## _cr08197

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---

### Executive Summary — Recent developments and immediate context
- Real GDP expanded by only 3.2 percent in Q1 2008 relative to Q1 2007, compared to 7.8 percent for 2007 as a whole.
- Inflation rate as of end-March 2008 was 20.3 percent on a 12-month basis, essentially unchanged from end-December 2007.
- Severe weather and energy shortages early in 2008 led to the significant slowdown in growth.
- Remittances surged in Q1 2008, enabling the National Bank of Tajikistan (NBT) to accumulate reserves and contributing to an overperformance in consumption-related tax revenue collections.
- As of end-March 2008:
  - The NBT had issued about $70 million in written guarantees.
  - Total NBT pledges amounted to about $240 million.
  - Gross foreign assets, as reported to the Fund, were about $385 million.
  - Previously unreported debt obligations (NBT guarantees and pledges) totaled $310 million with maturities between three and six months, requiring frequent rollovers.
  - Import reserve coverage was about half a month of imports.
- Budget performance:
  - The 2007 budget recorded a surplus of about 1½ percent of GDP (excluding the externally financed Public Investment Program (PIP)), compared to a target deficit of 1 percent of GDP.
  - Project disbursements from China (largest PIP component) amounted to $217 million (6 percent of GDP) in 2007.
- Banking sector and structural issues:
  - Banking sector appears well-capitalized and liquid, but supervisory framework is highly susceptible to political influence; the NBT was found insolvent in the FSAP team assessment.
  - Energy sector: gas tariffs at cost recovery levels; electricity tariffs remain below financially viable levels for Barki Tajik.
  - Cotton sector: land reform shortcomings persist; restructured farms remain subject to state control; cotton financing provided by politically powerful “investors” who control inputs and ginneries.
  - As of November 2007, previously misreported domestic credits to the cotton sector amounted to approximately 800 million somoni (US$ 232 million).

### Staff-Monitored Program (SMP) — Objectives and macro framework for 2008
- Main objectives:
  - Reestablish credibility by addressing governance and management problems at the NBT, including a special audit of the NBT and other involved parties.
  - Provide a framework for macroeconomic stability within existing policy constraints.
- Macroeconomic targets and settings for 2008:
  - Growth projected to slow to 5 percent.
  - Inflation target of 15 percent.
  - Target a balanced budget in 2008 (moving from a small surplus in 2007), allowing a real increase in social outlays and transparent financing of the cotton sector.
  - Monetary policy framework: reserve money target and a managed float exchange rate regime (noting MCM reclassified Tajikistan’s exchange rate framework as a conventional peg from a managed float).
- Debt strategy and contingent liabilities:
  - Zero ceiling on contracting of nonconcessional debt.
  - Establishment of a contingent liability reporting regime to cover SOEs and the NBT.
- Fiscal stance and budget execution:
  - 2008 budget is moderately expansionary to allow transparent financing of the cotton sector, support payments to farmers, and a 40 percent increase in the wage bill.
  - Original aim: target a deficit of ½ percent of GDP (excluding the PIP); strong revenue performance could allow a tighter stance.

### Measures on NBT governance, special audit, and safeguards
- Special audit of the NBT:
  - Terms of reference (ToR) finalized and agreed with staff as a prior action; ToR forwarded to potential specialist auditor firms on May 14 (prior action).
  - Special audit expected to last 6–8 months; interim reports to be shared with Fund staff and key findings made public.
  - Audit objectives include:
    - Assess governance and control environment at the NBT and recommend steps to prevent recurrence of misreporting.
    - Verify revised data reported to the Fund and establish a reliable foundation for future data provision.
    - Make transparent all NBT financial operations involving off-balance sheet transactions (pledges of international reserves, issuance of guarantees, extension of domestic credits to Kredit Invest).
    - Review financing transactions related to Kredit Invest, confirm legitimacy of payments to third parties, ascertain Kredit Invest’s total liabilities, and review decision-making allocating financing to cotton investors.
- Governance and legal reforms:
  - Program conditionality linked to conduct of the special audit.
  - Measures to strengthen NBT autonomy and governance include passage of amendments to the central bank law consistent with FSAP recommendations (financial autonomy and capitalization, fixed terms for appointments, conflict-of-interest provisions, disclosure of beneficial ownership).
- Safeguards and external audits:
  - FIN staff findings: previously misreported domestic credits to the cotton sector were largely financed through issuance of currency and not recorded in NBT’s accounting records made available to auditors.
  - PwC audits conducted in accordance with International Standards on Auditing; pledges and guarantees were not discovered because relevant information was withheld by the NBT and correspondent banks did not disclose these items.
  - PwC expected to finalize 2006 and 2007 annual audits once the special audit is concluded.
  - Preconditions for a possible new PRGF arrangement: completion of the special audit, external audit of financial statements for the year ended April 30, 2008, and a new safeguards assessment of the NBT by no later than the first review.

### SOE governance and cotton sector measures
- SOE governance concerns:
  - Operations of key SOEs remain beyond control of the ministry of finance; ministry lacks supervisory framework to monitor financial operations of the largest SOEs.
  - Largest SOEs have no public disclosure requirements and their financial statements are not audited by major internationally recognized auditing firms.
  - Talco remains nontransparent.
- Cotton sector measures:
  - SMP includes measures to improve governance and monitoring of the largest SOEs and to undertake external audits of the two largest SOEs by reputable international firms.
  - January 2008 cotton financing mechanism: budget funds (130 million somoni) onlent to farmers through commercial banks with low margins; under scheme, commercial banks bear credit risks in full and government may have exerted moral suasion in setting lending rates.

### Key risks and program monitoring
- Main program risk:
  - Delays in completing the special audit of the NBT represent the main risk to program success; complexity and lack of documentation on cotton transactions could delay audit; full cooperation by authorities essential.
- Program review timeline:
  - First review in October 2008 will focus on progress in completing the special audit and related governance measures.
- Monetary constraint:
  - Given low reserves and NBT insolvency, monetary policy flexibility is constrained; macro strategy relies on prudent fiscal stance in short term.

### Macroeconomic framework and outlook (additional details)
- Growth envisaged to slow “to about 5 percent.”
- Inflation target: “only a limited reduction in the inflation rate—to 15 percent per annum.”
- Weather-related frost expected to negatively affect activity and inflation during much of 2008; agricultural sector likely to underperform.
- Industrial production: “after coming to almost a complete halt in the first quarter, is likely to recover with improving energy supplies.”
- Drivers of sustained double-digit inflation despite headline decline:
  - “significant losses in agricultural and food production”
  - “further adjustments in electricity and gas tariffs”
  - “the continuing upward trend in international food and fuel prices”
- Current account: “Excluding imports of goods and services related to projects financed by China, the current account deficit is expected to stay at around 5 percent of GDP in 2008.”
- Remittances: assumed to “ease somewhat during the remainder of 2008, but will remain above the 2007 level.”
- Gross reserves target: “increase to about $170 million, or about 3 weeks of imports.”

### Fiscal policy details and public financial management
- Program objective: a “balanced budget objective with a view to securing the inflation goal.”
- Fiscal space under a balanced budget will allow:
  - “higher support payments to farmers for the acquisition of seeds, machinery and fertilizers (0.2 percent of GDP);”
  - “an increase in real wages ... (0.5 percent of GDP);”
  - “to provide financing to the cotton sector transparently through the budget (0.9 percent of GDP).”
- PFM and SOE measures include:
  - creation of a special monitoring unit at the ministry of finance;
  - tendering for external audits of Talco and Barki Tajik.

### Monetary and exchange rate policies (operational rules)
- Monetary objective: contain inflation by targeting reserve money while building up official foreign exchange reserves.
- Reserve money policy:
  - Reserve money growth targeted to slow sharply, to around projected growth rate of nominal GDP, implying no change in velocity.
  - Accumulation of international reserves will limit scope for drawdown of government deposits at NBT and leave no room for further directed credit from NBT to private sector.
  - If inflation accelerates, NBT will adjust reserve money target and tighten monetary conditions via increased sales of its own bills.
- Foreign exchange intervention: NBT committed to intervene only to limit excessive short–term fluctuations and to ensure targeted reserves gains.
- Insolvency implication: “Given the insolvency of the NBT, the cost of mopping up any excess liquidity will eventually need to be borne by the budget as part of the recapitalization of the NBT.”

### Debt strategy and constraints
- Core elements:
  - “No new contracting or guaranteeing of nonconcessional debt.”
  - Any new concessional foreign debt disbursement over next three years must be consistent with government’s borrowing plan approved by Parliament in January 2008.
  - Establish contingent liability reporting regime with FAD assistance to cover SOEs, public institutions and the NBT.
- Objective: stabilize external public and publicly guaranteed debt-to-GDP ratio in the medium-term at about 40 percent.
- Authorities’ concern: 40 percent limit “would could constrain their ability to finance urgently needed investments in new hydroelectric power plants.”
- Staff recommendation: first seek “nondebt creating inflows (especially foreign direct investment)” for energy investments and continue structural reforms.

