Kyrgyz authorities should make efforts to increase budget revenues and control expenditures in order to keep the fiscal deficit in 2016 within the budgeted 4.5% of GDP, the International Monetary Fund (IMF) said on July 15.

“In this context, the recent introduction of a new VAT exemption on imported grain is counterproductive and should be reversed,” the fund said in a statement following a visit to Bishkek on July 8-14. Going forward, the budget should continue the path of fiscal consolidation in 2017, thereby helping to maintain public debt at a sustainable level. Refraining from spending pressures will be critical in the run up to next year’s presidential election, the IMF notes.

After a difficult start of 2016, pressures on Kyrgyzstan’s economy are “beginning to moderate” helped by a stabilising regional context, the fund points out. The economy contracted by 2.3% in the first half mainly because of a decline in production at flagship gold mine Kumtor. Non-gold growth reached 1.2% in January-June. The IMF expects full-year growth to reach 2.2% in 2016. Still, that represents a downgrade from a 3% GDP rise expected last month, when the IMF approved $13.4mn tranche to Kyrgyzstan.

Inflation, which stayed subdued at 1.3% y/y at the end of June, is projected to remain below 3.5% by the end of the year. The som appreciated by 11.3% by early July, the IMF said adding that the central bank should continue to limit interventions only to smooth excessive volatility and allow the som to move in line with fundamentals.

The high banking sector vulnerabilities call for the immediate passage of the Banking Law, given its importance to preserving financial sector stability, the fund urges. “The Law is essential to reduce the duplication and contradictions prevalent under the existing regulatory framework and strengthen the independence, governance, and transparency of the central bank. Unfortunately, key provisions aimed at establishing a modern and efficient bank resolution framework and protecting depositors’ rights have been removed from the Law during the second reading,” the statement reads.