Unleashing Tajikistan’s Potential through Private Investment

December 19, 2011

Marsha Olive and Christopher Miller

Tajikistan is rich in endowments for strong economic growth. These include a young and growing population; agricultural and mining assets; abundant water and hydropower potential; spectacular scenery; and proximity to large markets in the North-South transport corridor.

So what is missing? Private investment. The private sector brings finance and new technologies, creates much-needed jobs, contributes fiscal revenues for human capital and infrastructure investment, and spurs long-term economic development.

In any country, private investment depends on a satisfactory regulatory and business environment. To invest and grow, private firms need sound laws and regulations, applied consistently and equally to every company.

The Government of Tajikistan understands the importance of improving the business environment, attracting foreign direct investment (FDI), and encouraging new entrepreneurs. In recent years, business regulations were simplified, investor protections in joint-stock companies were strengthened, and the capital required for new business registration was reduced. The Doing Business 2012 report showed that Tajikistan improved by 67 positions in the indicator that measures the ease of Starting a Business, and by 5 positions in the overall ease of doing business rankings from 152 in the Doing Business 2011 to 147 in this year’s report.

Yet in Tajikistan, FDI reached only USD 16 million in 2010, dwarfed by donor aid of USD 400 million in 2009 and migrant remittances of USD 2 billion in 2010. The rate of private investment has averaged about 6 percent of GDP since 2000, which is extremely low by international standards. Domestic investment is dominated by the government. Almost half of medium and large enterprises are state owned. As a result, the private sector makes up less than half of Tajikistan’s GDP compared to three-quarters in Kyrgyzstan and Kazakhstan, and two-thirds of employment in Tajikistan still depends on the public sector.

The 2009 EBRD-World Bank Business Environment and Enterprise Survey (BEEPS) helps provide some explanations. The survey identifies areas where businesses face greater obstacles compared to 2005. This gives Government important information for policy action. According to local businesses surveyed, the top four constraints they face on investment and profitability are taxes, access to finance, electricity, and corruption.

  • Tax: Businesses in Tajikistan file more variety of taxes and more frequently than almost anywhere else in the world. This creates a significant compliance burden, particularly for small- and medium-sized businesses, which slows private sector development and encourages informal operations. In addition, the broad powers granted to tax officials during tax inspections, the complexity of the tax code, and the weak appeals process all serve to discourage entrepreneurs from operating their businesses formally through the rule of law.
  • Access to Finance: High interest rates and the lack of long term finance reflect inefficiencies in the financial sector, slowing the pace of economic growth. Cash outside of banks represents 72 percent of the total money supply, compared to 6 percent in OECD countries and 22 percent in the countries that borrow from the World Bank. The high ratio of cash outside banks in Tajikistan results from the low confidence that the public has in banks and the lack of non-cash payment instruments (e.g., debit and credit cards).
  • Electricity. Many countries have energy shortages. In Tajikistan, however, unreliable supply costs firms the equivalent of 7.5 percent of total sales compared with a regional average in Europe and Central Asia I of 3.8 percent. Difficulties accessing the grid and inefficiency in electricity management, generation, and distribution have economy-wide costs.
  • Corruption. The proportion of respondents citing corruption as a constraint doubled from the 2005 survey. It is particularly burdensome for faster growing firms, suggesting that officials may target these firms for bribes. Corruption affects many aspects of business operations, including obtaining licenses and permits; bidding for government contracts; and getting utility connections.

All these factors make Tajik businesses and exporters less competitive. Investment often goes elsewhere.

These challenges are recognized by the Government of Tajikistan and are being openly discussed through a collaborative process with development partners and the private sector. Indeed, a demand for faster reform and stronger implementation of adopted reforms emerged from the recent 8th Session of the Consultative Council, chaired by the President Emomali Rahmon. Other platforms such as the Development Forum are actively working to improve the investment climate.

Tajikistan’s development partners are working to address the critical issues of improving business environment and share the government’s desire for private sector led economic growth. Among others, the Government of Tajikistan is preparing a USD 10 million project to be financed by IDA that focuses on private and financial sector development in Tajikistan, which aims at implementing some of the reforms carried out to date. These include the one-stop-shop for business registration; unifying land registry and the building registry; creating a single window for utilities simplifying the process of obtaining construction permits; and modernizing the collateral registry. Should these reforms be implemented, business procedures will be simplified and interactions between government officials and businesses reduced. The project will also help develop the mining and financial sectors.

IFC, the private-sector arm of the World Bank Group, has expanded its investment program in Tajikistan significantly in the last three years with commitments of USD 27 million in 10 projects in the financial markets, manufacturing, and infrastructure sectors. IFC’s advisory program in Tajikistan supports various projects focusing on developing financial markets through improving credit information systems, and supporting microfinance, agricultural finance, and leasing. IFC’s corporate governance program promotes transparency and good governance in larger corporations.

The main result for Tajikistan from the Government’s and development partners’ efforts will be jobs. Tajikistan now earns close to half of its GDP from migrant labor remittances. By increasing private investment, which generates employment at home, Tajikistan will increasingly meet the employment aspirations of its young and growing population. The World Bank Group, along with other development partners, is committed to that vision and to unleashing Tajikistan’s tremendous potential.