Republic of Tajikistan: Selected Issues and Statistical Appendix

This Selected Issues paper analyzes the sources of recent growth in Tajikistan. It concludes that economic growth has been mainly driven by the services sector and a surge in remittances that have been mainly used for private consumption and small-scale private investment. The paper summarizes the recently introduced revisions to the Tax Code, which are an evolutionary step in simplifying the tax system and setting the base for better revenue administration. It also examines the likely impact on households of increasing electricity prices to cost-recovery levels.

Abstract

This Selected Issues paper analyzes the sources of recent growth in Tajikistan. It concludes that economic growth has been mainly driven by the services sector and a surge in remittances that have been mainly used for private consumption and small-scale private investment. The paper summarizes the recently introduced revisions to the Tax Code, which are an evolutionary step in simplifying the tax system and setting the base for better revenue administration. It also examines the likely impact on households of increasing electricity prices to cost-recovery levels.

IX. External Public Debt Developments and Sustainability1

This chapter reviews the substantial progress made by the Tajikistan authorities in improving external debt sustainability. However, it notes that the debt profile still needs to be managed prudently, especially from a fiscal sustainability perspective.

A. Historical Trends

1. In 1991, Tajikistan started its development as an independent state without external debt, but debt accumulated rapidly during the 1990s. In the early years of transition, against the backdrop of a chaotic political situation, civil conflict, poor governance and cessation of transfers from the central budget, the authorities had to import petroleum products, grain, and consumer staples, all at market prices. These imports relied initially on short-term suppliers’ credits and subsequently on offsets through correspondent accounts in central banks of former Soviet states. As a result, Tajikistan’s external debt increased from zero at independence to 15 percent of GDP by end-1992 and to 60 percent a year later. The explosive trend in debt accumulation continued through the 1990s and culminated in 2000, when external debt reached 128 percent of GDP.

uA09fig01

Evolution of Public Debt

Citation: IMF Staff Country Reports 2005, 131; 10.5089/9781451837056.002.A009

2. Attempts to regularize the debt situation began in the mid-1990s but initially were only partly successful. In 1995, to arrest the buildup of arrears under bilateral trade arrangements with CIS partners, the government announced that it would no longer guarantee payments by Tajik enterprises. In the late 1990s-early 2000s, Tajikistan conducted a series of debt rescheduling negotiations with its main bilateral creditors, which helped to improve its debt service profile, although the terms of rescheduling were not sufficiently concessional to stabilize the debt ratios. At the same time, the authorities started using external concessional loans to finance development projects and accumulated additional debt.

3. Since the early 2000, prudent policies have reversed the pattern of a rising debt burden. The authorities implemented tighter policies on contracting new debt, avoiding non-concessional borrowing, and limiting new concessional loans under the public investment program (PIP) to 3 percent of GDP annually. In the absence of an effective debt management system, the ceiling on borrowing under the PIP has helped to restrain and better prioritize externally financed public investment. With a rapid recovery in output and further aggressive debt restructuring and regularization, the ratio of external debt to GDP first stabilized and then started to decline.

B. Recent Developments

4. Tajikistan’s external debt burden is relatively low compared with most other low-income countries. At end-2004, Tajikistan’s external debt amounted to $822 million (40 percent of GDP) and total debt service due was equivalent to 10 percent of relevant exports.2 The debt service payments due on government and government-guaranteed debt stood at 15 percent of fiscal revenue. In net present value (NPV) terms, Tajikistan’s external public sector debt at end-2004 amounted to about 33 percent of GDP, compared with 72 percent in the Kyrgyz Republic, 53 percent in Moldova, 41 percent in Georgia, and 39 percent in Armenia.

5. At end-2004, multilateral creditors accounted for two-thirds of the debt stock. Two largest multi-lateral creditors are the World Bank and the IMF. Uzbekistan is now the largest bilateral creditor, (after the October 2004 debt reduction agreement with Russia) followed by Russia, the United States, and Turkey. Over half of Tajikistan’s external debt is denominated in SDRs, 34 percent is in US dollars, 7 percent is in Euros, and the rest is in other currencies.

Public External Debt at a Glance

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Source: Tajik authorities.

