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The following item is a Letter of Intent of the government of Tajikistan, which describes the policies that Tajikistan intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Tajikistan, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.
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December 30, 1999

Mr. Michel Camdessus
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Camdessus:

After the Executive Board of the IMF approved the second annual PRGF arrangement on July 2, 1999, Tajikistan's macroeconomic stability deteriorated. Inflation accelerated sharply and several performance criteria for end-June and end-September were not observed. As a result, the first review under the arrangement could not be completed as originally scheduled. The government has been fully aware of the urgency of restoring monetary stability and has implemented strong corrective actions. As a result, consumer prices and the exchange rate have now stabilized.

In the attached Supplementary Memorandum of Economic Policies (SMEP), we have updated our second year economic program, with a view to consolidate the recent stabilization gains. We are also undertaking further structural and institutional reforms so as to make the program implementation sustainable. In view of the strong corrective actions, we request a waiver for the non-observance of those performance criteria that were not met at end-June and end-September. In support of this request, several prior actions have been agreed with the Fund staff to be implemented before Board consideration of the first and second reviews under the second annual ESAF arrangement. We are convinced that the completion of these reviews, and the related loan disbursements, will significantly strengthen the credibility of our stabilization and reform efforts.

The government believes that the policies described in the attached memorandum are adequate to broadly achieve the original objectives of our program. However, we stand ready to take any additional measures which are deemed necessary to keep the program on track. We will consult with the Fund on these matters regularly in accordance with the policies of the IMF on such consultations. We are also willing to make our policies known to the international public and would be grateful if the Fund would make the Supplementary Memorandum of Economic Policies available on its Internet site.

Very truly yours,


Emomali Rakhmonov
President of the Republic of Tajikistan




Supplementary Memorandum of Economic Policies


1.  Tajikistan's second annual PRGF arrangement was approved by the Executive Board of the International Monetary Fund (IMF) on July 2, 1999. The first review of this arrangement could not be completed because several performance criteria for end-June 1999 were not observed, and macroeconomic stability weakened sharply in July-August. In the third quarter, the key performance criteria, in particular for the fiscal deficit, central bank credit expansion, and the build-up of international reserves were not observed. While external factors played a significant role, we recognize that the deterioration of price stability was also due to deviations from the program's fiscal and monetary policy targets. In continuation of the discussions started during the August staff mission, the Tajik delegation at the IMF-World Bank Annual Meetings in September agreed with the IMF staff on a Memorandum of Understanding (MOU), which specified a short-term policy agenda to start bringing the stabilization and reform program back on track.

2.  We held further discussions with the IMF staff in Dushanbe in late October, in the context of the second review of the second annual PRGF arrangement and annual Article IV consultation. Based on a thorough review of recent macroeconomic developments and progress in the implementation of market reforms, we have updated our economic program for end-1999 and 2000, with a view to consolidate our efforts to bring the program back on track. The over-arching framework of our policies remains as developed in the Memorandum of Economic Policies of June 17, 1999. We also propose performance criteria and structural benchmarks for end-January and end-April 2000 to ensure continuing progress in our reform policies. Achieving these targets will provide the basis for the third annual ESAF arrangement to be negotiated with the IMF staff in the spring of 2000.

3.  Our macroeconomic indicators deteriorated sharply in the summer of 1999. Inflation accelerated, reaching 16 percent in August, or 64 percent when measured cumulatively from August 1998. In September-October, however, the consumer price level declined by 3.4 percent suggesting that part of the summer price hike reflected temporary factors such as supply shortages of wheat and gasoline. While we expect inflation to remain low in the remainder of the year, the 12-month inflation through December 1999 is likely to reach 35 percent, significantly higher than projected at the time of the approval of the second year ESAF arrangement. Overall, while this weakening in price stability largely reflected rising import prices and a delayed adjustment of the exchange rate to external disturbances, it also owed to expansionary financial policies in the summer months. In the third quarter of 1999, economic growth slowed down, largely owing to the decline in agricultural production due to inclement weather conditions and weaker yields. Taking into account the strong seasonality in economic activity, however, we believe that the growth of real GDP for the year as a whole will reach 3.5 percent, about 2 percentage points less than projected earlier.

