CONFERENCE CALL: Tajikistan's investment story is a hard sell

By bne IntelliNews October 17, 2014

Ben Aris in Dushanbe -


More than 500 investors, state officials and representatives of leading international financial institutions gathered in the shadow of the Pamir mountains in mid-October to listen to the government of Tajikistan sell the small mountainous republic at the country's first ever international investment conference. And it did a reasonable job, but it was always going to be a hard sell.

Wracked by a nasty civil war between 1992 and 1997, the country's economic recovery has only gotten underway relatively recently. The poorest country in the Commonwealth of Independent States (CIS), Tajikistan still has everything to do – it can’t even offer a reliable power supply. But the government is well aware of the problems and is grasping the nettle.

"We realise that we are not one of the best countries in the world, or the most attractive for investment. Nor can we offer the best platform [for investments]," Djamoliddin Nuraliev, the ebullient and English-speaking first vice minister of finance, who previously worked for both the International Monetary Fund (IMF) and the World Bank, told the Tajikistan Economic & Investment Forum. "But we are committed to change. We have implemented serious reforms, started to introduce [global standard] IFRS accounts, and do everything possible to facilitate investment."

The state has already made considerable progress. Over the last decade the size of the economy has expanded ten-fold and the poverty level shrank from 83% of the population in 2003 to 35% today, according to the government. "Reforms only started in 1997 and so have not had a very long history,” Tajik President Emomali Rahmon told delegates in his keynote speech October 15. "The government of Tajikistan, in its long-term development strategy, identified the development of the private sector and investment as one of the top priorities of its economic policy… Over the recent years, a series of reforms in doing business aimed at reducing administrative barriers and state interference in the activities of businesses were implemented in the country."

And these reforms are starting to have an impact. While Tajikistan slid two places in the World Bank's “2014 Doing Business” ranking to 143rd place out of 188 countries, it has made great strides in several of the key subcategories: Tajikistan is ranked at 87th for the ease of starting a business and 78th for registering property, and has extremely high rankings for contract enforcement (39th) and protecting investors (22nd).

"Business registration has been simplified so there is a single window to set up a company… and four special economic zones have been established where our partner investors are released from almost all taxes," Rahmon told the packed room of investors. "Tajikistan is in a sustainable development phase and is strengthening its position every day. But more needs to be done to bring our investment climate into line with the international norms."

The country earned considerable brownie points after it successfully acceded to the World Trade Organization in 2012. "Tajikistan… has been strengthening its position in the global political and economic arena every day. The accession of Tajikistan to the WTO in 2012 as a vivid sign of this policy will definitely open wider horizons for the integration of our country into the global economy and global trade processes," the president said.

Of course, there is still an enormous amount of work to do, as the country ranks near the bottom of the list in things like getting electricity, issuing construction permits, trade and paying taxes. But the president laid out a comprehensive programme of reforms to deal with all these issues.

The simplification of the bureaucracy surrounding business is also part of the government's general drive to improve transparency and reduce corruption. Recently, the state begin to introduce international accounting standards (IFRS) for the largest companies, which is not obligatory but the standards have been adopted by many of the leading companies.

The main task that the government faces today is mobilising investment into the economy. Foreign direct investment is a modest 2% of GDP, but has recently had a huge fillip after China earmarked several billion dollars to build a gas pipeline across the territory, but more is needed. "Both [domestic] private investment and foreign direct investment have to rise dramatically if the standard of living is to rise for the people," said Richard Jones, the European Bank for Reconstruction and Development's (EBRD) Tajik country manager.

Power to the people

The answer to many of the government's problems is to tap into the country's enormous hydroelectric power potential. The biggest problem Tajikistan faces today is the country's power deficit. There is sufficient power in the capital of Dushanbe, but blackouts and even power rationing plague the countryside. But if the government succeeds in its plans to build several hydropower plants, not only will domestic demand be met, but the country could become a major power exporter to the energy-hungry region.

Hydropower was a constant theme running through out the conference. The cost of power production in water-rich Tajikistan is on the order of 2.5 cents per kilowatt hour (/kWh), but neighbours like Afghanistan and Pakistan with a power deficit are willing to pay 18-23 cents/kWh, making power exports extremely profitable for Tajikistan. "We have 527bn kWh of potential power production, but currently we are only using 6% of this. And realising this potential will not benefit just Tajikistan but all our neighbours too," Rahmon said.

Tajikistan already boasts the world’s highest dam, the 300-metre Nurek, built in the 1970s, but the government would like to add the even taller Roghun hydropower plant that would at a stroke solve all its problems. However, the project has been plagued by political and financial difficulties. Still, several other smaller power stations are in the works.

Business and banks

In the meantime the state is pushing on with other reforms that should help improve the investment climate. The government has set up four Special Economic Zones (SEZ) – in the regions of Sughd, Panj, Dangara, and Ishkashim – which offer substantial tax breaks and investment incentives. It has also established an enterprise fund to support local business projects, which will receive a big increase of funds to TJS1bn ($200m) next year.

Perhaps most progress has been made in the banking sector. Banking penetration is still low with only about one in five Tajiks holding a bank account and total credits as a share of GDP are a modest 30%, according to the EBRD. However, the sector is developing quickly with the use of debit cards on the rise, and consumer lending is also taking off, partly thanks to stiff competition since the leading Kazakh banks entered the market a few years ago. And the country recently launched its first credit bureau to further support consumer credit business. "The sector is starting to develop more quickly now," Gulanor Atobek, Deloitte's Tajik general director, tells bne. "Just a few years ago plastic cards were rare. In 2007 it was usual to pay workers in cash, but more recently companies have started paying into workers’ bank accounts and people are getting used to using cards in the supermarkets."

As the reforms take hold, the economy is beginning to diversify, led by the growth of small and medium-sized enterprises (SME), which is also bringing more business back into the formal economy. However, the lack of access to financing has slowed the pace of this growth. "The SMEs are developing, but they need access to capital to grow and develop," says Atobek. "Their main problem is the rates are still very high – typically about 25% a year – which means they cannot borrow a lot and have to borrow over the short term."

The low penetration of the banking sector is behind the high rates and the difficulty that small businesses have in raising credit. Without a large deposit base, banks are struggling to fund loans, which in turn reduces their role as financial intermediaries.

But the global financial institutions are committed to helping and the EBRD has already launched its highly successful SME support programme in Tajikistan, where it lends banks money to fund loans and micro-loans to small business.

The president neatly summed up the challenges facing the country in his closing remarks to the forum's delegates: "We definitely need huge investments to fully and effectively use the outlined resources and potential," he said. "Therefore, the local businesses need to avail this opportunity of your visit and establish mutually beneficial cooperation to identify priority areas in the development of production and expansion of export of final products to overseas."



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