Statement by the IMF Staff Representative on the Kyrgyz Republic

The Kyrgyz Republic is recovering from a deep political crisis. Agriculture, tourism, mining, and textile production will be important drivers of growth. Strong export-oriented growth and fiscal consolidation will help to reduce the current account deficit in the medium term. Executive Directors endorsed the authorities’ structural reform agenda, emphasizing that steadfast implementation is critical to the success of the economic program; developments in the banking sector have exposed shortcomings in the bank resolution framework and the central bank’s de facto lack of supervisory independence.

Abstract

The Kyrgyz Republic is recovering from a deep political crisis. Agriculture, tourism, mining, and textile production will be important drivers of growth. Strong export-oriented growth and fiscal consolidation will help to reduce the current account deficit in the medium term. Executive Directors endorsed the authorities’ structural reform agenda, emphasizing that steadfast implementation is critical to the success of the economic program; developments in the banking sector have exposed shortcomings in the bank resolution framework and the central bank’s de facto lack of supervisory independence.

1. This statement briefly summarizes recent developments since the issuance of the Staff Report for the 2011 Article IV Consultation and Request for a Three-Year Arrangement Under the Extended Credit Facility (www.imf.org). In the staff’s view, none of these developments warrant any change in the Staff Appraisal.

2. All three prior actions have been observed. The National Bank of the Kyrgyz Republic (NBKR) Board adopted a resolution announcing the liquidation of the Special Bank Refinancing Fund on June 10, 2011. The authorities/NBKR have selected big-four companies to conduct a forensic audit of the Kyrgyz Republic Development Fund (PWC) and a financial audit of Zalkar bank (KPMG).

3. Consumer prices fell in May for the first time in more than a year. Month-on-month deflation in May was 0.3 percent and was broad based, with the 12-month rates of both core and headline inflation declining (headline inflation declined to 22.1 percent). These developments were expected and suggest that the end-year inflation objective is attainable. However, the NBKR will need to remain vigilant to ensure that reserve money targets are met, especially in the face of a recent rebound in foreign exchange inflows.

4. The president nominated the current NBKR deputy chairperson for the position of NBKR chairperson. The parliamentary hearing on the nomination is currently scheduled for June 16. Any further delays could exacerbate uncertainties surrounding NBKR management, thereby hindering the NBKR’s ability to take resolute actions on the problem banks.

5. The authorities have continued to press for more concessional terms on planned borrowing from China for large energy infrastructure projects. The latest information from the Ministry of Finance indicates that the lender has agreed to extend the grace period on these loans, which will raise the grant element to above the 35 percent threshold.

6. Recently released official data confirm an increase in poverty in 2010. Following the economic contraction in the aftermath of the 2010 events and an increase in inflation, aggregate poverty increased from 31.7 percent to 33.7 percent and extreme poverty increased from 3 percent to 5.3 percent in 2010 compared to 2009.

Kyrgyz Republic: 2011 Article IV Consultation and Request for a Three-Year Arrangement Under the Extended Credit Facility: Staff Report; Supplement; Staff Statement; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for the Kyrgyz Republic.
Author: International Monetary Fund