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Kyrgyz Republic: Second Review Under the Three-Year Arrangement Under the Extended Credit Facility, and Request for Modification of Performance Criteria–Press Release; Staff Report; and Statement by the Executive Director for the Kyrgyz Republic

Author(s):
International Monetary Fund. Monetary and Capital Markets Department
Published Date:
June 2016
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Context

1. External shocks continue to hit the Kyrgyz economy hard, with the outlook for regional economic environment weaker than anticipated at the time of the first review. Oil and commodity prices, based on the latest (April 2016) WEO assumptions, are projected to be lower, with weaker growth and currencies in key trading partners such as Russia and Kazakhstan. These developments are depressing trade and remittances, reducing custom revenues, especially from the Eurasian Economic Union (EEU) countries, and harming the business sentiment. Moreover, trade diversion of Chinese goods through Kazakhstan following the EEU accession is creating additional strains on economy.

Projected 2016 Real Growth

(In year–on-year percent change)

Source: World Economic Outlook.

2016 Projections for EEU Imports and Customs Revenue

(In billions of USD)

Sources: Authorities’ data and staff projections.

2. The authorities’ response to the adverse external shocks has been a mix of exchange rate flexibility and, reflecting lack of fiscal space, unorthodox methods to stimulate the economy. Exchange rate flexibility helped the economy to absorb the external shocks. With public external debt surpassing the legal threshold of 60 percent of GDP in 2015, the authorities resorted to policies intended to stimulate demand with minimum direct fiscal impact, including targeted tax measures, a foreign exchange loan conversion program, and the establishment of a State Mortgage Company (SMC).

3. The political environment remains fluid. The prime minister resigned just six months after the elections amid allegations of corruption. The new government, with a new prime minister and minister of transport, was appointed swiftly. No major shifts in economic policies are expected, but populist measures in the run up to next year’s presidential elections cannot be ruled out.

Recent Developments

4. After showing resilience in 2015, the economy is starting to slow down. Real output grew by 3.5 percent in 2015, with nongold growth better than expected at 4.5 percent, helped by construction, trade, and agriculture. However, as a result of a slowdown in energy production, and back-loaded gold production, overall GDP contracted by 4.9 percent in April 2016, whereas nongold GDP was flat.

Contribution to GDP Growth

(Percentage points)

Source: National Statistics Committee.

Growth, 2012–16

(In year-on-year percent change, cumulative beginning of the year)

Source: National Statistics Committee.

5. While overall inflation has declined steadily, core inflation remains close to double digits. In 2015, inflation declined gradually to 3.4 percent by year-end, well below the National Bank of the Kyrgyz Republic’s (NBKR) target of 7 percent. This largely reflected a moderation in food prices. However, core inflation remained high at 9 percent, reflecting exchange rate pass-through to nonfood and nonfuel items. By March 2016, overall inflation had further dropped to 0.5 percent, while core inflation remained at 8.3 percent.

Contributions to Inflation

(In year–on–year percent change)

Source: National Statistics Committee.

6. The current account deficit narrowed to 10.4 percent of GDP in 2015, reflecting temporary factors in the run up to the EEU accession. Expectations of higher import tariffs following EEU accession, initially planned for early 2015, pushed businesses to advance their imports, especially cars, in late 2014, correspondingly reducing imports in 2015. Lower oil prices and delays in high-import content investment programs were also contributing factors. These developments significantly outweighed the fall in remittances (25 percent in dollar terms) and a weaker external demand (Annex I). Imports continued to decline over the first two months of 2016 (30 percent year-on-year), while nongold exports increased (36 percent year-on-year), driven by machinery and footwear. Remittances started to pick up and rose by 6 percent in dollar terms.

External Sector, 2012–16

(In year-on-year percent change, three-month moving average, USD)

Sources: National Statistics Committee and NBKR data.

Remittances Inflows, 2014–16

(In percent, cumulative change, year-on-year)

Sources: Authorities data and IMF staff calculations.

7. Monetary policy was kept on a tightening stance during 2015. The NBKR raised its policy rate to 10 percent as market pressures built up. It also allowed the som to depreciate by 29 percent against the U.S. dollar (and by 11 percent in nominal effective terms), while undertaking significant interventions, spending about one-sixth of its reserves. During 2016Q1, lower inflationary expectations allowed the NBKR to lower its policy rate to 8 percent. In addition, the combination of the recent ruble appreciation, tight som liquidity, and an increase in remittances helped the som appreciate by 10 percent, and allowed the NBKR to purchase about US$80 million. Reserves were also boosted by the conversion of nonconvertible currencies to dollars and stood at US$1.7 billion.

Foreign Exchange Market, 2014–16

Source: NBKR data.

Policy Rate, Inflation, and Depreciation

(In percent)

Source: NBKR data.

8. The exchange rate flexibility pursued by the NBKR helped mitigate the impact of the external shocks on the domestic economy. The real effective exchange rate (REER) depreciated by some 12 percent in 2015. In the first two months of 2016, the REER appreciated by 4 percent.

9. While fiscal policy in 2015 was designed to support growth in the face of emerging shocks, it ended up being contractionary due to one-off factors. The overall fiscal deficit fell to 1.2 percent of GDP, well below the program’s target of 3.5 percent of GDP. Revenues were better than anticipated due to one-off nontax revenues.1 Tax revenues, on the other hand, underperformed reflecting a weak economic environment, especially in tax-generating sectors (trade and construction), and lower customs duties. The latter reflected lower imports by the Kyrgyz Republic before it joined the EEU in August, and lower imports by the EEU as a whole after August.2 Nonpriority spending—mostly goods and services—was partially postponed to 2016 as budgetary support from the EU and Russia was delayed to the last quarter. Delays in major investment projects financed by China resulted in a significant drop in capital expenditure. In 2016Q1, fiscal performance was better than anticipated, with higher tax and grants revenues and lower current and development expenditures.

Exchange Rate Developments

(Index: 2010=100)

Sources: Authorities data and IMF staff calculations.

10. Debt vulnerabilities, however, intensified. While delays in major investments contained the increase, the external public debt ratio rose to 64.6 percent of GDP in 2015, 1.6 percentage points above projections at the time of the first review (Annex II), owing to weaker-than-anticipated nominal GDP growth and valuation effects from exchange rate depreciation. With the 60 percent of GDP legal threshold now breached, the authorities are reviewing the debt limit framework and have introduced annual debt limits in the context of the budget process.

Contribution to Debt Increase from the First to the Second Review

(In percent)

Sources: Authorities data and IMF staff calculations.

11. Vulnerabilities in the banking sector are high and rising, but capital buffers remain comfortable. In 2015, credit growth slowed significantly but remained relatively strong at 17 percent. The som depreciation led to a drop in demand for dollar loans—even before these loans to consumers were banned (Annex III)—and an increase in deposit dollarization. Banks remain well capitalized, with an average capital adequacy ratio of 23.5.3 Nonperforming loans (NPLs), mainly in the real estate and trade sectors, reached 7.1 percent. Loans under watch tripled in 2015,4 to 21.2 percent reflecting the deteriorated economic environment and weaker som. Credit growth slowed to 1 percent (year-on-year) by end-March 2016, mostly due to the contraction of the dollar denominated loan portfolio. However, som credit growth remained strong at 15 percent year-on-year.

Credit Growth

(In percent; year-on-year)

Sources: NBKR data and IMF staff calculations.

Figure 1.Kyrgyz Republic: Financial Sector Trends

12. Despite the mixed economic picture, program conditionality has so far been broadly met. All end-December quantitative performance criteria (PCs) and indicative targets (ITs) were met, except for the IT on tax revenues. All but two SBs have been met. The audit of DEBRA and banks under its management was not completed fully, as one of the eight banks still remains to be audited (prior action). The submission of the AML/CFT law to parliament was delayed to early June due, in part, to a protracted consultation process.

Outlook and Risks

13. The near-term outlook has worsened slightly, but with appropriate policies the medium-term prospects should improve. Reflecting a weaker external environment, nongold growth is projected to grow by 2.9 percent in 2016. Projected annual credit growth of 10 percent—mostly spurred by funding from the Russian-Kyrgyz Development Fund (RKDF), which is being largely onlent via commercial banks—is expected to support economic recovery. Inflation is expected to remain low, driven by a further decline in international food and fuel prices and weak domestic demand. The current account deficit will widen again this year as imports will return to normal following last year’s unusual dip ahead of the EEU accession and because of a pickup in the PIP program, but will gradually moderate thereafter as remittances recover and public investment moderates. Over the medium term, growth is expected to slowly recover as trading partner growth rebounds, reaching its potential of 5 percent by 2020. The fiscal and current account deficits are expected to gradually narrow.

14. The outlook is subject to significant downside risks. Near-term risks continue to stem from the external environment, especially developments in Russia, Kazakhstan, and China. Further som depreciation triggered by a weaker external environment could exacerbate the debt and banking sector vulnerabilities. Upside risks include a rebound in oil prices over the medium term, which would stimulate the economy through remittances and external demand, mainly via Russia. Other upside factors include the strengthening of economic ties with China and investments through the US$1 billion RKDF.

15. The authorities broadly agreed with staff views on the outlook and risks. Their near-term growth projections are aligned with staff’s forecast, but more optimistic for the medium term due to expectation of a faster recovery in the region. They agree on the increasing risks in the financial sector, as well as mounting debt vulnerabilities. In addition, they acknowledge that steadfast commitments to program policies and decisive implementation of reforms are necessary to weather the existing shocks and catch up with regional peers.

Real GDP: Kyrgyz Republic and Peers

(Index: 2000=100)

Sources: World Economic Outlook and IMF staff calculations.

Real GDP, GDP per Capita, and PPP GDP per Capita, 2000–15

(Index: 2000=100 unless otherwise indicated)

Sources: World Economic Outlook and IMF staff calculations.

Program Issues

A. Resuming fiscal consolidation

16. While the 2016 budget approved by parliament targeted a deficit of 4.5 percent of GDP as programmed, it implied a much larger deficit. Since the budget was prepared, macroeconomic assumptions changed substantially as the exchange rate depreciated and GDP growth was marked down. In addition, the budget’s tax revenue estimates were optimistic, and it included measures that would increase the deficit, such as the phasing out of the sales tax (0.6 percentage point of GDP) and accommodating expenditure carried over from 2015 (0.8 percentage point of GDP). As a result, the budget implied a deficit of 7.1 percent of GDP, 2.6 percentage points of GDP higher than targeted.

Text Table 1.Kyrgyz Republic: 2016 Budget Deviations and Additional Efforts
2016
AuthoritiesSecond Review
Budget to ParliamentBudget with latest macro-assumptions 1/ (A)Projections (B)
Revenue33.236.935.7
Taxes21.523.521.1
Social contributions5.05.65.4
Grants2.33.04.2
Other revenue4.44.85.0
Expenditure29.332.930.5
Compensation of employees9.210.09.9
Purchases/use of goods and services7.59.07.1
Interest1.11.21.3
Subsidies and social benefits11.612.712.3
Gross operating balance3.94.05.2
Net acquisition of nonfinancial assets8.410.49.7
Acquisition of nonfinancial assets8.410.49.7
Domestically financed2.93.21.7
Foreign financed5.57.28.0
Disposals of nonfinancial assets0.00.00.0
Overall balance including onlending−4.5−6.4−4.5
Gap(A)-(B) =1.9
Additional revenue shortfall from sales tax0.7
Total2.6
Memo items:
Exchange rate (som per US$)64.877.477.4
GDP (In millions of soms)501,583455,374455,374
Sources: Kyrgyz authorities and IMF staff estimates.

17. The authorities are committed to taking action to reduce the deficit to the targeted level. They concurred with staff that the absence of fiscal space prevents any relaxation of the fiscal target, despite the weaker economic outlook. Accordingly, they identified a comprehensive set of measures—more than two-thirds of which are permanent—which are expected to yield 2.6 percentage points of GDP, with no individual measure yielding more than 0.4 percentage point of GDP. These include: (i) tax revenue measures (strengthening tax administration, introducing new tax measures, and streamlining exemptions), which are expected to yield about 1.2 percentage points of GDP (LOI, ¶12); (ii) nontax revenue measures yielding 0.4 percentage point of GDP; (iii) expenditure measures amounting to 0.6 percentage point of GDP; and (iv) PFM measures equivalent to 0.4 percentage point of GDP. Some of the measures either require legislation, whose passage is uncertain or may yield less than expected. Should any of these measures fall short of their estimated impact, the authorities agreed to cut expenditures by an equivalent amount.

Text Table 2.Kyrgyz Republic: 2016 Measures to Close 2016 Fiscal Gap
Estimated contribution
Type of measureDetails(In percent of GDP)
Tax policy0.5
Revise VAT applicable to certain types of exports and regulate of transfer pricing.
Revise rates in mining licenses and harmonize of FEZ with EEU.
Raise excise rate for beer.
Raise excise rates on alcohol and tobacco products.
Increase tax rate for luxury tax.
Introduce labels for Kyrgyz goods to reduce the informal economy.
Introduce a minimum level of target prices for imports from EEU.
Cancel tax exemptions in the context of the harmonization with the EEU.
Tax administration0.7
Incentive to boost foreign activities through improved administrative procedures.
Strenghten VAT administration for entrepreneurs by introducing electronic invoices and simplifying procedures.
Strenghten administration of tax collection on a patent basis from cargo and passenger carriers by carrying joint inspection of the road patrol and STS.
Introduce new administrative tools for local taxes, including giving powers to local authorities to establish additional coefficients and expand the range of existing rates.
Improve customs payments through harmonization procedure, closer relationships with third countries and better information system.
Fight against violation of customs duties and illegal imports of goods and vehicles, and collection of arrears by improving the monitoring of operations and procedures and pursuing unscheduled inspections.
Remove prohibition of tires imports from third countries.
Improve administration of tax and non tax payments by increasing the number of scheduled and non scheduled audits, and enforcing application of car stickers (group 4 vehicles).
Speed up litigation cases.
Speed up the collection of tax arrears.
PFM0.4
Improve efficiency of the payment system through savings in procurement operations.
Expenditure0.6
Streamlining of non priority goods and services.
Reducing domestically financed capital expenditure.
Abrogation of the employees’ health promotion fund.
Nontax revenues0.3
Higher profits from the NBKR (already received).
Privatization of state property.
Increase in proceeds from the leasing of state property and dividends.
Sales of mineral deposits.
Reimbursement of taxes from criminal procedures and fraud.
Total2.6
of which permanent1.8
Memo item:
GDP (in billions of soms)455.4
Sources: Authorities data and IMF staff calculations.

18. The authorities and staff agreed that a more efficient and growth-friendly fiscal framework is needed to support fiscal consolidation going forward. While past deficit targets have typically been met, the quality of adjustment was low. To address this, staff noted that on the revenue side this will require identification of permanent measures to build a solid revenue base, while one-off revenues should only be used to reduce the deficit. On the spending side, this will necessitate streamlining nonpriority expenditures, particularly on goods and services, through expenditure reforms rather than ad hoc cuts, while preserving the much-needed social programs. With respect to the development budget, increasing the efficiency of public investment and focusing on priority infrastructure projects will be essential (Annex V). The authorities broadly agreed with staff on the consolidation strategy, but reiterated that investments are needed to close the country’s infrastructure gap.

19. The authorities and staff reaffirmed that fiscal consolidation should continue in 2017–18 to maintain public debt at sustainable levels, reduce external imbalances, and restore private sector confidence. The consolidation efforts during those two years should target a cumulative improvement in the primary balance of 3.7 percent of GDP, of which 1.8 percentage points are needed in 2017. To bolster their credibility, the authorities have developed a menu of measures from which the bulk of the adjustment is expected to come from:

  • a. On the revenue side, they committed to strengthen the customs and VAT administrations, streamline exemptions, raise excise tax rates on alcohol and tobacco and harmonize excise tax rates with EEU countries, introduce excise stamps for domestically produced goods, and introduce a luxury tax on properties. They also intend to review the taxation of natural resources.

  • b. On the expenditure side, they committed to gradually reduce the wage bill (Annex IV), refrain from ad hoc wage increases, and set up a comprehensive register for all public sector employees (SB, March 2017). Additionally, they will undertake a review of subsidies with the objective of streamlining them, improving the targeting of social benefits to avoid duplication (LOI, ¶13), and containing domestically financed capital expenditure. They will also refrain from potential quasi-fiscal activities that may have budgetary implications.

  • c. On tax administration, they will take measures to strengthen the capacity of the State Tax Services (STS) to: (i) overcome the impact of the transition to the EEU by, among other things, increasing inspections and control at the borders; (ii) gradually add additional tax collection functions to the STS; and (iii) reduce the size of the informal sector (LOI, ¶12).

For 2017, the authorities have already committed to about 0.7 percentage point of GDP in permanent measures, namely from (i) tax policy including revisions to the VAT; and (ii) strengthening tax and customs administration, including improving payments through harmonization procedures. The remainder of the measures will be specified in the draft budget for 2017, which will be prepared in the fall.

20. Meeting the medium-term objectives will also require strengthening public investment management (Annex V). To enhance their public investment framework, the authorities undertook an action plan, where they agreed to: (i) modify through a government decree the decision-making process for the selection of public investment projects by formalizing the role of the ministry of economy and ministry of finance (LOI, ¶16) (SB, December 2016); and (ii) introduce a standardized framework for project monitoring of physical and financial performance for all projects exceeding KGS 50 million (SB, June 2017).

21. Strengthening public financial management remains a priority. First and foremost, it is critical to strengthen the budget process through better coordination or consolidation of tasks. Currently, the ministry of finance prepares the budget and is in charge of current spending; the ministry of economy designs tax policies and selects investments projects; and the STS, which reports to the prime minister, acts as the tax collecting agency. The authorities agreed to review the process with the objective of enhancing cooperation among the three agencies. The authorities will also continue working toward the implementation of the financial management information system (LOI, ¶31) with support from the Turkish Cooperation and Coordination Agency (SB, February 2017), which will help to better monitor spending and improve the oversight of the budget operations.

B. Preserving debt sustainability

22. The attached DSA suggests that debt sustainability has further deteriorated compared to the DSA in the November staff report. However, the DSA update suggests that debt remains at a moderate risk of debt distress. The present value of the public and publicly-guaranteed debt to GDP and remittances ratio is expected to exceed 36 percent of GDP in 2016–17, and will remain around 34 percent of GDP thereafter. Acknowledging escalating debt vulnerabilities, the authorities are revising their public investment framework to better manage debt and bring it back to sustainable levels. They also agreed with staff on the need for a more selective public investment process to maximize the long-term impact on growth and prevent the explosive path of the public debt (Annex VI).

C. Fine-tuning monetary and exchange rate policies

23. Monetary policy will continue to focus on containing inflation within the NBKR’s targeted range of 5–7 percent. The NBKR and staff agreed that the policy rate should balance the need for policy relaxation stemming from the recent drop in headline inflation, the moderation in credit growth, and the weaker growth prospects, against potential fiscal and exchange rate pressures. The NBKR indicated that it will continue to adapt its monetary stance to circumstances (LOI, ¶17). Moreover, the NBKR and ministry of finance agreed to continue strengthening their coordination to facilitate liquidity management (LOI, ¶18). In addition, the NBKR will continue to work on enhancing the policy rate’s transmission mechanism (LOI, ¶24).

24. Exchange rate flexibility has helped reduce external imbalances, enhance competitiveness, and prevent a rundown of external buffers. The NBKR stressed the need to balance the objectives of financial sector stability and exchange rate flexibility. At the same time, the NBKR remains committed to: (i) limiting interventions in the foreign exchange market to only smoothing excessive fluctuations; and (ii) introducing new monetary and hedging instruments (LOI, ¶20).

25. Staff and the authorities agreed on the need to rebuild reserves to about four months of imports, given the country’s vulnerability to shocks and the high dollarization. Following its large depreciation in 2015, the real effective exchange rate is assessed to be broadly in line with fundamentals. Although reserves are largely adequate, continued significant intervention or additional external shocks would make reserves drop below desired levels.

Text Table 3.Kyrgyz Republic: Estimated Exchange Rate Misalignment: Comparison Between Reviews
First ReviewSecond Review
EBA LITE CA14.04.8
Macroeconomic Balance9.0−3.8
External Sustainability4.4−4.8
Purchasing Power Parity4.3−1.4
Sources: Authorities data and IMF staff calculations.

D. Safeguarding financial stability and supporting growth

26. Financial sector risks are high and increasing, particularly foreign currency-induced risks. Key vulnerabilities continue to stem from high dollarization and credit risks due to the economic slowdown and the som volatility. Stress test results continue to indicate increasing vulnerabilities from exchange rate volatility and sectoral concentration. The NBKR emphasized that the introduction of macroprudential measures has helped to contain foreign currency credit growth. It also agreed to closely watch developments in NPLs and bring loan classification in line with international standards, in particular for restructured and extended loans. Staff argued for carefully monitoring FX liquidity, given the significant foreign currency denominated liabilities. The authorities are also committed to developing a strategic plan for robust banking supervision and to expanding the risk-based supervision framework to the entire sector (LOI, ¶22). Moreover, they are establishing a high-level financial stability committee and finalizing a crisis preparedness framework with the assistance from the IMF and World Bank (LOI, ¶23).

