Tajikistan
Recent Economic Developments
Author:
International Monetary Fund
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Publication Date:
08 Jul 1996
eISBN:
9781451836936
Language:
English
Keywords:
ISCR; CR; currency unit; U.S. dollar; debt service; broad money; fourth quarter; hard currency; national bank; trade balance; Tajik ruble
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This paper reviews economic developments in the Republic of Tajikistan during 1992–95. Aggregate production, dominated by the cotton and aluminum sectors, continued its decline in 1994, falling by an estimated 21 percent to less than half its 1991 level. GDP declined a further 18 percent in the first quarter of 1995 over the same period a year earlier. With production sharply lower across all sectors of the economy, recorded unemployment reached almost 8 percent of the labor force at end-1994, although less than 2 percent were officially registered as unemployed.

Abstract

This paper reviews economic developments in the Republic of Tajikistan during 1992–95. Aggregate production, dominated by the cotton and aluminum sectors, continued its decline in 1994, falling by an estimated 21 percent to less than half its 1991 level. GDP declined a further 18 percent in the first quarter of 1995 over the same period a year earlier. With production sharply lower across all sectors of the economy, recorded unemployment reached almost 8 percent of the labor force at end-1994, although less than 2 percent were officially registered as unemployed.

Tajikistan: Basic Data

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Sources: Tajik authorities and IMF staff estimates.

Preliminary estimates.

In billions of Russian rubles in 1994; in billions of Tajik rubles thereafter. For the period before the currency introduction in 1995, Russian rubles were converted at a rate of Rub 90 to 1 Tajik ruble.

Refer to wages earned. In 1994 and the first three quarters of 1995, wages paid were well below wages earned.

In Russian rubles in 1994; in Tajik rubles thereafter.

Due to the transition from Russian to Tajik rubles, calculations of changes in cash outside banks, and thus broad money, are not meaningful.

Data for 1995 refer to the period of May 10—the date of introducion of the national currency—to December 31, 1995.

I. Overview

1. Country profile and developments before 1994

Tajikistan is a mountainous, land-locked country in Central Asia. With an area of 143 thousand square kilometers, it is similar in size and geography to Nepal and about three times the size of Switzerland. Tajikistan is bordered by Uzbekistan, the Kyrgyz Republic, China and Afghanistan. High mountain ranges, including the Pamirs (part of the Himalayas), make communication between regions difficult, especially in the winter; major traffic routes between regions traverse neighboring countries. While only 7 percent of the land is arable, the country is well endowed with water resources. About four-fifths of agricultural land is irrigated. The abundance of water has contributed to Tajikistan’s specialization in the production of cotton. Fruits and grains are also produced, and animal husbandry is also important. Tajikistan has substantial hydroelectric potential. Aluminum smelting—relying on inexpensive and abundant hydroelectricity—constitutes the bulk of industrial output, followed by textiles and food processing. Mineral resources include gold, silver and uranium.

Tajikistan’s population was estimated at 5.7 million in 1994. The country’s average annual population growth of 2.85 percent between 1970 and 1994 was one of the highest among the states of the former U.S.S.R. As a result, 45 percent of Tajikistan’s population is below 16 years old, 1/ while only 31 percent of the population is of working age. Two-thirds of the population are ethnic Tajiks, one-fourth Uzbeks and the remainder Russians, Kyrgyz and Tatars. Approximately 70 percent of the population lives in rural areas, with roughly 45 percent of the labor force engaged in agriculture.

Following independence in September 1991, Tajikistan suffered from serious political upheaval and natural disasters, as well as external shocks originating from the disintegration of the Soviet Union. Political turmoil and civil strife escalated into civil war in 1992. By early 1993, the consequences were devastating: about 50,000 people had been killed; approximately 15 percent of the population had either been displaced within the country or had sought refuge in northern Afghanistan; the bulk of the Russian-speaking population, which comprised a significant part of the skilled labor force, had emigrated; 36,000 homes had been destroyed and almost 20 percent of schools were damaged beyond repair. Extensive floods in 1992 and 1993 exacerbated the damage to the infrastructure.

Strained by the civil war and repeated changes of political leadership, the Government lacked a coherent policy to deal with the mounting economic problems. As a result, the beginnings of economic reform were seriously delayed in Tajikistan. Without economic reform, and confronted with the civil war and natural disasters, Tajikistan’s economy deteriorated rapidly, even in comparison to the declines taking place elsewhere in the former Soviet Union. Per capita GDP dropped from 39 percent of the average for states of the former U.S.S.R. in 1990 to 14 percent in 1993. 1/ In dollar terms, per capita GDP was estimated at only about US$120 in 1993. 2/

2. Developments in 1994 and 1995

In September 1994 a cease fire was arranged. Later that year a Constitution was adopted by referendum and a president elected. Parliamentary elections were held in February 1995. The political environment continued to improve in 1995 as the cease fire was extended, most refugees were resettled, and the Government consolidated its control over most of the country. It is estimated that by mid-1995 virtually all internally displaced people, and two-thirds of those who fled to Afghanistan, had returned home. However, few of those who had fled to other countries of the former U.S.S.R. had returned. In addition, about half of the destroyed homes had been repaired.

The primary exception to the improved security situation was along the border with Afghanistan where, reflecting the lack of a permanent political settlement with the armed opposition, tension remains despite the deployment of CIS (mainly Russian) peacekeeping forces. Signs of a renewed deterioration in the security situation emerged in early 1996, including the temporary lapse in the cease fire, which expired on February 26 before being extended to May 26, 1996.

a. Development prior to the introduction of the national currency

Aggregate production, dominated by the cotton and aluminum sectors, continued its decline in 1994, falling by an estimated 21 percent to less than half its 1991 level (Chart 1). GDP declined a further 18 percent in the first quarter of 1995 over the same period a year earlier. With production sharply lower across all sectors of the economy, recorded unemployment reached almost 8 percent of the labor force at end-1994, although less than 2 percent were officially registered as unemployed and eligible to receive unemployment benefits.

Chart 1
Chart 1

TAJIKISTAN: Main Macroeconomic Indicators, 1994-95

Citation: IMF Staff Country Reports 1996, 055; 10.5089/9781451836936.002.A001

Sources: Tajik authorities; and IMF staff estimates.

Economic problems had been compounded by the lack of a properly functioning monetary arrangement, a problem which the Government attempted to resolve in 1994 and again in 1995. Tajikistan remained the only country still using pre-1993 Russian rubles as its legal tender in late 1993. When pre-1993 ruble notes, no longer of value elsewhere, swamped Tajikistan in December 1993, the overall price level more than doubled.

In January 1994, pre-1993 rubles were withdrawn from circulation and the 1993 Russian ruble was introduced as the sole legal tender. A dual monetary system emerged, with cash supplied by the Central Bank of Russia on strictly commercial terms while deposit money was created at will by the NBT. The volume of noncash rubles more than tripled during 1994, while cash in circulation was reduced by two-thirds at the time of the conversion to the new Russian ruble and remained well below its end-1993 level by end-1994. Bank deposits became increasingly difficult to convert into cash or goods, and the value of deposit money slid sharply against cash in informal markets, with an effective discount of up to 95 percent by late 1994. Wage arrears accumulated rapidly, as bank deposits could not be drawn on by enterprises and taxes were collected largely in inconvertible deposit money. By early May 1995, wage arrears in the economy were estimated to have reached the equivalent of about seven to ten months’ wages. In response to the cash shortage, the Government imposed cash surrender requirements and cash rationing. This only accelerated currency hoarding and financial disintermediation. The economy relied increasingly on settlements through scarce foreign exchange and payment in kind.

As a result of the sharp initial drop in cash in circulation, consumer prices fell for several months following the transition to the new Russian ruble. As cash continued to be of relatively limited availability throughout the year, CPI inflation remained restrained for the balance of 1994. The wholesale price index (WPI), however, tripled in 1994, as interenterprise transactions were conducted mainly in rapidly growing noncash. Contractual average wages kept pace with CPI inflation in 1994, but wages actually paid were only 25 percent of wages earned due to the cash shortage. The minimum wage, which affects all public wages through a system of coefficients, remained unchanged from October 1993 through April 1995.

Since the authorities did not take account of the sharply different value for cash and noncash when recording budgetary transactions, analysis of the budgetary outcome in 1994 and early 1995 is severely impaired. Based on official data, the state budget deficit on a cash basis was reduced from 25 percent of GDP in 1993 to just over 10 percent of GDP in 1994. In 1995 before the currency reform, the state budget officially ran a cash basis surplus of 9 percent of GDP. This “improvement” in the fiscal position in 1994 and early 1995 reflected two factors: an overstatement of tax revenue, which was collected largely in increasingly valueless deposit money; and the accumulation of expenditures arrears as, despite revenues officially estimated at roughly half of GDP, the Government had insufficient cash to settle wage and other expenditure obligations.

Fiscal analysis is further impaired by the existence of the extrabudgetary State Foreign Exchange Fund; the details of its operation are not known. This fund collected “taxes” through the forced surrender of export earnings at unfavorable exchange rates or even without compensation, mainly from the cotton and aluminum sectors, and financed the importation and subsidization of grains, fuel and other items.

b. The 1995 currency reform and subsequent developments

In response to the deteriorating economy the present Government, formed in December 1994, was given a mandate to accelerate reforms. An economic reform program was launched, with the introduction of a national currency at the core of the agenda. 1/ The currency reform on May 10, 1995 was initially relatively successful, in large part because of the tight credit policies in the months preceding the reform. With a sharp cut in deposit money relative to cash through the use of differentiated conversion rates, the wide gap between the value of cash and noncash money disappeared. Exchange rates for the new currency were determined in weekly interbank auctions. Temporary withdrawal restrictions were quickly lifted, except on frozen deposits linked to pre-May 1995 wage arrears.

The success of the currency reform was short lived, however, as expansionary credit policies and fiscal problems quickly undermined confidence in the new currency. Bank credit to the economy doubled between end-May and end-August, while broad money more than doubled and the exchange rate depreciated. Budget revenues dropped, as tax liabilities were cut due to administrative errors and as tax arrears emerged. Enterprises resisted paying taxes as previously useless bank deposits, which had been sharply cut as part of the currency reform, could now be used for other purposes. Together with a sharp increase in budgetary wages just prior to the currency reform, this resulted in total revenue falling short of the budgetary wage bill. Bank credit to the Government was relatively restrained initially, at the expense of large wage and benefit arrears. The deficit from May 11 through September was 3.8 percent of GDP on a cash basis, but on an accrual basis it was almost 14 percent of GDP. As a result of the expansionary policies, inflation increased sharply, from 7 to 8 percent per month in June and July to almost 80 percent in August.

In response to the accelerating inflation, the authorities intensified their efforts to redress the deteriorating macroeconomic situation. Monetary expansion slowed somewhat in the fourth quarter of 1995, although foreign exchange equivalent to one-third of end-August reserve money flowed into the economy in September in the wake of the tightened domestic credit.

At the same time, the authorities failed to increase bread prices to compensate for a sharply rising cost of grain, mainly because of the continued appreciation of the exchange rate. The budget could not afford the increasing subsidy needed by the bread complex. The NBT and the cotton complex were ordered to “lend” large portions of their foreign exchange to finance grain imports. Deprived of a substantial portion of its export proceeds, the cotton complex demanded and received new domestic credits from the NBT. Official data show a state budget deficit on a cash basis in the fourth quarter—inclusive of the wheat transactions—of nearly 16 percent of GDP, and a deficit of 26 percent of GDP on an accrual basis.

Inflation in the fourth quarter averaged roughly 50 percent per month. While real wages earned fell sharply in the period after the currency reform, the share of wages paid rose. As a result, real wages received declined only modestly between end-1994 and end 1995. Moreover, the introduction in August 1995 of cash payments to compensate for higher bread prices, equivalent to one minimum wage, protected the incomes of the most vulnerable groups. This allowance was doubled in December 1995 when bread prices were raised again, although prices remained below costs.

The decline in production appears to have slowed down after the currency introduction; for all of 1995, GDP declined by about 12 percent. Declines in industrial production in the first half of 1995 were largely reversed in the second half of the year. Registered unemployment continued to rise, however, reaching 9.3 percent of the labor force by end-1995.

c. External developments in 1994 and 1995

Balance of payments developments were mainly driven by the availability of external financing and movements in the terms of trade, as well as the steadily declining domestic production. The current account went from a deficit of 31 percent of GDP in 1993 to one of 23 percent of GDP in 1994, before moving to rough balance in 1995. In 1993 and 1994, significant external financing was available to Tajikistan in the form of loans and trade credits. Both sources of financing dried up because of arrears. Disbursements in 1995 were only about one-quarter of their dollar value in 1993, while suppliers increasingly required advance payment for imports.

Tajikistan’s terms of trade deteriorated in 1994 due to rising energy and grain import costs. This was reversed in 1995 with the relative stabilization of import prices—which had reached roughly world price levels in 1994—and sharp increases in international prices for cotton and aluminum. These commodities accounted for 90 percent of exports in 1995. Reflecting also the decline in domestic production, the volume of imports and exports fell sharply in both 1994 and 1995.

Because the country’s key export products are internationally traded, Tajikistan was able to quickly shift its exports to the rest of the world. In 1991, over 80 percent of Tajikistan’s trade was with countries of the former U.S.S.R. Already in the period 1993-95, over 55 percent of imports came from countries outside the former U.S.S.R., and over 70 percent of exports were destined for these markets. This has not correspondingly decreased the country’s dependence on barter trade, however, as much trade with western countries has been conducted on barter terms.

Tajikistan signed the zero option agreement, and thus had no external debts at independence in 1991. Tajikistan quickly accumulated external debt, which amounted to US$817 at end-1995, or almost 150 percent of GDP, including debt service arrears of US$172 million. Interest on external debt increased from US$4 million in 1993 to US$27 million in 1995. The country had accumulated foreign exchange reserves of only US$7 million by the end of 1995, or about one week of nonalumina, nongrant imports.

d. Structural reforms

Progress on structural reform was limited during 1994 and early 1995, but accelerated in mid-1995. After limited price liberalization during 1992 and 1993, price controls were severely tightened in 1994. Price liberalization resumed in early 1995, and by mid-1995 direct price controls on all consumer items except bread and flour had been eliminated.

The system of state orders, particularly for agricultural products and aluminum, was tightened in the second half of 1993 and in 1994 through stricter implementation of existing regulations and the imposition of licensing requirements. A sharp reversal in policy occurred in late 1995. State cotton procurement was reduced to 70 percent of targeted production for the 1995 crop, while all other state orders—including for the 1996 cotton crop—were eliminated.

Privatization had begun in early 1992, and a substantial part of housing had been privatized. After its interruption during the civil war, privatization resumed in 1994 but slowed again in the period leading up to the currency reform. Private land ownership remained prohibited, although private farming was allowed on a small portion of unirrigated farmland in 1994 through long-term inheritable leases. In November 1995, Parliament adopted laws which eliminated several important barriers to privatization.

The banking system remained under tight state control in 1994, serving primarily to ration and channel centralized credits which were granted at negative real interest rates. Commercial bank interest rates were liberalized in May 1995, except for rates applying to onlending of NBT credits; rates nonetheless remained highly negative in real terms. The NBT’s independence was weakened by frequent government interventions. In 1995 the Ministry of Finance discontinued its credit operations and transferred its budgetary accounts to the NBT, which became responsible for managing the foreign exchange reserves.

There was little progress on external sector reforms in 1994. Exports were subject to multiple restrictions, including tariffs, licensing requirements, state orders, quotas, and trading directed through governmental monopoly agencies. Barter remained the dominant form of trade. A progressive tightening of control over international trade culminated in December 1994 with the nationalization of cotton and aluminum trade. Under this system, the Government allocated rights over specified quantities of cotton and aluminum to ministries and state enterprises. The foreign exchange market remained undeveloped under such circumstances.

External sector reform began in the second half of 1995, with the elimination of the State Foreign Exchange Fund and the establishment of an interbank foreign exchange market. Interstate trade agreements were allowed to expire, and the Government ceased to guarantee payments. Large gas consumers, such as the aluminum factory, entered into direct contracts with foreign exporters, bypassing Tajikgas. Export quotas and licenses were eliminated. New barter deals were prohibited, except for aluminum.

3. Developments in early 1996

The authorities embarked in early 1996 on a renewed effort at stabilization and structural reform, in close cooperation with the staffs of the International Monetary Fund and the World Bank. The authorities’ program has the following broad aims: to sharply reduce inflation, through tightened fiscal and monetary policies; to regularize Tajikistan’s relations with its external creditors through a comprehensive concessional debt restructuring; to increase foreign exchange reserves to the equivalent of almost 1 1/2 months of imports; to liberalize external trade and payments; and to make progress on structural reform, with the assistance of the World Bank, by initiating land reform, accelerating progress on privatization (in particular in the cotton industry), and improving the targeting of the social safety net. The authorities have requested financial support, both from the International Monetary Fund and the World Bank, for their comprehensive stabilization and adjustment effort.

In the first quarter of 1996, the authorities successfully implemented the initial components of this program. Monetary growth has slowed consistent with the program objectives and inflation is declining. The government deficit was well below the program target, and tax collection has been strong. Since the resumption of regular weekly foreign exchange auctions in February 1996, the nominal exchange rate of the Tajik ruble has appreciated by 7 percent against the U.S. dollar by mid-April.

In support of the program, a comprehensive set of policy measures has already been implemented, including the following: the price of bread has been freed; presumptive taxes have been imposed on the cotton and aluminum state monopolies, sharply increasing government revenue; foreign exchange surrender requirements and export duties have been abolished, and all resolutions that established administrative allocation of foreign exchange revoked; and the first payment into a special debt servicing account has been made. With the successful implementation of this program, Tajikistan will have started the process of economic reform and macroeconomic stabilization. This will create the basis for a resumption of sustainable growth. However, substantial donor support will be required to assist in this transformation and to help protect the most vulnerable groups during the transition.

This paper provides a review of economic developments in Tajikistan in 1994, 1995 and early 1996. Developments in the real sector are discussed in Chapters II and III. Fiscal, monetary and external sector developments are discussed in Chapters IV through V, I and structural issues in Chapter VII. The annexes provide detailed information on the currency introduction, tax system, social safety net, foreign exchange market, exchange and trade system, and statistical issues.

II. Output and Employment in 1994-95

1. Overall developments

Tajikistan’s real growth rates began declining well before the disintegration of the U.S.S.R. The average annual growth of real output declined from 2.6 percent in 1980-85 to 1.1 percent in 1986-90. Combined with rapid population growth, this resulted in a continuous decline of per capita income throughout the 1980s. Real GDP has fallen steadily since independence. The cumulative decline in real GDP during the period 1991-94 was 54 percent, higher than the declines experienced in Russia (40 percent) and Kazakstan (33 percent), but comparable to the experience of other wartorn countries in the CIS—Azerbaijan (53 percent), Armenia (57 percent), and Georgia (63 percent) (Chart 2). Following a decline in 1994 and the first part of 1995 at an annual rate of 20 percent, the GDP appears to have slowed somewhat in the second half of 1995, limiting the 1995 annual decline to about 12 percent (Table 1 and Chart 3). However, all these figures must be viewed cautiously, as the compilation of national accounts remains at a preliminary stage due to the understaffing and underfunding of the State Statistical Service. 1/

Chart 2
Chart 2

STATES OF THE FORMER U.S.S.R Output Decline, Inflation and Dollar Wages

Citation: IMF Staff Country Reports 1996, 055; 10.5089/9781451836936.002.A001

Sources: National sources; and IMF staff calculations
Table 1.

Tajikistan: Indices of Real GDP, 1990–95

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Sources: State Statistical Agency; and IMF staff calculations.

Preliminary estimates.

Chart 3
Chart 3

TAJIKISTAN: Real GDP, 1991-95

Citation: IMF Staff Country Reports 1996, 055; 10.5089/9781451836936.002.A001

Source: State Statistical Agency.

The protracted output decline reflects a number of factors. First, import prices for natural gas and petroleum products increased by about 140 percent in 1994. Most enterprises could not absorb, or pass on, the higher energy costs to end-users, and lacked the voluntary financing necessary to postpone adjustment. As a result, external arrears accumulated rapidly, in response to which gas supply was repeatedly suspended and foreign suppliers shifted to requiring pre-payment. This brought about a sharp contraction of energy imports. Shortages and energy black-outs were frequent in 1995.

