CREDIT NUMBER 5554-TO GRANT NUMBER 002--TO , Financing Agreement (Second Economii. Reform Support Development Policy Financing) between THE KINGDOM OF TONGA and INTERNATIONAL DEVELOPMENT ASSOCIATION Dated November 19, 2014 FINANCING AGREEMENT AGREEMENT daled November 19, 2014, entered into between KINGDOM OF TONGA ("Recipient") and INTERNATIONAL DEVELOPMENT ASSOCIATION ("Association") for the purpose of providing financing in support of the Program (as defined in the Appendix to this Agreement). The Association has decided to provide this financing on the basis, inter alia, of (a) the actions which the Recipient has already taken under the Prog -am and which are described in Section I of Schedule 1 to this Agreement, and (b) the Recipient's maintenance of an adequate macroeconomic policy framework. The Recip-ient and the Association therefore hereby agree as follows: ARTICLE I - GENERAL CONDITIONS; DEFINITIONS 1.01. The General Condilions (as defined in the Appendix to this Agreement) constitute an integral part of this Agreement. 1.02. Unless the context requires otherwise, the capitalized terms used in this Agreement have the meanings ascribed to them in the General Conditions or in the Appendix to this Agreement. ARTICLE II - FINANCING 2.01. The Association agrt es to extend to the Recipient, on the terms and conditions set forth or referred to in this Agreement, a grant and a credit (collectively, "Financing") in the f illowing amounts: (a) an amount equivalent to one million seven hundred thousand Special Drawing Rigihts (SDR 1,700,000) ("Grant"); and (b) an amount equivalent to one million seven hundred thousand [Special Drawing Rig its) (SDR 1,700,000) ("Credit"). 2.02. The Recipient may withdraw the proceeds of the Financing in support of the Program in accordanie with Section II of Schedule 1 to this Agreement. 2.03. The Maximum Commitment Charge Rate payable by the Recipient on. the Unwithdrawn Financing Balance shall be one-half of one percent (1/2 of 1%) per annum. -2- 2.04. The Service Charge payable by the Recipient on the Withdrawn Credit Balance shall be equal to three -fourths of one percent (3/4 of 1%). 2.05. The Payment Dates are February 15 and August 15 in each year. 2.06. The principal amount of the Credit shall be repaid in accordance with the repayment schedule s -t forth in Schedule 2 to this Agreement. 2.07. The Payment Currency is Dollar. ARTICLE III - PROGRAM 3.01. The Recipient declar -s its commitment to the Program and its implementation. To this end: (a) the Recipien1 and the Association shall from time to time, at the request of either part, exchange views on the Recipient's macroeconomic policy framework aid the progress achieved in carrying out the Program; (b) prior to each such exchange of views, the Recipient shall furnish to the Association for its review and comment a report on the progress achieved in carrying out the Program, in such detail as the Association shall reasona)ly request; and (c) without limil ation upon the provisions of paragraphs (a) and (b) of this Section, the Recipient shall promptly inform the Association of any situation that would have the effect of materially reversing the objectives of the Progrm or any action taken under the Program including any action specif ed in Section I of Schedule 1 to this Agreement. ARTICLE IV - REMEDIES OF THE ASSOCIATION 4.01. The Additional Event of Suspension consists of the following, namely that, a situation has arisen which shall make it improbable that the Program, or a significant part of it, will be carried out. ARTICLE V - EFFECTIVENESS; TERMINATION 5.01. The Additional Condition of Effectiveness consists of the following, namely that, the Association is ,atisfied with the progress achieved by the Recipient in carrying out the Program and with the adequacy of the Recipient's macroeconomic policy framework. -3- 5.02. The Effectiveness D.,adline is the date ninety (90) days after the date of this Agreement. ARTICLE V I - REPRESENTATIVE; ADDRESSES 6.01. The Recipient's Reprisentative is Minister for Finance and National Planning.. 6.02. The Recipient's Address is: Ministry of Finance and National Planning Vuna Road, Nuku 'alofa P.O. Box 87 Kingdom of "onga Facsimile: +676-26-011 6.03. The Association's Address is: International Development Association 1818 H Stree:, N.W. Washington, D.C. 20433 United States of America Cable addres;: Telex: Facsimile: INDEVAS 248423(MCI) 1-202-477-6391 Washington, D.C. -4- AGREED at District of Columbia, United States of America, as of the day and year first above wi itten. KINGDOM OF TONGA By Authorized Representative Name: Rionald Silaban Title: Executive Director of the Kingdom of Tonga INTERNA TIONAL DEVELOPMENT ASSOCIATION By Authorize epresent tive - Name: Axel van senburg Title: Regional Vice President, East Asia and Pacific Region -5- SCHEDULE 1 Program Actions; Availability of Financing Proceeds Section I. Actions Takv.n Under the Program. The actions taken by the Recipient under the Program include the following: 1. The Recipient's Mini;try of Finance and National Planning, has: (a) Restructured and fully staffed the Central Procurement Unit; and (b) issued Treasury Circular No.PP_1_NPT_2014- 15 to set a new threshold value at TOP 7,500 and above for all procurement to be handled by the Central Procurement Unit in order to improve compliance with procurement best practice standards. 