Regions and Countries

	Table of Contents
p. 1 of 4 BACK | NEXT I. Current Development Trends and Issues II. Implementation of the Country Strategy and Program III. Portfolio Management Issues IV. Country Performance and Assistance Levels

Country Strategy and Program Update 2003-2005: Tajikistan

---

I. Current Development Trends and Issues

A. Recent Political and Social Developments

1. After the signing of the peace agreement in 1997, the new Government has coped well with the aftermath of the 5-year civil war. A 3-year national reconciliation process was successfully concluded in 2000 with parliamentary elections, despite occasional disruptions. Subsequently, political reconciliation and social stability was aided by the ensuing strong economic growth. The Government is currently being reorganized for improving governance and the efficiency of public administration.

2. Changes in Afghanistan will have a positive long-term impact on socioeconomic development in Tajikistan by opening up new trade routes and markets. The overall security situation has significantly improved¹ after the defeat of the Taliban. However, despite the strengthened border control, increased drug smuggling into Tajikistan from Afghanistan is reported. Challenges remain, and continuous efforts to improve security, safety, and governance are crucial to guarantee social stability and foster economic development.

3. In June 2002, a national poverty reduction strategy (NPRS) was approved by the Parliament. The NPRS provides overall policy directions and goals along with measures and actions to be taken by the Government in the next 3 years. The objectives of the strategy are to increase real income, achieve a fair distribution of benefits of growth, and in particular, ensure a rise in living standards of the poorest groups in the population. The successful implementation of the NPRS is critical as the poverty incidence is as high as 82.6%.² The Government has adopted the Millennium Development Goals as fundamental objectives of poverty reduction and human development (Appendix 1, Table A1.1). Jobs are gradually increasing in the emerging private sector but job growth remains weak due to the narrow base of economic growth, and around one third of the labor force remains unemployed. As of 2001, an estimated 500,000-700,000 Tajiks live and work abroad, either permanently or on a seasonal basis. Although the Government has allocated more than 40% of the budget for social sector expenditures, the quality of service delivery of these public services remains insufficient. Therefore, economic growth is vital for further making increasing funds available for social services.

B. Economic Assessment and Outlook

4. Following the slump in 1999 resulting from the Russian financial crisis, Tajikistan's gross domestic product (GDP) registered strong growth rates in 2000 and 2001, 8.3% and 10.3% respectively, and this trend continued during the first half of 2002 with 8.3% growth (Appendix A1.2). Economic growth was driven by increased production of cotton and aluminum, and supported by a recovery in agriculture and textile production as well as construction. However, despite the fact that cumulative GDP increased by more than 32% during 1997-2001, the total level of output is still only 43% of that of 1991. While end of year inflation reached 60% in 2000 due to high oil prices and loose monetary policy, corrective monetary policy brought inflation down to 12.7% by the end of 2001.

5. The civil war delayed Tajikistan's economic reform. Beginning in 2000, the Government accelerated the privatization process, tax administration reform, and development of the treasury system and the auditing system. However, the privatization of medium- and large-scale enterprises has encountered difficulties, mainly because of the overvaluation of government assets. Moreover, the Government declared that the privatization of 25% of large state-owned enterprises are subject to a case-by-case scrutiny and approval by the Government. In the agriculture sector, about 200 state-owned farms must still be privatized but this process is severely hampered by the high indebtedness of these farms. Bank restructuring is continuing, but banks' financial position and operational efficiency remain weak. Nonbank financial institutions must be developed to expand the outreach of financial intermediation, including in the rural areas, where more than 70% of the population live. In recognition of the importance of trade for economic growth, Tajikistan applied for World Trade Organization membership in 2001.

6. Unless external debt is rescheduled on favorable terms, the heavy external debt burden will remain one of the most binding constraints for pro-poor economic growth. Public and publicly guaranteed debt stood at 87% of GDP at the end of 2001. Servicing the external debt has exerted serious pressure on the budget and the net present value of external debt surpasses 450% of fiscal revenue, well above the heavily indebted poor countries³ eligibility ratio of 250%. Approximately 40% of public external debt is owed to multilateral institutions, while the remaining 60% is mostly owed to the Russian Federation ($300 million) and Uzbekistan ($130 million). Debt restructuring negotiations with Uzbekistan has recently been successfully completed, while negotiation with Russia is ongoing. If there is no development in negotiations with Russia by September, the Government considers approaching the Paris Club toward the end of 2002. The European Union, the United States, and Turkey also provided commercial loans, which now account for 13% of total external debt. Most of the commercial debt is in the cotton and aluminum sectors. Without additional debt rescheduling, the level of due debt service may increase to over 66% of the budget in 2002.

7. The Poverty Reduction and Growth Facility (PRGF) of the International Monetary Fund (IMF) went off track in 2001 because the country failed to meet some of its structural reform targets. Since October 2001, IMF has introduced a staff monitored program due to repeated misreporting of external debt levels.⁴ IMF plans to present the new PRGF to the board in October 2002; it includes a public investment plan (PIP) ceiling of approximately 3% of GDP per year on a disbursement basis during 2002-2005 (most public investments are financed by external resources). The ceiling will be reassessed and can be adjusted in light of revenue performance and the absorptive capacity of the Government. The main concerns are the availability of counterpart funds and the increasing costs of operation and maintenance to be borne by the budget. Therefore, revenue collection needs to be improved further.

C. Implications for Country Strategy and Program

8. The interim operational strategy (IOS) adopted in 1998 needs to be replaced by a full country strategy and program (CSP) as the political and social situation in Tajikistan has stabilized and the NPRS newly identified the priority areas for the country's development. Accordingly, projects planned after 2004 in this CSP update (CSPU) may be reprioritized in relation to the new CSP, due for Board consideration in 2003.

9. Given the current high level of external debt and severe budget constraints, ADB needs to adopt a realistic and effective lending program with an appropriate lending level that meets the absorptive capacity of the Government, closely coordinating with other funders. The processing and implementation of all loans in the 2002 and 2003 program will be carefully monitored while implementing this CSPU in order to keep ADB disbursement at an appropriate level. Close policy and operational support is essential for the success of ADB operations.

10. In view of the recent improvement in security and safety, ADB will propose the establishment of a resident mission in late 2002 or early 2003 to enhance collaboration with the Government and civil society, strengthen support for ADB operations, and improve coordination with external funding agencies. At the same time, as long as the United Nations (UN) security phase remains higher than level 3, all ADB missions must make necessary arrangements with the UN to be fully covered by the UN security umbrella.⁵

_____________________

Back Country Strategy and Program Update 2003-2005: Tajikistan	Next II. Implementation of the Country Strategy and Program