The Kyrgyz economy is projected to sustain a potential growth rate of 4% in the medium term, IMF reported. The Executive Board of the International Monetary Fund (IMF) has concluded its 2023 Article IV consultation with the Kyrgyz Republic, endorsing the staff appraisal during a meeting held on February 5.
Despite facing a challenging regional environment, the Kyrgyz economy exhibited strong growth in 2023, primarily driven by the construction and trade sectors. Tax revenue mobilization improved, leading to a decline in public debt. Headline inflation witnessed a decrease from 14.7% in December 2022 to 7.3% in December 2023, supported by reductions in food and fuel inflation. However, demand pressures have kept core inflation elevated. The current account deficit remained due to various factors, including a decline in net remittance inflows and lower gold exports.
Looking forward, the Kyrgyz economy is expected to grow at a potential rate of 4% in the medium term, with inflation declining to mid-single digits while keeping public debt contained. The forecast suggests that the current account deficit could narrow to more sustainable levels, provided that exports of gold production fully resume and re-exports are accurately reflected in external accounts. However, the main risk to this outlook stems from a potential escalation of the war in Ukraine and secondary sanctions, which could adversely affect the Russian economy, leading to decreased remittances and trade, consequently impacting growth and fiscal revenue.
Recognizing the current favorable macroeconomic conditions as a window of opportunity, there is a call to strengthen the policy framework and enhance growth prospects through structural reforms. Key priorities include governance strengthening, particularly in the management and privatization of state-owned enterprises, competition enhancement, electricity sector reform, and bolstering social safety nets. Early reform efforts are seen as crucial in unlocking concessional external financing.
The Executive Board assessment aligned with the staff appraisal, acknowledging the strong recovery and measures taken to maintain macroeconomic stability despite external challenges. Directors emphasized the need to capitalize on these favorable conditions to implement reforms aimed at building resilience and supporting higher and more inclusive growth.
Furthermore, the Board welcomed the Kyrgyz government's fiscal discipline and revenue performance, which have contributed to containing the fiscal deficit and reducing debt. Continued consolidation efforts were encouraged to strengthen debt sustainability while creating space for priority development and social spending. Suggestions to sustainably increase revenues included streamlining tax exemptions and special tax regimes, enhancing revenue administration, and measures to contain the wage bill and reduce energy subsidies.
Monetary policy tightening was recommended to durably reduce inflation, along with measures to improve its effectiveness. Strengthening the autonomy and governance of the central bank and encouraging greater exchange rate flexibility were highlighted. Additionally, ambitious reforms aimed at supporting higher and more inclusive growth were called for, including measures to improve governance, competition policies, management of state-owned enterprises, and anti-corruption efforts.
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