social assistance: policy recommendations
- Broaden the coverage of social assistance.
- Shift from categorical to income-based targeting.
- Consolidate social assistance programs to eliminate duplication.

### Public financial management (PFM) progress and priorities
- Government reorganization merged the Ministry of the Economy and the Ministry of Finance, including tax and customs authorities, to:
  - eliminate fragmentation of the budget process,
  - strengthen reporting lines,
  - enhance accountability.
- Plans through streamlining and digitalization to improve:
  - budget planning and execution,
  - accounting and financial reporting,
  - payroll management.
- IMF support: extensive technical assistance on program-based budgeting and implementation of FMIS.
- Debt management recommendations:
  - Strengthen the published debt management strategy by introducing medium and long-term debt projections, borrowing plans and risk assessments.
  - Authorities plan to implement the World Bank’s Debt Management Performance Assessment (DeMPA).

### Monetary policy and inflation management
- Price stability remains the main objective.
- Credit growth through February 2021 was 12 percent y-o-y, including mortgages, industry, trade, consumer credit, and transport.
- Headline inflation reached 10.2 percent in March 2021, primarily due to exchange rate pass-through and imported food prices.
- NBKR policy actions:
  - Raised the policy rate by 50 basis points in February 2021 and by another 100 basis points in April 2021 (total 150 basis points).
  - Will monitor food and non-food prices, wages, remittance flows, credit and import growths, and other indicators of demand pressures; prepared to tighten policy further if inflation continues to increase.
  - Continue providing liquidity support selectively to banks if they experience temporary liquidity pressures.
- Staff view: preserving institutional and operational independence of the central bank is critical; clear communication would help anchor inflation expectations.

### Exchange rate policy and reserves
- NBKR remains committed to exchange rate flexibility as a buffer against external shocks.
- The som depreciated by 19 percent against the US dollar since March 2020.
- NBKR interventions:
  - Sold about $520 million during 2020 and another $208 million in 2021.
- International reserves are projected to decline further in the coming years, primarily due to a weaker financial account.
- Authorities and mission agreement:
  - Preserve exchange rate flexibility and use FX interventions to smooth volatility.
  - Exchange rate alone cannot address structural balance of payments weaknesses; deep structural reforms and mobilizing additional concessional foreign financing are needed.

### Transition toward inflation targeting and liquidity management reforms
- Staff supported NBKR’s intention to adopt inflation targeting in the medium term.
- Preconditions and reforms identified:
  - Strengthen central bank’s legal and operational autonomy.
  - Build analytical capacity and develop money markets to improve monetary transmission.
  - Strengthen the bank resolution framework and improve communication.
  - Gradually phase out transitional arrangement of interest rate caps.
- Technical recommendations (Fund TA):
  - Reduce the daily limit for reserve requirements.
  - Use the 7-day note as the main liquidity absorption instrument.
  - Introduce short-term repos.
  - Enhance usage of the standing lending facility with adequate collateral.
  - Clearly communicate monetary and FX policy decisions.
- Mission offered additional Fund TA on liquidity management and the Banking Law.

### Central bank governance and non-core operations
- Following the 2021 Safeguards Assessment, agreed measures include:
  - Introduce a majority of non-executive Directors on the Board.
  - Strengthen rules on the composition of the audit committee.
  - Gradually wind down NBKR’s non-core central bank operations (divest ownership in Keremet Bank and the Guarantee Fund, discontinue lending to non-supervised entities).
  - Introduce statutory mechanisms for recapitalization of the NBKR.
- NBKR progress: building internal audit capacity, strengthening foreign reserves operations, establishing a stand-alone unit for enterprise-wide operational risk management.

### Banking sector health and risks
- Sector assessment:
  - NPLs increased from 8.3 to 10.5 percent since March 2020.
  - Banks’ profitability and capital ratios have declined somewhat.
  - Capital adequacy ratio nearly 25 percent at end-2020.
- Most affected loan sectors: trade, services, construction, transport, agriculture, and mortgages.
- Stress tests indicate resilience to severe shocks thanks to strong capital buffers.
- Policy/operational priorities:
  - Continued supervisory vigilance and comprehensive stress-testing.
  - Maintain sound accounting, reporting, and provisioning standards.
  - Prepare a comprehensive NPL resolution strategy.
  - Allow banks time to restore capital if impaired.

### Contingency policy response in a downside (prolonged pandemic) scenario
- If pandemic persists, weaker growth and worsening external and fiscal accounts could warrant policy recalibration:
  - 2021 fiscal deficit could be allowed to widen more to support affected sectors and vulnerable households.
  - Financing constraints and higher public debt would limit room for deficit expansion; require expenditure reallocation from lower priority spending while prioritizing health and social spending.
  - Renewed efforts to mobilize additional concessional financing, including advancing growth-friendly reforms (improving business climate, stepping up fight against corruption).
  - NBKR actions: maintain monetary stimulus and liquidity support to banks for longer, preserve exchange rate flexibility and use FX interventions to prevent sharp volatility (not defend any particular level), and apply macro-prudential tools flexibly.
- Assessment: the additional impact from a protracted pandemic is judged moderate given the already significant GDP contraction in 2020.

### Medium-term structural reforms for growth and job creation
- Need: higher and more inclusive growth to absorb rapidly growing labor force; prevent rising unemployment (especially youth), accelerated outmigration, and widening income gap with emerging markets.
- Policy objective: transition from remittance and aid dependency to private sector-led growth underpinned by investment and exports.
- Reform areas and agreed measures:
  - Governance:
    - Anti-Corruption Strategy to enhance civil society role, transparency and accountability of public institutions, and trust in courts and law enforcement.
    - Improve governance and transparency of SOEs and optimize government ownership, including divestiture; institutional oversight by State Property Fund (SPF); SOEs required to provide annual audited financial statements to the SPF (mission recommended publishing these statements).
    - Further strengthen AML/CFT regime: strengthen risk-based supervision, monitor cross-border activities, implement remaining recommendations from the EAG assessment.
    - Publish comprehensive asset and income declarations by senior public officials and investigate illicit enrichment.
  - Transparency of emergency spending:
    - Revised procurement law (enacted January 2021) requires disclosure of beneficial owners in all public contracts.
    - Staff reiterated need to publish full contracts with identities of beneficial owners and audit reports for emergency spending as committed in Letters of Intent under the RFI/RCF.
    - Authorities committed to disclose beneficial ownership information in all future procurement contracts and to publish audit reports of all public procurement contracts for 2020 by end-September.
    - Improve efficiency and transparency of complaints handling in public procurement.
    - SOEs are subject to the public procurement law.
  - Access to finance:
    - Expand coverage of credit registries and improve lender access to borrower information.
    - Encourage entry of new banks and strengthen bank resolution framework to facilitate speedy exit of failed banks.
    - Develop a competition law, automate information exchanges between financial institutions and with the tax authority, and develop capital markets and fintech.
    - NBKR modified provisions related to permissible collateral and property appraisal; NBKR efforts to improve financial literacy are welcome.
  - Access to export markets:
    - Address non-tariff barriers: underdeveloped infrastructure, inadequate quality and phytosanitary controls, lengthy customs procedures.
    - Implement WTO agreements, digitalize and simplify customs procedures, improve quality controls, eliminate duplication of phytosanitary inspections, introduce e-commerce legislation and supportive infrastructure.
  - Education and skills upgrading:
    - Kyrgyz Republic spends more per capita on education than peers but underperforms on school enrollment and test scores.
    - Most education spending is on wages; outlays to improve quality (modern teaching, new learning strategies, textbooks, other materials) are small.
    - Reprioritize the education budget and develop an education reform strategy.
    - Improve integration of women in the labor market and support youth employment (childcare, flexible work arrangements, better access to finance).

