## 1. The New External Trade Patterns and the Risk of Fragmentation for the Kyrgyz Republic

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### Context
- Regional geopolitics (Russia’s war in Ukraine and associated sanctions) reshaped trade and migration patterns affecting the Kyrgyz Republic.
- An unexpected inflow of productive labor and income from Russia and a significant increase in trade, predominantly re-exports from China to Russia, boosted domestic demand and growth in 2022 and sustained growth in 2023.
- Increased dependence on Russia and China raises exposure to reversal of trade and labor migration and to the risk of fragmentation.
- Poverty and inequality: poverty rate estimated to remain around 33 percent, in part due to relatively high inflation.
- Policy priorities: rebuild macroeconomic buffers, improve social protection, and deepen structural reforms to create a supportive business environment for private sector-led growth.

### Recent developments, outlook, and risks — key findings and indicators
- Growth:
  - 6.3 percent in 2022; 4.4 percent in eleven months of 2023.
  - Staff projections: around 4.2 percent for 2023; 4.4 percent in 2024; return to potential of around 4 percent in medium term.
- Sector performance: weaker gold production and agriculture in 2023; trade and construction leading, followed by transport and communications.
- Inflation:
  - Headline: 14.7 percent in December 2022 → 8.1 percent in November 2023; staff expects mid-single digits by 2025 with calibrated monetary policy.
  - Core inflation: remained elevated in double digits (core inflation 11.4 percent in December; 12.4 percent in November noted elsewhere).
- Current account and Balance of Payments (BoP):
  - Official current account deficit: 43.6 percent of GDP in 2022 driven by non-oil imports increasing by 26 percent of GDP, suspended gold exports, and net money transfer decline.
  - BoP recorded positive Errors & Omissions (E&O) of 37 percent of GDP in 2022; staff estimates unrecorded re-exports to Russia at about 30 percent of GDP. Including these re-exports would lower the 2022 current account deficit to around 11 percent of GDP.
  - First half of 2023: current account deficit and E&O reached 27 and 23.3 percent of GDP respectively.
  - Gross reserves: declined from 3.2 months of total imports in 2021 to 2.6 months by end-2022; stood at 3.6 months of imports net of re-exports.
- Fiscal and public debt:
  - General government budget deficit narrowed to 0.3 percent of GDP in 2022 from 0.7 percent in 2021.
  - Public debt fell from 56 percent of GDP in 2021 to 49 percent in 2022.
- Risks:
  - Escalation of the war in Ukraine, tighter Western sanctions, secondary sanctions, reversal of migration and trade flows.
  - Possible reemergence of global food and energy price inflation.
  - Sustained reduction in gold prices; power outages from ageing electricity infrastructure; extreme climate events; cyberthreats.

### Policy discussions — overview
- Objective: increase resilience and sustainably raise growth by strengthening policy buffers and addressing structural constraints.
- Core focus areas: fiscal policy, monetary/exchange rate/financial sector policy, and structural reforms including public financial management (PFM) and tax administration improvements.

### A. Fiscal policy — findings, projections, and recommendations
Findings and 2023–24 projections:
- General government budget projected balanced in 2023.
  - Tax revenue expected to increase by 1.1 percent of GDP in 2023 vs 2022 (driven by VAT on imports).
  - Non-tax revenue expected to increase by 1.3 percent of GDP due to Kumtor dividends (1 percent of GDP) and NBKR profit distribution.
  - Grants and social contributions lower by 0.8 and 0.6 percent of GDP respectively.
  - Expenditure: higher wage bill by 1.3 percent of GDP; higher social benefits by 0.4 percent of GDP; capital spending estimated at 8.1 percent of GDP.
  - Budget financing needs about 2 percent of GDP financed by net foreign borrowing of 1.4 percent of GDP and 0.7 percent of GDP domestic borrowing.
- Authorities’ draft 2024 budget: tax revenue increases by 1.5 percentage points of GDP; non-tax revenue declines by more than 3 percent of GDP; projected overall surplus of 1.6 percent of GDP.
- Authorities’ medium-term projection: tax-to-GDP ratio rising to nearly 29 percent in 2026.

Staff cautions and baseline:
- Staff cautioned against excessive revenue and expenditure optimism.
- Staff unchanged-policy projection: lower tax revenue, higher wage bill and social benefits, budget deficit of 1.6 percent of GDP in 2024, rising to nearly 3 percent of GDP by 2028.
- Mission urged reducing fiscal deficits further and seeking concessional external financing.

Debt sustainability and DSA conclusions:
- Public debt sustainable with a moderate risk of debt distress.
  - Baseline: total public debt remains below 48 percent of GDP over the medium term.
  - External debt: 80 percent of total in 2023, declining to around 60 percent by 2028.
  - Moderate risk driven by breach of PV of external debt-to-GDP threshold under standard export shock and lower assessed debt carrying capacity; breach is limited and trend downward.

Fiscal reform recommendations (revenue and expenditure):
- Revenue-raising potential: up to 4 percent of GDP medium term via:
  1. Eliminating inefficient VAT exemptions and streamlining special tax regimes.
  2. Increasing progressivity of the Personal Income Tax.
  3. Strengthening revenue administration (digitalization, electronic cash registers).
- Expenditure reforms:
  - Cap nominal wage increases below inflation; limit headcount through attrition.
  - Reduce energy subsidies.
  - Comprehensive reform of public employment and compensation in medium term.
- PFM reforms:
  - Implement IFMIS modules; limit extra-budgetary funds such as the Stabilization Fund.
  - Improve targeting of social spending; operationalize an SOE fiscal risks framework; strengthen capital expenditure management.

Selected numeric excerpts from State budget summary (percent of GDP) 2023–2026 (text table):
- Revenues: 33.9 32.2 31.4 32.3 30.6 32.8 30.0
- Tax revenues: 25.5 27.0 25.2 27.9 24.6 28.8 24.1
- Non-tax revenues: 7.1 3.7 4.8 3.5 4.8 3.4 4.8
- Grants: 1.2 1.4 1.4 0.9 1.2 0.5 1.1
- Expenditures: 25.6 24.4 24.7 25.1 24.6 27.0 24.5
- Salaries: 11.1 9.2 11.0 8.4 10.9 8.1 10.9
- Interest payments: 1.2 1.5 1.3 1.4 1.3 1.3 1.4
- Net acquisition of nonfinancial assets: 8.1 6.2 8.4 5.4 7.8 3.8 7.8
- Net lending/borrowing (overall balance): 0.1 1.6 (1.6) 1.8 (1.8) 1.9 (2.2)
- Memorandum: Nominal GDP (in billion soms): 1,134 1,286 1,286 1,429 1,429 1,568 1,568
- Nominal GDP growth (in precent): 4.2 4.4 4.4 4.2 4.2 4.0 4.0

Authorities’ stance:
- Authorities expect continued revenue yields from policy and administrative reforms (abolition of Sales Tax exclusion, VAT administrative reforms).
- Plan mandatory cost-benefit analysis of tax exemptions in 2023–27; view special tax regimes as simplifying for medium and small enterprises.

### B. Monetary, exchange rate and financial sector policies — findings and recommendations
Findings:
- NBKR policy rate kept unchanged at 13 percent despite declining inflation since February 2023.
- Domestic demand pressures: strong wage growth (14 percent y/y in September) and credit growth (27 percent y/y in October).
- NBKR support for sales and exports of domestically produced gold led to significant surplus liquidity.
- NBKR sterilized part of surplus liquidity via sale of central bank notes and FX interventions totaling US$296 million in 2022 and US$656 million in 2023.
- Policy interest rates in real terms turned positive in 2023 as inflation subsided.

Recommendations:
- Maintain adequately tight interest rate policy and tight liquidity until headline and core inflation decline durably; be prepared to tighten if disinflation reverses.
- Discontinue NBKR gold purchases to address surplus liquidity and strengthen interest rate pass-through.
- Strengthen monetary policy transmission by:
  - Lifting interest rate caps on NBKR note auctions.
  - Improving communication and coordination between monetary and fiscal policies.
  - Containing subsidized lending programs, including those by development funds.

### External Sector Assessment (ESA), exchange rate, and reserves
- ESA: external position in 2022 was substantially weaker than level implied by medium-term fundamentals and desirable policies.
- Real effective exchange rate appreciated by 6.8 percent in 2023 due to inflation differential with trade partners.
- Adjusting current account for unrecorded exports, the som overvaluation for 2022 is 16.4 percent.
- Overvaluation largely explained by discontinuation of gold exports.
- NBKR non-monetary gold: as of end-November 2023, equivalent of US$1.54 billion; converting it would increase international reserves to 5.8 months of prospective imports at end-2023.
- NBKR converted US$666 million equivalent from non-monetary to monetary gold in 2023.
- MCP: Multiple Currency Practice to be considered eliminated as of February 1, 2024 when new MCP policy becomes effective.
- Restrictions on export of U.S. dollar notes by individuals in place (January 2023 temporary ban limits: non-resident/foreign citizen USD 5,000; resident/Kyrgyz citizens USD 10,000; charge of 10 percent on amounts exported in excess of USD 10,000).

### New trade patterns and risk of fragmentation
- Trade shifts since start of war in Ukraine:
  - China’s share in imports rose from 26 percent in 2021 to 42 percent in 2022.
  - Merchandise imports increased by 26 percent of GDP in 2022 alone and more than doubled between 2021 and 2023 to around US$10 billion.
  - Fastest growing imports: household electronics, footwear, computers, construction equipment, cell phones and cars.
- Large part of these imports appears reexported to Russia but not captured in official statistics (trade within Eurasian Economic Union not subject to customs declarations).
  - Adjusting for unrecorded re-exports increases Russia’s share in Kyrgyz exports from 48 percent (excluding unrecorded re-exports) to 77 percent.
- Cost of extreme bipolar fragmentation scenario: around 2.7 percent of GDP for Kyrgyz Republic (compared to 8 percent in advanced economies).
- Cost relatively low due to already high trade concentration with China and Russia; expanding and diversifying trade with rest of world could reduce cost.

