International Conference

«Conflicts in the Caucasus: History, the Present and Prospects for Resolution»

Baku (Azerbaijan) 22-23 October, 2012 and Tbilisi (Georgia) 25-26 October, 2012

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ECONOMY

Sobir KURBANOV

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Sobir Kurbanov, National Program Officer for Economic Affairs, Swiss Cooperation Office in Tajikistan (Dushanbe, Tajikistan)

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By the beginning of 2005, the republic had achieved significant positive results. These were due to the course taken by the government and society as a whole several years ago in order to stabilize the sociopolitical situation in the country, enhance business activity and improve the investment climate. As a result of these efforts, the average annual rate of economic growth in 2000-2004 was around 10%, and per capita GDP rose from $170 to $310. Another point to note is that from 1999 to 2004, according to the World Bank, the poverty rate fell from 80% to 64%.

In the economic sphere, the country has strictly followed the recommendations of international financial institutions, so that growth has been accompanied by macroeconomic stabilization achieved through measures to tighten monetary policy, reduce inflation (from 38.6% in 2001 to 5.7% in 2005), stabilize exchange rate policy (while maintaining a freely floating exchange rate without any sharp fluctuations in recent years), and improve fiscal performance (from 2001 to 2005, budget revenues increased from 15.2% to 17.9% of GDP). In the process, the government has managed to maintain a fiscal balance, with the absolute figure for budget revenues nearly doubling from $220 million to $400 million. This increase was achieved by broadening the tax base in the real sector, mostly in private business (including the service sector), and by improving tax compliance for sales tax.

But in 2005 (in contrast to earlier years), real GDP grew by only 6.7%, including 8.5% in industry and 3.1% in agriculture, whereas the target for the year, as agreed with the IMF, was 8%. The slowdown in agriculture is largely explained by a 20% decline in the production of raw cotton and a 42% drop in cotton fiber exports.

The World Bank and the International Monetary Fund regard recent economic growth in Tajikistan as recovery growth: output in 2004 was only about 68% of the 1990 level.¹ Let us recall that in 1990-1994 the country experienced a drastic decline in output averaging 20% a year (from the 1990 level), whereas the average figure for the CIS countries at that time was 7%. Consequently, the growth rates achieved in the republic to date do not as yet reflect such things as a real solution of structural problems in the economy, a significant increase in the contribution of the private sector, higher labor productivity at privatized enterprises in the real sector, an improvement of the employment situation or an increase in domestic or foreign investment. Current economic growth is a reflection of better utilization of traditional branches of the economy (cotton growing, aluminum production), and also of faster growth in the service sector owing to a surge in imports and household consumption. As regards household incomes, these have been rising largely due to money transfers and parcels from labor migrants. Estimates of migrant remittances range from $400 million (official data) to $1 billion a year, or from 30% to 50% of GDP (100% to 250% of annual budget revenue). These remittances from migrant workers, including imports of food, considerably stimulate domestic economic activity, especially in the service sector and in retail trade, and also affect the real estate market.

So, economic growth in the short term can be sustained by means of significant investments in the production of aluminum, the hydropower industry and large projects under the foreign-funded Public Investment Program (PIP), and also by means of the above-mentioned remittances from labor migrants. In the long term, however, growth can only be sustained through further economic restructuring, a real improvement in the investment climate, creation of a more supportive environment for private business activities, diversification of financial markets, an improvement in the quality of financial services, etc.

Figure 1

GDP—Composition by Sector (%)

S o u r c e: IMF Country Report No. 05/131, April 2005.

According to the RT State Statistical Committee, the consumer price index (CPI) in 2005 was 107.8%, and average monthly inflation, 0.60% (compared to 0.40% in 2004). The largest increase was in the prices of foodstuffs (8.3%) and paid services to the population (9.3%), while nonfood products rose by 2.7%. The price of a minimum consumption basket (based on rational nutrition standards) was 86.84 somoni (about $27) per person per month.

