Dialogue April-June, 2010, Volume 11 No. 4
Analysis of Generation, Dynamics and Structure of the External Debt of the Kyrgyz Republic
Erkin S. Mansurkhodjaev*
Recently a problem of the external indebtedness in the Kyrgyz Republic acquired a sufficiently acute nature. It is connected with a fact that servicing of the foreign debt is one of key factors of macroeconomic stability in the country. Budget capability of the country, a state of its currency reserves, and, therefore, a stability of the national currency, a level of interest rates, an investment climate and a nature of behavior of all segments of the domestic financial market will depend on the nature of the debt problem solution.
It is not a secret that a rational use of foreign loans, credits and assistance contributes to acceleration of economic development, solution of social and economic problems. At the same time unavailability of the integral state policy on attraction and use of external financial resources leads to generation of external indebtedness which becomes a serious obstacle to economic reforms. Besides, a state external debt as one component of the key economic threats influences the financial economic safety of the country in general. The security of each country depends on the amount of indebtedness, on conditions of payment of both interests on debts and the debts themselves, and also their impacts on the country's financial capacities.
Generation of the external debt in the Kyrgyz Republic and its contemporary structure had its own peculiarities. It became available after collapse of the Soviet Union and independence. As Russia committed to take Kyrgyzstan’s share in external indebtedness of the former Soviet Union into its liabilities and service it, Kyrgyzstan by the end of 1992 practically did not have debts in the converted currency. A major part of credit agreements concluded in 1992, including agreements with European Union and Turkey, remained per se unrealized. As of November 3, 2000, a volume of foreign credits signed by the Kyrgyz Republic Government made up US$ 1,856.35 million, including credits from CIS countries – to the time of US$ 257.46 million; from other countries and international financial organizations – amounting to US$1,598.89 million. However actually Kyrgyz Republic only received an amount of US$ 1,362.21 million. Repayments of US$ 208.17 million were made between 1992—2000, including payments of principal amounts – US$ 110.09 million (on credits of Uzbekistan, Switzerland, China, Turkey, Islamic Development Bank, Germany), and interest payments – at the amount of US$ 98.08 million.
A total state external debt of the Kyrgyz Republic on May 1, 2009 stood at US$ 2,348,600 thousand.1
Foreign loans and credits were attracted by the republic during the years of reforms for implementation of the following interconnected goals of support of the national currency and balance of payments, financing of the critical import of state sector and state budget deficit, structural reforms, implementation of economic reforms in all sectors of the economy, streamlining, development and strengthening of the social and public health system, investment projects aimed at modernization of existing production facilities in the republic and creation of new ones.
In spite of total increase in the external debt during the last few years the situation is changing for the better. It is confirmed by data of the external debt relative to Gross domestic product (GDP), fig.1.
At present the credits received from international financial organizations and donor countries are provided on easy terms (maturities from 15 to 40 years, grace periods from 5 to 10 years, interest rate from 0.75 to 3%). Large creditors of Kyrgyzstan are the World Bank, International Monetary Fund, Asian Development Bank, European Bank for Reconstruction and Development, governments of Japan, Turkey and Germany. Their credits make up 93% of all assistance provided to Kyrgyzstan, including 54% of credits which were provided by the World Bank and International Monetary Fund. Credits received from the World Bank and International Monetary Fund are the cheapest (from 0.5% to 0.75% p.a. for 30-40 years with 10 years as a grace period). Such credits are aimed at structural reforms in the economy, support of the national currency and balance of payments. All large credits are received against security of the Kyrgyz Republic Government.
From July 1992 the Government of the Kyrgyz Republic attracted credits of the National Bank for covering the budget deficit. From 1998 the National Bank of the Kyrgyz Republic does not give direct credits to the Government. In compliance with the Kyrgyz Republic Law “On restructuring of the debt of the Kyrgyz Republic Government before the National Bank of the Kyrgyz Republic”, restructuring of the basic debt on credits before the National Bank of the Kyrgyz Republic and the debt which has already been restructured into the state securities to the amount of KGS 2,379.6 million, was carried out by means of issue of bonds of the state restructured loan and their transfer to the National Bank of the Kyrgyz Republic. The debt of the Kyrgyz Republic Government on accrued interests is restructured by means of issue of two simple promissory notes of the Kyrgyz Republic Government for 70% and 30% of the accrued interests, for KGS 1,445.8 million and KGS 619 million, accordingly.
