Tajikistan - Post-Conflict Rehabilitation Credit Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-71 99-TJ REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ONA PROPOSED POST-CONFLICT REHABILITATION CREDIT IN AN AMOUNT SDR 7.3 MILLION TO THE REPUBLIC OF TAJIKISTAN November 20, 1997 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (as of June 30, 1997) Currency Unit = Tajik Rubles TR 1 US$0.0018 US$ TR 541 PERIOD AVERAGE EXCHANGE RATES The Tajik Rubel replaced the Russian Rubel on May 10, 1995, at an initial conversion rate of TR = Rus R100 Russia Rubles per US $ 1 Tajik Rubles per US $1 1993 932 1995 95 1994 2,192 1996 300 WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS ARSP - Agriculture Recovery and Social Protection CAS - Country Assistance Strategy CNR - Commission for National Reconciliation CU - Coordination Unit ERS - Economic Reform Support FSU - Former Soviet Union GNP - Gross National Product IBTA - Institution Building and Technical Protection IDA - International Development Association IDF - International Development Fund IDP - Internally Displaced People IFC - International Finance Corporation IMF - International Monetary Fund NBT - National Bank of Tajikistan PCRC - Post-Conflict Rehabilitation Credit PFP - Policy Framework Paper PPAP - Pilot Poverty Alleviation Project UNDP - United Nations Development Project UNHCR - United Nations High Commission for Refugees UNOPS - United Nations Office for Project Services TAJIKISTAN - FISCAL YEAR January I - December 31 Vice President: Johannes Linn, ECAVP Country Director: Ishrat Husain, ECCO I Sector Director: Pradeep Mitra, ECSPE Sector Leader: Robert J. Anderson, ECSPE Task Team Leader: M. R. Ghasimi, ECSPE  International Development Association FOR OFFICIAL USE ONLY FOR EXECUTIVE For consideration on DI RECTORS' Tuesday, December 16,1997 MEETING IDA/ R97-159/1 FROM: Vice President and Secretary November 26,1997 TAJIKISTAN - Post-Conflict Rehabilitation Credit Corrigendum The attached replaces page 11 of the President's Report and Recommendation on a proposed credit to Tajikistan for a Post-Conflict Rehabilitation Credit (IDA/ R97-159, distributed on November 21,1997), which was missing two lines in paragraph 30. Distribution: Executive Directors and Alternates President's Executive Conmmittee Senior Management, Bank, IFC and MIGA This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.   authorities undertake not to use the proceeds for items covered in the negative list and to have the account audited upon IDA's request by independent auditors acceptable to IDA. 31. Environmental Assessment Requirements. In accordance with the Association's Operational Directive on Environmental Assessment (OD 4.01, Annex E), the proposed operation has been placed in Category "C" and does not require an environmental assessment. E. Benefits and Risks 32. Benefits. The proposed Credit would allow imports of critical inputs and help finance essential expenditures in a manner that is non-inflationary. The Government's proposed program to strengthen the funding of the social safety net for the most vulnerable groups in the country - children and pensioners - through payment of arrears would partially offset the war's adverse impact on poor, help increase purchasing power in towns and villages and provide an important signal that the Government is turning its attention from war to peace. 33. Risks. There are substantial risks. The main risk associated with the proposed Credit is that the peace process may unravel and cause a resurgence of hostilities. Still some groups have not fully reconciled with the peace process. Sporadic attacks and violence, including the recent attacks on the Presidential guard, make the peace process quite fragile. 34. By bringing the Government and the main opposition group together, the June peace agreement represents a major step in the peace process. Recent acts of violence have spurred both the Government and the UTO to forge a common front against the renegades and move swiftly to implement the peace accord. Social assessments portray the people's weariness with war and the chances of civil strife will be reduced if the population sees a difference in their lives as a result of peace process. The proposed Credit will help the Government make this positive "difference." V. RECOMMENDATION 35. I am satisfied that the proposed Credit complies with the Articles of Agreement of the Association and recommend that the Executive Directors approve the proposed Credit. James D. Wolfensohn President by Caio Koch-Weser Washington, D.C. November 20, 1997 11l   FOR OFFICIAL USE ONLY REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED POST-CONFLICT REHABILITATION CREDIT IN AN AMOUNT EQUIVALENT TO SDR 7.3 MILLION TO THE REPUBLIC OF TAJIISTAN CONTENTS Credit Summary .................................................1 I. INTRODUCTION .................................................3 II. RECENT ECONOMIC DEVELOPMENTS AND PROSPECTS ......................4 III. GOVERNMENT'S NEAR TERM PROGRAM ................................................6 A. Implementing the Peace Process ............................................6 B. Strengthening Implementation of Ongoing Economic Reforms ...................7 C. Developing a Medium Term Reform Strategy ................................................8 IV. FEATURES OF THE PROPOSED CREDIT .................................................9 A. Objectives ...........................................9 B. Rational of Bank Involvement and Strategy ..........................................9 C. Coordination with Donors .......................................... 10 D. Implementation Arrangements ...................................... 10 E. Benefits and Risks .......................................... 11 V. RECOMMENDATION ................................................ 11 ANNEXES: Annex 1: Letter of Development Policy Annex 2: Key Economic Indicators Annex 3: Timetable of Key Processing Events Annex 4: Status of Bank Group Operations Annex 5: Tajikistan at a Glance MAP IBRD No. 29170 This.document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  I  REPUBLIC OF TAJKSTAN Proposed Post-Conflict Rehabilitation Credit Credit Summary Borrower: Republic of Tajikistan Amount: SDR 7.3 million Terms: IDA terms, with 40 years maturity, including a 10 year grace period. Commitment Fee: A variable rate not exceeding 1/2 of 1 % of the undisbursed Credit balance, set annually by the Executive Directors of IDA and beginning 60 days after signing. Executing Agency: Office of the Prime Minister Objectives: The main objectives of the proposed Credit are to support the Government's efforts to: (a) ease the foreign exchange shortage so that critical imports can be acquired; and (b) improve the performance of the social safety net for the most vulnerable groups in the country, particularly, children under the age of eight and pensioners. Benefits: The proposed Credit would allow imports of critical inputs and help finance essential budget expenditures in a manner that is non-inflationary. Strengthening the funding of the social safety net for children and pensioners through payment of arrears will partially offset the war's adverse impact on poor and help increase purchasing power in towns and villages. Risks: The main risk associated with the proposed Credit is that the peace process may unravel and cause a resurgence of hostilities. Although the June peace agreement between Government and the United Tajik Opposition (UTO) represents a major step in the peace process, peace is still fragile. Recent progress on macro stabilization, combined with a good relationship between the Government and the UTO, auger well for implementation of the peace agreement. Additionally, provision of critical imports and support to the social safety net will demonstrate the strength of the peace. Rate of Return: Not applicable Poverty Category: The proposed Credit includes measures to provide assistance to the most vulnerable groups - children, pensioners and those affected by war. Appraisal Report: Not applicable  Disbursement: The proposed Credit is classified as a rehabilitation operation and would be provided in one tranche. Upon effectiveness of the Credit, disbursements will be deposited into a Government account without need for evidence of imports of eligible goods. The Borrower will undertake not to use the proceeds for items covered in the negative list and to have the account audited upon IDA's request. Map: IBRD No. 29170 Project ID Number: TJ-PA-55133 -2 -  REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A POST-CONFLICT REHABILITATION CREDIT TO THE REPUBLIC OF TAJIINSTAN 1. I submit for your approval the following report and recommendation on a proposed Post- Conflict Rehabilitation Credit (PCRC) to the Republic of Tajikistan for SDR 7.3 million. The proposed Credit would allow imports of critical inputs and support the social safety net for the most vulnerable groups in the country, mainly children and pensioners. The Credit, a rehabilitation operation disbursed in one tranche, would be on standard IDA terms and repayable over 40 years. 