Kyrgyz Republic: Fourth and Fifth Reviews Under the Three-Year Arrangement Under the Extended Credit Facility, and Request for Modification of Performance Criteria
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International Monetary Fund. Middle East and Central Asia Dept.
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Publication Date:
22 Feb 2018
eISBN:
9781484342954
Language:
English
Keywords:
ISCR; CR; Kyrgyz authorities; debt; government; deficit; headline inflation; state government; government decision; equity position; Credit; Monetary base
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Fourth and Fifth Reviews under the Three-Year Arrangements under the Extended Credit Facility, and Request for Modification of Performance Criteria-Press Release; Staff Report

Abstract

Fourth and Fifth Reviews under the Three-Year Arrangements under the Extended Credit Facility, and Request for Modification of Performance Criteria-Press Release; Staff Report

Recent Developments and Program Performance

1. The improving regional environment is boosting economic activity, although the border tension with Kazakhstan slowed trade and dampened activity in late 2017. The economies of the main trading partners, Kazakhstan and Russia, are gradually recovering. The first nine months of 2017 saw strong growth of 5 percent (y/y) as front-loaded gold production increased from a low base, and the industry, trade, and construction sectors performed well. Non-gold GDP grew by 3.6 percent (y/y), supported by surging remittances and growing exports, which benefited from the regional recovery. However, the border tension with Kazakhstan, if not resolved soon, could have a significant economic impact (Annex I).

2. Inflation is normalizing from the low level in 2016. Headline inflation reached over 4 percent (y/y) in June before a mild som appreciation pushed it down in the summer. At end-October, headline inflation at 3.6 percent was still below the 5–7 percent target range of the National Bank of the Kyrgyz Republic (NBKR). Core inflation, however, has been steadily declining for the past one and half years, reflecting the lagged effect of the som appreciation in 2016.

3. Reserve money continues to expand rapidly, but so far pressure on inflation and the exchange rate remains subdued. The growth of reserve money, outpacing broad money, is largely accounted for by government spending, NBKR’s FX, and gold-related transactions. The NBKR has maintained its policy rate at 5 percent since end-2016. The som was relatively stable until early November, when pressures emerged due to the uncertainty surrounding the border tension. Since then, the NBKR has sold close to $30 million, compared to $5 million during the first 10 months of the year.

A01ufig1

Foreign Exchange Market, 2014–17

Citation: IMF Staff Country Reports 2018, 053; 10.5089/9781484342954.002.A001

Sources: NBKR and IMF staff estimates.

4. Banking activity is picking up, but vulnerabilities remain. Credit grew 15.2 percent in September (y/y), helping reduce the nonperforming loan (NPL) ratio to 8.1 percent.1 Capital adequacy stood at 23.8 percent, almost twice as high as the minimum regulatory requirement (12 percent). All but one bank met the new capital requirement of som 500 million effective July 1. In September, loan and deposit dollarization were each 4 percentage points below the end-2016 level. Profitability remains low, with return on assets at 1.1 percent in September. The narrowing of correspondent banking relationships (CBRs), after the withdrawal of U.S. banks, continues to weigh on banks’ activities.

5. The fiscal deficit in 2017H1 was below the program level, reflecting one-off revenues. The fiscal deficit was 0.9 percent of GDP, compared to the programmed 3.6 percent of GDP. Revenues exceeded projections by 1.5 percent of GDP, mainly due to overperformance in nontax revenue reflecting higher-than-expected proceeds from telecom court litigations. An unscheduled grant from Russia ($30 million, or 0.4 percent of GDP) in April also helped boost revenues. Both current and capital expenditures were in line with program projections.

A01ufig2

Tax Revenue Performance

(In y-o-y percent change)

Citation: IMF Staff Country Reports 2018, 053; 10.5089/9781484342954.002.A001

Sources: Kyrgyz authorities and IMF staff estimates.

6. Since then, spending initiatives ahead of the October presidential elections put the program’s fiscal targets in jeopardy. The authorities announced a number of permanent (increases in wages and allowances) and one-off measures (infrastructure and disaster relief efforts) that, unless canceled or offset by other measures, would undermine medium-term fiscal sustainability (LOI, ¶8-9).

7. Following rapid increases in previous years, total external debt declined from 57 percent of GDP in 2016 to 54 percent in July. The sharp decline primarily reflects (i) the som appreciation; (ii) the rephrasing of public investment projects; and (iii) the write-off of Russian debt ($240 million).2

8. The external position improved in 2017H1, driven by buoyant gold exports and the improving regional environment. The current account deficit narrowed, mostly on the back of surging exports and remittances. Growth of exports (31 percent) far exceeded that of imports (8 percent). Remittances grew by 31 percent, driven by a recovery in Russia and better access of the Kyrgyz labor force to the Russian market following the accession to the Eurasian Economic Union (EEU). The real effective exchange rate appreciated, reflecting the nominal appreciation of the som vis-à-vis the U.S. dollar, ruble, and tenge.

9. Performance under the program was mixed.

  • All end-December 2016 and end-June 2017 quantitative performance criteria, and all but three indicative targets (ITs) have been met. The December 2016 IT on tax revenue was missed due to the underperformance in tax collection, especially from the State Tax Services (STS). The continuous IT on introducing new or renewal of existing tax exemptions was also missed as VAT and profit tax exemptions for private schools and a personal income tax exemption for financial police staff were granted (totaling less than 0.1 percent of GDP). To show their commitment to refrain from further exemptions, the authorities agreed to convert this IT into a QPC. The June 2017 IT on reserve money was also missed due to rapid growth of cash outside banks.

  • One structural benchmark (SB) is not being assessed and six SBs out of thirteen were missed. The end-July 2017 SB on submission of amendments to the Banking Law to Parliament is not being assessed for program purposes.3 The SB on a comprehensive register of all employees of the general government was finalized in April with a one-month delay. The remaining five non-met SBs were proposed to be postponed or modified at the time of the forth review in June. These are (i) the liquidation of banks under Debt Enterprise Bank Resolution Agency (DEBRA), which could not be completed due to protracted litigation and needed to be reset to later dates;4 (ii) the signing of the terms of reference for the Financial Management Information System (FMIS) project did not materialize, as the foreign partner retracted from the project; and as a result, (iii) the signing of the contract with the IT provider (end-September SB) was also missed; (iv) the identification of quantitative measures to reduce the wage bill (end-May SB) was completed with a one-month delay; and (v) the deadline for the SB on introducing a standardized framework for project monitoring of physical and financial performance for all projects exceeding som 50 million was proposed to be postponed to December 2017, to be in line with the new SB on developing the formal appraisal of all major projects.

10. Following the October presidential elections, Mr. Sooronbai Jeenbekov became the fifth president of the Kyrgyz Republic. The newly elected President, was Prime Minister under President Atambayev and belongs to the ruling party, SDPK.

11. The fourth review under the ECF arrangement was not completed on time, but recently taken corrective measures have cleared the way for completing the fourth and fifth reviews. In June, the government did not roll back the VAT exemption on flour (prior action). Subsequently, new spending initiatives put the fiscal targets in jeopardy. In addition, the NBKR was planning to take an equity position in a new bank, which would create a conflict of interest, compromise central bank integrity as an impartial regulator, and detract from its key objective of ensuring macroeconomic stability. Since then, the authorities have committed to undertaking corrective measures, paving the way for completing the fourth and fifth reviews.

Outlook and Risks

10. Near-term prospects are improving as the economies of the main trading partners are recovering, but resuming fiscal consolidation and reforms is crucial for sustainable medium-term growth. Non-gold growth is expected to slow to 3.3 percent this year mainly due to the tightening of controls at the Kazak border, but should rise gradually over the medium term as external demand picks up. However, growth will remain below historical norms barring major structural reforms, especially with respect to improving the business environment and promoting female labor force participation. Inflation is forecasted to be moderate this year and should stabilize at around 5 percent over the medium term. The fiscal deficit should drop to around 2 percent of GDP over the medium term, provided the authorities resume consolidation efforts as envisaged under the program. The current account deficit should narrow over the medium term, if two-way exchange rate flexibility and fiscal discipline are maintained.

11. The risks remain mostly tilted to the downside. A slowdown in China or economic setbacks in Russia or Kazakhstan could dampen external demand, remittances, and foreign-financed investment, and reduce the positive effects of EEU accession. The tension with Kazakhstan, if not resolved soon, could have significant adverse effects on the Kyrgyz economy and undermine EEU integration efforts. The narrowing of correspondent banking channels could further isolate the banking sector from the rest of the world and push economic activities into the informal sector. A loosening of fiscal discipline would put debt sustainability and price stability at risk. Backsliding on reforms could undermine fiscal sustainability and economic stability. The potential strengthening of the dollar would increase debt and banking sector vulnerabilities, which could weigh on credit and economic activity. Upside risks include higher growth in Russia, stronger economic relations with Uzbekistan (Annex II), and increased trade, investment, and financing from China.

12. The authorities broadly agreed with staff views on the outlook and risks. They agreed on the risks to the economy from their key trading partners. They expressed concerns about the potential consequences on the banking sector from the withdrawal of CBRs (LOI, ¶20).

Program Issues

A. Fiscal Consolidation Remains Essential

13. The consolidation initiated in 2016 was undermined by significant spending in the runup to the October presidential elections. One-off expenditures, with a total cost of 3.7 percent of GDP in 2017, were undertaken. These included (i) road building; (ii) housing for law enforcement; and (iii) disaster and humanitarian relief for the April landslide in the south. Furthermore, the recent tightening of border controls with Kazakhstan is expected to result in 0.2 percentage point in forgone revenues.

14. Despite these slippages, the authorities are committed to a 2017 deficit target of 3.5 percent of GDP. The initial deficit commitment for this year was 3 percent of GDP, but the authorities requested, and staff agreed, to relax it to accommodate the rehabilitation efforts following the April landslide in the south and the impact of the tightening of border controls with Kazakhstan. To meet this target, the authorities (i) have identified one-off revenues (unbudgeted dividends and litigation receipts); (ii) will cut some non-priority expenditures and domestically-financed investments; and (iii) will save the unscheduled September grant received from Russia (0.4 percent of GDP). While the 2017 supplementary budget features a deficit of 4.3 percent of GDP, the authorities are committed to cut spending on non-priority goods and services to meet the end-year target.

Budget Deviations and Compensatory Measures

(In percent of GDP)

article image
Sources: Kyrgyz authorities and IMF staff estimate.

15. Pre-election fiscal initiatives also included permanent measures, which could jeopardize debt sustainability, if not reversed. These initiatives, with a total annual cost of about 2 percent of GDP, include (i) the adoption of a universal child allowance; (ii) ad-hoc measures to increase pensions and wages for certain categories of public sector employees; (iii) the continuation of the VAT exemption on wheat and flour; and (iv) various tax exemptions and subsidies for private schools, export producers, and capital investment in remote areas. Unless reversed or offset with other measures, these initiatives would threaten debt sustainability.

16. Cognizant of this risk, the authorities agreed to reduce the 2018 deficit to sustainable levels. The government had submitted in early October to Parliament a draft budget featuring a deficit of 3.8 percent of GDP compared to a commitment of 1.6 percent of GDP at the time of the third review. The authorities noted that the permanent measures adopted this year could not be reversed given a weaker than expected domestic economic environment and that these measures were initiated by Parliament. Staff pointed out that these measures, unless reversed or offset, could result in a deficit as high as 4.5 percent of GDP, which would have serious consequences on medium-term debt sustainability. In the end, the authorities and staff agreed to relax the 2018 deficit to 2.5 percent of GDP (LOI, ¶9). Notwithstanding this relaxation, the cyclically-adjusted balance would still improve by 2.1 percentage points.

17. To meet the 2018 deficit target, staff underscored the importance of refraining from implementing any of the permanent measures unless offsetting permanent deficit reducing measures have been identified. In this context, the authorities and staff agreed on the following:

  1. Revenues: (i) amending the tax code to revoke the VAT exemption on wheat and flour effective January 1, 2018 (prior action); (ii) submitting to Parliament proposals on tax policy (LOI, Table 3), including eliminating exemptions, raising excise taxes, and expanding the tax base, totaling 0.4 percent of GDP (SB, January 2018); (iii) preparing an analysis of the 20 largest exemptions in terms of revenue impact on the budget, including concrete measures to streamline them (SB, February 2018); (iv) refraining from introducing new exemptions or renewing expiring one (continuous QPC); and (v) increasing non tax revenue, including increasing the share of NBKR profits to the government from 70 to 90 percent (LOI, Table 3).

