Kyrgyz Republic: Staff Concluding Statement of the 2025 Article IV Consultation Mission

Mission Concluding Statement

Kyrgyz Republic: Staff Concluding Statement of the 2025 Article IV Consultation Mission

April 4, 2025

Washington, DC: An International Monetary Fund (IMF) mission led by Mr. Nikoloz Gigineishvili conducted discussions for the 2025 Article IV consultation with the Kyrgyz Republic during March 12 - 26, 2025 in Bishkek. At the conclusion of the mission, Mr. Gigineishvili issued the following statement:

Economic Developments, Outlook, and Risks

The Kyrgyz Republic has performed remarkably well against the backdrop of a highly uncertain external environment. The economy has maintained robust growth of 9 percent annually since 2022, supported by increased trade, labor and capital inflows, and government supported construction. The post-Covid surge in inflation has been contained, and public debt fell sharply from 64 percent of GDP in 2020 to about 36½ percent in 2024 thanks to strong nominal GDP growth and fiscal consolidation. At the same time, per capita GDP has nearly doubled, while unemployment and poverty declined noticeably. The current account deficit for 2024 is estimated at 30.7 percent of GDP, of which staff attributes about 23 percent of GDP to unrecorded re-exports of goods imported from outside into the Eurasian Economic Union within which trade is not subject to customs declarations. Adjusting for staff estimates of this unrecorded trade, goods and services exports are estimated to have increased by 40 percent in 2024, and the current account deficit narrowed to around 8 percent of GDP.
Growth is projected to moderate to under 7 percent in 2025 and converge to about 5¼ percent in the medium term. This slowdown from exceptionally high growth rates of the past three years reflects normalization of the re-export trade. Inflation is projected to remain broadly stable under the assumption of prudent monetary policy, and the current account deficit to stabilize at about 6-7 percent of GDP over the medium term, accounting for the gradual normalization of re-export trade and large imports related to the constructions of Kambarata-1 hydropower plant (HPP) and the China-Kyrgyzstan-Uzbekistan railway. These large-scale public investments would widen the overall fiscal deficits, but public debt should remain broadly contained thanks to robust GDP growth.
Risks to the outlook remain considerable in view of geopolitical uncertainty. Escalation of Western sanctions on Russia could result in a slowdown in Russia and depreciation of the ruble, and therefore reduced remittances and higher poverty. These risks are compounded by a possible reversal of the recent surge in gold prices, an increase in global oil prices, extreme weather events, and cyberthreats. Conversely, the ending of the war in Ukraine could strengthen the ruble and growth in Russia, resulting in higher demand for Kyrgyz workers and tighter labor markets but higher remittances, wages and inflationary pressures. Easing of sanctions, however, could also unwind some trade flows and reduce growth. The current favorable macroeconomic environment provides an opportunity to strengthen policy buffers and advance structural reforms in support of private sector-led growth.

Fiscal Policy

The overall fiscal balance is expected to swing from a surplus of 1.9 percent of GDP in 2024 to a deficit of 3.4 percent of GDP in 2025 and remain around 3 percent of GDP in the medium term. Tax revenue is projected to decline by about 1 percent of GDP in 2025 and another 0.7 percent by 2030 due to lower trade taxes and VAT on imports as trade moderates. Staff projects capital expenditure to increase by about 1.6 percent of GDP in 2025 due to large-scale infrastructure investments, which are not yet included in the authorities’ budget. These expenditure will moderate in the medium term. The mission acknowledges the authorities' strong track record in fiscal discipline and urges prioritization of spending and caution about external commercial borrowing to ensure fiscal and debt sustainability. Lowering fiscal deficits would strengthen fiscal buffers, improve resilience to shocks and ease inflation pressures.
The Kyrgyz Republic has the potential to expand its fiscal space. Additional revenue can be mobilized by streamlining VAT exemptions and special tax regimes; increasing the progressivity of the Personal Income Tax; improving revenue administration; and channeling all of Kumtor’s net profits to the treasury. Expenditure optimization measures include containing the public wage bill; reducing energy subsidies; improving the targeting efficiency of social spending and strengthening public investment management.