### Staff appraisal: macroeconomic impact and policy guidance
- 2020 impacts:
  - Real GDP contracted by 8.6 percent in 2020.
  - Inflation and public debt increased, jobs were lost, and poverty increased.
- Authorities’ response: emergency health spending, food security program, comprehensive macroeconomic policies, supported by international financial assistance.
- Outlook and risks:
  - Economy expected to recover in 2021–22, but uncertainty is high (slow vaccine rollout or new variants could delay recovery beyond 2022).
  - Securing vaccines and mass-vaccination campaign are critical.
  - If downside risks materialize, accommodative macroeconomic policies and increased health and social spending will be needed; macroeconomic buffers largely exhausted.
- Fiscal guidance:
  - Continue fiscal support in near term and rebuild buffers in medium term.
  - Moderately expansionary stance in 2021 to maintain stimulus while preserving some fiscal space.
  - If sufficient financing cannot be mobilized, identify contingency expenditure cuts while protecting the vulnerable.
  - Medium-term anchor: reduce public debt to below 60 percent of GDP by 2025; consolidation measures of about 1 percent of GDP if taken in 2022.
  - Suggested consolidation measures: optimize public sector wage bill, reduce goods and services spending and energy subsidies, and improve revenue mobilization.
  - Demonstrated commitment to reforms would engender additional concessional donor financing and reduce domestic borrowing needs.
- Monetary guidance:
  - NBKR should continue to focus on controlling inflation and anchoring inflation expectations; monitor demand indicators and be prepared to tighten if second-round inflation pressures emerge.
  - Provide selective liquidity support to banks facing temporary liquidity difficulties.
  - Maintain exchange rate flexibility and phase out central bank non-core operations and ownership of entities it supervises.
  - Preserve institutional and operational independence of the central bank as critical for efficient monetary policy and macroeconomic stability.

*Source: IMF staff report excerpt.*

### 30.      The overarching challenge in the medium term is to achieve higher and more inclusive

### 1kgzea2021001 - 30.      The overarching challenge in the medium term is to achieve higher and more inclusive

### Medium-term challenge and objective
- "The overarching challenge in the medium term is to achieve higher and more inclusive growth to absorb the rapidly growing labor force."
- Transform from "an economy characterized by remittance and aid dependency to a   more diversified and private sector-led economy underpinned by investment  and exports."

### Role of the state
- "The state has an important role to play in this process by providing political stability, policy predictability, quality healthcare, education and infrastructure, and a market-friendly business environment."

### Key bottlenecks and structural reforms needed
- "To address key bottlenecks to growth, structural reforms are needed to strengthen governance and reduce corruption, restore financial viability  of the energy sector, improve access to finance, reduce non-tariff  trade barriers, and improve human  capital."

*Source: 1kgzea2021001 - 30.      The overarching challenge in the medium term is to achieve higher and more inclusive*

### 31.      Staff recommends that the next Article IV consultation is held on a standard 12-month

### 1kgzea2021001 - 31. Staff recommends that the next Article IV consultation is held on a standard 12-month cycle.

### Recommendation
- Staff recommends that the next Article IV consultation is held on a standard 12-month cycle.

### Key constraints to growth and structural findings
- Governance indicators have remained at a low level.
- For firms, governance constraints top all factors.
- Collateral requirements are high (Kyrgyz Republic: Collateral, 2019 — proportion of loans requiring collateral 99.1 percent; value of collateral needed of the loan amount 289.5 percent for Manufacturing and 201.7 percent for Services).
- Bank credit to the private sector is low and spreads high.
- Education spending is high but achievements are low; quality of education is a concern for firms (Student Performance and Education Spending: latest available TIMSS or PISA scores; Expenditure on Education (% of GDP)).
- Overall performance of the Kyrgyz electricity sector is weak in cross-country comparison and showed only modest improvement over 1990–2015.

### Selected social and demographic indicators (latest available)
- Population (in millions, 2021): 6.6
- GINI Index (2019): 0.36
- Unemployment rate (official, in percent, 2019): 3.0
- Life expectancy at birth in years (2019): 71.5
- Poverty rate (in percent, national definition, 2019): 20.1
- Adult literacy rate (percent of popul., 2018): 99.6
- Per capita GDP (2019, U.S. dollars): 1,430
- Under-five mortality (per 1000 live births, 2019): 17.5

### Key macroeconomic projections and indicators (selected)
- Nominal GDP (in billions of soms): 2017: 530.5; 2018: 569.4; 2019: 619.1; 2020: 598.3; 2021: 679.9; 2022: 768.3; 2023: 850.6; 2024: 928.3; 2025 (Proj.): 1,013.6
- Nominal GDP (in millions of U.S. dollars): 2017: 7,701; 2018: 8,276; 2019: 8,870; 2020: 7,741; 2021: 8,027; 2022: 8,723; 2023: 9,376; 2024: 9,934; 2025 (Proj.): 10,531
- Real GDP growth (growth in percent): 2017: 4.7; 2018: 3.8; 2019: 4.6; 2020: -8.6; 2021: 3.8; 2022: 6.4; 2023: 4.4; 2024 (Proj.): 4.0; 2025 (Proj.): 4.0
- Nongold real GDP growth (percent): 2017: 5.1; 2018: 3.7; 2019: 4.1; 2020: -9.0; 2021: 4.6; 2022: 5.5; 2023: 4.5; 2024 (Proj.): 4.1; 2025 (Proj.): 4.1
- Consumer prices (12-month percent change, eop): 2017: 3.7; 2018: 0.5; 2019: 3.1; 2020: 9.7; 2021: 7.4; 2022: 5.6; 2023: 5.1; 2024 (Proj.): 5.1; 2025 (Proj.): 5.0
- Investment (in percent of GDP): 2017: 30.7; 2018: 27.7; 2019: 26.4; 2020: 18.7; 2021: 25.2; 2022: 25.6; 2023: 26.6; 2024 (Proj.): 28.0; 2025 (Proj.): 28.9
- Savings (in percent of GDP): 2017: 24.5; 2018: 15.7; 2019: 14.3; 2020: 23.2; 2021: 19.4; 2022: 19.4; 2023: 20.5; 2024 (Proj.): 21.9; 2025 (Proj.): 22.8
- Savings-investment balance (percent of GDP): 2017: -6.2; 2018: -12.1; 2019: -12.1; 2020: 4.5; 2021: -5.8; 2022: -6.2; 2023: -6.1; 2024 (Proj.): -6.1; 2025 (Proj.): -6.2
- General government revenue (in percent of GDP): 2017: 33.3; 2018: 32.5; 2019: 32.4; 2020: 31.0; 2021: 31.1; 2022: 31.0; 2023: 30.9; 2024 (Proj.): 30.8; 2025 (Proj.): 30.8
- General government expense (in percent of GDP): 2017: 29.2; 2018: 27.9; 2019: 27.4; 2020: 30.1; 2021: 29.4; 2022: 29.2; 2023: 28.7; 2024 (Proj.): 28.6; 2025 (Proj.): 28.4
- Overall balance (net lending/borrowing, percent of GDP): 2017: -3.7; 2018: -0.6; 2019: -0.1; 2020: -3.3; 2021: -4.2; 2022: -4.0; 2023 (Proj.): -3.4; 2024 (Proj.): -3.4; 2025 (Proj.): -3.2
- Total state government debt (in percent of GDP): 2017: 58.8; 2018: 54.8; 2019: 51.6; 2020: 68.0; 2021: 67.1; 2022: 65.1; 2023: 63.5; 2024 (Proj.): 63.6; 2025 (Proj.): 64.3
- Credit to private sector (in percent of GDP): 2017: 20.8; 2018: 22.9; 2019: 24.2; 2020: 28.2; 2021: 25.3; 2022: 25.6; 2023: 25.6; 2024 (Proj.): 25.8; 2025 (Proj.): 26.0
- Current account balance (percent of GDP): 2017: -6.2; 2018: -12.1; 2019: -12.1; 2020: 4.5; 2021: -5.8; 2022: -6.2; 2023: -6.1; 2024 (Proj.): -6.1; 2025 (Proj.): -6.2
- Exports of goods and services (in millions of U.S. dollars): 2017: 2,638; 2018: 2,746; 2019: 3,126; 2020: 2,432; 2021: 2,572; 2022: 3,216; 2023: 3,409; 2024 (Proj.): 3,579; 2025 (Proj.): 3,772
- Imports of goods and services (in millions of U.S. dollars): 2017: 5,113; 2018: 5,913; 2019: 5,690; 2020: 4,000; 2021: 5,113; 2022: 5,819; 2023: 6,085; 2024 (Proj.): 6,335; 2025 (Proj.): 6,626
- Gross international reserves (in millions of U.S. dollars): 2017: 1,971; 2018: 1,919; 2019: 2,176; 2020: 2,628; 2021: 2,384; 2022: 2,302; 2023: 2,202; 2024 (Proj.): 2,065; 2025 (Proj.): 1,924
- Gross reserves (months of next year imports, eop): 2017: 4.0; 2018: 4.0; 2019: 6.5; 2020: 6.2; 2021: 4.9; 2022: 4.5; 2023: 4.2; 2024 (Proj.): 3.7; 2025 (Proj.): 3.3
- External public debt outstanding (in percent of GDP): 2017: 53.0; 2018: 47.0; 2019: 43.3; 2020: 58.3; 2021: 56.8; 2022: 52.6; 2023: 49.4; 2024 (Proj.): 46.9; 2025 (Proj.): 44.7

