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IMF - an unfair partner? Interview with Tapio Saavalainen, Mission Chief,
European II Department, IMF, published in Public Rating
— We work not only during visits of the mission; as a matter of fact we to keep track of the development and state of affairs in your country every day. Each morning when I get to my work I would have already 7–8 e-mail messages from your National Bank, Ministry of Finance and from our resident representative in Kyrgyzstan. For instance, the National Bank e-mails us its daily balance sheets, budget execution data we receive each month, i.e., most of the work on the economic analysis we do in reality in Washington. I believe the fact that my department is in charge of the Baltic countries, Russia, and other CIS countries provides definite advantage to us. Comparing various policy directions in these countries we gain deep insight into what is happening in Kyrgyztan. — What is your assessment of the current economic conditions in Kyrgyzstan? What has changed in our country since the beginning of the year? — Inflation went down, exchange rate appreciated by about 30 percent in 2002. Output in the country dropped after a landslide in the Kumtor gold mine in July. Though in general one could say that in the last 2 years gains in price stabilization were observed to have been very appreciable. I believe the basic rates of growth to be about 5 percent, though according to our projections actual current year numbers will be only 0.8 percent. In the context of structural policies, one could say that it would take more time to pay off. However, in recent two years the banking system has showed further consolidation. The size of the financial system remains certainly very modest in terms of, for instance, a ratio of financial assets to GDP. Likewise, the capacity of the financial market is very small either. The population prefers savings in dollars to savings in domestic currency; neither it would prefer keeping the savings in the banking system. Nevertheless, available data indicate a reduction of dollarization of the economy that is in evidence. One of the encouraging factors is that according to statistics, excluding Kumtor gold and energy production industrial output has been expanding for already two years. Furthermore, there is evidence of growth of deposits in the banking system. Therefore I believe that there are positive developments in the economy. —Our economic indicators have not changed much in recent years, the same concerns the financial system: there are some changes — a bit upwards, a bit downwards. Though when 5 billion of 8 billion soms of money supply is outside the banking system and only 3 billion soms is in the banking system, it would be incautious in my opinion to talk about minor changes as positive developments. For, such a volume of money supply, circulating outside the banking system, should worrit in itself. You say nothing about it. What do you think about it? — If to speak about such a measure as dollaraization as the ratio between the bank deposits in dollars and broad money, this indicator has been decreasing lately. Though you are quite right: remonetization of the economy, i.e., a return of money into circulation and a take-off in money supply was due to mainly cash. Let’s hope for a strengthening of competition in the banking system. With operations of Kazcommertsbank in the bank market we could hope for an expansion of the banking system through relative growth of deposits, through the return of money from outside the banks and the banking system. — The indicators you named – rate of dollarization, money outside the banking system — all of this proceed from the current expectations of Kyrgyz residents. Moreover, these indicators could change quickly — but everything depends on confidence in the Government’s policy. — That's right. Though, subject to continuance of the current monetary and fiscal policies the population will confide more in the banking system and the Government, for these policies are directed to stabilization. An income the population earns on its deposits in the banking system is determined by an interest rate. This year people who held their savings in cash dollars virtually lost their money - they did not earn the income. I suppose the operations of the Kazcommertsbank in the Kyrgyz market would be positive in their results. Of course, let us see what follows next. — Our current financial market is shallow and it is represented by only the banking sector. Unfortunately, insurance companies, pension funds, that is, major sources of long and cheap money are still in embryo. What are the IMF’s plans in this respect? — Essential changes in the financial market should be expected in the context of what would happen with a pension system. There are some plans to move to a funded pension system — fully or partially funded plan. It needs no saying that we still have to wait for emergence of the funds that would be able to provide long-term financing. We have to go a long way to emergence of the market of corporate bonds, for enterprises do not have any access to this market, while the population is new about such an investment of capital. Maturity dates of credits are still short, nevertheless, the situation has changed: if previously the average maturity date of credits was about three months, nowadays it is six and nine months. So, the enterprises’ profit remains as the primary source of their financing. I believe I would give such a situation five years more. — Am I correct to understand your words that the IMF has not
made any plans on financial deepening? — What do you put into a concept “banking system reform”? — We have a long list of measures we intend to implement. This
concerns five areas: banking supervision, legal and regulatory framework,
state banks, DEBRA, and payment systems. Partiality of a judiciary system
is a chief problem in the area of banking supervision. We plan to analyze
the current legislation at the next stage of the reforms in order to
eliminate contradictions and weaknesses. Amendments should also be made
in the Law “On Central Bank” to ensure the central bank’s
functional independence and it is scheduled to approve an Anti-Money
Laundering Law. Minimum own capital requirements for banks will be raised.
