Tajikistan: World Bank Cautions Dushanbe about Tough Economic Times Ahead

Last winter, hundreds of thousands of Tajik citizens shivered in the dark as the country experienced widespread shortages of heating and electricity. The situation may end up being substantially worse in 2009, World Bank officials are warning.

After conferring with Tajik leaders on November 7, World Bank officials issued a dire public warning. Sudharshan Canagarajah, the World Bank Country Economist for Tajikistan, said the bank was urging the Tajik government to go into austerity mode, refraining from making any large-scale outlays on economic projects over the near term.

"Resources will be needed to provide essential health, education, and social protection services to people to ensure that a temporary shock does not result in permanent loss of human capital and social welfare of poorer households. Lower priority expenditures can be deferred," Canagarajah said in a written statement.

As for the private sector, economic activity could experience a precipitous decline due to a fall in remittances sent home by economic migrants in Russia and elsewhere, Canagarajah said. [For background see the Eurasia Insight archive]. http://www.eurasianet.org/departments/insightb/articles/eav111008.shtml It will take some time before the full impact of the remittances decline will be felt in Tajikistan. In the meantime, things might get slightly better before they become much worse. Because the country is a net oil importer, it will greatly benefit from the sharp drop in oil prices over the near term. The same is true for imported fertilizers and foodstuffs. Declining prices, of course, will contain inflation in Tajikistan, which has had the highest rate in the former Soviet Union in recent months, according to CIS Intergovernmental Statistics Committee.

But savings generated by cost reductions for inputs -- like the raw materials needed for the smelter in Tursonzoda -- are likely to be offset by a decline in the price of commodities, including aluminum and cotton -- Tajikistan's two principle exports.

The real danger, however, is connected with remittances. According to various sources, as many as 1.5 million out of the total of about 6 million Tajik citizens currently live and work abroad, mostly in Russia and Kazakhstan. According to 2008 World Bank statistics, Tajikistan received $1.25 billion in remittances via bank transfers last year. Unofficially, the figure is much larger, possibly comprising as much as 60 percent of GDP. With such an important role in their country's economy, the question remains how the migrants abroad will weather the global economic crisis. Placing the importance of remittances in context, Tajikistan's annual budget in 2007 was less than $700 million, excluding international aid and loans, or roughly half the amount of official remittances.

Initially, the Bank predicts workers abroad will "repatriate their accumulated savings," providing a short-term boost to the Tajik economy. But "a slowdown in construction is likely to result in lower earnings or unemployment of Tajiks working abroad, lower remittances, and the return to the country of migrant workers," said a statement released by the World Bank. A large inflow of unemployed workers could have a politically destabilizing effect in Dushanbe.

With debt currently at 30 percent of GDP, according to IMF figures, some economists warn that a severe decrease in remittances could push that figure higher, resurrecting fear of inflation and a possible food crisis. On top of all this, with international lenders grappling with a global credit crunch, Tajikistan is likely to see a reduction in aid. Canagarajah urged Dushanbe to increase its foreign currency reserves to provide a buffer against potential shocks, but it was unclear whether Tajik leaders have the means to follow through on this recommendation.

Noting the unfavorable business environment in Tajikistan, Canagarajah called on President Imomali Rahmon's administration to "limit [government] interventions and lift constrains on business operations and market entry." The World Bank's annual Ease of Doing Business index for Tajikistan currently ranks the country 159 out of 181, pointing to difficulties opening a business, getting credit, and engaging in international trade.

Diversification of the agriculture sector is another urgent priority, Canagarajah said. Though the country is still predominantly oriented toward cotton farming, this sector has accumulated large losses since the 1991 Soviet break-up. From 2003 to 2007 -- as the price decreased on global commodity exchanges -- the share of cotton in the country's GDP has decreased from 9 percent to 2 percent.