June 22, 2001

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Köhler:

The Government of Tajikistan is implementing a program of economic reform with support from the IMF's Poverty Reduction and Growth Facility (PRGF). The Executive Board of the IMF approved a third annual arrangement under the PRGF on October 25, 2000. The first quarterly review of this program was concluded on April 12, 2001, and the Executive Board approved a disbursement of SDR 6 million.

Together with an IMF mission that visited Dushanbe during April 23–May 3, 2001, we conducted the second quarterly review of the Fund-supported program, based on quantitative performance criteria and structural benchmarks at end-March 2001. Except for the accumulation of external arrears, we observed all of the quantitative performance criteria, and implemented all of the structural benchmarks. We are requesting a waiver for the non-compliance with the performance criterion on external arrears.

The attached Supplemental Memorandum of Economic Policies (MEP), which augments the MEP of October 11, 2000 and the Supplemental Letter of Intent of March 2001, sets out a number of additional measures that we will take to further strengthen our macroeconomic stabilization efforts and, in particular, our structural reform program. It also outlines a debt reduction strategy that we developed, in consultation with Fund staff, that should help us achieve external debt sustainability over the medium term.

The Government believes that the policies described in the supplemental MEP will enhance the prospects for achieving the objectives of our economic program for 2001. We intend to remain in close consultation with the IMF in accordance with IMF policies on such consultation and will provide the IMF with any information it requests for monitoring economic developments and implementation of policies under the program. The Government stands ready to take any further measures, in consultation with the IMF staff, which might be necessary to ensure that the overall objectives of the program can be attained.

Finally, to enhance transparency, we request that the Supplemental Memorandum of Economic Policies and the staff report for the second review of the third annual arrangement under the PRGF be published on the IMF's web site.

Very truly yours,

//s// Emomali Rakhmonov President of the Republic of Tajikistan

Attachments

Republic of Tajikistan

Supplemental Memorandum of Economic Policies

I.  Introduction

1.  The Government of Tajikistan is implementing a program of economic reform with support from the IMF's Poverty Reduction and Growth Facility (PRGF). The Executive Board of the IMF approved a third annual arrangement under the PRGF on October 25, 2000, covering the period October 1, 2000 through September 30, 2001. The first quarterly review of this program was concluded on April 12, 2001, and the Executive Board approved a disbursement of SDR 6 million.

2.  During the first quarter of this year, the strong growth achieved during 2000 continued as real GDP expanded by over 7 percent. Inflation, which surged in the latter part of 2000, moderated significantly in the first four months of this year, with consumer prices increasing by 7.2 percent. Reflecting our improved inflation performance, the nominal exchange rate has remained broadly stable since late 2000.

3.  Underlying our improved economic performance has been our adherence to the Fund-supported financial and economic program. During the first quarterly review of our program, the IMF's Executive Board expressed support for our efforts, although the need to strengthen structural reforms were also stressed. Progress on structural reform during late 2000 did not proceed as expected and some of the benchmarks were not met. At end-March 2001, however, we observed all of the quantitative performance criteria except for the accumulation of external arrears, and implemented all but one of the four structural benchmarks.

4.  We intend to continue our macroeconomic adjustments efforts and to accelerate the implementation of structural reforms. These reforms are required to accelerate economic growth, which is the best means of reducing poverty. In this memorandum we outline the specific measures we will take to achieve these objectives. We also outline a debt management and reduction strategy that we have developed, in consultation with Fund staff, that should achieve external debt sustainability over the medium term.

II.  Program Measures

A.  Macroeconomic Policy

5.  We believe that the macroeconomic objectives for 2001, as outlined in the Memorandum of Economic Policies (MEP) of October 2000 and the Supplemental Letter of Intent of March 2001 can be achieved. Real GDP growth is expected to be around 5 percent, with inflation falling to about 14 percent by year-end. This relatively favorable outlook reflects our ongoing efforts at macroeconomic stabilization.

