VZCZCXRO4312
RR RUEHLN RUEHSK RUEHVK RUEHYG
DE RUEHDBU #1502/01 3470306
ZNR UUUUU ZZH
R 120306Z DEC 08
FM AMEMBASSY DUSHANBE
TO RUEHC/SECSTATE WASHDC 1244
INFO RUCNCIS/CIS COLLECTIVE
RUEHIL/AMEMBASSY ISLAMABAD 0256
RUEHBUL/AMEMBASSY KABUL 0349
RUEHNE/AMEMBASSY NEW DELHI 0197
RUEHBJ/AMEMBASSY BEIJING 0230
RUEAIIA/CIA WASHDC 0245
RUCPDOC/DEPARTMENT OF COMMERCE WASHINGTON DC 0089
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHNS/NSC WASHINGTON DC

UNCLAS SECTION 01 OF 02 DUSHANBE 001502 
 
SENSITIVE 
SIPDIS 
 
DEPARTMENT FOR SCA/CEN 
 
E.O. 12958: N/A 
TAGS: EFIN ECON ETRD PGOV TI
SUBJECT: IMF Says Tajik Economic Outlook Rosy; Others Doubtful 
 
Corrected copy as to comment section 
 
Ref A: 07 Dushanbe 1753 
Ref B: 08 Dushanbe 1348 
Ref C: 08 Dushanbe 1470 
 
¶1. (SBU) Summary: Despite the world financial crisis, the 
International Monetary Fund (IMF) has made a number of positive 
projections about Tajikistan's economy over the coming year, 
including GDP growth of 5-6%, a drop in inflation, and continued 
record high remittance levels.  The IMF predicts the effects of the 
crisis will be moderated by lower food and fuel prices.  The 
government of Tajikistan continues to argue that the isolation of 
its banking sector insulates it from the crisis.  Dushanbe-based 
representatives of the World Bank and other institutions -- 
including the IMF's own representative here -- are not so sanguine, 
however, and point out a number of ways that the crisis may affect 
Tajikistan: through lower cotton and aluminum prices, reduced 
liquidity, and lower remittances.  The remittance issue will be 
reported in more detail septel.  End summary. 
 
¶2. (U) The IMF recently completed an assessment of the macroeconomic 
outlook in Tajikistan as part of its Financial Sector Assessment 
Project (FSAP), a multi-country joint program with the World Bank to 
identify the strengths and vulnerabilities of a country's financial 
system, ascertain risks and assistance needs, and develop policy 
responses.  The first 10-day review, led by the IMF's new mission 
chief for Tajikistan, Axel Schimmelpfennig, was completed in 
November; a final assessment based on end-of-year data will be 
conducted at the end of December.  The reviews come in the wake of 
the National Bank of Tajikistan's acknowledgment earlier this year 
that it had consistently and purposefully misreported its balances 
to the IMF (Ref A).  While the review is not a direct consequence of 
the scandal, IMF officials acknowledge that positive marks on the 
review will help ease the way for a resumption of IMF financial 
assistance to Tajikistan through its Poverty Reduction and Growth 
Facility (PRGF).  The status of audits of key Tajik institutions 
connected with the misreporting scandal will be reported septel. 
 
Despite Financial Crisis, IMF Says Outlook Rosy... 
--------------------------------------------- ----- 
 
¶3. (U) During a briefing for donors in November, Schimmelpfennig 
provided a generally positive appraisal of Tajikistan's economic 
outlook, saying the IMF recently revised its growth estimate for 
2008 upward to 7%, bringing it in line with the government's own 
projection.  For 2009, the IMF estimates growth at 5-6% -- slightly 
lower, Schimmelpfennig said, than the 7% projection of the National 
Bank of Tajikistan (NBT).  In a subsequent meeting, NBT Deputy 
Chairman Jamshed Yusupov told us -- apparently incorrectly -- that 
after seeing more economic data the IMF had revised its 2009 growth 
projection upward to match the NBT's 7% figure. 
 
¶4. (U) Schimmelpfennig said that while inflation had been high in 
2008, it began leveling off in September, and the IMF was now 
estimating year-end inflation would come in at 16%.  The projection 
for next year was lower, however, at 10-12%, partly as a result of 
lower food and fuel prices, one positive benefit from the 
international financial crisis.  He praised the NBT for maintaining 
higher than expected national reserves, totaling over US $167 
Qhigher than expected national reserves, totaling over US $167 
million, and said the IMF was recommending that the government run a 
small budget surplus at year's end.  Tajik authorities had been 
meeting all of their macroeconomic and reform targets, and if the 
country's performance and repayment of its IMF loans (see Ref A) 
continued positively, Tajikistan would be in good shape to begin 
considering the resumption of economic assistance, possibly as early 
as mid-February. 
 
