Kyrgyz Republic—Supplementary Memorandum of Economic Policy, and Supplementary Technical Memorandum of Understanding
Bishkek, Kyrgyz Republic
June 30, 2003

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

Dear Mr. Köhler:

1. This Supplementary Memorandum of Economic Policies (SMEP)updates our Memorandum of Economic Policies (MEP) dated January 31, 2003, which describes the economic policies supported by the International Monetary Fund with a three-year arrangement under the Poverty Reduction and Growth Facility (PRGF). The SMEP supplements the policies detailed in the MEP for the period April-September 2003. These policies are consistent with our National Poverty Reduction Strategy (NPRS) presented to the IMF and World Bank in December 2002.

I. PERFORMANCE UNDER THE PROGRAM

2. Macroeconomic developments during the first six months of the second annual program (October 1, 2002 - March 31, 2003) were satisfactory. While the economy contracted by ½ percent in 2002, in the first quarter of 2003 growth was 5.2 percent. Industrial production in January-March 2003, excluding Kumtor, grew by 15 percent over the same period a year earlier. Reflecting low inflation expectations and a stable nominal exchange rate, the 12-month inflation rate remained low, at 3.7 percent in April 2003. Despite a reduction in gold and energy exports, the current account deficit was reduced from 3.3 percent of GDP in 2001 to 2.7 percent of GDP in 2002. Nominal interest rates on three-month treasury bills declined from 7 percent at end-2002 to 6 percent at end-March. Over the same period, the nominal exchange rate appreciated by 1½ percent against the U.S. dollar. However, our relatively low inflation, compared to that of our main trading partners, has resulted in a moderate depreciation of the real effective exchange rate.

3. We have met all end-March 2003 quantitative performance criteria under the program. The adjusted floor on net international reserves (NIR) was exceeded by 7 percent of reserve money due to increasing confidence in our local currency and purchases of foreign exchange in the domestic market. Nevertheless, the central bank (NBKR) held its net domestic assets (NDA) below the adjusted ceiling by 4 percent of reserve money, so that the indicative reserve money target was exceeded by only 3 percent. The ceiling on the fiscal deficit was observed, as was the floor on tax collections. As of end-March, there were no central government budget arrears or Social Fund pension arrears, and the stock of Social Fund arrears to the Medical Insurance Fund had been reduced to below 40 million soms, in line with the program. The floor on cash payroll collections into the Social Fund was exceeded. The zero limits on short-term debt, nonconcessional debt, and external payment arrears were observed. We have incurred no external arrears.

4. The end-March structural performance criterion regarding the publication of the 2004-06 Medium-Term Fiscal Framework (MTFF) was met. Under the MTFF, the fiscal deficit would decline to 3 percent of GDP by 2006; this would be achieved mainly by further expanding the tax base and by continued improvements in tax administration, and without resorting to across-the-board spending cuts that could undermine the priorities of our NPRS. The end-March performance criterion regarding the extension of the VAT to domestic sales of large agricultural producers was met with a delay, as it was signed into law only on April 14, 2003. Similarly, the adoption by parliament and enactment of a new tax law on real property was not observed, as the Upper House did not approve this legislation until April 8 and the law became effective on April 30. As these delays were brief and did not affect program objectives, we are requesting waivers of nonobservance for these performance criteria. The new property tax will improve the financial position of local governments and promote fiscal decentralization. The target date for issuing a privatization tender for KAIRAT bank has been delayed by a few months because the external audit and other aspects of the preparation process required more time; however, the program's six other structural benchmarks scheduled for end-January and end-March 2003 were observed. Regarding our privatization program, in response to requests from bidders we agreed to postpone the deadline for bids for Kyrgyz Telekom until June 15, 2003.

5. To help protect vulnerable groups from the inflationary impact of the VAT extension to large agricultural producers, the 2003 budget grants a 20 percent increase in the Unified Monthly Benefit. The budget also envisages a similar increase in social benefits for the disabled and military pensioners, a differentiated pension increase (with the lowest pensions rising by 15 percent and higher pensions by 5 percent), and an 8 percent increase in the government wage bill.

II. PROGRAM REVISIONS FOR THE PERIOD JUNE 2003-SEPTEMBER 2003

6. We will supplement the MEP in the following areas: (i) revisions to the 2003 macroeconomic framework and program targets, (ii) structural conditionality to strengthen the banking sector, (iii) measures to improve efficiency in public administration, and (iv) the introduction of a framework for monitoring and reducing the electricity sector quasi-fiscal deficit. Quantitative targets and structural benchmarks are contained in the attached Tables 1 and 2.

