COMMISSION OF THE EUROPEAN COMMUNITIES
Brussels, 26.07.1999
COM (1999) 391 final
99/0172 (CNS)
Proposalfora
COUNCIL DECISION
modifying Decision 97/787/EC granting exceptionalfinancialassistance to
Armenia and Georgia in orderto extend itto Tajikistan
(presented bythe Commission)
2EXPLANATORY MEMORANDUM
1. GENERALECONOMICSITUATIONIN TAJIKISTAN
Like Armenia and Georgia, Tajikistan was severely hit by the economic
collapse resulting from the breaking up of the command economy and the
disintegrationoftheFormerSoviet Union. The crisis reached its height when
inter-republican payments and trade virtually ceased, arrears accumulated,
and prices increased at hyper-inflationary rates. Furthermore, civil hostilities
in the country destroyed infrastructure, disrupted trade, and led to a large
number of refugees or displaced persons to other regions. Under such critical
circumstances, output sharplydropped, bytwo-thirds, and living standards of
the average population fell below povertylevels.
As a result of the continuing civil hostilities, Tajikistan was among the last
NIS countries to initiate reforms. However, after repeated efforts to stabilise
the economy and thanks to a peace agreement between the warring parties,
Tajikistan recorded a first year of growth in 1997 (1.7 %). Notwithstanding
two externalshocks (continued fall in world commodityprices - in particular
cotton and aluminium - and the financial crisis in Russia), output expanded
remarkably by about 5.3% in 1998, although from a very low base. Despite
credit expansion to the cotton sector and a sharp depreciation of the currency
against the US$ (by 33 % from August 1998 to mid-March 1999), annual
inflation fell below 3 % in December 1998. Fiscal/quasi-fiscal difficulties
continued in early 1999, as the Government failed to collect satisfactory
revenue levels in January, while the CentralBank continued to provide some
direct credits to the illiquid cotton sector. In 1998, the current account deficit
expanded from5.5 % to 15.2%ofGDP (without official transfers), as export
revenues declined and remittances from Russia, likely, diminished. At end-
1998, gross foreign exchange reserves were equivalent to US$ 65 million
only or 1.4 months’ imports. Tajikistan's balance of payments position is
expectedto remain fragile inthe mediumterm.
At the end of1998, the externaldebt ofTajikistanwas stillequivalent to US$
1,263 million and represented 98 % of GDP. Owing to its external financing
needs and insufficient currency reserves, the country has accumulated
substantial arrears vis-à-vis its creditors and suppliers, including vis-à-vis the
Community(fora globaloutstanding amount inarrears ofsome /uni20AC74 million
including late interest) on commercial credits to finance food and medical
imports made available in 1992. However, the Tajik authorities have
committed themselves to fully settle their outstanding financial obligations
towards the Community and have already secured a minimum servicing of
theirdebts.
Tajikistan is the poorest country among the CIS and one of the least
developed countries in the world, with most of the population living below
the povertyline. The civilwar had caused povertyto intensify and to become
widespread and had confronted the Government with the difficult challenge
of dealing with refugees, internally displaced persons (700,000) and the
3demobilised soldiers. Since August 1998, in addition to the local political
problems, the Russian financial crisis has been deeply affecting the
population, a large share of which is unable to meet its basic needs. With a
possible loss of control of public finances, the temptation to recourse to
social arrears might be increased, while budgetary support for the
implementationofthe yet fragile peace agreement would be weakened.
In order to cover basic needs in recent years, Tajikistan, as Armenia and
Georgia, has had recourse to international humanitarian assistance, out of
which the Community has provided a substantial share, (in particular,
through ECHO). However, technical assistance through TACIS and Food
Security assistance already granted have been delayed for security reasons
while, in November 1997, the Council postponed decision on an exceptional
financial assistance in favour of Tajikistan, pending implementation by the
country of an IMF supported macroeconomic stabilisation and structural
reformprogramme.
2. POLITICAL SITUATION
In June 1997, after several years of civil war, a General Peace Agreement
was signed between Tajikistan's government and the United Tajik Opposition
(UTO). A free and fair constitutional referendum as well as parliamentary
and presidentialelections foreseen for Autumn1999 are essentialelements of
this Peace Agreement.
