Page 1 January 10, 2000 Mr. Mirsad Kurtovic Minister of Foreign Trade and Economic Relations Musala 9 71000 Sarajevo Bosnia and Herzegovina Re: Dutch Grant for the cofinancing of Second Public Finance Structural Adjustment Credit Grant Number TF023282 Dear Mr. Kurtovic: I am writing on behalf of the International Development Association (IDA) to indicate IDA’s agreement, as administrator of grant funds provided by the Netherlands, to make a grant in an amount not exceeding nineteen million United States dollars (US$19,000,000) (the Grant) to Bosnia and Herzegovina (the Recipient). The Grant is made in response to the Recipient's request for financial assistance and for the purposes and on the terms and conditions set forth in the Annex to this Letter Agreement. The Recipient represents, by confirming its agreement below, that it is authorized to contract and withdraw the Grant for the said purposes and on the said terms and conditions. Please confirm your agreement with the foregoing, on behalf of the Recipient, by signing, dating, and returning to us the enclosed copy of this Letter Agreement. Upon receipt by IDA of the copy of this Letter Agreement countersigned by you, this Letter Agreement will become effective as of the date of the countersignature. Very truly yours, INTERNATIONAL DEVELOPMENT ASSOCIATION By /s/ Elaine W. Patterson Acting Resident Representative for Bosnia and Herzegovina Europe and Central Asia Region AGREED: BOSNIA AND HERZEGOVINA By /s/ Mirsad Kurtovic Authorized Representative Date: January 24, 2000 ANNEX Purposes, Terms, and Conditions of the Grant 1. Purposes and Activities 1.1. The purpose of the Grant is to cofinance the Second Public Finance Structural Adjustment Credit (the Project) to Bosnia and Herzegovina. The activities (the Activities) for which the Grant is given are as follows: (a) consolidate the public finance reforms began under the First Public Finance Structural Adjustment Credit; (b) promote the free flow of goods between the entities and improve tax revenue collection by completing harmonization of major tax structures; (c) develop a more robust intergovernmental system, by improving efficiency Page 2 and coverage of public sector services; and (d) develop a comprehensive budgetary strategy and a regulatory framework for auditing aimed at improving transparency, fiscal efficiency and accountability in public sector operations. 2. Implementation Generally 2.1. The Recipient shall cause the Federation and Republika Srpska to: (a) carry out the Activities with due diligence and efficiency; (b) promptly provide the funds, facilities, services and other resources required for that purpose; (c) furnish all information covering the Activities and the use of the proceeds of the Grant as IDA shall reasonably request; (d) from time to time exchange views with IDA's representatives on the progress and results of the Activities; and (e) take all necessary measures required to enable IDA to visit the territory of Bosnia and Herzegovina for purposes related to the Grant. Without limitation on the foregoing, the Recipient shall, if IDA shall so request, prepare and furnish to IDA promptly upon completion of the Activities a report, in form and substance satisfactory to IDA, on the results and impact of the Activities. 2.2. For purposes of ensuring that the Grant is implemented and that the funds are transferred according to the terms and conditions of the Grant, the Recipient shall enter into a subsidiary grant agreement with the Federation and a subsidiary grant agreement with Republika Srpska on terms and conditions satisfactory to IDA. 2.3. It is expected that the Activities will be completed by December 31, 2000. 3. Withdrawal of Grant Proceeds 3.1. The Recipient shall, prior to furnishing to IDA the first request for withdrawal from the Grant Account, open and thereafter maintain in its central bank a deposit account in Dollars on terms and conditions satisfactory to IDA. All withdrawals from the Grant Account shall be deposited by IDA into the Deposit Account. 3.2. Subject to the provisions of paragraphs 3.1., 3.3. and 3.4. of this Section, the Recipient shall be entitled to the use of proceeds of the Grant withdrawn from the Grant Account and deposited in the Deposit Account in support of the Activities. 