## _cr08382

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---

### Executive summary: main conclusions
- Economic developments in 2008 were favorable, but the global slowdown weighs on the 2009 outlook.
- The global financial crisis is expected to impact Tajikistan mainly through spillovers from the global slowdown; a direct impact on the financial sector seems unlikely.
- Real GDP growth should slow in 2009 on account of stagnating remittances and sluggish export growth.
- Inflation is projected to slow in 2009, following the expected decline in international commodity prices.
- Tajikistan’s external position is likely to weaken significantly in 2009, after the projected surplus in 2008 that allowed the central bank to build reserves.

### Key statistics and outcomes (2008 and near-term projections)
- Real GDP growth: 7percent in 2008 (revised upward from 5percent under the program).
- Projected real GDP growth: 5percent at best in 2009 (with risks largely on the downside).
- Inflation: projected to decline to 16percent year-on-year in December 2008.
- Inflation projection for December 2009: 10–12 percent (or even less if international price changes are fully passed through).
- Remittances: increased by 70percent through September 2008 versus the same period in 2007.
- Remittances projected at over 40 percent of GDP in 2008.
- Net international reserves: increased by $111 million to $167 million at end-September 2008.
- Overall deficit (including faster PIP disbursements): widened to 4.5 percent of annual GDP through September 2008.
- Total public and publicly guaranteed debt: declined to 30 percent of annual GDP.
- Authorities expect an overall fiscal surplus (excluding the PIP) of 1 percent of GDP for 2008 compared to the program target of a balanced budget.
- Somoni: appreciated by about 2 percent in 2008 to date.
- Food and fuel in CPI basket: food products account for 60 percent and fuel products for another 2½ percent.
- Banking sector external liabilities: around 1½ percent of banks’ liabilities is external debt with a clause allowing early repayment requests.
- Pledged deposits and NBT operations: following a retention in June of a pledged $25 million deposit, a foreign creditor retained pledged deposits of $125 million in September; the remaining $91 million were settled in October. NBT guarantees of over $70 million remain outstanding.
- New hydropower: recent induction of Sangtuda I is estimated to raise total capacity by more than 10 percent.

### Impact channels of the global crisis (Box 1 summary)
- Main transmission: stagnation or decline in remittances from Russia and Kazakhstan (an estimated 1 million migrants work in these two countries).
- Export channel: export growth projected to decline, reflecting falling demand and international prices for cotton.
- Partial offset: projected decline in international food and fuel prices.
- Financial sector linkages: limited direct linkages to global financial markets; commercial banks are funded primarily by local deposits and capital; one foreign-owned bank’s capital constitutes around 20 percent of total banking sector capital.
- Vulnerabilities:
  - Banks’ profitability could decline as remittances slow (fee income from remittances constitutes around one-third of total income).
  - Deposit growth may be affected by slowing remittances or regional confidence shocks.
- Aluminum exports: projected decline in international aluminum price would not affect exports under the tolling arrangement, though a quantity effect is possible if global demand falls.

### Performance under the SMP (2008)
- Most end-September quantitative targets under the SMP were met; prospects for meeting end-December targets are good.
- One missed indicative target: nonaccumulation of new tax arrears by the state-owned power utility Barki Tajik was missed by $2 million.
- Overall fiscal balance (excluding the externally financed public investment program, PIP) registered a surplus through September 2008, higher than programmed.
- Revenue overperformance: stronger than projected, mostly reflecting high nominal growth and imports.
- Concessional external financing under the PIP: disbursements exceeded the program ceiling because existing projects moved faster than anticipated, reflecting frontloading rather than new borrowing.
- Net international reserves accumulation: allowed NBT to buy foreign exchange and satisfy somoni liquidity demand; interventions helped keep the somoni broadly stable.
- Reserve outlook: reserve accumulation likely to be reversed in the fourth quarter as remittance growth showed first signs of slowing in October; authorities agreed to raise the end-December program floor on net international reserves in light of overperformance.
- Arrears: remain a problem; new arrears arose largely from noncollection from consumers and nonpayment of penalties to the Revenue Authority; tax arrears are linked to cross-arrears and the debt overhang of cotton farmers.
- Structural reforms: good progress outside agriculture; end-September structural benchmarks completed on time (special audit of the NBT, draft amendments to NBT and commercial banking laws, terms of reference for audit of Talco, supervision unit in ministry of finance, contingent liability reporting regime drafting).

### Structural and sectoral issues
- Banking system remains fragile; the new cotton-financing scheme introduced in 2008 is likely to adversely impact asset quality.
- Agricultural (cotton) sector reforms: progressing slowly; cotton sector vulnerabilities persist and are key obstacles to reducing vulnerabilities and supporting growth.
- State enterprise oversight: government issued a decree establishing a supervision unit in the ministry of finance for monitoring the 10 largest state-owned enterprises; technical assistance requested to make unit operational.
- Debt management: government adopted a three-year debt management strategy with an external debt ceiling of 40 percent of GDP; based on borrowing plans, total public and publicly-guaranteed external debt is projected to reach 31 percent of GDP at end-2008.

### Macroeconomic policy mix for 2009 (authorities’ stance)
- Fiscal policy: 2009 budget is expansionary, allowing significant increases in capital spending and civil service wages; authorities aim for a modest overall fiscal deficit for 2009 (target described as modestly counter-cyclical), which will require expenditure restraint (compared to the budget) or specific revenue measures.
- Monetary policy: aims to contain monetary growth, but will be passive in the absence of an effective monetary policy instrument.
- Exchange rate policy: exchange rate will have to move in line with the market to facilitate external adjustment; exchange rate flexibility will be key if inflows dry up as projected.
- Fund involvement: authorities would like to move to a PRGF arrangement soon after completion of the SMP.

### Staff appraisal and recommendations (high level)
- Staff welcomes the good performance under the SMP and supports the authorities’ policy objectives for the remainder of 2008.
- The authorities’ target of a modest fiscal deficit for 2009 is appropriate, but will require expenditure restraint or specific revenue measures to be met.
- Exchange rate flexibility is emphasized as essential to facilitate external adjustment in 2009 if remittance and export inflows decline.
- The banking system remains fragile; staff notes that the new cotton-financing scheme introduced in 2008 is likely to adversely impact asset quality.

### 2009 budget and fiscal stance (detailed)
- Targeted overall deficit (excluding the PIP): ½ percent of GDP.
- Authorities intend to raise spending by around 25 percent in real terms, mostly for domestically financed capital spending and civil service wage increases.
- Expenditure increases:
  - Health: 45 percent increase in real terms (from a low base, mostly on account of wages).
  - Education: 35 percent increase in real terms (from a low base, mostly on account of wages).
- Continued financing of cotton farmers via on-lending by commercial banks.
- Projected increase in revenues: around 2 percent of GDP, largely from improvements in revenue administration.
- Staff caution: achieving the revenue improvement may be difficult without specific measures; staff projects an overall deficit of 1 percent of GDP in 2009, absent further measures.
- Authorities’ planned deficit financing sources: drawing down deposits at the NBT, privatization proceeds, and issuing a small amount of government securities.
- Specific allocations noted: Around $160 million are allocated for the construction of the Roghun hydropower plant alone.
- Staff projection on government deposits: Under staff projections, government deposits at the NBT would be depleted in about three years.

### Reserves, monetary policy, and exchange rate strategy
- Authorities see little scope for further enhancing reserves in 2009.
- Expectation that the excess supply of foreign exchange will fade; authorities will let the exchange rate move with market trends, following an asymmetric intervention strategy.
- To achieve inflation objective: aim to reduce broad money growth and constrain reserve money growth accordingly.
- Reserve money growth expected to come mainly from the government drawing down its deposits at the NBT.
- Authorities committed to refrain from direct lending to banks or the economy.
- Anticipated liquidity shortages to continue; some banks may reduce their excess reserves.

