TAJIKISTAN JOINT IDA-IMF STAFF ASSESSMENT OF THE POVERTY REDUCTION STRATEGY PAPER … · 2016. 7....

Document o f The World Bank

FOR OFFICIAL USE ONLY

Report No. 29207-TJ

TAJIKISTAN

JOINT IDA-IMF STAFF ASSESSMENT

OF THE

POVERTY REDUCTION STRATEGY PAPER

AND

POVERTY REDUCTION STRATEGY PAPER ANNUAL PROGRESS REPORT

June 7,2004

This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not otherwise be disclosed without World Bank authorization.

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FOR OFFICIAL, USE ONLY

THE INTERNATIONAL MONETARY FUND AND THE INTERNATIONAL DEVELOPMENT ASSOCIATION

TAJIKISTAN

Joint Staff Assessment of the Poverty Reduction Strategy Paper Annual Progress Report

Prepared by the staffs o f the International Monetary Fund And the International Development Association

Approved by Mohammad Shadman-Valavi and Juha Kahkonen (IMF) and Shigeo Katsu and Gobind Nankani (IDA)

June 7,2004

. I I. OVERVIEW J

1. The Government o f Tajikistan has completed and submitted the “PRSP Progress Report for 2003” (hereafter referred to as “the report”) to the Boards o f the International Monetary Fund (IMF) and the International Development Association (IDA). The Poverty Reduction Strategy Paper (PRSP) was approved by the Boards o f the IMF and the IDA in 2002. The f i rst Joint Staff Assessment (JSA) stressed the importance o f prudent macroeconomic management and acceleration o f structural reforms for sustainable growth. Additionally, the JSA called for the inclusion o f detailed costing o f social and sectoral programs consistent with the medium-term expenditure framework, prioritization o f expenditures in light o f the high external debt burden and limited absorptive capacity, and improving monitoring and evaluation o f the PRSP. These shortcomings were reiterated at the CG meeting in Dushanbe, in May 2003 and i ts follow-up meeting in London in February 2004.

2. The report presents the most recent poverty diagnosis based on the 2003 Tajikistan Living Standards Survey (TLSS) and a candid assessment o f progress achieved in the first year o f implementing the PRSP, and highlights key obstacles to policy implementation. The Government has taken steps in addressing the weaknesses o f the PRSP, including reprioritizing the extemally financed public investment program (PIP) to reflect concems about health and education spending, and improving monitoring and evaluation. Nevertheless, some issues remain to be addressed; these include detailed costing and prioritizing of programs proposed in the PRSP and broadening o f consultation with stakeholders.

3. Macroeconomic management has improved and some structural reforms have been implemented, but serious institutional weaknesses hinder effective policy implementation. Privatization o f a number o f hitherto state-owned enterprises and increasing remittances from

This document has a restricted distr ibution and may be used by recipients only in the performance o f their official duties. I t s contents may n o t be otherwise disclosed without W o r l d Bank authorization.

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migrant workers have facilitated the development o f private sector activities in the service sector, and thus contributed to a gradual diversification o f the sources o f growth. Good progress has been achieved in maintaining fiscal discipline, and monetary pol icy management has recently improved. Reforms in the social sector (especially in education and health), and in the energy sector have been initiated, but institutional weaknesses and poor governance are delaying implementation. As a result, utilization o f committed resources has been low-for instance, the World Bank disbursed only a tenth o f its total commitments in FY2003.

11. UPDATED POVERTY DIAGNOSIS

4. The staffs commend the government’s effort in completing the 2003 TLSS supported by DFID and the World Bank. The survey has enabled the government to monitor progress in reducing poverty and providing sectoral services for enhancing human development. At present, there are no officially accepted poverty standards in Tajikistan-three methods are used in measuring poverty, two o f which are based on estimates o f the cost o f a food-basket that has not been adjusted since the Soviet period. The staffs, therefore, stress the importance o f developing consensus about a national poverty l ine that would be used consistently.

5. widespread and living standards remain low. Preliminary results o f the TLSS are encouraging as the poverty rate appears to have declined over the four year period by 8-1 8 percent (depending on the methodology used). The rate o f decline in poverty, however, varies significantly by region and residence. The poverty gap and the severity o f poverty have fallen, for each o f the poverty lines used, but inequality has increased somewhat. Despite the apparent improvement in the overall poverty situation and a decline in the infant mortality rate, about 57 percent o f the population s t i l l lives below the poverty line-PPP- based per capita expenditures o f $2.15 per day,-making Tajikistan the poorest country in Central Asia. In addition, progress in reducing poverty i s threatened by the emergence o f new challenges, including the emergence o f new diseases such as TB and H IV /A IDS and destabilizing influences o f crimes and drug trafficking.

Although poverty has declined significantly between 1999 and 2003, it i s s t i l l

111. PROGRESS IN PRSP IMPLEMENTATION

6. mixed, The improvements in macroeconomic management have reflected in growth and continued reduction in inflation. Challenges remain, however, in governance, the development o f the private sector, and in prioritizing expenditures in light o f scarce fiscal resources and institutional shortcomings. Enhancing l inks between the PIP, the medium-term budget framework, and the PRSP would be essential for the poverty reduction strategy. This would help prioritize expenditures, identify any need for supplemental financing especially for priority projects, and facilitate contingency planning.

Macroeconomic management has improved, but progress in structural reform i s

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A. Macroeconomic Policies

7. Real GDP growth has been strong in recent years, averaging 9.5 percent in 2000-03, but real GDP at end-2003 was only 68 percent o f i t s level in 1991. There are indications o f increasing diversification o f the sources o f growth, driven by nontraditional exports and workers’ remittances from abroad. In this regard, the report could have assessed the gradual shift in the sources o f growth and identified policy strategies for sustaining growth. The report could also have usefully discussed how the authorities intend to solve likely policy trade-offs resulting from required economic adjustment in the event o f exogenous shocks.

8. Monetary policy implementation continues to be constrained by institutional limitations, despite recent streamlining o f the functions o f the central bank and reform o f policy formulation. Inflation in Tajikistan was one o f the highest among the CIS countries during the past few years, but recent focusing of policy implementation has helped reduce inflationary pressures significantly-the 12-month inflation rate declined to 5.1 percent at end-April 2004. In th i s context, it i s necessary to enhance policy co-ordination between the Ministry o f Finance and the NBT, improve institutional capacity, and develop additional monetary policy instruments to help sustain the reduction in inflation.

9. report, the authorities have updated the macroeconomic framework to take into account the more recent higher growth rates, together with a more modest improvement in the revenue- to-GDP ratio. The latter partly reflects weaker commodity prices and i s realistic if there i s a concerted effort to improve tax administration and capture the new nontraditional sectors, However, the budgetary system remains weak. There i s no formal system o f cash management or cash forecasting, which leads to arbitrary variations in payment dates and inefficient use o f resources. The system o f payment prioritization i s excessively centralized, and requiring daily decisions by senior Ministry o f Finance officials. The staffs consider that a more determined effort at reforming public expenditure management i s needed to deliver the poverty reduction goals.

The authorities have maintained a prudent fiscal stance. Since the drafting o f the

B. Structural Reforms and Sectoral Policies

10. sustaining growth and poverty reduction. However, this priority i s not clearly emphasized in the report. Although the Government has taken steps to reduce administrative barriers and streamline business registration, inspection and licensing procedures, improving the business environment remains a major challenge. Corruption and lack o f transparency associated with weak governance increase the cost o f doing business, worsen the investment climate and deter private investment (both domestic and foreign).

Improving the business environment for private sector development i s critical for

1 1. the over 400 strategic enterprises foreshadowed in the PRSP and to ensure that this process i s fair, transparent, and efficient. The PRSP plans to implement energy sector reforms including restructuring o f the sector and transforming Barki Tajik and TajikGas into joint stock

Regarding privatization, the staffs encourage the authorities to accelerate the sale o f

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companies during the reporting period. The staffs are deeply concerned about delays in implementing these measures, and regret that the authorities have further complicated the reform by making Barki Tajik a department o f the Ministry o f Energy in March 2004. This creates conflicts o f interest and reduces transparency in operations. Additionally, the action violates the thrust o f the program for privatizing energy distribution companies. The staffs strongly recommend that the authorities reverse the action as soon as possible.

12. formulating a comprehensive energy strategy over the medium term. While additional investments are required, these need to be better balanced with other sectoral needs in the PIP. To mitigate the poverty impact o f increases in electricity and gas tariffs, a compensation mechanism financed by the budget in 2003 and 2004 has been established; however, i t s benefits do not reach the most vulnerable groups due to poor targeting. The authorities intend to improve targeting and streamline administrative procedures under the mechanism with assistance from the World Bank.

