EN    EN EN 
EN    EN  EUROPEAN COMMISSION 
Brussels, 9.6.2010 
SEC(2010) 706 final 
  
COMMISSION STAFF WORKING DOCUMENT 
Ex ante evaluation statement  
Macro-financial assistance to the Republic of Moldova 
  
Accompanying document to the 
  
Proposal for a decision of the Europe an Parliament and of the Council  
providing macro-financial assistan ce to the Republic of Moldova 
  
COM(2010)302  
EN 2   EN EX ANTE EVALUATION STATEMENT 
MACRO-FINANCIAL ASSISTANCE TO  THE REPUBLIC OF MOLDOVA 
TABLE OF CONTENTS 
1. Problem analysis and needs assessment....................................................................... 3 1.1. Background ................................................................................................................ .. 3 
1.2. Recent economic developments and economic outlook .............................................. 4 1.3. The government programme  of economic reform ....................................................... 7 
1.4. The Republic of Moldova's external financing needs.................................................. 8 2. Objectives and related indicators of  the macro-financial assistance............................ 9 
2.1. Objectives................................................................................................................ ..... 9 
2.2. Indicators................................................................................................................ .... 10 
3. Alternative delivery mechanis ms and risk assessment .............................................. 10 
3.1. Delivery mechanisms................................................................................................. 10 3.2. Risk assessment.......................................................................................................... 1 0 
4. Added value of EU involvement................................................................................ 11 5. Genval criteria on macro- financial assistance............................................................ 12 
5.1. Exceptional Character and Limited Timeframe......................................................... 12 5.2. Political pre-conditions .............................................................................................. 12 5.3. Compleme ntarity........................................................................................................ 13 
5.4. Conditionality............................................................................................................ . 13 
5.5. Financial discipline .................................................................................................... 13  
6. Planning of future monitoring and evaluation ........................................................... 14 6.1. Monitoring................................................................................................................ .. 14 
6.2. Evaluation ................................................................................................................ .. 14 
7. Achieving cost-effectiveness ..................................................................................... 15 
 
EN 3   EN 1. PROBLEM ANALYSIS AND NEEDS ASSESSMENT  
1.1. Background 
The Republic of Moldova has gone through a diffi cult period of transi tion since the breakup 
of the former Soviet Union. It has been one of  the countries in the European Union's eastern 
neighbourhood most heavily affected by the gl obal crisis. Despite high average economic 
growth rates in the years leading up to the cris is, the country's income level as measured by 
purchasing power parity adjusted real GDP pe r capita is by far the lowest among the EU 
eastern neighbour countries. The policy response to the economic crisis was delayed first by 
the preparation for parliamentary elections in  Spring 2009 and later by internal political 
tensions over the election results.  The repeat elections that had to be organised in the Autumn 
of 2009 brought a coalition government into pow er on a reform agenda that seeks closer 
approximation to the EU and aims at turnin g around the previous growth model that was 
relied heavily on the inflow of remittances. These political developments have allowed a 
speeding up of the scaling up of b ilateral relations with the EU, culminating in the opening of 
formal negotiations on a new Associ ation Agreement on 12 January 2010. 
In 2008, the Commission completed the implemen tation of the previous package of macro-
financial assistance, totalling EUR 45 milli on, which was adopted by the Council on 16 April 
2007. The second and third instalments of, respec tively, EUR 10 and 15 million were released 
in June and December 2008. The programme was pa rt of the financing package in support of 
the government's three-year arrangement w ith the IMF under the Poverty Reduction and 
Growth Facility (PRGF) dating back to May 2006. In addition, the World Bank (WB) has a consistent engagement strategy with the country. 
