Tajikistan - Country assistance strategy

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 18075 TJ MEMORANDUM OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ONA COUNTRY ASSISTANCE STRATEGY FOR THE REPUBLIC OF TAJIKISTAN June 25, 1998 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 EQUIVALENT (Exchange Rate on June 25, 1998) Currency Unit = Tajik Ruble (TJR) TJR = US$0.001236 US$ = 754 TJR GOVERNMENT'S FISCAL YEAR January I - December 31 ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank CAS Country Assistance Strategy CEM Country Economic Memorandum CG Consultative Group cIS Commonwealth of Independent States CNR Council of National Reconciliation CPI Consumer Price Index ECA Europe and Central Asia ESAF Enhanced Structural Adjustment Facility ESW Economic and Sector Work EU European Union TACIS Technical Assistance for the Commonwealth of Independent States FHH Female-Headed Household FSU Former Soviet Union GDP Gross Domestic Product GoRT Government of the Republic of Tajikistan GTZ Gesellschaft fir Technische Zusammenarbeit IBRD International Bank for Reconstruction and Development IBTA Institution Building and Technical Assistance IDA International Development Association IDF International Development Fund IDP Internally Displaced People IFC International Finance Corporation IMF International Monetary Fund MIGA Multilateral Investment Guarantee Agency NEAP National Environmental Action Plan NGO Non-Governmental Organization PER Public Expenditure Review SAC Structural Adjustment Credit SSN Social Safety Net TA Technical Assistance UNDP United Nations Development Program UNHCR United Nations High Commissioner for Refugees UNICEF United Nations Children's Fund UNMOT United Nations Military Observers in Tajikistan USAID United States Agency for International Development UTO United Tajik Opposition  FOR OFFICIAL USE ONLY TAJIKISTAN COUNTRY ASSISTANCE STRATEGY TABLE OF CONTENTS SUMMARY 1. BACKGROUND ...................................................... 1 II. MACROECONOMIC PERFORMANCE-POST-JUNE 1997, MEDIUM-TERM PROSPECTS AND EXTERNAL ENVIRONMENT .....................5 A. Economic Developments-Post-June 1997 .....................................................5 B. Macroeconomic Prospects ......................................................6 C. External Environment ......................................................7 III. TAJIKISTAN'S DEVELOPMENT AGENDA .....................................................7 A. Macroeconomic Stability ......................................................7 B. Structural Reform and Poverty Reduction .....................................................8 C. Restoring Basic Services ...............9......................................9 IV. BANK GROUP COUNTRY ASSISTANCE STRATEGY .......................................9 A. Progress Under the Previous CAS ................................... ...................9 B. Strategic Focus and Approach of the FY99-01 CAS ................... ................ 10 C. Country Program Elements ..................................................... 14 D. Country Risk Management ..................................................... 17 V. CONCLUDING REMARKS ..................................................... 17 LIST OF TABLES Table 1: Profile of the Poorest Groups in Tajikistan ......................................................3 Table 2: Macroeconomic Performance Indicators ...................................................... 5 Table 3: Macroeconomic Scenarios .............6........................................6 Table 4: Proposed Assistance Scenarios and Triggers ................................................... 15 LIST OF BOXES Box 1: Economic Hanrassment and Corruption in Tajikistan ..........................................4 Box 2: Civil Society's Views on Tajikistan's Political, Social and Economic Priorities 11 Box 3: Direct Intervention in Aid of Poverty Reduction ............................................... 13 Box 4: Civil Society's Reaction to the CAS .......................... ........................... 14 I This document has a restricted distribution and may be used by recipients onl in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  ANNEXES Annex Al: Tajikistan at a Glance Annex B 1: Tajikistan - CAS Program Matrix Annex B2: Tajikistan - Selected Indicators of Bank Portfolio Performance and Management Annex B3: Tajikistan: page 1 Bank Group Program Summary, FY99-01: Proposed IBRD/IDA Base-Case Lending Program page 2 IFC and MIGA Program Annex B4: Tajikistan - Summary of Nonlending Services Annex B5: Tajikistan - Social Indicators Annex B6: Tajikistan - Key Economic Indicators Annex B7: Tajikistan - Key Exposure Indicators Annex B8: page 1 Status of Bank Group Operations in Tajikistan - IBRD Loans and IDA Credits in the Operations Portfolio page 2 Tajikistan - Statement of IFC's Committed and Disbursed Portfolio Annex B9: Tajikistan - CAS Summary of Development Priorities Map The World Bank Group Team Vice President: Johannes Linn Country Director: Ishrat Husain Task Team: Robert Christiansen, Pirouz Hamidian-Rad, Mustapha Rouis  REPUBLIC OF TAJIKISTAN COUNTRY ASSISTANCE STRATEGY SUMMARY i. The previous CAS for Tajikistan was discussed by the Board in May 1996. At that time, it was agreed that circumstances in the country warranted a shorter than customary planning horizon for the Bank's assistance strategy. Specifically, the unresolved civil conflict raised concerns about the ability of the Government to implement effectively its proposed economic reform program. Nonetheless, the extent of poverty in Tajikistan provided a compelling rationale for supporting the proposed reforms, despite the obvious risks associated with a post-conflict situation. ii. In the last two years the country has experienced a wide range of both political and economic events. In early 1997, during the final stages of negotiation between the Govemment and the United Tajik Opposition (UTO), there was a resurgence in the conflict between these two parties. The situation was exacerbated by the presence of third parties that sought both political and economic gain from the renewed turmoil. Renewal of the conflict had implications for economic management because of the demand for increased public spending on military and related activities. A serious deterioration in the economy resulted during the first half of 1997 as the budget deficit rose to 10 percent of GDP, eight months of social safety net payments arrears accumulated and inflation was 52 percent and accelerating. iii. Despite this political and economic deterioration, the Government and the UTO were able to negotiate and sign (in June 1997) a peace agreement that promises to open an era of peace and reconciliation. Although the implementation of the peace agreement has been uneven, progress has been made during the past year. Senior UTO leaders have returned to the country and accepted several cabinet level positions in the Govemment. Relations between the two parties have been strained at times, especially during outbursts of violence engineered by groups-many of which have some links to either the Government or the UTO-that remain outside the existing political framework. Nonetheless, there remains a clear commitment on both sides to implement the agreement successfully as evidenced by recent actions including the joint participation of the Government and the UTO at the Consultative Group Meeting in May 1998. While these events are encouraging, Tajikistan remains a post-conflict situation and Bank operations are in the context of our post-conflict framework (Stage IV: Post Conflict Reconstruction) with all the associated risks. iv. Following the signing of the peace agreement, the Government turned its attention, with strong support from the UTO, to re-establishing control of the macroeconomy. As a result of actions taken in the last half of 1997, inflation declined to a monthly average of about one percent during the first four months of 1998; the fiscal deficit narrowed to less than two percent of GDP in the first quarter of 1998; and GDP grew by 2 percent for 1997 as a whole and continued to grow in the first quarter of 1998-the first post-independence growth of the economy. In recognition of the Government's progress, the IMF approved a Post-Conflict Facility in December 1997 and an ESAF in June 1998. v. The Government's structural reform agenda-which concentrates on private sector development, financial sector reform and restructuring of the agriculture and social sectors-also suffered during the first half of 1997 with the result that progress has been uneven. More recently, Government's commitment to and concentration on reform has increased with the result that there has been an improvement in several areas, e.g., privatization and financial restructuring. Nonetheless, much remains to be done with regard to structural reform, especially in the areas of agriculture and social sectors. Of particular importance is the need to: (i) redesign strategies and delivery systems in  both the health and education sectors, and (ii) accelerate the process of farm restructuring in order to foster employment intensive growth. vi. Although the Government's reform program has made some headway and the economy is again growing, the problem of poverty-with per capita income of US$330 in 1997-remains severe and will be the focus of assistance efforts for many years to come. Even prior to the economic collapse of the early 1990s, Tajikistan was one of the poorest areas in Central Asia, despite the large budget transfer from Moscow. More recently, the combination of economic decline and civil conflict has caused poverty to both intensify and become more widespread. The intensification of poverty has been greater in certain regions (the war-affected areas in the south and southwest) and among some ethnic groups (those ideritified with the opposition). Among those especially hard hit were people living in rural areas and those who lost family members or physical assets in the war. Currently, it is estimated that about 80 percent of the total population is unable to cover adequately their basic needs for food, shelter, clothes, education and health and that this is largely a post-1 991 phenomenon. vii. Against this background, the clear challenge for the Bank Group is to design an assistance strategy that supports sustainable, employment-intensive growth, thereby promoting