DUSHANBE, June 2, 2015, Asia-Plus /Payrav Chorshanbiyev/ -- The spring 2015 edition of biannual Tajikistan Economic Update released by the World Bank on May 25 notes that the State Budget (excluding externally financed programs [PIP]) is expected to stay close to balance for the near future.  The government is committed to having a fiscal deficit of no more than 0.5 percent of GDP over the medium term.  It will achieve this in 2015 by restraining and rationalizing expenditures while ring-fencing, and even increasing, social spending.  With the support of the EU-funded project, the Ministry of Finance is crafting a strategy to address fiscal risks from state-owned enterprises SOEs, to be presented to the government by yearend. In support of its medium-term debt strategy, the government intends to keep total public debt below 40 percent of GDP.  Enhancing public sector efficiency and transparency will then be necessary to allow for reallocation of resources from the public to the private sector while safeguarding social cohesion. Policies to facilitate the absorption of returning migrants into the local labor market will also be important.

The projected decline in GDP growth is expected to slow poverty reduction through 2016.  During that time it is projected that household purchasing power will grow more slowly due to lower remittances and slower growth in real wages.  Vulnerability is magnified by the current lack of well-targeted social programs. The poor are likely to suffer from both the decline in remittances and higher somoni prices for imported grain and flour—bread is a diet staple—though the planned expansion of the targeted social assistance (TSA) program will mitigate some of the worst effects.

Over the medium term, growth is projected to rebound, assuming responsible macroeconomic policies and a sufficient pace of structural reform. Private investment is expected to expand somewhat, to 8 percent of GDP, and the financial sector and the business environment are both expected to improve. Gross investment is projected to reach 19.5 percent of GDP over the medium term. With better global conditions and better economic management, economic growth will be led by private investment and exports.  Toward 2017 Tajikistan should achieve progressively higher growth rates, although they will still be below recent historical averages.  More ambitious reforms will be needed to accelerate growth in the medium term.

Significant risks to the macroeconomic outlook arise from the external balance, low external reserves, SOEs, and the banking sector.  Prudent macroeconomic management is a high priority to assure the necessary adjustment, increase the country’s resilience to shocks, and provide a solid foundation for growth.  It is crucial to undertake the needed fiscal and exchange rate adjustment promptly and adhere to a sound policy mix going forward.

The impact of Russia’s recession on Tajikistan underscores the immediate need to create the foundations for a new model of growth and development.  It will be vital to address financial sector vulnerabilities and to assure proper management of SOEs to minimize fiscal risks and deliver services to consumers cost-efficiently.  Reforms to provide a more attractive environment for business need to accompany comprehensive public sector reform.  Policies to promote employment creation in the private sector, where job creation has been very limited since 2009, will be critical to facilitate absorption of returning migrants; in the medium term, to sustain poverty reduction and secure the monetary welfare gains of recent years will require increased access to opportunities and basic services, such as education, water, sanitation, and heating.