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We do not want to have monopoly on control Interview with Tapio Saavalainen,
mission chief, European II Department, IMF - Mister Saavalainen when the IMF puts tasks for Kyrgyzstan on introduction of new taxes, does it take into account such issues as correctness of introduction of the taxes, their calculation and feasibility, as well as implications of this action for its economy? - The issue of scrupulousness of taxpayers is extremely important for us. We always draw a comparison between actual tax collection and potential opportunities and developments in other countries. We have been trying a great while to adhere to strategic reasons in questions of taxation, paying attention to development of structural taxation so that it would as less as possible resulted in distortions in the economy. In this sense we could note a tendency that has developed for the last ten years. After Kyrgyzstan attained independence a necessity has been noted for changing from the taxes of a Soviet type, that is, the taxes on production, to the taxes on consumption, that is, to the indirect taxes. Among immediate challenges, a strategy would be to gradually extend the taxes to consumption and remove the taxes on production. At the same time, it is necessary to adhere to a principle of equality of taxpayers: a tax burden should cover as wider base as possible. The more the taxpayers in a country, the lower tax rates are. - Your visit to Kyrgyzstan fell on the time when the government and agricultural producers had a dust-up on VAT on agricultural produce. This conversation was sometimes tough that indicates that no preliminary work including with representatives of a regulated sector - agricultural producers - was duly done. What's your theory of the case? - One should say that this issue would be politically unhealthy in any country. And when heated discussions grow warm, there remain not so many opportunities for a cool analysis. When I met with the agricultural producers, I was convinced that they did not consider VAT as the tax on consumption; they considered it as the tax on production. As an example I adduced a simple calculation of how VAT is levied. It should be stated in this case that a tax administration is faced with the most challenging task of levying VAT in accordance with its nature, namely, as the tax on consumption and not the tax on production. Certainly, the more intensive the educational campaign, clearer the situation. I believe that in the worst cases practice would be the best explanation. Though hard work is needed to provide for operation of this mechanism according to our plans. - Unfortunately, this kind of uncompromising disputes happens ex post, when a law is already enacted and nothing could be done. As a rule, it is connected with a speed of a procedure for introducing the tax without its due discussion and approval. - I believe that this problem is prone to not only Kyrgyzstan, but also to all countries with economies in transition. In fact the matter in hand is the largest structural system reform. The market economy is a new phenomenon for these countries, whose population still thinks along within the framework of the old economy principles. In the process of our work we paid special attention to this problem and reached an agreement that the government of Kyrgyzstan would develop a document that would indicate the government’s key policy directions, including a sectoral policy for a mid-term period, i.e., for the nearest three years. It would also publish this document to encourage debate. In that case, the public will have more time to study the emerging questions. For instance, I hope that a mid-term budget forecast that is currently developed would contain a description of the mid-term tax policy, the description of the key reforms and targets in such sectors, as national education and public health. This document should also represent the pension reform and it should clear a meaning of the current pension system and a funded pension scheme. The main thing is that mechanisms of financing the pension system will be described in this document. Here taxation-related problems would emerge: the matter is that the present rate of insurance contributions to the Social Fund is 33 percent. It is obvious that there is no opportunity for a further increase in these rates and in this connection the issues of financing of the funded pension scheme would emerge. It would be necessary to carefully coordinate expenditures and financing in each of these areas. A reduction of the rates of insurance contributions would be possible only in case of expansion of a tax base. Today, with respect to the issue of reducing losses, we could adduce as an example of a public investment program, issues of an optimal size of this program, sectors it should cover, as well as the issues of eliminating a quazi-fiscal deficit in the energy sector including the tariff policy. If all of these issues were raised in the mid-term budget forecast, which is the framework document, the public would have time and opportunities to understand the eye of the problem. You, probably, know that there were much less numerical indicators in the program under the National Poverty Reduction Strategy than there could have been. Furthermore, it suffered from an insufficiently precise prioritization of the reform directions. The mid-term budget forecast can be considered as a tool to reveal the priority directions and calculate numerical parameters for the directions connected to the National Poverty Reduction Strategy. The mid-term forecast will serve, thus, as a link between the national strategy and annual budgets. - Mister Saavalainen, the purpose of this interview is to focus on two issues: the first one is VAT on agricultural products and the second one is the tax on real property. We think that we are in for the same disputes concerning introduction of the tax on real property as we had with respect to VAT on agricultural produce. In fact, according to the agreement, the IMF wanted the tax on real property to be approved by Parliament by end-March. We did some preliminary work and found out that both those whom this tax would affect directly - potential payers and those who would enact it have insufficient information. In addition, we had a talk with members of parliament and other representatives of Government and we got an impression that