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p. 37 of 81 BACK | NEXT I. Developing Asia and the World II. Economic Trends and Prospects in Developing Asia East Asia Southeast Asia South Asia Central Asian Republics Azerbaijan Kazakhstan Kyrgyz Republic Tajikistan Turkmenistan Uzbekistan The Pacific III. Preferential Trade Agreements in Asia and the Pacific

Asian Development Outlook 2002 : II. Economic Trends and Prospects in Developing Asia : Central Asian Republics

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Tajikistan

The economy in 2001 fared much better than forecast, with GDP growth reaching double digits, though this is expected to slow somewhat as capacity constraints are reached in aluminum smelting. External developments will also be critical, since exports, primarily cotton and aluminum, amount to about 70% of GDP. The situation in neighboring Afghanistan and developments in the Russian Federation, the country’s major trading partner, will be particularly important to watch.

Macronomic Assessment

With the conclusion of the peace process in 2000, Tajikistan embarked on rebuilding an economy ravaged by civil war. In 2001, contrary to all expectations, economic growth accelerated to 10%, up from 8.3% in the previous year. As in 2000, it was led by a substantial increase in aluminum production. However, other industry subsectors languished, so while overall industrial production rose by 14.1%, industrial output (excluding aluminum) shrank by 5%. The agriculture sector, which contributes around 20% of GDP and accounts for more than half total employment, performed very well. Despite continued drought, it recorded an 11% expansion, fueled mainly by a 35% increase in cotton production, which stemmed from an increase in both planted and irrigated areas and from the low-base effect of low output in 2000.

Economic growth, in which the driving force is rising capital-intensive aluminum production, has so far failed to have much of an impact on formal sector employment or the level of poverty. While the official unemployment rate fell to 2.8% in 2001 from 3.3% in 2000, unofficial estimates put the unemployment or underemployment rate much higher at over 30%. An estimated 200,000 people left the country in 2001, more than in the previous year, most of them to the Russian Federation in search of work. Some emigrated permanently, and some left for seasonal work. Further, about one third of the labor force is estimated to be working abroad. (Even during the Soviet era, Tajikistan was a major supplier of labor within the Soviet Union.) Such population movements should be seen against a background in which almost 80% of the population continue to live in poverty.

The Government derives its main revenues from sales taxes on cotton and aluminum (37% of the revenue base), as well as from excise and customs duties. The tax base of the private sector is very narrow, and neither personal nor corporate income tax yet plays a significant role. The budget deficit fell by half to 0.2% of GDP in 2001, and showed a primary surplus of 0.4% of GDP, a switch from a 0.3% deficit in 2000. This surplus was attained mainly by higher than expected revenue collections, but excludes the largely externally financed Public Investment Program, which accounted for 3% of GDP in 2000 and 4.1% in 2001. The greatest strain on, and danger to, the economy derive from the high levels of external debt repayments, both in terms of the principal and debt service. For 2001, over 1.7% of GDP was scheduled for servicing the external debt, up from 0.3% in 2000. Despite some successful bilateral negotiations, the grace period for some loans expired, and substantial repayments were due to IMF.

In 2000 and 2001, social spending accounted for 48% of government revenues and this has resulted in a squeeze on other essential expenditures, because of the Government’s aim that over 40% of the budget should go to providing essential social services. Capital expenditures invariably suffered.

The Government continued its tight monetary stance in 2001. In the past, much of the inflationary pressure in the country was generated by exchange rate movements, the high costs of key imports from the Commonwealth of Independent States, and bad harvests that drove up food prices. Overall annual inflation was 38.5% in 2001, about 6 percentage points higher than in the previous year (Figure 2.24). The currency is stronger while the impact of the ongoing drought has diminished as a result of imports.

Burdened by many nonperforming loans, mostly extended in the form of direct credits to SOEs, or privatized enterprises with strong state connections, the banking sector remains paralyzed. Lending to the private sector is at a virtual standstill. If banks extend loans at all, they are short term and intended for trade finance only. Indeed, the largest sources of credit to the private sector are the nonperforming loans of commercial banks that are rolled over.

The economy is highly dependent on foreign trade, with exports equivalent to 70% of GDP. Cotton and aluminum are responsible for over 80% of export earnings, rendering the economy extremely vulnerable to terms-of-trade shifts caused by fluctuations in international prices and, indeed, the prices of these two major exports deteriorated considerably in 2001: cotton, for example, fell by 35%. In addition, production of goods for export was severely hampered by a 2-month closure of the railway connection between Tajikistan and the Russian Federation—the country’s major trading partner. Some conservative estimates put the loss of export earnings at about $8 million, approximately 1% of total exports. Imports increased, but at a slower rate than in 2000. Wheat and power imports rose as a result of the drought. Thus, the current account deficit widened from 5.9% of GDP in 2000 to 7.7% in 2001.

