World Bank Document fileDocument of The World Bank FOR OFFICIAL USE ONLY Report No. 46717-TJ INTERNATIONAL DEVELOPMENT ASSOCIATION PROGRAM DOCUMENT FOR A THIRD PROPOSED GRANT IN THE

Document of The World Bank

FOR OFFICIAL USE ONLY

Report No. 46717-TJ

INTERNATIONAL DEVELOPMENT ASSOCIATION

PROGRAM DOCUMENT

FOR A THIRD PROPOSED GRANT

IN THE AMOUNT OF SDR 13.3 MILLION

(US$20 MILLION EQUIVALENT)

TO

THE REPUBLIC OF TAJIKISTAN

FOR A

PROGRAMMATIC DEVELOPMENT POLICY OPERATION

March 2,2009

Poverty Reduction and Economic Management Unit Central Asia Country Unit Europe and Central Asia Region

This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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REPUBLIC OF TAJIKISTAN

GOVERNMENT FISCAL YEAR January-December

BEE DFID DSA EBRD EC GDP IDA IFC IMF KI LIC LDP MDGs MIGA MTEF NBT NDS PDPG PEFA PIP PPIAF PRGF PRS ROSC SCISPM SME SMP UNICEF USAID

CURRENCY EQUIVALENTS (Exchange Rate Effective as o f February 25,2009)

Currency Unit Tajikistan Somoni US$1 .oo 3.60 TJS 1-00 0.28

WEIGHTS AND MEASURES Metric System

ABBREVIATIONS AND ACRONYMS

Business Enabling Environment Department for International Development (U.K.) Debt sustainability analysis European Bank for Reconstruction and Development European Commission Gross domestic product International Development Association International Finance Corporation International Monetary Fund Kredit Invest Low income country Letter o f Development Policy Millennium Development Goals Multilateral Investment Guarantee Agency Medium-term expenditure framework National Bank of Tajikistan National Development Strategy Programmatic Development Policy Grant Public expenditure and financial accountability Public investment program The Public-Private Infrastructure Advisory Facility Poverty Reduction and Growth Facility Poverty reduction strategy Report on the Observance o f Standards and Codes State Committee for Investments and State Property Management Small and medium enterprises Staff Monitored Program United Nations Children’s Fund United States Agency for International Development

Vice President: Shigeo Katsu Country Director: Motoo Konishi

Sector Director: Luca Barbone Sector Manager: Kazi Mahbub-A1 Matin

Task Team Leader: R. Sudharshan Canagarajah

FOR OFFICIAL USE ONLY CONTENTS

1 . 2 . 3 . 4 .

5 .

Boxes Box 1: Box 2:

Figures Figure 1:

Tables Table 1: Table 2: Table 3:

Annexes Annex 1: Annex 2: Annex 3:

Annex 4: Annex 5: Annex 6:

Map

Country Context ....................................................................................................................... 1 Recent Macroeconomic Developments ..................................................................................... -3

Tajikistan’s Poverty Reduction Strategy ............................................................................... 9 Progress of the Development Policy Program ..................................................................... 10

A . Description o f the Operation ............................................................................................. 21 Objectives. Themes. and Policy Areas .............................................................................. 21

Proposed Operation ............................................................................................................... 21

B . C . Linkages to Country Partnership Strategy ......................................................................... 23 D . Collaboration with the IMF and Other Donors ................................................................. 23 E . Relationship with Other Bank Operations ......................................................................... 24 F . Lessons Learned ................................................................................................................ 25

Operation Implementation .................................................................................................... 28 A . Poverty and Social Impact ................................................................................................. 28 B . Implementation. Monitoring. and Evaluation., ................................................................. -29 C . Fiduciary Aspects .............................................................................................................. 29 D . Disbursement and Auditing ............................................................................................... 31 E . Environmental Aspects ...................................................................................................... 32 F . Risks and Risk Mitigation ................................................................................................. 34

Governance in Tajikistan: Challenges and Efforts to Improve Outcomes ................................. 7 Good Practice Principles on Conditionality.. ........................................................................... 27

Composition of Consumption o f the Average Household ......................................................... 2

Medium-term Macroeconomic Outlook .................................................................................... 6 Status and Proposed Changes in Prior Actions from those Indicated at PDPG 2 Stage .......... 18 Prior Actions for PDPG 3 ........................................................................................................ 22

Letter of Development Policy ................................................................................................. -53 Policy Matrix ........................................................................................................................... 64 Link Between the PDPG, Analytical Work, and other Bank and Development Partner-supported Programs ..................................................................................................... 74 Relations with the International Monetary Fund .................................................................... 76 Tajikistan’s Status in Relation to the MDGs ............................................................................ 78 Assessment Letter from the International Monetary Fund to the World Bank ........................ 79

IBRD 33493 ............................................................................................................................................... 81

This document has a restricted distribution and may be used by recipients only in the performance o f their off icial duties . I t s contents may not be otherwise disclosed without Wor ld Bank authorization .

The proposed Third Programmatic Development Policy Grant was prepared by an IDA team consisting of R. Sudharshan Canagarajah, Jariya Hoffman, Utkirdjan Umarov, Svetlana Proskurovska, Shuhrat Mirzoev, Hassan Aliev (ECSPE); Aziz Khaidarov (ECCTJ); Brett Coleman, Andrea Dall’Olio (ECSPF); Gary Fine (ECAVP); Rekha Menon, Saodat Bazarova, Pia Helen Schneider, Vladmir Kolchin (ECSHD); Sudhee Sen Gupta (CICIC); Norpulat Daniyaraov, Naushad Khan, John Ogallo, Moustapaha Ndiaye (ECSPS); Bekzod Shamsiev, Raghuveer Sharma (ECSIE); Simone Giger (ECSSD); Andrea Dall’Olio (ECFPF); Wendy S. Ayres, Sodiyk Khaitov (Consultants). The team benefited from the inputs and guidance of Annette Dixon and Kazi Mahbub-A1 Matin. The team gratefully acknowledges the excellent close collaboration o f the Tajikistan authorities, development partners, as well as the support and guidance o f Motoo Konishi, Annette Dixon, Luca Barbone, Kazi Mahbub-A1 Matin, Chiara Bronchi, and Mehrnaz Teymourian. Zakia Nekaien-Nowrouz and Takhmina Jumaeva assisted the team.

i v

REPUBLIC OF TAJIKISTAN

THIRD PROGRAMMATIC DEVELOPMENT POLICY GRANT AND

Recipient

Implementing Agency Amount

Terms

Objectives and Description

Benefits

R i S k S

Estimated Disbursement

Operation ID Number

PROGRAM SUMMARY

Republic o f Tajikistan

Ministry of Finance SDR 13.3 million (US$20 million equivalent)

IDA Grant

The proposed Third Programmatic Development Policy Grant i s the third and final operation in a programmatic sequence that supports the government’s reform program outlined in the Tajikistan first and second poverty reduction strategy. Its development objectives are to improve the environment for private sector development, and to improve overall functioning o f the public sector and the delivery o f key public services. The proposed program i s divided into two pillars each with several components: Pillar 1. Promoting Private Sector Development

Component 1 : Maintain macroeconomic stability. Component 2: Improve investment climate through reform o f licensing and inspections, increasing transparency o f the privatization process and promoting market competition. Component 3 : Reform regulatory frameworks by separating policy making from regulatory functions in key strategic sectors (aviation, cotton, and energy).

Pillar 2. Improve Public Sector Management and Public Service Delivery: Component 1 : Public sector management reform through restructuring of core public institutions, reforms o f civil service management and wage system, strengthening o f the medium-term expenditure framework. Component 2: Improving social service delivery in health and education.

The credit will help to sustain economic growth and poverty reduction by supporting reforms presented in the PRS 2 and by providing resources for the budget.

The implementation of the proposed reform program faces five major risks related to: (a) weak government implementation capacity, (b) poor governance and corruption, (c) the government’s willingness to contract non-concessional loans, (d) Tajikistan’s complex political economy, and (e) the vulnerability o f the economy to external shocks. The program contains a number o f measures to mitigate these risks.

SDR 13.3 million (US$20.0 million equivalent) will be disbursed in a single tranche following effectiveness.

P 106963

V

INTERNATIONAL DEVELOPMENT ASSOCIATION PROGRAM DOCUMENT FOR A

PROPOSED THIRD PROGRAMMATIC DEVELOPMENT POLICY GRANT

TO

THE REPUBLIC OF TAJIKISTAN

1. COUNTRY CONTEXT

1. Tajikistan i s a small economy in Central Asia with 6.7 million inhabitants and a per capita income of US$460 in 2007.' The economy, which has been growing strongly (9 percent annually from 2000-07) depends heavily on exports o f cotton, and hydroelectricity (including for aluminum processing), and on growing remittances o f migrants estimated at US$2.3 billion in 2008 (about 50 percent o f GDP). Despite a severe winter that led to energy shortages, real GDP grew by 8 percent in 2008.

2. Poverty although declining steadily remains very high. In 2007, about 53 percent of the population was living below the poverty line o f US$41 per month, and 17 percent were below the extreme poverty line o f US$26 per month.* This i s a significant improvement over the 64 percent of people that were living below the poverty line in 2003 and the 83 percent there were doing so in 1999.3 About 71 percent of the poor and 76 percent o f the extremely poor live in rural areas. The high poverty rate o f people living in rural areas makes them exceptionally susceptible to weather and price shocks. Food comprises about 64 percent o f total consumption for Tajiks (see figure 1 for composition o f consumption expenditure).

3. Not surprisingly, food insecurity i s high in Tajikistan. About 27 percent o f children under age 5 are stunted (short for their age). This i s the highest rate of stunting o f any country of the region (the average for Commonwealth o f Independent States i s 12 percent stunted). Moreover, 24 percent of households report that they have inadequate access to food. Households with large number o f children, female headed households, households with less educated heads, households with heads who are not employed are more vulnerable to poverty. Remittances comprise an important source of income for many poor families, reducing the risk of being poor and narrowing the poverty gap.

4. Tajikistan i s an unequal society by income and by geographical location. Tajikistan's income gini coefficient of 0.51, indicates that disparities in income are large. Regional disparities are significant. About 69 percent of people living in Sogd are poor, while only 43 percent o f those in Dushanbe are. Female-headed households are more likely to be poor than male-headed households (57 percent compared with 52 percent).

5. Social indicators have improved since 2000, following a decline after independence. Indicators of school enrollment rates, infant mortality, child mortality, and others deteriorated

Gross national income per capita, World Bank Atlas method. Source: Projections based on the Tajikistan Living Standard Survey (2007). The data from the 2003 and 1999 surveys are not directly comparable, due to methodological

1

3

differences in their design.

following independence due to the civil conflict, worsening public services, and weak governance. However, following peace and improved economic management, they started to improve. For example, the primary completion rate rose from 95 percent o f children in 2000 to 100 percent in 2007. Infant mortality f e l l significantly over the same period, from 75 per 1,000 live births in 2000 to 56 per 1,000 live births in 2007. Child mortality similarly declined from 93 to 68 per 1,000 live births. Tajikistan made progress with gender equality. The proportion o f seats in the parliament held by women rose from 3 percent in 2000 to 1 8 percent in 2007. The ratio o f girls to boys enrolled in primary school rose from 93 to 100 in 2000 to 95 to 100 in 2007. Maternal health services improved. The proportion o f pregnant women attending antenatal clinics increased from 71 percent in 2000 to 77 percent in 2007. However, despite recent progress, Tajikistan i s the only country in ECA region unlikely to achieve most o f i t s Millennium Development Goals (MDGs).~ See annex 5 for details on the Tajikistan’ status with respect to the MDGs.

Figure 1: Composition of Consumption Expenditure o f the Average Household

E3 Healtl.

Housing and utilities

0 Nonfood, (32.9), 21%

0 Food

64% (1 01.2),

Source: Tajikistan Living Standards Survey, 2007.

6. While earlier efforts to accelerate structural reforms were hampered by the post- war environment, the combination of sustained macroeconomic stability and economic growth and the recent political consolidation have created the space for more fundamental reform. Concerned about the vulnerability o f Tajikistan’s economy to a change in external conditions, the government has outlined a comprehensive program o f structural and institutional reform aimed at sustaining growth and reducing poverty. This program, incorporated in the second poverty reduction strategy (PRS) (formally approved in April 2007) centers on (a) reform o f public sector management, (b) development o f the private sector and attracting investment, and (c) development o f human potential.

The World Bank, Millennium Development Goals: Progress and Prospects in Europe and Central Asia region, 2005.

2

7. The proposed operation i s the third in a programmatic series that provides support for reforms aimed at promoting private sector development and improving the delivery of public services. In the private sector, the proposed reforms are improving the investment climate through reforms o f the licensing, permitting, and inspections regime; strengthening the legal, institutional and regulatory framework in key strategic sectors (aviation, cotton, and energy); and enhancing transparency o f the privatization process. In the public sector, the operation i s focusing on improving the quality o f public administration, c iv i l service management, public financial management, and the efficiency and equity o f social service delivery. Policy actions in private sector development and public administration are addressing the cross-cutting governance issues that are critical for sustaining growth and reducing poverty in Tajikistan.

Recent Macroeconomic Developments

8. The government’s pursuit o f sound macroeconomic management successfully stabilized the economy during 2000-06. From late 1997 when the c iv i l war ended until 2006 the government managed macro economic policy soundly. Macroeconomic performance was characterized by strong GDP growth, declining inflation, fiscal balance, much reduced external debt, and a manageable current account deficit. Real GDP growth averaged 9 percent between 2000 and 2007, which helped to reduce poverty. Prudent monetary policy led to a fa l l in inflation f rom 30-40 percent during 1998-2001 to 6-7 percent during 2004-05, before it rose again to 12 percent in 2006, as a more expansionary domestic policy exacerbated the buoyancy o f remittance- financed demand for domestic goods and services. The overall fiscal balance (excluding externally-financed investment) since 2003 has been in surplus, achieved through improved revenue mobilization and a reduction in interest payments on external public debt. In addition, Tajikistan benefited f rom several successful debt restructuring and reduction agreements reached with key bilateral creditors, notably with the Russian Federation, Pakistan and through the Multilateral Debt Relief Initiative with the International Monetary Fund.

9. Growth has been driven largely by a favorable external environment, including rising world prices of cotton and aluminum, and strong growth in Russia and other trading partners, leading to rising demand for Tajik labor, which in turn has resulted in strong growth in remittances. Growth has also resulted from recovery in capacity utilization, primarily in agriculture. Government responded appropriately in response to the favorable external environment, forging an agreement with Russia to allow visa-free access to that country for Tajik workers. The sound macroeconomic management and strong growth was accompanied by greater diversification o f the economy as reflected in a decline in the combined share o f aluminum and cotton in total value added (below 9 percent in 2006 compared to about 30 percent in 2000), and expansion o f the nontraditional products. Nevertheless, Tajikistan remains highly exposed to external developments, including shifts in global prices o f key exports (aluminum and cotton) and imports (oi l and gas), and changes in the labor market in Russia.

10. Macroeconomic management deteriorated significantly in 2007, forcing a delay in the processing of the proposed Programmatic Development Policy Grant 3. The authorities revealed in October 2007 that the National Bank o f Tajikistan (the central bank) has guaranteed at least US$328 mi l l ion o f external loans to Kredi t Invest, an insolvent Taj ik private sector non- bank financial institution, ostensibly for cotton financing. Of this amount US$24 1 mi l l ion comprise pledges o f the NBT’s foreign exchange reserves, held by creditor banks as collateral against the loans to Kredi t Invest. Gross official reserves were reported to be US$355 mi l l ion at end o f 2007. Thus in effect a l l o f the country’s foreign exchange reserves had been either encumbered as pledges or could be called on to cover the guarantees. In addition, the NBT provided domestic credits equivalent to about 8 percent o f GDP to KI, thereby expanding the

supply o f base money almost threefold. Inflation accelerated to almost 20 percent at the end o f 2007. Trade and current account deficits and public debt rose sharply. The increase in inflation and widening o f the trade deficit are attributable to both supply side shocks (higher fuel and food process) and the very strong growth o f aggregate demand which has been fuelled by expansionary monetary policies. External debt distress reemerged due to heavy external borrowing and the aforementioned loan guarantees, putting pressure on fiscal management.

11. T o tackle the impending macroeconomic crisis, the authorities in late 2007 requested the IMF to establish a new program. The Fund agreed on a Staff Monitored Program (SMP) in M a y 2008 that provides the authorities with an opportunity to build a track record in support o f a request for a new financial arrangement with the Fund. The aim o f the program i s t o ensure improved governance at the NBT, to reduce inflation through monetary restraint, and to restore external viabil ity through rebuilding o f reserves, curbing new external borrowing, and reducing the trade deficit.

12. Macroeconomic indicators strengthened in 2008. Inflation receded to 12 percent year- on-year by December 2008, helped by the recent decline in international food and fuel prices. Although the trade deficit climbed to 48 percent o f GDP in 2008, it started to decline during the second ha l f o f the year and i s projected to amount 34 percent o f GDP in 2009 because o f slowing demand for consumer goods, fall ing prices o f imported fuel and food, and improved fiscal and monetary policies. The balance o f payments registered a surplus in 2008, owing to a surge in remittances by 50 percent over 2007. The improved performance, while partly a result o f the favorable external environment, are also due to better governance o f the NBT under the management appointed in early 2008.

13. Tajikistan’s debt is sustainable under the baseline scenario, but vulnerable to adverse macroeconomic shocks. An update o f the 2007 debt sustainability analysis (DSA) indicates that Tajikistan’s risk o f debt distress remains high, although i t s resilience to adverse shocks has improved compared to the findings o f the 2007 DSA.’ Under the baseline scenario, the external debt burden indicators in present value terms remain below their respective thresholds, with the exception o f the debt-to-exports ratio. In particular, by 2009, the debt-to- exports ratio will reach 133 percent, exceeding the threshold o f 100 percent by a significant margin. This indicator i s expected to deteriorate continuously throughout 2012; after that, it i s projected to decrease gradually throughout 2028, however, continuously staying above the threshold. However, external debt service ratios are expected to stay below their thresholds over the entire period, so that debt service remains manageable. The high level o f concessionality o f the external public and publicly guaranteed debt i s a key factor underlying these projections.

