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p. 39 of 68 BACK | NEXT I. Developing Asia and the World II. Economic Trends and Prospects in Developing Asia East Asia Southeast Asia South Asia Central Asia Azerbaijan Kazakhstan Kyrgyz Republic Tajikistan Turkmenistan Uzbekistan The Pacific III. Competitiveness in Developing Asia Statistical Appendix

Asian Development Outlook 2003 : II. Economic Trends and Prospects in Developing Asia : Central Asia

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Tajikistan

Overall economic performance was strong in 2002. Macroeconomic management improved as Tajikistan continued in the effort to rebuild its economy and institutions shattered by civil war. A Poverty Reduction Strategy Paper was finalized and presented to Parliament. Implementation of its stabilization and structural reform policies is necessary to sustain economic growth and move toward a reduction in poverty.

Macronomic Assessment

GDP grew by 9.1% in 2002, the fifth consecutive year of strong economic growth. As in the past, growth was driven by the post-conflict recovery of output in aluminum, electricity, and agriculture. Aluminum output increased by 6.1% (total industrial growth was 8.2%), electricity was up by 5.0%, and cotton production rose by 13.9% (total agricultural growth was 15.0%). The end of a drought in 2002 also pushed up production of wheat, which is rain fed and not irrigated and, for the first time in many years, the country produced enough wheat to avoid dependence on foreign aid to supplement domestic production. Light industry, mostly textiles, and cotton processing grew markedly by about 27%. Construction was another major growth area, up 30%, but its 4% share of GDP somewhat limited its impact on overall growth. Domestic demand and economic growth were boosted by worker remittances, estimated at $120 million or about 10% of GDP. It is estimated that up to 1 million Tajiks, almost 17% of the population, live abroad either permanently or temporarily, and mainly in the Russian Federation.

Fixed capital investment amounted to only 7.0% of GDP in 2000, the latest year for which data are available, and it is unlikely to be any higher in 2002. The Public Investment Program (PIP) was equal to 2.8% of GDP in 2002, a slight increase from 2001. The PIP is financed by foreign aid, and most expenditures are directed toward the rehabilitation of agriculture, transport, and social infrastructure. After a trough in 2001, when the signing of several FDI contracts was delayed because of the crisis in Afghanistan, FDI inflows in 2002 picked up, doubling to $21.0 million. FDI continued to be concentrated in textiles and mining.

Reliable statistics on poverty trends since 1999 are not yet available, but anecdotal evidence and regional surveys suggest that incomes, both cash and noncash, increased substantially since the finalization of the peace agreement in 2000. This is mainly due to growth in informal, service-oriented activities. Most people's wages are substantially below the minimum consumption basket, and only a small share of the labor force is engaged in formal sector employment—an area that has shown little growth. While the official unemployment rate rose only slightly from 2.3% to 2.7% in 2002, unofficial estimates place unemployment or underemployment much higher, at over 30% of the labor force. For many Tajiks, informal activity, agricultural labor, and jobs abroad are the most likely sources of employment.

Under IMF economic programs, Tajikistan managed to improve revenue collection rates steadily from 12% of GDP in 1998 to over 15% in 2001. In 2002, fiscal performance was better than anticipated: faster than expected economic growth, an increase in cotton exports (leading to an increase of cotton sales tax collection), and a more systematic implementation of the new VAT regime based on the destination principle meant that revenue collection was stronger than budgeted. After VAT, the cotton and aluminum sales tax, at 10% and 2%, respectively, are the largest revenue sources for the Government (together providing 20% of revenues). On the expenditure side, revenue performance allowed a 25% increase in civil servants' wage rates; these are very low and have been heavily eroded by inflation. Social expenditures accounted for about 43% of revenues. Excluding the foreign-financed PIP, the budget deficit was 0.2% of GDP (up slightly from 0.1% in 2001) and is among the lowest in Central Asia.

