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2012 Investment Climate Statement - Tajikistan


2012 Investment Climate Statement
Bureau of Economic and Business Affairs
June 2012
Report
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Tajikistan presents selected opportunities for investors who are willing to put significant research and effort into market development and who have local experience or contacts to help navigate the maze of bureaucracy and corruption. The poorest of the former Soviet republics, Tajikistan lags economically behind its neighbors. The Tajik government relies largely on foreign state-led investment and loans from China, Russia, Kazakhstan, and Iran, as well as assistance from international financial institutions, for major infrastructure projects. The government has shown interest in broader foreign investment, but has a poor record implementing the reforms necessary to attract investors from abroad. Some improvements have been made, including limited reforms in business legislation that increased Tajikistan’s ranking in the World Bank’s “Doing Business” index for 2011. But in other areas, the government’s policies have dramatically worsened the investment climate, for instance through the coercive campaign to force businesses to contribute to the construction of the Roghun dam and projects celebrating 20 years of Tajik independence. Tajikistan’s tax code remains byzantine, its legislation is confusing, and, more than anything else, its officials remain mired in a culture of corruption. Until Tajikistan successfully tackles such basic problems, it will not attract significant growth in foreign direct investment (FDI).

Openness to, and Restrictions Upon, Foreign Investment

Tajikistan mostly courts state-led investment and external loans from the country’s perceived geopolitical friends rather than making conditions favorable to private investors from abroad. Through non-transparent practices and barriers to competition, the government burdens the private sector with unnecessary costs and creates substantial uncertainty and risk. Accordingly, the principal investors in recent years have been governments with geopolitical interests in the region, especially China, Russia, and Iran. The United Kingdom was another active investor in 2011 with $27.7 million in FDI (Source: State Statistical Agency of Tajikistan). As the world financial crisis eased, non-state FDI (which may also include loans and credits) from China, Russia, and Iran has declined from $124.7 million in the first nine months of 2010 to $41 million in the first nine months of 2011. FDI from other countries totaled $44 million during the same period, based on State Statistics Agency of Tajikistan figures. The National Bank of Tajikistan estimates total FDI in Tajikistan for the first half of 2011 was $11.3 million, or 0.5% of GDP.

President Rahmon has made many public and private statements calling for increased foreign investment, particularly in hydropower. At the same time, the government promised to finance its largest hydropower project, Roghun, using only domestic financing. With improvements in the investment climate, opportunities exist in energy, telecommunications, construction, food processing, textiles, consumer goods, healthcare, natural resource extraction (mining), and tourism.

According to the Civil Code (Article 1) there is no legal discrimination against foreign companies and entities. Practically all of Tajikistan’s international agreements have a provision for most-favored-nation status. According to the 2007 Investment Law, foreign investments can be made by:

  • Owning a share in existing companies, jointly either with other Tajik companies or Tajik citizens;
  • Creating fully foreign-owned companies under the laws of Tajikistan;
  • Acquiring assets, including shares and other securities;
  • Acquiring the right for use of land and other mineral resources, as well as exercising other property rights either independently or shared with other Tajik companies and citizens of Tajikistan; or
  • Concluding agreements with legal entities and citizens of Tajikistan providing for other forms of foreign investment activity.

In principle, the judicial system recognizes sanctity of contracts; in practice, contract enforcement is poor, due in part to inadequate legal awareness. In addition to questions of competence, the judicial system suffers from a lack of independence, and government officials have in several notable cases leaned on judges to produce “correct” outcomes in business disputes. Though Tajikistan is party to a number of arbitration agreements and conventions, it does not have its own internationally recognized arbitration system. The courts do not always respect or uphold international arbitration rulings.