Reflecting the high priority o f the energy sector, the authorities are in the process o f

13. Preliminary findings o f the Poverty and Social Impact Analysis (PSIA) o f farm privatization carried out by the World Bank indicates that privatization has had differential impacts on the population. Delays in addressing the problems o f the cotton sector have created rent-seeking opportunities for vested interest groups with a negative impact on government tax revenues, foreign exchange earnings and the welfare o f farmers. The analysis confirms that farm privatization increases incomes and welfare o f farmers, and lowers losses from rent-seeking as it weakens control o f vested interest groups. However, children and workers were negatively affected as social services provided by state farms-kindergartens, schools and hospitals-deteriorated following the transfer to their parent ministries. The authorities, therefore, need to address the cotton farm debt and accelerate the privatization o f farmland, and identify appropriate measures to mitigate the negative impacts o f farm privatization.

14. education by the poor. To achieve this goal, public expenditure on education has been increased and an education sector reform strategy has been developed. In addition to a re- drafting o f the education law, full implementation o f the strategy would require restructuring o f school networks, increased funding to meet the recurrent costs, and re-aligning education financing to improve the efficiency and targeting o f public spending. In this context, notwithstanding increased funding, some reduction in staffing from previous levels and commensurate increases in teaching loads will be required to accommodate the needed salary increases. Implementing the strategy will also require a further strengthening o f donor coordination in the sector. The staffs urge the authorities to meet these requirements and arrest the recent decline in school enrollment.

The authorities should be commended for improving the quality and access to basic

15. The PRSP rightly focuses on health sector reforms aimed at improving the efficiency o f the health-care delivery system, instituting financing reform, and promoting public health. Public spending on health in Tajikistan i s among the lowest in the world, having declined from around 5-6 percent o f GDP in the early 1990s to about 1 percent o f GDP in 2002, or

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below US$2 per capita. The current health delivery system i s characterized by inadequacy o f funds to meet the salaries o f personnel, resulting in low productivity, low quality o f health- care services at all levels and loss o f qualified staff through emigration. The authorities have now initiated a commendable reform o f the health-care system that focuses on shifting resources fiom hospital services towards more cost-effective primary health-care and preventive services. Health financing reforms will introduce population-based health budgeting in place o f input-norm based budget allocation to ensure a more equitable distribution o f public resources. The staffs encourage the authorities to review the experiences gained from the rationalization o f primary care services in two pilot regions, and carefully develop and roll out the plan to a national level.

16. It i s important to note that given the decline in public service provision, community linked development initiatives (CLD) have taken the lead in providing basic services to citizens and supporting citizen mobilization to solve community problems in Tajikistan. In this context, the World Bank has followed a CLD approach in i t s assistance programs and has pursued strong donor coordination and consensus around a tangible CLD vision. This approach should bring government and communities closer within the context o f strengthened local governance. In this regard, the experience and impact o f the National Social Investment Fund o f Tajikistan (NSIF) and other CLD projects in improving social services and reducing poverty could be brought out in the next progress report.

C. Expenditure Prioritization and Program Financing

17. Some improvements have been made in the prioritizing the PIP. While public spending on education, health, and multi-sectoral activities are projected to increase in the medium term, spending on agriculture, irrigation, and transport were reduced. Prioritization o f investment projects outside the PIP is, however, a cause for concern. For example, neither the total cost nor the prioritization process that led to the construction o f the Palace o f Nations seem transparent. We would urge the Government to address such lapses as they undermine efforts at prioritizing the investment program.

18. slow. The authorities urgently need to establish a budget commission that includes stakeholders outside the Ministry o f Finance in order to ensure strategic prioritization o f public expenditures (including the externally financed PIP) in line with the PRSP process, and to build a consensus on policy reforms. The commission would also provide a forum for stakeholders to discuss various policy trade-offs within and across sectors, taking into account resource constraints and government priorities outlined in the PRSP.

Overall, progress in institutionalizing the medium-term budget framework has been

D. Targets, Indicators and Monitoring and Evaluation System

19. technical capacity and oversight o f the PRSP monitoring unit in order to improve monitoring o f inputs, programs and beneficiaries, and broaden consultation with other stakeholders. The number o f monitoring indicators has been reduced to a total o f 94 indicators, compared with

The Government has adopted the recommendation o f the UNESCAP to improve the

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the original proposal of 136 indicators. In 2003, the Government drafted and published the Report on Achievement o f Millennium Development Goals in Tajikistan with the support o f the UNDP. The MDGs are, on the whole, in agreement with the priorities and tasks o f the PRSP.

20. social sector remains a major concern. These statistics are neither comprehensive nor reliable, and are not published on a timely basis. Further, limited data are available at the sub-oblast level. The definitions and methodologies used by various agencies for calculating monitoring indicators need to be harmonized. Also, the TLSS process should be institutionalized to enhance the process o f monitoring poverty reduction and developments in living standards over time.

The staffs concur with the authorities that the quality o f statistics especially on the

Iv. GOVERNANCE AND THE PARTICIPATORY PROCESS 21. The staffs welcome the authorities’ plans to audit the state financial control committee (SFCC) with a view to broaden i t s role in safeguarding use o f public resources. In addition the authorities need to formulate and adopt a coherent strategy for strengthening public administration and promoting transparency and good governance, Although the PRSP recognizes that development o f an effective and high quality public administration i s core to effective governance, l i t t l e progress has been made in improving the quality o f public administration. Progress on organizational reform o f ministries has been slow, and duplication o f functions among uni ts s t i l l exists. Furthermore, the state continues to intervene in private sector activities, leading to inefficiency, non-transparency and corruption. Effectiveness o f the civil service i s hindered by low institutional capacity due to inadequate incentives and lack o f professional training and career development for civi l servants.

Further improvements in governance are essential for private sector development,

22. Despite the initial progress in involving all stakeholders in drawing-up the PRSP, the participatory process has weakened. For instance, stakeholders outside the executive branch, including civil society and parliamentarians, were excluded from the development o f the PRSP Progress Report. The report was entirely prepared by the PRSPMU in the President’s Office. The staffs note the continued limited involvement o f stakeholders outside the Government (Parliament and civil society organizations) and therefore, urge the Government to take bold steps in involving civil society and parliamentarians in the formulation, implementation and evaluation o f the PRSP. The establishment o f an Aid Coordination Unit has improved donor coordination in support o f the PRSP implementation. Following the CG meeting in May 2003 and the follow-up CG meeting in February 2004, donors have slowly aligned their assistance and coordinated their effort to maximize the effectiveness o f assistance, especially in health and education. In addition, steps have been taken in harmonizing donor activities. For example, the World Bank and the Asian Development have jointly conducted their Country Portfolio Performance Review for the f i rs t time in March 2004.

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v. RISKS TO THE STRATEGY 23. authorities’ ability to raise sufficient funds to finance the PRSP. Despite recent signs o f increasing diversification o f the sources o f growth, Tajikistan i s s t i l l heavily dependent on exports o f aluminum and cotton which together account for over three-fourths o f total export earnings and employ a significant proportion o f the labor force. Also, the increasing importance o f workers’ remittances in the balance o f payments and growth o f domestic absorption makes Tajikistan vulnerable to economic developments in Russia. Additionally, despite the participation of civil society in drawing-up the PRSP, the implementation may be hampered by vested interests (who might make implementation o f structural reforms difficult), institutional weaknesses and poor governance.

External shocks could limit the growth potential o f the economy and compromise the

24. The report i s too optimistic in what i s set to achieve, given the limited absorption capacity and slow progress o f the reform agenda. The macroeconomic framework could usefully ref lect Tajikistan’s vulnerability to external shocks and other risks by including optimistic and pessimistic medium-term scenarios in the projections. This approach could be supplemented by a balanced discussion o f how government proposes to resolve policy trade- offs in the event o f external shocks. Moreover, weak institutional capacity was cited as one o f the factors that delay the PRSP implementation. In this context, the authorities could intensify their efforts to strengthen the capacity o f public officials by accelerating the reform o f public administration, and better articulating their technical assistance needs.

VI. CONCLUSIONS

25. poverty but reforms need to be accelerated in the next few years. The staffs welcome the commitment o f the authorities to address the shortcomings pointed out in the JSA o f the PRSP by better refining the strategy. Nonetheless, the report suggests a number o f areas where gaps remain in the strategy, and these constitute part o f the agenda for further work. The next progress report could usehlly address the following issues:

Modest progress has been made so far in improving policy effectiveness and reducing

0 Extending the macroeconomic framework and sectoral targets o f the PRSP beyond 2006. The framework should include detailed costing and financing needs and an analysis o f external and fiscal sustainability in light o f the serious external debt service burden.

