The primary task of the Government and the National Bank of Kyrgyzstan (NBK) is financial stabilization, which includes:
Effective management of money circulation, stabilization of monetary emission and inflation processes, and maintaining the exchange rate of the national currency at a necessary level against the ruble and the dollar.
Creating a modern banking system with balanced development of all major banking functions, such as savings and credit, commercial and investment; eliminating the deficit of banking services.
Ensuring strict control over compliance with tax legislation, the accuracy of tax calculations, and the completeness and timeliness of contributions to the budget of state taxes and other payments to ensure budget stability and funding for urgent economic and social programs.
Let’s take a closer look at the problems of each of these components of financial stabilization.
The most important issue is the stabilization of money circulation, for which it is necessary to:
a) reduce inflation to single digits and keep it there;
b) adhere to strict, yet reasonable limits on money emission.
How to combat inflation?
One of the main causes of inflation is the budget deficit. Therefore, transitioning to a balanced budget by eliminating subsidies and grants, preferential state financing of sectors, and generally reducing unproductive expenditures is the primary method of combating inflation in the civilized world.
We must cultivate such an approach to budget formation, as the attitude towards the budget is an indicator of the economic literacy of society.
The Government and the NBK must make it a rule to implement strict budgetary and credit policies. It is necessary to abandon all unplanned subsidies to enterprises and sectors that cover unproductive and non-productive costs. The legislative independence of the NBK allows it to resist any inflationary financing of the state budget deficit.
If Kyrgyzstan manages to stabilize inflation, trust in the som will increase both within the republic and abroad. A real economic assessment of enterprise performance will become possible, forecasting their profitability will improve, and economic activity will increase.
Thus, the stability of money is the cornerstone for the future dynamic development of the economy. Full-value money is the most necessary market tool, a powerful incentive for production development and more productive labor.
The Government and the NBK must take measures against the artificial maintenance of the som's exchange rate and move towards unifying the exchange rate regime by gradually lifting all restrictions on participation in currency auctions. However, even today, it is necessary to ensure that the difference between the official exchange rate of the national currency and the parallel market rate does not exceed 10%.
To strengthen trust in the som, it is very important to encourage the population to deposit their savings in banks. This will serve as an additional stabilizing factor. The growth of bank deposits, in turn, will provide anti-inflationary investment resources for the structural restructuring of the economy. But for this, banks must pay sufficiently high interest rates on citizens' deposits, which the state could compensate by conducting a liberal tax policy towards banks.
The question of the amount of money in circulation, the so-called level of monetization, is also significant. The growth of the money supply undoubtedly leads to inflation. It is necessary to achieve a balance between the money supply and commodity resources at every stage.
In Kyrgyzstan, the level of monetization is naturally low due to the underdevelopment of financial relations. Apparently, we should not rush to increase the level of monetization and do this gradually, along with the increase in commodity mass and the improvement of the functioning of the financial machine - the banking system, tax, and customs services. Otherwise, the state will lose control over operations in the trade and services sector, and the budget will lose a significant portion of tax revenues.
What are the ways to reduce the budget deficit, and what goals are realistic here?
The reality is that in the near term, we will not be able to achieve a deficit-free budget, but we can set the goal of reducing the budget deficit to 4-5% of GDP, which is considered a quite normal limit according to modern economic theory and is confirmed by the practice of many countries around the world.
If we talk about ways to reduce the budget deficit, we should start with the need to introduce a regime of strict economy in all areas, cut all state expenditures, and begin with reducing expenses on bureaucratic management structures.
The process of transitioning to a market economy has shown that the successful implementation of this task is only possible with an effectively functioning banking system.
Today, our banking system does not meet this requirement for objective and subjective reasons.
To be fair, it should be noted that the actions of the NBK in the conditions of the chaos that prevailed in the ruble zone, as well as during the introduction of the national currency, were thoughtful and competent. The NBK managed to ensure minimally stable operation of the banking system in this difficult situation, despite its technical and technological backwardness.