  2. Wage bill: reducing the wage bill to 9 percent of GDP in 2018 by (i) conducting a headcount analysis prior to adopting the relevant government decision or resolution to cut the ceiling for state and local administrative staff and subordinated institutions by 10 percent to be implemented by September 2018 (SB, March 2018) (LOI, ¶9); (ii) containing support staff; (iii) eliminating redundant or ineffective state entities; (iv) saving rather than distributing as bonus unused wage allocations; (v) limiting wages, bonuses, and allowances’ growth to inflation; and (vi) refraining from ad-hoc salary increases.

  3. Goods and services: containing spending on goods and services by (i) implementing e- procurement; (ii) tightening the financing of local budgets by recovering unused funds to the government; and (iii) refraining from quasi-fiscal activities that may have budgetary implications.

  4. Transfers: introducing some elements of targeting to the recently adopted universal child allowance law, which is costly and biased against the poor, by submitting to Parliament amendments to the law (SB, May 2018).

  5. Subsidies: adopting a new medium-term tariff strategy to restore the financial sustainability of the energy sector by adjusting the prices for all energy users starting in 2018 (SB, March 2018) (LOI ¶9).

  6. Tax administration: (i) improving tax collection efficiency by introducing an electronic system for trade transactions (e-invoicing, e-labelling, e-patents, and online cash registers); (ii) continuing simplification of tax payment and e-reporting; and (iii) installing service centers to track imported EEU goods to improve indirect tax administration.

  7. Given that some of the above measures—about 0.3 percent of GDP—require Parliamentary approval, the authorities agreed to cut non-priority goods and services and domestically financed capital expenditures to meet the deficit target, if needed.

Table 1.

Kyrgyz Republic: Selected Economic Indicators, 2015–22

article image
Sources: Kyrgyz authorities and IMF staff estimates and projections.

Includes general government and onlending to state owned enetrprises

General government comprises State Government and Social Fund finances. State government comprises central and local governments.

Calculated at end-period exchange rates.

Excluding direct lending of the Russia-Kyrgyz Development Fund for 2016.

Twelve-month GDP over end-period broad money.

The US$263 million of reserve assets in nonconvertible currencies were reclassified to other assets at the end-2015 upon the recommendation of the Safeguards Assessment.

Table 2.

Kyrgyz Republic: Balance of Payments, 2015–22

(In millions of U.S. dollars)

article image
Sources: Kyrgyz authorities and IMF staff estimates and projections.

Includes IMF and identified budget support.

Includes return of RKDF investments abroad.

The US$263 million of reserve assets in non-convertible currencies were reclassified to other assets at the end-2015 upon the recommendation of the Safeguards Assessment.

Projected IMF financing.

Public and publicly-guaranteed debt.

Net of rescheduling.

Valued at end-period exchange rates. The discrepancy between the difference in year-end stocks and the change in reserves under financing is caused by movements in prices and exchange rates.

Table 3.

Kyrgyz Republic: NBKR Accounts, 2015–18

article image
Sources: Kyrgyz authorities and IMF staff estimates and projections.

The US$263 million of reserve assets in nonconvertible currencies were reclassified to other assets at the end-2015 upon the recommendation of the Safeguards Assessment.

Contribution is defined as change of asset stock relative to previous end-year reserve money stock (in percent).

B. Preserving Debt Sustainability

18. While debt sustainability has improved, it remains vulnerable to external and domestic shocks. Compared to the third review, debt-to-GDP ratio is now lower as a result of the Russian debt write-off and the som appreciation (Figure 4). External public and publicly guaranteed (PPG) debt is expected to level off at around 56 percent in 2019 and then gradually decline toward 50 percent in the medium term provided appropriate policies are implemented. Overall, debt remains at a moderate risk of debt distress, as vulnerabilities continue to persist, especially regarding the depreciation of the som and/or a deterioration in the fiscal balance, including from scaling-up of public investments. The adoption of a new fiscal rule in early 2018 anchored around a fiscal deficit ceiling of 3 percent of GDP and a debt ceiling of 60–65 percent of GDP will ensure fiscal sustainability. 5

Figure 1.
Figure 1.

Kyrgyz Republic: Macroeconomic Indicators—Regional Comparators

Citation: IMF Staff Country Reports 2018, 053; 10.5089/9781484342954.002.A001

Sources: Kyrgyz authorities and IMF staff estimate.
Figure 2.
Figure 2.

Kyrgyz Republic: Growth and Inflation

Citation: IMF Staff Country Reports 2018, 053; 10.5089/9781484342954.002.A001

Sources: Kyrgyz authorities and IMF staff estimate.
Figure 3.
Figure 3.

Kyrgyz Republic: Monetary and Financial Sector Development

Citation: IMF Staff Country Reports 2018, 053; 10.5089/9781484342954.002.A001

Sources: NBKR and staff estimates.
Figure 4.
Figure 4.

Kyrgyz Republic: Contribution to the Revision of External Debt

Citation: IMF Staff Country Reports 2018, 053; 10.5089/9781484342954.002.A001

Sources: Kyrgyz authorities and IMF staff estimate.

19. The authorities agreed with staff’s assessment and reiterated their commitment to preserve debt sustainability through both fiscal consolidation and the implementation of structural reforms. To that effect, they will (i) pursue fiscal consolidation efforts over the medium term; (ii) refrain from non-concessional borrowing; (iii) improve debt monitoring; (iv) minimize fiscal risks stemming from state-owned enterprises (SOEs) by enhancing coordination between the Ministry of Finance (MoF) and the State Property Fund; and (v) enhance the efficiency of public sector investments by implementing the public investment management assessment (PIMA) recommendations. As part of the latter, they plan to introduce a standardized framework (SB, December 2017) and develop a framework for the formal appraisal for all externally and domestically financed projects (exceeding som 50 million) prior to selection, with the nature of the appraisal tailored to the size of the project and sector (SB, December 2017).

C. Finetuning Monetary and Exchange Rate Policies

20. With inflation below the NBKR’s target, staff agreed that the current monetary policy stance was prudent. However, considering the recent pickup in reserve money and inflation, the NBKR should closely monitor developments and stand ready to finetune its monetary policy accordingly. Staff also underscored the importance of maintaining the policy rate positive in real terms. The NBKR reiterated its key objective of maintaining price stability (LOI, ¶13) and that it will continue to contain inflation within the 5–7 percent range.

21. Efforts are needed to improve the monetary transmission mechanism (LOI, ¶14). Staff emphasized the importance of strengthening the effectiveness of the policy rate by (i) withdrawing the excess liquidity to a level that provides sufficient incentive for interbank trading; (ii) gradually narrowing the corridor around the policy rate and making it more symmetric; and (iii) developing the domestic securities market and establishing a benchmark yield curve jointly with the MoF. The NBKR pointed out that it continues to improve its modeling capacity and communication strategy, and expressed interest in Fund technical assistance (TA), including assistance in developing monetary instruments based on Islamic principle.

22. Exchange rate flexibility is key to reducing external imbalances, preserving competitiveness, and safeguarding international reserves. The authorities and staff agreed on the need to maintain two-way exchange rate flexibility and limit interventions solely to smoothing excessive fluctuations (LOI, ¶15). Reserves, currently at 3.8 months of imports and expected to be slightly lower in 2018 as imports recover, are above levels based on metrics for flexible exchange rate regimes and credit-constrained economies. Given the high level of financial dollarization and the economy’s vulnerability to external shocks, staff stressed the importance of building up reserves to around four months of imports in the medium term. Staff also encouraged the NBKR to introduce new monetary instruments to balance the effect of its FX interventions on the money supply, and develop hedging instruments to address exchange rate risks. The NBKR agreed, but thought that more time was needed to introduce these instruments (LOI, ¶14).

23. The external position is assessed as moderately weak, with the som slightly overvalued vis-à-vis fundamentals. While the sudden depreciation of the som at end-2015 lowered the exchange rate misalignment temporarily, the som appreciation vis-à-vis main trading partners’ currencies since 2016—partially fueled by the strong recovery in remittances—resulted in a moderately overvalued real effective exchange rate. In the medium term, the gradual recovery of regional demand should help improve the external position. The authorities and staff agreed that continued fiscal consolidation and exchange rate flexibility will be critical to achieve this goal.

D. Safeguarding the Financial Sector

24. Conditions in banks are gradually improving, but the sector continues to face challenges. The narrowing of correspondent banking channels has made it increasingly difficult for local banks to carry out dollar-denominated transactions (LOI, ¶20). Staff indicated that the Fund can help raise awareness and foster coordinated actions at the multinational level, but stressed that it is also incumbent on the authorities to strengthen the domestic legal framework and enhance implementation capacity. In this context, the timely enactment of the AML/CFT Law in line with international standards would be crucial. Staff also encouraged the NBKR to closely monitor the double-digit credit growth, in particular risks of overheating and the trend of the NPLs. While noting staff’s cautious stance, the NBKR clarified that recent credit growth reflects recovering demand, relatively loose liquidity conditions, and initiatives that provide preferential lending in som (LOI, ¶13).6

25. To be able to adequately address these challenges, the NBKR continues its reform efforts to strengthen its supervisory framework (LOI, ¶16). Transition to risk-based supervision (RBS) is underway, and a new group of bank supervisors is being established. Inspection is expected to be expanded to three more banks by end-2017. Moreover, changes to the organizational structure of the NBKR, to better adapt to the requirement of RBS, is under consideration. The NBKR is making recommendations to prepare commercial banks for the new international reporting standard (IFRS9), supported by Fund TA. As a step to operationalize the crisis preparedness framework, the list of systemically important banks and their recapitalization procedures are expected to be soon approved by the NBKR board. The NBKR continues to finetune its stress test methodology and publishes the results regularly in its financial stability report.

26. Staff emphasized the importance of maintaining a level playing field among market players. Staff and the NBKR concurred that given its significant size, the RKDF should be carefully monitored. Staff urged the NBKR to take all necessary measures to enforce the minimum capital requirement of som 500 million to all banks without exception (LOI, ¶17). In line with international best practice and to avoid a conflict of interest, the NBKR agreed to refrain from assuming an equity position in a commercial bank or any other entity involved in lending or investment activities (LOI, ¶17).

27. The authorities reiterated their commitment to amend the Banking Law. Previously prepared amendments were rejected by the Ministry of Justice on constitutionality grounds with respect to provisions in the proposed amendments regarding the limitation of judicial review. It was agreed to drop these provisions and other provisions in the proposed amendments relating to the NBKR’s powers in the resolution and liquidation process, which are already addressed in the current law. The authorities committed to resubmit to Parliament by early December the remaining amendments (prior action) pertaining to (i) governance and oversight, particularly to introduce majority of non-executive membership in the board of the NBKR; and (ii) lending to non-supervised institutions. The NBKR also agreed to exert every effort to have these amendments enacted by March (SB, March 2018), while noting that it has no control over Parliament’s decision.

28. Other financial reforms are experiencing delays. Protracted litigation and ongoing asset freezes continue to prevent the three remaining banks under DEBRA’s management from being liquidated. Hence, new deadlines have been agreed to submit to the court the liquidation request for “AUB” bank by February 2018 (SB, LOI, ¶18), and for “Manas” and “Issyk-Kul” banks by May 2018 (SB, LOI, ¶18). The draft AML/CFT Law was recently withdrawn from Parliament as the responsible review committee issued a negative opinion, arguing that measures in the draft law would raise costs to businesses and weaken the business climate. The State Financial Intelligence Services now plans to resubmit the draft AML/CFT Law in March (SB, LOI, ¶19), after revising it to address Parliament’s comments. Staff emphasized that diluting the essence of this critical law would have a negative impact on the country’s compliance with the Financial Action Task Force (FATF) standard and on efforts to address pressures on CBRs. The adopted law should take into account the findings of the recent AML/CFT assessment and appropriately cover preventive measures related to politically-exposed persons, regulation and supervision of designated non-financial institutions, and transparency of legal persons.

E. Structural Reforms

29. While Public Financial Management (PFM) reforms have been progressing slowly, they are essential to promote efficiency in the public sector, fight corruption, and enhance governance.7 Taza Koom, the authorities’ national strategy for sustainable development, promotes the transition to a digital economy, which should support PFM reforms (Annex III). A significant portion of additional spending carried out in 2017 was based on a loose interpretation of the Budget Code and articles in the 2017 Budget Law, allowing extra-budgetary spending simply by obtaining the consent of the budget committee in Parliament. The law also allowed the government to shift resources between budget chapters at will. To address this, the authorities agreed to amend the 2018 Budget Law to remove these articles (prior action). The authorities also agreed to amend the Budget Code to include a fiscal rule to provide an anchor to their fiscal policy and to clarify the rules for intra-year additional spending and the allocation of resources within the budget envelope (SB, March 2018). With the withdrawal of the foreign financing from the FMIS project, the authorities are experiencing a serious delay in setting up an information system. However, they remain committed to completing the FMIS project with their own resources and to the preparation of the terms of reference for the FMIS, including the human resources module (LOI, ¶11). In addition, to enhance the efficiency of public sector asset management, the authorities carried out a stocktaking exercise of SOEs and joint stock companies (JSCs), and streamlined them from over 200 SOEs in 2016 to 105 currently. The authorities plan to draw a roadmap to improve management of the remaining SOEs and JSCs.

