Trade reform, financial sector development keys to sustained growth in Kyrgyz Republic

• Author: David O. Robinson
• Position: IMF European II Department
• Pages: 179-181

Page 179

Conferences in Bishkek on May 10 and May 12-13 celebrated the tenth anniversary of the Kyrgyz Republic's national currency and highlighted the economic progress that has been made in the countries of the Commonwealth of Independent States (CIS). But participants also had their eyes on the future. What would be needed to sustain the strong recent macroeconomic performance in the region? Boosting trade was high on the list of priorities, as was financial sector development.

Ten years ago, the Kyrgyz Republic became the first CIS country to leave the ruble zone and issue its own currency (the som). Like other CIS countries, it faced hyperinflation when prices were liberalized, but the authorities could do little to control monetary expansion because financial relations among the CIS countries lacked clarity. It was soon clear that the Kyrgyz Republic needed a national currency to facilitate its macroeconomic stabilization efforts.

But the actual decision to exit the ruble zone was a difficult political step. As President Askar Akaev noted, the Kyrgyz people had had money in circulation since ancient times, but now steps were being taken to create a national currency, perhaps for the first time in several millennia. Ten years after making that decision, Akaev stated with complete confidence "that the introduction of the som was an absolutely correct and timely step."And the data bear witness to this. Inflation has declined to 2.3 percent in 2002 from 929 percent in 1993; economic growth in 1996-2002 averaged 4.7 percent; and the exchange rate has, apart from the period of the Russian financial crisis of August 1998, been fairly stable and has appreciated relative to the U.S. dollar over the past three years.

Sustaining strong growth

What could the Krygyz Republic do to continue to grow at a higher rate than the world economy?

Clearly, strong policies and determined implementation of needed reforms would be essential. In his remarks, IMF Deputy Managing Director Eduardo Aninat highlighted three key steps for further progress:

* Liberate the business and investment climate from poor governance and corruption;

* Speed up financial sector reform by showing no tolerance for substandard banking performance.

Banks that do not meet prudential banking standards, he said,must simply be closed down; and

* Eliminate the quasifiscal deficit of energy...