Publication: Monitor Volume: 7 Issue: 191

After a downturn in relations this summer, Kyrgyzstan and the International Monetary Fund (IMF) are discussing a possible new loan. Following meetings with Kyrgyz government representatives in mid-September, the head of the IMF mission there announced the Fund’s readiness to allocate a US$90 million credit for a three-year development program, pending approval by the IMF Executive Council next month. That announcement follows the Fund’s July decision to withhold a disbursement of some US$35 million from Kyrgyzstan because of controversial changes to the Kyrgyz tax code. The disbursement was to have been the final installment of Kyrgyzstan’s Poverty Reduction and Growth Facility (PRGF) approved in 1998, worth SDR 73.38 (then nearly US$100 million). Kyrgyzstan received its last IMF disbursement in September 2000.

The reason for the withholding of the IMF tranche this past summer was related to the decision by Kyrgyz authorities to reduce top tax rates on corporate profits and individual incomes by about two-thirds. The president signed the measure into law in July without consulting the IMF, despite the country’s participation in an IMF program at the time. Although those taxes have been less important to government revenues than the value-added tax in recent years, the cut was of concern to the IMF in view of the Kyrgyz authorities’ stated goal of increasing the share of tax revenues relative to GDP. Kyrgyzstan’s poverty reduction strategy paper, released weeks before the cut, had called for tax revenues to increase from 13.3 percent relative to GDP to 14.2 percent in 2005.

The fate of the tax cut is now uncertain. As before, the IMF maintains that the new rates are too low. Even the Kyrgyz authorities appear to have mixed feelings about the measure. In August, the Finance Ministry elicited harsh criticism from the prime minister when the draft 2002 budget reflecting the impact of those and other cuts in decreased revenues was presented. Since then, a revised budget draft has been prepared, and it remains unclear whether the tax cuts will be included in the final version. Nonetheless, the Kyrgyz authorities have a strong incentive to avoid persistent tension in relations with the IMF in view of their need to manage payments on the country’s large external debt, which in 2000 reached an estimated 136 percent of GDP (Kyrgyz Radio First Program, August 17;, September 19; Kabar News Agency, September 28, October 1; Interim National Strategy for Poverty Reduction 2001-2003).