Tajikistan’s real GDP growth rate is projected to decelerate in 2017 before gradually recovering in 2018-19, according to the World Bank report, TAJIKISTAN: Strong Growth with a Challenging Outlook.

However, growth will remain below 2016 levels in 2017-2019, the report says, noting that lingering challenges in the financial sector, growing vulnerabilities in state-owned enterprises (SOEs) and an unconducive business climate will weigh on the economy’s growth prospects. 

With foreign direct investment (FDI) and debt inflows more than offsetting the current-account deficit, the overall external position is projected to be positive in 2017.  Although the current-account deficit will widen considerably in 2017—driven by a pickup in domestic demand—over the medium-term, the revival of remittances and moderate price improvements for the country’s principal export commodities—namely cotton and aluminum—should result in a slight reduction in the current-account deficit and boost fiscal revenue.  To the extent that the macroeconomic management framework is enhanced to ensure prudence—and structural reforms to improve the business climate are sustained and accelerated—higher public and private inflows are expected to materialize.  Foreign reserves are forecast to rise to above the benchmark minimum of three months of import cover.

The reports notes that despite an anticipated improvement in the external environment, risks to economic growth remain to the downside.  Substantial contingent liabilities among SOEs and a weak business environment—particularly with regards to a tax administration still plagued by contradictory objectives and inefficiencies in its implementation—will continue to hinder broad-based growth and may intensify debt-related risks.  

With an asset to GDP ratio of only 39 percent, Tajikistan’s financial sector is relatively small compared to those of other regional economies.  The banking industry reportedly represents almost 90 percent of total financial sector assets and comprises 16 commercial banks, including one fully state-owned bank, two majority state-owned banks and six majority foreign-owned banks.  The largest four banks account for more than 80 percent of total bank assets.  The micro-finance sector is the second largest industry, represented by 34 micro-deposit organizations and 46 micro-lending organizations and funds.  The size of the insurance and leasing sectors is small, while the capital market is limited to 91-day treasury bills and advisory services are virtually non-existent.

Largely as a result of its troubled banking history and legacy of government interference in operational decisions Tajikistan’s deposit and credit penetration rates are below those of other regional economies.

At end-2016, the ratio of bank deposits and credit to GDP stood at 16.9 percent and 18 percent, respectively -- significantly lower than Kyrgyzstan (23.4 percent and 20.4 percent) and Kazakhstan (39.7 percent and 28.1 percent).  Although falling in recent years, interest rates remain high; deposit and lending rates stood at 16 percent and 25 percent, respectively, in local currency terms at end-2016. The interest rate margin was high (at over 9 percent), indicating low efficiency, limited competition and severe funding constraints.

The banking sector in Tajikistan has a long history of weak performance, including a major collapse after independence, a largest bank resolution in 2004 and its bailout in 2012, according to the report.  The first signs of the 2016 financial sector crisis were evident in 2013, when the NPL ratio suddenly doubled to 15.9 percent, up from an average of 8 percent in 2010-2012.  Risks related to poor lending practices, including directed lending and inadequate risk management were further magnified by shortcomings in corporate governance and low capitalization levels in key banks.  The onset of recession in Russia in 2014-16 worsened the situation.  A simultaneous fall in remittances depressed private consumption and squeezed profit margins in the domestic market.  As a result, asset quality indicators deteriorated rapidly, with NPLs rising from 25 percent in 2014 to 54 percent by the end of 2016.  The banking sector portfolio, characterized by high levels of unhedged foreign-exchange borrowers, suffered even more due to a sharp depreciation of the somoni (totaling more than 39 percent in 2014-2016).