14. A decline in GDP and export growth rates, shortfall in other inflows, or sharper exchange rate depreciation relative to the baseline, all have the potential to undermine debt sustainability. However, simulations indicate that debt-service ratios remain below thresholds until 2017, even when several shocks are combined. The results o f the D S A thus underscore the need for the authorities to exercise extreme caution in incurring new debt and to carefully vet large-scale investment projects, to make sure that external resources are used productively. Sound macroeconomic policies and acceleration o f structural reforms would also be essential for

The fmdings presented here are preliminary and subject to change. This DSA has been produced jointly by World Bank and IMF staff, in consultation with Asian Development Bank staff. It updates the last DSA o f April 2007 ,presented in the IMF Staff Report for the 2007 Article IV Consultation. The final DSA will be distributed to the Board once cleared by the IMF and the World Bank.

4

maintaining debt sustainability by strengthening Tajikistan’s growth potential and safeguarding external stability.

15. The overall fiscal balance (excluding the externally financed public investment program, PIP) registered a surplus through December 2008, higher than programmed. Revenue collection was stronger than projected, mostly reflecting high nominal growth and imports. Revenue overperformance and strict expenditure control i s estimated to result in a fiscal surplus in 2008 o f 1.3 percent of GDP (excluding the PIP). Including the PIP, the fiscal deficit in 2008 i s expected to total 5.7 percent of GDP.

16. The global economic crisis i s negatively affecting Tajikistan’s economy. First, remittances are expected to fall by 30 percent. Many Tajiks working in Russia are employed in the construction industry, which has enjoyed a boom during the years of high o i l prices. Some planned construction projects in Russia have already been delayed or scrapped altogether. A slowdown in construction i s likely to result in lower earnings or unemployment o f Tajiks working abroad, lower remittances, and the return to the country o f migrant workers, putting pressure on public services. Second, the fall in commodity prices i s expected to affect the value o f Tajik exports, such as cotton. Third, foreign direct investment i s likely to decline, affecting plans for large infrastructure projects. Fourth, access to concessional financial resources from emerging economies, such as Kazakhstan and China, may fall, increasing the cost o f capital for business. A projected reduction in external finance from all sources will likely put pressure on the balance of payments, reserves, the exchange rate, and the current account. Due to these factors, real GDP growth i s projected to reach 3 percent at best in 2009.

17. Although the global financial crisis i s not likely to directly affect Tajikistan’s banking sector, the sector i s under stress because of potentially non-performing cotton sector debt. In early 2008, the government directed several banks to borrow somoni 140 million from the Ministry o f Finance and lend it to the cotton sector, carrying the risk on their own balance sheets. This amounts to 22 percent o f total banking sector capital as o f June 2008. Significant default on this debt could become a major problem for commercial banks. NBT’s financial position prevents it from making effective use o f monetary policy instruments and could limit its ability to intervene in a financial crisis. The authorities are aware o f these issues, and stand ready to support the financial sector with budgetary resources if necessary.

18. T o minimize the potential negative impact on the economy of the global economic crisis, the authorities plan to pursue macroeconomic policies aimed at maintaining external stability. The authorities are targeting an overall deficit (excluding PIP) of 0.5 percent o f GDP in 2009, while maintaining expenditures that directly benefit the poor and vulnerable. They are currently preparing a social protection program that may include cash-for-work scheme and measures to facilitate entrepreneurship. The program i s aimed at creating employment opportunities for migrants forced to leave their jobs in Russia and other countries as well as others. The authorities have committed to a flexible exchange rate regime, which will be key to facilitating external adjustment. (The exchange rate has depreciated by 11 percent between December 2008 and mid-February 2009.) Access to concessional finance from donors would help the government expand fiscal expenditures without driving up inflation and domestic interest rates, both of which would blunt the benefits o f expansionary fiscal policy. To help limit the risk o f a banking crisis in Tajikistan, the NBT i s strengthening its supervision of the commercial banks and taking measures to reduce the vulnerability of the banking system to a financial crisis. The priorities are to improve the liquidity position o f the banks and to curb the impairment of their assets. The NBT i s also drawing up contingency plans for tackling a banking crisis, so that

5

it i s not caught unprepared should one materialize. The World Bank and the IMF stand ready to assist in these efforts.

GDP, US$ million Real GDP growth, percent Real per capita US$ GDP growth, percent Annual CPI inflation (period average), percent

Current account balance Exports of goods and non-factor services Imports of goods and non-factor services

Net transfers Net foreign direct investment

Net income

19. Even with good policies, Tajikistan faces a balance-of-payments financing gap of at least US$135 million in 2009 and US$45 million in 2010. The authorities have requested financial support o f at least US$51 million in 2009 and US$35 million in 2010 from the IMF under the PRGF. The remaining financing needs are expected to be met through budget support from other donors, including the Asian Development Bank the World Bank, and the European Commission (EC). With this, Tajikistan’s external position remains vulnerable to a further worsening of the external environment. For example, the external financing gap would increase by US$l 10 million if remittances declined by an additional 5 percentage points.

Actual Estimated Projected 2002-04 2005 2006 2007 2008 2009 2010 2011

1,608 2,311 2,811 3,712 5,135 5,383 5,572 6,362 10.0 6.7 7.0 7.8 7.9 3.0 4.0 6.0 8.7 5.0 6.0 5.7 6.3 1.5 2.5 4.4

11.9 7.3 10.0 13.2 20.4 12.4 11.5 9.5

(Millions of USSS) -48.1 -62.0 -79.0 -414.0 -453.0 -522.0 -461.0 -446.0 998.3 601.3 651.4 766.9 813.7 756.3 826.1 912.1

1,174.2 1,220.9 1,617.7 2,554.8 3,469.2 2,791.6 2,879.4 3,093.1

202.3 636.3 984.3 1,484.0 2,313.0 1,630.3 1,714.4 1,861.0 113.2 55.6 66.0 160.0 190.0 100.0 160.0 180.0

-74.5 -79.0 -101.0 -110.6 -111.0 -117.0 -121.1 -125.3

Current account balance 1 Overall revenues and grants Total expenditures and net lending Fiscal balance (incl. externally funded P W Fiscal balance (excl. externally funded PIP+multilateral debt rel ief initiative) External debt Debt service due, in percent of export of goods & nonfactor services

(in percent of GDP)

-3.0 17.3 19.5 -2.2

0.5

64.2 17.3

-8.3 20.4 25.8 -5.2

-0.5

36.4 9.9

-2.7 20.1 23.0 -2.9

0.5

38.9 12.9

-7.0 20.5 24.4 -3.9

-0.5

34.5 10.5

-2.8 23.6 21.9

1.7

0.8

32.9 24.8’

-1 1.2

33.6 28.9 6.5 12.7

-9.7 21.4 28.4 -7.0

-0.5

33.9 13.8

1. Including grants. 2. Source: IMF and World Bank staff calculations.

This figure i s large because it reflects the multilateral debt re l i e f initiative payment.

20. T o maintain growth and reduce poverty over the medium and long term, the authorities will need to maintain sound macroeconomic management and implement reforms to improve the business environment, increase access to financial services, promote non-cotton agriculture, strengthen public financial management, and maximize the benefits to the economy of migration and remittances. Increased agricultural productivity due to diversification and improvements in the supply chain, greater private sector investment funded in part by remittances, and the start o f a large-scale Russian-financed hydroelectric power project and other infrastructure investments have the potential to support growth o f 7-8 percent over the long term.

6

21. The authorities satisfactorily completed the June-December 2008 IMF-supported Staff Monitored Program. The authorities made good progress on their structural reform agenda under the SMP, setting up a supervision unit for state-owned enterprises and preparing legislative changes to the central bank and commercial banks laws. The special audit o f the NBT has been completed, and the report’s executive summary wi l l be published on the NBT’s website. Annex 6 contains the IMF’s assessment o f Tajikistan’s current macroeconomic outlook.

22. The authorities in February agreed with the IMF on a 2009-11 program to be supported under a under the Poverty Reduction and Growth Facility (PRGF). In the context o f a deteriorating global economic environment, the authorities want to benefit f rom the stability that a Fund financial arrangement could bring. The aim o f the PRGF-supported program would be to further strengthen governance at the NBT, to strengthen fiscal and macroeconomic management, and to assist the country cope with potential impact o f the global financial crisis. Conditional on the completion o f f ive prior actions by the authorities, the IMF’s Executive Board i s expected to consider Tajikistan’s request for support under the PRGF in early April.

Box 1: Governance in Tajikistan: Challenges and Efforts to Improve Outcomes Governance challenges

The legacy of the civil war in Tajikistan includes a complex political economy that has constrained public sector performance, private sector investment, and social development. In the initial years, the main priority o f the government was to consolidate peace, and to gain the support o f various political groups. L i t t le progress was made to undertake the fundamental reforms to redefine the role o f the state from central planner and operator o f productive activities to that o f policymaker, regulator, and facilitator o f private sector investment, Moreover, few efforts were made to ensure that constitutionally independent institutions o f accountability, such as the judiciary and the parliament, have the capacity to perform their accountability functions. Civil society organizations, the media, and other nongovernmental entities are also unable to effectively act as institutions o f accountability, strengthening the checks and balances in society and on government performance. Governance in the financial sector i s also weak and banking supervision falls well below international standards. State involvement in productive enterprises has resulted in waste, appropriation o f public funds for private gain, and inefficient and outmoded industries. Such involvement also creates obstacles for private sector investment.

This has led to poor governance outcomes in Tajikistan. Tajikistan compares poorly with other countries o f the region on accountability, control of corruption, government effectiveness, and regulatory quality according to the Governance Research Indicator Country Snapshot o f the World Bank Institute. Tajikistan also scores poorly in other major surveys of governance, including Transparency International’s Corruption Perceptions Index, the Global Economic Forum’s Global Competitiveness Index, and the European Bank for Reconstruction and Development (EBRD) transition indicators dataset. Moreover, surveys undertaken by local f i r m s show corruption to be a problem. For example, about 60 percent o f people surveyed in the 2006 survey on corruption in Tajikistan undertaken by the government and UNDP, said that corruption was the main problem in Tajikistan.

Government’s efforts to improve governance

The government is taking action to strengthen governance both to attract private sector investment for growth and to improve the delivery of public services. Important reforms to streamline the licensing, inspection, and permitting process are expected to improve the climate for business. Restructuring the government administration and reforming pay and incentives i s aimed at promoting a more professional civil service. Strengthening o f public financial management-including enactment o f a new public procurement law, strengthening o f internal audit, reform o f the tax administration, and improvements in the budget process-should increase public accountability and transparency, and, coupled with other reforms, are expected to result in improved service delivery. Separation o f the policymaking from regulatory

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functions in the aviation and energy sectors, and privatization o f state-owned enterprises are expected to improve transparency and accountability in key sectors of the economy. A comprehensive assessment o f the financial sector i s the first step in defining a program to address its weaknesses.

Support of the Bank Group and of other development partners for improved governance

The Bank Group and other development are helping to improve governance in many ways. The IFCIBEE project i s helping to reform the inspections, taxation, and permitting regimes. The Public Sector Reform Project (fiscal 2006) i s supporting government efforts to restructure the public administration, improve incentives for civil servants, and reform the management o f the civil service. The forthcoming Public Financial Management Reform Project will support reforms o f financial management, procurement, budgeting, auditing, and debt management. The programmatic public expenditure review and two public expenditure tracking surveys (one for health and one for educationFhave provided the basis for further dialogue on the issues. The Cotton Sector Modernization Project (fiscal 2007), Land Cadastre Project (fiscal 2005), and Energy Loss Reduction Project (fiscal 2005) Bank are helping to improve the transparency and accountability of major sectors of the economy. The Bank’s aviation sector study and cotton sector review have highlighted the problems of governance in these sectors and recommended reforms that are now being implemented. The Community and Basic Health Project (fiscal 2006), and its Education Modernization Project (fiscal 2003) i s helping to improve the efficiency and effectiveness of the delivery of basic public services. A grant from the FIRST Trust Fund i s helping to implement the recommendations of the financial sector assessment program, carried out jointly by the Bank and the IMF, has inform the government of what needs to be done aimed at improving governance of bank and non-bank financial institutions.

Other development partners are also working to improve governance in Tajikistan. Switzerland, the EC, and EBRD are assisting with various aspects of the privatization program. Switzerland and the U.S. are helping with the licensing, inspections, and permitting regimes. The EC, the Asian Development Bank, and the U.K. are supporting the implementation o f aspects o f the government’s public administration reform strategy and with public financial management. The French government and EBRD are helping the new aviation enterprises to put into place modem accounting and financial management systems. The Asian Development Bank, Sweden, Switzerland, the EC, the U.K., and the U.S. are involved with improving the management o f health and education services. Additional information on Bank operations and analytical work aimed at improving governance i s presented in annex 4.

Support of the PDPG operation for improved governance

The PDPG operation supports governance reforms in a broad range of areas. Reforms o f the licensing and inspection regimes will reduce the demands for irregular payments. Actions to promote transparency in privatization and with encouraging greater competition among enterprises will reduce the opportunities for well-connected elites to appropriate funds for personal benefit. Separation of policy making, regulatory, and operational functions o f state-owned enterprises in the energy and aviation sectors will increase the transparency and performance of the operations. Audits of the financial statements of Barki Tajik, Tajik Gas, and TALC0 are bringing transparency to their operations. Reforms of the institutions governing cotton pricing and grading and elimination of NBT’s role in licensing cotton exports wi l l strengthen the bargaining power of farmers, which i s expected to increase their share of sales proceeds. Reforms to restructure the public service and to improve the compensation policies for civil servants and for health and education workers will reduce the opportunities and incentives for bribes. Strengthening the budget process, procurement, and internal and external audit will help to ensure that public resources are used as intended. Finally, reforms o f the policies determining how health and education budgets are formed and services delivered will reduce the misuse o f public funds and improve the services.

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2. TAJIKISTAN’S POVERTY REDUCTION STRATEGY

23. The Government o f the Republic o f Tajikistan in April 2007 formally approved its Second Poverty Reduction Strategy (PRS 2 ) for 2007-2009. Building on the first PRS for 2002-05, the PRS 2 presents the first three-year plan to operationalize the country’s long-term development vision laid out in the National Development Strategy (NDS) for 2006-2015. The PRS 2 reflects lessons learned during the implementation o f the first PRS. These include strengthening the monitoring and evaluation framework, improving the approach for prioritizing and sequencing interventions, and enhancing coordination of development partner support. The PRS 2 also incorporates key elements of its predecessor, emphasizing prudent macroeconomic management and allocating an increasing share o f the budget to the social sectors, while improving the effectiveness of spending.

24. The PRS 2 presents a comprehensive medium-term program to implement the strategic directions of the NDS: (a) improvement of public administration, (b) promotion of sustained economic growth, and (c) development o f human potential. The overarching PRS 2 objective i s to promote sustainable improvements in the living standards o f the population, particularly of vulnerable groups. The PRS 2 i s organized around three pillars, in line with its key strategic directions: (a) a functional pillar, covering public administration reform, macroeconomics, investment climate, private sector, regional cooperation and global economic integration; (b) a production pillar, covering food security, agriculture, infrastructure, energy and industry; and (c) a social pillar, covering health, education, water and sanitation, housing, and social welfare. The PRS 2 also recognizes several cross-cutting issues, including institutional reforms, demographic change, environmental management, and gender equality.

25. The PRS 2 gives a central role to private sector development to stimulate growth and poverty reduction. The strategy contains a range o f measures to enhance Tajikistan’s investment climate, including eliminating unnecessary licenses and inspections, cutting the number of mandatory standards and easing certification procedures, strengthening property rights, and improving infrastructural services. These initiatives are welcome, given that Tajikistan still ranks only 159 o f 18 1 countries in Doing Business 2009 of the World Bankhternational Finance Corporation. Sustained effort to improve the overall climate for investment i s needed if Tajikistan i s to attract the private investment expected to finance the PRS 2. Attention to development o f the financial sector will also be important.

26. The PRS 2 recognizes that action must be taken to improve governance in the public administration and in state enterprises. The PRS 2 presents measures aimed at (a) reducing corruption at al l levels o f government; (b) strengthening public procurement and financial management systems; (c) scaling back involvement o f the state in economic activity, which hinders private sector development; (d) simplifying currently complex and nontransparent business regulation; and (e) enhancing protection o f property rights. However, the strategy would be strengthened with clearer prioritization and sequencing of the reforms. Empowering one central agency that has strong political support to manage the public administration reform agenda could help in building consensus for reform and ensuring timely their implementation.

27. The government plans to both increase expenditures on education and health services and to improve their effectiveness with the aim of attaining the related MDGs. Tajikistan can achieve universal primary education if the government increases public expenditures in education during 2008-1 0, and improves the effectiveness of expenditures. The planned nationwide introduction of per capita financing o f general education accompanied by increased school autonomy, the reform o f the teacher load (stavka) system, and the introduction

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o f the medium-term budget framework for education will help to improve equity in public resources allocation between the regions and the impact of available resources. Increasing spending on health services, especially primary care, will accelerate progress towards the MDGs.

28. The PRS 2 includes a comprehensive results framework to measure progress toward key outcomes and objective. However, monitoring arrangements remain weak. The government i s strengthening capacity o f the State Statistical Committee, and the statistics offices o f the line ministries, local government entities and others to collect and analyze data.

29. The PRS 2 provides a reasonable assessment o f Tajikistan’s development challenges and the measures required to improve development outcomes. However, reforms need to be prioritized to ensure that fast progress towards the MDGs and the PRS 2 targets can be made. A stronger monitoring and evaluation system will enable stakeholders to monitor progress towards targets, providing essential information to improve the design and implementation of policies. The government plans to prepare a PRS progress report to draw lessons from implementation to inform the Joint Country Support Strategy and other strategy documents.

3. PROGRESS OF THE DEVELOPMENT POLICY PROGRAM

30. The government i s pursuing policies and institutional reforms consistent with the PRS 2 to address weaknesses in the private sector environment and public sector performance. Taken together, these reforms are key to address the urgent need to diversify the economy, improve government effectiveness in service delivery, and improve overall governance. The PDPG program o f three development policy operations i s designed to broadly support this medium-term agenda.