Tajikistan has made a number of changes that have improved its World Bank “Doing Business” rankings from 152 in 2011 to 147 in 2012 (out of 183 countries). The most significant reform was the inauguration in July 2009 of a “single-window” business registration system, which applies to both foreign and domestic applicants, and reduces red tape associated with opening a business. Applicants now pay a fixed fee at the Tax Committee and are supposed to receive permission to begin operating within five working days. Last year a few other targeted reforms were enacted, including a law improving the rights of minority shareholders. Given Tajikistan’s paucity of corporations, with or without minority shareholders, this law has limited scope in practice.

In other areas improvement has been slow or conditions have deteriorated. Beginning in December 2009, the government began forcing individuals and enterprises across the country to make “voluntary” contributions to Roghun. Those refusing to pay faced threats including loss of income or jobs. The most vulnerable were individuals who relied directly on the government for their salaries or livelihoods, including doctors, teachers, and pensioners. Many individuals were told to contribute amounts far in excess of their monthly wages to retain their jobs. Others were issued Roghun stock certificates in lieu of their salaries with no say in the matter. There is no secondary market for Roghun shares, and their value remains uncertain. Foreigners were officially barred from purchasing shares, although in practice government officials sometimes attempted to cajole foreigners or foreign-owned firms into doing so. The government backed off the Roghun campaign in 2010 as a result of pressure from the International Monetary Fund and other donor organizations, but there was a similar, albeit smaller-scale, campaign to raise money for construction of a series of buildings, parks and monuments celebrating the 20th anniversary of Tajikistan's independence. Most of the collected money was not spent on Roghun, but deposited in commercial banks following the IMF's recommendations.

Tajikistan’s State Committee on Investments and State Property, created in 2006 to assist investors, has done little to fulfill its mission. There are no established criteria for screening investment proposals, and potential investors go through a lengthy review process by all (potentially) concerned government agencies, rather than working with a single investment promotion agency. The government has privatized most small and medium enterprises, but the largest concerns remain in state hands. Although there are no limits on foreign participation, in many circumstances non-transparent decisions are made that favor investors with connections to the existing power structure. Some of the largest enterprises, in Tajikistan’s transportation, infrastructure, and electricity distribution and maintenance sectors, will remain government-owned for the foreseeable future.

There is no legally sanctioned discrimination against foreign investors at the time of an initial investment or after the investment is made. Current investment laws and the tax code provide for incentives, including a waiver on taxation on initial investment and VAT-free importation of some industrial equipment. Companies may have a difficult time realizing these benefits due to poor implementation of tax regulations and/or corrupt tax authorities. The onus of proving that an investment qualifies for the benefits is on the investor, and Tajik authorities are often skeptical. The government also attempts to increase revenue by taxing profitable companies more aggressively. For example, the Government introduced a 3% tax on cell phone and internet services. Not surprisingly, the communications sector is one of the few bright spots in the Tajik economy. The fact that the tax burden is placed on companies that have a greater degree of compliance with regulations results in distorted competition. To avoid predatory behavior by the ruling elite, some foreign investors find it easier – some say necessary – to establish joint ventures with well-connected officials, including the President’s extended family.

According to some sources, even well-meaning companies inevitably violate some tax legislation, since internal contradictions and draconian rules make it impossible to abide by all existing requirements. This plays into the hands of corrupt regulators, who can very easily find evidence of violations for which they then demand bribes to ignore. A moratorium on business inspections ended in mid-2010, but was reinstated October 1, 2011, for a three-year period with the stated hope of increasing foreign investment.

Although the Tajik economy has grown rapidly since 2000, many economic indicators remain below the benchmarks of 1991, when Tajikistan became independent. Tajikistan’s GDP grew by an estimated 6% in 2011 to $6.54 billion (Source: IMF). The informal economy is substantial; according to some estimates, it may be as high as $2 billion, over one-third the size of official GDP. Tajikistan’s banking sector is relatively undeveloped, and businesses tend to raise capital through other means, including selling assets and borrowing from other companies or individuals.