Immediately after the new government headed by Prime Minister Filat was sworn in on 25 
September 2009 the authorities of the Republic  of Moldova approached international donors 
with a request to cover the financing needs of the country. On 29 Septem ber, during a visit to 
Commissioners Almunia and Ferrero-Waldner, th e new Prime Minister confirmed the request 
for EU financial support submitted earlier in the year by the previous government. On 29 
January 2010, the IMF Board approved a three- year assistance prog ramme, covering the 
period 2010-2012. The IMF programme consists of  a mixture of Extended Credit Facility 
(ECF) and Extended Fund Facility (EFF) Arrangements and was designed to be 
complemented by other international donors, in  particular the WB and the EU. The IMF 
programme entails a frontloaded package of  SDR 369.60 million in total over a three-year 
period (around USD 588 million). An initial purchase of SDR 60 million became available 
upon approval by the IMF Board. In addition, the au thorities have been able to use the new 
allocation of SDRs from the IMF (around US$18 6 million, transferred in late 2009) to cover 
its immediate budget financing needs. Key pr ior actions implemented before the Board 
approval included corrective measures to th e 2009 budget (scaling down of commitments to 
public wage increases made earlier in 2009, and m easures to increase taxation and the price of 
heating to cost-recovery levels. 
The Commission is submitting to the European Pa rliament and to the Council a proposal for 
macro-financial assistance (MFA) for the Republic of Moldova amounting to a maximum total amount in grants of EUR 90 million over a two year period. The European Union MFA 
is aimed at contributing to covering the coun try's external financing needs in 2010 and 2011 
as identified by the Commission in cooperation with the IMF. Since the uncovered financing 
EN 4   EN needs of the Republic of Moldova are concentrat ed in those two years, a two-year programme 
would be an appropriate contri bution of the EU to close th e financing gap. Should in 2012 a 
substantial financing gap still exist, further EU assistance might be considered under a new 
proposal. But on present information and given the large uncertainties  surrounding the final 
year of the IMF programme, the curre nt proposal appears appropriate.  
The Union MFA will be part of the financing p ackage put in place in support of the Republic 
of Moldova's efforts to confront substantial ex ternal financing needs a nd a sharp deterioration 
of public finances in the cont ext of a v difficult economic s ituation. It will complement 
financing provided by the Bretton Woods Institutions  (BWIs) – the IMF, in the context of the 
ECF/EFF programme and the WB, centred on a Development Policy Operation currently 
under preparation. The Union MFA is aimed at covering the residual financing needs that 
remain after the contributions of other multilate ral creditors, and of other official bilateral 
donors, including other EU instruments, such  as EIB loans and sectoral budget support 
programmes financed under the European Neighbourhood and Partne rship Instrument.  
The swift implementation of the measure is jus tified by the need to close the substantial 
external and budgetary funding gap of the Re public of Moldova in 2010 and 2011. EU macro-
financial assistance to help stabilise the macr o economy is needed rapi dly in the expectation 
that the contributions from other (bilateral) donors are lik ely to take longer to come on 
stream1. A rapid response is in li ne with the objectives of the MFA instrument, which is by 
design a crisis-related support tool. 
1.2. Recent economic developments and economic outlook  
The Republic of Moldova has faced a very difficult year on both eco nomic and political 
fronts. In Europe’s poorest country, violent protes ts in the aftermath of disputed elections in 
April 2009 added to political grievances and le d to new elections in the summer, with a 
victory for the opposition coalition. On the econo mic side, tumbling remittances are crippling 
the economy. The Republic of Mo ldova is one of the countries  in the Eastern neighbourhood 
hit hardest by the global recessi on. GDP in 2009 shrank by 6.5%, which is in sharp contrast 
with the 7.2% GDP growth in 2008 . External shocks due to the global crisis, such as falling 
remittances and FDI inflows are the main cause s for the deep recession. The unemployment 
rate is rising rapidly and the government deficit has widened sh arply to 6.9% of GDP in 2009. 
While the deep contraction in demand has also led to a considerable reduction in the current 
account deficit it still remains high. Monetary a nd fiscal instruments can help to cushion the 
shocks, but international assistance will be crucial to help stabil ise the economy. For the 
medium term, the main reform agenda remain s the diversification of economic activity and 
improvements to the business environmen t and public and private governance.  
The Republic of Moldova is suffering from the economic recession in its main trading 
partners: Russia, Ukraine, Belarus and the EU. The global crisis starte d affecting the economy 
already in the last months of 2008. A decelerati on of trade growth, decl ining access to trade 
finance, and lower remittances and FDI inflows were important transmission channels. In the 
course of 2009, the broad-based downturn co ntinued. Exports declined substantially but 
imports declined even more sharply, along with  domestic demand. In the third quarter of 
2009, industrial production was about 25% lo wer to its level a year before. 
