Tajikistan: Risk Assessment
Country Risk Rating
Business Climate Rating
- Significant hydroelectric potential
- Wealth of raw material resources (aluminum, cotton, and materials)
- Financial support of international donors, including China
- Fragility of the banking system
- Low level of foreign exchange reserves
- Dependence on remittances from expatriate workers
- Islamist terrorist risk against a backdrop of poverty and scarcity of jobs
- Neighbour of Afghanistan
Growth is Below Potential and Depends on Public Investment
After a marked slowdown in 2017 (although probably earlier, this was not reflected in the official figures), the Tajik economy is expected to decelerate further in 2018 as a result of fiscal consolidation and a decline in credit. Pace of growth will, therefore, remain relatively weak compared to past performance (growth often above 7% after 2011) and the objectives that have been set (8.8% in the National Development Plan for 2030).
While the recovery in Russia provides support for household consumption through remittances from expatriate workers, which represent about one-third of GDP, non-membership of the Eurasian Economic Union will continue to limit the movement of Tajik workers into Russia. Since the growth of the services sector is hampered by the measured pace of household consumption, growth, which is dependent on public investment, will tend to be driven by the construction sector, and projects such as the construction of the Rogun hydroelectric plant.
However, bank weaknesses will curb both private investment and the financing capacity of the government, which had to support the recapitalization of four banks in 2016 at an estimated cost of 7% of GDP. Restructuring the banking sector will be a key factor in Tajikistan’s return to its potential growth rate, with credit supply being hit by the high ratio of non-performing loans – which has doubled since 2014 to reach almost 50% in late 2016 – and with demand for credit adversely affected by the numerous moves to tighten monetary policy in order to control inflation. While labor market tensions have eased slightly, inflation is nonetheless likely to be fuelled by more expensive imports following the somoni’s devaluation against the dollar.
Budget Fragility and External Weaknesses
The government is expected to continue the fiscal consolidation begun in 2017, the goal of which was to improve the sustainability of public debt, which was damaged by both the substantial effort made to recapitalise the banking system, and by the inaugural USD 500 million international bond issue (7% of GDP) at a rate just over 7% so as to finance the Roghun complex. In 2018, despite the inefficient tax system, the slight rebound in activity should encourage higher tax revenues in addition to the controls on investment spending. However, public debt will remain exposed to the state’s contingent liabilities, to exchange rate risk (as evidenced by the effect of devaluation on its weight in the past two years), and additional bank sector recapitalization costs.
The considerable reliance on imports and weak export diversification will foster a substantial current account deficit, despite an increase in remittances from expatriate workers, the very moderate rebound in the prices of some commodities – particularly aluminium and cotton, which respectively account for 23% and 15% of exports – as well as the economic recovery in Russia (20% of exports), which both add a volume effect to the price effect. Exchange rate pressures remain, despite the somoni’s sharp depreciation against the dollar in 2016 and early 2017, making the country vulnerable to external shocks. Capital control measures, including notably the obligation to deposit a proportion of remittances in roubles, is evidence of the special attention given by the central bank (NBT) to exchange rates in view of the high dollarisation of the economy (70% of loans are denominated in foreign currency). Low levels of foreign exchange reserves, which are struggling to stabilize at around three months of imports, leave the NBT little leeway to support its own currency.
Domestic and Imported Political and Social Fragility
Elected to the presidency for a fourth consecutive term in November 2013, Emomali Rahmon won popular support in a referendum in May 2016 to stay on as Head of State indefinitely. While his country is a significant supplier of jihadists, the president is stepping up measures aimed at combatting the radicalization of the Muslim population, such as the restrictions on clothing. However, together with weak performance in the fight against corruption and drug trafficking, the high poverty rate (30% of the population live below the poverty threshold) continues to fuel social frustration and foster the development of jihadist groups.
With regard to external relations, tensions with Uzbekistan are easing, with the first direct flight between the two countries since 1992 taking place in February 2017, as part of the continuing easing of Uzbek opposition to the construction of the Roghun dam because of its supposed impact on its cotton fields’ irrigation system. In contrast, problems with Kyrgyzstan regularly surface over borders, the sharing of water resources, and transport between the two countries. Likewise, the presence of the Taliban in northern Afghanistan is threatening the security of the border populations, even though the presence of the Russian army and US aid should prevent the conflict spilling into Tajikistan. Relations with China are deepening thanks to the completion of public infrastructure projects and to China’s financial investment.