IMF Executive Board Concludes 2021 Article IV Consultation with Kyrgyz Republic

Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with the Kyrgyz Republic.

The Kyrgyz economy was severely hit by the COVID-19 pandemic, but the authorities reacted swiftly to protect public health and cushion the impact on the economy. Real GDP declined by 8.6 percent in 2020 due to significant contraction in exports, gold mining, industry, tourism, transport, and construction. Headline inflation rose to 9.7 percent in 2020, primarily because of imported food price inflation and the exchange rate pass-through, while public debt increased by 16.5 percent of GDP to 68 percent. The authorities’ crisis mitigating measures amounting to 7.2 percent of GDP included emergency health spending, a food security program, temporary tax deferrals and subsidized loans to small and medium enterprises, liquidity support to banks, deferrals of loan payments, and the temporary relaxation of capital and loan provisioning norms. Nevertheless, unemployment and poverty increased in 2020.

Growth is expected to rebound in 2021-22. The economy is projected to grow by 3.8 percent in 2021 and by 6.4 percent in 2022, underpinned by the more favorable global outlook, higher gold production, and a gradual rebound in tourism, transportation and related services. Annual inflation will remain elevated in the coming months but gradually return to the central bank’s target range of 5-7 percent. The current account deficit is projected at about 6 percent of GDP in 2021 and in the medium term, driven by a recovery in imports and the opening of the borders.

The level of uncertainty, however, remains high. A slow rollout of vaccines or emergence of new COVID-19 variants may delay the recovery to 2022 or beyond, while lower gold prices or weaker remittances could weaken the balance of payments. More depreciation due to external pressures would further raise public debt while financing constraints could limit fiscal room for countercyclical policies. While securing vaccines is a top priority to contain the pandemic, with macroeconomic buffers largely exhausted in 2020, policymakers will face tighter constraints with less room for policy flexibility. Advancing structural reforms would be critical to improve the business climate and strengthen market confidence.

Executive Board Assessment [2]

Executive Directors agreed with the thrust of the staff appraisal. They noted that the Kyrgyz Republic was severely hit by the COVID-19 pandemic. Output contracted, inflation and public debt rose, and unemployment and poverty increased. Directors commended the authorities’ broad-based policy response which, backed by financial support from the international community, supported households and firms during the crisis. Despite the expected economic rebound in 2021-22, uncertainty remains high. In that context, Directors emphasized the importance of securing vaccines as soon as possible to save lives and revive economic activity. Accommodative policies should be maintained in the near term supported by medium-term fiscal consolidation. Noting that policy flexibility was constrained by limited macroeconomic buffers, Directors stressed the importance of advancing structural reforms to improve the business climate and strengthen market confidence.

Directors emphasized that fiscal policy should support the economy in the near-term but aim to reduce public debt to below 60 percent of GDP by 2025. To achieve the needed fiscal consolidation and create space for the country’s development needs, they urged the authorities to reduce the wage bill, goods and services spending and energy subsidies, and improve revenue mobilization and public financial management. They noted, however, that if financing becomes a constraint, additional expenditure cuts would be necessary while protecting social spending. A demonstrated commitment to reforms would engender additional concessional donor financing.

Directors emphasized that monetary policy should remain focused on price stability. Given the recent increase in inflation, they welcomed the National Bank of Kyrgyz’s (NBKR) decision to raise the policy rate and stressed that further monetary tightening would be warranted if second-round inflation pressures emerged. They also welcomed the central bank’s intention to adopt an inflation targeting framework over the medium-term and its commitment to maintain exchange rate flexibility as a shock absorber.

Noting the resilience of the banking sector, Directors encouraged the NBKR to remain vigilant to ensure financial sector stability given a possible rise in NPLs. They also stressed the importance of strengthening institutional and operational independence of the central bank.

Directors agreed that the Kyrgyz Republic needs an ambitious implementation of structural reforms to achieve higher and more inclusive, private sector-led growth. They urged the authorities to strengthen governance, including transparency of emergency spending, and reduce perceptions of corruption, restore financial viability of the energy sector, improve access to finance, reduce non-tariff trade barriers, and improve human capital and female labor force participation. Strengthening the AML/CFT framework would also be important. Directors also stressed the criticality of political stability, policy predictability, and a market-friendly business environment. A speedy and transparent resolution of the ongoing commercial dispute with the largest foreign investor would be critical to ensure uninterrupted gold production while protecting the environment.

It is expected that the next Article IV consultation with the Kyrgyz Republic will be held on the standard 12‑month cycle.