6.   Fiscal policy. Our overall fiscal target continues to be guided by the budget for 2001 approved by Parliament last December, that provided for a deficit of Sm12.4 million (0.5 percent of GDP). To achieve this goal, we will maintain tight control over public expenditures, and will continue to make improvements in tax administration to ensure that our tax revenue projection (Sm320 million, excluding grants) is realized. In this regard, by end-June 2001 we plan to: improve operation of the VAT by enforcing the use of tax invoices by taxpayers, for which return forms will be made available by the Tax Committee; ensure that funds are available for producing tax-return forms and pamphlets required by the Large Taxpayer Inspectorate and to retain and attract suitably qualified staff; and give priority to recruiting and retaining the computer programmers necessary to complete the computerization project at the Tax Committee. Our fiscal performance will also be strengthened by enhancing the treasury system, in particular, by implementing the pilot project of commitment control, and by publishing and distributing the second part of the treasury manual by end-June 2001. By end-September, we will, in consultation with Fund staff, finalize a strategy for enhancing the effectiveness and efficiency of the Tax and Customs Committees, including their interactions with the Ministry of Finance.

7.  The 2001 budget includes, a 40 percent increase (beginning April 1) in wages and salaries of public sector employees in the education and health sectors, as well as for social security and pension benefits. This increase is intended to raise the level of income in these areas to address poverty.

8.   The budget for 2001 currently includes Sm 8 million to compensate partially TRR for servicing the government of Tajikistan's debt to the government of the Republic of Uzbekistan. We will allocate a further Sm 4 million in the 2001 budget to compensate fully TRR for these services. TRR will pay its 2001 tax obligations without the use of offsets. In addition, TRR will reduce its stock of tax arrears by 10 percent this year, and we will develop a plan to eliminate the remaining stock in future years. These measures will facilitate the ability of TRR to repay its loans to the National Bank of Tajikistan (NBT) in accordance with a schedule set forth in the agreement between TRR and NBT. The government budget resolution that will be submitted to Parliament by end-June 2001 will reflect this change. In addition, we plan to submit a draft law on public finances to Parliament by end-July 2001.

9.  We will also complete implementation of the agreement between the National Bank of Tajikistan and the MOF concerning the regularization of their financial relations. The last step involves (a) ensuring that the agreement is fully operational, including the issuance of long-term government bonds and treasury bills, and the payment of interest and profit transfers, and (b) resolving, by end-June 2001, the status of the remaining US$32 million of NBT loans to commercial entities by either transferring these loans to the NBT's debt recovery agency, or converting them into long-term bonds, or writing them off. On June 27, 2001 the MOF will refinance the Sm3 million of maturing treasury bills, and settle with the NBT the first quarterly payment and receipt of accrued interest.

10.  We are now in the process of developing tax policy measures for the 2002 budget. We will abolish the sales tax on both cotton and aluminum (which have a 20 percent and 2 percent rate currently applied, respectively) by September 2002. To compensate for the loss of revenues (around 3.3 percent of GDP), we are examining a number of different measures, including: increasing the coverage and collection rate of excise taxes; adopting a presumptive tax system for profits, in order to minimize tax collection leakages; implementing a uniform land tax (to replace all other taxes on agricultural producers); and reducing tax exemptions. We will consult with Fund staff before finalizing these proposals.

11.   Monetary policy. A tight monetary policy will be maintained, in order to further reduce inflation. Reserve money growth, which is projected to be about 8 percent during 2001, will be kept under tight control through the programmed ceilings on net domestic assets and net credit to general government of the NBT. Recent progress in this regard is important both to increase confidence in our national currency, and to help maintain the stability of the exchange rate. We intend to enhance the efficacy of monetary policy by greater reliance on a broader range of instruments to control liquidity, including expanding the sales of certificates of deposit and treasury bills, expanding efforts to collect loans, and to allow interest rates to respond to market forces. Consistent with our obligations under the program, the NBT will not provide any directed credits, which is a continuous performance criterion. With regard to the exchange rate, the NBT will set the official exchange rate as the weighted average of actual daily transactions in the interbank foreign exchange market. We are planning to accept the obligations under Article VIII of the Fund's Articles of Agreement and would like to request assistance from the Fund in ascertaining the additional measures in order to fulfill this obligation.