The implementation of the Agreement has been difficult, since not all armed
groupings within Tajikistan are full participants in the process. Violent
incidents, some of which targeting foreign personnel, have created problems
bothfor the peace process and for the activities ofinternationaldonors.
The UN family and the IFIs continue, however, to support the peace process,
whose success is important not just for Tajikistan’s future, but for Central
Asia as a whole. The EC continues to be present through ECHO and, as from
this year, under its rehabilitation programme and intends to normalise its
relations with Tajikistan, including through new contractual arrangements.
However, the timing of implementation will take into account political
progress as regards the overall security situation and the peace process, in
particular the holding of the constitutional referendum and the elections
under acceptable conditions.
3. STATUSOF IMFPROGRAMME
After two emergencypost conflict credits respectivelyin December 1997 and
April 1998, the IMF adopted in June 1998 a three-year ESAF programme in
favour of Tajikistan, for an amount equivalent to US$ 128 million, in order
to consolidate the stabilisation gains and to achieve sustainable growth. Key
elements of the programme include restoring monetary and fiscal discipline,
stabilising the exchange rate and interest rates, improving domestic resource
mobilisation and increasing international reserves. The structural reforms
4emphasise privatisation of industrial and agricultural enterprises, private
sector development and reforms of the financial, agricultural and social
sectors.
In addition, on 11 December 1998, the IMF and the World Bank took the
initiative to convene a Consultative Group (CG) aiming at providing greater
access to the financial facilities they implement in favour of Tajikistan and
other NIS countries particularly hit by the spill-over effects of the Russian
crisis. Since these countries had alreadyhigh access in relation to their quota,
the Fund and the Bank were asking bilateral donors, in particular the
EuropeanCommunity, to provide exceptionalcomplementarysupport.
In December 1998, despite some slippages in the implementation of the
ESAF-supported program, the IMF continued to support the authorities'
adjustment and reform efforts and recommended the completion of the mid-
termreview under the first annualESAF arrangement. Moreover, it endorsed
their request for increased access (US$ 6 million) to Fund resources under
theESAFarrangement.
The government of Tajikistan has taken strong measures to respond to the
external shocks it faces and policies implemented have brought inflation to
fallmore rapidlythanexpected, economic activityto recover and real income
to rise. Structuralreforms in keyareas appear to be proceeding satisfactorily,
even if not fullyaccording tothe initialtime schedule. Progress has also been
reported recently in areas where delays had been registered. The conclusions
of the recent IMF review mission (May 1999) in the country were
encouraging and a positive decision on a second annual programme under
thethree-year ESAF Facility is expected shortly.
4. THE PROPOSED EXCEPTIONAL FINANCIAL ASSISTANCE TO TAJIKISTAN
The Commission considers Tajikistan's macro-economic programme as
being strong and comprehensive. This programme, if fully implemented,
should ensure the necessary macro-economic stabilisation and, by the means
of structural reforms, establish the core frame of a market economy.
However, without additional external assistance, the reform process would
be put in jeopardy and the country would be faced with substantial external
imbalances in 1999 and, in the medium term, would not be able to meet its
international financial obligations.
Tajikistan, as one of the least developed countries in the world, is eligible for
World Bank lending at highly concessional IDA (International Development
Association) conditions, as well as for IMF ESAF lending, the concessional
facilityofthe Fund.
Owing to the exceptionally harsh social and economic conditions presently
faced by Tajikistan and, in particular, to its extreme vulnerability to external
shocks, the Commission considers that this countryshould be supported with
concessionalassistance and that exceptionalsupport inthe formof a mix of a
5loan and straight grants is required to underpin the implementation of the
country'sstabilisationandstructuralreformprogramme.
On 17 November 1997, the Council adopted a decision1providing
exceptional financial assistance to Armenia and Georgia and agreed in
principle to consider a similar assistance to Tajikistan once the latter would
benefit fromanupper credit tranche arrangement withthe IMF.