2. Tajikistan became a member of IBRD and IDA in June 1993 and IFC in 1994. To date, assistance from the World Bank Group has consisted of policy advice, an IFC investment in Zarafshan Gold Company and three operations by the World Bank. In May 1996, the World Bank Board approved the first operation --Institutional Building Technical Assistance (IBTA)-- and discussed a Country Assistance Strategy (CAS). In September 1996, the Board approved a first rehabilitation credit-- The Agricultural Recovery and Social Protection (ARSP) Credit. A third credit, the Pilot Poverty Alleviation Project (PPAP), was approved by the Bank in April 1997. In August 1997, the Bank provided an Institutional Development Fund (IDF) grant to Tajikistan to finance an external debt advisor to strengthen the Ministry of Finance's capacity for external debt management. A Country Economic Memorandum was issued in August 1994. At the request of the Government, the World Bank organized the first Consultative Group meeting for Tajikistan in Tokyo on October 31, 1996. I. INTRODUCTION 3. Tajikistan has been wracked by political instability and civil war since its independence from the Former Soviet Union in 1991. Civil war erupted in Tajikistan in May 1992, as different regional and political interest struggled for power after the collapse of the previous system. The armed conflict continued for the next five years with varying degrees of intensity, with major hostilities concentrated in 1992 and 1993. An estimated 50,000 people died, 600,000 people were displaced inside the country, some 60,000 Tajiks fled to neighboring Afghanistan and as many as half a million people were forced to emigrate to other CIS countries. 4. In the first phase of the conflict, the heaviest fighting and physical destruction took place in the south of the country (Khatlon area), shifting later to the east-central part (Karategin- Gharm-Tavildara area). Houses, roads, bridges, schools, hospitals, water systems and other key infrastructure facilities were destroyed. The war has also had a severe impact on the country as a whole, significantly disrupting economic activities and intensifying poverty. Over the last few years, military expenditures increased, to the detriment of other more productive or socially oriented sectors. -3 -  5. The years of civil war in Tajikistan also saw the emergence of a number of armed gangs and paramilitary groups that have murdered, looted and taken hostages, including prominent Tajik personalities and international personnel. At this point, these bands represent one of the most serious threats to the consolidation of peace and the return to normal economic activity. 6. A complex and lengthy negotiation process between the Government of Tajikistan and the UTO culminated on June 27, 1997, with the signing of the General Agreement on the Establishment of Peace and National Accord in Tajikistan. The peace agreement lays the foundation for peace and security in the country and is based on a 12-18 month transition period, during which the agreementfs provisions are to be further defined and implemented. The principal agency for overseeing the peace agreement is the National Commission for Reconciliation (CNR), which is chaired by Mr. Said Abdullo Nuri, the leader of the UTO. The CNR is composed of 26 members, 50 percent nominated by the Government and 50 percent by the UTO. After the inaugural session in Moscow (July 7-11,1997), the CNR relocated to Dushanbe in mid-September 1997, and is now beginning operation. Members of the UTO will be represented in the Government. Political parties, outlawed in 1993, are now free to function and Parliamentary elections are scheduled for the second half of 1998. _1. Recent Economic Developments and Prospects 7. Tajikistan is the poorest country in the FSU, with a 1996 per capita income of US$330. Seventy percent of the country's 5.8 million people reside in rural areas. The population is large relative to the available arable land. Only 7 percent of the country's 143,000 square kilometers, which are mostly mountainous, is arable. The economy is predominantly rural, with agriculture contributing about 25 percent of GDP and 50 percent of employment. Tajikistan's main agricultural products are cotton (which accounts for about half of total agricultural production) and vegetables, grains and livestock. These products, especially cotton, are heavily dependent on imports and external markets. The industrial sector accounts for 35 percent of GDP and 15 percent of employment and is dominated by approximately 7000 state-owned enterprises. The availability of hydroelectric power has influenced the pattern and structure of this sector. Aluminum, chemicals and other energy-intensive industries are the sector's mainstays. 8. The war shattered the economy and inflicted extensive human and physical devastation. The combined effect of the war, the breakup of the FSU (which broke trade links and ended generous budget transfers from Moscow, amounting to about 40 percent of GDP) and severe floods, (which damaged much of the remaining infrastructure) resulted in a roughly 50 percent decline of Tajikistan's GDP during the first half of the 1990s. Additionally, imprudent borrowing immediately following the collapse of the FSU gave rise to a crushing debt burden. By the end of 1996, Tajikistan had accumulated nearly US$850 million of external debt (about 84 percent of GDP), mostly assumed on commercial terms between 1992 and 1994. Actual debt service payments have remained relatively low, however, as the country is rescheduling its debt. 9. After a halting attempt at stabilization and a structural reform program in late 1995 and much of 1996 supported by a first credit tranche stand-by arrangement with the IMF and a rehabilitation credit from IDA, the macroeconomic situation deteriorated in late 1996 and the first half of 1997. The budget deficit far exceeded that in 1996, rising to around 10 percent of GDP in the first half of 1997. By the end of June 1997, the social safety net arrears amounted to TR 5.1 billion--about one-third of the total state expenditure arrears and 1.0 percent of GDP, -4 -  equivalent to 8 months of entitlements. Reserve money increased by 115 percent and broad money by 50 percent during the first half of 1997. The Tajik ruble depreciated sharply in official markets, from an average rate of TR 300 per US dollar in 1996 to TR 541 by the end of June 1997. Inflation was 52 percent during the first half of 1997, compared to 40 percent during the whole of 1996. 10. The loss of financial control and backsliding on structural reform during this period stemmed largely from renewed hostilities during the peace agreement's negotiation. Tax revenues declined and expenditures for defense and law enforcement increased relative to the budgeted amount. The mandatory evacuation of several expatriate advisors, including Bank and IMF staff, in early 1997 in response to the deteriorating security situation contributed to the loss of financial control. As noted below, (para. 17), when the security situation improved in mid 1997, the Government moved promptly to reestablish financial discipline and remove some of the controls imposed on the economy during the 1996-97 period. 11. The peace accord, no less than the war and the unstable security situation that preceded the peace, poses enormous challenges to Tajikistan's Government. The immediate impact of the peace is the need for substantial near term Government expenditures to implement the peace agreement, including demobilization and reintegration of ex-combatants, reintegration of refugees and the IDPs and operation of the CNR. Additionally, the formal end of hostilities has created popular pressure to produce tangible benefits from the peace process. While the Government will reap a peace dividend in the form of reduced defense expenditures and higher tax revenues, the realization of most of these resources will take some time. The combination of urgent near term peace-related expenditure requirements and more gradual realization of a peace dividend leaves the Government with a serious near term financing problem. TAJIKISTAN: BALANCE OF PAYMENTS, 1996-98 (In millions of US dollars) 1996 1997 1998 Current Account -92 -18 -61 Exports 770 727 786 Imports 808 732 836 Services (net) -54 -13 -11 Capital Account -134 -18 -2 Overall Balance -226 -36 -63 Financing items 226 11 -27 Financing gap 0 25 90 Source: IMF 12. Looking beyond the next six to nine months, the Government faces the daunting tasks of (a) adjusting its economy to substantially lower levels of spending than it was able to afford when it had access to large budget transfers and borrowing within the FSU, and (b) establishing an environment conducive to rapid, equitable and sustainable economic growth. Unavoidably, this will require sweeping changes in the role and modus operandi of Government, with substantial impact on social services and the level of protection provided by the safety net and a decisive program