|Project Rationale and Linkage to Country/Regional Strategy
Tajikistan recovered from the economic impacts of the global financial crisis, supported by (i) the government of Tajikistan (the government) anti-crisis program; (ii) a rebound in remittances (18% year-on-year in 2010) resulting principally from the economic upturn in the Russian Federation; and (iii) higher global prices for aluminum and cotton, which represented 83% of total exports in 2010. However, while the real gross domestic product (GDP) growth rate for 2010 was 6.5% (an increase from 3.4% in 2009), it is still below the 7.4% average growth experienced in 2005-2008. Recovery continues to be affected by (i) tighter credit to the private sector due to growing stress in the banking system, and (ii) the recent hike in imported food prices. These factors will likely continue restraining real GDP growth in 2011 and 2012, forecast at 5.5% and 6.0% respectively. Recovery also remains dependent on sustained economic recovery in the Russian Federation based on Tajikistan's reliance on trade and remittance inflows.
Increases in salaries and pensions and higher international commodity prices are expected to keep inflation levels high (10% estimated for 2011, close to the 9.8% figure of 2010). Unemployment also remains high (11.5% in 2009), and close to one million Tajiks, or about 40% of the working force, work abroad. Remittances from migrant workers are the main source of income of many families, averaging 41.1% of GDP in the period 2005-09. Tajikistan remains the poorest country in the Commonwealth of Independent States (CIS), with the lowest per capita GDP ($1,900 in 2009) and the lowest per capita social expenditures. The weak social protection system offers limited social assistance benefits with little impact on poverty. Fiscal spending on social assistance (0.5% of GDP) is the lowest in the Central Asia Region. Although declining steadily since 1999, poverty remains high, especially in isolated rural and mountainous areas, where about 70% of the people are poor. In 2007, 53% of the country's population was living below the poverty line of $41 per month, down from 64% in 2003 and 83% in 1999.
Increasing tax revenues from 2005-2008 enabled the government to increase social expenditures. Subsequently, the global financial crisis resulted in a stall in GDP growth and a decrease in tax revenues. To help maintain critical social expenditures, ADB provided a $40 million grant to Tajikistan in 2009. Other development partners provided grants for the same purpose in 2009 and 2010.
Low fiscal space for social policies. The government has been facing fiscal pressures based on the need to increase social spending and to finance much-needed public investment. This translates into significant state budget deficits, as revenues have not kept pace with increased expenditures and revenue recovery will take time.
The country's borrowing capacity is low, which limits the capacity to finance social policies. While economic recovery is underway in Tajikistan, fiscal support is needed to (i) continue to increase critical social expenditures from their current low levels, (ii) face the impact of the demographic challenges on the pension system, (iii) prevent the risk that a full-scale exit of the fiscal stimulus may jeopardize its positive impact, and (iv) avoid a higher fiscal deficit that could further weaken debt sustainability.
Fiscal pressures. The overall fiscal balance in 2009, excluding the public investment program, was maintained at a close to expected deficit of 0.6% of GDP, despite lower than expected growth. For 2010, the government estimates a 1.0% deficit, which required additional cuts in nonessential expenditures until the end of the year, due to less than expected revenues. In 2011, the government is planning a deficit not higher than 1.0% of GDP. Public debt (including public guaranteed debt) remains high at 36.4%. Net international reserves are estimated at $447.0 million, providing import cover for only about 1.6 months. The current account deficit in 2010 is estimated at 3.5% of GDP, a decrease from 4.9% in 2009, but is expected to increase again in 2011 and 2012 to 4.5% and 5.5% of GDP, respectively.
For many years, the government has not fully prioritized the sectors being covered by the Program. The government is now strongly committed to making improvements in these areas. The support and inducement of a Program grant will support the government in implementing long-needed reforms and will provide resources needed to ensure that critical social expenditures are included in the 2011 and 2012 budgets.
The Program is consistent with Tajikistan's National Development Strategy for 2006-2015, which has the improvement of public administration as one of its three main goals. It is also consistent with Tajikistan's Poverty Reduction Strategy, 2010-2012, which aims to broaden access to basic social services. Governance and gender, two themes under the Program, are two of the thematic areas of the Tajikistan Country Partnership Strategy 2010-2014. The Program contains features (e.g., operationalizing internal audit audits and reviews of pilot social service delivery projects) that will improve governance by strengthening accountability. The Program also includes gender mainstreaming features, including an analysis of the gender impact of the pilot social service delivery.