In January 1997, Tajikistan committed to fully servicing its outstanding
financial obligations towards the Community and is presently securing a
minimum servicing of the Community's outstanding claims. Moreover, the
country is now implementing a comprehensive adjustment and reform
programme inthe context ofathree-year ESAFarrangement approved bythe
IMF in June 1998. Therefore, the necessary preconditions for considering a
Community exceptional financial assistance for this country appear now to
be met.
In the circumstances, and as already announced in its Communication to the
Council and the Parliament of 20 January 19992, the Commission intends to
propose an increase in the financing made available in favour of Armenia
and Georgia in November 1997, so as to make room for exceptional
assistance to Tajikistan. The Commission proposes that Council Decision
97/787/EC of 17 November 1997 is adjusted with a view to increasing the
present ceilings oflong-termloans and grants that canbe made available :
– the loans ceiling would be increased by a maximum amount of /uni20AC75
million ;
– the grants ceiling would be increased by a maximum amount of /uni20AC35
millionto be financed bythe generalbudget.
These amounts are consistent with Tajikistan's residual financing needs,
takingalso into accountthefinancialoutflow resulting fromthe settlement of
the country's arrears towards the Community (as of 31 March 1999, /uni20AC73
million of arrears, with a monthly increase of some /uni20AC200,000 in interest on
late payments). The amounts envisaged are, ofcourse, maxima, and effective
disbursements would depend on negotiations to be held between the Tajik
authorities and the Commission. These negotiations would also have to fix
the leveland timetable for a net reduction in the country's net debtor position
towards the Community, taking into account, as in the cases of Armenia and
Georgia, the availability of the grant element of the assistance to be
disbursed insuccessive annualtranches.
The loan component ofthis assistance would be funded through Community
market borrowing with a guarantee by the general budget. The beneficiary
country would subsequently borrow from the Community. The borrowing
and lending operations would be perfectly matched and without any
197/787/EC, OJ L322 of25.11.1997, p. 37
2The Russian crisis and its impact on the NIS and Mongolia, COM(1999) 8 final, adopted by
theCommission on 20 January1999
6commercial risk for the Community. In accordance with the Guarantee Fund
mechanism the budgetary implications of a decision to make available loans
of up to /uni20AC75 million to the beneficiary country would be a maximum of /uni20AC
10.5 million provisioning of the Fund to be drawn from the 1999 reserve forguarantees relating to externalactions.
As for the grant component of this assistance and without prejudice to the
competencies of the budgetary authority, the Commission considers that this
partofthe exceptionalassistance would have to be implemented in five equal
annual instalments of up to
/uni20AC7 million from 2000 to 2004, within the limits
ofCategory4 ofthe financialperspective forthe 2000-2006 period.
Inorderto ensure coherence withthe EC’s general policytowards Tajikistan,
a decision would be taken after the adoption of this Decision as to whether
sufficient progress has been made in the peace process, and in particular the
holding of elections, as to justify the immediate implementation of the
exceptionalfinancialassistancetoTajikistan.
Accordingly, the Commission requests the Council to adopt the proposed
amendments and to allow Tajikistan to benefit from the existing Council
Decision97/787/EC along withArmenia and Georgia.
