TOPIC OF THE WEEK: Is Tajikistan the weakest link in the CCA in terms of its ability to repay foreign debt?
In 2020 the World Bank stated that in Tajikistan “the risk of debt default is high." Ever since, this assessment has consistently carried through a variety of analyses undertaken both by IFIs and rating agencies. For example, in its most recent review of the economy, the WB re-affirmed its judgment, arguing that “Tajikistan is still at high risk of debt distress." Moody’s recent (Oct) analysis was more constructive as the rating agency pointed to the "moderately high government debt burden in the context of Tajikistan’s small, low-income economy, weak governance and contingent risks posed by state-owned enterprises."
Concerns about Dushanbe’s ability to service its foreign (public) debt have re-surfaced recently given the significant drop in FX reserves that the country has posted so far in the year. Indeed, FX reserves have declined by US$1.1bn since Jan or about 30 percent relative to their levels at the start of the year. While other regional peers have also experienced some pressures on external buffers, with Uzbekistan and Armenia also standing out, the fall of FX reserves in Tajikistan has been the largest in the Caucasus and Central Asia.
We investigate the reasons behind this precipitous decrease in FX reserves and argue that it has been almost entirely driven by the steep deterioration of the current account position, whereby robust GDP growth has spilled over into higher imports while remittances from Russia have moderated. At the same time, the better portion of the decline in FX reserves occurred earlier in the year as in more recent months the CA has recovered somewhat on a stabilizing trade deficit amid a welcome pick up in remittances.
Looking at public external debt service, Tajikistan does not currently appear to be the weakest link among CCA peers. For example, external public debt repayments run at about 10 percent of FX reserves and 8 percent of budget revenues. These levels are not excessive and have in fact improved in recent years. Armenia and Georgia do stand out as the more vulnerable on these metrics, including because they will need to repay/rollover upcoming Eurobonds in 2025 and 2026, respectively. At the same time, Azerbaijan and Uzbekistan seem to be the most robust in this respect even though they both also face maturing Eurobonds in 2024. In our view, Tajikistan’s real test will present itself in 2027, when Dushanbe’s own Eurobond will come due. Until then, we are prone to take a more constructive view of the country’s ability to successfully meet its external obligations. It would in fact be fair to say that, taking a longer-term historical perspective, Tajikistan is now in a better position to repay its foreign debt given its more robust FX reserve position (vs 5 or 10 years ago) and the steady inflow of concessional financing.
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