4.  In the third quarter of 1999, our policy performance also deteriorated. The fiscal deficit was larger than allowed for by the program, the central bank's (NBT) domestic assets and net credit to government exceeded the program ceilings, and official net international reserves fell far below the program floor. As new NBT loans were directed to domestic borrowers outside the credit auction mechanism, the related structural performance criterion was also violated. On the other hand, the combined tax collection by the State Tax Committee and State Customs Committee exceeded the program target, external debt service payments were made on time, wage and social benefit arrears did not occur, and the government did not contract or guarantee any non-concessional loans.

5.  Progress in structural reforms has been somewhat uneven. The land reform has proceeded well, small-scale privatization exceeded the program targets, and the issuance of tax identification numbers to enterprises was completed on time. Meanwhile, operational restructuring of the major banks slowed down and large scale privatization, in particular the privatization of cotton ginneries, continued to be hampered by weak payment collection. Overall, however, of the eight structural benchmarks of the program for end-June and end-September 1998, six were observed, one was met with delay, and one was missed. The latter related to the privatization of cotton ginneries.

6.  More recently, our policy performance has improved and the financial targets agreed in the above-mentioned MOU for end-October were initially met. During October, the NBT's net domestic assets declined by an equivalent of nearly 10 percent of reserve money, official foreign exchange reserves increased, and the general government budget was broadly balanced for the second consecutive month. This tightening of policies underlines our determination to return to the programmed path in policy implementation.

7.  The government realizes, however, that bringing the program on a sustainable basis will require not only a tightening of financial policies, but also progress in strengthening our institutional capacity. To this effect, a presidential decree was issued on October 22 to implement the institutional measures as agreed in the MOU. These measures included the closure of all non-bank enterprise accounts at the NBT, an explicit prohibition of any directed NBT lending, and tightening of expenditure control by the Ministry of Finance. An Economic Program Monitoring Group was established, with the Fund resident representative as an observer.

8.  In further support of our request for a waiver for the non-observance of the missed performance criteria at end-June and end-September (Annex I), we will take the following measures as prior actions for the completion of the first and second reviews under the second annual ESAF arrangement:

  • We will implement a virtually balanced budget in the fourth quarter of 1999 with a cumulative cash surplus of the general government of TR 0.2 billion in October-December;

  • We will reduce the level of the NBT's NDA from TR 164.3 billion by end-September to TR 149.7 billion to end-November and further to TR 137.4  billion by end-December; and increase the level of the NBT's NIR from negative US$60.8 million at end-September to negative US$50.6  million by end-November and further to negative US$41.0  million by end-December1999. Net credit of the NBT to the government will be reduced from TR 120.3 billion at end-September 1999 to TR 118.9 billion at end-December 1999;

  • We will submit to Parliament the relevant legislation to empower the Large Taxpayer Inspectorate (LTI) with the same authority as local tax offices. The tax offices in Dushanbe and Khujand will be informed by December 15, 1999 that large taxpayers will submit tax declarations and balance sheets directly to the LTI. Large taxpayers in Dushanbe and Khujand will be notified by December 31, 1999 that, effective February 1, 2000, their responsible tax office will be the LTI;

  • We will close all extra-budgetary foreign exchange accounts of the budgetary organizations and consolidate them in the single treasury account by December 31, 1999;

  • We will complete the privatization (i.e., full payment received for at least 75 percent of shares) of all remaining cotton ginneries by December 31, 1999;

  • We will sign sale contracts for at least 180 medium- and large-scale enterprises and collect full payment for at least 140 such enterprises (cumulative since January 1, 1998) by December 31, 1999;

  • We will privatize at least 400 small-scale enterprises (cumulative since May 1, 1999) by December 31, 1999;

  • We will reach the target of privatizing at least 110 state and collective farms (cumulative since April 1, 1999) by issuing freely marketable land share and land use certificates for private farmers by December 31, 1999;

  • Finally, we recognize that approval by parliament of the 2000 general government budget, as agreed with the staff of the IMF, will be a prior action for the completion of the first and second reviews of the second annual ESAF arrangement.
9.  With these prior actions, and the forceful implementation of the presidential decree of October 22, 1999 to strengthen our institutional capacity, we believe that the program will be brought back on track by the time of Board consideration of the reviews under the second annual ESAF arrangement. To ensure that the consolidation of stabilization gains will continue, we have set the quantitative performance targets under the program for end-January 1999 and end-April 2000 as specified in Annex I. Progress with our structural reforms will be assessed relative to the structural performance criteria and benchmarks specified in Annex II.

