VZCZCXRO6497
RR RUEHLN RUEHSK RUEHVK RUEHYG
DE RUEHDBU #1105/01 2720318
ZNR UUUUU ZZH
R 290318Z SEP 09
FM AMEMBASSY DUSHANBE
TO RUEHC/SECSTATE WASHDC 0769
INFO RUCNCIS/CIS COLLECTIVE
RUEHIL/AMEMBASSY ISLAMABAD 0165
RUEHBUL/AMEMBASSY KABUL 0251
RUEHNE/AMEMBASSY NEW DELHI 0128
RUEHBJ/AMEMBASSY BEIJING 0087
RUEAIIA/CIA WASHDC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC
RUEHDBU/AMEMBASSY DUSHANBE 1625

UNCLAS SECTION 01 OF 03 DUSHANBE 001105 
 
SIPDIS 
 
SENSITIVE, DEPARTMENT FOR SCA/CEN 
 
E.O. 12958: N/A 
TAGS: EFIN ECON ETRD PGOV TI
SUBJECT: IMF ASSESSMENT OF TAJIK ECONOMY AND REFORMS:  CAUTIOUSLY 
OPTIMISTIC 
 
REF: A. DUSHANBE 846, B. DUSHANBE 570, C. 2008 DUSHANBE 1502 
 
DUSHANBE 00001105  001.2 OF 003 
 
 
¶1. (SBU) Summary:  An IMF team recently completed a two-week 
visit to Dushanbe to assess economic and government performance 
before releasing a second tranche of funding under the Poverty 
Reduction and Growth Facility (PRGF).  Briefing donors, the team 
noted the Tajik government had met most of its structural and 
quantitative targets.  The government agreed to publicly release 
audits of key state-owned enterprises, including the electrical 
operator Barqi Tojik and the Talco aluminum company. 
Long-overdue annual audits of the National Bank -- a formal 
requirement for release of the PRGF funding -- should soon be 
underway.  The IMF noted that Tajikistan's economy was doing 
"surprisingly" well given the world economic crisis, and was 
expected to grow by 2-3% this year.  Modest growth is predicted 
for next year.  Inflation remains low, at just 4%.  The 
government's single major failure has been the 35 million somoni 
in pension arrears it has run.  The President has committed to 
paying these off by November, although by what means remains 
unclear.  The IMF continues to recommend that the National Bank 
allow a controlled devaluation of the somoni to boost exports 
and improve the lopsided trade balance.  The IMF is keeping an 
eye on government debt, although this is expected to rise next 
year.  End summary. 
 
 
 
GOVERNMENT AGREES TO RELEASE KEY AUDITS 
 
 
 
¶2. (U) A team from the International Monetary Fund (IMF) just 
completed a two-week visit to Dushanbe to assess Tajikistan's 
macroeconomic conditions and progress on structural reforms. 
The assessment, intended to measure progress over the first half 
of 2009, is a prerequisite for disbursing a second tranche of 
approximately $28 million under the IMF's Poverty Reduction and 
Growth Facility (PRGF).  A first tranche of $40 million was 
disbursed in April; the IMF will deliver a total of $116 million 
over three years.  During a September 24 breakfast meeting with 
Ambassador and Econoff and at a briefing for donors later in the 
day, Washington-based IMF mission chief for Tajikistan Axel 
Schimmelpfennig and Resident Representative in Tajikistan Luc 
Moers were cautiously optimistic about the government's progress 
in making key structural reforms and the country's resilience in 
the face of the global economic crisis. 
 
 
 
¶3. (SBU) Schimmelpfennig announced that the government had just 
that afternoon agreed to release an audit of the state-owned 
electrical grid operator, Barqi Tojik, completed earlier this 
year.  (Note: Secretary Clinton brought this issue up with 
President Rahmon on the margins of UNGA, noting that releasing 
the audit would be an important indication of Tajikistan's 
genuine desire for economic reform.  As late as the morning of 
the IMF briefing, the government was still declining to release 
the audit.  No publication date for the audit has been 
announced.  End note.)  Schimmelpfennig said that several years 
of annual audits of the state-owned Talco aluminum plant would 
be published on the company's website by December or January. 
The audit of 2005 is almost done, and the British accountancy 
firm Moore Stephens will soon be turning to 2006 to 2008. 
 
