Tajikistan—Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding

Dushanbe, July 7, 2004

Mr. Rodrigo de Rato
Managing Director
International Monetary Fund

Dear Mr. de Rato:

Mr. Managing Director, permit me to take this opportunity to express my gratitude to the International Monetary Fund for its valued support for our economic reforms and development.

Based on the recent discussions between the Government of Tajikistan and Fund staff we have prepared a supplement to the Memorandum of Economic and Financial Policies of December 19, 2003. This supplement reflects the impact of recent economic developments on the macroeconomic framework, and proposes additional measures for the period April 1-December 31, 2004.

All of the quantitative performance criteria for end-March 2004 were observed. Additionally, the program's structural benchmarks for end-March 2004 were observed except for an external audit of the State Financial Control Committee (SFCC). Reflecting difficulties in identifying appropriate audit company, this action will be replaced by a World Bank-financed twinning arrangement to strengthen the SFCC. Also, the continuous performance criterion prohibiting issuance of directed credits by the NBT was not observed in late April and in May because of operational errors. We have, however, taken remedial actions that have reversed the transaction and strengthened central bank operational monitoring. On the basis of these actions we request a waiver for the non-observance of this structural performance criterion. To strengthen our reform process further, and consolidate our macroeconomic stability, we agreed with Fund staff on a revised financial program and two additional structural benchmarks for completion by end-September 2004. These benchmarks include completion of external debt inventory of state enterprises and strict enforcement of prudential regulations.

On the basis of performance during the period up to end-March 2004 and the policies set out in the attached supplemental Memorandum we request the completion of the third review under the PRGF arrangement, disbursement of the fourth loan, and scheduling of the fourth review on or after December 15, 2004.

The Government of Tajikistan believes that the policies described in the supplemental Memorandum achieve the objectives of our economic program for 2004. We intend to remain in close consultation with Fund staff on the adoption of any measures that may be appropriate, in accordance with IMF policies on such consultations, and will provide the staff with information it requests for monitoring economic developments and progress in the implementation of polices and in reaching the objectives of the program supported by the PRGF arrangement. In addition, we stand ready to take any further measures, in consultation with Fund staff, on economic and financial policies that might be necessary to ensure that the overall objectives of the program can be attained.

In order to enhance transparency of our economic policies, we request that this letter, the supplemental Memorandum of Economic and Financial Policies, the Technical Memorandum of Understanding, and the Staff Report be published on the Fund's website.

Please accept, sir, the assurance of my highest consideration for you.

Supplemental Memorandum of Economic and Financial Policies
for the Period April 1, 2004 to December 31, 2004
Supported Under the Poverty Reduction and Growth Facility

I. Introduction

1. Since December 2002, the International Monetary Fund has supported Tajikistan's economic reform program under the Poverty Reduction and Growth Facility (PRGF). The second review under this arrangement was completed in January 2004 and we have continued to make progress with implementing our reform program. All quantitative and two structural performance criteria for end-March 2004 were met. The continuous performance criterion prohibiting issuance of directed credits by the NBT was not observed in late April-May because of operational errors, but we have since taken corrective actions. Further, we have implemented two of the three structural benchmarks but the third, the audit of the State Financial Control Committee (SFCC), could not be implemented because of difficulties in finding a reputable audit company in the region that could carry out the operational audit. This audit will now be replaced by a World Bank-financed twinning arrangement, starting in fall 2004.

2. This supplemental Memorandum of Economic and Financial Policies (SMEFP) describes our economic strategy for the remainder of 2004. Revised targets for end-September and end-December 2004 and the quantitative performance criteria and structural conditionality for end-September 2004 are detailed in Annexes I and II.

II. Recent Developments and Performance Under the Program

3. We have continued to solidify macroeconomic stability. Real GDP increased by 10.2 percent in 2003 and we project real GDP growth to be at least 8½ percent in 2004. Rapid growth of migrants' remittances and small-scale agricultural exports are continuing to support the expansion of domestic demand. In response to the disappointing inflation performance in 2003 (14 percent, year-on-year), we have tightened monetary policy and improved its operation by focusing on reserve money as the primary operational target. Twelve-month inflation fell to 5 ½ percent in May 2004 and we expect it to remain under 7 percent through end-2004. Exports remain buoyant and we project the current account deficit (including transfers) in 2004 to be 2 percent of GDP, and the gross international reserve coverage to reach 2.3 months of imports by year-end.