Monetary and Exchange Rate Policies

Monetary policy should remain data-driven, focusing on keeping inflation within the NBKR’s target range of 5–7 percent. Inflation bottomed out in August 2024 at 3.8 percent and has since risen to 7 percent in February 2025. Strong GDP, credit and real wage growth coupled with the projected fiscal stimulus suggest persistent demand pressures, which warrant timely tightening of interest rates and market liquidity if inflation pressures were to persist or rise. To strengthen monetary policy effectiveness, the mission recommends lifting interest rate caps on NBKR notes, lengthening maturities of monetary policy instruments, enhancing liquidity management and curbing subsidized lending through state-owned banks. The mission strongly supports the NBKR’s decision to discontinue purchases of domestic gold to prevent further liquidity injections, and to convert part of its non-monetary gold to monetary gold to enhance its international reserves. Greater exchange rate flexibility and reducing concentration of reserves in gold would further bolster external resilience.
Strengthening the autonomy and governance of the NBKR is critical to safeguard its ability to maintain price and financial stability. The mission welcomes the NBKR’s decision to sell Keremet Bank and the ongoing efforts to phase out its ownership in the Guarantee Fund. However, the repeated transfers of NBKR profits to the budget while its capital remains below the statutory threshold weakens NBKR’s credibility and institutional integrity, increases liquidity, and adds to inflation pressures. The entrenched expectations of regular profit transfers carry a risk of diverting the NBKR’s focus from its price stability mandate to generating additional income through non-core activities such as gold operations in international markets. The mission strongly recommends discontinuing this practice and upholding the provisions in the constitutional law on the National Bank of Kyrgyz Republic related to NBKR capital.
The authorities’ legislative initiatives about digital assets require further scrutiny. While a digital som could enhance financial access and inclusion, its design should be backed by robust regulatory and cybersecurity measures. Trading in crypto assets and establishment of crypto banks could give rise to systemic vulnerabilities due to inherent volatility of crypto assets, coupled with AML/CFT and fraud risks. Granting a legal tender status to crypto assets should be avoided to safeguard monetary sovereignty and stability and ensure consumer protection. The regulatory framework should integrate the standards of the Basel Committee on Banking Supervision for crypto assets, including risk-based capital charges, robust risk management, and clear categorization and reporting of crypto assets.

Financial Sector Policies

Systemic risks to the financial sector are contained, but supervisory vigilance is warranted in view of heightened uncertainty. Banks are well capitalized and liquid, but NPLs remain elevated at over 10 percent of total loans, which may suggest pockets of vulnerability. Despite high interest rates, consumer loans have grown strongly. Proactive macroprudential measures such as building countercyclical capital buffers, limiting loan-to-value ratios, and enhancing liquidity requirements could help mitigate risks and ensure resilience to shocks. To support securities market development, the capital markets legislation should be aligned with international standards and clearly define the roles and functions of Central Security Depositories, custodians, registrars, and settlement agents.

Structural Reforms

Sustaining high growth requires accelerating structural reforms to improve governance and SOE management, foster competition, enhance labor markets, and address climate risks. The authorities’ Anti-Corruption Strategy for 2025-2030 rightly emphasizes the need for comprehensive legal and institutional reforms to combat corruption. If duly implemented, the strategy could lay a solid foundation for a more resilient and dynamic economy. The Fund’s governance diagnostics and fiscal transparency assessment could support these efforts. A comprehensive SOE ownership strategy is essential to define the government's policy objectives for SOEs and guide its decisions about which SOEs to retain and which to divest through transparent and competitive privatization. The rule of law, protection of property rights, avoiding state monopolies and fostering competition are crucial for building trust in public institutions and improving the business climate to encourage private investment and innovation. Reforms aimed at increasing labor market flexibility, reducing gender gaps, expanding vocational training and improving social safety nets will also support more inclusive economic growth. Investments in sustainable energy and infrastructure, and health and education remain vital to enhance resilience to climate risks.

Technical Assistance

The International Monetary Fund reaffirms its readiness to support the authorities’ reform efforts through provision of capacity development. In addition to the ongoing technical assistance on national accounts statistics, optimization of the public wage bill, and fiscal risks management, the Kyrgyz Republic would benefit from the Fund’s technical assistance on external sector statistics, public investment management and the operations of the Stabilization Fund, digital assets, and international reserve management.

The mission would like to thank the authorities for open and constructive discussions and their hospitality.

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Mission Concluding Statement

Kyrgyz Republic: Staff Concluding Statement of the 2025 Article IV Consultation Mission

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