Identifier
Created
Classification
Origin
10DUSHANBE176
2010-02-17 08:06:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Dushanbe
Cable title:  

IMF TAKES STAND ON ROGHUN; SOME SAY NOT STRONG ENOUGH

Tags:  EFIN ECON ETRD PHUM IMF TI 
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VZCZCXRO5389
PP RUEHLN RUEHSK RUEHVK RUEHYG
DE RUEHDBU #0176/01 0480806
ZNR UUUUU ZZH
P 170806Z FEB 10
FM AMEMBASSY DUSHANBE
TO RUEHC/SECSTATE WASHDC PRIORITY 1259
INFO RUCNCIS/CIS COLLECTIVE
RUEHBUL/AMEMBASSY KABUL PRIORITY 0453
RUEHBJ/AMEMBASSY BEIJING PRIORITY 0167
RUEHIL/AMEMBASSY ISLAMABAD PRIORITY 0256
RUEHNE/AMEMBASSY NEW DELHI PRIORITY 0188
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEAIIA/CIA WASHDC
RUEHDBU/AMEMBASSY DUSHANBE 2711
UNCLAS SECTION 01 OF 04 DUSHANBE 000176 

SENSITIVE
SIPDIS

TREASURY FOR JEFF BAKER, DAVID WRIGHT

E.O. 12958: N/A
TAGS: EFIN ECON ETRD PHUM IMF TI
SUBJECT: IMF TAKES STAND ON ROGHUN; SOME SAY NOT STRONG ENOUGH

REF: A. 09 DUSHANBE 1443

B. DUSHANBE 52

C. DUSHANBE 67

D. DUSHANBE 103

E. DUSHANBE 171

DUSHANBE 00000176 001.2 OF 004


UNCLAS SECTION 01 OF 04 DUSHANBE 000176

SENSITIVE
SIPDIS

TREASURY FOR JEFF BAKER, DAVID WRIGHT

E.O. 12958: N/A
TAGS: EFIN ECON ETRD PHUM IMF TI
SUBJECT: IMF TAKES STAND ON ROGHUN; SOME SAY NOT STRONG ENOUGH

REF: A. 09 DUSHANBE 1443

B. DUSHANBE 52

C. DUSHANBE 67

D. DUSHANBE 103

E. DUSHANBE 171

DUSHANBE 00000176 001.2 OF 004



1. (SBU) Summary: An IMF team recently completed a two-week
visit to Dushanbe to assess economic and government performance
before releasing further funding under its Extended Credit
Facility (ECF). A central issue was the government's campaign
to fund the Roghun hydroelectric dam. The IMF outlined three
main concerns about Roghun: (1) there is no clear plan in place
to manage and use the funds it has raised -- over $160 million
so far. (2) The funds are raised in somoni, but the bulk of the
spending on Roghun will have to be in foreign exchange. (3) The
Roghun campaign is causing a modest but real increase in poverty
and decline in economic growth. IMF team leader Axel
Schimmelpfennig acknowledged concerns that the government
continues to force its citizens to contribute to Roghun. He
said it was not the IMF's role to question Roghun on human
rights grounds, but he urged the government to halt on economic
grounds: Tajikistan already has raised more somoni than it
needs; the government must now turn its attention to raising
foreign exchange. Schimmelpfennig told the government frankly
that the campaign was burning political capital with donors, all
to raise money it could not use in the short term. He
encouraged donors to press their concerns about Roghun with the
government directly. Apart from Roghun, Tajikistan's economic
performance had been better than expected given the financial
crisis. The IMF team will bring a recommendation about future
assistance to the PRGF to the full IMF Board within the next few
months. End summary.


2. (SBU) On February 12, representatives from the International
Monetary Fund (IMF) briefed donors on the tentative conclusions
of its two-week assessment mission to Tajikistan. The mission's
specific task was to measure the government's progress on the
2009 benchmarks set in the Extended Growth Facility (ECF)
(previously the Poverty Reduction and Growth Facility). Deputy
Division Chief Axel Schimmelpfennig, who led the mission,

acknowledged that donors had serious and wide-ranging concerns
about the government's campaign to raise funds for the Roghun
hydroelectric dam -- including extortion, the anticipated
increase in poverty, and the lack of transparency in accounting
for the funds (see refs A through C). He said, however, that
the IMF had to consider Roghun within IMF's mandate -- i.e., by
examining its effects on macroeconomic stability, fiscal
operations, and poverty. From this narrower perspective, he
identified several concerns.

IMF PUSHES FOR BETTER MANAGEMENT OF ROGHUN FUNDS


3. (SBU) Schimmelpfennig said the government did not appear to
have a clear plan in place to manage and use the funds raised.
The government has a "pretty good idea" of the total costs of
Roghun, but did not present the IMF with a realistic timeline.
The government was officially maintaining that the dam would be
built by 2012, but no one with any knowledge about the project
believed it would be completed before 2014. The IMF was using
the later date for its calculations. Another concern was the
management of the funds raised so far. The government has
committed to releasing details of the fundraising campaign every
ten days. According to the February 11 update, available on the
Ministry of Finance website (www.minfin.tj),the government has
sold 706,002,413 somoni ($162 million) in shares in Roghun.
(Note: Since shares are sold in 100 somoni increments it is not
clear why the total is not a round number. End note.) The
money was held in eight banks and the treasury at the Ministry
of Finance. Schimmelpfennig said the government had agreed to
have an external audit of the Roghun joint stock company for
2008 and 2009. While the audit would not reveal anything about
the current fundraising campaign, which began in early January
2010, it was important to provide a baseline for future
accounting.