Public external debt is very high at over 87% of GDP (a total of $962 million, with about one third owed to the Russian Federation). The debt is a major obstacle in fiscal management: in 2002, total scheduled debt service amounted to 5.3% of GDP (Figure 2.22). In early 2002, the Government renegotiated concessional terms on debts with Kazakhstan and Uzbekistan, and a major breakthrough was achieved by the restructuring of debt to the Russian Federation on concessional terms in December (this lowered debt service due in 2002 from 41% to 18% of fiscal revenues).

The central bank, the National Bank of Tajikistan (NBT), in general pursued a tight monetary policy, which, with moderation in food price increases (due to the end of the drought) helped pull down inflation to 14.5% in 2002 from 38.6% a year earlier. Implementation of monetary policy, however, was uneven. During 2002, the exchange rate depreciated by 14% against the dollar.

Recent movements of commercial interest rates have become more market oriented, have fluctuated less, and indeed became positive for the first time in many years. However, as there is a high degree of credit rationing, interest rates are not significant determinants in lending.

The health of the banking sector has not improved significantly. Two of the four major banks have effective negative net capital, and two are severely underprovisioned. Only five (out of 14) banks meet the minimum capital requirements. As part of the reform effort, improved banking regulations were issued during the year and supervision capacities of NBT were improved. Two regulations that stifled banking activities—a tax on remittances and the ability of the tax authorities to freeze accounts without a court order—were removed in 2001 and 2002, respectively. Reflecting these changes and an improving economy, household deposits increased by 85% in 2001 and by 22% in the first quarter of 2002. Nevertheless, deposits amount to little over 4% of GDP, representing a somewhat lower degree of mobilization than in most other transition economies.

The external sector performed significantly better in 2002 than a year earlier. Exports grew by 11.0% (to $723 million) while imports rose by only 6.0% (to $819 million). This reduction in the trade deficit and an improved surplus in invisibles narrowed the current account deficit to 4.1% of GDP from 7.1% in 2001. Exports and imports have been growing strongly since 1998 (except in 2001). However, export growth is not only highly dependent on world market prices—especially for cotton and aluminum, which weakened in the previous 2 years but also on political relations with neighboring countries. Exports in 2001 suffered heavily because of the closure of the only railway line through Kazakhstan to Tajikistan's main export markets. In 2002, rail transport resumed, but export and import levels are still somewhat below their 2000 levels.

The current account deficit is financed almost entirely by external assistance. Capital flows, however, have been sufficient to increase gross international reserves and keep import cover stable at approximately 2 months since 2000. Total debt service due in the first 6 months of 2002 increased to 20.0% of exports, from 16.0% over the same period in 2001, due to the expiry of loan grace periods. Because of Tajikistan's high level of exports (over 70% of GDP), the debt service ratio appears to understate the magnitude of the problem of managing a debt burden at nearly 100% of GDP.

Policy Developments

The Poverty Reduction Strategy Paper (PRSP) that was presented to Parliament in June 2002, finalized after 2 years of deliberation and consultations with civil society, outlines the major issues that the Government intends to address in the next 3 years. Identified reforms cover all major sectors and aim to promote the transition to a market economy and to combat poverty. The next steps are arguably even more difficult for the Government than producing the PRSP: to prioritize and implement the identified reforms and find necessary international concessional funding.

The healthy economic and fiscal performance in 2002 gave the Government some scope to plan for the 2003 budget to include an average 15% civil service wage increase and for social expenditures to rise to around 46% of the budget. Larger spending in the context of a balanced budget for 2003 was aided by the successful 2002 debt relief negotiations. Renegotiation of the Russian debt, which includes a 3-year grace period, considerably reduced the debt service burden. It fell to 18% of revenues in 2002 (it would have been 41% without restructuring) and will remain low at approximately 12% until 2004. However, because of the heavy debt service and lack of counterpart funds for projects, the Government needs to limit the PIP to the availability of concessional funds and keep disbursement at approximately 3% of GDP.

During the next 2 years, the Government plans to reduce the quasi-fiscal deficit, mainly subsidies to the energy sector, that are estimated at about 5% of GDP. Plans include some increase in tariffs and increasing collection rates by cutting off commercial customers who fail to pay.

