## _cr0663

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### Executive Summary
- Fund involvement: Stand-by Arrangement (SBA) late 1996; Emergency Post-Conflict Assistance last quarter 1997; ESAF/PRGF 1998–2001; second PRGF originally covering 2002–05.
- Assessment scope: performance under the last two arrangements; lessons and areas for future Fund engagement.
- Macroeconomic performance, 1998–2005:
  - Economic growth far exceeded program projections.
  - Inflation performance was at times volatile and often overshot program targets.
  - Macroeconomic stabilization mainly driven by strong fiscal consolidation.
  - Monetary policy has occasionally undermined inflation performance.
- Structural reforms:
  - First ESAF/PRGF: uneven progress; broad structural agenda + weak institutions → persistent underperformance, numerous waiver requests, programs off track in last two years.
  - Second PRGF: improved performance with stronger ownership and a streamlined agenda.
- Key lessons:
  - Weak institutional capacity constrained reform.
  - Peace agreement imposed ex-ante constraints limiting rapid structural reform.
  - Early programs attempted too much structural conditionality, including measures outside Fund expertise and hard-to-monitor requirements.
  - Programs should have more forcefully addressed public financing of the cotton sector and channeled assistance transparently through the budget.
  - Programs failed to address institutional weaknesses in monetary policy design and implementation.
- Policy implication: low per-capita income, low reserves, lack of capital market access, and high probability of medium-term financing gaps argue against immediate return to regular surveillance or PSI; a successor PRGF arrangement is likely warranted.

### Introduction and Transition Context
- Fund involvement since independence in 1991; financial assistance began late 1996 due to civil war (1992–peace agreement June 1997).
- Transition challenges:
  - At Soviet breakup, Tajikistan received almost fifty percent of its total budget revenues from federal transfers.
  - Disruption of trade links, sharp input cost increases (critically energy), loss of implicit food import subsidies.
  - Civil war and subsequent instability; industrial production (mainly aluminum) collapsed by nearly 70 percent during early transition.
- External shocks: Russian crisis, Afghanistan conflict, natural disasters, trade barriers from nonreforming neighbors.
- Growth resumed late 1990s and accelerated since 2000; output remains below estimated pre-independence level.

### Program Strategy
- First ESAF/PRGF (1998–2001): export-led growth, liberal trade/investment, address high external debt.
  - Macroeconomic elements:
    - Fiscal deficit reduced from 3.3 percent of GDP in 1998 to 0.3 percent of GDP in 2001.
    - Tight monetary policy with no central bank financing of the budget after mid-1999.
    - Asymmetric exchange rate policy: appreciation not resisted; downward pressure countered by tighter financial policies.
  - Structural agenda: banking reform, ambitious privatization, public enterprise reform, trade liberalization, energy sector reform, public administration and legal framework reform, acceleration of land reform.
- Second PRGF: streamlined structural conditionality; refocus on banking restructuring, energy sector reform (gas only), farm privatization.
  - Macroeconomic focus: limit fiscal deficit to levels financeable from concessional external sources; adopt a “cleaner” managed float (intervene only to limit unwarranted fluctuations).
  - Intensified external debt resolution efforts.
- Streamlining began in year three of the first arrangement and during a staff-monitored program in early 2002 (central bank condition/independence; tax/customs administration reform; improve public spending efficiency).

### Macroeconomic Performance and Implementation Record (1998–2005)
- Overall:
  - Robust growth but occasional policy lapses.
  - Growth outperformed projections; inflation volatile and exceeded targets.
  - Fiscal consolidation was the principal stabilizing force; fiscal quantitative targets met often by wide margins.
  - Monetary policy lapses (directed credit to state enterprises and cotton producers) contributed to exchange rate volatility, high inflation, and review delays with numerous waiver requests.
- Structural implementation:
  - First arrangement: 113 structural performance criteria, benchmarks, and prior actions; monitoring difficulties and underperformance led to slippage in final years.
  - Second PRGF: significant improvement in implementation and ownership; concerns remain about reform quality in agriculture and weak institutional capacity.
- Misreporting and external debt management:
  - Seven cases of misreporting discussed by the Executive Board, resulting in ten noncomplying disbursements during the two PRGF arrangements.
  - Causes: limited debt management capacity, lack of IMF procedural experience, weak debt management capacity.
  - Nonconcessional borrowing and arrears causing misreporting were quickly repaid or cleared; waivers granted in most cases; early repayment requested in some instances.

### Fiscal Policy
- Fiscal consolidation:
  - Overall fiscal balance, excluding the externally financed Public Investment Program (PIP), turned from a deficit of about 4 percent of GDP in 1998 to small surpluses in 2002–05.
  - Expenditures increased from 16.6 percent to 20.7 percent of GDP over the period.
  - Spending reprioritized toward social sectors (education and health care).
  - Public sector wages increased significantly in last two years without jeopardizing fiscal targets.
- Debt and sustainability:
  - Fiscal consolidation plus debt cancellation/restructuring improved medium-term fiscal and external sustainability.