4. In the fiscal area, first quarter 2004 tax revenues were significantly above the target in nominal terms. While this result was boosted by revenues from last year's cotton harvest and some other taxes, difficulties continued in taxing the new faster growing sectors, in particular services. The higher nominal revenues, together with the restrained disbursement of expenditures, resulted in a significant surplus in the quarter that facilitated the implementation of monetary policy.

5. We have made progress in structural reform. In the banking sector we have withdrawn banking licenses from the three weakest banks and strengthened both on-site and off-site banking supervision. Also, three specialists were proposed to the National Bank of Tajikistan (NBT) Executive Board in May 2004 and are awaiting Presidential nomination, as recommended by the Fund's safeguards assessment. In the energy sector, we have installed 16,200 gas meters in individual households during October 2003-March 2004. To promote land reform, we issued 5,665 land use certificates in October 2003-March 2004 and we are preparing a strategy for addressing the external debt of the cotton sector, although this has been delayed by the complexity of the issue and data weaknesses.

III. Economic Policies for the Remainder of 2004

A. Fiscal Policy

6. Our fiscal performance in 2004 remains on track to meet the program targets. In view of the strong revenue performance in the first quarter of 2004, and given the stronger underlying growth, we projected 2004 revenue to be SM 55 million above the budget target. We will submit a supplementary budget in July and will devote these additional resources to support health and education and other poverty related expenditure. However, if these resources cannot be efficiently spent, we would use them for deficit reduction. In view of the continued heavy debt burden we will continue to limit debt-financed disbursements under the PIP to 3 percent of GDP. We will, in consultation with IMF staff, reassess this ceiling later in 2004. At the same time, we have strengthened our project implementation capacity by strengthening the Aid Coordination Unit and will continue to improve the alignment of the PIP with the PRSP.

7. We will submit to parliament by end-September, 2004, a revised tax code that will become effective January 1, 2005. The new tax code will improve the legal basis for taxation, simplify tax administration, and contribute to a favorable environment for private sector activity and economic growth. Simplification includes eliminating nuisance taxes, increasing the VAT registration threshold, and providing simplified tax regimes for small business and agriculture. The tax code will reduce the list of tax concessions and exemptions and eliminate tax holidays, although taxpayers currently enjoying tax holidays will be grandfathered. The enforcement powers of the Ministry of State Revenues and Duties (MSRD) will be enhanced while protecting taxpayer rights by requiring the MSRD to obtain a court order under an expedited procedure before accessing bank accounts. Tax rates will be set so that projected revenues (as agreed with Fund staff) are consistent with program projections.

8. We will implement the reorganization of the MSRD along functional lines by end-2004, supported by forthcoming FAD technical assistance. By the start of 2005 we will adopt a standardized taxpayer registration document that will allow the introduction of a single taxpayer identification number for all tax, customs, and the social protection fund purposes.

9. We will continue with civil service reform both to improve civil service performance and release resources that can be used to increase real wages. We are starting with the education sector and are currently finalizing a reform strategy for this sector. Although this has been delayed by the complexity of the problem and consultations with many stakeholders, we will complete a fully-costed strategy by end-June 2004. The reform will include a 5 percent reduction in the number of employees in the education sector by September 2004 (structural benchmark for end-July 2004). We will also analyze two regional pilot reforms in the health sector to develop a national reform plan for this sector. In addition, we will start to rationalize key parts of the government administration. We will delay the announcement of a wage policy for 2005 until it can be set within a framework of the 2005 budget that has been agreed with Fund staff. In addition, specific actions will be identified to improve the efficiency and effectiveness of key ministries.