3 1. The government remains committed to the policy reforms presented in the PDPG 1 (May 15, 2006) and PDPG 2 (June 15, 2007) program documents. The government has demonstrated its commitment to pursue a medium-term reform agenda to promote growth and private sector development by completing the policy actions defined in the PDPG 1 and PDPG 2. The funds under PDPG 1 were fully disbursed in October 2006 and the funds of PDP.G 2 were disbursed in September 2007. The government’s commitment to the agreed program has remained strong and it has been actively implementing policy reform actions agreed for the third year.

32. Implementation of agreed policy actions has generally been satisfactory, although with some delays. Progress in promoting private sector investment i s largely on track. The government i s focusing on implementation of new and amended laws on licensing and inspections passed under the first two operations. Recognizing that permits can also unnecessarily burden business, it i s initiating work to rationalize the permits system. Planned reforms of the cotton, energy, and aviation sectors are largely proceeding as scheduled. The Bank i s coordinating closely with other development partners in these areas, who are providing complementary technical assistance and finance for investment. Reforms of the public administration on the whole are on track. Measures to improve delivery o f health and education services are being implemented in accordance with expectations. Details of progress in al l policy areas i s discussed below.

33. While outcomes of the reform program are still relatively modest-not surprising given the country’s short history as an independent state and its recent emergence from civil conflict-the PDPG program has laid the foundation for future growth and poverty

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reduction. The early years o f the operation focused on strategy preparation and adoption of new legislation, with implementation taking place in the final year of the operation, so results will take time to appear. However, the PDPG operation has created a solid basis for private investment and innovation and for more effective public services, which are expected to eventually result in sustained economic growth and poverty reduction. Future PDPG programs will support deepening o f reforms already started, while addressing new areas.

Pillar 1: Promoting Private Sector Development

34. To sustain economic growth over the medium and long-term, Tajikistan will need to further diversify the economy. Realizing the potential, however, will require significant improvements to the private investment climate. Currently, the private sector in Tajikistan must cope with an unclear and overly cumbersome regulatory and institutional framework that stifles competition, increases the costs and risks o f doing business, and discourages innovation and risk taking.

35. To address these issues, the government i s implementing private sector development reforms with support of a Bank-administered Institutional Development Facility grant, the Asian Development Bank, DFID, and the IFC Business Enabling Environment Project. Init ial efforts are focusing on the simplification of the business registration process, increasing the efficiency o f custom procedures, and streamlining and simplifying the business license, inspections, and permits regime. Details follow.

Reform of Business Licensing, Inspections, and Permits

36. Licenses. The government is streamlining the licensing system. The government in 2004 adopted a new licensing law that reduced the number o f activities subject to licensing from some 1,500 to about 1 13, updated application processing requirements, and harmonized licensing fees. In 2005 and 2006, under the first two PGPG operations, the government adopted amendments to the law and a regulatory framework to implement the law. Under PDPG 3, the government has focused on implementation of the law, tracking agencies’ preparation or revision o f subnormative acts in compliance with the new licensing legislation and their registration with the Ministry o f Justice where required. These documents provide detailed instructions to staff and applicants on the licensing process. While agencies have been slower than expected to comply with this requirement of the law, the process i s now well underway and al l agencies are expected to comply with the prior action by January 15, 2009. USAIDh3usiness Environment Improvement project has partnered with IDA in support of this effort.

37. Inspections. The government aims to reduce the frequency, duration, and arbitrariness of inspections. The government under PDPG 1 adopted legislation to reduce the burden o f inspections on business. Under PDPG 2 the authorities completed the legislative framework (through amendments to the secondary legislation) and initiated the implementation o f the new law, which requires inspection agencies’ to prepare and register inspections checklists and manuals with the Ministry o f Justice. Two pilot agencies prepared the required documents. Under PDPG 3 all inspection agencies have now prepared inspection manuals and registered them with the Ministry of Justice. They also have registered checklists that cover at least 50 percent o f inspections; in many cases checklists cover 100 percent o f inspections. This prior action i s complete. IFC/Business Enabling Environment (BEE) project has partnered with IDA in support of this effort.

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38. Permits. The government has initiated work to diminish the burden of permits on business. To further enhance the business environment the government has reached agreement with the IFC/BEE Project on a workplan that sets forth the steps to be taken and a timetable to reduce the burden o f permits on businesses. The IFCBEE Project i s supporting the government in implementing the workplan.

39. The government i s undertaking a review of implementation of the new licensing and inspections legislation. In keeping with the focus on implementation o f the PDPG 3, the government i s undertaking an in-depth review o f two licensing and two inspection agencies’ implementation o f the new laws, regulations, and procedures in granting licensing and conducting inspections to determine if agencies are fully applying the new laws and regulations when issuing licenses. The entities participating in the review are (a) construction and pharmaceuticals for licenses, and (b) f ire and sanitation for inspections. The review, which i s expected to be complete by the end o f December, will recommend reforms to further reduce the regulatory burden on businesses.

40. The next step in reducing the regulatory burden on business i s to address the issue of permits and to further improve the administration of the new licensing and inspections regimes. An important step will be to raise awareness o f entrepreneurs o f the requirements o f the new licensing and inspections through measures such as a communications campaign, posting license forms and instructions on a website, and preparing brochures and instructions booklets for distribution at licensing agencies.

Improve Transparency in Privatization Process and Market Competition

41. Tajikistan has now fully implemented its privatization plan. The authorities divested about 420 medium and large enterprises during 2004-06 and another 79 firms in 2007, completing the privatization of al l medium and large enterprises. The PDPG operations have promoted transparency in the privatization process by supporting the conduct by independent international auditors o f annual reviews o f the privatization process to monitor compliance with the law. The most recent of these compliance reviews was completed in summer 2008. This showed that the government adopted remedial measures to address the deficiencies noted in the reviews o f the 2005 and 2006 privatization. The compliance reviews have been posted on the website o f the State Committee on Investment and State Property Management. The government in January 2008 disclosed in a national newspaper details o f past privatization transactions and upcoming asset sales.

42. T o promote free and fair competition in the market place, the parliament enacted in July 2006 amendments to the competition law, and in 2007 amendments to the law on natural monopolies. The government has revised implementing regulations and institutional mechanisms to implement these amended laws. In addition, the Ministry of Economic Development and Trade issued internal orders to ensure that its administrative procedures comply with the law and regulations on competition.

Regulatory reform in key strategic sectors

a. Aviation

43. Good progress has been made since June 2006 with aviation sector reforms. The government recognizes the need to reform the aviation sector to reduce the cost and increase the convenience o f air travel. Under PDPG 1 and PDPG 2, the government separated the functions o f

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policy-making, technical regulations, and accident investigation, with the aim o f increasing the transparency and performance o f operations. It also adopted a resolution on restructuring Tajik State Airlines, which commits to a separation of airlines, airports, and air traffic control by the end o f 2008. This prior action i s expected to be fully complete by January 15, 2009. In addition, the government has allowed several airlines from the region, including a private Tajik carrier, to operate new flights, expanding choices for consumers. These reforms have contributed to a 37 percent increase in passenger traffic (both domestic and international), from 878,000 passengers in 2006 to 1.2 million passengers in 2007.

44. A national aviation policy aimed at ensuring that the sector i s able to make the best possible contribution to the nation’s economic development i s the next step in the reform process. The series o f aviation sector reforms will ensure that the costs and profits of the various operations o f Tajik Airlines are transparent and create opportunities for other airlines to enter the market. The French government and the EBRD, who are financing improvements in airport infrastructure and facilities, are coordinating their support with that of the Bank to maximize the effectiveness o f policy dialogue in encouraging reform.

45. The next step in aviation sector reform i s to adopt a national aviation sector policy aimed at ensuring that the aviation services are able to make their maximum contribution to the nation’s economic development. Such a policy would address issues such as aviation safety, including funding o f air traffic control and the safety regulator, aviation security to ensure that flights and facilities are secure from acts o f terrorism, aviation taxation, the extent open skies will be permitted, private sector participation in provision of aviation services, airport infrastructure planning and development for the medium and long term., consumer protection, and environmental policy. The government plans to develop the policy with assistance of the World Bank.

b. Cotton

46. Recognizing the challenges facing the cotton sector-traditionally, Tajikistan’s most important agricultural export-the government adopted a Cotton Sector Reform Strategy in early 2005. The strategy proposes measures to (a) resolve the current farm debt overhang, (b) revise the pricing and contracting systems, (c) encourage alternative sources o f financing for agriculture, (c) abandon the practice of local authorities o f setting cotton production targets, and (e) create the necessary framework for increasing and encouraging competition in input markets.

47. The PDPG operations are supporting implementation of several elements of the strategy. The government under the PDPG 2 issued a resolution introducing the use o f universal cotton grading standards. Under PDPG 3, Tajik Standard has registered universal cotton grading standards as one of the standards for which it provides accreditation. A joint venture of the Ministry o f Agriculture and an internationally recognized private U.K.-based firm i s now grading cotton in accordance with the new standards. Support o f the Asian Development Bank has helped to equip the laboratories and train staff o f the joint venture to apply the new standards. Tajikistan i s the first Central Asian country to have introduced international standards for cotton grading, which should eventually enable Tajikistan to fetch higher prices on the international market for its cotton. However, applying universal cotton grading standards widely will take time and considerable capacity building among farmers, gins, traders, Tajik Standard, and others before the new standards can be widely applied. Thus, only a small proportion of the 2008 cotton crop will be graded according to the universal cotton grading standards. The government under PDPG 2 also introduced a new cotton pricing method (methodica) for calculating the ex-gin price in Tajikistan to replace al l other pricing methods. Since then, the Birja (the state-owned commodity

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exchange) has been reorganized and it no longer has a role in registering contracts, a first step in transforming the organization into a true commodity exchange.

48. The role of the National Bank of Tajikistan in permitting or supporting cotton export licenses has been eliminated. The government issued a resolution in November 2008 removing any role for the central bank in permitting or supporting cotton export licenses. While aimed at ensuring that exporters repaid their cotton debt, this i s not a legitimate role for the central bank and served largely to protect cotton financiers at the expense o f farmers.

49. M o r e needs to be done to revitalize agriculture, including the cotton sector, in Tajikistan. Many cotton farmers s t i l l do not have land use certificates, and thus full control over cropping and marketing decisions. Access to rural finance i s s t i l l limited; and what i s available i s often provided on terms that are not transparent. Access to extension services aimed at helping farmers to diversify their output i s also diff icult to obtain.

c. Electricity

50. The government has made good progress under the PDPG program in implementing the energy strategy. Fol lowing a tar i f f increases in 2005 and 2006, the authorities adopted a resolution raising electricity tariffs in line with a revised schedule (2007- 2010) to ensure that full cost recovery can be achieved by 2010. In line with the revised schedule, the government in M a y increased electricity tariffs by an average o f 64 percent. It has announced increases to take effect in January 2009. The tar i f f reforms have enabled the government to reduce the quasi-fiscal deficit slightly from around 10 percent o f GDP in 2005 to 9 percent in 2007. With the assistance o f the Bank, an international firm has conducted an audit o f the financial accounts o f Barki Taj ik and Taj ik Gas. Both energy f i r m s are implementing international financial reporting standards under the Bank-supported Energy Loss Reduction Project. This two-year effort will enable the energy utilities to improve their internal controls and management o f their f ixed assets and revenues. The government has maintained i t s program aimed at ensuring that the poor and vulnerable are able to access electricity at prices they can afford, although more needs to be done to improve targeting o f assistance. Despite good progress with reforms, much more must be done to prevent the energy shortages that affl ict Tajikistan most winters, with a deleterious impact on the economy and on social welfare. T o help the government to repair the electricity and gas transmission system, to import the energy needed to meet a potential winter shortfall, and to help implement the Energy Emergency Act ion Mitigation Plan, the World Bank i s providing US$3 mi l l ion in emergency assistance. These resources will also help over the medium term to initiate preparatory actions for the next two winters (during which an energy deficit i s expected) and to identify actions to be implemented over the medium and long-term to improve the energy security o f the country.

Pillar 2: Public Sector Reform and Improving Public Service Delivery

5 1. The government i s committed to implementing public sector reforms to improve the effectiveness of the administration. The government adopted on March 16, 2006 a comprehensive public administration reform strategy. The strategy covers restructuring o f government institutions, c iv i l service reform including wage reform, local public administration, and public financial management. The strategy has a long-term timeframe and short and medium-term action plans. The government has begun to implement the strategy’s short-term measures, including restructuring o f selected government institutions, and sectonvide reforms o f health and education to improve e access to and quality o f public services.

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52. The Bank through the Public Sector Reform Project (approved in July 2006) i s supporting the implementation and monitoring and evaluation of the public administration reform strategy. The operation i s assisting with selected measures to rationalize core public administration structures and reform the civil service management and remuneration system. In addition, the proposed Public Financial Management Project i s expected to contribute to improved public financial management by supporting the implementation o f the medium-term expenditure framework (MTEF), modernizing core treasury functions and operations, and streamlining financial reporting. Details follow.

Public sector management reform

a. Rationalization of Core Public Administration Structures

53. The government’s 2006 public administration reform strategy provides the basis for the rationalizing and increasing the effectiveness of the public administration through better delineation of authorities. However, the 2006 elections and the subsequent reorganization o f government revealed that a deeper consensus was needed before major reforms could be implemented. Therefore, the authorities decided to first draft a concept for the structure of the public administration and measures for its realization. The Department o f Economic Reforms and Investments has drafted a concept, satisfactory to the World Bank, which was approved on September 15, 2008. The concept presents measures for rebuilding the public administration that are in line with the generally accepted principles of the functioning of the public administration in a market economy. The government has drafted an action plan to implement the provisions of the concept, which includes drafting o f a legal act, regulating public administration, as well as conducting vertical functional reviews to align the public administration with the principles established in the concept.

b. Civil Service Reform

54. Civil service wage reform i s being implemented as planned. In agreement with the Bank, the government i s reforming public sector wage policy, aimed at linking rewards to performance and at creating improved career and earnings prospects for public officers. Under the PDPG operations, it introduced and has systematically rolled out to al l central ministries a new wage system. This (a) integrates al l bonuses and allowances, (b) decouples the calculation of the incremental wage for qualification ranks from the minimum wage, (c) introduces in a phased manner decompression of wages to better reward those that hold positions o f higher complexity and responsibility, and (d) changes the status o f technical staff in the ministries to contract staff. This i s a significant step toward building a professional civil service, although full implementation i s expected to take a total o f four or five years.

55. Progress with civil service reform i s somewhat slower than expected, but the government remains committed to this difficult reform area. The Civil Service Department has developed a register (classification) o f the civil service positions. However, the secondary legislation on job classification and pay grading i s behind schedule, due to the delay in contracting qualified consultants to assist the government in developing a civil service pay grading structure consistent with the recommendations o f the Bank’s 2008 wage policy note. This grading structure would need to accommodate the current pay levels, as well as establish an incremental progressive scale reflecting career development and performance. It i s expected to improve incentives and career management in the civil service, with the aim of attracting and retaining skilled professional staff. The computerized civil service register will have to be

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designed on the basis of the new job classification system and wage grid for civil servants, and will therefore have to be postponed until after decisions on the new system are reached.

c. Public Financial Management Reform

56. The government i s implementing its new procurement law. The PDPG 1 and PDPG 2 supported the drafting and adoption o f a modern procurement law and its implementing regulations. PDPG 3 i s focusing on implementation of the law, which i s progressing satisfactorily. The standard bidding documents adopted under PDPG 2 were registered with the Ministry o f Justice in January 2008. Completion o f the training and accreditation of the staff o f the public procurement agency and of the six entities-the ministries o f education, health, justice, industry and energy, agriculture, and the State Committee for Investment and State Property Management (SC1SPM)-whose procurement units were made fully functional in 2008. Technical assistance for this has been provided under a grant from the Bank’s Institutional Development Fund. Staff o f the newly functional procurement agency and six entities are now beginning to procure goods, works, and services in accordance with the new procurement law.

57. The government i s expanding the MTEF to additional sectors. The government formally endorsed the introduction of the MTEF through a resolution issued in September 2006. Implementation started in 2007 with a pilot covering the education sector. Recognizing the value o f a three-year budget framework, the government i s now planning to expand the MTEF to four additional sectors-transport and communications, energy and industry, agriculture and environmental protection, and culture-during next budget cycles. Introducing the MTEF requires radical restructuring of the budget processes to give the line ministries+urrently marginalized in the process o f determining budget allocations in their respective sectors-a central role in the budget process, with responsibility for coordinating and directing budget allocations for a l l budget organizations in their respective sectors consistent with an aggregate sector ceiling determined by the Ministry o f Finance. The process requires considerable capacity building, and the government i s now developing an MTEF capacity building action plan. Development partners are considering establishing a basket fund to finance i ts implementation. Ln addition, the government has prepared and published budget execution reports that comprehensively analyze implementation o f the budgets o f those sectors covered by the MTEF. Development partners (EC, Department for International Development U.K (DFID)), United Nations Children’s Fund (UNICEF), and the IMF) intend to support strengthening o f budget management and of the MTEF process to improve predictability o f the budget and to ensure priority and efficiency of public spending.

58. The government i s committed to strengthening internal financial control. The government adopted in March 2007 its public internal financial control strategy. This strategy i s compliant with international standards, and includes the decentralized internal audit approach and methodology, structural and institutional arrangements, and staffing and skills requirements. In November 2007 the parliament approved amendments to the law on public finances, which cover the key budget organizations, managerial accountability, and the internal control and audit function. The EC-financed public financial management project i s supporting implementation of the strategy.

59. Work to establish an independent external audit function i s advancing. The government adopted in September 2008 the strategy and action plan for the establishment o f an independent external audit body, meeting the prior action for the PDPG 3. I t has now initiated work on the drafting of legislation on external audit. The Swiss Economic Cooperation in collaboration with the World Bank i s providing technical assistance to the government to

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implement the action plan. Other development partners have also expressed interest in supporting implementation o f the strategy and action plan.

60. A Programmatic Public Expenditure Review and public expenditure tracking surveys of spending in the education and health sectors have been completed. The reports reveal weaknesses in public expenditure management and recommend action for improvement. The findings o f the reports have been discussed with key government officials, development partners, and other stakeholders, and have been released to the public.

