Proposal for a COUNCIL DECISION providing macro-financial assistance to Belarus
Date: 1995-02-14
Institutions: European Commission
Subjects: Community loan, USSR, economic cooperation, economic model, long-term credit, market economy

COMMISSION  OF  THE  EUROPEAN  COMMUNITIES 

COM(95) 36 final 

Brussels, 14.02.1995 

95/ 0032(CNS) 

Proposal for a 

COUNCIL DECISION 

providing  macro-financial  assistance 

to  Belarus 

(presented by the Commission) 

EXPLANATORY  MEMORANDUM 

Belarus* request for Community  macro-financial  support 

In  December  1994  Mr  Lukashenko,  the  new  President  of  Belarus,  addressed  to  the 
Commission  a  request  for  macro-financial  assistance  from  the  European  Union.  This 
request  was  made  in  the  context  of  a  comprehensive  macro-economic  adjustment  and 
reform  programme  on  which  the  Belarussian  authorities  have  reached  an  understanding 
with the International Monetary Fund (IMF). 

The  programme  of  Belarus  was  to  be  supported  by  the  second  tranche  of  the  IMF 
Systemic Adjustment  Facility  (STF) approved  in  1993, and by  drawings  under  a  stand-by 
arrangement  (overall  some US$ 300 million). Balance of payments  support to Belarus  was 
also  expected  from  the  World  Bank  (US$  60 to  100 million)  through  adjustment  lending 
and  from  Russia  through  a  restructuring  of  claims  (some  US$  405  million)  relating  to 
energy  supplies. However,  despite those  contributions,  substantial  residual  financing  gaps 
remained to be filled  by official  support to ensure the viability of the IMF  programme. 

A  donors'  pledging  session  organized  by  the  IMF  on  15  December  with  a  view  to 
obtaining complementary  financing  assurances for the stand-by arrangement,  proved to  be 
unsuccessful.  Russia  indicated  that  negotiations  on  a  settlement  of  gas  supplies  related 
arrears  were  about  to  be  finalised.  The  United  States  pledged  a  first  US$  25  million 
support, and  indicated  that this  amount  could  be increased  if other  donors  also  contribute. 
Japan  could  not  at  this  stage  commit  any  specific  amounts  but  made  also  a  clear  link 
between  its  potential  contribution  and  those  from  the  United  States  and  the  EU.  Several 
EU  Member  States  indicated  that  they  would  support  a  proposal  for  a  Community  loan. 
On  this  basis  the  IMF  Management  concluded  that  the  financing  assurances  were 
insufficient  for  the  programme  to  be  recommended  for  approval  by  the  IMF  Board  and 
decided  to  revise  it  with  a  view  to  further  compressing  the  associated  external  financing 
needs. 

On  the  basis  of  a  revised  programme  with  even  more  drastic  stabilisation  measures,  in 
particular  a reduced  budget  deficit,  a tighter  monetary  policy  and  lower  imports,  the  IMF 
Board  approved  on  30  January  1995  the  release  of  the  second  STF  tranche.  The  IMF 
management  is  also  ready  to  recommend  the  approval  of  the  stand-by  arrangement, 
provided  financing  assurances  from  the main donors are secured  for  the  residual  financing 
gap,  which  has  been  revised  downwards  to  some  US$  250  million  over  and  above  debt 
restructuring  and IMF/WB contributions. 

The Belarus'  economic  programme 

After  the election of President  Lukashenko  in July  1994, the new government  under  Prime 
Minister  Chigir  adopted  in  Autumn  a  reformist  stance  and  an  ambitious  programme  of 
reforms.  This  programme  was  officially  submitted  to  the  IMF  in  the  context  of  a  request 
for  a  stand-by  arrangement  and  a  second  drawing  under  the  STF.  The  aim  of  the 
programme  is  to  stabilise  the  economy,  to  address  the  difficult  balance  of  payments 
situation, and  to implement  essential  systemic  reforms. 

Juices and Subsidies:  Bread and milk  subsidies were suppressed m August  1994.  Since 
October  lood  prices  were  liberalised,  .doeiestic  supplies  of  imported  oil  and  gas  are 
charged at a cost covering price, and a progressive phasing out of all subsidies on energy 
and public transport has started. Overall  limits have been set for budgetary subsidies in 
1995, which should not exceed 0.5% of  GDP. In order to counter-balance the negative 
social impact of those measures, the social safety benefits will be reviewed and targeted to 
the most vulnerable groups. 