As noted in the IMF Country Report for 2005, the republic’s authorities seek to maintain low inflation (with a projected annual figure of 8%). The increase in the money supply, including bank and reserve money, should not exceed 18%. The gross international reserves of the National Bank of Tajikistan (NBT) are to increase by $45 million, reaching 2.3 months of imports (compared to 1.9 months today). Nevertheless, the range of liquidity instruments available within the banking system remains fairly limited. In view of this, the National Bank and the Ministry of Finance should take urgent measures to stimulate the secondary market of government securities, notably for trading 3 million somoni of government treasury bills so as to enable the Ministry of Finance to repay its debt to the National Bank.

In its exchange rate policy, the republic seeks to maintain the free convertibility of its national currency, the somoni (SM), put into circulation in 2000. In 2005, on the IMF’s recommendations, the National Bank switched from weekly adjustments of the exchange rate based on actual supply and demand in the official interbank market to daily currency trading with daily quotation of the official exchange rate. Despite these changes, the foreign exchange spot market has remained stable, without any swings in supply and demand or problems with cash. In its efforts to regulate banking policy and consolidate the banking system, the NBT has also taken steps (in 2005 and 2006) to raise the minimum capital requirements for commercial banks from $3 million to $5-6 million.

In the area of fiscal policy, the total amount of revenues and grants going into the state budget in 2005 was SM 1,295.2 million (18% of GDP). As of 1 December, 2005, the execution of the state budget showed a deficit of SM 33.7 million (0.5% of GDP). Budget expenditures for the first 11 months of the year totaled SM 1,195.01 million, or 85.1% of the target figure (18.7% of GDP). The overall increase in budget revenues is due to a significant reduction in the list of tax exemptions and to a number of other measures: the introduction of a minimum corporate income tax (tax on enterprise profits) and of a unified agricultural tax in place of 17 different taxes collected in the past; implementation of the provisions of the new tax and customs codes, which entered into force on 1 January, 2005, etc. In addition, a significant increase in budget revenues is expected from a tightening of control over the Tajik Aluminum Plant (TadAZ) to ensure payment of its accumulated tax and electricity arrears. The country’s authorities believe that the new Tax Code will help to simplify procedures, improve tax administration and reduce the cost of collecting taxes, in particular by increasing transparency and reducing opportunities for corruption. Nevertheless, there are still many complaints from both fiscal agencies and taxpayers, including agricultural and other enterprises, about the absence of detailed procedures, the document’s vaguely worded provisions, etc.

In formulating the budget for 2005, the authorities focused their attention on avoiding a deficit and ensuring fiscal discipline. Transparency was increased through more active participation in this process of a parliamentary budget commission (to select the main priorities). Thus, some unproductive investments in construction were redirected into the social sphere, in order to ensure, among other things, a significant increase (by 40%) in the salaries of government employees, which are still among the lowest in the CIS countries. Incidentally, such a pay rise is envisaged by a program for reforming public administration agreed with the IMF and the World Bank. But this raises the question of whether such pay rises will be accompanied by measures to maintain a fiscal balance, to cut staffs and upgrade the system as a whole.

Under the 2006 State Budget Law, approved by the country’s parliament on 6 December, 2005, budget revenues were established at SM 1.51 billion (SM 243 million more than in 2005), and budget expenditures at SM 1.542 billion (30% more than in 2005). This budget can be called a social one, because SM 1.033 billion (67% compared to 46% in 2005) is to be used for social purposes, including social protection of the population. As before, the increase in budget revenues is connected with measures to improve tax administration and fiscal administration in general, to broaden the tax base, especially in the service sector and trade, and to raise import duties.

According to the monthly bulletin of the State Statistical Committee, the republic’s foreign trade turnover in 2005 amounted to $2,238.5 million. The trade balance was negative: $421.1 million. Compared to 2004, exports fell to 99.3% ($908.7 million), mostly owing to the decline in cotton exports, and imports rose to 111.6% ($1,329.8 million), mostly due to growing imports of consumer goods, foodstuffs, building materials and engineering products. The CIS countries account for 46.6% of the republic’s foreign trade, and non-CIS countries, for 53.4%. A point to note is that the Commonwealth countries are the main source of Tajikistan’s imports (63.6%), providing the republic with food, petroleum products, etc., so that the trade balance with these countries is highly negative: $686.2 million. Most of the republic’s exports (83%)— cotton fiber and primary aluminum—go to non-CIS countries (Switzerland, Netherlands), with a surplus of $265.1 million. Against the background of Tajikistan’s poorly developed production base and the absence of competitive lines of production, the country is heavily dependent on imports of a wide range of goods, including staples falling into the food security category.

