Tajikistan’s government is advised to be selective about borrowing
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Tajikistan Public Expenditure Review (PER) released by the World Bank notes that Tajikistan’s economy has grown rapidly since the late 1990s, at an average of about 7 percent between 1998 and 2019. Economic growth has held up well, even after the onset of the COVID-19 crisis, and is estimated to have increased to above 6.0 percent in 2021, from 4.5 percent last year.
Effective management of the government’s budget is essential—fiscal space is already highly constrained, fiscal and public debt risks are high, and the efficiency and effectiveness of public spending is generally low. Large COVID-related spending since 2020 has created further spending pressures, according to the report.
Fiscal space has reportedly been compressed by the weak finances of state-owned enterprises (SOEs), substantial state aid with modest economic returns, and the very high government infrastructure spending that limits scope for outlays on health and social assistance.
The report notes that the large COVID-related spending since 2020 has only exacerbated the situation. Continued weaknesses in public financial management (PFM), including lax oversight of SOEs, the low credibility and predictability of budget plans, and inaccuracies in the application of public-sector accounting standards and budget classifications, inter alia, have contributed to mounting fiscal risks. The country’s limited range of exports, high import dependency, and reliance on remittances raises external risks, which are compounded by a public debt stock that is mostly denominated in foreign currency.
The 2020 budget law envisaged reducing the 2020 fiscal deficit to 2 percent of GDP from 2.7 percent in 2019 but pandemic-related tax and spending measures in the context of weaker growth increased the deficit to 3.2 percent. Following substantial borrowing since 2015 to finance infrastructure spending and bail out two systemic banks, government debt rose to 50 percent of GDP by the end of 2020 from 27.4 percent in 2014.
Tajikistan’s public spending increased from 28.5 percent of GDP in 2010 to 30.5 percent in 2018-20, mainly reflecting higher capital expenditures and public wages.
High government debt represents one of Tajikistan’s most important vulnerabilities the authorities face over the medium-term.
The latest Debt Sustainability Analysis (DSA) from 2021 suggests that the country’s sovereign debt is most vulnerable to exports shocks and contingent liabilities. One external debt burden (debt service-to-exports ratio) indicators breach the respective threshold under the baseline scenario but falls below the threshold in 2028, according to the report.
The report says the main fiscal policy priority over the medium-term should be to reduce risks of debt distress while creating the budgetary space to increase social assistance and finance investments in human capital.
This can be achieved through gradual fiscal consolidation, establishing a zero non-concessional borrowing policy, and other measures that would help reduce potential sources of fiscal risk.
Tajikistan’s authorities are advised to advance gradual fiscal consolidation over the medium term.
PER recommends reaching fiscal and debt sustainability by: 1) pursuing fiscal discipline and refraining from non-concessional borrowing to address vulnerability from a high risk of debt distress; and 2) balancing the composition of public spending from heavy emphasis on infrastructure towards social sectors.
It also recommends creating much-needed fiscal space by: 1) tempering the spending on the Roghun hydroelectricity power project (HPP) to levels that are consistent with debt sustainability, permitting the state to allocate the resulting resources for physical and human capital investments; and 2) remove preferences for SOEs and level the playing field for private sector.
PER recommends advancing institutional reforms, organizational structure and responsibilities through modernizing the organizational structure of the Ministry of Finance, focusing mainly on optimizing the Main State Budget Department and the Main Public Debt Management Department.