Republic of Tajikistan
2011 Article IV Consultation, Fourth Review Under the Three-Year Arrangement Under the Extended Credit Facility, Request for Waiver of Nonobservance for Performance Criteria and Modification of Performance Criterion-Staff Report; Staff Supplements; and Public Information Notice on the Executive Board Discussion.

Tajikistan’s economic performance has been satisfactory, but challenges still remain. Executive Directors agreed that the challenge is to support recovery while addressing risks to macroeconomic stability. They emphasized for prudent monetary stance to avoid inflation and also to address vulnerabilities in the financial sector. Directors agreed that structural reforms should be given top priority. They welcomed progress in establishing a framework for agricultural financing. Directors commended plans to improve the business climate through a reform of the tax regime and improved transparency and accountability of state-owned enterprises.


Tajikistan’s economic performance has been satisfactory, but challenges still remain. Executive Directors agreed that the challenge is to support recovery while addressing risks to macroeconomic stability. They emphasized for prudent monetary stance to avoid inflation and also to address vulnerabilities in the financial sector. Directors agreed that structural reforms should be given top priority. They welcomed progress in establishing a framework for agricultural financing. Directors commended plans to improve the business climate through a reform of the tax regime and improved transparency and accountability of state-owned enterprises.

Executive Summary

Background: Tajikistan is emerging from the global crisis, with real GDP growth rising to 6.5 percent in 2010, up from 3.9 percent in 2009. A strong policy response, supported by a devaluation of the somoni, helped to facilitate adjustment, but a quick return to pre-crisis growth rates appears unlikely. The external balances improved markedly in 2010, but due to temporary factors. Inflation is now sharply on the rise, reaching nearly 10 percent by end-2010, and rising further thus far in 2011. Program performance is generally good but the continuous criterion on non-accumulation of new external payment arrears was not met. Staff proposes a waiver for nonobservance of this performance criterion.

Policy Challenges: Tajikistan’s principal economic challenge remains creating and sustaining levels of economic growth necessary to reduce poverty and unemployment, while also working within domestic and external resource constraints.

Key Recommendations:

  • Maintain a prudent monetary stance to avoid adding pressure to core inflation. Over the medium term, develop a cash transfer system to protect the poor during price shocks.

  • Address vulnerabilities in the financial sector, with a view to reducing the overhang of nonperforming loans, creating confidence in the banking system, and enabling higher levels of financial intermediation.

  • Shift to a post-crisis view of fiscal policy. Gradually reduce the fiscal deficit to allow for a rebuilding of fiscal buffers. Reform the tax policy regime to help build revenues, make space for priority social and infrastructure spending, and create a more conducive environment for private sector growth.

  • Continue work on agricultural reform, with a particular emphasis on creating a sustainable mechanism for agricultural finance.

  • Make further progress in development of domestic financial markets, starting with the domestic Treasury-bill (T-bill) market.

I. Overview: Recovery Gains Ground but Challenges Remain

A. Growth Returns, Inflation Rises

1. Economic activity has recovered, but a return to pre-crisis growth rates appears unlikely. Tajikistan registered real GDP growth of 6.5 percent in 2010, up from 3.9 percent in 2009. Stronger hydroelectricity production helped to boost industrial activity, while trade and services benefited from a recovery of inward remittance flows (reflecting Russia’s economic rebound). Construction also increased during the second half of the year. The upturn in GDP suggests that Tajikistan is emerging from the effects of the global crisis. However, a return to pre-crisis growth rates (which ranged as high as 10 percent during 2001–08) seems unlikely given that such growth was fueled in part by significant increases in remittances (based on large emigration) which may not be sustainable going forward.

2. Inflation remained in the low single digits through the first half of 2010, but began to rise thereafter in line with international commodity prices—particularly grain and flour. Headline inflation reached 9.8 percent by the end of the year, with food and fuel prices accounting for the bulk of the increase.1 Core inflation (excluding food and fuel) actually fell through the course of the year, but on an annual average basis was roughly steady compared with 2009. No second-round effects have yet emerged, as the authorities exercised restraint on increases in civil service wages and salaries in 2010.


Sector Contributions to GDP growth

(In percent)

Citation: IMF Staff Country Reports 2011, 130; 10.5089/9781455287659.002.A001



(Percentage Growth)

Citation: IMF Staff Country Reports 2011, 130; 10.5089/9781455287659.002.A001

3. Tajikistan remains one of the poorest countries in the region and lags behind in a range of social and governance indices. Real per capita GDP has only recently regained the ground lost during the civil war, rising to a level (in PPP terms) comparable with such countries as Gambia and Senegal. The UNDP’s Human Development Index, ranks Tajikistan closer to such countries as Syria, Vietnam, and Morocco. However, Transparency International ranks Tajikistan in the bottom seventh of the countries surveyed with respect to corruption, and the overall rating has changed little over the past five years. Tajikistan ranked 139 (of 183 countries) on the 2011 World Bank Doing Business indicators—gaining 10 places in 2010 due to improvement in ease of starting business and investor protection. Tajikistan has also gained some ground on EBRD transition indicators. However, much remains to be done, particularly in competition policy, securities market development, enterprise restructuring, bank reform, privatization, and infrastructure reform. Tajikistan’s anti-money laundering and combating the financing of terrorism (AML/CFT) framework is weak. A draft AML/CFT law was presented to parliament in December 2010, based on technical assistance from the World Bank. However, the 2010 Voluntary Tax Compliance (VTC) program has the potential to increase the risk of money laundering.


Tajikistan – Real per capita GDP and PPP GDP, 1992-2010

Citation: IMF Staff Country Reports 2011, 130; 10.5089/9781455287659.002.A001

Source: WEO

Average EBRD Transition Indicators, 2008 and 2010 Maximum=4

Citation: IMF Staff Country Reports 2011, 130; 10.5089/9781455287659.002.A001

B. External Accounts—Temporary Shift to Surplus

4. The external accounts have strengthened, but the improvement is expected to be temporary. The external current account shifted to a surplus of 2.2 percent of GDP in 2010, compared with an average 5 percent deficit during 2005–09. Remittances recovered by nearly 29 percent, equivalent to a rise of almost 5 percent of GDP. Despite the pick-up in remittances (which usually entail higher imports) the trade balance improved. The lagged impact of real exchange rate depreciation, disruptions to rail transit in the first part of 2010, and a slowdown in external loan disbursements for the public investment program (PIP) underpinned this shift. The latter two factors are temporary and expected to reverse in 2011. Adverse terms-of-trade shocks from higher food prices and the full-year impact of Russian export duties on fuel are likely to be only partially offset by higher cotton prices. On balance, risks to the external accounts in the near- and medium-term are likely to be on the downside.