B.  Structural Policies

12.  We remain fully committed to implementing a thorough structural reform program as the key element in achieving broad based, sustainable growth and poverty reduction. Recognizing the problems with implementation of our structural reform program, we intend to intensify and extend our efforts in this area. To this end, we will take a number of additional measures that should help in this regard.

13.  As regards our efforts to enhance performance of the banking sector, we have prepared several amendments for submission to parliament that would eliminate the obligation of commercial banks to report automatically information on new deposits to the tax committee; eliminate the 30 percent tax on transfers from abroad; and change the present practice that allows the tax committee to assess the property tax on net worth of the commercial banks, instead of on their fixed assets. By end-June 2001, we will take the necessary steps to allow average foreign equity ownership of the banking system as a whole to increase to a maximum of 40 percent in 2001 and 50 percent in 2002. Finally, by end-June 2001 we will amend Article 104 of the tax code to prevent the tax authorities from reviewing customer accounts when conducting corporate reviews of the commercial banks. By end-September 2001, we will complete a strategy for rationalizing the banking sector in light of our experience with the restructuring of the four largest banks.

14.  We have begun to address the delays in our efforts at farm restructuring by upgrading the committee responsible for implementing this program, to create the State Land Reform Committee (SLRC). A statute defining the responsibilities of the SLRC and our farm restructuring methodology will be in effect by end-June this year. Thus far, less than 30 percent of restructured farms have been issued land share and use certificates. In order to expedite the issuance of these certificates, we will phase out all fees and charges for certificates to be issued to restructured farms by end-September 2001. In order to cover the cost of issuing these certificates and other expenses associated with the new responsibilities of the SLRC, we will increase the budget allocation to the SLRC by 7 percent in real terms for the second half of the year.

15.   As regards governance, we are working closely with Fund staff to prepare and submit to parliament a draft law defining the responsibilities of the auditing agency that was created in January 2001. This law will include provisions requiring submission of audit reports to parliament on the execution of the budget, and of a summary report on the other audits performed by the agency. This agency has already become operational under its provisional charter. In order to enhance the transparency of the budget, we plan to begin quarterly publication of data on the public sector's external debt including total debt, terms and amount of new debt, and the nature of project for which foreign financing was obtained. Additionally, we plan to continue to publish the quarterly budgetary planned and execution data.

III.  External Debt Strategy

16.  We recognize the severity of our external debt situation and the risks it poses for macroeconomic stability. At end-2000, the total stock of public sector external debt (including state-owned enterprises) was estimated at 129 percent of GDP (US$1,231 million), as compared with 77 percent of GDP in 1993. Debt service as a share of tax revenues is projected to be 44 percent in 2001, leaving little room for pursuing measures to alleviate poverty. Thus, we a have developed a comprehensive medium- term debt reduction strategy. The strategy incorporates, at least, the following seven elements.

• Effective debt monitoring: We will strengthen the debt-monitoring department within the MOF, and transfer all external debt management responsibilities to this department. This department will maintain a comprehensive computerized loan-by-loan database of all external debt of the government, government-guaranteed debt, and state-owned enterprises. This computerized database will be operational by end-September 2001. The department will monitor operations relating to loan commitments, disbursements and debt servicing on all borrowings on a loan-by-loan basis. It will also provide analytical support, in the form of preparing projections of debt and debt service levels to facilitate domestic cost budgeting and foreign exchange management.

• Effective debt management: We will establish clear policy guidelines (supported by the debt department in the Ministry of Finance) to determine the appropriate level, terms and purpose of foreign borrowing. In this context, we will develop economic criteria for project selection for the foreign-financed public investment program, and undertake on a regular basis a portfolio review of projects. In such reviews, it will be possible to make decisions on canceling those which are not performing, and to stop new loan disbursements (if legally permissible), thus containing future debt servicing costs. In order to effectively manage our debt, the authority to contract new debt or to provide a sovereign guarantee will be vested in a single inter-agency Debt Management Committee, chaired by the Minister of Finance. With the exception of the Ministry of Finance, all line ministries, departments, or government agencies will be prohibited from contracting or providing government guarantees.