Loan Classification, 2007–16

(In percent of total loan portfolio)

Source: NBKR data.

27. Staff argued that de-dollarization should be only pursued through market-based measures. The authorities and staff concurred on the need to focus on stabilizing the economy and strengthening central bank credibility. They also agreed that the recent foreign currency loan conversion program should not be expanded beyond its current scope (Annex VII). They also indicated that they will be supervising the SMC should it engage in banking activities (LOI, ¶24). Moreover, the NBKR indicated that it is in the process of signing a memorandum of understanding with the RKDF to exchange the necessary information for the proper conduct of monetary and financial policies.

28. The current challenging economic environment strengthens the case for the immediate passage of the Banking Law. Staff reiterated that the current banking resolution framework is contradictory and inefficient, as it allows shareholders to delay the resolution process indefinitely. It also opens the door for insolvent banks to be resurrected and provides impunity to bank owners at the expense of depositors who are made to wait for years to be compensated. The draft Banking Law, which has been lingering in parliament since 2013, aims to address these issues by strengthening the independence of the central bank and establishing a robust banking resolution framework in line with international best practice. The proposed framework allows for swift resolution of distressed banks to prevent problems in one bank from destabilizing the entire sector. It also allows depositors to be paid out quickly and protects their rights. The authorities noted that delays in the passage of the Banking Law were continuing because clarifications were needed on the constitutionality of key provisions related to the judicial review of the NBKR’s decision. The authorities nevertheless indicated that they will continue to exert their best efforts to ensure its passage by September in a form substantially similar to the draft submitted to parliament in September 2013 (LOI, ¶25).

29. Speedy resolution of all problem banks under DEBRA is essential to enhance confidence in the banking sector. Staff indicated that the situation with DEBRA and the banks under its administration is another manifestation of the shortcomings of the existing bank resolution framework. Delays in the liquidation of these banks, some of which have been under DEBRA since the mid-1990s, undermine the credibility of banking regulations and trust in the system as a whole. The audit of DEBRA and the banks under its management suggests that four have no assets at all. As a result, the authorities proposed, and staff agreed, that as a first step the liquidation procedures for the four banks that have no assets will be initiated by September (SB) (LOI, ¶26). The authorities also committed to proceed with the liquidation of the remaining four banks in the first quarter of 2017. To ensure a smooth and successful liquidation process, staff and the authorities agreed on the need for full cooperation between DEBRA on one side, and the NBKR and ministry of finance, as the largest creditors in some banks, on the other side.

E. Advancing structural reforms

30. The authorities recognized that improving the business climate is essential for diversifying the economy and maximizing the benefits from EEU accession. While the country’s 2016 Doing Business ranking remained largely unchanged, the Kyrgyz Republic continues to lag behind its’ regional peers. The authorities and staff agreed that bold reforms are needed in several areas, including trading across borders, the insolvency regime, access to electricity, and contract enforcement. In addition, reforming the energy sector is important to ensure a better service delivery and to put it on sound economic footing (LOI, ¶30). Staff also underscored the importance of a constructive and fair resolution of the dispute with Centerra, which is critical for maintaining a stable and predictable investment climate.

Doing Business Elements

(Rank)

Source: Doing Business database.

Cross-Country Comparison of Ease of Doing Business

(Rank, 2016)

Source: Doing Business database.

31. Corruption and the rule of law continue to prevent maximizing the economy’s potential by reducing inefficiency. According to Transparency International, corruption perception remains high, while governance indicators are deteriorating. Staff emphasized, and the authorities agreed, that timely adoption of the AML/CFT law by parliament should contribute to a positive assessment of technical compliance with the FATF standard by the Eurasian Group on Combating Money Laundering and Financing of Terrorism later this year. An AML/CFT legal framework in line with the 2012 FATF standard could complement anti-corruption efforts by assisting in detecting, prosecuting, and deterring instances of corruption. Staff welcomed the recent passage by parliament of the Budget Code, which is expected to enhance budgetary transparency.

Corruption Perception Index

(Rank, 2015)

Source: Transparency International data.

Governance Indicators

(In percentile rank)

Source: Worldwide Governance Indicators.

F. Program modalities

32. Program design and modification of performance criteria. Revised QPCs for June and December 2016—on the floor on NIR, ceiling on NDA, ceiling on cumulative over deficit of the general government, and present value on new external debt contracted or guaranteed and ITs on ceiling on reserve money, cumulative state government tax collections, and nonconcessional borrowing—are proposed (LOI, Table 1) to reflect the weaker macroeconomic outlook. Structural conditionality (LOI Table 2) will focus on macro-critical areas, particular in the financial sector and reforms to support fiscal consolidation. The program will continue to be monitored on a semi-annual basis.

33. Financing needs for the remainder of the year are covered. The IMF, along with multilateral and bilateral partners, is expected to cover the country’s financing gap for the next 12 months. Despite the downside risk to the outlook, the Kyrgyz Republic’s capacity to repay the Fund is expected to remain adequate.

Text Table 4.Kyrgyz Republic: Financing Needs
201620172018
Proj.Proj.Proj.
(In millions of U.S. dollars)
Financing Gap97.6121.686.3
Available financing70.093.872.3
Identified budget support70.043.822.3
World Bank20.215.91.4
European Union19.820.920.9
Other grants30.07.00.0
Unidentified budget support0.050.050.0
IMF ECF disbursement27.627.814.0
(In percent of GDP)
Financing gap1.71.91.3
Available financing1.21.51.0
Identified budget support1.20.70.3
World Bank0.30.30.0
European Union0.30.30.3
Other grants0.50.10.0
Unidentified budget support0.00.80.7
IMF ECF disbursement0.50.40.2
Memo item:
GDP (in millions of U.S. dollars)5,8826,3546,901
Sources: Kyrgyz authorities and IMF staff estimates and projections.

34. An updated safeguards assessment was completed in October 2015. The assessment concluded that legal amendments are needed to strengthen the central bank’s autonomy and governance arrangements. The enactment of the draft Banking Law should address these recommendations. Furthermore, the internal audit mechanism requires strengthening.

Staff Appraisal

35. The Kyrgyz Republic continues to face large and persistent external shocks, requiring a strong policy response. The regional economic slowdown, which is being transmitted primarily through a decline in remittances, a slowdown in trade, and exchange rate pressures, has amplified domestic vulnerabilities. At the same time, large external borrowing has significantly increased debt levels, and the som depreciation has elevated financial and debt vulnerabilities. Given this environment, a more decisive implementation of macro policies and reforms is needed.

36. After showing resilience in 2015, the economy is expected to slow down this year before picking up again over the medium term. Lower oil prices, a weak regional economic environment, and the slowdown in China will all be contributing factors. Over the medium term, growth should gradually pick up, provided prudent macro policies are implemented and structural reforms accelerated.

37. Fiscal consolidation and a sound public investment management framework are critical to maintaining debt on a sustainable path. Reliance on grants and one-off revenues to keep fiscal deficits within program targets are not substitutes for permanent measures to ensure lasting fiscal consolidation. The authorities’ commitment to resume consolidation in 2016 and bring the budget in line with program commitments by implementing additional measures is welcome. Compensating any possible shortfall from these measures by equivalent cuts in expenditures will be critical to meet fiscal targets. Going forward, success will hinge on identifying concrete measures to boost tax revenues over the medium term, reducing the wage bill, streamlining spending on goods and services, and improving the public investment framework. It is also critical to strengthen coordination among various government agencies to ensure an efficient budget process.

38. Public debt has reached worrisome levels and should be contained. Prudence should be exercised when selecting new infrastructure projects, and contracting and guarantying new public debt. Debt is close to moving from medium to high risk of debt distress, which would reduce access to concessional and nonconcessional borrowing. Furthermore, debt should be carefully monitored to avoid contingent liabilities. In addition, the new debt limit legislation, which would allow revisions to the debt limit on an annual basis, increases the risk of undermining its credibility. In this context, the authorities should refrain from frequent revisions to this limit, especially to soften up borrowing constrains.

39. Monetary policy should continue to focus on containing inflation within the NBKR’s target range. The current interest rate level appropriately balances declining inflationary pressures, weakening credit, and GDP growth against rising fiscal and exchange rate pressures. The NBKR should continue to monitor developments and inflation expectations and adjust monetary policy as needed. Efforts to enhance the monetary transmission mechanism should be stepped up by, as a first step, narrowing the corridor around the policy rate and making it more symmetric. Strengthening coordination between the NBKR, ministry of finance, and the RKDF as well as enhancing the forward looking component of the NBKR’s communication policy will be critical in the period ahead.

40. The central bank’s flexible exchange rate policy has served the economy well by acting as a shock absorber. Looking forward, the NBKR should continue to limit interventions only to smooth excessive volatility while allowing the som to move in the line with fundamentals. In this context, given the large current account deficit and the high degree of dollarization, building reserves to about four months of imports would be appropriate. The NBKR should also introduce new monetary and hedging instruments to offset the effect of its FX interventions.

41. High and rising banking sector vulnerabilities call for the immediate passage of the Banking Law, given its macro-criticality to preserve financial sector stability, particularly in the current difficult economic environment. The authorities should exert every effort to ensure the passage of the Law in a form substantially similar to the draft submitted to parliament in September 2013. At the very least, the Law should maintain the original provisions in the areas of: (i) governance and oversight; (ii) judicial review and nonsuspension of the NBKR’s decisions; and (iii) powers of the NBKR in the resolution process.

42. Additional efforts are needed to ensure financial sector stability. The authorities’ efforts to strengthen supervision by developing a strategic plan for banking supervision, improve the quality of prudential regulation, and put in place a crisis preparedness framework are all welcome. The NBKR should also stand ready to introduce additional macro-prudential measures. Moreover, finalizing the liquidation of all the banks under DEBRA and winding down DEBRA’s activities by early 2017 are important measures to enhance confidence in the banking sector. Success will hinge on the full cooperation between DEBRA, NBKR, and ministry of finance.

43. Expanding the economy’s potential will necessitate bold structural reforms. Improving the business climate, addressing the infrastructure bottlenecks and tackling corruption and governance are necessary to enhance broad-based growth and maximize benefits from the EEU. Governance reforms are essential to reduce the corruption perception and unlock the growth potential. Speeding up the PFM reforms will enable the authorities to better monitor spending and increase transparency of the budget’s operations. Simplifying cross border trade, better enforcement of contracts and faster resolution of insolvency will allow the Kyrgyz Republic to have a competitive edge within the EEU.

44. The program continues to face significant risks, but the authorities’ policy commitments provide safeguards and the Kyrgyz Republic’s repayment capacity remains adequate. Regional economic slowdown, volatile exchange rates, and uncertainty about gold production are key risks to the program. Furthermore, political resistance to financial sector reforms, as well as populist polices in the run up to the 2017 presidential elections, could reverse the reform process, undermine macroeconomic and financial sector stability, and increase risk of debt distress. Continued dialogue with the Fund is essential for the success of the program.

45. Staff supports completing the second review of the authorities’ program under the ECF arrangement. Staff supports authorities’ request to modify end-June, end-September, and end-December 2016 QPCs and ITs. The policies outlined in the attached LOI are adequate to achieve the program’s goals.

