- How do you assess the current economic conditions in Kyrgyzstan? What has changed in the economy since the beginning of the year?

- I believe that this year could be characterized as successful from the point of view of growth rates, inflation, and exchange rate stability. This year developments equaled more or less to our expectations. Growth was high enough in the first half of the year, though later it slowed down because of specific features of a production cycle at Kumtor. Our three-year program, if to speak about an orientation of a policy, was completed at the end of September. Obviously, all macroeconomic targets have been achieved. Thus, in the area of both fiscal, and monetary policies the situation developed according to our expectations.

If to speak about the forthcoming year, one should expect the further reduction of gold extraction and here much depends on the rates of growth of other branches of the economy that are not related to gold mining. One should note some positive signs in this sphere either. For the recent three years the rates of economic growth excluding gold extraction were 4-5 percent. If this tendency survives and is strengthened, one could count on the sufficiently high rates of growth for the economy as a whole, despite of a decline in gold extraction. I believe that in the mid-term perspective we could well expect annual growth of 5 percent, real growth of the economy and inflation of about 4 percent. It means, then, further poverty reduction.

Certainly, some unpredictable factors could play their role here, in particular, results of elections, as well as opportunities of implementation of the post-election policy.

- You are now working on the final numbers in the draft budget that should be submitted for approval to parliament in early-November. As well as on such issues, as an increase in wages, rates of payroll taxes, budget deficit, use of money received from Centerra, etc. What are the results as of today?

- Our discussions are not completed yet. We have studied the available numbers and found it proved to slightly raise budget revenue projections for 2005, given the quite high rates of tax revenue collection. I believe that to decide, more precisely, to discuss the issue of the wage increase for some categories of workers, such as teachers and nurses, is worth doing already now, while the discussion of the issue of increasing wages in other categories should be left for spring, when the situation with budget execution becomes clear. As to the reduction of the rates of insurance contributions, we suggested such a reduction be gradual in the mid-term perspective. However this proposal stumbled on a certain resistance, for there is an opinion that it would be better to use this money for the increase in pensions. There are two points of view and according to one of them, all available resources should be assigned for the pension increase, and in that case the rates of insurance contributions should not be reduced; the second point of view sticks to the happy medium, that is, to raise the pensions to a smaller extent than in the first case, and to start a mid-term reform on the reduction of rates of insurance contributions.

As far as the Centerra money is concerned, an arrangement was achieved to establish a working group that would identify directions of using this money to combat poverty in the nearest 3-5 years as one-time expenses, i.e., they would not result in the steady increase in expenditure year by year. Mainly, we speak about investments in such one-time expenses. Due to availability of the Centerra money there is an opportunity to plan the higher-than-earlier projected fiscal deficit. Because the issue is to finance the deficit without any increase in external debt. The deficit financed through foreign loans will continue to be reduced.

- One year and a half ago we discussed with you the issue of introducing VAT on agricultural products. To what extent has this tax justified itself?

- I believe that introduction of this tax was the proved measure. The whole problem comes down to its implementation. The VAT system is the complex system, I would even tell, intricate, and in Kyrgyzstan it is viewed as the system of the tax on a turnover. However, obviously, this tax failed to function because of political resistance. In the context of the reform of small business taxation we suggested to raise abruptly the VAT threshold - from 500 thousand to 2.5 million soms. Then, it means that the most of the agricultural enterprises will not be obliged to pay VAT any more. Actually, the law remains in force, but it will provide for such a high threshold of taxation that it would cover only a few agricultural companies.

- Is it a surrender?

- Hardly it would be the surrender. We always considered the threshold for VAT collection in Kyrgyzstan to be at an overly low level. I believe the reforms of tax agencies in Kyrgyzstan should be directed to focus on large taxpayers, instead of running after the small taxpayers. The matter is that collection of VAT from the small enterprises is not good from the economic point of view. The issue is to increase the threshold of VAT collection, to pass to the next stage of the reform and draw near the international standards. Initially, when the matter was to introduce the VAT in agriculture, the threshold was established at the level of 300 thousand soms, then, during negotiations it was raised to 500 thousand soms. Concerning the current increase of the VAT threshold, it is, as I have already said, the next step in the reform to bring it in conformity with the international practice. We would recommend it in any case, irrespective of the situation with the VAT. In addition, as a substantiation we could give such an argument that in this very case we unify the threshold of the turnover threshold, spinning off small businesses, with the VAT threshold. This, first of all, simplifies the system, and secondly, transforms the tax on small business into the basic tax that would be paid by small and medium businesses. It was our main reason, and the change in the situation with the VAT was kind of a by-effect.

- You said that the Ministry of Finance figured a number of large agricultural producers in 190, the Ministry of Agriculture – in 24 000, and the IMF – in 550. Who was then right eventually?

