Abstract
This paper discusses the Kyrgyz Republic’s First Review Under the Poverty Reduction and Growth Facility. The current account deficit remained broadly unchanged because of a significant increase in workers’ remittances, mainly from Russia and Kazakhstan. Large negative errors and omissions in the balance of payments suggest that the spring political events led to some capital flight. Structural reforms will continue to focus on developing the financial sector, addressing energy sector imbalances, and increasing labor market flexibility.
The following information has become available since the staff report was issued on October 7, 2005. It does not change the thrust of the staff appraisal.
Preliminary data suggest that real GDP declined by 0.4 percent in January-September 2005 (year on year), compared with a growth rate of 2.4 percent in January-June. Excluding operations of the Kumtor gold mine and the energy sector, real GDP increased by 1.1 percent. The growth of nominal GDP, however, was broadly in line with the staff’s projection. The 12-month rate of consumer price inflation was 4.7 percent in September, as projected. The nominal exchange rate against the U.S. dollar has remained stable.
The program’s quantitative benchmarks for end-September appear to have been observed. Tax collections continued to exceed the targets and the primary fiscal deficit (before grants) remained ½ percent of GDP below the program ceiling. Net official international reserves exceeded the program floor by a wide margin, as a result of sizeable unsterilized intervention. The 12-month rate of growth of broad money (40 percent) was higher than projected (25 percent), with reserve money and bank deposits increasing faster than anticipated.
The end-September structural benchmarks have reportedly been completed. Amendments to the Civil Code to provide for the legal independence of the NBKR were submitted to Parliament on September 29. At the same time, a revised central bank law was brought to parliament in order to improve the NBKR’s accountability and strengthen the legal protection of its employees while discharging their duties.
President Bakiev has recently stated that the Kyrgyz Republic should seek assistance under the Multilateral Debt Cancellation Initiative. Discussions on the authorities intentions in this regard will continue during the November staff visit.