Table 1.Kyrgyz Republic: Selected Economic Indicators, 2014–21
I. Social and Demographic Indicators
Population (In millions, 2015)5.9GINI Index (2012)27.37
Unemployment rate (official, 2013)8Life expectancy at birth in years (2013)70.2
Poverty rate (2013)37Adult literacy rate (percent of population)99
GNI per capita (2014, Atlas method, U.S. dollars)1,250Under-five mortality (per 1000 live births) (2014)22.6
Sources: Kyrgyz authorities and IMF staff estimates and projections.
II. Economic Indicators
20142015201620172018201920202021
Act.Est.Projections
Nominal GDP (in billions of soms)400.7423.6455.4506.6561.2614.6675.7734.5
Nominal GDP (in millions of U.S. dollars)7,4656,6505,8826,3546,9017,4107,9878,512
Real GDP (growth in percent)3.63.53.03.05.24.65.74.5
Nongold real GDP (growth in percent)4.64.52.93.54.14.55.05.2
GDP per capita (in U.S. dollars)1,2661,1139711,0341,1081,1731,2471,311
Consumer prices (12-month percent change, eop)10.53.45.85.75.45.35.15.0
Consumer prices (12-month percent change, average)7.56.52.88.15.35.55.25.1
Investment and savings (in percent of GDP)
Investment26.929.231.330.829.629.429.730.7
Public 1/8.811.016.614.312.411.48.58.5
Private18.218.214.716.417.218.021.122.1
Savings9.118.816.115.517.017.119.520.9
Public9.36.27.08.99.69.89.810.3
Private−0.112.69.16.67.47.39.810.6
Savings-investment balance−17.8−10.4−15.2−15.3−12.6−12.2−10.1−9.9
General government finances (in percent of GDP) 2/
Revenue35.338.137.937.036.236.335.936.0
Of which: Tax revenue20.620.021.822.322.522.622.722.9
Expense29.730.630.929.528.528.427.927.7
Gross operating balance5.77.56.97.57.77.98.08.3
Net acquisition of nonfinancial assets4.78.711.49.98.28.48.58.6
Overall balance(net lending/borrowing)1.0−1.2−4.5−2.4−0.4−0.5−0.5−0.4
Overall balance excluding foreign financed PIP loans3.53.24.24.54.74.45.43.5
Overall balance including onlending−3.7−3.2−8.7−5.1−2.7−2.0−0.5−0.4
Primary net lending/borrowing1.9−0.2−3.1−1.30.60.50.50.7
Primary balance excluding foreign financed PIP loans4.34.25.65.65.75.56.44.5
Primary balance excluding grants−1.4−4.3−8.7−6.3−3.4−2.4−1.6−1.4
Cyclically adjusted balance−4.7−2.7−7.2−4.0−1.80.50.50.8
Total public debt 3/52.366.073.173.572.872.271.468.9
Banking sector
Reserve money (percent change, eop)−11.94.013.59.98.88.47.57.2
Broad money (percent change, eop)3.014.914.011.610.810.310.39.5
Credit to private sector (percent change, eop)43.617.210.419.113.012.212.511.3
Credit to private sector (in percent of GDP)20.522.723.325.025.526.126.727.3
Velocity of broad money 4/3.23.02.82.82.82.82.82.7
Policy Rate10.510.0n.a.n.a.n.a.n.a.n.a.n.a.
External sector
Current account balance (in percent of GDP)−17.8−10.4−15.2−15.3−12.6−12.2−10.1−9.9
Export of goods and services (in millions of U.S. dollars)3,2482,6482,5392,6452,9203,2013,5543,811
Export growth (percent change)−23.2−18.5−4.14.210.49.611.07.2
Import of goods and services (in millions of U.S. dollars)6,5214,6834,7635,0985,3605,5475,7576,145
Import growth (percent change)5.7−28.21.77.05.13.53.86.7
Gross International reserves (in millions of U.S. dollars) 5/1,8561,4681,6211,6381,7401,8542,0852,260
Gross reserves (months of next year imports, eop)4.83.73.83.73.83.94.14.1
External public debt outstanding (in percent of GDP)50.664.671.872.371.771.270.568.0
External public debt service-to-export ratio (in percent)3.64.97.27.37.57.57.27.1
Memorandum items:
Exchange rate (soms per U.S. dollar, average)53.764.4
Real effective exchange rate (2010=100) (average)107.25106.3
Gold related tax receipts of the general government (percent of GDP)1.21.4
Sources: Kyrgyz authorities and IMF staff estimates and projections.
Table 2.Kyrgyz Republic: Balance of Payments 2014–21(In millions of U.S. dollars)
20142015201620172018201920202021
Act.Proj.
Current account balance 1/−1,330−691−893−970−872−907−808−839
Excluding transfers−3,581−2,309−2,505−2,668−2,612−2,692−2,592−2,705
Trade balance−2,943−1,921−2,154−2,415−2,431−2,394−2,299−2,511
Exports, fob2,3481,8051,8161,8152,0002,1602,4032,514
CIS countries1,3469001,0111,0191,0751,1701,2801,383
Of which: Energy products6339515865727986
Of which: Re-exports of consumer goods173108100107113124136155
Non-CIS countries1,0029058057969249911,1221,131
Of which: Gold7176657297188459081,0381,042
Imports, fob5,2903,7263,9704,2314,4314,5544,7025,025
CIS countries2,5802,0401,8521,9962,1502,1772,2702,399
Of which: Energy (including for re-exports)1,042701570551626621656694
Non-CIS countries2,7101,6862,1182,2352,2812,3782,4322,626
Of which: Goods for re-exports1737870778394106125
Services−331−114−70−38−94896177
Receipts9018437238309201,0411,1521,298
Payments−1,231−957−793−867−929−993−1,055−1,120
Income−308−275−280−215−171−346−389−371
Interest payments−79−67−150−92−48−87−169−180
Other net income−229−208−130−123−123−258−220−191
Current Transfers (net)2,2511,6181,6121,6971,7401,7851,7841,865
Of which: Private2,0421,5151,5441,6061,6701,7371,7861,867
Capital Account58207274243221185189193
Official53184274243221185189193
Private523000000
Financial account779584735712738834847807
Commercial banks0−140000000
Medium- and long-term loans (net)490283316228165173152−12
Disbursement 1/901647829731659677680555
Of which: Loan financed PIP (excl. energy investments financed by China)9695144186218184210108
Of which: Energy investments financed by China (PIP)349154353199921288845
Amortization−411−364−513−503−494−504−528−567
Foreign direct investment 2/348704512465493527545564
Portfolio investment02000000
Other (including SDR allocation) 3/0−263000000
Net short-term flows−6425−942080135150255
Errors and omissions367−405000000
Overall balance−127−305117−1586112228161
Financing 4/127305−11715−86−112−228−161
Net international reserves127305−174−43−130−142−258−191
Gross official reserves (–, increase)132293−153−17−101−114−232−175
IMF−612−21−26−29−28−27−16
Exceptional financing (including arrears)00303030303030
Financing gap00282814000
Memorandum items:
GDP (in millions of U.S. dollars)7,4656,6505,8826,3546,9017,4107,9878,512
Current account balance (percent of GDP)−17.8−10.4−15.2−15.3−12.6−12.2−10.1−9.9
Current account balance excluding official transfers (percent of GDP) 1/−20.6−11.9−16.3−16.7−13.7−12.9−10.1−9.8
Growth of exports of GNFS (volume, percent)−22.7−6.84.20.58.86.68.63.9
Growth of imports of GNFS (volume, percent)7.4−14.315.93.63.31.32.43.9
Terms of trade (goods, percentage change)0.88.77.1−1.1−0.8−0.5−0.1−0.7
Gold price (U.S. dollars per ounce)1,2661,1601,2191,2311,2341,2561,2781,300
Fuel Price Index (2005=100)176.997.568.478.083.588.491.493.1
External Public Debt (in millions of U.S. dollars) 5/3,4403,6064,1434,5484,8985,2245,5755,734
As percent of GDP50.664.671.872.371.771.270.568.0
External public debt service-to-exports ratio 5/6/3.64.97.27.37.57.26.76.6
Gross reserves 3/7/1,8561,4681,6211,6381,7401,8542,0852,260
In months of subsequent year’s imports4.83.73.83.73.83.94.14.1
Sources: Kyrgyz authorities and IMF staff estimates and projections.
Table 3.Kyrgyz Republic: NBKR Accounts, 2014–16
201420152016
Dec.Dec.Mar.Jun.Sep.Dec.
Act.Act.Act.Proj.Proj.Proj.
(In millions of soms)
Net foreign assets104,770123,167125,149139,303135,098131,466
Net international reserves 1/105,936108,490119,230133,385129,179126,097
Long-term foreign liabilities−7,233−8,929−8,379−8,379−8,379−8,929
Other foreign assets 1/6,06823,60614,29814,29814,29814,298
Net domestic assets−40,298−56,112−58,985−63,389−60,884−55,374
Net claims on general government−18,191−13,714−17,611−6,865−7,065−6,107
Of which: Total government deposits (including foreign exchange deposits)−19,618−15,105−18,999−8,238−8,438−7,494
Of which: Securitized government debt1,4541,4021,3991,3991,3991,399
Claims on commercial banks1,309−2,204−9,067−6,398−7,384−6,621
Of which: NBKR notes−1,326−2,126−1,999−2,278−3,264−2,502
Claims of other financial corporations0−4,364−6,562−11,955−6,898−1,792
Other items net−23,416−35,829−25,744−38,171−39,537−40,854
Reserve money64,47267,05566,16375,91574,21376,092
Currency in circulation57,07558,39857,49564,90763,08164,297
Commercial banks’ reserves7,3978,6578,66911,00811,13211,794
Of which: Required reserves6,6938,2257,5177,8238,6509,348
(Contribution to reserve money growth, in percent) 2/
Net foreign assets6.628.53.024.117.812.4
Net domestic assets−18.5−24.5−4.3−10.9−7.11.1
Of which: Net claims on general government−15.36.9−5.810.29.911.3
Reserve money−11.94.0−1.313.210.713.5
Of which: Currency in circulation−13.52.1−1.39.77.08.8
Memorandum items:
Reserve money growth (12-month change, in percent)−11.94.017.219.411.513.5
Gross International Reserves (in millions of U.S. dollars) 1/1,8561,468.31,7261,7571,6811,621
Net international reserves (in millions of U.S. dollars) 1/1,6691,2801,4051,5721,5021,447
Sources: Kyrgyz authorities and IMF staff estimates and projections.
Table 4.Kyrgyz Republic: Monetary Survey, 2014–16
201420152016
Dec.Dec.Mar.Jun.Sept.Dec.
Act.Act.Act.Proj.Proj.Proj.
(In millions of soms)
Net foreign assets108,590134,500127,683141,837137,632142,799
Net domestic assets15,9558,6437,7645,05716,73220,417
Domestic credit61,31779,22371,52785,74798,78896,791
Net claims on general government−20,831−17,021−21,706−8,398−7,796−9,426
Credit to the rest of the economy 1/82,14896,24593,23394,145106,584106,217
Of which: In foreign exchange45,46451,71142,71143,12848,82754,944
Other items net−45,363−70,580−63,763−80,690−82,056−76,373
Broad money (M2X)124,544143,143135,446146,895154,364163,216
Of which:
Broad money, excluding foreign exchange deposits (M2)82,38682,26785,04394,06396,146100,274
Currency held by the public51,90453,11852,88360,35259,00060,112
Total domestic currency deposit liabilities30,48229,14932,16133,71137,14740,162
(Contribution to broad money growth, in percent) 2/
Net foreign assets2.420.8−4.85.12.25.8
Net domestic assets0.6−5.9−0.6−2.55.712.1
Domestic credit10.314.4−5.44.613.759.4
Net claims on general government−10.43.1−3.36.06.4−5.8
Credit to the rest of the economy20.611.3−2.1−1.57.265.2
Other items (net)−9.6−20.24.8−7.1−8.0−47.2
Broad money (M2X)3.014.9−5.42.67.814.0
Of which:
Broad money, excluding foreign exchange deposits (M2)−7.1−0.11.98.29.712.6
Currency held by the public−8.31.0−0.25.14.14.9
Total deposit liabilities1.2−1.12.13.25.617.5
Memorandum items:
Broad money (M2X) (12-month change, in percent)3.014.913.116.813.814.0
Credit to the rest of the economy (12-month change, in percent) 1/43.617.21.33.511.510.4
Credit growth FX portion in dollar terms (12-month change, in percent)30.7−11.8−19.4
Credit growth FX portion in som term(12-month change, in percent)55.713.7−11.7
Credit growth som protion (12-month change, in percent)31.121.415.8
Real credit growth, (12-month change, in percent)33.213.80.8
Credit growth in constant exchange rate—DEC 2013 (12-month change, in percent)30.94.5−0.5
Credit to the rest of the economy (in percent of GDP)20.722.720.520.723.423.3
M2X velocity 3/3.23.03.43.13.02.8
M2X multiplier1.92.12.01.92.12.1
Dollarization indicators (in percent)
Loan dollarization55.353.745.845.845.851.7
Deposit dollarization58.067.661.061.061.061.0
Sources: Kyrgyz authorities and IMF staff estimates and projections.
Table 5.Kyrgyz Republic: General Government Finances, 2014–18(In millions of soms)
20142015201620172018
YearYearQ1Q2Q3Q4YearYearYear
Act.Prel.Proj.Proj.Proj.Proj.Proj.Proj.Proj.
Revenue141,578161,26239,84439,68643,14549,758172,434187,693202,962
Taxes82,63984,65520,33021,40926,12331,29199,153112,837126,158
Taxes on income, profits, and capital gains19,63521,7735,2275,4376,5039,48626,65429,74033,460
Payable by individuals8,5429,5142,2372,4932,9824,50912,22115,63118,167
Payable by corporations and other enterprises8,7949,8132,3512,5912,8595,01812,81912,41513,697
Other income taxes2,2992,446639354662−411,6141,6941,596
Taxes on property2,2102,2866014875827162,3862,6422,919
Property Tax1,2901,3323462923494441,4321,5931,765
Land Tax9209542551952332719541,0491,154
Taxes on goods and services46,26048,48611,42413,07714,84617,13256,48064,36171,925
General taxes on goods and services39,92640,7299,66711,07112,18413,62546,54853,49359,686
Value-added taxes32,66333,2217,8559,0489,92211,19138,01543,06748,093
Excises6,3347,7571,7572,0062,6623,5079,93310,86912,239
Taxes on international trade and transactions13,7719,6842,9222,0103,7153,03611,68313,96615,526
Other Taxes7632,4251553984769211,9502,1272,328
Social contributions22,05824,1065,6556,5655,7627,31325,29526,62830,080
Grants13,13217,1925,1534,8375,3399,79025,12025,27322,192
Program grants11,3766,7492,288003,1335,4227,4785,879
Project grants 1/1,75610,4432,8654,8375,3396,65719,69817,79516,313
Other revenue23,75035,3108,7066,8755,9211,36422,86622,95624,531
Expense118,829129,46329,90037,45432,47541,020140,849149,594159,702
Compensation of employees35,28839,6128,65413,5989,79414,12446,17045,05346,198
Wages and salaries31,29235,1037,69812,0048,64712,41240,76039,95640,763
Social contributions3,9954,5099561,5941,1471,7135,4105,0985,435
Purchases/use of goods and services29,03930,5296,0687,9937,79510,93132,78735,96937,880
Consumption of fixed capital000000000
Interest3,4664,0231,5241,5421,5601,5246,1495,6775,665
Foreign interest2,2302,7491,0631,0631,0631,0634,2504,5695,227
Domestic interest1,2361,2744614794974611,899608438
Subsidies3,3593,5181,129603398−1072,0232,4522,717
To public corporations3,3593,5181,129603398−1072,0232,4522,717
To private entities000000000
Grants20025611681606263318345
To foreign governments000000000
To international organizations20025611681606263318345
To other general government units000000000
Social benefits47,47651,52412,41013,63812,86814,54353,45860,12566,897
Social Assistance9,96610,8472,5233,3842,1793,03211,11813,48014,622
Social security benefits37,51040,6779,88710,25410,68811,51142,34046,64552,275
Gross operating balance22,75031,7999,9452,23210,6708,73831,58538,09943,259
Net acquisition of nonfinancial assets18,74036,7497,86716,41714,16413,62852,07650,36245,740
Acquisition of nonfinancial assets18,78936,8917,95516,44014,19513,61252,20350,50245,896
Domestically financed8,94018,3271,4695,5193,4982,03312,51815,34317,042
Foreign financed 1/9,84918,5646,48610,92110,69811,57939,68535,15928,854
Disposals of nonfinancial assets−49−142−88−23−3116−126−141−156
Net lending/borrowing4,010−4,9502,077−14,185−3,494−4,890−20,492−12,263−2,481
Net acquisition of financial assets30,0694,9746,119−7,1907,0094,86511,70610,99311,481
Domestic30,0694,9746,119−7,1907,0094,86511,70610,99311,481
Currency and deposits11,358−3,6454,952−10,186−205−2,159−7,599−2,721−1,317
Loans18,7248,6321,2122,9997,2187,02819,31913,72812,814
Sales of equity (privatization proceeds)−13−13−45−3−3−3−14−14−15
Foreign000000000
Net incurrence of liabilities22,92812,1341,8736,99410,50311,96531,33622,86513,826
Domestic−1,582−933485−224−224−37000
Foreign24,50913,0671,3887,21910,72712,00231,33622,86513,826
Program loans3,5981,791581,1261862,1483,5193,4041,276
Public investment program loans23,86715,8593,9478,73613,21112,55038,44330,70225,219
Amortization−2,955−4,582−2,617−2,643−2,669−2,696−10,626−11,241−12,669
Sources: Kyrgyz authorities and IMF staff estimates and projections.
Table 6.Kyrgyz Republic: General Government Finances, 2014–18(In percent of GDP)
20142015201620172018
YearYearQ1Q2Q3Q4YearYearYear
Act.Proj.Proj.Proj.Proj.Proj.Proj.Proj.Proj.
Revenue35.338.18.78.79.510.937.937.036.2
Taxes20.620.04.54.75.76.921.822.322.5
Taxes on income, profits, and capital gains4.95.11.11.21.42.15.95.96.0
Payable by individuals2.12.20.50.50.71.02.73.13.2
Payable by corporations and other enterprises2.22.30.50.60.61.12.82.52.4
Other income taxes0.60.60.10.10.10.00.40.30.3
Taxes on property0.60.50.10.10.10.20.50.50.5
Taxes on goods and services11.511.42.52.93.33.812.412.712.8
General taxes on goods and services10.09.62.12.42.73.010.210.610.6
Value-added taxes8.27.81.72.02.22.58.38.58.6
Turnover and other taxes on goods and service1.81.80.00.00.00.01.92.12.1
Excises1.61.80.40.40.60.82.22.12.2
Taxes on international trade and transactions3.42.30.60.40.80.72.62.82.8
Other Taxes0.20.60.00.10.10.20.40.40.4
Social contributions5.55.71.21.41.31.65.65.35.4
Grants3.34.11.11.11.22.15.55.04.0
Program grants2.81.60.50.00.00.71.21.51.0
Project grants 1/0.42.50.61.11.21.54.33.52.9
Other revenue5.98.31.91.51.30.35.04.54.4
Expense29.730.66.68.27.19.030.929.528.5
Compensation of employees8.89.41.93.02.23.110.18.98.2
Wages and salaries7.88.31.72.61.92.79.07.97.3
Social contributions1.01.10.20.30.30.41.21.01.0
Purchases/use of goods and services7.27.21.31.81.72.47.27.16.8
Consumption of fixed capital0.00.00.00.00.00.00.00.00.0
Interest0.90.90.30.30.30.31.41.11.0
Foreign interest0.60.60.20.20.20.20.90.90.9
Domestic interest0.30.30.10.10.10.10.40.10.1
Subsidies0.80.80.20.10.10.00.40.50.5
To public corporations0.80.80.20.10.10.00.40.50.5
To private entities0.00.00.00.00.00.00.00.00.0
Grants0.00.10.00.00.00.00.10.10.1
To foreign governments0.00.00.00.00.00.00.00.00.0
To international organizations0.00.10.00.00.00.00.10.10.1
To other general government units0.00.00.00.00.00.00.00.00.0
Social benefits11.812.22.73.02.83.211.711.911.9
Social assistance2.52.60.60.70.50.72.42.72.6
Social security benefits9.49.62.22.32.32.59.39.29.3
Other Expenses0.00.00.00.00.00.00.00.00.0
Gross operating balance5.77.52.20.52.31.96.97.57.7
Net acquisition of nonfinancial assets4.78.71.73.63.13.011.49.98.2
Acquisition of nonfinancial assets4.78.71.73.63.13.011.510.08.2
Domestically financed2.24.30.31.20.80.42.73.03.0
Foreign financed 1/2.54.41.42.42.32.58.76.95.1
Disposals of nonfinancial assets0.00.00.00.00.00.00.00.00.0
Net lending/borrowing1.0−1.20.5−3.1−0.8−1.1−4.5−2.4−0.4
Net acquisition of financial assets7.51.21.3−1.61.51.12.62.22.0
Domestic7.51.21.3−1.61.51.12.62.22.0
Currency and deposits2.8−0.91.1−2.20.0−0.5−1.7−0.5−0.2
Loans4.72.00.30.71.61.54.22.72.3
Sales of equity (privatization proceeds)0.00.00.00.00.00.00.00.00.0
Foreign0.00.00.00.00.00.00.00.00.0
Net incurrence of liabilities5.72.90.41.52.32.66.94.52.5
Domestic−0.4−0.20.10.00.00.00.00.00.0
Foreign6.13.10.31.62.42.66.94.52.5
Program loans0.90.40.00.20.00.50.80.70.2
Public investment program loans6.03.70.91.92.92.88.46.14.5
Amortization−0.7−1.1−0.6−0.6−0.6−0.6−2.3−2.2−2.3
Sources: Kyrgyz authorities and IMF staff estimates and projections.
Table 7.Kyrgyz Republic: Selected Financial Soundness Indicators, 2014–16
Mar-14Jun-14Sep-14Dec-14Mar-15Jun-15Sep-15Dec-15Jan-16Feb-16
Capital Adequacy
Regulatory capital to risk weighted assets23.922.122.521.820.720.921.522.422.623.5
Tier 1 capital to risk weighted assets20.618.217.716.417.817.617.418.120.421.1
Capital to total assets16.916.316.716.215.415.715.715.616.116.3
Liquidity
Liquidity ratio67.356.855.165.167.564.770.577.880.783.8
Excess reserves/total reserves16.07.47.38.34.220.57.23.210.49.3
Asset quality
Nonperforming loans/total loans5.44.64.24.55.45.26.07.17.98.4
Restructured Loans2.11.71.92.23.64.37.77.89.4
Prolonged Loans3.83.53.43.02.42.95.05.05.9
Nonperforming loans by sector (share of total loans)
Industry0.50.50.40.60.60.7
Agriculture0.20.30.50.70.91.0
Trade1.72.32.33.13.23.4
Construction0.70.70.30.20.50.4
Mortgage0.40.40.50.80.90.9
Consumer loans0.20.20.30.40.40.5
Other0.81.00.91.31.41.6
Nonperforming loans by currency (share of total loans)
Foreign currency nonperforming loans4.13.53.13.44.13.85.15.65.8
Som nonperforming loans1.31.11.11.11.31.52.02.32.7
Loan-loss provisioning/nonperforming loans59.861.061.358.853.754.054.153.453.253.8
Nonperforming assets/total assets2.82.52.42.63.13.03.43.84.34.5
Earnings and profitability
Return on equity15.716.018.618.715.311.513.410.8−9.6−2.2
Return on assets2.42.42.72.62.21.61.81.5−1.3−0.3
Net interest margin7.98.18.48.38.38.38.17.87.67.0
Spread7.47.78.07.97.77.87.57.17.36.3
Income from services and commission fee/total income12.013.113.914.08.18.78.08.37.47.0
Loans and deposits
Loans/deposits100.1104.2109.4109.7118.3117.5111.5100.7106.2106.0
Loans/total assets52.554.957.358.357.758.156.853.053.952.8
Foreign currency exposure
Foreign currency exposure780.31,669.82,218.11,816.0626.0242.41,704.8−578.0−1,299.2−1,570.2
Loans/deposits (in foreign currency)95.6101.3104.5107.9100.395.790.080.378.675.7
Share of foreign currency deposits in total deposits 1/57.053.758.058.664.164.568.369.170.668.2
Share of foreign currency loans in total loans54.452.255.457.654.352.655.255.152.248.7
Memorandum items:
Assets to GDP32.833.433.733.937.636.438.941.742.241.7
Deposits to GDP17.217.617.718.018.318.019.821.921.420.8
Source: National Bank of the Kyrgyz Republic.
Table 8.Kyrgyz Republic: Proposed Reviews and Disbursements Under the Three-Year Extended Credit Facility Arrangement
Availability DateActionAssociated DisbursementShare of Access (In percent)
On April 8, 2015First disbursement based on approval of the three-year ECF arrangement.SDR 9.514 million14.3
On October 7, 2015Second disbursement based on completion of the first review.SDR 9.514 million14.3
On April 6, 2016Third disbursement based on completion of the second review.SDR 9.514 million14.3
On October 5, 2016Fourth disbursement based on completion of the third review.SDR 9.514 million14.3
On April 4, 2017Fifth disbursement based on completion of the fourth review.SDR 9.514 million14.3
On October 3, 2017Sixth disbursement based on completion of the fifth review.SDR 9.514 million14.3
On April 2, 2018Seventh disbursement based on completion of the sixth review.SDR 9.516 million14.3
TotalSDR 66.600 million100.0
Source: International Monetary Fund.
Table 9.Kyrgyz Republic: Indicators of Capacity to Repay the Fund, 2016–21 1/
201620172018201920202021
Fund obligations based on existing credit
(In millions of SDRs)
Principal15.018.320.717.518.716.2
Charges and interest0.00.00.00.20.10.1
Fund obligations based on existing and prospective credit
(In millions of SDRs)
Principal15.018.320.717.518.717.1
Charges and interest0.00.00.00.30.30.2
Total obligations based on existing and prospective credit
In millions of SDRs15.018.320.717.819.017.4
In millions of U.S. dollars20.925.629.025.026.724.4
In percent of gross international reserves1.31.61.71.41.31.1
In percent of exports of goods and services0.81.01.00.80.80.6
In percent of debt service 2/11.413.213.210.410.59.0
In percent of GDP0.40.40.40.30.30.3
In percent of quota16.920.623.320.121.419.5
Outstanding Fund credit 2/
In millions of SDRs139.9140.6129.5112.093.276.1
In billions of U.S. dollars0.20.20.20.20.10.1
In percent of gross international reserves12.112.010.48.56.34.7
In percent of exports of goods and services7.77.46.24.93.72.8
In percent of debt service 2/106.8101.582.865.251.539.3
In percent of GDP3.33.12.62.11.61.3
In percent of quota157.5158.4145.8126.1105.085.7
Net use of Fund credit (in millions of SDRs)4.10.8−11.2−17.5−18.7−17.1
Disbursements19.019.09.5
Repayments and Repurchases15.018.320.717.518.717.1
Memorandum items:
Nominal GDP (in millions of U.S. dollars)5,8826,3546,9017,4107,9878,512
Exports of goods and services (in millions of U.S. dollars)2,5392,6452,9203,2013,5543,811
Gross International Reserves (in millions of U.S. dollars)1,6211,6381,7401,8542,0852,260
Debt service (in millions of U.S. dollars) 2/183.1193.9219.1241.3254.9272.4
Quota (millions of SDRs)88.888.888.888.888.888.8
Sources: IMF staff estimates and projections.
Table 10.Kyrgyz Republic: Quantitative Performance Criteria and Indicative Targets Under the Extended Credit Facility, December 2015–December 2016(In millions of soms; unless otherwise indicated; eop)
20152016
DecemberMarchJuneSeptemberDecember
QPCITQPCITQPC
CR16/55Adj.ActualStatusCR16/55Adj.ActualStatus
Quantitative performance criteria 1/
1. Floor on net international reserves of the NBKR (eop stock, in millions of U.S. dollars)1,1031,0861,230Met9481,0641,375Met1,2351,1641,110
2. Ceiling on net domestic assets of the NBKR (eop stock)−24,195−21,313−27,174Met−20,222−20,187−34,797Met−22,625−23,688−18,523
3. Ceiling on cumulative overall deficit of the general government 2/15,3048,1954,950Met12,13413,795−2,077Met12,10815,60220,492
4. Present value of new external debt contracted or guaranteed (continuous, in millions of U.S. dollars)650Met226134Met220220220
5. Ceiling on accumulation of new external payment arrears (continuous, in millions of U.S. dollars)00Met00Met000
Indicative Targets 1/
1. Ceiling on reserve money69,14567,055Met68,25666,163Met75,91574,21376,092
2. Cumulative floor on state government tax collections 2/87,00984,655Not met19,63920,330Met41,73967,86299,153
3. Floor on cumulative state government spending on targeted social assistance, Unified Monthly Benefit and Monthly Social Benefit programs 2/4,4124,925Met1,1891,368Met2,3773,6155,417
4. Ceiling on contracted or guaranteed of new nonconcessional external debt by public sector (continuous, in millions of U.S. dollars) 3/300Met00Met000
Sources: Kyrgyz authorities and IMF staff estimates and projections.
Table 11.Kyrgyz Republic: Prior Action and Structural Benchmarks Under the Extended Credit Facility
MeasuresTimingStatus
Prior Action
Finalize the audit of DEBRA and banks under its management.5 business days prior to the Board meeting
Structural Benchmarks
I. FISCAL POLICY
Undertake a review of the public investment framework in cooperation with development partners and line ministries to identify gaps and then define an action plan.End-April, 2016Met
Draw an action plan for the reform of public sector personnel and remuneration policy to reduce the wage bill as a share of GDP.End-May, 2016
Revise the MDTS in light of the outcome of the new DSA.End-July, 2016
Conduct a review of all subsidies and draw up an action plan to reduce them.End-September, 2016
Sign a Memorandum of Co-operation with TIKA, the Turkish Cooperation and Coordination Agency, to develop new Financial Management Information System.End-June, 2016Met
Review the methodology for setting power tariffs to ensure economic soundness and adjust accordingly the roadmap for increasing tariffs.End-June, 2016Met
Set up a comprehensive register of all employees of the general government.End-March 2017New
Modify through government decree the decision making process for the selection of public investment projects by formalizing gate keeping roles of the MoE on evaluation, including economic assessment and project efficiency, and MoF on financing respectively. The PIP guidelines will be updated accordingly.End-December 2016New
Sign the FMIS terms of referenceEnd-February 2017New
Introduce a standardized framework for project monitoring of physical and financialEnd-June 2017New
performance for all projects exceeding KGS 50 million.
II. FINANCIAL SECTOR
Resubmit to Parliament amendments to the code for administrative responsibility aimed at increasing penalties for unlicensed foreign exchange activity.End-February, 2016Met
Submit a new draft AML/CFT law that reflects all the recommendations provided by the Fund as well as other donors to the new parliament.End-April, 2016Broadly implemented
Finalize the audit of DEBRA and banks under its management.End-March, 2016Not met
Develop a crisis preparedness framework, including establishing a high-level financialEnd-September 2016
stability council comprised of representatives of the NBKR, DPA, ministry of finance, and prime minister’s office.
Enact and publish in the Official Gazette (“Erkin-Too”) the banking law and the supporting law on “enactment of the banking law”.End-September 2016
DEBRA to submit to the courts requests for liquidating the following banks: “Bishkek”, “Mercury”, “Kurulush-bank”, and “Adil” banks.End-September, 2016New
DEBRA to submit to the courts requests for liquidating the following banks: “Kyrgyzagroprombank” banks, “Manas”, “Issyk-Kul”, and “AUB” banks.End-March, 2017New
Develop a strategic plan for supervision with the following components: (i) personnel policy to attract and retain qualified personnel, and decrease personnel turnover rate; (ii) training of supervisors to ensure that staff is familiar with the NBKR’s supervisory approach and to improve their technical ability; (iii) enhancing the supervisory approach, including implementation of the risk based supervision; and (iv) strengthening the current regulatory framework and bring it line with international standards.End-December 2016New
Table 12a.Kyrgyz Republic: Actual Borrowing Program(December 4–31, 2015)
PPG external debtVolume of new debt in 2015PV of new debt in 2015 (programPV of new debt in 2015 (including negative GEs)
USD millionUSD millionUSD million
Sources of debt financing0.00.00.0
Concessional debt, of which0.00.00.0
Multilateral debt0.00.00.0
Bilateral debt0.00.00.0
Other0.00.00.0
Non-concessional debt, of which0.00.00.0
Semi-concessional0.00.00.0
Commercial terms0.00.00.0
By Creditor Type0.00.00.0
Multilateral0.00.00.0
Bilateral - Paris Club0.00.00.0
Bilateral - Non-Paris Club0.00.00.0
Other0.00.00.0
Uses of debt financing0.00.00.0
Infrastructure0.00.00.0
Social Spending0.00.00.0
Budget Financing0.00.00.0
Other0.00.00.0
Table 12b.Kyrgyz Republic: Type of New External Debt(In millions of U.S. dollars, December 4–31, 2015)
By the type of interest rate
Fixed Interest Rate0.0
Variable Interest Rate0.0
Unconventional Loans0.0
By currency
USD denominated loans0.0
Loans denominated in other currency0.0
Table 12c.Kyrgyz Republic: Actual Borrowing Program(January 1–March 31, 2016)
PPG external debtVolume of new debt in 2016PV of new debt in 2016 (program purposes)PV of new debt in 2016 (including negative GEs)
USD millionPercentUSD millionPercentUSD millionPercent
By sources of debt financing220.7100133.5100133.5100
Concessional debt, of which220.7100133.5100133.5100
Multilateral debt113.15169.75269.752
Bilateral debt107.64963.84863.848
Other0.000.000.00
Non-concessional debt, of which0.000.000.00
Semi-concessional0.000.000.00
Commercial terms0.000.000.00
By Creditor Type220.7100133.5100133.5100
Multilateral113.15169.75269.752
Bilateral - Paris Club107.64963.84863.848
Bilateral - Non-Paris Club0.000.000.00
Other0.000.000.00
Uses of debt financing220.7100133.5100133.5100
Infrastructure220.7100133.5100133.5100
Social Spending0.000.000.00
Budget Financing0.000.000.00
Other0.00.00.00.00.00.0
Memo Items
Indicative projections
Year 20.00.00.0
Year 30.00.00.0
Table 12d.Kyrgyz Republic: Type of New External Debt(In millions of U.S. dollars, January 1–March 31, 2016)
By the type of interest rate
Fixed Interest Rate214.2
Variable Interest Rate6.5
Unconventional Loans0.0
By currency
USD denominated loans100.0
Loans denominated in other currency120.7
Table 12e.Kyrgyz Republic: Projected External Borrowing Program(January 1–December 31, 2016)
PPG external debtVolume of new debt in 2016PV of new debt in 2016 (program purposes)PV of new debt in 2016 (including negative GEs)
USD millionPercentUSD millionPercentUSD millionPercent
By sources of debt financing416.8100219.8100219.8100
Concessional debt, of which415.0100218.699218.699
Multilateral debt307.374154.870154.870
Bilateral debt107.62663.82963.829
Other0.000.000.00
Non-concessional debt, of which1.801.211.21
Semi-concessional1.801.211.21
Commercial terms0.000.000.00
By Creditor Type416.8100219.8100219.8100
Multilateral309.174156.071156.071
Bilateral - Paris Club107.62663.82963.829
Bilateral - Non-Paris Club0.000.000.00
Other0.000.000.00
Uses of debt financing416.8100219.8100219.8100
Infrastructure416.8100219.8100219.8100
Social Spending0.000.000.00
Budget Financing0.000.000.00
Other0.00.00.00.00.00.0
Memo Items
Indicative projections
Year 20.00.00.0
Year 30.00.00.0
Table 12f.Kyrgyz Republic: Type of the New External Debt(In millions of U.S. dollars, January 1–December 31, 2016)
By the type of interest rate
Fixed Interest Rate404.1
Variable Interest Rate12.7
Unconventional Loans0.0
By currency
USD denominated loans165.5
Loans denominated in other currency251.3

