October 11, 2000

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

Dear Mr. Köhler,

I am pleased to enclose the Memorandum of Economic Policies (MEP) for a third year economic program under the PRGF arrangement for which we request your support. In this memorandum, the Government of Tajikistan reports on the implementation of the policies supported under the second annual arrangement of the three-year PRGF. Although policy implementation was less than perfect under the second year arrangement, the government is committed to improving this performance in this area. The MEP describes our stabilization and reform policies for the period October 1, 2000 to September 30, 2001. In support of our program, we request the third year arrangement under the PRGF in an amount equivalent to SDR 40 million. The government requests that the Executive Board of the IMF consider the request after the prior actions specified in the attached MEP have been implemented.

The government is aware that disbursements under the PRGF arrangement are subject to observance of performance criteria and completion of program reviews. I believe that the policies set out in the MEP are adequate to achieve the objectives of the program. The government, however, is ready to take any additional measures appropriate for this purpose and will consult with the Fund on such matters in accordance with the policies of the IMF. We are also willing to make our policies known to the international public and would be grateful if the Fund would make the MEP and the Interim-Poverty Reduction Strategy Paper available on its internet site. The government will conduct reviews of the program with the IMF under the PRGF arrangement as described in paragraphs 33-35 of the MEP. Because the final program review will be based on the observance of the performance criteria for end-September 2001, we request a six-month extension of the commitment period in order to allow for the completion of this review.

In addition to the MEP, I am pleased to also enclose the Interim-Poverty Reduction Strategy Paper (I-PRSP) that has been prepared in accordance with my order of March 24, 2000. I hope you will regard the I-PRSP as a progress report on our efforts to prepare a more complete poverty reduction strategy paper in 2001.

Very truly yours,

INTERNATIONAL MONETARY FUND

I.  Introduction

1.  Since mid-1998, the Government of Tajikistan has been implementing a program of economic reforms supported by the International Monetary Fund (IMF) under its Poverty Reduction and Growth Facility (PRGF). During May 4–18 and August 10–17, 2000 discussions were held in Dushanbe with IMF staff on an economic adjustment and reform program that could be supported by a third annual arrangement under the PRGF. This new program would cover the period October 1, 2000 through September 30, 2001.

2.  It is recognized that policy implementation during the second annual PRGF arrangement was not as good as was originally anticipated. It is regrettable that the third and fourth reviews under that arrangement could not be completed. Apart from the difficult external environment, the weaknesses in economic policies largely reflected the difficult resource allocation decisions that had to be taken in connection with implementing the peace agreement. We realize, however, that the uneven policy performance and delays in achieving the economic targets that we had set for ourselves have adversely affected the credibility of our reform effort. With the peace process completed and the political situation stabilized, we now intend to concentrate on improving our economic policies.

3.  Notwithstanding these difficulties, significant progress has been achieved, especially with regard to macroeconomic stabilization. Under the second-year program, 12-month inflation declined from over 60 percent in August 1999 to 14 percent in August this year. Real GDP has been growing since 1997 and the data of the State Statistics Committee suggest that it increased by almost 10 percent in the first eight months of 2000 compared to the same period in 1999. Growth has been driven mainly by a recovery of productivity in industrial enterprises.

4.  Our external position, however, remains precarious. While world market prices for our two key exports, cotton fiber and aluminum, have recovered after a two-year slump, we have experienced a significant increase in the price of oil imports since late 1999. Additionally, the spring drought has worsened our balance of payments prospects for 2000–2001. We estimate that the additional import requirement for grain will amount to the equivalent of about US$20 million. Furthermore, without further debt rescheduling agreements, the already heavy burden of Tajikistan's external debt is projected to become very severe in coming years. Against this background, the country's gross international reserves, at no more than 1½ months of imports, remain insufficient.

5.  Nevertheless, the economic recovery and improved inflation performance have brightened prospects for enhancing macroeconomic stability, improving living standards, and reducing poverty. A key requirement for sustained poverty alleviation in the years ahead is non-inflationary and equitable economic growth. To achieve this, stabilization policies need to be firmly grounded in transparent market mechanisms, which will improve the business environment for private sector activity and investment. The government must also offer greater empowerment, better opportunities, and enhanced security to people most exposed to the risk of poverty. A key policy requirement for achieving these objectives is better governance, both in the private and public sectors. We are confident that better governance will considerably strengthen our ability to implement economic policies and make macroeconomic management more predictable and transparent.

6.  With this framework in mind and with assistance from the IMF and the World Bank, we are launching a broad participatory process to prepare a full-fledged poverty reduction and growth strategy for Tajikistan by spring 2001. As one step in this process, we are submitting our Interim Poverty Reduction Strategy Paper (I-PRSP) for consideration by the Executive Boards of the IMF and the World Bank.

II.  Short-Term Track Record

7.  After the 1999/2000 economic program went off track, we reached understandings with the Fund staff in March 2000 on a set of corrective short-term policies. During the subsequent missions in May and August, we reached further understandings on the observance of track record targets through September 2000, which were successfully implemented. In particular, fiscal policy in the first quarter of 2000 was tighter than envisaged in the Memorandum of Understanding (MOU) and we were able to maintain this strong fiscal performance in the second quarter, as evidenced by a lower-than-targeted fiscal deficit of 2.5 percent of GDP. However, while the monetary targets for end-March were broadly met, the second quarter target for the National Bank of Tajikistan's net domestic assets (NDA) and net international reserves (NIR) were missed. Failure to meet these targets reflected the difficulty of recovering loans issued by the NBT to critical sectors of the economy. Nonetheless, we were able to satisfactorily meet the NDA and NIR performance target for end-July and end-August. In addition, the directed credits that had been extended to the Somonion and Goskomcontracttorg companies (totaling US$1.5 million) were repaid by end-July, although loan repayment to Tajik Rail has continued to lag. However, the NBT has now reached agreement with Tajik Rail on a repayment schedule for the US$26 million credit due to the NBT.

8.  We have also successfully implemented other agreed measures. These include (i) issuing a decree that requires cotton and aluminum sales taxes to be paid in Tajik rubles beginning in May and September 2000, respectively; (ii) increasing household electricity tariffs¹; (iii) prohibiting the power ministries from inspecting the transactions of participants in the foreign exchange market; and (iv) eliminating a government-imposed ceiling on ginning fees.

9.  In May, restrictions applied temporarily on the withdrawal of foreign exchange deposits by commercial banks from their TICEX settlement accounts at the NBT were eliminated. Specifically, the NBT discontinued its practice of delaying TICEX settlements for customers with overdue debts to the central bank. Nevertheless, the performance of our foreign exchange market remained unsatisfactory. The spread between the TICEX and curb market exchange rates averaged 9 percent in the second quarter of 2000. We concluded that creating effective and efficient foreign exchange markets can only be achieved by phasing out the TICEX mechanisms and establishing competitive interbank markets. In order for an interbank foreign exchange market to develop, the role of the NBT as the sole supplier of foreign exchange was to be reduced. Accordingly, the NBT ceased all foreign exchange activities with nonbanks and suspended the operations of TICEX in July 2000. The NBT is now quoting the official exchange rate based on a weighted average of the interbank market exchange rates. To enhance the role of our domestic currency, the Ministry of Finance started collecting all taxes in Tajik rubles in September, as stipulated in the agreement between the Ministry of Finance and the State Tax Committee of April 12, 2000.

10.  Good progress has been achieved regarding the implementation of structural policies. For example, the privatization of the cotton ginneries is now complete. As agreed with the World Bank, a Dutch auction was held on April 21, 2000, in which 19 ginneries were offered for sale. Full payment was received for 15 of these ginneries and, per our understanding with the World Bank, the remaining 4 were sold at another Dutch auction on August 22, 2000 and full payment for these ginneries was received in early September.

11.  Progress with the land reform program continues to be encouraging. In the first seven months of 2000, the State Committee for Land Resources converted 51 state-owned farms into private farms by issuing 204 marketable land use certificates and 49,395 land share certificates. Equally encouraging progress has been achieved with respect to the privatization of medium- and large-scale enterprises. By end-August, the State Property Committee had collected full payment for 214 medium- and large-scale enterprises sold through auctions since January 1998. Progress is also being made in the financial sector. The audit of the NBT's 1999 accounts by Pricewaterhouse Cooper was completed in September 2000. Four commercial banks (Orion Bank, Vneshekonombank, the Savings Bank, and Agroinvestbank) have been placed under the NBT's operational restructuring programs and restructuring agreements were signed by the four participating banks in late May 2000 (Annex II). The bank supervision department in the NBT is monitoring progress with the implementation of these agreements.