5. The somoni remained steady against the U.S. dollar in nominal terms, but the real effective exchange rate appreciated by 5.5 percent in the 12 months to December 2010. Analysis suggests the somoni may be modestly overvalued from a medium-term perspective, highlighting the need for further exchange rate flexibility (see Box 1).

C. Financial Sector—Post-Crisis Problems Remain

6. Some financial soundness indicators have improved, but frailties in key banks remain. Private sector credit (excluding activities related to the write-off of loans held by Kredit Invest as part of the cotton sector debt resolution) recovered through the course of the year. Financial soundness indicators have also improved but remain a concern. Classified loans2 have declined, but the extent to which this reflects a lasting improvement is uncertain.3 The two largest banks continue to account for the lion’s share of classified loans. These banks are most closely associated with agricultural and state-owned enterprises (SOE) financing, and are also the two banks most often in violation of established prudential criteria. Profitability turned positive in the fourth quarter, but remains minimal. Recent gains appear fragile, and linked to restructuring of assets rather than an underlying improvement in profitability (see Box 2).

D. Policy Stance

7. The authorities generally maintained fiscal discipline. The overall fiscal deficit (excluding the externally financed PIP) in 2010 was 0.4 percent of GDP, compared with a budgeted deficit of 1 percent of GDP. Tax revenues suffered in the first half of the year as rail blockades impacted VAT on imports, but recovered during the second half of 2010 and ended the year in line with the indicative target under the ECF-supported program. The authorities also increased nontax revenues in an effort to keep pace with tax shortfalls in the first half of the year. Capital spending was higher than expected by about 0.75 percent of GDP—including domestically financed capital expenditures.4 Current spending, on the other hand, was about 1 percent of GDP less than expected. This was due in large part to a decision to limit the increase in civil service wages and salaries to 10 percent rather than the envisioned 15 percent, and not to fill a number of government posts.

8. Monetary policy was accommodative for most of 2010, but began responding to inflation late in the year. Reserve and broad money grew by 15.8 and 26.2 percent, respectively, in 2010. Higher-than-expected growth in net foreign assets was not fully compensated by a lower-than-expected increase in net domestic assets (reflecting the small fiscal deficit and a year-end drive to reduce the outstanding balance of liquidity loans to commercial banks). Policy rates were increased by 25 bps in October 2010, and by another 75 bps in March 2011. At the same time, however, liquidity support from the NBT to commercial banks started to rise sharply in the second half of 2010 and into 2011. NBT liquidity loans rose from SM 78 million at end-June 2010 to SM 265 million (1 percent of GDP) by September 2010. While this was reduced to SM 186 million by end-year,5 liquidity loans jumped to over SM 400 million (about 1.3 percent of GDP) in January 2011. Part of this increase is related to import of food and fuel products for strategic reserves, but was otherwise mirrored in rising private sector credit, suggesting that some portion of the liquidity support was on-lent.


Credit Growth

(12-monthchange, in percent)

Citation: IMF Staff Country Reports 2011, 130; 10.5089/9781455287659.002.A001

1/ As part of cotton debt resolution, KI loans write-off began in 2010, affecting in turn credit indicators.

Exchange Rate Developments

Citation: IMF Staff Country Reports 2011, 130; 10.5089/9781455287659.002.A001


NBT Liquidity Lending, 2010–11

(Somoni, thousand)

Citation: IMF Staff Country Reports 2011, 130; 10.5089/9781455287659.002.A001


Asset Side of Broad Money

(y/y, in percent)

Citation: IMF Staff Country Reports 2011, 130; 10.5089/9781455287659.002.A001

Tajikistan: Exchange Rate Analysis

Preliminary analysis based on the three CGER methodologies suggests some modest overvaluation of the somoni, in the range of 3 to 15 percent. The current level of the real effective exchange rate would become overvalued in light of the anticipated balance of payments pressures that would likely emerge in the wake of projected adverse external developments (such as the expected sharp decline in cotton prices in 2012 and increase in international food and fuel prices, based on WEO projections). Staff considers that this overvaluation is temporary, given the authorities’ commitment to a flexible exchange rate policy, and history of allowing the somoni to adjust in the face of persistent shocks (such as the substantial depreciation undertaken during the global economic crisis). Given the heavy concentration of exports in cotton and aluminium, the impact on competitiveness is seen as negligible.

Tajikistan: Methodologies to Assess Real Exchange Rate Misalignment 1/

article image
Source: WEO, and IMF staff estimates.

Based on CGER methodologies (SM/06/283).

The macroeconomic balance approach and the external sustainability approach define misalignment as the exchange rate adjustment needed to eliminate the gap between an estimated “current account norm” and the “underlying” current account balance based on 2016 WEO projections.

This approach defines misalignment as the change in the real exchange rate required to eliminate the gap between actual REER and the estimated values from the regression of the equilibrium exchange rate based on current fundamentals.


Tajikistan used exchange rate flexibility in responding to the crisis.

Citation: IMF Staff Country Reports 2011, 130; 10.5089/9781455287659.002.A001

Note. The EMPI combines movements in the exchange rate and international reserves. Negative (positive) values suggest downward (upward) pressure on the exchange rate, to which countries could respond by either letting the exchange rate depreciate (appreciate) or by selling (accumulating) reserves. The index is the weighted average of quarterly changes in foreign reserves and quarterly changes in nominal bilateral exchange rates, using the inverse of their standard deviations as weights. Changes in foreign reserves are normalized on base money.

Tajikistan: Financial Sector Developments

The banking system continues to show signs of weakness despite a modest decline in classified assets. This mainly reflects the exposure of the two largest banks to the cotton and state enterprise sectors. Stress tests point to a degree of resilience at the system level, but capital positions should be strengthened, risk management and accounting practices improved, and dependence on liquidity support from the NBT eliminated.