of structural reform. It will also require substantial amounts of assistance, in the form of generous debt relief (see para. 8) and sustained balance of payments support on concessional terms. -5-  M. Government 's Near Term Program 13. The Government's near term strategy has three pillars: (i) implementing the peace agreement; (ii) strengthening implementation of ongoing economic reforms; and (iii) developing a medium term reforn strategy. A. Implementing the Peace Agreement 14. The Government peace program will focus on four areas in an effort to sustain the peace process for the country as a whole and for those most directly affected by the conflict: * Political Reconciliation and Democratization. The CNR will be strengthened to oversee the peace process during the transitional period to help prepare for national elections and assist with institutional reform, especially on important legal matters. * Repatriation and Reintegration of Refugees and IDPs. Efforts will be accelerated to support the voluntary repatriation of all refugees, with priority given to some 20,000 refugees currently in northern Afghanistan. In addition, while many IDPs have already returned to their homes, the program will support the return and reintegration of those who have not. * Demobilization and Reintegration of Ex-Combatants. An estimated 5,000-7000 ex-combatants will either be demobilized and assisted to pursue civilian occupations or integrated into the government defense establishment. At the same time, the overall defense capability of Tajikistan will be reorganized, leading to an estimated 30% reduction of personnel. * Relief, Reconstruction and Development. Assisted by the donor community, the Government's relief and reconstruction efforts will focus on three phases: (i) short term relief and reconstruction to carry severely affected people through the winter and provide them with the means to reestablish their lives. In regions directly affected by the civil war, the highest relief priorities are food, shelter and basic social services and measures to restore economic productivity, particularly in agriculture, for Spring 1998 planting. Funding the social safety net for the country as a whole, including reducing arrears, is an important element of establishing popular support; (ii) reconstruction of essential economic and social services and restoration of purchasing power and employment are the priorities set by needs assessment for the second half of 1998 and 1999; and (iii) longer term reconstruction, especially roads, telecommunications and power supply, where implementation requires longer lead times. -6 -  B. Strengthening Implementation of Ongoing Economic Reforms 15. Compared to other FSU republics, Tajikistan started implementing economic reforms late, adopting an economic reform program in November 1995. The reform program's initial phase has concentrated on: (i) restoring macroeconomic stability; (ii) restructuring the agricultural sector; (iii) privatizing state-owned enterprises; and (iv) protecting the most vulnerable groups. 16. Restoring Macroeconomic Stability. Tajikistan undertook its first comprehensive effort to restore macroeconomic stability in 1996. Supported by an IMF stand-by arrangement and the ARSP credit, the Government implemented tight monetary and fiscal policies and controlled inflation. Exchange and trade policies were liberalized and the few remaining price controls were removed. The results were promising, with inflation declining to 40 percent during 1996, compared with 2000 percent during 1995. Program implementation was satisfactory until late 1996, when defense expenditures increased significantly in response to renewed fighting. The increased defense expenditures were financed by a combination of monetary expansion and budget arrears, including significant amounts owed to components of the social safety net. 17. Since the signing of the peace agreement, the Government has made good progress in stabilizing the macro environment. Reserve money growth declined in July-September to about 6 percent per month, compared to a monthly average of 12 percent in the first half of 1997. The foreign exchange auction is now being regularly held. Inflation is decreasing because of slower credit expansion and a lower budget deficit. Since July 1997, the Fund staff has visited Tajikistan several times to reestablish the policy dialogue, review the Govermment's draft 1998 budget and discuss a coherent macroeconomic strategy for the reminder of 1997 and 1998 that could be supported by financial resources from the Fund. 18. Privatization of State-owned Enterprises. The privatization program began in 1991 but was interrupted in 1993 by the deteriorating security situation. When security improved in late 1994, privatization resumed but was hindered until the Tajik ruble was introduced as the national currency in 1995. Security and war-related disruptions were compounded by the absence of an effective legal and institutional framework, lack of Government commitment and macroeconomic instability. As a result, less than 8 percent of state-owned enterprises were privatized by the end of 1996. 19. The Government's privatization program is currently supported under the World Bank IBTA credit. A new privatization law, passed by Parliament on May 16, 1997 and signed by President on June 11, 1997, substantially improves the legal framework and states clearly that equality and competitiveness among buyers will be one of the guiding principles for privatization. Furthermore, the Government approved new corporatization procedures in June 1997 that allow corporatization to be completed faster, with preparation of several short documents. 20. Restructuring the Agricultural Sector. By focusing on structural changes in agriculture, which is the backbone of the Tajik economy, the Government has tried to slow the economic decline and increase employment opportunities, household income and economy's foreign exchange earnings. The Government's reforms in the agricultural sector include (a) liberalizing agricultural prices, (b) liberalizing agricultural marketing, and (c) restructuring state - 7 -  collective farms. The Government has removed price controls on all agricultural commodities. Beginning in mid-1996,'industrial and agricultural water users were required to pay for water. To liberalize agricultural marketing, the Government eliminated the state order system' for all agricultural commodities. The Land Code has been revised to reflect new Government guidelines for the farm restructuring program that called for transparent and equitable criteria for selecting farners to receive land and authorized unrestricted transfer and the inheritability of land access rights. While agricultural producers have benefited from higher cotton prices as a result of the 1996 liberalization, the Government re-imposed some restrictions on cotton exports in late 1996, which hindered the development of private trade in cotton. 21. In September 1997, the Government once again eliminated these restrictions and simplified cotton export mechanisms. The cotton marketing agency (Glavklopkoprom) has been transformed into a joint stock company and other trading companies have been allowed to compete with Glavklopkoprom. The Government has also taken a number of other measures to strengthen agricultural reform. The creation of the Land Reform Committee has removed the land reform process from the exclusive domain of the Ministry of Agriculture and given it greater visibility and political support, and significant progress is being made in land reform. 22. Protecting the Most Vulnerable Groups. In 1996, the universal bread subsidy and child allowances were replaced by a social welfare system targeted to the society's most vulnerable groups. Under the new system, family allowances were provided to those with children under 16 at a rate of TR 72 per child in households with per capita income not exceeding two minimum wages per month. The family allowance was also paid to non-working pensioners and registered unemployed. In March 1996, the family allowance was raised to TR 500 per child. The system has an estimated 1.3 million beneficiaries, at a total cost of TR 7.8 billion (17 percent of the 1996 budget expenditures and 2.5 percent of GDP). 