Republic of Tajikistan
2009 Article IV Consultation, Final Review Under the Staff-Monitored Program, and Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility: Staff Report; Staff Supplement; Staff Statement; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for the Republic of Tajikistan.

Tajikistan’s growth potential is constrained by government interference in markets, and poor energy and transport infrastructure. The report focuses on Tajikistan’s combined 2009 Article IV Consultation, final review under the Staff-Monitored Program, and request for a Three-Year Arrangement under the Poverty Reduction and Growth Facility. Macroeconomic policies may need to be tightened further if external developments turn out worse than currently projected. Alternatively, additional donor support could ease the domestic adjustment burden.

Abstract

Tajikistan’s growth potential is constrained by government interference in markets, and poor energy and transport infrastructure. The report focuses on Tajikistan’s combined 2009 Article IV Consultation, final review under the Staff-Monitored Program, and request for a Three-Year Arrangement under the Poverty Reduction and Growth Facility. Macroeconomic policies may need to be tightened further if external developments turn out worse than currently projected. Alternatively, additional donor support could ease the domestic adjustment burden.

I. Introduction and Background

1. Adverse external developments are expected to lead to a deterioration in economic conditions. Despite progress toward poverty reduction, 53 percent of the population was below the poverty line of $41/month and 17 percent were below the extreme poverty line of $26/month in 2007. The expected economic slowdown in 2009 and the possible return of migrant workers (around 1 million out of a population of 7 million, or almost half the labor force, worked outside Tajikistan in 2008) will add to the existing problem of widespread underemployment. Under current projections, U.S. dollar per-capita gross national disposable income would decline by around 6 percent in 2009. Food security could again become a problem; many households already had to rely on coping mechanisms during the harsh 2007/08 winter, selling productive assets, such as farm animals, or taking on debt. As such, the government is facing spending pressures in 2009 to safeguard living conditions and support growth.

uA01fig01

Gross National Disposable Income per capita, 2000-09 1/

(in U.S. dollars)

Citation: IMF Staff Country Reports 2009, 174; 10.5089/9781451837193.002.A001

Source: Tajik authorities; and Fund staff calculations and projections.1/ GNDI is defined as GDP + net factor income + net transfers.

2. Staff reached agreement ad referendum on a three-year program that could be supported under the PRGF. Tajikistan’s external position is projected to worsen in 2009 because of the deteriorating global and regional economic environment. Noting the helpfulness of past Fund advice (Box 1), the authorities want to benefit from the stability that a Fund financial arrangement would bring, and expect that formal Fund involvement will unlock budget support from the Asian Development Bank (AsDB), the World Bank, and the European Union. Staff believes that the PRGF is the appropriate facility given that many of Tajikistan’s underlying problems are structural, though the external shocks in 2009 will require upfront adjustment.

3. The PRGF request follows completion of the 2008 SMP. The SMP was put in place after a misreporting episode uncovered in late 2007 had seriously undermined the credibility of the authorities. 1 The episode involved the provision of inaccurate data to the Fund on the level of international reserves and net domestic assets of the National Bank of Tajikistan (NBT), and the issuance of directed credit by the NBT over a six-year period through 2007. On March 5, 2008, the Executive Board supported the Managing Director’s recommendation that Tajikistan repay early the three noncomplying disbursements (amounting to SDR 29.4 million) that had not already been discharged under MDRI relief.

The Authorities’ Response to Past Fund Advice

  • The authorities have maintained a prudent fiscal stance, but deficits of state-owned enterprises have remained high and nontransparent, despite some recent progress.

  • The authorities adopted an external debt strategy in 2008 that sets a debt ceiling of 40 percent of GDP, in line with staff advice.

  • Monetary policy effectiveness continues to be constrained by a lack of appropriate instruments and weak institutional capacity.

  • While a managed-floating exchange rate was maintained de jure, the NBT has de facto pegged the somoni against the U.S. dollar until very recently.

  • Key Financial Sector Assessment Program (FSAP) recommendations are being addressed, with World Bank assistance.

  • NBT recapitalization and adoption of an anti-money laundering framework are still pending.

  • Progress on agricultural (in particular, cotton) sector reforms has been poor.

