Horses roaming the landscape, Kyrgyz Republic.(photo: extremal/iStock by Getty Images)

Horses roaming the landscape, Kyrgyz Republic.(photo: extremal/iStock by Getty Images)

How the Kyrgyz Republic Tackled the Pandemic

August 3, 2021

The Kyrgyz Republic was the first country to receive IMF emergency funding to tackle the COVID-19 crisis. IMF Country Focus spoke with the mission chief, Nikoloz Gigineishvili, about the pandemic’s impact on the economy and how the IMF supported the recovery.

  • How has the pandemic affected the Kyrgyz Republic?

    The Kyrgyz Republic has been significantly affected by the COVID-19 pandemic and was one of the hardest-hit countries in the region. The human cost of the lives lost is immeasurable, but the shock to the economy has also been substantial. The pandemic led to the contraction of output by 8.6 percent in 2020, a substantial loss of jobs, and an increase in poverty.

    The labor-intensive sectors of the economy were affected the most. Tourism fell by nearly 80 percent. Transportation, trade, and construction were also significantly impacted. On the other hand, agriculture, which is mostly family-operated and does not involve extensive human interaction in closed environments, grew by about 1 percent in 2020.

    Inflation increased from 3 percent in 2019 to about 10 percent in 2020, primarily due to the depreciation of the currency and higher imported food prices. Public debt increased by 16 percentage points of GDP to 68 percent in 2020, reflecting lower output, a higher fiscal deficit, and currency depreciation. According to World Bank estimates, poverty increased from 20 percent to 31 percent as incomes declined and unemployment rose.

  • What were their policy responses to tackling the crisis, and were they effective? 

    The authorities responded swiftly with a range of measures to protect public health and mitigate the economic impact of the pandemic. These included emergency health spending, stepping up the food security program for the vulnerable, temporary tax deferrals and subsidized loans for small and medium enterprises, and liquidity support to banks. Without these measures, the economic downturn and its impact on poverty would have been much worse.

    Unfortunately, the virus is still present, and the risk of the pandemic’s resurgence remains. Therefore, securing vaccines as soon as feasible is the highest priority, but the inadequate supply of vaccines and insufficient financing remain significant challenges. Encouragingly, earlier this month the World Bank approved a US$20 million loan to help the Kyrgyz Republic finance the purchase of additional vaccines, and other international organizations are also planning to step up support. Once the health crisis is contained, we expect life to gradually return to normal; firms to begin hiring again, people who are unemployed to return to work, and borders to reopen to allow trade and travel. In this scenario, we project the economy to grow by 3.8 percent in 2021 and 6.4 percent in 2022. However, uncertainty remains high because the pandemic may take an unexpected turn.

  • How is the IMF supporting their recovery? 

    The Fund responded to the crisis with unprecedented speed, supporting member countries with financing, policy advice and capacity development. Since the onset of COVID-19, the Fund has provided over US$110 billion in emergency financial assistance to member countries. The Kyrgyz Republic was the first country to benefit from such support, receiving about US$242 million in partially concessional financing, which provided much-needed budgetary resources for the crisis response, including for the procurement of emergency medical supplies. In the interest of transparency and governance safeguards, the authorities committed to publishing audit reports and beneficial ownership information for all COVID-related contracts.

    The Fund also advised the authorities on policies during the crisis, the exit strategy to achieve and maintain macroeconomic stability after the crisis, and how to strengthen resilience over the medium term. We have continued to help the Kyrgyz Republic with capacity building as well, focusing on public finance management, monetary policy, banking supervision, and government finance statistics.

  • What are the top priorities moving forward? 

    The main challenge is to balance two competing objectives: continue supporting the most vulnerable firms and households until the recovery is entrenched, and strengthening resilience of the economy including by reducing public debt and inflation.

    The budget deficit is expected to widen in 2021 to maintain fiscal support to a still fragile economy, but measured and growth-friendly policies to reduce public debt will be essential thereafter.. The Fund recommends reducing public debt to below 60 percent of GDP by 2025. This level of debt would still be higher than the pre-crisis 51.6 percent of GDP, but would provide some fiscal space to respond to future downturns.

    Monetary policy should aim to gradually reduce inflation to mid-single digits, while preserving exchange rate flexibility, which has played a critical role in cushioning the shock. Without it, international reserves would have been severely depleted in 2020 and overvaluation of the currency would have increased the risks to financial stability.

    In addition to macroeconomic stability, the Kyrgyz Republic needs to support inclusive growth and job creation. This means improving the business environment; strengthening governance and tackling corruption; ensuring a stable supply of electricity by reforming the energy sector, including electricity tariffs; improving access to finance, especially for small and medium-sized enterprises; reducing non-tariff trade barriers; and strengthening labor skills and the quality of education. The sooner these reforms are implemented, the sooner the benefits will be felt by the population.