0 Strengthening o f reform efforts in the health and education sectors and accelerating these reforms through the use o f pilot activities and community link development, wherever appropriate. Further, the reform o f financing strategies need to be realigned with public expenditure management in order to enhance the efficiency o f service delivery and improve access to these services, especially by the poor.

0 Restoring the independence o f Barki Tajik,

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0 Detailing measures and action plans to improve governance and accelerate private sector development.

0 Strengthening the l i n k s between sectoral policies and poverty reduction and a detailed costing o f efforts to sustain the recent modest progress, and analyzing the impact o f the National Social Insurance Fund (NSIF) on poverty reduction.

26. Staffs o f the World Bank and the IMF consider the country’s efforts towards implementation o f the strategy provide sufficient evidence o f the authorities’ commitment to poverty reduction, and the PRSP continues to provide a credible framework for Bank and Fund concessional assistance. The staffs therefore recommend that the respective Executive Directors o f the World Bank and the IMF reach the same conclusion.

Na 24b@,l/!!

,, i J

GOVERNMENT OF THE REPUBLIC OF TAJIKISTAN

PRSP

First Progress Report

DUSHANBE -MARCH 2004

2003 Annual Progress Report

ABBREVIATIONS:

ACU ADB cso DOTS EBRD GBAO GDP GRT HIV/AIDS HPS IDB ILO 1 OM MDG MOE MOET MOF M O H MLSP MSRD MTBF NBT NGO "WSS NSIFT PHC PIP PPP PRGF PRSP PRSPMD RRS SAC ssc SFCC SLMC TADAZ TLSS UNDP UNICEF VAT WE3 WHO

Aid Coordination Unit Asian Development Bank Civi l Society Organizations Directly Observed Therapy Strategy European Bank for Reconstruction and Development Gorno-Badakshan Autonomous Oblast Gross Domestic Product Government o f Republic o f Tajikistan Human Immuno-Deficiency Virus/Acquired Immuno-Deficiency Syndrome Hydro-Power Station Islamic Development Bank International Labor Organization International Organization o f Migration Millennium Development Goals Ministry o f Education Ministry o f Economy and Trade Ministry o f Finance Ministry o f Health Ministry o f Labor and Social Protection Ministry o f State Revenues and Duties Medium-term Budget Framework National Bank o f Tajikistan Non-Governmental Organizations National Nutrition and Water and Sanitation Survey National Social Investment Fund o f Tajikistan Primary Health Care Public Investment Program Purchasing Power Parity Poverty Reduction and Growth Facility Poverty Reduction Strategy Paper PRSP Monitoring Department Regions o f Republican Subordination Structural Adjustment Credit State Statistics Committee State Financial Control Committee State Land Management Committee Tajik Aluminum Factory Tajik Livings Standards Survey United Nations Development Programme United Nations Children's Fund Value-added Tax World Bank World Health Organization

2

/

2003 Annual Progress Report 3

Table o f Contents:

Abbreviations

1 . Introduction ......................................................................................................................... 4 1.1 Background .................................................................................................................. - 4 1.2 Highlights o f performance o f implementing PRSP compared to targets .......................... 5 Assessment ofmacroeconomic developments ......................................................................... 7

3 . Poverty analysis update ..................................................................................................... 11 3.1 Basic education coverage ............................................................................................. 13 3.2 Infant mortality ........................................................................................................... 13 3.3 Maternal mortality ...................................................................................................... 13 3.4 Access to health services ............................................................................................... 14 3.5 Access to safe water ..................................................................................................... 14 3.6 Employment ................................................................................................................ 14 3.7 Private sector share in the GDP .................................................................................... 15 3.8 Access to telecommunications ...................................................................................... 15

4 . PRSP policy implementation: 2002-2003 ............................................................................. 15 4.1 Administration and governance ................................................................................... 15

4.1.1 Governance organs ............................................................................................... 15 4.1.2 State budget management ..................................................................................... -16 4.1.3 Public Investments Program 2004-2006 .................................................................. 17

4.2 Improvement o f business environment ......................................................................... 19 4.2.1 Pnvatmtion ......................................................................................................... 22

Privatization o f enterprises .......................................................................... 23 4.2.1.2 Privatization of agricultural lands ............................................................... 24 4.2.1.3 Privatization and employment .................................................................... -25

4.3 Social sector policies .................................................................................................... 26 4.3.2 Education ............................................................................................................. 28 4.3.3 Social protection ................................................................................................... 31 4.4.1 Water resources ................................................................................................... 33 4.4.2 Irrigation and agriculture ..................................................................................... 34 4.4.3 Energy ................................................................................................................. 35 4.4.4 Transport ............................................................................................................. 35 4.4.5 Communication .................................................................................................... 35

4.5 Environmental protection ........................................................................................... 36 4.6 Tourism .................................................................................................................... 36 Challenges in the PRSP implementation .............................................................................. 38 5.1 Momtonng and evaluation ............................................................................................ 38 5.2 Technical assistance needs .......................................................................................... -40 5.3 Role o f stakeholders .................................................................................................... -41 5.4 Donor aid coordination ............................................................................................... -42

2 .

. . . 4.2.1.1

4.3.1 Health .................................................................................................................. 26

. . 4.4 Sustamg economic growth ........................................................................................ 32

5 . . .

ATTACHMENTS:

ATTACHMENT 1 . Matrix o f GRT Policies for Poverty Reduction ................................... 43 ATTACHMENT 2 . Matrix o f legal base for PRSP implementation ................................... 54 ATTACHMENT 3 . Surveys used in the PRSP Progress Report ........................................ 59

TABLES:

Table 1 : Poverty reduction targets based on MDG ..................................................................... 5 Table 2 . General Macroeconomic Indicators. 1999-2003. ............................................................ - 7 Table 4 . Expenditures by Economic Type, 2002-2003 (% GDP) ................................................. 8 Table 5 . Medium-term budget framework, 2004-2006 ............................................................... 10 Table 6 . UN MDG and GRT PRSP targets 2002-2015 ............................................................... 11 Table 7 . Water contamination (2002, 2003) .............................................................................. 14 Table 8 . PIP 2004-2006 by sector (USD mill.) ........................................................................... 18 Table 9 . Grants and Technical Assistance Program, PIP 2004-2006 by sector (USD thou.) ...... 19 Table 10 . Number of businesses established 2000-2003 ............................................................. 20 Table 11 . Enterprise prhatizations (as o f August 2003) ........................................................... 23 Table 12 . State Employment Program o f MLSP (2002) ............................................................. 25 quota system (1998-2003) ......................................................................................................... 29 Table 14 . Average wages and average pensions, (1 999-2003) .................................................... 32 Table 15. Foreign visitors in Tajikistan (1 996-2003) ................................................................. 37 Table 16 . Televised hotline conferences (200 1-2003) ................................................................. 41

Table 13 . Female students admitted to higher educational institutions under Presidential

FIGURES:

Figure 1 . PRSP Monitoring Department in the GRT (2003) .................................................... 39 Figure 2 . Coordination o f institutions for PRSP monitoring .................................................... 40


1. Introduction

1.1 Background

The Government o f Republic o f Tajikistan had committed i t se l f to Poverty Reduction Strategy Paper (PRSP) in June 2002. The purpose o f this First Progress Report i s to inform on the progress in PRSP implementation and progress in poverty reduction. I t i s expected that the Report wi l l be used as a tool to better coordinate the implementation o f PRSP and as a basis for continued cooperation wi th the donor community. The Report assesses the activities for the period between the approval o f the PRSP by the Parliament in June 2002 and the end o f 2003. The Report notes that the poverty situation has improved, details the progress made in key sectors and highlights constraints. I t also notes that, the most significant challenges relate to the acceleration o f implementation in the context o f privatization, land reform, and improvement o f private business environment. The outstanding need to strengthen the institutional capacity to implement reforms i s a subtext throughout the report.

The original PRSP objectives were to increase the real incomes o f the people, achieve fair distribution o f the benefits o f growth and ensure a r ise in the living standards o f the poorest groups o f the population. The main elements in the strategy are:

Accelerated, labor-intensive, export-oriented, and socially-fair economic growth, Fair and efficient provision o f basic social services, Targeted support to the poorest groups o f the population, and Efficient governance and improved security.