Annex I. Kyrgyz Republic: Current Account Trends

Despite a weakening external demand, the current account deficit of the Kyrgyz Republic narrowed significantly in 2015, roughly halving from 2014. The key drivers were lower oil prices, temporary pre-EEU accession pilling up of car imports and weak domestic demand, partly due to delays in public investment projects. Over the near term, the current account is expected to revert to historical trends.

Export values continued to decline in 2015, hampered by weak regional demand and administrative hurdles imposed by EEU regulations. Exports dropped by 23 percent last year and stood at roughly half of their value in 2013. The decline was almost exclusively driven by regional trends, as non-CIS exports (mainly gold) remained constant in value terms in the last two years. While in 2014 the decline in Kyrgyz exports was uniform across CIS trading partners, reflecting a broad-based weakening in regional demand, last year’s drop was confined to Kazakhstan, as abolition of simplified customs procedures in the Kyrgyz Republic following the EEU entry resulted in a fall in Kyrgyz re-exports to Kazakhstan. Anecdotal evidence also suggests that Kyrgyz agricultural exports to Kazakhstan are subject to rising nontariff barriers.

Exports

(In millions of U.S. dollars)

Source: NBKR data.

Remittances, which are almost as sizeable as exports, dropped by 25 percent in U.S. dollar terms in 2015, but are starting to recover. The decline was driven by the depreciation of the ruble, the dominant currency of remittances invoicing, vis-à-vis the dollar. In ruble terms, remittances increased by 19 percent, showing a remarkable resilience to the contraction of the Russian economy. The number of registered Kyrgyz workers in Russia increased by 10 percent between October 2015 and April 2016, during a period when the number of foreign workforce including those from other EEU countries dropped by 7 percent in total. This data suggest that the Kyrgyz Republic is a main beneficiary of the more favorable treatment of migrant workers under EEU rules.

The fall in imports far outpaced the reduction in exports and remittances. Imports have dropped by 30 percent, driven by both external and domestic factors. Weak domestic demand and delays in high-import content public investment program (PIP) contained import demand in 2015. Lower oil prices contributed to a 31 percent fall in oil imports. In addition, the entry into the EEU has also dampened imports via a number of channels. First, higher effective tariffs shifted demand from imported goods to cheaper domestic substitutes. Second, as re-exports are now diverted directly through Kazakhstan, imports of goods for re-export have also declined. Finally, while the expectations for an increase in tariffs propelled the import of passenger cars in 2014 to more than 100,000 cars equivalent to US$585 million, imports came to an almost complete standstill following the EEU entry in 2015. While the impact of this frontloading is likely to be temporary, it may take some time for large inventories to unwind and the volume of imports to fully recover.

Imports

(In millions of U.S. dollars)

Sources: NBKR data and staff estimates.

* Import content of domestic demand and PIPs assumed at 0.4 and 0.9 respectively.

Looking ahead, the current account deficit is expected to widen again to historical trends as import growth accelerates and outpaces both exports and remittances. Imports will be supported by strong public investments in the next couple of years and the unwinding of car inventories. Export growth, on the other hand, remains largely dependent on the gradual recovery in regional demand and the reduction of administrative and nontariff barriers in the EEU. However, as PIP slows down, the current account is expected to gradually narrow over the medium term.

Annex II. Kyrgyz Republic: Debt Sustainability Analysis Update1

The significant depreciation of the som at end-2015 contributed to a further increase in the external debt burden of the Kyrgyz Republic. The public and publicly guaranteed external debt is estimated to slightly exceed 36 percent of GDP and remittances2 in present value (PV) terms in the next two years, implying that while the Kyrgyz Republic is still at moderate risk of debt distress, it is getting closer to the ultimate threshold of high risk of debt distress. In order to avoid debt being assessed in high risk of debt distress and the ensuing decline in concessional donor funding, the authorities need to remain extremely cautious when contracting and guaranteeing new debt and should resume fiscal consolidation this year without any delays. The authorities broadly concurred with the results of this DSA.

Background

1. The external public debt of the Kyrgyz Republic increased rapidly since 2013, propelled by large scale public investment.3 Starting from just 44 percent of GDP two years ago, external debt reached 64.6 percent of GDP by end-2015. The acceleration of debt accumulation at the end of last year was mainly driven by the significant depreciation of the som vis-à-vis the U.S. dollar and the weaker than expected nominal GDP growth. At the same time, the delays in PIP disbursements, mainly due to delays in Chinese projects, contained the accumulation of external debt. Looking forward, the external public debt to GDP ratio is expected to rise further to above 70 percent of GDP in the next two years, and gradually decline afterwards dropping below 60 percent of GDP by 2021.

Underlying DSA assumptions

Text Table AII.1.Kyrgyz Republic: Composition of External Public and Publicly-Guaranteed Debt in 2015
CreditorIn millions of USDIn percent of total external debtIn percent of GDP
Multilaterals1,53242.527.45
IMF1885.23.37
IDA63917.711.45
ADB57616.010.32
Other Multilateral1283.62.30
Official Bilaterals2,05757.036.9
Paris club73920.513.2
Non-Paris Club1,31836.623.6
Eximbank of China1,29635.923.2
Others Non-Paris Club220.60.4
Commercial170.50.3
TOTAL3,606100.064.6
Sources: Authorities data and IMF staff calculations.

2. In 2015, the Kyrgyz economy proved to be more resilient to external economic shocks compared to peer regional countries. Economic growth remained strong, while the fiscal deficit declined, largely due to one-off revenues and an underperformance in the PIP program. Total loan disbursements (including PIP and support loans) that were supposed to reach about US$360 and US$660 million in 2015 and 2016, respectively, were revised down to US$265 and US$539 million. Despite the weak external environment, the current account deficit narrowed, partly due to the weaker exchange rate and lower oil prices, but also due to reduced import demand under higher EEU tariffs and frontloading of import purchases in 2014.

Box AII.1.Kyrgyz Republic: Macroeconomic Assumptions for 2015–35

GDP growth: Against the backdrop of strong external headwinds, GDP growth is expected to bottom out in 2016, but recover gradually in the following years and each its potential estimated at 5 percent by 2020. Growth in the medium to long run will be supported by public investments in infrastructure and energy and intensified trade relations within the EEU.

Inflation is expected to remain low by historical standards due to subdued energy and food prices and prudent monetary policy and converge to 4 percent in the long run.

The current account deficit dropped to 10.4 percent in 2015, mainly driven by lower oil prices, slightly weaker domestic demand, and the temporary adverse impact of EEU accession on imports (frontloading of imports in 2014). The current account is expected to widen in the near term, in line with the depletion of imported goods inventories and the pick-up in public investment programs. After the unwinding of these programs the current account is expected to stabilize around 10 percent in the medium to long run.

Public investments will be a major source of economic growth in the coming years. PIP disbursements will reach 8.5 percent of GDP in 2016, and gradually decline to around 4 percent in the medium run. Public investments, which predominantly infrastructure and energy projects financed by China, are also expected to increase net FDI to above 8 percent in 2016. In the long run FDI should stabilize at 6 percent of GDP.

The overall fiscal deficit is expected to rise to close to 9 percent this year driven by elevated capital spending. Following the unwinding of large public investment projects the fiscal balance should stabilize gradually at around 1 percent in the long run.

Financing: FDI and concessional borrowing remains the main source of financing for public infrastructure investments. The average grant element of external borrowing is projected to remain above 40 percent in the medium run, but gradually decline to 20 percent by the end of the period. The effective interest rate is expected to remain below 2 percent in the next five years, but converge towards the market rate by the end of the forecast period.

Text Table AII.2.Kyrgyz Republic: Selected Indicators 2015–20
201520162017201820192020
Real GDP growth
Current DSA3.53.03.05.24.65.7
Previous DSA (First Review)2.43.63.15.35.26.0
Overall fiscal balance (percent of GDP)*
Current DSA−3.2−8.8−5.2−2.8−2.0−0.5
Previous DSA (First Review)−5.4−9.1−4.1−1.10.61.3
Current account balance (percent of GDP)
Current DSA−10.4−15.2−15.3−12.6−12.2−10.1
Previous DSA (First Review)−16.0−17.3−14.9−14.1−13.1−11.4
PIP Disbursements
Current DSA249497385310312298
Previous DSA (First Review)344618506431384374
Exchange rate (year end)
Current DSA75.978.980.582.183.885.4
Previous DSA (First Review)71.572.974.475.977.478.9
Sources: Authorities data and IMF staff calculations.

External DSA

3. The debt outlook is deteriorating and remains vulnerable to large external shocks. The recent depreciation of the national currency has further increased the risks of external debt distress. The ratio of present value of the public and publicly guaranteed (PPG) debt to GDP and remittances is in small breach of the 36 percent threshold in 2016 and 2017, but still within the +/- 5 percent confidence band. While the probability approach indicates that the risk rating changed to high-medium from medium-high in the first review,4 it shows no breach of the PV debt to GDP and remittances threshold.5 Thus the overall risk rating of Kyrgyz’s external debt remains moderate risk of debt distress. The alternative measures of debt sustainability are below their indicative thresholds suggesting that liquidity risks remain limited.

4. The external PPG debt outlook remains vulnerable to large shocks, in particular to a further depreciation of the exchange rate. The PV of the debt to GDP and remittances ratio raises above the relevant indicative thresholds over the medium term under all stress test scenarios (see Table AII.2). In particular, a one-time 30 percent depreciation of the som vis-à-vis the U.S. dollar, which is not unprecedented given the magnitude of the 2015 depreciation, would significantly elevate the debt ratio and result in a high risk of debt distress rating for the next five years.

Text Table AII.3.Kyrgyz Republic: Comparison of Debt Ratios
201520162017201820192020Long Term (2025)
PPGE debt to GDP ratio
Current DSA64.670.269.667.064.861.447.5
Previous DSA (First Review)63.065.366.164.763.662.750.8
Public debt to GDP ratio
Current DSA66.572.071.268.566.162.657.7
Previous DSA (First Review)64.966.967.666.164.963.864.6
Sources: Authorities data and IMF staff calculations.

Public DSA

5. The public debt outlook has also deteriorated compared to the previous DSA, mainly driven by the increase in external public debt following the depreciation of the som. Public debt reached 66.5 percent of GDP in 2015 and is expected to increase further to above 71 percent in 2016–17 as a result of planned disbursements for public infrastructure projects. Total public debt is expected to be manageable in the medium and long term, but remains highly sensitive to shocks that reduce real GDP growth or a failure to reduce the primary deficit over the medium term.

Conclusion

6. The 2016 joint Bank-Fund debt sustainability analysis (DSA) suggests that debt sustainability in the Kyrgyz Republic has further deteriorated compared to the last November DSA.6 The Kyrgyz Republic is now a high-moderate borderline case, very close to its debt being rated at high risk of debt distress. A DSA assessment of high risk of debt distress would automatically reduce the availability of both concessional and nonconcessional resources,7 and thus should be avoided. Given the persistently weak external environment and high exchange rate volatility, the borrowing space has also become extremely limited.

7. Against this background, the authorities need to remain extremely cautious when contracting and guaranteeing new debt and should resume fiscal consolidation this year without any delays. In 2016, the primary fiscal deficit is expected to be some 5 percentage points higher than the debt-stabilizing level, implying contributing to a further 5.5 percentage points increase in the public debt ratio by end 2016. In this context, it is important that the new debt limit legislation, which would allow revisions to the debt limit on an annual basis, would not be used to soften up borrowing constrains. Further efforts are needed to strengthen public debt management, in order to ensure that potential gains from externally financed public investment projects are fully utilized.

8. The authorities broadly concurred with the results of this DSA. They stressed, however, that the recent rapid debt accumulation was mainly driven by exchange rate volatility, a factor beyond their control. They argued that large scale external borrowing was necessary to the country’s economic development and considered that the current debt level was sustainable to the extent that public investment projects were successful in increasing the economy’s debt servicing capacity. The authorities remained committed to refrain from nonconcessional borrowing and agreed to remain prudent when contracting concessional debt.

Table AII.1.Kyrgyz Republic: External Debt Sustainability Framework, Baseline Scenario, 2016–361/(In percent of GDP; unless otherwise indicated)
ActualHistorical Average6/Standard Deviation6/Projections
2013201420152016201720182019202020212016-2021

Average
202620362022-2036

Average
External debt (nominal) 1/72.980.599.0109.1104.698.894.589.483.965.745.2
of which: public and publicly guaranteed (PPG)43.750.664.670.269.667.064.861.457.244.832.2
Change in external debt−7.37.618.510.1−4.5−5.8−4.3−5.1−5.5−3.9−1.3
Identified net debt-creating flows−15.411.99.73.45.00.40.9−1.7−0.5−0.1−1.4
Non-interest current account deficit0.216.89.44.46.812.613.811.911.18.07.77.14.16.2
Deficit in balance of goods and services26.543.830.637.838.635.431.727.627.424.217.4
Exports57.743.539.843.241.642.343.244.544.850.962.6
Imports84.287.470.481.080.277.774.972.172.275.180.0
Net current transfers (negative = inflow)−31.1−30.2−24.3−28.52.4−27.4−26.7−25.2−24.1−22.3−21.9−19.2−14.3−17.6
of which: official−1.7−2.8−1.6−1.2−1.4−1.0−0.60.00.00.00.0
Other current account flows (negative = net inflow)4.83.13.12.21.91.83.52.82.22.10.9
Net FDI (negative = inflow)−8.5−4.7−10.6−7.22.6−8.7−7.3−7.1−7.1−6.8−6.6−5.4−4.9−5.5
Endogenous debt dynamics 2/−7.0−0.210.9−0.5−1.5−4.3−3.1−2.9−1.7−1.8−0.6
Contribution from nominal interest rate1.01.11.12.91.50.71.22.12.12.01.6
Contribution from real GDP growth−7.6−2.6−3.1−3.4−3.0−5.1−4.2−5.0−3.8−3.7−2.2
Contribution from price and exchange rate changes−0.41.313.0
Residual (3-4) 3/8.0−4.38.86.7−9.5−6.2−5.2−3.4−4.9−3.80.1
of which: exceptional financing0.00.00.0−0.5−0.5−0.4−0.4−0.4−0.40.00.0
PV of external debt 4/75.784.480.676.273.069.465.751.834.7
In percent of exports190.1195.6193.7180.1169.0155.9146.8101.855.4
PV of PPG external debt41.445.645.644.443.341.439.130.921.7
In percent of exports103.9105.7109.6105.0100.393.187.260.734.6
In percent of government revenues121.6141.0142.3137.9129.6122.6113.892.168.7
Debt service-to-exports ratio (in percent)17.715.716.924.521.017.517.418.718.616.49.2
PPG debt service-to-exports ratio (in percent)6.83.64.95.96.16.46.66.46.56.64.5
PPG debt service-to-revenue ratio (in percent)12.34.95.87.97.98.48.58.48.510.09.0
Total gross financing need (Billions of U.S. dollars)0.21.40.40.91.00.80.90.80.81.21.2
Non-interest current account deficit that stabilizes debt ratio7.59.2−9.12.518.417.715.413.113.211.05.4
Key macroeconomic assumptions
Real GDP growth (in percent)10.53.63.54.43.73.03.05.24.65.74.54.35.85.15.0
GDP deflator in US dollar terms (change in percent)0.4−1.7−13.96.714.0−14.24.93.22.62.02.00.12.02.02.0
Effective interest rate (percent) 5/1.31.51.21.10.22.61.40.71.32.42.51.83.03.73.3
Growth of exports of G&S (US dollar terms, in percent)10.3−23.2−18.512.224.6−4.14.210.49.611.07.26.412.18.79.5
Growth of imports of G&S (US dollar terms, in percent)12.65.7−28.216.730.01.77.05.13.53.86.74.78.57.97.8
Grant element of new public sector borrowing (in percent)35.537.237.336.747.643.939.736.523.932.0
Government revenues (excluding grants, in percent of GDP)32.032.134.032.432.132.233.433.834.333.631.532.9
Aid flows (in Billions of US dollars) 7/0.30.30.40.40.40.40.30.30.20.40.5
of which: Grants0.20.20.30.30.30.30.20.20.20.20.3
of which: Concessional loans0.10.10.10.10.10.10.10.10.10.20.3
Grant-equivalent financing (in percent of GDP) 8/8.87.55.74.43.42.72.82.02.5
Grant-equivalent financing (in percent of external financing) 8/59.663.965.962.571.077.259.643.153.7
Memorandum items:
Nominal GDP (Billions of US dollars)7.37.56.75.96.46.97.48.08.511.923.6
Nominal dollar GDP growth11.01.8−10.9−11.68.08.67.47.86.64.57.97.17.0
PV of PPG external debt (in Billions of US dollars)2.312.62.93.03.23.33.33.65.1
(PVt-PVt-1)/GDPt-1 (in percent)4.94.12.62.11.30.22.50.51.00.8
Gross workers’ remittances (Billions of US dollars)2.22.01.51.51.61.71.71.81.92.33.4
PV of PPG external debt (in percent of GDP + remittances)33.736.136.435.835.133.932.025.918.9
PV of PPG external debt (in percent of exports + remittances)66.165.768.266.865.062.058.644.128.2
Debt service of PPG external debt (in percent of exports + remittances)3.13.73.84.14.34.34.44.83.7
Sources: Country authorities; and staff estimates and projections.