The government does not impose geographic restrictions on business operations, but topography (93% of the country is mountainous), poor infrastructure, and a lack of reliable electricity pose their own restrictions. Roads in Dushanbe and Khujand are poor even by Central Asian standards, and roads outside of major towns are often unpaved and poorly maintained. A few major routes, such as those between Dushanbe and Khujand, Dushanbe and Gharm, and Dushanbe and the Afghan border, are being renovated with foreign financing. Weather also impacts commerce; overland travel to parts of the country (e.g., the Gorno-Badakhshan Autonomous Oblast) is difficult if not impossible in the winter and spring. Electricity production is well short of demand, especially in the winter. For three to six months of the year, most parts of the country outside of Dushanbe receive only a few hours of power each day. Overland import/export requires patience and ingenuity as customs agents at borders and internal checkpoints frequently seek bribes to allow passage.

Tajikistan’s rankings on a few selected indices are as follows:

Index

Score (max)

Ranking (out of)

Year

Transparency International Corruption Perceptions Index

2.3 (10)

152 (182)

2011

Heritage Foundation Index of Economic Freedom

53.5 (100)

128 (179)

2011

World Bank Doing Business Ranking

n/a

147 (183)

2012

Tajikistan’s rankings on selected Millennium Challenge Corporation (MCC) Indices for fiscal year 2011 are as follows:

MCC Index

Score

Percentile

Government Effectiveness

-0.20

32%

Rule of Law

-0.29

29%

Control of Corruption

-0.34

32%

Fiscal Policy

-5.8

12%

Trade Policy

82.5

97%

Regulatory Quality

-0.39

31%

Business Start-Up

0.956

66%

Land Rights and Access

0.538

29%

Natural Resource Management

72.13

76%


Conversion and Transfer Policies

Tajikistan does not restrict conversion or transfer of “reasonable sums” of money. There are no legal limits on the kinds of transfers – i.e., whether commercial or otherwise. However, an underdeveloped banking infrastructure, with strict government controls and limited capital, presents obstacles for investors in finding local sources of financing. Although legal, it is often difficult in practice to conduct large currency transactions due to the limited amount of foreign currency available in the domestic financial market. Investors are free to import currency. The minimum regulatory capital for existing commercials banks is $6 million and $10 million for newly opening banks. All banking institutions (15 commercial banks, including five branches of foreign banks, and state-owned Amonat Bank) meet this requirement. Thirteen out of 15 banks in Tajikistan have a foreign stake in their authorized capital.

Expropriation and Compensation

The Law on Investments details the types of actions that can be taken with regard to expropriation of property. There have been no known cases where foreign commercial entities have had their property seized, but there have been several recent cases of potential or actual state expropriation of other privately owned property under dubious circumstances. Though the Law states that investors are to be reimbursed for expropriated property, actual compensation may be minimal. Predatory behavior by officials – e.g., during the Roghun campaign described above – has bordered on a “creeping expropriation” in which business assets are taken without effective due process. Businesses in all sectors risk this kind of activity on an ad hoc basis.

Dispute Settlement

In official pronouncements, the Tajik government values the rule of law; in practice it has not demonstrated a clear understanding of its importance to investors. The international community, including the United States, has encouraged Tajikistan to improve its legal system with mixed results. Well-written laws have been passed, but implementation and consistent interpretation lag behind. Few people, especially small business owners, are aware of their rights and responsibilities. Tajikistan’s weak judiciary is ill-equipped to defend the interests of investors. As a general rule, disputes are solved by appealing to government officials who are as highly placed as possible. The victor is frequently the party whose contact is more powerful.

Tajikistan has well-written commercial and bankruptcy laws. There are no differences between foreign and domestic investors according to Tajikistan’s bankruptcy law. The country’s contract law is modeled on European legislation. These laws are regulated under the country’s Civil Code, but they are not always enforced in the courts.

