Republic of Tajikistan and the IMF

Country's Policy Intentions Documents

See also:
Poverty Reduction Strategy Papers (PRSPs)



Tajikistan
Enhanced Structural Adjustment Facility
Policy Framework Paper (1999–2002)

Prepared by the Tajikistan Authorities in Collaboration
with the Staffs of the International Monetary Fund and the World Bank
June 18, 1999

Use the free Adobe Acrobat Reader to view Appendices I-II, Tables 1-3, and Figure 1.

Contents

  1. Background

  2. Policy Implementation Lessons
    1. Areas of Strong Progress
    2. Areas of Slower Progress

  3. Macroeconomic Policies for 1999–2002

  4. Policies to Reduce the Size of the Non-Cash Economy

  5. Structural, Social and Human Resources Polices
    1. Structural Reforms
    2. Infrastructure
    3. Social and Human Resource Polices

  6. External Financial Requirements and External Debt

  7. Technical Assistance and Statistical Issues

Use the free Adobe Acrobat Reader to view Appendices I-II, Tables 1 - 3, and Figure 1.

Appendix I. Tajikistan: Policy Matrix, 19999-2002

Appendix II. Development Management Matrix

Tables

  1. Tajikistan: Summary of Medium-Term Program (pdf file)
  2. Tajikistan: Income and Social Indicators, 1995-2001 (pdf file)
  3. Tajikistan: External Financinng Requirements and Sources,
    1993-2002
    (pdf file)

Figure

  1. Structural Reforms and Real GDP Growth in Transition Economies, 1995-98 (pdf file)


I.  Background

1. In June 1998, the government of Tajikistan adopted a medium-term economic adjustment and reform program, supported by a three-year financial arrangement under the Fund's Enhanced Structural Adjustment Facility (ESAF) and by the World Bank's Structural Adjustment Credit (SAC). In line with the objectives of that program, good progress has been made in macroeconomic stabilization as evidenced by the sharp reduction in inflation and continued recovery in economic growth. Structural and institutional reforms have also moved forward, although the progress in some areas--most notably large scale privatization-has been less than initially envisioned. The government has now revised its medium-term economic program for the period 1999-2002, in order to consolidate the gains in financial stabilization and deepen structural reforms. For the support of this program, it is requesting further financial assistance from the Fund and from the World Bank.

Contents

II. Policy Implementation Lessons

2. Despite significant progress made in macroeconomic stabilization, the overall policy implementation under the first year ESAF program remained somewhat mixed. The implementation of the financial program was complicated by two serious external shocks. First, world market prices of cotton and aluminum--Tajikistan's two main export products--declined sharply during 1998. In 1999, they have remained low while import prices, oil and flour in particular, have started to rise. Second, the collapse of the Russian ruble in August 1998 had severe adverse effects on the Tajik economy. Nevertheless, key macroeconomic indicators have performed well, and the country has responded appropriately to the external shocks it faced.

A.  Areas of Strong Progress

3. The major achievement under the program was the progress in macroeconomic stabilization. Inflation declined more rapidly than programmed--with the rate of increase of consumer prices declining from about 160 percent during 1997 to 2.7 percent in 1998. With maintenance of a tight monetary policy in early 1999 to dampen the effects of the exchange rate depreciation in late 1998, inflation has continued to be moderate; in April, the price level was only 11 percent higher than a year earlier. The official exchange rate remained stable in the first half of the program, but it came under pressure after the Russian crisis and since mid-October 1998 the authorities allowed the Tajik ruble to depreciate. Supported by relatively tight policies, the rate of exchange rate depreciation has slowed significantly recently. By mid-May, the nominal exchange rate had depreciated by 35 percent against the U.S. dollar since the beginning of the Russian crisis.

4. Real GDP increased by 5.3 percent in 1998. This growth rate was about 2 percentage points higher than originally envisaged in the program. Although most sectors of the economy experienced growth in 1998, the recovery was led by agriculture, industry, and services. In agriculture, cotton production increased for the second consecutive year by almost 10 percent, supported by significant private external financing. Aluminum production, which was stagnant in 1997, increased by 3.7 percent. Retail trade expanded by more than 40 percent from its low initial level.

