- Mr. Saavalainen , to what extent, in your view, do agreements and memoranda concluded between Kyrgyzstan and the IMF take into account economic interests of a business community of the republic?

- First of all, the agreements are not concluded between the IMF and the Government of Kyrgyzstan. During any discussion with the Government of Kyrgyzstan we render assistance to develop an economic policy for a period of the Agreement and, if we decide that this policy is well thought over and well established, we support it and allocate funds. In practice the matter in hand is, certainly, that of the discussion. However, at the same time, the discussions are not always easy, as the economic policy is not an easy thing. After we come to a conclusion as to validity of the policy suggested by the Government, we petition the IMF Executive Board for appropriation of funds, and, let me remind you that the Executive Board represents all countries - members of the IMF. During negotiations an impression is created that each country brings something into this process. Therefore, here shouldn't emerge any question as to any dictatorship of the IMF. The only thing we care for is to assure other IMF members that money our organization could give will be spent rationally. The discussions and negotiations are sometimes quite tough, because frequently we do not agree as to validity of this or that policy.

- The IMF reasonably considers that the Government of Kyrgyzstan is its only partner in the negotiations and in execution of agreements and memoranda. To what extent does the IMF care for the degree of awareness of the civil society and the business community of restrictions (obligations) planned vis-à-vis the Kyrgyz party?

- The IMF working procedure is determined by its Charter, which was drawn way back in 1947. The IMF is the organization belonging to its members. Kyrgyzstan , Tajikistan , Uzbekistan , and Kazakhstan are, among other countries, our shareholders. Joining the IMF, Kyrgyzstan gets an opportunity to apply to this organization for financial support from the common pool of funds. The Government of Kyrgyzstan, which represents the whole country, is the member of the IMF. When evaluating its business plan on the use of the IMF loan proceeds, we try to be convinced of its validity, therefore, we try to have a dialogue with the civil society, with business circles, with pensioners, and with the population of the remote areas. The more contacts we have with various circles of the society, the more opportunities there would be to assess validity of the suggested business plan. That is why we try to attend NGO meetings; based on information we get we exchange our views and eventually come to the conclusion as to what extent the policy suggested by the Government is thought over. We try to be objective from the economic point of view, but certainly, perfection is an unattainable thing. However, the more often we enter into the dialogue with the nongovernmental circles, the more we learn. That is, from the formal point of view, the IMF talks to its members, including Kyrgyzstan , whose interests are represented by its government.

- So, we could say that the IMF cares for a degree of awareness of the civil society of the measures the IMF suggests?

- Yes, certainly. Execution of the tasks in view, such as maintenance of macroeconomic stability or inflation of about 5-6 percent would be impossible without support of the society as a whole, and, may be, the members of the Kyrgyz society keep a stock of decisions, proposals we have never thought about. The IMF is not the omnipotent organization and we are just its staff. Our work is just to serve our members, the governments of the countries and the countries that are our members.

- Could we say that signing the Memorandum (for our part - the Government and the National Bank), the IMF is confident that the Kyrgyz party completely realizes and recognizes economic interests of the civil society and the business community of Kyrgyzstan ?

- No. No country would have the uniform and just opinion. In any country there are groups representing various interests. I remember that our former President of Finland, Mauno Koivisto , was asked the same question. He was Prime Minister that time. He was asked whether he was confident that he was implementing the correct policy. No, he answered. Any policy could be considered wrong depending on what and from whose point of view it is estimated. That is why it is so important to know the views of employers, workers, pensioners, members of parliament, journalists, thinkers, and writers, etc. For, each of them has his own point of view. It gives me a chance to develop the weighed policy, which would provide for the maximum level of support enabling us, economists, to achieve such strategic goals, as stabilization and reduction of poverty. You live in the society with the various views and opinions, and this case requires the development of balanced approaches.

- You have never doubted that our government keeps nothing from you and gives a full and objective account of everything, haven’t you?

