## 1. Bank Recapitalization Plan ## Source details **Canonical URL:** [1. Bank Recapitalization Plan](https://www.imf.org/-/media/files/publications/cr/2021/english/1tjkea2021004.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2021/english/1tjkea2021004.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2021/english/1tjkea2021004.pdf.json) --- ### Context and structural background - Tajikistan is described as the poorest of the eight Central Asian and Caucuses (CCA) countries; President Rahmon has led the government since 1994 and the next presidential elections will be in 2020. - Structural reform progress has been slow, contributing to poor governance in banks and the public sector and constraining private sector development and employment generation (two-thirds of employment is in agriculture). - Poverty remained significant at 31 percent in 2015; Tajikistan ranks 129 of 188 countries on the Human Development Index. - National strategies: National Development Strategy (NDS) through 2030 and a medium-term development program (MTDS) for 2016–20. ### Economic developments during 2015–16 - Remittances and output - Remittances from Tajik migrant workers in Russia were nearly 37 percent of GDP in 2014. - Remittances declined by 45 percent in nominal USD terms in 2015-16. - Real GDP growth was 6-7 percent in 2015-16, supported by expansionary fiscal policy. - External position and reserves - Current account deficit widened from 2¾ percent in 2014 to 6 percent of GDP in 2015 before narrowing to 3¾ percent of GDP in 2016. - End-2016 reserves provided 2¼ months of import cover. - Exchange rate and monetary developments - Between 2015 and 2016, the somoni depreciated against the dollar by a cumulative 33 percent in nominal terms; the real effective exchange rate depreciated by 21 percent. - Monetary policy: NBT policy rates increased from 8 to 11 percent in March–July 2016, but broad money growth was 37 percent in 2016. - Private sector credit declined in 2016 after moderate growth in 2015. - Fiscal developments - Fiscal policy was expansionary in 2015–16. Overall balance (including PIP spending) widened from balance in 2014 to a deficit of 10.6 percent of GDP in 2016, comprised of 4.5 percent of GDP from regular budget operations and 6.1 percent to recapitalize banks. - Combined with the somoni depreciation, public debt increased significantly. ### Banking sector stress and causes - Longstanding weaknesses: poor governance, widespread lending to connected parties and unprofitable SOEs, exposure to exchange rate risk from short open FX positions and FX lending to unhedged borrowers. - Nonperforming loans (NBT definition: 30+ days overdue) - NPLs rose from 25 percent of gross loans at end-2014 to 54 percent at end-2016. - Capital and profitability - Capital adequacy deteriorated from nearly 15 percent at end-2014 to 7 percent in June 2016. - Two largest banks (Tojiksodirotbank (TSB) and Agroinvestbank (AIB)) became insolvent and illiquid. ### Bank Recapitalization Plan — design and mechanics - Original and amended plan - December 2016 plan announced to recapitalize four banks (including TSB and AIB); later amended to recapitalize only the two systemic banks and liquidate two smaller banks (TPB and Fonombank). - Fiscal cost of the amended plan: TJS 3.32 billion, 6.1 percent of GDP. - Deposit Guarantee Fund to pay insured depositors of liquidated banks. - Recapitalization mechanics - AIB and TSB were recapitalized with five-year government local currency bonds at 2 percent interest, collateralized by bank assets. - Banks used the bonds to obtain liquidity from the NBT to honor deposits and other liabilities. - Incumbent chairmen/CEOs were retained; those removed during temporary administration were reinstated; supervisory boards chaired by senior government officials. - Banks were instructed to produce a three-year plan, limit lending for a year, and take measures to reduce losses. Banks became majority state-owned. - Authorities working with the EBRD to assess viability. ### Staff assessment of the recapitalization - Benefits and shortcomings - Recapitalization alleviated depositor concerns and helped maintain financial stability. - Significant shortcomings: - It was expensive but fell significantly short of the amount needed due to large NPLs. - Further supervisory forbearance was necessary; capital shortfalls were not robustly addressed, implying likely need for further support. - Structure not in line with international standards; liquidity impact created negative spillovers to inflation and the exchange rate. - Shareholders were shielded from losses; reinstatement of chairmen/CEOs increased moral hazard. - Restriction on new lending could drag on economic growth. ### Policy and reform measures implemented and needed - Implemented measures - Temporary administration of TSB and TajPromBank (TPB) in May 2016; asset quality reviews of systemic banks. - Bank recapitalization (Dec 2016) and restructuring plans for TSB and AIB. - Legislation on regulation of payment services and adoption of strategic priorities on consumer protection in 2017. - Further reforms needed (medium term) - Enhanced monitoring of systemic banks; strengthened banking regulation and supervision (lower dollarization, increase minimum capital for new banks, develop stress testing, implement risk-based supervision). - Improved financial inclusion and establishment of a Financial Stability Committee. - Governance improvements and NPL workout focus to restore long-term viability. - Near-term policy mix and sequencing - Priorities: bank repair (restore viability and, where needed, resolution at least cost), fiscal consolidation, flexible exchange rate, tighter monetary policy. - Fiscal consolidation to rely on curtailing capital spending and improving public investment efficiency. ### Outlook, projections, and scenarios - Near-term 2017 developments and pressures - Real GDP growth in first seven months of 2017: 6.4 percent. - Broad money growth January–July 2017: 26 percent y-o-y. - Inflation in July 2017: 8.8 percent; food inflation 12.2 percent; energy price inflation 10.7 percent. - Gap between official and market exchange rates reemerged in early 2017; in May authorities unified the official exchange rate with market interbank rates. - 2017H1 overall fiscal balance: small deficit of 0.3 percent of GDP. - September 2017: authorities issued a $500 million, ten-year Eurobond with coupon 7.125 percent to finance a large energy project, pushing government debt to an estimated 49 percent of GDP. - Staff projections (2017) - Staff project inflation to reach 10 percent at end-2017. - Growth projected to weaken to 4½ percent in 2017 due to fiscal consolidation and declining private sector credit. - Authorities target a decline in the budget deficit of two percentage points of GDP (overall balance, including PIP, excluding bank recapitalization). - Preliminary staff estimates suggest around 7½ percent of GDP in additional capital for banks will be needed to meet regulatory requirements as a going concern; these costs are allocated over 2017-18. - Baseline (medium term) - Assumes prudent macro policies but limited reforms; vulnerabilities remain. - Excluding bank recapitalization needs in 2018, fiscal consolidation projected to decline overall deficit to around 2 percent of GDP. - Real effective exchange rate generally stable; current account deficit declines to around 4.5 percent of GDP in outer years. - Dollar value of remittances would rebound; reserves increase to more than 3.5 months of imports over the medium term. - Growth limited to 4 percent. - Inflation projected to decline and remain in single digits after increase in 2017. - Strong-reform scenario - More fiscal adjustment and deep structural reforms would deliver higher growth and lower vulnerabilities. - Growth would rise to 5 percent in 2018, and to 6 percent in and after 2020. - Deficit would decline to around ¾ percent of GDP; public debt lower than baseline. - Inflation would fall to about 6 percent. - Structural reforms (better SOE and bank performance, improved public investment efficiency, better business environment) would strengthen corporate and bank balance sheets, increase competitiveness, attract investment, and generate employment and growth—offsetting the negative impact of fiscal consolidation. ### Risks and vulnerabilities - Staff view risks as mostly on the downside; some could be high impact. - Delays in structural reforms, particularly in banks or SOEs, could hurt confidence and risk a bank run with a large adverse impact on growth. - Slower growth in emerging markets would reduce remittances, loans, and FDI. - Debt sustainability analysis indicates risk of external debt distress increased from low to high. - Increase in risk driven by higher debt level, projected non-concessional borrowing, lower expected growth, weaker external outlook, and CPIA downgrade reflecting weaker institutions and policies. ### Authorities’ views - Authorities noted remittances have started to rebound and expect significantly higher medium-term growth of 7-7½ percent. - They expect growth to be supported by manufacturing, investment in fixed assets, stable agricultural growth, and a pickup in consumption. - They expect lower inflation (7-8 percent) in 2017, aligned with NBT policy goals. --- ### Debt needs careful management and DSA findings ### Debt outlook and key DSA findings - Staff projections indicate a high risk of debt distress under the baseline scenario. - Ratios breaching LIC-Debt Sustainability Framework (DSF) thresholds: - PV of public and publicly guaranteed (PPG) external debt to the sum of GDP and remittances (breaches threshold). - External debt service to revenue (breaches threshold). - PV of public debt to GDP ratio remains above the 38 percent LIC Debt Sustainability Analysis (DSA) threshold over the medium term. - DSA assumptions for the large energy project (2017-32): - Authorities borrow $1.2 billion to finance the project. - Total project cost is $3.9 billion. - Footnote: The DSA envisages this project is financed by $1.2 billion of external borrowing (including the recent $500 million Eurobond), $1.2 billion in domestic revenue, and $1.5 billion of export proceeds due to early electricity generation. - Projected recapitalization needs and financing of the project increase public debt in the short and medium terms. - Additional fiscal risks that could further increase public debt: - Policy slippages. - Additional potential bank recapitalization needs. - Liabilities of SOEs around 8½ percent of GDP. ### Fiscal policy: consolidation needs and staff operational anchor - Fiscal space has been used up and public debt has risen. - Staff recommends an operational fiscal anchor: - A medium-term primary deficit below 1½ percent of GDP. - This is consistent with reducing the PV of public debt to GDP ratio to the 38 percent LIC DSA threshold and lowering the risk of debt distress to moderate in the strong reform scenario. - Would help create a fiscal buffer to manage risks. - To ensure debt sustainability, staff advises: - Gradually narrow the overall deficit, including PIP outlays, to 0.7-1.7 percent of GDP over the medium term. - Borrow on concessional terms to reduce the PV of public debt below the 38 percent of GDP anchor. - The DSA indicates non-concessional borrowing in excess of $1.2 billion would further threaten debt sustainability. ### Staff recommendations to mitigate risks and protect the social safety net - Additional revenue and expenditure measures: - Expand the tax base through reductions of exemptions and preferences, which reached 11 percent of GDP in 2016. - Address erosion in productivity of the VAT and the real estate and immovable properties taxes. - Cut non-priority expenditure, including capital spending, to offset revenue shortfalls and ensure achievement of the 2017 deficit target. - Rebalance current expenditure