opportunities for a majority of the poor, all in a post-conflict context. In response to this situation, the CAS focuses on support for privatization with a particular emphasis on restructuring farms, investing in rural infrastructure, improving the quality of social services and assistance to the poorest, and enhancing institutional capacity. viii. In contrast to other poor countries with comparable income and poverty levels, the flow of bilateral assistance, other than humanitarian aid, has been very small in Tajikistan. Although a few other donors are present, the Bank and the Fund have been the two major sources of external assistance to Tajikistan. ADB may, however, be able to assist with sharing the burden in the future. ix. The operational program of IDA during the next three years would provide $165 million in financing for ten operations of which $40 million is for an adjustment operation. Of the remaining nine operations, two provide direct support for investment in the agricultural sector ($40 million), four concentrate on social sectors ($45 million), two are for infrastructure development ($35 million), and one is for technical assistance and institution strengthening ($5 million). Both IFC and EDI are active in Tajikistan. x. The present circumstances in Tajikistan are such that the program for the Bank Group is very risky, but also offers the potential of high rewards. The most obvious risks are: (i) resumption of the conflict if the implementation of the peace process falters; (ii) implementation and institutional weaknesses; and (iii) diminished political commitment to the reform process as powerful vested interests are threatened. The prospects for a high return to the strategy rest in the economic potential of the country as evidenced by the quick resumption of growth in 1997 and the commitment of the coalition Government to implementing the peace agreement and the reform program. xi. The Executive Directors may wish to consider the following points: * the composition of the lending program and its focus on poverty reduction; * the scope for greater bilateral support for the peace process and Government's reform program; and * the level of risk especially given the potential for renewed civil conflict. . .-  MEMORANDUM OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A COUNTRY ASSISTANCE STRATEGY OF THE WORLD BANK GROUP FOR THE REPUBLIC OF TAJIKISTAN I. BACKGROUND From independence until mid-1997 Tajikistan suffered a chronic civil conflict of fluctuating intensity as well as uneven economic management and sporadic reform efforts. The resulting post-conflict situation has delayed reform and contributed to more widespread and intense poverty than experienced in the soviet period. Two-thirds of the population is unable to meet their basic needs and an additional 17 percent is either extremely poor or destitute and lack the capacity to participate in the economy. With the resolution of the civil conflict, weak institutions have become the greatest hindrance to better economic management and policy reform, although the vestiges of the conflict remain. The Bank's assistance strategy concentrates on promoting growth and reducing poverty via interventions targeted mainly on the largest groups of the poor. More specifically, the Bank's assistance program will focus on maintaining macroeconomic stability, accelerating privatization, reforming the financial sector, restructuring the agriculture sector and providing direct support to the most vulnerable groups in society. It must be stressed, however, that the country's present post-conflict situation creates substantial risks for successful implementation. Furthermore, even if the potentially high rewards of the CAS program are realized, the extent and depth of poverty at present means that it will remain the focus of assistance efforts for many years to come. 1. Political Economy Background. Tajikistan declared its independence in September 1991 amid the collapse of the FSU. Within months of independence, however, a complex mix of regional, ethnic and religious differences that had been suppressed during the soviet era erupted into a civil conflict. Opposing the Govemment was a loosely constituted force known as the United Tajik Opposition (UTO) that emphasized ethnic and religious differences in its dispute with the Government. In addition to the UTO, the Government was opposed by numerous independent forces and militias who were motivated mainly by economic opportunism. The most violent phase of the conflict occurred in 1992 and 1993 and was centered in the southem and southeastern parts of the country. The conflict continued with varying intensity until mid-1997 when a peace agreement between Government and the UTO was signed. Because the agreement is only between Government and the UTO and given the factious nature of the latter, numerous "third parties" have continued to foment tensions in an effort to extract economic and/or political concession from the GovernmentlUTO coalition. This has resulted in occasional outbursts of violence as the governing coalition seeks to reduce the number and activities of these "third parties". 2. The peace agreement provides a window of opportunity for pursuing economic stabilization and structural reform as tools for solidifying the peace process. The agreement stipulated the creation of a Council of National Reconciliation (CNR) responsible for implementing the peace process. In particular, the CNR is charged with overseeing the demobilization of soldiers and their reintegration into civil society. One year after signing, implementation of the agreement is broadly on track, but implementation of some aspects has been slow. Parliamentary elections were scheduled for later this year, but will likely be delayed until early 1999, and will be followed by presidential elections. Despite delays in implementation  Page 2 Tajikistan County Assistance Strategy of the peace accord, there is sufficient political stability and commitment to reform by both parties to allow the Government to again begin concentrating on economic reforn. Evidence of this renewed commitmnent includes significantly improved macroeconomic performance since mid-1997 (para 9). Nonetheless, the current situation in Tajikistan is clearly within stage four of the Bank's post-conflict framework and significant risks exist.I 3. Social Background. More so than most of its neighbors, the creation of present day Tajikistan during the soviet period was the result of efforts to create multi-ethnic countries. As a result, its population of 6 million is comprised of several ethnic groups with about 70 percent being ethnic Tajik and the balance consisting of more than a dozen other nationalities including Uzbeks (20 percent) and Russians (5 percent). Mirroring this domestic diversity is the fact that more Tajiks live in either Afghanistan (about 4 million) and Uzbekistan (5 million) than in Tajikistan itself.2 The ethnic tensions that have resulted from this diversity are exacerbated by the country's mountainous terrain and the weak road and communications networks that hinder interactions between groups and contribute to isolation of communities. In addition, regional differences-principally between groups in the north that have close ties to Moscow and Tashkent and that dominated government during the soviet era and groups in the south who were typically excluded from the ruling elite-was one set of factors contributing to the civil conflict.' Yet another factor was the role played, at least in the early years of the conflict, by Tajik religious fundamentalists with links to the groups in Afghanistan. 4. Even before the dissolution of the FSU, Tajikistan was one of the poorest areas in Central Asia despite the large annual budget transfers from Moscow. The economic collapse of the early 1990s caused poverty to both intensify and become more widespread. The intensification of poverty has been greater in certain regions (the war-affected areas in the south and southwest) and among some ethnic groups (those identified with the opposition). Among those especially hard hit were people living in rural areas and those who lost family members or physical assets in the war. Presently, it is estimated that the great majority-about 85 percent or 5.1 million people-of the population cannot meet their basic needs for food, shelter, clothing, health needs, and educational services because of reduced incomes and transfer payments as well as the deterioration of many public services. The vast majority of the poor-about four million-owe their circumstances to the collapsed economy and would, if employment opportunities are made available through growth, be able to improve their living standard. The remaining one million poor-who are classified as either extremely poor or destitute-are less able to respond to the employment opportunities and will, in varying degrees, require direct assistance (Table 1). The distinction between these two sub-groups of the poor is that the "extremely poor" once had the means of sustaining themselves, but have lost those means, e.g. internally displaced persons and families who have lost houses and/or other property. In contrast, most of the "destitute" are those who cannot participate in the economy and are unlikely to be able to support themselves in the future, e.g. pensioners, orphans, and the disabled.3 World Bank. 1998. "Post-Conflict Reconstruction: The Role of the World Bank." Washington D.C. 2 The demarcation of republics during the soviet era that led to large minority populations in Uzbekistan and Tajikistan has contributed to tensions between the two countries. An additional source of tension is the fact Samarkand and Bokhara, two major centers of Tajik culture and history, are now in Uzbekistan. 3 A more detailed knowledge of the extent and severity of poverty will be available in early 1999 following the completion of national poverty survey that is being supported by UNDP and the World Bank.  