After IMF whistleblowers revealed last year that Tajikistan misreported the state of its currency reserves and was forced to repay close to US$47mn in IMF money, the country has been eager to improve its levels of transparency, and increase cooperation with multilaterals. Philip de Leon reports.

Following the IMF’s public revelation early last year that the National Bank of Tajikistan (NBT) and the finance ministry had been misreporting the state of its currency reserves, and hiding the disappearance of millions-worth of foreign loans, the country is in acute need of radically reforming its legal and business infrastructure.

According to corruption monitor, Transparency International, Tajikistan ranks 151 out of 180 in its 2008 Corruption Perceptions Index (Somalia is in at 180 as the most corrupt nation).

Steps to remedy the reputation of Tajikistan are now beginning to be taken. In July 2009, the government of Tajikistan approved a programme called ‘Improvement of Business Environment – 200 Days of Reforms’ to be implemented between June 1 and December 18, 2009.

The programme aims at promoting administrative and regulatory reforms to facilitate the development of entrepreneurship. The programme will include the simplification of inefficient administrative procedures, the protection of entrepreneurs’ rights and the development of business infrastructure.

Commenting on the corruption investigations, Luc Moers, the IMF resident representative in Tajikistan, remarks: “The authorities have already taken important steps to address these problems, such as passing legal amendments to strengthen governance at the NBT and is seeking to prevent future conflicts of interest; conducting an external audit of the NBT’s net international reserves position as of end-2008; and appointing an external auditor for its financial statements for this fiscal year.”

The external audit, conducted by Ernst & Young, was made public on the NBT website in April.

For Abdujabbor Shirinov, ambassador of Tajikistan to the US, a significant event of the past few years was the creation of an advisory council for the “improvement of the investment climate under the president of Tajikistan, which is to provide for an effective dialogue and co-operation between the government and business circles”.

The council consists of business professionals and representatives of business associations that meet twice a year with the president’s participation.

The country has also raised its geopolitical visibility with President Emomali Rahmon hosting the Shanghai Cooperation Organisation summit in August 2008, which focused on security, economic and cultural co-operation.

Following this, in July 2009, Presidents Medvedev of Russia, Karzai of Afghanistan and Zardari of Pakistan all signed a joint declaration on combating terrorism and extremism.
Given its geographical location, Tajikistan has the potential to become an important regional player by supporting international efforts to stabilise Afghanistan and Pakistan and foster durable regional stability and security.

The country is also emerging as an alternate transit route, not only for commodities and goods, but also for energy, hence domestic and international efforts to upgrade transportation and hydropower infrastructures.

Tajikistan has seen the arrival of new investors from China and the US as well as Iran and India.

Russia’s reluctance to offer economic assistance has opened the door to Chinese companies: in June 2009, four deals were signed with China whereby Chinese companies will invest over US$1bn in the next two years to build a hydropower plant, a coal-fired power plant, power transmission grids and roads in Tajikistan. China will overtake Russia as number one investor in Tajikistan in 2009 and bilateral trade between China and Tajikistan is expected to rise from US$524mn in 2007 to US$1.5bn in December 2009.

For Temur Rakhimov, executive director at the American Chamber of Commerce in Tajikistan, “the creation of AmCham Tajikistan in 2009 could be seen as a ‘green light’ for foreign investors.

“At least they know that there is an organisation that can help them to set up, and provide truthful and objective information about investment climate and other issues.”

Traditional sectors
Cotton, hydropower and aluminium are the traditional industries in Tajikistan. However, investor appetite in these core industries, partially decrepit hangovers from the Soviet era, may well have been dampened by their involvement in the IMF investigations into misappropriated funds.

At the break-up of the Soviet Union, Tajikistan inherited TadAZ – renamed Talco in 2007 – one of the largest aluminium smelters in the world with a production capacity of over 500,000 tonnes. Despite the fact that Tajikistan produces no alumina.