2. (a) The Recipieni's Legislative Assembly has passed the 2014/2015 Appropriation Act 2014 fiscal year, which includes standardization between budget sub-programs and organizational divisions in corporate plans; and (b) The Recipient's Ministry of Finance and National Planning, has issued Treasury Circular No. BG 2 VBI_2014-15 which introduces new controls on transfers between sub-programs. 3. The Recipient's Cabinet has: (a) established a new Revenue Policy Committee tasked with review ng and advising on all requests of discretionary tax exemptions; and (b) approved a framework for standardized and transparent investment incentive s in order to support priority investment in a fiscally sustainable manner. 4. The Recipient's Miiistry of Finance and National Planning has, through its 2014/2015 Budget Statement, made adjustments to the excise duty regime in line with the non-commuinicable diseases health policy. 5. The Recipient's Cabiaet has approved a policy framework for foreign investment in order to open the fisheries and agriculture sectors to foreign investment, and launched public consultations. 6. The Recipient's Cab.)inet has approved the implementation of a sustainably financed electricity lifeline tariff under provisions of the Public Enterprise Act, targeted to support low-income households.. -6- Section H. Availability if Financing Proceeds A. General. The Recipient may withdraw the proceeds of the Financing in accordance with the provisions of this Section and such additional instructions as the Association may specify by notice to the Recipient. B. Allocation of Financing Amounts. The Financing is allocated in a single withdrawal tranche, From which the Recipient may make withdrawals of the Financing. The alloc Etion of the amounts of the Financing to this end is set out in the table below: Amount of the Grant Amount of the Credit Allocated Allocated Allocations (expressed in SDR) (expressed in SDR) (1) Single 1,700,000 1,700,000 Withdrawal Tranche TOTAL 1,700,000 1,700,000 AMOUNT C. Withdrawal Tranche Release Conditions 1. No withdrawal shall be made of the Single Withdrawal Tranche unless the Association is satisfied (a) with the Program being carried out by the Recipient, and (b) with the adeq iacy of the Recipient's macroeconomic policy framework. D. Deposits of Financing Amounts. Except as the Association may otherwise agree: 1. all withdrawals fro -n the Financing Account shall be deposited by the Association into a deposit account in Dollar ("Foreign Currency Deposit Account") designatec by the Recipient and acceptable to the Association; and 2. the Recipient shall easure that upon the deposit of an amount of the Financing into the Foreign Currency Deposit Account, an equivalent amount in Tongan Pa'anga is accounted for in the Recipient's budget management system, in a manner acceptable to the Association. E. Audit. Upon the Association's request, the Recipient shall: 1. have Foreign Currency Deposit Account audited by independent auditors acceptable to the Association, in accordance with consistently applied auditing standards acceptable to the Association; -7- 2. furnish to the Associal ion as soon as available, but in any case not later than six (6) months after the date of the Association's request for such audit, a certified copy of the report cf such audit, of such scope and in such detail as the Association shall reascnably request, and make such report publicly available in a timely fashion and in a manner acceptable to the Association; and 3. furnish to the Asscciation such other information concerning the Foreign Currency Deposit Ac counts and their audit as the Association shall reasonably request. F. Excluded Expenditures. The Recipient undertakes that the proceeds of the Financing shall not bo- used to finance Excluded Expenditures. If the Association determines at any tii ne that an amount of the Financing was used to make a payment for an ExclLided Expenditure, the Recipient shall, promptly upon notice from the Association. refund an amount equal to the amount of such payment to the Association. Amc unts refunded to the Association upon such request shall be cancelled. G. Closing Date. The Closing Date is December 31, 2015. -8- SCHEDULE 2 Repayment Schedule Date Payment Due Principal Amount of the Credit repayable (expressed as a percentage)* On each February 15 and August 15: commencing February 15, 2025 to and including 1% August 15, 2034 commencing February 15, 2015 to and including 2% August 15, 2054 * The percentages represent :he percentage of the principal amount of the Credit to be repaid, except as the Association may otherwise specify pursuant to Section 3.03 (b) of the General Conditions. -9- APPENDIX Section I. Definitions 1. "Central Procuremeni Unit" means the unit of the procurement division in the Ministry of Finance ai id National Planning. 