Tajikistan - Agriculture Recovery and Social Protection Credit Project (ARSP)

Document of The World Bank FOR OFiFICIAL USE ONLY Report No. 18077 IMPLEMENTATION COMPLETION REPORT REPUBLIC OF TAJIKISTAN AGRICULTURE RECOVERY AND SOCIAL PROTECTION CREDIT (ARSP) (Credit No. 2917-TJ) 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 EQUIVALENTS (as of June 25, 1998) Currency Unit = Tajik Rubles TR I = US$0.0013 US$ TR 754 PERIOD AVERAGE EXCHANGE RATES The Tajik Rubel replaced the Russian Rubel on May 10, 1995, at an initial conversion rate of TR Rus R100 Russia Rubles per US $ 1 Tajik Rubles per US $1 1993 932 1995 95 1994 2,192 1996 300 1997 748 (end of period) WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRON'YMS ARSP - Agriculture Recovery and Social Protection CAS - Country Assistance Strategy CNR - Commission for National Reconciliation ESAF - Enhanced Structural Adjustment Facility FSU - Forner Soviet Union GNP - Gross National Product IBTA - Institution Building Technical Assistance IDA - International Development Association IDF - International Development Fund IFC - International Finance Corporation MOF - Ministry of Finance LDP Letter of Development Policy IMF - International Monetary Fund NBT - National Bank of Tajikistan PCRC - Post-Conflict Rehabilitation Credit PCERC - Post-Conflict Emergency Reconstruction Credit PFP - Policy Framework Paper RCPT Republican Corporation of Pakhteh Tajik SPC - State Property Committee PPAP - Pilot Poverty Alleviation Project UNDP - United Nations Development Project UTO - United Tajik Opposition TAJIKISTAN - FISCAL YEAR January I - December 31 Vice President: Johannes Linn, ECAVP Country Director: Ishrat Husain, ECCO I Sector Director: Pradeep Mitra, ECSPE Sector Leader: Robert J. Anderson, ECSPE Task Team Leader: M. R. Ghasimi, ECSPE  FOR OFFICLIL USE ONLY IMPLEMENTATION COMPLETION REPORT REPUBIIC OF TAJIKISTAN AGRICULTURE RECOVERY AND SOCIAL PROTECTION (ARSP) CREDIT NO. 2917-TJ CONTENTS Preface .....................................................i Evaluation Summary ...................................................... ii Part I. Project Implementation Assessment ...................................................... 1 A. Project Objectives and Onigin ...................................................... 1 B. Achievement of Objectives ......................................................2 C. Implementation Record and Major Factors affecting the Project .......... 9 D. Project Sustainability ..................................................... 10 E. Bank Performance ..................................................... 10 F. Borrower Performance ..................................................... 11 G. Assessment of Outcome ..................................................... I 1 H. Future Operations ..................................................... 12 I. Key Lessons Learned ..................................................... 12 Part II. Statistical Tables ..................................................... 13 Annexes: I. Mission's Aide-Memoire II. Borrower's Contribution to the ICR MAP IBRDNo. 25721 This documentation 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.  IMPLEMENTATION COMPLETION REPORT THE REPUBLIC OF TAJIKISTAN AGRICULTURAL RECOVERY AND SOCIAL PROTECTION (ARSP) (Credit No. 2917-TJ) Preface This is the Implementation Completion Report (ICR) for the Agricultural Recovery and Social Protection Credit (ARSP), for which Credit 2917-TJ in the amount of SDR 34.8 million ($50 million equivalent) was approved on September 12, 1996 and made effective on September 16, 1996. This credit was closed on Septembler 30, 1997, in line with the original date in the Credit Agreement. As this was classified as a rehabilitation credit, rather than a structural adjustment credit, disbursements were not tranched. Final disbursement took place on May 6, 1997, at which time the credit was fully disbursed. The ICR was prepared in the Poverty Reduction and Economic Management Sector Unit of the Europe & Central Asia Regional Office. Mr. M. Reza Ghasimi was Task Manager for the ICR, which was drafted by a consultant, Mr. Michael Payson, during a mission to Tajikistan May 18-29, 1998. The report is based upon material in the project file and discussions held with Borrower staff involved in project implementation. The Borrower contributed to the preparation of the ICR by reviewing the draft ICR and by preparing its own evaluation of the project's preparation and implementation. ;I  1MPLEMENTATION COMPLETION REPORT REPUBLIC OF TAJIKISTAN AGRICULTURAL RECOVERY AND SOCIAL PROTECTION (ARSP) (Credit No. 2917-TJ) Evaluation Summary Introduction 1. Tajikistan is the poorest country in the FSU with per capita income in 1997 of US$330. Its economic prospects are shaped by its historic role as a supplier of raw materials: (i) mainly cotton fiber, and aluminum to the Former Soviet Union (FSU); (ii) the limited area of arable land relative to the rural population; (iii) the existence of many isolated and semi-autonomous communities in mountainous terrain; (iv) excess demand for imported inputs, supplies and food; the flight of large numbers of skilled people out of the country; (v) the absence of a strong community of bilateral donors; and (vi) recently a heavy burden of debt. During the early 1990s there was civil war in Tajikistan. In 1994/95 presidential and parliamentary elections were held, and a succession of cease fires was arranged under UN auspices. However, there was no firm peace agreement, and outbreaks of civil violence occurred at end 1996 and into 1997. In June 1997, a Peace Accord was signed between the Government and the United Tajik Opposition (UTO), which provides for the sharing of power between the opposing parties and for implementation within an 18 month time frame. 2. By 1996, the Association had completed two economic reports but had done no lending operations in Tajikistan. The IMF had been active in helping iintroduce a national currency and was providing technical assistance for fiscal and monetary policy and price statistics. TheIMF's first program, a stand-by arrangement, was approved in May 1996, and the Association's first operation, the Institution Building Technical Assistance Credit; (IBTA), was approved the same month. 3. Preparation of the Agricultural Recovery and Social Protection Credit (ARSP) began in mid-1995. The project was appraised a year later in mid-1996, and negotiations took place in August 1996. The Board approved it as a single tranche IDA rehabilitation credit in the amount of SDR 34.8 million (US$50 million equivalent) in September 1996. Thirty million dollars of the credit was disbursed before the end of 1996 and the remainder in four monthly installments during January-April 1997. The project was closed in September 1997. Project Objectives 4. The ARSP was contingent on a strong Government commitment to macroeconomic stabilization and economic reform. Its specific objectives were to: (i) stabilize the economy; (ii) ease the foreign exchange shortage to acquire critical inputs; (iii) reform agricultural policy in areas including pricing and marketing, land reform, trade and privatizing state-owned agricultural enterprises; and (iv) enhance the social safety net and improve its targeting. Specifically, it focused on the alleviation of poverty through support of the CGovernment's first comprehensive program of economic reform, set out in a Letter of Development Policy (LDP) sent to the Association in July 1996. It was a "front-loaded" operation in that virtually all of the policy - ii -  measures and prior actions were completed by Government prior to approval. It was expected that these policies would lead to the achievement of agreed objectives with respect to stabilization, reform of the agricultural sector and cotton subsector, and social protection. Implementation Experience and Results 5. Shortly after approval of the ARSP there was a renewal of civil violence that continued into 1997. From the end of 1996 until mid-1997, the Government was engaged in domestic military operations to retain power and maintain security, while it participated simultaneously in peace talks with the opposition. Personnel of the UN and IMF were evacuated in February. (They returned in May.) This chain of events was imposed on an administration weakened by the loss of trained personnel and hampered by vested interests opposed to reform objectives. Through June 1997, it absorbed the atlention of the authorities and arrested implementation of both the stabilization and structural reform programs. Those months saw a return to restrictive trade policies, rapid monetary expansion, suspension of the foreign exchange auctions, a widening of the fiscal deficit, an acceleration of inflation and a fall in the value of the Tajikistan Ruble from about TR330/USD to about TR600/USD. 6. Following the June Peace Accord, the authorities again turned their attention to economic stabilization and reform. Monetary and trade policies were tightened. The Government ended directed credits, resumed the foreign exchange auctions and again liberalized most trade policies. The budget deficit declined sharply, inflation moderated, and the exchange rate stabilized starting in early September. In October the authorities designed a new program supported by the IMF for late 1997 and the first half of 1998. By the end of 1997, the economy realized its first positive growth since 1991, about 2 percent, and stabilization targets were met. 7. The events of the first half of I 997 took their toll on the effectiveness of the ARSP credit and the program of reforms in agriculture and the social sectors. Structural reforms were also hampered by weak institutions, lack of clarity in action programs, and ambiguity in the implementation of reforms at the local level. Education and health continued to suffer from the inadequate provision of resources. Although it was the intent of the ARSP to allocate local currency proceeds of the operation to the social safety net, beneficiaries of the system went without compensation, as arrears in payments accumulated. Similarly the diversion of foreign exchange to finance security needs frustrated the intent of the ARSP to increase imported inputs and supplies to the productive sectors. Important legislation was passed to facilitate land reform, farm