ExternalDebtManagement:

PolicyIssuesforSustainabilitywithReferenceto

theKyrgyzRepublic:

DrHKPradhanProfessorofFinanceandEconomicsXLRIJamshedpurIndia831001ExternalFinanceandDevelopmentExternalborrowingservesasanimportantsourceforfinancingdevelopmentEnablescountriestoachievehighereconomicgrowththroughhigherinvestmentsandimportsaswellasconsumptionsmoothingExternalcapitalcanbechanneledtowardsachievingtheMillenniumDevelopmentGoals(MDGs)CurrentpreoccupationsofDonorsareonfulfillingtheMDGsandaproactivestrategyofobtainingaidandtheireffectiveutilizationwillonlyenhancesuchinflowsExternalborrowingcanalsoactlikeadouble-edgedswordExcessivecontractionofdebtaswelltheirirrationaldeploymentscanalsobecomeobstaclestogrowthHighdebtservicingweakensthegovernment’sabilitytoimplementitsownpolicies,particularlyasaidflowsareoftenearmarkedforservicingFallingaidflowsalsohaltssocialanddevelopmentalprogress,accentuatingpovertyDebtreschedulingerodesthesanctityofcreditcontracts(discouragedonorgovernmentsandprivateinvestorsfromengaginginlonger-termcommitmentstothecountry)HighdebtlevelscreatesadverseincentivesassociatedwithfuturedistortionarytaxesInrecentyearsmanydevelopingcountrieshavebeensubjecttofrequentdebtcrisesinformoranotherThirdWorldDebtCrisisof1982,Mexico(1994),EastAsia(1997),Brazil(1998),Russia(1998),Turkey(2001)andArgentina(2001)Hadsevereconsequencesfortheirnewcapitalinflows,long-termgrowthandpovertyResolutionofthedebtoverhangaswellasanorderlyfunctioningoftheInternationalFinancialArchitectureareimportantissuesfiguringinseveralmultilateralforumstodaySeveralEpisodesofDebtCrisesRecentDebtandFinancialCrises1982DebtCrisis:oilpricehikesduring1973-74and1979-80,globalrecessionduring1981-82,risingUSinterestratesandsharpappreciationoftheUSdollarduring1980-85ledtoSovereigndefaultsbymanycountriesfromLatinAmericanandfewfromAsia1997EastAsiancrisis:massivecapitaloutflows,speculativeattackonthecurrencies(withsharpfall);lossofinternationalreserveswhilethecentralbanksdefendingthepeg;corporatedefaultandbankingcrisis,compellingthegovernmenttoextendmassivefinancialassistancewithheavyfiscalimpact,and,theircontagiouseffectsonothercountriesintheEastAsiaRecentDebtandFinancialCrises1994Mexico&2001Argentina:excessiveexternalborrowings,capitalaccountliberalizationsfacilitatingprivatesectorborrowings,lackofprudentmacroeconomicpolicies,andweekgovernanceandtransparencyinpolicyenvironmentinwhichborrowingsareconducted,allledtocapitalflightandinabilityofgovernmenttoservicedebt1998Russia:Inter-relatedeconomicandpoliticalproblemswithhighfiscaldeficitandinternaldebt,capitalflightandfallingoilpricesleadingtointernaldebtdefault,partialdefaultofexternaldebt,collapseoftheRuble,andasharpfallinthevalueoffinancialassets.CrisesaffectingadiversegroupofcountriesCriseshaveemergedinhealthyaswellasweekeconomiesOccurredduetoaninteractionsofseveraldomesticaswellasexogenousshocksAffectedcountries(Indonesia,Argentina,Brazil,Turkey)thathaveagoodtrackrecordofprivatecapitalmarketaccess,deeperdomesticfinancialmarkets,accesstonon-concessionaryfinancing,andrelativelyhighersavingsratesSituationsinseveralcountriesfromtheSouthandSouth-WestAsia,theCentralAsianrepublics,andthePacificIslandersaredifferent:verylowsavingsrateslackingaccesstoprivatecapitalmarketsunderdevelopeddomesticcapitalmarketsdependsmostlyontheconcessionalfinancingLow-incomegroupMiddle-incomegroupAngolaLiberiaArgentinaJordanBhutanMyanmarBelizeLatviaBurundiNicaraguaBrazilLebanonCentralAfricanRepublicNigeriaDominicaPanamaChadPapuaNewGuineaEcuadorPeruComorosRwandaEstoniaSerbiaandMontenegroCongo,Dem.Rep.ofS?oToméandPrincipeGabonSyrianArabRepublicCongo,Rep.ofSierraLeoneGuyanaTurkeyC?ted’IvoireSomaliaJamaicaUruguayEthiopiaSudanGuinea-BissauTajikistanIndonesiaTogoKyrgyzRepublicZambiaLaoPDRSeverelyIndebtedDevelopingCountries:2004GlobalDevelopmentFinance2004DebtResolutionFrameworkDebtreschedulingunderParisClubandLondonClubhavebeentheearliest,implyingconsolidationofdebtintonewlong-termobligations,withnewtermsandconditionsMarketbaseddebtreduction/restructuringmechanismsundertakenintheformofdebtbuybacks,debt-for-equityswaps,secondarymarketsaleofdebts,andexchangeofdebtsforcollateralizedsecurities.Bradyinitiativesinvolvedavarietyofdebtconversioninstrumentssuchasdebtbuybackatadiscount,exchangesfordiscountbondsatmarketrates,andparbondsatbelow-marketinterestrates.TheInternationalDevelopmentAssociation(IDA)createdaDebtReductionFacilityin1989tohelplow-incomecountriestobuybacktheircommercialdebt.Sinceitsinception,thefacilitycompleted22operationsfor21countries.HIPIC(HeavilyIndebtedPoorCountries)Launchedin1996bytheWorldBankandtheIMF,theHIPCinitiativewasthefirstcomprehensiveapproachtothedebtreduction,particularlyprovidingreliefofmultilateraldebtDecisionPoint,apotentiallyeligiblecountryfirstgoesthroughtraditionaldebtreliefmechanisms(suchasapplicationofNaplestermsundertheParisClubagreement),establishrecordofgoodmacroeconomicmanagementbyputtinginplacetheIMF/WorldBankstructuraladjustmentandstabilizationprogram,andpreparesapovertyreductionstrategypaper(PRSP).CompletionPoint,OncetheconditionslaiddownatthedecisionpointarereachedthecountryissaidtobereachingtheCompletionPoint,therebyqualifyingforthecommitmentoftherelief.