6. The external debt situation improved markedly in 2002–2004 owing to the reduction in face value and favorable endogenous debt dynamics. The authorities concluded a number of debt cancellation and restructuring (most recently with Russia and Pakistan) which help reduce the face value of external debt by 20 percent in 2004 alone. Also, the government did not contract any new bilateral loans, other than from two development funds (the Saudi Fund and the Kuwait Fund) classified as bilateral lenders. Most bilateral assistance is now provided in the form of grants. Endogenous debt dynamics, in particular from the rapid increase in the nominal GDP, both from the high real growth rate and the improvement in the coverage of previous informal economic activities, have also contributed markedly to the reduction of debt ratios.

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Key Debt Ratios

(In percent)

Citation: IMF Staff Country Reports 2005, 131; 10.5089/9781451837056.002.A009

7. The agreement on regularization of debt with Russia was an important factor behind the reduction of the debt burden. The agreement signed in October 2004 affecting $306 million of principal and interest is part of a broader investment package and includes: a debt-for-asset swap of $242 million; offset of the National Bank of Tajikistan’s claims on the Central Bank of Russia; and cancellation of the bulk of the unpaid interest accrued in 2004. Under the swap, $242 million will be converted into Russia’s state ownership of the Nurek space tracking station located in Tajikistan. The formal write-off of the debt will take place after Russia’s ownership of Nurek is legally finalized. The government of Tajikistan will repay the remaining $50 million by investing this amount during 2005–2008 on behalf of Russia in the construction of the Sangtuda I hydro-power station.

Debt Reduction Agreement with Russia

(In millions of US dollars)

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Source: Tajik authorities.

8. Tajikistan’s debt to Uzbekistan has been the subject of protracted negotiations. Uzbekistan’s total debt outstanding is $94 million. The debt originated from trade credits and negative balances on correspondent accounts opened in the early 1990s in the central banks of both countries for offsets in trade-related payments. This debt has been serviced by offsets with services provided by Tajik Rail for the transportation of Uzbek goods through the Tajik territory. After protracted negotiations, in February 2005 the governments of Tajikistan and Uzbekistan signed an agreement for debt payments in 2004 and 2005. The debt service of $14 million falling due in 2005 will be paid with services by Tajik Rail. As the offset agreements have to be renegotiated annually, this creates significant uncertainty regarding future debt payments.

C. Debt Sustainability

9. The assumptions underlying this debt sustainability analysis (DSA) include: continued strong real growth of 6.5 percent a year on average in 2005–2010, moderate inflation of 5 percent annually, fiscal deficit, (excluding the PIP) of 0.5 percent of GDP, externally financed PIP at 4.5 percent of GDP, and current account deficit of 4–5 percent of GDP. Commodity prices (aluminum, cotton) and exchange rate projections are based on the January 2005 WEO baseline, updated with recent near-term price movements. The discount rate for NPV calculations is set at 5 percent, and exports are computed as the current year exports of goods and services, excluding barter exports of aluminum and electricity. The DSA is based on the operational framework for low-income countries3 adjusted to Tajikistan’s circumstances, mainly by calibrating stress tests.

10. Under the baseline scenario, Tajikistan’s public debt will remain sustainable in the foreseeable future.4 Assuming highly concessional new borrowing and overall prudent debt management, the face value of Tajikistan’s public external debt is not expected to exceed 40 percent of GDP in the long-run (Table 1). The non-interest current account is projected to remain close to balance as the trade deficit will be largely offset by net transfers, while FDI, other non-debt creating inflows, and high GDP growth will have a positive impact on the endogenous debt dynamics. In the medium term, reflecting its highly concessional nature, the NPV of Tajikistan’s debt will average 31 percent of GDP. The NPV of public debt-to-exports ratio is projected to decline gradually from 100 to 91 percent during the projection period, reflecting mainly faster exports growth, with the NPV of debt remaining broadly stable. The public debt service-to-export ratio will also decline from 10 to 5 percent. The profile of the government and government-guaranteed (GGG) debt is largely similar to that of the public debt (Table 2).

