Transcript Consultative Group Meeting, Bishkek, November, 3 , 2004

Medium-Term Economic
Challenges
Presentation by Mr. Paulo Neuhaus
Assistant Director
IMF Middle East and Central Asia Department
A few basic premises
•
Economic development in the Kyrgyz Republic (a small open
economy joining WTO soon after independence) must be
outward-looking. Best to refrain from protectionism and
aggressive industrial policy.
•
Beyond correction of egregious market failures,
indiscriminate state intervention can distort resource
allocation and worsen income distribution. Scope for nondistortionary intervention is constrained in practice by limited
fiscal space, bottlenecks in administrative & technical capacity,
and governance problems.
•
Optimal state intervention in the Kyrgyz circumstances:
Stamp out corruption and rent-seeking by interest groups.
Provide public goods & services. Create enabling legal &
regulatory framework to spur private sector-led growth.
Post-independence experience
•
The Kyrgyz Republic has built impressive record of macroeconomic
stability. Despite political tensions, small government deficits have
underpinned low inflation over the past several years.
•
Some concerns, nevertheless, e.g., (a) high electricity sector quasi-fiscal
deficits (7½ percent of GDP in 2006); (b) heavy, though declining, external
debt burden; (c) financial viability of Social Fund threatened by rapid
pension increases & retirement age cuts; and (d) abrupt move to two-tier
government budgets could weaken overall fiscal control.
•
Momentum of structural reform has slowed this decade
(“implementation gap”), after promising start early on. Political tensions,
short-term planning horizon of policymakers and politicians, vested
interests, and poor government communication strategy probably played a
part.
•
Key argument government needs to disseminate more pointedly:
structural reform benefits a wide swath of the population, the status quo
benefits a few privileged groups.
Some guideposts for future action
• Macroeconomic stability: crucial but not sufficient to
avoid poverty trap.
• Key reason to expedite structural reform: longer-term
rapid sustained growth is a supply phenomenon, driven by
private investment & productivity gains.
• Demand stimulus: Can be useful at times to deal with
short-term cyclical downturns. But 2005-06 KR
recession was not a cyclical phenomenon. Moreover, the
economic recovery is well under way in 2007.
Where does the IMF fit into the picture?
•
Macro- and growth-critical reforms: useful taxonomy, though these
dimension often overlap.
•
Program framework: Three-year PRFG in place through mid-March
2008. Provides subsidized financing to help consolidate macro stability.
Acts as a catalyst to help mobilize financing from other donors and,
more generally, bolster investor confidence. Also supports macro-critical
reforms (e.g., financial sector, tax policy & administration, and public
financial management).
•
IMF provides free technical assistance to build capacity in above
areas.
•
Fund staff maintains close, constructive economic policy dialogue
with government, donors & other stakeholders, including on broader
economic strategy & growth-critical reforms that also have macro
dimensions.
Highlights of 4th PRGF Review Discussions (May 18, 2007)
•
IMF Executive Board positively assessed performance to-date under the
authorities’ economic program. Directors encouraged authorities to persevere
with fiscal consolidation, add momentum to reform (including fulfilling missed
structural program benchmarks and designing pension fund reform to put its
finances on a sound footing), and further enhance external debt management
framework.
•
CDS reform agenda was broadly endorsed. Overarching goals: poverty
alleviation & meeting Millennium Development Goals. Board welcomed
instruments envisage in the CDS to achieve these objectives, especially (a)
emphasis on improving delivery & targeting of social services; and (b) government
intention to intensify its dive to eradicate corruption and reform key energy &
mining sectors, so as to foster rapid economic & social development.
•
Risks in the outlook can be mitigated by further diversifying Kyrgyz
economy to reduce vulnerability to external shocks. Also important: ease
political tensions and rally broad internal support for macroeconomic discipline
and economic reform.
•
PRGF review paper will shortly be posted on Fund’s (www.imf.org) and
resident office (www.imf.kg) websites.
Thank you for your attention!
Presentation by Mr. Paulo Neuhaus
Assistant Director
IMF Middle East and Central Asia Department