OREANDA-NEWS. September 23, 2010. The Executive Board of the International Monetary Fund (IMF) today approved a disbursement of an amount equivalent to SDR 22.2 million (about USD 33.73 million) under the Rapid Credit Facility (RCF) for the Kyrgyz Republic to help manage the economic impact of recent political turmoil and ethnic conflict in the country. The Board’s approval enables the immediate disbursement of the full amount.

The political and ethnic turmoil earlier this year has taken a heavy toll on the Kyrgyz economy. Gross Domestic Product is likely to contract by 3? percent in 2010 owing to serious disruption in agriculture and damage to infrastructure as well as the adverse impact on trade and services stemming from a fragile security situation and border closures. The fiscal deficit is likely to rise sharply in the second half of the year whilst the current account balance and international reserves are expected to decline. The RCF-supported program aims at addressing the balance of payments need, enabling progress towards a stable and sustainable macroeconomic position and helping catalyze donor support for the country.

The RCF, which provides rapid and flexible financial assistance for low-income countries with an urgent balance of payments need, does not require any explicit program-based conditionality or review. However, economic policies are expected to address the underlying balance of payments difficulties and support policy objectives including macroeconomic stability and poverty reduction. Financing under the RCF carries a zero-percent interest rate (until end 2011), has a grace period of 5? years, and a final maturity of 10 years. The Fund reviews the level of interest rates for all concessional facilities every two years.

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

“The political turmoil in Bishkek in April 2010 and the outbreak of ethnic conflict in the south of the Kyrgyz Republic in June 2010 caused considerable disruption to economic activity. Along with a difficult external environment, these developments contributed to a severe recession. While inflation is expected to remain in the single digits, the external current account could swing to a deficit from a small surplus in 2009. The authorities’ program, supported by the Fund under the Rapid Credit Facility, will help address the balance of payments need and restore a sustainable macroeconomic position, while catalyzing critically needed donor support.

“The authorities are responding with a strong fiscal stimulus targeted at overcoming the impact of the recent shocks and providing for social and reconstruction needs. They are aware of the need to avoid excessive borrowing and to adjust the pace of spending in line with the economy’s absorptive capacity. Looking beyond 2010, priority will need to be given to ensuring fiscal sustainability.

“In the aftermath of the crisis, the authorities have taken prompt action in the banking sector to stabilize the situation. They are moving forward with resolving and restructuring Asia Universal Bank and are developing plans to take action on the banks under temporary administration. Monetary and exchange rate policies are designed to support the economic recovery while preventing any resurgence of inflation.

“External financing for the budget will be critical to overcome the consequences of the crisis and sustain essential public expenditures throughout 2010. Fiscal and balance of payments pressures are likely to continue for some time, requiring sustained international support over the medium term.”