III. The Government's Program for 2000–2001

12.  We believe that implementation of the measures described above provides a solid foundation for our third-year economic program. Our broad objectives are for real GDP growth of 5 percent or more in both 2000 and 2001. Our end-year inflation target for 2000 is 19 percent, while for end-2001, policies will seek to reduce the 12-month inflation rate to 12 percent. With a view to strengthening confidence in our national currency and ensuring timely fulfillment of our external obligations, we will aim at increasing our gross international reserves to the equivalent of 1.9 months of imports by end-2000, and to 2.7 months of imports by end-2001. Consistent with these objectives, and the availability of projected foreign financing, Tajikistan's current account deficit is projected at 5.7 percent and 6.5 percent of GDP in 2000 and 2001, respectively. The detailed policy framework that will allow us to achieve these broad objectives is described below.

IV.  Prior Actions

13.  In order to complete the process of establishing a credible track record of policy implementation, we will take the following prior actions before the Executive Board considers our request for the third annual arrangement under the PRGF:

(i) We will limit the deficit of the general government to TR 11.7 billion, or 2.3 percent of GDP, in the third quarter of 2000;

(ii) The NBT's NDA will not exceed TR 203.3 billion at end-September 2000. At end-July, NDA was TR 199.8 billion and, as an interim target, NDA will not exceed TR 206.0 billion at end-August. The NBT's net credit to government will not exceed TR 142 billion at end-September 2000;

(iii) The NBT's net international reserves (NIR) were a negative US$56.4 million at end-July. The NBT's NIR should be no less than a negative US$58.4 million at end-August (interim target), and a negative US$56.4 million at end-September;

(iv) In the event that the cotton companies Pakhtai Khatlon, Ranspar, and Safarabad fail to meet government-guaranteed debt obligations to Credit Suisse First Boston, Inc. by October 10, 2000, we will file bankruptcy claims against these companies at the economic court by October 20, 2000;

(v) We will issue a decree ensuring that contracts between private dekhan farms producing cotton and other agricultural products, and their export or marketing agents are not controlled by central or local governments;

(vi) We will adopt legislation ensuring that government wages and pensions are paid no later than the end of the month following the pay period;

(vii) We will have an agreement signed between the Ministry of Finance and the NBT on the regularization of their financial relations, as specified in Annex III; and

(viii) We will submit the draft Treasury Law, which has been prepared in cooperation with the IMF's FAD and LEG departments, to parliament for adoption.

V.  Fiscal Policy

14.  Consistent with the stabilization targets, and because less net foreign financing will be available to finance expenditures due to rising debt service, the fiscal stance will be further tightened in 2000 and 2001. We will reduce the overall cash deficit of the general government (excluding foreign financed capital expenditure and special projects financed by the World Bank and AsDB) to 1.2 percent of GDP in 2000 and to 0.6 percent of GDP in 2001. Under the program, domestic financing of these deficits will be provided mainly by privatization receipts and sales of treasury bills, with NBT financing limited to a maximum of 0.1 percent of GDP in 2000 and 2001.

15.  Estimates of fiscal revenue will continue to be conservative until improvements in tax administration begin to strengthen collections. The rate of the sales tax on cotton and aluminum will be lowered as indicated in Annex I (A.1). In 2000, our program aims at increasing the gross tax ratio to 14 percent of GDP. In 2001, the ratio of tax revenue-to-GDP is expected to increase to 14.5 percent as reforms in tax administration take effect. Efforts to improve tax administration are benefiting from assistance of three resident advisors provided by the Swiss-financed project. Specific measures will include the full implementation of the VAT reform, strengthening the Large Taxpayer Inspectorate, a further taxpayer registration effort in order to extend the tax base, strengthening the collection of tax arrears, moving to a system of self-assessment, collection of taxes at source, and eliminating the practice of debiting taxpayers' bank accounts. We will request an FAD follow-up mission on tax policy, with particular emphasis on reviewing excise taxes, where collections have remained low.

16.  Expenditure policies will be adjusted in order to allow for increased social sector spending in support of the poverty reduction strategy. Priority expenditure areas will include timely payment of wages, pensions, and external debt service. Continuous performance criteria will be used to monitor compliance in external debt service and structural benchmarks will be applied to wage and pension payments. We intend to increase the government wage bill by 5 percent in 2001 in real terms, which would allow significant real wage increases for government employees provided that employment can be reduced as part of the government restructuring. A reserve of TR 6 billion was earmarked for social benefit reforms in the 2000 budget. As proposed by the World Bank, a pilot program that would provide an allowance to the poorest 20 percent of school children, based on community targeting, will start in September. If the pilot program is successful, it will be implemented nationwide in 2001, with budgetary costs amounting to about 0.4 percent of GDP. Meanwhile, the remainder of the reserve will be used to continue the current cash compensation scheme and to increase the budgetary allocations needed to cover counterpart funds for the IDA-funded health, education, Pilot Poverty Alleviation projects, and other programs directly linked to poverty reduction.

17.  In the 2001 budget, spending on the social sector will consist of two components. First, the basic social sector budget will cover health, education, pensions, and the reformed cash compensation system. About 42 percent of total expenditure (6.3 percent of GDP) will be allocated for these purposes. Specific steps—designed and implemented in consultation with the World Bank—will be taken to move away from the norm-based budgetary allocation system. To eliminate the overlap between the pension and cash compensation programs, all pensions below the minimum pension will be raised to TR 2,000 per month in the course of the program year. Second, a special reserve of funds will be created for poverty reduction programs. These funds will amount to TR 14 billion (0.7 percent of GDP) in 2001 and will be used mainly for the health and education sectors. These funds will also serve as counterpart resources for projects with the World Bank, AsDB, and bilateral donors to be sought at the prospective Consultative Group meeting in spring 2001.

18.  The required fiscal adjustment and the need to improve salaries and strengthen the social sector do not permit significant increases in expenditures in other areas. In particular, we will limit the overall size of government capital spending to 1.5 percent of GDP in 2000. This allocation will be increased if international donor financing becomes available. With a view to increasing the transparency of public finances, the 2001 budget will include all foreign financed projects. Similarly, we will regularize the financial relations between the government and Tajik Rail as described in Annex IV. As part of preparations for the Consultative Group meeting, we will streamline our public investment program and ensure that it is fully consistent with the government's poverty reduction strategy.

19.  In view of the uncertainties related to budgetary projections (the impact of drought, debt rescheduling negotiations (see below), foreign aid, and revenue developments), we are prepared to introduce to parliament a supplementary budget during 2001 in order to accommodate any significant deviations from projections, including through new tax measures and/or expenditure restraint.

VI.  Monetary Policy

20.  We recognize that monetary conditions must remain tight in order to support the balance of payments and reduce inflation. The monetary program assumes that the income velocity of money will be broadly constant during the remainder of 2000, but decline by about 5 percent during the balance of the third-year program as confidence begins to improve with sound policy performance. Central bank net credit to the private sector should decline as a result of a combination of aggressive loan recovery (including repayments by the cotton sector from the 2000 harvest sales) and strict limits on new lending. There would be only a small increase in the government's net debt to the NBT to finance the budget deficit in the remainder of 2000. With this containment of domestic credit expansion, the NBT's NIR should improve from negative US$56.4 million at end-July 2000 to negative US$35.8 million by the end of the third-year program (end-September 2001). Achieving the proposed NDA and NIR targets implies a growth rate of reserve money of about 19 percent during the 12-month period through end-September 2001.

21.  To strengthen our instruments of monetary policy, the NBT will begin open market operations through purchases and repurchase agreements (repos and reverse repos) with banks as soon as the stock of government securities is sufficient. To this end, a special issue of short-term treasury bills in the amount of TR 3 billion will be made as part of the regularization of financial relations between the Ministry of Finance and the NBT. This regularization operation will be carried out as of November 1, 2000, as described in Annex III. We plan to phase out NBT credit auctions during the program period.

VII.  Structural Policies

22.  Because of the long civil war, Tajikistan's economic reform process—especially as it pertains to structural reform—was greatly delayed. Since 1998, however, progress in structural reform has been significant. In order to continue with our structural reform agenda, it is critically important that rent-seeking opportunities be minimized and governance be improved. Therefore, we will undertake a special effort to improve governance in order to strengthen financial discipline, improve efficiency, and reduce corruption.