7. Our main macroeconomic objectives for 2003 have changed only modestly. Real GDP is expected to grow by 5.2 percent, in line with the program, while we now expect inflation (4.1 percent) and the current account deficit (3.4 percent of GDP) to be slightly below the figures in the current program.

8. We believe the state government 2003 fiscal deficit target adopted at the time of the second review remains appropriate. This deficit will be fully financed from external sources, and we will continue to conduct our domestic debt management exclusively through the NBKR. However, a 330 million som higher deficit in April-September is necessary, mainly to reflect the costs of the recent large landslides in the south of the country and to accommodate the revised disbursement pattern for the Public Investment Program.

9. On the revenue side, we have recently taken several steps not foreseen under the program. With a view toward limiting smuggling, we reduced our excise tax rates on oil products and aligned these rates with those of Kazakhstan. To recoup some of the revenue losses stemming from the reduced rates, we have proposed to parliament the elimination of rights for excise-free imports of oil products into three Free Economic Zones (Kara-Kol, Talas, and Naryn), and we will increase the excise tax rate on cigarettes (see below). A seasonal tariff of 20 percent on grain and flour imports was resurrected—counter to the intentions expressed in our January 2003 memorandum—and applied during the period February-March 2003. Approval of this measure, which bypassed the normal process in the Economic Policy Committee (EPC), reflects our frustration with trade restrictions in neighboring countries.

10. We intend to extend the mandatory patent tax to three hard-to-tax business categories (cafes, bars, and minivan transportation services). To ensure that the regular tax system is not undermined, we will formulate, by end-September 2003, a strategy for improving the reporting and accounting of small enterprises subject to the patent tax. We will not extend the mandatory patent tax to other business categories. The stock of outstanding VAT refunds due to large taxpayers was reduced to below 53 million soms at end-March 2003, as targeted under the program. We intend to eliminate the remaining stock of overdue refunds by end-2003. To help ensure attainment of the programmed level of VAT receipts, we will, by end-June 2003, complete the registration process of taxpayers and finalize the guidelines implementing the VAT for large-scale agriculture. We will submit to Parliament by end-June 2003 the necessary implementing regulations that will ensure the public availability of the property values used in assessing taxes under the recently-approved property tax. We will prepare a concept paper by end-September 2003 for discussion with Fund staff, with a view toward reducing production and payroll taxes in the medium term, provided that the performance of other taxes (e.g., the property tax, the VAT on agriculture, and the land tax) is sufficient to compensate for the associated revenue losses.

11. The quasi-fiscal deficit (QFD) in our electricity sector was equivalent to 12.9 percent of GDP in 2002. The QFD was aggravated by a deteriorating cash collection rate, which fell to one third, and by growing technical and commercial losses. We are working toward reducing the QFD to 6.8 percent of GDP by 2006 and, with this in mind, have introduced electricity sector QFD monitoring into our Fund-supported program. This monitoring is reflected in a new indicative target for end-2003 to limit the electricity sector QFD to 9.6 billion soms (11.7 percent of GDP). By end-September 2003, we will develop the semi-annual reporting framework for the electricity sector QFD and present our first report under this new framework to Fund staff, based on end-June data. Because the strategy to reduce the QFD in the medium-term will include measures such as tariff increases, improved payment compliance and strengthened management practices, we will establish a small working group that will, by end-September 2003, elaborate details, including the design of compensatory measures for low-income consumers.

12. Our monetary program remains broadly in line with the stance outlined in our January 2003 MEP. The central bank's end-September 2003 NIR and NDA targets have been changed only a little, mainly to reflect the end-March 2003 outcome. Reserve money is programmed to increase by 6.0 percent during 2003. On exchange rate policy, we will intervene in the market only to smooth exchange rate fluctuations or to strengthen our foreign reserve position.

13. We are taking steps to respond to increasing political pressure from depositors who have been promised compensation for savings lost when the former Soviet Savings Bank went bankrupt in January 1996 and those who lost their savings in the 1999 bankruptcies in the aftermath of the Russian financial crisis. We intend to fully compensate the eligible Savings Bank depositors and to compensate other individual depositors only up to a maximum of 10,000 soms. We will effect this compensation by issuing tradable seven-year government bonds paying annual interest of 2 percent, and expect to issue these bonds in early 2004.The deadline for depositor registration will be set at end-December 2003. On the deposit insurance mechanism, we will set up a working group that will clarify the necessary prerequisites, including the required funding of the system, for its introduction in the medium-term.

