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Program note

Kyrgyz Republic

Last Updated: April 9, 2013

IMF Financial Support:

On December 3, 2012, the IMF Executive Board completed the third review under the three-year US$102.3 million Extended Credit Facility (ECF) that was approved on June 20, 2011. Approval of the review made US$14.6 million available to the Kyrgyz Republic, bringing total disbursements under the arrangement to US$58.5 million.

Background

Following the collapse of the government on August 22, 2012, the political situation has stabilized with the formation of a new coalition on September 1, 2012. Because the period of political instability was brief, the impact on economic policymaking was limited. Economic policies have not changed materially under the new government. 

GDP growth dropped significantly in 2012 because of disruptions in gold production, although nongold growth was strong. Inflation increased somewhat because of pressures from international food prices. Reflecting a decline in gold exports, the current account deficit widened. Nonetheless, macroeconomic policies remained generally prudent. Unexpected external grants in late 2012 led to a better-than-expected fiscal outturn. Financial stability indicators continued to improve, but vulnerabilities remain.

The medium-term outlook is generally positive. Growth is projected to pick up to 7.5 percent on average in 2013-14 because of the recovery in gold production. The 2013 budget is based on conservative revenue forecasts, nonpriority expenditure restraint, and social considerations. The overall fiscal deficit is expected to decline to 5.3 percent of GDP, in line with the government’s commitment to consolidate the fiscal position. Prudent fiscal and monetary policies, in line with the ECF arrangement, would help keep inflation at bay. Barring exogenous shocks, inflation is expected to stabilize at about 7 percent over the medium term. Ongoing structural reforms, geared toward enhancing the business environment and strengthening public financial management and the financial sector, will also be critical in sustaining strong growth.

Role of the IMF

The IMF, together with the World Bank and the Asian Development Bank, has played a leading role in helping the Kyrgyz Republic respond to the challenges it faced in the aftermath of political unrest in April 2010 and the outbreak of ethnic conflict in the south in June 2010. In September 2010, the IMF Executive Board approved a disbursement under the Rapid Credit Facility in support of the authorities’ emergency economic program to meet the immediate challenges in the aftermath of the crisis. Strong adherence to the policies agreed under a three-year ECF that was approved by the IMF Executive Board in June 2011 has played a pivotal role in achieving post-conflict economic recovery and macroeconomic stabilization.

The ECF draws from the authorities’ priorities and supports their efforts to restore and maintain macroeconomic stability, rebuild policy buffers, promote inclusive growth in a low-inflation environment, achieve medium-term fiscal consolidation, address weaknesses in the financial sector, bolster reserves, and catalyze critical donor support. The Kyrgyz authorities are also benefitting from technical assistance from the IMF and the donor community in the areas of public financial management, tax policy and administration, and financial sector issues.

The Challenges Ahead

Significant immediate and medium-term challenges remain. Restoring fiscal sustainability will be essential, as the budget has become more dependent on external assistance since the 2009 global crisis. At the same time, the authorities will need to create fiscal space for priority spending such as health, education, and infrastructure. Shallow financial markets remain an impediment to growth, and the large government footprint in the banking sector hampers innovation in the sector. Better governance and institutions are essential for continued strong economic performance and inclusive private sector–led growth over the medium term. The Kyrgyz economy remains vulnerable to external shocks, including adverse terms-of-trade shocks and the impact of a global downturn on remittances. In addition, high international food and fuel prices could push up inflation and aggravate external vulnerabilities.