## _cr05131

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### Key macroeconomic developments (2000–2004)
- Growth continued to average 10 percent per year.
- Inflation was sharply reduced to about 5 percent by end-2004.
- The exchange rate has been relatively stable.
- Monetary policy has been strengthened.
- The budget balance (excluding the foreign funded public investment program) has recorded surpluses.
- Regional ties have been strengthened, enabling greater labor mobility, more trading opportunities, and better investment prospects.
- Public external debt was reduced from 131 percent of GDP in 2000 to 40 percent in 2004.
- DSA conclusion: under a baseline scenario and even with slightly higher concessional borrowing than in the recent past, Tajikistan’s external debt profile will remain sustainable; continued prudence in debt management required given historical volatility.

### Sources of growth and productivity dynamics
- Growth drivers and TFP:
  - Growth mainly driven by the services sector and a surge in remittances used for private consumption and small scale private investment.
  - Since 1998 rebound attributable mostly to increases in total factor productivity (TFP).
  - TFP resumed growth starting in 1998 and has averaged about 7 percent per year.
  - Sectoral TFP averages: agriculture 3 percent per year; industry 8 percent per year.
  - Sustaining TFP growth and realizing forthcoming public and private investments would sustain current growth rates.
- Historical output and sectoral composition:
  - Output decline: averaging 20 percent a year during 1990-1994; cumulative decline 69 percent.
  - Continued contraction 1995-1999: decline about 7 percent.
  - Rebound 2000-2004: growth averaged about 10 percent per year (CIS-7 average 7 percent).
  - Output in 2004 was about 68 percent of its 1990 level.
  - Sector shares and changes:
    - Services contribute 35 percent of GDP and expanded relative to agriculture and industry.
    - Cotton production fell by more than 31 percent during 1990–2004.
    - Industrial output fell by over 60 percent; aluminum production bottomed out in 1997 and current level is 70 percent of the 1990 level; aluminum contributes more than 40 percent of value added in manufacturing.
    - Many manufactured products (cement, fertilizers, caustic soda, cotton fabrics) remain at low production levels.
- Measurement caveats:
  - TFP is a residual and subject to data deficiencies; services sector value added difficult to measure.
- Cross-country TFP comparisons (CIS-7, in percent of GDP, 1991-97 / 1998-2003):
  - Armenia: -6.5 ; 8.0
  - Azerbaijan: -11.1 ; 1.9
  - Georgia: -10.2 ; 6.3
  - Kyrgyz Republic: -9.4 ; 1.3
  - Moldova: -13.5 ; 4.1
  - Tajikistan: -12.9 ; 8.1
  - Uzbekistan: -3.1 ; 3.8
  - CIS-7 aggregate: -9.5 ; 4.6

### Fiscal, tax, and public expenditure reforms
- Revised Tax Code (2005) objectives and expected yield:
  - Objectives: simplify tax system, improve revenue administration, eliminate nuisance taxes, reduce tax avoidance incentives.
  - Expected net revenue increase: about 0.5 percent of GDP in 2005.
  - Short-term revenue estimates (authorities’ estimates for 2005):
    - Reductions in tax exemptions: 0.1 percent of GDP.
    - Minimum corporate tax and unified agricultural tax: 0.3 percent of GDP (gross yield from these taxes 0.6 percent of GDP).
    - Strengthened procedures for collecting taxes from defaulters: 0.1 percent of GDP.
- Key tax and rate changes (selected highlights):
  - Corporate profit tax: old 30 percent → new 25 percent.
  - Carry-over of losses: 5 years → 3 years.
  - Accelerated depreciation allowed with a factor of 2.
  - Simplified tax for small businesses with turnover below SM 144,000 at 12 percent.
  - VAT: rate remains 20 percent; registration threshold increased from SM 24,000 to SM 48,000.
  - Minimum corporate income tax: 1 percent of gross income.
  - Unified tax on agricultural producers replaces multiple agricultural taxes.
  - Personal income tax (new brackets): up to minimum wage zero-rated; above minimum and up to SM 100 per month: 8 percent; above SM 100: tax due between minimum wage and SM 100 plus 13 percent of taxable income over SM 100.
  - Social Fund contributions: 25 percent for corporate entities and 20 percent for individual entrepreneurs of payroll.
  - Ginned cotton tax retained at 10 percent; primary aluminum tax raised from 1 percent to 3 percent.

### Government wages, civil service, and employment reforms
- Wage levels and recent adjustments:
  - General government wage bill slipped to 2.7 percent of GDP in 2003–04.
  - 2005 budget raises general government wage bill to 3.9 percent of GDP.
  - In 2004, average government wages (including other employment related supplements) were about SM 74 ($25) per month.
  - Average wages 2004: teachers SM 43; health sector workers SM 23; non-agricultural nongovernment sectors SM 156 ($52).
- Employment and civil service:
  - Total employment fell by 10 percent between 1990–1998.
  - Core civil service employment reported at 0.6 percent of the population (general government excluding education, health and defense), below the low-income country norm of 1 percent.
  - Registry of central government civil service positions expected to show about 15,000 positions (0.2 percent of the population).
- Education and health sector reforms:
  - Education: MOF records total employment in education 220,000 at start of 2004; general education 170,000 positions. Resolution 291 (June 2004) envisaged 5 percent cuts per year over 5 years; implemented cuts of 25.5 percent together with compensating wage increase.
  - Health: shift to primary health care funding on a per capita basis; establish guaranteed benefits package (free) with optional co-payments for other services; formal incomes expected to increase substantially.
- Civil service reform constraints:
  - Reforms slow due to vested interests, complexity, and inertia; low wages created low morale and high attrition.

### Electricity tariff reform: PSIA findings, scenarios, and mitigation
- Background:
  - World Bank estimated energy sector quasi-fiscal deficit in 2003 at 19 percent of GDP.
  - Households account for about 20 percent of electricity generated and allocate around 2.3 percent of total consumption to electricity (2003 national household survey).
- Existing lifeline tariff system (first 250 kWh monthly):
  - Winter lifeline: SM 0.016 per kWh
  - Summer lifeline: SM 0.008 per kWh
  - Above-lifeline seasonal rates: SM 0.027 (winter) and SM 0.014 (summer) per kWh
- Current implicit subsidy (complete withdrawal scenario):
  - Equivalent to 6.8 percent of household income or 3.7 percent of GDP.
  - Impact by quintile under full withdrawal: lowest quintile 8.2 percent of household income; highest quintile 5.9 percent.
- Reform scenarios and quantitative impacts:
  - Scenario A — increase all tariffs, retain lifeline rates doubled, reduce lifeline limits, set above-lifeline to cost recovery:
    - Lifeline rates doubled; monthly lifeline limits reduced to 100 kWh (summer) and 200 kWh (winter); above-lifeline set to cost recovery SM 0.06 per kWh.
    - Subsidy decreases to 1.9 percent overall; lowest quintile 2.3 percent → reform results in average 4.8 percent decrease in household income relative to existing structure.
    - Decrease by quintile: lowest quintile 6.0 percent; highest quintile 4.2 percent.
  - Scenario B — apply lower lifeline limits only to households with monthly consumption below these limits:
    - Average subsidy falls to less than one percent of household incomes.
    - Targeting worsens: middle-income households receive highest subsidy share.
  - Scenario C — tariff-cum-limit reforms combined with direct transfer program:
    - Nearly 25 percent of households identified as beneficiaries using household characteristics.
    - Total transfer budget 0.2 percent of GDP.
    - Average transfer SM 48 annually, equivalent to 1.5 percent of the average income of the poorest two quintiles.
    - 85 percent of beneficiary households fall into the lowest two quintiles.
    - Lowest income quintile receives a 3.4 percent net subsidy; reforms decrease lowest quintile incomes by only 4.8 percent compared to nearly 6–8 percent under tariff-only reforms.
- ECM (Energy Compensation Mechanism) design and issues:
  - ECM spending in 2004: 0.3 percent of GDP.
  - Eligibility approach: households with total income below district average wage; around half of electricity-consuming households identified as beneficiaries.
  - Thresholds and maximum transfers:
    - 100 kWh/month in summer and 150 kWh/month in winter; maximum transfer per household SM 0.8 per month (summer) and SM 2.4 per month (winter) — equivalent to SM 19.2 per year.
  - Concerns: poor targeting, use of energy companies to transfer resources dilutes metering incentives, administrative costs large relative to payments.
- Key PSIA findings and policy implication:
  - Large immediate tariff increases could cause an associated 8 percent income loss for the poorest households; phasing increases over 5 years mitigates impact.
  - Implicit subsidies poorly targeted and leak to higher income households.
  - Policy implication: strengthen direct, well-targeted cash transfer systems rather than rely on implicit tariff subsidies; use lifeline tariffs as transitional measure while building transfer capacity.
- Distributional summary (implicit subsidy as percent of income by quintile; selected entries preserved):
  - Existing Tariff Structure — Lowest 8.2 ; All 6.8 ; Subsidy/GDP 3.7
  - Tariff and Limit Reforms — Lowest 2.3 ; All 1.9 ; Subsidy/GDP 1.1
  - Reforms with Targeted Limits — Lowest 0.2 ; All 0.2 ; Subsidy/GDP 0.1
  - Reforms with Cash Transfers — Lowest 3.4 ; All 2.4 ; Subsidy/GDP 1.3
  - Reduction (percent) relative to existing: Tariff and Limit Reforms 71.2 ; Reforms with Targeted Limits 97.7 ; Reforms with Cash Transfers 65.0

### Social safety nets and transitional design recommendations
- Well-targeted social safety net programs can provide a higher level of protection to the poorest households and improve targeting performance of reforms.
- Introduce direct compensation program to allow utilities to adopt efficient pricing and operations.
- Consider administrative constraints (metering coverage, payment records) before adopting cash transfers.
- Consider incorporating small compensation payments into the general transfer system over time.
- Use lifeline tariffs as transitional measure while building capacity for direct transfers.