restructuring, and the privatization of the cotton sector, but little progress was achieved on the ground in these areas during 1997. Summary of Findings and Key Lessons Learned 8. Notwithstanding inadequate program implementation and limited results in achieving specific reform targets, this report concludes that the sustainability of economic reform in Tajikistan is likely and that the outcome of the process of economic reform supported by the ARSP is satisfactory. The Peace Accord substantially lessened the political risk to the reform process, in that both Government and the UTO have declared support for reform. The renewal of commitment was manifest in the restoraltion of financial discipline, the confirmation of objectives in agriculture and the social sectors, progress in extending the program to the privatization of enterprises and financial institutions wiithin an appropriate legal and regulatory framework, and - iii -  success in obtaining the technical and financial support of the international community. Other factors contributing to the sustainability of reform are the positive growth of GDP, recent improvement in bilateral relations with Uzbekistan, and the prospective easing of the foreign exchange constraint through debt rescheduling and balance of payments support. Most important of all, evidence suggests that the Tajik populace believes a return to the past is not a viable alternative and has the patience to get through the difficult period of transition. Completion of the protocols of the Peace Agreement, clarification and simplification of the Government's complex approach to land reforms, greater transparency and accountability in farm and enterprise privatization, and expanded public information on the program of reforms would further improve the prospects for sustainability. 9. The macroeconomic outcome at end 1997 was satisfactory as described above. With respect to structural reform, the policy framework developed during the ARSP was sound, remains in place, and continues to shape the reform agenda. Further analytical studies and pilot projects supported by the Association were identified under the ARSP. They are being completed in the areas of land reform and poverty alleviation and will improve the effectiveness of policies in those sectors. In some regions of the country the establishment of family farms has accelerated, and there is good evidence of improved yields and productivity. Government has set a firm timetable for the privatization of cotton gins and its disengagement from cotton marketing channels. Social safety net arrears are being reduced with Association support under the Post- Conflict Rehabilitation Credit. Government has gained experience in the implementation of the reform program and coordinating mechanisms for program implementation. In summary, this judgment allows for the fact that the ARSP was the first policy based operation the Association has undertaken in Tajikistan, that the "front loaded" policy conditions were met prior to approval, that slippage on financial and liberalization policies was rectified by the closing date of the operation, that a constructive dialogue was initiated and has been maintained between the Tajikistan authorities and the Association, and that both Association and Borrower remain committed and have moved forward with the reform program. 10. The lessons learned are guided by the set of circuimstances that pertain to Tajikistan presented in this report. Key lessons from the Agricultural and Social Protection Credit are: a) The institutional and policy environment inherited from the USSR is similar to that of other FSU countries whose reform programs are supported by the Association. A key difference for this credit was the degree of civil unrest that prevailed in the months before and during implementation, a political risk that was acknowledged by Association staff and conveyed to management before Board approval. The risk of political disruption to future Association operations could be lessened by supporting the peace process when it gains momentum. The two Post-Conflict operations approved for Tajikistan since the ARSP move in that direction. b) The design of the ARSP operation was trimmed back during preparation to focus on the central issues of agricultural reform and social protection. Effective implementation of such sectoral reforms requires both sector-intensive supervision during implementation and detailed sector action plans agreed with the Borrower prior to implementation. In the absence of such conditions, future policy-based operations might better focus on general reforms to the economic environment, supplemented by sector or project operations to achieve sector goals. The focus of the first SAC on the private sector and banking reform addresses these issues of the economic environment. - iv -  c) Strong commitment on the part of the Borrower is essential to the success of structural reform operations. The ARSP was effective in developing a policy framework and initiating the reform process but ineffective in ensuring implementation. Tranche conditionality is an instrument to concentrate minds on getting the work done. d) The Association's contribution is in project design and sharing the lessons of experience as much as in providing financial resources. The Association was able to support a closely knit team of national officials which was able to coordinate policy decisions and implementation. Their team had the capacity to see the interrelationships of the components of reform programs and to think in both strategic and operational terms. e) The Field Office was effective in advising the Association of conditions in Tajikistan and in helping restore the Borrower's commitment to the program. To ensure that policy actions are implemented within an agreed time frame, formal supervision is essential. To facilitate HQ supervision, in addition to reporting on the progress of reforms, the Field Office should continue to play an active role in suggesting corrective measures to Government to prevent delays and slippage in meeting program goals. -v -  IMPLEMENTATION COMPLETION REPORT REPUIBLIC OF TAJIKISTAN AGRICULTURAL RECOVERY AND SOCIAL PROTECTION (ARSP) (Credit No. 2917-TJ) Part I. Project Implementation Assessment A. Project Objectives and Origin 1. The objectives of the Agricultural Recovery and Social Protection Project (ARSP), which was contingent on having a macroeconomic stabilization program in place, were to: (i) stabilize the economy; (ii) ease the foreign exchange shortage to acquire critical inputs; (iii) reform agricultural policy in areas including pricing and marketing, land reform, trade, and privatizing state owned agricultural enterprises; End (iv) enhance the social safety net and improve its targeting. Specifically the ARSP supported the program set forth in the Government's Letter of Development Policy (LDP) sent to the Association in July 1996. The Government had put key policy components in place by the date of credit approval, and the operation was approved as a rehabilitation credit with one tranche. 2. Background. Violent internal civil struggle and the occurrence of natural disasters (major flooding and mudslides in 1992 and 1993) marked the early 1990's. By 1994 the fighting subsided in most parts of the country, and in September 1994, a UN-monitored cease fire was arranged. Later that year, a constitution was adopted by referendum and a president elected. Parliamentary elections were held in February 1995. As the political environment began to improve, many refugees who had fled to Afghanistan returned; internally displaced persons regained their localities; and damaged Ihomes were being repaired. Peace talks continued under UN auspices in 1995/96. The negotiations led to successive extensions of cease fire, but a definitive accord had not been reached when the ARSP Credit was approved September 1996. 3 . Strained by the civil war and repeated changes of political leadership, the Government had lacked a coherent policy to deal with the challenges facing the economy after the breakup of the Soviet Union. The beginnings of economic reform were long delayed. (For example, introduction of the Tajik Ruble was postponed until May 1995.) Consequently the economy collapsed faster than in any other FSU country. By end-1995, aggregate output had fallen to about half of its 1991 level -- the largest decline in Central Asia. Output fell first in agriculture, then spread to other sectors. Acute shortages of fertilizers, pesticides and improved seeds contributed to the fall in agricultural output and to growing dependence on food imports. Plagued by shortages of energy, spare parts and raw materials, most industries operated for only a few months a year, and Tajikistan's main exporting industry, the aluminum smelter, was running at about half capacity. 4. Origins and Sequencing. In 1996, the authorities embarked on their first comprehensive effort at economic reform. Prior to that the Association had completed a country economic memorandum on Tajikistan and had begun to identify priorities for structural reform. The IMF had been active in helping the Government to introduce the national currency and was providing technical assistance for fiscal and monetary policy and price statistics. The IMF's first program with the Government of Tajikistan, a fiirst credittranche stand-by arrangement, was approved in May 1996. Preparation of the Association's first operation in Tajikistan, the Institution Building  Technical Assistance (IBTA) Project was also begun in 1995 and was approved May 16, 1996, four months prior to the signing of ARSP. The IBTA project provided $5 million for technical assistance in the design of significant reform components of the Government's medium term program, notably for assistance in the legal, regulatory and institutional framework for enterprise privatization and financial sector and agricultural reform, and for establishment of a project coordinating unit. Preparation of the ARSP began in June 1995, with three follow up missions leading to appraisal in May 1996 and approval in September 1996. 