Tajikistan
Recent Economic Developments
Author:
International Monetary Fund
Search for other papers by International Monetary Fund in
Current site
Google Scholar Close
Publication Date:
06 Mar 2000
eISBN:
9781451836950
Language:
English
Keywords:
ISCR; CR; U.S. dollar; exchange rate; debt service; private sector; Tajik authorities; terms of trade; current account; Tajik ruble; joint stock; land reform; peace process; government expenditure-to-GDP ratio
Download PDF (4.2 MB)

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

article image
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)
article image

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)

article image
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)

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

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

article image
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

article image
Source: State Statistical Committee.
Table 6.

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

(In thousands of tons unless otherwise specified)

article image
Source: State Statistical Committee.
Table 7.

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

article image
Source: State Statistical Committee.

Data for 1998 include private dekhan farms.

Table 8.

Tajikistan: Allocation of Agricultural Land in 1998

article image
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

article image
Source: State Statistical Committee.

From 1985 to 1994, in millions of Russian rubles.

Table 10.

Tajikistan: Selected Indicators of Industrial Production, 1985-98

article image
Source: State Statistical Committee.
Table 11.

Tajikistan: Electricity Consumption and Output, 1985-98

(In billions of kilowatt hours)

article image
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)

article image
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)

article image
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

article image
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.

Table 15.

Tajikistan: Registered Unemployment, 1995-99

(In thousand; end of month)

article image
Source: State Statistical Committee.
Table 16.

Tajikistan: Employment by Sector of Economy, 1985-98

article image
Sources: Ministry of Labor; and State Statistical Committee, and Fund staff calculations.

Slight differences between total employment in Tables 14 and 16 reflect data discrepancies.

Table 17.

Tajikistan: Sectorial Output, Employment and Productivity, 1991-98

(Index 1991 = 100)

article image
Sources: State Statistical Committee, Ministry of Labor, and Fund staff calculations.

Include transport and communications.

Table 18.

Tajikistan: Consumer Price Inflation, 1996-99

article image
Source: State Statistical Committee.
Figure 2.
Figure 2.

Tajikistan: Consumer and Wholesale Prices Indices, 1996-99

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

Sources: Tajik authorities

18. Disaggregated data indicate that, of the three main components of the Consumer Price Index (CPI), food prices exhibited strong seasonality and have a major influence on the overall CPI. Food prices typically fall in the summer months (May-August) when the local harvest of fruits and vegetables reaches the markets and rise in the winter. In the summer of 1999, however, hike in the import prices of flour and rice, coupled with expansionary domestic policies, led to a sudden rise in the prices of food items, contributing to a sharp acceleration of overall consumer price inflation. Service prices have also increased substantially since September 1998 in part due to upward adjustments of administered utility prices. In comparison, non-food prices appeared to be less volatile and increased at a slow pace during the period.

19. The State Statistical Committee also compiles a wholesale price index (WPI), which is based mostly on self-reporting by enterprises and may suffer from inadequate coverage of the emerging private sector (Table 19). The official WPI has moved in a pattern broadly similar to the CPI in the last two years. The wholesale price inflation was on a declining trend from the fourth quarter of 1997 to August 1998. Since then it rose by 78 percent during the 12 months to September 1999, somewhat faster than consumer prices, reflecting the rising costs of industrial inputs, semi-finished goods, and fuel, the bulk of which were imported from neighboring countries.

Table 19.

Tajikistan: Wholesale Price Inflation-Selected Categories, 1996-99

article image
Source: State Statistical Committee.

D. Wages and Labor Market Developments

20. As the economy turned around in the second half of 1997, real wages nearly doubled in the following year due to the combined effect of a drop in inflation and an increase in nominal wages (Tables 20-21 and Figure 3). The stabilization of the exchange rate in the first three quarters of 1998 implied that in U.S. dollar terms, average monthly wage went up sharply, from the equivalent of USS10.3 in December 1997 to almost US$14 in September 1998. The level of dollar wages, however, remained low in comparison to neighboring countries (about 3 times less than in the Kyrgyz Republic and 5 times less than in Uzbekistan in 1998). Real wages have declined since the onset of the Russia crisis, by 19 percent during the 12 months through September 1999. As the exchange rate weakened, the average wage in dollar terms also declined to below US$10 per month in September 1999.

Table 20.

Tajikistan: Monthly Wages, 1996-99 1/

(In Tajik rubles, unless otherwise indicated)

article image
Sources: State Statistical Committee; and Fund staff calculations.

Table reflects wages due. In many instances wages were not paid in time.

Index deflated by the CPI.

Table 21.

Tajikistan: Average Monthly Wages by Sector, 1985-1998

article image
Sources: Ministry of Labor; State Statistical Committee; and Fund staff calculations.

In Russian rubles until 1994 and Tajik rubles since 1995.

Percentage changes for 1985 indicates the annual average over the period 1980-85. Percentage changes for 1995 are calculated using a currency conversion rate of 90:1.

Figure 3.
Figure 3.

Tajikistan: Real Wages and Dollar Wage, 1997-99

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

Sources: Tajik authorities; and Fund staff estimates.

21. Although slower than during the 1980s, population growth is still relatively high in Tajikistan, averaging 1.3 percent a year in 1997-1998. With a young age structure, the working age population and hence the labor force rose rapidly, putting heavy pressure on the labor market (Table 14). The official data indicate that private farming or other private activities have provided most new employment opportunities. Although Tajikistan’s official rate of unemployment is low (at some 3 percent in 1999, see Table 15), the actual unemployment rate is likely high. With some reasonable assumptions on the number of students and housewives, the working age population and total employment data provided in Table 14 imply that the unemployment rate was about 25 percent in 1997.

E. Inflation and Exchange Rate Dynamics

22. The consumer price level and the nominal exchange rate have been closely related over the last few years in Tajikistan (Figure 4).1 Sometimes, inflation has been faster than depreciation and vice versa. Nevertheless, over the whole period for which reliable data exist, the price level and the exchange rate broadly moved together. The CPI and the curb exchange rate have increased by almost the same amount cumulatively since the introduction of the new currency in May 1995, or 444 and 455 percent respectively.

Figure 4.
Figure 4.

Consumer Prices and Curb Market Exchange Rate, 1996-99

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

Source: National authorities.

23. The existence of a stable, long run relationship between the overall price level and the TR/US$ exchange rate is borne out also by a formal econometric test of this hypothesis by means of cointegration analysis, The econometric results change slightly depending on the method used to test for cointegration (i.e., the Engle and Granger two steps procedure or the Johansen system approach), the particular sample period considered, and the specification of the deterministic component of the model (i.e., the treatment of the constant, the time trend, and seasonal dummies). On balance, however, all tests strongly support the existence of a close relationship between these two variables, with a long run elasticity of the price level to the exchange rate in the range 0.6-0.9. Moreover, a formal test of the hypothesis that the long run elasticity is equal to one is rejected only marginally (Box 2).

24. Such a cointegration relationship, however, does not necessarily imply by itself a causal relationship running from the exchange rate to the price level. Economic causality can run either, or even both, ways within a bivariate cointegration relationship. We assume a causal relationship to run from the exchange rate to the price level, with an elasticity determined by the share of imports in the consumption basket. Considering only the second part of the sample after the end of the civil war, we find evidence of causation running from the exchange rate to the price level, as evidenced by the fact that the cointegration vector—called also error or equilibrium correction term measuring the deviation from the long run equilibrium relationship—does not enter the depreciation equation in a statistically significant way.

25. Tajikistan is a small open economy with a large share of imports from non-CIS countries in GDP of about 50 percent. Consumption is estimated at about 90 percent of GDP in 1998. Assuming that the import share of the consumption basket is the same as that of GDP, one would then expect a long run elasticity of about 0.6, which can be higher taking into account that much of intra-CIS trade is valued in US dollars. Hence, considering also second round effects of a steadily depreciating exchange rate operating through imported intermediate inputs and higher wage demands, it is not implausible to conceive a long term elasticity close to unity as was found in the data over the entire sample considered. Indeed, several key inputs in agriculture production such as fuel and fertilizers are almost entirely imported, feeding indirectly into the CPI via food prices which represent the vast majority of items in measured consumption basket.

26. In order to analyze the short run price and exchange rate dynamics around the long run cointegration relationship, we estimated a simple model for the log-difference of the CPI (DLCPI) and the Curb rate (DLCURB) over the period December 1997 through August 1999, including also other relevant domestic and international variables. More specifically, the model together with the cointegration vector (ECM) includes also the log-difference of currency in circulation (DLHC) approximating changes in money supply, the log difference of the nominal exchange rate of the Russian ruble vis-a-vis the U.S. dollar (DLRUSER) to reflect the spillover effects of the Russian crisis, a four-months moving average of a measure of the Tajik terms of trade (TOTMA) capturing other external shocks (mainly cotton, aluminum, gas, oil, and wheat prices changes), a constant, and finally a dummy (SEASON) capturing seasonality in domestic food supply. The estimated equations, together with a Chi-square statistic for over-identifying restrictions, are reported at the end of Box 2.2

27. The econometric results suggest that the main determinants of exchange rate depreciation during the program period have been the Russian crisis and domestic monetary expansion, as well as lagged inflation, capturing adaptive expectations, and some exchange rate overshooting.3 While a monetary shock appears to feed one-to-one into depreciation within three months, only approximately 30 percent of a shock to the Russian ruble is transmitted to the TR/USS rate within four months. Considering that the Russian ruble depreciated by about 70 percent since August 1998 and was broadly stable in April-August 1999, approximately one third of the depreciation of the Tajik ruble since October 1998 may be attributed to the Russian crisis. Money supply increased by 28 percent during the 12-mont period through August 1999, explaining 28 percent of the cumulative depreciation since August 1998. Inflation expectations, overshooting, and other factors explain the remaining third.

