The last day for Tajik banks to disburse the credits received from the Government last year to finance the cotton farms in Tajikistan was 1 April 2009. When the deadline of repayment was reached, the largest Tajik banks requested that their debts be restructured or, at least, to extend the repayment term until the end of the year. The two largest banks in Tajikistan – Agroinvestbank and Orienbank – which provided the largest amount of credits to cotton farms, announced that they are facing serious difficulties in credit repayments due to an inability to extract funds from the cotton farms. Experts say that the main problem of the Tajik banking system now is the ‘inadequate credit repayment’ by the growing cotton sector due to the low cotton prices caused by the financial crisis and last year’s low cotton yield.

Cotton is still the main crop and the second main export and source of income in Tajikistan after aluminum. Furthermore, according to official statistics, almost half of the labor force, 495,500 out of 991,800, are employed in agriculture. Every year, the Government decides to allocate most of the irrigable lands for cotton production, neglecting every year’s problems of low yields and the huge debts of cotton farms estimated to be more than US$500 million.

In an attempt to solve the problem, the Government decided to change the system of crediting for cotton farms. The loans in the new system are provided to cotton farms directly by banks instead of futures companies. For the last ten years, futures companies were providing cotton farms with seeds, fertilizers, fuel and lubricants at high prices in exchange for the potential cotton yield. This system resulted in huge debts of farmers to these companies. In 2008 and as a part of the new system, the Government provided a credit of 140 million somoni to six commercial banks with an interest rate of 12-18 percent. In turn, the banks provided those credits to cotton farms along with a credit of 68 million somoni from the banks’ assets.

The new system, however, has not proven effective, as the banks are not able to repay the credits received from the Government. According to the data provided by the National Bank, only 33 percent of the received credits were repaid as of the beginning of April. As farmers cannot repay credits to the banks, neither can the banks repay the Government. Cotton farms blamed the financial crisis for causing a decrease in cotton prices and unprecedented low cotton yield last year. In 2008, Tajik farms produced about 355,000 tons of raw cotton which is the lowest yield since 1991, when Tajikistan gained independence.

Experts claim that the new system cannot succeed because what the cotton sector needs is a significant structural reform, particularly a liberalization of agriculture. “Still farmers are not free. They have no right to decide whether to grow cotton or another crop. We still have ‘plans’ on cotton production that remained from Soviet times,” says Bakhriddin Karimov, an economist. He claims that even if last year’s entire yield would have been sold; this would not have been enough to repay even half the credits received from the banks.

After the banks’ announcement concerning the ‘cotton crediting’ problems, which might threaten their liquidity and stability, the Ministry of Finance requested the Government to extend the deadline of repayment. On 14 April 2009, the President of Tajikistan, Emomali Rahmon, approved the Ministry’s request. As pointed out by the Minister of Finance, Safarali Najmiddinov, the President decided to support the agricultural sector taking into account the consequences of the financial crisis. As a result, the repayment terms are extended for six months and the interest rates are reduced to 10%. Nevertheless, some experts say this would not solve the banks’ problem but only postpone them. “It is more important to help the farmers to solve their debt problems. Deferment of payment will not help banks, but only worsen their situation”, claims Davron Kurbonaliev, an expert in economics.

This year, the Government decided to continue the system of crediting cotton farms directly through commercial banks despite last year’s failure. As the Ministry of Finance reports this year, the banks will, again, receive 180 million somoni for crediting cotton farms. Furthermore, during the meeting with the heads of the banks, Emomali Rahmon recommended commercial banks “to increase credits for cotton production and to reduce the interest rate of the credits for cotton farms.” Therefore, the only difference that was introduced in this year’s plan is that banks will receive credits for the cotton sector at a “lower and reasonable interest rate”.

In sum, the system of crediting cotton farms through commercial banks failed due to the inability of farmers to repay credits to the banks. The system seems to be incapable of solving continuous problems in the cotton sector, especially the fast-growing debts of farmers. Moreover, the system has threatened the stability of the whole banking system in Tajikistan. Experts put the system itself in question, asking whether the banks, as commercial entities, should credit an unprofitable sector, with the result of risking their own stability.