14. On external sector policies, we reaffirm our commitment to liberal, non-discriminatory trade policies. We will modify the cigarette excise tax to eliminate the current differential excise rates between domestically-produced and imported products by implementing, by end-September 2003, a non-discriminatory ad valorem excise tax. The seasonal tariffs on wheat and flour expired at end-March; we will not re-introduce such tariffs without first consulting with the IMF staff and, in any event, only if consistent with our WTO obligations.

15. In the governance area, we intend by end-September 2003 to complete the functional reviews of the Ministry of Labor and Social Protection, the Ministry of Justice, the Ministry of Transport and Communications, and the State Property Fund. As part of the ongoing reorganization of the Ministry of Finance, we will revise its charter and terms of reference for civil servants by end-June 2003 and, in addition to the recently established post of Permanent Secretary of the Ministry of Finance, establish three Permanent Undersecretary positions, thus creating a clearer distinction between political and career posts. We are also drafting a new Law on the Civil Service, which will ensure the separation of political responsibility from the professional accountability of the civil service. The new Law will also include income and asset declaration requirements for high-level civil servants. The new Law on Government, currently being drafted, will establish a transparent mechanism for government decision making on financial issues. We have recently introduced a National Integrity Council to coordinate governance reform and reduce corruption, and will ensure that civil society is sufficiently represented in this Council.

16. We are preparing legislative amendments to eliminate the 15 percent ceiling that now applies to legal entities in their ownership of commercial banks, and will submit these amendments to parliament by end-September 2003. We also intend, by end-September 2003, to submit to Parliament revisions to the Law on Audits to give the NBKR a greater role in supervising bank audits in order to: (i) empower the NBKR to reject, require replacement of and, if necessary, to appoint external auditors, (ii) to require auditors, upon NBKR request, to disclose and discuss their findings, and (iii) to define the qualification requirements for external bank auditors. A privatization tender for KAIRAT bank, which had been delayed, will be issued by end-September 2003. Following the transfer to the Government of the Settlement Savings Corporation (SSC) on March 31, 2003, we are preparing an SSC Development Strategy and will submit it to Fund and World Bank staff by end-September 2003. By end-September 2003, we also intend to implement an electronic payments clearance system and to gain approval of the NBKR Board for concept papers on the bulk clearing system and on the system of real time gross settlements. The government will work with the parliament to ensure that the AML/CFT law it adopts is consistent with international best practice.

III. PROGRAM MONITORING

17. To monitor policy implementation under the second-year program through end-September 2003, quantitative and structural performance criteria and benchmarks are set out in Tables 1 and 2 of this SMEP and the revised Technical Memorandum of Understanding.

18. The government of the Kyrgyz Republic and the NBKR believe that the policies and measures set forth in this SMEP are adequate to achieve the objectives of the program. However, in consultation with the Fund staff we will take any further measures that may be needed to ensure the success of the program. These consultations can be initiated by the government, the NBKR, or the Managing Director.

Sincerely yours,

 

	s				s
Nikolai Tanaev Prime Minister Kyrgyz Republic				Ulan Sarbanov Chairman National Bank of the Kyrgyz Republic

1. Floor on net international reserves of the NBKR in convertible currencies
(eop stock, in millions of U.S. dollars) 2/

105.2

2. Ceiling on net domestic assets of the NBKR (eop stock)

1,780

1,804

1,850

1,883

1,749

1,560

1,539

1,308

1,587

3. Ceiling on cumulative fiscal deficit of the state government 3/

1,339

2,713

2,390

3,705

3,351

4,396

4,401

1,130

915

4. Cumulative floor on state government tax collections in cash 3/

3,085

5,303

5,343

8,240

8,280

11,619

11,437

3,876

3,803

5. Ceiling on the stock of central government budget arrears

0

0

0

0

0

0

0

0

0

6. Ceiling on the stock of Social Fund pension arrears

0

0

0

0

0

0

0

0

0

7. Floor on payroll collections in cash of the Social Fund 3/

920

1,715

1,777

2,515

2,515

3,389

3,389

1,102

1,091

8. Ceiling on the stock of Social Fund arrears to the Medical Insurance Fund

43

40

38

20

20

10

10

0

0

9. Ceiling on contracting or guaranteeing by the state government or NBKR of new
nonconcessional external debt of less than one year (in millions of U.S. dollars) 4/