From a systemic perspective, bank profitability is low, and classified loans remain a concern. After turning negative in mid-2010, commercial banks’ returns on equity and assets improved modestly—registering 0.8 and 3.8 percent, respectively, in the fourth quarter. Total system capital has followed a similar pattern, contracting during the third quarter and recording a slight recovery late in the year. Both capital and profitability have benefitted from a reduction in classified assets and the associated decline in provisioning. Classified loans declined to 17.2 percent of total loans by the end of 2010 from a peak of 28 percent in the first quarter. However, almost all of this improvement reflects recent restructuring efforts at a few banks, including a reclassification of the terms related to a sizeable directed loan portfolio held by Agroinvest Bank (AIB).


Asset Quality Classified Loans

Citation: IMF Staff Country Reports 2011, 130; 10.5089/9781455287659.002.A001

1/ Includes loans 1 and more days overdue.2/ Includes loans 30 and more days overdue.


(In percent)

Citation: IMF Staff Country Reports 2011, 130; 10.5089/9781455287659.002.A001

The weakness in the system’s financial soundness measures is attributable largely to the deterioration of the balance sheets of the two largest banks. Orien Bank (OB) and AIB account for nearly 60 percent of system assets and hold the majority of classified loans, which dropped from 67 percent of total loans in September to 60 percent by end-2010. Despite this improvement, these banks’ exposure to problematic sectors is significant and poses ongoing challenges to their capital positions. The recent write-back of provisioning has improved CARs for OB (adjusted for government cotton debt) and AIB to 20 percent each (from 19.3 and 13 percent previously), but this may only prove temporary given their loan concentration.

Banks have been increasingly dependent on NBT liquidity loans to meet their funding needs. This mitigates banks’ incentives to enhance capital buffers, implement stricter risk management and accounting practices, and engage in interbank markets. Outstanding liquidity loans at end-January 2011 amounted to over SM 465 million, with OB and AIB accounting for the majority. While the banking system’s liquid assets remain below pre-crisis levels, current borrowing appears inconsistent with historical liquidity needs, and reinforces balance sheet risks to both banks and the NBT.

The financial system remains vulnerable to future shocks. Stress tests indicate that credit risks to capital adequacy are non-negligible, particularly when large exposure loans migrate into doubtful categories. Under such assumptions, the system’s CAR declines by 8.5 percent to 15 percent, while an increase in the deposit rate of 4 percent translates into a decline of 8 percent in the CAR. Liquidity risks do not appear to be significant, but a depreciation of the exchange rate would negatively affect system capital given heavy financial dollarization.

The NBT should undertake urgent steps to strengthen the financial sector and reduce its dependence on liquidity support. In particular, system capital requirements should be raised, collateral strictly enforced, governance frameworks enhanced, and the terms of liquidity support brought in line with market trends. In addition, T-bills issued to banks as part of the cotton debt resolution should be reissued on market terms.

II. Medium-Term Outlook

9. The nascent recovery provides grounds for optimism, but significant challenges remain in the post-crisis environment. The economy remains relatively undiversified and dependent on external financial flows—especially remittances. High pre-crisis growth rates were enabled by large-scale emigration and an associated sixteen-fold increase in remittances as a share of GDP during 2001–-08, which in turn fueled an increase in trade and services activity, as well as higher levels of construction. Significant investment in agriculture (including cotton) also contributed to high levels of economic growth, and may do so in the future, depending on continued progress in land reform and establishing sustainable mechanisms for agricultural financing.

10. On balance, future growth may be lower than during the boom years, but more sustainable, and will depend on a mix of policies to address existing vulnerabilities, ensure macroeconomic stability, and boost market orientation. The authorities’ medium-term strategy is embodied in the National Development Strategy and the Poverty Reduction strategy (PRS) for 2010–12. The economic development pillar of the PRS (which complements the strategy for health, education, and food security) emphasizes (i) development of Tajikistan’s comparative advantage in hydroelectricity production; (ii) agricultural diversification; and (iii) creating a more conducive environment for private sector activity and investment—including reforms in land and property rights, state enterprise management, removing regulatory barriers to trade and investment, and boosting financial intermediation and access to credit. Consistent with these objectives, public investment is expected to remain strong (albeit declining from recent peaks in line with a relatively conservative projection for external financing over the medium term as spending on Roghun tapers off) and private investment is projected to rise steadily.

11. Tajikistan remains at a high level of debt distress under the joint Bank-Fund Debt Sustainability Framework (see Appendix). While the level of external debt is not high by international comparison and domestic debt remains small, Tajikistan’s low level of institutional capacity and vulnerability to external shocks translates into a larger potential for debt distress. However, notably, the projected prolonged breaches of debt sustainability thresholds under the baseline scenario and under stress tests do not incorporate remittances in the debt sustainability assessment. If remittances (currently in excess of 30 percent of GDP) were included in the analysis, Tajikistan’s risk of debt distress would likely be lower.

III. Policy Discussions

12. Against this backdrop, the policy discussions focused on (i) the recent rise in inflation and the government’s policy response; (ii) addressing vulnerabilities in the financial sector; and (iii) shifting to a post-crisis fiscal stance, while ensuring sufficient space for critical social and infrastructure spending.

A. Coping with Price Shocks

13. Rising inflation is likely to be a central policy challenge in the near and medium term, particularly if the shock to food and fuel prices is sustained. Food imports make up about 20 percent of Tajikistan’s total import bill (about 8 percent of GDP), and food and fuel together make up just over 60 percent of the CPI basket. The bulk of Tajikistan’s wheat and flour come from Kazakhstan, but prices are sensitive to international commodity market fluctuations, and the price increase following Russia’s export ban have been clearly visible in the food component of Tajikistan’s CPI.

14. The government’s response to recent price shocks has been mainly through administrative measures. In late 2010 and early 2011, the government imported and sold food products from strategic reserves in an effort to ensure adequate supply to the market and curb any speculative pressures. Government agencies (such as the Antimonopoly Agency) have been charged with monitoring prices in an attempt to curb any “artificial” rise in the prices of essential goods. The government has also sought relief from the recent increase in fuel export duties imposed by Russia, and is considering measures to foster agricultural diversification and ensure a robust supply response to the shift in relative prices.6 The decision to restrict the increase in public sector wages and salaries, while motivated primarily by budget concerns, is also likely to have mitigated the risk of second round inflation effects.