II. Recent Economic Developments and Performance under the 2008 SMP

4. Economic developments in 2008 were positive, despite a severe winter, a prolonged drought, and electricity shortages. Real GDP growth reached 8 percent in 2008, mainly driven by remittance-financed demand in the services and construction sectors, and noncotton agricultural production. Inflation receded from its mid-year peak to 11 percent year-on-year in February 2009, helped by the recent retrenchment in international commodity prices. With strong domestic demand, the trade balance worsened in 2008. Imports grew by around 36 percent, partly reflecting high international food and energy prices in the first half of the year, while exports were held back by sluggish industrial activity. Despite this, the overall balance of payments registered a surplus in 2008 as remittances surged by 50 percent.

5. The authorities achieved an overall fiscal surplus of 1 percent of GDP (excluding the externally financed public investment program, PIP) in 2008, compared to a target of overall balance under the SMP. Revenues were buoyant, mostly reflecting high nominal GDP and import growth, as well as some administrative gains. At the same time, the authorities maintained strict expenditure control. Disbursements of concessional external financing for the planned investment projects under the PIP were within the program ceiling, and there was no new borrowing. Despite the expanding PIP, the overall deficit remained at about 6 percent of GDP broadly unchanged from 2007, and total public and publicly guaranteed debt declined to 29 percent of GDP from 34 percent in 2007. The authorities avoided accumulating new gross arrears with the exception of tax arrears by the power utility Barki Tajik, which have been a perennial problem in recent years. 2

Figure 1.
Figure 1.

Tajikistan: Economic Activity, 2003-09

(year-on-year growth in precent)

Citation: IMF Staff Country Reports 2009, 174; 10.5089/9781451837193.002.A001

Sources: Tajik authorities; and Fund staff calculations.
Figure 2.
Figure 2.

Tajikistan: Fiscal, External, and Price Developments, 2005-09

Citation: IMF Staff Country Reports 2009, 174; 10.5089/9781451837193.002.A001

Sources: Tajik authorities; and Fund staff calculations.
Figure 3.
Figure 3.

Tajikistan: Monetary and Financial Developments, 2007-09

Citation: IMF Staff Country Reports 2009, 174; 10.5089/9781451837193.002.A001

Sources: Tajik authorities; and Fund staff calculations.1/ As of April 2008, the statutory requirements are 9 percent on somoni deposits and 11 percent on foreign currency deposits.
Figure 4.
Figure 4.

Tajikistan: The Structure of the Economy

Citation: IMF Staff Country Reports 2009, 174; 10.5089/9781451837193.002.A001

Sources: Tajik authorities; and Fund staff calculations

6. The NBT built net international reserves above its SMP target, while containing monetary growth. The strong inflow of remittances allowed the NBT to accumulate $125 million in net international reserves during 2008 to a level of $181 million at end-December. 3 However, gross international reserves of $199 million covered only 1.2 month of imports. Foreign exchange market purchases helped contain appreciation pressures on the somoni, given the authorities’ concerns about competitiveness. These interventions also served to provide liquidity to the banking system in the absence of other effective monetary policy instruments. Reserve money growth slowed, mainly because of an accumulation of government deposits at the NBT that offset the provision of short-term liquidity loans to banks toward the end of 2008.

7. The authorities made progress on their 2008 structural reform agenda:

  • Ernst & Young (London) completed the special audit of the NBT, and the authorities will publish the Executive Summary once the auditors have released the final report (Box 2).

  • The ministry of finance has established a contingent liability-reporting regime for state-owned enterprises (SOEs), public institutions, and the NBT with the assistance of the FAD regional adviser.

  • The authorities have prepared amendments to the NBT and commercial banking laws with assistance from the World Bank to address key recommendations of the FSAP report with delays for reasons explained in IMF Country Report No. 08/382. The amendments will be submitted to parliament in April.

  • The ministry of finance has issued a regulation requiring official identification and disclosure of beneficial owners of companies registered with its Agency for Securities.

  • The NBT has discontinued its previous practice of issuing cotton export licenses.

III. Policy Discussions

8. Policy discussions for the Article IV consultations focused on three main issues and laid the groundwork for the proposed 2009–12 program for which the authorities seek support under the PRGF.

  • Facilitating external adjustment in 2009 while allowing for rising social spending needs;

  • Laying the foundation for medium-term growth and ensuring that there is no build-up of external debt; and

  • Structural reforms in the areas of central bank governance, state-owned enterprises, and the agriculture sector.

