PROGRAM INFORMATION DOCUMENT (PID) APPRAISAL STAGE 09/21/2012 Report No.: AB7139 Operation Name TAJIKISTAN PDPG 6 Region EUROPE AND CENTRAL ASIA Country Tajikistan Sector Primary education (25%); General agriculture, fishing and forestry sector (25%); Aviation (24%);General finance sector (14%);Public administration- Information and communications (12%) Operation ID P126042 Lending Instrument Development Policy Lending Borrower(s) Government of Tajikistan Implementing Agency Ministry of Finance Ag Street 3 Dushanbe Tajikistan Tel: (992-372) 211-417 Fax: (992-372) 221-3329 minfin@tojikiston.com Date PID Prepared September 21, 2012 Estimated Date of Appraisal September 21, 2012 Estimated Date of Board Approval October 30, 2012 Corporate Review Decision Following the corporate review, the decision was taken to proceed with the preparation of the operation. Country and Sector Background Tajikistan’s economy grew at an average of 8.6 percent per year during 2000-2008, but was adversely impacted by the 2008-09 global economic recession through a sharp fall in remittances and a decline in exports of cotton and aluminum. Inflows of remittances, which had grown fivefold in 2004-2008, declined from $2.3 billion in 2008 (equivalent to 45 percent of GDP) to $1.6 billion, while export receipts dropped by almost 13 percent due to lower international prices of cotton and aluminum. According to the 2010 Life in Transition Survey (LITS), 58 percent of households in Tajikistan reported they had been adversely affected by the crisis. International migration and remittances were among the main transmission channels: one-third of respondents said they were affected through a reduced flow of remittances or the return home of household members who used to work abroad. The financial sector was also adversely affected by the growth slowdown, with non-performing loans in the banking sector rising to record levels. The disruption of cargo deliveries due to Uzbekistan border closures added to financial sector difficulties, which in turn led to a fall in credit flows to the private sector. The government’s fiscal management plan, depreciation of the somoni, and increased support from development partners helped mitigate the adverse impact of the crisis. Under its fiscal management plan adopted in response to the crisis, the government revised the 2009 budget to reflect revenue shortfalls. It increased public spending on the social sectors (education, health, and social protection) and expanded employment opportunities through social programs such as a cash-for-work scheme and measures to facilitate entrepreneurship. Additionally, the government restrained nonessential current spending, including operation and maintenance spending, but excluded essential nondiscretionary expenditures like wages and salaries, employer contributions and interest payments. On the revenue side, the VAT rate was reduced from 20 to 18 percent. Greater exchange rate flexibility and depreciation of the somoni served as an effective shock absorber during the crisis, contributing to improved competitiveness compared to other countries in the region, and facilitated current account adjustment (Table 1). Higher international prices of aluminum and cotton were also important contributory factors. Development partners provided increased external assistance in 2009—grants equivalent to 3.4 percent compared to 1.6 percent of GDP in 2008. While adversely affected by the global downturn, Tajikistan’s economic growth of 3.9 percent in 2009 was better than most other countries in the region. Tajikistan’s economy grew by 6.5 percent in 2010, 7.4 percent in 2011, and 7.4 percent in the first half of 2012. For 2012, this growth reflected higher growth in industry (up 12 percent) and in services (up 13.1 percent). The agriculture sector performed well too, expanding by 6.5 percent despite a harsh winterError! Reference source not found.. Strong growth during the post-crisis period has been spurred by the rebound in inflows of remittances (equivalent to about 40 percent of GDP in 2011), reflecting a higher outflow of migrants following the economic recovery in Russia. This in turn has led to strong growth in the services sector, which accounted for more than one-third of the growth in 2011 and 2012. Imports surged 37 percent in 2011 and the current account balance reverted to an estimated $153m deficit in 2011 from the $120m surplus the previous year Operation Objectives The PDPG4-6 programmatic development policy grants are central to the World Bank’s FY10-FY13 Tajikistan Country Partnership Strategy, and support its two main objectives to: (a) mitigate the negative impact of the crisis on poverty and vulnerability in Tajikistan, and (b) pave the way for post-crisis recovery and sustained growth. Rationale for Bank Involvement In February 2010 the Government of Tajikistan approved its Third Poverty Reduction Strategy (PRS 3) for 2010–2012. Its overarching objective is to promote sustainable strong economic growth and improve the population’s living standards. The World Bank and other development partners are collaborating closely through a Joint Country Partnership Strategy to help the government implement PRS 3. PDPG 4– 6 serve as the Bank’s primary vehicle for policy dialogue with the government, and for discussions with other development partners on how best to align support for the Government’s program. Many development partners have provided technical assistance and financial support for the PDPG4-6 reform program. PDPG4 focused mainly on protecting earlier gains in social spending and improving the climate for private investment, in the face of ongoing global crisis. PDPG6 supports the economic recovery underway following the 2009 slowdown. As noted above, GDP growth has recovered to more than 6 percent in 2010 and 2011. Accordingly, the focus of the PDPG series has shifted from protecting earlier social sector gains to improving the environment for private sector development and strengthening government effectiveness. PDPG6 supports continued implementation of health and education financing reforms and ongoing efforts to improve targeting effectiveness of social assistance. To help spur private sector-led growth, the government has submitted a new law on public private partnerships to Parliament in August 2012, and has continued expedited issuance of land-use certificates to farmers. It has introduced a new salary grid in all central government entities, submitted a new law on public administration to Parliament which was approved in May 2012, approved the chart of accounts for public institutions, and prepared the 2012 budget based on the new budget classification. The government has also conducted an energy