15. Monetary policy in this context will need to find a balance between supporting the recovery and minimizing second round effects of the food and fuel price increases. While core inflation has been subdued, headline inflation increased to 12 percent in February 2011, adding to the risks posed by the pickup in money growth. The recent 75 basis point increase in the policy rate to 9 percent is welcome, but in the absence of an active interbank market the interest rate channel of monetary policy remains relatively weak. More stringent terms on liquidity loans7 should provide greater traction for containing reserve money growth to levels consistent with the objective of mitigating upward pressure on core inflation. In particular, increasing the interest rate for liquidity lending to prevailing market levels and restricting the use of this facility to emergency purposes should help to reduce banks’ dependence on the NBT, and contain reserve money.

16. Over the medium term, a framework for direct support to the poor in the event of shocks is needed. Cash transfer mechanisms now in place apply only to (i) selected consumers of electricity and gas; and (ii) low income households to encourage school enrollment. The amounts involved in these two schemes are small, and neither has the potential for rapid scaling-up. The World Bank is engaged in preparing a project to help develop a more effective system of social assistance. A pilot of consolidated social assistance is underway in two local districts to test a proxy-means-based methodology to identify beneficiaries. However, given the time necessary to establish a database of beneficiaries and set up the infrastructure for transfers, it will likely be two-three years before a system is in place.

B. Financial Sector—Vulnerabilities and Policies

17. Directed lending, regulatory forbearance, and exposure to weak or volatile sectors have left a legacy of low banking sector profitability and a large stock of classified loans. The small size of the financial sector and limited financial intermediation suggest the systemic risk of a bank failure to economic activity is relatively low. The narrow composition of deposits also suggests that bank runs in the classic sense are unlikely, and that the impact of a bank failure would not fall primarily on the poor.8 However, standardized stress tests also indicate vulnerability of capital adequacy to a range of shocks. Given the limited capacity of the deposit insurance scheme, and the net-negative position of the NBT, absorbing potential financial system losses could fall to the budget. Further, low levels of financial intermediation are a drag on prospects for future economic growth.

Tajikistan: Cross Country Comparison of Financial Intermediation

article image

Sum of net foreign assets of banks, credit to the government by banks, credit to the private sector, and other items net.

Sources: IFS, WEO, Country desks, and authorities.

18. The authorities recognize the need for financial sector reform. They pointed out that financial sector indicators had improved steadily over the year, and that (due largely to high prices and investor interest) no additional bank financing for the cotton sector was needed for 2010. They agreed on the need for a reform strategy that would address, in sequence: (i) regulation; (ii) accounting; (iii) revaluation of asset positions; and (iv) on the basis of the preceding steps, a reassessment of banks’ position relative to prudential criteria, including capital adequacy. Work in this area has already begun, based on a vulnerability assessment conducted by the World Bank, and will be further facilitated by donor-funded strategic advisors. In line with a structural benchmark for end-March 2011, banks not in compliance with established prudential criteria have also submitted time-bound actions plans to become fully compliant with these standards. A role for Fund technical assistance may be needed as the work progresses. A sustainable mechanism for agricultural financing will also be needed to ensure that the banking system and the state budget are protected going forward (see Box 6).

C. Maintaining Fiscal and Debt Sustainability

19. Counter-cyclical fiscal policies in 2009–10 allowed for tax cuts, additional expenditures, and an expansion of the fiscal deficit beyond historical norms. The overall deficit, including the foreign-financed PIP, averaged nearly 5 percent per year during 2008–10, putting external debt on a rising trend. While the narrower deficit, excluding the foreign financed PIP, has not been large by international comparison, it poses a potential risk going forward given (i) the lack of international market access and the near absence of a domestic debt market; (ii) a limited cushion of government deposits at the NBT; and (iii) an increase in recurrent expenditures (partly associated with social spending), without similar gains in tax revenue (see Boxes 3 and 4). In addition, high external debt (and a high risk of debt distress under the DSA framework), as well as potential contingent liabilities in state enterprises (see Box 5) and the financial sector9 suggest the need for careful fiscal management, rebuilding buffers, and leaving room for maneuver in the event of negative shocks. Particular emphasis is needed on improving the efficiency of tax collection and a review of tax policy.

20. Fiscal consolidation will therefore be needed over the medium term. The fiscal stance envisioned for 2011 (a deficit of 1 percent of GDP) seeks to balance support for anti-inflationary monetary policies and addressing social pressures, including from higher food prices. Looking ahead, however, some consolidation (at least to a balanced budget, excluding the PIP) will be needed to meet both external and internal resource constraints. In the absence of additional budget support from donors, continuing deficits of up to 1 percent of GDP, as implied under the government’s medium-term expenditure framework (MTEF) may not be feasible given a declining buffer of government deposits in the banking system and a very shallow domestic debt market (see Boxes 3 and 4). At the same time, incurring additional external debt to finance government spending (even if available) would add further pressure to debt dynamics. Tajikistan can ill afford such debt given its already high risk of debt distress.

21. The authorities accepted the need for prudent fiscal management, as well as the need to rebuild some fiscal buffers. But they also highlighted pressing social expenditure needs (a point also emphasized by donors), and the comparatively low level of spending in this area compared with other countries in the region. They also emphasized investment spending on Tajikistan’s relatively underdeveloped physical infrastructure (particularly hydroelectricity, which is a key element under the poverty reduction strategy) as central to ensuring levels of economic growth sufficient to address poverty and unemployment.10 Staff highlighted the need to raise tax revenue to its full potential and the desirability of additional grant financing to create room for higher spending in these priority areas.

Tajikistan: Medium-Term Fiscal Sustainability

With the economy now recovering, Tajikistan needs to moderate or eliminate budget deficits to maintain fiscal sustainability and rebuild buffers. A countercyclical fiscal response to the global crisis starting in 2009 led to budget deficits and a drawdown of government deposits accumulated in previous surplus years. Particularly in light of expected increases in external debt service, fiscal consolidation will be required to maintain debt sustainability going forward.

