Tajikistan strategy overview

Full strategy  (0.3Mb) Approved 15  Nov 2005

Стратегия для Таджикистана  (1Mb)

Invitation to comment

Over the past two years Tajikistan has made progress towards implementation of the principles of Article 1 of the Agreement Establishing the Bank. Progress towards a market economy was clearly evident, while transition towards a multi-party democracy and pluralism remained uneven, with the last parliamentary elections in February 2005 failing to meet international standards, despite showing some improvement over previous elections.

Macroeconomic conditions have improved during the past two years. The economy grew by 10% annually during 2002-2004, supported by increased consumer spending fuelled by higher incomes and foreign remittances as well as greater output of aluminium. A sharp reduction in inflation was also observed during the course of 2004, partly thanks to improved monetary policy and its governance. The state budget remains in near balance (excluding public investment programmes) and the expenditures are in line with the objectives set out by the Poverty Reduction Strategy Paper (PRSP). Moreover, the bilateral debt reduction agreements with Russia and Pakistan have led to a significant improvement in the external debt position, reducing the external debt to GDP ratio to 40% from 82% two years ago. Nevertheless, given the limited fiscal resources, the government continues to limit externally financed public investments to four percent of GDP annually. The authorities continue to refrain from borrowing any non-concessional loans.

Poverty reduction
Tajikistan remains one of the low-income countries among the Bank's countries of operation, with a per capita income of US$ 316 in 2004. The government has been committed to a Poverty Reduction Strategy since 2002 and a certain measure of success in reducing poverty has already been achieved, as indicated in the 2004 PRSP progress report. Nevertheless, the level of poverty remains high. During the last Consultative Group meeting in November 2004, multilateral and bilateral donors confirmed their support of the policies set out by the PRSP and stressed the need for comprehensive land reform, a reduction of barriers to private sector development, urgent improvements to local service delivery by strengthening local government capacity and improvements in public sector efficiency and accountability.

Privatisation
Tajikistan maintains the managed floating exchange rate regime with full currency convertibility. The country made rapid progress in small-scale privatisation and price and trade liberalisation in a difficult environment during the 1990s. However, little progress has been made in the areas of large-scale privatisation, enterprise restructuring and governance, and market-orientated development of infrastructure. Although steady development has been made in recent years, the financial sector still remains weak, and has not yet provided the corporate sector with sufficient financing sources, especially for micro and small enterprises.

Key transition challenges
The country still faces enormous challenges in moving forward, relating to a complex political situation in a potentially volatile region, and the combination of key development issues with specific transition challenges, in line with the Millennium Development Goals. Government capacity to introduce, implement and enforce new legislation remains weak and the functioning of domestic markets is still impeded by many informal and physical barriers.

Under these circumstances, the key transition challenges are:

• Private sector development through enterprise restructuring and privatisation of large state-owned enterprises, as well as through improvements in corporate governance and the business environment.

• Creating a financial sector that is able to function as financial intermediary, attracting private savings and meeting the financial needs of private domestic enterprises.

• Promoting commercialisation and private sector participation in public infrastructure, with an initial focus on hydro-electricity.

To achieve these goals, impediments such as corruption and excessive bureaucracy need to be reduced and the accountability of private and public activities require improvement.

Given the macroeconomic environment and the stage of reforms mentioned above, the Bank, with a strong commitment to deliver more projects, will focus on the following during this strategy period:

Financing the private sector
The Bank will continue to focus on micro businesses, through further development of micro and small business credit lines administered by local banks and non-bank financial institutions. A particular focus will be to develop the branch networks, fostering penetration of financial institutions in secondary cities and towards the rural areas, thus increasing financial intermediation in rural areas and the agricultural sector.

In parallel, the Bank will initiate the launch of much-needed SME facilities through local banks with technical cooperation. The Bank will also continue to promote enterprises engaged in foreign trade through the Trade Facilitation Programme. In addition, it will seek to attract regional and international investors, including from Russia, Turkey, China, Kazakhstan, Pakistan and India, particularly in the agribusiness and financial sectors. The Bank is ready to support further efforts on the part of the government towards large-scale privatisation, if improvements in corporate governance, efficiency and transparency can be achieved.

The Bank will make use of the recently launched ETC products to explore opportunities for direct financing in a number of key sectors, including agribusiness and food processing, textiles and other light industries, construction materials, property and tourism, natural resources and telecommunications. The new banking tools introduced with the ETC Initiative, such as the Direct Lending Facility, Direct Investment Facility, Medium Co-Financing Facility (MCFF), as well as the support of a team dedicated to the ETC Initiative, are well adapted to the Tajik scale and will enhance opportunities to develop local and smaller projects.

Strengthening the financial sector
Despite significant improvement and consolidation, the banking sector still has a limited impact on economic development. Given the constraints of a small capital base, the Bank will be more proactive in advocating increased capitalisation and will remain ready to support the entry of new private investors, i.e. reputable local investors and regional and international investors, including Russia and Kazakhstan, and will seek further opportunities for equity participation, in order to strengthen the banking sector’s institutional capacity.

The Bank will actively seek opportunities to involve more banks in its programmes, including the Micro and SME credit lines, TFP and MCFF. It will strengthen the banking sector through Technical Cooperation activities, including capacity and institution building programmes, seminars and legal advice on anti-money laundering, banking supervision, credit bureau and advice on the introduction of sound deposit insurance.

The capacity to expand the full range of bank lending products (MF, SME and TFP) will be constrained by the size and strength of the partner banks. The Bank will therefore continue to utilise the Central Asia Risk Sharing Special Fund’s bilateral risk mitigation facilities and ETC funds to maximise exposure to local banks.

Supporting critical infrastructure
The investment needs in infrastructure are considerable and remain critical to the country’s development as well as to the attraction of foreign investment, but progress is constrained by limited public resources and restrictions on sovereign borrowing. Given the Bank’s inability to provide concessional loans, the Bank will consider financing non-sovereign infrastructure that produces cash flows to meet debt repayments without recourse to sovereign guarantees. This could be the case in the hydro power sector which should develop considerably in the coming years.

In the municipal infrastructure and transport sectors, including road and air transportation, in which the Bank has developed much needed expertise, the Bank will attract further donor grants to blend with its resources, in order to achieve the necessary concessional terms. The ETC Initiative and bilateral support should enhance the availability of such funds. The Bank will cooperate with the ADB and the WB Group with a view to participating in road and power transmission projects.

Policy dialogue
During the strategy period, the Bank will strengthen its policy dialogue with the authorities, in order to improve the investment climate, governance, transparency and to support reform efforts. The Bank will coordinate closely with other IFIs and the business community within the existing donor coordination structures. As noted above, the Bank will seek co-financing opportunities with other IFIs and bilateral institutions to mobilise greater resources, especially in the hydro power sector and in projects that could enhance regional cooperation.