Monetary policy and Financial sector reform: Since last October important measures have 
been taken to  make  the  exchange  rate  of  the  currency  determined on  a  market  basis. 
Furthermore,  direct  subsidisation  of  enterprises  by  the  Central  Bank  has  ceased  as  of 
January  1995  and  market  credit  mechanisms  are  being  introduced.  Central  Bank 
refinancing  is now provided at positive real interest rates. In late December the Central 
Bank increased the one-month refinancing rate to 40%. A  new legislation oh the Central 
Bank is being drafted and should be submitted to the Belarussian Parliament before the 
end of March 1995. In January it was agreed with the IMF to tighten further the monetary 
policy. According to the new objectives, broad money should now increase by  55 % in 
1995, instead of 100 % initially agreed. 

Budget: The goal of the authorities was initially to limit the general budget deficit to 4% of 
GDP in 1995. This target has now been further tightened to a 3.2% level in the context of 
the revised programmed  agreed with the IMF. While  some  taxes  shall  be  lowered,  the 
programme aims at broadening the tax base. 

Foreign trade: The foreign  exchange surrender requirement was abolished  in November 
1994, except for Russian Rubble export earnings. Most export taxes were suppressed and 
the number of products requiring export licenses was reduced. 

Privatisation:  Targets have been set for privatisation. By end-1995  70% of  small  firms, 
and 50% of global assets in large firms should be privatised. Foreign participation shall be 
encouraged, and auctions against vouchers introduced. 

External outlook and financing needs 

Although imports were heavily  constrained, the current account deficit  reached in  1994 
some  US  dollars  500  million.  Inter-enterprise  and  external  debt  arrears  significantly 
increased  (mainly vis-à-vis  Russia,  with some US$  480  million  gas and petrol  arrears) 
because of balance of payments uncovered needs and the lack of foreign reserves. 

Following the unsuccessful  pledging session of December 1994, new discussions between 
the  IMF  and  the  Belarussian  authorities  took  place  in  early  January,  which  led  to  a 
tightening  of  the  programme  and  monetary  policy.  As  noted  above,  the  budget 
expenditures  have  been  further  curtailed  and  imports,  will  be  lower  than  initially 
envisaged  (partly  also  because  recent  negotiations  with  Russia  on  gas  supplies  were 
concluded  with  a  price  more  favourable  than  initially  anticipated).  A  current  account 
deficit of US$ 320 million (instead of US$ 540 million initially projected) is anticipated 
for  1995. After a very  sharp 22% estimated drop in  1994, real GDP is now expected to 
decline in 1995 by 7% (instead of the 4.5% initially envisaged). 

In  assessing  the  residual  external financing gap  for  1995,  the  IMF  considers  that  the 
expected agreement between Russia and Belarus to restructure some US$ 405  Million of 

Belarus'  existing  arrears  on  energy  supplies  vis-à-vis  Russia  is  likely  to  be  finalised 
shortly. 

After  IMF  disbursements  expected  to  reach  overall  some  US$  300  million  (SDR  70.1 
million  under  the  STF  second  tranche  and  SDR  172.5  million  under  the  forthcoming 
stand-by  arrangement),  and  taking  into  consideration  US$  60  million  World  Bank 
structural  adjustment  lending  during  the  programme  period,  the  new  financing  gap 
amounts to some US$ 250 million. 

Belarus,  1995 financing  gap 
(IMF  estimates) 

Current account 
Capital account 
Increase of reserves 
Gross financing  gap 
IMF disbursements  (STF, Stand-by) 
World Bank disbursements (adjustment  lending) 

millions US $ 
-322 
-63 
-222 
-607 
297 
60 

Residual financing  gap 

-250 

Unless  this  gap  can  be  filled  by  official  donors,  delays  will  be  imposed  to  the 
implementation  of  the  stand-by  arrangement  and  new  modifications  would  need  to  be 
made  to  the  programme.  This  situation  could  undermine  Belarus'  ability  to  pursue  the 
adjustment  and  reform  efforts  that  it  has  undertaken  as  well  as  its  capacity  to  meet  its 
external  financing  obligations. 

The proposed  macro-financial  assistance 

The  Commission  considers  that  the  situation  has  considerably  improved  in  Belarus  over 
the  last months  and that  the country's  new  macro-economic  programme  is  comprehensive 
and ambitious and would  ensure the necessary macro-economic  stabilisation  and  structural 
change. 

Despite  particularly  difficult  circumstances,  Belarus  has  fulfilled  its  financial  obligations 
towards  the  Community  (incurred  under  the  ECU  100.2  million  food  credit  allocated  in 
1992 to  Belarus  under  the  ECU  1250 million  loan  facility  to the New  Independent  States) 
thus  demonstrating  its  willingness  to  make  every  effort 
international 
commitments. 

to  fulfil 

its 

The  Community  remains  an  important  creditor  of  Belarus  and  has  therefore  an  interest  in 
securing  that  the  country  continues  the  reform  and  stabilisation  programme  which  is 
supported  by  the  IMF  and  which  would  ensure  medium-term  balance  of  payments 
sustainability. 