### Cotton financing scheme and bank asset quality risks
- New cotton financing scheme introduced in 2008: government provides funds to commercial banks who then on-lend to cotton farmers at negative real interest rates.
- Credit risk remains with commercial banks; banks have also made additional loans to the agricultural sector from their own funds.
- Some scheduled repayments received in October 2008; bulk expected to start in the spring of 2009.
- Risk factors:
  - International cotton market weakening.
  - Many farmers already highly indebted and may not be able to service new loans.
- Implication: the scheme could impact banks’ asset quality as of 2009.

### Post-SMP Fund involvement and structural reform agenda
- Authorities intend to move to a PRGF arrangement soon after completion of the SMP.
- Budget support from ADB, World Bank, and EU has been put on hold pending successful completion of the SMP and initiation of PRGF negotiations.
- 2009 structural reform priorities:
  - Strengthen public institutions and ease growth bottlenecks.
  - Use results of the special audit of the NBT to strengthen governance and improve the NBT’s balance sheet for better monetary policy execution.
  - Enhance transparency and management of state-owned enterprises via a new monitoring unit in the ministry of finance; audits of key SOEs should be used to develop the reform agenda.
  - Continue revenue administration reforms to raise revenue yield and strengthen the business environment.
  - Continue public financial management reforms to ensure budget allocations reflect policy priorities and expenditures are cost-effective.
  - With World Bank assistance, finalize strategy to resolve the domestic cotton debt problem before the next harvest season and develop a sustainable financing model for the sector that is free from government interference.

### Staff appraisal, risks, and policy recommendations (detailed)
- Positive assessments:
  - Staff welcomes good SMP performance through end-September 2008.
  - Substantial increase in net international reserves above program objectives noted as important for reducing external vulnerabilities.
  - Cautious fiscal approach and saving revenue overperformance allowed government to increase deposits with the NBT, helping constrain reserve money growth.
- Concerns and required actions:
  - Continued accumulation of tax arrears by Barki Tajik is regrettable; authorities need to address underlying problems at the state-owned power utility and prevailing cross-arrears urgently.
  - Need to submit legal amendments to strengthen governance of the NBT and commercial banking laws to parliament as soon as possible (delay in making certain legal changes is unfortunate).
- Fiscal policy guidance for 2009:
  - Fiscal policy will be the main instrument to support domestic activity in 2009.
  - Targeted overall deficit (excluding the PIP) of ½ percent of GDP is appropriate given projected growth slowdown, but achieving it may require expenditure restraint or specific revenue measures.
  - Much of the increase in expenditures is intended for energy projects; individual projects need close scrutiny to ensure cost effectiveness and debt sustainability.
  - A somewhat less ambitious increase in capital expenditures would help safeguard the deficit target.
- Monetary and exchange rate policy guidance:
  - Policies should focus on maintaining external stability; with weaker remittances, pressures could arise in the foreign exchange market.
  - NBT’s international reserves, while improved, are not sufficient to defend the exchange rate; the somoni will have to be allowed to move in line with market trends.
  - NBT aims to contain money growth to reduce inflation, but without an effective direct monetary instrument it has limited scope to control monetary developments or stabilize activity.
  - Need to develop and deepen the market for government securities or NBT bills, and strengthen the interbank market in line with FSAP recommendations.
- Banking supervision guidance:
  - Step up supervision to safeguard banking system soundness; monitor banks carefully to detect early deterioration in balance sheets.
  - Ensure banks fully comply with reserve requirements without exceptions.
  - Strengthen the existing deposit insurance system with World Bank assistance to maintain depositor confidence.
  - Closely monitor banks’ exposure to the agricultural sector, particularly the cotton sector, where loan portfolios have expanded rapidly since 2007.

### Risks to the outlook (main channels)
- Remittances could fall in absolute terms in 2009 (rather than just stagnate as in staff’s baseline scenario).
- A fall in remittances would require significant external adjustment while further curtailing a key income source for many households living below the poverty line.
- Possible sharp depreciation of main trading partners’ currencies may require further exchange rate adjustment.
- Cotton and aluminum exports likely to be adversely affected by reduced external demand and declining international prices.
- Banks’ balance sheets and profitability could be hit, e.g., due to a worsening of asset quality in case of further decline in international cotton prices, or a loss of fee income.
- With little direct linkage to global financial markets, no direct impact on Tajikistan’s financial sector is foreseen in the letter, but indirect effects via remittances and commodity prices are highlighted.

### Fiscal policy implications and recommendations (risks)
- Fiscal policy would need to react flexibly and provide relief, even in the absence of an effective social safety net.
- There may be a need to revisit spending priorities and the deficit target, e.g., by maintaining the expenditure envelope while allowing for revenue shortfalls.
- The 2009 budget targets a modest overall fiscal deficit (excluding the PIP) of ½ percent of GDP, while raising social spending by over 60 percent and undertaking investments in hydropower and other infrastructure.
- Government measures noted: three year debt management strategy with a debt ceiling of 40 percent of GDP; tendered audits of Talco and Barki Tajik; decree establishing a supervision unit in the Ministry of Finance for the 10 largest SOEs; plan to reduce tax arrears including higher penalties and arrears repayment mechanism for water users.

### Monetary and exchange rate policy stance (risks)
- Monetary and exchange rate policy would need to let the somoni move with market trends.
- The authorities intend to allow the exchange rate to move in line with market trends and see little scope for further reserve build-up in 2009.
- The government intends to save any revenue overperformance while maintaining strict expenditure control and aims to strengthen net international reserves somewhat faster than previously projected in Q4 2008.

### Banking sector and NBT governance (risks and actions)
- Ongoing special audit of the National Bank of Tajikistan (NBT); draft report to be made available to the NBT in late November (as stated).
- Amendments to the NBT Law and the Commercial Banking Law prepared (to be submitted to parliament by March 2009) and incorporating FSSA recommendations.
- Negotiations with foreign creditors over guarantees issued by the NBT are ongoing; committed to settling valid claims while maximizing loan recoveries from domestic investors.
- Structural reform agenda for 2009: improving NBT financial position and governance; enhancing transparency and management at key SOEs; strengthening tax administration and public financial management; creating environment for financial sector development; resolving domestic cotton debt problem.

