Financing Rural WSS in Tajikistan/socio-economic context

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Historical trends

Declaring itself independent in late summer 1991, the Central Asian republic soon found itself the victim of civil conflict. Although it had been the poorest of the Soviet republics, in relative terms it had also been the most heavily subsidized. Employment was next to universal and educational and health standards were much improved compared to a generation or two earlier. Having been reasonably peaceful, a collapse triggered through the early transition variety and as a result of establishment of independence under conditions of civil war. Official figures, incomplete and imprecise as they are, suggest that the economy may have contracted by more than two thirds between 1990 and 1997. In the late 1990s the economy began to pick up again as peaceful conditions returned and support from the outside in the form of both remittances and ODA started to make an impact. As the new millennium began, growth accelerated, with GDP growth rates in the range of 10 to 11 per cent a year being recorded over the period 2002–2004. Although growth has since fallen back to single digit figures – 6.7 per cent in 2005 and about 7–8 per cent in 2006 (Ronnas et al., 2007, p.14). Though economic growth during 2002–05 far exceeded projections, inflation performance was at times volatile, mostly because of lax monetary policy. A strong fiscal policy stance was the centerpiece of macroeconomic policy efforts, with significant remittance flows playing a key role in fostering growth. Moreover, foreign debt has fallen sharply, to a sustainable level. While initial progress in implementing structural reforms in the context of weak institutional capacity was mixed, the authorities’ implementation record improved significantly over time. Nevertheless, the implementation of some key structural reforms is still pending. In 2006, strong growth continued, though with accelerating inflation. Despite considerable disruptions to energy supply late in the year, real GDP growth reached 7 percent, fueled by a surge in construction activity and continuing strong remittance-financed demand for retail services. CPI-inflation reached 12.7 percent, its highest level since 2003, mostly as a result of failed harvests and higher gas prices, but also reflecting a relatively passive monetary policy stance and remittance-related demand pressures (IMF, 2007, p.4). The following table gives an overview on economic indicators between 2003 and 2006 (EIU, 2008, p.5).

Structure of the economy

Agriculture dominates the Tajik economy, with cotton being the most important commodities for export. Tajikistan was the third largest cotton producer in the former USSR with 1 million tons per year or 11 percent of total production volume. In past years, cotton production has not exceeded 60percent of the previous amount (UNDP, 2005, p.15). Agriculture provides the main source of livelihood to well over 60 per cent of the population and accounts for about two-thirds of the total domestic employment (World Bank 2006b, p. 4). However, its contribution to GDP is considerably smaller; about 24 per cent in 2003 and a mere 21 per cent in 2005. An important input into the agricultural production function is the decline in quality of soil and irrigation infrastructure. This is one of the reasons why yields of main crops and productivity remains very low, also by regional standards (Ronnas, 2007, p.47). Tajik agriculture is highly dependent on irrigation. Some 85 per cent of the arable land is covered by irrigation systems, but about a third of these have fallen into disuse due to lack of maintenance and investments and as a consequence of soil degradation and salinisation (World Bank 2006b, p. 4). Labour productivity and incomes from agriculture remain very low, as evidenced by the large discrepancy between the contribution of the sector to GDP and to employment, respectively, and by the fact that poverty remains more widespread in rural than in urban areas. Although Tajikistan is to a large extent a country where employment and income earning activities are still related to agricultural sector activities, there is a non-agricultural sector to reckon with. It is not nearly as big or as dynamic as would be desirable, indeed necessary, if the economy is to continue grow at rates anywhere near those recorded in the very recent past. Both agriculture and industry are losing shares to construction and above the category “other”. As the latter comprises trade, transportation and communication, and services (both public and private, both business and consumer services), most of the expansions can be found in this category. Most SMEs are to be found in the services category and new entrants appear more common in consumer services than elsewhere (Ronnas, 2007, p. 44). The countries mineral resources include silver, gold and uranium. Aluminum production constitutes 40 percent of the total industrial production. The minimum value of the Gross Domestic Product (GDP) was registered in 1996 (30 percent of its level in 1990) that has been growing by the end of the civil conflict. Following 2001, GDP has grown at 10 percent per year, reaching 47.7 percent of 1990 levels. Around 80 percent of total export revenues come from aluminum and cotton, making Tajikistan highly dependent on price fluctuations in world primary products markets. The nation's major economic assets include vast water resources; the hydropower potential in the country is significant. Lack of investment prevents from the development of the country’s current hydropower capacity (317 billion kW/h/year), as production amounts to only 5 percent of potential output. Potential capacity for energy consumption is almost three times higher in Central Asia. The hydropower industry is the largest water user in the country, leading to water allocation problems with the important agricultural sector. The signed agreement with the “Russian Aluminum” Company (RUSAL) and OJSC IPS foresees the completion of construction for Sangtuda-1 and Rogun HPP (UNDP, 2005, p.15).

