Tajikistan: Staff Concluding Statement of the 2021 Article IV Mission
IMF News, November 5, 2021
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- Published: November 5, 2021
Recent developments, outlook, and risks
- Real GDP growth declined to 4.5 percent in 2020 from 7.5 percent in 2019.
- The economy expanded by 8.9 percent in the first nine months of 2021, driven by the industrial (including mining), agricultural, and construction sectors.
- The current account surplus is expected to decline to 2.6 percent of GDP in 2021 as imports pick up with the recovery.
- Inflation remains above the NBT’s target range (6±2 percent) mainly due to higher global food and fuel prices.
- Reserves have risen to 8 months of import cover, supported by the NBT’s gold purchases from domestic producers and timely international partner support, including the IMF.
- Monetary normalization in 2021: the refinancing rate has been raised by 250 bps in four steps, reserve requirements restored to pre-COVID levels, and exchange rate depreciation restrained.
- Growth projections and risks:
- Economy estimated to grow by 7.0 percent in 2021.
- Growth in 2022 projected at 5.5 percent.
- Medium-term growth projected to settle at 4 percent with inflation declining to the NBT target range.
- Downside risks: uncontrolled COVID outbreaks, new lockdowns, regional security and geopolitical tensions.
Fiscal policy — findings and recommendations
- 2020 fiscal deficit widened by 2 percentage points to –4.4 percent of GDP due mostly to a decline in tax revenues; COVID-related expenditures were largely accommodated via expenditure reprioritization.
- 2021 budget deficit expected to improve to –2.0 percent of GDP reflecting higher revenues and lower expenditures as COVID measures unwind.
- Debt dynamics:
- Debt-to-GDP ratio rose by 7 percentage points to 51 percent in 2020 (financed by new donor disbursements and IMF support).
- Debt-to-GDP ratio set to fall back to 47 percent in 2021.
- Overall risk of debt distress remains high.
- 2022 draft budget and fiscal stance:
- The 2022 draft budget implies an expansionary fiscal stance; preliminary estimates suggest the fiscal deficit will widen to around -2.5 to -2.7 percent of GDP.
- Authorities committed to limit the fiscal deficit to -2.5 percent of GDP in line with the draft budget; achieving this will require marked expenditure restraint.
- Revenue risks from the current tax-code draft (lower tax rates without base broadening and new tax expenditures) could lead to revenue losses inconsistent with RCF commitments.
- Recommended fiscal measures:
- Adhere to fiscal discipline to keep debt on a downward trajectory.
- Implement an operational fiscal anchor limiting fiscal deficits to -2.5 percent of GDP.
- Phase out ineffective tax exemptions.
- Commit to a sustainable Roghun financing envelope.
- Improve spending prioritization, efficiency, and transparency.
- Undertake a public investment management assessment and a fiscal transparency evaluation.
- Use contingency measures if revenue shortfalls occur (e.g., higher mining royalties, lower non-priority capital expenditures).
State-owned enterprises (SOEs)
- Complete and expedite SOE fiscal risk management reforms and resume disclosure of SOE-related risks.
- For Barki Tojik (BT):
- Expedite full operational unbundling.
- Resume increases in electricity tariffs, accompanied by strengthened social safety nets to protect vulnerable populations.
- Develop a plan to clear BT’s arrears to suppliers and ensure all bank loans are current.
- Apply market electricity rates gradually on Tajik Aluminum Company to improve BT’s financial health.
Monetary and exchange rate policies
- Monetary conditions should remain restrictive given inflation and inflation expectations above the NBT target range, strong growth, surging remittance flows, excess liquidity, and volatile global food and fuel prices.
- Interim arrangements:
- Continue using monetary aggregates as an interim anchor during transition to inflation targeting (IT).
- Move to price-based FX auctions and improve transparency on FX market transactions.
- Execute public-sector transactions at prevailing market rates to reduce FX shortages and facilitate elimination of exchange restrictions and multiple currency practices.
- Gradually increase FX flexibility to allow monetary policy to focus on inflation stabilization.
- Commendations and governance:
- Mission commends the NBT’s efforts to strengthen its equity position and diversify international reserves through proactive gold sales.
- Ensuring the NBT Board is composed of a majority of non-executive members would help enhance governance (as noted in the Fund’s Safeguard Assessment).
Financial sector policies
- Progress and vulnerabilities:
- NBT support measures underpinned banking system stability and spurred private credit growth during the pandemic.
- NBT revoked licenses of two formerly systemic banks (AIB and TSB) and commenced liquidation.
- Aggregate bank capital adequacy ratios have improved.
- Key vulnerabilities persist: elevated dollarization, high NPL ratios, and concentration risks due to legacy governance, risk management, and supervision weaknesses.
- Bank resolution and crisis management:
- Complete AIB and TSB resolutions swiftly and transparently to minimize costs while protecting creditor rights.
- Bank liquidators assigned; appraisals of eligible collateral and creditor lists submitted to courts.
- Authorities should publish a detailed report on full costs of resolving the banks and who will bear them.
- Revise bank resolution and crisis management frameworks in line with international standards.
- Supervision and macroprudential policy:
- Increase intensity and rigor of supervision as COVID measures are rolled back to avoid deterioration in system health and rising problem loans.
- Ensure appropriate asset classification, provisioning, and credit risk management standards.
- Banks unable to maintain prudent capital positions should postpone dividend payments and share buybacks.
- Banks with high NPLs should strengthen NPL management capabilities.
- Consider measures to restrict FX lending to unhedged corporate borrowers in addition to prior de-dollarization steps (e.g., higher risk weights for FX loans).
- Governance, AML/CFT, and disclosure:
- Fully incorporate Beneficial Ownership (BO) and Related Party Transaction (RPT) disclosure requirements into supervision, and empower supervisors to conduct and act on shareholder suitability assessments.
- Enact a new AML/CFT law to strengthen the legal and supervisory framework and address correspondent banking relationship pressures.
- Deposit Insurance Fund (DIF):
- DIF assets appear sufficient to cover liquidation-related payouts (approximately TJS 200 million), but resources would be significantly reduced.
- A backstop funding mechanism has been put in place; raising insurance premiums and revising the DIF investment strategy would help rebuild buffers over the medium term.
Policies to enhance governance, transparency, and sustainable growth
- Governance and anti-corruption:
- Authorities adopted a new anti-corruption strategy and enacted a new Anti-Corruption Law.
- Weaknesses in governance and transparency across the public sector persist and impede efficient resource allocation and growth.
- Encouraged actions:
- Pass the new public procurement law aligned with best international practices.
- Eliminate opaque direct contracting by SOEs.
- Implement actionable anti-corruption policies (e.g., asset declaration by public officials).
- Ensure assets repatriated under the new Amnesty Law are fully in line with AML/CFT principles.
- Climate resilience and adaptation:
- Tajikistan is susceptible to climate change; increased intensity and frequency of droughts disproportionately impact vulnerable households.
- Adaptation planning should focus on priority sectors: agriculture, water, and energy to promote economic diversification, increase rural resilience, and reduce food insecurity.
- Raising tariffs would improve BT’s cost recovery and encourage more efficient electricity usage.
Source: Tajikistan: Staff Concluding Statement of the 2021 Article IV Mission