Interest Rates Seen as Too Blunt a Tool

The Tajik government’s focus on monetary instruments to curb inflation will not produce the desired corrections to the economy unless they are accompanied by efforts to strengthen the real sector and place the national currency on a firmer footing, according to NBCentralAsia’s economic experts.



Effective from February 23, the National Bank of Tajikistan increased its refinancing rate – the headline rate at which it lends to commercial banks - from 12 to 13 per cent. It was the fourth such increase in just six months.



The interest rate hikes are an attempt to curb inflation by making it more expensive for commercial banks to borrow from the central bank; they will pass the higher cost of borrowing onto their customers, and the idea is that the latter are then discouraged from taking out loans. Overall, the total amount of money in circulation should fall.



These measures are the central bank’s response to concerns over inflation, which in 2006 hit a year-on-year rate of 12.5 per cent instead of the seven per cent that had initially been predicted.



NBCentralAsia experts note that the authorities are trying to tackle inflation through ever tighter monetary policies. But they warn that one side-effect of hiking up interest rates will be to cut into demand for the national currency, the somoni, whose exchange rate is not buoyed up by a strong and vibrant economy. If the somoni loses significant value against the US dollar, it will quickly become less desirable and people will opt to hold their money in foreign currencies instead.



NBCentralAsia economic expert Hojimuhammad Umarov warns that the somoni’s value will plummet in the next six months, to the point where the state itself becomes insolvent. The two causes are, he says, the underlying slump in industrial production, curbed with what he sees as futile attempts to curb inflation.



“The somoni could fall dramatically over the course of several hours, with grave implications for Tajikistan’s economy. To prevent that from happening, manufacturing should grow, giving the currency real backing,” he said.



Other experts agree there is a risk that the somoni will take a nose-dive, and point to yet another contributory factor – the imminent deadline for Tajikistan to start repaying the capital on its sovereign debt, due in late 2008 and early 2009.



One NBCentralAsia economist says that while Tajikistan continues to take out more and more loans, it risks defaulting on its debt in 2009.



However, not all the experts are so pessimistic. Munim Hasanov, head of the department for economic and financial management at the Institute for the Advanced Training of Tajik State Officials is more sanguine about the debt situation, saying, “The peak time for paying off debts comes in 2008 and 2009 and it will mean difficult times for the country.



“Yes, the republic will have to repay large sums of debt, but this won’t lead to the collapse of its economy. The country will make it through.”



(News Briefing Central Asia draws comment and analysis from a broad range of political observers across the region.)