5. During most of 1998, the fiscal deficit was kept within the program limits and fiscal consolidation has been a major contributor to the general economic stabilization. However, due to the slippage in the fourth quarter of 1998, when the impact of the external shocks built up, the deficit increased from 3.3 percent of GDP in 1997 to 3.8 percent of GDP for 1998 as a whole (0.6 percent of GDP higher than programmed). An important step toward strengthening Tajikistan's tax system was accomplished with the introduction of the new Tax Code in January 1999.

6. Regarding monetary policy, even though central bank credit expansion has been greater than envisioned in the program, mainly because of directed credits to the cotton sector, Tajik Rail and the national oil company, in support of their weak liquidity positions, the overall monetary expansion through March 1999 was close to the programmed target as the central bank's foreign exchange sales, stemming from World Bank loan disbursement and sales tax collection, increased significantly. Despite problems earlier during the program period, the National Bank of Tajikistan (NBT) is now extending virtually all gross credit via the credit auction mechanism.

7. On external debt, the government has completed rescheduling agreements with several creditors since mid-1997. Agreements have been signed with Russia, Uzbekistan, Kazakhstan, the Kyrgyz Republic, and Turkey. In addition, detailed proposals have been presented to the EU, Pakistan, India, China, and Turkmenistan, and agreements with the first three of these creditors are expected to be signed in the near future.

8. On structural reforms, good progress was made during the program period in privatizing small-scale enterprises and converting large collective farms into smaller private farms. By end-May 1999, more than 80 percent of small-scale enterprises was in private hands. In line with the program, 22 cotton ginneries were put up for international tender in January, although by end-March, final sale contracts had been signed only for six ginneries. In addition, The State Cotton Company (the previous cotton monopoly) was liquidated in January 1999.

9. Progress was also made in restructuring the banking sector. The first round of bank restructuring programs for four major banks was completed in November 1998 with progress in reducing staff, improving management practices, and expanding the capital base. Diagnostic audits have been completed for the major banks. Several weak and small banks have been liquidated or merged with others. In April 1999, the NBT took over the administration of one of the big five, the Tajikbankbusiness, because of non-compliance with prudential regulations. The NBT has also adopted a new set of prudential regulations which complies with international standards. Loan-loss provisions have been made tax deductible to encourage realistic provisioning of bad loans of commercial banks. The minimum capital requirement has been raised to the equivalent of US$500,000. In addition, the NBT has introduced a new chart of accounts consistent with International Accounting Standards (IAS).

B.  Areas of Slower Progress

10. While the fiscal deficit developed broadly as programmed for most of 1998, fiscal revenue fell short of targets towards the end of the year due to a combination of the external shocks and weaknesses in tax collection. In 1998, total revenue collection amounted to 12 percent of GDP, compared to 13.7 percent in 1997. However, in the first quarter of 1999, revenue performance improved with higher VAT, profit taxes, and payroll taxes.

11. As regards monetary policy, despite the fact that reserve money remained close to the indicative targets, net domestic assets were significantly higher than programmed as net credits to the government exceeded the program targets and new credits were extended to finance quasi-fiscal operations and the cotton sector. The liquidity effects of most of these operations did not materialize due to simultaneous sales of foreign exchange. As a result, net international reserves of the NBT dropped significantly. By end-March 1999, gross international reserves while rising from US$32 million in the beginning of the program to US$52 million, were about US$20 million lower than originally envisioned.

12. The spread between the official non-cash auction exchange rate and the curb market cash rate increased during 1998 from a level of about 7 percent to a level fluctuating at around 20 percent. Although there are no formal restrictions on the availability of foreign exchange, informal restrictions have evidently been imposed and this contributed to the increase of the spread. In late May 1999, the spread fell to about 12 percent, and further to [...] percent by early June as the informal exchange restrictions were not applied any more.

13. The privatization of medium-size and large enterprises advanced more slowly than envisaged. For some time, the government showed less than full commitment to this part of the privatization program and delays occurred mainly due to unrealistic pricing. In addition, delays in payments from buyers have slowed the process. The political difficulties experienced in the northern part of the country in late 1998 may also have contributed to the slowdown of the process.

