Press Release: IMF Approves First Credit Tranche Stand-By for Republic of Tajikistan
May 8, 1996
The International Monetary Fund (IMF) today approved a stand-by in the first credit tranche for the Republic of Tajikistan of SDR 15 million (about $22 million), equivalent to 25 percent of quota1, to support the Government s economic reform program through the end of 1996. This is the first use of IMF financial resources by Tajikistan, which joined the IMF on April 27, 1993 and has a quota of SDR 60 million (about $87 million).
Tajikistan was one of the poorest republics when it formed part of the former Soviet Union and, after independence in September 1991, suffered severe external shocks from rising energy prices, the discontinuation of union transfers, and the breakup of traditional trade and payments arrangements. Because of prolonged domestic instability, Tajikistan was also one of the last former Soviet republics to begin serious economic reform. Its economic performance was, furthermore, severely affected by the civil war and its aftermath, and by natural catastrophes.
The Government that took office at the end of 1994 made efforts to stabilize the economy and to revive structural reforms. It introduced a national currency in May 1995 but was not able to take advantage of the opportunity this created to reduce inflation sharply.
The 1996 Program
To lay the foundation for sustained economic growth over the medium term, the authorities framed a program in January 1996 designed to eliminate macroeconomic imbalances relatively quickly while making significant progress on structural reforms. The 1996 program, which is supported by the stand-by credit, aims at: 1) reducing monthly inflation to about 4 percent by September; 2) making progress toward a viable external balance of payments, including by building up convertible currency reserves to the equivalent of nearly six weeks of non-grant, non-alumina imports by the end of 1996, and by normalizing relations with external creditors; and 3) slowing the decline in output and real income.
To these ends, the authorities intend to pursue a tight monetary policy that will strictly limit domestic bank credit financing to the budget and the rest of the economy. They are targeting an overall budget deficit for 1996 equivalent to 5.4 percent of GDP, compared with 11.2 percent of GDP over the eight-month period after the currency introduction in 1995. This will be accomplished while integrating all previously extrabudgetary foreign exchange transactions into the budget. The reduction in the budget deficit will be achieved, on the revenue side, by transparent presumptive taxes on cotton and aluminum (which have replaced the extrabudgetary taxation of these sectors), by other tax measures, and by strengthening tax administration. On the expenditure side, there will be a real decline in nearly all spending categories, except the social safety net and certain priority categories.
On the structural side, the objectives of the program include the initiation of land reform and further progress in privatization. In the banking sector, the authorities intend to introduce legislation that will enable the National Bank of Tajikistan to exercise full and independent control over monetary and credit policies. The Government intends to build on the progress already made in the liberalization of domestic and foreign trade, and to maintain a unified exchange rate.
Addressing Social Costs
To shield the most vulnerable groups of the population from the effects of increases in the prices of energy and public transportation, as well as the price of bread which was freed on March 1, 1996, the Government has increased compensating cash transfers. The program envisages a strengthening and better targeting of the social safety net, consistent with the overall budget objective and the financial program. The Government also plans to reform the Pension Fund.
The Challenge Ahead
There are risks to the program that arise from Tajikistan's heavy external debt burden, so far limited donor interest, and low foreign exchange reserves. The authorities have, however, in recent months implemented a comprehensive set of strong prior actions, successfully adhered to the targets of an IMF staff-monitored program, and secured the necessary financing assurances from creditors and donors. The first credit tranche arrangement is an initial step and is expected to lay the foundation for economic growth and generate momentum for further reform. Continued assistance on highly concessional terms will be needed for years to come, however.
Tajik authorities; and IMF staff estimates.
***Data for 1995 refer to the period of May 10 (the date of the introduction of the national currency) to December 31, 1995.
1. A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its allocation of SDRs.