Can you tell
us a little bit about history of establishment
of the National Bank and its main duties?
How the bank has contributed to the improvement
of the economy of Kyrgyzstan?
Our history is very short; we are just
11 years old. Previously it was called Kyrgyz
Office of the State Bank of the Soviet Union
and the office was very small in this exact
same building. The main duties were just
cash handling, delivering to the rural areas
and reporting back to Moscow. I would say
it was not really a central bank. The bank
really became a central a little bit later;
I can say that it is not because of the
law which past in December 1991, but because
we introduced our national currency. We
did it on May 10th, in 1993. From that time
it seems to be there was a real possibility
to call the National Bank and central bank
of the country, because we are pursuing
so-called independent monetary policy.
Basically the purpose or the main criteria
of the central bank is achievement and maintenance
of the price stability. This is the main
goal and according to the legislation we
also have so-called main task, which is
preserving and keeping the purchasing power
of national currency, through the implementation
of the appropriate monetary policy. We are
responsible at the same time for the banking
system and the payment system. All the rest
we are doing is more or less similar to
all functions of the central bank. There
is an exception we are doing calculation
of the balance of payment and preparing
forecast of balance of payment for the government
together with national statistics. It is
not a business of government; it is the
business of the two independent institutions,
the statistical committee and central bank.
Basically what we need to do is first of
all to keep low inflation and price stability.
I can give you some short examples.
I have a question regarding your answer.
Last year there were a number of banks that
were declared insolvent or rather their
operations were not as clear and adequate
as the standards that the government had
established demanded. They were declared
insolvent and they were removed from operations.
How would you describe the banking sector
of Kyrgyzstan today? Do you think that because
of this move it has been sanitized and improved?
The situation is quite different. I was
appointed as a governor of the Central Bank
in January of 1999. I faced this problem
of a frugal banking system. Some local people
said this was a clear banking crisis. I
can't call a banking crisis, because even
though it was an unstable situation there
was nothing to indicate the banking sector
was crisis just because of bankruptcy of
some banks. Some of the creditors, including
depositors and maybe some entrepreneurs
were losing a significant part of their
money, but they were not becoming bankrupt.
This was clearly not a banking crisis but
the situation was very serious. From the
year 1999 until now we have been working
on detailed analysis of the eight commercial
banks. The total number of commercial banks
at the current moment is around 21. It was
a really difficult situation because in
1999 and early 2000 I was just in fact feeling
myself like on the surgery table, not an
old body, not a young body but something
not in a good shape. Deciding weather to
close a bank after only one week of having
became the governor of the Central Bank
was not an easy task.
During 1999-2000 we closed 4 out of the
5 biggest banks. This created really big
social tension and a generated a hot discussions
in government, the media and the parliament.
We had a difficult time. What can I say
now is that we closed about 8 banks. In
contrast we were able to open the second
one, Kyrgyzstan Industrial Credit Bank that
is a joint branch between Agahan foundation
for economic development. The main shareholders
are EBRD, the German Agency for Development
and our government. This is the biggest
bank, which is going to be in charge of
managing medium and long-term investments,
so in practice we can call it a development
bank. My assessment of the current situation
is that the banking system is become healthier
than previously was. If you ask serious
businessmen, 80% of them are saying that
within last two years the local banking
service has improved. Of course they want
to have a higher level of satisfaction and
services from banks. The banking system
is shrinking and banking assets are only
4% of GDP. Banks sizes have been reduced,
but the capital is increasing substantially
and as a result the banking system is becoming
profitable again.
Three years ago the total loss of banking
system was around 360 million soms. Last
year the banking system was totally profitable
for the first year in a long time.
During the first half of this year almost
90% of the local banks forecast that the
half-year was very profitable. This is the
reason I am saying there is improvement,
but I am not praising the current state
of the banking system because our society
is not happy still.
Kyrgyz society is not happy because from
one side people want to get more credit,
which is understandable, but it is likely
to be difficult. The banking system is still
not consolidated and it is not strong enough
to help in some area maybe lift economic
rules.
Nevertheless the National Bank is basically
recipient of the rest of the banks in the
republic. You secure all deposits of the
remaining banks. Do you perform that function?
No, we don't provide that service. In this
stage of development we don't give a guarantee.