42countriesqualifiedaspotentiallyeligibleforHIPCdebtreliefasofSeptember2004,14hadreachedtheircompletionpointsandanother27hadreachedtheirdecisionpoints.ThedebtreductionpackagesapprovedasofSeptember2004forthe27countries,ofwhich23arefromAfrica,estimatedtohavebeenprovidedthedebtservicereliefof$32billioninNPVterms.

PrivateSectorInitiativesCollectiveActionClauses(CACs)inthebondindenturesisbeingworkedoutasthelegalbasisforthecollectiveactionbythebondholders.TheCACswouldpermitaspecifiedsuper-majorityofholdersofaparticularbondissuetoagreetoarestructuringthatwouldbebindingonallholdersofthatissue.Bypreventingholdoutsinindividualbondissues,suchclauseswouldtherebyfacilitateanyneededrestructuring.SovereignDebtRestructuringMechanism(SDRM)proposedbytheIMF,intheaftermathoftheArgentinecrisisin2001,fordebtwork-outsprovidingthenecessaryforumfordisputeresolution,somewhatsimilartothebankruptcystatutesforthecorporate.Undertheproposedsystemthenationalgovernmentwouldrequesttheconveningofaninternationalpanel,whichinturnwouldnegotiatewiththeprivatecreditorsandarriveatadebtrestructuringagreement,withtheapprovalbyamajorityofthecreditors.TheproposalhasnotbeenfavoredbytheprivatecreditorsExternalDebtoftheKyrgyzGlobalDevelopmentFinance2004(WorldBank)classifiesKyrgyzRepasseverelyindebtedlowincomecountryRapidaccumulationofexternaldebtfromadebt-freestartin1991toreach$2.0billionby2003.HadaParisClubreschedulingonMarch72002ofUS$99millioncontractedbeforeAugust31,2001(cut-off-date),theamountfallingdueduringDecember6,2001-December5,2004ExternalDebtoftheKyrgyz$millionor%19981999200020012002TotalExternalDebt15051736182717121797ETD/GNI96.1147.7142.1117.3116.4ETD/EXPORTS245.7321.7288.8288.1263.3DebtServiceRatio18.720.427.429.825.3NetResourceflows2802611174759NetTransfers2142098-2415Source:GlobalDevelopmentFinance,2004KyrgyzRephasbyfartheheaviestdebtburdenwithinthegroupofCIS-7