The government’s Medium-Term Expenditure Framework (MTEF) for 2011–13 has yet to reflect constraints imposed by the need to maintain fiscal sustainability. A sustainable fiscal framework for Tajikistan needs to satisfy two constraints—the first imposed by external debt sustainability (see DSA), and the second by a realistic ceiling on domestic financing. Under staff’s conservative revenue and grant projections, the authorities’ MTEF-based expenditure levels could result in fiscal gaps (as much as 1 percent of GDP by 2013), which would be difficult to fill from domestic sources given (i) limited appetite for domestic debt; and (ii) the likely depletion of government deposits in the banking system by 2013. External financing to fill these gaps, even if available, would bring public debt above the targeted ceiling of 40 percent of GDP, and extend significantly the breach of debt sustainability thresholds over the long term in the event of most adverse shocks.


Potential Fiscal Gap Under Authorities’ MTEF

Citation: IMF Staff Country Reports 2011, 130; 10.5089/9781455287659.002.A001

Revenue and expenditure measures together with financial market development will be needed for medium-term sustainability. On the revenue side the staff’s adjustment scenario targets an increase in the efficiency of tax collection, a decrease in tax exemptions, and an overhaul of tax policy (with IMF technical assistance)—leading conservatively to a revenue increase of perhaps 0.5 to 1 percentage point of GDP over the medium term. Remaining adjustment should come from expenditure compression after taking into account the potential for increases in domestic financing. Staff estimates the capacity of the banking system to absorb new government debt to be in the range of 0.5–0.8 percent of GDP per year in 2011–16. Allowing for substantial investment spending, a sustainable fiscal path would imply on average a balanced budget in the medium term.

Notably, the proposed fiscal path (while sustainable in a normative scenario) leaves little room for dealing either with new external shocks or quasi-fiscal risks from the state enterprise and financial sectors. A more aggressive path for revenue improvement, a less ambitious (but hopefully well targeted) path for investment spending, or additional grant resources from donors would be necessary to establish a cushion for such shocks. In this context, the path proposed above is a minimal adjustment, and a more aggressive approach consistent with rebuilding fiscal buffers would entail a return to small fiscal surpluses over the medium term.

Tajikistan: Financial Market Developments

Financial markets in Tajikistan are embryonic. Liquidity in all markets (money, bond, stock, and foreign exchange) is low, secondary markets have yet to emerge, and interbank lending is minimal. To deepen financial markets, the issuance of T-bills should be properly integrated in the process of public debt management. To help create an active interbank market, the structural weaknesses in commercial banks should be addressed and the NBT should only lend to banks for emergency liquidity reasons.

The money market is the only active securities market in Tajikistan. NBT Depository Certificates (CDs) and government T-bills are the only instruments. CDs are issued twice a week—with 14 and 28 day maturities—and monthly with a 56 day maturity. Total issuance is usually small—about SM 153 million (0.6 percent of GDP) and mainly for monetary management. With IMF technical assistance, T-bill auctions were started in 2009. Some SM 53 million were issued in 2010—all with a maturity of 91 days and an average interest rate of 7 percent. The auction process is improving, and bid-to-cover ratios have risen steadily. However, the issuance of T-bills has yet to be integrated with budget financing needs. The Ministry of Finance also issued bonds to commercial banks as part of the cotton debt resolution, but on nonmarket terms (8 year maturity and 2 percent interest). The legal framework for a stock market exists and the stock exchange resides theoretically in the NBT, but no active trading takes place.


Auction Results of NBT CDs

Citation: IMF Staff Country Reports 2011, 130; 10.5089/9781455287659.002.A001

Source: NBT

Auction Results Treasury Bills

Citation: IMF Staff Country Reports 2011, 130; 10.5089/9781455287659.002.A001

Source: NBT

Trading in currency markets takes place mainly in U.S. dollar, Russian Ruble, and Euro. The NBT provides foreign exchange to the commercial banks through spot trading and liquidity loans in dollars and Rubles upon availability. Currencies are also traded in the interbank market and by foreign exchange traders on the street market. The highest volume of trade occurs in U.S. dollars ($6.8 million in 2010) as the economy remains highly dollarized. Second comes the Russian Ruble, reflecting the main source of remittances. The NBT restricts banks’ open currency positions to a small proportion of their capital such that larger transactions often cannot be accommodated by market participants.

The efficiency of financial markets in Tajikistan could be improved by several measures. A proper integration of T-bill auctions in the process of public debt management and budget financing would increase the reliability of the auctions, their liquidity, and size. To avoid fragmenting the market, higher demand would be an important precondition for lengthening maturities and development of a proper yield curve. A liquid primary T-bill market could be a catalyst for secondary market trading and, when used as collateral, for a more active interbank market. The interbank market has also been constrained by a lack of confidence in the repayment capabilities of counterparties. A stronger, more effective supervisory role by the NBT and actions to address underlying vulnerabilities in commercial banks is needed to address this constraint. Additionally, the banking system needs to be weaned from the ample and relatively inexpensive liquidity available through the NBT. Beyond the increase in liquidity loan rates, future measures could potentially include introduction of a standing overnight facility for emergency liquidity.

IV. Program Review and Policies for 2011

22. Performance under the program has generally been good. All but one of the quantitative performance criteria for end-December 2010 were met. The exception was with respect to the continuous criterion on accumulation of new external payment arrears.

23. In the context of the discussions on the fourth review, staff received data indicating that arrears were accumulated in 2010 on two external loans with government guarantees.

  • In the first case, external payment arrears accumulated on two scheduled payments from a Tajik textile company to a German bank of Euro 86,685 and Euro 83,272 in January and July 2010, respectively, and reached a maximum of Euro 103,032 (equivalent to US$148,428 at program exchange rates) during the course of the year. All payment arrears were cleared by end-August 2010, and penalty interest was cleared by end-December 2010.

  • In the second case, the City of Dushanbe entered into a loan agreement in July 2008 with the European Bank for Reconstruction and Development (EBRD), guaranteed by the central government. On October 26, 2010, the EBRD presented the City of Dushanbe with the Billing Advice for US$43,426 which consisted of US$216 in loan interest and US$43,210 in a commitment charge, payable on November 15, 2010. The authorities have indicated that the City of Dushanbe paid the amount of $43,426 on January 17, 2011—two months after the date due.