10.  In light of the recent price developments, we have revised the program's inflation and growth targets for 2000. Inflation is now targeted at 13 percent during the year and real GDP is projected to increase by 5 percent in 2000. Achieving these targets requires continued monetary stability and good progress in structured reforms. These policies for the remainder of the program period are covered below.

A.  Fiscal Policy

11.  The general government budget aims at reducing the overall fiscal deficit (excluding foreign financed capital expenditures) from 3.0 percent of GDP in 1999 to 2.2 percent of GDP in 2000. This target is ambitious because the growth of our traditional sources of revenue (cotton and aluminum sales taxes) will slow down reflecting the necessary reduction in the sales tax rates, and our external debt service will increase sharply. Improved performance in revenue collection from other taxes and greater control on expenditures will thus be critical to achieving this overall fiscal objective.

12.  Specifically, we will further strengthen tax and customs administration through: (i) the full implementation of the LTI and VAT reforms according to the time schedule outlined in Annex III; (ii) enforcing the presidential resolution of February 8, 1999 forbidding tax offsets; and (iii) starting weekly reporting of the revenue collection by the State Tax Committee, the State Customs Committee, and the Social Protection Fund (SPF) to the Ministry of Finance and the President's office. We will also enact several revenue enhancing measures, effective January 1, 2000, including: (i) increasing the specific land tax per hectare by 40 percent to reflect the increase in the value of land due to inflation; (ii) limiting the VAT exemptions on imported inputs of TADAZ; (iii) introducing in the budget law the requirement that the local authorities implement the recently introduced retail sales tax at the rate of at least 4 percent (and up to 5 percent maximum). In compensation for Tajik Rail's servicing of Tajikistan's external debt to Uzbekistan, TR 8 billion will be allocated from the budget to Tajik Rail as debt repayment. In turn, Tajik rail will start paying taxes in cash and repaying its debt to the NBT. Finally, with a view to achieving greater transparency in payment of taxes, tax settlement accounts in banks for all taxpayers under the LTI will be eliminated by March 31, 2000.

13.  Greater control on expenditure will be essential. A key objective is to bring extrabudgetary operations within the purview of the Ministry of Finance, and to centralize fiscal management within this ministry. Specifically, the budget execution will be improved by enforcing the recently issued decree which prohibits any government agency from contracting the acquisition of goods and services without a signed confirmation by the Ministry of Finance. Without such confirmation, no payment will be made by the Treasury. Furthermore, we will strictly adhere to the targets for reforming the Treasury system as specified in Annex IV. The draft 2000 budget has been based on GFS accounting standards, and quarterly reports and forecasts will be conducted on that basis starting in March 2000.

14.  Our expenditure policies will seek to improve the efficiency of government outlays without increasing their share in GDP. If needed, we will cut expenditures of the national economy programs (mainly outlays on construction, transportation, and agrobusiness) as well as capital expenditures to achieve our fiscal deficit target. We will rationalize the wage bill with a view to improving incentives for skilled workers in public service. To this effect, effective on January 1, 2000, the average wage will be increased by no more than 15 percent with larger increases for key government employees.

15.  In close cooperation with the World Bank and IMF staffs, we will overhaul the current social safety net in Tajikistan. Expenditures on the social safety net will be increased to 2.2 percent of GDP, up from 1.9 percent of GDP in 1999, based on the analysis and policy recommendations derived from the recent household survey. These reforms will be specified by end-April 2000, and the budget includes a reserve of TR 6 billion for their financing during 2000. Apart from those new measures, the existing cash compensation program will be abolished and replaced by a program providing social assistance to the needy, e.g., to large families with children through services provided by schools. In addition, all pensions below the minimum pension will be raised to TR2,000 per month in the course of the year 2000. To improve the financial sustainability of the pension system in the longer term, working pensioners' benefits will be frozen and early retirement provisions will be tightened. We have also submitted to parliament an amendment to the pension law to increase the minimum pension age by six months as of January 1, 2000.