Figure 2

Exports by Product (US$ million)

S o u r c e s: IMF Country Reports No. 05/131 and No. 05/368; RT State Statistical Committee (September 2005).

Figure 3

Imports by Product (US$ million)

S o u r c e s: IMF Country Reports No. 05/131 and No. 05/368; RT State Statistical Committee (September 2005). Final data on imports of petroleum products are not available.

Table 1

Balance of Payments (US$ million)

	2000	2002	2004
Current account	–62	–33	–81
Current account balance (% of GDP)	–6.5	–2.8	–3.9
Balance of trade (exports minus imports)	–24	–125	–332
Balance of services	4	–36	–67
Balance of income	–36	–57	–80
Balance of transfers, of which:	37	184	399
Remittances from labor migrants	n/a	65	313
Capital account	63	54	84
Capital transfers	5	5	9
Government loans	17	9	–211
World Bank	13	0	25
Asian Development Bank	9	5	0
Foreign direct investment	24	36	272
Commercial bank assets	24	8	63
Other	–28	–8	–74
Overall balance	1	21	3
[Use of international reserves	–29	–1	–54

Sources: RT Ministry of Economics; IMF Country Report No. 05/131, April 2005.

Table 1 shows a growing deficit of the republic’s current account balance. According to IMF estimates, this deficit is around 4-5%, whereas the Ministry of Economics and independent experts estimate it at 16-22%, which means that the country’s foreign trade position is highly unstable. This is largely due to the decline in world prices for its key export goods, with a resultant reduction, as noted above, in cotton exports in 2005. At the same time, the prices of such key import items as petroleum products, foodstuffs and natural gas have been growing rapidly. Another factor behind the sharp increase in imports is the surge in consumer demand caused by a significant increase in remittances from migrant workers as a result of growing labor migration to neighboring countries, and also by other factors stimulating domestic business activity and, most importantly, the informal economy. As noted in the latest IMF Country Report (No. 05/368, October 2005), the Tajik authorities are concerned that the growing trade deficit makes the economy vulnerable to external shocks and possible disruptions in the supply of key import goods, reflecting the low competitiveness of domestic production.

Given the high share of foreign trade in the structure of Tajikistan’s economy and its difficult geographical position, the republic is an advocate of regional trade and of an open and liberal foreign trade regime. On this basis, it is actively working to develop regional cooperation in such organizations as the Eurasian Economic Community (EurAsEC or EAEC), the Shanghai Cooperation Organization (SCO), the Central Asian Cooperation Organization (CACO) and the Economic Cooperation Organization (ECO).

A special problem facing Tajikistan is that of tight non-trade and transport restrictions on the part of Uzbekistan (considering that Tajikistan’s border with this country constitutes 70% of its total border length). All commercially viable transportation routes (road and rail) for Tajik exports and imports run through the territory of Uzbekistan. Examples of existing serious barriers include a 100% prepayment requirement in the transit of Tajik exports and imports through Uzbekistan, delays at the border, a ban on the passage of Tajik road and rail transport, massive mining of the border in the north, bribes and harassment of private traders. Naturally, all of this significantly increases Tajikistan’s export-import costs. The World Bank estimates² that non-transport costs in the transit of Tajik freight traffic through Uzbekistan, mostly consisting of unofficial payments at border crossing points and customs posts, amount to an average of $200 per ton. In addition, Tashkent has introduced at least eight kinds of official fees for transit of freight traffic from Tajikistan, which may amount to $500 per truck. When goods are exported to Russia, for example, transit through Uzbek territory accounts for about 30% of total transportation costs.

The Dushanbe authorities are aware of these problems and trade restrictions, both objective and subjective, and hope that they will eventually be overcome with the help of the World Trade Organization. Of course, WTO accession will not result in any immediate economic benefits for Tajikistan, especially given the existence of regional trade barriers, the country’s isolation, and inconsistencies between the goals and purposes of regional political and trade associations and those of the WTO. In the long run, however, entry into the WTO will be an important political step towards recognition of the openness of the Tajik economy, helping to reform its trade policy, attract foreign investment and diversify national exports. Let us recall that the republic declared its political commitment to WTO accession back in 2001, when it took a basic decision to initiate this process.