11. The most optimistic scenario of conservative borrowing policies and the continuation of favorable recent macroeconomic trends would ease the debt burden further. A historical scenario assumes the continuation of the favorable 2002–2004 trends in debt dynamics—key macroeconomic variables (real GDP growth, GDP deflator, non-interest current account and non-debt creating flows) at their 1998–2004 averages. Under this scenario, the NPV of public debt would decline from the baseline of 33 percent of GDP in 2004 to 24 percent in 2013, the NPV of debt-to export ratio will decline from 100 to 72 percent, and the debt service ratio will drop from 10 to 6 percent. (Table 3, Figure 1). In addition, if the primary fiscal deficit remains at the low level of 2002—2004 during the projection period, the NPV of debt-to-revenue ratio will decline from 175 percent in 2004 to 65 percent in 2013 and debt service-to-revenue ratio will drop to from 11 to 3 percent (Table 4, Figure 2) However, the economic factors that led to the recent rapid improvement in the debt outlook are not likely to be repeated.

12. Alternative less favorable scenarios suggest that the prospects of debt sustainability will depend critically on the continuation of sound policies and concessional borrowing. An extreme alternative scenario of a deterioration in all key variables by one-half standard deviation yields a significant deterioration of debt ratios. During the five years after such a shock, the NPV of public debt-to-GDP ratio may worsen by almost 50 percentage points on average, and a permanently lower GDP growth (by one standard deviation compared to the baseline) results in a deterioration in the NPV of debt-to-revenue ratio by 44 percentage points on average in 2005–2010. In the long run (Table 3), the scenario of less favorable terms for new public sector borrowing (interest rate 2 percentage points higher than in the baseline) may result in a significant deterioration the NPV of debt-to-GDP ratio from 33 percent of GDP in 2004 to 48 percent in 2023 and in the NPV of debt-to-exports ratio from 100 to 137 percent. A permanently lower GDP growth is also a significant risk factor for fiscal debt sustainability in the long-term prospective (Table 4), as the associated lower revenue collection can result in an increase of NPV of debt-to-revenue ratio from 175 to 304 percent in 2004–2023, and the debt service-to-revenue ratio on GGG debt from 11 to 18 percent.

Stress tests results, 2005-2010 averages

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13. Additional bound tests show that Tajikistan’s external public debt position will remain highly sensitive to adverse shocks. As just three commodities—aluminum, cotton, and fruits and vegetables—constitute some 40 percent of GDP, 70 percent of exports, and 10 percent of fiscal revenue, Tajikistan’s debt sustainability in the long run will depend substantially on price and volume dynamics in these highly volatile sectors. Not surprisingly, an export revenue shock is one of the more extreme shock modeled by this DSA. In the medium term (see box above), assuming that export revenue declines by one standard deviation from its historical average, the NPV-to-exports ratio worsened from an average of 93 percent under the baseline in the next five years, to 169 percent in 2004-2010 on average, and the debt service ratio on public debt will deteriorate from 7 to 11 percent. In the longer-term prospective (Table 3), the debt dynamics are particularly sensitive to the export revenue shock. A one standard deviation shock compared to historical averages can lead to a protracted deterioration of the NPV of debt-to exports ratio, which will not disappear even by 2023. A surge in inflation and nominal depreciation are also important risk factors, which can have lasting effect on the NPV of debt-to-GDP and the fiscal ratios, in particular the NPV of debt-to-revenue and debt service-to-revenue ratios (Table 4). Therefore, if the forecast of the underlying GDP growth does not materialize, a permanently lower GDP growth is the most negative alternative scenario, which can have an adverse impact on the overall debt dynamics. Shocks to GDP and export growth, exchange rate depreciation and inflation are the most important risk factors for fiscal sustainability of the existing debt burden.

D. Conclusions

14. Tajikistan’s debt situation seems sustainable, but vulnerable to shocks and hinges on continued strong policy implementation.

  • External concessional borrowing not exceeding 4.5 percent of GDP annually is broadly consistent with long-term debt sustainability. Stability of debt ratios in the long run depends on cautious borrowing policies and strong macroeconomic performance. With strong growth underpinned by sustained reforms and no new non-concessional borrowing, Tajikistan debt indicators are projected to remain stable in the longer term. However, slippages in reforms, lower growth, and adverse exogenous shocks, in particular to exports, are the largest sources of debt vulnerability.

  • Fiscal sustainability of debt, although improved after the recent debt regularization agreements, needs to be monitored closely and continuously. Government’s debt service obligations will remain an important expenditure item, in particular in the medium term. The revenue effort (taxes and grants) of at least 18.0–18.5 percent GDP during the forecast period and a fiscal deficit excluding the PIP not exceeding 0.5 percent of GDP are needed to target the debt service-to-revenue ratio at below 15 percent. This targeted level of debt service is appropriate based on historical experience and would permit additional budget expenditure on development and social needs, without diverting an excessive share to debt repayments. Lower GDP growth and revenue are the main risks to debt sustainability, as debt service payments could increase up to 20 percent of fiscal revenue in the worst case scenario.