B. Monetary and Exchange Rate Policies

10. Better implementation of monetary policy should enable us to achieve the target of limiting inflation to under 7 percent in 2004. Our monetary program will continue to use reserve money as the operational target. However, we recognize that increasing confidence in the banking system and in the value of the somoni could increase the demand for money and we will monitor these developments closely. We will not intervene in the interbank foreign exchange market except to smooth excessive volatility. With a view to developing a transparent and efficient interbank market the NBT will not make direct or indirect foreign exchange purchases from large exporters. The NBT will more closely monitor its credit to banks and the private sector which should only increase in exceptional cases when the NBT has to act as the lender of last resort to address systemic risk in the financial sector. To improve the market sensitivity of the official exchange rate we will examine the feasibility of setting this on a daily rather than the current weekly basis. We will ensure that the quarterly settlement of interest due between the NBT and MOF is completed within six weeks of the end of the relevant quarter.

11. We expect the recent reduction in the liquidity requirement for banks and the projected increase in demand for bank deposits will facilitate further expansion of bank credit to the private sector in 2004. We will monitor the impact of these changes on lending and delay further reductions in the liquidity requirement until we can assess the impact of the reductions to date on the growth and quality of the banks' portfolios.

C. External Policies and Debt Management

12. We will accept the obligations of Article VIII, Sections 2(a), 3, and 4. In consultation with Fund staff, we have prepared revisions to the regulatory framework governing exchange rates, payments and convertibility, including amendments to the Law on Foreign Exchange Control and Regulation, to ensure full compliance with the requirements under Article VIII, Sections 2(a), 3, and 4. These amendments are expected to enter into effect in late 2004, after which we will advise the Fund of our acceptance of the obligations under this Article by end-2004.

13. We will continue to prohibit all non-concessional external borrowing, and we will not draw on any outstanding non-concessional credit facility. To ensure external debt sustainability, we will finalize the debt restructuring negotiations with Russia and accelerate negotiations with Uzbekistan. With technical assistance from the Fund, we will introduce the new debt management system and will make it fully operational by September 2004.

14. Over the past year we have been undertaking an inventory of public and government and NBT guaranteed external debt. Recent work has identified some unpaid obligations of state enterprises and their government successors. By September 2004, we will complete the inventory of the external debt of state enterprises, and for each debt we will identify the current status and develop proposals for settling each one, and report to the Fund on the steps taken to initiate good faith negotiations to this end (a structural benchmark, end-September 2004).

D. Structural Policies

15. Our structural reform program will continue to focus on the energy, banking, and agricultural sectors, and on improving governance, especially as regards the private sector business environment.

16. Structural reform in the banking sector will focus on strengthening the enforcement of prudential regulations. The Bank Supervision Department of the NBT will closely examine the compliance with the prudential regulations, especially for loan classification and provisioning. By end-September 2004, we will reach agreement with banks that do not comply with the prudential regulations on a time bound action plan to correct identified deficiencies (a structural benchmark for end-September 2004). We will revise the methodology for the calculation of capital adequacy indicators to meet the Basel standards. Specifically, starting January 1, 2005, we will implement a new reporting system to meet full compliance with the Basel I agreement. This will allow the commercial banks to improve their internal accounting system and strengthen the NBT's ability to monitor the soundness of the banking system. In line with the objective of developing the banking system, we will utilize the forthcoming technical assistance from the Fund to address the legal impediments to the entry of new banks and any other legal deficiencies that limit lending opportunities, for example in the Law on Collateral. We will also expeditiously implement the recently passed Law on Micro-finance Organizations.

17. In the energy sector, we will continue strengthening the financial position of Tajikgas. We will build on recent efforts and install 60,000 gas meters in households between October 1, 2003 and end-2004 and make quarterly adjustments of all utility tariffs to account for depreciation of the nominal exchange rate, but will not lower nominal gas tariffs. Although we hoped to complete an external audit of Tajikgas by end-June 2004 (structural benchmark), progress was delayed because of problems in arranging financing. We will, however, ensure that the field work for the audit is completed by end-June and the report is finalized by end-September. To improve the targeting of financial support for low-income households in the energy compensation mechanism (ECM), the SFCC will review the ECM's operations. Based on the findings of this review and other information, the Ministry of Finance and other concerned ministries will make recommendations by end-December 2004 for improving the ECM.