(Figuresarefor2002)Debt/GDPDebt/ExportsDebtServiceRatioArmenia46.81136.088.79Azerbaijan24.5048.756.51Georgia53.82157.4011.03KyrgyzRepublic116.43263.3425.32Moldova76.03117.5519.91Tajikistan99.92149.1510.25Uzbekistan58.65151.5524.32Source:GlobalDevelopmentFinance2002End-2000KyrgyzRepwasidentifiedaseligiblefortheEnhancedHIPCInitiative(afterfullytakingintoaccounttheParisClubReschedulingbasedonNaplesTerms)TheCountrypreferredtointroduceacomprehensivedebtmanagementtorestoredebtsustainability:(i)fiscaladjustment,(ii)increasingtheminimumgrantelementinallnewfinancingto45%,(iii)repayingnon-concessionaldebtaheadofschedulein2002-05,and(iv)preparingforthereschedulingfromParisClubunderNaplestermsSource:IMFandWorldBank,Povertyreduction,GrowthandDebtSustainabilityinLowIncomeCISCountries,February4,20022000Average2000-02NPVofDebtas%ofXGS

169126*NPVofDebtas%ofCGR

493475.1*HIPCdebtsustainabilitythresholdsare:NPVofdebt-to-exportratioexceeded150%;NPVofdebt-to-fiscalrevenueratioexceeded250%HIPIC(HeavilyIndebtedPoorCountries)Launchedin1996bytheWorldBankandtheIMF,theHIPCinitiativewasthefirstcomprehensiveapproachtothedebtreduction,particularlyprovidingreliefofmultilateraldebtDecisionPoint,apotentiallyeligiblecountryfirstgoesthroughtraditionaldebtreliefmechanisms(suchasapplicationofNaplestermsundertheParisClubagreement),establishedrecordofgoodmacroeconomicmanagementbyputtinginplacetheIMF/WorldBankstructuraladjustmentandstabilizationprogramme,andprepareapovertyreductionstrategypaper(PRSP).CompletionPoint,OncetheconditionslaiddownatthedecisionpointarereachedthecountryissaidtobereachingtheCompletionPoints,therebyqualifyingforthecommitmentoftherelief.

