Proposal for a COUNCIL DECISION providing medium-term financial assistance for Estonia, Latvia and Lithuania
Date: 1992-09-23
Institutions: European Commission
Subjects: Baltic States, Community loan, balance of payments, medium-term credit

COMMISSION  OF THE EUROPEAN  COMMUNITIES 

COM(92) 410 final 

Brussels, 23 September  1992 

Proposal  for a 

COUNCIL DECISION 

providing medium-tern financial  assistance 
for Estonia, Latvia and Lithuania 

(presented  by  the Commission) 

-4  -

EXPLANATORY  MEMORANDUM 

The request  for  financial  support of Estonia. Latvia  and  Lithuania 

At  the  G-24  high-level  meeting  of  October  1991,  Estonia,  Latvia  and 

Lithuania  expressed  their  need  for  financial  assistance  from  the 

Community  and  the Group of  Twenty-Four  industrial  countries  in support 

of  their  transition  process  to  market-oriented  economies.  At  the 

November  Ministerial  meeting  of  the  G-24, Ministers  agreed  to  examine 

the  possible  needs  of  the  Baltic  States  in  the  context  of  the 

arrangements  that  these  countries  were  expected  to  conclude  with  the 

IMF on  the basis of  their  reform programmes. 

Lithuania,  Estonia  and  Latvia  became  members  of  the  International 

Monetary  Fund  in Spring  1992.  In the  following  months  they  finalized, 

in  close  cooperation  with  the  IMF,  their  stabilization  and  reform 

programmes.  The Fund  in liaison with  the Commission  consulted  the G-24 

before  completing  its  negotiations  with  the  three  countries  and  made 

its  recommendation  of  the  programmes  and  stand-by  requests  contingent 

on  the existence of  sufficient  complementary  financing  assurances  from 

the  Community  and  the  G-24.  The  financial  gaps  remaining  after 

potential  support  from  the  international  financial  institutions  had 

been taken  into account, were estimated  to be $105 million for  Estonia, 

$210 million  for  Latvia  and  $285 million  for  Lithuania,  in  total  some 

$600 mi I I ion. 

The  Commission  as  coordinator  of  the  G-24  financial  assistance  to  the 

Central  and  Eastern  European  countries  has supported  the  requests  from 

the  three  Baltic  countries  and  initiated  discussions  with  non-EC  G-24 

countries  with  a  view  to  ensuring  the  mobilization  of  the  overall 

amount.  Most  countries  revealed 

a  positive  attitude 

towards 

participation  in the support  scheme and  indicated  likely contributions. 

On  14  September  the  Latvian  stand-by  arrangement  was  approved  by  the 

IMF 

Board.  Approval 

of 

the 

Estonian 

arrangement 

is 

-  2 -

expected  for  16 September  and  that of Lithuania  for October.  Following 

discussions  at  the  informal  Ecofin  Council  on  4-6  September,  the 

Commission  has  decided  to  present  a  formal  proposal  of  a  Community 

contribution  to G-24 assistance  to Estonia, Latvia  and  Lithuania. 

The  reform  programmes 

Main  elements  of  the  stabilization  and  reform  programmes  of  the  three 

Baltic  countries  are  the  completion  of  price  reform,  conduct  of  a 

prudent  fiscal  and  monetary  policy,  adoption  of  strict  incomes-policy 

measures,  further  liberalization of  the exchange  and  trade system  and a 

comprehensive 

adjustment 

effort 

including 

acceleration 

of 

privatization,  fiscal  reform,  restructuring  or  closure  of  nonviable 

enterprises,  banking  sector  reform  and  establishment  of  a  legal 

framework  consistent  with  a market  economy. 

All  three  countries  have  advanced  quite  far  in  their  reform  efforts, 

although  the  degree  of  progress  in  each  area  differs  somewhat  from 

country  to  country.  First  steps  in  direction  of  greater  independence 

from  the  other  Soviet  republics  and  towards  a  market  economy  had 

already  been  made  in  the  late  eighties  under  the  Soviet  system.  This 

process was speeded up considerably  since  the Baltic States have become 

formally  independent  in Summer  1991. 

