Against the backdrop of a serious deterioration in its terms of trade and a large reversal of private capital flows following the Russian crisis in August 1998, the Tajik economy has entered a period of adjustment. Output growth has slowed down, inflation has flared up, and the exchange rate has weakened. More recently, macroeconomic stability has restored as the authorities have embarked on a strong adjustment path in response to adverse external developments and to correct the slippages in policy implementation during 1999.

Abstract

Against the backdrop of a serious deterioration in its terms of trade and a large reversal of private capital flows following the Russian crisis in August 1998, the Tajik economy has entered a period of adjustment. Output growth has slowed down, inflation has flared up, and the exchange rate has weakened. More recently, macroeconomic stability has restored as the authorities have embarked on a strong adjustment path in response to adverse external developments and to correct the slippages in policy implementation during 1999.

I. Introduction

1. In 1999, the Tajik people celebrated the 1, 100th anniversary of the founding of the Tajik nation—the state of Samanids. They celebrated not only because of the long history of the Tajik nation but also the progress toward lasting peace and re-building of the Tajik state, which gained independence only in 1991 and went through a protracted and destructive civil war since. The progress in the peace process has improved security and enabled Tajikistan to focus on economic reconstruction. Despite a very difficult external environment, the country has made significant strides in the transition toward a market economy.

A. Progress in the Peace Process

2. Year 1999 has witnessed significant advancement in the implementation of the Peace Agreement signed by President Rakhmonov and Mr. Nuri, the leader of the United Tajik Opposition (UTO) in June 1997. Good progress was made in implementing the Military Protocol as over 6,200 ex-UTO fighters were registered and nearly 2,500 were integrated into the Tajik army and Border Forces. On May 14, 1999, Parliament adopted an amnesty law which pardons all registered UTO fighters. Subsequently, the UTO announced the completion of Phase II of the Military Protocol, implying full disarmament of its ex-fighters. Progress in demobilization cleared the way for the constitutional referendum and the elections.

3. On the political front, a breakthrough was made over the deadlock on the integration of the UTO into the government and law enforcement agencies in late summer 1999 with appointments of the heads of the Customs, Ministry of Emergency Situations, the National Oil Company, and the Border Forces, thereby completing the envisaged 30 percent UTO representation at ministerial positions as required under the Peace Agreement. On September 26, a referendum on amendments to the constitution was held. Voters showed strong support for the continuation of the secular state and the constitutional changes that, inter alia, extended the President’s term in office from five to seven years and allowed the opposition to freely set up political parties. The presidential election was held on November 6, 1999 and the incumbent President, Mr. Rakhmonov, was re-elected with a large majority of votes. The parliamentary elections are now scheduled for late February 2000, which will complete the implementation of the 1997 Peace Agreement.

4. The peace process moved ahead in the past year owing importantly to the solid cooperation between the President and the UTO leadership, with strong support from the population and the international community through the multinational Contact Group which has been monitoring the peace process. In late May 1999, due to a number of disputes between the government and the UTO including over the proposed amendments to the constitution as well as the appointment of a UTO field commander to the position of Minister of Defense, the UTO suspended its participation in the National Reconciliation Commission (CNR). President Rakhmonov and Mr. Nuri, whose leadership was challenged by some field commanders, moved quickly to resolve the disputes, and the UTO representatives resumed their work in the CNR in June.

5. More recently, political tensions increased in the run-up to the presidential election and threatened again to derail the peace process. The opposition protested that Mr. Usmonov, the only candidate from the Islamic Revival Party (the main political party of the UTO), was unfairly obstructed in the registration process. After intense discussions with President Rakhmonov, Mr. Nuri lifted the UTO’s boycott of the ballot one day before the voting began. In these cases, dialogue, compromise, and political participation replaced armed struggle as a means of dispute settlement notwithstanding the significant differences in political opinions and interests.

6. The enhanced cooperation between the government and the UTO helped improve the domestic security situation. When a major armed rebellion took place in Khujand, the Northern industrial region on November 4, 1998, the government forces, with support from the UTO, managed to suppressed the rebellion within a week. In addition to exerting political influence on field commanders to stop supporting criminal activities, both sides also have worked closely to neutralize several armed bandit groups in and around Dushanbe, and arrested the culprits behind the killings of four UN personnel and the Chairman of the CNR legal sub-commission. Both tragedies occurred in July-September 1998. A panel of the European Commission conducted a security review in March 1999 and concluded that the improvement of the security situation warranted the resumption of EU operations in Tajikistan.

B. Economic Transition and Adjustment

7. Against the backdrop of a serious deterioration in its terms of trade and a large reversal of private capital flows following the Russian crisis in August 1998, the Tajik economy entered a period of adjustment. Output growth slowed down, inflation flared up, and the exchange rate weakened. More recently, macroeconomic stability was restored as the authorities embarked on a strong adjustment path in response to adverse external developments and to correct the slippages in policy implementation during 1999. Meanwhile, Tajikistan made progress in structural reforms under the economic programs supported by the World Bank and the International Monetary Rind, notably in small scale privatization, land reform, restructuring of the banking system, and development of market based institutions and the legal system.

