KyrgyzRepublicWT/TPR/S/170
Page 1

I.Economic environment

(1)Introduction

  1. The KyrgyzRepublic, formerly a centrally planned economy, began transition to a market-based economy in 1993, soon after independence in 1991. Landlocked in Central Asia between China, Kazakhstan, Uzbekistan, and Tajikistan, it has a population of 5.1 million (Table I.1). Infrastructure, including transportand communications, is underdeveloped. It depends critically on mining, agriculture, and services, especially electricity, much of which is exported, including as countertrade. Gold, while fluctuating, usually accounts for well over one third of exports. Harsh climate and lack of suitable arable land, due to the highly mountainous terrain, are major natural production constraints, and agriculture is mainly irrigation based. The KyrgyzRepublic is ranked 109th overall on the UN Human Development Index. While half the population still lived in poverty in 2004, this has declined significantly due largely to economic growth.[1] GDP per head rose to US$473 in 2005, up from US$381 in 2003.

Table I.1

Main social and economic indicators, 2004 (unless otherwise indicated)

Land area / 0.2 million km2 / Urban share of population / 35.0%
Population / 5.1 million / Nominal GDP (current market prices) (2005) / Som 100.1 billion
US$2.4 billion
Annual population growth / 1.1% / GDP per capita / US$473
UN human development index / GDP per capita average growth rate (2003-05) / 15.6%
-Overall ranking
-Category
-Ranking within category
/ 109th
Medium humandevelopment
52nd / GDP shares 2005 (nominal GDP at current prices, 2001 shares in brackets):
-Primary
-agriculture, hunting and forestry
-mining and quarrying
-Manufacturing
-Services
-wholesale and retail trade
-transport and communications /
35% (38%)
34% (37%)
1% (1%)
14%(19%)
51%(43%)
20% (13%)
8% (5%)
Life expectancy at birth
Infant mortality rate per '000
Adult literacy / 68.2 years
58.4
98.7% / Enrolment ratios in education
-primary
-secondary
-tertiary /
98.0%
88.0%
39.7%

Source:World Bank, World Development Indicators; United Nations Development Programme, Human Development Report 2005; and IMF, Second Review Under the Three-Year Agreement Under the Poverty Reduction and Growth Facility, April 2006.

  1. Sweeping reforms on transition were implemented speedily, including land reform, farm privatization and price deregulation, financial sector liberalization, and significant divestment of state entities (Table I.2).[2] Laws and regulations were changed to create a legal framework supportive of a market economy. Despite impressive progress in economic and political transition, the economy has suffered setbacks, aggravated by several natural disasters and exogenous developments, such as the Soviet Union's collapse and termination of aid, and the Asian/Russian economic crises in 1997-98. Although faced with substantial social and political unrest, culminating in a political crisis in 2005 with the ousting of the founding president and the collapse of the previous government, the administration has remained committed to democracy and to dismantling the command economy; however, priorities have been variable and structural reforms have been "stop go" and ineffectively implemented. While tariffs remain relatively low, and the Government has generally resisted sectoral protectionist pressures, there is no longer a uniform 10% rate, which has undesirable implications for economic efficiency. Encouragingly, recent proposals to apply export taxes on construction materials, to control rising domestic prices caused by Kazakhstan's building boom, have been dropped.