Public service delivery

a. Primary Health Care

6 1. The government adopted in May 2005 a national health financing strategy, based in part on an earlier health policy note prepared by the World Bank. The strategy aims to improve fiscal sustainability, transparency, and accountability in the health sector. The financing reform measures agreed under the PDPG operations include (a) allocating a greater share o f wage increases to primary health care workers, (b) reintroducing the basic benefits package, (c) introducing a new job classification and wage grid system for primary health care workers, and (d) introducing per capita allocations in primary health care in two phases on a pilot basis.

62. Implementation of the health policy actions i s largely on track, with slippages in some planned reforms. For the third year, the government has adopted a resolution that allocates in 2008 a greater share o f wage increases for health workers to primary health providers. The Ministry o f Finance in July 2008 expanded per capita financing to additional seven pilot rayons. However, expansion o f the basic benefits package to four additional rayons has been postponed to the beginning o f 2009 due to the emergence of a financing gap in the pilot rayons. and the review o f the findings o f surveys o f patients in the districts participating in the basic benefits package pilot that have collected information on patients’ satisfaction with primary health and hospital services, patient’s financial burden under the basic benefits package. To address the issue o f financing gap, the government in September 2008 refined the basic benefits package model by introducing higher co-payments and updating cost o f health services. To further refine the model, the government i s reviewing the findings of surveys of patients in the districts participating in the basic benefits package pilot that have collected information on patients’ satisfaction with primary health and hospital services, patient’s financial burden under the basic benefits package. Introduction o f a new job classification and wage grid system for primary health care workers has been delayed, and will now be introduced in 2009 or 2010.

63. The PDPG operations complement other projects in the health sector. The World Bank-financed (with cofinance from Sweden International Development Agency and Swiss Development Cooperation) Community and Basic Health Project (approved by the Board in December 2005), the Public Sector Reform Project and projects supported by other donors (USAID-financed Zdrav++ Project, Swiss-financed Sino Project, Asian Development Bank- financed Health Sector Reform Project) are providing support for capacity building, monitoring, and implementation of the reforms supported through the proposed operation.

b. Education

64. The government has continued to expand the system of per capita allocation of the education budget. In September 2007, it adopted a resolution that specifies (a) the pilot districts that will form their general education budget on a per capita basis, (b) the timetable of the scale-

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up o f per capita financing, and (c) the methodology. In June 2008, the government adopted a new remuneration and promotion system that compensates education workers based on level o f responsibility and qualifications, following the recommendations o f the Bank’s 2008 wage policy note.

Reform Areas

Proposed PDPG 3 Prior Action

Table 2: Status and Proposed Changes in Prior Actions from those Indicated at PDPG 2 Stage

Amendments to the PDPG 3 Prior actions

Comments

Pillar 1: Pron Improving the (i) Business licensing, permits, and inspections.

Trans- parency and accountability in privatization and enhancing competition

ting private sector development #vestment climate Licensing

1. Key license-granting ministries and agencies issue internal instructions pursuant to government regulation adopted in May 2007 to implement the law and regulations on licensing.

Permits

1. Adopt an action plan agreed with IDA to reduce the burden of permits on businesses. Inspections

1. Issue inspection manuals and checklists for all key types o f inspections and all agencies specified in the new law on inspections.

Licensing and Business Inspections

2. Empower an organization to undertake reviews of compliance with the amended law on licensing, the new law on inspections, and other laws related to the investment climate. Transparency

1. Disclose in the media detailed information on al l asset sales in 2007 by the state committee on investments and state property management.

Compliance Review

1. Complete and make publicly

Licensing

1. The ministries and agencies o f the Recipient responsible for the granting o f business licenses have: (a) adopted the necessary internal documents to implement the Law on Licensing (Decree 37, dated May 17,2004, as amended) and its associated regulations; and (b) taken all steps to bring all other internal documents into accordance with the Law on Licensing (Decree 37, dated May 17,2004) and its associated regulations, including registration with the Ministry o f Justice.

Permits

1. The SCISPM adopts a workplan agreed with IDA to reduce the burden of permits on businesses. Inspections

1. The ministries and agencies o f the Recipient responsible for inspections of businesses have registered new or amended inspection manuals and checklists with the Ministry of Justice. Licensing and Business Inspections

1. SCISPM submits draft report to the government with the results o f the review o f the implementation o f the amended law on licensing and the new law on inspections. Transparency

1. Disclose in the media detailed information on al l asset sales in 2007 by the state committee on investments and state property management.

Compliance Review

1. Complete and make publicly

N o change. The prior action i s now specified in greater detail.

No change.

No change.

More progress has been made than expected, which the revised indicator reflects.

No change.

N o change.

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Regulatory re

Aviation

Cotton

Energy

Pillar 2: Pub1 Reforming pur (a) Ration-


available the results o f a random compliance review of randomly sampled privatization transactions in 2007. Laws on Competition and Natural Monopolies:

1. Revise implementing regulations and institutional mechanisms to implement new law on natural monopolies. 2. The Ministry of Economic Development and Trade issues internal instructions to ensure that its administrative procedures comply with the law and regulations on competition, 'm in key strategic sectors

1. Implement restructuring in accordance with the timetable set forth in government resolution for the separation of airport, airline, and air traffic control.

1. Conduct a rev iew o f a l l contracts registered with the Birja since July 2007 to assess compliance with the new cotton pricing methodica.

2. Tajik Standard registers universal cotton grading standards as one of the standards for which it provides accreditation.

1. Issue government resolution raising electricity tari f fs in line with the agreed revised schedule (2007-2010).

Amendments to the PDPG 3 Prior actions available the results o f a compliance review of randomly sampled privatization transactions in 2007.

Laws on Competition and Natural Monopolies:

1. Revise implementing regulations and institutional mechanisms to implement new law on natural monopolies. 2. The Ministry of Economic Development and Trade issues internal orders to ensure that its administrative procedures comply with the law and regulations on competition,

1. The Recipient has satisfactorily implemented restructuring of the aviation industry for the separation of airport, airline and air traffic control functions in accordance with the plan set forth in Resolution No. 175 of the Recipient's Government, dated April 3,2007, as agreed with the Association. 1. Conduct a review of a random sample of contracts registered with the Birja since July 2007 to assess compliance with the new cotton pricing methodica.

2. Tajik Standard registers universal cotton grading standards as one of the standards for which it provides accreditation. 3. Issue a government decree abolishing the requirement for documentation from the NBT to permit or support cotton export licenses starting with the 2008 croa 1. Issue government resolution raising electricity tariffs in line with the agreed revised schedule (2007-2010). [Being done on semiannual basis until end of

2. Submit draft audit of the 2007 financial statements of Barki Tajik and o f Tajik Gas to IDA. 3. Implement at Barki Tajik and at Tajik Gas the financial management improvement program (including migration to an international financial reporting system) in line with the agreement specified in the Energy Loss Reduction Proiect and the January 2006

2010.1

Comments

N o change.

No change

Dropped, as the Birja now longer has a role in registering contracts. No change.

Added to address issues o f NBT and cotton-sector governance.

N o change

Added to address issues o f energy sector governance. Added to address issues o f energy sector governance.

memorandumbf understanding. sector reform and improving public service delivery 2 sector management 1. Adopt government resolution I 1. Presidential Decree 541, dated I Nochange.

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alization of core public administration structures (b) Civil service reform

Civi l service management

1. Adopt secondary legislation by March 2008 to implement a new job classification and central wage model (based on categories, bands and steps, integrating years of service component).

(c) Public financial management reform


endorsing the draft concept (which i s acceptable to IDA) for the structure of the public administration and measures for its realization. Wage reform

1. Implement the third phase in wage decompression satisfactory to IDA.

Medium-term expenditure framework

1. Issue budget instructions for the pilot sectors in accordance with the instructions for the medium-term budget framework. 2. Publish the 3-year fiscal framework 2009-1 1.

Procurement reform

1. Adopt the new regulation on the public procurement agency in line with the public procurement law. 2. Ensure that procurement departments in at least six government agencies are fully functional. Internal control and audit

1. Establish a central methodology division in the Ministry of Finance (responsible for setting standards and methodologies o f internal audit in the public sector). 2. Transform the current unit of internal financial revision and control into the internal audit unit o f the Ministry of Finance in line with public internal financial control strategy adopted in March 2007. External audit

1. Develop a strategy and action plan for the establishment of an independent external audit body and draft the legislation which shall govern the external audit function.

Amendments to the PDPG 3 Prior actions September 16,2008, approving the concept and an action plan for improving the structure of the Recipient’s public administration has been adopted. Wage reform

1. Presidential Decree 480, dated June 20,2008, implementing the third phase o f wage decompression has been adopted. Civi l service management

1. Submit for interministerial coordination draft secondary legislation to implement a new job classification and wage grid (based on categories, bands and steps, integrating years of service component).

Medium-Term Budget Framework

1. Issue budget instructions for the pilot sector in accordance with the instructions for the medium-term budget framework.

2. Publish the 3-year fiscal framework 2009-1 1.

Procurement reform

1. Adopt the new regulation on the public procurement agency in line with the public procurement law. [Complete.] 2. Ensure that procurement departments in at least six government agencies are fully functional. Internal control and audit

1. Submit draft amendments to the law on public finance and draft government resolution on MTEF and reform of internal control and audit to parliament.

External audit

1. Presidential Decree 557, dated October 29,2008, approving the strategy and action plan for the establishment of an independent external audit entity has been adopted.

Comments

N o change

This policy action had been delayed, and a more realistic target specified.

No change.

N o change. Procurement reforms now more clearly specified.

The original policy actions have been replaced by a policy action that that better reflects the government capacity.

The first part of this prior action has been strengthened. However, more time i s needed to draft legislation which enjoys

Public service (a) Primary health care

(b) Education

Proposed PDPG 3 Prior Action Amendments to the PDPG 3 Prior actions

Comments

:livery 1. Adopt a government resolution that allocates in 2008 a greater share o f wage increases in health sector to primary health care workers, as agreed with IDA. 2. Expand basic benefits package and per capita financing to oblast level and develop a mechanism to redistribute funds at oblast level to improve equity.

1. Adopt a new remuneration and promotion system that compensates education workers based on level o f responsibility and qualifications. 2. Adopt a government resolution satisfactory to IDA that specifies (a) the pilot districts that wi l l form the general education budget on a per capita basis, (b) the timetable, and (c) the methodology.

1. Presidential Decree 480, dated June 20,2008, allocating a greater share of wage increases in the health sector to primary health care workers has been adopted. 2. Expand per capita financing to additional seven pilot rayons by July 2008.

1. Adopt a new remuneration and promotion system that compensates education workers based on level o f responsibility and qualifications. 2. Adopt a government resolution satisfactory to IDA that specifies (a) the pilot districts that wi l l form their general education budget on a per capita basis, (b) the timetable o f the scale-up o f per capita financing, and (c) the methodology.

strong government ownership, so the send part o f this prior action i s deferred to the proposed next development policy grant.

N o change in the prior action. Expanding the basic benefits package was postponed to the beginning o f 2009, so i s no longer included in the milestone. N o change.

4. PROPOSED OPERATION

A. Description of the Operation

65. Programmatic Approach. This i s the third of the three programmatic development policy operations consistent with the Country Partnership Strategy finalized in July 2005. The full details o f the policy actions supported under PDPG 1, PDPG 2, and PDPG 3 are specified in the policy matrix (annex 2).

B. Objectives, Themes, and Policy Areas

66. Development objectives. The development objectives o f the proposed PDPG are to improve the environment for private sector development, and to improve overall functioning o f the public sector and the delivery of key public services. The proposed program i s aligned with pillars 1 (addressing public administration reform, macroeconomics, investment climate, and private sector) and 3 (addressing health and education) of Taj ikistan’s poverty reduction strategy.

67. Themes of the operation. To achieve its development objectives, the program requires maintenance o f macroeconomic stability. To promote private sector development, the program will support measures to reduce the cost of doing business, promote transparency of the privatization process, and assist with regulatory and institutional reforms in key strategic sectors (aviation, cotton, and energy). To improve the overall functioning o f the public sector and improvements in the delivery o f public services, the program will support public sector reforms

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aimed at improving public sector management, and the efficiency and effectiveness o f public spending. The program wil l also support reforms in education and health sector policies to improve access, quality, and equity o f services. Prior actions were selected on the basis o f three criteria: (a) their importance for the country’s growth and development, (b) the existence o f commitment o f the authorities for the reform, and (c) availability o f assistance from donors to enable the government to achieve the reform. Excessive and duplicative business regulations and a relatively closed aviation sector are among the important constraints to private sector development in Tajikistan. In ineffective public sector, a result o f Tajikistan’s being a young state, serves to hinder both private sector investment and effective delivery o f public services. C iv i l service reform (including wage reform) and strengthened public financial management (particularly external audit) are important elements o f an overall public administration reform program. Reforms with potentially high impact (restructuring o f Talco and other state-owned enterprises, some cotton sector reforms, judicial reform, and strengthening o f local government) have not been included in the program because o f a lack o f government commitment to move ahead in these areas. The table below l is ts the prior actions agreed with the government for PDPG 3.