efficiency audit of TALCO, the country’s large aluminum smelter, to identify options for reducing its energy use. This will have several benefits, including reducing production costs and improving access to scarce electricity for other consumers, particularly in the winter, which is an energy deficit period. Tentative financing Source: ($m.) International Development Association (IDA) 20 Borrower/Recipient 0 IBRD 0 Total 20 Institutional and Implementation Arrangements The Ministry of Finance is responsible for overall implementation of PDPG6, and for coordinating actions among other concerned ministries, agencies, and departments, with additional help provided by the State Advisor of the President of Tajikistan for Economic Policy. The Executive Office of the President is responsible for implementing the public sector reforms, while various other agencies and line ministries involved (i.e. NBT, agriculture, energy, and transportation, and labor) are accountable for implementing the reforms under their responsibility. The State Committee for Investments and State Property Management is responsible for overseeing policy actions related to streamlining business regulations. World Bank staff will monitor actions and review progress using the Program Policy Matrix. An important objective of the PDPG series is to strengthen national monitoring systems to track poverty and human development outcomes. With the support of a 2-year trust fund financed by DFID, the World Bank has substantially increased technical assistance provided to the Government to increase in-country capacity for poverty monitoring and analysis. Risks and Risk Mitigation Successful implementation of the PDPG-supported reform program faces some risks, including (i) general macroeconomic risks as well as (ii) risks related to poor governance.  General macroeconomic risks: Slower than projected regional and global recovery could undermine projected improvements in growth, fiscal and current account balances, and asset quality in the banking sector. These risks are partially mitigated: the government has prepared a fiscal policy program identifying expenditures of a more provisional nature that can be cut in response to a slowdown, and is taking remedial action to reduce financial sector vulnerability.  Governance: While Tajikistan has made some progress in improving its governance, many public institutions remain very weak. The functional block of the PRS aims at strengthening the public administration system through introduction of professional civil service, and improving the investment climate by strengthening property rights and reducing the regulatory burden. Poverty and Social Impacts and Environment Aspects A key objective of the PDPG series is to protect delivery of basic services (health, education, and social protection), and to support implementation of reforms designed to ensure more equitable resource allocation across regions. Introduction of partial capitation in primary health care and greater emphasis on maternal and child care is also expected to have positive equity and gender impacts. The social assistance pilot supported by the series is expected to help the government design and eventually scale-up an improved social assistance program nationwide. This program will use refined targeting mechanisms to channel resources to needy households. According to official statistics, agriculture accounts for more than half of total employment. In the medium term, strengthening farmers’ rights to land and improving access to inputs is likely to lead to greater agricultural profitability, reduced production risk, and lower rural poverty. More reliable energy services will help promote growth. Similarly, poor households and women are also more likely to benefit from efforts to improve the business environment and reduce the regulatory burden: for example, the time needed to register a business in Tajikistan is higher for women than men. The new PPP law is expected to help spur private investment and growth. Similarly, more reliable energy services will help promote growth—essential for poverty reduction. Improved billing and collection in the energy has helped establish a more equitable system, with electricity tariffs in Tajikistan continuing to be quite low in relation to other comparator countries. There is no expected poverty or social impact from implementing performance appraisal scheme or from introduction of the law on public administration (neither of these envisages lay-off of public sector employees). An improved incentive framework for service providers is expected to have a positive impact on public service delivery. An important objective of the program is to strengthen national monitoring systems to track poverty and human development outcomes. With the support of a 2-year trust fund financed by DFID, the World Bank has substantially increased technical assistance provided to the government. Policy reforms supported by PDPG6 are not expected to have adverse impacts on the environment and natural resources. The measures supported by PDPG6 are primarily geared at enhancing the efficiency and effectiveness of spending in the social sectors, strengthening government effectiveness, and helping to pave the way for post-crisis recovery and growth. Positive impacts on the environment are expected through measures such as farmland restructuring. The PDPG series supports farmland restructuring, whereby larger government-directed farms are being broken down into smaller family farms. The tenure security associated with the issuance of land use rights to families strengthens the incentive framework for sustainable natural resource management and empowers the families to have more control over farm management. The program of reform of agriculture for 2012-2020 recently approved by the government is supported by a 22-point action plan to help realize its implementation. Envisaged actions, many of which are already underway, include several which are expected to reduce environmental degradation and promote more efficient use of natural resources. These include raising public awareness on measures to prevent degradation of natural resources, development of a draft law on pastures, improved cropping patterns, as well as development of proposals for commercialization of promising environmentally friendly energy-efficient technologies in the agricultural sector. Contact point Salman Zaidi Title: Lead Economist Tel: +7(727) 2980-580. Ext 224 Fax: +7(727) 2980-581 Email: Szaidi5@worldbank.org Location: Almaty, Kazakhstan (IBRD) For more information contact: The Info Shop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-4500 Fax: (202) 522-1500 Web: http://www.worldbank.org/infoshop