23. To better target the social safety net and reduce the overall budgetary burden, in April 1997, the Government decided to maintain the monthly family allowance of TR 500 per child but reduce its eligibility to families with children under 8 and per capita income of less than one minimum wage per month. Payment mechanisms were also improved. Family allowances are now paid in the mother's place of work or if the mother does not work at the workplace of other relatives. If the parents and other relatives are all unemployed, payments are made to the Social Protection branch of the family's place of residence. Eligibility for compensation is determined by a commission that includes representatives of the work place or the social protection branch, based on aggregate family income over the most recent three months. Notwithstanding these improvements, due to the program's scope (covering one-fourth of the population) and the budget constraint, the Government has been unable to remain current on family allowance payments. C. Developing a Medium Term Reform Strategy 24. The combination of the peace accord, early steps toward stabilizing the macroeconomy (para. 17) and renewed progress on structural reform (para. 19-23) provide solid evidence that the Government is serious about its reform program. However, considerable hard work remains before the Government's reform program can be regarded as well established. The reform agenda needs to pursue not only macroeconomic stability, but also privatization of farms and state enterprises, strengthening the financial sector and diversifying exports. Near term support -8 -  is being provided by the Fund and IDA, through their post-conflict oper;ations. The Fund's post- conflict emergency assistance operation is scheduled for consideration by the Fund's Board in December. In addition to the proposed Credit, IDA is preparing a second post-conflict reconstruction credit. In order for the Government's reform program to become well established and focused, the Government must concentrate on its medium term strategy to deepen the reform program. Support for the medium term strategy will be provided by the Fund and IDA. Fund support for Tajikistan is planned under an ESAF arrangement planned for 1998, including preparation of a Policy Framework Paper. IDA support will be in the form of the proposed Economic Reform Support (ERS) scheduled for Board presentation in June 1998. The latter operation will be accompanied by a CAS to support the Government's effort to develop a coherent medium term strategy. IV. Features of the Proposed Credit A. Objectives 25. The proposed Credit's main objectives are to ease the foreign exchange shortage so that critical imports can be acquired, thus helping restore production, employment and consumption in Tajikistan's post-conflict economy. The proposed Credit will provide non-inflationary financing for the budget. The Government has indicated that the counterpart funds generated by the Credit will help meet near term costs associated with the peace accord, while maintaining progress toward financial stabilization. The Government intends to use the Credit's counterpart proceeds to reduce the arrears for the social safety net throughout the country and to finance some expenditures related to resettlement of refugees, IDPs, and demobilized soldiers. This will provide an early and direct peace benefit and demonstrate the Government's desire to include the entire population in the process of national reconciliation. B. Rationale for Bank Involvement and Strategy 26. Tajikistan's population has borne enormous hardships inflicted by the war and disruption of economic activities, which the Government has not been able to offset in any significant way. After years of suffering, the population is judged by many to be near the breaking point--an inauspicious condition for beginning to implement the peace process, especially as another winter looms. Tajikistan's balance of payments situation continues to be very difficult and gross reserves have dwindled to no more than 2 weeks of imports. The proposed Credit will help meet some of the country's urgent balance of payments requirements. Immediate social measures, such as vaccinations or other health needs, have largely been provided by the Government and other donors. The Government intends to use the Credit's counterpart proceeds to meet social assistance obligations, particularly the family allowance, which offers the best chance of supporting poor households in a politically neutral fashion, in order to demonstrate early benefits of the peace. This approach is strongly supported by both the Government and UTO representatives in the CNR. At the Government's request, IDA prepared the proposed Credit to provide assistance to the country's most vulnerable groups and help implement the peace agreement. IDA supports the Government intentions to use the counterpart funds to reduce the -9-  arrears in the social safety net and to implement the peace agreement within the criteria specified by the Government in the attached Letter of Development Policy. 27. The Bank Group's Country Assistance Strategy (CAS) for Tajikistan was discussed by the Board on May 16, 1996. In view of uncertainty about the security situation and the pace of reform, the CAS called for a flexible approach to the Bank Group's assistance strategy in FY96/97. The FY96/97 lending program was designed to foster a supply response, based on employment intensive growth combined with direct steps to protect the most vulnerable groups. Future lending was to depend on progress toward reform and the process of national reconciliation. The proposed Credit, the second rehabilitation credit to Tajikistan, is in response to Government's request from IDA to provide urgent balance of payments assistance and help the Government finance peace-related budgetary expenditures. The proposed Credit provides critical imports; counterpart funds will be used to meet the near term non-inflationary costs of the peace accord and will help jump-start the economy and mitigate poverty. C. Coordination with Donors 28. Given the enormous problems faced by Tajikistan, the peace process will require coordinated assistance by the international community. This coordination is being handled at the local level by the UN and World Bank resident offices. The UN has taken the lead in coordinating the relief effort, which is being implemented by its specialized agencies, bilateral donors and non-governmental organizations. Special effort is being made to include non- governmental organizations because of their extensive role in providing direct assistance to affected people, including implementing components of World Bank projects. A donors' meeting on relief and short term recovery was held in November 1997 in Vienna, at which a number of donors indicated the assistance they will provide to the peace process. Over the next few months, the Bank's contribution to this effort would be through the proposed Credit and a companion Post-Conflict Reconstruction Credit being prepared for Board consideration in early 1998 to deal with short and medium term reconstruction requirements in the Karategin Valley region, which has received little assistance so far from the Government and the donor community. The Government has requested the World Bank to chair a Consultative Group meeting during 1998 to review financing for the country's medium term reconstruction and recovery. D. Implementation Arrangements 29. A Coordination Unit (CU) has been created in the Office of the Prime Minister to provide IDA with necessary information on the use of the counterpart funds and implementation of Government's reform program. The head of the CU will report directly to the Prime Minister and has been approved by the CNR. 30. The borrower will the Republic of Tajikistan, as represented by the Ministry of Finance. The Credit, in the amount of SDR 7.3 million, will be disbursed in one tranche and will follow the simplified Association procedures for adjustment operations. The proceeds of the Credit will be deposited in a Ministry of Finance special account at the NBT. IDA disbursement procedures provide for credit disbursements without the need for evidence of imports of eligible goods, the - 10-  31. Environmental Assessment Requirements. In accordance with the Association's Operational Directive on Environmental Assessment (OD 4.01, Annex E), the proposed operation has been placed in Category "C" and does not require an environmental assessment. E. Benefits and Risks 32. Benefits. The proposed Credit would allow imports of critical inputs and help finance essential expenditures in a manner that is non-inflationary. The Government's proposed program to strengthen the funding of the social safety net for the most vulnerable groups in the country - children and pensioners - through payment of arrears would partially offset the war's adverse impact on poor, help increase purchasing power in towns and villages and provide an important signal that the Government is turning its attention from war to peace. 33. Risks. There are substantial risks. The main risk associated with the proposed Credit is that the peace process may unravel and cause a resurgence of hostilities. Still some groups have not fully reconciled with the peace process. Sporadic attacks and violence, including the recent attacks on the Presidential guard, make the peace process quite fragile. 