CENTRAL ASIA BLOG: Tajik banking problems to continue despite bailout

CENTRAL ASIA BLOG: Tajik banking problems to continue despite bailout
The rescue package included more than TJS2bn to recapitalise Tojiksodirotbank.
By bne IntelliNews February 2, 2017

Tajikistan, Central Asia’s poorest country, has failed to persuade international financial institutions to help bail out its rotten banks, forcing it to apply half measures to tide the lenders over.

Tajikistan spent most of 2016 engaged in negotiations with IFIs, hoping that an external force would bail out its ailing banking sector, which has been knocked by falling remittances from Russia and bad loans to well connected insiders. Even before the economic downturn of the past few years caused by Russia’s recession, the country has frequently relied on donors to help it out.

But talks with the European Bank for Reconstruction and Development (EBRD) and the International Monetary Fund (IMF) have borne no fruits.

The IFIs may be shy because some of the money from past assistance by the IMF and the Asian Development Bank (ADB) has disappeared into the pockets of the political elite surrounding President Emomali Rahmon, while grant conditions were never truly met, ensuring promised reforms only ever existed on paper only.

As the banking crisis has snowballed over the past couple of years, donors’ calls for reform were ignored time and time again. Seeing as there’s no expectation that this cycle will be broken in the near future, international lenders appeared more cautious this time around.

The government therefore was forced to take the initiative itself. In December the authorities announced injections into problem banks costing some TJS3.85bn (€460mn). This rescue package included more than TJS2bn to recapitalise Tojiksodirotbank (TSB), which was run by central bank appointed management for seven months until mid December, and TJS1.7bn for Agroinvestbank, Tajikistan’s largest lender. According to Tajik media reports, Dushanbe now holds an 80% stake in TSB following the injection, with the state stake in Agroinvestbank possibly not too far off his figure.

The injections must have had an impact on the country’s cash-strapped budget, which failed to meet its revenue target by a $100mn margin in 2016. It is, however, worth noting that failing to meet budgetary commitments is not a rare event in Tajikistan. Tajikistan only managed to meet its 2015 budgetary goals thanks to ADB’s $60mn grant, for instance.

The budget is also very opaque because of Tajikistan’s unreliable statistics and official mendacity. Muradali Alimardon was even promoted to deputy prime minister in 2012 right after he had admitted he’d lied to the IMF about the size of the country’s reserves.

A chain of promising news followed the injections as TSB began paying out savings on January 3 and allowing withdrawal of deposits of up to $200 per month. The bank’s depositors had been experiencing difficulties making withdrawals throughout 2016.

TSB has also recently announced a relaunch of its credit card operations, with a cap of TJS100 per day for cash operations and TJS200 per day for non-cash operations.

Too little, too late

However, some economists believe the authorities took too long to recapitalise the banks, and that problems will only recur without more substantial injections and reform.

“The decision [to recapitalise] the banks should have been taken prior to the erosion of client trust,” independent Tajik economist Samijon Nasirjonov tells bne IntelliNews. “Even after [recapitalisation], the banks still need to keep earning money,” he adds.

Nasirjonov says the injection only served to temporarily appease clients, and he doubts the amount will be sufficient to sustain the Tajik banks until they can regain clients’ trust. “Therefore there is no certainty that the allocated funds may be sufficient for a period of recovery and restoration of client trust,” he says.

The clients are not the only ones lacking faith in the banks. “The National Bank issued a recall of 1.6bn somoni from the two largest banks,” Nasirjonov notes, referring to the central bank’s announcement on January 4 to pull back its fiscal deposits from “problem banks”. “This indicates that [nearly] half of the [injected] funds will go back to the National Bank, where they will be frozen.”

“Therefore, we can say with certainty that the allocated funds will not solve the problems of Tojiksodirotbank,” he added.

The banks are still suffering from the recession in Russia, which has hit remittances. Remittances from Russia plunged by 14.5% y/y in the first nine months of 2016, though the decline eased from a 39.6% y/y plunge registered in the first half of 2016 and a more than 40 per cent fall in 2015.

Tajikistan non-performing loans (NPLs) are on a continuously rising trend, though data is rarely publicised. The share of NPLs in the total loans stood at 21.21% at the end of 2014. EBRD data suggests the NPL ratio expanded to 32% at end-August 2016.

“It is possible that in 2017 the problem of unpaid loans and bad debt will remain, since, due to the falling volume of remittances, the purchasing power of the population has plummeted significantly,” Nasirjonov points out. Hurt by declining exports and remittances from Russia, many of the country’s businesses and individuals were left unable to repay their loans to banks and microfinance institutions.

The signs of economic recovery in Russia, though they may improve Tajikistan’s budget outlook, appear insufficient to alleviate TSB’s and Agroinvestbank’s troubles, according to Nasirjonov.

“[The banks] may need to cut offices and branches in order to optimise costs, as these offices and branches were meant to operate under annual $4bn worth of inbound remittances,” he says. “Thus, proper management will [at best] allow the banks to stay afloat and, otherwise, lead to more losses.”

TSB already partially implemented a plan of action in late-December and early January by selling off residential buildings, offices and vehicles in order to expedite its payments to clients. The bank also announced it would put up a “certain number” of shares up for sale. 

But these measures look half hearted. The injections into the banks and the restructuring moves are only stop-gap measures, and appear insufficient to prevent the banks’ problems recurring. It seems that Dushanbe has still not understood that it can no longer consistently rely on unconditional donor support to repeatedly pull it out of tight corners.