14. Overall, the achievements during the first program year have shown that the government, despite a difficult political and external environment, is committed to maintain economic stabilization and reform the fundamental economic conditions of the country. The experience also shows that clear ownership of the program objectives by the key policy makers, including the President, is critical for a successful policy implementation. The future reform challenge facing the government is demanding for three reasons. First, administrative and institutional capacity is still weak and, although it has been a small obstacle for macroeconomic stabilization, it has contributed to several implementation problems in structural reforms. Second, the Russian crisis and the large terms-of-trade shock have demonstrated Tajikistan's vulnerability to the external environment, and the response requires skills and perseverance from policy makers. Third, the country's internal political situation remains unsettled despite the gradual progress achieved in the peace process.

Contents

III.  Macroeconomic policies for 1999–2002

15. The aim of the government's revised economic program for 1999-2002 is to consolidate the progress already achieved and to correct policies in areas where performance has been less satisfactory. In line with the previous Policy Framework Paper, the medium-term strategy focusses on creating a favorable environment for export-led growth, through promoting private sector development and foreign investment, and increasing the efficiency of the business enterprise sector. The key macroeconomic objectives for 1999-2002 will be to(i) increase real GDP growth to 6-7 percent a year; (ii) to achieve low inflation at around 7 percent; and (iii) to increase foreign exchange reserves of the NBT to about 3 months of imports by end-2002. To achieve the inflation and foreign reserve objectives, the program is based on appropriately tight fiscal and monetary policies. Low inflation and the implementation of a wide array of structural reforms will support growth which will continue to be driven by agriculture, agricultural processing and an expanding service sector, utilizing Tajikistan's comparative advantage in agricultural production and low labor costs. The latter factor will also support industrial production where the potential for productivity gains is significant. Also, growth potential exists in other sectors such as hydropower and mining.

16. The government recognizes that a successful implementation of the macroeconomic stabilization and reform program is critical to achieve its most important goal--the completion of the peace process. At the same time, failure from any of the parties involved to adhere to the peace agreement would endanger reaching the objectives of the new economic program.

17. The medium-term macroeconomic framework has been revised by using a formalized financial programming model to generate the program projections. Box 1 and Table 1 provide an overview of the medium-term program consistent with the key macroeconomic objectives mentioned above.

Box 1. Macroeconomic Framework
  1998 1999 2000 2001 2002
  (In percentage change)
Program objectives

Real GDP growth

6.2 5.5 6.0 6.5 6.5

12-month CPI inflation (in percentage change)

2.7 13.2 7.0 7.0 7.0

Gross reserves (in months of imports)

1.3 2.0 3.2 3.7 3.4
 

(In percent of GDP)

Fiscal policy

General government overall balance

- 3.8 - 3.0 - 2.4 - 2.2 - 2.0

   Excluding public investment program

- 3.8 - 3.0 - 1.9 - 1.2 - 1.0

Total revenue

12.0 12.8 13.5 13.8 14.0

Total expenditures

15.8 15.8 15.9 16.0 16.0

Monetary policy

Reserve money growth (in percentage change)

4.9 17.5 17.6 20.0 16.7

Money multiplier (end of period)

0.88 0.89 0.93 0.97 1.03
  (In percent of GDP)
Saving-investment balance

Foreign saving

10.9 4.9 7.0 6.1 5.1

National saving

- 2.1 0.8 1.3 3.2 4.3

Fixed investment

7.0 7.1 8.3 9.2 9.4

Changes in stocks

1.7 - 1.5 0.0 0.0 0.0
Sources: The Central Bank of Tajikistan, the Ministry of Finance, and Fund staff estimates.
 

18. Consistent with the real GDP growth, investment is projected to increase from 7 percent of GDP in 1998 to 9.6 percent in 2002. This relatively small increase in the investment ratio reflects the strategy where a larger proportion of growth is expected to come from efficiency gains and catching up effects after the long lasting civil strife. Meanwhile, national savings are expected to rise from a negative 2.1 percent of GDP in 1998 to 4.3 percent in 2002--of which about half would be generated by the public sector. Private sector saving would be supported by higher profitability of the business sector stemming from productivity gains and by recovering real incomes of the household sector. As a result, investments would need to be supported by foreign saving of about 6 percent of GDP on average during 1999-2000, falling to about 5 percent of GDP in 2002. For 1999, the program implies a significant adjustment in domestic absorption as required by large external imbalances due to the external stocks. The medium-term fiscal adjustment, with the deficit declining from 3.8 percent of GDP in 1998 to about 1 percent of GDP in 2002, leaves little room for growth of private consumption in 1999, but consumer spending would recover in 2000-2002. The expected efficiency gains are supported by continued macroeconomic stability, low inflation, continuation of the privatization program (including cotton ginneries), restructuring of the banking system, land reform, and improving governance in the electricity sector.