To achieve progress in these four elements for reducing poverty, the GRT adopted sector policies and actions, which focused on education, health, and social protection; agriculture; privatization, labor and private sector development; infrastructure and communication; environmental protection and tourism. During the reporting period, the GRT has used the matrix o f activities for the f i rs t implementation year o f PRSP (Attachment 1). This matrix i s based on the original PRSP matrix.

The GRT i s encouraged with the reception given to the implementation o f the PRSP at the M a y 2003 Consultative Group Meeting o f Donors and at the Follow-up meetings during November 2003 and February 2004. Measures to improve institutions, such as maintaining peace and stability, reforming the banking system, and improving the functions o f the public services were seen as making important contributions to economic growth and equity. Implementation o f poverty reduction policies requires working closely with development partners. Progress has been made to improve aid coordination and aid absorption. However, significant difficulties remain in the full realization o f aid delivery and aid absorption. The responsibility for implementation o f policies l ies with the GRT and the donor partners. The GRT, faced with the very complex issues o f poverty, recognizes that increasing levels o f efforts are needed to achieve development goals.

During the reporting period, the GRT has attended to some o f the init ial measures o f poverty reduction policies. These included further defining the prioritization o f policies, creation o f various policy implementing organizations and expanding the basic legal infrastructure and administrative procedures. Attachment 2 summarizes the legal framework, o n which the Government has been building the foundation o f institutionalization o f the poverty reduction policies. These init ial measures may become the building blocks for the next stages o f poverty reduction work if the currently observed difficulties are managed well by the time the PRSP Second


Progress Report i s prepared. Before then, a strategic and a comprehensive management o f the entire process wi l l be put in place. The practical implementing process wi l l be broadened with involvement o f more stakeholder groups and by increased information base. The implementation o f the existing legislation also gains a much more fundamental role.

These are institution building activities. Their realization requires determination, time and resources. Among the GRT actions, to deepen the poverty reduction strategies (PRS) policies in the next cycle, the fo l lowing are proposed. The number o f organizations for data collection and analyses w i l l be increased and given a voice in public forums. The Parliament, media, and CSOs will be able to more easily enlist and to participate in the implementation o f the PRSP process. The capacity o f the judiciary and legislature wi l l be increased. In addition, the Government recommits itself to sustaining the ongoing policies o f macroeconomic stability, private sector growth, agricultural reforms, and increased and targeted spending in social sectors. The donor community i s expected to participate with the GRT in these particular areas o f poverty reduction policies through grants and other technical assistance.

1.2 Highlights of performance of implementing PRSP compared to targets

To be able to measure progress in poverty reduction, the GRT has chosen a number o f poverty indicators and set itself specific quantitative targets to be achieved for each o f the indicators wi th in a certain period o f time. In the selection o f indicators, the GRT adopted some that were established as part o f the Millennium Development Goals by the United Nations Organization. Table 1 shows the indicators for Tajikistan and the targets to be reached.

*Oflcial statistic based on live birth definition other than accepted by WHO. ** For 2002.

The implementation o f broad set o f PRSP policies has had a tentative beginning. The PRS policies o f the GRT remain a multiple-sector approach. The broad approach emphasizes private sector development, which includes reducing government intervention and completing the


privatization o f state-owned enterprises and o f farms, reducing quasi-fiscal deficits in energy sector, improving governance, and rationalizing and rehabilitating infrastructure,

The economic growth since 2000 has been strong and real GDP has increased annually on average by 9.5 percent. This real growth has had an impact on reducing overall poverty despite some indications that there i s increased income inequality. Even though the per capita income i s very low, it has r isen in real terms since 2000.

There are positive signs in the ini t ia l implementation stages o f the PRS process. The national budget remains within the macroeconomic framework o f our agreements wi th the multi lateral donor programs (PRGF, SAC). The revenue performance has improved and expenditures are managed with tight fiscal discipline. The expenditures in the social sectors were almost 43% o f the budget in 2003. Cash compensations, increased public sector salaries and increased pensions have targeted social sector spending better. The cash compensations were 12 m i l l i on Sm. in 2003 budget. This w i l l be increased to 20 mi l l ion Sm. in the 2004 budget. The budget deficits have declined since 2000 and in 2003 there was a budget surplus. The external borrowing i s limited only to the Government's public investment programs in light o f the debt burden. Improved financial intermediation and financial infrastructure for micro enterprises are helping private sector economic activities to develop. Increased tariffs for electricity and gas are reducing quasi-fiscal deficits. The Government policies compensate the very poor, who are most adversely affected by these tariff increases,, to alleviate the burden. A Department in the President's Executive Offices was established to monitor and regularly report o n poverty reduction developments.

The GRT acknowledges that the pace and the depth o f the implementation o f PRSP reforms have been below the level o f init ial expectations. In public expenditure management, the links between PRSP and the state budget are weak. The creation o f a strategic policy group such as a Budget Commission would provide the institutional framework to implement the medium-term budget framework (MTBF). The budget's current expenditures and capital investments are not yet fully prioritized according to the PRSP. The MTBF for the budget i s not yet implemented. The proposed Public Investment Program 2004-2006 i s within the external borrowing limit o f 3% o f GDP only for 2004. The GRT wil l revise annual external borrowing levels in accordance with the changing economic conditions. The broader participation o f and the accountability to the stakeholders in the use o f public funds remain elusive. However, the GRT has taken measures to increase transparency in budget execution, transparency in privatizations, transparency in public procurement, and to improve the standards o f auditing institutions. The reasons for the slow adjustment to structural reforms are various. The existing legislations, which were designed in the service o f PRSP, are not enforced wel l and remain, in general, ineffective. The lack o f fin-cia1 resources required in the broad approach to a l l policies has been a hard constraint on the Government's efforts. In this light, further prioritization o f poverty reduction strategies becomes very important.


2. Assessment of macroeconomic developments

Tajikistan has shown strong real economic growth in the last five years. Macroeconomic stability on broad terms has been attained despite uneven inflationary performance and vulnerability to external shocks.

More recently, the overdependence o f economic performance to production o f cotton and aluminum has moderated as the economy started to diversify. The impact o f structural reforms resulted in increases o f non-cotton agricultural goods and non-aluminum manufacturing. The share o f the services sector in the GDP has been steadily growing. Some o f the more recent economic growth came from increased domestic demand resulting from workers' remittances from abroad. However, the growth o f the importance o f migrant worker remittances may contribute to economic vulnerability because in the longer term it i s d i f f icul t to sustain. Also, many migrant workers earning their livelihood in foreign countries mean that the domestic economy i s not creating enough job opportunities for the population.

Table 2. General Macroeconomic Indicators, 1999-2003 Actual

1999 2000 2001 2002 2003 GDP (mill Sm.) Real 1,345 1,807 2,512 3,345 4,758

Inflation (end o f period) 30.1 60.6 12.5 14.5 13.7 GDP (% change) 3.7 8.3 10.3 9.1 10.2

GDP distribution (%)

Agriculture 25.4 27.0 26.7 22.0 n.a. Industry Trade 21.7 23.9 22.6 18.7 U.a. Construction 19.7 18.3 19.3 19.4 n.a. Other 5.4 3.4 4.1 2.6 n.a.

27.8 27.5 27.4 37.3 n.a.

Foreign trade (US0 mill)

Exports 689 784 652 734 798 Imports 663 675 682 72 1 88 1 Net exports 2 6 . 109 -3 0 13 -83

External Debt (% GDP) 118 128 99 82 73 Current Account (% GDP) -3.4 -6.5 -7.1 -2.7 -1.3*

Source: MOF, MOET, SSC, NBT. (*)Preliminary data.

Inflation rates, since 2000, have moderated, but have remained uneven and relatively high with respect to Government's targeted levels. In the past, external shocks have played intermittent and large role in higher inflation rates. However, the main reason in persistently moderate inflation rates has been the weakness in monetary policy implementation. The National Bank o f Tajikistan does not have adequate monetary instruments and expertise to timely manage the monetary aggregates. The lack o f independence o f NBT activities from Government policies has, also on occasion, contributed to uneven monetary policy implementation.


