Since the turn of the century, GDP growth has officially averaged 7.7% per annum (Figure 1), albeit slowing slightly over the last decade as the economy rebounded from the Soviet era. Up until September 2021, Tajikistan’s real GDP grew at an annual rate of 8.9%, as the country bounced back from the COVID-19 shock of 2020 (World Bank, 2021[1]) (OECD, 2021[2]). GDP measured in constant 2010 USD rose from 2.6 billion in 2000 to 10.9 billion in 2021. As a result, from 2000 to 2019, the share of the population below the national poverty line fell from 83% to 26.3% (World Bank, 2019[3]; World Bank, 2021[4]). There is still considerable scope for catch-up growth, though; per capita GDP in 2020 was estimated at USD 3858 in purchasing power parity terms (2017 constant international dollars) (World Bank, 2020).
Enhancing Investment Promotion in Tajikistan
Introduction
The main drivers of growth in Tajikistan
Figure 1. GDP growth (1988-2020) in Tajikistan and the production structure of GDP in 2019
Growth has been driven to a substantial extent by the government’s policy of channelling high levels of public investment into large-scale infrastructure projects. However, it could be difficult to sustain this approach over the long-term, as general government gross debt has risen significantly since the mid-2010s from 28% of GDP in 2014 to an estimated 44% in 2019, narrowing the government’s fiscal space (IMF, 2021[7]). This highlights the need to mobilise greater private investment – which is both a challenge and a huge opportunity for Tajikistan.
Remittances from labour migrants working abroad constitute a major source of income for the country, equivalent to 26.7% of GDP in 2020 (Agency on Statistics under the President of Tajikistan, 2020[6]). While some remittances are saved or invested, 57% are used for immediate consumption. Moreover, they have fluctuated considerably over time, in response to developments abroad (Figure 2). Increasing FDI, particularly into sectors that would generate more and more productive jobs, could substantially reduce the country’s vulnerability to external shocks linked to changes in export prices or remittance flows.
Figure 2. Oil price movements and migrant remittances received by Tajikistan (2002-2020)
Sources: (World Bank, 2021[8]; OECD, 2021[9])
The COVID-19 pandemic slowed growth to 4.5% in Tajikistan in 2020. Restrictions on labour mobility and economic activity resulted in lower remittances, weaker consumer demand, and a reduction in investment (OECD, 2020[10]; World Bank, 2020[11]). Despite the crisis, the Statistical Agency under President of the Republic of Tajikistan reported real GDP growth of 8.9% by September 2021 (ADB, 2021[12]).
Foreign direct investment trends in Tajikistan
Annual FDI inflows during 1999-2019 averaged 4.3% of GDP (Figure 3), below the average for the OECD Eurasia region of 6.3% but close to the regional average of 5.1% if one excludes the main oil and gas exporters1. This has led to an accumulated FDI stock of 38.65% of GDP in Tajikistan as of 2020, compared to an average of 55.84% in Central Asia (UNCTAD, 2020[13]). In dollar terms, Tajikistan’s inward FDI stock stood at USD 3.1 billion before the pandemic (UNCTAD, 2020[13]). At the same time, according to the SCISPM, the country attracted 150 bn somoni (USD 14 bn) in foreign investment (both FDI and other foreign investment) since 2001. However, FDI inflows fell by 53% in 20202 (greater than the estimated global drop of 42%). Global flows rebounded, albeit unevenly, in 2021, but the outlook for Tajikistan and the world remains clouded by uncertainties about the pandemic and recovery prospects (UNCTAD, 2021[14]). However, the pandemic may also open some opportunities for FDI as firms seek greater resilience through geographic diversification, including cost-cutting, nearshoring and offshoring, which will primarily affect developing countries like Tajikistan (OECD, 2020[15]).
Figure 3. Inward FDI as a % of GDP, 3-year moving average
Source: (World Bank, 2021[16])
Foreign direct investment inflows (FDI) fell after the global financial crisis of 2008-09, a trend common to Tajikistan’s regional peers (Figure 3). Investments from Russia – previously Tajikistan’s primary source of FDI – never fully recovered, as the Russian economy continued to suffer from low hydrocarbon prices and then Western sanctions. However, rising Chinese investments enabled a recovery in FDI inflows during the 2010s, and these now constitute the bulk of inward flows (Figure 4). Inflows remain relatively concentrated in terms of sectors.
Investment in Tajikistan has been overwhelmingly driven by public funds (in 2020, only 25% of investment came from private sources of finance) and thus are concentrated in the government’s priority sectors, particularly aluminium, cotton, and energy (Santander Trade, 2021[17]). In 2018, the mining sector received 61% of total FDI (USD 221m) (World Bank, 2020[11]). According to data provided by the SCISPM, this proportion remained nearly unchanged (64%) during the pandemic, although in absolute terms the volume fell in line with the overall drop in FDI during the first stages of the COVID-19 crisis. As FDI inflows continue to be concentrated in the extractive sector, their volume is linked more closely to global demand and pricing for extractive goods than to the investment climate environment per se (EBRD, 2020[18]).
