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p. 44 of 69 BACK | NEXT Foreword, Acknowledgments, Acronyms and Abbreviations, Definitions 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. Foreign Direct Investments in Developing Asia

Asian Development Outlook 2004 : II. Economic Trends and Prospects in Developing Asia : Central Asia

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Tajikistan

Economic growth continued its brisk pace and welcome signs of diversification were seen, but a reduction in inflation was not realized. Progress was made in implementing the poverty reduction strategy program despite the legacy of weak institutional capacity and severe financial strain. The outlook is for further progress, but structural constraints present important challenges.

Economic Assessment

The year 2003 was another year of strong economic expansion, the sixth consecutive year following the agreement that ended the civil war. GDP growth accelerated to 10.2% from 9.1% in 2002. While cotton and aluminum, the two traditional pillars of the economy, remained important driving forces, economic growth become more broad based with about two thirds of it coming from outside cotton and aluminum activities. The industry sector expanded by 10.2%, including production of consumer goods that rose by about 12%. The services sector grew by 14.7%, with retail trade surging by about 24% and transportation by roughly 20%. The agriculture sector posted a strong gain of 9.6% as output was boosted by a good cotton harvest but dampened by a poor grain harvest. The main elements in growth were increased private consumption buoyed by an approximate tripling in worker remittances (to about 13% of GDP) and a leap in global cotton prices that also helped finance a surge in imports.

About 80% of the population were estimated to be living below the poverty line in 1999 and, while the economic recovery has likely helped lower this rate, Tajikistan remains one of the poorest countries in the world. The average monthly wage in mid-2003 was TJS44.3 or about $15. The lack of employment opportunities remains the prime social concern and a substantial number of the working population have become migrant laborers seeking employment opportunities abroad, mainly in the Russian Federation. A recent study by the International Organization for Migration for Tajikistan estimated that about 1 million people, or 15% of the population, are living in households in which the main source of income is derived from a family member working abroad.

The fiscal performance for 2003 was impressive. The overall budget balance (excluding the foreign-financed Public Investment Program, or PIP) moved to a surplus of 0.9% of GDP from a 0.1% deficit in 2002 (Figure 2.24). This reflected the combined effects of higher tax revenues associated with the stronger than anticipated growth and strengthened fiscal discipline on expenditures. Consistent with the budgetary objectives, essential social spending-including education, health, social security and welfare, and other social services-increased by about 35%.

Average inflation in 2003 was unexpectedly high at 16.4% (up from 12.2% in 2002), exceeding the 9.0% target set by the National Bank of Tajikistan (NBT). The year-on-year increase to December, however, was held to 13.8% due to better price performance in the last 2 months of the year. While price pressures from higher tariffs for electricity and gas introduced under the energy sector reforms had been expected, the uptick in inflation stemmed from two unanticipated factors: the sharp increase in prices of imported grains and wheat flour caused by severe droughts in neighboring countries producing these commodities, and an unintended loosening of monetary policy that resulted in a steep 44.4% increase in the money supply (M2). The nominal exchange rate against the dollar was kept at about TJS3.09/$1 for most of the year.

Merchandise exports increased by 14.2%, mainly due to higher exports of cotton boosted by sharply rising global prices. The trade deficit widened, due to higher imports (up by 23.2%) associated with strong economic growth and imports of capital goods under the external financed projects. Notably, the current account deficit narrowed in 2003 to about $21 million or 1.3% of GDP from 2.7% the previous year; this was on account of an upsurge in remittances from migrant workers, from about $65 million to about $202 million. International reserves strengthened from $96.2 million at end-2002 to $135.4 million, providing largely unchanged import cover of about 1.8 months. Preliminary data indicate that total external debt outstanding rose by about $25 million to about $1 billion at end-2003; it declined to about 65% of GDP from 82% a year earlier, mainly because of a large increase in nominal GDP in the context of exchange rate stability.

Policy Developments

In line with the macroeconomic framework supported by IMF’s PRGF, the Government has adopted a prudent fiscal policy that aims at a balanced budget (excluding the PIP) over the medium term. Several reform measures have been undertaken to enhance tax collection, including broadening the application of the destination principle for VAT, revising the tax and customs codes, and strengthening tax administration, including the establishment of a modernization office to oversee the reform effort.

The low level of civil service wages, equal to about half those earned in the nonagriculture private sector, has been a concern of the Government, both in terms of maintaining qualified staff to ensure proper provision of public services and of curbing corruption in the public sector. The strong revenue collection enabled the Government to raise civil service wages by 20% in 2003, although this was substantially eroded in real terms because of exogenous shocks that pushed up inflation. The Government has implemented a further 25% increase effective 1 January 2004. It recognizes that wage increases need to be carried out in line with the civil service reforms that are streamlining the bureaucracy, and made a cut in staff of about 5% in 2003. Further staff reductions are planned for 2004.

In response to the recommendations during the World Bank-led Consultative Group Meeting in May 2003, the Government has increased substantially the allocation for the social sector in its budget for 2004. To keep external debt at a manageable level, it further agreed that the annual disbursement for the PIP, which is financed by external borrowing, will not exceed 3.0% of GDP. Moreover, no debt will be contracted on commercial terms. The restructuring agreement with the Russian Federation reached at the end of 2002 on debts of about $300 million allows a 3-year grace period of principal repayment up to 2005, an extension of maturity from 15 to 17 years, a reduction in interest payment for 2002-2005, and a reduction in principal repayment falling due in 2005-2006. External borrowing to finance the PIP and larger debt payments to the Russian Federation after 2005 make the sustainability of the debt a matter of continuing concern though.