Tajikistan has no formal policy for accepting results of international arbitration, although the business community has advocated such a policy. It has signed bilateral agreements with several countries on arbitration and investment disputes, but these agreements are not always enforced or recognized. Tajikistan does not have a bilateral investment agreement with the United States. Domestic courts accept judgments of foreign courts on a case-by-case basis.

In 1993, Tajikistan became a member of the International Association on Investment Guarantees as well as the International Center for the Settlement of Investment Disputes (Washington Convention). Tajikistan is not a party to the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards.

Performance Requirements/Incentives

Current legislation provides the same tax and customs incentives to local and foreign investors. In practice companies with close connections to the government get preferential treatment. The government does not formally impose performance requirements as a condition for establishing, maintaining, or expanding investment. Though there is no requirement to "buy locally," it is encouraged. Operating from a Soviet-era legal code (and mentality) that views anything beneath the land’s surface as a potential state secret, the government has been reluctant to offer mining concessions to foreign companies. An effort to revise the legislation is underway, and the government has made some effort to attract foreign mining projects, but generally only on the condition that the State is given a controlling interest. The government has also established two Free Economic Zones that provide reduced taxes and customs fees.

Right to Private Ownership and Establishment

The government wants to encourage business development, but faces major obstacles, including its own poor management and corrupt practices. In principle, private entities may establish and own businesses and engage in almost all forms of remunerative activity. Foreign entities may establish, acquire, and dispose of interests in business enterprises. In practice the old Soviet mentality still prevails. Government inspectors often operate on the principle that activities are not permitted unless they are expressly allowed (or unless the inspector is remunerated for adopting a more flexible interpretation), and since laws are neither published nor uniformly applied and interpreted, businesspeople often find Tajikistan frustrating.

There are other unofficial barriers. In some cases, the existence of informal networks of clan-based, interrelated suppliers force would-be investors to "buy in" to the system, hindering competition and sometimes constraining new investors from fully participating.

Protection of Property Rights

Undeveloped legal avenues for dispute resolution create a weak environment for property rights protection in Tajikistan.

According to Tajik law all land belongs to the state; individuals or entities may be granted first- or second-tier land use rights. First-tier rights allow for indefinite land use over 99-year periods and inheritance of land use rights, while second-tier rights allow for land use up to 49 years. Though there is no formal distinction between domestic and foreign entities, in practice foreigners are given second-tier land-use rights. There are no legal limitations on foreign ownership or control of other property, but there are significant restrictions on using land-use rights as collateral. Efforts have been underway for several years to develop a new land code that provides for the sale and exchange of land use rights, but the issue has not yet been resolved. The government adopted mortgage legislation in December 2007 which allows parties to use property as collateral. In practice, land use continues as before because no legal mechanisms or procedures were developed to implement these new laws.

When secured interests in property do exist, enforcement remains an issue. Investors should be aware that establishing title may be a more involved process than in western countries since ownership is often unclear. Ownership of rural land can be particularly opaque, since many nominally “privatized” former collective farms continue to operate as a single entity. Many of the new “owners” do not in fact know where their land is and do not exercise property rights as such. A system to record, protect, and facilitate acquisition and disposition of property exists but needs improvement. The legal system is not adept at quickly and efficiently settling disputes.

Tajikistan is party to a number of conventions honoring intellectual property rights, but enforcement of such rights remains a low priority for the country. Tajikistan is a signatory to the WIPO Convention, but has not signed nine out of 24 of the WIPO treaties, including the Patent Law Treaty and the Hague Agreement.

Transparency of the Regulatory System

Cronyism, nepotism, and corruption create a business environment that favors those with connections to government officials. Tajikistan's regulatory system lacks transparency and poses a serious impediment to business operations. Regulators and officials often apply laws arbitrarily and are unable or unwilling to make decisions without a supervisor’s permission, leading to lengthy delays. Executive documents -- i.e., presidential decrees, laws, government orders, instructions, ministerial memos, and regulations -- are often inaccessible, leaving businesses and investors in the dark about rules. Each ministry has its own set of normative acts that are not published and may contradict law or the normative acts of other ministries.