### Selected exact macroeconomic figures and indicators (table excerpt)
- Real GDP (annual percent change): 2005 Act. 6.7; 2006 Act. 7.0; 2007 Est. 7.8; 2008 Prog. 5.0; 2008 Rev. 7.0; 2009 Proj. 5.0.  
- GDP deflator (cumulative): 2005 9.6; 2006 20.3; 2007 27.9; 2008 Prog. 20.2; 2008 Rev. 25.6.  
- CPI inflation (end-of-period): 2005 7.1; 2006 12.5; 2007 19.8; 2008 Prog. 15.0; 2008 Rev. 16.0; 2009 Proj. 9.0; 2009 Budget 11.0.  
- Investment (percent of GDP) total: 2005 14.8; 2006 13.7; 2007 22.0; 2008 Prog. 20.8; 2008 Rev. 20.6; 2009 Proj. 18.1; 2009 Budget 20.1.  
- Gross national savings (percent of GDP): 2005 12.1; 2006 10.9; 2007 10.9; 2008 Prog. 10.9; 2008 Rev. 11.3; 2009 Proj. 10.0; 2009 Budget 11.3.  
- Revenue and grants (percent of GDP): 2005 20.1; 2006 23.6; 2007 21.6; 2008 Prog. 22.4; 2008 Rev. 21.9; 2009 Proj. 22.6; 2009 Budget 22.9.  
- Tax revenue (percent of GDP): 2005 16.6; 2006 16.5; 2007 17.8; 2008 Prog. 18.5; 2008 Rev. 18.7; 2009 Proj. 19.1; 2009 Budget 19.6.  
- Expenditure and net lending (percent of GDP): 2005 23.0; 2006 21.9; 2007 27.8; 2008 Prog. 30.4; 2008 Rev. 29.2; 2009 Proj. 29.1; 2009 Budget 30.1.  
- Overall balance (excluding Public Investment Program) (percent of GDP): 2005 0.5; 2006 0.8; 2007 1.6; 2008 Prog. 0.0; 2008 Rev. 1.0; 2009 Proj. 0.0; 2009 Budget -1.2.  
- Overall balance (including Public Investment Program) (percent of GDP): 2005 -2.9; 2006 1.7; 2007 -6.2; 2008 Prog. -8.0; 2008 Rev. -7.3; 2009 Proj. -6.4; 2009 Budget -7.2.  
- Net foreign assets of the banking sector (in millions of somoni): 2005 -70.3; 2006 25.1; 2007 14.8; 2008 Act. 7.7; 2008 Rev. -20.8; 2009 Proj. -14.9; 2009 Budget -0.30.  
- Broad money (12-month percent change): 2005 30.2; 2006 63.4; 2007 78.8; 2008 Prog. 24.7; 2008 Rev. 33.0; 2009 Proj. 24.8; 2009 Budget 24.4.  
- Current account balance (percent of GDP): 2005 -2.7; 2006 -2.8; 2007 -11.2; 2008 Prog. -10.0; 2008 Rev. -9.3; 2009 Proj. -8.1; 2009 Budget -8.8.  
- Trade balance (percent of GDP): 2005 -26.9; 2006 -35.1; 2007 -45.1; 2008 Prog. -50.9; 2008 Rev. -50.5; 2009 Proj. -46.7; 2009 Budget -42.9.  
- Gross official reserves (in U.S. dollars, millions): 2005 9; 2006 11; 2007 111; 2008 Prog. 107; 2008 Rev. 169; 2009 Proj. 198; 2009 Budget 229.0; 2009 Proj. 187.8 (note: table entries vary by column).  
- Memorandum: Nominal GDP (in millions of somoni): 2005 7,201; 2006 9,272; 2007 12,780; 2008 Prog. 16,135; 2008 Rev. 17,178; 2009 Proj. 19,337; 2009 Budget 21,373.  
- Memorandum: Nominal GDP (in millions of U.S. dollars): 2005 2,311; 2006 2,811; 2007 3,712; 2008 Prog. 4,300; 2008 Rev. 5,014; 2009 Proj. 4,995; 2009 Budget 6,107.  
- Average exchange rate (somoni per U.S. dollar) reported: 2005 3.12; 2006 3.30; 2007 3.44.

### Quantitative and structural program implementation highlights
- Quantitative indicators and ceilings: ceilings and floors cited for net credit to government, total net international reserves (floors in U.S. dollars), ceilings on NDA of NBT, ceilings on concessional external financing disbursements (in millions of U.S. dollars), and targets on tax collection and arrears.
- Prior actions and structural benchmarks: special audit of the NBT (completed Apr. 2008); selection of internationally reputable audit firm (completed May 2008); interim reports provided monthly (complied with); NBT refrain from issuing new credits to private sector except for liquidity purposes (continuous/complied with); legislative changes expected end-Dec. 2008 but delayed to March 2009; audits of Talco and Barki Tajik tendered/completed Sept. 2008; decree to establish MoF supervision unit completed Sept. 2008.

### Data, institutional, and donor coordination notes
- Relations with the Fund: membership since April 27, 1993; quota 87.00 SDR million; outstanding PRGF arrangements and historical approvals listed; projected payments to the Fund for 2008 and 2009 shown.
- Safeguards and FSAP: previous safeguards assessment completed July 23, 2003; next safeguards assessment pending special audit results; Tajikistan participated in the Financial Sector Assessment Program during 2007-08.
- Data weaknesses and TA: data provision broadly adequate for surveillance but with shortcomings; improvements after a misreporting episode; participation in GDDS since November 2004; further work needed on national accounts, CPI methods, GFS migration, and MFS SRFs.
- Bank (World Bank/ADB) coordination: Bank-led projects across water, power, energy loss reduction, municipal infrastructure, and agriculture; joint Bank–IMF work on public sector management, budget planning, financial sector reform, utilities reform, and joint DSAs; IDA funding and ADB support details referenced.

*IMF staff—Executive Summary (cr08382).*

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

### _cr08382 - Executive Summary

### Executive summary: main conclusions
- Economic developments in 2008 were favorable, but the global slowdown weighs on the 2009 outlook.
- The global financial crisis is expected to impact Tajikistan mainly through spillovers from the global slowdown; a direct impact on the financial sector seems unlikely.
- Real GDP growth should slow in 2009 on account of stagnating remittances and sluggish export growth.
- Inflation is projected to slow in 2009, following the expected decline in international commodity prices.
- Tajikistan’s external position is likely to weaken significantly in 2009, after the projected surplus in 2008 that allowed the central bank to build reserves.

### Key statistics and outcomes (2008 and near-term projections)
- Real GDP growth: 7percent in 2008 (revised upward from 5percent under the program).
- Projected real GDP growth: 5percent at best in 2009 (with risks largely on the downside).
- Inflation: projected to decline to 16percent year-on-year in December 2008.
- Inflation projection for December 2009: 10–12 percent (or even less if international price changes are fully passed through).
- Remittances: increased by 70percent through September 2008 versus the same period in 2007.
- Remittances projected at over 40 percent of GDP in 2008.
- Net international reserves: increased by $111 million to $167 million at end-September 2008.
- Overall deficit (including faster PIP disbursements): widened to 4.5 percent of annual GDP through September 2008.
- Total public and publicly guaranteed debt: declined to 30 percent of annual GDP.
- Authorities expect an overall fiscal surplus (excluding the PIP) of 1 percent of GDP for 2008 compared to the program target of a balanced budget.
- Somoni: appreciated by about 2 percent in 2008 to date.
- Food and fuel in CPI basket: food products account for 60 percent and fuel products for another 2½ percent.
- Banking sector external liabilities: around 1½ percent of banks’ liabilities is external debt with a clause allowing early repayment requests.
- Pledged deposits and NBT operations: following a retention in June of a pledged $25 million deposit, a foreign creditor retained pledged deposits of $125 million in September; the remaining $91 million were settled in October. NBT guarantees of over $70 million remain outstanding.
- New hydropower: recent induction of Sangtuda I is estimated to raise total capacity by more than 10 percent.

### Impact channels of the global crisis (Box 1 summary)
- Main transmission: stagnation or decline in remittances from Russia and Kazakhstan (an estimated 1 million migrants work in these two countries).
- Export channel: export growth projected to decline, reflecting falling demand and international prices for cotton.
- Partial offset: projected decline in international food and fuel prices.
- Financial sector linkages: limited direct linkages to global financial markets; commercial banks are funded primarily by local deposits and capital; one foreign-owned bank’s capital constitutes around 20 percent of total banking sector capital.
- Vulnerabilities: banks’ profitability could decline as remittances slow (fee income from remittances constitutes around one-third of total income); deposit growth may be affected by slowing remittances or regional confidence shocks.
- Aluminum exports: projected decline in international aluminum price would not affect exports under the tolling arrangement, though a quantity effect is possible if global demand falls.

### Performance under the SMP (2008)
- Most end-September quantitative targets under the SMP were met; prospects for meeting end-December targets are good.
- One missed indicative target: nonaccumulation of new tax arrears by the state-owned power utility Barki Tajik was missed by $2 million.
- Overall fiscal balance (excluding the externally financed public investment program, PIP) registered a surplus through September 2008, higher than programmed.
- Revenue overperformance: stronger than projected, mostly reflecting high nominal growth and imports.
- Concessional external financing under the PIP: disbursements exceeded the program ceiling because existing projects moved faster than anticipated, reflecting frontloading rather than new borrowing.
- Net international reserves accumulation: allowed NBT to buy foreign exchange and satisfy somoni liquidity demand; interventions helped keep the somoni broadly stable.
- Reserve outlook: reserve accumulation likely to be reversed in the fourth quarter as remittance growth showed first signs of slowing in October; authorities agreed to raise the end-December program floor on net international reserves in light of overperformance.
- Arrears: remain a problem; new arrears arose largely from noncollection from consumers and nonpayment of penalties to the Revenue Authority; tax arrears are linked to cross-arrears and the debt overhang of cotton farmers.
- Structural reforms: good progress outside agriculture; end-September structural benchmarks completed on time (special audit of the NBT, draft amendments to NBT and commercial banking laws, terms of reference for audit of Talco, supervision unit in ministry of finance, contingent liability reporting regime drafting).

