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

January 31, 2002

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

Dear Mr. Köhler:

Significant progress was made by Uzbekistan in achieving the objectives of the macroeconomic and structural reform program for the second half of 2001 elaborated in consultation with the IMF staff in July/August 2001. The worsening of the international economic climate after the terrorist events of September 11, 2001, in particular the further deterioration in commodity prices, has, however, adversely affected the Uzbek economy. As a result, the original targets for end-December 2001 had to be revised.

We are pleased to inform you that we have elaborated, in close cooperation with the IMF staff, a comprehensive program of macroeconomic stabilization and structural reform, aimed at strengthening our efforts to implement market reforms, including the gradual removal of all restrictions on access to foreign exchange for current account transactions and the unification of exchange rates by end-June, 2002. Thereafter, Uzbekistan intends to accept the obligations of Article VIII of the IMF's Articles of Agreement within the framework of financial cooperation with the Fund. The program is described in the attached Memorandum of Economic and Financial Policies (MEP). The implementation of the program will be monitored by the IMF staff according to the procedures guiding Staff Monitored Programs (SMPs).

We hope that the implementation of the measures described in the SMP will demonstrate our commitment to reform to the international community and enable us to establish an economic program beyond mid-2002 that could be supported by financial resources from the IMF. We also hope that the successful implementation of the MEP would create the conditions for the granting of financial assistance from other international financial institutions, bilateral agencies, and the international financial community as a whole.

We believe that the policies described in the attached MEP are adequate to achieve its objectives, but we would be ready to take additional measures, if necessary, to keep the program on track. During the program period, we will cooperate closely with the IMF staff and provide promptly any information requested by the IMF staff to enable the staff to monitor program implementation. We fully understand the importance of adhering to the spirit of the reform program and will decisively implement the formal decrees, resolutions and instructions.

President Karimov has been briefed on the measures included in the MEP and fully supports the objectives of the program, as expressed in his December 19, 2001 letter to you.

In line with our commitment to transparency in economic policies, we authorize the IMF to publish this letter and the MEP. We will at the same time publish these documents in the mass media in the Republic of Uzbekistan.

Memorandum of Economic and Financial Policies
for the period January 1 - June 30, 2002
under the Staff Monitored Program

I. Introduction

1. Since independence in 1991, the government of Uzbekistan has followed a policy of gradual transition to a market economy. Our goals have been to stabilize the economy and maximize economic growth while ensuring social and political stability. These remain the overriding objectives of the economic policies of the government of Uzbekistan. The difficult external environment that Uzbekistan has faced over the past two years and especially the recent weakening of the international economy in the wake of the terrorist acts of September 11, 2001 have, however, necessitated an acceleration of economic reforms.

2. Following the introduction of measures aimed at liberalizing the foreign exchange regime in mid-2001, the government elaborated, in consultation with the IMF staff, an economic program for the second half of 2001 that aimed at strengthening macroeconomic policies and intensifying wide-ranging structural reforms.

3. The worsening of the international economic climate post-September 11, 2001, and in particular the further deterioration in commodity prices and decline in tourism receipts, adversely affected the Uzbek economy. As a result, some of the original targets for end-December 2001 had to be revised. The revised end-December 2001 targets which were specified as prior actions for the entering into effect of the SMP described below have been observed, as indicated in
Table 1.

4. We recognize, however, that the events of September 11 and the subsequent increased international focus on the Central Asian region have provided a unique opportunity to strengthen our efforts to implement market reforms. Accordingly, we have, in consultation with the IMF staff, designed a macroeconomic and structural policy framework for the period January 1 - June 30, 2002. The implementation of this program will be monitored by the IMF staff according to the procedures guiding Staff Monitored Programs (SMPs). It is our expectation that the successful implementation of the MEP would lead to discussions in the summer of 2002 of a program that could be supported by a financial arrangement with the Fund.

