Kyrgyz Republic: Staff Concluding Statement of the 2021 Article IV Mission
March 31, 2021
A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF’s Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.
The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.
An International Monetary Fund (IMF) staff team led by Mr. Nikoloz
Gigineishvili conducted a remote mission from March 12 to March 30,
2021 in the context of the 2021 Article IV consultation with the Kyrgyz
Republic. At the conclusion of the mission, Mr. Gigineishvili issued
the following statement:
Recent Developments, Outlook, and Risks
The Kyrgyz economy was hit hard by the COVID-19 pandemic.
The sharp decline in tourism, non-gold exports, and the slowdown in
domestic activity have led to a significant contraction of GDP by 8.6
percent in 2020. The authorities took a range of measures to save lives and
cushion the impact on the economy. These included emergency health
spending, stepping up the food security program for the vulnerable, and
temporary tax deferrals and subsidized loans to support small and medium
enterprises (SMEs). Due to the COVID-19 shock, the overall budget deficit
widened to 3.3 percent of GDP, public debt increased to 68 percent of GDP,
the overall balance of payments weakened, the exchange rate depreciated,
and inflation accelerated. The National Bank of the Kyrgyz Republic (NBKR)
raised its policy rate twice from 4.25 in early 2020 to 5.5 percent in
February 2021, while supporting banks through liquidity injections,
deferrals of loan payments and the temporary relaxation of capital and loan
provisioning norms. The Kyrgyz Republic was the first country to receive
the Fund’s COVID-related emergency financial assistance of about $242
million (100 percent of quota) under the Rapid Financing Instrument (RFI)
and the Rapid Credit Facility (RCF).
Growth is expected to rebound in 2021, but uncertainty remains high.
Barring a resurgence of the pandemic, the economy is projected to grow by
3.8 percent in 2021 and by 6.4 percent in 2022, underpinned by a more
favorable global outlook, recovery of domestic activity, higher gold
production, an increase in remittances from oil exporting neighbors, and a
rebound in tourism, transportation and related services. Growth should
gradually converge to its potential of 4 percent in the medium term. Annual
inflation will remain elevated in the coming months due to base effects but
decline to about 7.4 percent by end-2021 and return to the central bank’s
target range of 5-7 percent thereafter.
However, global economic conditions remain uncertain and warrant
A slower than expected rollout of vaccines or emergence of new COVID-19
variants may delay the recovery to 2022 or beyond and, therefore, securing
vaccines as soon as possible is essential to save lives and livelihoods.
Lower gold prices or weaker remittances could weaken the balance of
payments. If these risks materialize, accommodative macroeconomic policies
will need to be maintained longer, and health and social spending
increased. Political stability, policy predictability, and decisive reforms
to improve the business climate would strengthen business confidence.
In 2021 the general government budget deficit is projected to widen to
4.2 percent of GDP subject to availability of financing. This reflects a cyclical recovery in tax revenue and the observed
improvement in tax compliance due to digitalization of tax filings, a
moderate decline in the public sector wage bill after accounting for the
planned increase in wages of certain categories of public sector workers, and the budgeted increase in spending on goods and services
This fiscal stance maintains the needed fiscal stimulus while
preserving some fiscal space in view of the uncertain outlook. However, if sufficient financing cannot be mobilized, the authorities
should identify contingency expenditure cuts while preserving health and
social spending, and investment projects with the highest expected social
and economic returns. Engaging with international partners to demonstrate
their credible commitment to reforms would help to mobilize more
concessional resources given that higher domestic financing may increase
In the medium term, the main challenge is to steadily reduce public
debt while creating fiscal space for development needs.
At 68 percent of GDP, public debt leaves little room for fiscal policy
to respond to future downturns.
The mission recommends anchoring fiscal policy to the goal of reducing
public debt to below 60 percent of GDP by 2025. This
is still considerably higher than the pre-crisis 51.6 percent of GDP but
would provide additional fiscal buffers. To
achieve this target, consolidation measures of about 1 percent of GDP would
be needed if taken in 2022 to reduce the overall fiscal deficit to about 3
More fiscal efforts will be needed to create room for spending on
health, education, social assistance, and infrastructure
. Options to achieve these objectives may include (a)
optimizing the public sector wage bill, which at 13 percent of GDP is one
of the highest in the region and among low income countries and is about 30
percent of government expenditure; (b) limiting goods and services
spending; (c) reducing energy subsidies; (d)
improving excise taxation and the VAT refund system, and reducing tax
exemptions; and, (e)
strengthening tax and customs administration, including through
. Consideration could also be given to improving the sales tax and the VAT.
The planned modernization of the tax code is a good opportunity to
implement some of these tax policy and administrative reforms to
incentivize self-compliance and reduce the administrative burden on
Social assistance needs to be strengthened.
According to the World Bank estimates, poverty increased by 11 percentage
points to 31 percent in 2020 as incomes declined and unemployment rose and
may increase further this year. Compared to other low-income countries,
social spending in the Kyrgyz Republic is relatively high, but does not
translate into better social and poverty outcomes due to weak targeting,
low coverage, and limited adequacy. These shortcomings can be addressed by
broadening the coverage of social assistance, shifting from categorical to
income-based targeting, and consolidating social assistance programs to
Monetary, Exchange Rate, and Financial Policies
Price stability remains the main objective of monetary policy.
Headline inflation increased to 10.6 percent in February 2021, primarily
due to exchange rate pass-through and imported food prices, which rose
globally. The NBKR’s decision to raise the policy rate by 50 basis
points in February 2021 signals its commitment to contain inflation,
while avoiding a premature withdrawal of stimulus considering the
uncertain recovery. The NBKR is recommended to continue monitoring food
and non-food prices, wages, remittance flows, credit and import
growths, and other indicators of demand pressures, and should be
prepared to tighten the stance of monetary policy further if inflation
continues to increase and signs of second-round inflation pressures
. Preserving institutional and operational independence of the central
bank will be critical for the efficient conduct of monetary policy.