this tax had not been sufficiently worked out. It would cause not less, and may be even bitter debates. Moreover, dates of drafting and ways of its introduction invite very many questions. May be, that’s the case when bad execution could discredit a good idea? - A “Barents” group whose experts are financed by the USAID took an active part in drafting the tax on real property. I met them last week; they believe that a bill that is now considered is notable for its quite good quality. The only thing that is of concern to them and what they discussed with a tax committee of Parliament last week are the issues of publishing information on a value of real property. I have a feeling that the draft law would be amended appropriately. The experts emphasize that this law is only the framework law. After the final version of the approved law would be passed over to local administrations, they will start appropriately working on it. And, certainly, the most important task to face local self-governments is an estimation of the value of real property. The State Register is already working along this direction, there they developed a relevant formula that could hardly be called perfect, but it is quite applicable. The reason for the emerging difficulties is partly explained by backwardness of the market of real property in Kyrgyzstan. Certainly, if necessary, introduction of this law at a local level will be gradual as it depends on the rates of the assessment of the value of real property. And hardly this process would come to its end simultaneously at the level of all of the local governments. Understanding it, we have not included any revenue from introduction of the new tax in our fiscal forecasts. Similarly, we assume there would be a certain period of development of VAT in agriculture either. Nevertheless, we believe that in a mid-term perspective these two taxes will start to yield revenue and it would enable us to understand other taxes that harm the economy. I think for businessmen, for investors - both domestic and foreign - it is extremely important to know the basic tax policy directions for the nearest years as it makes the whole business climate and the nature of their operations more predictable. The problem is that if we do not adopt these laws, the factor of uncertainty will remain; any delay in adoption of these laws does not mean that a need for settlement of these problems I have listed – development problems – is no longer relevant. - Clearly, there is no time at all till the end of March. There are not the slightest doubts that the Government will anyway manage to force in adoption of this tax in such a form. Nevertheless, isn’t lack of any assessment mechanism surprising and puzzling? Or the fact that there are no data on a number of the potential payers of this tax? Figures given are completely different. This situation is almost the same, if you remember, you told at a meeting in the Bishkek Business Club that the number of the large agricultural producers is determined by the Ministry of Finance at 190, while the figures of the Ministry of Agriculture are 24 000, and those of the IMF are 550. In this connection the simple question (taking into account the fact, I believe, that very few people would deny the need for reforming the tax system) arises: is it really impossible to work out the details more carefully? I am not sure whether you know about it or not, however, here in our Government such questions are put the following way: if we do not approve this tax right now, the IMF will not extend our financing (the following option: the Paris Club will not write off our debts). And so far as such things are always introduced in our country in hot haste, very quickly, needless to say about any qualitative analysis. What is your opinion about it? - Experience of the CIS countries shows that real work on implementation of these or those laws starts when a decision is already taken. In this case the agreement on approval of these laws was achieved in October. That time introduction of these taxes, including the issue of approving the relevant laws, was considered as a prior action to continue the programs. The meeting of the IMF Executive Board was to take place in January and in fact we had already once postponed the issue of these laws when, instead of the prior action in the program, they were converted into performance criteria, three months later, in addition. There was such an alternative: the IMF could have told that it had sufficient time to wait for and organize the meeting of the IMF Executive Board, which as a mater of fact disburses the resources, when the country would be ready. You could imagine what it would result in? Taking into account all of your arguments, adoption of this law would be postponed indefinitely. I think that in both cases – the approval of VAT and the tax on property - the real issues would come to light in the process of enactment of these laws. And it seems to me as expedient to solve these issues when they would start to become apparent as they emerge, instead of doing it beforehand. The example, which you gave, connected with the number of the VAT payers - 190 or 24000 - is indicative. I believe that it is impossible to solve these problems beforehand. They will start to be solved when this law will start to operate and the necessity for accounting of the agricultural producers would emerge. Ideally, you are, certainly, right that it would have been the optimal way. I think that if we wait for the time to come, when 100 percent of the population would understand all principles of the market economy, we will have to wait forever. On the one hand, factors we speak about are undoubtedly necessary to take into account, but, on the other hand, if indefinitely to postpone a decision-making, the decisions will be never taken. Furthermore, nothing irreversible is done: if it is found out that in the approval of these laws a serious mistake is made, it could always be corrected. - Should we then interpret it the way that you, the IMF, deny our Government’s capability to do any analysis, forecast, and preliminary work? It seems to me that to solve problems as they emerge is a syndrome of a non-achiever, a syndrome of a loser. - No as I have told you, I consider this issue as a combination of
two approaches. The combination of planning and real actions. Whatever
good these plans are, planning per se does not serve economic growth.