to increase social outlays and lower non-priority capital expenditure. - Strengthen the social safety net by expanding benefits and better-targeting poor and vulnerable groups. - No central bank financing of development projects: - Staff counseled against using NBT financing for the large energy project or other projects in the future. ### Authorities’ views on fiscal stance and debt - Authorities viewed the 2017 deficit target level (2.5 percent of GDP) as appropriate over the medium term to manage risks of debt distress. - Agreed that a sound fiscal framework is indispensable and noted potential risks. - Considered staff’s macroeconomic projections to be too conservative and expected external debt to remain below their ceiling (40 percent of GDP) in the medium term. - Emphasized the large energy project as a high priority and indicated it would be partly financed by non-concessional external debt. - Assessment: even with $1.2 billion of external non-concessional borrowing, the authorities judged the risk of debt distress would remain moderate. - Disagreed with assumption of further bank recapitalization in 2017–18 and maintained the state will not be responsible for SOEs’ liabilities under the law. - Revenue measures underway per authorities: - Expansion of the tax base by revising tax preferences. - Identification of new tax sources. - Information campaign on tax administration. - Protection of social outlays; cuts in expenditures might be adopted later if needed. --- ### Exchange rate, monetary policy, and financial sector reforms ### External position and exchange rate policy recommendations - External position assessed as moderately weaker than level consistent with medium-term fundamentals and desirable policy settings. - Real exchange rate assessed to be close to equilibrium, but reserves significantly lower than recommended by the reserve metric. - Staff recommendations — Exchange rate: - Official exchange rate should equal the market rate; exchange rate determined by market forces. - Intervention only to smooth excessive market volatility. - NBT should clarify banks are free to sell foreign exchange cash. - Build FX reserves gradually (about $60 million in 2017); greater reserve accumulation could add to depreciation pressures and increase financial sector risks. - Staff welcomed unification of the official and market exchange rates on May 23 (January-May 2017 saw an actual deviation of more than 2 percent between official and market rates). - Multiple currency practices (MCPs): - MCP arose from use of an official somoni-dollar rate for government transactions based on the previous day’s prevailing market rate, potentially deviating by more than 2 percent. - In September 2017, the NBT removed the MCP by committing to adjust exchange rates for government transactions so as not to deviate by more than 2 percent from the prevailing market rate at the time of the transaction. ### Monetary policy recommendations - Tighten monetary policy further via greater sales of NBT notes at market interest rates to mop up liquidity and establish a standing deposit facility. - Increasing the refinance rate alone would likely have limited impact without effective interest rate transmission. - Increase in reserve requirements not recommended, as excess liquidity is not spread equally among banks. - Additional mopping-up required if additional bank recapitalizations take place. - NBT recapitalization is needed given sterilization’s impact on NBT income and its already negative capital. - Communication: NBT should actively and regularly communicate the monetary framework, that exchange rate will be set by market forces, and its determination to pursue price stability. ### Financial sector reform priorities and staff actions - Crisis management framework: - Swiftly submit legislative amendments to the NBT, banking, deposit insurance, and liquidation laws to strengthen bank resolution and emergency liquidity frameworks. - Bank restructuring and promoting viability: - Implement additional actions to restore long-term viability of the two largest systemic banks and address weaknesses found by asset quality reviews in other systemic banks. - Additional financial assistance to banks will be needed to meet regulatory capital requirements. - Bank governance: - Address governance weaknesses: prevalence of related party-lending, credit risk concentration, low risk mitigation by collateral, indirect credit risk from FX borrowing by unhedged borrowers. - Identify ultimate beneficial ownership and improve internal risk management frameworks. - Promote competition and allow state-owned banks to originate, price and monitor credit independently. - Framework to address NPLs: - Modernize bankruptcy law and foreclosure regime; upgrade NBT regulation. - Set ambitious NPL workout objectives for banks’ Board members and senior managers. - Explore system-wide schemes and address tax disincentives to NPL workouts. - Other regulatory and supervisory measures: - Shift supervision from rules-compliance to a risk-based and forward-looking approach. - Increase risk-awareness via micro and macroprudential measures, stronger capital requirements and internal governance, and stepped up NBT communication. - Financial inclusion: - Further develop mobile banking initiatives that have resulted in greater inclusion. --- ### Program interest, safeguards, data, and the IMF engagement path ### Program interest and prerequisites - Authorities expressed interest in a Fund program at the 2015 Annual Meetings; program discussions were held in 2016 but were not concluded. - To resume program discussions authorities are implementing reforms including: - a medium-term fiscal strategy to assure debt sustainability; - provision of information needed for assessment of macroeconomic implications of the large energy project; - preparation of banking reforms including legislative amendments to create effective bank resolution and emergency liquidity assistance frameworks; resolution plans for TSB and AIB; time-bound plans to address asset quality review deficiencies. - Fund staff indicated a Fund-supported program would need: - early measures to address economic vulnerabilities; - prudent macroeconomic policies to limit debt accumulation; - a flexible exchange rate with prudent monetary policy to limit inflation; - decisive macro-critical reforms. ### Safeguards, data provision, and statistical issues - Most recent safeguards assessment (2009) recommended improved transparency, information technology, and accounting controls. - NBT audit is in accordance with international standards and is published. - NBT’s 2016 financial statements show that its equity position continues to be negative. - Staff noted recent difficulties in receiving certain macroeconomic data due to personnel changes and communication issues; staff urged the authorities to share data on a timely basis in line with Tajikistan’s obligations under Article VIII, Section 5. - Data have shortcomings in national accounts, price statistics, and monetary statistics, but are broadly adequate for surveillance. - Authorities pledged to provide timely data. --- ### Fiscal projections, public debt, and contingent liabilities ### Baseline fiscal adjustment and projections - Baseline macroeconomic framework projects fiscal adjustment of 2 percent of GDP in 2017, net of the cost of bank recapitalization, expected to be achieved mainly through lower capital expenditures. - Overall fiscal deficit projected to remain below 2 percent of GDP over the medium term in the baseline. - Strong reform scenario projects an additional adjustment of about 1 percent of GDP from 2020. ### Key macro projections (selected) - Real GDP growth (2014–22 row in Table 1): 6.7 6.0 6.9 4.5 4.0 4.0 4.0 4.0 4.0. - Headline CPI inflation (end-of-period, 2014–22): 7.4 5.1 6.1 10.0 8.0 6.0 6.0 6.0 6.0. - Broad money (12-month percent change, 2014–22): 7.1 18.7 37.1 9.9 17.3 11.8 16.4 17.2 18.4. - Current account balance (percent of GDP, 2014–22): -2.8 -6.0 -3.8 -6.3 -6.2 -5.6 -5.1 -4.6 -4.3. - Total public and publicly-guaranteed debt (percent of GDP, 2014–22): 27.5 34.3 41.8 52.4 56.2 56.3 54.6 52.9 51.8. - Public debt DSA baseline: PV of public debt would rise from 35.2 percent of GDP in 2016 to a peak of 50.7 percent in 2019 and remain above the 38 percent benchmark until 2026. - Contingent liabilities equivalent to 8.5 percent of GDP in 2016 could be added to public debt should associated risks materialize (stock of accrued liabilities of 23 largest SOEs plus government-guaranteed deposits in Amonat Bank). ### DSA stress and scenario findings - Under baseline two debt indicators breach indicative thresholds; under stress tests all debt indicators breach thresholds. - Strong-reform scenario: debt indicators stay below thresholds but stress tests still show breaches for most indicators. - External debt-service-to-exports + remittances projected to peak at 11 percent in 2025. - Debt service-to-revenue projected to breach the threshold in 2025 at 20.6 percent and remain near this level through 2027. - Most extreme stress (30 percent nominal depreciation) shows PV of debt-to-GDP ratio peaking at 65 percent and remaining above the benchmark across the projection period. ### Recommended government actions on debt - Develop a prudent macro-fiscal framework to contain debt risks. - Reduce the fiscal deficit. - Avoid contracting and guaranteeing large amounts of external debt on non-concessional terms. - Address vulnerabilities in the financial sector and quasi-fiscal liabilities arising from SOEs. - Broadening the revenue and export bases through diversification and continued reforms. - Augment debt management capacity and actively manage contingent liabilities. --- ### Risk Assessment and policy priorities ### Key risks (Risk Assessment Matrix highlights) - Banking sector crisis: Likelihood Medium; Expected Economic Impact High. Effects include large-scale deposit withdrawals, capital depletion, possible deposit freeze, exchange rate depreciation, inflation, decline in credit, lower growth, higher fiscal deficit. Recommended response: strengthen fiscal and monetary policies, implement reforms to improve bank governance and supervision, including AML/CFT. - Delays or reversal of structural reforms (banks or SOEs): Likelihood Medium to high; Expected Economic Impact High. Effects: deterioration in banking health, state takeover of SOE liabilities, worse service delivery, weak investment climate. Recommended response: restructure/resolve loss-making banks, strengthen supervision, improve SOE monitoring and enforce dividend policy. - Protracted slow growth in emerging markets (e.g., Russia): Likelihood Low; Impact Medium. Effects: lower remittances and FDI; recommended response: exchange rate flexibility and tighter fiscal and monetary policies. - Opportunities/other risks: Greater stability in Afghanistan and Pakistan (Likelihood Medium; Impact Medium to High) could boost exports and hydropower exports; recommended response: improve business climate and public spending efficiency. ### Priority policy mix and sequencing (2017 and medium term) - Near term: careful implementation of prudent fiscal and monetary policies; fiscal consolidation via revenue base expansion and cuts in non-priority expenditure; disciplined implementation of the 2017 budget. - Monetary tightening: greater sales of NBT notes at market interest rates, launch of a standing deposit facility, curbs on NBT credit to public investment projects. - Medium-term structural priorities: improve bank governance and performance; clarify tax code and strengthen tax administration; improve efficiency of public spending and SOE oversight; strengthen business environment to lift investment and growth. --- ### Selected fiscal, monetary, and social indicators (selected exact figures from tables) - Remittances, inflows (memorandum, 2014–22): 3,384 2,259 1,867 2,183 2,552 2,932 3,222 3,413 3,614. - Gross official reserves (millions of U.S. dollars, 2014–22): 511 494 653 701 758 911 1,057 1,197 1,401. - Broad money (end-period stock, 2014–18): 9,092 10,790 14,788 16,254 19,061. - Credit to the private sector (end-period stock, 2014–18): 9,516 10,729 10,202 9,055 9,326. - Total public and publicly-guaranteed debt (in millions of U.S. dollars, 2014–22): 2,065 2,149 2,243 2,616 2,960 3,345 3,581 3,811 4,038. - Total public and publicly-guaranteed debt (percent of GDP, 2014–22): 27.5 34.3 41.8 52.4 56.2 56.3 54.6 52.9 51.8. - Nonperforming loans to total gross loans (2010–2017 Q2, Table 7): 7.4 7.2 9.5 15.9 25 29.9 54 50.8 50.3. - Fiscal nominal figures (overall revenues and grants, millions of somoni, 2014–22): 12,949 14,494 15,676 17,861 17,150 20,065 22,363 24,797 27,412 30,342. - Recapitalization bonds–commercial banks memorandum: TJS 3,320 million in 2016 included in overall balance. --- *Source: 1tjkea2021004 - IMF staff report excerpts and data contained in the provided content unit.