II. The Government's Economic Program for the First Half of 2002

Main elements of the program

5. The key aim of our program is to ease progressively restrictions and regulations on economic activity and in this way give greater scope for market forces to set prices and determine the allocation of resources. As an important step in this process, we plan to gradually lift all restrictions on access to foreign exchange for current account transactions and achieve exchange rate unification by the end of the SMP period. We will support the foreign exchange policy measures with appropriately tight macroeconomic policies and structural reform measures in other areas with a view, inter alia, to avoiding sharp fluctuations in the exchange rate.

6. As a first step in the further liberalization of the foreign exchange system we have eliminated a number of provisions in the foreign exchange regulations that in certain instances prevented economic entities from obtaining foreign exchange from the over the counter (OTC) market, as indicated in Table 2. We have already reduced by 15 the number of items on the list of consumer goods for which the provision of foreign exchange is not recommended. We plan to remove an additional 20 items from the list by the end of March and to eliminate the list completely by the end of the SMP period. As regards access to cash foreign exchange for individuals, we have increased the limit to US$750 per transaction from January 1, 2002 and will increase the limit to US$1,000 per transaction from April 1, 2002, but retain the current documentation requirements. It is our intention to increase the limit further during the second half of the year. Purchases of cash foreign exchange in excess of the limits will be permitted for all bona fide transactions, if the application for the additional amount is supported by appropriate documentation. With the liberalization measures outlined above, it is expected that the spread between the OTC exchange rate and the curb market exchange rate will be substantially reduced to at most 50 percent by March 31, 2002 and to at most 20 percent by June 30, 2002. We intend to achieve this reduction in the spread through a progressive liberalization of access to foreign exchange and not through any systematic official intervention in the curb market. The detailed measures and the timing for their implementation (including those that were prior actions) are specified in the attached Table 2.

7. To promote further growth and reduce poverty, we intend to introduce a number of reforms in the agricultural sector. In particular, we plan to improve the state procurement system for raw cotton and grain, including mandatory crop patterns and production targets. In addition, state procurement prices for the 2002 cotton crop have been set at the world market level, adjusted for normal processing, marketing, and transportation costs, and will be reviewed based on developments in world market prices for cotton and the OTC exchange rate by August 10, 2002. As regards grain, the state procurement price has been set at the level of the regional commodity exchange prices, and will be reviewed based on developments in world market prices for grain and the OTC exchange rate before June 1, 2002. Furthermore, state procurement for individual farms (for both raw cotton and grain) will be applied to actual instead of targeted production. Purchases of cotton fiber for state needs from the 2002 harvest will be carried out at the level of 30 percent of the volume of production on the farms at the state procurement price, purchases of another 20 percent of the volume of production shall be carried out at negotiated prices, while the remaining 50 percent of the volume of production shall be freely disposed of by farms at their discretion. Purchases of grains for state needs from the 2002 harvest will be carried out at the level of 25 percent of the volume of production on the farms at the state procurement price, purchases of another 25 percent of the volume of production shall be carried out at negotiated prices, while the remaining 50 percent of the volume of production shall be freely disposed of by farms at their discretion. Resolution No. 477 issued by the Cabinet of Ministers on December 19, 2001 concerning state procurement of cotton will be amended accordingly by August 1, 2002 at the latest, while Resolution No. 27 issued by the Cabinet of Ministers on January 19, 2002 concerning state procurement for grain will be amended accordingly by May 1, 2002 at the latest. (The state procurement system described above does not apply in the case of regions where the World Bank and the Asian Development Bank rural sector pilot projects are being implemented).

8. We also plan to implement a number of measures aimed at enhancing the role of the banking system in the economy. To that end, directed credits will be eliminated and be replaced, as an interim step before moving to a more market-based allocation of credit, by a system where all credits extended by the Central Bank of Uzbekistan (CBU) are based on competitive credit auctions. Effective January 1, 2002, we have taken all necessary measures to prevent any unjustified interference in the operations of commercial banks by the government, including (i) in the provision of specific loans and credits to enterprises, and (ii) other routine and otherwise legitimate bank operations. If and when temporary subsidies are provided to affected enterprises, they will be reflected in the budget. We also plan to limit the issuance of government guarantees for both sum and foreign currency loans in accordance with the Budget Law as approved by Parliament. Furthermore, consistent with the objective of providing individual entrepreneurs with unrestricted access to cash from their bank accounts, by June 1, 2002, Paragraph 6 of Presidential Decree UP-2564 will be amended to abolish the provision that limits quarterly access to cash from bank accounts for individual entrepreneurs to 50 percent of their turnover. We intend to eliminate all remaining restrictions on cash withdrawals for individuals and enterprises (except for diligence reporting on very large transactions by commercial banks) from January 1, 2003. In support of these measures, we will implement appropriate steps to strengthen tax administration so as to minimize the risk that lifting these restrictions will compromise tax compliance.

