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p. 15 of 54 BACK | NEXT I. Developing Asia and the World - Economic Developments and Prospects II. Economic Trends and Prospects in Developing Asia Newly Industrialized Economies Central Asian Republics, Azerbaijan, and Mongolia Kazakhstan Kyrgyz Republic Tajikistan and Turkmenistan Uzbekistan Mongolia People’s Republic of China Southeast Asia South Asia The Pacific III. Asia's Globalization Challenge

Asian Development Outlook 2001 : II. Economic Trends and Prospects in Developing Asia : Central Asian Republics, Azerbaijan, and Mongolia

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Tajikistan

Economic performance in 2000 improved despite a severe drought. Politically, the successful conclusion of the peace process that ended the civil war bodes well for an improvement in the general economic climate, and should help attract much-needed foreign investment and benefit the ongoing privatization process. Careful management of the heavy external debt burden will be necessary to maintain economic stability and support efforts to reduce poverty.

Recent Trends and Prospects

Economic growth accelerated to 5.0 percent in 2000 from 3.7 percent in 1999, despite the worst drought in 74 years (see Figure 2.5). Growth was led by the industry sector, which expanded by 10.3 percent compared with 5.0 percent in 1999. Aluminum production, rising by 30 percent still, dominates the sector. World prices for aluminum rose by 18 percent in 2000, spurring a 44 percent increase in the dollar value of aluminum exports. The services sector also continued to expand, as did small-scale crafts and trade.

Agriculture remains a key sector of the economy, contributing 20 percent of GDP and accounting for 60 percent of employment. A devastating drought resulted in a severe food deficit in 2000, compelling the Government to appeal to the international community for emergency food aid and related assistance. The Government allocated $30 million from the budget to purchase seeds. However, the important cotton sector was less affected because irrigation makes it much less dependent on seasonal weather patterns.

Labor markets remained weak because the country began its transition to a market economy later than other former Soviet republics. Moreover, the narrow base of economic growth has limited employment opportunities. However, they are increasing in the emerging private sector, especially in services, small-scale crafts, and trade. Although official unemployment in 2000 was 3.1 percent, the actual rate was about 30 percent. The official figure does not include unemployment and underemployment in inactive state-owned enterprises (SOEs), and many of the unemployed do not register because of low unemployment benefits.

The fiscal position improved in 2000 due to higher tax collection resulting from economic growth, better compliance, an expanding tax base, and continued rationalization of expenditures. Revenues increased marginally to 13.7 percent of GDP from 13.5 percent in 1999, while expenditures declined to 14.4 percent of GDP from 16.6 percent. As a result, the 2000 deficit narrowed to 0.7 percent of GDP from 3.1 percent in 1999, despite higher drought-related expenditures. However, the fiscal performance is somewhat overstated because some transfers to loss-incurring SOEs were made as directed credit from the banking sector rather than as allocations through the budget. Importantly, the Government has continued its policy and practice of avoiding arrears on government wages, pensions, and social benefits. This policy will soon have a statutory mandate, having been included in the 2001 budget law.

Since June 1997, the authorities have pursued a tight monetary policy to combat inflation. Consequently, inflation dropped steeply from 164 percent in 1997 to 2.7 percent in 1998. A number of external factors, including the Russian crisis, the resulting depreciation of Tajikistan’s currency, and increases in the prices of key imports, pushed inflation to 31.0 percent in 1999. There was slippage in the authorities’ tight monetary stance in the first half of 2000, resulting in broad money supply (M2) increasing by 30.0 percent in 2000. Monetary expansion, a food price rise of 30 percent due to the drought, and a 90 percent increase in fuel prices resulted in an inflation rate of 24.0 percent in 2000. The currency continued to depreciate, falling by about 30 percent against the dollar in 2000. On 30 October 2000, the somoni replaced the Tajik ruble as the national currency at a rate of 1 somoni to 1,000 Tajik rubles.

