Investment
Areas of Promotion
National economy includes more than 90 sectors. Majority of companies have been transformed into joint stock companies and private entities, some with attraction of foreign investment. At present, Tajikistan has achieved a qualitatively new stage of development, when restructuring of various sectors of economy and private sector development started to bring some positive results. Under these circumstances, investments in real sector of economy become effective and profitable.
Foreign Direct Investment (FDI)
Since 1996 total volume of FDI reached approximately US$277 million. In 2002 foreign direct investments in economy of Tajikistan reached US$36 million, which exceeds 2001 level by 3.8 times. Significant growth of FDI followed economy economic stabilization in te country and was directed in equity of Tajik companies. There are more than 300 enterprises with foreign capital operating in Tajikistan. Primary targetsof FDI were gold mining (30%), commercial activity (19%), food (17%), construction (16%) and chemical industry (8%). In 2002 major sources of FDI included the United Kingdom (40.2%), Russia (23.4%), the USA (7.8%), Cyprus (7.6%), Pakistan (6.9%), Canada (6.8%). Apart from Pakistan, among IDB member-countries major FDI sources also included Turkey (US$ 848.300), Iran (US$385,500) and UAE (US$200.000).
A lack of investment is an acute problem. It is the cause of low productivity and production volumes in manufacturing as well as of a weak infrastructure. The government started active development of national infrastructure. Together with IFIs several large road and bridge reconstruction and rehabilitation projects with the view to upgrade them internationally acceptable standards. Electricity distribution facilities are also undergoes a serious overhaul, as well as system of air navigation and telecommunications. New infrastructure facilities are also built with the use of own reserves and with assistance provided by bilateral donors.
Taxation
Since 1999 a new tax code development together with international experts has been in force in the RT. Enforcement of the TAX Code tax allowed to significantly simplified tax system by reducing number of taxes and simplifying the mechanisms of tax collection, shortening administrative expenses associated with state revenue collection. There are the following state taxes in the RT.
1. Income tax levied upon physical persons;
2. Profit tax levied upon legal persons;
3. Value Added Tax (VAT);
4. Excises;
5. Social contributions;
6. Land tax;
7. Subsoil use tax;
8. Property tax levied upon legal persons;
9. Road tax levied upon legal persons;
10. Tax levied upon vehicle owners;
11. Simplified tax levied upon small businesses;
12. Cotton and aluminum sales tax;
13. Customs duties and fees;
14. State duty.
Free Economic Zones
With the view to further promote foreign direct investment and develop of real sector of economy, the Government has drafted a new law “On free economic zones (FEZ) in the RT”, which is currently being reviewed by the Parliament. Draft law provides for legal and economic basis of organization and functioning of FEZ as separate areas with special customs and tax regimes within their boundaries, including full or partial relief from customs tariff when importing goods to FEZ; simplified procedure for transportation of goods and vehicles across FEZ boundaries; and cancellation of non-tariff restrictions.
It is also proposed that legal and physical persons Ressidance and non residents duly registered on the territory of FEZ will receive full or partial exemption from taxes and other contributions during their operating in FEZ, if they are directed into production on the territory of the RT. It is expected that this law will come into force soon.
Legal Review
Law “On foreign investment in the Republic of Tajikistan (RT) remains the main legal document that govern activity of foreign investors. Foreign investments on the territory of Tajikistan cannot be nationalized.
Investors enjoy a guaranteed right to repatriate profits and other amounts in foreign currency abroad, provided that they have been received legally from made investments. Profits received ion the territory of RT can be reinvested in accordance with investors request and in compliance with national legislation.
Investors can open and maintain accounts in local and foreign currencies in authorized banks of the RT, as well as abroad. Investors may use founds accumulated in local currency accounts to purchase foreign currency under of the prevailing legislation with regard to purchase and sale of foreign currency.
When investor stops its activity on the territory of the RT, he has a right to receive compensations for his investment and received profits in a monetary or commodity form at real prices prevailing at the time of stoppage of investment activity.