Inflation and Exchange Rate Dynamics: Econometric Results

Cointegration analysis (Johansen system approach)

Sample is: March 1996 to August 1999

article image
article image

Loglik = 281.4451 -log| Omega| = 13.402148 unrestr. Loglik = 283.8296 LR-test, rank=l: Chi2(l) = 4.769 [0.0290]

Econometric model

Sample is: December 1997 to August 1999

DLCURB = + 0.28 * DLCURB ( 1 ) ( 3.02 ) - 0.33 * DLCURB ( 2 ) ( - 4.15 ) + 0.06 * DLRUSER ( 1 ) ( 4.96 ) + 0.08 * DLRUSER ( 2 ) ( 5.55 ) + 0.15 * DLRUSER ( 3 ) ( 7.49 ) + 0.26 * DHLC ( 4.32 ) + 0.64 * DHLC ( 1 ) ( 9.70 ) + 0.18 * DHLC ( 2 ) ( 2.69 ) + 0.39 * DLCPI ( 2 ) ( 4.13 ) - 0.03 * SEASON ( - 1.77 )

Standard error of regression: 0.02

DLCPI = - 0.12 * ECM ( - 3.23 ) + 1.20 * TOTMA ( 5.53 ) + 0.04 * DLRUSER ( 1.71 ) - 0.04 * SEASON ( - 1.20 )

Standard error of regression: 0.05

LR test of over-identifying restrictions: Chi2(16) = 26.06 [0.06]

t statistics in parenthesis.

28. The main determinant of inflation since December 1997 appears to have been past exchange rate dynamics through the error correction term (ECM), which enters the inflation equation with the correct, negative sign and is statistically highly significant. The estimated coefficient, measuring the speed of adjustment to a deviation from the long run equilibrium, however, is rather low (-0.12), implying that it could take up to eight months for an exchange rate shock to pass through entirely. While this is slower than the actual speed of adjustment observed in more recent months, it is consistent with the plausible assumption discussed above that almost all depreciation will translate into domestic inflation eventually. In light of these results, therefore, it is not surprising that inflation accelerated sharply in July and August of this year, given that the cumulative depreciation since December 1998 had reached 20 percent by end-June as compared to cumulative inflation of only 12 percent over the same period. The results also show that, in the short term, inflation is affected directly by external shocks and seasonality in domestic food supply.4 However, the positive effect on domestic prices of cheaper imports from Russia and other neighboring countries appears small and short lived, while the negative effect of terms of trade shock looks persistent and larger than the initial disturbance, possibly due to speculative reactions of domestic producers and traders to adverse external developments, as happened in July 1999 with fuel and flour shortages.

29. In sum, external shocks explain a large part of recent inflation and exchange rate dynamics and, given their temporary nature, one would expect a slow down of consumer price inflation soon after these factors have subsided as the latest CPI figures suggest. However, in the run up to the presidential election starting last June, the relaxation of monetary and fiscal policies in the summer of 1999 also contributed considerably to further exchange rate depreciation and inflation.

III. Fiscal Developments

30. The government continues to exert a strong influence on the economy, although the public sector’s share in GDP has drastically declined since independence. Indeed, the size of general government is one of the lowest in BRO countries. In 1997, the government expenditure-to-GDP ratio was only 17 percent. However, the government’s influence on economic activity was larger than this measure suggests. Apart from traditional budgetary operations, there were large quasi-fiscal operations performed by state-owned financial and non-financial enterprises. In addition, formal and informal regulations and network links enabled government authorities to influence the decisions of state enterprises and also of private enterprises.

31. The consolidated general government consists of the republican budget, 70 local governments, and the extra-budgetary Social Protection Fund (SPF). After independence, the relative size of the general government was curtailed by the overall economic decline compounded with persistent civil strife which reduced the revenue base and made the environment for administering revenue and expenditure very difficult.

A. Revenue Performance

32. The share of revenue in GDP reached its lowest level in 1998, a mere 12 percent, but it recovered to about 13 percent for the first nine months of 1999 (Tables 22-26). This ratio is still very low when compared to an average of about 25 percent of GDP in the CIS countries (Box 3). Tajikistan has been a late starter to economic reforms because of the civil unrest, but developments regarding tax policy and tax administration over the past two years have improved its revenue performance.

Table 22.

Tajikistan: State Budget By Economic Classification of Expenditures and Revenues, 1992-99

article image
Sources: Ministry of Finance; and Fund staff estimates.

Data for 1995 are for May 11-December 31.

Preliminary figures for the first nine months of 1999.

Due to differential value of cash and non-cash rubles prior to the currency reform of May 1995, fiscal data as percent of GDP before a the currency reform are not comparable.

Table 23.

Tajikistan: State Budget by National Classification of Revenues and Expenditures, 1992-99

(In millions of Russian rubles before May 10, 1995 and in millions of Tajik rubles thereafter)

article image
Sources: Ministry of Finance; and Fund staff estimates.

Data for 1995 are for May 11-December 31.

Preliminary figures for the first nine months of 1999.

Includes purchases of hard currency and gold.

Includes sales of hard currency and gold.

Table 24.

Tajikistan: State Budget by National Classification of Revenues and Expenditures, 1992-99

(In percent of GDP)

article image
Sources: Ministry of Finance; and Fund staff estimates.

Data for 1995 are for May 11-December 31.

Preliminary figures for the first 9 months of 1999.

Includes sales of hard currency and gold.

Includes purchases of hard currency and gold.

Table 25:

Tajikistan: State Budget By Economic Classification, Quarterly, 1998-99

(In millions of Tajik rubles)

article image
Sources: Ministry of finance; and Fund staff estimates.
Table 26.

Tajikistan: Consolidated Operations of the General Government, 1992-99

article image
Sources: Ministry of Finance; Pension Fund; Ministry of Labor; and Fund staff estimates.

Data for 1995 are for May 11-December 31.

Preliminary figures for the first 9 months of 1999.

Excludes transfers from the state budget to the Pension and Employment Funds.

Due to the differential value of cash and non-cash rubles prior to the currency reform of May 1995, fiscal data as a percent of GDP before and after the currency reform are not comparable.

33. The recent increase in revenue-to-GDP ratio was partly due to recent reforms in tax administration and tax policy. Although the sales tax rates on cotton and aluminum have been reduced5, new tax measures and improvements in tax collection have offset these effects. The new measures included, inter alia, the elimination of the VAT exemptions of food in 1998, increases in excise duties levied on gasoline and diesel, the elimination of the import duty exemption on natural gas, the introduction of a retail sales tax and the small business tax. Effective on January 1, 1999, a new and comprehensive Tax Code was adopted. The VAT reform became effective on July 1, 1999.

34. The tax incidence has somewhat shifted from production (sales taxes) towards consumption (VAT, excises, and retail sales tax). This has eased the dependence on revenue sources which are highly volatile due to fluctuations in the world market prices of aluminum and cotton, and in cotton production. However, although receipts from VAT have increased from 1.5 percent of GDP in 1997 to 2.4 percent of GDP in the first three quarters of 1999, the collection of indirect taxes, at 7.3 percent of GDP is still low by BRO standards.6 With the new Tax Code, Tajikistan has started to modernize its VAT system. An immediate credit for VAT on inputs is granted, and excess credits are refunded. The collection of excises weakened sharply in 1998 as only 0.1 percent of GDP was collected compared to 0.5 percent of GDP in the previous year. In 1999, however, the collection has improved to 0.7 percent of GDP. The main reason for the decline in 1998 was under invoicing of imports and increased smuggling and tax evasion. To address this problem, ad valorem taxes were replaced by specific excise taxes on alcohol, tobacco, and petroleum products in mid-1998, Non-tax revenues have increased from 0.4 percent of GDP in 1997 to 0.6 percent during the first three quarters of 1999. The major sources of these revenues are rent fees and other local revenues.

General Government Revenue: Comparison with other BRO Countries

(In percent of GDP)
article image
Source: Fund staff estimates.

35. Tajikistan’s revenue collection remains plagued with tax offsets, although not more so than in many other CIS countries. Offsets occur when amounts owed by the government to the private sector for acquisition of goods and services are canceled out against unpaid taxes owed by the same companies. These offsets take place both at the central and local government levels. VAT, excises and custom duties are the most common revenue items to be offset. The share of non-cash transactions of state taxes was about 18 percent of total revenue in 1998.

B. Expenditure Developments

36. General government expenditures have increased from 17 percent of GDP in 1997 to 18 percent of GDP in the first nine months of 1999 (Table 26). Reviewing expenditures on a functional basis suggests that the bulk of government spending took place in the social sphere, notably education and health. Reported expenditure on defense remained constant in 1997-99 at about 1.5 percent of GDP. Expenditure on law enforcement and judicial bodies declined somewhat from 2.1 percent of GDP in 1997 to 1.6 percent of GDP in 1999. Key policy priorities have been the timely payment of wages, social benefits, and external debt obligations. Although some expenditure arrears have occurred from time to time, they have been quickly eliminated. Expenditure on education aimed to restore education standards, which have deteriorated badly since the Soviet era. At that time, education was broadly based and on par with most middle-income countries. According to the Goskomstat data, school enrollment rates have dropped to 80 percent. Increased poverty, coupled with the need to support family incomes through household work, limited school attendance. Many teachers have also left the profession due to low salaries. In 1998, spending on education amounted to 2.6 of GDP, up from 2.1 percent in 1996.

37. In the past, Tajikistan reportedly ranked even with middle-income countries with respect to health indicators. Since independence, the health situation has deteriorated and there has been an increase in the number of cases of serious diseases such as typhoid fever, malaria and tuberculosis. This decline in health status reflects many causes, including poverty, poor housing, water supplies, and nutrition. In the past health policy was also more focused on curative rather than preventive care. Budgeting was largely done on the old norm-based system, which directs funding to hospitals and specialization, ignoring the need for more flexibility in providing less centralized and preventive services. In 1998, spending on health amounted to 1.4 percent of GDP, up from 1.3 percent in 1996.