23.  The priorities for our structural reform agenda are large-scale privatization, bank restructuring, land reform, and energy sector reform. In each of these areas, we will cooperate closely with the IMF, the World Bank and the Asian Development Bank (AsDB). A matrix of specific structural reform measures, and the timing of implementation, is provided in Annex I. This policy matrix divides the structural measures into core policies that are crucial for macroeconomic stability and growth, and those that play an important supportive role in achieving these goals. The latter category of measures is expected to be largely covered by the prospective operations of the World Bank and the AsDB.

Governance reform

24.  Greater control and transparency of public finances will be the main focus of our efforts to enhance governance. The key elements of our program are described below.

• Under the third annual PRGF arrangement, the actions necessary to complete the treasury system have been identified and will be implemented as a prior action and structural benchmarks (Annexes I and V). These actions include (i) submitting a draft treasury law to parliament (prior action); (ii) setting-up regional treasuries in the remaining 6 rayons by December 30, 2000 (structural benchmark); and (iii) extending the treasury coverage of payments to all central and local government transactions by December 30, 2000 (structural benchmark). To make the treasury more effective, increased emphasis will be placed on improving control systems on commitments and arrears, staff training, and actual implementation of the treasury instruction manual.

• New legislation on public finances will be submitted to parliament by end-April 2001 that will clarify the tasks and responsibilities of the Ministry of Finance. We will seek IMF technical assistance in preparing this legislation.

• In order to enhance the transparency of public finances, the MOF will—beginning in January 2001—publish important budget documents. These will include, but not be limited to, quarterly budget execution reports, the medium-term expenditure framework, and the public investment program.

• The NBT will continue to be prohibited from issuing directed credits under a structural performance criterion in the Fund-supported program.

• Effective January 1, 2001, we will establish a genuinely independent external audit agency to inspect public financial management systems (Annex VI).

• By end-December 2000, we will create a "black book" mechanism to reduce inappropriate intervention by government officials in the operations of private enterprises, including in agriculture.²

• Finalize a plan for judicial reform by December 2000.

• Implement government wage reform in 2001 to ensure more competitive salaries for key personnel and to establish a merit-based recruitment and promotion mechanism in public administration.

• Complete the public procurement reform, with assistance of World Bank staff, by the end of the third year of the PRGF program (end-September 2001).

• In the context of the prospective second World Bank Structural Adjustment Credit in early 2001, we will rationalize the government structure to further improve governance.

Privatization

25.  In the area of privatization and enterprise restructuring, we will rely on advice and assistance from the World Bank Group. Having completed our small-scale privatization program, the main focus is now medium- and large-scale privatization. During the program period, we will (i) privatize and receive full payment for an additional 130 enterprises, thereby bringing to 40 percent the percentage of medium- and large-scale enterprises that will have been privatized under the current privatization program; and (ii) develop and start implementing a restructuring plan for the aluminum smelter (TADAZ) with the assistance of the International Finance Corporation (IFC).

26.  In order to strengthen the legal framework and correct lax law enforcement mechanisms, we will enact and amend numerous laws. Specifically, during the program period, the government will amend the Law on Collateral to provide for better enforcement, amend the Bankruptcy Law to introduce well specified restructuring and liquidation mechanisms, and adopt a new Secured Transactions Law to improve contract enforcement. To help reduce interenterprise arrears, the government will, by end-December 2000, fulfill its earlier commitment to identify the state-owned enterprises (other than TADAZ) responsible for most arrears. We will also adopt a restructuring plan for those enterprises that are viable and start bankruptcy procedures against those that are not viable.

Bank restructuring

27.  The government will continue the process of banking reform through operational restructuring, following closely the recommendations of the IMF's MAE department. No government recapitalization of commercial banks will be allowed without (i) sufficient operational restructuring; (ii) professional management in place; (iii) sound business plans for achieving required capital adequacy ratios and profitability; and (iv) private capital participation. Accordingly, in late May, the four biggest commercial banks (Orionbank, Vneshekonombank, Agroinvestbank, and Savings Bank) signed restructuring agreements with the NBT and have prepared preliminary business plans as part of their operational restructuring effort (Annex II).

Land reform

28.  Land reform has made substantial progress. As of end-July 2000, about 284 of the 600 state-owned farms had been restructured into approximately 13,750 private ("dekhan") farms. These were established through the distribution of: (i) marketable land use certificates and (ii) land share certificates. Local authorities have managed the process with support from the State Committee for Land Resources (SCLR). In order to strengthen the land reform process, especially with regard to the independence of the newly established farms, we will create by end-December 2000 a special unit in the SCLR. This unit will be provided adequate budget resources and be responsible for providing newly created farmers with (i) improved advisory services, including advice on their legal rights and (ii) training services. With respect to legal rights, this unit will encourage members of state-owned farms slated for restructuring to file complaints with the special unit if they feel that their right to form individual dekhan farms is being compromised or if their right to operate as independent private farms is being hampered. The creation of this special unit and a description of its responsibilities will be published in newspapers and announced on radio and television. Quarterly reports on the units operations and findings will be sent to the President's office, with copy to the World Bank and IMF.

29.  With the above safeguards in place, we intend to continue the land reform process by restructuring 120 state-owned farms in the period end-June 2000 through end-September 2001 or 30 farms each quarter. Further, in order to enable trading in land share certificates through the SCLR, legislation establishing a land share depository system will be submitted to Parliament no later than end-October 2000; this legislation will also specify the regulatory framework for trading land shares. Budgetary resources will be made available to conduct an aerial land mapping/survey in 2001. With assistance from the World Bank and other donors, a national title registration and land registry system will be established as part of the SCLR and made operational before end-March 2001.

Energy sector reform

30.  We have begun to reform the energy sector with assistance from the Asian Development Bank in the context of a post-conflict rehabilitation program loan. An energy sector rehabilitation project loan, to be approved shortly, will further support reform in this area. Additional measures to be taken under these two operations are further described in the policy matrix (Annex I). Broadly, these measures aim at (i) strengthening the legal and regulatory environment; (ii) rationalizing energy use and supply; and (iii) improving the operations and financial position of Barki Tajik and Tajikkomunservice. Policies will focus, in particular, on (i) improving payment collection and reducing accounts receivable and (ii) achieving full cost recovery for electricity and communal services provided to industrial and residential users.

31.  As intermediate targets, (i) the collection rate for services provided by Barki Tajik to households will increase to 65 percent by end-December 2000, and 70 percent by end-June 2001; (ii) Barki Tajik's accounts receivables will decline to 6 months by end-December 2001; and (iii) TADAZ will be current on its electricity bills from August 2000 onward, and on the repayment schedule agreed with the AsDB for some TR 18.3 billion of arrears to Barki Tajik. The timetable initially envisaged to achieve full cost recovery for residential consumers and industry has proven unrealistic from a social point of view. Therefore, we will adopt by end-October 2000, a new mechanism and timetable in consultation with the AsDB whereby residential and industrial tariffs will be increased gradually to achieve full cost recovery. The elimination of privileges for free usage of power currently enjoyed by certain groups of the population, initially envisaged for end-March 2000, will be postponed to March 2001, pending the reform and strengthening of the social safety net provisions in the 2001 budget.

VIII.  External Sector Issues

32.  Conditions in the external sector continue to be precarious. Although higher export prices for cotton and aluminum will improve export earnings in coming years, this will largely be offset by higher external debt service cost. The public debt service ratio is projected to rise from 6 percent of exports in 1999 to 14 percent in 2001. Although this ratio may not be excessively high, the debt service is becoming fiscally unsustainable. In 2001, government debt service is expected to amount to 35 percent of total revenue, excluding the debt to Uzbekistan which is currently serviced directly by Tajik Rail.³ Additional pressures on the balance of payments arise from the cotton sector's debt obligations to Credit Suisse First Boston Inc. (CSFB). Although the small outstanding debt under the Dunavant credit facility has been paid, a balance of US$24 million remained under the Reinhardt facility at the end of August 2000. The government has agreed with CSFB to reschedule this debt at a lower interest rate.

