Tajikistan - Agricultural Recovery and Social Protection

Report No. PIC3049 Project Name Tajikistan-Agricultural Recovery and Social (@&) Protection (ARSP) Credit Region Europe and Central Asia Sector Agriculture/Social Sector Project ID TJPA8863 Borrower Tajikistan Implementing Agency Office of the Prime Minister Date this PID Prepared June 24, 1996 (Updated) Date Initial PID Prepared August 3, 1995 Appraisal Date May , 1996 Projected Board Date September 3, 1996 COUNTRY BACKGROUND The Economic Setting. Tajikistan's economy has been adversely affected in recent years by three major shocks: the break-up of the FSU which triggered the collapse of inter-republic trade arrangements, and brought to an end the generous budget transfers that had long enabled Tajikistan to consume far more than it produced; the civil war which cost the loss of many lives and disrupted the economic activity in the country; and the severe flooding which caused major damage to infrastructure and productive assets. Even before these shocks, Tajikistan was the poorest republic of the FSU. Per capita income is estimated at about US$370 for 1995. As a result of these events, key economic indicators point to an economy in deep crisis. Production fell by close to 60 percent between 1991 and 1995, with agriculture and industry affected the most. Most industrial firms are currently operating below one-third of their capacity. The financial sector has deteriorated rapidly, largely because of the poor performance of state-owned enterprises. The state budget deficit and the current account deficit have been unsustainably large and inflation has been rampant. At present, the country's external debt obligations amounted to about US$860 million, owed largely to the Russian Federation, Uzbekistan, Kazakstan and the EU. The Government's Economic Reform Program. Tajikistan initiated economic reform shortly after independence in late 1991, but the program was quickly put on hold because of political turmoil and the accompanying civil war. Now that the political and security situations are more stable, the government has resumed the reform effort so as to overcome the serious economic, financial, and structural problems facing the country. The Government has clearly signaled its intention to resume the reform process. Several of the policy measures included in the first decree issued by the President after the November 1995 election have already been implemented. The most notable of these has been the launching of the national currency (Tajik ruble), paving the way for an  independent monetary policy. The Political and Security Situations. The political and security conditions, though remaining complex and fragile, have showed continued improvement over the past year. The last round of peace talks was held in Aaty in May 1995 and resulted in a cease fire agreement. This agreement has been extended and will remain in effect until August 1996. The meetings of the President with the opposition leader which took place in Kabul on May 17-18, 1995 and in Tehran on July 20, 1995 were other indicators of the seriousness of government in finding a lasting solution to the current crisis. Excluding the conflict on the border with Afghanistan, the rest of the country continues to enjoy peace and security. PROJECT OBJECTIVES The main objective of the Credit is to reduce poverty in Tajikistan through the support of policy and structural reforms. The focus is on support to the Government in the design and implementation of reform in the areas of agricultural policy, farm restructuring, and the social safety net. In addition, the Credit will help the stabilization program, ease import constraints and help arrest the downward spiral of incomes, consumption and investment. PROJECT DESCRIPTION The proposed Credit supports policies that: (a) liberalize domestic and external trade; (b) promote the development of the rural economy, with particular focus on farm restructuring and the efficiency of the cotton sector; and (c) provide social protection to the poor. The most important instruments for enhancing social protection are bread allowances and the provision of basic health care and education. The Credit is not tranched. The Borrower will undertake not to use the proceeds for items covered in the negative list and to have the account audited upon the Bank's request. PROJECT FINANCING The proposed Credit would amount to about SDR35 million. Through the Consultative Group process, IDA would assist Tajikistan in mobilizing additional financing needed to successfully implement the reform program. The foreign exchange financing requirements of Tajikistan are bound to be quite large, given the expected large current account deficit (owing to high level of imports required by an economy in need of rehabilitation and to initially low level of exports), the high level of debt service, and the need to reconstitute reserves at an adequate level. Given the large size of the financing requirements, debt reduction/rescheduling must take place. PROJECT IMPLEMENTATION The borrower will be the Republic of Tajikistan as represented by the Ministry of Finance. The proposed Credit will be implemented by a Project Implementation Unit (PIU) which has been created in the Prime Minister's Office. The PIU will be responsible for coordination with - 2-  various Government agencies in implementing the reform program and for providing the World Bank with the necessary information on the progress on credit implementation relating to policy actions and utilization of credit proceeds. PROJECT BENEFITS AND RISKS The proposed rehabilitation credit contains some risks, but it is an operation with considerable benefits and one that is essential if the economy is to recover. Macroeconomic stabilization and initial structural reforms, especially in agriculture, would help stop the decline in output and employment. Wages and salaries could be paid regularly and their purchasing power would be protected as inflation is brought under control. The Credit will help protect the poor from the adverse impact of adjustment through adequate provisions in the budget for social welfare payments (bread and child allowances) and for basic health care and education. In the long run, resumption of growth and employment would reduce the country's widespread poverty. The main risks associated with the operation relate to the resumption of political and social unrest, the limited capacity of implementation, and the opposition to reforms by some vested interests. While most observers believe that political stability has increased in recent months, the environment is still very fragile. At the root of the political instability are the ethnic tensions that continue to simmer and occasionally boil over into various disturbances. In order for these tensions to subside, Government will need to manage them skillfully and at the same time foster an economic recovery. With respect to implementation capacity, Tajikistan experienced a massive loss of human capital as a result of the civil war. Since February 1992, more than 400,000 technical experts have left the country. As a result, many institutions are operating with less than half the number of staff members that were in place a few years ago and a greatly diminished capacity for planning, analysis, and implementation. Finally, while there is widespread support for the reform process, it is not universal support. For example, many of the managers of enterprises to be restructured or privatized may well resist these processes which could delay the timetables that Government hopes to meet. POVERTY CATEGORY The proposed operation is poverty focused. The Credit includes specific measures to (a) protect the poor from the impact of price liberalization; (b) protect pensioners from the reforming of the Pension Fund; (c) promote job creation programs; and (d) monitor the impact of adjustment on the poor. ENVIRONMENTAL ASPECTS As the Credit is an adjustment operation, no environmental rating has been assigned. The project would be consistent with IDA policies and procedures. PROGRAM OBJECTIVE CATEGORIES -3-  Provision of foreign exchange to be sold on the foreign exchange auction would enhance private sector activity and access to necessary inputs. The sale of foreign exchange will also mobilize non-inflationary budgetary finance as the local counterpart funds will be transferred to the central budget. - 4 -  CONTACT POINT Public Information Center The World Bank 1818 H Street, NW Washington DC 20433 Telephone (202)4585454 Fax (202)522-1500 Task Manager Robert E. Christiansen, Principal Economist, EC3C1 Room No. H3-173 Tel. No. 202/473-5516 Fax No. 202/477-3372 Note: This is information on an evolving project. Certain components may not necessarily be included in the final project. Processed by the Public Information Center week ending June 28, 1996. - 5 -