2. "Excluded Expenditui e" means any expenditure: (a) for goods or services supplied under a contract which any national or international inancing institution or agency other than the Association or the Bank has financed or agreed to finance, or which the Association or the Bank has financed or agreed to finance under another credit, grant or loan; (b) for goods included in the following groups or sub-groups of the Standard International rrade 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 Recipient: Grolp Sub-group Description of Item 112 Alcoholic beverages 121 Tobacco, un- manufactured, 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 - 10 - (except watches and watch cases) and goldsmiths' or silversmiths' wares (including set gems) 971 Gold, non-monetary (excluding gold ores and concentrates) (c) for goods intonded for a military or paramilitary purpose or for luxury consumption; (d) for environmcntally hazardous goods, the manufacture, use or import of which is pro iibited under the laws of the Recipient or international agreements tc which the Recipient is a party); (e) on account (f any payment prohibited by a decision of the United Nations Secu -ity Council taken under Chapter VII of the Charter of the United Natior s; and (f) with respect t: which the Association determines that corrupt, fraudulent, collusive or coercive practices were engaged in by representatives of the Recipient or other recipient of the Financing proceeds, without the Recipient (or other such recipient) having taken timely and appropriate action satisfa.tory to the Association to address such practices when they occur. 3. "Foreign Currency D.-posit Account" means the account referred to in Part D.1 (a) of Section II of Sc iedule I to this Agreement. 4. "General Conditions" means the "International Development Association General Conditions 'or Credits and Grants", dated July 31, 2010 with the modifications set forth in Section II of this Appendix. 5. "Program" means thc program of actions, objectives and policies designed to promote growth and achieve sustainable reductions in poverty and set forth or referred to in the let:er dated September 25, 2014, from the Recipient to the Association declaring the Recipient's commitment to the execution of the Program, and requesting assistance from the Association in support of the Program during its exe,cution. 6. "Public Enterprise Act" means the Public Enterprise Act no. 25 of 2002. 7. "Revenue Policy Committee" means the committee established under Cabinet Decision No. 452 of June 26, 2014. -1l- 8. "Single Withdrawal Tranche" means the amount of the Financing allocated to the category entitled "Single Withdrawal Tranche" in the table set forth in Part B of Section II of Schedule I to this Agreement. 9. "Tongan Pa'anga" mc ans the currency of the Recipient. Section H. Modifications to the General Conditions The modifications to the General Conditions are as follows: 1. The last sentence of I)aragraph (a) of Section 2.03 (relating to Applications for Withdrawal) is deletei I in its entirety. 2. Sections 2.04 (Design qted Accounts) and 2.05 (Eligible Expenditures) are deleted in their entirety, and the remaining Sections in Article II are renumbered accordingly. 3. Sections 4.01 (Project Execution Generally), and 4.09 (Financial Management; Financial Statements, Audits) are deleted in their entirety, and the remaining Sections in Article IV are renumbered accordingly. 4. Paragraph (a) of Secti:n 4.05 (renumbered as such pursuant to paragraph 3 above and relating to Use of Goods, Works and Services) is deleted in its entirety. 5. Paragraph (c) of Se tion 4.06 (renumbered as such pursuant to paragraph 3 above) is modified to read as follows: "Section 4.06 Plans; Documents; Records ... (c) The Recipient shall retain all records (contracts, orders, invoices, bill;, receipts and other documents) evidencing expenditures under the Financing until two years after the Closing Date. The Recipient shall enable the Association's representatives to examine such records," 6. Section 4.07 (renumbered as such pursuant to paragraph 3 above) is modified to read as follows: "Section 4.07. Program Monitoring and Evaluation ... (c) The Recipient shall prepare, or cause to be prepared, and furnish to tho Association not later than six months after the Closing Date, a repor: of such scope and in such detail as the Association shall reasonably request, on the execution of the Program, the performance by -12- the Recipient and the Association of their respective obligations under the Legal Agreements and the accomplishment of the purposes of the Financing." 7. The following terms and definitions set forth in the Appendix are modified or deleted as follows, aid the following new terms and definitions are added in alphabetical order to :he Appendix as follows, with the terms being renumbered accordingly: (a) The definition of the term "Eligible Expenditure" is modified to read as follows: "'Eligible Ex',penditure' means any use to which the Financing is put in support of the Program, other than to finance expenditures excluded pursuant to the Financing Agreement." (b) The term "FInancial Statements" and its definition as set forth in the Appendix are deleted in their entirety. (c) The term "Project" is modified to read "Program" and its definition is modified to rcad as follows: "'Program' means the program referred to in the Financing Agreement in support of w-iich the Financing is made." All references to "Project" throughout these General Conditions are deemed to be references to "Program".