Table 3: Prior Actions for PDPG 3

Reform of business licensing and inspections

Aviation

reform

Civil service reform

Public financial management reform Improved public service delivery

The ministries and agencies o f the Recipient responsible for the granting o f business licenses have: (a) adopted the necessary internal documents to implement the Law on Licensing (Decree 37, dated May 17,2004, as amended) and its associated regulations; and (b) taken all steps to bring al l other internal documents into accordance with the Law on Licensing (Decree 37, dated May 17, 2004) and i ts associated regulations, including registration with the Ministry of Justice. The ministries and agencies o f the Recipient responsible for inspections o f businesses have registered new or amended inspection manuals and checklists with the Ministry of

~~~ ~~

The Recipient has satisfactorily implemented restructuring o f the aviation industry for the separation o f airport, airline and air traffic control functions in accordance with the plan set forth in Resolution No. 175 o f the Recipient’s Government, dated April 3.

Presidential Decree 541, dated September 16, 2008, approving the concept and an action plan for improving the structure of the Recipient’s public administration has been adopted. Presidential Decree 480, dated June 20, 2008, implementing the third phase o f wage decompression has been adopted. Presidential Decree 557, dated October 29,2008, approving the strategy and action plan for the establishment of an independent external audit entity has been adopted.

Health Presidential Decree 480, dated June 20, 2008, allocating a greater share of wage increases in the health sector to primary health care workers has been adopted.

68. Expected outcomes. Over the medium term, the three-year PDPG operation i s expected to result in an investment climate more conducive to growth and in greater access to quality public services. Specifically, reforms in the business climate are expected to lead to (a) a reduced regulatory burden, (b) more choice (and eventually lower costs) in aviation services, (c) a somewhat more transparent cotton sector (leading over time to higher incomes for farmers), and (d) improved efficiency and financial viabil ity o f energy utilities (resulting in the medium term in greater reliability o f and access to modern energy services). Reforms o f the public sector are expected to result in (a) a more effective government, the elements o f which include (b) improved budget management, (c) more transparent procurement, and (d) stronger internal control and audit. The operation also expects to achieve (e) greater access to primary health services, and (0

22

and more efficiency in resource allocation in education (leading to higher access and better quality education services). The outcomes and the baseline, targets, and means o f measurement are described in the program’s policy matrix (annex 2). The proposed Programmatic Development Policy Finance for 20 10-1 2 will help to ensure that the medium to long-term results are achieved.

C. Linkages to Country Partnership Strategy

69. The three programmatic development policy operations support the key policy reforms intended to meet the objectives of the Country Partnership Strategy for fiscal 2006-09. The Country Partnership Strategy, discussed by the Board on July 26,2005, focuses on maintaining growth in the short term and building a foundation for growth in the future. Developed in close consultation with the government, it focuses on three strategic objectives: (a) improve business opportunities in rural and urban areas, (b) enhance the quality of health and education, (c) improve the delivery of energy services and exploit the country’s hydropower potential. These are the areas in which the Bank has a comparative advantage; other development partners will support other elements of the country’s development strategy and some will partner with the Bank in above-areas of focus.

70. T o achieve the objectives of Country Partnership Strategy, the proposed operation will support a selective cross-cutting reform program. To improve business opportunities in rural and urban areas, the operation i s supporting reforms aimed at streamlining licensing, inspections, and permits regimes, ensuring greater transparency o f the privatization process, promoting market competition, and improving aviation transport. The operation i s promoting equity and efficiency in the use of public resources for education and health services by supporting the reform o f the budget allocation mechanism (per capita allocation) and the other reforms planned for these sectors. The operation i s also supporting energy sector reforms aimed at improving the delivery of energy services and increasing the supply of electricity exports. These reforms are complementing the Bank’s ongoing investment projects in public administration, education, health, agriculture, and energy. The policy matrix included in the annex 3 shows how each o f the proposed reform programs i s linked to analytical work and Bank and other development partner supported programs.

D. Collaboration with the IMF and Other Donors

71. The Bank and the IMF are collaborating closely to help the government address the macroeconomic crisis. The Bank and the Fund have been closely coordinating their policy dialogue to help the authorities maintain macroeconomic stability in the face o f significant global shocks. The Fund and the Bank are coordinating their missions to ensure maximum synergy as the Fund reviews progress under its SMP and the Bank continues i t s dialogue on progress with the policy actions supported by the PDPG 3. In general, the Bank takes the lead and provides background to the IMF program in private sector development and privatization, enterprise reforms, farm productivity, and regulatory reforms (see details in annex 4). The Bank and the Fund share responsibility in public sector management, budget planning and execution, financial sector reforms, and utilities’ reform. The Fund and the Bank cooperate on fiscal policies and reduction of quasi-fiscal deficits, which requires close cooperation with the Bank’s programs for health, education, and infrastructure. The two institutions are working together to produce the debt sustainability analysis. The Fund leads in macroeconomic policy, tax reform, and in revenue and expenditure management. In these areas the Bank takes into account the Fund policy recommendations and ensures consistency between them and its own measures. In addition, there i s close coordination between the Bank and the Fund concerning the public sector reform agenda.

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72. The Bank i s also coordinating closely with other development partners in Tajikistan. The development partners have recently established a donor coordination council, with a rotating chair (currently held by the Swiss). The members o f the council, which meets monthly, discuss developments in Tajikistan, exchange experience, and share information on current and planned interventions. The establishment o f this forum has greatly improved coordination of development partner support in the country. The development partners, including the World Bank, are now in the process o f formulating a joint assistance strategy, expected to be finalized in mid-2009.

73. Development partners are providing substantial technical assistance and policy advice in support o f the reform program supported under the PDPG 3. For example, USAID i s assisting with the assessment o f implementation o f the laws on licensing and inspections. The Asian Development Bank i s supporting the implementation of the new cotton grading system. The Bank, the European Commission, DFID, Swiss Economic Cooperation, and USAID are working closely to support the government’s reform program in the area o f public financial management. The Bank, USAID, the Asian Development Bank, and UNICEF are al l supporting reforms of the health and education sectors. The European Commission, the Asian Development Bank, DFID, and the IFC Business Enabling Environment Project are working together to support regulatory reform and other measures aimed at improving the climate for investment.

74. Stronger partnerships with non-OECD donors are being pursued. China and Russia have become important financiers in Tajikistan. They are keen to avoid duplication and waste in their operations and are interested in strengthening their collaboration with other development partners in areas of common concern. For example, the Bank, and the IMF are discussing issues o f long-term debt sustainability with their Chinese and Russian counterparts. The current macroeconomic crisis highlights the importance o f such collaboration. The Bank and other development partners will discuss specific areas o f mutual interest, such as infrastructure development and regional integration.

E. Relationship with Other Bank Operations

75. The proposed reforms are based on extensive Bank analytic and advisory activities carried out during the past three years. A public expenditure and institutional review, a country procurement assessment report, a country financial accountability assessment, a public and civil service wage note and an update, and a remittances note have informed the public sector reform program. A trade diagnostic, an investment climate assessment, an aviation sector note, an energy utility reform review, the Central Asia Regional Electricity Export Potential Study, and an Agricultural Development Strategy have highlighted key reforms required to attract private sector investment. A poverty assessment update has deepened understanding of poverty and its dynamics, and i s important for the design o f policy reforms that effectively reduce poverty. Poverty and social impact assessments of cotton and energy reforms have helped promote dialogue with the government on issues of social protection. A programmatic public expenditure review i s supporting Tajikistan’s first public expenditure and financial accountability (PEFA) review, and analyzing the country’s prospects for achieving the MDGs and long-term growth, and providing support for the introduction of the MTEF. Two public expenditure tracking surveys, one for health and one for education, are promoting transparency and efficiency of expenditure in these sectors. A Country Portfolio Fiduciary Review revealed strengths and weaknesses in government procurement and financial management systems and recommended actions for improvement. A country environmental analysis has identified policy and capacity reforms to improve environmental management. A Report on the Observance of Standards and Codes

24

(ROSC) on accounting and auditing now under preparation will analyze the current situation and will recommend measures to strengthen these important areas o f public financial management. A country economic memorandum i s identifying the constraints to growth and laying out options to address them. Annex 3 presents the linkages between Bank’s analytical and advisory work and the reform actions o f the proposed operation.

76. The proposed PDPG 3 supports policy reforms that are critical to the success of ongoing and planned investment and technical assistance operations. The proposed operation will support adoption of policies critical for reform o f the public administration while capacity building support to implement the reforms will come from the Bank-financed Public Sector Reform Project. Similarly, the program supports policy reforms in the public financial management, education, health, agriculture, and energy sectors-all areas o f recent or forthcoming Bank-supported projects. Reforms to improve the investment climate and to redefine the role of the state in the economy will complement support of the IFC to promote private sector development. Annex 3 shows the links between PDPG policy actions and other investment operations.

F. Lessons Learned

77. The design of the proposed operation reflects several lessons from implementation of the previous CAS in Tajikistan, other operations in Tajikistan, and policy-based loans in other countries. These include:

a Government ownership of the reform program is essential for success. Extensive experience demonstrates that government ownership of the reform program i s the single most important criterion for success. The medium-term reform program o f the proposed operation has been designed in close collaboration with key relevant ministries and the Executive Office of the President, and the authorities have consistently worked to implement the agreed reforms. Although reform areas with potentially high impact, no actions to resolve cotton sector debt or to enhance transparency o f Talco and Talco Management or of other state-owned enterprises have been included in the program, because of a lack of government commitment to bring about the necessary improvements, which would have ultimately led to frustrations on both sides. The dialog in these areas should continue through other instruments, such as analytical work, technical assistance, and capacity building activities.

0 Design interventions on the basis of a good understanding of Tajikistan’s political economy. Tajikistan’s political economy i s complex. Designing a reform program that will be implemented and effective requires a thorough understanding o f the country’s political economy and the levers o f change. The PDPG team has been working with the government on the reform program for several years and has gained a deep understanding of what i s feasible and what i s not.

0 Focus on a limited set of key reforms. The proposed Grant supports deep reforms in a few areas. The program includes only the critical actions that the government believes that it can realistically implement in a three-year timeframe, backed by sector-specific projects, capacity-building, and communication campaigns. These are the reforms that the government i s already committed to and has been carrying out. The proposed operation contains seven prior actions (see table 3) that are critical to the achievement o f development objectives o f the Grant.

25

a Build capacity for implementation of the reform agenda. Passage o f legislation and adoption o f strategies have often had little impact in Tajikistan, because of lack o f institutional capacity to implement reforms. The proposed PDPG 3 focuses on implementation of legislation passed and strategies prepared under the first two operations. For example, PDPG 3 i s supporting in-depth review of the implementation o f licensing and inspections reforms with the aim o f both discovering the effectiveness of the reforms and at identifying areas further measures needed to ensure implementation. Similarly, reviews o f compliance with rules for privatizations and with the new cotton pricing methodica focus on implementation. The Public Sector Reform Project i s helping to build capacity o f the public administration to implement reforms.

a Build effective partnerships with the IMF and other donors in designing the proposed program. Substantial progress i s being made with development partner coordination, with the Bank regularly consulting with other development partners on a wide variety o f issues. This has led to a greater division o f labor among partners and reduced duplication and waste. The IMF, the Asian Development Bank, the EC, and the major bilateral donors in Tajikistan are all informed o f the status o f the implementation of the prior actions and milestones o f the PDPG operations to ensure that al l are able to advance the reform agenda. The Bank and the IMF are consulting closely on the design and implementation o f the SMP and the PDPG operations to ensure the quality and effectiveness o f their dialogue on macro issues.

a Base the reform program on a strong foundation of analytical work and pilot innovative approaches. High-quality analytical work i s critical in gaining the confidence o f decision-makers that innovative approaches will provide the intended results, especially in a country with limited experience of market-based approaches. Piloting i s also essential to allow the government, the beneficiaries, and the Bank to gain experience with alternative approaches and to gain the knowledge required to refine the design o f interventions. Reforms in PDPG operations aimed at improving health and education services have been based on substantial analytical work and piloting. The design of public sector wage reforms has been based on a Bank-led wage note and an update. By contrast, reforms of the cotton sector will likely require extensive piloting to convince farmers and the government that reforms will increase farm income while lowering risk.

Offer a series of annual single tranche budget support operations, rather than multi- tranche operations. Single-tranche operations, which are approved only after the government has implemented agreed reforms, require both the government and the Bank to be realistic about what i s possible, and then to agree on a program o f completed actions that i s acceptable to both sides. The proposed program i s a single tranche operation-the third o f a proposed series o f three annual operations-each of which furthers the reforms supported by the previous operation. This approach allows the government and the Bank to adapt the medium-term program as new information becomes available and feasible options for realizing the intended development goals change. It also ensures that the flow o f funds i s predictable and that the technical assistance required to implement and sustain reforms i s available.

78. The proposed next series o f Programmatic Development Policy operations 2010-12 will build on and deepen reforms supported under the first three PDPG operations. The Bank, the government and other donors, building on the lessons o f PDPG 1-3 and the recently finalized PRS 2, have specified broad criteria for the design o f the next series o f development

26

policy operation 2010-12. These are l ikely to include (a) the sectordareas that are important for economic growth and poverty reduction and to protect the poor during the crisis; (b) the existence o f a sector strategy; (c) the availability o f teohnical assistance to support reform implementation on a principle o f mutual accountability; and (d) evidence o f government commitment to the reform program that i s supported by the operation. Preliminary findings o f the country economic memorandum that i s currently under preparation indicate that regulatory obstacles to private investment, high transportation energy costs, unreliable energy services, an ineffective financial system, and inadequate property rights, agricultural support services, and human capital may be significant constraints to growth. The next program may therefore contain prior actions aimed at streamlining the regulatory system, liberalizing the aviation sector, improving transparency and governance o f energy utilities, strengthening the financial sector (including for rural finance), and accelerating access to land use certificates and agricultural support services. Another potential area o f reform i s social protection policy, which wi l l grow in importance as Tajikistan i s affected by the global economic slowdown, particularly a decline in remittances and a rise in unemployment. The program may also continue with the public sector reform agenda initiated under PDPG 1-3, including c iv i l service reform, strengthening public financial management, and actions to improve health and education services. The program will be developed through extensive consultations with the government, development partners, and other stakeholders. It will be more selective and include fewer triggers and key outcomes that can realistically be achieved in a three-year program.

Box 2: Good Practice Principles on Conditionality

Principle 1: Reinforce ownership The proposed operation i s based on the Tajikistan PRS 2. I t also responds to several government sector strategies, including the national strategy for education development, the public administration reform strategy, an investment climate assessment, an aviation sector note, an energy utility reform review, and an agricultural development strategy. A l l ministries and agencies undertaking policy reforms presented in the policy matrix have participated in periodic workshops to discuss and agree on the objectives o f reforms, current status, and next steps.

Principle 2: Agree up front with the government and other financial partners on a coordinated accountability framework The PDPG program i s summarized in an agreed policy matrix in annex 2. The matrix contains both policy actions and indicators o f expected outcomes. The State Advisor for Economic Policy in the Executive Office o f the President i s responsible for monitoring progress with the agreed reform program and for coordinating the actions o f the other agencies and ministries involved. The Bank consults regularly with other development partners in Tajikistan to ensure that aid i s as effective as possible.

Principle 3: Customize the accountability framework and modalities of Bank support to country circumstances The accountability framework i s based on recent Bank analytical work, including a study o f macroeconomic management, a public expenditure and institutional review, a country procurement assessment report, and a country financial accountability assessment. Two public expenditure tracking surveys, one for health and one for education, and several poverty and social impact studies are also contributing to the accountability framework.

Principle 4: Choose only actions critical for achieving results as conditions for disbursement The proposed PDPG 3 operation contains only six prior actions and 18 milestones. Al l are part o f the agreed framework set out in the policy matrix.

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Principle 5: Conduct transparent progress reviews conducive to predictable and performance-based financial support Progress reviews o f the policy actions in specific areas and o f the operation as a whole are held regularly with government officials from ministries and agencies participating in the project. These reviews allow the Bank to update the matrix on the basis o f actual and expected performance and to communicate to the government what i s essential to enable the approval o f the operation. Predictability i s further strengthened through the use o f a policy matrix containing agreed reforms o f a series o f three annual operations-each of which furthers the reforms supported by the previous operation.

5. OPERATION IMPLEMENTATION

A. Poverty and Social Impact

79. Poverty and social impact o f this operation i s likely to be positive. In the medium term, the proposed reforms in health and education are l ikely to result in improved access and quality o f services to the poor. Reforms in the aviation sector will improve access and reduce cost o f transport for low-income migrants. Reforms o f the cotton sector should result in higher prices for farmers. Special provisions have been put into place to ensure that the poor and vulnerable can afford to access energy at affordable prices. In the medium term, reforms proposed in public administration reform strategy should yield benefits through more efficient and effective public sector management.

80. Poverty and social impact analyses have recently been carried out to ensure that the government and the development partners understand the potential impact o f policy reforms on specific groups. The studies include an assessment o f the potential impact o f changes in energy tar i f f policy, a study investigating the impact o f changes in policies affecting the cotton sector, and the impact o f the basic benefits package for health on the accessibility and quality o f maternal and chi ld health services and on citizens’ willingness and ability t o pay for the services. These studies have informed the design o f the reform program in several ways. For example, the study o f energy tar i f f policy, completed in April 2005, recommended that the government adopt a three-band tar i f f structure that will allow the poor to pay subsidized rates for energy, whi le ensuring full-cost recovery for the energy sector through imposition o f higher tariffs on the better off,‘ The government has now designed a new tar i f f structure consistent with this letter o f development strategy for the energy sector that will be implemented gradually starting in 2007 and i s expected to be completed in 2010. The recently completed study on the impact o f the basic benefits package wil l inform the government in refining and geographically expanding the package. A poverty and social impact analysis to be carried out in 2009 wil l explore the impact o f per capita finance in education on equity o f access to education.

81. Improved governance is important to reduce poverty and access of public services by the poor. Improved management and incentive systems in the state administration aim to reduce the capture o f policy processes by special interests. This i s achieved by gradually increasing c i v i l servants’ earnings and the development o f improved internal accountability mechanisms in the administration. I t thus creates the conditions for the policy process to become more transparent and accessible, which wi l l benefit those who have limited access to decision- making processes.

World Bank. “Provision o f Energy Services to the Poor: Design o f Sustainable Social Protection Schemes under Energy Sector Reforms.” April 2005, Washington D.C.

