Summary:KEY ISSUES Context. Performance under the previous 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. Nevertheless, the economy is facing challenges: (i) a weak regional economic environment, (ii) some key reforms have yet to be implemented, particularly in PFM and the banking sector, and (iii) a higher public debt due to the materialization of an ambitious investment program. Accession to the Eurasian Economic Union (EEU) is expected to take effect in May, and parliamentary elections are slated for late 2015. Program objectives. In light of the challenges, the Kyrgyz authorities have requested a new 36-month ECF arrangement, with access equivalent to SDR 66.6 million (or 75 percent of quota). The program aims to 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 program would also help unlock support from official lenders and provide safeguards against adverse shocks. Program policies. Fiscal consolidation will pause in 2015 to accommodate external shocks, but will resume in 2016–17 to maintain public debt at sustainable levels. Public debt management will be strengthened through the preparation of a medium-term debt management strategy to be complemented by a review of the public investment framework. Monetary policy will be tighter to keep inflation under control. The exchange rate will continue to be flexible, with limited interventions to smooth volatility. Banking sector resilience will be strengthened through the introduction of macro-prudential measures and the adoption of a comprehensive Banking Code. Structural reforms will be stepped up to expand the economy’s potential. Staff views. Staff supports the authorities’ request for an ECF arrangement under a Fund-supported program. The LOI/MEFP provides an adequate set of policies to pursue the objectives of the Fund-supported program.