9. A number of measures are envisaged with respect to strengthening the role of the CBU and improving the transparency of its operations. Most importantly in this respect, the CBU plans to conduct an international audit of its 2001 balance sheet. To this end, the CBU has issued a tender for the selection of the external auditor and plans to sign the contract with the successful bidder before March 31, 2002. Further, to improve the transparency of reserve management, the CBU will transfer all gold and foreign exchange reserves currently being managed by the National Bank for Foreign Economic Activity (NBFEA) to its own accounts (as and when related contracts expire) and take responsibility for their management. In the meantime, the NBFEA has released to the IMF staff the detailed assessment by international auditors of the gold and foreign exchange accounts currently being managed by the NBFEA on behalf of the CBU. In order to enhance the ability of the CBU to conduct market-based monetary and exchange rate policies, the management board of the Consolidated Stabilization Fund (CSF) has been limited exclusively to CBU staff and the elimination of the CSF will be discussed later in the year.

10. With respect to price policy, we plan to reduce gradually the number of monopolies and monopoly products subject to price regulation. During the first half of 2002, the number of monopolies and monopoly products are expected to be reduced by 184 and 52, or by 25 percent and 16 percent, respectively. In connection with the unification of the official and OTC exchange rates in November 2001, controls on trade margins were introduced for socially important goods. It is our intention to abolish these price margin regulations by December 31, 2002 and to address concerns regarding abuse of market power by fostering better competition and following through with the introduction of full current account convertibility.

11. We also plan to make further progress with respect to trade liberalization. In February 2001, the import tariff system was streamlined and rationalized and we plan to take additional measures to improve and simplify the import tariff system during 2002. To further liberalize trade, we will gradually reduce the number of goods subject to export bans (according to the schedule outlined in Table 2). To that end, we will increase transparency and streamline procedures associated with pre-registration of import contracts during the MEP period and take steps to prepare for the transition to a monitoring system based on internationally accepted norms, including by seeking international technical assistance to expedite this process. We plan to abolish the system of ex ante registration of import contracts by end-2002 (except for state procurement contracts) and thereafter to monitor the legitimacy of import contracts (to avoid capital flight, corruption, and other abuses).

12. We fully recognize the importance of producing timely and reliable macroeconomic statistics. To achieve this aim, we intend to implement the recommendations of technical assistance provided by the Fund and other IFIs. Specifically, we intend to implement the recommendations with respect to improving the national accounts statistics, including the computation of discrete quarterly GDP estimates by economic activity at constant prices. Furthermore, we are currently preparing a new Statistics Law that will, among other things, provide for the establishment of an independent statistical agency. This draft law will be passed on to Parliament by May 1, 2002 at the latest with a view to having the law adopted by the end of 2002.

The macroeconomic program for 2002

13. The latest official forecast for real GDP growth for 2002 is slightly above 5 percent. However, the more difficult external environment together with the policy measures outlined above may have a temporary negative impact on the real economy. Accordingly, we acknowledge that there may be a certain reduction in the growth rate of real GDP, which according to IMF staff estimates could be slightly above 2 percent for 2002. We have accepted this latter estimate as the basis for the calculations underlying the economic program. Similarly, the IMF staff estimate, according to which consumer prices may increase up to 18 percent, is used as the basis for the program instead of the latest official forecast of 14 percent. With the forecast continued weak commodity prices and the liberalization of the foreign exchange system, the external current account deficit of ½ percent of GDP estimated for 2001 is expected to widen to about 1 percent of GDP in 2002. However, it is expected that the capital account will turn positive and the decline in gross international reserves during 2002 is expected to be limited to US$90 million.