Figure 4. Incoming FDI to Tajikistan by country (2009-2020) and sector (in absolute USD figures)
Source: Compiled data from annual U.S. Investment Climate Reports for Tajikistan; (National Bank of Tajikistan, 2020[19])
Tajikistan would benefit from more diversified FDI inflows
Given fewer alternative domestic private or public sources of capital and the need to recover from the pandemic, Tajikistan needs more diversified FDI (Embassy of Switzerland in Tajikistan, 2020[19]; OECD, 2020[10]; OECD, 2021[2]). There are many good reasons for the country to want to diversify FDI flows and, in particular, attract FDI to manufacturing and other non-resource tradables. This would not only reduce the economy’s vulnerability to commodity-price fluctuations, but also generate more – and more productive – formal-sector jobs. Resource extraction, which is capital- rather than labour-intensive, generates relatively little employment. More diversified FDI flows will also indirectly create employment opportunities and promote entrepreneurship and SME development through supplier linkages. These investments open new markets to domestic companies through their integration in the international production chains of MNEs and are accompanied by transfers of skills and technology.
This ambition has important implications for policy. Many economies have done well in attracting FDI to the extractive sector but not elsewhere. The conventional typology of FDI (resource- seeking, market- seeking and efficiency-seeking) is instructive here. Resource-seeking FDI in the extraction sector in some ways resembles public procurement, since the subsoil is state property. The government knows what it wants and so does the investor, so the government has to choose among competing investors – in effect, competing service-providers – to extract the primary resource. The chosen investor is supposed to deliver what it and the government agree ex ante. Often, there is little trust, because the government sees the investor as keen to exploit a resource that belongs to the state, but the investor is needed for his capital, expertise, etc. Even when trust is low, agreement can often be reached because the potential paybacks are high and the major variables affecting the economics of the project are well understood. Tajikistan is no exception to the rule. The extractive sector requires additional investment in branches in which the country should be a leading regional player, such as aluminium and hydropower, to increase their competitiveness and tap a larger share of unexploited potential.
Beyond extractive materials, which are dependent on global commodity prices, foreign investments in new promising sectors could help diversify economic activity in Tajikistan. They require a rather different approach to foreign investment. Market- and efficiency- seeking investments in manufacturing and other non-extractive sectors are more closely linked to institutional quality and investment policy settings. There is much less known ex ante about the potential investment’s viability and profitability. This means investors generate new opportunities rather than compete for pre-existing ones, and in response, the government has to be far less risk-averse and far readier to ease restrictions. This entails willingness to trust, rather than control, foreign investors. The conviction that the investor is there to exploit the locals’ resources, and must therefore be subject to close scrutiny every step of the way, will impede potentially productive investment. Moreover, when foreign investors are smaller, they are more likely to rely on general framework conditions for business and investment rather than on deal- or project-specific mechanisms like tailored concessions or production-sharing agreements. They are also less likely to have the internal resources to make up for deficits in public goods provision (security, infrastructure, etc.). This implies that these other forms of FDI will depend on the overall business environment far more than investment in large-scale resource extraction.
In Tajikistan, agricultural processing, the petrochemical industry and tourism are deemed promising sectors that for efficiency-seeking investments. To ensure this, the government needs to define clearly which specific sectors both have an attractive value proposition and meet Tajikistan’s development goals, then target investors accordingly.
For both types of investments, dynamic demographics and high labour supply are key. The population has been growing steadily at a rate of 2.4% over the last five years. However, the labour participation rate amounted to 41.5% in 2020, way below the OECD average (61.1%, 2020) and peer countries like Kyrgyzstan (58.81%, 2018) or Kazakhstan (69%, 2020). Therefore, well-designed employment policies are needed to increase labour-force participation and create the skills needed in sectors that could thrive with new foreign investment. Integration in the region will also be critical, given that Tajikistan remains, in global terms, a small market: FDI attraction will be more likely to succeed where conditions for export are more promising.
Tajikistan’s natural resources, especially gold, silver and antimony, are currently the main sources of export earnings. However, some sectors’ profitability could be improved with additional investments, making access to international finance crucial. Apart from traditional products such as aluminium or hydroelectricity, which are very dependent on global commodity prices, foreign investments in new promising sectors could help diversify the economic activity (agricultural processing, petrochemicals and tourism). To ensure that sectors with potential are able to attract the FDI they require, the government needs to understand and communicate the value propositions of these sectors and then target investors accordingly.