8. The remainder of this report documents the macroeconomic developments and analyzes the government’s economic policies and reform efforts since the signing of the Peace Agreement in June 1997.

II. Output and Price Developments

A. Demand Developments and Sectoral Balances

9. The economic recovery, which started soon after the formal end of the civil conflict in 1997, accelerated in 1998, with officially recorded real GDP up by 5.3 percent (Table 1 and Figure 1). The economy slowed down since then and real GDP increased only by 0.9 percent in the first nine months of 1999 over the same period a year ago. These developments, especially the recent output slowdown, in large part reflected corresponding changes in domestic demand or absorption, which in turn was heavily influenced by external developments (Box. 1).

Table 1.

Tajikistan: Nominal and Real GDP, 1992-99

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Sources: State Statistical Committee; and Fund staff calculations.

Converted to Tajik rubles using a conversion factor of 90.

Figure 1.
Figure 1.

Tajikistan: Real GDP, 1994-99

Citation: IMF Staff Country Reports 2000, 027; 10.5089/9781451836950.002.A001

Sources: Tajik authorities; and Fund staff estimates.

Domestic Absorption and Sectoral Balances

(In percent of GDP)
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Based on partial data for the first three quarters of 1999.

Includes changes in net foreign assets of the commercial banks, foreign direct investment, other capital flows, as well as errors and omissions.

Includes official transfers and net factor income.

General government cash balance.

106.3 if real GDP increases 3.5 percent in 1999; 103.5 if real GDP growth is zero

10. Domestic absorption, defined as the sum of total government and private expenditures, increased by 8.1 percent in real terms in 1998, mostly on account of a surge in private sector expenditures. Both private consumption and investment apparently increased, as suggested by the worsening of the private sector saving-investment balance equivalent to 2.2 percent of GDP from 1997 to 1998, a sharp rise in real wages, and large capital inflows associated with the financing of the cotton sector. Government expenditure shrank relative to GDP but fell only marginally in real terms.

11. Based on partial data for the first three quarters of 1999, real domestic demand is estimated to have declined in 1999 by 1.5-4 percent. While government expenditures barely maintained their share in GDP, private sector expenditures appear to have dropped both in relation to GDP, and in real terms. The marked improvement in the private sector net savings (in the order of 4.5 percent of GDP on an annual basis) suggests that the composition of private expenditures has changed and investment has most likely fallen. The large drop in net private capital inflows during 1999 further supports this observation. It is worth noting that the fiscal deficit of the general government has diminished by about 0.8 percentage point of GDP from 1998, thereby supporting the private sector adjustment to the external shocks.

B. Production Developments

12. The rebound in output in 1997-1998 can be largely explained by better use of existing resources as the civil conflict ended. Efficiency gains owing to a gradual reduction of structural distortions under the government’s stabilization and reform programs supported by the IMF and the World Bank may have also contributed to the recovery during the period. The slowdown in output growth in 1999 suggests that these effects have been partially offset by adverse external developments and the ensuing decline in domestic demand.

13. Agriculture is a key sector in Tajikistan. Over 70 percent of the population reside in rural areas and most of them are employed directly or indirectly in agriculture and related activities. The export of cotton, fruits, and vegetables account for a major part of net foreign exchange earnings of the country. Agriculture production grew by 6.3 percent in 1998, following an initial rebound of 0.2 percent in 1997 (Tables 3-4). This increase, after years of decline since independence, was largely due to a recovery in cotton output. With the end of the civil war, external private creditors provided pre-financing (US$50 million) for the cotton crop in 1997. Further credits of about US$80 million were extended in 1998, which enabled the farmers to purchase pesticides, fertilizers, fuel, and other needed inputs as well as agricultural equipment. The buoyant world market prices for cotton at the time also provided incentives for cotton growing. Cotton output increased by 11 percent in 1997 and a further 8.5 percent in 1998 to 383,000 tons, up from 318,000 tons in 1996. In 1999, however, external creditors stopped providing new financing. With about the same area of planting, cotton output is estimated to be 15-20 percent lower than last year, reflecting lower yield due to lesser inputs as well as inclement weather conditions.

Table 2.

Tajikistan: Nominal GDP by Sector of Origin, 1994-1999

(In Millions of Tajik rubles)

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Source: State Statistical Committee; and Fund staff calculation.

Data for 1994 are measured in Russian rubles.

Calculated as value added plus an estimate for depreciation.

Shares based on preliminary January to June 1999 GDP figures.

Table 3.

Tajikistan: Agricultural Production, 1985-98

(In millions of Tajik rubles at constant 1997 prices)

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Sources: State Statistical Committee; and Fund staff calculations.
Table 4.

Tajikistan: Production and Yield of Major Agricultural Crops, 1985-98

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Source: State Statistical Committee.

