Kyrgyz Republic: Staff Concluding Statement of the 2022 Article IV Consultation Mission
December 2, 2022
A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.
The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.
Recent Developments, Outlook, and Risks
1. The Kyrgyz economy has shown resilience to the spillovers from the war in Ukraine. Real GDP grew by 7 percent in the first ten months of this year driven by gold production, transportation, trade, and agriculture. Russia’s resilience to sanctions, and unanticipated migration of capital and labor from Russia to the Kyrgyz Republic appear to have muted the war’s adverse spillovers so far. Inflation increased to 15.4 percent in October (y/y), mainly due to high global food and fuel prices, but core inflation also rose to double digits. In the first nine months of 2022 imports increased by nearly 80 percent, partly because of higher oil prices, but also due to an increase in transit trade while gold exports were negligible as most of the domestic gold production was purchased by the NBKR. Net inflow of money transfers from abroad declined by 12.8 percent through September, and international reserves fell to below four months of prospective imports.
2. The outlook is subject to heightened uncertainty. Growth this year is projected to ease from 7 percent through October to 5.5 percent by year-end and to 3.5 percent next year, as the projected contraction in Russia starts to weigh on the Kyrgyz economy, while gold production of the Kumtor mine reaches capacity and activity in the agriculture sector slows from exceptionally high levels. Inflation is expected to remain elevated at about 15 percent this year due to strong wage growth and a temporary demand boost from the inflow of Russian migrants, and decline to about 10 percent only by end-2023 as food and energy prices moderate and remittances decline with the growth slowdown in Russia. In the medium term, GDP is projected to converge to its potential growth rate of about 4 percent, and inflation return to mid-single digits, supported by adequately calibrated monetary policy. Immediate resumption of gold exports is critical to reduce the current account deficit to sustainable levels.
3. R isks are mostly on the downside . A stronger contraction of the Russian economy could result in lower growth and remittances, and a return of migrant workers. The resulting reduction in disposable incomes combined with high inflation, if persistent, could raise already elevated poverty. Without additional fiscal space and concessional financing, large new infrastructure projects such as the China–Kyrgyzstan–Uzbekistan railway and Kambarata-1 hydropower plant would further increase public debt. These risks could be compounded by escalation of regional conflicts, the reemergence of the pandemic, shortages of power supply due to the ageing electricity infrastructure or a sustained reduction in gold prices. On the upside, a new wave of immigration from Russia could improve the short-term growth outlook.
Fiscal Policy
4. Fiscal deficits are expected to increase considerably. The general government deficit, including lending to energy sector SOEs, is estimated to widen to 5.2 percent of GDP in 2022 from 0.8 percent last year and remain slightly under 5 percent of GDP in the medium term. The authorities’ exceptional tax administration efforts substantially improved revenue collection in 2022, but expenditure has increased much more due to the significant increase during the year in public wages, pensions and public investment. From 2023 onwards the full year impact of the wage and pension increases will keep the deficit elevated despite the planned reduction in domestically financed investment spending. The latter could undermine growth in view of the large infrastructure investment needs. At the same time, given limited foreign financing, raising around 4 percent of GDP per year in a shallow domestic bond market to close the fiscal deficit could be a significant challenge and costly. The authorities should proactively seek external concessional financing.
5. Without fiscal consolidation, public debt will rise gradually from 58 percent of GDP in 2022 to 61 percent of GDP by 2027 . The mission recommends anchoring fiscal policy to keeping public debt below 60 percent of GDP in the medium term and reducing it further thereafter to rebuild fiscal buffers for future shocks. This entails lowering primary fiscal deficits from an estimated 4.2 percent of GDP in 2022 to 1 percent of GDP by end-2027. More revenue could be mobilized by reducing tax exemptions, strengthening taxation of e-commerce, adjusting specific taxes to inflation, raising excises on tobacco and petroleum, and continuing to improve tax administration through e-filing, taxpayer registration, risk-based auditing and expanding the use of cash registers. The 2021 tax code reform is a forgone opportunity to implement some of these measures and should be revisited. Further, since the Kumtor gold mine is now fully state-owned, it should comply with the same tax regime as other gold mines, while channeling its dividends to the budget would provide much-needed fiscal resources. A tax amnesty or new preferential tax regimes could result in additional revenue loss. The IMF stands ready to provide technical assistance on tax policy and tax administration reforms.
