Republic Of Tajikistan: Request for Disbursement Under the Rapid Credit Facility—Press Release; Staff Report; Staff Statement; and Statement by the Executive Director for the Republic of Tajikistan

Request for Disbursement under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Tajikistan


Request for Disbursement under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Tajikistan

Recent Economic Developments

1. Economic developments were favorable in 2019. Reported real GDP growth reached 7.5 percent, supported by agriculture, industry, and services. Inflation picked up to 8 percent, partly due to base effects, but remained within the NBT’s target range (7 ± 2 percent). Banking sector indicators (profitability, asset quality, provisioning) improved and credit started recovering, although the two formerly largest banks remained defunct and deposit withdrawal restrictions remained in place.

2. The fiscal and current account deficits narrowed. Tax and non-tax revenues dropped due to a moratorium on tax inspections and advance payments, newly granted exemptions from the VAT, and a short-lived ban on mineral exports. Despite the decline in revenues, the fiscal deficit narrowed to 2.1 percent of GDP (from 2.8 percent in 2018) due to lower-than-expected capital expenditure on the Roghun hydro-power project. Public debt decreased as a share of GDP to 44.6 percent. Meanwhile, the current account deficit narrowed to 2.3 percent of GDP (from 5 percent of GDP in 2018) on the back of stronger remittances and a significant increase in gold exports. Supported by the NBT’s domestic gold purchases, international reserves reached close to 6 months of imports. The real exchange rate appreciated as somoni remained stabilized against the USD, reflecting inflation differentials and movements in partner currencies.

3. The COVID-19 pandemic has significantly worsened the macroeconomic situation in 2020. While there have been no confirmed cases of COVID-19 yet in Tajikistan, the authorities have taken containment measures to prevent an outbreak. Trade and transportation challenges with trading partners (China, Uzbekistan, Iran, Russia, and Kazakhstan) have significant negative bearing on industrial production, construction, and services. The sharp decline in oil prices and travel disruptions with Russia have severely affected migrant worker mobility and remittances, which declined by almost 50 percent (y-o-y) in March and first half of April, and the Tajik somoni has come under pressure. The National Bank of Tajikistan (NBT) has provided FX liquidity to banks, reduced reserve requirements on deposits, and allowed depreciation of the exchange rate by 5 percent. Prices of consumer staples have increased, pushing headline inflation above 9 percent and breaching the upper bound of the NBT’s target range in March. The NBT hiked the policy rate by 50 basis points to 12.75 percent to contain inflationary pressures. The decline in economic activity has also led to a significant decline of budget revenues over the first three months of 2020. At the same time, the budget is experiencing expenditure pressures associated with containment measures, health checks at the border, establishment of quarantine zones, and other prophylactic and disinfection actions.

Impact of the Shock on the Outlookt

4. Before the COVID-19 shock, the macroeconomic outlook was already challenging owing to large fiscal and external imbalances. Construction for specific projects, a high priority for the government, was expected to widen fiscal and current account deficits over the medium term. Further, limited exchange rate flexibility and gaps in the implementation of reforms to the monetary policy framework and the financial sector were expected to hamper efforts to transition to inflation targeting, reduce dollarization, and deepen the financial sector. Uneven structural reforms perpetuate the weak business environment. Together, these factors would reduce prospects for investment and inclusive job-creating growth in the near and medium terms. Growth was projected at 4.8 percent in 2020 and to moderate to 4 percent over the medium term. The fiscal deficit was projected at 4.3 percent of GDP, while the current account deficit was projected near 5½ percent of GDP. Public and publicly guaranteed debt was projected to rise over the horizon and was considered to be on an unsustainable path under these policies.

5. COVID-19 is slowing economic activity substantially in 2020. The impact of the COVID-19 shock is likely to be the greatest in 2020Q2-Q3. As a result, output in 2020 is expected to fall by 2 percent due to a sharp trade slowdown, limitations on migrant worker mobility and remittances, and disruptions in mining, services, and construction (Text Table 1). Despite lower oil prices, currency depreciation and supply difficulties for food and other essentials are likely to contribute to inflationary pressures. Second-round effects are likely to be limited owing to subdued aggregate demand. Already fragile credit growth is expected to stagnate in the face of declining confidence.

Text Table 1.