Table I.2

Indicators of progress in transition, selected years, 1996-05

1996 / 1998 / 2000 / 2001 / 2003 / 2004 / 2005
Private sector share of GDP (%)a / 50 / 60 / 60 / 60 / 65 / 75 / 75
Private sector share of employment (%) / 72.5 / 76.2 / 78.2 / 79.1 / 80.3 / .. / ..
Enterprisesb
Large-scale privatization / 4 / 3 / 3 / 3 / 3 / 3+ / 3+
Small-scale privatization / 4 / 4+ / 4+ / 4+ / 4+ / 4+ / 4+
Enterprise restructuring / 2 / 2 / 2 / 2 / 2 / 2 / 2
Markets and tradec
Price liberalization / 4+ / 4+ / 4+ / 4+ / 4+ / 4+ / 4+
Trade and foreign exchange / 4 / 4 / 4+ / 4+ / 4+ / 4+ / 4+
Competition policy / 2 / 2 / 2 / 2 / 2 / 2 / 2
Financial institutionsd
Banking reform and interest rate liberalization / 2 / 2+ / 2+ / 2+ / 2 / 2 / 2
Securities markets and non-bank financial institutions / 2 / 2 / 2 / 2 / 2 / 2 / 2
Infrastructure reforme / 1+ / 1+ / 1= / 1+ / 1+ / 1+ / 1+
Telecommunications / 2+ / 2+ / 2 / 2 / 2 / 3 / 3
Railways / 1 / 1 / 1 / 1 / 1 / 1 / 1
Electricity / 2 / 2+ / 2+ / 2+ / 2+ / 2+ / 2+
Roads / 1 / 1 / 1 / 1 / 1 / 1 / 1
Water and waste water / 1 / 1 / 1 / 1 / 1 / 1 / 1

..Not available.

aMid-year estimates.

bA "1" ranking signals little private ownership or progress while a "4+" signals standards and performance typical of advanced industrial countries.

cA "1" ranking signals extreme controls while “4+” is typical of standards and performance of advanced industrial countries.

dA "1" ranking signals little progress while “4+’ is typical of standards and performance of advanced industrial countries.

eThis rating is computed as an average of the reform process in telecommunications, electricity, water and waste water, roads, and railways.

Source:EBRD (2006),Transition Report Update 2006. Available at:

  1. Economic performance has improved, helped by greater macro-stabilization and ongoing structural reforms. However, the KyrgyzRepublic, like other transitional economies, experienced an initial "transformational recession". Real GDP slumped in the early 1990s, with output falling by over 50%. Macro-stability was restored and growth returned in 1996; this continued until 2005. While aggregate real GDP rebounded to almost 60% above 1995 levels in 2005, it remains some 13% below pre-transition (1991) levels. The economy is still fragile and faces severe economic challenges, but its transition and recovery was helped by its early market-oriented reforms, including moving to a relatively open trade regime as part of its WTO accession, and adoption of a new convertible currency in 1993 with a floating exchange rate.
  2. Economic reforms to promote growth and alleviate poverty were central to the Government's Comprehensive Development Framework Until 2010 (CDF), and reinforced in the Medium-term Strategy for Poverty Alleviation Until 2005, both adopted in 2001. As a first stage in implementing the CDF, the Government also adopted a National Poverty Reduction Strategy (NPRS) in February2003, to accelerate social, political, and economic reforms, including macro-stabilization and key trade and other structural reforms to improve efficiency and competitiveness. Progress in achieving the NPRS was recently reviewed favourably, and it is being updated in consultation with stockholders.[3] The Government has adopted a new IMF Memorandum on Economic Policy for 200507, focusing on enhanced macro-stabilization and key structural reforms, especially in the finance and energy sectors, under the IMF's Poverty Reduction and Growth Facility (PRGF), to help meet the 2015 Millennium Development Goals.[4] The IMF concluded recently that the authorities had made commendable efforts to stick to the programme by observing all quantitative performance criteria for end-2005 and to safeguard macro-stability.[5] The Economic Policy Council was transformed into the Supreme Economic Council in February 2006, and the Coordination Council for Macroeconomic and Investment Policies was established in March 2006 (Chapter II).
  3. Real GDP has grown virtually unabated since 1996, and averaged 4.0% during 2000-05. After stagnating in 2002, annual growth redounded strongly to 7% before contracting by 0.6% in 2005 (Table I.3). Nominal GDP per capita, after falling significantly in the early 1990s, exceeded the 1995 level in 2005 by 30% but remained well below the pre-transition (1991) level of US$572. Consumption growth, especially from private spending, has largely driven the recovery along with gold production (from 1997), a turnaround in agriculture, and services. Services have grown substantially, accounting for 51.1% of GDP in 2005 (up from 43.1% in 2001), and a large share of employment(Tables I.4 and I.5).