5. The ARSP credit was fully consistent with the Country Assistance Strategy (CAS) discussed by the Board on May 16, 1996.1 Because of its relevance to subsequent performance, one paragraph is quoted here: "While acknowledging the country's urgent needs, especially for balance of payments support, it is also clear that there are substantial risks of continued political and economic instability, and erratic implementation of reform. In this environment, the Association Group's initial assistance strategy is intended to provide support for meeting the country's most immediate needs while allowing flexibility to adjust the nature and level of engagement: as circumstances warrant. Our program will begin in FY96-97 with three operations that are intended to: (a) strengthen institutional capacity to plan and implement a medium-term program of structural reform (IBTA); (b) support the Government's efforts to stabilize the economy (ARSP); and (c) moderate the impact of the economic collapse on vulnerable groups (ARSP). The development of this program will be linked to the security situation and paced to the Government's progress with the reform process."2 6. The ARSP Credit is the first IDA operation in Tajikistan to be fully disbursed and closed. The complexity of structural reform in transition economies and the close interrelationship of the IMF and Association programs justify evaluating its outcome in terms of its contribution to the process of reform, which is ongoing and which the Association is continuing to support. B. Achievement of Objectives 7. Macroeconomic Objectives. Government's stabilization program, launched in early 1996, aimed to: (i) halt the decline in output and incomes; (ii) contain inflation through prudent fiscal and monetary policy; and (iii) liberalize domestic and external trade. The LDP contained specific macroeconomic targets for 1996 and qualitative objectives for 1997. A summary of the macroeconomic outcomes is presented in Table 1. See IDA/R96-74/2,TAJIKISTAN:Country Assistance Strategy Revised, May 24, 1996 2 ibid., page 1. -2 -  Table 1: Summary Macroeconomic Outcome 1995-1997 Actual LDP Target 1995 1996 1996 1997 GDP(real growth, %) -1:2.5 Slow decline -4.4 1.7 CPI(Ave. month % 32 4.0 4.2 10.7 change) l. Total Govt. Revenues 15.2 13.0 12.1 13.7 (%GDP) l Total Govt. 26.5 19.0 17.9 17.0 Expenditure(%GDP) l Govt. Deficit (Cash,% -11.2 -5 to 6 -5.8 -3.3 GDP) Current Acct -9.0 -12.0 -7.2 -5.5 Deficit(%GDP) Official Exchange Rate 288 n/a 334 581 (eop) Intl. reserves (net USD 4 1 mon. -8 -7 mill.) Import Notes to table: CPI target and actuals are last Q1996 and first 9 mos., 1997. Average monthly CPI rate calculated from Table 18, IMF SM/97/280, Dec 5,1997 1997 Government revenue, expenditure and deficit are nine months, Jan-Sept. Ibid., Table 23 For more comprehensive indicators, see Appendix Table 1. 8. The annual growth and deficit targets of the Letter of Development Policy were achieved during the ARSP program period. However, these global achievements mask the extent of destabilization that took place in the months following approval of the ARSP, with severe impact on the process of reform and the intended allocation of limited public resources to social and productive sectors. Furthermore, although the decline in GDP was slowed in 1996, Tajikistan still experienced the lowest level of real income since 1991, as agricultural and industrial output and exports continued to fall. Also, while the overall Government deficit was reduced, revenues available to the Government declined. The burden of deficit reduction fell entirely on spending, which compromised social and development objectives and was financed by increases in outstanding arrears. Lastly, because exports declined, the narrowing of the current account deficit fell entirely on imports, which were compressed across all major import categories, including raw materials, inputs and supplies. In summary, notwithstanding the achievement of overall annual targets, 1996 saw a further impoverishment of Tajikistan's economy. 9. GDP growth in 1997 is estimated at 2 percent, the first positive rate since 1991. A 15 percent increase in the cotton crop, private external financing for planting and harvesting of the cotton crop, the improved outlook for peace, the restoration of liberalized trade and price policies in the second half of 1997, and the impact of land distribution to farmers - all contributed to growth in agricultural output of about 3!/2 percent. Industrial output, on the other hand, declined by some 21/2 percent in 1997, while production of aluminum, at around 200,000 tons, remained well below capacity. -3-  10. Stabilization during the ARSP Program Period. Securitby problems and the need to meet the timetable for a complex agenda of peace talks were key factors in the derailment of the reform program during the first half of 1997. In early December 1996, fighting broke out again in many parts of Tajikistan. In late December, the Government and the UnitedTajik Opposition (UTO) reached agreement on an agenda for talks aimed at a peaceful resolution of the war by June 1997. At about the same time a new type of civil disturbance erupted, when 23 foreigners were kidnapped and briefly held hostage by a group reportedly not connected with either the Government or UTO. There were more incidents involving foreign personnel in February, which led to the temporary evacuation of UN, World Bank and IMF personnel. (They returned in May 1997.) 11. As the Government scrambled to supplement its limited resources and meet defense expenditures, long term priorities gave way to day-to-day crises. Among other changes more arrears accumulated, the foreign exchange auction was abandoned, and trade restrictions were reimposed. In June 1997, the budget deficit was 10 percent of GDP, social safety net payments were eight months in arrears, the TR had depreciated to TR541/$US, and reserve money was expanding at 115 percent per annum. 12. The peace agreement signed June 27, 1997, between the Government of Tajikistan and the UTO provided for the sharing of power among the principal conflicting parties and established a 12-18 month transition period for the implementation of its provisions. Since both parties acknowledged support for the reform process, this political achievement paved the way for the reestablishment of financial discipline and the removal of some of the controls imposed on the economy. The Government quickly requested a renewal of the policy dialogue with IMF and the Association. Subsequently, the Government ended all directed credits and initiated credit auctions by the National Bank of Tajikistan, restored the foreign exchange auction, introduced a uniform low tariff rate of 5 percent, removed export taxes that had been reimposed during the crisis, and considerably tightened monetary and fiscal policies. Inflation declined in the last half of the year, and the budget deficit was held to 1996 levels as of the end of September 1997. 13. The combined financial and technical support of the Fund and Association were critical in laying the foundation for economic reforms and in renewing Tajikistan's commitment to the reform program in the second half of 1997. However, the disbursement of balance of payments assistance under the ARSP at the end of 1996 and beginning of 1997 coincided with the outbreak of hostilities and did not serve the expected result of increasing supplies of imported inputs and revitalizing social services. Similarly, while the IMF provided a macroeconomic framework for the Government's stabilization program and the program of structural reforms supported by the IDA credit, the availability of Fund resources per se could not prevent the slippages in program implementation that took place with the outbreak of hostilities at end 1996 and early 1997. In October 1997, the authorities designed, with the assistance of IMF staff, a new economic program for late 1997 and the first half of 1998. -4 -  14. Structural Reforms. The ARS]' was heavily front-loaded, with 3 out of 4 actions to be implemented prior to appraisal and the remainder by negotiations. The key prior actions were: Agriculture Pricing and Marketing * Decontrol prices on all agricultural commodities. * Eliminate the state orders system for all agricultural commodities. * Eliminate external trade restrictions on all agricultural commodities. * Eliminate the surrender requirement for foreign exchange. * Eliminate export taxes and duties on all agricultural commodities, except for cotton. For cotton, reduce the export tax and rationalize the tax system. * Design and begin phased implementation of cost recovery pricing for irrigation water. F arm Restructuring * Adopt guidelines and mechanisms for the transfer of land access rights. 3 Prepare terms of reference for an action plan for implementing the farm restructuring program. * Increase the number of leasehold farmers by at least 5,000 (accounting for about 25,000 ha of irrigated land) by allocating irrigated land in use by state or collective farms. Privatization in Cotton * Prepare terms of reference for elaboration of a time-bound action plan for the privatization of Glavklopkoprom. * Prepare timetable, in agreement with IDA, for privatization of cotton ginneries. Social Protection * Target social welfare payments to the poor and allocate adequate resources in the 1996 budget. * Allocate at least six percent of the 1996 budget to health and 14 percent to education. 15. Government took all of the above steps prior to Board presentation (with the exception that only about 3,000 farms were beneliciaries of life-long inheritable leases, while others were granted use rights of alternative forms). These actions established a framework for ongoing policy reform and were a significant achievement of the ARSP. On the part of Government the 5-  actions entailed painstaking review and political commitment. In this sense, enactment of the body of laws, regulations and executive decrees underlying the Government action constituted a threshold in the country's transition from a command to a market economy. However, progress in following up the measures was uneven, and results were nnodest during the ARSP program period. 16. Farm restructuring and land reform. Rights to property in land are contentious in Tajikistan. The area of arable land is small relative both to rural population and the total area of the country; there are powerful elites in many localities isolated from each other by rugged terrain and poor transport and communications. The Government has become historically dependent on tax and export revenue from the main crop, cotton, while the low income rural populace perceives land as a source of food, employment and household income. The large irrigation systems, now in disrepair, were put in place during the Soviet era to develop cotton under a system of state and collective farms. 