VZCZCXRO7824
RR RUEHLN RUEHSK RUEHVK RUEHYG
DE RUEHDBU #0846/01 1961136
ZNR UUUUU ZZH
R 151136Z JUL 09
FM AMEMBASSY DUSHANBE
TO RUEHC/SECSTATE WASHDC 0541
INFO RUCNCIS/CIS COLLECTIVE
RUEHBUL/AMEMBASSY KABUL 0179
RUEHDBU/AMEMBASSY DUSHANBE 1138

UNCLAS SECTION 01 OF 04 DUSHANBE 000846 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR SCA/CEN 
 
E.O. 12958: N/A 
TAGS: EAGR EAID PGOV EFIN TI
SUBJECT: AGRICULTURAL REFORMS IN TAJIKISTAN: MORE MANURE? 
 
REF: A. A: 08 DUSHANBE 1548 
     ¶B. B: DUSHANBE 570 
 
DUSHANBE 00000846  001.2 OF 004 
 
 
¶1. (SBU) Summary: At the end of May President Rahmon signed a 
decree calling for writing off over half a billion dollars in 
debt owed by cotton farmers to agricultural investors and, 
ultimately, the National Bank of Tajikistan.  The International 
Monetary Fund (IMF) required the passage of a debt resolution 
plan before providing further assistance to Tajikistan.  On July 
8 - eight days late - the government distributed an action plan 
detailing how the process will work.  The comprehensive plan 
provides not only for debt relief, but -- as donors demanded - 
also includes other reforms, including the establishment of 
land-use rights and guarantees that farms can choose which crops 
to grow.  Given the failure of previous reforms that threatened 
the interests of those in power, the current plan will be a 
challenge to implement.  The debt relief stands the most chance 
of succeeding, because it is in the interests of the elite. 
Cotton investors, many of whom are government officials or 
politically connected, get to write off millions of dollars in 
government loans they may never have intended to pay back.  End 
summary. 
 
 
 
----------------------------- 
 
A Plan to Resolve Cotton Debt 
 
---------------------------- 
 
 
 
¶2. (SBU) One of the major conditions to resume IMF lending to 
Tajikistan this year under the $116 million Poverty Reduction 
and Growth Facility (PRGF) was the resolution of over half a 
billion dollars of debt owed by cotton farmers to investors. 
These investors had in turn borrowed most of the money from the 
National Bank of Tajikistan or abroad, an arrangement the 
government had kept hidden from the IMF (Ref A).  Although an 
audit of the National Bank earlier this year revealed that it 
and other lending institutions were shockingly lax in keeping 
track of the debt owed to them (ref B), donors were concerned 
that investors continued to force farmers to grow cotton to pay 
off their accumulated debt.  (Comment: The failure to track 
outstanding debt likely had a great deal to do with the fact 
that many of the investors were in the government or closely 
tied to it -- up to and including former National Bank chairman 
Murodali Alimardon -- and were essentially providing themselves 
loans they never intended to repay.  End comment.) 
 
 
 
¶3. (SBU) With a consultant paid for by the World Bank, Tapio 
Saavalainen, the government began drafting a comprehensive plan 
to reform the agricultural sector, including resolving the debt 
issue.  The first step was the passage of Decree 663, signed by 
President Rahmon on May 30, "On additional measures to support 
the agricultural sector in the Republic of Tajikistan."  The 
decree calls for writing off U.S. $548 million in debt 
accumulated by farmers before January 1, 2008.  This includes 
U.S. $435 million owed to cotton investors, who in turn owe the 
money to the National Bank (through the quasi-governmental 
institution KreditInvest), as well as U.S. $113 million owed by 
farmers to cotton investors who borrowed from commercial banks. 
(Comment: The basis for these numbers is unclear.  They appeared 
without explanation in the initial draft legislation prepared by 
Saavalainen, and they have remained through each successive 
draft.  Neither donors nor the government appear to have any 
firm sense of where they come from.  The donors' general sense 
is that the government's commitment to forgive the farmers' debt 
is the most important issue, and that the sums under 
consideration are probably in the rough ballpark.  End comment.) 
 
 
 
¶4. (U) In return for writing off these debts, commercial banks 
will receive newly-issued long-term government securities.  An 
additional U.S. $154 million lent from the National Bank through 
KreditInvest to support ancillary, profit-making enterprises, 
such as ginneries, spinning factories, machinery, warehouses, 
and other infrastructure, must be repaid at an interest rate of 
12% over eight years on equal quarterly installments. The decree 
calls for the establishment of an institution to implement the 
process of cotton debt restructuring, including ensuring that 
debts to and from investors are repaid as planned. 
 
