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Eduardo Aninat: Keynote Address
at the 10th Anniversary of the Kyrgyz Som

President Akaev, Prime Minister Tanaev, Chairman Sarbanov, Ladies and Gentlemen;

Five years ago, the Managing Director of the IMF, Michel Camdessus, came to Bishkek to celebrate with you the Fifth Anniversary of the introduction of your national currency—the som. This event also included a successful International Conference taking stock of challenges facing the transition economies. The meeting brought together participants from all over the world to support the Kyrgyz authorities’ efforts towards a market economy and democracy.

Today, I am happy to represent the IMF at the Tenth Anniversary of the som. I am grateful for the invitation of the President and his economic team that has made possible my participation here today. My presence here is a testament to the close cooperation the Kyrgyz Republic and the IMF have had since the country’s independence. It also is recognition of the success in building macroeconomic stability to ensure that the country remains on a path of rising real incomes and better living standards.

This anniversary takes place in a stable economic environment but the road behind you has not been an easy one. Let me look back and recall some of the key milestones. Ten years ago the world economy was on the third straight year of poor growth with many developing countries suffering from declining per capita incomes. Even more so, real incomes were falling in the transition economies and the move from planned to market economies was proving increasingly complex. This called for much perseverance and international financial support. In the Kyrgyz Republic, inflation was in triple digits, multiple exchange rates persisted, and real GDP continued to fall.

Nevertheless, these were euphoric times in Bishkek. The country had recently achieved independence and had its destiny in its own hands. President Akaev was fairly new in his job, full of energy to leave the past and lead the country to democracy and economic prosperity. As the first CIS country to leave the ruble area, the Kyrgyz Republic’s own currency was the flagship of its newly gained national pride. This step gained support from the IMF under one of the first stand-by arrangements with the countries of the former Soviet Union.

Reforms started with great enthusiasm sparked by the new economic and political system. The policy climate was favorable and early results were promising—foreign reserves increased, inflation fell, and the exchange rate stabilized. Several first-generation structural reforms were implemented—prices were liberalized, import tariffs were lowered, small-scale enterprises were privatized, new legislation for the central bank was passed, and a comprehensive land reform was launched. The country was recognized to be one of the front-runners in economic reforms among the CIS countries. As a result, the government attracted significant amounts of international financial support.

During that period, the world economy also improved. After the IMF Declaration for Sustained Global Expansion in 1993, there had been notable progress in carrying out the agenda. The Uruguay Round of multilateral trade negotiations had been concluded, programs of fiscal consolidation had been announced in several key countries, interest rates had fallen, and growth was robust in many developing countries. The IMF’s ESAF resources were increased and the Systemic Transformation Facility was introduced to support reforms in transition countries. In 1994-96, world real GDP grew at an average rate of slightly over 4 percent, in line with the trend of the past 20 years or so.

In the Kyrgyz Republic, however, despite the reform efforts, output and real incomes continued to decline. The period of “hope and enthusiasm” (1992-94) was replaced by a period of “dismay and frustration” (1995–2000). Frustration came with the realization that despite the sacrifices of the population, living standards were not improving rapidly. Although much had been achieved under the ESAF-supported economic program, it went repeatedly offtrack. Often fiscal revenue fell short of targets and the central bank came under heavy pressure to monetize the resulting fiscal gaps. Reforms in the energy sector and pension system stalled, and debt arrears increased.

Some relief was felt when real GDP started to grow in 1996 and foreign investments increased to develop the country’s gold deposits. On the 5th anniversary of the som in May 1998, President Akaev set the following agenda for the period ahead:

• Ensure reliable operation of the energy sector;
• achieve recovery in industry;
• generate growth of entrepreneurship and small and medium-size enterprises;
• resolve problems in processing and marketing agricultural produce;
• strengthen market institutions and the rule of law;
• reform the social safety net; and
• ensure financial sector stability for sustainable economic development.

This was an impressive agenda but had the Kyrgyz authorities known what the world would look like after three months, they probably would have been more cautious. The Russian financial crisis took the headlines and panic and herd instinct spread through financial markets all over the world. The IMF’s World Economic Outlook in October 1998 was subtitled “Financial Turbulence and the World Economy.” It underscored the great uncertainty about the global outlook. For most countries of the CIS—including the Kyrgyz Republic—the effects of the crisis were slower growth, depreciating exchange rates, rising inflation, and weakening fiscal positions. Countries that entered the crisis with weak banking systems and unstructured enterprises found these problems rapidly aggravated. An initiative by the IMF and World Bank to increase donor assistance to the Kyrgyz Republic eased the pain—but did not eliminate it.

President Akaev’s agenda was hard hit by these turbulent events. In addition, there were delays in strengthening the policy framework to deal with them. In particular, continuing fiscal deficits led to levels of public debt and debt service payments that increasingly appeared unsustainable. The underlying problem was the weak tax system, inadequate tax collection, lack of spending discipline in important areas, and slow progress in structural reform including enterprise restructuring and amending the legal system. At the same time, the Kyrgyz banking system ran into a major crisis as dollar-denominated credits could not be repaid with depreciated som earnings and the government defaulted on its bond repayments. A slender comfort was that the Kyrgyz Republic was not alone with these problems in the region. It is telling that to bring the PRGF-supported economic program back on track in late 1998 would have required completing no less than 11 prior actions. That did not happen, and, in the end, two of our Executive Board reviews under the 1998 PRGF arrangement could not be completed. This was mainly because of the fiscal problems and weaker implementation of structural reforms. The external debt rose to 130 percent of GDP at end-2000 from 50 percent at end-1997.