Report on Special Audit of the NBT

The special audit report, prepared by E&Y, confirms governance weaknesses at the NBT, Kredit Invest, and cotton investors. The auditors confirmed the misreporting to the Fund. They noted that their work was constrained by limited, incomplete, and unreliable information, and complicated by the destruction and fabrication of documents. The auditors also found some misclassification of loans on the NBT balance sheet, and could not confirm all activity by Kredit Invest. As such, they concluded that “there is no audited, reliable basis for NBT’s current balance sheet.” In this context, they noted that net international reserves data could not be ascertained for April 30, 2008, since some confirmations by third parties were not received by E&Y. The auditors also commended the current NBT Chairman for improving governance since taking office in early 2008. The previous NBT Chairman took full responsibility for ordering selected NBT staff to arrange pledges, guarantees and loans, and conceal them from the external auditors and the IMF. He explained that this was to ensure funding for Tajikistan’s cotton sector, a key source of employment in rural areas. The auditors noted that, regarding the role of the former NBT Chairman, “There is evidence to indicate that there was a conflict of interest.”

The special audit report found that the NBT pledges and guarantees that were part of the misreporting episode were not disclosed to PricewaterhouseCoopers, the external auditors for the 2007 accounts and earlier years. Therefore, PricewaterhouseCoopers did not contact all of the relevant institutions that had extended credits to the cotton sector. It is not known why the financial institutions that were contacted did not disclose the existence of the pledges and guarantees.

article image

A. Macroeconomic Policies for 2009

9. External shocks and domestic rigidities are expected to take a heavy toll on Tajikistan in 2009. Remittances are projected to decline in 2009 by 30 percent (Box 3), while exports (cotton, aluminum) are likely to contract by 7 percent in value terms, owing to lower international prices. This will require a large balance of payments adjustment, and may trigger further pressures on the exchange rate. This year, the somoni has already depreciated by 8 percent against the U.S. dollar through end-February. Moreover, domestic demand is likely to weaken. On the supply side, ongoing electricity rationing, a difficult international market for aluminum and cotton, and expected water shortages during the agricultural season are weighing on growth. 4 In all, staff projects real GDP growth in 2009 at only 2 percent at best. The authorities see some upside risks, pointing to positive impulses from the continuing shift toward noncotton agriculture and from government spending. Inflation is likely to stabilize around 13 percent in 2009, as the positive impact of declining international commodity prices is offset by the impact of the likely somoni depreciation.

Remittances and Growth Spillovers

Remittances are expected to be the main channel through which the global economic downturn will affect Tajikistan. Estimated at 47 percent of GDP for 2008, remittances have been the largest source of current inflows during the last several years, supporting domestic demand and allowing the NBT to accumulate reserves. A large share of Tajik migrant workers is employed in the Russian construction sector. With Russia projected to contract in 2009, remittances inflows in Tajikistan are expected to decline, as migrant workers are laid off or see their U.S. dollar wages fall. In January 2009, remittances contracted by 22 percent year-on-year.

Remittances and Trade Deficit, 2003-2008 (in billions of US dollars, unless otherwise indicated)

uA01fig02

Remittances and Trade Deficit, 2003-2008

(in billions of US dollars, unless otherwise indicated)

Citation: IMF Staff Country Reports 2009, 174; 10.5089/9781451837193.002.A001

Sources: Tajik authorities; and Fund staff estimates.1/ Data net of $250 mln. of debt-equity swap with Russia.
uA01fig03

Growth in Russian Construction Sector, Inflow of Remittances and Real GDP

(2006Q2-Jan 2009, percentage change)

Citation: IMF Staff Country Reports 2009, 174; 10.5089/9781451837193.002.A001

Source: national authorities, and Fund staff calculations.

10. Macroeconomic policies need to be geared primarily at maintaining external stability. The authorities view the exchange rate as the primary instrument for facilitating external adjustment. Fiscal policy needs to accommodate the expected demands for social spending, and the authorities believe that the overall fiscal deficit target (excluding PIP) of ½ percent of GDP set out in their 2009 budget remains appropriate.

11. The authorities have committed to a flexible exchange rate regime. An assessment of the level of the exchange rate suggests that, in light of the already large current account deficit in 2008, the somoni could be overvalued (Box 4). This is compounded by the external shock expected for 2009. As such, the authorities have discontinued their policy—in place since 1998—of a de facto peg to the U.S. dollar and plan to let the somoni move in line with market pressures to bring about the necessary external adjustment in 2009, and return the current account deficit to a more sustainable level over the medium term. At the same time, they will seek to reduce excess volatility in the foreign exchange market, including by purchasing foreign exchange during temporary episodes of inflows.

