Republic of Tajikistan: Staff Report for the 2002 Article IV Consultation and Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility

This paper evaluates Tajikistan’s 2002 Article IV Consultation and a Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility (PRGF). Tajikistan’s previous IMF-supported program went off track in mid-2001 largely because of poor progress with structural reform and weak management of external debt. To revitalize the reform process, the authorities satisfactorily implemented a Staff-Monitored Program that covered the first half of 2002. The IMF staff commends the authorities for the progress in economic areas realized over the past few years, and supports the authorities' request for a new three-year PRGF arrangement.

Abstract

This paper evaluates Tajikistan’s 2002 Article IV Consultation and a Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility (PRGF). Tajikistan’s previous IMF-supported program went off track in mid-2001 largely because of poor progress with structural reform and weak management of external debt. To revitalize the reform process, the authorities satisfactorily implemented a Staff-Monitored Program that covered the first half of 2002. The IMF staff commends the authorities for the progress in economic areas realized over the past few years, and supports the authorities' request for a new three-year PRGF arrangement.

I. Introduction

1. The Article IV staff discussions were held in Dushanbe during April 25-May 4, 2002, July 9-18, 2002, and October 3-10, 2002.1 These missions also assessed progress under a Staff Monitored Program (SMP) that covered the period January-June 2002 and held discussions on a new arrangement under the Poverty Reduction and Growth Facility (PRGF).

2. The Fund has supported Tajikistan’s economic reform program since 1996, most recently with a three-year PRGF arrangement approved in June 1998.2 The third annual arrangement was approved in October 2000, but the third and fourth reviews were not completed due to slow progress with structural reform. The PRGF arrangement expired in December 2001 with total disbursements of SDR 78.3 million.

3. Tajikistan received several noncomplying disbursements from the PRGF Trust mainly related to the accumulation of external payment arrears. Although the Executive Board granted waivers for the first two of these incidents, it required an early repayment for the third one, which involved three noncomplying disbursements totaling SDR 25.32 million. Tajikistan was allowed to repay in four quarterly tranches beginning end-June 2002. Two payments have been made.

4. During the last Article IV consultation (IMF Country Report No. 01/65, April 2001), Executive Directors welcomed Tajikistan’s strong economic growth but regretted the uneven program performance. They noted that despite adverse circumstances, real GDP growth remained strong. Directors stressed, however, that slippages caused the Fund-supported program to go off track and contributed to a spike of inflation in late 2000. Directors expressed concern about Tajikistan’s heavy external debt burden and its difficult economic and financial outlook. They stressed the need for consistent implementation of prudent fiscal and monetary policies, as well as for an acceleration of structural reform to promote macroeconomic stability and sustainable growth.

5. In the attached letter of intent, the authorities request approval of a new PRGF arrangement in an amount equivalent to SDR 65 million (75 percent of quota) to support the program for the period October 1, 2002-September 30, 2005. In October the PRSP was submitted to the Executive Board. As of end-September 2002, Tajikistan’s outstanding use of Fund resources amounted to SDR 69.37 million, 79.7 percent of quota. The Fund (Appendix I) and other international financial institutions (Appendix II and III) have provided Tajikistan with extensive technical assistance. The core minimum data provided to the Fund has weaknesses but is adequate for program monitoring (Appendix IV). Tajikistan plans to implement measures that will lead to acceptance of the obligations under Article VIII of the Fund’s Articles of Agreement. A Safeguards Assessment of the National Bank of Tajikistan (NBT) was completed in November 2001 and the authorities are implementing its recommendations. A follow-up assessment is being prepared.

II. Recent Economic Developments and Performance Under the SMP

6. Economic performance has improved in recent years, despite natural disasters, deteriorating terms of trade, the Russia crisis, and regional instability. Real GDP growth has averaged 7 percent a year since 1997 and remained strong in the first three quarters of this year (Table 3). This pace of growth places Tajikistan among the top performers of comparable countries (Box 1). Macroeconomic stability has facilitated recovery from the civil war, which ended in 1997. Production of the two main export commodities (aluminum and cotton) has rebounded from their immediate post civil war lows and domestic demand has been supplemented by higher workers’ remittances.3

Table 1.

