Geopolitics

How A Broke Government Keeps Its Books Balanced

In its annual budget, Tajikistan is relying on unusual accounting maneuvers to ensure its books reflect a healthy balance. The reality is far bleaker, and international support is playing a key role in holding the country back from the economic precipice.

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Tajikistan Banking Crisis Tajikistan
Tajikistan Banking Crisis

In November, lawmakers adopted a budget for 2018 that shows the deficit as a proportion of gross domestic product, or GDP, at a healthy 0.5 percent — a figure that would be the envy of most advanced economies. Anticipated GDP for next year is 67 billion somoni ($7.4 billion).

When counting in the local currency, expenditures are seen rising to 21 billion somoni, a one-tenth increase on 2016. In dollar terms, however, the scale of that increase is far more modest, from $2.2 billion to $2.3 billion — a result of the somoni’s devaluation.

But these marginal improvements are achieved through out-of-the-ordinary measures.

On paper, tax revenue is slated to hit 14.7 billion somoni ($1.5 billion) and non-tax revenue 1.2 billion somoni (about $136 million). In reality, regular tax-collection methods are not considered up to the job of raising those sums, so the government often turns to exceptional means.

For some years, the government has dangled a compelling incentive for tax and customs services to collect revenue. If those bodies manage to ferret out any stashes of money perceived to be hidden from government scrutiny, they are entitled to retain 30 percent of the amount for their own department. To date, the biggest subjects of this approach have been the country’s beleaguered mobile telecommunications companies. In late 2016, the Tax Committee slapped fines of around $18 million apiece on Tcell, Beeline and Megafon Tajikistan for alleged tax improprieties that the companies vehemently denied.

Shokirjon Hakimov, a political analyst, said that the policy of giving officials free rein to pursue aggressive methods in raising government revenue is proving counterproductive, as it harms the business climate. Such actions also fly in the face of occasional declarations from officials about the need to grant enterprises tax moratoriums as a way of bolstering the private sector.

“Problems need to be solved not in words but in deeds. And for that you need political will and an institutional approach,” Hakimov said.

Information about sources of revenue is often provided in a tantalizingly perfunctory manner. For example, around $14.5 million is to be raised by the over-fulfillment of local government budgets. What that means is that while the national government runs up what is, in real terms, a sizable deficit, some administrations in Tajikistan’s regions are actually expected to end the year with a profit. On paper, local officials do this by raising local taxes, privatizing state assets or renting out government facilities. But there is strong anecdotal evidence that plain extortion also plays a major role in hitting targets.

Arm-twisting is nowhere near enough to keep Tajikistan solvent, however. Only a combination of foreign aid and grants enables the government to avoid having to officially record catastrophic deficits.

In 2018, Tajikistan expects to raise $45 million in foreign grants for budget support. In another section of its economic projection for the year, the government states that $22.5 million will come in the form of aid and grants to “cover the budget deficit.”

Another $364 million is expected from international financial organizations in the form of “investment projects.” Of those, $196 million will be loans and $168 million will be grants, according to the budget.

It is not stated in the Tajik budget which specific countries or organizations are to provide the money.

All told, around one-fifth of the incoming money is projected to come from foreign sources. Prior to 2007, it was not standard practice in Tajikistan to include loans on the books as revenue — a practice that many accountants would look askance at.

In any event, expectations about credit and grants have not always been fulfilled. According to a recent World Bank report, published only in Russian, the only support that Tajikistan received from international financial institutions in 2016 was a $20 million credit from the Eurasian Development Bank.

“The World Bank, the Asian Development Bank and the European Union halted payments of budget support funds to Tajikistan after targets on political reforms were missed and issues in the financial sector were not properly addressed,” the World Bank report noted.

Economist Alisher Safarov told Eurasianet.org that the potential consequences of hoped-for foreign funds not arriving could be grim in the coming year.

“Look what happened in 2015-2016. The foreign money for budget support was not given, so the order was given from above to squeeze everybody and everything. The order was to raise taxes and fines at the rate of 130 percent. The result was that the private sector, particularly foreign investors, lost interest in working here,” Safarov said.

None of this is to say that the help has dried up.

In 2017, China gave Tajikistan $230 million to build a new government and parliamentary complex in the capital, Dushanbe. Another $75 million soft loan was issued by China to fund the construction of a power transmission line in the region around the capital.

In November, despite its prior wariness, the Asian Development Bank issued a $50.9 million grant-aid cocktail in support of efforts to “expand economic opportunities, develop the private sector, and attract investments.”

Speaking to parliament in November, Finance Minister Abdusalom Korboniyon explained that under the government foreign debt program, Tajikistan intends to source a total of $850 million worth of credit in 2018-2020 — $196.5 million in 2018, $295.9 million in 2019 and $354.7 million in 2020.

This will all go to inexorably inflating the nation’s outstanding debt pile, which now stands at $2.8 billion.

Debts are being serviced, albeit slowly. Almost $123 million is being set aside for settling outstanding debts in 2018. There is no mention in the budget about what countries or entities are being prioritized for debt-servicing, but the $500-million eurobond sale successfully carried out earlier this year implies that tens of million dollars will need to go to the private investors who sunk money into those obligations.

The saving grace on the debt front is that Tajikistan’s creditors have historically offered generally forgiving terms. Interest rates vary between 0.15 percent and 3 percent and repayment periods range from 15 to 40 years.

But on a politically sensitive point, a significant chunk of the debt, $1.2 billion, is held by a single party — the state-owned Export–Import Bank of China.

The shaky state of government finances is, in the view of many experts, partly attributable to misplaced priorities. The construction of the giant Rogun hydroelectric dam is deemed essential to Tajikistan’s future and yet it is not clear how the government will be able to foot the entire $3.9 billion bill. Despite that, vast amounts of money are spent on things like new government buildings and lavish festivities to mark events like the national Flag Day holiday.

Mikhail Petrushkov, an economist, told Eurasianet that it is urgent that the government radically shift its spending model away from one based on vague aspirations toward concrete and achievable results. The construction of a new parliament complex will ultimately prove counterproductive if Rogun is not completed on time, he said.

“We have to stop funding for the vast majority of capital investments and put all our energies into building the Rogun hydropower plant and the development of the [telecommunications sector],” Petrushkov said.

Article by EurasiaNet