12. Given the need for exchange rate flexibility, the authorities will target reserve money growth as a nominal anchor. The authorities are concerned about liquidity shortages in the banking sector. They expect that they will have to continue providing short-term liquidity loans (with a maturity of up to three months) at the refinancing rate. Staff suggested to lower the reserve requirement, e.g., by reducing the reserve requirement for foreign exchange deposits to that of somoni deposits, as an alternative way of providing liquidity. However, the authorities were concerned that lowering the reserve requirement on foreign exchange deposits would lead to an increase in deposit dollarization, and felt that liquidity loans—or the issuance of certificates of deposits—would be sufficient to control reserve money growth.

13. Fiscal policy will have to provide space for additional social spending. The revenue-to-GDP ratio is expected to decline by close to 1½ percent of GDP in 2009, mainly reflecting sluggish activity. At the same time, the authorities intend to raise social spending on transfers to households, health, and education by almost 1½ percent of GDP consistent with their PRSP and the last JSAN (IMF Country Reports 09/82 and 09/83)—they are working closely with the World Bank in these areas. Moreover, they plan to continue implementing their civil service reform strategy, also developed in consultation with the World Bank, which involves right-sizing the civil service workforce and increasing government wages. Low salaries, below the living wage, were a hindrance to attracting qualified staff and are likely to foster corruption. 5 To achieve their overall fiscal deficit target of ½ percent of GDP (excluding PIP), they will, therefore, delay domestically financed capital spending, while focusing expenditures on key infrastructure bottlenecks and other high priority items. Included in these projections is an allowance for nonrecovery of loans extended in 2008 to the cotton sector through commercial banks. 6 In 2009, the lending scheme amounts to $45 million (almost 1 percent of GDP).

14. The authorities are concerned about rising financial sector vulnerabilities. Headline financial soundness indicators have improved during 2008. However, some banks faced severe funding problems towards the end of 2008 due to some large corporates drawing down their deposits, a drying up of trade credits and advances for remittances, and rising nonperforming loans. 7 In response, most banks have started to raise deposit rates and constrained credit growth. In addition, the NBT has provided liquidity loans, mainly in somoni. Against this background, staff updated the FSAP stress tests with end-2008 data (Box 5). The results suggest that banks are vulnerable to a large depreciation of the somoni and the risk of a deposit run. To safeguard the banking system, the authorities are stepping up supervision and regulatory requirements, and are also following up on indications that some banks’ may not be fully compliant with regulatory requirements or not provisioning adequately (MEFP ¶16).

15. The authorities and staff agreed that there are significant downside risks to the projections. The decline in remittances could be larger than anticipated, shortages in power and water supply could affect industry, services and agriculture by more than expected, and world market conditions for Tajikistan’s key exports aluminum and cotton could worsen further. 8 The authorities are monitoring external developments closely, and stand ready to further tighten policies if needed or to avoid an overshooting of the exchange rate that could adversely affect the banking system. However, they also note the trade-off between further expenditure restraints and the need to improve Tajikistan’s infrastructure, as well as to continue ongoing reforms even at a fiscal cost.

Exchange Rate Assessment

During 2008, the somoni appreciated in nominal and real effective terms, mainly driven by large remittances inflows. The NBT limited the nominal appreciation against the U.S. dollar to about 2 percent in 2008 through foreign exchange market interventions. However, given the nominal depreciation of key trading partners against the U.S. dollar (e.g., the Russian ruble) and inflation differentials with other trading partners, the real effective exchange rate (REER) appreciated by 14 percent. The current account deficit remained high at 9 percent of GDP.

uA01fig04

Nominal Exchange Rate and Net Foreign Exchange Purchases

Citation: IMF Staff Country Reports 2009, 174; 10.5089/9781451837193.002.A001

Sources: Tajik authorities; and Fund staff calculations.
uA01fig05

Nominal and Real Effective Exchange Rates

(1998 = 100)

Citation: IMF Staff Country Reports 2009, 174; 10.5089/9781451837193.002.A001

Sources: Tajik authorities, and Fund staff calculations.

