IMF Staff Finish 2023 Article IV Mission in Kyrgyz Republic

• The Kyrgyz economy grew strongly in 2022 and so far in 2023, fiscal revenue improved, and public debt declined, but inflation has remained elevated despite the recent downward trend.
• In the face of the heightened global uncertainty, the country could strengthen its resilience to future shocks by creating additional fiscal space, reducing inflation further, and rebuilding reserves.
• Improving governance, management of state-owned enterprises, and competition, and reforming the electricity sector are essential to boost medium-term growth prospects and support job creation.

Washington, DC: An International Monetary Fund (IMF) mission led by Mr. Nikoloz Gigineishvili held the 2023 Article IV consultation with the Kyrgyz Republic during November 9 - 22, 2023 in Bishkek. At the conclusion of the mission, Mr. Gigineishvili issued the following statement:

The Kyrgyz economy performed strongly in 2022 and expanded at 6.3 percent despite the headwinds from the difficult regional environment. Tax revenue improved sharply, and public debt declined to 49 percent of GDP. Headline inflation fell from 14.7 percent in December 2022 to 9.2 percent in October 2023, but demand pressures have kept core inflation elevated. The current account deficit widened significantly to 43.6 percent of GDP in 2022 as non-oil imports increased by 26 percent of GDP and gold exports were suspended, while re-exports to Russia were not captured in official statistics. Growth is expected to remain around 4 percent in the medium term and inflation would decline to mid-single digits. However, further escalation of the war in Ukraine and secondary sanctions could weaken the Russian economy, result in a return of Kyrgyz migrant workers, and reduce trade and growth.

Strong revenue performance and lower public debt provide an additional fiscal buffer to counter adverse external shocks. Reducing fiscal deficits further would strengthen debt sustainability and support disinflation, but in the absence of new tax measures, VAT collections could decline in the medium term with the envisaged moderation of imports. Additional fiscal space could be created by eliminating inefficient tax exemptions and streamlining special tax regimes, increasing the progressivity of the Personal Income Tax, strengthening revenue administration, and optimizing the public wage bill and reducing energy subsidies.

Strengthening operational and legal autonomy of the central bank is essential for the credibility of monetary policy. To effectively serve its primary objectives of price and financial sector stability, the central bank should refrain from pursuing other activities such as gold exports or prematurely lowering interest rates. To reduce inflation, adequately tight interest rate policy should go hand in hand with liquidity tightening, including by discontinuing central bank's gold purchases and avoiding unwarranted transfers of central bank profits to the budget, while greater exchange rate flexibility would improve competitiveness and strengthen international reserves. The banking sector remains sound, but the heightened uncertainty warrants supervisory vigilance as non-performing loans may increase if growth slows.

Medium to long-term growth can be raised through structural reforms that improve the efficiency of resource allocation in the economy. The priorities are strengthening governance, including public procurement and management of state-owned enterprises, enhancing competition, reforming the electricity sector, and strengthening social safety nets. Early efforts are also needed to strengthen resilience of the Kyrgyz economy to climate change including by investing in green infrastructure, healthcare, and education. These reforms will also help unlock concessional external financing.

The mission is grateful to the authorities for open and constructive discussions and their hospitality.