18. Notwithstanding recent progress, we will continue our efforts to settle the external debt of the farm sector related to cotton production. The government and the NBT will discuss with the foreign financiers, cotton exporters, and farm managers to evaluate other options for restructuring this debt. We will finalize the strategy to reduce cotton sector external debt by end-July 2004 and plan to initiate discussions with creditors and debtors immediately thereafter. Under this framework, the government will not issue guarantees for this debt.

19. We will continue to enhance the transparency of the process of privatizing state farms. We will strengthen the NGOs' monitoring of the farm privatization process and invite them to monitor any stage of this process. By the end of the year we will invite the NGOs to monitor and assess the privatization of an additional 20 state farms. The invitations for monitoring these will be sent to the NGOs at least two months before the start of each privatization. Starting in July 2004 we will begin to progressively publish in national newspapers the lists of land-share and land-use certificates of reorganized farms. Further, we will also publish a bulletin that details the results of the stocktaking of land reorganization by end-July 2004.

20. Recognizing the importance of improving governance and transparency, by October 2004 we will consolidate the work being undertaken in several areas to develop a strategy for addressing key governance problems. This strategy would have three main components: (i) Strengthen the SFCC with a twinning arrangement supported by the World Bank and using a reputable international audit agency starting in fall 2004 to provide us a hands-on diagnostic and implementation support for reforming the SFCC. (ii) Enhance the management and financial accountability in the budget sector, including by upgrading the budget reporting to parliament and the public to improve expenditure tracking. For the 2005 budget preparations we will set up a Permanent Budget Committee to strengthen the link between government policy and budget expenditure. In addition, we will enhance the presentation of the national budget to the parliament and the public by including allocations and outcomes of the expenditure by key budget organizations. (iii) Reduce regulations and bureaucratic obstacles for the establishment and operation of business, and develop fora and avenues to address specific concerns.

21. Other measures to promote transparency and governance are to complete a draft anti-money laundering legislation. Additionally, we plan to implement the recommendations of the IMF's Report on Observance of Standards and Codes (ROSC) data module. With Fund assistance we will complete the requirements for participation in the IMF's GDDS and submit the necessary documentation to the Fund by December 2004.

Table 1: Tajikistan: Quantitative Performance Criteria for the Second Annual Program Under the PRGF Arrangement, October 2003 - March 2004
	2003			2004
	End-Dec.			End-Mar.
	Indicative Target (EBS/03/96)	Adjusted Target1	Actual	Performance Criteria (EBS/03/171)	Adjusted Target1	Prel.
Performance Criteria:	(In millions of somoni)
1. Ceiling on net domestic assets of the NBT	117	196	132	41	120	73
2. Ceiling on net credit of the banking system to general government2	-72	10	-87	-162	-83	-165
3. Ceiling on the cumulative overall fiscal balance of the general government3,4 (excluding foreign-financed public investment program)	-74	...	3	9	...	63
4. Ceiling on general government wage, and nonworking pensioners' pension arrears5	0	...	0	0	...	0
5. Floor on tax collection in the general government budget3	350	...	372	339	...	432
	(In millions of U.S. dollars)
6. Floor on total net international reserves	22	0	39	54	30	49
7a. Ceiling on the contracting or guaranteeing of short-term non-concessional external debt with original maturity of up to and including one year5,6	0	...	0	0	...	0
7b. Ceiling on the contracting or guaranteeing of medium and long-term nonconcessional external debt with original maturity of more than one year5,6	0	...	0	0	...	0
8. New external payments arrears5	0	...	0	0	...	0
Indicative targets:	(In millions of somoni)
Ceiling on reserve money	185	...	256	215	...	228
New arrears of budget entities and key state-owned enterprises to Naftrason, Barqui Tajik and Tajikgas	0	...	-14	0	...	0
Memorandum items:
Disbursement of program loans (in millions of U.S. dollars)3	25	0	0	25	0	0
Sources: Tajik authorities; and Fund staff estimates. 1For end-December 2003 and end-March 2004, the targets are adjusted for non-disbursement of the World Bank SAC ($24.7 million). For end-December 2003, the NIR is additionally adjusted for non-withdrawal of the US grant deposited at the NBT ($2.4 million). 2Excludes deposits related to project financing. 3Targets for overall fiscal balance and tax revenues in EBS/03/96 were cumulative from April 1, 2003. In the EBS/03/171, these targets are cumulative from October 1, 2003 and the definition of tax revenues for 2004 has been broadened in the Technical Memorandum of Understanding to include all tax receipts. 4On a cash basis, the ceiling will be adjusted downward by 100 percent for any rescheduled interest payments and for any accumulation of arrears. 5A continuous performance criterion. 6By the government, NBT or any other agency acting on behalf of the government as defined in the Technical Memorandum of Understanding.