Despite these setbacks, however, the growth of the Kyrgyz economy between 1996 and 2001 was the fourth highest among the CIS countries. This can largely be credited to the progress made in carrying out the land reform and utilizing the country’s gold deposits and hydropower resources. Employment increased in agriculture and services which absorbed labor from declining state-owned industries. And most importantly, with economic growth, poverty started to decline in 1999, although it still remains much too high.
These events set the stage for the beginning of the new millennium. Its first years have been characterized as the time of “realism and pragmatism.” Pragmatism came with the acceptance that much work remains to be done, and there are no easy solutions. Constraints imposed by the high external debt and the need to restructure the country’s external liabilities contributed to this realism. We in the Fund believe that the attitude of “pragmatism and realism” has strengthened the program ownership. It has also brought about low inflation, a stable exchange rate, and a resumption of growth. In recognition of these achievements, the Paris Club creditors rescheduled the Kyrgyz debt providing the necessary—although so far temporary—relief from the heavy debt burden.

Looking back to President Akaev’s agenda set out at the time of the 5th anniversary, the outcome does not look bad despite all the difficulties. First, industrial production has been on the rise since 2000. In fact, so far this year it has been above last year’s level by a hefty 15 percent. No doubt the hard-won gains in macroeconomic stabilization contributed to this performance. Second, the growth of entrepreneurship and small and medium-size enterprises has been promising. The National Statistics Agency estimates that almost half of the country’s value added is produced by new entrepreneurs. I am sure that their contribution will increase further provided they are granted a business environment free from inappropriate government interference. We welcome President Akaev’s call for this in his recent meeting with the country’s security establishment. Third, the task of reforming the social safety net is receiving increasing attention—although based on my own experience as a Minister of Finance, it will never be completed to everybody’s full satisfaction. But today we can see that pensions have increased and are paid regularly, a unified monthly benefit system for better targeting of social support has been introduced, and other social benefits have been increased faster than inflation in recent years. Finally, while the banking sector shrank with the 1998 crisis, it has begun to recover and has become stronger. The evidence of progress is that deposits have started to grow and bank lending has increased—both signs of growing confidence in the banking system.

Looking ahead, let me return to the world economic landscape. In the past few months, concerns over the conflict in Iraq weighed heavily on the global economy. Uncertainties about oil prices, investor confidence, and financial market developments were high. As the conflict is now largely over and oil prices have declined, the critical question is whether the global economy is on the way to an immediate strong recovery. Perhaps—but our latest World Economic Outlook report remains cautious. The baseline projection for global growth is slightly over 3 percent in 2003 and about 4 percent in 2004. The situation could turn out more quickly if confidence improves rapidly. In any event, the chances for such an outcome are now higher than they were just a few months ago. But it is not just the war in Iraq—a number of other risks cloud the outlook. These include the continuing unwinding of the equity price bubble, the emerging risk of a housing price bubble in some regions, financial imbalances around the globe, and structural weaknesses in Japan and Europe. In addition, continuing security concerns put sand in the wheels of globalization, vulnerabilities remain high in emerging markets, and SARS—if it continues—could have an adverse impact on growth.
But, even if near-term war-related uncertainties are subsiding, there is the possibility that perceptions of global security may not return to pre-September 11 levels. This implies weaker confidence, higher trade costs, and a slower pace of global economic integration. These security risks could have long-term effects that could eventually reduce our notion of “normal” global growth from 4 percent to, say, 3 ¾ percent. Good policies—such as broad-based structural and institutional reforms, could offset this effect but if these reforms are not coming, some markdown of the global growth trend might be appropriate.

Good policies are crucial also for the Kyrgyz Republic’s economic prospects. This year, we believe that growth is returning to its 5 percent trend, inflation seems to be under control, and the som is strong, thereby supporting macroeconomic stability and the purchasing power of the population. We believe the country can grow at a higher rate than the world economy for several years. But this will happen only if three conditions are met. First, the business and investment climate must be liberated from poor governance and corruption. As President Akaev mentioned in his recent address to the Security Council of the Kyrgyz Republic, “Combatting corruption through the law enforcement and other agencies is to fight consequences, not the reasons that have given birth to this social evil. Effective anti-corruption efforts should combine the control and accountability of public officials, independent law enforcement and judiciary, and other prerequisites.” Second, the financial sector reform must be speeded up by allowing no room for substandard banking. Those banks that do not meet prudential banking standards must simply be closed down. Third, coming back to President Akaev’s point on the energy sector, eliminating financial deficit of energy companies is essential because otherwise the basis for prudent fiscal policies is undermined. And of course—I trust that the government’s reform program will be fully implemented.
Mr. President, Mr. Prime Minister, if you can meet these conditions, I foresee that your 15th anniversary of the som will be the occasion to mark several important achievements. First, the economy could be more diversified and less prone to external shocks with sectors other than gold and energy accounting for an increasingly higher share of exports. Second, economic growth could be above the global average rate for the 6th consecutive year. Third, inflation could be below 4 percent for the 8th consecutive year. Fourth, the poverty rate could possibly have fallen to below 35 percent, from the current 50 percent. These are all key factors that could contribute to the improvement of the welfare of Kyrgyz citizens in a durable and sustainable way.

You can be assured that the IMF will provide strong support to the Kyrgyz people in these endeavors.

Thank you for your attention.

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