17. Nevertheless, Tajikistan was among the first FSU republics to initiate a privatization program. In 1991 the Government enacted legislation establishing a State Property Committee and a decree subjecting "all state property (including assets in agriculture) to denationalization and privatization". Subsequently it enacted a succession of laws and decrees from 1992-1996 which provided for: (i) the gradual disengagement of the Staite from the control of agricultural marketing (compulsory state procurement) and production (quotas); (ii) the designation of the forms of farm organization (collectives, state farms, lease enterprises, joint-stock companies, co- operatives, and family "Dehkan" farms); (iii) establishment of public entities to implement (a) land reform (State Committee for Land Reform - LRC - responsible for reallocation of all lands under control of collective farms), and (b) farm restructuring (the State Commission for the Reorganization of Agricultural Enterprises and Organizations, to reallocate the physical assets of the collective farms); and (iv) a Land Code (submitted to the Majlisi Oli June, 1996; approved December, 1996). The Land Code is the umbrella legislation for the land reform/farm restructuring process and sets out guiding principles, of w]hich four important ones are: (i) transparent and equitable criteria in the selection of farmers to acquire land use rights; (ii) unrestricted transfer of land access rights; (iii) conversion of all land controlled by state and collective farms to private farms operated under life-long inheritable leases (except for activities having a public purpose such as research and seed generation); and (iv) reliance on Local Land Committees to allocate the assets of state and collective farms. 18. It was recognized during preparation of the ARSP tlhat there were weak points in the legal and administrative framework of the land reform effort, and a technical assistance component was included in the IBTA project to evaluate the situation and make proposals to strengthen implementation. In general, the Government's initial strategy to reorganize state farms into collectives and subsequently into leaseholds seemed to reflect a reluctance at the center to relinquish control. On the other hand the delegation of authority to local levels, while appropriate from the viewpoint of grass roots governance, entailed a number of difficulties, not least of which has been inconsistent application of the complex land lease options in the various districts of the country and the lack of uniform property registration standards. Data on the actual status of land reform is thus inconsistent among sources. The latest Association staff assessment summarizes progress as follows.3 Tajikistan: Country Assistance Strategy EXC Upstream Review, March 31, 1998 - 6-  "Only modest progress has been made on farm restructuring and creation of an enabling environment for privalte agricultural enterprises. The version of the Land Code passed by parliament did not make provision for the transferability of land access rights to third parties. Moreover implementation has been hindered by the civil conflict, uneven political commitment and resistance to the program by vested interests. Presently only 5 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 tend to offer farmers only short term leases and conltinue to be oriented towards output targets and generating rents for a small political elite. There is some evidence that the allocation of leases has not been implemented fairly, with the result that the land access rights of some groups have been compromised, causing increased poverty..." 19. The Cotton Sector. Difficulties in reforming the cotton sector had their origin in the situation inherited from the FSU at indebendence. The economic policy of the FSU in Tajikistan was to develop cotton as a source of inputs for textile industries in other FSU Republics, utilizing the country's abundant water for large scale irrigation systems managed by state and collective farms. Reform of the cotton sector afler independence entailed converting from internal FSU trade to export for foreign markets, from state order "inputs" to commercial sales, from output quotas to market-determined levels of production, from state cotton gins to profit-maximizing business enterprises, from budget reliance on state enterprise income to tax revenue, and the removal of Government from direct intervention in marketing channels. 20. The liberalization of trade and prices and the rationalization of cotton taxes adopted prior to approval of ARSP created a favorable environment for reform of the cotton sector, but vested interests, ingrained habits, and the limited commercial experience of cotton farmers and gin operators were significant obstacles to the overhaul of the system. Even before the ARSP was approved, measures specific to cotton were adopted that left Government a large measure of control.4 Throughout the first half of 1997, there was dialogue between the Association and Government on these measures, and by September most had been lifted. However, transformation of the sector remained partial. In September 1997, Glavkhlopkoprom was converted into the Republican Corporation of Pakhteh Tajik (RCPT) whose dissolution is now a condition of an IDA structural reform credit; only two of 25 cotton gins scheduled by decree (May 1996) for privatization by end 1997 were privatized, and collective farms were still the dominant form of organization for irrigated cotton at end 1997. 21. Social Protection. The Government recognized that it could not afford to maintain the level of social services and welfare subsidies that it had enjoyed under the Soviet system, and that during the transition period the economy would be unable to generate sufficient resources to reduce poverty. Consequently the reform program tried to achieve balance between the provision of a social safety net for the most needy, maintenance of the quality of health and education, and 'These measures were: (a)approval of the export contract from the Ministry of Finance, (b) 100 percent pre-payment of cotton exports, (c) certificate from Ministry of Finance confirming payment of the sales tax, (d) certificate from Industrial Trade Chamber certifying the origin of the cotton and (e)written approval from Glavkhlopkopromn that these requirements were met before release of cotton fibber from the ginneries. -7 -  targeting the social programs. The ARSP sought to support the Government's efforts by: (i) protecting budget allocations to health and education; (ii) improving the targeting of safety net expenditures; and (iii) restructuring pension and social insurance programs. 22. The revenue shortfalls and higher defense and security outlays that since independence had curtailed the availability of resources for other public services persisted in the last quarter of 1996 and through the first half of 1997. Actual expenditures in Tajik rubles for education and health were about half what had been budgeted in 1996 and were less than the targeted shares of a shrinking budget. The sectors also suffered from arrears in payment of salaries and pension; education alone accounted for half of salary and pension arrears of some TR 2.2 billion by mid- 1997. Arrears were substantially reduced in the last half of 1997, but this achievement could not by itself reverse the long run erosion in the quality of health and education services. Many schools were totally destroyed in the civil conflict. During 1997 between 20-25% of school age children were not receiving any formal education, and the drop out rate appeared to be rising. The health sector was suffering from lack of funds to pay health personnel, limited stocks of medicine and medical supplies, as well as aging and war-damaged facilities. Health indicators such as infant and maternal mortality appeared to be deteriorating. 23. As part of the social safety net (SSN) program, Government decided in 1996 to replace its universal bread subsidy and child allowances with a welfare system targeted at the most vulnerable groups. There were estimated to be 1.3 million beneficiaries, mainly children aged 8 years or less but also non-working pensioners, for total estimated costs of TR 7.8 billion in 1996 and 8.3 billion in 1997. However, Government was unable to stay current on SSN payment obligations in 1996, and arrears accumulated despite the fact that $15 million of the disbursement proceeds from ARSP were used to finance the social safety net. The situation worsened in 1997, when arrears in SSN payments rose from TR 1.5 billion at end 1996 to TR 5.9 billion at end September, 1997.5 The arrears problem is now being partially addressed under the IDA Post- Conflict Rehabilitation Credit, approved in December 1997, which provides for the use of part of the local currency proceeds to reduce SSN arrears, and the SAC, which calls for the elimination of arrears on salary by end June 1998. 