Tajikistan’s legislation provides for 18 different types of national taxes and three local taxes and numerous ways to calculate them. Not only are the regulations complicated, but the inconsistency with which they are applied impedes the development of small and medium enterprises. The President announced in April 2011 that Tajikistan needed a more simplified tax system and ordered a new tax code to be legislated by June 2012 and put into force by January 2013. It is still too early to tell if the tax code revisions will be a positive development for the private sector.

An inspections law signed in 2006 and promoted extensively by the International Finance Corporation has reduced the practice of government agencies shaking down enterprises for bribes, but reports of such incidents are still widespread. President Rahmon reinstated a three-year moratorium on business inspections on October 1, 2011, with the hope of improving this situation. Tajikistan is working towards international accounting standards, but these are not yet implemented.

Tajikstandart, the government agency responsible for certifying goods and services, calibrating and accrediting testing laboratories, and supervising compliance with state standards lacks experts and appropriate equipment. It nevertheless has the mandate to inspect and approve even the most technologically complicated imports. Tajikstandart does not publish its fees for licenses and certificates or its regulatory requirements. As a result, businesses are vulnerable to individual inspectors’ whims. So far no concrete steps have been taken to create proposed “one-stop shops” for certifying businesses in various categories.

The government has made a number of efforts to promote business reforms, but such efforts generally have been more rhetorical than substantive. As long as government inspectors treat their positions as a license for rent-seeking – and as long as the government tolerates it – Tajikistan will remain a difficult place for investors.

Efficient Capital Markets and Portfolio Investment

Tajikistan’s nascent banking sector faces numerous challenges: insufficient capital, limited banking services, mistrust, and fallout from earlier banking system crises. The national currency, the somoni, was introduced in October 2000.

The total value of authorized capital of all commercial banks in Tajikistan as of September 2011 was 1,3 billion somoni (approximately $287.6 million). Banking sector assets total 7.7 billion somoni (approximately $1.6 billion). As of December 2011, there were 15 banks, two non-banking financial organizations and 122 microfinance organizations in Tajikistan, as well as the National Bank of Tajikistan. Nine banks are joint stock companies, one is state-owned, and five are branches of foreign banks: Tijorat (Iran); KazCommerceBank (Kazakhstan); First Micro Finance Bank of Tajikistan, owned jointly by the Aga Khan Fund for Economic Development and the International Finance Corporation (IFC); and AccessBank Tajikistan, a development bank owned jointly by the IFC, the European Bank for Reconstruction and Development, and the German development Bank KfW and investment bank “Kont.”

The majority of Tajikistan’s cash and capital is from remittances from Tajiks working abroad. The ratio of remittances to GDP, estimated at 35% over the first nine months of 2011, is the highest in the world. During this period, up to a million Tajiks worked abroad, primarily in Russia, and sent home $1.03 billion through the banking system. Although an ever greater share of remittances now flows through the banking system (vice being carried home in cash), banks have limited success in convincing consumers to deposit funds into savings accounts that could be used for investment.

The private sector has access to several different credit instruments, but interest rates in Tajikistan are very high – commercial banks offer loans beginning at 25%. For the most part, the few foreign companies operating in Tajikistan do not rely on local sources of credit. The government has proceeded with a plan to write off over $500 million in agricultural debts, which will require recapitalizing the National Bank. Despite the many difficulties, Tajik banks remain relatively well capitalized with good debt-to-asset ratios. The government has taken steps to create a credit bureau, but its realization remains several years off. There is no securities market, and enabling legislation is in its infancy. The government issues treasury bills to cover budget deficits, using local banks to cover the loans.