Second, imports of raw materials and spare parts dropped significantly as a result of the disruption of traditional interenterprise relations. This was primarily due to the phasing out of state orders and the liberalization of markets in the rest of the states of the former U.S.S.R. As a result, producers of raw materials began to switch to non-CIS markets.

Third, demand from other states of the former U.S.S.R. declined, due to the sharp and protracted income decline that these countries have experienced and to their increasing reliance on non-CIS countries for their imports. Fourth, grants from the central government of the former U.S.S.R., on which Tajikistan used to rely heavily, were eliminated, while investment programs begun under the U.S.S.R. have been suspended or canceled.

Fifth, the civil war and natural disasters had both permanent and temporary effects on output and productive capacity. The war devastated the infrastructure of the country and the capital of enterprises, raised production costs (mainly transportation costs and insurance premiums), forced enterprises in conflict areas to suspend or even cease production, and delayed structural transformations that could have mitigated the output decline and paved the way for recovery. The damage to the infrastructure and capital was exacerbated by extensive floods and landslides, especially in the south. Population displacement was massive, resulting in serious regional mismatches in the labor market. Skilled workers, particularly those lacking ethnic ties to Tajikistan, emigrated in large numbers. This had a particularly severe impact on public administration.

Finally, the highly distorted monetary system of 1994 and early 1995 also contributed to the decline in output. With a severe cash shortage, and the divergence of cash and noncash prices, wage arrears accumulated rapidly, price distortions deepened and enterprises increasingly resorted to hoarding of inventories.

The pace of structural transformation has accelerated since late 1994, but progress remains limited. By mid-1995 just over 7 percent of stateowned enterprises, mainly small ones, had been privatized. The restructuring of loss making enterprises has also proceeded at a slow pace. This slow progress in structural transformation may have helped contain the decline in output and the emergence of large-scale unemployment which, in the absence of an effective social safety net, may have had serious social consequences.

The slowing of the output decline in the second half of 1995 appears to have been related to the cessation of the armed conflict and the restoration of Government control over most of the country, the improved monetary system and the negotiated reduction in the cost of imported gas in the fourth quarter. The 1994 and 1995 increases in world market prices for cotton and aluminum, the main export items, also helped mitigate the decline in output by generating hard currency to finance needed inputs.

2. Sectoral developments

Tajikistan is mainly an agricultural country, with a narrow production base and a heavy reliance on imported inputs. The pattern of specialization (mainly cotton and aluminum) was intended under the Soviet system to exploit the rich endowment of the country in water resources. Tajikistan operated as a cotton growing enclave, with limited interaction between the cotton and other sectors of the economy: less than 15 percent of locally produced cotton is processed domestically, while the bulk of inputs needed for cotton growing are imported. Aluminum, which accounts for over half of industrial production, also has minimal linkages with other domestic sectors, except for electricity. Smelting is concentrated in one city, with limited spillover effects on the rest of the economy. Cotton and aluminum are significant sources of foreign exchange earnings for the country, accounting for 32 and 59 percent, respectively, of total exports in 1995.

The decline of industrial production by over half, and the collapse of construction and transport, explain most of the 54 percent decline of GDP from 1991 to 1994, while the cumulative decline in agriculture was more modest. Industry accounted for just over one-third of GDP in 1994, construction for one-tenth of GDP, and the remaining third was primarily public administration, procurement and trade. With the massive decline of output and the shift in the sectoral composition of GDP, official unemployment increased to about 7 percent of total employment in 1994 (Table 3). The share of agriculture in total employment increased from 43 percent to 55 percent between 1990 and 1994, while that of industry fell slightly, from 13 to 11 percent (Table 4).

Table 2.

Tajikistan: Nominal GDP by Sector of Origin, 1993-94

(In millions of Russian rubles)

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Sources: State Statistical Agency; and IMF staff calculations.

Calculated as value added plus an estimate for depreciation.

Table 3.

Tajikistan: labor Resources and Employment, 1985–94

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Source: Ministry of Labor.

End of year.

Men between 16 and 59; women between 16 and 54.

Defined as the ratio of economically active over working age population.

Annual averages.

Equals total employment plus total unemployment.

Includes central and local governments, state enterprises, and state farms.

Table 4.

Tajikistan: Employment by Sector of Economy, 1985-94

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Source: Ministry of Labor.

Slight differences between total employment in Tables 3 and 4 reflect data discrepancies.

Agriculture: Agricultural output remained stable in 1994, but is preliminarily estimated to have declined by 15 percent in 1995. With the cultivated area remaining virtually unchanged in recent years, the cumulative decline reflected policy and nonpolicy factors. Administrative control of agricultural prices, delays in paying agricultural workers, and administrative confiscation of cotton export proceeds all contributed to reducing the incentive to produce agricultural products. In addition, weather conditions and persistent shortages of fertilizers, pesticides, and spare parts for agricultural machinery contributed to the falling yields. 1/ The effects of pesticide shortages were particularly severe in early 1995, when one-fifth of arable land was infested with locusts. Only a third of the affected area could be treated.

After reaching a peak in 1988-89, yields have been declining steadily, with the average cumulative decline reaching 38 percent (Table 6). Particularly affected have been grain products, while vegetable production has been more resilient. The yield of raw cotton production declined by over one-third. 2/ The 1995 decline in production and average yield is possibly overestimated due to the inadequate statistical coverage of production outside state and collective farms.

Table 5.

Tajikistan: Registered Unemployment, 1992-95

(In thousands: end of month)

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Source: State Statistical Agency.
Table 6.

Tajikistan: Production and Yield of Major Agricultural Crops, 1985-95

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Source: State Statistical Agency.

Crops represent two-thirds of total 1994 agricultural production, with cotton accounting for over half the value of crop production, and vegetables the next most important item (Table 7). Raw cotton production peaked in 1988; 1995 production is estimated to have been just over half of the 1988 level. 3/ The cumulative output decline since the peak in 1988 was comparable for crops and livestock. The production of selected livestock items, however, such as pigs and poultry, plummeted as a result of changes in consumption patterns and shortages of fodder and antibiotics (Tables 7, 8, and 9). The country relies heavily on grain imports, as the annual grain consumption requirement is about three times the 1994 production of roughly 230 thousand tons. The combination of high world market prices at the end of 1995 and the precarious balance of payments situation have created temporary grain shortages. Tajikistan has received humanitarian assistance to cover part of the cost of grain imports; in 1995 this assistance covered over 20 percent of imported grain needs. Together, the declining agricultural production and the rapid population growth has reduced the country’s self reliance in foodstuff.

Table 7.

Tajikistan: Agricultural Production, 1980-94 1/

(In millions of Russian rubles at consent 1983 prices)

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Source: State Statistical Agency.

See Table 10 for cross reference.

Table 8.

Tajikistan: Animal Husbandry, 1985–94

(In thousands of heads)

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Source: State Statistical Agency.
Table 9.

Tajikistan: Production of Meat, Milk, and Eggs, 1985–94

(In thousands of tons unless otherwise specified)

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Source: State Statistical Agency.

Agriculture is still dominated by large state and collective farms, which cultivate most of the arable and all of the irrigated land. There is a wide differentiation in yields across types of farms. Collective farms produce about 60 percent more per hectare than state farms (Tables 10 and 11). This difference in productivity is partly due to the fact that collective farms have a 34 percent higher irrigation rate than on state farms. Private plots, which account for less than six percent of arable land, produce more than one quarter of agricultural production, despite lacking access to irrigation. This suggests sizeable inefficiencies in resource allocation and corresponding opportunities for rapid efficiency gains. State monopolies also continue to dominate most output markets. However, in 1994 the bulk of vegetables were raised in private plots and over one-third of agricultural production was sold at public markets (Table 12).

Table 10.

Tajikistan: Production by Type of Farm, 1985-94 1/

(In millions of Russian rubles at constant 1983 prices)

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Source: State Statistical Agency.

See Table 7 for cross reference.

Table 11.

Tajikistan: Allocation of Agricultural Land in 1994

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Source: State Statistical Agency.

State farms (Shovkhozes) in transformation into collective farms (Kolkhozes).

Table 12.

Tajikistan: Sale Outlets tax Selected Agricultural Products in 1994

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Source: State Statistical Agency.

Total production for which SSA could identify sales outlet.

In thousand pieces.

Industry: Industrial production declined at an average annual rate of 17 percent from 1992 through 1994. However, with the progress on peace, industrial production was broadly unchanged in 1995 from 1994. Production declines from 1991 to 1995 varied widely across sectors, from a modest decline in electricity output to declines of over 90 percent in the output of the fuel, wood, paper and construction materials sectors (Table 13). Movements in the share of industrial output across sectors reflected relative price movements as well as output movements. For example, the doubling in the share of heavy industry between 1991 and 1994 (Table 14) largely reflects the relative increases in the prices of energy products and aluminum.

Table 13.

Tajikistan: Industrial Output by Sector at Constant Prices, 1980-95

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Sources: State Statistical Agency; and IMF staff calculations.

Number of enterprises reporting to the SSA in 1995.

For 1995; represents employment of reporting enterprises.

1995 figures were attained by applying 1995 growth rates to the figures for 1994.

Table 14.

Tajikistan: Industrial Production by Sector at Current Prices, 1985–94

(In millions of Russian rubles)

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Source: State Statistical Agency.

Energy: Tajikistan has limited amounts of oil and natural gas deposits, but their exploitation is unprofitable at current world prices and, due to a difficult geography, would require substantial investment. As a result, virtually all oil products and all natural gas are imported. The country does, as noted above, have a large potential for hydroelectric power. Tajikistan is currently both an exporter and an importer of electricity.

The civil war, the decline in GDP and the lack of external financing have led to sharp reduction in energy consumption: consumption declines between 1991 and 1994 were 90 percent for kerosene, 88 percent for gasoline, 81 percent for crude oil, 79 percent for household fuel, 62 percent for diesel fuel, and 46 percent for natural gas (Table 17). 1/

Table 15.

Tajikistan: Industrial production by sector in 1995

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Source: State Statistical Service.
Table 16.

Tajikistan: selected Indicators of Industrial production, 1985–95

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Source: State Statistical Agency.
Table 17.

Tajikistan: Fule consumption,1990–95

(In tons, unless otherwise indicated)

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Source: State Statistical Agency.

In thousand cubic meters.

In cubic meters.

Before July 1993, gas was imported from Turkmenistan via Uzbekistan. Arrears started to accumulate in July 1993 when correspondent accounts were closed and limits set on interstate borrowing. Since July 1993, almost all gas has been imported from Uzbekistan, reportedly because Uzbekistan refused trans-shipment of Turkmen gas on the grounds that its pipeline system lacked the capacity to handle Tajikistan’s import volumes.

Since the first half of 1993, gas prices have been expressed in U.S. dollars. The price was set at US$46.6 per thousand cubic meters in the second half of 1993, increased to US$84 in 1994 and for the first nine months of 1995, and was lowered to US$64 on October 1, 1995. 1/ Payment was made partly in foreign currency and partly in kind. Payment arrears for gas imports have been converted into state debt (see Section VI).

Until July 1995, all gas was imported by Tajikgas. Since then, the aluminum company has been importing gas through its own pipeline, under a separate contract. Since October 1995, other major enterprises (including textile plants and the electric power plant) connected with exclusive pipelines have started importing gas under separate contracts. Tajikgas now sells only to public organizations (municipalities, schools, hospitals), households and enterprises which lack access to an independent pipeline.

Currently, the full cost of imported gas is not passed on to the population. Charges depend on installed household capacity, which is often under-reported. Prior to a rate increase in November 1995, Tajikgas collected about 75 percent of its bills; collection rates with the new tariff schedule are not yet known. The difference between the cost of gas and the below cost price to the population was covered by enterprises: they were required to supply Tajikgas with goods to be delivered to Uzbekistan as payment for gas. There was also substantial cross-subsidization, as industrial enterprises were charged more than the import price plus distribution costs. Since December 1994, prices for industrial users have been indexed to the U.S. dollar, and since November 1995 payment has to be made in U.S. dollars or in goods that can be sold for foreign exchange.

III. Prices and Wages

1. Price developments during 1994 and early 1995

In 1994 and 1995, until the Tajik ruble was introduced as the national currency, Tajikistan had two price systems, one based on cash and the other on noncash transactions. This distinction between cash and noncash prices developed in 1994, as cash in circulation remained relatively scarce while noncash money increased rapidly due to a rapid expansion of credit (see Section V.3). This led to a large and increasing premium for cash relative to noncash, and an informal exchange rate between noncash and cash which reached 20:1 in late 1994. However, the exchange rate between cash and noncash money was far from homogenous, and the premiums associated with cash transactions typically depended on the product and the parties involved in the transaction, as well as time and location. For example, some transactions between state-owned enterprises continued to be conducted at cash prices—prices which had not undergone the inflation of noncash prices elsewhere in the economy—even though they were settled in noncash.

CPI changes largely reflected cash price developments, since the CPI survey covers mainly retail outlets transacting in cash (Chart 4). WPI movements, on the other hand, represented a mixture of cash and noncash inflations, as the WPI covers both types of transactions and, as stated above, within the state sector some noncash prices for intermediate inputs did not reflect the depreciation of noncash money in retail transactions.

Chart 4
Chart 4

TAJIKISTAN: Consumer 1/ and Wholesale Price Inflation, 1991-95

Citation: IMF Staff Country Reports 1996, 055; 10.5089/9781451836936.002.A001

Source: Stale Statistical Agency.1/ Retail prices until 1993; consumer prices thereafter.

The distinction between cash and noncash prices is crucial in interpreting CPI and WPI inflation in 1994. Following the introduction of the 1993 Russian ruble as legal tender, there was a large and sudden contraction of currency in circulation, as pre-1993 rubles withdrawn from circulation were only gradually replaced with new Russian rubles. This was reflected in a fall in the CPI by 30 percent from January to March 1994 (Table 21). On the other hand, the WPI increased almost 30 percent during the same period (Table 22), reflecting loose credit policies.

Table 18.

Tajikistan: Electricity Consumption and Output, 1980–94

(In billions of kilowatt hours)

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Source: State Statistical Agency.

All electricity imports come from states of the former U.S.S.R.

Table 19.

Tajikistan: Indices of Real GDP, Employment and Energy Consumption, 1990–94

(1990 = 100)

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Sources: State Statistical Agency; and IMF staff calculations.

Total electricity consumption excluding household consumption and unaccounted losses.

Sum of gaslion, diesel, crude oil, and engine fuel consumption.

Includes household consumption due to data availability problems.

Table 20.

Tajikistan: Sectoral Output, Employment, and Electricity Consumption, 1990–94

(1990 = 100)

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Sources: State Statistical Agency; Ministry of Labor; and IMF staff calculations.

Employment data refers to sum of transport and communications.

Table 21.

Tajikistan: Consumer Price Inflation, 1993–95 1/

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Source: State Statistical Agency.

Retail price index through 1993; consumer price index thereafter.

Food comprises approximately 3/4 of the total weight.

The May 1995 figure for overall CFI inflation is an estimate incorporating price realignments during the 1995 currency reform, and is thus not directly comparable to the May 1995 figures for food, nonfood and service inflation.

Table 22.

Tajikistan: Wholesale Price Inflation—Selected Categories 1993–95

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Source: State Statistical Agency.

As a result of the continuing shortage of cash and rapid credit growth, WPI inflation substantially exceeded CPI inflation throughout 1994. Monthly CPI inflation averaged just over 4 percent in the last half of 1994 compared with a continuation of over 10 percent monthly WPI inflation. This pattern was, however, reversed in the first four months of 1995 as a result of several factors: 1) the receipt of a large (Rub 21 billion) cash shipment from Russia in March 1995, enabling payment of some back wages and pensions; 2) the imposition of tight credit ceilings in February, which froze credit and broad money until April; and 3) an extensive consumer price liberalization between January and May (see Section VII). As a result, CPI inflation averaged almost 16 percent in the period January-April 1995, while WPI inflation averaged just over half that rate.

2. Price developments since the introduction of the national currency

One of the main objectives of the currency introduction was to reestablish full convertability of deposit money into cash at par. The currency conversion had been designed to produce Tajik ruble (TR) cash prices which were lower than prevailing Russian ruble (Rub) prices by a factor of 50. In the event, TR cash prices as measured by the CPI were set at a level lower than the prevailing Rub prices by a factor of ninety, for reasons described in Annex 1. 1/

Following the currency conversion, Tajikistan experienced relatively modest CFI inflation in June and July. This was in part due to seasonal influences, such as declines in the prices of certain foodstuffs, but was primarily due to the lagged effects of the strict credit policies pursued in the months prior to the currency conversion. In August, however, CPI inflation accelerated to 78 percent—the highest monthly rate since December 1993. While the liberalization of bread prices on August 20 contributed to this increase, the main reason was the high rate of credit and monetary expansion. Credit policy remained expansionary throughout most of the second half of 1995, resulting in an average monthly CPI inflation of over 57 percent in the last five months of the year.

3. Wage developments

In Tajikistan, budgetary wages are tied to the minimum wage through a system of coefficients, or ratios to the minimum wage. As a result, any increase in the minimum wage is automatically passed on to the wages of government employees. Outside the budgetary sphere, there is no longer centralized wage setting; the only formal restriction on enterprise wages is the minimum wage.

Average wages kept up with the modest CPI inflation during 1994, but decreased in real terms in early 1995 (Table 24). In May 1995, just before the introduction of the national currency, the Government increased the minimum and average budgetary wages by 80 percent. While this increase did not restore average real wages to their 1994 level, it substantially increased government wages relative to wages in other sectors. After the currency introduction in May, government and minimum wages remained unchanged in nominal terms, and were thus eroded by the high inflation in the second half of 1995. For the year, real wages in 1995 averaged about 50 percent of their average level in 1994; the average wage at the end of 1995 was under US$4. This was the lowest in the states of the former U.S.S.R., about one-third the dollar wage in Armenia and Azerbaijan, and only one-tenth the level in neighboring Kyrgyz Republic and Uzbekistan (Chart 5).

Table 23.

Tajikistan: Wholesale Prices in 1995

(Monthly changes in percent)

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Source: State Statistical Agency.
Table 24

Tajikistan: Monthly Wages. 1/ 1993-95

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Source: State Statistical Agency.

Table reflects wages due. Between May 1994 and May 1995, in many instances wages either were not paid or were paid in noncash.

Deflated by the CPI.

In Russian rubles until April 1995 and in Tajik rubles thereafter.

Chart 5
Chart 5

TAJIKISTAN: Wages, 1993-95

Citation: IMF Staff Country Reports 1996, 055; 10.5089/9781451836936.002.A001

Sources: State Statistical Agency and IMF staff calculations.

The path of real and nominal payroll wages (Tables 24 and 25), however, bears little relationship to actual earnings, for two reasons. First, earnings from nonwage sources and payments in kind, which have risen in relative importance, are omitted. Second, nominal wages reflect wages earned, rather than wages paid. Substantial wage arrears were accumulated during 1994 and 1995, particularly in the budgetary sphere, as well as among state and collective farms. Table 26 gives an indication of the discrepancy between the economy-wide monthly wage bill and actual wage disbursements during 1994 and 1995. It shows a sharply decreasing ratio between wages actually disbursed and wages earned from January to April 1994. In the year from May 1994 through April 1995, an average of just over 20 percent of wages were disbursed each month. 1/

Table 25.

Tajikistan: Average Monthly Wages by Sector, 1985-94

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Sources: Ministry of Labor; and IMF staff calculations.

In 1993 and 1994 this number refers to employment in culture and arts combined.

Percentage change information for 1985 indicates the annual average over the period 1980–85.

Table 26.

Tajikistan: Monthly Wage Bill and Wage Disbursements, 1994-95

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Sources: State Statistical Agency (SSA); National Bank of Tajikistan; and IMF staff calculations.

Total economy excluding private farm employment. SSA estimate based on enterprise data.

NBT estimate of total cash disbursement of wages and salaries by the banking system.

Russian rubles before May 10, 1995; Tajik rubles thereafter.