• Improving our credit worthiness: We will work to enhance our credibility with our creditors, both to increase the probability of success in future debt rescheduling negotiations and to heighten our ability to borrow on favorable terms. We will continue to work with our creditors, including Turkmenistan,on the reconciliation of our liabilities. We will refrain from accumulating new debt service arrears. To increase transparency of debt management, we will include the entire amount of debt service due in the budget, and we will issue a resolution prohibiting any new public or publicly guaranteed non-concessional debt (with the exception of the US$9.2 million envisioned for the EBRD under the current program). This leaves no room for future drawings under the US$25 million credit line opened with Iran. In addition, Agroinvestbank plans to repay the government-guaranteed debt to Credit Swiss First Boston in the amount of US$18.4 million by end-June 2001.

• Fiscal adjustment: We will pursue a medium-term fiscal strategy, that will be based on increasing the ratio of tax revenue-to-GDP. We will also seek grants, instead of foreign borrowing to finance poverty alleviation initiatives as part of the interim Poverty Reduction Strategy Paper (PRSP). Proposals for further rationalizing expenditures will also be evaluated, although room for expenditure reduction is limited. Consistent with the medium-term fiscal framework in the interim-PRSP and the PRSP that is under preparation, social spending will be increased in real terms. In addition, loans on highly concessional terms only will be considered for financing the public investment. With a view to facilitating assessment of the proper fiscal policy stance for achieving a sustainable balance of payment and debt position, all foreign-financed expenditures for the public investment program (including debt which is to be on-lent to commercial entities) will be included in the budget for 2002.

• Earmarking privatization proceeds for debt reduction: We will continue to pursue privatization of state-owned enterprises, including through the planned case-by-case privatization program that is being prepared with the support of the World Bank, and we will earmark all privatization receipts for debt reduction. These privatization receipts will be deposited into a special privatization account at the NBT to monitor their use. In addition, we will review the current list of state-owned enterprises that are not subject to privatization, with a view to reducing the number of such entities by half.

• Bilateral debt restructuring and new concessional financing: We intend to intensify our debt-restructuring negotiations with Russia and Kazakhstan by end-June 2001 with a view to reaching an early agreement, and will continue our negotiations with India with the hope of concluding a rescheduling by end-September 2001. We have paid our arrears to Pakistan and will service this debt in a timely manner.

• Debt-for-equity swaps: We will actively seek debt-for-equity swaps to alleviate the debt burden. By end-September 2001, we will compile a list of assets which we could offer for such transactions.

IV.  Program Monitoring

17.  To help monitor the implementation of our stabilization and structural reform program, we will rely on quarterly performance criteria, quarterly reviews and quarterly disbursements. The quantitative performance criteria and structural benchmarks for both end-June and end-September 2001 are specified in Annexes I and II, and are further specified in the Technical Memorandum of Understanding, Annex III.

18.  In aid of transparency, we hereby request that the letter of transmittal, Supplemental Memorandum of Economic Policies, and the staff report for the second review of the third annual arrangement under the PRGF be published on the IMF web site.

19.  The Government believes that the policies described herein will strengthen our macroeconomic stabilization and structural reform efforts, and that they are adequate to achieve the objectives of our economic program for 2001. We intend to remain in close consultation with the IMF in accordance with IMF policies on such consultation and will provide the IMF with any information it requests for monitoring economic developments and implementation of policies under the program. The Government stands ready to take any further measures, in consultation with the IMF staff, which might be necessary to ensure that the overall objectives of the program can be achieved.

Annex I

Annex II

Tajikistan: Structural Performance Criteria and Benchmarks for End-June and End-September 2001

Continuous Performance Criteria

The National Bank of Tajikistan will issue no directed credits.

Performance Criteria for end-June 2001

Ensure that the agreement between the NBT and the MOF, including the issuance of long-term bonds and treasury bills and the payment of interest, is fully operational.

Submit to Parliament amendments to the existing law that will (1) eliminate the obligation of commercial banks to report automatically information on new deposits to the Tax Committee; (2) eliminate the 30 percent tax (specified in Government Resolution 583 dated November 29, 1993) on transfers from abroad; and (3) change the present practice such that the Tax Committee assesses the property tax on the fixed assets of the commercial banks instead of on the net worth of banks.

