Kyrgyz Republic: Staff Report for the 2019 Article IV Consultation—Debt Sustainability Analysis
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International Monetary Fund. Middle East and Central Asia Dept.
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Publication Date:
03 Jul 2019
eISBN:
9781498324199
Language:
English
Keywords:
ISCR; CR; deficit; IMF government Finance Statistics Manual; Kyrgyzstan; market financing; financing need; debt outlook; debt burden indicator; GDP ratio; Exports
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2019 Article IV Consultation-Press Release; and Staff Report

Abstract

2019 Article IV Consultation-Press Release; and Staff Report

Public Debt Coverage

1. Public sector debt comprises state government debt (both central and local government), state guarantees, and the debt of the central bank towards the IMF (Text Table 1). Almost all the public sector debt is central government debt. Local governments have no external debt and negligible domestic debt vis-à-vis non-governmental entities. According to the 2019 budget, there is no outstanding state guarantee because the budget code has been preventing the state from guaranteeing debt of state-owned enterprises (SOEs) and other public entities since 2007, except for the cases stipulated by the obligations of the Kyrgyz Republic within its membership in international and inter-governmental organizations. SOEs have no external debt, while their domestic debt vis-à-vis non-governmental entities is limited to short term borrowing from commercial banks and is not significant, as most of their borrowing is from the State. The social security fund has no debt. Nevertheless, a contingent liability shock of 7 percent of GDP was applied, reflecting risks around the operation of SOEs (2 percent of GDP, which is about the structural cash shortfall of loss-making energy sector SOEs)2 and the default value representing the average cost to the government during a financial crisis (5 percent of GDP, Text Table 2).

Text Table 1.

Kyrgyz Republic: Public Debt Coverage

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Text Table 2.

Kyrgyz Republic: Combined Contingent Liability Shock

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The default shock of 2% of GDP will be triggered for countries, whose government-guaranteed debt is, not Fully captured under the country’s public debt definition (1.). IF it is. already included in the government debt (1.) and risks associated with SoE’s debt not guaranteed by the government is assessed to be negligible, a country team may reduce this to 0%.

Background

2. Public debt decreased over the last three years, driven by external debt (Text Chart 1). Following a sharp increase between 2013–15 mostly due to the significant depreciation of the KGS vis-à-vis the U.S. dollar, public debt decreased from 67.1 percent of GDP in 2015 to 56.0 percent of GDP in 2018. This was the result of the decline in external debt by 16 percent of GDP thanks to the appreciation of the KGZ as well as the debt relief received from Russia.3 At the same time, domestic debt rose from 3.6 to 8.0 percent of GDP, thereby increasing its share from 5 to 14 percent in total debt. The domestic public debt is composed of treasury bills and bonds that are mostly held by commercial banks (50 percent) and the social security fund (30 percent).

Text Chart 1.
Text Chart 1.

Public Debt (percent of GDP)

Citation: IMF Staff Country Reports 2019, 208; 10.5089/9781498324199.002.A003

Underlying Assumptions

3. The current DSA is built on revised macroeconomic assumptions (Text Table 3). Economic growth is projected to be slightly lower in the near term than in the last DSA. Following a substantial widening in 2018–19, the current account deficit is expected to narrow between 2020–22 on the back of a recovery of remittances and a slight increase in gold exports. Over the medium term, the current account deficit is projected to increase owing to the decline in gold production and exports starting in 2023. Over the long term, other exports are projected to materialize to partially replace the exports of the main gold mine that accounted for 37 percent of exports in 2018 and is projected to cease operations in 2026. The source of such exports could be new gold mines, other minerals, such as rare earths, or hydropower, for which only 10 percent of the potential has been exploited so far. A steady flow of foreign direct investment (FDI) prompted by sustained improvement in the business environment is projected to materialize to limit the gradual drop of the level of exports to about 5 percent of GDP over the projection horizon. After an unexpectedly tight fiscal stance in 2018, we project a moderate fiscal loosening in 2019 to close the output gap to be followed by strict adherence to the fiscal rule presently considered by parliament that caps debt at 70 percent of GDP and the budget deficit at 3 percent of GDP over the medium and long term. The budget deficit should be recorded in line with the IMF Government Finance Statistics Manual (GFSM), that is including on-lending to loss making state-owned enterprises as capital grants contributing to the deficit rather than as a financing item. The authorities have room to keep the deficit at such level while financing their development needs by reducing tax exemptions, better capturing imports, reducing transfers to energy sector SOEs and identifying other expenditure savings through progress in public investment and financial management.4 Beyond firm commitments in the near term, a limited amount of grants (current grants around 0.4% of GDP and capital grants around 1% of GDP) is projected to continue over the medium term. These grants are highly likely and their inclusion does not change the risk rating.