Table I.3

Selected macroeconomic indicators, 2000-05

2000 / 2001 / 2002 / 2003 / 2004 / 2005a
National accounts / (Percentage change, unless otherwise indicated)
Real GDP growth (constant prices) / 5.4 / 5.3 / 0.0 / 7.0 / 7.0 / -0.6
Private consumption / -4.6 / 4.4 / 6.8 / 5.2 / 11.2 / 14.6
Government consumption b / 7.0 / -9.3 / -0.7 / 4.7 / 0.1 / 0.8
Gross fixed capital formationc / 23.2 / 11.8 / 1.7 / 10.9 / 11.4 / 6.0
Exports of goods and non-factor services / 10.5 / -3.2 / 7.3 / 9.5 / 22.2 / -8.2
Imports of goods and non-factor services / 0.5 / -9.9 / 19.6 / 11.8 / 26.0 / 14.4
Unemployment rate (%)d / 7.5 / 7.8 / 8.6 / 8.9 / 9.0 / 9.2
Productivitye / (Percentage change)
Total labour productivity / 5.2 / 4.2 / -3.9 / .. / .. / ..
Total factor productivity (1990 = 100) / 4.3 / 3.7 / -3.6 / .. / .. / ..
Prices and interest rates / (Per cent)
Inflation (CPI, 1994=100) / 18.7 / 6.9 / 2.1 / 3.1 / 4.1 / 4.3
Commercial bank loan interest rate (US$)f / 31.9 / 27.5 / 24.5 / 19.6 / 19.4 / 17.7
Commercial bank deposit interest rate (US$)g / 7.8 / 5.4 / 4.3 / 3.1 / 3.5 / 3.5
Central bank (3-month Treasury Bill)h / 33.6 / 17.9 / 9.1 / 7.3 / 4.0 / 4.3
Money and credit (end period) / (Percentage change, unless otherwise indicated)
Broad money supply (M2) / 11.4 / 17.1 / 34.2 / 33.5 / 22.4 / 17.6
Broad money supply (M2X)i / 12.1 / 11.3 / 34.1 / 33.5 / 33.6 / 25.5
Credit to private sector / 9.5 / 3.8 / 11.4 / 26.4 / 19.4 / 11.4
Dollarization indicator (asset dollarization) (per cent) / 68.6 / 56.9 / 57.9 / 61.1 / 72.1 / 72.6
Table I.3 (cont'd)
Exchange rate / (Percentage change, unless otherwise indicated)
Soms per US$ (period average) / 47.7 / 48.4 / 46.9 / 43.7 / 42.7 / 41.0
Nominal effective exchange rate / -8.2 / 7.7 / 7.7 / 3.0 / -1.7 / 2.5
Real effective exchange rate / -3.5 / 4.5 / 1.8 / -0.7 / -3.2 / 1.2
Government Policy / (Per cent of GDP)
Overall primary fiscal balance (excludes grants)j / -6.9 / -3.3 / -3.8 / -4.3 / -3.5 / -2.8
