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Asian Development Outlook 2006 :
II. Economic trends and prospects in developing Asia :
Central Asia
Tajikistan
Following the peace settlement in 1999, the economy
has experienced a strong recovery, but per capita income remains
among the lowest in the world. Progress has been made in implementing
a poverty reduction strategy, despite the legacy of weak institutional
capacity and a limited resource base. The pace of economic growth
slowed to 6.7% in 2005, due mainly to falling cotton production
and deteriorating terms of trade. Slippages in implementing structural
reforms were also in evidence. Economic prospects are promising,
though, in view of the start of major foreign-invested projects
and renewed efforts at implementing the structural reforms outlined
in the national development strategy.
Economic performance
A period of strong recovery and economic expansion has followed
the agreement in 1999 that ended the civil war. Growth of gross
domestic product (GDP) averaged nearly 10% in the 4 years through
2004. GDP growth then slowed to about 6.7% (preliminary estimates),
reflecting weak performance in agriculture, slower growth in industrial
output, and less favorable terms of trade caused both by higher
import prices for oil products and natural gas and by a softening
of cotton export prices. Cotton and aluminum are the traditional
pillars of the economy and, even with some diversification in activity,
they continue to drive outcomes in agriculture and industry, and
account for more than three quarters of exports (Figure 2.5.1).
Cotton production appears to have declined by about 20% from its
2004 level, mainly because of a reduction in the area planted (and
because of poor weather). However, the cotton sector suffers from
a slew of structural problems, including heavy debt ($280 million)
resulting from unfavorable credit terms and slow implementation
of land and marketing reforms. The weaker growth in industry stemmed
from a slowdown in the growth of aluminum production where growth
in output, estimated at 6%, was about one half that seen in 2004.
On the expenditure side, domestic demand was driven essentially
by higher private consumption spending, in turn financed mainly
by strong growth in workers’ remittances and, to a lesser
degree, by public sector wage rises. Remittances are estimated in
the 2005 balance of payments to have increased to about $600 million,
including small-scale export receipts, which are usually 30% of
transfers. This amount is likely double that, if unofficial inflows
are counted. These funds, largely from workers in the Russian Federation,
have buoyed growth in services activities, such as retail trade
and light manufacturing. They have also financed some investments
in small enterprises.
Diversification of the economy continued (though slowly), bringing
the share of the services sector to nearly 50%, with trade, construction,
communications, and financial activities the fastest growing. The
share of agriculture has declined steadily from 36% in 1991 to 22%
in 2005. The protracted approach to land reform and resolution of
cotton farmers’ debt remain major issues that have accelerated
the decline of agriculture. The Government’s Farm Debt Reduction
Strategy advocates land reforms and liberalization of cotton production,
which together hold the key to agricultural growth, but little headway
was made on either in 2005.
Reflecting a cautious fiscal policy, and excluding the foreign-financed
public investment program, a budget deficit of 0.3% of GDP was achieved
in 2005, according to preliminary estimates (Figure 2.5.2).
Having been stagnant at about 15% of GDP since 2000, tax revenue
exceeded budget expectations and rose sharply to 16.6% in 2005,
chiefly because of larger collection of income taxes and value-added
tax. Ongoing reforms in tax administration, including a new tax
code that came into effect in January 2005, helped boost revenues.
The Government for the most part exercised restraint in spending,
and the outcome was as budgeted. In an attempt to improve the quality
of services, though, it raised wages, as it had done a year earlier—especially
in health care and education—to help bring up the prevailing
extremely low levels. There has been a substantial reduction in
the level of external debt, which reduced the strain on the general
government budget.
International Monetary Fund (IMF) stabilization programs are delivering
results. For example, average annual inflation was brought down
from 38.6% in 2001 to 7.1% in 2004, even as the economy expanded
rapidly. In 2005, inflation was at 7.1%, but stayed within the central
bank’s 7.5% target limit. It reflected unusually high food
prices in the summer, rises in electricity and petroleum fuel prices,
temporary disruptions to border trade with Uzbekistan, and exchange
rate depreciation.
Monetary policy, directed at fighting inflation, remained cautious
in 2005. In this regard, IMF has indicated that all monetary program
targets were met in September 
(and they appear to have been met
in December as well). The previous relative stability of the national
currency, the somoni, against the dollar was lessened as the authorities
focused on stabilizing reserve money growth. Over all of 2005, the
somoni depreciated modestly in nominal and real terms, reflecting
worsening terms of trade and a weakening against main trading partner
currencies in the second half of the year.
The current account deficit, which had been narrowing consistently
since 2000, widened to 4.0% of GDP in 2004 and then contracted slightly
in 2005 to 3.7% (preliminary estimates), as higher remittances more
than offset the deteriorating terms of trade (Figure 2.5.3). Continued
flows of development assistance financed most of the current account
deficit. Gross official reserves increased by $30 million to
$219 million (providing only about 2 months of import
cover) (Figure 2.5.4). Total external public and publicly guaranteed
debt amounted to $894.9 million, or about 38% of GDP, at end-2005.
The Government has secured a substantial reduction in its external
debt, which as a share of GDP fell by more than half (113% to 38%)
between end-1999 and end-2005 (Figure 2.5.5). It held direct
negotiations with bilateral creditors for debt rescheduling, write-offs,
and asset swaps (most of the creditors were outside the Paris Club),
enabling it to use its historical ties. The main breakthrough was
the restructuring of the heavy debt owed to the Russian Federation,
through a debt-asset swap in October 2004. This involved exchanging
$242.4 million of debt against Russian state ownership of the
Nurek space tracking station, in the process lowering Tajikistan’s
external debt by more than 20%. IMF’s decision to write off
this year, under the Multilateral Debt Relief Initiative, 100% of
the approximately $100 million that Tajikistan owes it, is
another major boost to the debt consolidation effort. 