The wage bill figure is based on SSA’s estimate of TR 738 million for May 1995.

There was a sharp rise in the share of wages paid after the introduction of the national currency, with economy-wide wage payments averaging over 90 percent of wages due from June through September 1995. There was a net reduction of budgetary wage arrears in the fourth quarter of 1995. Thus, while December 1995 wages earned were less than one-fifth of their December 1994 level in real terms, the decline in real wages paid was only an estimated 20 percent.

In addition to changes in the real value of wages earned and the portion of wages paid, household incomes were affected by changes in bread price compensation payments (see Annex 3). These changes contributed to a further decline in household incomes in May 1995, when this allowance was abolished at the time of the currency reform, and a somewhat offsetting increase in incomes for vulnerable households in August and December 1995, when bread price compensation payments were reintroduced and doubled, respectively..

IV. Public Finance

1. Structure of Government

The general government consists of the republican government, 19 local governments 2/ and the social security funds: the Pension Fund, Employment Fund, and Social Insurance Fund. Until its abolition in mid-1995, there was also a State Foreign Exchange Fund. Occasionally, the authorities have transferred resources between state enterprises via extra-budgetary operations. Also, the NBT has at times undertaken quasi-fiscal operations at the behest of government.

The republican budget finances higher education, defense, justice, major infrastructure projects, bread compensations and general subsidies. Local governments are responsible for hospitals, elementary and secondary education and local infrastructure projects. The main sources of revenue for the state budget—which is the consolidation of the republican and local budgets—are the value-added tax (VAT), enterprise profit tax, personal income tax, and excise and customs taxes. Revenues are divided between the republican and local budgets; local governments receive the personal income and land taxes, 50 percent of the enterprise profit tax, and a share—which varies by local government—of VAT and excises collected locally.

The social security funds provide benefits that, combined with general subsidies and transfers from the republican and local governments, constitute a broad but poorly targeted social safety net. These funds are largely financed from payroll taxes. The Pension Fund provides old-age, disability and social pensions, and child allowances; it has an autonomous administration, with policies set by the Ministry of Social Welfare. Family benefits are administered by the Pension Fund, but financed by budgetary transfers. The Employment Fund is independent of the budget, but managed by the Ministry of Labor and Employment. The Social Insurance Fund is also independent of the budget; it is in charge of health-related benefits, and is managed by the trade unions. The operations of the social security funds and the social safety net are described in greater detail in Annex III.

2. Fiscal developments prior to the currency introduction

Interpreting budgetary developments in 1994, and up to the currency introduction on May 10, 1995, is complicated by the fact that the government budget treated cash and noncash interchangeably. As most revenues were in nearly value-less noncash, and important expenditures—such as wages and social benefits—had to be paid largely in cash, official figures significantly overstate revenue/GDP ratios, understate expenditures relative to GDP, and therefore understate deficits relative to GDP. In the absence of separate information on cash and noncash transactions, no comparison of budgetary figures before and after May 10, 1995 is meaningful.

The assessment of fiscal policy in 1994 and early 1995 is further complicated by the existence of the State Foreign Exchange Fund. Until its abolition in mid-1995, this fund was involved in sometimes large extra-budgetary foreign exchange operations, including making payments for external debt obligations and some imports of grain and gas. This fund was financed by surrender requirements on the foreign exchange earnings of the aluminum and cotton monopolies. These enterprises were entitled to payment from the budget for their foreign exchange—in noncash rubles at the prevailing exchange rate for cash—but did not always receive payment in full or on a timely basis. As there is little information available on the operations of the State Foreign Exchange Fund, the following discussion excludes its operations.

a. The 1994 outcome

Budgetary outcome: Based on the authorities’ data, the state budget deficit, on a cash basis, 1/ was reduced from 25 percent of GDP in 1993 to 10.5 percent in 1994 (Table 27 and Chart 6). These deficits were financed by credits from the NBT. The major factors behind the apparent reduction in the cash deficit were the relative overstatement of the value of taxes and understatement of expenditures, as described above, as well as the accumulation of wage and other expenditure arrears totalling 13 percent of GDP. As a result of these factors, the overall deficit of the general government as officially reported gives a severely distorted picture of the fiscal stance in 1994; it is possible that the true underlying fiscal stance deteriorated further. Despite significant noncash revenues, the state budget came under increasing pressure during the year as a result of several factors: the lack of cash to pay wages and social benefits; rising bread subsidies in the face of fixed administered prices; higher than anticipated capital outlays related to reconstruction; and deepening inadequacies in tax administration.

Table 27

Tajikistan: State Budget By Economic Classifications of Expenditure 1992-95

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Sources: Ministry of Finance; and IMF staff estimates.

Includes sales (TR 265 million) of hard currency and gold in 1995.

1995 outcome includes wheat purchases of TR 33 billion.

Includes purchases (TR 451 million) of hard currency and gold in 1995.

Due to differential value of cash and non-cash prior to the currency reform of May 1995, fiscal perfomance in percent of GDP before the currency reform is not comparable to one thereafter.

Chart 6
Chart 6

TAJIKISTAN: State Budget, 1992-95 1/

Citation: IMF Staff Country Reports 1996, 055; 10.5089/9781451836936.002.A001

Source: State Statistical Agency.1/ The break in the graph reflects the fact that data before and after the currency conversion are not comparable.

The extrabudgetary social security funds ran a 1994 surplus of 5 percent of GDP on a cash basis, while accumulating roughly five months of pension and unemployment compensation arrears. On an accrual basis, these funds ran a surplus of 3 percent of GDP, compared to a balanced position in 1993.

Revenue performance: 2/ Tax revenue increased in 1994 to 42 percent of GDP, substantially above the 25 percent of GDP in 1993. The main reason for this increase in tax revenue was that taxes were paid in increasingly worthless noncash rubles. Additional factors included higher customs revenues and excise collections due to higher world prices for cotton, and tax rate hikes for the VAT, excises, and enterprise profit taxes. 3/ Tax evasion continued to be a problem. Evasion was largely explained by three factors: poor tax administration, the absence of a tax code and a weak legislative framework for collecting from tax evaders.

The tax structure in Tajikistan placed heavy reliance on the VAT and enterprise profit taxes, which accounted for almost 60 percent of total tax revenue in 1994. One serious deficiency in Tajikistan’s tax laws was the numerous exemptions for selected taxpayers. This problem was compounded by the fact that Parliament and the Ministry of Finance had the right to grant additional exemptions and deferrals. Significant examples included the effective exemption of state and collective farms from the VAT and the enterprise profit tax; enterprise profit tax exemptions for some new small businesses and joint ventures; and the deductibility of enterprises’ outlays on health, education, culture and housing. These exemptions and deferrals reduced the neutrality of the tax system and narrowed the tax base.

In July 1994, the enterprise profit tax rate was increased from 32 to 40 percent; the ratio of the profit tax to GDP rose by 5 percentage points in 1994. Personal income tax threshold levels were adjusted upward, in line with inflation. Revenue from this tax increased modestly relative to GDP, despite the accumulation of wage arrears throughout the economy. Personal income tax collections were low relative to GDP, with little progressivity; almost the entire population was taxed at rates of 10 and 15 percent.

Also in July 1994, a 3 percent surcharge was imposed on top of the existing 20 percent VAT rate. The revenue yield of the VAT rose by 4 percent of GDP, reflecting the increase in the rate and the reduction in inflation. The yield of the land tax was unchanged in 1994, at about 0.2 percent of GDP (Table 28). Export tariffs had been introduced in July 1993, but yielded little revenue that year. In January 1994, the Government centralized cotton exports in one state agency, simplifying customs collection. In addition, the dollar price for exported cotton rose 58 percent and the customs committee was strengthened through improved legislative powers, an increase in the number of personnel and enhanced training. Together, these factors led to a sharp increase in customs revenue relative to GDP in 1994.

Table 28.

Tajikistan: State Budget, 1992-95

(In million of Russian rubles before May 10,1995 and in millions of Tajik rubles thereafter)

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Sources: Ministry of Finance; and IMF staff estimates.

Includes sales of hard currency and gold.

Includes purchases of hard currency and gold.

Tajikistan relied on a large number of excise duties; cotton, vodka and rugs accounted for 77 percent of excise revenue in 1994. In July 1994, the excise rate was increased for vodka and rugs, and excises were imposed on tobacco. Together, these changes increased excise revenue by 3.5 percent of GDP. Privatization generated little revenue for the budget. Enterprise contributions to the Pension Fund increased by 1.4 percent of GDP in 1994.

Expenditure performance: The major factor behind the containment of expenditures in 1994 was the shortage of cash. All government organizations accumulated arrears, primarily for expenses which had to be paid in cash. A number of other factors also contributed to the expenditure containment: lower than budgeted defense and security-related outlays; 1/ the lack of adjustment of budgetary wages and social benefits for inflation; the virtual elimination of loans to budgetary organizations; and the partial freeze of expenditures for goods and services. Capital outlays, however, increased sharply—by about 9 percent of GDP—due to reconstruction expenditures in areas damaged by the armed conflict.

The compression of current expenditures was not uniform. Expenditures on health increased by 1 percent of GDP, due to the higher import cost of medicines and higher than planned spending on programs to control epidemics. Expenditures on state bodies and administration rose by 3 percent of GDP, due to increases in personnel in area councils (rayons) and the Council of Ministers, 1/ while purchases of goods and services were cut by 5 percent of GDP relative to 1993. Social safety net transfers, wages and salaries decreased by a total of over 3 percent of GDP. Bread allowances—cash compensations paid to the entire population without regard to need—constituted the major social safety net. 2/ These compensations were only partially paid during 1994.

Subsidy reform proceeded unevenly: subsidies were eliminated for dairy and meat industries, children’s clothing, and book printing and publishing, but total subsidies nonetheless increased by almost 4 percent of GDP. Flour and bread products alone received direct subsidies totalling 8.4 percent of GDP. 3/ Other subsidized products included water to agriculture (2.3 percent of GDP) and communal services (1 percent of GDP). During 1994, defense outlays decreased by 2 percent of GDP, in part due to a 10 percent reduction in armed forces personnel. 4/

b. Fiscal developments in 1995 prior to the currency introduction

Until May 1995, fiscal policy in Tajikistan continued to be hampered by the cash shortage, which distorted the fiscal stance and contributed to growing wage, pension, and other expenditure arrears. The draft 1995 budget aimed at a cash deficit of 9 percent of GDP, to be achieved in part by new revenue measures, including the introduction of an enterprise property tax. However, when the new Parliament took office in March 1995, approval of the 1995 budget was postponed and, after the introduction of the Tajik ruble on May 10, the authorities decided to prepare an updated budget for the balance of 1995, Parliament did not discuss the revised budget proposal until early November, so the Government operated without an approved budget, or new revenue measures, for most of 1995.

According to official figures, the state budget during January 1-May 10, 1995 ran a surplus of almost 9 percent of GDP on a cash basis, and a balanced budget on an accrual basis (Table 29). The reversal of the cash deficit was achieved by expenditure cuts, the accumulation of wage and other expenditure arrears and the increasing overvaluation of noncash revenue relative to cash expenditures. 1/ The surplus of the state budget was used to repay part of the government debt to the NBT in depreciated deposit money. The social security funds had a surplus of 8 percent of GDP on a cash basis, 2 percent of GDP on an accrual basis (Tables 30, 31, and 32).

Table 29.

Tajikistan: State Budget, 1992-95

(In percent of GDP)

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Sources: Ministry of Finance; and IMF staff estimates.

Includes sales of hard currency and gold.

Includes purchases of hard currency and gold.

Table 30

Tajikistan: Operations of the Pension Fund, 1992-95

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Sources: State Pension Fund; and IMF staff estimates.
Table 31.

Tajikistan: Operations of the Employment Fund, 1992–95

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Sources: State Employment Fund; and IMF staff estimates.
Table 32.

Tajikistan: Operations of the Social Insurance Fund, 1993–95

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Sources: Social Insurance Fund; and IMF staff estimates.

Total expenditures during the period were sharply lower than envisioned in the first draft budget, because the Government accumulated wage arrears totalling some Rub 95 billion (9 percent of GDP), and because the shortage of cash contributed to delays in expenditures or payments for other goods and services. To improve cash management and expenditure control, state budget accounts held in commercial banks were transferred to NBT branches, except in those regions where there was no NBT branch.

3. The period after the currency introduction

Fiscal developments in 1995, in the period after the currency introduction, were dominated by four developments: the sharp, unplanned increase in real budgetary wages at the time of the currency introduction, followed by a continual real decline in those wages during the remainder of the year because of inflation; the unintended one-time reduction in tax liabilities during the currency conversion; the growth in tax arrears; and developments in bread prices, subsidies and cash compensations.

Real budgetary wages after the currency introduction were almost double the intended level, putting strong upward pressure on government expenditures. At the same time, tax collections were falling sharply, because of a currency conversion-related decline in tax liabilities and growing tax arrears (See Annex I).

There was a temporary collapse in revenues at the time of the currency introduction, as tax liabilities which had been accrued but not yet paid were converted by a factor far greater than the eventual adjustment in prices. This revenue shortfall was aggravated by, and persisted because of, growing tax arrears caused by a number of factors. First, as a result of the fact that deposits were converted at a rate greater than the eventual adjustment in prices, there was a reduction in enterprise liquidity which contributed to growing interenterprise and tax arrears. Second, the elimination of the opportunity to pay taxes in a depreciated form (relatively worthless noncash money) sharply increased the tax burden on enterprises, contributing further to tax arrears. Third, prior to the currency reform, paying taxes was one of the few uses for deposit money. With the renewed convertability, at par, between cash and noncash, noncash could now be used for almost anything, including wages and inputs, thereby increasing the opportunity cost of paying taxes with noncash and contributing to the increase in arrears. In addition, there were delays by banks in transferring tax payments to the budget accounts at the NBT because of bank liquidity problems. Finally, there were significant problems related to the reorganization of the Tax Inspectorate.

As a result, monthly tax revenues in the first three and half months after the currency conversion were insufficient even to cover monthly budgetary wages. As inflation continued, and accelerated in August, the Government kept nominal wages unchanged while tax obligations and tax payments rose. Thus in September, for the first time since the currency conversion, revenues exceeded wage obligations, although they remained insufficient to cover all government obligations.

Revenues increased relative to GDP in the fourth quarter of 1995, as a result of several factors: the seasonality of cotton earnings and thus tax payments; the modest success of the Tax Inspectorate in collecting arrears from large taxpayers; and the reduction of tax exemptions and deferrals—including for the aluminum plant and railway company—in November. In addition, some local fees and tax payments, including the land tax, are largely due in the last quarter of the year. As a result of this improved revenue collection, the Government settled some previously accumulated wage arrears in the fourth quarter, despite running new arrears on other expenditure items. Net wage arrears in 1995, after the currency conversion, amounted to about 15 percent of total wages due.

The other important influence on the fiscal outcome during this period was the evolution of policy regarding bread prices, bread subsidies and cash compensations. In 1995 prior to the currency introduction, explicit bread subsidies had totalled 5.2 percent of GDP, in addition to the cash compensation payments that were made to all Tajik citizens. 1/ At the time of the currency introduction, in an effort to reduce the associated budgetary costs, bread and flour prices were increased 140 percent, while cash compensations were completely eliminated. These measures, which lowered budgetary obligations for subsidies and social safety net expenditures, were nonetheless insufficient to address the growing fiscal problem. As a result, substantial arrears were incurred; total subsidies paid from May 11 to July 31, 1995 were only about half of the bread subsidy due in the month of July alone.

The situation concerning bread prices and subsidies deteriorated further as the summer progressed. The price of bread was kept unchanged from May through July, despite a number of factors which would have warranted increasing the bread price: the Government’s inability to pay subsidies to the bread complex; a sharp increase in the dollar price of imported wheat; 2/ a 16 percent nominal depreciation of the Tajik ruble relative to the U.S. dollar from the time of currency introduction until end-July; and rising domestic costs due to inflation. The authorities were forced to adjust the bread price in August when the market exchange rate depreciated by over 130 percent that month alone. Bread prices were increased by 275 percent, while cash compensations—equal to one minimum wage—were reintroduced for targeted groups.

In addition, improved revenue collection facilitated an increase in subsidy payments, as bread subsidies paid by the budget more than doubled from third quarter, to 2.5 percent of GDP in the fourth quarter of 1995. Despite this increase in prices and subsidies, the bread complex was unable to generate sufficient resources to finance needed grain imports. The exchange rate continued to depreciate, falling by a further 120 percent before the end of the year. The dollar price of imported grain rose roughly another 10 percent, domestic costs continued to grow rapidly with inflation, but bread prices were held constant until December. 1/

Due to the shortfall in the earnings of the bread complex, the NBT was ordered to provide, between September and December 1995, about US$11 million in foreign exchange to the bread complex to finance grain and wheat imports. 2/ This quasifiscal operation was defacto an implicit bread price subsidy—there is little prospect that the bread complex will be able to repay this “loan”—which brought fourth quarter bread subsidies to 14 percent of GDP (total subsidies were 15 percent of GDP). To begin to address this growing problem, the Government in December increased bread prices by over 130 percent, while at the same time doubling cash compensation payments to two minimum wages.

Largely as a result of these implicit and explicit bread price subsidies, the budget deficit increased dramatically on a cash basis, to 16 percent of GDP in the fourth quarter of 1995, bringing the 1995 deficit on a cash basis in the period after the currency conversion to 11 percent of GDP. In addition, wage and tax developments contributed to growing arrears, so that the deficit on an accrual basis was 26 percent of GDP in the fourth quarter, and 21 percent of GDP for the entire period after the currency reform. As noted above, almost three-fourths of the fourth quarter deficit stemmed from the NBT-financed wheat imports.

In an effort to combat this growing deficit, the Government took a number of measures in November 1995: some agencies and organizations were removed from the budget; there were cuts in loans to organizations and ministries; investment expenditures were reduced, bringing budgetary capital expenditures to their lowest level since the onset of the civil war; and import duties, which had been approved in June, became effective. Defense spending remained modest in the period after the currency conversion, at 1.1 percent of GDP, as the cost of the CIS peace keeping forces is paid by the providing countries. 1/

The Pension Fund recorded a deficit (0.2 percent of GDP) in the period May 11 to September 31. In the fourth quarter the situation deteriorated further, so that for the last seven and a half months of 1995, the Pension Fund accumulated total arrears of 0.8 percent of GDP and a cash basis deficit of 0.7 percent of GDP. The Employment and Social Insurance Funds were roughly balanced on a cash basis. The Employment Fund, however, accumulated arrears of TR 15 million. The problems of the Pension and Employment Funds were due in part to government arrears on its payroll tax obligations. 2/ ln addition, there was substantial evasion of contributions by other employers, as these funds lacked the administrative capacity to enforce payroll tax compliance.

4. The 1996 budget

A tight fiscal stance is a key element of the Government’s economic program in 1996. With the 1996 budget, the authorities have focused on strengthening public finances and minimizing domestic bank financing of the budget. The budget reflects a commitment to a restrictive fiscal policy stance, and a move toward greater transparency by incorporating previously extra-budgetary operations.

The 1996 budget targets a deficit of 5.4 percent of GDP, to be achieved through a number of measures: presumptive taxes on cotton and aluminum; the reduction of tax arrears; and the elimination of bread subsidies in March, with simultaneous increases in budgetary and minimum wages by 60 percent and cash compensation payments to TR 500 (thereby eliminating the linkage between these payments and the minimum wage). 3/ The Government is planning to improve the targeting mechanisms of the social safety net along the lines of IMF technical assistance recommendations, including by introducing an auditing procedure for eligibility decisions, and improving the flow of information from enterprises to local authorities responsible for determining eligibility.

Additional budget savings are expected from the continuation of the process of removing from the budget public agencies and organizations which do not perform strictly budgetary functions, and from substantial cuts in budgetary allocations to individual ministries, including the elimination of some ministries.

Presumptive taxes on Tajikistan’s two major monopolies (aluminum and cotton) replace previous extrabudgetary expropriation and allocation of foreign exchange earnings. The combined revenue yield of these taxes is estimated at 6 percent of GDP. The budget also contains measures to reduce tax exemptions. With the introduction of presumptive taxes, all export taxes were eliminated in March 1996. To improve compliance, a tax police unit (under the control of the Tax Inspectorate) was established in February and became operational in March. Over the next few months, the authorities are planning to hire 700 tax policemen and 100 new tax inspectors. Moreover, the VAT and excise tax base has been broadened to cover imports from outside the CIS.

