OREANDA-NEWS. May 13, 2011. An International Monetary Fund (IMF) mission led by Mr. Christian Beddies visited Bishkek during April 20-May 4, 2011 to hold discussions on a set of economic policies that could be supported by a medium-term arrangement under the Extended Credit Facility (ECF). The IMF mission reached a staff-level agreement that could be supported by an ECF in the amount of SDR 66.6 million (USD 108 million). The proposed arrangement requires approval of the IMF Executive Board, which is expected to consider the Kyrgyz Republic’s request in June. The mission also held discussions with the authorities in the context of the 2011 Article IV Consultation.

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

“The Kyrgyz Republic suffered from a deep political crisis last year. The fallout from the domestic crisis has posed significant challenges. The economy contracted by 1.4 percent last year, straining the government’s financial position, which was further exacerbated by critical reconciliation, recovery and reconstruction needs. Moreover, the global food and fuel price shock triggered a sharp rise in inflation, eroding real incomes of the most vulnerable part of the population. Business confidence deteriorated, hampering prospects for private sector-led economic recovery.”

“The authorities discussed with the mission the medium-term challenges following the crisis and, in this context, policies for 2011 and beyond that will provide a coherent macroeconomic framework to support economic recovery. “These policies will aim to restore macroeconomic stability, rebuild macroeconomic policy buffers, promote inclusive growth in a low inflation environment, achieve medium-term fiscal consolidation, address weaknesses in the financial sector, and catalyze critical donor support, which would help to keep reserves at a comfortable level. The overall fiscal deficit will be contained by strong growth and the authorities’ efforts already underway to strengthen tax administration and tax policy, and to fight corruption and tax evasion. Inflation is projected to decline but remain in the lower double digits in 2011.

“As a result of these discussions, the mission reached a staff-level agreement with the authorities on a set of macroeconomic and structural policies that could be supported by an ECF. In particular:

• Medium-term fiscal policy aims to bring the fiscal position back on a sustainable path, anchored by the need to ensure that public debt will return to a declining trend. To achieve this goal, substantial fiscal consolidation through additional revenue measures and expenditure restraint in 2012 will be necessary. The measures will help to encourage formalization of the economy, limit tax evasion, spread the tax burden more evenly and simplify the tax system. The fiscal consolidation strategy will also be supported by measures to enhance tax administration and by a comprehensive civil service reform, which will contain the wage bill, enhance the effectiveness of the civil service, while still allowing for moderate wage increases.

• Public financial management reforms will be instrumental to increase the effectiveness of public spending, strengthen budget design and implementation, and increase transparency of budgetary operations. The experience with the Kyrgyz Republic Development Fund last year has also shown that to support transparency and good governance it will be crucial to ensure that public finances are fully channeled through the budget.

• Monetary policy has been appropriately tightened to counter inflation and will remain tight to ensure that inflation expectations do not become entrenched. These policies will slow the growth of monetary aggregates and help to reduce inflation further in 2012 and beyond. Continued exchange rate flexibility will help to maintain the real exchange rate in line with the fundamentals.

• The events of 2010 put the financial system to a test and decisive action is needed to deal with these legacy issues and ensure that the banking system has adequate buffers to withstand possible further shocks. Actions to isolate and resolve the problems in the banking system have already been taken but the process remains incomplete. The failed Asia Universal Bank and Zalkar Bank, which was created from AUB, needs to be resolved swiftly and in line with international best practice.

• The recent experience with the banking sector also revealed weaknesses in the legal framework for early intervention and resolution of problem banks in the Kyrgyz Republic. As a result, a comprehensive reform of the legal framework governing the financial sector will be important to remedy these shortcomings and ensure that the supervisory authority is better placed to take resolute action in case of future banking problems.

“These policies will support strong and inclusive private sector-led growth and aid in reducing poverty. To ensure that the growth dividends from the authorities’ reform efforts also benefit the poor, key targeted social assistance programs should be further developed with the support of the Kyrgyz Republic’s development partners.”