All  countries  are  well  advanced  with  price  liberalization.  By  mid-

1992,  most  prices  had  been  liberalized;  some  controls  remain  in  the 

areas  of  energy,  transport  and  rents.  The  increase  of  raw  materials 

prices,  in particular  oil  imported  from  Russia,  has  been  passed  on  to 

consumers  to a  large extent.  As a consequence of  these measures, price 

levels  have  risen  by  700  and  1000% between  mid-1991  and  mid-1992, but 

recently  inflation  has slowed  down.  In an effort  to conduct  a prudent 

fiscal  policy, subsidies  to state enterprises and consumers were cut or 

eliminated,  and  decisions  were  taken  to  raise  taxes  and  abolish  tax 

exemptions.  A balanced  budget  was not  always  realized; e.g.  in Latvia 

the general  budget  was  in deficit  with  3te%.  But measures were  taken to 

bring  the budget  in balance  in the second  half of  this year. 

-  3 -

As  to  monetary  reform  and  policy,  there  are  some  differences  between 

countries.  Estonia  introduced  its own national  currency,  the kroon,  in 

June  in the context  of  a currency  board, with  broad  current  account  and 

limited  capital  account  convertibility.  This  has  greatly  enhanced  the 

governments'  ability  to  stabilize  the  economy.  Latvia  introduced  a 

parallel  currency  in May,  the  Latvian  rouble,  under  the  impression  of 

the  shortage  of  cash  roubles  also  experienced  by  other  former  Soviet 

republics.  In July,  it  left  the rouble area  completely  by  replacing  the 

remaining  Russian  roubles  by  Latvia  ones.  This  has  allowed  the 

authorities  to  pursue  a  more  ambitious  inflation  objective  than  in 

Russia  and  has  in  recent  months  led  to  an  appreciation  of  the  Latvian 

rouble  vis-à-vis  those  of  neighbouring  republics.  Lithuania  is still 

in the  rouble  zone, but  is expected  that  it will  introduce  its national 

currency,  the  litas,  in  the  fall  with  approval  of  the  IMF  stand-by 

arrangement. 

Concerning  structural  reforms,  progress  has  been  slower  than  expected 

in  the  area  of  privatization.  Whereas  a  number  of  small  enterprises 

and  flats  have  been  sold,  the  privatization  of  larger  enterprises  has 

not  progressed  by  much.  The  unresolved  question  of  restitution  keeps 

hampering  the  process.  Legislation  on  bankruptcy,  competition  and  the 

banking  sector  has  generally  been  passed;  however,  the  implementation 

is still  far  from complete  in most  cases. 

The need  for  additional  financial  support 

The Baltic  States were affected  strongly  by supply  disturbances  in 1991 

caused  by  the  disruption  of  trade  with  the  other  former  republics  of 

the  Soviet  Union,  which  hit  the  Baltic  States  (compared  to  other 

Central  and  Eastern  European  countries)  particularly  hard  in  view  of 

their  great  interdependence  with  the  other  republics.  In  early  1992 

the  situation  was  aggravated  by  a  new  external  shock  as  Russia 

substantially  liberalized  its  prices  and  raised  in  particular  prices 

for  oil  and  other  raw  materials  (terms  of  trade  shock  of  20-25%  of 

GDP).  In  Summer  the  situation  was  further  aggravated  by  the 

exceptional  drought  that  cut  the  harvest  (food  and  feed  grain) roughly 

in half  compared  to  last year. 