Tajikistan Country Assistance Strategy Page 3 TABLE 1: PROFILE OF THE POOREST GROUPS IN TAJIKISTAN Features Poverty Categories _ _Extremely Poor Destitute Number of People 700,000 (12% of population) 300,000 (5% of population) Characteristics Experience acute or chronic food insecurity; Unemployable; aged and pensioners without lack adequate shelter, health, and education. family support; orphans, disabled, street Included in this group are urban and rural children. unemployed; unpaid employees; returned refugees; IDPs, FHHs; families whose houses and property were destroyed and/or assets depleted. ___ Location Disproportionately in isolated mountainous War affected areas, urban areas, streets, state and war affected areas; poor rural and urban institutions, agencies, and households which areas; state enterprises, collective farms. have lost the adult male and are now female headed. Coping Strategies Survive by selling assets, assistance, begging, Support from state agencies, begging, and stealing, or reducing food intake. charity. Proposed Policy Public works job creation for infrastructure Refocus social protection payments, including Response rehabilitation, restoration of basic health and reinforcement of local community caring education services in poor areas, targeted mechanisms, and targeted poverty community-based projects, and small-scale interventions. informal sector development. 5. The present social and economic conditions in Tajikistan, combined with increased economic harassment and corruption in recent years (see Box 1), also serve to emphasize the worsening circumstances of many women. The war created a large number of female-headed households who experience a higher incidence of poverty than average-making up a disproportionate share of the "extremely poor". Although the incidence of gender discrimination does not yet seem to be a widespread problem, there are incidents of female-headed households being denied access to land or being given land of lower quality. 6. Economic Background. Tajikistan's economic endowment rests largely on plentiful supplies of water-a scarce commodity in Central Asia-that can be used for irrigation and power generation.4 Recognizing this potential, investment during the soviet era concentrated on developing extensive irrigation systems that are used largely for cotton production and hydroelectric power generation, much of which is used by the aluminum smelter. These sectors, however, developed as enclaves with few links to other parts of the economy and are heavily dependent on external markets for inputs and buyers.5 Presently the agricultural sector accounts for about 50 percent of employment and 28 percent of GDP, while industrial production accounts for 20 percent of GDP of which one-third is generated by the smelter. Although a combination of poor design and a lack of maintenance have left many of the productive assets in poor condition, they still are able to serve as the basis for economic growth especially in the agricultural sector. 4 There are also extensive mineral deposits (e.g., coal, gold, and base metals), but estimates are still largely preliminary. The Government, in collaboration with international investors and the IFC, has begun the exploitation of some deposits, but more generally the combination of political instability and the inaccessibility of the deposits has hindered investors. 5 For example, inputs for the smelter are imported from Russia, Kazakhstan and Ukraine and over 90% of the ingots produced by the smelter are exported outside the CIS. Similarly, only about 15 percent of cotton fiber is processed locally.  Page 4 Tajikistan County Assistance Strategy Box 1: Economic Harassment and Corruption in Tajikistan Documenting the extent and range of corruption in Tajikistan is difficult, but examples are easy to find and serve to illustrate the problem. According to a 1996 social assessment conducted by the Bank, economic harassment is so widespread that it is regarded as a regular feature of life in Tajikistan. Perhaps the most common form of corruption is the official and unofficial checkpoints that are used to extort bribes and confiscate goods in transit. It is reported that stops .t such checkpoints-the official function of which is to monitor vehicles for drugs and firearms-can take several hours, and usually involves a bribe either in kind or cash. Reflecting another aspect of corruption, businesses report that it is virtually impossible to operate without paying bribes for a range of "services" e.g., police protection and licenses. Economic harassment in Tajikistan stems from the widespread availability of firearms, lack of professional law-enforcement agencies, difficult economic conditions, and central govemnment's inability to enforce laws especially in rural areas. Perhaps the most insidious aspect of corruption is the commonly held perception that it is an inevitable feature of every economic activity-an attitude that helps to perpetuate corruption. Although informnation on corruption is typically anecdotal, there is a consensus that is widespread in Tajikistan. Senior govemment officials are aware of the problem and have recently requested Bank assistance in combating it. At the recent Consultative Group meeting (May 1998), the Government stressed its commitment to reducing corruption. The Govemment's strategy consists of several elements, including: (a) implementing the peace process in order to reduce road blocks and the number of armed fighters; (b) implementing economic reform and thereby decreasing the number of rent-seeking opportunities; (c) redesigning and strengthening public procurement procedures; and (d) designing and implementing a voluntary arms collection program; and (e) implementing both legal and civil service reform. The Bank plans to support Govemment's anti-corruption strategy through numerous activities, including an IDF grant to strengthen institutions responsible for implementing legal and civil service reforn, an institution strengthening credit (IBTA lI) that supports tax reforn, strengthened law enforcement agencies and adjudication processes, and a revised legal framework, and a second adjustment operation that will support public sector reform. 7. Tajikistan's progress in restructuring its economy and moving toward a market-based economy has been uneven and achieved only modest results. A combination of external shocks, anti-market policies, structural rigidities and weak institutions are responsible for this lack of progress. The abrupt withdrawal of subsidies provided during the soviet era-amounting to 40 percent of budgetary expenditures-was not accompanied initially by an equal retrenchment in public spending thereby creating serious fiscal imbalances. The incentive structure in most sectors, especially agriculture, was unfavorable. The protracted civil conflict and the resultant political instability diverted resources to defense and security purposes at the same time that revenues were declining. Policy inexperience and weak administrative capacity due to the emigration of many professionals created a shortage of people with the skills needed to manage the economy effectively. Collectively, these factors resulted in GDP going into near free fall beginning in 1991. By 1994 income had fallen by nearly 50 percent in real terms and inflation soared to an average that was in excess of 1000 percent per year during 1992-94 primarily because of unsustainable budget deficits (over I I percent of GDP in 1995). Short-term external borrowing to finance budget deficits resulted in total debt rising from $504 million in 1993 to $817 million by the end of 1995 (134 percent of GDP). 8. To correct this situation, the Government introduced several reform measures in 1995, including issuance of a new currency, fiscal retrenchment and price liberalization. The Government's reform program was supported by an IMF standby arrangement in May 1996 and an IDA rehabilitation credit in September 1996. Although these efforts began to yield results, they were short-lived because the civil conflict re-intensified and distracted policymakers. Between November 1996 and June 1997, much of the progress of the previous year was undone as, among other changes, arrears accumulated, the foreign exchange auction was abandoned and trade restrictions were reimposed, with the result that the reform program was derailed.  Tajikistan Country Assistance Strategy Page 5 II. MACROECONOMIC PERFORMANCE-POST-JUNE 1997, MEDIUM-TERM PROSPECTS AND EXTERNAL ENVIRONMENT A. Economic Developments-Post-June 1997 9. As of June 1997, the fiscal deficit was 10 percent of GDP, social safety net payments were eight months in arrears, inflation was 61 percent and accelerating, and the Tajik ruble had depreciated to TR541/US$ (from TR135 a year earlier). Recognizing that they were rapidly losing control, authorities made the re-establishment of macroeconomic stability and re-vitalizing the structural reform program their first post-conflict priority-a decision supported by the UTO. The Government, in consultation with the IMF, moved quickly to: re-establish fiscal discipline; remove administrative controls; reactivate the foreign exchange auction; abolish export taxes; and tighten fiscal and monetary policy. 10. The Government has made significant progress during the past year in achieving macroeconomic stability. Average monthly inflation for the first four months of 1998 was 1.3 percent compared to over 20 percent per month in July/August 1997. This has contributed to a broadly stable official nominal exchange rate since September 1997 and to an appreciation of the real exchange rate by 12 percent during the same period. Recent fiscal performance has been equally impressive. The fiscal deficit (on a cash basis) in the last quarter of 1997 narrowed to only 0.2 percent of GDP. During the first quarter of 1998, the deficit was 1.6 percent of GDP. 11. In response to the restoration of macroeconomic stability and the availability of extemal financing for cotton production, GDP grew by 1.7 percent in 1997, the first real growth since independence in 1991 (see Table 2). Growth in 1997 was driven mainly by increased cotton production. The recovery has continued, with real GDP in the first quarter of 1998 estimated to be 1.3 percent over the corresponding period of 1997. 