Clearly communicating the policy direction would help anchor inflation
expectations. At the same time, liquidity support should be provided
selectively to banks if they experience temporary liquidity pressures.
Exchange rate flexibility is an important buffer against external
After a prolonged period of stability, the som depreciated by 19 percent
against the US dollar since March 2020. The NBKR balanced the use of
macroprudential tools and FX interventions to maintain financial stability
and avoid excessive swings in the exchange rate. Going forward, the
exchange rate should remain market-driven while FX interventions are used
to smooth excessive volatility. However, the exchange rate alone cannot
address the underlying structural weaknesses of the balance of payments,
which require deep structural reforms to improve competitiveness of the
The NBKR intends to move to inflation targeting in the medium term
. For a smooth transition, it would be important to strengthen autonomy,
the governance structure, and recapitalization rules of the NBKR, further
build its analytical capacity, support development of money markets
including by gradually phasing out the transitional arrangement of interest
rate caps, strengthen the bank resolution framework, and improve
communication. Once recovery takes hold, the NBKR intends to gradually
reduce its non-core operations, which will strengthen monetary
transmission. The NBKR is also developing a medium-term plan to unwind its
ownership in Keremet Bank and the Guarantee Fund.
The banking sector is in good financial health, but risks remain.
Since non-performing loans (NPL) tend to respond with a lag to an
underlying weakening of the economy, elevated credit risk may materialize
with a delay. Asset quality may weaken with the lapse of the temporary tax
deferrals to SMEs while the deferrals of loan payments allowed during the
pandemic could delay realization of NPLs. Continued supervisory vigilance
and comprehensive stress-testing will be essential to monitor systemic
vulnerabilities. The mission recommends maintaining sound accounting,
reporting, and provisioning standards to properly appraise risks, while
allowing banks sufficient time to restore capital, if impaired. Preparing a
comprehensive NPL resolution strategy would also be essential.
Medium-Term Structural Reforms for Growth and Job Creation
The Kyrgyz Republic needs higher and more inclusive growth to absorb
the rapidly growing labor force
. Otherwise, unemployment will rise especially for youth, outmigration
accelerate, and the income gap with emerging markets widen. This will
require policymakers to guide the transformation of the economy from
remittance and aid dependency to private sector-led growth underpinned by
investment and exports.
The government should seek to provide a market-friendly business
climate, a stable legal framework, a competitive environment, and
opportunities for human capital development. Structural reforms are
needed in the following areas to address the main bottlenecks to
The authorities’ new Anti-Corruption Strategy aims to address systemic
corruption by enhancing the role of the civil society, strengthening
transparency and accountability of public institutions, and improving
trust in courts and law enforcement. These objectives can be supported
by (i) improving governance and transparency of state owned enterprises
(SOEs); (ii) further strengthening the AML/CFT framework; (iii)
publishing comprehensive asset and income declarations by senior public
officials and investigating illicit enrichment; and (iv) strengthening
public finance management through automation and digitalization. The
revised procurement law envisages disclosure of beneficial owners in
all public contracts, which is a welcome institutional reform. Full
contracts with identities of beneficial owners, including for all
emergency spending contracts, and audit reports should be published as
committed under the RFI/RCF. Improving efficiency and transparency of
complaints handling would further strengthen the public procurement
Access to electricity
. The electricity sector is in a difficult financial condition, is
poorly managed, and is in urgent need of investment to improve service
quality. To strengthen its financial and operational viability, the
mission recommends developing a medium-term reform plan to optimize
costs, strengthen governance and accountability, and improve revenue
generation. While commercial tariffs are above cost-recovery,
residential tariffs are well below this level, implying inefficient
cross-subsidization. Any adjustment in residential tariffs, as recently
announced by the authorities, would need to be paired with targeted
social assistance to protect the most vulnerable households.
Access to finance.
Addressing information asymmetries and fostering competition would help
reduce high interest rate spreads and high collateral requirements by
banks. There is scope for expanding the coverage of credit registries
and improving lender access to borrower information; encouraging entry
of new banks and strengthening the bank resolution framework to
facilitate speedy exit of the failed ones; developing a competition
law; automating information exchanges between financial institutions
and with the tax authority; and developing capital markets and fintech.
The NBKR’s efforts to improve financial literacy are welcome.
Access to export markets.
Underdeveloped infrastructure, inadequate quality and phytosanitary
controls, and lengthy customs clearance procedures for goods are significant non-tariff
barriers. To address some of these issues, the authorities are planning
to speed up implementation of WTO agreements to simplify trade
procedures, including through digitalization, simplify customs
procedures, improve quality controls, eliminate duplication of
phytosanitary inspections, and introduce e-commerce legislation and
supportive infrastructure. Speedy progress in these areas would support
Education and skills upgrading.
The Kyrgyz Republic spends more per capita on education than its peers
but continues to rank poorly on school enrollment and test scores. Most
education spending is on wages, while the outlays to improve the
quality of education are small. It will be critical to reprioritize the
education budget and develop an education reform strategy. Better
integrating women in the labor market and supporting youth employment
would also raise potential growth.
Steadfast implementation of reforms will be essential for the continued
support of the international community.
Many of these reforms require limited budgetary resources but could
generate significant gains. The IMF stands ready to assist the Kyrgyz
Republic in its reform efforts.
The mission would like to thank the authorities for the close
collaboration and the candid discussions.