Figure AII.1.Kyrgyz Republic: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2016–36 /1

Sources: Country authorities; and staff estimates and projections.

Figure AII.2.Kyrgyz Republic: Probability of Debt Distress of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2016–36 /1

Sources: Country authorities; and staff estimates and projections.

1/ The most extreme stress test is the test that yields the highest ratio on or before 2026. In figure b. it corresponds to a Exports shock; in c. to a Exports shock; in d. to a One-time depreciation shock; in e. to a Exports shock and in figure f. to a One-time depreciation shock

Table AII.2.Kyrgyz Republic: Indicators of Public and Publicly-Guaranteed External Debt Under Alternative Scenarios, 2016–361/
Projections
20162017201820192020202120262036
PV of debt-to-GDP+remittances ratio
Baseline36.136.435.835.133.932.126.219
A. Alternative Scenarios
A1. Key variables at their historical averages in 2016-2036 1/36322824222088
A2. New public sector loans on less favorable terms in 2016-2036 23637373837353232
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2017-20183637373735342720
B2. Export value growth at historical average minus one standard deviation in 2017-2018 3/3640484746443722
B3. US dollar GDP deflator at historical average minus one standard deviation in 2017-20183640424240383123
B4. Net non-debt creating flows at historical average minus one standard deviation in 2017-2018 4/3638383836352819
B5. Combination of B1-B4 using one-half standard deviation shocks3640474544423523
B6. One-time 30 percent nominal depreciation relative to the baseline in 2017 5/3647464544423425
PV of debt-to-exports+remittances ratio
Baseline6668676562594528
A. Alternative Scenarios
A1. Key variables at their historical averages in 2016-2036 1/6660534642371413
A2. New public sector loans on less favorable terms in 2016-2036 26670707067645447
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2017-20186668666461584428
B2. Export value growth at historical average minus one standard deviation in 2017-2018 3/66841141121081038245
B3. US dollar GDP deflator at historical average minus one standard deviation in 2017-20186668666461584428
B4. Net non-debt creating flows at historical average minus one standard deviation in 2017-2018 4/6672717067634829
B5. Combination of B1-B4 using one-half standard deviation shocks6674858279755934
B6. One-time 30 percent nominal depreciation relative to the baseline in 2017 5/6668666461584428
PV of debt-to-revenue ratio
Baseline1411421381301231149369
A. Alternative Scenarios
A1. Key variables at their historical averages in 2016-2036 1/1411231068979672827
A2. New public sector loans on less favorable terms in 2016-2036 2141146144139133125113115
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2017-20181411441461371301219873
B2. Export value growth at historical average minus one standard deviation in 2017-2018 3/14115718617516615613080
B3. US dollar GDP deflator at historical average minus one standard deviation in 2017-201814116017216215314211686
B4. Net non-debt creating flows at historical average minus one standard deviation in 2017-2018 4/14114914813913212310171
B5. Combination of B1-B4 using one-half standard deviation shocks14116018717616715612985
B6. One-time 30 percent nominal depreciation relative to the baseline in 2017 5/14119719118017015812995
Baseline44444454
A. Alternative Scenarios
A1. Key variables at their historical averages in 2016-2036 1/44433331
A2. New public sector loans on less favorable terms in 2016-2036 244444454
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2017-201844444454
B2. Export value growth at historical average minus one standard deviation in 2017-2018 3/44566676
B3. US dollar GDP deflator at historical average minus one standard deviation in 2017-201844444454
B4. Net non-debt creating flows at historical average minus one standard deviation in 2017-2018 4/44444454
B5. Combination of B1-B4 using one-half standard deviation shocks44455554
B6. One-time 30 percent nominal depreciation relative to the baseline in 2017 5/44444454
Debt service-to-revenue ratio
Baseline888889109
A. Alternative Scenarios
A1. Key variables at their historical averages in 2016-2036 1/88776653
A2. New public sector loans on less favorable terms in 2016-2036 2888889109
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2017-2018889999109
B2. Export value growth at historical average minus one standard deviation in 2017-2018 3/8891010101111
B3. US dollar GDP deflator at historical average minus one standard deviation in 2017-201889101010101211
B4. Net non-debt creating flows at historical average minus one standard deviation in 2017-2018 4/889988109
B5. Combination of B1-B4 using one-half standard deviation shocks88101010101211
B6. One-time 30 percent nominal depreciation relative to the baseline in 2017 5/811121211111312
Memorandum item:
Grant element assumed on residual financing (i.e., financing required above baseline) 6/2222222222222222
Sources: Country authorities; and staff estimates and projections.
Table AII.3.Kyrgyz Republic: Public Sector Debt Sustainability Framework, Baseline Scenario, 2013–36(In percent of GDP; unless otherwise indicated)
ActualAverage5/Standard 5/ DeviationEstimateProjections
2013201420152016201720182019202020212016-21

Average
202620362022-36

Average
Public sector debt 1/46.152.666.572.071.268.566.162.658.356.150.2
of which: foreign-currency denominated43.750.664.670.269.667.064.861.457.244.832.2
Change in public sector debt−2.96.513.95.5−0.9−2.7−2.4−3.5−4.2−1.6−2.9
Identified debt-creating flows−1.06.214.36.0−1.3−3.3−3.1−4.6−3.8−1.9−1.4
Primary deficit2.72.82.32.82.07.44.11.71.0−0.5−0.62.21.21.01.2
Revenue and grants34.435.338.137.937.036.236.335.936.435.232.7
of which: grants2.43.34.15.55.04.02.92.12.01.71.2
Primary (noninterest) expenditure37.238.240.445.341.237.937.335.435.736.533.7
Automatic debt dynamics−3.83.312.0−0.9−4.9−4.6−3.7−3.7−2.8−3.1−2.4
Contribution from interest rate/growth differential−5.2−2.0−1.7−1.9−2.4−3.8−3.2−3.7−2.8−3.1−1.7
of which: contribution from average real interest rate−0.5−0.40.10.1−0.3−0.2−0.2−0.1−0.10.10.8
of which: contribution from real GDP growth−4.7−1.6−1.8−2.0−2.1−3.5−3.0−3.6−2.7−3.2−2.6
Contribution from real exchange rate depreciation1.45.313.71.0−2.6−0.8−0.50.00.0
Other identified debt-creating flows0.00.00.0−0.5−0.5−0.4−0.4−0.4−0.40.00.0
Privatization receipts (negative)0.00.00.00.00.00.00.00.00.00.00.0
Recognition of implicit or contingent liabilities0.00.00.00.00.00.00.00.00.00.00.0
Debt relief (HIPC and other)0.00.00.0−0.5−0.5−0.4−0.4−0.4−0.40.00.0
Other (specify, e.g. bank recapitalization)0.00.00.00.00.00.00.00.00.00.00.0
Residual, including asset changes−1.80.3−0.4−0.50.40.60.71.2−0.40.3−1.5
Other Sustainability Indicators
PV of public sector debt2.043.347.447.245.944.642.640.242.239.6
of which: foreign-currency denominated0.041.445.645.644.443.341.439.130.921.7
of which: external41.445.645.644.443.341.439.130.921.7
PV of contingent liabilities (not included in public sector debt)
Gross financing need 2/7.76.15.511.37.65.34.63.02.810.42.9
PV of public sector debt-to-revenue and grants ratio (in percent)5.7113.7125.1127.5126.8122.9118.7110.4119.7121.2
PV of public sector debt-to-revenue ratio (in percent)6.3127.2146.5147.3142.3133.5126.2117.0125.7125.7
of which: external 3/121.6141.0142.3137.9129.6122.6113.892.168.7
Debt service-to-revenue and grants ratio (in percent) 4/11.65.75.97.97.27.88.18.38.215.612.1
Debt service-to-revenue ratio (in percent) 4/12.56.36.79.28.48.88.88.88.716.412.6
Primary deficit that stabilizes the debt-to-GDP ratio5.6−3.7−11.61.95.04.43.43.03.62.83.9
Key macroeconomic and fiscal assumptions
Real GDP growth (in percent)10.53.63.54.43.73.03.05.24.65.74.54.35.85.15.0
Average nominal interest rate on forex debt (in percent)1.21.31.31.10.21.51.41.51.51.61.71.52.12.62.3
Average real interest rate on domestic debt (in percent)16.75.113.32.98.818.31.91.91.91.91.94.60.00.00.0
Real exchange rate depreciation (in percent, + indicates depreciation)3.412.828.1−0.714.61.6
Inflation rate (GDP deflator, in percent)3.58.92.210.87.44.38.15.34.74.04.05.14.04.04.0
Growth of real primary spending (deflated by GDP deflator, in percent)4.66.39.42.13.415.6−6.4−3.13.10.15.62.50.85.24.6
Grant element of new external borrowing (in percent)0.00.035.537.237.336.747.643.939.736.523.9
Sources: Country authorities; and staff estimates and projections.

Figure AII.3.Kyrgyz Republic: Indicators of Public Debt Under Alternative Scenarios, 2016–36 /1

Sources: Country authorities; and staff estimates and projections.

1/ The most extreme stress test is the test that yields the highest ratio on or before 2026.

2/ Revenues are defined inclusive of grants.

Table AII.4.Kyrgyz Republic: Sensitivity Analysis for Key Indicators of Public Debt, 2016–36
Projections
20162017201820192020202120262036
PV of Debt-to-GDP Ratio
Baseline4747464543404240
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages4746454647475463
A2. Primary balance is unchanged from 201647505356606385114
A3. Permanently lower GDP growth 1/4748474746455784
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviations in 2017-20184749515251506068
B2. Primary balance is at historical average minus one standard deviations in 2017-20184748494745434541
B3. Combination of B1-B2 using one half standard deviation shocks4747484847455052
B4. One-time 30 percent real depreciation in 20174766636058555550
B5. 10 percent of GDP increase in other debt-creating flows in 20174755535250474844
PV of Debt-to-Revenue Ratio 2/
Baseline125127127123119110120121
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages125123126126130129153192
A2. Primary balance is unchanged from 2016125134146155167174241348
A3. Permanently lower GDP growth 1/125129130129128123160256
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviations in 2017-2018125131141141142138170208
B2. Primary balance is at historical average minus one standard deviations in 2017-2018125129135131126118126126
B3. Combination of B1-B2 using one half standard deviation shocks125127134132130123143160
B4. One-time 30 percent real depreciation in 2017125177173166160151155153
B5. 10 percent of GDP increase in other debt-creating flows in 2017125148147143138129137134
Debt Service-to-Revenue Ratio 2/
Baseline8788881612
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages8788891717
A2. Primary balance is unchanged from 2016878910102025
A3. Permanently lower GDP growth 1/8788991819
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviations in 2017-20188789991817
B2. Primary balance is at historical average minus one standard deviations in 2017-20188788981613
B3. Combination of B1-B2 using one half standard deviation shocks8788991715
B4. One-time 30 percent real depreciation in 201789111212122119
B5. 10 percent of GDP increase in other debt-creating flows in 20178799991613
Sources: Country authorities; and staff estimates and projections.

Annex III. Kyrgyz Republic: Banking Sector Prudential Measures

Policy/InstrumentDetailsDate Effective
Debt to Income RatioDTI of 50 percent for new loans in foreign currencyMay, 2015
Differentiating loss loan provisioning (LLP) for loans in national and foreign currency1. Increase LLP for new FX loans:
  • a. 2 percent if more than 75 percent of income in foreign currency.

  • b. 5 percent if more than 50 percent of income in foreign currency.

  • c. 10 percent if less than 50 percent of income in foreign currency.

May, 2015
2. Decrease LLP from 2 to 0 percent for som loans (normal loans).January, 2016 (increase relative to
3. Decrease LLP from 5 to 2 percent when restructuring FX loans into som loans.the level introduced in May 2015)
4. Decrease LLP for second restructuring from 25 percent to 15 percent, and to 5 percent for second restructuring of FX to som loans.May, 2015
May, 2015
5. Increase LLP to 25 percent for extended loan with principal repayment on higher than monthly frequency.January, 2016
6. Increase LLP to 15 percent for extended loan with principal repayment on higher than monthly frequency if loan matures in two years.
Differentiating reserve requirement (RR) for deposits in national and foreign currency1. RR for liabilities in national currency is 4 percent.December, 2015 (few rounds of gradually increasing RR for FX deposits and gradually decreasing RR for som liabilities)
2. RR for liabilities in Armenian drams, Belarusian ruble, Kazakh tenge, Chinese Yuan Renminbi, Russian ruble is 4.0 percent.
3. RR for liabilities in all other currencies is 12.0 percent.
Capital buffersIncrease CAR to:January, 2016
1. 20 percent for systemic banks.
2. 18 percent for all other banks.
No time limit by when banks need to comply, but dividends cannot be paid out till new CAR is reached.
Ban mortgage and consumer lending in foreign currency1. Ban issuing of new mortgage and consumer loans to individuals in foreign currency by banks and other financial institutions.February, 2016
2. Prohibit indexing payments on these loans to foreign currency.
Liquidity ratios1. Increase liquidity ratio to 45 percent.January, 2016
2. Introduce short-term liquidity ratio of 35 percent.
3. Introduce instant liquidity ratio for systemic banks. Individual ratios will be set for each bank that is subject to the policy (most likely systemic banks).
Limit exposure to securitiesOECD securities cannot account for more than 100 percent of net capital of the bank.January, 2016

Annex IV. Kyrgyz Republic: Managing Government Wage Expenditure

Reducing government wages is a key pillar of the Kyrgyz Republic’s fiscal consolidation effort and it is essential to achieve fiscal targets. Excessive growth of government wages may crowd out other expenditures that are important for supporting growth. While crude measures (such as containing nominal growth of average wages or reducing employment via attrition) can deliver fiscal adjustment in the short term, over a longer horizon only structural measures can bend the spending trajectory toward a sustainable path and improve the efficiency.

The Kyrgyz government wage bill is high compared to peers. It amounts to about 11 percent of GDP (including Mandatory Health Insurance Fund (MHIF)), against a median wage bill for the country’s peers (in terms of income level) of 6.3 percent in 2014. Employment is relatively high in international comparison, with education and health sectors representing the largest employers. The government wage bill has been rising over the recent years, mostly driven by increases in compensation.

Government Wage Bill

(In percent of GDP)

Source: IMF database.

Since 2011, the government has undertaken a number of reforms, some of which are yet to be fully implemented. Reform of compensation was first introduced in the social sectors (such as health and education). Measures have achieved some important results, such as an increase of the share of base salaries in total compensation, separate pay scales in health and education sectors, elimination of the thirteenth month salary, and progress in providing incentives by linking bonuses to staff performance. Reform for the civil service was approved only in 2013. Despite these recent reforms, the public sector pay system is still fairly opaque and overly complex, leading to difficulties when comparing compensation across sectors and inefficiencies.

In general, the current framework for setting wage policies and managing the government wage bill has important weaknesses, namely: (1) the data availability for monitoring and analysis; (2) budgeting and financing reflecting norms, rather than needs and availability of resources; and (3) lack of a framework for guiding wage policies.

Improving the management of the government wage bill will require addressing these weaknesses with structural reforms, such as:

  • Improving data and information availability for analysis, budgeting, and monitoring of public wages and headcounts (including the establishment of a unified register of all employees in the general government sector).

  • Carrying out functional reviews to assess staffing needs and remuneration policies (starting with the main sectors of health, education, and the civil service).

  • Reviewing budgeting and financing mechanisms to better reflect staffing needs.

  • Strengthening the public financial management framework, including the assessment of the merit and viability of transitioning to a rule-based framework.

The authorities, in line with the requirements under the ECF program, are preparing an action plan, which will draw the path to undergo the much needed structural reforms and enable achieving the 2018 wage bill target.

Annex V. Kyrgyz Republic: Public Investment Management Assessment

The Kyrgyz Republic recently intensified public investment program to close the infrastructure gap and improve quality of infrastructure. The current framework suffers from numerous weaknesses in the planning and prioritization of projects, monitoring process, and budgeting practices. Reforms are necessary to improve efficiency of public investments and maximize their impact of growth.

Since independence to 2010, public investment ratios declined and the Kyrgyz capital stock was halved, aggravating the large infrastructure gap. The trend was reversed recently with an ambitious investment program undertaken by the authorities, financed mostly by external creditors, especially China. PIPs aim at supporting sectors that are key to the country’s long-term growth. The largest share of PIPs is concentrated in the road and energy sectors, followed by urban infrastructure and social services, particularly education.

Although the Kyrgyz Republic compares favorably to peers in access to infrastructure, the perceptions of quality are poor. The perceptions of corruption are also high, hindering investment. The quality and efficiency of institutions for managing public investment are comparable to other LICs, however practical implementation remains the country’s major weakness.

Public Investment and Capital Stock

(In percent of GDP)

Sources: WEO, authorities data, and IMF staff estimates.

The priority areas for reform are: (1) strengthening the planning and prioritization of projects; (2) upgrading the monitoring framework; and (3) improving budget practices to avoid projects being stalled or stranded. More specifically, the government should:

  • Modify, through government decree, the decision-making process for the selection of public investment projects by formalizing gate-keeping roles of the ministry of economy (on evaluation) and ministry of finance (on financing).

  • Subject projects to an initial assessment and prioritize them on the basis of their economic value, taking account of financial constraints before they are included in the next national sustainable development strategy (due in 2018).

  • Introduce a standardized framework for project monitoring of physical and financial performance for all major projects and support this through the development of a database system.

  • Develop a system for tracking multi-year commitments for investment projects, prioritize funding for existing projects over new projects (unless a decision has been taken to close them), and ensure the funding of recurrent costs at the time the decision is taken to construct the project.

Being aware of the need to prioritize their investment plan and enhance efficiency, the authorities drew an action plan accordingly. The authorities were reluctant, but finally agreed, to include domestically-financed capital expenditure to the plan.

Annex VI. Kyrgyz Republic: Public Investment, Debt Sustainability, and Growth

A. Introduction

1. The Kyrgyz Republic pushed forward a significant scale up in public infrastructure investment to close its infrastructure deficit. Public investment on infrastructure increased from 4.8 percent of GDP in 2011 to 7.6 percent of GDP in 2015, and it is expected to increase further maintaining an average of 7.9 percent of GDP over the coming decade. Significant part of the public investment is expected to be financed through external concessional loans. This annex looks at the macroeconomic implications of the scale up using the debt-investment-growth (DIG) model developed by Buffie and others (2012).

B. Model calibration: key parameters

2. The model’s parameters are calibrated to match the Kyrgyz Republic’s economy. This annex focuses on two key parameters that underpin the institutional environment under which public investment is scaled up: the return on public investment and efficiency of public investment.

