A small open economy like the Kyrgyz Republic is vulnerable to external shocks as evidenced in recent years by the Russian financial crisis, volatility on gold prices, and variations in weather conditions which all have had a significant effects on the country’s external current account. A healthy level of central bank foreign currency reserves helps alleviate the negative impact of such shocks by giving more time for adjustment. With respect to current account considerations, reserve adequacy is ususally measured as gross official reserves in months of imports. This indicates the period over which a country could continue its current level of imports if export earnings were to drop sharply and additional external financing were unavailable.

According to this measure, the Kyrgyz reserve level was somewhat higher at end-2002 than in most other CIS countries (Table 1). However, with the dependence on volatile gold export volumes and prices, variations in energy export, and unceratin inflows such as those associated with the military base, the risks related to foreign exchange earnings from trade are higher than for many other economies. This calls for a larger reserve cushion.

Table 1. Gross international reserves in the CIS in months of imports, end-2002
Armenia	4.9
Azerbaijan	2.8
Belarus	0.8
Estonia	1.9
Georgia	1.8
Kazakhstan	3.3
Kyrgyz Republic	4.9
Latvia	3.3
Lithuania	3.4
Moldova	2.5
Russia	6.9
Tajikistan	1.2
Turkmenistan	n/a
Ukraine	2.5
Uzbekistan	5.4
Source: IMF FSU database

Adequate central bank reserves also help stabilize expectations and ultimately the exchange rate thus protecting the purchasing power of the population. With a history of high inflation, fiscal pressures, and a weak banking system, one cannot rely on the stability of money demand. In such an environment, adequate reserves support the remonetization of the economy which in turn will gradually increase the supply of credit to the private sector thus promoting growth and poverty alleviation. From this point of view, the reserve adequacy is often measured by reserves-to-money ratios indicating the central central bank’s capacity to respond to temporary changes in real money demand without undermining the exchange rate and people’s confidence in the som. At present, resrves-to-money ratios remain low compared to most other CIS countries.

Table 2. Gross international reserves in percent of monetary aggregates in the CIS, end-2002
	Reserves/ Reserve money	Reserves/ Broad money
Armenia	231.6%	121.6%
Azerbaijan	378.9%	199.0%
Belarus	325.5%	170.9%
Estonia	479.9%	252.0%
Georgia	103.9%	54.6%
Kazakhstan	1648.6%	865.7%
Kyrgyz Republic	146.9%	77.2%
Latvia	697.7%	366.4%
Lithuania	1229.8%	645.8%
Moldova	141.3%	74.2%
Russia	25121.3%	13192.4%
Tajikistan	50.6%	26.5%
Turkmenistan	n/a	n/a
Ukraine	2353.1%	1235.7%
Uzbekistan	638.8%	335.5%
Source: IMF FSU database

The Kyrgyz Republic also needs a high level of reserves because of its high level of external debt and the uncertainty related to further debt relief from the Paris Club. Without Paris Club debt relief, debt service payments will become substantially larger starting in 2005. One should also note that the central bank’s reserves are not idle. They earn market interest in hard currency and thus contribute to the central bank’s profit transfers to the budget. In addition, as an asset for the Kyrgyz Republic, official reserves reduce the external net debt. Indeed, the country’s net external debt has declined from [121.9] percent of GDP in 2000 to [107.9] percent at end-2002, largely because of the growth in official gross reserves. This, in turn, has increased our credibility in tackling the external debt problem seriously.

Finally, growing reserves are the result of smoothing movements of the real exchange rate, i.e. the country’s external competitiveness. The recent gains in macroeconomic stability and remonetization of the economy have helped the central bank improve the foreign exchange reserve level as the monetary impact of the foreign currency purchases did not have to be fully sterilized. By purchasing foreign currency from the market, the central bank has leaned against a nominal appreciation of the som. Without this policy, the nominal appreciation would have been significantly larger.