Tajikistan is in a very slow transition from a command economy to a more market-oriented economy. Difficulties abound with the disruption of established trade routes, civil unrest, natural disasters, and an absence of the traditional Soviet-era inputs that came from Moscow for over seventy years.

The collapse of the trade and payment system, the deterioration of the terms of trade, and the absence of union transfers from Moscow, which had been the main method of funding Soviet Republics during the Soviet period, have inflicted significant damage to Tajikistan's economy. The move from a command economy under the Soviet system to a more open and market-oriented economy has been an onerous task, replete with legislative, institutional, and cultural obstacles. These obstacles have been compounded by civil war and natural disasters. As a result of political instability, Tajikistan has been late in receiving the international monetary assistance and foreign investment that other former Soviet Republics have already received. On the economic front, the government of Tajikistan now appears to be ready to do the work necessary to receive international donor support and to return Tajikistan to the standard of living experienced prior to the outbreak of the civil war.

With the assistance of the IMF, Tajikistan has established a three-stage economic reform process designed to carry the country into the next century. The first stage (mid-1995/1997) focused on improvement in the legal infrastructure, reforms in the agricultural sector, privatization of small-scale enterprises, and creation of favorable conditions to attract foreign investors. The second stage (1998- 2000) presently focuses on the privatizing of large-scale enterprises, and establishing efficiently- functioning banking, credit and taxation systems. The third stage (2001+) will focus on the further modernization of the economy, the formation of an efficient infrastructure and the implementation of large scale socio-economic programs.

There appears to be a good degree of political will behind the reforms and their implementation. Progress has been slow, but steady. Partially to reward the government's implementation of some economic reforms and to encourage more, international financial organizations such as the IMF and the World Bank have begun an infusion of credit to Tajikistan which should straighten the path of economic reform. On June 15, 1999, the World bank approved three credits worth a total of $31.7 million with $20 million being used to support the privatization of farms.

Basic Strategy of Economic Reform

The basic strategy of the economic reform plan is to move the economy from a command economy to a socially-oriented, market-oriented one which provides for economic growth and the welfare of the population. The current program envisages a set of measures for deepening economic changes and for finding a way out of the crisis to promote stabilization and economic growth.

The First Stage of Economic Reform

The first stage of economic reform entails legislative reform. The following laws were adopted in 1995 and 1996 to provide a legal basis for reform:
- On Credit Insurance;
- On Money Circulation;
- On the National Budget for 1996;
- On Copyrights;
- A decree "On Support of Small Business" was also adopted instead of the Law of the Republic of Tajikistan for the Protection of Private Entrepreneurs.

Privatization

The Government of Tajikistan has outlined plans to accelerate the pace of privatization and to form a securities market in 1997. While most of the small retail enterprises have already been privatized, only 11 percent of medium and large enterprises have been privatized. In most cases the government has maintained a share of more than 40 percent of privatized enterprises. While leveraged buyout has been the preferred method of privatization, the program has reportedly been plagued by corruption.

The current share of the private sector in GDP is approximately 20-30%. Obstacles to the growth of the private sector include difficult entry and exit rules, lack of finance, limited access to business information, strict labor regulations and an incomplete legal framework.

Enterprise restructuring began in 1991 but stalled as a result of the war and political instability and has yet to gain momentum. A Law on Bankruptcy was passed in June 1992 but few companies have been forced into bankruptcy. The 1995 decree on "The Identification of Bankrupt Enterprises" represents an effort to speed up rehabilitation and restructuring of inefficient enterprises.


Agricultural reform - The goal of the government's plans for agricultural reform is to release a sufficient amount of land to individual farmers so as to reinvigorate agricultural production and generate more commercial activity. At present the agrarian sector is still controlled by large collective farms (kolkhozes) and state farms (sovkhozes). All kolkhozes will be transformed into farms which will be governed by individuals or a group of private farmers having the right of inheritance leasing, which permits the lessor to designate an heir to control the property being leased. One of the difficulties of this type of reform is choosing deserving candidates for land use and giving equitable compensation to those farmers who will be deprived of land.