The economy’s external position is fragile. External balances face substantial instability due to lack of diversity of exports and volatility of prices. Over three quarters of Tajikistan’s export earnings come from aluminum and cotton, prices of which fell substantially in 1998 and remained low in 1999, exacerbating the external position. Although prices of these goods rebounded in 2000, by 18 percent and 13 percent, respectively, the current account deficit worsened because the price of imported oil also increased while the drought necessitated significantly higher volumes of imported food: it stood at 5.7 percent of GDP in 2000, compared with 3.5 percent in 1999. The balance of trade also deteriorated in 2000 as imports rose by 13.6 percent and exports expanded by 11.4 percent. Export earnings were led by aluminum, which accounted for 55 percent of the total. Cotton export earnings fell by 5.4 percent, despite higher prices, because of the poor harvest at the end of 1999. Gross international reserves stood at 1.9 months of imports at the end of 2000, up from 1 month at the end of 1999, but this is still too low. The small increase occurred because capital inflows in the form of concessionary lending from international financial institutions offset the deteriorating current account balance.

External debt was 117 percent of GDP at the end of 2000, and the economy’s debt-service burden is fiscally unsustainable. Including repayment of principal, debt service in 2000 was estimated as a proportion of government revenue at 44 percent, and as a proportion of exports at 13 percent. About 35 percent of the outstanding public debt at the end of 2000 was owed to multilateral institutions. The two largest bilateral creditors, the Russian Federation and Uzbekistan, accounted for almost half the public external debt. Virtually all multilateral debt is concessionary, but most bilateral debt is not, and is of a short-term nature. The Government has ongoing negotiations to resolve remaining external debt issues with several bilateral creditors. The Government of the People’s Republic of China converted Tajikistan’s bilateral debt to a grant in June 2000, but further debt rescheduling agreements with other bilateral donors will be required to prevent the debt-service burden from worsening in the future.

After four consecutive years of economic growth, the outlook continues to improve, but risks and uncertainties remain. A continued tight monetary policy, including a prohibition on directed credits by the central bank, will contribute to achieving a stable macroeconomic environment conducive to growth and poverty reduction. GDP is expected to grow by 5–6 percent in 2001 and 2002, led by faster growth in newly privatized businesses and farms. Manufacturing output is also likely to rise in response to rising domestic demand and excess capacity. However, high world oil prices, food shortages, and the continued depreciation of the currency suggest that the rate of inflation, though slower, will remain quite high over the next two years and that the balance-of-payments position will remain precarious.

The country’s large external debt is a major concern and severely constrains the Government’s ability to establish a meaningful poverty reduction program. Over the next five years, the external debt could strain the balance of payments as the grace periods for rescheduled debt expire. Debt service is projected to peak at 48 percent of government revenue in 2001 before falling to 30 percent by 2004, while as a proportion of exports it is forecast to rise to about 14 percent in 2001 before falling to around 12 percent in 2003. Managing the debt burden successfully will require the Government to continue negotiations to reschedule the nonconcessionary debt from bilateral creditors, as well as to increase fiscal revenues to about 17 percent of GDP by 2005. Fiscal performance should improve as the value-added and excise tax bases continue to expand and tax compliance improves with the strengthening of the inspectorate dealing with large taxpayers and computerization of tax administration. These gains should more than offset the revenue reductions resulting from a lower sales tax on exported cotton.

Issues in Economic Management

In 2000, the successful conclusion of the peace process that began with the peace agreement of 1997 marking the end of the civil war was of crucial importance to stability and the country’s potential to continue its economic recovery. In February and March 2000, members of a new parliament were elected. The subsequent dissolution of the National Peace and Reconciliation Council, in accordance with the 1997 peace agreement, officially concluded the peace process. Continued peace, stability, and security are clearly prerequisites to promoting economic recovery and attracting foreign investment.

Because of the long civil war, Tajikistan’s economic reforms were delayed. However, substantial progress in structural reforms has been made since the signing of the peace agreement. The reform process, including privatization, accelerated in 2000. In the first nine months of the year, an additional 60 state-owned farms were privatized. Hence, by the end of September, 290 of the 600 state farms had been restructured into about 14,000 private farms with marketable land-use rights. Moreover, the Government issued a decree in October to ensure that contracts between private farms and their marketing agents are not controlled by central or local governments. Between April and September, the country’s 19 remaining state-owned cotton ginning mills were privatized and paid for. Furthermore, 265 out of some 700 medium and large state-owned enterprises had been sold by August, with full payment received for 214, against December 2000 targets of 280 sold with full payment for 250. Plans were also being developed to restructure and reequip the Tursonzoda aluminum smelter with the assistance of the International Finance Corporation. Hence, after an initial slow start in implementing its privatization program, the Government is largely meeting the program targets. While this is commendable, reports of continued lack of transparency in some privatization activities, resulting in insider sales of farms and enterprises to vested interests, suggest that steps are needed to ensure a more open and fair privatization process. Some local authorities also continue to interfere in the production decisions of privatized farms. More generally, governance and public sector management need to be strengthened to reduce the scope for misuse of public resources and to promote structural reforms that create an environment promoting private-sector-led growth.

