Sergey Shatalov in an interview to information agency “Asia-Plus”: Development of Tajikistan calls for strengthening of its financial sector
August 27, 2013. During his visit to Dushanbe on August
— Mr. Shatalov, what is the purpose of your visit to the Republic, whom did you meet, what issues were discussed?
— First goal was to participate in the work of the High-Level International Conference on Water Cooperation held in Dushanbe on August
Second, to discuss with the Ministry of Finance and other relevant ministries and agencies the country’s request for the second financial credit to support its budget. The application was submitted to ACF in May.
— How EDB engaged in addressing the issues discussed during the Conference on Water Cooperation in Dushanbe?
— Important topics were discussed at the Conference on Water Cooperation. They include the issue of water cooperation for human development, for economic benefits in the environment of increasing water deficit.
We see that over the last decade, problems related to transboundary waters have aggravated due to various reasons, especially in the areas of water stress. It is clear that riparian countries should intensify their dialogue and cooperation to ensure mutually beneficial and efficient use of transboundary water resources based on generally accepted standards, principles, and rules.
Based on these key topics of the conference a multilateral discussion also covered such issues as gender relations, capacity building, sector interaction, as well as triggers and catalysts to pursue cooperation in water management.
Moving to the question of how the Bank is involved in addressing these problems, I’d like to note that ever since the time the Bank’s objectives and goals were formulated, we clearly understood that water issues in Central Asia, i.e. in the region covered by Bank operations, are acute, especially in their transboundary context.
While not all the states of the basins of the transboundary Amu-Darya and Syr-Darya Rivers are currently members of the Bank, we understand that the problems of management of limited water resources in the basin of the Aral Sea can be solved only through the cooperation of all riparian states.
Capacity-building and strengthening confidence, clear rules of conduct and common institutions — all this is essential for ensuring stability and prosperity of the countries in the region.
At the same time, political will of the states to find mutually acceptable solutions is required too.
In order to improve the efficiency of EDB’s operations, its Strategy for
To this end, the Bank holds consultations with governments and international organisations on issues related to joint use of water resources in Central Asia, and provides them with analytical support.
The proof are the numerous widely-read publications and monographs issued by the Bank on water and energy-related issues with a focus on specific features of Central Asia, the prospects of adapting the positive experience of water cooperation accumulated worldwide.
The Bank sees investment projects in water management, energy sector development in general, and hydropower development in particular, as priority ones.
— What projects are currently implemented by EDB and the Anti-Crisis Fund in Tajikistan?
— EDB and ACF have different investment portfolios. EDB’s portfolio in Tajikistan exceeded US $ 38 million as of the beginning of August this year. In particular, the Bank financed construction of a textile mill in the north of Tajikistan. This project is completed.
Furthermore, two credit lines totalling US $ 6 million were provided to Tajprombank for a microlending programme in Tajikistan.
The Bank also manages the resources of the EurAsEC Anti-Crisis Fund (ACF). In 2010 the ACF disbursed a credit in the amount of US $ 70 million to support Tajikistan’s budget.
ACF’s Programme for 2013 includes two potential projects: second financial credit in the amount of US $ 30 million to support the budget in 2013 and the investment project “Modernization and Institutional Capacity Building for Irrigation Systems” in the estimated amount of US $ 60 million. The latter is expected to be co-financed by ACF (in the amount of US $ 30 million), the World Bank (US $ 20 million), and the Swiss Agency for Development and Cooperation (US $ 10 million).
EDB is an instrument of investment cooperation. Unlike the Bank, ACF covers two areas with a primary focus on anti-crisis support of budget and balance of payments.
ACF’s second area is investment projects. There exist attractive investment ideas, but the Fund can start working on a specific project only after submission of an official application by the Ministry of Finance of the Republic. In other words, the Anti-Crisis Fund works primarily with governments and only on projects which are prioritized in the governments’ anti-crisis programmes. Even when an application is submitted by a specific company, it should be accompanied by a letter of support issued by the Ministry of Finance.
The Fund’s priorities in investment cooperation are energy and food security, strengthening the public finance management and the financial sector, and improving the investment climate.
At this time, the Fund does not provide grants. We are currently drafting amendments to statutory documents in order to be able to extend grant assistance using a portion of the Fund’s profits. With these amendments approved,—and I do not think that it will take long—we should be able to support the social sectors of Tajikistan working in partnership with other donors.
— What is the stage of considering the issue of supporting Tajikistan in Nurek HPP rehabilitation?
— The rehabilitation needs of Nurek HPP are very significant. Its generators and infrastructure are beyond their operating lifespan, and the risks are significant. An HPP is a project with long recovery period. It is difficult to finance such a project from EDB resources.
Besides, EDB has the limitation per individual borrower. EDB is responsible vis-a-vis its shareholders for the resources they have put into it. Therefore, the EDB cannot spend on a single project the amount of, say, US $ 400 million, which is required for full reconstruction and rehabilitation of Nurek HPP. We have considered the prospects of financing modernisation of this HPP using the resources of the Anti-Crisis Fund.