7Proposalfora
COUNCIL DECISION
modifying Decision 97/787/EC granting exceptionalfinancialassistance to
Armenia and Georgia in orderto extend itto Tajikistan
THE COUNCIL OFTHE EUROPEAN UNION,
Having regard to the Treaty establishing the European Community, and in particular
Article 308 thereof,
Having regard tothe proposals fromthe Commission3,
Having regard tothe opinionofthe EuropeanParliament4,
(1) Whereas the Council Decision 97/787/EC of 17 November 1997 provides
exceptionalfinancialassistancetoArmeniaandGeorgia5;
(2) Whereas, in parallel with its Decision to provide exceptional financial
assistance to Armenia and Georgia, the Council agreed to also consider a
similar operation for Tajikistan once circumstances allow ;
(3) Whereas Tajikistan is undertaking fundamental political and economic
reforms and is making substantial efforts to implement a market economy
model ;
(4) Whereas trade, commercial and economic links are expected to develop
between the Community and Tajikistan ; whereas Tajikistan is eligible to a
Partnership and Cooperation Agreement with the European Communities and
their Member States and has formally requested to benefit from such an
agreement assoonaspossible;
(5) Whereas Tajikistan agreed with the International Monetary Fund (IMF) in
June 1998 onathree-year Enhanced StructuralAdjustment Facility(ESAF) ;
(6) Whereas the Tajik authorities have formally undertaken to fully settle their
outstanding financial obligations towards the Community and whereas
Tajikistansecures a minimumservicing ofoutstanding Communityclaims ;
(7) Whereas the Tajik authorities have formally requested exceptional financial
support fromthe Community;
3COM(1997) 24 final (OJ C 95 of 24.3.1997 p. 64) - 1997/0028/CNS and COM(1999) xxx
final (OJ C )
4OJ C
597/787/EC, OJ L322 of25.11.1997, p. 37
8(8) Whereas Tajikistan is a low income country and is facing particularly critical
economic, social and political circumstances; whereas this country is eligible
tohighlyconcessionalloans fromtheWorldBankandtheIMF;
(9) Whereas concessional financial assistance from the Community in the form of
a mix of a long term loan and straight grants is an appropriate measure to help
the beneficiarycountryat this critical juncture;
(10) Whereas this assistance, both the loan and the grant component, is highly
exceptionaland therefore in no wayconstitutes a precedent for the future;
(11) Whereas the inclusion of a grant component in this assistance is without
prejudice to the powersofthe budgetaryauthority;
(12) Whereas this assistance should be managed bythe Commission;
(13) Whereas in implementing this Decision, the Commissionwilltake due account
of progress made in the Inter-Tajik peace process and, in particular, in the
holding ofelections under acceptable conditions ;
(14) Whereas the Commission consulted the Economic and Financial Committee
before submitting its proposal ;
(15) Whereas the Treatydoes not provide, for the adoption ofthis decision, powers
otherthanthose ofArticle 308,
HAS DECIDED AS FOLLOWS :
Sole article
CouncilDecision97/787/ECof17 November 1997 is modified as follows :
1. Article1 is modifiedas follows:
(i) Paragraphs 1 to 3 arereplaced bythe following :
"The Community shall make available to Armenia, Georgia and
Tajikistan exceptional financial assistance, in the form of long-term
loans and straight grants. "
"The total loan component of this assistance shall amount to a
maximum principal of /uni20AC245 million, with a maximum maturity of 15
years and a grace period of 10 years. To this end, the Commission is
empowered to borrow, on behalf of the European Community, the
necessary resources that will be placed at the disposal of the
beneficiary countries in the formof loans. "
"The grant component ofthis assistance willconsist ofanamount ofup
to /uni20AC130 million during the 1997-2004 period, with a maximum of
9/uni20AC24 millionannually. The grants shallbe made available insofar as the
net debtor position ofthe beneficiary countries towards the Community
is being substantiallyreduced. "
2. Article 3 (1) is replaced bythe following text :
"1. Subject to the provisions ofArticle 1 (4) and Article 2, thetotalamount
of the loan offered to each country shall be made available by the
Commission in parallel with the first instalments of the grants. The
remainder of the grant component of the assistance shall be made
available by the Commission in successive instalments, subject to the
same provisions."
3. Article 5 (2) is replaced bythe following text :
"2. Before 31 December 2004 at the latest, the Council shall examine the
application of this Decision to that date on the basis of a
comprehensive report bythe Commission. "
Done at Brussels,
For the Council
The President
10ANNEX
BUDGETARY RESOURCES NECESSARY FOR THEPROVISIONING OFTHEGUARANTEE
FUND IN 1999 ANDMARGIN UNDERTHE RESERVEFORLOANSAND LOANGUARANTEES IN
FAVOUR OF THIRD COUNTRIES
(EURmillion)
Operations Basisofthe
calculation6Provisioning of the
Fund7ReserveMargin
346.08
Operations decided
EIB/Newmandates9
CEEC 872.9 122.2 223.8
ALA 218.1 30.5 193.3South Africa 143.5 20.1 173.2MED 351.4 49.2 124.0FYROM 38.5 5.4 118.6Bosnia 42.0 5.9 112.7
EIB/Old protocols
9
Syria -30 -4.2 116.9
Macro-financial assistance
AlbaniaIII 20 2.8 114.1
BosniaI 20 2.8 111.3
Operationsproposed
EIB/Turkey10105 14.7 96.6
EIB/Croatia1135 4.9 91.7
Macro-financial assistance
Bulgaria IV12100 14.0 77.7
Romania IV12200 28.0 49.7
FYROM II1250 7.0 42.7
Tajikistan1275 10.5 32.2
6The provisioning basis is calculated by applying the relevant guarantee cover rate, namely70% (EIB loans new mandates), 75% (EIB loans old protocols) or 100% (macro-financialassistance loan).