14. The depreciation of the exchange rate during 2001 has put pressure on the budget. In relation to GDP, revenues have been lower than budgeted. Nevertheless, it is expected that the budget deficit in relation to GDP for 2001 will be somewhat lower than budgeted since we have managed to pursue a tight expenditure policy. Although gross credit from the CBU was within the budgeted limit, net credit from the CBU to the budget has been higher than envisaged (Table 1). We are firmly committed to maintain a tight fiscal stance in 2002, although the difficulties associated with the depreciation of the exchange rate have necessitated an increase in the budget deficit from about 1½ percent in 2001 to about 2 percent of GDP, according to the government definition. According to the definition used by the IMF staff, the deficit is expected to widen from 2½ percent of GDP in 2001 to about 3½ percent of GDP in 2002. All expenditures related to temporary assistance for enterprises in accordance with Resolution 423, dated October 25, 2001, "On Measures of Government Support for Priority Sectors of the Economy" will be taken into account in the execution of the consolidated budget for 2002. To contain expenditures, we intend to limit wage increases significantly and to grant such increases twice a year instead of once a year. The first increase to be granted on April 1, 2002 will be at most 15 percent. At this stage, the unfinanced part of the budget deficit, equivalent to about ½ percent of GDP, is expected to be covered with external assistance. If such assistance is not forthcoming, we will take both revenue raising and expenditure reducing measures to close the gap. Accordingly, gross credit to the government from the CBU will be limited to 0.5 percent of GDP in 2002 and net credit to the government from the CBU will be limited to 1.4 percent, including credit to be provided pursuant to Resolution No.423. The deficit targets for the first two quarters of 2002 are indicated in
Table 1.

15. Monetary policy will play a key role in containing inflation and preventing any disruptive exchange rate movements in 2002. To stem the increase in velocity experienced in 2001, the CBU increased its monthly refinance rate from 2.0 percent to 2.5 percent from January 1, 2002 and it will keep interest rate policy under constant review and adjust its refinance rate as necessary during 2002 to ensure that it is positive in real terms. On this basis the increase in velocity is expected to be limited to 4½ percent during the year. With the envisaged tightening of credit conditions (described below) and the increase in interest rates, net international reserves are expected to amount to US$1,017 million by end-2002. To achieve the objectives of the monetary program, the stock of net domestic assets (NDA) of the CBU will be limited to no more than negative sum 400.8 billion at end-March 2002 and to no more than negative sum 301.3 billion at end-June 2002. The NDA targets will be achieved mainly by limiting the amount of credit provided by the CBU to commercial banks. Net credit to the government from the CBU will be limited to no more than sum 7.7 billion by end-March 2002 and to no more than sum 22.9 billion by end- June 2002. We will also monitor closely the development of reserve money. The NDA and net credit to government limits and the floor for net international reserves of the CBU, as well as the targets for reserve money, are indicated in Table 1.

The reform strategy beyond mid-2002

16. It is our intention to continue the macroeconomic and structural reform efforts beyond mid-2002 so as to achieve macroeconomic stability, sustainable growth and poverty reduction over the medium-term. In support of this effort, and to permit the private sector (and especially the SME sector) to contribute to both real growth and job-creation, the government will progressively dismantle existing restrictions and regulations to facilitate the ability of economic agents to do business. Moreover, and in light of the prospects for long-term stability and economic growth and development in the region, we intend to intensify our economic cooperation with other countries in the region.