Investment promotion must be part of efforts to diversify production, employment and exports
As a relatively small economy in the heart of Central Asia, Tajikistan is a relatively little-known to potential investors in many regions of the world; many global investors may not be aware of its potential or have experience doing business there. This means that significant research on their end is necessary to learn about opportunities and navigate the logistics of investing. As some investors come to the country, others can benefit from the information generated by the first movers, which makes it even less appealing for investors to be pioneers (they would be generating positive spill-overs to the benefit of potential competitors). Nor do investors consider the positive externalities for domestic businesses. These considerations provide a justification for public intervention (OECD, 2018[20]; OECD & Inter-American Development Bank, 2019[21]).
Centralised investment promotion agencies can be instrumental in resolving such market failures by both promoting and facilitating investment (OECD, 2019[22]; OECD, 2015[23]). To promote investment, IPAs usually conduct image-building and outreach activities, including marketing through their websites and promotional materials and public relations events, such as road shows, forums, and missions abroad. These can brand the host country as a profitable investment destination. IPAs also engage in specific outreach to prospective investors. To facilitate investment, IPAs provide administrative assistance to prospective and existing investors, with support for the latter serving to encourage reinvestment and contribute to the country’s favourable reputation. These close interactions with investors allow IPAs to grasp their challenges and channel them to policymakers through their policy advocacy function, thereby improving the overall investment climate.
This report, drawing on OECD expertise in IPAs, will help the Tajik government realise its goals of increased and diversified FDI and continuing to improve the investment climate
The government of Tajikistan has defined the attraction of foreign investment and the creation of a favourable business climate that enables it as national policy priorities in its 2030 National Development Strategy (NDS) and the Medium-term Development Strategy for 2021-25. The NDS sets a target of attracting more than USD 55 bn in FDI by 2030.
To achieve this very ambitious goal, the government has enacted a number of legal and regulatory reforms to improve the investment climate (OECD, 2021[2]). These reforms include the simplification of administrative requirements, encompassing the reduction of licenses and permits from 605 to 64 and the increased ease of obtaining them. Tajikistan introduced a risk-based mechanism to select candidates for inspection in order to improve regulatory effectiveness while reducing the burden on firms; created a co-ordination council, and instituted a moratorium on business inspections, which has been in place since January 2019. An online portal tajtrade.tj has detailed import and export information on selected goods, including required documents. Tajikistan has also made significant improvements in facilitating access to credit. Many other reforms are planned or ongoing in areas such as justice, procurement, and taxation. De jure, Tajikistan is very open to investment (OECD, 2021[2]). The OECD FDI Restrictiveness Index, which measures statutory limitations to FDI, shows the country close to the average for non-OECD economies in most sectors and in line with regional peers. Indeed, Tajikistan has no laws discriminating against foreign investors by conditioning, limiting or prohibiting overseas investment in any economic sectors (OECD, 2021[2]).
Figure 5. OECD 2019 FDI Regulatory Restrictiveness Index: sectoral restrictions in Tajikistan
Note: Open=0, closed=1
Source:OECD FDI Regulatory Restrictiveness Index
For now, Tajikistan ranks 104th on the World Economic Forum’s Global Competitiveness Index (Schwab, 2019[24]). It is critical that Tajikistan’s IPA takes advantage of this moment to inform investors about new opportunities and assist them in overcoming the remaining barriers. This paper thus argues that an updated and realistic strategy, including methods of targeting and facilitating investment, can help Tajikistan attract investors and convince them to continue investing even in the midst of a protracted crisis. Such efforts must, however, be undertaken in the context of concrete steps to improve the legal environment for business, as discussed in the OECD report Improving the Legal Environment for Business in Central Asia (2021[2]). Investment promotion can only succeed when the investment environment really is attractive to investors. It cannot offset defects in that environment.
Drawing on OECD expertise with IPAs in OECD and partner countries, this report makes the following recommendations:
I. Raise investor awareness of Tajikistan’s strengths, branding it as an attractive investment destination through clear and consistent messaging and leveraging digital platforms. Given pressure on public finances and the need for economic diversification, Tajikistan’s IPAs have an incentive to select priority sectors for promotion to allocate strained resources. Systematising information-sharing among them about investors using a database and targeted outreach will help attract high-quality investments.
II. Clarify the institutional architecture of investment promotion to avoid duplication and overlap and put in place a strategy that is up to date with respect to Tajikistan’s evolving needs and challenges.
III. Retain investors already in Tajikistan by offering logistical facilitation and aftercare services, which can encourage re-investment. This mainly includes closely liaising with investors to identify bottlenecks in the investment climate to provide evidence-based policy recommendations to the government.
In addition to the specific recommendations presented in this report, several cross-cutting themes apply to all topics (see Way Forward): ensuring a whole-of-government approach to adopting the recommendations, maximising the ability of limited IPA staff to achieve the recommendations, and making use of the international knowledge community to help implement these recommendations and continue adopting best practices in the future.