The balance of payments is shored up by international donors. In 2001, additional donor transfers increased reserves and resulted in import cover of 2.3 months at year-end, compared with 2.1 months 12 months earlier. External debt stood at 113% of GDP at the end of 2001.

Policy Developments

The external debt burden is the most pressing economic problem that the Government will face over the next decade. It has therefore agreed to a debt reduction strategy with IMF, which includes making fiscal adjustments. To broaden the tax base, the Government now plans to strengthen the Large Taxpayers Inspectorate and to computerize the tax system. This is crucial, if it wants to offset the effects of the reduction to 5% in the cotton sales tax by end-2002. It also plans to earmark privatization proceeds for debt reduction, as well as to continue bilateral debt restructuring, for which purpose it is negotiating with the Russian Federation, its largest creditor. Although in 2001 the two governments agreed to reduce Tajikistan’s debt stock by $49.5 million, the remaining discussions will be more controversial as both parties disagree on the exchange rate for valuing the remaining debt and on the question of debt-equity swaps. However, even the more optimistic debt scenarios conclude that the fiscal burden of servicing the debt will become unsustainable, and that debt rescheduling through an approach to the Paris Club in the near future will be necessary. The Government hopes to reschedule its debt under Naples terms (i.e., a debt reduction of two thirds of the net present value of eligible debt).

Since 2000, foreign exchange has been traded in the relatively competitive interbank currency market, and the authorities aim to intervene only to smooth out short-term volatility. The financial market itself is still undeveloped, hampered by an almost complete public lack of trust in the banking sector. This is reflected in the very low deposit-to-GDP ratio of below 5%. To revitalize the banking sector, the Government has embarked on a reform program. In 2000, the largest four commercial banks signed restructuring agreements, which include submitting business plans and undergoing financial audits. Two have already published audit results and the others are expected to follow soon. Five banks that did not comply with minimum capital requirements are now being liquidated. The Government is also working on changes to the legislative framework and tax system, including making loan losses 10% tax deductible.

Agriculture sector restructuring still presents a major hurdle to economic growth. The Government is undecided between safeguarding a minimum number of large-scale, industrialized, agricultural complexes to produce cash crops such as cotton, or allowing privatization and agricultural reform (to which it officially pledges its commitment). The process of privatization itself has been slowed by allegations of corruption and by a lack of the necessary skills in government to deal with such an ambitious undertaking. In addition, agriculture suffers from both a lack of credit in the noncotton sector and overindebtedness in that sector. It is thus crucial that the Government develop mechanisms to support the provision of rural finance for noncotton activities. This will decrease dependence on cotton and help diversify agriculture. Private farms are keen to expand production of high value-added crops, such as fruits and vegetables. In turn, this could stimulate growth in agroprocessing industries. Several international nongovernment organizations are providing microfinance services in rural regions, and beginning this year, the Government is planning to foster growth of viable microfinance institutions through creating a supportive regulatory framework.

Outlook for 2002–2003

After 5 consecutive years of economic growth, the outlook continues to improve, but significant risks remain. The main factors affecting stability are the high debt burden, the volatility of the external sector, the monolithic nature of industrial and agricultural production, and developments in Afghanistan. In addition, the price of aluminum will continue to weaken due to global oversupply. On the other hand, though, growth in the Russian Federation is expected to remain fairly constant and oil prices are projected to remain relatively stable.

Under these broad assumptions, GDP growth is expected to taper off. The only aluminum smelter is already operating close to full capacity and productivity gains of newly privatized farms will only be realized gradually. In monetary policy, the Government will keep a tight stance to reduce inflation to around 9% in 2002, and ensure fiscal discipline. The budget deficit is not expected to exceed 1% of GDP. The forecast for the debt service ratio has worsened in comparison with previous estimates made in 2001, as Tajikistan has to repay newly called-in government guarantees. However, the current account will likely improve as forecast increases in wheat and power production will reduce the need for such imports.

Whether economic growth finally succeeds in bringing down poverty levels depends crucially on the nature of that growth. There is an urgent need to diversify the economy and encourage manufacturing and small-scale enterprises. However, the Government’s focus has so far remained on increasing power, cotton, and aluminum production, none of which is labor intensive.

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