* ### 1. Bank Recapitalization Plan ### 1. Bank Recapitalization Plan ### Context and structural background - Tajikistan is described as the poorest of the eight Central Asian and Caucuses (CCA) countries; President Rahmon has led the government since 1994 and the next presidential elections will be in 2020. - Structural reform progress has been slow, contributing to poor governance in banks and the public sector and constraining private sector development and employment generation (two-thirds of employment is in agriculture). - Poverty remained significant at 31 percent in 2015; Tajikistan ranks 129 of 188 countries on the Human Development Index. - National strategies: National Development Strategy (NDS) through 2030 and a medium-term development program (MTDS) for 2016–20. ### Economic developments during 2015–16 - Remittances and output - Remittances from Tajik migrant workers in Russia were nearly 37 percent of GDP in 2014. - Remittances declined by 45 percent in nominal USD terms in 2015-16. - Real GDP growth was 6-7 percent in 2015-16, supported by expansionary fiscal policy. - External position and reserves - Current account deficit widened from 2¾ percent in 2014 to 6 percent of GDP in 2015 before narrowing to 3¾ percent of GDP in 2016. - End-2016 reserves provided 2¼ months of import cover. - Exchange rate and monetary developments - Between 2015 and 2016, the somoni depreciated against the dollar by a cumulative 33 percent in nominal terms; the real effective exchange rate depreciated by 21 percent. - Monetary policy: NBT policy rates increased from 8 to 11 percent in March–July 2016, but broad money growth was 37 percent in 2016. - Private sector credit declined in 2016 after moderate growth in 2015. - Fiscal developments - Fiscal policy was expansionary in 2015–16. Overall balance (including PIP spending) widened from balance in 2014 to a deficit of 10.6 percent of GDP in 2016, comprised of 4.5 percent of GDP from regular budget operations and 6.1 percent to recapitalize banks. - Combined with the somoni depreciation, public debt increased significantly. ### Banking sector stress and causes - Longstanding weaknesses: poor governance, widespread lending to connected parties and unprofitable SOEs, exposure to exchange rate risk from short open FX positions and FX lending to unhedged borrowers. - Nonperforming loans (NBT definition: 30+ days overdue) - NPLs rose from 25 percent of gross loans at end-2014 to 54 percent at end-2016. - Capital and profitability - Capital adequacy deteriorated from nearly 15 percent at end-2014 to 7 percent in June 2016. - Two largest banks (Tojiksodirotbank (TSB) and Agroinvestbank (AIB)) became insolvent and illiquid. ### Bank Recapitalization Plan (Box 1) - Original and amended plan - December 2016 plan announced to recapitalize four banks (including TSB and AIB); later amended to recapitalize only the two systemic banks and liquidate two smaller banks (TPB and Fonombank). - Fiscal cost of the amended plan: TJS 3.32 billion, 6.1 percent of GDP. - Deposit Guarantee Fund to pay insured depositors of liquidated banks. - Recapitalization mechanics - AIB and TSB were recapitalized with five-year government local currency bonds at 2 percent interest, collateralized by bank assets. - Banks used the bonds to obtain liquidity from the NBT to honor deposits and other liabilities. - Incumbent chairmen/CEOs were retained; those removed during temporary administration were reinstated; supervisory boards chaired by senior government officials. - Banks were instructed to produce a three-year plan, limit lending for a year, and take measures to reduce losses. Banks became majority state-owned. - Authorities working with the EBRD to assess viability. - Staff assessment of the plan - The recapitalization alleviated depositor concerns and helped maintain financial stability, but had significant shortcomings: - It was expensive but fell significantly short of the amount needed due to large NPLs. - Further supervisory forbearance was necessary; capital shortfalls were not robustly addressed, implying likely need for further support. - Structure not in line with international standards; liquidity impact created negative spillovers to inflation and the exchange rate. - Shareholders were shielded from losses; reinstatement of chairmen/CEOs increased moral hazard. - Restriction on new lending could drag on economic growth. ### Policy and reform measures implemented and needed - Implemented measures - Temporary administration of TSB and TajPromBank (TPB) in May 2016; asset quality reviews of systemic banks. - Bank recapitalization (Dec 2016) and restructuring plans for TSB and AIB. - Legislation on regulation of payment services and adoption of strategic priorities on consumer protection in 2017. - Further reforms needed (medium term) - Enhanced monitoring of systemic banks; strengthened banking regulation and supervision (lower dollarization, increase minimum capital for new banks, develop stress testing, implement risk-based supervision). - Improved financial inclusion and establishment of a Financial Stability Committee. - Governance improvements and NPL workout focus to restore long-term viability. - Near-term policy mix and sequencing - Priorities: bank repair (restore viability and, where needed, resolution at least cost), fiscal consolidation, flexible exchange rate, tighter monetary policy. - Fiscal consolidation to rely on curtailing capital spending and improving public investment efficiency. ### Outlook, projections, and scenarios - Near-term 2017 developments and pressures - Real GDP growth in first seven months of 2017: 6.4 percent. - Broad money growth January–July 2017: 26 percent y-o-y. - Inflation in July 2017: 8.8 percent; food inflation 12.2 percent; energy price inflation 10.7 percent. - Gap between official and market exchange rates reemerged in early 2017; in May authorities unified the official exchange rate with market interbank rates. - 2017H1 overall fiscal balance: small deficit of 0.3 percent of GDP. - September 2017: authorities issued a $500 million, ten-year Eurobond with coupon 7.125 percent to finance a large energy project, pushing government debt to an estimated 49 percent of GDP. - Staff projections (2017) - Staff project inflation to reach 10 percent at end-2017. - Growth projected to weaken to 4½ percent in 2017 due to fiscal consolidation and declining private sector credit. - Authorities target a decline in the budget deficit of two percentage points of GDP (overall balance, including PIP, excluding bank recapitalization). - Preliminary staff estimates suggest around 7½ percent of GDP in additional capital for banks will be needed to meet regulatory requirements as a going concern; these costs are allocated over 2017-18. - Baseline (medium term) - Assumes prudent macro policies but limited reforms; vulnerabilities remain. - Excluding bank recapitalization needs in 2018, fiscal consolidation projected to decline overall deficit to around 2 percent of GDP. - Real effective exchange rate generally stable; current account deficit declines to around 4.5 percent of GDP in outer years. - Dollar value of remittances would rebound; reserves increase to more than 3.5 months of imports over the medium term. - Growth limited to 4 percent. - Inflation projected to decline and remain in single digits after increase in 2017. - Strong-reform scenario - More fiscal adjustment and deep structural reforms would deliver higher growth and lower vulnerabilities. - Growth would rise to 5 percent in 2018, and to 6 percent in and after 2020. - Deficit would decline to around ¾ percent of GDP; public debt lower than baseline. - Inflation would fall to about 6 percent. - Structural reforms (better SOE and bank performance, improved public investment efficiency, better business environment) would strengthen corporate and bank balance sheets, increase competitiveness, attract investment, and generate employment and growth—offsetting the negative impact of fiscal consolidation. ### Risks and vulnerabilities - Staff view risks as mostly on the downside; some could be high impact. - Delays in structural reforms, particularly in banks or SOEs, could hurt confidence and risk a bank run with a large adverse impact on growth. - Slower growth in emerging markets would reduce remittances, loans, and FDI. - Debt sustainability analysis indicates risk of external debt distress increased from low to high. - Increase in risk driven by higher debt level, projected non-concessional borrowing, lower expected growth, weaker external outlook, and CPIA downgrade reflecting weaker institutions and policies. ### Authorities’ views - Authorities noted remittances have started to rebound and expect significantly higher medium-term growth of 7-7½ percent. - They expect growth to be supported by manufacturing, investment in fixed assets, stable agricultural growth, and a pickup in consumption. - They expect lower inflation (7-8 percent) in 2017, aligned with NBT policy goals. *1tjkea2021004 - 1. Bank Recapitalization Plan* ### 17. Debt needs careful management. Staff projections suggest a high risk of debt distress ### 17. Debt needs careful management. Staff projections suggest a high risk of debt distress ### Debt outlook and DSA findings - Staff projections indicate a high risk of debt distress under the baseline scenario. - Ratios breaching LIC-Debt Sustainability Framework (DSF) thresholds: - PV of public and publicly guaranteed (PPG) external debt to the sum of GDP and remittances (breaches threshold). - External debt service to revenue (breaches threshold). - PV of public debt to GDP ratio remains above the 38 percent LIC Debt Sustainability Analysis (DSA) threshold over the medium term. - DSA assumptions for the large energy project (2017-32): - Authorities borrow $1.2 billion to finance the project. - Total project cost is $3.9 billion. - Footnote: The DSA envisages this project is financed by $1.2 billion of external borrowing (including the recent $500 million Eurobond), $1.2 billion in domestic revenue, and $1.5 billion of export proceeds due to early electricity generation. - Projected recapitalization needs and financing of the project increase public debt in the short and medium terms. - Additional fiscal risks that could further increase public debt: - Policy slippages. - Additional potential bank recapitalization needs. - Liabilities of SOEs around 8½ percent of GDP. ### Fiscal policy: consolidation needs and staff operational anchor - Fiscal space has been used up and public debt has risen. - Staff recommends an operational fiscal anchor: - A medium-term primary deficit below 1½ percent of GDP. - This is consistent with reducing the PV of public debt to GDP ratio to the 38 percent LIC DSA threshold and lowering the risk of debt distress to moderate in the strong reform scenario. - Would help create a fiscal buffer to