Kyrgyz Republic—Supplementary Letter of Intent

Bishkek, Kyrgyz Republic, February 14, 2003

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Köhler:

This Supplementary Letter of Intent seeks the IMF Executive Board approval for a modification of our Second-Year Memorandum of Economic Policies (SYMEP) presented to you on January 31, 2003. In the SYMEP, we recognized that the adoption by parliament of the 2003 State and Social Fund Budgets was a precondition for the IMF Executive Board completion of the second review under the three-year PRGF arrangement.

So far, however, we have not been able to carry out fully this prior action. While the 2003 budget expenditures and revenue estimates were approved by both the lower and upper houses of the parliament in late December 2002, the work is not yet completed on the supporting tax legislation. Specifically, two tax laws remain to be enacted. First, on February 8, the Lower House of the parliament approved to extend the VAT on large agricultural producers but the upper house has not yet confirmed it because of the winter recess. Second, while we have presented the new property tax law to parliament, it is expected to be discussed in the lower house only on February 19 and requires the upper house confirmation after that.

There are three reasons for the delay. First, the referendum of our new constitution took more time than initially expected as the process was subject to high political tensions. Therefore, the parliament was able to consider the tax legislation only after the February 2 referendum. Second, our constitution requires a sequential approval of tax legislation by both chambers of parliament. Since the next session of the upper house starts only in mid-March 2003, we were not able to pass these two tax laws as committed in the SYMEP. Third, it took more time than envisaged to convince the parliamentarians about the necessity of the politically sensitive extension of the VAT within agriculture.

Because of these difficulties, we request the IMF Executive Board to approve a modification of our SYMEP regarding these two tax laws. We propose that the Executive Board approve our second-year program with the following performance criteria to be applied for end-March 2003:

• approval by the upper house of the parliament, and enactment, of the VAT extension on the direct sales of large agricultural producers referred to in paragraph 14 of the SYMEP; and



• approval by the lower and upper houses of parliament, and enactment, of a new tax on real property with a combination of tax rates and coverage providing at least the same estimated revenue impact as the draft submitted to parliament on February 12, 2003, and referred to in paragraph 14 of the SYMEP.

With these measures, our 2003 budget will be completed, including the tax legislation as envisaged in the SYMEP. This delay in decision making does not have any significant impact on our fiscal program. The VAT extension was initially expected to become effective on April 1, 2003, and we estimated the revenue impact of the real property tax conservatively for 2003. Overall, however, we recognize that these delays in the budgetary process should not be repeated. Therefore, we intend to review our budgetary mechanisms to ensure that parliament can approve our future budgets before the beginning of each fiscal year.

Yours sincerely,