34. By bringing the Government and the main opposition group together, the June peace agreement represents a major step in the peace process. Recent acts of violence have spurred both the Government and the UTO to forge a common front against the renegades and move swiftly to implement the peace accord. Social assessments portray the people's weariness with war and the chances of civil strife will be reduced if the population sees a difference in their lives as a result of peace process. The proposed Credit will help the Government make this positive "difference." V. RECOMMENDATION 35. I am satisfied that the proposed Credit complies with the Articles of Agreement of the Association and recommend that the Executive Directors approve the proposed Credit. James D. Wolfensohn President by Caio Koch-Weser Washington, D.C. November 20, 1997  CAPBA3HPH ,.U flPEMbEP-MMHHHCTP RYMXYPHH TOLRHKHCTOH PEC[IYBJHUKH TAA)1HKHCTAH 199 LETTER OF DEVELOPMENT POLICY Tajildstan: Post-Conflict Rehabilitation Credit November 8, 1997 Mr. James D. Wolfensohn President World Bank I. This Letter of Development Policy (LDP) focuses on the emergency needs of Tajikistan in support of the peace process. Donor support is essential if peace and stability are to be achieved. Quick budget support from IDA is critical, as Government is under pressure to: i) meet its immediate financial obligations under the peace accord and ii) demonstrate to the population at large the tangible benefit from the accord. The emergency economic framework, which underpins the rationale of this operation, is spelled out. Finally, the LDP discusses briefly Government's reform intentions beyond the current emergency program. 2. Tajikistan was already the poorest Republic in the FSU and, with independence in September 1991, it suddenly lost significant budgetary transfers (estimated at 40 percent of GDP) from Moscow. Soon after independence, the civil war erupted in 1992 and intensified during the second half of that year. The armed conflict continued, with a varying degree of intensity, during the subsequent five years. The collapse of the economic planning system, together with the civil war, traumatized deeply the people of Tajikistan and initiated a steep downward spiral of income and employment. Many human lives were lost and hundred of thousands, notably those with valuable skills, fled the country. Tajikistan's physical infrastructure, economic assets and human capital have been severely affected. 3. These factors, combined with lack of economic reform until the mid-1990's, led to a sharp drop in income and a high level of unemployment. In 1996, GDP was less than 40 percent of its level in 1991. Cotton production, the main agricultural activity and source of foreign exchange and budget revenues, declined by two-thirds. Most other economic activities are now operating at less than one-fourth their capacity at the turn of the decade. At US$ 330 per capita income, Tajikistan ranks among the poorest countries in the world. Poverty is wide-spread and it is estimated that 4 out 5 Tajiks are below the poverty line. Yet, Tajikistan is still not afforded the status of Least Developed Country (LDC) by the United Nations. 4. Faced with these difficulties, the Government of Tajikistan: i) launched in late 1995 a comprehensive economic reform program to move Tajikistan from planned to market economy; and ii) engaged itself into serious peace talks with the United Tajik Opposition (UTO). Establishing permanent peace in Tajikistan will benefit not only the Tajik people but also the whole region of Central Asia.  -2 - The Peace Process-The Need for External Support 5. Achievements. The Government of Tajikistan and the U.T.O signed a General Agreement on Establishing Peace and National Reconciliation on June 27, 1997 in Moscow. This was the culmination of a series of inter-Tajik peace talks which started in April 1994 under the auspices of the United Nations. Under the peace accord a Commission for National Reconciliation (CNR), which consists of 26 members split equally between Government and UTO and which is headed by Mr. Said Abdullo Nuri, was established and started its operation in mid-September of this year. The peace accord calls for the repatriation and reintegration of refugees and armed forces. Parliamentary elections will be held in about a year from the 'date the CNR started its work. Other important decision have already been reached on the representation of UTO in Government structure (30 percent), in the central commission for election and referendum (25 percent); recognition of political parties which were outlawed in 1993; and international guarantees for the implementation of the accord. 6. Action Plan. The signing of the peace accord represents only the beginning of hard work to ensure the sustainability of peace. Strong commitment of all parties-- Government, the former opposition and the donor community--is required to support peace stability. The implementation of the peace accord will result, in the short run, in an increase in government spending (repatriation and reintegration of refugees and displaced people, demobilization and reintegration of ex-combatants, rehabilitation of physical infrastructure, establishment of the CNR, and community-based activities support.) In the medium run, the peace dividend is expected to be in the form of both expenditure savings (on security/defense) and revenue increases (on account of better tax collection effort -- many areas in Tajikistan are currently out of reach because of lack of security -- and economic recovery. 7. The implementation of the peace accord is estimated to cost at least USD 65 million over the next 12-18 months, the bulk of which will have to come from external resources given our limited capacity. Since the signing of the peace accord Government has spent TR 3.1 billion (about USD 4.1 million). This came at the expense of priority areas, namely the social safety net, pensions and salaries. For the remainder of 1997, Government additional spending on the peace process is estimated at TR 2.5 billion (USD 3.4 million). These figures include expenditures on the rehabilitation of infrastructure (estimated at about 10 percent). In the 1998 budget we allocated TR 819 million (about USD 1.1 million) to cover further the cost of refugees. This amount is small in relation to government obligations vis-a-vis the peace process as a whole. 8. The donor conference which is scheduled to take place in Vienna, Austria in late November 1997 under the auspices of the UN is a step in the right direction. It will give the peace accord visibility and enable Tajikistan to mobilize resources. The two lending operations envisaged by IDA, the Post-Conflict Rehabilitation Credit and the Post- Conflict Reconstruction Credit will go a long way in the implementation of the peace accord. Under both operations, Government is committed to use efficiently the resources  -3 - made available by IDA and donors in support of the peace accord. Government intends to use USD 3.0 million from the disbursement proceeds of Post-Conflict Rehabilitation Credit to cover the immediate cost of the peace process. We intend to use Post-Conflict Reconstruction Credit for the rehabilitation of physical and social infrastructure in the Karategin-Gharm-Tavildara region (center-east of the country). The Khatlan region, the other war-affected area, has benefited in the past from Government and donor support, including the World Bank under the Pilot Poverty Alleviation Project. 9. Government is committed to undertake two sets of actions. First, we will implement the following measures by March 1998: repatriate and reintegrate refugees (estimated at 20,000 in Afghanistan alone); demobilize and reintegrate ex-combatants (estimated at 5,000-7,000); and re-admit political parties in the country. Second, we intend to reform the power structure (ministry of defense, ministry of interior, ministry of security and border forces), with the view of eliminating redundancies. For this, we plan to formally request technical assistance from the World Bank and UJNDP. Government has already announced to reduce staff in these ministries by 30 percent. The Economic Reform Program--An Overview 10. In late 1995, Government adopted a comprehensive economic reforn program which focused on four major areas: macroeconomic stability, land reform and farm restructuring, privatization of state-owned enterprises, and social protection. In 1996 we cut the budget deficit in four to around 5 percent of GDP, contained credit expansion and liberalized foreign exchange regime. As a result, inflation was reduced from 2000 percent in 1995 to 40 percent in 1996. Also, the current account deficit of the balance-of- payments remained under control, largely due to debt rescheduling. Among the key policy measures adopted by Government to achieve these results were: rationalization of taxation on cotton and aluminum, reduction in budget subsidies, adoption of positive real interest rate, and rescheduling of the public debt. The major balance of payments issue facing Tajikistan is its large debt, which at the end of 1996 was US$ 850 million. 11. On the structural front, we fully liberalized prices, with the exception of utilities; eliminated state orders on aluminum and all agricultural commodities, including cotton; and liberalized cotton marketing. Regarding privatization, we have made significant progress on reforming the legal and institutional framework, but we have yet to move aggressively on actual privatization. 