### Structural and sectoral issues
- Banking system remains fragile; the new cotton-financing scheme introduced in 2008 is likely to adversely impact asset quality.
- Agricultural (cotton) sector reforms: progressing slowly; cotton sector vulnerabilities persist and are key obstacles to reducing vulnerabilities and supporting growth.
- State enterprise oversight: government issued a decree establishing a supervision unit in the ministry of finance for monitoring the 10 largest state-owned enterprises; technical assistance requested to make unit operational.
- Debt management: government adopted a three-year debt management strategy with an external debt ceiling of 40 percent of GDP; based on borrowing plans, total public and publicly-guaranteed external debt is projected to reach 31 percent of GDP at end-2008.

### Macroeconomic policy mix for 2009 (authorities’ stance)
- Fiscal policy: 2009 budget is expansionary, allowing significant increases in capital spending and civil service wages; authorities aim for a modest overall fiscal deficit for 2009 (target described as modestly counter-cyclical), which will require expenditure restraint (compared to the budget) or specific revenue measures.
- Monetary policy: aims to contain monetary growth, but will be passive in the absence of an effective monetary policy instrument.
- Exchange rate policy: exchange rate will have to move in line with the market to facilitate external adjustment; exchange rate flexibility will be key if inflows dry up as projected.
- Fund involvement: authorities would like to move to a PRGF arrangement soon after completion of the SMP.

### Staff appraisal and recommendations
- Staff welcomes the good performance under the SMP and supports the authorities’ policy objectives for the remainder of 2008.
- The authorities’ target of a modest fiscal deficit for 2009 is appropriate, but will require expenditure restraint or specific revenue measures to be met.
- Exchange rate flexibility is emphasized as essential to facilitate external adjustment in 2009 if remittance and export inflows decline.
- The banking system remains fragile; staff notes that the new cotton-financing scheme introduced in 2008 is likely to adversely impact asset quality.

*IMF staff—Executive Summary (cr08382).*

### 14.      The 2009 budget targets an overall deficit (excluding the PIP) of ½ percent of

### _cr08382 - 14.      The 2009 budget targets an overall deficit (excluding the PIP) of ½ percent of

### 2009 budget and fiscal stance
- Targeted overall deficit (excluding the PIP): ½ percent of GDP.
- Authorities intend to raise spending by around 25 percent in real terms, mostly for domestically financed capital spending and civil service wage increases.
- Expenditure increases:
  - Health: 45 percent increase in real terms (from a low base, mostly on account of wages).
  - Education: 35 percent increase in real terms (from a low base, mostly on account of wages).
- Continued financing of cotton farmers via on-lending by commercial banks.
- Projected increase in revenues: around 2 percent of GDP, largely from improvements in revenue administration.
- Staff caution: achieving the revenue improvement may be difficult without specific measures; staff projects an overall deficit of 1 percent of GDP in 2009, absent further measures.
- Authorities’ planned deficit financing sources: drawing down deposits at the NBT, privatization proceeds, and issuing a small amount of government securities.
- Specific allocations noted: Around $160 million are allocated for the construction of the Roghun hydropower plant alone.
- Staff projection on government deposits: Under staff projections, government deposits at the NBT would be depleted in about three years.

### Reserves, monetary policy, and exchange rate strategy
- Authorities see little scope for further enhancing reserves in 2009.
- Expectation that the excess supply of foreign exchange will fade; authorities will let the exchange rate move with market trends, following an asymmetric intervention strategy.
- To achieve inflation objective: aim to reduce broad money growth and constrain reserve money growth accordingly.
- Reserve money growth expected to come mainly from the government drawing down its deposits at the NBT.
- Authorities committed to refrain from direct lending to banks or the economy.
- Anticipated liquidity shortages to continue; some banks may reduce their excess reserves.

### Cotton financing scheme and bank asset quality risks
- New cotton financing scheme introduced in 2008: government provides funds to commercial banks who then on-lend to cotton farmers at negative real interest rates.
- Credit risk remains with commercial banks; banks have also made additional loans to the agricultural sector from their own funds.
- Some scheduled repayments received in October 2008; bulk expected to start in the spring of 2009.
- Risk factors:
  - International cotton market weakening.
  - Many farmers already highly indebted and may not be able to service new loans.
- Implication: the scheme could impact banks’ asset quality as of 2009.

### Post-SMP Fund involvement and structural reform agenda
- Authorities intend to move to a PRGF arrangement soon after completion of the SMP.
- Budget support from ADB, World Bank, and EU has been put on hold pending successful completion of the SMP and initiation of PRGF negotiations.
- 2009 structural reform priorities:
  - Strengthen public institutions and ease growth bottlenecks.
  - Use results of the special audit of the NBT to strengthen governance and improve the NBT’s balance sheet for better monetary policy execution.
  - Enhance transparency and management of state-owned enterprises via a new monitoring unit in the ministry of finance; audits of key SOEs should be used to develop the reform agenda.
  - Continue revenue administration reforms to raise revenue yield and strengthen the business environment.
  - Continue public financial management reforms to ensure budget allocations reflect policy priorities and expenditures are cost-effective.
  - With World Bank assistance, finalize strategy to resolve the domestic cotton debt problem before the next harvest season and develop a sustainable financing model for the sector that is free from government interference.

### Staff appraisal, risks, and policy recommendations
- Positive assessments:
  - Staff welcomes good SMP performance through end-September 2008.
  - Substantial increase in net international reserves above program objectives noted as important for reducing external vulnerabilities.
  - Cautious fiscal approach and saving revenue overperformance allowed government to increase deposits with the NBT, helping constrain reserve money growth.
- Concerns and required actions:
  - Continued accumulation of tax arrears by Barki Tajik is regrettable; authorities need to address underlying problems at the state-owned power utility and prevailing cross-arrears urgently.
  - Need to submit legal amendments to strengthen governance of the NBT and commercial banking laws to parliament as soon as possible (delay in making certain legal changes is unfortunate).
- Fiscal policy guidance for 2009:
  - Fiscal policy will be the main instrument to support domestic activity in 2009.
  - Targeted overall deficit (excluding the PIP) of ½ percent of GDP is appropriate given projected growth slowdown, but achieving it may require expenditure restraint or specific revenue measures.
  - Much of the increase in expenditures is intended for energy projects; individual projects need close scrutiny to ensure cost effectiveness and debt sustainability.
  - A somewhat less ambitious increase in capital expenditures would help safeguard the deficit target.
- Monetary and exchange rate policy guidance:
  - Policies should focus on maintaining external stability; with weaker remittances, pressures could arise in the foreign exchange market.
  - NBT’s international reserves, while improved, are not sufficient to defend the exchange rate; the somoni will have to be allowed to move in line with market trends.
  - NBT aims to contain money growth to reduce inflation, but without an effective direct monetary instrument it has limited scope to control monetary developments or stabilize activity.
  - Need to develop and deepen the market for government securities or NBT bills, and strengthen the interbank market in line with FSAP recommendations.
- Banking supervision guidance:
  - Step up supervision to safeguard banking system soundness; monitor banks carefully to detect early deterioration in balance sheets.
  - Ensure banks fully comply with reserve requirements without exceptions.
  - Strengthen the existing deposit insurance system with World Bank assistance to maintain depositor confidence.
  - Closely monitor banks’ exposure to the agricultural sector, particularly the cotton sector, where loan portfolios have expanded rapidly since 2007.