30. The decentralized budget process complicates consolidation efforts. Budget responsibilities are divided among several actors. The Ministry of Economy (MoE) is responsible for the tax policy and PIP selection, the MoF for the budget execution and current spending, and the Prime Minister for tax collection (through the STS, State Customs Service, and the social fund). More coordination is needed to increase the efficiency and consistency of the budget process. Whereas staff would have preferred that the tax policy unit be integrated within the MoF as was the case previously, the authorities argued that having this unit in the MoE makes it better attuned to the needs of the business community. The authorities agreed to analyze the institutional responsibilities for tax policy design and implementation toward increasing coherence and accountability (LOI, ¶11).

31. The benefits from the Procurement Law should be safeguarded. Amendments to the Procurement Law have been proposed, which could significantly weaken the law that was adopted in April 2015 in line with international best practices. The authorities ensured their intention to safeguard the benefits of the new law, by introducing changes to these amendments, currently under consideration in Parliament (prior action) (LOI, ¶11).

32. The authorities continue their efforts to reduce poverty. Progress has been made towards implementing the measures envisaged under the 2013–17 poverty reduction strategy (Annex IV). Over the longer term, reversing the widening gender gap in labor force participation could help boost growth and reduce poverty (Annex V). Staff encouraged the authorities to consider the gender aspect when designing tax and social policies. Staff also emphasized the importance of avoiding measures that could give disincentives to women to participate in the labor market, such as the recently adopted universal child allowance. Enhancing the business environment remains critical to promote private sector-led growth. Further efforts need to be carried on to improve governance and fight corruption.8

A01ufig3

Ease of Doing Business 2018

(Current ranking and change in distance to frontier)

Citation: IMF Staff Country Reports 2018, 053; 10.5089/9781484342954.002.A001

Source: World Bank 2018 Doing Business Report.

F. Program Modalities

33. Program design and modification of performance criteria (LOI, Table 1). Modifications of QPCs for December 2017 are proposed for the floor on NIR, ceiling on NDA, the ceiling on cumulative overall deficit of the general government, and the present value of new external debt contracted or guaranteed. The ceiling for new or renewal of existing tax exemptions is proposed to be converted from an IT to a QPC. The debt issued by the RKDF is proposed to be excluded from debt conditionality as the RKDF was not assessed as an external creditor for program purposes. Revisions for December 2017 and new March 2018 ITs are also proposed on the ceiling on reserve money and the cumulative state government tax collections. The proposed changes reflect the updated macroeconomic outlook.

34. The program will continue to be monitored on a semi-annual basis. The sixth review will be based on continuous and end- December 2017 QPCs and ITs. Structural conditionality (LOI, Table 2) will focus on macro-critical areas, especially on rationalizing expenditures, pursuing PFM reforms, and ensuring financial sector stability.

35. Financing needs for 2017 and 2018 are covered. The IMF, along with multilateral and bilateral partners, is expected to cover the country’s financing gap for this year and 2018. Despite downside risks to the outlook, the Kyrgyz Republic’s capacity to repay the Fund is expected to remain adequate.

36. An updated safeguard assessment was completed in October 2015. The assessment concluded that legal amendments were needed to strengthen governance and autonomy of the central bank. The timely passage of the necessary amendments to the Banking Law will strengthen the independence of the NBKR.

Kyrgyz Republic: Balance of Payments Financing, 2017–18

article image
Sources: Kyrgyz authorities and IMF staff estimates and projections.

Staff Appraisal

37. The economic recovery, the improved regional environment, and the end of the political season provide an opportunity to correct recent slippages, rebuild buffers, and resume stalled reforms. As the economy enters its seventh consecutive quarter of recovery, growth is spreading to most sectors, buoyed by rising remittances, recovering external demand from key trading partners, and good weather. Recent tensions with Kazakhstan have dented growth, highlighting the need to prepare for future shocks by rebuilding fiscal buffers and strengthening the financial sector. Difficult structural reforms should be resumed to increase resilience and ensure sustainable and broad based growth.

38. In addition to filling the gaps left by pre-election spending, fiscal sustainability will hinge on resolving long standing weaknesses in revenue collections, the public sector wage bill, energy subsidies, and social transfers. Measures to fill the gaps should focus on identified areas to broaden the tax base, streamline exemptions, rationalize the public sector wage bill and energy subsidies and better target social transfer programs to assist the most vulnerable.

39. Favorable external dynamics offer an opportunity to strengthen the monetary and exchange rate policy framework. Increased remittances and gold exports have shored up the current account balance, foreign exchange reserves, and the national currency. Together with relatively low food and energy prices they have kept inflation in check despite the increase in economic activity. The recent increase in fuel prices and the tensions at the border with Kazakhstan are a reminder for the NBKR to remain vigilant and stand ready to adjust course. Two-way exchange rate flexibility, which proved helpful during the 2014–15 crisis, should be maintained and complemented by a more effective monetary policy with greater traction. The current benign environment offers an opportunity to develop and introduce new monetary instruments, and improve forecasting, communication, and coordination with other agencies.

40. As credit accelerates, it is essential to detect and address imbalances early, and ensure an open competitive environment for all market participants. Following an extended period of flat activity and dwindling margins, the banking sector is experiencing a credit boom. Despite good capitalization, NPLs remain a concern. The NBKR should continue the rollout of risk-based supervision and bolster the crisis preparedness framework working with other government agencies. In this context, amendments to the Banking Law should be enacted to strengthen the NBKR’s governance. Also, the NBKR should refrain from any activity which could detract from its ability to provide a favorable regulatory environment and a level playing field for all market participants.

41. Growth will fall short of expectations unless structural reforms are accelerated. The Kyrgyz Republic continues to lag compared to its peers in key business climate and competitiveness indicators. Persistent challenges in rule of law, enforcement of contracts, access to electricity, and paying taxes remain unresolved. The government’s ambitious medium-term agenda for broad and sustainable growth hinges on the resumption of structural reforms in public finance management, including (i) public investment management; (ii) product markets, particularly energy and infrastructure; and (iii) the labor market, particularly female participation.

42. A flagging reform momentum and ad-hoc fiscal initiatives combined with issues with key trading partners are the key risks to the program. Tensions on the border with Kazakhstan, if not resolved soon, could constitute a significant shock on both the supply (fuel, grain, construction materials) and demand sides (agricultural products, textiles, remittances). Internal risks stem from the faltering reform momentum and the possible continuation of populist policies. Continued dialogue with the Fund is essential for the success of the program, along with the commitment to adjust policies as needed to achieve the program’s objectives.

43. Staff supports completing the fourth and fifth reviews of the authorities’ program under the ECF arrangement. Staff also supports the authorities’ request for modification of end-December 2017 QPCs and ITs and for setting new end-March ITs.

Table 4.

Kyrgyz Republic: Monetary Survey, 2015–18

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Sources: Kyrgyz authorities and IMF staff estimates and projections.

One MFI got banking license in March 2015, and another in January 2016. It also includes RKDF’s lending via banks.

Contribution is defined as change of asset stock relative to previous end-year broad money stock (in percent).

Twelve-month GDP over end-period broad money.

Table 5.

Kyrgyz Republic: General Government Finances, 2015–18

(In millions of soms)

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Sources: Kyrgyz authorities and IMF staff estimates and projections.

Mineral fees have been classified under other revenue since the third review under the ECF. They were previously classified under taxes.

Including grants in-kind from EEU accession.

Table 6.

Kyrgyz Republic: General Government Finances, 2015–18

(In percent of GDP)

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Sources: Kyrgyz authorities and IMF staff estimates and projections.

Mineral fees have been classified under other revenue since the third review under the ECF. They were previously classified under taxes.

Including grants in-kind from EEU accession.

Table 7.

Kyrgyz Republic: Selected Financial Soundness Indicators, 2015–17

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Source: National Bank of the Kyrgyz Republic.

Without deposits of banks, nonbank financial-credit institutions, and deposits of the Government of the Kyrgyz Republic.

Table 8.

Kyrgyz Republic: Proposed Reviews and Disbursements Under the Three-Year Extended Credit Facility Arrangement

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Source: International Monetary Fund.
Table 9.

Kyrgyz Republic: Indicators of Capacity to Repay the Fund, 2016–22 1/

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Sources: IMF staff estimates and projections.

Assumes seven semi-annual disbursements under the ECF facility of 37.5 percent of quota (SDR 66.6 million) starting in April 2015. On October 3, 2016 the IMF Executive Board approved a modified interest rate setting mechanism which effectively sets interest rates to zero on ECF and SCF through December 31, 2018 and possibly longer. The Board also decided to extend zero interest rate on ESF till end 2018 while interest rate on RCF was set to zero in July 2015. Based on these decisions and current projections of SDR rate, the following interest rates are assumed beyond 2018: projected interest charges between 2019 and 2020 are based on 0/0/0/0.25 percent per annum for the ECF, SCF, RCF and ESF, respectively, and beyond 2020 0/0.25/0/0.25 percent per annum. The Executive Board will review the interest rates on concessional lending by end-2018 and every two years thereafter.

Total external public debt service includes IMF repurchases and repayments.

Table 10.

Kyrgyz Republic: Quantitative Performance Criteria and Indicative Targets Under the Extended Credit Facility, December 2016–March 2018

(In millions of soms; unless otherwise indicated; eop)

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Sources: Kyrgyz authorities and IMF staff estimates and projections.

As defined in the TMU.

Cumulative from beginning of the year.

Agreed during the April negotiations to switch the IT to a QPC.

External debt contracted or guaranteed with a grant element of less than 35 percent.

A VAT exemption on private schools and personal income tax exemption for the financial police were granted, respectively, in Q2 and Q4.

IT until becoming a QPC by the Executive Board during the fourth and fifth reviews board meeting.

Table 11.

Kyrgyz Republic: Prior Actions and Structural Benchmarks Under the Extended Credit Facility

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Source: IMF staff.

The action plan was completed with one-month delay as agreed during the April mission.

Given that the measure is unconstitutional due to the unconstitutionality of a provision requiring judicial review and nonsuspension of the NBKR’s decisions, this end-July 2017 structural benchmark is not being assessed for program purposes.

Proposed to remove from this benchmark, established previously as a December SB under the third review, two provisions regarding (a) judicial review and nonsuspension of the NBKR’s decisions which is unconstitutional, and (b) powers of the NBKR in the resolution process and liquidation process which is no longer necessary given provisions under the current Banking Law.

Table 12a.

Kyrgyz Republic: Actual Borrowing Program

(January 1–December 31, 2016)

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Sources: Kyrgyz authorities and IMF staff.
Table 12b.

Kyrgyz Republic: Type of New External Debt

(In millions of U.S. dollars, January 1–December 31, 2016)

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Sources: Kyrgyz authorities and IMF staff.
Table 13a.

Kyrgyz Republic: Actual Borrowing Program

(January 1–September 30, 2017)

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Sources: Kyrgyz authorities and IMF staff.
Table 13b.

Kyrgyz Republic: Type of New External Debt

(In millions of U.S. dollars, January 1–September 30, 2017)

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Sources: Kyrgyz authorities and IMF staff.
Table 14a.

Kyrgyz Republic: Projected External Borrowing Program

(January 1–December 31, 2017)

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Sources: Kyrgyz authorities and IMF staff.
Table 14b.

Kyrgyz Republic: Type of the New External Debt

(In millions of U.S. dollars, January 1–December 31, 2017)

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Sources: Kyrgyz authorities and IMF staff.
Table 15a.

Kyrgyz Republic: Projected External Borrowing Program

(January 1–June 30, 2018)

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Sources: Kyrgyz authorities and IMF staff.
Table 15b.

Kyrgyz Republic: Type of the New External Debt

(In millions of U.S. dollars, January 1–June 30, 2018)

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Sources: Kyrgyz authorities and IMF staff.

Annex I. Assessment of the Impact of Tightened Border Control with Kazakhstan

1. On October 10, Kazakhstan strengthened controls on the Kazakh-Kyrgyz border. Specifically, Kazakhstan intensified security, phytosanitary, veterinary, and customs checks of goods from the Kyrgyz Republic, claiming the need to properly track the goods entering the EEU through the Kyrgyz borders. The Kyrgyz Republic has referred the matter to the WTO and the EEU Commission, arguing violation of trade rules.

