## _cr0983 - 1. The Government of the Republic of Tajikistan in April 2007 formally

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### Overview and PRS 2 scope
- PRS 2 approved in April 2007 for 2007–2009, building on the first PRS for 2002–05 and operationalizing the National Development Strategy (NDS) for 2006–2015.
- Lessons from PRS 1 incorporated: strengthen monitoring and evaluation; improve prioritizing and sequencing of interventions; enhance coordination of development partner support.
- Emphasis on prudent macroeconomic management and increasing budget shares for social sectors while improving spending effectiveness.
- PRS 2 organized around three blocks aligned with NDS strategic directions:
  - Functional block: public administration reform, macroeconomics, investment climate, private sector, regional cooperation, global economic integration.
  - Production block: food security, agriculture, infrastructure, energy, industry.
  - Social block: health, education, water and sanitation, housing, social welfare.
- Cross-cutting issues: institutional reforms, demographic change, environmental management, gender equality.

### Poverty analysis (key findings and data constraints)
- Data constraints: most recent household survey referenced is the 2003 living standards measurement survey; staffs welcome a living standards survey to be completed in 2007.
- Reported poverty trends from surveys:
  - Poverty declined from 83 percent in 1999 to 64 percent in 2003.
  - Extreme poverty fell from 36 percent in 1999 to 18 percent in 2003.
  - Regional variation: 12 percent drop in Dushanbe; 26 percent drop in the Region of Republican Subordination.
- Recent factors likely to have reduced poverty further since 2003: strong economic growth, high migration, remittance inflows.
- Areas the 2007 survey should inform:
  - food security,
  - functioning of labor markets,
  - impact of migration on household incomes,
  - access of income groups to health and education services,
  - potential impact of external price shocks.
- Policy gaps and suggested measures:
  - PRS 2 notes need to address rising inequality but lacks detailed measures.
  - Suggested measures: remove barriers to credit, land, and productive resources; strengthen agricultural research and extension; improve access to public services for vulnerable groups; enhance labor market flexibility; focus public spending on services targeting the poor; maximize development benefits of labor migration and remittances; address child poverty, child labor, and social risks linked to labor migration.

### Macroeconomic policy framework and PRS 2 financing
- Recent macroeconomic performance:
  - Real GDP growth averaged about 9 percent during 2002–06.
  - Real GDP growth expected to remain robust in 2007, at about 7.5 percent.
  - Fiscal surplus (excluding externally-financed PIP) reached 0.4 percent of GDP in 2006.
  - External public debt reduced to about 30 percent of GDP in 2006.
  - Inflation accelerated to 12.5 percent in 2006; PRS 2 target inflation rate is 6–7 percent.
  - Inflation expected to remain in double digits in 2007 partly due to world grain and energy price increases.
- Risks and projections:
  - External debt-to-GDP ratio expected to reach 55 percent by end-2009 given planned rapid accumulation of external debt.
  - Staffs warn this debt accumulation could destabilize macroeconomic gains.
- Fiscal and debt management recommendations:
  - Urgent need for a well-defined debt management strategy with cautious limits, concessional borrowing only, and project vetting mechanisms.
  - Any cotton debt resolution strategy must account for the external debt situation.
  - PRS 2 targets an overall budget deficit, excluding the PIP, of about 1 percent of GDP.
  - Staffs judge authorities’ revenue projections overoptimistic and stress expenditures should be based on realistic revenue projections with limited recourse to central bank financing.
  - Enhance efficiency and transparency of state-owned enterprise operations, particularly Tajik Aluminum Company, to generate fiscal resources.
  - Control quasi-fiscal deficit related to the energy sector projected at 9 percent of GDP in 2006 by: raising electricity tariffs, reducing technical losses of Barki Tajik, improving tariff collection.
- Monetary and central bank recommendations:
  - Ensure operational independence of the National Bank of Tajikistan (NBT): end directed subsidized credit, enforce legal reserve requirements and prudential ratios.
  - Strengthen NBT balance sheet via securitization of government obligations on NBT balance sheet and recapitalization.
- Budget framework and financing transparency:
  - Introduce a medium-term budget framework (MTBF) consistent with macroeconomic framework and fiscal objectives.
  - MTBF should detail allocations to programs targeting the poor and to promote growth, disaggregated into capital and recurrent expenditures.
  - Improve financing framework by breaking down projected annual financing for PIP and other expenditures by financing source (domestic revenue, domestic borrowing, external borrowing, external partner assistance, foreign direct investment, other).
  - Prioritize expenditures and include contingency measures if concessional financing falls short.