¶5. (U) In spite of the IMF's generally positive assessment of the 
economic climate here, Schimmelpfennig acknowledged that 2009 would 
be "tough."  Although Tajikistan remained relatively insulated from 
the world financial crisis (ref B), the slowdown in Russia and 
Kazakhstan would be felt here through two channels: potential 
disruptions in remittance flows from Tajiks working abroad and the 
decline in world cotton prices.  For the moment, the IMF is 
predicting that remittances in 2009 would match this year's record 
level of $2.5 billion.  A broader discussion of remittances, 
including serious doubts about the IMF's projections, will be 
reported septel.  The reduction in world cotton prices was the 
primary factor leading the IMF to reduce its growth projection for 
2009 from 7% to 5-6%.  Nevertheless, the decline in prices would be 
 
DUSHANBE 00001502  002 OF 002 
 
 
somewhat offset by lower fuel and input prices.  Although the Talco 
aluminum smelter is Tajikistan's largest industrial enterprise, 
Tajikistan was insulated from the precipitous drop in world aluminum 
prices because Talco's profits and losses were absorbed offshore 
through a tolling arrangement (see Ref C). 
 
... But Others Disagree 
----------------------- 
 
¶6. (SBU) Others in Dushanbe's financial community, however, are not 
so sanguine about Tajikistan's economic prospects.  Chiara Bronchi, 
Tajikistan Country Manager for the World Bank, said the drop in 
cotton prices -- from some $1,600 a ton to around $1,000 -- would 
have a significant negative effect on the country's economy. 
Although cotton production was responsible for a relatively small 2% 
of GDP, it accounted for a much larger share of Tajikistan's 
exports.  Although she acknowledged that the world aluminum slump 
would not have a direct effect on Tajikistan's economy because of 
Talco's tolling arrangement, it would still have significant 
secondary effects due to slowed investment and reduced deposits in 
Tajik banks.  Continued weak aluminum prices could also result in a 
renegotiation of the current tolling agreement and lower receipts. 
At the same time, with its balance sheet in jeopardy Talco would 
delay environmental, efficiency, and safety improvements at the 
smelter, which would affect the lives and livelihoods of many 
hundreds of workers. 
 
¶7. (SBU) Even IMF's own Resident Representative in Dushanbe, Luc 
Moers, is somewhat skeptical of his organization's growth estimates. 
 He said that the drop in cotton prices might have indirect negative 
effects on the banking system.  Farmers who had borrowed money from 
commercial banks might have difficulty paying back their loans 
because of poor cotton sales.  The banks, in turn, might ultimately 
have a difficult time paying back loans they received from the 
national budget.  While ultimately the financial burden was on the 
banks, their failure would hurt the country as a whole.  Moers 
emphasized that, so far, there were no signs of defaults or 
difficulties in the banking system, and he did not foresee any 
problems in the near future.  If the price continued to drop, 
however, there could be cause for concern. 
 
¶8. (SBU) Moers agreed with Bronchi that the drop in world aluminum 
prices would only affect Tajikistan indirectly.  These effects might 
nevertheless become palpable.  Although Talco's financial 
arrangements remained deeply murky, in part because the smelters 
profits and inputs are managed offshore in the British Virgin 
Islands, Talco managers had admitted that much of the operation's 
profits end up back in Tajikistan through deposits in Tajik banks, 
particularly Orion Bank.  To the extent that Talco's profits 
declined or disappeared, local bank holdings would also suffer. 
There might be "third-order" effects as well, since many of the "pet 
projects" of Talco managers would be put on hold.  This might have a 
chilling effect particularly on the domestic construction sector. 
 
¶9. (SBU) Finally, Moers said, as a result of the financial crisis 
the country could see some liquidity problems connected with the 
trade credit system.  Tajik traders received loans from banks to buy 
products from abroad, repaying the loans after selling their stock 
Qproducts from abroad, repaying the loans after selling their stock 
domestically.  Tajik banks that had agreements with foreign banks to 
cover this lending might be hit with liquidity problems as a result 
of difficulties abroad.  To the extent that Tajik traders had 
difficulties selling their wares as a result of reduced domestic 
demand, this could lead to other banking problems.  Again, Moers 
said that he had so far seen no evidence of such difficulties. 
 
¶10. (SBU) Comment: While Tajikistan's banking sector is relatively 
undeveloped, the country is still linked to the world economy 
through a series of trade and lending arrangements.  As these 
connections are explored, a consensus appears to be emerging that 
the financial crisis will be felt here, and that the view of some in 
the government and elsewhere that Tajikistan will be saved by its 
isolation may be unjustifiably optimistic.  Bronchi and others have 
suggested that the IMF's rosy public projections in the face of this 
mounting evidence are intended to signal its solidarity with the 
government and encourage it to work with international financial 
institutions instead of around them, as it did in the recent loan 
misreporting scandal.  Whether untenable economic projections will 
further this goal is open to debate.  End comment.