manage risks. - To ensure debt sustainability, staff advises: - Gradually narrow the overall deficit, including PIP outlays, to 0.7-1.7 percent of GDP over the medium term. - Borrow on concessional terms to reduce the PV of public debt below the 38 percent of GDP anchor. - The DSA indicates non-concessional borrowing in excess of $1.2 billion would further threaten debt sustainability. ### Staff recommendations to mitigate risks and protect the social safety net - Additional revenue and expenditure measures: - Expand the tax base through reductions of exemptions and preferences, which reached 11 percent of GDP in 2016. - Address erosion in productivity of the VAT and the real estate and immovable properties taxes. - Cut non-priority expenditure, including capital spending, to offset revenue shortfalls and ensure achievement of the 2017 deficit target. - Rebalance current expenditure to increase social outlays and lower non-priority capital expenditure. - Strengthen the social safety net by expanding benefits and better-targeting poor and vulnerable groups. - No central bank financing of development projects: - Staff counseled against using NBT financing for the large energy project or other projects in the future. ### Authorities’ views on fiscal stance and debt - Authorities viewed the 2017 deficit target level (2.5 percent of GDP) as appropriate over the medium term to manage risks of debt distress. - Agreed that a sound fiscal framework is indispensable and noted potential risks. - Considered staff’s macroeconomic projections to be too conservative and expected external debt to remain below their ceiling (40 percent of GDP) in the medium term. - Emphasized the large energy project as a high priority and indicated it would be partly financed by non-concessional external debt. - Assessment: even with $1.2 billion of external non-concessional borrowing, the authorities judged the risk of debt distress would remain moderate. - Disagreed with assumption of further bank recapitalization in 2017–18 and maintained the state will not be responsible for SOEs’ liabilities under the law. - Revenue measures underway per authorities: - Expansion of the tax base by revising tax preferences. - Identification of new tax sources. - Information campaign on tax administration. - Protection of social outlays; cuts in expenditures might be adopted later if needed. ### Exchange rate and monetary policies: external position and recommended actions - External position assessed as moderately weaker than level consistent with medium-term fundamentals and desirable policy settings. - Real exchange rate assessed to be close to equilibrium, but reserves significantly lower than recommended by the reserve metric. - Staff recommendations — Exchange rate: - Official exchange rate should equal the market rate; exchange rate determined by market forces. - Intervention only to smooth excessive market volatility. - NBT should clarify banks are free to sell foreign exchange cash. - Build FX reserves gradually (about $60 million in 2017); greater reserve accumulation could add to depreciation pressures and increase financial sector risks. - Staff welcomed unification of the official and market exchange rates on May 23 (January-May 2017 saw an actual deviation of more than 2 percent between official and market rates). - Staff recommendations — Monetary policy: - Tighten monetary policy further via greater sales of NBT notes at market interest rates to mop up liquidity and establish a standing deposit facility. - Increasing the refinance rate alone would likely have limited impact without effective interest rate transmission. - Increase in reserve requirements not recommended, as excess liquidity is not spread equally among banks. - Additional mopping-up required if additional bank recapitalizations take place. - NBT recapitalization is needed given sterilization’s impact on NBT income and its already negative capital. - Staff recommendations — Communication: - NBT should actively and regularly communicate the monetary framework, that exchange rate will be set by market forces, and its determination to pursue price stability. - Multiple currency practices (MCPs): - MCP arose from use of an official somoni-dollar rate for government transactions based on the previous day’s prevailing market rate, potentially deviating by more than 2 percent. - In September 2017, the NBT removed the MCP by committing to adjust exchange rates for government transactions so as not to deviate by more than 2 percent from the prevailing market rate at the time of the transaction. - Authorities’ views on monetary and exchange rate policies: - NBT broadly agreed with staff views but disagreed on sources of inflationary pressure, seeing them as temporary and seasonal. - NBT tightened monetary policy but was constrained by impact on its income position. - NBT had adopted measures to enhance transparency, statistics quality, economic analysis and forecasts, and intended to notify the Fund soon of exchange restrictions introduced since the last notification in 2004. ### Structural reforms — overarching priorities - Structural reforms in the financial sector are an overriding priority to overcome pressing macroeconomic vulnerabilities. - Strong reforms in other areas are also needed to secure sustainable and more inclusive growth. - Note: The lack of data precludes analysis on labor markets. ### Financial sector: vulnerabilities and staff actions - Banking sector reform is critical to restore confidence in the banking system. - Staff recommended actions (detailed in Annex III) include: - Crisis management framework: - Swiftly submit legislative amendments to the NBT, banking, deposit insurance, and liquidation laws to strengthen bank resolution and emergency liquidity frameworks. - Bank restructuring and promoting viability: - Implement additional actions to restore long-term viability of the two largest systemic banks and address weaknesses found by asset quality reviews in other systemic banks. - Additional financial assistance to banks will be needed to meet regulatory capital requirements. - Bank governance: - Address governance weaknesses: prevalence of related party-lending, credit risk concentration, low risk mitigation by collateral, indirect credit risk from FX borrowing by unhedged borrowers. - Identify ultimate beneficial ownership and improve internal risk management frameworks. - Promote competition and allow state-owned banks to originate, price and monitor credit independently. - Framework to address NPLs: - Modernize bankruptcy law and foreclosure regime; upgrade NBT regulation. - Set ambitious NPL workout objectives for banks’ Board members and senior managers. - Explore system-wide schemes and address tax disincentives to NPL workouts. - Other regulatory and supervisory measures: - Shift supervision from rules-compliance to a risk-based and forward-looking approach. - Increase risk-awareness via micro and macroprudential measures, stronger capital requirements and internal governance, and stepped up NBT communication. - Financial inclusion: - Further develop mobile banking initiatives that have resulted in greater inclusion. - Authorities’ views: - Acknowledged need for further reforms, highlighted efforts in last two years. - Noted recapitalization of large banks was needed to alleviate social tensions in late-2016 but led to exchange rate pressures and increased domestic debt. - Emphasized debt service of recapitalization bonds would be paid directly by commercial banks, rather than the budget. - Maintained there would be no more government financial assistance to banks and planned cooperation with the EBRD on restructuring the two systemic banks. - Considering removing tax disincentives to NPL workouts. - Highlighted approval of legislation on payment services and credit bureaus, strategic priorities for consumer protection, and upgrades to banking regulation and supervision. ### Fiscal structural reforms: tax administration, PIP, and SOEs - Structural fiscal reforms needed to improve service delivery, enhance the business climate, and reduce fiscal risks. - Key needs: - Significant improvement in tax administration to reduce taxpayer harassment and protect the tax base. - Careful review of the PIP to ensure selection of high return projects and effective implementation. - Decisive measures to improve performance of SOEs, especially Barki Tojik and Talco. - Staff recommended targeted measures: - Clarify the tax code and tax administration procedures: - Ensure access to information on taxes, increase level and number of services to taxpayers, simplify tax collection procedures, prevent tax violations through computerization, use an electronic declaration system, and improve tax and customs procedures. - Strengthen efficiency of public spending: - Improve fiscal institutions to reduce waste, boost expenditure efficiency, and preserve critical social expenditures that protect the poor and vulnerable. - Develop frameworks to identify and monitor growth-enhancing PIP projects: - Strengthen monitoring of PIP implementation and enhance commitment controls to ensure expenditures can react quickly to revenue shortfalls. - Enhance SOEs’ oversight and mitigate fiscal risks: - Build on momentum to improve SOEs’ performance; require SOEs to provide financial and operational plans at the beginning of every year and establish an accountability mechanism. - Set an aggregate debt limit on SOEs based on capacity to repay. - Move ahead with action plans for financial turnaround of Barki Tojik and Talco to achieve cost recovery. - Authorities’ views: - Broadly agreed with the thrust of advice on fiscal structural reforms. - Noted reforms implemented to streamline tax administration procedures and introduce electronic filing, enhance transparency, improve efficiency and fairness of taxes, and ease taxpayer burden. - Indicated PIP is developed on a three-year basis in coordination with donors and includes priority projects, making immediate changes difficult. - Agreed to accelerate SOE reforms to reduce fiscal risks. ### Monetary framework: interim anchor and IT transition - Monetary management reforms needed to anchor inflation and exchange rate expectations and enhance monetary transmission. - NBT wishes to adopt inflation targeting (IT). - Staff recommendations: - Adopt reserve money targeting as an interim anchor while preparing the move to IT. - Strengthen liquidity management, further develop domestic money markets, and establish new facilities to improve interest rate transmission. - Strengthen communications to promote use of new facilities, deepen financial markets, and strengthen interest rate transmission. - Authorities’ views: - NBT has been working toward an IT regime since 2015 and prepared a roadmap for IT implementation. - Seeking TA and support from IMF and other IFIs. - Operational structure of monetary policy revised; work underway to improve effectiveness of instruments and transmission, and expand instruments in interbank and financial markets. - Increased volume of securities sold in 2017 compared to previous years. - In March 2017, introduced standing credit facilities and started conducting overnight and credit auctions based on liquidity forecasts. - Developed new instructions to implement refinancing operations to enhance the role of the refinancing rate and improve transmission. ### Business environment: reforms to support investment and productivity - Improving the business climate will support higher and more productive investment. - Staff recommended measures to improve the business climate: - Bolster anti-corruption efforts: - Strengthen legislative framework in line with the United Nations Convention Against Corruption, further develop and mobilize the AML/CFT framework, and publish income and asset declarations of high-level officials. - Reduce the cost of doing business: - Streamline procedures, improve