33.  Given the strains on the balance of payments, a new creditors meeting for debt rescheduling from official creditors on concessional terms is needed in order to ease our debt service burden over the medium term. We hope that such a meeting could take place in the second quarter of 2001 to ensure the needed external financing for our planned new three-year economic reform program. We realize, of course, that for this initiative to be successful, our economic program must stay strictly on track. Meanwhile, we will tighten our debt management, and there will be no external nonconcessional borrowing guaranteed by the government or the central bank.⁴ On current debt discussions, we have agreed with the European Union staff to make a US$10 million up-front repayment to settle our past obligations in the last quarter of 2000. This would facilitate new balance of payments financing from the EU, including a significant (US$35 million) grant element, to support the foreseeable principal repayments. At the same time, we will remain persistent in resolving the remaining external debt issues with other bilateral creditors (Russia, Turkmenistan, Kazakhstan, India, and Pakistan). We highly appreciate China's recent decision to convert its loan into a grant.

IX.  Program monitoring

34.  To help maintain the program on track, we have found it useful to rely on quarterly performance criteria, quarterly reviews, and quarterly disbursements and propose to continue doing so. We also believe that, to ensure performance toward the end of the arrangement, the final program review and the last disbursement should be based on the observance of the performance criteria for end-September 2001, which goes beyond the initial commitment period of the three-year PRGF arrangement. Therefore, we request a six-month extension of the commitment period in order to allow for the completion of the final review. The program's eight quantitative performance criteria from end-December 2000 through end-March 2001 will cover (i) minimum levels for NIR; (ii) ceilings on the net domestic assets of the NBT; (iii) ceilings on the net position of the general government with the NBT; (iv) limits on the overall fiscal deficit; (v) minimum levels of tax collections of the State Tax and Customs Committee; (vi) ceilings and sub-ceilings on the contracting or guaranteeing of new non-concessional external debt by the government and the NBT; (vii) no accumulation of new external payment arrears by the government (a continuous performance criterion); and (viii) no accumulation of arrears on government wages and pension benefits for non-working pensioners (a continuous performance criterion). A continuous performance criterion regarding trade and exchange arrangements (Annex VII) is included such that 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. In addition, an indicative target applies on the stock of reserve money. Quantitative performance criteria for the remainder of the program period will be defined in the context of the second program review, which is scheduled for March 2001.

35.  In addition to a continuous performance criterion prohibiting directed credits from the NBT, we propose to include several quarterly structural benchmarks for the period through end-March 2001 as described in Annex V. Program reviews will focus on the achievement of macroeconomic objectives and progress in key structural areas, i.e., governance, privatization, bank restructuring, and land reform. Actions to be taken before submission of our request to the IMF Board were defined in paragraph 14. To enhance the transparency of Tajikistan's economic policies, we request the Fund to publish the Memorandum of Economic Policies on its web site.

36.  The government believes that the policies described above are adequate to achieve the objectives of the program. 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, that might be necessary to ensure that the overall objectives of the program can be achieved.

ANNEX I

Tajikistan: Policy Matrix, 2000–2002
Core Structural Policy Measures	Responsibility	Timing	TA Need
A. Fiscal policy
1. Reduce the sales taxes for cotton and aluminum according to the following schedule:	MinFin/STC/SCC
(i) Cotton
20 percent		September 2000
15 percent		September 2001
0 percent		September 2002
(ii) Aluminum
2 percent		January 2001
0 percent		January 2002
2. Replace VAT exemptions with a zero rating for aluminum exporters.	MinFin/STC/SCC	2001	IMF
B. Tax administration
1. Improve tax administration by:
(i) strengthening Large    Taxpayers Inspectorate;	State Tax Committee	2000-2001	IMF
(ii) increasing use of asset seizure    and the bankruptcy law to    enforce tax payments;	State Tax Committee	2000-2001	IMF
(iii) implementing the VAT    reform, including staff training;.	State Tax Committee	2000-2001	IMF
(iv) completing the    computerization of the STC; and	State Tax Committee	2000-2001	IMF
(v) eliminating automatic     taxation through banks' settlement    accounts for all enterprises.	State Tax Committee	December 2000
C. Governance reform
1. Complete the Treasury reform by:	MinFin/Treasury	March 2001	IMF
(i) setting up regional treasuries    in the remaining 6 rayons subject    to availability of banking facilities;		December 2000
(ii) extending treasury coverage    of payments to all central and local    government transactions; and		December 2000
(iii) completing preparation of a    detailed treasury instruction    manual.		March 2001
2. Submit to Parliament a new law on public finances.	MinFin	April 2001	IMF
3. Eliminate tax offset mechanism in state debt service to Uzbekistan through Tajik Rail.	President's Office/MinFin/ Tajik Rail	September 2000
4. Publish fourth quarter budget execution, MTFF, and PIP documents.	MinFin	January 2001
5. Establish an independent external audit agency.	President's Office	January 2001
6. Introduce a "black book" mechanism for private enterprises.	President's Office	December 2000
7. Finalize a plan for judicial reform.	MinJustice/President's Office	December 2000
8. Complete the public procurement reform.	President's Office/MinFin	June 2001
D. Financial sector reform.
1. Introduce repos and reverse repos and introduce Lombard facility.	NBT	October 2000	IMF
2. Phase out credit auctions.	NBT	2001	IMF
3. Implement bank restructuring programs for Agroinvestbank, Savings Bank, Vneshekonombank, and Orionbank (see Annex II).	NBT/commercial banks	July 2000-June 2001	IMF/WB
4. Conduct annual audits of the NBT by an internationally reputable firm.	NBT	2000-2001
5. Publish the audited financial statements for the commercial banks and the NBT.	NBT	2000-2001
6. Increase and strictly enforce minimum capital requirements for banks as follows:
Present US$1 million	NBT
To US$2 million	NBT	December 2001	IMF
To US$3 million	NBT	December 2002	IMF
E. Exchange and trade policies
1. Modify the existing customs tariffs regime to be consistent with WTO recommendations taking into account Tajikistan's international commitments.	MinFin/SCC	2000-2002
2. Refrain from imposing any non-tariff trade barriers.	State Customs Committee	Continuous
F. Legal reform
1. Enact a new Secured Transaction Law to improve contract enforcement.	MinJustice	March 2001
2. Amend the Bankruptcy Law to introduce specific restructuring and liquidation mechanisms.	MinJustice	March 2001
3. Amend the Law on Collateral to provide for better enforcement.	MinJustice	March 2001
G. Land reform
1. Establish a land registry system in the State Committee for Land Resources (SCLR) and ensure that:	SCLR/MinAgr	March 2001	World Bank
(i) requirements that newly    created farms register with other    agencies or institutions are    eliminated, and
(ii) registration fees are kept to a    minimum.
2. Restructure state and collective farms by:	SCLR/MinAgriculture
(i) issuing land use and land    share certificates, and
(ii) registering the newly    established farms with the land    registry system as follows    (cumulative since June 2000):
30 farms		September 2000	WB
Cumulative 60 farms		December 2000
Cumulative 90 farms		March 2001
Cumulative 120 farms		June 2001
H. Privatization
1. Privatize (full payment received) medium and large scale enterprises (cumulatively since January 1, 1998) as follows:
250 sale contracts with 220 full    payments;		September 2000
280 sale contracts with 250 full    payments;		December 2000
310 sale contracts with 280 full    payments; and		March 2001
340 sale contracts with 310 full    payments.		June 2001
Supportive Structural Policy Measures1	Responsibility	Timing	TA Need
A. Social spending
1. Implement a program of providing allowances to the poorest 20 percent school children based on community targeting.	MinFin/MinEducation/ Ministry of Social Protection/SPF		World Bank
(i) start the pilot project; and		September 2000
(ii) begin nationwide    implementation if the pilot project    is successful.		2001	World Bank
2. For the health sector:	MinHealth and MinFin
(i) implement a comprehensive    program of health service reform    in 2 pilot districts by end-2001 and    in another 6 districts by end-2002.		2001-2002	World Bank
3. For the education sector:	MinEducation
(i) rehabilitate 20 schools in    2000, and another 200 in 2001; and		2000-2001
(ii) retrain 10,000 teachers in    active learning methods by    January 2002.		January 2002
4. Rehabilitate the pension system by:
(i) increasing the age for pension    eligibility by 6 months each year;	Ministry of Social Protection/SPF	2000-2002	World Bank
(ii) freezing working pensioners'    benefits;		2001-2002
(iii) developing a detailed plan    and strategy for pension reform    that includes the introduction of    individual retirement accounts; and		January 2002
(iv) introducing one percent    workers' social security    contributions for pensions.		January 2002
B. Agriculture
1. Begin rehabilitation of the irrigation system by developing a planfor improving cost recovery.	MinIrrigation	June 2001	WB
2. Develop a rural credit system.	MinAgriculture/NBT	2000-2002	WB
3. Establish a unit in the SCLR for supporting newly established private farms.	SCLR and Min/Agriculture	December 2000
4. Review the present system of taxing agricultural enterprises with the objective of introduction changes to make the system simpler and more equitable.	MinFin, SCLR, Min/Ag	June 2001	IMF and WB
C. Private sector environment
1. Develop TADAZ in accordance with the restructuring plan agreed with IFC.	MinEcon/MinFin/TADAZ	2000-2002	IFC
2. Identify state-owned enterprises responsible for most tax and inter-enterprise arrears and develop their restructuring plans.	MinEcon/MinFin/NBT	December 2000, June 2001
E. Energy
1. Approval of Energy and (Transport) Laws and completion of thereorganization of related ministries.	MinEcon/Barki Tajik	October 15, 2000	AsDB
2. Submit to ADB an action plan for full cost recovery for electricity use with the following targets:	MinEcon/Barki Tajik	October 2000	AsDB
(i) Industry:
75 percent cost-recovery		January 2001
100 percent cost-recovery		End-2002
(ii) Households:
100 percent cost recovery
3. Phase-out special electricity tariff for TADAZ.		2001-2002	AsDB
4. Submit to AsDB an action plan for reducing the accounts receivable of Barki Tajik and Tajikkumservice to an average of:	MinEcon/Barki Tajik		AsDB
6 months		End-2001
3 months		End-2002
5. Submit an action plan to AsDB for corporatizing and commercializing Barki Tajik.	MinEcon	To be determined as part of Energy Sector Action Plan under preparation with ADB	AsDB
Sources: Tajik authorities; and Fund staff estimates. 1Structural policy measures not under Fund conditionality that are supportive of growth and poverty reduction and that are expected to be covered by World Bank and AsDB operations during the program period.

