Kyrgyzstan’s growth this year will remain weak at 2.3% as a result the regional slowdown, but the economy should improve over the medium term as the country’s main trading partners see recovery in growth, the International Monetary Fund (IMF) said on September 28.

Despite moderating since the beginning of 2016, the economy is still “held back” by external pressures, the fund said in a statement following its visit to Bishkek on September 15-28. Growth excluding gold production at the Kumtor mine, the largest contributor to the economy, reached 2.1% by end-August “on the back of modest improvements in trade, construction and agriculture”. At the same time, consumer prices edged up 0.5% by the end of August due to some recovery in food and fuel prices, after venturing into deflation earlier in the year, the statement notes.  

The IMF reiterated its previous statement that 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 and reduce it to 2.4% of GDP in 2017. To accomplish this, the IMF is suggesting the authorities to reverse recent VAT exemption on flour and unwind other tax exemptions.

“It will also require careful consideration of public investment projects, be they foreign or domestically financed, to ensure that only the most essential ones are selected and that they are executed in an efficient and transparent manner,” the IMF notes. The fund also re-emphasises its point that the country should refrain from unbudgeted spending in the run-up to 2017 presidential elections.

Given the recent fall in headline inflation, subdued economic prospects and the moderation of credit growth, the Kyrgyz central bank could relax monetary policy while staying on lookout for signs of fiscal and exchange rate pressures, the fund suggests. “Foreign exchange intervention should continue to be limited to smoothing out excessive volatility.”

The fund welcomes the passage of the banking law, seeing it as an “important step towards building a modern and effective regulatory framework”, but urges to strengthen it further to enhance the banking resolution framework, and the central bank’s autonomy and governance. “The mission and the authorities have made good progress toward reaching a staff-level agreement on the third review under the ECF,” the IMF concludes.