Report No. PID6108 Project Name Tajikistan - Structural Adjustment Credit (SAC) (@) Region Europe and Central Asia Sector Industrial Adjustment Project ID TJPE47438 Borrower Republic of Tajikistan Implementing Agency Office of the Prime Minister Date this PID prepared March 13, 1998 Projected Board Date June 25, 1998 1. Background. Since the signing of the peace agreement, the Government has initiated movement toward reestablishing financial discipline in the economy and has removed some of the controls imposed on the economy. It has adopted several policies, including: reactivating the foreign exchange auction, establishing a credit auction, introducing a uniform and low tariff rate of 5 percent and eliminating export taxes. The Government has also made satisfactory progress in stabilizing the macroeconomic environment through tightening fiscal and monetary policies in the second half of 1997. As a result, the rate of inflation declined rapidly from 20 percent in July to 2.3 percent in December 1997. The budget deficit for the year as a whole was less than 3.5 percent of GDP with the exchange rate premium declining from 19 percent to less than 3 percent during the same period. The noticeable progress achieved since July 1997 led to approval of the IMF Emergency Post- Conflict Assistance and the World Bank Post-Conflict Rehabilitation Credit in December 1997. 2. With improvement in the security situation, the Government started to address the structural reform measures and initiated movement toward establishing the necessary foundation for an accelerated privatization program. The State Property Committee (SPC) prepared and the Government approved most of the regulations necessary to implement the new Privatization Law. It also attempted addressing the weaknesses in the current law on banking by drafting a new banking law which provides a better definition of what a bank is and what its activities should be. 3. Project Scope and Objectives. The principal objectives of Tajikistan's reform program, supported by the proposed Credit, are: (i) restoring macroeconomic stability; (ii) implementing a transparent privatization program; (iii) undertaking financial sector reform to establish a conducive environment for private sector development and restructuring the banking system; and (iv) lessening the adverse impact of adjustment on the poor by enhancing budget provisions for health, education and social safety net. The proposed credit will be the World Bank's sixth credit to Tajikistan. As a quick disbursing operation, it will support the country's balance-of-payments and budgetary requirement. 4. The proposed SAC builds on policy achievements under the World Bank's Agricultural Recovery and Social Protection (ARSP) Credit, and is supported by technical assistance provided under the Institution Building Technical Assistance (IBTA) Credit. It will benefit from the impact of the Pilot Poverty Alleviation Project (PPAP), the Post-Conflict Rehabilitation Credit (PCRC), and the Post-Conflict Emergency Reconstruction Credit (PCERC), which aim to minimize the transitional social cost of reform and facilitate efforts to move away from a wartime economy. Although not part of the proposed credit, policy changes at the macro level (fiscal, monetary and exchange rate), are required to provide an environment conducive to private sector development. IMF support to assist the Government in formulating a comprehensive stabilization program under an ESAF arrangement will be crucial for achieving macroeconomic stability. 5. Environmental Aspects. In accordance with the Association's operational Directive on Environmental Assessment (OD 4.01, Annex E), the proposed operation has been placed in Category "C" and does not require an environmental assessment. 6. Benefits. The major benefits of the proposed credit include: (i) greater efficiency in the economy; (ii) increased availability of critical imports financed by the credit; (iii) development of a private sector and more competitive transport, construction and cotton sectors; and (iv) enhancement of the budgetary provisions for health, education and social safety net. 7. Risks. Four potential risks are associated with the proposed credit: (i) deterioration in the political and security environment may undermine the Government's support and commitment to the policy reforms and could delay project implementation; (ii) implementation of policy reforms under the proposed credit may place heavy demands on the country's limited weak institutional capacity; (iii) opposition to reforms by some vested interests may result in policy slippage; and (iv) high level of external debt. 8. Risks minimizing measures include: (i) The gradual improvement of the country's political situation with the signing of the peace agreement on June 27, 1997 and the operation of the CNR. Government efforts to foster economic recovery will facilitate the transitional process toward national reconciliation and peace. (ii) Policy reforms under the proposed credit will be implemented with assistance from consulting firms currently engaged under the IBTA credit. (iii) Various stakeholders, including the managers of enterprises that are expected to be privatized, will be fully informed about the privatization program's objectives, the nature of the process and the opportunities available and will be brought into the design and implementation of the reform program to the extent possible. (iv) Intensification of the authorities' efforts to seek rescheduling agreements with Tajikistan's external creditors and provision of external assistance in the form of generous debt relief and sustained balance of payments support on concessional terms, will help to reduce this risk. Contact Point: M.R. Ghasimi The World Bank 1818 H Street, N.W. Washington, D.C. 20433 Telephone No. (202)473-5868 Fax No. (202) 477-1692 Note: This is information on an evolving project. Certain activities and/or -2 - components may not be included in the final project. Processed by the InfoShop week ending March 20, 1998. - 3 -