### Banking sector development, structure, and performance
- Banking sector depth and key aggregates:
  - End-2003: total loans (including cotton sector) 9.1 percent of GDP.
  - September 2004 (after foreign-financed cotton lending no longer intermediated by AIB): loans fell to 3.4 percent of GDP.
  - Deposits in 2004: barely reached 4.3 percent of GDP.
  - Deposits growth: over 40 percent per year in 2002–03; fell to 17 percent in 2004.
  - Share of dollar deposits in total deposits: about 70 percent.
- Structure and concentration:
  - September 2004: NBT, 12 commercial banks, 5 credit unions, 7 nonbank financial institutions.
  - Four largest banks (AIB, Orienbank, Tajiksoderotbank, Amonatbank) control 70 percent of assets, 81 percent of household deposits, 71 percent of nongovernment loans.
  - Amonatbank: 14.3 percent of banking system assets, 8.4 percent of household deposits, 80 branches.
- Regulatory and supervisory developments:
  - Bank license withdrawals: NBT withdrew licenses from four banks in 2004; total closed since 1997 equals 21.
  - May 2004: new microfinance law enacted (implementing regs pending).
  - Minimum capital requirement increased to $5 million for new banks (applicable to four largest banks since January 1, 2005; others by January 1, 2006).
  - New reporting system consistent with IFRS introduced February 1, 2005 (Resolution 50; Resolution 290).
  - Liquidity requirement K2-1 reduced from 75 percent to 30 percent for banks in full compliance; K2-2 abolished.
- Financial soundness and asset quality:
  - Nonperforming loans (excluding AIB) fell from 32 percent in 2000 to 11 percent in September 2004.
  - Reported NPLs may underestimate problems due to time lags and rapid credit expansion.
  - Selected FSI: Nonperforming loans to gross loans 10.9 percent (Tajikistan); comparative global sample 5 percent; European sample 3 percent; U.S. sample 1 percent.
  - Provisions to NPLs (Tajikistan): 83 percent.
  - NPLs net of provisions to capital (Tajikistan): 3.6 percent.
  - Reported return on assets (ROA) declined from 18.0 percent in 2002 to 3.4 percent in 2004.
  - Reported return on equity (ROE) 12.0 percent.
- Earnings and liquidity:
  - Net interest income contributes only 23–24 percent of banks’ gross earnings.
  - Liquid assets to demand and savings deposits: 137 percent.
  - Liquid assets to total deposits: 76 percent.
- Policy recommendations for banking sector development:
  - Strengthen supervisory capacity and on-site inspection to ensure accurate loan classification and reliable FSIs.
  - Continue enforcement of prudential requirements to sustain consolidation and improve soundness.
  - Facilitate development of interbank market by increasing availability of government securities and improving payment and settlement systems.
  - Encourage increased financial intermediation to expand credit to private sector and broaden access to finance.
  - Support improved reporting and external audits (IFRS adoption) to increase transparency and market confidence.
  - Phase-in increased minimum capital requirements with support for consolidation; monitor market concentration implications.
  - Promote entry by reputable foreign banks, develop a banking association, strengthen contract enforcement (credit bureau), and develop microfinance (increase loan sizes, extend maturities).

### Remittances, migration, and macro implications
- Official and broader remittance estimates (2004):
  - Official BOP-recorded remittances: $433 million (21 percent of GDP).
  - Broader estimates range up to about $1 billion (21–50 percent of GDP).
- Migrant stock and destinations:
  - Authorities estimate migrants about 17 percent of economically active population (300–400 thousand).
  - IOM (2003) reported some 1.2 million Tajik citizens working abroad in 2001.
  - Russia is main destination; money transfers from Russia represent 92 percent of remittances.
- Uses and macro effects:
  - Remittances raised consumption and growth; GNDI per capita $342 in 2004 at least 15 percent higher and growing faster than GDP per capita due to remittances.
  - Remittances financed up to 80 percent of the trade deficit, which reached 19 percent of GDP in 2004.
  - Remittances through banks increased almost tenfold in 2001–2004 after end-2002 reforms.
- Measurement and classification issues in BOP:
  - NBT estimates up to 40 percent of inflows recorded as remittances may represent trade-related payments.
  - NBT/BOP proposed adjustments: all single transfers > $1,000 plus 50 percent of transfers between $1,000 and $3,000 considered workers’ remittances; all single transfers > $3,000 and 50 percent of transfers between $1,000 and $3,000 to be reclassified as exports.
  - Net remittances via banking system included in BOP estimated at $313 million (15 percent of GDP); outflows of remittances recorded at $120 million (6 percent of GDP) in 2004.
- Policy recommendations:
  - Improve business environment to channel remittances into productive investment.
  - Strengthen financial sector to intermediate remittance savings into business investment.
  - Continue efforts to regularize regional labor migration arrangements.

### External public debt developments, DSA results, and stress tests
- Recent debt trajectory and stocks:
  - External debt rose from zero at independence to 15 percent of GDP by end-1992 and to 60 percent a year later; peaked at 128 percent of GDP in 2000.
  - External debt at end-2004: $822 million (40 percent of GDP); NPV public sector debt at end-2004 about 33 percent of GDP.
  - Total public debt (2003/2004): 1,031 / 822 — percent of GDP: 66.3 / 39.7.
  - Government debt (2003/2004): 827 / 649 — percent of GDP: 53.2 / 31.3.
  - Creditor composition end-2004: multilateral creditors two-thirds of debt stock; largest multilateral creditors World Bank and IMF; largest bilateral creditor Uzbekistan (after October 2004 reduction with Russia), followed by Russia, the United States, and Turkey.
  - Currency composition: over half denominated in SDRs, 34 percent in US dollars, 7 percent in Euros, rest in other currencies.
- Recent debt-reduction actions:
  - Face value of external debt reduced by 20 percent in 2004 alone through cancellation and restructuring.
  - Russia debt regularization (October 2004) affecting $306 million: $242 million debt-for-asset swap converted into Russian state ownership of Nurek space tracking station; remaining $50 million to be repaid by investing 2005–2008 in Sangtuda I on behalf of Russia.
- DSA baseline assumptions:
  - Real GDP growth: 6.5 percent a year on average in 2005–2010.
  - Inflation: 5 percent annually.
  - Fiscal deficit (excluding the PIP): 0.5 percent of GDP.
  - Externally financed PIP: 4.5 percent of GDP.
  - Current account deficit: 4–5 percent of GDP.
  - Discount rate for NPV calculations: 5 percent.
- DSA baseline projections and conclusions:
  - Under baseline (highly concessional new borrowing and prudent debt management): public external debt face value not expected to exceed 40 percent of GDP in the long-run.
  - NPV of Tajikistan’s debt will average 31 percent of GDP in the medium term.
  - NPV public debt-to-exports ratio projected to decline from 100 to 91 percent.
  - Public debt service-to-export ratio projected to decline from 10 to 5 percent.
  - Conclusion: public debt projected to remain sustainable under baseline, but vulnerability to shocks is significant.
- Alternative scenarios and sensitivity:
  - Historical (optimistic) scenario (1998–2004 averages):
    - NPV of public debt declines from 33 percent of GDP in 2004 to 24 percent in 2013.
    - NPV debt-to-exports declines from 100 to 72 percent.
    - Debt service ratio drops from 10 to 6 percent.
  - Less favorable / extreme scenario (deterioration by one-half standard deviation in key variables):
    - Short-term (five years): NPV public debt-to-GDP may worsen by almost 50 percentage points on average.
    - Permanently lower GDP growth (one std dev): deterioration in NPV of debt-to-revenue by 44 percentage points on average in 2005–2010.
    - If interest rate on new borrowing 2 percentage points higher than baseline: NPV debt-to-GDP rises from 33 percent in 2004 to 48 percent in 2023; NPV debt-to-exports rises from 100 to 137 percent.
    - Permanently lower GDP growth increases NPV debt-to-revenue from 175 to 304 percent (2004–2023) and debt service-to-revenue on GGG debt from 11 to 18 percent.
  - Commodity/export revenue shock (aluminum, cotton, fruits and vegetables constitute some 40 percent of GDP, 70 percent of exports, 10 percent of fiscal revenue):
    - A one standard deviation export revenue shock worsens medium-term averages: NPV-to-exports from baseline average 93 percent to 169 percent in 2004–2010; debt service-to-exports from 7 to 11 percent.
    - Long-run: one standard deviation export shock produces protracted deterioration that does not disappear by 2023.
- Debt sustainability policy implications and recommended targets:
  - External concessional borrowing not exceeding 4.5 percent of GDP annually broadly consistent with long-term sustainability.
  - Revenue effort required: at least 18.0–18.5 percent of GDP during the forecast period.
  - Fiscal deficit excluding PIP target: not exceeding 0.5 percent of GDP.
  - Target debt service-to-revenue ratio: below 15 percent.
  - Worst-case debt service-to-revenue could increase up to 20 percent.
  - Restructuring/rescheduling of bilateral debt with large creditors (priority for Uzbekistan, the United States, and Turkey) remains important.
  - Strengthen debt-management capacity: establish computerized debt tracking for public and private external debts; analyze PIP loan terms carefully; prepare an annual full DSA as part of budget process.

*Source — IMF staff report content (selected sections as provided).*

### 1. Sensitivity Analyses for Key Indicators of Public External Debt, 2002–23 ...............62

### 1. Sensitivity Analyses for Key Indicators of Public External Debt, 2002–23 ...............62

### Key macroeconomic developments and outcomes (2000–2004)
- Growth continued to average 10 percent per year.
- Inflation was sharply reduced to about 5 percent by end-2004.
- The exchange rate has been relatively stable.
- Monetary policy has been strengthened.
- The budget balance (excluding the foreign funded public investment program) has recorded surpluses.
- Regional ties have been strengthened, enabling greater labor mobility, more trading opportunities, and better investment prospects.
- Public external debt was reduced from 131 percent of GDP in 2000 to 40 percent in 2004.
- The Debt Sustainability Analysis (DSA) indicates that, under a baseline scenario and even with slightly higher concessional borrowing than in the recent past, Tajikistan’s external debt profile will remain sustainable; however, given historical volatility, continued prudence in debt management would be required to ensure this result.

### Sources of recent growth (overview)
- Growth has been mainly driven by the services sector and a surge in remittances that have been mainly used for private consumption and small scale private investment.
- Since 1998 the economy’s rebound is mostly attributable to increases in total factor productivity (TFP).
- TFP resumed growth starting in 1998 and has averaged about 7 percent per year.
- At a sectoral level, significant increases in TFP have been realized in agriculture and industry, averaging 3 and 8 percent a year, respectively.
- Assuming TFP growth is maintained at current levels and forthcoming investments (both public and private) are realized, this would result in sustaining the current growth rates.

### Historical output dynamics and sectoral composition
- Tajikistan experienced a drastic decline in output — averaging 20 percent a year during 1990-1994; the cumulative decline in real output during the same period was 69 percent.
- Tajikistan’s output continued to contract during 1995-1999, declining by about 7 percent (attributable in part to the civil war).
- Growth rebounded to average about 10 percent a year in 2000-2004 (the CIS-7 average growth was 7 percent).
- Output in 2004 was only about 68 percent of its 1990 level.
- Sectoral shifts:
  - Services contribute 35 percent of GDP and have expanded relative to agriculture and industry.
  - Recovery for most agricultural crop production to pre-transition levels has been achieved, but cotton production fell by more than 31 percent during 1990–2004; other crops (corn, vegetables, fruits) remain well below potential.
  - Industrial output fell by over 60 percent; aluminum production bottomed out in 1997 and the current level is 70 percent of the 1990 level. Aluminum contributes more than 40 percent of the value added in the manufacturing sector.
  - For many manufactured products (cement, fertilizers, caustic soda, cotton fabrics), production levels remain low.

