TAJIKISTAN'S TOP EXPORT, COTTON, CONTINUES TO DECLINE

UNCLAS DUSHANBE 000002

SIPDIS


STATE FOR EUR/CACEN, SA

E.O. 12958: N/A
TAGS: EAGR ECON ETRD PGOV PREL TI
SUBJECT: TAJIKISTAN'S TOP EXPORT, COTTON, CONTINUES TO DECLINE

REF: DUSHANBE 209


1. SUMMARY: Tajikistan's cotton harvest continues to decline
since the fall of the Soviet Union due to lack of farm capital,
poor land management, and detrimental financing options. The
government acknowledges a need to change policies to resuscitate
the cotton industry, but real reform has been slow. END SUMMARY.


2. Tajikistan only harvested 73.3% of its 610,000 tons cotton
quota this year, down 109,354 tons from last year. The loss of
over one-quarter of expected cotton revenue, coupled with
decreasing world cotton prices, hurts Tajikistan's economy and
its impoverished farmers, three-fourths of whom grow cotton.
Based on this year's results, Tajik authorities plan to revise
the cotton quota for 2006 down to 550,000 tons from the slated
610,000 tons. The government had forecasted cotton harvest
yields through 2010 and hoped to harvest 750,000 tons in 2010,
but will most likely have to downgrade upcoming projections.
Tajik cotton production has been in decline since the collapse
of the Soviet Union when the country averaged one million tons
of cotton per year. In addition to reducing expectations for
the cotton harvest, authorities have allocated less land towards
cotton for 2006, only 250,000 hectares compared to 2005's
288,000 hectares.


3. In a newspaper article December 26, Prime Minister Akilov
blamed the poor harvest on a shortage of technical equipment and
futures companies' failure to provide pesticides and fertilizer
in a timely manner. Futures companies are the interlocutors
between international investors and farmers. They provide loans
and farm supplies to farmers and collect the cotton to sell on
the international market. Akilov held a meeting on December 24
with relevant ministries, such as the Ministry of Agriculture,
the Tajik Central Bank and futures companies to strategize an
efficient 2006 harvest. Regional authorities were tasked with
preparing for cotton sowing by mid-January. He also stated that
farms should clear off their water and electricity debt.
According to Saidmurod Bahriddinov, Chief of the Department of
Technical Crops, the government decreased the 2006's cotton
target to increase grain, potato and vegetable production in an
effort to balance food security, a growing concern for
Tajikistan.

POOR LAND MANAGEMENT LEADS TO LOW COTTON YIELD


4. Tajikistan's poor cotton harvest stems from a combination of
many factors (REFTEL). Tajikistan's concentrated efforts on
growing cotton has taken its toll on the land and led to a
decrease in cotton yield. An old and inefficient irrigation
system exacerbated by Tajikistan's high elevation has worsened
land salinization and rendered the land infertile to crops.
Although all farms have been privatized, farmers have no say
over what they can use the land for and are instructed by the
government to grow cotton year after year just so the country
can meet its cotton quota. There is no system of crop rotation
and continuous cotton growth wears out the land.


5. Access to water affects the entire country and lack of water
contributes to a low cotton harvest. Agriculture uses 84% of
Tajikistan's water supply, however due to an inefficient and old
leaky irrigation system, only half of the water actually reaches
farms. Prime Minister Akilov called on farmers to cut their
electricity and water debt. However, the cost of pumping water
up to high elevations is expensive and many impoverished farmers
cannot pay their electric or water bills.


6. Akilov's complaints about the lack of machinery and futures
companies are valid. Cotton is still handpicked in Tajikistan
by peasants and forced student laborers. Farmers complain that
existing gins are inefficient and the majority cannot afford
capital machinery for their farms. Futures companies hold a
monopoly over farm supplies and force farmers to buy products at
their designated prices. The futures companies' delay in
supplying pesticide this year was detrimental to Tajik crops,

which are constantly plagued by pests. Tajikistan is also
disadvantaged by not having a cotton grading facility. Although
the cotton may be high quality, it is bought by international
buyers at a discount since the quality of the cotton must be
established offshore.

THE GOVERNMENT PLANS TO REFORM


7. The Minister of Agriculture sent a letter in November to
President Rahmonov outlining several recommended agriculture
reforms, including: introducing better cotton seeds, increasing
crop rotation, and increasing the number of domestic cotton
gins. The Ministry of Agriculture hopes to see a textiles
industry grow in Tajikistan.


8. Reforming the banking and finance sector would help small
and medium-sized enterprises as well as the country's farmers.
Tajik farmers owe an estimated 230 million dollars to banks and
investors. Bahriddinov told PolOff that President Rahmonov gave
a verbal order to the National Bank to lend directly to farmers
and not go through futures companies. The government set up an
independent commission to investigate reforming the futures
companies.


9. Bahriddinov said President Rahmonov is looking at ways to
offer credit at a lower rate and provide farmers with the loans
they need. Bank loan interest rates are exorbitantly high at up
to 36% and prevent farmers as well as other entrepreneurs from
borrowing money. However, the futures companies set interest
rates on farm loans even higher at nearly 60%. Banks will not
lend to farmers because the farmers come with old land debt. In
addition, the banks require collateral on the loans, which
farmers cannot provide, thereby prohibiting them from receiving
bank credit.


10. Even the government has acknowledged futures companies do
not meet expectations as investment mediators and contribute to
farmers' debt. Political interests have prevented reform of the
banking sector and the role of futures companies. The Chairman
of the National Bank, Murodali Alimardonov, is also a partner of
HIMA, one of the largest Tajik futures companies. His
investment in the cotton industry is a conflict of interest in
reforming the sector.


11. Although the government, NGOs and farmers complain about
futures companies' gouging activities, the Asian Development
Bank (ADB) has argued middlemen are needed because international
investors hesitate to deal with farmers directly. ADB instead
advises that the government audit futures companies, weed out
exploitative middlemen and establish good investment practices.


12. Tajikistan's government insists on promoting cotton because
it is a strategic cash crop for the country. Bahriddinov argues
this is because the state earns ten percent on all cotton
revenues, with cotton accounting for 40% of exports and
providing badly needed jobs.


13. COMMENT: The government may blame and rationalize a poor
cotton harvest on a variety of peripheral factors, but a
consistently declining cotton yield is the result of bad
government policy, poor land management and a system that
squeezes farmers out of the business. Unless Tajikistan can
reform the cotton industry and improve farming and land
conditions, the country will no longer be able to rely on cotton
to sustain its economy. Banking and financial reforms are
needed, but are hindered by entrenched financial interests of
powerful politicians. The government is only beginning to
realize the need to reform. A working group of NGOs, IFIs and
government officials continues to discuss ways to move the issue
forward in a way that addresses Tajikistan's national interests
and not special interests. END COMMENT.
ARMBRUSTER


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