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82. Consultations and outreach are being conducted on the proposed operation to ensure that it reflects the views of a broad range of stakeholders. Discussions are held regularly in Dushanbe with government officials across ministries and agencies, the private sector, nongovernmental organizations, and other development partners on the overall reform program. These have been important in adjusting the program to reflect changing conditions and thinking in Tajikistan. Workshops have also been held with stakeholders on specific aspects o f the reform program, including on proposed reforms of licensing, inspections, and permits; cotton pricing and grading; aviation sector reforms; energy tariffs; the privatization process; and public sector reforms. In addition, the government, with support o f the Bank and other partners, i s implementing a communications strategy to inform the public o f changes in the licensing and inspection regimes and of the budget preparation process. Measures have included broadcasting public service announcements on the reforms o f licensing, conducting workshops and publishing information on the new cotton pricing method, and publishing information on privatizations.

B. Implementation, Monitoring, and Evaluation

83. This operation i s the third o f three programmatic single- tranche operations. I t provides an IDA grant in the amount of US$20 million equivalent, consistent with the program and the current financing requirements o f the country.

Amount and tranching.

84. Executing agency. The Ministry o f Finance i s the executing agency. The Executive Office o f the President i s the implementing agency, and the State Advisor for Economic Policy i s responsible for coordinating actions among the ministries and agencies involved and for monitoring and reporting on progress. The Office of the Prime Minister will provide overall guidance and oversight. The presidential administration will be responsible for implementing the public sector reforms. The line ministries involved (energy, education, health, agriculture, and transportation) are accountable for implementing the sectoral reforms specified in the reform program. The State Committee for Investment and State Property Management will be responsible for overseeing specific policy actions related to private sector development. The Ministry of Economy and Trade will oversee implementation o f anti-monopoly and competition policy. The Ministry of Energy and the Office o f the Prime Minister will be responsible for the energy sector reforms.

85. Monitoring and evaluation. Bank staff will continuously monitor implementation o f the reforms specified in the program matrix o f the proposed operation to ensure that progress towards outcomes i s made during the three year program. Country capacity for monitoring will be strengthened through the ongoing Bank-supported Statistical Capacity Building Project. DFID, the European Commission, and the Asian Development Bank are also providing support to strengthen capacity for statistics and monitoring and evaluation. An implementation completion report will be issued within six month following the closing date o f the three-year PDPG program.

C. Fiduciary Aspects

86. Country Financial Accountability Assessment. The June 2004 CFAA concluded that the risk to public funds was high in Tajikistan. The findings, later confirmed by the Public Expenditure and Financial Accountability Assessment (PEFA) o f 2007, included, among other aspects: (a) poor systems of public accountability and weak mechanisms for public sector transparency; (b) weak internal control systems and internal audit function; (c) weak institutional capacity to implement some of the budget reforms being undertaken; (d) fragmented budgets and poor cash management, (e) lack o f transparency in state-owned enterprises; and ( f ) weak capacity

29

within the legislative bodies to provide effective oversight over the working o f the government. To minimize fiduciary risks associated with weak PFM system, there has been the need to ring- fence financial resources in Bank-financed projects in the country.

87. Tajikistan has made substantial progress since then in various aspects of the public financial management, as noted in the 2007 PEFA report. For example, the organic budget system has been thoroughly revised, the budget classification system has been changed, the treasury system has been modernized by introducing automation, a treasury single account has been established, quarterly budget execution reports are now routinely prepared, and external audits have become more timely. In addition, through a grant of the Institutional Development Fund, Tajikistan has enacted a modern public procurement law. However, the restructuring o f the government that took place following the elections of November 2006 has undermined the independence of the external audit institution and weakened the effectiveness of public external auditing. The Bank and other development partners are now advising the government on the importance of establishing a truly independent supreme audit function reporting directly to the parliament. The Executive Office o f the President has expressed interest in moving forward with this option, has approved a strategy and plan o f action for establishment of an independent supreme audit institution.

88. The Country Portfolio Fiduciary Review completed in October 2008 revealed that the great majority o f Bank-financed projects are being managed satisfactorily or marginally satisfactorily. Of the 18 projects reviewed for procurement, 16 projects were rated satisfactory or marginally satisfactory. Two projects were rated marginally unsatisfactory. In addition, 15 o f the projects have adequate or marginally adequate financial management arrangements. The main issues identified related to weaknesses in systems and procedures, staff capacity, and lack of understanding o f Bank requirements for financial management and disbursements. Addressing these weaknesses i s a priority for the government during the next few years.

89. Overall, the fiduciary risk at the country level remains high and public financial management capacity i s weak. As a result most Bank-financed projects in Tajikistan do not rely on country systems o f accounting, reporting, and audit.

90. Capacity to implement good policies needs to be developed. The adoption o f good policies i s not enough to improve performance. Capacity i s also needed. The government i s working with the Bank in preparing the Public Financial Management Modernization Project. This together with the Public Sector Reform Project i s expected to strengthen capacity to implement improved systems of public financial management systems. The 2007 PEFA provides a baseline for measuring progress with reforms in public financial management. A three year programmatic public expenditure review (completed in 2008) led by the Bank in close collaboration with key donors (EC and DFID) i s assisting government in addressing institutional and capacity constraints related to introducing the MTEF and improving budget efficiency. A ROSC issued in January 2007 i s helping the government to reform the accounting and auditing legislation and practices in the country. Strengthening o f the fiduciary aspects o f the education sector under the Fast Track Initiative i s assisting in improving systems in education and, ultimately, across the government. Fiduciary risk will need to be monitored closely on a continuous basis.

91. IMF safeguards assessment. The IMF’s most recent safeguards assessment, conducted in June 2003, noted several weaknesses at the NBT, including a qualified audit opinion by an international firm on the financial statements for fiscal 2002 that included audit observations with

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respect to guarantees issued and loans made to commercial banks, nonpublishing of annual financial statements, weak internal audit capacity at NBT, and infrequent and inaccurate periodic financial statements. I t recommended several measures to address the weaknesses, mainly in the areas o f financial accounting and reporting and auditing. The IMF Article IV consultation report completed in early 2005 concluded that the NBT was implementing the recommendations made in the safeguards assessment. The external audit o f the NBT was completed for 2003, 2004, and 2005. However, details on progress made in implementing various recommendations, including results of audits for the latest three years, are not yet publicly available. Audits for 2006, 2007, and 2008 have not yet been completed. Moreover, government abolished State Financial Control Committee under the reforms undertaken after presidential elections held in November 2006, thus undermining efforts to build capacity for public sector auditing. Overall, additional assurance measures are required in order to minimize the risks associated with current weaknesses of the PFM arrangements in the country. Accordingly, a dedicated foreign currency deposit account will be opened at the NBT, in the name o f the Ministry o f Finance, to receive funds under the proposed operation.

D. Disbursement and Auditing

92. Disbursement. The Recipient i s the Republic o f Tajikistan. The proceeds o f the Grant will be disbursed in one single tranche upon effectiveness of the Financing Agreement. The Recipient will open and maintain a separate foreign currency deposit account (in US dollars) at the NBT, as part o f the official FX reserve. At the request o f MOF, the Association will deposit the proceeds o f the IDA Grant into the foreign currency deposit account. The proposed Grant will follow the Association’s disbursement procedures for development policy lending. The government will utilize the proceeds of the Grant in foreign currency for either foreign debt servicing or for crediting the local currency equivalent into the deposit account for financing budget expenses. If the Grant proceeds are used for ineligible purposes as defined in the Financing Agreement, the Association will require the Recipient to either: (a) return that amount to the account for use for eligible purposes, or (b) refund the amount directly to IDA, in which case IDA will cancel an equivalent undisbursed amount o f the Grant.

93. Reporting and auditing arrangements. Through the Ministry o f Finance, the Republic o f Tajikistan will (a) report on a quarterly basis to IDA the amount received into the deposit accounts at the NBT, (b) provide confirmation o f the amounts withdrawn and/or transferred from the deposit accounts, including bank account numbers, date and names o f beneficiaries, and (c) ensure that the proceeds o f the Grant are not used for ineligible expenditures defined in the IDA “negative l ist” as agreed during negotiations and specified in the Financing Agreement. The quarterly reports will provide details of utilization o f the proceeds of the grant, until proceeds have been fully utilized. The final statement on the utilization o f the proceeds of the foreign currency, showing total amount deposited into the deposit account and the transactions from this account to the ultimate beneficiaries’ accounts will be independently audited in accordance with terms of reference to be agreed with IDA and by independent auditors acceptable to IDA. The audit o f the deposit account i s to be conducted on an annual basis, with the first audit for the period to December 3 1, 2009, and subsequently audits are to be conducted annually until the balance in the deposit account has been fully used for eligible expenditures. The audit reports will be submitted to the association not later than four months after the end of the fiscal year.

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E. Environmental Aspects

94. The conclusion of an environmental screening of the proposed reforms, undertaken as per the requirements o f OP 8.60, i s that the reforms are not likely to be significant from an environmental point o f view. Details o f the analysis for each reform area follow.

0 Maintaining macroeconomic stability. Macroeconomic stability i s necessary for economic growth and poverty reduction, which may indirectly generate environmental benefits by encouraging the adoption of modern technologies which use resources more efficiently than those they replace.

0 Reforming licensing and inspections. Reform of licensing in general will facilitate business entry and growth and reduce costs for businesses. This will result in uncertain environmental impacts, depending on the sectors that attract new investment, and the availability and cost-effectiveness o f new technology. The reforms may be positive for the environment if they attract businesses into the formal sector, since formal businesses are more likely to comply with environmental policies. Reform o f the inspection law will increase the accountability o f inspectors and reduce the opportunity for rent seeking. This in turn will increase the effectiveness of the inspection process to detect violations in health, safety, environmental, tax, and other laws. In time, streamlining of specific environmental inspection and licensing rules will be necessary to ensure positive environmental outcomes from the reform process.

0 Improving transparency of the privatization process and market competition. Increasing the transparency and accountability of the privatization process will likely have a positive impact on the environment, because this transparency will include disclosure of a firm’s environmental liabilities for past contamination and current environmental performance. This, however, needs to be carefully monitored, as the country i s expected to privatize some pollution-intensive industries in the near future. International best-practice suggests that addressing environmental issues upfront significantly eases the time and costs of privatization. Amending the competition and natural monopolies laws to increase competition among enterprises will have uncertain impacts on the environment. The cross-country evidence suggests that over time, competition leads to more efficient resource use, and thus reduces environmental impact of a unit of output. However, competition could also lead to negative environmental impacts if it encourages firms to use cheaper, but environmentally-damaging technologies. This again needs to be carefully monitored.

0 Aviation sector reform. The proposed operation seeks to improve efficiency and enhance competition in aviation. Although increased competition i s expected to raise the number o f flights between Tajikistan and other countries, this i s expected to lead to adoption o f more fuel-efficient, less noisy aircraft by the Tajik State Airline, with an overall benign impact on the environment. The operation does not support investment in airports, which i s being supported by other development partners with oversight of the State Committee on Environment Protection and Forestry.

0 Cotton sector reform. The proposed operation aims to introduce a universal cotton grading system that will increase the confidence of potential end users o f the quality of Tajikistan cotton being purchased. This will maximize the sales price and stimulate demand from end users for premium cotton. This will have only indirect, if any, impacts on the environment. An increase in demand for premium cotton could stimulate new

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production, or it could encourage farmers to substitute higher-grade cotton for lower grade. An increase in cotton production with an efficient irrigation and drainage infrastructure may prevent negative effects on the environment and soil fertility. However, it could also lead to land degradation, primarily through waterlogging, salinization, and erosion. It could further lead to (a) a potential increase in use or overuse o f water; (b) an increase in use o f chemical fertilizers, pesticides, herbicides and other chemicals; (c) an increase in operation o f ginning factories and associated hazards; and (d) dumping o f excavated sediments and other materials f rom irrigation and other drainage canals. The task team i s aware o f the risks and i s coordinating actively with ongoing Bank projects, including the Land Cadastre Project, the Ferghana Valley Development Project, and the Cotton Sector Recovery and Poverty Reduction Project to closely monitor and mitigate the potential environmental impacts arising f rom cotton production and to strengthen capacity o f the government to address environmental issues arising f rom reforms o f the cotton sector.

Energy sector reform. M u c h o f the forest loss in Tajikistan i s due to lack o f access to energy supply in remote rural areas. In the long term a more efficient energy sector i s expected to reduce these pressures. The proposed operation wil l support separation o f policymaking f rom commercial operations and restructuring o f tariffs to promote cost recovery, while ensuring that the poor have access to a minimal level o f service at affordable rates. These measures are expected to promote efficiency and conserve energy, which wil l have a positive impact on the environment. Without mitigating measures, reforming the tar i f f structure may have had a negative impact on the poor, according to the poverty and social impact analysis, which may have increased pressure on forests for fuelwood. However, this will be mitigated through provision o f subsidies to low-income electricity consumers. The proposed operation does not support any investment operation for constructing new dams. Environmental impact assessments o f future energy investments wi l l be carried out under the projects that support them.

0 Reforming public sector management. The operation will support implementation o f reforms o f public sector management aimed at improving the efficiency and effectiveness o f the public service and the delivery o f health and education services. These reforms are not expected to have any impact on the environment. Efforts will be made in the future through these reforms to improve the efficiency and accountability o f environmental agencies.

95. As a newly independent country emerging from a civil war, neither awareness of environmental issues nor institutional capacity to address them are well developed in Tajikistan. Tajikistan’s PRS 2 recognizes water pollution, soil degradation, water pollution, deforestation, and biodiversity conservation as environmental priorities and proposes a range o f measures to address them. Tajikistan i s an active party to several United Nations conventions and has prepared a National Strategy for Combating Desertification (2002), and a National Biodiversity Conservation Act ion Plan (2003). The country has also adopted environmental laws and regulations, including a requirement that environmental impact assessments are conducted for al l new economic activities. The Recipient also imposes fees and fines on al l major polluters. The State Committee on Environment Protection and Forestry in January 2004, merging the Ministry for Environment Protection and the Committee on Forestry was recently merged with the Ministry o f Agriculture. This has raised some concerns that this may interfere with some o f the core functions o f the state committee (now a department). The task team would monitor developments in this area as things are s t i l l evolving

This is now changing.

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and continue i t s dialogue with the government to focus i t s efforts in conducting further reforms in the environmental sector in short term and to strengthen the capacity of environmental authorities.

96. Gaps in capacity i s being strengthened through a number of Bank-supported projects. The government i s strengthening its capacity to assess and mitigate environmental impacts of economic activities through training and hands-on experience. The Bank, through four ongoing rural development projects, i s strengthening the local line departments by supporting the upgrading of their national and local level analytical laboratories and training their staff with internationally-recruited environmental and natural resource protection specialists. The Bank has also assisted the government in holding conferences and workshops on natural resource and environmental management and in disseminating their proceedings to the public. Additional measures to strengthen the government’s institutional capacity for environmental management will be addressed through the Bank’s country program and programs o f other development partners.

97. Opportunities for mainstreaming environmental issues in government policies and programs, and additional measures to strengthen capacity for environmental management will be identified through a country environmental analysis. With support of a multidonor trust fund, the government undertook a country environmental analysis in 2007/08. This was aimed at deepening the understanding o f the country’s major environmental challenges, and assessing capacity within the country (both public and nongovernment) for sound environmental management. The findings of the analysis are guiding support of the Bank and other development partners to strengthen capacity in Tajikistan for sound environmental management.

F. R i s k s and Risk Mitigation

98. which mitigation measures have been identified. Specific risks include:

Successful implementation of the medium-term reform program faces risks, for

0 Poor governance and corruption prevents effective use of resources and discourages private sector investment. Tajikistan’s public financial management system i s characterized by poor internal controls, lack o f transparency, high level of corruption, low capacity, poor cash management and budget execution, al l of which undermine efforts to enforce fiscal discipline. During implementation, fiduciary risks will be mitigated by: (a) creating a dedicated foreign currency account into which Bank funds will be disbursed; (b) regular reporting on the use of funds disbursed; and (c) requiring an independent audit on the use of funds provided under the proposed operation. In addition, the following actions will be required in order to realize longer term progress in public financial management: (a) commitment by the authorities to implement key recommendations of the Country Financial Accountability Assessment, the Country Procurement Assessment Report and other IMF reports; (b) satisfactory implementation of the grants from the Bank’s Institutional Development Fund supporting public sector reforms; (c) satisfactory implementation o f the Public Sector Reform Project, and the proposed Public Financial Management Modernization Project. The Fast Track Initiative i s supporting implementation o f actions to strengthen fiduciary management in the education sector, another important step in improving the management of external and public funds. Progress in strengthening the public financial management has been assessed through the IMF fiscal transparency Reports on Observance o f Standards and Codes (completed in January 2007), and a fiduciary update conducted by the Bank in fiscal 2008. A Report on the Observance of Standards and Codes on accounting and auditing, expected to be complete in early 2009, will further deepen understanding o f the

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current situation and recommend measures for reform. A PEFA completed in 2007 i s providing baseline data against which to benchmark Tajikistan against other countries and to measure progress in the area o f public financial management. It has resulted in an action plan aiming at strengthening the procurement and management capacity o f the Ministry o f Education. The Bank will support opportunities for candid dialogue between the government and other stakeholders on the issues, and will support civil society’s efforts to be able to better track and monitor the use o f government funds. The Bank sees closer collaboration with donor partners as key to moving this agenda forward.

0 The government contracts excessive non-concessional loans, which it cannot repay. The government contracted in 2007 a US$604 million loan with the Chinese. This loan i s concessional and i s being used to construct roads and electricity transmission lines, but it also raises risks o f future debt distress should the economy grow more slowly than expected or should the projects prove to generate fewer benefits than projected. While the DSA update shows that debt i s currently sustainable, new loans, especially those provided on commercial terms would add to the risk o f debt unsustainability. To mitigate this risk, the Bank in collaboration with the IMF i s maintaining an active dialogue on the issue. Should the country be found to be in violation o f the Bank’s non-concessional loan policy in the future, the grant element o f IDA credits will be reduced. A severe violation could lead to a cut in Tajikistan’s overall IDA allocation.

0 A complex political economy prevents positive reform. Tajikistan has been independent from the former Soviet Union for slightly over ten years and i s s t i l l recovering from a devastating civil war. I t s institutions are very weak and vulnerable to capture by special interests. Stakeholders who benefit from the current institutional arrangements are likely to resist reforms that will leave them worse off. The president’s overwhelming majority in the November 2006 polls, however, strengthens his mandate to implement the reform program. Nonetheless the Bank will continue to support reforms by improving and expanding i t s efforts at communications, emphasizing the costs o f continuing with the economic status quo, the long-term benefits o f reforms, and opportunities for accelerating growth through greater private sector involvement in infrastructure. Better dissemination of the findings of Bank-supported analytical work will be an important vehicle of this enhanced communications effort, but it will also involve proactive efforts, with assistance from the external affairs units in the country office and in headquarters. The Bank will regularly monitor progress and actively engage in dialogue to help government and with the opposition. It will continue to coordinate closely with other development partners to monitor and respond to political developments.

