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

1. Political situation. After a series of demonstrations by the opposition in April, political tensions have eased. The immediate focus of the political debate has shifted to a new constitution (the third one since late 2006) that is being drafted by a task force for submission to parliament in the coming weeks. The new draft is expected to demarcate more clearly the responsibilities of the president, the prime minister and parliament. Some opposition groups have, nonetheless, announced plans to organize new demonstrations later this year.

2. Output and prices. The economic recovery has accelerated, with real GDP growth of 4.4 percent in the 12 months ended April, driven by the construction and manufacturing sectors. CPI inflation during the same period fell to 3.7 percent, despite stepped up foreign exchange intervention by the NBKR that helped raise the annual growth rate of reserve money to 45.3 percent. As a result, gross international reserves in early May stood at $850 million, or 3.6 months of projected 2008 imports of goods and services. The authorities attribute the easing of price pressures in recent months to increasing remonetization of the economy. Staff has cautioned them to be ready to tighten the monetary stance if inflationary pressures reemerge over the coming months.

3. Fiscal issues. Preliminary Q1 2007 data suggest that the overall general government deficit was 0.5 percent of GDP lower than programmed, owing to continued revenue buoyancy and under-execution of capital outlays. Tax collections, in particular, exceeded the program’s indicative floor, increasing by 28.6 percent year-on-year on the back of strong performance of VAT, customs duties and land taxes. The authorities have indicated that the reduction in the retirement age enacted by parliament (overriding an earlier presidential veto) will create an unexpected fiscal gap in the order of 0.5 percent of GDP, which they expect to cover during the year by intensifying their tax effort and possibly foregoing certain outlays. Staff plans to discuss the authorities’ evolving fiscal strategy in greater detail at the time of the 5^th PRGF review in summer 2007.

4. Structural benchmarks. The authorities are working toward fulfillment of the missed end-December 2006 and end-March 2007 structural benchmarks under the program. They said that the review of the NBKR’s internal audit function will begin shortly (with assistance from the Swiss National Bank), and noted that parliament has included the former Kyrgyz Agricultural Finance Corporation (KAFC) in the list of strategic companies requiring legislative approval for privatization. A decree outlining the new medium-term external debt strategy is awaiting government approval. The new tax code bill has already undergone its first reading and is expected to be considered by parliament in the coming weeks. Regarding the envisaged amendments to the civil, housing and land codes and to laws governing collateral, aimed at harmonizing provisions on collateralized lending by financial institutions, parliament has already passed the amendments to the civil code and the authorities are working on the requisite amendments to the land and housing codes.

5. Mining sector bill. The government has publicly distanced itself from a bill introduced by parliament proposing nationalization of the mining industry, which has since undergone a first reading. Moreover, the government has offered to restart negotiations with the Canadian Cameco/Centerra mining group (which had been initiated by the previous cabinet) to revise the 1994 investment contract guiding the operations of the key Kumtor mine.

6. Electricity sector issues. The authorities have indicated that they remain broadly committed to the energy sector action plan, which they had designed last year with World Bank assistance with a view to improving the sector’s financial and physical performance. The officials are still contemplating two increases in power tariffs later this year, as part of the phased adjustments to reach cost-recovery tariffs by 2010, but details remain to be worked out by the top political leadership.

7. Development Fund. A draft bill sent to parliament proposing creation of a Development Fund is awaiting its first reading. The new cabinet has not yet decided whether to champion the bill.

8. HIPC/MDRI. Prime Minister Atambaev has just written to the Managing Director and the President of the World Bank acknowledging that the country’s earlier decision to forego HIPC/MDRI debt relief was mainly conditioned by pressures from parliament and civil society. He stressed that the government remains committed to the implementation of the structural reforms drawn from the CDS that had been agreed, ad referendum, in late 2006 as floating Completion Point triggers under the HIPC Initiative. Against this backdrop, the Prime Minister appealed to the Fund and World Bank to consider whether the Kyrgyz Republic could still qualify for debt relief under the MDRI. Under the existing guidelines, the country exceeds the per capita income threshold of $380 for income-based MDRI from the Fund. The Bank does not provide income-based MDRI relief, but both institutions would grant MDRI relief to highly indebted poor countries that reach the completion point under the HIPC Initiative. However, recently released 2006 data suggest that the Kyrgyz Republic would be highly unlikely to meet the HIPC eligibility thresholds at this point because of amortization payments and gains in government revenue that have significantly reduced the ratio of net present value of debt to government revenue.