14. Animal husbandry has revived since 1997, as evidenced by the ample supplies of meat, milk, eggs, and other products in the markets. However, these developments do not seem to be fully reflected in the official statistics (Tables 5-6). It is likely that reported production understates private sector activities, which have increased substantially in the last few years. The State Statistical Committee (Goskomstat) estimated that up to 90 percent of this subsector is now in private hands. The private sector’s share in farming has also increased due to the land reform program implemented by the government, contributing to the overall recovery in the primary sector (Tables 7-8).

Table 5.

Tajikistan: Animal Husbandry, 1985-98

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Source: State Statistical Committee.
Table 6.

Tajikistan: Production of Meat, Milk and Eggs, 1985-98

(In thousands of tons unless otherwise specified)

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Source: State Statistical Committee.
Table 7.

Tajikistan: Agricultural Production by Type of Farm, 1985-98

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Source: State Statistical Committee.

Data for 1998 include private dekhan farms.

Table 8.

Tajikistan: Allocation of Agricultural Land in 1998

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Source: State Statistical Committee.

Includes collective farms (Kolkhozes), state farms (Sovkhozes), state farms in transformation into collective farms (Mezhozes), and other farms.

15. Industrial production was up by 8.2 percent in 1998 and an estimated 6.8 percent in the first three quarters of 1999, after continued declines since 1990 (Tables 9-11). Marked increases were registered in the production of electricity, nonferrous metal, metal products, food and light industries. In 1998, aluminum output, the traditional industrial product, increased by 3.7 percent; and the food processing and textile industry went up by 19.5 percent and 58 percent respectively, indicating that the production pattern increasingly reflected Tajikistan’s comparative advantages with vast hydropower resources, favorable climate, and cheap labor. In addition to manufacturing, construction appears to be another leading sector in the recovery as brick production increased by 22 percent 1998. Electricity consumption was up by 4 percent in 1998, providing further evidence that economic activities were picking up.

Table 9.

Tajikistan: Industrial Output by Sector at Constant Prices, 1985-98

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Source: State Statistical Committee.

From 1985 to 1994, in millions of Russian rubles.

Table 10.

Tajikistan: Selected Indicators of Industrial Production, 1985-98

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Source: State Statistical Committee.
Table 11.

Tajikistan: Electricity Consumption and Output, 1985-98

(In billions of kilowatt hours)

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Source: State Statistical Committee.

16. Output in the tertiary sector has risen dramatically since 1997. In the official statistics, the share of trade, transport, domestic commerce, and “other nonmaterial services” in GDP increased from some 27 percent in 1996 to 31 percent in 1997 and 39 percent in 1998 (Table 2). The main driving forces appear to be commerce and services. A survey by the State Statistical Committee suggests that the volume of retail trade increased by 28 percent in 1998 and 21 percent in the first nine months of 1999. As state trading shrank, private commerce developed rapidly. The private sector accounted for 98 percent of the retail turnover in 1998, of which 96 percent related to consumer goods and food markets. Other services also grew during the period, up by 11 percent in 1997 and 19 percent in 1998. The State Statistical Committee also reported that transportation of goods by railway, automobile and airplane, measured in tons, after a sharp decline in 1996-97, increased 30 percent in 1998, contributing to the larger share of the tertiary sector in GDP.

C. Price Developments

17. Inflation declined sharply since the authorities started implementing the IMF-supported financial stabilization and reform programs. Twelve-month inflation fell from over 170 percent in September 1997 to 2.7 percent by end-December 1998 (Table 18 and Figure 2). Since then, inflation rose again, peaking at 64 percent at end-August 1999 before the price level again stabilized. As further analyzed in the next section, a number of factors have contributed to this surge in prices: a continuing deterioration of the terms of trade due to rising world market prices of oil and flour imported from the neighboring countries; delayed pass-through of the past currency depreciation; as well as fiscal and monetary expansion in July-August 1999.

Table 12.

Tajikistan: Fuel Consumption, 1991-98 1/

(Index 1991=100)

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Sources: State Statistical Committee; and Fund staff calculations.

The figures in this table probably overstate the decline in fuel consumption as they do not appear to adequately cover private sector activity in this area.

Table 13.

Tajikistan: Indices of Real GDP, Employment and Energy Consumption, 1991-98

(Index 1991 = 100)

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Source: State Statistical Committee.

Total electricity consumption excluding household consumption and unaccounted losses.

The figures in this table probably overstate the decline in fuel consumption as they do not appear to adequately cover private sector activity in this area.

Sum of gasoline, diesel, crude oil, and engine fuel consumption.

Includes household consumption

Table 14.

Tajikistan: Labor Resources and Employment, 1985-98

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Sources: State Statistical Committee; and Fund staff calculations.

End of year.

Men between 16 and 59; women between 16 and 54. From 1997, includes persons of 15 years old.

Defined as the ratio of economically active over working age population.

Annual averages.

Equals total employment plus total unemployment.

Includes central and local governments, state enterprises and state farms.