The government reorganized "Glavkhlopkoprom" (a state organization called "The Main Cotton Industry" which controls all the ginning and part of the selling of cotton fiber) at the end of 1997. The organization was replaced by half a dozen firms which are intermediaries for receiving crop loans from international banks and assisting individual kolkhozes to buy inputs and sell their cotton. The intermediary firms see this as a temporary stage, with some of the kolkhozes already dealing directly with suppliers and buyers. Smaller producers and traders are already dealing directly, but such activity is impeded by the lack of effective international banking facilities.

Concerning other agricultural products, the government has started to liberalize of the marketing system by reducing the share of production being purchased by the state order and giving producers the right to sell the remainder of their products not sold to the state. This creates a more commercial atmosphere.


SELECTED INDUSTRY SECTORS

Agriculture

The agricultural sector is the major employer (45% of the work force) and the most important economic activity in Tajikistan. Agricultural production makes a significant contribution to the balance of payments. Agriculture and agribusiness have helped lead the way towards economic recovery for the country since independence. Agriculture is more mechanized in Tajikistan than in neighboring countries although the country now faces shortages of spare parts and adequate maintenance.

Although the agricultural sector is one of the most modernized in the NIS, total output has been declining sharply during the last five years. Cotton yields, for example, are suffering from a lack of fertilizers, pesticides and herbicides.

The main crop production areas lie in the irrigated valleys of the tributaries of the Amu and Syr Darya rivers. About 9.6 million hectares of land are under cultivation, mainly in the hands of state and collective farms. Cotton, which is the major cash crop accounting for about two thirds of the gross production value of the agriculture sector, takes up 35 percent of the cultivated area. There are unconfirmed reports that the government intends to permit forward sales of cotton for the first time. The state cotton procurement agency, Glavkhlopoprom, has indicated that some of the cotton should be sold from foreign shipment points like Riga, Latvia, and that letters of credit should be used rather than pre- payment terms. The introduction of forward trading would serve to boost foreign confidence in Tajik cotton.

Agriculture in Tajikistan offers virtually unlimited opportunities for investment in terms of capital, joint ventures and the transfer of know-how. This includes improved management techniques, better irrigation practices, the use of basic agricultural chemicals, and more efficient harvesting and distribution. In addition, there are many opportunities to increase the added value of products through more quality control, processing and packaging. The first loan signed by the Dushanbe office of the Central Asian-American Enterprise Fund was for a cannery on the outskirts of Dushanbe. A visit by BISNIS in May 1996 revealed an intense interest in both northern and southern Tajikistan for food processing ventures and food packaging ventures to take advantage of the country's rich agricultural output and export the products to Russia, the NIS, and surrounding countries.

Cotton Production - The 1998 cotton harvest of approximately 350,000 tons fell below 1997's 358,000 tons, due to inadequate inputs, reduced acreage and poor weather. Productivity also dropped in terms of kilograms per hectare. In 1996, a total of 95,000 tons of cotton, with an estimated value of $146 million, was exported to more than 18 countries. The state cotton procurement agency Glavkhlopkoprom was recently liquidated and some of its functions were taken over by the Ministry of Agriculture.

Mining and Minerals

Underneath Tajikistan's ever-present mountains lie a wide array of natural resources, many of which have not yet been exploited because of their geographical location or geological depth. For its size, Tajikistan is relatively blessed with silver and gold deposits. Total silver ore deposits are estimated at 60,000 tons and the largest, in Bolshoi Kanemansur, is around 38,000 tons. There are more than 30 known gold deposits, of which only a few have been prospected. Several potentially important coal deposits have been identified but have not yet been exploited. May of the mineral deposits are suitable for relatively inexpensive open-pit mining, but they are found in mountainous regions where extreme weather conditions prevail and transportation routes are difficult or non-existent.

A large antimony deposit has been discovered in the Khovland district southeast of Dushanbe. Japan has tentatively agreed to provide financing for the mine with an initial sum of $2 million earmarked for planning and feasibility studies.

Aluminum

During the Soviet era, Tajikistan was famous for its aluminum smelter. The largest enterprise in Tajikistan, the Tursunzade Aluminum Smelter (Tadaz) is in the south-west of the country. It has an overall capacity of over 520,000 tons a year, making it one of the largest in the world. However, the plant produced only 195,000 tons of aluminum in 1998, compared with 450,000 tons in 1990. The aluminum is exported to countries including the Netherlands, Finland, England, Hungary, South Korea, Turkey and Belgium. Among NIS countries, Russia and Turkmenistan are the largest importers of Tajik aluminum. An estimated 5,000 tons of aluminum was consumed domestically to produce kitchenware and other household necessities.