*Source: _cr08382 - 14.      The 2009 budget targets an overall deficit (excluding the PIP) of ½ percent of*

### 24.      Risks to the outlook stem largely from external developments. Most importantly,

### Risks to the outlook stem largely from external developments. Most importantly,

### Main risk channels
- Remittances could fall in absolute terms in 2009 (rather than just stagnate as in staff’s baseline scenario).  
- A fall in remittances would require significant external adjustment while further curtailing a key income source for many households living below the poverty line.  
- Possible sharp depreciation of main trading partners’ currencies may require further exchange rate adjustment.  
- Cotton and aluminum exports likely to be adversely affected by reduced external demand and declining international prices.  
- Banks’ balance sheets and profitability could be hit, e.g., due to a worsening of asset quality in case of further decline in international cotton prices, or a loss of fee income.  
- With little direct linkage to global financial markets, no direct impact on Tajikistan’s financial sector is foreseen in the letter, but indirect effects via remittances and commodity prices are highlighted.

### Fiscal policy implications and recommendations
- Fiscal policy would need to react flexibly and provide relief, even in the absence of an effective social safety net.  
- There may be a need to revisit spending priorities and the deficit target, e.g., by maintaining the expenditure envelope while allowing for revenue shortfalls.  
- The 2009 budget targets a modest overall fiscal deficit (excluding the PIP) of ½ percent of GDP, while raising social spending by over 60 percent and undertaking investments in hydropower and other infrastructure.  
- Government measures noted: three year debt management strategy with a debt ceiling of 40 percent of GDP; tendered audits of Talco and Barki Tajik; decree establishing a supervision unit in the Ministry of Finance for the 10 largest SOEs; plan to reduce tax arrears including higher penalties and arrears repayment mechanism for water users.

### Monetary and exchange rate policy stance
- Monetary and exchange rate policy would need to let the somoni move with market trends.  
- The authorities intend to allow the exchange rate to move in line with market trends and see little scope for further reserve build-up in 2009.  
- The government intends to save any revenue overperformance while maintaining strict expenditure control and aims to strengthen net international reserves somewhat faster than previously projected in Q4 2008.

### Banking sector and NBT governance
- Ongoing special audit of the National Bank of Tajikistan (NBT); draft report to be made available to the NBT in late November (as stated).  
- Amendments to the NBT Law and the Commercial Banking Law prepared (to be submitted to parliament by March 2009) and incorporating FSSA recommendations.  
- Negotiations with foreign creditors over guarantees issued by the NBT are ongoing; committed to settling valid claims while maximizing loan recoveries from domestic investors.  
- Structural reform agenda for 2009: improving NBT financial position and governance; enhancing transparency and management at key SOEs; strengthening tax administration and public financial management; creating environment for financial sector development; resolving domestic cotton debt problem.

### Key macroeconomic figures and indicators (selected exact values from tables)
- Real GDP (annual percent change): 2005 Act. 6.7; 2006 Act. 7.0; 2007 Est. 7.8; 2008 Prog. 5.0; 2008 Rev. 7.0; 2009 Proj. 5.0.  
- GDP deflator (cumulative): 2005 9.6; 2006 20.3; 2007 27.9; 2008 Prog. 20.2; 2008 Rev. 25.6.  
- CPI inflation (end-of-period): 2005 7.1; 2006 12.5; 2007 19.8; 2008 Prog. 15.0; 2008 Rev. 16.0; 2009 Proj. 9.0; 2009 Budget 11.0.  
- Investment (percent of GDP) total: 2005 14.8; 2006 13.7; 2007 22.0; 2008 Prog. 20.8; 2008 Rev. 20.6; 2009 Proj. 18.1; 2009 Budget 20.1.  
- Gross national savings (percent of GDP): 2005 12.1; 2006 10.9; 2007 10.9; 2008 Prog. 10.9; 2008 Rev. 11.3; 2009 Proj. 10.0; 2009 Budget 11.3.  
- Revenue and grants (percent of GDP): 2005 20.1; 2006 23.6; 2007 21.6; 2008 Prog. 22.4; 2008 Rev. 21.9; 2009 Proj. 22.6; 2009 Budget 22.9.  
- Tax revenue (percent of GDP): 2005 16.6; 2006 16.5; 2007 17.8; 2008 Prog. 18.5; 2008 Rev. 18.7; 2009 Proj. 19.1; 2009 Budget 19.6.  
- Expenditure and net lending (percent of GDP): 2005 23.0; 2006 21.9; 2007 27.8; 2008 Prog. 30.4; 2008 Rev. 29.2; 2009 Proj. 29.1; 2009 Budget 30.1.  
- Overall balance (excluding Public Investment Program) (percent of GDP): 2005 0.5; 2006 0.8; 2007 1.6; 2008 Prog. 0.0; 2008 Rev. 1.0; 2009 Proj. 0.0; 2009 Budget -1.2.  
- Overall balance (including Public Investment Program) (percent of GDP): 2005 -2.9; 2006 1.7; 2007 -6.2; 2008 Prog. -8.0; 2008 Rev. -7.3; 2009 Proj. -6.4; 2009 Budget -7.2.  
- Net foreign assets of the banking sector (in millions of somoni): 2005 -70.3; 2006 25.1; 2007 14.8; 2008 Act. 7.7; 2008 Rev. -20.8; 2009 Proj. -14.9; 2009 Budget -0.30.  
- Broad money (12-month percent change): 2005 30.2; 2006 63.4; 2007 78.8; 2008 Prog. 24.7; 2008 Rev. 33.0; 2009 Proj. 24.8; 2009 Budget 24.4.  
- Current account balance (percent of GDP): 2005 -2.7; 2006 -2.8; 2007 -11.2; 2008 Prog. -10.0; 2008 Rev. -9.3; 2009 Proj. -8.1; 2009 Budget -8.8.  
- Trade balance (percent of GDP): 2005 -26.9; 2006 -35.1; 2007 -45.1; 2008 Prog. -50.9; 2008 Rev. -50.5; 2009 Proj. -46.7; 2009 Budget -42.9.  
- Gross official reserves (in U.S. dollars, millions): 2005 9; 2006 11; 2007 111; 2008 Prog. 107; 2008 Rev. 169; 2009 Proj. 198; 2009 Budget 229.0; 2009 Proj. 187.8 (note: table entries vary by column).  
- Memorandum: Nominal GDP (in millions of somoni): 2005 7,201; 2006 9,272; 2007 12,780; 2008 Prog. 16,135; 2008 Rev. 17,178; 2009 Proj. 19,337; 2009 Budget 21,373.  
- Memorandum: Nominal GDP (in millions of U.S. dollars): 2005 2,311; 2006 2,811; 2007 3,712; 2008 Prog. 4,300; 2008 Rev. 5,014; 2009 Proj. 4,995; 2009 Budget 6,107.  
- Average exchange rate (somoni per U.S. dollar) reported: 2005 3.12; 2006 3.30; 2007 3.44.

### Policy and transparency commitments
- Authorities will continue publishing all SMP-related documents and the recent FSSA report on the IMF website; all key findings of the special audit of the NBT will be published on the NBT’s website.  
- Authorities hope to begin discussions on a new program supported by the Fund under the Poverty Reduction and Growth Facility in early 2009.