Because of the sharp economic contraction since independence in 1991, the Government’s ability to provide basic social services has been severely strained. The estimated poverty rate is 83 percent; the existing social safety net remains inadequate and poorly targeted, and must be strengthened urgently. The Government has already committed itself to reducing poverty, and to this end devoted 42 percent of its 2001 budget to education, health, pensions, and a cash compensation program. In addition, in October 2000, it completed an interim national poverty reduction strategy, which sets out a broad framework for reducing poverty, promoting employment and economic growth, and reforming the social safety net. A final version of this strategy is due to be completed in early 2001. A pilot program to provide an allowance to the poorest 20 percent of schoolchildren began in September 2000. If successful, it will be implemented nationwide in 2001.

Policy and Development Issues

The banking sector performed poorly after independence because of weak management skills, directed credits, an inadequate legal and regulatory framework, and the country’s political and macroeconomic instability. Given the importance of this sector, particularly in supporting newly privatized farms and businesses, the authorities are implementing a program to restructure it and rebuild public confidence in it. Under the restructuring guidelines, the Government will only recapitalize a commercial bank if it has restructured its operations, established a professional management team, developed a business plan to achieve the required capital adequacy ratios and profitability level, and attracted private capital. In May 2000, the four largest commercial banks, which account for over 90 percent of the country’s savings and loans, signed restructuring agreements with the central bank. The agreements include reducing staff headcounts and branch numbers, improving recovery of bad loans, limiting new credit expansion, enhancing credit administration and internal controls, and preparing preliminary business plans. Some of these banks have already improved loan recovery rates.

Implementation of banking reforms has been uneven, however. In 2000, the central bank continued occasionally to extend directed credits to some state-owned enterprises, in violation of its stated policies and International Monetary Fund conditions. Moreover, the central bank’s loan collection performance was poor. While some of this weakened performance was brought on by the urgent needs resulting from the drought, the authorities need to redouble their efforts to implement sound central banking policies. In the commercial banking sector, lending to insiders is still common, and loan collection remains inadequate. Hence, to further improve supervision, the central bank created a Problem Bank Unit in late 2000 that will be responsible for monitoring and inspecting banks that systematically violate prudential standards. At the same time, the central bank created a Bank Liquidation and Loan Recovery Unit responsible for liquidating failing banks. Moreover, the central bank’s Legal and Bank Supervision Department and the ministries of finance and justice are reviewing banking legislation to identify inconsistencies, deviations from international best practice, and impediments to prudent banking. Areas of the legal framework that need to be improved include reducing the cost of repossessing collateral, making loan-loss provisions 100 percent tax deductible, and making the accounting principles in the tax and banking laws consistent with each other.

Finance to the agriculture sector was severely limited in 2000. Most of it was provided to the cotton sector, while financing for newly privatized farms was virtually nonexistent. There were exceptions: a few isolated microfinance schemes led by nongovernment organizations, and pilot credit unions set up in association with newly privatized farms in selected districts. However, these programs have limited outreach, depend on subsidies from donors, and their operations are unsustainable. In 2000, the authorities began to address the need for sustainable rural financial institutions by working with nongovernment organizations to begin developing a framework to encourage the expansion of microfinance services. The need to expand, deepen, and strengthen rural financial institutions will be a crucial component of a general program to reduce rural poverty.

Although distortions in the foreign currency exchange market have lessened, the spread between the official exchange rate and the curb rate remained substantial, averaging 9 percent in 2000, after averaging 22 percent in 1999. In order to further reduce these distortions and to create an efficient market, the operations of the Tajik Interbank Currency Exchange, by which the central bank auctioned foreign currency, were suspended in July 2000, and the central bank lost its role as the sole supplier of foreign exchange. Competitive interbank markets were established to replace the old system. The central bank now quotes the official exchange rate based on a weighted average of the interbank market exchange rates.

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