19. The policy measures to be implemented in support of the objectives of the program are listed in the policy matrix (Appendix I). A development management matrix, a tool that indicates the areas of responsibility for the main development institutions working in Tajikistan, is attached as well (Appendix II). At this stage, the World Bank and the IMF dominate the external support in Tajikistan, but it is expected that other institutions such as the Asian Development Bank (ADB), the Islamic Development Bank (ISDB), EBRD, and USAID and a number of NGO's will play a larger role in the near future. For all the areas covered in matrix, the objective is that the government and the private sector will gradually take over activities and increase the ownership of various development programs.

20. Fiscal policy will be critical to the success of the outlined macroeconomic strategy. The sharp decline in the fiscal deficit reflects the need to avoid inflationary budget financing, the need to contain domestic demand to improve the external balance, and the need to create room for expanding private economic activities. The deficit will be financed by a combination of external loans, treasury bills, and privatization proceeds. No new central bank credits to the government will be permitted. The government will be cautious in its external borrowing, doing so only on concessional terms and using such financing primarily for capital expenditures, while rigorously adhering to its external debt repayment schedule.

21. Budget policy will focus on the provision of essential public services in a market economy, as well as increased capital expenditures required mainly to rebuild the infrastructure after the termination of the civil war. In order to fund these expenditures, the program targets an increase in the revenue to GDP ratio from 12 percent of GDP in 1998 to 14 percent of GDP in 2002. This task is complicated by the need to gradually replace the sales taxes--which are effectively export taxes--on cotton and aluminum by value added taxation (VAT). This reform will lead to greater reliance on VAT revenues, and require better tax administration. After gaining more experience with the new tax code, collection ratios are expected to improve in all tax categories. Efforts to improve tax collection will focus on large tax payers as well as on collections of VAT, customs duties, and excise taxes.

22. On the expenditure side, priority areas are wages, social benefits, and external debt service. Through the government's expenditure management program, which will be supported by the World Bank, the efficiency of the civil service will be improved. The quality of government services will also be supported by a market-oriented wage policy where higher salaries can be paid to more qualified personnel. Resources for health and education are programmed to increase in real terms during the program period. Given the low level compared to other countries in the region, expenditures on the social safety net will be increased from 2.3 percent of GDP in 1998 to 3.1 percent of GDP by 2001. The public pension system will be made more effective and its finances strengthened, and pension benefits will be increased in line with the improvement. On cash compensations, in the financial position of the Social Protection Fund (SPF), the government will reform the system and improve efficiency and targeting. In the short-term, the benefit delivery of the cash compensation system will be improved by reducing the paper work required to claim the benefit. Over the medium-term, the government will more fundamentally change the system with assistance from the World Bank to improve efficiency and targeting. External debt service payments are projected to increase over the next few years from about 12 percent of total revenue in 1999 to about 22 percent in 2001. Regarding capital expenditures, such areas as agriculture, water supply, education, health, and transportation will receive priority.

23. During the program period, the Ministry of Finance will seek to improve its expenditure management through completion of the treasury system, improvements in the payments process and accounting, strengthening of institutional and regulatory framework for budget management, as well as establishing multi-year fiscal planning and its implementation procedures. In both of these areas, the IMF and the World Bank will provide technical assistance.

24. Monetary and exchange rate policies will aim at strengthening the balance of payments while supporting low inflation. A stable monetary environment will also help strengthen domestic savings and investment. After only a slight decline in the income velocity of money in 1999, owing to the adverse effects of the Russian crisis and external shocks, the program assumes that velocity will decrease by 5-6 percent annually for the rest of the program period as confidence gradually improves. The fiscal and monetary programs are designed to increase gross reserves to about 3.5 months of imports by 2002. During 1999, the reserve buildup will be financed through IMF disbursements, but in 2000-2002 net international reserves are expected to increase each year by US$25 million on average, reflecting a stronger demand for money and increased national savings. To ensure the successful implementation of monetary policy, the NBT will improve its short-term liquidity management and enhance its tools for indirect monetary control. The NBT will not extend any directed credits to the economy, including to the cotton sector and infrastructure projects. Instead, it will extend credits exclusively through credit auctions. When the secondary market for treasury bills has been sufficiently developed, short-term financing will also be channeled through a Lombard facility.

