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International Monetary Fund. Middle East and Central Asia Dept.
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Publication Date:
02 Aug 2021
eISBN:
9781513594040
Language:
English
Keywords:
headline inflation; policy flexibility; Policy recommendation; Policy discussion; IMF's transparency policy; Structural reforms; Inflation
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IMF Country Report No. 21/174

Abstract

IMF Country Report No. 21/174

Copyright Page

IMF Country Report No. 21/174

KYRGYZ REPUBLIC

2021 ARTICLE IV CONSULTATION—PRESS RELEASE; AND STAFF REPORT

August 2021

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2021 Article IV consultation with Kyrgyz Republic, the following documents have been released and are included in this package:

  • A Press Release summarizing the views of the Executive Board as expressed during its June 4, 2021 consideration of the staff report that concluded the Article IV consultation with Kyrgyz Republic.

  • The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on June 4, 2021, following discussions that ended on March 30, 2021, with the officials of Kyrgyz Republic on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on May 18, 2021.

  • An Informational Annex prepared by the IMF staff.

  • A Debt Sustainability Analysis prepared by the staff[s] of the IMF and the World Bank.

  • A Supplementary Information updating information on recent developments.

The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.

Copies of this report are available to the public from

International Monetary Fund • Publication Services

PO Box 92780 • Washington, D.C. 20090

Telephone: (202) 623–7430 • Fax: (202) 623–7201

E-mail: publications@imf.org Web: http://www.imf.org

Price: $18.00 per printed copy

International Monetary Fund

Washington, D.C.

©2021 International Monetary Fund

Press Release

PR21/160

IMF Executive Board Concludes 2021 Article IV Consultation with the Kyrgyz Republic

FOR IM MEDlATE RELEASE

Washington, DC – June 8, 2021: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with the Kyrgyz Republic.

The Kyrgyz economy was severely hit by the COVID-19 pandemic, but the authorities reacted swiftly to protect public health and cushion the impact on the economy. Real GDP declined by 8.6 percent in 2020 due to significant contraction in exports, gold mining, industry, tourism, transport, and construction. Headline inflation rose to 9.7 percent in 2020, primarily because of imported food price inflation and the exchange rate pass-through, while public debt increased by 16.5 percent of GDP to 68 percent. The authorities’crisis mitigating measures amounting to 7.2 percent of GDP included emergency health spending, a food security program, temporary tax deferrals and subsidized loans to small and medium enterprises, liquidity support to banks, deferrals of loan payments, and the temporary relaxation of capital and loan provisioning norms. Nevertheless, unemployment and poverty increased in 2020.

Growth is expected to rebound in 2021–22. The economy is projected to grow by 3.8 percent in 2021 and by 6.4 percent in 2022, underpinned by the more favorable global outlook, higher gold production, and a gradual rebound in tourism, transportation and related services. Annual inflation will remain elevated in the coming months but gradually return to the central bank’s target range of 5–7 percent. The current account deficit is projected at about 6 percent of GDP in 2021 and in the medium term, driven by a recovery in imports and the opening of the borders.

The level of uncertainty, however, remains high. A slow rollout of vaccines or emergence of new COVID-19 variants may delay the recovery to 2022 or beyond, while lower gold prices or weaker remittances could weaken the balance of payments. More depreciation due to external pressures would further raise public debt while financing constraints could limit fiscal room for countercyclical policies. While securing vaccines is a top priority to contain the pandemic, with macro economic buffers largely exhausted in 2020, policymakers will face tighter constraints with less room for policy flexibility. Advancing structural reforms would be critical to improve the business climate and strengthen market confidence.

Executive Board Assessment2

Executive Directors agreed with the thrust of the staff appraisal. They noted that the Kyrgyz Republic was severely hit by the COVID-19 pandemic. Output contracted, inflation and public debt rose, and unemployment and poverty increased. Directors commended the authorities’ broad-based policy response which, backed by financial support from the international community, supported households and firms during the crisis. Despite the expected economic rebound in 2021–22, uncertainty remains high. In that context, Directors emphasized the importance of securing vaccines as soon as possible to save lives and revive economic activity. Accommodative policies should be maintained in the near term supported by medium-term fiscal consolidation. Noting that policy flexibility was constrained by limited macro economic buffers, Directors stressed the importance of advancing structural reforms to improve the business climate and strengthen market confidence.

Directors emphasized that fiscal policy should support the economy in the near-term but aim to reduce public debt to below 60 percent of GDP by 2025. To achieve the needed fiscal consolidation and create space for the country’s development needs, they urged the authorities to reduce the wage bill, goods and services spending and energy subsidies, and improve revenue mobilization and public financial management. They noted, however, that if financing becomes a constraint, additional expenditure cuts would be necessary while protecting social spending. A demonstrated commitment to reforms would engender additional concessional donor financing.

Directors emphasized that monetary policy should remain focused on price stability. Given the recent increase in inflation, they welcomed the National Bank of Kyrgyz’s (NBKR) decision to raise the policy rate and stressed that further monetary tightening would be warranted if second-round inflation pressures emerged. They also welcomed the central bank’s intention to adopt an inflation targeting framework over the medium-term and its commitment to maintain exchange rate flexibility as a shock absorber.

Noting the resilience of the banking sector, Directors encouraged the NBKR to remain vigilant to ensure financial sector stability g iven a possible rise in NPLs. They also stressed the importance of strengthening institutional and operational independence of the central bank.

Directors agreed that the Kyrgyz Republic needs an ambitious implementation of structural reforms to achieve higher and more inclusive, private sector-led growth. They urged the authorities to strengthen governance, including transparency of emergency spending, and reduce perceptions of corruption, restore financial viability of the energy sector, improve access to finance, reduce non-tariff trade barriers, and improve human capital and female labor force participation. Strengthening the AM L/CFT framework would also be important. Directors also stressed the criticality of political stability, policy predictability, and a market-friendly business environment. A speedy and transparent resolution of the ongoing commercial dispute with the largest foreign investor would be critical to ensure uninterrupted gold production while protecting the environment.