Current revenue (including grants) / 14.2 / 16.1 / 17.8 / 22.2 / 23.1 / 24.3
Tax revenue / 11.7 / 12.4 / 13.9 / 17.7 / 18.3 / 20.2
Current expenditure / 17.2 / 17.5 / 18.9 / 23.1 / 23.2 / 24.5
Total expenditure (includes net lending) / 25.9 / 23.5 / 25.4 / 27.4 / 27.2 / 28.3
Total public sector debt / 121.1 / 108.8 / 108.6 / 103.9 / 96.3 / 89.8
Domestic / 9.9 / 9.0 / 9.9 / 8.8 / 7.9 / 7.5
Savings and investment / (Per cent of GDP)
Gross national saving / 15.7 / 18.1 / 17.8 / 16.4 / 17.5 / 13.7
Gross domestic investment / 20.0 / 19.6 / 20.3 / 20.5 / 20.9 / 21.8
Saving-investment gap / 4.3 / 1.5 / 2.6 / 4.1 / 3.4 / 8.1
External sector / (Per cent of GDP, unless otherwise indicated)
Current account balance (excluding transfers) / -6.6 / -1.6 / -2.5 / -2.8 / -3.4 / -8.1
Net merchandise trade / 0.3 / 0.9 / -5.5 / -7.0 / -7.7 / -17.8
Exports / 37.3 / 31.4 / 31.0 / 30.9 / 33.1 / 28.1
Imports / 37.1 / 30.5 / 36.5 / 37.8 / 40.8 / 45.9
Services balance / -12.5 / -7.2 / -3.7 / -2.8 / -1.0 / -1.8
Capital and financial account / 4.7 / -1.2 / 0.1 / 0.3 / 4.3 / 5.0
Direct investment / -0.5 / -0.1 / 0.3 / 2.4 / 5.9 / 4.1
Balance of payments / -1.2 / -2.8 / 2.1 / 0.3 / 4.0 / 2.0
Terms of trade (percentage change) / 6.2 / 1.1 / -0.6 / 2.7 / 0.5 / -0.5
Merchandise exports (percentage change) / 8.6 / -6.0 / 3.7 / 18.5 / 24.2 / -6.4
Merchandise imports (percentage change) / -7.1 / -13.1 / 26.0 / 23.2 / 34.3 / 22.3
Service exports (percentage change) / -4.8 / 29.9 / 77.5 / 9.2 / 34.8 / 22.5
Service imports (percentage change) / -3.6 / -1.6 / 18.4 / 0.7 / 56.1 / 29.9
Gross official reserves (US$ million)k / 206 / 230 / 290 / 359 / 544 / 609
(in months of imports of goods) / 4.1 / 3.8 / 4.0 / 4.1 / 4.6 / 4.5
Total external public debt (end period) / 130.0 / 100.0 / 99.0 / 96.0 / 88.0 / 82.0
(in US$ million) / 1,520 / 1,522 / 1,587 / 1,827 / 1,960 / 2,010
Debt service ratiol(percentage of exports) / 22.0 / 13.0 / 10.0 / 8.0 / 6.0 / 7.0

