Tajikistan needs to study neighbouring countries’ experiences and diversify its economy, believes Umedjon Ibrohimzoda, a political scientist and graduate of the CABAR.asia School of Analytics.
Tajikistan, as a country with little economic growth, remains dependent on foreign direct investment, humanitarian aid and grants from international organisations and partner countries. An analysis of data for 2010-2021 (data for 2022 is not yet available in the public domain and we were unable to obtain it upon official request) on foreign direct investment received by partner countries showed that the thesis that the country is attractive for foreign investment is not justified. The investment climate, administrative barriers, underdeveloped investment infrastructure and inadequate tax incentives are more of an issue here than the overall potential of the country.
Top investing countries in Tajikistan’s economy
According to the Statistical Agency under the President of Tajikistan, the total inflow between 2007-2021, foreign investments totalled about $11 billion, of which $4.8 billion were direct investments, $5.7 billion were other types of investments, and $500 million were portfolio investments.
Investments in Tajikistan’s economy over the last 15 years have come from 65 countries, among which China, Russia, Britain, the United States and Kazakhstan have a comparatively high share.
Since 2010, China has been the biggest investor in Tajikistan’s economy. China’s total share of investment in its neighbour’s economy is almost USD 2.7 billion, making it the most important investor in Tajikistan over the past 11 years.
Russia is second behind China with a share of $1.2 billion. Next on the list is the UK with $671 million, with $577 million and Kazakhstan $149 million.
“Big neighbour” and major investor
China is a major investor in Tajikistan’s economy. The Celestial Empire builds roads and participates in joint projects and large industrial projects. Chinese investments have been channelled into communications, construction, financial services, mining and the installation of technological equipment.
Interestingly, a significant increase in investment inflows from China began after the settlement of territorial issues between the two countries in 2011, when 1% of Tajikistan’s territory in the Murghab district of GBAO was handed over to the ‘Big Neighbour’.
For instance, on 8 July 2012, during President Emomali Rahmon’s visit to Beijing, China promised to increase investment in Tajikistan’s economy to one billion. Since then, there has been an unprecedented rapprochement between the two countries, and investment has steadily increased. A significant increase in Chinese investment was seen in 2016 and a sharp fall occurred during the Covid-19 pandemic. In 2021, investment inflows are in the process of recovery.
One of the interesting features of Chinese investors is that they prefer direct investment in the Tajik economy, i.e. setting up their own companies or acquiring shares in existing enterprises in the republic.
Another form of Chinese investment in Tajikistan’s economy is concessional lending. These loans are granted at an annual interest rate of 2 to 3 per cent for a period of more than 20 years. But most commonly, the condition for obtaining them is that the projects must be implemented by Chinese companies. For instance, in 2020, the China Road construction company began preliminary work for the Qalai Khumb-Vanj-Rushan border road section with Chinese funding. Or the rehabilitation of road sections such as Dushanbe-Chanak (400km), Dushanbe-Vahdat-Dangara-Kulyab and the Shahristan, Dusti, Khatlon and Ozodi tunnels have been implemented by Chinese companies with money allocated by China. The scheme goes like this: China gives Tajikistan preferential loans for the construction or rehabilitation of certain enterprises, which are implemented by Chinese companies. As a result, a portion of the money allocated by China goes to Chinese companies, i.e. goes back into the economy of the lender itself, while Tajikistan remains a debtor to the ‘Big Neighbour’ in the long run.Is Russia losing ground?
Russia has been one of Tajikistan’s key economic partners for many years, directing direct investments in various sectors of Tajikistan’s economy. Russian investments are mainly directed to construction, communications, geological exploration, health care, the construction industry and the energy sector.
Russia is implementing various projects in Tajikistan, mainly in the fields of energy and education. For example, the construction of the “friendship project” of Tajikistan and Russia — the first stage of the Sangtuda HPP The first stage of the Sangtuda HPP was completed and handed over «on a turnkey basis» in 2009. The construction of this HPP increased Tajikistan’s electricity production by eight million kilowatt-hours and helped partially solve the problem of electricity shortages in the autumn-winter period.
Another project implemented by Russia in Tajikistan is the construction of Russian-language general education institutions in five cities – Dushanbe, Khujand, Bokhtar, Kulob and Tursunzoda. The governments of both countries in 2019 signed an agreement on this construction, for which the Russian government has allocated $150 million. These schools are taught by Russian teachers and the curriculum is adapted specifically for Tajikistan.
Russia’s investment activities were intense in Tajikistan in the early 2000s, when major projects were being implemented, and it is notable that it was the leading investor in Tajikistan’s economy until 2014, but since 2015 the Celestial Empire has caught up and surpassed it by a great margin.
Russian media, citing their own experts, attribute the decline in Russian investment and the exit of some investors to corruption, “weak rule of law, exorbitant taxes, an unfavourable business environment” and other reasons. According to Igor Lyakin-Frolov, the former Russian ambassador in Tajikistan, Russian investors encounter “serious difficulties in Tajikistan, primarily prohibitive taxation and frequently changing the rules of the game.
There has been a decline in Russian investment since 2014, i.e., since Russia’s annexation of Crimea. It is highly It is highly likely that these processes have had the effect of reducing the inflow of Russian investment into Tajikistan.
Diversifying investment inflows
The UK is also one of Tajikistan’s main investors. Significant growth of British investment was in 2015 and 2017, but since the year 2017, there has been a decline in investment from the UK.