Table 3. Revenues and Expenditures by Functional Type, 1999-2003 (OhGDP)

1999 2000 Revenue 14.5 13.8 Expenditure 1 / 17.6 14.4

Education 2.1 2.3 Health 1 .o 0.9 Social Protection 2.1 1.8 Mgmt, defense, law and order 5.5 5.2 Economic sectors 4.4 2.9 Other 2.5 1.3

Deficit 1/ -3.1 -0.6

2001 15.1 15.2 2.4 1 .o 1.9 4.6 3 .O 2.3 -0.1

2002 16.0 16.1 2.6 0.9 2.1 4.9 2.7 2.9

-0.1

2003 17.2 16.2 2.4 0.9 2.3 4.7 3.0 2.9 1 .o

Source: MOF I/ Excludes externally financed public investments program,

Fiscal policy performance has improved over the medium-term. The new tax code, which came into effect in 1999, simplified the taxation system. Since then, the tax administration and the customs administrations have been consolidated and strengthened. In response, mainly to these developments, the tax revenues have been gradually increasing. The budget expenditures have been tightly managed. As a result, the budget deficits have been declining in the recent years. In 2003, there was a budget surplus. The Government, in compliance with the policy o f targeting social sectors, has increased the share o f the expenditures in social sectors. The raising o f tariffs for electricity and gas to cost recovery levels and increasing collection rates have reduced the quasi- fiscal deficits. However, the quasi-fiscal deficits continue to be a relatively high.

Table 4. Expenditures by Economic Type, 2002-2003 (YO GDP).

2002 2003 I Total expenditure & net lending (IIi-V) 16.1 16.2

I1 Total expenditure (III+IV) 16.0 16.1

111 Current expenditure

Wages & salaries Other purchases o f goods & services

Domestic Foreign

Expenditure on goods & services

Interest payments

Transfers to households Subsidies and other transfers

12.9 12.5 7.8 8.3 3.4 2.8 4.4 5.6 1.5 1.2 0.5 0.5 0.9 0.7 2.7 2.7 0.5 0.4

Iv Capital expenditure 3.2 3.5

Centralized investments Other

2.1 2.2 1.1 1.4

V Total lending minus repayments 0.0 0.0

Source: MOF (Expenditure excludes externally financed public investments program.)


Disciplined fiscal policy, wi th l ow deficits, has alleviated Tajikistan's external debt sustainability. The Government has limited i t s external borrowing and negotiated restructuring o f i t s debts. The Government has limited the foreign-financed component o f PIP to 3 percent o f GDP. As a result o f debt restructuring, as well as strong economic performance, the total external debt as a share o f GDP has declined to 73 percent at the end o f 2003 from 82 percent o f GDP at the end o f 2002. External debt management has also been improved.

The national currency, Sm., has depreciated significantly since 2000. However, more recently, the depreciation rate has dramatically slowed due mainly to the performance o f the economy. In 2003, there has been a slight appreciation against the U S dollar even though Sm. has depreciated against the Russian Ruble, which i s an important trading partner. Recently, external current account deficit improved from increased workers remittances. However, the foreign currency reserves have remained at the level o f about two months' worth o f imports, because o f increased imports demand. Tajikistan's exchange rate policies are relatively liberated. The National Bank intervention in the exchange rate valuation i s limited to strengthening the national currency rather than defending it against free-floating exchange rate depreciations.

In 2003, the real GDP grew by 10.2 percent. Inflation rate, at 13.7 percent, was above the initial policy target o f 7 percent. One o f the reasons in the higher inflation rate was the effect o f the one-time amnesty on declaring cash holdings without source documentation. O n the fiscal side, main fiscal parameters improved and the budget showed a surplus. The Government fiscal policies have been linked to the need to target the surplus towards more targeted spending in social sectors and also in servicing the external debt.

Looking ahead in the medium-term, during 2004-2006, the real economic growth rate i s expected to settle to more sustainable levels as the structural economic reforms are broadened. The production o f cotton and aluminum wil l remain important but the economic growth wi l l mainly come from non-cotton agriculture, non-aluminum manufacturing, and growing services sector. Migrant worker remittances, increased regional trade and reforms in agricultural sector wi l l drive the domestic demand. During this period, inflation rates are expected to decrease. Lower inflation rates are expected as restructuring o f the NBT i s completed and i ts capacity in monetary policy implementation i s increased. As well, the effects o f the amnesty program for repatriating cash holdings wil l have dissipated.

In the medium term, the budget expenditures are expected to rise together w i th the increased budget revenues. The revenue increases during 2004-2006 are expected from improved economic activities and also f rom the implementation o f the new tax code, which w i l l simplify taxation, enhance tax administration and increase compliance further. In 2004, the budget has allocated 7.4 percent o f GDP towards social sectors. The expenditures in the education, health and social protection sectors wi l l be gradually increased during 2004-2006. In t h e immediate future, increasing external debt servicing wi l l contribute to the difficulties in the expenditure policy. During the medium term period, slight but declining budget deficits are expected.


Table 5. Medium-term budget framework, 2004-2006 Forecast

2004 2005 2006 GDP (mill Sm) 5,100 5,850 6,680 Real GDP % change 5.0 5.0 5.0 Inflation e.0.p. . 7.0 5.0 5.0

General Government Finances (YO GDP)

Revenue 18.0 18.9 19.7 SPF* 1.9 1.8 1.9 VAT 6.2 6.7 7.0 Excise tax 0.9 0.9 1 .o Sales tax (cotton, aluminum) 1.6 2.1 2.2 Income and profit taxes 1.6 1.7 1.8 Other tax 4.8 4.7 5.0 Non-tax 1 .o 0.9 0.9

Expenditure 1/ 18.5 19.2 19.8 Education 3.2 3.3 3.4 Health 1.2 1.3 1.3 Social Protection 3 .O 3.1 3.2 Mgmt, defense, law and order 4.9 5.1 5.2 Economic sectors 2.3 2.4 2.5 Other 3.9 4.0 4.1

Deficit 1/ -0.5 -0.3 0.0

Externally financed PIP 3.0 3.1 3.2 External Debt** 70 63 57

Source: MOF. I/Excludes externally financed public investments program. *SPF is contributions to the Social Protection Fund. ** Assuming that annual PIP disbursements are filly made.

During the next stage o f PRSP realization, the GRT plans to facilitate the structural reforms o f privatization and in banking and social sectors. In particular, we intend to strengthen restructuring o f agricultural enterprises and lands, privatization o f the large and medium enterprises, to establish legal and procedural business environment for encouraging entrepreneurial initiatives, to simplify tax administration and reduce tax burden, to rehabilitate transport and communication infrastructures, and to establish banking system and credit institutions to facilitate investments. In the public sector, we wil l reform the social sector service delivery and increase our investments in the human capital o f Tajikistan. In education sector, relevant costs, including reformipg o f financing o f education with granting the more independence to schools, wi l l be reflected. In health sector, primary health care policies will be implemented. Intergovernmental reforms to distinguish the responsibility and authority between local and central government bodies will guide some o f the changes in public resources management. The GRT w i l l promote activities to lower rates o f inflation, wi l l improve private sector growth policy, and wi l l continue disciplined fiscal policy while sustaining high social sphere expenditures and improving c iv i l servant wages and services. Government believes that these economic policies wi l l consolidate macroeconomic stability, and sustain real economic growth and contribute to real improvements in the standards o f living o f the population.


3. Poverty analysis update

In 2003, the GRT drafted and published the Report on Achievement o f Mil lennium Development Goals in Tajikistan with the support o f UNDP. The MDG are, on the whole, in agreement with the priorities and tasks o f the PRSP. Table 6 assesses, broadly, necessary policies and chances o f achieving development goals and PRSP objectives by 2015.

1.

2.

3.

4.

UN MDG and GRT PRSP tar2ets 2 Goal and tasks

Liquidation o f extreme poverty and hunger 1. Halve the share ofpoor population by 2015; 2. Halve the number of the population suflering from hunger bv 2015. Provision o f elementary education.

Qy 2015, children wi l l be provided opportunities of fu l l elementary education.

Extension o f rights and opportunities for women.

Liquidate gender disparity in elementary education and secondary education

Reduction o f child mortality.

Reduce mortality among the children under 5 years by 2/3.

Improvement o f maternity protection.

Reduce maternal mortality coeficient by 3/4.

H I V / A I D S control and control o f malaria and other diseases.

1.Contain HW/AIDS and initiate. reduction of incidence rate;

02-2015. Assessment and necessary conditions

With stable economic growth rates o f 5% as well as continuation o f progressive and effective structural economic reforms, the poverty level :an be halved by 20 1 5.

Tajikistan can provide elementary education to al l boys and girls by 20 15 provided that:

The Government, c i v i l society and private sector o f Tajikistan, and the international community take proactive ioint actions.