..Not available.

aPreliminary.

bExcludes non-commercial entities.

cIncluding net acquisition of valuables.

dActual unemployment rate defined as the ratio of total unemployed to economically active population. Substantially exceeds the official unemployment rate, which is based on official (registered) unemployed.

eEstimates from IMF Working Paper WP/04/151, August 2004.

fWeighted average annual rate on new loans granted for 1-3 months to all sectors.

gWeighted average annual rate on new deposits by legal entities for 1-3 months.

hWeighted average annual rate in the primary market.

iM2 plus foreign exchange deposits.

jNational government and Social Fund finances, but excluding local governments.

kValued at end-period exchange rates.

lPublic and publicly guaranteed debt, net of rescheduling.

Source:IMF (various years), Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Strategy, Staff Reports; and IMF(2005), Statistical Appendix: KyrgyzRepublic, Country Report No. 05/31, 4February.

Table I.4

Share of GDP by sector, 1995 and 2001-05

(Per cent)

Share of GDPa
1995 / 2001 / 2002 / 2003 / 2004 / 2005
Agriculture, hunting and forestry / 44.9 / 37.2 / 37.7 / 37.1 / 33.3 / 34.1
Fisheries, fish-breeding / - / - / - / - / - / -
Mining and quarrying / 0.2 / 0.6 / 0.5 / 0.5 / 0.7 / 0.6
Manufacturing / 12.8 / 19.0 / 14.3 / 14.6 / 17.1 / 14.1
Services / .. / 43.1 / 47.5 / 47.8 / 48.8 / 51.1
Construction / 6.6 / 4.1 / 3.7 / 3.2 / 2.7 / 2.8
Electricity, gas and water / .. / 5.3 / 4.8 / 3.9 / 3.6 / 3.4
Wholesale and retail trade, vehicle repairs , household appliances and items of personal use / 11.9 / 13.1 / 15.6 / 16.7 / 17.8 / 19.9
Hotels and restaurants / .. / 0.9 / 1.2 / 1.6 / 1.7 / 1.9
Transport and communications / 2.1 / 4.5 / 5.6 / 5.9 / 7.1 / 7.6
Financial activities / 2.0 / 0.4 / 0.7 / 0.7 / 0.6 / 0.7
Real estate / 0.6 / 2.9 / 3.4 / 3.1 / 3.0 / 2.8
Government management / .. / 5.5 / 5.7 / 5.1 / 5.1 / 4.8
Education / .. / 3.4 / 3.7 / 4.4 / 3.9 / 3.9
Public health and social work / .. / 1.7 / 1.9 / 1.9 / 2.1 / 2.0
Communal, social and personal services / .. / 1.4 / 1.2 / 1.2 / 1.2 / 1.3

..Not available.

-Negligible.

aNominal GDP (at current prices). Shares do not add to 100 due to rounding.

Source:Bulletin of National Bank of KyrgyzRepublic. Available at: and Kyrgyz authorities.

Table I.5

Share of employment by sector, 1995 and 2001-05

(Per cent)

1995 / 2001 / 2002 / 2003 / 2004 / 2005a
Employment (thousand persons) / 1,642 / 1,787 / 1,807 / 1,837 / 1,880 / 1,934
Agriculture, hunting and forestry / 47.2 / 52.9 / 52.6 / 51.8 / 49.8 / 47.9
Fisheries, fish-breeding / 0.1 / 0.1 / 0.1 / 0.1 / 0.1 / 0.1
Mining and quarrying / 0.6 / 0.5 / 0.4 / 0.3 / 0.4 / 0.4
Manufacturing / 10.7 / 6.2 / 6.2 / 6.2 / 6.4 / 6.5
Services / 41.4 / 40.3 / 40.8 / 41.7 / 43.3 / 45.1
Electricity, gas and water / 1.4 / 1.2 / 1.2 / 1.2 / 1.3 / 1.3
Construction / 4.0 / 2.4 / 2.5 / 3.0 / 3.5 / 3.9
Wholesale and retail trade, vehicle repairs, household appliances and items of personal use / 6.8 / 10.9 / 11.1 / 11.2 / 11.4 / 11.9
Hotels and restaurants / 0.7 / 0.8 / 0.9 / 1.1 / 1.4 / 1.8
Transport and communications / 4.7 / 3.6 / 3.8 / 3.9 / 4.3 / 4.8
Financial activities / 0.4 / 0.4 / 0.4 / 0.5 / 0.5 / 0.5
Real estate / 2.6 / 1.7 / 1.7 / 1.6 / 1.8 / 1.9
Public administration and defence; compulsory social security / 3.7 / 3.6 / 3.7 / 3.8 / 3.8 / 3.7
Education / 9.5 / 8.2 / 8.3 / 8.2 / 8.2 / 8.1
Table I.5 (cont'd)
Public health and social work / 5.2 / 4.6 / 4.2 / 3.9 / 3.8 / 3.7
Other / 2.4 / 2.9 / 3.0 / 3.1 / 3.3 / 3.5
Unemployed ('000 persons) / 100 / 152 / 265.5 / 212.3 / 185.7 / ..
Labour force ('000 persons)b / 2,408.8 / 2,701.3 / 2,2764.3 / 2,835.4 / 2,909.5 / ..

..Not available.

aPreliminary.

bEconomically active population.

Source:National Statistics Committee.

