Tajikistan: Never waste a crisis – see it as opportunity for reform

Published on Friday, 18 March 2016

Published by Chang Ching Yu on Friday, 18 March 2016

Withdrawing cash from an ATM in Dushanbe, Tajikistan.
Withdrawing cash from an ATM in Dushanbe, Tajikistan.

The Russian economy was experiencing severe downturns triggered by slumping oil prices in the backdrop of the global financial crisis, and remittances inflows to Tajikistan fell by 35%. This reduced consumption, slowed construction, and hampered imports. Tajik migrants had to return home, and this in turn increased pressure for jobs. There was a drop in demand and prices of unwrought aluminum and raw cotton, which accounted for 80% of Tajikistan exports. The somoni depreciated by 28%, and the financial sector was stressed as non-performing loans reached 22%. The time was 2008 and 2009.

By 2010, budget support from development partners, including ADB, and a quick recovery of the Russian economy helped the Tajik economy stabilize.

Fast forward to late 2014; a feeling of déjà vu started to unfold, and is still unfolding as falling oil prices hit the Russian economy and the remittances inflow to Tajikistan dropped by more than one third in dollar terms. Compared to 2008-2009, the impacts of this ongoing downturn—including another depreciation of the somoni and more returned migrants—seem to be even more severe and long lasting, and it is unclear when the world economic climate, particularly the Russian economy, will improve.

It must be acknowledged that since 1997, when the newly independent Tajikistan came out of a civil war in ruins, the country had achieved remarkable economic growth up to 2014, averaging 7.2% per year. The poverty incidence fell from 81% in 1999 to 47% in 2009, and then to 31.6% in 2015. Tajikistan has every reason to be proud of this achievement. However, at the same time, it's a sober fact that the growth has several undesirable structural characteristics that make the Tajik economy particularly vulnerable to external shocks, as shown in the cyclical 2008-2009 crisis and the current economic downturn.

As often mentioned, the Chinese word for ‘crisis’ consists of two parts: the first means ‘danger,’ and the second implies ‘opportunity.’ Whether such combination is a coincidence or reflects some deep-rooted wisdom is not the subject here. It does, however, apply very well to Tajikistan’s recurring economic challenges. The vulnerability of Tajikistan’s economy arises from the increasing consumption- and service-driven growth, and its inability to generate high-paying industrial jobs. From 2005 to 2014, the contribution of agriculture to GDP growth was 26.2%, while industry's was only 1.2%. Services, including construction, expanded to 72.6% due to increasing remittances from migrant workers. In terms of total employment, the share of industry declined from 20.5% in 1991 to 4.1% in 2014, and services from 34.8% to 30.3%, while agriculture increased from 44.7% in 1991 to 65.5% in 2014.

Urgent reforms are needed to improve Tajikistan’s economic competitiveness and diversification by unleashing the country’s potential for entrepreneurship and creativity. This may be achieved through creating an enabling environment for businesses, particularly for small and medium-sized enterprises that can provide the bulk of the employment the country needs.

ADB, together with other development partners, has been supporting government-led reforms to improve the country's investment climate. In 2015, ADB provided $60 million to promote reforms to reduce the costs of doing business, strengthen protection of business from misappropriation, and increase innovation and knowledge of external markets. However, businesses continue to face challenges in Tajikistan, and further reforms need to be pursued with greater vigor and pace. For example, many legally registered companies are currently facing heavy taxation burdens and irregular tax collection methods that have created opportunities for corruption. On the other hand, a large number of businesses are operating underground, without paying taxes. Firms also face challenges in foreign exchange restrictions, high financing costs, and poor power supply during the winter months.

ADB’s Country Partnership Strategy 2016-2020 for Tajikistan, which is being finalized, will likely aim to help the government achieve sustained and inclusive growth, which will be less susceptible to external shocks and create higher-paying jobs. This will be done through continuing to invest in infrastructure rehabilitation, coupled with supporting reforms to improve the investment climate.

Tajikistan’s neighboring countries also face similar challenges. Kazakhstan, for example, has been severely hit by slumping oil prices, while the People’s Republic of China’s traditional resource-intensive and high-polluting growth model is also looking unsustainable. Both countries have recognized the need for far-reaching structural reforms, and have taken big steps to improve their long-term economic prospects. Tajikistan must not be left behind.

Economists disagree with each other on how long it will take for the current economic environment to improve and, when it does, whether it will restore Tajikistan to the previous high growth path. Some believe that the ‘New Normal’ of the world economy will be characterized by far lower growth than before. Will Tajikistan carry out enough reforms to be able to ride the world economic recovery when it comes, and furthermore, will it improve the quality of its growth so that the next time a crisis hits Tajikistan’s economy will be more resilient? We hope so!

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