Press Release No. 11/245

Press Release: IMF Executive Board Approves US$106 Million Extended Credit Facility Arrangement for the Kyrgyz Republic

June 20, 2011

The Executive Board of the International Monetary Fund (IMF) today approved a three-year SDR 66.6 million (about US$106 million) arrangement under the Extended Credit Facility for the Kyrgyz Republic to support the economic recovery in the short term and place the country on the road to stronger sustained and inclusive growth in the medium term. The Board’s approval enables the immediate disbursement of SDR 9.514 million (about US$15.2 million).

The Kyrgyz Republic suffered from a deep political crisis in 2010. The fallout from the domestic crisis has posed significant challenges. The economy contracted last year, straining the government’s financial position, further exacerbated by critical reconciliation, recovery and reconstruction needs. The banking sector also suffered from diminished depositor confidence and the economic effects from the events in the south. Moreover, the global food and fuel price shock triggered a sharp rise in inflation, eroding real incomes of the most vulnerable part of the population.

The new Fund-supported program will provide a coherent macroeconomic framework that will support the authorities’ efforts to sustain economic recovery, promote inclusive growth in a low inflation environment, restore macroeconomic stability, achieve medium-term fiscal consolidation, address weaknesses in the financial sector, improve the country’s governance, and catalyze critical donor support.

Following the Executive Board’s discussion on the Kyrgyz Republic, Mr. Naoyuki Shinohara, Deputy Managing Director and Acting Chair, stated:

“Domestic political turmoil in the Kyrgyz Republic in 2010 disrupted economic activity and negatively affected near-term growth prospects. Real GDP contracted, the current account shifted to a deficit, international reserves coverage declined, and credit growth stalled. Moreover, rising international food and fuel prices have increased inflation and eroded real incomes. Faced with these challenges, the authorities have developed a strong program, which aims at restoring macroeconomic stability, rebuilding policy buffers, catalyzing donor assistance, and promoting private sector-led inclusive growth.

“A limited fiscal expansion in 2011 will support the nascent economic recovery, but policies will need to be carefully balanced to curb inflationary pressures. Significant fiscal consolidation in 2012 and beyond will be critical to ensure medium-term fiscal and debt sustainability and support efforts to reduce inflation. The central bank has already tightened monetary policy and stands ready to tighten further if necessary.

“Last year’s political turmoil exposed weaknesses in the financial sector. Strengthening the supervisory independence of the central bank will play a pivotal role in restoring confidence in the financial sector, mitigating vulnerabilities, and ultimately enabling banks to perform their key function of intermediating scarce resources.

“While the authorities have made progress in reforming the regulatory framework related to the business environment, addressing longstanding governance issues will be key to enhancing the role of the private sector and fully realizing the economy’s long-term growth potential.”

ANNEX

Recent Economic Developments

While there are early signs of recovery from the economic contraction in 2010, the situation remains fragile with inflation at more than 20 percent. The political crisis has disrupted trade flows, agricultural production, construction, and tourism, which led to a shift in the current account from surplus to deficit. Fiscal policy has been expansionary, albeit less than anticipated and monetary policy was tightened toward the end of the year to counter rising inflation. The latter is already yielding tangible results with May 2011 having been the first deflationary month in over a year.

Program Summary

Sustain economic recovery and foster inclusive growth to help reduce poverty. The program foresees a slight fiscal expansion in 2011 to further support the nascent economic rebound. The authorities expect real GDP to grow by about 6 percent on average during 2011–14 on the back of continued political stability and a rebound in agriculture, trade and construction. To ensure that the growth dividends also benefit the poor, the government plans to further develop key targeted social assistance programs with the support of development partners. The authorities also plan to raise the size of the Guaranteed Minimum Income by almost 20 percent and increase spending on Unified Monthly Benefits and Monthly Social Benefit to catch up with the rising cost of living.

Bring the fiscal position back on a sustainable path in the medium term. To achieve this goal, the authorities will introduce additional revenue measures and restrain expenditures. Given that a large part of the domestic economy remains outside the tax system, the Kyrgyz government efforts will focus specifically on broadening the tax base, which should help improve the efficiency of the Kyrgyz tax system. The main elements of the reform will be to improve the customs valuation system, removing tax exemptions and reforming excise taxation on tobacco and alcohol. Such measures will encourage the formalization of the economy, limit tax evasion, spread the tax burden more evenly and simplify the tax system.

Improve the resilience of the country’s financial sector. Political developments in 2010 tested the Kyrgyz financial system and severely disrupted the regular course of supervisory activities. The authorities are taking actions to isolate and resolve the problems in the banking system to ensure that the banking system is sufficiently resilient to withstand possible further shocks. Such actions include resolution of troubled banks, asset recovery measures from fraudulent transactions and strengthening supervision, particularly of systemically important banks.

The authorities are committed to improving governance in the country. Addressing this issue remains one of the biggest challenges for the Kyrgyz government. Ensuring the efficient use of public resources and improving the business climate will be instrumental to attract high-quality domestic and foreign investments in the country.