12. In recognition of the Government's progress, the IMF approved a Post-Conflict Facility in December 1997. Similarly, the Bank approved two post-conflict operations in December 1997 and January 1998 in recognition of the Government's performance. The first of these operations provided balance of payments and budgetary support and the second provided direct support for reconstruction of war-damaged infrastructure. A proposed Structural Adjustment Credit of US$50 million (which accompanies this CAS) was negotiated in May 1998 to support the implementation of Government's key structural reformns. A three year ESAF arrangement (equivalent to US$120 million) in support of the Government's program was also negotiated in mid-May and was approved by the Fund's Board in late June 1998. Table 2: Macroeconomic Performance Indicators 1995 1996 1997 1998 Actual Actual Estimate Projection GDP (real growth, %) - 12.5 - 4.4 1.7 3.4 Consumer Prices (end of period, % change) 2133 41 164 17 Revenues (% of GDP) 19.2 12.1 13.7 14.8 Expenditures (% of GDP) 26.5 17.9 17.0 18.2 Budget deficit (% of GDP) - 11.2 - 5.8 - 3.3 - 3.3 Exports (US$ m) 839 771 783 826 Imports (US$ m) 880 809 761 832 Current Account Balance (% of GDP) -11.3 - 7.1 - 2.3 - 2.7 Gross Reserves (US$ m) 4.1 14 30 91 in months of imports 0.1 0.3 0.6 1.9 Extemal Debt (US$ m) 817 868 1039 1120  Page 6 Tajikistan County Assistance Strategy B. Macroeconomic Prospects 13. For several reasons, our assessment of the outlook for the economy in the near-tern is one of cautious optimism, tempered by an awareness of the risks that still exist. First, the signing of the peace agreement has produced a governing coalition that regards economic reform as the only viable political strategy. Second, the restoration of peace will allow greater realization of the country's agricultural potential as farmers respond to an improved security situation and areas formerly under opposition control again become productive. Third, the availability of additional external financing for cotton production will contribute to further increases in cotton production and exports. Fourth, the recent improvement in bilateral relations with Uzbekistan should allow for an expansion of regional trade. Finally, the balance of payments support for the Government's program will ease, the foreign exchange and budgetary pressures facing the economy and allow the Government to meet demands for social expenditures without resorting to inflationary finance. 14. Base Case Scenario: Political Stability and Sustained Reform Efforts. Reflecting the present positive factors, this scenario depicts favorable prospects for growth in output and employment. Assuming a deepening of structural reforms, GDP is projected to grow by an average of four percent per annum during the 1998-2000, and will accelerate somewhat over the ensuing five year period. Agricultural activities would be the main source of growth in the medium-term. Growth in output would result from higher levels of investment, including direct foreign investment in privatized enterprises, as well as higher public investment in infrastructure rehabilitation and social capital formation. The external outlook under the Base Case scenario is also projected to be favorable. Higher capital flows, including foreign direct investment, would provide opportunities to build up external reserves from 0.6 months of import cover in 1997 to 3 months by 2001. Regularization of the external debt situation, while limiting future foreign borrowing to concessional funds for productive investment, is expected to result in a declining share of external debt in GDP and exports, therefore improving Tajikistan's creditworthiness. 15. Core Case Scenario: Faltering Political Commitment and Policy Reversals. A failure by Govemment to continue implementing the macroeconomic and structural reform would have a devastating impact on Tajikistan's ability to maintain political stability and continue the economic recovery. Under the Core Case scenario, average real GDP growth over the projection period (1998-2005) would fall to two percent as a minimum, resulting in a worsening of poverty. In response, donor funding would be limited to humanitarian aid and direct foreign investment would disappear. The budget deficit would increase and, because of increased domestic bank borrowing, inflation would also rise. Table 3: Macroeconomic Scenarios (%) Estimate Core Case Base Case 1997 1998-00 2001-05 1998-00 2001-05 GDP Growth 1.7 1.5 -2.0 3.9 4.9 Consumption pc growth -4.2 -1.0 4.6 0.9 1.9 Inflation 88 45 70 35 8 Fiscal Balance -3.3 4.8 -5.4 -3.4 -2.8 Current Account -6.0 -7.0 -8.5 -2.6 -2.2 Debt Service/ Exports 13.8 15.9 25.1 9.8 13.4  Tajikistan Country Assistance Strategy Page 7 C. External Environment 16. Although the estimated balance of payments gap for 1998-99 is currently covered, as a primary commodity exporter, Tajikistan is highly exposed to external shocks, including fluctuations in world prices for its only significant exports-cotton and aluminum. In addition, poor cotton harvests have the potential to impose serious constraints on the growth of the economy and undermine the sustainability of the Bank's program. Political stability will also be an important factor influencing economic outcomes. Despite the need, comparatively few bilateral donors are active in Tajikistan (para 42). This absence raises serious issues for closing Tajikistan's financing gap beyond 1999 and for burden sharing. 17. Although not classified as a severely indebted country, Tajikistan has suffered from an acute external debt problem. By the end of 1997, the country had accumulated US$1,039 million of external debt (about 100 percent of GDP). About 70 percent of the debt is owed to CIS creditors including $289 million to Russia. Substantial progress has been made in regularizing Tajikistan's relations with its external creditors. Rescheduling agreements were reached with Russia, Turkey, Kyrgyz Republic and Uzbekistan, and external arrears not subject to rescheduling declined sharply. At the end of March 1998, external arrears of US$2.7 million were outstanding (to India, Russia, and the United States) exceeding the program target of US$1.8 million, due primarily to administrative delays. Arrears to Russia and United States were settled in early April 1998, with the settlement of arrears to India expected shortly. III. TAJIKISTAN'S DEVELOPMENT AGENDA 18. The current situation in Tajikistan requires decisive and dramatic policy changes on the part of the Government, especially in the areas of political and macroeconomic stability as well as accelerated structural reform. The Government is aware of this need and its strategy concentrates on: (i) implementing the peace agreement and fostering national reconciliation; (ii) macroeconomic stabilization and structural reform in order to achieve faster and more broad- based growth; and (iii) restoring basic services, rehabilitating infrastructure, and promoting human development. Recognizing that political stability is fundamental to achieving the remaining objectives, the Government is working closely with the CNR to ensure that soldiers are demobilized and reintegrated into civil society, as well as facilitating the repatriation and reintegration of refugees. Both the Government and the UTO are cooperating closely to ensure that political stability is maintained and that differences are resolved through political mechanisms and not military solutions. At the same time, it must be acknowledged that because this is a post-conflict situation there are factions opposed to the peace agreement that seek to disrupt the cooperation between Government and the UTO. As a result, there will continue to be occasional political disruptions that result in uneven implementation of the peace agreement and possibly the reform process. It must also be stressed that even a very successful program over the next three years will achieve comparatively modest progress with regard to poverty reduction. A. Macroeconomic Stability 19. The Government is currently implementing an economic reform program that is supported by the IMF and the World Bank. The key elements of the stabilization program are restoring monetary and fiscal discipline, stabilizing the exchange rate and interest rates, improving domestic resource mobilization and utilization, and increasing international reserves. Despite some success, the Government recognizes that the situation could be compromised, if the reform program is not implemented vigorously. Anticipating continued success in these areas,  Page 8 Tajikistan County Assistance Strategy the existing IMF Post-Conflict Facility is to be followed by a 3-year ESAF arrangement in June 1998. B. Structural Reform, Growth and Poverty Reduction 20. The Government is pursuing its structural reform agenda with an emphasis on private sector development, financial sector reform and with restructuring of the agriculture and social sectors. Major inefficiencies in resource use will be corrected by privatizing small, medium and large-scale enterprises, eliminating remaining price distortions, and encouraging new entrants. 21. Privatization of both industrial and agricultural enterprises lies at the heart of Tajikistan's transition strategy. The privatization strategy consists of two components-reform of the institutional and legal framework followed by the actual privatization of enterprises. After a slow start during the past year because of the disruption caused by the civil conflict, implementation constraints, and uneven political commitment, implementation of the strategy improved during the first half of 1998. As a result of Government's renewed commitment to the reform process, inputs from technical assistance and preparation of the first Structural Adjustment Credit (FY99), nearly two-thirds of small-scale enterprises have been privatized. Furthermore, Government plans to complete the privatization of all small-scale enterprises, the state-owned trucking fleet, the unfinished construction sites, and the ginneries by early 1999. It also plans to privatize all medium-and large-scale enterprises by 2000. Only a limited number of strategic enterprises (utilities and other natural monopolies) will be kept in the public sector. 22. Central to the Government's strategy for supporting the private sector is the reform of the financial sector. As part of SAC I, the Government has begun establishing a regulatory and legal framework by introducing international accounting and payment systems, and improving supervision of commercial banks. While the long-term objective of this initiative is to create a commercially viable financial sector, in the near-term, the focus is on ensuring that the use of directed credit is eliminated and that the banks begin structural reform including rationalizing their portfolios. 