2. The tightening of border controls has predominantly affected exports via road. The tightening of border controls has not been applied uniformly, affecting road transport more than rail and air links, and affecting exports to Kazakhstan and via Kazakhstan to Russia and Europe more than imports. Staff estimates that the tightened controls will lower exports to these countries by 20 percent in 2017Q4 and 2018. As the shares of Kazakhstan, Russia, and Europe (excluding Switzerland as gold exports remain unaffected) in total exports are around 18, 16, and 5 percent, respectively, this implies a decline in total exports by 7.8 percent. Imports have also been affected though to a lesser degree with reported delays for some shipments of construction materials, food and coal from Kazakhstan. Staff estimates the impact on imports to be modest.

3. The slowdown in trade would affect the Kyrgyz economy through several channels. As a result of the slowdown in exports, non-gold real GDP growth is estimated to decelerate by around 0.3 and 0.6 percentage point, respectively, in 2017 and 2018.1 The impact on prices may be neutral with lower growth and higher domestic supply of perishable goods (e.g., fruits, vegetables) offset by an increase in prices for construction materials, fuel and food items imported from Kazakhstan. Combined with the effect of the depreciation of the som in 2018, this would result in a slightly higher inflation. The decline in exports, only partially compensated for by lower imports stemming from weaker economic activity, is estimated to lead to a deterioration in the current account balance by 0.1 and 1.8 percent of GDP in 2017 and 2018, respectively. Lower GDP growth is expected to worsen the fiscal balance by 0.1–0.3 percentage point in 2017–18, respectively.

Impact of Tightened Border Control with Kazakhstan

(In percentage point, unless otherwise specified)

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Source: IMF staff calculations.

4. If not resolved, tensions with Kazakhstan could have a long-term impact on the Kyrgyz economy as it would be difficult to find alternative transit routes and export markets bypassing Kazakhstan. The recent improvement of relations with Uzbekistan could partially offset the loss of the Kazakh market, but it would be hard to bypass Kazakhstan as a transit route to Russia and Europe.

Annex II. Potential Benefits from Opening-Up of Relations with Uzbekistan

1. There are substantial potential benefits to the Kyrgyz economy from the opening-up of Uzbekistan. The strong market of 32 million people with pent-up needs after years of economic isolation offers many opportunities for Kyrgyz businesses.

2. Trade between the two countries has been growing in the past two years with the Kyrgyz Republic running a trade surplus. The surplus amounted to about 0.3 percent to GDP in 2016. Uzbekistan today is the fourth largest destination for the Kyrgyz Republic, after Switzerland, Russia and Kazakhstan. The data likely understate the true extent of trade relations, and will likely show an increase following the opening of borders between the two countries this summer.

Economic Indicators

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Sources: World Bank and Tradingeconomics.

Evaluated at average exchange rate.

Evaluated at the spot exchange rate as of November 16, 2017.

Trade between the Kyrgyz Republic and Uzbekistan

(In millions of U.S. dollars)

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Source: IMF Direction of Trade Statistics.

3. Key sectors which could benefit immediately from the opening of borders are agriculture, food processing, light industries, and trade. With comparable wage levels, trade between the two neighbors may offer synergies and benefits for business on both sides of the border, with the Kyrgyz economy benefiting more from gaining access to a larger market.

4. In the medium and long terms integration of energy and transport infrastructure could offer substantial gains. Joint projects to exploit cross-border hydropower and water resources, and extend road, rail and gas infrastructure could offer large gains, particularly in the context of regional integration (the One Belt One Road initiative and CASA-1000). Significant capital outlays will be needed to realize such gains. The diversification of trade routes and energy sources will have additional benefits.

Doing Business Indicators

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Source: World Bank 2018 Doing Business Report.

5. To realize the benefits from the opening of the borders the Kyrgyz Republic needs to maintain its advantage in terms of economic openness and substantially improve business and investment climates. In the medium and long terms, most benefits will flow to the economy that succeeds in attracting more investment and enhancing productivity. While ranking close in such indices as the World Bank Doing Business or Transparency International Corruption Perception Index, Uzbekistan has been progressing faster as it has opened up.

Annex III. Kyrgyz Development Strategies

1. Three overlapping strategic planning exercises have been taking place since last spring. The 2013–17 National Strategy for Sustainable Development (NSSD) coming to an end is being replaced by three medium and long term strategies including a new NSSD, Taza Koom and Jany Doorgo Kyrk Kadam or Fourty Steps to Prosperity (JDKK). With NSSD providing the overall vision up to 2040, JDKK is meant to chart its implementation in the first five years 2018–23. Taza Koom is a program of digital transformation running across the other two.

2. The strategies pursue ambitious development and reform objectives derived mainly from the United Nation’s Sustainable Development Goals. Key objectives include reaching upper middle income status per World Bank classification (a minimum threefold increase in GDP per capita) and reducing poverty to 7 percent by 2040 (about one fourth of current level). They also include ambitious reform targets such as entering the top 40 in the World Bank’s Doing Business index (currently 71), top 30 in Rule of Law index, and top 60 in Corruption Perceptions Index.

3. The strategies are at various stages of development and still in the process of prioritization and costing. The initial draft of the NSSD 2040 was unveiled on November 15, 2017, JDKK was adopted by Parliament in August as the government’s program but remains largely a list of 40 projects and programs. Taza Koom is one of the 40 programs and the most detailed of the three strategies. Even though it is already being implemented, significant details remain to be worked out.

4. Taza Koom uses digital transformation as a vehicle for far-reaching reforms with the aim of enhancing transparency and efficiency in government, economy, and society. Program areas range from the electronic provision of public services to building a “digital e-economy” and “digital citizenship”. The total cost of the project is not quantified apart from identifying the state budget, external aid and private sector investments as sources. A hierarchy of oversight and implementation structures are envisaged, from a higher council led by the Prime Minister to units within each government agency. Allocations for Taza Koom in the 2018 budget are modest compared to the tasks at hand.

5. JDKK is the official program of the Government. The 40 programs and projects are divided into reform and development categories. Reforms include the election process, development of civil society, support for small and medium enterprises, rule of law and foreign policy. Economic development programs are divided into economic, social, and security. Sector development programs focus on export oriented sectors: agriculture, tourism, and textiles. Social development includes health care, equality, education, and culture. There are also programs for security, combating terrorism, promoting democracy and environmental security.

6. The strategies offer an important platform for elaborating the next stage in economic and social development, but further prioritization, streamlining and costing are needed before they can be realized. The individual projects and programs under the proposed strategies vary greatly. Some are quite detailed while others are little more than wish lists. There are tensions between programs that emphasize reform (public administration, energy, finance) and those that promote investment (agriculture, industry, health). The process of prioritizing and elaborating implementation and resources for these programs is important for building consensus on the next stage in economic development.

Annex IV. Review of Poverty Reduction Strategy Implementation1

1. The Kyrgyz Republic’s poverty reduction strategy is outlined in its Sustainable Development Program (SDP) 2013–17. The SDP, adopted in early 2013 through a presidential decree, highlights strategic milestones, identifies development priorities as well as proposes 78 major investment projects. It has five main components: (i) economy, social development and environmental aspects; (ii) public administration system; (iii) human development and poverty alleviation; (iv) government services to certain parts of the population; and (v) regional sustainable development. The section on human development and poverty alleviation includes detailed objectives and priorities in the areas of labor market and employment, education, health, social protection, and pension system as well as the role of family and gender equality.

2. Sound policies have helped restore macroeconomic stability and ensure fiscal sustainability, thereby contributing to poverty alleviation. The completion of the Extended Credit Facility (ECF) Arrangement in 2014 was followed by the adoption of a 3-year successor ECF arrangement in 2015. Sound policies conducted under the ECF arrangements contributed to enhancing macroeconomic stability. Public debt is projected to decrease from 64.9 percent of GDP in 2015 to 55.9 percent in 2017 and toward 50 percent in the medium term. Economic activity picked up, with real GDP growth averaging 5 percent between 2013–17, while inflation has been contained. Unemployment rate declined from 8.3 percent in 2013 to 7.7 percent in 2016.2 Monetary policy was enhanced through the adoption of a new interest rate-based framework, and financial supervision was strengthened. Finally, the Kyrgyz Republic’s becoming a member of the Eurasian Economic Union in 2015 could further attract remittances, by allowing for the free movement of labor within the union. Given that remittances are one of the key factors affecting poverty and can reach up to 20 percent of families’ income in some regions,3 this in turn could help alleviate poverty.

3. Progress in improving the business environment has been limited. The country’s 2018 Doing Business ranking has slightly deteriorated and continues to lag behind its peers in key areas such as getting electricity, paying taxes, enforcing contracts and resolving insolvency. However, a number of reforms have been undertaken, including the enhancement of the efficiency of public procurements and the easing of property transfer through the introduction of an online procedure. In the energy sector, the Datka-Kemin power transmission line was put into operation in 2015, while the Bishkek CHP power plant has been modernized. The Kyrgyz Republic also strengthened access to credit by establishing a unified and modern collateral registry as well as by improving its credit reporting system through the adoption of a new law on exchanging both positive and negative credit information. Finally, the customs union membership eased trading across borders.

4. There has been some progress in enhancing agricultural production. Significant efforts were made to increase agricultural production, which was also found to be one of the main determinants of poverty.4 Specifically, the country enhanced agricultural infrastructure, including through the opening of an agricultural logistics center in Sokuluk, major repairs and new equipment of two veterinary laboratories in Bishkek and Osh, the development of greenhouses (1,448 in 2016 up from 351 in 2014), increased sowing area, the implementation of irrigation projects and the approval of a program in 2015 to build machine and tractor stations until 2020. It also succeeded in stabilizing the epizootic situation and reducing brucellosis incidence. Finally, better access to finance allowed the introduction of a special agricultural financing program under which loans were granted to 53,590 entities in the amount of som 17 billion for crop production, livestock raising, recycling, and services between 2013 and 2016.

5. Social spending has been preserved under the ECF arrangement; however, targeting has deteriorated. In the education sector, 351 community kindergartens were opened, contributing to a 40 percent increase in the number of children in kindergartens during 2013–16. Moreover, 230 new schools were built and the overhaul of 287 school buildings was completed. There has also been an increase in the number of students in secondary vocational education. In health care, a number of measures were undertaken, including the opening of three cardiology clinics, improved access to medicine and the prioritization of the fight against tuberculosis. As a result, tuberculosis incidence rate fell from 102.4 cases to 94.9 cases per 100 thousand people during 2013–16, while there was also a decrease in infant (from 19.9 to 16.6), child (from 23.3 to 19.8) and maternal mortality (from 36.0 to 29.7). Furthermore, access to drinking water and sanitary conditions have also improved. Finally, average pensions increased by almost 40 percent between 2012 and 2016 due to a two-stage increase, while social spending has been preserved in line with the indicative target on government spending on social assistance under the ECF arrangement. However, the recently approved universal child allowance replaces the previous means-tested social transfer scheme, reducing the targeted nature of the scheme and substantially increasing fiscal costs. It also leads to a decline in the monthly benefit from som 810 per child under the age of 16 to som 700 per child under the age of three and som 500 per child between the ages of three and sixteen, starting from the third child, thereby leading to lower social benefits for poor families.

Annex V. Female Labor Force Participation in the Kyrgyz Republic: Trend and Impact on Growth

1. Labor used to be an important growth driver for the Kyrgyz economy.1 However, in recent decade, growth momentum was largely sustained by capital accumulation, while contribution of labor more than halved, a change more drastic than what would be implied by the trend of the working-age population (age 15–64).2

2. Declining female labor force participation (FLFP) appears to be the major factor behind such changes. Estimates made by the International Labor Organization (ILO) indicate that significantly smaller share of young and prime-age women were active in the labor market in 2016 relative to 1995. Over the same period, however, participation of men barely changed. Moreover, gender- and age-specific employment rates also remain broadly unchanged over the last fifteen years.3

Contribution to Output Growth

(In percent)

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Source: UN population survey, ILO, and IMF staff estimate.
A01ufig4

Age Profile of Labor Market Statistics

Citation: IMF Staff Country Reports 2018, 053; 10.5089/9781484342954.002.A001

Source: International Labor Organization (ILO).

