September 4, 2017
Despite a sharp drop in remittances, the Tajik economy has maintained high (around 6-7% annually) economic growth during last years. Large scale infrastructural projects financed mainly from Chinese loans and foreign direct investments (FDI) boosted domestic demand and counteracted unfavourable conditions in Russia. Since the second half of 2016 the external sector recovery has also propped up the economy: Improving business cycle conditions in the economies of Tajikistan's main trading partners, most notably in Russia, and higher aluminium and cotton prices have lent support to Tajik GDP growth.
Nonetheless there are significant dark spots: First, Tajikistan has been in a full blown banking crisis. Four major banks including the two largest ones (Agroinvestbank and Tojikosodirotbank) had gone under the special administration of the central bank and applied serious limits on cash withdrawals. Subsequently the operation licenses of two smaller banks (Tajprombank and Fononbank) were withdrawn and some other smaller credit institutions were also closed.
Additionally, high public expenditure has increased external debt by 15 percentage points of GDP from 2014 to 2016. Although there are significant uncertainties about the true level of debt (as we question the quality of a number of macroeconomic statistics in Tajikistan), debt financed fiscal expansion and the banking crisis combined could easily lead to a financial crash. No surprise that the Tajik government has been in talks with the International Monetary Fund at least since early 2016, although so far no progress has been reported.
On the contrary, last December the government adopted a banking sector bailout package which was practically financed from the central bank money and increased the monetary base over 60% by April 2017. With liquid FX reserves precariously low (liquid reserves stood at 0.5% of imports and including gold are well below 3 months of imports), the above mentioned factors can well explain the 12% weakening of the somoni against the US dollar since the beginning of the year and the widening of the black market exchange rate spread to 8%. To support the currency and contain inflationary pressures, the central bank has raised the base rate by 500 basis points since the beginning of the year.
Given these problems it is no surprise that our most recent Macro Forecast foresees a worsening economic performance with both the banking sector troubles and an inevitable fiscal consolidation hampering economic growth. However this still means growth rates close to 5-5.5% in the next two years, according to OGResearch's medium-term macroeconomic prediction. Nonetheless the growth numbers are probably not too informative as we have serious reservations about the quality of economic growth figures. Although this scenario assumes a deal with the IMF and international lenders by the end of 2017, it is still consistent with a sharp weakening of the somoni exchange rate until an agreement is reached. If a deal does not materialize, the situation could get easily out of control leading to an even weaker exchange.
Nevertheless, Tajikistan could also surprise on the upside. Given its tiny size (with the size of GDP around USD 8 billion), any Chinese decisions to help or support could improve the country's prospects. In this respect, financial problems in China could be a factor at the first sight but given the size of Tajikistan we do not consider this an issue. However as Mongolia learned, most probably any Chinese direct financial support (in the form of an extension of swap facilities) would be linked to an IMF program. Otherwise Chinese loans are usually on purpose, to finance the purchase of certain equipment and the expenses on a particular projects. This can help GDP but not enough to contain the depreciation of the currency.
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