Text Table 3.

Kyrgyz Republic: Selected Indicators, 2016–24

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Sources: Kyrgyz authorities and IMF staff estimates.

IMF Country Report No. 18/53, Kyrgyz Republic—4th and 5th Reviews under the Extended Credit Facility.

Including onlending to energy SOEs.

Including total onlending to SOEs.

4. The realism tools suggest that the baseline scenario is credible. There are small differences between the past and projected drivers of external and public debt dynamics; however, unexpected changes in debt are close to the upper end of the interquartile range (Figure 3). The lower projected contribution of the primary deficit to changes in public debt is due to the improvement in the fiscal balance. This, however, is in line with the historical distribution of adjustments under Fund-supported programs in LICs (Figure 4). Moreover, while the planned adjustment reflects the change in the fiscal balance between 2017–20, the bulk of the improvement already took place in 2018.

Figure 3.
Figure 3.

Kyrgyz Republic: Drivers of Debt Dynamics—Baseline Scenario

Citation: IMF Staff Country Reports 2019, 208; 10.5089/9781498324199.002.A003

1/ Difference between anticipated and actual contributions on debt ratios.2/ Distribution across LICs for which LIC DSAs were produced.3/ Given the relatively low private external debt for average low-income countries, a ppt change in PPG external debt should be largely explained by the drivers of the external debt dynamics equation.
Figure 4.
Figure 4.

Kyrgyz Republic: Realism Tools

Citation: IMF Staff Country Reports 2019, 208; 10.5089/9781498324199.002.A003

5. The stable debt outlook reflects the broadly neutral fiscal stance in the medium term. Total public debt is expected to hover around 55 percent of GDP over the medium term as the impact of positive growth/interest differential is offset by the fiscal deficit (Table 2). As the financing need is expected to be increasingly covered through domestic debt issuance, the composition of total public debt is projected to shift from external towards domestic debt. Domestic debt is expected to double from 8 percent of GDP in 2018 to 16 percent of GDP in the long term and the increase is projected to be subscribed by commercial banks while leaving room for credit to the private sector, in sync with the gradual deepening of the financial sector.

Table 2.

Kyrgyz Republic: Public Sector Debt Sustainability Framework, 2015–38

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

Coverage of debt The central, state, and local governments, central bank, government-guaranteed debt. Definition of external debt is Residency-based.

The underlying PV of external debt-to-GDP ratio under the public DSA differs from the external DSA with the size of differences depending on exchange rates projections.

Debt service is defined as the sum of interest and amortization of medium and long-term, and short-term debt.

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period and other debt creating/reducing flows.

Defined as a primary deficit minus a change in the public debt-to-GDP ratio ((-): a primary surplus), which would stabilizes the debt ratio only in the year in question.

Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.

Country Classification

6. The Kyrgyz Republic’s debt-carrying capacity is assessed to be strong. The country’s Composite Indicator (CI) index, 5 calculated based on the April 2019 WEO and the 2017 World Bank Country Policy and Institutional Assessment (CPIA) score, is 3.19, above the threshold of 3.05 for strong debt-carrying capacity (Text Table 4). This translates into the following external debt burden thresholds and public debt benchmark: 240 percent for the present value (PV) of external debt-to-exports ratio, 55 percent for the PV of external debt-to-GDP ratio, 21 percent for the external debt service-to-exports ratio, 23 percent for the external debt service-to-revenue ratio, and 70 percent for the PV of total public debt-to-GDP ratio.

Text Table 4.