### Quasi-fiscal Activities and Energy Sector
- Early practices limited consolidation: “tax offsets” (Tajik Rail serviced government debt to Uzbekistan with subsequent tax reductions) and directed central bank/state bank credit to Tajik Rail and cotton exporters; mostly eliminated now.
- Energy sector quasi-fiscal deficit remains high:
  - Economic losses from underpricing of electricity estimated at about 10 percent of GDP in early 2005.
  - Low electricity prices → inefficient usage, frequent shortages, underinvestment in transmission and distribution; major obstacle to attracting foreign investment.
- Gas sector:
  - Quasi-fiscal deficit declined to 1 percent of GDP as of end-2004, compared to 3 percent at end-2002.
- Electricity tariff gap:
  - Tariffs would have to be adjusted by more than 400 percent (to the equivalent of $0.02 per KWh) to make the electricity sector financially viable.
  - Authorities considering a World Bank proposal for quarterly increases to reach this level over five years.
  - Appropriate regulatory framework development is crucial to attract foreign investment (mostly from Russia).

### Revenue Collection and Tax Administration
- Tax revenues rose from 12 percent of GDP in 1998 to about 16 percent in 2005.
- Sources of improvement: change in VAT basis from origin to destination; reduced exemptions; elimination of “nuisance taxes.”
- Remaining weaknesses: narrow tax base; large proportion of revenues linked to cotton and aluminum, both vulnerable to international price volatility.
- Institutional reforms and TA: Fund technical assistance helped prepare new tax and customs codes approved in late 2004; tax code introduces a two-tier income tax, reduces tax concessions, and reduces number of taxes for agricultural producers; tax department restructured along functional lines and established a large taxpayer inspectorate.

### Public Financial Management
- Reform pace slow due to weak institutional capacity and lack of funding/technical support.
- Recent momentum: improving budget process and establishing a proper treasury.
- Achievements: better scope and quality of budget documentation and broader public availability of fiscal information.
- Limitations: basic treasury systems not firmly established; computerization at early stage due to financing constraints; many budget/treasury operations (especially local) remain manual.

### Monetary and Exchange Rate Policy
- Objectives: reduce inflation and restore confidence in national currency; aided by fiscal consolidation.
- Implementation challenges:
  - Frequent performance lapses, particularly during first PRGF.
  - Central bank exceeded NDA and reserve money targets by lending to public enterprises and cotton growers despite prohibitions.
  - Inability to resist pressures from vested interests affected implementation.
- Improvements in second PRGF:
  - Conditionality barred directed central bank loans and withdrew central bank from primary monetary market (credit auctions).
  - Fiscal surpluses led to government deposits at central bank, facilitating foreign exchange accumulation and sterilization.
  - External pressures to lend to agriculture and public entities persisted.
- Instrumental and institutional constraints:
  - Central bank financially insolvent, limiting monetary operations.
  - Limited diversification of monetary instruments; measures (e.g., collection of loans, sale of collateral) lack flexibility.
  - Higher-than-programmed foreign reserves accumulation could not be easily sterilized except via foreign exchange sales.
  - Reliance on foreign exchange interventions may create confusion given commitment to intervene only for unwarranted market fluctuations.
  - Ministry of finance unwilling to make obligations to central bank more marketable by agreeing to pay market interest rates.
- Exchange rate practice: asymmetric interventions to limit nominal appreciation; interventions generally unsterilized and sometimes led to deviations from indicative reserve money targets.

### External Position and Debt
- Trade and remittances:
  - Trade deficits larger than projected; integration into world economy occurred mainly through labor exports → massive remittance inflows that partly financed trade deficits.
  - Some export/import diversification but limited progress due to weak structural reforms.
- Current account and reserves:
  - Current account improved 2000–2003, deteriorated thereafter.
  - Early reduction reflected increased domestic savings from fiscal consolidation; later improvements linked to remittances.
  - FDI inflows very low; current account deficits financed almost entirely by grants and concessional loans.
  - Accumulation of reserves remained well below targets; cited reserve coverage: 1.7 months of imports.
- Debt dynamics:
  - Debt about 100 percent of GDP by mid-1990s; external debt-to-GDP increased to 130 percent by end of the Russian crisis; brought down to 40 percent of GDP by end-2004.
  - Contributing factors: debt/equity swap with Russia in 2004 ($260 million), fast growth, restraint on borrowing.
- Financing strategy:
  - Greater weight should have been given to grant financing.
  - Share of multilaterals in external debt rose significantly (financing of PIP and bilateral rescheduling); servicing imposes substantial burden on domestic resources.
  - PIP borrowing ceiling raised during second PRGF from 3 percent to 4 percent of GDP (indicative).
- Debt monitoring weaknesses: frequent misreporting incidents reveal weak debt monitoring; slow progress in establishing comprehensive external debt database (including private sector) — priority area.

