TOPIC OF THE WEEK: Tajikistan: Steady as it goes (for now)
This report on Tajikistan completes the task of providing detailed chart packs on individual countries in the CCA region.
Tajikistan’s economy has performed better than anticipated this year with GDP growth having expanded by 8.2 percent over the first eight months of the year. While traditionally, economic performance has been well supported by remittances, which in the past have tended to account for a third of GDP, last year saw an all-time record of these inflows, chiefly from Russia, coming at slightly more than 50 percent of GDP. With proceeds from remittances accounting for about a quarter of all household income streams, it would not be counterintuitive to assume that last year's bountiful monetary transactions may have continued to provide useful support to consumer spending and the broader economy.
At the same time, there are already signs that remittances have slowed this year, including because of the weaker RUB. This will weigh more meaningfully on economic performance later in the year and further into 2024. Nevertheless, we anticipate that GDP growth will remain solid as we forecast a mild moderation from an estimated 7.5 percent this year to 6.0 percent next.
Remittances have also played a critical role in boosting the CA, which posted a record surplus of 15.6 percent of GDP in 2022. FX reserves had thus risen significantly to cover 9 months of goods and services by mid-2022. The combination of robust GDP growth and higher reserves have served Tajikistan well and contributed to Moody’s recent (this Oct) change in country’s outlook to positive from stable (rating B3). Despite these welcome improvements, we now see emerging signs of a more challenging external backdrop. First, the 2023 decline in remittances has had an immediate effect on the CA. Second, the widening trade deficit, driven in turn by higher growth-induced imports and lower exports of gold and base metals, has also affected external performance. As a result, we forecast that the CA will post its first deficit (at 3.5 percent of GDP) since 2019.
The turnaround in the CA position has been financed by drawing down on FX reserves, which have decreased by US1$bn since Jan, or by 27 percent since the start of the year. Consequently, FX reserve cover has also dropped to 5.8 months of imports of goods and services. Therefore, we now expect the local currency, the TJS, which appreciated in the last couple of years on the back of the improving external position, to face more challenges into year-end and beyond.
Inflation has behaved somewhat out of sync with regional peers as it slowed significantly earlier in 2022 driven, in our view, by the outsize weight of food prices in the CPI basket and the global moderation of food inflation. While food accounts for a large share of CPI indexes in all CCA economies, it runs at 58 percent of the basket in Tajikistan. Hence, headline inflation is particularly sensitive to food inflation. Given the underlying dependence on food inflation, the CPI in Tajikistan was the first in the region to reach its target (6 percent) from above, in 2022, but, similarly, it will now also approach its target (from below) the earliest in the region. Monetary policy has had to adjust to the inflation path, with the NBT cutting earlier than peers and now looking to hike rates into 2024. We forecast the policy rate to increase from 10 percent now to 11 percent next year.
The issue of political transition is important as Tajikistan is the only CCA economy where the transfer at the helm has not yet transpired (with President Emomali Rahmon in power since the breakup of the Soviet Union). We discussed this important risk in some detail recently, drawing the welcome conclusion that the transfer of power will most likely proceed peacefully while acknowledging the challenges that might accompany the passing of the baton.
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