### Fiscal sector (selected)
- State government revenues (in millions of soms): 2017: 149,490; 2018: 152,014; 2019: 167,094; 2020: 152,149; 2021: 189,229; 2022: 179,108; 2023 (Est.): 202,973; 2024 (Auth.): 224,618; 2025 (Proj.): 245,374; 2025 (Mem.): 268,909
- State government expenditures (in millions of soms): 2017: 131,219; 2018: 131,493; 2019: 140,047; 2020: 150,648; 2021: 168,533; 2022: 167,381; 2023 (Est.): 188,418; 2024 (Auth.): 206,785; 2025 (Proj.): 225,553; 2025 (Mem.): 246,647
- Net lending/borrowing (overall balance, in millions of soms): 2017: -24,947; 2018: -8,244; 2019: -4,365; 2020: -22,946; 2021: -20,483; 2022: -28,453; 2023 (Est.): -29,785; 2024 (Auth.): -28,706; 2025 (Proj.): -31,746; 2025 (Mem.): -34,108

### Financial sector indicators (selected)
- Regulatory capital to risk weighted assets (Dec-20): 24.9
- Nonperforming loans/total loans (Dec-20): 10.5
- Loan-loss provisioning/nonperforming loans (Dec-20): 58.9
- Return on equity (Dec-20): 5.5
- Loans/deposits (Dec-20): 95.9
- Loan dollarization (percent): 38.0 (2017) → 33.0 (Dec-20)
- Deposit dollarization (percent): 48.7 (Dec-16) → 43.4 (Dec-20)

### Structural policy priorities implied by the analysis
- Strengthen governance to address top constraints reported by firms.
- Improve access to finance by addressing high collateral requirements and low bank credit to the private sector.
- Raise education quality to align high education spending with improved student achievement and reduce firms’ concerns about an inadequately educated workforce.
- Improve electricity sector performance to boost cross-country competitiveness and sustained improvements in service delivery.

*Source: Kyrgyz Republic — IMF staff report excerpts and statistical tables.*

### Annex I. Risk Assessment  Matrix

### Annex I. Risk Assessment Matrix (March 2021)

### Global Risks — Summary of risks, likelihood, impacts, and staff assessment
- Unexpected shifts in the COVID-19 pandemic
  - Relative Likelihood: Medium
  - Staff assessment: Medium
  - Possible Impact if Realized:
    - Prolonged pandemic: disease proves harder to eradicate (e.g., due to new virus strains, short effectiveness of vaccines, or widespread unwillingness to take them).
    - Requires costly containment efforts and prompts persistent behavioral changes rendering many activities unviable.
    - For countries with policy space, prolonged support exacerbates stretched asset valuations, fueling financial vulnerabilities.
    - For those with limited space, especially EMs, policy support is insufficient.
    - A resurgence or new strains could result in lower domestic demand, a delayed recovery in tourism, slow growth and higher unemployment; global slowdown could lead to lower trade, FDI inflows, remittances, and foreign aid.
  - Policy Response:
    - Maintain monetary stimulus and fiscal support to the most affected sectors and vulnerable households.
    - Subject to availability of budget financing, allow a larger deficit in 2021, while prioritizing health and social spending; seek additional donor support; maintain exchange rate flexibility.

- Widespread social discontent and political instability
  - Relative Likelihood: High
  - Staff assessment: Medium
  - Possible Impact if Realized:
    - Social tensions erupt as the pandemic and inadequate policy response cause socio-economic hardship (unemployment, poverty, and shortages and higher prices of essentials—often exacerbating pre-existing inequities), or due to unequal access to vaccines.
    - Growing political polarization and instability weaken policymaking and confidence.
    - Social tension globally could spill over to Kyrgyz Republic with implications for political and economic stability.
  - Policy Response:
    - Adopt policies and reforms to foster higher and more inclusive growth and strengthen social safety nets.
    - Mobilize donors financing.

- Oversupply and volatility in the oil market
  - Relative Likelihood: Medium
  - Staff assessment: Medium
  - Possible Impact if Realized:
    - Higher supply (due to, e.g., OPEC+ disagreements) and lower demand (including due to a slower global recovery from COVID) lead to renewed weakness in energy prices.
    - Uncertainty about production cuts, prospects for the shale gas industry, and the pace of demand recovery lead to bouts of volatility.
    - As an oil importer, the Kyrgyz Republic would benefit from lower global oil prices; increased volatility could transmit through remittances, oil imports, the exchange rate, external demand and aid flows.
  - Policy Response:
    - To absorb oil price volatility, maintain exchange rate flexibility, and reprioritize spending to support the vulnerable.
    - Use fiscal savings from lower oil prices for other priority spending and/or fiscal consolidation.

### Country-Specific Risks — Summary of risks, likelihood, impacts, and staff assessment
- Lower gold prices
  - Relative Likelihood: Medium
  - Staff assessment: Medium
  - Possible Impact if Realized:
    - Global recovery could lead to portfolio reallocation from gold to higher yielding assets and result in a fall in gold prices.
    - Lower gold prices would weaken growth, the external and fiscal positions.
  - Policy Response:
    - Maintain exchange rate flexibility, prioritize fiscal expenditure to avoid excessive buildup of public debt, and strengthen the business environment to support economic activity.

- Build-up of vulnerabilities in the financial sector from COVID-19
  - Relative Likelihood: Medium
  - Staff assessment: Medium
  - Possible Impact if Realized:
    - Balance sheet vulnerabilities may start showing up with a delay.
    - A rise in nonperforming loans may constrain credit, causing a further decline in investment and availability of budget financing.
    - Bank capitalization remains strong, but pockets of liquidity shortages may appear.
  - Policy Response:
    - Stand ready to provide liquidity; maintain sound accounting, reporting and provisioning standards to properly appraise risks; allow more time to restore impaired capital, if needed; prepare a comprehensive NPL resolution strategy.