 
 
¶4. (SBU) After a series of fits and starts, it appears that 
long-overdue annual audits of the National Bank will now get 
underway.  The last signed audit of the Bank was for the year 
2005 by PriceWaterhouseCoopers.  Audits of two successive years 
were unsigned, apparently because of major discrepancies in the 
Bank's accounts (ref B).  Schimmelpfennig said that in all 
likelihood KPMG would conduct the new audit, which would cover 
fiscal year 2008, ending in April 2009 (the Bank is currently 
working to align its fiscal year to the calendar year). 
Completion of this audit is a formal requirement for the 
disbursement of the second tranche of IMF funding, which had 
initially been expected to occur within the next month or two. 
KPMG had a team in Dushanbe two weeks ago doing a due-diligence 
survey, or "pre-audit."  Schimmelpfennig told the Ambassador 
privately that the pre-audit team, based out of Almaty, was 
recommending that KPMG take on the project, but would have to 
 
DUSHANBE 00001105  002.2 OF 003 
 
 
push to convince office principals that the firm should run the 
risk.  Given the audit delays, the IMF was unlikely to release 
the second tranche of funding before January 2010.  If things 
are further delayed, the Fund would combine the second tranche 
with its next mission, currently scheduled for February 2010, to 
assess end-2009 performance data.  Schimmelpfennig said that in 
view of better-than-expected economic growth, the delay would 
not pose any risk to the budget, and he was fairly optimistic 
that the audit would soon be underway. 
 
 
 
¶5. (SBU) The government passed a cotton debt resolution plan in 
July, although implementation would be a challenge (ref A).  The 
government has already asked the IMF for technical assistance 
with the project, and the IMF has someone looking at the issue. 
In the earlier breakfast meeting with the Ambassador, 
Schimmelpfennig and Moers admitted that the IMF did not have 
much information about the cotton reform process and was 
consequently relying on the donor community for information and 
assistance in ensuring that the project was implemented properly. 
 
 
 
SOME TARGETS MET; OTHERS NOT SO MUCH 
 
 
 
¶6. (U) According to the IMF assessment team, the Tajik 
government has met most of the quantitative targets set out for 
it by the IMF.  The one clear exception has been the 
approximately 35 million somoni ($7.9 million) in pension 
arrears that the government owes.  Schimmelpfennig said, 
however, that he had a firm commitment from President Rahmon to 
make all back pension payments by November.  When asked later in 
the briefing where that money would come from, given the 
government's already strained budget, Schimmelpfennig admitted 
he did not know.  He said that the IMF might advise the 
government to close some tax loopholes and lift the value-added 
tax (VAT) back to 20%, after having been lowered to 18% earlier 
this year.  The government appeared to have fallen just short of 
the IMF-mandated target for social sector spending, but 
Schimmelpfennig said the difference is so small -- just 4 or 5 
million somoni (approximately $1 million) -- that it "lies 
within the margin of error."  Most importantly, he said, social 
spending picked up significantly in the second quarter after 
being slack through Q1. 
 
 
 
¶7. (SBU) European Community Charge d'Affaires Charlotte Adriaen 
noted that she and others in the room had heard a good deal of 
anecdotal evidence that the government was also running 
significant wage arrears.  She said contacts in Sughd province 
had reported that even teachers and health workers, whose 
salaries should be protected under the minimum social sector 
spending targets, were not receiving their wages. 
Schimmelpfennig said the government had admitted to some "minor 
technical delays" in wage payments but reported that most 
salaries were being paid on time.  The IMF team acknowledged 
that the government might be understating the issue, but said 
the Fund, absent any systematic data to the contrary, had to 
accept the government's figures. 
 