### Structural policies and cotton sector reforms
- Authorities designing comprehensive strategy to address cotton sector problems: “steady decline in productivity and profitability,” monopsonistic/monopolistic market structures, existing stock of debt.
- Decree 111 (March 5, 2007) addresses farm debt resolution, termination of government interference in cotton production/processing/sale, improvements in marketing/pricing/taxation, land reform, and improved access to rural financing.
- Actions on outstanding debt: discussions with Kredit Invest’s external creditors to “improve the terms ... including through the extension of maturities and a reduction of interest rates”; exploring “swapping some of its external obligations for assets that were used by domestic borrowers (cotton investors) to collateralize their own obligations to Kredit Invest.”
- External support: ADB preparing Sustainable Cotton Program loan focused on market reforms; World Bank approved Cotton Sector Recovery Project in 2007.

### Cotton-sector financing: contractual risk allocation and bank exposures
- Contracts place costs of loan default exclusively on banks; lending rates do not fully reflect such risks.
- Credits to the cotton sector (in millions of somoni) reported in Table 4 memorandum: 378, 571, 885, 893, 893, 893, 893.
- Note in Table 5 footnote: "Liabilities to cotton financiers related to domestic cotton financing."
- Staff recommendation: introduce performance-based management contracts for banks participating in cotton financing to provide incentives to collect outstanding sums and avoid unduly penalizing banks for delinquencies.
- Broader reforms encouraged: resume cotton sector reform with World Bank and ADB assistance, address distortions created by politically powerful investors, and effectively grant farmers freedom to farm.

### Selected banking, monetary, fiscal, and external figures (preserved exactly as presented)
- Banking and monetary indicators (Table 1 memorandum):
  - Net foreign assets of the banking sector (12-month growth in percent of broad money): -70.3, 25.1, 6.4, 7.7, -14.9.
  - Net domestic assets of the banking sector: 129.6, 87.5, 112.7, 40.8, 58.2.
  - Broad money (12-month growth): 30.2, 63.4, 78.8, 24.7, 24.8.
  - Reserve money (12-month percent change): 29.2, 49.2, 40.3, 23.8, 18.5.
- Credit to the private sector (Table 4, in millions of somoni): 596, 937, 1,172, 1,188, 1,188, 1,187, 1,186.
- Fiscal tables and memorandum items:
  - Table 2/3 memorandum: "Includes SM140 mn lending to the cotton sector in 2008."
  - Overall balance (incl. externally financed PIP) projected: -8.0 (2008), -6.4 (2009).
  - Total financing (incl. externally financed PIP): 8.0 (2008), 6.4 (2009).
  - Net external financing (2008, Table 2 quarterly breakdown): 7.2 (year), disbursements 8.1, program loans 0.1, project loans 8.0, amortization -0.9.
- Macro and external projections:
  - Real GDP growth (Table 1): 6.7, 7.0, 7.8, 5.0, 7.0 (2005–2009).
  - CPI inflation (end-of-period, Table 1): 7.1, 12.5, 19.8, 15.0, 9.0 (2005–2009).
  - Gross official reserves (Table 1, in millions of U.S. dollars): 9, 11, 11, 10, 7, 16, 92, 29 (as presented in table sequence).
  - Exports of goods and services (Table 8 projections): 601, 656, 767, 856, 896, 970, 1,048, 1,113 (2005–2012).
  - Imports of goods and services (Table 8 projections): 1,221, 1,618, 2,555, 3,188, 3,357, 3,417, 3,705, 3,916 (2005–2012).
  - Current account balance (Table 8): -62, -79, -414, -429, -401, -238, -339, -362 (2005–2012).

### Program monitoring, quantitative targets, and reporting requirements
- Program duration: “June through December 2008.”
- Composition: quantitative indicative targets and structural benchmarks for end-September and end-December 2008.
- Prior actions for SMP approval: reach understandings on ToR for special audit and launch selection process for the special audit.
- Reviews: two reviews scheduled—October 2008 and January 2009; first review focuses on special audit progress.
- Selected operational targets and ceilings (as stated in program tables and TMU, preserved exactly):
  - NDA ceiling (in millions of somoni): 500 (2007), 420 (End-Dec. Est.), 454 (End-March Est.), 528 (End-June Est.), 551 (End-Sept. Est.).
  - Ceiling on net credit of banking system to general government (in millions of somoni): -857 (2007), -1,044 (End-Dec. Est.), -953 (End-March Est.), -831 (End-June Est.), -759 (End-Sept. Est.).
  - Floor on total net international reserves (in millions of U.S. dollars): 669 (2007), 396 (End-Dec. Est.), 117 (End-March Est.), 151 (End-June Est.), 151 (End-Sept. Est.).
  - Floor on cumulative overall fiscal balance of general government (excluding PIP and PIP related grants) (in millions of somoni): 20 (2007), 22 (End-Dec. Est.), 206 (End-March Est.), 148 (End-June Est.), 62 (End-Sept. Est.), 8 (End-Dec. Est.).
  - Ceiling on contracting or guaranteeing of any nonconcessional external debt: 0 (End-Dec. Est.), 0 (End-March Est.), 0 (End-June Est.), 0 (End-Sept. Est.), 0 (End-Dec. Est.).
  - Ceiling on disbursements of concessional external financing (in millions of U.S. dollars): 308 (2007), 117 (End-Dec. Est.), 206 (End-March Est.), 283 (End-June Est.), 350 (End-Sept. Est.).
  - Memorandum item: Cumulative disbursement of program loans and grants (in millions of U.S. dollars): 1/ 1000 25 (as stated).
- TMU valuation and exchange rate assumptions:
  - Program exchange rate for the U.S. dollar: SM 3.435 = $1 (end-March 2008).
  - Program SDR exchange rate: SDR 1 = $1.647.
  - Official gold holdings valued at $978.25 per troy ounce.
- Reporting requirements (selected, preserved exactly):
  - NBT analytical balance sheet — Weekly — 3 working days.
  - NBT balance sheet — Monthly — 2 weeks.
  - Commercial banks' and Kredit Invest balance sheets — Monthly — 4 weeks.
  - Fiscal revenues, expenditures and financing of budget execution, and extrabudgetary funds — Monthly — 4 weeks.
  - Stocks, disbursements, guarantees, new contracts of external debt including terms and disbursement profile — Monthly — 4 weeks.

### Relations with the World Bank and other donors (summary)
- World Bank Country Partnership Strategy endorsed July 26, 2005 and updated June 22, 2007; aligned with PRS 2 (2007–2009).
- Bank priorities: improve business opportunities, enhance human capital quality, and improve energy service delivery and electricity exports.
- Division of labor:
  - IMF leads on macroeconomic stability (fiscal consolidation, restrictive monetary policy, prudent debt management).
  - World Bank leads structural policy dialogue (poverty reduction, agriculture reforms, private sector development, institution building, budget planning, governance).
- World Bank instruments: PDPG, sector projects, analytical work (health, education, power, agriculture, environment, poverty).
- ADB and other bilateral/multilateral support noted for cotton sector, energy, and infrastructure projects.

### Staff appraisal and policy recommendations (concise)
- Program opportunities:
  - “create a modern central bank that can conduct effective monetary policy;”
  - “restore the authorities’ credibility by cooperating fully with the special audit of the NBT;”
  - “advance cotton reforms by establishing a more transparent financing mechanism;”
  - “open a window into the operations of large SOEs that have been a major drain on national resources.”
- Implementation is essential: “the key to the success of the program will be their full implementation.”
- Transparency and audit cooperation:
  - “Full cooperation with the specialist auditor will be paramount.”
  - Authorities urged to “disclose publicly all the results of the audit—and promptly take up the recommendations of the auditor once the work is concluded.”
- Fiscal and monetary recommendations:
  - Maintain a “prudent fiscal stance” and commitment to a balanced budget; save any unplanned tax overperformance to improve inflation performance and build international reserves.
  - Strengthen NBT’s operational independence by reforming central bank legislation with urgency, including conflict-of-interest provisions and sanctions.
  - End policy of directed credits to achieve tightened monetary conditions.
- Energy investment recommendation: encourage “proper incentives for foreign direct investment” to meet hydroelectric financing needs and “refrain from contracting new foreign debt obligations for this purpose,” given worsening debt ratios.

*Source: Executive Summary and extracts from Republic of Tajikistan Staff Report and SMP materials (IMF)._

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

### Executive Summary

### Recent Developments
- Real GDP expanded by only 3.2 percent in Q1 2008 relative to Q1 2007, compared to 7.8 percent for 2007 as a whole.
- The inflation rate as of end-March 2008 was 20.3 percent on a 12-month basis, essentially unchanged from end-December 2007.
- Severe weather conditions and related energy shortages early in the year led to the significant slowdown in growth.
- Remittances surged in Q1 2008, allowing the National Bank of Tajikistan (NBT) to accumulate reserves and contributing to a significant overperformance in consumption-related tax revenue collections.
- As of end-March 2008:
  - The NBT had issued about $70 million in written guarantees.
  - Total NBT pledges amounted to about $240 million.
  - Gross foreign assets, as reported to the Fund, were about $385 million.
  - Previously unreported debt obligations (NBT guarantees and pledges) totaled $310 million with maturities between three and six months, requiring frequent rollovers.
  - Import reserve coverage was about half a month of imports.
- Budget performance:
  - The 2007 budget recorded a surplus of about 1½ percent of GDP (excluding the externally financed Public Investment Program (PIP)), compared to a target deficit of 1 percent of GDP.
  - Project disbursements from China (largest PIP component) amounted to $217 million (6 percent of GDP) in 2007.
- Structural issues and sectoral developments:
  - The banking sector appears well-capitalized and liquid, but the supervisory framework is highly susceptible to political influence; the NBT was found insolvent in the FSAP team assessment.
  - Energy sector: gas tariffs at cost recovery levels; electricity tariffs remain below financially viable levels for Barki Tajik.
  - Cotton sector: land reform shortcomings persist; restructured farms remain subject to state control over production and harvesting; cotton financing is provided by politically powerful “investors” who control inputs and ginneries.
  - As of November 2007, previously misreported domestic credits to the cotton sector amounted to approximately 800 million somoni (US$ 232 million).