Economic growth is promoted by actual measures, including enforcement
of the laws. I think that a contingent risk of enactment of these laws
is smaller than potential benefits that could be gained in case of their
good enforcement. - Only fools learn from their own mistakes… - No, I believe that generalization in practice is a good method for the developing countries. - Aren’t you really alert of the fact that the government, lobbying introduction of these taxes, is not capable to give more or less weighed figures? Concerning the tax on real property, for example, there are no even estimates of the potential payers of this tax, as well as, however, of those who would not be covered by this tax. There are no proved figures about expected collection of this tax. It seems to me that these are the disturbing facts. - The rates of the taxes on real property will be set up by the local governments and the republican government is not bound to know the value of property in all regions of the country. The idea is that the local governments should deal with the issue of assessing this value. - Mister Saavalainen, now I would tell you about quite an entertaining thing: municipalities of the largest cities in the republic - Bishkek and Osh, has no information on mechanisms of introducing the tax on real property, terms of the assessment of real property, etc. - The thing is that they will make the assessment of the value with the help of the formula developed by the State Register. - But the State Register has, unfortunately, not promulgated this “magic” formula thus far. - I admit it to be true, but the work is already at a quite advanced stage. - Is obligatoriness meant in application of this formula? Could it be subject to changes? - I do not know about the details, however, as far as I understand, this formula will be applied in view of specificity of the regions. Application of the formula would also allow leading us into understanding the value of property in the different regions. However, the required changes could be made in the definition of the assessment by the decisions of the local governments. - I had to have talk-ins with the people who deal with these issues and they said about the serious unresolved problems in this area. Unfortunately, it seems that nobody in the Government worries about this issue. Perhaps, it somehow wrecks you? - The point is that without adoption of this frame law the assessment work could not be effective. It could not even start. We will see the way the situation at this front would develop. As I have already said, technical assistance in this area is rendered not by IMF, but by the American Agency of Development. Three or four experts work on a continuous basis on this issue. We will se the way the things would develop. - Somehow here, in Kyrgyzstan, they try to introduce the taxes at once, suddenly and at the maximal rate. It seems to me that phased introduction could nevertheless play a positive role. For instance, with an overwhelming desire to impose the 20-percent VAT on the agricultural producers, maybe, it was necessary to begin with introduction of some stage-by-stage scale – with the 5-10 percent rate, first? At least, such gradualism would not hit the producers severely. In due course this tax could be elaborate, corrected, and in the event that it would appear to be absolutely unsuitable for our agriculture, there would not be, at least, time for it to incur great losses to ours agricultural producers. For example, in Russia since 2004 they plan to introduce this tax at the rate of 6 percent and it seems to me that it is the example of the weighed and elaborated approach. - VAT, provided it is appropriately collected, is not the tax on production. The problem with differentiation of the VAT rate is that such an approach results in the distortions in the price structure. This could distort the resource allocation pattern in the long-term and mid-term perspectives. I don't fully understand the arguments adduced by agrarians as regards the fact that they would be only too ready to agree with the sharp increase in the land tax as the land tax is paid by farmers themselves, while VAT is paid by you and I – the consumers. - In general, first they suggest improving tax collection. Here in Kyrgyzstan we have our own layer of latifundists, who have big areas of land and who are not properly registered, and as a consequence - not paying the land tax. It is a privilege here for those who have a drag. - The VAT reimbursement mechanism should become an incentive for registering as the VAT payer. - I would reiterate that the point is the desire of the government to develop observance of the effective taxes to the full extent. While today, based on the principle of tax payments, people are divided in our country into “white” and “black”: some are allowed not to pay the land tax, while others pay. Quite a reasonable question arises in this sense: providing no base for due collection of the land tax, the government demands introduction of the new one. Why are the already effective taxes not duly enforced? - Full tax collection is really a problem. The second problem is that Parliament’s attitude towards the idea of increasing the rates of the land tax is half-hearted. Though even without these reasons, our main argument is that VAT is the burden on the consumer and not on the producer. Improvement of land tax collection means the increase in the burden on the producers and would have a negative impact on the resource allocation in the long-term run. - Mister Saavalainen, I did not start the conversation about the increase in the land tax rate. The question was that its resources have not been completely developed. - It is really a problem of enforcement of law. I think that the problem of insufficiency and inefficiency of tax collection is in its general nature. In case of insufficient collection of some other tax or, in particular, of VAT, the budget does not get revenue due. A