Table 2: Tajikistan: Quantitative Performance Criteria for the Second Annual Program
	2003
	End-Jun.		End-Sep.		End-Dec.
	Indicative Targets (EBS/03/171)	Proj.	Performance Criteria (EBS/03/171)	Revised Performance Criteria	Indicative Targets
Performance Criteria:	(In millions of somoni)
1. Ceiling on net domestic assets of the NBT	32	35	14	23	23
2. Ceiling on net credit of the banking system to general government1	-162	-211	-184	-209	-215
3. Ceiling on the cumulative overall fiscal balance of the general government2,3 (excluding foreign-financed public investment program)	7	28	-15	-15	-4
4. Ceiling on general government wage, and nonworking pensioners' pension arrears4	0	0	0	0	0
5. Floor on tax collection in the general government budget2	551	638	753	853	224
	(In millions of U.S. dollars)
6. Floor on total net international reserves	59	66	74	76	80
7a. Ceiling on the contracting or guaranteeing of short-term non-concessional external debt with original maturity of up to and including one year4,5	0	0	0	0	0
7b. Ceiling on the contracting or guaranteeing of medium and long-term nonconcessional external debt with original maturity of more than one year4,5	0	0	0	0	0
8. New external payments arrears4	0	0	0	0	0
Indicative targets:	(In millions of somoni)
Ceiling on reserve money	222	247	251	265	278
New arrears of budget entities and key state-owned enterprises to Naftrason, Barqui Tajik and Tajikgas	0	0	0	0	0
Memorandum items:
Disbursement of program loans (in millions of U.S. dollars)3	25	25	35	35	40
Sources: Tajik authorities; and Fund staff estimates. 1Excludes deposits related to project financing. 2For June-September 2004, the targets are cumulative from October 1, 2003 (EBS/03/171), and the definition of tax revenues for 2004 has been broadened in the Technical Memorandum of Understanding to include all tax receipts. The program exchange rates used are SM 3.2 per US dollar and US $1.388 per SDR. 3On a cash basis, the ceiling will be adjusted downward by 100 percent for any rescheduled interest payments and for any accumulation of arrears. 4A continuous performance criterion. 5By the government, NBT or any other agency acting on behalf of the government as defined in the Technical Memorandum of Understanding.

Tajikistan: Structural Performance Criteria and Benchmarks for the Second Annual Program Under the PRGF Arrangement, October 2003–September 2004
Measure	Target Date	Status
Structural Performance Criteria
Prohibit the NBT from issuing directed credits.	Continuous	Not met. Noncomplying credit in late April-May 2004 repaid after 8 weeks.
Prohibit the NBT from making expenditures not related to its core business activities or paying dividends while it has negative net worth.	Continuous	Met.
Implement quarterly adjustments of all utility tariffs, equivalent to the depreciation in the nominal exchange rate in the previous quarter.	Continuous beginning end-March 2004	Met.
Structural Benchmarks
Install 15,000 gas meters in households from October 1, 2003.	End-March 2004	Met.
From October 1, 2003, issue an additional 5,000 land use/share certificates in connection with the privatization of state-owned farms.	End-March 2004	Met.
Complete an external audit of the State Financial Control Committee by a reputable international audit company.	End-March 2004	Not met. Replaced by prospective World Bank supported twinning arrangement starting in fall 2004.
Complete an external audit of Tajikgas by a reputable international audit company.	End-June 2004	Delayed; field visit of external auditors now scheduled for June, and completion targeted for September 2004.
Reduce the number of employees in the education sector by 5 percent.	End-July 2004	Delayed, now targeted for September 2004.
Complete an inventory of external public debts (especially of state enterprises) and government or NBT guaranteed debts, identify their status, propose settlement, and initiate good-faith negotiations.	End-September 2004	...
Reach agreement with commercial banks not complying with prudential regulations on a time-bound plan to correct these deficiencies.	End-September 2004	...