0

0

0

0

0

0

0

0

0

10. Ceiling on contracting or guaranteeing by the state government or NBKR of new
nonconcessional external debt with a maturity of one year or more
(cumulative, in millions of U.S. dollars)

0

0

0

0

0

0

0

0

0

11. Ceiling on accumulation of new external payment arrears
(in millions of U.S. dollars) 4/

1.14

0

0

0

0

0

0

0

0

1. Ceiling on reserve money (NBKR liabilities)

7,659

7,784

7,986

7,916

8,122

2. Ceiling on the electricity sector quasi-fiscal deficit (in millions of som)

9,708

1/ Performance criteria, benchmarks, and indicative targets are defined in the Supplementary Technical Memorandum of Understanding.
2/ Until September 2002, foreign exchange components valued at the exchange rate US$1 = som 49, gold holdings valued at US$265 per ounce, SDR valued at SDR 1 = US$1.259. Starting December 2002, foreign exchange components valued at the exchange rate US$1 = som 47, gold holdings valued at US$322.4 per ounce, SDR valued at SDR 1 = US$1.3186. Targets exclude net claims to BRO countries.
3/ For March 2003, cumulative begins on October 1, 2002. For December 2003, cumulative begins on October 1, 2003.
4/ On a continuous basis.

Adjustors
1. The floor on net international reserves of the NBKR will be adjusted: (i) upward/downward by 100 percent of excess/shortfall in net foreign financing of the state government budget and cash grants; and (ii) upward/downward by 100 percent of excess/shortfall in cash privatization receipts. The adjustment for shortfalls in adjustors (i) and (ii) is to be limited to US$ 15 million each, valued at the program exchange rate. In the case of a release of the NBKR's pledged foreign reserves, the NIR floor will be adjusted upward/downward by 100 percent of any excess/shortfall in the net effect of the releases and related amortization payments.
2. The ceiling on net domestic assets of the NBKR will be adjusted: (i) downward/upward by 100 percent of excess/shortfall in net foreign financing of the state government budget and cash grants; and (ii) downward/upward by 100 percent of excess/shortfall of cash privatization receipts. The adjustment for shortfalls in adjustors (i) and (ii) is to be limited to US$ 15 million each, valued at the program exchange rate, excluding the amortization payments for the release of the NBKR's pledged foreign reserves.

Table 2. Structural Benchmarks through end-September 2003

By end-September 2003

• Modify the cigarette excise tax to eliminate the current differential excise rates between domestically-produced and imported products by implementing a non-discriminatory ad valorem excise tax.
  
  
• Submit to Parliament amendments to the Law on Audits, as described in paragraph 16 of the SMEP.
  
  
• Issue a privatization tender for KAIRAT Bank, as described in paragraph 16 of the SMEP.
  
  
• Develop a semi-annual reporting framework for the electricity sector quasi-fiscal deficit, as specified in Table 12 of the Supplementary Technical Memorandum of Understanding, and present to Fund staff the first report, based on end-June 2003 data.

1. The Kyrgyz Republic's performance during the second half of the second-year of the PRGF-supported program will be assessed by the IMF on the basis of the observance of quantitative and structural performance criteria and benchmarks. This annex and the tables attached to the SMEP define the quantitative performance criteria and indicative targets, the structural benchmarks (Box 1 attached to the SMEP), as well as the monitoring requirements¹.

I. QUANTITATIVE TARGETS

2. Quantitative targets (i.e., quantitative benchmarks for end-June 2003, quantitative performance criteria for end-September 2003, and indicative targets for end-December 2003) are defined below and summarized in Table 1 of the SMEP.

Floor on net international reserves of the NBKR in convertible currency

3. The program contains a floor on the stock of net international reserves of the NBKR in convertible currencies. This floor will be calculated as the difference between total gross international reserves in convertible currencies at the NBKR and total international reserve liabilities of the NBKR in convertible currencies.

4. Total gross international reserves of the NBKR shall be defined as the NBKR holdings of monetary gold, holdings of SDRs, any reserve position in the IMF, and any holdings of convertible currencies in cash, debt instruments (including accrued interest) or with foreign banks. Amounts pledged as collateral or in swaps or otherwise blocked, capital subscriptions in foreign financial institutions, and non-liquid assets of the NBKR are excluded. Excluded are net forward positions, defined as the difference between the face value of foreign currency denominated NBKR off-balance sheet claims on non-residents and foreign currency obligations to both residents and non-residents. In addition, net claims on other BRO countries are excluded from the ceiling. For program monitoring purposes, gross international reserves shall be valued at a fixed program exchange rate of som 47 per U.S. dollar and $1.3186 per SDR. Official gold holdings shall be valued at $322.4 per troy ounce. Program cross exchange rates are listed in Table 13.