3. Policies aimed at encouraging higher FLFP have the potential to boost economic growth and increase per capita income. To quantify the economic impact, different scenarios are simulated in a growth accounting exercise. In all scenarios, productivity as measured by the total factor productivity is assumed to grow at its historical trend average, capital accumulation is such that a constant capital-labor ratio is maintained, and employment rate for each age-gender cohort is assumed to remain constant at the respective 2016 level. The baseline scenario (Scenario I) assumes labor force participation for both men and women identical to that in 2016, and population will grow according to the most likely projection of the United Nations Population Survey (2015) over the long term. Scenario II aims to quantify the impact of higher FLFP. Hence, it adopts the same assumption regarding population growth and male labor force participation, but assumes that women’s participation will gradually improve so that the gender gap between male and female participation will narrow to the 1995 level in 2050.4 As illustrated by the table below, higher FLFP will accelerate growth permanently, and result in significantly higher per capita GDP.

Comparison of Different Scenarios

(In percentage points, unless otherwise specified)

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Source: UN population survey, ILO, and IMF staff estimate.

4. Through its positive impact on growth, higher FLFP will also help reduce poverty. Preliminary estimate indicates that one percentage point increase in per capita GDP is associated with 1.6 percentage points reduction in poverty headcount ratio (at $3.10 a day, 2011 PPP).5 Therefore, policies that gradually increase FLFP as proposed in Scenario II could potentially lead to 2 percentage points further reduction in poverty ratio in the medium term compared with the baseline.

5. In light of the recently adopted law to provide universal child allowance effective January 2018, a high fertility scenario (Scenario III) is added to gauge its potential impact on growth.

In absence of detailed demographic information, Scenario III assumes that the resulted demographic trend will follow the high fertility projection of the United Nations Population Survey (2015), an assumption that probably sets the upper bound of the positive demographic influence of the universal child allowance. All other assumptions are the same as in the baseline scenario. Intuitively, any such positive demographics boost economic growth only in the long run, as it takes roughly two decades for the newborns to reach working-age. Even up to 2050, the gain in terms of per capita GDP is still less than Scenario II, as part of the output gain is offset by the larger population. Moreover, policies such as the universal child allowance could alter people’s—especially women’s—preference regarding time allocation to child-bearing and work. It is likely that such policies will result in lower FLFP and further widen the gender gap, and eventually lead to output loss relative to the baseline scenario at least in the near term.

6. Women’s decision to work can be significantly affected by labor market policies. This includes flexibility of working hours, tax policies, as well as child-support policies. As a result, promoting more flexible work arrangement by formalizing part-time jobs and developing remote-work options could encourage more women to participate in the labor market. Tax policies should avoid penalizing the second income earner in the household, which in many cases turns out to be the woman and hence discourages her from engaging in formal labor market. Child-upbringing could be challenging for working mothers. In this context, policies aimed to improve the accessibility to, and affordability of, childcare service and advocate a more balanced share of responsibility between the parents, could increase FLFP.

Appendix I. Letter of Intent

Ms. Christine Lagarde

Managing Director

International Monetary Fund

700 19th Street, N.W.

Washington, D.C., 20431

U.S.A.

December 1, 2017

Dear Madame Lagarde:

We continue to make progress on a comprehensive economic and financial reform program, supported by an arrangement under the Extended Credit Facility (ECF) approved by the IMF Executive Board on April 8, 2015 (the program). We are grateful to the IMF for its continued support.

Our economy continues its recovering trend and grew by 5 percent in the first three quarters. We expect the growth momentum to extend into 2018 despite risks arising from recent tensions at the border with Kazakhstan. The recently launched Program of the Government of the Kyrgyz Republic “Jany Doorgo Kyrk Kadam” envisions far reaching structural reforms aimed at accelerating growth and making it more equitable.

The fourth review, originally scheduled in June 2017, could not be completed on time due to delay in implementing the prior action of reversing the VAT exemption on wheat and flour, and the lack of agreement on the Letter of Intent (LOI). However, we remain committed to the policies and objectives supported by the ECF arrangement. Our actions ensured that all end-December 2016 and end-June 2017 quantitative performance criteria (QPCs) were met. All but three indicative targets (IT) were met. The December 2016 IT on tax revenue was missed due to weak tax collection. The continuous IT on introducing new or renewing existing tax exemptions was also missed as financial police staff were exempted from income tax, and VAT and profit tax exemption was granted to private schools in 2017, at the initiative of Parliament. The June 2017 IT on reserve money was missed due to the rapid growth of cash outside the banks.

The delay in the fourth review also negatively affected our performance in terms of structural benchmarks (SBs). Six SBs were missed, five of which were proposed to be postponed or modified at the time of the fourth review. These are: (i) liquidation of banks under DEBRA (completed for “Kyrgyzagroprombank”, pending for the other three banks due to ongoing litigations); (ii) the signing of the terms of reference for the FMIS project with the withdrawal of the foreign financing; and subsequently; (iii) the signing of the contract with the IT provider; (iv) the identification of quantitative measures to reduce the wage bill, met with a one-month delay after it was turned into a prior action; and (v) introducing a standardized framework for project monitoring of physical and financial performance for all projects exceeding 50 million soms whose deadline was proposed to be postponed to December 2017. In addition, the comprehensive register of all employees of the general government was finalized with one-month delay. The SB to submit to Parliament the amendments to the Law of the Kyrgyz Republic “On the National Bank of the Kyrgyz Republic, Banks, and Banking Activity” (the Banking Law) is not being assessed for program purpose, as these amendments were rejected by the Ministry of Justice of the Kyrgyz Republic, on the ground that the ones pertaining to judicial review were unconstitutional.

In view of the progress made and our continued commitment to the program, we request completion of the combined fourth and fifth review and disbursement in the amount of SDR 19.028 million (about US$26.35 million). We envisage that the disbursements under the ECF arrangement be channeled to the budget. We also request for modification of the performance criteria to reflect the updated macroeconomic outlook.

We believe the economic and financial policies set forth in this LOI to be adequate to meet the program’s objectives.

We will continue to maintain a policy dialogue and consult with the IMF, at our own initiative or whenever the Managing Director of the IMF requests such a consultation, in advance of revisions to the policies contained in our LOI, in accordance with the IMF’s policies on such consultations. We will provide IMF staff with data and information necessary for monitoring program implementation in line with the laws of the Kyrgyz Republic.

The program’s QPCs, ITs, and SBs are set out in Tables 1 and 2 and described in the attached Technical Memorandum of Understanding (TMU).

As in the past, the authorities of the Kyrgyz Republic agree to the publication of this letter, the TMU, and the Debt Sustainability Analysis.

Performance in 2016 and 2017H1

1. Economic activity has been on the rise since late 2016. After a slow start, GDP growth accelerated towards the end of 2016 to 3.8 percent (3.7 excluding the Kumtor gold mine) supported by strong performance in trade, industry, agriculture and construction. Growth momentum continues into 2017 and the overall GDP grew by 5 percent in the first nine months. Inflation is also normalizing from a deflation at 0.5 percent at end-2016 to 3.3 percent in September 2017 (y/y), still below our target range of 5–7 percent. Low food and fuel prices due to in part by the lagged effect of currency appreciation were the main factors. Core inflation also declined to around 4 percent.

2. The current account deficit narrowed in 2016 and is expected to further decline in 2017, reflecting a number of factors. Exports benefited from the expansion of the Kumtor goldmine, while weak domestic demand and low energy prices continued to contain imports. Moreover, remittances surged by over 30 percent in US Dollar terms in 2017H1, benefiting both from improved access to the Russian labor market and regional economic recovery. The real effective exchange rate appreciated, reflecting nominal appreciation against the main trading partners’ currencies.

3. The overall fiscal deficit for 2016 reached 4.5 percent of GDP, and for 2017H1 1.3 percent of GDP, both in line with the program target. In 2016, revenues were lower than planned mainly due to shortfall in tax collection. To compensate, we carried out ad-hoc cuts to goods and services expenditures and rephased some foreign-financed investment projects. The latter together with currency appreciation helped bring external public debt down to 56.6 percent of GDP at the end of 2016. The 2017H1 deficit was better than expected mainly due to one-off revenues from higher than expected proceeds from telecom court litigations and an unexpected grant from Russia, while expenditures were broadly in line with expectations.

4. In absence of inflationary pressure, we relaxed our monetary policy stance to alleviate pressure on the banking sector and spur credit. We lowered the policy rate from 10 percent at the beginning of 2016 to 5 percent by the end of the year, where it remains. Credit by commercial banks to the private sector started to recover since early 2017, and posted a growth of 15.2 percent (y/y) in September 2017.

5. Pressures on the banking sector are subsiding, but vulnerabilities remain. Falling dollarization is reducing pressure on the banking sector. Thanks to our policy measures and the appreciation of the som, loan and deposit dollarization fell significantly. Nonetheless, we continue to monitor the sector for vulnerabilities, particularly NPLs and restructured loans which stood respectively at 8.3 percent and 7.9 percent (of which 4.7 percent are prolonged loans) and are among the lowest in the region.

Outlook and Risks

6. Prospects for the near and medium terms are improving as regional pressures subside, but realizing good outcomes requires prudent macro policies and structural reforms. For 2017, we expect real growth to reach around 3.5 percent, benefiting from recovery in domestic and external demand. Growth is expected to gradually recover over the medium term. Economic recovery will push inflation up to within the NBKR target range (5-7 percent) as food and fuel prices recover. The current account deficit is expected to narrow to about 10 percent in 2017.

7. The main risks to our economy continue to stem from developments in our key partners Russia, Kazakhstan and China. A slowdown in oil dependent Russia and Kazakhstan and economic retrenchment in China could dampen external demand, remittances and foreign-financed investment. Recent tightening of border controls by Kazakhstan could negatively affect economic performance in 2017 and further delay the positive effects of EEU accession. The narrowing of correspondent banking channels could weigh on economic activities by isolating the banking sector from the rest of the world and increasing informal economy. Upside risks include higher growth from Russia, stronger economic relationships with Uzbekistan, and the strengthening of economic ties with China.

The Policies for the Remainder of 2017 and 2018

To keep the program on track, we will adhere to revenue and expenditure policies consistent with program commitments; exert of our efforts to re-introduce key missing elements of the recently enacted Banking Law; and continue to carry out limited interventions in the foreign exchange market to smooth excessive volatility.

Fiscal Policy

8. We are committed to a 2017 fiscal deficit target of 3.5 percent of GDP, which is relaxed compared to the previous commitment under the program, to accommodate the spending on emergency and rehabilitation work related to the April landslide in the south. In the first nine months of the year, we undertook one-off expenditures, which represent about 4 percent of GDP. To offset the one-off expenditures, we have identified one-off revenues (unbudgeted dividends and litigation receipts). We will also cut some non-priority expenditures and domestically-financed investments, which will help us achieve a relaxed program target of 3.5 percent of GDP.

9. Despite recent permanent expansionary policy measures, we remain committed to a fiscal deficit of 2.5 percent of GDP in 2018 to continue our consolidation efforts, rebuild our buffers, and keep our debt level sustainable. The permanent expansionary measures adopted in 2017 equivalent to 2 percent of GDP include (i) the universal child allowance; (ii) increase in the pensions and wages for certain categories of public sector employees; (iii) continuation of the VAT exemption on wheat and flour; and (iv) new tax exemptions for private schools, initiated by Parliament, and subsidized interest rates for export producers. Other measures are under consideration, which could further worsen the fiscal balance. To mitigate this, we will (i) implement measures included in the appendix, of which the measures on tax and non-tax revenues represent 1.6 percent of GDP; and (ii) reduce current expenditures and domestically financed capital spending by 0.4 percentage points. To meet our deficit target, we will:

  1. Increase budgetary revenues as a matter of priority. To this end, we will broaden the tax base by streamlining exemptions and capturing the non-observed economy. In particular, we will (i) work to defend in Parliament changes to the Tax Code of the Kyrgyz Republic to restore the VAT on wheat and flour effective January 1, 2018 (prior action); (ii) submit to parliament proposals listed in Table 3 under tax policy, totaling 0.4 percent of GDP, including eliminating tax exemptions on some goods and services, raising excise rates, and expanding the tax base (SB, January 2018); (iii) prepare an analysis of the 20 largest exemptions in terms of revenue impact on the budget, including concrete proposals to streamline them (SB, February 2018); and (iv) refrain from introducing new exemptions or renewing expiring ones (continuous QPC).

