Public Information Notice No. 11/64

Public Information Notice: IMF Executive Board Discusses Ex Post Assessment of Longer-Term Program Engagement in the Kyrgyz Republic

May 27, 2011

On May 23, 2011, the Executive Board of the International Monetary Fund (IMF) discussed the Ex Post Assessment of Longer-Term Program Engagement (EPA) with the Republic of Kyrgyzstan.

Background

The Kyrgyz Republic has been engaged with the IMF since 1993 through a series of Fund-supported programs. An EPA of the early Fund program engagement was completed in November 2004. The new EPA reviews the Kyrgyz Republic’s economic performance under Fund-supported programs from early 2005 to mid-2010.

The report concludes that macroeconomic performance under Fund-supported programs in the period under review has been generally satisfactory. Prudent fiscal policy in the good years provided crucial space for countercyclical policies in 2009 and 2010. Revenue targets were met, often with wide margins; and external debt was reduced significantly, despite the missed opportunity of forgone debt relief. Monetary policy was also generally appropriate, with exchange rate flexibility helping to absorb the impact of the external shock during the global crisis. However, progress in promoting structural reforms and in improving the transparency of government operations was disappointing. Lingering weaknesses in the energy and financial sectors came to the fore in the 2010 domestic political crisis and had large macroeconomic implications.

The report further concludes that a new three-year program with the Fund could be very helpful during the reconstruction period. Given the Kyrgyz Republic’s protracted balance of payments need, an Extended Credit Facility that helps finance this need, catalyzes support from other donors and addresses structural issues could play a key role in supporting macroeconomic management over the next few years.

Executive Board Assessment

Executive Directors agreed with the conclusions of the EPA. They noted that macroeconomic performance under Fund-supported programs had been broadly satisfactory in 2005-10. Directors expressed concern, however, about the limited progress in promoting structural reforms and improving the transparency of government operations, which could affect macroeconomic stability.

Directors noted that prudent fiscal policy in 2007-08 had provided critical space for countercyclical policies when the global crisis hit. They agreed that monetary policy had been generally appropriate, although the central bank could have tightened policy earlier in 2007 to address rising inflationary pressures. Directors concurred that increased exchange rate flexibility had helped to absorb the impact of the external shock during the global crisis.

Directors noted that program performance had been uneven and the difficulties in implementation identified in the 2004 EPA had persisted. Owing to governance concerns, only one review was completed under the 2008-10 program supported by the Exogenous Shock Facility. Directors emphasized that the authorities’ commitment to improve public sector governance and advance structural reforms will form the basis for any future engagement with the Fund.

Directors considered that a new Fund-supported program could be helpful in the reconstruction period following the 2010 internal turmoil. They underscored that such a program should ensure fiscal consolidation over the medium term to avoid a renewed build-up of public debt, and restore macroeconomic policy buffers. Directors stressed the need to tailor program design and conditionality to address the risks associated with weak governance. In particular, they agreed that structural conditionality should be based on a homegrown development strategy and take into account implementation capacity.