7In accordance with theprovisioning rules in Council Regulation (EC, Euratom) No 2728/94 of31 October 1994, the Fund having reached its target amount on 31 D ecember 1997, the
provisioningratehas been reduced to 14%.
8Amount of the Reserve for loans and loan guarantees in favour of third countries for 1999under thefinancial perspective.
9Annual amounts of loans scheduled to be signed in 1999 and correction of amounts alreadyprovisioned in theFundtotakeaccount ofactual signingsat theend of1998: Transfer 5/99 totheGuaranteeFund.
10Proposal for a Council Regulation on a special financial cooperation measure for Turkey(COM(95)389/3).
11EC/Croatia cooperation agreement (SEC(95) 180/final).
12Commission proposal.
11FINANCIAL STATEMENT
1. T ITLE OFOPERATION
Exceptional financial assistance to Tajikistan.
2. B UDGET HEADINGINVOLVED
– Grant component ofthe assistance
Article B7-531 : Exceptional financial assistance to Armenia, Georgia
and Tajikistan.
– Loancomponent oftheassistance:
Article B0-213 : European Community guarantee for the borrowing
programmes contracted by the Community to provide financial
assistance to the countries of the Commonwealth of Independent
States.
3. L EGALBASIS
Article 308 ofthe Treaty
4. D ESCRIPTION OF OPERATION
4.1 Generalobjective
a) Descriptionofthe action
Provision of a Community loan (to be financed by Community borrowing in
the international capital market) in the amount of up to /uni20AC75 million and
grant of up to /uni20AC35 million (to be financed by the General Budget) to the
beneficiarycountrywitha view to supporting its government's reformefforts
towards economic progress, to containing the already widespread poverty
and strengthening the current peace process.
b) Justification for the action
The sustainability of the beneficiary country's economic reforms heavily
depends on external financial assistance from official sources, at
concessionalterms.
4.2 Period covered and arrangements for renewal
Period 2000-2004forthe grant
Period 1999-2014forthe loan
125. C LASSIFICATIONOF EXPENDITURE ORREVENUE
5.1 Compulsory/Non-compulsory expenditure
–Grant component : noncompulsory.
–Loan component :compulsory.
5.2 Differentiated/Non-differentiated appropriations
–Grant component : differentiated.
–Loan component : differentiated.
6. T YPE OF EXPENDITURE OR REVENUE
– Straight grant (100% subsidy), which would be released in successive
instalments.
– Potential activation of budget guarantee for the Community borrowing
ai m e dtof un dth el oa n .
– The Communitygrant willnot be reimbursed. The loan element will be
reimbursed.
7. F INANCIALIMPACT
7.1 Method of calculating total cost of operation (relation between
individualandtotalcosts)
a) Methodofcalculation
The evaluation of the amounts of the assistance deemed necessary is based
on the present estimates of the beneficiary country's residual external
financing needs.
For the loan component of the assistance, a token entry is proposed given
that the amount and timing of any call on this budget line cannot be
calculated in advance and because it is expected that the budget guarantee
will not be called.
b) Effect ofthe actiononinterventioncredits
The budget entrycorresponding to the grant component ofthe assistance will
be activated subject to compliance with a number of policy conditions to be
agreedwiththeauthoritiesofthebeneficiarycountry.