Performance Criteria for end-September 2001

Conduct at least 40 general meetings cumulative since April 1, 2001.

Convert at least 20 state owned farms into private farms by issuing marketable land use certificates and land share certificates cumulative since April 1, 2001.

Structural Benchmarks

By end-June 2001

Convert at least 60 state-owned farms cumulative since October 2000 into private farms by issuing marketable land use certificates and land share certificates.

Amend Article 104 of the Tax Code to prevent the tax authorities from conducting reviews of customer accounts while conducting corporate tax examinations of commercial banks.

Complete implementation of the pilot project to enhance expenditure commitment control.

Prepare, in consultation with the staff of the IMF and in line with Annex IV of the MEP of October 2000, a draft law on the Independent Audit Agency and submit it to Parliament.

Amend legislation to allow average foreign equity ownership of the banking system as a whole to increase to a maximum of 40 percent in 2001 and 50 percent in 2002.

Prepare, in consultation with the staff of the IMF, and approve a statute defining the responsibilities of the upgraded Land Reform Committee.

By End-September 2001

Complete an assessment of the bank restructuring agreements with the four banks and develop a strategy for either privatizing, merging or closing those banks that fail to make satisfactory progress toward achieving the minimum capital requirement or fail to meet the loan recovery targets specified in their respective restructuring agreements.

Phase out all charges and fees for land use and share certificates.

Establish and make operational a computerized database on external debt data.

Implement expenditure commitment control measures in all ministries based on the findings of the pilot project.

Annex III

Tajikistan: Technical Memorandum of Understanding¹

I.  Quarterly Performance Criteria

1.  Fiscal deficit

Adjustors

Should the actual financing component of the Public Investment Program (PIP) exceed the programmed levels, these limits will be adjusted upwards by the corresponding amount up to a limit of Sm10 million. Thus far such financing is programmed at zero.

Definitions

The general government budget is defined to include the republican budget, local (including municipal) budgets, and all extra budgetary funds at all levels of general government, including the social protection fund (SPF). The overall cash deficit of the general government is defined from the financing side as the sum of the following: (i) the increase in net claims on the general government from the NBT; (ii) the increase in net claims on the general government of the rest of the domestic banking system; (iii) the increase in net claims on the general government of domestic non-bank institutions and households, including payments to the Tajik Rail for its servicing the government's external debt; (iv) the use of proceeds from the privatization of state property; and (v) net foreign financing of the general government.

(i) Net claims of the NBT on the general government are defined as all claims of the NBT on the general government (including holdings of government securities), less claims on the government as regard bank restructuring, and all deposits of the general government with the NBT, excluding counterpart deposits of loans received from the World Bank and from other official creditors, and privatization account where proceeds from the privatization state property is held.

(ii) Net claims on the general government of the rest of the domestic banking system are defined to comprise (i) the net asset position arising from operating balances and current accounts of the general government with domestic commercial banks; and (ii) the net position of the general government in regard with other domestic commercial bank assets (loans, overdrafts, cash advances, holdings of treasury bills or other securities) and liabilities (deposits, etc.).

(iii) The change in net claims on the general government of domestic nonbank institutions and households is defined to include net sales of treasury bills, bonds or other government securities to nonbank institutions and households (including nonresidents and nonresident financial institutions), plus any other increase in liabilities of the general government to domestic nonbank institutions or households. Included in this item are also compensation payments (-) to Tajik Rail for its servicing external debt to Uzbekistan.

(iv) Proceeds from the privatization of state property, which are kept in a separate account with the NBT, are defined as all net receipts originating from the sale of state property.

(v) Net foreign financing of the general government is defined as the difference between gross disbursements of foreign financing and amortization of government debt to foreign financial and nonfinancial institutions, plus the change in the stock of government counterpart deposits with the NBT during the period. Foreign financing of the general government is defined as the increase in claims on the general government of foreign financial and nonfinancial institutions, excluding the IMF, and including but not limited to loans received for balance of payments support from the World Bank's Structural Adjustment Credit and the Asian Development Bank's Post-Conflict Infrastructure Program Loan.

