Tajikistan's economy enjoyed about 8% growth annually over the past decade thanks to a favorable external environment and high prices for its main exports, but following the crisis it now faces challenges related to energy and to job creation.
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Recent Economic DevelopmentsLower remittances and terms of trade effects are causing a deterioration in economic growth in Tajikistan. GDP growth slowed to 6.7 percent in 2014, down from 7.4 percent i... Show More +n 2013, as remittances from Russia slackened, global demand weakened, and prices fell for the main export commodities of aluminum and cotton.The current account deficit grew to an estimated 7 percent of GDP, due to a wider trade gap and lower remittances – although foreign direct investment increased slightly. Inflation started to accelerate as depreciation of the somoni led to higher food prices, while services costs rose due to tariff adjustments, reaching 7.4 percent at year-end 2014, up from 3.7 percent a year earlier.The fiscal deficit narrowed to 0.6 percent of GDP due to both solid revenue performance and spending restraints. However, the situation in the financial sector worsened; many commercial banks are saddled with under-performing portfolios.So far, policy responses have been mixed. On the fiscal policy side, the government continued its commitment to a generally balanced budget, while protecting social spending and postponing spending on categories deemed to be of lower priority.Regarding the exchange rate policy, the National Bank of Tajikistan (NBT) responded to pressures by allowing a managed depreciation of the somoni and imposing administrative controls on the foreign exchange (forex) market. This ate into the NBT’s already low reserves and multiple exchange rate practices emerged.Recently, the NBT allowed the official rate to depreciate faster in order to align it with the cash rate, but the gap between the two rates remains about 5 percent, while administrative controls on forex market also remain.OutlookEconomic growth is projected to slow to 3.2 percent in 2015 and then to recover gradually in the medium term – although not to recent historical averages. The expected steep drop in remittances (40 percent in US$ terms) will have a particularly adverse impact on services, which account for over 40 percent of Tajikistan’s economy.Growth is also slowing in some of Tajikistan’s major trading partners – Turkey, China, and Kazakhstan –and a lack of demand will likely keep prices low on cotton and aluminum, the main export commodities. Growth is projected to rebound in the medium term – given responsible macroeconomic policies and a reasonable pace of structural reform.Economic growth should be progressively higher toward 2017, although still below recent historical averages. The projected decline in GDP growth is likely to slow the pace of poverty reduction. The significant risks to the macroeconomic outlook mainly relate to the external balance, low external reserves, state-owned enterprises (SOEs), and the banking sector.RecommendationsWith the external environment highly uncertain and domestic pressures growing, the Tajik authorities are confronted with the need to transition to a more sustainable and inclusive growth model. In response to external pressures, the government has approved an action plan to reinforce its development strategy for 2015–16.Prudent macroeconomic management must be a priority to assure the necessary adjustment, make the country more resilient to shocks, and lay a solid foundation for growth. High on the agenda are addressing financial sector vulnerabilities and assuring that SOEs are well-governed in order to minimize fiscal risks and deliver services to consumers in a cost-efficient way.The business environment also needs to be reformed in sync with comprehensive public sector reform.In the short to medium term, policies to promote job creation in the private sector, which has been very limited since 2009, will be critical to facilitating absorption of returning migrants; in the medium term, more access to opportunities and basic services, such as education, water, sanitation, and heating, will be needed to ensure the sustainability of poverty reduction and of the monetary welfare gains achieved in recent years.Download the full Economic Update (PDF) Show Less -
Tajikistan’s economic growth moderated to 6.7 percent in the first half of 2014, down from 7.5 percent a year earlier, as activity slowed in almost all sectors.Weaker world economic growth a... Show More +nd lower prices for cotton and aluminum adversely affected the major export-oriented industries, pushing total industrial growth below 3 percent from nearly 7 percent a year earlier.Lower inflows of remittances, due to the slowdown in Russia, have translated into lower domestic demand and slower growth in services and housing construction. Though growth in agricultural output also moderated, due to heavy rains and low temperatures, it was still a healthy 6 percent. Fixed investment grew swiftly as the public investment program got underway.Inflation began to pick up as food prices rose and tariffs for utilities were adjusted, reaching 4.7 percent for the first half of 2014, compared with 1.6 percent a year earlier.GDP growth is projected to ease to 6.5 percent in 2014, because of the spillover effect from the slowdown in Russia and in export sales.A Russian slowdown affects Tajikistan largely through remittances channels. A slackening in remittances weighs heavily on household demand, particularly demand for services and housing construction.Inflation pressures are expected to increase, but stable global food prices should help to keep growth in inflation within a single digit. Despite slower economic growth, the fiscal deficit is projected to remain unchanged in 2014, because of higher than expected revenues from foreign trade, reforms in revenue collection, and spending restraint.The current account deficit is projected to widen to 3.7 percent of GDP, due largely to sluggish export growth and the slowdown in remittances.Tajikistan could potentially benefit from the Russian ban on imports of food from the West, but fragile market links, limited economies of scale, poor access to credit, and barriers to entry and expansion limit Tajikistan’s ability to benefit from increased Russian demand. Both domestic and external risks face the country. The main risks to the near-term outlook relate to serious vulnerabilities and governance issues in the financial sector, fiscal