Regions and Countries

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p. 1 of 10 BACK | NEXT Executive Summary I. Recent Economic Developments II. Short and Medium-Term Economic Prospects and Policy Issues Appendix

Country Economic Review - Tajikistan

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Executive Summary

Tajikistan made significant progress in macroeconomic stabilization and its transition to a market-based economy in 1997 and 1998. Economic growth slowed in 1999, however, with preliminary figures showing that real gross domestic product (GDP) grew by 3.7 percent, considerably lower than the 1998 growth rate of 5.3 percent and the original 1999 forecast of 5.5 percent. The fall in the growth rate reflects the adverse effects of the Russian financial crisis, the deterioration in Tajikistan’s terms of trade, and weather damage to agricultural crops.

In the key agriculture sector, the 1999 grain harvest decreased by 20 percent because of bad weather. Production of cotton, one of Tajikistan’s two main exports, declined by 17.6 percent in 1999 because of bad weather and a shortage of inputs after external financing was withdrawn. Industrial output grew by 8.2 percent in 1998 and 5.0 percent in 1999. Production of aluminum, Tajikistan’s other major export, increased by 20 percent in 1999. Tajikistan’s official unemployment rate was 3.1 percent in the first half of 1999, compared to 3.2 percent in 1998. However, the official statistics grossly underestimate actual unemployment, which is about 30 percent.

Budget overruns and weak tax administration widened the budget deficit during the first three quarters of 1999. However, the authorities intensified revenue collection and rationalized expenditures in the fourth quarter. As a result, the deficit fell to 3.1 percent of GDP in 1999 after a deficit of 3.8 percent in 1998.

The Russian financial crisis has had a detrimental effect on Tajikistan’s economy, especially through its effects on the exchange rate and consequent macroeconomic instability, which complicated adherence to the targets under the Poverty Reduction and Growth Facility (PRGF, formerly Enhanced Structrual Adjustment Facility, or ESAF) program of the International Monetary Fund (IMF). The official exchange rate to the US dollar depreciated 47.5 percent from August 1998 to August 1999. Since August 1999, however, the exchange rate has remained stable. After inflation of only 2.7 percent in 1998, the currency devaluation carried with it inflationary pressures in 1999, causing the authorities to establish new fiscal and monetary targets and implement new policy measures to shore up the budget and tighten monetary policy. However, the economy faced more shocks in 1999 when the prices of key commodities, including bread and imported fuel, increased. Administrative price increases in electricity and gasoline also contributed to inflation, which was 24 percent for the year.

In 1998, Tajikistan’s trade balance deteriorated sharply because of steep declines in prices of cotton and aluminum. The trade balance recovered in 1999, however, due to increased export earnings from aluminum whose price has rebounded. The appreciation of the Tajik ruble vis-à-vis the Russian ruble in the aftermath of the Russian crisis caused exports to Russia and other former Soviet Union (FSU) countries to decline in late 1998 and early 1999. However, Tajikistan’s success in diversifying its trading partners since independence cushioned the effects of the crisis somewhat as its main exports, cotton and aluminum, are sold mostly to non-FSU countries.

Tajikistan continues to have a heavy debt service burden. In 1998, external debt represented 91.4 percent of GDP. In April 1999, however, Moscow reduced Tajikistan’s debt to Russia by over 50 percent. Agreements have also been signed with several other countries. Consequently, Tajikistan’s foreign debt service due has fallen from 17.5 percent of GDP in 1996 to 2.7 percent in 1999.

During 2000 and 2001, the Government will continue to implement the IMF PRGF program, which calls for tight fiscal and monetary policy and continued structural reforms, supported by a flexible exchange rate regime. New program targets proposed in December 1999 call for economic growth of 5.0 percent per year and inflation of 13 percent.

Continued progress in the peace process is the most crucial factor in Tajikistan’s efforts to maintain a stable and secure macroeconomic environment that will foster economic development and promote investor confidence. Despite occasional disruptions, the peace process made significant progress in 1999. The United Tajik Opposition (UTO) completed the disarmament of its soldiers in 1999 and emphasized that they are now only a political opposition. The Supreme Court subsequently lifted the 1993 ban on opposition parties. President Rakhmanov was re-elected in November 1999. Parliamentary elections for the lower house took place in February 2000, and those for the upper house in March 2000. These elections officially mark the completion of the peace process set in motion by the 1997 peace accord. For peace to be maintained, it is important that the election victors continue to cooperate with the opposition to create the conditions necessary for promoting economic growth and prosperity.

In December 1999, the Government announced that its privatization program for small enterprises was complete. Land reform has also proceeded well. From June 1998 to October 1999, 183 state and collective farms (out of more than 600 to start) were broken up into smaller private farms, and over 63,000 land share certificates were distributed to farmers. There were 13,034 private peasant farms as of October 1999. However, the privatization of medium and large state-owned enterprises has lagged. As of October 1999, only 7 of 23 cotton-ginning mills had been sold. Nevertheless, the state cotton monopoly was liquidated in January 1999. The Government has also announced its intention to eventually restructure Tajikistan’s two largest firms: the electricity monopoly Barki Tajik, and the aluminum smelter TADAZ.

The first round of bank restructuring for four of the five major banks was completed in November 1998 with progress in reducing staff, improving management practices, and expanding the capital base. The new prudential regulations reduced the number of banks from 26 to 16 in 1999 as several weak banks were liquidated or merged with other banks. In April 1999, the National Bank of Tajikistan (NBT) took over one of the five big banks to liquidate it because of noncompliance with prudential regulations. This action should demonstrate the NBT’s resolve to the other banks. Agricultural finance has been especially constrained in recent years. There is a crucial need to develop sustainable rural financial institutions in Tajikistan.

Because of the civil war, the sharp contraction in GDP since independence in 1991, and decreased tax revenues, the Government’s ability to provide basic public and social services has been severely strained. The estimated poverty rate in Tajikistan is 80 percent. The existing social safety net remains inadequate and poorly targeted. With Tajikistan’s high incidence of poverty and the Government’s limited resources, there is an urgent need to reform and strengthen the social safety net. A household poverty survey undertaken in August 1999 should provide the basis for a more comprehensive reform of the existing social safety net.

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