The augmented deficit of the general government is defined from the financing side as the sum of the same items as in the definition of the overall cash deficit of the general government plus the counterparts (-) to increases in net credits or net claims on the general government from the NBT or commercial banks as a result of the resolution of the bad loans problem under the bank restructuring program. These counterparts consist of the full value of the loans taken over by the government.

Monthly data on net claims of the domestic banking system on the general government are taken from the balance sheets of the NBT and commercial banks. The Ministry of Finance shall provide information on, and confirm the amounts of general government deposits held abroad, disbursements of foreign loans to the general government, net sales of treasury bills and other securities, borrowing from the nonbank sector, as well as gross receipts and expenditures of the central government privatization account. It shall furthermore provide detailed monthly data on (i) revenues, expenditures and lending operations of the state and local budgets, as well as all budgetary and extra budgetary funds; (ii) quasi-fiscal operations; (iii) estimates of the outstanding stock of wage and pension and all other domestic expenditure arrears; and (iv) estimates of the outstanding stock of tax and other revenue arrears to the general government.

The cumulative net foreign financing projected for the program period is as follows:

2. Minimum Levels of Tax Collection of the State Tax and State Customs Committees¹

Definitions

Tax collection of the State Tax Committee (STC) and State Customs Committee (SCC) include all taxes collected by the STC and SCC. Excluded from the definition of tax collection of STC and SCC are the following: any tax offsets, in-kind payments, sales taxes on cotton and aluminum exports, taxes, charges, and fees collected by the Social Protection Fund, any proceeds from loans, or other banking system credits, the issuance of securities, or from the sale of state assets. Custom revenues are defined to include import duties, export duties and taxes, customs duties, exchange taxes, and other taxes (including VAT) on international trade and transactions.

II.  Targets for Monetary Aggregates

1. Limits on the Stock of Net Domestic Assets of the NBT

Adjustors

The limits will be adjusted downward by 100 percent of the amount by which actual net foreign financing of the budget exceeds the amount programmed for (i) debt repayments and (ii) disbursement of external loans for balance of payments support, including but not limited to the World Bank's Structural Adjustment Credit and the Asian Development Bank's Post-Conflict Infrastructure Program Loan. In the event of a shortfall of net foreign financing, the limits will be adjusted upward, but by no more than the Somoni equivalent value of US$10 million.

Definitions

Net domestic assets of the NBT are defined as: reserve money minus net foreign assets of the NBT. Reserve money is composed of currency in circulation, required reserves, other bank reserves, and deposits of non-government non-banks with the NBT. Net foreign assets of the NBT comprise net international reserves in convertible currencies. The NBT's net domestic assets comprises the following assets and liabilities: net credit to the general government (excluding counterpart funds), counterpart deposits of the World Bank, AsDB, EU and other official creditors (-), privatization account (-), claims on the government with regard to bank restructuring, claims on banks, credit to the economy, and other items net (OIN). OIN includes, inter alia, the foreign exchange re-valuation and capital accounts of the NBT.

The NDA ceiling should be also adjusted for changes in reserve requirements, in accordance with the following formula:

NDA = ∆rB_ο + r_ο∆B + ∆r ∆B

where r_ο denotes the reserve requirement ratio prior to any change; B_ο denotes the programmed level of the reservable base money in the period prior to any change; r is the change in the reserve requirement ratio; and ∆B denotes the immediate change in the reservable base with respect to the programmed base money level as a result of changes in the definition.

2. Limits on the NBT's Net Credit to General Government²

Adjustors

The limits will be adjusted upward by 100 percent of the amount by which actual net foreign financing of the budget falls short of the amount programmed for (i) debt repayments and (ii) disbursements of external loans for balance of payments support, including but not limited to the World Bank's Structural Adjustment credit and the Asian Development Bank's Post-Conflict Infrastructure Program Loan, up to an amount the lower of (i) the programmed use of net external financing for the budget as listed in section I.1, or (ii) the equivalent value of US$10 million. The limits will be adjusted downward for any write-off of government debt to the NBT.

Definitions

Net credit from the NBT to the general government is defined in section I.1 above.