### Structural Reform: Banking, Privatization, Land, and Trade
- Banking sector:
  - Priority: capital strengthening and comprehensive restructuring (initially five biggest banks > ¾ of assets).
  - Measures: central bank withdrawal from retail banking, streamline interbank FX market, strengthen supervision, open to foreign competition.
  - Outcomes:
    - Banks fell to 12 from 33.
    - Banks are profitable and liquid; system largely privately owned.
    - Deposits (and loans) < 10 percent of GDP and heavily dollarized.
    - Nonperforming loans declined from 32 percent in 2000 to about 10 percent in early 2005 but remain high by international standards.
    - Majority of banks regularly comply with prudential regulations.
- Privatization:
  - SME privatization rapid but monitoring/transparency issues (asset valuation, nontransparency).
  - Large-scale privatization slow; new mid-2003 strategy envisaged auctions/international tenders for large enterprises including TadAZ and Barki Tajik restructuring.
- Land and agriculture:
  - More than half of state and collective farms dismantled; many land share certificates issued.
  - Quality concerns: restructured farms often under implicit state control (cotton); many reorganizations “on paper” under former state farm bosses.
  - Cotton sector burdened by external debt overhang from input financing in arrears; ADB assistance exploring restructuring.
- Trade and diversification:
  - Need to diversify away from primary products.
  - Trade regime relatively liberal but neighboring trade restrictions hinder exports.
  - Required measures: lower nontrade barriers, improve business environment, infrastructure, regional integration; simplify border procedures and improve transit mechanisms.
- Governance:
  - Improved in recent years but gaps remain.
  - Fund programs promoted legal changes for transparency, tax streamlining, and audits of large enterprises.
  - Remaining problems: bureaucratic regulatory/licensing procedures impede business; State Financial Control Committee operates nontransparently with limited availability of quarterly audits to legislature.

### Collaboration with the World Bank
- Close coordination: joint conditionality on privatization; joint bank restructuring work with central bank.
- Division of responsibilities:
  - First ESAF/PRGF had many conditions beyond Fund expertise; second PRGF streamlined responsibilities with the World Bank taking lead on health, education, infrastructure, private sector development, privatization, and enterprise reforms.
  - Joint Bank-Fund work continued on public sector management, budget planning/execution, civil service reform budget aspects, financial sector reforms, and utility reforms.
- Scope for improvement: further streamlining and clearer division of labor remains desirable.

### Lessons Learned and Policy Recommendations
- Institutional capacity constraint: programs needed a better balance between reform speed and implementation capacity.
- Political constraints from peace agreement: entrenched vested interests limited reform quality and pace (notably agriculture, land, governance).
- Overambitious structural conditionality: early program contained close to 120 specific measures; only about a third met. Shifted many conditions to other IFIs by second PRGF.
- Cotton sector and central bank vulnerabilities:
  - Programs should have enforced transparent public financing for the cotton sector via the budget.
  - Safeguarding the central bank from pressures to lend to nongovernmental entities would have improved monetary consistency.
  - Central bank balance sheet weakness remains a risk despite strong fiscal performance mitigating it.
- Considerations for future Fund involvement:
  - Successor PRGF likely warranted; return to regular surveillance or PSI not appropriate now.
  - Access to a successor PRGF should be determined by program strength and balance of payments need at request time.
  - Focus areas for new arrangement and TA: tax policy and revenue administration; financial management and public financial management (transparency, governance); monetary policy and banking sector reform; strengthen revenue administration capacity to support social spending.
  - Risks to exit: low income levels, reserve building needs, potential financing gaps pending further debt relief; major political risk from entrenched vested interests and pressures undermining monetary programs — Fund should remain vigilant and ready to disengage if implementation falters.

### Selected Cases of Misreporting and Noncomplying Disbursements
- 1998 — 1 non-complying purchase: SDR 22 million; date: December 30, 1998. Type: PC on ceiling for government guaranteeing or contracting nonconcessional loans. Board decision: Waiver.
- 2001 — multiple instances:
  - 1 non-complying purchase: SDR 6 million; date: April 1, 2001. Type: Continuous PC on nonaccumulation of new external arrears. Remedy: arrears repaid and strengthened debt management commitments. Board decision: Waiver.
  - 3 non-complying purchases: SDR 25.32 million; dates: January 2000, April 2001, and July 2001. Board action: Tajikistan asked to repay SDR 25.32 million plus interest.
  - 2 non-complying purchases: SDR 12 million; dates: April 2001 and July 2001. Type: Continuous PC on nonaccumulation of new external arrears. Remedies: arrears clearance and commitments to develop debt inventories and monitoring.
  - 3 non-complying purchases: SDR 20 million; dates: April 2001, July 2001, and December 2002. Type: Continuous PC on nonaccumulation of new external arrears (April and July 2001); prior action on clearance of external arrears (December 2002). Board decision: Waiver for breach of prior action for December 2002 disbursement.
- Nature of misreporting examples:
  - Nonnotification of government guarantee on loan for cotton crop financing from Credit Suisse First Boston Co. (PC).
  - Nonnotification of arrears on loans from Pakistan, Germany, Iran, and USAID (PCs and prior action).
- Typical remedies/policy responses: repayment/clearance of arrears; corrective actions for transparent foreign borrowing and guarantees (Law on Foreign Borrowing and Government Guarantees); commitments to strengthen debt management (computerized debt stock database, training, equipment); improved reporting to Parliament.

*IMF staff assessment as presented in the source document.*

### Executive Summary ......................................................................................................

### _cr0663 - Executive Summary ......................................................................................................

