Last month, deputies of the Committee of the Parliament on Economic and Fiscal Policy refused to adopt amendments to the law on the Kyrgyz National Bank and banking operations, which the International Monetary Fund insists on.

The amendments propose to change the management structure of the National Bank so that the Chairman and two his deputies to have administrative and managerial powers. At the same time, it was proposed to increase the number of board members, who monitor and analyze the bank management process, from three to five.

In addition, it is proposed to declare paragraphs 11 and 12 of Part 1 of Article 18 of this Law invalid. They say that the National Bank can carry out transactions on the purchase of foreign currency with organizations created by Kyrgyzstan with other states within the framework of the Eurasian Economic Union. The second paragraph states that the National Bank can provide money in the national currency to international organizations established by Kyrgyzstan with other countries within the framework of EEU.

These two points were included into the law so that the Russian-Kyrgyz Development Fund could work more effectively in the republic.

IMF Visit to Kyrgyzstan

Edward Gemayel

An IMF team led by Mr. Edward Gemayel visited Bishkek during January 25-31, 2018 to take stock of the latest economic and policy developments. Mr. Gemayel said:

During the visit the team met with Deputy Prime Minister Mukanbetov, Minister of Finance Kasymaliev, Chairman of the National Bank Abdygulov, Head of the Financial and Economic Analysis and Monitoring Department at the President’s Administration Ahmetova, other senior officials, and representatives of the diplomatic community.

We would like to thank the authorities for their warm welcome, excellent cooperation, and candid and constructive discussions during the visit. The team would like to reaffirm the IMF’s support to the government’s efforts to implement their economic reform program.”

According to Mr. Gemayel, eonomic growth exceeded expectations in 2017. GDP grew by 4.5%, with the recovery encompassing most sectors. Demand was supported by remittances, which surged 25%t in dollar terms, and public spending, which grew by 4% of GDP. Headline inflation at 3.6% remained below the NBKR’s target range of 5-7%.

The 2017 fiscal deficit was kept close to the 3.5% of GDP target, despite a significant fiscal expansion in the run-up to the October presidential elections and weak tax revenue collection. The economic recovery and efforts to tighten expenditures after the elections helped limit the deficit.

The authorities should take fiscal and structural measures to limit the deficit to the targeted 2.5% of GDP in 2018. The IMF team advises the Kyrgyz government to improve revenue performance and refrain from introducing new or extending expiring tax exemptions, including the tax exemptions on ATM equipment and agricultural cooperatives.

Preparatory work is underway to streamline the public sector wage bill, restore the energy sector’s sustainability by adjusting tariffs, and amend the law on universal child allowances to reintroduce targeting. According to Mr. Gemayel , the authorities should formulate amendments to the Budget Code to introduce a credible and enforceable fiscal rule and to close loopholes for extra-budgetary spending.

Exchange rate volatility towards the end of 2017 and early this year prompted several NBKR interventions. For exchange rate flexibility to deliver the macroeconomic benefit of acting as a shock absorber, the NBKR is recommended to restrict interventions to solely smoothing out excessive volatility.

For IMF, the recent rejection by Parliament of the amendments to the Banking Law, which aim to improve NBKR’s governance and ensure financial sector health, represents a setback for reforms. Efforts should be redoubled to reintroduce these important amendments and ensure their adoption.

The IMF notes however the Kyrgyz authorities remain committed to carry out reforms aimed at improving the business climate, including by improving governance and continuing to combat corruption. In that regard, they believe that efforts should be pursued to resubmit an AML/CFT law in line with international standards. Public finance management reforms should be accelerated to enhance the transparency and credibility of the fiscal framework.