                                                 
1 In this regard, the outcome of  the Consultative Group meeting wh ich took place in Brussels on 24 
March 2010 was encouraging. 
EN 5   EN With the trade balance improving due to imports contracting faster than exports, the current 
account deficit decreased markedly but remain s large; it fell from  around 17% of GDP in 
2008 to some 9% of GDP in 2009. A fall in real  incomes was partly cushioned by the rapid 
deceleration in prices. CPI in flation decreased very rapidl y, from around 16% in the second 
quarter of 2008, to -2.3% in August 2009, before picking up again to 2.8% in January 2010. 
The adjustment of the external deficit due to  the crisis also helped alleviate financing 
constraints somewhat. But external financing sources dried up even more sharply than the 
current account deficit, as remittance inflows are estimated to have decreased by 30% in 2009, and foreign direct investment by around 45%. 
Whereas the external accounts have started to adjust as a result of the deep recession, the 
fiscal situation has deteriorated quickly si nce the middle of 2008, desp ite public expenditure 
cuts of 20% across the board decided in Spri ng 2009. The latest budgetary execution figures 
for 2009 reveal substantial revenue  shortfalls (reflecting the st rong reduction in imports as a 
key source of revenue), partly but not fully offset by lower-than-budgeted  expenditures and 
rectifications implemented by th e incoming government. All in al l, the government deficit is 
expected to have deteriorated markedly in 2009, to 6.9% of GDP, agains t only 1% of GDP in 
2008. The government has been financing part of  the revenue shortfall by placing T-bills, 
largely with domestic banks. But this strategy is not sustainable as it is leading to a sharp 
increase in public debt (expected to rise to 31% of GDP towards the end of 2009, up from 
21% in 2008), and also risks the heightening vulnerability of the financial sector to an adverse 
shift in sentiment.  
The 2010 budget was approved by Parliament on 23 December 2009. It is in line with the 
targets of the IMF programme. It  includes several adjustment m easures aimed at reducing the 
deficit. On the revenue side, taxes were incr eased for gambling and diesel powered and luxury 
cars, the road tax was increased and excises were raised substantially for petrol, beer, other alcoholic beverages and cosmetics. Local taxes will  also be higher, wherea s the real estate tax 
will be levied on the market value of proper ties, not on the book value. On the expenditure 
side, several measures were implemented as well. Public employment will be reduced and early retirement options curtailed for civil servants, while public sector wages are set to increase less than had been foreseen by the pr evious government. In addition to the measures 
implemented in the budget, utility tariffs were ra ised to bring them to cost recovery levels. 
This entailed sharp increases in the cost of  energy for households: 16.6% for gas, 29% for 
heating and 20% for electricity as of January  2010. Announced reforms on the structural side 
include a simplification of the procedures to register, start and liqui date a business and to 
obtain construction permits. The intended overhaul of the pension and soci al security schemes 
includes extension of the obligation to pay social security contributions to all employees. The 
statutory pension age (currently 62 for men and 57 for women) will not be raised, however. 
All in all, the 2010 budget foresees a slight reduc tion of the government deficit to around 6% 
of GDP. The government debt level is expected to rise further to nearly 40% of GDP in 2011-
2012. Domestic sources of budget financing are not sufficient to cover budgetary financing 
needs. Hence, there is a need for higher external financing. 
EN 6   EN Table 1 : Republic of Moldova - Main economic indicators
2007 2008 2009 2010 2011 2012
      actual projections
Real sector
   Real GDP growth (domestic currency, % change) 3,0 7,2 -6,5 1.5 3,0 5,0
   GDP nominal (US$, billion) 4.4 6,0 5.4 5.1 5.3 5.7
   GDP per-capita (EUR) 902 1160 1091 979 n.a n.a.
   Inflation (average) 12,4 12,8 -0,2 6,2 5,0 5,0
   Inflation (end-year) 13,3 7,2 0,5 6,5 5,0 5,0
Social indicators
   Unemployment (ILO definition, %) 5,1 4,0 5,5 n.a n.a n.a.
Fiscal sector   Total revenues (% GDP) 41,7 40,6 39,3 38,8 n.a n.a.
