Press Release No. 05/40

Press Release: IMF Executive Board Approves US$13.6 Million PRGF Arrangement for the Kyrgyz Republic

February 23, 2005

The Executive Board of the International Monetary Fund (IMF) approved today a three-year SDR 8.88 million (about US$13.6 million) arrangement under the Poverty Reduction and Growth Facility (PRGF) for the Kyrgyz Republic, which is designed to support the government's economic program for 2005-2007. This arrangement will become effective on March 15, 2005. In addition, the Executive Board also completed the sixth and final review of the Kyrgyz Republic's performance under its current PRGF arrangement with the Fund.

As a result of the Executive Board's approvals, the Kyrgyz Republic will be able to draw immediately an amount equivalent to SDR 9.56 million (about US$14.6 million) under the current arrangement, and an amount equivalent to SDR 1.26 million (about US$1.9 million) when the new arrangement becomes effective in March 2005.

Total disbursements under the current PRGF arrangement amounted to SDR 73.4 million (about US$ 112.3 million (see Press Release No. 01/49)).

Following the Executive Board's discussion of the Kyrgyz Republic, Agustín Carstens, Deputy Managing Director and Acting Chair, said:

"The Kyrgyz Republic's economic performance under the PRGF-supported program was strong in 2001-04, as seen in solid economic growth, low inflation, and a comfortable foreign reserves position. Importantly, there was also a significant decline in poverty levels.

"The authorities' new three-year PRGF-supported program aims at preserving strong growth with low inflation and further reducing poverty. The success of the program will depend largely on the government's determination to adhere to its policy commitments and to reduce the external debt overhang. Even with further Paris Club debt relief, continued fiscal adjustment will be critical for maintaining macroeconomic stability. Achieving the program's fiscal targets will require containing expenditure pressures, particularly during this election year. Developing a strategy for government wage reform, aimed at reducing overstaffing in order to create room for raising the wages of key personnel, is also a high priority.

"The central bank's monetary policy has been prudent. The central bank's independence should be strengthened to maintain monetary stability and the effectiveness of bank supervision. The authorities are committed to ensuring that any signs of prudential weakness are addressed promptly and effectively.

"Strong structural policies will be crucial to boost productivity growth and help diversify the economy. Regarding the labor market, reducing the high payroll tax rate should support employment, and increasing labor market flexibility should promote private investment and enterprise restructuring. The program envisages measures to reinvigorate energy sector reform so as to cut further the sector's quasi-fiscal deficit. In addition to these measures, a less intrusive regulatory framework and keeping an arm's-length relationship between the government and private sector activities should foster the development of a more propitious business environment," Mr. Carstens said.

ANNEX

Background

The Kyrgyz Republic has made substantial economic progress over the past several years. Disciplined economic policies led to a successful macroeconomic stabilization with growth averaging 4.7 percent per annum in 2001-04 and per capita GDP rising to US$425 at end-2004. In addition, the poverty rate has declined from 52 percent in 2000 to 35 percent in 2004.The 12-month rate of inflation was kept below 4 percent most of the time since 2001 and official gross reserves reached 5.5 months of imports at the end of 2004. The key challenge facing the country is to maintain steady economic growth to further reduce poverty and bring its external debt down to sustainable levels.

Program Summary

Key macroeconomic objectives for 2005-07 are to achieve an annual real GDP growth rate of 5-6 percent; reduce the primary fiscal deficit (before grants) to 3 percent in 2005 and further to 2¾ percent in 2007. The government will continue building fiscal institutions and promoting fiscal transparency.

Monetary policy will seek to accommodate remonetization while containing annual inflation at 4 percent. The current exchange rate policy of a managed float regime will be maintained. To ensure that the external debt ratio is reduced, the program introduces a new indicative target for concessional public borrowing.

The investment ratio is projected to increase from an average of 20 percent in 2001-04 to 23 percent in 2005-07. Debt-financed public investment would continue to decline over the program period and private investment would rise—in line with recent trends—from an average of 15 percent in 2001-04 to 18 percent in 2005-07.

The structural reform agenda under the program will focus on reforming the financial sector, increasing labor market flexibility, and reducing the energy sector quasi-fiscal deficit.

The financing gaps under the program—2½ percent of an annual GDP in 2005-07—are expected to be filled through debt relief by Paris Club creditors, and external assistance from the Fund, the World Bank, and the Asian Development Bank.