Tajikistan is a landlocked low-income country in Central Asia with a population of 7 million, and per capita income of US$410 (Atlas method, 2007). The economy, which has been growing on average at 8 percent during 2000-06, depends heavily on exports of cotton and aluminum, and on growing remittances of migrants to Russia (estimated at 36 percent of GDP in 2007). Poverty although declining steadily remains very high. In 2005, the headcount was 57 percent using poverty line of US$ PPP 2.15/day.
Thus, Tajikistan remains the poorest and among the most fragile of the CIS countries. Social indicators have continued to decline, reflecting deteriorating public service delivery, weak governance and sharp falls in per capita incomes. Tajikistan is the only country in the Europe and Central Asia region unlikely to achieve most of its Millennium Development Goals (MDGs).
During the five-year civil war from 1992 to 1997, Tajikistan’s fragile economy lost more than 60% of its GDP, the country suffered widespread physical damage amounting to US$7 billion and heavy human losses of up to 50,000 lives. Peace and stability were achieved ten years ago in 1997. The country’s economy began to recover in 1998 and onwards, which allowed the Government to focus on administering the country and implementing the economic and social development agenda. Nevertheless, legacy of the civil war in Tajikistan includes a complex political economy that has constrained public sector performance, private sector investment, and social development.
The government’s pursuit of sound macroeconomic management successfully stabilized the economy during 2002–05. Through tight monetary policy and strong fiscal discipline, inflation fell from 30–40 percent during 1998–2001 to below 10 percent since 2004. Revenues increased from 14 percent of GDP in 2000 to an estimated 20 percent of GDP in 2005. In addition, Tajikistan benefited from several successful debt restructuring and reduction agreements reached with key bilateral creditors, notably with the Russian Federation and through the Multilateral Debt Relief Initiative with the International Monetary Fund, which brought external debt down to 42 percent of GDP in 2005 from 124 percent in 2000. However, China has recently allocated around USD 604 million in long-term loans to Tajikistan for implementing energy and transport projects in Tajikistan.
Cotton and aluminum, traditional sectors of the Tajik economy, provide about 9 percent of GDP (2007). Yet, their contribution to total economy has been declining steadily. This is due to the increasing diversification of the economy and loosing efficiency gains in traditional sectors as well as further diversification of the economy, i.e. growing non-cotton agriculture, textiles, and services.
Tajikistan’s agriculture output is dominated by a cotton sector that absorbs vast of agricultural inputs but produces only 14 percent of agricultural output (value added); it suffers from substantial domestic inefficiencies and inequities. Today, the Tajik cotton sector is facing significant challenges. The large debt of the cotton sector (estimated at up to USD 340 million), the absence of competition in input and output marketing, and slow land reforms have led to a decline in the sector and left cotton farming barely viable for many farmers.
Since market transition in 1991, Tajikistan has experienced high levels of migration. Early emigration was motivated by war and the conflicts following independence, while more recent migration has been motivated by economic factors. Labor migrants’ remittances have played an important role as one of the drivers of Tajikistan’s robust economic growth during the past several years. The volume of official remittances has significantly increased since 2001 and now is estimated at USD 1.5 billion (36% of GDP) in 2007. Remittances have become the most important source of external financing for the balance of payments, have increased incomes, and as a result helped reduce poverty.
With 67.5 % of its population under the age of 29, Tajikistan’s youth will be a main force in determining the country’s economic future and stability. The country’s challenge in serving its youth is underscored by the fact that the country is, as of now, unlikely to meet most of the Millennium Development Goals (MDGs).
The country is rich in natural resources, most importantly water and hydropower potential, and also some minerals— high quality coal, gold, silver, precious stones, and uranium. The Government welcomes and supports foreign investments by introducing tools such as tax breaks, incentives for technological upgrades of production lines and full hard currency convertibility.
Tajikistan's 1,200-km border with Afghanistan makes the country an important route for the drug trade, which complicates the challenge of tackling corruption and makes the spread of HIV/AIDS through injecting drug users a growing concern.
Tajikistan is among the few post-conflict countries that have moved quickly from war to internal stability and have formed a functioning government. The country has achieved remarkable economic success, with an average growth of ten percent per year between 2002 and 2004. During this period, inflation was brought under control, the exchange rate was stabilized, external debt was halved, and poverty was reduced from 83% of the population in 1999 to 64% in 2003. However, the economy slowed in 2005, from ten percent of GDP to six percent, partly due to global fluctuations in aluminum as well as cotton prices – the country’s main exports.