Tursunzade consumes nearly 40 percent of the total power output in the country, employs 12,000 workers and indirectly supports a community of 100,000. The only downstream industries at present are a cable and foil plant. Aluminum is one of the two main exports. The government is seeking foreign investment in the aluminum plant itself as well as opportunities for downstream projects. There have been instances of fighting near the plant as different factions have tried to assert control over the plant's production and lucrative exports.

The Government of Tajikistan has decided to include the plant in its privatization program. The government would retain a controlling block of shares, while the remaining assets could be purchased by foreign investors. The plant has, however, accumulated an estimated $120 million in debt to foreign creditors which is likely to make it less attractive to foreign investors.

Energy

Tajikistan is the world's third largest producer of hydroelectric power after the U.S. and Russia. Hydroelectric generation accounts for 76 percent of total energy output in the country. Energy consumption per capita is among the lowest in the NIS. An estimated 3.8 billion kWh of electricity was exported to other Central Asian countries in 1996, generating approximately $177 million in export earnings. The primary consumer was Uzbekistan, which consumed 3.4 billion kWh at a cost of nearly $170 million. Tajikistan is also an importer of electricity and in 1996 imported electricity worth $135 million, which amounted to almost 3 billion kWh, the bulk of which came from Uzbekistan.

The hydroelectric power station at Norwalk is one of the largest in Central Asia. Another major power station, a legacy of Soviet ?gigantism', is the Rogun dam which is under construction. Rogun is designed to have a capacity of 3,6000 megawatts, which would produce an average annual output of 13.3 billion kilowatt hours. The Government of Tajikistan is anxious to identify foreign financing to finish the construction of the Rogun complex to address the country's critical energy shortages that result in only a few hours a day of electricity in the winter and has shut down much of the country's industry. Upon completion, the Rogun Dam would have an estimated annual output of 13.3 billion kWh.

Tajikistan also consumes significant quantities of oil, natural gas and coal but is self-sufficient for less than 50 percent of its total energy needs. Tajikistan imported more than $64 million of oil products in 1996, of which 35 percent was supplied by Turkmenistan, with 22 percent supplied by Uzbekistan and 21 percent by Kazakhstan. Indigenous oil and gas production provides six percent of demand, the remainder coming from imports.

In the past, Tajikistan relied on Uzbekistan for its supply of natural gas but payment arrears and political difficulties have resulted in frequent shut-offs and drastically reduced supplies. The government has identified several gas fields for development and is seeking foreign investors.

TAJIKISTAN INVESTMENT AND TRADE OVERVIEW

Foreign Investment and Trade Environment: The Tajik Government welcomes foreign investment, and Tajikistan offers genuine opportunities for those willing to consider innovative forms of financing for trade and investment which usually involve significant risk. Numerous barriers to U.S. exports and trade are more a result of geography and the general economic crisis than any deliberate targeting of U.S. goods and services which are highly regarded and desired in the country. Tajikistan's geographical isolation, devastated economy and, most importantly, lack of currency, largely crimp its ability to trade effectively, even with neighboring NIS states. Great interest in U.S. products is hindered by the lack of banking transfers or cash payments with which to purchase them. Another hindrance is a business culture which emphasizes personal contacts over competitive bidding, a concept American companies are frequently slow to acknowledge. In general, legislation encourages foreign investment but contradictory decrees and an expanded tax burden make doing business in Tajikistan a labyrinthine process.

There were almost 200 registered joint ventures in Tajikistan in 1996, a minority of which are currently operational. Seventy percent of existing joint ventures are involved in production, and the remainder are mostly in trading and services. The two largest joint ventures are with British mining companies, Zarafshan and Darvoz. There is one Italian joint venture, Giavoni, with Carrera jeans which started in 1995, and one South Korean cotton processing joint venture, Koobal. There were six registered Tajik- American joint ventures and four American representative offices, Interfur and Karakum Oil Ltd. being the most active. Due to financial and bureaucratic problems, 229 joint ventures and foreign companies closed in 1996. Among these, 19 involved some level of American capital: 13 Tajik-American joint ventures, 2 American companies, and 4 Tajik-American joint ventures with British, Russian, and Ukrainian capital. At present there are only seven companies with American capital officially present in Tajikistan. Most joint ventures are located where the raw materials are found, and therefore, many are in the northern part of the country.