### Banking sector soundness and risks
- Banking sector remains sound; systemic risks contained but supervisory vigilance warranted.
- Key indicators:
  - Risk-weighted capital adequacy: 25.2 percent on average.
  - Liquidity ratio: 76.6 percent.
  - Non-performing loans (NPLs): 12.8 percent of total loans in December 2022 → 9.5 percent in November 2023.
- Asset quality improved in 2023; profitability remains strong.
- Foreign exchange exposure of banks has increased.
- NBKR stress-tests indicate banks resilient to various severe shocks.
- Banks face higher costs of correspondent banking due to isolation of major Russian banks from western financial system but currently manage cross-border payments.

### Structural reforms: priorities and measures
- Objective: reduce state footprint (large number of SOEs, intrusive regulations, market interventions) to raise medium- to long-term growth.
- MCD departmental paper: governance reforms, SOE management and privatization, and strong competition policies could durably increase annual growth by about 2.5 percent.
- Governance challenges:
  - World Governance Indicators weakened in 2021 and 2022; government effectiveness and rule of law declined most.
  - Recent tax amnesty law may hinder investigation/prosecution of economic crimes and raise money laundering concerns.
- SOE oversight recommendations:
  - Centralize and standardize SOE financial reporting; broaden coverage to include large SOEs (state railway company, Kyrgyz Telecom) and financial sector SOEs (e.g., Alpha Telecom).
  - Articulate SOE ownership policy with criteria for strategic vs. non-strategic SOEs; privatize non-strategic SOEs via transparent competitive processes.
  - Development funds and SDB should not crowd out private sector or borrow externally in ways that impair debt sustainability.
- Electricity sector:
  - Residential tariffs increased by 30 percent in May 2023, average tariff increase 10 percent; average residential tariff remains among lowest globally.
  - Reform plan (with World Bank support): (i) gradual tariff increases to cost recovery while protecting vulnerable households; (ii) reduce technical and commercial losses; (iii) strengthen sector regulation.
- Market regulation and social policy:
  - Avoid price controls and state monopolies; use better targeted social spending for social objectives.
  - Price controls in place include bread and coal; eligible goods list includes flour, baked goods, milk, butter, vegetable oil, meat, sugar, rice, pasta, eggs, potatoes, carrots, onions, gasoline and diesel fuels, liquefied gas, mineral fertilizers, and animal food.

### AML/CFT and anti-corruption measures
- AML/CFT legislative strengthening in 2023:
  - Eurasian Group (EAG) noted progress; Recommendation 8 on Non-Profit Organizations upgraded from non-compliant to partially compliant.
  - Kyrgyz Republic now compliant or mostly compliant with all the 40 recommendations, higher than the CCA average; effectiveness ratings remain insufficient in 11 assessed areas.
- Recommended actions:
  - Strengthen implementation capacity of risk-based AML/CFT supervision and monitoring of cross-border activities.
  - Improve targeted financial sanctions implementation and confiscation effectiveness.
  - Enhancing system effectiveness will help address financial sector risks including correspondent banking issues.

### Staff appraisal and consolidated policy recommendations
- Macroeconomic outlook and risks:
  - Kyrgyz Republic navigated uncertain global environment relatively well; strong economy helps alleviate unemployment and poverty and lower public debt provides fiscal space.
  - Inflation has declined but remains above target; with calibrated monetary policy inflation is expected to return to pre-pandemic level by 2025.
  - Downside risks: escalation of war in Ukraine, secondary sanctions, reversal of migration and trade flows, geopolitical fragmentation, climate vulnerability.
- Consolidated policy priorities:
  - Fiscal: reduce tax exemptions and special tax regimes; increase progressivity of Personal Income Tax; strengthen revenue administration; contain public wage bill and energy subsidies; channel Kumtor profits to budget; privatize non-strategic commercial SOEs competitively.
  - Monetary/exchange rate: maintain NBKR autonomy; discontinue purchases of domestic gold; maintain adequately tight policy interest rates until headline and core inflation decline durably; greater exchange rate flexibility; resume gold exports without NBKR participation to support BoP sustainability and address som overvaluation assessed at 16 percent (after accounting for staff estimates of unrecorded re-exports).
  - Structural/institutional: implement ambitious reforms—better governance, SOE management, competition policies, broaden transparency rules, strengthen AML/CFT, improve cross-border monitoring; avoid state monopolies, tax amnesties, and non-competitive procurements.
  - Financial sector: strengthen supervisory vigilance; deepen domestic financial markets to accommodate increasing domestic debt issuance.

### Debt Sustainability Analysis (DSA) — summary findings and vulnerabilities
- Coverage: PPG debt covers state government debt, state guarantees, and central bank debt to IMF.
- Recent developments:
  - Public debt decreased to 49.2 percent of GDP in 2022 from 56.2 percent in 2021.
  - External debt decreased by 7.2 percentage points of GDP in 2022; domestic debt increased marginally.
  - Major external creditors end-2022: China over 40 percent; AsDB over 15 percent; IDA over 15 percent; IMF almost 12 percent.
- Contingent liability shock applied: 7.0 percent of GDP (2.0 percent operational SOE risk + 5.0 percent financial market default).
- Baseline projections:
  - Public debt estimated at 46.9 percent of GDP in 2023; expected to decrease to 42.7 percent of GDP by 2025; increasing interest payments put debt on upward trajectory starting in 2027.
  - Public debt projected to rise to almost 67 percent of GDP by 2043 under baseline long-run projection.
- External DSA:
  - External PPG debt: 39.5 percent of GDP at end-2022.
  - PV of PPG external debt: 28.8 percent of GDP in 2022; projected PV of PPG external debt about 19.3 percent of GDP by end-2028.
  - Under standard export shock, PV of external debt-to-GDP breaches threshold between 2025 and 2029.
  - Customized stress test (discontinuation of gold exports and collapse in re-exports): exports fall by 2 standard deviations → negative export growth of 36.8 percent annually over two years and decrease in exports equivalent to US$4.5 billion in 2025 (over baseline); threshold for PV of external debt-to-GDP briefly breached in 2025.
- Public DSA vulnerabilities:
  - Under extreme growth shock: PV of debt-to-GDP breaches 55 percent by 2028; PV of debt-to-revenue would reach over 230 percent by 2033; debt service-to-revenue ratio would peak at 30 percent in 2032.
  - Drivers: growing domestic borrowing at high interest rates; rising interest payments; limited concessional external financing; shallow domestic debt markets could crowd out private credit.
- Policy recommendation to secure debt sustainability:
  - Fiscal consolidation and/or greater access to concessional financing.
  - Fiscal target: reduce primary deficit under 1.0 percent of GDP in the medium term.
  - Revenue mobilization: streamline tax exemptions; strengthen tax administration.
  - Expenditure: rationalize public wage bill; reduce subsidies; improve targeting of social benefits.
  - Strengthen public debt and expenditure management; improve public investment management; review SOE involvement and improve oversight; increase transparency of SOE financial performance and channel Kumtor profits to budget.
  - Deepen domestic financial markets to accommodate domestic debt issuance.

### Key projections and selected numeric tables (high-frequency reference)
- Real GDP (growth in percent): 4.6 (2021), -7.0 (2022), 5.5 (2023), 6.3 (2024), 4.2 (2025), 4.4 (2026), 4.2 (2027), 4.0 (2028).
- Consumer prices (12-month percent change, eop): 3.1 (2021), 9.7 (2022), 11.2 (2023), 14.7 (2024), 10.0 (2025), 8.0 (2026), 5.5 (2027), 5.5 (2028).
- Current account balance (percent of GDP): -11.5 (2021), 4.5 (2022), -8.0 (2023), -43.6 (2024), -31.8 (2025), -9.7 (2026), -7.9 (2027), -5.9 (2028).
- Gross international reserves (millions of U.S. dollars): 2,779 (2021), 2,633 (2022), 2,953 (2023), 2,584 (2024).
- Exports, fob (millions of U.S. dollars): 3,301 (2021), 3,564 (2022), 6,672 (2023), 9,598 (2024).
- Imports, fob (millions of U.S. dollars): 5,938 (2021), 10,497 (2022), 11,989 (2023), 12,434 (2024).
- Financial soundness indicators (selected): Regulatory capital to risk weighted assets: 25.6 (Dec-22), 25.2 (Nov-23); NPLs/total loans: 12.8 (Dec-22), 9.5 (Nov-23); Liquidity ratio: 82.8 (Dec-22), 76.6 (Nov-23).

### Risks, scenarios, and prioritized policy actions (selected)
- High / Medium likelihood risks with policy advice:
  - Intensification of regional conflict(s): allow more exchange rate flexibility; recalibrate monetary policy; targeted support to vulnerable; reduce universal subsidies; eliminate inefficient tax exemptions; seek concessional financing; enhance financial oversight.
  - Commodity price volatility: allow more exchange rate flexibility; tight monetary policy; targeted social assistance; seek concessional financing.
  - Social discontent: reduce inefficient energy subsidies; strengthen social safety nets; mobilize donor financing; prioritize business climate reforms.
  - Deepening geo-economic fragmentation: accelerate trade diversification reforms; strengthen policies to mitigate secondary sanctions risk.
  - Extreme climate events and cyberthreats: advance green transformation and enhance cyber-security.

*Source: IMF staff assessment as presented in the chapter "The New External Trade Patterns and the Risk of Fragmentation for the Kyrgyz Republic" (IMF staff report excerpts).*

### 1. The New External Trade Patterns and the Risk of Fragmentation for the Kyrgyz Republic _____ 10

### 1. The New External Trade Patterns and the Risk of Fragmentation for the Kyrgyz Republic

### Context
- Regional geopolitics, particularly Russia’s war in Ukraine and associated sanctions, have reshaped trade and migration patterns affecting the Kyrgyz Republic.
- An unexpected inflow of productive labor and income from Russia and a significant increase in trade, predominantly re-exports from China to Russia, boosted domestic demand and growth in 2022 and sustained growth in 2023.
- Increased dependence on Russia and China raises exposure to reversal of trade and labor migration and to the risk of fragmentation.
- Poverty and inequality remain significant: the poverty rate is estimated to remain around 33 percent, in part due to relatively high inflation.
- Policy priorities to increase resilience and sustainable growth: rebuild macroeconomic buffers, improve social protection, and deepen structural reforms to create a supportive business environment for private sector-led growth.

