The staff report for the Fifth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility on the Kyrgyz Republic highlights recent economic developments and performance. The current account deficit continued to widen on account of higher imports driven by strong demand, but was more than financed by private capital inflows. Policy discussions focused on the challenges posed by the sharp uptick in inflation in the context of exogenous shocks and global financial turbulence. Continued fiscal restraint is important both for reducing inflation and for enhancing debt sustainability.

Abstract

The staff report for the Fifth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility on the Kyrgyz Republic highlights recent economic developments and performance. The current account deficit continued to widen on account of higher imports driven by strong demand, but was more than financed by private capital inflows. Policy discussions focused on the challenges posed by the sharp uptick in inflation in the context of exogenous shocks and global financial turbulence. Continued fiscal restraint is important both for reducing inflation and for enhancing debt sustainability.

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. In advance of parliamentary elections scheduled for December 16, and in line with the new constitution, the prime minister and government formally resigned in late October and were reappointed on an interim basis. President Bakiev is seeking a mandate in the elections for his new party, which would likely lead to a more cooperative relationship between government and parliament.

2. Output and prices. The economy continues to rebound, with year-on-year GDP growth of 8½ percent in the period January-October, driven by the construction, manufacturing and services sectors. However, 12-month consumer price inflation rose further to 23 percent in October. Soaring food prices continue to be the main factor, with nonfood inflation still relatively low at 6½ percent. Weekly data for November suggest that price pressures may now have begun to ease, helped by the National Bank’s marked tightening of monetary policy and the sharp appreciation of the exchange rate during September and early October. It is now clear that, as a result of the external shock from food prices, inflation will end the year well above the authorities’ target of 9 percent, but staff considers that the policies now being implemented and described in the staff report—aimed at containing the second-round effects—remain appropriate and should result in a substantial reduction in inflation over the next few months.

3. Exchange rate. Since end-August, the exchange rate has appreciated by nearly 9 percent against the dollar. In recent weeks, the authorities have limited intervention to smoothing sharp fluctuations in the exchange rate, and the rate has been relatively stable as foreign exchange inflows appear to have slowed. International reserves remained at over $1 billion at end-October, almost unchanged from their end-September level.

4. Banking Sector. Banking sector loans and deposits have stabilized in the past two weeks at 3-4 percent below their end-September peak levels, with deposits and loans of Kazakh-owned banks down 6-8 percent. While spillovers from the credit crunch in Kazakhstan appear to be contained so far, the central bank remains concerned and is monitoring the situation carefully.

5. Fiscal issues. Strong fiscal performance continued in the 3rd quarter of 2007. Preliminary data for the first three-quarters indicate a fiscal surplus of over 2¼ percent of GDP on an annualized basis, compared with a full year programmed deficit of 3 percent. This over performance is due to continued buoyancy in revenues and under execution of expenditures. The authorities have allocated some additional resources to finance the constitutional referendum and parliamentary elections during the 4th quarter, but substantial fiscal over performance for the year as a whole is still likely. The 2008 budget will be delayed by the parliamentary elections and will not be approved until late December, at the earliest.

Kyrgyz Republic: Fifth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility: Staff Report; Staff Supplement; Staff Statement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Kyrgyz Republic
Author: International Monetary Fund