Return on investment

3. The return on public investment is set at 30 percent, corresponding to Dalgaard and Hansen’s (2005) upper bound estimate for developing countries. The median rate of return on the Kyrgyz Republic public investment projects financed by the World Bank1 is 27.5 percent, with the minimum rate of return of 13.7 percent. The return on public investment could however be lower if infra-marginal projects are selected and/or implementation capacity is weak.

Public investment efficiency

4. A dollar of public investment spending may not necessarily be translated into a dollar of public capital. Some of the spending may be wasted or spent on poor (sub-marginal) projects. Dabla-Norris and others’ (2011) public investment management quality index ranks the Kyrgyz Republic at forty-eighth out of 71 countries and it is the least efficient among its regional peers.2 Public investment efficiency is thus set at 40 percent in the baseline. That is, for every dollar of public investment, only 40 cents will be transformed into public capital.

C. Baseline scenario

5. Higher public investment financed through concessional loans would lead to a moderate increase in the level of output but also raise the external debt substantially. The baseline scenario assumes a scale up of public investment at around 7.9 percent of GDP over the coming years. Consistent with the macro framework, concessional external financing is assumed to cover close to 90 percent of public investment, on average, until 2023 and decline gradually thereafter, implying that investment is increasingly financed from fiscal savings either in the form of increase in taxes or reduction in transfers. The impact of this investment scale up on growth is minimal. Growth picks up from its trend level of 3.5 percent to 3.9 percent at the peak and gradually tapers off to an average of 3.7 percent. As a result, total public debt to GDP ratio increases to 86 percent in 2032 before it starts declining (Figure AVI.1).

D. Alternative scenarios

6. Improvement in public investment efficiency would increase the positive impacts of the public investment scale up. With a gradual improvement in public investment efficiency from the baseline level of 40 percent to 70 percent over a decade,3 growth would reach 4.3 percent at the peak, and remain elevated with an average of 4.2 percent over a decade. In level terms, real GDP will be higher than the baseline by 6.2 percent by 2036 (Figure AVI.2). The peak of total debt to GDP ratio would also be lower by 4.3 percentage points as compared to the baseline.

7. Lower returns erode the growth dividend of the scale up. At a conservative rate of return of 15 percent due to poor project selection and implementation, real GDP growth rate will be lower than the baseline by about 0.1 percentage points on average, leading to higher external debt to GDP ratio. As a result, the required fiscal adjustment to pay for the maturing debt will be higher than the baseline. Consumption tax rate has to rise up to 16.3 percent to pay for the accumulated debt as compared to 15.1 percent in the baseline (Figure AVI.2).

8. In the presence of adverse external shocks, low return on public investment and high public investment inefficiency could lead to unsustainable debt path. Under both the baseline and lower return scenarios, external debt to GDP ratio surpassed the 100 percent mark in about nine years. The debt dynamics could even blow up in the absence of stringent fiscal adjustment. However, in the case of the efficiency improvement scenario, debt would not be explosive, and it starts to decline gradually as growth remains resilient (Figure AVI.3).

E. Conclusion

9. The model results suggest that public investment scale up has a positive effect on growth when high return projects are prioritized and public investment efficiency is high. Scaling up of public investment when returns are low and inefficiencies are high run the risk of undermining debt sustainability. Overall, the growth impact of the Kyrgyz Republic public investment scale up plan, on average, ranges between 0.2 to 0.7 percentage points per annum depending on the return and efficiency considerations. However, adverse external shock undermines debt sustainability, particularly when returns are low and inefficiencies are high. Proper planning and prioritization of projects should thus be at the forefront of public investment allocation to guarantee the selection of high return projects. This should be complemented by adequate monitoring of physical and financial progress of projects to reduce leakages and promote investment efficiency.

10. The authorities welcomed the model simulation results and expressed interest to receive technical assistance on how to use the model for policy analysis.

Figure AVI.1.Kyrgyz Republic: Baseline

Sources: Authorities data and IMF staff calculations.

Figure AVI.2.Kyrgyz Republic: Baseline vs. Alternative Scenarios

Sources: Authorities data and IMF staff calculations.

Figure AVI.3.Kyrgyz Republic: Terms of Trade Shock Impact on Growth and Debt

Sources: Authorities data and IMF staff calculations.

References

    Buffie, E., ABerg, CPattillo, RPortillo, & L-FZanna. 2012. Public Investment, Growth, and Debt Sustainability: Putting Together the Pieces. IMF Working Paper No. WP/12/144. International Monetary Fund. Washington DC.

    Dabla-Norris, E., Brumby, J., Kyobe, A., Mills, Z, and Papageorgiou, C.2011. Investing in Public Investment: An Index of Public Investment Efficiency. IMF Working Paper No. WP/11/37. International Monetary Fund. Washington DC.

    Dalgaard, C. and H.Hansen (2005), “The Return to Foreign Aid,” Discussion Paper no. 05–04, Institute of Economics, University of Copenhagen.

Annex VII. Kyrgyz Republic: Financial Sector Initiatives Aimed at Reducing Dollarization and Addressing Social Needs

This annex provides an overview of a number of sporadic financial sector initiatives that the authorities are implementing. Most of the initiatives are in response to the regional slowdown or populist efforts to stimulate lending to certain sectors. Reacting to an exchange rate spike in November 2015, parliament encouraged the government and the National Bank of the Kyrgyz Republic (NBKR) to introduce de-dollarization measures.

A. Conversion of foreign currency denominated mortgages

1. The authorities implemented a conversion program for foreign currency denominated mortgages during March 2016. The program, which banks were “advised” to implement, covers US$45 million of mortgage loans (or 3.6 percent of total loan portfolio) and was restricted to loans under US$40,000. Mortgage loans were converted at the July 1, 2015 exchange rate of KGS 62.14 per U.S. dollar and will carry an interest rate of 19.6 percent, which is equal to the weighted average interest rate of outstanding som denominated loans as of January 1, 2016. The exchange rate subsidy, estimated at KGS 574 million (0.15 percent of GDP), was fully bourn by the budget. In order to minimize the negative impact of the conversion program on banks’ balance sheets, the NBKR offered a number of instruments, including foreign exchange swaps and som loans. Additionally, the NBKR provided incentives for banks to de-dollarize their balance sheet by relaxing reserve requirements.

2. The conversion program adds to the fiscal burden and is subject to risks, especially for the financial sector. It namely:

  • Undermines private contracts, erodes investors’ confidence, and creates moral hazard by shielding some borrowers and lenders from the consequences of their decisions. Anticipation of future conversions could affect the willingness of current and future borrowers to honor contractual commitments, undermine the credibility of the NBKR and weaken financial intermediation.

  • Could have a negative impact on bank’s balance sheets. Net open foreign exchange position for the sector is expected to deteriorate. Banks could be in violation of the NBKR requirements in this regard. The NBKR should ensure that the above instruments are appropriate to correct this imbalance.

B. State Mortgage Company (SMC)

3. The authorities established the SMC in July 2015 with a capital of KGS 300 million. The ministry of finance will on-lend funds to the SMC for 10 years at 5 percent, which it is expected to raise from: (i) the Russian Kyrgyz Development Fund (RKDF) by issuing U.S. dollar denominated five year bonds at 2 percent; and (ii) the Social Fund (SF) by issuing som denominated T-bonds at 8 percent. The SMC will not engage in direct lending activities but rather operate through commercial banks against a 5 percent margin. Participation in the program will be initially limited to borrowers working in health, education and social services. The SMC will be neither licensed nor supervised by the NBKR. SMC’s future plans include refinancing mortgages and issuing mortgage backed securities.

4. While SMC design has certain safeguards, the SMC could create the following risks:

  • The SMC’s financing scheme (i.e., issuance of USD denominated bonds) exposes the budget to a number of risks. The budget will incur losses from borrowing at 8 percent from the SF while lending to the SMC at 5 percent. Likewise, interest paid by SMC is unlikely to cover the 3.5 percent interest on the U.S. dollar denominated T-bonds sold to RKDF. Inflation and exchange rate depreciation pose even greater risks to the budget. In addition, the issuance of dollar denominated T-bills contradicts the government’s de-dollarization efforts.

  • The SMC’s operations could distort mortgage and real-estate markets. The SMC’s different lending terms could create market distortions. Also, by initially being restricted to state employees, SMC policies contradict private sector promotion policies. This approach could also lead to abuse considering that the civil service registry is not complete and does not have accurate statistics.

C. Russia-Kyrgyz Development Fund (RKDF)

5. The RKDF was established to facilitate accession of the Kyrgyz Republic to the Eurasian Economic Union, by modernizing and developing Kyrgyz economy. The RKDF was established as an international financial institution, with a capital is US$1 billion (US$500 million as Russian FDI, and US$500 million as a loan from Russian to RKDF when need). So, far US$400 of FDI have been disbursed, while remaining US$100 is expected in the second quarter of the 2016. In 2015, the RKDF placed US$265 million in Russian banks, and financed projects in the Kyrgyz Republic in the amount of US$43 million, of which about half via the state owned banks. During the 2016, the RKDF plans to expand its lending activities, by investing additional US$90 million via banks and US$100 million directly to enterprises for investment projects over US$1 million.

6. The RKDF is operating increasingly as a commercial bank. It is benefiting from privileged access to som liquidity from the NBKR without being subject to regulatory and supervisory constraints faced by other banks. However, it provides U.S. dollar as collateral for som loan it receives from the NBKR.

Appendix I. Letter of Intent

June 2, 2016

Ms. Christine Lagarde

Managing Director

International Monetary Fund

700 19th Street, N.W.

Washington, D.C., 20431

U.S.A.

Dear Madame Lagarde:

We continue to make progress on a comprehensive economic and financial reform program, supported by an arrangement under the Extended Credit Facility (ECF) approved by the IMF Executive Board on April 8, 2015. We are grateful to the IMF for its continued support.

The external environment has worsened over the past few months, affecting the outlook for our economy. Having withstood severe adverse shocks in 2015, growth is expected to slow further this year. Lower demand for our exports among key trading partners, the impact of lower remittances on domestic demand and the challenges of adjusting to membership in the Eurasian Economic Union (EEU) will take their toll. We expect growth to slow down this year before picking up from next year. We are undertaking a number of stimulus measures, including the expansion of credit from the Russian Kyrgyz Development Fund (RKDF) and continued progress on our Public Investment Program (PIP) to help mitigate some of the impact of the adverse environment.

We remain committed to the policies and objectives supported by the ECF arrangement. Our actions ensured that all end-December quantitative performance criteria (PCs) and indicative targets (ITs) were met. All, but two structural benchmarks have been met. We have submitted the law on administrative responsibility to parliament. As per our commitments, we drafted an action plan to review the public investment framework and increase efficiency of borrowing, and an action plan to reduce the public wage bill. However, the audit of DEBRA has not yet been completed, whereas the draft law of the Kyrgyz Republic on combating the legalization (laundering) of proceeds from crime, financing of terrorist and extremist activities will be submitted to parliament with a delay due, in part, to a protracted consultation process. Notwithstanding, some setbacks in passing the Banking Law, we will continue to make every effort to ensure its enactment by parliament by September 2016.

In view of the progress made and our continued commitment to the program, we request completion of the second review and disbursement in the amount of SDR 9.514 million (US$13.35 million). We ask that the disbursements under the ECF arrangement be channeled to the budget.

We believe that the economic and financial policies set forth in this Letter of Intent (LOI) to be adequate to meet the program’s objectives.

We will continue to maintain a policy dialogue and consult with the IMF, at our own initiative or whenever the Managing Director of the IMF requests such a consultation, in advance of revisions to the policies contained in our LOI, in accordance with the IMF’s policies on such consultations. We will provide IMF staff with data and information necessary for monitoring program implementation.

As in the past, the government of the Kyrgyz Republic agrees to the publication of this letter, the Technical Memorandum of Understanding (TMU), and the Debt Sustainability Analysis.

Recent economic developments

1. Adverse external shocks continue to affect our economy, with the regional environment weaker than anticipated at the end of last year. The economy contracted in early 2016, and weaker-than-expected growth rates and exchange rates in the region (especially Russia and Kazakhstan) will weigh on growth throughout the year. Inflation continues to decline, having reached 0.5 percent year-on-year by end-March 2016, well below our 5–7 percent target, reflecting a moderation in food prices.

2. The som depreciated by 29 percent against the U.S. dollar in 2015 due to the depreciation of the ruble and the tenge, drop in remittance and other regional factors. To contain inflation and mitigate exchange rate volatility, we kept monetary policy on a tightening stance. We raised the policy rate to 10 percent and undertook significant interventions. However, since the beginning of 2016, most of the above factors were reversed due largely to the rise in oil prices, which, in combination with the monetary policy measures taken, allowed the som exchange rate to appreciate by 7.7 percent between January and March. This allowed us to lower the policy rate to 8 percent and intervene on the foreign exchange market by purchasing U.S. dollars.

3. The overall fiscal deficit for 2015 reached 1.2 percent of GDP, well below the 3.5 percent of GDP program target. Revenues were better than anticipated due to one-off nontax receipts from the sale of the Geroi gold mine and some radio frequencies, and NBKR profits. On the other hand, tax revenue underperformed due to a weaker economic environment, especially in tax-generating sectors (trade and construction). Some nonpriority spending—mostly goods and services and domestically financed capital expenditures—was postponed to 2016 due to delays in budgetary support. Delays in PIP project execution resulted in a significant drop in capital expenditure. In particular, there were procedural delays in the construction of the Eximbank China North-South road. The refurbishment of the Bishkek power and heating plant was postponed due to the power shortage.

4. Public external debt continued to rise increasing by 14 percentage points of GDP over 2015, reflecting additional borrowing and exchange rate depreciation.

5. We are facing mounting challenges in tax administration particularly in the process of transitioning to EEU. The shift of VAT and excise collection, following EEU accession, from the customs services to the state tax services (STS) where they are paid on the basis of self-assessment after the goods have entered the country have resulted in underperformance in the collection of these taxes. Our ability to collect these taxes is further limited due to reliance on the not yet fully developed tax administration system within fellow EEU members tax authorities. We are mindful that while it is preferable to have a one-stop shop for tax payment, any addition of collection functions to the STS should be done gradually to ensure maximum efficiency.

6. The current account deficit narrowed to 10.4 percent of GDP by the end of 2015, largely driven by a significant drop in imports, which more than compensated the fall in remittances. While falling by 25 percent in dollar terms, remittances growth remained positive in ruble terms. As a result of the depreciation of the som and low inflation, the real effective exchange rate depreciated by 9.6 percent by end-2015.

7. We are aware of the elevated risks to the financial sector stemming from exchange rate volatility coupled with a high degree of dollarization and higher credit risk due to economic slowdown. We are closely monitoring the quality of the loan portfolio for signs of increase in nonperforming loans. To contain exchange rate risk for highly dollarized bank balance sheets, we introduced new macro-prudential measures aimed at: (i) further increasing the provisioning for foreign currency denominated loans; and (ii) further differentiating reserve requirements between som and dollar deposits.

8. We have recently introduced several policies aimed at reducing dollarization, addressing affordable housing shortage and stimulating the economy. We successfully implemented a conversion program for foreign currency denominated mortgages and banned mortgage and consumer lending in foreign currency. We have also established a SMC and accelerated lending from the RKDF.

Outlook and risks

9. The near-term outlook has worsened over the past few months but medium-term prospects should improve. Reflecting a weaker external environment, nongold growth is now projected to reach around 3 percent in 2016. Growth is expected to gradually pick up over the medium term as trading partners’ growth rebounds. Inflation is expected to remain low, driven by a further decline in international food and fuel prices, and weak domestic demand. The current account deficit will widen this year due to higher activity under the PIP program but will gradually moderate thereafter as remittances recover and public investment moderates.

10. We are mindful of the increase in downside risks. In the near term, these continue to stem from developments in Russia, Kazakhstan, and China. The impact of EEU accession has been mixed so far, reflecting a weak economic activity within the union and change in trade flows. The exchange rate volatility will have an impact on debt and banking sector. Upside risks include the recovery of oil prices and consequently revival of economic activity among our key trading partners.

The government’s policies for the remainder of 2016

To keep the program on track, we will implement the necessary policies to ensure that the program’s objectives are achieved. In this context, we will carry out the necessary measures to prevent budgetary slippages. We remain committed to containing inflation and maintaining a flexible exchange rate that would allow us to preserve foreign exchange reserves. We will do our best to have the draft banking law adopted by the new parliament in a form substantially similar to the draft submitted to parliament in September 2013. Having recently completed the audit of DEBRA, we will now proceed to liquidate some of the banks under its management.

Fiscal policy

11. As per our commitment at the time of the first review, our 2016 fiscal deficit target remains at 4.5 percent of GDP. As a result of the depreciation of the som and the downward revision of our growth prospect for this year, the target deficit of the budget as approved by parliament last December has increased to about 7 percent of GDP. Despite these adverse developments, we remain committed to a deficit of 4.5 percent of GDP and will do our utmost effort to meet this target. Earlier this year, we started working on an action plan to mobilize additional revenues and continued to prioritize our investment budget and improve its efficiency. This allowed us to bring down our deficit target substantially, but we were left with a gap of 1.5 percentage points of GDP. More recently, through great efforts we have identified new measures to close this gap, in the following areas (Attachment 1): (i) tax policy; (ii) tax administration; (iii) nontax revenues; and (iv) PFM and rationalization of expenditures. Furthermore, should any shortfall emerge from these measures, we are committed to reducing expenditures in an equivalent amount in order to ensure that we meet our fiscal target.

12. On the revenue side, we have identified new measures, which will contribute to closing the 2016 fiscal gap and support the medium-term adjustment. We will strengthen the VAT administration by, among others, enhancing control with tax officers and other regulatory authorities in the border areas. We are reviewing the system of exemptions in order to streamline them; meanwhile we will refrain from extending expiring exemptions or granting new ones. We are also harmonizing excise tax rates on alcohol and tobacco products with some EEU countries, considering introducing excise stamps for domestically produced goods, and considering the introduction of a luxury tax for properties. Additionally, we are planning to review taxation of natural resources with the help of an international expert.

13. On the expenditure side, we will keep on streamlining nonpriority current expenditures particularly within the goods and services category and domestically financed capital spending around 3 percent of GDP. We already introduced the e-procurement system, which will help us substantially rationalize non-priority expenditures. We will refrain from potential quasi-fiscal activities that may have budgetary implications. We undertook a review of our electricity tariffs and are firmly committed to pursue the Medium Term Tariffs Policy of the Kyrgyz Republic for Electric and Heat Energy (MTTP) for 2014–17. A revised MTTP based on the principle of energy sector actual costs recovery will be approved by the Government of the Kyrgyz Republic in July 2016. We will carry out a review of all subsidies with the objective of streamlining them (structural benchmark, September 2016). To maximize pro-poor spending, we will improve the targeting of social benefits to avoid duplication.

14. We remain committed to gradually reduce the wage bill to 8 percent of GDP by 2018. We finalized the action for the reform of the public sector personnel and remuneration policy to reduce the wage bill. Next step in the implementation of the action plan is to set up a comprehensive register of all public employees by March 2017 (structural benchmark). As a first step, the register will cover, by November 2016, health and education employees. We will also develop a wage rule and undertake a functional review of main sectors (including assessment of staffing needs and remuneration policies), which will be included in the action plan to be implemented in the medium term.

15. We will undertake urgent measures to ensure debt remains at sustainable levels. To this end we will: (i) refrain from nonconcessional borrowing; (ii) improve debt monitoring, to minimize fiscal risk stemming from SOEs; and (iii) undertake remedial actions to maintain external public debt at moderate risk of debt distress.

16. We will build on the recommendations of the recent Public Investment Management Assessment (PIMA) mission to enhance the efficiency of public sector investments, mainly by: (i) strengthening planning and prioritization of projects; (ii) upgrading the monitoring framework; and (iii) improving budget practices to avoid projects being stalled or stranded. Following our action plan, we will modify through government decree the decision making process for the selection of public investment projects by formalizing gate keeping roles of the ministry of economy on evaluation, including economic assessment and project efficiency, and ministry of finance on financing respectively. The PIP guidelines will be updated accordingly (structural benchmark, December 2016). We will also introduce a standardized framework for project monitoring of physical and financial performance for all projects exceeding KGS 50 million (structural benchmark, June 2017).

Monetary and exchange rate policy

17. Containing inflation within the targeted range of 5–7 percent remains the anchor of our monetary policy. We will ensure that our monetary policy formulation is forward looking, given the dynamic nature of monetary policy and the lags with which it affects the key economic variables. We will continue to adjust the policy rate in line with the emerging market pressures. We are, at present, balancing the need for policy relaxation stemming from the recent drop in headline inflation, the moderation of credit growth, and weaker growth prospects, against the potential of fiscal and exchange rate pressures. We stand ready to tighten monetary policy should inflation pick up again or depreciation pressures re-emerge.