The poorest and among the most fragile of the CIS countries, Tajikistan is burdened with failing infrastructure, tenuous health and education systems, and weak institutions. The average monthly salary is slightly above $20 (2004) and the unemployment rate remains high. Over two thirds of the population continues to live on less than $2.15 a day.
Tajikistan's 1,200-km border with Afghanistan makes the country a significant route for the drug trade, which complicates the challenge of tackling corruption and makes the spread of HIV/AIDS through injecting drug users a growing concern.
Cotton and aluminum, traditional sectors of the Tajik economy, provided 80 percent of total export earnings in 2004. Yet their contribution to total output has since declined steadily, due to the increasing cost of business in these sectors as well as further diversification of the economy, including a growing non-cotton agriculture sector and growth in textiles and services.
The country is rich in natural resources, significantly water, hydropower, and some minerals, including gold, silver, precious stones, and uranium. These resources provide great potential for virtually all sectors of the economy. The Government has welcomed and supported foreign investment in Tajikistan by introducing tools such as tax breaks, incentives for technological upgrades of production lines, and full hard currency convertibility.
A farm-privatization program has also begun to show results, with private farms often yielding two and sometimes three times more than the public ones.
Challenges ahead
Tajikistan still faces the following challenges:
Reducing poverty. Despite the turnaround in economic growth, 57 percent of the population remains below the poverty line. Tajikistan is unlikely to meet most of the the Millennium Development Goals (MDG) targets by 2015. While the country’s challenges are enormous, its resources are limited. The Government and donors need to be very efficient and selective to ensure that these limited resources translate into significant poverty reduction and produce tangible impact on the ground. In 2006, the Government adopted the National Development Strategy for 2006-2015 and the Second Poverty Reduction Strategy Paper for 2007-09 (PRSP II). Both strategies address what needs to be done to achieve the MDGs, while also paying attention to the country’s specific development objectives.
Maintaining macroeconomic stability and growth. Tajikistan needs to act swiftly to consolidate recent achievements and diversify its basis for growth. It is unlikely that the past sources such as post-war recovery, workers remittances, and commodity exports will be sufficient to ensure future growth. Better revenue collection and expenditure management is necessary to maintain economic stability and growth. As a small open economy, Tajikistan remains quite vulnerable to possible external shocks. Its narrow export base mostly consists of aluminum and cotton, and economic dependence on imports of oil products and other primary goods makes it vulnerable to world market prices. The key to sustainable long term growth is boosting private investment from the current very low levels of around 6 percent of GDP, stimulating more competition to increase the efficiency of resource allocation and strengthening human capital development to enhance labor productivity. These are difficult challenges which require institutional reforms to the regulatory system and public financial management.
Strengthening weak institutions and governance.The country's weak institutions and poor governance do not provide an environment conducive to domestic and foreign private investment or efficient public service delivery. Deficiencies in the legal framework and the judicial system, as well as weak public administration and the undeveloped financial sector hamper the nurturing of an investment climate needed for private sector development. Capacity-building measures are needed to help the Government build transparent and reliable institutions. The Government has adopted and is implementing the Public Administration Reform Strategy.
Managing the public external debt.Tajikistan also faces a serious challenge in maintaining external debt at sustainable levels over the long term. A March 2007 external debt sustainability analysis conducted jointly with the IMF shows that Tajikistan’s debt is sustainable, but is at a high risk of debt distress. Tajikistan has continued to meet its external public and publicly guaranteed debt obligations on a timely basis and to seek relief from its creditors. However, in 2006 Tajikistan contracted debt from China of US$604 million to finance projects in infrastructure and energy. While the debt was contracted on a concessional basis, with a 40 percent grant element, its size (25 percent of GDP) and uncertainty regarding the economic impact of the projects increases risks to debt sustainability. Therefore, further debt reduction and prudent debt management is needed as the government’s investment budget is financed almost entirely out of development assistance, and sustainability of budget revenues is questionable due to the country's limited and non-diversified growth sources.
Improving the business environment and creating more job opportunities at home.Despite reforms over the past several years, the business climate still lags behind those of other transition countries. Compared to other economies in the region, Tajikistan continues to rank low on most of the Doing Business indicators. Tajikistan’s ranking slipped in several categories this year, including dealing with construction licenses, getting credit, registering property, paying taxes, protecting investors, and trading across borders. Tajikistan ranks 153 in the overall global standing on the ease of doing business in the Doing Business 2008 report.The private sector is only about 50% of the GDP, and foreign direct investment is low. The small and medium-size businesses continue to suffer from excessive administrative barriers to efficient and profitable operation. The country's legal and regulatory institutions and public sector administration need to be improved further in order to provide an environment truly conducive to domestic and foreign private investment and efficient public service delivery.
