OREANDA-NEWS. End-of-Mission press releases include statements of IMF staff teams that convey preliminary findings after a visit to a country. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board.

An IMF mission, led by Edward Gemayel, visited Bishkek during from April 21 to May 5, 2016 to conduct the second review under the Extended Credit Facility (ECF).

At the conclusion of the visit, Mr. Gemayel issued the following statement:

“The Kyrgyz economy has been facing severe external shocks, including lower commodity prices, weak growth and depreciating currencies in the region. As a result, growth fell to 3.5 percent in 2015, with remittances being hit especially hard. On the positive side, the floating exchange rate regime under the National Bank of Kyrgyz Republic’s (NBKR) stewardship acted as a shock absorber, mitigating the impact of external shocks on the real economy.

“The weak external environment is expected to persist in 2016, further slowing growth to about 3 percent, widening external and fiscal deficits and slowing credit to the economy. Recovery in the medium term will hinge on steadfast commitment to reforms, in addition to improvements in the economies of main trading partners.

“A combination of slowing revenues and rising spending have exhausted the fiscal space available to the government. Debt is approaching a critical level, making it increasingly difficult to raise necessary financing while at the same time meeting essential social and development needs. Against this backdrop, it is imperative to keep the budget deficit within the target of 4.5 percent of GDP approved in 2016 budget. Achieving this target will require major additional efforts—identifying permanent revenue measures, containing non-priority spending, and exercising diligence in the choice of investments and associated borrowing.

“The financial sector has shown resilience in the face of adverse economic conditions. Banks remain well capitalized. The NBKR is keeping a close eye on emerging vulnerabilities stemming from the weak economic environment, high dollarization, and currency rate fluctuations. The central bank is deploying prudential and other tools at its disposal to bolster the sectors’ defense.

“A key missing instrument in the NBKR’s toolbox is an efficient bank resolution mechanism. The existing framework is contradictory and inefficient. By allowing shareholders to delay the resolution process indefinitely, it opens the door for insolvent banks to resurrect and provides impunity to bank owners at the expense of depositors who are made to wait for years to be compensated. The banking legislation lingering in Parliament since 2013 aims to address these issues by establishing a robust banking resolution framework in line with international best practice. The proposed framework allows for swift resolution of distressed banks to prevent problems in one bank from destabilizing the entire sector. It also allows depositors to be paid out quickly, and protects their rights. The challenging economic environment strengthens the case for the passage of the banking legislation in the nearest future.

“The situation with DEBRA and the banks under its administration is another manifestation of the shortcomings of the existing bank resolution framework. Delays in the liquidation of these banks, some of which have been under DEBRA since the mid-1990s, undermine the credibility of banking regulations and trust in the system as a whole. We look forward to the completion of the audit of DEBRA and the banks under its management in the coming weeks and the commencement of liquidation procedures for a number of bankrupt banks in the coming months.

“Institutional and structural reforms are essential for the Kyrgyz economy to realize the benefits from Eurasian Economic Union (EEU) membership, and more generally to raise growth in the medium term. The latest Doing Business Report highlights a number of persistent challenges, such as the difficulty of establishing and closing a business, accessing electricity and other utilities, and enforcing contracts. Measures to improve the business climate and reduce corruption are therefore particularly important.

“The mission and the authorities have made good progress toward reaching a staff-level agreement on the second review under the ECF. Discussions with the authorities will continue in the coming weeks. If these discussions are successful, the second review can be completed in June.

“During its visit, the mission met with Prime Minister Jeenbekov, Deputy Prime Minister Pankratov, Minister of Finance Kasymaliev, Chairman of the National Bank Abdygulov, Head of the President’s Administration Niazov, Members of Parliament and other senior officials, and representatives of the private sector, civil society, and the diplomatic community. The team thanks the authorities and other counterparts for their warm welcome, excellent cooperation, and candid and constructive discussions during the visit, and reaffirms the IMF’s support to the government’s efforts to implement their economic reform program.”