IMF Executive Board Concludes 2013 Article IV Consultation with Kyrgyz Republic

Public Information Notice (PIN) No. 13/68
June 18, 2013

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On June 10, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Kyrgyz Republic.1


The economy contracted in 2012 because of disruptions in gold production. Strong non-gold growth, fueled by remittances inflows, cushioned the drop in overall output to -0.9 percent. The current account deficit increased substantially, mainly owing to the decline in gold exports and an increase in imports of inputs for ongoing energy infrastructure projects. Official assistance and remittances, which have the strongest impact on the exchange rate, mitigated depreciation pressures. Therefore, the som depreciated by less than 2 percent against the U.S. dollar during 2012. Inflation increased to 7.5 percent by end-2012, owing to rising international food prices in the summer. The recovery in the gold sector along with continued strong performance in the other sectors is expected to boost growth to 7.4 percent in 2013. Inflation should settle at around 7 percent.

Notwithstanding adverse economic conditions, fiscal policy remained prudent. The 2012 fiscal deficit was 5.4 percent of GDP, below the targeted deficit of 6 percent of GDP, but slightly higher than in 2011 because of expenditure carryover. The revenue-smoothing arrangement with the Kumtor gold company and buoyant customs revenue in the first nine months of 2012 offset the shortfall in gold-related revenue. The government also curtailed nonpriority expenditure to accommodate lower-than-budgeted external financing.

The National Bank of Kyrgyz Republic (NBKR) reduced the policy rate in several steps to 2.6 percent, in response to negative economic growth and moderate inflation. However, sterilization efforts were not sufficient to contain reserve money growth. The banking sector remained generally stable. Nonperforming loans continued to decline while provisioning increased. Capital adequacy remained high at 18 percent. While credit growth has been strong, credit remains low at 13 percent of GDP.

The authorities continued to pursue structural and governance reforms. Progress has been made in public financial management, including public procurement, and financial sector reform. The government has also adopted a medium-term energy sector strategy in 2012 in order to improve transparency, accountability and sustainability of the energy sector.

The medium-term outlook is broadly favorable. The Kyrgyz economy is expected to grow by 5 percent in the medium term and inflation is expected to gradually decline to 5 percent. Fiscal consolidation is expected to continue with the deficit declining to 2½ percent of GDP by 2015. The current account deficit is projected to improve, reaching 3 percent of GDP in 2018, while reserves are expected to increase to 4.2 months of imports. Risks mostly emanate from exogenous shocks via increased commodity prices and a slowdown in global growth that could spill over to the Kyrgyz economy through the trade and remittances channel.

Executive Board Assessment

Executive Directors welcomed the progress under the Extended Credit Facility-supported program, including adherence to the fiscal targets despite political uncertainty and a temporary slowdown in growth. Given remaining downside risks to the outlook, Directors encouraged steadfast implementation of reforms to consolidate the fiscal gains, strengthen the financial system, and enhance the business climate with a view to diversifying the economy.

Directors welcomed the authorities’ commitment to continued fiscal consolidation to ensure sustainability, rebuild policy buffers, reduce dependence on external assistance, and keep debt on a declining path. Restraining and rationalizing non-priority expenditures and the wage bill will be important to create space for higher social and infrastructure spending. These steps should be complemented by measures to broaden the tax base through tax policy and administration reforms. Directors also called for further progress on fiscal institutional reforms, including in public financial management. They urged strict monitoring of borrowing by state enterprises.

Directors supported the authorities’ tight monetary policy stance in view of underlying inflationary pressures. They stressed the need to revise the monetary policy framework to enhance monetary policy transmission, and to strengthen the independence of the central bank to ensure sound monetary and financial policies. Continued exchange rate flexibility should help absorb external shocks.

Directors welcomed progress toward strengthening the financial sector. Following the resolution of Zalkar Bank, it will now be important to ensure its full compliance with capital requirements. Directors looked forward to timely enactment of the draft banking code with all its key features, particularly those aimed at further enhancing the central bank’s autonomy and governance. Directors welcomed the enactment of amendments to the Criminal Code and urged the authorities to swiftly implement the changes to the Anti-Money Laundering/Combating the Financing of Terrorism payment system laws.

Directors encouraged the authorities to diversify the economy and increase its resilience. They stressed the need to improve the business climate and institutions and enhance governance, including in the energy sector. Directors underscored the importance of evenhanded and consistent application of business laws to lay the foundation for strong private-sector-led growth. They looked forward to a constructive resolution of the Kumtor gold mine dispute.

Kyrgyz Republic: Selected Economic Indicators, 2010–13


2010 2011 2012 2013
Act. Act. Act. Proj.

Real GDP (growth in percent)

-0.5 6.0 -0.9 7.4

Nongold real GDP (growth in percent)

-2.1 5.6 5.0 4.5

Consumer prices (12-month percent change, eop)

18.9 5.7 7.5 7.0

Consumer prices (12-month percent change, average)

7.8 16.6 2.8 8.6

General government finances (in percent of GDP) 1/


Total revenue and grants

30.5 31.8 34.5 32.0

Of which: Tax revenue

22.3 23.1 26.0 25.4

Total expenditure (including net lending)

36.6 36.3 39.8 37.2

Of which: Current expenditure

31.0 30.9 32.4 30.8

Capital expenditure

5.4 5.5 7.8 6.4

Overall fiscal balance

-6.3 -4.6 -5.4 -5.3

Primary balance excluding grants

-8.2 -6.6 -7.1 -5.7

Banking sector


Reserve money (percent change, eop)

18.4 12.8 17.7 16.4

Broad money (percent change, eop)

21.1 14.9 23.8 19.8

Credit to private sector (percent change, eop)

6.3 20.8 26.2 21.0

Credit to private sector (in percent of GDP)

12.5 11.7 13.8 14.6

External sector


Current account balance (in percent of GDP)

-6.4 -6.5 -15.3 -8.0

Export growth (percent change)

-1.1 34.1 4.4 12.9

Import growth (percent change)

6.0 30.2 26.5 -0.1

Gross International reserves (in millions of U.S. dollars)

1,716 1,831 2,061 2,160

Gross reserves (months of next year imports, eop)

4.0 3.4 3.8 3.8

External public debt outstanding (in percent of GDP)

55.1 45.9 45.8 45.2

Sources: Kyrgyz authorities, and IMF staff estimates and projections.

1/ General government comprises State Government, Social Fund and Development Fund (starting from September 2009) finances. State government comprises central and local governments.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summing up can be found here:


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