What we guarantee to society is that every
commercial bank will go through a full inspection
at least once a year. Also we prepare them
to publicize what is called regulatory responsible
policy, which is written in very simple
language. For example, if a bank is fully
capitalized and has no problem we just indicate
to the state that there will be no special
attention to this bank except for one full
inspection a year. It is publicized in mass
media, to become more transparent, because
after posing the event they start complaining.
It can be explained with some subjective
reasons because we don't want that we explain
the general rules. So we explain to all
society that we agreed on this rule with
the parliament, government and now we are
trying to secure what we publicize.
Nevertheless is it the only way you
are utilizing to bring straight public faith
within the banking system?
No, we are in the process of creating a
of public campaign, which will be called
" I love my bank". Because the
banking system is undoubtedly becoming healthier.
I talked with almost all commercial banks'
chairmen, presidents, CEO´s and we
agreed to start from the end of September.
There will be some regular open door meetings
and every commercial bank will explain themselves.
We will be sending representatives just
to make sure that people are really trying
to do their best to draw a healthy picture,
because in front of supervisors one cannot
make false advertisement. By the end of
September we will be ready to present people
a new banking reform program. There will
be a document, which will not only consist
from nice words about whatever, but we are
very practical, maybe 30-40 practical stages
in each area of banking and financial sectors.
How we are going to do a financial market,
what it is going to happen with government
securities market, stock market, insurance
company, investment etc. Everybody will
know what we are going to deal with to the
end up to the end year, what we are going
to deal with next year, and what we have
in mind to deal within 3 years. The most
important thing is to lead some kind of
reform, because people sometimes t think
the reform is how the people are just talking
but no real changes. We want to replace
this rule so that we may inform of what
exactly we are going to do, who will be
responsible and the most important thing
the timing of this action.
As you yourself mentioned in the beginning
one of the main tasks of the National Bank
is to preserve the purchasing power of the
national currency. In the last 12 months
the som has showed a lot of the strength
and it is a quiet stable currency. To what
you attribute the stability, is there a
specific policies you have adopted to maintain
such strength of your currency?
First of all, when we introduced the national
currency we chose a flexible exchange rate
regime. At that time there was a lot of
criticism about why we were choosing the
flexible exchange rate system. People criticized
it very much saying that is was a dirty
bag and with many managing faults. It is
not true, when now the situation and trade
partners are developing and people are realizing
that we made a right choice in the beginning
in 1993. If at that time president had not
supported the Central Bank it would had
been a disaster. Now it has been proven
that it was the right choice for and early
independence state. Later on Russia changed
their exchange rate regime for the same
system. It was also the direction taken
in Kazakhstan back in 1999. Later on I hope
there will be some progress in foreign exchange
rate policies of our respectful big neighbor
like Uzbekistan. There is nothing artificial.
Artificial from the point of view that we
are not sorting the international reserves
of the country, which we are managing.
Every year if you look at the dynamics we
are becoming the net purchaser on the market
and we are not supporting the national currency
artificially with just by selling dollars.
I would say that it this sound monetary
policy is contributing to it. Maybe the
most important thing is the structural reform
program. It seems as if Kyrgyzstan is one
of the countries which undertook land reform
from early on in its independence and doing
it even against some political resistance
from the political side. Not all the people
understand the issue of the land reform.
Now land reform is giving some force, for
example we are one of the first countries,
which is allowing constitutional private
ownership of land. Maybe it is difficult
to understand for the people who don't remember
and do not understand what is private ownership,
it is a big step. Now the land is a subject
for trade, with some restrictions such as
foreigners cannot buy land but they can
rent for long term up to 40 years. There
are some restrictions for the inhabitants
of big cities.
From my point of view it is understandable,
but nevertheless the price of land is a
market deal not a private deal. There was
a tender; a publication on mass media, that
stated that depending on the quality of
land the price also differs. Concerning
the structured reform, in addition to land
reform, we are choosing a liberal regime
of the economic liberalism, which is possible.
We are liberalizing prices, facilitating
foreign trade relation, and encouraging
the possibility to open small medium size
business. It is not easy to do, but now
overtime after 7-8 or 10 years it is giving
some hopes. Why The actual the share of
the private sector of GDP is much higher
than in neighboring countries of CIS. We
have great potential and I am sure that
our entrepreneurs are very competitive and
they can do it. The only problem that we
can't realize is that we are a double land
lock country and we have a so- called not
successful economic reform. We are sometimes
experiencing that we are not very successful
at handling all the trade restrictions that
our trade partners impose on Kyrgyzstan.