 
 
SURPRISING GROWTH IN TAJIK ECONOMY 
 
 
 
¶8. (U) The IMF team reported that the Tajik economy was 
performing surprisingly well considering the global financial 
crisis.  GDP growth for the year was expected to reach 2-3%, in 
the face of a 1% decline worldwide and a 7.5% drop in Russia, to 
which Tajikistan's economy is closely linked.  Schimmelpfennig 
credited the economic growth to the relatively robust 
performance of the non-cotton agricultural sector, which was 
helped by abundant spring rains.  The government of Tajikistan 
was forecasting GDP growth of 5% for 2010, which the IMF 
believed was reasonable.  The IMF is predicting that the world 
economy will expand by 3%, fueled mainly by growth in China and 
 
DUSHANBE 00001105  003.2 OF 003 
 
 
emerging markets.  Russia's GDP is expected to increase modestly 
by 1.5% in 2010.  Schimmelpfennig said that IMF's projections 
were perhaps slightly optimistic compared to others. 
 
 
 
¶9. (U) Remittances from Tajiks working abroad, chiefly in 
Russia, are still some 30% below 2008's record levels.  The IMF 
team predicted that next year will see a modest turnaround, with 
levels rising by 5%.  Making accurate predictions is difficult, 
however, because it depended on the dollar-ruble exchange rate. 
In a positive sign, inflation had been low this year, reaching 
just 4% this August, year-on-year.  The IMF predicts that it 
will increase to as high as 8% by the end of this year and 11% 
by end-2010, averaging 9.0-9.5% for the year. 
 
 
 
IMF ADVICE FOR TAJIK GOVERNMENT 
 
 
 
¶10. (U)The IMF believes that despite earlier devaluation of the 
Tajik somoni from around 3.4 to the dollar in late 2008 to 4.4 
to the dollar today, Tajikistan's currency remains overvalued 
and should be allowed to further depreciate in real terms.  This 
will help relieve the high trade deficit by creating more 
opportunities for Tajik exports.  As they noted in previous 
visits, the IMF team said the National Bank's key role should be 
to ensure that the devaluation is smooth.  The Bank lacked the 
currency reserves to significantly affect the somoni exchange 
rate and consequently should not try to do anything more than 
even out the rough patches. 
 
 
 
¶11. (SBU) The IMF has agreed with the government to increase the 
recommended budget deficit to 1% of GDP in 2010 from 0.5% of GDP 
this year.  The government said it needed the increase to raise 
wages and pensions next year.  Total government debt this year 
is not to exceed 40% of GDP (this excludes recapitalization of 
the National Bank, which may increase the figure by 10-12%). 
Schimmelpfennig said the government was looking at debt of 46% 
of GDP in 2010 (again without bank recapitalization), which 
might be a bit high.  He said the Fund would be watching state 
borrowing carefully.  China has discussed lending a total of $10 
billion to Shanghai Treaty Organization countries, although it 
is unclear how this might be divided among the ten member 
states.  Schimmelpfennig said that if China decided, for 
example, to offer $1 billion to Tajikistan, this would equal 
one-half of current debt.  "We would certainly have concerns 
about debt sustainability if that happened."  He noted, however, 
that the Chinese Ambassador to Tajikistan had told him earlier 
in the week that China had not made any determination to offer 
the loans, and had made no decisions about how much might be 
offered to each country if any loans were made. 
 
 
 
¶12. (SBU) Comment:  The government appears to have taken some 
genuine steps to increase economic performance and the 
investment climate in recent months, including new laws easing 
business registrations, more transparent banking rules, and a 
major overhaul of the agricultural sector.  The announcement 
that the Barqi Tojik audit will be released comes as further 
welcome news.  Whether these steps represent a cynical effort to 
curry favor with the donor community to help weather the 
financial crisis or a deeper desire to reform remains to be 
seen.  Either way, the IMF appears to be playing a more 
constructive role.  While a year ago donors were visibly shaking 
their heads at the Fund's overly rosy economic projections and 
assessments of government performance, IMF team members are now 
more critical in their appraisals.  And the government may be 
taking notice.  End comment. 
GROSS