### Recent developments, outlook, and risks
Findings and indicators:
- Growth: 6.3 percent in 2022; 4.4 percent in eleven months of 2023.
- Sector performance: weaker gold production and agriculture in 2023; trade and construction leading, followed by transport and communications.
- Inflation: headline inflation declined from 14.7 percent in December 2022 to 8.1 percent in November 2023; core inflation remained elevated in double digits.
- Current account and BoP:
  - Official current account deficit reached 43.6 percent of GDP in 2022 driven by non-oil imports increasing by 26 percent of GDP, suspended gold exports, and net money transfer decline.
  - Balance of payments recorded positive errors and omissions (E&O) of 37 percent of GDP in 2022; staff estimate unrecorded re-exports to Russia at about 30 percent of GDP. Including these re-exports would lower the 2022 current account deficit to around 11 percent of GDP.
  - In the first half of 2023, current account deficit and E&O reached 27 and 23.3 percent of GDP respectively.
  - Gross reserves declined from 3.2 months of total imports in 2021 to 2.6 months by end-2022, but stood at 3.6 months of imports net of re-exports.
- Fiscal: general government budget deficit narrowed to 0.3 percent of GDP in 2022 from 0.7 percent in 2021; public debt fell from 56 percent of GDP in 2021 to 49 percent in 2022.

Projections:
- Growth expected at around 4.2 percent for 2023; 4.4 percent in 2024; return to potential rate of around 4 percent in the medium term as war spillovers fade.
- Inflation to be gradually reduced to mid-single digits by 2025 with adequately calibrated monetary policy.
- Current account: projected to reach 31.8 percent of GDP in 2023 (full-year BOP projection reflects actual E&O for first half of 2023 of 23.3 percent of GDP), and to narrow to 5 percent of GDP in the medium term with moderation of external trade.

Risks:
- Further escalation of the war in Ukraine and tighter Western sanctions on Russia could reverse trade and migration flows, weaken the Russian economy and the ruble, reduce remittances, and weigh on growth and fiscal revenue.
- Possible reemergence of global food and energy price inflation.
- Risk of secondary sanctions reducing trade, growth, and fiscal revenue.
- Additional risks: sustained reduction in gold prices, possible power outages due to ageing electricity infrastructure, extreme climate events, and cyberthreats.

### Policy discussions — overview
- Objective: increase resilience to shocks and sustainably raise growth by strengthening policy buffers (contain fiscal financing needs, strengthen public debt sustainability, reduce inflation, rebuild reserves) and addressing structural constraints to growth.
- Focus areas: fiscal policy, monetary/exchange rate/financial sector policies, and structural reforms including PFM and tax administration.

### A. Fiscal policy — findings, projections, and recommendations
Findings and 2023–24 projections:
- General government budget projected to be balanced in 2023.
  - Tax revenue expected to increase by 1.1 percent of GDP in 2023 compared to 2022, driven by VAT on imports which offsets a dip in income tax.
  - Non-tax revenue expected to increase by 1.3 percent of GDP due to Kumtor dividends (1 percent of GDP) and NBKR profit distribution.
  - Grants and social contributions lower by 0.8 and 0.6 percent of GDP respectively.
  - Expenditure: higher wage bill by 1.3 percent of GDP and higher social benefits by 0.4 percent of GDP; capital spending estimated at 8.1 percent of GDP.
  - Budget financing needs about 2 percent of GDP financed by net foreign borrowing of 1.4 percent of GDP and 0.7 percent of GDP in domestic borrowing.
- Authorities project budget surpluses in 2024 and beyond:
  - Draft 2024 budget: tax revenue increases by 1.5 percentage points of GDP; non-tax revenue declines by more than 3 percent of GDP; projected overall surplus of 1.6 percent of GDP.
  - Authorities’ medium-term projections: rise in tax-to-GDP ratio to nearly 29 percent in 2026.

Staff cautions and staff baseline:
- Cautioned against excessive revenue and expenditure optimism.
- In staff’s unchanged-policy projection: lower tax revenue, higher wage bill and social benefits, budget deficit of 1.6 percent of GDP in 2024, rising to nearly 3 percent of GDP by 2028.
- Mission urged reducing fiscal deficits further and seeking concessional external financing to lower borrowing costs, strengthen debt sustainability, and support disinflation.
- Mission welcomed authorities’ intent to seek external investments and private sector participation for Kambar-Ata 1 hydro-power plant and China–Kyrgyzstan–Uzbekistan railway.

Debt sustainability:
- DSA conclusion: public debt sustainable with a moderate risk of debt distress.
  - Baseline: total public debt remains below 48 percent of GDP over the medium term.
  - External debt: 80 percent of total in 2023, declining to around 60 percent by 2028.
  - Moderate risk driven by breach of PV of external debt-to-GDP threshold under standard export shock and lower assessed debt carrying capacity, but breach is limited and trend is downward.

Fiscal reform recommendations:
- Revenue-raising potential: staff analysis indicates up to 4 percent of GDP in the medium term through:
  1. Eliminating inefficient VAT exemptions and streamlining special tax regimes.
  2. Increasing progressivity of the Personal Income Tax.
  3. Strengthening revenue administration, building on digitalization and electronic cash registers.
- Expenditure-side reforms:
  - Consolidate public wage bill by capping wage increases to below inflation and limiting headcount through attrition.
  - Reduce energy subsidies.
  - Comprehensive reform of public employment and compensation framework in the medium term.
- Other PFM reforms:
  - Implement IFMIS modules to strengthen budget preparation and wage bill management.
  - Limit use of extra-budgetary funds such as the Stabilization Fund.
  - Improve targeting of social spending and operationalize an SOE fiscal risks framework.
  - Strengthen capital expenditure management; benefit from Public Investment Management Assessment.

Authorities’ views:
- Authorities expect continued strong revenue yield from policy and administrative reforms (abolition of exclusion of transactions subject to VAT from Sales Tax, VAT administrative reforms).
- Authorities plan mandatory cost-benefit analysis of tax exemptions in 2023–27.
- Authorities view special tax regimes as simplifying the tax system for medium and small-size enterprises.

Selected numeric excerpts from State budget summary (in percent of GDP) 2023–2026 (text table):
- Revenues: 33.9 32.2 31.4 32.3 30.6 32.8 30.0
- Tax revenues: 25.5 27.0 25.2 27.9 24.6 28.8 24.1
- Non-tax revenues: 7.1 3.7 4.8 3.5 4.8 3.4 4.8
- Grants: 1.2 1.4 1.4 0.9 1.2 0.5 1.1
- Expenditures: 25.6 24.4 24.7 25.1 24.6 27.0 24.5
- Salaries: 11.1 9.2 11.0 8.4 10.9 8.1 10.9
- Goods and services: 2.7 4.0 2.7 3.7 2.7 3.7 2.7
- Subsidies to public corporations: 0.5 0.4 0.5 0.3 0.5 0.3 0.5
- Interest payments: 1.2 1.5 1.3 1.4 1.3 1.3 1.4
- Grants (expenditure): 5.1 5.6 5.1 5.0 5.1 4.5 5.1
- Social benefits: 2.6 1.6 2.6 1.4 2.6 1.3 2.6
- Other: 2.3 2.1 1.5 4.9 1.4 7.9 1.3
- Gross operating balance: 8.2 7.8 6.7 7.2 6.0 5.7 5.6
- Net acquisition of nonfinancial assets: 8.1 6.2 8.4 5.4 7.8 3.8 7.8
- Net lending/borrowing (overall balance): 0.1 1.6 (1.6) 1.8 (1.8) 1.9 (2.2)
- Memorandum: Nominal GDP (in billion soms): 1,134 1,286 1,286 1,429 1,429 1,568 1,568
- Nominal GDP growth (in precent): 4.2 4.4 4.4 4.2 4.2 4.0 4.0

Notes:
- The State budget covers central government and local authorities, but not the social fund.
- Expenditures include on-lending to energy sector SOEs for the IMF, whereas the Kyrgyz authorities classify it as an acquisition of financial assets.

### B. Monetary, exchange rate and financial sector policies — findings and recommendations
Findings:
- NBKR policy rate kept unchanged at 13 percent despite declining inflation since February 2023.
- Staff assessment: persistent inflation largely driven by domestic demand, evidenced by strong wage growth (14 percent y/y in September) and credit growth (27 percent y/y in October).
- Central bank support for sales and exports of domestically produced gold led to significant surplus liquidity, complicating monetary policy.
- NBKR sterilized part of surplus liquidity via sale of central bank notes and FX interventions totaling US$296 million in 2022 and US$656 million in 2023.
- Policy interest rates in real terms turned positive in 2023 as inflation subsided.

Recommendations:
- Maintain an adequately tight interest rate policy and tight liquidity conditions until headline and core inflation decline durably; be prepared to tighten policy if disinflation reverses.
- Discontinue NBKR gold purchases to address surplus liquidity and strengthen interest rate pass-through.
- Strengthen monetary policy transmission by:
  - Lifting interest rate caps on auctions of NBKR notes.
  - Improving communication and coordination between monetary and fiscal policies.
  - Containing subsidized lending programs, including those by a growing number of development funds.

*IMF staff report: Chapter 1 — The New External Trade Patterns and the Risk of Fragmentation for the Kyrgyz Republic*

### 16. The External Sector Assessment (ESA) suggests that the external position of the Kyrgyz

### 16. The External Sector Assessment (ESA) suggests that the external position of the Kyrgyz Republic in 2022

### External position, exchange rate, and reserves
- The ESA suggests the external position of the Kyrgyz Republic in 2022 was substantially weaker than the level implied by medium-term fundamentals and desirable policies.
- The NBKR’s foreign exchange interventions supported stability of the som/USD exchange rate in 2023, but the real effective exchange rate appreciated by 6.8 percent due to the significant inflation differential with trade partners.
- The ESA does not capture large Errors & Omissions (E&O) in the BoP, which are likely to reflect unrecorded exports; adjusting the current account for unrecorded exports, the overvaluation of the som for 2022 stands at 16.4 percent.
- The overvaluation is largely explained by the discontinuation of gold exports.
- The mission stressed that:
  - Exporting gold without NBKR’s involvement will be critical for balance of payments sustainability.
  - Greater exchange rate flexibility and continued conversion of non-monetary gold to reserves would strengthen external buffers against possible shocks.
- As of end-November 2023, the NBKR held an equivalent of US$1.54 billion in non-monetary gold, which if converted to reserves would increase international reserves to 5.8 months of prospective imports at end-2023.
- In 2023, the NBKR converted an equivalent of US$666 million from non-monetary to monetary gold.
- The Multiple Currency Practice (MCP) in the Kyrgyz Republic will be considered eliminated as of February 1, 2024 when the new MCP policy becomes effective.
- Restrictions on the export of U.S. dollar notes by individuals remain in place:
  - In January 2023, a temporary ban on the export of cash in USD was introduced with limits: non-resident/foreign citizen USD 5,000; resident/Kyrgyz citizens USD 10,000.
  - If residents/Kyrgyz citizens export USD cash in excess of the limit of USD 10,000, a charge of 10 percent of the amount over the USD 10,000 is charged.
  - These measures are being assessed as CFMs under the Institutional View on the Liberalization and Management of Capital Flows.