38. The government wage bill has increased in real terms since 1997, and from 3.3 percent to 4.3 percent relative to GDP. There has been no major adjustment to staffing levels in the budgetary organizations to date and total employment in the public sector7 as a share in total employment has remained close to 42 percent during this period. Significant adjustments have been made for nominal salaries of teachers, defense personnel and other occupational groups in the public sector. In 1999, a general increase of 15 percent from the beginning of January 1999 was envisaged.

39. Outlays on the social safety net increased from 2.0 percent of GDP in 1997 to 2.2 percent of GDP in the first nine months of 1999. The growth in social spending has been hampered by increasing inefficiencies in the cash compensation system with poor targeting and delivery problems. The recent household survey revealed that only 5 percent of the population had received these benefits compared to a notional eligibility of some 15 percent of the population. Following the international roundtable discussion on the social safety net in March 1999 in Dushanbe, delivery of the cash compensation program was simplified by reducing the number of certificates needed by claimants and lowering the payment frequency from a monthly to a quarterly schedule. These reforms became effective on May 1, 1999. The benefits paid by the Social Protection Fund (SPF) rose from 1.6 percent of GDP in 1997 to 2.0 percent of GDP in the first nine months of 1999 as the minimum pension level has been doubled twice since 1997. The SPF’s revenue are obtained from the payroll tax paid by employers, the current payroll tax rate is 25 percent, down from 38 percent in 1997. Unemployment benefits, sick and maternity leave benefits, and some other welfare costs are also covered by the SPF but they constitute only 20 percent of outlays. The pension age for men is 60 years and for women 55, based on at least 25 or 20 years of work, respectively. The minimum pension is presently TR 2,000 per month.

40. Subsidies have declined sharply after bread prices were liberalized and general bread production subsidies were eliminated in 1996. In 1998, subsidies constituted only 0.6 percent of GDP. Capital expenditures have increased from 0.6 percent of GDP in 1997 to 3.0 percent of GDP in 1999. Capital spending in the first nine months of 1999 largely reflected increased expenditures on projects related to the nation’s 1,100th anniversary celebrations during August and September, and the presidential election campaign. This increase, however, should be viewed against the fact that capital expenditure in the past was severely compressed due to the civil strife.

41. On institutional reform, good progress on reforming the Treasury system in Tajikistan has been made with technical assistance from the Fund and other donors. During 1999, all fiscal revenues, including tax collections of the State Customs Committee, have been brought under the treasury system. Most central budgetary transactions (except a few occurring outside Dushanbe) have come under treasury control. Regional treasuries have been set up in all but seven rayons where banking facilities are not yet available. Efforts were made to restructure the central Treasury and strengthen internal audit and control. However, improving transparency in fiscal operations will depend critically on persistent implementation and training of the local staff. The government also prepared, with Fund technical assistance, the 2000 budget in accordance with the international Government Finance Statistics standards, which will help improve budgetary analysis and monitoring.

C. The Budget Deficit and Financing

42. The overall cash deficit of the general government has declined from 5.8 percent of GDP in 1996 to 3.3 percent of GDP in 1997, and to 3.8 percent of GDP in 1998, as the government’s stabilization programs have taken hold (Table 26). Financing of the deficit in 1998 and 1999 relied on the World Bank loan disbursements and privatization proceeds while the central bank financing has been sharply curtailed. In the first three quarters of 1999, these sources of financing accounted for respectively 3.9 percent of GDP, 1.0 percent of GDP and 0.2 percent of GDP. The Ministry of Finance started the issuance of Treasury bills in September 1998 but so far the Treasury bill market has developed slowly and only a very small amount of Treasury bills have been issued.8

D. Poverty Assessment

43. With an estimated per capita income at US$330 in 1997, Tajikistan ranks among the poorest countries in the world. According to the poverty survey conducted by Goskomstat with technical assistance from the World Bank in 1999, some 80 percent of the population is below poverty line, with nearly one out of every six citizens classified as extremely poor and destitute.

44. In assessing poverty in Tajikistan, the following six factors are being addressed: (i) compiling a poverty profile for Tajikistan; (ii) determining the characteristics of the labor market which influence poverty; (iii) investigating the possible linkages between agriculture and poverty alleviation; (iv) analyzing education as a means to alleviate poverty; (v) assessing the possible impact of health reforms on the standard of living; and (vi) evaluating links between governance and poverty.

45. Poverty seems to correlate significantly with the family size based on data collected in the recent poverty survey. It also appears that agriculture and poverty are closely linked, although there are encouraging signs that land privatization is having a positive effect on poverty alleviation, in particular in the oblast of Gorno-Badakhstan and in the Karategin Valley. Thus, the ongoing land reform could have a major impact on poverty reduction if carried out equitably and efficiently. There are also many aspects of cotton production which fail to contribute to poverty alleviation because producers receive low returns at the current depressed world market prices and farmers are still under strong influence of local authorities which reduces their incentives for efficiency.

46. The labor market is barely functioning, and employment does not appear to be significantly related to poverty. However, there is excess supply of labor caused by demographic pressures, the collapse of the old command system with overemployment, and the lack of a new market mechanism for labor mobility. The labor market slack is concentrated among the younger people and women, and regionally very differentiated.

47. Education reform could play a major role in addressing poverty. Historically there was a strong school system, but the current situation has many negative features: loss of teachers, tight budget constraints, lack of textbooks, out-of-date curricula, schools in need of rehabilitation. The government has started to address these issues with World Bank assistance, but it faces many challenges. The most critical issues are the need for sustainable financing mechanisms and to address declining school enrollments. Poverty poses an important constraint to access to schooling.

48. Health sector reform could also alleviate poverty as the current health care system has many negative features: excess number of hospitals and personnel, declining public spending on the sector, reduced availability of medicine and supplies, staff in need of training, and the run-down health care facilities. The problems of the sector hit particularly the poor: (i) there has been an increase in the private financing of the sector, and the poor are the least able to afford the unofficial costs charged; (ii) many poor people are deterred from seeking health care due to the indirect and direct cost barriers that they face; (iii) the poor have probably been most affected by the upsurge of infectious diseases (such as malaria, tuberculosis and typhoid fever); (iv) utilization of health services has dropped, especially among the poor; (v) although severe malnutrition is not widespread, there is evidence of significant under-nutrition; and (vi) there is considerable food insecurity, particularly among the poor.

49. There is also evidence that problems of governance such as crime, corruption, insecurity, and non-participation exacerbate poverty. Many poor people are forced to pay bribes, including for health services and training while poor people do not have the power or ability to deal with harassment by armed individuals and groups. Furthermore, legislation is often vague and weak. As a result, people tend not to know their rights.

IV. Monetary and Financial Developments and Policies

A. Monetary and Credit Developments

50. Following the Peace Agreement in June 1997, the National Bank of Tajikistan (NBT) tightened monetary policies which largely stabilized the exchange rate and reduced inflation. With a lag, the emerging peace and stronger price stability led to rising confidence stabilizing the demand for local currency (Figure 5). However, the ruble broad money-to-GDP ratio remains low at 5 percent, indicating a highly demonetized economy.9

Figure 5.
Figure 5.

Tajikistan: Velocity and Money Multiplier, 1996-99

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

Sources: Tajik authorities; and Fund staff estimates.1/ Annual GDP divided by average ruble broad money over the last year.

51. Despite the low inflation and stable exchange rate during most of 1998, remonetization of the economy did not take off. In part this reflected the uncertainty created by frequent external shocks including declining export prices of cotton and aluminum (and in 1999, rising oil prices). However the monetary stance in mid-1998 as the NBT expanded credit to state-owned enterprises and other domestic borrowers. This credit expansion, including a sharp increase in net credit to government in the fourth quarter of 1998, put also heavy pressure on the NBT’s net foreign reserves, which declined by about US$15 million between April-December 1998 (Figure 6).

Figure 6.
Figure 6.

Tajikistan: Money, Credit and Foreign Reserves, 1996-99

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

Sources: Tajik authorities; and Fund staff estimates.

52. In 1999, the central bank lending to the private sector increased sharply as the NBT started financing cotton production after foreign sources of finance could not be secured. In addition, the NBT provided again loans to state-owned enterprises. In the first nine months of 1999, the NBT’s lending to the private sector increased by 55 percent of reserve money, of which more than 60 percent went to the cotton sector10. As a result, the NBT’s gross international reserves declined by US$25 million during the first three quarters of 1999, despite the sizeable new loans from the IMF and the World Bank during the period. As the growth in the NBT’s net domestic assets was largely offset by declines in international reserves, reserve money increased only by 16 percent.

53. The money multiplier has remained low but stable since mid-1997 (Figure 5). Its low level largely indicates that the development of the Tajik banking sector is still at an incipient stage and the efficiency of financial intermediation is very low. The currency-to-deposit ratio has increased significantly, reflecting low confidence in the banking system and existence of a sizable shadow economy. On the positive side, the reserve-to-deposit ratio has declined since end-1997 as the payment system has started to function better.

54. The growth of broad money has stemmed from rising cash in circulation which has increased at an average annual rate of 23 percent during the last two years compared with an average growth of 10 percent in broad money. At the same time, the composition of deposits has moved in favor of foreign currency, though there was a period of declining currency substitution between mid-1997 until the Russian crisis (Figure 7). At that time, foreign currency deposits constituted only 10 percent of total broad money. This ratio has tripled since with the depreciation of the Tajik ruble. Also, the culture of non-payment, the existence of sizeable tax and interenterprise arrears and barter trade has kept the demand for local currency and ruble bank deposits low.

Figure 7.
Figure 7.

