VZCZCXRO6832
PP RUEHLN RUEHVK RUEHYG
DE RUEHDBU #1584/01 3061748
ZNR UUUUU ZZH
P 021748Z NOV 07
FM AMEMBASSY DUSHANBE
TO RUEHC/SECSTATE WASHDC PRIORITY 1273
INFO RUEHAK/AMEMBASSY ANKARA 2029
RUEHBJ/AMEMBASSY BEIJING 2005
RUEHRL/AMEMBASSY BERLIN 1906
RUEHBS/USEU BRUSSELS 1267
RUCNCIS/CIS COLLECTIVE
RHEFDIA/DIA WASHINGTON DC
RUEHDBU/AMEMBASSY DUSHANBE 3180
RHMFIUU/HQ USCENTCOM MACDILL AFB FL
RHMFISS/HQ USEUCOM VAIHINGEN GE
RUEHIL/AMEMBASSY ISLAMABAD 2284
RUEHBUL/AMEMBASSY KABUL 2308
RUEHLO/AMEMBASSY LONDON 1834
RUEHNE/AMEMBASSY NEW DELHI 2233
RUEHFR/AMEMBASSY PARIS 1624
RUEKJCS/SECDEF WASHDC
RUEHKO/AMEMBASSY TOKYO 1650
RUEHNO/USMISSION USNATO 1792
RUEHVEN/USMISSION USOSCE 2043
RUCNDT/USMISSION USUN NEW YORK NY
RUEAIIA/CIA WASHDC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHML/AMEMBASSY MANILA PRIORITY 0176
RHEHAAA/NSC WASHINGTON DC
RUCPDOC/USDOC WASHDC PRIORITY 0197

UNCLAS SECTION 01 OF 04 DUSHANBE 001584 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/CEN; 
TREASURY PASS TO JEFF BAKER 
 
E.O. 12958: N/A 
TAGS: EFIN EAGR ECON PGOV PREL EINV ETRD TI
SUBJECT: A LOOMING COTTON CRISIS IN TAJIKISTAN 
 
REF: Dushanbe 1285 
 
DUSHANBE 00001584  001.2 OF 004 
 
 
¶1. (SBU)  Summary:  International banks have begun calling in 
part of their $360 million in agricultural loans to Tajikistan, 
which lacks the ability to pay, threatening a liquidity crisis 
in the banking sector here.  Behind the scenes of this week's 
Sixth Ministerial Conference of the Central Asia Regional 
Economic Cooperation in Dushanbe, the international financial 
institutions will grapple directly with key Tajik government 
officials on how to handle the immediate crisis and how to make 
the sector profitable in the future, including a strong 
recommendation that the government enter into a new 
International Monetary Fund program.  The international 
community will try to use this opportunity to push the Tajik 
government to implement painful agricultural reforms.  End 
Summary. 
 
Looming Macroeconomic Crisis 
---------------------------------------- 
 
¶2. (U) Over the past year, external shocks from inflation and 
the global credit squeeze have hurt Tajikistan's fiscal health 
(reftel).  Increased prices of food and energy resources in 
particular have resulted in 12-18% annual inflation in 2007.  In 
addition, the government's 2008 budget is attempting to squeeze 
increased revenues from a relatively few generators of tax 
revenues.  Reviewing the Tajik state budget, World Bank's 
Annette Dixon characterized Tajikistan's fiscal policy as "going 
to hell in a handbasket." 
 
¶3. (SBU) The international development banks have begun to come 
to some agreement on what the key issues are and how to resolve 
them.  The Asian Development Bank is focused mostly on a 
perceived liquidity crisis in the financial system.  In 
response, they have prepared an $80 million budget support 
program to pay off international investors.  The World Bank is 
looking at the cotton debt's impact on the overall macroeconomy, 
and would like Tajikistan to reenlist in an International 
Monetary Fund program to help monitor and control fiscal and 
monetary policy.  Both international banks have the ear of the 
government's key decision makers, although the Asian Development 
Bank maintains a closer relationship to the government. 
 
¶4. (SBU) Both the World Bank and Asian Development Bank plan to 
use their meetings with President Rahmon over the weekend to 
convince him that the government's fundamental management of 
fiscal policy is falling apart, and to go back on an 
International Monetary Fund Poverty Reduction and Growth 
Facility program.  Under this program, which is specifically not 
a bailout, the government would receive funds, along with a 
policy framework and monitoring program that help keep the 
government on target.  The International Monetary Fund will 
reiterate to President Rahmon that Tajikistan is not eligible 
for the Policy Support Instrument, which is designed for more 
advanced low-income countries and which the IMF Board rejected 
for Tajikistan last year. 
 
The Cotton Debt - Sovereign Guarantees? 
--------------------------------------------- ------- 
 
¶5. (SBU) The Tajik government has quietly disclosed the nature 
and amount of the external loans related to cotton debt.  These 
loans total $373 million, and are largely owed to German and 
Kazakh banks, including KazCommerce Bank, ATF Bank, Deutche 
Bank, Commerce Bank of Germany, and Paul Reinhard.  Credit 
Invest is a non-banking institution under control of the Tajik 
 
DUSHANBE 00001584  002.2 OF 004 
 
 
National Bank that inherited the cotton debt and must pay off 
these loans. 
 
¶6. (SBU) The first of these loans are coming due at the end of 
November.  Due to the credit crunch in Kazakhstan, the 
international banks are predicting that Kazakh banks will make 
Tajikistan pay up on its loans rather than roll them over.  The 
World Bank's Annette Dixon told the Ambassador November 2 that 
Tajikistan has $200 - $320 million in reserves available, and 
the government has not requested a bailout from the IMF to pay 
off the debt. 
 