   Total expenditures (% GDP) 42,0 41,6 46,2 45,8 n.a n.a.
   General government balance (% GDP) -0,2 -1,0 -6,9 -6,5 -5,0 -3,0
   Gross public debt (% GDP) 26,8 21,3 30,9 36,9 39.6 39.6
Monetary sector
   Domestic credit to the private sector (% GDP) 37,8 51,7 20,3 -4,9 n.a n.a.
   Broad money (M3, % change) 12,2 47,3 18,4 -6,0 n.a n.a.   Degree of monetisation (M2/GDP, %) 34,5 34,7 26,5 26,5 n.a n.a.
   Dollarisation in bank deposits (%) 43,3 31,3 43,8 43,8 n.a n.a.
External sector
   Current account balance (% GDP) -15,3 -16,3 -9,0 -9,5 -11,2 -10,2
   Trade balance (% GDP) -52,1 -53,3 -52,8 -36,6 n.a n.a.
   FDI (net, % GDP) 11,0 11,2 11,8 6,4 n.a. n.a.
   Remittances (% GDP) 32,3 33,9 31,2 22,5 23,6 n.a.External vulnerability
   External public and private debt (% GDP) 64.2 56,0 65.9 78.6 83.6 85.7
debt service (% of exports of goods and services) 13.7 16.6 19.2 20.8 16.9 18.3
   International reserves (USD, million) 1334 1672 1456 1695 1876 2090
Financial sector
   Real effective exchange rate end-year (%, + is apprec.) 16,0 16,0 23,3 -19,7 n.a. n.a.
   Exchange rate (Moldovan leu per EUR, average) 16,5 16,5 15,2 15,5 n.a. n.a.
   Exchange rate (Moldovan leu per USD, average) 12,1 12,1 10,3 11,1 n.a n.a.
Sources: Moldovan authorities, IMF, EBRD, WB, NBM, EC staff calculations.
 
As regards monetary and exchange  rate policies, as a result of the double external shock on 
trade and remittances, pressures on the national currency built up. The National Bank of 
Moldova (NBM) could, however, partly counte r these pressures by using some of the 
country's official reserves. Reserves were reduced by nearly 40% between September 2008 
and April 2009. The bulk of this reduction took place in early 2009 . Subsequently, the 
exchange rate of the Moldovan leu versus the US D (the traditional anchor currency) stabilised 
and reserve levels started increasing agai n. Between December 2009 and mid-February 2010, 
the exchange rate of the Moldovan leu weak ened once more, by around 15% against the USD 
but stabilised thereafter. The centr al bank was also able to reduce official interest rates despite 
concerns about the exchange rate due to di sinflation. Reserve requirements were eased 
substantially as well. Between September 2008 and September 2009, the NBM cut its main 
refinancing rate from 18.5% to 5.0%. Neverthe less, real interest rates remain high.  
The outlook for the Republic of Moldova for th e short to medium term is challenging. Its 
main trading partners – Russia, Ukraine, Belarus, but also the EU – have all been severely affected by the global crisis, and the recovery is  expected to be gradual. Moreover, external 
financing conditions, notably the availability of credit resour ces for transition economies, and 
prospects for remittance flows have deteriorated sharply since the start of the crisis. Thus, after the sharp adjustment in 2009, the economy of  the Republic of Moldova is expected to 
EN 7   EN recover only slowly in the comi ng years. The budgetary situati on in particular remains highly 
vulnerable. Macro-economic stabilisation is th us the central immediate concern, and financial 
assistance of the international community will be crucial in achieving  this. That said, the 
ambitious domestic reform and adjustment agenda needs to be implemented to put the Republic of Moldova back on a su stainable convergence track.  
1.3. The government programme of economic reform 
In response to the challenges posed by the economic crisis, on 4 December 2010 the 
Moldovan authorities launched an Economic Stab ilisation and Recovery Programme covering 
the period 2009-2011. The Economic Stabilisation and Recovery Progra mme aims at three 
priorities, namely: 1) stabilisation and stream lining of public finance; 2) economic recovery 
through structural reforms and 3) securi ng efficient and fair social protection. 