Tajikistan: Quantitative Targets Under the Staff Monitored Program, January-June 2002

(In stocks; unless otherwise indicated)

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Sources: Tajik authorities; and Fund staff estimates.

Cumulative from January 1, 2002.

By the government. NBT or any other agency acting on behalf of the government as defined in the Technical Memorandum.

A continuous performance criterion.

The adjuster, amounting to US$9.5 million, reflects the ongoing negotiations between the authorities and Russia concerning debt rescheduling.

The adjuster, amounting to US$19 million, reflects the ongoing negotiations between the authorities and Russia concerning debt rescheduling.

Table 2.

Tajikistan: Structural Benchmarks Under the Staff Monitored Program January-June 2002

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Table 3.

Tajikistan: Selected Economic Indicators, 1999-2003

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Sources: Tajik authorities; and fund staff estimates.

Figures are converted at weighted average official exchange rates.

For Ql and Q2 2002, in percent of quarterly GDP.

Average program exchange rates are Sm2.85=US$l and SDRI-US$1.29 for 2002 and Sm3.0=US$l and SDR1=US$1.33 for 2003.

In July 2001, Sm41 million in assets were reclassified from net credit to government to credit to the private sector. In February 2002, Sm64.4 million in assets were reclassified from net credit to the private sector to net credit to government, as specified in the agreement between the government and the National Bank of Tajikistan.

Defined as GDP divided by end-period broad money.

For 2001 and 2002, the annualized three-month treasury bill rate is shown because no one-month treasury bills were issued.

Computed as a three-year moving average of exports of goods and services, less alumina and electricity which are traded on a barter basis.

Non-financial public sector debt.

7. Occasional lapses in policy implementation combined with exogenous shocks have contributed to an uneven inflation performance over the postwar period. While inflation has declined from its peak at the end of 2000, it has yet to fall below 10 percent. In contrast, inflation in other low-income CIS countries was 4-6 percent last year and is expected to be the same this year. For the twelve months through September 2002, inflation was 16 percent (Figure 1) and the outlook is for a decline to 13 percent by year’s end, compared with the 9.5 percent target under the SMP.

Figure 1.
Figure 1.

Tajikistan: GDP and Inflation, 1997-2003

(Percent change from previous year)

Citation: IMF Staff Country Reports 2003, 010; 10.5089/9781451837001.002.A001

Sources: Tajik authorities; and Fund staff estimates.

Macroeconomic Indicators in Selected CIS Countries, 2001-2002

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Source: Data provided by the authorities and Fund staff projections.

8. The curb market exchange rate was broadly stable throughout 2001. It weakened early this year, however, with the pace of depreciation accelerating more recently mainly because of excess liquidity injected during the third quarter. The authorities set the official exchange rate as a weighted average of weekly transactions in the official interbank foreign exchange market. Indicators of bilateral real exchange rates with Tajikistan’s major trading partners do not indicate any major changes in competitiveness (Figure 2).

Figure 2.
Figure 2.

Tajikistan: Indicators of International Competitiveness, 1999-2002 1/

Citation: IMF Staff Country Reports 2003, 010; 10.5089/9781451837001.002.A001

Sources: National Bank of Tajikistan; and Fund staff estimates.1/ A decline in the exchange rate indices reflects a depreciation.

9. Real wages increased in 2001 after several years of stagnation. The increases, however, were uneven across sectors with non-agricultural private sector real wages rising by 22 percent in 2001 and agricultural wages rising by 40 percent. In contrast, public sector real wages declined by 8 percent during 2001. The increase in agricultural wages is important because the sector accounts for the majority of employment and historically wages have been comparatively low. While a boost in civil service salaries in 2001 and 2002 helped to narrow the substantial gap between public and private sector pay, average wages in Tajikistan remain below US$1 per day. Official statistics indicate that between 1999 and 2001, employment increased by 1.8 percent, with a 4.4 percent gain in agriculture, while non-agricultural employment declined over the period.