¶7. (SBU) According to Dixon, if the Tajik government had failed 
to disclose to the IMF that it had guaranteed loans while under 
an IMF program, it would be in breach of its agreement and 
theoretically obliged to pay back the IMF.  So far, no one in 
the international financial institutions has actually seen the 
loan agreements.  It is likely that the government provided oral 
guarantees to the international banks rather than written 
sovereign guarantees underwritten by the Minister of Finance. 
It is unclear whether Tajikistan can be legally held to these 
oral guarantees.  The Government of Tajikistan may also try to 
cut a deal with Kazakhstan by giving away other assets, 
including mining or energy rights, as a way to pay down the 
debt.  However, the international financial institutions will 
advise the Tajik government against a fire-sale of the country's 
assets. 
 
Cotton Debt Resolution 
----------------------------- 
 
¶8. (SBU) The World Bank remains wary of the Asian Development 
Bank's $80 million proposal to relieve the cotton debt.  The 
World Bank feels that investors made plenty of money over the 
years from cotton profits and should largely write off the 
remaining debt, which Annette Dixon described as "fake."  The 
World Bank also does not know how the Asian Development Bank 
will structure its budget support program.  At the request of 
the Tajik Prime Minister in May 2007, the Asian Development Bank 
hired Recovery Partners, a high-profile Canadian debt 
restructuring consulting company, to examine the Tajik debt. 
According to the ADB's Betty Wilkinson, since August, the 
government provided Recovery Partners information on the amount 
and nature of the debts that alarmed the Asian Development Bank, 
who then ensured the information was given to the International 
Monetary Fund. 
 
¶9. (SBU) The Asian Development Bank insists their program will 
be based on government performance.  According to the ADB, the 
key questions regarding the debt are: Is the debt legally 
enforceable?  And is it within farmer ability to re-pay?  The 
Asian Development Bank's consultants presented their debt 
restructuring proposal to the government and have received 
general approval on the approach.  The World Bank informed the 
Ambassador that the Asian Development Bank meanwhile is seeking 
additional funds for its debt resolution program.  ADB's Betty 
Wilkinson approached EmbOffs to query whether the United States 
could forgive the $17 million in official debt to buy into the 
ADB's cotton debt restructuring program. 
 
Cotton Reform 
------------------- 
 
¶10. (SBU) The government approved a cotton sector reform roadmap 
earlier this year, which is designed to provide farmers the 
 
DUSHANBE 00001584  003.2 OF 004 
 
 
freedom to farm what they choose, promote land reform, and 
remove government interference from the agricultural sector. 
The donor community is engaged with the Tajik government and 
with the private sector to implement reforms as laid out in the 
roadmap.  Land reform and freeing up farmers from government 
control are top priorities.  The government dragged its feet on 
both these issues this year: the draft land reform legislation 
went through several undesired revisions, and President Rahmon 
continues to demand cotton quotas from his regional governors. 
Several weeks ago, he lambasted the Khatlon Governor for not 
meeting cotton targets, calling to mind the days of central 
planning.  The combined diplomatic and donor corps sent a letter 
November 2 to the government expressing its desire that the 
reform process be taken seriously. 
 
¶11. (SBU) At a donor briefing November 1, members of the 
Principals' Group in Dushanbe asked the Asian Development Bank 
if cotton is a viable economic product for Tajikistan, after the 
ADB showed figures indicating Tajikistan's cotton yield at a 
meager 1.60 tons per hectare - a third to half less than in 
neighboring countries.  Betty Wilkinson of the Asian Development 
Bank gave three reasons why cotton is viable in Tajikistan: 
 
--  Tajikistan has plenty of water; 
--  Tajikistan has a cold winter and few pests to kill off the 
crop; 
--  The world's biggest cotton user China is right next door. 
 
¶12. (U) Comment: After farmers remove land that is less viable 
for cotton use from production, remaining areas should be able 
to produce a competitive product.  Vertical mechanisms for 
buying and selling, though flawed, are already in place.  Also, 
Tajikistan has the potential to produce long-staple cotton, a 
higher and more valuable grade of cotton for export.  China, 
though nearby, has not been a major purchaser of Tajik cotton. 
End Comment. 
 
Funding next year's crop 
---------------------------- 
 
¶13. (U) The World Bank has a $7 million loan guarantee program 
to attract new investors and break the current financing 
monopoly in order to sow next year's cotton crop.  Dixon 
estimates that this will cover half of the $80-$100 million 
necessary to plant the crop.  The USAID credit development 
authority program will supply at least an additional $5 million 
of liquidity for non-cotton agricultural loans starting next 
year.  Agricultural observers will watch next year's planting 
closely for signs of whether the harvest will be sufficient to 
produce a living income for the population, and also to provide 
cotton sticks that rural residents use to heat their homes in 
the winter. 
 
¶14. (U) All parties want to see the "investors" taken out of the 
picture of funding the cotton crop, but the Asian Development 
Bank warned donors that this process should be done slowly 
because the local banking sector is not ready to take over 
agricultural lending from investors.  The Asian Development 
Bank's program will help banks build up their technical and 
financial capacity. 
 
¶15. (U) Comment: The situation is likely to evolve rapidly over 
the next few months.  The Asian Development Bank remains the 
lead on cotton debt sector reform, and their local 
representative will remain a key partner for coordination.  The 
 
DUSHANBE 00001584  004.2 OF 004 
 
 
government's actions will be key for the development of 
Tajikistan's economy.  End Comment. 
JACOBSON