It is expected that the next Article IV consultation with the Kyrgyz Republic will be held on the standard 12-mo nth cycle.

Table 1.

Kyrgyz Republic: Selected Social and Economic Indicators, 2017–25

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

General government comprises the State government, the Social Fund, and the Mandatory Health Insurance Fund (MHIF). The State government com prises central and local governments.

Includes loans on-lent by the State government to state-owned enterprises in the energy sector.

Calculated at end-period exchange rates.

Twelve-month GDP over end-period broad money.

Gross international reserves exclude reserve assets in non-convertible currencies.

Title page

KYRGYZ REPUBLIC

STAFF REPORT FOR THE 2021 ARTICLE IV CONSULTATION

May 18, 2021

KEY ISSUES

Context. The Kyrgyz economy is highly dependent on remittances and foreign aid and does not have access to international capital markets. Inequality is relatively low, but poverty is widespread. The COVID crisis led to a sharp recession with output contracting by 8.6 percent in 2020, public debt rising by 16.5 percent of GDP to 68 percent, and the som depreciating by 19 percent against the US$. Under the assumption that the global pandemic begins to decisively recede this year, a rebound in growth is expected in 2021–22. However, significant uncertainty surrounds the baseline outlook and the recovery could be delayed if downside risks materialize. In the medium to long term, the main challenge is to create jobs for about 65,000 new jobseekers annually and to reduce labor out-migration. This will require deep structural reforms to transform the economy from a reliance on remittances to more diversified and private sector-led growth that is underpinned by higher investment and exports.

Policy recommendations. Macroeconomic policies should continue to support the economy in 2021 but start rebuilding buffers thereafter to strengthen resilience. This year, the fiscal deficit could be allowed to widen to permit additional health and social spending and some recovery in postponed public investment, while the central bank should monitor demand pressures and be prepared to tighten the monetary stance if inflation continues to rise. In the medium term, fiscal policy should be anchored to the objective of reducing public debt to below 60 percent of GDP by 2025, and aim to create fiscal space by reducing the public sector wage bill, energy subsidies, goods and services spending, and strengthening tax policy and administration to raise more revenue. Monetary policy should be calibrated to maintain inflation in mid-single digits while preserving exchange rate flexibility. If downside risks to growth were to materialize, monetary and fiscal support to the economy would need to be maintained for longer and the planned fiscal consolidation may need to be back loaded. To raise the economy’s growth potential, structural reforms should aim to strengthen governance, improve access to finance, electricity, and export markets, and strengthen the labor market.

Approved By

Subir Lall (MCD) and Uma Ramakrishnan (SPR)

Discussions with the authorities were held remotely during March 12–30, 2021. The staff team comprised Nikoloz Gigineishvili (head), lulia Teodoru, Jean van Houtte, Tigran Poghosyan (Resident Representative), Lilia Kadyrberdieva, and Erkeaim Shambetova (both Resident Representative office) (all MCD) with support from Vahid Khatami and Liliya Nigmatullina. Piotr Trabinski and Chorobek Imashov (OED) participated in the discussions.

Contents

  • RECENT DEVELOPMENTS, OUTLOOK, AND RISKS

  • POLICY DISCUSSIONS: RESTORING STABILITY AND SUPPORTING INCLUSIVE GROWTH

  • A. Fiscal Policy

  • B. Monetary, Exchange Rate, and Financial Policies

  • C. Policy Response in a Downside Scenario

  • D. Medium-Term Structural Reforms for Growth and Job Creation

  • STAFF APPRAISAL

  • BOX

  • 1. Policy Responses to the COVID-19 Crisis

  • FIGURES

  • 1. Growth, Poverty, and Inequality

  • 2. Real and External Developments

  • 3. Fiscal and Monetary Developments

  • 4. Wage Bill

  • 5. Constraints to Growth

  • TABLES

  • 1. Selected Social and Economic Indicators, 2017–25

  • 2. National Accounts, 2017–25

  • 3. Balance of Payments, 2017–25

  • 4. NBKR Accounts, 2017–21

  • 5. Monetary Survey, 2017–21

  • 6. State Government Finances, 2017–25 (in millions of soms)

  • 7. State Government Finances, 2017–25 (in percent of GDP)

  • 8. General Government Finances, 2017–25, GFSM 2014 Presentation (in millions of soms)

  • 9. General Government Finances, 2017–25, GFSM 2014 Presentation (in percent of GDP)

  • 10. Selected Financial Soundness Indicators, 2015–20

  • ANNEXES

  • I. Risk Assessment Matrix

  • II. Implementation of 2019 Article IV Consultation’s Key Recommendations

  • III. External Sector Assessment

  • IV. Potential Output Growth and Growth-Augmenting Structural Reforms

  • V What Drives Bank Interest Rate Spreads in the Kyrgyz Republic

  • VI. Income Inequality in the Kyrgyz Republic: the Role of Remittances and Social Transfers

1

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. Due to the COVID-19 pandemic, the2021 discussions were carried out virtually.

2

At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm.

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Cover IMF Staff Country Reports
Kyrgyz Republic: 2021 Article IV Consultation-Press Release; and Staff Report
Author:
International Monetary Fund. Middle East and Central Asia Dept.
Volume/Issue:
Volume 2021: Issue 174
Publisher:
International Monetary Fund
ISBN:
9781513594040
ISSN:
1934-7685
Pages:
89
DOI:
https://doi.org/10.5089/9781513594040.002