Tajikistan: Components of Broad Money, 1996-99

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

Source: Tajik authorities

55. On the foreign exchange market, the exchange rate has been under heavy pressure since the Russian financial crisis in August 1998. Over the 12-month period through September 1999, the Tajik ruble depreciated against the U.S. dollar by 46 percent in the cash market.11 Meanwhile, the spread between the curb and Tajikistan Interbank Currency exchange (TICEX) rates rose from a relatively stable 7 percent in 1997 and until mid-1998 to 10-15 percent since then and sometimes to above 20 percent. Although the exchange rate regime is nominally flexible, from time to time, the NBT has resisted depreciation pressures by intervening in the foreign exchange market. As this policy, in particular after the Russian crisis, was depleting the NBT’s small reserves, it changed its policy and allowed the currency to depreciate. More recently, credit has become tighter and interventions fewer. Since September 1999, the exchange rate at the TICEX has been relatively stable and the spread has hovered between 10-14 percent. Although there are no formal restrictions for the participants in TICEX or availability of cash, informal restrictions, moral suasion, harassment of the market participants by individuals from the power ministries and tax authorities, and a high risk premium attached to importing cash to Tajikistan explain the obvious weaknesses in the arbitrage mechanism.

B. Monetary Policy Instruments

56. The NBT’s ability to control liquidity is very limited. Actively used instruments have been credit auctions and interventions in the foreign exchange market. Open market operations have not been an option as the Treasury bill market has remained thin. The obligatory reserve requirement on bank deposits is set at 20 percent, but this rate has not been used as a tool for monetary policy.

57. Credit auctions, held since December 1997, have not played a significant role as a large part of central bank credits has been allocated outside the auction mechanism and bank participation in auctions has remained low. Consequently, auction interest rates have not accurately reflected the supply and demand conditions in the credit market. Banks’ lending rates became positive in real terms in the second half of 1997 and only recently, following the exceptionally high inflation in the summer of 1999, the lending rates appeared negative in real terms (Figure 8). The role of the credit auction mechanism is expected to strengthen, however, as a presidential decree of October 1999, banned the NBT from lending directly to borrowers.

Figure 8.
Figure 8.

Tajikistan: Real Interest Rates, 1997-99

(In percent) 1/

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

Sources: Tajik authorities; and Fund staff estimates.1/ Deflated by the 12-month consumer price inflation.

58. Interventions in the foreign exchange market have been large given the NBT’s central role in supplying foreign exchange. The NBT is a collection agency for the cotton and aluminum sales taxes (the major government revenue sources), as it is feared that tax compliance rates would decline if commercial banks would intermediate tax payments. Similarly, the foreign financing of the budget by the International Financial Institutions is channeled through the NBT. In the first nine months of 1999, US$57 million was sold at the TICEX compared to US$107 million in 1998 and US$54 million in 1997 (Table 34).

Table 27.

Tajikistan: Operations of the Social Protection and Road Funds, 1997-99

article image
Sources: Social Protection Fund; and Fund staff estimates.
Table 28.

Tajikistan: Accounts of the National Bank of Tajikistan, 1996-99 1/

(In millions of Tajik rubles, end-of-period stock unless otherwise specified)

article image
Sources: National Bank of Tajikistan; and Fund staff estimates.

A new chart of accounts was adopted in December 1998. The balance sheet based on the new chart of accounts is not strictly comparable to previous data.

Imports of goods and services excluding alumina and electricity.

Table 29.

Tajikistan: Monetary Survey, 1996-99 1/

(In millions of Tajik rubles, end-of-period stock unless otherwise specified)

article image
Sources: National Bank of Tajikistan; and Fund staff estimates.

A new chart of accounts was adopted in December 1998. The balance sheet based on the new chart of accounts is not strictly comparable to previous data.

Annual GDP divided by average ruble broad money over the last year.

Table 30.

Tajikistan: Sources of Broad Money Growth, 1997-99 1/ 2/

(Quarterly percentage change relative to the beginning period broad money)

article image
Sources: National Bank of Tajikistan; and Fund staff estimates.

A new chart of accounts was adopted in December 1998. The data based on the new chart of accounts are not strictly comparable to previous data.

Assuming fixed exchange rate.

Table 31.

Tajikistan: Credit of the Banking System, 1996-99 1/

(In millions of Tajik rubles; end of period)

article image
Source: National Bank of Tajikistan.

From operational data of the NBT.

The license of Tajikbankbusiness was revoked on June 4, 1999.

The license of Textinvestbank was revoked in July 1999.

Table 32.

Tajikistan: Results of Treasury Bill Auctions

(In billions of Tajik Rubles unless otherwise specified)

article image
Source: National Bank of Tajikistan. Note: The bids of two banks were rejected from the first auction (one failed to deliver payment; the other bid a non-competitive basis when only nonbanks are permitted to do so).
Table 33.

Tajikistan: Average Annual Interest Rates, 1997-99

(In percent, end of period)

article image
Source: National Bank of Tajikistan.
Table 34.

Tajik Interbank Currency Exchange (TICEX) Auctions, 1997-99

article image
Sources: TICEX; and Fund staff estimates

59. The first Treasury bill auction was held in September 1998 with a small amount (TR 100 million) offered for sale. During the last 14 months, the total volume of Treasury bills offered for sale was TR1.8 billion, of which TR1.1 billion (2 percent of broad money) was subscribed (Table 32). The main reasons for this limited growth of the Treasury bill market have been low confidence in the government’s ability to redeem the bills, weaknesses in the liquidity management by banks and the negative effect of the Russian crisis which coincided with the initiation of the Treasury bills market. Interest rate formation in the Treasury bill market, however, appears truly market determined as investors demand different volumes at different yield rates. The Treasury bill market rate rose trendwise since late 1998 with the exchange rate and price instability but has started to decline more recently.

60. Obligatory reserve requirements for both local and foreign currency deposits are set at a uniform rate of 20 percent and are not remunerated. Since April 1998, a limited form of averaging of required reserves during the month has been permitted.

C. Banking Regulation and Supervision

61. In 1997-99, the authorities have made significant progress in improving banking regulation and supervision. In particular, the minimum capital requirement was increased from the Tajik ruble equivalent of US$300,00012 in 1997 to US$750,000 on July 1, 1999 and to US$1 million from January 1, 1999. As of September 1, 1999, however, only about one third of the banks were in compliance with this requirement. Bank supervision has improved as the NBT has expanded and restructured its Banking Supervision Department (BSD) and strengthened its prudential regulations. The number of both on-site and off-site audits has increased and new International Accounting Standards (IAS) based charts of accounts were adopted in the beginning of 1999. Also, with the new Tax Code banks were allowed to deduct 80 percent of their loan loss provisions from pre-tax profits, starting from July 1, 1999. In 1998-99, several problem banks were liquidated.

D. Bank Restructuring

62. The banking system remains weak and is highly concentrated. Most banks are saddled with non-performing loans; operational management of banks is weak; and the financial system suffers from weak regulatory environment and lack of functioning capital markets. As a result, the overall confidence in the banking system is low and banks’ ability to mobilize savings remains very limited. All these characteristics are reflected in high cash-to-broad money ratios, and low monetization and credit-to-GDP ratios.

63. In comparison to the 1995-97 period, the past two years have seen some consolidation of the banking system. The number of banks has declined from 28 in 1997 to 17 in 1999, including with the liquidation of Tajikbusinessbank—one of the largest banks. The four major commercial banks (Agroinvestbank, Orion Bank, Vneshekonombank, and Savings Bank) collect about 70 percent of total deposits and control about 75 percent of total loans to the economy. These banks were successors of the specialized banks in the Soviet period, which were restricted to serve particular sectors of the economy: agriculture, industry, foreign trade, and households. Although re-established as joint-stock companies with private sector participation, they are still largely controlled by the state through state-owned enterprises’ shareholdings13. While not formally restricted to particular sectors anymore, they are still operating in their traditional areas. The Agroinvestbank and the Savings Bank have large branch networks, covering the whole country, which were built up on the basis of socio-political reasons during the Soviet era rather than profitability considerations. Most smaller banks are “pocket banks” for large enterprises. As they have a small capital and deposit base, their financial operations are largely influenced by a few shareholders or clients.

64. Most banks have small or negative net worth. At end-September 1999, the consolidated net worth of the four major banks (Agroinvestbank, Orionbank, Savings bank, and Vneshekonomkbank) was estimated at only 0.9 percent of their total assets (Table 36).14 Yet, some progress has taken place as the negative net worth of these banks was estimated at 14 percent of assets at end-1997. The share of required loan-loss provisions in total loans varies across banks, with Agroinvestbank recording the largest share.15

Table 35.

Tajikistan: Commercial Banks as of October 1, 1999 1/

article image
article image
Source: National Bank of Tajikistan.

Tajikbankbusiness and Textinvestbank are being liquidated.

Joint Stock Company (JSC) Agroprombank “Shark” is renamed to “Agroinvestbank” as of December 3

JSC “Akbarbank” was renamed to “Gulsarabank” as of April 10, 1998.

Table 36.

Tajikistan: Consolidated Balance sheet of Commercial Banks, 1997-99 1/

(In millions of Tajik Rubles)

article image

Based on the diagnostic studies prepared by international accounting firms.

Consolidated balance sheet for the Savings Bank, Agroinvestbank, Orion Bank, and Tajikvnesheconombank.

Based on the assumption that Government Resolution No. 10 of February 3, 1999 is implemented. The resolution requires a bond swap among the government, Tajikbankbusiness, and the Savings Bank.

Excludes assets and liabilities related to special cotton financing.

65. Operational management of the commercial banks remains weak as banks have little knowledge of project appraisal, collateral requirements, and monitoring of the financial situation of clients. Loans appear to be provided largely on the basis of network relationships, rather than risk-based analyses of projects. The banks also appear overstaffed and internal controls remain underdeveloped. Weaknesses in accounting, asset valuation, and disclosure rules make the reporting of banks unreliable. Technology used in the banks is old and training of personnel deficient.

66. The efficiency of the banking system is also constrained as the government has channeled directed credits to specific sectors, and even to specific projects. As these credits were in large part guaranteed by the government, the practice has reduced the involved banks’ interest in collecting these loans, worsening their loan portfolios16. Due to weak macroeconomic conditions, banks’ choices of investing in viable and low risk projects have been limited. In addition, the legal and regulatory environment does not provide adequate support for bank restructuring as the lack of a reliable court system makes banks hesitant to claim their rights through the legal system.