According to experts, the banking sector’s legal framework is adequate, but laws and regulations are not always enforced or correctly implemented. On occasion, banks have been directed to lend to particular entities, sometimes at below-market rates. Partly as a result of directed and related lending, the banking sector is experiencing some liquidity difficulties and 20% of the credit portfolio is classified as non-performing. Lending to small and medium enterprises is much healthier with a non-performance rate of 12%. The country has a lively microcredit sector; performance on micro-loans exceeds 90%. Though liquidity remains adequate for smaller transactions, the market may be too shallow for large changes in position. Some work is being done to strengthen creditor and shareholder rights, but there is a long way to go.

Without a securities market, there are no hostile takeovers as such. All large-scale economic activity is tightly controlled by state authorities who sometimes ignore or apply laws selectively to achieve a desired result. In 2010, the government sold shares in the Roghun hydroelectric project directly to the population. Since by most accounts Tajiks were forced or intimidated into buying the shares and little information about shareholder rights or maintenance of funds has been released, this represented a step backward rather than forward for the country’s financial system.

More information about the National Bank of Tajikistan is available on its website: http://www.nbt.tj.

Competition from State-Owned Enterprises

Although the government of Tajikistan has sold many formerly state-owned small and medium enterprises, several large enterprises remain under state control. These include the national electrical grid operator (Barqi Tojik), the natural gas operator (Tojikgaz), and the Talco Aluminum Company (TALCO), Tajikistan’s largest enterprise. As a general rule, private companies cannot hope to compete with state-owned enterprises (SOEs) unless they have good connections in the government. This has less to do with any explicit policy favoring SOEs than with the fact that Tajikistan’s ruling elite often profit directly from the SOEs.

SOEs are not run transparently. Their budgets, assets, and liabilities are rarely disclosed to the public. Some efforts are underway to make SOEs more transparent, but little tangible progress has yet been seen.

Corporate Social Responsibility

There is little awareness of corporate social responsibility in the western sense in Tajikistan. Many, if not most, corporations have contributed to the Roghun campaign (see above, under Efficient Capital Markets), but many of these contributions were coerced. Some corporations do engage in voluntary community assistance on an ad hoc basis.

Political Violence

Political violence in Tajikistan is minimal. The security situation has stabilized significantly since the Civil War ended in 1997. All factions signed a peace agreement, and the government incorporated members of the opposition into a multi-party system – although President Rahmon has since steadily removed opposition figures from government to consolidate his power. The Tajik government has worked to minimize the impact of political discord on foreign investors. With the civil war a recent memory, the people of Tajikistan are keen to maintain peace, a factor sometimes adduced to explain the population’s acceptance of the government’s egregious corruption.

Late summer 2010 saw several disturbances, including a major prison-break, the country’s first-ever suicide car bombing, and militant activity in the former opposition areas of the Rasht Valley. By November 2011, all escapees had been recaptured and Rasht remained relatively peaceful. Tajikistan sometimes serves as a transit country for terrorist groups, and narcotics trafficking from Afghanistan is significant. These phenomena have little effect on most residents.

Corruption

As in previous years, Tajikistan ranked very low on the 2011 Transparency International Corruption Perceptions Index. It scored 2.1 out of 10, placing it 154 on a list of 178 countries. Anemic anti-corruption efforts from the Tajik government have proven ineffective – indeed, some anti-corruption units are ironically known to be particularly corrupt. Extremely low official salaries do not help since they force many officials to look for alternative means to make ends meet. Buying a government position is common, and people frequently bribe superiors for promotions. Cultural expectations play a role as well: people are expected to share their good fortune with superiors and extended family, and nepotism or other favors for clan members, extended family, or superiors are commonplace.

As noted throughout this report, endemic corruption stifles business by local and international investors. Officials at any number of agencies expect payoffs for opening and running a business. Although a signatory to the OECD Convention on Combating Bribery and the United Nations Convention against Corruption, corrupt practices are deeply embedded in every aspect of commerce, and calculating the actual cost is difficult. The Agency to Fight Corruption and Economic Crimes, which reports directly to the Presidential Administration, has yet to achieve anything significant. Indeed it appears unwilling to take on major corruption cases, which are often linked to high-ranking government officials.