4  -

These  shocks  to  the Baltic  economies  and  the  impact  of  the dismantling 

of  the  system  of  central  planning  have  led  to  a  decline  of  output  in 

the order  of  30% in the first  half of  1992 compared  to the  same  period 

of  the  previous  year;  until  now  this  is barely  reflected  in  official 

unemployment  figures.  The  import  levels  are  compressed  due  to  the 

current  lack  of  external  financing.  Without  financial  assistance  from 

international  financial  institutions,  the  Community  and  other  G-24 

countries, the decline of production  is  likely to continue at about  the 

same  rate, which would  put  the full  implementation of stabilization and 

reform programmes  in Jeopardy. 

Main  features of  the  loans 

The  Commission  is proposing  that  the  Community  would  participate  in a 

medium-term  financial  support  package  from  the  G-24  to  the  Baltic 

States  (the total  amount of which would  be approximately  $600 mio) with 

up  to ecu  220 million  to be split up between  the  countries  as outlined 

below. 

Regarding  Estonia.  the  Commission  proposes  that  the  Community 

participates  with  up  to  40 mecu  in  a  medium-term  balance  of  payments 

support  package  from  the  G-24,  the  total  amount  of  which  would  be 

approximately $ 105 mio. 

With  respect  to Latvia, the Commission proposes  that  the Community  will 

participate  with  up  to  80  mecu  in  a  medium-term  balance  of  payments 

support  package  from  the G-24  totalling approximately $ 210 mio. 

As  to  L i thuania.  the  Commission  proposes  a  Community  participation  of 

up  to  100  mecu  in  a  medium-term  balance  of  payments  support  package 

from  the  G-24, the  total  amount  of  which  would  be  approximately  $  285 

mio. 

The  loans the Commission  is envisaging would  have a maximum  duration of 

seven  years, would  be  closely  linked  to  the  countries'  IMF  programmes 

and would  be disbursed  in two tranches.  In each  case, the  disbursement 

of  the  first  tranche  would  be  conditional  upon  the  approval  of  the 

country's  IMF stand-by  arrangement.  The second  tranche of each  loan  — 

to  be  disbursed  not  before  the  second  quarter  of  1993  —  would  be 

- 5 -

conditional  upon  the  compliance with  a number  of  performance  criteria 

to  be  agreed  with  the  Estonian,  Latvian  and  Lithuanian  government, 

respectively,  after  consultation  with  the  Monetary  Committee.  The 

borrowing  and  lending operations will  be perfectly  matched  and  without 

any commercial  risk  for  the Community. 

-  G-

Proposai  for a 

COUNCIL  DECISION 

providing medium-term  financial  assistance 

for Estonia, Latvia and Lithuania 

THE COUNCIL OF THE  EUROPEAN COMMUNITIES, 

Having  regard  to  the  Treaty  establishing  the  European  Economic 

Community, and  in particular Article 235 thereof, 

Having  regard  to  the  proposal  of  the  Commission1)  submitted  following 

consultation with  the Monetary Committee, 

Having  regard  to the opinion of  the European Par Iiament2), 

Whereas  Estonia,  Latvia  and  Lithuania  are  undertaking  fundamental 

political  and  economic  reforms  and  have  decided  to  adopt  a  market 

economy mode I ; 

Whereas  the  financial  support  of  the  reforms  from  the  Community  will 

strengthen  mutual  confidence  and  bring  Estonia,  Latvia  and  Lithuania 

closer  to the Community-, 

Whereas  trade, commercial  and  economic  links between  the Community  and 

Estonia,  Latvia  and  Lithuania  are  expected  to  develop  within  the 

framework  of  the 1992 Cooperation Agreements; 

Whereas  Estonia,  Latvia  and  Lithuania  have  requested  financial 

assistance  from  the  International  Monetary  Fund  (IMF),  the Group  of  24 

industrial  countries and  the  European  Community,  and  whereas, over  and 

above  the  overall  estimated  financing  which  could  be  provided  by  the 

IMF and  the World  Bank  to these countries, a global  residual  financial 

gap of  some US$ 600 million  remains  to be covered,  in order  to provide 

7) 
2) 