### NBKR autonomy, governance, and safeguards
- The autonomy and governance of the NBKR need to be strengthened; operational and legal autonomy are essential for credibility and effectiveness of monetary policy.
- The central bank should focus on its primary objectives of price and financial sector stability and not be expected to pursue other priorities such as sales and exports of domestically produced gold or lowering interest rates for reasons unrelated to price stability.
- Overriding the banking law by passing new laws in 2022 and 2023 to allow transfer of 90 percent of NBKR’s profit to the budget undermines institutional integrity and independence and should be avoided.
- Remaining Safeguards Assessment recommendations to strengthen NBKR credibility include:
  - Introducing a non-executive majority to the NBKR’s board and the audit committee.
  - Divesting ownership in Keremet bank and the Guarantee Fund.
  - Winding down non-core central bank operations.
- The mission welcomed full repayment of the NBKR loan by the Russian-Kyrgyz Development Fund.

### New trade patterns and risk of fragmentation
- Since the start of Russia’s war in Ukraine, trade patterns changed considerably:
  - China’s share in imports rose from 26 percent in 2021 to 42 percent in 2022.
  - Merchandise imports increased by 26 percent of GDP in 2022 alone and more than doubled between 2021 and 2023 to around US$10 billion.
  - Fastest growing imports include household electronics, footwear, computers, construction equipment, cell phones and cars.
- A large part of these imports appears to be reexported to Russia but not captured in official statistics because trade within the Eurasian Economic Union is not subject to customs declarations; adjusting for unrecorded re-exports increases Russia’s share in Kyrgyz exports from 48 percent (excluding unrecorded re-exports) to 77 percent.
- The risk of global fragmentation has increased; a long-term cost estimate for the Kyrgyz Republic in an extreme bipolar scenario is around 2.7 percent of GDP (compared to 8 percent in advanced economies).
- The cost of fragmentation for the Kyrgyz Republic is relatively low due to already high trade concentration with China and Russia; expanding and diversifying trade with the rest of the world could further reduce this cost.

### Banking sector soundness and risks
- The banking sector remains sound and systemic risks are contained, but supervisory vigilance is warranted.
- Key indicators:
  - Risk-weighted capital adequacy: 25.2 percent on average.
  - Liquidity ratio: 76.6 percent.
  - Non-performing loans (NPLs) decreased from 12.8 percent of total loans in December 2022 to 9.5 percent in November 2023.
- Asset quality improved in 2023 after weakening in 2022; profitability remains strong.
- Foreign exchange exposure of banks has increased.
- NBKR stress-tests indicate banks are resilient to various severe shocks, including interest rate shocks, as most government bonds are held to maturity.
- Banks face higher costs of correspondent banking due to isolation of major Russian banks from the western financial system, but do not seem to face major challenges with respect to cross-border payments.

### Authorities’ views on monetary policy and BoP statistics
- The NBKR agreed demand pressures contributed to persistent inflation and maintained the policy rate at 13 percent to reduce inflation to its target range of 5–7 percent.
- The NBKR acknowledged winding down gold purchases would affect excess liquidity and that resumption of direct gold exports improved the current account deficit to some extent.
- The NBKR converted part of its non-monetary gold to reserves and indicated future conversions would be informed by its reserve management strategy.
- Authorities formed an interdepartmental group to improve BoP statistics and are considering IMF technical assistance in this area.

### Structural reforms: priorities and measures
- The favorable outlook is an opportunity for structural reforms to raise medium- to long-term growth; priority is to reduce the state footprint in the economy.
- The state footprint is reflected in a large number of SOEs, intrusive regulations, and market interventions that undermine efficiency and productivity.
- An MCD departmental paper finds governance reforms, sound management of SOEs and privatization, and strong competition policies could durably increase annual growth in the Kyrgyz Republic by about 2.5 percent.
- Governance challenges:
  - World Governance Indicators weakened in 2021 and 2022, with government effectiveness and the rule of law showing largest declines.
  - Allowing public access to income and asset declarations was an important anti-corruption measure, but the recent tax amnesty law may hinder investigation and prosecution of economic crimes and raise money laundering concerns.
- SOE oversight improvements:
  - Centralizing and standardizing SOE financial reporting; draft 2024 budget includes an informative fiscal risk statement for SOEs.
  - Further recommendations: clarify reporting timeframe, methodological improvements, broaden coverage to include large SOEs (state railway company, Kyrgyz Telecom), financial sector SOEs and companies owned by them (e.g., Alpha Telecom owned by the State Development Bank (SDB)).
  - Articulate a comprehensive SOE ownership policy with clear objectives and criteria to determine strategic vs. non-strategic SOEs; privatization of non-strategic SOEs through transparent competitive processes could generate significant growth benefits in the medium term.
  - Development funds and the SDB should not compete with or crowd out the private sector and should avoid external borrowing to preserve debt sustainability.
- Electricity sector financial sustainability:
  - Residential tariffs increased by 30 percent in May 2023, but average tariffs remain among the lowest in the world.
  - A generous lifeline tariff benefits the rich disproportionately and contributes to network load and financial distress.
  - The reform plan (being developed with World Bank support) envisages: (i) a gradual increase of tariffs to cost recovery while protecting vulnerable households; (ii) reducing technical and commercial losses; (iii) strengthening sector regulation.
- Market regulation and social policy:
  - Use of price controls and state monopolies should be avoided; social objectives can be better addressed by strengthening adequacy and targeting of social spending.
  - Price controls in place include bread and coal; the eligible goods list also includes flour, baked goods, milk, butter, vegetable oil, meat, sugar, rice, pasta, eggs, potatoes, carrots, onions, gasoline and diesel fuels, liquefied gas, mineral fertilizers, and animal food.

### AML/CFT and anti-corruption measures
- The authorities strengthened AML/CFT legislation in 2023:
  - Eurasian Group (EAG) noted progress; upgraded status for Recommendation 8 on Non-Profit Organizations from non-compliant to partially compliant.
  - The Kyrgyz Republic is now compliant or mostly compliant with all the 40 recommendations, higher than the CCA average.
  - Effectiveness ratings remain insufficient in the 11 assessed areas.
- Recommended actions:
  - Strengthen implementation capacity of risk-based AML/CFT supervision and monitoring of cross-border activities to detect and recover proceeds of crimes, including from corruption.
  - Improve targeted financial sanctions implementation; enhance confiscation effectiveness.
  - Enhancing system effectiveness will help address financial sector risks including correspondent banking issues.

### Staff appraisal and policy recommendations
- Macroeconomic outlook and risks:
  - The Kyrgyz Republic navigated an uncertain global environment relatively well; strong economy helps alleviate unemployment and poverty and lower public debt provides fiscal space.
  - Inflation has declined but remains above the central bank’s target range; with adequately calibrated monetary policy, inflation is expected to return to its pre-pandemic level by 2025.
  - Outlook is favorable but subject to downside risks: escalation of the war in Ukraine, secondary sanctions, reversal of migration and trade flows could reduce remittances, trade, economic activity and budget revenue; geopolitical fragmentation and climate vulnerability exacerbate risks.
- Fiscal policy recommendations:
  - Create additional fiscal space by reducing tax exemptions and special tax regimes, increasing progressivity of the Personal Income Tax, strengthening revenue administration, and containing the public wage bill and energy subsidies.
  - Channeling Kumtor profits to the budget and privatization of non-strategic commercial SOEs through competitive public tenders would provide additional fiscal resources.
  - Discontinue special fixed-rate treasury securities and mobilize domestic financing through standard marketable treasury bills and bonds.
- Monetary policy and exchange rate:
  - Monetary policy should remain focused on further reducing inflation, requiring a high degree of NBKR autonomy.
  - The NBKR should discontinue purchases of domestic gold and maintain adequately tight policy interest rates until headline and core inflation decline durably.
  - Greater exchange rate flexibility and resumption of gold exports without NBKR’s participation is critical for balance of payments sustainability and to address the overvaluation of the som, which is assessed at 16 percent after accounting for staff estimates of unrecorded re-exports.
- Structural and institutional reforms:
  - Use the favorable macro environment to undertake ambitious structural reforms: better governance, SOE management, stronger competition policies to improve productivity and inclusive growth.
  - Implement a sound SOE ownership policy, broaden transparency and coverage of income and asset disclosure rules, strengthen AML/CFT framework, and improve monitoring of cross-border activities.
  - Avoid state monopolies, tax amnesties and non-competitive public procurements.
  - The electricity sector reform and these structural measures would strengthen the business climate, support climate adaptation policy, reduce fragmentation risks, and catalyze concessional external financing.