Economic outlook
GDP growth is projected to be 8.0% in 2006 and 6.0% in 2007 (Figure 2.5.6).
This reflects the assumption that export prices for cotton and aluminum
do not improve substantially over 2005’s levels and that cotton
production recovers to normal levels. In these circumstances, exports
are expected to expand by about 6%. The current account deficit
is projected at about 4.5% of GDP, as growth in workers’ remittances
is seen as remaining buoyant and offsetting rising imports, including
higher costs of energy from both price and volume increases. The
deficit should be financed from expected concessional loans and
grants and some rise in foreign direct investment associated with
the start of construction of large-scale, Russian-financed hydropower
projects.
Macroeconomic policy is expected to stay cautious within the existing
framework of the economic program with IMF. Several revenue measures
were included in the 2006 budget and the overall deficit is limited
to 0.5% of GDP, excluding the foreign-financed public investment
program, which will be maintained at 4.0% of GDP. A conservative
monetary program has been set as part of the overall economic framework,
containing inflation to 5–7% (Figure 2.5.7).
The Government is currently formulating a National Development
Strategy (NDS) for 2006–2015. Macroeconomic growth projections
for the NDS have been developed under three scenarios. Under the
most ambitious, high-growth, scenario, growth will average 9% in
2006–2010 and 8.5% in the 5 years to 2015. The assumptions
are, between 2005 and 2015, that: the investment rate rises from
6.7% of GDP to 11–12%; tax revenues improve from 16.6% of
GDP to 22.0%; the current account balance switches from a deficit
of 3.7% of GDP to a surplus of 2.0%; inflation declines from 7.1%
to 3.0%; and the planned multibillion dollar investments in new
aluminum and hydropower capacity are completed.
Growth averaged nearly 10% in the 4 years through 2004. The
question is whether this is sustainable given the lag in reform
momentum in key sectors, and institutional and infrastructure bottlenecks
that the economy faces, as highlighted by 2005’s sharp reduction
in growth. Five main structural weaknesses are discernible.
First, national income is still below the level of 1991. In 2003,
the latest year for which data are available, 64% of the population
still lived below the poverty line (defined as $2.15 a day using
2000 purchasing power parity exchange rates), down from 81% in 1999.
The high growth rate, to some extent, therefore reflects a catching
up with earlier levels. Real progress is hampered by the fact that
more than 60% of the labor force are employed in low-productivity
agriculture. Successful policy implementation, especially in the
areas of land reform and resolution of cotton farmers’ debt,
is needed to substantially raise agricultural output and help reduce
poverty.
Second, the main drivers of growth are remittances from the Russian
Federation (and, if transfers outside official channels are included,
total remittances may well account for some 20% of national income);
export earnings from cotton and aluminum (these commodities together
account for about three quarters of export earnings); and construction
(primarily Russian-financed hydropower plants). When the heavy dependence
on imported oil and natural gas (Figure 2.5.8), and the landlocked
nature of the economy, are considered, the economy’s extreme
susceptibility to exogenous shocks is apparent.
Third, low inflation and relative exchange rate stability provide
an auspicious environment for growth, but power and transport bottlenecks
remain a serious handicap for sustained development. Reforms in
the energy sector require urgent government attention. While utility
rates for gas have been adjusted to reflect imported gas prices,
electricity rates remain significantly below economic viability
levels. Together with large and still-growing accounts receivables
of the power utility, low power prices have generated a large quasi-fiscal
deficit. On a positive note, however, the Government has committed
itself to wide-ranging reforms for development of indigenous hydropower
resources, including greenfield hydropower projects with public-private
partnerships and a trading and transmission infrastructure designed
to satisfy domestic energy demand and augment export revenues. In
transport, air services are particularly poor in the absence of
competition, with Tajik Air enjoying a virtual monopoly.
Fourth, channeling private savings into productive investment faces
major hurdles. The bulk of savings are “under the carpet”
and banks are not the usual repository, although financial intermediation
via formal banking channels has, from a very low base, been growing
steadily. A significant step-up in bank lending to business would,
however, require addressing weaknesses in property rights, in the
judicial system (including contract enforcement), in bankruptcy
procedures, and in accounting standards.
Fifth, access to education and to primary health services remains
limited and of poor quality—the latter rendering the population
vulnerable to the spread of disease. The main reason is low public
spending (2.7% on education and 1.0% of GDP on health in 2004) relative
to international standards. The Government has in fact used most
of the resources released by external debt relief for the social
sectors, and public spending on education and health together climbed
to nearly 5% of GDP in 2005. Public investment in education will
also be boosted by a recent decision of the Education For All Fast
Track Initiative to grant $18.4 million over 2006–2007
as budgetary support.
The authorities recognize that they have to undertake sweeping
reforms to achieve the high-growth scenario. For example, the investment
climate must dramatically improve, since it is crucial for diversifying
the sources of growth. Public-private partnership models must be
tested and adopted for realizing planned investments in generating
and exporting hydropower. The public administration reform strategy
that is currently being finalized must be speedily implemented.
And the long-awaited reforms in agriculture and energy need to be
implemented, in accordance with the Government’s own commitments.
Publications 
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