During 1996, the extrabudgetary social security funds will be consolidated with the 1996 state budget, but their financial independence will be kept. To improve cash management and expenditure control, the Government intends to establish in 1996 a treasury in the Ministry of Finance, with the assistance of an expert from the Fund.

V. Money and Credit

1. Monetary arrangements

Monetary arrangements in Tajikistan have undergone radical changes since the break up of the Soviet Union in 1991. These changes were initially dominated by developments in other states of the former U.S.S.R. With the introduction of national currencies in the three Baltic states and Ukraine in 1992 and in the Kyrgyz Republic in May 1993, Soviet and pre-1993 Russian rubles were withdrawn from circulation in these countries (Table 34). When the Russian Federation in July and August 1993 introduced the new Russian ruble, Belarus, Moldova, Azerbaijan, and Georgia introduced national currencies. Other countries, including Tajikistan, continued to use pre-1993 rubles, in the hope of creating a new ruble zone. These prospects faded rapidly, however, and Armenia, Turkmenistan, Kazakstan and Uzbekistan introduced national currencies in November 1993, leaving Tajikistan as the only country still using the pre-1993 ruble. This resulted in pre-1993 rubles—no longer of value in other countries—swamping Tajikistan, and the overall price level more than doubled in December 1993. In response, Tajikistan introduced the new Russian ruble as its currency in January 1994, without, however, establishing a monetary union with Russia.

Table 33.

Tajikistan: Consolidated Operations of the General Government, 1992–95 1/

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Sources: Ministry of Finance; Pension Fund; Ministry of Labor; and IMF staff estimates.

Includes operations of the Social Insurance Fund since 1993.

Excludes transfers from the State Budget to the Pension and Employment Funds.

Mostly borrowing from the National Bank of Tajikistan.

Table 34.

Introduction of National Currencies in the States of the Former U.S.S.R.

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Sources: Various IMF Economic Reviews.

During 1994 and early 1995, Tajikistan maintained a highly distorted dual monetary system. Cash was supplied by the Central Bank of Russia on commercial terms, with vague understandings of possibly treating the cash supplied as a sharing of seignorage if a new monetary union were created. At the same time, domestic credit was provided mainly by the NBT, by on-lending through commercial banks and through direct credits. This was done largely in accordance with directives of the Parliament and the Government. The highly expansionary credit policy created a large imbalance between deposit money and cash money. The resulting relative cash shortage caused a sharp depreciation of noncash against cash, currency hoarding and financial disintermediation, and contributed to the accumulation of wage arrears.

The Tajik ruble was introduced as the national currency on May 10, 1995, as part of a comprehensive currency reform designed to restore the balance between cash and deposit money. The Tajik ruble was allowed to float against foreign currencies, including the Russian ruble.

2. The banking system

Tajikistan has a two-tier banking system, for which the legal system was established in 1992. It consists of the NBT and 17 commercial banks, most of which are owned by state enterprises; the banks are largely independent of the Government (Table 35). Commercial banks were largely limited to channeling credit from the NBT.

Table 35.

Tajikistan: Commercial Banks as of January 1, 1996

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Sources: National Bank of Tajikistan; and the World Bank. Notes: JSC = Joint Stock Commercial, C = Commercial, CP = Cooperative

“Shark” means “East”.

A foreign branch of a Moscow-based bank.

Founded in September 1994.

Founded in November 1994.

The banking system is dominated by the three largest banks (Shark, Orion, and Tajikbankbusiness), which account for over 80 percent of total credit to the economy (Table 36). These banks are successors to the previous state banks of the Soviet Union, with specialized lending areas in agriculture, industry and construction, and trade and light industries, respectively. Credit to agriculture, mostly through Shark—the largest bank and successor to the former Agroprom Bank—accounts for more than half of total credit to the economy. The Savings Bank continues to be the only commercial bank with deposit insurance from the Government and remains the main holder of household savings, accounting for about 75 percent of total household deposits. The banking system is in the process of gradual restructuring. Three new banks were opened in 1994 and 1995, and one small bank was liquidated in 1995 because of continued violations of banking regulations.

Table 36.

Tajikistan: Qredit of the Banking System, 1993–95 1/

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Source: National Bank of Tajikistan (NBT).

From operational data of the NBT, which slightly differ from monthly balance sheet data.

Ruble credits provided prior to the national currency introduction were converted to Tajik rubles at 1000:1 in May 1995.

Liquidated in October 1995.

Opened in October 1995.

3. Money and credit in 1994 and 1995

a. Developments in 1994

A severe cash shortage emerged in 1994, as the growth rates of cash money and noncash money diverged. As a result of the currency reform in 1994, currency in circulation decreased sharply, as pre-1993 ruble notes withdrawn in January 1994 were only gradually replaced with new Russian rubles. Cash emission in the first half of 1994 was Rub 95 billion, and total emission in 1994 was Rub 140 billion, 60 percent less than the total pre-1993 rubles withdrawn. 1/ By contrast, ruble deposits increased by 225 percent in 1994, as domestic credit increased by 125 percent (Table 37). These increases were modest compared with the over seven-fold increases in broad money and credit in 1993. However, the more than tripling of deposits in conjunction with the contraction of currency in circulation led to a sharp increase in the ruble deposit to currency ratio, from 2.2 at end-1993 to 9.6 at end-1994 (Table 38 and Chart 7). With the rapid WPI inflation, however, credit and ruble deposits declined in real terms (Chart 8).

Table 37.

Tajikistan: Monetary Survey, 1993–05

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Source: National Bank of Tajikistan.

Preliminary, pending resolution of problems in resident/nonresident distinctions, revaluation and coverage.

Includes pre-1993 rubles collected during a currency reform of January 1994.

Includes the central and local governments.

Includes the Pension Fund, the Employment Fund and the Social Insurance Fund.

Russian rubles (Rub) issued less Rub in vaults of the banking system before May 1995 and Tajik rubles Issued less Tajik rubles (TO) in vaults of the banking system since May 1995.

Includes grain loans of US $2.2 million (TR 637 million) to the Ministry of Bread and state trading organisations.

Includes grain loans of US $7.3 million (TR 2143 million) to the Ministry of Bread and state trading organizations.

Table 38.

Tajikistan: Monetary Authorities Accounts, 1993–95

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Source: National Bank of Tajikistan (NBT).

Preliminary, pending resolution of problems in resident/nonresident distinctions, revaluation and coverage.

Includes foreign currency holdings of the NBT and reserve position in the Fund. Also includes foreign currency holdings of the Ministry of Finance held with the NBT.

Includes pre – 1993 rubles collected during a currency reform of January 1994.

Includes the central and local governments.

Includes the Pension Fund, the Employment Fund and the Social Insurance Fund.

Before May 1995, refers to Russian rubles (Rub) issued less Rub in NBT vaults and thereafter, Tajik rubles issued less Tajik rubles (TR) in NBT vaults.

Includes grain loans of US $2.2 million (TR 637 million) to the Ministry of Bread and state trading organizations.

Includes grain loans of US $7.3 million (TR 2143 million) to the Ministry of Bread and state trading organizations.

Chart 7
Chart 7

TAJIKISTAN: Deposits to Currency Ratio, 1993-95

Citation: IMF Staff Country Reports 1996, 055; 10.5089/9781451836936.002.A001

Sources: National Bank of Tajikistan; and IMF staff estimates.1/ The increase in January 1994 reflects the surge in deposits associated with the withdrawal of the pre-1993 ruble from circulation, as discussed in SM/94/209.2/ The drop in May 1995 Is due to differential conversion rates applied to cash and deposits, as part of the currency reform.
Chart 8
Chart 8

TAJIKISTAN: Credit and Deposits, 1994-95

Citation: IMF Staff Country Reports 1996, 055; 10.5089/9781451836936.002.A001

Sources: National Bank of Tajikistan; and IMF staff estimates.

Administrative restrictions on cash holdings, imposed in 1994 to deal with the cash shortage, aggravated the situation further. Enterprises were required to surrender most cash receipts to banks, and only limited withdrawals were allowed for paying wages. The balance of the accrued wages were transferred to individual savings accounts and could not be withdrawn, except for special occasions such as funerals and emigration. 1/ In view of the confiscatory nature of the cash surrender requirement, only state enterprises under strict government control complied with the cash surrender requirements, while others either hoarded cash or spent it in private markets.

The cash shortage led to a limited convertability of noncash to cash. As a result, an informal market for cash developed, with noncash money trading for cash at a sharp discount. Through the informal market, cash holders, who were mostly private enterprises, could buy noncash at a deep discount for a variety of purposes such as purchasing materials from state enterprises, paying taxes and repaying bank loans. At the same time, the economy started to rely increasingly on barter trade, the U.S. dollar and currencies of neighboring countries.

b. Developments in 1995 until the currency introduction

As the monetary system deteriorated, a consensus in favor of the introduction of a national currency built within the Government. On the advice of Fund staff, the NBT in February 1995 froze credit from the banking system, as a first step toward creating the conditions for a successful currency introduction. In view of the lack of experience with the use of indirect monetary instruments, bank-by-bank credit ceilings were imposed that were consistent with no increase in overall credit to the economy until the currency introduction. These credit ceilings were largely observed. In addition, no central bank credit was issued to the Government until the currency introduction in May. As a result, bank deposits remained roughly unchanged from January to April 1995. Currency in circulation, however, increased by 15 percent in March, as part of the accumulated wage arrears throughout the economy were paid with ruble notes purchased from the Central Bank of Russia.

In April, a high level state commission was established to design and implement a currency reform, with the introduction of a national currency at the core of the agenda. This commission was headed by the Prime Minister, and included other high ranking government officials and members of Parliament. Parliament and the government delegated a wide range of authority to this Commission. In close consultation with Fund staff, preparatory work was quickly completed. The Tajik ruble was introduced on May 10 and became the sole legal tender on May 15.

Several supporting measures were introduced to ensure the stability and internal convertability of the new currency. The ceilings on credit to the economy were extended through June 1995; the refinance rate was raised from 25 percent to 100 percent per annum; exchange bureaus were opened and the Tajik Interbank Foreign Exchange (TICEX) was created; bank deposit and lending interest rates were liberalized except for on-lending to “priority” sectors; and wage arrears that had been accumulated prior to May 1995 were transformed into special accounts for future conversion into privatization certificates. At the same time, restrictions on the withdrawal of enterprise deposits were eliminated and a temporary liquidity facility was established to support commercial banks in case of excessive deposit withdrawal. Restrictions on household deposits were lifted on July 1, completing the liberalization of all deposits except those linked to pre-May 10, 1995 wage arrears. In addition, prices of vegetable oil, milk and dairy products were fully liberalized and bread and flour prices were increased 150 percent.

c. Developments after the currency introduction

The currency introduction was orderly, and succeeded in unifying the money supply, as the premium for cash over deposit money was eliminated. The initial success of the currency introduction was short lived, however, as expansionary credit policies over the summer months quickly undermined confidence in the new currency. Under pressure from the agriculture sector and other public sector enterprises, the NBT was ordered to issue directed credits. Credit to the economy more than doubled between end-May and end-August, with credit in August already exceeding, by 54 percent, the NBT’s original ceiling for end-September. Broad money increased by over 140 percent, between end-May and end-August.

The rapid credit expansion led to a sharp depreciation of the national currency, widespread dollarization and financial disintermediation. The exchange rate depreciated from TR 50 per U.S. dollar in May to TR 80 per dollar by late July on the official market. The depreciation of the exchange rate accelerated when the foreign exchange auctions were discontinued in early August due to the depletion of foreign exchange reserves, with the exchange rate moving to TR 135 per dollar in late August. Dollarization became prevalent, most notably in the northern region of the country, adjacent to Uzbekistan and the Kyrgyz Republic.

Fearing the inflationary impact of this monetary expansion, the authorities briefly reintroduced deposit withdrawal restrictions in late July and increased the refinance rate by 20 percent in early August to 120 percent per annum. Reflecting the growing lack of confidence in the banking system, currency in circulation grew much faster than deposits. When the restrictions on withdrawals were lifted in August, deposits declined by 5 percent. Combined with rapidly expanding bank lending, this led to serious strains on bank liquidity and contributed to substantial bank overdrafts, including, by Shark.

Since late August, the authorities have sought to intensify their efforts to redress the rapidly deteriorating macroeconomic situation. The NBT raised the refinance rate from 120 percent to 250 percent per annum as of September 1, and to 40 percent a month in early October. The NBT also established a system of weekly bank credit monitoring, and in September imposed new bank-by-bank credit ceilings consistent with virtually no increase in total bank credit to the economy through October and a slight decline (for seasonal reasons) through December 1995.

Despite these efforts, monetary expansion accelerated in September, before decelerating in the last quarter of the year. In the wake of a tighter domestic credit policy, foreign exchange equivalent to well over one-third of reserve money flowed into the economy in September, mostly in the form of advance payments obtained from foreign cotton buyers. Partly because of the thin foreign exchange market and the temporary liquidity shortage of key commercial banks, the National Bank purchased this foreign exchange. This contributed to an expansion of Ruble broad money by 35 percent in September. The banks’ liquidity situation improved, as some loans were repaid by the cotton farms, and banks abstained from issuing new credits.

Despite the tightened credit policy, there was significant demand for foreign exchange as evidenced by a further sharp depreciation of the exchange rate in October. However, the opportunity for sterilization of the September foreign exchange inflows was lost when the National Bank was instructed to lend most of its international reserves to the Ministry of Bread and state trading organizations to finance grain imports, as described in Section IV.3. In addition, the Government ordered the administrative allocation of a substantial part of the foreign currency receipts of the state cotton complex for the financing of further grain imports. The cotton complex in turn demanded and obtained large Tajik ruble credits from the NBT to offset its loss of liquidity. As a result, during the fourth quarter of 1995, credit to the Government and to the economy rose by 60 and 40 percent of end-September reserve money, respectively, while ruble broad money increased by 44 percent. The exchange rate depreciated further, to about TR 300 per U.S. dollar.

4. Interest rates

The NBT refinance rate of 25 percent per annum, which had been set in 1993 by a Parliamentary Resolution, continued to be in effect through May 1995 (Table 39). 1/ More favorable lending rates, which ranged from 5 percent to 15 percent, were applied to special loans provided to priority sectors, including agriculture, and to regions affected by natural disasters. All NBT lending rates, except for budget loans, were unified and raised to 100 percent in June 1995, 120 percent in August, 250 percent in September and 480 percent in October. Nevertheless, the refinance rate stayed negative in real terms in 1994 and 1995 (Chart 9).

Table 39.

Tajikistan: Annual Intaraat Ratas, 1994–95

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Source: National Bank of Tajikistan.

Set from early 1993 until June 1995 by Parliament Resolution No. 776 of 1993.

Maximum rate.

Account for about 85 percent of the total banking system credit to the economy.

Effective weighted average (paid Interest revenues divided by outstanding credit).

Weighted average interest rates of credits sold in the Central Fund Exchange.

Effective weighted average (interest expenditures divided by outstanding deposits).

Chart 9
Chart 9

TAJIKISTAN: Inflation, Currency and Interest Rates

Citation: IMF Staff Country Reports 1996, 055; 10.5089/9781451836936.002.A001

Sources: National Bank of Tajikistan; and IMF staff estimates.

Commercial bank interest rates remained largely unchanged in 1994 and early 1995. Although commercial banks were free to set rates for loans from their own funds, the interest rate on on-lent funds and loans to priority sectors, which were the bulk of loans, were regulated, with spreads above the refinance rate not to exceed 5 to 10 percent. Shark’s effective lending rate was considerably lower than that of other large banks, since Shark handled a larger portion of NBT credit. Lending rates were not determined on the basis of risk assessments, but according to the past relationship between the bank and its customer. Throughout 1994 and early 1995, deposit rates of the Savings Bank were regulated by Parliament at 8 percent per annum for demand deposits and 30 percent for one year savings deposits.

In May 1995, in conjunction with the currency reform, all commercial bank interest rates were liberalized, except for on-lending of NBT credits. In response, the Savings Bank more than tripled deposit interest rates, and other commercial banks followed suit. Nevertheless, nominal deposit rates remained highly negative in real terms throughout 1995. This, combined with the generally weak financial condition of the commercial banks and the public distrust of banks, limited the scope of financial intermediation.

The Central Fund Exchange, an interbank credit auction market, was established on May 24, 1995 to facilitate sales and purchases of funds between commercial banks. The trading sessions were intended to be held on a weekly basis. However, there were few transactions; the auction came to a halt in August 1995, due to the lack of funds in the banking system and relatively cheap and plentiful NBT credits. During its operation, 17 weekly auctions were held, for funds with a typical maturity of three to six months and interest rates of 150-195 percent per annum, considerably higher than the prevailing NBT refinance rate (Table 40).

Table 40.

Tajikistan: Interbank Credit auction (Central Stock Exchange)

(May 24-September 13, 1995)

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Source: The Central Fund Exchange.

5. Banking regulation and supervision

There were no major changes in banking regulation or supervision in 1994, but several important changes in regulations were introduced in 1995 in conjunction with the currency reform. These changes were aimed at reducing direct controls over banking activities, while reorienting the NBT’s function toward being a central bank. Most restrictions on deposit and lending interest rates were eliminated, and surrender requirements for cash were removed at the time of the currency reform. In mid-1995, reserve requirements—20 percent on demand deposits and 15 percent on savings deposits—were extended to the Savings Bank, which had previously been exempted. In November 1995, reserve requirements were unified at 20 percent for all types of deposits (Table 41). In addition, state budget accounts held with commercial banks were transferred to NBT branches in February 1995, and international reserves were transferred from the Vneshekonombank (VEB) to the NBT in June 1995.

Table 41.

Tajikistan: Reserve Requirements, 1988–95 1/

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Source: National Bank of Tajikistan.

Reserve requirements on domestic currency deposits only. There are no reserve requirements on deposits denominated in foreign currencies.

To compensate for the effects of high inflation and depreciation, minimum capital requirements for all commercial bank were raised from Rub 100 million to US$500,000 in 1994. Following the currency reform in 1995, the NBT introduced lower minimum capital requirements of TR 10 million for banks established by legal entities and TR 5 million for banks set up by private citizens.

Further regulatory reforms were needed, to complete the transformation from a financial system appropriate for a planned economy to one appropriate for a market economy. For example, an enterprise still required the NBT’s authorization to change its bank, and it could not keep settlement accounts in several banks. On the other hand, there were no reserve requirements for foreign currency deposits and no exposure limits on the foreign exchange positions of banks.

Overdrafts from commercial banks were rare in the first half of 1995, largely due to intensified supervision, with the NBT monitoring balances on the correspondent accounts of commercial banks at the end of each day. Overdrafts were charged a penalty rate of 0.5 percent per day. If the overdrafts persisted, the NBT’s settlement service was stopped. Despite the NBT’s efforts, however, overdrafts grew in the second half of 1995. Shark in particular incurred large overdrafts, prompting frequent suspension of inter-bank settlements. In December 1995, in an attempt to tighten control, the NBT ordered all branches of Shark to open separate correspondent accounts with the NBT and suspended settlement services for individual branches of Shark where overdrafts occurred.

There is as yet no evidence of open problems with loan collections. However, the data on this issue is of limited value, since overdue loans are often extended, rather than being classified as in arrears. In addition, the easy credit policies of 1995 may have contributed to a masking of the problem.

In general, banking supervision remained relatively ineffective because of a lack of expertise and organization. The work of the Supervision Department was limited to licensing, and monitoring bank compliance with legal requirements, including the capital asset and liquid asset ratios (Table 42). However, these ratios do not necessarily reflect the true financial standing of the banks, as the norms could be fulfilled by insufficient provisioning and accounting for doubtful and bad loans. On-site inspections were carried out mainly to verify accuracy of reported data, and little effort was devoted to reviewing asset quality or management performance of banks in order to determine their financial health.

Table 42.