*Source: IMF staff assessment as presented in the chapter "The External Sector Assessment (ESA) suggests that the external position of the Kyrgyz Republic in 2022" from the IMF country report.*

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

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

### Real sector and social indicators
- Growth:
  - Real GDP (growth in percent): 4.6 (2021), -7.0 (2022), 5.5 (2023), 6.3 (2024), 4.2 (2025), 4.4 (2026), 4.2 (2027), 4.0 (2028).
  - Nongold real GDP (growth in percent): 4.1 (2021), -7.5 (2022), 5.9 (2023), 5.2 (2024), 4.5 (2025), 4.3 (2026), 4.3 (2027), 4.1 (2028).
- Prices and inflation:
  - Consumer prices (12-month percent change, eop): 3.1 (2021), 9.7 (2022), 11.2 (2023), 14.7 (2024), 10.0 (2025), 8.0 (2026), 5.5 (2027), 5.5 (2028).
  - Consumer prices (12-month percent change, average): 1.1 (2021), 6.3 (2022), 11.9 (2023), 13.9 (2024), 11.7 (2025), 8.6 (2026), 6.6 (2027), 5.5 (2028).
- Social indicators:
  - Population (in millions, 2022): 7.0
  - GINI Index (2020): 0.29
  - Unemployment rate (ILO, in percent, 2022): 4.6
  - Poverty rate (in percent, national definition, 2021): 33
  - Per capita GDP (World Bank, in million U.S. dollars, 2022): 1,655
  - Life expectancy at birth in years (2021): 72.0
  - Adult literacy rate (percent of popul., 2019): 100
  - Under-five mortality (per 1000 live births, 2021): 17.4

### External and monetary sector: developments and projections
- External position and reserves:
  - Current account balance (in percent of GDP): -11.5 (2021), 4.5 (2022), -8.0 (2023), -43.6 (2024), -31.8 (2025), -9.7 (2026), -7.9 (2027), -5.9 (2028).
  - Gross International reserves (in millions of U.S. dollars): 2,176 (2019), 2,628 (2020), 2,779 (2021), 2,633 (2022), 2,953 (2023), 2,584 (2024), 2,311 (2025), 2,226 (2026), 2,185 (2027), 2,167 (2028).
  - Gross reserves (months of next year imports, eop): 6.4 (2019), 5.3 (2020), 3.2 (2021), 2.6 (2022), 2.9 (2023), 2.4 (2024), 2.1 (2025), 2.0 (2026), 1.9 (2027), 1.8 (2028).
- Trade and capital:
  - Exports, fob (in millions of U.S. dollars): 3,126 (2019), 2,444 (2020), 3,301 (2021), 3,564 (2022), 6,672 (2023), 9,598 (2024), 10,212 (2025), 10,575 (2026), 10,783 (2027), 10,903 (2028).
  - Imports, fob (in millions of U.S. dollars): 5,690 (2019), 4,060 (2020), 5,938 (2021), 10,497 (2022), 11,989 (2023), 12,434 (2024), 13,017 (2025), 13,328 (2026), 13,641 (2027), 14,036 (2028).
- Monetary aggregates and credit:
  - Reserve money (percent change, eop): 11.0 (2019), 24.8 (2020), 6.5 (2021), 44.9 (2022), 3.0 (2023), 7.1 (2024), 11.1 (2025), 20.6 (2026), 4.5 (2027), 8.2 (2028).
  - Broad money (percent change, eop): 12.8 (2019), 23.9 (2020), 19.1 (2021), 30.6 (2022), 18.4 (2023), 10.8 (2024), 11.1 (2025), 9.7 (2026), 8.9 (2027), 8.2 (2028).
  - Credit to private sector (percent change, eop): 14.9 (2019), 12.6 (2020), 11.7 (2021), 11.4 (2022), 21.5 (2023), 14.1 (2024), 19.0 (2025), 6.7 (2026), 4.1 (2027), 1.5 (2028).
  - Credit to private sector (in percent of GDP): 22.9 (2019), 26.4 (2020), 24.1 (2021), 21.7 (2022), 22.5 (2023), 22.6 (2024), 24.3 (2025), 23.6 (2026), 22.6 (2027), 21.2 (2028).

### Fiscal sector: revenues, expenditures, debt, and financing
- General government (GFSM/Government aggregates):
  - Revenue (percent of GDP): 30.8 (2019), 29.0 (2020), 31.4 (2021), 36.5 (2022), 38.5 (2023), 36.0 (2024), 35.2 (2025), 34.6 (2026), 34.2 (2027), 33.9 (2028).
  - Expense (percent of GDP): 25.9 (2019), 28.2 (2020), 26.1 (2021), 27.8 (2022), 30.3 (2023), 29.3 (2024), 29.1 (2025), 28.9 (2026), 28.9 (2027), 29.0 (2028).
  - Overall balance (net lending/borrowing): -0.1 (2019), -3.1 (2020), -0.7 (2021), -0.3 (2022), 0.1 (2023), -1.6 (2024), -1.7 (2025), -2.2 (2026), -2.6 (2027), -2.9 (2028).
  - Total state government debt (percent of GDP): 48.8 (2019), 63.6 (2020), 56.2 (2021), 49.2 (2022), 46.9 (2023), 44.3 (2024), 42.7 (2025), 42.1 (2026), 42.2 (2027), 42.9 (2028).
- State government finances (in millions of soms, selected items):
  - Revenues: 167,431 (2019), 152,149 (2020), 209,827 (2021), 300,622 (2022), 383,799 (2023), 404,057 (2024), 437,435 (2025), 470,901 (2026), 507,279 (2027), 545,532 (2028).
  - Expense: 140,047 (2019), 150,648 (2020), 173,000 (2021), 229,513 (2022), 290,937 (2023), 317,574 (2024), 351,421 (2025), 383,321 (2026), 418,469 (2027), 455,725 (2028).
  - Compensation of Employees (wages and salaries): 51,724 (2019), 58,981 (2020), 57,822 (2021), 84,978 (2022), 109,351 (2023), 122,766 (2024), 135,319 (2025), 147,682 (2026), 159,892 (2027), 173,483 (2028).
  - Capital transfers to SOEs (energy sector): 3,933 (2019), 3,240 (2020), 7,662 (2021), 4,914 (2022), 10,000 (2023), 11,000 (2024), 11,500 (2025), 11,000 (2026), 11,200 (2027), 12,000 (2028).
  - Net lending/borrowing (overall balance, in millions of soms): -4,028 (2019), -22,946 (2020), -9,427 (2021), -15,316 (2022), 1,451 (2023), -20,328 (2024), -24,772 (2025), -34,270 (2026), -44,446 (2027), -53,937 (2028).

### Financial soundness and banking sector
- Selected FSIs (Dec-19 to Nov-23, as reported):
  - Regulatory capital to risk weighted assets: 24.0 (Dec-19), 24.9 (Dec-20), 22.2 (Dec-21), 25.6 (Dec-22), 25.2 (Nov-23).
  - Nonperforming loans/total loans: 8.0 (Dec-19), 10.5 (Dec-20), 11.1 (Dec-21), 12.8 (Dec-22), 9.5 (Nov-23).
  - Loan-loss provisioning/nonperforming loans: 56.6 (Dec-19), 58.9 (Dec-20), 63.2 (Dec-21), 67.1 (Dec-22), 68.6 (Nov-23).
  - Return on equity: 7.7 (Dec-19), 5.5 (Dec-20), 7.8 (Dec-21), 43.4 (Dec-22), 34.1 (Nov-23).
  - Return on assets: 1.2 (Dec-19), 0.9 (Dec-20), 1.2 (Dec-21), 5.9 (Dec-22), 4.7 (Nov-23).
  - Net interest margin: 8.1 (Dec-19), 7.0 (Dec-20), 6.7 (Dec-21), 7.5 (Dec-22), 7.8 (Nov-23).
  - Liquidity ratio: 64.0 (Dec-19), 64.9 (Dec-20), 71.3 (Dec-21), 82.8 (Dec-22), 76.6 (Nov-23).
  - Share of foreign currency deposits in total deposits: 39.1 (Dec-19), 43.4 (Dec-20), 42.2 (Dec-21), 48.3 (Dec-22), 51.3 (Nov-23).
  - Share of foreign currency loans in total loans: 35.2 (Dec-19), 33.0 (Dec-20), 28.0 (Dec-21), 23.6 (Dec-22), 22.0 (Nov-23).

### Key projections and memorandum items
- Nominal GDP (in millions of U.S. dollars): 9,372 (2019), 8,283 (2020), 9,256 (2021), 11,672 (2022), 12,782 (2023), 13,791 (2024), 14,873 (2025), 15,842 (2026), 16,752 (2027), 17,594 (2028).
- Gold price (U.S. dollars per ounce) (memorandum): 1,392 (2019), 1,770 (2020), 1,800 (2021), 1,802 (2022), 1,959 (2023), 2,071 (2024), 2,158 (2025), 2,212 (2026), 2,250 (2027), 2,283 (2028).

### Risks, scenarios, and policy recommendations
- Risk: Intensification of regional conflict(s)
  - Likelihood / Timeframe: High / Medium
  - Possible impact: Lower growth and remittances, trade disruptions, return of migrant workers, lower disposable incomes, higher public debt, increased poverty, social pressures.
  - Policy advice:
    - Allow for more exchange rate flexibility and recalibrate monetary policy to contain inflation.
    - Provide targeted support to the most vulnerable, while creating additional fiscal space by reducing universal subsidies, eliminating inefficient tax exemptions, and seeking external concessional financing.
    - Enhance oversight of the financial system and mitigate risks to the banking sector.
- Risk: Commodity price volatility
  - Likelihood / Timeframe: High / Medium
  - Possible impact: Higher food and energy prices raise inflationary pressures, weaken the current account and exchange rate, increase food and energy insecurity, and cause social discontent; depreciation would increase public debt; higher gold prices would strengthen the current account.
  - Policy advice:
    - Allow for more exchange rate flexibility and adequately tight monetary policy to prevent second round inflation.
    - Provide targeted social assistance to the poor, while seeking external concessional financing.
- Risk: Social discontent
  - Likelihood / Timeframe: High / Medium
  - Possible impact: Reduction in remittances and incomes combined with high inflation would increase poverty, result in social discontent, and undermine political stability.
  - Policy advice:
    - Reduce inefficient energy subsidies to create fiscal space and strengthen social safety nets.
    - Seek to mobilize more donor financing.
    - Prioritize reforms that improve the business climate and support activity (e.g., governance).

*Source: Kyrgyz Republic — IMF staff report excerpt (figures, tables, and risk matrix).*

### Annex I. Risk Assessment Matrix

### Annex I. Risk Assessment Matrix

### Global risks: potential shocks, likelihood/timeframe, impacts, and policy advice
- Monetary policy miscalibration.
  - Likelihood / Timeframe: Medium
  - Possible Impact (if realized) / Transmission Channels:
    - Inflation would rise and the current account deficit widen, resulting in strong exchange rate pressures. Social conditions would deteriorate and poverty increase. Depreciation would increase public debt.
  - Policy Advice:
    - Allow for more exchange rate flexibility and adequately tight monetary policy to prevent second round inflation. Create more fiscal space by optimizing expenditure and the tax system, strengthen social safety nets and seek external concessional financing.  