ANNEX II

Tajikistan: Banking Restructuring Objectives and Strategy

I.  Objectives

1.  The Tajik banking sector's current fragility impairs its capacity to intermediate savings effectively and to contribute to economic development and growth. The banking sector constitutes a large contingent liability for the government and one that could grow unless the sector undergoes extensive structural change. Priorities for bank restructuring include: (a) strengthening the resilience of the system against Tajikistan's cyclical, commodity-based economy; (b) building confidence in the banking sector; (c) enabling banks to perform their allocative role more effectively; and (d) minimizing the contingent liabilities posed to public finances by the system.

2.  In order to achieve these objectives, the following specific measures need to be taken.

• Identify viable and nonviable banks and rehabilitate weak, but viable banks by implementing time-bound restructuring agreements.

• Close insolvent and unviable banks and merge small and viable banks.

• Cease, without exception, the provision of directed credits and guarantees by the government or the NBT.

• Improve the legal framework by (i) amending the law(s) and regulation(s) in order to reduce the costs of re-possessing collateral, (ii) making loan loss provisions 100 percent tax-deductible, (iii) aligning the property taxes levied on banks with international best practice, and (iv) synchronizing the accounting principles in the tax and banking laws.

• Eliminate prudential forebearance through the strict enforcement of prudential regulations and bank restructuring agreements, particularly the absolute minimum capital requirement of US$1,000,000, and capital adequacy ratios (K-1₁ and K-1₂).

• Improve the management of banks by taking prompt corrective action against weak banks, including the replacement of poor bank managers with experienced and competent managers.

• Transform the Savings Bank into a viable and profitable financial institution by first "commercializing" the bank's operation, and then privatizing it by selling it to a strategic investor.

3.  Although the government should be responsible for designing and implementing the strategy, the mechanisms of consolidation should be based on market principles and commercial criteria. Importantly, the government will not recapitalize any bank before substantial operational restructuring is undertaken.

II.  Institutional Framework

4.  The objectives outlined above require a flexible institutional framework that takes into account Tajikistan's institutional constraints. The responsible institution must be capable of reacting quickly to changing circumstances, be vested with adequate decision-making authority, and ensure proper coordination among government agencies involved. Accordingly, the Bank Supervision Department (BSD) of the National Bank of Tajikistan (NBT) will assume a central role in driving the bank restructuring process aided by the following two new institutional structures.

5.  Problem Bank Unit. A Problem Bank Unit (PBU) will be established within the BSD, with a dedicated staff responsible for monitoring and inspecting banks that are systemic violators of prudential standards and their restructuring agreements. The monitoring framework currently in place will be strengthened considerably by the PBU, whose staff will maintain regular contact with problem banks and periodically visit them. The PBU will make analytical judgments on the viability of banks and report its analysis and recommendations to the BSD.

6.  Bank Liquidation and Loan Recovery Unit. The BSD is currently burdened with the task of liquidating closed banks, in addition to its core responsibilities of prudential supervision and enforcement. However, the BSD should not be burdened with the task of asset management and sales, in which it has no comparative advantage in terms of skill set, especially given its limited staff. As that the NBT has the greatest incentive to maximize recoveries from closed banks given its claims against them, the NBT will establish a new department that assumes responsibility for liquidating banks and which incorporates the activities of the Economic Security Department. It will be important for the new department to be staffed well enough to cope with a growing number of closed banks.

III.  Implementation and Next Steps

Institutional framework

• The NBT will adopt a board decision or regulation outlining the main elements of the restructuring program and outlining the new institutional framework.

• The BSD will establish and staff the PBU and clearly define its role and responsibilities.

• The BSD will establish and staff the Bank Liquidation and Loan Recovery Unit and clearly define its role and responsibilities.

• The BSD will identify unviable banks and close them as soon as possible. The BSD already has identified some weak banks, and has given them deadlines to replenish their capital. In the event of non-compliance, these banks will be promptly closed. More generally, all banks will be brought into full compliance of the absolute minimum capital requirement of US$1 million by December 31, 2000. If the number of conservators required exceeds qualified and available candidates in the country, the government will appeal for external technical assistance and attract skilled people from abroad.

• The BSD will compile a shortlist of possible bank managers, who would be able to takeover and rehabilitate weak banks on the basis of a fixed-term management contracts as conservators. Potential candidates could be identified through advertisements in the FSU countries and international financial publications. At the same time, twinning arrangements with foreign banks will be sought.

• As per the Presidential decree issued in October 1999, the government and the NBT will cease and desist from issuing directed credits or guarantee to support certain sectors of the economy.

• The NBT has already finalized bank restructuring agreements with the four largest banks. Agreements are attached.

• The NBT's Legal and Bank Supervision Department, in conjunction with the Ministry of Finance and Ministry of Justice and with outside technical assistance, will review legislation on banking, collateral, bankruptcy, and taxation. Impediments to prudent banking (e.g., collateral repossession, 100 percent tax-deductibility of loan loss provisions) and inconsistencies among the various regulations (e.g., tax code and IAS applied by banks) and deviations from international best practice (e.g., property taxation of banks) should be identified and subsequently removed through amendments.

Agreement Between the National Bank of Tajikistan and Agroinvestbank on the Restructuring of the Agroinvestbank

May 19, 2000

Compliance with prudential regulations

7. The bank shall achieve a capital-to-total assets ratio of 12 percent by December 31, 2000 and 15 percent by June 30, 2001.¹

Management and operational restructuring

8. Undertake an audit by a reputable international accounting firm as of December 31, 2000 to be completed by March 31, 2001.

9. Submit a well-documented and quantitatively backed business plan and an Institutional Development Plan to the Bank Supervision Department (BSD) of the NBT by September 30, 2000. The business plan should include an analysis of the bank's business strategy and financial performance in recent years, a forward-looking strategy for product development and mix, and balance sheet and income statement projections for the next three years demonstrating how profitability will be achieved.

10. Establish internal controls, internal audit standard and procedures, foreign exchange and market risk assessment methods, credit risk guidelines, and loan monitoring standards by December 31, 2000.

11. By end September 30, 2000, establish an in-house training program for loan officers, risk managers, and internal auditors. Put into practice foreign exchange and market risk assessment methods, credit risk guidelines, loan monitoring standards, and international accounting standards by end-December 2000.

12. Ensure that all new loans are based on proper documentation of the borrower's financial and business condition, and a thorough analysis of the borrower's creditworthiness.