The Government's plans call for a continued tight monetary policy to reduce inflation to about 6% by 2004, which is very ambitious. One of the main contributors to inflation has been an excessive volume of loans directed almost exclusively to the cotton sector. Pressure on NBT to grant such loans might lessen, however, as more private finance by cotton investors and banks becomes available. Plans are in the pipeline to introduce a proper functioning interbank credit market in 2003 and this should facilitate a more efficient credit system. It is planned to allow banks to hold their capital in foreign exchange, a step intended to encourage them to increase their capital. No changes were made in the floating exchange rate regime during the year.

Ongoing bank restructuring will continue and the Government is committed to enforcing all prudential requirements in the first half of 2003. By end-September 2003, noncomplying banks (other than those currently being restructured) will be either closed or merged. Minimum capital requirements will increase to $2.0 million in December 2003 for existing banks, while for new banks the requirement is $3.0 million.

Agriculture sector restructuring is high on the reform agenda as it offers strong prospects for growth and poverty reduction. Ongoing farm privatization has created 14,500 dekhan (private) farms, which are either privately owned or operated by collectives. The proliferation of household plots as well as plots granted by the president means that private and dekhan farming has taken over the larger share of agricultural production (in volume terms) in all categories except cotton and silk. The Government plans to privatize all remaining farms by 2005. Some 225 very large farms are yet to be privatized, but they are burdened with large debts that make them unattractive to private investors; the Government is exploring options to deal with this problem. Other important agricultural reforms include removing government interventions in production and marketing decisions of producers and improving producers' access to finance and markets.

Since the economy is still very much in the process of recovering from civil war, it is crucial to physically rehabilitate infrastructure and utilities, particularly in power. With donor assistance, the Government has committed to unbundling and corporatizing utilities and to privatizing transport. The large aluminum smelter, TADAZ, is currently undergoing an international audit, as a first step toward restructuring in this crucial firm.

Outlook for 2003-2004

The outlook for the next few years is uncertain. International attention focused on the country and grant aid (mostly from the US) increased substantially after the events of September 11. Assuming that the goodwill of the international community persists, the inflow of additional funds and grants may well continue, significantly relieving pressure on the budget and current account. Increasing regional stability following the elimination of the Taliban in Afghanistan and subsequent regional integration will also contribute to the positive effect of economic reforms by reinforcing diversification and stabilizing the prospects for economic growth. Nevertheless, Tajikistan's economic development remains extremely vulnerable to various constraints, including remnants of the monolithic culture of industrial and agricultural production, weak institutions and administrative capacities to carry out reforms, a high debt burden, and a narrow export base subject to volatile price swings.

In the period ahead, the economic policy framework is based on the PRSP, which focuses on enhancing macroeconomic stability and structural reform to reduce poverty. Key components of the strategy are reducing inflation, achieving modest fiscal strengthening while reducing quasi-fiscal energy subsidies, improving NBT operations, continuing agricultural privatization, and improving governance.

Aided by further diversification of agricultural production and expansion of light industry, GDP growth is expected to decline to about 7% in 2003 and then to about 5% in 2004, as aluminum production reaches capacity limits. It is expected that domestic demand will continue to be supplemented by substantial worker remittances from abroad. Assuming that NBT continues its tight monetary stance, inflation is expected to fall to about 10% in 2003 and to 6% in 2004. The budget, excluding the PIP, is expected to be kept in near balance.

The current account deficit is not expected to change much over the next 2 years. Stagnant or even slightly decreasing prices of the major exports (due to slower global demand for aluminum and large global stocks of cotton) are expected to lead to slow export growth. Two opposite pressures will influence import growth: on the one hand, demand for imported consumer goods will increase, financed in part by remittances, while on the other, this will be kept in check by slower growth of PIP-related capital goods imports. The immediate pressure on the budget to service external debt will be substantially reduced through 2004; however, further debt restructuring may be required to keep the subsequent debt service burden manageable.

Whether Tajikistan fully succeeds in implementing the measures outlined in the PRSP will depend on a host of uncertainties. That a political consensus has emerged to set out such a detailed plan is, however, a basis for some optimism.

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