### Implementation of 2019 Article IV Consultation’s Key Recommendations — status and actions
- Fiscal Policy
  - Staff Advice: Strengthen the overall fiscal framework and pursue fiscal consolidation to maintain debt sustainability and promote inclusive growth.
  - Policy Action / Status:
    - The overall fiscal deficit was reduced to 0.1 percent of GDP in 2019, but the COVID crisis has led to a significant countercyclical increase in the deficit and public debt. Nevertheless, the risk of public debt distress remains moderate. If the pandemic recedes, fiscal consolidation is expected to resume from 2022.
    - Streamline current expenditures, especially the wage bill and subsidies, and better target social assistance programs.
      - The COVID crisis has undermined feasibility of reducing some categories of current spending, but the authorities new reform program prioritizes modernization of the public sector compensation system and reforming the energy sector.
    - Increase tax revenues by removing tax exemptions and strengthening tax administration.
      - The tax-to-GDP ratio fell in 2020 with GDP contraction, but is expected rebound with the growth recovery. At the same time, tax compliance was improved with digitalization of tax e-filings. More progress can be achieved by reducing tax exemptions.

- 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. Strengthen central bank governance and reduce non-core operations.
  - Policy Action / Status:
    - Continuous progress made in the transition to IT. After a prolonged period of stability, the som depreciated by 19 percent against the US dollar in 2020, which marks a welcome break from the past.
    - The authorities are planning to strengthen NBKR governance by introducing a majority of non-executive members in its Board, and to develop a medium-term plan to unwind its ownership in Keremet Bank and the Guarantee Fund.

- Structural Reforms
  - Staff Advice: Remove obstacles to private sector-led growth through reforms to boost financial sector development, reform the energy sector, and improve governance.
  - Policy Action / Status:
    - The financial sector has remained strong so far and has weathered the crisis well. The NBKR implemented measures to help reduce the high collateral requirements and increase financial literacy, but more structural reforms are needed to increase financial inclusion and reduce the cost of financial intermediation.
    - Reforms of the electricity sector have not progressed but is now the declared priority of the new administration.
    - The authorities have developed a new Anti-Corruption Strategy and have recently streamlined government institutions to enhance accountability. The procurement law was amended to require disclosure of beneficial ownership in public contracts. Further efforts are needed to reduce corruption, strengthen the rule of law and enhance transparency.

### External Sector Assessment — key findings and metrics
- Overall assessment:
  - The external position of the Kyrgyz Republic in 2020 was moderately stronger than the level implied by medium-term fundamentals and desirable policies. However, the current account is projected to return to a deficit in 2021.
  - Gross official foreign exchange reserves are above adequate levels indicated by the IMF reserve adequacy metric, but some reserve accumulation is needed over the medium term.
  - To increase competitiveness, structural reforms should focus on strengthening governance, improving access to finance, reducing non-tariff trade barriers, and improving human capital.

- Net international investment position (NIIP) and external stocks (2020):
  - NIIP was about -87 percent of GDP in 2020.
  - Gross assets estimated at about 72 percent of GDP:
    - international reserves: 34 percent of GDP
    - foreign direct investment (FDI) assets: 15 percent of GDP
    - other assets: 23 percent of GDP
  - Gross liabilities amounted to 159 percent of GDP:
    - external public and publicly guaranteed debt: around 54 percent of GDP
    - private external debt: around 38 percent of GDP
    - FDI liabilities: around 67 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 reserve developments:
  - The current account deficit turned into a surplus of 4.5 percent of GDP in 2020 (from 12 percent deficit in 2019).
    - Improvement driven by significant import compression reflecting exchange rate depreciation, border closures, and reduced demand.
    - Workers remittances fell sharply at the beginning of the COVID-19 crisis, but recovered subsequently ending the year at the 2019 level.
    - Exports of goods remained at the same level as in 2019 due to strong growth in gold exports, while non-gold exports fell. Exports of services declined because of travel restrictions.
    - Current account balance is projected at about minus 6 percent of GDP in 2021 and should remain at that level over the medium term.
  - Exchange rate and REER:
    - After a prolonged period of stability, the KGS exchange rate depreciated by about 19 percent vis-à-vis the US dollar in 2020.
    - The real effective exchange rate (REER) depreciated by 14.8 percent y-o-y in November 2020.
  - Gross foreign exchange reserves:
    - Decreased from 6.5 months of imports of goods and services at end-2019 to 6.2 months in 2020.
    - During 2020, the NBKR sold $519.7 million to cushion excessive fluctuations in the exchange rate.
    - Gross reserves are projected to decline to about 5 months of imports of goods and services in 2021 and further to 2.8 months by 2026, slightly below levels indicated by standard reserve adequacy metrics for credit constrained economies.

- External assessment models and staff conclusions:
  - The Current Account (CA) model identifies a current account gap of 1.8 percent of GDP and suggests a REER gap of -4.9 percent.
  - Large negative output gap reduces the actual CA surplus by 2.7 percent of GDP.
  - Adjustors applied: tourism (0.002 percent of GDP), oil (0.6), remittances (1.3), and gold exports (1.2) reduce the CA surplus by 3 percent of GDP.
  - The relative fiscal policy gap is 2.7 percent of GDP.
  - The EBA-lite IREER model identifies REER broadly in line with its fitted value, resulting in a REER gap of 0.02 percent.
  - Staff-assessed REER gap range: [-3; +2] percent.

### Potential Output Growth and Growth-Augmenting Structural Reforms — key findings and reform priorities
- Potential output and historical growth:
  - Estimated potential output growth at about 4 percent.
  - The Kyrgyz economy grew annually on average by 4.2 percent during 1995–2019, compared to 6.4 percent in the Caucasus and Central Asia (CCA) and 5.3 percent in EMDEs.
  - At projected average growth of 4.1 percent and population growth of 2 percent, it would take more than 30 years for the Kyrgyz Republic with $1,189 per capita GNI to reach $2,541 (the midpoint for lower middle-income economies). With higher growth of 6 percent the time needed would shrink to 16 years.
- Growth contributors (1995–2018 and longer-run patterns):
  - Demand side: GDP growth mostly driven by private consumption (contribution 4.2 percent during 1995–2018).
  - Supply side: Contributions of TFP and labor around 2 and 1.1 percent, respectively; capital contribution less than one percent but increasing.
  - Private investment contribution: 1.8 percent; public consumption: 0.8 percent; public investment: 0.5 percent; net exports: -3.1 percent.
  - Inward remittances increased from 3 percent of GDP in 2000 to about 29 percent of GDP in 2019, fueling private consumption and imports.
  - Contribution of labor declined after 2007 due to outward migration and declining labor force participation by women.
- Estimated potential output:
  - Average of all approaches indicates potential growth over the sample was 4.1 percent and increased by 0.5 percent from 1995–2000 to 2013–2019.
  - Methods used: Hodrick-Prescott (HP) filter, Baxter-King (BK) filter, multivariate filter, and a production function approach.
  - Production function approach shows potential output growth has been declining since 2007, reflecting the drop in labor productivity.
- Growth-augmenting structural reforms — priorities and estimated impact:
  - Key reform areas: strengthening governance, increasing access to finance, improving quality of education, and reforming the energy sector.
  - Strengthening governance:
    - The Kyrgyz Republic has considerable room to improve its ranking in governance indicators. Improvements in voice and accountability noted; other indicators show little progress.
    - Improving business environment and tackling corruption could, per staff estimates, increase growth of per-capita GDP by 0.8 percent a year.
    - Key reform priorities:
      - (i) Fiscal governance: modernize tax and custom administration, streamline tax exemptions, improve wage bill and public investment management, implement the procurement code (including for state-owned enterprises), and a computerized Financial Management Information System.
      - (ii) Financial sector oversight: strengthen the bank resolution framework.
      - (iii) Market regulation: simplify import licensing, make it transparent and predictable, and eliminate licensors’ discretion.
      - (iv) AML/CFT: align AML/CFT framework with FATF standards, ensure effective implementation of measures related to politically-exposed persons and increase transparency of beneficial ownerships, and strengthen risk-based supervision.
      - (v) Rule of law: strengthen independence of judiciary and publish statistics on court proceedings.
      - (vi) Anti-corruption: align laws with the UN Convention against Corruption, strengthen the asset declaration regime by allowing public access to comprehensive declarations of high-level public officials, investigate illicit enrichment, and publish the results of verifications and sanctions imposed.
  - Other reform areas:
    - Improving access to finance, education quality, and energy sector reforms are identified as key to boost potential growth by at least two percentage points.

