Proposal for a Council Decision modifying Decision 97/787/EC granting exceptional financial assistance to Armenia and Georgia in order to extend it to Tajikistan
Date: 1999-07-26
Institutions: European Commission
Subjects: Community loan, International Monetary Fund, Tajikistan, financial aid

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 26.07.1999
COM (1999) 391 final

99/0172 (CNS)

Proposal for a

COUNCIL DECISION

modifying Decision 97/787/EC granting exceptional financial assistance to
Armenia and Georgia in order to extend it to Tajikistan

(presented by the Commission)

EXPLANATORY MEMORANDUM

1. GENERAL ECONOMIC SITUATION IN TAJIKISTAN

Like Armenia and Georgia, Tajikistan was severely hit by the economic
collapse resulting from the breaking up of the command economy and the
disintegration of the Former Soviet 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 sharply dropped, by two-thirds, and living standards of
the average population fell below poverty levels.

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 external shocks (continued fall in world commodity prices - 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 Central Bank continued to provide some
direct credits to the illiquid cotton sector. In 1998, the current account deficit
expanded from 5.5 % to 15.2 % of GDP (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
expected to remain fragile in the medium term.

At the end of 1998, the external debt of Tajikistan was still equivalent to US$
1,263 million and represented 98 % of GDP. Owing to its external financing
the country has accumulated
needs and insufficient currency reserves,
substantial arrears vis-à-vis its creditors and suppliers, including vis-à-vis the
Community (for a global outstanding amount in arrears of some
74 million
including late interest) on commercial credits to finance food and medical
the Tajik authorities have
imports made available in 1992. However,
committed themselves to fully settle their outstanding financial obligations
towards the Community and have already secured a minimum servicing of
their debts.

€

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 poverty line. The civil war had caused poverty to 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

2

demobilised 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
the
social arrears might be increased, while budgetary support
implementation of the yet fragile peace agreement would be weakened.

for

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
reform programme.

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 presidential elections foreseen for Autumn 1999 are essential elements 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
both for the peace process and for the activities of international donors.

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. STATUS OF IMF PROGRAMME

After two emergency post conflict credits respectively in 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

3

emphasise 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 already high access in relation to their quota,
the Fund and the Bank were asking bilateral donors,
in particular the
European Community, to provide exceptional complementary support.

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-
term review under the first annual ESAF arrangement. Moreover, it endorsed
their request for increased access (US$ 6 million) to Fund resources under
the ESAF arrangement.

The government of Tajikistan has taken strong measures to respond to the
external shocks it faces and policies implemented have brought inflation to
fall more rapidly than expected, economic activity to recover and real income
to rise. Structural reforms in key areas appear to be proceeding satisfactorily,
even if not fully according to the initial time schedule. Progress has also been
reported recently in areas where delays had been registered. The conclusions
of the recent
in the country were
encouraging and a positive decision on a second annual programme under
the three-year ESAF Facility is expected shortly.

IMF review mission (May 1999)

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
facility of the 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 country should be supported with
concessional assistance and that exceptional support in the form of a mix of a

4

loan and straight grants is required to underpin the implementation of the
country's stabilisation and structural reform programme.

the Council adopted a decision1 providing
On 17 November 1997,
exceptional financial assistance to Armenia and Georgia and agreed in
principle to consider a similar assistance to Tajikistan once the latter would
benefit from an upper credit tranche arrangement with the 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 in the context of a three-year ESAF arrangement approved by the
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 of long-term loans and grants that can be made available :
€

the loans ceiling would be increased by a maximum amount of
million ;

75

–

–

the grants ceiling would be increased by a maximum amount of
million to be financed by the general budget.

€

35

These amounts are consistent with Tajikistan's residual financing needs,
taking also into account the financial outflow resulting from the settlement of
73
the country's arrears towards the Community (as of 31 March 1999,
million of arrears, with a monthly increase of some
200,000 in interest on
late payments). The amounts envisaged are, of course, 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 level and 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 in successive annual tranches.

€

€

The loan component of this 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

1

2

97/787/EC, OJ L 322 of 25.11.1997, p. 37
The Russian crisis and its impact on the NIS and Mongolia, COM(1999) 8 final, adopted by
the Commission on 20 January 1999

5

€

commercial risk for the Community. In accordance with the Guarantee Fund
mechanism the budgetary implications of a decision to make available loans
€
of up to
10.5 million provisioning of the Fund to be drawn from the 1999 reserve for
guarantees relating to external actions.

75 million to the beneficiary country would be a maximum of

As for the grant component of this assistance and without prejudice to the
competencies of the budgetary authority, the Commission considers that this
part of the exceptional assistance would have to be implemented in five equal
annual instalments of up to
7 million from 2000 to 2004, within the limits
of Category 4 of the financial perspective for the 2000-2006 period.

