Faint Praise for Tajik Crisis Plan

Analysts warn that plans to use tax cuts to boost manufacturing are over-optimistic.

Faint Praise for Tajik Crisis Plan

Analysts warn that plans to use tax cuts to boost manufacturing are over-optimistic.

Tajikistan’s government has finally announced how it plans to counter the multiple effects of global economic crisis, but analysts worry that its analysis of the problems and the cure it prescribes are unrealistic.



President Imomali Rahmon gave details of the “anti-crisis” action plan in an address to parliament on April 15, saying it had actually been operating for some time.



The basic approach is to encourage local producers by cutting interest rates and attracting investment. The president also described how the government budget would be kept afloat by trimming non-essential expenditure and financing much of the rest with loans from international lenders.



Although the budget is being revised downwards in light of first-quarter results, Rahmonov gave a firm pledge that spending on public sector wages and benefits, hospitals, schools and the like would not be touched.



The Tajik leader painted a grim picture of Tajikistan’s performance to date this year. The economy grew by 3.5 per cent in January-March, he said, which suggested that overall growth this year would be slower than anticipated.



The IMF’s latest forecast, published on April 30, suggests the Tajik economy will grow by two per cent this year, which compares badly with figures of just under eight per cent achieved in both 2008 and 2007.



The president noted that foreign-currency receipts from Tajikistan’s key export commodities – aluminium and cotton – had taken a major hit, with world prices tumbling by between 30 and 50 per cent.



This has already resulted in lost revenues for central government. Payments from aluminium and cotton exports account for a hefty proportion of budget inflows – last year’s budget, for example, was based on expectations that 17 per cent of total revenue would come from the former and ten per cent from the latter.



Although these effects started being felt late last year, Rahmon said overall revenues really took a hit in the first quarter of 2009, when the government received 14 per cent less money than it had planned for.



The finance ministry has now cut its original 1.7 billion US dollar spending plan by 130 million.



That will be achieved by trimming overheads and non-essential business trips in the public sector, and by holding off on repair work, new purchases and recruitment.



The cuts would have been deeper were it not for the 70 million dollars in financial assistance the government has secured from international lenders. Rahmonov said further loans would be sought to support the budget.



TAX CUTS DESIGNED TO HELP BUSINESSES



On the economic front, the government’s main strategy seems to be to stimulate domestic production, although some analysts question how feasible this is.



The central bank has been told to reduce its benchmark lending rate, and businesses will also benefit from lower profit and value-added taxes. The government is also improving the terms of its fast-track tax system for some businesses, and extending the freeze on tax inspections for smaller firms.



Finally, legislation has been put to parliament to cut away some of the bureaucracy that hampers new business start-ups by creating a kind of one-stop shop to handle the various procedures involved.



Rustam Jabbarov, deputy head of the taxation service, told IWPR the focus was on easing conditions for smaller businesses because Tajikistan – in contrast to countries like Russia and Kazakstan – had few really big companies.



“Our [revenue] source is based largely on small and medium businesses,” he said.



Firuz Saidov, a departmental head at Tajikistan’s Centre for Strategic Studies, is optimistic that the tax breaks and other measures outlined by the president will mean more small businesses are set up, generating more money for the government.



“If the system works, the budget won’t lose out; it might even gain if there are more people paying taxes,” he said.



However, other economists say things are not that simple, because the bulk of companies operating in Tajikistan do not make goods; they simply trade in them.



Tax official Jabbarov acknowledged this was a reality, saying, “Eighty per cent of our entrepreneurs are not producers but traders. They buy here and sell there. That isn’t a bad thing, but it doesn’t deliver much [in taxes] to the state.”



Bahor Kamarov, an expert on business development, told IWPR that the dominance of the retail sector made it implausible that tax cuts alone could stimulate manufacturing.



With that in mind, Kamarov warned that the government’s decision to slash profit tax from 25 to 15 per cent was likely to result in a lower overall revenue figure.



“If you look at it [tax cut] in isolation it doesn’t amount to much, but multiplied across the country it will create a budget shortfall,” he said.



The measure would only make sense, he suggested, if businesses used their tax savings to invest in growth and purchase new technology.



LESS MONEY AROUND TO SPEND



Economists are warning that taxes from retailers are likely to dip this year, since consumer spending in Tajikistan is largely driven not by locally-earned income, but by the money which the million or so Tajiks working abroad send home to their families.



By not only supporting households but also allowing them to buy from local businesses, these remittances contribute around 40 per cent of Tajikistan’s gross national product, according to World Bank figures.



Since last year, the construction industry in Russia and Kazakstan, where most of the Tajik migrants work, the flow of money has fallen dramatically.



Central bank figures show that migrant workers sent money transfers of more than two billion dollars in the period from January to September last year. But after that, the transfers started falling away. These figures do not take into account the money migrants bring home in cash.



Saidov noted that Rahmonov’s keynote speech omitted to mention that “we used to receive 2.5 billion dollars a year from them [migrant worker] – a substantial contribution to people’s livelihoods”.



He added, “It will be very dangerous if the president continues to rely on labour migration, because the world is changing…. It’s a question of our country’s economic and political security.”



Saidov predicted that the true extent of the decline in remittances would only become apparent after the end of June, when economic figures for the first half of the year were available.



The reason, he said, was that “people are still sending back money they earned in 2008”



“If the remittances fall by 50 per cent, gross domestic product will fall by 25 per cent,” he added.



The IMF predicts that remittances will fall by 30 per cent in 2009.



TRANSLATING PLANS INTO ACTION A CHALLENGE



Aside from its hopes that tax cuts will generate more production, analysts interviewed by IWPR said the government’s anti-crisis programme largely makes sense.



There are, however, still question-marks over how quickly and effectively the plan can be implemented.



According to Saidov, much depends on how swiftly the tax cuts can be pushed through parliament.



“If the tax legislation hasn’t been approved by June or July, then Tajikistan will face major economic problems this autumn and winter,” he warned.



Member of parliament Yusuf Ahmedov noted that Rahmonov’s speech was largely given over to the economy and the creation of new jobs.



“But how is that going to be paid for?” he asked.



Rahmatullo Valiev, deputy head of the opposition Democratic Party, said transparency would be a key issue when it came to implementing the anti-crisis programme.



“What [Rahmonov] should have talked about… is how effectively the money that’s now being spent to get the country out of crisis is being used,” he said. “Bearing in mind the way officials generally behave, only a small proportion of the funding allocated to deal with the crisis will trickle down to ordinary people.”



Farzona Abdulqaisova is an IWPR-trained journalist in Dushanbe.
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