Macroeconomic performance

Economic growth remained strong at 7.4 per cent in 2013. Growth was driven by a rapid rise in remittances, higher domestic demand, high aluminium prices and strong cotton harvests. Growth was strong in the construction sector, which increased by 17 per cent and was primarily driven by public infrastructure projects and a boost in private housing construction. The agriculture sector remained robust with 7.6 per cent growth, and extractive industries output increased by around 43.6 per cent, while manufacturing output declined by 0.8 per cent. In the first half of 2014 growth stood at 6.7 per cent.

Inflation remained low in 2013. Average annual inflation stood at 5 per cent in 2013 due to the moderate increase in food prices and stable exchange rate. In January to August 2014, inflation reached 6.7 per cent. In response to these lower inflationary pressures, the NBT has been easing monetary policy. The refinancing rate was cut twice in 2013 and was decreased further to 4.8 per cent in January 2014, compared with 6.5 per cent a year ago. In May 2014 the National Bank of Tajikistan increased the refinancing rate to 5.9 per cent; the rate was increased further to 6.9 per cent in October 2014.

The fiscal deficit widened in 2013. It stood at around 0.8 per cent of GDP in 2013, driven by higher expenditures in capital projects mainly in energy and transport. However, revenues increased by 18 per cent year-on-year due to improved collection and a higher tax base. The fiscal balance stood in surplus at 1.4 per cent in the first half of 2014. Meanwhile, public and publicly guaranteed external debt decreased from 28.6 per cent of GDP in 2012 to 25.4 per cent in 2013. The decrease in debt ratios was driven by debt repayments on loans from the Export-Import Bank of China and the European Union.

Growth is expected to slow down in 2014. The economy remains highly dependent on remittances from Russia, which account for around 50 per cent of GDP. Even a small drop in remittances has a substantive effect and may significantly dampen consumer demand. Internal vulnerabilities associated with a weak banking sector and high levels of NPLs also continue to stymie growth in Tajikistan. Growth in 2015 is expected to remain at the 2014 level, although there is still significant uncertainty due to the risk of a further slow-down in the Russian economy. In the longer term, growth will depend on successful implementation of much-needed structural reforms and on whether – and to a lesser extent, on what terms – Tajikistan will join the Eurasian Customs Union.

Major structural reform developments

The business environment remains weak, despite some progress in recent years. Progress in regulatory reforms has been slow. Tajikistan ranked 166th globally and 26th regionally for ease of doing business in the World Bank Doing Business 2015 report. The country’s improved ranking is largely due to streamlined procedures for starting a business, the implementation of new software at the one-stop shop for registering a business, a reduction in the cost of dealing with construction permits, and the introduction of an electronic system for filing and paying taxes. In 2013 the first credit information bureau was established to improve credit risk management by offering timely and credible information on borrowers to creditors. However, the credit information bureau has only been used by a few smaller banks, as large banks do not request creditor information before making loans, thereby undermining the effectiveness of the bureau. There are still significant administrative barriers to establishing new enterprises, and the dominance of enterprises owned by politically exposed persons is hindering new entrants and the growth of small and medium-sized enterprises in the private sector.

Reforms in agriculture have advanced but challenges remain. Agricultural reform in recent years includes the liberalisation of the domestic cotton market and a write-off of cotton debt, which accumulated as a result of the cotton processing and marketing monopolies. However, land reform has remained stalled, although a new land code has been drafted. The Ministry of Agriculture, together with the Ministry of Economic Development and Trade, are preparing measures to increase fruit and vegetable exports to Russia by simplifying the export process.

Steps have been taken towards improving the power sector. In August 2011 the government approved a corporate restructuring programme for Barki Tojik for 2011-18, which aims to turn the company into a commercially viable entity with the ultimate objective of unbundling. Barki Tojik is on the verge of bankruptcy and has been criticised for poor management. In July 2014 the company’s management was reshuffled and all employees must now undergo a qualification review. In addition, in May 2014 the government adopted a separate decree to improve the financial situation of Barki Tojik. At the beginning of July 2014 tariffs for electricity and heating were increased by around 15 per cent except for TALCO, whose annual average tariff was increased by around 56 per cent.

Tajikistan’s banking sector remains weak. State-directed lending has adversely affected the banking sector, where bank capitalisation, profitability and asset quality continued to deteriorate with a significant rise in NPLs (more than 60 days overdue) from 9.9 per cent at the end of 2013 to around 11.7 per cent by the end of June 2014. Other major risks stem from the overall fragility of the banking system given the large exposure of banks to cotton and state enterprises, weak capital positions and dependence on liquidity support from the central bank.

Tajikistan has introduced the principles of Islamic banking. On 5 August 2014 the law on Islamic banking in Tajikistan came into force. To implement the law in practice, the National Bank of Tajikistan is now in talks with the Islamic Development Bank on receiving technical assistance for the preparation of statutory acts, which aim to introduce Islamic banking principles.

The NBT has taken further steps to create mobile banking services in Tajikistan. The new regulatory framework, adopted in July 2014, will allow banks to use innovative technologies and existing retail infrastructure to expand their services outside of traditional bank branches. It will also enable non-banks in Tajikistan to provide innovative mobile payment services. Mobile banking services are currently available in four financial institutions: Agroinvestbank; micro lending organisations Avfar and Samar; and IMON International, which is one of the largest microfinance institutions in Tajikistan. The NBT is cooperating closely with the EBRD, the German Agency for International Cooperation (GIZ) and the International Finance Corporation on the roll-out of mobile financial services in the country.