- We considered that about 2 thousand producers had the turnover of more than 500 thousand soms, the Ministry of Finance assumed that such producers would number about 550, and the Ministry of Agriculture considered that they were about 20 thousand. There turned out to be about 190 of the actually registered large taxpayers in agriculture, and to date – about 220. The final number would be determined in case of active registration, but it has never taken place.

- How could we then get at the truth of who was the initiator of this or that innovation – the IMF, the government or the NBKR? The matter is that usually there would be a nice passing of a ball: no, it is not our initiative, these were they who have proposed it … Are there any IMF procedures on this account?

- It is quite difficult to trace from whence exactly these or those ideas came, we never considered what percent of this or that initiative belongs to the IMF, the Government, or the NBKR. And it is difficult to specify any specific procedures in this sense. During the discussions of the program a dialogue would develop between the IMF representatives and the Kyrgyz party. In addition, the ideas are born on the basis of examples, historical experience, and during the discussions between experts. I should note that for the recent years the tendency on the side of the NBKR, government, and other state agencies gets stronger to bring forward their own ideas for the programs.

As is known, all countries faced more or less similar problems in the past. However, these countries started to differ, and the problems arising between them started to acquire a more and more complex nature specific to each country and consequently the situation, when the initiative comes more often from the Kyrgyz party, becomes quite natural. Kazakhstan could serve as a good example in this sense and to the greater degree - Russia. Both the IMF, and the Kyrgyz party are significantly guided by experience of the neighboring countries and, in particular, the CIS countries. Therefore, when positive experience accumulated by this or that country is drawn, it is difficult to tell from whom the idea comes from.

The IMF’s comparative advantage is that it follows the developments not only in the CIS countries, but also in the countries of the whole world. And it could assess whether this or that initiative is viable. Thus, it is the dialectic process.

- Tell me, please, what are the IMF plans on the Kyrgyz banking sector? What is your current interpretation of a concept “banking sector reform in Kyrgyzstan”?

- It is the difficult question. In the course of implementation of our program we would develop extensive numerous banking reform matrices, that is, a table of measures on the banking reform developed not only by the IMF, but the Central, World, European and Asian Banks as well. I believe that a need for the reform becomes more specific. We applied a comprehensive approach. The reforms went successful. However, now the need manifests clearly the specific, “narrower” reforms. Some of them are similar to those reforms that were in need some time ago, some of them are quite new. For example, quite a significant growth of lending is currently observed in the country, in addition, the deposit base started to grow. Moreover, such phenomena require stricter banking supervision. We do not refuse other elements of that reform package that we recommended, however, we believe that it is essential to pay special attention to the issue of banking supervision. I believe that as the share of credit and the deposit base grow, both depositors and bankers will understand that it would be in their own interests to strengthen banking supervision.

- Does the strengthening of banking supervision mean compleat professionalism of its executors? The matter is that the issue of strengthening banking supervision is usually understood in Kyrgyzstan as the increase in the number of inspections and the volume of reporting to the NBKR, and in no wise as the increase of the level of professionalism of banking supervision staff.

- I believe that part of the problems come from imperfection of the accounting and reporting system. First, shortcomings of the accounting and reporting system at the enterprises essentially complicate operation of banks in credit testing. In addition, it reduces a possibility for the banks to follow the international accounting standards, which have been introduced quite recently, and it would take time to make these standards be fully effective. Such issues, as internal audit at the enterprises and in the banks, the system of internal arbitration, and a resolution of disputes between the banks and the Central Bank, are still at a stage of development. In other words, I believe that improvement of professional skills in this case is completely necessary not only in the Central Bank, but also in the banks themselves, as well as at the enterprises. The point is that development of the banking sector frequently lags behind economic development on the whole, however, today we notice the situation when confidence of the population in the banking system is enhancing, the deposit base is increasing, and lending is growing. The issue is then raised whether the banks, enterprises, and the Central Bank would be able to react quite promptly to this new situation, to adapt to it so that the banks could operate with the minimal risk.

- At the meeting of the IMF-NGO working group on October 29 the NGOs passed you their proposals, however, you answered the question on when one could get the answer that the civil society could find it when reading the approved Memorandum. If relations are of such a unilateral nature, then, it might be not the working group, but something else?

- The idea was that we would regularly meet to discuss the pressing issues. I believe it would be proper to establish the working group on interaction between the government and the NGOs, and not between the IMF and the NGOs. We are not fully against entering into a dialogue with the NGOs, even on those issues that would not be reflected in the Memorandum. From my experience it follows: the more debate, the more useful it is for a society. And so far as one of our tasks is to promote development of economic debates in the countries, we are not against the dialogue with the NGOs. However, we do not want to create an impression that we, as part of the working group with the NGOs, are involved in elaboration of the economic program for the government. Our task is to ensure that the NGOs would contribute to program implementation and so that this contribution would be taken into account by the government.

- All the same, could we get the answers to the proposals we have passed?

- We could meet during our next visit. I have not had time to study them yet. However, my impression is that the issue is a large set of issues.