### Equity, governance, and poverty reduction (findings and recommendations)
- Institutional environment and governance:
  - PRS 2 candidly addresses governance problems: corruption at all levels; weak public procurement and financial management; heavy state involvement in economic activity; complex and untransparent business regulation; weak property rights protection.
  - Capacity and political constraints require prioritization and sequencing of reforms.
  - Initial focus recommended: proper and transparent planning and execution of the annual budget and empowering one agency with strong political support to manage public administration reform.
  - Improve management of state enterprises: promote private sector participation in management, develop expenditure management and audit systems, establish transparent corporate governance structures.
  - PRS 2 is silent on improving transparency in public procurement and public financial management; staffs urge a comprehensive public financial management strategy.
- Economic growth and private sector development:
  - PRS 2 actions to improve investment climate noted (eliminate unnecessary licenses/inspections, reduce mandatory standards, ease certification, strengthen property rights, improve infrastructure).
  - Tajikistan ranked 153 of 178 countries in Doing Business 2008.
  - Staffs caution against government selection of specific industries for public investment or special support.
  - Greater focus requested on financial sector; staffs look forward to discussing World Bank-IMF Financial Sector Assessment Program findings.
- Rural development and cotton debt:
  - Support measures to secure land-use rights, promote equal access to land for men and women, enhance agricultural research/training, strengthen financial service providers.
  - Urge development of a cotton debt resolution strategy in consultation with relevant parties to facilitate private resolution and ensure no public bailout of private interests.
  - Address underlying causes of cotton debt recurrence: land use rights, investor competition, inappropriate government interventions.
- Energy sector:
  - Harnessing hydropower potential can increase exports and encourage energy-intensive investment.
  - Reform management of Barki Tajik and ensure transparency and accountability.
  - Carefully evaluate technical and financial viability of proposed hydropower projects to ensure expected returns.
- Human development:
  - Education:
    - Universal primary education achievable if public education expenditures increase from 4 percent of GDP in 2005 to an average of 4.2 percent of GDP during 2008–10 and effectiveness improves.
    - Support planned per capita financing, teacher-load (stavka) reform, and MTBF for education.
    - Need to ensure access for girls and children from poor and vulnerable groups; improve quality via pre-service/in-service training, curriculum revision, remuneration reform.
  - Health:
    - Support focus on primary health services.
    - Encourage increase in public allocation for health from the 2007 figure of 1.6 percent.
    - Emphasize outcomes focus, institutional reforms, implementation of health finance strategy, and investment in health physical infrastructure.
    - Recommend a comprehensive sector reform strategy to clarify and facilitate reforms.
  - Social protection:
    - Improving targeting, integration, and effectiveness of social benefits is critical.
    - Require assessment of allocation mechanisms, better integration of existing programs (including those mitigating energy price increases), and careful benefits-package design.
    - Staffs and development partners ready to assist in designing and implementing a more effective social protection system.

