The Kyrgyz Republic’s competitiveness was maintained since wages in US$ terms remained at low levels and the real effective exchange rate depreciated somewhat during 1995–96. The current account balance, dominated in 19 by imports related to the construction phase of the Kumtor gold mine, improved in the first half of 1997 with the beginning of Kumtor gold exports. Moreover, the exchange rate A01app05tabilized in 1997 and international reserves were built up to over 2½ months of imports by end-June 1997. Concomitantly, in 1996 domestic financing of the deficit fell to one-third the 1995 level, and has fallen further in 1997, which facilitated a corresponding decline in monetary growth rates. The budget deficit was halved during 1995–96 and is targeted to decline further in 1997, financed mostly through external assistance. After a massive output decline during 1991–95, real GDP started to increase in late 1995 and showed solid growth in 1996 and during the first half of 1997. Inflation has fallen sharply over 1992–97, and projections indicate that the 17 percent targeted for the year will be achieved. Significant progress has been achieved in etablishing macroeconomic A01app05tability since 1994 ( Figure 1). However, output fell sharply, unemployment rose, and poverty increased, partly owing to the loss of extensive financial support from the USSR and the disruption of trade and payments links. Structural reforms included privatizing small-scale enterprises and housing, etablishing a two-tiered banking system, introducing a VAT, and enacting market-friendly legislation. During the first stage of transformation, the government freed most prices, created a national currency, introduced a liberal trade regime, and eliminated most capital controls. The Kyrgyz Republic has thus been one of the earliest and most active reformers of the Commonwealth of Independent States (CIS). In the aftermath of the breakup of the USSR, the Kyrgyz government rapidly adopted a strategy to transform the economy to a market system.
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