The budget entry reflecting the budget guarantee for the loan component of
the assistance will be activated only in the case of an effective call on the
guarantee.
137.2 Itemised breakdown of cost - Schedule of commitment and payment
appropriations
(i)Grants
The financing of the expenditure will be secured in annual or six-
monthlyinstalments from2000 onwards within the limits ofCategory
4ofthe new FinancialPerspectives for the 2000-2006period.
The following schedule of appropriations is proposed (in current
million /uni20AC):
2000 2001 2002 2003 2004
Commitment
appropriations77777
Payment
appropriations77777
(ii)Eventual call onthe budgetguarantee
– Recourse to the Guarantee Fund established by Council
Regulation(EC, EURATOM) n°2728 of31 October 1994.
– In case the Guarantee Fund did not contain sufficient resources,
additional payments would be called up from the budget by
transfer :
•Ofany marginremaining inthe Reserve for guarantees ;
•Of any late payments to the budget for which the budget
guarantee has been activated (under Article 27 (3) of the
FinancialRegulation) ;
•Of any margin available under the ceiling of category 4 of the
financialperspectives or redeployment therein.
– In order to fulfil its obligations, the Commission can
provisionally ensure the debt service with funds from its
Treasury. In that case, Article 12 of the Council Regulation (EC,
EURATOM) n°1552/89 of29 May1989 willapply.
8. F RAUDPREVENTIONMEASURES
The funds will be paid directly to the Central Bank of the beneficiary country
only after verification by the Commission Services, in consultation of the
Economic and Financial Committee and in liaison with the IMF and World
Bank Services, that the macro-economic policies implemented in this country
are satisfactoryand that the specific conditions attached to this assistance are
fulfilled.
14Financialassistance operations under this Decisionwillbe subject to audit by
the relevant Commission services and the Court of Auditors, to be carried on
the spot whenever and wherever appropriate.
9. E LEMENTSOFCOST -EFFECTIVENESSANALYSIS
9.1 Specific and quantified objectives;
By supporting the beneficiary country’s macro-economic reform efforts and
complementing financing by the International Community provided to this
country in the context of an IMF agreed programme, this assistance would
not only underpin the transition towards market economy, but the resulting
improved social, economic and financial situation would also be a crucial
element for the strengthening ofthe peace process inthe country.
The assistance would also help the country servicing its outstanding external
financial obligations, in particular towards the Community. These
outstanding financial obligations towards the Community are presently
equivalent to euro 74 million (including arrears and late interest).
The present assistance will only be mobilised with the proviso that the
beneficiary country will have fully discharged its outstanding financial
obligations towardsthe Community.
9.2 Groundsforthe operation
– Higher access for Tajikistan to International Financial Institutions'
financial facilities is limited and the country has already high access in
relation to its quota.
– Choice ofways and means :
•Owing to its dire social and economic situation and to its extremely
vulnerable balance of payments, Tajikistan should be supported with
highlyconcessionalassistance.
•A similar assistance package has already been adopted in favour of
Armenia and Georgia (97/787/EC)
– Main factors of uncertainty which could affect the specific results of the
operation:
•Further negative developments in the economic and financial situation
ofthewholeregionand, inparticular, ofthebeneficiarycountry.
•Resumptionofcivilhostilities.
159.3 Monitoring and evaluation ofthe operation
This exceptional assistance is of macro-economic nature and its monitoring
and evaluation are based on a satisfactory track record of the IMF supported
adjustment and reform programmes that the beneficiary country is
implementing.
The monitoring of the action by the Commission services will take place on
the basis of a genuine system of macro-economic and structural policy
indicators to be agreed with the authorities of the beneficiary country. The
Commission services will also remain in close contact with the IMF and
World Bank services in order to benefit from their assessment of the
recipient country’sstabilisationandreformachievements.
An annual report to the European Parliament and to the Council is foreseen
in the proposed Council decision, which will include an evaluation of the
implementationofthisoperation
10. A DMINISTRATIVEEXPENDITURE (SECTIONIII, PARTAOFTHEBUDGET )
This action is exceptional in nature and will not involve an increase in the
number ofCommission staff.