13. Adequate and complete loan files should be maintained by implementing a checklist of necessary documents and periodically verifying the timeliness of existing documents.

14. All collateral securing existing and new loans should be registered in accordance with existing legislation.

15. Ensure that as of December 31, 2000, financial accounts are reported in compliance with international accounting standards. Starting on December 31, 2000, publish detailed balance sheet, income statement, and loan classification figures on a quarterly basis, within 45 days of the end of each quarter. Published accounts should be signed by the chief internal auditor and chairman of the bank.

16. Implement adequate monitoring procedures for branches by end-September 2000. The procedures should include setting quantitative loan limits under which branches may operate freely and above which headquarter approval is required.

17. Close a minimum of 5 offices and cut a minimum of 5 percent of staff by June 30, 2001.

Loan recovery

18. The bank shall undertake a detailed analysis of the bank's largest 20 loans in arrears, and outline a recovery plan for each non-performing loan based on discussions with the delinquent borrowers. The analysis should include a detailed assessment of the borrower's financial condition and business prospects and the reasons why the borrower is in arrears. The recovery plan should specify the expected timeframe and terms of principal and interest repayments on the rescheduled loan.

19. The bank shall file claims in courts against the delinquent borrowers of the largest 20 loans in arrears, who have not begun to repay their loans by December 31, 2000.

20. The bank shall collect a minimum of 20 percent of its total outstanding non-performing loans—estimated at TR 16,143,844 as of April 1, 2000—by June 30, 2001. Loan recoveries at a discount (i.e., with a partial write-off of principal) shall be subject to the review and approval of the BSD of the NBT before execution.

21. The bank shall not rollover loans or extend new loans to borrowers that are in arrears by more than 30 days.

Profitability

22. The Bank's loan portfolio shall not be increased by more than 50 percent of net repayments on all outstanding loans (including non-performing loans) and new nongovernment deposits, starting from the balance sheet date of May 30, 2000. .

23. The bank shall place excess liquidity in treasury bills or in the interbank market against treasury bill collateral.

24. The bank shall report all new lending in excess of TR 50 million and associated collateral to the BSD of NBT.

25. The bank shall not pay out any dividends until the capital adequacy ratio specified in Article #1 of this agreement is fully met.

Implementation and compliance

26. The bank shall submit monthly reports to the BSD within 7 days after the end of each month. In addition, the bank shall submit detailed progress reports within 30 days after the end of each quarter (i.e., October 30, 2000, January 30, 2001; April 30, 2001; and July 30, 2001).

27. This agreement shall be valid for a period of one year (June 30, 2000 through June 30, 2001), but may be amended at the discretion of the BSD, in consultation with the bank to incorporate the findings of the external audit or unexpected developments.

28. Non-compliance with one or more of the provisions of this agreements shall trigger one or more of the following regulatory sanctions by the NBT provided for in Article 48 of the Republic of Tajikistan Law "On the National Bank of Tajikistan."

29. This agreement supersedes previously signed restructuring agreements with the bank.

Agreement Between the National Bank of Tajikistan and Orionbank on the Restructuring of the Orionbank

May 19, 2000

Compliance with prudential regulations

30. The bank shall achieve a capital-to-risk weighted assets ratio of 15 percent by December 31, 2000 and 20 percent by June 30, 2001.²

Management and operational restructuring

31. Undertake an audit by a reputable international accounting as of March 31, 2000, to be completed by June 30, 2000.

32. Submit a well-documented and quantitatively backed business plan and an Institutional Development Plan to the BSD by July 30, 2000. The business plan should include an analysis of the bank's business strategy and financial performance in recent years, a forward-looking strategy for product development and mix, and balance sheet and income statement projections for next three years demonstrating how profitability will be achieved.

33. Establish internal controls, internal audit standard and procedures, foreign exchange and market risk assessment methods, credit risk guidelines, and loan monitoring standards by December 31, 2000, fully taking into account the recommendations of the external auditor.

34. Establish an in-house training program for loan officers, risk managers, and internal auditors to ensure foreign exchange and market risk assessment methods, credit risk guidelines, loan monitoring standards, and international accounting standards are put into practice.

35. Ensure that as of December 31, 2000, financial accounts are reported in compliance with international accounting standards. Starting on December 31, 2000, publish detailed balance sheet, income statement, and loan classification figures on a quarterly basis, within 45 days of the end of each quarter. Published accounts should be signed by the chief accountant and chairman of the bank.

36. Adequate and complete loan files should be maintained by implementing a checklist of necessary documents and periodically verifying the timeliness of existing documents. The documents should include an analysis of the borrower's financial and business condition, and a thorough analysis of the borrower's creditworthiness.

37. All collateral securing existing loans should be registered in accordance with existing regulations.

38. If some branches show losses, the bank shall consider closing or reorganizing the branches.

Loan recovery

39. The bank shall undertake a detailed analysis of the bank's largest 20 loans in arrears, and outline a recovery plan for each non-performing loan based on discussions with the delinquent borrowers. The analysis should include a detailed assessment of the borrower's financial condition and business prospects and the reasons why the borrower is in arrears. The recovery plan should specify the expected timeframe and terms of principal and interest repayments on the rescheduled loan.

40. The bank shall file claims in courts against the delinquent borrowers of the largest 20 loans in arrears, who have not begun to repay their loans by December 31, 2000.

41. The bank shall collect a minimum of 20 percent of its total outstanding non-performing loans—estimated at TR 5,637,838 as of April 1, 2000—by June 30, 2001. Loan recoveries at a discount (i.e., with a partial write-off of principal) shall be subject to the review and approval of the BSD of the NBT before execution.

42. The bank shall not extend new loans to borrowers that are in arrears by more than 30 days and shall not defer the repayment of principal and interest by more than 90 days for borrowers suffering from exceptional circumstances..

Profitability

43. The bank shall not make any new loans unless its risk-weighted capital adequacy ratio is above 12 percent.

44. The bank shall place excess liquidity in treasury bills or in the interbank market against treasury bill collateral.

45. The bank shall not pay out any dividends until the capital adequacy ratio specified in Article #1 of this agreement is fully met.

Implementation and compliance

46. The bank shall submit monthly reports to the BSD within 3 days of the submission of monthly balance sheets after the end of each month. In addition, the bank shall submit detailed progress reports within 30 days after the end of each quarter (i.e., October 30, 2000, January 30, 2001; April 30, 2001; and July 30, 2001).

47. This agreement shall be valid for a period of one year (June 30, 2000 through June 30, 2001), but may be amended at the discretion of the BSD, in consultation with the bank, to incorporate the findings of the external audit or unexpected developments.

48. Non-compliance with one or more of the provisions of this agreements shall trigger one or more of the following regulatory sanctions by the NBT as provided for in Article 48 of the Republic of Tajikistan Law "On the National Bank of Tajikistan."

49. This agreement supersedes previously signed restructuring agreements with the bank.

Agreement Between the National Bank of Tajikistan and Savings Bank
on Restructuring of Savings Bank

May 31, 2000

Compliance with prudential regulations

50. The bank shall achieve a capital-to-risk weighted assets ratio of 12 percent by December 31, 2000 and 15 percent by June 30, 2001.³

Management and operational restructuring

51. Undertake an audit by a reputable international accounting firm as of December 31, 2000 to be completed by March 31, 2001. The audit should include a revised and more realistic valuation of the bank's real estate assets (including branches), which may be undervalued in the last international audit report as of June 30, 1999.

52. Submit a well-documented and quantitatively-backed business plan and an Institutional Development Plan to the Bank Supervision Department (BSD) of the NBT by September 30, 2000. The business plan should include an analysis of the bank's business strategy and financial performance in recent years, a forward-looking strategy for product development and mix, and balance sheet and income statement projections for next three years demonstrating how profitability will be achieved. The business plan should take into account the impact of market interest rates paid on government deposits, the possibility of some portion of government deposits being placed at other banks on a competitive basis, and the possibility of a gradual relaxation of lending restrictions.

53. Establish written internal control procedures, internal audit standard and procedures, foreign exchange and market risk assessment methods, credit risk guidelines, and loan monitoring standards by December 31, 2000.

54. Discontinue practice of lending solely on the basis of approval by individual board members. All new loans must be based on proper documentation of the borrower's financial and business condition, and a thorough analysis of the borrower's creditworthiness.

55. By end-September 2000, establish an in-house training program for loan officers, risk managers, and internal auditors. Put into practice foreign exchange and market risk assessment methods, credit risk guidelines, loan monitoring standards, and international accounting standards by end-December 2000.