- Abrupt global slowdown or recession.
  - Likelihood / Timeframe: Medium
  - Possible Impact (if realized) / Transmission Channels:
    - Kyrgyz Republic’s relatively limited integration into the global economy dampens the likely impact of a global downturn, except for the spillovers from Russia
  - Policy Advice:
    - Allow for more exchange rate flexibility and recalibrate monetary policy to contain inflation.
    - Provide targeted support to the most vulnerable, while creating additional fiscal space by reducing universal subsidies, eliminating inefficient tax exemptions, and seeking external concessional financing.
    - Enhance oversight of the financial system and mitigate risks to the banking sector. 

- Systemic financial instability.
  - Likelihood / Timeframe: Medium
  - Possible Impact (if realized) / Transmission Channels:
    - The limited integration of the Kyrgyz banking system in international financial markets would contain the impact, but growth slowdown could weaken banks’ asset quality.
  - Policy Advice:
    - Maintain supervisory vigilance and closely monitor banks' balance sheets. Calibrate stress tests to reflect such a risk. 

- Sovereign debt distress.
  - Likelihood / Timeframe: Medium
  - Possible Impact (if realized) / Transmission Channels:
    - The Kyrgyz Republic does not rely on international financial markets for its financing. However, large public investments that require international finance could fail to materialize and trigger a call on high-cost domestic financing. A higher interest bill would crowd out other priority spending, lead to debt build-up and pose a risk to debt sustainability.
  - Policy Advice:
    - Pursue fiscal consolidation by strengthening tax policy and administration, and reducing energy subsidies and the public wage bill. Delay low-priority capital spending. Accelerate structural reforms to support private sector led growth. 

### Structural risks
- Deepening geoeconomic fragmentation.
  - Likelihood / Timeframe: High
  - Possible Impact (if realized) / Transmission Channels:
    - Increased geo-economic fragmentation would disrupt traditional trade routes exacerbating inflation and costs from the lack of economic and trade diversification of the country.
  - Policy Advice:
    - Accelerate reforms to promote economic and trade diversification and attract FDI. Strengthen policies and regulatory compliance against the risks of secondary sanctions. 

- Extreme climate events.
  - Likelihood / Timeframe: Medium
  - Possible Impact (if realized) / Transmission Channels:
    - The Kyrgyz Republic could face escalating natural disasters such as droughts, heatwaves, floods, mudflows, and landslides, causing land degradation, air pollution, infrastructure damage, and loss of life.
  - Policy Advice:
    - Implement policies to advance the green transformation, including by fostering mitigation and adaptation. Build fiscal buffers if needed to facilitate the transition.

- Cyberthreats.
  - Likelihood / Timeframe: Medium
  - Possible Impact (if realized) / Transmission Channels:
    - Cyberattacks on critical physical or digital infrastructure (including digital currency platforms) trigger financial instability and disrupt economic activities. Cyberattacks could disrupt the payment system, which relies on electronic means to a large extent.
  - Policy Advice:
    - Accelerate efforts to enhance cyber-security.

### Domestic risks
- Sustained reduction in gold prices.
  - Likelihood / Timeframe: Medium
  - Possible Impact (if realized) / Transmission Channels:
    - Lower gold prices would weaken growth, the external and fiscal positions.
  - Policy Advice:
    - Allow for more exchange rate flexibility and strengthen the business environment to support economic activity.

*Annex I. Risk Assessment Matrix (July 2023) — Kyrgyz Republic, International Monetary Fund*

### Annex III. Implementation of Key Recommendations of the

### Annex III. Implementation of Key Recommendations of the 2022 Article IV Consultation

### Fiscal Policy
- Staff advice and recommendations:
  - Raise tax revenue by reducing tax exemptions, incentives, and preferential tax regimes; strengthen taxation of e-commerce; raise excises on tobacco and petroleum; adjust other specific excises to inflation; strengthen tax administration through e-filing, taxpayer registration, risk-based auditing and expanding the use of cash registers.
  - Maintain public debt below 60 percent of GDP in the medium term and reducing it more thereafter.
  - Contain the public wage by limiting nominal wage growth to below inflation and allowing headcount reduction through attrition and public employment optimization; pursue a comprehensive reform of the public sector compensation and employment framework in the medium term.
  - Gradually raise electricity tariffs and lower operating costs of the energy sector to reduce subsidies and generate fiscal savings.
  - Implement Integrated Financial Management Information System (IFMIS) modules for budget preparation and payroll and limit extra-budgetary funds.
  - Strengthen the efficiency of social protection to provide adequate and well-targeted social benefits to the vulnerable in a fiscally sustainable manner.
  - Channel Kumtor profits to the budget.

- Implementation status and key findings (as reported):
  - "Tax policy measures have not been implemented."
  - Tax collections increased considerably in 2022 primarily due to one-off tax payment by Kumtor (1.7 percent of GDP) and an increase in VAT collections on imports, driven by a significant increase in imports.
  - Efforts to digitalize tax procedures and promote e-tax reporting have helped to improve tax administration.
  - "Low financing needs helped keep total public debt below 49 percent of GDP at the end of 2022." It is projected to remain under 50 percent in the medium term.
  - Staff recommendations on containing the public wage have not been implemented, but the public wage bill as a share of GDP is projected to be lower thanks to stronger nominal GDP growth in 2022, active headcount management and limited bonus pay.
  - In Spring 2023, residential electricity tariffs above the lifeline were increased by about 30 percent, resulting in an average tariff increase of 10 percent. The average residential tariff remains well below the cost recovery level. Commercial tariffs are above cost-recovery.
  - "There has been no progress on IFMIS or extrabudgetary funds."
  - Social protection benefits remain category-based rather than need-based.
  - "A part of Kumtor profits was transferred to the State budget in 2023."

### Monetary/Exchange Rate, Financial Policies, and Safeguards Assessment
- Staff advice and recommendations:
  - Discontinue gold purchases by the NBKR and resume gold exports without NBKR’s involvement.
  - Convert non-monetary gold on the NBKR’s balance sheet to foreign exchange to increase and diversify international reserves.
  - Eliminate the interest rate cap on NBKR note auctions to strengthen the effectiveness of monetary policy.
  - Divest NBKR’s ownership in Keremet Bank, develop a strategy to unwind its ownership of the Guarantee Fund, and strengthen its governance and operational independence.
  - Strengthen analytical and implementation capacity of risk-based AML/CFT supervision and monitoring of cross border activities.
  - Safeguards assessment recommendation: amend the NBKR law to address shortcomings identified in the 2020 assessment, including governance and non-core operations.

- Implementation status and key findings (as reported):
  - "The NBKR has continued to purchase domestically produced gold, a part of which has been exported by the NBKR."
  - "The NBKR has exported some non-monetary gold, but is still holding a significant stock."
  - "Interest rate caps on NBKR note auctions remain in place."
  - The NBKR is intending to divest Keremet Bank but means to retain ownership of the Guarantee Fund.
  - "The suspension of the NBKR profit distribution provision for 2021 and 2022 by passing a constitutional law undermines the independence of the central bank."
  - AML/CFT: "Not implemented" — strengthening analytical and implementation capacity of risk-based AML/CFT supervision and monitoring of cross border activities has not been implemented.

### Structural Reforms
- Staff advice and recommendations:
  - Strengthen the SOE ownership and corporate governance frameworks by streamlining and harmonizing legislation; articulating ownership policy and disclosure requirements; strengthening institutional oversight, transparency and accountability; subject SOEs to the public procurement law.
  - Strengthen income and asset declarations by public officials and investigate illicit enrichment to minimize opportunities for corruption.
  - Create fiscal space for additional public spending on green infrastructure, healthcare and education, and social safety nets; reduce air, soil, and water pollution, and expand renewables.

- Implementation status and key findings (as reported):
  - "There has been no change to the SOE ownership and governance framework."
  - "The recent amendments to the public procurement law weakened the requirements for mandatory competitive bidding, while SOEs remain excluded from the law."
  - The 2023 law on the Legalization and Amnesty of Individuals’ Assets "undermines the credibility of the anti-corruption framework."
  - The authorities announced their intention to develop renewable energy sources, including hydropower.

### Debt Sustainability and Fiscal Outlook (selected findings)
- Staff assessment summary:
  - "Staff assesses the Kyrgyz Republic’s public debt as sustainable with moderate risks of external and overall debt distress."
  - The country's debt carrying capacity was downgraded to "medium" from "strong," lowering relevant thresholds and resulting in a breach of the external debt threshold of the PV of debt-to-GDP ratio between 2025 and 2029 under a standard shock to exports.
  - A customized stress test reflecting discontinuation of gold exports and the collapse in re-exports would have resulted in a breach of the PV of external debt-to-GDP threshold had the debt carrying capacity remained "strong."
  - External debt burden indicators trend downward and the breaches are limited; staff judges external public debt to be sustainable, "with some space to absorb shocks."
  - "The PV of total public debt-to-GDP breaches its benchmark under the baseline scenario in 2028 under a standard shock to growth," resulting in the "moderate" rating for the overall risk of debt distress.
  - Without fiscal discipline, the overall deficit will start increasing after 2026 as interest payments increase, and total public debt continues to rise to 67.2 percent of GDP by 2043.
  - Recommendations to address vulnerabilities: improve tax collections, reduce the wage bill and energy subsidies, strengthen debt management, seek concessional financing and improve public investment management.

### Relations with the Fund and Data/Technical Capacity (selected items)
- Membership and financial position (as of November 30, 2023):
  - Quota: 177.60 (SDR million)  Percent of Quota: 100.00
  - Fund Holdings of Currency (Exchange Rate): 266.12 (SDR million) 149.84 percent of Quota
  - Reserve Tranche Position: 0.31 (SDR million) 0.18 percent of Quota
  - Net Cumulative Allocation (SDR Department): 254.96 (SDR million) 100.00 percent of Allocation
  - Holdings (SDR Department): 145.29 (SDR million) 56.99 percent of Allocation
  - Outstanding purchases and loans include RFI: 59.20 (SDR million), RCF loans: 88.80 (SDR million) / 59.20 (SDR million) noted in table.

