Public Information Notice: IMF Concludes Article IV Consultation with Tajikistan

February 14, 2000

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On January 27, 2000, the Executive Board concluded the Article IV consultation with Tajikistan.1


Against the backdrop of a sharp deterioration of its terms of trade, a large reversal of private capital inflows, and relaxed domestic policies, Tajikistan's macroeconomic performance weakened during 1999. In response to such adverse developments, however, the authorities embarked on a strong adjustment path last autumn while continuing structural reforms under their economic program supported by the IMF's Poverty Reduction and Growth Facility (formerly Enhanced Structural Adjustment Facility).

For the year as a whole, economic growth slowed down, from 5.3 percent in 1998 to 3.7 percent in 1999. The adverse external effects were particularly severely felt in cotton production. In addition, Inflation rose sharply in July-August owing to a rise in key import prices, the delayed pass-through of the exchange rate depreciation, as well as fiscal and monetary expansion in the summer months.

Fiscal performance deteriorated in the summer months because of weak tax collection and strong expenditure pressures. The overall deficit of the general government, although lower than in the corresponding period of the preceding year, was significantly higher than targeted under the IMF-supported program by end-August. Domestic credit expansion also accelerated, accommodating the larger fiscal deficit, quasi-fiscal operations, and the cotton sector's financing requests. As a result, balance of payments pressures intensified and international reserves of the National Bank of Tajikistan (NBT) declined from 1.5 months of imports at end-1998 to 1.0 month of import by end-September 1999.

In response to the growing financial imbalances, the authorities took strong corrective actions to restore macroeconomic stability. By intensifying revenue collection and prioritizing expenditures, they ran a virtually balanced budget in the fourth quarter of 1999. Meanwhile, the central bank tightened monetary policy, particularly through the collection of overdue loans from the cotton sector and other domestic borrowers. Its net domestic assets declined by 35 percent of reserve money during the fourth quarter 1999. An agreement was reached with the cotton sector's external creditors to reschedule their cotton claims without government guarantees. These policies restored the stability of the exchange rate and consumer prices and allowed a rebuilding of the NBT's gross international reserves to the equivalent of 1.4 months of imports by the end of the year.

Progress in structural reform has been mixed. While small-scale privatization and land reform have made much headway, the privatization of cotton ginneries and medium- and large-scale enterprises remains problematic. The authorities have taken steps to increase the success rate at the privatization auctions and to improve payment collection. On bank restructuring, two banks were liquidated during 1999 and bank-restructuring agreements with the Savings Bank and the Agroinvestbank were continued.

Executive Board Assessment

Directors noted that the difficult external environment-in particular the deterioration of the terms of trade and a large reversal of private capital inflows associated with the cotton sector's financing-had placed a severe constraint on domestic economic activity in 1999. In addition, significant slippages in policy implementation had weakened Tajikistan's macroeconomic performance. As a result, inflation had accelerated and economic growth slowed. Directors concurred, however, that the authorities deserved credit for having taken strong corrective actions to bring the program back on track. Tight fiscal and monetary policies implemented since last September had restored price stability, strengthened the balance of payments, and improved confidence in the economy. Directors also welcomed the major progress in the peace process, which had facilitated the strengthening of economic policies and reforms.

Directors stressed that the policy adjustment needed to be continued in the period ahead to ensure macroeconomic stability and further strengthen the external position. They supported the envisaged reduction of the fiscal deficit in 2000 and urged the authorities to maintain the recent strong performance in revenue collection by fully implementing the VAT reform and further improving tax and customs administration. Public expenditure reform was also seen as essential to achieving the fiscal adjustment goal. In this context, pointing to the high level of poverty, Directors welcomed the recent poverty survey and the authorities' intention to amend the social safety net accordingly, as well as their early commitment to developing a strategy for sustained poverty reduction. Directors viewed the deficit overrun of the summer of 1999 as clear proof that fiscal institutions, especially the Ministry of Finance and the treasury system, needed to be strengthened to improve expenditure control and enhance transparency in fiscal operations. They stressed the importance of avoiding the buildup of public domestic arrears, which could also help strengthen confidence in government policies.