### Executive Summary
- The Fund’s financial involvement with Tajikistan started in late 1996 with the approval of a Stand-by Arrangement (SBA), followed by Emergency Post-Conflict Assistance in the last quarter of 1997, an Enhanced Structural Adjustment Facility/Poverty Reduction and Growth Facility arrangement (ESAF/PRGF) covering 1998–2001, and a second PRGF arrangement originally covering 2002–05.
- This assessment covers Tajikistan’s performance under the last two arrangements and identifies lessons and potential areas for future Fund engagement.
- Macroeconomic performance, 1998–2005:
  - Economic growth during this period has far exceeded program projections.
  - Inflation performance has been at times volatile, and often overshot program targets.
  - Macroeconomic stabilization was mainly driven by a strong fiscal consolidation.
  - Monetary policy has occasionally undermined inflation performance.
- Structural reforms:
  - Initial progress under the first ESAF/PRGF was uneven; a broad and ambitious structural agenda coupled with weak institutions led to persistent underperformance, numerous waiver requests, and programs going off track in the last two years of the first arrangement.
  - Performance improved under the second PRGF with stronger program ownership and a streamlined policy agenda.
- Key lessons:
  - Weak institutional capacity posed a major constraint to reform.
  - The peace agreement imposed constraints that ex-ante limited the authorities’ ability to implement structural reforms quickly and effectively.
  - Early programs attempted too much in structural conditionality, including measures outside the Fund’s areas of expertise and difficult-to-monitor requirements.
  - Programs should have been more forceful in addressing public financing of the cotton sector and ensured public financial assistance was channeled transparently through the budget.
  - Programs failed to address institutional weaknesses in the design and implementation of monetary policy.
- Policy implication:
  - Given the still low level of per-capita income, the low level of reserves, lack of access to capital markets, and the high probability of financing gaps in the medium term, a return to a regular surveillance relationship or engagement under the policy support instrument (PSI) would not seem appropriate at this point. A successor PRGF arrangement is likely warranted.

### Introduction
- The Fund has been involved in Tajikistan’s transition since independence in 1991, but financial assistance began in late 1996 due to the civil war (1992–peace agreement signed June 1997).
- Transition challenges:
  - At breakup of the Soviet Union, Tajikistan was the largest relative recipient of federal budget transfers, accounting for almost fifty percent of its total budget revenues.
  - Disruption of traditional trade links, sharp increases in input costs (most critically energy), and loss of implicit subsidies on food imports.
  - Civil war and subsequent political instability and small-scale fighting continued for some time after the peace accord.
  - Industrial production (mainly aluminum) collapsed by nearly 70 percent during the early transition period.
- External shocks after the civil war: the Russian crisis, the Afghanistan conflict, natural disasters, and trade barriers by nonreforming neighboring countries.
- Growth resumed in the late 1990s and accelerated since 2000; output remains below estimated pre-independence level.

### Program Strategy
- First ESAF/PRGF (1998–2001) centered on an export-led growth strategy with a liberal foreign trade and investment regime and aimed to address high external debt accrued during conflict years.
  - Macroeconomic elements included:
    - Significant fiscal consolidation: reduction in fiscal deficit from 3.3 percent of GDP in 1998 to 0.3 percent of GDP in 2001.
    - Tight monetary policy with no central bank financing of the budget after mid-1999.
    - Asymmetric exchange rate policy: appreciation not resisted; downward pressure counteracted by tightening financial policies.
  - Structural agenda included a comprehensive banking system reform, ambitious privatization, public enterprise reform, trade liberalization, energy sector reform, public administration reform, legal framework reform, and the acceleration of land reform.
- Second PRGF arrangement significantly streamlined structural conditionality, refocusing on:
  - Banking restructuring, energy sector reform (gas sector only), and farm privatization.
  - Macroeconomic policy focus: limit the fiscal deficit to levels financeable from concessional external sources and adopt a “cleaner” managed float regime (intervention only to limit unwarranted fluctuations).
  - Intensified efforts to resolve external debt problems.
- Note: Efforts to streamline structural conditionality had started in the third year of the first arrangement and during the staff-monitored program in early 2002 (focus on central bank financial condition and independence; tax and customs administration reform; improving efficiency of public spending).

### Macroeconomic Performance and Record of Implementation
- Overall 1998–2005 performance:
  - Robust growth but occasional lapses in policy implementation.
  - Economic growth outperformed program projections; inflation often volatile and exceeded targets.
  - Fiscal consolidation was the principal stabilizing force; fiscal quantitative targets were met, often by wide margins.
  - Monetary policy lapses (e.g., directed credit to state enterprises and cotton producers, especially early in engagement) contributed to exchange rate volatility, high inflation, and review delays with numerous waiver requests.
- Structural implementation:
  - First arrangement included 113 structural performance criteria, benchmarks, and prior actions; underperformance and monitoring difficulties led to program slippage in the final years.
  - Second PRGF showed significant improvement in implementation and program ownership, though concerns remain about reform quality in agriculture and persistence of weak institutional capacity.
- Misreporting and external debt management (Box 1):
  - During the two PRGF arrangements, the Executive Board discussed seven cases of misreporting resulting in ten noncomplying disbursements.
  - Causes: limited capacity to manage external debt, initial lack of IMF procedural experience, weak debt management capacity.
  - Nonconcessional borrowing and arrears that caused misreporting were quickly repaid or cleared; waivers were granted in most cases; early repayment of outstanding amounts was requested in several instances.