### Growth accounting and productivity dynamics
- The early transition years were characterized by a significant drop in TFP; negative TFP growth affected all sectors, especially manufacturing and agriculture.
- During 2000–2004, Tajikistan sustained high economic growth averaging 10 percent per annum, largely driven by improvements in the use of factors of production (TFP growth averaging 7 percent a year) and increases in labor input.
- The marginal productivity of capital and labor declined significantly at the start of the transition but have been increasing over the past five years, suggesting more efficient use of factor inputs.
- Measurement caveats: TFP is a residual measure and subject to data deficiencies; services sector value added is difficult to measure.

### Fiscal and sectoral policy-relevant findings
- Chapter III introduced revisions to the Tax Code aimed at simplifying the tax system and setting a base for better revenue administration.
- Analysis of government wages (Chapter IV) compares levels to the rest of the Tajik economy and comparable countries in the context of pressure for wage increases.
- The likely impact on households of increasing electricity prices to cost-recovery levels (Chapter V) shows that:
  - The overall impact on consumers would be manageable, especially if phased in over 5 years.
  - A cash payment system has important advantages in targeting measures to reduce the impact on the poor.
- The banking system has been strengthened over the past 2–3 years (Chapter VI) but remains very small relative to the economy; further measures are needed for it to support private sector development.
- Regional reengagement has supported trade, investment, labor mobility, and remittances—important drivers of the recovery; regional linkages are spurring development of hydro-electric power projects that could be important sources of growth and budget revenue.

_Italic: Source — IMF staff report content (selected sections as provided)._

### 13.      During the early 1990s, both labor and capital growth was negative, reflecting

### _cr05131 - 13.      During the early 1990s, both labor and capital growth was negative, reflecting

### Labor and capital growth (1990s–2002)
- Total employment fell by 10 percent between 1990–1998.
- Sectoral employment changes:
  - Large reductions in construction, industry and the services sector.
  - Significant increase in the growth rate of labor in the agricultural sector, suggesting labor shedding in other sectors and shifting towards agriculture.
- Capital inputs:
  - Decline in capital inputs in the agricultural sector reflects movement away from traditional capital-intensive farming to subsistence farming.
- Figure 3 (descriptive):
  - Panel A: Stock of Capital and Labor (Index, 1990=100) covering 1990–2002 for Labor and Capital.
  - Panel B: Annual Growth Rate of Capital, Labor and Productivity in Agriculture (In percent) covering 1990–2002 for TFP, Labor, Capital, Output.
  - Panel C: Annual Growth Rate of Capital, Labor and Productivity in Industry (In percent) covering 1990–2002 for TFP, Labor, Capital, Output.
  - Panel D: Overall Annual Growth Rate of Capital, Labor and Productivity (In percent) covering 1990–2002 for TFP, Labor, Capital, Output.

### Cross-country comparisons of Total Factor Productivity (TFP)
- Summary statement:
  - In all CIS-7 countries including Tajikistan, capital obsolescence and economic distortions inherited from the central planning system contributed to the significant decline in TFP.
  - By 1998 most CIS countries witnessed more efficient use of factor inputs.
  - Caveat: For all the CIS countries (including Tajikistan), TFP changes capture not only technological progress but also capacity utilization, increases in GDP due to regularization of the informal sector, and changes in hidden employment.
- Table 3: CIS Total Factor Productivity 1991-2003 (In percent of GDP)
  - Armenia: 1991-97 = -6.5 ; 1998-2003 = 8.0
  - Azerbaijan: 1991-97 = -11.1 ; 1998-2003 = 1.9
  - Georgia: 1991-97 = -10.2 ; 1998-2003 = 6.3
  - Kyrgyz Republic: 1991-97 = -9.4 ; 1998-2003 = 1.3
  - Moldova: 1991-97 = -13.5 ; 1998-2003 = 4.1
  - Tajikistan: 1991-97 = -12.9 ; 1998-2003 = 8.1
  - Uzbekistan: 1991-97 = -3.1 ; 1998-2003 = 3.8
  - CIS-7 Countries (aggregate): 1991-97 = -9.5 ; 1998-2003 = 4.6
- Sources noted: De Broeck and Koen (2000); and authors' estimates.

### Conclusions on TFP and short- vs long-term growth drivers
- Findings:
  - TFP started increasing in 1998, suggesting that stability and reform efforts are showing some results on the production side.
  - Agriculture production has rebounded.
  - Production in the industrial sector is still way below its 1990 level.
  - Significant growth of labor in the agriculture sector has helped to reduce rural poverty.
- Short-term growth supports:
  - FDI-financed investment in the energy sector (forthcoming) and continuing flow of remittances from migrant workers are expected to sustain the current high growth rates.
- Long-term constraints and needed structural measures:
  - Investment is restrained by institutional impediments and the restrictive business environment.
  - To achieve higher investment, authorities will need to:
    - Remove ownership restrictions, especially in the banking sector.
    - Enhance governance and transparency, particularly with regard to tax and business registrations.

### Main elements of the revised Tax Code (2005) — objectives and expected fiscal yield
- Objectives and overall impact:
  - Revised tax code at the start of 2005 to improve tax administration and reduce the cost of collecting taxes.
  - Eliminates nuisance taxes, enhances incentives for growth of private businesses, and reduces incentives for tax avoidance.
  - Revisions streamline taxes on businesses and concessions, increase the VAT threshold, introduce new taxes to broaden the tax base, and strengthen tax collection procedures while protecting taxpayer rights.
  - Expected net revenue increase of about 0.5 percent of GDP in 2005.
  - Revisions streamline taxpayer registration, assessments, audits and refunds; reduce tax concessions including tax holidays; introduce accelerated depreciation schedules.
- Short-term revenue sources and estimates for 2005 (estimates provided by the Tajik authorities):
  - Reductions in tax exemptions: 0.1 percent of GDP.
  - Introduction of a minimum corporate tax on enterprises and a unified agricultural tax: 0.3 percent of GDP (on a gross basis, the yield from these taxes is estimated at 0.6 percent of GDP in 2005).
  - Strengthened procedures for collecting taxes from defaulters: 0.1 percent of GDP.
  - Note: Slightly more conservative estimates were used in the 2005 budget.

### Key changes in tax structure and rates (selected highlights)
- Corporate profit tax:
  - Old tax rate: 30 percent.
  - New tax rate: 25 percent.
  - Carry-over of losses: reduced from 5 years to 3 years.
  - Accelerated depreciation allowed with a factor of 2.
  - Deductions of repair costs increased twofold (from 5 percent to 10 percent of value).
  - Deductions for charity increased from 2 percent to 5 percent.
  - Corporate property taxes abolished.
  - Simplified tax system for small businesses with annual turnover below SM 144,000 introduced at a higher rate of 12 percent (replacing corporate profit tax and minimum tax for small businesses).
  - Local retail tax rate reduced from 5 percent on cash-only sales to 3 percent.
- Value Added Tax (VAT):
  - VAT rate remains at 20 percent.
  - Registration threshold increased from annual turnover of SM 24,000 (equivalent to $30,000 in 1998) to SM 48,000 (equivalent to $16,000).
- New taxes and tax base broadening:
  - Minimum corporate income tax introduced to replace abolished corporate property tax; it is applicable to loss-making enterprises.
  - Unified tax on agricultural sector enterprises replaces agricultural VAT, road user tax, land tax, personal income tax on agricultural workers, and agricultural corporate income tax.
- Personal income tax:
  - Old brackets: a. up to minimum wage: zero-rated; b. between minimum wage and SM 200: 10 percent; c. between SM 200 and SM 300: 15 percent; d. above SM 300: 20 percent.
  - New brackets: a. up to minimum wage: zero-rated; b. above minimum wage and up to SM 100 per month: 8 percent; c. above SM 100 per month: tax due between the minimum wage and SM 100 plus 13 percent of taxable income over SM 100.
- Minimum corporate income tax (new):
  - Based on gross income (excluding assessed VAT and sales tax).
  - Minimum business income tax rate set at 1 percent of gross income.
  - If corporate income tax liability is higher than the minimum income tax, corporate income tax is payable; purpose to eliminate incentives to undervalue corporate income.
- Unified tax on agricultural producers (new, applied to all agricultural producers):
  - Payers do not pay: agricultural VAT, road user tax, agricultural corporate income tax, minimal income tax, land tax, simplified tax, personal income tax on agricultural workers.
  - No exemptions from tax on owners of means of transport; no exemptions from local taxes (local Majlises authority).
- Other notable changes:
  - Excise groups retained; strengthened control mechanisms for alcohol and tobacco; loss of excise stamps treated as taxable transaction.
  - Social Fund contributions remain: rate is 25 percent for corporate entities and 20 percent for individual entrepreneurs of payroll.
  - Subsoil users taxes: excess profit tax abolished.
  - Land tax: new rates described (double the rates in rural areas and other towns: SM 150-300 per hectare; Dushanbe increase of 2.7 percent for land sizes up to SM 400 per hectare); earlier rates for land register zones at SM 13-23 per hectare of arable plowed land.
  - Tax on owners of means of transport: rate doubled; use the minimal wage as base; previous example: tax for a 100 h.p. vehicle was SM 4.
  - Ginned cotton and aluminum: ginned cotton tax retained at 10 percent; primary aluminum tax raised from 1 percent to 3 percent; customs duty rates applicable to aluminum smelters reduced.
  - Local taxes for maintenance of public transport abolished.
  - Local retail tax: rate reduced to 3 percent; now defined as cash-only sales.

