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p. 48 of 77 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. Promoting competition for long-term development Statistical appendix

Asian Development Outlook 2005 : II. Economic trends and prospects in developing Asia : Central Asia

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Tajikistan

Following a period of robust growth based on recovery from the low base after the civil war and in strengthening export prices, a slowdown is expected in the medium term, though reforms under the Poverty Reduction Strategy Paper are likely to maintain the tempo of poverty reduction. Further domestic policy reform, economic diversification, and stronger regional cooperation could put the economy back on a high-growth track in the longer term.

Macroeconomic assessment of 2004

Building on annual average growth of 9.5% since 2000, the economy showed strong performance in 2004. GDP grew by 10.6%, due primarily to gains in light manufacturing and the fast-growing services sector, particularly trade and other market services. This outcome broadly follows the realignment observed in 2003 to broader-based growth beyond the traditional engines of cotton and aluminum. While cotton production is estimated to have expanded by 4%, aided by favorable weather conditions, the agriculture sector nevertheless remains hobbled by structural constraints, such as limited access to inputs and inadequate marketing and credit systems, as well as a deteriorating irrigation system and obsolete agricultural machinery.

In the industry sector, aluminum production is estimated to have grown by 9.4% in 2004 as higher global prices strengthened earnings at the large Tajik Aluminum Smelter.

On the expenditure side, growth continued to be fueled by demand from rapidly rising workers’ remittances, financing higher consumption and investment expenditures.

Notwithstanding reforms to date, government officials still function in a command and control framework, hampering an enabling environment for private enterprises to operate. Accordingly, privatization of SMEs remained slow during the year. Reinforcing this trend, the Government’s emphasis on large-scale industrial projects has slowed the impetus for development of small private sector enterprises that have a significant employment potential.

Strong growth, policy reforms, and a favorable economic environment led to a sustained reduction in poverty from 82% in 1999 to 64% in 2003, based on a daily $2.15 per capita purchasing power parity expenditure poverty line. Per capita nominal GDP is estimated to have grown from $236 in 2003 to $269 in 2004, but this is still way below $1 a day. Significant regional differences in poverty persist. Moreover, inequality has worsened and is higher in Tajikistan than in other low-income countries in central Asia.

One result of these developments is that poverty and a lack of proper facilities keep school attendance low, while inadequate funding has led to a severe shortfall of teachers, as many have moved to better-paying jobs. Economic opportunities are still sparse, which encourages continuing outward migration.

Those engaged in cotton farming--the largest source of employment and the core of the agriculture sector--account for three quarters of all farmers. Yet cotton farming suffers from restrictive financial practices (contract farming), low productivity, official intervention in farm decisions, and poor marketing. Reflecting this, cotton farm debt owed to banks and investors is estimated to have increased from $180 million at end-2003 to $230 million at end-2004, as falling cotton prices over the year exacerbated structural weaknesses.

Through rationalized tax and fiscal policies, the budget in 2004, excluding the externally financed public investment program (PIP), was kept in surplus, at 0.3% of GDP. In exchange for a space-monitoring center, the Russian Federation in 2004 wrote off $250 million of its total debt of $300 million owed by Tajikistan. Debt-restructuring negotiations with bilateral creditors reduced external public debt from $1.0 billion or 66.3% of GDP at end-2003 to $822 million or 41.1% of GDP at end-2004. The improved external debt outlook allowed the limit on the PIP to be raised from 3% to 4% of GDP.

The National Bank of Tajikistan adhered to all of its monetary policy targets in 2004. Strengthened execution of monetary policy and a stable nominal exchange rate contributed to a substantial reduction in inflationary pressure. From 17.1% in 2003, inflation in 2004 fell to 6.8%, within the Government’s target of 7%. With the repeal of 30% duty on remittances, more people used banking channels to send funds from abroad and flows through formal banking channels reached $300 million in 2004 (about 15% of GDP). This was also reflected in an upward trend in domestic bank deposits over the year.