### The Staff-Monitored Program (SMP) — Objectives and Framework
- Main objectives:
  - Reestablish credibility by addressing governance and management problems at the NBT, including a special audit of the NBT and other involved parties.
  - Provide a framework for macroeconomic stability, taking into account existing policy constraints.
- Program macroeconomic targets and settings for 2008:
  - Growth projected to slow to 5 percent (reflecting the impact of the harsh winter).
  - Inflation target of 15 percent.
  - Target a balanced budget in 2008 (moving from a small surplus in 2007), allowing for a real increase in social outlays and transparent financing of the cotton sector.
  - Monetary policy framework relies on a reserve money target and a managed float exchange rate regime (recently noted that MCM reclassified Tajikistan’s exchange rate framework as a conventional peg from a managed float).
- Debt strategy and contingent liabilities:
  - Program’s debt management framework includes a zero ceiling on the contracting of nonconcessional debt.
  - Establishment of a contingent liability reporting regime to cover state-owned enterprises (SOEs) and the NBT.
- Fiscal stance and budget execution:
  - The 2008 budget approved last November is moderately expansionary to allow for more transparent financing of the cotton sector, support payments to farmers, and a 40 percent increase in the wage bill.
  - Original aim: target a deficit of ½ percent of GDP (excluding the PIP); strong revenue performance could allow for a tighter stance.

### Measures on NBT Governance, Audit, and Safeguards
- Special audit of the NBT:
  - Terms of reference (ToR) for the special audit were finalized and agreed with staff as a prior action.
  - On May 14, the authorities forwarded the ToR to potential specialist auditor firms seeking bids for the contract (also a prior action).
  - The special audit is expected to last 6–8 months; interim reports will be shared with Fund staff and key findings will be made public.
  - Audit objectives include:
    - Assessing effectiveness of governance and control environment at the NBT and recommending steps to prevent recurrence of misreporting.
    - Verifying revised data reported to the Fund and establishing a reliable foundation for future data provision.
    - Making transparent all NBT financial operations involving off-balance sheet transactions (pledges of international reserves, issuance of guarantees, extension of domestic credits to Kredit Invest).
    - Reviewing financing transactions related to Kredit Invest, confirming legitimacy of payments to third parties, and ascertaining Kredit Invest’s total liabilities.
    - Reviewing decision-making at Kredit Invest to determine allocation of financing to cotton investors and verification of contractual obligations.
- Governance and legal reforms:
  - Program conditionality linked to the conduct of the special audit.
  - Measures to strengthen NBT autonomy and governance include passage of appropriate amendments to the central bank law consistent with FSAP recommendations.
  - Areas identified for strengthening in Box 1 (Central Bank Autonomy and Governance) include:
    - Financial autonomy and capitalization, conditional on stopping commercial activities.
    - Fixed terms for appointment and explicit dismissal reasons for board members.
    - Clear conflict-of-interest provisions, monitoring, and sanctions.
    - Disclosure of beneficial ownership of registered companies, including financial institutions.
- Safeguards and external audits:
  - FIN staff findings: previously misreported domestic credits to the cotton sector were largely financed through issuance of currency and not recorded in the NBT’s accounting records made available to auditors.
  - PwC audits were conducted in accordance with International Standards on Auditing; pledges and guarantees were not discovered because relevant information was withheld by the NBT and correspondent banks did not disclose these items.
  - PwC is expected to finalize the 2006 and 2007 annual audits once the special audit is concluded.
  - Prior to consideration of a possible new PRGF arrangement, the special audit of the NBT would need to be completed; an external audit of financial statements for the year ended April 30, 2008 would need to be completed without delay; and a new safeguards assessment of the NBT would have to be completed by no later than the first review of such an arrangement.

### SOE Governance and Cotton Sector Measures
- SOE governance:
  - Operations of key SOEs remain beyond control of the ministry of finance; the ministry lacks an appropriate supervisory framework to monitor financial operations of the largest SOEs.
  - Largest SOEs have no public disclosure requirements and their financial statements are not audited by major internationally recognized auditing firms.
  - Talco (the aluminum company), the largest SOE, remains nontransparent.
- Cotton sector:
  - SMP includes measures to improve governance and monitoring of the largest SOEs and to undertake external audits of the two largest SOEs by reputable international firms.
  - In January 2008 the government put in place a cotton financing mechanism using budget funds (130 million somoni) to be onlent to farmers through commercial banks with low margins; under this scheme, commercial banks bear the credit risks in full and the government may have exerted moral suasion in setting lending rates.

### Key Risk and Program Monitoring
- Main program risk:
  - Delays in completing the special audit of the NBT represent the main risk to the program’s success.
  - Causes of potential delay include complexity and lack of adequate documentation of cotton sector transactions; authorities’ full cooperation with auditors will be essential.
- Program review:
  - The first review of the program (October 2008) will focus on assessing progress in completing the special audit and related governance measures.
- Other monitoring and constraints:
  - Given low reserves and NBT insolvency, monetary policy flexibility is constrained; the authorities’ macroeconomic policy strategy relies on a prudent fiscal policy stance in the short term.

*Source: Executive Summary, Republic of Tajikistan Staff Report (excerpt).*

### 9.      The program’s macroeconomic framework for 2008 envisages a slow down in

### _cr08197 - 9.      The program’s macroeconomic framework for 2008 envisages a slow down in

### Macroeconomic framework and outlook
- Growth is envisaged to slow down “to about 5 percent.”
- Inflation target: “only a limited reduction in the inflation rate—to 15 percent per annum.”
- Weather-related problems (frost) expected to have a negative effect on economic activity and inflation during much of 2008; agricultural sector likely to underperform.
- Industrial production: “after coming to almost a complete halt in the first quarter, is likely to recover with improving energy supplies.”
- Drivers of sustained double-digit inflation despite decline in headline rate:
  - “significant losses in agricultural and food production”
  - “further adjustments in electricity and gas tariffs”
  - “the continuing upward trend in international food and fuel prices”
- Current account: “Excluding imports of goods and services related to projects financed by China, the current account deficit is expected to stay at around 5 percent of GDP in 2008.”
- Remittances: program assumes remittance flows “will ease somewhat during the remainder of 2008, but will remain above the 2007 level.”
- Gross reserves target: “increase to about $170 million, or about 3 weeks of imports.”

### Fiscal policy
- Program objective: a “balanced budget objective with a view to securing the inflation goal.”
- Rationale: “given the limited flexibility in monetary policy, it would be prudent ... to make use of the revenue overperformance so far in 2008 and aim for a balanced budget.”
- Fiscal space under a balanced budget will allow:
  - “higher support payments to farmers for the acquisition of seeds, machinery and fertilizers (0.2 percent of GDP);”
  - “an increase in real wages ... (0.5 percent of GDP);”
  - “to provide financing to the cotton sector transparently through the budget (0.9 percent of GDP).”
- Public financial management: improvements noted; program includes steps to enhance monitoring and corporate governance of state-owned enterprises, including:
  - creation of a special monitoring unit at the ministry of finance;
  - tendering for external audits of Talco and Barki Tajik.

### Monetary and exchange rate policies
- Monetary objective: “contain[] inflation by targeting reserve money while building up official foreign exchange reserves.”
- Reserve money policy:
  - “reserve money growth will be targeted to slow sharply, to around the projected growth rate of nominal GDP, implying no change in velocity.”
  - Accumulation of international reserves will “limit the scope for a drawdown of government deposits at the NBT ... and will leave no room for any further directed credit from the NBT to the private sector.”
  - If signs of accelerating inflation emerge, the NBT will “respond by adjusting its reserve money target and tightening monetary conditions through an increase in the sales of its own bills.”
- Foreign exchange intervention: the NBT committed to intervene “only to limit excessive short–term fluctuations in the exchange rate and to ensure that targeted reserves gains are achieved.”
- Insolvency note: “Given the insolvency of the NBT, the cost of mopping up any excess liquidity will eventually need to be borne by the budget as part of the recapitalization of the NBT.”

### Debt strategy
- Core elements of the cautious debt strategy:
  - “No new contracting or guaranteeing of nonconcessional debt.”
  - Any new concessional foreign debt disbursement over the next three years must be “consistent with the government’s borrowing plan already approved by Parliament in January 2008.”
  - Strengthen debt data management by establishing, with assistance from FAD, “a contingent liability reporting regime to cover state-owned enterprises, public institutions and the NBT.”
- Objective: “stabilize the external public and publicly guaranteed debt-to-GDP ratio in the medium-term at about 40 percent.”
- Authorities’ concern: this 40 percent limit “would could constrain their ability to finance urgently needed investments in new hydroelectric power plants.”
- Staff recommendation: first seek “nondebt creating inflows (especially foreign direct investment)” for energy investments and continue structural reforms to make the sector financially viable.