24. Following interdepartmental consultations, staff has concluded that the arrears are so small as to be trivial, with no material impact on debt sustainability. As such, staff supports the granting of a waiver for the nonobservance of the continuous performance criterion on non-accumulation of external payments arrears. Importantly, the discovery of the arrears has prompted a range of remedial actions by the authorities. To prevent recurrence of new arrears on the textile company loan, the Ministry of Finance is drafting a supplementary guarantee agreement introducing a penalty interest that would be paid to the government if the loan falls in arrears. The government has also requested a Debt Management Performance Assessment (DEMPA) from the World Bank, and has reaffirmed that issuance of such guarantees will continue to be restricted.1112

25. Two of the indicative targets (IT) under the program were also missed:

  • Social spending. The authorities maintain that budgetary targets on health and education spending were met. With respect to the IT under the program, however, spending was less than targeted due to a decision to limit the increase in public sector wages and salaries, and a decision not to fill a number of vacancies. The mission emphasized the importance of meeting social spending targets—particularly given the relatively low (on a cross country basis) level of spending in this area, and noted that there was sufficient room under the program to meet the target but that priority had been given to capital spending.

  • NBT liquidity lending. While a significant portion of new liquidity lending was related to the import of strategic food and fuel products, the rapid increase and impact on reserve money posed the risk of additional pressures on inflation, the exchange rate, and the NBT balance sheet.13 To address these risks, staff and the authorities reached understandings on the following steps: (i) resetting the indicative targets for 2011 in line with the revised macroeconomic framework and with a view to substantially reducing NBT liquidity loans; (ii) restructuring the IT for liquidity support from an end-quarter basis to a three-month average to address the issue of intra-test date volatility; and (iii) changing the terms of these loans to reduce their attractiveness and better assure that they are used for short-term liquidity management.

26. Changes to the macroeconomic framework require one proposed revision to the performance criterion for net domestic assets for end-June 2011 and end-December 2011. The monetary framework was adjusted to accommodate a higher level of real GDP growth and inflation in 2010 and 2011. In this context, the authorities are requesting an upward revision to the target for net domestic assets for end-June 2011 and end-December 2011. Even with this upward revision, monetary policy remains moderately restrictive and consistent with the objective of mitigating second-round effects from the ongoing food and fuel shock.

27. Structural measures for the fourth review were met with slight delays. Audited NBT financial statements through December 2009 were published on the NBT’s website in September 2010, as envisioned. A revised NBT law and draft bankruptcy law for credit institutions were submitted to parliament in the first week of January 2011 (just after the end-December 2010 deadline). Importantly, the Roghun OJSC has continued to publish on the Ministry of Finance website quarterly reports on sources and uses of funds, along with other operational data. Plans are also proceeding for a general shareholders’ meeting in the first half of 2011 (a commitment under the MEFP).

28. The attached LOI and TMU update the government’s policies and commitments for 2011. The authorities have encountered technical difficulties in meeting one benchmark (publication of an audit of Roghun OJSC, slated for end-February 2011), and are requesting to have this shifted to end-June 2011.14 Staff and the authorities came to an understanding on publication of audited financial statements for Talco Management by end-June 2011, which is significant step forward in transparency. Understandings were also reached on a structural benchmark for NBT Board approval by end-June 2011 of a reform strategy to maintain financial sector stability. This should serve as an anchor for addressing vulnerabilities and transparency issues in the financial sector as well as a framework for structuring technical assistance from the IMF and other sources. In the revised TMU, a new program exchange rate (based on the end-2010 rate) is being proposed, as well as a new definition for the indicative target on NBT liquidity loans, and (recognizing capacity constraints) a grace period in the definition of external payments arrears.

29. Risks to the program stem from the potential for new exogenous shocks and from the many challenges involved in the transition to a more market based economy. As a landlocked economy with a heavy dependence on food and fuel imports, a reliance on inward remittances, and a relatively narrow export base, Tajikistan’s external position and growth prospects are vulnerable to shocks from different directions. Vulnerabilities in the financial and state enterprise sectors also remain, and could represent a quasi-fiscal liability should efforts to reform these institutions be delayed or watered-down. Critical in this regard will be the commitment from the government to refrain from directed lending and to make room for supervisory authorities to take corrective actions, when necessary.

V. Staff Appraisal

30. The economic recovery in Tajikistan is taking hold, and the medium-term outlook has promise, but challenges remain. Facilitated by a regional economic rebound, rising aluminum prices, agricultural diversification, favorable climatic conditions, and counter-cyclical fiscal policies, economic growth is rising. A return to the pre-crisis boom years is unlikely, but there is room for optimism that Tajikistan can generate sufficient rates of economic growth to make progress in reducing widespread poverty and unemployment. Careful macroeconomic management, rebuilding fiscal buffers, a comprehensive effort to address financial sector vulnerabilities, and a commitment to market-oriented reforms, including in the areas of governance and transparency, will be key.

31. The shift to a post-crisis environment suggests the need for a fresh look at medium-term fiscal objectives. The government’s medium-term fiscal policy is appropriately anchored in the National Development Strategy and the Poverty Reduction Strategy, and the fiscal framework for 2011 remains broadly appropriate. However, as the crisis recedes, consolidation will be needed to ensure medium-term fiscal and debt sustainability. Particularly in light of expected increases in external debt service, a steady reduction of deficits will be required to maintain debt sustainability going forward. The staff recommends a combination of (i) continued progress on improving tax administration; (ii) a review of tax policy with a view to simplifying the tax regime, expanding the tax base, and facilitating an increase in tax revenue; (iii) continued development of the domestic debt market; and (iv) maintaining a careful balance between current and capital expenditures in order to simultaneously meet resource constraints while meeting social and developmental objectives outlined in the poverty reduction strategy.

32. The staff recognizes the potential impact of recent inflation on the poor. It supports the authorities’ proactive approach in trying to mitigate this impact, but emphasized the need to ensure transparency and avoid long-term fiscal costs. In the absence of adequate social safety nets, the authorities had little alternative but to resort to temporary administrative measures. Staff considers, however, that further operations to procure food and fuel for strategic reserves should be carried out as a fiscal operation rather than through the banking system, and that blanket subsidies should be avoided. Looking ahead, a more effective means of providing direct and targeted assistance to the poor is needed and the authorities are encouraged to cooperate closely with the World Bank to develop such a system.

