Kyrgyz Republic Gets Loan to Boost Economy Amid Regional Slump

Weaker regional economic environment weighs on Kyrgyz growth

High public debt, banking sector vulnerabilities pose risk

Accession to Eurasian Economic Union to provide boost

The landlocked country in Central Asia faces considerable challenges: a weak regional environment, high public debt stemming from an ambitious investment program, and heavy reliance on remittances, gold, and foreign aid.

The new financing package, which extends for three years under the IMF’s Extended Credit Facility, aims to address vulnerabilities that have recently emerged. The Kyrgyz Republic had already begun to implement reforms under a previous IMF program that expired in July 2014.

In the following interview, Edward Gemayel, Kyrgyz mission chief for the IMF, discusses the economy’s current challenges and potential for growth as the country prepares to join the Eurasian Economic Union later this month.

IMF Survey : Why is the economy growing below its potential?

Gemayel: Various factors are affecting economic activity. The country has strong ties to Russia, so the slowdown there has had a major impact. The Kyrgyz Republic is highly dependent on remittances—which represent about 30 percent of GDP—and grants from other countries, mainly Russia. The level of these grants and remittances are now lower, affecting growth.

The country also has a high level of debt, as a result of a huge investment program it recently embarked upon. In recent months, they’ve invested heavily in infrastructure and the energy sector by borrowing externally, mainly from China, and this has created an increase in debt. The country also has a high current account deficit partly as a result of these investments, which require a lot of imports.

Another factor is inflation, which has picked up since early 2014, mainly because of the depreciation of the som, the domestic currency. The som’s weakening has created inflationary pressure in the economy, with inflation going above 10 percent at the end of last year. And the vulnerability of the banking sector is also having a negative impact.

IMF Survey : How is the banking sector being affected by high dollarization—the fact that many people use dollars rather than the local currency?

Gemayel: The country has always had a dollarized banking system, on both the deposit side and the lending side, but that has been exacerbated by the recent slowdown in Russia and the weakening of the domestic currency. This high dollarization—combined with...