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DE RUEHEK #1085/01 2780420
ZNR UUUUU ZZH
R 050420Z OCT 09
FM AMEMBASSY BISHKEK
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INFO RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
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RUEHGV/USMISSION GENEVA 1551
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UNCLAS SECTION 01 OF 02 BISHKEK 001085 
 
SIPDIS 
SENSITIVE 
 
DEPT FOR SCA/CEN 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PREL PGOV KG
SUBJECT: KYRGYZSTAN: GOVERNMENT FACES 2010 BUDGET DEFICIT 
 
REF: BISHKEK 409 
 
BISHKEK 00001085  001.2 OF 002 
 
 
¶1. (SBU) SUMMARY: An International Monetary Fund Mission 
visiting Kyrgyzstan reported that the stimulus provided by 
international assistance and a good harvest should help keep 
economic growth slightly positive in 2009.  They were 
cautiously optimistic that Kyrgyzstan's economy would grow by 
about three percent in 2010, although the risk of a "double 
dip" economic slow down remains.  The team gave the Kyrgyz 
Central Bank high marks for management of its currency and 
the banking sector.  The main problem the government faces in 
the near future is financing its 2010 budget, and prospects 
appear slim that Kyrgyzstan will receive enough international 
assistance to cover its budget shortfall.  End Summary. 
 
Growth To Pick Up Slowly (Maybe) 
-------------------------------- 
¶2. (SBU) An International Monetary Fund (IMF) Mission 
visiting Kyrgyzstan to review the Exogenous Shocks Facility 
(ESF) program gave a briefing to international donors on 
September 23. In December 2008, the IMF Board approved an 
18-month ESF for Kyrgyzstan with a total disbursement of SDR 
66.6 million (approximately USD 100 million). The IMF Mission 
visited Kyrgyzstan in September as part of the second review 
of the ESF program. Nadeem Ilahi, IMF Mission Chief for 
Kyrgyzstan, said that the IMF estimates that Kyrgyzstan's GDP 
will grow 1.5 percent in 2009, slightly higher than estimates 
earlier this year.  The country escaped falling into 
recession thanks to financial assistance from Russia and the 
IMF, including a USD 150 million grant from the Russian 
government (reftel).  In addition, a good harvest this year 
provided an additional boost to the economy.  However, a drop 
in exports, mainly to Kazakhstan and Russia, and a steep 
decrease in remittances from Kyrgyz workers in these 
countries slowed the economy.  Ilahi noted that in June and 
July remittances were down 30 percent from the previous year, 
depressing domestic consumption. 
 
¶3. (SBU) The IMF estimates that Kyrgyzstan's economy will 
grow three percent in 2010.  However, Ilahi cautioned that 
this estimate depends upon the Russian and Kazakh economies 
not deteriorating any further. He said that if exports and 
remittances continue to fall, Kyrgyzstan risks a "double dip" 
economic crisis.  In this scenario, government stimulus would 
push growth up briefly before it slows again due to lack of 
consumer demand. In any case, Ilahi said, there are no 
obvious engines of strong growth for Kyrgyzstan's economy in 
the short to medium term. 
 
Central Bank Performing Well 
---------------------------- 
¶4. (SBU) Ilahi gave the Kyrgyz Central Bank high marks for 
its handling of the depreciation of the currency, the som, 
and management of the banking system.  The Central Bank, 
according to Ilahi, managed a smooth and steady depreciation 
of the som without using excessive amounts of reserves.  The 
banking sector is adequately capitalized, without significant 
liquidity problems or a high level of non-performing loans. 
However, credit growth has fallen sharply as banks reacted 
cautiously to the economic slow-down. 
 
A Large, But Unclear, Budget Gap in 2010 
---------------------------------------- 
¶5. (SBU)  The most significant economic problem the 
government currently faces is a large projected budget 
shortfall in 2010.  The IMF calculates that the government's 
2009 primary budget deficit, before accounting for grants 
from donors, will be 8.8 percent of GDP.  Donor assistance 
has allowed the government to continue without major spending 
cuts this year.  However, the government again faces a large 
budget shortfall in 2010.  Kyrgyz government officials have 
told donors they need an additional USD 150 million to cover 
 
BISHKEK 00001085  002.2 OF 002 
 
 
government spending in 2010.  The IMF team said that the 
Kyrgyz government's figures do not yet give a clear picture 
of the size of the projected budget deficit. However, they 
confirmed that, whatever the precise number, the government 
faces severe budget problems in 2010 due to lower tax 
revenues and some increases in social spending. 
 
¶6. (SBU) Earlier this year, the Kyrgyz government received a 
USD 300 million loan on concessional terms as part of the 
assistance package from the Russian government.  The 
government plans to use most of that money to create a new 
economic development fund that would provide funding for 
private sector projects. Some of the participants at the IMF 
briefing argued the government should use that money to cover 
their budget gap, rather than asking for additional money 
from donors.  A Russian Embassy representative attending the 
IMF briefing said that the money had been given with the 
understanding it would be used for private sector 
development, but that, as a sovereign country, the Kyrgyz 
could use the money as they saw fit. Ilahi said that 
government representatives had promised the IMF to use some 
of the Russian loan money to partially plug the budget gap, 
but had stood firm on using most of it to stimulate the 
private sector. 
 
¶7. (SBU) The donors represented at the meeting noted the 
following possible budget support to the Kyrgyz government: 
the IMF Board will consider an additional USD 20 million, the 
World Bank Board will consider providing USD 30 million,  the 
Swiss government may provide an as yet undetermined amount, 
the EU will provide no additional support, ADB is unlikely to 
provide additional support, and EBRD does not provide direct 
budget support.  The Russian Embassy representative did not 
say whether any additional Russian support would be provided. 
MEMMOTT