- Exchange rate and multiple currency practice (MCP):
  - De jure arrangement: floating arrangement.
  - De facto arrangement reclassifications: to "other managed" effective February 25, 2022; to "crawl-like" effective October 21, 2022.
  - MCP policy in place until February 1, 2024; staff does not recommend approval of this MCP. Under the MCP, the official exchange rate used for government transactions may differ by more than 2 percent from the FX market rate.

- Statistical and technical assistance capacity:
  - Data provision is adequate for surveillance. Four institutions collect macroeconomic statistics: NSC, Ministry of Economy and Commerce, Ministry of Finance, NBKR.
  - NSC subscribed to SDDS in February 2004.
  - Implementation of the System of National Accounts 2008 (2008 SNA) was finalized in May 2023 with major revision of national accounts time series from 2019 year.
  - Progress and outstanding issues noted across national accounts, price and labor market statistics, government finance statistics, monetary and financial statistics, external sector statistics.
  - IMF technical assistance delivered across FAD, MCM, LEG, STA and other departments between January 2014 and November 2023 on topics including Tax Administration, Public Finance Management, IFMIS strategy, Monetary Policy and Inflation Targeting, AML/CFT, National Accounts, Government Finance Statistics, and more.

*Prepared by staffs of the International Monetary Fund and the International Development Association; January 19, 2024.*

### 1. Public and Publicly Guaranteed (PPG) debt covers state government debt (both central

### 1. Public and Publicly Guaranteed (PPG) debt covers state government debt (both central 

### Coverage of public debt
- PPG debt covers state government debt (both central and local government), state guarantees, and the debt of the central bank to the IMF (Text Table 1).
- Almost all public sector debt is issued by the central government.
- The 2021 SDR allocation (SDR 170 million, equivalent to US$242 million), retroceded to the central government, is projected to be fully drawn down by end 2023 and is therefore counted fully toward public debt after that point.
- Local governments: no external debt and insignificant domestic debt.
- Social security fund: has no debt.
- State-owned enterprises (SOEs): mostly borrow from the government and have no external debt by law; short-term domestic borrowing from the banking sector is limited and they do not have long-term domestic debt.
- Government guarantees: the government has no outstanding guarantees.
- Note on Budget Code: Since 2007 the Budget Code prevented the state from guaranteeing debt of SOEs and other public entities except when stipulated by obligations of memberships in international and inter-governmental organizations; recent changes allow the government to issue guarantees subject to conditions being developed.

### Contingent liability shock applied
- Rationale: large stock of liabilities associated with the energy sector (equivalent to around 15 percent of GDP in 2022) and conversion of energy SOE debt to equity due to solvency issues.
- Applied contingent liability shock: 7.0 percent of GDP (Text Table 2).
  - 2.0 percent of GDP: operational risk stemming from structural cash shortfall of loss-making energy sector SOEs (default value reflects possible losses from SOE operations).
  - 5.0 percent of GDP: financial market default value representing the average cost to the government during a financial crisis.
- Text Table 2 summary (percent of GDP):
  - Other elements of the general government not captured in 1.: 0.0
  - SoE's debt (guaranteed and not guaranteed by the government): 2.0 (default value)
  - PPP: 0.0
  - Financial market (the default value of 5 percent of GDP is the minimum value): 5.0
  - Total (2+3+4+5): 7.0

### Background: recent debt developments and composition
- Public debt decreased to 49.2 percent of GDP in 2022 from 56.2 percent of GDP in 2021 (Text Chart 1).
  - Drivers: restated higher nominal GDP for 2021, a small overall fiscal deficit, strong nominal GDP growth in 2022 (including almost 2 percentage points of GDP of public debt eliminated by a higher GDP deflator), and slower exchange rate depreciation.
  - External debt decreased by 7.2 percentage points of GDP; domestic debt increased marginally.
- Domestic public debt holders: commercial banks (50 percent) and the social security fund (50 percent).
- External debt currency composition at end-2022:
  - US dollars and SDRs: more than 84 percent of nominal external debt at end 2022 (vs 80 percent at end 2021).
  - Euro: just under 4 percent.
- Major external creditors at end-2022:
  - China: over 40 percent of total external debt.
  - Asian Development Bank (AsDB): over 15 percent.
  - International Development Association (IDA–World Bank): over 15 percent.
  - IMF: almost 12 percent after US$112 million of the SDR allocation was drawn down in 2022.
  - “Other” category includes Japanese International Cooperation Agency, Islamic Development Bank, other bilateral lenders, and Eurasian Development Bank.

### Underlying macroeconomic and financing assumptions (Text Table 3 highlights)
- Growth and inflation:
  - 2022 growth strong due to recovery in gold production and agriculture, and significant increases in trade, transport, communications, and construction.
  - Growth expected to taper off in 2023 due to base effects; medium- and long-term potential of 4 percent.
  - End-of-period inflation: 14.7 percent in 2022; below 10 percent by October 2023; forecast in mid-single digits in 2025.
- Fiscal policy:
  - Overall budget deficit: 0.3 percent of GDP in 2022 (down from 0.7 percent in 2021).
  - Projected: almost nil in 2023 due to sharp increase in VAT revenue.
  - Capital injections in state-owned banks and the development fund expected to add 2.6 percentage points of GDP to financing needs, assumed filled by domestic debt.
  - Deficit projected to increase gradually to slightly under 3 percent of GDP through 2028; interest payments rise from 1 percent of GDP in 2023 to 1.6 percent by 2028.
- External sector:
  - Current account balance: -8.0 percent of GDP in 2021 to about -43.6 percent in 2022 (Text Table 3 shows -43.6 for 2022).
  - Net remittances fell by 17.4 percent in 2022; net remittances slated to fall another 3.6 percentage points of GDP to 13.8 percent of GDP in 2023.
  - Discontinuation and resumption of gold exports affect recorded trade and balance of payments; BoP errors and omissions surged to more than 37 percent of GDP in 2022.
  - From 2024 Staffs project full resumption of gold exports and export increases that offset part of recorded import increases since 2022.
- Financing assumptions:
  - New external borrowing assumed mostly on concessional terms; country expected to remain IDA-eligible.
  - IDA loan disbursements: increase to around US$70 million by 2030 and fall to around US$25 million over the following 8 years.
  - Net domestic borrowing share: over 40 percent of net financing needs in 2023; almost 100 percent by 2028.
  - Domestic borrowing rates assumed in 2023: 12.4 to 16.4 percent for maturities between 1 year and 20 years; gradual decrease by 2027 to between 6.7 and 10.7 percent respectively.

### Baseline projections and realism checks
- Drivers of debt dynamics:
  - Forecast error of change in public debt-to-GDP over past five years has been small.
  - Projected stabilization of total public debt in medium term reflects high nominal GDP growth and limited financing needs despite high domestic interest rates due to inflation.
  - Gradual increase in total public debt ratio beyond 2026 explained by expected widening of general government deficit due to lower revenue and high domestic debt costs while nominal GDP growth slows.
- Fiscal adjustment realism:
  - Projected 3-year adjustment shows some deterioration of the primary balance and is close to the middle of the chart, reflecting deterioration in tax revenue and large wage bill.
- Consistency checks:
  - Growth projection for 2023 is below cone suggested by fiscal multipliers.
  - Public investment path decreases in 2023 after significant increase in 2022; rises slightly above previous DSA levels from 2023 onward.

### Country classification and indicative thresholds (Text Table 4)
- Debt-carrying capacity: Medium.
  - Composite Indicator (CI) score: 2.97 (most recent vintage).
  - Threshold for strong capacity: 3.05.
- External debt burden thresholds for Medium classification:
  - PV of debt in % of Exports: 180
  - PV of debt in % of GDP: 40
  - Debt service in % of Exports: 15
  - Debt service in % of Revenue: 18
- Total public debt benchmark (PV of total public debt-to-GDP) for Medium: 55
- Final classification: Medium (current vintage) — previous vintages: Medium, Medium, Strong; CI values shown as 2.97, 3.04, 3.06 across vintages.

### External DSA findings
- All four external debt ratios remain below thresholds under baseline.
  - External PPG debt: 39.5 percent of GDP at end-2022.
  - Private external debt: 23.9 percent of GDP at end-2022.
  - PV of PPG external debt: 28.8 percent of GDP in 2022 (from about 35.7 percent at end-2021 estimated in previous DSA).
  - Projected PV of PPG external debt: about 19.3 percent of GDP by end-2028 (well below 55 percent threshold).
- Residual high values in 2022 and 2023 attributable to high errors and omissions in the BoP, not projected onward.
- Stress tests:
  - Standard stress test to exports: PV of external debt-to-GDP breaches its threshold between 2025 and 2029.
    - Cause: lowering of thresholds despite declining external borrowing and higher denominators due to inflation and higher projected exports.
    - Among standard stress tests, export shock yields most extreme values.
  - Customized stress test mirroring discontinuation of gold exports and collapse in re-exports:
    - Reduces exports by 2 standard deviations, resulting in negative export growth of 36.8 percent annually over two years and a decrease in exports equivalent to US$4.5 billion in 2025 (over the baseline).
    - Outcome: threshold for PV of external debt-to-GDP briefly breached in 2025 before all external debt burden indicators decrease monotonously under respective thresholds.

