Tajikistan’s new growth model should rely more and more on a dynamic private sector, says WB report

The report is selective in looking at key public policies needed to improve Tajikistan’s macroeconomic resilience and foster private sector development to ensure sustainable growth.  This CEM reportedly should be seen as the first of a series of programmatic work intended to provide advisory support to the Tajik authorities over the medium-term as they update the National Development Strategy.

The report focuses on two important areas of public policy: first, the role of the tax system in encouraging investment and entrepreneurship, examines the principal deficiencies in the tax regime and in its administration, and proposes reforms to improve the incentives for investment.  Second, in view of the dominance of the state and of state-owned enterprises in the economy and regulatory gaps to ensure level playing field, the report analyzes the competition policy framework, with the aim of identifying policy reforms that will encourage firm entry and create a competitive market in goods and services. The two interrelated objectives – macroeconomic incentives for investment and savings and the domestic competition and tax regime - reinforce each other.

The choice of the above thematic areas is reportedly guided by the team’s preliminary discussions with various stakeholders within the government and outside the government.

The CEM builds on the World Bank’s previous reports on Tajikistan, namely on the Jobs Diagnostics and Systematic Country Diagnostics.  The Jobs Diagnostics proposes the government to consider a jobs strategy based on the following three pillars: 1) facilitate the creation of more jobs, particularly in the formal private sector; 2) improve the quality of existing jobs, especially in the informal sector; and 3) facilitate better access to jobs including transitions from inactivity to employment and from low to higher quality jobs, with a focus on vulnerable workers.

The focus of the CEM is well aligned also with the new Country Partnership Framework (CPF) for 2019-23 currently in making.  This report will be followed by analytical and policy work on other critical constraints to private sector-led growth: the establishment of a rules-based policy setting and creating market-supporting institutions that promote greater economic formalization; building upon areas of high potential for transformative change such as the financial strengths of the energy sector and macro-fiscal implications of investments to Roghun HPP; gains from deeper international integration and infrastructure access provided by the Belt and Road Initiative (BRI); and investing in human capital. This chapter of the CEM analyses the main causes of macro-fiscal vulnerabilities and suggests policy recommendations to improve resilience of the Tajik economy.

The report notes that more inclusive economic growth is necessary if Tajikistan is to offer better job opportunities and a higher standard of life for all of its people.  Although the economy continues to grow at high rates, it faces a wide range of challenges, which are impeding its full potential.

Robust economic growth has not led to sufficient job creation, nor has it significantly reduced poverty. Tajikistan continues to rely heavily on external sources for financing, which exposes the economy to external risks.  The relatively small domestic private sector contributes only modestly to the economy.

Meanwhile, macro-fiscal pressures are rapidly building up, due to unresolved issues in the banking sector, a high public debt burden, and large and inefficient state-owned enterprises.

While the economy has expanded by as much as 90 percent over the last decade, employment has only increased by 12 percent during the same period.  The share of poor and vulnerable among the total population was 77 percent as recently as 2017, while around 6 percent of the population had to sell their assets to pay for basic needs.

The Government of Tajikistan has set an ambitious target: to increase domestic incomes by 2 to 3.5 times between 2016 and 2030.  However, unless the Tajik authorities introduce a new growth model, this target will likely not be met.

A new growth model should rely more and more on a dynamic private sector, one that is motivated to invest and create decent jobs.  This shift toward the private sector should be accompanied by a change in the role of the state – toward being a facilitator and regulator that ensures transparent rules, effective regulations, and fair competition for all market participants.

This Country Economic Memorandum for Tajikistan makes recommendations for how to strengthen the country’s resilience to shocks, increase the role of the private sector, and strengthen growth potential. The report argues that it will be necessary to accelerate structural reforms and re-assess the role of the State as a facilitator of long-term transformation and re-balancing of the economy.

The recommendations in the report are summarized under four broad areas: 1) macroeconomic stability and sustainability; 2) a healthier and more inclusive financial sector; 3) an effective tax policy and administration system; and 4) a competitive environment for the private sector.