### Government wages in Tajikistan — context, trends, and 2005 budget response
- Context and rationale:
  - Government wages among the lowest in the CIS countries.
  - Private sector wages have increased rapidly as economic conditions improved; government wages have not kept pace with nominal GDP and total government expenditures.
  - General government wage bill slipped to 2.7 percent of GDP in 2003-04.
  - 2005 budget includes a large wage increase, differentiated by sectors, raising the general government wage bill to 3.9 percent of GDP in 2005.
- Wage levels (Table 1: Wages by Sector, 2000–2004; In somoni per month; in 2004, SM 3 exchanged for US1):
  - Total economy: 2000 = 162 ; 2001 = 243 ; 2002 = 33 ; 2003 = 45 ; 2004 = 61  [note: table formatting preserved as provided]
  - Agriculture: 2000 = 81 ; 2001 = 41 ; 2002 = 92 ; 2003 = 7 ; 2004 = 35
  - Nonagricultural, nongovernment sectors: 2000 = 35 ; 2001 = 37 ; 2002 = 56 ; 2003 = 87 ; 2004 = 156
  - Industry: 2000 = 47 ; 2001 = 71 ; 2002 = 92 ; 2003 = 114 ; 2004 = 144
  - Transportation: 2000 = 31 ; 2001 = 49 ; 2002 = 70 ; 2003 = 101 ; 2004 = 148
  - Construction: 2000 = 39 ; 2001 = 55 ; 2002 = 75 ; 2003 = 100 ; 2004 = 151
  - Banking and insurance: 2000 = 77 ; 2001 = 91 ; 2002 = 111 ; 2003 = 817 ; 2004 = 5231
  - Private enterprises: 2004 entries shown as 356289136 (table formatting preserved as provided)
  - General government: 2000 = 24 ; 2001 = 30 ; 2002 = 49 ; 2003 = 63 ; 2004 = 74
  - Health care: 2000 = 7 ; 2001 = 9 ; 2002 = 13 ; 2003 = 17 ; 2004 = 23
  - Education: 2000 = 12 ; 2001 = 17 ; 2002 = 26 ; 2003 = 34 ; 2004 = 43
  - Source: State Statistical Committee. 1/ Data based on Statistical Appendix Table 18.
  - In 2004, average government wages (including other employment related supplements) were about SM 74 ($25) per month.
  - Average wages for teachers and health sector workers in 2004: teachers SM 43 per month; health sector workers SM 23 per month.
  - Average wage level in the non-agricultural nongovernment sectors in 2004: SM 156 ($52 per month).
- Wage bill comparisons:
  - General government wage bill was 3½ percent of GDP in 1998–2002.
  - Comparable central government wage bills:
    - Central and Eastern Europe: 5.1 percent of GDP.
    - Low-Income Countries: 5.7 percent of GDP.
    - Middle-Income Countries: 6.0 percent of GDP.
    - High-Income Countries: 5.9 percent of GDP.
    - PRGF-Supported Programs (average): 4.8 percent of GDP.
  - Tajikistan: General government wages and salaries in 1998–2002 = 3.4 percent of GDP and 17.1 percent of government expenditures (table shows "Tajikistan 1/ 3.4 17.1" where 3.4 is percent of GDP and 17.1 is percent of government expenditures).
  - For Central Asia and the Caucasus (excluding Tajikistan), the average wage bill was 4 percent of GDP in 2003.
- Recent dynamics and nonmonetary benefits:
  - Wage bill declined sharply in 2002–2004.
  - Nominal wage increases were eroded by higher than expected inflation.
  - As the economy expanded faster (remittances boosted incomes and consumption), government wages declined relative to nominal GDP and private sector wages.
  - Government nonmonetary fringe benefits historically included generous travel allowances, cars, mobile phones for senior staff (included in the budget as other goods and services), off-budget benefits such as land plots for rural teachers, and discounted gas and electricity (the latter removed in 2003 following significant energy price increases).

*Prepared from the content of the provided IMF PDF chapter/section.*

### 5. Faster growth in wages in 2002-04 was envisaged after the start of civil service

### 5. Faster growth in wages in 2002-04 was envisaged after the start of civil service reforms

### Civil service reforms and wages
- Reforms were slow to develop because of vested interests, complexity (especially in education and health), and inertia related to the low level of wages.
- Low wages (despite fringe benefits) created low morale and high attrition, especially in education and health, where qualified staff have found positions abroad.
- It has been very difficult to attract staff with new technical skills into the civil service.

### Employment levels and government employment (Table 3 highlights)
- Excessive government sector employment reduces wages for a given wage bill; reforms often focus on employment levels.
- Core civil service employment numbers in Tajikistan are not high by international norms:
  - Core civil service employment (general government excluding education, health and defense) reported at 0.6 percent of the population, below the norm of 1 percent for low-income countries.
- Government employment breakdown (In percent of total population):
  - Tajikistan: Civilian central government 1/0.3, Civilian subnational government 0.3, Education 3.6, Health 1.7, Police ...0.9, Armed forces 6.7, Total general government (table formatting as in source).
  - Europe and Central Asia: 0.6 0.6 1.6 1.2 0.7 0.9 5.6
  - Central and Eastern Europe: 0.5 0.5 1.4 0.3 0.8 4.5
  - Low income countries: 0.5 0.5 0.9 0.6 0.3 0.3 3.1
- Notes and ongoing work:
  - Education and healthcare workforce may be overestimated by 10-30 percent, due to double shifting to offset low wages.
  - Registry of central government civil service positions almost finalized and expected to show about 15,000 positions (0.2 percent of the population).
  - A registry of civil service personnel is expected to be completed shortly afterwards to enable a more accurate understanding of vacancies and alignment between registries.

### Budget bias, attrition, and sectoral staffing
- Budget system funds inputs (numbers of staff and facilities), creating incentives to maintain historical counts to preserve funding; vacancies due to attrition remain funded.
- Workers commonly perform additional jobs to capture pay for vacant positions.

- Education sector specifics:
  - Total employment in education per MOF records was 220,000 at the start of 2004; general education accounted for 170,000 positions.
  - Resolution 291 (June 2004) envisaged cuts in personnel of 5 percent per year over 5 years.
  - Implemented in September 2004: positions reduced by the full amount (25.5 percent) together with a compensating wage increase; possible without significant redundancies because of widespread vacancies and multiple positions per teacher.
  - Further cuts to link teaching resources to teaching load and train more teachers to teach multiple subjects; actual number of teachers does not appear excessive.
  - Reform plans to address redundancies in recorded positions for higher and pre-school education to be adopted shortly.

- Education reform focus:
  - Change teaching organization, financing, and incentive structure.
  - Formalize and regulate school fees to provide additional resources to raise formal wages.
- Health sector reform focus:
  - Shift focus to primary health care and prevention to reduce need for underutilized hospitals.
  - Shift funding to a per capita basis, possibly with regional adjustments.
  - Establish a guaranteed benefits package that would be free; make other services optional with co-payments (replacing informal payments) and criteria for exemptions.
  - Major operational change for medical staff; impact on actual employment unclear, but formal incomes expected to increase substantially.

### Government administration reforms
- Reforms are underway within a medium-term context; main aim to modernize functions, reduce duplication, and improve services to the public.
- Initial actions and pilot reforms planned in key social and economic ministries to address ineffective administration and redundant regulations that interfere with business development.

---

### V. THE IMPACT OF ELECTRICITY TARIFF INCREASES ON HOUSEHOLDS

### Background and objectives
- Low domestic energy prices constrain resources for investment in the sector; World Bank estimated the energy sector quasi-fiscal deficit in 2003 at 19 percent of GDP.
- Authorities plan extensive energy sector reforms; electricity tariffs will need to increase to aid cost recovery and encourage investment.
- This chapter summarizes a Poverty and Social Impact Analysis (PSIA) of the direct impact of electricity price increases on poor households and compares mitigation approaches. Indirect effects (e.g., on farm labor, sectoral output prices) are not addressed; estimates are lower bounds.

### Household electricity use and current pricing
- Based on 2003 national household survey:
  - Households allocate around 2.3 percent of their total consumption to electricity.
  - Households account for about 20 percent of the electricity generated.
- Existing lifeline tariff system (applied to first 250 kWh monthly):
  - Winter lifeline: SM 0.016 per kWh
  - Summer lifeline: SM 0.008 per kWh
  - Above-lifeline seasonal rates: SM 0.027 (winter) and SM 0.014 (summer) per kWh
- Energy Compensation Mechanism (ECM) in 2004 involved spending of 0.3 percent of GDP to compensate for past gas and electricity tariff increases.

### Implicit subsidy and distributional impacts (summary of scenarios)
- Current implicit subsidy (complete withdrawal scenario):
  - Subsidy implicit in the existing system is equivalent to 6.8 percent of household income or 3.7 percent of GDP.
  - Impact by quintile under full withdrawal: lowest quintile 8.2 percent of household income; highest quintile 5.9 percent.
  - Although progressive in distribution, the subsidy is badly targeted with similar amounts per quintile.

- Scenario: increase all tariffs, retain lifeline rates doubled, reduce lifeline limits, set above-lifeline to cost recovery:
  - Lifeline tariff rates doubled; monthly lifeline limits reduced to 100 kWh (summer) and 200 kWh (winter); above-lifeline rates increased to cost recovery SM 0.06 per kWh.
  - Subsidy decreases to 1.9 percent (overall), falling from 2.3 percent for the lowest quintile to 1.7 percent for the highest.
  - Reform results in an average 4.8 percent decrease in household income relative to the existing structure.
  - Decrease by quintile: lowest quintile 6.0 percent, highest quintile 4.2 percent.
  - The lower subsidy implicit in this structure would not be better targeted than the existing structure.

- Scenario: apply lower lifeline limits only to households with monthly consumption below these limits:
  - Average subsidy falls to less than one percent of household incomes.
  - Subsidy implicit in this tariff structure is similar across quintiles; targeting worsens with middle-income households receiving the highest subsidy share.

- Key finding: electricity price subsidies, targeted or not, are not very effective at protecting poor households because of high leakage to higher income households.

### Use of cash transfers as alternative mitigation
- Tariff-cum-limit reforms combined with a direct transfer program:
  - Targeting using household characteristics (size, composition, age and education of household head, housing, assets) can identify beneficiaries.
  - Under proposed targeting, nearly 25 percent of households are beneficiaries.
  - Total transfer budget of 0.2 percent of GDP.
  - Average transfer SM 48 annually, equivalent to 1.5 percent of the average income of the poorest two quintiles.
  - 85 percent of beneficiary households fall into the lowest two quintiles.
- Distributional impacts under this system:
  - Lowest income quintile receives a 3.4 percent net subsidy.
  - Reforms now decrease lowest quintile incomes by only 4.8 percent compared to nearly 6–8 percent under the earlier tariff-only reforms.
  - The lowest quintile receives 24 percent of total net benefits, compared to around 20 percent or less under other reform programs.
- Note: Increasing the size of the cash transfer would further improve distributional outcomes, even if financed by further scaling up tariffs.

### The Energy Compensation Mechanism (ECM) — design and implementation issues
- ECM design (introduced January 2003):
  - Households apply via village committee or local government, providing income and asset information; local office may conduct home visits to estimate total household income.
  - Eligibility: households with total income below the district average wage are in principle eligible.
  - Around half of electricity consuming households are identified as beneficiaries.
  - Compensation at lifeline tariffs up to thresholds:
    - Thresholds: 100 kWh/month per household in summer (April to September) and 150 kWh/month in winter (October to March).
    - Maximum transfer per household: SM 0.8 per month in summer and SM 2.4 per month in winter (equivalent to SM 19.2 per year, slightly more than $6).
- Concerns identified by government and World Bank:
  - Eligibility approach relies on monetary income and is not conducive to good targeting.
  - Use of aggregate monetary income rather than per capita biases eligibility against large households.
  - Using district-level wages as threshold is inconsistent with protecting the most vulnerable regardless of location.
  - Using energy companies to transfer resources by discounting bills dilutes incentives to improve metering and collection, adds administrative burden, and distracts from core activities.
  - Administrative process for selecting beneficiaries needs streamlining to reduce costs.
  - Size of payment per household is very small relative to administrative costs.
- Technical assistance identified design and implementation changes, including introducing an element of geographic targeting of the transfer budget.