Bribery is endemic. Many businesses view paying off predatory regulators and other officials as a necessary cost of doing business. Legitimate prosecutions for corruption, including bribery, are rare to nonexistent. Ironically, since bribery is so widespread it proves to be a reliable charge officials can use to silence a potential critic or business rival. Officials tend to face consequences for corruption only when their activity competes with that of more powerful officials.

Bilateral Investment Agreements and Double Tax Treaties

Tajikistan has agreements on avoiding double taxation with Russia, Belarus, Ukraine, Azerbaijan, Turkey, and some other countries, but not with the United States. Tajikistan signed the Trade Investment Framework Agreement between the five Central Asian states and the United States in 2004. Tajikistan is a member of the EURASEC trade organization, which provides loose regulation of trade among Russia, Belarus, Kazakhstan, Kyrgyzstan, and Tajikistan. Tajikistan is also a member of the Shanghai Cooperation Organization.

OPIC and Other Investment Insurance Programs

Tajikistan is open to insurance and financing programs of the Overseas Private Investments Corporation (OPIC). Thus far, however, OPIC's involvement in investments in Tajikistan has been limited to a beverage bottling project many years ago. Nevertheless, Tajikistan’s relative macroeconomic stability and a growing economy may provide for opportunities for OPIC insurance and financing. Tajikistan’s currency has devalued approximately 32% since the beginning of 2009, and stands at 4.8 somoni to the dollar as of December 2011.

The airline Somon Air concluded a deal with the U.S. Export-Import Bank for guarantees to help purchase two new Boeing 737 aircraft in November 2011. The Ex-Im bank is not otherwise active in Tajikistan.

Labor

Due to its crumbling and corrupt education system, Tajikistan’s labor force is becoming increasingly less skilled and is ill-equipped to provide Western standards of customer service and management. International businesses and NGOs lament the small pool of qualified staff for their organizations. Corruption in secondary schools and universities means degrees do not accurately reflect the level of professional training or competency. Although education is compulsory, many students must work to support their families. Since there few well-paid jobs available, many Tajiks with advanced skills emigrate to find better opportunities.

The official unemployment rate in Tajikistan is 2.6% (as of September 2011), but the actual rate is much higher. Approximately one million labor migrants work abroad, almost all of them in Russia. Indeed, there are areas of Tajikistan with few working-age males. According to some studies, the average level of education of labor migrants is higher than that of those who remain in Tajikistan even though the vast majority of migrants work as unskilled laborers. Remittances have a profound effect on economic stability in Tajikistan, paying for a high percentage of its growing appetite for imports, particularly foreign vehicles, construction materials, food, and consumer goods.

The average monthly salary in Tajikistan is around $100, and inflation outstrips wage growth. According to the World Bank, over half the population lives below the poverty line. Tajikistan's high birth rate means that 50% of the population is less than 25 years old, creating a worrisome demographic bulge given limited domestic employment opportunities.

Nepotism and corruption play a large role in the labor market. Many of the higher prestige or more lucrative jobs require a "buy-in" and continuing payments to supervisors, leading the job holder to look for ways to pay back that sum by seeking bribes or other corrupt activity.

The labor market favors employers. Although technically the majority of workers are unionized, most are not aware of their rights and few unions have the will or know-how to effectively advocate for workers' rights. Unions are tightly controlled by the government.

Tajikistan is a party to 44 international labor conventions, including the Worst Forms of Child Labor Convention, dedicated to eliminating child labor and protecting children and young people. In 2010 and 2011, the government made important strides in preventing child labor in the cotton harvest.