The past year, just as 2004, brought a considerable reduction in the republic’s external debt, which has enabled it to move from the category (according to the accepted international classification) of heavily indebted poor countries (HIPCs) to the category of moderately indebted countries. After the signing of a number of bilateral debt restructuring agreements, the republic’s external debt was reduced from $1.3 billion to $895 million in 2004, and then to $840 million by the end of August 2005. Accordingly, the ratio of external debt to GDP (against the background of GDP growth) has fallen by half, from 82% to 40%, with a sharp drop in the other indicators of external debt vulnerability: debt-to-exports, debt-to-revenue and other ratios. Agreements in this area have been signed, in the first place, with Russia, Pakistan, India, Uzbekistan, Kazakhstan and Iran.

The agreement with Russia, reached during President Vladimir Putin’s official visit to Tajikistan in October 2004, is regarded as particularly successful in various respects, including investment promotion. In the event, Tajikistan’s debt obligations in the amount of $306 million were cancelled in return for the deployment in the republic of Russia’s military base and its Okno (Window) space tracking station ($250 million), and also Russia’s contribution to the construction of the Rogun Hydropower Plant, which already had a positive effect on the Tajik economy in 2005.

Under the Multilateral Debt Relief Initiative, on 19 December, 2005, the IMF Executive Board included Tajikistan among 19 countries eligible for a write-off of their entire debt to the IMF, which has reduced the republic’s debt burden by another $99 million.

Table 2

Selected Macroeconomic Indicators

	2001	2002	2003	2004	2005
Nominal GDP (SM million)	2,512	3,345	4,758	6,158	7,201.1
Nominal GDP (US$ million)	1,051	1,197	1,556	2,073	2,336.5
Real GDP (% change)	10.2	9.1	10.2	10.6	6.7
CPI inflation (end-of-period, % change)	12.5	14.5	13.7	5.6	7.8
Average monthly wage (SM)	—	32.55	44.61	60.79	93.63
Total budget revenue (% of GDP)	15.2	16.7	17.3	17.9	18.0
Total budget expenditure (% of GDP)	18.4	19.2	19.1	20.3	18.5
Balance (excluding PIP, % of GDP)	–0.1	–0.1	0.9	0.7	–0.5
Balance (including PIP, % of GDP)	–3.2	–2.4	–1.8	–2.4	–4.1 (projection)
Domestic financing (% of GDP)	–0.8	–0.1	–1.1	–1.7	0.9 (projection)
External financing (% of GDP)	3.0	2.6	2.8	4.0	3.2 (projection)
Change in net domestic assets (% of broad money)	86.0	45.9	–21.4	78.8	15 (projection)
Change in net foreign assets (% of broad money)	–38.2	–7.5	48.8	–22.3	2.1 (projection)
Change in M3 money supply (broad money, %)	40	39.7	29.2	14.3	18.4 (projection)
Exports of goods and services (US$ million)	735	799	985	915	908.7
Change in exports (%)	–13.5	8.8	23.2	–7	–0.7
Imports of goods and services (US$ million)	847	929	1,142	1,191	1,329.8
Change in imports (%)	–2.5	9.7	22.9	4.3	11.6
Current account balance (% of GDP)	–5.1	–3.6	–1.3	–4.0	–10 (IMF projection), –18 (government projection)
External debt (US$ million)	1,017	1,009	1,031	853	890
External debt (% of GDP)	96.7	84.3	66.2	41.1	38.4
Gross international reserves (US$ million)	96	96	135	189	225
Average exchange rate (SM/US$)	2.4	2.8	3.1	2.97	3.22

Sources: IMF Country Report No. 05/368, October 2005; RT State Statistical Committee (October 2005).

One of the main priority lines of the country’s economic policy is to create a favorable investment and business climate. According to World Bank data, foreign investors today own a total of just over 20 enterprises in the country. Naturally, a favorable investment regime helps to attract domestic and foreign investment, create new jobs and improve company performance through the introduction of new corporate governance practices, new skills, advanced technologies, etc. However, Tajikistan’s policy in this area cannot be regarded as very successful, because the average annual inflow of investment ($30 million) is the lowest among all the 26 transition economy countries.³ The reasons here, according to The Economist, include inadequate domestic legislation and its implementation, governance problems and permanent political stability risks, as well as tariff and nontariff barriers on the part of Uzbekistan impeding the free transit of potential investor capital, products and technologies to Tajikistan.