- It happens that you have to discuss problems, which are connected to political costs and which I frequently, as an economist, do not take into account. In this situation, people would adduce arguments, protect their position as, say, in a conversation of a husband with his wife, and to support their positions both parties use available figures and facts. Therefore, I always advise all of the new mission members, who come to Kyrgyzstan for the first time, not to trust what they are told. Double-check everything what is said, at least, twice. If to you are given any number, find an alternative source to verify. Principles of discussion of economic programs form a consistent system. If data in any column are wrong, they will necessarily reveal themselves in another column. However, man is prone to error: sometimes our experts spend long hours calculating this or that parameter, and it turns out then that it is not consistent with other numbers. Proceeding from the operational experience in the countries of the former Soviet Union , including the Baltic counties, I dare to assert that information in Kyrgyzstan is more reliable and better than it is on the average across the former USSR . All countries would use the relevant numbers to support their arguments, sometimes this or that number is not true, but this is the most common phenomenon in any country, including the USA and Finland . We double-check these figures, and quite often we manage to reveal mistakes the Kyrgyz experts have not even suspected. That is, when our expert does not trust those figures he is given, he is compelled to do the research work.

- To what extent does Kyrgyzstan comply with the established IMF procedures when negotiating and concluding the credit agreements, adopting the programs and Memoranda? Could we get these procedures from you?

- Each international organization has it own procedures. The program, which is implemented supported by the IMF, comprises broad macroeconomic parameters. The procedure will consist in the following: that conditionality, which we put forward to complete the agreement, is formulated in the Memorandum of Economic Policy. There are a lot of facilities to finance such programs in the IMF. The program in Kyrgyzstan is financed under the so-called RRGF (English abbreviation) loan – it is a title of the poverty reduction and growth program. There is also the Standby credit. The РRGF loan provides for low interest rates and long-term maturity. The Standby Credit is intended to solve short-term economic problems and it has the high interest rate and short-term maturity. There are the enhanced financing facilities for the more prosperous countries that need the mid-term programs, there are the contingency financing programs implemented under the relevant circumstances. But the Standby and РRGF loans are remarkable for their great adjustability. Being characterized by their own terms of repayment and interest rate, their size could be, however, adjusted at the same time. In addition, the memorandum provides for monitoring of program implementation. To this end, we come here each three months. Furthermore, it is envisaged to review the programs each six months, specific dates would be established, as of the end of June , for instance. Other international institutions operate differently. For example, the World Bank discusses the program and does not stipulate the terms of granting the funds. Disbursements would depend here on implementation of this or that conditionality - it is a facility, which is called “a floating tranche”. Both the European and Asian Banks apply the same mechanism. In addition, maybe, one of the reasons why close attention of the public is drawn to the IMF is the case, when performance criteria we recommend are the quantitative criteria. These are such criteria, as a budget deficit or the level of gold and foreign exchange reserves. It assumes tighter discipline in when implementing provisions of the Memorandum, as against implementation of inter-structural reforms, which are difficult to review.

- Let me specify the question. Is the sequence of actions established in the IMF procedures observed?

- When returning to Washington, I write a memo, which I submit to the IMF Executive Board, inform the management about the Memorandum that we discussed; and, please, note that the mission members, IMF staff, have no right to take their own decisions. They could just hold the negotiations. The right of the final decision remains with the Executive Board. Prior to my arrival to Kyrgyzstan , I should draft a briefing note, which is sent out to all IMF departments for comments. Thus, I should discuss my position with all my colleagues and in spite of the fact that the mission chiefs have more freedom, the Fund itself, as the organization, is careful that all countries are treated equally. And if I, in my recommendations, deviate from the common economic principles, I should have the valid arguments. The missions come here, including those that come to learn the views of the public. If we could predict the developments in this or that country, there would be no point in visiting the country. And if, arriving in the country, we find out the specific developments, specific arguments, we should be flexible. These are our procedures.

- Could we get these procedures?

- Look for them on our web site. Each department has its own web page that describes its functions. There is a wealth of clauses and materials on this subject.

In our work we should follow the policies and procedures of the IMF, stated in a huge volume. The Executive Board determines at its meetings the basic Fund policy directions obligatory for execution. Ten years later after the Fund was established this volume was 4 centimeters in thickness, and now, probably, - 20 centimeters. Sometimes our staff complains that one should be a superman to remember contents of all these instructions. That is why I should report to the management - to lower any probability of my mistakes.