56. Ensure that all new loans are based on proper documentation of the borrower's financial and business condition, and a thorough analysis of the borrower's creditworthiness.

57. Adequate and complete loan files should be maintained by implementing a checklist of necessary documents and periodically verifying the timeliness of existing documents.

58. All collateral securing existing and new loans should be registered in accordance with existing legislation.

59. Ensure that as of December 31, 2000, financial accounts are reported in compliance with international accounting standards. Starting on December 31, 2000, publish consolidated balance sheet, income statement, and loan classification figures on a quarterly basis, within 45 days of the end of each quarter. Published accounts should be signed by the chief accountant and chairman of the bank.

60. Close a minimum of 50 agencies and cut a minimum of 10 percent of total staff (2,445 as of May 1, 2000) by June 30, 2001.

Loan recovery

61. By end-September 2000, the bank shall undertake a detailed analysis of the bank's largest 20 loans in arrears, and outline a recovery plan for each non-performing loan based on discussions with the delinquent borrowers. The analysis should include a detailed assessment of the borrower's financial condition and business prospects and the reasons why the borrower is in arrears. The recovery plan should specify the expected timeframe and terms of principal and interest repayments on the rescheduled loan.

62. The bank shall file claims in courts against the delinquent borrowers of the largest 20 loans in arrears, who have not begun to repay their loans by December 31, 2000.

63. The bank shall collect a minimum of 30 percent of its total outstanding non-performing loans—estimated at TR 1,440,463 thousand as of April 1, 2000—by March 30, 2001. Loan recoveries at a discount (i.e., with a partial write-off of principal) shall be subject to the review and approval of the BSD of the NBT before execution.

64. The bank shall not rollover any loans or extend new loans to borrowers that are in arrears by more than 30 days.

Profitability

65. The bank shall invest all new household deposits (excluding those posted for reserve requirements) in Treasury bills and in the interbank market against Treasury bill collateral.⁴ Current lending restrictions shall be gradually relaxed in tandem with the strengthening of the capitalization of the bank according to the terms mutually agreed upon between the bank and the NBT during each quarterly review of the implementation of this agreement.

66. Starting on September 1, 2000, the bank shall pay market interest rates on government and non-government deposits.

67. Starting on September 1, 2000, the bank shall charge fees for collection and payment service undertaken for the government. The fee schedule should be drawn-up in consultation with the government and feed directly into the business plan of the bank.

Implementation and compliance

68. The bank shall submit monthly reports to the BSD within 7 days after the end of each month. In addition, the Bank shall submit detailed progress reports within 30 days after the end of each quarter (i.e., October 30, 2000, January 30, 2001; April 30, 2001; and July 30, 2001).

69. This agreement shall be valid for a period of one year (June 30, 2000 through June 30, 2001), but may be amended at the discretion of the BSD, in consultation with the bank, to incorporate the findings of the external audit or unexpected developments.

70. Non-compliance with one or more of the provisions of this agreements shall trigger one or more of the regulatory sanctions by the NBT as provided for in Article 48 of the Republic of Tajikistan Law "On the National Bank of Tajikistan."

71. During the implementation of this agreement, the bank shall not be fined by the BSD for prudential violations not under its full control.

72. This agreement supersedes previously signed restructuring agreements with the bank.

Agreement Between the National Bank of Tajikistan and Tajiksodirotbank on Restructuring of Tajiksodirotbank

May 19, 2000

Compliance with prudential regulations

73. The bank shall achieve a capital-to-risk weighted assets ratio of 9 percent by December 31, 2000 and 12 percent by June 30, 2001.⁵

Management and operational restructuring

74. Complete an audit by a reputable international accounting firm by December 31, 2000.

75. Submit a well-documented and quantitatively backed business plan and an Institutional Development Plan to the Bank Supervision Department (BSD) of the NBT by June 30, 2000. The business plan should include an analysis of the bank's business strategy and financial performance in recent years, a forward-looking strategy for product development and mix, and balance sheet and income statement projections for next three years demonstrating how profitability will be achieved.

76. Establish internal controls, internal audit standard and procedures, foreign currency and market risk assessment methods, credit risk guidelines, and loan monitoring standards by December 31, 2000, fully taking into account the recommendations of the external auditor.

77. Establish an in-house training program for loan officers, risk managers, and internal auditors to ensure foreign exchange and market risk assessment methods, credit risk guidelines, loan monitoring standards, and international accounting standards are put into practice.

78. Ensure that as of December 31, 2000, financial accounts are reported in compliance with international accounting standards. Starting on December 31, 2000, publish consolidated balance sheet, income statement, loan classification figures on a quarterly basis, within 45 days of the end of each quarter. Published accounts should be signed by the chief accountant and Chairman of the bank.

79. Ensure that all new loans are based on proper documentation of the borrower's financial and business condition, and a thorough analysis of the borrower's creditworthiness.

80. Adequate and complete loan files should be maintained by implementing a checklist of necessary documents and periodically verifying the timeliness of existing documents.

81. All collateral securing existing and new loans should be registered in accordance with existing legislation.

82. The bank shall not increase staff or the number of branches by June 30, 2001.

Loan recovery and profitability

83. The bank shall undertake a detailed analysis of the bank's largest 20 loans in arrears, and outline a recovery plan for each non-performing loan based on discussions with the delinquent borrowers. The analysis should include a detailed assessment of the borrower's financial condition and business prospects, and the recovery plan should specify the expected timeframe and terms of principal and interest repayments on the rescheduled loan.

84. The bank shall file claims in court against the delinquent borrowers of the largest 20 loans in arrears, who have not begun to repay their loans by December 31, 2000.

85. The bank shall collect a minimum of 20 percent of its total outstanding non-performing loans—estimated at TR 2,999,367 as of April 1, 2000—by June 30, 2001. Loan recoveries at a discount (i.e., with a partial write-off of principal) shall be subject to the review and approval of the BSD of the NBT before execution.

86. The bank shall not rollover loans or extend new loans to borrowers that are in arrears by more than 30 days.

Implementation and compliance

87. The bank shall submit monthly reports to the BSD within 7 days after the end of each month. In addition, the bank shall submit detailed progress reports within 30 days after the end of each quarter (i.e., October 30, 2000, January 30, 2001; April 30, 2001; and July 30, 2001).

88. This agreement shall be valid for a period of one year (June 30, 2000 through June 30, 2001). Depending on the fulfillment of the agreement, the BSD shall have the right to amend the agreement, in consultation with the bank, incorporate the findings of the external audit or other developments.

89. Non-compliance with one or more of the provisions of this agreements shall trigger one or more of the following regulatory sanctions by the NBT, as provided for in Article 48 of the Republic of Tajikistan Law "On the National Bank of Tajikistan."

90. This agreement supersedes previously signed restructuring agreements with the bank.

91. During the duration of this agreement, the bank shall not be fined for non-compliance with minimum capital requirements so long as it is in compliance with Article #1 of this agreement.

ANNEX III

Tajikistan: Regularizing Financial Relations Between the National Bank of Tajikistan and the Ministry of Finance

1.  In order to regularize the financial relations between the National Bank of Tajikistan (NBT) and the Ministry of Finance (MOF), the government will convert its debt to the NBT into treasury bills and long-term bonds that bear a market rate of interest. The NBT will pay interest on all government deposits. These arrangements will become effective as of January 1, 2001.

2.  The profits of the NBT, after provisions and other allocations to reserves, will be transferred to the MOF in accordance with a formula that is consistent with the Central Bank Law.

3.  The principles and procedures that will guide the process of regularizing relations between the NBT and MOF will be as follows:

(i) The MOF and NBT will agree on the size of government debt to the NBT as of June 30, 2000. Foreign currency loans to government will be valued at the official exchange rate that prevailed at the time the loan was contracted;

(ii) The total value of NBT's claims on the government, agreed to in (i) above, will be reduced by 30 percent;

(iii) The value of NBT's claims on the government as adjusted in (ii) above, will be converted into treasury bills with a maturity of 28 days in an amount of TR 3 billion on November 1, 2000.

(iv) The difference between the adjusted value of NBT's claims and the government and the value of treasury bills, from (iii) above, will be converted into 20-year bonds issued by the MOF to the NBT.