Talco is the single largest revenue generating company in the country, the largest exporter and the largest consumer of electricity. A total of 40% of the electricity generated by state-owned company Barki Tojik goes to Talco.

Efforts are now under way to ensure greater transparency and better corporate governance at both Barki Tojik and Talco. IMF’s Moers comments: “Tendering for independent audits of Barki Tojik and Talco was one of the conditions of an IMF staff monitored programme (SMP), which was meant to rebuild the authorities’ credibility after a serious episode of misreporting to the IMF. Both tenders were completed in accordance with the SMP, and, in the meantime, the audit of Barki Tojik has been completed. The audit of Talco is planned to start soon.”

Somon Capital, the first domestic investment bank working in Tajikistan, is keen to capitalise on the fundamental strength of the country’s aluminium industry, and, according to its CEO Jamshed Rahmonberdiev, to “help unlock the potential of Tajikistan”.

He has identified potential projects such as one to, “provide a local aluminium smelter with locally produced alumina.

“This is a multi-billion dollar project, which will substantially impact the mining, chemical and construction sectors of Tajikistan. To perform scoping study for this project we worked with world known engineering consulting firm Hatch. Preliminary results are very encouraging.”

Post-Soviet Union break-up, Tajikistan was also left with a poorly managed cotton sector with an estimated debt of over US$500mn in 2008. With the cotton industry representing over 75% of rural employment and cotton exports representing 8% of GDP or 15% of all exports, the stakes are high to keep the cotton industry going regardless of its poor yield and unprofitability.

The World Bank also considers Tajikistan to have one of the largest hydropower potentials in the world. Tajikistan has the potential to produce more than 300 billion kilowatt-hours of electricity per year, but currently only produces 16.5 billion kilowatt-hours, which is far from the country’s estimated 24 billion kilowatt-hours need. Tajikistan experiences severe energy shortages with crippling effects on its food processing, textiles and construction materials industries.

Reliable banking counterparties?
Beyond the traditional sectors, mired by debt and controversy, there are new areas of development with the potential of attracting foreign investment.

The financial and banking sectors in Tajikistan are in their infancy. As of April 1, 2009 there were 12 banks in Tajikistan: one state bank, eight joint stock banks and three foreign banks.

A number of these banks are being assisted by the European Bank for Reconstruction and Development (EBRD). Agroinvestbank, Tojik Sodirot Bank and Eskhata Bank are part of the EBRD’s Tajik Agricultural Finance Framework (TAFF), which facilitates on-lending for crop finance for small and medium farms.

Agroinvestbank – in which the EBRD acquired a stake of 25% + 1 share in August 2009 – is a regular participant in the EBRD’s trade finance facilitation programme, whereby the EBRD helps Tajik banks do trade finance with international banks, by guaranteeing some of the risk.

Other Tajik banks are also working towards gaining international respectability and visibility. For instance, Orienbank is inviting auditing companies to bid from September 1 to October 1 to do its audit for 2009.

International financial institutions (IFIs) such as the Asia Development Bank (ADB) also provide direct support to local and foreign banks in aid of trade transactions. Makoto Ojiro, country director for Tajikistan at the ADB says: “ADB has an ongoing trade finance facilitation programme for nine countries in Asia, including Tajikistan, up to 2013 with an overall exposure limit of US$1bn.

“It comprises (i) a credit guarantee facility under which ADB issues guarantees to participating international and regional banks to guarantee payment obligations issued by approved local banks; and (ii) a revolving credit facility under which ADB provides trade-related loans to local banks in support of local companies’ export and import activities.”

Paul Hamlin is general director of Finca MDO Tajikistan, the Tajik arm of Finca International, an organisation that provides microfinance to the very poorest and post-conflict countries. He observes that “anytime clients conduct more of their financial transactions through the formal financial sector, they are helping to build the size and strength of the financial sector, which in turn benefits the entire economy”.


The EBRD estimates that there are over 500,000 micro and small enterprises, whose growth is severely hampered by the lack of access to credit. As a result, the microfinance sector has been growing at high-speed, the number of borrowers tripling in the last two years.