With respect to state banks it is scheduled to issue a privatization
tender for Kairatbank by end-March. A development strategy of the Settlement
Savings Company and a concept paper for sustainable financial development
of the Kyrgyz Agricultural Financial Corporation will be worked out.
Measures are envisaged for strengthening DEBRA (Debt Resolution Agency)
and accelerating the computerization of the payment system. Total measures
for the banking sector reform and various steps towards these reforms
make 24. That’s what we mean when speaking about the banking system
reform.
— You know, the main problem is not the judicial system, though it is a trial either, but a combination of functions of monetary control and banking supervision performed by the National Bank. The fact is, that implementation of the monetary policy always weighs upon supervision and there is always temptation to push aside the initiation of timely measures in supervision as it happens quite often. Therefrom those notorious bankruptcies of banks resulted. There are many cases, when the NBKR’s banking supervision department should have taken measures with reference to banks pursuing dishonest policies and would not do it and would virtually let the collapsing banks to continue attracting money. In my opinion it is worth raising the issue of separating these functions. — It is a normal practice in many countries. — Do you mean the combination of functions? — The Central Bank is assigned to exercise banking supervision in many countries. In restrained terms banking supervision is the only function of the Central Bank, for instance, in the countries with currency boards. I do not see any conflict between monetary policy and banking supervision objectives. — By way of illustration I could give an instance of the Swiss banking system … — In Finland these functions were also separated in due time. The issue of who is assigned to perform the banking supervision functions is non-essential and a much more important issue in this case is to have a balanced law on banking that would clearly determine proper banking supervision functions, as well as to fulfill the requirements of this law. The question reduces itself to the question whether a capital base of commercial banks is strong and whereto this capital base is developing. To increase this capital we need a positive inflow of earnings or in other words — profitability. In this regard it makes no difference as to what agency introduces the capital adequacy requirement, - the only important thing is to introduce and to track its compliance. The question at issue is inter alia in finding quite an efficient staff that would be capable of assessing the quality of bank portfolios. Let us take a bank with assets abroad. It is quite easy for the central bank to assess the quality of these assets using relations with colleagues in other central banks. — I'm sorry to say the National Bank slides into error demanding from the commercial banks to raise their capital. This will not improve the banking system: the number of the commercial banks will decrease and it will not improve the quality of management, assets, and credit portfolios. What for to demand the increase in statutory capital of small and medium banks if they perform well and meet all of the established requirements? What for should they be forced to look for new shareholders or to merge? For, virtually all of the banks that went phut in Kyrgyzstan were large according to our standards — Mercury, Maksat, Bishkek, and Kramds. All of them had considerable capital that did not retrieve them from ruin. — It stands to reason that it would not solve all of the problems. Though, if I were a depositor, I would be very much comfortable, if the bank where I have my bank deposit has considerable capital. Though certainly much depends on the portfolios, in which the banks invest their assets. That comes to mean a need for a careful assessment of the assets in the portfolios of the banks and risks in sectors, in which the banks invest their assets. — Let the market settle the issue of whom the bank trusts. Why should we forcibly urge the well-performing banks to raise their statutory capital? — Let us consider the situation in Kyrgyzstan: with the population of 5 million people there are about 20 banks in the country. Under these circumstances, the consolidation of the banking system could be achieved through the increases in capital requirements: the banks will either attract capital or merge. The capital adequacy ratio in the banking sphere improved during the last few years, albeit, it is not anywhere near a reasonable level natural for the Baltic and Central European countries. It is a standard policy based on Basel principles of banking supervision, put into practice in all countries. There are three whales of banking supervision that are reviewed in the first instance: capital adequacy, solvency, and liquidity. — Apropos