23. Only modest progress has been made on farm restructuring and creation of an enabling environment for private agricultural enterprises. As part of an earlier phase of the reform program, the legal framework for farm restructuring was created by the passage of a land code in late 1996. While generally adequate, the version passed by parliament did not make provisionfor the transferability of land use rights to third parties. Moreover, the implementation of the farm restructuring program has been hindered by the civil conflict, uneven political commitment and resistance to the program by vested interests. Presently, only five percent of the country's irrigated land is being cultivated by private farmers. Although most of the collective and state farms have been converted to joint stock companies, they continue to be operated in the old collective farm mode. For example, farmers are given short-term leases and continue to be oriented toward achieving output targets and generating rents for a small political elite. There is some evidence that the process of allocating leases has not been implemented fairly with the result that the land access rights of some groups have been compromised causing increased poverty. More generally, the division of the large state-owned farms and allocation of land access rights is the most potent issue for poverty alleviation in the future. In order to reorient and accelerate the farm restructuring process, the Government plans to reconstitute the state committee managing the farrn restructuring process under the direction of the Prime Minister. In addition, the Govemment is in the process of preparing specific targets for the privatization of individual farms and reorienting its technical assistance programs in this area.  Tajikistan Country Assistance Strategy Page 9 24. While agricultural pricing and some marketing policies have been liberalized, the marketing institutions in the sector as a whole, but especially in the cotton sub-sector, are weak. Inputs are in short supply and often only available on unfavorable terms. It is often the case that leaseholders receive only partial payment for their crops with the result that many private farmers prefer not to grow cotton. The Government has initiated liberalization of the state cotton marketing enterprise by eliminating its marketing monopoly and is preparing a detailed plan for its liquidation. Further, the Government is in the process of privatizing the cotton ginneries and is taking steps to encourage new entrants by encouraging foreign investors to provide crop financing. C. Restoring Basic Services 25. Several years of civil conflict and a shrinking revenue base have severally eroded essential infrastructure and social services. Furthermore, public sector expenditures have been falling rapidly in real terms. Most schools are unable to provide books and materials, perform routine maintenance, and virtually all school buildings are unheated. Additionally, teachers' salaries are low and are not paid on a regular basis, thus providing little incentive to teachers. Reflecting this environment, there has been a sharp deterioration in school attendance, enrollment and in the quality of services. 26. Similarly, the health services are deteriorating because of budget cuts and shortages of supplies despite humanitarian and relief support. Estimates suggest that both infant mortality and maternal mortality rates are increasing. In addition, structural design weaknesses have created a health system bias towards curative rather than preventive care. As in other sectors, the erosion of salaries and payment delays have compromised the incentive structure and hurt the quality of services. Other critical services have also deteriorated. In early 1997, spring flooding overwhelmed Dushanbe's water supply system and contributed to a serious outbreak of typhoid in the country. The road network in many parts of the country cannot be maintained because of budget cuts and equipment shortages. 27. The Govemment is well aware of the deterioration of critical services and of the need to develop service systems that are sustainable in the new economic environment. The Govemment is also aware of the importance that the public places on these issues. For example, survey data indicate that improved education is the second highest priority of the population-exceeded only by the concern over security. The Government is prepared to move quickly to change the existing system by restructuring the delivery mechanisms for all major public services. It is currently working on strategy documents that will outline the new approaches. Some experimentation is already taking place via cooperation with donors and NGOs. IV. BANK GROUP COUNTRY ASSISTANCE STRATEGY A. Progress Under the Previous CAS 28. The Board discussed the first CAS for Tajikistan in May 1996 at a time when the Government was implementing the early stages of its reform program and the conflict was still active. Bank support for that program was judged to be necessary for its success, although such support was acknowledged as risky in light of the prevailing political instability. In addition, our understanding of critical issues in Tajikistan was quite limited. Consequently, it was agreed that the first CAS would be an abbreviated one and only cover a period of 12-15 months-through the preparation of the first adjustment operation-and that a more complete CAS would then be prepared. The delay in preparing the present CAS is the result of the intensification of the conflict in late 1996 and the first half of 1997. During the Board's discussion of the previous  Page 10 Tajikistan County Assistance Strategy CAS, the Bank was urged to be more proactive because of the urgent needs of the country. We have responded to these concerns in a manner consistent with the Bank's post-conflict framework and have, along with the IMF, played a major leadership role by providing policy advice, increasing our field presence, financing post-conflict needs through rehabilitation and reconstruction operations, and by mobilizing resources from other donors, in part, via the recent Consultative Group Meeting (May 1998). 29. Over the past 26 months, the policy performance in Tajikistan has been mixed-largely because of the conflict and because of weak institutional capacity. For instance, much of the policy reform agenda contained in the 1996 rehabilitation credit-Agricultural Restructuring and Social Protection Credit (approved by the Board in September 1996)-was eroded or even reversed because of the renewed conflict in 1997. While the post-conflict environment that has prevailed since the peace agreement was signed is an improvement, it has been punctuated with political disruptions and uneven implementation due to institutional constraints. The Bank has been able to counteract, at least partially, these difficult circumstances by emphasizing institution strengthening in our operations, supporting extensive policy dialogue, and relying on partnerships with NGOs. This experience combined with an improving political situation means that it is now possible for the Bank to move gradually to a more normal operational basis in Tajikistan. 30. Lessons of Experience. The general lessons that have emerged from implementation experience fall into three categories: (i) creating institutional capacity is the highest priority and allowances must be made for the time it takes to build up this capacity to manage operations well and efficiently; (ii) using local staff to assist with the process of project implementation and supervision is an important means of training and building capacity; and (iii) mitigating the real dangers of corruption at the project level is best achieved by training and continuous supervision. More generally, we know that post-conflict environments contain risks of uneven performance and setbacks. The experience of Tajikistan confirms this and suggests that frequent and regular supervision is necessary as is a very strong resident field presence that is able to interact effectively with local officials. 31. There are four projects in Tajikistan that are currently being implemented with total commitments of $37 million.. Implementation of all projects in the portfolio is satisfactory. Gross disbursements as of May 30, 1998 total about $64 million. Disbursements for investment projects to date are $2.4 million which is about 21% of the undisbursed stock at the beginning of the year. One project, the Agricultural Recovery and Social Protection project has been closed and assigned an unsatisfactory rating because of policy reversals which were subsequently corrected. B. Strategic Focus and Approach of the FY99-01 CAS 32. Given the extent of poverty in Tajikistan, the Bank's strategic focus is obvious, but the actual task of sustainable poverty reduction is daunting and is complicated by the post conflict environment. The challenge for the Bank Group is to design an assistance strategy that supports sustainable, employment-intensive growth, thereby promoting opportunities for a majority of the poor (para 4). At the same time, the Bank strategy must address specific post-conflict needs, e.g., reestablishing the framework of govemance, repairing important infrastructure, targeting assistance to the war affected, and revitalizing the economy. In response to this situation, the CAS concentrates on four main areas: (i) reducing inefficiency by transferring publicly owned enterprises to the private sector; (ii) restructuring farms under private ownership and investing in rural infrastructure as a means of creating rural growth and livelihoods; (iii) improving coverage,  Tajikistan Country Assistance Strategy Page 11 access and quality of social services; and targeting assistance to the poorest groups; and (iv) enhancing institutional capacity. (See Box 2 for a summary of the priorities voiced by members of civil society.) Because most of the poor are in rural areas, a primary theme of the strategy is transferring agricultural assets from public to private hands, enhancing incentives, and investing in rural infrastructure. This will be complemented by investments in health, education, and social funds. 