Republic of Tajikistan: Debt Sustainability Analysis Under the Debt Sustainability Framework for Low-Income countries

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.

Based on the external low-income country (LIC) debt sustainability analysis (DSA), Tajikistan’s risk of debt distress remains high. 1 Under the baseline scenario, external debt burden indicators in present value terms remain below their respective thresholds, with the exception of the debt-to-exports ratio. The high level of concessionality of the external public and publicly guaranteed debt is a key factor underlying these projections. A decline in GDP and/or export growth rates, a shortfall in other inflows, or a sharp exchange rate depreciation relative to the baseline, all have the potential to undermine debt sustainability. Likewise, additional lending compared to the baseline, even at concessional terms, would undermine debt sustainability. The public DSA yields similar results in light of the current size and the projected evolution of the domestic debt stock. It also shows that a one-off increase in the government’s debt obligations, e.g. related to existing contingent liabilities, would push the debt-to-GDP ratio just above its respective threshold for the first six years, but would not put the country on an unsustainable debt path in the long run. In sum, the DSA suggests that there is little scope for additional borrowing compared to the baseline projections and underlines the need to carefully scrutinize individual investment projects to ensure that they will yield the intended growth dividends.

III. Background

1. Over the last 10 years, multilateral donors were the main creditors of Tajikistan. During 1996-2008, lending by multilaterals increased by almost six times in absolute value and reached 50 percent of Tajikistan’s external loan portfolio as of end-2008. A debt-for-equity swap with Russia significantly reduced Tajikistan’s debt burden.

2. Recent developments are marked by increased bilateral borrowing. Disbursement of loans from China increased the share of bilateral creditors in the last two years. Most of the increase in debt stock during 2008 was due to disbursement of loans from China ($277 million). At the same time, major multilaterals, the World Bank and Asian Development Bank, provided all new financing in the form of grants. As a result, the share of bilateral creditors increased from 35 percent to 47 percent, while multilaterals’ share in Tajikistan’s debt portfolio decreased from 61 percent to 50 percent at end-2008 (also reflecting early repayment to the IMF).

3. Domestic debt constitutes only a negligible part of public debt. This is mostly due to the fact that the general government budget ran continuous surpluses (excluding externally financed public investment program) in recent years. Domestic debt represents 3 percent of total public debt (end-2008) and mostly consists of non-tradable government securities held by the National Bank of Tajikistan (NBT).

4. The stock of publicly guaranteed debt has further increased. In addition to the guarantees issued by the NBT for cotton sector financing, the government issued three new guarantees in 2008: two for credits from the European Bank for Reconstruction and Development and one from the government of France. These credits, with total commitments of $29 million, are to be used for rehabilitation of water supply in Khujand province, solid waste management in the city of Dushanbe, and reconstruction of the Dushanbe airport.

5. New credit agreements of around $80 million were signed in 2008. These included credit agreements with France, the Islamic Development Bank, KfW, OPEC Fund, and the Saudi Development Fund, all on concessional terms. The government of Tajikistan has also signed a Memorandum of Understanding with Eximbank of China to extend a new credit in the amount of $100 million to finance road and energy projects. The terms of this loan are still being negotiated, but the authorities have committed to borrowing only on concessional terms.

6. The status of debt obligations to Pakistan is now clarified. This debt of $13 million was restructured in 2003. In May 2004, the Tajik authorities announced a verbal agreement with the Pakistani authorities, according to which the debt would be converted into a grant with a subsequent write-off of accumulated interest liabilities. Accordingly, the Ministry of Finance of Tajikistan removed the credit from debt register and discontinued its service. However, in 2008 the ministry of finance (MOF) reported the receipt of notification from the government of Pakistan, which requested debt service. Upon clarification from the government of Pakistan, the government of Tajikistan has allocated adequate funds in the 2009 budget for debt service according to the initial restructuring agreement.

IV. Underlying DSA Assumptions

7. The impact of the global economic slowdown clouds the economic outlook for Tajikistan over the coming two years consistent with current WEO projections. Thereafter, staff projects that Tajikistan would return to a high growth path under the baseline scenario:

  • Tajikistan’s underlying growth potential is in the range of 5-7 percent per annum, as suggested by past performance. However, on account of adverse external environment (slowdown of remittances, declining world market prices for tradables, etc.) growth is expected to be subdued in 2009-11.

  • The 2009-14 projections are based on a substantial depreciation of the real effective exchange rate, which should return the current account balance towards its equilibrium level of about 3 percent from around 9 percent in 2008.

  • Compared to past performance, medium- and long-term projections are based on conservative assumptions about non-debt creating flows such as foreign direct investment, remittances and official transfers (Table 1a).

  • Underlying assumption for the fiscal projections is that the government budget deficit (excluding Public Investment Program) will stay at about ½ percent of GDP. This seems feasible based on current spending plans and revenue projections.

