Transcript of a Joint Briefing by IMF European II Department Assistant Director, Mohammad Shadman-Valavi, and World Bank Sector Manager, Samuel Otoo, on External Debt and Fiscal Sustainability in Armenia, Georgia, Kyrgyz Republic, Moldova, and Tajikistan

March 8, 2001


Thursday, March 8, 2001
Washington, D.C.

MS. WHITE: Good morning. My name is Kathleen White. I'm with the IMF Press Office. My counterparts at the Bank are here in the room also.

This is a joint briefing of the IMF and the World Bank on the subject of external debt and fiscal sustainability in Armenia, Georgia, Kyrgyz Republic, Moldova, and Tajikistan. The World Bank and the Fund will publish at 1:00 p.m. today on the Web a jointly written staff paper on these selected CIS countries and debt sustainability.

The two principal authors from the Bank and the Fund are available to discuss it with you and to answer your questions. Let me point out that the papers and the contents of the briefing are both embargoed for transmission until 1:00 today. when we will post the papers on the Webs of both institutions.

I'm very pleased to introduce our briefers. On my left, Mr. Mohammad Shadman-Valavi is the Assistant Director of the IMF's European II Department, and on his left is Mr. Samuel Otoo of the World Bank. He is Sector Manager of Macroeconomics I, Poverty Reduction and Economic Management Group for Europe and Central Asia Region.

The focus of the briefing is on the paper and not on other Bank or Fund issues, but we're happy to help you with other outside questions, if you have them, through the Press Offices.

Could you please use your microphones so that we have an accurate transcription so we can post it on the Web.

Mr. Otoo I think has something to say to begin.

MR. OTOO: Thank you.

At the request of the Executive Boards, the staffs of the World Bank and the IMF have prepared a report on external debt and fiscal sustainability in Armenia, Georgia, the Kyrgyz Republic, Moldova, and Tajikistan. The report was discussed in an informal meeting by the World Bank Executive Board on March 1 and in a seminar by the IMF Executive Board on March 5. We would like to brief you today on the findings of this report, which represents analytical work done by the staffs of the Bank and the Fund, and not the views of the Executive Boards.

These five small countries are all heavily dependent on energy imports. Four of them are landlocked. In 1999, per capita income levels ranged from $290 in Tajikistan to $620 in Georgia, ranking them among the poorest countries in the world.

All five countries began the transition in 1991 with virtually no external debt. By 1999 their total public and publicly guaranteed debt exceeded $5.7 billion, despite a number of reform programs supported by the international community, including the IMF and the World Bank. They have received little in the way of bilateral grants and have relied increasingly on the Fund and the Bank for financial assistance. The net present value of debt service on existing debt at end-1999 amounted to an average of 162 percent of exports and 422 percent of central government revenues. This debt burden is expected to create serious balance of payments and fiscal difficulties and adversely affect poverty reduction efforts in these countries in the coming years.

A number of factors have contributed to the accumulation of debt. Sharp increases in energy prices and the loss of transfers from the central government of the USSR following the break-up of the former Soviet Union were massive shocks to these economies. Regional and internal conflicts adversely affected their economic recovery. Policy failures by the authorities as well as corruption and weak governance have also played an important role. In addition, the 1998 economic and financial crisis in Russia severely impacted trade and economic activity, and the ensuing devaluations led to sharp increases in the domestic currency cost of servicing external debt. In the early to mid-1990s, the international financial institutions and other international creditors overestimated the implementation capacity and willingness to reform of the authorities in these countries and underestimated the difficulty of transition. Finally, the terms of some of the financing received by these countries was not always appropriately concessional.

The Bank and Fund believe that policies to strengthen the growth performance of these countries can do much to alleviate the difficulty of the debt burden. The experience of the transition so far shows that, to promote economic growth and reduce poverty, it is essential to improve the business climate, confront corruption, and carry institutional reform forward, in addition to securing macroeconomic stability. The Bank and the Fund are currently supporting economic programs along these lines in the five countries.

If the external environment turns out to be less favorable than anticipated or economic growth does not respond to the reforms as projected, some of these countries could face serious difficulties in servicing their external debt over the period ahead, even if they implement comprehensive reforms. Under the circumstances, the international community should recognize their difficult position and help them find durable solutions that do not adversely impact the poor.