 
 
-------------------------------------------- 
 
DUSHANBE 00000846  002.2 OF 004 
 
 
 
Action Plan Leaves Some Questions Unanswered 
 
-------------------------------------------- 
 
 
 
¶5. (SBU) While Decree 663 outlined the broad goal of resolving 
cotton debt, it was short on specifics.  The IMF set a deadline 
of June 30 for a detailed action plan laying out the specific 
debt resolution mechanisms as well as a series of other 
agricultural reforms required by the PRGF.  On July 8 a plan -- 
Resolution 406, bearing the date July 2 -- was finally 
distributed to donors, ending some suspicions that the plan had 
not been approved.  Despite persistent suggestions from the IMF 
and the donor community that cotton sector investors be made to 
shoulder more of the outstanding debt, the numbers in the 
resolution are the same as those in the earlier decree: $548 
million in debt will be written off, including $435 million to 
the government and $113 to commercial banks.  In the view of 
many of the donors, this was too generous to the investors, who 
were the only ones to profit in an otherwise unprofitable 
sector.  They received government loans they had no intention of 
paying back, leaving the farmers with debt and the government 
holding the bag, while reaping the proceeds of cotton sales. 
 
 
 
¶6. (SBU) It was not clear whether donors made headway on three 
other demands.  First, in a July 1 meeting with the Donor 
Coordination Council (DCC), the government agreed to move the 
cut-off date for debt write-off from January 1, 2008, to October 
1, thus including more debt.  In the final resolution, however, 
there is no mention of any cutoff dates.  Second, the government 
agreed to remove Alimardon - promoted last year from National 
Bank chairman to Deputy Prime Minister - from the working group 
in charge of debt resolution.  While the final document notes 
specifically that the Prime Minister's office will supervise the 
implementation of the resolution, it does not list members of 
the working group.  Finally, the Donors have long insisted that 
an essential component of the action plan must be a public 
communication strategy to ensure that farmers are aware of and 
understand their rights and responsibilities.  Although the 
original decree was widely publicized in June, to date there has 
been only very minor discussion of the action plan in the press. 
 
 
 
¶7. (SBU) The Donors raised all of these issues at a July 10 
Donor Coordinating Council meeting (DCC) meeting.  State 
Economic Advisor Matlubkhon Davlatov assured donors that their 
concerns hinged primarily upon legal formalities.  He insisted 
that there would be flexibility in the amounts of debt relieved 
and the dates of debt accrued, provided that the debts were for 
cotton cultivation.  He also reiterated that Alimardon would 
have no role in determining what debts are forgiven (he 
explained that in accordance with Tajik law, the action plan can 
only list offices, not individuals).  Both of these were key 
issues for the IMF, and can be expected come up during the next 
evaluation mission at the end of August.  As for the 
communication plan, Alimardon responded that donor assistance in 
this sphere would be welcome, but did not promise to increase 
official publication. 
 
 
 
¶8. (SBU) The final resolution was apparently as controversial 
within the government as it was outside of it.  At the July 1 
meeting, Davlatov admitted that the government was having some 
"heated" internal discussions about the draft, although he would 
not go into further details.  Some donors suspect that these 
discussions were the cause of the resolution's delay. 
 
 
 
--------------------------------------------- ------------ 
 
Will New Agriculture Reforms Do Any Better Than Old Ones? 
 
--------------------------------------------- ------------ 
 
 
 
¶9. (U) In addition to resolving the cotton debt, the government 
resolution aims to satisfy another IMF demand by detailing a 
program for reforming the entire agricultural sector.  Some 
elements of this plan have been provided for by previous 
legislation, so it remains to be seen how the current resolution 
will succeed where its predecessors have failed.  Resolution 
 
DUSHANBE 00000846  003.2 OF 004 
 
 
111, issued in March 2007, guaranteed farmers the freedom to 
grow the crops they wished and provided them with the ability to 
use land rights - tantamount to ownership -- as collateral in 
transactions.  Some 37,000 land use certificates have so far 
been granted under Resolution 111.  In reality, however, there 
has been no enforcement mechanism behind the law, and local 
governments (hukumats), in collaboration with central 
authorities, have continued to require and subsidize cultivation 
of a single crop: cotton.  The increasing amount of cotton debt 
was likely responsible in part for the unprecedented number of 
rural Tajiks who went abroad in the past few years in search of 
work as labor migrants.  A subsequent resolution, designed to 
improve implementation of Resolution 111, similarly failed to 
make much headway. 
 