-  ?  -

the  necessary  financing  assurances  to  the  stand-by  arrangements  that 

these  countries  are  expected  to conclude  with  the  IMF on  the  basis of 

their economic  adjustment  and reform  programmes; 

Whereas  the  financial  gap  estimates  have  been  provided  by  the  IMF  in 

close  consultation  with  the Commission  and  the  Group  of  24  industrial 

countr ies; 

Whereas  the  Commission  as  coordinator  of  assistance  from  the  Group  of 

24  industrial  countries  has  invited  them  to  provide  medium-term 

financial  assistance  to Estonia, Latvia  and  Lithuania; 

Whereas  the  grant  by  the  Community  of  medium-term  loans  to  Estonia, 

Latvia  and Lithuania  are appropriate measures  to support  their  balances 

of payments and  to strengthen  those countries' reserve positions; 

Whereas  the  question  of  the  risks  associated  with  guarantees  from  the 

general  budget  of  the  European  Communities  will  be  examined  in  the 

context  of  the  renewal  in  1992 of  the  Inter inst i tut ionai  Agreement  on 

budgetary  discipline and  improvement of  the budgetary  procedure; 

Whereas  the Community  loan should be managed  by  the Commission; 

Whereas  the Treaty  does not  provide  for  the  adoption of  this Decision, 

powers other  than those of Article 235, 

HAS DECIDED AS FOLLOWS 

Article 1 

The Community  shall  grant  to Estonia,  Latvia  and  Lithuania  medium-

term  loan  facilities  of  a  maximum  amount  of  respectively  ecu  40 

million, ecu  80 million  and  ecu  100 million  in principal,  with  a 

maximum  duration  of  seven  years,  with  a  view  to  ensuring 

sustainable  balance-of-payments  situations  and  strengthening  the 

reserve posi t ions. 

- ?-

2.  To this end  the Commission  is empowered  to borrow, on behalf of  the 

European  Economic  Community,  the  necessary  resources  that  will  be 

placed  at  the disposal  of  Estonia, Latvia  and Lithuania  in the form 

of  loans. 

3.  These  loans  will  be managed  by the Commission  in full  consultation 

with  the  Monetary  Committee  and  in  a  manner  consistent  with  any 

Agreements  reached  between  the  IMF  and  Estonia,  Latvia  and 

Lithuania. 

Article 2 

1.  The Commission  is empowered  to negotiate with  the Estonian, Latvian 

and  Lithuanian  authorities,  after  consultation  with  the  Monetary 

Committee,  the  economic  policy  conditions  attached  to  the  loan. 

These  conditions  shall  be  consistent  with  the  agreements  referred 

to  in  the  third  paragraph  of  Article  1 and  with  arrangements  made 

by  the Group of Twenty-Four. 

2.  The  Commission  shall  verify  at  regular  intervals,  in collaboration 

with  the  Monetary  Committee  and  in  close  coordination  with  the 

Group  of  Twenty-Four  and  the  IMF,  that  the  economic  policies  in 

Estonia, Latvia  and Lithuania  are  in accordance with  the objectives 

of  these  loans and  that  their  conditions are being  fulfilled. 

Article 3 

1.  The  loans shall  be made  available  to Estonia, Latvia  and  Lithuania 

séparâtly, on a case by case basis.  Each  loan shall  be released  in 

two  Instalments. 

2.  The  first  instalment  shall  be  released  in each  case  as  soon  as a 

"stand-by  arrangement"  has  been  agreed  with  the  IMF.  Subject  to 

the  provisions  of  Article  2(2),  the  second  instalment  shall  be 

released  on  the  basis  of  a  satisfactory  track  record  in  the 

implementation  of  this  arrangement  and  not  before  the  second 

quarter  of 1993. 