24. Summary. The ARSP was the first IDA credit to support a program of economic reforms in Tajikistan. Approval had been preceded by the Institution Building Technical Assistance (IBTA) project four months earlier, one year of preparation, and two comprehensive economic reports during 1993-1996. Notwithstanding the volatile political environment, by the end of the preparatory phase the Government had liberalized trade, prices and exchange rates and enacted a policy framework for reform of the key agricultural sector and social protection. This policy framework continues to guide the country's transition to a market economy, and its adoption as a condition of approval of the ARSP was a satisfactory achievement. However, many of the policies entailed follow up action to restructure agriculture, safeguard health and education services and adapt the social safety net to limited resources. As described above, in 1996 and 1997, there were delays in moving forward on these reforms, shifts in the Government's expenditure priorities, and lapses in the implementation of the stabilization program. As a result, the resources provided under the ARSP had limited effect, and the achievement of program objectives was not immediately satisfactory. The ARSP did however ' Payment delays were in part attributable to the facts that Govemnment transferred the responsibility for compensation payments to local governments, and their source of financing for compensation payments is the land tax, which is due and payable in September and December. This explanation affords little solace to the beneficiaries who were not compensated. - 8-  serve as the basis for resuming the policy reform dialogue in late 1997 in the guise of SAC. C. Implementation Record and Majcor Factors Affecting the Project 25. In terms of achievement of stabilization and structural reform objectives, the implementation record is discussed above. The major factors accounting for policy slippage were the outbreak of hostilities in the last quarter of 1996 and the effort to end them in the first half of 1997. A consequence of the former was the diversion of budget expenditure and foreign exchange to finance security needs and of the latter the diversion of effort of policy makers towards reaching a peace accord. The temporary repatriation of representatives of the international financial institutions, U4 and other advisory personnel also slowed program implementation. The foregoing difficulties associated with the security crisis were superimposed on a weak institutional structure resulting from the emigration of qualified people from Tajikistan, competition among vested interests, and limited knowledge and experience of government's role in a market economy. Lastly, the analytical foundation for an action program to link the policy framework to the reform objectives in agriculture and the social sectors was inadequate and needed more work. 26. Although the ARSP was a single tranche operation, in order to be compatible with the IMF and to support the foreign exchange auction and provide a smooth flow of funds the Association made an internal arrangement to phase disbursements. Following the release of $25 million in September/October 1996, the remaining $25 million was disbursed in five monthly payments of $5 million each, with final disbursement on April 29, 1997. D. Project Sustainability 27. Like other FSU countries in the early stages of transition, the basic issue with respect to 'sustainability" is the overall sustainability of reforms in Tajikistan. The Peace Agreement to some extents lessened the political risk to the reform process, in that its protocols provided for the sharing of power between the opposing parties, and both Government and the UTO have declared their support for reform. Since June, 1997, when the accord was signed, the renewal of commitment to program objectives was manifest in the restoration of financial discipline, the confirmation of program objectives in agriculture and the social sectors, progress in extending the program to the privatization of enterprises and financial institutions within an appropriate legal and regulatory framework, and attempits in obtaining the technical and financial support of the international community. Other factors contributing to the sustainability of reform are the positive growth of GDP and the evidence of higher productivity on Dehkan (family) farms, recent improvement in bilateral relations with Uzbekistan, and the prospective easing of the foreign exchange constraint through debt rescheduling and balance of payments support. Most important of all, long term observers of conditions in Tajikistan and informal sampling of public opinion suggest that the Tajik populace believes a return to the past is not a viable alternative, is supportive of reform goals, and has the patience to see it through the difficult period of transition. For these reasons the sustainability of r eforms supported by the ARSP is likely. Completion of the protocols of the Peace Agreement, clarification and simplification of the Government's complex approach to land reforms, greater transparency and accountability in farrn and enterprise privatization, and expanded public information on the program of reforms would further help to improve the prospects for sustainability. g9-  E. Association Performance 28. The Association's overall performance in the ARSP was satisfactory. The two economic reports prepared during 1994-96 helped identify overall priorities for program design; during preparation of the ARSP the focus of the operation was narrowed to address poverty and concentrate on agriculture and social protection. Dialogue during the preparation phase helped Government formulate and enact key policy measures as conditions of approval of the ARSP. The principal weakness in the Association's performance was its inability, due to the renewed violence, to supervise the operation adequately. As a result only one fonmal supervision report was prepared at end 1996, which dealt exclusively with agriculture, and supervision was disrupted thereafter by the security problems. Nevertheless, monitoring of the economy and the reform program was done informally by the Field Office, which cooperated with the IMF and helped in redirecting the attention of the authorities to structural reforms, following the June Peace Accord. Although the Association recognized the need for detailed analytical work to develop action plans linking policies to specific refonms, there was not sufficient time to complete this work. Approval of the IBTA only four months before the ARSP left little time for technical assistance to influence the shape of reforms. With respect to subsequent operations, the Association was quick to support the peace process by preparing two projects for Post-Conflict Rehabilitation and Post-Conflict Reconstruction, approved in December 1997 and January, 1998 respectively. The Association also began preparation of a Structural Adjustment Credit (SAC) with continued emphasis on development of the private sector through privatization of state- owned enterprises, promotion of an efficient banking systeml and enhancement of budgetary provisions for health, education and social safety net. Finally, the Association was active in formal donor coordination, which culminated in Consultative Group meeting in Tokyo in May 1996 and in Paris May 1998. F. Borrower Performance 29. Although the breakdown in internal security was beyond Government's control, its performance during the ARSP was not satisfactory. The implementation of the program was limited, largely because of a lack government commitment and the destruction caused by the renewal of the conflict. As described in Section B above, there was negligible progress on privatization of the cotton sector, budget provision for health and education, and compensation under the social safety net. In one area, liberalization of the cotton trade, there was backsliding on policy, as the Government introduced measures that were in effect restrictive of the cotton trade. Other trade policies which were adopted to prevent exchange rate depreciation (higher tariffs and excise taxes, the introduction of export duties) violated the spirit of the reform program. It was expected that foreign exchange made available under the ARSP would facilitate the foreign exchange auction, but these auctions were deferred until July 1997. Similarly, it was intended that the local currency proceeds from the ARSP would improve the solvency of the social safety net, but more arrears accumulated. It is clear that the pressures on Govemnment resources resulting from the security crisis were a prime cause of the slippage on financial and trade policies, but inadequate achievement of structural refonns was also a consequence of the intellectual heritage of a controlled economy, weak institutions, and uneven appreciation within government of the purpose of reform measures. Intemnal coordination and supervision of the program was weak, since authority for the implementation of r eforms was spread over a number of different agencies in the social and agricultural sectors. While the Office of the Prime Minister was responsible for the operation, it was unable to monitor it effectively in the absence of a PIU. -10-  G. Assessment of Outcome 30. The outcome of the ARSP measured in terms of its contribution to the process of economic reform in Tajikistan was satisfactory. Although results in the agricultural and social sectors were inadequate, the policy framework developed during preparation of the ARSP was sound, remains in place, and continues to shape the agenda for economic and structural reform. The President and the leader of the IUTO have affirmed their commitment to reform in international councils and have publicized the program at home. Further analytical studies and pilot projects supported by the Association were identified under the ARSP. They are being completed in the areas of land reform and poverty alleviation and will improve the effectiveness of policies in those sectors. In some regions of the country the establishment of family farms has accelerated, and there is good evidence of improved yields and productivity. Government has set a firm timetable for the privatization of cotton gins and its disengagement from cotton marketing channels. Social safety net arrears are being reduced with Association support under the Post- Conflict Rehabilitation Credit, approved December 1997. Government has gained experience in the implementation of the reform program and coordinating mechanisms for program implementation. Para. 12 above describes progress on the stabilization program after the June Peace Accord, which is reflected summarily in the relative stability of the exchange rate since September 1997. In view of this progress, the IMF approved Emergency Post-Conflict assistance in December, and an ESAF on June 24, 1998. In summary, this judgment allows for the fact that the ARSP was the first policy based operation the Association has undertaken in Tajikistan, that the "front loaded" policy conditions were met prior to approval, that slippage on financial and liberalization policies was rectified by the closing date of the operation, that a constructive dialogue was initiated and has been rnaintained between the Tajikistan authorities and the Association, and that both Association and Borrower remain