National Library of Tajikistan – 16 October 2020
Jan-Peter Olters
Chair, Development Coordination Council
Of the set of socio-economic development challenges in Tajikistan, spanning those inherited from pre-COVID-19 times to those that have surfaced since spring, the answer tends to be private-sector development.
- Digital transformation. Two days ago, in this very room, the potential inherent in the development of Tajikistan’s information and communication technologies (ICT) sector has been discussed, and there has been a broad consensus that the success in the country’s digital transformation required investments by private companies and opened the possibility to unlock a considerably—hitherto largely unexploited—potential for new private companies, including those that would provide employment opportunities for the young living in rural and remote areas.
- Food security. The COVID-19 pandemic has brought challenges of food security to the forefront, together with official encouragements for increased local food production and processing—relying on micro and small businesses as agents to increase agricultural self-reliance and reinforce the foundation for exports.
- Interest rates. In the financial sector, a lot has been discussed on the constraints posed by high interest rates—in themselves a reflection of a narrow deposit base and the perception of high risk premia. Increased economic activity by private-sector enterprises would, of course, broaden the deposit base, diversify banks’ risks, and contribute to lower interest rates and further stimuli to economic growth.
- Exchange rate. Against the backdrop of the economy’s high degree of import reliance, households, enterprises, and Governments tend to lose from instances of somoni depreciations. Fostering domestic production and exploiting—now principally—available export opportunities to large, underserviced neighbouring markets would increase the availability of foreign exchange and facilitate large imports. Again, this would not work without a more dynamic, export-oriented private sector.
- Even challenges of fragility, largely reflecting low rates of youth being in employment, education, or training, in a country with high population growth rates, can be addressed by efforts to strengthen the business climate, increase investors’ confidence, and have them recruit additional labour for new activities being launched.
Encouraging private-sector development is, at the same time, ‘very difficult’ and ‘very easy’:
- On the one hand, governments do not have instruments for, or direct control over, desired outcomes of policies aimed at stimulating private-sector development and, as a function of that, employment creation and growth. The only thing that policy-makers are able to do is to allow investors develop the confidence that, through the supply on the market of their products and/or services, investments can be amortised, wages and taxes paid, and profits be made and protected. It is thus a very indirect set of policies that might or might not affect entrepreneurs’ perceptions of the overarching business climate and their abilities to run a successful business. That is the ‘very difficult’ component of corresponding policies.
- The ‘very easy’ part, by contrast, is the fact that, with the appropriate confidence and space, the clear understanding of the rules, and the assurance of their enforceability and in their uniform applicability, the private sector’s response will come almost automatically, with all the desired externalities of increased employment, wages, and tax receipts. The impact can be particularly large in a context, where relatively recent geopolitical changes in Tajikistan’s direct neighbourhood allow for companies to create markets in South, East, and Central Asia.
It has been encouraging to see that Tajikistan is addressing the various elements that have prevented this confidence to overshadow the legacy of uncertainties and concerns. Last year this time, the Doing Business report reflected this attention to business climate constraints, having seen Tajikistan raise by 20 ranks vis-à-vis other countries and be seen as a top-ten reformer worldwide. The Government has agreed with the IMF on a crisis response framework, in the context of the current Rapid Credit Facility, the report of which it agreed to have published.
But most importantly, the country has recognised that it would have to redefine the underlying social contract and, within that, the core of the relationship between the State and the private sector: taxes. It has been understood that the twin objectives—domestic revenue mobilisation (DRM) and private sector development (PSD)—were both affected detrimentally. Beyond the challenges that have arisen from inconsistencies across the tax code, from complexities in obligations and inaccuracies in formulation, it was the reliance on ‘tax collection targets’, with the resultant reliance on on-site tax audits as principal policy instrument, with penalties and pre-payments as important revenue components, that have discouraged businesses and undermined the PSD objective. To correct this, tax exemptions and tax incentives were granted generously, to the detriment of the DRM target and an insufficient impact on the broader, implicit socio-economic development objectives, whether it was the promotion of investments, the encouragement of innovation, the generation of employment opportunities, or the development of lagging (and remote) regions.
Important work has been done during the current year in efforts to address these constraints to more dynamic entrepreneurship in Tajikistan. More than a discussion over taxes and tax rates, the preparations have focused on reforming the principles around which taxes are collected. Clearly, it would be in everyone’s interest if incentives are aligned so that (i) properly recorded non-cash payments and honest tax declarations reduce a company’s risk of on-site audits; (ii) investments, innovations, and entrepreneurial success are encouraged; (iii) the Tax Committee’s core policy instrument becomes internal risk assessments, on which basis tax audits will be prioritised; and (iv) tax incentives are provided for specific development objectives, monitored for, and be made conditional on, the socio-economic benefits they generate, and offered alongside transparent principles and clear expectations applicable to every company that qualifies.
Within the context of the goals spelt out in the country’s National Development Strategy 2030, the fiscal challenges inherent in the ambitious public investment programme and COVID-19 impact, and the expectations voiced by Tajikistan’s young and growing population, the ‘policy key’ to unlocking the country’s potential is private-sector development. Tajikistan has identified and prepared the major policy responses in a very strategic manner. In following up on these, and on this basis, the balance—as perceived by investors—between opportunities and risks should be tilting more and more towards the former. In so doing, Government would have succeeded with the ‘very difficult’ part, being able to wait for the benefits derived from the ‘very easy’ part of corresponding policies. In this current window of opportunity, DCC members remain interested in supporting the Government of the Republic of Tajikistan in all efforts aimed at taking full advantage of translating the challenges of the current COVID-19 crisis into the foundation for a fast, private sector-led recovery and dynamic rates of sustainable and inclusive growth during the post-COVID-19 era.