Abstract
The Kyrgyz Republic has made good progress under the Poverty Reduction Growth Facility (PRGF)-supported economic program. Executive Directors commended the sound policies, low inflation, and poverty reduction. They appreciated the strong fiscal discipline, and monetary and exchange rate policies. They emphasized the need to accelerate structural reforms, strengthen the financial system, and restructure the electricity sector. They stressed the need to reduce corruption and improve governance so as to promote investment and growth. They congratulated authorities for the successful implementation of the second PRGF, and granted a waiver.
1. This statement reports on: (i) implementation of the prior action for completion of the fourth review under the Poverty Reduction and Growth Facility, as specified in the staff report, Attachment II, Table 4, (ii) preliminary information regarding the third-year program’s targets for end-December 2003, and (iii) key economic data that have become available since the staff report was issued.
2. The Kyrgyz authorities have informed the staff that the prior action has been implemented:
The Law on the State Budget for 2004 was adopted by the parliament on December 29,2003. The Law on the Social Fund Budget for 2004 was adopted by the parliament on December 16,2003.
These laws are consistent with the fiscal targets and measures as specified in paragraphs 19 and 23 and Table 2 of the Memorandum of Economic Policies.
3. The authorities have provided preliminary information regarding the outcomes during the first quarter under their new annual program:
The end-December benchmark on NIR was observed with a wide margin and NDA remained below the program ceiling. However, the NBKR’s unsterilized intervention in October-November contributed to higher-than-programmed reserve money growth.
The Ministry of Finance reports that the fourth quarter benchmarks for state government tax collections and Social Fund payroll tax collections have been met. However, the targeted (cash) fiscal deficit may have been exceeded by 0.4 percent of GDP, reflecting the difficulties in containing expenditures as planned, and a delay in the disbursement of the second tranche of the EU Food Security grant (equivalent to 0.2 percent of GDP). Taking account of the higher GDP and preliminary deficit estimates, it appears that the fiscal deficit declined from 5.4 percent of GDP in 2002 to 5.2 percent of GDP in 2003 (0.3 percentage points above the 2003 target).
4. The following information on economic developments has become available since issuance of the staff report:
Preliminary information indicates that real GDP increased by 6.7 percent in 2003. Growth was driven by increased gold and energy production. The 12-month rate of inflation rose to 5.6 percent at end-2003, up from 1.0 percent at end-September. The average rate of inflation in 2003 was 3.1 percent, about ½ percentage point higher than targeted under the program. The increase in inflation during the last quarter of 2003 resulted mainly from regional shortages of wheat and an unanticipated interruption of gasoline imports from Kazakhstan. However, a depreciation of the nominal exchange rate against the U.S. dollar by 5 percent in October-November due to a surge in domestic liquidity also contributed to price increases. On the advice of staff, in December the central bank reduced interventions and undertook open market operations to contain liquidity. As a result, the nominal exchange rate has stabilized.