*Source: 1kgzea2021001 - Annex I. Risk Assessment Matrix (March 2021)*

### 7.      Inadequate access to finance is an important impediment to growth. Credit to the

### 7.      Inadequate access to finance is an important impediment to growth

### Key findings on financial access and macro effects
- Credit to the economy is only 28 percent of GDP in 2020.
- Interest rate spread and collateral requirements by banks are high relative to comparators due to weak competition, high credit risk, weaknesses in the rule of law, high operating costs, and information asymmetries.
- Dynamic stochastic general equilibrium model simulations show that relaxing collateral requirements, reducing lending-deposit interest spreads, and reducing financial access costs would raise long-term GDP by around 14 percent and productivity by 5 percent.
- Collateral constraints can be addressed by expanding the range of eligible assets, strengthening the legal framework for collateral enforcement and strengthening the rule of law.
- The NBKR recently amended regulations to allow non-property guarantees as permissible collateral, modified the coverage and loan-to-value ratio requirements for property collateral, and strengthened provisions to improve the quality of property appraisal and ensure appraisers’ independence.
- Greater competition can be achieved by facilitating entry of new banks and exit of failed ones, improving the bank resolution process, and developing capital markets.
- Mobile banking and fintech would help reduce financial access costs.

### Education and labor productivity
- Improving education is essential to close the skills gap, boost labor productivity and increase growth.
- The Kyrgyz Republic spends significantly more on education than its peers but ranks poorly on school enrollment and test scores.
- Vocational education and training (VET) could be improved to help more than 3,000 students find a job each year.
- Education reform is necessary to upgrade teaching practices, learning strategies and education materials and modernize education financing to deliver better outcomes.

### Energy sector constraints and macro impact
- Difficulty in getting electricity is among the most stringent constraints for businesses.
- Energy companies are running chronic deficits; poor maintenance and under-investment have led to infrastructure decay with 45 percent of the generation capacity being beyond its useful life.
- Low tariffs have hindered private sector participation and utilization of hydro-power potential.
- A comprehensive approach is needed to optimize costs, strengthen governance, improve collections, and raise residential tariffs, which are well below cost-recovery.
- The impact of higher tariffs on the most vulnerable households would need to be mitigated through targeted social protection.
- Staff analysis suggests that closing 10 percent of the gap in electricity sector performance with the median country of a sample of 81 countries could raise per capita GDP the following year by 1.1 percent.

### Annex V — Determinants of bank interest rate spreads (summary)
- Main drivers identified: competition, bank capital, loan size, credit risk, deposit rates, and protection of property rights.
- More competition, higher capital, lower credit risk, larger loan size, lower deposit rates, and lower external funding costs are key to lowering spreads.
- Lowering operating costs for small and medium-sized banks is critical to reduce their relatively higher spreads.
- Stronger legal framework and greater transparency on borrowers’ creditworthiness could reduce high collateral requirements.

### Detailed financial inclusion and collateral statistics
- Access of firms to bank loans: 25.8 percent.
- Share of investment financed by banks: 7.2 percent.
- Comparator benchmarks: access to bank loans 29 percent (lower middle income Europe/Central Asia), bank-financed investment 13 percent (both comparator groups).
- Proportion of loans requiring collateral: 93.6 percent.
- Collateral-to-loan ratio: 244 percent.
- These collateral indicators have increased since 2013 when the respective ratios were 84.7 percent and 194 percent.
- Interest rate spreads remain high (10 percentage points) despite strengthened macroeconomic stability and improved banking supervision.
- Around 40–50 percent of SMEs fail to obtain a bank loan due to prohibitively high collateral requirements.
- Time deposits comprise about 40 percent in total deposits (weighted average interest rates on these are over 8 percent); demand deposits constitute the remaining 60 percent (weighted average interest rates of about 1 percent).
- NBKR prudential minima: at least 120 percent collateral for a loan to be classified as ‘normal’ assets (if government securities, NBKR notes, and funds in a separate deposit account serve as collateral); uncollateralized (unsecured) loans should not exceed 50 percent of a bank’s net total capital.
- Banks’ internal discount rates on collateral (from market values) can range from 50 percent to 90 percent depending on collateral type and region.
  - Real estate in the capital discounted by 30 percent.
  - Less-liquid real estate in rural areas or factories discounted by 40 percent.
  - Movables and stocks/equity discounted by 50 percent.
- Banks do not accept agricultural land as collateral given restrictions: agricultural land should be sold by a bank within two years and should first be offered to local buyers.

### Policy recommendations and reform priorities
- Expand eligible collateral assets and allow non-property guarantees.
- Strengthen the legal framework for collateral enforcement and the rule of law to reduce legal costs and recovery time.
- Improve coverage of credit bureaus and access to borrower information; adopt new credit scoring technologies to shift reliance from collateral to borrower creditworthiness.
- Facilitate entry of new banks and exit of failed ones; improve bank resolution processes.
- Develop capital markets to increase alternative financing and broaden the domestic funding base.
- Reduce operating and funding costs for small and medium-sized banks (including via fintech, e-wallet, and mobile banking) to lower spreads.
- Strengthen deposit insurance, develop more competitive hedging instruments to lower FX funding costs, and improve financial literacy.
- Upgrade regulatory framework in the energy sector to attract private investors and mitigate the impact of tariff reform on vulnerable households via targeted social protection.

*Source: IMF staff report content (Kyrgyz Republic).*

### Annex VI. Income Inequality in the  Kyrgyz Republic:

### Annex VI. Income Inequality in the Kyrgyz Republic: the Role of Remittances and Social Transfers

### A. Stylized Facts on Income Inequality in the Kyrgyz Republic
- Poverty remains a main policy challenge, though income inequality declined over 2006–18:
  - Gini coefficient dropped from 0.42 in 2006 to 0.36 in 2018.
  - Rural Gini: 0.37 in 2018; Urban Gini: 0.33 in 2018.
  - Share of inequality between regions in total inequality ranged between 6–11 percent over 2006–18.
- Real household income growth and distributional outcomes, 2008–18:
  - Real household income grew by 54.4 percent over 2008–18.
  - Households up to the 68th percentile experienced income growth exceeding the average.
  - The poorest households experienced the highest growth rates, lifting many out of poverty; the richest 20th percentile experienced lower than average growth rates.
- Regional patterns:
  - Southern regions (except for Osh) tend to have higher income inequality (Gini coefficient ranging between 0.36–0.40) compared to Northern regions (Gini coefficient ranging between 0.28-0.36).
  - Income levels vary widely across regions, especially for the middle-class.

