Countries and Regions

	Table of Contents
p. 2 of 20 BACK | NEXT I. Country Performance Assessment A. Economic Performance Assessment B. Poverty Assessment C. Assessment of Socio-Environmental Performance D. Governance: Sound Development Management E. Implementation Assessment II. Country Operational Strategy III. Sector Strategies IV. Regional Cooperation V. Donor Activities and Aid Coordination VI. Cofinancing and Catalyzing External Resources VII. ADB’s Operational Program VIII. Economic and Sector Work Program IX. Local Cost Financing

Country Assistance Plans - Tajikistan : I. Country Performance Assessment

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A. Economic Performance Assessment

1. After independence in 1991 Tajikistan suffered a five-year civil war. The dissolution of the Soviet Union and the ensuing civil war caused an economic crisis, and real gross domestic product (GDP) contracted by 60 percent during 1991-1996. The Government suffered a fiscal crisis as budget support from Moscow, which accounted for 40 percent of the country's GDP, ceased with the break-up of the Soviet Union. Moreover, revenue collection fell and military expenditure increased.

2. The drastic economic setback occurred in association with the structural change of GDP. The industrial sector's share in GDP declined from 35 percent in 1992 to 18 percent in 1998 while the service sector grew from 27 percent to 40-50 percent, reflecting the overall decrease in production and the newly emerging market-oriented environment. The share of the agricultural sector has varied, influenced by weather conditions, but has maintained a level of 20-27 percent. Cotton, aluminum, and hydropower are the three key resources of Tajikistan's economy. Cotton comprises 40 percent of total agricultural output while aluminum dominates the industrial sector. Cotton and aluminum are the major sources of foreign exchange earnings, together accounting for around 50-60 percent of the country's exports. Abundant water resources are used for cotton production and power generation, the latter largely supporting the aluminum industry.

3. A peace agreement, signed in 1997, provided the basis for national reconciliation. Despite occasional disruptions, the peace process made significant progress. Tajikistan's President was re-elected in November 1999, following a referendum in September 1999, which approved amendments to the country's Constitution. The three-year peace process was concluded by completing parliamentary elections for a new bicameral legislature in February and March 2000. Following completion of the peace process, the United Nations (UN) Mission of Observers withdrew from Tajikistan in May 2000 upon the expiration of its mandate. Upon agreement with the Government, the UN opened a small office, the UN Tajikistan Office of Peace Building (UNTOP), similar to those established in other post-conflict countries, after the withdrawal to further support the country's stability.

4. In the course of the peace process, Tajikistan's economic growth turned positive (at 1.7 percent) in 1997 for the first time since independence and reached 5.3 percent in 1998. Inflation fell from 2,000 percent in 1995 to 2.7 percent in 1998. During 1999, although the budget deficit and debt burden were reduced, economic growth slowed to 3.7 percent and inflation accelerated to 24 percent because of the Russian financial crisis and weather damage to agriculture crops. The fall in world market prices of Tajikistan's two main export commodities, cotton and aluminum, also reduced incomes. Due to weak economic recovery, budget constraints continued to limit the Government's ability to finance and provide social services and to undertake capital investment and rehabilitation of infrastructure destroyed or damaged during the civil war.

5. With the peace process completed and the political situation stabilized, the Government is concentrating more on economic recovery. Significant macroeconomic growth and stabilization have been achieved in 2000. Despite this year's drought, the most severe in 74 years, and high oil prices, Tajikistan's GDP is estimated to grow by 5 percent each year in 2000 and 2001. The drought hit the spring grain production hardest, but a favorable fruits and cotton harvest upheld overall agricultural production growth. Industrial production grew 10 percent during January-September 2000. The fiscal deficit is estimated to decrease to 1.2 percent of GDP in 2000, compared to 3.1 percent in 1999. Annual inflation is expected to be halved in 2001 from its current level of 24 percent. With the projected GDP growth and the expected rising tax ratios, total general government expenditure is estimated to grow on average by 4-5 percent annually in real terms, creating room for a real increase in social spending in 2000 and 2001.

6. Pressure to maintain high defense expenditures has eased due to the peace process. According to official data, its share in the total state expenses declined from 11.3 percent in 1997 to 8.8 percent in 1998, and its share in GDP decreased from 1.7 percent to 1.3 percent respectively¹. However, challenges still remain, and resources are needed to improve security and social order, necessary to foster economic development and promote investor confidence. With the conclusion of the peace process, the Government has moved to restore the safety of civilians and the control at the Afghan border to prevent illegal entry.

7. Some progress on structural reform has been achieved. Price liberalization has been virtually completed. A liberal trade and exchange system has been established. Land reform has been undertaken as farmers are now permitted to have transferable land use rights. The Government announced that the privatization of small enterprises was completed in December 1999 and restructuring of medium and large firms is ongoing. The state cotton monopoly was liquidated in January 1999, and the privatization of cotton ginneries completed in 2000.The Government announced its intention to restructure the two largest state-owned firms (the electricity monopoly Barki Tajik and the aluminum smelter TADAZ). Although financial sector reform is in progress, agricultural finance has been especially constrained in recent years, and there is a crucial need to develop sustainable rural financial institutions.

8. The development of external trade is critical for the economic recovery of Tajikistan as its internal market and variety of domestic products are limited. The Government has become active in strengthening trade and economic relations with foreign countries since 1999. Although Tajikistan has succeeded in diversifying its trading partners since independence, former Soviet republics still represent 60 percent of Tajikistan's imports and more than 30 percent of its exports. The recent improvement of the political and economic environment with Uzbekistan and other CARs, and the economic recovery of former Soviet republics, including Russia and Belarus, are expected to boost Tajikistan's economic recovery through trade and investment. In 1999, after Tajikistan joined a customs union with Russia, Belarus, Kazakhstan, and the Kyrgyz Republic, it raised its average tariff rate from 5 to 8 percent. Notwithstanding this tariff increase, Tajikistan still has a relatively liberal trade system compared to the other customs union's members. The Government also initiated the application process for membership in the World Trade Organization in 1999. The external position of Tajikistan remains weak. The deficit in the current account balance is expected to rise from 3.4 percent of GDP in 1999 to 5.7 percent in 2000, and to 6.5 percent in 2001. Gross international reserves were equal to 1.7 months of imports in 1999 and are estimated at the 1.9 months in 2000. The import coverage of official international reserves is programmed to increase to 2.7 months by end-2001.

9. The Government will continue to implement the three-year (1999-2001) IMF Poverty Reduction and Growth Facility (PRGF), which calls for tight fiscal and monetary policies and continued structural reforms. Because of the external shocks, the PRGF targets were missed in the second and third quarters of 1999. However, strong corrective measures were taken in the fourth quarter, and the program's targets were adjusted. As a result, the PRGF program was back on track by year's end. Based on favorable macroeconomic developments during 2000, the IMF approved the third-year program under the PRGF in an amount equivalent to SDR 40 million ($51 million) in October 2000. The first quarterly disbursement of SDR 6 million ($8 million) under the third year of the program became available in November. On 30 October 2000, the day after IMF approval of the PRGF loan, the new national currency, the "somoni", was announced by the Government. One somoni is equal to 1,000 Tajik ruble. There is no limit for exchanging the old currency with the somoni, and both currencies will be circulated until 1 April 2001. The Government expects that the introduction of the somoni will help strengthen market confidence and national identity.

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