- What is your view on the need for the Kyrgyz party to have its own procedures of adopting, monitoring and estimating the IMF programs?

- I believe that these procedures are in place. Both the Ministry of Finance, and the NBKR monitor the program quite carefully, because the IMF support has a direct financial impact on their activity. Ideally, we aspire to maximal transparency in our activity and consequently we recommend publishing the adopted documents for the public so that the public would know what commitments are assumed by the Government. Kyrgyzstan in this area can serve as the example, because its Government does not object to publication of any materials. If I am not mistaken, all Kyrgyz programs are published on the IMF website.

- Not that I remember anything like the texts of memoranda published somewhere in the governmental newspaper …

It is, on the one hand, the problem of the government, and, on the other hand, the problem of journalists, who do not want to take the trouble of reading such documents.

- Perhaps, it speaks for access to information or the level of freedom of speech?

- I believe it speaks for lack of professionalism. We even translate all these programs into Russian. It seems to me that people simply do not read these documents.

- Could you please clarify this. Do you assume that the Kyrgyz party has its own procedures or do they exist in fact?

- I am confident of it, as each 3 months the Kyrgyz party sends us information on implementation of these programs. The Ministry of Finance deals with the budgetary issues, while the NBKR – with the monetary policy issues. Moreover, it happens not each three months, but almost every day. They track implementation of parameters, as I do it in return. We receive the great volume of information on the country from the press. I have already said that first what I do arriving in my office, I check the exchange rate. I would like more active involvement of the NGOs and the public as a whole in tracking the program.

- To what extent does the absence in Kyrgyzstan of institutes delving into the issues of macroeconomics influence the quality of the programs, in particular, and the economic situation, in general?

- There are institutions addressing the macroeconomic issues in Kyrgyzstan : these are the NBKR and the Ministry of Finance. To my great delight, the first working group on macroeconomics, Marat Tazabekov 's Institute of Economic Policy , is now established. Last week we held the meeting and discussed the issues of contingent cooperation. The IMF could assist in getting information on the developments in other countries and the research work done by the IMF. The ideal situation in the country could be described as follows: the NBKR reviewing the economic policy, the Ministry of Finance, 4-5 independent organizations, who should arrive at their own conclusions and bring them up for the discussion by the public, for instance, with the help of such remarkable journalists, as Mr. Maripov. I urge you to mention this remark. I believe that the level of your preparedness on the economic issues becomes higher and higher. The questions become more focused and it is obvious that you show the higher level of understanding. However, the high quality of articles about the economy under the free market economy circumstances requires excellent knowledge of principles of this economy. But you, guys, all become better and better that could not be attributed to many states in the CIS.

- What IMF document regulates the level of participants in the negotiations on the part of the Kyrgyz (Prime Minister, President, chiefs of line departments of the Ministry of Finance and the NBKR, Minister of Finance and the Board of the NBKR)?

- There is no such document. The memorandum is the document of the Government. Someone should sign it. Usually, it is signed by the Prime Minister and the Chairman of the NBKR, sometimes the President of the country signs it, sometimes – heads of the Ministry of Finance and the NBKR. It is the common procedure. But if to speak about those, with whom we meet in this mission, these are Speakers A. Erkebaev and A. Borubaev , the new Ambassador of Finland, the Ministry of Finance staff, you, the NBKR, Mr. Myrzpayazov , then - the meeting again with the Chairman of the NBKR, Messrs. A. Muraliev , J. Otorbaev , and K. Kanimetov . I would greatly prefer that the IMF would establish a limited list of partners - my life would become much easier. To have maximum information, you should meet with the maximally large public. But if you have more than 5 meetings a day, your brains cease to work by the end of the day.

- I heard that in some countries the IMF mission works with people at the level of chiefs of departments of the Ministry of Finance, National Bank and meet with the Prime Minister only when signing the final document …

- It depends on the country. In some countries for the IMF missions it is difficult to even arrange the meeting with the Minister of Finance. Here we work at two levels - I frequently meet with the Minister of Finance, various ministers, Prime Minister, and the NBKR Chairman. At the same time, the members of my mission work with the staff of the ministry and central bank, and these meetings are headed quite often by the chiefs of departments - depending on the complexity of the issue. However, my team has to address many strategic issues, because the mission consists of only 5 members, and each of them should cover quite a range of issues. Therefore, I allow them large discretion subject to reporting, that is, the outcome of their negotiations is not final. They also do the significant technical work so that the mission would develop the well-founded recommendations.