### Participation, monitoring and evaluation, and implementation risks
- Participatory preparation:
  - Sector working groups with government, civil society, private sector, academia, and development partners drafted the NDS and presented drafts through public forums and regional meetings.
  - Nonstate actors had a stronger role in the NDS drafting process and a somewhat lesser role in drafting of the PRS 2 compared with PRS 1.
- Monitoring and statistics capacity:
  - PRS 2 includes a comprehensive results framework, but monitoring arrangements remain weak: more indicators than likely trackable over the next three years; many indicators poorly specified and lacking baselines; data collection instruments often not specified.
  - Staffs welcome plans to strengthen the State Statistical Committee and statistics offices of line ministries and local governments.
  - Staffs stand prepared to assist in developing a more useful monitoring framework and building government capacity for monitoring and evaluation.
- Implementation risks:
  - Major risks: deterioration of macroeconomic management; rapid accumulation of external debt that could destabilize gains; poor governance; weak government capacity to implement and coordinate poverty-reduction programs; external shocks (deteriorating terms of trade, instability in neighboring countries, slowdown in the Russian economy).
- Recommended mitigants:
  - Adopt a debt management strategy.
  - Develop and implement public financial management reforms, implement the new law on public procurement, and establish an independent external audit function.
  - Continue public administration reform to build capacity.
  - Focus on export diversification and strengthen regional cooperation on trade and transportation.

### Conclusions and policy priorities
- PRS 2 provides a reasonable assessment of development challenges and required measures to improve outcomes.
- Reforms need prioritization to ensure fast progress towards the MDGs and PRS 2 targets.
- Strengthen monitoring and evaluation to enable stakeholders to monitor progress and improve policy design and implementation.
- Provide a more realistic financing framework that identifies likely sources of finance to enhance PRS 2 credibility.
- Strategy to underpin macroeconomic stability and promote shared growth should include:
  - Introducing a well-defined debt management strategy.
  - Maintaining a clear focus on inflation and measures to restore the operational independence of the NBT.
  - Continuing prudent fiscal policies to safeguard debt sustainability and stable macroeconomic environment.
- Improving governance is critical:
  - Improve the investment climate through regulatory reform.
  - Strengthen the financial sector.
  - Enhance infrastructural services to attract private sector resources.
- Continued focus on human capital development:
  - Better education and healthcare services.
  - Improved targeting of social benefits to protect the poorest and most vulnerable.

### Staffs’ recommended areas to address in the next progress report
- Strengthen the poverty analysis, including collecting updated information on the dynamics of poverty and inequality.
- Specify actions to ensure that the benefits of growth are widely shared.
- Provide a more detailed discussion of measures to improve governance, including public procurement and financial management.
- Describe measures being taken to strengthen the planning and budgeting process to ensure that budget allocations reflect PRS 2 priorities.
- Further strengthen discussion of structural reforms, especially measures to improve the business climate and to strengthen property rights.
- Highlight progress with enhancing education and health services and improving mechanisms to protect vulnerable groups.
- Include a detailed debt sustainability analysis.

### Question for Directors
- Do Directors agree with the staffs conclusions for:
  - (a) areas in which further analysis or adjustments to the PRS 2 are needed,
  - (b) measures for improving its implementation,
  - (c) implementation risks and measures to address them, especially the risks of a debt-based development approach?

*Source: _cr0983 - 1. The Government of the Republic of Tajikistan in April 2007 formally / 22. The process of preparing the NDS and the PRS 2 has been highly*

### 1. The Government of the Republic of Tajikistan in April 2007 formally

### _cr0983 - 1. The Government of the Republic of Tajikistan in April 2007 formally

### Overview and PRS 2 scope
- PRS 2 approved in April 2007 for 2007–2009, building on the first PRS for 2002–05 and operationalizing the National Development Strategy (NDS) for 2006–2015.
- Lessons from PRS 1 incorporated: strengthen monitoring and evaluation; improve prioritizing and sequencing of interventions; enhance coordination of development partner support.
- Emphasis retained on prudent macroeconomic management and increasing budget shares for social sectors while improving spending effectiveness.
- PRS 2 organized around three blocks aligned with NDS strategic directions:
  - Functional block: public administration reform, macroeconomics, investment climate, private sector, regional cooperation, global economic integration.
  - Production block: food security, agriculture, infrastructure, energy, industry.
  - Social block: health, education, water and sanitation, housing, social welfare.
- Cross-cutting issues recognized: institutional reforms, demographic change, environmental management, gender equality.