Efforts are made to attract workers’ remittances so that they can be re-injected into the economy and support poverty reduction efforts. According to the IMF, in 2008 workers’ remittances inflows amounted to US$2.4bn or 47% of GDP, coming mainly from Russia.

In the summer of 2009, the launch of a new microfinance bank, planned for the end of the year, was announced: AccessBank Tajikistan.

With a total capital of US$11mn and 50.5% held by Access Microfinance Holding, 18% EBRD, 18% IFC and 13.5% Kreditanstalt fuer Wiederaufbau (KfW), AccessBank Tajikistan plans to expand access to finance for micro, small and medium enterprises in the country.

Asked about the appeal of Tajikistan, the future CEO Christoph Ziegler says: “Tajikistan is financially totally underserved and local banks and other financial institutions do not have the capacity to meet the demand for financial services, hence the proposal to interested co-investors to set up an AccessBank in Tajikistan.”

He adds that “even though the country has in itself much smaller growth potential than other post-Soviet countries that sit on large oil or gas reserves and though the market in Tajikistan is one of the smallest in Central Asia it is a commercially viable investment and additionally a strategic investment in the region”.

Of course, there are some operating challenges such as the absence of credit bureaus and of a securities market. When asked about reimbursement of loans, Ziegler says: “The main mechanism to ensure reimbursement is prudency in the loan assessment, tailoring loan conditions in a way that avoids over-indebting the clients, a system of rewards and penalties to induce compliance with contracts and tight enforcement to the last penny.

“Loan assessment is based not on written, formal or official documentation but on information retrieved from direct interviews with businesses and related parties using commonsense, psychological and some scientific cross-checking to verify data.”

Interestingly, the telecommunications sector in Tajikistan has shown a rare dynamism – especially in mobile telephony – with large foreign operators capturing market shares.

In 2007, TeliaSonera, a major Scandinavian player in mobile telecommunications acquired two of Tajikistan’s main mobile operators: Indigo and Somoncom. For Martti Yrjö-Koskinen, senior vice-president for TeliaSonera Eurasia: “The share of telecommunications as a percentage of GDP is still low and represents an opportunity. So does the less developed fixed-line infrastructure, as it leaves room for high mobile services demand.”

According to AmCham Tajikistan’s Rakhimov, “the government supported this sector a lot in its initial stages of development”.

Bahriddin Najmudinov, general director of Indigo Tajikistan confirms that, “the government selected the right course of liberalisation and the outcome is obvious today.

“The telecom industry is one of the most developed; almost 95% of populated and 47% of geographical areas are covered by 2G GSM networks, and 3G UMTS is developing very fast. Fair competition forced companies to offer better prices and by the end of the year 2009 penetration in the mobile sector should reach 63%.”

The infrastructure needs of Tajikistan are immense. ADB’s Ojiro comments: “I would like to see foreign private companies participate one way or the other in our infrastructure projects in transport and energy.

“One possibility is to operate and maintain the Dushanbe-Kyrgyz border road project (350km) by contract with the government once the rehabilitation works have been completed (planned for 2013).”

“For our infrastructure projects, we always encourage foreign contractors and consultants to participate in the bidding under international competitive bidding. For example, the big one coming up soon for bidding is the Nurek 500kv Switchgear Reconstruction Project (hydropower) approved by ADB in November last year. We will need a reputable international company who can handle a turnkey contract for this work.”

He further elaborates on co-financing options: “We are carrying out a feasibility study for a proposed Dushanbe-Tursunzade (Uzbek border) road project (about 66km), which will need cofinancing, given the limited ADB financing. There will also be an energy project coming up soon that would include a transmission line, substation, etc.”