### Concluding remarks and policy implications
- Increasing electricity tariffs to cost recovery levels would require substantial domestic price adjustments and adversely affect real incomes of the poor.
- The PSIA indicates:
  - An associated 8 percent income loss for the poorest households (under large, immediate increases) can be mitigated by phasing tariff increases over 5 years.
  - Maintaining lifeline tariffs can help, but implicit subsidies are not well targeted and leak substantially to higher income households.
- Policy implication: Strengthening direct, well-targeted cash transfer systems is preferable to relying on implicit subsidy through tariff structures for protecting the poorest households.

*Source: _cr05131 - 5. Faster growth in wages in 2002-04 was envisaged after the start of civil service reforms*

### 13.      Well-targeted social safety net programs can provide a higher level of protection

### 13.      Well-targeted social safety net programs can provide a higher level of protection

### Social safety nets and electricity tariff reform: findings and analysis
- Well-targeted social safety net programs can provide a higher level of protection to the poorest households and substantially improve the targeting performance of the overall reform program.
- Introducing a direct compensation program allows electricity companies to follow a more efficient pricing and operational structure.
- Higher electricity prices promote more efficient energy consumption patterns by both households and other users by reducing unnecessary use and switching to alternative cheaper sources.
- Before moving to cash transfers, additional administrative costs and implementation problems need to be considered, including the current poor payment record due to the low number of metered households.
- Given the small size of the average transfer, over time it may be better to incorporate the compensation payments into the general transfer system, which would allow for improvements in targeting.
- In view of the time and resources needed to develop and implement an efficient direct transfer mechanism that effectively reaches the poorest households, lifeline tariffs could serve as a transitional measure.

### Distributional impacts and key quantitative results (Table 1: Distribution of Electricity Tariff Reform Burden)
- Implicit subsidy as percent of income:
  - Lowest: 8.2 (Existing Tariff Structure); 2.3 (Tariff and Limit Reforms); 0.2 (Reforms with Targeted Limits); 3.4 (Reforms with Cash Transfers)
  - 2nd quintile: 7.1; 2.0; 0.2; 2.7
  - 3rd quintile: 6.6; 1.9; 0.2; 2.2
  - 4th quintile: 6.0; 1.8; 0.1; 2.0
  - Highest: 5.9; 1.7; 0.1; 1.8
  - All: 6.8; 1.9; 0.2; 2.4
- Subsidy/GDP:
  - Existing Tariff Structure: 3.7
  - Tariff and Limit Reforms: 1.1
  - Reforms with Targeted Limits: 0.1
  - Reforms with Cash Transfers: 1.3
- Reduction (percent):
  - Tariff and Limit Reforms: 71.2
  - Reforms with Targeted Limits: 97.7
  - Reforms with Cash Transfers: 65.0
- Share of total implicit subsidy (in percent):
  - Lowest: 20.3; 19.9; 19.9; 24.0
  - 2nd quintile: 20.0; 20.0; 18.9; 21.5
  - 3rd quintile: 20.1; 20.4; 24.8; 19.3
  - 4th quintile: 19.4; 20.0; 18.5; 18.1
  - Highest: 20.1; 19.7; 17.8; 17.1
- Note on methodology:
  - Summer electricity expenditures taken from the 2003 Tajikistan Living Standards Survey; winter expenditures estimated using a simple demand model; quantities scaled to match residential electricity use from utility data.
  - Cost recovery tariff (CRT) = SM 0.06 /kWh.
  - Average tariff under existing tariff structure ≈ SM 0.0154/kWh, equivalent to nearly 26 percent of CRT.

### Policy recommendations (social protection / transitional design)
- Consider well-targeted direct cash transfers to protect poorest households while allowing efficient pricing by utilities.
- Weigh administrative costs and implementation constraints (metering coverage, payment records) before adopting cash transfers.
- Consider incorporating small compensation payments into the general transfer system over time to improve targeting.
- Use lifeline tariffs as a transitional measure while building capacity for effective direct transfer mechanisms.

---

### VI.   BANKING SECTOR DEVELOPMENT AND REFORM

### Overview and main challenges
- The level of financial intermediation in Tajikistan is among the lowest in the world.
- Recent progress: improved macroeconomic stability, tightened enforcement of prudential requirements, exit of weak banks, overall improvement in financial condition of the banking sector.
- Remaining challenge: the small size of the banking sector constrains development and access to finance.

### Key quantitative indicators and trends
- End-2003: total loans, including to the cotton sector, represented 9.1 percent of GDP.
- As of September 2004 (when mostly foreign-financed lending to the cotton sector was no longer intermediated by AIB), loans of the banking sector fell to an equivalent of 3.4 percent of GDP.
- Deposits in 2004: barely reached 4.3 percent of GDP.
- Deposits growth:
  - Grew by over 40 percent per year in 2002–03.
  - Deposit growth fell to 17 percent in 2004.
- Share of dollar deposits in total deposits: about 70 percent in recent years.
- Deposits as share of total liabilities:
  - 24 percent in 2001
  - 37 percent in 2003
  - 63 percent during the first nine months of 2004
- Low financial depth creates barriers to access to finance and limits private-sector-led growth.
- Net interest income contributes only 23 percent of banks’ gross earnings.

### Banking sector structure and concentration
- In September 2004, financial sector comprised: National Bank of Tajikistan (NBT), 12 commercial banks, 5 credit unions, and 7 nonbank financial institutions.
- Sector concentration: four largest banks (AIB, Orienbank, Tajiksoderotbank, Amonatbank) control 70 percent of assets, 81 percent of household deposits, and 71 percent of nongovernment loans.
- AIB (post-divestiture) accounts for 38 percent of all assets and 22 percent of deposits; AIB was first to offer ATM services.
- Amonatbank (only remaining state-owned bank): holds 14.3 percent of banking system’s assets, 8.4 percent of household deposits, and has 80 branches nationwide; it functions largely as a fiscal agent for the government.

### Regulatory, supervisory, and market developments
- Bank closures and consolidation:
  - NBT withdrew banking licenses from four banks in 2004; number of closed banks since 1997 totals 21.
  - Two new banking licenses granted in 2003 (one foreign-owned, one with foreign and domestic capital).
- Recent legal and regulatory changes (selected):
  - May 2004: new microfinance law enacted; necessary implementing regulations still need to be drafted.
  - November 2004: NBT regulation for interbank market requires collateralization with government securities; lack of government securities constrains interbank market development.
  - Minimum capital requirement for new banks increased to $5 million (applicable to four largest banks since January 1, 2005; smaller banks and Amonatbank must comply by January 1, 2006).
  - Minimum capital for credit unions increased from $100,000 to $300,000; adoption period for existing credit unions until January 1, 2006.
  - February 1, 2005: new reporting system consistent with IFRS introduced (Resolution 50 requires banks to keep books according to IFRS; Resolution 290 defines new charts of accounts).
  - Liquidity requirement K2-1 reduced from 75 percent to 30 percent for banks in full compliance with prudential regulations and to 50 percent for banks in breach of one or more prudential requirements; K2-2 abolished.
  - Instruction 118 authorizes banking representations near branches/headquarters to increase penetration and promote microcredit.
- Interbank market and market liquidity:
  - Interbank foreign exchange market very thin and dominated by NBT; somoni market dominated by bilateral deals.
  - Government not issuing treasury bills; NBT bills insignificant in volume and short maturities (28–56 days), unsuitable for collateralization.
  - Most liquid resources reside with Amonatbank and are invested in NBT bills.
  - Market liquidity constrained by varying credit quality, lack of trust, and payment/settlement uncertainties.

### Financial soundness and portfolio quality
- FSIs are sensitive to data quality and loan portfolio classification; audited banks required substantial initial loan classification corrections.
- With exception of NPLs, FSIs compare well to international benchmarks.
- Violations of prudential requirements decreased significantly in past two years; two of three banks currently violating norms have performance contracts with supervision.
- Nonperforming loans (excluding AIB):
  - Fell from 32 percent in 2000 to 11 percent in September 2004.
  - Reported NPLs may underestimate problems due to time lags in loan deterioration and recent rapid credit expansion.
- Amonatbank’s reported portfolio quality has been volatile due to rounds of quality assessments and reclassifications; potential underestimation amid rapid credit growth.

### Policy implications and recommendations for medium-term reform
- Strengthen supervisory capacity and on-site inspection to ensure accurate loan classification and reliable FSIs.
- Continue enforcement of prudential requirements to sustain consolidation and improve bank soundness.
- Facilitate development of the interbank market by increasing availability of government securities and improving payment and settlement systems.
- Encourage increased financial intermediation to expand credit to the private sector and broaden access to finance.
- Support improved reporting and external audits (IFRS adoption) to increase transparency and market confidence.
- Phase-in increased minimum capital requirements with support for consolidation where necessary; monitor implications for market concentration and competition.

*Source: IMF country report chapter — “Well-targeted social safety net programs can provide a higher level of protection” / Banking sector development and reform (Tajikistan).*

### 14.      The current ratio of NPLs to total loans of 10.9 percent remains very high by

### 14.      The current ratio of NPLs to total loans of 10.9 percent remains very high by

### Asset quality and financial soundness indicators
- Nonperforming loans (NPLs) to gross loans in Tajikistan: 10.9 percent.
- Comparative NPL ratios:
  - Global sample: 5 percent.
  - European sample: 3 percent.
  - U.S. sample: 1 percent.
- NPLs net of provisions to capital (Tajikistan): 3.6 percent — lower than in the global and European samples.
- Provisions to NPLs (Tajikistan): 83 percent; benchmark in the global sample: 139 percent.
- Table 3 selected indicators (2002–2003–Sept. 04; excluding Agroinvestbank, in percent, unless otherwise indicated):
  - Total net capital to unweighted assets: 14.9 / 17.8 / 25.9
  - Reported total capital to risk weighted assets (K1-1): 10.9 / - / 3.0 / 37.5
  - Nonperforming loans to gross loans: 20.5 / 11.5 / 10.9 / 5.0 / 3.2 / 1.0
  - Nonperforming loans net of provisions to capital: 2.3 / 2.3 / 3.6 / 3.7 / 6.7 / -5.3
  - Provisions to nonperforming loans: 93.0 / 89.9 / 82.8 / 139.0 / 129.0 / 185.0
  - Reported return on assets (ROA): 18.0 / 10.6 / 3.4 / 0.7 / 0.6 / 1.6
  - Reported return on equity (ROE): 14.9 / 1.4 / 12.0 / 9.2 / 13.7 / 15.2
  - Interest margin to gross income: 20.2 / 10.9 / 23.8
  - Non-interest expenditures to gross income: 47.5 / 46.1 / 53.8 / 63 / 62 / 60
  - Salary expenditures to non-interest expenditures: 29.4 / 28.2 / 26.7
  - Liquid assets to total assets: 14.6 / 22.1 / 37.3
  - Liquid assets to demand and savings deposits: 88.1 / 124.7 / 136.9
  - Liquid assets to total deposits: 75.6 / 75.6 / 75.6
  - Net open position in foreign exchange to capital: N/A / N/A / 8.8
- Sources for table: National Bank of Tajikistan; Bankscope and Fund staff estimates.
- Notes from table: Nonperforming loans include three loan classifications: substandard, doubtful and loss. Total 108 commercial banks from Latin America (56), Europe (42) and the U.S. (10). Total net capital includes statutory capital, reserves, retained earnings, fixed assets reserve and currency revaluation reserves.