Roza Aknazarova , Minister of Social Protection and Labor, complains wondering why we have not met with her earlier. Now, as the development outlook stabilizes and improves, we could already plan our work for the nearest 3-4 years. Our agenda always depends on the situation in this sense.

- Who, in your opinion, should regulate the competitive environment in the banking sector – the NBKR, the antimonopoly department or some other agency?

- The whole question rests with the need for the mechanism, which would allow to ensure competition in the banking sector. I believe that it is not so easy to implement. One of the ways to develop competition would be that of a removal of all restrictions. A lot of work was done in this context in Kyrgyzstan . In addition, equal conditions should be created for all of the participants in the banking market, for example, through prudential norms. The country needs to adopt a new law on competition. The current antimonopoly committee is a heritage of the past. You do not need to have the antimonopoly committee and the agency for development of competition. We discussed this issue and we hope that the law on competition will be adopted. In other words, competition in the banking sector differs a little from competition in other sectors. If to simplify the problem, one could say the following: it is impossible to ensure competition by taking administrative measures. Well, if to further simplify the issue: one could open borders and invite all those, who wish to engage in banking, because it would force the domestic banking system to find more effective ways of work.

- And how, in your opinion, does the NBKR cope with this task?

- The NBKR has two main tasks. The first is to conduct the elaborate monetary policy aimed at maintaining low inflation. The second is to exercise banking supervision. There are certain international principles of banking supervision, such, as the Basle main principles and the bank rating norms. This mechanism is effective and equally refers to all banks. At the same time, there is certain inequality. Let's imagine banks with low authorized capital. The matter is that the society is obliged to guarantee stability of banking system this or that way. Therefore, the banks are obliged to meet the prudential norm on capital adequacy. It is obvious that those banks, whose capital is insufficient, complain that they are treated unfairly. However, it is impossible to provide for high-grade financial intermediation in the economy, if the interests of one bank govern the system. As the economy develops the demand for financial services increases and the number of bank depositors is observed to grow. If not to raise the capital adequacy ratio, the share of equity capital of banks in their total assets continuously decreases and that means that the bank risks increase and it is, naturally, unacceptable. The banking supervision agencies should regulate this situation, and this work takes some doing. But these are their duties in any country. And the success of the banking system in any country depends on performance of the banking supervision agencies.

- Does the NBKR cope with the task of regulating the competitive environment?

- I just tried to explain what role is played by the central bank in assisting competition. It should provide easy access to the banking system and equal access for all participants in the market - it is the function of the banking supervision system. I dwelt upon some details to show that a lot of problems are connected to the function of maintaining competition. The NBKR should really provide the sufficient level of competition. I believe that it copes with these tasks quite well, as is the case in the majority of countries. The central banks usually act as leaders of reforms in the territory of the former Soviet Union .

- Generally, I heard that not in all countries the banks are treated all alike, that is, there are small, medium and large banks there. If they meet the established norms, they would have the right to operate.

- I believe that you mean the Camel Rating System. This rating is a banking supervision tool. This tool helps to determine whether the prudential norm, which is uniform for all banks, is observed. The banks’ rating is determined within the range of 1 to 5 scores. If the bank is 5-rated, that means that it possesses significant capital, high liquidity, high professionalism of employees, high professionalism in estimation of quality of loans, high level of automation, and the opportunity of providing the modern services in the financial sphere. This tool is applied by the central bank or other bodies of banking supervision to assess observance by banks of prudential norms. The rating is given on the basis of quarterly reporting by the banks. If the rating of this or that bank goes down, it testifies to possible problems and the matter is whether it is an upward or downward tendency indicating its condition. As to the prudential norms, their non-observance leads to bankruptcy of banks.

- Are you ready to work with the Advisory Council for a partner project "Cooperation of Civil Society with Breton-Woods Institutes", which will develop the mechanisms of effective interaction of the civil society, the governments and the IMF?