5. Total international reserve liabilities of the NBKR in convertible currencies shall be defined as outstanding liabilities to the IMF and other convertible currency liabilities of the NBKR to non-residents with an original maturity of up to and including one year. For program monitoring purposes, total international reserve liabilities shall be valued at the program exchange rates. Thus calculated, the stock of net international reserves in convertible currencies amounted to $109.0 million as of March 31, 2003.

6. The program floors on the NIR of the NBKR in convertible currencies are reported in Table 1 below

Table 1. Floors on NIR of the NBKR in Convertible Currencies 1/ 2/
	(In millions of U.S. dollars)
March 31, 2003 (actual)	109.0
June 30, 2003 (benchmark)	113.4
September 30, 2003 (performance criterion)	119.8
December 31, 2003 (indicative target)	120.0
1/ End-of-period stocks. 2/ In the event the base value of March 31, 2003 is revised, the program targets will be revised by the same amount.

7. The floor on net international reserves of the NBKR will be adjusted: (i) upward/downward by 100 percent for any excess/shortfall in net foreign financing of the sate government budget and cash grants; and (ii) upward/downward by 100 percent for any excess/shortfall in cash privatization receipts. The adjustment for shortfalls in adjustors (i) and (ii) is to be limited to $15 million each, valued at the program exchange rate. In the case of a release of the NBKR's pledged foreign reserves, the NIR floor will be adjusted upward/downward by 100 percent for any excess/shortfall in the net effect of the releases and related amortization payments. The programmed net effect is $ 0.4 million per quarter in the second, third, and fourth quarter of 2003.

8. 'Net foreign financing and cash grants' is defined as balance of payment support loans plus cash grants to the state government budget plus any changes in the balance of unused Public Investment Program (PIP) funds held in the NBKR minus amortization payments by the Ministry of Finance and NBKR (excluding repayments to the Fund). This definition applies to the adjustors to NIR and NDA. The programmed cumulative net foreign financing is as follows. The balance of unused PIP funds was equivalent to $3.6 million on March 31, 2003.

Ceiling on the net domestic assets of the NBKR

9. Net domestic assets of the NBKR are defined as reserve money of the NBKR (defined below) minus the NBKR's net foreign assets² minus the medium- and long-term NBKR obligations (MLT) minus the counterpart of the loan by the Eximbank of Turkey minus the counterpart of the EBRD and IDA enterprise loans (see equation 1 below).

(1) NDA=RM-NFA-MLT-Turkish Loan-EBRD-IDA Enterprise Loan

10. Thus defined, the NBKR's net domestic assets consist of: (a) gross credit to the general government from the NBKR minus deposits of the general government with the NBKR minus the counterpart of the loan by the Eximbank of Turkey; (b) gross credit to domestic banks by the NBKR minus the counterpart of the EBRD and IDA enterprise loans; and (c) all other net assets of the NBKR (other items net). Thus defined, the stock of the NBKR's net domestic assets amounted to som 1,850 million on March 31, 2003.

11. The program ceilings on the net domestic assets of the NBKR are reported in Table 3 below.

12. The ceiling on net domestic assets of the NBKR will be adjusted: (i) downward/upward by 100 percent of the excess/shortfall in net foreign financing of the state government budget and cash grants; and (ii) downward/upward by 100 percent of the excess/shortfall of cash privatization receipts. The adjustment for shortfalls in adjustors (i) and (ii) is to be limited to $15 million each, valued at the program exchange rate, excluding the amortization payments for the release of the NBKR's pledged foreign reserves.

Ceiling on the cumulative fiscal deficit of the state government

13. The ceiling on the state government fiscal deficit is defined as the negative sum of: (i) the change in the stock of net claims of the domestic banking system and nonfinancial institutions—including state-owned enterprises and public companies—and households on the state government; (ii) the change in the stock of net claims of the foreign banking system and nonfinancial institutions and households on the state government; (iii) net privatization receipts; (iv) net foreign loans disbursed to the state government for budgetary support; (v) net foreign loans disbursed to the state government for project financing; and (vi) rescheduling of bilateral debt (principal and interest payments), following the Paris Club agreement. The fiscal balance will be measured at the program exchange rates, excluding valuation gains and losses on all foreign currency denominated assets and liabilities arising from exchange rate fluctuations.

