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

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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).


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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