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 Executive Board of the International Monetary Fund (IMF) today completed the fifth review of the Kyrgyz Republic’s economic performance under the three-year Poverty Reduction and Growth Facility (PRGF) arrangement. The completion of this review allows the release of an amount equivalent to SDR 1.27 million (about US$2 million). This brings total disbursements under the arrangement to SDR 7.61 million (about US$12.1 million).
The Executive Board also approved the authorities’ request to extend the PRGF arrangement until May 31, 2008 to allow for the completion of the sixth and last review. The PRGF arrangement was approved on February 23, 2005 (see Press Release No. 05/40) for an amount equivalent to SDR 8.88 million (about US$14.1 million).
Following the Executive Board discussion of the Kyrgyz Republic’s economic performance, Mr. Murilo Portugal, Deputy Managing Director and Acting Chair, said:
“The Kyrgyz economy is growing rapidly and the authorities have maintained firm macroeconomic policies, comfortably meeting the end-June 2007 quantitative targets under the PRGF-supported program. Their economic program for the remainder of 2007 and 2008 aims at limiting the inflationary impact of the recent external shock from higher food prices, while sustaining economic growth to improve living standards.
“Continuation of tight monetary policy is essential to contain the second round effects of higher international food prices. The monetary authorities are committed to restrain unsterilized intervention in the foreign exchange market, continue to enhance indirect instruments of monetary control, and raise policy interest rates further if needed. Progress in modernizing the financial sector and enhancing supervision has been encouraging. It is important to further strengthen financial sector supervision and increase the central bank’s autonomy to enhance policy effectiveness.
“Fiscal prudence needs to remain the linchpin of macro-economic stability and debt sustainability, and will require efforts to contain the upward drift in current spending observed recently. This will involve refraining from further across the board wage increases, moving forward with broad civil service reform, and designing a comprehensive pension reform that puts the pension system on a sound financial footing. Prompt passage of the new tax code would facilitate further improvements in tax administration.
“Following the authorities’ decision earlier this year not to pursue debt relief under the HIPC Initiative, encouraging progress has been made in improving the Kyrgyz Republic’s external debt situation, reflecting strong growth, prudent debt management, and continued fiscal consolidation. Adherence to the program commitment not to contract or guarantee nonconcessional external debt and early adoption of the medium-term debt management strategy will allow further consolidation of this progress.
“Prospects for a more cooperative relationship between the government and the new parliament set the stage for progress on the broader structural reform agenda, including critical measures to reform the energy sector and improve the business environment,” Mr. Portugal said.