### Structural policies and cotton sector reforms (Box 4)
- Authorities are designing and implementing a comprehensive strategy to address long-standing problems in the cotton sector.
- Key problems: “steady decline in productivity and profitability,” monopsonistic/monopolistic market structures, and an existing stock of debt.
- Decree 111 (March 5, 2007) addresses:
  - farm debt resolution;
  - termination of government interference in cotton production, processing and sale;
  - improvements in cotton marketing, pricing and taxation;
  - land reform;
  - improved access to rural financing.
- Actions regarding outstanding debt stock: discussions with Kredit Invest’s external creditors to “improve the terms ... including through the extension of maturities and a reduction of interest rates”; exploring “swapping some of its external obligations for assets that were used by domestic borrowers (cotton investors) to collateralize their own obligations to Kredit Invest.”
- External support:
  - ADB preparing a Sustainable Cotton Program loan focused on market reforms to ensure freedom of choice and greater competition.
  - The World Bank approved a Cotton Sector Recovery Project in 2007 to advise on debt resolution options.

### Program monitoring, timeline, and risks
- Program duration: “June through December 2008.”
- Composition: “quantitative indicative targets and structural benchmarks for end-September and end-December 2008.”
- Prior actions for SMP approval: reaching understandings on the terms of reference for the special audit and launching the selection process for conducting the special audit.
- Reviews: “two reviews of the program, one in October 2008 and the other in January 2009.” The first review will focus on progress in the special audit of the NBT.
- Key risk: “possibility of delays in completing the special audit of the NBT.” Avoiding delays requires “full cooperation by the authorities with the auditors.”
- Additional risk: the new cotton financing scheme “could entail significant risks to the financial position of the commercial banks involved ... particularly as they are shouldering all of the credit risks in dealing with already financially overburdened farmers.”

### Staff appraisal and policy recommendations
- Program signals opportunities to:
  - “create a modern central bank that can conduct effective monetary policy;”
  - “restore the authorities’ credibility by cooperating fully with the special audit of the NBT;”
  - “advance cotton reforms by establishing a more transparent financing mechanism;”
  - “open a window into the operations of large SOEs that have been a major drain on national resources.”
- Implementation is essential: “the key to the success of the program will be their full implementation.”
- Transparency and audit cooperation:
  - “Full cooperation with the specialist auditor will be paramount.”
  - Staff urges authorities to “disclose publicly all the results of the audit—and promptly take up the recommendations of the auditor once the work is concluded.”
- Fiscal and monetary recommendations:
  - Maintain a “prudent fiscal stance” and the commitment to a balanced budget; save any unplanned tax overperformance to improve inflation performance and build international reserves.
  - Strengthen the NBT’s operational independence by “press[ing] ahead with the reforms of the central bank legislation with urgency,” including defining conflict of interest and sanctions.
  - End the policy of directed credits to achieve tightened monetary conditions.
- Energy investment recommendation: encourage “proper incentives for foreign direct investment” to meet hydroelectric financing needs and “refrain from contracting new foreign debt obligations for this purpose,” especially given worsening debt ratios.

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08197.pdf*

### 21.      While staff welcomes the transparency of the new cotton sector financing

### _cr08197 - 21.      While staff welcomes the transparency of the new cotton sector financing

### Cotton sector financing: contractual risk allocation and bank balance-sheet exposure
- The contracts place the costs of loan default exclusively on the banks.
- Lending rates do not fully reflect such risks.
- Credits to the cotton sector (in millions of somoni) reported in Table 4 memorandum: 378, 571, 885, 893, 893, 893, 893.
- Note in Table 5 footnote: "Liabilities to cotton financiers related to domestic cotton financing."

### Staff concerns and recommended safeguards for banks
- Concern: possible impact on commercial banks’ balance sheets given exclusive default risk placed on banks.
- Recommendation: introduce, as soon as possible, performance-based management contracts for banks to:
  - provide strong incentives for them to collect the outstanding sums;
  - avoid unduly penalizing banks for delinquencies.

### Broader reforms to reduce credit risk in the cotton sector
- To enhance profitability of the cotton sector and thus reduce credit risk for commercial banks, staff encourages:
  - vigorously resuming the path of cotton sector reform with the assistance of the World Bank and the Asian Development Bank;
  - addressing the distortions created by the politically powerful investors;
  - effectively granting farmers the freedom to farm.

### Banking and monetary indicators (selected figures preserved exactly)
- Net foreign assets of the banking sector (12-month growth in percent of broad money, Table 1 memorandum): -70.3, 25.1, 6.4, 7.7, -14.9.
- Net domestic assets of the banking sector (Table 1 memorandum): 129.6, 87.5, 112.7, 40.8, 58.2.
- Broad money (12-month growth, Table 1 memorandum): 30.2, 63.4, 78.8, 24.7, 24.8.
- Reserve money (12-month percent change, Table 1 memorandum): 29.2, 49.2, 40.3, 23.8, 18.5.
- Credit to the private sector reported in Table 4 (in millions of somoni): 596, 937, 1,172, 1,188, 1,188, 1,187, 1,186.
- Credits to the cotton sector included in credits to private sector (Table 4 footnote).

### Fiscal context and cotton-sector financing in budget tables
- Table 2/3 memorandum: "Includes SM140 mn lending to the cotton sector in 2008."
- Overall balance (incl. externally financed PIP) projected for 2008 and 2009 (Table 2): -8.0 (2008), -6.4 (2009).
- Total financing (incl. externally financed PIP) for 2008 and 2009 (Table 2): 8.0 (2008), 6.4 (2009).
- Net external financing (2008, Table 2 quarterly breakdown): 7.2 (year), disbursements 8.1, program loans 0.1, project loans 8.0, amortization -0.9.

### Macro and external sector environment relevant for bank risk
- Real GDP growth (Table 1): 6.7, 7.0, 7.8, 5.0, 7.0 (2005–2009, Real GDP annual percent change).
- CPI inflation (end-of-period, Table 1): 7.1, 12.5, 19.8, 15.0, 9.0 (2005–2009).
- Gross official reserves (Table 1, in millions of U.S. dollars): 9, 11, 11, 10, 7, 16, 92, 29 (as presented in table sequence).
- Exports of goods and services (Table 8 projections): 601, 656, 767, 856, 896, 970, 1,048, 1,113 (2005–2012 series).
- Imports of goods and services (Table 8 projections): 1,221, 1,618, 2,555, 3,188, 3,357, 3,417, 3,705, 3,916 (2005–2012 series).
- Current account balance (Table 8): -62, -79, -414, -429, -401, -238, -339, -362 (2005–2012 series).

### Key policy summary (concise)
- Immediate policy action: adopt performance-based management contracts for banks participating in the cotton financing scheme.
- Medium-term policy action: resume cotton sector reform with World Bank and Asian Development Bank support to improve sector profitability, remove distortions from politically powerful investors, and grant farmers freedom to farm—thereby reducing credit risk to commercial banks.

*Source: _cr08197 - 21.      While staff welcomes the transparency of the new cotton sector financing (extracts and tables as provided).*

### 1.      This memorandum outlines the economic and financial policies of the Government of

### _cr08197 - 1.      This memorandum outlines the economic and financial policies of the Government of

### The focus of the program
- Two main objectives of the Staff-Monitored Program (SMP):
  - Address governance and legal framework shortcomings at the National Bank of Tajikistan (NBT), linked to a special audit of the NBT and other involved parties to investigate the misreporting of data and related financial operations.
  - Provide a macroeconomic policy framework for price stability and growth, with continued prudent fiscal policy and a well-defined debt strategy due to low international reserves and limits on monetary policy flexibility caused by NBT insolvency.
- Complementary measures: implementation of measures consistent with a comprehensive strategy to tackle fundamental problems of the cotton sector, developed in consultation with the World Bank and the Asian Development Bank (ADB).

### Macroeconomic framework for 2008
- Growth and inflation targets and drivers:
  - Real GDP growth projected at about 5 percent.
  - Targeted inflation reduction to 15 percent (from about 20 percent at the time).
  - Anticipated strong rebound in the second half of 2008 supported by remittances and commissioning of the Sangtuda 1 hydropower plant; weather-related problems in Q1 2008 expected to reduce agricultural output and dent annual growth.
  - Inflation to remain in double digits due to high international food and fuel prices and required electricity and gas tariff adjustments.
- External sector and reserves:
  - Current account deficit expected at about 10 percent of GDP, to be financed by FDI flows and official concessional project finance disbursements.
  - Gross official reserves targeted to increase, but import coverage expected to remain less than one month.
- Public Investment Program:
  - PIP limited to about 9 percent of GDP in 2008.

