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International Monetary Fund. Middle East and Central Asia Dept.
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Publication Date:
16 Feb 2023
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9798400234859
ISBN:
9798400234859
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IMF Country Report No. 23/91

Abstract

IMF Country Report No. 23/91

Copyright Page

IMF Country Report No. 23/91

KYRGYZ REPUBLIC

2022 ARTICLE IV CONSULTATION—PRESS RELEASE; AND STAFF REPORT

February 2023

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 2022 Article IV consultation with Kyrgyz Republic, the following documents have been released and are included in this package:

  • A Press Release.

  • The Staff Report prepared by a staff team of the IMF for the Executive Board's consideration on lapse-of-time basis following discussions that ended on November 2022, 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 January 4, 2023.

  • An Informational Annex prepared by the IMF staff

  • A Debt Sustainability Analysis prepared by the staffs of the IMF and the International Development Association.

The documents listed below have been or will be separately released.

*Selected Issues

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

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

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International Monetary Fund

Washington, D.C.

© 2023 International Monetary Fund

Press Release

PRESS RELEASE

PR23/44

IMF Executive Board Concludes 2022 Article IV Consultation with the Kyrgyz Republic

FOR IMMEDIATE RELEASE

Washington, DC — February 16, 2023: The Executive Board of the International Monetary Fund (IMF) concluded the 2022 Article IV consultation1 with the Kyrgyz Republic and considered and endorsed the staff appraisal without a meeting on a lapse-of-time basis.2

The economy of the Kyrgyz Republic has shown resilience to the spillovers from the war in Ukraine and is estimated to have grown by 5.5 percent in 2022, driven by gold production, trade, transportation, and agriculture. Annual inflation increased to over 15 percent during the year, mainly due to high global food and fuel prices, but core inflation also rose to double digits. The general government deficit, including lending to energy sector state-owned enterprises, is estimated to have widened to 5.2 percent of GDP in 2022 from 0.8 percent the year before, primarily due to a significant increase in public sector salaries and pensions, and public investment, offsetting efforts to strengthen tax administration that have yielded a remarkable improvement in tax revenue of around 6 percentage points of GDP. Imports are estimated to have increased considerably, partly because of higher oil prices, but also due to an increase in transit trade, while gold exports were negligible. The banking system has remained financially healthy, but non-performing loans increased to more than 12 percent of total loans.

Growth in 2023 is expected to ease to 3.5 percent, as the projected global slowdown and the contraction in Russia start to weigh on the Kyrgyz economy. Inflation is expected to decline to about 10 percent by end-2023 and the current account deficit to narrow to more sustainable levels, but the elevated fiscal deficit would result in a moderate build-up of public debt in the medium term. In view of the heightened global uncertainty, policy priorities include restoring macroeconomic buffers to strengthen resilience to future shocks and implementing structural reforms to support higher and more inclusive growth and poverty reduction.

Executive Board Assessment

The Kyrgyz Republic has shown resilience in the face of multiple shocks, but risks are elevated. Unexpected migration of capital and productive labor from Russia have supported activity. However, inflation surged, external and fiscal balances deteriorated, international reserves declined, and poverty increased. Total public debt fell, largely because of high nominal GDP and real appreciation of the exchange rate.

The outlook is subject to heightened uncertainty at a time when macroeconomic buffers have been eroded. The decline in the net inflow of remittances suggests that adverse spillovers from the war in Ukraine are starting to materialize. In addition, high commodity prices, the global slowdown and the tightening of global financial conditions are likely to weigh on output growth. However, policy flexibility is constrained by reduced buffers, while forthcoming concessional external financing is limited. The main challenge for policymakers is to strengthen macroeconomic stability, rebuild policy space for future shocks, mobilize financing for development needs, and raise growth potential by advancing reforms.

Fiscal policy should aim to reduce deficits while creating space for priority spending on infrastructure, health and education, and social protection. The expansionary stance in 2022 would need to be reversed in the coming years to restore fiscal buffers, contain build-up of public debt, and alleviate financing constraints. It is recommended maintaining public debt below 60 percent of GDP in the medium term and reducing it more thereafter. Growth-friendly consolidation can be achieved by reducing tax expenditure, optimizing tax policy, strengthening tax and customs administration, reducing the public sector wage bill, and raising electricity tariffs to reduce energy subsidies. Channeling dividends of the state-owned Kumtor Gold Company to the budget would significantly ease financing constraints. Strengthening social safety nets would support the poverty reduction objective.

Monetary policy should aim at reducing inflation to mid-single digits. This will require a restrictive monetary policy stance and tightening of liquidity. Discontinuing NBKR's purchases of gold would prevent further injection of liquidity while resumption of gold exports is critical for sustainability of the balance of payments. The exchange rate was overvalued by about 5-10 percent in 2021, but the NBKR remains committed to exchange rate flexibility, which provides important cushion against external shocks. Renewed efforts are needed to introduce amendments to the NBKR law to strengthen governance and operational independence of the central bank.

