Tajikistan’s Lack of Private Business Unsustainable – ADB

Tajikistan’s economic growth, hinging on remittances and public spending, is not sustainable without substantial private investment, but Dushanbe is doing too little to stimulate a friendly climate for investors, says a new report by the Asian Development Bank (ADB).  

On paper, Tajikistan’s economy looks in decent shape. GDP grew by 7.4 percent in 2011, up from 6.5 percent in 2010, says the April report, “Outlook 2012: Confronting Rising Inequality in Asia.” The Bank expects 5.5 percent growth in 2012. “Agriculture grew by 7.9 percent, despite difficult climatic conditions. Cotton production shot up by 34 percent, reflecting a 30 percent rise in the area devoted to cotton, as high international prices encouraged additional planting. Other crops, particularly fruits and vegetables, also showed double-digit growth.”

But services -- fueled by rising remittances from labor migrants abroad -- were the main source of growth, expanding by 13.5 percent. Indeed, labor migrants, mostly in Russia, sent home the equivalent of 45 percent of GDP, making Tajikistan the most remittance-dependent country in the world, according to the World Bank.

Services alone are not a healthy base for any economy, especially when a country has little industry, chronic energy shortages, and a poor record attracting investment. Spending patterns are deeply dependent on external factors—in this case those remittances, which are tied to Russia’s hydrocarbon-fueled economy and political good will between the two countries. When Russia’s economy goes south, it takes Tajikistan’s down with it. When Russia slaps fuel duties on Tajikistan-bound exports, it sparks inflation. New export duties on Russian fuels in the first half of 2011 boosted prices at the Tajik pump a whopping 59 percent. 

Some government policies appear to be driving inflation, too (though the ADB avoids describing Tajikistan’s authoritarian grip over the country’s major assets). Officials have encouraged farmers to grow cotton on the mountainous country’s limited supply of arable land, allowing select middlemen to benefit from the difference in local and international prices. Meanwhile, Tajikistan must import food, although fruits and vegetables grow well in its fertile valleys. Food prices rose 32 percent in the first half of 2011, mostly due to the rising cost of grain on international markets, before slipping in the second half of the year.  

Government spending, moreover, is driving inflation while doing little to boost investor confidence. “Massive public expenditure on infrastructure and special projects to commemorate the 20th anniversary of Tajikistan’s independence added to inflationary pressures,” says the report. According to officials, Dushanbe spent $212 million last year on projects and parties to mark the 20th anniversary of its independence—more than ten percent of the national budget and more than six times the amount the United States Agency for International Development gave the country in aid.

 

The most important thing Tajikistan can do to help its economy, says the ADB, is encourage private investment. Unfortunately, rampant corruption (read: officials’ rapacious families and cronies) continues to frighten investors, while “difficult business regulations also discourage private investment.”

As it is, private investment accounts for less than 5 percent of GDP, “reflecting an unfavorable business environment and lack of investor confidence. Most private enterprises are still small or of medium size and require little capital, operating in areas such as trade and services,” said the report, which adds that “reducing risks to private investors – by providing and then enforcing property rights, for example, by reducing corruption, and by enhancing supportive infrastructure – is critical.”

Tajikistan’s landlocked location makes it vulnerable as well. The country is now facing a de facto blockade by Uzbekistan, part of a long-running conflict over water resources, cutting it off from rail traffic and energy imports. This standoff underscores the major takeaway from the ADB report: Tajikistan’s economy remains too close to the edge for comfort.