Press Release No. 99/27

Press Release: IMF Approves Second Annual ESAF Loan for Tajikistan

July 2, 1999

The Executive Board of the International Monetary Fund (IMF) today approved the second annual loan for Tajikistan under the Enhanced Structural Adjustment Facility (ESAF),¹ to support the country's economic program. Tajikistan's three-year ESAF was approved on June 24, 1998 in the amount of SDR 96.0 million (about US$128 million), and in December 1998 was augmented by SDR 4.3 million to SDR 100.3 million (about US$134 million), of which SDR 40.3 million (about US$54 million) has been disbursed. (See Press Release No. 98/25.)

In commenting on the Executive Board discussion on Tajikistan, Shigemitsu Sugisaki, Deputy Managing Director of the IMF, said:

"The Executive Board of the IMF today approved Tajikistan's request for the second annual arrangement under the Enhanced Structural Adjustment Facility in support of the government's 1999-2000 economic program. The approved loan is equivalent to SDR 30 million (about US$40 million) and will be disbursed on a quarterly schedule. The first installment of SDR 6.7 million is available immediately.

"Directors commended the Tajik authorities for their achievement of economic growth and low inflation under the first annual ESAF arrangement. Despite the sharp decline in world market prices for Tajikistan's key export commodities and adverse effects of the Russian crisis, the government and the National Bank of Tajikistan have been able to maintain broad macroeconomic stability and build up a track record of policy performance through successive corrective actions. Directors also noted the progress in a number of structural areas, particularly in small-scale privatization and land reform.

"Directors welcomed the authorities' ambitious fiscal targets for the coming years. They encouraged the authorities to further strengthen revenue performance by effectively implementing the new Tax Code and the VAT and by improving tax and customs administration. On the expenditure side, strict adherence to the program's spending limits was encouraged, as was the need to give a high priority to safeguarding expenditure in social sectors and improving the targeting of social safety nets.

"Directors supported the authorities' commitment to tight monetary policy and a flexible exchange rate regime. To maintain macroeconomic stability, the importance of recovering the loans extended to the cotton sector by the central bank once the new harvest is sold was emphasized. They also underscored the need to strictly enforce the limits on government guarantees on external nonconcessional loans. The authorities' commitment to strengthen external debt management was welcomed.

"It was emphasized that structural reforms need to be pursued more vigorously to promote development of a market economy and support economic growth and financial stability. Directors encouraged the authorities to speed up the privatization of medium- and large-scale enterprises, continue bank restructuring, and create an enabling legal and regulatory environment for the development of the emerging private sector. To realize Tajikistan's growth potential, further progress needs to be made in land reform and restructuring of the energy sector."

ANNEX

Program Summary

Tajikistan made good progress in macroeconomic stabilization and transition to a market-based economy during the first year of the ESAF-supported program, with growth and inflation objectives achieved despite external shocks from the Russian financial crisis and a sharp deterioration in the terms of trade, which weakened the balance of payments and public finances. In 1998 real GDP grew by 5.4% and inflation fell to 2.7%.

During 1999-2002, the program² envisages average annual real GDP growth of about 6%, with GDP growth in 1999 projected at 5.5%, largely reflecting the continued rebound from low output levels during the civil war. Inflation is targeted at 13% during 1999, owing mostly to the exchange rate depreciation in late 1998 and early 1999, but it should fall to about 7% in 2000-2001. In view of lower export earning and shortfalls in private financing, gross official reserves are projected at the equivalent of 2.2 months of imports by the end of the second annual program, and at about 3.7 months over the medium-term. To support these objectives, the program aims to reduce the overall fiscal deficit, excluding foreign financed capital expenditure, to 3.0% of GDP in 1999 from 3.8% of GDP in 1998. Strategies for reaching monetary objectives will be a tight credit policy and continuation of the bank restructuring program.

A primary structural priority of the second year policy agenda is to complete the privatization of the cotton ginneries and make significant progress in the privatization of medium- and large-scale enterprises. The principle features of the non-cash economy - payment arrears, widespread barter trade, and inefficient enterprises - will be addressed through specific measures aimed to strengthen financial discipline and reduce the scope of non-cash transactions. Other structural goals are to accelerate land distribution to private farmers and to maintain a free trade regime.

Social safety net expenditure in Tajikistan remains among the lowest in the transition economies, as extended family networks provide the bulk of social protection. A major contribution of the program in improving social conditions will be through low inflation and a stable exchange rate, thereby protecting real incomes of the most vulnerable segment of the population.

Tajikistan joined the IMF on April 27, 1993, and its quota³ is SDR 87.0 million (about US$116 million). Its outstanding use of IMF financing currently totals SDR 70.3 million (about US$94 million).