committed and have moved forward with the reform program. H. Future Operations 31. Tajikistan is the poorest country in the FSU, with a per capita income in 1997 of $330. Strategies to accelerate growth and alleviate poverty must cope with the narrow economic base resulting from the country's historic role as a supplier of raw materials, mainly cotton fiber, to the FSU, the limited availability of arable land, the existence of many isolated and semi- autonomous rural communities, the demnand for imported inputs, supplies and food, the absence of a strong community of bilateral donors and recently a heavy burden of debt. Balance of payments support associated with policy measures to liberalize the economy and promote a healthy private sector is an appropriate strategy under these conditions, provided that the necessary groundwork has been prepared to establish effective institutions to facilitate private activity and to set up regulatory mechanisms for the oversight of markets. Experience with the agricultural and social sector components of the ARSP suggests that singletranche rehabilitation credits may not be the most effective vvay to tackle reform at the sector level, which demands detailed sectoral knowledge and analysis of sectoral constraints, opportunities and institutions. - 11 -  I. Key Lessons Learned 32. The lessons learned are guided by the set of circumstances that pertain to Tajikistan as presented in the foregoing sections of this report. Key lessons from the Agricultural and Social Protection Credit are: a) The institutional and policy environment inherited from the USSR is similar to that of other FSU countries whose reform programs are supported by the Association. A key difference was the degree of civil unrest that prevailed in the months before and during the implementation of this credit, a political risk that was acknowledged by Association staff and conveyed to management before approval of the operation. One way to lower the risk of political disruption to future Association operations would be to find ways and means to support a peace process if and when such processes gain momentum. The two Post-Conflict operations approved for Tajikistan since the ARSP seem to be a move in that direction. b) The design of the ARSP operation was trimmed back during preparation to focus on the central issues of agricultural reform and social protection. Effective implementation of such sectoral reforms requires both sector-intensive supervision during implementation and detailed sector action plans agreed with the Borrower prior to implementation. In the absence of such conditions future policy-based operations might better focus on general reforms to the economic environment, supplemented by sector or project operations to achieve sector goals. The focus of the first SAC on the private sector and banking reform addresses these issues of the economic environment. c) Strong commitment on the part of the Borrower is essential to the success of structural adjustment operations. The ARSP was effective in developing a policy framework and initiating the reform process, but ineffective in ensuring implementation. Tranche conditionality is an instrument to concentrate minds on getting the work done. d) The Association's contribution is in project design and sharing the lessons of experience as much as in providing financial resources. Without a closely knit, cohesive core team of national officials with whom Association staff can work, support for policy reform will be ineffective. Such a team should have the capacity to see the interrelationships of the components of reform programs and to think in both strategic and operational terms. e) The Field Office helped to advise the Association of conditions in Tajikistan and assisted in restoring the Borrower's commitment to the program. To ensure that policy actions are implemented within an agreed time frame, formal supervision is essential. To facilitate HQ supervision, in addition to reporting on the progress of reforms, the Field Office should continue to play an active role in suggesting corrective measures to Government to prevent delays and slippage in meeting program goals. - 12-  Appendix Table 1: TAJIKISTAN: Key Economic Indicators Projected 1997 1998 1999 2000 National Accounts 1/ (% of GDP at current prices) Gross Domestic Product 100.0 100.0 100.0 100.0 Agriculture 34.0 35.0 36.0 36.0 Industry 24.0 23.0 22.0 Services 42.0 42.0 41.0 42.0 Total Consumption 97.0 94.0 93.0 91.0 Gross Domestic Investment 7.1 9.1 10.6 11.7 Public 0.6 2.1 3.1 3.7 Private (incl. change in stock) 6.5 7.0 7.5 8.0 Exports (GNFS) 74.0 67.0 61.0 59.0 Imports (GNFS) 80.0 71.0 65.0 63.0 Gross Domestic Savings 1.6 4.6 6.5 7.6 Gross Domestic Product (US$ mil) 1087 1242 1499 1714 GNP Per Capita (US$, Atlas method) 330 Real Annual Growth Rates (%): Gross Domestic Product at mkt prices 1.7 3.4 4.0 4.0 Balance of Payments (US$ mil) Exports 746 762 849 939 Imports 759 768 854 944 Resource Balance -13 -6 -5 -5 Current Account Balance -60 -56 -62 -70 Residual Financing Gap 0 194 97 90 Memorandum Items: Current Account Balance/GDP (%/6) -5.5 -4.5 -4.1 -4.1 Mechandise Export Growth (%/o) 2.9 5.1 5.0 5.4 Mechandise Import Growth (%/6) 1.3 2.6 5.6 5.9 1/ The ratios at current prices are based on IMF projections.  Appendix Table 1: TAJIKISTAN: Key Economic Indicators Projected 1997 - 1998 1999 2000 Public Finance (% of GDP) Total Revenues 13.7 14.8 15.9 16.2 Total Expenditures 17.0 18.1 19.7 19.3 Overall Budget Deficit -3.3 -3.3 -3.8 -3.1 Price Indices (1994=100) Merchandise Exports 105.2 107.5 111.1 114.7 Merchandise Imports 110.5 100.6 101.3 103.0 Merchandise Terms of trade 95.2 106.9 109.7 111.3 Nominal Exchange Rate (LC/US$) 581.0 751.0 750.0 750.0 Real Exchange Rate (LC/US$) 635.8 810.7 844.2 801.2 Domestic Inflation (%) 101.4 42.8 15.9 10.0 Total Debt Outstanding & Disb (DOD) 1039 1114 1208 1297 Net Disbursement -18 -5 3 2 Total Debt Services 72 54 53 80 Debt & Debt Service Ratios (%) DOD/Exports of Goods & Services 202.0 202.0 189.0 187.0 DOD/GDP 96.0 90.0 81.0 76.0 Debt Services/Exports of GS 13.9 9.8 8.2 11.5 Concessional Debt/Total Debt 15.8 23.3 29.0 32.9 World Bank Exposure Indicators IDA Outstanding & Disb (US$ mil) 41 69 105 133 IDA DOD/ Total Debt (%) 3.9 6.2 8.7 10.3 Sources: Data provided by the Tajik authoities and IMF staffestimates.  PART II. Statistical Tables Table 1: Summary of Assessments Table 2: Related Bank Loans/Credits Table 3: Project Timetable Table 4: Credit Disbursements: Cumulative Estimated and Actual Table 5: Key Indicators for Project Implementation Table 6*: Key Indicators for Project Operation Table 7*: Studies Included in Project Table 8A: Project Costs Table 8B: Project Financing Table 9*: Economic Costs and Benefits Table 10: Status of Legal Covenants Table 11 *: Compliance with Operational Manual Statements Table 12: Bank Resources: Staff Inputs Table 13: Bank Resources: Missions * Standard Tables 6, 7 and 9 are not included because they are not applicable to this Agriculture Recovery and Social Protection Credit. Table 11 is not included because there have been no instances of non- compliance with Operational Manual Statements. - 13 -  Table 1: Summary of Assessments A. Achievement of Objectives Substantial Partial Negligible Not applicable Macro Policies Sector Policies Financial Objectives Institutional Development Physical Objectives %O Poverty Reduction Gender Issues % Other Social Objectives VO Environmental Objectives Public Sector Management v Private Sector Management %O Other (specify) B. Project Sustainability Likely Unlikely Uncertain Highly C. Bank Performance Satisfactory Satisfactory Deficient Identification O Preparation Assistance , Appraisal , Supervision % Highly Highly D. Borrower Performance Satisfactory Satisfactory Unsatisfactory Unsatisfactory Preparation Implementation %O Covenant Compliance E. Assessment Outcome %  Table 2: Status of Bank Group Operations in Tajikistan IBRD Loans and IDA Credits in the Operations Portfolio Original Amount in US$ Milions Project ID Loan or Fiscal Borrower Purpose Credit No. Year IBRD IDA Cancellations Undisbursed Number of Closed Loans/Credits: 1 TJ-PE-53386 IDA 30370 1998 GOVT. OF TAJIKISTAN P-C RECONSTRUCTION 0.00 10.00 0.00 9.73 TJ-PE-55133 IDA 30220 1997 GOVT. OF TAJIKISTAN P-C REHABILTATION 0.00 10.00 0.00 0.00 TJ-PE-44202 IDA29460 1997 GOVT. OF TAJIKISTAN PILOT POVERTY ALLEV. 0.00 12.00 0.00 9.47 TJ-PE-43231 IDA28610 1996 GOVT. OF TAJIKISTAN INST. BLDG./TA 0.00 5.00 0.00 1.91 Total 0.00 37.00 0.00 21.11 Active Loans Closed Loans Total Total Disbursed (IBRD and IDA): 14.90 49.40 64.30 of which has been repaid: 0.00 0.00 0.00 Total now held by IBRD and IDA: 37.00 50.00 87.00 Amount sold 0.00 0.00 0.00 Of which repaid : 0.00 0.00 0.00 Total Undisbursed : 21.11 0.00 21.11 Generated by the Operations Information System (OIS)  Table 3: Project Timetable Steps in Project Cycle Date Planned Date Actual Identification (Executive Project Summary) June 27, 1995 June 27, 1995 Preparation February 18 - March 5, 1996 February 18 - March 5, 1996 Appraisal May 25 - June 3, 1996 May 23 - June 3, 1996 Negotiations July 1996 July 17, 1996 Letter of Development Policy (if applicable) July 31, 1996 July 31, 1996 Board Presentation September 12, 1996 September 9, 1996 Signing September 12, 1996 September 16, 1996 Effectiveness September 30, 1996 September 16, 1996 Project Completion June 19, 1998 June 19, 1998 Loan Closing September 30, 1997 September 30, 1997  Table 4: Loan/Credit Disbursements: Cumulative Estimated and Actual (LTS$ thousands) FY97 Appraisal estimate 50,000 Actual 50,000 Actual as % of estimate 100% Date of final disbursements April 29, 1997  Table 5: Key Indicators for Project Implementation Key implementation indicators in the President's Report I. Agricultural Sector A. Pricing Policy: The process of price liberalization was largely completed by end 1995. In 1996 Goveinment eliminated price controls on all remaining agricultural commodities (cotton, flour, bread) raised the producer price of cotton procured through Glavchlopko:prom (GKP) and began phased implementation of a scheme for pricing irrigation water, which is, however, still subject to price control. B. Agricultural Marketing: The state order system for all agricultural commodities (except cotton) 'was eliminated in August, 1995 and in 1996 for