Why does Tajikistan increase its debt and how will the republic cover it?
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In 2021, the government of Tajikistan decided to increase external debt and ask for loans from the country’s external creditors. This was decided despite the fact that external debt currently reaches $3.1 billion (36.9% of GDP) and is equal to $294 per capita. The government explains that without loans, the implementation of projects for the development of certain sectors of the Tajik economy is impossible.
How Much Does Tajikistan Owe?
In 2020, Tajikistan’s external debt increased by $238 million due to the use of loans provided to the country. On January 1 of last year, the external debt amounted to $2 billion 925.3 million, but by October 2020, it reached $3 billion 163.18 million.
The country’s public debt amounted to $3.7 billion, or 44.9% of GDP in October 2020. 80% of the public debt of Tajikistan is external debt, the rest is internal debt.
The country’s internal debt rose sharply five years ago: from $217.5 million in 2015 to $565.5 million in 2016, when a number of the country’s strategic banks were on the verge of bankruptcy. The government of Tajikistan decided to issue treasury bills in order to solve the problem of such banks as Agroinvestbank and Tajiksodirotbank.
To Whom Does Tajikistan Owe the Most?
The Export-Import Bank of China (Eximbank) remains the largest creditor of Tajikistan over the past 12 years.
Prior to that, in 1997, Russia and Uzbekistan were the largest creditors of Tajikistan with shares of 52% and 31% respectively.
In 2007, China issued a loan to Tajikistan for the first time. By the end of that year, the amount of used funds of the Eximbank loan was $184 million.
At that time, the largest creditor of the republic was the World Bank with $346 million share in the total external debt of the country.
A year later, at the end of 2008, China surpassed all creditors of Tajikistan, and its share in Tajikistan’s external debt amounted to $500 million. In 2009, 77% of Tajikistan’s loan portfolio were comprised of Chinese loans.
Eximbank of China began lending to Tajikistan’s projects in 2007 within the framework of the Shanghai Cooperation Organisation (SCO). China provided a loan to Tajikistan for the construction of 500 kW “South-North” and 220 kW “Lolazor-Khatlon” high-voltage power transmission lines, as well as for the reconstruction of the Dushanbe-Chanak highway (border with Uzbekistan).
At that time, the very first toll highway in Central Asia appeared. The length of the Dushanbe-Chanak highway is 335.9 km, and the total cost of the project was $304.5 million, of which Chinese share was $289.7 million; the contribution of the Tajik government amounted to $14.8 million. The project also included the construction of the Shahristan tunnel.
In following years, Tajikistan and China continued cooperation in this direction. In 2009, the Tajik government and the Eximbank of China signed an agreement on the allocation of additional funds for the construction of 500 kW “South-North” and 220 kW “Lolazor-Khatlon” high-voltage power transmission lines in the amount of $51 million and reconstruction of the Dushanbe-Kulma highway (Tajikistan-China border) on the Dushanbe- Danghara section in the amount of $49 million.
What Are the Terms for Loans to Tajikistan?
The conditions under which Tajikistan receives loans are usually not discussed; there is little data about this. International organisations publish reports with such data and terms, but the subject is not fully disclosed.
It is known that before providing a loan, the creditor analyses the financial viability of the borrower and the ability to repay the loan in due time. However, in addition to that, the development partners can demand reforms in the country.
For example, the World Bank, along with the allocation of grants and loans to Tajikistan, advocates reforms in the republic’s energy sector, including the restructuring of Barqi Tojik State Energy Holding and a gradual increase in electricity prices. According to the WB experts, the current prices are unprofitable, and with the low tariffs, the industry will not develop. Therefore, the WB often supports the energy industry, and the increase in electricity prices helps the government to repay the debt to the WB.
China’s policies and goals are different. China does not disclose data on the issued loans, their interest rates and conditions. However, China has its own business interests and the main condition for the preferential loans is the Chinese companies’ participation in the financed project. Therefore, along with Chinese loans, the labour force from China came to Tajikistan with such large companies as CNPC, China Road and Bridge, Zijing Mining, etc. In Tajikistan, they implement projects financed by the Chinese government. In addition, the Chinese labour force can be observed in the agricultural sector in the regions of the country.
In addition, in 2011, Tajikistan transferred part of its territory to China. Then, the Parliament of Tajikistan ratified the protocol on the demarcation of its border, according to which 1.1 thousand square kilometres of disputed territories in the east of the country were transferred to China. The experts assumed that this territory of the Pamir Mountains contained deposits of not only precious stones, but also uranium. This might be one of the conditions for the provision of preferential Chinese loans to Tajikistan.
Loan During Crisis
The global COVID-19 pandemic hit hard on the budgets of the countries, especially those with developing economies, including Tajikistan.
In 2020, the government of Tajikistan approved and signed five new loan projects for $459.5 million. In addition, within the framework of the “Program of State External Borrowings for 2021 and Its Indicators for 2022-2023”, Tajikistan plans to request loans for $562 million from international partners in 2021.
The Ministry of Finance notes that currently, eight loan agreements are being created in Tajikistan:
– Khatlon Energy Loss Reduction Project – €20 million,
– Power Sector Development Program – $25 million,
– Kulob Water and Wastewater Project – $8.9 million,
– Dushanbe District Heating Project – $5 million (EBRD loan),
– Obigarm – Nurobod Road Construction Project – $50 million (Asian Infrastructure Investment Bank loan),
– Program of Economic Reforms of the Government of the Republic of Tajikistan – $50 million (planned to obtain a loan from the Eurasian Fund for Stabilization and Development),
– Rogun HPP Construction Project – €340 million (planned to obtain loans from the Swiss bank Credit Suisse and the German bank Landesbank Baden – Wiirttember),
– Nurek HPP Rehabilitation Project, Phase II – $50 million.