16.  On other expenditure, with assistance from the World Bank, we will review and further develop our Public Investment Program for the medium-term, with a view of presenting it to the prospective Consultative Group meeting in the spring of 2000.

B.  Monetary and Exchange Rate Policies

17.  Monetary policy needs to be tight to strengthen the balance of payments and contain inflation by rolling back central bank credits, in particular to the cotton sector. Such an adjustment is facilitated by the foreign exchange inflow generated by the new cotton harvest. We will ensure that a significant part of this inflow is directed to build up the official international reserves of the NBT. At the same time, the balance of the cotton credits extended by Credit Suisse First Boston Inc.(CSFB), and guaranteed by the government, will be reduced so that the outstanding debt does not exceed US$27.5 million at end-December 1999, US$13.7 million at end-March, and US$10.8 million at end-April 2000.1 Although the debt cannot be fully settled by the end of 1999, the existing government guarantee will not be extended. While honoring these debt ceilings may not prevent CSFB from calling the guarantee, CSFB has assured us that it would not make the calling of the guarantee effective for early repayment as long as the debt repayment scheme proceeds as agreed. Accordingly, our monetary program takes into account the need to reduce this balance as indicated above. In the event the guarantee is effectively called, the government and the NBT will, in order to ensure repayment without undermining the 2000 budget, take immediate action to acquire legal rights to the cotton harvests of those exporters who have failed to meet their obligations to CSFB. The government will not provide any guarantees for the cotton sector's external borrowing in 2000 as required by the relevant performance criterion of the program.

18.   With the implementation of the presidential decree of October 22, 1999, the NBT will no longer finance any quasi-fiscal activities by providing directed credits, including to the cotton sector. All credits from the NBT will be channeled through credit auctions at market determined interest rates and the NBT's indirect exposure to the cotton sector will be strictly limited. Neither will the central bank finance the budget in 2000 except for temporary (maximum one month) liquidity management purposes. The stock of the NBT's loans to the private sector will be reduced by at least TR 20.4  billion during the fourth quarter of 1999, mainly through loan recovery from Naftrason, State Committee on Contracts, Tajik Rail, commercial banks, as well as from the cotton sector (at least TR 14.3 billion).

19.  The tight credit policy will support the stability of the exchange rate and help reach the program's NIR target. The NBT will allow the TICEX exchange rate to be determined by market forces and ensure free availability of foreign exchange cash in order to narrow the spread between the TICEX rate and the cash market rate to below the estimated transaction cost of 7 percent. To further increase competition in the foreign exchange market and credit auctions, free access to these markets will be ensured for all solvent commercial banks acting on behalf of their clients. The functioning of these markets will be reviewed with the forthcoming MAE mission in February 2000 with the view to encourage the development of inter-bank markets for foreign exchange and domestic credits. The NBT will ensure that the exchange rate at the TICEX and the interest rate at the credit auctions are not subject to moral suasion, collusion or any other indirect influence by market participants.

20.  To achieve greater transparency and accountability of the key policy institutions, the financial relations between the NBT and the Ministry of Finance will be regularized. Starting January 1, 2000, the government will pay interest at market rates on any borrowing from the NBT. As of the same date, the NBT and government will convert the stock of foreign currency and Tajik ruble debt to the NBT outstanding at end-December 1999 into Tajik ruble denominated long term bonds. TR 2 billion of this stock will be converted into short-term treasury bills. The NBT will pay market interest rates on government deposits at the NBT and the NBT will transfer part of its profits to the budget. A working group consisting of the representatives of the NBT, the Ministry of Finance, and the President's Office, with the IMF Resident Representative as an observer, will be appointed immediately and it will submit its specific proposal on the implementation of the scheme outlined above for government and NBT Board approval by December 15, 1999.

