IMF TO TAJIKISTAN: LOOKING A BIT DEBT-HEAVY, AREN'T WE?

UNCLAS DUSHANBE 001641 SIPDIS SIPDIS STATE FOR SCA/CEN E.O. 12958: N/A TAGS: ECON EFIN EINV EAID PGOV TI SUBJECT: IMF TO TAJIKISTAN: LOOKING A BIT DEBT-HEAVY, AREN'T WE? ¶1. (U) SUMMARY: The International Monetary Fund (IMF) has concerns over Tajikistan's accepting $637 million in debt from China, but feels confident the Tajik government still supports economic reforms. During a donor briefing the IMF reported inflation in Tajikistan exceeded expectations due to increased energy prices and export of agricultural products. Foreign remittances, mainly from Russia, reached $1 billion. The IMF mission will return in October to continue negotiations on a new round of financing. END SUMMARY. ¶2. (U) Washington-based Carlos Pinerua, Chief, IMF Mission to Tajikistan, briefed donors August 31 on the mission's discussion with government over Tajikistan's 2007 budget, macroeconomic situation and reforms. During a week-long visit, the IMF mission discussed its concerns surrounding the $637 million in new Chinese debt signed in Beijing in June (septel) and its fear this might start a new cycle of debt-taking. The low-interest concessional loans represent close to one quarter of Tajikistan's GDP, and do not sit well with many IMF shareholders. The IMF postponed its decision on initiating a new Poverty Reduction and Growth Facilitation Program, and will return in October to continue discussing the three-year program. ¶3. (U) The IMF views the government's new draft budget as reasonable, given the country's current needs. The draft budget, not yet introduced to Parliament, contains three new objectives: increased public sector wages from 4.5% to 5% of GDP; increased investments in the road and electricity sectors from 4% to 12% of GDP through the Chinese loans; and subsidies to offset increased energy costs for the general population. ¶4. (U) The rate of inflation reached 12% over the last year, due to a 30% increase in energy prices from Uzbekistan, and an increase in the price of staple products such as rice, carrots, and onions. Increased demand from Russia and Kazakhstan combined with a weak harvest led farmers to sell to the higher-priced export markets, rather than domestically. Uzbekistan may continue to push Tajikistan gas prices higher, as the current $55 per 1,000 cubic meters of gas is still relatively cheap. The National Bank also expanded monetary policy over the summer, contributing to inflationary pressures. ¶5. (U) The IMF estimates that remittances from migrant workers increased 60% this year, to $1 billion; however, they gave no indication whether this reflected more workers in Russia, or higher wages sent home. Much of this cash now flows through the banking sector, and mostly goes for local consumption needs. ¶6. (U) COMMENT: The IMF briefing left a number of lingering questions about the fiscal stability of Tajikistan. Will Tajikistan ask for debt relief again in five years when they are due to start paying back the Chinese? The IMF estimates the government should be able to sustain this debt, but the question remains how the government can increase social sector payments as it wishes to, as well as pay off debt interest? The answers will depend on government policies. END COMMENT. JACOBSON