IMF Executive Board Concludes 2019 Article IV Consultation with the Republic of Tajikistan

IMF News, January 17, 2020

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Published: January 17, 2020

Main findings on recent developments

Reported economic activity has been strong in 2018-19.
Inflation has picked up in the past year due to base effects and food price inflation in partner countries but remained within the National Bank of Tajikistan’s (NBT) target range.
Weak remittances and exports and strong imports have contributed to a deterioration of the external current account.
The real effective exchange rate has appreciated, and foreign exchange shortages have emerged.
Fiscal policy has been expansionary with the overall 2019 deficit projected to reach 3.8 percent of GDP.
Public and publicly guaranteed debt has been stable as the deficit has been financed from the proceeds of the 2017 Eurobond.
Reforms to place the loss-making energy sector on a sound financial footing are underway.
Debt vulnerabilities are rising on account of non-guaranteed borrowing by state-owned enterprises (SOE).
The financial sector is recovering from the 2015-16 crisis, with a decline in nonperforming loans and improved profitability.
The authorities have taken steps to strengthen bank supervision and regulation; however, two formerly-systemic banks remain insolvent and further reforms are needed to restore public confidence in banks.

Projections and medium-term outlook

The fiscal deficit is expected to remain high over the medium-term owing to the large Roghun hydro-power construction project, putting debt on an unsustainable path.
Together with limited exchange rate flexibility, the fiscal deficit is expected to contribute to a weak external position, with the current account deficit over 5 percent of GDP.
In a weak global environment, these factors are expected to weigh on confidence and growth is projected to moderate to 4 percent over the medium term.
Inflation is expected to remain moderate.
Downside risks include cost overruns or implementation difficulties for large infrastructure projects, delays in structural reforms (particularly in bank and SOE governance), and slower-than-expected growth in emerging markets that would reduce remittances, loans, and FDI.

Executive Board assessment — Commendations and concerns

Commendations:
- Solid growth performance and poverty reduction.
- Improvements to bank supervision and regulation.
- Progress in further developing the monetary and macroprudential frameworks.
Concerns:
- Continued large external and fiscal deficits create a challenging macroeconomic outlook over the medium term.
- Rising risk of external debt distress, suggesting heightened fiscal vulnerabilities to adverse shocks.

Policy recommendations (Directors’ advice)

Fiscal policy and debt:
- Encourage further fiscal consolidation measures to put debt on a downward trend, including broadening the tax base and gradually phasing out tax incentives.
- Prioritize and improve efficiency of public investment to create fiscal space for important infrastructure projects.
- Step up targeted social assistance to protect vulnerable groups.
- Avoid non-concessional borrowing and implement a comprehensive debt management strategy, with IMF technical assistance, to manage risks from large infrastructure projects and SOEs.
- Mitigate fiscal risks from the largest SOEs through passage of the SOE law in line with IMF recommendations.
Exchange rate and monetary policy:
- Increase exchange rate flexibility to facilitate adjustment to shocks, help preserve external buffers, and support growth.
- Remove the exchange restriction and improve transparency and functioning of the FX market, with attention to dollarization and inflation considerations.
- Strengthen the monetary policy framework and transmission.
- Continue NBT’s planned transition to inflation targeting as an appropriate medium-term goal, supported by enhancements to exchange rate flexibility and the NBT’s financial position and independence.
- As inflationary pressures have risen in recent months, consider tighter monetary policy to mitigate possible second-round effects.
Financial sector and governance:
- Liquidate two formerly-systemic insolvent banks and payout insured depositors as an important priority to restore financial stability and confidence.
- Continue efforts to strengthen bank governance and supervision, and implement AML/CFT policies to mitigate pressures on correspondent banking relationships and boost financial integrity.
- Sustain and strongly implement structural reforms to improve the business environment, governance of core economic institutions and SOEs, rule of law, and anti-corruption policies to boost investment and inclusive growth.
- Improve the quality and timeliness of economic data to strengthen analysis and policy making.