33. Privatization. The Bank intends to support privatization with its Structural Adjustment Credit (FY99) which would also launch financial sector reform. This credit will support the privatization of all 4,600 small-scale enterprises via auction and at least 15 percent of large enterprises-a pace that is geared to institutional and absorptive capacity. Also included in this operation will be agreement on a privatization plan for the aluminum smelter. Financial sector reform will, in the near term, prevent further deterioration of the banks and eliminate the use of directed credits by implementing operational and financial restructuring of the major banks. In the longer term, reform will establish commercially viable intermediaries capable of mobilizing and allocating domestic savings for use by investors interested in expanding, modernizing and restructuring the newly acquired enterprises as well as finance new entrants. 34. Restructuring Agricultural Enterprises. In response to the need by the majority of the poor for employment intensive growth, the CAS for Tajikistan would support vigorous implementation of farm restructuring and improved agricultural support services. Two agriculture investment projects-Farm Privatization and Agricultural Support Services project (FY99) and Post-Privatization Agricultural Support Credit (FY01)-during the CAS period would support implementation of a more systematic farm restructuring program and improve agricultural services. The first operation would strengthen the land registration system, develop mechanisms for allowing transfers of land access rights, assist with the division of farms for distribution among beneficiaries, allocation of land use rights to individual households, and provide technical assistance to newly created private farms. The second operation would Box 2: Civil Society's Views on Tajikistan's Political, Social, and Economic Priorities The World Bank Field Office in Dushanbe conducted five workshops in Tajikistan between January 23, and February 3, 1998, to solicit the views of civil society on the main development priorities over the next three years. About 150 participants attended the workshops, representing various segments of the society as well as development partners (govemment 36 percent, scientific bodies 23 percent, international community 17 percent, and others-businesses, NGOs, journalists, etc. 24 percent). At the end of each workshop, participants completed a questionnaire on priority areas, obstacles to economic transition, growth potential, and the role of the donor community and of the World Bank in particular. The main messages expressed by participants were: * The economic outlook for Tajikistan is good and the main sources of growth are rural development, hydropower and mining. Labor-intensive industries were cited by participants as especially critical for employment creation and growth. * The major concems of civil society over the short- to medium-term are: peace, security, and rule of law; macroeconomic stability; rural development and land reform; and privatization and banking sector reform. Although poverty alleviation was not high on the short-term development agenda, several related actions were identified as important, i.e., preventive health care, basic education and social safety net. * The three major obstacles to a successful transition to a market economy were lack of security and rule of law, resource availability and weak government commitment to reform. * The perceived role for donor community is to provide institutional building; lending and analytical work. The role of the World Bank is perceived differently: lending, institutional building, and resource mobilization.  Page 12 Tajikistan County Assistance Strategy concentrate on extending the farm restructuring program to the remaining large-scale state owned/managed farms, developing an agricultural credit system, rehabilitating on-farm infrastructure, and improving extension and research services. These operations would also be the main vehicle for dialogue on the outstanding policy issues in the sector. As part of the first investment agricultural sector operation, the Government would prepare a letter of sector development policy that will specify the next steps, including a timetable for legitimizing the land-lease rights provided to existing privatized farm units; design and implementation of a transparent "bottom up" approach for equitable land and asset allocation; establishment of a secure land registration and titling services and supporting mechanisms; and strengthen those institutions responsible for land privatization and farm restructuring. 35. Enhancing Critical Social Services. In order to respond to the need for better social services, the Bank's strategy in these sectors comprises four elements: protection of the minimum necessary budget for priority services (in coordination with the IMF), investments in key activities, support for policy change and institution building efforts. * First, under the Agricultural Reform and Social Protection Credit, the Government agreed that the health and education sectors' share of the total government budget would not fall below an agreed minimum proportion. The SAC I agreement will extend this principle further to an agreement on the size and detailed composition of the 1999 budget for the social sectors. The SAC I will also include the elimination of salary arrears, the bulk of which are presently owed to health and education workers. * Second, there would be IDA-supported investments in the education and health sectors, initially through learning and innovation projects. The health project would focus on the rehabilitation and strengthening of primary care, while the focus of the education project would be at the primary level. In both cases, there would be an emphasis on experimentation and working with local communities, and the ongoing experience of the TASIF (see below) will be taken carefully into account. In its social sector project work, the Bank would continue to work closely with the other agencies that are already active in the country. For example, in the health sector, this includes particularly UNICEF, the German GTZ and USAID (especially with the Center for Disease Control which has analyzed the links between poor water quality and disease). The Bank will also work with NGOs, such as Relief International and Save The Children (US), which have carried out small health projects. In the education sector, a similar approach could be adopted, though extemal support to that sector is more limited: UNICEF so far is the principal actor, though the Aga Khan Foundation and the Save The Children (UK) have important and innovative projects too. The initial IDA activities in the health and education sectors are intended to lay the foundation for a major investment operation in the last year of this CAS period (FY01). In total, over 25 percent of Bank lending to Tajikistan during FY99-FYOI will be directly to the social sectors. * Third, there will also be support for policy change relating to some of the key structural issues facing each of the sectors, such as financing, decentralization and personnel management reform. This will build upon what is already being done by the Government, for example through an increased emphasis on cost sharing by patients (in the health sector) and by parents/students (in education). But the approach will necessarily be selective and limited. * Fourth, there will be an emphasis on building up institutional capacity, partly through the IDA-supported education and health projects, but also through coordination with the EDI program (such as was done with the design of the PPAP) and in conjunction with other relevant donor and NGO partners. In the design and evaluation of projects, local consultants would also be used wherever feasible.  Tajikistan Country Assistance Strategy Page 13 Box 3: Direct Intervention in Aid of Poverty Reduction Community-level investments. The thrust of the Bank's assistance strategy is on the many aspects of poverty reduction. For example, an important part of the strategy is to support a farm restructuring program with the provision of improved agricultural services and credit to small farmers. Another part is to ensure that basic social sectors are a recognized priority in the Government's budget and to design and implement operations in the oasic social sectors. These activities are in the planning stage. There is one ongoing Bank supported operation that directly targets some of the poorest groups. This is the Pilot Poverty Alleviation Project (PPAP), which supports demand-driven microprojects and the programs of three international NGOs. Under the PPAP, the Tajikistan Social Investment Fund is designing and implementing microprojects, with an emphasis on community participation. These microprojects are small and will have only a modest impact on the intrinsic structural problems facing the poor. Under the TASIF investment plan, US$4.35 million will be disbursed over 2-3 years for 130-135 microprojects. During the first year of project effectiveness, the TASIF met its goal of completing 10 microprojects. The TASIF aims to complete an additional 55 microprojects in 1998 and 65-70 microprojects in 1999. Through both the microprojects and also the programs of the three international NGOs, the aim is for the PPAP to benefit 250,000 people (5 percent of the total population). The PPAP should be fully implemented by FY00, at which time there would be a follow-up project-Poverty Alleviation Credit II (FY00). Enhancing the knowledge base. The Poverty Note (FY98) brings together the existing information about living standards, much of which was obtained from social assessments as part of the PPAP. The insights into poverty provided by earlier social assessments will be enhanced by completion of the first fully representative household survey of living standards scheduled for mid-FY98. In addition, the preparation of the education and health leaming and innovation operations will be critical in expanding our understanding of the situation at the community level. 