Tajikistan has been underserved by the hospitality and air travel industries. In March 2009 The Hyatt Regency Dushanbe was the first international brand hotel to open in Dushanbe. The US$165mn hotel project was fully auto financed by Oleg Deripaska’s Basic Element, which is his biggest hospitality project outside Russia. Mathieu Greppo, general manager of the Hyatt Regency Dushanbe underlines that “there was no loan taken by the investor, which of course put us on a very comfortable position towards the future upcoming competition scheduled late 2010 with Serena Hotel and Kempinski”.

Oil and gas
In August 2009, Tethys Petroleum started the appraisal of drilling operations on the Komsolmolsk field, which could contain up to 2.12 billion cubic metres of natural gas.
Existing pipeline infrastructure could enable gas deliveries before the end of the year or early next year. Foreign companies play an important educative role in bringing local authorities up to speed on international business practices.

David Robson, president and CEO of Tethys confirms, “Tethys played an important role in presenting the advantages to the Tajikistan government of internationally accepted legislation to attract capital investment to the oil and gas industry in Tajikistan. This resulted in production sharing being adopted into law and allowed negotiations to be concluded on the first ever production sharing contract in Tajikistan, which Tethys signed for the 35,000 square kilometre Bohktar area in south west Tajikistan.”

Robson further adds: “Introducing a completely new approach to taxation through this mechanism had its challenges, but the Tajikistan government proved to be open to change for the benefit of accelerating the development of their oil and gas resources.”

Logistical issues
Logistics remain a significant challenge that can impact operations. Greppo at the new Hyatt Regency in Dunshanbe says, “As there is no major industry in Tajikistan, 95% of all the materials have been imported through Turkey, Germany, Italy, China.

“Logistics have been playing a key role in the opening of the hotel and due to the harsh 2007-2008 winter, many items have been delayed and ultimately we ended up opening eight months behind the original schedule.”

For Tethys’ Robson: “Logistics and supply chain planning leaves no room for error in an area where equipment has to be imported in.”

Persuading foreign investors
The foreign private sector could play an instrumental role in helping integrate Tajikistan into the global economy.

Moers suggests: “It could help first and foremost by stipulating very clearly what the Tajik authorities need to do to create a level playing field (I am clearly not talking about special favours) conducive to attracting more (private) foreign direct investment, and assist, where possible, in its implementation. Business experiences from other developing countries where they have been successful could serve as useful examples.”

For the financial sector, Finca’s Hamlin says: “My recommendation to foreign financial institutions is to engage in partnerships with counterparts in Tajikistan to strengthen their capacities and balance sheets.

“There are many profitable and well-run institutions that need foreign capital and technical expertise and these could provide good opportunities for entering the market.”

For Wendy Werner, country officer for the IMF in Tajikistan, “the financial sector has good potential for foreign investors, but also the mining sector, agro-processing sector, food processing, energy generation and manufacturing”.

ADB’s Ojiro tells GTR that, “the ADB together with the Islamic Development Bank (IsDB) recently approved establishing a US$500mn private equity fund, called the Islamic Infrastructure Fund.

“We are currently seeking third-party investors to contribute to this in addition to ADB (US$100mn) and IDB (US$150mn). This fund will make shariah-compliant equity investment in infrastructure projects (like power, roads, water, telecoms, etc) in the common member countries of ADB and IDB, including Tajikistan.”

The Aga Khan Development Network (AKDN), which has been active in Tajikistan since 1992, gave a statement saying it looks forward “to exploring investments with current or other partners in the development of the social and private sectors in Tajikistan and the region”.

It continued: “These include development of the hydro-power potential, support to the government in its efforts to implement health reforms, develop the aviation sector to improve air connectivity in the region and, support cross-border initiatives including infrastructure to help enhance regional cooperation.”

Yet, with a dramatic fall in remittance inflows, a weaker demand for aluminium and cotton, which are a major source of foreign revenues, and frequent natural disasters, 2009 and 2010 will continue to be tough years for Tajikistan.

Effective and far-reaching reform will become even more essential to build confidence, and improve the country’s risk profile in the eyes of foreign investors, banks and companies.