VZCZCXRO4826
RR RUEHLN RUEHSK RUEHVK RUEHYG
DE RUEHDBU #0241/01 0581300
ZNR UUUUU ZZH
R 271300Z FEB 09
FM AMEMBASSY DUSHANBE
TO RUEHC/SECSTATE WASHDC 0095
INFO RUCNCIS/CIS COLLECTIVE
RUEHIL/AMEMBASSY ISLAMABAD 0010
RUEHBUL/AMEMBASSY KABUL 0025
RUEHNE/AMEMBASSY NEW DELHI 0020
RUEHBJ/AMEMBASSY BEIJING 0010
RUEAIIA/CIA WASHDC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC
RUEHDBU/AMEMBASSY DUSHANBE 0128

UNCLAS SECTION 01 OF 03 DUSHANBE 000241 
 
SENSITIVE 
SIPDIS 
 
DEPARTMENT FOR SCA/CEN 
 
E.O. 12958: N/A 
TAGS: EFIN ECON ETRD PGOV ELAB TI
SUBJECT: TAJIKISTAN'S ECONOMY IN DIRE CONDITION, INTERNATIONAL 
FINANCIAL INSTITUTIONS SAY 
 
REF: A: 08 DUSHANBE 1502, B: 08 DUSHANBE 1548 
 
DUSHANBE 00000241  001.2 OF 003 
 
 
¶1. (U) Summary: The International Monetary Fund (IMF) and the 
European Bank for Reconstruction and Development (EBRD) are 
predicting a very difficult year ahead for Tajikistan as a 
result of the global financial crisis.  Economists at both 
institutions say the situation is far worse than they had 
predicted even a month ago.  It is expected that the major 
impact on the Tajik economy will come from a steep drop in 
remittances from Tajiks working abroad, especially in Russia. 
Remittances, which equaled over half of Tajikistan's GDP last 
year, are a lifeline for this poor economy.  But January figures 
were 22% lower than the previous year, the first such drop in 
six years of recordkeeping.  The IMF predicts GDP growth of 3% 
this year, but cautions that this is "optimistic."  The EBRD 
initially predicted 5%, but said the figure will be revised 
downward.  Economists at both organizations said the economy 
will likely get much worse before it gets better, and Tajikistan 
may require significant support to avoid serious hardship.  The 
IMF mission here said the results of the IMF-mandated audit of 
the Central Bank will be made public soon, and following this 
they will recommend renewed a Poverty Reduction and Growth 
Facility (PRGF) for Tajikistan at the April meeting of the IMF's 
board.  End summary. 
 
IMF, EBRD Urge Support for Fragile Tajik Economy 
 
¶2. (U) The IMF briefed the international donor community on the 
health of Tajikistan's economy on February 18.  Over the course 
of the previous two weeks, an IMF team lead by Mission Chief for 
Tajikistan Axel Schimmelpfennig had been in Dushanbe to assess 
the country's macroeconomic conditions, meet with government 
officials, and make recommendations about the future. 
Schimmelpfennig announced that, based on the team's findings, 
they are recommending a resumption of assistance to Tajikistan 
under the IMF's low-interest lending program for low-income 
countries, the Poverty Reduction and Growth Facility (PRGF). 
(IMF assistance to Tajikistan was suspended last year as a 
result of National Bank misreporting about loans it had 
underwritten to cotton sector financers.  IMF officials report 
that the Bank has been meeting the loan repayments required for 
resumption of assistance, and they are satisfied with 
Tajikistan's macroeconomic policy.)  Schimmelpfennig said his 
team will recommend a PRGF in the amount of $120 million, with 
much of the assistance front-loaded in order to help Tajikistan 
cope with the financial crisis.  The proposal will be taken up 
by the IMF's board in Washington at the beginning of April. 
 
¶3. (U) In a separate presentation two days later, the EBRD 
unveiled its transition report for 2008, detailing economic 
conditions and country performance in the Eurasian region.  EBRD 
Principal Economist Rika Ishii, based in London, was similarly 
pessimistic about the state of the Tajik economy, saying that 
the situation here is considerably worse than she had predicted 
just a month ago.  EBRD country director Mathieu Le Blan said 
that the Bank intends to make some 50 million Euros available to 
Tajikistan this year in assistance. 
 