GOVERNMENT RAISES SOMONI BUT MUST SPEND DOLLARS


4. (SBU) The IMF's second major concern about Roghun was the
"foreign exchange gap." The government was raising funds in
somoni, but the bulk of the expenditures for construction
materials will have to be made in foreign currencies.
Schimmelpfennig said the government had acknowledged its import
needs for Roghun lay between $500 million and $800 million (he
said it was not clear whether this was for the first phase alone
or the entire project). Using somoni to buy large amounts of

DUSHANBE 00000176 002.2 OF 004


dollars could have profound macroeconomic consequences,
including a plunge in the exchange rate and a skewed balance of
trade.

EFFECTS OF ROGHUN CAMPAIGN ON POVERTY


5. (SBU) Under the ECF (formerly PRGF),the government of
Tajikistan has undertaken to maintain certain social sector
spending minimums. Donors expressed concern that the
government's policy of forcing doctors, teachers, and other
social sector employees to buy shares in Roghun effectively
undercut these spending floors. Schimmelpfennig acknowledged
the concern, but said it has been difficult to determine the
effects of the Roghun campaign on poverty in Tajikistan. He
said the World Bank was working on a report on the social impact
of Roghun, while the IMF focused on the macroeconomic issues.
According to very preliminary calculations, the World Bank
estimated the Roghun campaign would increase poverty between
0.5% and 6.0%, probably closer to the lower figure. There were
two reasons for the relatively modest effect on poverty. First,
if one considered the Roghun payments to be a sort of ad hoc
tax, it appeared relatively progressive. According to
discussions with government officials and anecdotal information,
it seemed the majority of shares have been sold to the better
off. Second, the Roghun campaign was a "one-off effect," that
should not have a lasting impact on poverty.


6. (SBU) Donors disputed both claims. Numerous attendees
related how even the very poorest segment of the population had
been forced to contribute. Schimmelpfennig appeared to
backtrack somewhat, saying it was true that although the overall
share of money collected from the poor was small, the campaign's
"marginal effect" on poverty could be significant among this
population. He noted that the poverty line in Tajikistan is
calculated at 86 somoni ($20) per capita per month, but the
minimum share purchase is pegged at 100 somoni. There were
reports that many Tajiks who cannot afford even the minimum 100
somoni payment have been "encouraged" to pool their resources to
purchase shares. This raised an additional problem, however,
since the share will be issued in only one person's name, so the
others will have no equity. (Comment: This assumes the shares
have any value at all -- a concern the IMF acknowledged but did
not elaborate on. End comment.)


7. (SBU) Donors questioned whether the Roghun campaign would
truly be a "one-off" event. Certainly the official rhetoric has
suggested a more permanent campaign. Further, the very success
of the campaign -- the IMF said they never would have expected
the government to be able to raise $160 million in this way --
might tempt the government to employ the same tactics for future
fundraising. Schimmelpfennig said the IMF could not base its
analysis on hypothetical events, but encouraged the
international community to be vigilant and forceful with the
government to prevent future occurrences. He said the IMF
estimated that the Roghun campaign could slow GDP growth by "up
to 1%" in 2010.

ROGHUN COMPLETION DATE: 2012 or 12TH OF NEVER?


8. (SBU) World Bank Country Representative Chiara Bronchi
reinforced the IMF's assessment that the government was raising
funds it could not use. She said the Roghun project did not
have the capacity to absorb more than $40 or $50 million a year.
The only way the government could spend more money would be to
bring supplies in by plane, a scenario she did not think
possible. If true, and assuming stable exchange rates (an
unlikely assumption),the government had already raised enough
money to fund Roghun through 2014. Bronchi agreed with the IMF
that the government's timeline for completing the first phase of
Roghun by 2012 was untenable. Builders still had not repaired
the damage to Roghun's massive tunnels from severe landslides in

1993. (Roghun was begun in 1976 by the Soviets, but the project
was mothballed during the Tajik Civil War in the 1990s.)
Despite official announcements that builders had fully excavated
the collapsed tunnels late last year, Bronchi said it would be
at least another twelve months before this work was done. The
World Bank was underwriting two studies on the Roghun project,
an environmental and social impact assessment and a technical
feasibility study. Bronchi said the long-delayed studies will
likely not be completed for another year.

