Problem bank, state debt, poverty. IMF gives recommendations to Kyrgyzstan

Executive Board of the International Monetary Fund (IMF) concluded consultation with the Kyrgyz Republic in 2019. The experts gave outlook for the development of the country's economy and recommendations to the Government and the National Bank. Among other things, it was recommended to control the state debt and transfer Rosinbank to the state as soon as possible.
The economy is stable ...
The IMF stresses that the economy of Kyrgyzstan has experienced moderate growth of 3.5 percent in 2018, benefiting from a benign regional environment. Core inflation has declined, and lower food prices have pushed headline inflation to 1.5 percent on average.
The current account deficit of the balance of payments weakened to 8.7 percent of GDP while gross official foreign exchange reserves declined to the still adequate level equivalent to four months of imports of goods and services.
According to IMF estimates, the general government deficit declined to 1.3 percent of GDP in 2018, mainly owing to lower-than-budgeted spending on investment and goods and services.
"While the National Bank of the Kyrgyz Republic (NBKR) loosened monetary policy, it made further progress in reducing excess liquidity and dollarization. The soundness of the banking sector improved, but the NBKR took the unusual step of acquiring a problem bank," statement of IMF says.
Growth is expected to moderately rise in 2019 owing to gold production and fiscal expansion and reach about four percent in the medium term. However, risks are tilted to the downside mainly because of the impact of trade tensions on the regional economic environment.
... but vulnerable to external shocks
"Executive Directors welcomed the improved macroeconomic and financial conditions but noted that the economy remains vulnerable to external shocks and that risks are tilted to the downside. Continued stability-oriented macroeconomic policies and further policy reform is therefore needed to create the necessary buffers and to generate increased inclusive growth," IMF stressed.
According to IMF forecasts, Kyrgyzstan's GDP will grow by 3.8 percent in 2019, but already in 2020 economic growth will slow down to 3.4 percent.
Excluding Kumtor, the economy will grow by 3.7 percent this year, and by 3.6 percent - in 2020. Prices will rise by 2.2 percent in 2019. And 2020 inflation rate is expected to be higher than GDP growth and will reach 4.9 percent.
While stressing the need to ensure long-term debt sustainability, a modest expansionary fiscal stance, as implied by the 2019 budget, was considered appropriate. Given the negative output gap and tighter than anticipated fiscal stance in 2018, an increase in the deficit could be helpful without jeopardizing long-term sustainability. To create the appropriate fiscal buffer, the fiscal deficit should, however, remain below 2.5 percent of GDP from 2020 and beyond, allowing the stabilization of public debt.
IMF called for reducing tax exemptions, the high public-sector wage bill, and energy sector subsidies, and to strengthen public financial management.
It emphasized that the general government budget deficit should be measured in line with the Government Financial Statistics Manual to include on-lending to loss-making state-owned enterprises.
Rosinbank and conflicts of interest
In addition, Executive Directors considered the monetary policy stance as appropriate but saw merit in greater exchange rate flexibility. They welcomed steps taken to move toward inflation targeting, including reducing excess liquidity, dollarization, and the width of the interest rate corridor.
To help this transition and allow the economy to adjust to shocks through the exchange rate channel, the National Bank of the Kyrgyz Republic was recommended to maintain two-way exchange rate flexibility and limit interventions solely to smoothing excessive fluctuations.
IMF
Directors stressed the importance of implementing risk-based supervision and strengthening the bank resolution framework. They urged the NBKR to transfer the recently acquired problem bank to the state as soon as possible, to eliminate conflict of interest with its role as central bank and banking supervisor, to protect the central bank's balance sheet, and to allow it to better focus on monetary policy formulation and implementation and banking supervision.
IMF experts noted the challenge of maintaining correspondent banking relationships (CBRs) and supported the call for an active role of the Fund in assisting members to address CBR withdrawal.
Poverty reduction course
As for work of the government, IMF emphasized the importance of structural reforms to increase income and reduce poverty. The reform should focus on enhancing financial sector development, restructure the energy sector, and improve governance.
A gradual increase in residential tariffs, with cash transfers to compensate the poor, is necessary to increase capacity and to unleash the growth potential of the energy sector.
IMF
"Strengthening the fiscal framework, improving financial sector oversight, further bolstering the AML/CFT framework, and buttressing the rule of law should help improve governance and reduce vulnerabilities to corruption. It is expected that the next consultation with Kyrgyz Republic will be held on the standard 12-month cycle," IMF summed up.