IMF: With the recovery of domestic and external demand, economic growth in Kyrgyzstan in 2017 is pro

Kyrgyz Republic: Final statement on the outcome of IMF's 2017 consultation mission in accordance with Article IV and the fourth review of the implementation of the Enhanced Credit Facility (ECF) program.

The final statement outlines the preliminary findings of IMF staff after the official visit of the IMF staff (or "mission"), in most cases to the IMF member country. Missions are conducted as part of regular (usually annual) consultations on Article IV of the IMF's Articles of Agreement, in connection with a request for the use of IMF resources (borrowing from the IMF), discussions of programs implemented in IMF staff monitoring, or other types of monitoring by the staff of the economic situation.

The authorities agreed to publish this statement. The views expressed in this statement are those of the IMF staff and do not necessarily reflect the views of the IMF's Executive Board. Based on the preliminary findings of the mission, staff will prepare a report, which, once approved by management, will be submitted to the Executive Board for discussion and decision.

The mission of the International Monetary Fund (IMF) led by Edward Djemayel was in Bishkek from April 5 to 18, 2017 for the fourth review of the implementation of the program under the Enhanced Credit Facility (ECF) and the 2017 consultations in accordance with Article IV. The mission included meetings with Prime Minister S.Zhenenbekov, Parliament Speaker Ch.Tursunbekov, Finance Minister A.Kasymaliev, Minister of Economy A.Kozhoshev, Chairman of the National Bank T.Abdigulov, other high officials, as well as representatives of the private sector, civil Society and the diplomatic community. The focus was on the policy measures necessary to support the emerging economic recovery, including: (i) continuing the course of fiscal consolidation, primarily the work to improve tax administration and reform of the public sector wage system; (Ii) maintaining bilateral flexibility of the exchange rate; (Iii) strengthening safeguards to address vulnerabilities in the banking sector, including the adoption of the Anti-Money Laundering and Combating the Financing of Terrorism (AML / CFT) Law and ensuring equal conditions for all market participants; And (iv) implementing structural reforms to achieve diversified and inclusive growth.

Prospects and risks

  1. Against the backdrop of good performance in the countries of region, prospects for the recovery of the economy of Kyrgyzstan after the recent crisis improve, but without additional efforts to strengthen economic stability and structural reforms, growth rates may not meet expectations. With continued recovery of domestic and external demand, economic growth in 2017 is projected to reach 3.5% and will continue to increase in the medium term. Economic recovery should lead to an increase in inflation to the range of 5-7% set by the National Bank of the Kyrgyz Republic (NBKR) and an increase in the external balance to approximately 13% in 2017, followed by a gradual reduction in the medium term.
  2. The main risks for the economy are still conditioned by regional factors. Weaker growth rates in Russia in the event of a new shock of oil prices or a change in the growth model in China, involving a reduction in investment, could have a negative impact on the economy through remittances, trade and foreign investment. The pressure on expenditure, which is closer to the second half of this year, may adversely affect the consolidation of the budget. At the same time, increasing growth in Russia and deepening economic ties with China can have a positive impact on growth prospects.
  3. Progress has been made in completing the fourth review, but additional efforts will be required. All quantitative criteria for the implementation of the program, established at the end of December 2016, were fulfilled. All indicative targets were fulfilled, except for the indicator on tax revenues. All structural benchmarks set at the end of December 2016 were fulfilled. One of the structural benchmarks set for the first quarter of 2017 (liquidation of banks under the control of DEBRA) was not carried out in connection with protracted litigation. Despite significant progress, further efforts will be required to complete the fourth review, including a firm commitment to meeting the program targets for wages and the overall budget deficit for 2017. The IMF mission will continue to maintain close contacts with the authorities in the coming weeks

Fiscal policy

  1. As the dynamics of economic recovery strengthens, fiscal consolidation will play a key role in restoring the buffer reserves need to protect against future shocks and to maintain macroeconomic stability. Thus, the overall level of the budget deficit in 2017 should correspond to the target of 3% of GDP. Nevertheless, the expected pressure on the expenditure side in the second half of this year may lead to an increase in the budget deficit. Increasing the constant income through the implementation of new agreed measures, the abolition of tax benefits (especially the abolition of VAT on flour), the refusal to provide new benefits and improved tax administration are key components of fiscal policy. Increasing the efficiency of public spending, especially through public sector wage reform, in order to achieve an agreed target for the payroll at 8.8% of GDP by 2018, is also an important component of fiscal policy. Reforms in public financial management should continue, including work on information systems for financial management, for the adoption of a reliable, transparent and binding budget rule, and on fully taking advantage of the recently adopted law on public procurement.
  2. Maintaining a sustainable level of public debt in the medium term will require further efforts to consolidate and implement reforms. In this regard, it is extremely important to continue improving the management of public investments, financed from both internal and external sources, and to refrain from non-concessional borrowing. To reduce the risks associated with state-owned enterprises (SOEs), closer coordination between the Ministry of Finance and the State Property Management Fund is needed, starting with a full assessment of the assets and liabilities of the SOE.

Monetary and exchange rate policies and policies in the financial sector

  1. To achieve the main goal of economic policy - ensuring price stability, it is necessary to maintain bilateral flexibility of the exchange rate and to improve the efficiency of transferring the impact of monetary policy measures through the interest rate. The NBKR should continue to intervene only to reduce excessive volatility. The decisive factors for strengthening the mechanism for transferring the impact of monetary policy are further efforts to improve the forecasting of monetary indicators, the development of the interbank market and the development of the forecasting component of information interaction.
  1. Further strengthening of supervision and regulation, as well as maintaining equal conditions for all market participants, play a crucial role in protecting the financial sector from vulnerabilities. In this regard, the important steps are the transition to risk-based supervision, the continuation of work to improve the foundations of asset classification and the formation of reserves in accordance with international practice and the creation of a reliable system of crisis preparedness. The NBKR should continue to fulfill its main function of maintaining price stability and ensuring equal conditions and equal treatment for all market participants and supervisory organizations.

Structural reforms

  1. To achieve the long-term goal of sustainable growth and joint prosperity, structural reforms are need to overcome the shortcomings associated with the qualifications of workers, with infrastructure and with capital, and diversify the economy. The implementation of plans for the construction of a high-tech society («Таза Коом») with an emphasis on the development of human potential, knowledge and information technologies will require additional investments in education and healthcare and increasing the efficiency of expenditures in these areas. It is important to eliminate distortions in the market and to liberalize electricity tariffs in order to open up opportunities for much-needed private investment. It is necessary to develop a policy on foreign trade and competitiveness in order to take full advantage of the benefits from membership in the EEA and the acquisition of the status of an EU partner under the Generalized System of Preferences (GSP +).
  2. The improvement of the business climate and the principles of public administration, as well as the continued fight against corruption, are the decisive factors in stimulating economic growth with the leading role of the private sector. It is necessary to take concrete measures to eliminate regulatory and management-related obstacles to doing business, which will lead to an unobserved economy from the shadow and use the potential of private entrepreneurship to stimulate growth. In this regard, further work is need to reduce the level of tax evasion and reduce opportunities for abuse, as well as to improve the predictability and transparency of regulatory and legal regulation.

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