The level o f gender disparity in elementary education remains high. The economic difficulties and social changes o f the transition period lowered the coverage ratio o f girls in the basic education levels (especially girls f rom poor families). This gender gap may further increase and it wi l l be di f f icul t for the country to achieve gender equality by 20 1 5, The situation o n ch i l d and maternal mortal i ty remains complicated and has been d i f f icu l t to track. Of f ic ia l statistical data and results o f independent surveys are inconsistent regarding the slowdown o f infant and maternal mortal i ty during the period since 1990.

the available data suggests that Tajikistan i s unlikely to reduce ch i ld mortal i ty by 2/3 and the maternal mortality coefficient by 3/4.

Actions in accordance with the Strategic Plan on Prevention o f Spread o f HIV/AIDS assume that i t i s possible to stabilize the situation by 2015.

2003 Annual Progress Report

!. Contain spread of malaria and. Ither major diseases and initiate seduction of incidence rates.

'rovision o f environmental ustainability.

I, Include sustainable development. winciples in national strategies and wograms and reverse loss of

12

Without large investments in malaria control, Tajikistan w i l l be unable to contain i t s spread and to reduce i ts incidence rate.

Potentially, Tajikistan can ensure ecological sustainability . In 2002, the National Commission on Sustainable

Development conducted a progress assessment since NO-92. All national plans and programs were

7

'00 mil l ion O f 8 1 ~ ~ inhabitants Worldwide) by 2020.

actions to study or classify conditions similar to slums are taken.

iatural resources,

?. Halve the number ofpeople with. io permanent access to safe water y 201 5.

3. Ensure significant improvement.

assessed in accordance with the sustainable development principles, and clear recommendations were given for appropriate national policies.

Tajikistan may be unable to halve the number o f people who are without permanent access to safe water by 2015, The quality o f water and sanitation remain to be a problem, while other issues (low level o f financing and mismanagement) wi l l continue to hinder progress until an effective interaction mechanism o f a l l stakeholders in o f water resource management (community, private sector, Government) i s established.

1 - The GRT does not recognize the existence o f

Yource: Report on Achievement of Millennium Development Goals in Tajikistan, GRJ 2003.

Number o f household surveys and other studies were used for the current report. We present details o f results from selected surveys in Attachment 3. The data covers a period longer than our PRSP reporting period. Both the GRT institutions and the donor organizations collated information to understand the poverty status in Tajikistan. Based on the current information, the f irst progress report w i l l show more the depiction o f poverty than a quantified change through time, which would have given us a fuller understanding o f poverty.

In the process o f preparing the Progress Report, it became clear that to measure the effectiveness o f poverty reduction strategies requires upgrading o f existing statistical systems to provide reliable, consistent, and timely data. With the current level o f information on the key issues in poverty identification, and with the weak data collection system it has been difficult to produce a highly quantitative evaluation o f PRS progress. In the process o f drafting the Report, significant gaps in data on poverty issues and organizational lapses in uti l izing the access to information were


discovered. Different methodologies o f surveys for poverty assessment created problems in planning and implementation o f policy measures aimed at poverty reduction. However, we have benefited during the preparation o f this Report in identifying current problems and we are drafting specific measures to overcome the shortcomings. The GRT i s addressing these issues with the help o f the donors. A Trust Fund Grant technical assistance agreement was signed to improve statistical capacity o f SSC. The PRSP Monitoring Department i s receiving technical assistance in designing methodology o f monitoring and evaluation o f poverty data.

The GRT has chosen a number o f poverty indicators to be able to measure progress in poverty reduction. Some indicators were established as part o f the UN MDG. Below we summarize the status o f these indicators as o f 2003. PRSP Monitoring Department i s reviewing other indicators in order to target development goals for Tajikistan.

3.1 Basic education coverage

Basic education (compulsory grades 1-9) coverage has been declining since the early 1990s. In 1989, the coverage stood at 94.3%. In 2000, it had fallen to 88.4%. Recent data shows, that coverage in basic education rose to 94.4% in 2002 from 93.2% in 2001. The situation has been similar with elementary education (grades 1-4). The data on elementary education shows that coverage increased to 79.1% in 2002 from 77.7% in 2001. We do not have gender specific data, for which we w i l l take measures to rectify.

3.2 Infant mortality

There i s large variance in infant mortality rates in the data, which come from various sources. Main reason for the conflict in data i s the definition o f live births. The definition o f live- birth used by M O H underestimates infant mortality rates relative to the WHO standards. According to the MOH, infant mortality rates per 1000 live-births were as follows: in 2002 17.2, in 2001 27.9, and in 2000 15.5. Latest information for 2003 shows the rate to be 16.7, which does not include information from deliveries at home. UNDP reports that the unattended home deliveries are 40.7% in the country (up to 80% in some regions).

On the other hand, a UNICEF MICS study indicated infant mortality rate o f 89 in 2000. In the same study the mortality rate for children under 5 was 126. Definition o f live-birth under the WHO standards was introduced to our data collection practice at the end o f 2003.

3.3 Maternal mortality

Official maternal mortality indicator has declined to 50.6 per 100,000 live births in 2002 from 97.7 in 1995. The levels o f maternal mortality in some regions range from 157.1 to 1075.3, which supports the fact that poverty has strong regional character in Tajikistan. In 2002, maternal deaths were from hemorrhage (30.4%), pre-eclampsia (30.4%), extra-genital diseases (1 3.9%), and complications resulting from infections (1 0.1 %). Anemia i s prevalent among registered pregnant women (50.3%). Overall registered abortions have been declining except among adolescents, for whom it has become a recent cause o f maternal mortality.


3.4 Access to health services

Preliminary results o f the WB Assessment o f the Living Standards in Tajikistan in 2003 (fLSS) prove that access to health services deteriorated since 1999. The ratio o f physicians in population was 20.3 per 10,000 persons in 2002. This rate i s 47.0 for paramedical personnel.

There i s no detailed information on the number o f population having access to basic medicines. According to the WHO study, there i s no guaranteed supply o f standard basic medicines to the socially vulnerable population. Public pharmacies stock only 25.7% o f basic medicine supply inventories. This rate i s 66.4% at private pharmacies and i s 37.3% at district hospitals.

3.5 Access to safe water

In general, 57% o f the population has access to reasonably safe water. UNICEF studies prove that only 40% o f the Tajikistan's population uses freshly piped water at home or outdoors. Another 8% uses wells, 6% uses bore-holes, and 33% get water from unreliable sources. According to statistics, 5 1.2% o f the population uses the infrastructure o f the water supply system and 48.8% uses water from other sources with questionable sanitary-epidemiological condition. Analysis o f water quality conducted by sanitary-epidemiological stations during the last two years in Khatlon and Sugd regions showed widespread chemical and bacteriological contamination.

Chemical 20.6

Source: Epidemiological stations.

According to the NNWSS 2003, bacteriological analysis o f 3 80 water samples, nationwide, shows that 41.1% o f the water was o f unacceptable and grossly polluted categories.! The majority o f the contaminated water samples were collected directly from the water source while the majority o f samples for acceptable quality water were collected from piped taps or hand pumps.

3.6 Employment

Officially, total unemployment rate according to I L O definition i s 11.3%. Urban unemployment rate i s higher (13.2%) than rural unemployment rates (10.9%).2 According to the official statistics, average labor force in 2002 was 3,477,000 people. In 2002, labor participation rate in the economy was 53.4%, which fel l from 57.3% in 1999. Part o f the decline i s the result o f the change in the broadening o f age brackets in the definition o f labor force. The new age brackets for labor force are, for men 15-62 (earlier 16-59) and for women 15-57 (earlier 16-54).

Mean count o f thermo tolerant E coli greater than 1 1 at 44OC in 100 mI. This i s the main indicator

According to the poverty monitoring assessment conducted wi th the support o f the Asian of risk o f contracting water borne and water related diseases.

Development Bank in 2002.


In recent years, migrant worker component o f the labor force has gained significance. The prolonged lack o f j ob opportunities in the domestic economy i s forcing growing number o f workers to other countries. According to the MLSP, the number o f labor migrants abroad was around 210.000people. Of these, more than 85% work in the Russian Federation. The majority are male (91%) and are between the ages o f 18-29 years (62%).

3.7 Private sector share in the GDP

It has not been possible to identify accurately the share o f the private sector in the GDP. A large share o f the private sector i s part o f the informal economy. The SSC has not officially estimated this. According to one estimate, in 2002, the share o f private sector activities in the economy was 32%.3 According to the ADB, the share o f the private sector in national output was 50%. Currently, private sector activities are dominated by small businesses enterprises wi th legal entity status, small businesses licensed by 'patents' and private dehkan farms.