Foreign Trade Zones/Free Trade Zones

Tajikistan is a landlocked country whose neighbors demonstrate varying abilities and interest in trade. All of Tajikistan’s rail links and most of its roads pass through Uzbekistan, whose relations have soured considerably with Tajikistan making transit of goods through Uzbek territory difficult. Throughout much of 2011, for example, Uzbekistan prevented or delayed a considerable amount of rail traffic into Tajikistan. In November 2011, the main rail road route that connects southern Tajikistan with southern Uzbekistan was disrupted due to an explosion and as of January 2012 has not been repaired. There are no commercial flights between Uzbekistan and Tajikistan. To overcome this dependence on Uzbekistan, Tajikistan has sought to open alternative transit routes to the north via Kyrgyzstan and Kazakhstan; the south, via Afghanistan and Pakistan; and the east, via China. The Asian Development Bank and the Governments of China and Iran have funded several projects to improve Tajikistan’s road infrastructure, but these new routes remain difficult. The Kulma border crossing with China lies at an altitude of 4,600 meters, across a very rough road which is open only in Spring and Fall. Trade with and through Afghanistan has expanded markedly in recent years but remains low.

The government has established two Free Economic Zones (FEZs) that offer greatly reduced taxes and customs fees to both foreign and domestic businesses locating in the zones. The legislation for the FEZs is still being developed, but current law requires a minimum investment of $500,000 manufacturing companies, $50,000 for trading companies, and $10,000 for consulting and service companies, before being eligible for the preferential tax treatment. The most developed FEZ is in Khujand, with 14 officially registered companies. Most of them are local, but there are companies from Turkey, China, Russia, Belarus and Poland. A second FEZ was recently set up in Nizhniy Panj, on the Afghan border, but so far has only three tenants and still lacks essential infrastructure. According to Tajik Government reports, more than $48 million in investment projects have been registered in the Free Economic Zones in Sughd and Nizhniy Panj. A third and fourth FEZ, in the President’s home district of Danghara in the south of Tajikistan and along the Afghan border in Ishkoshim, are still in the planning stages.

Foreign Direct Investment Statistics

Foreign Direct Investment statistics vary by source. There are two primary agencies monitoring foreign investments in Tajikistan: the National Bank of Tajikistan (NBT) and the State Statistical Agency under the President of Tajikistan. The NBT is more conservative in its methodology but does not break out its data by sector or country. The NBT estimated total FDI of $11.3 million during the first half of 2011, compared with $15.7 million during the same period in 2010. According to the State Statistical Agency, total foreign direct investment (FDI) in the first nine months of 2011 was $85.1 million, half as much as in 2010. Of this, $22.8 million came from former Soviet states (almost entirely Russia, with investments of $20.7 million). Total FDI in the same period in 2010 was $171.4 million, indicating that in 2011 foreign investors are cautious about investments to Tajikistan. Between 1997 and 2011, total FDI amounted to $1.66 billion. In the first nine months of 2011, the FDI to GDP ratio equaled 2%, down from 8% in 2010.

According to Tajikistan’s official state statistics, the largest foreign direct investors for the first nine months of 2011 were:

Russia – $20.7 million
Iran – $14.2 million
Great Britain – $27.7 million
Switzerland – $5.5 million
Kazakhstan – $1.6 million
China – $6 million

Foreign direct investment by sector over that period was as follows:

Energy: $17.9 million
Communications: $21.9 million
Mining: $11.3 million
Agriculture: $0.4 million

Note: Some of the FDI statistics above may include investment in Tajik-held companies registered offshore. Tajik government leaders or their family members control most large-scale enterprises in Tajikistan, and usually register them offshore to circumvent local tax laws. For example, a portion of Great Britain’s FDI was likely directed toward Tajik companies registered in the British Virgin Islands, but Tajikistan’s State Statistical Agency does not disclose this level of detail to the public. These figures do not include state-led investment projects, including the Chinese-financed road and communications projects valued at $1 billion and the Iranian-financed construction of the Sangtuda-2 hydropower station.



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