of liquidity: presently, liquidity in our commercial banks is excessive and makes 170 percent. This implies that there is no one the commercial banks could give credits. I believe you pay too much attention to banks as financial intermediaries and forget about another sectors. At the same time, the NBKR does not work on the issue of alternative financing, mortgage lending, it doesn’t care for insurance market problems, and the funding pension scheme — these traditional sources of long and cheap money. In this context, when the commercial banks are primary and almost the only players in the financial market, it is easier, of course, to put the blame on them — to say they are the cause of all troubles. Perhaps the cause is to be sought in the wrong policy of both the IMF and the National Bank? Haven’t you given it a single thought? — In what sense: too large money supply or too small money supply? — I dare say, in pursuit of indicators you forget about the meaning and essence of the economy. As things go, one could as much one wants discipline the commercial banks, nevertheless, today no long and cheap resources are simply within reach, while the state is helpless in this matter. Moreover, neither the state, nor the IMF raised the issue of a development budget. Owing to what then should the economy grow? — Availability of the resources for long-term expansion depends on a behavioral model the people accept with respect to their savings. There are three sources of savings: national savings, savings of the private sector — population and enterprises, and foreign savings. Obtaining credits from the IMF, the government attracts foreign savings to finance investment. Public Investment Program provides for long-term investment in Kyrgyzstan.
— But then the IMF is for their reduction, isn’t it? — We speak in defense of the PIP reduction relative to GDP by virtue of external debt problems. Hence the problem of the state debt increase in this particular case is equivalent to the increase in the fiscal budget. If external debt runs up to the unacceptable level, we should slow up the rates of its accumulation. This does not mean an elimination of the Public Investment Program — its volume in Kyrgyzstan is still on the higher level than in other CIS countries. This volume was extremely large in the second half of 90-s. Today the problem is to find means that would help to maintain the volume of the Public Investment Program at 3 percent of GDP in the second half of the decade. Many of the financing sources, if I may say so, will start to shrink in 2005–2006. Fortunately, many commitments were heard at the Consultative Group meeting to provide the means in the future. To attract additional resources for investment through domestic savings, we need a long period of stabilization that would allow the population to increase its savings in domestic currency and invest them in the economy. Though, on the other hand, the demand in the system is observed to be significantly depressed, therefore, the sharp increase in the savings of the population is not expected. This implies that a more optimal policy is to expect the savings in the business sector and that, in its turn, is the need for hard work on increasing labor productivity. This is what our structural reform is aimed at. — Mr. Saavalainen, we are very wary of the IMF here in Kyrgyzstan, to put it otherwise, it is simply disliked. It is believed to be an unfair partner of Kyrgyzstan. — With no cooperation with the IMF the task of maintaining the
required level of international reserves would stand for the need to
implement much tighter monetary and fiscal policies. You know that the
country cannot live without foreign reserves. Certain foreign reserves
are essential just to give the central bank a chance to exchange domestic
currency for dollars and vice versa. Naturally, it would be much better
if required foreign currency would come through the balance of payments
than from the central bank. However, foreign reserves in the central
bank are a guarantee in its kind, an insurance policy. — The reform in such a sector as energy comes within the terms of reference of the World Bank and is carried out under the Consolidated Structural Adjustment Credit. While tax collection is in truth one of the IMF conditions; but, on the other hand, if the government has specific expenditure commitments, it should have certain reserves. One of the restrictions the economy is facing is a high level of external debt. If to speak about transparency of our operations and IMF activity, we publish all of the programs we implement with all countries. You could acquaint yourself with them on a website in Internet. — What could be changed when a decision is taken? — The program is subject to a review and analysis each six months. — Tell me, whose views do you take into account when assessing the financial system? My guess is taking shape that you listen to