Tajikistan - Agricultural Recovery and Social Protection Credit Project

-/Z :29/7- -c r Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-6951-TJ REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED AGRICULTURAL RECOVERY AND SOCIAL PROTECTION CREDIT IN THE AMOUNT OF SDR 34.8 MILLION (USD50 MILLION) TO THE REPUBLIC OF TAJIKISTAN AUGUST 14, 1996 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 Currcncy Unit = Russian Ruble (Until May 10, 1995) Currency Unit = Tajik Ruble (After May 10, 1995) Period Avcrage Period Average (Russian Rubles per US$) (Tajik Rubles per US$) 1993 December 1,240 1995 May 50 1994 December 3,388 August 58 1995 January 3,858 September 103 February 4,259 December 300 March 4,749 1996 March 280 April 5,030 May 278 WEIGHTS AND MEASURES Metric System GOVERNMENT FISCAL YEAR January 1 - December 31  FOR OFFICLAL USE ONLY ABBREVIATIONS AND ACRONYMS ARSP Agricultural Recovery and Social Protection * CAS Country Assistance Strategy CIS Commonwcaltih of Indepcndent States CPI Consumer Price Index DFI Direct Foreign Investmcnt EBRD Europcan Bank for Rcconstruction and Development EU European Union FSU Former Soviet Union GDP Gross Domnestic Product IBTA Institutional Building Tcchnical Assistance IDA Intemational Developmcnt Association IDF Institutional Developmcnt Fund IMF International Monetary Fund NBT National Bank of Tajikistan NGO Non-govemmental Organization PHRD PopulatiOn and Human Resource Development PIU Projcct hnplementaion Unit SDR Special Drawing Rights SOE State Owned Enterprise SPC State Property Commnittee TA Technical Assistance TACIS Technical Assistance to the Commonwealft of Indepmdet States TR Tajik Ruble UNDP United Nations Development Progamme UNHCR United Nations High Commissioner for Refugees UNICEF United Nations Children's Fund USAID US Agency for Intemational Development Vice Prcsident: Foae . iDmn, ECA Director. Yukon Huang, EC3| Division Chief- Kadir Tanju Yurukcoglu,EC3Cl I Task Managr: Robert E. Christiansen, EC3C1 This document has a restricted distnrbution and may be used by eipients only in the performance of their | ofa duies. Its contents My not othawise be disclosed uiihout World Bank authorization. il  REPUBLIC OF TAMaSTAN AGRICULTURAL RECOVERY AND SOCIAL PROTECTION CREDIT Contents Page Credit and Progmm Summary ..............................i I. Introduction ............................. ........................................................................1 II. Recent Economic Developments and Prosp .............................2 A. The Economic Setting ................. .2 B. Medium Term Outlook .3 m. The Government's Economic Reform Program ......................................5 A. Maroeconomic Stabilization .......................................5 B. Agricultural Sector Rebnn and Rsucting ......................................6 C. Social Expenditures and the Safety Net ...................................... 10 TV. Features of the Proposed Credit ...................................... ..13 A. Objectives ...................................... 13 B. The Crcdit and the Country Assistance Strategy ...................................... 13 C. Institufional Capacity and TA ...................................... 14 D. Coordination with the IMF and other Donors ...................................... 14 B. Im.le on Arrangements....................................... 14 F. Agremats Reached ....................................... 15 G. Benefits and Risks ...................................... 16 H. Ro D........................................ 6 Annzes: 1. Letter of Development Policy (English) 2. Policy Matrix (Policy Conditions) 3. Key Economic Indicators 4. Timetable of Key Processing Events 5. Status of Bank Group Operations 6. Tajikistan at a Glance  REPUBLIC OF TAJIKISTAN Agricultural Recovery and Sodal Protection Credit Credit and Program Summary Borrower. Republic of Tajikistan Amount: SDR34.8 million Tenns: IDA terms, with 40 years maturity Executing Agency: Office of the Prime Minister Objectives: The main objectives of the proposed Credit are to support Government's efforts to: (a) stabilize the economy; (b) ease the foreign exchange shortage so that critical imported inputs can be acquired; (c) reform agriculture policy in areas including the pricing and marketing of agriculural commodities, land reform, trade, and privatizing state owned enterprises; and (d) enhance the social safety net and improve its targeting. Benefits: Restoring macroeconomic stability and implementing structural reforms in agriculture would help arrest the collapse in production and employment. The proposed Credit would allow imports of critical inputs and help finance essential expenditures in a manner that is non-inflationary. Additionally, the Credit would partially offset the adverse impact of adjustment on the poor by enhancing provisions in the budget for elements of the social safety net (bread and child allowances) and for basic health care and education. In the long run, restoring growth and employment would reduce the widespread poverty in the country. Risks: The main risks associated with this Credit center on the: (a) fragile political balance and the possibility of renewed social unrest, and (b) Government's limited implementation capacity. Although political tensions have eased during the past year, the peace is still fragile and its consolidation will depend on the success of the negotiations that were recently resumed. With respect to implementation capacity, the political turmoil of recent years has resulted in the emigration of many skldled personnel and the consequent deterioration of institutional capacity. Rate of Return: Not applicable. Poverty Category: Poverty focused. The Credit includes specific measures to: (a) protect the poor from the transitional effects of liberalization; (b) improve the targeting of the social safety net; (c) support a farm restrucuring program that is intended to help low-income households in rural areas; and (d) assist pensioners by reforming the Pension Fund. Appraisal Report: Not applicable.  -i}- DWbursement: The proposed Credit, which is classified as a rehabilitation operation, would be provided in one tranche. On effectiveness of the Credit, disbursements will be deposited into a Govermment account without the need for evidence of imports of eligible goods. The Borrower will undertke not to use the proceeds for items covered in the negative list and to have the account audited upon IDA's request. Map: IBRD No. 25721 Project ID Number: TJ-PA-8863  REPORT AND RECOMDATION OF THE PRESIDENT OF TIE INTERNATIONAL DEVELOPMNT ASSOCIATION TO TH EXECUTIVE DIRECTORS ON AN AGRICULTURAL RECOVERY AND SOCIAL PROTECTION CREDIT TO THE REPUBLIC OF TAJIKISTAN 1. I submit for your approval the following report and recommendation on a proposed Agricultura Recovery and Social Protection Credit to the Republic of Tajikistan for SDR34.8 million (USSSO million) to provide support for the Govermment's reform program with particular emphasis on agricultural recovery and social protection. The Credit, a rehabilitation operation disbursed in one tranche, would be on standard IDA tems, repayable over 40 years. 2. Tajilistan became a member of the BRD and IDA in June 1993 and of the IFC in December 1994. To date, assistance from te World Bank Group has consisted of policy advice and an Institution Building and Technical Assistance Project (IBTA) approved by the Board on May 16, 1996. The CAS was discussed at the time the IBTA Credit was approved by the Board. A Country Economic Memorandum was issued in August 1994. I. bmdu- on 3. After three yeas of political turmoil, the Government of Tajikistan has resumed the reform effort that was initiated soon after its indepedence in 1991. The Bank Group and the IMF are working closely to support and shape the Goverment's refbrm program. In January 1996, Govnment reached agemement with the BIF on a one-year stand-by aanm_ ent which was approved by the IMP Board of Directo in May 1996. The IMF program supports macroeconomic stability based on the implementation of prudent fiscal and monetary policies. At the request of Governmt, IDA prepared the proposed Agriclltural Recovery and Social Proteion (ARSP) Credit in the amount of SDR34.8 million. The proposed ARSP Credit is consistent with the CAS that was discussed by the Board on May 16, 1996 in conmnction with the IBTA Project. 