THE ECOMONIC SIGNIFICANCE OF REMITTANCES

Tajikistan’s economy has been seriously weakened by the civil war, but is now making a slow recovery. An immediate consequence is that remittances come across as a major fact of Tajik life. As employment and income opportunities dwindled and Tajiks found it increasingly difficult to put their labour to productive use and to make ends meet, they increasingly resorted to migration in search of work abroad, mainly in Russia. As noted in Chapter 3, apart from some 400,000 people, mostly Russian and other ethnic minorities, who left Tajikistan in the 1990s, it is estimated that some 600,000 to 800,000 Tajiks, that is, about a quarter of the Tajik labour force, work abroad on a temporary or seasonal basis. Estimates on earnings from work abroad and remittances are uncertain and vary within a wide range. In 2005 between 500 and USD 600 million in remittances were channeled through the banking system and it is estimated that a comparable amount bypassed the banking sector using informal channels instead (Ronnas, 2007, p.30). Futhermore, along with the benefits brought about by the return of peaceful conditions, under which the realignment of the economy made possible and necessary by the transition from Soviet-type central planning to market economy has been able to proceed at a much higher speed than was possible during the years of civil strife, macro-economic stability has been achieved. The dependence on remittances, although clearly a very important and often also necessary part of the livelihood strategies of many Tajik households, carries a number of problems, many of which are of a social nature. In addition, it is not likely that seasonal labour migration to Russia and elsewhere, is a sustainable practice. If not, it will have an immediate and negative effect on those households that depend on this resource – and it will have an impact on economic growth. In the private sector, remittances are one of the main potential sources of such investments. Little, however, has been put aside for uses that might enhance the ability to generate future earnings (ibid, 2007, p.45).