Through structural reforms, measures have been undertaken to address the quasi-budget deficit and the buildup of arrears in receipts at the government-owned public utility industries. In this effort, two major gas tariff increases were introduced in 2003 to bring revenues to approximately the cost recovery level as of July 2003. While continued efforts are needed to further improve collection rates, the reforms managed to bring down the quasi-fiscal deficit of the gas sector to 1.2% of GDP in mid-2003 from 3.0% at end-2002.

Progress in other areas of structural reform, however, has been uneven. Arrears in receipts in the electric power sector remain large, amounting to about 20% of GDP as estimated by the World Bank. To cushion the impact of the energy price increases on vulnerable groups, the Government set up a compensation mechanism in 2003 and has further raised the allocation for the compensation fund in its budget for 2004. This approach is expected to facilitate reforms to eliminate the remaining subsidies in the tariff structure.

In 2003, the focus of monetary policy was directed at maintaining a stable exchange rate against the dollar at the time of strong foreign exchange inflows resulting from good export performance, higher worker remittances, and inflows stimulated by an amnesty for funds held abroad. Large foreign exchange purchases meant a much faster increase in reserve money than had been planned since tools for sterilization are limited and this led to intensified inflationary pressures. Accordingly, the focus of monetary policy has been reoriented to reducing inflation and improving liquidity management.

With respect to banking sector reforms, the internal restructuring of NBT has been completed and the Government has also strengthened the function of the Monetary Policy Committee to guide monetary policy formulation and implementation. The Law on Amnesty of Cash Holdings was implemented from 1 April through 10 June 2003. The amnesty was intended to channel individuals’ cash holdings and deposits abroad into the formal economy through investment, property acquisition, or bank deposits. During this period, any cash holdings and deposits from abroad could be deposited in one of the eight commercial banks without source documentation. It is estimated that $190 million (about 12% of GDP) entered the banking system, of which about $40 million remained as demand deposits.

With the support of international development agencies, reforms in the banking sector have made progress. The restructuring of Agroinvestbank, the largest commercial bank, to put it on a sound financial footing was delayed in 2003 and was completed in March 2004. The minimum capital requirement for banks will be raised from the current $1.5 million to about $2.0 million by end-2004. Moreover, NBT is expected to enhance the quality of its supervision of commercial banks to further strengthen the banking sector.

To achieve the long-term development and poverty reduction goals, the Government aims to achieve economic growth at an average annual rate of 6.0% over the medium term. This requires continued policy reforms and economic restructuring to foster sustained growth through private sector development and economic diversification. It also calls for greater efforts to integrate the economy with the world market through enhanced international cooperation, particularly with countries within the subregion where progress has been slow. The strategy of the Government to address these challenges is summarized in its Poverty Reduction Strategy Paper and many measures have been initiated in line with the paper. While it recognizes the need to restore and maintain economic stability through strengthened macroeconomic management, the Government is constrained by substantial institutional weakness and very limited financial resources, and has to prioritize and coordinate its development initiatives and restructuring undertakings. In this regard, progress in economic reform is likely to remain patchy.

Outlook for 2004-2005

Persistent growth over the past 6 years reflects the steady recovery of the economy from the civil war. Assuming continued improvement in the general security situation in the country as well as in the Central Asian republics generally, this growth is expected to continue, but most likely at a more moderate rate of about 8% in 2004 and about 5% in 2005 as the recovery phase is completed. The momentum of rapid expansion in the services sector, and in the non-cotton agriculture and non-aluminum manufacturing sectors is anticipated to continue, thus further strengthening the driving forces for growth in the economy. While production of cotton and aluminum is expected to stabilize gradually as it reaches capacity limits, anticipated volumes and prices for these commodities (which represent about 75% of total exports) over 2004-2005 are likely to support continued export growth of 10.8% in 2004 and 6.4% in 2005.

Import growth is projected to slow to 11.0% in 2004 and to 6.6% in 2005 given the pattern of economic growth envisaged. The current account deficit is forecast to widen to 2.2% of GDP in 2004 and then further in 2005, though concessional assistance from development partners as well as IMF financing are expected to be sufficient to cover the deficit and to provide for some increase in international reserves.

With its commitment to a balanced budget, the Government is expected to continue its prudent fiscal policy in accordance with the macroeconomic framework supported by the PRGF. Following the 2003 surplus, the budget for 2004 is targeted to have a small deficit of 0.5% of GDP and then return to balance in 2005. Social sector expenditures in 2004 are planned to rise markedly, one half of which will be devoted to nonwage health and education spending. Revenue performance in 2004-2005 is forecast to steadily improve as a result of the ongoing tax reforms.

High inflation will remain the major concern of macroeconomic stability. The economic program calls for a 20% increase in the money supply (M2) in 2004. The shift of the monetary policy focus from the exchange rate to liquidity management may lead to some nominal appreciation in the TJS/$ exchange rate. Further tariff adjustments in 2004 are planned for the power sector as part of the restructuring program and this, coupled with the country’s vulnerability to price fluctuations on grain imports, indicate that NBT will have to strictly implement its monetary program to achieve the targeted inflation rate of 8.5% this year.

Over the medium to long term, economic progress will need to be increasingly supported by real headway in efforts aimed at resolving certain core structural problems. The large debt (about $216 million or 18% of GDP) accumulated by the cotton farms and the quasi-fiscal deficit of the power sector require resolution. The increase in external debt service in the years after 2005 could become a major constraint on continued growth. The economy needs to diversify, so as to foster and develop new sources of economic expansion. Moreover, sustaining such growth in a small, landlocked economy will be contingent, to a large extent, on the progress made in promoting mutually beneficial economic cooperation with its neighbors.

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