Preserving human capital and physical infrastructure.Human capital and physical infrastructure have deteriorated as a result of the shocks of transition, the long civil war, and frequent natural disasters, which have worsened the situation. Inadequate systems of social protection, deteriorating health and education services, and rising concerns about the quality of and access to drinking water need urgent attention. Since independence, the key social indicators (primary and secondary school enrollment rates, infant mortality, maternal mortality ratio, total fertility rate, incidence of tuberculosis, and child malnutrition) have been declining. Tajikistan is therefore facing a depreciation of its human capital, which is exacerbated by the migration of a large part of the workforce to seek work in Russia and, to a lesser extent, other FSU states.
Improving energy services delivery and developing the country’s export capacity.High on the Government’s development agenda is improving domestic energy services delivery and increasing electricity exports. Energy sector is a very important sector for the economy of Tajikistan. Tajikistan is experiencing power shortages every winter due to increased demand from population for heating purposes, lack of generation and absence of power surplus in neighboring countries. Since independence, no significant investments were made in the energy sector leading to deterioration of the energy infrastructure, in part because sub optimal pricing has squeezed the financial resources available for essential maintenance and rehabilitation of the transmission and distribution network. To protect the viability of domestic electricity supply, domestic tariffs need to be raised to reach the full cost-recovery level, with low income consumers supported by fiscally affordable social protection schemes. External support is required for the Government’s efforts to promote hydropower exports. Private investors should take the lead in developing new power generation projects for exports.
The World Bank, through soft loans and grants from the International Development Association (IDA), helped the country rebuild the infrastructure destroyed during the civil war and supported economic reforms. These reforms, along with the peace agreement, allowed Tajikistan to achieve a turnaround in economic growth. To date, the Bank has supported projects and carried out non-lending activities aimed at structural adjustment (public administration, expenditure and financial management reform and private sector development), agriculture and rural development, health, education, social security, infrastructure rehabilitation, and disaster management.
Given the importance of agriculture to the livelihoods of more than half the country’s population, the World Bank has helped the country restructure collective farms on some one third of the country’s arable land. Pilot poverty-alleviation projects have also improved the lives of over one and a half million people in the poorest areas of Tajikistan, reduced the number of school dropouts, and improved the quality of primary healthcare services in the selected districts of Tajikistan. Support was also provided to the central government to build and strengthen institutions needed for the country’s longer term development.
In fiscal year 2007, World Bank commitments to the country were $30 million. Overall commitments for active projects total $189.3 million.
The World Bank, through soft loans and grants from the International Development Association, has helped the country rebuild infrastructure destroyed during the civil war and supported economic reforms. These reforms, along with the peace agreement, allowed Tajikistan to achieve a turnaround in economic growth. To date, the Bank has supported projects and carried out non-lending activities aimed at supporting policy and institutional reforms, agriculture and rural development, health, education, social security, infrastructure rehabilitation, and disaster management.
Given the importance of agriculture to the livelihood of more than half the country’s population, the World Bank has assisted in restructuring collective farms that cover one-third of the country’s arable land. Pilot poverty alleviation projects also improved the lives of over a million people in the poorest areas of Tajikistan, reduced the number of school dropouts, and improved primary health services delivery in selected pilot districts.
Going forward
The World Bank continues to assist the government of Tajikistan in furthering its development agenda and reducing poverty by focusing on the following three key areas:
An early warning system at Lake Sarez, completed in December 2004, helps prepare those most vulnerable to flooding and other natural hazards. Read more
Improving business opportunities in rural and urban areas by strengthening the financial sector, reducing the cost of doing business, supporting measures to improve access to agricultural land, and reducing rent seeking in the cotton sector.
Enhancing and preserving the quality of human capital. The World Bank helps improve the system of resource allocation to education and health, create conditions for better teaching and primary school attendance, intensify utilization of primary healthcare, and increase the supply of safe water in selected areas.
Exploiting the country’s hydropower potential. The World Bank supports efforts to increase the efficiency of the domestic energy sector through improved cost recovery and assists the government in attracting foreign investment in the hydropower sector.
Underpinning the above strategic objectives, the Bank works with the Government to improve its capacity and efficiency, and to reduce corruption by giving special emphasis to measures that increase transparency of resource use, reduce excessive controls, and encourage participation of users in the provision of services.
NB: Lending is per fiscal year, July 1-June 30
Active Portfolio by Sector as of June 2006 (US$ millions)
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