### Special audit of the NBT and related legal reforms
- Special audit actions and objectives:
  - Terms of Reference (ToR) agreed with Fund staff (prior action); bids requested from potential international auditing firms on May 14, 2008 (prior action).
  - Interim reports to be shared with Fund staff as audit progresses.
  - Main audit objectives:
    - Assess effectiveness of governance structure and control environment at the NBT and ascertain governance breakdowns that led to credits to Kredit Invest being excluded from audited balance sheets and nondisclosure of pledges and guarantees.
    - Review transactions involving balances linked to information not provided to the Fund and the previous external auditor, and confirm legitimacy of payments to third parties by Kredit Invest.
    - Verify accuracy of data reported to the Fund after discovery of misreporting and review data-reporting procedures to recommend control-strengthening measures.
- Legal and governance reforms (structural benchmark by end-December 2008):
  - Amend NBT law and related legislation to:
    - Appoint the NBT Chairman and deputies for fixed terms that will not coincide with the electoral cycle and explicitly define reasons for dismissal.
    - Introduce clearer conflict of interest provisions and sanctions.
    - Introduce requirements for identification and disclosure of beneficial ownership of companies registered with the Agency for Securities in the Ministry of Finance and other authorized entities, including financial institutions.
- Technical assistance:
  - Requested from the World Bank to draft legal amendments and assess the financial sector legal framework to meet international standards.

### Monetary and exchange rate policies
- Monetary program and operational constraints:
  - Reserve money to expand in line with nominal GDP growth.
  - If underlying inflation does not fall as planned, NBT will tighten monetary conditions in consultation with Fund staff while aiming to maintain international reserves accumulation target.
- Operational restrictions and rules:
  - NBT will refrain from issuing credits to the private sector, except to commercial banks (including Amonatbank) for liquidity and lender of last resort purposes.
  - Tightly enforce reserve requirements on all deposit liabilities of all financial institutions without exception (continuous).
- Exchange rate regime:
  - Commitment to a managed floating exchange rate regime with interventions limited to smoothing operations and ensuring targeted reserves gains.

### Fiscal policy and public financial management
- Fiscal stance and outcomes:
  - Fiscal program for 2008 envisages a balanced budget (excluding the Public Investment Program [PIP]).
  - 2007 fiscal overperformance (a surplus in excess of 1½ percent of GDP) and continued strong revenue performance into the first four months of 2008 supported the balanced budget aim.
  - Balanced budget allows for increases in real expenditures to address weather-related needs and finance cotton sector support transparently through the budget.
- PFM and SOE governance measures (structural benchmarks):
  - Issue tender papers for an audit of Talco’s and Barki Tajik’s 2007 financial operations by an internationally recognized auditing company by end-September 2008.
  - Issue a government decree by end-September 2008 establishing a unit in the Ministry of Finance for regular monitoring of financial operations of the 10 SOEs with the highest annual turnover; decree to require SOEs to provide draft annual financial plans for review and approval and to submit quarterly financial statements and external audit reports.

### Debt management strategy
- Core elements:
  - No new contracting or guaranteeing of nonconcessional debt.
  - Any new concessional foreign debt disbursement over the next three years must be consistent with the government’s borrowing plan approved by Parliament in January 2008.
- Targets and reporting:
  - Strategy intended to stabilize external public and publicly guaranteed debt-to-GDP ratio in the medium term at about 40 percent.
  - Strengthen debt data management framework, including establishing a contingent liability reporting regime by end-December 2008 to cover state-owned enterprises, public institutions and the NBT (structural benchmark).

### Cotton sector reforms
- Interim and medium-term measures:
  - Transparent cotton financing mechanism using budgeted public funds for lending to farmers through commercial banks as a stop-gap.
  - Introduce performance-based management contracts for banks involved to safeguard bank financial positions while encouraging collection efforts.
  - In consultation with World Bank and ADB, design a comprehensive strategy to:
    - Improve profitability of the sector (including implementing Decree 111 addressing freedom to farm and use of land rights as collateral).
    - Resolve outstanding stock of debt.
- Kredit Invest resolution efforts:
  - Discussions with Kredit Invest’s external creditors to improve terms of obligations guaranteed by the NBT (including maturity extensions and interest rate reductions).
  - Exploring swaps of some external obligations for assets used by domestic borrowers as collateral to maximize loan recoveries.
  - Decree to abolish the practice of the NBT issuing export licenses beginning with the 2008 crop by end-September 2008.

### Program monitoring, targets, and reporting
- Monitoring framework:
  - Quantitative financial targets and structural benchmarks for September and December 2008 defined in the Technical Memorandum of Understanding (TMU).
  - TMU specifies definitions, program adjustors, and reporting requirements; two program reviews scheduled: October 2008 (focus on progress of special audit of the NBT) and January 2009.
- Valuation and exchange rate assumptions in TMU:
  - Program exchange rate for the U.S. dollar: SM 3.435 = $1 (end-March 2008).
  - Program SDR exchange rate: SDR 1 = $1.647.
  - Official gold holdings valued at $978.25 per troy ounce.
- Selected quantitative targets and indicators (as stated in the program tables):
  - Table 1: Prior actions and structural benchmarks (selected deadlines)
    - Prior actions: Reach understandings on ToR for special audit of the NBT; request bids for selection of an internationally reputable audit firm (Prior action).
    - Provide interim reports of the special audit to Fund staff: Monthly.
    - NBT refrain from issuing new credits to private sector except to commercial banks: Continuous.
    - Legislative changes to appoint NBT chairman and deputies for fixed terms, require disclosure of beneficial owners, clarify conflicts of interest: End-December 2008.
    - Issue tender papers for audit of Talco and Barki Tajik 2007 operations: End-Sept. 2008.
    - Establish contingent liability reporting regime covering SOEs, public institutions and the NBT: End-Dec. 2008.
    - Government decree to establish MoF supervision unit for monitoring 10 largest SOEs and reporting requirements: End-Sept. 2008.
  - Table 2: Indicative quantitative targets (2008; in millions of somoni and U.S. dollars where indicated)
    - Ceiling on net domestic assets of the NBT: 500 (2007), 420 (End-Dec. Est.), 454 (End-March Est.), 528 (End-June Est.), 551 (End-Sept. Est.).
    - Ceiling on net credit of the banking system to general government: -857 (2007), -1,044 (End-Dec. Est.), -953 (End-March Est.), -831 (End-June Est.), -759 (End-Sept. Est.).
    - Floor on total net international reserves (in millions of U.S. dollars): 669 (2007), 396 (End-Dec. Est.), 117 (End-March Est.), 151 (End-June Est.), 151 (End-Sept. Est.).
    - Floor on the cumulative overall fiscal balance of the general government (excluding PIP and PIP related grants) (in millions of somoni): 20 (2007), 22 (End-Dec. Est.), 206 (End-March Est.), 148 (End-June Est.), 62 (End-Sept. Est.), 8 (End-Dec. Est.).
    - Ceiling on general government wage, and nonworking pensioners' pension arrears: n/a (2007), n/a (End-Dec. Est.), 0 (End-March Est.), 0 (End-June Est.), 0 (End-Sept. Est.), 0 (End-Dec. Est.).
    - Floor on tax collection (in millions of somoni): 2,274 (2007), 778 (End-March Est.), 1,502 (End-June Est.), 2,277 (End-Sept. Est.), 2,979 (End-Dec. Est.).
    - New tax arrears of Barki Tajik and Talco: n/a (2007), n/a (End-Dec. Est.), 0 (End-March Est.), 0 (End-June Est.), 0 (End-Sept. Est.), 0 (End-Dec. Est.).
    - Ceiling on contracting or guaranteeing of any nonconcessional external debt: n/a (2007), 0 (End-Dec. Est.), 0 (End-March Est.), 0 (End-June Est.), 0 (End-Sept. Est.), 0 (End-Dec. Est.).
    - Ceiling on disbursements of concessional external financing (in millions of U.S. dollars): 308 (2007), 117 (End-Dec. Est.), 206 (End-March Est.), 283 (End-June Est.), 350 (End-Sept. Est.).
    - New external payments arrears: n/a (2007), 0 (End-Dec. Est.), 0 (End-March Est.), 0 (End-June Est.), 0 (End-Sept. Est.), 0 (End-Dec. Est.).
    - Memorandum item: Cumulative disbursement of program loans and grants (in millions of U.S. dollars): 1/ 1000 25 (as stated).
- Definitions provided in TMU:
  - General government budget includes republican, local (including municipal) budgets, and all extra-budgetary funds at all levels, including the Agency on Social Protection and Pensions, but excluding the externally financed public investment program.
  - Overall cash balance of the general government defined from the financing side as sum of:
    - (i) Change in stocks of NBT’s net claims on the general government (deposits, counterpart deposits, NBT loans and advances, NBT holdings of government securities, bank restructuring costs, privatization account).
    - (ii) Change in net claims of the rest of the domestic banking system on the general government (loans, overdrafts, advances, holdings of treasury bills or other securities, deposits).
    - (iii) Change in net claims of domestic nonbank institutions and households on the general government (net sales of Treasury bills, bonds or other government securities to nonbank institutions and households, including nonresidents).
    - (iv) Gross proceeds from privatization of state property.
    - (v) Net foreign financing of the general government (gross disbursements of foreign financing excluding externally-financed PIP minus amortization of government debt to foreign institutions, plus principal arrears and debt rescheduling).