3. Net international reserves

Adjustors

The limits will be adjusted upward by 100 percent of the amount by which actual net foreign financing of the budget exceeds the amount programmed for (i) debt repayments and (ii) disbursements of external loans for balance of payments support, including but not limited to the World Bank's Structural Adjustment Credit and the Asian Development Bank's Post-Conflict Infrastructure Program Loan. In the event of a shortfall of net foreign financing, the limits will be adjusted downward, but by no more than US$10 million.

Definitions

Total net international reserves of the NBT are defined as the difference between total gross international reserves of the NBT and total reserve liabilities of the NBT. Total gross international reserves of the NBT are defined as the NBT's holdings of monetary gold, holdings of SDRs, any reserve position in the IMF, holdings of convertible currencies in cash or in nonresident banks that are readily available. Also included are holdings of foreign currency-denominated securities issued by governments or central banks of OECD member states. Excluded are capital subscriptions in foreign financial institutions, non-liquid assets of the NBT (with maturity beyond one year), convertible currency denominated claims on domestic banks and other residents (if the NBT does not have control over use of these resources), assets in non-convertible currencies, foreign assets pledged as collateral or otherwise encumbered and the net forward position, if any (defined as the difference between the face value of foreign currency denominated NBT off balance sheet claims on nonresidents and foreign currency obligations to both residents and non-residents). Reserve liabilities of the NBT are defined as outstanding IMF credit, and liabilities of the NBT to nonresidents with an original maturity of up to and including one year, that are public or publicly guaranteed.

For the purpose of program monitoring, U.S. dollar denominated components of the balance sheet will be valued at the program exchange rate, and other foreign currency denominated items will be valued at cross rates between the program exchange rate of the U.S dollar and current official exchange rates of the U.S. dollar against those currencies. Official gold holdings shall be valued at US$265 per troy ounce.

Fund staff will be informed of details of any gold sales, purchases, or swap operations during the program period, and any resulting changes in the level of gross foreign reserves that arise from revaluation of gold will be excluded from gross reserves (as measured herein).

III.  Limits on External Debt and Arrears

1.  Limits on Short-, Medium-, and Long-Term External Debt

Definitions

The ceilings specified in Table 7 shall apply exclusively to external debt to the EBRD in the amount of US$9.2 million and to other creditors in the amount of US$0.8 million. No other non-concessional external debt is permitted. The contracting or guaranteeing of external debt by the government of Tajikistan, the NBT, or any other agency acting on behalf of the government, is understood to mean a current, i.e., not contingent, liability, created under a contractual arrangement which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future points in time; these payments will discharge the principal and/or interest liabilities under the contract. Included are also commitments contracted or guaranteed for which value has not been received. Debts can take a number of forms, the primary ones being as follows: (i) loans, i.e., advances of money to obligor by the lender made on the basis of undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans, and buyers' credits) and temporary exchanges of assets that are equivalent to fully collaterilized loans under which the obligor is required to repay the funds and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements); (ii) suppliers' credits, i.e., contracts where the supplier permits the obligor to defer payments until some time after the date on which the goods are delivered or services are provided; and (iii) leases, i.e., under which property is provided the lessee has the right to use one or more specified periods of time that are usually shorter than the total expected service life of the property, while the lessor retains the title to the property. For the purpose of the program, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement excluding those payments that cover the operation, repair or maintenance of the property.

Under the definition of debt above, arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation that is not considered debt under this definition will not give rise to debt. Excluded from this performance criterion are two government guarantees extended to the cotton sector totaling US$83 million which remained effective until end-1999, when the guarantees were called but not enforced as agreed between the government and CSFB. As of end-2000, the total outstanding government guaranteed debt amounted to US$18.5 million. The room remaining under extended guarantee will not be used for any additional external borrowing.

External debt limits³ apply to the net disbursement of short term external debt (with an original maturity of up to and including one year); and contracting or guaranteeing of nonconsessional medium- and long-term external debt (with original maturities of more than one year) with sublimits on the contracting and/or guaranteeing of such debt with maturities of up to and including five years.

Short-term debt includes all short-term obligations excluding the reserve liabilities of the NBT, as defined in section II.3 above and import credits. Debt denominated in currencies other than the U.S. dollar shall be valued in U.S. dollars at the exchange rate prevailing at the time of disbursement. Net disbursements of short-term external debt are defined as net changes in the stock of such debt, i.e., disbursements of new short-term obligations minus any amortization of existing obligations.

