Short cut to reform eludes a model state: Hugh Pope finds pessimism in Kyrgyzstan's search for economic liberalisation

HIS office a sanctuary of bright intelligence at the heart of Kyrgyzstan's former Soviet apparat, Harry Trines of the IMF is a missionary for the brave new Western financial doctrines that will decide the future of Central Asia.

Confident and persuasive, the Dutch banker has been trying to help Kyrgyzstan along the way to economic salvation since the launch last May of the first independent currency on the Muslim southern rim of the former Soviet Union.

Mr Trines says the experiment has not failed. But diplomats say it is clear that Kyrgyzstan's transition from a centralised to a free-market economy is going to take far longer and be more expensive than anybody had realised.

'Unfortunately, we are not good pupils,' said Kemalbek Nanaev, Kyrgyz National Bank director, speaking with characteristic Kyrgyz frankness about his fight against demands for money from all sides.

Western moral and financial authority in the region is at stake. All are watching Kyrgyzstan as a role model of reform for the bigger countries of Central Asia - Uzbekistan, Turkmenistan and Kazakhstan - whose communist-era leaderships support command economies from relatively rich resources.

Kyrgyz President Askar Akaev, a convinced reformer, has no regrets. 'Time showed we were right to launch our currency. We prevented an economic disaster. We are just a small country and we could have been carried away in the storm of rouble inflation.'

But once Russia cut off aid, the IMF had to step into the breach. So far, it has spent more than dollars 60m supporting the Kyrgyz currency and the US added a grant of more than dollars 100m. The bill is likely to go on mounting. Landlocked Kyrgyzstan was almost completely dependent on the Soviet system: 10 per cent of GDP was transferred as straight gifts and much of its industry has collapsed along with the Soviet Union.

One day Kyrgyzstan may produce 20 tonnes of gold a year, export farm products and perhaps some hydro-electricity. But the country is so hard-pressed now that a local prospectus lists such odd-sounding exports as frozen pancreases, nomad felt tents, antimony waste, hen's dung and the droppings of silver mice.

Some Kyrgyz have started to cross the bridge to a free market system, as elsewhere in Central Asia. They trade from sheet-metal kiosks on street corners or from blankets on the icy pavement, the economic amoeba from which the free market may one day emerge.

But this is all still marginal in what just 100 years ago was a country of nomads. Standing in the way of President Akaev's good intentions is a state-run economic bureaucracy that planned every move in this country during decades of Soviet rule from ministries whose grandiose facades dominate central Bishkek, the Kyrgyz capital.

There is still no law providing for a company to go bankrupt, no matter how much money it loses. The ideas are deep-rooted that publicly owned companies do not really have to pay tax and that debt payments are voluntary even for imports paid for with foreign currency, such as gas.

Kyrgyz collective farms have a surplus of wool and tobacco this year, now languishing in warehouses because the bureaucracy has not granted export licences. Would-be private restaurants have been closed down. As elsewhere in the former Soviet Union, anything private is automatically perceived as 'the mafia'.

'It's the old Soviet mentality that cannot see that private good can lead to public good,' one Western diplomat said. There is also a view that people are child-like and need to be guided. Kyrgyzstan's Deputy Foreign Minister, Askar Aitmatov, said the government 'would not permit the country to be ransacked'.

The question is who is doing the ransacking. The Kyrgyz National Bank has auctioned off dollars 50m of its IMF money, but little of it has been easily available to private enterprises. On the streets, few doubt that those close to the bureaucrats have benefited.

Monetary controls vital to maintaining the value of the new Kyrgyz Som are under constant attack. Ministers and top bureaucrats believe that by providing long lines of credit to otherwise useless state factories, they can avoid social unrest and jump-start the economy.

The state enterprise budget is ballooning with soft credit, mocking the way Mr Akaev has managed to cut the actual government budget to the bone.

As a result, inflation is ticking back up towards 40 per cent a month; Mr Akaev just laughs when asked what he will predict as annual inflation. The Kyrgyz Som has halved in value against the dollar since last spring and a further steep fall seems inevitable.

With the economy going back to basics, farms will be vital. Peasants are getting relatively rich on earnings from their private plots, including the increasing cultivation of cannabis and poppies. But the moment anybody tried to sell to all comers, officials slapped on export tariffs.

The 'state orders' that defined centralised Soviet economic activity may have changed their name, but a plan to reduce such compulsory production and purchases by 50 per cent in Kyrgyz state and collective farms has failed, the acting minister of agriculture, B Talgarbekov, said.

'Under the guise of the national interest, the majority of administrators are going to pursue the old, dead-end agricultural policy, which will bury the rural reforms,' Mr Talgarbekov wrote in a local newspaper. Farming managers were therefore unwilling to take logical free market steps like investigating which crops are actually in demand.

Tom Unwin, representing a European technical assistance agency in Bishkek, feared that a hyper-inflationary period similar to Weimar Germany in the 1920s threatened Kyrgyzstan, with the rest of Central Asia not far behind.

'They are the blue-eyed boys, with their political freedom, perfect obedience and so on. But they have absolutely no economic viability,' he said. 'There are no solutions to the problems faced by this country. It is a time in which demagogues may rise.'

Worst of all is that the public blames the collapse in the standard of living not on the bureaucrats but on the reforms.

Mr Talgarbekov warned: 'People are coming to hate the non-existent market . . . a nostalgia for the command economy and the Communist regime have appeared.' (Photograph omitted)