Tajikistan: Capital Asset and Liquid Asset Ratios, 1995

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Source: National Bank of Tajikistan (NBT). Note: * denotes a violation of NBT rules.

K1 is the ratio of bank’s own resources to its risk-weighted assets.

K2 is the current liquidity ratio (bank’s liquid assets per the sum of demand deposits).

Liquidated in October 1985.

6. Settlements system

Significant progress was made in reducing interbank settlement delays in 1994 and 1995, due to improvements in logistics and the security situation. Most intra-bank payments were settled in four days, compared with frequent delays in 1993 of more than a week even within the Dushanbe area. It generally took a maximum of one week for inter-bank inter-regional settlements. Many branches of commercial banks were linked by computers, and daily courier services were set up along six routes across the country. In addition, as of March 1, 1995, commercial bank branches were allowed to transact through their regional or head offices, rather than through NBT clearing centers. Since then, several branches of the largest banks have chosen to clear through their head offices, as such settlements were superior in terms of security and speed. In an effort to accelerate the settlement process Parliament, in November 1995, issued a resolution under which banks can be penalized severely for intentionally delaying settlements.

VI. External Sector Developments

1. Balance of payments developments in 1993-94 1/

Tajikistan’s external current account deficit was 31 percent of GDP in 1993 (Table 43). 2/ The high trade deficit in 1993 was caused by an adverse shift in the terms of trade and a sustained fall in the volume of exports. After the disintegration of the former Soviet Union, prices faced by Tajikistan for imports of energy and grain products rose more than 150 percent, reaching roughly international levels by end 1994. Over the same period, the collapse of the Tajik economy and the breakdown of traditional trade and payments arrangements contributed to a steady decline in the volume of Tajikistan’s exports. 3/ Exports of cotton and aluminum had been falling for several years because of shortfalls in fertilizers and other inputs, and because of failure to maintain and upgrade plant and equipment. By 1993 exports of both commodities amounted to only about half of their 1990 levels. The current account deficit in 1994 improved somewhat, to a deficit of 23 percent of GDP. This reflected a further in import volumes as the economy continued to adjust to higher import prices and tighter external financing constraints; and a rise in world prices for cotton and aluminum (Tables 44-47).

Table 43.

Tajikistan: Balance of Payments, 1993–95

(In millions of U.S. dollars)

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Sources: Data provided by the authorities; and IMF staff estimates.

Available data on commercial banks’ net foreign assets in 1992-93 are unreliable due to valuation problems.

Gross convertible foreign assets of the monetary authorities. Available data on the monetary authorities’ gross non-convertible foreign assets are unreliable due to valuation problems.

Includes conversions of debt service arrears, trade arrears, and correspondent account balances into debt.

External debt stock includes estimated interest arrears.

Table 44.

Tajikistan: Import Prices, 1993–95

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Sources: Customs Department; State Statistical Agency; Tajik aluminum; Tajik gas; Tajik oil; Ministry of Bread; aid organizations; and IMF staff estimates.

In U.S. dollars per thousand cubic metres.

Weighted average composite price for imports of petroleum products which comprise mostly diesel fuel and similar products.

Table 45.

Tajikistan: Export Prices, 1993–95

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Sources: Customs Department; State Statistical Agency; Glavkholpkoprom; Tajik aluminum; and IMF staff estimates.
Table 46.

Tajikistan: Import Volumes, 1993–95

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Sources: Customs Department; State Statistical Agency; Tajik aluminum; Tajik gas; Tajik oil; Ministry of Bread; aid organizations; and IMF staff estimates.

In thousand cubic metres.

Table 47.

Tajikistan: Export Volumes, 1993–95

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Sources: Customs Department; State Statistical Agency; Glavkholpkoprom; Tajik aluminum; and IMF staff estimates.

Tajikistan’s trade deficit with states of the former U.S.S.R. rose from 12 percent of GDP in 1992 to 19 percent in 1993 (Chart 10). In 1994 this deficit grew to 24 percent of GDP, reflecting three factors: (i) higher prices for imports (especially energy) from states of the former U.S.S.R.; (ii) trade and other credits from Russia and Uzbekistan that were often tied to imports from those countries; 1/ and (iii) a continuing shift in exports toward non-CIS markets. The trade deficit with non-CIS countries rose from 7 percent of GDP in 1992 to 12 percent in 1993. In 1994, trade with non-CIS countries shifted to a surplus of 4 percent of GDP, reflecting the increasing share of exports to these markets and falling imports due to financing constraints and the declining Tajik economy.

Chart 10
Chart 10

TAJIKISTAN: External Trade Balance, 1992-95

(In Percent of GDP)

Citation: IMF Staff Country Reports 1996, 055; 10.5089/9781451836936.002.A001

Sources: Data provided the authorities; and IMF staff estimates.

The current account deficits led to a rapid accumulation of external debt which, in turn, has resulted in a rising deficit on services trade, as accrued interest payable continued to grow. Inflows of humanitarian grant assistance from UN agencies, private foundations, states of the former U.S.S.R. and other official donors, together with military assistance in kind from CIS countries, helped reduce the current account deficits by about US$25 million per year over the period 1993 to 1994. 2/

The capital account (including errors and omissions) shifted from a surplus of US$193 million in 1992 to deficits of US$29 million in 1993 and US$52 million in 1994. Unidentified net inflows of about US$140 million contributed to the 1992 surplus. 3/ These inflows probably reflected unrecorded suppliers’ credits, and perhaps also the repatriation of foreign exchange holdings after independence. There were unidentified net foreign exchange outflows of US$95 million in 1993 and US$86 million in 1994. These outflows are consistent with the experience of other transition economies, and may have reflected foreign exchange flight (from both capital and trade sources) and dollarization. There are indications of over-invoicing of imports and, to a lesser extent, under-reporting of export earnings during this period, even though trade continued to be dominated by centralized state orders. 4/ The dwindling level of disbursements from official loans also contributed to the capital account deficits during 1993-94.

The large current account deficits, and the emergence of capital account deficits, led the overall balance of payments to shift from an estimated surplus of US$140 million in 1992 to deficits of US$238 million in 1993 and US$223 million in 1994 (Table 48). The balance of payments was financed by the accumulation of liabilities, mainly to Russia and Uzbekistan, including in the form of trade and debt service arrears that were subsequently converted into interstate debt. 1/ During 1993-94, arrears on trade payments grew rapidly, as did arrears on debt service payments to virtually all creditors (see Section VI.7).

Table 48.

Tajikistan: External Debt Stock Including Arrears, 1992–95

(In millions of US dollars)

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Sources: Ministry of Finance; Vneshekonombank; and IMF staff estimates.

External debt for which accurate breakdown by creditor is not currently available.

2. Balance of payments developments in 1995

The current account moved into approximate balance in 1995, largely reflecting a shift in the trade balance from a deficit of 20 percent of GDP in 1994 to a surplus of 5 percent of GDP in 1995. This reflected an improvement in the terms of trade and a further compression in the volume of imports, external financing dried up. Import volumes in 1995 are estimated to have been just over 50 percent of their 1993 level.

With the shift to international prices in trade being largely complete, import prices rose at a much slower pace in 1995. An exception was alumina (the key input in the production of aluminum), for which import prices are estimated to have risen sharply over 1994-95. Creditors became less willing to extend new financial support—including by delivering goods prior to payment—or to disburse new credits in the absence of payments on outstanding credits. Overall, the value of imports fell by over 11 percent in US dollar terms. Tajikistan did not reap the full benefits of the increase in world cotton and aluminum prices over 1994-95, as cotton and aluminum export volumes continued to fall in 1995 from already low levels. In addition, the prolonged slump in imports and economic activity contributed to a steep decline in the volume of other exports.

The trade balance with states of the former U.S.S.R. remained substantially in deficit (17 percent of GDP) in 1995, reflecting the permanent impact of higher energy costs on Tajikistan’s trade relationship with the region. In trade with other countries, the upswing in international cotton and aluminum prices, and a sharp fall in imports other than alumina, energy and grain products, led to a rising trade surplus (22 percent of GDP). Interest payments were met in part in 1995, as US$12 million was paid to CIS creditors, primarily Uzbekistan. These payments generally occurred in exchange for the resumption of energy supplies. These supplies had been disrupted several times during the year due to nonpayment. Arrears continued to accumulate rapidly. The value of humanitarian and other assistance reaching Tajikistan is estimated to have remained unchanged in 1995, despite some disruption in deliveries of U.S. and EU grain assistance late in the year, related to difficulties with the generation of counterpart funds. Because of the external financing constraints, the quarterly pattern of imports (Table 49) was largely driven by the timing of resource availability rather than by seasonal demand factors.

Table 49.

Tajikistan: Quarterly Balance of Payments, 1995

(In millions of U.S. dollars)

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Sources: Data provided by the authorities; IMF staff estimates and projections.

Available data on commercial banks’ net foreign assets in 1992–93 are unreliable due to valuation problems.

Gross convertible foreign assets of the monetary authorities. Available data on the monetary authorities’ gross non-convertible foreign assets are unreliable due to valuation problems.

Includes conversions of debt service arrears, trade arrears, and correspondent account balances into debt.

The capital account deficit (including errors and omissions) widened to US$133 million in 1995, reflecting a significant increase in accrued amortization largely related to an EU credit that matured—but could not be repaid—in August. Unidentified net foreign exchange outflows fell from their 1993 and 1994 levels. After a large outflow in the first quarter of 1995, a modest inflow occurred in the second quarter, around the time of the currency introduction. When inflation accelerated and the exchange rate depreciated rapidly in the second half of the year, unidentified outflows surged again.

With the improvement in the current account balance in 1995, the overall balance of payments deficit fell to US$132 million (23 percent of GDP). This deficit was financed primarily by the accumulation of arrears on debt service payments, although the conversion of trade and debt service arrears into debt to CIS creditors continued to play a part. An accumulation of official reserves (estimated at US$3 million) made a modest contribution to financing needs.

3. Developments in the direction of trade during the period 1993-95

Over the past three years, countries outside the states of the former U.S.S.R. have emerged as Tajikistan’s major trade partners. At independence in 1991 states of the former U.S.S.R. accounted for over 80 percent of trade turnover. During the period 1993-95 the share of imports from countries outside the former U.S.S.R. has averaged over 55 percent, while the share of exports destined for these markets has averaged over 70 percent (Tables 50 and 51). 1/ Nonetheless, relatively greater access to trade credits from states of the former U.S.S.R. (notably to finance energy imports) has led to a rebound, from 40 to 47 percent, in total imports from these countries during 1994-95. The need to finance essential imports also led to some increase in the share of cotton and aluminum exports sold to former U.S.S.R. markets over 1994-95. A rapidly increasing share of other exports has been destined for markets outside the former U.S.S.R., however, following the successful establishment of cotton and aluminum trading relationships with these relatively new partners.

Table 50.

Tajikistan: Imports by Product, 1993–95

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Sources: Customs Department; State Statistical Agency; Tajik aluminum; Tajik gas; Tajik oil; Ministry of Bread; aid organisations; and IMF staff estimates.

The breakdown between states of the former U.S.S.R. and other countries is estimated, based on incomplete data.

Table 51.

Tajikistan: Exports by Product, 1993–1995

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Sources: Customs Department; state Statistical Agency; Glavkholpkoprom; Tajik aluminum; and IMF staff estimates.

The breakdown between states of the former U.S.S.R. and other countries is estimated, based on incomplete data.

Because of its role as an important center for world aluminum trade, the Netherlands has emerged as a major import channel (if not direct supplier) for about 40 percent of Tajikistan’s total imports, including alumina and grain. 1/ Russia and Uzbekistan have remained significant import suppliers, and were the two largest import sources directly identifiable from the trade data (Table 52). About 25-30 percent of Tajikistan’s total imports came from Russia in 1995, including petroleum products, grain, alumina, and other imports. As the principal supplier of energy imports and a monopoly supplier of natural gas to Tajikistan, Uzbekistan is a strategically important trade partner and was the source for 15 percent of 1995 imports. Among other states of the former U.S.S.R., Kazakstan (grain, petroleum products) and Turkmenistan (petroleum products) were the most significant import partners. Outside the states of the former U.S.S.R. and the Netherlands, the United Kingdom, Belgium, Hungary (alumina), and Brazil (alumina) were significant import partners.

Table 52.

Tajikistan: Origin of energy imports, 1995 1/

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Sources: Customs Department; and IMF staff estimates.

Estimates based on data for January through October 1995.

Each country’s percent share within each commodity group.

The Netherlands has become the key market for Tajikistan’s, sizable exports of bartered aluminum. As a result, the Netherlands has overtaken Russia as Tajikistan’s largest export destination, with over 60 percent of aluminum exports and 40 percent of total exports estimated to have gone through this market in 1995 (Table 53). Russia is the destination for an estimated 7 percent of aluminum exports, 36 percent of cotton exports, and 17 percent of all exports. Other export markets for cotton and aluminum are highly fragmented, with countries such as Belgium, the United Kingdom, Finland, Switzerland, the United States, Austria, Japan, South Korea, and Turkey all destinations for small shares of these exports. Insignificant exports are recorded to nearby countries, such as Afghanistan, Pakistan, Iran, and China.

Table 53.

Tajikistan: Destination of Principal Exports, 1995 1/

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Sources: Customs Department; and IMF staff estimates.

Estimates based on data for January through October 1995.

Each country’s percent share within each commodity group.

4. Developments in the commodity composition of trade over 1993-95

The shares of aluminum and cotton in total exports have risen since 1993, reflecting higher prices for these commodities and the continuing slump in other exports. Other exports have fallen from almost a quarter of all exports in 1993 to under 10 percent in 1995. Little information is currently available on the composition of other exports. Over 1991-93, these exports included electricity, light manufactured products, consumer goods (including carpets and sparkling wine), and intermediate products. In 1995, customs data suggest that other exports comprised mainly leather, tobacco and silk cocoons.

The composition of imports has also shifted over 1993-95. The relative importance of alumina imports has grown. The share of energy products has also increased, reflecting the steep rise in energy prices over 1993-94. While prices for grain imports have risen significantly, a sharp contraction in the volume of grain imports since 1993 (a year in which grain imports were unusually high) has been reflected in a stagnant share of grain in total imports. Other imports have declined markedly as a share of total imports. This reflected the compression in nonessential imports, and in imports of supplies and other inputs as economic activity has contracted. Little information is available on the composition of other imports, except that this group comprises mainly raw materials.

5. Exchange rate policy and international competitiveness 1/

Prior to May 1995, the national currency of Tajikistan was the Russian ruble. In the period following independence in 1991, the NBT quoted an official exchange rate between the Russian ruble and the U.S. dollar that was based on, but not identical to, the rate prevailing in Moscow. Throughout 1993 and 1994, the exchange rate quoted by the NBT was generally slightly lower (zero to 3 percent) than the Moscow MICEX rate. On May 10, 1995 the authorities introduced the Tajik ruble at an initial exchange rate of TR 1 to Rub 100 (Table 54). The official TR/US$ exchange rate was adjusted weekly or fortnightly by the authorities, based on the rate emerging from the weekly interbank auction market or on developments in the average interbank exchange rate if an auction had not taken place (Chart 11).

Table 54.

Tajikistan: Exchange Rates and U.S. Dollar Wages, 1991–95 1/

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Sources: National Bank of Tajikistan; State Statistical; World Bank; International Financial Statistics; and IMF staff estimates.

Prior to May 1995, Tajikistan’s currency was the Russian ruble; in May 1995, the Tajik ruble was introduced as the national currency at an initial rate of 1 to 100 Russian rubles.

U.S. dollars per national currency unit, deflated by relative consumer prices. An increase in the index signifies appreciation.

Chart 11
Chart 11

TAJIKISTAN: Exchange Rates and Wages

Citation: IMF Staff Country Reports 1996, 055; 10.5089/9781451836936.002.A001

Sources: State Statistical Agency; National Bank of Tajikistan; World Bank; and IMF staff estimates.1/ The national currency was the Russian ruble prior to May 1995; the Tajik ruble thereafter.2/ National currency units per U.S. dollar. An increase in the graph signifies appreciation.3/ U.S. dollar per national currency unit, deflated by relative consumer prices. An increase in the graph signifies appreciation.

Auctions were at times discontinued because high surrender requirements on export earnings led to a lack of sellers in the market. The surrender requirement was not used to accumulate foreign exchange reserves, but as a means of obtaining foreign exchange for the State Foreign Exchange Fund. Moreover, a lack of confidence in the domestic banking system discouraged enterprises and individuals from depositing foreign exchange holdings with banks and from participating in the interbank auction market through banks. Also, the failure by the Government to pay (in Tajik rubles) for some of its early foreign exchange purchases in the auction market adversely affected the market.

The limited access to foreign exchange through formal channels encouraged nondeclaration of foreign currency holdings and disintermediation of these flows. A parallel foreign exchange market was generally tolerated by the authorities. This market, from time to time and in certain parts of the country, is reported to have been of considerably greater significance than the official foreign exchange market.

The official exchange rate depreciated by over 80 percent in foreign currency terms against the dollar between May and December 1995. This depreciation took place despite attempts to slow depreciation by administrative means (especially between May and end-August), and reflected the highly expansionary financial policies during this time. Domestic inflation amounted to around 1,150 percent over the same period, and the real exchange rate is estimated to have appreciated by around 140 percent against the U.S. dollar.

Domestic wages have not kept pace with inflation or depreciation. By November 1995 the average wage had fallen to around US$4 per month. The contrast between wage developments in Tajikistan and Russia over the past four years paints an even starker picture. While U.S. dollar wages in Tajikistan in January 1992 amounted to 90 percent of the level in Russia, by December 1995 Tajik U.S. dollar wages had fallen to only 3 percent of the Russian level. Cash wages are, however, only a small part of labor cost. In addition, productivity is very low because of unsettled conditions, overstaffing, and irregular input supplies.

6. Developments in the trade system

From 1993 through much of 1995, the state dominated export and import trade through a system of state production quotas and monopoly export rights. Barter trade was the norm, both with states of the former U.S.S.R. and other countries. Trade with states of the former U.S.S.R. was based on annual bilateral trade agreements negotiated at an intergovernmental level. For nonbarter trade, payments by both state and nonstate traders mostly took place through correspondent accounts maintained by Vneshekonombank. High surrender requirements on export earnings limited export incentives and the supply of foreign exchange outside the state sector, as most surrendered foreign exchange was allocated to state enterprises. While imports remained relatively free from direct restrictions, state trading companies retained a dominant position in the importation of key commodities.

This system was largely a legacy of the old soviet regime. The retention of its key elements was designed to ensure a continued supply of essential imports, such as grain and petroleum products. The authorities’ response to declining export receipts was to progressively tighten trade and exchange controls during 1993 and 1994. In 1995, the Government eased certain restrictions but some key elements of the system effectively remained in place throughout much of the year. Significant steps toward liberalization were taken in late 1995 and early 1996, with the abolition of most remnants of the state order system and the replacement of foreign exchange surrender requirements with a repatriation requirement.

a. Developments in 1993 and 1994

Throughout 1993 and 1994, exports were subject to multiple restrictions. From mid-1993, specific ministries and state enterprises held monopoly export rights and export licensing authority over more than 80 percent of all exports, including cotton and aluminum. Exports were initially subject to one of 10 surrender rates, ranging from 30 percent (for exports not subject to state monopoly) to 62 percent of export earnings. In September 1993, the surrender requirement on all monopoly exports was increased to 100 percent. However, since barter trade predominated, surrender requirements applied in practice to only a small portion of exports. In principle, exports were subject to high tariffs throughout 1993 and 1994; however, numerous exemptions—for exports by most state trading bodies, exports under bilateral agreements, and bartered exports—meant that these tariffs, like the surrender requirements, in practice applied to only a small portion of exports.

In January 1994, export licensing authority was centralized in the Ministry for Foreign Economic Relations, and the number of goods subject to state export control was increased from 37 to 54, or virtually all exports. In addition, barter trade for cotton and aluminum was prohibited, although this was not enforced, and the surrender requirement for monopoly export products other than cotton and aluminum was lowered to 70 percent. In April 1994, exclusive rights to export cotton and aluminum in exchange for imports of energy products and grain were assigned to three government agencies: the state cotton agency (Glavkhlopkopprom), the aluminum company, and the major state trading company (Somonion). Later in 1994, cotton growers were granted the right to retain 10 percent of their 1994-95 crop for disposal through domestic sales.