10. The overall fiscal deficit, excluding the foreign-financed public investment program (PIP), declined from nearly 4 percent of GDP in 1998 to near balance in 2001 (Figure 3). The steady improvement in Tajikistan’s fiscal position compares favorably with other low-income CIS countries. This reflects a modest gain in revenue collections and better expenditure discipline. While tax revenues are low compared with other transition countries, in 2001 they were at their highest level (14 percent of GDP) in the post-independence period. Consequently, current expenditures have increased only slightly over time, limiting social programs. In education and health, for example, equipment shortages compromise quality and have made private supplementary payments common (Box 2). The fiscal situation, however, is not fully reflected in current expenditures because of extensive quasi-fiscal activities, especially in the energy sector where they were equivalent to 5-6 percent of GDP in 2001.

Figure 3.
Figure 3.

Tajikistan: Overall Fiscal Balance, Expenditures, and Tax Revenue, 1998-2003

(In percent of GDP)

Citation: IMF Staff Country Reports 2003, 010; 10.5089/9781451837001.002.A001

Sources: Tajik authorities; and Fund staff estimates.

Spending on Health and Education

As in other CIS countries, public spending on social services in Tajikistan declined precipitously after the collapse of the former Soviet Union such that by 1999 real public spending on health and education was an eighth of its level in 1992. Although there has been a modest recovery in the past three years—to one-sixth of their 1992 levels—Tajikistan’s social expenditure (7 percent of GDP) remains half of that in other CIS countries.

About 80 percent of total education spending is for basic and secondary education, the bulk of which is financed by local governments. The decline in real spending for education has led to a shortage of materials, a decline in teachers’ real wages, and an exodus of qualified teachers. Lack of financing has also caused schools to charge education fees, further reducing enrolment ratios among the poorest segments of the population.

Overstaffing and under financing characterize the public health system. The government finances 1,428 hospitals and 156 health care centers staffed with a large number of doctors and beds compared with other countries in the region. The decline in the real level of health spending is reflected in inadequate equipment and supplies of medicine, wages that are 40 percent of the national average, and the imposition of informal fees that further reduce access of the poor.

Real Education and Health Expenditure Indices, 1992-2001

(Index 1992 = 100)

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Sources: Tajik authorities; and Fund staff estimates.

11. The fiscal stance continued to improve in the first half of 2002. Instead of a projected deficit of ¼ percent of GDP, a surplus of 1.1 percent of GDP was realized (Table 4). This reflected higher-than-expected revenues resulting from strong economic growth and better tax administration, as well as the comprehensive application of the destination principle to imports from CIS countries. Recent indicators confirm the continued over-performance of tax revenue collections and expenditure discipline.

Table 4a.

Tajikistan: General Government Operations, 2000-2003

(In millions of somoni)

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Sources: Tajik authorities; and Fund staff estimates.

Excludes payments to Uzbekistan which are paid in kind by Tajik Rail.

This reflcects an expected debt rescheduling agreement with Russia that will result in full financing of the program for the first and subsequent years of the program. The terms are expected to include an interest rate of 2.8 percent, a three-year grace period and 17-year maturity, and a provision that US$23 million of the NBTs credit balance with the Central Bank of Russia ($49.8 million) would be used to clear outstanding interest arrears. The remainder would be applied to interest payments falling due during the grace period.

Differences between these figures and those in the accounts of the NBT reflect the revaluation of foreign exchange deposits.

Table 4b.

Tajikistan: General Government Operations, 2000-2003

(In percent of GDP)

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Sources: Tajik authorities; and Fund staff estimates.

Excludes payments to Uzbekistan which are paid in kind by Tajik Rail.