Tajikistan: Selected Economic Indicators, 2017–25

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Sources: National authorities and IMF staff estimates

6. The rapid deterioration in the external position has opened a large and urgent balance of payments gap, which current estimates suggest is about USD 384 million. The current account deficit is projected to widen to 7.8 percent of GDP in 2020 (from 2.3 percent in 2019), due to a combination of sharply lower remittances and lower non-gold exports. On the other hand, imports of goods and services are likely to fall by 9 percent due to the closure of the border with China and lower domestic absorption, which will likely lead to a slightly lower trade deficit. Current estimates indicate a balance of payments need of $384 million. Tajikistan has already received debt relief from the IMF’s CCRT ($11 million). The authorities have requested additional support under the RCF of 80 percent of quota (SDR 139.2 million). Without further IMF financing and support from other donors, central bank reserves would fall significantly to 3.6 months of imports in 2020 or the exchange rate could fall in a destabilizing manner due to weak confidence, resulting in higher inflation and bank NPLs. It is envisaged that, with concerted support from the Fund and development partners, official reserves could be maintained above 4.5 months of prospective imports and otherwise excessive exchange rate depreciation pressures could be contained to a manageable level. The Fund emergency support also helps catalyze donor support and preserve fiscal space for essential COVID-19 related health and social expenditures. The RCF financing is justified because the balance of payments need is urgent and there is insufficient time to design and finance a program requiring upper tranche conditionality (UCT).

7. The fiscal position is also deteriorating sharply, opening a fiscal gap estimated at USD 373 million.1 The COVID-19 shock is expected to lead to a reduction in revenues (1.8 percent of GDP) relative to the 2019 outturn owing to weaker imports, as well as the introduction of temporary VAT exemptions on imports of consumer staples and tax relief for businesses. On the spending side, in 2020, the initial budget spending allocation included about 1.9 percent of GDP for health spending. This expenditure will be protected, and an additional 2 percent of GDP in health spending has been allocated for COVID-19. Social transfers to vulnerable households will increase by 0.5 percent of GDP, by expanding the coverage of targeted social assistance to all districts in Tajikistan and increasing the real benefit levels. The authorities envisage that benefits will mitigate the effects of higher unemployment by supporting food security for vulnerable groups.

8. Budgetary cuts in non-priority areas have provided some fiscal room this year and signal the authorities commitment to consolidation. On the current spending side, the authorities have reallocated the budgeted amount of current spending and cut some lower-priority items to reduce the overall budgeted envelope by 0.5 percent of GDP (Text Table 2). They have also identified cuts to budgeted capital spending by 1 percent of GDP, including to domestically financed non-Roghun capital expenditures (LOI ¶ 6). These changes have already been approved through a budget resolution signed by the Prime Minister and will be implemented in a supplementary budget with Parliamentary approval expected by end-June. Despite these cuts, the fiscal deficit is expected to widen to 7.7 percent of GDP in 2020. Roghun spending will be maintained in line with the project’s previously contracted schedule. Public and publicly guaranteed debt is expected to rise to 52.8 percent of GDP.

Text Table 2.

Tajikistan: General Government Finances, 2019–20

(Percent of GDP)

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Sources: National authorities and IMF staff estimates.

9. Bank balance sheets are likely to weaken. Bank capitalization, provisioning, and asset quality have been improving since the 2015–16 crisis, although NPLs still remain high, near 25 percent.2 Although the net open FX position is small, dollarization of loans and deposits is high, over 50 percent, creating risks from unhedged borrowers. Stress scenarios that were run during the recent Article IV consultation indicated that the banking sector has relatively strong capital buffers and would be able to withstand a moderate currency depreciation. A large currency depreciation could however prove difficult.

10. Over the medium term, fiscal consolidation and greater exchange rate flexibility will help ensure macroeconomic stability. The immediate impact of COVID-19 is expected to largely dissipate by end 2020, with growth recovering strongly in 2021. Over the medium term, as lower oil prices are expected to persist, remittances from Russia are likely to see some long-lasting effects. Fiscal consolidation will help reduce debt vulnerabilities, while greater exchange rate flexibility will be key to ensuring price competitiveness and a faster adjustment once the immediate effects of the shock dissipate.

11. The impact of the COVID-19 pandemic is subject to a considerable margin of uncertainty and could be worse than estimated. Given that the shock is still unfolding, there is considerable uncertainty about projections. If the disruptions to economic activity and external demand are more severe or last longer than assumed presently, the external and fiscal financing pressures could be much larger than projected. In such an event, the authorities agreed to boost health spending and mobilize additional donor support. If donor financing were unavailable, they committed to take additional fiscal measures to ensure fiscal sustainability and identify additional cuts to lower-priority spending. If the downturn in remittances were greater than expected, they would allow needed exchange rate flexibility to promote external adjustment. The authorities considered the RCF disbursement and the building of a track record through implementation of ex ante commitments could serve as a bridge to an UCT program if the magnitude of negative impact of the shocks on the economy amplifies. They plan to start preparing such a program, which will be needed to catalyze longer-term donor support.

