Mission Concluding Statement 

Tajikistan: Staff Concluding Statement of the 2021 Article IV Mission

November 5, 2021

Washington, DC: An International Monetary Fund (IMF) staff team led by Selim Elekdag conducted a remote mission from October 18 to November 3, 2021 in the context of the 2021 Article IV consultation with Tajikistan. At the conclusion of the mission, Mr. Elekdag issued the following statement:

Recent Developments, Outlook, and Risks

1. Preliminary indications suggest a strong recovery is underway . In response to the COVID-19 shock, the authorities took decisive steps to protect public health and economic activity. As a result, real GDP growth declined moderately to 4.5 percent in 2020 from 7.5 percent a year earlier. The economy expanded by 8.9 percent in the first nine months of this year, 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 pickup in line with the recovery. Inflation remains above the NBT’s target range (6±2 percent) mainly due to higher global food and fuel prices.

2. Monetary policy has begun to normalize. In 2021, the refinancing rate has been raised by 250 bps in four steps, reserve requirements have been restored to their pre-COVID levels, and exchange rate (ER) depreciation has been restrained. Reserves have risen on the back of the NBT’s gold purchases from domestic producers to 8 months of import cover, as well as due to timely support from international partners including the IMF.

3. The overall fiscal balance is set to improve. The 2020 fiscal deficit widened by 2 percentage points to –4.4 percent of GDP due mostly to a decline in tax revenues as activity sagged. For the most part, COVID related expenditures were accommodated under expenditure reprioritization. For 2021, the budget deficit is expected to improve to –2.0 percent of GDP reflecting a combination of higher revenues as the recovery takes hold, and lower expenditures, signaling an unwinding of COVID measures. As a result, the debt-to-GDP ratio, which had risen by 7 percentage points to 51 percent in 2020 financed by new donor disbursements and IMF support, is set to fall back to 47 percent in 2021.

4. Risks to the outlook remain tilted to the downside due to uncertainty on the pandemic and regional spillovers . The economy is estimated to grow by 7.0 percent in 2021, underpinned by the global economic recovery, strong industrial activity, and domestic demand spurred on by public investment. Growth in 2022 is projected at 5.5 percent as the impact of pent-up demand (reflecting a rebound in remittances) and base effects fade. Over the medium term, growth is projected to settle at 4 percent with inflation declining to the NBT target range. An uncontrolled outbreak, potentially related to the deteriorating COVID situation in major trading partners, and new lockdowns could undercut the recovery. Regional security and geopolitical tensions could also jeopardize economic prospects.

Fiscal policy

5. A comprehensive reform of the tax system is expected to enter into force in 2022 . The current draft contains some positive features (e.g., taxpayer protections, administrative reforms). However, it also includes lower tax rates (without base broadening) and new tax expenditures, which are not in line with commitments under the Rapid Credit Facility (RCF), and which will likely result in revenue losses that would undermine development and social spending.

6. Adhering to fiscal discipline would help to create fiscal space and ensure that debt remains on a downward trajectory.

• The 2022 draft budget implies an expansionary fiscal stance. Preliminary estimates suggest that the fiscal deficit will widen to around -2.5 to -2.7 percent of GDP. The authorities underscored their commitment to limit the fiscal deficit to -2.5 percent of GDP in line with the draft budget. However, achieving this will require marked expenditure restraint. Moreover, notwithstanding forthcoming administrative reforms, there is a risk of greater revenue shortfalls (given the new tax code) which would need to be promptly offset with concrete contingency measures (e.g., higher mining royalties, lower non-priority capital expenditures) in order to align with the assumptions in the budget.
• Although the debt-to-GDP ratio is projected to decline and is assessed as sustainable, Tajikistan’s overall risk of debt distress remains high. Spending pressures (e.g., on Roghun, healthcare, residual bank resolution costs, and SOE contingent liabilities) remain large, while revenue flows and additional funding sources remain uncertain.
• Over the medium term, an operational fiscal anchor, which limits fiscal deficits to -2.5 percent of GDP, would foster fiscal discipline and be in line with RCF commitments. Within this operational framework, additional key measures would include phasing out ineffective tax exemptions, committing to a sustainable Roghun financing envelope, and improving spending prioritization, efficiency, and transparency. In this context, undertaking a public investment management assessment and a fiscal transparency evaluation would be invaluable.

7. Reforms across the large SOE sector should proceed apace to improve transparency and performance. The ongoing SOE fiscal risk management reform strategy should be finalized and disclosure of SOE-related risks should be resumed. Turning to Barki Tojik (BT)—the state-owned energy company and largest SOE—the process to fully unbundle operations should be expedited, and given the economic recovery, increases in electricity tariffs should resume and be accompanied by a strengthening of the social safety net to protect vulnerable populations. Likewise, a plan to clear BT's arrears to suppliers and to ensure that all loans from banks are current needs to be developed. Applying market electricity rates gradually on Tajik Aluminum Company, which consumes a sizeable share of Tajikistan’s electricity, would also improve BT’s financial health.