only the National Bank and ignore opinions of others. By the way, the IMF never forgets to commend the National Bank in its reports. — Above all things we rely on the available data. — You know, all the same, each country has its own peculiarities and the IMF is accused now of stereotype approaches. — I do not agree with you. I believe that our programs are not stereotype, for we take into account singularities of specific countries. Though, on the other hand, I would not deny the fact that in conformity with the programs our recommendations are based on general laws of economics. Stanley Fisher, former Deputy Managing Director of the IMF, said that one of the cases that caused his greatest surprise was that almost each country you were negotiating insisted that it was this country that was not subject to the general laws of economics. — What do you think about the CDF and NSPR? — CDF is a document, a kind of a vision of a long-term country
development outlook. NSPR is a medium-term program designated to concretize
the CDF for the forthcoming two-three years. Then, annual programs are
the final stage of this process. If to speak about the current strategy
for poverty reduction that is reviewed and adjusted in the afterlight
of the Consultative Group meeting, I would attribute a composite nature
of this document and general participation to its true merits. But this
is its weak side as well, for, covering the largest areas of social
developments, this document may be somehow misses the issue of priorities
so that it becomes difficult to establish these priorities. Hence, this
document adjustment process provides for mid-term prioritization in
economic development and anti-poverty programs, in particular.
— But still, are there any mechanisms of their implementation in the CDF and NSPR or not? — I think that one of the successful examples of such a mechanism is the one of the development of medium-term fiscal positions to set up expenditure allocations that ministries could expect in the medium term each year. A structural benchmark in our program implementation aimed at improving this process is that the government committed itself to develop and to publish such fiscal targets for a period from 2004 to 2006, clearly showing how much it plans to spend for education, public health, social policy, and public administration. This document will be designated to promote economic debates on the priorities facing the country. — Original figures, which serve as the basis for this poverty strategy, look somewhat strange, if not immoral. Monthly income of 350 soms (7.5 dollars) means extreme poverty and 650 soms (14 dollars) is just poverty. Then, people with the income of more than 650 soms turn out to be already a middle class, don’t they? — At this point, international standards are used. You know yourself
that the issue of what to consider as poverty is always partly subjective.
However, similar figures are based on standards accepted by the World
Bank worldwide. Each country sets up its own specific levels of poverty.
However, these figures correspond to a definition of poverty, which
are accepted by the WB. — Do they get this money? We know that the average pension is about 600 soms per month. And I hope that these pensions are paid. At least, we keep track of it. There are certain outstanding arrears of pensions at the level of local governments. Sometimes money is transferred from the Center, but does not reach its final recipients. — I put a concrete question and ask you to answer it. — The data I proceed from result from household surveys. It is a standard methodology to study a financial position of any family in any country. I believe that the household surveys done by the World Bank provide for the reliable data. — The matter again concerns not this. Proceeding from these figures, it is possible to draw a conclusion that the middle class developed in our country, though with the income of 14 dollars. Such indicators dictate wrong targets in drafting a policy of economic development of the country. You should agree that such a level of income means poverty of an overwhelming part of the population in Kyrgyzstan. — If you want to establish some other definition of poverty at the higher level, may be, I would not argue. But it would hamper a comparison of Kyrgyzstan with other countries in the world. — Then, how one would evaluate the results? We have the monthly average salary of about 1500 soms or 32 dollars. People live on one dollar a day and it is misery. — It includes all of the earnings of the population. If this figure included all of the earnings of the population, there would be a very funny view of the economy in Kyrgyzstan. It would mean that about 30 percent of GDP is the share of wages. Though, by definition, GDP consists of two components: part of GDP is that of payment to labor force and profit on capital. If the figure of 30 dollars per month were true, it would