VZCZCXRO8707
RR RUEHLN RUEHSK RUEHVK RUEHYG
DE RUEHDBU #0670/01 1531831
ZNR UUUUU ZZH
R 021831Z JUN 09
FM AMEMBASSY DUSHANBE
TO RUEHDBU/AMEMBASSY DUSHANBE 0812
RUEHC/SECSTATE WASHDC 0386
INFO RUCNCIS/CIS COLLECTIVE
RUEHBUL/AMEMBASSY KABUL 0134
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 03 DUSHANBE 000670 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR SCA/CEN 
 
E.O. 12958: N/A 
TAGS: EFIN EAID PREL TI
SUBJECT: AFTER Q1 FINANCIAL RESULTS, TAJIKS BEG DONORS FOR CASH 
 
DUSHANBE 00000670  001.2 OF 003 
 
 
¶1. (SBU) Summary: On May 29 the Tajik Ministry of Finance 
briefed donors on the country's economic performance over the 
first quarter of 2009.  With declining exports, falling 
remittances, and a weakening currency, budget revenues are 
expected to fall 20-25% short of initial projections.  Officials 
rolled out a new "Virtual Fund" to track social sector spending 
and a plan for quarterly budget updates, the first of which is 
expected in the next few weeks.  Officials said the measures 
were not simply to appease donors, who demanded social spending 
not be cut, but were the results of ongoing budget reform 
efforts.  Immediately after saying "We're not trying to 
fundraise here," a deputy minister bluntly asked donors to 
contribute to the state budget.  Without such assistance, he 
hinted, Tajikistan would have to turn to China for loans that 
break commitments to the International Monetary Fund.  End 
summary. 
 
 
 
Finance Ministry: Budget Situation Grim 
 
--------------------------------------- 
 
 
 
¶2. (U) Minister of Finance Safarali Najmiddinov began a meeting 
with donors called at short notice for May 29, at a 
newly-constructed annex at the Tajik Ministry of Finance, by 
saying that the world financial crisis was hitting Tajikistan 
harder than expected.  Prices and volumes for Tajikistan's two 
major exports, cotton and aluminum, had fallen dramatically. 
Remittances from Tajiks working abroad were down 35% from last 
year, and the Tajik currency, the somoni, had lost a quarter of 
its value against the dollar in the last five months.  As a 
result, Tajikistan's national budget revenue is expected to be 
20-25% lower than projected for FY 2009, and the government was 
looking for ways to cut spending while meeting basic 
obligations.  As a condition for external assistance, donors had 
insisted the government maintain 1.87 billion somoni in social 
sector spending. 
 
 
 
Government Rolls Out New Financial Tracking 
 
------------------------------------------- 
 
 
 
¶3. (U) The Ministry announced a "Virtual Poverty Fund" created 
to track social sector expenditures.  The fund, developed with 
technical assistance of a consultant from the London-based 
Overseas Development Institute, is not a new account, but a 
method to identify and monitor selected budget items.  In this 
case, the government proposed including subventions to local 
governments, subsidies to poor families for utility payments, 
job training, and wages and capital expenditures in health, 
education, and other social sectors.  If spending in these areas 
drops below certain key levels, a flag is raised. 
 
 
 
¶4. (U) The Finance Ministry also is preparing to release 
quarterly budget reports to detail key issues such as outturn by 
sector, Virtual Poverty Fund performance, and local government 
expenditures.  The first budget report will be issued in the 
next few weeks, but the Ministry provided some initial results: 
 
 
 
-- First quarter revenue has been very unclear, so the release 
of budget funds has been limited to 82% on recurrent items. 
Capital expenditures have been reduced by over 50%. 
 
 
 
-- Social sector expenditures, however, have dropped by only 3%. 
 These savings have been realized through "administrative 
measures."  No program spending has been cut. 
 
 
 
-- Subventions to local governments have averaged about 81% of 
budget allocations.  According to Minister Najmiddinov, 
subventions to local governments for social sector spending have 
increased to 100% in April. 
 