What a Difference Two Months Make 
 
¶4. (U) The majority of Axel Schimmelpfennig's presentation was 
devoted to a dour appraisal of Tajikistan's economic climate 
over the coming year.  His tone was markedly gloomier than it 
was during his last visit two months ago (ref A).  During that 
visit he said Tajikistan was likely to be insulated from the 
full brunt of the economic crisis due to the isolation of its 
banking sector and the presumed resilience of remittance flows. 
This time, however, he acknowledged that the crisis was already 
having a very negative effect on the country, and there were few 
domestic resources available to respond to it.  He noted that 
44% of domestic industries are not running at all right now due 
to insufficient power. 
 
¶5. (U) Schimmelpfennig said the IMF was now predicting GDP 
growth of 3% for Tajikistan in 2009 -- compared to its earlier 
projection of 5-6% -- "if all goes well."  But, he said, all was 
not likely to go well, particularly given new projections that 
Russia's economy will contract by 1% over the coming year. 
Given Tajikistan's dependence on Russia as its primary source of 
imports and remittances, negative growth in the Russian economy 
will almost certainly have a significant impact here.  EBRD's 
 
DUSHANBE 00000241  002.2 OF 003 
 
 
Ishii said that the Russian Ministry of Finance had recently 
released its own projection of a 2.2% contraction in the Russian 
economy.  In light of this, the projection she had made at the 
end of January that Tajikistan's economy would grow by 5% this 
year -- based chiefly on the relatively mild winter -- would 
have to be significantly downwardly revised.  She added 
anecdotally that even over the course of the two days she had 
spent in Tajikistan on this visit, it was clear that the 
situation is much worse than she had imagined from London. 
 
The Rose-Colored Glasses are Off on Remittances 
 
¶6. (U) The major impact of the global financial crisis on the 
Tajik economy will be felt through a decline in remittances. 
Since 2003, when the IMF began collecting data, remittances 
through the banking system have grown substantially year after 
year, reaching $2.67 billion in 2008 -- equivalent to 52% of 
Tajikistan's GDP, the highest percentage of any country in the 
world.  In January of this year, however, for the first time in 
six years remittances declined year-on-year, dropping 22% from 
January 2008.  The IMF forecasts that remittances over the 
course of 2009 will be 30% lower than 2008, but Schimmelpfennig 
once again cautioned that even this figure may be optimistic, 
given credible projections he has seen of a 50% drop.  The EBRD 
also predicts that remittances will decline steeply, but they 
did not make a specific prediction. 
 
¶7. (U) The IMF appears to have adopted a different paradigm 
since its earlier briefing in December.  Even as the financial 
crisis was gathering steam, IMF and World Bank officials were 
predicting that remittances would prove resilient to economic 
shocks.  Some of their confidence was based on economic 
research, including work done by World Bank remittance expert 
Dilip Ratha, arguing that remittances are very "supply 
dependent" -- i.e., that overseas guestworkers will do 
everything possible to continue sending money back home, 
including moving to a new location or country, accepting 
lower-status or lower-paying work, or even cutting back on their 
own expenditures on food and housing.  The new IMF and EBRD 
projections appear to eschew this earlier logic, however. 
 
¶8. (U) Ishii cautioned, however, that we should avoid drawing 
conclusions from one month in isolation.  She noted that January 
2008 remittance figures were particularly high as a result of 
last winter's food crisis, when overseas workers made efforts to 
send home as much money as possible to help their families.  She 
said she has also heard reports that more people may be 
hand-carrying remittances home rather than sending them through 
banks, out of concern about the stability of the Tajik banking 
sector.  Both factors would result in deflated January 2009 
figures.  A clearer picture would emerge, she said, when data 
from February and March are known.  Schimmelpfennig said that a 
side effect of continued decline in remittances would be the 
return of a significant amount of overseas workers.  If this 
happened, the country would have less money with which to feed 
more mouths -- a situation that had the potential to spiral 
downward. 
 