electricity supply and transparency of tariffs, and enhance trade facilitation through faster procedures. - Authorities’ views: - Welcomed staff’s diagnosis and recommendations. - Agreed on the need to maintain macroeconomic and financial stability and invigorate structural reforms to create dynamic, job-rich, and poverty-reducing growth as a major thrust of their NDS. *Source: 1tjkea2021004 - 17. Debt needs careful management. Staff projections suggest a high risk of debt distress* ### 35. The authorities expressed interest in a Fund program. They raised it at the 2015 Annual ### The authorities expressed interest in a Fund program. They raised it at the 2015 Annual ### Program interest, preparatory reforms, and program prerequisites - Authorities expressed interest in a Fund program at the 2015 Annual Meetings; program discussions were held in 2016 but were not concluded. - In 2016, priority was accorded to program discussions, which delayed the Article IV consultation beyond the 12-month cycle. - In spring 2017, the authorities restated their interest. - To avoid further delays to the Article IV consultation, the 2017 Article IV discussions were used to help identify reforms that could be supported by an IMF program. - Authorities are implementing reforms to pave the way to resume program discussions, including: - a medium-term fiscal strategy to assure debt sustainability; - provision of information needed for an assessment of the macroeconomic implications (on growth, exports, and debt sustainability) of the large energy project; - preparation of banking reforms that include: - (i) legislative amendments to create effective bank resolution and emergency liquidity assistance frameworks in line with international best practices; - (ii) resolution plans for TSB and AIB, consistent with the planned legislative amendments and international best practices; - (iii) time-bound plans to address the deficiencies highlighted in the asset quality reviews of other systemic banks. - Fund staff indicated that a Fund-supported program would need: - early measures to address economic vulnerabilities; - prudent macroeconomic policies to limit debt accumulation; - a flexible exchange rate with prudent monetary policy to limit inflation; - decisive macro-critical reforms. ### Safeguards, data provision, and statistical issues - The most recent safeguards assessment (2009) of the NBT recommended improved transparency, information technology, and accounting controls. - The NBT’s audit is in accordance with international standards and is published. - The NBT’s 2016 financial statements show that its equity position continues to be negative. - Staff noted recent difficulties in receiving certain macroeconomic data due to personnel changes and communication issues; staff urged the authorities to share data on a timely basis in line with Tajikistan’s obligations under Article VIII, Section 5 of the Fund’s Articles. - Data have some shortcomings in the areas of national accounts, price statistics, and monetary statistics, but are broadly adequate for surveillance (Informational Annex). - The authorities pledged to provide timely data. ### Staff appraisal — past policy actions and remaining vulnerabilities - Authorities made considerable efforts to manage the impact of the negative external shocks: - Exchange rate flexibility and the delay in the wage increase for public sector employees helped manage the impact of the external shock in 2015 and early 2016. - In 2016, several reforms were implemented: exchange rates converged in early 2016; the liquidity support interest rate was increased; a greater number of SOEs started paying dividends; the fiscal risks assessment was strengthened; and reserves were accumulated. - Monetary tightening in early 2017 helped manage liquidity pressures. - The unification of the official and market exchange rates, and efforts to promote financial sector development and stability, are welcome. - Remaining vulnerabilities and concerns: - The economy is still facing vulnerabilities, especially in the banking sector, stemming from governance challenges, large external shocks, and an insufficiently strong and comprehensive policy response. - The external position in 2016 was moderately weaker than the level consistent with medium-term fundamentals and desirable policy settings; authorities should seek to build reserves over time and reduce vulnerabilities to risks. - The 2016 bank recapitalization plan was expensive, may prove inadequate to tackle banking distress, could foster moral hazard, and may hold back economic growth; the type of capital provided was not appropriate. - Bailouts of the two large banks have been complemented with rehabilitation plans with specific objectives and milestones, but deeper and more urgent reforms are needed based on an assessment of the banks’ viability. - Specific timebound plans should be agreed to resolve these banks in a manner that protects public finances and ensures an equitable treatment of creditors. - Legislation on bank resolution and emergency liquidity assistance needs to be strengthened urgently and weaknesses in other banks addressed promptly to assure financial stability and maintain depositor confidence. ### Policy recommendations for 2017 and medium-term structural priorities - Macroeconomic policy recommendations for 2017: - Careful implementation of prudent fiscal and monetary policies will support macroeconomic stability. - Fiscal consolidation actions should include expansion of the tax revenue base and cuts in non-priority expenditure to boost public debt sustainability. - Disciplined implementation of the 2017 budget is recommended as a start to consolidation. - Further tightening of monetary policy through: - greater sales of NBT notes at market interest rates to mop up liquidity; - the launch of a standing deposit facility; - curbs on the use of NBT credit to finance public investment projects; - these measures will help anchor expectations and contain inflationary pressures. - Medium-term structural reform priorities: - Sustained and strong implementation of structural reforms accompanied by prudent macroeconomic policies would yield higher and more job-rich growth over the medium term. - Fiscal consolidation and concessional financing would reduce the risk of debt distress and help rebuild policy space. - Maintaining exchange rate flexibility together with strengthening the monetary policy framework will help support competitiveness. - Ambitious structural reforms to: - improve bank governance and performance; - clarify the tax code and tax administration; - improve the efficiency of public spending; - enhance SOE oversight and accountability; - create a better business environment; - these reforms would lift growth significantly over the medium term and result in higher investment, higher incomes, and more and better paying jobs. *Source: IMF staff appraisal and country discussion as provided in the content unit.* ### 41. It is proposed that the next Article IV consultation be held on the standard 12-month ### 1tjkea2021004 - 41. It is proposed that the next Article IV consultation be held on the standard 12-month cycle. ### Economic developments and cross-country comparisons - Proposal: The next Article IV consultation to be held on the standard 12-month cycle. - Tajikistan is the poorest country in the CCA region. - Growth observations: - "Growth has held up in recent years." - "GDP growth became less dependent on Russia." - 2012–2016 annual GDP growth series shown in figures (no single summary number provided in text block). - 2015–16 growth was driven by industry and construction; sectoral contributions to GDP growth shown (Services, Construction, Industry, Agriculture). - Inflation and prices: - "Headline inflation has been stable relative to the region." - Central Asia CPI (Jan-12 to Jan-17) series shown in figures (no single summary number provided in text block). - Per capita income: - "Tajikistan's per capita GDP is lower than its peers." - GDP per capita index series (1991=100) for TJK, CCA Oil Importers, CIS displayed. - 2016 GDP per Capita (In thousands of U.S. dollars) shown for KAZ TK M UZB KGZ TJK (exact values displayed in figure; no single numeric value in surrounding text). - Cross-country GDP growth (2012–2016) indicated for TJ K KAZ KGZ UZB (figure-based). ### Monetary and external sector developments - Exchange rate and reserves: - "Substantial exchange rate adjustment has occurred." (Exchange Rates: Somoni/Ruble index and Somoni/US$ (rhs) shown, Index: January 2012=100). - "Reserves have started to recover, but remain low." - Gross international reserves series and net international reserves series reported in tables and figures. - Gross official reserves (in millions of U.S. dollars): 511 494 653 701 758 911 1,057 1,197 1,401 (2014–22 row in Table 1). - In months of next year's imports: 1.8 2.0 2.3 2.3 2.2 2.5 2.7 2.9 3.2 (2014–22). - Remittances and trade: - "Remittances and imports have fallen." (Remittances and Trade percent change, year-on-year in U.S. dollars shown in figure). - Remittances, inflows (memorandum): 3,384 2,259 1,867 2,183 2,552 2,932 3,222 3,413 3,614 (2014–22). - Exports of goods and services (U.S. dollar, percent change): -10.7 -1.4 12.0 0.5 0.4 2.8 3.1 14.2 3.1 (2014–22). - Imports of goods and services (U.S. dollar, percent change): -19.1 -19.9 -10.4 12.4 10.5 10.4 7.2 7.0 4.7 (2014–22). - Monetary policy and aggregates: - "Tajikistan has recently raised its key policy rate." - Money growth increased significantly in 2015–16 (figures show Reserve money and Broad Money year-on-year). - Broad money (12-month percent change): 7.1 18.7 37.1 9.9 17.3 11.8 16.4 17.2 18.4 (2014–22, Table 1). - Reserve money (12-month percent change): 13.2 16.0 71.1 15.7 7.7 6.7 10.6 15.5 17.6 (2014–22, Table 1). - Credit to private sector (12-month percent change): 31.5 12.7 -4.9 -11.2 3.0 4.7 5.6 8.4 12.4 (2014–22, Table 1). - Refinancing rate (eop/ latest value): 8.0 8.0 11.0 (2014–16, Table 1). - Current account: - "After widening in 2015, the current account deficit narrowed in 2016." - Current account balance (percent of GDP): -2.8 -6.0 -3.8 -6.3 -6.2 -5.6 -5.1 -4.6 -4.3 (2014–22, Table 1). - Current account (in millions of U.S. dollars): -258 -472 -265 -458 -444 -429 -412 -400 -395 (2014–22, Table 6). ### Financial sector and fiscal developments - Banking sector performance: - "Profitability of the financial sector has plummeted." - Return on assets (ROA) and Return on equity (ROE) series depicted (figure). - Non–performing loans have increased sharply: - Non–Performing Loans (In percent of total loans) series shown (Mar-12 to Mar-16). - Table 7: Nonperforming loans to total gross loans: 7.4 7.2 9.5 15.9 25 29.9 54 50.8 50.3 (2010–2017 Q2). - Private credit declined in 2016. - Banking system capital: - "After plummeting, the banking system capital recovered due to bank recapitalization." - Capital Asset Ratio (Tier I capital as percent of risk-weighted assets) series shown (Mar-12 to Mar-16). - Fiscal position: - "The fiscal position has deteriorated." - Debt increased significantly in 2015–16. - Total public and publicly-guaranteed debt (percent of GDP): 27.5 34.3 41.8 52.4 56.2 56.3 54.6 52.9 51.8 (2014–22, Table 1). - Total public and publicly-guaranteed external debt (in millions of U.S. dollars): 2,065 2,149 2,243 2,616 2,960 3,345 3,581 3,811 4,038 (2014–22, Table 6). - Fiscal balances: - Overall balance (incl. PIP and stat. discrepancy), percent of GDP: 3.0 0.0 -1.9 -10.6 -6.5 -5.4 -1.9 -1.8 -1.7 -1.7 (2014–22, Table 1 and Table 3). - The 2016 overall balance includes 6.1 percent of GDP for bank recapitalization; 2017 includes 4 percent of GDP for bank recapitalization; 2018 includes 3.5 percent of GDP for bank recapitalization. Estimates are preliminary and subject to change. - General government finances (percent of GDP, Table 3): - Overall revenues and