3.8 Access to telecommunications

In 2003, nationally, access to telephones was 3.8 land lines for 100 persons. The urban population uses 85% o f all telephones lines. The access to land l ine telephones in rural areas is s t i l l 0.8 per 100 persons. Th is statistic roughly translates that about one percent o f rural population has access to basic telecommunication infrastructure. The telecommunications sector i s in the process o f upgrading with improvements in mobile phone coverage, upgrading o f telephone lines and switches, and broader Intemet services. m 2003, access to mobile phones rose to 0.80 per 100 people from 0.14 in 2002. The use o f mobile phones is also essentially an urban area phenomenon.

4. PRSP policy implementation: 2002-2003 4.1

4.1 Administration and governance

4.1.1 Governance organs

Effective governance i s one o f the main elements o f the PRSP along with accelerated economic growth and targeted support to the disadvantaged population. To improve governance management, many ministries, agencies, and the Off ice o f the President have undergone restructuring processes in the recent years. The State Financial Control Committee was created in 2001 to increase effectiveness and transparency in the use o f public funds and property. Increased transparency in the operations o f government bodies i s provided by periodic publications, in the media, o f new legislations, o f essential policy decisions, including state budget execution reports and results o f audits.

In 2002, to strengthen the state service system, the Civ i l Service Department was created. Functional reviews were conducted by the Public Administration Reform component o f the IBTA-I1 Project. The recommendations from the functional review have not been fully acted on. Over the period, the public sector employment was reduced by almost 5% through j o b attrition. Also, the legal base for a Register o f state positions and qualification requirements was adopted (December 2002). For

CARANA Corporation Study.


training o f qualified c iv i l servants, Professional Development Institute was established in October 2002. The under-funded Institute was not active in 2003.

The SFCC i s directed by law to audit annual government final accounts and to report the results to the Parliament and the President. Other internal audit reports are available to the public through the media. During the reporting period, concrete measures to increase the auditing capacity o f the SFCC and to create a mechanism to review the SFCC audits did not occur. The GRT and SFCC are working on means to fulfill the potential o f SFCC towards government accountability and transparency by resolving the issues o f auditing capacity and the appearance o f dependence o f SFCC on the executive branch.

Another measure in increased accountability, which i s considered, i s decentralized provision o f services. This involves community participation and strengthening local government accountability and financial management. In farm privatization process, the Government has tried to divest control from local authorities with respect to farmers' production decisions. Because this measure requires an informed population to have effectiveness, the GRT, i s educating the stakeholders about their rights and available legal recourses.

State budget does not financially support some public sector management agencies. These agencies financially depend on the enterprises, which they are supposed to regulate. This relationship compromises independence o f the agencies. Other departments after restructuring are s t i l l directed to implement centralized economic decisions. This applies to executive governance bodies, financial managers as well as legislative and judicial systems.

The expected impact from restructuring o f ministries and agencies has not fully taken root. Transparency and accountability are not embraced priorities yet. The most conspicuous reason for the delay in extensive gains in governance management organs seem that the GRT has not had a single coherent practical approach. The GRT has received draft recommendations from the WB regarding policies on state procurement processes, auditing standards and procedures, MOF functions regarding expansion o f treasury functions, independence o f the SFCC, and greater involvement o f stakeholders in the public expenditure management. The GRT considers follow-up actions on the recommendations o f public sector management issues as well as on functional reviews with renewed emphasis in the next PRSP implementation cycle.

4.1.2 State budget management

Despite continuing structural reforms in the budget management, budget allocations continue to reflect a planned economy system. Budget management process has not had the occasion to integrate PRSP priorities and its financial requirements into the state budget. In 2003, even though 43 % o f the state budget expenditures were towards social sector needs, this does not imply that the PRSP priorities were addressed. The adoption o f PRSP as government economic policy has not filtered into all the government organs. The PRSP priorities have not been explicitly communicated to the MOF, other ministries, and local authorities in a manner to link the budget allocations and the PRSP.

The GRT i s working on measures to improve the effectiveness o f the budgetary system. The creation o f a Budget Commission has been under consideration. The Budget Commission is expected to guide the budget process strategically and to target budget expenditures on the priorities o f the PRSP. The


Commission is also expected to improve the communication among the government organs and the population at large through the Parliament and CSOs. The preparation o f a full medium-term budget framework by the M O F would start the budget management process to incrementally integrate PRSP priorities. In the meantime, the automated Treasury fimctions w i l l be extended to local units to improve their budget management. The M O F w i l l also establish a cash management unit and participate in the treasury securities market to further institutionalize the treasury fmctions.

The MOF, in 2002 and 2003, developed draft MTBF, respectively, for the periods o f 2003-2005 and 2004-2006. The ministries and agencies now have the basic capacity to prepare the annual budgets under "programs." Therefore; the M O F has the ability to prepare and present the mual budget for 2005 to the GRT and the Parliament as a part o f a full MTBF for the 2005-2007 budget years. The GRT believes that the preparation and presentation o f the budget under the format o f budget programs (reflecting PRSP targets) and the associated Key Budget Organizations P O ) will provide concrete improvements in transparency and accountability in budget preparation and execution. The M O F will revise the budget classification to facilitate the new budget preparation and execution. The GRT, Budget Commission, Parliament and stakeholders will be able to measure more tangibly the purposes and the targeting o f budget expenditures with the new budgeting process.

At the same time, the management o f the state budget must consolidate the expenditures on capital investments within the context o f PRSP prioritizations. Currently, the state budget coverage includes centralized capital investments and externally financed PIP. However, unless the state budget is prepared in a singularly integrated structure, the budget allocations (current and capital) can not separately target the same set o f poverty reduction policies in the most effective manner. The GRT, to improve targeting o f investments in the public sector has created a PIP Unit in MOET. The MOET is receiving donor technical assistance to improve upon the PIP preparation and management. The MOF, MOET and the A C U are in the process o f delineating the tasks in the management o f PIP financing and other donor contributions. The MOF i s receiving donor technical assistance in external debt management.

4.1.3 Public Investments Program 2004-2006

To address some o f the medium term PRSP objectives the GRT prepared PIP 2004-2006. The PIP 2004-2006 i s a continuation o f earlier public investment programs. It tries to strengthen the current PRSP initiatives and for the first time, the PIP 2004-2006 recognizes the debt burden o f the public sector. The PIP limits the annual external borrowing to 3% o f the GDP for 2004. For the outer years, the GRT plans to revise annual external borrowing levels in accordance with the changing economic conditions. The borrowing constraint is based on the medium-term macroeconomic framework. The debt service o f the state budget as a percentage o f the annual revenues i s high and will increase in the next few years.

For priority financing projects in 2004, the planned amount i s USD83.8 mill ion o f which USD 63.8 mill ion are in loans. O f the total USD 63.8 mill ion in 2004, about USD 17 million i s not direct borrowing o f the GRT.4 Therefore, for 2004, the external borrowing i s under 3% o f GDP. The PIP 2004- 2006, to be financing by loans, consists o f 41 projects for a total sum o f USD 343.1 million. Twenty

The planned borrowings on two projects are re-classified that they were not public sector borrowings (energy sector IDB-ADB loans for USD 7 mill. and communications sector EBRD loan for USD 10 mill.).


Sector

US$ %in mill total

projects for USD 246.7 .million are ongoing and 21 projects for USD 96.4 million are for new projects. In the coming years, the PIP projects may need to be more highly prioritized to better reflect the PRSP objectives.

The total amount o f investments in the social sectors o f public health, education, social protection and employment, expansion o f a private sector and multi-sectors constitute USD 71.8 mi l l ion or 21% o f the total amount. Projects in agricultural sector, irrigation, and water supply make up U S D 93.1 mi l l ion or 27%. Projects in these sectors are aimed at reforming the agricultural sector, creation o f private dehkan farms, rehabilitation o f a rural infrastructure and improvement o f water supply.

New PIP Sector AUmtIon 'Total

US$ "LO in US$ YO in mill total mill total

Table 8. PIP 2004-2006 bv sector CUSD Mill)

I

Economic Management

2 3 4 5 6 7

8.0 3.2 0.0 0.0 8.0 2.3

Agriculture Irrigation and Rural Water Supply

22.5 9.1 8.0 8.0 30.5 8.9 29.2 11.8 6.2 6.2 35.4 10.3

I I I I I I

Water Supply and Sewage I 22.7 I 9.2 ~ 4.61 4.6 I 27.31 8.0 Energy

Transportation

Communications

62.4 25.3 31.6 35.0 93.9 27.4

55.0, 22.3 6.6 6.6 61.6 18.0

10.2 4.1 4.5 4.5 14.7 4.3

Education 2.9 1.2 14.6 14.6 17.5 5.1

Health

Social Security and Labour

Private Sector Development

Source: MOET

2.6 1.1 3.1 3.1 5.7 1.7

16.3 6.6 0.0 0.0 16.3 4.8

0.0 0.0 11.5 11.5 11.5 3.4

Projects in energy sector aimed at construction and rehabilitation o f infrastructure are 27.4% o f PIP. The transport sector allocates 18% o f PIP resources fo r construction and rehabilitation o f roads and highways. The program o f Grants and Technical Assistance consists of 128 projects for about USD 180 million. Sixty-two projects already have committed funding. Social sector projects are about U S D 80 mi l l ion or 45% o f the total. Economic management sector has 17 projects for U S D 15.2 mi l l ion or 8.5% o f the total.

