Regions and Countries

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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 2006-2008: Tajikistan

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I. Current Development Trends and Issues

1. The Board endorsed the Tajikistan country strategy and program update (CSPU) for 2005–2006 on 3 September 2004.¹ Continued reforms in fiscal, monetary, and macroeconomic policies, combined with enhanced measures for economic liberalization and regional cooperation, led the economy further on the path to its transition to a market economy. Tajikistan achieved the twin objectives of sustained high growth and reduced inflation in 2004. Appendix 1, Table A1.1, indicates the country's progress toward the Millennium Development Goals (MDGs) and targets.

A. Recent Political and Social Developments

2. Over the past decade the Government has made good progress in developing an economic management framework and more effective government institutions in spite of significant disruptions of the post-Soviet transition, the civil war, regional instability, and scarce resources. Internal security and living standards have improved. Gross domestic product (GDP) grew by 10.6% in real terms in 2004. While average monthly wages increased by 36.3% over the year, the total number of officially registered unemployed people dropped by 6,000 and total employment went up by 12,000. But economic opportunities continue to be limited, encouraging outward migration. Inequality has gone up and is higher in Tajikistan than in other low-income countries in Central Asia. Corruption continues to persist, thereby constraining the Government to fulfill its obligations in many public sectors, such as education and health, whose indicators have deteriorated since the collapse of the Soviet Union. Poverty and lack of proper facilities keep school attendance low. Lack of funds has led to a severe shortfall of teachers as many moved to better paid jobs. The Government is spending more in the social sector, especially health and education, by reallocating spending on non-core social services and savings in interest payments. The civil service reform, which began in 2003, is raising public sector wages and reducing staff size in phases. Since January 2005, key ministries are being restructured and streamlined, and their staff positions reduced. Public sector wages (average of $25 per month, including perquisites) will be increased substantially and linked to reforms in health care, education, social insurance, and public management to encourage better performance and to attract new people.

3. The security and political situation is stable and the country is more open to regional cooperation, as evident from recent announcements of Russian and Iranian investments in the power sector and discussions with Afghanistan, Iran, Pakistan, and Russia to diversify the market for export of energy. The President consolidated power through peaceful parliamentary elections in February 2005. He has stressed the need for the newly elected deputies to attract foreign investment and boost local small and medium-sized businesses. Top Government officials were reshuffled in early 2005.

B. Economic Assessment and Outlook

4. With robust growth in 2004, annual average growth was sustained at 10% over 2000– 2004. The strong macroeconomic performance is attributed to more activity in trade, transport, construction, banking, and other economic services. However, continued softening of cotton prices and hardening of oil prices is likely to slow down growth. The full economic impact of planned foreign direct investments in the energy sector cannot yet be estimated. In the near term, obsolete and weakening infrastructure will hamper growth. On balance, real GDP growth is projected to slow down to 8% in 2005 and further to about 6% by 2007.

5. A stronger monetary policy and a stable nominal exchange rate helped reduce inflationary pressure. Year-on-year average inflation was almost on target at 7.1%, compared with 16.4% last year. Keeping inflation in check is a major challenge given the vulnerability of the economy to external effects and possible impact of government wage increases. With the repeal of the 30% duty on remittances, $433 million or 21% of GDP flowed through banking channels in 2004.² Remittances have risen rapidly, supporting domestic demand. Individual bank deposits increased by 43.3% over the year, reflecting a growing confidence in the banking sector. The foreign-owned First Microfinance Bank began operations in 2004, and other foreign banks have begun exploring investment options in Tajikistan.

6. Rationalized tax and budget policies helped to keep a positive budget balance (excluding debt-financed public investment program [PIP]) at 0.3% of GDP in 2004, compared with 0.9% in 2003. Tajikistan's 2005 national budget envisages a rise in total budgetary expenditure net of repayments (excluding externally financed PIP) from 17.6% of GDP in 2004 to 18.2% in 2005. Social sector spending will rise from 7.1% to 9.4% of GDP. The fiscal deficit in 2005 is targeted at 0.5% of GDP, excluding externally financed PIP. The Government has initiated several reform measures from 1 January 2005. A new tax and customs code compliant with World Trade Organization requirements has been passed. The tax-GDP ratio is projected to increase because of new taxes on business and a unified agricultural tax, the rise in import tax and in income tax collection from high-income individuals and companies, as well as more tax compliance from the informal sector. Other improvements include a new electricity tariff policy to increase tariffs to cost recovery levels through quarterly adjustment. A compensation mechanism will mitigate the impact of energy price increases for the bottom 20% of the population, and Tajik Aluminum Smelter (TADAZ) and Barki Tajik will be required to pay taxes in full. Another key Government initiative to sustain short-term macro performance is structural reform of public administration supported by the World Bank and the International Monetary Fund (IMF).

7. Ties with Russia as a strategic partner were strengthened through agreements under which Tajikistan’s debt of nearly $242 million was written down in a debt-for-asset swap. The remaining nearly $50 million will be invested on behalf of Russia in the construction of the Sangtuda-I hydropower station. Along with debt-restructuring negotiations with other bilateral creditors, this reduced external public debt from $1.03 billion or 66.3% of GDP in 2003 to $822 million or 39.7% of GDP in 2004. Public debt service obligations are projected to fall to about 7.6% of exports by 2007, down from 10.4% in 2004. External public debt is likely to stabilize at about 35% of GDP in the medium term, providing much-needed fiscal space for investments in public goods. The ceiling on disbursements from the externally financed PIP has been increased to 4% from 3%. Prudent borrowing policy must continue to sustain the positive effects of successful debt negotiations over time.

8. Due to adverse movement in the terms of trade, the trade deficit is estimated to increase to $332 million in 2004 from $204 million in 2003. The considerable inflow of worker remittances helped keep the current account deficit in check. Foreign exchange reserves improved from $135.4 million in 2003 to $189.3 million in 2004, equivalent to 2 months of imports.

C. Implications for the Country Strategy and Program

9. The priorities of the country strategy and program (CSP) for 2004–2008 remain relevant. The projects included under the country assistance program continue to emphasize rural development and regional cooperation. A sharper focus on governance and social sectors is needed to improve governance and support the Government’s stronger emphasis on social sectors, for which the CSP suggests a feasible approach.

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