This reflects an expected debt rescheduling agreement with Russia that will result in full financing of the program for the first and subsequent years of the program. The terms are expected to include an interest rate of 2.8 percent, a three-year grace period and 17-year maturity, and a provision that US$23 million of the NBT’s credit balance with the Central Bank of Russia ($49.8 million) would be used to clear outstanding interest arrears. The remainder would be applied to interest payments falling due during the grace period.

Differences between these figures and those in the accounts of the NBT reflect the revaluation of foreign exchange deposits.

12. In contrast to fiscal policy, the uneven implementation of monetary policy has occasionally undermined macroeconomic stability. At times, the central bank has issued directed credit to support state enterprises and cotton production thus compromising compliance with its quantitative targets. During the period under the SMP (January-June 2002), monetary policy was generally on track. In July and August 2002, however, the NBT again issued directed credits that contributed to the rapid growth of reserve money and a spike in inflation. Since then, reserve money growth has been brought back in line with the program’s targets.

13. The limited development of the financial sector poses challenges for conducting monetary policy. Weak institutional capacity and the lack of a secondary market for treasury bills has precluded the use of open market operations. The effectiveness of the NBT’s Lombard facility is also limited by institutional weaknesses. Consequently, the central bank has relied on the development of a market for NBT bills to absorb excess liquidity. Injecting liquidity has also been problematic as the NBT’s credit auctions have tended to result in directed credits. To improve this situation, the NBT is developing an interbank credit market in which it could participate as necessary.

14. Increased deposits in the banking system suggest that confidence is improving, aided by measures to strengthen banks (Figure 4 and 5). The latter include eliminating a provision that required payment of a 30 percent tax on financial transfers from abroad, preventing tax authorities from freezing accounts without a court order, paying interest on deposits, and amending the tax code to enhance privacy.

Figure 4.
Figure 4.

Tajikistan: Quarterly Velocity and Money Multiplier, 1999-2003

Citation: IMF Staff Country Reports 2003, 010; 10.5089/9781451837001.002.A001

Sources: National Bank of Tajikistan; and Fund staff estimates.1/ Four-quarter average.
Figure 5.
Figure 5.

Tajikistan; 12-Month Broad Money Growth, 1999-2002

(In percent)

Citation: IMF Staff Country Reports 2003, 010; 10.5089/9781451837001.002.A001

Sources: Tajik authorities; and Fund staff estimates.

15. Tajikistan’s current account deficit widened in 2001 largely because of deteriorating terms of trade. Other low-income CIS countries have faced a similar situation, although the external adjustment in the Kyrgyz Republic has been particularly strong. The value of exports declined by 17 percent due to lower world prices for cotton and aluminum and lower electricity exports to the region. The balance on income improved, reflecting the inclusion of workers’ remittances for the first time. This year’s large cotton harvest combined with higher commodity prices suggests that the current account deficit will narrow (Table 8). The current account deficit in 2001 was financed mainly with borrowing from multilateral institutions and private capital inflows to the cotton sector. Foreign direct investment (FDI), already low compared with other countries in the region, declined further due to regional insecurity and a difficult private sector environment. Gross international reserves increased to 2.3 months of imports at mid-2002.

Table 5.

Tajikistan: Functional Classification of General Government Finances, 2000-2006

(In millions of somoni, unless otherwise indicated)

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Sources: Tajik authorities; and Fund staff estimates.
Table 6.

Tajikistan: Accounts of the National Bank of Tajikistan, 2001-2003

(End-of-period stock; unless otherwise specified)

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

Data are based on official SDR/U.S. dollar and somoni/U.S. dollar exchange rates.

Data are based on end-period program exchange rate of Sm3.0 -US$1 and SDR1 = US$1,299; from June 2003 SDR1 = US$1,333 in line with the World Economic Outlook, October 2003, assumptions.

On February 11, 2002, Sm64.348 million were transferred out of ALCO into long term government bonds as agreed in the agreement signed by the NBT and the government.