### B. The Role of Social Transfers and Remittances
- Aggregate impacts on poorest households, 2008–18:
  - Real incomes of the poorest decile increased by 160 percent over 2008–18.
  - Counterfactuals for the poorest decile:
    - Would have declined by 62 percent if social transfers were excluded.
    - Would have increased by 131 percent if remittances were excluded.
- Progressivity and coverage:
  - Social transfers and remittances are progressive, especially when pensions are included.
  - Share of households receiving transfers and remittances by decile:
    - 93.4 (31.6) percent of households in the poorest decile receive social transfers including (excluding) pensions; 27.8 (3.1) percent in the richest decile.
    - 35.7 percent of households in the poorest decile receive remittances; 8 percent in the richest decile.
  - Pensions account for 78 percent share in total social benefits and are the main contributor to the impact of social transfers.
- Trends in recipient shares over time:
  - Share of households receiving social transfers increased from 46.3 percent in 2006 to 57.3 percent in 2018, driven mostly by an increase in pension recipients.
  - Share of recipients of non-pension social transfers fell from 13.5 percent in 2006 to 7.4 percent in 2018.
  - Share of households receiving remittances changed marginally from 17.7 percent in 2008 to 18.3 percent in 2018; remittance recipient share decreased in 2008–14 and increased in 2014–18.
  - Number of pension recipients increased by 23 percent cumulatively over 2010–18.
- Determinants of receiving transfers and remittances (logit regression results):
  - Social transfers:
    - More likely for households with a larger number of adults (especially older adults), with at least one member with secondary or tertiary education, and those in rural areas.
    - Likelihood of receiving non-pension social transfers is lower for households with tertiary education.
    - Non-pension social transfers are more likely to flow to households with children (e.g., child allowance at birth and universal child allowance).
  - Remittances:
    - Households with a larger number of adults (including older adults) and with at least one member with tertiary education are less likely to receive remittances.
    - Households with children, with at least one member with secondary education, and located in rural areas are more likely to receive remittances.
  - Income effects:
    - Likelihood of receiving social transfers and remittances decreases with the level of pre-transfer and pre-remittance income, contributing to observed reduction in inequality.
  - Time effects:
    - Likelihood of receiving transfers increased over time due to more pensioners.
    - Likelihood of receiving non-pension social transfers decreased over time.
    - Likelihood of receiving remittances decreased in 2010–14.

### C. Policy Recommendations
- Raise living standards through inclusive growth:
  - Declining inequality combined with a high share of households just above the poverty line implies income redistribution alone is insufficient; policies should remove inclusive growth bottlenecks and accelerate growth rates.
- Improve targeting of non-pension social transfers:
  - Social transfers reduced inequality mainly via pensions; non-pension transfers had limited impact.
  - Means-tested social transfers constitute only a small portion of non-pension transfers.
  - A gradual transition from categorical to mean-tested social transfers would help reduce income inequality and improve sustainability of social spending given demographic pressures on categorical transfers.
- Redirect remittances toward investment:
  - Remittances currently mostly support consumption.
  - Difference-in-difference estimates indicate that one percentage point higher growth in remittances would result in about 0.25 percentage points higher growth rate in the 75th percentile more consumption-oriented industry (textile production) relative to the 25th percentile consumption-oriented industry (construction).
  - Gradual redirection of remittances from consumption to investment could revive economic activity, generate new jobs, concentrate in the SME sector, contribute to economic diversification, and lower dependence on gold production and remittance-based consumption.

*Annex VI. Income Inequality in the Kyrgyz Republic: the Role of Remittances and Social Transfers*

### 2. After a steady decline since 2015, public debt increased significantly in 2020 (Text Chart 1). A

### 1kgzea2021001 - 2. After a steady decline since 2015, public debt increased significantly in 2020 (Text Chart 1). A

### Summary of recent debt developments
- Public debt increased sharply in 2020 to 68 (16.4 percentage points higher than in 2019).
- Drivers in 2020:
  - GDP (expressed in US$) declined by 13 percent.
  - Kyrgyz Som depreciated by 19 percent against the US dollar (year-on-year at end December).
  - General government budget deficit estimated at 3.3 percent of GDP in 2020.
- Domestic debt:
  - Increased from 3.6 percent in 2015 to 9.8 percent of GDP in 2020.
  - Accounts for about 14.5 percent of total debt.
  - Mostly held by commercial banks (50 percent) and the social security fund (30 percent).

### Underlying assumptions and macro outlook
- Short-term outlook weakened due to COVID-crisis; projections assume the global pandemic recedes this year and activity rebounds in 2021-22.
- Real GDP growth (Text Table 3, Current DSA):
  - 2020: -8.6
  - 2021: 3.8
  - 2022: 6.4
  - 2023-2026: 4.4, 4.0, 4.0 (as presented in table rows)
- Previous DSA comparators retained where reported.
- Inflation:
  - End-of-period inflation reached 9.7 percent in 2020.
  - Projected to decline to 7.4 percent in 2021 and remain in the authorities’ target range (5 to 7 percent) in the medium and long term.
- Fiscal policy:
  - Overall budget deficit increased from near balance in 2019 to 3.3 percent of GDP in 2020.
  - Projected to reach 4.2 percent of GDP in 2021, then gradually decline to about 3.3 percent of GDP by 2026.
- External sector:
  - Current account: swung from a deficit of 12 percent of GDP in 2019 to a surplus of 4.5 percent of GDP in 2020.
  - Imports projected to rebound in 2021; current account deficit expected to reach upward of 6 percent of GDP in the medium term (2026).
- Financing assumptions:
  - New external borrowing assumed mostly semi-concessional; country expected to remain IDA-eligible.
  - Share of domestic borrowing expected to increase from 26 percent of the total in 2021 to about 70 percent in 2026.
  - Domestic borrowing assumed at interest rates of 6 to 11 percent for maturities between 1 year and 10 years in the medium term, with a decrease thereafter for bonds ranging from 100 to 200 basis points.

### Realism tools and diagnostic checks
- Drivers of debt dynamics:
  - No flag raised by the realism tool; forecast error on change in public debt-to-GDP over past five years is small (even negative for external public debt ratio).
  - Projected public debt ratio expected to decline more significantly (-4 percentage points of GDP) than previously evidenced (+1 percentage point), justified by expected recovery in economic growth.
- Realism of planned fiscal adjustment:
  - Projected evolution of the primary balance shows no adjustment and is near the median of past adjustments for the LIC sample; does not raise concerns.
- Consistency checks:
  - Consistency between fiscal adjustment and growth: growth projection for 2021 well above path suggested by fiscal multipliers; tool not reliable due to COVID-19 shock.
  - Consistency between public investment and growth: contribution of public investment to growth slightly higher than previous DSA, but still below historical contribution.

### Debt-carrying capacity and indicative thresholds
- Composite Indicator (CI) index is 3.12, above threshold of 3.05 for strong debt-carrying capacity.
- External debt burden thresholds (Strong classification):
  - PV of debt in % of Exports: 240
  - PV of debt in % of GDP: 55
  - Debt service in % of Exports: 21
  - Debt service in % of Revenue: 23
- Total public debt benchmark:
  - PV of total public debt in percent of GDP: 70
- Final classification: Strong (based on current and previous vintages).

### External DSA findings
- External PPG debt was 58 percent of GDP at end-2020; private external debt another 29.5 percentage points.
- Private external debt expected to decline to under 22 percent of GDP by 2026.
- PV of PPG external debt:
  - Increased to 36 percent of GDP in 2020 (from about 32 percent at end-2019).
  - Projected to decline to about 28 percent of GDP by end-2026 (below threshold of 55 percent).
- Stress test (“most extreme shock”: a shock to exports):
  - PV of debt-to-exports breaches its threshold during 2023-2028 by an average deviation of 10 percent.
  - Debt service-to-exports rises above 21 percent benchmark to 25 percent in 2029, then declines.
  - PV of PPG external debt-to-GDP breaches threshold marginally for one year (55.7 percent vs. 55 percent).