The importance of barter meant that a large proportion of imports was effectively under the control of state agencies. Imports were generally limited only by a prospective importer’s ability to gain access to the means of payment: either a state order against the production of an export item—usually cotton or aluminum—or hard currency. The supply of foreign exchange was limited by the reliance on barter trade and by surrender requirements. Limited amounts of foreign exchange were available for purchase from the banking system for authorized transactions, and imports by nonstate entities took place via this means. Only imports of items such as firearms, narcotics, poisons, chemical weapons and nuclear material were prohibited.

While bilateral trade agreements with states of the former U.S.S.R. remained an element of the trade system in 1993 and 1994, it is estimated that Tajikistan was able to fulfil only 30 to 40 percent of its obligations under these agreements in 1993, and 25 to 30 percent in 1994. The increasing difficulties in meeting these commitments stemmed from production shortfalls and from the shift to other export markets for cotton and aluminum. Interstate correspondent accounts with states of the former U.S.S.R. remained open in 1993 and 1994, but were largely inoperative. In early 1993, outstanding debit balances on the accounts with Kazakstan, Uzbekistan, and Russia were converted into official debt. While unsettled balances remained on a number of the other accounts, no new bilateral payments arrangements were entered into with any countries.

b. Developments from January 1995 through March 1996

A number of measures were taken to ease restrictions on exports in 1995. In January 1995, the number of products subject to monopoly export control was reduced from 54 to 6. The controls were replaced with monitoring of export and import contracts by the Ministry for Foreign Economic Relations to ensure that transactions did not take place at distorted prices. The Ministry had authority to refuse approval of contracts it deemed inappropriate. In May 1995, state monopoly export rights and requirements for export licenses were abolished, except for cotton and aluminum. State orders for aluminum were limited to 20 percent of production in 1995, with 80 percent remaining at the disposal of the aluminum company. In October 1995, the surrender requirement for exports that had previously been subject to state control was reduced from 70 percent to 30 percent, the same rate as applied to exports of products that had not been subject to such control. The surrender requirement on cotton and aluminum receipts was maintained at 100 percent, and strict prepayment requirements for exports were specified. However, since barter remained the principal form of trade for aluminum, the surrender requirement was largely irrelevant for aluminum. Additional cotton and aluminum quotas were imposed in October 1995 as a means of financing grain imports. Producers of manufactured consumer goods were instructed to give priority access to their output to the State Committee for Contracts and Trade and the Tajik Consumer Cooperative.

Export duties remained nominally in force throughout 1995 on virtually all export categories. Taxes were set at ad valorem rates ranging from 0.2 to 500 percent on around 160 product categories, with certain goods (mostly metallurgy products) subject to specific taxes ranging from US$2 to US$500 per ton. The January 1995 schedule was replaced in June and again in October with broadly similar schedules, although the range of exporters qualifying for exemptions or lower tax rates was widened in October. Import duties were introduced in October 1995 for five product categories at ad valorem rates of either 2 or 5 percent. Certain types of imports are exempt from these customs tariffs (imports from states of the former U.S.S.R., imports by state agencies, and bartered imports).

Beginning in late 1995, a number of measures were taken to reduce exchange and trade restrictions. State orders were abolished for aluminum and were reduced to 70 percent of the targeted 1995-96 cotton crop, with the remaining 30 percent left at the disposal of growers for either export or domestic sale. State orders were abolished for future cotton crops. New barter trade arrangements were prohibited, with the exception of contracts involving aluminum. In February 1996, state orders for trade effectively ended with the abolition of the state grain fund’s allocation of cotton and aluminum. Surrender requirements on export receipts were replaced with a repatriation requirement for earnings on all export products, and export duties were abolished for all goods, effective March 1, 1996.

While bilateral trade agreements with many states of the former U.S.S.R. were renewed for 1995, fulfillment of the obligations under these agreements fell further, to an estimated 20 percent. The dominance of large state import agencies (Tajik oil, the Ministry of Bread, Somonion, and the State Committee for Contracts and Trade) diminished, as private enterprises increased their share of imports of major commodities such as grain and petroleum products. With the dismantling of the state order system for exports, and the expiry of most bilateral trade agreements with states of the former U.S.S.R. at end 1995, such agreements have not been renewed for 1996. The Government announced in October 1995 that it would no longer guarantee payments by enterprises under the 1995 agreements, and that future trade agreements would specify that trade take place by direct contracts between enterprises. A number of agreements entered into subsequently by the Government (for example with Uzbekistan) have embodied these principles.

At end January 1996, no bilateral payments arrangements existed, and the trade agreements that are in force are essentially economic cooperation agreements. 1/ Discussions have taken place regarding Tajikistan joining a customs union with Russia, Belarus, Kazakstan and the Kyrgyz Republic, but these remain at an early stage.

7. External debt

In the short period since independence, Tajikistan has accumulated external debt amounting to over 140 percent of GDP (Chart 12). Borrowed resources were used largely to support current consumption and to delay adjustment to the changed external environment. Most of the debt has been contracted on highly unfavorable terms for a country of Tajikistan’s income level.

Chart 12
Chart 12

TAJIKISTAN: External Debt by Major Creditors, 1992-95

(In Millions of US Dollars)

Citation: IMF Staff Country Reports 1996, 055; 10.5089/9781451836936.002.A001

Sources: Ministry of Finance; Vneshekonombank; and IMF staff estimates.

Three official creditors (Russia, Uzbekistan, and the EU) account for over three-fourths of Tajikistan’s external debt. Almost the entire debt stock (about 97 percent) is either government or government-guaranteed debt. The share of total debts attributable to trade transactions is probably close to 90 percent. 2/ Around 90 percent of Tajikistan’s external debt is denominated in U.S. dollars, with the remainder denominated in ECUs.

In 1993-94, while debt service payable remained low relative to export earnings, Tajikistan made minimal payments to creditors (around US$2 million), with Russia and Uzbekistan agreeing to a deferral of most obligations. In 1995, both debt service payable and debt service paid increased. Russia and Uzbekistan agreed to a further deferral of most payments due or overdue. The Commission of the EU agreed to explore options for providing exceptional macroeconomic assistance; repayment on a large bullet loan from the EU fell due in August 1995. With debt service payable in 1996 amounting to over 40 percent of projected export earnings, a comprehensive approach to debt rescheduling and debt relief is essential in order to avoid further accumulation of external arrears or repeated short term deferrals. Tajikistan’s major creditors have acknowledged the need for a far-reaching rescheduling on concessional terms.

Management and control systems for public external debt commitments remained inadequate throughout 1993-94, and only improved somewhat toward the end of 1995. A debt management unit was established in the Ministry of Finance in order to monitor external debt and debt service for credits contracted or guaranteed by the Government, although monitoring of non-CIS credits remained poor. Two major steps were taken in October 1995 in an effort to improve control over the contracting of new debt. In order to limit the build-up of further debt through arrears under bilateral trade arrangements with CIS partners, the Government announced that it would no longer guarantee enterprise payments under such arrangements. Most of the existing bilateral arrangements expired at the end of 1995, and new agreements specify that trade will take place on the basis of direct contracts between enterprises. In addition, authorization of the Minister of Finance was required for the issuance of new Government guarantees.

8. Foreign direct investment

Tajikistan has a relatively liberal foreign investment law, but the economic and security situation in recent years has discouraged foreign investment. Statistics on foreign direct investment in Tajikistan are of poor quality. The Ministry of Finance maintains a register of planned joint ventures and planned investment expenditures, but no accurate data exists on actual investment flows. Official estimates of foreign direct investment over 1991-95 range from US$42 million to US$140 million, and no data is currently available on the investor or industry breakdown of these figures. One significant area of current and potential foreign direct investment is gold mining. Foreign investors are intended to be able to participate in future privatization sales.

VII. Structural Reforms

1. Price liberalization

Progress on price liberalization has been uneven and limited until 1995. The first price reform in Tajikistan was a partial liberalization in April 1991 (prior to the breakup of the Soviet Union and Tajik independence). Prices for a limited range of goods were freed and the prices for most other goods increased significantly. On January 10, 1992 there was a second round of price increases, with price controls on many goods removed entirely. 1/ However, consumer goods which were deemed important for social policy purposes remained subject to price controls. In addition, limits were established on the increase in prices for energy consumed by industry, precious metals, transportation, and communications.

While a number of administered prices were increased during 1992 and 1993, there was no further price liberalization through the end of 1994; in fact, price controls were tightened in 1993. On January 1, 1995 the Government took a major step toward price liberalization. Direct price controls were removed on all goods, except for a small but important group of consumer items—bread and flour, milk and dairy products, vegetable oil and meat. In June 1995, prices for these goods were liberalized, except for bread and flour, whose prices were raised by 150 percent at the time of the currency introduction. The currency introduction also eliminated existing differences between cash and noncash prices, unifying the price system and sharply increasing the effective prices of some goods for state enterprises.

On August 20, 1995 the Government removed direct price controls on bread and flour, while retaining a regulated markup. 1/ The bread price rose from 4 to 18 Tajik rubles per loaf (680 g), a larger increase than the Government had expected. Public protests prompted the Government to backtrack, and on August 23 the Government announced that the “market-determined” price of bread would be TR 15, effectively reintroducing an administered bread price, albeit at an almost cost-covering level. In spite of a rapidly depreciating exchange rate and soaring inflation, the bread price remained at this level until December 1995, when it was increased to TR 35, which at that point was still insufficient to cover costs. Bread and flour prices were completely liberalized on March 1, 1996, with bread prices increasing to about TR 72 initially and then moving freely.

The Government also set maximum markups under “anti-monopoly” laws dating back to 1993. A wide range of product categories—over 350, most in markets which are not monopolized according to standard definitions of that concept—are regulated under these laws; profits deemed to arise from “excessive” prices may be claimed for the state budget. However, apart from an attempt by the Tax Inspectorate to penalize some producers during the summer of 1995, regulated margins were apparently not enforced except for utilities and transportation. As a result, markup controls appear to have been largely ineffective.

2. State orders and procurement

During the Soviet era, a system of state orders was used to arrange mandatory purchases from individual agricultural and industrial enterprises, with the Government in return providing most inputs. Specified quantities of output had to be sold to the state at prices fixed by the State Committee on Prices (SCP). After independence, the Government continued to enforce the state order system. 2/ Many enterprises continued to rely on state orders, as they lacked the skills to procure inputs and market outputs on their own. In the second half of 1993, there was a strengthening of the state order system through stricter implementation and the imposition of licensing requirements. However, unlike the state order system of the past, there were few guarantees for the provision of raw materials to producers who met production quotas.

By mid-1995 the scope of the state order system had been significantly reduced, reflecting a conscious change of policy as well as the growing inability of the state to continue its traditional role as supplier of inputs and marketer of outputs for state enterprises. With the exception of the 1995 cotton harvest, in which the state continued to reserve 70 percent of planned output for state purchases, the state order system has been effectively abolished. Also, it was announced that the 1996 cotton crop would not be subject to mandatory sales to the cotton complex.

3. Privatization and enterprise restructuring

Tajikistan was one of the first states of the former U.S.S.R. to initiate a privatization program under the aegis of the State Property Committee (SPC), formed in August 1991. Progress on privatization started rapidly with small scale retail establishments. In addition, most of the country’s housing stock was privatized during 1991 and 1992. The civil war interrupted the privatization process, but privatization picked up again during 1994, bringing the total number of privatized enterprises to 1,246 by the end of 1994. Privatization slowed again, to only 59 privatized enterprises in the first half of 1995—reportedly due to uncertainties in the payments system and prices preceding the introduction of the national currency. Although almost 100 enterprises were privatized in the third quarter, as of September 1995, only about 7.5 percent of state-owned enterprises had been privatized. In general, these were small-scale enterprises, with average employment at these firms of just over 60 workers. Over 85 percent of these enterprises were engaged in catering or consumer services. Largely as a result of this slow pace of privatization, the private sector has grown very slowly in Tajikistan. As of mid-1995, Tajikistan had only about 1600 registered private enterprises and cooperatives, employing about 16,000 workers.

Larger enterprises have usually been turned into joint stock companies before privatization. In such cases, the state has typically maintained a significant stake in the company of 40 percent or more. The most common method of actual privatization has been the sale or transfer of the enterprise, or a stake in the enterprise, to its labor collective. The selling price has generally been the depreciated book value. Over 45 percent of enterprises privatized through end-1994 had been sold outright to private owners, but these were generally very small, with an average of just over one employee per enterprise. While over a quarter of the consumer services sector has been privatized as of end-1995, very little of the transport, wholesale trade, agriculture or construction industries have been privatized. Revenue from privatization has been low.

Apart from the civil war, the most important factor hampering privatization has been an inadequate legal framework. First, the privatization law gave labor collectives the responsibility to initiate the privatization process; no enterprise could be privatized at the initiative of the SPC against the wish of its employees. Second, line ministries (for Republican property) and local governments (for municipal property) had to approve the privatization of a specific enterprise. Third, the existing framework was restrictive regarding the sectors and enterprises open to privatization. Finally, restrictions were typically imposed on the employment and activities of a privatized enterprise. This, together with the large stake often kept by the Government, limited the scope for restructuring of privatized enterprises, reducing the number of redundant employees, or allowing greater flexibility in decision making by managers. As a result, the traditional relationship between enterprises, line ministries and local governments often survived privatization.

In recognition of the impact this legal framework had on privatization, and in response to a Presidential Decree 1/ two decrees designed to accelerate the privatization process were approved in late 1995. 2/ These decrees constitute a substantial departure from previous legislation: they explicitly state the objective of privatizing all state property, with the exception of a short negative list; they set strict deadlines for the completion of each stage of the privatization process; they give the SPC the authority to initiate and manage the privatization process; they open up all sectors to be privatized to foreign ownership; and they envisage standard methods for fast privatization, primarily the auctioning of enterprises with less than 30 employees and the transformation of larger enterprises into joint stock companies and their subsequent sale to the public through voucher privatization. A law passed in November 1995 confirmed the SPC’s authority to select enterprises to be privatized.

In the agricultural sector, private land ownership is not allowed, even though a family may lease farmland with inheritance rights for up to 100 years. About 70,000 hectares of farmland not being used by state and collective farms were designated for private farming in 1994. In addition, a November 1995 decree calls for all nonirrigated land to be handed over to private farmers, provided the farmer agrees to grow grain.

Enterprise restructuring has proceeded slowly, with limited progress to date in imposing hard budget constraints. As a result, 1995 saw growing interenterprise arrears. Measured by File No.2 of the banking system, 3/ interenterprise arrears increased fifteen-fold after the currency reform, equalling about 20 percent of estimated GDP at end-1995 (Table 55). Two factors contributed to the sharp increase of interenterprise arrears in Tajikistan. First, as was the case with tax payments, when noncash money became fully convertible to cash at par after the currency reform, enterprises began to use noncash for purposes other than paying suppliers, leading to a sharp increase in arrears.

Table 55.

Tajikistan: Arrears

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Source: National Bank of Tajikistan

Measured by setlement documents that have not been cleared by banks.

Second, noncash and cash prices were unified as a result of the currency reform, leading to a de facto price jump for state monopolies which had been using cash prices but paid in noncash. For example, state cotton monopoly had collected raw cotton from farms, paying noncash at cash prices. After the currency reform, they could no longer buy goods at cheap prices. The effect of this relative price increased was intensified by a one-time liquidity decline, related to the difference between the conversion rates for noncash deposit and the adjustment in noncash prices. In case of the Ministry of Bread, these problems were further aggravated by the failure to adjust regularly and sufficiently the administratively determined bread prices.

ANNEX I: The Introduction of the National Currency

1. The design of the currency reform of 1995

In designing the currency reform in Tajikistan, three key facts needed to be taken into account: first, the use of the 1993 Russian ruble as a sole legal tender prior to the currency reform—a currency which would retain its value as foreign exchange after the introduction of the national currency; second, the imbalance between cash and noncash as reflected in the sharp discount for the latter; and finally, the constraint imposed by the fact that the volume and denominations of Tajik ruble banknotes were predetermined by the printing of banknotes in the fall of 1994.

The authorities did not seek to withdraw the existing cash Russian rubles from circulation over a specified conversion period. Instead, the authorities decided to treat Russian rubles in circulation like any other foreign currency, with individuals and enterprises able to exchange these freely through the foreign exchange market, initially at a rate of 100:1 and subsequently at a floating exchange rate. This decision was in part motivated by the disruptions that such operations had caused in some other CIS countries. Also, withdrawal was not demanded by the Central Bank of Russia, since the Russian ruble banknotes issued in Tajikistan had been purchased with foreign exchange or supplied against loans bearing market interest rates. 1/ More importantly, the authorities felt such an operation might not be successful, as the population might have been reluctant to surrender holdings of a de facto convertible currency and also because the authorities believed much of the cash had already been used to finance imports.

Without a forced withdrawal of cash at a fixed exchange rate, the principal policy parameter of the reform was the conversion rate for noncash balances into Tajik rubles. Since the currency reform was intended to restore the convertability of bank deposits into cash without a discount, it was crucial to choose a noncash conversion rate which would result in a sharp cut of deposit money relative to currency in circulation. The authorities planned to convert cash Russian rubles at 100:1, thereby targeting a price conversion of about 100:1, enabling the TR 1 note—the smallest denomination—to buy one unit of the least expensive goods. Since at the time of the currency introduction noncash rubles were being informally traded, on average, at about 20 to one against cash rubles, the authorities planned to adopt a uniform noncash conversion rate of 2,000:1. 2/ This was expected to result in an initial level of prices in the new currency lower by a factor of 100 than the Russian ruble cash prices prior to the reform, or somewhat higher if velocity were to increase as a result of the currency introduction.

The conversion procedures were subsequently modified to accommodate two decisions. First, the authorities wished to grant preferential treatment to pre-1993 household deposits that had been eroded by inflation by converting them at a rate of 100:1. To ensure that bank deposits were converted on average at the rate 2,000:1, enterprise and other household deposits were converted at the more discounted rate of 2,400:1. To eliminate the effect of multiple deposit conversion rates on the net worth of banks, an equalization fund was established. Each bank was required to transfer any gains arising from the use of differential conversion rates, instead of a flat 2,000:1 rate, into the fund, and was compensated by the fund for any losses from the differential rates. The equalization fund was designed so that net transfers would equal zero.

Second, one day prior to the currency introduction, the authorities unexpectedly announced an increase in the minimum wage and average budgetary wages by about 80 percent. This increase could not be afforded by the budget. This wage increase could have been offset by converting public wages and the minimum wage at a rate of 200:1, i.e. by twice as much as the projected shift in prices once expressed in the new currency. Instead, the authorities decided to halve all noncash conversion rates, leading to an average conversion rate of 1000:1 rather than 2000:1. The approximately doubling of the post conversion price level was expected to also double the initial quantity of broad money in the economy and the post-conversion price level. Actual conversion rates for various assets and liabilities are listed in Table A1.

Table A1.

Tajikistan: Conversion Rates for the 1995 Currency Reform

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Source: National Bank of Tajikistan.

Depending on the type of capital.

Subject to comprehensive revaluation after the currency introduction.

Transferred to special accounts of the Savings Bank and frozen for the future issuance of privatization certificates.

2. Supporting measures

Because of the large initial differences between cash and noncash prices, the process of price unification was expected to lead to strong relative price movements. To prevent this process from leading to continued inflation, a number of accompanying measures were adopted simultaneously with the introduction of the Tajik ruble:

1. Prices of vegetable oil, milk and dairy products were fully liberalized. Prices of bread and flour—the last remaining product group with regulated consumer prices, apart from utilities—were increased by a factor of 2.5, then converted to Tajik rubles at a rate of 100:1.

2. Bank-by-bank credit ceilings, which had been introduced in February 1995, were converted at a rate of 1000:1 and extended through June 1995, and the freeze on NBT credit to the Government was extended for two months.

3. Wage arrears accumulated before May 10, 1995, including wages paid into individual saving accounts, were transformed into special accounts in the Savings Bank and frozen for future conversion into privatization vouchers, following the design of a privatization program.

