The three-year Poverty Reduction and Growth Facility Program (PRGF) is drawing to a close. This is also the last year in Kyrgyzstan for Tapio Saavalainen, head of the IMF mission. We have been looking forward to interviewing this person for a long time. MSN has very many questions to ask him as a representative of the republic’s strategic partner – the monetary fund that has determined the country’s macroeconomic development during the past few years, and to some extent as an independent expert.

 

Mr. Saavalainen’s views on a number of issues, including tax policy, the Kumtor investment agreement, and external debt, are not just interesting but also important for thousands of Kyrgyz people. We are very grateful to him for finding the time for an interview despite the mission’s busy schedule.

 

MSN: We learnt from a government newspaper that you gave a very high grade to Kyrgyzstan – 4 or even 5 – for its macroeconomic performance. But why does this grade differ so much from that given to the government by the public? Does this mean that we are even more critical than the IMF?

 

TS: No, no. Apparently, I have been misunderstood. The thing is that schools in Finland use a ten-point scale for grading – from 4 to 10. And during a meeting with the authorities I mentioned that some parameters of the Kyrgyz economy reminded me of my school years when my grades were between 4 and 5 on a ten-point scale. True, that was not always the case, and only during the time when I was more interested in soccer and hockey. By the time I was about to graduate from the university my grades had become twice as high.

 

On the other hand, the fact that such numbers as 4 and 5 per cent appear in macroeconomic statistics demonstrates that the macroeconomic situation is favorable. At the time, I was referring to the real GDP whose growth was 6-7 per cent including Kumtor and the energy sector. This country has seen progress not related to gold production or energy, which is necessary for export diversification. These numbers show that economic growth has a broader base. Excluding these main sectors of the economy that are not particularly stable, the growth in other sectors of the economy is 4.9 per cent. On the whole, one may say that the basic sectors of the economy have been growing at a rate of  4-5 per cent during the past two or three years.

 

 

TS: The food industry, glass making, and the textiles industry. The services sector has been expanding by 5-6 per cent a year, which partly reflects the previous underdevelopment of that sector. If  the real income of the population is growing, the demand for services is increasing accordingly.  The number of hotels and restaurants has grown in your country. I have been to Issyk-Kul three times and every time I saw signs of progress.

 

Agriculture has not been standing still either. Last year, production increased by 3.6 per cent, and the year before – by 5.3 per cent, if I am not mistaken. Of course, the privatization of this sector that took place in 1996 has had its effect. Today, I am more concerned with sustainable development – how to keep things moving forward.

 

As to government policies, our mandate primarily includes fiscal and monetary policies. And the measures of success in these areas are inflation and the exchange rate. It should be noted that macroeconomic stability has been observed since 2001. Inflation is 4-5 per cent, or even lower, the domestic currency has also become stronger. The only source of our concern are high interest rates.

 

The government is pursuing fiscal consolidation to deal with the external debt problem, which provides for reducing borrowing and the fiscal deficit. In accordance with the PRGF program, the country is conducting a sound fiscal policy.

 

The IMF has been closely following reforms in the banking sector, problems associated with the quasi-fiscal deficit in the energy sector and quality of governance. Progress has been made here as well. The banking sector has been profitable for two years now. True, achievements are insignificant, as profits began to grow from a very low base. But nevertheless, the banks have increased their lending, although the absolute numbers still remain comparatively low. The weaknesses of the banking system are the interests rates that still remain high, and the low public confidence in the banks.

 

Under the IMF program, benchmarks have been set for the energy sector – the so-called quasi-fiscal deficit. Basically, it is a difference between the cost of generating electricity and the proceeds from its sale, including losses. The target for the quasi-fiscal deficit was not only met, but even exceeded. However, we believe that the deficit is still high. It is still an open question as to what extent the fiscal deficit policy that has been conducted for the past six months can be maintained, and whether it is sustainable.  In the energy sector, further progress should be made in reforming the tariffs, reducing losses and increasing cash collection.

 

MSN: Mr. Saavalainen, you are quite optimistic about these things, but as far as I know the situation with commercial losses and cash collection in the electricity sector has virtually not changed since last year.