With higher import prices and a drop in cotton export prices, the trade deficit is estimated to have risen to $290 million or 14.5% of GDP in 2004 from $204 million in 2003. Mainly reflecting price developments, over this period the share of cotton fiber in exports fell from 24% to 16% while the share of aluminum increased from 54% to 62%. Despite high global oil prices and a decline in prices for cotton, the current account deficit in 2004 was kept relatively low at $46 million or 2.3% of GDP (1.3% in 2003) due to the larger inflow of workers’ remittances. The overall balance-of-payments position was in surplus; preliminary data indicate that foreign exchange reserves were $192.9 million at end-2004, the equivalent of 2.2 months of imports.

Macroeconomic policy developments

The Government has been pursuing an economic and financial reform program supported by IMF’s Poverty Reduction and Growth Facility (PRGF) over the past 2 years. The fiscal reform measures initiated in 2003 were consolidated in 2004 through a new tax and customs code compliant with the requirements of WTO, which was passed by Parliament for implementation effective 1 January 2005. Moreover, the Tajik Aluminum Smelter and Barki Tajik (the state power company) are now required to make full tax payments. Based on a new tariff policy, also beginning on 1 January 2005, a mechanism of quarterly adjustments will be implemented to raise power prices over the next few years to cost-recovery levels and to maintain gas tariffs at their real end-2003 (cost-recovery) level. These moves represent an attempt to make the energy sector self-sufficient, addressing the issue of large arrears (mainly in power) that amounted to about 20% of GDP at end-2003. A compensation mechanism introduced in 2003 mitigates the impact of energy price increases on the poorest 20% of the population.

It is estimated that improved governance has led to better internal security and higher living standards. Good governance received enhanced emphasis from donors at a consultative group meeting in November 2004, which also drew attention to a slowdown in the reform drive and emergence of serious governance issues. Corruption, though less severe, persists, preventing to some extent the Government’s efforts to fulfill its obligations in many public sectors, such as education and health. Indicators in these sectors have deteriorated since independence. To address such problems, the Government is spending more on the social sector, especially education and health, through the 2005 national budget passed by Parliament in December 2004 and the medium-term budget framework (Figure 2.24). This increase is partly financed through a reallocation of spending from noncore social services and savings in interest payments resulting from debt write-offs. The Government will also continue efforts to improve local service delivery and the quality of public services by strengthening local government capacity and by fostering a favorable investment climate for developing the private sector.

The civil service reform that began in 2003 is raising public sector wages and reducing staff numbers in phases. In continuation of this initiative, a major structural reform of public administration consonant with the transition to a market economy was approved in 2004. Key ministries will be restructured and streamlined. Departments are to be grouped according to function and noncore functions eliminated. As part of the PRGF program, there will be an upfront reduction in staff positions of 3-5% to accommodate substantial public sector wage increases geared to structural changes in agency operations that enhance productivity. These higher wages are intended to boost worker performance and improve the quality of hirees. This scheme has been approved by Parliament and will be implemented in five raions (districts).

Monetary policy in 2004 was designed to bring down inflation by improving liquidity management. Operations in the foreign exchange market helped keep the exchange rate stable. Under the PRGF agreement, the National Bank of Tajikistan has stopped providing credit to the banking sector (except for true lending of last resort) and it is to pay no dividends. Both policies aim to ensure better control over growth in reserve money. To assist commercial banks in their operations, the central bank is to help develop mechanisms for interbank lending. An innovation for 2005 is the plan of the Ministry of Finance to issue and auction short-term treasury securities.

Reforms in the agriculture sector have been slow. The enormous cotton debt that has been accumulated requires cotton farms to repay $65 million credit annually before the start of the new season. Building on an initiative in 2004, the Government, with donors, has developed a two-track comprehensive solution to the farm debt problem: measures to address debt reduction and the introduction of more competition in marketing, and the elimination of intervention in producer decisions related to cotton production.