Tajikistan: Macroeconomic Assumptions

Real GDP growth is projected at 2 percent in 2009, with gradual recovery in 2010 and 2011 (3 and 5 percent, respectively) and in the range of 6 to 7 percent during 2012-14 (when large infrastructure projects are completed) with some slowdown throughout 2028 (to 5 percent). These figures are significantly below their 10-year historical average of 8 percent (1998-2008). The GDP deflator is expected to decline from a projected 19 percent (2009) to 6 percent by 2015—reflecting progress toward a low-inflation environment—and remain at the level of 6 percent through 2028.

Export of goods and services is expected to decline due to a deteriorating external environment. A return to the previous growth path is expected in 2010, reflecting expansion in nontraditional agriculture sectors and a rebounding external demand. An average growth rate of about 9 percent is projected for 2010-28 as the economy is expected to expand following investment in the energy sector and progress with structural reforms.

Current account is expected to deteriorate in 2009, largely reflecting a decline in remittances and exports. Starting 2010 and onward, the current account should improve, following a depreciation of the REER and a recovery in remittances, although the role of the latter is expected to diminish gradually. The reserve coverage of imports is projected to build up gradually to about five months by 2028.

Fiscal policy is assumed to aim for an overall balance (excluding the externally financed public investment program) over the medium term, after a modest deficit in 2009-11 on account of the growth slowdown.

External assistance and scaling up. Official external loan financing on concessional terms is estimated to reach its peak in 2009 (6.6 percent of GDP) and then decline to 3.5 percent by 2015 and gradually decline to 2.6 percent of GDP throughout 2028. After 2012, the DSA assumes that no new grants will be disbursed during the projected period.

Public domestic debt. It is assumed that the share of domestic public debt in total public debt will stay at the current level.

Real interest rates. For domestic debt, it is expected that real interest rate becomes positive starting 2013 and then averages 8 percent per annum for the remainder of the projection period.

8. The baseline scenario shows that Tajikistan remains at a high risk of debt distress. According to the latest three-year average of the World Bank’s CPIA rating (2006-08), Tajikistan’s policies and institutions are assessed as those corresponding to a “poor performer.”2 The table below provides the debt-burden thresholds for countries in this category.

Debt Burden Thresholds for countries with poor policy performance

article image

V. External DSA

A. Baseline

9. Under the baseline scenario, only one of Tajikistan’s external debt burden indicators, the PV of debt-to-exports ratio, is projected to breach policy-dependent thresholds (Figure 1 and Table 1a). In particular, by 2009, the debt-to-exports ratio will reach 141 percent, exceeding the threshold of 100 percent by a significant margin. This indicator is expected to deteriorate continuously throughout 2014; after that, it is projected to decrease gradually throughout 2028, however, continuously staying above the threshold.

Figure 1.
Figure 1.

Tajikistan: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2008-2028 1/

Citation: IMF Staff Country Reports 2009, 174; 10.5089/9781451837193.002.A002

Source: Staff projections and simulations.1/ The most extreme stress test is the test that yields the highest ratio in 2018. In figure b. it corresponds to a Non-debt flows shock; in c. to a Non-debt flows shock; in d. to a Non-debt flows shock; in e. to a Non-debt flows shock and in picture f. to a Non-debt flows shock2/ Higher bilateral borrowing assumes additional one percent of GDP in new loans annualy starting 2011.
Table 1a.

Tajikistan: External Debt Sustainability Framework, Baseline Scenario, 2005-28 1/

(In percent of GDP, unless otherwise indicated)

article image
Source: Staff simulations.

Includes both public and private sector external debt.

Derived as [r - g - r(1+g)]/(1+g+r+gr) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and r = 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 PV of private sector debt is equivalent to its face value.

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

Rate of change for exports in 2005 reflects the structural break in exports series due to a change in the treatment of aluminium exports in the BOP.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

10. External debt service ratios are expected to stay below their thresholds over the entire period. During the projected period, debt service payments continue to be manageable, with the assumption that all of Tajikistan’s external public and publicly guaranteed debt is contracted on concessional terms, albeit spiking during the years when principal payments on loans from China fall due.

B. Alternative Scenarios and Stress Tests

11. The historical scenario is based on averages from 1999 to 2007,3 and thus reflects a period of macroeconomic consolidation, some progress with structural reforms, and debt reduction. During 1999-2006, the current account deficit was relatively small—at below 3 percent of GDP, though it significantly increased during 2007-08 due to high import prices and increasing imports associated with implementation of large infrastructure projects. Therefore, under this scenario, all debt burden ratios—excluding the PV of debt-to-exports ratio—remain well below their threshold; these ratios also follow a downward trend throughout the projection period. The scenario illustrates the importance of preserving macroeconomic stability, progress with structural reforms and continued prudent debt management. This will be even more important in the period ahead, when external conditions may be less favorable.