*Source: IMF staff report and attachments (Tajikistan: Selected Economic Indicators, General Government Operations, Monetary and Balance of Payments tables; Letter of Intent, November 26, 2008).*

### 1. Ceiling on net domestic assets of the NBT  1/ 2/4545403945281,043809551551

### 1. Ceiling on net domestic assets of the NBT  1/ 2/4545403945281,043809551551

### Quantitative indicators and ceilings (Table 1 excerpts)
- Ceiling on net credit of the banking system to general government: -953 -953 -1,149 -831 -831 -1,178 -759 -759
- Floor on total net international reserves (in millions of U.S. dollars) 2/: 969 612 211 711 718 115 117 0
- Floor on the cumulative overall fiscal balance of the general government (excluding foreign-financed public investment program and PIP related grants) 3/: 148 148 310 626 233 188
- Ceiling on general government wage, and nonworking pensioners' pension arrears 4/: 000 000 0
- Floor on tax collection 3/: 1,502 1,502 1,572 2,277 2,277 2,423 2,979 2,979
- New tax arrears of Barki Tajik and Talco: 007 002 200
- Ceiling on contracting or guaranteeing of any nonconcessional external debt 4/ 5/ 6/: 00000000
- Ceiling on disbursements of concessional external financing (in millions of U.S. dollars) 3/ 5/ 6/: 206 206 156 283 283 323 350 413
- New external payments arrears 4/: 00000000
- Memorandum item — Cumulative disbursement of program loans and grants (in millions of U.S. dollars) 3/: 0000002525

Notes accompanying the table:
- 1/ In June, September and December the program ceiling on NDA of the NBT was adjusted upwards to reflect the retention of the pledged deposits.
- 2/ At program exchange rates.
- 3/ Cumulative from January 1 of the year.
- 4/ Continuous quantitative targets.
- 5/ Short, medium and long-term debt by the government, NBT or any other agency acting on behalf of the government as defined in the Technical Memorandum of Understanding, excluding normal trade-related loans.
- 6/ Excluding the obligations resulting from the restructuring of the cotton debt.

### Prior actions and structural benchmarks (Table 2 excerpts)
- 1. Reach understandings with Fund staff on the Terms of Reference for the special audit of the NBT and other involved parties, as defined in the terms of reference.
  - Implementation Date: Prior action
  - Status: Completed Apr. 2008
- 2. Request bids for the selection of an internationally reputable audit firm to conduct the special audit of the NBT and other involved parities defined in the terms of reference.
  - Implementation Date: Prior action
  - Status: Completed May 2008
- 3. Provide interim reports, as noted in the terms of reference of the special audit of the NBT, to Fund staff.
  - Implementation Date: Monthly
  - Status: Complied with
- 4. NBT will refrain from issuing new credits to the private sector, except to commercial banks (including Amonatbank) for liquidity and lender of last resort purposes. These involve credits that are issued in the absence of a competitive auction or on non-market terms and conditions.
  - Implementation Date: Continuous
  - Status: Complied with
- 5. Make legislative changes to: (i) appoint the NBT chairman and his deputies for fixed terms that do not coincide with the electoral cycle, and outline the reasons for their dismissal explicitly in the law; (ii) require official identification and disclosure of beneficial owners of companies registered with the Agency for Securities in the Ministry of Finance and other authorized entities, including financial institutions; (iii) clarify the provisions covering conflicts of interest for the NBT management and staff and require them to disclose their personal holdings in financial institutions and excuse themselves from official decisions affecting those institutions.
  - Implementation Date: End-Dec. 2008
  - Status: Expected to be delayed until March 2009
- 6. Issue tender papers for an audit of Talco's and Barki Tajik's 2007 financial operations by an internationally recognized auditing company.
  - Implementation Date: End-Sept. 2008
  - Status: Completed Sept. 2008
- 7. Introduce legislative changes for establishing a contingent liability reporting regime to cover state-owned enterprises, public institutions and the NBT.
  - Implementation Date: End-Dec. 2008
- 8. Issue a government decree to establish a supervision unit in the Ministry of Finance (MoF) for regular monitoring of financial operations of the 10 SOE's with the highest annual turnover and require these enterprises to provide the MoF and Ministry of Economic Development and Trade draft annual financial plans for review and approval before the beginning of each financial year and submit their quarterly financial statements and their external audit reports.
  - Implementation Date: End-Sept.-2008
  - Status: Completed Sept. 2008

### Relations with the Fund — key institutional and financial facts (Annex I excerpts)
- Membership Status: Joined April 27, 1993; Article VIII
- General Resources Account:
  - Quota: 87.00 SDR million, 100.00 percent
  - Fund holdings of currency: 87.00 SDR million, 100.00 percent
  - Reserve position in Fund: 0.00 SDR million, 0.00 percent
- SDR Department:
  - Holdings: 19.85 SDR million, N/A percent allocation
- Outstanding Purchases and Loans:
  - PRGF arrangements: 19.60 SDR million, 22.53 percent quota
- Latest Financial Arrangements:
  - PRGF: Approval Date Dec 11, 2002; Expiration Date Feb 10, 2006; Amount Approved 65.00 SDR million; Amount Drawn 65.00 SDR million
  - ESAF/PRGF: Approval Date Jun 24, 1998; Expiration Date Dec 24, 2001; Amount Approved 100.30 SDR million; Amount Drawn 78.28 SDR million
  - Stand-by: Approval Date May 08, 1996; Expiration Date Dec 07, 1996; Amount Approved 15.00 SDR million; Amount Drawn 15.00 SDR million
- Projected Payments to Fund (SDR million; based on existing use of resources and present holdings of SDRs):
  - Forthcoming 2008 2009 2010 2011 2012 — Principal 9.8 9.8 0; Charges/Interest 0.04 0.00; Total 9.84 9.80
- Implementation of MDRI Assistance:
  - Total Debt Relief (SDR Million): 69.31
  - Of Which MDRI: 69.31
  - HIPC: --
  - Debt Relief by Facility (SDR Million): Eligible Debt Delivery Date GRP RGFTotal January 2006 N/A 69.31 69.31
- Safeguards Assessment:
  - Previous safeguards assessment of the NBT completed on July 23, 2003. The next safeguards assessment is pending the results of the special audit of the NBT.
- Exchange Rate Arrangements:
  - The NBT maintains conventional pegexchange rate arrangement, as per 2008 reclassification of the regime from managed float.
  - Since August 2005, the NBT has increased the frequency of calculating and announcing the official exchange rate from a weekly to a daily basis.
  - With effect from December 9, 2004, the Republic of Tajikistan accepted the obligations of Article VIII, Sections 2, 3, and 4 of the Articles of Agreement.
- FSAP Participation:
  - Tajikistan participated in the Financial Sector Assessment Program during 2007-08, and the authorities have agreed to publish the FSSA report.
- Article IV Consultation:
  - The 2006 Article IV consultation was completed on March 28, 2007.
- Resident Representative:
  - Mr. Moers, Resident Representative of the Fund, started his assignment in Dushanbe in June 2006.
- Technical Assistance (selected items since 2002):
  - Fiscal Affairs: July 2004 Revenue Administration Reform; December 2004 Poverty and Social Impact Analysis; June 2005 Public Financial Management; August 2005 Tax Policy and Administration; August 2006 Fiscal ROSC; May 2007 Public Financial Management (Budget Classification).
  - Monetary and Financial Systems: July 2002 Multi-topic; May 2006 Strengthening the Monetary Policy Framework and Liquidity Management.
  - Statistics: October/November 2002 Money and Banking Statistics; January 2003 Balance of Payments Statistics; February 2003 Money and Banking Statistics; May 2003 Balance of Payments Statistics; April 2004 Data ROSC; October 2004 General Data Dissemination System (GDDS); June 2006 Report on Monetary and Financial Statistics.
  - Finance: May 2003 Safeguards Assessment Follow-up.
  - Legal: March 2003 Tax Legislation; January 2004 Tax Legislation; May 2004 Tax Legislation.

*Source: Tajik authorities; and Fund staff estimates.*

### 10.      With regard to infrastructure development, the Bank is concentrating on upgrading

### _cr08382 - 10.      With regard to infrastructure development, the Bank is concentrating on upgrading

### Infrastructure development — Bank-led projects and objectives
- Dushanbe Water Supply Project: addressing the most critical deficiencies of water supply services for Dushanbe municipality and the local water company, with emphasis on basic utility services for the population and especially the poor.
- Pamir Private Power Project: supporting improvements in reliability of electricity supply in the Gorno Badakshan region with participation of the private sector.
- Energy Loss Reduction Project: helping to reduce commercial losses and improve the financial viability of the power and gas sectors.
- Municipal Infrastructure Project: providing support to improve urban infrastructure in big towns.
- Bank role in policy dialogue: leading policy dialogue (under PDPG) on increasing efficiency/viability to ensure long-term growth prospects of the energy sector.