We are certainly interested in joining this project, which is currently developed by the German government-owned agency KFW, German and French companies. When the Government of Tajikistan decides to use the Anti-Crisis Fund’s resources for this purpose, we will be ready to consider it.
— Last year, there were reports that Russia is interested in participating in the implementation of the regional CASA-1000 project. What is your opinion on the issue?
— True, such statements were made at the top level. At the moment, we hold consultations with the World Bank on the CASA-1000 project. We considered this issue in meetings with the senior government officials during this visit to Tajikistan. So far, no specific proposals have been submitted to the Anti-Crisis Fund on this issue by Tajikistan and Kyrgyzstan. Our experts also attend multilateral consultations. We are studying this issue, it’s important for us to understand the economics of the project.
— How do you see the prospects of Tajikistan’s accession to the Customs Union of Russia, Belarus, and Kazakhstan?
— I would like to give a brief overview of economic effects of Tajikistan’s accession to the Customs Union.
In April this year, EDB’s Centre for Integration Studies published a research report on this topic.
Their analysis showed that the overall benefit of Tajikistan’s accession to the Customs Union is estimated at 3.5 % of the country’s GDP.
The one-off trade effects will be not large if Tajikistan becomes a member of the Customs Union.
The estimated one-off effects for the most important sectors of the Republic are: mining —
At the same time, estimates of positive long-term effects appear to be much more significant both in absolute terms and in terms of their extent over time. This is related to the fact that the share of investment in Tajikistan’s GDP remains low——12 % on average in the first half of the 2000s and slightly above 20 % in recent years, which is significantly lower than in the Baltic states, Central and Eastern European countries, and the Customs Union’s member states. This suggests that the potential of capital investment to spur economic growth is vast.
It should be noted that the growth of investment inflows on accession to the Customs Union is not guaranteed.
There have been examples in other regions of the world, where unfavourable investment climate did not allow to fully use the window of opportunity created by economic unions. I am sure that, once consistent measures are taken by the Government to improve the country’s investment climate, the size of capital investment originating from both Customs Union member states and third countries can increase significantly.
Having traditional cooperation ties with Tajikistan, companies from the Customs Union member states will likely find it easier to start production and to bring investments to the country than businessmen from the rest of the world.
Among other factors in support of attracting investors from the CU are the common economic development over many decades and the fact that Tajikistan’s products are familiar to consumers in Russia, Kazakhstan, and Belarus.
If the Republic manages to reach the rate of capital formation which is equivalent, for instance, to that in the Baltic states in the 2000s, 7.9 % per year against the current 5.4 % that will be a solid additional source of GDP growth.
With growth parameters remaining at the level of the 2000s, tist will give Tajikistan an additional 1.6 percentage points of GDP growth per year.
Attracting foreign direct investment can impact changes in the total productivity in the economy through technology transfer and increased competition.
Remittances from abroad can additionally generate investments equivalent to 5 % of GDP and about 1.5 % of capital growth. This investment potential could add one more percentage point of GDP growth per year.
Investment inflow can also ensure the creation of new jobs.
Engaging additional labour resources in production can boost GDP growth by
— What is your assessment of the status of Tajikistan’s economy?
— Tajikistan continues to demonstrate solid economic growth. In the first half of the year, GDP grew by 7.5 % against the background of growth in remittances and favourable weather conditions. Growth drivers were trade (+13.2 %) and agriculture (+12.1 %). Inflation was low at 1.6 % since the beginning of the year, resulting from low rate of growth of food prices owing to the declines in world market prices and a good harvest in 2013.
Favourable economic situation, combined with the authorities’ efforts to improve tax administration, had a positive effect on the budget, which was executed with a surplus in the first half of the year.
The external position is improving. Despite lower prices for main export items of Tajikistan, aluminium and cotton — the overall volume of exports increased owing to higher exports of other items. Against the background of declining imports primarily owing to lower volumes of energy imports and higher remittances, this led to a marked improvement of the current account balance.
In general, the current situation is favourable, and the Government and the National bank of the republic keep it under effective control.
There are, however, risks related to both the vulnerability of Tajikistan’s economy to external factors and the quality of corporate governance and investment regime.
Risks to continued sustainable development are posed by insufficient level of international reserves, which cover less than two months of imports.
If external price shocks or any other extraordinary developments in the world market materialise, low level of international reserves can become a problem.
Another risk for Tajikistan is the deceleration of growth in Russia. In the first half of 2013, Russia recorded zero economic growth. That can lead to the slowdown of migrants’ remittances.
The fact that the Russian Rouble has depreciated vis-à-vis all major currencies, while the Somoni exchange rate remained stable, also poses a risk for Tajikistan. Exchange rate stability is good for investors planning to inject capital into Tajikistan’s economy, while the depreciation of the Russian Rouble can negatively affect both the trade balance and the amount of remittances.
There also exist risks in the financial sector: the level of bad debts is high, the banking system needs recapitalisation, and the quality of corporate governance must be improved. Measures to strengthen the financial sector are needed, to ensure Tajikistan’s long-term sustainable development.
We have discussed all these aspects with the Government of Tajikistan and the National Bank.
The country’s authorities have a vision of how to tackle these risks, and the Anti-Crisis Fund stands ready to support the Republic in its efforts.