IMF Finishes 2022 Consultation with Tajikistan

Washington, DC : On February 27, 2023, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with the Republic of Tajikistan.

Tajikistan continued to experience strong growth in 2022, with minimal disruption from the war in Ukraine as strong financial inflows supported domestic demand and liquidity. Real GDP increased by 8 percent in 2022, while higher remittances kept the current account in surplus and helped increase FX reserves to around 8 months' import coverage. Twelve-month inflation remained well-contained at 4.2 percent in December, below the mid-point of the NBT's medium-term target range of 6 (±2) percent. The fiscal deficit is estimated at 1.4 percent of GDP in 2022, implying a modest expansion due to increased capital spending, but remained below the 2.5 percent of GDP deficit target, helping to anchor a projected decline in public debt to 35 percent of GDP. Financial soundness indicators continued to improve as the resolution of two large banks in 2021 has helped clean up legacy loans in the banking system.

Significant uncertainty remains over the near-term outlook. While Tajikistan proved to be resilient to weaker economic activity in Russia in 2022, it remains vulnerable to spillover risks from a protracted slowdown. Real GDP growth is projected to decelerate to 5 percent in 2023 as remittances return to historical levels after the increase in 2022, but with downside risks in the event of a more adverse impact on Tajik migrants as the war in Ukraine continues. Over the medium-term, growth is expected to converge to its potential of about 4 percent, with inflation staying within the NBT's target range and FX reserves remaining at around 8 months of imports.

Far-reaching structural reforms are critical to achieve stronger and more inclusive medium-term growth. Reform efforts should continue to focus on improving SOE governance, supporting private sector development, enhancing social protection and combating corruption. Reducing climate-related vulnerabilities can also raise the economy's growth potential.

Executive Board Assessment [2]

Executive Directors agreed with the thrust of the staff appraisal. They commended the Tajik authorities for achieving continued macroeconomic resilience despite the spillovers from Russia's war in Ukraine. However, risks to the outlook remain significant, as the war continues and remittances from Tajik migrants working in Russia remain large. In this context, Directors encouraged the authorities to continue with prudent macroeconomic policies, while implementing structural reforms necessary to promote inclusive growth, improve governance and transparency, and address climate-related vulnerabilities.

Directors welcomed the authorities' commitment to a medium-term fiscal deficit target of 2.5 percent of GDP to keep public debt on a downward trajectory. Noting the budget constraints imposed by the sizable expenditures related to the Rogun Hydropower Project, they emphasized the need for improved spending efficiency and increased domestic revenue mobilization, including by phasing out tax exemptions, to create space for critical development and social spending. Directors stressed the importance of transparency and governance reforms to address fiscal risks related to state-owned enterprises (SOE), including efforts to reduce the financial deficit of the electricity sector. They also encouraged the authorities to develop the domestic debt market to reduce reliance on external financing.

Directors noted that inflation remains well-contained below the mid-point of the National Bank of Tajikistan's (NBT) medium-term target range. However, they emphasized that rapid monetary growth warrants caution and suggested considering quantitative measures to mop up excess liquidity and macroprudential controls to mitigate potential risks from overheating. Directors underscored the importance of enacting the amendments to the NBT law to strengthen the central bank's operational autonomy and independence. They also stressed that exchange rate flexibility remains essential to absorb external shocks.

Directors underscored that further strengthening banking supervision is essential to bolster resilience to shocks and improve confidence in the banking system. They emphasized that efforts should continue to implement the recommendations of the 2022 Financial Sector Stability Review.

Directors emphasized that a transition to more market-oriented resource allocation is needed to unlock the economy's full potential and support more inclusive growth. They encouraged the authorities to accelerate reforms to reduce the state footprint in the economy and stressed the need to focus on SOE reform, the central bank institutional framework, the AML/CFT regime, and anti-corruption. Directors also welcomed the authorities' green development strategy for climate change mitigation and adaptation, which would help reduce Tajikistan's climate-related vulnerabilities and open new opportunities for more sustainable growth. Some Directors looked forward to deepening Fund engagement, including on a possible program.