6. More fiscal space can be created by reducing expenditure and strengthening public finance management (PFM). The wage bill can be contained by reducing the headcount through attrition, limiting wage indexation to below inflation, and rationalizing the public sector employment and compensation framework. Gradually raising electricity tariffs and reforming the energy sector would reduce subsidies and generate fiscal savings, part of which should be used for targeted social assistance to the most vulnerable. These measures should be supplemented with PFM reforms to improve budget preparation and execution, including wage bill management, its transparency, and limit extra-budgetary funds such as the Stabilization fund. Strengthening the efficiency of social protection should be a priority to prevent further increase in poverty.
Monetary, Exchange Rate and Financial Sector Policies
7. Despite demand pressures, in late November the NBKR lowered its policy rate by 100 basis points to 13 percent. High food and fuel prices, immigration from Russia and strong GDP and wage growth are likely to keep inflation pressures elevated in the coming months. The mission recommends a restrictive monetary stance and tightening domestic liquidity until inflation is firmly on a downward trend. The effectiveness of monetary policy can be strengthened by lifting the interest rate cap on auctions of NBKR notes, improving coordination between monetary and fiscal policies and liquidity management, and containing Government’s subsidized lending. All banks, including private ones, should have equal access to any such programs.
8. Given the heightened risks to the outlook, exchange rate flexibility gains particular importance to absorb potential shocks . To strengthen medium-term competitiveness, however, structural reforms would also be needed for a lasting solution. Temporary emergency measures introduced during the pandemic are now being phased out, which is welcome, but the limits on export of foreign exchange cash by financial institutions remain in place. The NBKR’s extensive purchases of gold result in an injection of domestic liquidity that is unwarranted by the primary disinflation objective and entail significant sterilization costs. They also undermine exports and result in concentration of reserve assets in gold. The mission recommends discontinuation of gold purchases by the NBKR and resumption of gold exports without NBKR’s involvement, which is critical for balance of payments sustainability.
9. Parliament rejected most draft amendments to the NBKR law that aimed to address the 2020 Safeguards Assessment recommendations. The new law now envisages a proper recapitalization and profit distribution mechanisms, which is an important accomplishment, but does not introduce a majority of non-executive members of the NBKR Board and the Audit Committee, or provisions to wind down non-core central bank operations. These provisions are essential to strengthen governance and autonomy of the central bank and should be introduced in the law in the shortest possible time. The NBKR should continue its efforts to divest Keremet Bank and develop a strategy to unwind its ownership of the Guarantee Fund. Enforcing strict limits on lending to non-supervised entities are also critical.
10.
The banking sector remains liquid and well capitalized, but the
heightened uncertainty calls for supervisory vigilance
. Non-performing loans (NPL) increased to 12.8 percent of banking system loans in September 2022 and may
weaken further if the economy slows. The NBKR should develop an NPL
resolution strategy and be ready to provide liquidity support to solvent
banks, as needed. The increasing domestic borrowing by Government could
crowd out private sector credit, but banks appear resilient to interest
rate shocks as most government bonds are held to maturity. The isolation of
major Russian banks from the western financial system raised costs of
correspondent banking but does not seem to pose a major challenge for
cross-border payments.
Structural Reforms
11. Good governance can have a transformative impact on investment and growth. New laws and regulations should aim to minimize opportunities for corruption, enhance competition, prevent emergence of state monopolies, and strengthen transparency and accountability of the public sector. Digitization of tax administration and allowing public access to income and asset declarations by government officials were important steps, but management of SOEs should be improved. Developing a comprehensive SOE ownership and oversight policy would help determine which SOEs serve important public interests and should therefore remain in state ownership, and which should be divested to reduce state footprint. The AML/CFT framework should be strengthened, including by improving monitoring of cross-border activities to detect and recover proceeds of corruption.
