The growing public debt and declining incomes of the population just before the approaching peak payments to the major creditor, namely China, depict a harsh future for Kyrgyzstan.
The public debt has always been the subject of lively discussions in Kyrgyzstan. Partly it is because its size is always exploited by politicians, and partly because of the fear to lose the integrity of the state. The latter case is well-founded if we recall the policy of China, to which Kyrgyzstan owes 42.9 per cent of its total external debt, towards other debtors.
Since the start of the pandemic, the public debt of Kyrgyzstan has grown by a record figure – 366 million 720 thousand dollars. This is related to the coronavirus epidemic, and the republic requested assistance from the global community in this regard. The major creditor of the country to fight coronavirus was the International Monetary Fund (236.04 million dollars, or 64.4 per cent of total credits received in 2020).
Thus, the debt of Kyrgyzstan by the end of May amounted to 5 billion 115.45 million dollars. It consists of external and internal obligations of the republic. The ratio looks as follows: 82.4 per cent for external debt, and 17.6 per cent for internal debt.
The external debt of the republic amounts to 4 billion 215.12 million dollars. It comprises both bilateral and multilateral preferential and non-preferential credits.
Kyrgyzstan has 23 foreign creditors – banks, international organisations, and governments of various countries. However, the five largest of them that have 85.4 per cent of all external debt are Export-Import Bank of China, Asian Development Bank, International Development Association, International Monetary Fund, and Japan International Cooperation Agency.
According to the Ministry of Finance of the republic, the external debt comprises over 230 credits. Most of them, above 98 per cent, have been granted at preferential terms with the interest rate of 0.1-2 per cent and the term of payment for up to 40 years. All foreign loans, excluding credits raised from the European Bank for Reconstruction and Development, Asian Infrastructure Investment Bank, and Denmark, have been granted at a fixed interest rate.
The size of external debt was not formed in one day. Kyrgyzstan has taken loans after it has gained sovereignty. They date back to 1992. Back then, the republic received its first trance from the Export-Import Bank of China, its amount was 4 million 970 thousand dollars. The ice was broken and in 1993 the debt increased by 29.4 times up to 145 million 920 thousand dollars. The money was granted by International Monetary Fund and IDA.
Currently, the external debt of the republic has reached 48.76 per cent of GDP. High values have made the country’s authorities revise their approach to external loans. Moreover, this is what the republic’s international partners call for in their reports.
“The Kyrgyz Republic’s public debt remains sustainable and at moderate risk of debt distress for both external public debt and total public debt. The external and total public debt outlooks remain vulnerable to export shocks and real GDP growth shocks, respectively. The breaches of the debt thresholds under these standard shocks imply moderate risk ratings for external and total public debt,” according to the recent joint report of the World Bank and International Monetary Fund.
Despite the fact that the current capacity of Kyrgyzstan to repay the debt is estimated as strong, the public debt will continue to grow in the long run if no consolidation measures are taken. However, the leadership of the country can reduce the risks related to the increase in debt burden. One of the ways to do it is to borrow money from within the country. In fact, this is what is being done today.
“It is good to increase the share of domestic debt in total public debt. It helps to reduce currency risks, and also develops the domestic securities market,” said Bakyt Satybekov, expert in public finance and budget planning.
According to the Budget Code of Kyrgyzstan, internal loans can be taken only by means of emission and placement of government securities – treasury bills and treasury bonds. The Ministry of finance of the republic issues them on behalf of the government.
In 2022, as follows from the approved plan, 15 billion 618.6 million som (194,213 million dollars) is going to be borrowed in the domestic market by means of government securities. Moreover, since the start of the year until July 19, the Kyrgyz Republic has already borrowed 10.7 billion som (133,052 million dollars) by means of securities. It shows that the real placement of government securities can exceed the plan.
“Actual volumes and emissions of government securities will depend on the existing government security market situation, on the change in earning yield and the pattern of securities demand,” according to the Ministry of Finance.
Moreover, the value of money in the domestic market has jumped from April 2022, by 3.2 percentage points in average on all government securities, excluding 15-year bonds that cost cheaper by 3 percentage points. As a result, loans on bonds cost today 13 per cent to 15.5 per cent per annum.
However, given this situation, loans in the domestic market look less risky than external credits. It is mainly related to currency risks. The point is that the majority of foreign debts has been provided to the country in dollars.
However, the country earns in the national currency. It means that every time Kyrgyzstan has to buy dollars to settle with the creditors. Given the volatility in the currency market, this dependence adds uncertainty to the country’s capacity to pay debts. The day of March 16 this year will be remembered for the dollar to go up to 105 som. It has led to the rise in the extern debt by over 20 per cent.
“When the exchange rate of the dollar to som is growing, and when the cross rate of other currencies rises (Euro, Japanese yen, special drawing rights (SDR), etc.) to the dollar, there is a risk of shortage of budget funds allocated for the servicing of the foreign public debt,” the ministry said.
This is one of the reasons why Kyrgyzstan has decided to increase internal debt. It has risen by 1.4 times or by 22 billion 753.1 million som (282.928 million dollars) for one year. However, its share is still low in the total public debt profile and does not reach 20 per cent. But the authorities are planning to change the situation in the nearest time, and it should pass this number by 2024.
This parameter, just like other parameters, are set forth in the Public Debt Management Strategy for 2022-2024. According to it:
- New public external loans should be taken in compliance with the minimum concessionality level of 35 per cent;
- The public external debt of the Kyrgyz Republic must be serviced on time and in full;
- A debt to one creditor should not exceed 45 per cent of the total external debt during procurement of external loans.
By the way, the latter indicator has been reduced by 5 percentage points to the earlier approved one.
“The decrease in the share per one creditor is good in itself. It means that we will borrow less from the major creditors and will diversify our debt portfolio,” Satybekov said.
Moreover, total public debt servicing costs, according to the Strategy, should not exceed 20 per cent of the republican budget income. In 2022, 39 billion 528.3 million som are provided for this purpose, including 26 billion 681.5 million som for external debt, and 12 billion 846.8 million som for internal debt.
The chart shows that compared to 2020, the increase has doubled. However, peak payments, according to experts, will fall on 2025. That’s when Kyrgyzstan will have to pay its principal debt to the Export-Import Bank of China. The public is frightened with these obligations to China more than with others. The panic increased after the speech of the head of cabinet of ministers, Akylbek Zhaparov, to the parliament on June 29, when he said about the risk of failure to perform obligations. In particular, he said that in this case the TPP of Bishkek, power transmission line “Datka-Kemin” and alternative road North-South will be outsourced.
“Kyrgyzstan will manage to pay the debt to other countries,” Akylbek Zhaparov said.
In turn, the ministry of finance hastened to calm down the citizens and said that it performs all obligations on time and will continue to do so. However, expert Bakyt Satybekov still admits the risks and thinks that the statement by the head of the cabinet is not that groundless.
Main photo: belmarket.by