25. The government and the NBT will follow a flexible exchange rate policy with no formal or informal restrictions on foreign exchange trading. Since the real exchange rate remains largely undervalued, as indicated by low dollar wages compared to other countries in the region, an expected real appreciation of the currency through inflation is not expected to cause problems for competitiveness over the medium-term.

Contents

IV.  Policies to reduce the size of the non-cash economy

26. A fundamental building block in establishing a well-functioning market economy is to enforce hard budget constraints on all economic agents to ensure that scarce resources are allocated efficiently. Recent experience in other countries in the region shows that an increase in the size of the non-cash economy progressively undermines the government's ability to collect revenue and implement stabilization policies. An extensive non-cash economy would pave the way to financial crisis endangering the entire reform process. In Tajikistan, a significant proportion of economic transactions takes place in non-monetary forms--such as barter, arrears accumulation, and netting-out operations. Over the program period, this proportion of non-monetary transactions should be drastically reduced. It is recognized that this task presents a major challenge for the government, but progress in this area is critical for improving governance and reducing corruption.

27. The proposed measures to contain the non-cash economy concentrate in three areas. First, measures to improve governance and the legal framework include: (i) a revision of the bankruptcy law to streamline liquidation procedures of insolvent companies; (ii) a revision of the relevant laws to strengthen the protection of private contracts on monetary transactions, and (iii) launching international audits of public utility enterprises. Second, measures to eliminate barter, tax off-sets, and in-kind payments in the public sector include: (i) regularization of all payment responsibilities between the government agencies and state enterprises, including the energy companies; (ii) requiring all state enterprises to cease tax offset operations and not accept or make payments in-kind, and (iii) setting up a government mechanism under which transfers to local authorities are made contingent on timely payment of their current liabilities to suppliers and other creditors. Third, measures to eliminate the arrears between enterprises, on tax payments, public utilities, and repayment of principal and interest on bank loans--include: (i) establishing a mechanism for voluntary rescheduling and securitization of interenterprise arrears and arrears accumulated on taxes and public utilities; (ii) starting liquidations of enterprises and banks using the bankruptcy law; and (iii) applying conditions for any government financial support to enterprises or banks to be current in their payments of utility bills.

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V.  Structural, Social and human resource policies

A.  Structural Reforms

28. Continuation of the structural reforms will be vital for improving efficiency and reaching the economic growth and stabilization targets of the program. The relationship between structural reforms and growth is illustrated in Figure 1. Over the next three years, structural reforms will build on the achievements already made in such areas as privatization, financial sector reform, and land reform, but new programs will be initiated as well, in particular in the area of public sector restructuring and electricity production.

Private sector development

29. In the area of privatization, the sale of cotton ginneries to private entrepreneurs will be completed in the next few months and the privatization of the remaining small-scale enterprises (about 15 percent of the total) will be fully completed by end-1999. Privatization of medium and large-scale enterprises, which was initiated in 1998 through either share auctions or on a case-by-case basis, will proceed during the second program year where an additional 90 enterprises are envisaged to be privatized bringing the share of privatized medium- and large size enterprises to nearly 30 percent of the universe. Privatization of medium and large-scale enterprises is expected to be completed by end-2001. The incorporatization program is expected to be completed by mid-1999, when more than 700 enterprises will have been converted into joint stock enterprises. In order to allocate the privatization proceeds smoothly according to a specific plan over the medium term, the government will establish a special account for these funds at the NBT.

30. The Government is committed to creating a more conducive business environment for new private activities by reducing barriers of entry, licensing requirements and simplifying or eliminating unnecessary regulatory requirements for the establishment and operation of private businesses. The legal framework will be strengthened to speed up liquidation and post-privatization restructuring. The processing period for business registration will be reduced to one week and business licensing requirements will be streamlined. In the area of mining, the Government will prepare a plan to attract foreign participation in extracting the country's rich natural resources.