17. With respect to the external sector, we will take further liberalization measures within the framework of a program of financial cooperation with the Fund. Thus, we will at the start of such a program eliminate the foreign exchange regulation that precludes access to the OTC market if economic entities have foreign exchange in their account that is free of liabilities and take all other steps that will be necessary to accept the obligations of Article VIII, Sections 2, 3, and 4 of the IMF's Articles of Agreement. It is also our intention to reduce the obligatory surrender requirement within the framework of a program of financial cooperation with the Fund. In support of the move to current account convertibility, we will continue our efforts to liberalize trade. The envisaged measures will entail a further rationalization of the import tariff system, a simplification of customs procedures, and the gradual elimination of the remaining export bans. Our efforts to liberalize the trade system are expected to accelerate discussions on Uzbekistan's accession to the WTO. It is our intention to follow a cautious external borrowing policy which, together with appropriately tight macroeconomic policies, are expected to lead to a significant decline in the external debt service ratio and the external debt to GDP ratio over the medium term.

18. With respect to structural reform measures in the domestic economy, we will continue to implement the comprehensive privatization program covering 2001-2002. Similarly, we will intensify our efforts to implement the demonopolization and enterprise restructuring program initiated in early 2001 of such sectors as electric power, cotton processing, oil and gas, coal, chemical industries, furniture production and railway transport. In the agricultural sector, we will continue the efforts to improve the state procurement system for cotton and grain, and allow the privatization of majority stakes in cotton ginneries and liberalization of export procedures for such ginneries.

19. In the fiscal policy area a number of reforms are envisaged. Thus, we will adopt as soon as possible a timetable for the implementation of the World Bank's Public Finance Management Reform Project that is currently under preparation. We expect to start implementing improvements in cash planning in 2002, and to establish a Treasury system covering both central and local governments during 2003-2005. These measures will be central to increasing the effectiveness of the public sector and improving governance and transparency. Further, starting with the 2003 budget, the government will no longer rely on CBU loans for its financing operation, provided that there is adequate balance of payments and budgetary support from international financial institutions. Instead, it will rely to a larger extent on the treasury bill market and ensure that competitive interest rates are offered on such instruments. We will also continue our efforts to strengthen tax and customs administration. Furthermore, it is our intention to rationalize public administration and pursue tight wage policies for public sector employees.

20. As regards the financial sector, we will carefully analyze the balance sheets of banks and enterprises to assess their vulnerabilities in the context of a liberalized foreign exchange system. To the extent that support is needed for banks and enterprises that are deemed viable, such assistance will be temporary and included explicitly in the budget. We will also continue to strengthen the banking supervision capability of the CBU to ensure that all prudential regulations are observed in the banking system. The CBU will also ensure that all recommendations by external and internal auditors are properly implemented by bank management in a timely fashion. We will continue our efforts to privatize the remaining state banks. It is our expectation that Asaka Bank will be privatized in 2003 and that the NBFEA will follow in 2004, although we recognize that the further restructuring of balance sheets of these banks may be necessary to make them attractive to foreign investors. As regards the conduct of monetary policy, the CBU will continue to develop indirect monetary policy instruments, including greater use of open-market operations in treasury bills or CDs issued by the CBU.

21. It is our hope that the measures outlined above for the period beyond mid-2002 would form the basis for an economic program that could be supported by financial resources from the IMF. We intend to elaborate the details of such a program in consultation with the IMF staff during the second quarter of 2002, and to reach understandings that may make it possible to present the program to the Executive Board of the IMF during the summer.

22. The CBU will conduct a floating exchange rate policy. However, further exchange rate depreciation, which in the longer run will benefit the economy, will have in the short run a negative impact on prices of imported staple products, inflation, and the effectiveness of the social support programs for vulnerable segments of the population. In addition, the sharp depreciation will have a negative impact on external debt service, the financial conditions of import-dependent enterprises, and on the state budget as a whole. At the same time, the sharp decline in world-market prices for Uzbekistan's main exports will adversely affect the balance of payments. To deal with these problems, Uzbekistan will seek external assistance. We understand that the IMF staff, at any given time during the SMP period, will be prepared to inform other financial institutions and bilateral creditors of progress made by the government in the implementation of the SMP in order to give them a better basis on which to make decisions concerning potential provision of financial assistance to Uzbekistan.