36. Assisting the Most Vulnerable. While economic recovery and resumption of growth will help the majority of the poor, supplemental and targeted interventions for the "extremely poor" and "destitute" also need attention. This will be done in two ways. First, the Government will continue to implement employment intensive work programs in the context of Pilot Poverty Alleviation Project and the planned follow-up Poverty Alleviation Project (FY00). These programs will have a strong regional focus that includes the reconstruction of minor social and economic infrastructure, Second, there will be a review of the targeting of cash assistance to the poorest groups. As part of the reforms of the social safety net, the Government has already replaced the universal bread subsidy and child allowances with a system more targeted at the most vulnerable groups of the society. The beneficiaries, most of them children aged 8 and under, were estimated at 1.3 million and the total cost at about 2.5 percent of GDP. Under the SAC I, the Government is committed to the design of a better targeted social safety net system and a more comprehensive poverty alleviation strategy. These activities will use data from the ongoing work of the TASIF and also from the national household survey of poverty and living standards to facilitate the design of the additional reforms. The Government will also put the Pension Fund on a more fiscally sustainable base and increase the minimum pension levels and the reliability of payments. 37. Strengthening Institutions. The constraint posed by weak institutions would be addressed at the sector level through individual operations, including the learning and initiative operations in health and education (FY99); the Poverty Alleviation Project (FY00); and the Farn Privatization and Agricultural Support Services project (FY99) would also be used to enhance capacity. These operations would feature significant training components and would be designed to enhance the capacity of public agencies. The priority for technical assistance to the Government lies in implementation of structural reforms, strengthening economic management capacity as well as the regulatory and legal framework for private sector. For the  Page 14 Tajikistan County Assistance Strategy NGOs, the delivery of social services and targeted poverty alleviation should be the critical areas of intervention. The private sector, of course, will promote business management, transfer of technology and banking sector, telecommunications, industry, mining, agriculture marketing and support services. The more general issue of civil service reform and capacity building (including legal reform) would be addressed through a second IBTA credit and via the second adjustment operation (FYO1). The second IBTA operation (IBTA II) would continue the work of the first such operation in the areas of privatization and financial sector reform. The second IBTA would also be the primary vehicle for preparing for civil service reform. In addition, the stage for this latter operation would be set with the preparation of a note on civil service reform with an emphasis on reducing corruption and strengthening institutions. This will be combined with an IDF grant application to support a central unit that will be the counterpart for IBTA II and that will coordinate the reform process. In addition, EDI has made Tajikistan a country of emphasis and provide additional courses/seminars in several areas including public administration and basic economics (para 41). C. Country Program Elements 38. Selectivity. In the formulation of the-present strategy as well as in our consultation with the Government and civil society (Boxes 2 and 4), the need for selectivity and sequencing have been dominant themes. Given the small number of other donors and partners, there is a strong temptation for the Bank to get involved across the whole spectrum of the development agenda. In view of the limited IDA allocation and administrative budget, as well as the weak implementation capacity of the Government, we must be very selective in choosing our interventions. Lending will be limited to only 11 operations over three years and will concentrate on activities that offer the maximum impact on increasing incomes of the poor and improving their access to basic social services. In order not to overstretch Government's limited capacity, they are sequenced such that each operation builds on the capacity created under previous operations. Hence, for example, the Box 4: Civil Society's Reaction to the CAS Following discussions with senior Government officials on the CAS, the Bank's Field Office in Dushanbe conducted four workshops for members of civil society on the themes in the CAS. While there was general appreciation of World Bank efforts and the principles contained in the CAS, three points were raised by the participants in the workshops. First, members of civil society viewed it as paradoxical that there are qualified Tajiks working at the universities, institutes and academies of sciences who are on the verge of starvation and hence migrating to other CIS countries while, at the samne time there is a demand for skilled professionals to implement various development activities. Participants asked what can the Bank do to match the available skills of Tajik nationals with the specific assignments that can make use of these skills? Second, participants stressed that Tajikistan's transition to a market economy cannot succeed unless the existing skill professionals are reoriented and retrained to adapt to the new demands of the market economy. Can the Bank invest in areas of higher education (e.g. business and financial management, legal education) in order to facilitate this reorientation? Third, participants observed that most of the Bank's dialogue is conducted with the central ministries in Dushanbe. The lives of the common man, however, are most affected by the decisions taken at the oblast and rayon levels. They asked why the Bank involve these decentralized levels of the Government in designing and implementing its programs? The CAS provides opportunities to respond to these points. The Bank plans to work with EDI to establish a database of local experts that can be used in conjunction with visiting missions and project implementation. The issue of retraining local professionals will be examined as part of the preparation of the education "learning and innovation" operation. Finally, contact with local authorities has been limited in the past in large part because of restrictions on travel in rural areas. As these restrictions are eliminated and as the Bank expands its investment operations in health, education, and agriculture there will be more contact with officials at the oblast and rayon levels of government.  Tajikistan Country Assistance Strategy Page 15 Table 4: Assistance Scenarios and Triggers Core Case Base Case Macroeconomic/Fiscal Triggers Unsatisfactory performance, as evidenced, by a suspended IMF Satisfactory macroeconomic performance as evidenced, for arrangemert due. for example, to a deficit greater than 5 percent example, by satisfactory implementation of an IMF program, no of GDP, and/or resumption of administrative allocation of new wage or compensation arrears; and continued satisfactory foreign exchange. foreign exchange auctions. Sector/Structural Triggers Unsatisfactory implementation of the SAC I including second Satisfactory implementation of prior actions agreed under the tranche conditions for privatization of small and large-scale SAC 1, including: (i) full privatization of small-scale enterprises, enterprises. commercial truck fleet, unfinished construction, and privatization of cotton ginneries; (ii) privatization of 125 medium- and large scale enterprises; and (iii) improvement in provision and quality of social services. In addition, acceleration of the farm restructuring program in a fair and transparent manner will be required as part of investment operations in the agricultural sector. Portfolio Impletnentatio. Triggers More than a quarter of projects (by number) with unsatisfactory Less than a quarter of projects (by number) with unsatisfactory Implementation Progress (IP) or Development Objectives (DO) IP or DO ratings and disbursement ratio of 15% or higher in ratings and disbursement ratio of less than 15 percent in FY99, FY99, and thereafter. and thereafter. Lerading Program ind Non-lending Services (9LS) Lending: Learning and Innovation operations in education Lending: Core Case plus an adjustment operation (FY01), Farm (FY99) and health (FY99), Poverty Alleviation Credit II (FY00) Privatization and Agricultural Support Services (FY99); Rural and a Social Sector Rehabilitation operation for a total of $55 Infrastructure Rehabilitation (FY00); Post-Privatization million for FY99-01. Agricultural Support Credit (FY01); Dushanbe Water Supply (FYOO) and Social Sector Rehabilitation Credit (FY01) for a total of S165 million for FY99-01. NLS: Poverty Assessment, PER, NEAP, and CEM. No CG NLS: PER, Poverty Assessment, Civil Service Reforn Note, meeting. CEM, Social Sector Review Note, NEAP, and Agriculture. Sector Note. CG meeting in late FY00. public sector reform agenda will only be initiated mid-way through the CAS period via the second adjustment operation (FYO1). 39. Lending Scenarios. The two lending scenarios envisioned under this strategy (Table 4) describe a Core Case of $50 million (about $3 per capita p.a.) and a Base Case with IDA resources of $165 million (tahout $9 per capita p.a.).6 The level of IDA resources in the Base Case for FY99-01 is premised on a strong policy performance during the CAS period. Major improvements in policy performance (including, for instance, aggressive action on farm restructuring) could, however, justify making additional IDA resources available. The Core Case would apply if the security situation or macroeconomic management deteriorates and would support lending only to social sector operations. 40. International Finance Corporation. The IFC has a particularly important role to play in the area of increased private sector activity by facilitating and participating in additional joint investment ventures that would have the potential for generating employment, income and 6 The lending program for this CAS period (FY99-01) totals $165 million in IDA resources. Excluded from this total is $50 million under SAC I (which accompanies this CAS) which was originally scheduled for Board consideration in June 1998, but was postponed for administrative reasons to July 1998.  Page 16 Tajikistan County Assistance Strategy exports. So far IFC's involvement in Tajikistan have been limited to the mining sector, where conditions exist for a quick impact on recovery and growth. With political stability and continued progress in reforms, IFC's future activities are expected to focus on: (i) improving the investment climate by conducting a study of the impediments and roadblocks to foreign investment; (ii) institution-building in the financial sector by establishing an international commercial bank and a leasing company; and (iii) assistance in the development and financing of mining projects, technical assistance and financial support in hydroelectric power and other infrastructure projects, as well as agriculture, case-by-case privatization and SMEs development through cooperation with IBRD initiatives. 