  • Restructuring of bilateral debt with large creditors remains a priority. Debt rescheduling or cancellation of obligations to the largest creditors (Uzbekistan, the United States, and Turkey) would help smoothen the debt profile in the medium term and reduce strain on fiscal resources.

  • Strengthening debt management capacity must continue. The authorities need to establish a reliable computerized debt tracking system for all external debts—public and private—and start using it for budget and balance of payment forecasting and analysis. The terms and conditions of significant loans under the PIP or any other public credit line should be analyzed carefully to determine their impact on Tajikistan’s debt profile and its sustainability. A fully-fledged DSA should be prepared annually, as a contribution to the annual budget exercise.

Table 1.

Tajikistan: Sensitivity Analyses for Key Indicators of Public External Debt, 2002-23

(In percent of GDP, unless otherwise indicated)

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Source: Tajikistan authorities; and Fund staff estimates and simulations.

Includes external government and government-guaranteed (GGG) debt, not guaranteed debt of public enterprises, and debt serviced by NBT.

Derived as [r - g - ρ(1+g)/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that NPV of public not guaranteed debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Derived over the post-civil war period of 1998-2003.

Non-barter exports of goods and services.

Debt cancellation by Pakistan.

Current account and amortization payments minus FDIs.

Public debt minus not guaranteed debt of public enterprises.

Current account required to keep the debt-to-GDP ratio constant.

Table 2.

Tajikistan: Government and Government-Guaranteed Sector Debt Sustainability Framework, Baseline Scenario, 2002-23

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and Fund staff estimates and projections.

Central government, NBT, and guaranteed debt of public enterprises.

Defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues including grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are derived over the past 6 years.

Table 3.

Tajikistan: Sensitivity Analyses for Key Indicators of Public External Debt, 2003-23

(In percent)

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Source: Staff projections and simulations.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

Table 4.

Tajikistan: Sensitivity Analyses for Key Indicators of Government and Government Guaranteed Debt, 2003-23

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Sources: Country authorities; and Fund staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of 20 (i.e., the length of the projection period).

Revenues are defined inclusive of grants.

Figure 1.
Figure 1.

Tajikistan: Indicators of Public External Debt Under Alternative Scenarios, 2003–2023

(In percent)

Citation: IMF Staff Country Reports 2005, 131; 10.5089/9781451837056.002.A009

Source: Staff projections and simulations.
Figure 2.
Figure 2.

Tajikistan: Indicators of Government and Government-Guaranteed Debt Under Alternative Scenarios, 2003–23 1/

(In percent)

Citation: IMF Staff Country Reports 2005, 131; 10.5089/9781451837056.002.A009

Source: Staff projections and simulations.1/ Most extreme stress test is test that yields highest ratio in 2013.2/ Revenue including grants.

Statistical Appendix

Table A-1.

Tajikistan: Basic Economic Data, 2000–04

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Source: Tajik authorities.

Excludes externally-financed public investment program.

Lending rate for domestic currency denominated 3–6 months loans; end of year.

Table A-2.

Tajikistan: Nominal and Real GDP, 2000–04 1/

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Source: State Statistical Committee.

The data for 2004 are preliminary.

Table A-3.

Tajikistan: Nominal GDP by Sector of Origin, 2000–04

(In thousands of somoni; unless otherwise specified)

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Source: State Statistical Committee.

Since 1998, includes the State Statistical Committee’s estimate of the informal sector.

Table A-4.

Tajikistan: Production and Yields of Major Agricultural Crops, 2000–04

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Source: State Statistical Committee.
Table A-5.

Tajikistan: Animal Husbandry, 2000–04

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Source: State Statistical Committee.
Table A-6.

Tajikistan: Agricultural Production by Type of Farm, 2000–04

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Source: State Statistical Committee.
Table A-7.

Tajikistan: Allocation of Agricultural Land, 2004

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Source: State Statistical Committee.

Includes collective farms (kolkhozes), state farms (sovkhozes), state farms in transformation to collective farms (mezhozes), and other farms.

Personal plots, including 75,000 hectares of land distributed by presidential decree in 1997.