Somoni Expected to Slide South 
 
¶9. (U) Both the EBRD and IMF experts said they expected the 
Tajik somoni to continue to decline against the dollar.  (Note: 
In the last few months the somoni has dropped from 3.4 to as 
much as 3.9 to the dollar.  The official rate is currently 3.8. 
Since the currency floats freely, unofficial rates do not vary 
much from the official rate, although they are usually a tenth 
of a somoni higher.  End note.)  Schimmelpfennig said that there 
is almost nothing the National Bank of Tajikistan can do to halt 
the slide of the somoni, given its relatively small reserves and 
the sheer size of the macroeconomic forces it is up against. 
Even if it had the ability to protect the currency, however, he 
strongly advised the Bank to let the slide continue, acting only 
to ensure that the decline was smooth.  While the decline hurt 
imports, it nevertheless boosted domestic production.  He was 
reluctant to predict where the somoni would be trading at year's 
end, but said he would not be surprised if the "real effective 
exchange rate" against a basket of world currencies would likely 
drop by 10% or 20%. 
 
¶10. (U) Schimmelpfennig said that as a result of worsening 
 
DUSHANBE 00000241  003.2 OF 003 
 
 
macroeconomic conditions and declining revenues, the external 
financing gap for the country's budget would be $135 million 
this year.  He was recommending that the IMF contribute $51 
million toward closing that gap, with other donors offering $74 
million in direct budget support.  The IMF also predicts a 7% 
drop in trade, which some donors thought was optimistic. 
 
Bright Spots?  Not Many 
 
¶11. (U) Schimmelpfennig said that there are a few potential 
bright spots in the Tajik economy.  One was that domestic 
non-cotton agricultural production may receive a boost due to 
plummeting world cotton prices and the increased cost of food 
imports.  A great deal of Tajik food comes from Russia; while 
the somoni has held relatively stable against the ruble, its 
decline against other world currencies may make it more 
difficult to purchase imports.  Schimmelpfennig said he has 
already seen some limited evidence that government leaders 
recognized the importance of diversifying the agricultural 
sector, and this was an issue the IMF would follow up on.  He 
added that there has also been some positive inertia in the 
domestic construction sector, even in Dushanbe, which appears 
not to have slowed much due to the financial crisis.  As the 
crisis prolongs, however, this may change.  (He expressed some 
surprise that the construction of the Somoni Hotel, financed by 
a Turkish firm, is continuing around the clock.)  He added that 
inflation was expected to come in at 12-13% in 2009, 
 
Audit Results Expected Soon 
 
¶11. (SBU) During a question-and-answer session after the IMF 
presentation, Schimmelpfennig gave a status update on three 
major audits commissioned in the wake of the misreporting 
scandal.  The audit of the National Bank had been completed, and 
he expected that its key findings would be published on the 
bank's website within the next month.  (Note: in an earlier 
conversation IMF country director Luc Moers told Econoff that 
the bank, which could use its own discretion in deciding what 
findings were considered "key," might choose not to make 
negative conclusions public (ref B).  End note.)  He said there 
would be no surprises, although he added -- to some raised 
eyebrows in the room -- that "the key for everyone will be to 
take a little bit of a leap of faith in the authorities that 
everything is on track." 
 
¶12. (SBU) The audit of the Barki Tajik has been completed and 
should be published soon.  The audit of the Talco aluminum 
company, the nation's largest industry, has still not been 
conducted.  Three firms have submitted bids.  Under Tajik law 
the country is obligated to select the lowest bid, which in this 
case comes from the "mid-tier" London-based firm Moore Stephens, 
out of its Moscow office.  Schimmelpfennig admitted, however, 
that he would be much more comfortable if the audit were 
performed by Big-Four firm Ernst and Young, whose bid was 
$150,000 higher.  He appealed to donors in the audience to 
consider providing that funding.  (He had assurances from the 
Tajik government that there would be no problem accepting Ernst 
and Young provided the gap was met by a donor.) 
 
¶13. (SBU) Comment: Earlier predictions by the IMF, echoed by 
Tajik Goverment officials, that Tajikistan was shielded from the 
global crisis have now gone by the board, and all eyes are on 
the economic situation in Russia.  The next major economic 
indicator to watch will be how many Tajiks return to Russia to 
work later in the spring, and how much remittances pick up 
during that time.  Now that Tajikistan has successfully 
completed the Staff Monitoring Program demanded after the 
misreporting scandal, which the IMF says has led to some 
improvements in banking governance and Finance Ministry 
oversight of state enterprises, the IMF is looking to move 
forward with the PRGF; it will make a proposal to its board in 
the first week of April.  We would withhold judgement on the 
advisability of a PGRF until the Central Bank's audit is posted. 
 End Comment. 
JACOBSON