More Trouble for Tajik Economy

Major donors have accused Tajikistan's government of falsifying financial records, leading the IMF to order the repayment of more than $47 million in loans, nearly half the country's foreign reserves

Tajikistan weathered one of its worst winters in decades this year, enduring record snow and cold compounded by serious energy shortages.

But as the summer months approach, the country faces another kind of storm. Major donors have accused the government of falsifying financial records, leading the International Monetary fund to order the repayment of more than $47 million in loans, nearly half the country's foreign reserves.

In light of Tajikistan's precarious financial health and grinding poverty, the repayment will be made over time, starting in September.

Carlos Pinerua, IMF mission chief for Tajikistan, called the falsified financial reports submitted by the National Bank of Tajikistan a "major discovery" and the most serious of the six such incidents the international lender has had involving the Tajik government.

"The IMF case is only one example of the country's financial policy on the decline," said Tohiri Abdujabbor, an economist at the Tajikistan International University. "But the very sad thing is that the story with the IMF has finally dissuaded potential investors from investing their money in Tajikistan."

Indeed, U.S.-based investors pulled out of a transmission project in Tajikistan earlier this year. Other investors are also getting cold feet. Chinese entrepreneurs withdrew from a hydropower project on the Zarafshon river and the UK-based Commonwealth & British Mineral Ltd. sold its controlling interest in JV Zeravshan LLC, a Tajik gold mining and exploration company.

Investors and donors are also concerned about an estimated $500 million in unaccounted-for loans provided to the cotton industry through the Tajik finance company Creditinvest, while some foreign investors have decided to withdraw from the country. Legal battles, endemic corruption, and political uncertainty have also rattled investors.


Long-serving President Emomali Rahmon has vowed to fight corruption, improve public-sector services, and open up his country to investors, who aren't exactly queuing up at the door. Serious graft, bureaucracy, and state domination of the economy remain roadblocks, and the falsified financial reporting spooked other donors, including the European Bank for Reconstruction and Development, Asian Development Bank, and foreign governments.

"We discussed the fact that the international community is very concerned and has lost some of its confidence that the government is fully undertaking all of its responsibilities in the area both of its International Monetary Fund commitments and in making sure that it meets the needs of its people," a senior U.S. State Department official, Pamela Spratlen, told a news conference on 2 April, after meetings with senior Tajik officials in Dushanbe.

Graeme Neil Loten, the British ambassador to Tajikistan, recently told the Fakty i Kommentarii newspaper that investors are leery of doing business in Tajikistan. "Neither British nor other foreigners are ready to invest their money in the country since there is no warranty for security and return of investment," he said.

In April, visiting French Foreign Minister Bernard Kouchner told journalists that investors "need to trust in the government structures. If there is no such trust, then the flow of investment will be small. We are ready to assist Tajikistan in resolving these issues." He added, "As a friend of Tajikistan I can say that unless structural changes are undertaken, we will not be able to attract investment into the country's economy. I cannot make French businessmen invest their money in Tajikistan against their will. Therefore, help us so that we can help you."

Tajikistan, Central Asia's poorest economy, has few of the oil and gas resources of other Central Asian countries and has struggled to develop its economy after surviving a 1992-1997 civil war that followed independence from the Soviet Union in 1991.

Before the IMF decision in early March, the country was trying to recover from the harsh winter and, before that, a drought that threatened its hydroelectric capacity.

Its neighbor and major supplier of natural gas, Uzbekistan, last year imposed steep prices rises on Tajikistan and occasionally cut off supplies for nonpayment.

Today, more than half the country's 7 million people live in poverty, and its GDP still ranks well below what it was when the country became independent. The nation's main assets — aluminum smelting, cotton, and its hydroelectric power potential — are all beset by troubles. Government estimates for the cost of infrastructure damage, food shortages, and livestock deaths from the winter have ranged from $650 million to $1 billion.

Recognizing the country's dire conditions, UNICEF, the UN children's organization, called for millions in food and medical aid this spring to help vulnerable women and children threatened by crop shortages and soaring commodity prices. The World Bank, warning that the country faces a repeat of last winter's severe power crisis, early this month approved a $6.5 million loan to upgrade energy infrastructure.

The IMF loan repayment is just part of the bad news for the economy. Far away from Dushanbe, the operators of the Tajik aluminum smelter Talco are locked in a multinational legal battle in London courtrooms over allegations that a former director, a key supplier, and British consultants defrauded the state-run company of millions of dollars in profits. The Financial Times reported in early May that the case has become one of the most expensive lawsuits being contested in English courts, toting up more than $150 million in legal fees, roughly 4 percent of the country's GDP.

Still, the government insists things are improving. The Ministry of Economy and Trade estimated that foreign investment hit a record $860 million in 2007, and before recalling its loan, an IMF forecast some signs of progress in the country, including GDP growth of 4 percent this year and 7 percent in 2009.

But some economists caution that the figures can be deceiving. Consumer prices are expected to rise more than 18 percent this year, dampening any economic gains. Abdujabbor of the international university notes that the ministry's investment figure is inflated by the one-time gains of Chinese-backed telecommunications projects and construction of the Sangtuda-1 hydropower station. Combined, these amount to nearly half the foreign investment. Zafar Hotamov of the Asian Development Bank warns that the country still relies too heavily on imports, which tilts its trade balance.


Tajikistan's trouble with the IMF stems from the underreporting of financial reserves by at least $200 million after the country tapped those funds to prop up its cotton sector. Cotton is a key export but the industry has suffered because of slumping production blamed on centralized planning and, more recently, weather problems. IMF spokesman Masood Ahmed told journalists in Washington on 6 March, the day after the organization recalled the loan, that the Tajik case was "a serious incidence of misreporting."

Sharif Rahimzoda, who heads the National Bank of Tajikistan, has acknowledged that the IMF was not given an accurate accounting of its reserves, and the government has vowed to improve its auditing procedures. But Rahimzoda said the bank "had to support the national economy" and acted in the interest of the nation's cotton sector because commercial banks are wary of providing loans to Tajikistan.

Rahimzoda assured the IMF that the money would be returned and that the central bank would work with auditors to review its financial standing.

To date, the government has not taken action against any central bank officials for the falsified financial reports to the IMF.

Tajikistan's opposition, however, has criticized the central bank and government. Rahmatullo Zoirov, head of the opposition Social Democratic Party, said this was not the first time that the government had misled lenders. "After all this, the IMF probably lost its patience," he said.

But corruption and stifling bureaucracy are not just dissuading international entrepreneurs.

One foreign investor who asked not to be named said he has waited two years to get a permit to start a construction company. He said the system for obtaining permits to start a business is overly complicated and riddled with corruption.

He is not alone. A 2004 survey conducted in Tajikistan showed that 56 percent of those polled were dissatisfied with their government's anti-corruption efforts. A survey by International Finance Corp. shows many entrepreneurs find the paperwork for getting a business license too complex.

Transparency International's global Corruption Perceptions Index for 2007 ranks Tajikistan 150 out of 180 nations, with No. 1 being perceived as least corrupt. Meanwhile, the World Bank ranks it 153 out of 178 in its global "Ease of Doing Business" survey, and 176 in protecting investors, making the country a tough sell to potential investors.

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