Policy Discussions

To support Tajikistan through the COVID-19 shock, the RCF is anchored on forward-looking commitments for fiscal consolidation that would help achieve debt sustainability. A gradual increase in exchange rate flexibility would help facilitate a smooth external adjustment while monetary policy would need to be vigilant on second round effects. These policies are considered essential for maintaining macroeconomic stability.

A. Fiscal Policy

12. Staff agreed that widening of the fiscal deficit to 7.7 percent of GDP in 2020 is appropriate, provided enough donor financing is mobilized and transparency is strengthened. A wider fiscal deficit is needed to allow for higher health and social spending and to accommodate the decline in revenues (see ¶7 above). The authorities have launched an action plan accompanied by a costing exercise for medical supplies and equipment, although they noted that these are in short supply globally and prices could change. To ensure transparency and accountability, and the quality of additional health and social spending, authorities will issue quarterly spending reports. In addition, both the expenditure and the related procurement process would each be subject to ex-post audits by the Chamber of Accounts, and ex-post validation of deliveries in a year’s time, with results published on the external website of the Ministry of Finance. At the same time, to manage fiscal pressures the Budget Commission has issued a Resolution signed by the Prime Minister to approve the changes to the 2020 budget (described above in ¶8). The higher deficit in 2020 will be financed with concessional financing or grants to avoid a further deterioration in debt sustainability.

13. Staff and the authorities agreed on the implementation of fiscal consolidation measures of 2 percent of GDP in 2021–22 to ensure debt sustainability. While the decline in tax revenues and increased health and social spending in 2020 will likely ease in 2021, staff estimates that an additional fiscal consolidation of 2 percent of GDP will be needed over the medium term to achieve a fiscal deficit target of approximately 2½ percent of GDP and stabilize debt. Staff and the authorities agreed that deficit targets of 4.4 percent of GDP in 2021, and 2.6 percent of GDP in 2022 were appropriate. The authorities agreed that detailed policies underpinning the medium-term fiscal consolidation will be included in the FY2021 and FY2022 annual budgets. The FY 2021 budget is expected to be submitted to Parliament by end-November 2020.To underpin this fiscal adjustment, the authorities would implement a combination of revenue and expenditure measures to ensure that priority capital spending could be financed domestically to reduce the reliance on external financing. In the context of the ongoing tax reform which is supported under a WB project and with IMF TA, they would prioritize broadening of the tax base, including by phasing out the existing inefficient tax incentives to yield 0.5 percent of GDP starting in 2021.3 The authorities would also refrain from granting new tax incentives. The high tax rates would be rationalized only after a broadening of the tax base has been secured. As the economy recovers in 2022, capital spending would be prioritized to reduce it by 1.5 percent of GDP, while improving the efficiency of public investment projects (Text Table 3). Despite this consolidation, the risk of debt distress would remain high, and further fiscal consolidation would be needed over the medium term to put debt on a downward path and rebuild policy space to manage future shocks.

Text Table 3.

Tajikistan: Composition of Fiscal Adjustment, 2021–23

(In percent of GDP)

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Source: National authorities and IMF staff estimates.

14. Owing to commitments to fiscal consolidation and avoidance of non-concessional borrowing, Tajikistan’s public debt is assessed as sustainable, but the risk of debt distress remains high. Public debt is expected to spike above 50 percent of GDP in 2020 in reaction to the outbreak of the COVID-19 pandemic. However, based on the authorities’ commitment to fiscal consolidation and avoiding non-concessional borrowing, debt stabilizes over the medium term and is assessed as sustainable in a forward-looking sense (see attached DSA). The risk of debt distress remains high as two debt indicators breach thresholds, leading to a high external risk rating. Tajikistan’s debt is vulnerable, especially to export shocks and contingent fiscal liabilities. A more severe or prolonged COVID-19 shock could heighten debt vulnerabilities. On the other hand, greater-than-expected progress with economic diversification or higher energy and non-energy exports would improve debt sustainability over the longer term.