12. The draft amendment to the public procurement law to exclude competitive bidding, if passed, would undermine the integrity of the procurement system and considerably increase risks of corruption. It would lead to misuse of public resources, further weaken the investment climate, and may put at risk the access to much-needed concessional external financing. Moreover, the mission recommends inclusion of SOEs in the public procurement law. Full public procurement contracts and the identities of beneficial owners, including for all emergency spending during the pandemic, should be published as committed under the RFI/RCF.
13. Addressing climate-related challenges would open new opportunities for more sustainable and inclusive growth . The Kyrgyz Republic needs its own climate adaptation policy to strengthen resilience. This requires creating fiscal space for additional public spending on green investment, healthcare, training and education, and social safety nets. Despite its low carbon footprint, the country should also contribute to global mitigation efforts by reducing air, soil, and water pollution, expanding renewables, and raising electricity tariffs to cost recovery, which would attract private investment in clean power generation.
The mission is grateful to the authorities for open and constructive discussions and their hospitality.
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Table 1. Kyrgyz Republic: Selected Social and Economic Indicators, 2019-2027 |
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|
2019 |
2020 |
2021 |
2022 |
2023 |
2024 |
2025 |
2026 |
2027 |
|
|
Real sector |
|||||||||
|
Nominal GDP (in billions of soms) |
619 |
602 |
723 |
859 |
1,009 |
1,129 |
1,242 |
1,363 |
1,485 |
|
Nominal GDP (in millions of U.S. dollars) |
8,872 |
7,792 |
8,549 |
10,060 |
11,274 |
11,967 |
12,778 |
13,615 |
14,408 |
|
Real GDP (growth in percent) |
4.6 |
-8.6 |
3.6 |
5.5 |
3.5 |
3.8 |
4.0 |
4.0 |
4.0 |
|
Nongold real GDP (growth in percent) |
4.1 |
-9.0 |
3.9 |
4.9 |
3.7 |
4.0 |
4.1 |
4.1 |
4.1 |
|
GDP per capita (in U.S. dollars) |
1,389 |
1,196 |
1,285 |
1,481 |
1,626 |
1,691 |
1,768 |
1,847 |
1,914 |
|
Consumer prices (12-month percent change, eop) |
3.1 |
9.7 |
11.2 |
15.4 |
10.0 |
6.0 |
5.5 |
5.5 |
4.0 |
|
Consumer prices (12-month percent change, average) |
1.1 |
6.3 |
11.9 |
13.5 |
12.4 |
7.8 |
5.8 |
5.5 |
4.8 |
|
General government finances (in percent of GDP) 1/ |
|
|
|
|
|
|
|
|
|
|
Revenue |
32.5 |
30.8 |
34.0 |
39.5 |
36.3 |
36.7 |
36.2 |
36.0 |
35.7 |
|
Of which: Tax revenue |
19.6 |
17.4 |
20.5 |
26.7 |
25.7 |
25.8 |
25.5 |
25.3 |
25.2 |
|
Expense |
27.4 |
30.0 |
28.3 |
33.9 |
34.7 |
34.4 |
34.3 |
34.1 |
33.8 |
|
Gross operating balance |
5.1 |
0.9 |
5.7 |
5.6 |
1.7 |
2.3 |
1.9 |
1.9 |
1.8 |
|
Net acquisition of nonfinancial assets |
5.2 |
4.1 |
6.5 |
10.7 |
6.2 |
6.9 |
6.7 |
6.7 |
6.8 |
|
Overall balance (net lending/borrowing) 2/ |
-0.1 |
-3.3 |
-0.8 |
-5.2 |
-4.6 |
-4.5 |
-4.7 |
-4.8 |
-5.0 |
|
Primary net lending/borrowing |
0.8 |
-2.3 |