As regards fiscal policy, the authorities are embark ing on a path to restore fiscal sustainability 
by 2012. They target a structural budget deficit adjustment of about 6 percentage points of 
GDP, steadily reducing the headline deficit from  9 percent of GDP in  2009 to 7 percent in 
2010, 5 percent in 2011, and 3 pe rcent by 2012. This fiscal effort should bring the budget 
back to sustainability at a speed matching the ec onomy’s recovery. It will be achieved mainly 
through reform-based reduction of current expe nditure to affordable levels, while public 
investment will be raised and the social safety net enhanced. In addition, there is the intention 
to raise revenue from consumption-based taxes,  reinstate the corporate income tax in the 
medium term, and modernise tax admini stration to support the adjustment.  
Structural reforms will aim to improve the bus iness environment and support the fiscal effort . 
Over the whole programme period, a programme of deregulation and liberalisation will free 
business initiative, stimulate competition, and strongly suppor t the economic recovery. In 
2010, actions in the district heatin g sector will address the fiscal  losses resulting from prices 
set below cost. Reforms in the social insurance system aim to keep it sustainable by phasing out early retirement and improving the mechan ism for sick leave co mpensation. In 2011–12, 
continuing efforts to reform public administ ration and the education system should raise 
efficiency and yield further savings. The plan ned restructuring of th e energy and telecoms 
sectors would draw private investment in, lower costs and raise the economy’s long-term 
growth rate. Privatisation will accelerate as we ll once investor intere st rekindles. Specific 
plans for reforms beyond 2010 will be fleshed out in the context of programme reviews and the 2010 Article IV consultation. Th e authorities are co llaborating closely with international 
donors in the implementation of  the structural agenda. 
The fiscal adjustment and structural reform measures will be supplemented by developing 
targeted social assistance programmes to help vulnerable strata in society cope with the hardships stemming from the crisis. In th is regard, the programme will help mobilise 
resources for successful implementation of the poverty reduction agenda. 
As regards monetary and exchange ra te policies, towards the end of 2009
 the National Bank 
of Moldova announced a redefinition of its medium-term strategy for the period 2010-2012, 
which has price stability as its chief obj ective. For 2010, the central bank announced an 
inflation target of 5.0% with a deviation band of ±1 percentage point. As a first move under 
the new policy framework, the NBM raised the base  rate to 6% in late January 2010, due to an 
increased perceived risk of ove rshooting the inflation target. 
EN 8   EN The national programme attaches an important ro le to international financial assistance to 
help the economy achieve macro-economic stab ilisation and recovery and to underpin 
implementation of the reform agenda. 
1.4. The Republic of Moldova's external financing needs 
Table 2 summarises the estimates of the country's external financing needs over the 
period 2010-2012, the programme period foreseen by the IMF.  
Total needs for the three years amount to a total of USD 8 billion, largely due to the 
need to finance current account deficits of  around 10% of GDP. Reduced remittances 
and private capital flows (the combined amount of which is estimated to have 
decreased from around 41% of GDP in 2008 to around 27% of GDP in 2009) are 
expected to result in a persistent and substantial financing gap over the period 2010-
2012, amounting to slightly over USD 1.4 billion. 
Out of this amount, the Bretton Woods Inst itutions are expected to provide around 
USD 800 million. For the largest part, this wi ll be in the form of the IMF's ECF/EFF 
programme, while the World Bank is putting in place an additional USD 230 million, mainly in the form of budget support. Th e residual financing gap – around USD 620 
million or EUR 480 million over the 2010-12 period (based on the exchange rate 
assumptions underlying the financing table) – is expected to be partly covered by 
other multilateral creditors (the EIB, the EBRD and the C ouncil of Europe 
Development Bank) and bilateral donors (Sweden, the Netherlands and the USA). 
Identified loans and transfers under this heading add up to more than EUR 210 million. In addition the EU has put in place sectoral budget support (BS) grants under 
the European Neighbourhood and Partnership Instrument (ENPI). The disbursements 
in 2010-2012 under budget support programmes al ready approved amount to nearly 
EUR 100 million. Taking into account progr ammes planned under the ENPI National 
Indicative Programme for the period 2011- 2013 brings the total amount of ENPI 
budget support expected to be provided to  the Republic of Mo ldova over 2010-2012 
to nearly EUR 150 million. As ENPI budget al locations under future programmes are 
expected to be somewhat higher than t hose under the existing programmes, the ENPI 
BS disbursements should be increasing over time. This reflects a higher contribution 
of structural budget support to cove ring Moldova's financing needs.  