12. Although it is too early to talk about results on the ground, it is encouraging to see already the effect of price and trade liberalization on wheat supply and bread production. The fear of higher prices for bread (following the elimination of subsidies) did not materialize and instead a whole industry, largely informal, was created to meet the demand for bread at lower prices. GDP decline is expected to come to a halt in 1997. 13. Theses achievements could not have been possible without the support of Bretton Woods institutions, the donor community, and Tajikistan's major creditors. At the  -4- request of the Government of Tajikistan, the World Bank organized the first Consultative Group meeting in Tokyo on October 31, 1996. This forum gave us a unique opportunity to brief the donor community about Tajikistan's effort in reforming its economy. It also enabled us to get commitment of USD 185 million for balance-of-payments support, investment and technical assistance. However, to date, only a limited amount has been disbursed due to a number of factors, namely the deterioration in the security and macroeconomic framework during the first quarter of 1997. 14. The implementation of the reform program has not been easy and the deterioration in the security in the country in the Fall of 1996 and early 1997 did not help either. Slippages in the financial program have emerged as early as September 1996 and intensified in the first half of 1997. Financial imbalances reemerged as a result of higher expenditures and lower revenues. The budget deficit during the first half of 1997 stood at over 10 percent of GDP, 2-3 times the level in 1996. This, together with credit expansion, resulted in higher inflation-- 52 percent in the first half of 1997. The exchange rate depreciated rapidly in nominal terms from an average=of-TR-300-per US-dollar in 1996 to TR 541 by end-June 1997. And net international reserves dropped far below the minimum requirement. Also, some slippages on the structural reform emerged, namely related to cotton exports and the social safety net. Getting the Macroeconomic Framework Back on Track 15. With the peace agreement now in place, the Government is focusing closely on the economic reform program and taking the necessary corrective measures, in close consultation with the IMF and the World Bank. Thus, in July 1997 we issued a decree (Nb. 763) which re-established the Government's economic policy direction for the short run. Specifically, we stopped the administrative allocation of credit and foreign exchange, and resumed the regular auctioning of the foreign exchange. Furthermore, we eliminated the restrictions on cotton exports (decrees 400 and 823) and transformed the cotton marketing agency into a joint-stock company (decree 425). We have negotiated an Emergency Post-Conflict Assistance program under the IMF emergency financing mechanism covering the period October 1997-June 1998. 16. Under the emergency financial program supported by the IMF, Government agreed to contain the budget deficit (on a cash basis) at about 0.6 percent of GDP in forth quarter of 1997 and 2.8 percent of GDPin 1998. Measures taken to increase revenues include further elimination of exemptions, improvement in tax collections and introduction of a low, uniform tariff rate. In 1998, expenditures arrears will be reduced substantially. The Government will pursue a prudent credit and monetary policy consistent with a target annual rate of inflation rate of 21 percent in 1998. The level of reserves will be increased to cover about four weeks of imports by mid-1998 and six weeks of imports by end 1998. With respect to the foreign exchange, Government has unified the foreign exchange auctions and broadened the access to auctions to include non-banks.  -5- 17. During the post-conflict period (12-18 months), the Government's budgetary priorities are: i) to support the peace accord; ii) to protect the social sectors and social safety net; and iii) to service the external debt within the framework negotiated with our major creditors. Expenditures in these areas are expected to account for 46 percent of the draft 1998 budget (excluding the expected donor financial assistance in support of the peace accord). We also intend to protect the purchasing power of the civil servants by granting 20 percent salary increase in January 1998 and another 10 percent in July of the same year. Expenditures on security and law enforcement are budgeted for about 10 percent. Although, the 1998 budget allocates 9 percent of total expenditures to defense, we expect this share to drop over time. As a first step, the Government has announced to restructure the power ministries and reduce the staff by 30 percent. Protecting the Social Sectors and Safety Net 18. As an integral part of its reform program, Government adopted a 3-tier strategy to protect the most vulnerable groups of the society: macro stability and growth; protecting expenditures on education and health; and targeting assistance to the poor (cash compensation and income generating activities through public works). Under this strategy, salaries and pensions are expected to be paid on time. The strategy was supported by two IDA credits, Agricultural Recovery and Social Protection and Pilot Poverty Alleviation Project (which is expected to impact on about 5 percent of the population over a two-year period), and by an IMF financial program. Actual implementation of the strategy has run into major difficulties since the fall of 1996. 19. Protecting Social Expenditures. A combination of revenue shortfalls and increased allocation of resources to defense and security have resulted in less resources devoted to the social sectors. Actual expenditures on both sectors amounted to 15 percent of total expenditures and 3 percent of GDP in 1996 compared to the targets of 20 percent and 6 percent, respectively. The figures for the first half of 1997 show similar results. The two sectors continue to show arrears which increased substantially in nominal and relative terms in the first half of 1997. Arrears in education were largely with respect to salaries and pension, while arrears in health were largely with respect to operations and maintenance. 20. As a result of the budget constraint, health and education services continued to deteriorate fast. At present, about one-fifth of school children (7-18 years old) are not receiving any formal education. For girls the ratio is 25 percent. The drop-out rate is on the increase. The health indicators have deteriorated too. For instance, we witnessed an increase in the rates of infant and maternal mortality. Immunization coverage is falling. In 1996, it is estimated that about 18,000 cases of typhoid fever were registered, a nine- fold increase over the previous year. The number of malaria cases (mainly in the South and Gomo-Badakhshan) doubled over the same period and many cases of tuberculosis have recently been reported.  -6- 21. Faced with this situation, we have implemented a number of structural measures, including some cost recovery. For instance, parents contribution to teacher salaries (in kind and cash) is increasing and student's education is increasingly financed by employers. In health, in most cases patients have to buy their own drugs and bring their own food. The marketing of pharmaceutical products has de-facto being privatized, though with little regulation (quality control, consumer protection) or appropriate storage facilities. But we recognize that a lot more needs to be done in both sectors. In the short run, we are committed to protect the budget allocation to the sectors. And over the medium-term, we intend to deepen the reforms and seek donor support. We intend to work out the sector priorities, in consultation with the World Bank, during the preparation of the Country Assistance Strategy. 22. The Social Safet, Net. As part of the social safety net (SSN) program, Government decided in 1996 to replace the universal bread subsidy and child allowances with a social welfare system targeted at the most vulnerable groups of the society. The beneficiaries were estimated at 1.3 million and the total cost at about 2.5 percent of GDP. The bulk of the beneficiaries are children aged 8 years or less. Actual outcome in 1996 was disappointing, despite the fact that Government used US$ 15 million out of the disbursement proceeds from ARSP to finance the social safety net. Payment to the social safety net has dropped regularly since December 1996. By end-September 1997, arrears totaled TR 5.9 billion (about USD 7.9 million)--over one-third of total state expenditure arrears and 1.1 percent of GDP. This is equivalent to 8 months of entitlements. 