Public Information Notice No. 01/39

Public Information Notice: IMF Concludes Article IV Consultation with the Republic of Tajikistan

April 24, 2001

On April 12, 2001, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Republic of Tajikistan.¹

Background

Tajikistan's real GDP growth accelerated to 8.3 percent during 2000, compared with 3.7 percent in 1999. This growth was based largely on strong agricultural and industrial production, and occurred despite a drought that hampered both electricity generation and the output of non-irrigated crops (mainly grain), and disruptions in regional trade. Efforts to stabilize the macroeconomic situation were hindered by a surge in inflation in the latter part of the year, due to slippages in monetary policy, external factors, and the uncertainty surrounding the introduction of the new currency, the somoni.² The current account deteriorated during 2000, largely because of strong domestic demand, the drought, and higher petroleum prices.

More recently, there have been signs that efforts to stabilize the economy are paying off. Inflation moderated, with consumer prices rising by 5 percent during the first quarter of this year, compared with 17 percent in the last three months of 2000. At the same time, the nominal exchange rate has remained broadly stable since last November and the spread between the official and curb market levels have decreased slightly.

With regard to structural reform, progress was uneven during the past year. On the one hand, progress was achieved in improving tax administration and with extending the coverage of the treasury system; both important measures, given the need for fiscal consolidation. On the other hand, the privatization and restructuring of agricultural enterprises slowed significantly in the second half of 2000. Moreover, while there was some progress in dealing with the problems in the banking sector, however, the banking sector remains weak, especially as regard compliance with minimum capital requirements.

Recently, the authorities established an auditing agency, issued its interim charter, and appointed an Auditor General. The authorities are currently preparing draft legislation that will define the responsibilities and authority of the auditing agency, including a provision to disseminate the agency's findings to the public and parliament.

Tajikistan became a member of the Fund in 1993, and since then has had a number of Fund-supported programs. A three-year Poverty Reduction and Growth Facility (PRGF) arrangement was approved on June 24, 1998, in support of the authorities macroeconomic and structural adjustment program. In October 2000 the second year of the PRGF was approved by the Fund's Executive Board, and on April 12, 2000, the first (quarterly) review of that program was completed.

Executive Board Assessment

Directors commended the authorities for their expenditure restraint and the resulting strong fiscal performance in the fourth quarter of 2000 and urged them to continue this restraint without accumulating expenditure arrears. They also stressed that the efficiency and equity of tax administration needs to be improved to increase revenue collection as a share of GDP. Further development of the treasury would also strengthen expenditure control, and promote accountability.

Directors noted the importance of enhancing the transparency of the budget process and welcomed the establishment of the auditing agency and encouraged the authorities to make the agency fully operational as soon as possible.

Directors encouraged the authorities to maintain a prudent monetary stance, to stabilize prices, and restore confidence in the currency. To this end, they urged the authorities to adhere strictly to program targets and to employ a broader mix of monetary policy instruments to control inflation, including, in particular greater, reliance on sales of Treasury bills and NBT notes. They urged the National Bank of Tajikistan (NBT) to ensure that interest rates are positive in real terms. In commending the authorities for not having recourse to directed credits, Directors called for strengthening the independence of the Central Bank in order to minimize such pressures on the NBT.

Directors commended the authorities for their progress with privatization and urged them to begin privatizing the remaining large public enterprises. However, they regretted the uneven implementation of structural reforms. While noting progress with restructuring the four largest commercial banks, improving bank supervision, and removing distortions that compromised the operating environment for banks, they stressed that these measures constituted preliminary steps and should be extended and intensified. Directors also urged the authorities to intensify agricultural reforms, improve the general business environment, and strengthen governance.

Directors noted with concern the severity of Tajikistan's external debt problems and the challenges it poses for macroeconomic policies. They encouraged the authorities to intensify their efforts to resolve outstanding bilateral debt issues, and to develop an appropriate strategy for managing the external debt. To warrant international support, the main tenets should be consistent implementation of an ambitious stabilization and structural reform program over the next several years aimed at promoting sustainable economic growth while alleviating poverty. Directors pointed out that fiscal consolidation, the use of privatization proceeds to reduce debt, and renegotiation of nonconcessional bilateral loans should be key elements of this strategy. They look forward also to the May meeting of the Consultative Group. Directors noted that the authorities' adjustment efforts might need to be supported by debt restructuring, and grants or loans on highly concessional terms from the international community. In this respect, all future public sector borrowing should be on concessional terms and the authorities should seek to reschedule all recent nonconcessional loans on more favorable terms.