### Poverty analysis (key findings and data constraints)
- Data weaknesses limit completeness of poverty analysis; the 2003 living standards measurement survey is the most recent survey referenced.
- Reported poverty trends from surveys:
  - Poverty declined from 83 percent in 1999 to 64 percent in 2003.
  - Extreme poverty fell from 36 percent in 1999 to 18 percent in 2003.
  - Regional variation: 12 percent drop in Dushanbe; 26 percent drop in the Region of Republican Subordination.
- Recent factors likely to have reduced poverty further since 2003: strong economic growth, high migration, remittance inflows.
- Staffs welcome a living standards survey to be completed in 2007 to inform analysis of:
  - food security,
  - functioning of labor markets,
  - impact of migration on household incomes,
  - access of income groups to health and education services,
  - potential impact of external price shocks.
- Policy gaps noted:
  - PRS 2 notes need to address rising inequality but lacks detailed measures.
  - Suggested measures include: remove barriers to credit, land, and productive resources; strengthen agricultural research and extension; improve access to public services for vulnerable groups; enhance labor market flexibility; focus public spending on services targeting the poor; maximize development benefits of labor migration and remittances; address child poverty, child labor, and social risks linked to labor migration.

### Macroeconomic policy framework and PRS 2 financing
- Recent macroeconomic performance:
  - Real GDP growth averaged about 9 percent during 2002–06.
  - Real GDP growth expected to remain robust in 2007, at about 7.5 percent.
  - Fiscal surplus (excluding externally-financed PIP) reached 0.4 percent of GDP in 2006.
  - External public debt reduced to about 30 percent of GDP in 2006.
  - Inflation accelerated to 12.5 percent in 2006; PRS 2 target inflation rate is 6–7 percent.
  - Inflation expected to remain in double digits in 2007 partly due to world grain and energy price increases.
- Risks and projections:
  - External debt-to-GDP ratio expected to reach 55 percent by end-2009 given planned rapid accumulation of external debt.
  - Staffs warn this debt accumulation could destabilize macroeconomic gains.
- Fiscal and debt management recommendations:
  - Urgent need for a well-defined debt management strategy with cautious limits, concessional borrowing only, and project vetting mechanisms.
  - Any cotton debt resolution strategy must account for the external debt situation.
  - PRS 2 targets an overall budget deficit, excluding the PIP, of about 1 percent of GDP.
  - Staffs judge authorities’ revenue projections overoptimistic and stress expenditures should be based on realistic revenue projections with limited recourse to central bank financing.
  - Enhance efficiency and transparency of state-owned enterprise operations, particularly Tajik Aluminum Company, to generate fiscal resources.
  - Control quasi-fiscal deficit related to the energy sector projected at 9 percent of GDP in 2006 by: raising electricity tariffs, reducing technical losses of Barki Tajik, improving tariff collection.
- Monetary and central bank recommendations:
  - Ensure operational independence of the National Bank of Tajikistan (NBT): end directed subsidized credit, enforce legal reserve requirements and prudential ratios.
  - Strengthen NBT balance sheet via securitization of government obligations on NBT balance sheet and recapitalization.
- Budget framework and financing transparency:
  - Support for introducing a medium-term budget framework (MTBF) consistent with macroeconomic framework and fiscal objectives.
  - MTBF should detail allocations to programs targeting the poor and to promote growth, disaggregated into capital and recurrent expenditures.
  - Improve financing framework by breaking down projected annual financing for PIP and other expenditures by financing source (domestic revenue, domestic borrowing, external borrowing, external partner assistance, foreign direct investment, other).
  - Prioritize expenditures and include contingency measures if concessional financing falls short.

