NEW TAJIK BUDGET PRIORITIZES ENERGY

UNCLAS SECTION 01 OF 03 DUSHANBE 001456

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EINV PGOV TI
SUBJECT: NEW TAJIK BUDGET PRIORITIZES ENERGY

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1. (U) Summary: President Rahmon signed the 2010 "anti-crisis"
budget on November 14, three days after it was approved by the
Parliament and a month earlier than previous practice. Despite
the financial crisis, the new budget is Tajikistan's biggest
ever, totaling over 6.5 billion somoni (about $1.5 billion),9%
higher than the original 2009 budget, and 18% higher than the
final version of the 2009 budget that was reduced to deal with
the crisis. The new budget increases social sector spending
while addressing Tajikistan's perennial energy difficulties by
stepping up funding for the Roghun Hydropower Station to 650
million somoni, 117 million more than the previous year. Budget
numbers are in the final paragraph. End summary.



Budget Snapshot




2. (U) President Rahmon signed the 2010 "anti-crisis" budget on
November 14, three days after it was approved by the Parliament
and a month earlier than previous practice. Expenditures in
2010 are calculated at 6.782 billion somoni, while revenue is
anticipated at 6.537 billion somoni, leaving a deficit of 245
million somoni, or 1% of expected gross domestic product (GDP).
This is an increase over 2009's expected deficit of 0.5% of GDP,
but in the overall guidelines set by the International Monetary
Fund (IMF). GDP for 2010 is predicted to be 24.5 billion
somoni, up from 20.1 billion somoni in 2009. The government
expects to fill the budget deficit by loans from multilateral
donors (totaling 215 million somoni),proceeds from
privatization of state enterprises (15 million somoni),and new
treasury bonds (15 million somoni). Debt service is estimated
at 162 million somoni, or under 0.7% of GDP, and will be
financed with loans from the Asian Development Bank (ADB) and
World Bank as well as Finance Ministry deposits in the National
Bank.




3. (U) Expenditures in the 2010 budget have increased in all
categories except one. Overall social sector spending next year
is expected to be 2.75 billion somoni, 16.2% higher than the
revised 2009 budget (and 12.7% higher than the original).
Government operations and defense have increased by 7.6% over
the revised 2009 budget, although they are down 6.7% compared to
the original. The biggest increases in 2010, however, have come
in economic sector expenditures, which are up 29.2%, or 22.1%
compared to the original budget. The only expenditure to
register a decline is education, which will drop from 1.11
billion somoni to 1.07 billion somoni. This drop follows an
earlier reduction from 1.14 billion somoni in the original 2009
budget.



Social Sector Registers Modest Increases, but Education Falls




4. (U) The biggest increase over last year's budget is for
social protections, including pensions, slated to receive 1.07
billion somoni in 2010, 348 million somoni more than last year.
Social protections comprise 45% of all social sector spending in
the 2010 budget. Pensions are estimated at 770 million somoni
-- a 15% increase over last year. On average, statutory budget
items will receive a 24% increase against the revised 2009
budget with about 82% comprising wages and pensions. Overall
spending on social protections increases as a percentage of the
overall budget, from 12.6% last year to 15.7% in 2010.
Eliminating wage and pension arrears in 2010, however, will be a
real challenge in the context of tight fiscal constraints,
according to a World Bank expert. The Ministry of Finance
envisages nominal wage increases of 15% in the health sector by
July 1, 10% in education by September 1, and 10% for public
employees in all other sectors by July 1.




5. (SBU) Not all of the press about the budget appears to match
the figures as released. For example, Minister of Finance
Safarali Najmiddinov reported that education expenditures would
rise in 2010 by 126 million somoni, but according to official
figures they dropped by 42 million somoni (or by 71 million, if
one compares to the original 2009 budget). As a share of the
overall budget, expenditures in education drop from 19.6% last
year to 15.8%, roughly the same level as 2007 and 2008.
Relative health expenditures decline somewhat as well, from 6.8%
of last year's revised budget to 6.0%. (A World Bank consultant

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has calculated education's overall share of the budget as 17.9%
and that of health at 6.5%; it is not clear where these figures
come from.) To a certain extent, the reduction in expenditures
on health and education reflects the fact that 2009 figures were
relatively high, because donors insisted the government maintain
social sector spending in its revised budget as a condition for
receiving assistance to cope with the financial crisis. While
absolute numbers, with the exception of education, have
increased in 2010, the reduction in health and education
spending as an overall percentage of the budget indicates the
government plans to concentrate most anticipated 2010 revenue
increases in other areas.



