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Tajikistan is making gradual progress towards implementation of the principles of Article 1 of the Agreement Establishing the Bank. Transition to a multi-party democracy and political pluralism has been slow, with the last presidential election of November 2006 failing to meet international standards despite improvements from past elections. The country’s advancement towards market orientation of its economy has been uneven, with little progress in key areas of structural and institutional reforms, and is affected by many remaining internal and external challenges, including fragility of the macroeconomic environment.
Moving towards democracy
Progress towards building the institutions of representative democracy has been inconsistent, and the most recent national elections were criticised by international observers for lacking political competition and failing to offer voters a genuine choice. The election marked some improvement compared with the 1999 presidential election as Tajikistan now has many political parties, including opposition parties, and a network of NGOs. However, what remains a challenge is the development of genuine political pluralism with the ruling pro-presidential party continuing to dominate the political scene.
Economic growth
Tajikistan has enjoyed strong real GDP growth of 7.2 per cent per year on average since the previous Strategy in 2005. Nevertheless, the macroeconomic environment remains fragile. Whilst recent growth has been spurred by the service and construction sectors, the economy is still heavily reliant on agriculture, aluminium and hydropower, and it is vulnerable to unexpected disturbances as highlighted by the negative impact of unusually cold weather in early 2008.
The discovery of undisclosed public external debt (US$ 321 million) predominantly pledged against the central bank’s international reserves for the financing of the cotton sector in late 2007 raised very serious concerns over the country’s international liquidity situation and eroded confidence in its overall macroeconomic policy management. Confidence can only be rebuilt by the successful implementation of the IMF programme and by ceasing to use the central bank as a conduit of policy lending by increasing its independence and preventing future conflicts of interests. To date, good performance has been achieved under the IMF programme including progress on conducting a special audit of the central bank.
Risks to stability
Due to the deterioration in the external environment, there are increased risks to macroeconomic stability in the forthcoming strategy period. The maintenance of fiscal and monetary prudence and the successful completion of the current IMF programme particularly necessary to mitigate the risks.
Tajikistan remains the poorest country of operations of the EBRD, with a per capita income of US$ 580 in 2007. Diversification of the economy based on private sector development is crucial both to alleviate poverty and to stimulate long-term economic growth. However, progress in reform has been modest and Tajikistan continues to be one of the least advanced in undertaking market reform among the transition countries.
Key challenges
Challenges in the forthcoming strategy period are:
- to reform the agricultural sector, including full implementation of the “freedom to farm”, establish secondary legislation so that transferability of land including the ability of the farmers to pledge land as collateral would become effective, and resolve the existing debt burdens of the cotton farmers
- to enhance corporate governance and transparency of large state-owned enterprises in industry
- to strengthen the supervisory capacity and independence of the financial sector regulator and limit state interference so that financial institutions can operate on a fully commercial basis
- to further improve governance and regulatory framework across the infrastructure sectors to attract private sector participation, and strengthen the overall management of the electricity sector through enhancing corporate governance and transparency of the state-owned vertically integrated electricity company
- to advance the investment climate to foster small and medium-sized enterprises by reducing excessive bureaucracy, which will also reduce the level of corruption
Fostering the private sector
The Bank will continue to focus on the private sector, the development of micro, small and medium-sized enterprises (MSMEs) in particular, as its first priority. This will include continuation of microfinance instruments, the development of small and medium-sized enterprises credit lines, and continuation of the Trade Facilitation Programme. In order to cover a wider variety of sectors and financial needs, the Bank will fully utilise the financial tools developed under the Early Transition Countries Initiative (ETCI).
The Bank will accelerate its efforts to support primary agricultural sector reforms by further utilising the recently introduced Tajik Agricultural Financing Facility, agricultural credit lines through local commercial banks, and by introducing agricultural commodity based finance. The Bank will also continue in its efforts to provide finance to agro-processing industries in order to increase value-added more broadly.
For the further growth and development of MSMEs, provision of financing itself is not sufficient. To this end, the Bank will provide knowledge and transfer skills to the MSMEs by utilising technical cooperation funding available under the ETCI in association with the funding programmes or independently under the Business Advisory Service and Turn-Around Management programmes.
Strengthening the financial sector
The banking sector has grown sharply in recent years (albeit from a low base) but further growth is constrained by the small capital base and limited product availability. The Bank’s second priority therefore, is to strengthen the financial sector by increasing the sector’s capitalisation and further enhance its capacity for reputable financial intermediation. The Bank will also broaden its lending products and will explore the possibility of extending a Medium-Sized Co-financing Facility to suitable local banks.
The Bank will consider the introduction of local currency funding instruments and foreign exchange insurance mechanisms to mitigate risks of the lenders and borrowers. Opportunities in the leasing sector will be explored to meet the demand particularly in the agricultural sector, arising from the creation of smaller and more efficient farms.
These activities will be implemented with extensive technical cooperation (TC) funding to partner banks and financial institutions. The Bank will also provide TC towards the strengthening of the financial sector as a whole and its supervision, including support to the Credit Bureau, promotion of savings products, and improvement of the anti-money laundering legislation.
Support for critical infrastructure
The investment needs in infrastructure are significant, and their improvement should enhance the living standards of the population and facilitate a smooth conduct of business activities. The Bank’s third priority therefore is to facilitate commercialisation in infrastructure, while concentrating on the basic needs of the population and affordability. The Bank has decided, at this stage, not to exercise its right (i.e., non-disbursement or call for early repayment) against the breach of negative pledge clause on the existing sovereign projects, considering the country's situation of external balance and strong needs for infrastructure development. The Bank will closely monitor the Government's commitment to the formulation and implementation of the IMF programme and will also gather periodic reports from the Government to assess the situation.
Based on the successful implementation of the Water Supply and the Road Maintenance Facility projects and considering the concentration of other key donors’ activities in areas of large infrastructure projects, the Bank will focus its efforts on specific niches. These niches include municipal infrastructure as well as small maintenance facilities of transport and energy infrastructure. These projects will be in the form of small loans with a high proportion of co-financing grants with an institutional arrangement, such as a transparent tariff policy, efficient corporate management structure and accurate financial reporting and accounting. The Bank will need to mobilise grant co-financing from bilateral donors in order to meet IMF concessionality requirements and to increase affordability of the projects.
Policy Dialogue
The Bank will pay particular attention to its dialogue with the authorities to improve the investment climate as well as specific targeted sector reforms in the country. The Bank will continue to support the regular consultative process with the participation of the private sector, the authorities and the donor community through the Investors’ Council.
The Bank also supports the efforts of the IMF in making the central bank more transparent and independent so that its focus should be on price stability and financial sector regulation and not on financing particular sectors of the economy. The Bank will also promote policy dialogue and technical assistance, which contributes to the improvement of corporate governance, including the introduction of International Financial Reporting Standards at a country level, training and modernisation of regulatory agencies, anti-monopoly and anti-corruption bodies.
The Bank will coordinate closely with other IFIs and the business community and participate in the development of a Joint Country Support Strategy, which will serve as a roadmap for further reform in the country.
The Bank will continue to ensure that all EBRD operations in Tajikistan are consistent with the Bank’s Environmental Procedures and incorporate, where appropriate, Environmental Action Plans.
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