  2. Reduce expenditures and improve efficiency is essential to maintain a sustainable fiscal position.

    1. On the wage bill: We have introduced the register of state and municipal jobs, established requirements for high level civil servants, and reduced the number of political appointees by half. We will continue our reforms with the aim of reaching a wage bill of 9.0 percent of GDP in 2018 by (i) based on a headcount analysis, adopting the relevant government decision or resolution to cut the ceiling for state and local administrative staff and subordinated institutions by 10 percent to be implemented by September 2018 (SB, March 2018); (ii) containing the number of support staff in the public sector, including in the social sector and at other subordinated institutions; (iii) eliminating redundant or ineffective state entities; (iv) returning unused wage allocation to the treasury instead of using them for additional bonuses; (v) limiting the growth of base salaries, allowances and bonuses to inflation and refraining from ad-hoc wage increases; and (vi) gradually consolidating all wage-related expenditures, in the base part of the salary, including bonuses, with the exception of certain additions stipulated by law, in order to enhance budget transparency;

    2. On transfers and subsidies: continue reforms aimed at reducing the burden of subsidies and improving targeting by (i) adopting a new medium-term tariff strategy (SB, March 2018) with the intention of restoring the financial sustainability of the energy sector by adjusting energy prices to close the gap between the energy price and the cost recovery level for all energy users starting in 2018; (ii) improving the efficiency of social spending by gradually shifting from categorical to means-tested programs by (a) submitting to Parliament amendments to the recently adopted Law of the Kyrgyz Republic on “State Subsidies of the Kyrgyz Republic” (universal child allowance) to restore targeting of the most vulnerable (SB, May 2018), (b) reducing the leakages of the system and the risk of excluding the most vulnerable households, (c) freezing categorical programs and their monetary compensation instead of privileges, and introducing targeting; (iii) working with Parliament to reject the draft Law of the Kyrgyz Republic “On Amending the Law of the Kyrgyz Republic “On State Pension Social Insurance” (on increasing teachers’ pensions);

    3. On goods and services: (i) contain non-priority goods and services below the 2015 level by implementing e-procurement and improving control of ministries’ and agencies’ own resources (including special means); and (ii) continue to refrain from non-budget spending and any quasi-fiscal measures, which could undermine our targets; and

    4. On capital investment: adhere to the action plan on public investment management, especially on rationalizing domestically financed capital expenditures, keeping them under 3 percent of GDP.

  3. In the event of shortfall in any of the above measures, we will identify alternative measures, including reversing existing tax exemptions on the basis of the aforementioned analysis of 20 largest exemptions, further streamlining non-priority goods and services, and domestically financed capital expenditure.

10. We will continue with our efforts to strengthen tax administration. In this respect, we will (i) introduce an electronic system for tracking trade transactions (e-invoicing, labeling, e-patents, online cash registers); (ii) introduce “safe city” project to use connected cameras to collect traffic fines; (iii) continue efforts to simplify tax payment and electronic reporting; and (iv) install service centers to track movement of goods imported from EEU countries to improve indirect tax administration.

11. Despite recent setbacks, we remain committed to pursue financial management information system (FMIS) reforms. We are working toward reaching an agreement to set up a new Multi Donor Trust Fund arrangement to support PFM reforms. In this respect:

  1. We are committed to complete the FMIS project with our own resources, including through organic growth and integration of systems developed in-house. To this effect, we remain committed to completing the preparation of the terms of reference for FMIS including the human resources module to serve as a roadmap for the project implementation. We remain committed to extend treasury coverage to the Social Fund.

  2. With IMF technical assistance, we are developing a credible, transparent and enforceable fiscal rule, which will provide an anchor to our fiscal policy. The new rule includes remedial actions to ensure compliance. We will submit to Parliament amendments to the Budget Code of the Kyrgyz Republic (Budget Code) to include the new rule and to specify more clearly the conditions for emergency appropriations and reallocation of resources within the budget envelope (SB, March 2018). We will introduce changes to the draft 2018 Budget Law to replace articles 7.1, allowing reallocation of budgetary resources within the envelope, and 7.3, allowing additional expenditures for urgent measures, with a direct reference to the relevant articles in the Budget Code (prior action).

  3. The current framework, under which individual elements of fiscal policy, particularly on the revenue side, are divided among five different agencies with separate reporting lines and operational goals, has proven inefficient in addressing revenue shortfall. We will conduct an analysis of institutional responsibilities for tax policy design and implementation towards increasing coherence and accountability. Based on the outcome, we could decide on the optimal location of the tax policy function.

    The Procurement Law of the Kyrgyz Republic, which was adopted in 2015, represents a step forward compared to the previous one. We intend to safeguard the benefits of the new law, by introducing changes to the draft amendments, currently under consideration in Parliament (prior action), to (i) limit the special procedures for joint stock companies with state majority to shortening procurement period requirement; (ii) remove proposals that broaden the scope for the Government of the Kyrgyz Republic and the authorized government agency for state material reserves to engage in direct contracting beyond the conditions set out in the existing Procurement Law of the Kyrgyz Republic; and (iii) maintain mandatory publication of the contract awards in all cases except those related to national security and defense.

  4. In compliance with the Budget Code of the Kyrgyz Republic, we included information on fiscal risks and information on transfers, on-lending and loan restructuring for SOEs into the explanatory note to the republican budget for 2018.

12. To ensure that debt remains sustainable and that the public debt ratio starts to decline, we will aim to further reduce the deficit over the medium term. To this end, we will (i) continue consolidation efforts over the medium term; (ii) refrain from non-concessional borrowing; (iii) improve debt monitoring; (iv) minimize fiscal risks stemming from SOEs by enhancing coordination between the Ministry of Finance of the Kyrgyz Republic and the State Property Fund of the Government of the Kyrgyz Republic; and (iv) improve the efficiency of public investment by strengthening selection and appraisal in line with Fund’s Public Investment Management Assessment (PIMA) recommendations. To this end, we will develop a framework for the formal appraisal for all major externally and domestically financed projects (exceeding 50 million soms) prior to selection, with the nature of the appraisal tailored to the size of the project and sector (SB, December 2017).

Monetary and Exchange Rate Policies

13. Our monetary policy objective remains focused on ensuring price stability. Our monetary policy stance continues to reflect the need for relaxation to support growth as inflation remains subdued. On the other hand, we closely monitor credit growth and inflation dynamics, and stand ready to finetune our policy stance in case overheating pressures emerge.

14. We are committed to enhancing the monetary transmission mechanism, with a goal of gradually moving toward inflation targeting. Our efforts continue to focus on improving the traction of the policy rate, to achieve which goal the timely withdrawal of excess liquidity to encourage interbank trading remains a priority. In addition, we will: (i) continue to improve our monetary policy forecasting framework; (ii) continue the Ministry of Finance of the Kyrgyz Republic and the NBKR coordination on fiscal and monetary policy; (iii) consider developing the domestic securities market jointly by the NBKR and the Ministry of Finance of the Kyrgyz Republic in order to establish a benchmark yield curve; (iv) improve coordination between the NBKR and the RKDF to facilitate liquidity forecasting and improve coverage of monetary statistics; and (v) enhance the forward-looking component of our communication policy. We will also consider developing monetary instruments to balance the effect of our FX interventions and gold-related transactions on money supply.

15. We remain committed to a two-way exchange rate flexibility as the key to reducing external imbalances, enhancing competitiveness and safeguarding reserves. To ensure two-way flexibility, we will: (i) continue to intervene in the foreign exchange market only to smooth excessive fluctuations; and (ii) consider introducing new monetary instruments and developing hedging instruments.

Financial Sector

16. We continue to monitor the financial sector for emerging risks, particularly in the context of accelerating credit growth. In this context, we are (i) undertaking risk-based supervision (RBS) trainings with the plan of extending RBS to more banks by end-2017; (ii) preparing recommendations to help commercial banks to transition to the new international reporting standard (IFRS9) that will come into force in early 2018; (iii) operationalizing the crisis preparedness framework by approving the list of systemically important banks (SIBs), as well as the recapitalization procedure of these SIBs together with the Government of the Kyrgyz Republic. We will modify the organizational structure to better adapt to the requirement of RBS.

17. We will continue to maintain a level playing field among market players. NBKR will closely monitor RKDF activities in line with the Memorandum of Understanding (MOU). We are aware of the emerging cyber security risks, and actively work with the banks to strengthen the IT system, as well as to enhance our supervisory and regulatory framework to properly account for the cyber risks. We will also ensure equal application of capital requirements and other prudential regulations to all supervised entities. In line with international best practice, the NBKR will not assume an equity position in a commercial bank or any other entity involved in lending or investment activities.

18. We continue our reform efforts aimed at safeguarding the stability of the financial sector. We prepared amendments to the Banking Law, which were, however, rejected by the Ministry of Justice of the Kyrgyz Republic on constitutionality grounds with respect to the limitation of judicial review. Taking into accounts these developments, we will submit to Parliament in early December amendments to the Banking Law (prior action) to reintroduce key provisions on (i) governance and oversight, particularly to introduce majority of non-executive membership in the board of the NBKR; and (ii) lending to non-supervised institutions; and exert our best effort to enact them by March 2018 (SB). Due to protracted litigation and ongoing asset freezes, we were unable to liquidate the three remaining banks under DEBRA’s management. Nevertheless, we remain committed to make every effort to ensure that DEBRA submits the remaining three banks, namely “AUB” (SB, February 2018), “Manas” and “Issyk-Kul” banks to court for liquidation by May 2018 (SB).

19. Despite the recent withdrawal of the draft Law of the Kyrgyz Republic on AML/CFT from Parliament, we remain committed to further improving the national AML/CFT framework. To this end, we will, as a first step, introduce key provisions through Kyrgyz Republic government regulations by end-February 2018, in order to meet FATF requirements. As a next step, we will submit to Parliament a revised AML/CFT Law in line with international standards and Fund advice (SB, March 2018). In this respect, we will seek additional technical assistance from the Fund.

20. The narrowing of the correspondent banking channels is becoming a significant risk to our banking sector. We continue to assist banks to enhance their compliance capacity, and reach out to foreign correspondent banks to clarify the situation and establish mutual understanding. In this regard, we would like to request the Fund to step up its support to raise awareness and foster coordinated actions at multinational level.

Institutional and Structural Reforms to Ensure Broad Based Growth

21. As we start preparations for our next national strategy for sustainable development, the key challenge remains to raise growth and make it more inclusive. The new Long Term National Strategy 2040 highlights the importance of sustainable and equitable growth. The strategy is aimed at building a “Smart Nation/Taza-Koom” with emphasis on human development through knowledge, education, health and the harnessing of new information and management technologies. Policies aimed at diversifying the sources of growth; rebuilding fiscal buffers to withstand future shocks; and transitioning to inflation targeting are key stations on the way to realizing the long-term vision.

22. To achieve high and inclusive growth, we need to tackle structural impediments and encourage the traded goods sectors. In this context, we will work to eliminate the main obstacles to growth, namely: (i) enhancing labor force participation, including female labor force participation; (ii) addressing skills mismatches and improving education outcomes; (iii) removing market distortion to encourage private investment needed to close infrastructure gaps; (iv) developing a new medium term tariff strategy to ensure energy sector sustainability; (v) developing the financial market; (vi) improving trade and competitiveness policies with the objective of maximizing the benefits from EEU membership and GSP+ (Generalized Scheme of Preferences Plus) status with the EU; and (vii) enhancing governance and tackling corruption.

23. We are undertaking a largescale review of state owned enterprises (SOEs) and joint stock companies aimed at enhancing transparency and efficiency of state property. In this context, we evaluated assets, liabilities, stock of debt, and share of state ownership. As a result, we were able to reduce the number of SOEs by half. We will draw a roadmap to improve management of the remaining SOEs and joint stock companies. To that effect, we will seek donor technical assistance.

24. We remain committed to carry out reforms aimed at improving the business climate by, among others, improving governance and continuing to combat corruption. The Government of the Kyrgyz Republic is embarking on a program of reforms specifically aimed at addressing areas of concern under the World Bank doing business framework including: access to the power grid, enforcement of contract, protection of property rights, ease of paying taxes, business insolvency and trade across borders. In this context, we are working to address regulatory shortcomings and weaknesses in the judicial system and law enforcement by enhancing predictability and transparency; and reduce the regulatory burden by streamlining the number of regulations and enforcement processes, and bolstering protections for businesses against potential abuse.

25. We remain committed to implementing the outstanding recommendation of the 2015 IMF safeguards assessment of the NBKR, by exerting best effort to ensure a timely passage of the necessary amendments to the Banking Law.

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Table 1.

Kyrgyz Republic: Quantitative Performance Criteria and Indicative Targets Under the Extended Credit Facility, December 2016–March 2018

(In millions of soms, unless otherwise indicated; eop)

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Sources: Kyrgyz authorities and IMF staff estimates and projections.

As defined in the TMU.

Cumulative from beginning of the year.

Agreed during the April negotiations to switch the IT to a QPC.

External debt contracted or guaranteed with a grant element of less than 35 percent.

A VAT exemption on private schools and personal income tax exemption for the financial police were granted, respectively, in Q2 and Q4.