Multisector and Other

TOTAL

15.0 6.1 5.8 5.8 20.8 6.1

246.7 100.0 96.4 100.0 343.1 100.0


Sector

Economic Management

Results of Consultative Group Donor meetings, held in May 2003 and interim meetings in November 2003 indicated that donors are interested to see clearer process of prioritization especially by sectors. The failure of prioritization may be influencing the level o f donor disbursements. The GRT i s in the process of reprioritizing sector strategies.

Number Project Costs Sources of o f USD %in financing

Projects (oools> total o/, Gov't External

17 15,228 8.5 2.8 97.2 A2riculture Irrigation and Rural Water Supply Water Supply and Sewa2e

14 25,182 14.0 1.2 98.8 7 10,119 5.6 9.2 90.8 10 13,571 7.5 7.3 92.7

~~ ~

Energy Transportation

6 4,600 2.5 0.0 100.0 11 4,280 2.4 0.7 99.3

Communications Education

1 379 0.2 0.0 100.0 4 12,454 6.9 8.4 91.6

TOTAL 1 128 I 179,8621 100.0 I 5.1 1 94.9 1

Health Social Security and Labour

Source: MOET

21 58,335 32.4 8.2 91.8 10 9,252 5.1 1 .o 99.0

4.2 Improvement o f business environment

The private sector development i s the major PRSP strategy for economic growth and poverty reduction. The strategy i s multi-faceted: privatization of enterprises and agricultural lands, establishing legal and procedural business environment for encouraging entrepreneurial initiatives, simplifying tax administration and reducing tax burden, rehabilitating transport and communication infrastructures, creating opportunities for labor-intensive and export-oriented manufacturing, and establishing banking system and credit institutions to facilitate investments. The GRT i s (in the process of negotiations for accession to the WTO with the implications of liberalizing i t s international trade regime.

A Program for 2002-2005, to implement the provisions o f the Law on Government Protection and Support o f Entrepreneurship was put in place. In 2003, the state budget allocated Sm. 200 thousand for implementation of the micro-credits component of the program (each in the amount o f 10 thousand Sm.) to 20 entrepreneurs. However, other activities to improve transportation, storage facilities, and access to information are dormant for lack of funds. The

Environment Private Sector Development Multisector and Other

8 2,961 1.7 3.7 96.3 11 5,570 3.2 6.5 93.5 8 17,932 10.0 0.6 99.4


Number businesses without creation of le2al entities Number of small business subjects Number of middle-sized business subjects

Agency in charge o f the Program, estimates up to 10 mill. Sm. for seed financial support for entrepreneurs and 15 mill. Sm for establishment o f favorable business infrastructure.

2000 2001 2002 9 months 2003

60,247 70,254 71,309 n.a.

4746 5280 6050 6245

122 129 142 224

Table 10. Number o f businesses established 2000-2003.

In 2002, a Book o f Registration o f Checks was introduced to reduce unwarranted inspections and illegal interferences in the activities o f business entities. Single business registration system at the Justice Ministry offices was enacted. In connection wi th this, the Parliament i s considering amendments to eliminate the requirement o f additional registrations with the MOET o f foreign trade entities. Many costly obstacles prevent operations in private markets (road blocks by law-enforcement bodies hamper transportation o f cargos, requirement o f various permits and references, and difficulties in cotton production and sales). There i s not a single coordinating authority to address these issues on practical levels.

The MSRD has drafted a new tax code in 2003. The code w i l l simplify the taxation system and improve the tax and customs administrations. Currently, the draft code i s reviewed for comments. The draft code introduces a single tax for dehkan farms.5 This provision intends to lower the cost o f production and simplify tax compliance o f the farmers. The draft code eliminates two local taxes (retail sales tax and municipal transport maintenance), and the road users tax (a 2% value-added tax). Instead, the current VAT rate w i l l be increased by 2%. The enterprise property tax i s t o be replaced by minimum tax on enterprise gross revenues. In 2003, the destination principle on VAT was more broadly applied. The M S R D i s computerizing i t s activities and implementing functional organizational restructuring. I t i s expected that these reforms wi l l encourage development o f small and mid-size businesses, increase tax payments compliance, and wil l build, in the near future, on the already growing revenue collection rates.

The MOF and the NBT are moving towards improving operations o f financial markets. Properly functioning banking and credit institutions wi l l increase entrepreneurial activities and investments. The NBT has been adopting new rules and new monetary instruments for open market

5. The single tax on dehkan farms i s on the production and delivery o f agricultural products excluding any industrial processing. The farmers are exempt from al l other taxes. The single tax i s calculated on per unit o f land area. In 2003, a pi lot project on single land tax i s tested in four districts. The pilot program wil l continue in 2004. The program will be adopted nationwide by July 1, 2004 depending on the results based on revenue potential, tax collection rates, arrears recovery, administrative ease, and effects on economic activities.


operations. However, the treasury bills market remains underdeveloped. The MOF has not been issuing treasury bills and developing capacity in the securities market.

During the reporting period, banking services improved. The NBT regulates more closely the commercial banks. The commercial banks monitor their portfolios more prudently. Banking sector personnel has been receiving technical training wi th donor assistance. Agroinvest Bank, which i s heavily involved in lending to cotton sector, was restructured. Other procedural simplifications made banking services more accessible. The state duty on foreign currency transfers (30%) was abolished. Many commercial banks started performing electronic money transfer transactions. These facilitated worker remittances from abroad and generated income for the banks. Orion Bank has opened a branch bank in Germany. Orion Bank and Amonat Bank are now affiliated with Western Union money services. Agroinvest Bank provides American Express credit card services. In 2003, it i s estimated that around USD200 mill, entered Tajikistan under the new money transfer methods. At the same time, the new draft Law on Microfinance Institutions w i l l be a positive development in the sector. However, the lack o f legislation and clear contract procedures, as well as low skill levels o f the bank personnel preclude full banking services to businesses and individuals.

In 2003, worker remittances from abroad resulted in lowering current account deficit and increasing domestic savings. In 2003, banks also received deposits under a one-time amnesty on cash holdings, in which declaration o f sources o f earnings was not required. I t i s estimated that about USD 175 million was legally deposited into the banking system under the amnesty program. The impact o f cash transfers on increasing investments to small and medium businesses was very limited. People keep low levels of demand deposits in the banks and banks remain overly cautious in their lending.

Meetings by the President with entrepreneurs, in 2002 and 2003, as well as the results o f the Consultative Group Meeting of Donors in May 2003 accelerated resolving issues related to development of private sector initiatives. The GRT adopted specific action plans to simplify mechanisms affecting private sector. Legislation, which restricted activities o f the private sector, was revised. Arrangements were made between ministries and departments to simplify standardization, certification and other procedures. The Administrative Code was brought into compliance wi th market conditions wi th regard to elimination o f double subordination principles. Sanctions for accountability o f budget executors and against corruption were strengthened. The results o f these actions wi l l be analyzed in January and February on the economic performance results o f 2003.

In the agricultural sector, interventions by the local authorities in the production decisions st i f le cropping diversity and productivity in the privatized lands. In September 2002, a GRT order prohibited local authority interference in the processing and sale o f cotton. In particular, the practice o f cotton balances used for planning and distribution o f cotton and export earnings were to be discontinued. Cotton growing farms became less constrained to choose investors, to negotiate settlements with investors, and to sign export contracts at the cotton exchange. In addition, Agroinvest Bank monopoly o n issuing o f export permits was discontinued. Any local bank can now process the permits.

The incomes o f cotton producing farms remain chronically low. The farms also remain in debt from year to year. Most o f the farmers are restricted from using their lands as collateral. No r


are they able to register their movable assets against whose value they should be able to borrow. The market for cotton investors i s uncompetitive. Law o f Microfinance, on which the Parliament i s currently deliberating, wi l l address some o f these issues. In the meantime, very small number o f credit institutions, which also facilitate acquiring intermediate inputs, ensures that

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