Kyrgyz Republic: Debt Carrying Capacity and Relevant Indicative Thresholds

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External DSA

7. The debt outlook remains vulnerable to external and domestic shocks. Because of the write-off of Russian debt, external public and publicly guaranteed (PPG) debt declined to 48.0 percent of GDP in 2018 from 53.0 percent in 2017. PPG external debt is projected to gradually decrease further over the medium term. Total external debt decreased from 91.0 percent of GDP in 2017 to 85.0 percent in 2018 and will decline further towards 75 percent in the medium term.6

8. External debt remains at moderate risk of distress. Public and publicly guaranteed (PPG) external debt in PV terms is estimated to decline from 35 percent of GDP in 2018 to below 30 percent of GDP over the long term. While most external debt burden indicators remain below their indicative sustainability thresholds under shock scenarios and suggest limited rollover risks, the debt service-to-exports ratios breach its threshold in the medium term in the case of a shock to exports (Figure 1 and Table 3), indicating moderate risk of debt distress. Moreover, the PV of debt-to-exports also breaches its threshold, albeit for only a year. The assessment of moderate risk is also supported by the overvaluation of the exchange rate highlighted by the External Sector Assessment,7 the need for continued fiscal discipline in strict adherence to the draft fiscal rule, the expectations of continuing external concessional financing, and the large dependence on remittances and gold exports.

Figure 1.
Figure 1.

Kyrgyz Republic: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2018–28 1/

Citation: IMF Staff Country Reports 2019, 208; 10.5089/9781498324199.002.A003

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2028. Stress tests with one-off breaches are also presented (if any), while these one-off breaches are deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.2/ The historical scenario leads to much more favorable debt dynamics than the baseline mainly because the average annual FDI inflow was much higher than projected in the base line (see Table 1).Note: debt service was very high in 2018 because debt relief by Russia ($240 million) was recorded as debt amortization financed by debt relief in the balance of payments.
Table 3.

Kyrgyz Republic: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2018–28

(In percent)

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Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Includes official and private transfers and FDI.

9. The Kyrgyz Republic is assessed to have some space to absorb shocks. The external PPG debt outlook remains vulnerable to large external shocks, to a decline in exports and other flows, the depreciation of the KGS as well as combined external shocks. Given the gap between debt burden indicators and their respective thresholds, the Kyrgyz Republic has some space to absorb shocks without being downgraded to high risk of debt distress (Figure 5).

Figure 5.
Figure 5.

Kyrgyz Republic: Qualification of the Moderate Category, 2018–2028 1/

Citation: IMF Staff Country Reports 2019, 208; 10.5089/9781498324199.002.A003

Sources: Country authorities; and staff estimates and projections.1/ For the PV debt/GDPand PV debt/exports thresholds, x is 20 percent and y is 40 percent. For debt service/Exports and debt service/revenue thresholds, x is 12 percent and y is 35 percent.

Public DSA

10. The public debt outlook has remained broadly unchanged since the last DSA (Text Table 5). Public debt (external plus domestic) decreased from 58.8 percent of GDP in 2017 to 56.0 percent of GDP in 2018. Total public debt is expected to be manageable in the medium and long term but remains sensitive to shocks, especially to real GDP growth and the depreciation of the KGS. Specifically, the PV of debt-to-GDP ratio breaches its sustainability threshold in the case of shocks to real GDP growth over the medium and long term (Figure 2 and Table 4). Rollover risks associated with public debt are expected to remain modest in the years ahead, albeit increasing over the long term.

Text Table 5.

Kyrgyz Republic: Comparison of Debt Ratio

(percent of GDP)

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Sources: Kyrgyz authorities and IMF staff estimates.

IMF Country Report No. 18/53, Kyrgyz Republic—4th and 5th Reviews under the Extended Credit Facility.

Figure 2.
Figure 2.

Kyrgyz Republic: Indicators of Public Debt Under Alternative Scenarios, 2018–28

Citation: IMF Staff Country Reports 2019, 208; 10.5089/9781498324199.002.A003

* Note: The public DSA allows for domestic financing to cover the additional financing needs generated by the shocks under the stress tests in the public DSA. Default terms of marginal debt are based on baseline 10-year projections.Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2028. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.2/ The historical scenario leads to more favorable debt dynamics than the baseline in spite of higher primary deficits mostly because of the countervailing impact of the higher GDP deflator and the lower interest rate than in the baseline (see Table 2).
Table 4.

Kyrgyz Republic: Sensitivity Analysis for Key Indicators of Public Debt, 2018–28

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Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP.

Includes official and private transfers and FDI.

Authorities’ Views

11. The authorities agreed with the overall assessment. They noted that the fiscal rule being considered by Parliament will help keeping the overall public debt sustainable.