€

In order to ensure coherence with the EC’s general policy towards 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
exceptional financial assistance to Tajikistan.

Accordingly, the Commission requests the Council to adopt the proposed
amendments and to allow Tajikistan to benefit from the existing Council
Decision 97/787/EC along with Armenia and Georgia.

6

Proposal for a

COUNCIL DECISION

modifying Decision 97/787/EC granting exceptional financial assistance to
Armenia and Georgia in order to extend it to Tajikistan

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community, and in particular
Article 308 thereof,

Having regard to the proposals from the Commission3,

Having regard to the opinion of the European Parliament4,

(1) Whereas the Council Decision 97/787/EC of 17 November 1997 provides

exceptional financial assistance to Armenia and Georgia5 ;

(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 as soon as possible ;

(5) Whereas Tajikistan agreed with the International Monetary Fund (IMF) in

June 1998 on a three-year Enhanced Structural Adjustment Facility (ESAF) ;

(6) Whereas the Tajik authorities have formally undertaken to fully settle their
outstanding financial obligations towards the Community and whereas
Tajikistan secures a minimum servicing of outstanding Community claims ;

(7) Whereas the Tajik authorities have formally requested exceptional financial

support from the Community ;

3

4

5

COM(1997) 24 final (OJ C 95 of 24.3.1997 p. 64) - 1997/0028/CNS and COM(1999) xxx
final (OJ C )
OJ C
97/787/EC, OJ L 322 of 25.11.1997, p. 37

7

(8) Whereas Tajikistan is a low income country and is facing particularly critical
economic, social and political circumstances; whereas this country is eligible
to highly concessional loans from the World Bank and the IMF;

(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 beneficiary country at this critical juncture;

(10) Whereas this assistance, both the loan and the grant component, is highly
exceptional and therefore in no way constitutes a precedent for the future;

(11) Whereas the inclusion of a grant component in this assistance is without

prejudice to the powers of the budgetary authority;

(12) Whereas this assistance should be managed by the Commission;

(13) Whereas in implementing this Decision, the Commission will take due account
of progress made in the Inter-Tajik peace process and, in particular, in the
holding of elections under acceptable conditions ;

(14) Whereas the Commission consulted the Economic and Financial Committee

before submitting its proposal ;

(15) Whereas the Treaty does not provide, for the adoption of this decision, powers

other than those of Article 308,

HAS DECIDED AS FOLLOWS :

Sole article

Council Decision 97/787/EC of 17 November 1997 is modified as follows :

1.

Article 1 is modified as follows :

(i)

Paragraphs 1 to 3 are replaced by the following :

"The Community shall make available to Armenia, Georgia and
Tajikistan exceptional financial assistance, in the form of long-term
loans and straight grants. "

€

loan component of this assistance shall amount

to a
"The total
maximum principal of
245 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
beneficiary countries in the form of loans. "

the disposal of

€

"The grant component of this assistance will consist of an amount of up
to
130 million during the 1997-2004 period, with a maximum of

8

€

24 million annually. The grants shall be made available insofar as the
net debtor position of the beneficiary countries towards the Community
is being substantially reduced. "

2.

Article 3 (1) is replaced by the following text :

"1.

Subject to the provisions of Article 1 (4) and Article 2, the total amount
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 by the following text :

"2. Before 31 December 2004 at the latest, the Council shall examine the
this Decision to that date on the basis of a

application of
comprehensive report by the Commission. "

Done at Brussels,

For the Council
The President

9

ANNEX

BUDGETARY RESOURCES NECESSARY FOR THE PROVISIONING OF THE GUARANTEE
FUND IN 1999 AND MARGIN UNDER THE RESERVE FOR LOANS AND LOAN GUARANTEES IN
FAVOUR OF THIRD COUNTRIES
(EUR million)