Investment Barriers - There are difficulties with repatriation of profits and capital, due to a lack of legislation protecting foreign profits; currency convertibility problems; and prohibition on land ownership (only leases are allowed). Foreign investors have equal access to government contracts, although the Bilateral Investment Treaty between Tajikistan and the U.S. is still in the process of negotiation.

Attracting Foreign Investment

As prescribed in the law "On Foreign Investments in the Republic of Tajikistan," foreign investors and enterprises with foreign investments are allowed to conduct business in the free economic zones, despite the fact that the law "On Free Economic Zones" has not been adopted yet.

Major efforts have been done to inform potential foreign investors of business opportunities in Tajikistan through the intermediary of the internet:

- The State Property Committee of the Republic of Tajikistan has put together a list a major investment projects as well as comprehensive information on the privatization process in Tajikistan.
http://privatization.tajikistan.com/

- The External Resources Management Division (ERMD) within the Office of the Prime Minister of the Republic of Tajikistan provides information related to economic life and business opportunities in Tajikistan.
http://www.glasnet.ru/~ermdtaj/index.htm

Best Prospects for U.S. Exports and Investment

U.S.-Tajikistan trade has been small since Tajikistan's independence. U.S. exports to Tajikistan amounted to $12 million in 1998 down from $18.5 million in 1997. U.S. imports went up from $9 million in 1997 to $33 million in 1998, $30 million being import of aluminum.

Non-Agribusiness Sectors - Mining and related equipment, medical and pharmaceutical supplies, textile machinery, telecommunications, oil/gas extraction equipment and eco-tourism.

Agribusiness and Related Sectors - Canning/food processing equipment, grain/flour, fertilizers, and farm equipment (ginning and harvesting equipment and tractors).

In the agribusiness sector excellent opportunities exist in the food processing and packaging industry, particularly for packaging of tomato paste and dried fruit, as well as bottling of juices and wine. Currently, 40-50 percent of fruits and vegetables harvested goes to waste due to the lack of preservatives and portion technology for producing smaller packaging.

In the mining sector, there are significant reserves of rare and non-ferrous metals, as well as silver and gold quarries. Western technology is needed to develop these deposits. Tajikistan has made public its desire to seek foreign partners to rapidly develop its gold deposits and is actively courting foreign mining firms. In addition, the Government of Tajikistan has made strenuous efforts to attract foreign investment to the hydroelectric energy industry, with some projects already under construction.

As part of its effort to attract foreign investment to the mining sector, a September 1995 Presidential decree created the Committee on Precious Metals and Semi-Precious Stones ("Tajikdrag- metsamotzvety"). The goal of this committee is to develop and coordinate state policy on the extraction, processing, and use of precious metals and stones. The committee is based upon a combination of the previous government structures regulating gold extraction and production and "Pamirquartzsamotzvety".

There are no quantitative restriction on imports, but there is a list of commodities which can only be imported after the Ministry of Economy and Foreign Economic Relations has examined the contract. This list includes trucks, oil and oil products, fertilizers, wheat, flour, rice, tea, sugar, and vegetable oil. There is also a list of commodities which need government permission to import, including natural gas, uranium and other radioactive substances, narcotic and psychotropic substances, weapons and other military equipment, ammunition, cipher equipment, and electric power.

Standards - Standards, testing, labeling, and certification for export goods are in accordance with the standards of the Russian Federation. Quality certificates for import goods are checked by three government agencies: the Trade Industrial Agency, the State Committee on Standards, and the State Veterinary Control. Phyto-sanitary control was recently introduced. Ecological requirements for import goods are in the process of development.

VAT and fees - All companies, regardless of ownership or forms of property are subject to the value added tax (VAT) of 20 percent. In cases where other CIS republics have higher VAT rates Tajikistan imposes a reciprocal VAT.

Intellectual Property Rights - Tajikistan joined the World Intellectual Property Organization's permanent committee in the field of industrial property protection in 1994, thereby recognizing all international conventions in this area. The departments of copyright at the Ministry of Culture and Information and the National Center for Patents and Information have been charged with the administration of intellectual property rights in the country.