Biggest Increases are in Economic Sphere




6. (U) Government economic sector outlays rise more, in both
absolute and relative terms, than any other part of the budget.
In percentage terms, the biggest increase over last year's
revised budget came in the mining, mineral processing, and
construction sector, where spending is slated to rise 110%, from
27.5 million somoni to 57.8 million in 2010. The next highest
increase is a 62% boost in housing and public utilities. In
absolute terms the biggest economic sector increase (and second
largest overall increase) comes in the fuel and energy complex,
which will receive 1.07 billion somoni this year, 180 million
somoni more than 2009.




7. (U) Subsidies to regional budgets are expected to equal 1.64
billion somoni. As in previous years, the President's home
province of Khatlon receives nearly half of all subventions in
the 2010 budget. A number of projects under externally financed
investment (PIP),which are projected at 1,124 million somoni,
will affect the broad 7.3% deficit target. According to an
advisor at the World Bank, 76% of these investment projects are
in the energy sector, including construction of the Roghun
hydropower station (650 million somoni),rehabilitation of the
220 kV and 500 kV transmission lines at the Nurek hydropower
station (158 million),construction of the new electricity
transmission line "Tajikistan-Afghanistan" (172 million),and
others. Financing for Roghun increased by 117 million somoni,
22% over nominal previous year expenditures. Figures for Roghun
are not included in the published budget and were taken from
press reports. The World Bank has reported slightly different
number: 612 million somoni, representing an increase of 11%.
Their smaller percentage increase appears to have factored in
inflation.


Optimistic assumptions on the revenue side



8. (U) The 2010 income target of 6.537 billion somoni is
optimistic but achievable, according to the World Bank expert.
The latest figures show that budget outturn for the first nine
months of 2009 was 76% of projected annual income, indicating
that revenue models are on track. Tax and non-tax revenue is
projected to grow by 14.4% relative to the 2009 amended crisis
budget and will reach 4.810 billion somoni. The tax-to-GDP
ratio is projected to increase slightly from 17.4% in 2009 to
17.8% in 2010, while the revenue-to-GDP ratio is projected to
remain at 19.6%. The share of VAT and income tax in total
revenue is estimated at 58% and 14%, respectively -- high by
historic standards. The share of revenue generated by local
governments is estimated to increase in 2010 from 8.8% to 17.8%.




9. (SBU) A number of developments are exempt from taxes. Among
these are public sector construction projects such as secondary
schools and the National Library, and private sector
developments like the Serena Hotel and the Ismoili Somoni Hotel,
rumored to be connected to one of the President's daughters.
Also exempt from taxes is the President's lavish new "Palace of
Nations," which officially cost $100 million to build, but whose
actual cost, Embassy sources say, is closer to $300 million.
Imports of public transportation vehicles, agricultural
machinery, gas, and electricity are also tax-free.




10. (SBU) According to the 2010 budget law, 20% of any excess
revenue from local governments and 30% percent of excess revenue
from the republican budget will be transferred to a newly

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created Stabilization Fund intended to serve as a safety cushion
throughout the fiscal year. According to a World Bank
consultant, roughly 10% of generated revenue normally is
transferred to the President's Reserve Fund each year, which is
estimated at 96 million somoni in 2010. This information,
however, is not included in the budget. The government projects
GDP to grow by about 5% next year, inflation to come in at 9%,
and the somoni to slide against the dollar, from 4.37 to the
dollar to about 5 to the dollar.




11. (SBU) Comment: Making a detailed analysis of Tajikistan's
budget is difficult because the published version includes only
broad categories, and it is clear that not all funds controlled
by the government show up in the budget. The President's
Reserve Fund is one example; the revenue from the Talco aluminum
plant is another. What is clear is that the government is
throwing most of its new money into energy. If perhaps
optimistic projections for GDP and revenue growth bear out, then
it is reasonable to expect the government to make some inroads
in Roghun and other projects and still have enough money to fund
the social sector. If, however, the crisis continues to depress
revenue, donors will be watching carefully to see where the
government reduces its spending. End comment.
GROSS