- The idea is that about the same way the meetings with the business sector are held. That is, the meetings held this way for form’s sake could be described in the mission’s reports as productive. For instance, we know that for the meeting with the banking sector of Kyrgyzstan you invited representatives of foreign banks only, though the whole issue was the Kyrgyz banking sector. Why does it happen this way?

- In my opinion, I asked our resident representative office to arrange the meeting with the representatives of 4-5 largest banks. May be, all largest banks in the country are indeed foreign, however, I do not object to meeting with the Kyrgyz banks. The idea of these meetings with the NGOs, the representatives of business circles, the Bishkek Business Club, and the banking sector is to hear their views. Such meetings are held not on the regular basis. I have the regular meetings only with the government. There were also the meetings with the PASPP (Public Association of Social Protection of Population), protecting rights of pensioners. The matter is that this organization persistently requested the meetings. I believe that the more you meet with different organizations, the better.

- At the first meeting of the NGOs with the IMF, attended by Mr. Michael Mered, the issue was raised on the fact of violation of basic budget principles in Kyrgyzstan, with the IMF being one of accomplices of this infringement. The issue is fiscal federalism, i.e. about the ongoing formulation of the republican budget based on the “top-down” principle, without regard to the interests of local self-governments. What could you tell us about it?

- I could tell you that fiscal federalism is the extremely confusing issue. It comprises numerous aspects. The leading part in this process is that of the World Bank. It is part of the JSAC loan. Two important aspects could be noted in this respect. The first one concerns the volume of fees collected by the local governments. And in this respect we believe that the property tax will provide them with a source of revenue resulting in no distortions. Another aspect reflects the issue of what scheme of revenue is effective in the country. Usually in any country the volume of revenue of central government exceeds the volume of revenue of local governments.

On this point, it is necessary to create the system of income redistribution that would take into account the opportunities of various agencies of local self-governments for collecting taxes. Let’s take, for instance, such a largest tax, as the VAT. It is obvious that there is no sense to shift a function of collecting the VAT to the local governments. I believe that preservation of some of the elements of top-down income redistribution is inevitable. Furthermore, practically in any country, as well as in my motherland, the local governments are usually represented in parliament quite well. We call them as parties of local authorities. Let me reiterate that it is quite the complicated issue. The World Bank should develop the appropriate plan as part of its credit. In addition, one of the most serious problems that has to be solved is a great number of levels of government in Kyrgyzstan : republican, oblast, district government agencies and local self-governments. I believe that it would be expedient to abolish one of these levels in order to simplify the situation. Though it is still complicated.

- Could we recognize today a difference between what has been approved thus far through the legislative procedures and what has been done in practice? Under the law it should be the bottom-up budget formulation arrangement, while in practice – it is the top-down procedure.

- The law on taxation provides for a formula of income redistribution. I do not know legal subtleties of the issue. Usually such issues are addressed by our technical assistance missions. The mission on tax administration issues came here, but I did not here anything from this mission on this issue.

- Then, Mr. M. Mered should have reported to you, because he came to learn about it at the first meeting of the IMF-NGO working group on September 20, 2004 .

- And what is exactly the problem?

- As I have already told you, fiscal federalism.

- Has the law enacted that the local governments should collect taxes and transfer them to the center?

- The issue is that their interests are not properly taken into account.

- As far as I know, the discussions are currently held on self-financing institutions of local self-governments. But the corresponding law is the framework law and should be supplemented with statutory acts on its observance. These statutory acts should provide for what share of taxes should be collected by the local self-governments, and what share of expenditure should come from the center for equalization. I believe that this reform has just started. The general principles are in place, the framework law is in place either. The effective statutory acts are not yet in place. I hope that the World Bank staff is currently working on this issue.

- Tell me, please, what are the arrangements underlying operation of the IMF Resident Representative Office and the IMF missions arriving here?

- The IMF Resident Representative Office in Bishkek is kind of a connecting link between the Kyrgyz party and the IMF headquarters. The missions coming to your country at the request of the authorities would usually have two goals. The first one is what we call “oversight”, that is, the missions are assigned to hold Article IV consultations under the IMF Articles of Agreement. They are to review the economic situation and develop recommendations. Such missions would usually go to the countries where the IMF programs are not implemented.

The missions aimed at to discuss the programs and review the progress under the program implemented by the authorities would be sent to the countries that use the Fund resources, that is to say, borrow money from the IMF.

- Nevertheless, are there any arrangements that regulate your activity, could we make them public?

- We call them “terms of reference” and there is nothing special in these arrangements. These documents describe the functions of mission chiefs and the IMF resident representatives.

As to the discussion of the program, it is practically impossible to write some specific manual for such a discussion. Because politics is politics.

- What is an outlook for introduction of the property tax? Have the terms of property evaluation and other mechanisms been elaborated?

- In my opinion, parliament has not yet made the decision, many issues concerning this law are not clarified yet. I hope that deputies would do it quickly.