33. Monetary policy needs to focus on containing inflation. Liquidity lending has surged to levels beyond what would be expected for banks’ emergency liquidity needs. The associated excessive growth in reserve money could potentially put upward pressure on core inflation and downward pressure on the somoni if maintained over the course of the year. Substantial short-term depreciation pressures would be a particular concern for financial sector stability, given the high degree of dollarization. The risk of nonrepayment to the NBT is also non-negligible. Staff urges a reduction of liquidity lending in line with a path for net domestic assets and reserve money consistent with macroeconomic stability.

34. Exchange rate policy needs to take into account the potential for fundamental shifts in the terms of trade. The continued rise in food and fuel prices, coupled with a sharp projected downturn in cotton prices suggest the somoni may be overvalued on a medium-term perspective. As such, staff urges the authorities to take a flexible approach to exchange rate management. While intervention may be necessary to smooth excess volatility, the NBT should not resist fundamental shifts in the supply and demand for foreign exchange, but allow the somoni to move in line with these forces to facilitate external adjustment and protect the limited stock of foreign exchange reserves.

35. A comprehensive and well-sequenced effort is needed to address financial sector vulnerabilities. Failure to address structural weaknesses in the financial system could evolve into fiscal liabilities, particularly in the event of external shocks. Key actions should include: (i) an end to directed lending; (ii) a uniform classification of NPLs, together with tighter standards on reclassification; (iii) a requirement for banks to fully provision for the uncollateralized portion of NPLs; and (iv) a reevaluation of banks’ capital adequacy and a requirement for capital infusions to ensure banks meet minimum capital adequacy requirements. From the government side, a reissuance of government bonds placed with the banks to compensate for cotton loans at market rates would be an important near-term step to improving banks’ balance sheets and easing liquidity constraints.

36. A self-sustaining mechanism for agricultural financing should be a central objective. Considerable progress has been made in this area in recent years through the freedom to farm act, and the establishment of such initiatives as the Tajikistan Agricultural Financing Framework. It is critical that this work continue to prevent future recourse to the NBT or directed lending by the banking system to meet agricultural financing needs once the current boom in commodity prices ends. Should such a financing gap appear in the future, direct fiscal support (subject to the competing pressures on the budget and the transparency that accompanies such spending) would be a preferable course of action.

37. Structural reforms should continue to target governance and transparency, but also seek to facilitate market orientation. The progress made under the program with respect to transparency of state enterprises and government operations is laudable. The continued efforts to monitor the operations of SOEs through the Ministry of Finance are welcome, as is publication of financial information by Roghun OJSC. Looking ahead, staff emphasizes the potential benefits of an overhaul of the tax regime—both from the point of view of boosting revenue, but also to create a more open business environment. The latter will be particularly important for boosting economic prospects and job creation. On data provision and transparency, the staff welcomes the efforts to produce macroeconomic and financial data more regularly, and to publish these data on government agency websites. However, staff encourages the authorities to enhance Tajikistan’s AML/CFT framework, notably by implementing the recommendations made during the Eurasian group 2008 mutual evaluation.

38. Policies under the program remain broadly on track. All quantitative performance criteria for end-2010 were met, with the exception of the continuous performance criterion on non-accumulation of external payments arrears. The accumulation of external arrears was unfortunate, but (i) was so small as to be trivial, with no material impact on program performance; (ii) resolved in a short period; and (iii) accompanied by credible corrective actions. In this regard, staff supports the authorities’ request for a waiver for nonobservance of the continuous performance criterion on the non-accumulation of external payments arrears.

39. The two missed program indicative targets are a concern. The lower-than-projected level of social spending relative to the program indicative target is regrettable, particularly given that there was over-performance with respect to the budget deficit target. Staff urges the authorities to maintain the emphasis on badly needed social spending, particularly in light of the potential impact of recent inflation on the poor. With respect to the missed indicative target on liquidity lending by the NBT, staff urges the authorities to observe the revised path for the remainder of the year, so as to alleviate potential upward pressure on prices and downward pressure on the somoni, and to protect the NBT balance sheet.

40. As overall performance under the program has been good, staff supports the authorities’ request for completion of the fourth review under the ECF arrangement and the fifth disbursement. In this context, it also supports the authorities’ request for modification of end-June 2011 and end-December 2011 performance criterion on net domestic assets; the modification of the definition of the indicative target on NBT liquidity loans; the use of a new program exchange rate; and introduction of a grace period in the definition of external payments arrears..

41. It is proposed that the next Article IV consultation be held in accordance with Decision No. 14747–(10/96), adopted on September 28, 2010 on consultation cycles.

Tajikistan: State Enterprise Sector and the Problem of Arrears

Arrears are a pervasive problem in Tajikistan. Key areas of the economy remain dominated by SOEs operating under soft budget constraints. Inter-enterprise and tax arrears are widespread, affecting profitability and engendering weak fiscal discipline. As of October 2010, the largest SOEs had SM 2.6 billion on accounts payable and SM 1.7 on accounts receivable, up from SM 2.2 billion and SM 1.6 billion in 2009, respectively. SOEs with the biggest overdue payables are Tajik Aluminum Company (Talco), Tajiktransgaz (gas supplier), Barki Tajik (the electricity company), and Tajik Rail. Tax arrears by state firms have also increased, amounting to almost 700 million or about 3 percent of GDP in 2010.


Tax Arrears

Citation: IMF Staff Country Reports 2011, 130; 10.5089/9781455287659.002.A001


Large SOEs: Arrears on Accounts Payable SM 2.6 billion

Citation: IMF Staff Country Reports 2011, 130; 10.5089/9781455287659.002.A001

Large SOEs are responsible for almost half of tax arrears. Barki Tajik is the largest source, holding about 43 percent of all tax arrears, and reflecting in part inter-enterprise and other arrears on electricity services. These arrears persist despite periodic settlements with the government (the latest settlement in 2009 resulted in a decline of its tax obligations by roughly a quarter, or SM100 million). Barki Tajik also owes SM 627 million on accounts payables (claims on Barki Tajik, excluding tax arrears), and has large amounts on overdue accounts receivable (unpaid electrical bills and other claims on individuals and entities). Inability by the energy monopoly to collect payments for their services effectively and widespread government interventions seriously undermine its long-term financial viability.