3.  The  funds shall  be paid  to the Central  Banks. 

-3  -

Article 4 

1.  The  respective  borrowing  and  lending  operations  referred  to  in 

Article  1 shall  be  carried  out  using  the  same  value  date  and  must 

not  involve  the  Community  in  the  transformation  of  maturities,  in 

any  exchange  or  interest-rate  risk,  or  in  any  other  commercial 

risk. 

2.  The  Commission  shall  take  the  necessary  steps,  if  Estonia,  Latvia 

or  Lithuania  so  decides,  to  include  in  the  respective  loan 

conditions, and also to exercise,an early  repayment  clause. 

3.  At  the  request  of  Estonia,  Latvia  and  Lithuania,  and  if 

circumstances  permit  an  improvement  in  the  interest  rate  on  the 

respective  loans,  the  Commission  may  refinance  all  or  part  of  its 

initial  borrowings  or  restructure  the  corresponding  financial 

conditions.  Refinancing  or  restructuring  operations  shall  be 

carried  out  in  accordance  with  the  conditions  set  out  in 

paragraph  1 and shall  not  have  the effect  of extending  the  average 

duration  of  the  borrowing  concerned  or  increasing  the  amount, 

expressed  at  the  current  exchange  rate, of  capital  outstanding  at 

the date of  the refinancing or  restructuring. 

4.  Ail  related  costs  incurred  by  the  Community  in  concluding  and 

carrying  out  the  operation  under  this  Decision  shall  be  borne  by 

Estonia, Latvia  and Lithuania  as appropriate. 

5.  The  Monetary  Committee  shall  be  kept  informed  of  developments  In 

the operations  referred  to  in paragraphs  2 and  3. 

-  s)0  -

Article 5 

At  least  once  a  year  the Commission  shall  address  to  the  European 

Parliament  and  to  the  Council  a  report,  which  will  include  an 

evaluation on  the  implementation of  this Decision. 

Done at Brussels, 

For  the Counci1 

The President 

^  1 1-

FINANCIAL RECORD 

1.  Budget  Iine concerned 

Article  (...)  loan guarantee  for  assistance  to  Estonia,  Latvia  and 
Lithuania  (to  be  created  through  an  amending  and/or  supplementary 
Budget). 

2.  References  (legal  base) 

Article  235 of  the Treaty 

3.  Classification of  the Expenditure 

Obi igatory 

4.  Description  and Justification for  the action 

a)  Description of  the action 

Provision  of  a  guarantee  from  the  Community  for  individual 
loans  to  Estonia,  Latvia  and  Lithuania  in  view  of  supporting 
their  balances  of  payments  and  strengthening  the  countries' 
reserve posit ions. 

b)  Justification  for  the action 

The  G24  and  the  Council  of  the  EEC  have  endorsed  the 
principle of  providing  assistance  In response  to  a  request 
from Estonia, Latvia and Lithuania. 

The budget  entry  is Intended  to provide a budgetary  support 
for  guarantee  offered  by  the  European  Community  to  cover 
the  loans extended  to Estonia, Latvia  and  Lithuania. 

5.  Nature of  the expenditure  and method of  calculation 

a)  Nature of  the expenditure 

A  guarantee  to  individual  loans  in  favour  of  Estonia,  Latvia 
and Lithuania. 

b)  Method of calculation 

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  this  budget  guarantee  will  not 
be cal led. 

6.  Effect  of  the action on  intervention  credits 

Only  in the case of  an effective call  on  the guarantee. 

Financing of  intervention  expenditure 

~m -

Endowment  of  the  line  by  transfer,  by  reutilisation  of 
reimbursed  amounts  (Article  27(3)  of  the  Financial  Regulation 
of  1977), or by amended  and/or  supplementary  budget. 

In  order  to  fulfill  its  obligations,  the  Commission  can 
provisionally  ensure  the  debt  service  with  funds  from  Its 
treasury.  In  that  case,  Article  12  of  the  Council  Regulation 
(EEC, Euratom) no. 1522/89 of  29.5.1989 wiI I apply. 

BSN 0254-1475 

COM (92) 410 final 

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