AKIPRESS.COM - An International Monetary Fund (IMF) staff team led by Mr. Nikoloz Gigineishvili conducted a remote mission from March 12 to March 30, 2021 in the context of the 2021 Article IV consultation with the Kyrgyz Republic and made a statement following the mission.
The Kyrgyz economy was hit hard by the COVID-19 pandemic. The sharp decline in tourism, non-gold exports, and the slowdown in domestic activity have led to a significant contraction of GDP by 8.6 percent in 2020. The authorities took a range of measures to save lives and cushion the impact on the economy. These included emergency health spending, stepping up the food security program for the vulnerable, and temporary tax deferrals and subsidized loans to support small and medium enterprises (SMEs). Due to the COVID-19 shock, the overall budget deficit widened to 3.3 percent of GDP, public debt increased to 68 percent of GDP, the overall balance of payments weakened, the exchange rate depreciated, and inflation accelerated. The National Bank of the Kyrgyz Republic (NBKR) raised its policy rate twice from 4.25 in early 2020 to 5.5 percent in February 2021, while supporting banks through liquidity injections, deferrals of loan payments and the temporary relaxation of capital and loan provisioning norms. The Kyrgyz Republic was the first country to receive the Fund’s COVID-related emergency financial assistance of about $242 million (100 percent of quota) under the Rapid Financing Instrument (RFI) and the Rapid Credit Facility (RCF).
Growth is expected to rebound in 2021, but uncertainty remains high. Barring a resurgence of the pandemic, the economy is projected to grow by 3.8 percent in 2021 and by 6.4 percent in 2022, underpinned by the a more favorable global outlook, recovery of domestic activity, higher gold production, an increase in remittances from oil exporting neighbors, and a rebound in tourism, transportation and related services. Growth should gradually converge to its potential of 4 percent in the medium term. Annual inflation will remain elevated in the coming months due to base effects but decline to about 7.4 percent by end-2021 and return to the central bank’s target range of 5-7 percent thereafter.
However, global economic conditions remain uncertain and warrant contingency planning. A slower than expected rollout of vaccines or emergence of new COVID-19 variants may delay the recovery to 2022 or beyond and, therefore, securing vaccines as soon as possible is essential to save lives and livelihoods. Lower gold prices or weaker remittances could weaken the balance of payments. If these risks materialize, accommodative macroeconomic policies will need to be maintained longer, and health and social spending increased. Political stability, policy predictability, and decisive reforms to improve the business climate would strengthen business confidence.
In 2021 the general government budget deficit is projected to widen to 4.2 percent of GDP subject to availability of financing. This reflects a cyclical recovery in tax revenue and the observed improvement in tax compliance due to digitalization of tax filings, a moderate decline in the public sector wage bill after accounting for the planned increase in wages of certain categories of public sector workers, and the budgeted increase in spending on goods and services and investment. This fiscal stance maintains the needed fiscal stimulus while preserving some fiscal space in view of the uncertain outlook. However, if sufficient financing cannot be mobilized, the authorities should identify contingency expenditure cuts while preserving health and social spending, and investment projects with the highest expected social and economic returns. Engaging with international partners to demonstrate their credible commitment to reforms would help to mobilize more concessional resources given that higher domestic financing may increase borrowing costs.
See full statement here