If neighboring countries are doing well
as Kazakhstan and Russia this year they
will have high economic growth.
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Then we can discuss
and abolish some trade restrictions from neighboring
countries. It will be very good; export will
increase if not bloom. Our entrepreneurs are
functioning under market conditions, unless,
if we had an access to Uzbek market. I am
sure we can compete very successfully. This
is good sound economic policy. Particularly
in last two years we gained some achievment
and strength in our fiscal discipline. Before
because it was really difficult situation
of some mistakes in early days of independence,
we have quiet significant external debt. But
we have a strategy to achieve sustainable
external debt, one step is already is passed
and in March of this year we get so-called
place club treatment. This year we are hoping
to continue some economic policy and we already
got commitments from creditors from the place
club. If everything will be good with economic
policy we are going to discuss in reality
this treatment, which is good anyway.
Regarding inflation, the National Bank
can be credited for maintaining inflation
at the reasonable level. It has stayed around
12 % mark, and sometime came down much lower
than that and it is expected that this year
it should not exceed 8%. What are your predictions
for remaining of the year? Do you think
the inflation will remain at this level,
grow or perhaps even decrease?
We have a tactic not to increase than 5
% which has been no problem because for
the first 7 months from end of July to end
of December it was about 2 %. This is very
good indicator. Inflation is not going to
be higher than 5 %. The second thing is
that in last 12 months inflation was around
1,5 %, which is for people who do not know
about Kyrgyzstan, slightly change. But this
is done because of sound monetary and fiscal
policy. Monetary policy for last 8 years
was quiet tight, which should be. The only
one explanation for low inflation is the
problem with trade restriction. To realize
the potential of Kyrgyz economy we need
to get an access to outside market. If we
gain access to external market, maybe there
will be slight increase in inflation but
not anymore we are going to allow more than
10 % inflation in any case. We have the
media term type that inflation in next 5
years should not exceed 5 %. Depending on
current situation we are discussing in some
years maybe 3 % or 4 % in some cases.
Inflation directly affects the credit
interest rates. How would you rate the percentage
of interest rates given on commercial loans
to small and medium enterprises in Kyrgyzstan?
Do you think it is adequate; is it properly
stimulating these enterprises so vital to
developing economy?
Of course not, these is the macro economic
stability looking for inflation and exchange
rate. All of them somehow result in market
rate so-called deposit because it is quiet
low; it is still positive in real term,
6-8 % is quiet low. As for market rate for
loans it is still high. In national currency
it is around 25 %, in foreign currency it
is around 14 %.
Looking for margin between the loans there
is one explanation. The society, the depositors
are more smart and related to the macroeconomic
stability and low inflation. I cannot say
about random credit because problem is that
banking reform is still on the way. If we
can convince and prepare transparent strict
rules with a relation to so-called inside
activity, which is inside of isolated company
if they had the bad activity previous several
years. If we can break through this problem,
it used to be the case of inflation. We
are going to use all possible market means
just to push this rate down.
But we are not going to use administration
rules. This is the worse thing we can do,
when we are implementing liberal economic
policy. The entrepreneurs' side is not happy
and we are also not happy with that.
The National Bank has also committed
itself to the attraction of foreign investment
to Kyrgyzstan. In what ways are you contributing
or insentivating foreign investors to come
and invest to the republic?
First of all we are together with the government
responsible for macroeconomic stability.
Secondly thing that we are doing is we are
giving full picture to all investors. Sometimes
we are favoring some positive things. But
we never do misleading. We have a problem
we are showing how we are going to solve
this problem. We are talking openly, explaining
where are positive things and it seems investor
should understand the opportunity that if
they have a stable situation, no problem
and quiet. But if one day the situation
will challenge then it will the best to
return for investors. Another thing we are
trying to do is, we are one of the leading
institutions in the area that is informally
responsible to make financial transparency.
In all the means like in looking for annual
report provided. From our point of view
it is realistic information. It is not an
investment guide of the country, but people
who read the annual report of the National
Bank will get the full real picture of the
economy. We are also responsible for the
international counting standards. We introduced
it in the banking system. The banking system
is operating under international accounting
system for 5 years. Together with government
we are trying to do new international standards
for counts. All financial reports should
be in accordance with international standards.