3.3. The Recipient undertakes that the proceeds of the Grant shall not be used to finance expenditures excluded pursuant to the provisions of the Attachment to this Annex. If IDA shall have determined at any time that any proceeds of the Grant shall have been used to make a payment for an expenditure so excluded, the Recipient shall, promptly upon notice from IDA: (i) deposit into the Deposit Account an amount equal to the amount of said payment, or (ii) if IDA shall so request, refund such amount to IDA. Amounts refunded to IDA upon such request shall be credited to the Grant Account for cancellation. 3.4. The expenditures for the following items may be financed out of the proceeds of the Grant and shall be used exclusively in the carrying out of the Activities and shall be allocated as follows: Amount of the Grant Allocated Item (in United States Dollars) (1) Federation 12,500,000 (2) Republika Srpska 6,500,000 TOTAL 19,000,000 3.5. Upon IDA’s request, the Recipient shall: (a) have the Deposit Account audited in accordance with appropriate auditing principles consistently applied, by independent auditors acceptable to the IDA; (b) furnish to IDA as soon as available, but in any case not later than six (6) months after the date of IDA’s request for such audit, a certified copy of the report of such audit by said auditors, of such scope and in such detail as IDA shall have reasonably requested; and (c ) furnish to IDA such other information concerning the Deposit Account and Page 3 the audit thereof as IDA shall have reasonably requested. Attachment Excluded Expenditures For purposes of paragraph 3.3. of the Annex, the proceeds of the Credit shall not be used to finance any of the following expenditures: 1. expenditures in the currency of the Borrower or for goods or services supplied from the territory of the Borrower; provided, however, that if the currency of the Borrower is also that of another country from the territory of which goods or services are supplied, expenditures in such currency for such goods or services shall not be excluded; 2. expenditures for goods or services supplied under a contract which any national or international financing institution or agency other than the Bank or the Association shall have financed or agreed to finance, or which the Bank or the Association shall have financed or agreed to finance under another credit or a loan; 3. expenditures for goods included in the following groups or subgroups of the Standard International Trade Classification, Revision 3 (SITC, Rev.3), published by the United Nations in Statistical Papers, Series M, No. 34/Rev.3 (1986) (the SITC), or any successor groups or subgroups under future revisions to the SITC, as designated by the Association by notice to the Borrower: Group Subgroup Description of Items 112 - Alcoholic beverages 121 - Tobacco, unmanu- factured, tobacco refuse 122 - Tobacco, manufactured (whether or not containing tobacco substitutes) 525 - Radioactive and associated materials 667 - Pearls, precious and semiprecious stones, unworked or worked 718 718.7 Nuclear reactors, and parts thereof; fuel elements (cartridges), non-irradiated, for nuclear reactors 728 728.43 Tobacco processing machinery 897 897.3 Jewelry of gold, silver or platinum group metals (except watches and watch cases) and goldsmiths’ or silversmiths’ wares (including set gems) 971 - Gold, non-monetary (excluding gold ores and concentrates) 4. expenditures for goods intended for a military or paramilitary purpose or for luxury consumption; Page 4 5. expenditures for environmentally hazardous goods (for purposes of this paragraph the term "environmentally hazardous goods" means goods, the manufacture, use or import of which is prohibited under the laws of the Borrower or international agreements to which the Borrower is a party; 6. expenditures: (a) in the territories of any country which is not a member of the Bank or for goods procured in, or services supplied from, such territories; or (b) on account of any payment to persons or entities, or any import of goods, if such payment or import is prohibited by a decision of the United Nations Security Council taken under Chapter VII of the Charter of the United Nations; and 7. expenditures under a contract in respect of which the Association determines that corrupt or fraudulent practices were engaged in by representatives of the Borrower or of a beneficiary of the Credit during the procurement or execution of such contract, without the Borrower having taken timely and appropriate action satisfactory to the Association to remedy the situation.