Macroeconomic Indicators

Tajikistan has one of the lowest per capita GDPs among the 15 former Soviet republics. The civil war (1992-97) severely damaged the already weak economic infrastructure and caused a sharp decline in industrial and agricultural production. While Tajikistan has experienced steady economic growth since 1997, nearly two-thirds of the population continues to live in abject poverty. Tajikistan's economic situation remains fragile due to uneven implementation of structural reforms, corruption, weak governance, widespread unemployment, seasonal power shortages, and the external debt burden (CIA. 24th of July 2008). As a consequence of the economic collapse and the still low level of economic development there is a severe mismatch between the quantity and quality of human capital in particular, but also with regard to physical capital, on the one hand and the ability of the economy to make full and productive use of this capital on the other hand. At the same time the small size of the economy makes it impossible to maintain the educational and skill level of the human capital and to reverse the erosion of the physical and environmental capital (Ronnas, 2007, p. 29). A recent World Bank study concludes that ‘In the next 15 years, the ratio of the capital stock and the GDP per capita in Tajikistan will increasingly normalize one way or another. This race between capital stock decline and GDP growth makes a huge range of economic outcomes in principle available for Tajikistan’ (World Bank 2005, p. x). A review of the present structure and sources of growth underscores that it rests on a weak and unsustainable basis and that fundamental changes are required to put the economy on a path of high, sustainable and propoor growth. In recent years the government has broadly followed the reform prescriptions of the international financial institutions (IFIs), government policy is likely to be dominated by crisis-management, with Tajikistan reliant on the support of international aid agencies in its attempt to ameliorate the impact of the countrywide energy and food crisis. In view of the latest developments, the authorities will probably need to reassess expenditure priorities and, together with the IFIs, evaluate the scope for an easing of expenditure restraint. Given the economic hardship caused by soaring inflation and the winter energy crisis, coupled with the population!s general grievances about lack of social justice and government corruption, the long-term goal of structural reform will also need to be balanced against preventing a rise in social and political instability (EIU, 2008, p.7). Budget targets were substantially overfulfilled in 2007, result of a combination of rapid economic growth, higher than planned inflation, and improved tax collection. The economy-wide disruption in early 2008 and the subsequent worsening of the economic growth outlook for the forecast period will have an impact on government revenue, while raising demands on expenditure, although much of the slack will be taken up by international aid. In addition, the tax base remains narrow, with a large share of revenue still linked to the performance of the aluminium and cotton sectors, and this continues to present a risk to the government’s fiscal targets. The National Bank of Tajikistan (NBT, the central bank) will need to take steps to combat the sharp rise in inflation in the second half of 2008 and to ensure currency stability, but it will have to balance these goals against the need to support economic activity in the aftermath of the winter crisis of 2007/08. The fact that the inflationary spike has been largely caused by inclement weather and global trends in energy and food prices suggests that there is limited scope for the NBT to tackle the problem. The NBT will be similarly powerless to minimise the inflationary impact of food shortages stemming from the winter freeze (EIU, 2008, p.9). Although real GDP growth accelerated from 7% in 2006 to 7.8% in 2007, there were clear indications towards the end of 2007 that the sharp rise in consumer price inflation during the second half was having an impact on household consumption. Real GDP growth slowed sharply in January-March 2008, to just 3.2% year on year, as industry, exports and retail trade were hit by the harsh winter conditions (EIU, 2008, p.10). A sharp rise in consumer prices in the second half of 2007 led to the highest annual average inflation rate in four years, of 13.1%. According to the NBT, by end-2007 cumulative inflation stood at 19.7%. Much of the rise was caused by regional and global food and fuel prices, to which Tajikistan, a large importer of flour, grain and petrol, is particularly vulnerable. The problem will be exacerbated for Tajikistan in the second half of 2008, owing to high domestic food prices, as well as the damage to food stocks caused by the winter freeze in early 2008 and significant shortfalls in precipitation needed for rainfed wheat crops. Furthermore, in 2008 Uzbekistan has raised by 50% the price it charges Tajikistan for natural gas imports (EIU, 2008, p.11). Remittances from Tajiks working abroad will continue to rise during 2008-09. Together with inflows on the capital account, this should help to support the domestic currency against a weak US dollar, despite a rapidly widening trade in goods deficit. Owing to Tajikistan!s high inflation, the somoni will appreciate in real effective terms in 2008-09 against the euro and the Russian rouble, the currencies of its main trading partners. This will have a negative impact on the country.s competitiveness in its most important European export markets, but will improve terms of trade with Russia, the leading source of imports.

Employment, Household Income and Spending

Tajikistan does not share the fate of most other post-Soviet states, but is rather like its Central Asian neighbours endowed with rich resources of labour. A declining number of births which still allows for positive natural growth may imply that the overall dependency ratio improves. Tajikistan has a rather favourable position, where the number of people that are in the right age groups for productive employment increases in relative terms. This seemingly enviable position, however, presupposes that opportunities for productive employment is in fact made available to all the new entrants and to those in the labour age cohorts that are unemployed or under-employed. In Tajikistain, this is clearly not the case. Also a casual look suggests that a large share of the new entrants to the pool of labour age residents of the country do not find such productive employment. Already the statistic that the working age population grew by more than half – it increased by 57 per cent – over the period 1990–2005, while the economy contracted by more than a third, should sound an alarm simply by suggesting that the ability of economy to create new jobs needs to be quite impressive by any standard (Ronnas, 2007, p.19). In terms of absolute numbers as reported by the State Statistical Committee, it has grown from a low of 1,777,000 in 1996 to 2,154,000 in 2005, or by 21 per cent in ten years. Yet, as a proportion of the total tally (i.e., of those of working age), the economically active population has decreased. In fact, with an average annual net growth of the working age population of 4 per cent a year over the past ten years (1996–2005), much of which accrued during the second half of that interval, the economy needs to grow very fast indeed to be able to absorb the new entrants. Although formal unemployment (that is, registered) is said to be declining and in 2005 stood at about 42,000 individuals or less than a per cent of the working age population, also the labour participation rates suggest that the lack of a capacity to create income generating opportunities is likely to be a problem of quite some magnitude. The ability of the economy to create jobs does therefore not keep up with the pace of net growth of the working age population. However, as formal registration of unemployment appears to understate the real state of affairs quite substantially. More than half, or 55 per cent, of this unemployment is urban in origin and overall a slight majority of those unemployed are men. Work in the Tajik economy, while often necessary simply to bring food onto the table, is not particularly rewarding. Instead, the external labour market made available thanks to primarily demand for low skilled labour in Russia offers a way around the shortage of decently remunerated jobs and other income earning activities available at home (Ronnas, 2007, p.20).