Uncovered financing needs are currently estimated at close to EUR 120 million for 
the period 2010-12, including about EU R 90 million for 2010-2011. The proposed 
MFA would precisely match this uncovered part of the financing gap in 2010-2011. 
It would correspond to some 27%  of the residual financin g needs of this two-year 
period not covered by the Br etton Woods Institutions. Further EU MFA could be 
considered at a later stage, in case s ubstantial uncovered financing needs remain 
beyond 2011. 
EN 9   EN Table 2: Republic of Moldova - External Financing Requirements and Sources, 2010-12
2010 2011 2012 2010-12
   in million USD
1 Total requirements 2.537 2.665 2.844 8.047
Current account deficit (excl. transfers) 2.172 2.331 2.450 6.952
of which : exports of goods 1.448 1.761 2.020 5.229
              imports of goods -3.358 -3.821 -4.175 -11.354
Debt amortization 365 334 395 1.094
of which : public and publicly guaranteed debt 51 48 50 149
               private debt 314 286 345 945
2 Available financing 2.208 2.363 2.664 7.235
Capital and financial account 716 761 877 2.354
         Capital transfers (net) -11 -11 -12 -34         Foreign direct investment (net) 202 244 292 738         New private borrowing 440 460 534 1.433
Current transfers 955 999 1.112 3.065
Worker's remittances 700 759 855 2.314Other private transfers 255 240 257 752
Compensation of employees 536 604 675 1.816
Other financial and income flows
 186 68 63 217
3 Gross international reserve accumulation (+: increase) 240 180 200 6204 Financing gap 569 482 380 1.4325 Exceptional IFI financing 378 246 184 808
IMF 265 186 124 575
World Bank 113 60 60 233
6 Residual financing gap (after IMF/WB financing) 191 236 197 624
   in million EUR
Residual financing gap (after IMF/WB financing)  
2147 182 151 480
Identified public borrowing, incl. EIB/EBRD/CEDB 38 38 30 106
Identified official transfers 15 46 46 107EC structural budget support (ENPI-related) 44 55 49 148
7 Residual 49 43 26 118
Sources: IMF staff projections and Moldovan authorities
1 Includes portfolio investment, net errors and ommissions, use of IMF credit (PRGF and EFF) and other income balance
2 assuming exchange rate of euro vis-à-vis the US dollar of 1.30  
2. OBJECTIVES AND RELATED INDICATORS OF THE MACRO -FINANCIAL ASSISTANCE  
2.1. Objectives 
The objectives of the proposed macro- financial assistance operation are to:  
• Contribute to covering the external fina ncing needs of the Republic of Moldova 
and to alleviating budgetary financing needs; 
• Support the fiscal consolidation effort and external stabilisati on in the context of 
an IMF programme; 
• In this respect, help the Republic of Mo ldova to reduce the financial constraints 
on the implementation of its comprehensive economic reform programme; 
EN 10   EN • Facilitate and encourage efforts of the au thorities of the Republic of Moldova to 
implement measures identified under the EU- the Republic of Moldova Action 
Plan and the Eastern Partnership; 
• Reinforce the EU role in the economic po licy dialogue with the authorities of the 
Republic of Moldova on the programme of reforms. 
Detailed macro-economic and structural refo rm objectives will be further defined in 
the context of a Memorandum of Understand ing, to be agreed w ith the authorities. 
2.2. Indicators 
To monitor the fulfilment of the obj ectives of the programme throughout the 
implementation period of the assistance, the Commission will use two types of indicators:  
• Adherence to the IMF-supported programme;;  
• Progress in the implementation of specific policy actions to be included as 
conditions for disbursement. Those actions will be specified in the aforementioned 
Memorandum of Understanding. They will be consistent with the priorities of the 
European Neighbourhood Policy and those of  Eastern Partnership and the policy 
orientation of the IMF programme, with  an emphasis on the improvement of 
public finance management.   
