Page 1 CONFORMED COPY May 28, 2002 H.E. Miroljub Labus Deputy Prime Minister Belgrade 11000 Federal Republic of Yugoslavia Re: Swiss Grant for Cofinancing of Structural Adjustment Credit Grant Number TF050555 Excellency: I am writing on behalf of the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA) (hereinafter collectively referred to as the Bank) to indicate the Bank’s agreement, as administrator of grant funds provided by the Switzerland, to make a grant in an amount of ten million Swiss francs (CHF 10,000,000) (the Grant) to the Federal Republic of Yugoslavia (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 the Bank 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 BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION By /s/ Rory C. O’Sullivan Country Manager for Federal Republic of Yugoslavia Europe and Central Asia Region AGREED: FEDERAL REPUBLIC OF YUGOSLAVIA By: H.E. Miroljub Labus Deputy Prime Minister Date: May 28, 2002 ANNEX Page 2 Purposes, Terms, and Conditions of the Grant 1. Purposes and Activities 1.1. The purpose of the Grant is to provide support to the following activity (the Activity): Provision to the Recipient of balance of payments assistance in support of the Program described in the Development Credit Agreement (Credit No. 3599-YF: Structural Adjustment Credit) (hereinafter referred to as SAC). 2. Withdrawal of Grant Proceeds 2.1. The Recipient shall, prior to furnishing to the Bank the request for withdrawal of the Grant amount, open and thereafter maintain in its central bank a deposit account (the Deposit Account) in Swiss Francs on terms and conditions satisfactory to the Bank. The Bank shall thereupon and following satisfaction of the requirement set forth in paragraph 2.4 below, transfer the entire Grant amount to the Deposit Account. 2.2. Subject to the provisions of paragraphs 2.1, 2.3 and 2.4 of this Section, the Recipient shall be entitled to use the proceeds of the Grant deposited in the Deposit Account in support of the Activity. 2.3. The Recipient shall maintain records and accounts adequate to identify the Grant amounts disbursed on account of balance of payments assistance referred to in paragraph 1.1 of this Annex. 2.4. Except as the Bank shall otherwise agree, no request by the Recipient for transfer of the Grant amount in the Deposit Account shall be made later than June 30, 2002, or such later date as the Bank shall establish by written notice to the Recipient (the Closing Date). 2.5. The Recipient shall make available to the Republic of Serbia in Dinars the proceeds of the Grant under terms and conditions satisfactory to the Association. 3. Implementation Generally 3.1. The Recipient undertakes to utilize the remaining amount of the Grant for purposes of the balance of payments assistance referred to in paragraph 1.1 of this Annex, provided however, that the amount so utilized shall not be used to finance expenditures excluded pursuant to the provisions of Attachment I to this Annex. If the Bank 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 the Bank: (i) deposit into the Deposit Account an amount equal to the amount of said payment, or (ii) if the Bank shall so request, refund such amount to the Bank. Amounts refunded to the Bank upon such request shall be canceled. 4. Audit 4.1. The Recipient shall: (a) have the Deposit Account audited in accordance with appropriate auditing principles consistently applied, by independent auditors acceptable to the Bank; (b) furnish to the Bank as soon as available, but in any case not later than four (4) months Page 3 from the end of each of the Recipient’s fiscal years, a certified copy of the report of such audit by said auditors, of such scope and in such detail as the Bank shall have reasonably requested; and (c) furnish to the Bank such other information concerning the Deposit Account and the audit thereof as the Bank shall have reasonably requested. Attachment I Excluded Expenditures For purposes of paragraph 3.3 of this Letter Agreement, the proceeds of the Grant shall not be used to finance any of the following expenditures: 1. expenditures in the currency of the Recipient or for goods or services supplied from the territory of the Recipient; provided, however, that if the currency of the Recipient 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 shall have financed or agreed to finance, or which the Bank shall have financed or agreed to finance under another loan or credit; 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 Bank by notice to the Recipient: Group Subgroup Description of Items 112 - Alcoholic beverages 121 - Tobacco, unmanufactured, tobaccorefuse 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), Page 4 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; 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 Recipient or international agreements to which the Recipient 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 Bank determines that corrupt or fraudulent practices were engaged in by representatives of the Recipient or of a beneficiary of the Grant during the procurement or execution of such contract, without the Recipient having taken timely and appropriate action satisfactory to the Bank to remedy the situation.