The  Commission is  proposing-that the Community  would  make available  to  Belarus  a* 
balance of payments loan of up to ECU 75 million with a maximum duration of ten year:,. 

The assistance  would complement resources made available by the IMF and the World 
Bank  and would  be released  in two  tranches  in the  context  of  Belarus' new economic 
programme to be  supported by an IMF stand-by arrangement  The disbursement  of the 
first  tranche would take place after the approval of the stand-by arrangement by the IMF 
Board. The disbursement of the second tranche would be subject to  a satisfactory track 
record  of  the  macro-economic programme  agreed  with the  IMF  and  to  progress  with 
respect  to  structural  reforms,  including  the  observance  of  a  number  of  performance 
criteria. Before the release of the second tranche, full account would also be taken of the 
country's  effective  external financing needs  and  of  the financial contributions  to  the 
assistance package of the other major bilateral donors (especially the United States and 
Japan). 

As in the case of similar operations in favour of third countries, the Community would 
provide the funds through market borrowing,  which implies a guarantee by the general 
budget.  Belarus would  subsequently borrow from the Community.  The  borrowing  and 
lending  operations  will  be  perfectly  matched  and without  any  commercial risk for the 
Community. The proposed duration of the loan (ten years) is consistent with the medium-
term balance  of  payments  outlook  for  Belarus,  which  is  expected  to  face  substantial 
financing  needs for the years to come. 

In  accordance  with  the  Guarantee  Fund  mechanism,  the  budgetary  implications  of  a 
decision to make available assistance of up to ECU 75 million to Belarus would imply an 
ECU 11.25 million provisioning of the Fund. 

Proposal for a 

COUNCIL DECISION 

providing macro-financial  assistance 

for Belarus 

THE COUNCIL OPTHE EUROPEAN UNION, 

Having  regard  to  the  Treaty  establishing  the  European  Community,  and  in  particular 
Article 235 thereof, 

Having  regard  to  the  proposal  of  the  Commission1  submitted  after  consulting  the 
Monetary Committee, 

Having regard to the opinion of the European Parliament2, 

Whereas  Belarus  is  undertaking  fundamental  political  and  economic  reforms  and  is 
making substantial efforts to implement a market economy model; 

Whereas Belarus, the European Communities and their Member States have negotiated a 
Partnership  and  Cooperation  Agreement  which will  help  the  development  of  a  full  co 
operation relationship; 

Whereas Belarus agreed with the International Monetary Fund (IMF) in 1993 on a first set 
of stabilisation and policy reform measures to be supported by a purchase under the IMF's 
Systemic Transformation  Facility (STF) and whereas the IMF Board approved the release 
of the first STF tranche in  1993; whereas the Belarussian authorities adopted  in Autumn 
1994 an ambitious stabilisation and structural reform programme; whereas the IMF Board 
approved in January  1995 the release of the second STF tranche and whereas Belarus and 
the IMF have reached  an understanding on the support of this programme by a  Stand-by 
Arrangement; 

Whereas  the  authorities  of  Belarus  have  requested  financial  assistance  from  the 
international financial institutions, the Union and other bilateral donors;^whereas, over and 
above  debt  restructuring  arrangements  and  the  estimated  financing  which  could  be 
provided  by  the  IMF  and  the  World  Bank,  a  residual  financing  gap  of  some  US$  250 
million during the programme period remains to be covered; 

1  OJn°... 

2  OJ n°... 

Whereas  the  Belarussian  authorities  have  committed  to  fully  and  timely  service  their 
external financial obligations towards tj^Ça^n^unÂty; 

Whereas a Community long-term loan to Belarus is an appropriate measure to help easing 
the countries' external financial constraintsand  support me policy objectives  attached  to 
the government's reform effort; 

.# 

Whereas me 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 

1.  The  Community  shall  make  available  to  Belarus  a  long-term  loan  facility  of  a 
maximum  principal  amount  of  ECU  75  million  with  a  maximum  maturity  of  ten 
years,  with  a  view  to  ensuring  a  sustainable  balance-of-payments  situation  and 
strengthening the country's reserve position. 

2.  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 Belarus in 
the form of a loan. 

3.  This  loan  will  be  managed  by  thé  Commission  in  close  consultation  with  the 
Monetary  Committee  and  in  a  manner  consistent  with  any  agreement  reached 
between the IMF and Belarus. 

Article 2 

1.  The  Commission  is  empowered  to  negotiate  with  the  Belarus  authorities,  after 
f &msultauon with the Monetary Committee* the economic policy conditions attached 
to the loan. These conditions shall  be consistent  with the agreements referred  to  in 
Article 1(3). 