### Fiscal Policy
- Fiscal consolidation achievements:
  - Overall fiscal balance, excluding the externally financed Public Investment Program (PIP), turned from a deficit of about 4 percent of GDP in 1998 to small surpluses in 2002–05.
  - Expenditures increased from 16.6 percent to 20.7 percent of GDP over the period.
  - Authorities reprioritized spending towards social sectors such as education and health care.
  - Public sector wages were increased significantly in the last two years without jeopardizing program fiscal targets, addressing wage compression, staff retention, and corruption in social service delivery.
- Debt and sustainability:
  - Fiscal consolidation and debt cancellation and restructuring agreements improved medium-term fiscal and external sustainability positions.

### Figures and Tables Referenced (as reported)
- Table 1. History of Lending Arrangements, 1996–2005 (In thousands of SDRs): PRGF Commitments December 11, 2002–February 10, 2006: 65,000 agreed, 55,200 drawn; PRGF Commitments June 24, 1998–December 24, 2001: 100,300 agreed, 78,280 drawn; Emergency Post-Conflict Assistance December 19, 1997–March 31, 1998: 15,000 agreed, 15,000 drawn; Standby Arrangement May 08, 1996–December 07, 1996: 15,000 agreed, 15,000 drawn.
- Table 2. Real GDP Growth and Inflation, 1998–2004 (Average annual change; in percent):
  - Armenia 9.0 / 3.4
  - Azerbaijan 10.1 / 0.7
  - Georgia 5.6 / 6.7
  - Moldova 2.7 / 16.1
  - Kyrgyz Republic 4.3 / 11.1
  - Tajikistan 8.5 / 22.8
  - Uzbekistan 4.7 / 30.2
- Figure 1. Projected and Actual Performance Under Fund Arrangements, 1998–2005 (panels showing Real GDP Growth; CPI Inflation; Tax Revenue and Overall Deficit 1/; External Current Account Balance; Gross International Reserves; External Public Debt). 1/ Excluding PIP.

*IMF staff assessment as presented in the Executive Summary of the source document.*

### 11.      The persistence of quasi-fiscal activities early in the assessment period limited

### _cr0663 - 11.      The persistence of quasi-fiscal activities early in the assessment period limited

### Quasi-fiscal activities and energy sector
- Early program period practices limited fiscal consolidation: “tax offsets” (Tajik Rail serviced government debt to Uzbekistan with subsequent reduction in their tax obligations) and directed credits from the central bank and state banks to Tajik Rail and cotton exporters were used instead of transparent budget funding; these specific activities have now been for the most part eliminated.
- The quasi-fiscal deficit of the energy sector remains high:
  - Economic losses due to large under pricing of electricity were estimated at about 10 percent of GDP in early 2005.
  - Low electricity prices contributed to inefficient usage, frequent shortages, and massive underinvestment in transmission and distribution.
  - Low rates remain a major obstacle to attracting foreign investment to harness hydropower potential and support exports and energy-intensive manufacturing.
- Gas sector quasi-fiscal improvement:
  - Quasi-fiscal deficit of the gas sector declined to 1 percent of GDP as of end-2004, compared to 3 percent at end-2002.
- Electricity tariff gap and policy considerations:
  - Electricity tariffs would have to be adjusted by more than 400 percent (to the equivalent of $0.02 per KWh) to make the electricity sector financially viable.
  - Authorities are considering a World Bank proposal for quarterly increases in electricity tariffs to reach this level over a period of five years.
  - Development of an appropriate regulatory framework for the electricity sector is crucial to attract foreign investment (mostly from Russia).

### Revenue collection and tax administration
- Tax revenue performance:
  - Tax revenues rose from 12 percent of GDP in 1998 to about 16 percent in 2005.
- Sources of improvement:
  - Change in VAT basis from origin to destination.
  - Reforms to streamline taxation by reducing exemptions and eliminating “nuisance taxes.”
- Remaining weaknesses:
  - Tax base remains narrow; a large proportion of revenues linked to cotton and aluminum sectors, both vulnerable to international price volatility.
- Institutional reforms and TA:
  - Extensive Fund technical assistance contributed to reshaping legal and institutional frameworks for tax and customs administration.
  - New tax and customs codes prepared with Fund assistance were approved in late 2004.
  - The tax code introduces a two-tier income tax, reduces tax concessions, and reduces the number of taxes for agricultural producers.
  - The authorities restructured the tax department along functional lines and established a large taxpayer inspectorate.

### Public financial management
- Pace and focus of reform:
  - Public financial management reform has not proceeded as fast as envisaged, reflecting weak institutional capacity and a lack of funding and technical support.
  - Recent momentum focuses on improving the budget process and establishing a proper treasury.
- Achievements and limitations:
  - Progress in improving scope and quality of budget documentation and broadening public availability of fiscal information.
  - Basic treasury systems are not yet firmly established or well-developed.
  - Computerization of public financial management is at an early stage due to lack of financing; many budget and treasury operations, especially at the local level, remain manual.