0 External factors present unknown risks. Tajikistan i s exceptionally vulnerable to shifts in the external environment, due to its small internal market, its landlocked position, and i t s dependency on a small number of commodity exports, limited number o f transport routes, and workers’ remittances for income and for foreign exchange. Deteriorating terms of trade would negatively affect rural incomes and Tajikistan’s balance of trade. Political or economic instability in neighboring countries also poses a significant risk to Tajikistan, as such instability could lead to closures of borders or trade disruption. A slowdown in the Russian economy-as has recently happened due to the global financial crisis-r tightening of access to the labor markets o f either country could result in a decline in remittances or the return o f migrants to Tajikistan, putting pressure on already overstretched public services. Apart from pursuing suitable economic policies to diversify i t s exports, as an active member of the Central Asia Regional Economic Cooperation, Tajikistan i s addressing some of these trade and transportation issues

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through regional cooperation efforts. It i s maintaining a close dialogue with Russia to ensure that Tajik workers are able to continue having visa-free access to Russia’s labor markets.

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Annex 1: Letter of Development Policy

Unofficial translation

THE PRESIDENT OF THE PREPUBLIC OF TAJIKISTAN

Dushanbe 9 December 2008

H.E. Mr. Robert Zoellick President The World Bank 1818 H Street, N.W. Washington, DC 20433

Mr. President,

I would like to express my sincere gratitude to you and the World Bank Group for your continuous support provided to the Government o f the Republic o f Tajikistan in implementation o f the respective socio-economic and institutional reforms.

This letter on development policy (hereinafter referred to as LDP) i s submitted to cover the progress and recent changes in socio-economic situation in Tajikistan and relevant actions for the coming medium-term perspective. It i s based on fundamental strategic documents o f the Republic of Tajikistan, including National Development Strategy until 20 15 (hereinafter referred to as NDS) and Poverty Reduction Strategy for 2007-2009 (hereinafter referred to as PRS). Overall view of the state within the framework o f its strategic development in the long term i s reflected in NDS, while PRS represents a mechanism for implementation of NDS goals and objectives in the medium term. Besides, LDP i s also developed on the basis of various sector strategy documents such as the Public Administration Reform Strategy (hereinafter referred to as PARS), National Education Development Strategy (hereinafter referred to as NEDS) and National Health Development Strategy (hereinafter referred to as NHDS), which are presently implemented with support of the donor community.

Under the Country Assistance Strategy (hereinafter referred to as CAS) for the Republic o f Tajikistan in 2006-2009, Government closely cooperates with the World Bank to implement reforms under the Programmatic Development Policy Financing (PDPF).

PDPF actions are aimed at achieving sustainable economic growth, public sector reform, and private sector development, as well as improving quality o f social services. Government o f the Republic o f Tajikistan continues to show i t s commitment to implement these reforms under PDPF, which i s proved by successful implementation of two previous tranches of this program.

I. MACROECONOMIC REGULATION AND ECONOMIC GROWTH

Progress achieved in structural and institutional reforms has been combined with active efforts o f the Government aimed at sustainable economic growth and poverty reduction among the population. In particular, real economic growth rates continued to remain at an average o f 7.2 percent per year throughout 2006-2008. High economic growth rates i s mostly attributable to ongoing structural reforms, creation of favorable environment for private sector development,

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increase in exports o f agricultural products, energy sector development, and strong growth in remittances from labor migrants, which totaled over US$2 billion at the end o f 2008.

Economic growth achieved in the past few years has also contributed to poverty reduction in the country. Accordingly, poverty level (taking into account purchasing power parity at US$2.15 per capita per day) has significantly decreased to 53 percent o f the population in 2007, while extreme poverty in the same year decreased to 17 percent o f the country’s population. In addition, balanced macroeconomic and fiscal policy enabled to improve people’s welfare and ensure stability of macroeconomic indicators. Therefore, GDP per capita in 2007 was US$5 15.4 in comparison with only US$400.6 in the previous year.

In addition, we observed some slowdown in growth rates and significant increase in inflation in 2007-2008, primarily due to sharp increase in food and energy prices, as well as some reduction in cotton export volumes. Consequently, inflation increased from 7.8 percent in 2005 to 19.8 percent in 2007, whereas the biggest share was attributed to the increase in prices o f food products (mainly, wheat products) and significant inflow o f remittances not supported by corresponding volumes o f imported goods and services. However, during the period until 2007, stable domestic currency exchange rate and full control of the budget deficit were ensured through increased tax revenue and reduced interest payments on external public debt servicing after successful completion of the restructuring process.

Despite some challenges in the country’s socio-economic development, consequences o f the global financial crisis will only indirectly affect Tajikistan in the medium-term perspective. This i s explained by only minor integration o f the national banking system into the international financial system, provided that finance operations by commercial banks are conducted primarily in domestic currency. At the same time, global financial crisis can also have an indirect positive impact on the country’s economic situation and reduce inflation due to significant decline in oi l products and fuel prices, as well as imported wheat and other food product prices. On the other hand, we expect a decline in remittance inflows from labor migrants, decrease in foreign direct investments, and reduced exports. Therefore, Government envisages a series o f measures to minimize potential risks related to consequences o f the global financial crisis, including increase in budget expenditure aimed at supporting economic projects and provision of social services, and more constrained monetary policy combined with ensuring stability o f the national currency exchange rate and stabilization o f the current account balance.

Furthermore, external debt indicators have significantly improved in comparison with previous years as a result o f external debt volume reduction and significant GDP growth in 2006- 2007. More specifically, share o f public external debt in percentage to GDP in the last few years was significantly reduced and remained at 30.2 percent at end-2007. Presently, we are taking steps for hrther external borrowing policy improvements within the framework o f Public Debt Management Strategy, which was approved by the Government in 2008, with the goal to minimize expenditures and identify basic debt sustainability parameters. This will ensure continuous inflow of resources paralleled with maintaining public debt at levels acceptable for the country’s sustainable development. Government plans to borrow some US$765 million from multilateral and bilateral donors during 2009-20 1 1, which will nevertheless not have a significant impact on overall external debt indicators to GDP, exports, and state revenues.

However, we realize that low growth levels can increase the risk of public debt sustainability driven by an increase in external borrowings. Besides, Tajikistan i s s t i l l vulnerable to external factors, which are caused by the fact that prevailing share o f export earnings are accounted for by alumina, cotton, electricity and remittances from labor migrants. The national

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economy i s heavily dependant on imports o f energy resources and food products from neighboring countries in the region, which also contributes to the risk o f economic dependence and vulnerability to external factors that may affect economic development.

To mitigate the above mentioned risks, Government in line with the increase o f budget expenditure for social sectors and economic activity intends to continue structural adjustments in a l l sectors o f the economy aiming to extend the use of domestic potential not only to ensure high economic growth rates but also to reduce poverty.

Particularly, Government successfully implemented key reform measures agreed under the Programmatic Development Policy Financing (PDPF). We are ready to continue the process of deepening reforms under agreed action plan, while their implementation i s envisaged in the medium-term perspective. In the context o f PDPF, number o f practical actions are expected to be implemented which facilitate private sector development, stimulate foreign investment, and improve public administration system and efficiency o f public service delivery, especially in social sectors.

11. PRIVATE SECTOR DEVELOPMENT AND INVESTMENT CLIMATE

Creation o f more favorable investment climate and private sector development are considered to be priority areas for the country. Ongoing Government activity supported by international organizations and donor community correspond to agreed actions aimed at private sector development outlined in PRS for 2007-2009, including implementation of measures to minimize interference of government structures into entrepreneurial activity and elimination of entry barriers to local markets.

Government’s priorities for private sector development include simplification of business registration processes, inspections o f businesses, improvement o f customs procedures, streamlining processes of licensing and obtaining permissions to carry out entrepreneurial activity. In addition, active measures are undertaken on the harmonization o f the current legislation and regulatory framework to ensure effective and transparent entrepreneurial activity o f the Republic o f Tajikistan.

Business licensing and inspections

Since 2004 and after adoption of the Law of the Republic o f Tajikistan “On Licensing,” total number o f types of activities subject to licensing was reduced from 1,500 to 66. Under the third PDPF tranche, Government adopted amendments and created respective regulatory framework for practical implementation o f this law. In addition, key licensing ministries and agencies issued internal decrees to implement laws and bylaws regulating licensing activity. This, in turn, ensures full clarity among entrepreneurs and regulating bodies, and provides an opportunity to comply with the requirements of licensing entrepreneurial activity.

In addition, legal and normative acts on business inspections have been adopted in accordance with the Law of the Republic o f Tajikistan “On Inspections,” which made obliged inspecting bodies to develop manuals and checklists for all types o f inspections and register them at the Ministry o f Justice of the Republic of Tajikistan. In the future, Government will closely monitor implementation o f newly adopted laws on inspections and licensing to ensure their proper and effective implementation, supported by International Finance Corporation (IFC) and other donor agencies.

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Privatization urocess and market Competition

Government achieved good progress in this area by fully completing the privatization o f 420 state-owned enterprises during 2004-2006 and 79 medium and large state-owned enterprises in 2007. Furthermore, full transparency of the process was ensured through media publication o f detailed information on privatization transactions and sale o f al l assets by the State Committee on Investments and State Property Management (SCISPM) o f the Republic of Tajikistan in 2007 as well as privatization compliance review by means of conducting random sampling in the same period. Accordingly, al l privatized enterprises were divided into three categories: medium and large enterprises (privatization was done through auctions), the largest enterprises (through tender processes) and strategic enterprises in infrastructure sectors. Individual restructuring plans are being developed for the last category of enterprises so as to attract private investment in these strategic sectors.

To promote free and fair competition in the private sector, Government has taken relevant measures to amend the Law of the Republic o f Tajikistan “On Competition” in 2006 and the Law of the Republic of Tajikistan “On Natural Monopolies” in 2007. Institutional law enforcement mechanisms have been also revised to ensure competitiveness o f entrepreneurial activity in the country in the context o f improving the current legislation. In addition, we broadly implement incomplete construction sites’ privatization program, which enables to have them utilized by private sector, as well as create jobs and stimulate sustainable economic growth.

Agriculture development and productivity increase

Upon the adoption o f the Law of the Republic o f Tajikistan “On competition and restriction o f monopolistic activity in commodity markets” in 2006 and amendments to this law passed in March 2007, we expect that improved market competition rules and increased productivity in the agriculture sector will create healthy competition among dekhkan farmers and ensure sustainable growth of this sector in the medium term.

Government of the Republic o f Tajikistan within the framework of Cotton Debt Resolution Strategy under its Resolution issued on March 5, 2007 (#111) ensures implementation o f activities to address issues of cotton farm debts and increasing productivity o f alternative agricultural crops. These actions should facilitate increased productivity and ensure fair allocation o f revenues in the cotton sector. In addition, we are also concerned about price increase and unfair completion in the supply and procurement o f agricultural inputs. Therefore, we are committed to resolving these issues in the medium-term in close cooperation with the international donor community.

Another step on the way to simplification of dekhkan farmers’ supply o f cotton products became the introduction o f new cotton methodica, which enabled to restructure the Universal Commodity Exchange o f the Republic of Tajikistan.

In 2007, Agency on Standardization, Metrology, Certification and Trade Inspection (“Tajikstandard”) registered international cotton quality grading standards. In addition, joint Tajik-British venture with the support from Ministry of Agriculture presently carry out cotton grading produced within territories o f the Republic o f Tajikistan on the basis of new standards. Noteworthy that Tajikistan i s the first country in the Central Asian region to introduce international cotton quality grading standards, which ensures higher export prices o f cotton products at the international commodity markets.

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However, we understand that wide use o f advantages of these innovations will require time and efforts by farmers and other concerned parties. Ministry o f Agriculture closely cooperates with Ministry o f Economic Development and Trade to ensure more flexibility and increase competition in this sector, whereas it also considers options to stimulate growth by means o f cultivating and export selling high productivity non-cotton agricultural products.

Energy sector reform

Energy sector development has been identified as one of the priority strategic areas o f the Government o f the Republic o f Tajikistan in the long-term perspective. Under agreements reached with international financial institutions, upon signing the Memorandum o f Understanding on energy sector development strategy in early 2006, Government introduced and currently implements a new tariff policy, separated policy-making functions from commercial activity, and revised social protection mechanisms targeted at vulnerable population groups in light o f gradual increases in electricity tariffs.

Above mentioned actions under the new tariff policy are primarily aimed at reaching cost recovery and financial viability of the energy sector and, in particular, OJHC “Barki Tojik” and SUE “Tojikgas” upon separation from Ministry of Energy as stipulated in the Presidential Decree of the Republic o f Tajikistan in March 2006. New tariff policy envisages gradual increase energy consumption prices by 2010 until 2.1 cents per 1 kw/h (in 2003 prices). However, it i s remarkable that respective increases in gas tariffs in 2006-2007 were mostly caused by an increase in imported gas prices from the Republic of Uzbekistan.

Budget allocations to compensate costs o f vulnerable population due to an increase in gas and electricity prices have been increased in nominal terms by 19 percent in 2007 in comparison with the previous year, and are expected to increase by 30 percent in 2009 in comparison with the previous year. This compensation mechanism will continue until end-2010 to increase its targetedness and correspondence with changes o f the domestic tariff policy. I t i s therefore planned to review social protection mechanisms by employing the new energy supply household survey to analyze justification and targetedness of the implemented energy compensation mechanism. This work will be conducted in 2009 and supported by international donors and Center for Strategic Research under the Government o f the Republic of Tajikistan.

Government has also made steps to introduce international accounting standards for OJHC “Barki Tojik” and SUE “Tojikgas” with support by the World Bank Energy Loss Reduction Project. Besides, independent audits of financial and managerial activity o f above mentioned enterprises were conducted with support from the donor community and targeted at further increase in transparency and resolution o f existing structural problems in the energy sector.

We cooperate with governments o f Russian Federation, People’s Republic of China, India and other countries, as well as with a number of international financial institutions, to attract investments into implementation o f large infrastructural projects including construction o f hydropower plants (HpPs). In this regard, it i s noteworthy that Government takes measures to allocate budget expenditure (approximately US$66 million in 2008) for basic repair and rehabilitation works at the Rogun HPP, as well as Sangtuda - 1 and Sangtuda- 1 HPPs.

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Aviat ion sector reform

Government has achieved significant progress in the past years implementing aviation sector reforms. Referring to the current need for reducing airfare transport and passenger airline costs, as wel l as increasing competition and transparency in the aviation sector, Government o f the Republic o f Tajikistan took steps in 2008 towards restructuring the sector and separating functions o f ground passenger services (airport), air traffic control, and airlines. Separation o f balance sheets and financial activity i s envisaged by January 2009, while relevant regulatory framework has already been developed and adopted in a timely manner.

It should also be noted that in the past years Government has also separated policy making functions f rom technical regulation and accident investigations in the aviation sector. Ministry o f Transport and Communications and State Unitary Aviation Enterprise “Tajik Air” have shown their commitment to ongoing reforms and are considered key bodies involved in the reform process in this particular sector. In addition, Government has also issued authorizations to carry out regular passenger airfare services by several international airlines, including private national airline “Somon Air,” which enabled to increase opportunities for clients and citizens o f the country to choose preference routes and airlines combined with the development o f fair competition and further reduction in prices for airfare tickets. This led to an increase in clients using national and international airfare services by 37 percent in 2007 in comparison with the previous year (from 0.8 mi l l ion to 1.2 mi l l ion passengers).

In addition, French Government supports implementation o f the project aimed at construction o f the international terminal at the Dushanbe airport, which will ensure increased passenger capacity o f the central airport terminal in the country. Other donors support the Government o f the Republic o f Tajikistan by providing technical assistance, financial resources, and advisory support for development o f the aviation infrastructure, creation o f a competitive environment in the aviation sector, and procurement o f new equipment and communication facilities for respective airport terminals throughout the country.

However, we understand reforms in this sector wil l require more efforts with support o f the international community to address existing airport management policy issues, tar i f f liberalization, air transport management, international airline certification, and overall development o f the aviation infrastructure.

111. PUBLIC ADMINISTRATION AND FINANCE SECTOR REFORMS

In the context o f market economy development and creation o f respective public institutions aimed at improving quality o f services, Tajikistan strictly follows strategic NDS and PRS priorities. Hence, the key focus i s on the implementation o f PADS, improving the resource distribution system through strengthening linkages between medium-term and longer-term Government programs, improving budgeting planning practices, increasing effective use o f budget resources in the education sector, and improving primary health care by enhancing transparency in budget management and increasing wage bi l l in the social sectors. W e understand the importance o f priority measures aimed at reforming c i v i l service payroll system, strengthening the horizontal link between c iv i l service institutions and introducing respective amendments to current legislation in order to ensure proper implementation o f existing and planned reforms.

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Public administration reform

Since Public Administration Reform Strategy was adopted in March 2006, the Government took several important policy measures aimed at introducing wage reform, as well as reforms in local public administration system and pubic finance management. In particular, policy measures include:

Modernizing the payroll system designed to create a link between allowances and bonuses, and actual performance o f employees except for bonuses granted for qualification ranks and years o f service. Presently, Government of the Republic o f Tajikistan has finalized the third phase of wage decompression and official salary payment differentiations. The new wage system ensures that al l allowances and bonuses are fully integrated in the gross wage. Wage decompression i s sought to reward employees with greater scope of responsibilities and more complex work schedules. Additionally, as a result o f above mentioned, status o f technical personnel at ministries and agencies i s shifted to contract-based employment. Despite emphases on long-term perspective, these developments are very critical for the Government in i t s efforts to create a professional and effective public service.

Since April, 2007, public service vacancies are filled in accordance with new recruitment rules and competitive bidding results. Job descriptions needed to activate selection procedures based on professional merits in al l civil service dimensions have already been

. developed.

Development o f the Concept on public administration structures and i t s implementation measures, which include a number of measures on restructuring administrative public service functions and reporting mechanisms o f public institutions and agencies. In the next two years, Government plans to start implementation o f measures outlined in the concept note and introduce necessary amendments in the legislation, as well as to conduct functional review of the overall public administration system. Noteworthy that horizontal functional review of executive bodies at the central government level was carried out in 2007-2008 and included systematization o f functions of the Government’s central authorities.

Creation o f a computerized Register of public vacancies in civil service -this task will be completed within the next three years.

Implementation of the Public Administration Reform Project, which in 2007 included review o f legal and regulatory framework for future integration o f the new job classification and central wage model based on categories, levels, steps, and years of service.

As a follow up measure, Government intends to review and, if necessary, develop legal and regulatory framework of public administration to make sure functional separation i s properly exercised and effective public administration i s delivered. In this context, ongoing activities are implemented in coordination with the working group, set up specifically to deal with development o f the public administration structure and i t s respective implementation measures.

59

Improvements in public finance management

In the past several years, Government achieved good results in executing budget reforms targeted at increasing effectiveness o f the public finance management. These results are also consistent with outcomes of the “Public Expenditure and Financial Accountability” (PEFA) assessment, which was conducted by the World Bank in 2007. However, we acknowledge that a lot needs to be done to improve public expenditure efficiency and increase quality’ o f public services.