B. Monetary and Exchange Rate Policy

15. The NBT emphasized that monetary policy would remain vigilant to inflationary and liquidity pressures. Supply difficulties have led to temporary price increases for some food and other essentials, pushing inflation beyond the NBT’s target range. Given the transitory nature of the shock and slack in the economy, staff and the authorities agreed that second round-effects are unlikely. Monetary policy would accommodate the temporary increase in inflation due to the supply shock, but the NBT will shift to a tightening bias if second round effects were to come into play as the economy recovers. The NBT has already stepped up FX liquidity provision to banks and eased reserve requirements on bank deposits. It also plans to provide emergency liquidity assistance in domestic currency, in line with IMF TA recommendations, to help ensure financial sector stability in the face of possible deposit outflows from banks. Given past governance challenges in banks, the NBT remain committed to maintain strong oversight and supervision to ensure financial sector confidence. Staff and the authorities agreed that as non-performing loans increase, loan classification and provisioning rules would be transparently and fully applied. To the extent that bank capital or other metrics fall below minimum prudential requirements, banks would be required to implement credible restoration plans.

16. The NBT agreed that smoothing excessive exchange rate volatility would be key to avoid economic disruption in the near term.4 Staff welcomed the recent move to align the official and parallel market rates, although the parallel market rate has continued to depreciate. In the near term, to the extent that the COVID-19 shock is expected to be mostly temporary, the NBT agreed that smoothing excessive volatility would be key to avoid economic disruption, while some exchange rate flexibility would facilitate the needed external adjustment and protect reserves. The authorities committed to gradually remove the existing Article VIII restriction by progressively allowing exchange rate flexibility to reflect FX supply and demand (while avoiding an overshooting), once the shock has eased and conditions permit. 5 Staff emphasized that FX intervention would be needed to avoid the emergence of external private arrears. The authorities were concerned that the removal of the Article VIII restriction may lead to increased volatility in the exchange rate or sharp loss of reserves and considered that IMF technical assistance would be helpful in this regard. They also committed to remove the existing multiple currency practices (MCPs) by setting appropriate NBT guidelines. 6 Staff stressed that improving data collection regarding FX supply and demand, exchange rates in the official and parallel markets, and associated transaction volumes would help improve the functioning of the FX market.

Financing Issues

17. Staff estimates that a single disbursement of 80 percent of quota (SDR 139.2 million) will be needed given the magnitude of the financing requirement. Staff proposes access under the “exogenous shock” window of the RCF. It is not feasible to implement a UCT-quality Fund-supported program in the near term due to the high degree of uncertainty regarding the duration and scale of the COVID-19 impact and the practical difficulties of holding extensive discussions with the authorities in the current no-travel environment. However, the authorities’ track record of servicing IMF repayments and the size of the financing gap justify the access. Discussions are well advanced to obtain grant funding from the World Bank Group (WBG) (USD 47 million) and Asian Development Bank (ADB) (USD 86 million), and other development partners. Discussions with the Eurasian Fund for Stability and Development (EFSD) for a concessional financing operation (USD 40–60 million) are also ongoing.

18. Capacity to repay the Fund would remain adequate. Fund credit outstanding would peak at 14.7 percent of gross international reserves and 17.7 percent of exports of goods and services. However, Tajikistan continues to be at a high risk of debt distress. The possibility of a protracted pandemic is the main risk associated with Tajikistan’s capacity to service its debt owed to the Fund. Support under the CCRT mitigates near-term servicing risks.

19. The authorities have requested that the RCF disbursement should be channeled to the budget (LOI ¶3). The RCF funds will be disbursed to the NBT and on-lent to the government to provide space for virus-related spending, and the central bank should not lend to the government while the domestic financial sector is too shallow to provide the necessary budget financing. The authorities have made a commitment to establish a framework agreement between the NBT and the government on responsibilities for servicing financial obligations related to the RCF disbursement. The NBT and the Ministry of Finance will agree and sign a Memorandum of Understanding to: (i) commit to maintain funds received from the IMF in a government account at the NBT, pending their use, (ii) require the government to hold foreign exchange balances only with the NBT, and (iii) clarify the responsibilities for repaying Fund resources. The Letter of Intent includes the authorities’ commitment to undergo a safeguards assessment, which would need to be completed before Executive Board approval of any subsequent arrangement, and to authorize the central bank’s external auditors to hold discussions with staff.

