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IMF praises Kyrgyzstan, warns about risks to economy

The mission of the International Monetary Fund, headed by Edward Gemayel visited Bishkek from April 5–18. Following the meetings with the country’s leadership, the IMF presented its vision of the future of the economy, finance and gold projects of Kyrgyzstan.

Reality exceeds expectations

The head of the mission, Edward Gemayel, noted that the results of 2016 exceeded all expectations. The growth reached 3.8 percent, which is higher than expected. Inflation remained under control and even approached zero.

However, inflation may have been low due to the inability to export goods to the Eurasian Economic Union and excess supply in the domestic market.

The budget deficit was in line with the targets set at 4.5 percent of GDP.

Almost all recommendations met

Traditionally, the IMF gives recommendations to the authorities of Kyrgyzstan. They are needed not only for the development of the economy, but also for providing the country with the next tranche within the framework of the Extended Credit Facility. As a result, it was reported that almost all quantitative and structural indicators had been met.

The recommendations on collection of tax payments and liquidation of banks under the management of the Agency on Bank Reorganization and Debt Restructuring (DEBRA) have not been implemented.

Only one out of four banks, which should be liquidated in the first quarter of 2017, stopped working. Three more trials on them are under way, and more time is needed to close them.

How to live in 2017?

Experts believe that the economic growth in 2017 will be equal to the last year’s level. This is a good sign, reflecting the correct policy of the government of Kyrgyzstan. It was noted that since start of the regional crisis in 2014, the measures taken in the Kyrgyz Republic allowed not only to minimize its influence, but also to generate higher economic growth compared to its neighbors.

In 2017, economic growth in Kyrgyzstan will amount to 3.5 percent. Inflation will be low, but slightly higher than in 2016. It will expectedly increase up to 4 percent.

The budget deficit will reach 3 percent of GDP in case the appropriate economic policy measures are taken. If we talk about monetary policy, the IMF recommends retaining the one, which has been in effect in the past three or four years. That is, the National Bank needs to adjust the bank rate to inflation expectations, conduct limited interventions in the foreign exchange market not to influence the weakening or strengthening of som.

Risks persist

If we talk about the expected risks, they are connected with the prospects for the development of the situation in the countries of Central Asia. If it goes in a negative scenario, this will affect Kyrgyzstan also. In this case, the biggest challenge is to resist the pressure on the expenditure part of the budget, taking into account the upcoming presidential elections.

It is important to keep the tax revenues increasing, and the tax incentives — limited.

Edward Gemayel

«We urge the government and parliament to work more actively to achieve the abolition of VAT cancellation for flour. It costs the budget more than half a billion soms, and only a limited number of people get benefits," Edward Gemayel stressed.

As for the expenditure side of the budget, the IMF considers it important to reduce non-priority expenditure items.

Illegal earnings and finances

The legislative branch, as it turned out, can also influence the economy. It is a matter of urgent adoption of a law on combating proceeds of crime laundering and financing of terrorism. It was sent to Parliament in June 2016, but has not yet been adopted. The IMF believes that this could negatively affect the economy.

The fact is that the Eurasian group FATF, assessing the quality of the regime, laws and measures adopted by Kyrgyzstan in the fight against money laundering and the financing of terrorism, recently conducted an assessment, and our country is in the white list so far.

If Kyrgyzstan is transferred to the check list, this could negatively affect the banking sector.

Edward Gemayel

In addition, the non-adoption of the law may lead to the severance of correspondent relations with Western banks. This will affect trade financing and transfers arriving in Kyrgyzstan.

«The law is good as it is. The problem is that some parliament members have fears that it will create some restrictions and may affect their activities. But it is important to look at the bright side of the bill. After all, it will give a positive signal to local and foreign investors that the country has proper legislation and a regulatory regime to combat money laundering and the financing of terrorism. This is a signal that business can invest in Kyrgyzstan without additional fears," Edward Gemayel believes.

Can we live without Kumtor?

Mining of gold at Kumtor is decreasing from year to year. Journalists asked the head of the IMF mission in Kyrgyzstan whether the project would remain the driver of the economy as it is now.

Edward Gemayel noted that Kumtor does play a leading role in the country’s economy. But even without the project in 2016, the country’s economic growth was 3.7 percent.

Taking into account the current production level, we expect that Kumtor project will operate for other 8–9 years.

Edward Gemayel

«Other mines will be probably developed. Gold mining plays a big role, but even without it, the economy grows at a good pace. The most important question here is how to make the growth more inclusive. It is important that business environment reforms, management system efficiency, expansion and development of the financial sector to play a key role in ensuring economic growth," Edward Gemayel stressed.