Statement by the IMF Staff Representative

The Kyrgyz authorities have maintained macroeconomic discipline in recent years, despite a challenging political environment. This 2006 Article IV Consultation highlights that the economic activity is rebounding in 2006, with year-over-year real GDP growth of 3.2 percent through September, after a slight contraction in 2005. Inflation is projected to rise slightly to just below 6 percent during 2006. Remonetization has gathered pace in recent years, but the financial system remains relatively shallow by international standards. Comprehensive financial reforms are under way and are slated to gain momentum under the IMF-supported program.

Abstract

The Kyrgyz authorities have maintained macroeconomic discipline in recent years, despite a challenging political environment. This 2006 Article IV Consultation highlights that the economic activity is rebounding in 2006, with year-over-year real GDP growth of 3.2 percent through September, after a slight contraction in 2005. Inflation is projected to rise slightly to just below 6 percent during 2006. Remonetization has gathered pace in recent years, but the financial system remains relatively shallow by international standards. Comprehensive financial reforms are under way and are slated to gain momentum under the IMF-supported program.

The following information has become available since the staff report was issued on October 20, 2006. It does not change the thrust of the staff appraisal.

1. Economic activity has continued to rebound, with year-on-year real GDP growth of 3.2 percent through September. Output growth excluding the Kumtor gold mine (which suffered a serious accident) exceeded 6 percent, led by construction and services. Twelve-month inflation in September edged up to 5.3 percent. Faced with buoyant remittances and short-term capital inflows, the National Bank has continued its active unsterilized foreign exchange intervention. As a consequence, reserve money growth accelerated to 43 percent in the 12 months ending October and gross official reserves now stand at $730 million or 4.3 months of projected 2007 imports of goods and services. Bank credit to the private sector expanded by 51 percent in the 12 months ending September.

2. Tax collections through September rose well above program projections, sparked by a rapid increase in receipts from import transactions; receipts from domestic taxes grew much slower. Budgetary execution to date has been in line with the program. The first reading of the 2007 budget bill planned for September has been delayed to November and the government plans to submit a revised bill in late November, with input from a brief Fund staff visit planned shortly. The authorities have indicated that the phased fiscal decentralization slated to start next year has been postponed, pending progress in capacity building and clearer definition of central and local government fiscal competencies.

3. Preliminary data show that end-September 2006 indicative targets have been met with margins, except for the ceiling on reserve money. The authorities met the end-September structural benchmark on formulation (in close cooperation with World Bank staff) of an energy sector action plan, but the plan continues to be debated inside the government and will likely be revised in consultation with Bank staff. As described in the staff report, the current version features phased tariff hikes and supporting measures to improve bill collections and reduce technical losses and theft, with a view to curtailing the electricity sector’s quasi-fiscal deficit. Contrary to earlier indications, the authorities missed the benchmark on expanding coverage of the Large Taxpayers Unit, which only amounted to 56 percent of total tax revenue versus the target of 60 percent.

4. The authorities have just increased the minimum wage to som 340 ($8.70) a month effective January 1, 2007, from the level of som 100 that has been in place for many years. The upcoming staff visit will discuss the implications of this unexpected measure (e.g., on indexation of tax brackets and deductions).

5. Negotiations are underway with Uzbekistan on its proposal to raise the export price of natural gas from $55 per thousand cubic meters effective January 2007; Uzbekistan’s asking price ($100 per tcm) would further widen the Kyrgyz Republic’s external current account deficit by 1 percent of GDP in 2007.

6. The recent joint Fund/Bank FSAP update mission found the financial system resilient to external shocks in light of its strong capital base. It left specific recommendations to deepen financial sector reforms, and cautioned against the proposed consolidation of financial sector supervision under the fledgling State Agency for Financial Supervision and Reporting.

7. World Bank and Fund staff will initiate discussions shortly with the authorities on Completion Point triggers under the enhanced HIPC Initiative. Meanwhile, the government has intensified its internal outreach effort on the HIPC process to address widespread concerns from civil society and parliament.