### Monetary and exchange rate policy
- Objectives and implementation challenges:
  - Policy aimed at reducing inflation and restoring confidence in the national currency; aided by rapid fiscal consolidation.
  - Implementation suffered frequent performance lapses, particularly during the first PRGF arrangement.
  - Central bank exceeded NDA and reserve money targets on several occasions by lending to public enterprises and cotton growers, despite explicit prohibitions.
  - Uneven implementation may be linked to inability to resist pressures from powerful vested interests.
- Improvements in second PRGF:
  - Monetary policy implementation improved as recommendations were simplified and program ownership improved.
  - Conditionality barred the central bank from issuing directed loans and withdrew the central bank from the primary monetary market (credit auctions).
  - Fiscal surpluses led to government deposit accumulation at the central bank, facilitating foreign exchange accumulation and monetary sterilization.
  - External pressures to lend to agriculture (cotton) and public entities persisted.
- Instrument and institutional constraints:
  - Effectiveness constrained by a lack of appropriate instruments and weak institutional capacity.
  - Central bank is financially insolvent, limiting its ability to conduct monetary operations and restrain monetary expansion.
  - Limited progress diversifying monetary policy instruments; measures adopted (e.g., collection of loans from private sector, sale of collateral) lack flexibility and are difficult to implement.
  - Higher-than-programmed foreign reserves accumulation could not be easily sterilized except through sale of foreign exchange.
  - Central bank reliance on foreign exchange interventions (its only monetary policy instrument) may create confusion as it committed to intervene only in the event of unwarranted market fluctuations.
  - External constraint: ministry of finance unwillingness to make its obligations to the central bank more marketable by agreeing to pay market interest rates on them.
- Exchange rate practice:
  - Despite commitment to a flexible exchange rate under the second PRGF, foreign exchange strategy has often been asymmetrical to limit nominal appreciation.
  - Interventions have generally been unsterilized and have sometimes led to deviations from indicative reserve money targets.

### External position and debt
- Trade and remittances:
  - Tajikistan exhibited much larger trade deficits than projected under programs; projections were mostly optimistic.
  - Integration into world economy occurred mainly through “export” of labor, leading to massive remittance inflows that partly financed trade deficits.
  - Some diversification: shares of both exports and imports of nontraditional products increased, but overall progress limited by lack of structural reforms.
- Current account and reserves:
  - Current account improved between 2000 and 2003, with some deterioration since then.
  - Reduction in current account deficit during the first program reflected increased domestic savings from fiscal consolidation.
  - Later improvements largely linked to rapid increase in remittances.
  - Foreign direct investment inflows have been very low; current account deficits financed almost entirely by grants and concessional loans.
  - Accumulation of reserves remained well below targets throughout both programs, as concessional borrowing financed increased imports for consumption and investment.
- Debt dynamics and mitigation:
  - Debt levels: about 100 percent of GDP by the mid-1990s; external debt-to-GDP ratio increased to 130 percent by the end of the Russian crisis; brought down to 40 percent of GDP by the end of 2004.
  - Contributing factors to reduction: debt/equity swap with Russia in 2004 ($260 million), fast economic growth, and restraint on borrowing.
  - Fund programs discouraged acquisition of new nonconcessional loans or accumulation of external arrears.
- Financing strategy:
  - Greater weight should have been given to grant financing given substantial financing needs.
  - Share of multilaterals in external debt rose significantly, mainly due to financing of the PIP and bilateral rescheduling efforts; relative exposure to multilateral institutions is now quite high and servicing imposes a substantial burden on domestic resources.
  - PIP borrowing ceiling was indicative and was raised during the second PRGF arrangement from 3 percent to 4 percent of GDP.
- Debt monitoring weaknesses:
  - Frequent incidences of misreporting highlighted weaknesses in debt monitoring capacity.
  - Progress in establishing a solid external debt database (including external private sector debt) has been slow and should be a priority.

### Structural reform: banking, privatization, land, and trade
- Banking sector reform:
  - High priority in reform agenda; initial measures targeted capital strengthening and a comprehensive bank restructuring program.
  - Initially included five biggest banks accounting for more than ¾ of total banking system assets.
  - Subsequent measures: gradual withdrawal of central bank from retail banking, streamlining interbank foreign exchange market, strengthening central bank supervision, opening sector to foreign competition.
  - Outcomes and remaining issues:
    - Number of commercial banks fell to 12 from 33 at start of reforms.
    - Banks are profitable and liquid; banking system largely privately owned.
    - Deposits (and loans) account for less than 10 percent of GDP and are heavily dollarized.
    - Nonperforming loans declined from 32 percent in 2000 to about 10 percent in early 2005, but remain high by international standards.
    - Majority of banks comply with prudential regulations regularly.
- Privatization:
  - SME privatization completed rapidly, though monitoring and transparency issues existed (asset valuation, nontransparency).
  - Large-scale enterprise privatization has been slow.
  - New privatization strategy (mid-2003) envisaged sale through auction or international tenders of a significant number of large-scale enterprises, including restructuring of TadAZ and Barki Tajik.
- Land reform and agriculture:
  - More than half of state and collective farms were dismantled and many land share certificates issued.
  - Quality of farm restructuring questioned: restructured farms still subject to implicit state control over production and harvesting (especially cotton); many reorganizations are “on paper” and remain under administrative control of former state farm bosses.
  - Cotton sector burdened by an external debt overhang from input financing that is now in arrears; ADB assistance is being used to explore restructuring options.
- Trade and export diversification:
  - Need to diversify exports away from primary products to reduce vulnerability to shocks.
  - Although trade regime is relatively liberal, trade restrictions by neighboring countries hinder exports.
  - Future efforts: lower nontrade barriers by improving business environment and private sector development, develop infrastructure, increase regional integration.
  - Implementation gaps: Central Asian trade agreements lack effective implementation; progress requires simplification of border procedures, improved transit mechanisms, and increased cooperation on joint infrastructure projects.
- Governance:
  - Governance has improved in recent years but important gaps remain.
  - Fund-supported programs promoted legislative changes for transparency in budget, streamlining taxes, and audits of large enterprises.
  - Remaining issues: bureaucratic and complex regulatory and licensing procedures impede business establishment and operation.
  - State Financial Control Committee conducts activities in a nontransparent manner; availability of its quarterly audit reports to the legislature is still limited.

