Vinokurov E., Lavrova N., Petrenko V. (2020) EFSD Working Document 20/03. EDB: Moscow
A new EFSD Working Paper WP20/03 “Tajikistan and the Kyrgyz Republic Post-COVID-2019: Debt Sustainability, Financing Needs, and Resilience to Shocks” has been published.
The COVID-19 outbreak has revealed the sensitivity of economies and their debt positions to a wide range of disruptions: not only financial shocks may hamper economic growth, but health, political and environmental emergencies may also bring economic suffering.
In this context, experts estimated developing countries’ debt sustainability and their financing needs by considering the Kyrgyz Republic and Tajikistan. Both economies have been significantly hit by the COVID-19 emergency: exports plunged, remittances declined. The coronavirus has also led to unprecedented disruptions for small businesses and employment. In the baseline scenario, we calculated that a 4.3% contraction in GDP in the Kyrgyz Republic and a 2.8% slowdown in Tajikistan, accompanied by a 10-15% depreciation in the local currencies, might increase the public debt to almost 65.3% of GDP in the Kyrgyz Republic and 48.4% in Tajikistan by the end of 2020. Although these new levels of public debt are expected to remain affordable for both countries, there will be a significant increase in financing needs. In Tajikistan, gross financing needs (consisting of debt servicing and budget balance) are expected to increase from 3.8% of GDP in 2019 to 7.7% by the end of 2020, while in the Kyrgyz Republic they are projected to reach 10.9% compared to 4.5% in 2019. In the long run, the gross financing needs of both countries are expected to remain within 10% of GDP. In Tajikistan, they may increase from 7.7% of GDP in 2020 to 9.8% at the end of 2025, while in the Kyrgyz Republic they will hover around 7% of GDP. In these circumstances, the countries’ debt positions became even more vulnerable and they may need additional financial assistance.
In order to shed light on how much debt Tajikistan and the Kyrgyz Republic can sustain and how the situation may change their financing needs, we consider three alternative, more adverse scenarios.
The empirical findings suggest that adverse external conditions may significantly increase the two countries’ sovereign debt levels. “The series of stress tests demonstrated that the main threat would come from the depreciation of local currencies and widening budget deficits, highlighting the need for strengthening fiscal positions to address the possibility of external shocks», - suggests EFSD Chief Economist Evgeny Vinokurov. The positive result of stress testing is that Kyrgyz Republic debt sustainability will remain moderate. In Tajikistan, medium-term financing pressure may continue to increase, which will remain a source of economic vulnerability”.
You can also view the report on the EFSD official website.