67. Finally, the efficiency of the banking system is limited by the lack of active asset markets where banks can either raise capital or dispose of assets. Distrust of other banks, the underdeveloped Treasury bill market, and poor creditworthiness of borrowers make banks keep large excess reserves in their correspondent accounts with the NBT.17

68. With assistance from the IMF and the World Bank, the NBT designed operational restructuring programs for the three major banks in May 1998.18 These operational restructuring programs included several measures to improve liquidity and solvency. These measures focused on increasing the banks’ paid-in-capital by attracting new equity participation from the private sector, collecting overdue loans, improving management capabilities, and reducing costs, including through reduction in the number of employees and branches. In addition, the restructuring agreements typically included restrictions on lending activities to prevent a further accumulation of bad loans. Only the Agroinvestbank has been recapitalized by the government by taking over its stock of nonperforming loans extended to mountainous areas prior to 1997.

69. The results of these programs have been mixed. While the Vneshekonombank has graduated from the restructuring program and the Tajikbusinessbank has been liquidated, restructuring of the Savings Bank and Agroinvestbank has been slow, with little progress in staff reductions and loan recovery. These banks have now been audited according to international accounting standards by internationally reputable agencies and the audit results are being analyzed.

70. Restructuring schemes, including targets to increase paid-in-capital, have been also agreed with a number of smaller banks which have failed to comply with the NBT’s prudential regulations. In 1998, the NBT required four small banks (Culsara Bank, Dushanbe Bank, Textinvestbank, and Somon Bank) to temporarily discontinue their deposit taking, lending operations, foreign exchange transactions, and the issuance of bank guarantees. While the Somon Bank complied with the prudential regulations since, Textinvestbank was liquidated in 1999. Reports on compliance with prudential regulations suggest that Dushanbe Bank and Gulsara Bank still have major problems in complying with prudential regulations. The NBT has set a deadline for these banks to improve performance, or face liquidation.

71. Compliance with prudential regulations appears to have improved in 1999. On October 1, 1999, there was only one bank not complying with the required capital-assets ratio compared to four banks on September 1, 1997. However, the reported improvement in compliance with prudential regulations is not necessarily accurate as banks’ loan classification procedures tend to underestimate the amount of non-performing loans, and thus, overestimate the capital ratios. For example, the reported net worth of the Agroinvestment and the Savings Bank at end-September 1999 were TR 7.3 billion and TR 1.6 billion, respectively, while based on the assumptions on bad loan ratios of earlier diagnostic studies and staff estimates, the net worth of these banks would be negative TR 64 million for the Agroinvestment and negative TR 146 million for the Savings Bank.

V. External Sector Developments

A. Current Account Developments

72. Current account developments in 1998 and 1999 were dominated by three factors: declining export prices, real exchange rate movements, and large loans to the cotton sector. In 1998 the combination of a substantial terms of trade deterioration and large imports financed by capital inflows to the cotton sector led to a widening of the current account deficit, from 5.5 percent of GDP in 1997 to over 8 percent of GDP in 1998. In 1999, with no new external financing for the cotton sector, the repayment of the cotton loans, together with a substantial real exchange rate depreciation resulted in a sharp improvement in the current account, in spite of a considerable further worsening of the terms of trade, a decline in exports to Russia, and lax domestic policies during the summer months. The current account deficit is estimated to shrink to below 3 percent of GDP in 1999.

73. Tajikistan’s production and trade structure is prone to large terms of trade shocks. About sixty percent of Tajikistan’s export earnings is generated by only two products: cotton and aluminum. Cotton is grown and ginned in Tajikistan and then exported as cotton fiber. Planting and growing of cotton require heavy use of imported inputs. Aluminum is produced from imported alumina using domestically generated cheap hydro-electric power. Other exports include electricity, which is traded with neighboring countries on a barter basis,19 fruits and vegetables, and gold.

74. Between the third quarter of 1997 and the first quarter of 1999, world market prices of aluminum dropped by 30 percent, and those of cotton by 27 percent (Figure 9). As a result, Tajikistan’s terms of trade worsened by 3.5 percent in 1998. World market prices for cotton fell further by 14 percent in 1999 while oil prices went up by almost 40 percent. Although aluminum prices started to recover in the second quarter, the annual average is likely to remain below the level of a year earlier. Overall, the terms of trade deteriorated by some 5 percent in 1999, somewhat larger than the deterioration in 1998.

Figure 9.
Figure 9.

Tajkistan: Selected World Market Prices, 1997-99

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

Source: IMF, Commodity Price Indicators.

75. Notwithstanding the terms of trade shocks, the official exchange rate of the Tajik ruble remained at TR 754 per U.S. dollar throughout the first three quarters of 1998, resulting in a substantial real exchange rate appreciation. Following the Russian crisis in August 1998, the nominal exchange rate was allowed to depreciate vis-à-vis the U.S. dollar although it appreciated vis-à-vis the Russian ruble. In the first three quarters of 1999, the real effective exchange rate was 10 percent below its level in the same period of 1998 (Figures 10-11). When measured against the U.S. dollar only, the real depreciation was 24 percent. The depreciation of the real exchange rate reduced imports and thereby contributed to the narrowing of the current account deficit in 1999. Exports were far less affected by the real exchange rate depreciation, as domestic labor costs are already very low even by regional standards, and the key exports, aluminum and cotton, have large import contents.

Figure 10.
Figure 10.

Tajikistan: Nominal and Real Exchange Rates, 1997-99

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

Sources: Tajik authorities; and Fund staff estimates.
Figure 11.
Figure 11.

Tajikistan: TICEX and Curb Market Exchange Rates, 1996-99

(Tajik rubles per U.S. dollar)

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

Source: Tajik authorities

76. The current account worsened in 1998 also because of large loans to the cotton sector. The cotton sector received financing from a banking syndicate led by CSFB, to pre-finance the 1998 harvest. These loans were used to buy fuel, fertilizer, equipment, and other imports, and thus contributed significantly to the current account deterioration. In 1999, loan repayment through cotton shipments forced the sector to cut back its imports. The shift in capital flows to the cotton sector was very substantial: from an inflow of about US$80 million in 1998 to an estimated outflow of US$32 million in 1999. The drop in external financing of the cotton sector was only partially offset by lending from domestic banks.

77. Tajikistan’s current account is supported by sizeable current transfers. In recent years, current transfer inflows have amounted to some US$ 55 million a year, or about 5.5 percent of GDP in 1999. Major donors include the Aga Khan Foundation, the United States, TACIS, the World Food program, Mercy Corps International, Save the Children, and Cooperative for Assistance and Relief.

B. Capital and Financial Account Developments

78. Tajikistan has received large concessional financing from International Financial Institutions. Most important among official lenders are the World Bank, the IMF, and the Asian Development Bank (ADB). World Bank financing includes a Structural Adjustment Credit (SAC) as well as project loans. SAC disbursements amounted to US$ 20 million in 1998 and US$ 23 million in 1999, while project loans disbursements were about US$15 million a year—mainly for post-conflict programs, agriculture, and poverty alleviation. The IMF has provided balance of payments support first under a post-conflict emergency assistance mechanism and then under a three-year Poverty Reduction and Growth Facility (PRGF). It disbursed US$ 64 million in 1998 and US$ 9 million in 1999. Smaller amounts were provided by the ADB and the Islamic Development Bank (IDB). The ADB disbursed US$ 10 million in early 1999, while the IDB has lent about US$8 million in 1998-99.

79. As mentioned above, there were large private capital inflows in 1998 and outflows in 1999 associated with the cotton sector’s financing. The declining cotton prices not only reduced the value of the cotton crop but also led to delayed shipments as exporters were waiting for prices to recover. Consequently, loan repayment, which is based on cotton shipments, was behind the original loan agreements and was extended. The remaining stock of the cotton sector debt amount to US$44.5 million, including US$13.5 million interest, as of end-September 1999.

80. Foreign direct investment has remained modest due to high perceived country risk despite a relatively liberal legal regime. These inflows have amounted to some US$20 million a year recently. Most foreign investment has been through joint ventures. Large joint ventures include Nelson Gold Corporation (United Kingdom, gold exploration); Kabool Textiles (South Korea, textile); Ajanta Pharma (India, pharmaceutical products); Elchaml Scan International, (United Arab Emirates, consumer goods); Gulf International Minerals (Canada, gold and silver exploration); Adjind International (Italy, cotton processing and textile). There are no legal obstacles to foreign direct investment or to foreign ownership of shares in Tajik companies, and there are no restrictions on the repatriation of profit and capital. Foreigners are prohibited from owning land, but are allowed to lease it. Enterprises that receive foreign investment are exempt from profits tax for two to five years—with the duration depending on the amount invested. This tax exemption does not, however, apply to agriculture and extraction of natural resources.

81. The overall balance of payments deficit narrowed from US$20 million in 1998 to an estimated US$9 million in 1999. However, mainly reflecting the changes in IMF disbursements, gross official reserves increased by US$ 36 million in 1998 and declined by US$7 million in 1999. In terms of import cover, gross international reserves of the NBT fell slightly from 1.5 months of imports at end-1998 to 1.4 months of imports at end-1999.

C. External Debt and Restructuring

82. At the end of 1998, Tajikistan had a foreign debt of US$ 1,178 million, or 91 percent of GDP. The largest creditors were Russia (US$ 288 million), Kazakhstan (US$ 153 million), the IMF (US$ 95 million), the World Bank (US$ 91 million) and the European Union (US$80 million). Most of the debt is owed by the government, and is denominated in U.S. dollars. Tajikistan had no foreign debt at independence, but the elimination of the significant budgetary transfers Tajikistan had received in Soviet times, and later the civil war, led to a rapid build-up of debt. Most of the debt build-up came from short-term trade credits and unsettled debit balances on correspondent accounts with other CIS-countries.20 In addition, Tajikistan received credits from neighboring countries (China, Pakistan, and Turkey) and the United States, to finance the importation of grains and consumer goods.

