Public Information Notice No. 07/44

Public Information Notice: IMF Executive Board Concludes 2006 Article IV Consultation with the Republic of Tajikistan

April 10, 2007

On March 28, 2007, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Republic of Tajikistan.¹

Background

While the recent strong growth performance continued in 2006, inflation accelerated. Despite considerable disruptions to energy supply late in the year, real GDP growth reached 7 percent, fueled by a surge in construction activity and continuing strong remittance-financed demand for retail services. However, CPI-inflation reached 12.7 percent, its highest level since 2003, mostly because of failed harvests and higher gas prices, but also reflecting a relatively passive monetary policy stance. High aluminum prices and strong growth in nontraditional exports and workers' remittances did not translate into a commensurate improvement in the external accounts, as higher energy prices and strong demand for consumer and capital goods led to a surge in imports. Gross reserves remain relatively low, at the equivalent of two months of imports.

Fiscal policy remained prudent. Reflecting strong revenue performance and cautious fiscal management, the 2006 budget recorded a surplus, continuing the impressive fiscal performance of the past four years. While Tajikistan's external debt profile has improved significantly—mostly as a result of debt restructuring operations and relief under the Multilateral Debt Relief Initiative —on current trends, total public and publicly guaranteed debt is projected to increase significantly over the period of 2006-2009, mainly because of large project-related disbursements from China.

Progress in the structural reform area has been mixed. The authorities have been successfully implementing tax administration and public financial management reforms. While further headway has been made in strengthening the banking sector, it remains small and vulnerable, and public disclosure requirements continue to be inadequate. In the energy sector, important steps have been taken to align tariffs with costs; however, structural and regulatory weaknesses continue to undermine its potential. Agricultural reforms are on going, although finding a solution to the debt overhang in the cotton sector is still an outstanding policy issue. Enhancing growth prospects will also require improving the private investment climate. In this vein, the forthcoming second Poverty Reduction Strategy Paper is expected to address some of these issues.

Executive Board Assessment

Executive Directors commended the authorities for their progress in stabilizing the economy and their implementation of sound economic policies and structural reforms that have contributed to high rates of economic growth. Together with debt relief and macroeconomic stability, strong growth has led to significant progress toward meeting the Millennium Development Goals, including poverty reduction. At the same time, Directors observed that major challenges remain. Inflation pressures have resurfaced, debt sustainability could become a concern with rising indebtedness, and poverty remains widespread.

Directors commended the authorities for their strong fiscal performance in 2006. They urged the authorities to continue to implement a sound fiscal policy in 2007 and save any revenue overperformance, particularly since inflation is on an upward trend and the debt dynamics are worsening. Directors encouraged the authorities to refrain from adopting a supplementary budget until the inflation picture improves. Directors welcomed the significant progress achieved in the areas of tax administration, civil service reform, and public financial management. Nevertheless, the authorities need to address urgently remaining weaknesses in tax compliance and the financial monitoring of state enterprises.

Directors underscored the importance of controlling inflation. The macroeconomic policy framework should be buttressed not only by a strong fiscal position and a flexible exchange rate, but also by a tighter monetary stance. In this context, the balance sheet of the central bank needs to be placed on a firmer footing to give more flexibility and credibility to monetary policy. Directors advised the central bank to refrain from providing directed credits to the agricultural sector. Any financial resources directed to the private sector, particularly if subsidized, should be channeled through the budget in a transparent manner.

Directors supported the current managed float exchange rate regime, which they considered has served Tajikistan well. They encouraged the authorities to limit intervention in the foreign exchange market to smoothing operations and shoring up reserve coverage.

Directors observed that the authorities' development strategy, centered on financing essential infrastructure investments through large and rapidly disbursing project loans at concessional interest rates, could entail risks to debt sustainability in the longer term if the expected concomitant acceleration in growth does not materialize. In addition, many Directors cautioned that the rapid debt accumulation could place additional pressure on the budget, as significant counterpart funds would be needed, which could reduce resources available for other priority sectors and affect macroeconomic performance. Against that background, Directors welcomed the authorities' intention to put in place a debt management strategy that will prevent public debt from exceeding 60 percent of GDP.

Directors considered that the authorities' medium-term growth objectives are ambitious but achievable. Reaching these goals will require determination on the part of the government to address long-standing policy issues in the agricultural and energy sectors, intensify efforts to improve the private investment climate, promote the channeling of the large volume of private remittances to the most productive uses, and enhance the governance framework for state-owned enterprises. Directors welcomed the authorities' intention to focus the second poverty reduction strategy paper on efforts to improve the private investment climate and move forward with the public sector reform program.

Directors welcomed the authorities' commitment to continue with the reforms of core macroeconomic institutions. They looked forward to even closer cooperation and discussion between the authorities and the staff in the period ahead, with a view to the design of a program that could elicit Fund support.

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.