Monetary and exchange rate policies

8. Monetary conditions should continue to remain restrictive. The NBT appropriately raised interest rates and reserve requirements in 2021. Inflation and inflation expectations, however, remain above the NBT’s target range, against a background of strong economic growth, surging remittance flows, excess liquidity, and volatile global food and fuel prices.

9. The planned transition to an inflation targeting regime will require resolute reform efforts in line with IMF technical assistance. In the meantime, monetary aggregates should continue to be used as an interim anchor during the transition to IT. Moving to price-based FX auctions, improving transparency on FX market transactions, and executing public-sector transactions at prevailing market rates, would help reduce FX shortages and could facilitate the elimination of the exchange restriction and multiple currency practices. In addition, a gradual transition to greater FX flexibility would allow monetary policy to focus more directly on inflation stabilization.

10. The mission commends the NBT’s efforts to strengthen the central bank’s equity position and to diversify its international reserves through the proactive sale of gold. As noted in the Fund’s Safeguard Assessment, ensuring that the NBT Board is composed of a majority of non-executive members would help to enhance the NBT’s governance framework.

Financial Sector Policies

11. Some progress has been made in reforming the financial sector . NBT support measures underpinned banking system stability and spurred private sector credit growth during the pandemic. The NBT revoked the licenses of two formerly systemic banks (AIB and TSB), thereby commencing their liquidation. Aggregate bank capital adequacy ratios have improved. However, elevated dollarization, NPL ratios, and concentration risks remain as key vulnerabilities, reflecting the legacy of weaknesses in governance, risk management, and supervision.

12. The AIB and TSB bank resolutions should be completed swiftly and transparently to minimize costs while ensuring adequate protection of creditor rights. Bank liquidators have been assigned, and appraisals of eligible collateral and creditor lists have been submitted to courts for approval. The authorities should publish a detailed report on the full costs of resolving the banks and who in the end will bear them. Looking ahead, bank resolution and crisis management frameworks need to be revised in line with international standards.

13. Financial supervision and macroprudential policy frameworks should continue to be strengthened to improve resilience to external shocks . As COVID-related measures are rolled back, there is a risk that the overall health of the financial system could weaken, and problem loans could increase. Thus, the NBT should increase the intensity and rigor of supervision, and ensure appropriate asset classification, provisioning, and credit risk management standards. Banks that are unable to maintain prudent capital positions should postpone dividend payments and share buybacks. Likewise, banks with high NPLs should strengthen NPL management capabilities. In addition to previous macroprudential de-dollarization measures (e.g., higher risk weights for FX loans), the authorities could consider measures to restrict FX lending to unhedged corporate borrowers.

14. Beneficial ownership (BO) and related party transaction (RPT) disclosure requirements need to be fully incorporated into the supervisory process . Governance deficiencies, including RPTs, were a prime factor that led to the ultimate demise of the two banks (AIB/TSB)—and current high NPL levels. In response, the NBT strengthened BO disclosure requirements. To effectively manage RPT risks, it is important to fully integrate this information into the supervisory process (including by empowering supervisors to conduct and act on shareholder suitability assessments). Enacting a new AML/CFT law would further strengthen the overall legal and supervisory framework and help efforts to address pressures associated with correspondent banking relationships.

15. The Deposit Insurance Fund (DIF) should be placed on a firm footing. DIF assets appear sufficient to cover liquidation-related payouts (approximately TJS 200 million), but its financial resources would be significantly reduced. While 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

16. Implementing governance and transparency reforms would support higher and more productive investment and growth . The authorities have adopted a new anti-corruption strategy, focused on strengthening public procurement, and recently enacted a new Anti-Corruption Law. Notwithstanding these advances, weaknesses in governance and transparency across the public sector continue to impede the efficient allocation of resources and limit growth. Thus, the authorities are encouraged to pass the new public procurement law (formulated with the aid of development partners, and in line with best international practices), eliminate opaque direct contracting by SOEs, and implement actionable anti-corruption policies (e.g., asset declaration by public officials). The assets repatriated under the new Amnesty Law should be fully in line with AML/CFT principles.

17. To bolster resilience to climate-related risks, the authorities should follow through with their adaptation strategies . Tajikistan is susceptible to climate change and one of the most significant risks is the intensity and frequency of droughts that disproportionately impact vulnerable households. To promote economic diversification to increase rural resilience and to reduce food insecurity, adaptation planning focuses on priority sectors such as agriculture, water, and energy. In this context, raising tariffs would improve BT’s cost recovery and would also help more efficient electricity usage.