grants: 28.4 29.9 28.8 30.3 27.4 29.1 29.4 29.6 29.6 29.8 (2014–22). - Total expenditure and net lending: 28.4 31.8 39.4 32.8 33.9 34.5 31.3 31.4 31.4 31.4 (2014–22). - Capital expenditures: 10.1 13.8 15.0 12.2 11.6 11.2 11.0 10.7 10.9 11.2 (2014–22). - Interest payments: 0.5 0.4 1.4 0.8 1.1 1.5 1.7 1.8 1.8 1.8 (2014–22). - Fiscal tables (selected nominal figures, Table 2): - Overall revenues and grants (in millions of somoni): 12,949 14,494 15,676 17,861 17,150 20,065 22,363 24,797 27,412 30,342 (2014–22). - Total expenditures and net lending (in millions of somoni): 12,965 15,401 21,448 19,315 21,231 23,818 23,830 26,312 29,000 32,059 (2014–22). - Capital expenditures (in millions of somoni): 4,620 6,687 8,169 7,204 7,286 7,703 8,376 9,000 10,089 11,392 (2014–22). - Recapitalization bonds–commercial banks: reported as a memorandum item; TJS 3,320 million in 2016 included in overall balance (Table 2 footnote). ### Key macroeconomic projections and indicators (Table 1 / Table 6) - National accounts (real growth and price indicators): - Real GDP growth: 6.7 6.0 6.9 4.5 4.0 4.0 4.0 4.0 4.0 (2014–22). - GDP deflator (cumulative): 5.5 0.1 5.3 10.0 6.0 6.0 6.0 6.0 6.0 (2014–22). - Headline CPI inflation (end-of-period): 7.4 5.1 6.1 10.0 8.0 6.0 6.0 6.0 6.0 (2014–22). - Headline CPI inflation (period average): 6.1 5.8 5.9 8.9 8.0 6.0 6.0 6.0 6.0 (2014–22). - Investment and saving (percent of GDP): - Investment: 19.3 19.2 21.7 17.4 17.4 16.4 16.1 16.7 16.7 (2014–22). - Gross national savings: 16.5 13.2 17.9 11.1 11.1 10.8 11.0 12.1 12.4 (2014–22). - External sector (Table 6 summary): - Balance on goods and services (in millions of U.S. dollars): -3,307 -2,495 -2,050 -2,414 -2,760 -3,116 -3,378 -3,541 -3,727 (2014–22). - Exports (in millions of U.S. dollars): 527 572 691 688 684 701 721 852 877 (2014–22). - Imports (in millions of U.S. dollars): 3,528 2,826 2,604 2,952 3,287 3,654 3,920 4,197 4,388 (2014–22). - Remittances, inflows (memorandum): 3,384 2,259 1,867 2,183 2,552 2,932 3,222 3,413 3,614 (2014–22). - Current account balance (in percent of GDP): -2.8 -6.0 -3.8 -6.3 -6.2 -5.6 -5.1 -4.6 -4.3 (2014–22). - Monetary and banking (selected): - Broad money (levels and growth): Broad money (end-period stock) 9,092 10,790 14,788 16,254 19,061 (2014–18); 12-month growth percent: 7.1 18.7 37.1 9.9 17.3 (2014–18). - Credit to the private sector (end-period stock and growth): Credit to the private sector (end-period stock) 9,516 10,729 10,202 9,055 9,326 (2014–18); 12-month growth percent: 31.5 12.7 -4.9 -11.2 3.0 (2014–18). - Public debt and debt service: - Total public and publicly-guaranteed debt (in millions of U.S. dollars): 2,065 2,149 2,243 2,616 2,960 3,345 3,581 3,811 4,038 (2014–22). - Total public and publicly-guaranteed debt (percent of GDP): 27.5 34.3 41.8 52.4 56.2 56.3 54.6 52.9 51.8 (2014–22). - Debt service on PPG external debt (in millions): 126 126 141 161 191 223 245 270 294 (2014–22). - Debt service on PPG external debt (percent of exports of goods and services): 15.1 15.3 15.2 17.3 20.5 23.3 24.8 23.9 25.4 (2014–22). ### Social and development indicators (selected) - Population and poverty: - Population: 8.7 million (2016). - Per capita GDP: US$799 (2016). - Poverty rate: 31 percent (2015). - Main exports: aluminum, gold, cotton (2016). - Millennium Development Goals and social indicators (Table 8, selected): - Employment to population ratio, 15+, total (%) (modeled ILO estimate) (latest columns): 53.7 (column labeled 2015). - Primary completion rate, total (% of relevant age group): 95.8 65.9 (table entries across years and aggregates). - Immunization, measles (% of children ages 12-23 months): 70 88 85 94 97 78.0 93.6 (series across years). - Life expectancy at birth, total (years): 62.9 62.4 63.7 66.1 68.6 69.8 (series across years). - GNI per capita, Atlas method (current US$): 210 170 320 910 1,110 1,061 1,182 3,108.9 (series across years and aggregates). *Source: Data provided by the Tajikistan authorities, National Bank of Tajikistan, World Development Indicators, World Bank Millennium Development Goals Databank, and IMF staff calculations and estimates, as presented in the original content unit.* ### Annex I. Response to Past Fund Advice ### Annex I. Response to Past Fund Advice ### Exchange Rate and Monetary Policy - Advice: Allow a steady and substantial depreciation of the exchange rate to protect reserves, cushion the domestic purchasing power of falling remittances, and help protect competitiveness. Response: Mostly done. After a reduction in reserves, the authorities allowed substantial depreciation to restore competitiveness. In 2016, after the exchange rate stabilized, the authorities started to rebuild reserves. - Advice: Proceed quickly with the conversion of additional NBT non-monetary gold and have the MOF sell its monetary gold to the NBT, to strengthen both external and fiscal buffers. Response: Partially done. There have been some sales of nonmonetary gold to the NBT. - Advice: Pursue more conservative reserve management practices, and seek technical assistance from international partners in this area. Response: Partially done. The authorities requested TA from the Fund and prepared a reserve management strategy. However, recommendations on diversification of reserve assets and asset/liability matching were not fully implemented. - Advice: Actively use the refinance rate to signal tighter monetary conditions as long as price pressures persist. Response: Done. Refinance rate was raised from 8 to 11 percent in 2016 and from 11 to 16 percent in 2017. New monetary policy instruments have been introduced and rates on these have been linked to refinance rate to strengthen its policy signal. - Advice: Limit NBT liquidity assistance to a short-term, periodic basis, and only to solvent banks meeting all prudential norms and secured by proper collateral. Response: Not done. Lending to insolvent banks rolled over with limited collateral. A large part of NBT liquidity assistance was repaid when two banks were recapitalized in late-2016. - Advice: Avoid further transfers of government deposits into commercial banks. Response: Done. No government deposits have been transferred into commercial banks since 2015. At end-2016, the authorities withdrew all deposits in commercial banks except from one bank subject to liquidation proceedings. - Advice: Develop the government debt market so that a monetary policy framework can be developed in support of a more flexible exchange rate regime. Response: Partially done. Modest progress has been made in development of the primary market, with the MOF issuing about TJS 35-40 million per month at an interest rate of 0.99 percent. - Advice: Unify the official and bilateral interbank/cash market exchange rates. Response: Done. Partially implemented in February-December 2016 and after May 2017. The authorities have eliminated the multiple currency practices in September 2017. - Advice: Ensure that the official exchange rate is calculated using only interbank transactions. Response: Done. Rates converged in February 2016, but in late 2016/early 2017 gaps emerged between official and interbank/cash rates. Rate converged again in May 2017. - Advice: Remove the specified allowable rates for foreign currency transactions between banks and their customers. Response: Done. The 1 percent cap on resale of foreign exchange acquired from the interbank/intrabank market was removed in September 2017. ### Financial Sector - Advice: Immediately improve preparedness to handle possible financial sector instability, including through the establishment of a financial stability committee and a review of the coverage, funding, and payout of the deposit insurance system in view of high economic and deposit growth in recent years. Response: Partially done. The establishment of the financial stability committee is underway, supported by technical assistance from the Fund and the World Bank. Completion is contingent on the adoption of the amended NBT Law. The payout from Deposit Insurance Fund was increased from TJS 14,000 to 17,500 per depositor. - Advice: Rapidly resolve AIB in line with good international practices, including with a fit and proper management team, and a halt to the practice of directed lending that has undermined the financial health of AIB and other banks. In the absence of a commitment to an acceptable resolution strategy in the near future, which would require government recapitalization of AIB under strict conditions, AIB should be liquidated. Response: Not done. However, the NBT is working with the EBRD on the preparation of a Strategic Restructuring Plan for AIB. - Advice: No liquidity assistance to AIB—other than possibly in the context of a resolution strategy in line with good international practice—given the poor governance and poor health of the bank, and liquidity provision to other banks only if they are solvent and can provide proper collateral. Response: Not done. In December 2016, support was provided without a resolution strategy for AIB being in place. The design of the recapitalization plan was not in line with good international practices. - Advice: Shift the NBT to a more aggressive stance on banking supervision and regulation, including through a change in the law to require prompt corrective action by the NBT when banks are in violation of prudential norms. Response: Partially done. NBT has improved and tightened supervision in 2016-2017. During this period, two banks and more than 40 microfinance organizations have been slated for liquidation; provisional administration has been appointed in 3 banks; the NBT has restricted or limited several transactions of 7 banks which were assessed as overly risky; and replaced bank management in several cases. The NBT is working with LEG to prepare legislative changes to strengthen the legal framework. ### Fiscal Policy and SOE - Advice: Continue to prioritize expenditure while protecting, or even increasing, social outlays. Work closely with donors to secure additional financing to support social expenditures for returning migrant workers and to improve mechanisms for delivering social assistance. Response: Partially done. Social outlays have been prioritized. - Advice: Maintain an overall balanced budget in 2015 to help contain pressure on the foreign exchange market. Response: Not done. The overall budget balance was -1.9 percent of GDP. - Advice: Notwithstanding the improvement in Tajikistan’s debt rating to low risk of debt distress, continue to seek all loans on concessional terms in view of thin fiscal buffers, rising debt service, and limited availability of foreign exchange. Response: Not done. With the recent Eurobond issue, the government borrowed on non-concessional terms, although all other government borrowing has been on concessional terms. - Advice: Pursue a comprehensive restructuring of Barki Tojik (BT) in cooperation with donors to rationalize the electricity sector, improve financial discipline, lessen pressure for directed lending from banks to support major loss-making SOEs, and reduce fiscal risks. Response: Not done. The BT reform agenda focused on restructuring and financial recovery is underway. Some progress has been made. Specifically, the Asian Development Bank (ADB) is providing support in the form of the technical assistance and advisory support to implement the restructuring of BT. Functional unbundling into generation, transmission and distribution has been completed and BT has submitted a resolution to the Government to complete legal separation. On financial recovery, a revised action plan was approved by the Deputy Prime Minister on April 5, 2017 and some progress was achieved on its implementation. - Advice: Enforce fully the dividends policy for SOEs that became effective in 2014, and expand the policy to cover additional large SOEs (such as Talco Management) and all SOEs that are majority owned by the government. Response: Done. Except for Talco Management. - Advice: Increase SOE transparency by requiring all large SOEs to conduct and publish IFRS audits. Response: Partially done. There is a requirement for all large SOEs to conduct audits and, for those that are not State Unitary Enterprises, to publish them. However, there is an enforcement problem and few comply. - Advice: To help improve the efficiency of public investment, require all large SOEs to submit detailed investment plans annually for review to the SOE monitoring division (SOEMD) in the MOF and continue to strengthen the capacity of the SOEMD to monitor and analyze the operations and finances of SOEs. Response: Partially done. All SOEs are required to submit detailed investment plans annually and some do. The annual statement of fiscal risks from SOEs was submitted to the parliament along with the budget. - Advice: Submit the annual statement of fiscal risks arising from SOEs to parliament with the budget and have the SOEMD prepare an annual report on how to mitigate those fiscal risks. Response: Partially done. An annual statement of fiscal risks arising from SOEs was submitted to the parliament along with the budget. A fiscal risks mitigation strategy and action plan was adopted by the MoF in late 2016 and a committee was established to oversee its implementation. - Advice: Move away from the system of revenue targets to a compliance based tax system that treats all taxpayers fairly, and that does not encourage tax evasion or erode the tax base. Response: Not done. ### Other Structural policies - Advice: Implement measures to facilitate labor migration to alternative destinations including targeted language and skills training, and active engagement with other countries to establish labor migration agreements. Response: In progress. The measures taken to date to facilitate labor migration are concentrated in the Russian Federation, but the authorities are discussing measures with Turkey, Kazakhstan, UAE, and some Eastern European countries. *Source: Tajikistan 2015 Article IV Staff Report and IMF staff.* ### Annex IV. Risk Assessment Matrix ### Annex IV. Risk Assessment Matrix ### Banking sector crisis - Likelihood: Medium - Expected Economic Impact if Realized: High - Key expected effects if realized: - Large-scale deposit withdrawals, sharp reduction/depletion of banks’ capital. - In the near term, state intervention in banks, possible deposit freeze, exchange rate depreciation and/or increase in inflation, and decline in credit to the economy. - Lower growth results in a decline in domestic revenue and a higher fiscal deficit. - Exchange rate depreciation and/or high inflation leads to further dollarization and capital flight. - Banking sector constrained in fulfilling its intermediation role, resulting in less credit to the economy, inefficient allocation, lower access to finance, and slower growth. - Recommended policy response: - Possible state intervention in banks, deposit freeze, exchange rate depreciation and/or increase in inflation. - Strengthen fiscal and monetary policies to maintain macroeconomic stability and implement reforms to improve bank governance and performance and strengthen bank supervision, including for AML/CFT. ### Delays or reversal of structural reforms, particularly in banks or SOEs - Likelihood: Medium to high - Expected Economic Impact if Realized: High - Key expected effects if realized: - The banking sector’s financial health deteriorates due to rising losses and NPLs, shortcomings in governance, and nonenforcement of prudential requirements. - SOE performance deteriorates and results in the state taking over SOE liabilities, adding to government debt, and continued poor service delivery would hurt investment climate. - Recommended policy response: - Restructure and/or resolve loss-making banks, strengthen supervision and regulation of banks, and strengthen legislation to resolve banks in financial difficulty. - Strengthen monitoring of SOE performance, enforce dividend policy, and improve accountability of SOEs’ management. ### Protracted period of slow growth in emerging markets, especially in Russia due to low oil prices, and slower growth in China - Likelihood: Low - Expected Economic Impact if Realized: Medium - Key expected effects if realized: - Sustained slow growth in Russia would affect growth in Tajikistan through lower demand for migrant workers and lower remittances. - Slower growth in China could reduce loans to finance capital projects and inward FDI, which could reduce investment and growth and result in pressure on the somoni. - Recommended policy response: - Allow exchange rate flexibility and tighten fiscal and monetary policies. - Ensure that banks’ open FX positions and FX exposures (e.g., loans to unhedged borrowers) are managed carefully. ### Greater stability in Afghanistan and Pakistan (opportunity) - Likelihood: Medium - Expected Economic Impact if Realized: Medium to High - Key expected effects if realized: - Would allow Tajikistan to export significantly more goods and hydropower to South Asia. - Would support higher growth, economic and export diversification, and job creation. - Recommended policy response: - Improve business climate to spur domestic and foreign investment; ensure greater transparency and efficiency of public spending to support infrastructure development; strengthen anti-corruption efforts. - Assure exchange rate flexibility to support competitiveness. ### Heightened security dislocation in the Middle East and or South or Central Asia having negative spillovers to Tajikistan - Likelihood: Low - Expected Economic Impact if Realized: Low to Medium - Key expected effects if realized: - Would reduce economic confidence, investment and result in lower growth and result in volatility of the exchange rate. - Lower growth results in a decline in domestic revenue and a higher fiscal deficit. - Excessive volatility of the exchange rate leads to further dollarization, capital flight and inflation. - Recommended policy response: - Strengthen fiscal and monetary policies to maintain macroeconomic stability. - Closely monitor banking sector and enforce prudential norms. *The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.* ### 10. The current projections envisage a significant upfront fiscal adjustment to reduce the fiscal ### 10. The current projections envisage a significant upfront fiscal adjustment to reduce the fiscal ### Baseline fiscal and macro projections - Baseline macroeconomic framework projects fiscal adjustment of 2 percent of GDP in 2017, net of the cost of bank recapitalization. - This adjustment is expected to be achieved mainly through lower capital expenditures. - The overall fiscal deficit is projected to remain stable at below 2 percent of GDP over the medium term and improve over the long term in the baseline scenario. - In the strong reform scenario an additional adjustment of about 1 percent of GDP is projected from 2020. ### Key baseline macroeconomic indicators (selected, percent or absolute where indicated) - Real GDP growth, percent: 2015-19: 4.4; 2020-34: 5.0; Current DSA columns show varied period values including 5.1 and 4.0 with ranges and period splits evident. - GDP deflator, percent: 7.9; 6.0; 5.5; 6.0 with other period values shown. - Nominal GDP (billions somonis): 67.3; 216.5; 62.1; 181.1 with period comparisons and DSA adjustments. - Revenue and grants: 26.3; 26.2; 28.9; 30.3. - Expenditure and net lending: 28.6; 29.6; 34.2; 32.7. - Overall balance (incl. PIP): -2.3; -3.5; -5.3; -2.3; -3.0; 1.2 (period-specific entries present). - Public debt: 30.4; 33.0; 43.6; 40.9; 13.2; 7.9 (period columns and DSA comparisons provided). - Domestic debt: 3.2; 2.8; 10.2; 3.9; 7.0; 1.1. - External debt: 48.0; 49.5; 38.2; 42.7; -9.8; -6.8. - Exports of goods and services: 19.9; 25.0; 12.5; 11.3; -7.4; -13.7. - Imports of goods and services: -48.4; -51.0; -47.3; -52.2; 1.1; -1.2. - Current account balance: -5.1; -2.9; -5.6; -4.4; -0.5; -1.5. ### External DSA findings — baseline and stress - Based on Tajikistan’s current CPIA-based performance classification, two debt indicators breach indicative thresholds under the baseline. - Under stress tests, all debt indicators would breach the thresholds. - PV of PPG external debt-to-(GDP + remittances) ratio: - Projected to peak at 28.1 percent in 2019. - Stays above or upon the indicative threshold (27 percent) for four years before declining gradually to below 20 percent in the outer years. - PV of external debt-to-exports + remittances ratio: - Projected to peak at 77 percent in 2019; remains below its respective threshold at peak under baseline. - PV of external debt-to-revenue: - Projected to peak at 151 percent in 2019; below its respective threshold at peak under baseline. - Debt service indicators: - Significantly higher than average in 2025-27 because of large repayments. - External debt-service-to-exports + remittances ratio projected to peak at 11 percent in 2025. - Debt service-to-revenue ratio projected to breach the threshold in 2025 at 20.6 percent and remain near this level through 2027. - In the most extreme stress tests, multiple external debt indicators breach indicative thresholds with large margins under the most severe shocks. ### Strong-reform scenario - Debt indicators stay below the thresholds in the strong reform scenario, but under stress tests most debt indicators breach thresholds. - PV of PPG external debt-to-GDP + remittances ratio: - Projected to decline gradually from a peak of 27 percent in 2019 to 14 percent by end–2037. - PV of external debt-to-exports + remittances ratio: - Projected to decline monotonically from 77 percent to 53 percent by the end of the projection period. - PV of external debt-to-revenue: - Projected to drop from 140 percent to below 60 percent over the projection period. - External debt service indicators: - Would spike in 2025–27 but remain below the thresholds in the strong-reform baseline. - Under the most severe shocks, PV of external debt to GDP + remittances, PV of external debt-to-exports + remittances and external debt service-to-revenue would breach indicative thresholds; some breaches are by only small margins at peaks. ### Public DSA and vulnerabilities - Public debt indicators are projected to increase over the medium term, reflecting financing for a large energy project and additional domestic debt of about 7.5 percent of GDP in 2017-18 for bank recapitalization. - Under the baseline scenario: - PV of public debt would rise from 35.2 percent of GDP in 2016 to a peak of 50.7 percent in 2019. - Projected to be above the benchmark (38 percent for a weak policy performer) for nine years until 2026. - Under the strong-reform scenario: - PV of public debt would peak at 48.8 percent of GDP in 2018 and stay above the benchmark until 2022. - Liabilities of SOEs present fiscal risk that, if realized, would increase the public debt level. - Standard stress tests show public debt is sensitive to shocks: - A 30 percent depreciation of the nominal exchange rate (most extreme stress test) shows the PV of the debt-to-GDP ratio peaking at 65 percent and remaining above the benchmark across the whole projection period. ### Fiscal contingent liabilities - Contingent liabilities equivalent to 8.5 percent of GDP in 2016 could be added to public debt should associated risks materialize. - This 8.5 percent figure is based on the stock of accrued liabilities of the 23 largest SOEs at end-December 2016 plus all deposits in Amonat Bank, which are government guaranteed as they are not insured by the deposit insurance fund. - These contingent liabilities could add to the already high risk of debt distress. ### Conclusions and policy recommendations - The DSA, using thresholds for a CPIA performance rating of a weak policy performer, concludes Tajikistan’s risk of debt distress is high. - Under the baseline scenario, two debt indicators breach indicative thresholds. - Under the stress test, all debt indicators breach thresholds. - Public debt indicators are expected to increase over the medium term given projected costs of bank recapitalization and external financing for a large energy project and remain above the benchmark for a few years; the most severe shock would cause public debt to stay above the benchmark across the projection period under the baseline. - Tajikistan’s risk of debt distress would be lower in a strong-reform scenario, though stress tests still show breaches. - Recommended government actions: - Develop a prudent macro-fiscal framework to contain debt risks. - Reduce the fiscal deficit. - Avoid contracting and guaranteeing large amounts of external debt on non-concessional terms. - Address vulnerabilities in the financial sector and quasi-fiscal liabilities arising from SOEs. - Allow a margin to absorb the debt impact of potential economic shocks. - Broaden the revenue and export bases through diversification and continued reforms to improve the policy framework and institutional capacity to support a higher growth path over the medium and long run. - Augment debt management capacity and actively manage contingent liabilities so they do not add to the state’s liabilities. *Source: IMF staff DSA and chapter text.