14. The change in the stock of net claims of the domestic and foreign banking systems on the state government is defined as the change in the stock of claims of these banking systems on the state government less the change in the stock of all deposits of the state government with these banking systems. The claims of these banking systems on the state government include: (i) bank loans to state government; (ii) securities or bills issued by the state government held by banks with the exception of those issued in relation with bank rescue operations; and (iii) overdrafts on the current accounts of the state government with banks.

15. The program ceilings on the cumulative fiscal deficit of the state government are reported in Table 4 below.

Cumulative floor on state government tax collections in cash

16. Tax collections in cash correspond to the line "IV. Tax Receipts" in the Treasury Report and comprise the following categories: 1.0 taxes on income and profits; 4.0 taxes on property; 5.1 VAT on domestic and imported products; 5.1.1.0 retail sales tax; 5.2 excises on domestic and imported products; 5.4 specific taxes on services; 5.5 taxes on use of goods and services; 5.6 taxes on use of natural resources; 6.0 taxes on international trade; 7.0 other taxes. Thus defined, cumulative tax collections in cash since October 2002 amounted to som 5,343 million as of March 31, 2003. Cumulative tax collections in cash include collections of tax arrears but exclude tax offsets.

17. The program floors for the cumulative tax collection in cash are reported in Table 5 below.

Ceiling on the stock of central government budget arrears

18. For the purposes of the program, central government budget arrears are defined as an overdue payment obligation of the Republican budget arising since the start of the three-year program period (October 1, 2001) and related to: (i) wages; (ii) Social Fund payroll contributions; (iii) mandatory transfers to the Social Fund; (iv) categorical grants; (v) payments of electricity bills; and (vi) allowances for poor families. A payment is defined to be overdue if it remains unpaid after its due date for (iii) and (iv); for 30 days after its due date for (i) and (ii); for 60 days after its due date for (v); and for 40 days after its due date for (vi). As of September 30, 2002, the stock of thus defined central government budgetary arrears was zero.

19. The program ceilings on the stock of central government budget arrears are reported in Table 6 below.

Ceiling on the stock of Social Fund pension arrears

20. A pension payment by the Social Fund is defined as overdue if it has come due since the start of the three-year program period (October 1, 2001) and remains unpaid for 30 days or more after its due date. As of March 31, 2003, the stock of pension arrears was zero.

21. The program ceilings on the stock of Social Fund pension arrears are reported in Table 7 below.

Floor on the Social Fund payroll tax collections in cash

22. Payroll tax collections in cash correspond to the total contributions collected by the Social Fund from both employers and employees for a given period.

23. The program floors for the Social Fund tax collections in cash are reported in Table 8 below.

Ceiling on the stock of Social Fund arrears to the Medical Insurance Fund

24. Social Fund arrears to the Medical Insurance Fund are defined as overdue transfer obligations of the former to the latter as defined by law and refer to arrears incurred starting January 1, 2002. A transfer is defined to be overdue if the value date of any transfer obligation is more than 5 business days after the due date.

25. The program ceiling on the stock of Social Fund arrears to the Medical Insurance Fund are reported in Table 9 below. As of end-March 2003, total arrears of the Social Fund to the Medical Insurance Fund amounted to soms 38 million. No new arrears will be accumulated to the Medical Insurance Fund.

Ceiling on the quasi-fiscal deficit of the energy sector

26. The quasi-fiscal deficit (QFD) of the electricity sector is defined as cost of production minus cash revenues:

(1) QFD=Q*MC - R;

(2) Q = 1/(1-)*( Ci);

(3) R = ( Ci) * T * Ccash,

where:

Q is domestic supply (generation plus import minus export) minus normative losses;

MC is marginal cost of production required for efficient supply of Q;

R is total cash revenue;

Ci is sum of consumption by all end-users (households, industry, agriculture, budgetary institutions, and other);

is annual average loss rate of excessive (i.e., above normative) technical and commercial losses in percent of Q;

T is annual weighted average of posted (or nominal) tariffs for end-users; and
Ccash is ratio of annual average cash collections to total billing to end-users.