Technical Memorandum of Understanding
for the PRGF Arrangement 2004-2005

1. This memorandum defines variables that constitute quantitative performance criteria and indicative targets under the Poverty Reduction and Growth Facility Arrangement (PRGF), and sets out the reporting requirements for the authorities and the National Bank of Tajikistan (NBT).¹

IV. Quarterly Targets

A. Fiscal Balance of the General Government

Definitions

2. 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) but excluding the externally financed public investment program. The overall cash balance of the general government is defined from the financing side as the sum of the following:

(i) The change in net claims (transactions) of the NBT on the general government which includes all deposits of the general government with the NBT, counterpart deposits (which reflect balance of payment and/or general budget support from IFIs and other donors), NBT loans and advances to the general government, NBT holdings of government securities, bank restructuring costs, and the privatization account (where proceeds from the privatization of state property are held);

(ii) The change in net claims (transactions) on the general government of the rest of the domestic banking system which are defined to include the net position of the general government with respect to 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 (transactions) 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 of external debt to Uzbekistan;

(iv) Gross proceeds from the privatization of state property, which are kept in a separate account with the NBT, are defined as all receipts originating from the sale of state property; and

(v) Net foreign financing of the general government which is defined as the difference between gross disbursements of foreign financing excluding the externally-financed public investment program and amortization of government debt to foreign financial and nonfinancial institutions, plus principal arrears, debt rescheduling and the drawdown of Tajikistan's claim on the Central Bank of Russia.

3. The augmented Balance 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 Balance 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.

4. 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 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.

Adjustors

5. The ceiling on the cumulative overall fiscal Balance will be adjusted downward by 100 percent for any overdue or rescheduled interest obligations.

B. Total Tax Collections under the Budget

Definitions

6. Tax collections include all taxes collected under the budget. With regard to internal taxation excluded from the definition are any proceeds from loans, or other banking system credits, the issuance of securities, or from the sale of state assets. With regard to foreign taxes, 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.

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

Definitions

7. Net domestic assets (NDA) 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 includes net international reserves in convertible currencies. The NBT's net domestic assets comprises the following assets and liabilities: net credit to the general government, claims on banks, credit to the economy, and other items net (OIN). OIN includes, the foreign exchange re-valuation and capital accounts of the NBT.

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

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

Adjustors

9. The ceiling on net domestic assets of the NBT will be adjusted: (i) downward/upward by 100 percent for excesses/shortfalls of the disbursement of (non-project) foreign loans and cash grants; (ii) downward/upward by 100 percent for the excesses/shortfalls of privatization receipts; (iii) downward by 100 percent for any overdue or rescheduled debt service obligations; and (iv) upward by 100 percent for withdrawals from government project accounts at the NBT in excess of programmed levels and downward by 100 percent for disbursements in excess of programmed levels.

D. Limits on Net Credit of the Banking System to General Government²

Definitions

10. Net credit of the banking system to the general government is the sum of net credit from the NBT to general government and net credit from the rest of the domestic banking system to general government, both as defined in section A above.

Adjustors

11. The ceiling on net credit of the banking system to general government will be adjusted: (i) downward/upward by 100 percent for excesses/shortfalls of the disbursement of (non-project) foreign loans and cash grants; (ii) downward/upward by 100 percent for the excesses/shortfalls of privatization receipts; and (iii) downward by 100 percent for any overdue or rescheduled debt service obligations.

E. Net International Reserves

Definitions

12. 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, convertible currency denominated claims on domestic banks and other residents, 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.

