Press Release No. 12/387

Press Release: IMF Announces Staff-Level Agreement with the Kyrgyz Republic on Third Review of the Extended Credit Facility

October 10, 2012

An International Monetary Fund (IMF) team, led by Mr. Christian Beddies, visited Bishkek September 26-October 10, 2012 to hold discussions for the third review under a three-year, SDR 66.6 million (US$106 million) Extended Credit Facility arrangement with the Kyrgyz Republic (see Press Release No. 11/245, Press Release No. 11/446 and Press Release No. 12/153). The IMF mission reached a staff-level agreement with the Kyrgyz authorities on the measures needed for completion of the third review. This agreement requires approval by the IMF’s Executive Board, which is expected to consider the Kyrgyz Republic’s request for completion of the third review in early December 2012. Upon approval, SDR 9.514 million (US$15 million) would be made available to the Kyrgyz Republic. This would bring total disbursements under the arrangement to SDR 38.056 million (US$60 million).

At the conclusion of the visit, Mr. Beddies made the following statement:

“This year has turned out to be challenging for the Kyrgyz Republic. The economic situation is worse than expected because geological factors have led to the partial deferral of gold production by the largest mining company to 2013-14. As a result, real GDP contracted by 4.6 percent year-on-year over the first eight months of 2012 with non-gold growth at 3.9 percent. Headline inflation has dropped significantly to 2.1 percent at end-August year-on-year and is expected to remain in single digits despite the recent rise in international food prices. Following the break-up of the coalition government in August, the swift appointment of a new cabinet limited the period of political uncertainty and ensured that the impact on economic policy making was limited.

“Looking ahead, we expect real GDP to grow by about 1 percent this year and about 6.5 percent over the medium term on the back of the recovery in gold production, growth in agriculture, trade and construction, particularly if prices for key exports remain high, and regional partners continue to grow. The mission welcomes the central bank’s continued commitment to implement policies that will keep inflation at bay and barring exogenous shocks expects inflation to stabilize at about 7 percent over the medium term.

“The mission agreed with the authorities that continued fiscal consolidation is key to maintaining macroeconomic stability and to rebuilding policy buffers. Shortfalls in revenues and external financing this year will require cuts in expenditures, but social outlays will be safeguarded. Over the medium term, fiscal consolidation will be supported by prudent expenditure policies and public financial management reform, which will generate fiscal savings. Moreover, continued strengthening of tax administration is expected to help ensure strong revenue performance. To support the poor, the authorities should further develop targeted social assistance programs. In this context the mission welcomes the authorities’ decision to increase the guaranteed minimum income. In light of the uncertain global economic outlook, it will be important to exercise caution in fiscal policy planning and implementation and to prepare appropriate contingency measures.

“To bolster the financial system, the mission urged the authorities to swiftly complete the resolution of Zalkar Bank in a transparent and competitive manner, in line with their program commitment. Moreover, the mission advised the authorities to closely monitor systemically important banks and continue to work toward reducing the government footprint in the financial sector. The legal reforms envisaged under the ECF-supported program, once adopted, will strengthen the bank resolution framework and thereby better equip the central bank to effectively deal with problem banks in the future. The mission also highlighted the importance of strengthening the anti-money laundering and combating the financing of terrorism framework to bring it in line with international best practice. The IMF is providing ongoing technical assistance in these areas.

“To support sustainable and inclusive private sector-led growth, strengthening governance and combating corruption along with improving the business climate remain a key priority of the government. We welcome the adoption of a new anti-corruption law, which is an important step toward the successful implementation of the government’s anticorruption strategy. The mission also welcomes the approval of a medium-term energy sector strategy for 2012-2017 in cooperation with development partners. This strategy is expected to improve the public administration of the sector and increasing energy efficiency and output, while putting the sector on a sound financial footing.”