DONOR DISAGREEMENT ON TAJIK COTTON SECTOR

UNCLAS SECTION 01 OF 02 DUSHANBE 000894

SIPDIS

SENSITIVE
SIPDIS

TREASURY PASS TO JEFF BAKER; STATE FOR SCA/CEN; STATE FOR EUR/ACE

E.O. 12958: N/A
TAGS: EAGR EFIN ECON EAID PGOV TI
SUBJECT: DONOR DISAGREEMENT ON TAJIK COTTON SECTOR


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1. (SBU) Summary. Fissures within the donor community
threaten to derail efforts to resolve Tajikistan's $400 million
cotton debt. The Asian Development Bank favors a donor bailout
of the cotton sector, in order to save industry investors and
prevent a potentially fatal breakdown of the nascent banking
system. The World Bank believes that upwards of 80% of the debt
should be written off by investors who knew what they were
getting into, and allow farmers and the government to pay off
the remainder of the debt following a series of agricultural
reforms. The Tajik government is largely beholden to the
powerful investors (including some close relatives and
associates of President Rahmon) who control the debt, but donors
may be able to push the Tajik government into accepting a
debt-write off by finding ways to fund future harvests. We
should not subsidize wealthy local investors who have done
little to improve the situation and done much to keep
Tajikistan's farmers in poverty, and who may be inflating their
debt holdings to squeeze more out of donors. End Summary.


2. (SBU) Director General Juan Miranda of the Asian Development
Bank surprised donors at the June 2 Development Forum meeting in
Dushanbe by backing out of a plan to create an independent Tajik
mechanism to take on the $400 million cotton debt. He instead
proposed to bring in an international accounting firm to handle
the debt as an authoritative arbiter. [Comment: Having a
respected international company handle the debt makes sense
since the Asian Development Bank is interested in putting
significant funds into a bailout. End comment.] Asian
Development Bank proposed financing a bailout of up to $100
million, which they would split with the World Bank. World Bank
officials in Dushanbe chafed at this idea, preferring to punish
powerful Tajik investors, whom they calculate have made $1.2
billion from Tajik cotton exports over the last 10 years, while
Tajikistan's farmers grew more impoverished. The World Bank
believes the Tajik banking sector can withstand the fallout of
any investor bankruptcies, despite the fact that many of the top
cotton investors are intricately involved in Tajikistan's banks.



3. (SBU) Both donor banks remain committed to agricultural
reform, with the World Bank recently agreeing to a $15 million
agricultural development project, following on the Asian
Development Bank's $12 million program. Both projects include
funds to help create an independent debt resolution mechanism,
but do not provide loan funds to actually pay off the debt. All
donors agree that the farmers' debt should be taken out of the
hands of investors in order to free farmers from their control.


4. (SBU) Without debt relief for farmers, the roadmap on
agricultural reforms which the government signed in March will
not succeed. The roadmap commits the government to put through
a series of measures over the next three years, most importantly
preventing local governments from bullying farmers and allowing
them to buy inputs independently, plant the crop of their
choice, and sell to whomever they like. Additionally, the
government and donors will enhance seed stock, improve market
information, build processing capacity, and ease farmers' access
to credit. With U.S. technical assistance, the government is
working on land code reform that would allow buying, selling and
mortgaging of land use rights. These reform measures will put
the agricultural sector - and individual farmers -- on the path
to profitability.


5. (SBU) Getting farmers access to agricultural credit is vital
to the roadmap's success. According to the agricultural policy
unit at the Ministry of Agriculture, farmers need $80 - $100
million each year to fund the harvest. In order to improve
farmer access to credit, the United States is planning to work
with local banks to provide credit guarantees for their
agricultural loans. The European Bank for Reconstruction and
Development is also funding agricultural loan projects.
Increased funding for these programs would allow local banks to
increase their lending to the sector.


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6. (SBU) Comment: The local consultant for the Asian
Development Bank believes that the Tajik government will not go
through with essential agricultural reforms if the donors do not
bail out the investors. With tens of millions of donor funds
conditioned on the government implementing specific reform
measures spelled out in the roadmap, the government should
understand that failure to introduce reforms will only hurt the
Tajik agricultural sector more. What the government will
actually do, and how it will balance the clear need for reform
with the financial interests of powerful investors from Rahmon's
inner circle, remains unclear.


7. (SBU) Over the past year, as donors got closer to agreeing
on a debt resolution program and investors began anticipating a
big payoff, the size of the cotton debt ballooned from $300
million to $400 million, according to National Bank figures.
However, after spending over a year studying the debt on a
farm-by-farm basis, the World Bank basically gave up trying to
determine the actual size of the debt, since farmers themselves
hold scanty documentation of debts and only investors have
records of what is owed them. The World Bank feels no need to
pay off a made-up debt and neither should we. Reforming the
agricultural sector and pushing the government to fight off
powerful investors and write off the debt is the best solution
for Tajikistan's farmers. End Comment.
JACOBSON