The three Consultative Group on Exchange Rates (CGER) approaches suggest that the somoni could be overvalued. Using 2008 data, point estimates range from the somoni being broadly in line with fundamentals to being overvalued by 18 percent, reflecting the usual statistical uncertainty around such estimates. Assuming a constant REER, the medium-term balance of payments projections would show significant external financing needs, also pointing to an overvaluation of the somoni.

Tajikistan: Methodologies to Assess Real Exchange Rate Misalignment 1/

article image
Source: WEO and IMF staff estimates

Estimates A are based on CGER methodologies (www.imf.org) while estimates B are based on MCD coefficient estimates.

Based on 2008 WEO projections.

The underlying CA and the norm exclude income.

Based on current fundamentals

Updated Banking Sector Stress Tests

This box updates the FSAP stress tests of the Tajik banking system using end-2008 data. 1 Banks included in the update account for 95 percent of total assets. The simulated shocks are exceptional, but plausible, and may have particular relevance during the period ahead (Tables 8 and 9).

Banks are long in foreign exchange, but exchange rate movements could trigger credit events. At end-2008, deposit dollarization was 64 percent, loan dollarization 56 percent, and banks’ net open foreign exchange position was 6 percent of capital (long). As such, a depreciation of the somoni would not directly have an adverse effect on banks’ balance sheets. However, most debtors who have foreign exchange denominated loans are neither hedged nor have foreign exchange earnings, so that banks face a credit risk if the somoni depreciates. Moreover, banks’ asset quality may already be impaired by the doubling of lending to the cotton sector to 17 percent of total outstanding loans during 2008. The stress test assumes a 30 percent depreciation against U.S. dollar with and without a concomitant 30 percent deterioration in the foreign exchange loan portfolio. In the first case, the system’s capital adequacy ratio (CAR) actually improves, given banks’ long foreign exchange position. However, in the second, more plausible case, the system’s CAR falls by 3 percentage points, and two banks slip below the required minimum of 12 percent.

Banks’ vulnerability to a liquidity shock has increased compared to end-2007. Developments in the fourth quarter of 2008 point to liquidity shortages in the system. The stress test assumes a hypothetical deposit run of 10 percent of deposits per day for five consecutive days. The results suggest that liquidity shortfalls appear manageable, though individual banks may face liquidity shortages. Liquidity shortages would be higher in case of a foreign exchange deposit withdrawal than in case of a somoni deposit withdrawal.

1 Republic of Tajikistan: Financial System Stability Assessment, including Reports on Observance of Standards and Codes on the following topics, Banking Supervision, and Monetary and Financial Policy Transparency, December 2008 (IMF Country Report No. 08/371).
Table 1.

Tajikistan: Selected Economic Indicators, 2005-14

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

Private investment and savings are estimates. Investment includes changes in stocks.

2006 overall balance excludes the MDRI debt relief that is reflected in grants. PIP expenditure includes investment financed by loans from China.

Includes unidentified measures for 2009.

Starting from 2005, the export and import figures reflect the transition to tolling arrangement for aluminum exports. Therefore, the export and import figures are lower than earlier years.

Gross reserves are net of the pledged deposits of the NBT.

Excluding electricity, which is on barter basis, and imports related to projects financed with loans from China.

Table 2.

Tajikistan: General Government Operations, 2006-10

(In percent of GDP; unless otherwise indicated)

article image
Sources: Tajik authorities; and Fund staff estimates.

2006 grants figure includes the MDRI debt relief of 3.5 percent of GDP.

Includes unidentified measures for 2009.

Includes 140 million somoni lending to the cotton sector in 2008, and 170 million somoni in 2009 for agricultural sector.

2006 overall balance excludes the MDRI debt relief that is reflected in grants.

Table 3.

Tajikistan: General Government Operations, 2006-10

(In millions of somoni; unless otherwise indicated)

article image
Sources: Tajik authorities; and Fund staff estimates.

2006 grants figure includes the MDRI debt relief of 3.5 percent of GDP.

Includes unidentified measures for 2009.

Includes 140 million somoni lending to the cotton sector in 2008, and 170 million somoni in 2009 for agricultural sector.

2006 overall balance excludes the MDRI debt relief that is reflected in grants.

Table 4.

Tajikistan: Accounts of the National Bank of Tajikistan, 2006-10

(End-of-period stock; unless otherwise specified)

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

in 2008, claims on banks was adjusted upwards to reflect the retention of the pledged deposits.