The medium- and long-term debt includes all loans with maturities more than one year. Debt falling within these limits that are denominated in currencies other than the U.S. dollar shall be valued in U.S. dollars at the exchange rate prevailing at the time of contracting or guaranteeing takes place or at the exchange rate stipulated in the contract.

For the purposes of the program, the guarantee of a debt arises from any explicit legal obligation of the government or the NBT or any other agency acting on behalf of the government to service such a loan in the event of nonpayment by the recipient (involving payments in cash or in kind), or indirectly through any other obligation of the government or the NBT or any other agency acting on behalf of the government to finance a shortfall incurred by the loan recipient.

Concessionality will be based on currency-specific discount rates based on the OECD commercial interest reference rates (CIRRs). For loans of a maturity of an original maturity of at least 15 years, the average of CIRRs over the last 10 years will be used as the discount rate for assessing the concessionality of these loans, while the average of CIRRs of the preceding six-month period will be used to assess the concessionality of loans with original maturities of less than 15 years. To the ten-year and six month averages of CIRRs, the following margins will be added: 0.75 percent for repayment periods of less than 15 years; 1 percent for 15–19 years; 1.15 percent for 20–30 years; and 1.25 percent for over 30 years. Under this definition of concessionality, only loans with grant element equivalent to 35 percent or more will be excluded from the borrowing limits. The debt limits will not apply to loans classified as international reserve liabilities of the NBT, or to loans contracted for debt rescheduling or refinancing.

IV.  Continuous Performance Criteria

1. Continuous performance criterion on new directed credits by the NBT

The NBT will not issue any directed credits. This performance criterion will be monitored on the basis of changes in the NBT's balance sheets supported by the NBT's regular reporting on the results of its credit auctions, including interest rates, and amounts bid and received.

2. Continuous performance criterion relating to external arrears

No new external arrears shall be accumulated at any time under the arrangement. External arrears are defined as overdue debt service arising in respect of obligations incurred directly, guaranteed, or converted into interstate debt by the government of Tajikistan or the NBT, including penalties or interest charges.

3. Continuous performance criterion relating to exchange and payments arrangements

For the duration of the arrangement, the Republic of Tajikistan will not: (i) impose or intensify restrictions on the making of payments and transfers for current international transactions; (ii) introduce or modify multiple currency practices; (iii) conclude bilateral payments agreements which are inconsistent with Article VIII of the IMF's Articles of Agreement; or (iv) impose or intensify import restrictions for balance of payments reasons.

4. Continuous performance criterion relating to expenditure arrears of the republican (central) budget and of the Social Protection Fund

No new arrears of the republican budget on wages and of the Social Protection Fund on transfer payments to its regional offices shall be accumulated at any time under the arrangement.

For purposes of the performance criterion, expenditure arrears shall be defined as any shortfall in monthly disbursements on wages and in transfers from the Social Protection Fund to its regional offices related to the planned payments. A monthly disbursement plan will be presented to the Fund staff by the 15^th day of the month preceding the month of actual wage and pension payments.

To permit monitoring as defined above, the government will provide data on actual wage payments and on transfers from the Social Protection Fund to its regional offices to the IMF staff in the form of treasury reports and statements from the Social Protection Fund on a monthly basis no later than 14 days after the end of each month.

V.  Quarterly Indicative Targets

1. Reserve money

Definition

Somoni reserve money of the NBT is defined as the sum of (i) domestic currency issued by the NBT, (ii) deposits of commercial banks and other financial institutions held with the NBT, and (iii) deposit liabilities of the NBT with respect to the public. Deposits of the general government are excluded from reserve money, but are included under NDA. NBT reserve money liabilities with respect to commercial banks and other financial institutions comprise all deposits held by these institutions at the NBT, including required reserves and excess reserves held in the correspondent accounts, but excluding NBT liabilities held by commercial banks and other financial institutions in the form of short term NBT notes. Deposit liabilities of the NBT to the public include all deposits placed at the NBT, in domestic or foreign currency, by the nonbank public.