III. Program Monitoring

23. The attached Tables 1 and 2 and the attached Technical Memorandum of Understanding (Annex I) detail the quantitative targets and structural benchmarks. The monitoring of the implementation of the program will be done in the context of two program reviews. The first review will take place in late April/early May 2002, on which occasion the IMF mission will examine the foreign exchange regulations in order to determine the changes that would be necessary for Uzbekistan to accept the obligations of Article VIII, Sections 2,3, and 4 of the Articles of Agreement of the IMF. This mission would also start the elaboration of a program that could be supported by financial resources from the IMF. The conclusion of the discussion of such a program could take place during the second review under the SMP in late July/early August 2002.

24. To increase transparency of our policy intentions, it is our plan to have this Memorandum published on the IMF Website and in the Uzbek media.

Use the free Adobe Acrobat Reader to view Tables 1 and 2 (357 Kb PDF file)

Technical Memorandum of Understanding

Uzbekistan's performance under the SMP will be assessed by the IMF staff on the basis of the observance of quantitative and structural performance benchmarks. This annex and included tables define the quantitative performance benchmarks, indicative targets, and monitoring requirements.

I. Monetary Aggregates

Definitions

1. The net international reserves (NIR) of the Central Bank of Uzbekistan (CBU) are defined as the difference between the gross reserves of the CBU and the reserve liabilities of the CBU. Gross international reserves shall be defined as the sum of gold holdings of the CBU, excluding gold swapped against foreign exchange, holdings of SDRs, the reserve position in the IMF, holdings of convertible currencies in cash, debt instruments, deposits with foreign banks, and all other foreign currency assets as specified in the data template for foreign reserves as developed by the Statistics Department of the IMF. Excluded are forward positions and amounts pledged as collateral or in swaps or otherwise blocked, capital subscriptions in foreign international institutions, long-term (beyond one year) assets of the CBU, and any assets in nonconvertible currencies. For purposes of the program, official reserve liabilities in convertible currencies shall be defined as purchases from the IMF, and liabilities of the CBU in convertible currencies to nonresidents, with a maturity of up to and including one year. Also included in official reserve liabilities is the outstanding balance on the loan from Société Générale contracted by the National Bank for Foreign Economic Activity in April/May 1999, the proceeds of which were passed on to the CBU. For purposes of the program, all reserve assets and liabilities shall be valued at the exchange rate of sum 683.41 per U.S. dollar, U.S. dollar 1.26608 per SDR, and the cross rates prevailing as of December 31, 2001; gold holdings shall be valued at US$274.7 per troy ounce.

2. The net domestic assets of the CBU are defined as reserve money minus net international reserves of the CBU. The stock of reserve money of the CBU is defined as the sum of currency issued plus commercial banks' deposits with the CBU (the required reserves of banks, the balance of commercial bank' correspondent accounts with the CBU, and deposits in convertible foreign currencies). Net domestic assets include net credit to the general government (including all extrabudgetary funds), net credit extended to banks, and all other

net assets. Net credit to the general government extended by the CBU is defined as the consolidated gross credit provided by the CBU minus consolidated liabilities of the CBU to the general government (but excluding from these liabilities the non-budgetary accounts of budgetary organizations).

II. Fiscal Indicators

Definitions

3. The general government is defined as comprising the republican and local governments, but excluding state-owned enterprises. It includes the state budget agencies, including the republican and local government budgets, and all other budgetary organizations whose operations are covered by the State Budget, all the extrabudgetary funds at all levels of the general government, including the Pension Fund, the Employment Fund, the Road Fund, and the Privatization Fund. The consolidated cash deficit of the general government is defined from the financing side as the sum of: (i) the change in the stock of net claims on the general government of the banking system; (ii) the change in the stock of net claims on the general government of domestic non-bank institutions and households; (iii) the use of proceeds from the privatization of state property; and (iv) net foreign financing of the general government.

(i) The change in the stock of net credit to the general government of the banking system is defined as the change in the stock of claims of the CBU, state banks, and commercial banks (including the Savings Bank) on the general government minus the change in the stock of consolidated liabilities of these institutions to the general government (but excluding balances in non-budgetary accounts of budgetary organizations), with foreign currency deposits adjusted for valuation changes arising from exchange rate movements.

