TAJIK COMPLACENCY WORRIES INTERNATIONAL MONETARY FUND

UNCLAS DUSHANBE 001285

SIPDIS

SIPDIS

STATE FOR SCA/CEN DGEHRENBECK

E.O. 12958: N/A
TAGS: ECON EFIN PGOV TI
SUBJECT: TAJIK COMPLACENCY WORRIES INTERNATIONAL MONETARY FUND



1. Summary. The Tajik government's relaxation of monetary and
fiscal policy worried International Monetary Fund Mission Chief
Carlos Pinerua at a quarterly briefing for donors on the Tajik
economy Sept 4. Locally, the real estate, construction, and
consumer markets continue to expand rapidly. However, the
government's expansionary 2008 budget plans and unchecked
inflation weigh negatively against the country's strong economic
growth. End
Summary.


2. Pinerua reported that a 60% growth in remittances from
migrant workers channeled through the banking system fed an
impressive 7.5% annualized growth rate in the first half of

2007. Some of this remittance growth represents increased use
of the banking system for money transfers, but the booming local
economy and import growth bears out strong remittance growth as
well. Government revenue also increased largely from increased
Value Added Tax collection, and the government is expecting a
major budget surplus this year. However, the government has
done little to contain inflationary pressures, and the draft
budget [Note: which the government does not release to the
public. End Note.] is highly expansionary with 40% budget
growth in 2008 in nominal terms. This includes a 40% increase
in government salaries and increases in social sector spending.
The International Monetary Fund estimates annual inflation at
9.4% for 2007, but the Commonwealth of Independent States
Statistical Committee puts inflation much higher at 18.3%, and
the increased prices of foodstuffs and other products bear out
this higher figure.


3. Pinerua told donors to keep pushing the government to
relinquish control over the economy. De facto government quotas
particularly in the agricultural sector hamper growth and
efforts to reduce poverty. Government-directed lending by the
National Bank could also prove hazardous, damaging the
credibility of the banking sector. Pinerua believes that Tajik
banks are well capitalized, however, and are generally able to
withstand shocks. The banks may be tested by a proposed $80
million bailout of the agricultural sector by the Asian
Development Bank.


4. Tajikistan still does not record the nearly $1 billion in
Chinese loans on its books and has taken few steps to measure
the actual value of these loans. China recently backed out of a
deal to build a dam on the Zarafshan River due to Uzbek
pressure, and it is not known if they will find another
investment project or will simply recant this part of the loan.
At the Shanghai Cooperation Organization Summit in Bishkek,
China was rumored to be considering an additional $10 billion in
loans for Central Asia, which could further weaken the Tajik
economy should the government decide to take on more debt.


5. Comment. Consumer inflation is a growing concern among
average Tajiks, and local government officials have attempted to
artificially put a lid on price increases. Despite planned
increases, Tajikistan still lags far behind on social sector
spending. Meanwhile, the government continues its irresponsible
spending on palaces and, potentially, a new presidential Boeing
aircraft. Tajikistan's dependence on remittance income and on
unconditioned foreign lending and investment, including from the
Chinese Government, tends to undermine fiscal responsibility and
dampen real economic reform. End Comment.

JACOBSON