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By Raphael Minder in Hong Kong and Isabel Gorst in Moscow
Financial Times

Multilateral institutions are investigating Tajikistan’s failure to report to the International Monetary Fund that it guaranteed $500m in bank loans to its cotton sector, an exposure that could undermine the country’s entire financial system.

The IMF, which in 2003 helped establish Creditinvest, the Tajik company through which most of the loans were steered, is due to discuss the affair at a board meeting on Wednesday.

The IMF, the World Bank and the Asian Development Bank held emergency meetings in January with Tajik government officials and the governor of the central bank to establish the whereabouts of the loans and the financial situation in its cotton industry, the backbone of the economy.

The international bodies are concerned that the Tajik central bank could be held responsible for $500m in commercial debt, equivalent to almost half the country’s existing sovereign debt of $1.2bn (€780m, £600m).

Failure to resolve the lending issue quickly could threaten the overall economic stability of what is already central Asia’s poorest country.

The cotton sector is Tajikistan’s biggest employer. However, the country’s export revenues from cotton are expected to slump this year because of indebted farmers’ inability to buy quality seed and fertiliser and repair decrepit irrigation systems.
Any problem with cotton loans "can have a major impact on the [Tajik] economy", said Juan Miranda, director-general of the ADB’s central Asia department.

Tajik law bans the use of land as loan collateral, leaving borrowers with little choice but to seek state guarantees.

"We expect that the Tajik government will initiate a detailed investigation into the use of these funds and make every effort to ensure their recovery," said Mehrnaz Teymourian, the World Bank’s country programme co-ordinator for central Asia.
About $330m of the outstanding lending to the Tajik cotton sector has come from international banks, according to officials familiar with the situation. Tajik banks have also provided smaller loans.

The Tajik government would not comment ahead of the IMF meeting. The central bank did not respond to the FT.

Independently of the loans under investigation, donors estimate the sector, which also suffers from a lack of competition among processors, requires about $80m a year in additional lending to keep it afloat.