Lower public investment, reduced remittances, and weak foreign direct investments resulting from the COVID-19 outbreak are projected to slow down Tajikistan’s economic growth in 2020 and 2021, says a new Asian Development Bank (ADB) report released on April 3.

In its Asian Development Outlook (ADO) 2020, ADB forecasts (as of 16 March 2020) Tajikistan’s gross domestic product growth to drop to 5.5% in 2020 and to 5.0% in 2021, from the 7.5% economic growth rate recorded in 2019.  

Fiscal consolidation will reduce public investment, a weak business climate will discourage private investment, and low remittances from sluggish growth in the Russian Federation will limit domestic consumption.  A pickup in private credit along with increased production and exports will support growth, as will additional electricity generation and improving economic relations with neighboring countries, according to the report.  Downside risks reportedly stem from weakness at two large banks and several state-owned enterprises, along with the possibility of greater declines in remittances, foreign direct investment, and tourism receipts as a result of COVID-19.

The report notes that on the supply side, expansion in industry will likely slow as COVID-19 reduces foreign direct investment, despite continuing efforts to boost electricity generation, mining, and manufacturing. Reduced activity at Roghun and expected delays in construction of Tajikistan’s segment of a gas pipeline from Turkmenistan to the People’s Republic of China should slow construction.  Agriculture is expected to rise modestly with additional area under cultivation.  Growth in services will slow in 2020 with low remittances but recover somewhat in 2021 as remittances expand.

On the demand side, public investment will remain the main growth driver, despite a further slowdown, as a weak business climate limits private investment. Private consumption will fall with low remittances. Net exports are forecast to improve as the implementation of Roghun and construction of a new transmission line reconnecting Tajikistan’s electricity system to the Central Asia Power Grid boost electricity exports and support the domestic production of import substitutes.

Inflation, which stood at 8.0% last year, is projected to remain under 10% in 2020. The forecast rests on expected exchange rate flexibility, external currency pressures from ruble depreciation, potential supply shocks, and possibly faster monetary expansion during an election year, along with expected increases in public salaries and higher electricity tariffs. Inflation is expected at 8.0% in 2021 with slower growth in demand.

The report highlights the need to reform the country’s tax policy to spur investments, as the current tax policy has unrealistic revenue collection targets that rely heavily on private firms. Companies shoulder tax rates, pension, and insurance contributions that are more than double the norm for transitional economies in Europe and Central Asia.

To improve the investment climate, Tajikistan should consider how to make its tax policy more business friendly while finding other ways to increase revenue, says the ADB report. Electronic filing of tax returns and online payment of tax liabilities have already been introduced to simplify taxpaying and increase transparency, but further reforms are needed.

The country should review tax exemptions to further broaden the tax base, move from tax inspections to risk-based assessment, and shift more of the tax burden from income and profit to consumption. Tax incentives should be limited to activities with clear and monitorable impacts on investment, innovation, regional development, and employment generation.  Administrative and compliance burdens should also be reduced, says the report.

ADB’s first assistance to Tajikistan was in 1998 to support post-conflict reconstruction. Since then, ADB has mobilized over $1.8 billion for the country, including more than $1.3 billion in grants.  The assistance has helped improve the country’s transport and energy infrastructure, support social development, expand agricultural production, and strengthen regional cooperation and trade.