### Collaboration with the World Bank
- Close collaboration:
  - Conditionality on privatization was established jointly to reinforce implementation and monitoring.
  - On bank restructuring, World Bank and Fund staffs worked closely with the central bank.
- Division of responsibilities:
  - First ESAF/PRGF arrangement contained many structural conditions beyond Fund expertise; coordination and division of responsibilities were streamlined under the second PRGF arrangement.
  - The World Bank took the lead in health, education, infrastructure development, private sector development, privatization, and enterprise reforms.
  - Bank and Fund continue joint work on public sector management, budget planning and execution, civil service reform budget aspects, financial sector reforms, and utility reforms.
- Scope for improvement:
  - There remains scope for further improvement and streamlining of collaboration efforts.

*Source: IMF staff report content unit _cr0663 - 11.*

### 32.      The Bank continues to play a key role in assisting Tajikistan in furthering its

### _cr0663 - 32.      The Bank continues to play a key role in assisting Tajikistan in furthering its

### Bank role and country assistance
- The Bank focuses on: improving business opportunities in rural and urban areas; enhancing and preserving the quality of human capital; and exploiting Tajikistan’s hydropower potential.
- In July 2005, the Bank approved a new country assistance strategy (CAS) for Tajikistan for the period 2006–09.
- The CAS contemplates financial assistance worth a total of $120 million.

### Program effectiveness and Fund engagement
- Staff projections:
  - Early projections (original ESAF/PRGF arrangement) were thrown off by the Russian crisis, particularly for the external sector.
  - Subsequent macroeconomic projections were relatively accurate except when policy deviations occurred.
  - Staff adjusted program targets and parameters in response to exogenous shocks.
- Macroeconomic outcomes and drivers:
  - Fiscal performance has exceeded expectations; fiscal consolidation supported macro stability while allowing prioritization of key sectors.
  - Inflation performance has been uneven, with surges (particularly in 2000) when authorities deviated from agreed monetary targets.
  - Current account deficits have essentially mirrored the use of concessional debt inflows.
  - Accumulation of external reserves has fallen short of targeted import coverage; the current ratio cited is 1.7 months of imports.
  - A surge in migrants’ remittances in recent years has been difficult to account for in macroeconomic performance because remittances have not yet been fully and appropriately registered in macroeconomic accounts.
- Structural conditionality experience:
  - Early in engagement, structural conditionality was poorly focused and too ambitious: close to 120 specific measures in the original program, of which only about a third were met.
  - Conditionality was significantly streamlined for the second PRGF arrangement.
  - Authorities have acknowledged lagging reform efforts in agricultural, energy, public sector management, and governance.

### Key outcomes and vulnerabilities
- Growth and poverty:
  - Despite external shocks, growth performance described as remarkable.
  - Poverty rates declined from 81 percent of the population in 1999 to 64 percent in 2003.
- Governance and implementation capacity:
  - Implementation record improved after initial setbacks, but sustaining gains requires addressing agricultural reform, energy sector reform, private sector development, and governance problems.
  - Capacity to design and implement monetary policy needs strengthening.
- Reserve and financing constraints:
  - Low per–capita income, low level of reserves, lack of access to capital markets, and high probability of medium-term financing gaps (pending further debt relief) argue for continued concessional support rather than immediate exit from Fund support.