Potential investors can us the following types of investments in the economy of te country;
• Equity participation in entities and companies jointly with legal and physical persons;
• Establishment of companies, which are fully owned by foreign investors;
• Acquisition of assets, including shares and other securities;
• Acquisition of title to use land and other natural reserves, as well as other proprietary rights independently or with participation of local legal and physical persons;
• Enter into agreements with local legal and physical persons, which provide for other form of foreign investments.
An investor may also participate in privatization of assets, which are owned by the state or communal authorities in a manner provided for by prevailing legislation.
The Government has created foreign investment legal framework with regard to property and proprietary right, which can not be less attractive that legal framework for local companies, entities and citizens. Moreover, the government may provide for additional tax and other preferences in priority areas of economy and geographic regions.
Investors and companies with foreign participation may engage into any allowed by law of the RT. However, investors and companies with foreign participation may engage in several type activities upon receipt of special permit (license).
There are also other legislation acts on foreign investments such “On privatization of state property” and “On joint stock companies”.
Industry
Industrial production is mainly concentrated at few large industrial enterprises. In 2002 the volume of industrial output grew by 8.2%, if compared to 2001. Industrial output included the following components: metallurgy (49%), food industry (18.1%), fuel and energy (6%),, milling, grains and feed stuffs (5.8%), industrial construction materials (1.1%), chemical and petrochemical industry (0/9%), machine building and metal processing (0/8%). In 2002 the most rapid growth was observed in industrial construction materials (36.5%), machine building and metal processing (27.1%) and light industry (24.8%).
Mining
Tajikistan is rich in various natural resources, including such precious and semiprecious stones, as marble, precious spinel, clinohumite, lazurite, ruby, corundum, sapphire, garnet, rubellite, topaz, morion, polychrome, tourmalin, hambergite, scaploite, turquoise, etc. Many of them are classified as jewelry or collection items. With the view to develop this sector the Government drafted and adopted a development program with regard to production and processing of precious and semiprecious stones from 2001 to 2005, the program identified large deposits that should be given a priority development with the use of foreign investment. Moreover, the Government developed a development program with the regard to processing of precious and semiprecious stones from 2002 to 2010.
The country has sufficient reserves of raw materials for metallurgical, chemical, construction and other sectors. Large silver, gold, iron ore, lead, antimony, coal, sodium chloride, precious stones have been discovered in the country. Lead and zinc, cooper and molybdenum, gold, mercury and antimony and fluorite ore’ processing plants are available in the country. Production of processing plants is expected-oriented and enjoys stable demand in the global markets. Further investments is required to develop new deposits, introduce new processing technologies, increase volume of production and processing of coal and various ores, construction of metallurgical plants for processing of concentrates and extraction of rare earths and scattered elements.
Light Industry
Light industry currently encompasses over 100 companies and entities of various form of ownership, including Tajik-Kabol Textiles (Tajik-Korean join venture), Abreshim and Javoni (Tajik-Italian join venture), Rishta (Tajik-Chinese join venture), VT silk and VT Rohi Abreshim (Tajik-Vietnamese join venture). Production is currently exported to 18 countries, including Italy, South Korea, Vietnam, China, Russia, Germany, Switzerland, India and Uzbekistan. Companies operating in light industry are interested to establish and develop long-term cooperation in trade, production and advanced technologies. There is also a good potential for implementing join projects in the area of processing of such abundant primary commodities, as cotton fiber, silk cocoons, leather, and wool.
Food Industry
Food industry encompasses 34 companies, 55 agriculture entities, 18 small and 12 other businesses in such areas as fat and oil production, which includes companies engaged in processing of cotton seeds, packing and canning production of fruit and vegetables cans; nonalcoholic beverages – production of mineral water and soft drinks; salt industry- mining and production of table salt: and confectionary – wide range of products. Obi Zulol Tajik US joint venture is quite successful in production of mineral water, Dushanbe Tobacco Company – in production of cigarettes, TetraPak joint Venture- in production of juices. There are further opportunities for implementing joint projects in processing of fruit and vegetables, production of dried fruits, vegetables oils, as well as fruit juices.