 
 
DUSHANBE 00000670  002.2 OF 003 
 
 
 
Show Us the Money... Or We'll Get it From China 
 
--------------------------------------------- -- 
 
 
 
¶5. (SBU) After the presentation, Deputy Finance Minister (and 
Presidential son-in-law) Djamoliddin Nuraliev made a blunt 
appeal to donors for more money.  "The alternative," he said in 
fluent English, "is to go to China or other donors.  I don't 
want to do that.  I'm not saying we're going to do that.  I 
don't want to be a diplomat here.  We can talk to donors; donors 
are not diplomats; they are real people.  We don't want to 
borrow commercially.  We don't want to break the IMF agreement 
to contract concessional loans.  I hope you understand me and 
will help as much as you can."  He then turned to the assembled 
donors to ask them directly how much additional budget support 
they could deliver.  Charlotte Adriaen of the European 
Commission (EC) said Brussels was considering a budget support 
package, the results of which should be known in the next few 
weeks.  Other donors remained largely silent.  Nuraliev ended 
the meeting by incongruously saying, "We're not trying to 
fundraise here." 
 
 
 
Analysis: What Are Real Effects of Crisis in Tajikistan? 
 
--------------------------------------------- ----------- 
 
 
 
¶6. (SBU) Tajik officials routinely mention the same three 
factors as effects of the financial crisis: falling cotton and 
aluminum exports, declining remittances, and the struggling 
national currency.  It is not clear, however, that all these 
issues should have such a great effect on Tajikistan's economy. 
Despite years of forced production, for example, cotton exports 
accounted for only one-half of one percent of GDP last year. 
Aluminum has been exported via a tolling arrangement, under 
which most profits are delivered offshore.  Though some of this 
money presumably finds its way back to Tajikistan in the form of 
real estate and other purchases made by wealthy shareholders, 
dropping aluminum prices should not have much of a direct impact 
on the Tajik economy. 
 
 
 
¶7. (SBU) While remittances are off by 33% compared to 2008, they 
are still 23% above 2007 levels.  There is some disagreement 
about the significance of this year's decline.  According to 
some experts, the 2008 record highs were anomalous: the severe 
winter crisis inspired many Tajiks overseas to tighten their 
belts considerably to send money back home.  This year's mild 
winter, by contrast, has not elicited the same desperate 
response.  From this perspective, while the financial crisis is 
decreasing remittances, overall levels are still impressive. 
Others point out that this is the first time since records have 
been kept that remittances have fallen compared to the previous 
year.  Tajik economic growth depends upon steady remittance 
growth, so this year's performance is a bad omen. 
 
 
 
¶8. (SBU) For two years the Tajik somoni had traded very steadily 
at about 3.4 to the U.S. dollar.  Beginning in January 2009, 
however, the somoni began depreciating, and now stands at about 
4.4 to the dollar, after peaking at 4.8 last week.  There have 
been concerns about liquidity: in recent days there have been 
some difficulties getting cash dollars.  The ruble exchange rate 
is more important for most Tajiks, however, since most of 
Tajikistan's imports, including food, come from Russia.  The 
somoni has lost almost a third of its value against the ruble in 
the last four months, from a high of 10 rubles to the somoni in 
February to the current rate of 6.9.  Yet this followed a long 
period of appreciation in late 2008, so the current exchange 
rate is exactly the same as it was last summer.  As a result, 
prices for most consumer goods in Tajikistan have actually not 
risen very much, and in some cases have fallen. 
 
 
 
So Why Are Budget Revenues Down? 
 
-------------------------------- 
 
 
 
DUSHANBE 00000670  003.2 OF 003 
 
 
 
¶9. (SBU) If cotton, aluminum, remittances, and currency have not 
played a major direct role in Tajikistan's economic downturn and 
budget woes, what is responsible?  The answer appears to be that 
these factors are just parts of the broader problem, which is 
reduced overall trade.  About 71% of Tajikistan's budget revenue 
comes from customs duties and taxes; with exports down 41% and 
imports down 11% compared to last year, these have dropped off 
considerably.  Here, the fall in remittances, for example, has 
an indirect effect, since much of Tajikistan's consumer 
spending, and thus imports, is funded through money earned by 
Tajiks abroad. 
 
 
 
¶10. (SBU) Comment: While it is indisputable that the financial 
crisis is having a profound impact on Tajikistan's economy, the 
lack of government transparency -- particularly the finances of 
major state-owned enterprises such as the TALCO aluminum plant 
that remain a secret -- make it difficult to see precisely how 
the budget has been affected.  The Finance Ministry's Virtual 
Fund and quarterly reports are a step in the right direction, 
but coupling these efforts with a ham-handed appeal to donors 
for cash casts some doubt on the government's sincerity.  Time 
will tell whether these reforms improve transparency or whether 
they are part of a cynical effort to wring cash out of donors by 
telling them what they want to hear. 
 
End comment. 
JACOBSON