cotton. Government also removed licensing requirements for agricultural imports and exports. However, through mid-1997 cotton producers were still subject to restrictive commercial regulations that left Government and GKP with a significant degree of control. GKP held a 50 percent interest in the Cotton Exchange, established February 2, 1997, whose operations were limited mainly to the review of cotton export; contracts rather than the promotion of trade competition. C. Privatization in Cotton: Government prepared terms of reference for a time-bound action plan for the privatization of GKP. In 1997 GKP was converted to a joint stock company, Tajik Cotton Company (TCC), whose functions would be redundant in a liberalized cotton sector. SAC I now stipulates the dissolution of TCC as a condition o:f tranche release. Government also undertook (Decree#203 of May 1996) to privatize all 25 state-owned cotton ginneries by end 1997. By year end 23 ginneries remained to be privatized. Under SAC I auctions for these 23 ginneries will be announced by June 15, 1998 and privatization is expected to be completed by end March, 1999. D. Land Reform and Farm Restructuring: Government prepared guidelines for a farm restructuring program that included criteria for selecting farmers, allowing unrestricted transfer of land access rights, and ensuring the inheritability of land access rights. The L,and Code approved by Parliament December 12, 1996, omitted provision for unrestricted transfer of access rights. The implementing regulations set forth complex schemes of land classification and leasehold arrangements. Effective privatization was slow during 1997. Detailed proposals for simplification and orderly land registration procedures are being prepared under IBTA, for planned support under an Agricultural Sector Credit. Still, the establishment of Delkhan (family) farms accelerated towards the end of 1997, with good evidence of improved yields. Moreover, the Land Reform and Farm Restructuring Committees established during 1997 have strengthened mechanisms for coordination and implementation of the land reform process.  II. Social Safety Net A. Salary and Pension Payments: In July 1996, Government merged the pension fund, social insurance fund and unemploymnent fund into a single entity-- the Social Protection Fund. About 80 percent of SPF expenditures are for pensions, and most of the remainder for maternity and sick leave benefits and unemployment benefits. Contrary to what was agreed, in 1997 the pension was not being paid on a monthly basis at a flat rninimum rate. In practice, Government decided to cap the maximum payment at 10 times the minimum level. In the process arrears were accumulated. B. Government reduced maximum sick leave entitlement to one month per year and discontinued use of the Employment Fund for wage subsidies to maintain jobs in financially distressed enterprises. A pilot public works program, supported by the IDA-funded PPAP, is being implernented. C. In 1996, Government replaced the universal bread subsidy and child allowances with a social safety net system to be targeted on the most vulnerable groups of society. The initial target group was children under 16 years old (in households with per capita income not more than double the minimum wage), non-working pensioners, registered unemployed and the disabled. In practice the bulk of the beneficiaries were children aged 8 or less, and eligibility criteria have since been revised to exclude older children. However, Government payment to the social safety net dropped regularly through mid-1997, and high arrears accumulated. The Post-Conflict Rehabilitation Project provides for the use of local currency proceeds to fund part of the accumulated arrears, and their elimination is a condition of SAC I. A study on living standards and the results of the PPAP will help to improve the targeting of lthe social safety net and the efficiency of the welfare system. D. Protection of Education and Health: Targeted budget allocations to health and education were achieved by end 1997, but as a result of revenue shortfalls and higher allocations to defense and security, salary arrears accumulated and actual expenditure on these sectors was inadequate. The coverage and quality of both education and health services has deteriorated significantly. Under SAC I Govenment has undertaken to ensure planned quarterly expenditure on education and health in 1998 and to review planned 1999 budget allocations in consultation with the Bank. -2 -  Table 8A: Project Costs Appraisal estimate Actual/latest estimates (US$ million) (US$ million) Local Foreign Local Foreign Item Costs Costs Total Costs Costs Total 1. Foreign Exchange Component -- 50 50 -- 50 50 Total -- 50 50 -- 50 50 Table 8B: Project Financing Appraisal estimate Actual/latest estimates (US$ million) (US$ million) Local Foreign Local Foreign Item Costs Costs Total Costs Costs Total 1. IDA -- 50 50 -- 50 50 2. Co-financing -- -- -- -- -- -- 3. Other external sources -- -- -- -- -- -- 4. Domestic contribution -- -- -- -- -- -- Total -- 50 50 -- 50 50  Table 10: Status of Legal Covenants Original Revised Covenant Present Fulfillment Fulfillment Agreement Section Type Status Date Date Description of Covenant Comments IDA Credit 3.01 (a) 9 C The Borrower and the Association shall from time to time, at the request of either party, exchange views on the progress achieved in carrying out the Program. (b) 9 C Prior to each such exchange of views, the Borrower shall fumish to the Association for its review and comment a report on the progress achieved in carrying out the Program, in such detail as the Association shall reasonably request. (c) 9 C Without limitation upon the provisions of paragraph (a) of this Section, the Borrower shall exchange views with the Association on any proposed action to be taken after the disbursement of the Credit which would have the effect of materially reversing the objectives of the Program, or any action taken under the Program. 3.02 Upon the Association's request, the Borrower shall: (a) I C have the Deposit Account audited, in accordance with appropriate auditing principles consistently applied, by independent auditors acceptable to the Association; (b) I C fumish to the Association as soon as available, but in any case not later than six (6) months after the date of the Association's request for such audit, a certified copy of the report of such audit by said auditors, of such scope and in such detail as the Association shall have reasonably requested; and (c) I C fumish to the Association such other information conceming the Deposit Account and the audit thereof as the Association shall have reasonably requested. Covenant types: Present Status: 1. = Accounts/audits 8. = Indigenous people 2. = Financial performance/revenue generation from 9. = Monitoring, review, and reporting C = Covenant Beneficiaries complied with 3. = Flow and utilization of project funds 10. = Project Implementation not covered by CD = Complied with categories 1-9 after delay 4. = Counterpart funding 11. = Sectoral or cross-sectoral budgetary or other CP = Complied with resource allocation partially 5. = Management aspects of the project or executing 12. = Sectoral or cross-sectoral policy/ NC = Not complied with Agency regulatory/institutional action 6. = Environmental covenants 13. = Other 7. = Involuntary resettlement  Table 12: Bank Resources - Staff Inputs Planned Actual Stage of project cycle Weeks US$ Weeks US$ Preparation to Appraisal 122.00 329.90 167.00 451.90 Appraisal 39.00 106.60 16.70 45.10 Negotiations through Board Approval 2.00 6.60 40 12.00 Supervision 13.80 37.30 7.80 21.20 Completion 10.00 27.50 17.90 48.40 Total 186.80 507.90 213.40 578.60 Total  Table 13: Bank Resources - Missions Performance Rating Month/ No. of Days in Specialization' Implem. Developm. Types of Stages of project cycle year Persons Field Status Objectives Problems3 Through appraisal (1) 06/28/95 11 21 E (2) 12/07/95 2 9 E (3) 02/18/96 3 10 E Appraisal through Board 05/23/96 2 10 E approval Supervision 09/15/97 3 14 E U U T Completion 05/15/98 1 15 E S S -- Total 1- Key to Specialized staff skills: 2 - Key to Performance Ratings: 3 - Key to Types of Problems: E = Economist I - Highly satisfactory F = Financial P = Private sector development/privatization 2 - Satisfactory T = Technical 3 - Unsatisfactory M = Managerial  ANNEX I IMPLEMENTAlION COMPLETION REPORT REPUBLIC OF TAJIKISTAN AGRICULTURAL RECOVEIRY AND SOCIAL PROTECTION (ARSP) (Credit 2917-TJ) COMPLETION MISSION'S AIDE MEMOIRE 1. A mission to prepare the Implementation Completion Report for the Agricultural Recovery and Social Protection Credit (ARSP) took place in Tajikistan May 18-29, 1998. This task was managed by Reza Ghasimi, undertaken by a consultant, Michael Payson, and facilitated by the World Bank Field Office in Duslhanbe. The mission wishes to thank all officials met for their cooperation. Purpose and Content of the Implementation Completion Report (ICR) 2. A credit in the amount of $50 million was approved for the Agricultural Recovery and Social Protection project by the International Development Association September 12, 1996, fully disbursed by April 4,1997, and closed September 30, 1997. The ICR provides the Bank's Management and Executive Directors with an evaluation of the effectiveness of the ARSP Credit and derives lessons for the future based on that evaluation. Next Steps to Complete the ICR 3. The ICR includes two sections: i) an evaluation of the implementation of the ARSP by the Bank, and ii) an evaluation by the Borrower. a) A first draft of the Bankc evaluation is being prepared in the field. Following completion of the draft it will be reviewed by Bank staff, translated into Russian and transmitted to the 1Government with a copy of this memorandum. The Government is invited to comment on the Bank draft and transmit its comments to the Bank through the World Bank Field Office in Dushanbe. If the Govemment has no comment it may sD advise the World Bank. The preliminary conclusion of the mission is summarized in paras 4 and 5. b) Guidelines for preparation of the Government's contribution to the ICR have been given to the Director of the IDA Project Implementation Unit and the Economic Advisor to the Prime Minister. It should be completed by mid-June 1998. When completed, this section of the report should be transmitted to the Bank for translation and inclusion in the ICR. It will not be edited by Bank staff. Assessment of Outcome 4. The Agricultural Recovery and Social Protection Credit provided support for the Government's program of economic stabilization and structural reform set forth in its Letter of Development Policy dated July 31, 1996. The objectives supported by the ARSP Credit were: i) to stabilize the economy; ii) to ease the foreign exchange shortage so that critical inputs could be  acquired; iii) to reform agriculture policy in areas including the pricing and marketing of agricultural commodities, land reform, trade, and privatizing state owned enterprises; and iv) to enhance the social safety net and improve its targeting. 