In particular, Government i s implementing the second phase of policy-based budgeting. This work mostly related to providing sectoral ministries and agencies with opportunities and tools to lead policy discussions in their sectors and participate in budget resource planning for the medium-term perspective. At this time, Government’s efforts to expand project coverage (social pillar and infrastructure sectors) are supported by a group of donors including World Bank, UK Department for International Development, and Delegation of the European Commission.

Additionally, to improve public internal financial control, including internal audit, the Government of the Republic o f Tajikistan adopted Internal Audit Strategy based on Government Resolution dated March 2007. During 2007-2008, amendments were made to the Law o f the Republic o f Tajikistan on “Public Finance” and Central Methodology Department has been established at the Ministry of Finance. The latter i s in charge o f setting standards and internal audit methodologies in the public sector. Furthermore, existing internal Inspection and Monitoring Department o f the Ministry of Finance has been transformed into Internal Audit Department; internal audit divisions have been created in pilot ministries (Ministry of Labor and Social Protection, Ministry of Education, Ministry of Health, and Ministry of Agriculture), which i s in full conformity with the adopted strategy. In general, this strategy i s designed to support ongoing legal and institutional reforms, and create capacity o f the Government in the area of internal audit.

By end-2007, Government has created a working group on strategy and action plan development envisaged to formulate functions o f a new independent external auditing body in the Republic of Tajikistan. The above mentioned strategy and action plan were developed and subsequently approved by the Decree o f the President of the Republic o f Tajikistan in October 2008. These were built on recommendations reflected in the institutional development plan within the framework o f partnership project between the State Financial Control Committee (Tajikistan) and the National Audit Office (UK).

In the context o f public procurement reform and in conformity with the Law o f the Republic of Tajikistan “On public procurement,” Government adopted a new legislation in relation to Public Procurement Agency. Accordingly, special inter-agency committee was created to certify capacities of procurement agencies in accordance with new legislation. It i s also envisaged to introduce standard bidding documentation and Manuals on implementation o f the decentralization of procurement units in respective line ministries. Referring to these initiatives during 2007-2008, full functionality of procurement units in six government institutions and agencies was ensured.

Budget allocations and medium-term expenditure planning

The Government cooperates with the international donor community in the context o f harmonizing the formulation o f policy measures and public expenditure. For instance, Ministry o f Finance ensured integration o f the Public Investment Program (PIP), which stands for external

60

grants and borrowings, and annual state budget expenditure approved in accordance with the Law o f the Republic of Tajikistan “On the State Budget.” Besides, there i s a newly created linkage between PIP and Centralized State Investment Program (CSIP) and PRS priority actions in 2007- 2009, and other strategic sector programs.

Furthermore, annual update and adoption o f the Medium-Term Expenditure Framework (MTEF) for the three-year period and i t s linkage with the annual budget cycle contributes to effective allocation of resources within sectors and between social and economic sectors. Corresponding amendments to the Law o f the Republic of Tajikistan “On Public Finance” have been adopted in 2007, which form a solid legal foundation for further implementation o f the program.

Besides, attempts were made towards enhancing transparency and integrity o f the budget system through publishing annual state budget execution reports by Ministry o f Finance o f the Republic of Tajikistan, and strengthening capacity o f technical staff in respective ministries and agencies on revenue and expenditure projections and budget performance monitoring across oblasts, rayons, and respective sectors.

Education sector reforms

Government’s efforts aimed at improving the quality o f education services and enhancing expenditure allocation efficiency are fully in line with strategic goals reflected in NDS, PRS, and NSED. Hence, within the framework o f improving allocation efficiency of limited budget resources in education, per capita financing (PCF) mechanism has been introduced in certain areas throughout Tajikistan with further goals to expand the cover to al l rayons in the country. Government Resolution adopted in September 2007 specifies: pilot districts that moved to per capita financing, comprehensive calendar schedule o f PCF expansion, and methodology o f to expand PCF to more rayons across the country.

In addition to improving budget allocation efficiency, Government also supports educational institutions in order to increase quality of their educational services in cooperation with the international donor community. More specifically, the school computerization program i s in progress, while private schools, gymnasia and lyceums are also developing; new credit system i s being piloted in several universities in the Republic o f Tajikistan. Besides, Government also carries out school mapping throughout the country (to create public management information system in education). The outcomes will be disclosed in 2009 and will serve as an analytical foundation for capacity building o f ministries during policy formulation, investment plans and rationalization of school infrastructure for further integration of the per capita financing mechanism.

Remarkably, the state budget for education, in accordance with the Law o f the Republic of Tajikistan “On State Budget for 2009,” envisaged a twofold increase in budget resource envelope in comparison with the previous year. Moreover, education sector constitutes about 27 percent of aggregate budget expenditure and thus ranks as the top priority sector requiring significant investment in infrastructure and development o f human capital.

It i s expected that Ministry of Education o f the Republic o f Tajikistan will develop a new wage grid and career development system on the basis o f level o f responsibility and qualification of education sector employees. This work will be supported by international donors. Ministry o f Education will also launch a comprehensive survey of the pay rates system (“stavka”) in an attempt to approximate it to a full-time pay rate.

61

Health sector reforms

Health sector i s affected by a number of fundamental problems treated by the Government as priorities in the context of improving budget allocations o f primary health care facilities, and enhancing effective sector functionality in general.

Government’s efforts are aimed at implementing measures approved by Health Sector Financing Strategy, which includes the following: 1) creating institutional structure of a “single payer” in health; 2 ) consolidating public expenditure sources to secure guaranteed basic benefits package (BBP); 3) developing and implementing a compensation mechanism for health care services and procurement; 4) regulating informal payments in public health system and introducing formal co-financing scheme; and 5) reorganizing health services delivery system and equitable distribution o f budget resources in the health sector.

The Government takes steps towards modernizing primary health care system through implementation of the per capita financing mechanism (expansion to seven new pilot rayons per decision made by Ministry o f Finance and Ministry of Health in July 2008), reintroducing guaranteed basic benefits package in health (expansion to four new pilot districts starting in 2009), and introducing a new wage grid for primary health care workers. For instance, under ongoing activities in 2007-2008, Government Resolution o f the Republic of Tajikistan stipulated a wage increase for a l l health workers, on average, by 70 percent and 60 percent respectively; while wages of primary health care workers were increased by 80 percent and 70 percent respectively.

Moreover, in accordance with health services analysis in September 2008, decision was made to have guaranteed basic benefits package reviewed and expanded to new pilot rayons starting with the next year, while per capita financing needs to be expanded to more rayons within the same oblast. In parallel, Government decided to develop expenditure reallocation mechanism at the oblast level to ensure equity o f citizens in access to respective medical services regardless o f geographical distance and location of different groups o f population.

Government i s extending its gratitude to the international community and donors for their continuous support o f the ongoing reforms in public health by means of active participation in above mentioned reform agenda and financing of specific projects aimed at improving quality o f health services and increasing effectiveness o f allocated financial resources.

CONCLUSION

Taking into account special importance of ongoing social and economic reforms in the country, as well as actions targeted at improving investment climate and private sector development in the process of ensuring sustainable economic growth and improved quality o f public services, Government of the Republic of Tajikistan i s firmly committed to continue the implementation o f respective reforms.

In this context, World Bank support of efforts undertaken by the Government of the Republic o f Tajikistan and its contribution to implementation o f reforms will be significant through approval of the Programmatic Development Policy Financing.

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We look forward to further fruitful cooperation with the World Bank in implementing the above mentioned reform program.

Please accept, Your Excellency, the assurances o f my highest consideration.

Emomali Rahmon

63

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Annex 3: Link between the PDPG, Analytical Work, and other Bank and Development Partner-Supported Programs

Reform Area

management

Inspections

Privatization Program

Cotton Sector Reform r Reform

reform

AAA Macroeconomic review, country economic memorandum, programmatic public expenditure review 1 and 2, public sector and civil service pay note and update, public expenditure and financial accountability assessment. Investment Climate Assessment Enterprise survey IFC Business Enabling Environment and small and medium size enterprises survey Investment Climate Assessment Trade diagnostic study

Trade diagnostic study Aviation study

Trade diagnostic study Energy utility sector review Poverty and social impact analysis of impact on the poor o f tariff adjustments. Central Asia Regional Electricity Export Potential Study

Trade diagnosis study; Agricultural development strategy Poverty assessment update Cotton sector review

Programmatic public expenditure review 1 and 2, public sector and civil service pay note and update, public expenditure and financial accountability assessment.

Public expenditure review 1 md 2, public sector and civil service pay note and update

Other Bank Operation PDPG operations

PPIAF program IFC BEE Project MIGA Foreign Investment Advisory Service

PPIAF program IDF Grant for Strengthening Capacity o f the State Investment and Property Commission

Energy Loss Reduction Project Pamir Private Power Project Energy Emergency Project

Farm Privatization Support Cotton Sector Modernization Project Rural Infrastructure Project, Community Agriculture and Watershed Management Project, Land Registration and Cadastre, Farghana Valley Development Project. Public Sector Reform Project (FY06) IDF Grant for Strengthening Civil Service Capacity Public Financial Management Modernization Reform Project (FY09) IDF Public Sector Accountability Institution Building and Technical Assistance 2 Public Sector Reform Project (FY06)

Other Donors DFID, EC, Switzerland, Japan, IMF

Switzerland Asian Development Bank - (tax code modernization) USAID - (licensing)

Switzerland

EBRD French Government (both airport infrastructure) Asian Development Bank - (Power Rehabilitation) Germany EC Islamic Development Bank Switzerland UK US Organization for Security and Cooperation in Europe Asian Development Bank USAID Switzerland DFID UNCTAD - (Standards) UNFAO - (Land Reform) EC EBRD

EC Asian Development Bank DFID UNDP UNICEF USAID Sweden Organization for Security and Cooperation in Europe

EC Asian Development Bank

74

Public Financial Management Reform

Public Financial Management Modernization Reform Project (FY09) IDF Public Sector Accountability IDF Procurement Agency Statistical Capacity Building Project IDF-Governance in Tax Services

Community and Basic Health Project Education Modernization Project Central Asia HIV/AIDS Project Fast Track Initiative Trust Fund Social Protection Reform Grant Youth Social and Economic Opportunities Avian-Flu Food Security and Seed Import Municipal Infrastructure Project Pipeline projects: Health Sector Support Program (FY09), National Quality Education Project (FY IO).

Report on the Observance o f Standards and Codes (ROSC) on accounting and auditing, financial accountability assessment,

IMF DFID EC USAID Switzerland Germany UNICEF WHO

Asian Development Bank Sweden Switzerland EC DFID USAID

75

Annex 4: Relations with the International Monetary Fund

The Bank's Country Partnership Strategy, endorsed by the Bank's Board of Executive Directors on July 26, 2005, focuses on the following three priorities, which are in line with the country's PRS 2:

To improve business opportunities in rural and urban areas

e To enhance and preserve the quality o f the human capital

e To improve energy service delivery and increase electricity exports.

In addition, in each of the above areas, the World Bank Group and government agreed to work to improve government capacity and efficiency, and reduce corruption by giving special emphasis to measures that increase transparency o f resource use, reduce discretionary controls, and encourage the participation o f users in the provision o f services.

Macroeconomic management aims at establishing a stable economic environment through appropriate fiscal, monetary, exchange rate, and sustainable debt policies. In support o f these policies, the authorities are tightening payment discipline, especially in the energy sector, hardening budget constraints for state-owned enterprises, and pursuing enterprise and banking privatization and restructuring. Recent improvements in macroeconomic management have supported the current economic recovery. However, to maintain strong growth the authorities will need to accelerate structural reform to support private sector development and investment, and encourage foreign investment.

The IMF has taken the lead in assisting Tajikistan in enhancing macroeconomic stability. The Fund has encouraged the authorities to continue with fiscal consolidation, maintain a restrictive monetary policy, and restructure external debt to enhance debt sustainability.

The World Bank has taken the lead in the policy dialogue on structural issues, including poverty reduction measures, agriculture sector reforms, private sector development, institution building, and governance. A range o f instruments i s used to conduct the dialogue. Policy based lending and technical assistance i s supporting reforms in a number of sectors. The Policy Based Grant currently under preparation will engage the government in the areas of public administration reform, public expenditure management, social service delivery and private sector development.

This broad-based approach i s combined with sector projects in health, education, municipal infrastructure, power, agriculture, environment, and poverty alleviation. Over the last two years, the Country Procurement Assessment Review, the Country Financial Accountability Assessment, a Trade Diagnostic Study, an Investment Climate Assessment, a Note on Public Sector Wages and the Public Expenditure and Institutional Review have been finalized in collaboration with the government o f Tajikistan. An Aviation Sector Note and a Note on Remittances will be issued soon.

The table below illustrates division o f labor between two institutions in specific areas:

76

Area

Economic Framework/ Management

Budget

Public Sector Reform

SocialPoverty

Private and Financial Sector Development

Other Sectors

Specialized Advice from the Fund

Monetary policy, exchange rate, fiscal, and trade policies, economic statistics

Medium-term budget framework, tax and customs policy and administration, and treasury and debt management

Banking supervision; development of the interbank market and increasing competition in the banking sector

Specialized Advice from the Bank

Economic growth, economic statistics

Budget management, debt management and statistics, Public Expenditure Review, Country Procurement Assessment

Civil service reform, public sector wage policy, administrative restructuring and health and education financing

Poverty analysis; reforms in education, health, social protection; support to community driven development

Cotton export pricing, developing and implementing the privatization strategy, farm privatization, bank closure and restructuring.

Reforms in agriculture, energy sector, water and sanitation, environment, infrastructure.

Key Instruments

IMF: PRGF performance criteria and benchmarks on monetary and fiscal targets.

Bunk: TAJSTAT (under implementation), and Public Financial Management Modernization (under preparation).

IMF: PRGF performance criteria on overall fiscal balance, including PIP. Structural benchmark on treasury development

Bunk: Public Financial Management Modernization (under preparation), technical assistance.

IMF: PRGF

Bunk: Public Sector Reform (FY06), Public Financial Management Modernization (under preparation).

ZMF: PRGF

Bunk: Community and Basic Health (under implementation), Public Financial Management Modernization, Health Sector-Wide Program (under preparation). Education Modernization.

IMF: PRGF.

Bunk Public Financial Management Modernization (under preparation), FIRST Trust Fund technical assistance (under implementation).

Bunk: Public Financial Management Modernization, Cotton Development, Municipal Infrastructure, Energy Loss Reduction, Dushanbe Water Supply, Community Agriculture and Watershed Management, Ferghana Valley, Avian Flu, Pamir Private Power, Land Registration and Cadastre.

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Annex 5: Tajikistan’s Status in Relation to the MDGs

Tuberc,losis cases detected Lnder DOTS ( O h ) I I 3 3

-- - 1 Figures I n italics refer to periods other than those specified. _______

78

Annex 6: Assessment Letter f rom the International Monetary Fund to the Wor ld Bank

February 24,2009

Economic developments in 2008 were favorable, and the authorities completed the June- December 2008 Staff Monitored Program (SMP). Driven by a 50 percent growth in remittances, real GDP grew by 8 percent, and the National Bank o f Tajikistan (NBT) increased its net international reserves position to $181 mil l ion (1 month o f imports). Wi th buoyant activity, the government achieved an estimated overall fiscal surplus (excluding the externally financed public investment program, PIP) o f 1 percent o f GDP. Inflation receded to 12percent year-on-year in December as international prices eased. The authorities also made good progress on their structural reform agenda, including by setting up a supervision unit for state-owned enterprises and preparing legislative changes to the central bank and commercial banks laws. The special audit o f the NBT has been completed, and the report’s Executive Summary w i l l be published on the NBT’s website. Tajikistan also repaid all noncomplying disbursements to the IMF.

The external environment i s weighing on the 2009 outlook. The global slowdown i s expected to impact Tajikistan mainly via a 30 percent decline in remittances and falling exports. Real GDP growth i s projected to reach 3 percent at best, mainly driven by government spending and a continued expansion in the non-cotton agriculture sector. Inflation i s likely to stabilize around 13 percent, with the decline in international commodity prices being offset by a depreciating somoni against the US. dollar.

In this adverse external environment, macroeconomic policies need to be geared primari ly toward maintaining external stability. The authorities are targeting an overall deficit (excluding PIP) o f 0.5 percent o f GDP in 2009, while ensuring that there i s sufficient space for social spending needed to alleviate the impact o f the crisis on the population. They have committed to a flexible exchange rate regime, which w i l l be key to facilitate external adjustment. Tajikistan’s debt dynamics are sustainable, but remain vulnerable to less favorable macroeconomic developments, and Tajikistan’s risk o f debt distress remains high.

With these policies in place, Tajikistan has a remaining balance-of-payments financing gap of at least $135 million in 2009 and $45 million in 2010. The authorities have requested financial support o f at least $51 mil l ion in 2009 and $35 mill ion in 2010 from the IMF under the Poverty Reduction and Growth Facility. The IMF’s Executive Board i s expected to consider the request in early April, subject to the authorities completing five prior actions. The remaining financing needs are expected to be met through budget support from the Asian Development Bank ($40 mil l ion in 2009), the World Bank ($20 mil l ion in 2009 and $10 mill ion in 2010), and the European Union ($24 mil l ion in 2009). With this, Tajikistan’s external position remains vulnerable to a further worsening o f the external environment. For example, the external financing gap would increase by $1 10 mil l ion if remittances declined by an additional 5 percentage points.

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The authorities have committed to pushing ahead with ambitious structural reforms. They will fo l low up on key recommendations o f the report on the special audit o f the NBT, including an external audit o f net international reserves. Structural reforms over the remainder o f 2009 will focus on improving fiscal management, enhancing transparency at state-owned enterprises, and putting these enterprises on a sound financial footing. The authorities also intend to resolve the debt problem in the cotton sector, and lay the foundation for sustained growth in the agricultural sector.

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MAP SECTION

Tr a n s A l a i - R a n g e

FerganaValley

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SOGDREGION

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G H O R N O -B A D A K H S H A N

A . O .

Region underdirect Republicsubordination

Murgab

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Komsomolabad

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Chkolovsk

Taboshar

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AyniPendzhikent

VanjRukhch

Ishkashim

Vrang

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Andarob

Ura-Tyube

Jirgatal'

Obigarm

Rasht

Kulyab

Khorog

Khodjand

Kurgan-Tyube

DUSHANBE

AFGHANISTANPAKISTAN

CHINAUZBEKISTAN

KAZAKHSTAN

KYRGYZ REP.

UZBEKISTAN

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.

Panj

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T r a n s A l a i - R a n g e

FerganaValley

P a mi r s

Pik ImeniIsmail Samani

(7495 m )

Pik Lenin(7134 m )

Pik Revolution(6,974 m)

Pik Karl Marx (6723 m )

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TursunzodaShahrinavRudakiHissorVarzobFayzobodVahdatRoghunNurobodRashtTojikobodTavildaraJirgatolDarvozVanjIshkoshimRoshtqalaRushonShughnon

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MurghobNosir KhusravShahrituzQabodiyonJilikulKhurosonQumsangirBokhtarKolkhozobodJomiVakshsYovonSarbandPanjDangharaFarkhorNorakVoseSovet

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KulobBaljuvonMoskvaShurobodKhovalingMuminobodPandjakentAyniShahristonZafarobodIstaravshanGhonchiSpitamenMatchinJabor RasulobKuhistoni MastchohGhafurovKonibodomAshtIsfara

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2 Shahrinav

3 Rudaki

4 Hissor

5 Varzob

6 Fayzobod

7 Vahdat

8 Roghun

9 Nurobod

10 Rasht

11 Tojikobod

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13 Jirgatol

14 Darvoz

15 Vanj

16 Ishkoshim

17 Roshtqala

18 Rushon

19 Shughnon

20 Murghob

21 Nosir Khusrav

22 Shahrituz

23 Qabodiyon

24 Jilikul

25 Khuroson

26 Qumsangir

27 Bokhtar

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29 Jomi

30 Vakhsh

31 Yovon

32 Sarband

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34 Danghara

35 Farkhor

36 Norak

37 Vose

38 Sovet

39 Kulob

40 Baljuvon

41 Moskva

42 Shurobod

43 Khovaling

44 Muminobod

45 Pandjakent

46 Ayni

47 Shahriston

48 Zafarobod

49 Istaravshan

50 Ghonchi

51 Spitamen

52 Matchin

53 Jabor Rasulov

54 Kuhistoni Mastchoh

55 Ghafurov

56 Konibodom

57 Asht

58 Isfara

TAJIKISTAN

0 20 40 60

0 20 40 60 Miles

80 Kilometers

IBRD 33493R

MAY 2007

TAJ IKISTANSELECTED CITIES AND TOWNS

AUTONOMOUS OBLAST CENTER*

OBLAST CENTERS

NATIONAL CAPITAL

MAIN ROADS

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JAMOAT (SUB-DISTRICT) BOUNDARIES

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* Area with no oblast-level administrative divisions, where rayons are under direct republic jurisdiction.

World Bank Document fileDocument of The World Bank FOR OFFICIAL USE ONLY Report No. 46717-TJ INTERNATIONAL DEVELOPMENT ASSOCIATION PROGRAM DOCUMENT FOR A THIRD PROPOSED GRANT IN THE

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