Chemical Industry
Chemical industry was developed on the basis of available natural reserves, cheap power energy and abundance of water resourses. Tajikistan has unique reserves of salt concentrated in Hoja Mumin and Tut Bulat deposits, limestone in Pushur, boron in Ak Arhar, phosphorites and many others. The country has various several plants for processing of chloride-bearing products and disinfectants, ammonia and nitrogen fertilizers. Various household chemical goods, paintworks and explosive are produced in the country. The further development is envisaged with regard to production of synthetic hydrochloric acid, solid caustic soda, coagulant fro water purification, etc.
Machine-Building Industry
Machine-building complex consists of approximately 100 enterprises and accounts for 7.4% of industrial output. Current facilities allow manufacturing a wide range of production, including precision machines, individual parts and components and mounted spare of agriculture equipment, and pipeline fittings. The Government gives priority to development of assembly of tractors, vehicles and passengers buses and various consumer electronics. Moreover, several enterprises have been restructured to manufacture goods from local raw material.
Energy and Electrical Manufacturing Industries
Tajikistan is famous for its huge hydropower resources, which are estimated at the level of 527 billions kWt-h. However, only 3% of this potential is being used. There was lack of foreign investment in electronic power and gas coal production for the few years. Existing energy stations use only 50-8% of their capacity. Approximately 50% of equipment distribution networks and substation require rehabilitation. There are several hydropower plants (HPP). Nurek HPP is the largest one. Over the past years, energy generation, subject to annual water accumulation, is about 15.5 billion kWt-h. Investments in existing power facilities such as Nurek. Kairakum and Baigazi HPPs and small HPPa will allow raising generation capacity to additional 3.0 billions kWt-h. Investment of Sangtuda and Rogun HPPs construction is quite attractive for investors. General capacity of these HPPs is at the level of 2.7 and 13.1 billion kWt-h, respectively. Energy production at these HPPs id the cheapest in comparison with all power generating in Central Asian region. There are also 30 existing and 50 new SHPPs which require further investments. Limited possibilities on use alternative energy sources and low tariff on electric power encourage the use of electric power. In the period of economic recession the consumption of electrical power increased by 85 %. Barki Tojik is the national monopoly that controls the energy sector. The Government takes measures for the improvement of energy sector.
Tajikgas is supplier of natural gas to population and businesses. The company has set equal tariffs for all categories of consumers with the view to cover its expenses through improved payment collection. The Government has established the Ministry of energy to manage legal and regulatory relations within the energy sector. The country has some large oil, gas and coal deposits which are offered for further development. Further development of oil and gas sector is a very attractive area for investment, since 96% of natural gas and 100% of oil deposits are imported to Tajikistan from neighboring countries. At present, Rengan deposit, located in 35 km from Dushanbe, and Sargason deposit in Dangara, are proposed for foreign investors. Probable reserve of natural gas in these deposits amount to 30-50 and 100 billion m3, respectively.
Electrical manufacturing industry produces transformers, low voltage equipment, lighting equipment, cables, etc. Companies closely cooperate with producers from CIS countries and have a significant potential for further development.
-
Fiscal Policy
-
Currency Exchange Policy
Fiscal Policy
Over the last few years the Government achieved growth in all revenues. The budget revenue to GDP ratio remains low (16.7 % in 2002). The budget expenditure to GDP ratio continued to decline to 15.6 % following cutbacks and rationalization of expenditure. While the Government has been supporting the principle of non-inflationary financing since 1995, it did rely on bank financing of the deficit until 1999 following external shocks and various natural disasters. The continuing reduction in export taxes for cotton and aluminum together with the downturn in world prices of these commodities, result n decreased revenues. Since 1999 this has been compensated by some improvement in tax collection, as well as grants from international agencies. With regard to VAT payments among CIS countries’ shift to the destination principle was made in 2000.
Recent budget reforms include preparation of a year forward-looking budget. The Government takes measures to deepen financial sector reform with the view to strengthen tax administration and improve effectiveness of tax collection system, efficiency of government spending, monitoring system of commitments and external tax management.
