KYRGYZ REJECT HIPC, SEEK ALTERNATIVES

C O N F I D E N T I A L SECTION 01 OF 02 BISHKEK 000194 SIPDIS SIPDIS DEPT FOR SCA/CEN (GEHRENBECK) E.O. 12958: DECL: 02/21/2017 TAGS: ECON EFIN EINV PREL KG SUBJECT: KYRGYZ REJECT HIPC, SEEK ALTERNATIVES REF: A. 06 BISHKEK 1692 ¶B. 06 BISHKEK 1750 ¶C. BISHKEK 080 ¶D. BISHKEK 098 ¶E. BISHKEK 143 BISHKEK 00000194 001.2 OF 002 Classified By: Charge d'Affaires Lee Litzenberger for Reasons 1.4 (b) a nd (d) ¶1. (C) Summary: Reversing its initial decision in December, the Kyrgyz government and President Bakiyev February 20 rejected participation in the HIPC debt relief initiative. President Bakiyev subsequently tasked the government with finding alternative ways to pay off Kyrgyzstan's $2 billion foreign debt. While First Deputy Prime Minister Usenov celebrated the rejection decision, the pro-HIPC Finance Minister proposed using increased bond issuances, gold mining revenues and other measures to cover the debt obligation. Amidst Usenov's call for reduced interaction with international institutions, the local World Bank and IMF offices sought to press ahead with their programs. Usenov and to a lesser extent Finance Minister Japarov will likely steer the government's revenue-generating plans in an environment that will require close scrutiny to ensure funds are not misdirected. End summary. One for the History Books -------------- ¶2. (C) The Kyrgyz Cabinet of Ministers, with President Bakiyev in attendance, voted nearly unanimously February 20 to reject Kyrgyz entry into the Heavily Indebted Poor Countries (HIPC) Initiative. Minister of Finance Japarov cast the sole vote in favor of HIPC. The "futility" of Japarov's position, local International Monetary Fund (IMF) representative James McHugh told emboff February 21, had been predicted by Kyrgyz National Bank Chairman Alapayev following former Prime Minister Kulov's dismissal. McHugh noted to emboff that "there is no way back on HIPC." Amidst the Gloating, Finding Alternatives -------------- ¶3. (U) President Bakiyev tasked Prime Minister Isabekov's government with identifying alternatives to replace the debt relief envisioned in the HIPC program within two weeks. Bakiyev also refuted statements blaming international financial institutions for Kyrgyzstan's $2 billion external debt, and called for continued cooperation with the World Bank. Despite these comments, First Deputy Prime Minister Usenov appeared on a Kyrgyz talk show to trumpet the Cabinet's decision, and express his desire for Kyrgyzstan to disengage from cooperation with international institutions. ¶4. (SBU) The IMF's McHugh estimated Kyrgyzstan's total annual interest and principal debt payments to be nearly $100 million. In response to President Bakiyev's request to find new funding alternatives to pay Kyrgyzstan's debt, Finance Minister Japarov suggested 1) government bonds, 2) gold mining tenders, 3) cutting government expenditures and 4) a "national fund." Usenov previously cited 1) increased rental fees for the U.S. Manas base, 2) liquidating government-owned stock in Centerra, the Canadian parent company of the Kumtor gold mine operator, 3) cutting losses in the power sector and 4) loans from Kyrgyz nationals as possible alternatives (see reftel E). BISHKEK 00000194 002.2 OF 002 Happy Trails for the IMF and World Bank? -------------- ¶5. (C) Prior to the February 20 vote, the local World Bank and IMF representatives had informed emboff that their institutions planned to move ahead on other projects in the event of HIPC's demise. The IMF's McHugh confirmed plans to continue the Poverty Reduction and Growth Facility to aid Kyrgyzstan, but anticipated Kyrgyzstan would not qualify for the Multilateral Debt Relief Initiative without the HIPC commitment. Given the World Bank's increased focus on sectoral issues like mining and energy, McHugh speculated that the World Bank would encounter increased difficulties in Kyrgyzstan. Conversely, the World Bank's local chief Roger Robinson viewed the IMF to be at greater risk of Kyrgyz disengagement. Comment -------------- ¶6. (C) HIPC's demise came as no surprise. With this decision, and Bakiyev's criticism of the previous Kulov-led government's "powerlessness" in not identifying a "positive alternative" to HIPC, the pressure is on the current Isabekov-led government to find a solution. PM Isabekov will likely defer to Usenov and the increasingly marginalized Japarov to propose alternatives. Significant cuts in spending are unlikely. New bonds would only shift the debt around. If state assets, mineral resources and/or Centerra stock are sold ostensibly to meet Kyrgyzstan's foreign debt obligations, public oversight is key to ensuring that the proceeds are not diverted to private hands. Usenov's desire to limit engagement with international institutions could signal an attempt to minimize outside scrutiny of his growing economic portfolio. LITZENBERGER