(ii) The change in the stock of net claims on the general government of domestic non-bank institutions and households is defined to include net sales of treasury bills, bonds or other government securities to non-bank institutions and households (including to nonresidents and nonresident financial institutions, if any) and changes in the stock of any other liabilities of the general government to domestic nonbank institutions, including state-owned enterprises and public companies, and households.

(iii) Proceeds from the privatization of state property are defined as all net receipts originating from the sale of state property transferred to the republican and local government budgets.

(iv) 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 during the monitoring period. Foreign financing of the general government is defined as the increase in claims on the general government of foreign financial and non-financial institutions and households, excluding the IMF, for budgetary support, project financing, and other purposes. General government guarantees on loans to entities outside the general government are not included as foreign financing and payments made by the consolidated government to cover defaults on such loans are not included as amortization of the general government debt (which would be included in general government expenditures as subsidies to enterprises).

4. Monthly data on net claims of the domestic banking system on the general government are taken from the balance sheets of the CBU and commercial banks. The Ministry of Finance shall provide information on the amounts of general government deposits held abroad, if any; disbursements of foreign loans to the general government; net sales of treasury bills and other securities; and borrowing from the nonbank sector. It shall also provide detailed monthly data on (1) revenues and expenditures and lending operations of both the state and local budgets and budgetary and extrabudgetary funds; (2) quasi-fiscal operations; (3) estimates of the outstanding stock of wage and pension and all other domestic expenditure arrears, if any; (4) and estimates of the outstanding stock of tax and other revenue arrears to the general government.

III. External debt

7. External debt limits apply to the contracting or guaranteeing of nonconcessional short term external debt (with an original maturity of less than one year, except normal import-related credits and CBU reserve liabilities); and contracting or guaranteeing of nonconcessional medium- and long-term external debt (with original maturities of one year or more). Excluded from these external debt limits are (i) purchases from the IMF, (ii) the contracting or guaranteeing of new external debt that constitutes a rescheduling or refinancing of existing debt at terms more favorable to the debtor and (iii) debt contracted or guaranteed on terms which are considered concessional.

8. For program purposes, a debt is considered concessional if the grant element is at least 35 percent, calculated by using currency specific discount rates based on the Commercial Interest Reference Rates (CIRRs) published by the OECD plus margins depending on the debt maturity. A lower grant element will be considered only for new loans committed to replace old debt originally contracted at less favorable terms. The average of the CIRRs over the last 10 years will be used for debts with a maturity of at least 15 years and the average CIRR of the preceding six months will be used for shorter maturities.

9. The term "debt" has the meaning set forth in point number 9 of the Guidelines on Performance Criteria with respect to Foreign Debt (Decision No. 12274-00/85, August 24, 2000) and will be understood to mean a current, and not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debts can take a number of forms, the primary ones being as follows: (i) loans, i.e., advances of money to the obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans and buyers' credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements); (ii) suppliers' credits, i.e., contracts where the supplier permits the obligor to defer payments until some time after the date on which the goods are delivered or services are provided; and (iii) leases, i.e., arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the lessor retains the title to the property. For the purpose of the guideline, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement excluding those payments that cover the operation, repair or maintenance of the property.

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 (e.g., payment on delivery) will not give rise to debt.

IV. External Payments Arrears

10. External payments arrears consist of the total past-due amounts of debt service obligations (interest and principal) on public and publicly-guaranteed debt, excluding arrears on external debt service obligations where the amounts and/or terms of repayment are in dispute and under negotiation. Under the SMP, the nonaccumulation of external payments arrears is a continuous quantitative benchmark. As of December 15, 2001, there were no outstanding external payment arrears as defined above.

V. Foreign Exchange Market Spreads

11. The spread between the over-the-counter (OTC) exchange rate and the curb market exchange rate shall be defined based on the rate at which banks/market participants are prepared to buy US dollars against sum on the designated dates and shall be expressed in sums/US dollar. The spread between the OTC exchange rate and the curb market exchange rate is defined as the percentage by which curb market rate exceeds the OTC market rate.