Ofthe42countriesqualifiedaspotentiallyeligibleforHIPCdebtreliefinSeptember2004,14hadreachedtheircompletionpointsandanother27hadreachedtheirdecisionpoints.ThedebtreductionpackagesapprovedasofSeptember2004forthe27countries,ofwhich23arefromAfrica,estimatedtohavebeenprovidedthedebtservicereliefof$32billioninNPVterms.WhydidtheKyrgyzRepfacedebtdifficultiessince2000?Wasthereexcessiveborrowings(overlending)?Didmultilaterallenders(WB,IMF)overestimatedtheprospectsforgrowth,exports,revenueandinvestmentcapacity,leadingtocash-flowproblemssince2000?Wasthisjustacoincidence,thatthetransitioneconomiesfacedingeneral,duringtheperiodoftheirtransition?Didthedomesticmacroeconomicreformsproceededasplanned,facilitatinganimprovedinvestmentclimateforsustainedgrowth?Or,wasthereabadadvice?ReasonsfortherapidaccumulationofdebtLetusrecognizethatthedebtproblemsareduetothewaythecurrentaccountdeficitisbeingfinanced,thenatureofcapitalflows(suchasdebtvsnon-debtcreatingflows),thewayexternalcapitalbeingusedfor(suchasfinancinginvestmentasopposedtoconsumptionornon-tradable),theenablingenvironmentsupportinganinvestmentclimateforgrowthandexports.InthecaseofKyrgyzRepublic,itwasthelessthananticipatedgrowthofGDPandexports(asforecastedbythedonors),increasingcurrentaccountdeficits,externalborrowingforthePublicInvestment(lackingdomesticsavingsandresources),Russianfinancialcrisisin1998anditsimpactonexportsandlocalcurrency,anddevaluationoftheSomanditsimpactondebtburdenExternalDebtandNationalAccountsY=EY=C+S+TE=C+I+G+X-MC+S+T=C+I+G+X–M(S-I)+(T-G)=(X-M)=βDPrivateGovtBOPDebtExternaldebtactsasabalancingactinmeetingoneoralloftheTHREEGAPS,dependingonthecountry'stradeandinvestmentregimesDebtSustainabilityistheKey….Canacountrygoonacceleratingitsgrowthratesimplybyincreasingitsborrowingfromabroad?Asthesizeoftheborrowingsincrease,asizeablepartofexportearningsandfreshborrowingsgetutilizedinmeetingdebtobligationsAsthecountrycannotgetenoughnetexternalcapital,growthgetsaffectedDebtservicingimpingesonthegovernmentbudget,affectingsocialspendingandpovertyprogramsViciouscirclebeginsSustainabledebtsetsthestageforavirtuouscycle: Debt-investment-growth/productivity-exports-repaymentsTypesofcapitalflowsdeterminestoalargeextentthesustainabilityofexternaldebt

DebtcreatingflowsMultilateralandbilateralflowsCommercialbankloans,bondsNon-debtcreatingflowsForeigndirectinvestmentsHybridFlowsPortfolioinvestmentflowsVulnerableFlowsShorttermdebtDebtwithfloatinginterestratesShorttermdepositswiththebankingsystemExternalDebtOutstandingofKyrgyzRepublicExternalDebtoftheKyrgyzRepublic1996199719981999200020012002InUSDMillionsTotalExternalDebt989114313021485151014841593Pub&PubGuaranteed6267519341134122012511394PrivateNonGuaranteed369422401387327269209

MultilateralDebt289394537657722770888BilateralDebt331327364441461446496ConcessionalDebt3684646318018809661151IDAComponent197251328342377389454InPercentageofTotalDebtPub&PubGuaranteed63667276818488PrivateNonGuaranteed37373126221813

