Clare Nuttall in Almaty -

Exposed to the mercy of international price fluctuations, Tajikistan is feeling renewed pressure on its current account, but a project to reduce reliance on imports at the country's most important economic asset only illustrates how long a haul the country is in for.

The Tajik government has said it hopes to stop inflation exceeding 9% in 2011, and is also taking steps to improve the current account balance - including exploring the options to reduce dependence on imported raw materials at the country's largest enterprise, the Tajikistan Aluminium Company (Talco).

However, economic problems rarely remain confined to the business sector for long. The combination of poverty and rising prices, together with the constant threat of insurgency from neighbouring Afghanistan, pose a growing threat to security. A report from the International Crisis Group says the country is "profoundly vulnerable socially, economically, politically and militarily."

Combined with a 44% hike on petrol export duties introduced by Russia, anticipation of higher grain prices this year and speculation on the local market are all driving prices up. Recent months have seen food prices soar by around 30%, which is only compounding the effect of raging inflation on groceries felt in the second half of 2010.

As seen elsewhere in the world this year, such rapidly rising prices pose a threat when they hit the poor, a danger of which Dushanbe is well aware. Tajikistan is the poorest post-Soviet state, with almost half the population living on less than $2.50 a day, according to the World Bank. Food and fuel are the main expenditure for much of the population, so rising prices quickly exacerbate poverty levels.

Hence, the authorities have been trying to control prices, but success has been limited. In Dushanbe, market traders have been ordered to keep prices within limits, and in May several butchers were arrested for failing to keep within the 24 somoni ($5.30) per kilogram cap on meat products.

Current problems

Although Tajikistan managed to maintain growth during the recent global crisis - increasing GDP growth from 3.9% in 2009 to 6.5% in 2010, according to the International Monetary Fund (IMF) - the current account remains a concern. Whilst it shifted to a surplus of 2.2% of GDP in 2010, over the previous five years it saw an average deficit of 5%. "In general, we are concerned about the inflationary tendency," Jamshed Yusufiyon, first deputy chairman of the National Bank of Tajikistan, tells bne. "This is because of the openness of our economy, and some features of the balance of payments. Imports and exports total almost double Tajikistan's GDP, and the current account deficit is chronic."

Therefore, the government hopes to reduce dependence on imports at Tajikistan's largest company, Talco. On April 1, Talco directors announced plans for a $2bn investment programme to allow the plant's smelter to use a larger proportion of domestic raw materials. Currently, Talco currently imports around 90% of the raw materials and equipment it needs to run the smelter, but is working with Canada's Hatch to upgrade the plant to allow 60% of inputs to be sourced domestically.

According to Yusufiyon, the matter is crucial for Tajikistan. "We are developing a major plan to supply the plant with our own resources," he says. "Some research has been carried out already, and the numbers are quite realistic. However, it will be a long road to assess all the documentation, and more studies are needed."

There are questions both over where Talco will raise the $2bn it needs to rebuild the plant, and indeed whether it will actually be possible to source the required inputs in country. Despite hosting one of the world's largest aluminium plants, Tajikistan does not possess any bauxite. "Aluminium production is energy intensive, so to make it properly you need low-cost electricity, which effectively means hydropower. That's why aluminum plants are located in areas like the Pacific North West, Canada, Norway - and Tajikistan. However, everything else needs to be imported," says Ken Arne, senior associate at minerals industry consultancy Behre Dolbear.

Although there is a small deposit of bauxite in south Kyrgyzstan, near the Tajik border, none has been found in Tajikistan, despite extensive searches in the Soviet era. Aluminium can, however, also be produced from alumina oxide, and rocks with high alumina oxide content have been discovered around 200 miles east of Talco. The government is considering opening a quarry and building a railway to ship the output to the smelter. "The mining process would be very straightforward, but they would have to build 200 miles of railroad, and extracting alumina from rock is more expensive than starting with bauxite, as there are several extra stages. This would require a big capital investment into a new processing plant," says Arne. "Talco is the most important economic asset in Tajikistan, and one of the biggest political footballs."

The Tajik government is also hoping to give the economy a boost with some ambitious projects in the mining and hydropower sectors. The Roghun hydropower plant will solve a lot of Tajikistan's electricity shortages and free up surplus power for export, although it is a controversial issue internationally due to strong opposition from Uzbekistan. Meanwhile, a tender currently being carried out by Bolshoy Konimansuri is intended to bring a top international mining company to develop Tajikistan's largest silver deposit.