18. We will work on improving co-ordination between the NBKR, ministry of finance, and RKDF to facilitate monetary policy management. Back-loaded and unpredictable spending by large players in the financial system complicates liquidity forecasting and monetary policy operations. To overcome these obstacles, we will work on establishing regular communications between the NBKR and ministry of finance to ensure smoothing of budget spending throughout the year. We will also finalize a memorandum of understanding between the NBKR and the RKDF to exchange the necessary information and to better estimate the impact of RKDF’s investments on monetary policy.

19. We are committed to further improving the operational framework for monetary policy and enhancing the transmission mechanism. We are continuing to fine-tune our models, improve statistics and increase capacity of our staff. We are focused on improving the transmission mechanism of monetary policy and aligning market rates with policy rates. In that context, we will consider narrowing the corridor around the policy rate and make it more symmetric. At the same time, we will also undertake measures to deepen the interbank market by: (i) maintaining liquidity at a level that provides incentive for interbank trading; and (ii) allowing NBKR notes to be used as collateral in the interbank market. We will further enhance the forward looking component of our communication policy.

20. We are committed to exchange rate flexibility as a mean to reduce external imbalances, enhance competitiveness, and preserve foreign exchange reserves. In order to maintain an adequate level of reserves we will: (i) continue to limit interventions in the foreign exchange market to only smoothing excessive fluctuations; and (ii) consider introducing new monetary instruments and developing hedging instruments.

Financial sector

21. We continue to monitor the financial sector for emerging risks associated with foreign exchange volatility, dollarization, and economic slowdown. In this context, we will improve the monitoring of nonperforming loans (NPLs) by collecting additional information from banks. Moreover, we will continue our efforts to align our legislation with international best practice. We will consider the classification of the prolonged loans category, the differentiation between performing and nonperforming restructured loans and the introduction of a new category for loans issued to refinance NPLs.

22. We will finalize the strategic plan for supervision by the end of the year, with the help of the IMF and WB. The key elements of the plan are: (i) personnel policy to attract and retain qualified personnel, and decrease personnel turnover rate; (ii) training of supervisors to ensure that staff is familiar with the NBKR’s supervisory approach and to improve their technical ability; (iii) enhancing the supervisory approach, including implementation of the risk based supervision; and (iv) strengthening the current regulatory framework and bring it line with international standards. We will work towards the full transition to the risk-based supervision during the first half of next year in the context of the WB project.

23. We will develop a crisis preparedness framework, including establishing a high-level financial stability council comprised of representatives of the NBKR, DPA, ministry of finance, and prime-minister’s office (structural benchmark, September 2016). As a first step, we will analyze the task, functions and regulation of the financial stability council based on Kyrgyz legislation. The key components of the framework are: (i) coordinating arrangements between relevant agencies; (ii) supervisory remedial actions; (iii) depositor safety net; (iv) NBKR’s emergency liquidity assistance mechanisms for banks; (v) effective banking resolution system; and (vi) assigning clear roles to each representative. We are aware that the success of the framework will hinge on closer coordination among all relevant agencies including, regular communication and exchange of information between the NBKR, ministry of finance, and DPA. In this context, and with a goal of testing and improving our coordinating arrangements, we will conduct a crisis simulation exercise with the help of the WB.

24. Our efforts to reduce dollarization will remain strictly market based and will not come at the expense of economic stabilization or central bank credibility. In this context we will not expand the foreign currency denominated loan conversion program beyond the recently completed program for mortgages. We are exerting our best efforts to implement affordable housing program 2015–20, mostly through the recently established SMC. Should the SMC activities evolve into banking activities, as defined by banking legislation, we will consider regulating it by the NBKR. In providing direct liquidity to the RKDF, the NBKR will ensure that credit policy remains consistent with the monetary policy objectives.

25. We remain committed to exert our best efforts to enact the Banking Law in a form substantially similar to the draft submitted to parliament in September 2013 (structural benchmark, September 2016). The banking law is macro-critical as it is essential for preserving financial stability, especially at times of rising vulnerabilities. Having an efficient and effective bank resolution framework in place is necessary to prevent troubles in one bank from spilling over to the whole system. Furthermore, the law establishes the appropriate balance between the various stakeholders during the bank resolution process and enhances the protection of depositors. In this respect, amendments to the Banking Law proposed by some deputies during recent parliamentary deliberations undermine the essence of the law. We will work with parliament to address concerns regarding the constitutionality of certain provisions while maintaining the essence of the law. We will make every effort to ensure that the law maintains the original provisions in the areas of: (i) governance and oversight; (ii) judicial review and nonsuspension of the NBKR’s decisions; and (iii) powers of the NBKR in the resolution process.

26. We believe that the liquidation of all banks under DEBRA is essential to maintaining the integrity of the banking sector. We completed the audit of DEBRA and all the banks under its management. The audit concluded that four banks have no assets and therefore all chances for debt recovery have been exhausted. Therefore, as a first step DEBRA will, in accordance with the legal procedures, submit to the courts requests for liquidating these bankrupt banks: “Bishkek”, “Mercury”, “Kurulush-bank”, and “Adil” (structural benchmark, September 2016). As a second step, DEBRA will submit to the courts requests to liquidate: “Kyrgyzagroprombank”, “Manas”, “Issyk-Kul”, and “AUB” banks (structural benchmark, March 2017). In addition, we will sign the final debt reconciliation protocol thereby terminating the agreement between NBKR, ministry of finance, and DEBRA on the collection of debt outside the banks by end-March 2017.

27. We are committed to strengthening and implementing an AML/CFT regime in line with international standards. We will submit in early June to parliament a draft law of the Kyrgyz Republic on combating the legalization (laundering) of proceeds from crime, financing of terrorist and extremist activities, which incorporates the main recommendations from IMF experts. Timely action through the adoption and publication of the law should contribute to a positive assessment by the Eurasian Group on Combating Money Laundering and Financing of Terrorism (EAG) during 2016–17.

28. Accelerating the activity of the RKDF is a key pillar of our policy aimed at stimulating economic activity and adjusting the economy to membership in the EEU. The RKDF continues to lend to SME’s primarily through commercial banks including state owned Aiyl and RSK as well KICB. During 2016, the RKDF will expand the SME lending program by US$90 million operating through 9–10 partner banks. In addition, the RKDF aims to lend directly about US$100 million in 2016 to support the economic recovery. Through our representatives at the board of the fund, we will ensure that RKDF will continue to follow international best practice for development banks and institutions and carries out its activities without causing market distortions. We will continue to maintain a level playing field among the various agents operating the financial-investment space. We will make sure that neither the Government, nor the NBKR are liable for obligations (including guarantees) of the RKDF, and vice versa.

Institutional and structural reforms to ensure board based growth

29. We firmly believe that improving the business environment will be key to withstanding external shocks, attracting investment and generating inclusive growth. In order to realize the full benefits from EEU membership, we will redouble our efforts to address weaknesses in the business environment. The latest World Bank Doing Business report is mostly unchanged from previous year. We continue to face challenges in the areas of ease of paying taxes, access to the power grid and resolving a business. While there was improvement in access to credit, our position in terms of establishing a business has deteriorated. To address these challenges, we will continue to work in the following directions: (i) reducing the number of activities subject to licensing and streamlining the licensing process, (ii) streamlining tax and other inspection regimes, (iii) streamlining property registration; and (iv) establishing a unified and transparent procedure for access to utilities including the power grid. We will continue to improve the tax regime to ensure simplicity, fairness and equal treatment of all tax payers, a precondition for reducing the shadow economy. We will put all our efforts toward a constructive resolution of the dispute with Centerra to ensure that it does not lead to disruptions in gold production. A stable and predictable investment climate with proper contract enforcement, strong property rights, less red tape and corruption are essential for attracting investment and spurring private sector-led growth. Additionally, we developed an anti-crisis action plan to counter the weak outlook and external shocks.

30. Reforming the energy sector to ensure better service delivery and putting it on sound economic footing. In this context, we are: (i) improving the governance aspects of the sector by introducing a transparent cash settlement mechanisms monitored by the State Regulatory Agency for Fuel and Energy sector; (ii) increasing the human and financial resources available to the Regulatory Agency to match them to the entity’s functions and ensure proper functioning of the regulatory; (iii) enhancing policy planning and sector management by establishing and operationalizing a national Electricity Holding company to improve coordination among the various actors and enhance efficiency of operations; (iv) working to improve internal controls, introducing management information systems (MIS) at power companies and rolling out smart power meters; and (v) continuing reforms in the power sector and improving conditions for private sector investment. We remain committed to restoring the financial viability of the energy sector by, in particular, setting adequate tariff levels in line with MTTP for 2014–17 years.

31. PFM Reforms will remain our top priority. We recently agreed to a new Multi Donor Trust Fund arrangement to support PFM reforms. The implementation financial management information system (FMIS) would speed up the launching of the treasury single account (TSA). To that effect, a Memorandum of Co-operation with TIKA, the Turkish Cooperation and Coordination Agency to finance the new FMIS was signed in the last quarter of 2015 (structural benchmark, June 2016). We expect the announcement by TIKA of the tender for the selection of the FMIS software provider in early 2017. We will work with TIKA and other donors to implement a human resources management module covering all employees of the public sector under a new project. We expect to finalize the draft FMIS terms of reference by the end of 2016 and sign it by end-February 2017 (structural benchmark). We remain committed to extend treasury coverage to the Social Fund. The budget code was approved by parliament in April 2016 and will become effective in January 2017.

Program monitoring

32. The ECF-supported program will continue to be monitored through prior actions, quantitative performance criteria, continuous performance criteria, indicative targets, and structural benchmarks. Quantitative performance criteria (QPC) for June and December 2016 and indicative targets (IT) for June, September and December 2016 and continuous performance criteria are set out in Table 1. Prior actions and structural benchmarks are set out in Table 2. Program reviews will continue to be conducted semi-annually, based on end-June and end-December test dates. The understandings between the Kyrgyz authorities and IMF staff regarding the quantitative performance criteria and structural benchmarks described in this LOI and reporting requirements are further specified in the attached Technical Memorandum of Understanding (TMU).

33. In line with the recommendations of the IMF safeguards assessment of the NBKR, we are taking the necessary measures to improve the NBKR’s governance arrangements, audit mechanisms, and internal controls. Once adopted, the banking law will enable us to overcome key safeguards vulnerabilities by enhancing the institutional autonomy of the NBKR, independent oversight, and the external audit mechanism. In the interim, our future audit engagement letters will ensure that the audits are compliant with International Standards of Auditing and the engagement partner meets with the audit committee to discuss the audit plan and findings. In addition, NIR and NDA data for each test date under the program will be confirmed by an internal (end-June) and external audit (end-December).

Sincerely yours,

/s/
S.Sh. Jeenbekov
Prime Minister of the Kyrgyz Republic
/s//s/
A.A. KasymalievT.S. Abdygulov
Minister of Finance ofChairman of the National
the Kyrgyz RepublicBank of the Kyrgyz Republic
Table 1.Kyrgyz Republic: Quantitative Performance Criteria and Indicative Targets Under the Extended Credit Facility, June 2015–December 2016(In millions of soms; unless otherwise indicated; eop)
20152016
DecemberMarchJuneSeptemberDecember
QPCITQPCITQPC
CR16/55Adj.ActualStatusCR16/55Adj.ActualStatus
Quantitative performance criteria 1/
1. Floor on net international reserves of the NBKR (eop stock, in millions of U.S. dollars)1,1031,0861,230Met9481,0641,375Met1,2351,1641,110
2. Ceiling on net domestic assets of the NBKR (eop stock)−24,195−21,313−27,174Met−20,222−20,187−34,797Met−22,625−23,688−18,523
3. Ceiling on cumulative overall deficit of the general government 2/15,3048,1954,950Met12,13413,795−2,077Met12,10815,60220,492
4. Present value of new external debt contracted or guaranteed (continuous, in millions of U.S. dollars)650Met226134Met220220220
5. Ceiling on accumulation of new external payment arrears (continuous, in millions of U.S. dollars)00Met00Met000
Indicative Targets 1/
1. Ceiling on reserve money69,14567,055Met68,25666,163Met75,91574,21376,092
2. Cumulative floor on state government tax collections 2/87,00984,655Not met19,63920,330Met41,73967,86299,153
3. Floor on cumulative state government spending on targeted social assistance, Unified Monthly Benefit and Monthly Social Benefit programs 2/4,4124,925Met1,1891,368Met2,3773,6155,417
4. Ceiling on contracted or guaranteed of new nonconcessional external debt by public sector (continuous, in millions of U.S. dollars) 3/300Met00Met000
Sources: Kyrgyz authorities and IMF staff estimates and projections.
Table 2.Kyrgyz Republic: Prior Action and Structural Benchmarks Under the Extended Credit Facility
MeasuresTimingStatus
Prior Action
Finalize the audit of DEBRA and banks under its management.5 business days prior to the Board meeting
Structural Benchmarks
I. FISCAL POLICY
Undertake a review of the public investment framework in cooperation with development partners and line ministries to identify gaps and then define an action plan.End-April, 2016Met
Draw an action plan for the reform of public sector personnel and remuneration policy to reduce the wage bill as a share of GDP.End-May, 2016
Revise the MDTS in light of the outcome of the new DSA.End-July, 2016
Conduct a review of all subsidies and draw up an action plan to reduce them.End-September, 2016
Sign a Memorandum of Co-operation with TIKA, the Turkish Cooperation and Coordination Agency, to develop new Financial Management Information System.End-June, 2016Met
Review the methodology for setting power tariffs to ensure economic soundness and adjust accordingly the roadmap for increasing tariffs.End-June, 2016Met
Set up a comprehensive register of all employees of the general government.End-March 2017New
Modify through government decree the decision making process for the selection of public investment projects by formalizing gate keeping roles of the MoE on evaluation, including economic assessment and project efficiency, and MoF on financing respectively. The PIP guidelines will be updated accordingly.End-December 2016New
Sign the FMIS terms of referenceEnd-February 2017New
Introduce a standardized framework for project monitoring of physical and financial performance for all projects exceeding KGS 50 million.End-June 2017New
II. FINANCIAL SECTOR
Resubmit to Parliament amendments to the code for administrative responsibility aimed at increasing penalties for unlicensed foreign exchange activity.End-February, 2016Met
Submit a new draft AML/CFT law that reflects all the recommendations provided by the Fund as well as other donors to the new parliament.End-April, 2016Broadly implemented
Finalize the audit of DEBRA and banks under its management.End-March, 2016Not met
Develop a crisis preparedness framework, including establishing a high-level financial stability council comprised of representatives of the NBKR, DPA, ministry of finance, and prime minister’s office.End-September 2016
Enact and publish in the Official Gazette (“Erkin-Too”) the banking law and the supporting law on “enactment of the banking law”.End-September 2016
DEBRA to submit to the courts requests for liquidating the following banks: “Bishkek”, “Mercury”, “Kurulush-bank”, and “Adil” banks.End-September, 2016New
DEBRA to submit to the courts requests for liquidating the following banks: “Kyrgyzagroprombank” banks, “Manas”, “Issyk-Kul”, and “AUB” banks.End-March, 2017New
Develop a strategic plan for supervision with the following components: (i) personnel policy to attract and retain qualified personnel, and decrease personnel turnover rate; (ii) training of supervisors to ensure that staff is familiar with the NBKR’s supervisory approach and to improve their technical ability; (iii) enhancing the supervisory approach, including implementation of the risk based supervision; and (iv) strengthening the current regulatory framework and bring it line with international standards.End-December 2016New

Attachment I. Kyrgyz Republic: Identified Fiscal Measures to Close the 2016 Fiscal Gap

Estimated contribution
Type of measureDetails(In percent of GDP)
Tax policy0.03
Revise VAT applicable to certain types of exports and regulate of transfer pricing.
Revise rates in mining licenses and harmonize of FEZ with EEU.
Tax administration0.56
Incentive to boost foreign activities through improved administrative procedures.
Improve customs payments through harmonization procedure, closer relationships with third countries and better information system.
Fight against violation of customs duties and illegal imports of goods and vehicles, and collection of arrears by improving the monitoring of operations and procedures and pursuing unscheduled inspections.
Remove prohibition of tires imports from third countries
Improve administration of tax and non tax payments by increasing the number of scheduled and non scheduled audits, and enforcing application of car stickers (group 4 vehicles).
Speed up litigation cases.
Speed up the collection of tax arrears.
PFM0.44
Improve efficiency of the payment system through savings in procurement operations.
Expenditure0.13
Streamlining of non priority goods and services.
Nontax revenues0.35
Higher profits from the NBKR (already received).
Privatization of state property.
Increase in proceeds from the leasing of state property and dividends.
Sales of mineral deposits.
Reimbursement of taxes from criminal procedures and fraud.
Total1.50
of which permanent0.66
Memo item:
GDP (in billions of soms)455.4
Sources: Authorities data and IMF staff calculations.

Attachment II. Kyrgyz Republic: Technical Memorandum of Understanding

June 2, 2016

Introduction

This memorandum defines the quantitative performance criteria, indicative targets and adjustors, and establishes the content and frequency of the data to be provided to IMF staff for program monitoring related to the economic program supported by an arrangement under the Extended Credit Facility (ECF). The indicators presented in Table 2 of the Letter of Intent dated June 2, 2016 reflect the understandings on quantitative performance criteria reached between the authorities of the Kyrgyz Republic and staff of the IMF.

Performance Criteria and Indicative Targets

A. Definitions and concepts

Test dates. Quantitative performance criteria are set semi-annually starting June 30, 2015 through December 31, 2018, and are to be met at the end of each period.

National Bank of the Kyrgyz Republic (NBKR). The NBKR is the central bank of the country and is responsible for the formulation and implementation of monetary policy, bank supervision, and the payment system. For the purpose of the program, the NBKR includes all its central and regional offices.

Public sector. For the purpose of the program, the public sector comprises the general government, the NBKR, the 10 largest nonfinancial public enterprises (enterprises and agencies in which the government owns more than 50 percent of the shares, but which are not consolidated in the budget, as listed in Table 1), and any other newly created public development institution. The State budget comprises central and local government budgets. The general government budget includes the State and Social Fund budgets.

Foreign-financed Public Investment Program (PIP) loans and grants. The foreign financed PIP is a program of investments in infrastructure and social sectors agreed by the general government of the Kyrgyz Republic and its donors (including but not limited to international financial organizations). The PIP is fully financed by related grants and loans.

Program loans and grants are loans and grants received by the general government for direct budget support from external donors and not related to PIP financing.

The stock of external payment arrears for program monitoring purposes is defined as the end-of-period amount of external debt service due and not paid within the grace period specified in the relevant debt contract, including contractual and late interest. For arrears to exist, a creditor must claim payment of amounts due and not paid. Amounts in dispute are not considered arrears. Arrears for which a clearance framework/rescheduling or restructuring has been agreed with the creditor are not considered arrears for program monitoring purposes. Program arrears would include any debt service due under such agreements that have not been paid.

Concessional and nonconcessional debt. Concessional debt is defined as debt with a grant element equivalent of 35 percent or more. The grant element of a debt is the difference between the present value (PV) of the debt and its nominal value, expressed as a percentage of the nominal value of the debt. The PV of debt at the time of its contracting is calculated by discounting the future stream of payments of debt service due on this debt. The discount rate used for this purpose is 5 percent. The debt refers also to commitments contracted or guaranteed and for which value has not been received. The calculation of concessionality will take into account all aspects of the loan agreement, including maturity, grace period, payment schedule, upfront commissions, and management fees. The calculation is performed by the authorities and verified by the IMF staff based on the data provided by the authorities.

Variable interest rate. For debts carrying a variable interest rate in the form of a benchmark interest rate plus a fixed spread, the PV of the debt would be calculated using a program reference rate plus the fixed spread (in basis points) specified in the debt contract. The program reference rate for the six-month USD LIBOR is 3.34 percent and will remain fixed for the duration of the program. The spread of six-month Euro LIBOR over six-month USD LIBOR is -250 basis points. The spread of six-month JPY LIBOR over six-month USD LIBOR is -300 basis points. The spread of six-month GBP LIBOR over six-month USD LIBOR is -100 basis points. For interest rates on currencies other than Euro, JPY, and GBP, the spread over six-month USD LIBOR is -200 basis points.1 Where the variable rate is linked to a benchmark interest rate other than the six-month USD LIBOR, a spread reflecting the difference between the benchmark rate and the six-month USD LIBOR (rounded to the nearest 50 bps) will be added.

Valuation changes (program exchange rates). For program monitoring, U.S. dollar-denominated components of the NBKR’s balance sheets will be valued at the program exchange rates. The program exchange rate of the KGS to the U.S. dollar is set as of February 17 of 2015 exchange rate of KGS 60.7523 = US$1. The corresponding cross exchange rates and program gold price for the duration of the program are provided in Table 2.