MultilateralDebt29344144485256BilateralDebt33292830313031ConcessionalDebt37414854586572IDAComponent202225232526281998200020012002Interest(%)2.11.01.21.2Maturity(years)33.635.828.631.4Concessional(%)41.948.156.464.0Multilateral(%)35.739.545.049.4TermsofNewCommitmentstoKyrgyzRepublic:AllCreditors(Averageoftheyear)DebtSustainabilityAnalysis(DSA)Solvency:Ifitslevelofdebthasmadeitsservicing(amortizationaswellasinterestpayments)incompatiblewiththenetcurrentinflows.Liquidity:Temporaryliquidityproblemscantriggerdebtservicingdifficultintense,duetofallinexportearnings,increaseininternationalinterestrates,appreciationofthecontractedcurrencyorincreaseinpricesforimportssuchasoil.MakingDSAanalysisisimportanttodecidewhetheracountryneedsadebtreductionandmajorcorrectioninbalanceofpaymentsasinthecaseofsolvencyorreschedulingorrestructuringmaybejustsufficienttomakethelevelofdebtsustainable.DebtServiceRatioMeasuresInterestServiceRatio:Interestpaymentstoearninginexportsofgoodsandservicesindicatethetermsofexternaldebtburden.Italsoindicateshowmuchthecurrentearningsareneededinorderthatthedebtorremainscurrentinservicingdebt.Debt-ServiceRatio:Debt-servicepaymentstoexportsofgoodsandservicesindicatehowmuchofacountry’sexportrevenuewillbeusedupinservicingitsdebtInthecaseofconcessionaldebt,currentdebt-serviceratiomayunderstatetheburdenofdebtastherepaymentprofilesaretypicallyback-loadedProjectionsofdebt-serviceratiosaresubjecttoseveralassumptionsassociatedwithmakingforecastsoverlongperiods,aslongas35-40yearsincaseofconcesionalloans.DebtStocksBasedMeasuresExternalDebttoGDP:Providessomeindicationofthepotentialtoserviceexternaldebtbyswitchingresourcesfromproductionofdomesticgoodstotheproductionofexports.ExternalDebttoExports:Providesanindicationofsolvency,sinceanincreasingdebttoexportsratioindicatesthatthecountrymayhaveproblemsmeetingitsdebtobligationsinfutureExternalDebttoCentralGovernmentRevenue:Measuringthegovernment’sabilitytogeneratefiscalresources,asnotallexportearningsareinthehandsofthepublicsector.NPVofExternalDebttoGDP,ExportsorCGR:Presentvalue,asagainstthefacevalue,isexpectedtocapturetheextentofconcessionalityofoutstandingdebtHasthelimitationswhenthematurityisverylong,relatingthepresentvaluetoexistingGDPorExportsorRevenuesNPVsaresensitivetothelevelofthediscountrate,whichchangewithmarketconditionsIndicatorsofSolvencyfortheKyrgyzRepublicDebtService/ExportsInterestServiceRatioExternalDebt/GDPExternalDebt/ExportsLiquiditySpecificIndicatorsReserves/Imports:AnimportantindicatorofreserveadequacyReserves/ShortTermDebt:Canbeusedtoassessthevulnerabilitytoliquiditycrisisintheeventofcapitalflightonaccountofshorttermdebt.InterestPayments/Reserves:Measurestheinterestpaymentsofalldebtwhichcouldbecoveredbyusablereserves.ShortTermDebt/TotalDebt:Measurestherelativeimportanceofshorttermdebt(alldebtwithresidualmaturityoflessthanayear)intotalexternalfinancing,measurestheextentofvulnerabilityintheeventofliquiditycrisisIndicatorsofliquidityfortheKyrgyzRepublicReserves/Imports(months)ShorttermDebt/TotalDebtReserves/ShortTermDebtInterestPayments/ReservesForeignExchangeReservesHoldingofadequatelevelofreservesisanimportantelementofdebtmanagementpotentialdebtservicingessentialimportsattimesofshortagesforeignexchangemarketinterventionsothershorttermliquiditymanagementGoodpolicyofmaintainingreservesonthefaceofdebtservicedifficultiesMaintainingreservesalsoservesasagoodsignofcredibilityRatingagenciesconsiderthereserveholdingsasanimportantindicatorofforthecountry’sliquidityInternationalReservesminusgoldSolvencyvsLiquidityThereisofcoursenothumbrulethatwoulddeterminethethresholdsforsolvencyandliquidityEveryinsolventborrowerfacesliquidityproblemsNeedtomeasureandassesssimultaneouslyseveralindicatorsinaforwardlookingframeworkOtherindicatorsmayincludeexternaldebtovertotaldebt(domesticplusexternal),corporatedebt/totaldebt,shareofconcessionaldebt,averagetermssuchasinterestandmaturitySustainabilityanalysishastobecountryspecific,consideringthedebthistory,sovereignratings,thedevelopmentofcapitalmarkets.Wellfunctioningcapitalmarketwouldenablegovernmentstoborrowdomesticallythusavoidingexternaldebt.Country-specificexternaldebt-burdenthresholdsalsodependonthequalityofthecountry’spoliciesandinstitutionsPolicyDependentDebtThreshold