3. A
LTERNATIVE DELIVERY MECHANISMS AND RISK ASSESSMENT  
3.1. Delivery mechanisms 
Given the sharp deterioration of the Mo ldovan economy, the country's low income 
level and its eligibility fo r concessional lending, the foreseen macro-financial 
assistance will be provided in the form of grants. Macro-financial assistance is an untied and undedicated macro-economic su pport instrument, which helps the 
beneficiary country meet its external fi nancing needs, and may contribute to 
alleviating budgetary financing needs. Mo reover, as experienced with similar 
operations, including in the Republic of Mo ldova, the economic policy conditionality 
attached to this support strengthens the stabilisation and reform process. 
3.2. Risk assessment 
There are both fiduciary and policy risks re lated to this macro-financial assistance 
operation.  
There is a risk that the macro-financial a ssistance, which is not dedicated to specific 
expenses (contrary to projec t financing, for example), coul d be used in a fraudulent 
way. In general terms, this risk is relate d to factors such as quality of financial 
circuits and management systems in the central bank and Ministry of Finance, 
administrative procedures, control and overs ight functions, secur ity of IT systems 
and adequate internal and ex ternal audit capabilities.  
EN 11   EN To mitigate the risks of fraudulent use, seve ral measures will be taken. The Memorandum of 
Understanding and the Grant agreement will comp rise a set of provisions on inspection, fraud 
prevention, audits, and recovery of funds in case of fraud or corruption. Also, the assistance 
will be paid to clearly  identified accounts at the National Bank of Moldova. The NBM is one 
of the most professionally we ll-reputed state institutions in the Republic of Moldova. 
Moreover, before the agreement on the Me morandum of Understanding is reached, 
the Commission services will assess the reliability of financial circuits and 
administrative procedures that are relevant  to this type of assistance and will 
determine whether the framework for s ound financial management of macro-
financial assistance is sufficiently effectiv e in the Republic of Moldova. In the light 
of this assessment, specific mechanisms applying to the management of the funds by the beneficiaries may be introduced in agr eement with the national authorities. The 
Commission may also use other assistance in struments at its disposal to help the 
beneficiary authorities improve their public finance management systems if this area 
is not sufficiently covered by other donor s. Against this background, special 
conditionalities on improving public fina nce management will potentially be 
required. 
Finally, the assistance will be liable to ve rification, control and auditing procedures 
under the responsibility of the Commission, including the European Antifraud Office 
(OLAF), and the European Court of Auditors. 
As regards policy risks, the main assumpti on is that the Government of the Republic 
of Moldova will remain committed to fisc al adjustment and compliance with its 
agreement with the IMF. This will be va lidated on the basis of IMF’s regular 
monitoring of performance indicators and stru ctural benchmarks. There is a risk that 
the Government of the Republic of Mo ldova will not comply with the IMF 
programme conditions, as the programme target s may turn out more difficult to reach 
than assumed and as political conditions in the country may change. However, the 
authorities have shown strong commitment to work with international institutions to 
implement the overdue reform agenda. Also, there have been internal discussions in the Republic of Moldova regarding independence of the National Bank.  
Having made a serious assessment of the ri sks, the Commission services consider 
that there are sufficiently st rong grounds to proceed with the MFA to the Republic of 
Moldova.  
The Commission services will maintain clos e contacts with the authorities during the 
implementation of the macro-financial assi stance in order to address quickly any 
concerns that may arise.  
4. A
DDED VALUE OF EU INVOLVEMENT  
The European Union's financial support to  economic recovery in the Republic of 
Moldova reflects the country's strategic impor tance to the EU as a partner country in 
the context of the European Neighbourhood Policy and of the recently established 
Eastern Partnership. The main financial support instrument to the Republic of 
Moldova is the European Neighbourhood Partnership Inst rument that has three 
priority objectives: democra tic development, administra tive capacity building and 
EN 12   EN infrastructure development. The macro-financ ial assistance instrument is directed at 
alleviating short- and medium-ter m external financial needs.  
In addition to the financial impact of th e macro-financial assistance, the proposed 
programme will strengthen th e national government's reform commitment and its 
aspiration towards closer relations with th e EU. This result will be achieved, inter 
alia, through appropriate c onditionality for the disbursement of the assistance.  
