Tajikistan: Risk Assessment
Country Risk Rating
Business Climate Rating
- Plentiful natural resources (hydroelectric potential, cotton, aluminum, gold)
- Untapped agricultural and tourism potential
- Transit corridor between Uzbekistan, Kyrgyzstan, Afghanistan, Pakistan and China
- Youthful population (50% under 25 years old)
- Financial support from multilateral and bilateral donors, and China
- Member of China’s Belt and Road Initiative (BRI)
- Heavily dependent on the Russian economy, via remittances (25% of GDP), and on China (main export market, creditor and provider of FDI).
- Heavily dependent on commodities (cotton, aluminum); under-diversified economy
- Foreign exchange market and trade under tight control
- Weak and concentrated banking system; credit is expensive, underdeveloped, directed and dollarized (53% of the total)
- Challenging geography (landlocked and 90% mountainous); highly vulnerable to natural disasters
- Inadequate infrastructure (energy, water, transportation, health)
- High level of poverty (26.5% of the population); poorly educated and unproductive workers
- Limited role of the private sector; difficult business environment constrains FDI (1.2% of GDP)
- Poor governance (corruption, organized crime, politicization of the court system)
- Proximity to Afghanistan; increased terrorist risk
A recovery dependent on the pandemic, Russia and China
After growing strongly over the last 20 years, Tajikistan entered recession in 2020. In 2021, it is expected to return to a growth rate on a par with pre-crisis levels. Travel restrictions affected transport services. Moreover, with the recession in Russia, many Tajiks who worked there have returned to Tajikistan. Remittances (25% of GDP in 2019) fell by 15% year-on-year in the first half of 2020, and the number of Tajiks leaving the country to work abroad halved. Adding in the increase in poverty and unemployment due to the rigid labor market, private consumption (109% of GDP in 2019) and services (47% of GDP) were both severely impacted. The recovery in consumption, which will depend on the pandemic and the Russian economy, could be driven by the 10%-15% increases in benefits under the Targeted Social Assistance Programme and in public sector wages and pensions starting in September 2020.
Tajikistan's recession was also due to the slowdown in China, its main export market, as well as to the drop in the prices of and demand for aluminum (17% of exports) and cotton (10%). As Chinese demand firms, the recovery in 2021 should be driven by an increase in exports by extractive industries, particularly gold. The chronic trade deficit will tend to shrink, with imports (43% of GDP in 2019) contracting both in value terms, through the decline in the oil bill, and in volume terms through the capital goods needed for public investment. The sluggishness of these investments, which are constrained by the economic situation, has delayed infrastructure projects aimed at diversifying exports, such as the Rogun dam, whose objective is to double energy production by 2029. Multilateral grants will partly compensate for this, such as the World Bank's USD 132 million grant for transport infrastructure under the CARs-4 program.
To support activity, the central bank cut its policy rate. The rate is expected to remain high (10.75% in September 2020) in order to keep inflation, which is fuelled by rising food prices and the somoni’s depreciation trend, in the target corridor of 6% (±2%). The central bank also lowered banks’ reserve requirements and encouraged them to restructure their loans. These measures, which are expected to generate liquidity primarily for the benefit of state-owned enterprises, pose risks to a banking sector that is still recovering from the 2015 crisis. While profitability has improved and the level of capitalization is high, this may not be sufficient to absorb potential losses from non-performing loans (31% of the total by mid-2020).
International aid prevents a balance of payments crisis
The crisis and support measures caused the public deficit to widen. It is expected to narrow again in 2021 with the recovery but will remain significant. To finance the deficit, the authorities sold gold reserves and called for emergency multilateral financing. The International Monetary Fund (IMF) granted the country a Rapid Credit Facility (RCF) worth USD 189.5 million, while the Asian Development Bank (ADB) provided USD 323 million in grants for 2021-2023. The recovery, accompanied by fiscal consolidation, should safeguard the sustainability of the public debt-to-GDP ratio, which is exposed to potential risks in relation to state-owned enterprises. Public debt, which is external and in foreign currencies (USD 3.1 billion), is mainly held by Eximbank, a Chinese bank (38%), and bilateral and multilateral lenders (46%). Its sustainability will depend on negotiations with these lenders, which have already granted USD 50 million in relief, and Chinese creditors, which are expected to grant relief in return for land or mining concessions.
The crisis also sharply widened the current account deficit. While the trade deficit narrowed, lower remittances also reduced the secondary income surplus. FDI (67% in the extractive industry and 76% from China), which already financed little of the deficit, declined in 2020. While foreign exchange reserves (USD 1.25 billion in September 2020, or 5.1 months of imports covered) allow the central bank to intervene on an ad hoc basis to limit excessive volatility in the somoni exchange rate, multilateral financing will be crucial in helping to avert a balance of payments crisis.
A family succession in prospect?
In October 2020, President Emomali Rahmon, who has been in charge since independence in 1992, was predictably re-elected for a fifth consecutive term, after winning 91% of the votes in elections that were neither free nor fair. Likewise, in the legislative elections for the lower house in March 2020, his People's Democratic Party of Tajikistan (PDP) held onto three-quarters of the seats. Rahmon, who is relatively elderly, appears to be preparing to hand power over to his son, who was elected president of the upper house in April 2020. This position will allow him to become president if his father dies, becomes unfit to hold office or resigns, notably because of his state of health or due to developments in the pandemic or the economy. Internationally, ties with Russia, which provides security with its military base, remain strong, as do economic ties with China