5. While the mission recognizes that the ARSP project was part of an ongoing process of reform, for purposes of comparability it has focused the evaluation on the period between initial preparation of the operation in June 1995 and closing in September 1997. By the end of the preparatory phase that led to approval of the ARSP in September 1996, the Government of Tajikistan had enacted a comprehensive policy framework for macroeconomic stabilization; trade, price and exchange liberalization; reform of the agricultural sector; and the protection of vulnerable groups. This achievement will continue to guide the country's transition to a market economy and was satisfactory. However, many of the measures enacted prior to disbursement of ARSP resources entailed follow up action, for example in the restructuring of agriculture, the privatization of cotton operations, the protection of health and education services and the social safety net. Delays on these matters, shifts in the Government's expenditure priorities, and lapses in the implementation of the stabilization program limited the effectiveness of the financial resources made available under the ARSP credit. -2-  Annex II IMPLEMENTATION COMPLETION REPORT REPUBLIC OF TAJIKISTAN AGRICULTURAL RECOVERY AND SOCIAL PROTECTION CREDIT (ARSP) (Credit 2971-TJ) BORROWER'S CONTRIBUTION TO THE ICR I. Economic Situation and Stabilizaltion, 1995-1997 1 . At the beginning of 1995, the financial situation in the Republic of Tajikistan deteriorated because of difficulties associated with the Russian Monetary System, cash and non-cash settlements with CIS countries, and a gap in currency availability. Budget revenues declined and GDP, inflation, and household incomes were adversely affected. External debt had grown rapidly to some $700 million by January 1995. 2. The disruption of inter-enterprise transactions, the burden of payment transfers to CIS countries, and the large budget deficit were the cause of delay in addressing the national currency issue. However, the national currency--the Tajik Ruble-was introduced May 10, 1995, in accordance with Government regulations. The exchange rate was set at 50 TRI$l. This measure was accompanied by reductions in expenditure, additional taxes, and price liberalization. A program for privatization of state properties was adopted and an appropriate legal framework for the state budget was prepared. These measures helped establish the basis for economic stabilization. 3. In 1995, actual expenditure of the state budget was 59.4% of the 1995 estimate. More than a quarter (27.7%) of budgetary expenditures was allocated to support the economic sectors (4.2% of GDP) and 28.2% of available resources (4.3% of GDP) was allocated to the social sectors. 4. 1996 was characterized by further measures to overcome the crisis and support financial recovery. With respect to budget management, the Social Protection Fund and Transport Fund were consolidated with the state budget, and extra-budgetary accounts of the sectoral ministries were eliminated. The budget deficit was reduced, credit policy was tightened and hard currency transactions were liberalized (through foreign exchange auctions). As a result of these measures, inflation was reduced from 2000 % in 1995 to 40%. Prices were liberalized (except for public utilities), and subsidies were cut, in particular the bread allowance. 5. In order to strengthen the state budget and increase revenues, a tax on the export of cotton and aluminum was introduced in 1996,, which became one of the largest source of budget revenues. The tax generated 14.7 billion TR in revenue for the state budget. The ARSP credit was used to cover the budget deficit, which was 3.6% of GDP in 1996. 6. In 1997, the Government's econiomic policies led to the stabilization of the national currency and the sharp reduction of inflation from a monthly average of 20% in July and August 1997 to 1.5% at the beginning of 1998. The decline of production was arrested in 1997; real GDP  -2 - increased by approximately 2%, the first positive increase since Tajikistan gained independence. The increase was mainly in agriculture, as the harvest increased by about 15%, owing largely to the end of civil war and the availability of private external financing for seed cotton and the cotton harvest. II. Structural Reforms 7. The year 1996 may be seen as a starting point in the implementation of actions for Tajikistan's transition to a market economy. During this period, Tajikistan utilized credit from the IMF and received concessional funding from IDA to support economic stabilization and structural reform, based on the broad program of economic reform approved by the Parliament and adopted by the Government. 8. In agriculture, the most important sector for Tajikistan, the state order was eliminated and the process of liberalization of cotton marketing was on the way to completion. In addition, the Government made several policy decisions in farm restructuring and adopted several laws. 9. Incorporated ministries and organizations are now expected to conduct their activities on the basis of self-financing and cost recovery. Restructuring has been carried out in the former Republican union "Tajikselhotzteknika, now incorporated into "Madad". The former Ministry of Cotton Processing was incorporated into the "Tajik Cotton C'orporation", the Republican union Tajikselholzhimiya into the Republican Production Association "Tajikselholzhimiya", the former Ministry of Bread into the Holding Company "Galla", the Ministry of "Tajikpishprom" into the Corporation "Tajikpishprom" etc. 10. To improve the operations of agricultural enterprises and deepen land reform, land transfer was introduced. The transfer of state land to individuals for long term use is being actively carried out. According to preliminary data in the Ministry of Agriculture, there were 171 lease farms, 61 joint stock companies, 117 agricultural cooperatives, 87 dehkan associations and 7957 dehkan farms. The Government intends to convert all colllective farms (255) and state farms (23) into dehkan farms or agricultural cooperatives. 11. User charges for irrigation water have been introducecl, resulting in budgetary savings of some 2 billion TR in the last two years. The Government intends to promote self-financing of irrigation resources by restructuring water enterprises and integrating them into associations of water users on privatized farms. 12. With respect to social protection, structural reforms are accelerating, with the aim of ending the deterioration in living standards of our population. Pensions, social safety net allowances and stipends geared to the minimum wage were raised by Presidential Decrees on May 4 1996, February 15 1996, and December 27 1997. However, arrears accumulated on payments of salaries, social compensation and pensions. To cover these arrears the Government authorized the issue of registered checks to individuals through the Savings Bank. It was intended that these checks could be used as means of payment for the purchase of shares in privatizing enterprises, investment funds and state property, including dwellings. The Government is committed to eliminate arrears on these obligations by end of June 1998. 13. In the last several months, privatization of state-owned enterprises has accelerated. As a result, 60% of small scale enterprises were privatized and more than 100 medium and large scale enterprises have been incorporated. The Government plans to complete the privatization of all  -3 - small scale enterprises, privatize at least 120 of 750 medium and large scale enterprises, all 23 cotton ginneries, 350 unfinished construction sites and the remainder of the state-owned trucking fleet. 14. On external debt, the Department of External Debt Management was established in the Ministry of Finance in consultation with IDA and began operations in the second quarter of 1997. The Government has signed debt restructuring agreements with Russia, Kazakhstan, Uzbekistan and Turkey. Negotiations are under way for the restructuring of debt with Turkmenistan, India, the Islamic State of Pakistan and China. m. Use of the IDA Credit 15. The main objective of the IDA Credit (ARSP 2917-TJ) was to support the Government's efforts in agricultural recovery and enhbancement of the efficiency of social protection system. The Credit was approved by IDA on September 12, 1996 and disbursement began that month. Dates and amounts received (in US dollars) were as follows: Sept. 24, 1996 14,999,989.08 Oct. 10, 1996 9,999,989.60 Nov. 21, 1996 4,999,989.60 Feb. 07, 1997 4,999,990.85 Feb. 25, 1997 4,999,990.85 Mar. 24, 1997 4,999,991.10 Apr. 29, 1997 4,149,991.10 Total: 49,140,932.18 16. The amounts above were converted by the National Bank of Tajikistan into Tajik Ruble and transferred to the account of the Ministry of Finance of the Republic. In 1996, US$3 million was allocated to Glavhlopkoprom for 'the settlement of obligations on the collective and state farm cotton producers. The remainder was used for general budget support, including compensation payments under the social safety net. In 1997, the proceeds of the credit were utilized for general budget support, which included compensation payments, debt repayment, and wages and salary payments. 17. Foreign exchange proceeds of the credit were sold by NBT at auctions held in the Tajik Interbank Currency Exchange. m. Conclusion 18. The Government of the Republic of Tajikistan considers that the ARSP credit contributed to the solution of key problems of the economy of the Republic.  \tKAZAKHSTAN./619- n-f.|, ''\7' ,$r+t