In 2002, budget expenditure was associated mainly with public administration (17, 3%), education (17.3 %), social security and welfare (13.2%), transport and communication (6.7%), health (6.1%), and utilities (5.9%). Tax accounted for 93.4% of budget revenues or 15.3% of GDP. In government finance, the treasury is better executing the national budget resources. The National Audit Agency was created with the view to insure accountability and transparency. The Ministry of finance is improving the management of the external public debt. It is regulating all external borrowing and limiting all non-concessionary borrowing. The large external debt liabilities increase the on private sector financing or financing without state guarantee.
In 2002, with view to foster leasing operation the Government has drafted the Law “On financial rent” which cane into force in 2003. With the view to develop financial sector and simulate micro-crediting small and medium enterprises, the National Bank of Tajikistan (NBT) has drafted the Law “On micro-financing entities in the RT”, adoption of which is expected.
Monetary Policy
Despite commitments to adhere to a tight monetary policy, the Government at times had to depart from established monetary targets because of the fact that financial instruments to absorb redundant liquidity were not well developed. Given an expected in net of foreign financing, the Government will pursue a tight fiscal policy and balance budget by 2004. A deficit will be financed from the sale of treasury bills and from privatization proceeds. To compensate for the loss in revenue caused by phasing out reduction of sales tax, cotton and aluminum, the Government will introduce measures to expand the base and increase rate of excise taxes, extend VAT on domestic cotton production, experiment with the introduction of a unified agriculture tax in several regions, and reduce the number of tax exemptions. The Government will continue strengthening tax administration and tax collection system. Concrete measures include completion of VAT reform, strengthening of the Large Taxpayers’ Inspectorate, further work on registration of taxpayers to expand the tax base, take action on liquidation of tax arrears, move to modern self-accrual system, and introduce a system a tax withholding at source. In order to improve performance of a recently established Ministry of revenue and duties, the Government intends to allocate incentive amounts to its budget regarding revenue collection and over-fulfillments of plans. Tax administration reform has been started with the support of technical assistance from the International Monetary Found and Asian Development Bank. All these measures will lead to sustained growth of tax revenue to GDP.
Active measures to collect overdue loans, as well as strict limitations on new loans will reduce net claims of the NBT on the private sector. NBT will not extend directed loans. Containing internal credit emission will strengthen international reserves position. The NBT will broaden the sale of NBT deposit certificates and treasury bills and conduct further work on making its open market operations more effective. To strengthen independence and financial position of the NBT, its annual financial reports will be prepared in full compliance with international accounting standards.
The Government of Tajikistan intends to increase expenditures on social sector, though this will be constrained by the large share of expenditures on wages, pension and debt service, which are all expected to rise substantially. Civil service pay has risen by an average of 40 % in 2002. Social sector expenditures in the following three years will comprise of two components.
Inflation
From independence until the end of 1999, inflation was high, due mainly to inflation budget financing and the granting of direct credits to state-owned enterprises and farmers. However, the trend has been downward since 1996. Prices grew up again toward the end of 2000 after a new national currency –Somoni (TDS) was introduced in October. The experience in arranging a similar reform in the past, uncertainly, and excessive liquidity during the second half of the year resulted in inflation rates of 12.4% and 7.7% in October and November 2000 respectably and an annual rate of over 60%. A tight monetary policy in 2001-2002 and growing confidence in the new national currency subsequently reduced inflation to 14.5% in 2002. As a result, the nominal exchange rate has remained relatively stable since and 2000.
Reform Process
To halt the deterioration and stabilize the economy since independence, the Government of Tajikistan initiated an Economic reform Program for 1995- 2000. IN 1998-2001 financing faculty for post-conflict reconstruction and expansion of restructuring was carried out in accordance with two IMF programs (POST CONFLICT Faculty and Enhanced Structured Adjustment Faculty – EASF). EASF was later renamed as a faculty financing poverty alleviation and economic growth (PRGF). Sinning of the Grate General Agreement of Peace and national accord in 1997 allowed the Government of Tajikistan to concentrate on reforms targeted at macroeconomic stabilization and a series of structural reforms aimed at establishing the basics of a market – oriented economy. Significant progress was achieved in controlling inflation and completing the privatization of small enterprises. The process of restructuring of large-size enterprises has been started in 1999. Deeper reforms were conducted in the agricultural and by early 2001 land entitlements for 50 % of arable lands had commenced its operation. An agreement on restructuring of the largest business banks has been actualized. The result of these reforms and a more stable political climate was a significant growth in GDP, which over the period 1997-2002 reached a cumulative of 42.3%. In 2002, GDP grew by 9.1 %.