Although debt relief might need to be considered in some cases through established channels, such as the Paris Club, the countries first need to do as much as they can to strengthen their reform and adjustment efforts and to attract new concessional financing or grants, especially from bilateral donors. If successful, this approach should enable these countries to resolve their difficulties in the coming years.

Thank you.

MS. WHITE: Are you ready to take questions?

MR. OTOO: Yes.

QUESTION: Does that mean that the IMF and the World Bank support the participation of these countries in the HIPC Initiative?

MR. OTOO: We've not reached a stage of drawing conclusions about HIPC. It's very premature. The process needs to be one where the countries first need to explore the maximum extent of adjustment that they can achieve. They need to explore the options for enhanced concessional financing, notably from bilateral sources, and then, if necessary, go through debt rescheduling, debt relief, beginning with the Paris Club, and only if after all those avenues have been explored there is still an unsustainable debt situation on the debt front would it be relevant to think of the possibility of HIPC.

But, you know, HIPC is an open option for these countries, but there is a sequence and a process.

QUESTION: A follow-up. Have they requested such assistance? And, actually, have they requested this report? Have they requested to be considered for HIPC?

MR. SHADMAN-VALAVI: The answer is no to both; that is, we have not received a formal request for this consideration from any of these countries. The countries recognize that even HIPC treatment is not without a cost. And, in fact, there is a wide variety in their conditions, and some of them may be even reluctant to talk about some of these issues.

The paper was prepared at the request of a number of Executive Directors and the IMF Board. It was not prepared at the request of the authorities.

Thank you.

QUESTION: Is there a way you can summarize the way these countries would improve their business climates?

MR. OTOO: Well, obviously, macroeconomic stability is an important prerequisite, and my colleague may wish to speak more to that. But on the structural front, there are several key ingredients. I think that the basic message and the basic thrust of policy going forward needs to be to improve the environment for new firms, for the entry of new enterprises, and to create conditions where both foreign investors and domestic investors would have more confidence in the rules of the game, the rule of law, the respect for property rights, where sources of administrative corruption would be minimized.

There's a very heavy burden for reform of public sector governance, I think, as a key ingredient to improving the business environment.

Do you want to say something about the macro?

MR. SHADMAN-VALAVI: I just want to add a few words. I think part of the problem, I think--well, the initial conditions of these countries are not very investor-friendly, anyway. And so, therefore, they have to go the additional mile. In addition to the issues that my colleague from the Bank raised, I think one of the factors that has adversely affected investment climate is these sort of continuous interruptions or not staying the course with reforms that we have observed in many of these countries. And while this might be understandable because of the difficulties of the process, it certainly will not add to any sort of confidence in the economic environment or the continuity of the policies.

So, yes, they have to do all the things. They have to become more transparent. They have to do something about governance issues. They have to create a level playing field. They have to have appropriate macroeconomic policies so that the investor has some degree of security in entering this environment. But they also have to make progress on judicial process so that the investor has some protection under the law. And I think this is an area that sufficient progress has not been made in these countries.

There is no easy solution for any of them out, and, of course, the further they are from major economic centers, the more difficult they have to work to get there.

Thank you.

QUESTION: I just wanted to follow up on my previous questions. If they did not request the report, I assume they still were aware of the work being done. And I guess my question is: How supportive were they of this work of this report?

MR. SHADMAN-VALAVI: Let me answer, try to answer that question. Yes, of course, they're quite aware of it. As you know, we have active programs in the Fund and as well in the Bank with at least four of--in the Fund with four of these countries, and we have been under intensive discussions with Armenia for the fifth. So the issue of the paper and the issue of the external debt sustainability has been under discussion with the authorities for some time.

They have been extremely supportive in terms of providing data. They're, of course, very much interested in the issue. At the same time, I think they fully recognize that this is--there is no such thing as, you know, debt relief that is going to be materializing very quickly. There are all kinds of conditions, and as my colleague has pointed out in his opening statement, the creditors first and foremost will look for a credible record of adjustment from these countries. They have to be convinced for moral hazard issues that the countries are doing the best they can and they are doing it on a sustainable basis. And I think certainly the countries that we talked to, these five countries, they all recognize this.

Thank you.