### Public DSA findings
- PV of debt-to-GDP ratio (used to assess total public debt distress) increases gradually under baseline and does not breach its benchmark.
  - Public debt estimated at 46.9 percent of GDP in 2023 (down from 49.2 percent in 2022).
  - Under baseline: public debt expected to decrease to 42.7 percent of GDP by 2025 due to lower fiscal imbalances and buoyant growth.
  - Increasing interest payments put total public debt on upward trajectory starting in 2027.
  - Public debt projected to rise to almost 67 percent of GDP by 2043.
  - Ratio of debt service-to-revenue (including grants) rises to more than 15 percent and remains at that level until 2032, reflecting high interest rates on domestic debt.
- Text Table 5 selected comparisons (percent of GDP):
  - PPG external debt-to-GDP ratio (Current DSA): 39.5 (2022), 37.1 (2023), 34.4 (2024), 32.5 (2025), 30.6 (2026), 29.0 (2027), 28.0 (2028), 25.2 (2029)
  - Public debt-to-GDP ratio (Current DSA): 49.2 (2022), 46.9 (2023), 44.3 (2024), 42.7 (2025), 42.1 (2026), 42.2 (2027), 48.2 (2028)

*Source: Kyrgyz Republic — IMF staff Debt Sustainability Analysis and supporting text as provided in the source content.*

### 12. As in the previous DSA, total public debt is vulnerable to a growth shock, which is the

### 1kgzea2024001 - 12. As in the previous DSA, total public debt is vulnerable to a growth shock, which is the

### Vulnerability Assessment and Key Findings
- Under the most extreme (growth) shock:
  - The PV of debt-to-GDP ratio breaches the benchmark of 55 percent of GDP by 2028 and continues a persistent upward trajectory thereafter.
  - The PV of debt-to-revenue ratio would reach over 230 percent by 2033.
  - The debt service-to-revenue ratio would peak at 30 percent in 2032.
  - These projections point to potential debt and liquidity vulnerabilities in the long run despite no explicit benchmarks for the latter two ratios.
- External debt:
  - Mechanical risk rating and stress tests support staff assessment of external debt as at "moderate" risk of debt distress.
  - The breach of a threshold by one of four ratios under a standard stress test and a customized exports stress test justifies maintaining external debt risk at “moderate.”
  - External debt is assessed as sustainable under the baseline: no breaches of relevant thresholds and indicators projected on a downward trajectory before 2033, driven by low external borrowing and decline in PPG external debt.
- Overall public debt:
  - The risk of overall public debt distress remains “moderate,” as the PV of debt-to-GDP ratio breaches its benchmark of 55 percent before 2033 under a standard stress test.
  - Total public debt is still assessed as sustainable under the baseline because the PV of public debt-to-GDP ratio under the baseline remains below 50 percent of GDP by 2043, even though it increases monotonically.
  - The breach under stress reflects growing domestic borrowing at high interest rates; interest payments become a driver of financing needs and automatic debt dynamics.

### Drivers of Vulnerability
- Growing domestic borrowing as a residual source of financing in the absence of more concessional finance, at high interest rates.
- High interest payments feeding into financing needs over time, contributing to automatic debt dynamics.
- Heightened uncertainty and downside regional risks, including:
  - Possible adverse spillovers from Russia’s invasion of Ukraine.
  - Higher global interest rates.
  - Increased demand for public spending as inflation erodes purchasing power.
  - Limited diversification of exports.
- Envisaged domestic financing could crowd out private sector lending and constrain delivery of public services.
- Increasing issuances of domestic debt call for a deeper and more liquid financial sector.

### Policy Recommendations and Required Measures
- Fiscal consolidation and/or greater access to concessional financing are needed to avoid benchmark breaches under stress.
- Fiscal target:
  - "To keep public debt sustainable, the primary deficit should be reduced under 1.0 percent of GDP in the medium term."
- Revenue mobilization measures suggested:
  - Improve revenue mobilization, including by streamlining tax exemptions and strengthening tax administration.
- Expenditure measures suggested:
  - Rationalize the public wage bill.
  - Reduce subsidies.
  - Improve targeting of social benefits.
- Public debt and expenditure management:
  - Strengthen public debt and expenditure management and improve the business climate.
  - Public investment management to contain contingent liabilities, spur growth, and raise spending efficiency.
- State-owned enterprises (SOEs):
  - Review the state’s involvement in the economy through SOEs and improve their oversight to improve resource allocation and reduce contingent liabilities.
  - Make financial performance of SOEs, including Kumtor, transparent and accessible to the public; channel its profit distribution to the budget.
  - These steps would strengthen engagement with donors and help mobilize additional concessional financing.
- Structural reforms:
  - Implement structural reforms to improve the business environment and strengthen competitiveness of Kyrgyz exports over the medium and long term.
- Financial sector:
  - Deepen and make more liquid domestic financial markets to accommodate increasing domestic debt issuances.

### Authorities' Views
- Authorities broadly shared Bank and Fund staff views.
- They noted their nominal debt ceiling of 70 percent of GDP is not breached over the long term in this analysis and reiterated commitment to adhere to it.
- Authorities indicated medium-term revenue projections pointing to continuous increases, higher surpluses, and reduced borrowing needs, consistent with their debt rule.
- They recognized risks from the current high interest rate environment and potential reversal of trade and migration flows.
- They acknowledged challenges of shallow domestic debt markets and limited external concessional financing options, and emphasized adoption of a new Public-Private Partnership framework to mobilize financing for commercially viable ventures.

### Selected Numerical Indicators (as presented)
- PV of public debt-to-GDP ratio (public DSA, projections excerpt): ......39.337.435.233.833.533.834.540.060.5
- PV of public debt-to-revenue and grants ratio (projections excerpt): ......107.897.097.695.996.998.8101.6122.1187.1
- Debt service-to-revenue and grants ratio (projections excerpt): 9.37.15.88.212.913.513.113.913.612.718.6
- Public sector debt (percent of GDP, historical and projections excerpt): 63.656.249.246.944.342.742.142.242.948.267.255.844.6
- Primary deficit (selected series excerpt): 2.10.0-0.8-1.10.50.60.91.21.31.52.11.51.0
- Revenue and grants (percent of GDP, excerpt): 29.031.436.538.536.035.234.634.233.932.732.333.234.3
- Gross financing need (projections excerpt): 4.83.92.43.15.35.45.55.95.95.78.1

*Source: IMF staff report (Kyrgyz Republic) as provided in the supplied content.*

### 2. Primary balance54444443433

### 1kgzea2024001 - 2. Primary balance54444443433

### Economic developments and outlook
- The National Statistics Committee revised GDP figures: the GDP growth rate for 2022 was increased from 6.2 percent to 9 percent.
- For 2023, output growth was reported at 6.2 percent (compared to 4.4 percent growth through November); excluding Kumtor, GDP grew by 8.1 percent in 2023.
- Headline inflation declined from a peak of 16.2 percent in February to 7.3 percent in December 2023; headline inflation declined to 7.3 percent in December from 8.1 percent in November.
- Core inflation was 11.4 percent in December, down from 12.4 percent in November, and remained in double digits.
- The country’s international reserves increased by 16 percent over the year and exceeded USD 3 billion at the end of 2023.
- Staff is analyzing the nature of the GDP revision; the new data do not change the thrust of the staff appraisal and staff’s policy recommendations remain valid.

### Fiscal policy: recent outturns, reforms, and medium-term stance
- Preliminary fiscal outturns indicate an overall surplus of general government of 1.6 percent of GDP; this surplus is in large part due to a surplus of the Social Fund.
- Public debt reported below 50 percent of GDP.
- For the central government, lower tax revenue was more than offset by higher non-tax revenue; current spending (including wages and goods and services) was about 0.5 percent of GDP higher, and capital spending 0.3 percent of GDP lower than projected.
- With the entry into force of the new tax code in 2022, state budget resources increased, with improvements in tax administration.
- Results of the first stage assessment of five tax exemptions propose:
  - abolish the income tax benefit for credit unions from January 1, 2027;
  - not extend the exemption from value added tax on imported banking equipment beyond January 1, 2024.
- Authorities consider it premature to increase the progressivity of the personal income tax.
- Medium-term government spending goal: maintain social orientation of spending while reducing non-priority expenses and improving efficiency and targeting of spending.
- Fiscal consolidation and public debt sustainability, while increasing fiscal space for priority spending, remain medium-term objectives.

### Monetary policy and financial sector
- Monetary policy remains restrictive to contain inflationary pressures; the NBKR has kept the policy rate unchanged at 13 percent since November 2022.
- Headline inflation dropped to 5.9 percent as of January 19 this year, but the NBKR decided on January 29 to keep the policy rate unchanged at 13 percent; the NBKR projects inflation for 2024 near the upper level of the range 5–7 percent.
- Since August 2020, the NBKR has not been involved in subsidized lending.
- The domestic foreign exchange market has been susceptible to external shocks; the NBKR contained exchange rate volatility and minimized adverse inflationary pressures and risks to the economy.
- Authorities will cautiously maintain two-way exchange rate flexibility; interventions will be used to smooth excessive fluctuations.
- The NBKR will continue to strengthen monetary transmission and gradually phase out non-core activities:
  - NBKR’s loan to the Russian-Kyrgyz Development Fund was fully repaid in 2023.
  - NBKR plans to sell its ownership in Keremet Bank to the government in 2024; on January 31, 2024, the parliament considered and adopted in the first reading the bill on the acquisition of Keremet Bank by the Cabinet of Ministers from the NBKR.
  - NBKR’s gold operations will be determined by its reserve management strategy.
  - An interdepartmental working group was created to address external accounts and improve balance of payments statistics.
- Banking system indicators:
  - Banking sector expanded its loan portfolio by 26.3 percent.
  - Banking system is described as well-capitalized and stable, with sufficient liquidity and capital buffers and a decline in non-performing loans.
  - The NBKR remains vigilant and continuously enhances risk-based supervision.

### Structural reforms and institutional priorities
- Authorities commit to institutional and structural reforms to ensure broad-based and inclusive growth, including:
  - further improving the business and investment climate;
  - supporting SMEs;
  - enhancing governance, public financial management and accountability;
  - increasing economic diversification;
  - strengthening human capital;
  - addressing outstanding AML/CFT issues;
  - pursuing an ambitious digitalization agenda.
- Governance of SOEs and energy sector reforms will be improved.
- Authorities intend to increase the efficiency of development funds and the State Development Bank (SDB) in addressing market failures; they will be vigilant to avoid excessive borrowing by SDB to safeguard debt sustainability.
- Authorities remain committed to strengthening resilience to climate change, including investments in green infrastructure.

### Key policy messages and risks
- Staff’s policy recommendations remain valid despite statistical revisions.
- Main economic risks: global slowdown, world price volatilities, geo-economic fragmentation, and climate change.
- Authorities remain committed to increasing potential growth, diversifying the economy, and using fiscal policy to create an environment conducive to job-rich, private sector-led growth and to increase the country’s attractiveness to investment.

*Sources: Country authorities; and staff estimates and projections.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1kgzea2024001.pdf_