### Agriculture — Bank priorities and projects
- Focus areas: land reform, rehabilitation of irrigation and drainage infrastructure, introduction of market rules in procurement and marketing, resolution of cotton farm debts.
- Land Registration and Cadastre Project: assisting government with land reform, issuance of land certificates, and establishment of a modern cadastre system.
- Ferghana Valley Project: aims to increase water supply and efficiency of irrigation systems in the Ferghana Valley, and develop institutional capacity in land and water resources management.
- Cotton Sector Recovery Project: assisting cotton farmers’ livelihoods and conditions for sustainable growth in selected, low-income areas via cotton debt resolution, improved policy environment, and increased cotton output and profitability.
- Cross-cutting policy work: productivity and cotton sector issues addressed through the PDPG.

### Environment and disaster management
- National Environment Action Plan: developed with the Bank’s help.
- 2008 Country Environmental Analysis: highlighted the country’s most severe environmental issues and proposed measures to strengthen the legal and institutional framework.
- Emergency Flood Assistance and Lake Sarez Risk Mitigation Projects: helped mitigate consequences of natural disasters and build national capacity to address mudslides, rock-falls, avalanches, and seasonal floods.

### Bank leadership and analytical inputs to IMF program
- Bank leads structural reform dialogue through the three-year PDPG program.
- Institution building and TA supporting PDPG reforms sourced from PSRP, Education Modernization Project, Fast Track Initiative Grant, and Community and Basic Health Project.
- Private sector development support: Investment Climate Assessment and agriculture sector review completed; Tajikistan participated in three Doing Business surveys and in three Business Environment and Enterprise Performance surveys since the mid-2000s.
- Bank supported preparation of government’s private sector development strategy; implementation supported by an IDF grant.

### Privatization, regulatory reforms, and sector restructuring
- Bank and Fund both support enterprise and farm privatization, acceleration of privatization of medium and large enterprises, corporate governance improvements for public enterprises, land reform, and cotton subsector restructuring.
- Technical support: Bank provided technical support to the State Committee for Investments and State Property Management for a long-term strategic privatization plan and to promote private sector investment.
- Regulatory reforms include:
  - (a) changing role of anti-monopoly agency and further strengthening its capacity;
  - (b) improving the inspection regime for businesses;
  - (c) streamlining licensing.
- Aviation sector reforms under PDPG: separating policymaking, technical regulation, and accident investigation; restructuring Tajik Air Company into separate entities for airport, airline, and air traffic control to increase competitiveness.

### Bank–Fund coordination and shared responsibilities
- Continued active dialogue between Bank and IMF to ensure coordination on privatization and structural reforms critical to macroeconomic stabilization and growth.
- Four main joint areas (supported by Bank’s PDPG, grants, investment operations, and Fund’s SMP):
  - Public sector management:
    - Bank provided technical support for a comprehensive public administration reform strategy.
    - Reforms include redefining role of the state, reorganizing key ministries, strengthening internal control and audit, and supporting pay reform.
    - Bank involved in civil service reform; Fund provides TA for tax and customs administration and treasury management.
  - Budget planning and execution:
    - Joint support for treasury, adoption of new law on public finances, modern budgetary procedures, and switching from norm-based costing to per capita based financing in education and health.
    - Bank to continue technical support and donor mobilization for the medium-term budget framework.
    - Bank support for public financial external and internal control reform via PDPG, IDF grants, and PSRP.
    - Forthcoming Public Financial Management Project (FY09) will support treasury reform.
  - Financial sector reforms:
    - Acceleration of financial sector restructuring and closure of weak banks; new regulatory framework for non-bank intermediaries.
    - Significant tax code changes making tax authorities’ access to bank accounts conditional on a court authorization.
    - IMF monitoring of closure and merger of banks not satisfying prudential requirements.
    - Financial Sector Assessment Program (country’s first) conducted jointly by Bank and Fund; discussed with authorities in late 2007.
    - Bank implementing a grant from the FIRST trust fund to support implementation of assessment recommendations, especially reforms at the NBT.
  - Utilities reform:
    - Fund’s former PRGF benchmarks included energy tariff rates, energy arrears, and collection rates to reduce quasi-fiscal activities and increase transparency.
    - Bank under PDPG supports tariff reform aimed at reducing the quasi-fiscal deficit and supported an audit of Barki Tajik’s accounts, completed in August 2008.
    - Bank financial assistance to repair electricity and gas transmission systems, to import energy for winter shortfalls, and to implement the Energy Emergency Action Mitigation Plan.
    - Bank-supported Energy Loss Reduction Project supports reform implementation.
    - Bank coordination with Asian Development Bank and EBRD on utilities reform and restructuring of strategic enterprises such as railways and airlines.
  - Debt sustainability analysis:
    - Joint Bank–IMF DSAs: first in early 2006; update completed in February 2007; next update to be finalized before February 2009.

### IMF leadership areas and Bank inputs
- IMF leads dialogue on fiscal matters and sets overall envelope for public expenditures; Bank’s sectoral work (health, education, infrastructure) requires close cooperation.
- IMF leads on tax reforms, budget preparation and execution, and policies to rationalize and contain public sector expenditures (including wage setting and ceilings for public investment expenditures); Bank ensures its advice is consistent with IMF recommendations.
- IMF leads in formulation and execution of fiscal and monetary policies, tax policy, external trade policies, and economic and financial statistics.
- Bank-financed Strengthening National Statistics System Project: improving capacity to collect, analyze, and disseminate key information for evidence-based decision-making.

### IDA funding to Tajikistan
- IDA funding form:
  - FY06: 100 percent grant.
  - FY07: allocation with a 45 percent grant component.
  - FY08: 100 percent grant.
- Eligibility for grants determined based on the annual debt sustainability analyses.
- Indicative IDA 15 envelope for FY08–10: about SDR61.0 million.
  - Scheduled for FY09: about SDR 19.5 million.
  - Planned for FY10: about SDR 20.5 million.
  - Targeted for FY11: around SDR 21.0 million.
- FY09 IDA allocation will be 100 percent grant.

### Annex III — Relations with the Asian Development Bank (As of November 21, 2008)
- ADB membership: Tajikistan became a member in 1998; participated in Consultative Group Meeting since 1998.
- ADB Interim Operational Strategy identified three priority areas: (a) agriculture; (b) infrastructure rehabilitation (especially energy and transport sectors); 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.
- As of end 2007, Tajikistan has received $372.50 million in loans, $33.00 million in technical assistance, and $39.50 million in grants.
- Notable ADB loans and grants (selected highlights):
  - Postconflict Infrastructure Program Loan: $20 million, provided in 1998 and fully disbursed by end-2000.
  - Transport sector: Road Rehabilitation Project loan ($20 million in 2000); Dushanbe—Kyrgyz Border Road Rehabilitation Project loans ($15 million in 2003 and $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 reconstructing key infrastructure after 2006 flooding.
  - Power sector: Power Rehabilitation Project loan ($34 million in 2000); Regional Power Transmission Modernization Project loan ($20 million in 2002) (later cancelled due to inability to agree on Power Trade Agreement); Tajikistan-Afghanistan Power Transmission Interconnection Project loan $21.5 million approved in 2006 (220 kilovolt double circuit transmission line linking Vakhsh River hydropower stations to Sherkan Bandar and onward to Afghanistan).
  - 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 in 2004 for Community Participation and Public Information Campaign for Health Improvement, and $2 million in 2004 for School Improvement Project.
  - Agriculture sector: Agriculture Rehabilitation Project loan ($35 million in 2002); TA for Farm Debt Resolution and Policy Reforms completed; Roadmap for Implementation of the Farm Debt Resolution Strategy approved on 5 March 2007; Irrigation Rehabilitation Project loan $22.7 million in 2004; Sustainable Cotton Sub-Sector Project loan/grant and Rural Development Project loan/grant approved in 2006 and 2007, respectively; Grant assistance for Rural Poverty Reduction Project $2.9 million in 2001 (JFPR).
  - 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: 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.