### Equity, governance, and poverty reduction (findings and recommendations)
- Institutional environment and governance
  - PRS 2 candidly addresses governance problems: corruption at all levels; weak public procurement and financial management; heavy state involvement in economic activity; complex and untransparent business regulation; weak property rights protection.
  - Capacity and political constraints require prioritization and sequencing of reforms.
  - Staffs recommend initial focus on proper and transparent planning and execution of the annual budget and empowering one agency with strong political support to manage public administration reform.
  - Improve management of state enterprises: promote private sector participation in management, develop expenditure management and audit systems, establish transparent corporate governance structures.
  - PRS 2 is silent on improving transparency in public procurement and public financial management; staffs urge a comprehensive public financial management strategy.
- Economic growth and private sector development
  - PRS 2 actions to improve investment climate noted (eliminate unnecessary licenses/inspections, reduce mandatory standards, ease certification, strengthen property rights, improve infrastructure).
  - Tajikistan ranked 153 of 178 countries in Doing Business 2008.
  - Staffs caution against government selection of specific industries for public investment or special support.
  - Greater focus requested on financial sector; staffs look forward to discussing World Bank-IMF Financial Sector Assessment Program findings.
- Rural development and cotton debt
  - Support for measures to secure land-use rights, promote equal access to land for men and women, enhance agricultural research/training, strengthen financial service providers.
  - Urge development of a cotton debt resolution strategy in consultation with relevant parties to facilitate private resolution and ensure no public bailout of private interests.
  - Address underlying causes of cotton debt recurrence: land use rights, investor competition, inappropriate government interventions.
- Energy sector
  - Harnessing hydropower potential can increase exports and encourage energy-intensive investment.
  - Reform management of Barki Tajik and ensure transparency and accountability.
  - Carefully evaluate technical and financial viability of proposed hydropower projects to ensure expected returns.
- Human development
  - Education:
    - Universal primary education achievable if public education expenditures increase from 4 percent of GDP in 2005 to an average of 4.2 percent of GDP during 2008–10 and effectiveness improves.
    - Support planned per capita financing, teacher-load (stavka) reform, and MTBF for education.
    - Need to ensure access for girls and children from poor and vulnerable groups; improve quality via pre-service/in-service training, curriculum revision, remuneration reform.
  - Health:
    - Support focus on primary health services.
    - Encourage increase in public allocation for health from the 2007 figure of 1.6 percent.
    - Emphasize outcomes focus, institutional reforms, implementation of health finance strategy, and investment in health physical infrastructure.
    - Recommend a comprehensive sector reform strategy to clarify and facilitate reforms.
  - Social protection:
    - Improving targeting, integration, and effectiveness of social benefits is critical.
    - Require assessment of allocation mechanisms, better integration of existing programs (including those mitigating energy price increases), and careful benefits-package design.
    - Staffs and development partners ready to assist in designing and implementing a more effective social protection system.

### Participation, monitoring and evaluation, and implementation risks
- PRS 2 strengthened monitoring and evaluation framework compared with PRS 1, but more complete poverty analysis awaits better data (living standards survey to be completed in 2007).
- Implementation risks highlighted include:
  - Inflationary pressures and potential loss of macro stability if debt accumulation continues unchecked.
  - Overoptimistic revenue projections undermining fiscal stance.
  - Governance and capacity constraints delaying needed reforms.
- Recommended mitigants:
  - Strengthen MTBF and budgeting processes, improve program costing realism, prioritize expenditure, build contingency plans.
  - Enhance transparency and accountability across public sector operations and state-owned enterprises.
  - Accelerate structural reforms to reduce high costs of doing business (corruption, weak judiciary, excessive regulation), deepen agricultural reforms, liberalize aviation, and establish independent audit functions.

*Source: _cr0983 - 1. The Government of the Republic of Tajikistan in April 2007 formally*

### 22. The process of preparing the NDS and the PRS 2 has been highly

### _cr0983 - 22. The process of preparing the NDS and the PRS 2 has been highly

### Participatory preparation
- Sector working groups comprising government officials, civil society organizations, the private sector, academia, and development partners drafted the NDS.
- These sector working groups presented their drafts to a broad range of stakeholders through public forums and regional meetings.
- Nonstate actors had a stronger role in the NDS drafting process and a somewhat lesser role in drafting of the PRS 2 compared with their role in formulating the first PRS.