QUESTION: One of the major creditors, obviously, for these countries is Russia. So, first off, was Russia among those who requested the report? And, second, have you discussed--have you made any separate or special case of Russian debt in those countries?

MR. SHADMAN-VALAVI: Russia's Executive Director was not one of the Directors that asked for this paper, although they have been very supportive. And, in fact, in their statements repeatedly on every occasion they have recognized these difficulties.

The issue of the Russian debt--and Russia is not the only one. Turkmenistan is another as well. Uzbekistan has certain claims in some of these countries. As you know, Russia is now a member of the Paris Club, and so in a way, they are cooperating with other members of the Paris Club on these issues, although, of course, they will have to take the lead on some of these debt issues.

The issue of Turkmenistan is a very different issue. Turkmenistan is not a member of the Paris Club and, of course, has its own economic difficulties. And they would need to be persuaded to come forth with further assistance for these countries. And I think both the authorities first and certainly the staffs of the two institutions will have to discuss these issues further with the Turkmen authorities. But on at least one or two occasions, say, for example, the case of Georgia, there have been long and intensive discussions with the Turkmen authorities. And the same, of course, is true with Uzbekistan, although that's to a smaller degree.

MR. OTOO: If I could just add something to that. We should clarify that this current report is largely or essentially diagnostic in nature. What it does is lay out the problem and describe the genesis of the problem and some simulations of how the burden might evolve under different circumstances.

We have not explicitly sought to present solutions to the problem. That's going to be the subject of ongoing work. And in the context of that work, where we seek to try and find solutions on a case-by-case, country-by-country basis, of course, there would be intense consultations with the client governments and with major creditors, including Russia.

QUESTION: Are there any of these countries which are doing better in terms of business environment, corruption, and that sort of thing, rule of law, than others? And is there a particular reason why? It may be geographical as much as some, you know, internal governance. Or is there not, perhaps?

MR. OTOO: I think it would be fair to say that the countries have embarked upon these structural reforms in a somewhat sequenced fashion, and the way I'd like to respond to your question is to say that Tajikistan sort of came late to the reform process due to the armed conflict in its territory, which only ended in 1997. So they are relatively behind the other countries in terms of reform.

The other four are all at various stages. I think what's important to emphasize is that the process of reform in these countries has not been continuous or sustained. So some of the earliest reformers have had periods where things slowed down, and so it's difficult to rank them. And I don't think it's necessarily likely to be accurate, looking at that going forward.

What one would like to see is for a more sustained effort in the period ahead and one that would be more credible as a result.

QUESTION: I was going to ask you about IDA eligibility, but I see in the introduction you say these are all IDA countries. Correct?

MR. OTOO: That is correct.

QUESTION: Okay. So when you're talking about that they should look for more concessional aid, you're really talking about bilateral. You don't want them to add--is the idea that they should be looking for grants from bilateral donors because you don't want to add to their debt?

MR. OTOO: Well, these countries have had much less grant assistance from the major bilateral donors than comparable developing countries, and we feel it would be entirely appropriate for grant assistance and other concessional assistance from bilateral sources to be increased.

Now, that would make sense only in the context of a situation where these countries were indeed implementing strong economic reform programs or were doing the sorts of things described to improve the business environment or improving public sector management, which is another key area, we feel, for more resolute action going forward.

And we're also doing something, finally, to address some of the structural weaknesses in their economies which contribute or have contributed in the past to the debt build-up, notably the problems of energy arrears.

QUESTION: On this same subject, do you feel that the report will actually enhance the chances of these countries to attract bilateral assistance, or maybe it would be sort of a warning that donors might be scared off, actually?

MR. SHADMAN-VALAVI: Well, certainly we would hope that it would--let me backtrack. The report, as I mentioned earlier, was requested by a number of Directors, and we believe that the report has brought the difficulties that these countries are likely to face in the coming years in a sort of more focused manner to the attention of many in the international community. And certainly we would hope that not only it increases the urgency of more focus on the part of the authorities, but it would also encourage the creditors to pay closer attention to developments in these countries.

Thank you.

MS. WHITE: Do we have any last question from anyone?

[No response.]

MS. WHITE: Well, thank you for coming. Thank you for everybody's attendance here. Just a reminder of the 1:00 p.m. embargo.

[Whereupon, the press briefing was adjourned.]



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