Sergey Shatalov, Deputy Chairman of the ACF Resources Manager`s Board: “Kyrgyzstan’s open economy is capable of dynamic recovery.” (Unofficial translation)

18 July 2013

Bishkek. KyrTAG — Diana Esenaliyeva. Kyrgyzstan’s open economy is capable of dynamic post-crisis recovery and coping with financial challenges and risks. Sergey Shatalov, Deputy Chairman of the Management Board of the Eurasian Development Bank (EDB) as the EurAsEC Anti-Crisis Fund (ACF) Resources Manager, shared this opinion in an interview given to KyrTAG.

— Mr. Shatalov, what is the amount of resources Kyrgyzstan can expect to get from the EurAsEC Anti-Crisis Fund in the coming few years?

The total amount of resources of the Anti-Crisis Fund (ACF) created four years ago is US $ 8.5 billion. Each member state has an individual access limit established based on the scale of its economy. For Kyrgyzstan, the access limit is US $ 256 million. By now, two projects proposed by Kyrgyzstan totalling US $ 70 million have been preliminary approved. Thus, we currently have US $ 186 million of Kyrgyzstan’s access limit available. At the same time, if one of the ACF member states implements a major integration project, which is also important for its neighbouring countries, the latter can “share” their limits with it. For instance, if Kyrgyzstan requests ACF’s financial support for modernisation and rehabilitation of Toktogul HPP, both Kazakhstan and Russia can be expected to support a decision on lending access limit redistribution as this project is capable not only of satisfying Kyrgyzstan’s demand for electricity, but of ensuring sustainability of electricity supply in the region as well.

What projects proposed by Kyrgyzstan are under consideration at EDB?

It should be noted that EDB has two “lending windows” in Kyrgyzstan. The first one is the Bank itself, with its loans accessible for both private and state-owned companies of the country. The second one is ACF, with its resources managed by EDB. Unlike the Bank, the Fund can extend not only investment credits, but also credits for the purposes of balance of payment and budget support, and will be working mainly with Kyrgyzstan’s Government providing concessional sovereign credits.

As to ACF, Kyrgyzstan’s first project of Bishkek-Osh Highway Reconstruction was preliminary approved in December 2012. The project would significantly improve the access of both agricultural and industrial producers to the market. Several international development banks are engaged in the project, with Asian Development Bank leading the syndicate. ACF’s contribution to financing this project makes US $ 50 million.

There are two stages of investment project approval at ACF. At the first one, the Council consisting of Finance Ministers of six member states approves the project conceptual framework and extends resources for preparation of a detailed feasibility study. At the second stage, the Council takes a final decision. As to the Bishkek-Osh Highway Reconstruction project, a preliminary approval has already been granted and feasibility study preparation is underway now.

On June 26 this year, the ACF Council also approved the conceptual framework of the investment project to finance supplies of agricultural machinery to Kyrgyzstan. As we know, 90 % of machinery in Kyrgyzstan is overage; the country’s needs in its replacement are huge, totalling hundreds of millions of dollars, potentially up to US $ 1 billion.

The size of the first ACF credit requested by the Ministry of Finance of Kyrgyzstan for these purposes is not large — US $ 20 million, but we hope that these efforts will continue promoting staged renewal of the agricultural vehicle park.

A third project of US $ 48 million, which is currently under consideration, is of great interest. A private company engaged in developing production of short-life fruit and vegetable products proposed that project to ACF. The company has got contracts to supply the products to the cities of South Siberia, which represent a huge market for high quality organic produce of the Kyrgyz agribusiness. The company can supply the products to the markets in Kazakhstan and other Customs Union member states, thus significantly expanding its volume of operation. But it lacks centres for product contracting and pre-transportation and pre-export treatments.

This project is being finalised at the moment, but we see it as very important from the point of view of creating new jobs, boosting the export potential of the Kyrgyz Republic, and rural poverty reduction. That is feasible as the project implementation will involve a comprehensive approach to pre-export treatment and transportation of short-life products enabling a significant reduction in producers’ losses. This business model is used worldwide. The idea is that the agricultural producer no longer needs to worry about sales of his produce, caring only about his land. A stable procurement pattern ensures predictable procurement prices and the producer’s ability to better plan his future activity.

What challenges faced by Kyrgyzstan in improving its investment appeal would you highlight?

We are all aware of the international ratings covering various dimensions of Kyrgyzstan’s investment climate. In particular, the results of such independent assessments point at difficulties in formalising customs documentation, interacting with tax authorities, getting access to electricity and other utilities. Consistent hard efforts are called for in all these areas. Kyrgyzstan’s progress in some of those has been significantly greater than in others. Its rating remains low for some of the dimensions.

But a development bank should not be operating only in a comfortable environment. There are private investors to work in a transparent regulatory environment with easy-to-understand partners and predictable risks. If private investors do not come to a country for some reasons, interstate development banks, suchlike ours, should promote improvement of the investment climate already through their operations.

What is your forecast of Kyrgyzstan’s economic development?

Two weeks ago, the Bank’s Council adopted a new strategy for EDB for the coming 5 years. The new strategy covering a longer (five-year) period would promote long-term integration developments in the region and give a longer-term anti-crisis impulse to the economies of our countries. We find that within the coming 5 years the Bank can do a lot to promote post-crisis recovery of the Kyrgyz economy. Having adopted a political decision, Kyrgyzstan has launched the process of its joining the Customs Union. This process should be based on a comprehensive approach taking into account the country’s sovereign interests. EDB is capable of providing major support in this respect. Kyrgyzstan is currently the most open economy in the region, and these are exactly open economies deeply integrated into the system of global economic ties that are most vulnerable to global crises. At the same time, such economies are typically in a better position during the post-crisis recovery as they provide more space for their citizens’ initiative.

The rates of growth in Kyrgyzstan projected by both international institutions and its Government appear realistic and achievable. A dynamic post-crisis recovery of Kyrgyzstan is possible. Moreover, it will open new prospects for both national and foreign businesses and investors.

In this respect, we are encouraged by the Government’s commitment to further simplification of the investment regime and anti-corruption efforts. Only an open economy supported with efficient state institutions ensuring a transparent and predictable investment regime can cope with financial challenges and risks inherent in volatile global markets.

Do you find that EDB has achieved its objectives of overcoming the consequences of the global economic and financial crisis in the region as set out in its strategy?

In line with its mission, EDB helps its member states in their post-crisis recovery and invests in economically efficient projects. The Bank adopted its previous 3-year strategy in 2010. That strategy has been not simply fulfilled, but overfulfilled. The Bank was moving forward with expanding its lending operations in the member states so fast that all the targets under the strategy—the credit portfolio size, the volume of mutual trade and investment between member states, and the size of additional gross domestic product generated through EDB’s investments——turned out to be overfulfilled a year before the end of the strategy period. In recent years, the annual increase in EDB’s credit portfolio has been US $ 1 billion. These achievements have created a profound basis for expanding investment in projects of systemic importance for the economy of Kyrgyzstan and its partner countries.

Sergey Shatalov
Deputy Chairman of the ACF Resources Manager`s Board