Tajiks Stare into “Black Hole” Economy

Illegal and semi-legal business practices are so prevalent in Tajikistan that would-be investors are deterred and the state is starved of much-needed revenues, analysts say.



Most analysts would agree that a lot of dubious economic activity takes place in Tajikistan, either in semi-legal areas such as tax evasion by legitimate businesses, or wholly illegal ones involving fraud and crime.



However, opinions vary as to what exactly is meant by the “shadow economy” and what can be done about it.



Some argue that most of the blame lies with small businesses which systematically avoid paying their taxes, which weakens the government’s revenue base and thus its ability to deliver public services and build infrastructure.



Others, however, argue that the real culprits are the big fish – large companies with good political connections that regard themselves as above the law, and also organised criminals who launder money earned by trafficking Afghan heroin.



What all these activities have in common is that money is being made but the state does not benefit. The loss of tax, customs and other revenues means government is chronically short of cash to pay for essential public services.



In a speech in late October, Tajikistan’s minister of economic development and trade Ghulom Bobozada said the main area where illegal practices took place lay in small and medium businesses.



But this was disputed by a taxation service official who spoke to IWPR on condition of anonymity.



“The shadow economy encompasses all spheres, and paradoxical as it might seem, small businesses are involved least of all,” he said. “The economy goes into the shadows wherever there is a lack of proper accounting and state institutions are all-powerful, in the shape of the security and fiscal agencies – the customs and tax agencies, the prosecution service, the police and the like. These are present least of all in the area of small business.”



Even the numbers are unclear. According to minister Bobozada, the shadow economy accounts for about a quarter of all economic activity in Tajikistan.



His interpretation of the shadow economy appears to be a narrow one that focuses on tax evasion by otherwise legitimate businesses.



Economics professor Hojimahmad Umarov offers a broader reading of the problem. He says that while no one really knows, it is likely that the shadow economy has a value equivalent to Tajikistan’s total recorded gross domestic product, GDP, which the IMF put at 3.7 billion US dollars last year.



And in contrast to the minister, Umarov believes the bulk of this illicit money-making is attributable to organised crime including drug trafficking, as well as to false reporting of customs data and corruption.



A major study produced in 2007 for the United Nations Development Programme estimated that the shadow economy accounted for more than 60 per cent of GDP.



The report, by a team led by economist Jafar Olimov, also provided a working definition of the shadow economy, identifying three categories, firstly deliberate financial misreporting with the aim of avoiding taxes or other regulatory requirements.



Then there is economic activity which is often quite legal but is simply not captured by the government’s statisticians and taxmen, such as food production for one’s own use, wages paid cash in hand, and transactions in barter.



Finally, there are entirely illegal but still economically productive things like making, distributing and selling illegal goods and services – drugs, weapons, prostitution and smuggled items.



The narcotics trade is a major headache for Tajikistan. Despite the presence of Tajikistan’s border guard force along the border, heroin produced in Afghanistan continues to make its way through the country en route to Russia and other European markets. A donor-funded eradication programme has failed to curb annual rises in production in recent years, in large part because the main growing areas now have a strong Taleban presence.



Once again, no one knows how much of the proceeds from trafficking are swirling around Tajikistan. Two years ago, the then United Nations mission chief Vladimir Sotirov offered an estimate of 600 million dollars, which is equivalent to over 20 per cent of the IMF’s figure for GDP.



So far in 2008, the authorities have reported seizures totalling more than five tons of narcotics, but plenty seems to be slipping through the net.



As a spin-off from trafficking, drug use within Tajikistan has risen markedly, along with associated problems like petty crime and HIV infection through shared needle use.



Then there is corruption, a major problem in a country where obtaining public services, getting documents registered, and other interactions with state officials come with an additional fee on top, in other words a bribe to ensure that the official actually delivers.



According to Umarov, these transactions add up to a huge sum, and much of this money is then invested in the grey economy.



The losses caused by this diversion of cash are very real, according to Abdulvohid Shamolov of the Centre for Strategic Studies, which is affiliated to the Tajik president’s office.



“Corruption continues to be a bottomless pit into which resources disappear, resources which are vitally important [as state revenues] for education, healthcare and infrastructure development,” he said.



