CELEX: 51992PC0410
Language: en
Date: 1992-09-23
Title: Proposal for a COUNCIL DECISION providing medium-term financial assistance for Estonia, Latvia and Lithuania

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)
 ---pagebreak---                                          -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
 ---pagebreak---                                          - 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.
 ---pagebreak---                                        - 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.
 ---pagebreak---                                        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
 ---pagebreak---                                  - 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.
 ---pagebreak---                                      - 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 Iiament 2 ),
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)
 ---pagebreak---                                   - ? -
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.
 ---pagebreak---                                     -?-
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.
 ---pagebreak---                                        -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.
 ---pagebreak---                           - 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
 ---pagebreak---                             ^ 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.
 ---pagebreak---                           ~m -
Financing of intervention expenditure
    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.
 ---pagebreak---  ---pagebreak---                                                                      BSN 0254-1475
                                                              COM (92) 410 final
                                                      DOCUMENTS
EN                                                                             11
                                 Catalogue number : CB-CO-92-427-EN-C
                                                             ISBN 92-77-47852-7
Office for Official Publications of the European Communities
1^2985 Luxembourg