Press Release No. 04/5

Press Release: IMF Completes Fourth Review of the Kyrgyz Republic's Three-Year PRGF Arrangement and Approves Request for Waiver of Performance Criterion

January 14, 2004

The Executive Board of the International Monetary Fund (IMF) today completed the fourth review of the Kyrgyz Republic's economic performance under the three-year Poverty Reduction and Growth Facility (PRGF) arrangement. In doing so, the Executive Board also approved a request for a waiver of the nonobservance of the quantitative performance criterion with regard to the ceiling on the cumulative fiscal deficit of the state government—for which there was a minor deviation from the pre-established target. The decision enables the Kyrgyz Republic to draw an amount equivalent to SDR 9.56 million (about US$14.3 million) under the arrangement immediately.

The Executive Board approved the three-year arrangement effective on December 6, 2001 (see Press Release No. 01/49) for a total of the equivalent of SDR 73.4 million (about US$110 million). Disbursing the amount available upon completion of the latest review will bring total disbursements under the program to SDR 54.28 million (about US$81.3 million).

The PRGF is the IMF's concessional facility for low-income countries. PRGF-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners and articulated in the Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that PRGF-supported programs are consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5 ½-year grace period on principal payments.

Following the discussion of the Executive Board, Agustín Carstens, Deputy Managing Director and Acting Chairman, said:

"During the first two years of its PRGF-supported economic program, the Kyrgyz Republic has made good progress toward achieving the program's underlying objectives. Macroeconomic performance is strong: economic growth has recovered and inflation remains moderate.

"The authorities achieved further fiscal consolidation in 2003 by containing expenditure growth and strengthening tax collection. Continued fiscal adjustment is necessary in the coming years to reduce the unsustainable debt burden. This will require strong fiscal discipline, especially during the pre-election period. At the same time, reallocation of spending and a larger tax base are needed to promote social spending and to reduce tax distortions. To expand the tax base, the important measures taken in early 2003 to extend the value-added tax to large agricultural producers and to introduce a new real property tax must now be fully implemented. Reforms of small enterprise taxation in 2004 are critical to raise the efficiency of the tax system.

"The central bank's monetary and exchange rate policies have been broadly consistent with overall macroeconomic stability. Higher rates of inflation observed in late 2003 mainly reflected developments in the regional markets for wheat and fuel. Continued prudent monetary policy in the period ahead will be essential to keep inflation under control.

"Progress in reducing external debt and poverty will depend also on structural reform to diversify and boost exports and maintain strong economic growth. Key reform initiatives include restructuring of the electricity sector, strengthening the financial system, and privatization. Efforts to reduce corruption and improve governance also remain essential to promote investment and growth," Mr. Carstens stated.