2.  The Commission  sliall verify  at regular intervals, in collaboration with the Monetary 
Committee  and  in  close  co-ordination  with  the  IMF,  that  the  economic  policy  in 
Belarus is in accordance with the objectives of this loan and that  its conditions  are 
being  fulfilled. 

Article 3 

1.  The  loan  shall  be  made  available  to  Belarus  in  two  instalments.  Subject  to  the 
provisions of Article 2(1), the first instalment  shall  be released after  the approval  of 
the Stand-by Arrangement by the Board of the IMF. 

2. 

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  the  stand-by 
arrangement and not before two quarters after the release of the first instalment. 

3.  The funds shall be paid to the Central Bank of Belarus. 

Article 4 

1.  The  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 Belarus so requests, to ensure that 
an early repayment clause is included in the loan terms and conditions and that it may 
be exercised. 

3.  At  the  request  of  Belarus,  and  where  circumstances  permit  an  improvement  in  the 
interest  rate  on  the  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 maturity 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.  All  related  costs  incurred  by  the  Community  in  concluding  and  carrying  out  the 

operation under this Decision shall be borne by Belarus. 

5.  The  Monetary  Committee  shall  be kept  informed  of  developments  in the  operations 

referred to in paragraphs 2 and 3 at least once a year. 

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 

, 

For the Council 

The President 

FINANCIAL RECORD 

1.  Budget line concerned 

Article (...) reflecting the budget guarantee for the Community loan facility to Belarus 
(to be created through an amending and/or a supplementary budget). 

2.  fteferencesnegal  base^ 

Article 235 of the Treaty 

3.  Classification of the Expenditure 

,  Obligatory 

4.  Desaiption and  Justificatkm f 

a)  Description of the action 

The budget entry reflects the commitment of the  budget guarantee associated 
with the Community loan to Belarus designed to ensure a sustainable balance-
of-payments position and  strengthening international reserves of this country. 

b) 

Justification for  the action 
The  viability  of  Belarus'  external  accounts  heavily  depends  on  external 
financial  assistance from official sources. 

5.  Nature of the expenditure and method of calculation 

a)  Nature of the expenditure 

Potential activation of budget guarantee for the Community borrowing aimed 
to fund the  loan to Belarus. 

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 called. 

6.  Effect of the action on intervention credits 

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

7.  Financing of intervention expenditure 

-  Recourse  to  the  Guarantee  Fund  established  by  Council  Regulation  (EC, 

EURATOM) n° 2728 of 31 October 1994. 

-  In  case  the  Guarantee  Fund  did  not  contain  sufficient  resources,  additional 
payments  would  be  called  up  from  the  budget  by  transfer,  by  reutilisation  of 
reimbursed  amounts  (Article  27(3)  of  the  Financial  Regulation  of  1977),  or  by 

-,-,  amending and/or supplementary  Budget. 
-  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 (EEC, EURATOM) no. 1552/89 of 29.5.1989 will apply. 

ANNEX 

BUDGETARY RESOURCES NECESSARY FOR THE PROVISIONING OF THE 
GUARANTEE FUND IN 1995 AND MARGIN UNDER THE RESERVE FOR 
GUARANTEES 
(IN ECU MILLION) 

Operations 

Basis of the 
Calculation 

Provisioning of 
theFwnfl(l) 

Reserve 
Margin 

Project related assistance 
EIB/CEEC 
EIB/MED 
EIB/PVDLA 
EURATOM 

1121 
58 
139(3) 
50 

157 
8 
19 
8 

323 (2) 

166 
158 
139 
131 

Macro-financial assistance 
Bulgaria 
Belarus 

40(4) 
75(5) 

6 
11.25 

125 
114 

(1) 

(2) 
(3) 
(4) 

(5) 

According  to  the  provisioning  rules  provided  in  the  Council  regulation  (EC, 
EURATOM) n° 2728/94 of 31 October  1994. After  a first drawing of the Guarantee 
Fund, and in compliance with Article 5 of the Regulation, the rate of provisioning for 
new operations is being increased  from  14 % to  15% in  1995. For  1995, all E1B and 
EURATOM operations approved in 1993 and  1994 and have been provisioned with a 
14%  rate.  New. macro-financial  assistance  operations  are  new  and  have  been 
provisioned with a 15% rate. 
Reserve amount in 1995 under the financial perspective. 
Without amounts recently proposed for South Africa but not yet approved. 
Commission  proposal  (COM(94)118 of  21.11.1994, 94/0*103(CNS)) to  increase  the 
maximum  amount of the existing loan  facility  to Bulgaria from  ECU  110 million to 
ECU 150 million. 
Commission proposal. 

BSN 0254-1475 

COM{95) 36 final 

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