One effect of widespread tax evasion is that the state is forced to make higher demands of those organisations from which it can levy money. As a result, they too have a strong impetus to avoid shouldering their full share of the tax burden.



A former government official who now works in the private sector said nearly all companies engage in some form of evasion, principally by conducting double accounting on their wage bills.



Companies have to pay a gross wage that includes 25 per cent in welfare contributions and 13 per cent in income tax. So they simply reduce the amount they pay employees on paper, ensure the minimal tax and welfare payments are made and give them a larger net wage as cash in hand.



The former official said it was impossible to find good staff otherwise. Taking a gross wage of 500 dollars a month as an example, he said, “It’s virtually impossible to hire a qualified worker on a wage like that [after deductions], so one has to be inventive. If the official wage is put down on paper as 75 dollars, the various tax returns will come to 23 instead of 200 dollars. That system means the employee receives 477 rather than 310 dollars.”



“Business wouldn’t survive in Tajikistan without evading taxes, as they are so high,” he added.



Another businessman said that as well as lowering wages, he often avoids giving a receipt to customers so the purchase is never recorded for posterity– and they are happy, as they get a discount on what they would otherwise have paid.



As well as these small-scale but widespread dodges, economists say big business also avoids paying taxes and customs duties wherever possible.



Analysts say the existence of large grey (semi-legal) and black (illegal) economies tends to inhibit reform, as there are many powerful vested interests which are happy to keep things just as they are. It also makes for an uneven playing field which deters investors unless they are prepared to join in.



The presence of powerful men living off the proceeds of massive tax evasion or other illicit activity, and doing so with apparent impunity, undermines confidence in government, analysts say. In addition, if there is a widespread public perception that everyone else is on the make – taking bribes, engaging in shady business and not paying tax – the assumption is that anarchy prevails and one should join in oneself.



“If the trend goes too far, people start operating according to the principle that everything is permissible,” said economist Rahmon Juraev. “And that could have disastrous consequences.”



Some economists believe one way of reducing the size of the illicit, unrecorded economy is to set lower levels of tax and apply them more even-handedly.



For instance, the latest version of the tax code adopted last year provides for both value added tax, VAT – currently 20 per cent - but also a sales tax, whereas most countries have either one or the other.



Umarov believes VAT should not be more than ten or 12 per cent if people are to be encouraged to pay their taxes.



“Economic theory states, and it has been repeatedly proved true in practice, a reduction in taxation levels leads to a growth in production and a rise in the number of enterprises. In the final analysis, that will mean greater tax revenues,” he said.



When the conditions are right, he said, people will find it easier to pay their taxes than to live in fear of prosecution.



An economic expert working with an international financial institution in Tajikistan agrees that taxes should fall, but adds that other obstacles need to come down to encourage businesses to operate in the legal economy, not least the difficulty businesses have in overcoming red tape and obstructionism when engaging with the state.



“In addition, it would be desirable to lower the bureaucratic barriers, otherwise even those who want to come out of the shadows won’t be able to do so as they’ll run up against the local rules,” said the expert, who did not want to identified.



Recipes for bringing economic activity into the legal – and therefore taxable - spheres have already been tried out, in the shape of “amnesties” for declaring one’s assets and income without fear of retribution from the taxman.



The Tajik government launched a campaign to legalise concealed capital in 2003, followed in 2007 by a similar drive to register property. This second amnesty has so far uncovered hidden assets worth 650 million dollars. That is a large sum for an impoverished country like Tajikistan, and could mean a significant rise in taxes on now-legal assets.



However, the official-turned-businessman interviewed by IWPR suggested that all was not as it seemed.



The effect of both the financial and asset amnesties would be to grant legality to ill-gotten gains from activities like drug trafficking, areas where he believes “immense amounts of money are circulating”.



Almost simultaneously, he argued, small and medium enterprises have found themselves facing a squeeze as a result of last year’s fiscal changes and a new drive to increase tax revenues.



Other analysts agreed, suggesting that government policy appeared to be punishing small-time businesses with high tax demands – the very reason many of them feel justified in avoiding paying their dues in full – while letting the big players off the hook and even legalising the proceeds of crime into the bargain.



Ravshan Abdullaev is an independent journalist in Dushanbe. Lola Olimova is IWPR editor for Tajikistan.