After collapse of the USSR the Kyrgyz Republic found itself in a very difficult situation. Unavailability of own resources, loss of subsidies from the consolidated budget forced our Government to resort to the borrowing procedure. However, unavailability of coordinated policy on borrowing and weak management of the external debt caused by lack of the necessary experience led to the volume of the external debt of the republic increasing at a rapid rate. Thus, a dynamics given below (Fig. 2) shows a growth of the external debt of the republic from the zero level in 1992 to more than US$ 2 billion in 2006-2008.2
Fig. 2. Dynamics of the external debt
Difficult periods for the economy like reforms, depression, etc. are usually the reasons for generation of the state debt. During such periods when the national income is reduced or cannot increase, tax revenues are automatically reduced which result in budget deficits. Another source of the state debt – political interests leading to the increase of government expenses and, consequently, to the increase of the budget deficit. The more burdensome is the accrued external debt for the country, as its servicing influences the functioning of the whole national economy and its finances sphere.
The first debts in the Kyrgyz Republic actually acrued due to break in economic relations, collapse of the USSR and, with settlement of trade mutual relations with the former fraternal republics. The experience of working with international financial institutes, and bilateral donors was gained gradually. As a result Kyrgyzstan attracted investments for development at a slow pace. In confirmation of the previous diagram a dynamics indicated below shows annual volumes of the external debt application.
After adoption of a new Law of the KR “On state and non-state debt” in 2001 rates of the external debt growth have decreased. It is explained by adoption of the mid-term strategy of the external debt reduction which stipulated conduct of certain policy on borrowing. Currently the Ministry of Finance of the KR is developing a new strategy of the external debt management for the mid-term period.
Distribution of the external assistance3
No. Sector Agreements amount, % of the
US$ min total amount
management 48.3 2.1
2 Industry 117.9 5.1
3 Agriculture and irrigation 410.1 17.9
4 Social 254.7 11.1
5 Transport and telecommunications 400.5 17.4
6 Tourism 6.0 0.3
7 Support of national currency 763.3 33.2
8 Private 71.6 3.1
9 Energy 204.9 8.9
10 Environment 18.4 0.8
Total 2,295.7 100.0
This table shows a distribution of credit funds in sectorwise breakup. It is evident from the table that a significant part of funds is allocated for support of the budget and national currency.
According to an analysis around 11.7% of the total volume of external credit help were allocated for consulting services. During the period of 1992-2003 US$ 365 million were paid out for servicing of the external debt, including US$ 194 million on the principal amount and US$ 171 million for payment of interests. Non preferential credits make up only 32.7% of the external debt structure. These are credits, the interests on which make up not less than 25%. At the same time preferential borrowings from international financial institutions and donor countries make up 67.35 % of the accrued debt. Basic borrowing is a multilateral state debt, including that from IMF, which makes up 69% (Fig.4). These include credits of the Asian Development Bank, World Bank, Islamic Development Bank and other regional banks. Then a state bilateral debt follows - 30% and guarantees - 1%. A figure indicated below shows the state of the external debt as on January 1, 2009, by creditors.
Structure of external debt in breakdown by creditors as of 01.01.2009 (in US$ mln. and in %)4
On analysis of the figure indicated below we see that long-term debts prevail over short-term ones quantitatively. It should be underlined that there is no necessity to prove advantages of the low specific weight of short-term debts in the total indebtedness, in increase of potential for repayment of the external debt of the country.
Structure of the internal debt by maturities (up to 1 or more than 1 yesr)5
Basic creditors of the Kyrgyz Republic in multilateral agreements are: Asian Development Bank (ADB) - 25 credits, European Bank for Reconstruction and Development (EBRD) - 5 credits, Islamic Development Bank – 6 credits, International Development Association (IDA) – 31 credits, International Monetary Fund - 6 credits, International Fund for Agricultural Development – 2 credits, International Development Fund OPEC - 2 credits, Nordic Development Fund -1 credit. Bilateral creditors include the following countries: Germany – 8, Denmark – 3 credits, India – 2 credits, Kazakhstan – 1 credit, China – 4 credits, South Korea – 2 credits, EU Commission – 1 credit, Kuwait Fund for Arab Economic credits, France - 3 credits, Japan – 8 credits.
Structure of bilateral external debt of the Kyrgyz Republic, %6
It should be pointed out that credits were mainly used in the state sector for covering expenses of predominantly social nature and not for production purposes. And this may manifest itself on the incapability of the country to make payments on debts in the not distant future. At the same time, based on estimates of the Ministry of Finance, if we adhere to the same financial discipline to which we have adhered during the last 3-4 years and if the country refrains from populist measures, which require large costs, if the country stops indiscriminately following the same then by 2011 the external debt will cease to have a negative influence on development of the economy and the society.
However, at present the country balances as though on the “cutting edge of a knife”. If measures developed by the Government are effective and work, then Kyrgyzstan will receive a unique chance to ascend on a new height in its development. If not, then a chaos of political and economic crises will overwhelm the country, from which it will be very difficult to emerge.
1 Data of Ministry of
Finance of the KR, 2009.
2 Data of Ministry of Finance of the KR, 2009.
3 Data of Ministry of Finance of the KR, 2009.
4 Data of Ministry of Finance of the KR, 2009.
5 Data of Ministry of Finance of the KR, 2009.
6 At the same place.