### Earnings, profitability, and liquidity
- Return on assets (ROA) in Tajikistan declined from 18 percent in 2002 to 3.4 percent in 2004.
- Return on equity (ROE) in Tajikistan: 12.0 percent.
  - American comparator: 15.2 percent.
  - European comparator: 13.7 percent.
  - Global sample comparator: 9.2 percent.
- Income composition and margins:
  - Largest share of bank income from commissions for money transfers and trade financing, foreign exchange transactions, and possibly foreign exchange speculation.
  - Only 24 percent of income is earned from net interest payments.
  - By end-2003, lending-borrowing margin in dollars:
    - maturities 1–3 months: 9 percentage points.
    - maturities 6–12 months: over 10 percentage points.
  - Corresponding lending-borrowing margins in somoni:
    - maturities 1–3 months: 3 percent.
    - maturities 6–12 months: 7 percent.
  - Low overhead costs: 54 percent compared to international benchmarks of 63 percent.
  - Salaries account for less than 30 percent of banks’ non-interest expenditures.
- Liquidity:
  - Liquid assets account for 137 percent of demand and savings deposits.
  - Liquid assets account for 76 percent of total deposits.

### Reforms to deepen the banking sector — challenges and recommended measures
- Key constraint: Financial sector too small to function as an engine of growth; SME access to financing very limited.
  - IFC survey findings:
    - 82 percent of respondents do not use bank accounts in business activities.
    - Only 3 percent of SMEs in need of financing obtained bank loans.
    - 5 percent received financing from sectoral associations.
    - 13 percent received financing from nongovernment organizations.
- Prerequisite: Recent macroeconomic stabilization seen as necessary for financial deepening.
- Recommended measures to develop the traditional banking sector:
  - (i) Opening the banking system to entry by major international banks.
  - (ii) Development of a liquidity market.
  - (iii) Strengthening of contract enforcement.
  - (iv) Improved internal and external governance.
  - (v) Improved banking expertise.
  - (vi) Further development of microfinance initiatives.

- Opening to major international banks:
  - Expected benefits: access to banking expertise, capital, increased credibility, and links to foreign investors.

- Development of an interbank liquidity market:
  - Main impediment: insufficient availability of government securities.
  - Roles of government securities:
    - (a) Create a yield curve as a reference rate for pricing credits.
    - (b) Offer safe haven for temporary cash surpluses and investment diversification.
    - (c) Help establish government repayment track record for sovereign risk assessment.

- Strengthening contract enforcement:
  - Accelerate resolution of outstanding commercial banks’ and NBT’s NPLs.
  - Establish a credit bureau to promote loan performance and require banks to rate a client with the lowest classification assigned by any bank within the system.
  - Tighter loan classification regulations and higher provisioning requirements for non-standard loans to discourage lending to borrowers defaulting elsewhere.

- Improved internal and external governance:
  - Entry of reputable foreign banks to bring capital, know-how, international networks, and best-practice management.
  - Increase transparency: banks should open websites and regularly disseminate relevant market information; NBT should publish regular nonmarket sensitive reports on banking supervision.
  - Medium- to long-term: encourage banks to obtain ratings by reputable rating firms.
  - Consideration should be given to privatizing Amonatbank.

- Improved banking expertise:
  - Set up a banking association to identify reform priorities, coordinate reforms, and provide feedback on legislative and regulatory changes.
  - Train a critical mass of experts in finance and accounting in universities and the recently established banking institute.

- Microfinance development:
  - Historically donor-funded; EBRD provided capital and training.
  - Initial microfinance loans: mostly small, short-term (up to one year) to finance shuttle trade.
  - Future focus:
    - Increase typical loan size to the $10,000–$50,000 range.
    - Extend loan maturities up to 2 years.
    - Average annual interest rate on larger loans expected to decline to 20 percent.
    - Enable increased financing of small-scale production and services.
    - Specialized microfinance institutions have started taking deposits to tap local savings, including remittance accumulation.
  - EBRD-supported microfinance loans (historical): ranged from $50 to $10,000, with an average value of $2,600; most loans were for up to one month and carried an annul interest rate of 24 percent.

### Regional cooperation in trade and investment — context and priorities
- Background:
  - Tajikistan emerging from economic instability and civil conflict; reintegrating into world and regional economy.
  - Constraints: land-locked, mountain-locked, distance-locked; high export costs; limited transport infrastructure; longest borders with Afghanistan and Uzbekistan.
- Regional organizations of participation:
  - Euro-Asian Economic Community (EAEC): Belarus, Kazakhstan, Kyrgyz Republic, Russia, Tajikistan — aims to create a customs union by end-2006 and eventually a single economic space.
  - Shanghai Cooperation Organization: China, Russia, Kazakhstan, Kyrgyz Republic, Tajikistan, Uzbekistan — approved program to promote trade and investment.
  - Central Asian Cooperation Organization: Kazakhstan, Kyrgyz Republic, Russia, Tajikistan, Uzbekistan — focuses on consortiums for hydroelectricity, foodstuffs, and transport.
  - Economic Cooperation Organization: Afghanistan, Azerbaijan, Iran, Kazakhstan, Kyrgyz Republic, Pakistan, Turkey, Tajikistan, Turkmenistan, Uzbekistan — seeks to develop energy infrastructure, trade, transportation, agriculture, and drug control.
- Motivations for participation:
  - Reestablish economic linkages with enterprises in Russia, Kazakhstan, and the Kyrgyz Republic.
  - Establish links with China, Turkey, Pakistan reflecting pre-Soviet trade and cultural ties.
  - Support labor and shuttle trade and raise Tajikistan’s international profile.
- EAEC harmonization and WTO accession:
  - EAEC Agreement on Establishment of a Customs Union dated February 17, 2000 — formation to be completed in five years (by February 2005).
  - EAEC members coordinating WTO accession negotiations and tariff harmonization.
  - Tajikistan’s simple average external tariff increased from 5 to 7.7 percent.
  - Authorities’ justifications for tariff increase:
    - (i) previous 5 percent uniform tariff was a temporary measure introduced in 2002;
    - (ii) need to harmonize tariffs with EAEC commitments;
    - (iii) intention to preserve leverage on tariff reduction in WTO accession negotiations.
- EAEC harmonization techniques (Box 1 summary):
  - Basic List of Common External Tariffs covers 6,178 tariff lines out of 11,086 in HS.
  - Additional lists:
    - Commodities with tariff differences less than 5 percent: 262 lines (4.2 percent).
    - Commodities with tariff differences over 5 percent: 1,537 lines (25 percent).
    - Sensitive commodities exempt from common external tariffs; transition period allows exemptions up to 15 percent of trade in value terms (Tajikistan allowed up to 25 percent but only alumina).
  - Harmonization ongoing; shares and values reassessed annually.
- WTO accession status:
  - First working party meeting in March 2004; second scheduled for early 2005.
  - Key issues: tariff protection for industrial goods; maximum subsidies in agriculture; protection of intellectual property.
  - Tajik authorities intend to coordinate initial market access offers with Russian Federation and to bind tariffs in the WTO at rates above currently applied rates to retain flexibility.

- Attracting foreign investment:
  - Priority: mobilize foreign investment for projects of national importance.
  - Comparative advantages: rich mineral deposits (gold, non-ferrous metals, coal, salt) and water (cotton cultivation and hydro-power generation; aluminum smelting).
  - Government’s investment strategy: attract foreign investment in key sectors to increase employment and productivity, raise exports, and contribute to budget revenue and poverty reduction.

*Source: IMF staff report content (Table 3 and sections 14–C and VII from the provided PDF excerpt).*

### 11.      Aluminum and energy sectors are the main focus of foreign investment. In

### _cr05131 - 11.      Aluminum and energy sectors are the main focus of foreign investment. In

### Foreign investment: aluminum and energy projects
- October 2004: Tajikistan signed a seven-year $1.6 billion (76 percent of GDP) investment package with Russian interests; most of this financing is still to be raised and should be considered an expression of interest.
- Components of the Russian package:
  - Commitment by the Russian Aluminum holding company to invest $560 million in the Rogun hydro power station in 2005–2009.
  - Reconstruction of the TadAZ aluminum smelter: $160 million.
  - Construction of two new aluminum plants: $600 million in 2010—2013.
- Expected outcomes if projects materialize:
  - Completion of power stations would help solve electricity shortages, enhance aluminum production, and enable commercial exports of electricity.
- Status and caveats:
  - Agreements are preliminary; considerably more details on projects and export potential need to be discussed before investments could materialize.

### Sangtuda hydro power projects
- RAO EEC commitment: $200 million investment in Sangtuda I during 2005-2009.
- Complementary Tajik government investment on behalf of Russia: $50 million (part of the debt regularization agreement concluded in October 2004).
- Sangtuda II: Iran will invest in construction; planned exports to Iran and Pakistan.
- Project modalities remain uncertain despite being closer to finalization.

### Transport infrastructure and regional connectivity
- Major regional transport projects at various development phases with estimated costs:
  - Roads from Dushanbe through the Anzob tunnel to Khujand: estimated cost of $360 million.
  - Road from Dushanbe to the Chinese border: $290 million.
  - Road from Dushanbe to the Kyrgyz Republic: $110 million.
  - Roads to the Afghan border and bridges over the Pianj river (no cost specified).
- External financing highlights:
  - Iran: $25 million loan and $10 million grant co-financing for the Anzob tunnel.
  - China: partial financing for upgrading the road to the Chinese border.
  - United States and Norway: finance construction of a new transport bridge to Afghanistan.
- Strategic implications:
  - The Anzob tunnel is a major economic link for central and northern Tajikistan and for Iran to access Kazakhstan and Russia.
  - Upgraded road to China will also provide Tajikistan access to Pakistan and India.
  - Rehabilitation of roads to the Kyrgyz Republic is viewed as an important commercial bypass of Uzbekistan.

### Conclusions on regional cooperation and remaining impediments
- Progress:
  - Tajikistan has taken substantial steps toward reestablishing regional linkages.
  - Cooperation in investment and trade has contributed to economic growth, political relations with neighbors, easing social tensions, private sector development, and transition to a market economy.
- Remaining challenges:
  - Cumbersome transit through Uzbekistan and numerous procedural requirements in Russia and other EAEC countries need to be addressed bilaterally and regionally.