We are also helping the government in this
area. Basically that is all, all the rest
was indicated under the law whatever good
banking system we can put and even small
whatever they are good. Payment service
is good; exchange rate is flexible and no
restrictions, no administrative barriers
and no special permissions.
Everybody can open account here and abroad.
We just request to register accounts not
in purpose of regulating them but just to
give information.
Kyrgyzstan might offer lots of opportunities
for investment but there is still a lack
of knowledge about the existence of possibilities
here among international investors. What
is your bank doing to promote Kyrgyzstan's
image abroad as an investment destination?
We are not obliged to do something. We
are to deal with domestic problems. We collect
right information and clear picture for
investors. We are promoting investments
through our publications. Central Bank publishes
annual reports, monthly decrees, monthly
statistical bulletins, and weekly press
releases. All publications are in the state
language, which is Kyrgyz, and official
language, which is Russian. We are publicizing
activities and economic situation in English
as possible. Of course we are building up
to quiet good relations of some Central
banks. We plan to promote information about
Kyrgyzstan through Central Bank. Economic
financial banking was promoting that this
is the small country, which has a very good
potential and quiet good people. Kyrgyzstan
has nothing to do with Islam and all restrictions.
We are in Asia, but our mentality is more
likely European. I feel much more comfortable
talking in United Kingdom, for example not
to young generation probably talking to
some solid station country It is also sometimes
difficult even though mind is quiet different.
Our readers not just interested in the
professional person but also in the man
behind it. If you could tell us a little
bit about your personal profile and your
previous experience before you became the
chairman of the National Bank? What achievement
you feel most important in you professional
career?
It is very unusual. If three years ago
somebody told me that I would be the chairman
of the Central Bank I would not believe
him. My major in university was economics;
it was some kind of mixture between mathematics,
economics and management, very strange animal
I was. Nobody understood why I took that
road but now I have lots of advantages in
regards to other people because of this
strange background mixture. When I was starting
a degree, I studied and lived in Russia,
when the National Council was introduced
I was invited to comeback to the country
to try to work for my homeland. I agreed
and started my career in the central bank
in June 1993 just as an economist. It was
quite challenging time. I wasn't afraid
to face any problems, but rather when there
was some problem I was enjoyed trying to
find a way to solve it.
There was a big reshuffle in the 1999. In
the end of 1998 when there was a crisis
in Russia a reshuffle in government took
place. I was invited to work as a minister
of finance, I talked with them and I was
interviewed. The prime minister agreed and
I was appointed as a first deputy minister
of finance. I was ready to say good bye
to my colleagues at the central bank. In
the morning
I was presented to the staff of the ministry
of finance. I tried to organize all papers,
sitting and looking at my new office in
the ministry of finance. In the afternoon
I was called to the president's office,
saying that the president wanted to see
me. It was the first time I was to meet
the president. I am not afraid of people,
but what kind of numbers I should get with
me, what kind of the discussion will be
in short I was not really comfortable. After
my first meeting with the president that
lasted two hours in which we discussed very
important topics I was again back in the
Central Bank. We spoke on how big money
can influence badly on people.
After two hours I was in the Central Bank
but now as a chairman of it. I went from
being deputy minister of finance to chairman
of the Central Bank in just 24 hours and
was very strange. But I am happy because
I knew all the staff of the Central Bank.
They are quite young and they are supporting
me. But it is not easy. We should not look
for short term actions society but rather
we must look for longer terms. It is quite
challenging to have several young people
have possibility not only to talk what should
be done but also just explain to people
what we can do. There are lots of problems
at my job, which I am happy to solve.
Perhaps one last request, do you have
a message to send to investors and readers
about Kyrgyzstan?
Not many people come to Kyrgyzstan because
they don't know that we have very good people,
beautiful landscape and many attractions
. The significant portion of the population
consists of young people. We want to do
something for them; while at the same time
we fully respect the older generation. We
want opportunities for us, for investors
and we want to use our opportunities to
create wealth and a better life for older
generations. We have huge projects for potential
investors, like hydroelectric power station
building and we have neighbors like China
that would be willing to consume it. We
have huge opportunities in tourism like
Indian people can enjoy our four seasons.
We have many other small projects, such
as mountains, mineral waters, ecologically
clean air and food, which is much tastier
than western food in supermarkets. We are
not directly involved in business but we
are ready to assist in order to explain
where and when a potential investor has
possibilities to invest in profitable areas.
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V.I.P. INTERVIEWS
