On June 1, 2015 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation¹ with Tajikistan.

Growth has been strong and poverty has fallen in the past decade, though Tajikistan faces rising vulnerabilities. Growth is now softening and the external position has weakened as remittances have fallen with the slowdown in Russia and earnings from cotton and aluminum exports have dropped due to global market developments. The fiscal position has been near balance in recent years and debt has been kept low, while fiscal space is becoming limited by rising debt service and contingent liabilities. Structural reforms to remove bottlenecks to growth, support investment, and create more jobs are urgently needed given the likely long-lasting shocks the country and the region are facing. Downside risks include lower emerging market growth and instability in parts of the region. Upside risks include diversification through stronger economic ties with China, growing access to large markets in South Asia, and the potential discovery of commercially recoverable natural gas.

GDP growth eased to 6.7 percent in 2014 from 7.4 percent in 2013. Growth in 2014 was supported primarily by a rapid expansion in construction, while services (driven by remittances) and agriculture slowed markedly. In 2015, growth is projected to fall to 3 percent on the back of an expected sharp decline in the U.S. dollar value of remittances inflows. Annual headline inflation has been moderate—in the range of 3.5–7.5 percent—over the past two years, reflecting favorable food and fuel import prices and the relatively stable exchange rate through 2014. The external environment has worsened. Falling remittances and exports—combined with flat imports due to the relatively strong somoni—are estimated to have driven the 2014 current account deficit to around 9 percent of GDP, from an average of 3.3 percent during 2011–13. The exchange rate to the US dollar has been depreciating, notwithstanding efforts to slow that depreciation, and inflation is projected to reach double digits in 2015 due to exchange rate pass through.

Base and broad money expanded at a relatively moderate pace—13 percent and 7 percent, respectively—in 2014; private credit growth, however, remained robust at 32 percent. The placement of government deposits and National Bank of Tajikistan (NBT) foreign exchange deposits at commercial banks throughout 2014 supported the liquidity of several large banks and the refinance rate signaled loose monetary conditions for much of the year, with the NBT holding the rate at or below zero in real terms until late December 2014.

Recent fiscal performance has been better than expected, with the estimated 2014 budget surplus increasing to 1 percent of GDP. Tax revenue performance in 2013 and 2014 was stronger than expected, in part because of the simpler tax code introduced in 2013. Current spending has been in line with projections, while capital spending has been below the authorities’ plans and staff’s earlier projections, mostly due to delays in project implementation, including of the Rogun HPP. These fiscal outcomes were consistent with debt sustainability and the anchor of keeping nominal external public debt below 35 percent of GDP. Given the current challenging economic environment, the 2015 budget is expected to be near balance, with social spending being protected.

Executive Board Assessment²

Executive Directors welcomed Tajikistan’s significant progress in economic and social developments over the past decade, but observed that falling external demand and remittances have increased near-term vulnerabilities significantly. Accordingly, Directors encouraged the authorities to act swiftly to reconstitute external and fiscal buffers and strengthen medium-term growth prospects.

Directors agreed that greater exchange rate flexibility is needed to protect official reserves and competitiveness. They urged the authorities to remove the administrative cap on the exchange rate and limit interventions in the foreign exchange market to that needed to curb excess volatility. Directors also encouraged the authorities to strengthen reserve management, including by boosting the monetary gold holdings of the central bank.

Directors welcomed the authorities’ intention to tighten monetary policy if inflation pressure rises. Against a backdrop of robust credit growth, they stressed that central bank liquidity support should benefit only banks with strong balance sheets and good collateral, and that the government should refrain from shifting further deposits to banks.

Directors called for a comprehensive approach to manage macro-financial risks. They encouraged the authorities to improve crisis preparedness and help protect the health of the financial system by resolving properly troubled banks and stopping directed lending. Directors observed that establishing a financial stability committee and improving supervision would ensure that credit is extended to borrowers that help drive growth and job creation.

Directors emphasized the importance of a fiscal policy geared to preserving debt sustainability and managing fiscal risks. They commended the authorities’ policy of prioritizing expenditure—while protecting social outlays—in the current difficult macroeconomic environment. Directors agreed that a return to small fiscal surpluses over the medium term would help reconstitute depleted fiscal buffers. Reforms that broaden the tax base and strengthen compliance would be helpful in this regard. More broadly, Directors encouraged the authorities to seek concessional financing as much as possible to help safeguard debt sustainability. Directors also agreed that fiscal risks could be further reduced by improving the efficiency and governance of state-owned enterprises.

Directors encouraged the authorities to embark on bold structural reforms to help shift Tajikistan to a new growth model. They noted that measures to improve infrastructure, better match education to the economy’s needs, and streamline regulations would improve investment and reduce Tajikistan’s dependence on remittances as an engine of growth.