Tajikistan Needs Surefooted Action on Economy

Troubled currency just one aspect of country’s massive vulnerability to external economic shocks.

By Elena Miller and Lola Olimova in Dushanbe (RCA No. 566, 13-Feb-09)

Although Tajikistan’s currency appears to have stabilised after last week’s wobble, economists say the government is going to have to keep a firmer hand on monetary and economic policy, as the country remains highly vulnerable to external factors that it can do little about.

The Tajik somoni underwent a sudden deprecation on February 2, when its exchange rate slipped by nearly seven per cent from 3.75 to 3.90 to the US dollar. Panic-buying later in the week pushed the rate down further to four somoni to the dollar, and traders reported that dollars were in short supply.

“This spike is a result of panic-buying of foreign currency fuelled by news of the [relative] rise in the dollar’s value,” said a central bank statement dated February 4.

The National Bank of Tajikistan tried to calm nerves by assuring people they were taking “unnecessary risks” by buying dollars at unreasonably high rates. “The current situation will be short-lived and people will end up incurring big losses when the somoni recovers its real rate,” it said.

A week later, on February 11, the bank was able to offer some reassurance, with an official telling the Asia Plus news agency that the somoni was gradually strengthening. Despite that, the US dollar – the premium foreign currency throughout the former Soviet Union – remained in short supply at exchange offices, which were clearly trying to stock up rather than sell what they had.

Tajikistan has been hit hard by the international financial crisis, with its main exports – aluminium and cotton – fetching less on world markets, and a sharp fall in the amount of money that migrant workers are sending home from Russia and Kazakstan.

The government is currently negotiating with the International Monetary Fund, IMF, and the European Bank for Reconstruction and Development to secure loans worth over 200 million US dollars.

The somoni’s exchange rate has been unstable for some time. At the beginning of this year the rate fell from 3.43 to 3.70 to the dollar, resulting in long queues at exchange offices.

Towards the end of January, the central bank said it had been intervening to maintain the currency’s value. With dwindling foreign currency and gold reserves, though, there is a limit to how long that could go on. Speaking earlier last month, central bank chief Sharif Rahimzoda said currency reserves had been depleted from 350 to 198 million dollars because of monetary interventions over the course of 2008.

A taxation service official who asked to remain anonymous was critical of what he said was the government’s dilatory response to obvious trends.

He noted that an anti-crisis plan approved late last year were currently being revised following official talks World Bank and IMF, and the final version would not be ready until February 15.

The tax official said Tajik financial institutions had failed to grasp the implications which the global financial crisis would have for the country’s economy. For too long, he said, they insisted that Tajikistan would be safe because its financial system was relatively isolated from world markets – ignoring changes in commodity prices.

December exports were 44 per cent down on the previous month, and some analysts believe the aluminium industry has lost 100 million dollars in revenues in the last few months.

“It was these price falls on world markets in recent months that resulted in Tajikistan receiving less foreign currency,” said Zarif Razikov of Bank Eskhata.

Since workers’ remittances are believed to contribute to creating at least 40 per cent of Tajikistan’s gross national product, job losses and pay cuts as the construction and other sectors contract in Russia and Kazakstan have had a major impact on Tajikistan. As well as providing sustenance for Tajik households and the businesses they buy from, the influx of money has enabled the central bank to build up its reserves in recent years.

Central bank figures show that migrant workers sent home money transfers of more than two billion dollars in the period from January to September last year. But after that, the transfers started falling away.

The savings bank Amonatbank, for example, notes that remittances it handled in November were 25 per cent down on the previous year.

“We can explain this by noting that many of the labour migrants working in Russia have lost their jobs,” said Abunasir Sharipov, head of external relations at the bank.

Experts say that with traditional revenue sources drying up, the government needs to act resolutely.

With falling aluminium and cotton prices, the government “cannot expect to get the revenues that were projected earlier, and there is every reason to revise the budget and cut it down,” said the tax official.

Others argue the case for urgent action to promote domestic production. One obvious area for reform would be tax; a perennial complaint in the Tajik business community is that taxes are too numerous and too high.

“In my view, the president – who decides everything – should act quickly and lower the tax burden with immediate effect,” said one businesswoman based in the capital Dushanbe.

Another useful measure, she said would be to abolish import duty on equipment, machine-tools and spare parts so as to stimulate local manufacturing, while simultaneously raising the duties applicable to Chinese-made finished goods.

“This will benefit our economy and domestic manufacturers,” she said.

Elena Miller is the pseudonym of a journalist in Dushanbe. Lola Olimova is IWPR’s editor for Tajikistan.