83. As most of the debt was short-term, debt service obligations were large, and, in the event, largely fell into arrears. Overdue debt service payments rose to about 30 percent of export earnings in 1995, and by end-1995, 28 percent of public sector external debt was in arrears. Early attempts towards regularizing Tajikistan’s external debt obligations failed because rescheduling measures consisted of short-term deferrals, which were inconsistent with Tajikistan’s debt servicing capacity. At the same time, it was clear that creditors were hesitant to commit to longer term rescheduling in the absence of a peace agreement and a macroeconomic stabilization program under which Tajikistan could creditably commit to servicing its rescheduled debt.

84. Since October 1995, Tajikistan has been negotiating with its creditors to reschedule its outstanding debt. In that month, Tajikistan, in consultation with the IMF staff, invited donors and creditors to a round-table meeting. Among participants—which included Uzbekistan, Kazakhstan, Turkey, China, and Pakistan—there was a broad agreement on the need to provide Tajikistan with rescheduling on highly concessional terms. As a modus operandi, the IMF staffs medium-term balance of payments projections assumed that arrears and debt service falling due through 1996 would be rescheduled with a maturity of 15 years with a 5-year grace period at a concessional rate of interest of 2.8 percent per annum. Follow-up creditors’ meetings were held in the fall of 1996 and 1997, in which donors and creditors endorsed the Tajik authorities’ strategy of obtaining rescheduling agreements on broadly similar terms across all bilateral creditors. By mid-1998, debt restructuring agreements had been concluded with Kazakhstan, Russia, Uzbekistan, Turkey, and the Kyrgyz Republic (Box 4). The rescheduled debt constituted about 80 percent of the debt that Tajikistan was seeking to reschedule.

Tajikistan: Concluded Debt Rescheduling Agreements, 1995-98

article image
Source: Data provided by the Tajik authorities.

85. In 1998 and 1999, Tajikistan continued to negotiate with three of its largest creditors: Uzbekistan, Russia, and the European Union; as well as with Pakistan, India, and China. Negotiations continued with Uzbekistan on revision of the 1997 debt restructuring agreement. The 1997 agreement had a compressed maturity structure with no grace period, and although the restructured debt, of US$ 204 million, carried no interest, the large principal payment that fell due in 1997 proved very burdensome. In January 1998, the Uzbek government agreed to reschedule obligations falling due after 1998 in line with the terms discussed during the creditors’ meeting. In the event, however, the new agreement was rejected by the Uzbek parliament, and in 1999 Tajikistan continued to serve this debt according to the old schedule.

86. An agreement is being finalized to substantially reduce the debt to Russia. In 1996 an earlier agreement was reached to reschedule the outstanding debt of US$ 288 million, but more recently Russia agreed to also reduce the stock of debt, in compensation for the Russian rubles that had been returned to Russia when Tajikistan introduced its own currency in 1995. Under the new agreement, the outstanding debt would be reduced from US$288 million to US$137 million. Negotiations with the European Union aim to refinance the outstanding debt of about US$ 80 million. While the exact modalities are not yet known, they are likely to involve an up-front payment by Tajikistan, as well as annual grants by the European Union to assist Tajikistan in paying back the debt.

87. Negotiations were also held with smaller creditors. The Pakistan authorities have indicated their willingness to restructure the debt on the terms stipulated by the creditors’ conference; although the final agreement has yet to be signed. Agreement also seemed near with the government of India, while negotiations with China have so far not been successful. With assistance from the IMF staff, the government also held discussions with Turkmenistan and Kazakhstan to settle the discrepancies in their correspondent account debts.

D. Trade System

88. In early 1999, Tajikistan joined a customs union with Russia, Belarus, Kazakhstan, and the Kyrgyz Republic. In order to bring its external tariff structure in accordance with the stipulations of the customs treaty, Tajikistan changed its import tariff structure, which previously had a uniform rate of 5 percent, to one with rates of 5, 10, 15, 20, 25, and 30 percent, with an average of about 8 percent. There are no customs tariffs for members of the customs union, nor for the 47 least developed countries. Exports of cotton and aluminum are subject to sales taxes. As part of the tax system reform which aims to eliminate the de facto export taxes, the sales tax rates have been reduced in 1999. Tajikistan also initiated the application process for membership in the World Trade Organization in 1999.

89. Notwithstanding the recent tariff increase, Tajikistan has a relatively liberal trade system. On the IMF trade restrictiveness index, which measures trade restrictiveness on a scale from one to ten, with one being the lowest and ten the highest level of restrictiveness, Tajikistan scores a one mainly because its average tariff rate is below ten percent and it does not have any major nontariff trade barriers. This compares well with the other members of the customs union.21

90. Following a rapid shift in the years after independence, Tajikistan’s exports are now mainly directed to non-CIS countries (Table 44). Its main export products, cotton and aluminum, are mostly destined for the world commodity markets. Its main exports to CIS-countries include electricity to Uzbekistan, and vegetables and fruits to Russia. Imports are mainly from CIS countries. Tajikistan imports electricity, natural gas and oil from Uzbekistan, and wheat from Kazakhstan, while many manufactured products are obtained from Russia.

Table 37.

Tajikistan: Estimated Loan Loss Provision on Consolidated basis for the Four Major Banks, 1997-99

(In millions of Tajik rubles, unless otherwise specified)

article image
Sources: National Bank of Tajikistan; and Fund staff estimates.

Consolidated data for the Savings Bank, Agroinvestbank, Orion Bank, and Tajikvnesheconombank.

Outstanding loans exclude special cotton loans.

Table 38.

Implementation of Restructuring of the Agroinvestbank and the Savings Bank, 1999

article image
Source: National Bank of Tajikistan.

Applies to the Savings Bank only.

The Savings Bank collected TR 63 million out of TR786 million non-bank loans in the first 20 days of October 1999.

Applies to the Agroinvestbank only.

Table 39.

Tajikistan: Capital Asset and Liquid Asset Ratio, 1999

article image
Source: National Bank of Tajikistan.

Minimum total capital requirement was increased to an amount equivalent to US$750,000 on July 1, 1999 from US$500,000 earlier. Effective from January 1 2000, the minimum capital requirement is to increase to the equivalent of US$1 million for existing banks and US$2 million for new banks.

The ratio of total capital to risk weighted assets.

The ratio of liquid assets to demand liabilities.

Table 40.

Tajikistan: Balance of Payments, 1993-98

(In millions of US dollars)

article image
Sources: Data provided by the Tajik authorities; and Fund staff estimates.

Includes errors and omissions.

Imports of goods and services excluding alumina and electricity

Table 41.

Tajikistan: Exports by product, 1993-98

article image
Sources: Data provided by the Tajik authorities; and Fund staff estimates.
Table 42.

Tajikistan: Imports by product, 1993-98

article image
Sources: Data provided by the Tajik authorities; and Fund staff estimates.
Table 43.

Tajikistan: Trade Indices, 1993-98 1/

article image
Sources: Data provided by the Tajik authorities; and Fund staff estimates.

Including electricity.

Table 44.

Tajikistan: Destination of Exports, 1993-98

article image
Sources: Data provided by the Tajik authorities; and Fund staff estimates

E. External Debt Sustainability

91. Tajikistan’s external debt service burden is high in comparison with its fiscal revenue. In 2000, debt service on external public debt is projected at 24.9 percent of fiscal revenues (Table T1). If debt service to the IMF (which is not paid from the budget) is also included, the ratio increases to 32.4 percent. The ratio of public debt service to exports of goods and services is not very high at 5.5 percent. However, it increases to 9.5 percent when alumina imports and electricity exports are subtracted. In order to export aluminum, Tajikistan has to import alumina and other materials, which implies that net export earnings are substantially less. Electricity exports are bartered for electricity imports, and hence are also not available to service debt.

Table T1.

Tajikistan: Indicators of the Sustainability of Public and Publicly Guaranteed Debt

article image

Excluding grants.

Assuming fiscal revenue of 15 percent of GDP.

In net present value calculation, capital transfers of the European Union to help finance amortization have been taken into account.

As the debt service pattern of this debt is not known, it has been assumed that the net present value is equal to the nomimal value.

92. With a high debt and debt service burden, an important question is whether Tajikistan’s external debt situation is sustainable. One way of assessing the sustainability of Tajikistan’s external debt situation is through a comparison with the debt sustainability targets used in the context of the HEPC initiative. This comparison is relevant since Tajikistan could potentially be eligible for HIPC assistance at some point in the future. It meets the income criteria for the initiative and, as it turns out, has an unsustainable debt burden. These targets compare the net present value (NVP) of the public and publicly guaranteed external debt with both exports of goods and services and fiscal revenue. According to the targets, the external debt situation of a country is deemed unsustainable if (i) the NPV debt-to-exports ratio is more than 150 percent; or (ii) the NPV debt-to-revenue ratio is more than 250 percent, while the export to GDP ratio is at least 30 percent and the revenue to GDP ratio is at least 15 percent.22

93. At the end of 1999, the ratio of the net present value of public and publicly guaranteed debt to exports was estimated at 83 percent, well below the threshold of 150 percent. If alumina imports and electricity exports are subtracted, the ratio rises to 129 percent, but remains below the threshold.23 According to the debt-to-exports ratio criterion, Tajikistan’s debt situation is manageable but this criterion does not take into account the debt servicing capacity of the government which is liable to the debt in question. The ultimate test of debt sustainability in the case of Tajikistan thus rests on the debt repayment capacity of the government.

