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Country Strategy and Program Update 2005-2006: Tajikistan

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I. Current Development Trends and Issues

1. Tajikistan's Country Strategy and Program (CSP) for 2004-2008¹ was discussed and endorsed by the Board of Directors of the Asian Development Bank (ADB) on 22 October 2003. The basic political and socioeconomic parameters of the country have remained unchanged over the past months, though positive developments have been observed, particularly in the areas of economic growth and improvement of macroeconomic stability. Appendix 1, Table A1.1 provides a matrix showing the country's progress toward the Millennium Development Goals and targets.

A. Recent Political and Social Developments

2. The political situation in Tajikistan remains stable despite the forthcoming second parliamentary elections to be held by February 2005. Improved social stability, supported by rapid economic growth over the past 6 years, indicates Tajikistan's steady recovery from the civil war. The current situation calls, however, for continued and enhanced efforts by the Government to sustain growth, beyond the current economic recovery, to support long-term development and poverty reduction.

3. Preliminary findings of the ongoing living standard survey sponsored by the World Bank point to a declining share of population living below the poverty line, from the 83% reported in 1999 down to about 70%-though this is still the highest among the Central Asian republics. Tajikistan remains one of the poorest countries in the world, ranking 116th among the 177 countries in the Human Development Report 2004 of the United Nations Development Programme. The widespread poverty and lack of employment opportunities remain the prime social concerns. Overseas job opportunities, particularly in the Russian Federation, continue to be an important means of livelihood for many households in Tajikistan. A recent study conducted by the International Organization for Migration² estimated that about 1 million people, or 15% of the population, are living in households whose main source of income is derived from a family member working abroad. Women play an important role in maintaining family survival among day-to-day hardships, despite their vulnerability to redundancy and unemployment. Women constitute 56.4% of the registered unemployed.

B. Economic Assessment and Outlook

4. In 2003, Tajikistan posted another year of strong economic growth at 10.2%, following the 9.1% growth achieved in 2002 (Appendix 1, Table A1.2). The economy continued to expand at a brisk pace of 8.6% as of February 2004. While cotton and aluminum, the two traditional pillars of the economy, remain important driving forces, growth has become more broad-based. Economic diversification is led in part by the rapid expansion of the services sector, at 14.7% for 2003, which has been followed by further growth of 12.6% for the first 2 months in 2004 over the same period of 2003.

5. In line with the macroeconomic framework supported by the Poverty Reduction and Growth Facility of the International Monetary Fund, the Government has adopted a prudent fiscal policy that aims at a generally balanced budget. The 2003 overall budget balance (excluding the foreign assisted public investment program) was in surplus at 0.9% of gross domestic product (GDP), compared with a moderate deficit of 0.1% of GDP in 2002. Inflation at 16.4% was the major macroeconomic concern in 2003, and was mainly the result of (i) sharp increases in the price of imported grains and wheat flour; (ii) tariff increases for electricity and gas introduced under energy sector reforms; and (iii) rapid growth of reserve money due to purchases of foreign exchange by the National Bank of Tajikistan to maintain a stable exchange rate of the national currency, the somoni, at about $1/TJS3.09 for most of the year.

6. To strengthen macroeconomic stability, the Government has strengthened the function of the Monetary Policy Committee to guide the formulation and implementation of monetary policy. The focus of monetary policy has been reoriented to reducing inflation and improving liquidity management. While the full effects of these measures are yet to be developed, inflation has significantly fallen in 2004, to 0.7% in January and 0.9% in February, from the 3.7% and 5.3% for the same months in 2003. Prices of basic commodities have been relatively stable in 2004, and price increases are seen mainly in the services sector. The Government targets to bring inflation down to 7% in 2004.

7. On the fiscal side, preliminary data for the first quarter of 2004 indicate the continuation of the Government's prudent policy. The budget balance stayed in surplus in the first quarter of 2004, due to a shortfall in government spending (about 23% lower than planned) and good revenue collection (14% above target). In response to the recommendations of the consultative group meeting (CGM) held in May 2003, the Government has increased substantially the allocation for the social sectors in its budget for 2004. Through structural reforms, measures have also been undertaken to address the quasi-budget deficit-the arrears built up by the government-owned utilities. Two major tariff increases introduced in 2003 brought revenue in the gas sector to approximately the cost-recovery level. Arrears in the electric power sector remain large, amounting to about 20% of GDP as estimated by the World Bank.

8. Despite the favorable conditions for cotton and aluminum on the international market, the trade deficit widened in 2003 due to the increase in imports associated with strong economic growth. The current account deficit narrowed as the result of a sharp increase in remittances from migrant workers, from $65 million in 2002 to $202 million in 2003. External debt declined to about 65% of GDP at the end of 2003 from 82% of GDP a year earlier, mainly due to the successful conclusion of the debt-restructuring negotiations with bilateral creditors, including the Russian Federation, the largest bilateral creditor.³ To ensure long-term external sustainability, the Government has adopted a policy that the annual disbursement for public investment program, which is financed by external borrowing, will not exceed 3% of GDP. The Government will not contract any new debt that is not offered on concessional terms.

9. To achieve the long-term goals of development and poverty reduction set in its Poverty Reduction Strategy Paper (PRSP), the Government is targeting average economic growth of 6% over the medium term. This requires continued policy reform and economic restructuring to foster sustained growth through private sector development and economic diversification. This level of growth requires greater efforts by the Government to integrate the Tajik economy with the world market through international cooperation, particularly through regional cooperation with its neighboring countries. Given the relatively weak economic base and isolation from major markets, the short-term prospects for foreign direct investment appear to be limited. Tajikistan will need continued external assistance at a substantial level to support policy reforms and poverty reduction. To help the country achieve its goals as set out in the PRSP, the international funding community, including ADB, made a collective pledge of $900 million of financial support for Tajikistan at the CGM in May 2003. Of this, $700 million is to be provided in the form of grant funding. Tajikistan's ability to benefit from the financial support pledged by the international funding community hinges, to a large extent, on the Government's capacity to ensure efficient and effective implementation of the externally financed projects through improved portfolio management.

C. Implications for Country Strategy and Program

10. There has been no political or socioeconomic event in Tajikistan that calls for changes in the CSP approved in October 2003. To help the Government strengthen its capacity for more efficient use of development assistance, a new technical assistance (TA) for improving aid coordination and portfolio management has been included in the TA program for 2004 as a priority. It should be noted that this TA, as a follow-up to the ongoing TA for Aid Coordination and External Debt Management,⁴ will form part of the coherent interventions to strengthen the Government's overall capacity in managing the process of its public investment program from project identification, planning, and budgeting, through monitoring and implementation of the external assisted projects in Tajikistan.

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