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publicationJune 30, 2023

Tajikistan Economic Update – Summer 2023

Latest Issue: 
  • Focusing on Boosting Private Sector Dynamism in Tajikistan
Economic growth infographic

Recent Economic Developments

Despite regional instability and global inflation, Tajikistan had strong economic growth and record-low inflation in 2022. Economic activity was bolstered by remittances flows and expanded services and industrial production. Real GDP expanded by 8% in 2022, following the recovery of 2021.

Tajikistan's prudent monetary policy and appreciation of the exchange rate have enabled the country to attain the lowest inflation rate in the region. By end-2022, consumer price inflation had dropped to a mere 4.2%, and the trend continued well into the first half of 2023. Despite rising consumer imports, the external position remained strong thanks to migrant transfers and foreign investments. International reserves sharply increased and now cover more than nine months of imports.

However, challenges remain. The financial industry is struggling with bad loans, overreliance on the US dollar, and risky investments in state-owned enterprises. Small businesses face difficulties in obtaining financing due to limited options and strict collateral requirements. While external grants helped offset revenue loss from the adoption of the new tax code, the authorities maintained fiscal discipline by containing capital expenditures. While the public debt burden substantially eased, Tajikistan remains at high risk of debt distress. In 2022, vulnerable households relied heavily on labor migration as a significant source of income, contributing to a decline in the poverty rate to 13.4% under the international poverty line of $3.65 (2017 PPP). Social assistance reform has been aiming to ensure fairness and identify better vulnerable households.

Economic Outlook and Risks

Tajikistan’s growth prospects are not as strong as its recent performance record. The outlook for 2023 and the medium term are largely affected by uncertainty in the regional geopolitical environment, tightening global financial conditions, and continued weaknesses in accelerating structural reforms. Economic growth is forecast at 6.5% in 2023 and 4.5-5% over the medium term.

The inflow of remittances is expected to normalize after the positive shock of 2022, and weakening global manufacturing is forecast to reduce demand for Tajikistan’s major export commodities—metals and minerals. Foreign investment inflows are expected to remain muted due to the challenging business environment. Tajikistan’s high risk of debt distress also requires a medium-term fiscal discipline, thus constraining any significant hike in public investment programs. The poverty rate is expected to decline in line with GDP growth forecast.

Risks to the outlook and structural weaknesses expose Tajikistan to external and internal shocks. If Russia's invasion of Ukraine lasts through 2023 and sanctions further intensify, a sharp decline in remittance inflows could weaken the banks' earnings, raise non-performing loans, and create pressure on currency depreciation. Tajikistan may need to escalate social assistance transfers should migrants with dual Tajik-Russian citizenships decide to return as a result of pressures for military mobilization. High quasi-fiscal deficits of the state-owned enterprises and pressure to continue the construction of Rogun HPP create fiscal vulnerability. Tajikistan also remains highly sensitive to climate change and natural disaster shocks.

Special Focus: Boosting the Private Sector

Private sector participation in the Tajik economy is relatively large, but its dynamism is quite low. Analysis with micro-level data points to multiple weaknesses: low entry rate, low productivity, limited integration to trade, low incidence of innovation, and limited capabilities. Also revealing is that private firms struggle to grow as they age. All these aspects reflect a business environment that does not reward the more efficient firms or those with the highest growth potential. The COVID-19 pandemic brought additional challenges to this low-level equilibrium scenario with shocks in sales and financial distress. The silver line aspect stems from the increasing use of digital technologies. Still, the apparent digital divide regarding firm size poses questions on the real implications for future productivity performance.

Against this backdrop, and to tackle the long-term weaknesses of the private sector in Tajikistan, it is crucial to remove barriers that prevent the reallocation of resources towards more productive firms so that the private sector becomes more efficient and able to generate more and better jobs. In this case, and to prioritize measures that maximize effects on aggregate demand in the short and medium- terms, it is crucial to give precedence to structural policies to remove impediments to firm entry and expansion in the private sector. Three sets of barriers deserve particular attention: barriers to competition, barriers to foreign direct investment, and barriers to trade. These barriers need to be tackled together because they all reinforce each other in fostering firms' competitiveness.