*Source: IMF staff report content (text provided).*

### 11.      In end-2000, ADB started supporting the government in developing PRSP through

### _cr08382 - 11.      In end-2000, ADB started supporting the government in developing PRSP through

### ADB support for PRSP and country strategy
- In end-2000, ADB started supporting the government in developing PRSP through a participatory approach under a TA grant in close cooperation with the IMF, WB, and UNDP.
- Following finalization of the PRSP in June 2002:
  - ADB concluded the Poverty Partnership Agreement (PPA) with the government in December 2002.
  - ADB prepared a five-year Country Strategy and Program (CSP) for 2004–08 for Tajikistan, endorsed by the ADB Board in October 2003.
- Main objectives of the CSP:
  - (a) to strengthen rural development through institution building that will support policy implementation and the private sector;
  - (b) to rehabilitate power and rural infrastructure;
  - (c) to strengthen regional cooperation through improved customs services and transport links, both within the country and neighboring ones.

### Country operational planning and partnerships
- ADB updates three-year rolling programs for Tajikistan annually in consultation with the government, based on ADF resources availability and coordination with other donors, including IMF.
- The Country Operations Business Plan for Tajikistan covering 2008–2010 was approved in October 2007.
- A joint country support strategy for Tajikistan for 2009-2012 was being developed with ADB, European Commission, Swiss Development Corporation, UK Department for International Development, United Nations, and World Bank; planned for finalization by the end of 2008 and expected to be managed through a result-based framework.
- ADB priorities include monitoring progress toward MDG achievement and governance reforms via investment projects and technical assistance.
- Technical assistance and grants:
  - 2006: ADB approved a technical assistance project titled Strengthening Results Management in Support of Poverty Reduction in Tajikistan cofinanced by the Swedish Government.
  - 2007: A $2.0 million grant package co-financed by the Government of the United Kingdom’s Department for International Development was approved to help boost the Tajikistan government's capacity in promoting private sector development.

### 2008–2010 lending and grant program
- The proposed 2008–2010 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;
  - (c) processing status of the projects in the pipeline.

### Annex IV — Statistical issues: overview
- General assessment:
  - Data provision has some shortcomings, but is broadly adequate for surveillance.
  - After a serious misreporting episode, Tajikistan data reporting to the Fund has begun to improve.
- Participation and dissemination:
  - Tajikistan began participation in the Fund’s General Data Dissemination System (GDDS) in November 2004.
  - The country page in the International Financial Statistics (IFS) has been published since February 2003.
  - Authorities expressed interest in subscribing to the Fund’s Special Data Dissemination Standard (SDDS), appointed a national SDDS coordinator, and requested technical assistance.
  - Preconditions before SDDS subscription include compiling and disseminating: quarterly national accounts, template on international reserves and foreign currency liquidity, and international investment position; and regular dissemination of general government operations including special funds (extra-budgetary accounts) at least annually, quarterly central government debt, and quarterly external debt data, with improved timeliness for several data categories.

### Data ROSC mission findings and limitations
- The data ROSC mission in April 2004:
  - Found that government finance statistics (GFS) and monetary statistics broadly follow sound methodologies.
  - Noted source data are well-developed across statistical areas and that processes for assessment and validation of source data are in place.
  - Identified that further efforts to improve quality of economic statistics are limited by tight budgetary constraints.

### National accounts and price statistics
- ROSC mission identified significant deficiencies in:
  - Statistical techniques for national accounts, notably procedures to estimate the informal economy.
  - Price statistics techniques for imputation, replacement, quality adjustment, and introduction of new products in price indices.
- Technical assistance and outcomes:
  - The State Committee on Statistics (SCS) benefited from World Bank STATCAP technical assistance and an arrangement with a consortium of five European Statistical Offices.
  - This assistance led to improved GDP estimates for 2000 to 2006.
  - A May 2008 mission by an IMF regional advisor worked with authorities on problems with the volume estimates.
  - An August 2008 mission by the advisor pointed to aggregation and other problems with their CPI.

### Government finance statistics (GFS)
- GFS are compiled on a cash basis as recommended in A Manual on Government Finance Statistics, 1986.
- No plans at present to migrate to the Government Finance Statistics Manual 2001.
- Cash GFS operations data were reported in the new framework for inclusion in the 2005 GFS Yearbook.
- 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)
- A MFS mission visited in early 2006:
  - Assisted authorities to establish procedures for compiling analytical accounts for commercial banks using data from the revised chart of accounts.
  - Assisted in implementing the Standardized Report Forms (SRFs) for MFS developed by STA.
  - Authorities resumed regular reporting of monthly monetary data to STA for IFS publication shortly after the mission.
- Further work needed to implement SRFs and other recommendations.
- Due to a misreporting episode, authorities stopped reporting monetary data to STA for IFS publication in December 2007; reporting resumed in September 2008.
  - Reported data on monetary authorities were published in the November 2008 issue of IFS.
  - Data on deposit money banks slated for publication in the January 2009 issue of IFS.

### Balance of payments statistics
- Needs identified:
  - Improve consistency in applying the residency concept between balance of payments and national accounts.
  - Improve scope of foreign trade data to cover the shuttle trade.

### TAJIKISTAN: Table of Common Indicators Required for Surveillance (As of December 1, 2008) — selected memo items and timing
- Exchange Rates: Oct./08; Date received 11/13/08; Frequency of Data D; Frequency of Reporting M; Frequency of Publication W.
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: 09/30/08; Date received 10/25/08; Frequency of Data W; Frequency of Reporting M; Frequency of Publication W.
- Reserve/Base Money: 09/30/08; Date received 10/25/08; Frequency of Data W; Frequency of Reporting M; Frequency of Publication W; Data Quality – Methodological soundness: O, O, LO; Data Quality – Accuracy and reliability: O LO, O, O, O, NO.
- Broad Money: 09/30/08; Date received 10/25/08; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- Central Bank Balance Sheet: 09/30/08; Date received 10/25/08; Frequency of Data W; Frequency of Reporting M; Frequency of Publication W.
- Consolidated Balance Sheet of the Banking System: 09/30/08; Date received 10/25/08; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- Interest Rates: 09/30/08; Date received 10/25/08; Frequency of Data W; Frequency of Reporting M; Frequency of Publication V.
- Consumer Price Index: 09/30/08; Date received 10/25/08; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M; Data Quality – Methodological soundness: LO, LO, LNO, O; Data Quality – Accuracy and reliability: LO, LO, LO, O, O.
- Revenue, Expenditure, Balance and Composition of Financing — General Government: 09/30/08; Date received 10/25/08; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M; Data Quality – Methodological soundness: LO, LO, O, O; Data Quality – Accuracy and reliability: O, O, O, LO, LO.
- Revenue, Expenditure, Balance and Composition of Financing — Central Government: 09/30/08; Date received 10/25/08; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- Stocks of Central Government and Central Government-Guaranteed Debt: Q3/08; Date received 10/25/08; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication V.
- External Current Account Balance: Q3/08; Date received 10/25/08; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication V; Data Quality – Methodological soundness: LNO, LNO, O, O; Data Quality – Accuracy and reliability: LO, O, O, O, O.
- Exports and Imports of Goods and Services: Q3/08; Date received 10/25/08; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication V.
- GDP/GNP: 09/30/08; Date received 10/25/08; Frequency of Data M; Frequency of Reporting M; Frequency of Publication V; Data Quality – Methodological soundness: O, LNO, LNO, LNO; Data Quality – Accuracy and reliability: LO, LO, LNO, O, O.
- Gross External Debt: Q3/08; Date received 10/25/08; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication V.

*Source: IMF staff report content as provided in the supplied document._

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08382.pdf_