*Source: Memorandum outlining the economic and financial policies of the Government of Tajikistan for the remainder of 2008 (Staff-Monitored Program materials).*

### 19.      Tax collections include all taxes collected under the budget. Regarding internal

### _cr08197 - 19.      Tax collections include all taxes collected under the budget. Regarding internal

### Tax revenue definitions
- Tax collections include all taxes collected under the budget.
- Internal taxation definition excludes proceeds from:
  - loans, or other banking system credits;
  - the issuance of securities;
  - the sale of state assets.
- Custom revenues include customs duties and other taxes (including VAT) on international trade and transactions.

### Limits on the Stock of Net Domestic Assets (NDA) of the NBT
- Ceiling on the stock of Net Domestic Assets of the NBT (In millions of somoni):
  - March 31, 2008: 420
  - June 30, 2008: 454
  - September 30, 2008: 528
  - December 31, 2008: 551

Definitions and composition:
- NDA of the NBT = reserve money minus net foreign assets of the NBT.
- Reserve money is composed of:
  - currency in circulation,
  - required reserves,
  - other bank reserves,
  - deposits of nongovernment nonbanks with the NBT.
- Net foreign assets of the NBT = NBT’s claims on nonresidents minus its liabilities to nonresidents.
- NBT’s net domestic assets comprise:
  - net credit to the general government,
  - claims on banks,
  - credit to the economy,
  - other items net (OIN).
- OIN includes the foreign exchange revaluation and capital accounts of the NBT.

Adjustor:
- The NDA ceiling will be adjusted upward by the domestic-currency value of any existing pledged deposits of the NBT that are not renewed by the deposit holder.
- Pledged deposits amounted to $241 million as of end-March 2008.

### Limits on Net Credit of the Banking System to General Government
- Ceiling on net credit of the banking system to general government (In millions of somoni):
  - March 31, 2008: -1,044
  - June 30, 2008: -953
  - September 30, 2008: -831
  - December 31, 2008: -759
- Note: Calculated at fixed program exchange rate.

### Net International Reserves (NIR) of the NBT
- Floor under the stock of Net International Reserves of the NBT (In millions of U.S. dollars):
  - March 31, 2008: 93
  - June 30, 2008: 96
  - September 30, 2008: 117
  - December 31, 2008: 151

Definitions and coverage:
- Total net international reserves of the NBT = total gross international reserves minus total reserve liabilities.
- Total gross international reserves include:
  - NBT’s holdings of monetary gold,
  - SDRs,
  - convertible currencies in cash or in nonresident banks that are readily available,
  - any reserve position in the IMF,
  - holdings of foreign currency-denominated securities issued by governments or central banks of OECD member states.
- Exclusions from gross reserves:
  - capital subscriptions in foreign financial institutions,
  - nonliquid assets of the NBT,
  - convertible currency denominated claims on domestic banks and other residents,
  - assets in nonconvertible currencies,
  - foreign assets pledged as collateral or otherwise encumbered,
  - the net forward position, if any.
- Reserve liabilities = outstanding IMF credit plus liabilities of the NBT to nonresidents with original maturity up to and including one year.

Operational detail:
- Fund staff will be informed of details of any gold sales, purchases, pledges, guarantees or swap operations during the program.
- Changes in gross foreign reserves from revaluation of gold will be excluded from gross reserves (as defined).

Adjustor:
- The floor on NIR will be adjusted upward for any conversion of existing pledged deposits into long-term debt.

### Limits on Short-, Medium-, and Long-Term External Debt
- Cumulative ceiling on contracting or guaranteeing of non-concessional external debt (number of new non-concessional operations) for the period from end-December 2007 to test dates (0-1 Year Maturity / Over 1 Year Maturity):
  - March 31, 2008: 0 / 0
  - June 30, 2008: 0 / 0
  - September 30, 2008: 0 / 0
  - December 31, 2008: 0 / 0

Coverage and definitions:
- External debt limits apply to:
  - government of Tajikistan,
  - National Bank of Tajikistan (NBT),
  - any other agency acting on behalf of the government, including state-owned banks.
- Targets apply to debt as defined in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt and also to commitments contracted or guaranteed for which value has not been received.
- Debt definition summary (point No. 9):
  - Debt = current liability under a contractual arrangement created through provision of value (assets or services) requiring future payments (assets or services) that discharge principal and/or interest.
  - Forms include loans, suppliers’ credits, leases (present value of lease payments at inception, excluding operation/repair/maintenance).
  - Arrears, penalties, and judicially awarded damages from failure to pay contractual debt are considered debt.
- External debt limits apply to contracting or guaranteeing of new non-concessional short-term external debt (original maturity up to and including one year) and new non-concessional medium- and long-term external debt (original maturity over one year).

Exclusions:
- Loans for debt rescheduling or refinancing if terms are more favorable are excluded.
- IMF credit is excluded.
- Rollover of existing guarantees is excluded.
- If pledged reserves of the NBT were securitized, these amounts would be excluded.
- Indicative target on new non-concessional short-term external debt does not apply to loans classified as international reserve liabilities of the NBT.
- Normal import-related financing is excluded from the short-term target.

Valuation and guarantees:
- Debt denominated in currencies other than the U.S. dollar shall be valued in U.S. dollars at the exchange rate prevailing at the time of contracting/guaranteeing or at the contract exchange rate.
- A government or NBT guarantee arises from any explicit legal obligation to service a debt in event of debtor nonpayment or to finance a shortfall.

Concessionality:
- Concessional debt = debt with a grant element equivalent of 35 percent or more.
- Grant element calculated using commercial interest reference rates (CIRRs) plus a margin, taken as those for February 15, 2008 until revised in the program.
- For debts with original maturity of 15 years or more: use average CIRR over the last 10 years.
- For debts with original maturity of less than 15 years: use average of CIRRs of the preceding six-month period.
- To the ten-year and six-month CIRR averages add margins:
  - 0.75 percent for repayment periods of less than 15 years;
  - 1 percent for 15–19 years;
  - 1.15 percent for 20–29 years;
  - 1.25 percent for 30 and more years.
- Grant element calculation: value of the loan minus present discounted value of future payments over loan value (multiplied by 100). Present discounted value = sum of all future discounted payments (both amortization and interest) where discount rate corresponds to the CIRR described above.

### Continuous Quantitative Targets and Conditionalities
- No directed credits by the NBT:
  - The NBT will not issue directed credits except to banks for liquidity and lender of last resort purposes.
  - Directed credits are those issued in absence of competitive auction or on non-market terms.
  - Monitoring based on changes in NBT balance sheets and regular reporting on credit-related activities.

- No new external payments arrears:
  - No new external payments arrears shall be accumulated at any time under the program, excluding those subject to negotiation among creditors.
  - External payments arrears = debt service overdue for 30 days or more on obligations incurred directly, guaranteed, or converted into interstate debt by government or NBT, including penalties or interest charges.

- Ceiling on general government wage and nonworking pensioners’ pension arrears:
  - Arrears monitored as any shortfall in monthly disbursements of wages and pensions.
  - Overdue if due at end of month and unpaid for 30 days or more.
  - Stock of wage and pension arrears (In millions of somoni), cumulative from January 1, 2008 to:
    - March 31, 2008: 0
    - June 30, 2008: 0
    - September 30, 2008: 0
    - December 31, 2008: 0
  - To permit monitoring, government will provide data on actual wage payments as part of monthly budget execution statements. The Agency on Social Protection and Pensions will provide quarterly reports and statements of operations.

- Disbursements of contracted government and government-guaranteed external debt:
  - Ceiling on cumulative disbursements of contracted government and government-guaranteed external debt (In mln. of U.S. dollars):
    - End-March 2008: 117
    - End-June 2008: 206
    - End-September 2008: 283
    - End-December 2008: 350
  - Disbursement ceilings by year (In millions of U.S. dollars):
    - 2008: 350
    - 2009: 667
    - 2010: 814
  - Definition: Applies to disbursements of debt contracted or guaranteed by the government as defined in paragraphs 8-14 of the Annex. Ceilings consistent with government’s borrowing plan approved by Parliament in January 2008.

### Reporting Requirements for Program Monitoring
- Data to be reported to the Fund (Data — Frequency — Lag):
  - NBT analytical balance sheet — Weekly — 3 working days
  - NBT balance sheet — Monthly — 2 weeks
  - Commercial banks' and Kredit Invest balance sheets — Monthly — 4 weeks
  - Auction results for NBT certificates and treasury bills — Weekly — 1 week
  - Foreign exchange transactions — Weekly — 1 week
  - Fiscal revenues, expenditures and financing of budget execution, and extrabudgetary funds — Monthly — 4 weeks
  - Reports and statements from the Agency on Social Protection and Pensions — Quarterly — 6 weeks
  - Arrears of budget entities and state owned enterprises — Quarterly — 4 weeks
  - Stocks, disbursements, guarantees, new contracts of external debt including terms and disbursement profile — Monthly — 4 weeks

### Additional institutional and program context (selected points)
- Safeguards assessment:
  - Previous safeguards assessment of the NBT completed on July 23, 2003; next safeguards assessment pending results of special audit of the NBT.
- Exchange rate arrangements:
  - The NBT maintains a conventional peg exchange rate arrangement, per 2008 reclassification from managed float.
  - Since August 2005, NBT increased frequency of calculating and announcing official exchange rate from weekly to daily.
  - Official exchange rate is based on all interbank transactions in foreign exchange.
  - With effect from December 9, 2004, Tajikistan accepted obligations of Article VIII, Sections 2, 3, and 4 of the Articles of Agreement; maintains exchange system free of restrictions on current international transactions except security-related restrictions notified pursuant to Executive Board decision No. 144-(52/51).
- Fund relations snapshot (selected figures as of April 30, 2008):
  - Quota: 87.00 SDR million (100.00 percent)
  - Fund holdings of currency: 87.00 SDR million (100.00 percent)
  - SDR holdings: 2.37 (N/A)
  - PRGF arrangements outstanding: 29.40 SDR million (33.79 percent)
- Latest financial arrangements listed (approval dates and amounts drawn are provided in the source).