What tasks are the most important for the NBK today? They are: developing the banking system, regulating money circulation, controlling inflation, accelerating settlements, eliminating the deficit of banking services, and strengthening oversight of the activities of commercial banks and other credit institutions.
Commercial banks, which emerged from old banking structures, were called upon to solve the problem of lending to basic sectors of the economy (industry, agriculture, etc.) and to serve small and medium-sized businesses. So what do we observe today?
Indeed, the majority of credit resources have been issued based on the Government's recommendations for targeted purposes. The remaining part is used by commercial banks to service clients predominantly in the commercial trade and intermediary network, i.e., they are far from the interests of producers.
The second level of the banking system, which has been "usurious," must transform into a system that provides quality banking services to both large and small producer clients.
There are two ways to solve this problem.
First, commercial banks must consciously bear their share of social responsibility, promote credit policies for the development of goods and services production, and unite progressive producers around them, creating healthy financial-industrial groups.
Second, there is a pressing need to create special development banks to ensure long- and medium-term investments in production, supporting priority sectors of the economy. Such banks should be created, apparently, based on some of the largest commercial banks.
In any case, the NBK must use the strict measures provided by law to influence commercial banks for the rational allocation of credit resources. Today, there cannot be a uniform approach to banks that predominantly finance trade and intermediary operations and invest funds in production development.
Limited credit resources are scattered and often used for purposes not specified in credit agreements. Banks do not exercise proper control over the targeted spending of loans. Currency funds purchased by commercial banks at interbank auctions are spent by their clients on the supply of non-essential goods, and there are practically no contracts for the supply of new technologies and equipment. And these currency funds are obtained by the republic with great difficulty.
In short, all of the above indicates that we have not yet developed an effective credit policy aimed at stimulating production.
It is also particularly important to mention the main function of any second and subsequent level bank, which has taken a back seat in Kyrgyzstan - this is the accumulating function. One of the most important principles of banking operations should be to encourage clients to save. Banks should attract savings from the population like a magnet.
Accumulating small and tiny savings from the population through the system of postal savings banks, commercial banks, insurance companies, and other savings institutions and transforming them into production capital for investing in priority productions at preferential rates can become an important source for modernizing industry. Let’s remember the Kyrgyz proverb: "Dunuyie bir tyynan chogulat" - "Capital accumulates from one kopeck."
Taxes
Taxes, as is known, form the economic foundation of the state and perform a dual function - replenishing the budget and economic regulation.
Despite the establishment of an independent State Tax Inspectorate in the republic with a special division for tax investigations (tax police), both of these tax functions are functioning extremely poorly.
The current tax system does not contribute to overcoming the existing disproportions in the economy, does not fully meet the interests of entrepreneurship development and the satisfaction of social needs. It requires significant adjustment.
An orientation towards a strict fiscal policy in conditions of production decline has no prospects, narrows the potential revenue base, and initiates an increase in budget expenditures.
We must pursue a policy of restraining tax growth. At the same time, it is necessary to strengthen control over tax payments, introduce and strictly enforce significant fines for non-payment of taxes, incorrect or untimely transfer of tax payments to the budget. The principle of priority of payments to the budget must be strictly adhered to.
Tax policy should become the main task of the Ministry of Economy and Finance, the primary tool for managing the economy.
Currently, CIS countries have opted for a system of indirect taxes, the core of which is the value-added tax (VAT).
It is also advisable to simplify customs procedures with CIS countries. Customs policy should promote increased business activity among entrepreneurs. It would be ideal if it were possible to mutually agree to abolish export and import duties in trade with CIS countries.
For the success of financial stabilization, it is also extremely important to sharply improve statistical support and effectively use statistical data in the decision-making process. We need to learn to accurately forecast the dynamics and structure of the economy. This is the main key to success.