The fall 2018 edition of the biannual Tajikistan Economic Update entitled Rogun HPP: A Potential Resource for Building Tajikistan’s Human Capital outlines the economic situation in the country, as well as the medium-term development prospects.

The World Bank (WB) report that was released on January 11 highlights that economic growth in Tajikistan remains strong – but has been less inclusive for people, especially those at the lower end of income distribution, an average growth is expected to remain around 6% during 2019–2020, but domestic and external vulnerabilities persist, and it is vital for Tajikistan to create a level-playing field for all private sector participants. 

The report notes that gross domestic product (GDP) growth slightly accelerated through nine months of 2018, reaching 7 percent compared to 6.8 percent during the same period of 2017.  Growth was reportedly supported by domestic demand while net exports declined.  Large-scale public investments and growing remittances fueled the construction sector and helped prop up domestic consumption.  Main drivers from the supply side were industry followed by services and construction sectors.  The country’s external position deteriorated due to surging import for capital-intensive projects and falling export proceeds as global prices for minerals was on a downtrend.

Despite the sustained high rates of economic growth, the future growth prospects reportedly remain overshadowed by the protracted resolution of the banking crisis and long-awaited improvements in the business environment.  The package of amendments to the financial sector legislation was adopted in June 2018 and is expected to upgrade the regulatory and supervisory framework. However, the resolution of the two problem banks is still pending.  Despite some initiatives by the Tajik authorities to foster the overall investment climate and improve the business environment, structural reforms fell behind global trends.   

The report notes that Tajikistan’s growth prospects are weighed down by external and domestic risk factors.

Potential escalation of trade tensions and hikes of interest rates by leading central banks reportedly impose significant tail risks on foreign exchange inflows through remittances, low mineral prices, and foreign investment channels.

Domestic vulnerabilities are emanating from insufficient structural reforms to improve the investment climate, improper governance and transparency in state-owned-enterprises (SOEs), and unresolved banking sector problems.

The country’s risk of debt distress remains high in the context of the elevated public debt and further spending pressures to support the construction of the Roghun hydroelectric power plant (HPP).

To increase the Tajik economy’s resilience and ensure macro-stability, the authorities need to accelerate reforms in public finance by improving the efficiency of public spending and quality of tax collections and promoting development of a vibrant private sector for a sustainable economic progress, according to the report.

The structure of the economy remains highly susceptible to external and domestic risk factors.  The report says that further escalation of global trade tensions coupled with interest rate hikes by the Federal Reserve will dampen external earnings through commodity price shocks, lower foreign direct investment (FDI), and remittance inflows.  Domestic vulnerabilities are magnified by long-standing irresolution of toxic banks, contingent liabilities of SOEs, particularly in the energy and transport sectors, and unsatisfying progress in structural reforms to improve the business environment.

The transformational change of the country into an industrial-innovative economy—the high case scenario in the National Development Strategy 2030—is not possible without lifting reform efforts to a completely new level.  Creating a level playing field for all private sector participants, improving corporate governance in loss-making SOEs, and investing in human capital will be vital going forward.

The Human Capital Index (HCI), launched by the World Bank in October 2018, will help countries measure their human capital by answering the question: “How much human capital will a child born today acquire by the age of 18, given the risks to health and education that prevail in the country where he/she was born?”

The overall HCI in Tajikistan currently stands at 0.53, which indicates that individuals, and the country as a whole, are foregoing almost half their future economic potential.  The country modestly falls behind Armenia (0.57) and Kyrgyzstan (0.58), while the gap with Kazakhstan (0.75) and the Europe and Central Asia regional average (0.63) is much more pronounced.

Human capital consists of the knowledge, skills, and health that people accumulate throughout their lives, enabling them to realize their potential as productive members of society.  Investing in people through nutrition, health care, quality education, jobs, and skills helps develop human capital, and this is key to ending extreme poverty and creating more inclusive societies.