### Box 2 — The Tajikistan–Uzbekistan nexus: transit bottleneck and trade costs
- Geographic constraint:
  - All commercially viable export routes—the only railroad and a few highways—go through Uzbekistan.
  - During winter closure of the Anzob Pass, domestic north–south trade requires transit through Uzbek territory.
- Border and transit impediments:
  - Delays at the border, harassment of traders, and bribes limit export potential, especially for perishables to Russia.
- Domestic inefficiencies in Tajikistan:
  - One security control post every 20-kilometer segment of all major roads to foreign markets (World Bank study).
  - Average bribe required of $3 for clearance per control post.
  - Total bribes for one commercial ride from Dushanbe to the Uzbek border about $50 per truck (similar to estimated monthly private sector wage in Tajikistan).
  - Presidential decree of February 4, 2005: number of traffic police will be cut by 50 percent.
- Costs via Uzbekistan vs domestic route (World Bank estimates):
  - Non-transport related transaction costs: around $50 per ton for the domestic route; up to $200 per ton for the route via Uzbekistan.
  - The $150 per ton difference approximates bureaucratic hassle and corruption costs for transit through Uzbekistan.
  - At least eight types of official fees for transit through Uzbekistan, which may amount to $500 per truck.
  - Official and unofficial transit and border crossing payments in Uzbekistan constitute more than 30 percent of total road transportation costs from Dushanbe to Moscow.
- Specific Uzbek regulations increasing cost and delay:
  - Each cargo crossing Tajik–Uzbek border must be unloaded on the Tajik side and reloaded onto vehicles with Uzbek licence plates.
  - Passengers must leave vehicles in Tajikistan, cross on foot, and use Uzbek vehicles in Uzbekistan.

### Trade regime developments (selected findings from annex)
- Trade regime remains liberal.
- New customs tariffs applied starting on November 1, 2003.
- Imports from Euro-Asian Economic Community members (excluding alumina) are exempt from import duties.
- Tariff on imported alumina increased from 2 to 5 percent in November 2003.
- New specific excise taxes approved on March 31, 2003, levied on imports of alcohol (HS 22), tobacco (HS 24), and oil products (HS 27).
- Tajikistan has no export tariff.
- Tabulated trade policy indicators (selected exact entries preserved):
  - Tariff rates (2004): Minimum 2 percent; Maximum 15 percent; No. of tariff bands 6; Simple average 7.7
  - Goods subject to specific import tariffs (2004): Mineral water, soda, beer, wine, spirits, tobacco products
  - Import duty exemptions (2004): Natural gas, electricity, and some products included in tariff groups No. 01, 04, 30, 49, 51, 70, 87, 93, 97
  - Export taxes (2004): Sales tax on exports of aluminum and cotton.
  - Quantitative restrictions (2004): Quotas on imports of alcohol products and tobacco
  - Prepayment requirements: Exports of cotton fiber, aluminum, precious metal products, tobacco, leather, fertilizers, and some other products are subject to 100 percent prepayment requirement
  - Import valuation: The new customs Code and customs valuation of imports are compatible with WTO requirements.

### Labor migration and remittances — scale, impacts, and policy implications
- Scale and data uncertainty:
  - Official BOP-recorded remittances: $433 million in 2004 (21 percent of GDP).
  - Broader estimates of remittance inflows in 2004 range from $433 million to about $1 billion a year, or from 21 to 50 percent of GDP, respectively.
  - Authorities estimate migrant workers at about 17 percent of the economically active population, or 300–400 thousand.
  - IOM (2003) report indicated some 1.2 million Tajik citizens working abroad in 2001; with an average migrant bringing at least $1,300 annually, annual inflows could exceed $1 billion (50 percent of GDP).
- Destination and sectoral distribution:
  - Russia is the main destination and source of remittances: money transfers from Russia represent 92 percent of remittances.
  - IOM (2003): about 90 percent of Tajik labor migrants stay in Russia, 5 percent in Uzbekistan.
  - Employment sectors: 50 percent in housing and industrial construction; 33 percent in trade and services; remainder in gas and oil development, manufacturing, catering, and agriculture.
  - Skills: About 60 percent of Tajik migrants have no professional qualifications.
- Macro impact of remittances:
  - Provided a breathing space after civil disruption of the 1990s and helped offset income shortfalls.
  - Raised consumption and growth: GNDI per capita at $342 in 2004 was at least 15 percent higher and growing faster than GDP per capita due to remittances.
  - Spending patterns by remittance size (exact descriptors preserved):
    - Under $1,000 a year: spent on consumption, mainly food, clothing, and medical care.
    - $1,000–$5,000: buy durable goods, finance major family events, invest in home repair and small-scale import transactions.
    - Exceeding $5,000: mainly invested in rural house construction.
    - Exceeding $10,000: invested in remodeling city apartments and larger-scale imports.
  - Remittances financed growing trade deficit and kept current account deficit manageable: remittances covered up to 80 percent of the trade deficit, which reached 19 percent of GDP in 2004.
  - Strengthened banking system and competition: remittances through banks increased almost tenfold in 2001–2004 after end-2002 reforms that eliminated the 30 percent tax on international transfers and allowed transfers through Tajik banks without opening a current account.
  - NBT survey: 96 percent of respondents satisfied with bank services; 82 percent not ready to deposit remitted funds; 62 percent need money immediately to finance current household and business transactions.
- Challenges and risks:
  - Large, seasonal foreign currency inflows complicate monetary management in a small economy with a shallow foreign exchange market and limited monetary instruments.
  - Inflows can prompt somoni appreciation and rekindle inflationary pressures.
  - Continuous emigration of qualified labor and young people deprives Tajikistan of future manpower.
  - Remittance-financed investment concentrated in residential construction rather than commercial investment.
  - Remittances are volatile and sensitive to political climates in host countries.
- Statistical and classification issues in BOP:
  - NBT estimates that up to 40 percent of inflows recorded as remittances through the banking system may represent trade-related payments, overstating workers’ remittances.
  - NBT/BOP statistical treatment endorsed by Fund technical assistance:
    - All single transfers of more than $1,000 plus 50 percent of transfers between $1,000 and $3,000 will be considered workers’ remittances.
    - All single transfers of more than $3,000 and 50 percent of transfers between $1,000 and $3,000 will be reclassified as exports.
  - BOP data are being revised back to 2003; further analysis is needed to estimate thresholds for classifying transfers as workers’ remittances versus other transfers or export proceeds.
- Policy recommendations (preserved from conclusions and analysis):
  - Improve the business environment to stimulate use of remittances for productive investment.
  - Strengthen the financial sector to intermediate savings from remittances into business investment.
  - Continue efforts to regularize regional relations on labor migration (the 2004 agreement with Russia on labor migration noted as a welcome development).

*Source: _cr05131 - 11.      Aluminum and energy sectors are the main focus of foreign investment. In*

### 3.      The actual inflow of remittances may be substantially higher as amounts

### _cr05131 - 3.      The actual inflow of remittances may be substantially higher as amounts

### Remittances: informal channels and scale
- Transportation of cash:
  - Air transport capacity: "some 23 weekly flights to Dushanbe from Russia by Tajik Air and some local airlines" capable of delivering to Tajikistan "200,000 people a year."
  - Illustrative calculation in text: "If half of this number brings an average $1,000, at least $100 million (5 percent of GDP) should be added to remittances."
- Money ‘throwing’ (perekidka):
  - Used for relatively large amounts "usually in excess for $3,000."
  - Utilized mainly by "shuttle traders and moonlight workers" who cannot document legal income to Russian banks.

- Tajik migrant's income statement (WB survey of a typical seasonal worker staying in Russia 9 months at a time):
  - Gross earnings: "2,700" (US dollars)
  - Fixed expenses: "410"
    - Transportation: "330"
    - Border crossing: "30"
    - Other: "50"
  - Variable expenses: "945"
    - Food: "540"
    - Accommodation: "225"
    - Police: "135"
    - Other: "45"
  - Remittance to Tajikistan: "1,345"

### Classification and measurement issues in balance of payments
- All remittances through the banking system are shown as current transfers in the balance of payments statistics, though some transfers may be trade-related payments or income.
- IOM 2003 typology of labor migrants and implications for balance of payments classification:
  - Migrants on official or informal contracts with recipient enterprises: "20 percent of all migrants."
    - These migrants "usually stay for more than a year abroad" and transfers through banking system are "correctly shown as workers’ remittances."
  - Crews for moonlight construction and agricultural workers: "50 percent."
    - They "usually work abroad in March-November" and "return for winter in Tajikistan, remitting their incomes irregularly and bringing most of them in cash."
    - Their wages "should be classified in the income account as compensation of employees" and expenditures abroad in the travel account; currently shown as current transfers due to lack of reliable data on length of stay.
  - Shuttle traders: "30 percent."
    - Remittances through the banking system represent a mix of family support (should be shown as income) and export receipts (should be included in exports).
- Bank transfers by Tajiks living abroad permanently may be captured in the workers’ remittances item but "should be classified as other current transfers, not as workers’ remittances."

### Net remittances via banking system and outflows
- Outflows of remittances recorded in Tajikistan’s balance of payments:
  - Estimated at "$120 million (6 percent of GDP) in 2004" and include transfers by workers from Afghanistan and Iran, misclassified payments for small imports, and likely drug-related outflows.
- Net basis, remittances through the banking system included in the balance of payments:
  - Estimated at "$313 million (15 percent of GDP)."

### External public debt developments — historical trends
- Post-independence debt accumulation:
  - External debt rose from "zero at independence to 15 percent of GDP by end-1992 and to 60 percent a year later."
  - External debt culminated in 2000 at "128 percent of GDP."
- Debt regularization efforts:
  - 1995: government stopped guaranteeing payments by Tajik enterprises to arrest arrears under bilateral trade arrangements.
  - Late 1990s–early 2000s: series of debt rescheduling negotiations with main bilateral creditors; terms not sufficiently concessional to stabilize debt ratios.
- Early 2000s policy shift:
  - Tighter policies: avoid non-concessional borrowing, limit new concessional loans under the public investment program (PIP) to "3 percent of GDP annually."
  - Result: stabilization and subsequent decline in the external debt-to-GDP ratio.