### Public DSA and risk assessment
- Public debt stock ratios stable under baseline; debt service ratio increases steadily.
- Public debt evolution:
  - Public debt increased by nearly 17 percentage points to 68 percent of GDP in 2020.
  - Expected to remain around 65 percent of GDP over the medium term, rising to 77 percent of GDP by 2041.
  - PV of total public debt projected to stay under 56 percent of GDP target of the debt strategy through 2026 and below sustainability threshold of 70 percent of GDP.
- Debt service:
  - Ratio of debt service-to-revenue (including grants) averages 24 percent in the next five years.
  - Projected to rise in the medium term due to more expensive domestic financing relative to external financing.
- Vulnerabilities:
  - Growth shock is the most severe: under this shock the PV of debt-to-GDP reaches 70 percent by 2023 and continues upward.
  - Under growth shock, PV of debt-to-revenue would reach 420 in 2031; debt service-to-revenue rises above 50 percent by 2028.
- Risk ratings:
  - External debt: moderate risk of debt distress (breaches under export shock).
  - Total public debt: moderate risk of debt distress, primarily because of moderate external risk and vulnerability to a real GDP growth shock.
  - External debt deemed sustainable under the baseline; profiles show downward trajectory before 2031 driven by decline in PPG external debt.

### Policy recommendations and priorities
- Maintain fiscal discipline; reduce deficit to under 3.5 percent of GDP in the medium term after recovery from COVID-19.
- Strengthen public debt management and keep new borrowing on concessional terms.
- Improve public investment management to contain contingent liabilities and spur growth.
- Raise spending efficiency and create additional fiscal space by:
  - Expenditure prioritization.
  - Tax policy and administrative measures to raise more tax revenue.
- Strengthen engagement with donors to mobilize additional concessional financing.
- Implement structural reforms to improve the business environment and strengthen competitiveness of Kyrgyz exports over the medium and long term.

*Source: KYRGYZ REPUBLIC, INTERNATIONAL MONETARY FUND (excerpts).*

### 15. The authorities broadly shared the views of Bank and Fund staff.  They expressed a

### 1kgzea2021001 - 15. The authorities broadly shared the views of Bank and Fund staff.  They expressed a

### Authorities' views and policy intentions
- The authorities expressed a strong commitment to debt sustainability and prudent debt management.
- To guide fiscal policy, the authorities intend to adopt a fiscal rule that will put a ceiling on the budget deficit.
- The authorities also intend to set a legally binding overall debt ceiling for nominal debt as a percentage of GDP.

### External debt sustainability — baseline projections and key indicators (selected)
- External debt (nominal) (in percent of GDP): 
  - 2018: 76.5
  - 2019: 72.8
  - 2020: 87.8
  - 2021: 83.3
  - 2022: 78.1
  - 2023: 73.9
  - 2024: 70.4
  - 2025: 67.2
  - 2026: 64.3
  - 2031: 56.1
  - 2041: 55.7
- Of external debt: public and publicly guaranteed (PPG) (percent of GDP):
  - 2018: 47.0
  - 2019: 43.3
  - 2020: 58.3
  - 2021: 56.8
  - 2022: 52.6
  - 2023: 49.4
  - 2024: 46.9
  - 2025: 44.7
  - 2026: 42.8
  - 2031: 34.6
  - 2041: 29.5
- Change in external debt (percent of GDP): -4.6, -3.7, 14.9, -4.4, -5.2, -4.2, -3.5, -3.2, -2.9, -1.7, 3.6 (series for 2018–2041 as reported).
- Identified net debt-creating flows (percent of GDP): 4.8, 3.1, 2.7, 1.9, -1.1, 0.2, 0.4, 0.6, 2.0, 2.0, 0.5, 2.3, 2.1 (selected projection series included).
- Non-interest current account deficit (percent of GDP): 11.4, 11.5, -5.4, 5.1, 5.6, 5.5, 5.5, 5.6, 6.4, 5.8, 3.3, 10.1, 6.3 (historical and projections).
- PV of PPG external debt-to-GDP ratio (selected projections): 36.0, 36.9, 34.6, 32.6, 31.1, 29.6, 28.2, 22.2, 19.4 (as reported across projection years).
- PV of PPG external debt-to-exports ratio (selected): 114.6, 115.1, 93.8, 89.7, 86.4, 82.6, 81.3, 64.7, 47.1.
- PPG debt service-to-exports ratio (selected): 15.0, 5.7, 9.2, 8.9, 8.0, 7.9, 7.5, 9.0, 8.6, 7.9, 4.1.
- Gross external financing need (Million of U.S. dollars): 1,548.0, 1,367.3, 700.0, 950.8, 839.8, 826.6, 851.4, 1,022.2, 1,186.9, 1,538.5, 852.7 (series as reported).

### Macroeconomic assumptions used in external DSA (selected)
- Real GDP growth (percent): 3.8, 4.6, -8.6, 3.8, 6.4, 4.4, 4.0, 4.0, 3.7, 4.8, 4.0, 3.4, 4.2.
- GDP deflator in US dollar terms (change in percent): 3.8, 2.5, -4.4, -0.2, 2.1, 3.0, 1.9, 2.0, 1.9, 1.0, -1.0, 2.0, 1.4.
- Effective interest rate (percent): 0.9, 0.9, 1.1, 0.8, 0.9, 0.9, 0.9, 0.9, 0.9, 0.9, 0.8, 0.8, 0.9.
- Growth of exports of G&S (US dollar terms, percent): 4.1, 13.8, -22.2, 5.7, 25.0, 6.0, 5.0, 5.4, 2.5, 13.8, 7.4, 1.8, 6.8.
- Growth of imports of G&S (US dollar terms, percent): 15.6, -3.8, -29.7, 27.8, 13.8, 4.6, 4.1, 4.6, 4.9, 5.7, 4.9, 2.4, 7.6.
- Grant element of new public sector borrowing (in percent) (selected): 36.2, 37.4, 37.6, 37.7, 36.5, 36.2, 35.6, 34.4, 36.4 (as reported).
- Government revenues (excluding grants, percent of GDP): 30.8, 30.3, 29.0, 28.9, 30.0, 29.8, 29.7, 29.7, 29.6, 29.0, 29.0, 31.2, 29.3.
- Aid flows (Million of US dollars): 137.4, 190.1, 154.3, 306.7, 228.0, 228.9, 225.5, 267.3, 262.6, 298.7, 404.4.
- Nominal GDP (Million of US dollars) (selected years reported): 8,271; 8,872; 7,747; 8,027; 8,723; 9,376; 9,934; 10,531; 11,129; 14,247; 22,359.