### Monitoring, results framework, and statistics capacity
- The PRS 2 includes a comprehensive results framework to measure progress toward key outcomes and objective.
- Monitoring arrangements remain weak:
  - The monitoring framework contains more indicators than the government is likely to be able to track during the next three years.
  - Many indicators are poorly specified and lack baseline values.
  - Data collection instruments for many indicators are not specified.
- Staffs welcome plans for strengthening:
  - The State Statistical Committee.
  - Statistics offices of line ministries, local government entities and others for collecting and analyzing data.
- Staffs, working with other development partners, stand prepared to assist the government in developing a more useful framework for monitoring implementation and outcomes of the PRS 2 and to build capacity within the government for monitoring and evaluation.

### Implementation risks
- Major risks identified:
  - Deterioration of macroeconomic management poses a major risk to successful implementation of the PRS 2.
  - The government’s rapid accumulation of external debt has the potential to destabilize gains from macroeconomic stabilization of recent years, especially if the debt-financed projects generate lower returns than anticipated.
  - Poor governance that prevents effective use of resources and discourages private sector investment.
  - Weak capacity of the government to implement and coordinate a comprehensive program to reduce poverty.
  - External shocks, including deteriorating terms of trade, political or economic instability in neighboring countries, or a slowdown in the Russian economy, could adversely affect growth and household incomes in Tajikistan.
- Staffs’ recommended mitigations:
  - Adopt a debt management strategy to mitigate risks from rapid external debt accumulation.
  - Develop and implement a program of reforms in the public financial management area, particularly implementing the new law on public procurement and establishing an independent external audit function.
  - Continue efforts to create capacity, including through implementation of the public administration reform strategy.
  - Continue to focus on diversifying exports and on strengthening regional cooperation, including on issues of trade and transportation.

### Conclusions and policy priorities
- The PRS 2 provides a reasonable assessment of Tajikistan’s development challenges and the measures required to improve development outcomes.
- Reforms need to be prioritized to ensure fast progress towards the MDGs and the PRS 2 targets.
- A stronger monitoring and evaluation system is essential to enable stakeholders to monitor progress toward targets and to improve policy design and implementation.
- A more realistic financing framework that identifies likely sources of finance will help ensure PRS 2 credibility.
- Attaining PRS 2 objectives requires a strategy to underpin macroeconomic stability and promote shared growth, including:
  - Introducing a well-defined debt management strategy.
  - Maintaining a clear focus on inflation accompanied with measures to restore the operational independence of the NBT.
  - Continuing prudent fiscal policies to safeguard debt sustainability and a stable macroeconomic environment.
- Improving governance is critical to ensure resources are used as intended:
  - Improve the investment climate through regulatory reform.
  - Strengthen the financial sector.
  - Enhance infrastructural services to help attract private sector resources for growth and development.
- Continued focus on human capital development:
  - Better education and healthcare services to help people reach their full potential.
  - Improved targeting of social benefits to protect the poorest and most vulnerable.

### Staffs’ recommended areas to address in the next progress report
- Strengthen the poverty analysis, including collecting updated information on the dynamics of poverty and inequality.
- Specify actions to ensure that the benefits of growth are widely shared.
- Provide a more detailed discussion of measures to improve governance, including public procurement and financial management.
- Describe measures being taken to strengthen the planning and budgeting process to ensure that budget allocations reflect priorities of the PRS 2.
- Further strengthen discussion of structural reforms, especially measures being taken to improve the business climate and to strengthen property rights.
- Highlight progress with enhancing education and health services and improving mechanisms to protect vulnerable groups.
- Include a detailed debt sustainability analysis.

### Question for Directors
- Do Directors agree with the staffs conclusions for:
  - (a) areas in which further analysis or adjustments to the PRS 2 are needed,
  - (b) measures for improving its implementation,
  - (c) implementation risks and measures to address them, especially the risks of a debt-based development approach?

*Source: _cr0983 - 22. The process of preparing the NDS and the PRS 2 has been highly*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr0983.pdf_