Over the last few years the Government achieved growth in all revenues. The budget revenue to GDP ratio remains low (16.7 % in 2002). The budget expenditure to GDP ratio continued to decline to 15.6 % following cutbacks and rationalization of expenditure. While the Government has been supporting the principle of non-inflationary financing since 1995, it did rely on bank financing of the deficit until 1999 following external shocks and various natural disasters. The continuing reduction in export taxes for cotton and aluminium together with the downturn in world prices of these commodities, result n decreased revenues. Since 1999 this has been compensated by some improvement in tax collection, as well as grants from international agencies. With regard to VAT payments among CIS countries’ shift to the destination principle was made in 2000.
Recent budget reforms include preparation of a year forward-looking budget. The Government takes measures to deepen financial sector reform with the view to strengthen tax administration and improve effectiveness of tax collection system, efficiency of government spending, monitoring system of commitments and external tax management.
In 2002, budget expenditure was associated mainly with public administration (17, 3%), education (17.3 %), social security and welfare (13.2%), transport and communication (6.7%), health (6.1%), and utilities (5.9%). Tax accounted for 93.4% of budget revenues or 15.3% of GDP. In government finance, the treasury is better executing the national budget resources. The National Audit Agency was created with the view to insure accountability and transparency. The Ministry of finance is improving the management of the external public debt. It is regulating all external borrowing and limiting all non-concessionary borrowing. The large external debt liabilities increase the on private sector financing or financing without state guarantee.
In 2002, with view to foster leasing operation the Government has drafted the Law “On financial rent” which came into force in 2003. With the view to develop financial sector and simulate micro-crediting small and medium enterprises, the National Bank of Tajikistan (NBT) has drafted the Law “On micro-financing entities in the RT”, adoption of which is expected.
Despite commitments to adhere to a tight monetary policy, the Government at times had to depart from established monetary targets because of the fact that financial instruments to absorb redundant liquidity were not well developed. Given an expected in net of foreign financing, the Government will pursue a tight fiscal policy and balance budget by 2004. A deficit will be financed from the sale of treasury bills and from privatization proceeds. To compensate for the loss in revenue caused by phasing out reduction of sales tax, cotton and aluminium, the Government will introduce measures to expand the base and increase rate of excise taxes, extend VAT on domestic cotton production, experiment with the introduction of a unified agriculture tax in several regions, and reduce the number of tax exemptions. The Government will continue strengthening tax administration and tax collection system. Concrete measures include completion of VAT reform, strengthening of the Large Taxpayers’ Inspectorate, further work on registration of taxpayers to expand the tax base, take action on liquidation of tax arrears, move to modern self-accrual system, and introduce a system a tax withholding at source. In order to improve performance of a recently established Ministry of revenue and duties, the Government intends to allocate incentive amounts to its budget regarding revenue collection and over-fulfilments of plans. Tax administration reform has been started with the support of technical assistance from the International Monetary Fund and Asian Development Bank. All these measures will lead to sustained growth of tax revenue to GDP.
Active measures to collect overdue loans, as well as strict limitations on new loans will reduce net claims of the NBT on the private sector. NBT will not extend directed loans. Containing internal credit emission will strengthen international reserves position. The NBT will broaden the sale of NBT deposit certificates and treasury bills and conduct further work on making its open market operations more effective. To strengthen independence and financial position of the NBT, its annual financial reports will be prepared in full compliance with international accounting standards.
The Government of Tajikistan intends to increase expenditures on social sector, though this will be constrained by the large share of expenditures on wages, pension and debt service, which are all expected to rise substantially. Civil service pay has risen by an average of 40 % in 2002. Social sector expenditures in the following three years will comprise of two components.
From independence until the end of 1999, inflation was high, due mainly to inflation budget financing and the granting of direct credits to state-owned enterprises and farmers. However, the trend has been downward since 1996. Prices grew up again toward the end of 2000 after a new national currency Somoni (TDS) was introduced in October. The experience in arranging a similar reform in the past, uncertainly, and excessive liquidity during the second half of the year resulted in inflation rates of 12.4% and 7.7% in October and November 2000 respectably and an annual rate of over 60%. A tight monetary policy in 2001-2002 and growing confidence in the new national currency subsequently reduced inflation to 14.5% in 2002. As a result, the nominal exchange rate has remained relatively stable since and 2000.
To halt the deterioration and stabilize the economy since independence, the Government of Tajikistan initiated an Economic reform Program for 1995- 2000. IN 1998-2001 financing faculty for post-conflict reconstruction and expansion of restructuring was carried out in accordance with two IMF programs (POST CONFLICT Faculty and Enhanced Structured Adjustment Faculty EASF). EASF was later renamed as a faculty financing poverty alleviation and economic growth (PRGF). Sinning of the Grate General Agreement of Peace and national accord in 1997 allowed the Government of Tajikistan to concentrate on reforms targeted at macroeconomic stabilization and a series of structural reforms aimed at establishing the basics of a market oriented economy. Significant progress was achieved in controlling inflation and completing the privatization of small enterprises. The process of restructuring of large-size enterprises has been started in 1999. Deeper reforms were conducted in the agricultural and by early 2001 land entitlements for 50 % of arable lands had commenced its operation. An agreement on restructuring of the largest business banks has been actualized. The result of these reforms and a more stable political climate was a significant growth in GDP, which over the period 1997-2002 reached a cumulative of 42.3%. In 2002, GDP grew by 9.1 %.
The Government has targeted term GDP annual growth rate of 6 % and a rate of inflation not exceeded 7% in order t maintain a stable exchange rate and rise per capita income. To strengthen confidence in the national currency and meet external commitments, the Government intends to increase gross international reserves to the equivalent of three month of imports. Regarding fiscal policy the medium term target of the Government of Tajikistan is to achieve budget balance.
Despite natural disasters, dependency on global prices and vulnerable from external shocks, Tajikistan undertakes many reforms. In several sectors reforms were slower than expected to due to lack of institutional capacity. Macroeconomic stability and implementation of wide range of structural reforms will support the growth, especially in agriculture, taking in to account comparative advantages of Tajikistan in agriculture sector and low cost of labour. The latter factor will also support industrial output with substantial potential to improve the productivity. Growth potential exists in other sectors as well as, such a hydropower, mining and metallurgy, construction and infrastructure.