### Public sector debt — baseline projections and fiscal dynamics (selected)
- Public sector debt (percent of GDP):
  - 2018: 54.8
  - 2019: 51.6
  - 2020: 68.0
  - 2021: 67.1
  - 2022: 65.1
  - 2023: 63.5
  - 2024: 63.6
  - 2025: 64.3
  - 2026: 64.8
  - 2031: 66.8
  - 2041: 63.5
- Of public debt, external component (percent of GDP): 47.0, 43.3, 58.3, 56.8, 52.6, 49.4, 46.9, 44.7, 42.8, 34.6, 29.5 (series as reported).
- Change in public sector debt (percent of GDP): -4.0, -3.2, 16.4, -1.0, -2.0, -1.6, 0.1, 0.7, 0.5, -0.5, -1.1 (series as reported).
- Primary deficit (percent of GDP): -0.4, -0.7, 2.3, 3.3, 3.0, 2.4, 2.3, 2.1, 2.0, 1.7, 0.3.
- Revenue and grants (percent of GDP): 32.5, 32.4, 31.0, 31.1, 31.0, 30.9, 30.8, 30.8, 30.7, 30.1, 30.1.
- Primary (noninterest) expenditure (percent of GDP): 32.0, 31.7, 33.3, 34.5, 34.1, 33.2, 33.1, 32.9, 32.7, 31.8, 30.4.
- Automatic debt dynamics (percent of GDP): -2.6, -3.9, 11.1, -4.4, -4.3, -2.8, -2.2, -2.1, -1.9, -1.6, -0.7.
- PV of public debt-to-GDP ratio (selected projections): 48.3, 48.0, 47.6, 47.2, 48.3, 49.6, 50.6, 54.8, 53.9 (as reported).
- Debt service-to-revenue and grants ratio (selected): 15.4, 6.2, 9.3, 11.6, 15.2, 16.9, 17.8, 21.1, 23.3, 33.9, 36.5.
- Gross financing need (percent of GDP) (selected): 1.9, 1.2, 5.2, 7.0, 7.7, 7.6, 7.8, 8.6, 9.2, 11.9, 11.3.

### Stress tests, sensitivity analysis, and risk signals
- The DSA presents multiple stress-test categories: alternative scenarios, bound tests (e.g., real GDP growth, primary balance, exports, other flows, depreciation), and tailored tests (e.g., combined contingent liabilities, natural disaster, commodity price, market financing).
- Table and figure results show instances where breach of thresholds is flagged (bold values indicate breach of threshold).
- Selected sensitivity outcomes (public and PPG external debt indicators, 2021–2031) include:
  - PV of debt-to-GDP and PV of debt-to-exports ratios, debt service-to-exports and debt service-to-revenue ratios are traced under shocks; thresholds for moderation and breaches are identified in the DSA figures.
- Qualification of the "Moderate" category over 2021–2031 uses thresholds:
  - For PV debt/GDP and PV debt/exports thresholds, x is 20 percent and y is 40 percent.
  - For debt service/Exports and debt service/revenue thresholds, x is 12 percent and y is 35 percent.

### Technical assistance, data, and institutional context (selected)
- The authorities received IMF technical assistance across multiple areas between January 2014 and March 2021, including missions on Public Finance Management, Tax Administration, Monetary Policy and Inflation Targeting, Debt Management, AML/CFT follow-ups, and statistical capacity building (Price Statistics, External Sector Statistics, Government Finance Statistics, National Accounts, Monetary and Financial Statistics).
- Data provision is assessed as adequate for surveillance; the National Statistics Committee, Ministry of Economy and Industry, Ministry of Finance, and NBKR maintain legal and institutional environments supporting statistical quality.
- Identified statistical weaknesses and ongoing priorities:
  - Need to improve source data quality for quarterly GDP estimates and derive discrete quarterly estimates.
  - PPI coverage needs improvement; customs data shortcomings affect trade valuation and price indices.
  - Problems in compiling average wage and employment statistics (valuation of payments in kind; private sector coverage).
  - On-lending to loss-making energy SOEs is misclassified (below-the-line) and should be recorded as transfers (above-the-line) per GFSM 2014.
  - PSDS reporting was resumed in May 2018 but suspended with latest data reported for Q1 2019; Ministry of Finance aims to resume PSDS reporting and expand debt instrument coverage.
  - External sector statistics: work needed on shuttle trade and remittances estimation, direct investment coverage, and trade adjustments for Eurasia Custom Union requirements.
- Membership and Fund financial position notes (selected):
  - Joined: May 8, 1992; Article VIII.
  - Quota: 177.60 SDR million; Fund Holdings of Currency (Exchange Rate) 295.82 (SDR million).
  - Outstanding purchases and loans include: RCF Loans 59.2 (SDR million), Emergency Assistance 118.40 (SDR million), ECF Arrangements 82.77 (SDR million).
  - Latest RCF/RFI operations: RCF May 08, 2020 (29.60 SDR million drawn), RFI May 08, 2020 (59.20 SDR million drawn), RFI Mar 26, 2020 (59.20 SDR million drawn).
- Safeguards assessment: update assessment completed January 13, 2021; noted shortcomings in legal structure and governance arrangements of the NBKR, with conflicts of interest from NBKR participation in bank ownership and a guarantee fund; NBKR maintains broadly strong controls and sound financial reporting; external and internal audit arrangements enhanced.

*Source: Staff Report for the 2021 Article IV Consultation — Informational Annex (May 18, 2021).*

### 1.      Output and inflation through April are consistent with staff projections.

### 1.      Output and inflation through April are consistent with staff projections.

### Macroeconomic performance through April
- GDP contracted by 3.8 percent in January–April 2021 compared to the contraction of 9.4 percent in January–March.
- Excluding gold production, GDP grew by 1.1 percent through April compared to negative 4.5 percent through March.
- Sectoral performance in the first four months of 2021:
  - industry excluding gold grew by 10.9 percent
  - construction grew by 17 percent
  - transport grew by 7 percent
  - trade grew by 3 percent
  - communications grew by 2 percent
- Gold mining contracted by 9.8 percent, consistent with the staff report projections.
- Headline year-on-year inflation declined to 8.7 percent in April from 10.2 percent in March due to base effects.
- Monthly inflation recorded 0.85 percent in April 2021 compared to 2.2 percent in April 2020.

### Recent developments around Kumtor Gold Company (KGC)
- Legislative and judicial actions:
  - On May 6, the parliament passed amendments to the law on joint stock companies and the criminal code permitting the state to appoint external management in companies that operate under concessions and pose threats to lives and ecology.
  - The amendments were signed by the President on May 14.
  - On May 8, a district court in Bishkek ordered KGC to pay about US$3.2 billion for environmental damages related to disposal of waste rocks on glaciers, use of clean water for chemical processing instead of technical water, and disposal of polluted water in rivers instead of recycling.
  - On May 17, new external management was appointed in KGC for three months for violating environmental laws and damaging the ecology.
  - The State Tax Service initiated a court case against KGC for unpaid taxes.
- Ownership and significance:
  - KGC is the largest gold mining company in the Kyrgyz Republic, owned by publicly traded Centerra Gold, in which the Kyrgyz government has a 26 percent stake and the remainder is owned by private international investors.
  - KGC is the largest FDI in the Kyrgyz Republic.
- Investor response:
  - Centerra Gold viewed the authorities’ actions as violations of investor rights and the long-standing investment agreement, and filed for international arbitration against the Kyrgyz Republic.
- Policy note:
  - Constructive engagement between the authorities and the investor is critical to resolve the matter in a transparent and mutually acceptable manner that allows uninterrupted gold production while protecting the environment.
  - Any government decisions that are seen as arbitrary could undermine investor sentiment in the country.

### Risks to the macroeconomic outlook and policy implications
- Economic exposure to KGC:
  - KGC’s output accounts for about 10 percent of GDP and 40 percent of exports.
  - KGC’s budget contribution is estimated at about 1.7 percent of GDP in 2020.
- Potential impacts if KGC operations are suspended:
  - A suspension could significantly reduce growth, and weaken external and fiscal positions.
  - Concessional external financing may also decline.
- Recommended policy responses if the downside risk materializes:
  - Fiscal policy: fiscal tightening and expenditure reallocation from low to high priority spending to cover budgetary shortfalls.
  - External sector: preserve exchange rate flexibility to help absorb balance of payments pressures.
  - Structural: implement planned reforms decisively to strengthen the business climate, address governance issues, and reduce corruption to improve investor confidence and mobilize concessional financing.

*May 26, 2021 — KYRGYZ REPUBLIC, INTERNATIONAL MONETARY FUND*

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_Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1kgzea2021001.pdf_