Directors observed that the prudent monetary policy stance and maintenance of a flexible exchange rate had preserved Tajikistan's external competitiveness and facilitated the adjustment of the balance of payments in 1999. The continuation of a tight credit policy, including timely loan recovery, would help enhance the credibility of stabilization policies and contribute to the required strengthening of financial discipline in the banking system. To prevent the reoccurrence of quasi-fiscal operations, however, it remained imperative to increase further the independence of the central bank. In this connection, Directors welcomed the abolition of directed lending by the central bank.

Directors stressed the importance of maintaining a liberal trade and exchange system in order to ensure a competitive domestic market structure. They welcomed the authorities' application for WTO membership. Directors noted the progress made recently in debt rescheduling negotiations but, in view of Tajikistan's heavy debt-service obligations, they urged the authorities to be persistent in their efforts to regularize all remaining debts with bilateral creditors. The government should continue avoiding guarantees on nonconcessional external loans. Directors also observed that the recent involvement of private creditors in the cotton sector's debt restructuring had played a positive role in Tajikistan's adjustment to recent external shocks.

Regarding structural reforms, Directors welcomed the progress in land reform and small-scale privatization. However, the privatization of cotton ginneries and larger enterprises continue to be hampered by weak payment collection. To quicken the pace of reform in this area, Directors not only stressed the importance of increasing transparency in the privatization process, but also called for a thorough overhaul of the cotton sector's development strategy in order to ensure a fully liberalized and competitive market environment.

In other structural areas, Directors underscored the critical importance of a sound banking system in mobilizing domestic savings for sustained economic growth. They urged the authorities to press ahead with bank restructuring, while strictly enforcing the central bank's prudential regulations. Directors encouraged the authorities to improve the business climate in Tajikistan by reducing administrative interference in private sector activity.

Directors noted that Tajikistan's statistical database remained weak, and encouraged the authorities to make further improvement by devoting the necessary resources and seeking international technical assistance.

Tajikistan: Selected Economic Indicators

  1996 1997 1998 1999 2000 1/

  (Annual percentage change)
Production and prices
Real GDP -4.4 1.7 5.3 3.7 5.0
CPI (end-period) 40.5 163.6 2.7 31.3 13.0
Terms of trade -11.0 5.7 -4.0 -5.5 1.3
Monetary indicators
Reserve money 139.6 193.5 4.9 20.0 17.1
Ruble broad money 142.6 117.2 14.8 29.2 34.3
Velocity 2/ 20.3 19.8 21.1 22.5 22.4
  (In percent of GDP, unless otherwise indicated)
General government
Revenue 13.1 13.7 12.0 13.1 13.0
Expenditure 18.9 17.0 15.8 16.2 15.2
Cash balance 3/ -5.8 -3.3 -3.8 -3.1 -2.2
Exchange rate (end of period)      
Official (TR per US$) 328 748 977 1,436 ...
Curb market (TR per US$) 340 815 1,190 1,673 ...
  (In millions of U.S. dollars, unless otherwise indicated)
External sector
Exports of goods 770 746 586 641 715
Imports of goods -786 -809 -731 -694 -780
Current account -6.8 -5.2 -107 -29 -44
In percent of GDP -7.4 -5.5 -8.3 -2.8 -3.6
Gross international reserves 14 30 65 58 133
In months of imports 4/ 0.3 0.6 1.5 1.4 2.9

Sources: Tajik authorities; and IMFtaff estimates.

1/ Staff projections.
2/ Nominal GDP divided by average ruble broad money.
3/ Excluding Public Investment Program.
4/ Imports of goods and services excluding alumina and electricity.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.


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