shortfall in tax revenues in the budget means that we lose an opportunity to streamline the tax system by eliminating the unproductive taxes. - Now, a somewhat populist question. Perhaps, tight schedules the IMF sets for our government brought about introduction by the government of these taxes with the utmost promptitude? May be, because of exactly this our government did not have time to elaborate these laws? - I would give you a background of introducing this tax. Kyrgyzstan was offered technical assistance for the first time in 1994. The work started on introduction of VAT in the country as a whole. However, subsequent missions, particularly, the one that that visited your country in February 2001, two years ago, discussed also the issue of introducing VAT in agriculture - VAT on direct sales by the large producers – in greater detail. Thus, there were two years to draft this law. And now we have approached a deadline. I think that the point here is not in imposing too rigid terms, but in a tradition: the work is undertaken only when the deadline is looming up. - Then, probably, it is worthwhile to talk about the capability of our government to prepare for introduction of the new taxes and the analysis of the consequences of their introduction in due time? - I think that all these things are not so simple. As you yourself told, the majority understands that these are the correct taxes to be sooner or later will introduced. I believe that resistance of those, who are prejudiced against these taxes or stand for their postponement, would weaken in due course. The question is, to what extent the society is capable to move to achieving a common goal – holding together or torn apart by internal contradictions. Really, with the insufficiently high quality of management, the events would evolve not so smoothly as it would be desirable. In this sense, the process of introduction of the new taxes also concerns the quality of management and the process of its improvement. Given the balanced highly skilled public administration, the discussion process of the similar issues in the government itself could come to its end much earlier. However, on the other hand, postponement of the relevant decisions mean, that there is not apparent direction of development in the country. I cherish great hopes for the mid-term budget forecast formulation process. May be, the first of these documents wouldn’t perfect, but the process should repeat every year. - I see the serious problem in the insufficient ability of our government to study the problem, to analyze the consequences and to agree, or to split the difference. May be, the name of the game is lack of professionalism. To my greatest amazement, I have somehow learned that it appears that not all ministers responsible for the economic block in our country know what the GDP means and how it is calculated. - It is quite clear that different levels of professionalism of their staff would characterize various ministries. Though I believe that the Ministry of Finance is in this respect different in the best sense of word. In addition, it is not only my personal view - even the deputies of Parliament would express this view. Certainly, it is very important to have the ministries that could serve as an example. One of the basic reasons for establishing the Economic Policy Council was that it would serve the business of enhancing professionalism and the educational level of the ministers. If some ministry is not familiar with the concept of GDP, the Minister of Finance could explain thereby other staff of the ministry “would be also educated”. In this respect, it is very important to adopt the law on civil service that would safeguard professional state employees from being exposed to political pressures. Thus, the ministry would have the incentive to improve the professional level of civil servants, who would enjoy protection and certain guarantees as established by the law. - It seems to me that training of the ministers in economic principles charging the public is most expensive education in the world. - It is worthwhile to think that the progress achieved by the Ministry of Finance is due to no small extent to presence in this department of a plenty of youth. Other ministries should follow this example as well. - Mister Saavalainen, when the IMF sets the tasks and conditionality for our republic, you completely rely on professionalism of the government and you should not be interested in such trifles as the ability of the government to analyze, discuss, forecast, or whether the ways of introducing and collecting taxes have been worked out at the due level, should you? - No, it is not the vase. Very intensive technical assistance to the countries with the economies in transition is one of the cornerstones in our work, as well as in the work of other international financial institutions. Discussing the program, we always consider the opportunities of the country for its implementation and in this connection we make adjustments in the program. That is why technical assistance plays such an important role in the work with the countries in transition. The brighter and concrete example is the Vienna Institute that is fully designated for improvement of education and training of experts from the countries in transition. As you are aware, we develop all of our programs in close cooperation with the government and it could be considered as technical assistance. - The questions that remained without any answer concerning VAT on agricultural produce and the tax on real property to put us very much on the alert, and it could really lead to a social cataclysm one would hate. - I remember how last year the long discussions were held on the increase in tariffs when many people told me that the tariff increase could lead to social tensions, because the increase would result in a burst of inflation. As a result, inflation was 2.3 percent for the year, while we expected inflation of 3.9 