*International Monetary Fund. TAJIKISTAN — Staff–Monitored Program—Informational Annex (June 10, 2008).*

### ANNEX II. TAJIKISTAN: RELATIONS WITH THE WORLD BANK

### ANNEX II. TAJIKISTAN: RELATIONS WITH THE WORLD BANK

### I. Partnership in Tajikistan’s Development Strategy
- World Bank Country Partnership Strategy endorsed on July 26, 2005 and updated on June 22, 2007; aligned with Second Poverty Reduction Strategy (PRS 2) for 2007–2009.
- Three core Bank priorities:
  - To improve business opportunities in rural and urban areas.
  - To enhance and preserve the quality of the human capital.
  - To improve energy service delivery and increase electricity exports.
- Cross-cutting emphasis: improve government capacity and efficiency; reduce corruption by increasing transparency of resource use, reducing discretionary controls in business operations, and encouraging user participation in service provision.
- Macroeconomic outlook and risks:
  - Macroeconomic management aimed at stability via fiscal, monetary, exchange rate, and sustainable debt policies; recently worsened with risk of debt distress emerging.
  - Long-term prospects positive only if authorities restore sound macroeconomic management and implement institutional reforms to improve: the business climate, the financial sector, the agricultural sector, transparency and governance of large SOEs, and public financial management.
  - Potential long-term growth drivers: expansion in aluminum processing capacity, recovery in cotton production following institutional reforms, buoyant inflows of remittances, start of a large-scale Russian-financed hydroelectric power project and other infrastructure investments — these have potential to support growth of 7–8 percent over the long term.
- Division of labor with IMF:
  - IMF leads on macroeconomic stability: encouraged fiscal consolidation, restrictive monetary policy, and prudent debt management.
  - World Bank leads structural policy dialogue: poverty reduction, agriculture sector reforms, private sector development, institution building, budget planning, public service delivery, and governance.
- Instruments and programs:
  - Programmatic Development Policy Grant (PDPG): three-year development policy financing program approved on July 6, 2006 supporting public administration reform, public expenditure management, social service delivery, and private sector development.
  - Sector projects and analytical work in health, education, municipal infrastructure, power, agriculture, environment, and poverty alleviation.
  - Analytical products informing reforms: public expenditure and institutional review; country procurement assessment report; country financial accountability assessment; public and civil service wage note and update; remittances note; trade diagnostic; investment climate assessment; aviation sector note; energy utility reform review; Central Asia Regional Electricity Export Potential Study; Agricultural Development Strategy; poverty assessment update; poverty and social impact assessments of cotton and energy reforms; programmatic public expenditure review; two public expenditure tracking surveys (health and education); country environmental analysis.

### II. World Bank Collaboration in Specific Areas
Areas led by WB with little or no direct IMF involvement:
- Social sectors, infrastructure, environment.
- Poverty monitoring and surveys:
  - Poverty assessment update based on the 2003 living standards survey.
  - Strengthening National Statistics System Project completed data collection of a new living standards survey in 2007; analysis underway.
- Education:
  - Education Modernization Project (FY03): reforms in education financing and management, curriculum and textbooks, teacher training, student assessment, school facilities.
  - Grant funding from the Education for All Fast Track Initiative catalytic fund.
  - Key issues: pay reform, per capita financing, expenditure tracking.
  - Continued assistance via PDPG, multi-donor education investment program, PSRP; joint assistance with UNICEF on national education strategy formulation.
  - IMF support: PRGF structural benchmark requiring a fully costed education reform plan.
- Health:
  - Community and Basic Health Project and PDPG: strengthen institutional capacity, budgeting and spending for basic health services, pay reform.
  - Support for HIV/AIDS, malaria, and other communicable disease prevention.
  - Avian Influenza Control and Human Pandemic Preparedness and Response: minimize threat of highly pathogenic avian influenza and prepare for influenza pandemics and infectious disease emergencies.
- Infrastructure:
  - Dushanbe Water Supply Project: address critical water supply deficiencies.
  - Pamir Private Power Project: improve electricity reliability in Gorno Badakshan via private participation.
  - Energy Loss Reduction Project: reduce commercial losses, improve power and gas sector financial viability.
  - Municipal Infrastructure Project: improve urban infrastructure in big towns.
  - Bank-led policy dialogue (under PDPG) on sector efficiency/viability; coordination with ADB and EBRD on utilities and strategic enterprise restructuring.
- Agriculture:
  - Land Registration and Cadastre Project: land reform, issuance of land certificates, modern cadastre system.
  - Ferghana Valley Project: increase water supply and irrigation efficiency; develop institutional capacity in land and water management.
  - Cotton Sector Recovery Project: assist livelihoods of cotton farmers, cotton debt resolution, improve policy environment, increase cotton output and profitability.
  - PDPG addresses cross-cutting policy issues for cotton productivity.
- Environment and disaster risk:
  - National Environment Action Plan developed with Bank support.
  - Country Environmental Analysis identifying severe environmental issues and legal/institutional reforms.
  - Emergency Flood Assistance and Lake Sarez Risk Mitigation Projects: mitigate natural disaster consequences and build national capacity for hazards such as mudslides, rock-falls, avalanches, seasonal floods.

Areas where WB leads and feeds into IMF program:
- PDPG as lead on structural reforms; institution building and TA support via PSRP, Education Modernization Project, FTI Grant, Community and Basic Health Project.
- Private sector development:
  - Joint support for financial transparency and regulatory improvements.
  - Completed Investment Climate Assessment and agriculture sector review.
  - Participation in Doing Business survey in 2006 and 2007.
  - Support for government private sector development strategy.
- Privatization and restructuring:
  - Support for acceleration of privatization of medium and large enterprises, engagement of private sector in strategic enterprises, and corporate governance improvements for public enterprises.
  - Technical support to State Committee for Investments and State Property Management for long-term strategic privatization plan.
- Regulatory reforms:
  - Strengthen anti-monopoly agency; improve business inspection regime; streamline licensing.
  - PDPG support for separating aviation policy-making, technical regulation, and accident investigation; restructuring Tajik Air Company into airport, airline, and air traffic control.

### III. Areas of Shared Responsibility (Bank and Fund)
- Four main jointly supported areas (supported by Bank PDPG, grants, investment operations and Fund PRGF):
  - Public sector management:
    - Bank: technical support for comprehensive public administration reform strategy, civil service reform, pay reform.
    - Fund: technical assistance for tax and customs administration and treasury management.
    - Reforms include redefining state role, reorganizing ministries, strengthening internal control and audit.
  - Budget planning and execution:
    - Joint support for treasury development, adoption of new public finances law, modern budgetary procedures, and switching to per capita financing in education and health.
    - Bank to mobilize donor funds to implement MTBF; continue support for public financial external and internal control reform via PDPG, IDF grants, PSRP.
    - Public Financial Management Project planned for FY09 to support treasury reform.
  - Financial sector reforms:
    - Accelerate restructuring and closure of weak banks; create new regulatory framework for nonbank intermediaries.
    - Significant changes in tax code to make tax authorities’ access to bank accounts conditional on court authorization.
    - IMF monitors closure and merger of banks not meeting prudential requirements.
    - Financial Sector Assessment Program (country’s first) carried out jointly; discussed with authorities in late 2007.
    - Bank applied to FIRST trust fund to support implementation of assessment recommendations.
  - Utilities reform:
    - Fund included PRGF benchmarks on energy tariff rates, energy arrears, and collection rates to reduce quasi-fiscal activities and increase transparency.
    - Bank under PDPG supports tariff reform to reduce quasi-fiscal deficit; supporting audit of Barki Tajik’s accounts expected to be completed by August 2008.
    - Bank providing financial assistance for electricity and gas transmission repairs, energy imports for winter shortfalls, and implementation of Energy Emergency Action Mitigation Plan.
    - Energy Loss Reduction Project supports implementation of reforms.
    - Close coordination with ADB and EBRD on utilities and strategic enterprise restructuring.
  - Debt sustainability analysis:
    - Joint DSAs: first in early 2006; update completed in February 2007.

### IV. Areas Led by the IMF (inputs to World Bank program)
- IMF leads on fiscal matters and setting overall public expenditure envelope; Bank’s sector work necessitates close cooperation.
- Budgetary leadership:
  - IMF takes lead on tax reforms and budget preparation and execution.
  - IMF leads dialogue on policies to rationalize and contain public sector expenditures, including wage setting and defining ceilings for public investment expenditures.