94. According to the debt-to-revenue ratio criterion, Tajikistan’s debt situation is not sustainable. With the ratio of net present value of public and publicly guaranteed debt to fiscal revenues of 443 percent, it is well above the threshold of 250 percent. Formally, this criterion can only be applied if the revenue to GDP ratio is at least 15 percent, but if the revenue ratio would have been 15 percent, the debt-to-revenue ratio would have been 372 percent, well above the threshold. The unsustainability of Tajikistan’s external debt in large part reflects the very low revenue to GDP ratio. Tajikistan has the second lowest revenue-to-GDP ratio of all the BRO countries. Debt service of the non-financial public sector is projected to peak at 32 percent of fiscal revenues or 4.1 percent of GDP in 2002.

VI. Structural Reforms

95. Over the past few years, Tajikistan has made notable progress in setting up the institutional and legal framework required for a functioning market economy. The framework has established a basis for better macroeconomic policy management, and enabled to begin implementation of key structural reforms, in particular, private sector development, enterprise privatization, land and agricultural reform, and industrial restructuring.

A. Legal and Institutional Reform

96. Some 39 economic laws have been passed since independence, with quite a number of them strengthened in the last two years through successive amendments, often to make them consistent with international standards. Central and commercial banking, joint stock company, bankruptcy, security and stock exchange, anti-monopoly, collateral, foreign investment, and recently accounting laws are now all in place. Privatization and Land Reform laws have also provided a broad framework for reform in these areas. Legal rules were established for the Tajikistan Interbank Currency Exchange and a primary Treasury bill market. In many cases, the economic laws have been amplified by presidential and government decrees. The lack of unifying framework and central depository for economic laws and regulations, and related inconsistencies and uncertainties, have been recognized as a deterrent for potential investors. The authorities plan to rectify the situation and have secured technical assistance from the ADB for an overall review of the legal system, with a view to improve transparency and information dissemination.

97. There continues to be a significant divide between laws and institutions as defined “on the books” and the reality of their implementation and functioning. Such a divide has been observed in most transition countries, but appears especially wide in a country like Tajikistan just recovering from civil strife. For instance, while the bankruptcy law is in place, and the Economic Court has been assigned the role of Bankruptcy Court, implementation regulations are still missing. And no bankruptcy case has so far been brought to trial. On the other hand, the NBT successfully relied on the implementation of the commercial banking law to liquidate several problem banks including Tajikbankbusiness. Much remains to be done in practice to improve the transparency, depth, and efficiency of the fledging credit, foreign exchange, and government security markets. Strengthening public confidence in the financial system remains a critical condition for further development of these markets.

98. Monetary and fiscal institutions have gained strength in recent years, but further progress is needed. While the independence of the central bank is now reasonably assured under the law, in practice, the NBT has still been expected at times to perform quasi-fiscal functions dictated by broader economic and political considerations. A recent presidential decree of October 22, 1999 aimed at re-affirming that independence. Furthermore, monetary policy instruments at the disposal of the central bank remain limited, in part because financial markets are still in their infancy, and also because the financial relations between the central bank and the Ministry of Finance are still to be clarified and codified on market terms.

99. With the adoption of a new Tax Code and implementation of a Treasury, significant progress was made in 1999 to transform the fiscal system into a modern rule-based instrument of government policy. Nevertheless, despite substantial technical assistance, tax administration remains weak, particularly with respect to complex forms of taxation, such as the VAT. Furthermore, formulation and execution of the budget is hampered by limited capacities in macroeconomic forecasting and monitoring. The ability to formulate expenditure policies and programs which use efficiently limited resources is still weak as well. This has affected, in particular, the formulation and implementation of proper social safety net and public investment programs. Finally, outside the immediate confine of the budget, much remains to be done to redefine the role of government in a market environment. This relates, in particular, to devolving government from responsibilities in the provision of goods and services, and re-focusing its activities on regulatory functions. The legal framework remains substantially incomplete in this area. A Transportation Law and an Energy Law were at the drafting stage in 1999.

B. Enterprise Privatization

100. Amendments to the Law on Privatization adopted in mid-1997 cleared the way to a competitive and transparent divestiture of some 6,150 (out of a total estimated at some 9,500) state enterprises to the private sector. Although some enterprises were sold earlier, enterprise privatization, especially that of medium- and large-scale enterprises, did not take place in earnest until 1998 when the government started systemic restructuring of the enterprise sector under the economic programs supported by the IMF and the World Bank.

101. Since early 1998, the main method of privatization has been through auctions/tenders of the enterprises as operating entities, including their debts and accounts payables. Auctions of small-scale enterprises (less than 100 employees) have generally resulted in one employee or group of employees purchasing the enterprise in which he or they have been working; but on occasions, “outsiders” won the auctions. For the medium- and large-scale enterprises (with more than 100 employees), incorporation precedes the auctions of shares. Auctions have proceeded in lots of one-to-four, depending on the size of the enterprise, essentially to ensure control by strategic investors. For the past year, typically two auctions of shares in enterprises have taken place each month.

102. The results with privatization so far are summarized in Box 5. Privatization of small-scale enterprises has been virtually completed, as is the transformation of medium-and large-scale enterprises into joint stock companies. But only 125 medium- and large-scale enterprises can be said to be now in private hands, with almost 50 percent of them belonging to the list of “independent objects”, companies that had more than 100 positions, but whose current labor force had shrunk much below that, and which were therefore found not necessary to corporatize.

Progress in Enterprise Privatization

(As of end-September 1999)
article image
Sources: State Property Committee.

103. The relatively slow pace of divesture of medium- and large-scale enterprises in part can be attributed to the existence of de facto minimum prices. While officially there are no reservation prices for the shares, in practice, the “initial” price, published with the auction announcement in newspapers, has served as a minimum price. Typically, auctions of 20-30 enterprises have resulted in sales of some 5 enterprises, because of the absence of bids at the initial price; with the latter being only slowly adjusted from auction to auction. Another frequent problem has been the delay in receiving full payment for the enterprise after the sale contract was signed.

104. Given the importance of the cotton sector in the Tajik economy, special significance has been attached to the privatization of cotton ginneries. In early 1997, there were 28 ginneries in Tajikistan, almost half of them still under the control of Glavkhlopkoprom, the state monopoly responsible for cotton marketing under central planning. While Glavkhlopkoprom was transformed into a joint stock company in late 1997 and eventually liquidated a year later, by early 1999 most ginneries were de jure still state-owned. Five international tenders for some remaining 23 ginneries took place during the period January-November 1999. As of mid-December, full payment has been received for four ginneries; six were under contracts, with payment up to 30-60 percent.

C. Land and Agricultural Reform

105. Agriculture has traditionally been a key economic sector in Tajikistan, accounting for 20-25 percent of GDP. Following the contraction in industrial activity as a result of the collapse of central planning, agriculture and agro-processing should be expected to play a major role in any recovery of growth in Tajikistan, given the evident comparative advantages, and the scope for productivity improvements. Exploitation of these opportunities requires elimination of widespread distortions and disincentives that prevailed under central planning, as well as restructuring of the entire sector based on the private ownership of land/land use rights, and private farming.

106. There has been significant progress with price and trade liberalization in agriculture in recent years, with no formal restrictions known to be in place today. The still poor market infrastructure has continued, however, to give established production and commercial entities unusual market power. This has contributed to a relatively slow pace of change in the restructuring of incentives and production decisions in the agricultural sector.

107. Progress with a fundamental land reform was relatively slow till mid-1998. Since then the process has received a boost, with a series of Presidential Decrees confirming the right of farmers to have inheritable and transferable land share and use rights for a period up to 99 years. The government also started the dismantling of state agricultural enterprises into private dekhan (peasant) farms. Under the scheme, farmers/workers of previous state and collective farms are given land share certificates (i.e. rights to a portion of the land); and they are encouraged to get together to form a private dekhan farm by pooling their shares and other resources. Once the dekhan farm is formed, it is given one land use certificate.

108. At the outset of market reforms, there were more than 600 state and collective farms, of various sizes, but typically of more than 2000 hectares. By end-September 1999, some 183 state and collective farms had been privatized through the issuance of marketable land share and land use certificates to private farmers. As a result, private farms sprang up and there were some 13,034 private dekhan farms as of October 1, 1999. The total share of arable land in private hands had risen to 44 percent (about 356,000 hectares) as of the same date, almost double the figure at end-1997.24

109. There are indications that privatized farms generate higher productivity. Reportedly, in best “dekhan” farms, cotton yield would have reached already 3 tons per hectare, compared to 1 ton in many non-restructured farms. The combination of land reform and price and trade liberalization has already had a positive supply response in the agricultural sector and related activities. In particular, the dismantling of the state monopoly Glavkhlopkoprom has introduced greater competition in the procurement of inputs and the processing, marketing, and exporting of cotton. Several domestic and foreign firms are now involved in these activities, including two big international traders, P. Reinhardt A.G. from Switzerland and Dunavant S.A. from the United States. The cotton sector has attracted the interest of foreign investors, not only for export financing, but also purchasing and rehabilitating ginneries, and exploiting new opportunities in the domestic textile industry. The cotton crop rose annually by an average of 10 percent in both 1997 and 1998. Production and exports of fruits and vegetables have also increased markedly, as diversified activities of “dekhan” farms assume relatively greater importance.

D. The Energy Sector

110. Tajikistan has great potentials for producing hydro-energy, thanks to its geographic location. Nevertheless, electricity production fell sharply through most of the 1990s, from more than 18 billion Kwh in 1990 to only 14 billion Kwh in 1997, while electricity consumption decreased from more than 19 billion Kwh to just 14 billion in the period. This reflected both demand (collapse of industry) and supply factors (reduction in usable capacity due to lack of funds for inputs, maintenance, and capital expenditures, and damage to the facilities due to the civil war).

111. While the price for natural gas, mainly from Uzbekistan, has been adjusted to reflect higher import prices, and natural gas is generally delivered only to those customers who pay their bills, the situation is quite different for other utilities including electricity, district heating,25 and LPG for residential consumers. The tariffs for these services have continued to be under government control and highly cross subsidized in favor of households. For electricity in particular, tariffs for households have remained well below marginal cost, with a cross-subsidy from higher electricity prices for industrial users. Furthermore, electricity bill collections have been weak. This encouraged a switch toward electricity use among households, and resulted in large arrears toward the state electricity company Barki Tojik.