 

TS: No, the deficit has become smaller. The benchmarks for collection and losses have been met. The tariffs increased due to the nominal exchange rate appreciation. Our numbers show that the situation considerably improved in the latter half of the year. May be, not so much as one would like. But it is important that the situation was changed. Of course, it is not an easy job. To solve the common fundamental problems of the energy sector all of us need to emphasize regional cooperation and interaction.

 

MSN: The GDP growth should lead to high living standards of the population, but in our case prime minister Tanayev himself admitted that the last year’s task of reducing poverty by five per cent was not accomplished.

 

TS: The preliminary numbers that I have show that the poverty index was 41 per cent last year, and 44 per cent in 2002. But three years ago it was 54 per cent. Even if by three per cent, but the number of the poor has declined compared to the previous year, and this is not bad. There is another way of looking at this situation. Namely, one can look at the wages of the GDP per capita in dollar terms. These numbers have increased very significantly during the past three years, and so have the official wages.

 

 

TS: If people don’t buy anything, how can GDP grow? Does this imply that the GDP numbers are also wrong?

 

 

TS: Are you implying that things were better off three years ago compared to now?

 

 

TS: Then how do we get growth? Well, if you don’t believe official figures, try arguing with the statistics committee. I would like to note that back in my home country people don’t have much trust in numbers, either. If you use the full consumption basket to calculate inflation, then you get one number, but you would agree that every person has an individual basket. For some bread occupies a larger share, and January and February bread prices were increasing at higher rates than for other products.

 

Same thing in November when gasoline prices increased all the car owners inferred higher inflation rates. Because some people use more gasoline than others. That is why it is somewhat difficult to separate changes in relation of prices to inflation. Human perception is different from numbers derived by processing statistical reports. I would like to note that IMF experts have been to Kyrgyzstan many times and have not identified defects in the methodology for compiling the price index.

 

 

TS: But then no one is paid a minimum wage.

 

 

TS: The whole system of the minimum wage can be removed any minute. At one point it was required to calculate wages and pensions, but then we moved away from it. The only figure that makes sense in this context is the ratio of the total wage bill to the number of employed. This way we arrive at the average wage which is much different from the minimum wage. And then if you include the unofficial wages issued under the table, the average nation-wide wage would be even higher.

 

Besides, how does one gauge the income of farmers? They grow produce, which they themselves also consume, so you need to take that into account as well when calculating the purchasing power. That’s why in agriculture you don’t have a minimum wage. Farmers get some money from selling their produce, but other products with it and also consume their own produce. It has become clear to every one a long time ago that the minimum wage is a non-performing indicator of wealth. However, in the US and other countries there are some jobs that earn a minimum wage, but then it is much higher than your US$ 2.5. The minimum wage does not reflect the true pay for labor. That’s why I believe this concept to be senseless.

 

 

TS: End-September is the time of the last program review. As regards disbursements, they will stop on December 5. This means that after the review of the PRGF targets we will have time to draft relevant documents to submit them to the IMF executive board for a tranche disbursement.

 

What should we expect in the future? Kyrgyzstan is one of the countries that had used Fund resources on several occasions. There is a certain rule – if a country had entered into two consecutives arrangements over seven of the last ten years, then it is subject to an ex-post program assessment. A separate group of experts (by the way, they were appointed a week ago) will need to prepare a report for the executive board of the fund on program performance. The team is headed not by the mission chief, but an employee of my department. The group of experts will check the accuracy of my reports.

 

Should program performance receive a positive assessment, the country will have prospects for a new arrangement. I have already told the Prime Minister about the work we will be doing over the year. If we want to conclude a new agreement without any delays, the government will have a very serious job to do – performance under every PRGF item should be impeccable, for any violation may lead to postponement of the next agreement and a result a postponement of the Paris Club meeting. However, if everything goes well, then we may conduct negotiations for the signing of the new three-year arrangements already in October and November, and then in January all the conditions of the new arrangements will be submitted to the IMF executive board. In order to do that we may need to extend the program somewhat, but that will not cause any special complications.

 

 

TS: Of course, any violation of the program produces a certain negative effect, because it raises the issue of trusting the country, how well the government honors its commitments. In addition to that it has a negative impact on the investment climate, because it leaves an unfavorable impression both with local and foreign investors.

 

/to be continued/