(v) The interest rate on these treasury bills issued by the MOF, from (iii) above, will be the prevailing rate on treasury bills at the time of issuance. The annual interest rate on the bonds will be equal to the 12-month inflation rate as of end-July plus 1 percent. Interest will be paid quarterly. This interest rate will be reviewed every six months using the same formula; and

(vi) The NBT will pay interest on [the quarterly average of the treasury bills rate] all government deposits, including those in the privatization account and on counterparts funds of the WB, EU, and ADB loan disbursements.

ANNEX IV

Tajikistan: Establishing an Independent Audit Agency to Strengthen
Public Finance Management

1.  The new audit agency will be accountable to the President.

2.  The new audit agency will use the Revisor Department of the Ministry of Finance as a foundation. The Revisor Department will be eliminated.

3.  The new agency will inspect only the state sector, including governmental organizations at the hukumat level.

4.  The new agency's functions will be those of statutory auditors, i.e., it will investigate potentially fraudulent activities and the efficiency of the use of public funds.

5.  The new agency will be headed by an Auditor General whose position and independence will be protected by the law. The specification of duties and responsibilities of the Auditor General will also be provided by the law.

6.  The Auditor General is appointed and dismissed by the President.

7.  The Annual Reports of the Auditor General shall be submitted to the President

8.  Inspection and auditing rights of public finances of all other government agencies will be eliminated.

9.  Auditing of private sector economic activities will be governed by the Auditing Law.

ANNEX V

Tajikistan: Structural Performance Criteria and Benchmarks

Continuous Performance Criterion

1. No directed credits will be issued by the NBT.

Structural Benchmarks

By end-December 2000

2. Set up regional treasuries in the remaining 6 rayons.

3. Extend the treasury coverage of payments to all central and local government transactions.

4. Sign contracts for the sale of at least 250 medium- and large-scale enterprises and receive full payments for at least 220 of these enterprises (cumulative since January 1998).

5. Convert at least 30 state-owned farms into private farms by issuing marketable land use certificates and land share certificates to private farmers during the fourth quarter of 2000.

6. Introduce a "black book" mechanism to reduce inappropriate government interventions in private enterprises.

By end-March 2000

7. Sign contracts for the sale of at least 280 medium- and large-scale enterprises, with full payments received for at least 250 of them (cumulative since January 1998).

8. Convert at least 80 state and collective farms into private farms by issuing marketable land use and land share certificates to private farmers (cumulative since October 1, 2000).

9. Establish an independent external audit institution to inspect public financial management systems.

10. Prepare a draft Law on Public Finances for review by IMF staff.

ANNEX VI

Tajikistan: Regularizing Relations between the Ministry of Finance and Tajik Rail

1.  Under the terms of an agreement between the Government of Tajikistan and the Government of Uzbekistan, partial repayment of Tajikistan's debt to Uzbekistan will be through the provision of railroad services to Uzbekistan by Tajik Rail. Thus far, the Ministry of Finance (MOF) has provided Tajik Rail (TRR) with partial compensation for these services largely through tax offsets.

2.  In order to regularize relations between the MOF and TRR the following measures will be implemented in the 2001 budget:

• TRR will provide railroad services to Uzbekistan on behalf of the Government of Tajikistan in an amount estimated at the equivalent of US$18 million per year;

• TRR will make tax payments to the government as required by the law and tax offset arrangements between MOF and TRR will be discontinued immediately;

• The operating deficit at TRR will be included in the 2001 budget and will be covered from general tax resources; and

• Capital spending of TRR will be made part of the budget.

• The 2001 budget will include principal repayment to TRR of TR 8 billion as a compensation for TRR's debt service to Uzbekistan.

ANNEX VII

Tajikistan: Performance Criteria and Indicative Targets ¹

I.  Quarterly Performance Criteria

1. Fiscal deficit

Table 1. Floor on the Cumulative Overall Deficit of the General Government
(In millions of Tajik Rubles)
Cumulative deficit from end-September 2000 to:
December 31, 2000 (performance criterion)	4,190
March 31, 2001 (performance criterion)	14,480
June 30, 2001 (indicative target)	21,830
September 30, 2001 (indicative target)	19,600

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 TR 10 billion. Thus far such financing are programmed at zero.

Definitions

The general government budget is defined to include the republican budget, local (including municipal) budgets, and all extrabudgetary 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 (including holding government securities) of the NBT on the general government, excluding bank restructuring costs taken by the government, less all deposits of the general government with the NBT, excluding counterpart deposits of loans received from the World Bank and from other official creditors, 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. 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 payment support from the World Bank's Structural Adjustment Credit and Asian Development Banks' 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 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:

Table 2. Projected Net Foreign Financing of the Budget
	(In billions of Tajik Rubles)
Cumulative from end-September 2000 to:
December 31, 2000	4,351
March 31, 2001	10,641
June 30, 2001 (indicative target)	16,541
September 30, 2001 (indicative target)	15,711

2. Minimum levels of Tax Collection of the State Tax and State Customs Committees

Table 3. Floors on the Tax Collection of the STC and SCC
	Total
	(In billions of Tajik Rubles)
Cumulative revenues from end-September 2000 to:
December 31, 2000 (performance criterion)	53,701
March 31, 2001 (performance criterion)	94,726
June 30, 2001 (indicative target)	147,030
September 30, 2001 (indicative target)	199,796

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 this 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.

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

Table 4. Ceilings on the Stock of Net Domestic Assets of the NBT
(In billions of Tajik Rubles)
Stock as of September 30, 20001	203.3
December 31, 2000	166.9
March 31, 2001	184.7
June 30, 2001 (indicative target)	174.1
September 30, 2001 (indicative target)	182.8
1If the end-September stock estimate will be revised, the subsequent targets will be revised by the same amount.

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 Tajik ruble 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 comprises net international reserves in convertible currencies. The NBT's net domestic assets comprises the following assets and liabilities: net credit to the general government, 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.

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

Table 5. Ceiling on the NBT's Net Credit to General Government2
(In billions of Tajik Rubles)
Stock as of end-September 20001	142.0
December 31, 2000	142.0
March 31, 2001	142.0
June 30, 2001 (indicative target)	145.4
September 30, 2001 (indicative target)	145.4
1If the end-September stock estimate will be revised, the subsequent targets will be revised by the same amount.

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 Tajik ruble equivalent value of US$10 million.

Definitions

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

3. Net international reserves

Table 6. Floors Under the Stocks of Net Official International Reserves of the NBT in Convertible Currencies
(In millions of U.S. dollars)
Stock as of end-September 20001	-56.4
December 31, 2000	-36.5
March 31, 2001	-45.9
June 30, 2001 (indicative target)	-35.8
September 30, 2001 (indicative target)	-35.8
1If the end-September stock estimate will be revised, the subsequent targets will be revised by the same amount.

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.

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, and foreign assets pledged as collateral or otherwise encumbered. 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$[275] 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).

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

Table 7. Limits on Public and Publicly Guaranteed ExternalDebt
	Cumulative net Disbursements	Cumulative contracting and Guaranteeing of external debt
	(In millions of U.S. dollars)
	0-1 year Maturity	Total	1-5 year Maturity
During the period from end-September 2000 to:
December 31, 2000	0	10	10
March 31, 2001	0	10	10
June 30, 2001	0	10	10
September 30, 2001	0	10	10

Definitions

The ceilings allow only the accommodation of the EBRD lending operations. 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-August 2000, the total outstanding government guaranteed debt amounted to US$24 million. The room remaining under extended guarantee will not be used for any additional external borrowing.

External debt limits 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. Credits received from governments, central banks or banks of the Baltic States, Russia, and the other countries of the former Soviet Union shall be included under the limits; if denominated in currencies other than the U.S. dollar, these will be valued in U.S. dollars at the exchange rate prevailing at the time of disbursement (contracting or guaranteeing).

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.

II.  Continuous Performance Criteria

1. Continuous performance criterion on new credits by the NBT

The NBT will not issue any directed credits. This 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 Fund on a monthly basis no later than 14 days after the end of each month.

1. Reserve money

Table 8. Indicative Limits on the Stock of Reserve Money of the NBT
(In billions of Tajik Rubles)
Stock as of end-September 20001	96.1
December 31, 2000 (indicative target)	97.6
March 31, 2001 (indicative target)	97.5
June 30, 2001 (indicative target)	106.0
September 30, 2001 (indicative target)	114.8
1If the end-September stock estimate will be revised, the subsequent targets will be revised by the same amount.

Definition

Tajik Ruble 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 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.