  1. Investment has been low during the period under review. Economic contraction in 2005 resulted mainly from a temporary shortfall in gold output (by almost 24%); subdued agriculture output (falling by 4.2%) as bad weather and instability disrupted the Spring planting season; a dormant manufacturing sector with large excess capacity; and political uncertainty, especially until a new President and government were elected in August 2005.[6] Merchandise export growth, while substantial in recent years has generally lagged behind imports, and contracted in 2005 by 6.4% when imports surged by 22%. Inflation, reduced to single digit levels from 18.7% in 2000, rose slightly to 4.1% in 2004 and 4.3% in 2005. Actual unemployment reached 9.2% in 2005 (three times official levels).
  2. The large shadow economy is estimated at around one half of GDP. Despite recent reforms, high taxes, especially payroll taxes, widespread corruption, and heavy regulatory controls encourage informal activities, including in international trade, with substantial import smuggling (e.g. fertilizers) and informal export sales (e.g. wool). These undermine formal markets, erode the tax base and create a cycle of high taxes, which in turn drives more informal transactions. Reducing corruption and the shadow economy is a fundamental requisite for a functioning market economy, improving infrastructure, and sustaining economic growth. Many informal and formal activities, including government transactions, also involve barter, which compounds the inefficiencies of the informal economy.
  3. With gross domestic investment significantly exceeding gross national saving, the current account balance is in substantial deficit. While improving in the early 2000s, it deteriorated sharply from 3.4% of GDP in 2004 (excluding official transfers) to 8.1% in 2005 when the merchandise trade deficit escalated from to 7.7% of GDP to 17.8%. The relatively small services trade deficit also rose, to 1.8% of GDP in 2005 (1.0% in 2004), although it was still well down on earlier levels. External deficits have been met by capital inflows, particularly overseas aid, official loans from bilateral and multilateral donors, and more recently, rising foreign direct investment and record remittances, especially from the Russian Federation and Kazakhstan.[7] International reserves accumulated continuously from 2000 to reach US$609.0 million in 2005 (4.5 months of merchandise imports). Rising external public debt remains high, at US$2.0billion in 2005, and while a significant risk to economic prosperity, has declined to 82% of GDP from 130% in 2000. Public debt is almost totally held externally, and further restructuring of Paris Club debt in March 2005 helped improve long term debt sustainability. Even after this rescheduling, public debt accounted for over 90% of total external debt. The authorities have also requested debt relief under the IMF's Heavily Indebted Poor Countries (HIPC) Initiative's sunset clause and eventually under the Multilateral Debt Relief Initiative (MDRI).[8] The relatively low debt service ratio, which fellfrom 22% to 7% over 2000-05, reflects the increasingly high proportion of concessional debt.

(2)Macroeconomic Policies

  1. The Government's macroeconomic programme includes continued fiscal prudence supported by a tightening monetary policy with greater exchange and interest rate flexibility.[9]

(i)Fiscal policy

  1. Fiscal consolidation and related reforms have reduced the budget deficit, which fell from 6.9% of GDP (primary balance excluding grants) in 2000 to 2.8% in 2005. Deficit reductions have been achieved mainly by expanding tax revenues rather than rationalizing expenditure. Tax revenues, while on the low side, expanded ahead of projections, from 11.7% of GDP in 2000 to 20.2% in 2005, largely due to improved administration. In 2005, VAT accounted for 35.1% of total tax revenue (down from 39.5%), income (personal and company) tax 16.2% (up from 15.3% in 2004), customs duties 8.2% (up from 2.6%), and excise 5.7% (down from 7.2%). Non-tax revenue and grants accounted for 16.9% of total government revenue in 2005 (20.6% in 2004). Total expenditure rose slightly from 27.2% of GDP in 2004 to 28.3% in 2005, substantially higher than in 2000 and above official projections. Expenditure pressures, especially on goods and services, pose ongoing threats to fiscal consolidation. Budgeting is also complicated by substantial non-cash (barter) government transactions.
  2. Quasi-fiscal electricity deficits are to be further reduced from Som 7.6 billion in 2005 (7.6% of GDP) to Som 6.5 billion (5.9% of GDP) in 2006,by improving efficiency and gradually introducing cost recovery tariffs by 2010; this commenced in April 2006 when household tariffs were unified at 0.62 per kWh, raising bill collections.
  3. The 2005 budget deficit was below the three-year rolling Medium-Term Budget Framework (MTBF) 2005-07 target of 3.1% of GDP. However, while the MTBF aimed to reduce the deficit further in 2006 and 2007 to 2.9% and 2.6%, respectively, the 2006 budget forecasts a temporary rise to 3.3%. Total expenditure is projected to remain at 27.1% of GDP in 2006 (capped at 27.5%), while tax revenues are forecast to fall to 19.2% (Chapter I(3)(i)). Additional expenditure of Som300million planned on emergency preparedness in 2006, is to be funded largely from the sale of shares in Centerra, formed in 2004 to take over ownership of the Kumtor gold mine (ChapterIV(3)).