Tolerance of arrears by the government and inability to enforce legal actions against noncompliant agents aggravate the problem. Government nonpayments, or delayed payments, create an incentive for other economic agents to follow suit. For example, arrears outside the budget are tolerated to compensate for budgetary arrears (like wages and salaries). At the same time, the government’s ability to monitor arrears, and thus, prevent them is limited by the absence of a formal system to monitor arrears. An additional contributing factor is ineffective bankruptcy and judicial procedures, which make it difficult to enforce legal actions against noncompliant agents.

Resolution of the arrears problem will require wide-ranging actions to improve financial discipline. These include restructuring of SOEs to put them on the path of financial viability and subjecting them to hard budget constraints. To that end, the government has approved restructuring of Barki Tajik which will be undertaken with donor assistance in stages through 2015, and which among other things, involves breaking down the company into three entities with separation of power generation, transmission, and distribution. The SOE monitoring unit housed in the Ministry of Finance continues to build capacity in its role overseeing the operations of key SOEs and ensuring transparency. Completion of a fiscal risk assessment as part of the 2012 budget (a benchmark under the ECF arrangement) will also be a key step in transparency and sound public financial management. Supporting reform of the legislative and court system will also be required to more effectively regulate inter-enterprise financial relationships and boost enforcement of collection efforts.

Tajikistan: Financing the Agricultural Sector

Agricultural financing—particularly for cotton—has been a difficult issue in Tajikistan. While current high prices for cotton have led to sufficient financing from private investors, past years have required NBT and commercial bank involvement—contributing to the NBT’s net negative capital position, and the rise in banks’ classified or nonperforming assets. Looking forward, it is crucial to develop a sound market-based system, which grants farmers access to credit while at the same time protecting financial system stability.

While it accounts for a relatively small share of output, cotton production has dominated agricultural policy and credit resources. This concentration reflects an emphasis on cotton as an export good. Recent reforms such as the “Freedom to Farm Act” are leading to crop rotation and diversification into such value added products as fruit and vegetables. But cotton will likely continue to play a major role as its production is water and labor intensive (Tajikistan has generally been water abundant, and around 75 percent of the population is living in rural areas), related infrastructure is already in place, and perishability is low.


Percentage Share of Sectors in Total Loans of Credit Institutions: 2008–10

Citation: IMF Staff Country Reports 2011, 130; 10.5089/9781455287659.002.A001


Past Due Loans as Percent of Total Loans Within Sectors

Citation: IMF Staff Country Reports 2011, 130; 10.5089/9781455287659.002.A001

Cotton financing has been problematic. Farmers have typically borrowed from investors (rather than banks) who granted in-kind loans and were repaid in-kind. Investors enjoyed a monopoly in the provision of inputs and financing and a monopsony for the purchase of cotton output. Between 2002 and 2007 the NBT arranged credit lines from international banks for investors—backed by foreign exchange reserves. The failure of investors to repay these loans led to the loss of the foreign reserves of the NBT and its negative capital position. Since 2008, the Ministry of Finance has provided credit to banks which have been on-lent to farmers. Repayment rates were low, however, leading to NPLs. In the last three years, alternative financing has been provided by the Tajik Agricultural Financing Framework (TAFF) and the World Bank. Working with local financial intermediaries and accompanied by technical assistance to train their staff, repayment rates of these loans have been high.

The recent increase in cotton prices and resulting investor interest has precluded the need for additional public or commercial bank funds this year. In light of projected future declines in cotton prices, however, agricultural financing needs to be put on a stronger footing, which could be done in several ways: (1) ensuring an end to directed lending while simultaneously addressing the overhang of banks’ nonperforming assets related to agriculture; (2) enabling banks to better assess agricultural credit risks, including through the opening of local branches and establishment of credit bureaus; (3) preventing further moral hazard by insisting that investors repay cotton loans to the NBT; and (4) increasing farmers’ abilities and incentives to repay their loans—important steps include full implementation of the Freedom to Farm Act, and the freedom to independently buy inputs, gin, and sell output. Finally, if support to fill a financing gap is needed, such support should be through the budget and thereby subject to greater financial discipline and competing priorities.

Table 1.

Tajikistan: Selected Economic Indicators, 2008–16

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Sources: Data provided by the Tajikistan authorities, and Fund staff estimates.

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

For consolidation, Roghun equity sales in 2010–11 are added to general government revenue. Over 2011–15, it is assumed that the remaining financing needs of Roghun OJSC are met from external sources at consessional terms.

Receipts from aluminium exports under the tolling arrangements are booked as services exports.

Includes SDR 81.2 million allocation in Q3 2009.

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

For 2012–15, financing will partly come from yet to be identified fiscal measures.

Decline in 2010 is due to resolution of Kredit Invest (KI) carrying large nonperfoming loans to the cotton sector.

Table 2.

Tajikistan: General Government Operations, 2008–11

(In millions of somoni; unless otherwise indicated)

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Sources: Tajik authorities, and Fund staff estimates.

Includes 140 million somoni lending to the cotton sector in 2008 and 180 million somoni in 2009.

Includes transfer of MDRI deposits to the NBT in 2010 towards NBT recapitalization.

Issuance to compensate the NBT and banks for losses related to cotton lending as part of cotton debt resolution.

Table 3.

Tajikistan: General Government Operations, 2008–11

(In percent of GDP; unless otherwise indicated)

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Sources: Tajik authorities, and Fund staff estimates.

Includes 140 million somoni lending to the cotton sector in 2008 and 180 million somoni in 2009.

Includes transfer of MDRI deposits to the NBT in 2010 towards NBT recapitalization.

Table 4.

Tajikistan: Accounts of the National Bank of Tajikistan, 2008–11

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

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Sources: National Bank of Tajikistan, and Fund staff estimates.

Includes SDR 81.2 million allocation in Q3 2009.

Excludes nonmonetary gold.

Increase in the beginning of 2010 reflects reclassification of credits to KI according to debt resolution strategy.

Table 5.

Tajikistan: Monetary Survey, 2008–11

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Sources: National Bank of Tajikistan, and Fund staff estimates.

Revised from EBS/09/43 to exclude nonmonetary gold.

Liabilities to cotton financiers related to domestic cotton financing.