The following table provides aggregate income statistics from Tajkistan for the years 2005 and 2006 (billion TJS)

and these numbers indicate how the aggregate income is used (billion TJS):

Public Finance

The general government budget encompasses the budgets of republic governments (central government budget and the budgets of state targeted funds), local government budgets, social protection funds, and the public investment program (PIP). The republican budget covers expenditures of administrative bodies under management of the state, the legislative and judiciary bodies (Parliament and Justice). Local government budgets include four tiers of administrative and territorial units: regions (oblasts), districts (rayons), villages, and community administrations (jamoats). The social protection budget is an extra-budgetary item that accumulates funds for social protection purposes, namely pension and social insurance. Finally, the public investment program covers capital expenditures financed by the central government budget and by donors through loans, credits, and grants. The Republican budget accounts for over 65 percent of total general government expenditure. The republican government is responsible for broad expenditure functions. The state targeted funds are used only for the purposes determined by legislation and in accordance with the budget of specified funds. There are only two state targeted funds in Tajikistan, namely a contingency fund21 and a President’s Reserve Fund, both of which are disclosed in the budget and reported in the annual execution report to Parliament. The expenditure of the republican budget is financed by tax revenues, grants, and domestic and foreign borrowing. Local government expenditures make up about one-fourth of total expenditure (4 percent of GDP or about one-fourth of total expenditure) distributed among oblasts, rayons, and jamoats (WORLD BANK, 2005, p.32). The local authorities independently develop, approve, and execute the local government budgets. They are responsible for provisioning of social services (general education, health, housing, and local infrastructures) to the local population, construction and maintenance of local roads, and the development of housing and municipality facility (including sewage and waste management, transport services). The expenditure on social services (education, health, and housing services) accounts for about 70 percent of total local government expenditures. The bulk of local government expenditure is devoted to salaries, wages, and employers’ benefits, while capital expenditure directed towards repair and maintenance of existing facilities and other infrastructure is negligible. Rayons, which provide social services, absorb most of this expenditure, while oblasts perform an administrative and supervisory role. Jamoats and mahallas receive minimum budgetary funds to operate and they rely mostly on voluntary community efforts (WORLD BANK, 2005, p.32). In reality local governments have very limited capability to meet the above responsibilities assigned to them. First, they have little flexibility in using budgetary resources as several expenditure items, such as wages, stipends and transfers to the population, are protected. Discretionary spending granted to the local executive bodies is exercised at the chairperson’s discretion. Secondly, local governments’ finances are at the central government’s mercy. When revenue of oblasts exceeds expenditures, they need to transfer the surplus to the central government. The oblasts, whose local tax revenue is insufficient to cover the expenditures necessary for provision of social services, are dependent on the central government’ s subsidies and transfers. When resources are not available, the central government will reduce subsidies to local governments, thus affecting the quality and quantity of public service deliveries. Finally, the central government is reluctant to entrust local governments in policy decision making on resource allocation (WORLD BANK, 2005, p.33) Capital expenditures are financed by multiple budget and off-budget windows. The donor financed Public Investment Program (PIP) combines credits and grants and, when required, government’s counter-part funding (on-budget). The centralized State Investment Program (CSIP) is financed by the central and local governments’ budgets. Repairs and maintenance and small capital expenditures are financed by the regular budgets of line agencies. Investment of state-owned enterprises (SOEs) is financed by off-budgets, except for SOEs’ credit lines and/or investment grants that are financed by the state budget. Finally, local governments sometimes co-finance capital construction projects (WORLD BANK, 2005, p.33). The Public Investment Program (PIP) is a rolling three-year planning tool for public investment financed externally by bilateral and multilateral donors. Currently, the PIP is prepared by the Aid Coordination Unit that reports to the Executive Office of the President and is prepared outside the budget cycle. Since 1997, Tajikistan has had three PIPs for the 1998-2000, 2001-03, and 2004-06 periods. The Government uses the PIP to solicit financial support for public investment in various sectors at the consultative meetings of donors (WORLD BANK, 2005, p.34). As the country with the lowest per capita income and most narrow revenue base in the CIS, Tajikistan is faced with a low level of expenditure. The average general government expenditure for the 1995-2002 period stood at 20 percent of GDP, compared to an average of 27 percent for the CIS-7, and 18 percent for Georgia over the same period. Public expenditure has steadily increased about 5 percent (from 14 percent in 2000 to 20 percent of GDP in 2003). Financing of public capital expenditures is highly centralized. The republican budget finances about 97 of total capital expenditure (including PIP); the remaining is financed by local budgets and state-owned enterprises, mostly natural monopolies (World Bank, 2005, p.38). Public capital expenditure is extremely fragmented, which seems typical for many, if not, all CIS countries. The budget process for projects funded externally under the PIP is done outside the budget process. Implementation of the PIP represents a quasi-fiscal activity, thus making it more difficult to enforce, implement and monitor. Besides, public investment financed by the state budget is also fragmented both financially and institutionally within the Ministry of Economy and Trade and the Ministry of Finance. As the budgets for the counterpart funding of the PIP, domestic capital investment and other capital expenditures are responsible by different organizations, weakness in coordination among different budgets of the capital expenditure envelope is inevitable. This leads to probable inconsistency between the different components of the capital budget and the fiscal aggregate and sector strategies (World Bank, 2005, p.38).