23. The move from universal bread to targeted-bread compensation was a step in the right direction. In April 1997, the Ministry of Finance narrowed down the target group by excluding children between the age of 8 and 16 and assigned the responsibility for paying compensation to local Governments to reach faster the beneficiaries. Eligibility for compensation is determined by a commission which includes representatives of the work place or the social protection branch (where beneficiaries receive their payments) and is based on aggregate family income received over the most recent three months. However, further improvement is needed. 24. Salary and Pension Payments. In 1996, we made good progress in reducing the amount of salary and pension arrears and in making payment on time. However, since the Fall of 1996, arrears have begun to accumulate again, reaching TR 2.5 billion or 1.4 months equivalent of salary as of end-September 1997. Education alone accounts for nearly half of the salary and pension arrears. In a number of ministries, salaries and pension represent over half of the ministry arrears. 25. In July 1996, Government merged the pension fund, the social insurance fund and the unemployment fund into a single entity--the social protection fund--to improve efficiency in mobilizing revenue and cutting cost. With better enforcement by authorities, revenue collection increased in 1997 (for instance, from TR 450 January 1997 to TR 850 million in September 1997.) Furthermore, Government has taken measures in March 1997 to reduce the cost of the distribution of pension, by assigning the savings  - 7- bank (Sberbank) to handle the payment. Although the Social Protection Fund has been current on its pension disbursements (including the minimum pension), the Sberbank, encountered difficulties in reaching the beneficiaries in the Khatlon region in July/August 1997 due to the deterioration in the security. These difficulties have been overcome since then. The Ministry of Finance has, however, accumulated arrears of TR 520 million (as of end-September 1997) for pensioners who are covered directly by the State budget and not by the SPF. These are military and security guard pensioners (about 6,300) who, according to the Constitution, did not have to pay the 38 percent salary tax out of which pension is paid. 26. Action Plan. Government is committed under Post-Conflict rehabilitation Credit to protect social spending. We have allocated in the 1998 budget over a quarter of total expenditures to education (13.2 percent), health (9 percent) and the social safety net (4.4 percent). In addition, we will use USD 7.0 million from the disbursement proceeds of the credit to reduce the arrears towards the SSN to no more than 3 months (about TR 2.1 billion) by March 1998. We will also eliminate all the arrears with respect to the pension payments (estimated at TR 520 million or USD 0.7 million at the end of September 1997). To prevent arrears from recurring again, Government intends to adopt a more realistic budget, in consultation with the World Bank and the IMF. In the case of the social safety net, Government will review the effectiveness of the existing system and implement, in consultation with the World Bank, a better targeted program by June 1998. Reforming the Real Economy--The Road Ahead 27. Two areas of immediate priority to us from the point of view of growth and efficiency -- land reforn and privatization of state-owned enterprises -- are being tackled under the IBTA project. Already some progress has been made and we intend to further speed up the reform process. We are working closely with the World Bank in preparing two operations -- Economic Reform Support (FY98) and Farm Privatization Support (FY99) -- to underpin the reforms. 28. Land Reform. Government adopted guidelines for farm restructuring program that includes transparent and equitable criteria for land allocation, allowing the unrestricted transfer of land access rights, ensuring inheritability of land access rights, and ensuring no restrictions on crops or marketing channels. The land code was revised and adopted by Majles Oli in December 1996. Furthermore, Government created the Land Reform Committee which is solely responsible for the design and implementation of the land reform program. To date, 5-10 percent of total arable land is in private hands in one form or another. A lot however remains to be done, namely the actual implementation of the land reform and farm restructuring program, land registration, privatization of the cotton ginneries and marketing agency, and full liberalization of irrigation water prices. 29. Privatization. Government's main objective of the privatization program is to improve efficiency. To date, over 2,100 objects (about 30 percent of the estimated total  - 8 - number) have been privatized. To speed up the privatization process, Government has prepared, under IBTA, the necessary legal aspects of the privatization process (law on privatization, regulations on valuation, segmentation and investment funds). A timetable for privatization is being worked out by the Government in consultation with the World Bank, with the objective of privatizing all small scale enterprises by September 1998. Implementing the Post-Conflict Program 30. To facilitate the coordination and implementation of the peace accord, in addition to the establishment of the CNR, the President appointed Mr. Kadriddin Giyasov, Deputy Prime Minister, to be the overall coordinator on the Government side. Furthermore, Government has established a Coordination Unit (CU) within the Office of the Prime Minister to coordinate and oversee the implementation of the two projects supported by the World Bank. Government has also appointed, in consultation with the CNR, Mr. Shukurjon Zuhurov, Minister of Labor, as head of the unit. The functions and responsibilities of the CU are spelled out in Attachment 1. 31. The disbursement proceeds of the total amount of the credit ($ 10 million) will be held at the National Bank of Tajikistan (NBT) on behalf of the Ministry of Finance. These foreign exchange funds will then be bought by the NBT and/or auctioned, according to a timetable to be determined by the NBT, in consultation with the World Bank and the IMF. The counterpart funds (Tajik rubles) will be blocked at the Treasury account at the NBT. They will be released to the Ministry of Finance in two portions (of USD 3.5 million each) for the social safety net component and three portions (of USD 1.0 million each) for the peace process component. Attachment 2 provides detailed expenditures related to the peace process over the period July 1997-March 1998. 32. The disbursement of the first portion of line of credit component will be done upon effectiveness of the Credit. Subsequent portions will be released, in consultation with the World Bank, upon completion reports by the CU confirming the effective use of funds. The reports will be submitted to the Prime Minister, the Chairman of the CNR and the World Bank. These reports will be supplemented by independent surveys, to be conducted by the CU and the World Bank, to assess the effective use of resources. We will inform the public at large about the Government program in reducing the compensation and pension arrears and in supporting the peace process. Conclusion Government is committed to implement quickly the peace accord and the emergency economic program. The Post-Conflict Rehabilitation Credit augurs well for this endeavor. By supporting the budget, it will facilitate the implementation of the peace process and demonstrate to the population the tangible benefit from the peace accord. It will also, together with the IMF emergency program, help Government stabilize the  99- macro framework and thus enable the Government to pursue vigorously its structral reforms. Attachments 1. Terms of-reference of the Coordinaton Unit 2. Ildicative Government Expendites on the Peace Process Sincerely yours, Yakyo Azrov prime Minister Republic of Tajikistan  - 10- Attachment 1 Terms of Reference for the Coordination Unit under the proposed Post Conflict Rehabilitation and Reconstruction Credits 1. To facilitate effective implementation of Tajikistan's two Post-Conflict Rehabilitation and Reconstruction Credits, currently under preparation by the World Bank, a Coordination Unit (CU) for project administration will be established in the Prime Minister's office. 2. The CU will be headed by a full-time Coordinator who would report directly to the Prime Minister and whose appointment would be approved by the Commission for National Reconciliation (CNR). The Coordinator will need to have effective planning, managerial capacity, sufficient rank and political standing and be able to obtain quick decisions from the country's top decision-makers and execute them rapidly. 