4. Bank deposit and lending rates were liberalized, except for relending to “priority” sectors of the economy.

5. Access to enterprise deposits was liberalized. The authorities retained restrictions on most household deposits until; July 1, for fear of their inflationary impact.

6. Limits on the holding of cash in bank vaults were abolished.

7. A temporary liquidity facility was established to assist commercial banks in case of large cash withdrawals immediately following the currency reform, as had occurred in many other CIS states after the introduction of national currencies (Chart A1). To induce prompt repayment of any such loans, interest rates under the facility were to rise sharply after the first four weeks, and any outstanding balance were to be withdrawn from the bank’s correspondent account with the NBT after six months.

Chart A1
Chart A1

SELECTED STATES OF THE FORMER U.S.S.R.

Deposits to Currency Ratio 1/

Citation: IMF Staff Country Reports 1996, 055; 10.5089/9781451836936.002.A001

Sources: National sources.1/ Deposits in the national currency divided by currency in circulation.2/ For Azerbaijan, Belarus and Moldova, the number of months after the withdrawal of pre-1993 rubles.

8. The Tajik Interbank Currency Exchange (TICEX) was licensed to hold weekly interbank foreign exchange auctions, which would establish market exchange rates vis-á-vis the U.S. dollar. This rate would be used for transactions between the Government and the NBT, and for customs valuation purposes. Otherwise, the auction rate would be indicative; banks would be free to set their own rates in buying and selling foreign exchange.

10. Cross-border movements of currency, both domestic and foreign, were liberalized. The only remaining restriction was a customs declaration requirement for the import or export of currencies in excess of US$500 or the equivalent.

3. Results of the currency reform

The introduction of the national currency on was relatively successful. Although there was no fixed period for obligatory conversion in Tajikistan, some 22 billion Russian rubles (over 13 percent of the total issued) were exchanged for Tajik rubles within six weeks after the currency introduction. The gap between the value of noncash and cash money, which had been a major burden on the economy, disappeared as all deposits—except the frozen wage arrears deposits—became convertible into cash. The exchange rates of the new currency were determined in the weekly auctions on the TICEX, the first wholesale foreign exchange market in the country. The Savings Bank enjoyed a slight increase in its deposit base, due to the increase in the deposit interest rate.

Cash prices for mid-May, as measured by the May CPI denominated in the national currency were, lower by a factor of 90 than a price estimate for mid-May expressed in the Russian ruble, rather than by a factor of 50 which had been expected on the basis of the noncash conversion rates. 1/ The much larger then anticipated fall in prices can be attributed to a combination of three factors. First, the authorities feared that households would have a very high propensity to consume once bank deposits became convertible into cash. To prevent the attendant surge in prices, temporary withdrawal restrictions were imposed on most household deposits, contrary to the original plan. These restrictions had the effect of reducing the initial effective liquidity in the economy below the level that had been targeted on the basis of the conversion rates adopted. Second, the Government had created a perception that prices would fall by a factor of 100 along with wages—administrative prices for bread and flour were converted at a rate of 100:1 and the exchange rate between Tajik and Russian rubles was set at 100:1 in the first days after the currency reform and was maintained close to this rate for several weeks. Third, the effective discount for noncash applicable to the overall economy might have been lower than indicated by the black market rate for cash versus noncash. This may have reflected the fact that not all noncash transactions took place at noncash prices.

ANNEX II

Tajikistan: Tax Summary as of February 1, 1996

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All customs duties were eliminated on March 1, 1996.

ANNEX III: Social Safety Net

The social safety net consists of five elements: (i) family allowances, including student stipends and compensations for bread price increases; (ii) a Pension Fund providing old-age, disability, and social pensions; (iii) an Employment Fund providing job placement help, training, and benefits to unemployed workers; (iv) a Social Insurance Fund providing sick-pay, remedial health care services, and allowances for maternity leave; and (v) price subsidies.

a. Family allowances

The Pension Fund provides uniform family allowances for households with young children, financed from payroll taxes. During 1994, a monthly benefit of Rub 1,000 per child was given to some 2.1 million children up to the age of 16 years. In contrast to previous legislation, this arrangement placed no restrictions on family size or income to govern eligibility. Student stipends were financed from the state budget and distributed by local governments. During 1994, stipends to students in higher education consisted of a monthly average benefit of Rub 6,123 for some 141,000 students. In Kay 1995 the average student stipend was increased to TR 120 and the monthly allowance for children up to 16 years of age was increased to 50 percent of the minimum wage. Eligibility for child allowances was limited to families in which the average income per household is below the minimum wage. A lump-sum benefit equal to three times the minimum wage is paid on the birth of the first child, two times the minimum wage on the birth of the second child, and one minimum wage on the birth of a third child. 1/

During 1994, only 60 percent of the budgeted amount of social safety net expenditures were paid due to the severe cash shortages. During 1995, the budget and the Pension Fund, continued to be unable to pay benefits in full due to insufficient revenues.

Bread allowances constitute the major social safety net provision to the population. Up to May 10, 1995, the budget paid bread compensation to the whole population without regard to need. From August 1993 to May 1995, all citizens of Tajikistan were entitled to cash allowances of Rub 1,800 a month and since November 1993, old-age pensioners received Rub 2,800 a month. 2/ Local financial institutions are responsible for paying monthly compensations through enterprises. 3/ In May 1995, bread compensation payments to the population were abolished.

In June 1995, the situation with the bread and flour subsidy was particularly acute, as the monthly subsidy amounted to TR 350 million (4 percent of second quarter GDP). To address the fiscal imbalance, on August 20 the Government increased the prices of bread, flour, oil, oil products, and gas to near cost recovery levels. To protect the most vulnerable groups of the population, the Government reintroduced monthly cash compensations (TR 144) to specific population groups, including old-age nonworking pensioners receiving the minimum pension, registered unemployed, disabled pensioners, and children under 16 years of age as long as the monthly income per family member was below the minimum wage. 1/ Roughly 20 to 25 percent of the population received this compensation. With the bread price increase in December, these benefits were raised to twice the minimum wage. On March 1, 1996, with the freeing of bread prices, these benefits were delinked from the minimum wage and increased to TR 500.

b. Pensions

Tajikistan’s old-age population dependency ratio (14 percent) 2/ is the lowest among CIS countries. By comparison, this ratio is 17 percent in the Kyrgyz Republic, 18 percent in Kazakstan, and 34 percent in Ukraine. About 17 percent of the population receive a pension. This high share compared to other developing countries reflects pension design problems, in particular the relatively low compulsory retirement age (60 years for men, 55 for women) and the importance of early retirement programs. Old-age pensions for those who have worked at least 25 years (20 years for women) are 55 percent of the average earnings of the last two years or of the highest five years, whichever yields the larger benefit. This figure increases by one percentage point for each additional year of work above the minimum requirement, up to a maximum of 75 percent. Working pensioners receive the same benefits as nonworking pensioners.

During 1994 and early 1995, the minimum pension was Rub 12,000, while the average pension was Rub 25,000 a month. Procedures to calculate old-age pensions remained unchanged during 1994 and early 1995. In May 1995, the minimum monthly pension was increased to TR 216 and the average pension to TR 470. The average pension actually received, however, was lower as many beneficiaries received no benefits for several months.

The Pension Fund has considerable independence from the budget, but is overseen by the Ministry of Social Security (MSS) which determines its basic functions and activities. 3/ The MSS decides the formula to calculate pensions, calculates the pensions and determines payment mechanisms. In 1994, the Pension Fund recorded a cash basis surplus of 4.6 percent of GDP. In the second half of 1994, the Pension Fund accumulated arrears of 2 percent of GDP, as pensions were no longer paid on a timely basis. During 1994, payroll tax arrears amounted to 0.5 percent of GDP. This was primarily because audit procedures were inadequate and the penalty rate on overdue payments was low (0.5 percent per day, or 183 percent annually).

The Pension Fund recorded a surplus of 8 percent of GDP on an accrual basis in the first four and a half months of 1995. However, because of a shortage of cash, due to the fact that revenues were largely in noncash while expenditures were largely in cash, arrears amounted to 5.7 percent of GDP. Preliminary estimates for the last seven and a half months of 1995 indicate an accumulation of pension arrears of 0.8 percent of GDP, and a deficit on an accrual basis of 1.5 percent of GDP.

Despite the high statutory tax rate, payroll tax collections have been low since the introduction of the national currency. The main reason for this disappointing revenue performance was the sharp increase in the effective tax burden, since enterprises could no longer pay in depreciated noncash rubles. In addition, a number of other factors played a role: (1) the poor audit and enforcement procedures of the social security funds; (2) the negative real penalty rate, which provided an incentive to postpone tax obligations; (3) the special tax treatment for some groups of taxpayers (these exemptions were reduced from the fourth quarter of 1995); (4) the delay in payment of the Government’s own tax obligations; and (5) the occurrence of interenterprise arrears. Because of the nonpayment of taxes, the effective payroll tax rate is much less than the statutory tax rate.

To avoid new arrears, the authorities are considering introducing, during the course of 1996, a two-tier system of pension payments. This would consist of a flat payment during the year and a second payments at the end of the year if there is enough revenue. The Government also plans to raise the penalty for the nonpayment of the payroll tax.

c. Employment and Social Insurance Funds

The Employment Fund provides unemployment benefits, training and, to a few enterprises, employment subsidies. Individuals who have worked at least 3 months and are dismissed are entitled to an unemployment benefit equal to the minimum wage, paid for six months. If the individual has children, the benefit is increased by 20 percent per child for up to three children. Unemployed workers with no work history are eligible for three-fourths of the minimum wage, paid for three months. The Employment Fund collects payroll taxes and pays benefits on a regional basis.

During 1994 and the first half of 1995, unemployment benefits ranged from Rub 8,000 to Rub 14,000 a month (the average benefit amounted to Rub 10,682), and the average income replacement rate for an unemployed worker was about one-third. After the introduction of the national currency, the average unemployment benefit amounted to TR 177; in July, the average replacement rate represented only one-fifth of average income.

The Employment Fund comprised 68 district employment offices throughout the country, with 852 employees, similar to the 1993 level. Employment centers provided assistance to 46,000 people in 1994 and 22,406 people in 1995. In December 1995, around 12,500 people were receiving unemployment compensation, down from 16,000 in December 1994 and 21,600 in December 1993. This decline is explained by the reduction in the real value of unemployment benefits, and the fact that the unemployed were not paid during most of 1994 and were only paid in part during most of 1995. Combined with the bureaucratic hassles in collecting unemployment compensation, these factors resulted in few people applying for benefits.

By May 1995, unemployment benefits arrears were on average ten months. With the introduction of the Tajik ruble in May, unemployment payments resumed for two months, before arrears began again accumulating. Because of low tax compliance, during the second half of 1995 benefits were not paid in full, and were paid in some regions but not others. As a result, during that period the Employment Fund accumulated arrears of TR 15 million.

The Social Insurance Fund is mainly responsible for paying birth and maternity allowances and sick pay. In addition, the Social Insurance Fund provides sanatoria facilities for children and the temporarily disabled. Maternity benefits provide full salaries for 126 days of combined prenatal and postnatal periods. The Social Insurance Fund provides birth allowances which exactly duplicate birth allowances paid by the budget. Sick leave provides 100 percent of salary for up to four months per year; it represents the biggest Social Insurance Fund expenditure item, amounting to 0.6 percent of GDP in 1993 and 1994. The Social Insurance Fund is also responsible for eight sanatoria and health care facilities, but only four are operational and they are underutilized. During 1994 and the first four and a half months of 1995, the Social Insurance Fund had cash surpluses of 0.4 and 0.3 percent of GDP, respectively. During the rest of 1995, the Social Insurance Fund budget was roughly balanced. 1/

d. Price subsidies

In 1994, substantial resources were allocated to providing subsidies to the Tajik population. Flour and bread products subsidies—payments to bakeries—amounted to 8.4 percent of GDP in 1994 2/ and 5.2 percent of GDP in the first four and a half months of 1995.

Despite efforts to reduce the range of consumer subsidies in 1994, there were still large subsidies for energy for household consumption (1 percent of GDP), transport (0.6 percent of GDP), and irrigation water for the agricultural complex (2.3 percent of GDP, Table A2). Water to the agricultural sector was provided free, despite the mounting cost of maintaining the infrastructure. Preliminary data for last seven and a half months of 1995 show budgetary support for the bread complex of 9 percent of GDP.

Table A2.

Tajikistan: Subsidies, 1994-95

(In millions of Russian rubles (RR) and Tajik rubles (TR)

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Sources: Tajik authorities; and IMF staff estimates.

Preliminary.

Cash basis.

Subsidy reform progressed slowly, as subsidies absorbed over one fourth of the government budget in the first four and a half months of 1995. On May 10, 1995, the authorities increased bread and flour prices and liberalized prices for vegetable oil, milk, and milk products. Bread and flour subsidies were virtually eliminated on August 20, but domestic prices were subsequently not adjusted for changes in the exchange rate and the rise in the cost of imported grain and flour. As a result, bread subsidies re-emerged in the fourth quarter, and despite the doubling of bread prices in December, a subsidy element remained.

Tajikistan receives a significant amount of humanitarian assistance which, to the extent that it is given away, represents an implicit subsidy. Over the period 1992 to 1994, international organizations have channeled humanitarian grants—mainly wheat and other items—to refugees and population groups affected by the civil conflict.

ANNEX IV: Development of the Foreign Exchange Market

There was virtually no foreign exchange market in Tajikistan prior to the currency reform of 1995. The Tajikistan Interbank Currency Exchange (TICEX) was established in May 1995 to conduct auctions for the sale of foreign exchange. Paid-in capital was Rub 500 million, of which 31 percent was owned by the NBT and the rest evenly distributed between the seven commercial bank members (the Foreign Trade Bank (VEB), Orion Bank, Agroprom Bank, Sberbank, Tajik Bank Business, Somon Bank, and the Central Asia Bank).

Only one currency (the U.S. dollar) was chosen to be auctioned although the original plan called for the auctioning of seven currencies at the TICEX including currencies of four other Central Asian republics. The settlement system was based on banks having both Tajik ruble and U.S. dollar accounts at the NBT, with auction transactions being settled on the books of the NBT on the day of the auction. Late settlement was to be penalized at LIBOR plus 4 percent and exclusion from the auction. Banks’ U.S. dollar accounts at the NBT received a market rate of interest (LIBOR plus 0.1 percent for small amounts, rising to LIBOR plus 1.5 on amounts above US$500,000). Banks were to place funds in their U.S. dollar accounts at the NBT in advance of the auction. Commissions ranged from 0.4 percent for transactions up to US$50,000 to 0.1 percent for transactions above US$500,000.

The first auction was held on May 23, 1995 when US$60,000 were sold at TR 50 per U.S. dollar to three banks, with the Ministry of Finance the only seller of U.S. dollars. Overall, nine auctions were conducted until July, for a total amount of US$2.7 million. Up to seven banks have participated as buyers and on one occasion, three banks were sellers of foreign exchange in the auction.

The auctions were, however, discontinued in early August because of a lack of foreign exchange in the interbank market. Furthermore, the reputation of the TICEX was severely damaged since the Ministry of Finance (MOF), the sole seller of foreign currencies, did not settle its dollar liabilities of about US$1.5 million to banks throughout 1995. The official exchange rates used for accounting and customs duties were instead determined based on rates quoted by commercial exchange bureaus. The TICEX was briefly reopened in September but closed in November again as most foreign exchange inflows bypassed the TICEX and were rationed through Presidential decrees for importing grains in the form of interest free credits (Table A3).

Table A3

Tajikistan: Foreign Exchange Operation of the NBT, September 1995 - January 1996

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Sources: the NBT; and IMF staff estimates.

The positive balances refer to foreign exchange which was surrendered by the State Cotton Complex to the NBT without compensation.

Regular foreign exchange auctions were resumed in late February 1996. The major suppliers of foreign exchange have been the aluminum and cotton sectors, which have needed to sell foreign exchange to pay taxes and other domestic currency obligations. Weekly auction volumes, at just over US$500,000 on average, have been modest. However, they have been substantially greater than in previous auctions. The exchange rate of the Tajik ruble has appreciated by over 7 percent in nominal terms against the U.S. dollar since the resumption of the foreign exchange auctions.

ANNEX V: Exchange and Trade System

(Position as of March 31, 1996)

1. Exchange arrangements

As of May 10, 1995, the sole legal tender in Tajikistan is the Tajik ruble. Russian rubles, which circulated as legal tender prior to May 10, 1995, are now treated as foreign currency. The exchange market in Tajikistan comprises three tiers: an interbank and enterprise market which includes the National Bank of Tajikistan (NBT), an official retail market based on foreign exchange bureaux, and an unofficial curb market. The NBT is the holder of Tajikistan’s official foreign exchange reserves, and acts as an agent for the Government in respect of any significant Government transactions in the foreign exchange market. However, Government Ministries and agencies continue to hold foreign exchange accounts with the banking system in which working balances are maintained for small day-to-day requirements.

The principal exchange rate in use in Tajikistan is that determined in the interbank market. Transactions in the interbank market take place via weekly auctions and daily transactions among banks or between banks and enterprises. Since December 1995 enterprises have been permitted to participate directly (as well as indirectly via their banks) in the interbank auctions. Once a week the NBT quotes an official representative exchange rate for the Tajik ruble based on the midpoint of buying and selling rates for the Tajik ruble against the U.S. dollar in the Tajikistan Interbank Foreign Currency Exchange (TICEX). In the event that an auction does not take place, the NBT’s official rate is set at the average of commercial banks’ exchange rates for transactions in the interbank market during the previous week, as reported by the banks to the NBT. The official exchange rate is used for revaluation of the NBT’s foreign currency balances, for the calculation of customs duties, and for most of the NBT’s foreign exchange transactions. Prior to February 24, 1996, the official rate was also used for the required surrender of 30 percent of export foreign currency receipts to the NBT. On February 24, the surrender requirement was abolished and replaced with a repatriation requirement. In March 1996, the average TICEX rate was 283 Tajik rubles per U.S. dollar.

A freely negotiated market exchange rate may also emerge outside the auction from transactions among authorized commercial banks and/or between banks and enterprises. Fifteen commercial banks are authorized to deal in foreign exchange. However, only three or four banks in addition to the NBT are active. With the exception of the Vneshekonombank, most banks have only a handful of transactions each week. Authorized banks and the NBT obtain foreign exchange, inter alia, by purchasing repatriated foreign exchange earnings from exporters. Authorized bank holdings of foreign exchange may be sold to customers to pay for imports of goods and services with the appropriate documentation. The NBT mandates a maximum service commission or margin of 10 percent between commercial bank buying and selling rates. Exchange rates of authorized banks are published weekly in the business press.

A retail foreign exchange market operates through foreign exchange bureaux which are owned by authorized banks. Individuals may make purchases and sales in this market without limit. In addition, an informal parallel market in foreign exchange exists. Although technically parallel market transactions are illegal, small transactions are tolerated by the authorities. The parallel market exchange rate was within two percent of the official rate during March, 1996. Commercial banks monitor movements in the parallel market and TICEX rates when setting their own rates.

2. Administration of control

The current regulations concerning the availability and use of the Tajik ruble are set out in the Law on Foreign Currency Control of May 10, 1995. The Finance Ministry and the Ministry of Economy and Foreign Economic Relations have responsibility for financial relations between Tajikistan and other countries. The Vneshekonombank acts as the agent of the Finance Ministry and the depository of most day-to-day Governmental accounts, while the official foreign exchange reserves are held at the NBT. The NBT has licensed the fifteen commercial banks that are foreign exchange traders, and collects information on the foreign currency transactions of these banks.

3. Prescription of currency

Residents of Tajikistan may make and receive international payments and transfers in any convertible currency as well as in Tajik rubles. Since May 1995, residents and nonresidents are no longer permitted to use foreign exchange for domestic transactions, except for special cases allowed by the authorities. Commercial transactions with nonresident entities from all other countries must take place via correspondent accounts maintained either by authorized commercial banks or by the NBT. The Vneshekonombank has the most active correspondent accounts with banks abroad. The NBT has correspondent accounts with all of the states of the former U.S.S.R., but these accounts are effectively inoperative. Tajikistan does not have any official bilateral payments agreements with any other countries. While in the past the majority of trade transactions were arranged on a barter basis, in November 1995 the Government passed a resolution prohibiting new barter trade contracts with the exception of contracts for aluminum.