mean that 70 percent of GDP is that of the profit. It does not sound too convincingly. — And what would sound convincingly? — It would be more correct to define the true level of income of the population based on the household survey data. In the industrialized countries a wage fund, including social insurance contributions, is 60 to 70 percent of GDP. — As in Kyrgyzstan? — That’s right. In less developed countries, it is likely that the share of the wage fund, including the social insurance contributions, is a little bit below this level. I guess the real per capita income is about 55-60 dollars per month. — Well, then tell me: would you, particularly you, be able to live out on 55 dollars a months? — It is apparently possible, because the people survive in Kyrgyzstan. Certainly, it would be nice to double this amount, but it would mean the need for doubling GDP. This is why we need these programs. The programs that are directed to increase rates of economic growth. — Then, what is your income, your salary in the IMF? — My salary is obviously higher — just about the same as that of the financial sector personnel in the USA. — Then, what is the salary of the financial sector personnel in the USA? — … I do not remember … however, it’s a little bit more than 60 dollars per month. — Let us change the subject. Unfortunately, judging what commitments our party makes and then agonizes over their implementation; our government is a very bad negotiator and partner of the IMF. However, at the same time, the IMF, being a witness of all this, concludes agreements on terms, uneconomic for Kyrgyzstan. This is why the IMF is believed to be the unfair partner here. — Do you know how the IMF system works? We use the resources, which are paid to our budget, by 183 countries — our members. Therefore, it is quite logical that our Executive Board that represents interests of one hundred and eighty three countries, giving credits, would expect to have some business-plan. If you were a banker, hardly you would lend money to your client with no knowledge of how he is going to use it. If you do not care, it would be quite irresponsible to provide money on credit. The process is the one when we acquaint ourselves with the plans of the government and if we are not against these plans, we approve them and give credits. — Are you familiar with the National Bank’s concept of financial development of Kyrgyzstan? — I have already described you the plan of reforms in the banking system. The National Bank has already published this program, though, in somewhat general terms, at the end of September. — The NBKR published it on October 31. — The Board of the National Bank approved the Program on September 30 of this year. — Though it was published only some of these days, after one month. — It could be. Our arrangement was the approval of this document. — What do you think of an amnesty of capitals? — It is a very complicated issue. Basically, the rule of secrecy, characteristic of the Swiss banking system, could be quite useful, though, on the other hand, it is connected with certain risks. My view is that the issue of the amnesty of capital does not exclude the need for some system of restraints and counterbalances of cross checks and the relevant regulatory and legal framework, which would prevent criminal behavior: for example, activity in such an area as anti-money laundering is absolutely necessary. The approval of the relevant law is part of our program. — Mister Saavalainen, how many times did you meet with representatives of commercial banks to assess the situation in the banking system? — We had very many of such meetings. I cannot tell you that I met with the representatives of all of the commercial banks, but a joint World Bank and IMF mission visited Kyrgyzstan to analyze stability of the financial system. For the first time it came in May and its second visit was in August. The mission made a 400-page report on the operation of the financial system. — Thanks. Could you tell us how effective is cooperation of the IMF with other donors, for instance, with the World Bank and the Asian Development Bank? — In my opinion, our cooperation is effective enough. Every time, when we come to Bishkek, we meet with the representatives of these institutions. Furthermore, in Washington our institution is located across the street from the WB. We meet like twice a week to discuss these problems. — Do you have any contradictions with them? — Certainly, we have our differences. We polemize with them, as everyone, who is involved in economic policy-making, would do, though eventually we would work our general guidelines. The same is characteristic of our relations with the ADB and EBRD.
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Mr. Saavalainen, tell us, please, about principles of your work and
methods of making IMF recommendations to Kyrgyzstan. 
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