IMF RECOMMENDATIONS FOR GOVERNMENT


9. (SBU) In his conversations with government officials,

DUSHANBE 00000176 003.2 OF 004


Schimmelpfennig said he urged them to declare victory, cease the
Roghun fundraising campaign, establish a strong and transparent
governance framework for the Roghun funds, and work with the
Fund to secure further financing from an international
consortium that could raise forex. Schimmelpfennig said this
was the IMF's best path for convincing the government to stop
the forced contributions. He lightly scolded donors for hoping
the IMF would do their dirty work by criticizing the government
on issues that lay outside of its mandate. He said donors must
take a firm and clear stand with the government about their
Roghun concerns. He said he warned officials that the campaign
was unnecessarily burning political capital with the
international community. He acknowledged, however, that the
message was so far falling on deaf ears: the very day he
delivered it to President Rahmon, the President issued a renewed
appeal to the population for Roghun funds.


10. (SBU) The IMF urged the government to establish a mechanism
to redeem shares issued in 1994 for the Sangtuda-1 hydroelectric
plant, completed just last year with Russian financing. For
many Tajiks, the current Roghun campaign is a more aggressive
replay of the Sangtuda scheme. Many who were prevailed upon to
buy the Sangtuda shares had long ago given up hope of redeeming
them. Schimmelpfennig asked donors to underscore this issue as
well. It would be an important demonstration of principle for
the government.

GOVERNMENT HAS MET MOST IMF OBLIGATIONS...


11. (SBU) Schimmelpfennig said Tajikistan's overall
macroeconomic performance in 2009 had been satisfactory. (Since
Roghun share sales began on January 6, 2010, the fundraising
campaign had minimal impact on the 2009 IMF benchmarks.)
Tajikistan has weathered the global financial crisis better than
expected. GDP grew 3.4%, driven by non-cotton agriculture,
which expanded as a result of reforms in the sector. The
depreciation of somoni (from about 3.3 to 4.3 to the dollar)
contributed, encouraging expenditure on domestic products
instead of more expensive imports. According to preliminary
data, Tajikistan met all of its quantitative targets under the
ECF. Minimum social sector expenditures were met for 2009, and
the government agreed to increase social spending by 1% of GDP
in 2010. Structural reforms have been slower than anticipated,
but not enough to cause concern. Annual audits of the National
Bank for fiscal years ending April 2008 and April 2009 have been
delayed, but are finally moving forward. These audits must be
completed before further funding can be released under the ECF.

...BUT STILL NO AUDITS


12. (SBU) Audits of Barqi Tojik and the state-owned Talco
aluminum company have been mostly completed, but have not yet
been released to the public. These are not formal requirements
under the ECF, but the IMF has nevertheless been pressing the
government for their release. The Barqi Tojik audit, which was
supposed to have been published on the company's website by
December, has reportedly been delayed because some financial
figures must be recalculated. The fieldwork for the Talco audit
has been completed. In addition, the government has agreed to
an audit of Talco Management, the offshore entity based in the
British Virgin Islands that controls the real profits from
Talco, to be tendered by the end of June. The audit would cover
2008 and 2009.

DONORS DISMAYED BY IMF REACTION


13. (SBU) At the briefing and afterward, a number of donors
expressed their dissatisfaction with an IMF approach they
considered too weak. Some were particularly upset by a
subsequent press release from the IMF praising government
reforms while making scant mention of Roghun's negatives, noting
merely that it "...may temporarily dampen growth in 2010 by up
to one percentage point, with households reducing consumption
and corporates investment in order to purchase Roghun shares."
At the same time, the IMF tacitly endorsed Roghun itself by
calling it "...an important element of the government's energy
strategy." Donors noted as well that the IMF was actually
proposing to increase the ECF from its original $116 million to
$156 million, "in line with the new norms for similar
countries." Summing up the feelings of several donors, the head
of the Swiss Agency for Development and Cooperation questioned
the rationale for continuing to provide multi-million dollars of
assistance to Tajikistan when the government has shown it is
capable of raising that money on its own -- and, worse, taking

DUSHANBE 00000176 004.2 OF 004


for granted that foreign donors will step in to alleviate the
social sector problems that the government is exacerbating.

NEXT STEPS


14. (SBU) The IMF team will present its findings to management
in Washington, which will try to work out a package for delivery
of the next tranche of $42 million under the ECF. If things go
smoothly, management should take a request for approval to the
IMF Executive Board by the end of April. If the Board has not
approved the funding by the end of June, the ECF is officially
considered off-track.

COMMENT: WHEN TO SAY WHEN?


15. (SBU) Donor frustrations with the IMF are understandable: As
an IMF insider recently said, the Fund's natural priority is to
try to remain engaged where it is working. On the other hand,
Schimmelpfennig was right to be exasperated with those who
expected the IMF to carry all of their water on Roghun. Our
approach has been, and should continue to be, to pursue this
issue along two fronts: by putting pressure on lending
institutions such as the IMF and the World Bank to carefully
review their programs, but also by raising our concerns that
fall outside of these institutions' purview directly with the
government (ref D). On the first front, we and several other
donors are asking our representatives on the IMF Executive Board
to think carefully before approving additional funding under the
so-called "Poverty Reduction and Growth Facility" for a
government whose policies are in fact increasing poverty and
reducing growth. On the second, we are coordinating with other
donors to address the broader concerns of coercion and damage to
the investment climate (ref E). Should these concerns fall on
deaf ears, we may wish to review some bilateral programs. End
Comment.
QUAST