B. Quantitative performance criteria

Floor on net international reserves of the NBKR in convertible currencies

Definitions

Net international reserves (NIR) of the NBKR. The floor on NIR will be calculated as the difference between total international reserve assets and total international reserve liabilities of the NBKR in convertible currencies. Total international reserve assets of the NBKR are defined as the NBKR holdings of monetary gold, holdings of SDRs, reserve position in the IMF, and any holdings of convertible foreign currencies in cash or with foreign banks, and debt instruments issued by nonresidents that are liquid. For program purposes, convertible foreign currencies refers only to: U.S. dollar, Euro, British Pound, Japanese Yen, Swiss Franc, Australian Dollar, and Canadian Dollar. Accrued interest on deposits, loans, and debt securities are included in reserve assets and liabilities, correspondingly. Reserve assets pledged as collateral or otherwise encumbered, capital subscriptions in foreign financial institutions, deposits of resident financial institutions (commercial banks and the Russia-Kyrgyz Development Fund) in foreign currency and illiquid assets of the NBKR are excluded from NIR. Also excluded are net forward positions, defined as the difference between the face value of foreign-currency denominated NBKR off-balance sheet claims on nonresidents and foreign currency obligations to both residents and nonresidents. Total international reserve liabilities of the NBKR in convertible currencies are defined as the sum of Kyrgyz Republic’s outstanding liabilities to the IMF and other convertible currency liabilities to nonresidents with an original maturity of up to and including one year. NIR is not affected when foreign assets are received by the NBKR through foreign currency swaps with resident financial institutions. Total international reserves and NIR decline with the provision of foreign assets by the NBKR through foreign currency swaps with resident financial institutions.2 For program monitoring purposes, total international reserve assets and liabilities will be valued at the program exchange rates as described in paragraph 9. Thus calculated, the stock of net international reserves in convertible currencies amounted to US$1,230 million on December 31, 2015.

Net foreign assets (NFA) of the NBKR. NFA consist of net international reserve assets plus other net foreign assets, including other net claims on CIS countries, reserve assets pledged as collateral or otherwise encumbered, capital subscriptions in foreign financial institutions, illiquid assets, and obligations of the NBKR on SDR allocation. For program monitoring purposes, other NFA will also be valued at program exchange rates.

Adjustors

The floor on NIR will be adjusted upward/downward to the full extent of any excess/shortfall in program and other grants and program loans, as given in Table 3 and upward/downward to the full extent that amortization and interest payments of public external debt is less/more than the amortization and interest payments given in Table 3.

Ceiling on the net domestic assets of the NBKR

Definitions

Net domestic assets of the NBKR (NDA) are defined as reserve money of the NBKR (defined below), minus NFA as defined above. Items in foreign currencies will be valued at program exchange rates.

Thus defined, NDA consist of: (a) net claims to the general government from the NBKR; (b) net claims to other depositary corporations by the NBKR; (c) net claims on other financial corporations; and (d) all other net assets of the NBKR (other items net). Thus defined, the stock of NDA amounted to minus KGS 27,174 million on December 31, 2015.

Adjustors

The ceiling on NDA will be adjusted downward/upward to the full extent of any excess/shortfall in program and other grants and program loans, as given in Table 3 and downward/upward to the full extent that amortization and interest payments of public external debt is less/more than the amortization and interest payments given in Table 3. The ceiling on NDA will be adjusted downward/upward to the full extent of any excess/shortfall of the Russia-Kyrgyz Development Fund net flows given in Table 3a.

Ceiling on the cumulative overall cash deficit of the general government

Definitions

The overall cash deficit of the general government will be measured from the financing side (below the line) as the net cash inflow from financing activities, defined as the net incurrence of liabilities minus the net acquisition of financial assets other than cash. These will be measured at current exchange rates and will be defined as the sum of:

  • The change in the stock of net claims of the domestic banking system and nonfinancial institutions and households on the general government. The change in the stock of net claims of the domestic banking system on the general government is defined as the change in the stock of the banking system claims on the general government, less the change in the stock of all deposits of the general government with the banking system. The claims of the banking system on the general government include: bank loans to the general government; any securities issued by the general government and held by domestic banks and overdrafts on the current accounts of the general government with banks;

  • The change in the stock of net claims of foreign governments, banking systems, and nonfinancial institutions and households on the general government;

  • Net transactions in equity, i.e., any new sales net of purchases of shares;

  • Net foreign loans disbursed to the general government for budgetary support; and

  • Net foreign loans disbursed to the general government for PIP financing.

The quantitative performance criteria for the fiscal balance are calculated on the projected exchange rate. Reporting and adjustments, as defined above, will be made using current exchange rates.

Adjustors

The ceiling on the cumulative overall cash deficit of the general government will be adjusted downward to the full extent of any excess in program grants, as given in Table 3. The ceiling on the cumulative overall cash deficit of the general government will be adjusted downward to the full extent of any shortfall in program loans, as given in Table 3 and upward/downward to the full extent that PIP loans are more/less than PIP loans given in Table 3.

Ceiling on the present value of new external debt contracted or guaranteed, and accumulation of new external payment arrears by the public sector (continuous quantitative performance criteria).

Definitions

Debt. In connection with the contracting or guaranteeing of short-, medium-, and long-term external debt by any entity of the public sector, for program purposes, the definition of debt is set out in Executive Board Decision No. 6230–(79/140), as amended by Decision No. 15688–(14/107), point 8, adopted December 5, 2014, and reads as follows:

  • For the purpose of this guideline, the term “debt” will be understood to mean a current, i.e., not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debts can take a number of forms, the primary ones being as follows:

    • Loans, i.e., advances of money to the obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans and buyers’ credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements);

    • Suppliers’ credits, i.e., contracts where the supplier permits the obligor to defer payments until sometime after the date on which the goods are delivered or services are provided; and

    • Leases, i.e., arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the lessor retains the title to the property. For the purpose of the guideline, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement excluding those payments that cover the operation, repair or maintenance of the property.

  • Under the definition of debt set out in point 8 (a) above, arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.

For program purposes, external debt is defined based on the residency of the creditor.

External debt ceilings. A performance criterion (ceiling) applies to the present value (PV) of new external debt, contracted or guaranteed by the public sector with original maturities of one year or more. The ceiling applies to debt contracted or guaranteed for which value has not yet been received, including private debt for which official guarantees have been extended. The ceiling is subject to an adjustor defined below.

An adjustor of up to 5 percent of the external debt ceiling set in PV terms applies to this ceiling, in case deviations are prompted by a change in the financing terms (interest, maturity, grace period, payment schedule, upfront commissions, management fees) of a debt or debts. The adjustor cannot be applied when deviations are prompted by an increase in the nominal amount of total debt contracted or guaranteed.

Exclusions from the external debt limits. Disbursements by the IMF are excluded from the ceilings on external debt. Also excluded from external debt ceilings is the contracting or guaranteeing of new external debt that constitutes a rescheduling or refinancing of existing external debt on the terms more favorable to the debtor.

Guarantees. For program purposes, the guarantee of a debt arises from any explicit legal obligation of the public sector to service a debt in the event of nonpayment by the debtor (involving payments in cash or in kind), or from any implicit legal or contractual obligation of the public sector to finance partially or in full a shortfall incurred by the debtor.

New external payments arrears. The ceiling on accumulation of new external payments arrears is a continuous quantitative performance criterion.

C. Indicative targets

Ceiling on reserve money

Reserve money is defined as the NBKR’s national currency liabilities to the economy, which includes currency issued and liabilities to other depositary corporations.

Cumulative floor on state government tax collections

Tax collections in cash correspond to the line “Tax Receipts” in the Treasury Report and comprise the following categories: tax on income and profits; taxes on goods and services; specific taxes on services; turnover taxes; taxes on property; taxes on international trade; and other taxes. Tax collections include collections of tax arrears but exclude tax offsets.

Cumulative floor on state government spending on targeted social assistance

Targeted social assistance spending comprises state government spending on Unified Monthly Benefit (UMB) and Monthly Social Benefit (MSB) programs.

Ceiling on the new non concessional external debt contracted or guaranteed

An indicative target applies to the contracting or guaranteeing by the public sector of nonconcessional external debt, i.e. external debt with grant element of less than 35 percent, except normal short-term import-related credits and the NBKR international reserve liabilities.

Reporting Requirements Under the Arrangement

The government and the NBKR will provide the IMF with the necessary economic and financial statistical data to monitor economic developments and the quantitative targets (see Table 4). In particular, the government and the NBKR will provide the following specific information.

A. Analytical balance sheet of the NBKR

The NBKR will provide to the IMF its analytical balance sheet on a daily basis. The information provided will clearly identify the following items in the definitions specified above: the net foreign assets of the NBKR; the net international reserves of the NBKR; total reserve assets and total reserve liabilities of the NBKR ; the net domestic assets of the NBKR; net credit from the NBKR to the general government, disaggregated by state government and special funds of the KR; net credit from the NBKR to other deposit corporations and other financial corporations (including Russia-Kyrgyz Development Fund); other items net; and reserve money. The balance sheet will be provided using both actual and program exchange rates. The above information will be provided to the IMF Resident Representative and/or transmitted by e-mail to the IMF.

B. Monetary survey

Monthly banking system data, in the form of monetary surveys of the banking sector and other depository corporations, will be reported to the IMF by the NBKR within 16 days of the end of the month. The information provided will clearly identify the following items: net foreign assets and net domestic assets of the banking system, net credit from the banking system to the general government disaggregated by the state government, the social fund and the KRDF, net claims to the rest of the economy, other items net, and broad money. The monetary survey will be provided using both program and actual exchange rates.

The NBKR will provide monthly data to the IMF within seven days after the end of the month on the amount of holdings of treasury bills, treasury bonds and other securities issued by the state government, differentiated by the following categories of holders: the NBKR; resident banks; resident nonbanks (including separately the social fund and deposit protection agency); and nonresidents. The information will be provided in both the book (nominal) value and the actual value, where applicable.

C. International reserves and key financial indicators

The NBKR will provide monthly data within 20 days from the end of the month on its gross and net international reserves within the framework of reporting “International Reserves and Foreign Currency Liquidity” (IMF’s SDDS). The report on foreign assets and liabilities by currency will be provided 20 days after the end of each quarter. These data will be provided at two alternative sets of the exchange rates and the gold price: first, at those used to derive the NFA position in the NBKR accounts; and second, at those specified in the program (see Section I). The NBKR will also provide data on net foreign financing flows, including disbursements of program loans and grants, amortization, interest payments on external debt, interest income on reserves, other direct foreign currency payments by the government and the NBKR. In addition, reports should be sent to the IMF on nominal exchange rates (including the official and interbank exchange rates), foreign exchange interbank market turnover, and the volume of NBKR foreign exchange sales and purchases in the domestic interbank market and with other parties, on a daily basis. Reports on treasury bill yields and the amount of treasury bill sales and redemptions on a weekly basis every Monday. On the twenty-fifth day of the month following the reference month, the NBKR will provide indicators of financial soundness of the banking system, including the ratios of regulatory capital to risk-weighted assets, nonperforming loans to total loans, nonperforming loans by sector and by currency, restructured and prolonged loans by sector and by currency, return on equity, liquidity, earning and profitability, loans and deposits ratios in domestic and foreign currency, foreign currency exposure and dollarization as well as data on bank deposits and loans by maturity and sector, and bank deposit and lending rates by maturity. On the twentieth day of the month following the reference quarter the NBKR will provide data on nonperforming loans for micro-finance organizations and credit unions

D. External debt

The ministry of finance, together with the NBKR, will provide monthly information on the disbursements, principal and interest payment—both actual and falling due—on contracting and guaranteeing of medium- and long-term external loans by the state government, nonfinancial public enterprises, and the NBKR; and any stock of outstanding arrears on external debt service payments within 21 days of the end of each month. In addition, the ministry of finance will report the total amount of outstanding government guarantees and external arrears on a monthly basis. While the NBKR will provide the debt service payment data on private debt, the ministry of finance will provide data on debt service on public and publicly guaranteed loans.

E. Budgetary and extra budgetary data

In addition to the monthly treasury report, the Social Fund will report monthly on its operations. This information will be provided to the Fund staff within 26 days from the end of each reference month. The ministry of finance will also provide monthly reports on the disbursements and use under the public investment program and budgetary grants with a one-month time lag.

F. Balance of payments data

The NBKR will provide current account and capital account data, including data on foreign trade, services, official and private transfers, foreign investment, and disbursements of public and private loans, on a quarterly basis, with at most a three-month lag. The NBKR will also provide monthly foreign trade data with a two-month lag.

G. Other general economic information

The National Statistics Committee will notify the IMF of the monthly Consumer Price Index by category by the fifteenth business day of the following month, and convey monthly GDP estimates within 30 days of the end of each month.

Table 1.Ten Largest SOE’s(Included in the public sector)
Name of SOE
1JSC KyrgyzAltyn
2JSC KyrgyzNefteGaz
3JSC “Electrical Stations”
4JSC “National Electrical Grid of Kyrgyzstan”
5JSC “Manas International Airport”
6JSC KyrgyzTelecom
7JSC SeverElectro
8SOE “National Company Kyrgyz Temir Jolu”
9JSC KyrgyzGaz
10JSC BishkekTeploset
Sources: Authorities data and IMF staff calculations.
Table 2.Program Cross Exchange Rates and Gold
AbbreviationCurrency NameCurrency/US$US$/Currency
AUDAustralian Dollar1.29260.7736
AMDArmenian Dram479.68650.0021
CADCanadian Dollar1.25250.7984
CNYChinese Yuan6.24770.1601
CNHChinese Yuan6.25170.1600
JPYJapanese Yen119.05680.0084
KZTKazakh Tenge185.05120.0054
KWTKorean won1,100.58510.0009
KWDKuwati dinar3.38240.2956
KGSKyrgyz Som60.7523
NOKNorweigan Crown7.60200.1315
RUBRussian Ruble62.66350.0160
SARSaudi Rial4.60760.2170
SGDSingapore Dollar1.35850.7361
SEKSwedish Crown8.44260.1184
CHFSwiss Franc0.92931.0760
AEDUAE Dirham3.67790.2719
GBPUK Pound Sterling0.65081.5366
SDRSDR0.70961.4092
XAGSilver0.057917.2700
BYRBelarusian Ruble15,318.28040.0001
EUREuro0.87571.1420
XAUGold (US$/troy ounce)1,229.2500
Sources: Authorities data and IMF staff calculations.
Table 3.Projected Budget Support, PIP and Amortization(In millions of U.S. dollars)
20152016
MarchJuneSeptemberDecemberMarchJuneSeptemberDecember
Program grants0.027.627.850.530.00.00.040.0
Program loans0.006.760.0021.40.814.52.427.7
Grants in-kind32.332.332.332.328.828.828.828.8
PIP grants excl. grants in-kind5.46.610.412.58.834.039.956.7
PIP grants incl. grants in-kind37.638.942.744.837.662.868.685.5
Other grants0.00.00.00.00.00.00.00.0
PIP loans12.531.026.5178.951.0112.8170.6162.1
PIP loans, excl. onlending8.412.521.993.649.081.172.366.9
Amortization of public external debt16.518.718.818.034.334.334.334.3
Interest payments12.39.112.79.113.713.713.713.7
Table 3a.Projected flows of the Russia-Kyrgyz Fund(In millions of U.S. dollars)
2016
MarchJuneSeptemberDecember
Inflows50.0100.00.00.0
Lending0.030.065.065.0
Net5070(65)(65)
Table 4.Reporting Requirements and Frequency Under the Arrangement
Reporting AgencyDataFrequencyTiming
NBKRAnalytical balance sheet of NBKR at actual and program exchange ratesDailyThe following working day
NBKRMonetary surveys of the banking sector and other depository corporations at actual and program exchange ratesMonthlyWithin 16 days of the end of each month
NBKRThe amount of holdings of treasury bills, treasury bonds and other securities issued by the state governmentMonthlyWithin 7 days of the end of each month
NBKRThe gross and net international reserves Net foreign financing flowsMonthlyWithin 20 days of the end of each month
NBKRReserve composition by currency and instrumentQuarterlyWithin 10 days of the end of each quarter
NBKRNominal exchange rates Foreign exchange interbank market turnover Volume of NBKR foreign exchange sales and purchases in the domestic interbank market on a daily basisDailyThe following working day
NBKRTreasury bill yields and the amount of treasury bill sales and redemptions, and operations with other partiesWeeklyEvery Monday
NBKRBalance sheet and income statement of banks (aggregated); data on capital assessment of the commercial banks and the data on the main factors of the loan portfolio’s growth of the banking system and separately of the group of banks with a significant share of the Kazakh capitalMonthlyWithin 25 days of the end of each month
NBKRBalance sheet and income statement by individual bank and banking groups; sectoral distribution of loans and NPLs by currency and by bank; restructured and renewed loans; largest exposures by bank; loan classification by banks and by groups;MonthlyWithin 25 days of the end of each month
NBKRNonperforming loans for microfinancing organization and credit unionsQuarterlyWithin 20 days of the end of each quarter
NBKRIndicators of financial soundness of the banking system (capital adequacy, liquidity, asset quality, earning and profitability, loans and deposits ratios, foreign currency exposure and dollarization)MonthlyWithin 25 days of the end of each month
State Property FundBalance sheets of the 10 largest SOEsAnnuallyWithin 91 days after the end of the year
MOFRevenues, expenses, net lending and on-lending of financial assets and liabilities of the central governmentMonthlyWithin 26 days of the end of each month
MOF NBKRDisbursements, principal and interest payment (external debt) Contracting and guaranteeing of medium- and long-term external loansMonthlyWithin 21 days of the end of each month
MOFDetails (amount, currency, and financing terms) on new loans contracted on public external debt, including SOEs.QuarterlyWithin 25 days of the end of each quarter
Social FundSocial Fund operations reportMonthlyWithin 26 days of the end of each month
MOFDisbursements and use under the public investment program, budgetary grants, and grants in kind.MonthlyWithin 30 days of the end of each month
NBKRCurrent account and capital account dataQuarterlyWithin 90 days of the end of each quarter
NBKRForeign trade dataMonthlyWithin 60 days of the end of each month
NBKRRemittances by country of origin and currency.MonthlyWithin 45 days of the end of each month
NSCConsumer Price Index by categoryMonthlyWithin 15 days of the end of each month
NSCGDPMonthlyWithin 30 days of the end of each month

The sale of the Geroi gold mine and radio frequencies.

The Kyrgyz Republic customs revenues represent 1.9 percent of the EEU’s total customs revenues.

A micro-finance company became a bank and a new bank was established, which contributed to the increase in CAR.

Includes prolonged and restructured loans. A prolonged loan is one which maturity has been extended. A restructured loan is one which terms have been modified.

Prepared by the staff of the International Monetary Fund and the International Development Association. Approved by Juha Kähkönen, Masato Miyazaki (IMF), and Satu Kähkönen (IDA).

The Kyrgyz Republic is classified as a large remittances case. In the 2013–15 period remittances averaged 27 percent of GDP and 78 percent of exports of goods and services, well above the 10 percent and 20 percent respective threshold-criteria for the large remittances case.

External public and publicly-guaranteed debt, which includes the debt of 19 largest SOEs, accounted for 97 percent of public debt in 2015.

A borderline high/moderate case is one where stress tests result in one or more breaches, and there is a small breach (i.e., within the band) of the threshold in the baseline scenario. In the case of the Kyrgyz Republic this requires that the ratio of present value of debt to GDP and remittances falls between 36 and 37.8 percent. A borderline moderate/high case is where one or more stress tests indicate a breach, and the threshold is nearly breached in the baseline scenario (i.e., the ratio is between 34.2 and 36 percent).

Under the probability approach the indicative threshold is based on country specific CPIA and GDP growth information.

Country Report No 15/131.

If assessed to be at high risk of debt distress, the current IT on zero nonconcessional borrowing would be elevated to a PC and the PC on new external debt on PV terms would be quantified in nominal terms. Financing by the WB and ADB would be restricted to grant financing and based on the “modified volume approach” a 20 percent upfront volume discount would be applied on the overall grant allocation.

This refers to only the projects evaluated by the Independent Evaluation Group (IEG). The IEG evaluation database has rate of return only on 11 projects out of the total of 48 projects under evaluation.

Kyrgyz scores 1.41 out of a scale of 4, and much lower than the median score of 1.65. As compared to the best performer in the group—South Africa with a score of 3.53—Kyrgyz’s relative public investment efficiency is around 40 percent.

In terms of the Dabla-Norris and others (2011) public investment management quality index, this improvement closes the efficiency gap between the Kyrgyz Republic and the best performing Eurasian Economic Union (EEU) member country, Armenia, by 2026.

The program reference rate and spreads are based on the “average projected rate” for the six-month USD LIBOR over the following 10 years from the Fall 2014 World Economic Outlook (WEO).

In case of a currency swap providing for receipt of foreign exchange by the NBKR and transfer of domestic currency to a resident financial institution, total international reserves increase, NIR remain unchanged, and net claims on domestic banks in soms increase. In case of a currency swap providing for transfer of foreign exchange by the NBKR and receipt of domestic currency from a resident financial institution, total international reserves and NIR decrease, and net claims by NBKR on domestic banks remain unchanged.

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