Social and Technological Capacity

In Tajikistan, the transition and destruction of the Soviet systems was more profound than in neighboring countries, due to the effect of the civil war that started in 1993, with the situation only gradually calming down after that. Much of the social and utility infrastructure was destroyed during the conflict, and immediately after the war, the provision of water and electricity to the population was no longer ensured. Schools and health facilities mostly continued to function during the conflict but with a lower level of service (ECHO, 2007, p. 12). A further legacy of the Soviet times is the focus on technological solutions to service provision. The engineering quality of systems was reasonable during this time, and there is still some capacity in Tajikistan on how to maintain the Soviet style systems. Much of this, however, has been lost due to migration. Unfortunately, however, most of the technology legacy from the Soviet area is not suitable for Tajikistan, which should design or develop appropriate technology that will better fit into the new small scale economy structure of the country. China was quicker to understand this and saturate the country with their technology in such a way that Tajikistan has become and would certainly remain a consumer of Chinese technology – with practically no comparative advantage (except energy) toward China (ibid., 2007, p.13). The difficulties of farming in the cotton areas as well as the difficulties of starting businesses in turn have led to significant out-migration of Tajik population especially from Khatlon. A large part of the younger population is determined to escape from what they see as country that lacks a viable economic future for them (ibid. 2003, p15). Migrants are typically young male persons, leaving much of the burden of farming with women and children in the cotton areas of Tajikistan. While remittances help to sustain some of the families in the rural areas, migration also led to an increasing number of female headed households, as well as serious increase in some health risks such as HIV/AIDS which despite the risk factors has so far been stigmatized and ignored by government (ibid. 2003, p.14). The education sector is severely affected by the low salaries of teachers resulting in significantly lower educational attainment of the population as compared to the Soviet time. Furthermore, the curricula have not been updated, resulting in an education that is often perceived as irrelevant by the population, and consequently in lower attendance rates (ibid. 2003, p15).

References

See also

External Resources

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