Aluminum production and the energy sector are the main focus of foreign investor interest. Back in October 2004, the republic signed a seven-year package of “political” investment projects with the Russian Federation worth a total of $1.6 billion (76% of 2004 GDP), at that time seen as an expression of interest. This package provides for investments by RusAl, the largest Russian aluminum holding company, in the completion of the Rogun Hydropower Plant ($560 million) in 2005-2009, the reconstruction of the Tajik Aluminum Plant ($160 million), and the construction of two new aluminum plants ($600 million) in southern Tajikistan in 2010-2013. The completion of the Rogun and Sangtuda hydropower plants will help the republic to solve the problem of power shortages, increase its aluminum production potential (based on low-cost electric power) and start commercial exports of electricity to Russia, Pakistan and other countries. In 2005, the parties continued to discuss the details of these projects, and RusAl opened a permanent office in Dushanbe.

In addition, RAO UES of Russia has pledged to invest around $200 million in the completion of the Sangtuda Hydropower Plant in 2005-2009 (which will complement the $50 million to be invested as part of a swap of Tajik debt owed to Russia for assets in Tajikistan). Tehran, too, is planning to invest in the construction of the second stage of this hydropower plant, which is to export electricity to Iran and Pakistan.

As regards the business environment in Tajikistan, it lags far behind other transition economies. Thus, the private sector contributes only about 50% of GDP. A survey conducted by the International Finance Corporation (IFC), Business Environment in Tajikistan as Seen by Small and Medium Businesses, shows that local small and medium enterprises face significant administrative barriers in their business activities. These include lack of access to financing, foreign trade restrictions, complicated licensing and certification procedures, and pressure from inspection agencies, which impedes the development of the private sector and fuels corruption.

Figure 4

Administrative Barriers to Business

S o u r c e: Business Environment in Tajikistan as Seen by Small and Medium Businesses, SECO-IFC, 2003.

According to the findings of this survey, small businesses in Tajikistan are subjected to an average of 16 inspections a year at a cost of about $110 per inspection in the form of fines and unofficial payments, with each inspection lasting about 17 days. The registration of a firm takes 25 working days at a cost of $176 (both official and unofficial). About 65% of all businessmen find it difficult to get reliable information about registration procedures; 98% make unofficial payments for various administrative procedures; and 82% do not use bank accounts in their business activities. True, the IFC has recently launched another survey of businesses on this topic, and its results could show an improvement in the situation. But they will be published in a year.

The country’s banking system, according to NBT data, includes 11 independent banks, 6 credit unions, 7 nonbank financial institutions and 1 representative office of a foreign bank. Last year, the banking system’s assets increased by SM 21.2 million (to SM 825.4 million or 13.4% of GDP), although this is still a very low indicator pointing to the system’s weakness. Household deposits in 2005 increased by 58.9%, from SM 299 million to SM 467.1 million, which points to rising household income, to the population’s growing trust in the banking system and a stable national currency. Last year the authorities abolished the legislative limit on the share of capital that may be owned by foreign banks and, as mentioned above, raised the minimum capital requirements for commercial banks from $3 million to $5-6 million. On the whole, however, this system is still poorly developed: four major banks control 70% of all assets, 81% of household deposits and 71% of private loans, while the ratio of domestic credit to GDP is 16%, with credits to the cotton sector constituting half of the total. The activities of commercial banks are mostly focused on short-term loans to commercial entities and on foreign exchange transactions. Such sectors as consumer and residential mortgage lending, credit cards, operations with securities and other debt instruments of the securities market are in an embryonic state. In general, a proper stock market has yet to be created, especially a secondary market of government and corporate securities.

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¹ See: IMF Country Report No. 05/131, April 2005. _{Back to text}
² See: The World Bank, Tajikistan, Trade Diagnostic Study, June 2005. _{Back to text}
³ See: Country Report. December 2003. The Economist Intelligence Unit. _{Back to text}