While there has been some progress on governance, important gaps remain, which if properly addressed, could have a transformative impact on investment and growth. Opportunities for corruption can be reduced by strengthening income and asset declarations by public officials and investigating illicit enrichment. Competitive bidding should remain integral part of the public procurement law and should extend to SOEs. Its exclusion would increase risks of corruption and may put at risk access to concessional external financing. A comprehensive SOE ownership and oversight policy would improve SOE governance, while strengthening the AML/CFT framework and improving monitoring of cross-border activities can be a potent tool in deterring corruption.

The Kyrgyz Republic needs its own climate adaptation policy to strengthen resilience. This requires creating fiscal space for additional public spending on green infrastructure, healthcare, education, and social safety nets. Strengthening domestic institutions and governance would be essential to support climate policies. Despite its low carbon footprint, the country should also contribute to global mitigation efforts by reducing pollution, investing in renewables, and raising electricity tariffs.

Table 1.

Kyrgyz Republic: Selected Social and Economic Indicators, 2019-2027

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 comprises central and local governments.

Includes loans 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 2022 ARTICLE IV CONSULTATION

January 4, 2023

KEY ISSUES

Context. The Kyrgyz Republic is facing significant policy challenges stemming from multiple shocks: the anticipated spillovers from the projected contraction in Russia; the global slowdown; global financial tightening; and still-high food and energy prices. Strong output growth in 2022 was a positive surprise, but elevated inflation remains persistent, the current account and fiscal deficits have widened, international reserves have declined, and poverty has increased. In view of heightened uncertainty, policy buffers that were eroded in addressing the pandemic need to be rebuilt.

Policy recommendations. To strengthen resilience to future shocks, the Kyrgyz Republic needs to contain fiscal deficits, reduce inflation, and accumulate reserves. In the medium term, it also needs to accelerate structural reforms to raise potential output, generate more jobs and incomes, and reduce poverty.

  • Monetary policy needs to be restrictive until disinflation is well-established. Domestic liquidity should also be reduced, including by discontinuing NBKR's purchases of gold. Preserving and enhancing exchange rate flexibility is critical to cushion against possible shocks.

  • Fiscal policy faces the dual challenge of reducing deficits to strengthen debt sustainability and creating fiscal space for priority spending on infrastructure, human capital, and social protection. Key consolidation measures include reducing tax exemptions and strengthening tax administration, reducing the public wage bill and energy subsidies. Channeling Kumtor profits to the budget could boost fiscal space further.

  • The banking system is healthy, but heightened risks call for vigilance. The NBKR should monitor pockets of vulnerabilities and be ready to provide liquidity support to solvent banks as needed.

  • Governance reforms, such as improving management of state-owned enterprises, strengthening regulations, and combating corruption would support the business climate and growth prospects. Early action on climate change would strengthen long-term resilience of the economy.

Approved By

Subir Lall (MCD) and Uma Ramakrishnan (SPR)

Discussions with the authorities were held during November 9-22, 2022 in Bishkek. The staff team comprised Nikoloz Gigineishvili (head), Jean van Houtte, Nasir Rao (all MCD), Alexandra Solovyeva (FAD), Tigran Poghosyan (Resident Representative), Lilia Kadyrberdieva, and Erkeaim Shambetova (both Resident Representative office) with support from Aigerim Toigonbaeva and Liliya Nigmatullina. Cornelius Kuth (OED) participated in the discussions.

Contents

  • CONTEXT

  • RECENT DEVELOPMENTS, OUTLOOK, AND RISKS

  • POLICY DISCUSSIONS

  • A. Fiscal Policy

  • B. Monetary, Exchange Rate, and Financial Policies

  • C. Structural Reforms

  • STAFF APPRAISAL

  • FIGURES

  • 1. Real Sector and Social Indicators

  • 2. External and Monetary Sectors

  • 3. Fiscal Sector

  • 4. Financial Soundness Indicators

  • TABLES

  • 1. Selected Social and Economic Indicators, 2019–27

  • 2. National Accounts, 2019–27

  • 3. Balance of Payments, 2019–27

  • 4. NBKR Accounts, 2019–23

  • 5. Monetary Survey, 2019–23

  • 6. State Government Finances, 2019–27 (in millions of soms)

  • 7. State Government Finances, 2019–27 (in percent of GDP)

  • 8. General Government Finances, 2019–27, GFSM 2014 Presentation (in millions of soms)

  • 9. General Government Finances, 2019–27, GFSM 2014 Presentation (in percent of GDP)

  • 10. Selected Financial Soundness Indicators, 2019–22

  • ANNEXES

  • I. Risk Assessment Matrix

  • II. Implementation of 2020 Article IV Consultation's Key Recommendations

  • III. External Sector Assessment

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.

2

The Executive Board takes decisions under its lapse-of-time procedure when it is agreed by the Board that a proposal can be considered without convening formal discussions.

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Cover IMF Staff Country Reports
Kyrgyz Republic: 2022 Article IV Consultation-Press Release; and Staff Report
Author:
International Monetary Fund. Middle East and Central Asia Dept.
Volume/Issue:
Volume 2023: Issue 091
Publisher:
International Monetary Fund
ISBN:
9798400234859
ISSN:
1934-7685
Pages:
74
DOI:
https://doi.org/10.5089/9798400234859.002