13. 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$370 per troy ounce.

14. 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).

Adjustors

15. The floor on net international reserves of the NBT will be adjusted: (i) upward/downward by 100 percent for excesses/shortfalls of the disbursement of (non-project) foreign loans and cash grants; (ii) upward/downward by 100 percent for the excesses/shortfalls of privatization receipts in foreign exchange; (iii) upward by 100 percent for any overdue or rescheduled debt service obligations; and (iv) downward by 100 percent for withdrawals from government project accounts at the NBT in excess of programmed levels and upward by 100 percent for disbursements in excess of programmed levels.

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

Definitions

16. The external debt limits (short-, medium- and long-term) apply to the government of Tajikistan, the National Bank of Tajikistan and any other agency acting on behalf of the government. For short, medium- and long-term external debt, the performance criterion applies not only to debt as defined in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (Decision No. 12274-(00/85), adopted August 24, 2000), but also to commitments contracted or guaranteed for which value has not been received.

17. The definition of debt set forth in point No. 9 of the guidelines reads as follows: "(a) For the purposes of this guideline, the term "debt" will be understood to mean a current, i.e., not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and 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. 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 an 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 collateralized 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., arrangements under which property is provided which the lessee has the right to use one or more specified period(s) 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 guideline, 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. (b) Under the definition of debt set out in point 9(a) 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 (e.g., payment on delivery) will not give rise to debt."

18. External debt limits apply to the contracting or guaranteeing of new nonconcessional short term external debt (with an original maturity of up to and including one year), and to the contracting or guaranteeing of new nonconcessional medium- and long-term external debt (with original maturities of more than one year).

19. Excluded from the external debt limits are loans contracted for the purpose of debt rescheduling or refinancing if the terms of the new loan are more favorable. IMF credit is excluded from the external debt limits. The performance criterion on new nonconcessional short-term external debt will not apply to loans classified as international reserve liabilities of the NBT (liabilities of the NBT to nonresidents with an original maturity of up to and including one year). Normal import-related financing is excluded from the performance criterion on new short-term external debt.

20. Debt falling within the external debt 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.

21. 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.

22. Concessionality will be based on currency-specific discount rates based on the OECD commercial interest reference rates (CIRRs). For loans 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 29 years. Under this definition of concessionality, only loans with grant element equivalent to 35 percent or more will be excluded from the debt limits.

V. Continuous Quarterly Targets

A. No Directed Credits by the NBT

23. The NBT will not issue any directed credits. These involve credits that are issued in the absence of a competitive auction or on non-market terms and conditions. This requirement 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.

B. No Non-Core Activities of the NBT and no Dividend Payments by the NBT

24. The NBT will not make any expenditures not related to its core business activities or pay dividends while it has negative net worth.

C. No New External Payments Arrears

25. No new external payments arrears shall be accumulated at any time under the PRGF arrangement, excluding those which are subject to negotiation among creditors. External payments 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.

D. Exchange and Payments Arrangements

26. Over the next six months, 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.

E. No Expenditure Arrears of the General Government
and of the Social Protection Fund

27. For purposes of the performance criterion, expenditure arrears shall be defined as any shortfall in monthly disbursements of wages and pensions. The monthly disbursement plan will be a third of each quarter's budgeted wage and pension payments as in the general government budget and projections of the Social Protection Fund. These payments are defined as overdue if they have come due at the end of the month and remain unpaid thereafter for 30 days or more. The program ceilings on the stock of wage and pension arrears are presented in Table 7 below:

28. To permit monitoring as defined above, the government will provide data on actual wage and pension payments (as part of the monthly budget execution statements submitted to Fund staff) and on transfers from the Social Protection Fund to its regional offices for the payment of minimum pensions. The latter information will be presented 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.

VI. Quarterly Indicative Targets

A. Reserve Money

Definition

29. 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.

B. New Arrears by Budget Entities and State-Owned Enterprises
to Naftrason, Barqui Tajik and Tajikgas

Definition

30. Budget entities include all entities that are included in the state budget law. Key state-owned enterprises are Tadaz, Nitrogen (Sarband city), and Tajikcement.