Kyrgyzstan's economic growth -- hit by an output collapse at a flagship gold-mine -- is set to slow to just 1 percent this year, the International Monetary Fund (IMF) said on Wednesday.
But the IMF, which last year the approved a three-year, $103-million economic support package, also predicted a medium-term growth recovery.
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Prudent fiscal and monetary policies will help keep inflation at 8 percent this year and 7.5 percent on average in 2013-14, the IMF said, also stressing the need to fight corruption and the funding of terrorism.
A mainly Muslim Central Asian nation of 5.5 million which hosts both U.S. and Russian military air bases, Kyrgyzstan is one of the poorest former Soviet republics, whose per capita GDP is worth less than a tenth of that in next-door Kazakhstan.
The Fund is expected to approve the third review of the economy by the end of the year, making a new tranche of some $15 million available to the country.
The Centerra-operated Kumtor gold mine -- the largest gold venture run by a Western-based company in Central Asia -- alone accounted for 12 percent of Kyrgyzstan's GDP and more than a half of all exports in 2011.
Due to Kumtor's lower output, Kyrgyzstan's government in June slashed its original 7.5-percent GDP growth forecast to a modest 1.8-percent rise. GDP expanded by 5.7 percent in 2011.
"This year has turned out to be challenging for the Kyrgyz Republic," Christian Beddies, head of the Fund's monitoring mission, told a news conference at the end of a visit.
"The economic situation is worse than expected because geological factors have led to the partial deferral of gold production by the largest mining company to 2013-14."
As a result, real GDP contracted by 4.6 percent year-on-year over the first eight months of 2012, with non-gold growth of 3.9 percent, he said.
"We expect real GDP to grow by about 1 percent this year and about 6.5 percent over the medium term on the back of the recovery in gold production, growth in agriculture, trade and construction," he said.
Kyrgyzstan, which lies on a drug trafficking route out of Afghanistan, remains volatile after two violent popular revolts toppled two presidents since 2005. Some 500 people were killed in inter-ethnic riots in southern Kyrgyzstan in June 2010.
Last week, a court charged three opposition nationalist members of Kyrgyzstan's parliament with attempting to seize power after they led a crowd of supporters to storm government headquarters, demanding that Kumtor should be nationalized.
Nationalist outrage was sparked by assurances given by Kyrgyzstan's new prime minister, Zhantoro Satybaldiyev, that Kumtor would not be nationalized.
Satybaldiyev, holding the post since September 5, has pledged to alleviate widespread poverty and fight deep-rooted corruption.
The Fund "highlighted to the authorities the importance of strengthening the anti-money laundering and combating the financing of terrorism framework to bring it in line with international best practice", Beddies said.
Fighting corruption and improving the business climate must help support sustainable and inclusive private sector-led growth, the Fund said, welcoming the adoption of a new anti-corruption law.
(Writing by Dmitry Solovyov; editing by Ron Askew)