The Government has targeted term GDP annual growth rate of 6 % and a rate of inflation not exceeded 7% in order t maintain a stable exchange rate and rise per capita income. To strengthen confidence in the national currency and meet external commitments, the Government intends to increase gross international reserves to the equivalent of three month of imports. Regarding fiscal policy the medium term target of the Government of Tajikistan is to achieve budget balance.
Despite natural disasters, dependency on global prices and vulnerable from external shocks, Tajikistan undertakes many reforms. In several sectors reforms were slower that expected to due to lack of institutional capacity. Macroeconomic stability and implementation of wide range of structural reforms will support the growth, especially in agriculture, taking in to account comparative advantages of Tajikistan in agriculture sector and low cost of labor. The latter factor will also support industrial output with substantial potential to improve the productivity. Growth potential exists in other sectors as well as, such a hydropower, mining and metallurgy, construction and infrastructure.
Currency Exchange Policy
To carry out a flexible exchange rate policy and improve the functioning of the foreign exchange market, the Government, in July 2000, abandoned the mechanism of the Tajik Interbank Exchange, where the National Bank was the only supplier of foreign exchange, and established an inter-bank currency market. To strengthen the national currency, the Ministry of finance collects all taxes and fees in national currency. The Government will carry out a tight monetary policy to support the balance of payments and restrain inflation and will be guided be the monetary targets set in the framework of the IMF program.
NBT will continue to use a flexible exchange rate regime and will not intervene in the foreign exchange market, except to smooth out temporary fluctuations. NBT will establish an official exchange rate as an average weighted rate of actual weekly operation in the interbank foreign exchange market, and take measures to improve functioning of the market by introducing tight control over observance of limits of foreign exchange exposure of banks.
There is a two-tier banking in the RT. National Bank of Tajikistan (NBT) is the bank of the first tier, which has primary issuer.
There is a double-level bank sector in the republic. The first category bank is the National Bank and 13 commercial banks. Three commercial banks are registered with the foreign capital participation. Authorized capital of the second-tier banks should exceed US$ 1.5 million. There are plans to increase minimum level of authorized capital to US$2.0 million. Three non-banking credit institutions also operate in the RT.
In 2003, weighted average interest rate of shirt-term credits given by the second-tier banks in the national currency was 14, 92%, average interest rate - 21, 95% and maximum – 60%.
Weighted average interest rate of short-term credits given by the second-tier in the national currency was 18.04% average interest rate – 19,33%, maximum – 20%, and minimum – 18%.
The second-tier banks give credits mainly in the short terms basis. In 2002, share of short-term and long-term credits in national currency in total credit volume was equal to 25.4% and 1.0% respectively. As of 1 January 2003, share of short-term and long-term credits in the foreign currency in total credit volume was 71.5% and 2.1% respectively.
Strategic objective of the banks of the RT include developments and maintenance of the most competitive and profitable level applying high standards of professionalism and transparency and providing specialized international financial services to businesses.
With a view to develop and deepen the process of bank system reform, increase in confidence of businesses to the banks, the banks widen the range and improve quality of provided services, strengthen the bank’ role in development of private sector through provision of micro credits to entrepreneurs, farmers, and crate conditions for fare competitions in the financial sector. A mechanism of deposit crediting was introduced in 2001 to simulate secondary security market.
The Government will deepen banking reforms through restructuring, professional management, and acceptable business development, which will guarantee compliance with requirements, set forth with respect to reserve and authorized capital, profitable level and private capital participation.
THE NATIONAL BANK OF TAJIKISTAN
The National Bank of Tajikistan (NBT) is the central emission and reserve Bank of the country. The NBT takes part in the development of the economic policy of the country and reports to the Lower Chamber (Majlisi Nomoyandagon) of the Parliament (Majlisi Oli). By the Decree of the President dated 1997, the National Bank of Tajikistan became independent in order to better fulfill its mandate.