Staff Appraisal

20. The COVID-19 pandemic and sharp decline in oil prices have severely impacted remittances and created an urgent and immediate balance of payments need. Tajikistan is a fragile, low-income country, heavily dependent on remittances from migrants in Russia. Lower oil prices and travel disruptions have severely impacted remittances. Fiscal revenues have also seen a sizable decline. The impact of the virus is expected to last through 2020Q2-Q3, opening a sizable and immediate balance of payments financing gap, estimated at about $384 million. The NBT has adjusted the official exchange rate by 5 percent and increased FX interventions, although the parallel market exchange rate continues to be under pressure.

21. The temporary widening of the budget deficit in 2020 should be accommodated, but fiscal consolidation will be needed over the medium term to stabilize debt. The overall fiscal deficit is expected to widen in 2020 owing to a sharp decline of tax and non-tax revenue and higher health and social spending. The authorities have approved a budget resolution implementing reallocation and cuts to lower-priority spending to offset some of the COVID-19 impact. They have also committed to enhance the transparency and governance of their policy response through the publication of an ex-post audit of COVID-19 related spending and procurement processes. Revenue and expenditure measures will be specified in future budgets to reduce the fiscal deficit to 2.6 percent of GDP by 2022. Debt is expected to stabilize (as a share of GDP) and become sustainable, based on authorities’ commitment to these efforts.

22. Some exchange rate flexibility will be essential to ensure price competitiveness and support growth, while avoiding excessive volatility and economic disruption. The NBT depreciated the exchange rate by 5 percent in March. Some exchange rate flexibility would facilitate faster external adjustment and stepped up FX interventions can be used to smooth excessive market volatility during the crisis. As the shock eases, gradual removal of the existing Article VIII restriction and existing multiple currency practices will help improve the functioning of the FX market and will be supported by improving data on the parallel market rates and transaction volumes.

23. The monetary policy stance will need to remain vigilant to liquidity and inflation developments. The NBT has provided FX liquidity and reduced reserve requirements on bank deposits to ease liquidity and monetary conditions. The NBT is gradually moving to an inflation targeting regime. In this regard, the currency depreciation may push inflation further outside the NBT’s target range albeit a slowing economy is expected to dampen second-round effects. Although monetary policy transmission remains weak, a tightening bias would be needed if second-round effects come into play as the economy recovers.

24. Credible restoration plans will be needed to address the likely deterioration in financial sector balance sheets to maintain financial sector stability. Given the high level of dollarization and weak banking sector, sizable currency depreciation could weaken bank balance sheets. As banks are characterized by high NPLs and weak governance, it will be important to maintain strong oversight and supervision. Loan classification and provisioning rules should be applied fully and transparently, with credible capital restoration plans for banks that fall below the minimum prudential requirements.

25. Staff supports the proposed disbursement under the RCF of 80 percent of quota (SDR 139.2 million). Staff support for the RCF is based on the large and urgent balance of payments needs and the catalytic effect of IMF support for other external financing. While public debt is at high risk of debt distress, staff assesses that debt remains sustainable and Tajikistan’s capacity to repay the Fund remains adequate. . The possibility of a protracted pandemic is the main risk associated with Tajikistan’s capacity to service its debt owed to the Fund. Support under the CCRT mitigates near-term servicing risks.

Table 1.

Tajikistan: Selected Economic Indicators, 2016–25

(Quota: SDR 174 millions)

(Population: 9.1 million; 2018)

(Per capita GDP: US$827; 2018)

(Poverty rate: 27 percent; 2018)

(Main exports: mineral products, aluminum, cotton; 2018)

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

The 2016 overall balance includes 6.1 percent of GDP for bank recapitalization in addition to regular fiscal operations.

Table 2.

Tajikistan: General Government Operations, 2016–25

(In millions of somoni, unless otherwise indicated)

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Sources: Tajikistan authorities, and Fund staff estimates.

The 2016 overall balance includes TJS 3,320 million for bank recapitalization in addition to regular fiscal operations.

Table 3.

Tajikistan: General Government Operations, 2016–25

(In percent of GDP, unless otherwise indicated)

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Sources: Tajikistan authorities, and Fund staff estimates.

The 2016 overall balance includes 6.1 percent of GDP for bank recapitalization in addition to regular fiscal operations.

Table 4.

Tajikistan: Accounts of the National Bank of Tajikistan, 2016–25

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

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

Excludes eurobond proceeds, nonmonetary gold and foreign assets denominated in non-convertible currencies. Projections include domestic purchases of monetary gold.

Increase in 2019 is accounted by 1,300 mln deposit withdrawal by the Government.

Includes net credit to public non-financial corporations and credit to private non-financial institutions.