AssessmentofInstitutional StrengthandQualityofPolices

Poor Medium StrongNPVofdebt/GDP 30 45 60NPVofdebt/exports 100 200 300NPVofdebt/revenue 150 200 250Debtservice/exports 15 25 35Debtservice/revenue 20 30 40Source:DebtSustainabilityinLow-IncomeCountries—ProposalforanOperationalFrameworkandPolicyImplications,theIMFandtheWorldBank,February3,2004SustainabilityconditionsDebtcanbeservicedforlongperiods,aslongascreditorsmakepositivenettransfersthroughconcessionalloansandgrants,andthereforedependstoalargeextentontheonthewillingnessofofficialcreditorstomakepositivenettransfersDebtsustainabilityisthereforeadifficultconceptincountriespredominantlydependingontheofficial(bilateralandmultilateral,concessional)flowsMoreover,countriesheavilydependingonofficialflowsignoremarketsignals,suchcreditasseesment,marginsonprivatecredits,secondarymarketspreads,therebymaymakecompromisewithsustainabilityconditionsSustainabilityconditionsrequirethatcreditorsanddebtorshavefullinformation,andifthereisasymmetricinformation,unrealisticassessmentwouldbetheoutcomeSustainabilityconditionsDebtdynamicsisanoutcomebetweendebtsustainabilityandmacro-economicpolicies.Ukrainerefinanced(orrescheduled)$1.8billionEurobondsin2000,whenitsdebtratioswereconsideredmoderateHungary,withaveryhighratioofdebt,remainedsolvent,didnotresorttorescheduling,andcouldmanagewithpursuingstrongereconomicgrowth,taxrevenuesandexportsSustainabilityindicatorsserveastheearlywarningsignals,andsolutionswouldrequireundertakingsuitablemacroeconomicpoliciescorrectingimbalances.DSAQuadrants

FactorsaffectingdebtstressDomesticrealGDPExportsEnergyconsumptionNaturaldisastersForeignRealExportgrowthTermsoftradecurrentaccountdeficitRealExchangerateOilpriceshocksForeignFinancialInterestratesExchangeratesCurrencycrisisCommoditypricesCapitalflowsDomesticFinancialBudgetdeficitSavings-Investmentsrevenuegeneration,spending,taxpolicyMoneysupply,InflationDSArequires..MakinganalysisofeconomicandfinancialshockstowhichthecountryispotentiallyexposedExaminingtheinterrelationsbetweenvariablesintheeconomysuchasexchangeratedepreciation/appreciationsondebtservicingcapacity,inflation,macroeconomicandrealshocksPolicyIssuesin

ExternalDebtManagementMacroeconomicpoliciesMonitoringdomesticdebtMonitoringcontingentliabilitiesDebtmarketdevelopmentRiskmanagementInstitutionalframeworkMacroeconomicstabilityisthekeytoexternaldebtmanagement

Maintainmacroeconomicstabilityonasustainablebasiswithdueattentiontomonetary,fiscalandexchangeratepolicyconsistency. Inparticular,paycarefulattentiontothegrowingfiscaldeficitsofthepublicsector ExternalsectormustbesustainableKyrgyzRep:MacroeconomicTrendsSincetheDebtProblems1996199719992000200120022003GDPgrowthrateGDPPercapita($)7.1392.29.9375.73.7257.05.0279.15.3308.4-0.5321.66.7379Savings/GDP(%)Investments/GDP(%)-0.625.214.321.71.218.014.420.016.818.016.017.6-18.0Inflation(%)FiscalDeficit/GDP(%)Domesticdebt/GDP(%)32.0-9.5-23.4-9.2-35.9-11.99.418.7-9.99.86.9-5.09.152.1-5.410.53.0-5.08.6CAD/GDP(%)Som/US$(endperiod)InternationalRes($mn)-23.212.8122.7-7.817.3193.9-14.439.0248.8-5.647.7261.1-1.348.4285.5-2.046.9297.7-4.244.1364.6ExternalDebt/GDP(%)Debtserviceratio(%)63.613.078.711.4147.720.4142.127.4117.329.8116.425.3--SocialIndicatorsRealwages(%growth)PovertyIncidenceHumanDevIndex(Rank)-83(1993)-13.155.3-11.052.0-6.347.511.244.410213.940.2-Source:ADB,Economist,andNationalSourcesMonitorthelevelofdomesticdebt