41. Economic Development Institute. EDI has identified Tajikistan as one of its focus countries for FY99. The emphasis of EDI's activities will be a series of courses and seminars designed to enhance and extend Government's knowledge of effective macroeconomic policy as well as strengthening and restructuring key institutions. These courses would include: (i) an 8 to 10 week special offering of the joint-Vienna introductory course for 40 to 50 Government officials-covering basic aspects of macroeconomic and microeconomic policy formnulation, trade policy, private sector and financial sector development, and social sector reform; (ii) "training of trainers" in macroeconomic management, trade and investment policies, economic growth and economic statistics; (iii) short training programs for senior-level central and local government officials on macroeconomic policy issues; and (iv) broad-based training/capacity building assistance to help formulate the post-conflict reform agenda in consultation with civil society. Additionally, EDI will focus on promoting environmentally sustainable agriculture development using a combination of "training the trainers" and seminars for senior policy makers. Though already active in Tajikistan, the social policy reform in transitional economies program (SPRITE) will be strengthened to underpin the lending program in health, education, poverty alleviation and social sectors. Tajikistan will also be invited to participate in an ECA regional meeting in social investment funds and pension conferences. These activities, combined with the Bank's non-lending instruments, will complement the learning achieved through current investment operations. 42. Donor Coordination. Tajikistan is a country with few influential friends among the bilateral donor countries. In contrast to other poor countries with comparable income and poverty levels, the flow of bilateral assistance other than humanitarian aid, has been almost non-existent. The Bank and the Fund have been the two major sources of external assistance to Tajikistan. The Bank has been the leading donor with an IDA lending program of US$127 million over the FY96-98 period. Given our effective response to the Government's request for assistance with post-conflict needs combined with earlier programs, the Bank has gained the Government's confidence as a reliable partner and an objective advisor. The Bank is, therefore, able to influence policies and national dialogue to a greater extent than in many other countries. The Bank organized the Consultative Group for Tajikistan in May 1998 to discuss the Government's progress in implementing its economic reform program, as well as the peace agreement, its capacity building program, and to mobilize aid in support of the Government's reform program. As anticipated, the overwhelming majority of pledges were from the IMF and the Bank. Still, many donors agreed that increased bilateral support is necessary if Tajikistan is to escape the morass of political violence. The recent decision by the ADB to admit Tajikistan augurs well. UNMOT (UN Military Observers in Tajikistan) and UNHCR have been instrumental in assisting the Government with the implementation of the peace agreement. UNDP and Japan remain a major source of technical assistance. The European Commission, though a potential source of grant assistance for Tajikistan, remains hesitant to support the Government's program due mainly to their less optimistic outlook for peace and the security situation, primarily influenced by the  Tajikistan Country Assistance Strategy Page 17 murder of a European aid worker during a hostage crisis in late 1997. On balance, the prospects for increased burden sharing seem quite limited in the near term. Although the balance of payments gap is covered through the end of 1999, this could change quickly given the vulnerability of the economy to external shocks and undermine the sustainability of the Bank's strategy. Further, the urgent investment needs of a country at this stage of the post-conflict framework need to be addressed by a coalition of donors that offers both more and a wider range of resources than currently available. D. Country Risk Management 43. The strategy outlined herein features high risks and potentially high rewards. In particular, there are three major risks facing this program: (i) a fragile security situation; (ii) weak institutional capacity; and (iii) maintaining political commitment. 44. Undoubtedly, the biggest single risk associated with this program is that of renewed civil conflict. Progress on the implementation of the peace agreement has been uneven. During the recent Consultative Group Meeting, the importance of accelerating the peace process was stressed by donors and acknowledged by Government and the UTO. Additionally, numerous interests remain outside the political framework created by the agreement. Both the Government and the UTO have pledged their renewed commitment to the peace process, but the situation remains fragile and could go off-track. Even though the security situation is better today than a year ago, we must acknowledge the potential for temporary disappointments and possibly even longer term set-backs. 45. The second major risk is weak institutional capacity. We will seek to mitigate this risk through inclusion of highly focused technical assistance component in all our investment operations to build the capacity of the implementing agencies. The public sector reform program, as designed and implemented through IBTA II and SAC 11, is also expected to create the necessary institutions for the proper functioning of a market-based economy. But we must recognize that the Bank and our partners are together in Tajikistan for a long haul. The investments outlined in this CAS should therefore be seen as building blocks in a long chain of interventions. We have learned from the experience of countries in similar situations that our expectations for a large and immediate development impact on completion of a single project cycle may be unrealistic. 46. Over the past year, the Government has demonstrated its commitment to reform by correcting the earlier backsliding and moving forward with the measures recommended by the IMF and the Bank. Nonetheless, there is still the potential for political commitment to weaken, especially as some of the more ambitious reforms make progress and threaten existing vested interests. We plan to ameliorate this risk by linking performance to assistance in all our operations. 47. Nonetheless, it is not possible to eliminate all uncertainties and significant residual risks exist. Further, it must be stressed that in Tajikistan the Bank is operating in a post conflict environment, a factor that adds yet another source of risks many of which are beyond the direct control of the Government. V. CONCLUDING REMARKS 48. A sampling of recent events in Tajikistan confirms the number and magnitude of the country's problem, but also the commitment within the country to solve the problems. Included among events that have occurred since the Board's discussion of the first CAS are: (i) a brief intensification of the civil conflict; (ii) frequent incidents of violence attributable to political  Page 18 Tajikistan County Assistance Strategy factions that remain outside the political framework created by the peace agreement; (iii) serious flooding in 1997 and 1998 that resulted in several million dollars in damage; (iv) signing of a Peace Agreement in June 1997 between the Government and the United Tajik Opposition; (v) creation of ad hoc crisis management groups with both Government and UTO members to deal with incidents caused by armed groups that remain outside the political framework created by the Peace Agreement; and (vi) renewed commitment on the part of Government-including its UTO partners-to implementing an economic reform program. From this list of both encouraging and disappointing events, there is-we believe-a trend toward improvement that merits our expanded support. Indeed, as was noted at the recent Consultative Group Meeting, without our support the trend cannot remain positive. James D. Wolfensohn by: Caio K. Koch-Weser June 25, 1998 Washington D.C.  Annex Al page I of 2 Tajikistan at a glance 819197 Europe & POVERTY and SOCIAL Central Low- - Tajikistan Asia income Development dlamond Population mid-1996 (millions) 6.0 479 3,229 GNP per capita 1996 (USS) 330 2.180 500 Life expectancy GNP 1996 (billions US$) 2.0 1,043 1,601 Average annual growth, 1990-96 Populabon (%) 1.9 0.3 1.7 GNP Gross Labor force (%) 2.5 0.5 1.7 per primary Most recent estimate (latest year available since 1989) capita enrollment Poverty: headcount index (% of population) Urban population (% of total population) 32 65 29 Life expectancy at birth (years) 67 68 63 Infant mortality (per 1, 000 lWe births) 42 26 69 Access to safe water Child malnutrition (% of children under 5) Access to safe water (% of population) . .. 53 Illiteracy (% of population age 15+) 2 .. 34 .. Gross primary enrollment (% of school-age population) 89 97 105 Tay,kistan Male 91 97 112 Low-income group Female 88 97 98 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1975 1985 1995 1996 Economic ratios' GOP (billions UISS) ., .. 1.8 2.0 Gross domestic investmentVGDP .. .. 17.4 17.3 Openness of economy Exports of goods and services/GDP .. .. 36.5 24.0 Gross domestic savings/GDP .. .. 10.4 3.3 Gross national savings/GDP .. .. 10.2 2.1 Current account balance/GDP .. .. 0.1 -5.6 Interest payments/GDP .. .. 0.0 0.0 Savings - - Investment Total debtGDP .. .. 36.4 48.0 Total debt service/exports .. .. 0.0 0.0 Present value of debVGDP .. .. 34.3 Present value of debtlexports .. .. 95.4 .. Indebtedness 197546 1986-96 1996 1996 1997-06 (average a,rnual gowth) Tajikistan GDP .. -10.6 -12.5 -5.0 GNP per capita .. -13.3 -13.8 -6.8 --Low-income group Exports of goods and services . .. 40.2 -30.0 STRUCTURE of the ECONOMY 1975 1985 1996 1996 Growth rates of output and investment(%) (% of GDP) Agriculture .. .. 25.2 26.6