The National Bank of Tajikistan is entrusted to:
Develop and implement monetary policy of the country as well as foreign exchange policy.
Act as a state banker and financial agent.
License and supervise activities of all other banks and credit organizations.
Emit national currency and unsure its circulation.
Manage foreign reserves of the country.
Act on behalf of the Republic of Tajikistan and performs transaction under the agreements with the international organizations in the banking and monetary area.
Prepare balance of payment reports for the country.
The NBT consists of the central administration and regional branches. At present, the central administration of the NBT includes 2 departments and 12 divisions, 5 independent offices and the press-center.
The National Bank of Tajikistan is managed by the Board.
National currency is the Somoni.
The new national currency, the Somoni, was introduced on 30 October 2000.
On October 26, 2000 during the announcement of the new currency, the President of Tajikistan, His Excellency Emomali Rahmun said that the introduction of the new currency is intended to strengthen the national banking system. International organizations have voiced their support for the new currency, which would contribute to the macroeconomic stability and expedite the transition to a market economy.
Foreign Trade
Tajikistan has a fairly open economy, with an export to GDP ratio in 2001 of 61%. The foreign trade regime remains quite free, in spite of an increase in import duties in early 1999 following Tajikistan’s entry into a Customs Union.
Heavy specialization on cotton and aluminum production, which accounts from two thirds of exports, makes the republic dependent on world prices from these two export items, causing fluctuation in foreign currency flows. Significant fluctuation of world for cotton-fiber and aluminum occurred in 2001, created problems certain problems for producers.
Therefore, developing production of finished goods from local cotton fiber which is considered to have the quality in the region is one of the priorities.
Since independence, Tajikistan has had a current balance of payments deficit and has accumulated significant debts. The foreign trade deficit, in effect, replaced subsidies received by Tajikistan while part of the USSR.
Despite its flexible exchange rate policy since 1996, the current balance of payment deficit in 1998 reached 9.3% of GDP. In 2000 and 2001 the deficit increased to 6% and &% of GDP respectively, as the drought affect grain production and raised imports, and fuel prices increased.
With the view to foster trade, the Government took further measures to liberalized foreign trade regime, as a result of which foreign trade balance was positive (1.5% of GDP). In overall trade turnover increased by 8.9% and exceeded $US 1,4 billion.
The CIS countries accounted for 50% in foreign turnover. In 2002 the main importers of Tajik products were the Netherlands (29, 5%), Turkey (16.1%), Russia (11.9%), Uzbekistan (9.8%), Switzerland (9.3%), and Hungary (5.4%).
Major export commodities include aluminum (54.2%) cotton (17.4%) and energy (13.6%). Major exporters to Tajikistan were mainly from the CIS countries, namely Uzbekistan (20.6%), Russia (17.7%), Kazakhstan (10.5%), and Turkmenistan (6.6%). Energy resources accounted for 56.7% of total import to Tajikistan, followed by vehicles, machinery and equipment (17.8%).
Donor Assistance
Traditionally, foreign borrowing was viewed as an additional to domestic saving to fill the gap between savings and investments with the view to accelerate economic growth.
As of January 1, 2003 the country’s foreign debt reached US$ 989.5 million which is 3% less than in 2002. The main multilateral creditors include the World Bank (19.1% of total foreign debt). IMF ((.5%) ADB (3.4%), EEC (5.3%), IDB (1.6%), OPEC (0.6%) and KFAED (0.1%). Among bilateral creditors the largest is Russia (30.2%) Uzbekistan (10.6%, USA and Turkey (2.0% each), Pakistan (1.3%) and Kazakhstan (1.2%).
IFIs and other donor organizations developed and started implementation of Country Assistance Strategies and projects aimed at rehabilitation of social, infrastructure, agriculture and power sector pursuing an overall objective of macroeconomic stabilization and introduction of structural reforms designed to ease and speed up transition to a market economy. General benchmarks included price and trade liberalization, privatization of state enterprises, land reform, creation of social safety nets, as well as legal an institutional reforms.
Projects
Coming Soon.