Domesticdebthasbeenlimited(8.6%ofGDPin2003)duetothesmallsizeofthefinancialsector,lowsavingsrate,andlimitedgrowthofpensionandinsurancefunds DomesticdebtissueswereconsideredmerelyaspartofthebudgetaryexercisesETD/GDP&DD/GDPDebtmanagementshouldincludeexternalaswellasdomesticdebtGrowthofpublicdebthasimportantimplicationsontheeconomy.Servicingthedomesticdebtisbasicallyafiscalsustainabilityissue,involvesadditionaldomesticresourcemobilization(taxation,spendingcuts,newdomesticborrowings)Servicingexternaldebtinvolvesthesame,whenlimitedforeignexchangeearnings,implyingthatraisinglocalcurrency,convertingtoforeignexchangeandservicingexternaldebtContingentLiabilitiesExplicitorimplicitgovernmentguaranteesaffectthefutureincreasesingovernmentdebtobligationsExplicitcontingentliabilitiesarisefromanycontractualarrangementprotectingtheriskofanotherparty,suchasalineofcredit,exchangerateandinterestrateriskguarantees,sovereignguaranteeofcorporateexternalborrowings,andcommercialguaranteesofprojectsImplicitcontingentliabilitiescanariseduecontractualorlegalobligationconditionaluponcertaineventssuchasensuringsystemicsolvencyofthebankingsystem,depositinsurance,etc.Implicitcontingentliabilitiesaremoredifficulttoassessthanexplicitones,duetothepotentialmoralhazardissuesContingentliabilitiesaredifficulttomeasureinthepresenceofpoorgovernanceandnon-transparentregimesNeedtoseparatelymonitorthelevelofprivatesectordebtPrivatesectordebtincludecorporatedebt(domesticandinternational)aswellasliabilitiesofthefinancialintermediaries(banks,DFIs,NBFCs)SomeofthesedebtmayhavegovernmentguaranteesClaimsontheprivatesectorasawholeaccountedforabout4.8percentofGDPin2003NeedtograduallyalsoconsiderthedebtpositionsoftheprivatesectorTrendsinprivatesectordebtneedstobemonitoredhavethepotentialofcreatingmoralhazardordisruptingthefunctioningoffinancialmarketconditionsintheeventofmacroeconomiccrisisExcessivebuildupoftheprivatesectordebtcreatedseverenon-performingloan(NPL)problemsinpostcrisisAsia,needingbankfailuresandbailouts,withtheimplicationsofhugefiscalcostsExchangeRatePolicyPolicyofmanagedfloatwithlimitedinterventionExchangeratehasappreciatedinnominaltermsSofar,previouslyundervaluationhasbeencorrectingNeedtohaverealexchangeratetargetsAppreciation,thoughreducesdebtservicingcosts,butaffectsexportsShouldbalancebetweentwogoals:avoidfallingpricecompetitivenessofexportsandpreventariseinthecostofexternaldebtservicingOfficialExchangeRate(Soms/USD)19992000200120022003PeriodAverage45.4348.3047.7246.0944.19EndofthePeriod39.0247.7248.4446.9243.69CreatingDomesticBondMarketsGradualintroductionoflocalcurrencydebtinstrumentsbydeepeningdomesticcapitalmarketsCreatingdomesticmarketsforlocalcurrencybondissuanceisdifficultdueto:Smallsizeofthefinancialsystem(withbankassets7percentofGDPandnon-bankassetsanother2.5percentofGDP)Capitalmarkets,insurance,andpensionsectorsareallequallysmallNecessarypreconditionsfordomesticbondmarketinitiationCreatebenchmarkbondsEstablishmentofyieldcurveEstablishrealisticinterestratesStrengtheninginstitutionsandintermediariesCreateinvestorconfidenceStableinflation,sustainablefiscalparametersImprovetradingandsettlementinfrastructureImprovefinancialinformationfortheprivatesectorborrowersAdequateinvestorprotectionRationalizationofregulatoryframework

SelectedinterestratesinKyrgyzRep19992000200120022003InterestRateTbillrate47.232.319.110.27.2Depositrate35.618.412.55.95.0Lendingrate60.951.937.324.821.7Lombardrate51.632.810.76.84.0InflationRate35.918.76.92.13.0Source:IMF,IFSCurrencyRi