* ### 20. The authorities’ views. The authorities consider that the debt risk remains moderate and are ### 20. The authorities’ views. The authorities consider that the debt risk remains moderate and are ### Authorities’ assessment of debt risk and limits - The authorities consider that the debt risk remains moderate. - They are committed to keeping external debt below 40 percent of GDP over the medium term, the upper limit set under Tajikistan’s debt management strategy. ### Views on domestic debt and state assumption of liabilities - The authorities disagree with the assumption of public sector led bank recapitalizations in 2017–18 because of the harmful macroeconomic effects of the one carried out in 2016. - They maintain that the state will not take on SOEs liabilities because SOEs are solely responsible for their liabilities under Tajikistan laws. - Consequently, they expect: - Domestic debt to begin declining in 2017 as the recapitalized banks repay the outstanding bonds. - No significant fiscal risks emerging from SOEs liabilities. ### Macroeconomic projections and differences with staff - The authorities emphasize that staff’s macro projections might be too conservative. - They expect annual real GDP growth at or above 7 percent per year over the medium and long terms, as opposed to staff’s baseline projection of 4 percent. - They consider that remittances growth is likely to be stronger than the staff projection. ### External financing and large energy project - The authorities are actively seeking external financing, both on concessional and non-concessional terms, for the large energy project. - The authorities believe that there is fiscal space for additional external borrowing for this project based on the macroeconomic indicators and their projections. - They note that the attracted external resources are primarily used in strategic infrastructure projects financing and in implementation of reforms, which in turn will stimulate economic growth in the long term and strengthen the economy. *Source: Authorities’ views as presented in the IMF staff report excerpt.* ### 2007. To date more than 600 SMEs have had access to business advice and industry expertise. ### 1tjkea2021004 - 2007. To date more than 600 SMEs have had access to business advice and industry expertise. ### SME advisory activity and client impact - To date more than 600 SMEs have had access to business advice and industry expertise. - Advisory projects implemented across more than 15 industry sectors, with the most common being agribusiness, construction, and wholesale and retail trade. - Project evaluations one year after completion (data from 2007-2016) show: - 67% of evaluated clients increased their turnover. - 88% of evaluated clients improved productivity (revenue per employee). - 66% of evaluated clients increased their number of employees. - 16% of clients accessed finance (direct, indirect, and external investments). - New framework initiative to be launched in 2017 in partnership with local FIs – Women in Business. ### Municipal services commercialization and financing constraints - Improving availability, reliability and quality of municipal services (water supply, solid waste, urban transport) is a necessary precondition for commercialization of these utilities. - Progress towards commercialization and improvements in quality go hand in hand: once quality improves, willingness to pay will increase, generating resources for further improvements. - To address affordability constraints of the Tajikistani population and the debt capacity constraints of the government, a high level of grant co-financing will be required. - EBRD continues to be active in the municipal services sector. ### Energy sector priorities and EBRD support - Improving the quality of energy supply, regulation and energy efficiency is vital across the economy and for quality of life. - First priorities: rehabilitate existing infrastructure and restructure the state power utility company Barki Tojik. - Progress with reforms will allow commercialization of the sector and opening it to private sector investment. - Improving energy efficiency and reducing energy losses could contribute to improving energy security. - Conditional on the government’s commitment to energy sector reform, the Bank will selectively finance rehabilitation of energy sector infrastructure and support energy efficiency measures at Barki Tojik. ### Relations with the Asian Development Bank (ADB) and key ADB activities - ADB partnership with Tajikistan since 1998; approved over $1.5 billion in concessional loans, grants, and technical assistance. - ADB is Tajikistan’s largest multilateral development partner. - Infrastructure and sectoral highlights: - Over 650 kilometers of Tajikistan’s roads rehabilitated. - In energy, projects helped improve three hydropower plants and install or upgrade over 600 kilometers of power transmission and distribution lines. - ADB-supported projects have made clean water available to nearly 30,400 households. - Over 140,000 hectares of land benefited from improved irrigation, drainage, and flood management. - A special ADB climate resilience project helped over 100,000 residents cope with adverse effects of climate change. - In 2016, ADB approved a project to boost agriculture production and food security by improving water resource management of the Pyanj River Basin. - Education and health: - Built or upgraded 1,770 rural classrooms and learning institutions. - Trained more than 68,700 teachers to better educate 173,000 students. - Rehabilitation and equipment of about 240 rural health care facilities; trained approximately 960 family doctors and nurses. - Private sector and trade finance: - Since inception, ADB approved one private sector transaction in Tajikistan amounting to $11 million. - Total outstanding balance of trade finance transactions in the country as of 31 December 2016 was $2.8 million, representing .03% of ADB’s total non-sovereign portfolio. - ADB’s Trade Finance Program (TFP) supported $22.2 million in trade between 137 transactions. - 41.6% of the $22 million in trade supported through the TFP was co-financed by the private sector. - ADB country partnership strategy, 2016–2020 emphasizes widening Tajikistan’s economic base, improving investment climate, and developing transport, energy, and municipal infrastructure. - ADB plans to support inclusive economic growth in Tajikistan with an estimated program of $320 million in 2017–2019. ### Statistical issues and data adequacy (as of July 31, 2017) - General: Data provision has some shortcomings in national accounts, price statistics, and monetary statistics, but is broadly adequate for surveillance. - National accounts statistics: - Significant deficiencies in statistical techniques, notably in quarterly national accounts and the informal economy. - Technical assistance from the Fund in 2012 and 2016 advised on quarterly GDP estimates, consistency between GDP by production and expenditure, and methodology for estimating the informal sector. - Authorities have a strategy for statistical system development, including regional accounts and implementation of the 2008 SNA. - Prices statistics: - Consumer price index (CPI) published monthly by the Tajstat with national coverage; expenditure weights updated annually. - At the elementary index level the Dutot formulation is used; recommended to replace with the Jevons formulation. - Seasonally unavailable prices are treated by carry forward of last observed prices, which can introduce a downward bias and should be replaced by an appropriate imputation technique. - Producer price index (PPI) published monthly; prices collected from about 200 enterprises accounting for about 75-80 per cent of total production; indexes published according to 9 different activities with annually updated weights from production 2 years prior. - Government finance statistics: - GFS are based on cash transactions as recommended in the 1986 Manual on Government Finance Statistics. - In 2010, authorities introduced an administrative classification of the budget. - No data provided for the GFS Yearbook, neither for Public Sector Debt Statistics. - Monetary and financial statistics: - STA provided technical assistance in 2002, 2006, 2012 and 2015; NBT adopted recommended standards and submits MFS data using IMF SRFs for central bank, other depository corporations, and other financial corporations for IFS publication. - Timeliness needs improvement. - Financial sector surveillance: - Tajikistan reports the 12 core FSIs and 9 of the 13 encouraged FSIs for deposit takers, and one FSI for real estate markets on a quarterly basis for posting on the IMF’s FSI website; data are reported with a long lag. - External sector statistics (ESS): - Participated in a 20-month project on Improvement of ESS in three Central Asian countries; considerable improvements in coverage, periodicity, and timeliness. - Balance of payments, IIP, and external debt statistics compiled and disseminated quarterly applying the BPM6 framework and updated estimation methods. - Tajikistan started participating in the IMF’s Coordinated Direct Investment Survey. - Improvements still needed in estimation of shuttle trade, travel services, and remittances; work needed on expanding coverage of reporters and maintaining dataset consistency. - Data standards and quality: - Tajikistan began participating in the General Data Dissemination System (GDDS) on November 17, 2004. - A Data ROSC was published on March 30, 2005. - Reporting to STA: Country page in the International Financial Statistics (IFS) has been published since February 2003. ### Selected entries from "Tajikistan: Table of Common Indicators Required for Surveillance" (as of August 2017) - Exchange Rates: Date of latest observation 08/31/2017; Date received 09/01/2017. - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest observation July 2017; Date received 08/25/2017. - Reserve/Base Money: July 2017; Date received 08/25/2017. - Broad Money: July 2017; Date received 08/25/2017. - Consumer Price Index: July 2017; Date received 08/25/2017. - Revenue, Expenditure, Balance and Composition of Financing—General Government: July 2017; Date received 07/22/2017. - GDP/GNP: June 2017; Date received 07/20/2017. - Gross External Debt: March 2017; Date received 04/27/17. - External Current Account Balance: March 2017; Date received 05/02/17. *Source: 1tjkea2021004 - 2007. To date more than 600 SMEs have had access to business advice and industry expertise.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1tjkea2021004.pdf_