_ANNEX II. TAJIKISTAN: RELATIONS WITH THE WORLD BANK (As of May 16, 2008)_

### 21.      In these areas, the Bank takes into account the policy recommendations of the IMF

### _cr08197 - 21.      In these areas, the Bank takes into account the policy recommendations of the IMF

### IMF vs. World Bank roles and coordination
- The Bank takes into account the policy recommendations of the IMF and ensures that its own policy advice is consistent.
- Areas led by the Fund where there is no direct World Bank involvement:
  - Fiscal and monetary policies
  - Tax policy
  - External trade policies
  - Issues involving economic and financial statistics
- Note: The World Bank has recently provided an IDA project and catalyzed other donors’ financing for the Strengthening National Statistics System Project.

### IDA funding for Tajikistan (FY06–FY08 and outlook)
- IDA funding form and grant eligibility:
  - FY06: 100 percent grant
  - FY07: allocation set with a 45 percent grant component
  - FY08: 100 percent grant
  - Tajikistan’s eligibility for grants in outer years will be determined based on the annual Debt Sustainability Analyses.
- Indicative FY06–08 IDA funding: about SDR70 million
  - FY06 commitment: SDR 30 million
  - FY07 commitment: around SDR 24 million
  - FY08 commitment: around SDR 11 million
- The IDA 15 numbers for FY09-11 is still not available.

### Relations with the Asian Development Bank (ADB) — overview and financing
- Membership and strategy:
  - Tajikistan became a member of ADB in 1998.
  - ADB participated in the Consultative Group Meeting for Tajikistan since 1998.
  - Interim Operational Strategy identified three priority areas: (a) agriculture; (b) infrastructure rehabilitation (especially energy and transport); and (c) social sector.
  - Under the new ADF grants framework, Tajikistan receives 50% of its ADF allocation as loan and the remaining 50% as grant, subject to a 20% volume discount.
  - Under the performance-based allocation of ADF for 2007-2008, Tajikistan was allocated $63.24 million for the two-year period.
- ADB financing to date (as of end-2007):
  - $372.50 million in loans
  - $33.00 million in technical assistance
  - $39.50 million in grants
- 2008–2010 proposed ADB lending and grant program:
  - Comprises three programs and three projects worth a total of $185.0 million
  - Actual lending level contingent on (a) availability of overall ADF resources; (b) country performance assessment vis-à-vis ADB’s policy on performance based allocation of ADF resources; and (c) processing status of pipeline projects.

### ADB sectoral projects and amounts (selected)
- Postconflict Infrastructure Program Loan (in coordination with IMF and WB):
  - $20 million (two-year loan, fully disbursed by end-2000)
- Transport sector:
  - Road Rehabilitation Project loan: $20 million in 2000
  - Dushanbe—Kyrgyz Border Road Rehabilitation Project loans: first phase $15 million in 2003; second phase $30 million in 2005
  - Regional Road Corridor Improvement Project: $53.4 million loan/grant in 2007
  - Japan Fund for Poverty Reduction grant: $2.0 million in October 2007 for northeastern infrastructure reconstruction
- Power sector:
  - Power Rehabilitation Project loan: $34 million in 2000
  - Regional Power Transmission Modernization Project loan: $20 million in 2002 (later cancelled)
  - Tajikistan-Afghanistan Power Transmission Interconnection Project loan: $21.5 million approved in 2006
  - ADB technical assistance supporting CASAREM (Central Asia South Asia Regional Electricity Market)
- Social sector:
  - Social Sector Rehabilitation Project loan: $20 million in 1999
  - Health Sector Reform Project loan: $7.5 million in 2003
  - Education Sector Reform Project loan: $7.5 million in 2003
  - JFPR grants: $1 million (Health community participation project in 2004); $2 million (School Improvement Project in 2004)
- Agriculture sector:
  - Agriculture Rehabilitation Project loan: $35 million in 2002
  - Grant assistance for Rural Poverty Reduction Project: $2.9 million in 2001 (JFPR)
  - Irrigation Rehabilitation Project loan: $22.7 million in 2004
  - Sustainable Cotton Sub-Sector Project loan/grant: approved in 2006
  - Rural Development Project loan/grant: approved in 2007
- Finance:
  - Microfinance Systems Development Program loan: $4 million in 2003
  - Microfinance Systems Development Project loan: $4 million in 2003
- Trade facilitation:
  - Regional Trade Facilitation and Customs Cooperation Program loan: $10 million in 2002
  - Regional Customs Modernization and Infrastructure Development: $10.7 million in 2004
- Emergency assistance (selected):
  - Emergency Flood Rehabilitation Project loan: $5 million in 1999
  - Emergency Restoration of Yavan Water Conveyance System loan: $3.6 million in 2001
  - Emergency Baipaza Landslide Stabilization Project loan: $5.3 million in 2002
  - Khatlon Province Flood Risk Management Project loan: $22 million in 2007 (including rehabilitation of 8.3 kilometers of flood protection embankment along Pyanj River)

### Statistical issues, technical assistance, and data dissemination
- GDDS and IFS participation:
  - Tajikistan began participation in the GDDS in November 2004.
  - The country page in the International Financial Statistics (IFS) has been published since February 2003.
- SDDS subscription and data gaps:
  - Authorities indicated interest in subscribing to the Fund’s SDDS, appointed a national SDDS coordinator, and requested technical assistance.
  - Before subscribing to the SDDS, Tajikistan needs to compile and disseminate the following datasets: quarterly national accounts, template on international reserves and foreign currency liquidity, and international investment position.
  - Also needed: regular dissemination of general government operations that include special funds (extra-budgetary accounts) at least on an annual basis, quarterly central government debt, monthly gross international reserves, and quarterly external debt data, with improved timeliness for several data categories.
- ROSC findings and statistical weaknesses:
  - The data ROSC mission in April 2004 found that the consumer price index, government finance statistics (GFS), and monetary statistics broadly follow sound methodologies.
  - Source data are well-developed and suitable processes for assessment and validation of source data exist, but improvements are limited by tight budgetary constraints.
  - Identified deficiencies in national accounts and price statistics:
    - Procedures to estimate the informal economy
    - Techniques for imputation, replacement, quality adjustment, and introduction of new products in the price indices
    - Need to strengthen scope, classification/sectorization, and basis of recording of the national accounts
    - Need to reconsider concepts and basis of recording underlying the producer price index (PPI)
  - Fiscal statistics:
    - Government finance statistics are based on cash transactions as recommended in A Manual on Government Finance Statistics, 1986.
    - No plans at present to migrate to Government Finance Statistics Manual 2001.
    - Cash GFS operations data were reported in the new framework for inclusion in the 2005 GFS Yearbook, but no details on financing of the cash deficit were reported.
    - Data with a higher frequency for inclusion in the IFS are not reported.
  - Monetary and financial statistics (MFS):
    - MFS mission visited in early 2006 and assisted in establishing procedures for compiling analytical accounts for commercial banks using data from the revised chart of accounts.
    - Mission assisted authorities in implementing Standardized Report Forms (SRFs) for MFS developed by STA.
    - Authorities resumed regular reporting of monthly monetary data to STA for publication in IFS shortly after the mission.
    - Further efforts needed to implement SRFs and other recommendations.
    - Due to a recent misreporting episode, authorities stopped reporting monetary data to STA for publication in IFS since December 2007. Assessment of adequacy pending special NBT audit.
  - Balance of payments statistics:
    - Need for consistency in applying the residency concept in the balance of payments and the national accounts.
    - Scope of foreign trade data needs improvement to cover the shuttle trade.

### Key data reporting and quality timing (as of May 1, 2008)
- Data participation and publication dates (selected):
  - Exchange Rates: Date of latest observation 03/31/08; Date received 04/25/08; Frequency of Data D; Frequency of Reporting M; Frequency of publication W
  - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: 03/31/08; 04/25/08; W; M; W
  - Reserve/Base Money: 03/31/08; 04/25/08; W; M; W
  - Broad Money: 03/31/08; 04/25/08; M; M; M
  - Central Bank Balance Sheet: 03/31/08; 04/25/08; W; M; W
  - Consolidated Balance Sheet of the Banking System: 03/31/08; 04/25/08; M; M; M
  - Interest Rates: 03/31/08; 04/25/08; W; M; V
  - Consumer Price Index: 03/31/08; 04/25/08; M; M; M
  - Revenue, Expenditure, Balance and Composition of Financing — General Government: 03/31/08; 4/25/08; M; M; M
  - Stocks of Central Government and Central Government-Guaranteed Debt: Q3/08; 4/25/08; Q; Q; V
  - External Current Account Balance: Q3/08; 4/25/08; Q; Q; V
  - Exports and Imports of Goods and Services: Q3/08; 4/25/08; Q; Q; V
  - GDP/GNP: 03/31/08; 4/25/08; M; M; V
  - Gross External Debt: Q3/08; 4/25/08; Q; Q; V
- Data quality assessment notes (from ROSC April 2005, based on April 2004 mission):
  - Methodological soundness ratings use: O (fully observed), LO (largely observed), LNO (largely not observed), NO (not observed).
  - Accuracy and reliability assessment follows the same rating scheme.

*Source: _cr08197 - 21.      In these areas, the Bank takes into account the policy recommendations of the IMF (PDF).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08197.pdf_