- And what kind of the Council is it? With great pleasure I will listen to your proposals and I am even ready to discuss them. The dialogue is exactly what we aspire to. In my opinion, there is the certain level of misunderstanding in the country. I read headings in some of the newspapers that assert that the IMF refuses to cooperate with the civil society and is ready to negotiate only with the government. I would like to emphasize that officially we conclude the agreement on financing only with the government of the country. But for the development of the program, whose implementation will be supported by the IMF resources, active interaction with all layers of the society is essential. Here, again, we are restricted not with respect to the number of organizations we can cooperate with, by with respect to the number of hours a day.

- Is the appraisal document on the efficient use of the IMF resources in Kyrgyzstan for the recent 7-8 years (several years) ready and is it possible to get it?

- Yes, it is placed on our website.

- Is it in Russian?

- No, only in English. Why don’t you join your forces and hire someone to translate this document? For example, Bakhyt Kenzheyev , who is translating our conversation? We translate the Memorandum into Russian, but it is against our rules. I would note that I have some influence on our resident representative office here, in Kyrgyzstan , and I would ask them to translate this document in contravention of this rule.

- Probably, it is the duty of our government - to translate such documents. Unfortunately, it does not fulfill this duty...

- Yes, but if the government takes up this matter, how could it select the necessary documents? How to determine the demand? In general, I am for the translation. But sometimes even the English texts of such documents are difficult to understand, let alone their translation.

- I am afraid that my funds will not suffice to employ such a qualified expert, as your translator Bakhyt-bajke. And in general, why should we do the work of the government, in fact we pay money to them for it?

- But what to do, if you need the Russian version of the document? In Finland there are regions, where people speak different dialects and do not understand each other. But the national press is expressing itself in one language, taking no account of these dialects. And nobody complains of such an arrangement. Perhaps, the press too should start doing this work? If the matter is the significance of information, why don’t you spend some money for provision of this information to the people? I do not know whether you heard about concepts of research journalism, but basically this is quite a common phenomenon. However, I believe that you are the brightest representative of research journalism in Kyrgyzstan . You talk directly to me instead of examining the sources.

- Is very difficult. Unfortunately, the Government and the National Bank do not always respond to our requests.

- But they should do it. I should say that recently the TA mission came at the request of the National Bank to develop the communications and PR strategy for the National Bank. You know that for the obvious reason the IMF is very frequently criticized, as well as the Central Bank, by the way. So, the National Bank wanted to digest some lessons. To this end, my first advice was that of maximal openness and publicity. It seems to me that the National Bank should conduct the more active policy, not waiting for your requests, make frequent statements and provide explanations, making its own case. We know that today the Minister of Finance is compelled to actively work on public relations without any specific strategy, at least because it should continuously report to parliament. By its nature, the National Bank is the different institution. To conduct the optimal monetary policy, in any central bank in any country should have greater independence. Therefore many central banks in different countries of the world, including my native land, worked in due time under the conditions of secrecy. To a certain extent, it is still true for many current central banks. Let’s recollect even though the US Federal Reserve System. They have no right to speak about their intentions and plans as any statement of any member of the Federal Reserve System would significantly influence a business climate. The example of classified information of the central bank is that of the issue of foreign exchange interventions. That is, if people knew beforehand about the plans of the National Bank, they would have made profit of it. In addition, it destroys equality in the conditions for all of the participants in the market. Information on foreign exchange interventions is only the ex post facto data.

- Your mission will be soon completed. What basic provisions have you laid as the bases for the new three-year program?

- To tell you about the three-year program as a whole, I would need about two hours. But if to speak shortly, our task was to identify the basic difficulties the economy would face during this three-year period, and against this background - to develop the more specific measures for 2005-2006. I believe that all substantive provisions and circumstances of the program are familiar to you. It is the high level of external debt, fiscal discipline, shadow economy, and the structural reforms. The new area, which is covered by the program, is the labor market. Formulation of the new social policy is one of the task under the program either. At the same time, allocation of budgetary resources in the nearest three years will directly depend on this policy. Now the task is assigned to the Ministry of Finance to develop the new version of the mid-term fiscal forecast. This document should be ready by end-March and be published so that everyone could review and discuss it. Based on this, we should start preparing for the 2005 budget. This document contains numerous details, even our discussions. The budget, which is now pending approval by parliament, corresponds to those mid-term tasks that the country should solve for the nearest period.