3. The Government will provide the necessary office accommodation and related logistical support, including local assistants and support staff such as secretaries and drivers to the CU. An allocation of US$ 150,000 has been made in the 1998 budget to cover the operating cost of the CU. 4. The relevant agencies (the CNR and ministries of Finance and Social Protection in the case of Post Conflict Rehabilitation Credit and ministries of Transport and Roads Administration, Health, Education and Agriculture and /or other appropriate agencies in the case of Post Conflict reconstruction Credit) would designate a liaison officer to the CU to provide coordination in all aspects of project implementation and to represent the interests of their respective agencies in matters relating to project execution, so as to ensure timely and satisfactory project completion. These liaison officers may not be physically located in the CU. 5. The CU's responsibilities include monitoring progress in project implementation and providing the coordination that is required among the various participating agencies to ensure a common and consistent approach during all project implementation phases. The CU will be responsible for procurement and disbursement of the projects. Grant financing for the technical assistance that will be required to assist the CU in the procurement and disbursement aspects of the projects is being sought. 6. Other responsibilities of the CU would include, but would not be limited to, public announcement of the procedures for both credits and the timetable for distributing the payment to the beneficiaries under Post Conflict Rehabilitation Credit in order to enhance transparency and accountability. The CU will provide progress reports on the use of proceeds of the credits to the Prime Minister, the CNR and IDA. 7. The CU will remain responsible for administration of the Special Account, overall accounting and auditing of project accounts for Post Conflict Reconstruction Credit and preparation of Project Completion Report for both credits.  Attachm ent 2 Tajikistan - Indicative Government Expenditures on the Peace Process a) June 27, 1997 - March 31, 1998 June 27 - Oct - Dec, Jan - Mar, Total June 27 - Oct - Dec, Jan - Mar, Total Expenditure Items Sept.30, 1997 1998 Sept30, 1997 1998 1997 1997 In millions of TR In thousands of USSb) 1. Refugees Transportation 94 105 97 296 126 141 129 396 Credit 50 100 0 150 67 134 0 201 Compensation 1 5 3 8 2 6 3 11 Food 26 0 24 50 34 0 32 66 Lodging 272 48 341 661 364 65 456 885 Checking points 23 0 0 23 31 0 0 31 Medical 6 6 7 20 8 9 9 26 Other c) 1,895 1,489 625 4,009 2,537 1,993 837 5,367 Subtotal 1 2,368 1,753 1,096 5,217 3,169 2,347 1,467 6,984 2. CNR Office maintenance 170 43 0 213 228 58 0 285 Transport 58 0 0 58 77 0 0 77 Equipment 63 244 0 307 85 327 0 411 Wages 15 15 15 45 20 20 20 60 Other 0 0 41 41 0 0 54 54 Subtotal 2 306 302 56 664 410 404 74 889 3. Demobilization of Soldiers UTO battalion 20 33 0 53 27 44 0 71 UTO Operating 80 172 126 378 107 230 169 506 expens. Demobilization 0 7 15 22 0 9 20 29 Subtotal 3 100 212 141 453 134 283 189 606 4. Rehabilitation 304 280 285 869 407 375 382 1,163 Total 1 (1-3) 2,774 2,267 1,293 6,334 3,713 3,035 1,731 8,479 Total 2 (1-4) 3,078 2,547 1,578 7,203 4,120 3,410 2,112 9,642 a) Totals may not add up due to rounding b) Exchange rate 1 747 TR c) Other expenditures include clearing residence places of m ines, organization of boarding schools for orphans, repairment of electricity and telephone lines, etc. Source: Office of the Prime Minister 21. 10. 97 15:20:08  Annex II Page 1 of 1 TAJIKISTAN - KEY ECONOMIC INDICATORS a/ 1995 1996 b/ 1997 (Jan-June) GDP (real growth, %) cl -12.5 -4.7 1.5 CPI (end of period, %) 2132.0 41.0 36.5 CPI (average, %) 609.0 418.0 32.4 Unemployment Rate (%) 25.0 30.0 30.0 (Registered) 1.2 1.7 1.6 General Govemment Revenues (% of GDP) 15.2 16.2 14.8 Expenditures (% of GDP) 26.5 19.4 27.2 Social Safety Net 1.1 2.4 0.4 Social Sectors 5.4 2.9 4.2 Expenditures (% of total spending) Social Safety Net 4.1 12.4 1.5 Social Sectors 20.3 15.2 15.3 Budget Deficit Cash -11.2 -4.2 -12.4 Accrual -21.5 -2.3 -12.8 Arrears (% of GDP) Expenditures 10.3 2.3 2.2 Taxes 0.0 4.9 2.2 Balance of Payments Exports (US$, mill.) 657.0 464.0 304.0 Cotton 212.0 146.0 68.0 Aluminium 385.0 266.0 121.0 Imports (US$, mill.) 628.0 540.0 350.0 Current Account deficit (% GDP) 0.0 -122.3 -49.0 Net Reserves (US$, mill.) 4.0 -8.4 -36.8 Extemal Interest Payment (US$, mill) d/ 28.0 13.0 Extemal Debt Extemal Debt (US$, mill.) 817.0 850.0 850.0 External Debt (% of GDP) 143.0 90.0 121.8 Monetary Data Domestic Credit (end of period, real growth, %) Net Credit to Govt. .. 133.7 30.6 Net Credit to Economy 211.5 87.6 27.6 Interest rate (average lending, %) 157.5 8.2 8.2 Exchange Rates (end of period) Official Rate 288.0 328.0 541.0 Black Market Premium (%) 2.5 3.7 12.8 Notes: a/ For lack of appropriate deflator, CPI was used in all calculation of real figures. b/ 1996 fiscal data are for the period May 11 -December 31. c/ 1997 growth rate is the expected rate for the whole year. d/ Interest payment of $13m in 1996 were held in trust account.  Annex III Page 1 of 1 TAJIKISTAN PROPOSED POST-CONFLICT REHABILITATION CREDIT Timetable of Key Project Processing Events 1. Time taken to prepare: One and a half months 2. Project prepared by: Government with IDA assistance(*) 3. Identification mission: September 1997 4. Negotiations: November 7, 1997 5. Planned Board Presentation: December 16, 1997 6. Planned effectiveness: December 23, 1997 7. Expected project completion: December31, 1998 * This Credit was prepared by a Bank staff team composed of: Messrs./Mme. M. R. Ghasimi, Project Team Leader; Robert J. Anderson, Sector Team Leader; Ishrat Husain, Director; Robert E. Christiansen; Mustapha Rouis; Jonathan Brown; Felix Jakob; Paolo Caputo; Maniza Naqvi; Kieth Rennie; Ian Newport; Ahmed Jehani; Tariq Hassan; and Subash Chandra. Omar Hadi provided support under a tight deadline.  Annex IV Page I of 2 Status of Bank Group Operations in Tajikistan IBRD Loans and IDA Credits in the Operations Portfolio As of 09/30/97 (In Millions of US Dollars) Project ID Credit No. Fiscal Borrower Purpose IBRD IDA Undisbursed Closing Year Date TJ-PE-44202 IDA29460 1997 GOVT. OF TAJIKISTAN PILOT POVERTY ALLEV. 0.00 12.00 11.40 06/30/00 TJ-PE-43231 IDA28610 1996 GOVT. OF TAJIKISTAN INST. BLDG./TA 0.00 5.00 2.85 12/31/00 TJ-PE-8863 IDA29176 1996 GOVT. OF TAJIKISTAN AGRI. RECOV. SOC. PROTECT. 0.00 50.00 0.00 12/09/97 Total 0.00 67.00 14.25 Active Loans Closed Loans Total Total Disbursed (IDA) : 2.75 50.00 52.75 of which has been repaid 0.00 0.00 0.00 Total now held by IDA : 17.00 50.00 67.00 Amount sold : 0.00 0.00 0.00 of which repaid 0.00 0.00 0.00 Total Undisbursed . 14.25 0.00 14.25 Generated by the Operations Information System (OIS)  Annex IV Page 2 of 2 Tajikistan STATEMENT OF IFC's Committed and Disbursed Portfolio as of 08/31/97 (In Millions of US Dollars) Committed Disbursed IFC IFC FY Company Loan Equity Quasi Pratic Loan Equity Quasi Pratic Approval 1997 Zeravshan Gold 0.00 1.20 6.30 0.00 0.00 1.20 5.26 0.00 Total Portfolio 0.00 0.00 6.30 0.00 0.00 1.20 5.26 0.00 Generated by the Operations Information System (OIS)  Annex V Page I ofZ Tajikistan at a glance Europe 8 POVERtY and SOCIAL Central Low. TaJihIstn Aab income s aOeeopmotdsamnc Popubloia mid-16 ffiffos 6.0 479 3.220 i GNP pwecapa I1096 (USS) 330 2.180 500o Lb !Phd5l GNP 1996 M Eions S Lo0 1.043 1.601 Avon*g annul growth, 19904 1 P-*''onpI) 1.9 0.3 1.7 S- Labor ftc% (S) 2.5 0.5 1.7 PW hostw emm adabJ ~ ilw) _ I Urbinpepbn{ X dXoWopbl 32 SS 2; Lb _pcrx t df t*Ub 67 a 6S *meOlf tOOOA:t 42 22 89 c dm wa* m_ ddn wmdWS) - _ Amnaaaoadwee(SVofpvEini) 53 mm uuflVS puleUot,.e1.) 2 34 Gros piowy aobmmnt (U duof .gs pepW q s *7 105 = male, 0l or 112 1 -n .iiF Parade 33~~~~~~~~~~~t 97 93 KEY ECONOM RtATOS mNd LONG47ETl 1975 1#4 1s" 18"9 GDP (bE U= . - 1.8 10 1 Gras domead_anWGOP - - 17.4 17.3 i opwsus _ EVportso ods andsorn'cesIGOP _ - 36_ 24.0 Gssdom d bawkgAGOP - - 10.4 13 Gross ad plGOlP - 102 2.1 i Curwn acout bai,ceIGOP - 0.1 -SA ntarea petmIP _ - 0.0 0.0 SS*'s Toal dsbWOP - - 364 460 TOW dmbt Sric.IUpots* - - 00 0. Pnt vkoddbdUGOP _ _ 34.3 - lnl vwad _Wpf _ _ 95.4 __ GP -10.8 -125 -6. _- GNP pr e_pit 1 .13 -13S ._I8 Exps of goods and _swice - 40.2 -30.0 STRUCTUE Of the ECONOMY 17 1968 1995 188# ia,uetaut .a s Awbhaw - 25.2 2a. .,_ _ Industry - 48.6 49.3 serv6cas - - 26.2 24.1 ' I Pdvut cl ln - 79.7 3.1 f _ 6ana gowment corsumor - 8S.9 10.6 Imob of goods and seodee . 43.5 36.0 . 1878.85 1585.8 158 18 Agiubib AO -. 1.1 k,a&sY 4 - -63 -3.0 LUUiScu1a ftn- - - 3. sandes - -26.5 .12.S P&ftN munwon - -30.6 - a Ganwal governmen comumplon - - .4 . Gmaedommskhiwabmit - - 4~~~~~~-1.7 a GOSS 1150I1 product -11.3 -12.5 -60 - Nos:1096 data arom pellmlnry adaa.Figurine MiaM ae for yewala UtvUaa Uose pecifld. b The amond so . ha hi_m_late.  Ann=c PageZof2 PRICE3 nd GWVERNMET FINAWCE 1975 imab 19 193 ~%Chat"9) sJffo pf4Cg - - 109.0 419.3 16 IlicpIt GOP dbto - tw.9 - cun _Is ; - an cwultnM , . 16.0 5' " = = Cunat dg bd - - - Ovamm - - -11.0 t.3 TRACE Tetd _"m Mh) _ _ Su5 464 .,,_ A_Nm1 1 385 2136 coma 212 144 TOWhwpeeWt (_ _2i S2 PX * tt - - - - i. JIn AACeof PAMETS 7 19 19 19 Emp0WZ N dW w g _ _ SB? 464 Imoi ofcd ai _V - n 4 15 5 NVeu*a_s - _ - 2S 4t ;ti . &W a Tfok=fn"o .a i '1_lb_s _ 1 vi11 I f25 4! 14. Ch lmnt t w~u be_anc_7 I ~~~~~~~~~~~~~~~'44 R n._. pd g gd (n4 7 JS0) - - - 14 Caveab rb Ibca&tSSJ _ 28.8 1St.7 B1ERNAL M* TANd RESOUlCE PLOWS 1575 1l8 1es 6 199 (m3US3 w C _.pmwdew1Im IBRo 0 0 _T IDN .. 2 _0 O i