27. For the purposes of the program, the marginal cost is determined as 2.3 US cents per kilowatt hour, and normative losses (including own use) as 10 percent of domestic supply. Total billing of end-users is defined as consumption times the posted nominal tariff. The cash collection component is the amount of bills paid in cash to the energy companies, and excludes any form of cash-to-cash settlements, off-sets, barters, or other non-cash payments.

28. The quasi-fiscal deficit targets are denominated in millions of soms. Defined as above, the quasi-fiscal deficit in the electricity sector amounted to som 9,708 million (or 12.9 percent of GDP) in 2002. The indicative ceiling on the quasi-fiscal deficit in the electricity sector for 2003 is som 9,645 million (or 11.7 percent of GDP), as set out in Table 10 below. In the event the actual end-2002 figure is revised, the 2003 ceiling will be revised by the same amount.

Ceilings on contracting or guaranteeing of new external debt by the state government of the Kyrgyz Republic or the NBKR or any other agency acting on behalf of the state government

29. In connection with the contracting or guaranteeing of external debt by the state government of the Kyrgyz Republic, the NBKR, or any other agency acting on behalf of the state government of the Kyrgyz Republic, 'debt' is understood to have the meaning set out in point 9 of the Guidelines on Performance Criteria with respect to External Debt in Fund arrangements (Decision No. 12278-00/85, dated August 24, 2000).³

30. External debt ceilings apply to (i) the contracting or guaranteeing of short term external debt (i.e. external debt with an original maturity of less than one year, except normal import-related credits and NBKR reserve liabilities); and to (ii) contracting or guaranteeing of nonconcessional medium- and long-term external debt (i.e., external debt with an original maturity of one year or more). Disbursements by the Fund from the PRGF Trust are excluded from the ceilings on external debt. Also excluded from these external debt ceilings is the contracting or guaranteeing of new external debt that constitutes a rescheduling or refinancing of existing external debt at terms more favorable to the debtor. The limit on the contracting or guaranteeing of short-term external debt is zero on a continuous basis throughout the period of the arrangement. The limit on the contracting or guaranteeing of medium- and long-term external debt is zero as specified in Table 1 of the SMEP.

31. For program purposes, a debt is considered concessional if the grant element is at least 45 percent, calculated by using currency specific discount rates based on the Commercial Interest Reference Rates (CIRRs) published by the OECD. A lower grant element will be considered only for new debt committed to replace old debt originally contracted at less favorable terms. The average of the CIRRs over the last 10 years will be used for debts with a maturity of at least 15 years and the average CIRR of the preceding six months will be used for shorter maturities.

Ceiling on new external payments arrears

32. For the purposes of the program, external payments arrears will consist of all debt-service obligations (i.e., payments of principal or interest) arising in respect of any debt contracted or guaranteed or assumed by the state government of the Kyrgyz Republic, or the NBKR, or any agency acting on behalf of the state government of the Kyrgyz Republic since the Kyrgyz Republic's independence, including, without limitations, unpaid penalties. interest charges or judicially awarded damages associated with these arrears owed by the state government of the Kyrgyz Republic, or the NBKR, or any agency acting on behalf of the state government of the Kyrgyz Republic, on imports received subsequent to independence. The ceiling on new external payments arrears shall apply on a continuous basis throughout the period of the arrangement. It shall not apply to external payments arrears arising from external debt being renegotiated with external creditors, including Paris Club creditors; and more specifically, to external payments arrears in respect of which a creditor has agreed that no payment needs to be made pending negotiations.

Ceiling on reserve money

33. For the purposes of the program, reserve money consists of currency issued by the NBKR and balances on commercial banks' correspondent accounts with the NBKR. The stock of reserve money amounted to som 7,871 million as of end-March, 2003. The indicative program limits are reported in Table 11 below.

II. REPORTING REQUIREMENTS UNDER THE PROGRAM

34. The government and the NBKR will provide the Fund with the necessary economic and financial statistical data to monitor economic developments and the quantitative targets. In particular, the government and the NBKR will provide the following specific information: ⁴

The balance sheet of the NBKR

35. The NBKR will provide to the Fund its balance sheet every Monday. The information provided will clearly identify the following items in the definitions specified above: the net foreign assets of the NBKR; the net international reserves of the NBKR; medium- and long-term liabilities; the net domestic assets of the NBKR; net credit from the NBKR to the general government; net credit from the NBKR to commercial banks; the balance of unused PIP funds held in the NBKR; other items net; and reserve money. The balance sheet will be provided valued at the actual exchange rate as well as according to the valuation applied under the program, as specified in Section I. The above information should be provided to the IMF Resident Representative and/or transmitted by e-mail to the Fund.