Key statistics (selected indicators, 2017–22)

Quota: SDR 174 million
Population: 9.1 million; 2018
Per capita GDP: US$827; 2018
Poverty rate: 29 percent; 2017
Main exports: mineral products, aluminum, cotton; 2018

National accounts (Annual Percent Change, unless otherwise indicated)

Real GDP: 2017: 7.1; 2018: 7.3; 2019 (Est.): 5.5; 2020 (Proj.): 4.7; 2021 (Proj.): 4.5

Prices

Headline CPI inflation (end-of-period): 2017: 6.7; 2018: 5.4; 2019 (Est.): 7.4; 2020 (Proj.): 6.8; 2021 (Proj.): 6.5

General government finances (Percent of GDP, unless otherwise indicated)

Revenue and grants: 2017: 29.7; 2018: 29.1; 2019 (Est.): 26.7; 2020 (Proj.): 27.2; 2021 (Proj.): 27.1
Tax revenue: 2017: 21.6; 2018: 21.3; 2019 (Est.): 20.1; 2020 (Proj.): 20.2
Expenditure and net lending: 2017: 35.6; 2018: 31.9; 2019 (Est.): 30.4; 2020 (Proj.): 31.5; 2021 (Proj.): 31.4
- Current: 2017: 17.0; 2018: 17.2; 2019 (Est.): 17.7; 2020 (Proj.): 17.9
- Capital: 2017: 18.6; 2018: 14.6; 2019 (Est.): 12.8; 2020 (Proj.): 13.5; 2021 (Proj.): 13.6; 2022 (Proj.): 13.7
Overall balance (excl. PIP and stat. discrepancy): 2017: -3.4; 2018: 1.6; 2019 (Est.): 0.5; 2020 (Proj.): 1.5
Overall balance (incl. PIP and stat. discrepancy): 2017: -6.0; 2018: -2.8; 2019 (Est.): -3.8; 2020 (Proj.): -4.3
Total public and publicly-guaranteed debt: 2017: 50.4; 2018: 47.9; 2019 (Est.): 45.2; 2020 (Proj.): 46.4; 2021 (Proj.): 47.5; 2022 (Proj.): 48.9

Monetary sector

Broad money (12-month percent change): 2017: 21.9; 2018: 5.1; 2019 (Est.): 12.1; 2020 (Proj.): 11.8; 2021 (Proj.): 11.4
Reserve money (12-month percent change): 2017: 21.0; 2018: 7.0; 2019 (Est.): 11.7; 2020 (Proj.): 11.6; 2021 (Proj.): 11.1
Credit to private sector (12-month percent change): 2017: -20.2; 2018: 1.3; 2019 (Est.): 7.8; 2020 (Proj.): 9.3; 2021 (Proj.): 9.6; 2022 (Proj.): 9.8
Refinancing rate (in percent, eop/ latest value): 2017: 16.0; 2018: 14.8; 2019: ...

External sector

Current account balance: 2017: 2.2; 2018: -5.0; 2019 (Est.): -4.5; 2020 (Proj.): -5.2; 2021 (Proj.): -5.3
Trade balance (goods): 2017: -21.2; 2018: -25.1; 2019 (Est.): -23.0; 2020 (Proj.): -23.3; 2021 (Proj.): -22.8
FDI (net): 2017: 0.9; 2018: 3.3; 2019 (Est.): 3.0; 2020 (Proj.): 2.4; 2021 (Proj.): 2.1; 2022 (Proj.): 1.8
Total public and publicly guaranteed external debt: 2017: 40.6; 2018: 38.7; 2019 (Est.): 36.8; 2020 (Proj.): 42.7

Memorandum items

Nominal GDP (in millions of somoni): 2017: 61,093; 2018: 68,844; 2019 (Est.): 77,351; 2020 (Proj.): 86,130; 2021 (Proj.): 95,593; 2022 (Proj.): 105,622
Average exchange rate (somoni per U.S. dollar): 2017: 8.55; 2018: 9.15; 2019: …

Sources: Data provided by the Tajikistan authorities, and Fund staff estimates.

IMF Communications Department — January 17, 2020.