The Government is seeking to integrate the economy with foreign markets, particularly through regional cooperation with neighboring countries. In this regard, a recent agreement with the Russian Federation is to generate a substantial investment in the energy sector while Iran is to invest in the Sangtuda hydropower plant and the Anzob tunnel in the north. A new road between Tajikistan and the PRC, laid in 2004, will facilitate better trade with that country. The Government has also sought cooperation with Afghanistan on establishing power, transport, and trade links.

In its preparation for accession to WTO, the Government is developing a domestic and external trade regime and will need to balance its tax harmonization commitment to its subregional country customs partners against WTO requirements of reduced tariffs. Having implemented a WTO-compatible tax code, it also plans to bring relevant laws into line with WTO requirements.

Outlook for 2005-2007 and medium-term trends

The high GDP growth achieved in the last several years depended to a large extent on external factors such as export earnings that were boosted by higher international prices and ever-growing workers’ remittances. However, cotton and aluminum, the two major export products, are susceptible to price volatility that can impact both export earnings and tax receipts. Due to anticipated global price trends and capacity constraints in aluminum production, a slowdown in growth is expected in the medium term.

Consequently, GDP growth is projected at 8.0% in 2005 with the downtrend continuing to about 6% by 2007. The impact of, for example, strengthened domestic policies, development of markets, accelerated investments in infrastructure and industry, as well as more effective use of development aid is likely to be felt only with a lag.

Policy changes in the agriculture sector could boost agricultural productivity and contribute to growth, since the Government now has a better appreciation of the importance of diversifying farm production to achieve higher growth. Resolution of the cotton farm debt issue and accession to WTO would allow better access to foreign markets and would expand the scope for a market-based strategy, allowing farmers to allocate crops based on profitability.

The budget for 2005 envisages the fiscal deficit to be limited to 0.5% of GDP. Total budgetary expenditure (excluding the PIP) is estimated to rise to 18.2% in 2005. Social sector spending is emphasized, and is projected to increase markedly from 6.6% of GDP in 2004 to 7.2% in 2005. Government revenues are also anticipated to rise to 17.7% of GDP due to the implementation of new measures on tax and customs codes, despite a decline in sales tax revenues stemming from the drop in cotton prices. Revenue measures include new taxes on businesses and a unified land tax.

External debt is projected to fall from 41.1% of GDP in 2004 to 37.5% in 2005, reflecting the impact of successful debt negotiations; it should stabilize at about 35% of GDP thereafter. Future debt service obligations would see a steep fall to 10.1% of exports in 2007, down from 49.2% in 2004, giving fiscal space for social expenditures. The budget deficit (excluding the PIP) in 2006-2007 is expected to be very small, at about 0.1-0.2% of GDP.

Inflation is expected to remain under control, bearing witness to improved implementation of monetary policy. It is expected to be 7.1% in 2005, reflecting pressures from wage adjustments granted in the budget, and then to moderate to 5.0% in the following 2 years.

In the face of export growth slowing to 2.2%, large hydropower projects will mean a faster expansion in imports, of 7.9%, than exports, which will substantially raise the current account deficit in 2005 to 5.2% of GDP. Larger capital inflows and external aid are projected to more than offset this and allow for some increase in gross international reserves. The current account deficit is likely to widen to 6.5% by 2007, mainly due to continued high levels of project implementation.

While poverty has declined in Tajikistan, it is still the highest among the Central Asian republics, and the country remains one of the poorest in the world. High growth and climbing per capita income mask rising inequality, and provision of adequate social services remains a challenge.

Economic developments so far indicate that it is unlikely that growth will be sustainable at high levels without structural reforms. Although the prospects for the medium term are for moderate growth, the long-term prospects could be brighter, but they depend on the strength of actions taken on domestic policy reform and on institutional change that the Government is undertaking, as well as on the success of regional cooperation.

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