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Kyrgyz Republic: Statement on the Conclusion of an IMF Staff Mission

Press Release No. 13/126 April 17, 2013

An International Monetary Fund (IMF) mission led by Mr. Christian Beddies visited Bishkek during March 27-April 10 to conduct discussions for the fourth review of the Extended Credit Facility arrangement and the 2013 Article IV Consultation.

At the conclusion of the visit, Mr. Beddies made the following statement:

“Macroeconomic conditions deteriorated last year in the Kyrgyz Republic. Despite solid growth in the nongold sector, fueled by remittances, the substantial drop in gold production led to a drop in output by 0.9 percent. The current account deficit increased substantially mainly due to the decline in gold exports and an increase in imports of inputs for ongoing energy infrastructure projects. Inflation increased to 7.5 percent by end-2012 owing to rising international food prices in the summer.

“Looking ahead, the recovery in gold production is expected to lead to a strong rebound in growth to 7½ percent and a decline in the current account deficit. The mission welcomes the central bank’s continued commitment to implement policies that will keep inflation at bay. Barring exogenous shocks inflation is expected to stabilize at about 7 percent over the medium term.

“Program performance remains broadly satisfactory. The government continues to place strong emphasis on fiscal consolidation in 2013 and the medium term. 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. The government is committed to strengthening the tax policy function, which was recently moved to the ministry of finance. It also continues working toward strengthening tax administration and public financial management.

“Structural reforms are progressing, albeit more slowly than anticipated. In the financial sector, the mission urged the authorities to sell or liquidate Zalkar bank swiftly and communicate with parliament to ensure that amendments to the AML/CFT framework are adopted in line with international best practice. The mission agreed with the authorities that further improving the business environment is a key pillar of sustainable and inclusive growth. In addition, a stable and predictable investment climate with proper contract enforcement, strengthened property rights, less red tape, and addressing perceived corruption are essential for attracting investment and spurring private sector-led growth.

“The Kyrgyz Republic is facing substantial medium-term challenges. Restoring fiscal sustainability will be essential, as the budget has become more dependent on external assistance since the 2009 global crisis. Creating a sound and predictable revenue base and reducing the dependency on external assistance will play a pivotal role in reducing the structural deficit. 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 for growth. Reducing the government footprint in the banking sector will foster innovation, and a more developed and well-regulated financial sector would instill confidence and help to strengthen the monetary transmission mechanism.

“The mission reached a preliminary agreement on most elements of a policy framework for 2013 that could form the basis for completion of the review. Provided further progress is made in the coming weeks, the IMF Board could consider the review in June. Upon approval, the IMF would disburse US$14.6 million, bringing total disbursements under the ECF to about US$73 million.”