C.  Trade and External Debt Policies

21.  To facilitate the balance of payments adjustment, the government is committed to maintain an open trade system. As Tajikistan joined the customs union with Russia, Belarus, Kazakhstan, and Kyrgyz Republic in early 1999, import tariffs on shipments from member countries of the customs union are planned to be abolished. Several tariffs on imports from other countries have been raised, however, so as to bring them closer to the external tariffs stipulated by the customs union treaty, thereby raising the average tariff rate from 5 to about 7.8 percent. Since our ultimate objective remains to integrate with the world economy, we have initiated the application process for membership in the World Trade Organization (WTO). During the WTO accession process, possible tariff adjustments will be in line with the WTO policy goals.

22.  Our external debt service is expected to increase sharply as a proportion to government revenues, as the grace period of a number of rescheduling agreements ends. We therefore will keep tight control on government debt guarantees and borrowing,2 and continue our efforts to regularize our external debt obligations, in particular with Turkmenistan, Kazakhstan, and Uzbekistan. In this endeavor, the authorities would appreciate the assistance of the IMF in using its good offices to bring parties together to help settle the debt discrepancies. An agreement has been reached with the Russian government on further reduction of our debt and it is expected to become effective in early 2000. Documents are being prepared to sign the agreement with Pakistan. Negotiations with the EU are expected to be finalized soon. With China and India, debt rescheduling discussions are still ongoing.

D.  Structural Policies

23.  The main emphasis of our structural reforms will continue to be in privatization, land reform, energy pricing, and bank restructuring. On privatization, we will focus on increasing the success rate at the auctions of enterprises in terms of sales contracts and accelerating the collection of payments from new owners of privatized enterprises. We will also continue to strive at increasing transparency, openness, and competition in the privatization process. To reach our targets for medium- and large-scale privatization for the remainder of the second-year program, the State Property Committee (SPC) will conduct at least 2 auctions per month, offering at least 20 enterprises for sale at each auction. It will refrain from applying any arbitrary coefficients in setting the auction starting prices. Moreover, to accelerate enterprise sales and strengthen payment collection, the SPC will use the Dutch auction method for those enterprises which fail to attract sale contracts in English auctions, or when payment has fallen short of the contracted amount. With good progress already made during the second-year program, the government intends to complete the privatization of small-scale enterprises by end-1999. To this end, more than 300 items will be offered for sale in auctions in the fourth quarter 1999.

24.  The government recognizes that the privatization of cotton ginneries is an important step in increasing efficiency in the cotton sector, but so far the process has been plagued by delays in receiving full payment for assets sold. In addition, the existence of de facto minimum prices has contributed to the slow pace of privatization. Despite five international tenders so far this year, of the 23 enterprises for sale, four ginneries have been fully paid for and for another three 30-50 percent of payment has been collected. At present, eight ginneries are under privatization contracts, and the remaining ginneries will be re-offered for sale in late December. To speed up the process, the SPC will enforce payment collection of the existing contracts. In close consultation with the World Bank staff, the tender process will be streamlined to ensure transparency. The government will not set any minimum prices and will allow the highest bid to win.

25.  Significant progress has already been made in land reform. As of end-September 1999, more than half of state and collective farms have been dismantled and nearly 45 percent of the arable land is now in private hands. For the remainder of the second-year program, the Land Reform Committee will continue to convert at least 50 state and collective farms per quarter into private dekhan farms through the issuance of marketable land use and land share certificates to private farmers. With assistance from the World Bank, we are also improving the current land registry and making further progress in land mapping, surveying, and title registration in order the facilitate the development of land use rights/lease markets. To encourage more efficient use of water resources, irrigation tariffs will be raised to cover at least 20  percent of the cost as soon as cost calculations are finalized, but no later than March 1, 2000.