Tajikistan Increased the Threshold of External Debt to GDP
Until 2018, the threshold of Tajikistan’s external debt was not supposed to exceed 40% of GDP. This threshold was considered the most preferable and safe for the country’s economy. The external debt exceeding this threshold could lead to a gradual default in the country: these were the recommendations of international partners, including the World Bank. However, in 2017, the country’s external debt amounted to 40.3% of GDP. This meant that Tajikistan had to reduce this value by paying off debt on loans, and until that moment, to suspend the attraction of new loans.
After that, the government of Tajikistan decided to calculate the external and internal debts together denoting it as public debt starting from 2018. Thus, the threshold of value of public debt to GDP was approved at 60%. According to the new strategy, during the attraction of borrowings, priority is given to highly preferential loans containing at least 35% of the grant funds (according to the recommendation of the International Monetary Fund).
The public debt of Tajikistan is 45% of GDP today, which is officially not a dangerous threshold for the country’s economy.
Tajikistan Asked for Loans’ Deferral
On April 15, 2020, finance ministers and heads of the central banks of the G20 countries agreed to temporarily suspend debt servicing for the low-income countries. Initially, the term of suspension was 6 months, but then, it was extended until June 2021. At first, the list included 25 low-income countries of the world, and was expanded later.
The right to suspend external debt payments was granted to Tajikistan as well, but the Ministry of Finance of Tajikistan emphasizes that this does not mean that the country is in default and cannot pay off its debts.
“This initiative aims to support developing countries in countering the COVID-19 pandemic, and it applies to all countries that attracted loan funds from the G20 member countries and the Paris Club. In addition to the Republic of Tajikistan, more than 46 countries of the world joined this initiative. Tajikistan decided to join the G20 Debt Service Suspension Initiative, relying on the recommendations of its development partners. The funds freed up after suspension of external debt servicing were allocated to the country’s healthcare sector,” says the website of the Ministry.
On September 3, 2020, within the framework of this initiative, Tajikistan signed a memorandum with the Paris Club. As a result, it was agreed to suspend payments on debt obligations to Eximbank of China and the Kuwait Fund for Arab Economic Development for $43 million and the German KfW Development Bank for €363 thousand.
The amount of external debt servicing is annually included to the state budget of the country. During the crisis year of 2020, when the economic activity and the flow of remittances to Tajikistan dropped significantly, the republic’s budget was in decline, but the external debt service did not stop.
The World Bank believes this should free up the necessary funds in the country’s budget to finance socio-economic measures to support the healthcare sector in the fight against the pandemic.
In addition, the government continues negotiations with other bilateral creditors for a temporary debt service suspension.
Is There a Risk of Default?
Such active ambitions of Tajikistan to receive loan funds for economic development alarms international development partners. The World Bank openly and tactfully expresses its concerns that such steps are not entirely appropriate for Tajikistan.
The World Bank data differ from official statistics; the report notes that the country’s external debt reached almost 40% of GDP by September 2020, compared to 36.6% of GDP at the end of 2019.
The report notes the government financed the higher deficit related to COVID-19 by borrowing. To address the pandemic’s challenges and to close the fiscal deficit arising from the revenue shortfall, international organisations supported the government by stepping up healthcare projects and budget support programs.
The urgent international assistance in the form of grants and loans was agreed with the IMF ($189.5 million), ADB (more than $102.5 million) and the EFSD ($50 million). The World Bank’s support for the healthcare sector during COVID-19 amounted to $11.3 million, which will be supplemented by another $16.2 million.
“Tajikistan May Face a Moral Hazard Problem”
The risk of default in countries with developing economies is quite high. According to economist Shuhrat Mirzoev, COVID-19 has further weakened the government’s macro-fiscal position, since the income base narrowed significantly due to the decline in economic activity, the temporary closure of the borders and the associated decline in the purchasing power of the population.
As the economist explains, the risks of underfunding social obligations from the state budget are real and should be emphasized.
The Ministry of Finance of Tajikistan raised the threshold level of debt from 40 to 60% of GDP in 2018, and therefore, according to Mirzoev, nothing below this level should create risks of a great debt load.
“This measure provides an opportunity for new loans. I agree that there were no macroeconomic prerequisites for this. Apparently, at that time, the threshold was raised based on the expected economic growth and other macroeconomic indicators such as, for example, the volume of state reserves, balance of payments indicators, remittances of labour migrants, changes in the somoni exchange rate, consumer price index, etc. But here, it is worth noting the fact that the official forecasts of the government were taken as a basis, and they are usually overestimated and rarely reflect the real picture,” he emphasizes.
The economist admits that the international development partners – the IMF and the World Bank – were indignant about this for a long time, but they could not do anything. The threshold is determined by calculating a public debt sustainability model. The government of Tajikistan has its own model, while international financial institutions have their own. This explains the difference of opinions.
The economist notes that, unfortunately, Tajikistan cannot cope without external borrowing, and the only condition under which loans will not be needed is a poorly regulated private sector with access to finance and skilled labour, which is not yet developed in Tajikistan.
“From the financial point of view, we learned to plan for the medium term only 3-4 years ago. Almost no one is planning for 10-15 years because of the volatility of the macroeconomic situation and the large monetary and fiscal risks. Almost everyone understands that loans must be eventually repaid, but no one takes it seriously. This is actually the case,” says Mirzoev.