percent. One should take into account that such a huge number of the factors have a simultaneous impact that any partial analysis does not allow to come to conclusions at the macroeconomic level. - On initiative of the National Bank, an exemplary pupil of the IMF, such a paragraph as impeachment of credibility of the management of any bank in case of any infringements from its side was introduced into the law “On Banks and Banking” that has been approved on one of these days. Could it be the case when the IMF would impeach credibility of the government as an unfair borrower? - Conditionality of granting our loans is notable for its preciseness, they are quite objective, for they are formulated as figures. In case of infringements, for example, like submission of the data not adequate to the reality the question would be raised as to deliberate misreporting by the state. If there were no convincing reasons for refraining from applying the criterion of deliberate misreporting, the loan already disbursed to the country on the basis of the wrong data would be subject to immediate repayment. - Mister Saavalainen, we are greatly concerned with the insufficiently professional approach to introduction of the new taxes on the part of our government. We understand that the terms of cooperation with donors are determined in many respects by both the formal factors and the agreements, though many of those obligations, which Kyrgyzstan undertakes, including those on introduction of the new taxes, are not always fully substantiated. Unfortunately, it is difficult to do anything in this sense, because the government would more often refer to its obligations to the donors and creditors. Probably, you know, that at the recent meeting of the government with the taxpayers – the agricultural producers – quite an illustrative phrase was pronounced: “Why did you burst into angry words because of this VAT? If the IMF asks, we will introduce the tax on air”. - In my opinion you already have the “tax on air” - on pollution of an atmosphere, which is by the way levied from the producers. I doubt that the IMF is capable of offering any measures that would be unjustified from the economic point of view, for the government would not agree to these measures, not at any price, and it would be right. I think that control over the work of the government, the government’s professionalism and relations with the public is to a great extent the task of the press and Parliament. It is the long process. Though I believe that if to compare it with the situation of 10 years ago one could speak about the certain progress. - Last question: today you had the meeting with the representatives of the large agricultural producers. To what extent have you been convinced by their arguments? - The discussion was basically devoted to an explanation of what is the VAT. In this sense I want to note a misunderstanding of the mechanisms of appropriate collection of VAT from the producers. For instance, technical ways of application of the new law was the matter of this discussion. We promised to give the greatest possible volume of technical assistance along this direction; in particular, our expert who once held a post of a director of a large taxpayer department in Hungary is currently working in Kyrgyzstan. It is the country, in which the VAT is collected from all of the agricultural producers, not only the large producers. I am confident that it could help to solve these technical issues. I think that if the public understood the essence of this tax better, there would be much less disputes. - Is there anything left that you would consider as important to tell? - One of the important things I most actively emphasized during this mission is a readiness of Kyrgyzstan to carry out the reform in the system of public administration. There is a section in our Memorandum including 26 or 27 measures for improvement of quality of public administration. The result of this work substantially depends on how effectively these measures would be implemented. The government will have to concretize the reforms as indicated in a matrix. Control over a startup of the reforms and their further implementation will serve as a subject of our over-close attention. In particular, some of the suggested measures will serve the decision of those issues that you have mentioned today, namely: elaboration of the relevant decisions, information of the public, and the discussion of the political measures. The common principles, which would enable both the public and Parliament to trace the political work of the government, are already available, they are incorporated in our program. In due time all of these initiatives were somehow scattered: part of the programs was implemented under the Asian Development Bank program and another part – under the World Bank program. Of course, it is the current situation because the programs of the mentioned institutions include the measures for improvement of public administration. One more important thing: in the future the IMF expects that the government would show greater activity in drafting the documents for the programs. It would enhance accountability of the government, for the documents made by the government itself would indicate the obligations and terms and the data on fulfillment of these obligations. While our work here would be to monitor conformity of the actual results with our targets. Though we do not want to have monopoly on control. Information should be fully common property of the public. Activity of the whole society will be required to get the concrete results. - Mister Saavalainen, we agreed with you about 30 minutes of the interview, as a result, we have been talking for more than one and a half hours. Thanks you that you found time for this. - Yes, it was more than 30 minutes. Please also note that I was not clock-watching all the time. March 6, 2003, Bishkek, Hotel “Hyatt”
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