112. The Tajik authorities have begun to address these distortions and imbalances in the context of IMF-supported programs, and a program loan from the Asian Development Bank. Specific steps have included (i) setting targets for tariff adjustments to achieve greater cost recovery for electricity and communal services (principally, heating); and (ii) reducing the accounts receivable of Barki Tojik to no more than six months billing, through collection efforts and greater control on delinquent customers. Box 6 highlights some of the results so far. Electricity bills collection rate in 1999 rose to 60-65 percent for households in Dushanbe, owing to efforts to improve individual metering and more regular inspections. However, the collection rate in industry remains low, at around 20 percent, despite the authority given to Barki Tojik to cut supply to delinquent customers. As a result, accounts receivables of Barki Tojik has reached 26 months of billings (including large arrears from TADAZ).

113. Given the large share of energy resources which the aluminum smelter company TADAZ is using, any restructuring and investment plan for the energy sector must take into account the prospects for the aluminum sector in Tajikistan. Questions about its economic viability have not yet been definitely answered, and the World Bank is to report on a comprehensive study of the smelter company in early 2000. There have been substantial efforts since 1998, including with external assistance, to cut costs, rehabilitate equipment, increase productivity, and improve the quality of the aluminum produced. Partly as a result, aluminum output rose by 3 percent to 196,000 tons in 1998, and is projected to reach some 220,000 tons in 1999, However, rationalization efforts were not sufficient to make TADAZ profitable in 1998, mainly because of a drop in international prices for its output. With the recovery of these prices during 1999, by more than 10 percent, TADAZ’s financial situation is likely to have improved. A proper assessment of the company’s economic profitability will, however, have to value energy inputs at their appropriate opportunity cost rather than at the current still highly subsidized prices.

Tajikistan: Electricity Tariffs and Cost Recovery

article image
Sources: Tajik authorities and staff estimates.

Official estimate; do not cover capital costs.

Including capital costs.

Excluding lower rates for irrigation pump stations.

Up to 150 k Wh, the tariff rate is TR 2.5 per k Wh; beyond, the rate is TR8.5 per k Wh, Households consume on average 250 k Wh per month; typically, the average effective tariff rate is therefore TR 4.9 per k Wh.

Decline from April 1 reflects combination of unchanged rates set in Tajik rubles and depreciation of the exchange rate.

Table 45.

Tajikistan: Origin of Imports, 1993-98

article image
Sources: Data provided by the Tajik authorities; and Fund staff estimates.
Table 46.

Tajikistan: External Debt, 1993-98

article image
Sources: Data provided by the Tajik authorities; and Fund staff estimates.

Includes correspondent accounts, the balances of which have not yet been reconciled with the respective creditors.

Break in data series in 1997.

Exports of goods and services less alumina and electricity imports.

Table 47.

Tajikistan: External Debt Service, 1993-98 1/

article image
Sources: Data provided by the Tajik authorities; and Fund staff estimates.

Excluding commercial debt service.

Exports of goods and services less alumina and electricity imports.

Table 48.

Tajikistan: Exchange Rates and U.S. Dollar Wages, 1993-99

article image
Sources: Data provided by the Tajik authorities; and Fund staff estimates.

On May 10, 1995 the Tajik ruble was introduced at a rate of 1 per 100 Russian rubles. Prior to that the Russian ruble was in use.

May 1995=100. Using period average exchange rates. The average index is the geometric average of the U.S. and Russian indices. An increase denotes appreciation.

Nominal indices adjusted for changes in consumer prices

1

This section was prepared on the basis of a background note by Alessandro Rebucci.

2

This model is the final stage of a reduction process, within a modeling strategy from general to specific. The starting point was a vector auto-regression of the fourth order including also DLHC as an endogenous variable together with the exogenous variables mentioned above. The reduction process has been driven by a battery of standard specification and miss-specification tests carried out with the GiveWin econometric package. The Chi square statistic reported at the end of Box 2 tests jointly, and does not rejects, the 16 exclusion restrictions imposed on the reduced form of the model presented. These include also the restriction imposing a causal link from the exchange rate to the price level by excluding the ECM term from the depreciation equation. Similar results were obtained experimenting with reserve money as a measure of money supply rather than currency in circulation.

3

Quite surprisingly, given the sharp decline of the cotton price throughout 1998, no evidence was found of a direct effect of terms of trade disturbances on the depreciation rate. This, however, may simply reflect the fact that much of the cotton price decline took place before September 1998 while the authorities were holding the exchange rate stable. The sample used to obtain these particular parameter estimates is also probably too short to be able to disentangle the effect of the Russian crisis from a further deterioration of the terms of trade which took place at the end of 1998 and the beginning of 1999.

4

SEASON was not excluded for the final specification of the model, even though its statistical significance is low, because this variable is highly significant when the model is estimated over the entire sample period.

5

In 1997 sales taxes replaced presumptive taxes on cotton and aluminum, with rates set at percent for aluminum and 25 percent for cotton. Tax measures implemented during 1998 included the reduction in the sales tax rates on cotton from 25 to 23 percent and on aluminum from 5 to 4 percent.

6

For example, the share of indirect taxes in GDP was 12.2 percent in Armenia, 13.9 percent in Estonia, 9.9 percent in the Kyrgyz Republic, and 11.7 percent in Lithuania.

7

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

8

For more details on the Treasury bill auctions, see Chapter IV, Section B.

9

In the neighboring countries, the money-to-GDP ratio at end-1997 was at about 12 percent in the Kyrgyz Republic and 9 percent in Kazakhstan.

10

The calculations are based on fixed accounting exchange rate of TR 1,038 per U.S. dollar.

11

The Tajik foreign exchange market consists of two segments. Foreign exchange deposits are sold in the Tajik Interbank Currency Exchange while cash is traded in foreign exchange bureaus at the curbside. The NBT’s official exchange rate is set according to the TICEX rate. There are also individual traders at the curbside and bazaars but their rates follow very closely the rates of the foreign exchange bureaus.

12

For domestic banks.

13

The Savings Bank remains fully state-owned.

14

These estimates are based on the preliminary findings of international audits.

15

The Agroinvestbank staff claimed that most of these loans were guaranteed by the government or the NBT. However, there was no detailed information available on this issue.

16

There are high risks associated with these guarantees as the government’s capacity to honor them seems to be limited.

17

At end-September 1999, excess reserves of commercial banks with the NBT were TR9 billion or 11 percent of broad money, compared to TR3 billion required reserves.

18

As the Orion bank’s overall conditions seemed adequate, no specific restructuring program was agreed with this bank.

19

Tajikistan both exports and imports significant amounts of electricity. Built in the Soviet era, the electricity grids in the central Asian CIS countries are well integrated, facilitating trade. Within Tajikistan, the grid is segmented between a northern and a southern grid, with no possibility of transferring electricity supplies between the two grids. The southern grid has excess capacity, and thus electricity is exported from this grid. The northern grid generates a deficit, necessitating imports. Electricity is traded on a barter basis, and no cash payments are made.

20

In the immediate period after the dissolution of the Soviet Union, trade among the newly independent states was facilitated by bilateral trade credits. These credit lines were suspended and balances blocked in late 1992, with the opening of correspondent accounts among the new states’ central banks. Since mid-1994, the correspondent accounts have been mostly inoperative, although small amounts were transferred through them as late as in 1996.

21

Other members of the customs union have a higher score on this indicator: Kyrgyz Republic two; Kazakhstan five; Russia five; Belarus eight.

22

Before their recent modification (see IMF, Public Information Notice No. 99/76) the NPV debt-to-exports ratio target was 200-250 percent, and the NPV debt-to-revenue ratio target 280 percent. For the exports-to-GDP ratio and the revenue-to-GDP ratio, the average of the most recent three years of annual data is used.

23

The debt sustainability analysis undertaken for Tajikistan assumes all debt is post cut-off date debt, i.e., it is not simulated to receive any debt reduction under additional debt relief mechanism.

24

Arable land accounts for about 810,000 hactares in Tajikistan. Of this amount, some 250,000 hactares (about 30 percent) were already in private hands by the end of 1997 as the result of various decrees passed before or since independence, and other special circumstances (e.g. private tilling of the land for wheat production).

25

District heating is produced both by the hydro-electric power system (steam and hot water to households and industries in Dushanbe and Yavan), and by burning coal and gas.

Same Series

Other IMF Content

Other Publishers

  • Collapse
  • Expand
Cover IMF Staff Country Reports
Tajikistan: Recent Economic Developments
Author:
International Monetary Fund
Volume/Issue:
Volume 2000: Issue 027
Publisher:
International Monetary Fund
ISBN:
9781451836950
ISSN:
1934-7685
Pages:
99
DOI:
https://doi.org/10.5089/9781451836950.002
Figure 1.

Tajikistan: Real GDP, 1994-99
Figure 2.

Tajikistan: Consumer and Wholesale Prices Indices, 1996-99
Figure 3.

Tajikistan: Real Wages and Dollar Wage, 1997-99
Figure 4.

Consumer Prices and Curb Market Exchange Rate, 1996-99
Figure 5.

Tajikistan: Velocity and Money Multiplier, 1996-99
Figure 6.

Tajikistan: Money, Credit and Foreign Reserves, 1996-99
Figure 7.

Tajikistan: Components of Broad Money, 1996-99
Figure 8.

Tajikistan: Real Interest Rates, 1997-99

(In percent) 1/
Figure 9.

Tajkistan: Selected World Market Prices, 1997-99
Figure 10.

Tajikistan: Nominal and Real Exchange Rates, 1997-99
Figure 11.

Tajikistan: TICEX and Curb Market Exchange Rates, 1996-99

(Tajik rubles per U.S. dollar)