Financial sector reform

31. Despite the success in implementing the initial stages of the bank restructuring program, Tajikistan's banking system remains fragile and financial intermediation continues to be minimal, which impairs allocative efficiency and growth. In the commercial banks, the average level of nonperforming loans amounts to about 50 percent of outstanding loans and the consolidated net worth, assuming appropriate loan loss provisioning, for the five largest banks is estimated to be only about 1.5 percent of total assets. Against this background, the NBT will strengthen its banking supervision and improve the regulatory environment to facilitate bank restructuring. The minimum capital requirement will be further raised to the equivalent of US$1 million by January 2000. The restructuring programs, which were extended with Agroinvestbank and the Savings Bank, will be closely monitored during the program and modified if necessary. The government's plan to take over an estimated TR 7 billion of old directed credits to the mountainous areas and recapitalize Agroinvestbank by the same amount through a long-term government bond will be implemented in 1999. The five major banks (Agroinvestbank, Savings Bank, Vnesheconombank, and Orien Bank) will be subject to independent audits according to international accounting standards and issue audited financial statements for the financial year 1999. All commercial banks will be subject to similar requirements for the financial year 2000. Based on improving bank supervision capabilities, the NBT will more forcefully monitor whether all banks meet all prudential standards and withdraw licenses for banks failing to meet them.

Agriculture sector reform

32. Agriculture is the key sector for sustained growth. The government has already established a better environment for farming, including by liberalizing prices and eliminating state orders and restrictions on agricultural imports and exports. The major challenge for the next few years will be to maintain the momentum of land distribution to private farmers. During the second-year program, the objective is to break up an additional 120 state and collective farms through the issuance of marketable land use and land share certificates to private farmers. This would bring the share of private farming up to over 50 percent. With assistance of the World Bank, procedures will be simplified and fees reduced to obtain land certificates. In addition, progress will be made in land mapping, surveying, and title registration.

33. For further support of private agriculture, the government will develop, in consultation with the World Bank, a timetable for the implementation of measures to (i) liberalize the supply of farm inputs by divesting related enterprises from the Ministry of Agriculture and privatizing them; (ii) rehabilitate the irrigation system by supporting water user associations among privatized farms and improving cost recovery ratios of irrigation; and (iii) develop a rural credit system to ensure financial support of the newly created private farms. In the cotton sector, a more transparent process for price setting, including written agreements between cotton farmers and marketing intermediaries, will be supported by the government. However, the government will not give any new guarantees for foreign participation in the harvest financing.

Public sector reforms

34. To strengthen its institutional capacity, the government will implement a public sector reform program in the following areas: (i) budget management systems; (ii) the civil service; and (iii) the restructuring of government agencies.

35. A medium-term budget framework (MTBF) will be developed to improve the effectiveness of government expenditures by allowing ministries and government organizations to plan their expenditure programs over a multi-year time frame. The government will introduce the MTBF progressively over a three-year period staring in 2000, allowing for improvements in the scope and quality of its analysis. A Macroeconomic Unit will be established within the Ministry of Finance to integrate budget policy into a broader macroeconomic framework. Budgeting and expenditure management systems will be improved by developing the regulations and procedures for budget appropriation by ministries. The government will introduce the new budget management systems in two pilot ministries in 2000 and full implementation will be ready for the 2001 budget. Finally, inter-governmental finance will be improved to ensure satisfactory distribution of public expenditure resources between the republican and local governments and proper use of budgetary resources within local governments. These modifications will be reflected in the 2001 budget.

36. Civil service management will be strengthened to facilitate implementation of the new Law on State Services, which was approved by the Majles Oli in November 1998. The Government will establish a Department of State Services and will appoint its director and staff in 1999. During 2000, the Government will: (i) develop a civil service personnel management function, (ii) prepare and introduce a civil service code, (iii) set up a central civil service register recording all posts and their grading, (iv) prepare and approve regulations for civil service recruitment and employment, and (v) design a central data base on civil service employment. A public service pay strategy will be developed to improve the remuneration of civil servants in order to upgrade their performance. During 2000, the Government will complete a study on the pay and incentive system consistent with the macroeconomic outlook and introduce the recommended measures identified in the study in two pilot ministries.