(ii)Monetary and exchange rate policy

  1. The National Bank of the Kyrgyz Republic (NBKR), the central bank, formulates and implements monetary policy by regulating reserve money (broad money excluding foreign currency deposits, or M2), to achieve price stability. It formulates and implements monetary policy independently in coordination with the Government, which according to the authorities is not empowered to interfere in its setting.[10] The NBKR reports to Parliamentformally and presents its inflation and quantitative monetary targets annually in its Statement on Monetary Policy.[11] The NBKR objective was to contain annual CPI inflation in recent years to a maximum 4% (achieved from 2002-04), but this was belatedly raised to 4.7% for 2005 (actual rate of 4.3%). Monetary policy was generally expansionary from 2002 (when inflation was at its lowest of 2.1%) fuelling substantial liquidity accumulation through money supply and bank credit growth. Monetary growth (broad money including foreign currency deposits, or M2X) accelerated from 11.3% in 2001 to well over 30% in subsequent years but eased to 25.5% in 2005. Bank credit to the private sector also rose substantially, peaking at 26.4% in 2003 before slowing to 11.4% in 2005. This also reflected restored financial intermediation and re-monetarization of the economy, which is heavily "dollarized" (bank asset dollarization rose to 72.6% in 2005).
  2. The NBKR's initial inflation target of 4.5% for 2006, based on M2 growth of 14-16% and an optimistic real GDP growth forecast of 8%, was subsequently revised upwards to 5.7% based on a growth projection of 5% (Law on Budget for 2006) and M2 expansion of 17-19%.[12] It has recently tightened liquidity conditions following the overrun in monetary growth and inflation.[13] The main NBKR instruments are open market operations in state treasury bills, along with minimum mandatory reserve requirements, set at 10% since 2001. "Repo" operations (purchase and sale of government securities between NBKR and commercial banks with reverse sale/purchase obligations) totalled Som227.5 million in 2005. The average annual yield on weekly auctioned NBKR notes has fallen sharply since 2000, from 23.6% to 4.3% in 2005. The NBKR is more actively using indirect monetary control instruments to curb liquidity.
  3. The KyrgyzRepublic has a managed floating exchange rate system for the som with no pre-announced exchange rate path.[14] The NBKR publishes the exchange rate daily against the U.S. dollar, which is set in the interbank market. Following the Russian crisis, the som depreciated rapidly by 40% nominally in 1998 and overall by 60% by end-1999. In the early 2000s, the exchange rate was at times de facto pegged to the U.S. dollar or to a basket of currencies to maintain stability when faced with volatile international developments. However, exchange rate flexibility has since been increased, and the NBKR intervenes in the foreign exchange market only to smooth out abrupt currency fluctuations, to offset speculative pressures or to support a "proper" level of international reserves aimed at, inter alia, financing the country's external debt liabilities.[15] The som has nominally depreciated steadily against the U.S. dollar since 2000, depreciating by almost 0.8% in 2005.