26.  In the energy sector, notwithstanding the increase in the electricity tariffs for households in April 1999, the recent exchange rate depreciation has eroded the cost recovery of the electricity company, Barki Tojik. To improve the basis for prudent pricing policies, Barki Tojik is currently conducting a review of the cost recovery calculations with technical assistance from the Asian Development Bank (ADB). In the coming months, we are committed to (i) seek ADB's support for an audit of Barki Tojik according to international accounting standards, with the aim to complete the audit by end-March 2000; (ii) remove, effective March 2000, the privileges for free usage of electric power by certain groups except for war veterans, invalids, and Chernobyl victims; and (iii) raise households electricity tariffs, by end-March 2000, to cover 50 percent of the costs based on the ADB-supported study. Government agencies at all levels will not be allowed to interfere with Barki Tojik's and Tajik Communal Service's policy of cutting off service to delinquent customers. To protect the poorest segments of the population from the effects of price increases, a special compensation scheme will be designed with assistance from the ADB.

27.  With regard to TADAZ, progress has been made in the separation of non-aluminum activities from this enterprise. Work on a specific restructuring plan, which was started in April 1999 with the help of the International Finance Corporation (IFC), will be completed by February 2000.

28.  On bank restructuring, some progress has been made in the liquidation of Tajikbankbusiness, particularly in the repayment of deposits. Operational restructuring of the Savings Bank and Agroinvestbank, however, has been slow, with little progress in staff reduction and loan recovery. Both banks have now been audited by PricewaterhouseCoopers according to International Accounting Standards. The achievements of the restructuring program will now be assessed in light of these audit reports, and we believe that further steps are needed in the areas of loan recovery, loan loss provisioning, risk assessment procedures, and loan monitoring practices. These further steps will be defined during the February Fund mission. The TR 7.3 billion recapitalization of the Agroinvestbank will be completed shortly as recommended by the auditors and earlier agreed with the World Bank and Fund staffs. The government recapitalization of other banks will be considered in light of the international audit results, in consultation with the staffs of the World Bank and the IMF. At present, out of the total of 16 active banks, three are not in compliance with NBT prudential standards. The NBT will revoke the licenses of those banks that have systematically failed to meet prudential standards, and start the liquidation process in accordance with the NBT and Banking Laws. The NBT will also issue a Guide on Collateral, where the purpose of collateral and risks associated with different type of collaterals will be explained. A registry will be established for collaterals so that the same asset cannot be used as collateral for other loans or sold to a third party.

29.  Improving the business climate in Tajikistan is essential in order to attract domestic and foreign investors. We are aware that private businesses are too often harassed by public officials from various levels of government. The Interior Ministry, Prosecutor General, and local authorities will be prohibited from interfering with the activities of banks and enterprises and inspections by the State Tax and Customs Committees will strictly comply with the limits assigned to them by law. A record keeping mechanism about the interference of government agencies in enterprises operations will be established and reviewed periodically with quarterly reports sent to the President, starting in March 2000.

30.  We are keenly aware of the urgent need to strengthen our statistical data base in order to meet the increasing demand of a market economy. Our priorities at present include national accounts, price indices, and balance of payment statistics. In addition, we need help in sampling techniques, analysis of statistical data, computerization, and software. We hope that the Fund could take the lead in providing technical assistance in all these areas.

31.   The Government welcomes the initiative to prepare a Poverty Reduction Strategy Paper (PRSP) to enhance the social safety net and employment opportunities. We hope that in the context of this process, we will be assisted in the design of the program by staffs of the World Bank and the IMF, other international supporters of the Tajik development process and in consultation with the civil society. We will prepare an outline of the PRSP by mid-February for discussion with the IMF and World Bank staffs. We aim at completing an interim PRSP by end-May 2000 so that the principles of an efficient poverty reduction strategy can be introduced in the context of the prospective third annual ESAF arrangement. A full-fledged PRSP would be completed in early 2001.

32.  With the policies specified in this SMEP and other measures to which we committed ourselves in the Memorandum of Economic Policies and Policy Framework Paper dated June 1999, we believe that our performance in implementing stabilization policies and structural reforms will improve on a sustained basis. We will maintain continuous contacts with the Fund staff on monitoring program implementation, and in the event of any slippages from the programmed track, we will stand ready to take immediate policy action to reverse such deviations.

1This remaining balance will be settled from the 2000 harvest in October-November.
2The new draft Law on Foreign Debt and Government Guarantees, prepared with assistance from the IMF's Legal Department, is currently before Parliament.

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