IT until becoming a QPC by the Executive Board during the fourth and fifth reviews board meeting.

Table 2.

Kyrgyz Republic: Prior Actions and Structural Benchmarks under the Extended Credit Facility

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Source: IMF staff.

The action plan was completed with one-month delay as agreed during the April mission.

Given that the measure is unconstitutional due to the unconstitutionality of a provision requiring judicial review and nonsuspension of the NBKR’s decisions, this end-July 2017 structural benchmark is not being assessed for program purposes.

Proposed to remove from this benchmark, established previously as a December SB under the third review, two provisions regarding (a) judicial review and nonsuspension of the NBKR’s decisions which is unconstitutional, and (b) powers of the NBKR in the resolution process and liquidation process which is no longer necessary given provisions under the current Banking Law.

Table 3.

Kyrgyz Republic: Fiscal Measures to Close the Gap

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Attachment I. Technical Memorandum of Understanding (TMU)

December 1, 2017

Introduction

This memorandum defines the quantitative performance criteria, indicative targets and adjustors, and establishes the content and frequency of the data to be provided to IMF staff for program monitoring related to the economic program supported by an arrangement under the Extended Credit Facility (ECF). The indicators presented in Table 1 of the Letter of Intent dated December 1, 2017 reflect the understandings on quantitative performance criteria reached between the authorities of the Kyrgyz Republic and staff of the IMF.

Performance Criteria and Indicative Targets
Definitions and Concepts

1. Test dates. Quantitative performance criteria are set semi-annually starting June 30, 2015 through December 31, 2017, and are to be met at the end of each period.1

2. National Bank of the Kyrgyz Republic (NBKR). The NBKR is the central bank of the country and is responsible for the formulation and implementation of monetary policy, bank supervision, and the payment system. For the purpose of the program, the NBKR includes all its central and regional offices.

3. Public sector. For the purpose of the program, the public sector comprises the general government, the NBKR, the 10 largest nonfinancial public enterprises (enterprises and agencies in which the government owns more than 50 percent of the shares, but which are not consolidated in the budget, as listed in Table 1), and any other newly created public development institution. The State budget comprises central and local government budgets. The general government budget includes the State and Social Fund budgets.

4. Foreign-financed Public Investment Program (PIP) loans and grants. The foreign financed PIP is a program of investments in infrastructure and social sectors agreed by the general government of the Kyrgyz Republic and its donors (including but not limited to international financial organizations). The PIP is fully financed by related grants and loans.

5. Program loans and grants are loans and grants received by the general government for direct budget support from external donors and not related to PIP financing.

6. The stock of external payment arrears for program monitoring purposes is defined as the end-of-period amount of external debt service due and not paid within the grace period specified in the relevant debt contract, including contractual and late interest. For arrears to exist, a creditor must claim payment of amounts due and not paid. Amounts in dispute are not considered arrears. Arrears for which a clearance framework/rescheduling or restructuring has been agreed with the creditor are not considered arrears for program monitoring purposes. Program arrears would include any debt service due under such agreements that have not been paid.

7. Concessional and nonconcessional debt. Concessional debt is defined as debt with a grant element equivalent of 35 percent or more. The grant element of a debt is the difference between the present value (PV) of the debt and its nominal value, expressed as a percentage of the nominal value of the debt. The PV of debt at the time of its contracting is calculated by discounting the future stream of payments of debt service due on this debt. The discount rate used for this purpose is 5 percent. The debt refers also to commitments contracted or guaranteed and for which value has not been received. The calculation of concessionality will take into account all aspects of the loan agreement, including maturity, grace period, payment schedule, upfront commissions, and management fees. The calculation is performed by the authorities and verified by the IMF staff based on the data provided by the authorities.

8. Variable interest rate. For debts carrying a variable interest rate in the form of a benchmark interest rate plus a fixed spread, the PV of the debt would be calculated using a program reference rate plus the fixed spread (in basis points) specified in the debt contract. The program reference rate for the six-month USD LIBOR is 3.34 percent and will remain fixed for the duration of the program. The spread of six-month Euro LIBOR over six-month USD LIBOR is -250 basis points. The spread of six-month JPY LIBOR over six-month USD LIBOR is -300 basis points. The spread of six-month GBP LIBOR over six-month USD LIBOR is -100 basis points. For interest rates on currencies other than Euro, JPY, and GBP, the spread over six-month USD LIBOR is -200 basis points.2 Where the variable rate is linked to a benchmark interest rate other than the six-month USD LIBOR, a spread reflecting the difference between the benchmark rate and the six-month USD LIBOR (rounded to the nearest 50 bps) will be added.

9. Valuation changes (program exchange rates). For program monitoring, U.S. dollar–denominated components of the NBKR’s balance sheets will be valued at the program exchange rates. The program exchange rate of the KGS to the U.S. dollar is set as of February 17 of 2015 exchange rate of KGS 60.7523 = US$1. The corresponding cross exchange rates and program gold price for the duration of the program are provided in Table 2.

Quantitative Performance Criteria
Floor on Net International Reserves of the NBKR in Convertible Currencies
Definitions

10. Net international reserves (NIR) of the NBKR. The floor on NIR will be calculated as the difference between total international reserve assets and total international reserve liabilities of the NBKR in convertible currencies. Total international reserve assets of the NBKR are defined as the NBKR holdings of monetary gold, holdings of SDRs, reserve position in the IMF, and any holdings of convertible foreign currencies in cash or with foreign banks, and debt instruments issued by nonresidents that are liquid. For program purposes, convertible foreign currencies refer only to U.S. dollar, Euro, British Pound, Japanese Yen, Swiss Franc, Australian Dollar, and Canadian Dollar. Accrued interest on deposits, loans, and debt securities are included in reserve assets and liabilities, correspondingly. Reserve assets pledged as collateral or otherwise encumbered, capital subscriptions in foreign financial institutions, deposits of resident financial institutions (commercial banks and the Russia-Kyrgyz Development Fund) in foreign currency and illiquid assets of the NBKR are excluded from NIR. Also excluded are net forward positions, defined as the difference between the face value of foreign-currency denominated NBKR off-balance sheet claims on nonresidents and foreign currency obligations to both residents and nonresidents. Total international reserve liabilities of the NBKR in convertible currencies are defined as the sum of Kyrgyz Republic’s outstanding liabilities to the IMF and other convertible currency liabilities to nonresidents with an original maturity of up to and including one year. NIR is not affected when foreign assets are received by the NBKR through foreign currency swaps with resident and non-resident financial institutions. Total international reserves and NIR decline with the provision of foreign assets by the NBKR through foreign currency swaps with resident financial institutions and non-resident institutions.3 For program monitoring purposes, total international reserve assets and liabilities will be valued at the program exchange rates as described in paragraph 9. Thus calculated, the stock of net international reserves in convertible currencies amounted to US$ 1,643 million on September 30, 2017.

11. Net foreign assets (NFA) of the NBKR. NFA consist of net international reserve assets plus other net foreign assets, including other net claims on CIS countries, reserve assets pledged as collateral or otherwise encumbered, capital subscriptions in foreign financial institutions, illiquid assets, and obligations of the NBKR on SDR allocation. For program monitoring purposes, other NFA will also be valued at program exchange rates.

Adjustors

The floor on NIR will be adjusted upward/downward to the full extent of any excess/shortfall in program and other grants and program loans, as given in Table 3 and upward/downward full

12. extent that amortization and interest payments of public external debt is less/more than the amortization and interest payments given in Table 3.

Ceiling on the Net Domestic Assets of the NBKR
Definitions

13. Net domestic assets of the NBKR (NDA) are defined as reserve money of the NBKR (defined below), minus NFA as defined above. Items in foreign currencies will be valued at program exchange rates.

14. Thus defined, NDA consist of (a) net claims to the general government from the NBKR; (b) net claims to other depositary corporations by the NBKR; (c) net claims on other financial corporations; and (d) all other net assets of the NBKR (other items net). Thus defined, the stock of NDA amounted to minus KGS 11,563 million on September 30, 2017.

Adjusters

15. The ceiling on NDA will be adjusted downward/upward to the full extent of any excess/shortfall in program and other grants and program loans, as given in Table 3 and downward/upward to the full extent that amortization and interest payments of public external debt is less/more than the amortization and interest payments given in Table 3. The ceiling on NDA will be adjusted downward/upward to the full extent of any excess/shortfall of the Russia-Kyrgyz Development Fund net flows given in Table 3a.

Ceiling on the Cumulative Overall Cash Deficit of the General Government Budget
Definitions

16. The overall cash deficit of the general government budget will be measured from the financing side (below the line) as the net cash inflow from financing activities, defined as the net incurrence of liabilities minus the net acquisition of financial assets other than cash. These will be measured at current exchange rates and will be defined as the sum of:

  • The change in the stock of net claims of the domestic banking system and nonfinancial institutions and households on the general government. The change in the stock of net claims of the domestic banking system on the general government is defined as the change in the stock of the banking system claims on the general government, less the change in the stock of all deposits of the general government with the banking system. The claims of the banking system on the general government include: bank loans to the general government; any securities issued by the general government and held by domestic banks and overdrafts on the current accounts of the general government with banks;

  • The change in the stock of net claims of foreign governments, banking systems, and nonfinancial institutions and households on the general government;

  • Net transactions in equity, i.e., any new sales net of purchases of shares;

  • Net foreign loans disbursed to the general government for budgetary support; and

  • Net foreign loans disbursed to the general government for PIP financing.

17. The quantitative performance criteria for the fiscal balance are calculated on the projected exchange rate. Reporting and adjustments, as defined above, will be made using current exchange rates.

Adjustors

18. The ceiling on the cumulative overall cash deficit of the general government budget will be adjusted downward to the full extent of any excess in program grants, as given in Table 3. The ceiling on the cumulative overall cash deficit of the general government budget will be adjusted downward to the full extent of any shortfall in program loans, as given in Table 3 and upward/downward to the full extent that PIP loans are more/less than PIP loans given in Table 3.

Ceiling on the present value of new external debt contracted or guaranteed, and accumulation of new external payment arrears by the public sector (continuous quantitative performance criteria).
Definitions

19. Debt. In connection with the contracting or guaranteeing of short-, medium-, and long-term external debt by any entity of the public sector, for program purposes, the definition of debt is set out in Executive Board Decision No. 6230–(79/140), as amended by Decision No. 15688–(14/107), point 8, adopted December 5, 2014, and reads as follows:

  • For the purpose of this guideline, the term “debt” will be understood to mean a current, i.e., not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debts can take a number of forms; the primary ones being as follows:

  • Loans, i.e., advances of money to the obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans and buyers’ credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements);

  • Suppliers’ credits, i.e., contracts where the supplier permits the obligor to defer payments until sometime after the date on which the goods are delivered or services are provided; and

  • Leases, i.e., arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the lessor retains the title to the property. For the purpose of the guideline, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement excluding those payments that cover the operation, repair or maintenance of the property.

  • Under the definition of debt set out in point 8 (a) in the above mentioned Executive Board Decision, arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.

20. For program purposes, external debt is defined based on the residency of the creditor, and the RKDF is not considered as an external creditor.

21. External debt ceilings. A performance criterion (ceiling) applies to the present value (PV) of new external debt, contracted or guaranteed by the public sector with original maturities of one year or more. The ceiling applies to debt contracted or guaranteed for which value has not yet been received, including private debt for which official guarantees have been extended. The ceiling is subject to an adjustor defined below.

22. An adjustor of up to 5 percent of the external debt ceiling set in PV terms applies to this ceiling, in case deviations are prompted by a change in the financing terms (interest, maturity, grace period, payment schedule, upfront commissions, management fees) of a debt or debts. The adjustor cannot be applied when deviations are prompted by an increase in the nominal amount of total debt contracted or guaranteed.

23. Exclusions from the external debt limits. Disbursements by the IMF are excluded from the ceilings on external debt. Also excluded from external debt ceilings is the contracting or guaranteeing of new external debt that constitutes a rescheduling or refinancing of existing external debt on the terms more favorable to the debtor.

24. Guarantees. For program purposes, the guarantee of a debt arises from any explicit legal obligation of the public sector to service a debt in the event of nonpayment by the debtor (involving payments in cash or in kind), or from any implicit legal or contractual obligation of the public sector to finance partially or in full a shortfall incurred by the debtor.

25. New external payments arrears. The ceiling on accumulation of new external payments arrears is a continuous quantitative performance criterion.

Ceiling on newly introduced or renewed tax exemptions

26. A performance criterion applies to any change in law, or regulation, that expands the eligibility for, or value of, existing tax deductions, exemptions, or credits, or introduces new tax deductions, exemptions, or credits, or reduces tax rates, or reduces the number of taxpayers subject to tax.