We intend to submit the program for consideration of the IMF Executive Board on February 16. We booked this meeting beforehand and are now working on the program approval schedule.

- Should the Jogorku Kenesh approve the programs and memoranda signed with the IMF, taking into account their impact on the budget?

- As have I already explained, the memorandum is the business - plan of the government. The government is the member of the IMF. The IMF in turn supports the program made by the government. After that, the government has to get the approval by the whole society. The matter here is not the Memorandum as such, but the fact that it provides a lot of measures, such as the adoption of new laws, the new provisions of the Central Bank, the budget approval, etc. I believe that it is not expedient to approve the Memorandum itself, as it represents only the commitments to conduct the certain policy. If the Memorandum is approved by parliament it becomes absolutely binding for implementation. But the economic policy could not be predicted by 100 percent. It should be adjustable. In any country the government is the executive power, while parliament – the legislative one. And in this sense the government is more adapted to signing the Memorandum. However, I believe that the country would only gain from active participation of parliament, as the more parliament knows what the government is doing, the more competent is its-decision-making. I try to keep parliament informed of developments by holding regular meetings with its representatives.

- But this is not your duty …

- Yes, I am not obliged. But as I have already noted, the greater we are acquainted with the various views and positions, the better our policy is grounded. Consultations with parliament become the widespread practice in the IMF.

- Aren't there contradictions saying that from the very start the government, signing the Memorandum, assumes obligations, which are anyway reflected in the budget, and then submits it for approval to parliament. They say that there is no other choice, in general.

- Parliament is not obliged to approve neither the budget, nor the fiscal policy. However, at the same time, the Fund (IMF) is also not obliged to support with its resources the budget, which, in our opinion, is not executed, because otherwise all 183 Fund members will make a row saying why I so unreasonably spend their money. Everything what I do here is supervised by some pensioner from Botswana because he has the right to know what the money he gives to the IMF goes on. There are only two countries that could not complain - Cuba and Northern Korea - as they are not the IMF members. All others have their own interests.

- What document determines the powers and restrictions in activity of the Resident Representative and the IMF mission chief? Is it is possible to take a look at it?

- Powers and restrictions in activity of the Resident Representative are described in quite a standard document. I have a feeling that this document is also there on the website.

- If I do not find this document, could I request it?

- I am not sure whether it is the public document. However, there is nothing special there. As to the work of the mission chief, it is very easy to describe. The government of the specific country requests financial support. Validity of this request should be verified and this is what I am doing. I believe that it is the huge document, updated, in addition, every year. But, if you familiarize yourself with the numerous Fund publications, for example, the research works from its occasional series, it is expounded there not in the bureaucratic language, but in the plain language. From the formal point of view, I would even be at a loss to specify my terms of reference. Briefly: I should arrive to the country, discuss with its representatives a set of economic issues, arrive at the conclusion and report to the IMF Executive Board. In general, I could show you the list of duties of the Resident Representative. This document exists, and it is common for all countries. The basic policies as to his work are specified in the Instruction .

- That is, this document could be obtained, couldn’t it?

- I don’t know for certain whether it is for official use only or not. I am afraid that it is not subject to publication. Though, I might be mistaken either. Probably, it is placed on the website. You should address such questions to our communications division. Once again I would repeat that there is nothing confidential there. They would simply give you the better answer, than I would do.

- Who is Isaac Svartsman ? What are his powers, rights and duties? What are the directions he is responsible for? What is his term of assignment and who will work after him?

- Svartsman is the IMF and WB TA Resident Adviser assigned to Kyrgyzstan at the request of the Central Bank. Usually such an adviser is sent to any country for 1-2 years. Isaac has been already working here for the third year. His assignment is to consult the Central Bank on the banking supervision and credit policy issues. He is reporting not to the mission chief, but to the Monetary and Financial Systems Department of the Fund. His assignment to Kyrgyzstan expires at the end of this year.