### Recent external debt situation (end-2004)
- Aggregate levels and ratios:
  - External debt amounted to "$822 million (40 percent of GDP)" at end-2004.
  - Total debt service due was "equivalent to 10 percent of relevant exports."
  - Debt service payments on government and government-guaranteed debt stood at "15 percent of fiscal revenue."
  - NPV terms: external public sector debt at end-2004 amounted to "about 33 percent of GDP."
- International comparisons (NPV terms):
  - Kyrgyz Republic: "72 percent"
  - Moldova: "53 percent"
  - Georgia: "41 percent"
  - Armenia: "39 percent"
- Creditor composition and currency composition:
  - At end-2004, "multilateral creditors accounted for two-thirds of the debt stock."
  - Two largest multilateral creditors: "the World Bank and the IMF."
  - Largest bilateral creditor: "Uzbekistan" (after October 2004 debt reduction with Russia), followed by "Russia, the United States, and Turkey."
  - Currency breakdown: "over half of Tajikistan’s external debt is denominated in SDRs, 34 percent is in US dollars, 7 percent is in Euros, and the rest is in other currencies."
- Public External Debt at a Glance (selected figures for 2003 and 2004 from Tajik authorities):
  - Total public debt: "1,031" (2003) and "822" (2004) — percent of GDP: "66.3" (2003) and "39.7" (2004)
  - Government: "827" (2003) and "649" (2004) — percent of GDP: "53.2" (2003) and "31.3" (2004)
  - Bilateral: "468" (2003) and "325" (2004) — percent of GDP: "30.1" (2003) and "10.3" (2004)
  - Multilateral: "360" (2003) and "436" (2004) — percent of GDP: "34.9" (2003) and "21.0" (2004)
  - NBT: "100" (2003) and "116" (2004) — percent of GDP: "9.7" (2003) and "5.6" (2004)
  - Public enterprises: "103" (2003) and "58" (2004) — percent of GDP: "10.0" (2003) and "2.8" (2004)
  - Government-guaranteed: "63" (2003) and "25" (2004) — percent of GDP: "6.1" (2003) and "1.2" (2004)
  - Non-guaranteed: "40" (2003) and "32" (2004) — percent of GDP: "3.9" (2003) and "1.6" (2004)
- Private external debt (cotton sector approximation):
  - Foreign liabilities of Kredit-Invest reached "$150 million (7 percent of GDP) in 2004."

### Recent debt-reduction actions and agreements
- 2002–2004 improvements:
  - Face value of external debt reduced by "20 percent in 2004 alone" through cancellation and restructuring (including Russia and Pakistan).
  - Government avoided contracting new bilateral loans except from two development funds (Saudi Fund and Kuwait Fund) classified as bilateral lenders; "Most bilateral assistance is now provided in the form of grants."
  - Rapid increase in nominal GDP contributed to endogenous debt dynamics improvement.
- Russia debt regularization (October 2004 agreement affecting $306 million):
  - Components:
    - Debt-for-asset swap: "$242 million"
    - Offset of National Bank of Tajikistan’s claims on the Central Bank of Russia
    - Cancellation of bulk of unpaid interest accrued in 2004
  - Under the swap, "$242 million will be converted into Russia’s state ownership of the Nurek space tracking station located in Tajikistan."
  - Remaining $50 million to be repaid by investing this amount "during 2005–2008 on behalf of Russia in the construction of the Sangtuda I hydro-power station."
- Uzbekistan debt:
  - Uzbekistan’s total debt outstanding: "$94 million."
  - Debt service of "$14 million falling due in 2005 will be paid with services by Tajik Rail."
  - Offset agreements require annual renegotiation, creating "significant uncertainty regarding future debt payments."

### Debt sustainability analysis (DSA): assumptions and baseline
- Core assumptions in the DSA:
  - Real GDP growth: "6.5 percent a year on average in 2005–2010"
  - Inflation: "5 percent annually"
  - Fiscal deficit (excluding the PIP): "0.5 percent of GDP"
  - Externally financed PIP: "4.5 percent of GDP"
  - Current account deficit: "4–5 percent of GDP"
  - Discount rate for NPV calculations: "5 percent"
  - Exports computed excluding barter exports of aluminum and electricity
  - Commodity prices and exchange rate projections: based on "the January 2005 WEO baseline, updated with recent near-term price movements"
- Operational framework: "operational framework for low-income countries" adjusted to Tajikistan via calibrated stress tests.

### DSA baseline results and projections
- Under the baseline scenario (highly concessional new borrowing and prudent debt management):
  - Public external debt face value not expected to exceed "40 percent of GDP in the long-run."
  - NPV of Tajikistan’s debt will average "31 percent of GDP" in the medium term.
  - NPV of public debt-to-exports ratio projected to decline from "100 to 91 percent" during the projection period.
  - Public debt service-to-export ratio projected to decline from "10 to 5 percent."
  - The profile of government and government-guaranteed (GGG) debt is "largely similar to that of the public debt."

### Alternative scenarios and sensitivity (stress tests)
- Historical (optimistic) scenario:
  - Uses 1998–2004 averages for key macro variables.
  - Results:
    - NPV of public debt declines from baseline "33 percent of GDP in 2004 to 24 percent in 2013."
    - NPV of debt-to-exports declines from "100 to 72 percent."
    - Debt service ratio drops from "10 to 6 percent."
    - If primary fiscal deficit remains at 2002–2004 low level, NPV of debt-to-revenue declines from "175 percent in 2004 to 65 percent in 2013" and debt service-to-revenue drops from "11 to 3 percent."
  - Note: "the economic factors that led to the recent rapid improvement in the debt outlook are not likely to be repeated."
- Less favorable / extreme scenario (deterioration by one-half standard deviation in key variables):
  - Short-term impact (five years): NPV of public debt-to-GDP may worsen "by almost 50 percentage points on average."
  - Permanently lower GDP growth (by one standard deviation compared to baseline) results in deterioration in NPV of debt-to-revenue "by 44 percentage points on average in 2005–2010."
  - Long-run less favorable terms for new borrowing (interest rate "2 percentage points higher than in the baseline"):
    - NPV of debt-to-GDP rises from "33 percent of GDP in 2004 to 48 percent in 2023."
    - NPV of debt-to-exports rises from "100 to 137 percent."
  - Permanently lower GDP growth increases NPV of debt-to-revenue from "175 to 304 percent in 2004–2023" and debt service-to-revenue on GGG debt from "11 to 18 percent."
- Commodity/export revenue shock:
  - Three commodities (aluminum, cotton, fruits and vegetables) constitute "some 40 percent of GDP, 70 percent of exports, and 10 percent of fiscal revenue."
  - An export revenue shock (decline by one standard deviation) worsens medium-term averages:
    - NPV-to-exports ratio worsens from baseline average "93 percent" to "169 percent in 2004-2010 on average."
    - Debt service ratio on public debt deteriorates from "7 to 11 percent."
  - In long run, a one standard deviation export revenue shock produces protracted deterioration of NPV of debt-to-exports that "will not disappear even by 2023."
- Other significant risk factors:
  - Surge in inflation and nominal depreciation can have lasting effects on NPV of debt-to-GDP and fiscal ratios, notably NPV of debt-to-revenue and debt service-to-revenue ratios.
- Stress test summary figures (2005-2010 averages as presented):
  - Baseline to exports to real GDP combined (selected results):
    - NPV of debt-to-GDP: "29......78" (tabular snippet; preserved as in source)
    - NPV of debt-to-exports: "93 169......"
    - Debt service-to-exports: "7 11......"
    - NPV of debt-to-revenue: "157...201..."
    - Debt service-to-revenue: "12...14..."
  - "The most extreme shock" label retained as in source.

### Key takeaways on debt sustainability
- Under baseline assumptions and highly concessional borrowing, Tajikistan’s public debt is projected to remain sustainable with declining debt ratios (NPV of debt averaging "31 percent of GDP" in medium term).
- Continuation of favorable macro trends and conservative borrowing could reduce debt burdens further (historical scenario outcomes).
- Debt sustainability is highly sensitive to:
  - Permanently lower GDP growth,
  - Adverse export revenue shocks (especially aluminum, cotton, fruits and vegetables),
  - Exchange rate depreciation and inflation,
  - Less concessional borrowing terms.
- Policy implication (as stressed by scenarios):
  - Continuation of sound macroeconomic policies and concessional borrowing are critical to maintain debt sustainability; failure to do so can lead to substantial deterioration in debt ratios.

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05131.pdf*

### 14.      Tajikistan’s debt situation seems sustainable, but vulnerable to shocks and hinges on

### 14.      Tajikistan’s debt situation seems sustainable, but vulnerable to shocks and hinges on continued strong policy implementation.

### Long-term debt sustainability — findings
- External concessional borrowing not exceeding 4.5 percent of GDP annually is broadly consistent with long-term debt sustainability.  
- Stability of debt ratios in the long run depends on cautious borrowing policies and strong macroeconomic performance.  
- With strong growth underpinned by sustained reforms and no new non-concessional borrowing, Tajikistan debt indicators are projected to remain stable in the longer term.  
- Slippages in reforms, lower growth, and adverse exogenous shocks, in particular to exports, are the largest sources of debt vulnerability.

### Fiscal requirements and debt-service targets
- The revenue effort (taxes and grants) of at least 18.0–18.5 percent GDP during the forecast period is required.  
- A fiscal deficit excluding the PIP not exceeding 0.5 percent of GDP is needed to target the debt service-to-revenue ratio at below 15 percent.  
- Targeted debt-service-to-revenue ratio: below 15 percent (appropriate based on historical experience and to permit additional budget expenditure on development and social needs without diverting an excessive share to debt repayments).  
- Main downside risk: lower GDP growth and revenue — in the worst case scenario debt service payments could increase up to 20 percent of fiscal revenue.

### Debt restructuring priorities
- Restructuring (rescheduling or cancellation) of bilateral debt with large creditors remains a priority to smoothen the debt profile and reduce fiscal strain.  
- Largest creditors identified for priority action: Uzbekistan, the United States, and Turkey.

### Strengthening debt-management capacity — recommendations
- Establish a reliable computerized debt tracking system for all external debts—public and private—and start using it for budget and balance of payment forecasting and analysis.  
- Analyze the terms and conditions of significant loans under the PIP or any other public credit line carefully to determine their impact on Tajikistan’s debt profile and its sustainability.  
- Prepare a fully-fledged DSA annually as a contribution to the annual budget exercise.

### Key indicators and statistics (selected from tables and text)
- External concessional borrowing consistent with sustainability: not exceeding 4.5 percent of GDP annually.  
- Required revenue effort: at least 18.0–18.5 percent of GDP.  
- Fiscal deficit excluding PIP target: not exceeding 0.5 percent of GDP.  
- Target debt service-to-revenue ratio: below 15 percent.  
- Worst-case debt service-to-revenue: up to 20 percent.  
- Public external debt (nominal) (Table 1, first reported figure): 84.4 (percent of GDP).  
- NPV of public external debt (Table 1, first reported figure): 54.7 (percent of GDP).  
- NPV of public external debt in percent of exports (Table 1, first reported figure): 132.1 (percent).  
- Public debt service-to-exports ratio (first reported figure): 18.3 (percent).  
- Nominal GDP (billions of U.S. dollars) (Table 1 memorandum): 1.2 (first reported value) … 8.2 (last reported value).

*Source: Tajikistan authorities; and Fund staff estimates and simulations.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05131.pdf_