The Tajik authorities hope that the first Tajik-UK investment forum, held in London on 28-29 March 2023, will give a new impetus to joint projects between the two countries. During the forum, 23 new documents were signed between the two countries, totalling more than $370 million.
According to the Statistics Agency of the Republic of Tajikistan UK investment, among other areas, is going towards construction, mining and geological studies, as well as coal mining and manufacturing industry.
A similar trend with declining investment inflows can be observed in the United States. An analysis of data from 2010-2021 shows that US investment is moving in leaps and bounds, with a peak in 2017. The US is mainly investing in communications, mining, as well as financial intermediation, education, agriculture, healthcare, water and construction.
Next is Kazakhstan, which invested heavily in Tajikistan’s economy from 2012 to 2015, but has sharply reduced its infusions since 2016. Kazakhstan’s investments are directed towards the manufacturing industry, geological and mining research, financial services and trade.
Note that these three countries have reduced investment since the second half of the 2010s when investment in Tajikistan’s private sector was hampered for a number of reasons.
Overall, the reason for the decline in investment, in our view, is the lack of compliance with a number of conditions by Tajikistan. These conditions include the development of democratic institutions, the rule of law, the creation of a pluralistic society and freedom of expression.
There are also other reasons that prevent Tajikistan from attracting foreign investment into its economy. For instance, the unfavourable investment climate, administrative barriers, and underdeveloped investment infrastructure, Inadequate tax system and tax incentives, monopolisation of market segments, corruption and unhealthy competition.
What’s the Situation Like in Adjacent Uzbekistan and Kyrgyzstan?
In neighbouring Uzbekistan, the country’s investment climate has improved since Shavkat Mirziyoyev came to power. For instance, in 2021, Uzbekistan attracted $9 billion in foreign direct investment and loans to its economy. More than 50 countries have invested in the economy, but the leading investing countries are China (2.2 billion USD), Russia (2.1 billion USD), Turkey (1.18 billion USD), Germany (800.7 million USD) and South Korea (137.4 million USD). The fundraising rate slowed down in 2022, amid global turbulence, and the country received only $8 billion in foreign direct investment. The bulk of Uzbekistan’s investment is in the energy sector, metallurgy, chemical industry, IT, construction of electrical products and light industry.
In contrast to Tajikistan, neighbouring Uzbekistan is more attractive for foreign investment, which can be explained by the activation of large alternative investors such as Turkey, Germany and South Korea. And also note that in Uzbekistan, no single investor has significant dominance over the other, as we can observe in Tajikistan in the case of China.
Foreign fundraising in Kyrgyzstan looks more modest compared to Uzbekistan but is more solid than in Tajikistan. In 2021 the country attracted USD 1 billion in foreign investment. The main investors in Kyrgyzstan’s economy in 2021 are China ($334.7 m), Turkey ($237.9 m), Russia ($147.2 m), Kazakhstan ($65.6 m) and the Netherlands ($64.8 m). Foreign direct investment inflows in Kyrgyzstan are divided into the following economic activities: professional, scientific and technical activities, manufacturing and mining.
In Kyrgyzstan, besides traditional investors such as Russia and China, there is an increase in the activities of Turkey, which in 2022 has surpassed the main partners, having invested $321.6 million in the country’s economy. In 2021, Turkey ranked second on the list of major investors in Kyrgyzstan’s economy, and in 2022 it became the leader.
Kyrgyzstan has relatively recovered investment inflows to its economy after the Covid-19 pandemic, but despite this, the country has still experienced both a 25-30% decline in investment inflows since 2017 and an outflow of direct investment, which consists of repaid loans received from non-residents. Foreign investors have not reinvested income in Kyrgyzstan, which resulted in a record outflow of direct investments and a negative balance in the country.
Conclusion
Based on all of the above data on foreign investment in Tajikistan, the following generalised conclusions can be drawn:
First, the main investor in Tajikistan’s economy is, and will likely continue to be, China, as one-third of the foreign investment inflow in Tajikistan in 2010-2021 came from that country. The Celestial Empire, as a ‘big neighbour’, allocates money for various projects and companies that it itself implements and buys. That is, China invests, so to speak, in its companies in Tajikistan, while turning Tajikistan into its debtor for the next 20 years.
Secondly, Russia, which is always on the radar screen and declared to be nearly the most important investor in Tajikistan, is noticeably losing ground to China. Since 2014, Russia has been losing ground in Tajikistan due to sanctions and its involvement in the war in Ukraine, and based on the current situation, it is safe to say that this trend will continue.
Third, due to a number of existing problems, the inflow of foreign investments is poorly diversified, making the Tajik economy dependent on a single large investor. Major investors in Tajikistan’s economy, such as the UK, the US and Kazakhstan, have reduced their investments in recent years. Therefore, the country needs to create an exceptionally favourable environment in all respects in order to level out the existing situation.
Fourth, although Kyrgyzstan and Uzbekistan also have some problems related to the local specifics of the investment climate, Tajikistan needs to study the experience of these countries in attracting foreign direct investment in order to diversify its portfolio of investors in the future. For example, the US, Japan, South Korea and India may become potential investors in Tajikistan’s economy in the future.
Finally, in order to diversify the inflow of investment and attract foreign investors into the country, Tajikistan needs to create a favourable investment environment, curb corruption schemes within the country and simplify the taxation system. Because managing the economy by relying only on investment from one country, in our case China, can lead to dependency, multiple levers of influence and ultimately, various negative consequences.