0.0 |
-4.2 |
-3.5 |
-3.0 |
-2.8 |
-2.4 |
-2.3 |
|
Total state government debt 3/ |
51.6 |
67.6 |
60.8 |
58.3 |
57.9 |
57.8 |
58.8 |
59.7 |
61.0 |
|
Of which domestic debt |
8.3 |
9.7 |
10.3 |
11.5 |
13.7 |
16.8 |
19.7 |
22.7 |
25.8 |
|
Monetary sector |
|
|
|
|
|
|
|
|
|
|
Reserve money (percent change, eop) |
11.0 |
24.8 |
6.5 |
40.4 |
6.4 |
|
|||
|
Broad money (percent change, eop) |
12.8 |
23.9 |
19.1 |
27.7 |
9.6 |
|
|||
|
Credit to private sector (percent change, eop) |
14.9 |
12.6 |
11.7 |
9.3 |
7.6 |
|
|||
|
Credit to private sector (in percent of GDP) |
24.2 |
28.1 |
26.1 |
24.0 |
22.0 |
|
|||
|
Velocity of broad money 4/ |
2.7 |
2.1 |
2.1 |
2.0 |
2.1 |
|
|||
|
Policy Rate |
4.3 |
5.0 |
8.0 |
... |
... |
... |
|||
|
External sector |
|
|
|
|
|
|
|
|
|
|
Current account balance (in percent of GDP) |
-12.1 |
4.8 |
-8.6 |
-28.6 |
-10.5 |
-10.0 |
-9.1 |
-8.7 |
-8.1 |
|
Export of goods and services (in millions of U.S. dollars) |
3,126 |
2,444 |
3,301 |
4,348 |
5,308 |
5,619 |
5,892 |
6,227 |
6,639 |
|
Export growth (percent change) |
13.8 |
-21.8 |
35.0 |
31.7 |
22.1 |
5.8 |
4.9 |
5.7 |
6.6 |
|
Import of goods and services (in millions of U.S. dollars) |
5,690 |
4,060 |
5,938 |
8,523 |
7,764 |
8,148 |
8,401 |
8,785 |
9,213 |
|
Import growth (percent change) |
-3.8 |
-28.7 |
46.3 |
43.5 |
-8.9 |
4.9 |
3.1 |
4.6 |
4.9 |
|
Gross International reserves (in millions of U.S. dollars) 5/ |
2,176 |
2,628 |
2,779 |
2,380 |
2,017 |
1,745 |
1,625 |
1,578 |
1,560 |
|
Gross reserves (months of next year imports, eop) |
6.4 |
5.3 |
3.9 |
3.7 |
3.0 |
2.5 |
2.2 |
2.1 |
2.0 |
|
External public debt outstanding (in percent of GDP) |
43.3 |
57.9 |
50.6 |
46.9 |
44.1 |
41.1 |
39.1 |
37.0 |
35.3 |
|
External public debt service-to-export ratio (in percent) |
6.6 |
9.7 |
5.6 |
8.0 |
8.2 |
8.0 |
6.7 |
7.0 |
6.7 |
|
Memorandum items: |
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|
Exchange rate (soms per U.S. dollar, average) |
69.8 |
77.4 |
84.7 |
... |
... |
... |
... |
... |
... |
|
Real effective exchange rate (2010=100) (average) |
99.9 |
95.8 |
95.2 |
... |
... |
... |
... |
... |
... |
|
Sources: Kyrgyz authorities and IMF staff estimates and projections. |
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1/ General government comprises the State government, the Social Fund, and the Mandatory Health Insurance Fund (MHIF). |
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The State government comprises central and local governments. |
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2/ Includes loans by the State government to state-owned enterprises in the energy sector. |
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3/ Calculated at end-period exchange rates. |
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4/ Twelve-month GDP over end-period broad money. |
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5/ Gross international reserves exclude reserve assets in non-convertible currencies. |
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