37. The public services will be improved by implementing a comprehensive government restructuring program in order to reflect the changed role of government following economic liberalization. The government has established a Presidential Task Force on Public Administration Reform (PTFPAR) to oversee the planning and implementation of public administration. The government has also established a Public Administration Reform Management Unit (PARMU) to act as Secretariat of the PTFPAR to follow-up on implementation of reform initiatives. By March 2000, the government will develop a plan to set out its priorities for the public administration reform program. During 1999 and the first half of 2000, a number of concrete measures will be implemented, including reducing the large number of departments within each ministry to eliminate duplication of functions; separating enterprises from existing ministries and state committees, converting them into joint stock companies, and registering them for privatization at the State Property Committee (SPC).

Trade and exchange regime

38. Maintaining the openness of the trading system is crucial for the country's growth strategy. The gradual substitution of the sales taxes on cotton and aluminum, and maintaining uniform and low import duties, are critical targets of the program. Following the abolition of the monitoring of export contracts by the Tajik Commodity Exchange, there are no non-tariff barriers in the trading system. The government's trade policy will be guided by the requirements for early accession to the World Trade Organization (WTO), for which it intends to apply before end-1999. The Government will refrain from introducing any discriminatory tariff changes and non-tariff trade barriers inconsistent with WTO policies, and it aims to accept the obligations of Article VIII of the IMF's Articles of Agreement in the near future. Regarding the availability of foreign exchange, no formal or informal restrictions on foreign exchange deposit withdrawal from the NBT will be imposed.

B.  Infrastructure

Energy

39. To support the economic growth targets of the program, the electricity sector, which suffers from under-investment, distorted relative prices, and payment arrears, needs to be rehabilitated. A key to this effort is to improve payment collection and cost recovery ratios, and to develop a realistic long-term investment plan for the sector. Privileges for free usage of power enjoyed by certain groups of the population will be removed and a timetable has been developed for increasing electricity tariffs to a level consistent with full cost recovery and for eliminating cross-subsidies from industries to households. The government will request assistance from the Asian Development Bank to conduct an audit of Barki Tojik according to international accounting standards and make proper calculations of the economic costs of power production in Tajikistan. Moreover, the government will develop a long-term rehabilitation plan for the energy sector and request support for this effort from the Asian Development Bank. The government will also abstain from interfering with Barki Tojik's and Tajik Gas' efforts to enforce payment discipline through supply cuts.

Water and sewerage

40. Structured water supply exists only in larger cities, while in the rest of the country water is supplied from wells, irrigation channels, and rivers. Waste water collection exists only in larger cities and waste water treatment, though inefficient, is limited to Dushanbe. Contamination of water supply sources is severe, and as a result there is a high incidence of water-borne diseases throughout the country. In Dushanbe, the quality of urban water supply is extremely poor and does not satisfy minimal standards. In addition, because of significant network leakage and wastage at the end-consumer level, gross per capita production of water is similar to that of European cities. Tariffs are extremely low by international standards and payments arrears are large, and as a result, operations are highly dependent on municipal budget subsidies.

41. Rehabilitation of water supply systems is critical for economic sustainability and improving the social standards of the country. In this initial phase, the water supply problems in Dushanbe will be addressed by projects by the World Bank and the Islamic Development Bank. Other external donors are expected to provide assistance to improve the water supply in other areas of the country.

Roads and transportation

42. Tajikistan has inherited a relatively well developed road infrastructure network, except in the sparsely populated eastern region. Due to the mountainous terrain and the geological instability of large areas, road construction and maintenance costs are extremely high. The civil war and recent strong floods and numerous landslides have caused extensive and severe damages to the roads. A key issue will be to ensure a minimal resource allocation to maintenance in order to prevent further deterioration. With financial assistance from the World Bank, the government will continue repair work and reconstruction of bridges and roads damaged in the war or by the flooding. Road construction in several areas of the country will also be supported by the Islamic Development Bank. The government is expected to complete its expansion of the railway system during the program period. All public financing for this project will be included in the budget. The financial relations between Tajik Rail and the government will be normalized so that no tax offsets are used in settling mutual obligations.