Monetary survey

36. Monthly banking system data, in the form of a monetary survey, will be reported to the Fund by the NBKR within 14 days of the end of the month. The information provided should clearly identify the following items: net foreign assets and net domestic assets of the banking system, medium- and long-term liabilities, net credit from the banking system to the general government, financing provided to the rest of the economy, other items net, and broad money. The monetary survey will be provided valued at the actual exchange rate as well as according to the valuation applied under the program, as specified in Section I.

37. The NBKR will provide monthly data to the Fund within seven days after the end of the month on the amount of holdings of treasury bills, GKOs, state obligations, state bonds, and other securities issued by the state government, differentiated by the following categories of holders: the NBKR, resident banks, resident nonbanks, and nonresidents. The information will be provided in both the book (nominal) value and the actual value, where applicable.

International reserves and key financial indicators

38. The NBKR will provide detailed monthly data within 14 days from the end of the month on the composition of both its gross and net international reserves in convertible currencies and holdings of monetary gold. These data will be provided at two alternative sets of the exchange rates and the gold price: first, at those used to derive the NFA position in the NBKR accounts; second, at those specified in the program (Section I). In addition, weekly reports should be sent to the Fund every Monday on: (a) exchange rates (including the official and interbank exchange rates), foreign exchange interbank market turnover, and the volume of NBKR foreign exchange sales and purchases in the interbank market and with other parties; and (b) treasury bill yields and the amount of treasury bill sales and redemptions. On the 25th day of the month following the reference month, the NBKR will provide data on bank deposit and lending rates by maturity.

Banking system data

39. The NBKR will provide detailed bank-by-bank data within 14 days of the end of the month on commercial banks' compliance with: (a) prudential requirements; and (b) reserve requirements, as well as any penalties, sanctions and other administrative actions imposed on banks.

External debt

40. The Ministry of Finance, together with the NBKR, will provide monthly information on the disbursements, principal and interest payment—both actual and falling due; on contracting and guaranteeing of medium- and long-term external loans by the state government and the NBKR; and any stock of outstanding arrears on external debt service payments within 21 days of the end of each month. In addition, the Ministry of Finance will also report the total amount of outstanding government guarantees and external arrears on a monthly basis. While the NBKR will provide the debt service payment data on private debt, the Ministry of Finance will provide data on debt service on public and publicly guaranteed loans.

Budgetary and extrabudgetary data

41. In addition to the monthly treasury report, the Ministry of Finance and the Social Fund will report monthly on all their recorded expenditure arrears, in particular on those defined above in this Annex. This information will be provided to the Fund staff within 26 days from the end of each reference month. The Ministry of Finance will also provide monthly reports on the disbursements and use under the public investment program and budgetary grants with a one-month time lag.

42. The State Energy Agency, in consultation with the Ministry of Finance and the World Bank, will submit to Fund staff by end-September 2003 the first semi-annual report for the electricity sector QFD as specified in Table 12 below, based on end-June 2003 data (structural benchmark).

Balance of payments data

43. The NBKR will provide current account and capital account data, including data on foreign trade, services, official and private transfers, foreign investment, and disbursements of public and private loans, on a quarterly basis, with at most a two-month lag. The NBKR will also provide monthly foreign trade data with a two-month lag.

Other general economic information

44. The National Statistics Committee will notify the Fund of the monthly Consumer Price Index by category by the 5th business day of the following month, and convey quarterly GDP estimates within two months of the end of each quarter.

¹Central government and Republican government are synonymous in this memorandum. State government comprises central and local governments. General government comprises state government and Social Fund finances.
²The NBKR's net foreign assets consist of net international reserves, as defined in this Annex, plus other foreign assets plus the net claims on other BRO countries.
³Debt is understood to mean a current, i.e., not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debts can take a number of forms, the primary ones being as follows: (i) loans, i.e., advances of money to the obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans and buyers' credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements); (ii) suppliers' credits, i.e., contracts where the supplier permits the obligor to defer payments until some time after the date on which the goods are delivered or services are provided; and (iii) leases, i.e., arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the lessor retains the title to the property. For the purpose of the guideline, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement excluding those payments that cover the operation, repair or maintenance of the property.
Under the above definition of debt, arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation that is no considered dent under this definition (e.g., payment on delivery) will not give rise to debt.
⁴Any correction or revisions to the data previously reported should be clearly indicated and documented as to the reasons for revision.