12. A scenario with increased bilateral borrowing reflects an additional 1 percent of GDP of bilateral borrowing per annum to finance higher capital spending. This scenario shows a deterioration of all indicators compared to the baseline scenario. In particular, the PV of debt-to-exports and the PV of debt-to-GDP ratios breach relative policy thresholds. Under this scenario, the PV of debt-to-exports is expected to deteriorate continuously and peak at 327 percent in 2028. Similarly, the PV of debt-to-GDP ratio will deteriorate continuously breaching the threshold in 2018 and peaking at 39 percent in 2028. Remaining indicators are also expected to deteriorate (against baseline) but remain under their respective policy thresholds.

13. A high-investment low-growth scenario underscores the risk to debt sustainability if investment does not yield the expected strong growth (Table 1b). The scenario demonstrates that, starting in 2013, when growth is reduced by half due to lower than expected productivity of investments, all ratios deteriorate notably, with the ratio of the PV of debt-to-GDP approaching its respective threshold by the end of projection period. The ratio of the PV of debt-to-exports deteriorates even further.

Table 1b.

Tajikistan: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2008-28

(In percent)

article image
article image
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

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.

14. A relaxation of the authorities’ current prudent approach to contracting external debt only on concessional terms would lead to a deterioration of Tajikistan’s external debt indicators compared to the baseline scenario. If all new borrowing were to be contracted on less than concessional terms during the projection period, Tajikistan’s PV of debt-to-export ratio would rise substantially. Specifically, with the increase in the average interest rate on new disbursements by 2 percentage points, the PV of debt-to-GDP ratio would rise continuously and breach the threshold in 2025, and the PV of debt-to-exports ratio would increase from existing level and stay above the threshold.

15. Bound tests show that adverse macroeconomic shocks would also have a profound negative impact on Tajikistan’s external position. In the event of a combined shock (to real GDP growth, exports growth, FDI inflows), all ratios, except debt service-to-revenues, exceed the policy-dependent thresholds by a significant margin and almost all of them remain above the thresholds throughout the projection period.

VI. Public DSA

16. The results of the public sector DSA are very similar to those of the external DSA, given that public sector domestic debt is small. An important stress test in the public sector DSA models the impact of the government facing a contingent liability equal to 10 percent of GDP. This amount broadly corresponds to the expected possible recapitalization needs of the central bank and the fiscal costs of resolving the cotton debt problem (estimated at around $500 million). In this scenario, the PV of debt-to-GDP ratio will breach the threshold and stay above it during the six years following the assumption of such liabilities.

VII. Debt Distress Classification and Conclusions

17. Tajikistan’s risk of debt distress remains high, although its resilience to adverse shocks has improved compared to the findings of the 2007 DSA. The results of the alternative scenarios and stress tests indicate that the debt sustainability situation could further deteriorate with adverse macroeconomic shocks, borrowing on nonconcessional terms or incurring additional debt—even on concessional terms—and could become unsustainable if growth associated with high investment does not materialize. The DSA results thus underscore the need for the authorities to exercise extreme caution in incurring new debt and to carefully vet large-scale investment projects, to make sure that external resources are used productively. Sound macroeconomic policies and acceleration of structural reforms would also be essential for maintaining debt sustainability by strengthening Tajikistan’s growth potential and safeguarding external stability.

Figure 2.
Figure 2.

Tajikistan: Indicators of Public Debt Under Alternative Scenarios, 2008-2028 1/

Citation: IMF Staff Country Reports 2009, 174; 10.5089/9781451837193.002.A002

Sources: Country authorities; and Fund staff estimates and projections.1/ Contingent liability shock assumes an increase in debt by 10 percent of GDP.2/ Revenues are defined inclusive of grants.
Table 2a.

Tajikistan: Public Sector Debt Sustainability Framework, Baseline Scenario, 2008-28

(In percent of GDP, unless otherwise indicated)

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

General government gross debt.

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

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

Table 2b.

Tajikistan: Sensitivity Analysis for Key Indicators of Public Debt 2008-28

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

Assumes that real GDP growth is at baseline minus one standard deviation divided by the length of the projection period.

Revenues are defined inclusive of grants.

1

The DSA has been produced jointly by World Bank and IMF staff, in consultation with Asian Development Bank staff. It updates the last DSA of April 2007 presented in the IMF Staff Report for the 2006 Article IV Consultation. The fiscal year for Tajikistan is January 1-December 31.

2

Three-year average of CPIA ratings is used according to recently issued joint Bank-Fund Staff Guidance Note on the Application of the joint Bank-Fund Debt Sustainability Framework (October 2008). These guidelines aim at a less volatile assessment of risk than that based on a single latest CPIA rating.

3

For exports and non-interest current account only 2005-2007 historical averages were used due to a break in the export series which reflects a change in the treatment of exports of aluminum in the current account. For the rest of the variables, the usual 10-year historical average was applied.