C.  Social and Human Resource Policies

Social safety net and social programs

43. Estimates from 1997 suggest that the majority of Tajikistan's population is living in poverty (Table 2). The social safety net that is intended to cushion the impact of poverty is poorly targeted and inadequate. Over the program period the share of government expenditures allocated to the social safety will increase. To be included in the 2000 budget, the government will start a comprehensive social safety net reform to replace the current compensation payments and subsidies for transportation and utilities. In addition, the pension system will be rehabilitated and modernized. To obtain the necessary background information for these reforms, the government, in collaboration with the World Bank and UNDP, will complete a comprehensive household poverty survey in July-August 1999. Also, the World Bank will continue to implement a pilot poverty alleviation project in 1999.

Education and health

44. Systems for fostering human resource development have been severely eroded, as the efficiency to provide these services has declined and the public sector funding has remained low. There is an urgent need for building capacity in the education and health sector. Extensive rationalization and restructuring are necessary to improve delivery of services. In 1999 and 2000, the budget system will be reformed, including abolishing the system of funding based on capacity and allowing efficiency gains to remain in the sector. Moreover, with help from the World Bank and other international institutions, pilot projects to rationalize health services and schools will be developed and implemented. The plans will include reducing overstaffing, extensive retraining of health workers, changes in salary structures, and increases in salary levels.

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VI.  External Financing Requirements and External Debt

45. The balance of payments position is expected to remain difficult during the program period with current account deficits (including transfers) of 5-7 percent of GDP, largely because significant imports will be needed to alleviate Tajikistan's supply shortages, reconstruct the infrastructure, and help economic recovery after the civil war (Table 3). The capital account (excluding commitments from bilateral and multilateral donors) is projected to record small surpluses throughout the program period. Private sector inflows--particularly foreign direct investment--are expected to increase during the program period with a further stabilization of the economic and political environment.

46. As the program targets a build up of gross reserves to the equivalent of over 3.5 months of imports, a substantial amount of external financing is needed during the program period. Taking into account repurchases to the IMF, the residual financing gap is estimated to vary between US$10-US$40 million per year in the period of 2000-2002. For the period of the second annual ESAF arrangement, a financing gap of US$209 million is projected to be fully covered by disbursements from the IMF (US$36 million), the World Bank under a Structural Adjustment Credit (US$40 million), the ADB's Infrastructure Rehabilitation Program loan (US$10 million), other bilateral donors (the United States and Switzerland, US$12 million), and debt rescheduling by the EU, China, India, and Turkmenistan (US$111 million). For the third-year arrangement there is a projected financing gap of US$46 million prior to accounting for disbursements from the IMF and the World Bank.

47. Tajikistan has a very high stock of external debt, close to 100 percent of GDP at end-1998. In light of this, the Government is committed to strictly limit the buildup of external public sector debt. During the program period, the Government will limit the contracting of new loans to highly concessional credits and loans from international financial institutions, and issue only a small amount of guarantees on external borrowing from the EBRD. As Tajikistan has rescheduled a substantial part of its debt on concessional terms, external debt service in 1999 constitutes only 7 percent of export earnings. By 2001, the share of export earnings needed to service Tajikistan's external debt obligations is projected to rise to about 11 percent.

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VII.  Technical Assistance and Statistical Issues

48. Tajikistan has made significant progress in strengthening the key institutions for economic policy management, but a great deal remains to be done and the country will continue to require technical assistance in a number of areas. These include bank restructuring and supervision, the treasury system, budget policy and preparation, tax policy and administration, the regulatory environment, and economic data management. In a number of these areas, support has been promised or is being provided by the IMF, the World Bank and others. Appendix I identifies specific areas where technical assistance will be needed and who could be providing that assistance. The IMF and World Bank staffs will continue to assist the authorities in identifying sources of technical assistance for the remaining areas.

49. The government recognizes the urgent need to strengthen the timeliness and accuracy of key economic statistics, and is thus committed to increasing the resources available to Goskomstat. In this respect, the implementation of the recommendations of previous technical assistance programs will receive close attention by the government. Technical assistance will be requested on national accounts and price statistics to assist in the efforts to improve the GDP data, balance of payments statistics, and key price indices. The immediate priority in this area will be the preparation of reliable quarterly nominal and real GDP statistics.