Operations

Basis of the
calculation6

Provisioning of the
Fund7

Reserve Margin

Operations decided

EIB/New mandates9

CEEC
ALA
South Africa
MED
FYROM
Bosnia

EIB/Old protocols9
Syria

Macro-financial assistance
Albania III
Bosnia I

Operations proposed

EIB/Turkey10
EIB/Croatia 11

Macro-financial assistance
Bulgaria IV12
Romania IV12
FYROM II12
Tajikistan12

872.9
218.1
143.5
351.4
38.5
42.0

-30

20
20

105
35

100
200
50
75

122.2
30.5
20.1
49.2
5.4
5.9

-4.2

2.8
2.8

14.7
4.9

14.0
28.0
7.0
10.5

346.0 8

223.8
193.3
173.2
124.0
118.6
112.7

116.9

114.1
111.3

96.6
91.7

77.7
49.7
42.7
32.2

6

7

8

9

10

11

12

The provisioning basis is calculated by applying the relevant guarantee cover rate, namely
70% (EIB loans new mandates), 75% (EIB loans old protocols) or 100% (macro-financial
assistance loan).
In accordance with the provisioning rules in Council Regulation (EC, Euratom) No 2728/94 of
31 October 1994, the Fund having reached its target amount on 31 December 1997, the
provisioning rate has been reduced to 14%.
Amount of the Reserve for loans and loan guarantees in favour of third countries for 1999
under the financial perspective.
Annual amounts of loans scheduled to be signed in 1999 and correction of amounts already
provisioned in the Fund to take account of actual signings at the end of 1998: Transfer 5/99 to
the Guarantee Fund.
Proposal for a Council Regulation on a special financial cooperation measure for Turkey
(COM(95) 389/3).
EC/Croatia cooperation agreement (SEC(95) 180/final).
Commission proposal.

10

FINANCIAL STATEMENT

1.

TITLE OF OPERATION

Exceptional financial assistance to Tajikistan.

2.

BUDGET HEADING INVOLVED

–

Grant component of the assistance

Article B7-531 : Exceptional financial assistance to Armenia, Georgia
and Tajikistan.

–

Loan component of the assistance :

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.

LEGAL BASIS

Article 308 of the Treaty

4.

4.1

DESCRIPTION OF OPERATION

General objective

a)

Description of the action

€

Provision of a Community loan (to be financed by Community borrowing in
the international capital market) in the amount of up to
75 million and
grant of up to
35 million (to be financed by the General Budget) to the
beneficiary country with a view to supporting its government's reform efforts
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
at
concessional terms.

from official

assistance

financial

sources,

4.2

Period covered and arrangements for renewal

Period 2000-2004 for the grant

Period 1999-2014 for the loan

11

5.

5.1

CLASSIFICATION OF EXPENDITURE OR REVENUE

Compulsory/Non-compulsory expenditure

–

–

Grant component : non compulsory.

Loan component : compulsory.

5.2

Differentiated/Non-differentiated appropriations

–

–

Grant component : differentiated.

Loan component : differentiated.

6.

TYPE OF EXPENDITURE OR REVENUE

7.

7.1

–

–

–

Straight grant (100% subsidy), which would be released in successive
instalments.

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

The Community grant will not be reimbursed. The loan element will be
reimbursed.

FINANCIAL IMPACT

Method of calculating total cost of operation (relation between
individual and total costs)

a) Method of calculation

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 of the action on intervention credits

The budget entry corresponding to the grant component of the assistance will
be activated subject to compliance with a number of policy conditions to be
agreed with the authorities of the beneficiary country.

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.

12

7.2

Itemised breakdown of cost - Schedule of commitment and payment
appropriations

(i)

Grants

The financing of the expenditure will be secured in annual or six-
monthly instalments from 2000 onwards within the limits of Category
4 of the new Financial Perspectives for the 2000-2006 period.

The following schedule of appropriations is proposed (in current
million

) :

€

2000

2001

2002

2003

2004

Commitment
appropriations

Payment
appropriations

7

7

7

7

7

7

7

7

7

7

(ii)

Eventual call on the budget guarantee

–

–

–

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 :

• Of any margin remaining in the Reserve for guarantees ;

• Of any late payments to the budget for which the budget
guarantee has been activated (under Article 27 (3) of the
Financial Regulation) ;

• Of any margin available under the ceiling of category 4 of the

financial perspectives or redeployment therein.

to fulfil

its obligations,

In order
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 of 29 May 1989 will apply.

8.

FRAUD PREVENTION MEASURES

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 satisfactory and that the specific conditions attached to this assistance are
fulfilled.

13

Financial assistance operations under this Decision will be subject to audit by
the relevant Commission services and the Court of Auditors, to be carried on
the spot whenever and wherever appropriate.

9.

9.1

ELEMENTS OF COST-EFFECTIVENESS ANALYSIS

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 of the peace process in the country.

The assistance would also help the country servicing its outstanding external
financial obligations,
the Community. These
outstanding financial obligations towards the Community are presently
equivalent to euro 74 million (including arrears and late interest).

in particular

towards

The present assistance will only be mobilised with the proviso that the
beneficiary country will have fully discharged its outstanding financial
obligations towards the Community.

9.2

Grounds for the 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 of ways and means :

• Owing to its dire social and economic situation and to its extremely
vulnerable balance of payments, Tajikistan should be supported with
highly concessional assistance.

• 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

of the whole region and, in particular, of the beneficiary country.

• Resumption of civil hostilities.

14

9.3

Monitoring and evaluation of the 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
the beneficiary country is
implementing.

that

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’s stabilisation and reform achievements.

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
implementation of this operation

10.

ADMINISTRATIVE EXPENDITURE (SECTION III, PART A OF THE BUDGET)

This action is exceptional in nature and will not involve an increase in the
number of Commission staff.

15