4. Resident and nonresident accounts

Resident individuals may open, maintain and use foreign currency accounts in authorized banks in Tajikistan. Resident enterprises may open foreign currency accounts in Tajikistan if they are registered foreign traders at the Ministry for Foreign Economic Relations. Documentation, including the relevant import contract, is required any time a resident enterprise desires to buy foreign exchange from an authorized bank. Resident individuals or enterprises may also open foreign exchange bank accounts in banks abroad. 1/ The transfer of foreign exchange held in domestic accounts to a resident bank account abroad does not require authorization. Nonresident individuals and enterprises can open foreign exchange accounts with authorized domestic banks in Tajikistan. The amounts in such accounts may be transferred abroad or sold to the local banks for Tajik rubles. Nonresident enterprises and foreign governments and institutions are also permitted to open Tajik ruble accounts.

Inward and outward transfers of Tajik rubles and foreign currency banknotes are regulated by the Customs Committee together with the Ministry of Finance and the NBT. The physical importation and exportation of foreign currency bank notes and Tajik ruble bank notes are freely permitted, subject only to declaration of amounts over US$500. There are no taxes on purchases or sales of foreign exchange, except that banks must pay tax equal to the full amount of any commission or margin in excess of 10 percent.

5. Trade and payments

a. Import and export of goods

In the past Tajikistan’s trade and payments system was governed almost entirely by state orders and quotas, together with stringent surrender requirements and restrictions on access to foreign exchange. In November 1995 state orders were abolished with the exception of the 1995 cotton crop. On February 24, 1996, the Government abolished the foreign exchange surrender requirement and replaced it with a requirement that foreign exchange earnings be repatriated. Upon repatriation, foreign exchange proceeds may either be held by exporters in foreign currency accounts with domestic banks or sold in the interbank market.

Payments for imports may be made through authorized commercial bank correspondent accounts. Foreign exchange needed for authorized import transactions may be purchased from commercial banks, taken from a domestic foreign exchange account or purchased directly by enterprises or their agents in the weekly foreign exchange auction. Imports are free from all restrictions, including tariffs, licenses, monopoly import rights, and quotas, with the following exceptions. The importation of firearms, narcotics, poisons, chemical weapons, and nuclear material is prohibited. Five product categories (certain alcohol products, tobacco products, photographic items, audio equipment, and motor vehicles) are subject to ad valorem customs import tariffs which are levied at one of only two rates (2 percent and 5 percent). Certain types of imports are exempt from these customs tariffs (goods imported from CIS trading partners, goods imported according to barter contracts, and goods imported by certain state agencies).

In the past exports were subject to multiple restrictions, including state orders, quotas, trading directed through government monopoly agencies, licensing and tariffs. In November 1995 export quotas and state orders were abolished in respect of all goods, with the exception of the 1995 cotton crop. 1/ In respect of the 1996 cotton crop, the complete abolition of the system of state orders was announced in November 1995, and cotton growers will be free to decide with whom and what prices they dispose of their crop. Exports are currently free from export licensing requirements and, with the exception of the 70 percent of the 1995 cotton crop that is subject to state orders, free from monopoly export rights. On February 24, 1996, the Government abolished all customs duties on exports with effect from March 1, 1996. However, exports of cotton fiber, aluminum and other metal products, tobacco, leather, fertilizers, and certain other products remain subject to a 100 percent prepayment requirement before goods will be shipped. Exports of other products are subject to a requirement for payment within 90 days to be guaranteed by a domestic bank.

The Ministry of Economy and Foreign Economic Relations monitors export and import contracts to ensure that trade transactions do not take place at undervalued prices. The Ministry has the authority to refuse approval to contracts that it believes specify inappropriate prices.

b. Services and current transfers

There is no limit on the amount of foreign exchange that may be taken by residents traveling abroad for tourism purposes. Foreign exchange needed for public or private business or other travel (e.g., education, medical expenses) is also not subject to limits. There are no minimum spending or conversion requirements for nonresident travelers to Tajikistan. Nonresidents from outside the states of the former U.S.S.R. are not required to pay for transportation and hotel services in foreign currencies. There are no restrictions on the making of interest or principal debt service payments.

c. Capital transactions

Inward and outward capital transactions do not require licensing by the NBT. Foreign investors are required to register with the Ministry of Finance, but there are no limits on inward capital transactions. There are no restrictions on the repatriation of foreign investment profits, assuming domestic tax obligations have been fulfilled. Profits may be reinvested in Tajikistan, held in local commercial banks in rubles or foreign currency, or transferred abroad.

ANNEX VI: Survey of Reporting of Main Statistical Indicators

1. National Accounts Statistics

The compilation of national accounts remains at a preliminary stage due to the understaffing and underfunding of the State Statistical Service (SSA). Annual GDP estimates are derived from the production side by supplementing net material product data with rough estimates for the nonmaterial sectors. There are no available data on the expenditure breakdown of GDP. The quality of the data is undermined by coverage and valuation problems. The coverage is unbalanced because of the under-representation of the nonstate sector and, in particular, services and the unofficial economy. To the extent that the private sector expanded faster (or declined by less) in recent years than the state sector, the GDP decline is overestimated. Valuation problems for certain periods are even more serious. For extended periods in 1994 and early 1995 noncash money traded at a significant discount against cash, creating serious difficulties in valuing stocks and flows. As a result, intermediate inputs, which as a rule were sold on noncash terms and, therefore, for inflated prices, tended to be overstated. The value of production was also distorted because enterprises often report accounting prices instead of actual transaction prices, which tend to be higher. Production costs and depreciation are seriously underestimated, as enterprises use historic rather than replacement cost despite high inflation. Finally, changes in inventory valuation are not appropriately accounted for.

Quarterly GDP at constant prices is compiled from estimated indices of sectoral output. This method provides reliable estimates if there is a strong correlation between output and value added. 1/ In 1995, the SSA started compiling quarterly GDP on the basis of a limited sample of enterprises.

2. Price Statistics

Since January 1994, Tajikistan’s statistical services compiles two main price indices: the consumer price index (CPI), which replaces the retail price index formerly compiled, and the wholesale price index (WPI), which closely corresponds to a producer price index. Both are modified Laspeyres indices and as such avoid problems associated with Sauerbeck indices traditionally compiled in Tajikistan. However, the WPI suffers from a number of shortcomings which the CPI avoids: while the CPI captures actual transactions prices at retail outlets, the WPI prices are based on a unit cost plus markup formula, which reflects past factor costs rather than current market prices. Although transactions are frequently absent, enterprises continue to provide price estimates. Moreover, export items are excluded, there is little attempt to account for private sector activities, and noncash and cash prices were mixed in the WPI during the period up to the introduction of the national currency.

3. Government Finance Statistics

The classification of fiscal accounts essentially follows the former U.S.S.R. accounting system. The present system does not clearly identify financing items; revenue and financing items are mixed together above-the-line. For instance, credits from the NBT and nonbank financing to the budget are included as revenue items. Also, the needed distinction between interest and principal payments is lacking. Although some progress has been made in the economic classification of expenditures, there are still major classification problems between purchases of goods and services and net lending operations. The weaknesses inherent in the accounting system are made worse by the scarcity of data on expenditure arrears. Currently, the Ministry of Finance reports data on cash basis only, inhibiting an assessment of the fiscal stance on a commitment basis.

Statistics on state budget operations are available 15 days after the end of the reference period. Data on the extrabudgetary funds, however, are available with a considerable lag, particularly for the Pension Fund, resulting in the impossibility of a timely monitoring of the general government accounts.

4. Monetary and Banking Statistics

Foreign currency-denominated accounts are not separated by the criteria of residency and domestic economic sectors. This shortcoming creates imprecision in the classification of these accounts. Recently, the NBT has introduced some modifications to the banks’ accounting system in order to address some of these deficiencies.

The Savings Bank still compiles accounting data in the old accounting format, which is different from the standard accounting framework used by other commercial banks, causing delays and imprecision in the compilation of the monetary survey.

Data on interest rates of commercial banks are not compiled by the NBT on a regular basis. Sporadic reports by commercial banks are incomparable because of a lack of clear instructions. Lending rates, for example, as reported to the NBT are effective weighted average rates, computed by dividing interest revenues by credit balances, while the refinance rate and interbank rates refer to rates charged by banks.

5. Balance of Payments Statistics

According to the report of the IMF Statistics Department mission that visited Dushanbe during November-December 1995 to provide technical assistance in balance of payments statistics, a system for balance of payments compilation does not exist in Tajikistan. The mission made a number of recommendations regarding the institutional arrangements necessary to develop, within the National Bank of Tajikistan, a balance of payments compilation unit and also a number of procedures that could be employed to produce some balance of payments estimates in the short term.
1/

The average for CIS countries is 27 percent.

1/

CIS Statistical Service Yearbook for 1993.

2/

For details on developments prior to 1994, see SM/94/209.

1/

See Annex I and SM/95/141 for details on the currency introduction

1/

See Annex VI for details.

1/

In 1995, fertilizer use was only 17 percent of the 1988 level, while 1994 pesticide use (the latest available information) was only 10 percent of the 1988 level.

2/

The 1992 yield was low because, due to the armed conflict, part of the output was left unharvested.

3/

Producing one ton of cotton fiber requires three tons of raw cotton.

1/

While complete data is not yet available for 1995, the available data indicates continuing declines in energy consumption, with gasoline and natural gas consumption falling another 45 and 15 percent, respectively, in the first half of 1995.

1/

Prices paid by Tajikgas are determined in negotiations between Uzbekistan and Tajikistan. Enterprises importing directly may pay different prices.

1/

This estimate was obtained as follows: May CPI inflation was measured by Tajikistan SSA at 27.9 percent, assuming a conversion-related drop in prices by a factor of 100. This implies that the combination of May inflation and the level shift in prices led to a decline in prices by a factor of 78.18 (100 divided by 1.279). Based on inflation in the surrounding months, and taking into account the bread price increase in May, underlying inflation in May is estimated at about 15 percent. This implies that the level shift in prices amounted to a factor of 90 (78 times 1.15 percent).

1/

While this comparison suffers from data problems—data on the wage bill and wages disbursed are taken from different sources and wage bill data are likely to be incomplete—these shortcomings would tend to lead to an over estimation of the share of wages disbursed. This view is supported by the fact that Table 26 implies accumulated wage arrears of less than Rub 500 billion between January 1994 and February 1995, while data from the NBT indicate accumulated wage arrears over this period were Rub 720 billion.

2/

Local government consists of three oblasts and the city of Dushanbe, as well as 4 cities and 11 regions under the jurisdiction of the Republic.

1/

The “cash basis” deficit refers to the deficit on transactions actually paid for, either by cash or non-cash means. The “accrual basis” deficit includes all transactions in the cash basis budget, plus accrued expenditure liabilities for goods and services delivered.

2/

A detailed description of the tax system is presented in Annex II.

3/

In addition, the number of Tax Inspectorate employees increased from 1,400 in early 1994 to 1,511 in early 1995.

1/

This was largely due to the presence of CIS troops, financed by the providing countries, on the border with Afghanistan. As a result, despite the ongoing conflict, military expenditures were lower than in other states of the former U.S.S.R.

1/

These increases in personnel were a reversal of massive employment reductions in rayons which had taken place in 1992-93, during the civil war.

2/

For a description of the cash compensation system, see Annex III.

3/

This was in addition to the bread price compensation payments.

4/

Armed forces personnel are estimated at 56,000 soldiers, or about 5 percent of total budgetary employment.

1/

Because of the increased depreciation of non-cash rubles, problems of valuation of revenues, expenditures, and thus the deficit or surplus, were more severe in early 1995 than they had been in early 1994.

1/

There may also have been an implicit subsidy, stemming from the bread complex’s ability to purchase foreign exchange for non-cash at cash prices.

2/

While precise figures for movements in the price of Tajik wheat imports are not available, these prices have tended to follow world market prices in recent years. World market prices for wheat increased on average by almost 20 percent between the second and third quarters of 1995.

1/

The bread complex’s problems were aggravated by arrears—particularly arrears of the Ministry of Defense—in payments for bread.

2/

In addition, the cotton complex loaned US$16 million to the bread complex; about U$5 million of this total has since been repaid.

1/

Roughly 60 percent of defense expenditure was allocated to equipment and supplies, with the remainder going to wages and pensions.

2/

In July, the budget made a transfer to the Pension Fund of TR 175 million, well below the government’s obligations for the year. By end-1995, statutory budget obligations to the Pension Fund had not been settled.

3/

In March 1996, bread prices were increased from TR 35 to TR 72 and flour prices from TR 54 to TR 120 per kilo.

1/

Due to the influx of pre-1993 rubles from neighboring countries, the amount withdrawn was about 40 billion rubles more than the amount of pre-1993 rubles issued on the Tajik territory. The fall in officially measured currency in circulation, from end-1993 to end-1994, was only 25 percent.

1/

Although individuals could draw personal checks against deposits, private shops did not accept them and state shops were generally empty.

1/

Resolution No. 778 of 1993 on guidelines for 1993 monetary policy. These guidelines remained in effect in 1994 since no new resolution on monetary policy was passed by Parliament.

1/

External sector developments in 1993 were described in SM/94/209 (August 4, 1994). As noted in that report, however, the analysis was severely hampered by limited data availability and poor data quality. New data on 1993 have become available and the discussion of 1993 external developments in this report supersedes that in the earlier report.

2/

Because of valuation and recording problems (described in SM/94/209), the balance of payments data for 1992 are not strictly comparable with those for subsequent years.

3/

Disaggregated price and volume data are available only from 1994 (Tables 44-47), but information on key commodities confirms these trends of rising import prices and falling export volumes prior to 1994.

1/

Many credits were interstate credits converted from trade arrears.

2/

Data on aid flows are limited and of poor quality. Also, no information is currently available on transfers by emigrants and refugees.

3/

Data on private capital flows are extremely limited.

4/

Official trade data are incomplete and distorted by exchange rate valuation problems. The available data are consistent, however, with the accumulation of unreported foreign exchange holdings. In addition, over-invoicing of imports is widely reported to have taken place. The staff’s import and export data have been adjusted to incorporate estimates where official data are lacking and to reduce exchange rate-related distortions.

1/

Much of Tajikistan’s debt has been contracted on terms that provide for full repayment of principal, or principal plus interest, on maturity. As a result, the relationship between debt and debt service is highly erratic. Due to a lack of information on some credits, interest and amortization on debt to the states of the former U.S.S.R. are recorded in the balance of payments largely on a payments basis, while debt service payable to other countries is recorded largely on an accrual basis.

1/

Detailed direction and composition of trade data for 1993 are not available in a form consistent with aggregate export and import data for the period. For 1994 only qualitative information and partner country data (which is not typically disaggregated by commodity composition) are available. For 1995, estimates based on data for most of the year are available by country for individual key commodities (Tables 52 and 53). For 1993-95 estimates of the distribution of trade between states of the former U.S.S.R. and other countries, for the major commodities and for aggregate imports and exports, have been derived based on the above information (Tables 50 and 51).

1/

Direction of trade data are incomplete at the level of individual partner countries and do not distinguish clearly between direct or final trade with the Netherlands and indirect or transit trade through the Netherlands.

1/

A description of the development of the foreign exchange market in Tajikistan is contained in Annex IV, and a technical description of Tajikistan’s current exchange system is included in Annex V.

1/

Countries with which Tajikistan has agreements of this type include China, Czech Republic, Hungary, India, Kazakstan, Kuwait, Russia, Slovakia, Turkey, Turkmenistan, United States, and Uzbekistan.

2/

Trade and commodity credits, and debt converted from trade arrears, account for almost 50 percent of total debt. In addition, debt from converted correspondent account balances (24 percent) and debt for which a complete breakdown is not yet available (12 percent) both appear primarily to reflect trade transactions.

1/

A similar price liberalization took place in Russia in January 1992.

1/

Decree No. 527, August 17 1995.

2/

Resolution numbers 292 (1992), 161 (1993) and 449 (1993).

1/

Decree Number 8, December 1994.

2/

Presidential Decree No. 294, “On Measures for the Further Deepening and Expansion of Privatization of State Property,” August 2, 1995 and related Government Decree No. 543, “On Organizational Measures for the Further Deepening and Expansion of Privatization of State Property,” August 23, 1995.

3/

When a payment order arrives in a buyer’s bank and the buyer does not have sufficient deposits in its settlement account, the bank lists the payment order in File No.2 as an off-balance sheet item and postpones paying the supplier until the settlement account reaches an adequate balance.

1/

On the advice of Fund staff, the authorities of Tajikistan coordinated the introduction of the Tajik ruble with the Government and Central Bank of the Russian Federation.

2/

The 20:1 rate between cash and noncash underlying the design of the currency reform represented the consensus at the time of the currency reform within the State Commission for the Introduction of the National Currency.

1/

See Section III.2 for more details on the price developments.

1/

In addition, refugees and forced migrants received a one-time family benefit of up to TR 80 (TR 40 for the family head, and TR 10 for each additional family member).

2/

The cash allowance of rub 1,800 was designed to cover the cost of 5 kilograms of flour and 1/2 kilogram of vegetable oil.

3/

Unemployed workers receive bread compensation payments through the local employment fund.

1/

This cash compensation scheme was designed to compensate these groups for the increased cost of 7 Kg of bread per capita per month.

2/

The ratio of the number of people over 60 to the number of people between 25 to 59 years of age.

3/

The Pension Fund is financed by 85 percent of the 37 percent payroll tax paid by enterprises and by an employees’ contribution of 1 percent of wages; the remaining 15 percent of the payroll tax goes to the Social Insurance Fund.

1/

No information is available on any arrears which the State Insurance Fund may have accumulated in 1993, 1994 or 1995.

2/

This is in addition to the bread compensation payments which were made directly to the population.

1/

While this is the case in practice, some legal ambiguity exists with respect to the ability of residents to hold foreign exchange accounts abroad. The ambiguity arises from the fact that while such accounts are permitted under the Law on Foreign Currency Control, they are prohibited under the Monetary Law.

1/

However, Government Decree no. 617 of October 10, 1995, instructs producers to give the State Committee for Contracts and Trade, and the tajik Consumer Cooperative, priority access to output of manufactured consumer goods.

1/

The sharp terms of trade deterioration in 1993 resulted in smaller declines in output by sector than in value added. As a result, the real GDP decline in that year was underestimated; rough calculations put the true decline at about 18 percent. The continuing decline in the terms of trade in 1994 means that the estimated real GDP decline was again understated. For 1995, quarterly real GDP estimates are based on survey data compiled by the authorities, and are thus not subject to this problem.

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Cover IMF Staff Country Reports
Tajikistan: Recent Economic Developments
Author:
International Monetary Fund
Volume/Issue:
Volume 1996: Issue 055
Publisher:
International Monetary Fund
ISBN:
9781451836936
ISSN:
1934-7685
Pages:
157
DOI:
https://doi.org/10.5089/9781451836936.002
Chart 1

TAJIKISTAN: Main Macroeconomic Indicators, 1994-95
Chart 2

STATES OF THE FORMER U.S.S.R Output Decline, Inflation and Dollar Wages
Chart 3

TAJIKISTAN: Real GDP, 1991-95
Chart 4

TAJIKISTAN: Consumer 1/ and Wholesale Price Inflation, 1991-95
Chart 5

TAJIKISTAN: Wages, 1993-95
Chart 6

TAJIKISTAN: State Budget, 1992-95 1/
Chart 7

TAJIKISTAN: Deposits to Currency Ratio, 1993-95
Chart 8

TAJIKISTAN: Credit and Deposits, 1994-95
Chart 9

TAJIKISTAN: Inflation, Currency and Interest Rates
Chart 10

TAJIKISTAN: External Trade Balance, 1992-95

(In Percent of GDP)
Chart 11

TAJIKISTAN: Exchange Rates and Wages
Chart 12

TAJIKISTAN: External Debt by Major Creditors, 1992-95

(In Millions of US Dollars)
Chart A1

SELECTED STATES OF THE FORMER U.S.S.R.

Deposits to Currency Ratio 1/