### Bank-Fund collaboration (high-level areas)
- Macroeconomic framework:
  - Fund: fiscal policy, monetary and exchange rate policies, trade policy; selected tax, customs, and banking sector reforms, and economic statistics. Instruments: quantitative and structural performance criteria and benchmarks.
  - Bank: economic growth, PRSP-related expenditure allocations, financial sector reforms, and economic statistics. Instruments: Macroeconomic monitoring, SAC, and PBC.
- Budget:
  - Fund: formulation and execution, tax policy and administration, customs, debt management. Instruments: performance criteria on overall fiscal balance, limits on borrowing from the banking system, and benchmarks on revenue collection and overall fiscal balance.
  - Bank: public expenditure review, development budget formulation (social and infrastructure), country procurement, and financial accountability assessments. Instruments: public expenditure review updates, PRSP support updates, SAC, and PBS.
- Public sector reform:
  - Fund: public sector management, quasi-fiscal deficits, selected civil service and energy sector reforms. Instruments: ESAF/PRGF structural performance criteria and benchmarks.
  - Bank: civil service reform, public administration reforms, strengthening financial control office. Instruments: PBC.
- Poverty and social sectors:
  - Bank involvement highlighted: poverty analysis; education, health, social protection reforms; community-driven development support. Instruments listed include poverty studies and assessments, education modernization project, primary health care project, community and basic health project, SAC, and PBC.
- Private sector and infrastructure development:
  - Bank instruments include business surveys, IBTA2, and farm privatization support project to support measures for financial transparency, regulatory framework improvements, investment climate reviews, and privatization.

### Lessons learned
- Institutional capacity constraint:
  - Weak institutional capacity was a major constraint; programs needed a better balance between speed of reforms and authorities’ implementation capacity.
  - Many measures in early programs would have been difficult to implement even for stronger institutions.
- Political constraints from peace agreement:
  - The peace agreement created constraints that limited the authorities’ ability to move quickly on structural reforms by entrenching vested interests and limiting reform quality in areas such as agricultural and land reforms and governance.
- Overambitious structural conditionality:
  - Early programs reached too far in structural conditionality, including measures outside the Fund’s expertise and difficult to monitor.
  - By the second PRGF, more conditionality had been shifted to other IFIs, though some energy (gas) sector conditionality may still have been beyond the Fund’s capacity to monitor (example: structural performance criterion on collection rates of Tajikgas followed by a structural benchmark requiring installation of 15,000 gas meters).
- Cotton sector and central bank vulnerabilities:
  - Programs should have more forcefully addressed public financing of the cotton sector, ensuring public financial assistance was channeled transparently through the budget.
  - Safeguarding the central bank from external pressures to lend to nongovernmental entities would have improved monetary program consistency.
  - Structural weakness of the central bank’s balance sheet remains a risk; strong fiscal performance has so far mitigated that risk but it cannot be ignored.

### Considerations and recommendations for future Fund involvement
- Role for a successor PRGF:
  - Authorities are interested in a new PRGF arrangement; Fund engagement and financial assistance could be beneficial given Tajikistan’s status among the poorest countries.
  - A return to regular surveillance or engagement under the policy support instrument is not seen as appropriate at this point; a successor PRGF arrangement is likely warranted, with access determined by program strength and balance of payments need at the time of request.
- Focus areas for a new arrangement and TA:
  - Continue focusing on reform of narrow institutions: tax policy and revenue administration; financial management and public financial management (to reinforce transparency and address governance issues); monetary policy and banking sector reform; and financial sector reform to foster sustained high growth.
  - Strengthen capacity in revenue administration to enhance ability to increase social expenditures.
- Risks and exit uncertainty:
  - It is difficult to predict the possibility of exit from Fund support at the end of a new three-year arrangement given low income levels and need to build reserves; financing gaps may persist pending further debt relief, although bilateral donor resources could help.
  - Major risk: detrimental effect of entrenched vested interests on reform quality, especially in land and agricultural reform, and political pressures that could prompt deviations from agreed monetary programs. The Fund should remain vigilant and ready to disengage if implementation falters.

### Cases of misreporting and noncomplying disbursements (selected highlights)
- 1998 — 1 non-complying purchase: SDR 22 million; date: December 30, 1998. Type affected: PC on the ceiling for government guaranteeing or contracting nonconcessional loans. Board decision: Waiver of nonobservance of performance criterion.
- 2001 — multiple instances:
  - 1 non-complying purchase: SDR 6 million; date: April 1, 2001. Type: Continuous PC on nonaccumulation of new external arrears. Remedy: arrears repaid and strengthened debt management commitments. Board decision: Waiver.
  - 3 non-complying purchases: SDR 25.32 million; dates: January 2000, April 2001, and July 2001. Board action: Tajikistan was asked to repay SDR 25.32 million together with any interest accrued.
  - 2 non-complying purchases: SDR 12 million; dates: April 2001 and July 2001. Type: Continuous PC on nonaccumulation of new external arrears. Remedies included arrears clearance and commitments to develop debt inventories and monitoring.
  - 3 non-complying purchases: SDR 20 million; dates: April 2001, July 2001, and December 2002. Type: Continuous PC on nonaccumulation of new external arrears (for April and July 2001); prior action on clearance of all external arrears (December 2002). Board decision: Waiver for breach of prior action for December 2002 disbursement.
- Nature of misreporting examples:
  - Authorities did not inform staff about government guarantee granted on loan for cotton crop financing from Credit Suisse First Boston Co. (PC).
  - Authorities did not inform staff about arrears on loans from Pakistan, Germany, Iran, and USAID (PCs and prior action).
- Typical remedies and policy responses included: repayment/clearance of arrears; corrective actions to create transparent frameworks for foreign borrowing and government guarantees (Law on Foreign Borrowing and Government Guarantees); commitments to strengthen debt management (computerized debt stock database, training, equipment), and reporting improvements to Parliament.

*Source: IMF.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr0663.pdf_