IMF welcomes the improved macroeconomic and financial conditions in Kyrgyzstan

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BISHKEK (TCA) — Economic growth in Kyrgyzstan is expected to moderately rise in 2019 owing to gold production and fiscal expansion and reach about four percent in the medium term, the Executive Board of the International Monetary Fund (IMF) said on June 28, after concluding the Article IV consultation with the Kyrgyz Republic last month.

The Kyrgyz economy has experienced moderate growth of 3.5 percent in 2018, benefiting from a benign regional environment. Core inflation has declined, and lower food prices have pushed headline inflation to 1.5 percent on average. The current account deficit of the balance of payments weakened to 8.7 percent of GDP while gross official foreign exchange reserves declined to the still adequate level equivalent to four months of imports of goods and services, the IMF said.

IMF Executive Directors welcomed the improved macroeconomic and financial conditions in Kyrgyzstan but noted that the economy remains vulnerable to external shocks and that risks are tilted to the downside. Continued stability-oriented macroeconomic policies and further policy reform is therefore needed to create the necessary buffers and to generate increased inclusive growth.

While stressing the need to ensure long-term debt sustainability, a modest expansionary fiscal stance, as implied by the 2019 Budget, was considered appropriate. Given the negative output gap and tighter than anticipated fiscal stance in 2018, an increase in the deficit could be helpful without jeopardizing long-term sustainability. To create the appropriate fiscal buffer, the fiscal deficit should, however, remain below 2.5 percent of GDP from 2020 and beyond, allowing the stabilization of public debt.

Directors saw the need for heightened efforts to increase fiscal space for development needs by improving domestic revenue mobilization and expenditure efficiency. They called for reducing tax exemptions, the high public-sector wage bill, and energy sector subsidies, and to strengthen public financial management.

Directors considered the monetary policy stance as appropriate but saw merit in greater exchange rate flexibility. They welcomed steps taken to move toward inflation targeting, including reducing excess liquidity, dollarization, and the width of the interest rate corridor. To help this transition and allow the economy to adjust to shocks through the exchange rate channel, Directors recommended that the National Bank of the Kyrgyz Republic (NBKR) maintain two-way exchange rate flexibility and limit interventions solely to smoothing excessive fluctuations.

Directors emphasized the importance of structural reforms to increase income and reduce poverty. The reform should focus on enhancing financial sector development, restructure the energy sector, and improve governance. A gradual increase in residential tariffs, with cash transfers to compensate the poor, is necessary to increase capacity and to unleash the growth potential of the energy sector. Strengthening the fiscal framework, improving financial sector oversight, further bolstering the AML/CFT framework, and buttressing the rule of law should help improve governance and reduce vulnerabilities to corruption.

Sergey Kwan

TCA