Conclusion

12. Both external and overall public debt remains at moderate risk of distress. Both the results of stress tests and country-specific circumstances point toward moderate risk of external debt distress. Given this assessment of external debt and that at least one indicator breaches the threshold under the public debt stress tests, overall public debt is also assessed to have moderate risk of debt distress.

13. The authorities need to maintain fiscal discipline, remain cautious when contracting or guaranteeing new debt and continue to improve the business climate. To keep the public debt sustainable, the authorities will need to strictly adhere to the fiscal rule considered by Parliament. While necessary to fill the large infrastructure gap, externally-financed public investments, could undermine debt sustainability. In this context, further efforts are needed to strengthen public debt and public investment management, to ensure that potential gains from externally financed public investment projects are fully realized. Moreover, the authorities should keep improving the business environment to maintain the country’s export beyond the closure of the main gold mine. An attractive business environment will be of paramount importance to generate new exports to replace those of the main gold mine that will close in 2026.

Table 1.

Kyrgyz Republic: External Debt Sustainability Framework, Baseline Scenario, 2015–38

(In percent of GDP unless, otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

Includes both public and private sector external debt.

Derived as [r – g – ρ(1+g) + εα (1+r)]/(1+g + ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, ρ = growth rate of GDP deflator in U.S. dollar terms, ε=nominal appreciation of the local currency, and α = share of local currency-denominated external debt in total external debt.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Current-year interest payments divided by previous period debt stock.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Assumes that PV of private sector debt is equivalent to its face value.

Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.

2

Kyrgyz Republic—Staff Report for 2019 Article IV Consultation, ¶35 (forthcoming).

3

The initial agreement between Russia and the Kyrgyz Republic signed in 2014 to write-off of a $300 million debt (4.0 percent of GDP) in equal tranches over a 10-year period was revised to write off the outstanding $240 million in 2018.

4

Kyrgyz Republic—Staff Report for 2019 Article IV Consultation, ¶¶28–30 (forthcoming).

5

The CI is a function of the CPIA, international reserves, remittances, country and global economic growth. The calculation is based on 10-year averages of the variables, across 5 years of historical data and 5 years of projection. For more details, see IMF, 2018, Guidance Note on the Bank-Fund Debt Sustainability Framework for Low-Income Countries.

6

This implies that private external debt (for example, debt of commercial banks) would be in the range of 20–40 percent of GDP in the medium term.

7

Kyrgyz Republic, Staff Report fort the 2019 Article IV Consultation, Annex 2. External Sector Assessment (forthcoming).

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Cover IMF Staff Country Reports
Kyrgyz Republic: 2019 Article IV Consultation-Press Release; and Staff Report
Author:
International Monetary Fund. Middle East and Central Asia Dept.
Volume/Issue:
Volume 2019: Issue 208
Publisher:
International Monetary Fund
ISBN:
9781498324199
ISSN:
1934-7685
Pages:
81
DOI:
https://doi.org/10.5089/9781498324199.002
  • Text Chart 1.
    View in gallery
    Text Chart 1.

    Public Debt (percent of GDP)

  • Figure 3.
    View in gallery
    Figure 3.

    Kyrgyz Republic: Drivers of Debt Dynamics—Baseline Scenario

  • Figure 4.
    View in gallery
    Figure 4.

    Kyrgyz Republic: Realism Tools

  • Figure 1.
    View in gallery
    Figure 1.

    Kyrgyz Republic: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2018–28 1/

  • Figure 5.
    View in gallery
    Figure 5.

    Kyrgyz Republic: Qualification of the Moderate Category, 2018–2028 1/

  • Figure 2.
    View in gallery
    Figure 2.

    Kyrgyz Republic: Indicators of Public Debt Under Alternative Scenarios, 2018–28

Text Chart 1.

Public Debt (percent of GDP)
Figure 3.

Kyrgyz Republic: Drivers of Debt Dynamics—Baseline Scenario
Figure 4.

Kyrgyz Republic: Realism Tools
Figure 1.

Kyrgyz Republic: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2018–28 1/
Figure 5.

Kyrgyz Republic: Qualification of the Moderate Category, 2018–2028 1/
Figure 2.

Kyrgyz Republic: Indicators of Public Debt Under Alternative Scenarios, 2018–28