International Monetary Fund

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Program note

Kyrgyz Republic

Last Updated: April 13, 2015


Performance under the 2011-14 Extended Credit Facility (ECF) arrangement, which expired last July, was good. Macroeconomic stability was restored, fiscal consolidation was stronger than planned, monetary policy was enhanced through a new interest rate-based framework, and supervision was strengthened in the financial sector.

However, key reforms have yet to be implemented. While progress was made in the financial sector and tax administration, important reforms, such as the banking code, treasury single account (TSA) implementation, and revised AML/CFT law, are lagging behind. Progress in governance, transparency, and improving the business environment has been limited. Further reforms are needed to enhance growth and make it inclusive and sustainable.

Moreover, since the completion of the previous arrangement, the external economic environment has worsened and domestic vulnerabilities have increased. The regional economic slowdown is exerting downward pressure on the Kyrgyz economy through remittances and trade, whereas the surge in public debt due to large public investment projects jeopardizes debt sustainability.

Role of the IMF

On April 8, 2015, the IMF Executive Board approved a request for a three-year ECF arrangement.

The new arrangement draws from the government’s 2013-17 National Strategy for Sustainable Development, and will support the authorities’ efforts to generate inclusive growth and reduce poverty through reducing macroeconomic vulnerabilities, achieving fiscal sustainability, supporting banking sector reforms, strengthening debt management, and encouraging structural reforms to expand the economy’s potential. The key policies under the program are:

  • A pause in fiscal consolidation in 2015 to accommodate external shocks, followed by a resumption in 2016–17 to maintain public debt at sustainable levels;

  • Strengthened public debt management through the preparation of a medium-term debt management strategy to be complemented by a review of the public investment framework;

  • Tighter monetary policy by keeping the policy rate positive in real terms in order to keep inflation under control;

  • Maintainance of a flexible exchange rate, with limited interventions to smooth volatility without resisting trends;

  • Strengthening banking sector resilience through the introduction of macro-prudential measures and the adoption of the Banking Code; and

  • Speeding up structural reforms, with the aim of promoting inclusive growth and reducing poverty by reforming tax administration, strengthening public financial management, improving the domestic and foreign business environments, and combating corruption.

The IMF is also supporting the Kyrgyz Republic by providing technical assistance in public financial management, tax policy and administration, monetary policy management, banking supervision, balance of payments statistics, and AML/CFT.

The Challenges Ahead

The economy continues to face challenges associated with a weak regional economic environment, high public debt, and the transition to the Eurasian Economic Union. This, together with volatile growth and inflation, increases the economy’s vulnerability to external shocks. Rapid credit growth, combined with high dollarization and a weaker som, places the banking sector at an elevated risk. Progress in reducing poverty and unemployment has been slow. Weak institutions, political uncertainty, and a challenging business environment further hamper economic development. Dependence on gold, remittances, and foreign aid remains an obstacle for sustained and inclusive growth.