4. Economic Background. Tajikistan is a small country of 5.8 million people with only seven percent of its land area classified as suitable for agriculture. The combination of rapid popution growth (about three pacent per year) and limited supplies of arable land have resulted in a serious land shortage - there was only 0.14 hectares of arable land per capita in 1994. Despite this land pressure, the economy is predominly agrimultual with sector accounting for 25 percet of GDP and 50 percent of employment. About seventy percent of the population live in the rural areas. hiu report D baed on do. finditp of Puepu4ion, Preaia, and Apprid numin th visd Du_habe s Jun, October, nd Deember l99, d Febtwuay and May 1996. as. mimuoi wee led by M. Rois (APR) ad tR Chridian (FM3CI) and iwued M. Oain;, B. Ouwika (Et3C1); G. Abdukadr &!C3A1); M. Mill, E. Pauumo BC3HR); M. F}ch (BTFS); S. Dell, L. Brefort (PSD); A. MacBean, A. NeweL, and S. Tabor (CSnh_bnts). r. K. T. Yurukglu and Mr. Y. Hung an Us maging Divion Chief and Dqpau Direcr, rpecivdy. 2 Of this sven perceat, 54,000 ecr (about SS perct) can be ued for co prodution. ApproxieWy SS per.ee (720,000 hecae) of th able am is irigte  -2- 5. Under the Soviet system, the agriculture sector operated primarily as a cotton growing enclave. Prior to the breakup of the FSU, cotton production typically accounted for about 50 percent of total agricultural production - most of which was exported as cotton fiber (lint) - while fruits, vegetables, grains and livestock accounted for the remainder. Agricultural production, and especially cotton, were heavily dependent on Imported inputs and external markets for the sale of cotton fiber. Only 13 percent of industrial production was accounted for by agricultural and food processing. The industrial sector, which is dominated by aluminum production, accounts for 35 percent of GDP and 12 percent of employment. Cotton fiber and aluminum together accounted for roughly 90 percent of exports. 6. Poltical Background. Immediately following independence - declared amid the collapse of the Soviet Union -- the country suffered an outburst of political and ethnic strife. Although elections were held shortly after independence and again in 1992, political and ethnic rivalries erupted into a civil war that lasted from mid-1992 through early 1993. Gradually, however, the Government - relying heavily on military support from Russia - has been able to reestablish its control over most of the population. Following implementation of a cease fire (September 1994), a new constitution was adopted by referendum in late 1994, and presidential elections were held with Imamali Rahmamov elected as head of state. Elections for a new parliament (Majles Oli) were held in February 1995. 7. Peace talks have been underway intermittently since May 1995 and the cease fire agreement has been extended through August 1996. Nonetheless, there have been numerous violations of the cease-fire particularly in the Southeastern part of the country and along the border with Afghanistan. The main obstacles to peace appear to be disagreement over proposed constitutional changes and the restructuring and staffing of Government agencies. At the heart of the domestic conflict of recent years is ethnic conflict over political power. This conflict was in evidence in early February 1996 when military units nominally loyal to Government demanded changes in several senior political appointmnents. At least partially as a consequence of this unrest, the Prime Minister, Deputy Prime Minister, and several other officials, resigned. More recently (May), riots in the northern part of the country resulted in new appointments at the local level designed to achieve better ethnic balance. Such ongoing low-level conflicts provide a reminder of the fragility of the peace and are likely to continue until a peace agreement is finalized. Currently, plans are being made for the President of Tajikistan to meet directly with the opposition leader in an effort to resolve outstanding differences and bring the peace process to a satisfactory closure. II. Recent Economic Developments and Ponects A. The Economic Setting 8 At independence, Tajikistan was the poorest republic of the FSU and remains so today - its estimated per capita income in 1995 was $370. The poverty that was inherited from the FSU was due largely to geographical factors. Most of the poor were located in the remote eastern areas of the country, although there were pockets of severe poverty in other parts of the country. In recent yea, the nature and extent of poverty has changed - becoming more widespread and intense - in large measure because of three major shocks that account for much of the decline in GDP. First, the break- up of the FSU precipitated the collapse of inter-republic trade arrangements and brought an end to the gonerous budget transfers that had long enabled Tajikistan to consume far more than it produced.