 
 
¶10. (SBU) According to Justin Holl, Jr., director of the Land 
Reform and Market Development Project funded by USAID, 
Resolution 111 had myriad problems.  There was no related 
legislation governing how long land use certificates will last; 
the process of obtaining a certificate was lengthy and 
complicated; debt from collective farms would be transferred to 
new owners, even though they may still be physically unable to 
use their land; local governments had a say in the process, 
opening the door to bribery and bullying; and, finally, farmers 
very often received parcels of land entirely different from the 
ones they sought.  According to several agricultural experts, 
many "former" collective farms have been deliberately parceled 
out in such a way that individual farmers receive plots of land 
that are not adjacent to one another, or that are distant from 
irrigation sources.  In this way, according to Kathrine Kelm, an 
agricultural consultant with the World Bank and DFID who has 
been intimately involved in the reform process, although the 
farm has technically been privatized, in fact it continues to be 
operated on a collective basis, usually by the former brigade 
leader, who controls all of the infrastructure and equipment, as 
well as access to markets.  Yet there is some cause for 
optimism.  Mr. Holl reported that even as the action plan's 
status was in doubt, a separate government-donor working group 
that his project leads approved all of the reform objectives 
that donors sought. 
 
 
 
¶11. (U) Similarly, although Resolution 111 theoretically 
guaranteed farmers "freedom to farm" the crops they wished, the 
reality has been otherwise.  According to a survey released 
earlier this year by the Food and Agriculture Organization 
(FAO), despite the fact that 80% of respondents had heard of 
Resolution 111, 86% of them still did not feel free to cultivate 
any crop other than cotton.  The survey also revealed very high 
levels of interference by local hukumats in farmers' decisions. 
 
 
 
¶12. (SBU) Given past difficulties with agricultural reform, some 
donors are skeptical of the current effort.  They point out that 
the current system benefits those in power -- from the local 
hukumats all the way to Alimardon himself.  Perhaps because of 
this, it is unclear how much ownership or interest the 
government has in seeing Decree 663 work.  The draft decree 
appears to have been prepared in its entirety by Saavalainen and 
the action plan by another international consultant, Romas 
Zemekis, in both cases with limited input from official sources. 
 Some doubt was put to rest last Friday, when the government 
gave a surprisingly detailed presentation on how it intended to 
fulfill the action plan.  The fact that the government speaker 
was none other than Alimardon -- in theory removed from a 
position of responsibility -- illustrated what many donors feel 
is an ongoing difficulty the government faces.  Alimardon is the 
one official who has the clout, knowledge, and inclination to 
lead agricultural reform, while his obvious conflicts of 
interest and poor track record should clearly disqualify him 
from participating. 
 
 
 
------- 
 
Comment 
 
------- 
 
 
 
¶13. (SBU) The government's interest in debt relief seems clear, 
although its motivations might be different from those of the 
international donor community.  Where the IMF sees the debt 
 
DUSHANBE 00000846  004.2 OF 004 
 
 
forgiveness as an essential means of freeing farmers from 
crushing obligations to cotton investors, state officials - many 
of whom are themselves cotton investors - may very well see it 
as a state-funded bailout: they get to keep half a billion 
dollars lent out of the state treasury.  This is quite a coup: 
in light of recent audit findings, it is likely that much of 
this money was diverted before it ever reached its intended 
recipients.  And, given the financial crisis and plummeting 
cotton prices, the investors were unlikely to see much if not 
most of the money they actually lent on to farmers.  But the 
government's broader commitment to reform the agricultural 
sector remains in question.  State lending to unprofitable 
cotton operations continue, just on-budget.  Last year 180 
million somoni was loaned to cotton investors.  According to 
recent estimates, only 40% has been paid back.  This year 140 
million was lent, although technically to agriculture as a 
whole, not just cotton. The action plan calls for this amount to 
be decreased by 30% each year. 
 
 
 
¶14. (SBU) Even assuming a genuine desire to reform, Decree 663 
will be difficult to implement.  Tajikistan's continued reliance 
on cotton production is the result of ingrained economic and 
social practices dating from the early days of the Soviet Union. 
 Many of the underlying problems are social and economic: 
hukumats often exercise dictatorial authority, farmers remain 
relatively uneducated and poorly informed about new practices 
and possibilities, and the agricultural sector is structured 
around getting cotton to market.  While the debt resolution plan 
attempts to get to the root of this by introducing systemic 
reform, the very comprehensiveness of the plan, in a country 
with little monetary or technical capacity, will make it 
difficult to carry through. 
JACOBSON