Indicative Targets
Ceiling on reserve money

27. Reserve money is defined as the NBKR’s national currency liabilities to the economy, which includes currency issued and liabilities to other depositary corporations.

Cumulative floor on state government tax collections

28. Tax collections in cash correspond to the line “Tax Receipts” in the Treasury Report and comprise the following categories: tax on income and profits; taxes on goods and services; specific taxes on services; turnover taxes; taxes on property; taxes on international trade; and other taxes. Tax collections include collections of tax arrears but exclude tax offsets.

Cumulative floor on state government spending on social assistance

29. Social assistance spending comprises state government spending on Unified Monthly Benefit (UMB) and Monthly Social Benefit (MSB) programs.

Ceiling on the new Non-Concessional External Debt Contracted or Guaranteed

30. An indicative target applies to the contracting or guaranteeing by the public sector of non-concessional external debt, i.e. external debt with grant element of less than 35 percent, except normal short-term import-related credits and the NBKR international reserve liabilities.

Reporting Requirements Under the Arrangement

31. The government and the NBKR will provide the IMF with the necessary economic and financial statistical data to monitor economic developments and the quantitative targets (see Table 4). In particular, the government and the NBKR will provide the following specific information.

Analytical Balance Sheet of the NBKR

32. The NBKR will provide to the IMF its analytical balance sheet on a daily basis. The information provided will clearly identify the following items in the definitions specified above: the net foreign assets of the NBKR; the net international reserves of the NBKR; total reserve assets and total reserve liabilities of the NBKR ; the net domestic assets of the NBKR; net credit from the NBKR to the general government, disaggregated by state government and special funds of the KR; net credit from the NBKR to other deposit corporations and other financial corporations (including Russia-Kyrgyz Development Fund); other items net; and reserve money. The balance sheet will be provided using both actual and program exchange rates. The above information will be provided to the IMF Resident Representative and/or transmitted by e-mail to the IMF.

Monetary Survey

33. Monthly banking system data, in the form of monetary surveys of the banking sector and other depository corporations, will be reported to the IMF by the NBKR within 16 days of the end of the month. The information provided will clearly identify the following items: net foreign assets and net domestic assets of the banking system, net credit from the banking system to the general government disaggregated by the state government, and the social fund, net claims to the rest of the economy, other items net, and broad money. The monetary survey will be provided using both program and actual exchange rates. In light of the limited coverage of the RKDF activities in the monetary survey, the NBKR in accordance with the MOU will exert the best efforts to ensure that the IMF has access to the macro-critical information.

34. The NBKR will provide monthly data to the IMF within seven days after the end of the month on the amount of holdings of treasury bills, treasury bonds and other securities issued by the state government, differentiated by the following categories of holders: the NBKR; resident banks; resident nonbanks (including separately the social fund and deposit protection agency); and nonresidents. The information will be provided in both the book (nominal) value and the actual value, where applicable.

International Reserves and Key Financial Indicators

35. The NBKR will provide monthly data within 20 days from the end of the month on its gross and net international reserves within the framework of reporting “International Reserves and Foreign Currency Liquidity” (IMF’s SDDS). The report on foreign assets and liabilities by currency will be provided 20 days after the end of each quarter. These data will be provided at two alternative sets of the exchange rates and the gold price: first, at those used to derive the NFA position in the NBKR accounts; and second, at those specified in the program (see Section I). The NBKR will also provide data on net foreign financing flows, including disbursements of program loans and grants, amortization, interest payments on external debt, interest income on reserves, other direct foreign currency payments by the government and the NBKR. In addition, reports should be sent to the IMF on nominal exchange rates (including the official and interbank exchange rates), foreign exchange interbank market turnover, and the volume of NBKR foreign exchange sales and purchases in the domestic interbank market and with other parties, on a daily basis. Reports on treasury bill yields and the amount of treasury bill sales and redemptions on a weekly basis every Monday. On the twenty-fifth day of the month following the reference month, the NBKR will provide indicators of financial soundness of the banking system, including the ratios of regulatory capital to risk-weighted assets, nonperforming loans to total loans, nonperforming loans by sector and by currency, restructured and prolonged loans by sector and by currency, return on equity, liquidity, earning and profitability, loans and deposits ratios in domestic and foreign currency, foreign currency exposure and dollarization as well as data on bank deposits and loans by maturity and sector, and bank deposit and lending rates by maturity. On the twentieth day of the month following the reference quarter the NBKR will provide data on nonperforming loans for micro-finance organizations and credit unions.

External Debt

36. The ministry of finance, together with the NBKR, will provide monthly information on the disbursements, principal and interest payment—both actual and falling due—on contracting and guaranteeing of medium- and long-term external loans by the state government, nonfinancial public enterprises, and the NBKR; and any stock of outstanding arrears on external debt service payments within 21 days of the end of each month. In addition, the ministry of finance will report the total amount of outstanding government guarantees and external arrears on a monthly basis. While the NBKR will provide the debt service payment data on private debt, the ministry of finance will provide data on debt service on public and publicly guaranteed loans.

Budgetary and Extra Budgetary Data

37. In addition to the monthly treasury report, the Social Fund will report monthly on its operations. This information will be provided to the Fund staff within 26 days from the end of each reference month. The ministry of finance will also provide monthly reports on the disbursements and use under the public investment program and budgetary grants with a one-month time lag, as well as any new or renewed tax exemption, including its quantification.

Balance of Payments Data

38. The NBKR will provide current account and capital account data, including data on foreign trade, services, official and private transfers, foreign investment, and disbursements of public and private loans, on a quarterly basis, with at most a three-month lag. The NBKR will also provide monthly foreign trade data with a two-month lag.

Other General Economic Information

39. The National Statistics Committee will notify the IMF of the monthly Consumer Price Index by category by the fifteenth business day of the following month, and convey monthly GDP estimates within 30 days of the end of each month.

Table 1.

Kyrgyz Republic: Ten Largest State Owned Enterprises (SOEs)

(Included in the public sector)

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Sources: Authorities data and IMF staff calculations.
Table 2.

Kyrgyz Republic: Program Cross Exchange Rates and Gold

article image
Sources: Authorities data and IMF staff calculations.
Table 3a.

Kyrgyz Republic: Projected Budget Support, PIP and Amortization 1/

(In millions of U.S. dollars)

article image
Sources: Kyrgyz authorities and IMF staff estimate.

Data for 2017 are cumulative since the latest available actual data (June, 2017). Data for 2018 are cumulative starting March.

Table 3b.

Kyrgyz Republic: Projected Flows of the Russia-Kyrgyz Development Fund

(In millions of U.S. dollars)

article image
Sources: Kyrgyz authorities and IMF staff estimate.
Table 4.

Kyrgyz Republic: Reporting Requirements and Frequency Under the Arrangement

article image
Source: IMF staff.

1

Restructured loans stood at 7.5 percent in September, of which 4.4 percent were prolonged loans, which are more susceptible to becoming non-performing.

2

The initial agreement between Russia and the Kyrgyz Republic signed in 2014 consisted of a write-off of a $300 million debt in equal tranches over a 10-year period. $60 million was written off in 2015–16. However, the agreement was revised earlier this year to write off the outstanding $240 million in 2017. As a result, the ratio of debt to GDP will drop by 3.7 percentage points. This reduction has no implication on the assessment of debt sustainability, given that the initial agreement did not envisage any debt service payment.

3

Complying with the component of the SB pertaining to judicial review and non-suspension of NBKR decisions was found unconstitutional. The authorities have also demonstrated that the component of the SB regarding the NBKR’s powers in the resolution and liquidation process is addressed in the provisions of the current law. In view of these developments, the remaining components of the July 2017 SB have been reformulated into a prior action under which the authorities committed to reintroduce the key provisions on (i) governance and oversight, particularly to introduce majority of non-executive membership in the board of the NBKR; and (ii) lending to non-supervised institutions. The end-March 2018 SB on the enactment of these amendments has been revised accordingly.

4

Out of the four banks, only “Kyrgyzagroprombank” was liquidated on time.

5

The fiscal rule will be anchored around a debt ceiling, which would place a cap on the level of public debt and thus directly controls the main factor in ensuring fiscal sustainability. In addition, it will also have an operational target in the form of a deficit ceiling (general government fiscal deficit including net investment by the government in SOEs). Since debt and deficit ceilings may lead to procyclicality, a notional control account for deviations from the deficit ceiling—and associated automatic correction mechanism—should allow for small fluctuations around the deficit ceiling. Also, a well-specified escape clause should provide for the suspension of the rule under exceptional circumstances.

6

These initiatives include (i) a subsidized program to support agriculture sponsored by the government; (ii) subsidized lending under the affordable housing program of the state mortgage company; and (iii) the preferential loans provided by the RKDF to small- and medium-size enterprises through banks.

7

See also International Monetary Fund, 2017, Selected Issues “Improving Governance to Support More Inclusive Growth and Prosperity in the Kyrgyz Republic”, IMF Country Report (Washington).

8

International Monetary Fund, 2017, Selected Issues “Improving Governance to Support More Inclusive Growth and Prosperity in the Kyrgyz Republic”, IMF Country Report (Washington).

1

The baseline scenario assumes that the situation will be resolved by end-2017.

1

Most of the specific information and data are based on the “Preliminary Results of the Implementation of the National Strategy for Sustainable Development in the Kyrgyz Republic for 2013-17” prepared by the Kyrgyz authorities in 2017.

2

World Bank, “World Development Indicators”.

3

International Monetary Fund, 2016, Selected Issues “Income Inequality in the Kyrgyz Republic”, Country Report No. 16/56 (Washington).

4

International Monetary Fund, 2016, Selected Issues “Income Inequality in the Kyrgyz Republic”, IMF Country Report No. 16/56 (Washington).

1

See also International Monetary Fund, October 2017. “Kyrgyz Republic: Selected Issues “Economic Transformation: A Human Centered Diversification Strategy”, IMF Country Report (Washington).

2

The labor input used in the growth accounting exercise is constructed using five-year age cohort for both male and female, taking into account as much as possible cohort-specific population, labor force participation and employment rates, as well as education (share of population with above basic level of education as classified by ILO, i.e., either intermediate or advanced level of education). Cohort-specific education data are available only for 2011–2013, therefore the average of these three years for each age-gender cohort has been applied to all years.

3

Data prior to 2002 are not available, therefore in the growth accounting exercise, employment rates by age and by gender in 2002 are applied to the period 1995–2001.

4

Linear interpolation is assumed for the convergence of the participation gap to its level in 1995, which implies around 2 percentage points improvement for most of the age groups. The assumed improvement could be relatively optimistic in the near term.

5

The growth elasticities (semi-elasticities) of poverty usually range from -1 to -4 in empirical studies. The relative modest estimate for the Kyrgyz Republic is likely due to the fact that a significant part of growth since mid-2000 is driven the capital-intensive mining sector and hence is not very inclusive.

1

The TMU paragraphs are numerated as of December 1, 2017.

2

The program reference rate and spreads are based on the “average projected rate” for the six-month USD LIBOR over the following 10 years from the Fall 2014 World Economic Outlook (WEO).

3

In case of a currency swap providing for receipt of foreign exchange by the NBKR and transfer of domestic currency to a resident financial institution, total international reserves increase, NIR remain unchanged, and net claims on domestic banks in soms increase. In case of a currency swap providing for transfer of foreign exchange by the NBKR and receipt of domestic currency from a resident financial institution, total international reserves and NIR decrease, and net claims by NBKR on domestic banks remain unchanged.

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Cover IMF Staff Country Reports
Kyrgyz Republic: Fourth and Fifth Reviews under the Three-Year Arrangements under the Extended Credit Facility, and Request for Modification of Performance Criteria-Press Release; Staff Report
Author:
International Monetary Fund. Middle East and Central Asia Dept.
Volume/Issue:
Volume 2018: Issue 053
Publisher:
International Monetary Fund
ISBN:
9781484342954
ISSN:
1934-7685
Pages:
106
DOI:
https://doi.org/10.5089/9781484342954.002

Foreign Exchange Market, 2014–17

Tax Revenue Performance

(In y-o-y percent change)
Figure 1.

Kyrgyz Republic: Macroeconomic Indicators—Regional Comparators
Figure 2.

Kyrgyz Republic: Growth and Inflation
Figure 3.

Kyrgyz Republic: Monetary and Financial Sector Development
Figure 4.

Kyrgyz Republic: Contribution to the Revision of External Debt

Ease of Doing Business 2018

(Current ranking and change in distance to frontier)

Age Profile of Labor Market Statistics