Banking in Tajikistan

While banks in Tajikistan have not been rated by the major rating agencies and it is not as easy to transfer money in and out of the country as it may be in other NIS countries, there are signs that the banking sector is improving. In the past year, the National Bank of Tajikistan (NBT) has instituted measures to reform and improve the sector. These measures include raising capital requirements and signing reorganization agreements with larger banks. In addition, international technical assistance is aimed at improving the regulation of the sector and increasing working capital available from banks to businesses.

Capital Requirements
As in most NIS countries, many Tajikistani "banks" started operating with little capital. The NBT has taken an active role in closing down such banks by gradually raising the minimum capital requirements in order to establish a more sound and reliable banking system. The board of the NBT set the present minimum capital requirement for existing banks on April 17, 1998 (in its instruction No. 79). The minimum capital requirement will be raised gradually to: US$500,000 as of January 1, 1999; US$750,000 as of July 1, 1999; and US$1 million as of January 1, 2000. Banks created in 1998 have been required to meet the US$1 million statutory minimum from the time of their establishment.

The NBT declared bankrupt and closed certain banks that have failed to meet the 1998 requirements. These banks included Bahtovar, Toribank, and Ziroat. Two others, Ilhom and Rishta, were transformed into branches of Agroinvestbank. In addition, as a result of the more stringent requirements, the NBT has not been receiving any applications for banking activity licenses or the establishment of new banks.

Reorganization Agreements
The NBT signed reorganization agreements with four large commercial banks: Agroinvestbank, Tajikbankbusiness, Sberbank, and Vnesheconombank. According to the guidelines set out in the agreements, these four banks had until November 30, 1998, to increase their statutory capital, reduce expenditures, try harder to collect earlier-issued loans, pay back overdue debts and loans, and liquidate unprofitable branches.

Another important requirement of the agreements (with these banks) is the transition to International Accounting Standards (IAS). All other banks in Tajikistan have until December 31, 1998, to convert to IAS. The transition has been facilitated by the requirement, as of November 1, 1996, that all banks prepare parallel financial statements in accordance with IAS.

Correspondent Relationships and Money Transfer
Almost all Tajikistani banks have correspondent relationships with Western banks, with the three largest banks having the most relationships of this type. For instance, Orienbank has relationships with around 50 foreign banks, including one with a U.S. bank (Citibank in New York). Vnesheconombank has correspondent relationships with 35 Western banks, but no direct relationships with U.S. banks. Sberbank's corresponding relationships are limited to Russian banks.

An ordinary money transfer usually takes two to three days, while an urgent transfer can take up to one and a half days. Usually, a bank charges a commission of 0.1 percent. Vnesheconombank charges US$50 for a transfer plus a 0.1 percent commission; Orienbank's commissions range from US$40 to US$150.

Regional branches of banks usually do not perform money transfers themselves; instead they send transfer instructions to their headquarters in Dushanbe. This procedure can add one to three days to the transfer process. However, some banks have authorized their branches to make transfers themselves. Tajikbankbusiness granted such a right to its branch in Khojand.

There are no monetary amount restrictions for currency transfers by individuals or legal entities. However, the transfer must be justified: for individuals, the client must have written confirmation from the local tax authorities that the individual is a law-abiding taxpayer; for legal entities, proof of existence of a contract or another legal document is required.

Outside Assistance
Financial assistance by multilateral institutions, such as the World Bank, the International Monetary Fund, and the European Bank for Reconstruction and Development (EBRD), kicked off the reform of the banking system in Tajikistan in 1994. The EBRD has granted lines of credit totaling US$4 million to Orienbank, enabling it to lend to private sector small and medium-sized enterprises or to privatizing state-owned companies. Loans range in size from US$10,000 to US$250,000.

Choosing a Bank
Investors and depositors should exercise caution when choosing a bank in Tajikistan, especially considering that the major rating agencies have not rated any banks in Tajikistan. Currently, all banks in Tajikistan that have been issued a license by NBT to carry out banking operations and that have met and can meet the minimum capital requirements could be considered reliable. However, the existence of a correspondent account with a foreign bank should not be considered a sure sign of a bank's reliability. As a guideline, one should first consider those banks already using IAS and meeting the future US$1 million minimum capital requirement. A potential client can utilize financial statements prepared in accordance with IAS to assess the future viability of the bank considered.

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