risks from state-owned enterprises (SOEs), a slower recovery in the prices of aluminum and cotton, and a further slowdown in activity in Tajikistan’s main trading partners.The pace and financing of large infrastructure projects are also highly uncertain. The main transmission channels through which adverse external shocks could impact the Tajikistan economy are remittances (partly because migrants may return) and external trade.Reinforcing fiscal and external buffers will be critical to mitigating the impact of external shocks, particularly in light of Tajikistan’s strong links with Russia and other important trading partners such as Kazakhstan, Turkey, and China.In the near-term, prudent macroeconomic policies, such as greater exchange rate flexibility, could help the country absorb any shocks. A comprehensive structural reform program is needed in order to bolster growth, create jobs, and reduce poverty – especially as risks are intensifying.Reforms to improve the business-enabling environment need to go hand-in-hand with comprehensive public sector reform. Among the highest priorities are to address financial sector vulnerabilities and assure proper SOE governance to minimize fiscal risks and deliver cost-efficient services to consumers.Beyond general reforms, specific challenges need to be addressed in many sectors where SOEs operate, such as energy, infrastructure, and delivery of other services. Policies to facilitate absorption of returning migrants into the local labor market will also be important.Over the medium-term, prudent macroeconomic management and structural reforms directed towards diversification and better integration into global and regional markets could create more economic opportunities and reduce Tajikistan’s vulnerability to shocks.Investing in human and institutional capital could support productivity improvements and job creation, and ultimately speed up the transition to a more sustainable growth model. Show Less -
The Programmatic Public Expenditure Review (PPER) is the part of the World Bank's ongoing analytical and advisory activities, which provide a solid platform for policy dialogue and discussions with th... Show More +e Government of Tajikistan and other stakeholders on a range of key issues and reforms. The PPER consists of three policy notes – “Government Expenditures: Size, Composition and Trends”, “Review of Public Expenditures on Health”, “Review of Public Expenditures on Education” - completed in 2013, and three policy notes - “Key Issues in Public Finance Management”, “Fiscal Risks from State-Owned Enterprises”, “Capital Expenditures and Public Investment Management” - completed in 2014.The Policy notes aim to inform fiscal policy and expenditure prioritization in key areas of the budget to improve the efficiency and quality of public spending and to support the structural transformation of the economy. More specifically, they are:Policy Note No. 1 “Government Expenditures: Size, Composition and Trends” sets a stage for the further in-depth discussion of the issues, identified in the note, based on the analysis of trends and composition of public spending during the last six years. It begins with a brief review of macroeconomic context to provide the background for analysis of fiscal policy during the last six years and implications for fiscal policy going forward; presents the overall fiscal picture and highlights the fiscal risks to be addressed to sustain the recent progress in fiscal consolidation; shows composition and trends of expenditures and revenues and provides brief conclusions.Policy Note No. 2 “Review of Public Expenditures on Health” examines public expenditures on health in Tajikistan. The note describes the institutional and administrative structure of the health sector; presents health outcomes and health care utilization indicators; describes health financing and presents the main options to expand fiscal space for health; reviews the health financing and organizational reforms implemented in Tajikistan.Policy Note No. 3 “Review of Public Expenditures on Education” examines public expenditures on education in Tajikistan, focusing on assessing efficiency and equity of general education spending. It reviews the characteristics of Tajikistan’s educational system, including access and equity in enrollment and quality of education; analyzes overall public spending on education and a breakdown by financing source, subsector, and expenditure category, as well as unit costs by level of education; examines general education financing—the largest spending unit within the education sector—in more depth; covers demographic trends and enrollment projections and their implications on education spending.Policy Note No. 4 “Key Issues in Public Finance Management” describes the current state of public finance management (PFM) reform in Tajikistan; examines the amount and nature of public spending; and explores the objectives the Government aims to accomplish through its spending. This note provides a number of recommendations to the Government to help achieve its stated PFM reform objectives.Policy Note No. 5 “Fiscal Risks from State-Owned Enterprises” reviews the role of state-owned enterprises (SOE) in Tajikistan's economy and identifies key issues. It assesses the fiscal risks posed by SOEs, especially those in the energy sector; and provides possible solutions. The Note also benchmarks SOEs governance framework and practices in Tajikistan against OECD principles and provides recommendations for strengthening the SOE governance and transparency.Policy Note No. 6 “Capital Expenditures and Public Investment Management” analyzes the composition and trends in capital expenditures; reviews a public investment management process in Tajikistan along the capital budgeting cycle (planning, budgeting, implementation, and audit) and provides recommendations for improving efficiency of capital spending and strengthening public investment management. Show Less -
Regionally, East Asia and the Pacific drives the aggregate trend in GDP growth and continues to show relatively strong economic performance. On average, its GDP growth increased from 5.3 to 6.7 p... Show More +ercent between the first quarters of 2012 and 2013, respectively. This can largely be attributed to the GDP growth in China (at 7.7 percent), as well as the sharp rise in Thailand (from 0.4 to 5.3 percent) and in the Philippines (6.5 to 7.8 percent). However, the income growth rates in these countries have not improved the situation in their labor markets. Show Less -