|Photo © iStockphoto.com|
The Russian economy suffered a double blow in 2008; first from the drop in world crude oil prices and secondly from a reversal of capital account inflows. The fall in national income and the adjustment of the balance of payments to the external shocks triggered a steep recession. After recording real GDP growth of 8.1 percent in 2007, growth fell to 5.6 percent on 2008 and then to negative 9 percent in 2009, one of the steepest falls of any major economy. This affected remittances, mainly to other CIS economies, through two channels: first because of a contraction in employment, especially in the cyclically sensitive construction industry and secondly because the depreciation of the Russian rouble, by 51 percent against the US dollar between March 2008 and March 2009, reduced the dollar value of remittances.
Remittances to Tajikistan fell much more sharply in the final quarter of 2008 than can be attributed to seasonal factors alone. The slump continued throughout 2009 with gross inflows of remittances valued in US dollars for the year falling 31 percent below the total for 2008. How did this fall in remittances, of more than $800 million (about one sixth of GDP) relative to the level in 2008, affect the macroeconomy in Tajikistan? There are three possible channels of adjustment to a reduction of foreign exchange inflows of this magnitude.
|Women selling produce, Tajikistan. Photo © Gennadiy Ratushenko, World Bank|
First, if the fall in remittances is expected to be purely temporary, the economy could run a balance of payments deficit by running down international reserves, thereby avoiding the need for macroeconomic adjustment. This option was ruled out for Tajikistan because it did not have anywhere near sufficient international reserves. At the end of 2008, the central bank held gross international reserves equivalent to less than one month’s worth of imports of goods and services. Secondly, the economy could borrow from abroad to fund the deficit on the current account; again this option would only be appropriate if it was known that the fall in remittances, and hence the need for borrowing, would be purely temporary. This option was also not available for Tajikistan, because the country is not sufficiently creditworthy to access finance from external commercial sources. The government was able to access finance from the IMF, albeit only a fraction of the reduction in remittances, but this finance was used to rebuild international reserves rather than to fund a BOP deficit. The third option is to adjust through the current account, through an increase in net exports. This was the only option available to Tajikistan.
The table below provides some basic balance of payments data for Tajikistan. Exports, which mainly comprise the smelting of aluminium and cotton have very low short run supply elasticities and so were not able to contribute to the needed adjustment in the current account of the BOP. Exports actually fell in 2009, partly because of lower world market commodity prices. Hence all of the adjustment to the fall in remittances took place through lower imports, which compared to 2008 fell by $880 million or 28 percent in 2009. The fall in imports was driven by price and income effects; the former brought about by the nominal depreciation of the exchange rate, which against the US dollar depreciated by nearly 30 percent in 2009 compared to 2008, and the latter by the fall in household incomes which was brought about by the reduction in remittances.
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Real GDP growth is projected to slow to 3 percent in 2009, a fall of 5 percentage points from the average during the 2000s. Nevertheless Tajikistan has fared better during the crisis than other CIS economies. The average real GDP growth rate in the CIS, excluding Russia, is projected at negative 3.9 percent in 2009, a fall of 9.2 percentage points from the growth rate in 2008. This rather begs the question of why real output in Tajikistan was not hit more severely by the global crisis, especially given that its economic structure is relatively rigid which impedes flexible supply side adjustment to price incentives. The depreciation of the exchange rate partly explains this conundrum. Even if domestic supply price inelasticities prevented depreciation from boosting exports and import substitutes, as is likely, the nominal depreciation of the Somoni against the US dollar dampened the real fall in household incomes and thus the impact on demand for non traded consumption goods. In dollar values, remittances fell by 31 percent in 2009, but only by 17 percent when valued in constant Somoni prices. In real terms, private disposable incomes probably fell by only about 2 percent in 2009. What is more difficult to explain is why the sharp rise in the real cost of imports did not have a larger supply side effect on production. One possible explanation for this is that most of the largest business enterprises in Tajikistan, which are probably the most import intensive, are state owned and do not operate under hard budget constraints; hence they may have been able to maintain output levels despite the rise in input costs, although for how long this can be sustained is unclear.
This is the topic of a forthcoming paper I am writing with Luca Barbone and Martin Brownbridge. But, how did other countries manage the impact of global crisis on remittance and in turn on their economic growth and poverty reduction? I am keen to understand the transmission mechanisms.