In a wider context, the action fits well in to the EU’s general approach towards the 
Republic of Moldova, which is one of an accelerated and progressive engagement, as 
reflected in the opening of negotiations on an Association Agreement. This reflects 
the impetus the authorities have recently given to deepening the country's relations 
with the EU and is expected to lead to closer co-operation between the EU and the 
Republic of Moldova in many fields. 
5. GENVAL CRITERIA ON MACRO -FINANCIAL ASSISTANCE  
On 8 October 2002 the Council reconfirmed a set of principles for the use of the 
European Union's macro-financial assistance (G enval criteria). The five criteria are: 
(i) the exceptional character of the assistance, (ii) its complementarity to financing of the International Financial Institutions (IFIs), (iii) the existence of policy conditionality attached to the assistance, (iv) the existence of political pre-conditions and, finally (v) strong financial disciplin e that needs to accompany the MFA. 
5.1. Exceptional Character and Limited Timeframe 
The financing requirements of the Republic  of Moldova in 2010-2011 result from the 
impact of the global economic crisis, and the substantial impact on the country's economy in view of its external and fis cal imbalances and its high dependence on 
foreign inflows and remittances.  
The exceptional character of the foreseen MF A is reflected in the limited timeframe 
of the programme. The programme's planned duration is two years, one year shorter 
that the IMF programme which covers also  2012. In determining the actual amount 
of the tranches under the MFA programme, the Commission services intend to take 
into consideration the progress in the im plementation of the IMF programme and of 
the World Bank development policy loans. 
5.2. Political pre-conditions 
MFA is reserved to the third countries th at are geographically close to the EU 
territory, that respect democracy and hu man rights and with which the EU has 
important political, economic and commercial  ties. The Republic of Moldova fulfils 
these criteria. First, it has direct borders with the EU. Second, its economic and 
political relations with the EU are evolvi ng rapidly towards closer approximation: it 
is an active EU partner in the multilateral track of the recently established Eastern Partnership. Third, the Republic of Moldova has made progress regarding respect of 
democracy and human rights. The politi cal situation in the country remains 
uncertain, in particular as regards the unr esolved issue of presidential elections. 
However, the current government came to  power on a pro-European agenda and has 
EN 13   EN initiated many initiatives to bring the count ry closer to the EU, culminating in the 
opening of negotiations on an Association Agreement in January 2010. 
5.3. Complementarity  
The proposed macro-financial assistance will  be complementary to the existing EU 
financing, to the IMF financing and to the financial support of other international 
donors.  
The MFA programme is complementary to other EC financing, in particular to 
medium-term ENPI support. Thus, it can help increase the EU's  leverage on policy 
making in the Republic of Moldova as well as help the country overcome the current 
deep economic crisis and to implement refo rms as a basis for sustainable recovery.  
The complementarity with the IMF programme is also assured. An MFA can only 
take place when a residual external financ ing gap is identified over and above the 
IMF resources and under the condition of a fair burden sharing. A residual external 
financing gap has been identified by the IMF; this assessment constitutes the basis for Commission's MFA programme proposal that would cover roughly one third of 
the external financing gap remaining after the interven tion of the Bretton Woods 
Institutions.  
5.4. Conditionality 
The macro-financial assistance to the Repub lic of Moldova will be linked to the 
existing IMF Extended Credit Facility/Ext ended Fund Facility Arrangements. As 
usual with this type of assistance, disbursements under this macro-financial 
assistance will be subject to progress in the implementation of the IMF arrangement. 
It will also be conditional upon specific stru ctural reform measures that will be 
further defined in the context of a Memo randum of Understanding to be agreed 
between the Commission and the author ities of the Republic of Moldova. 
Given the nature of the planned operation, in  defining the conditionality in the area 
of structural policies, partic ular attention will be paid to public finance management 
with a view to strengthening efficiency, transparency and accountability, and because 
of its importance for fiscal consolidation. As the Republic of Moldova is a partner 
country to the European Neighbourhood Polic y and to the Eastern Partnership, the 
Commission may consider targeting specif ic sectoral policies of particular 
importance, identified as such in the EU- the Republic of Moldova Action Plan or the 
2010 Progress Report, such as financial sector stability. 
5.5. Financial discipline 
The planned assistance would be provided in the form of  a grant. The Commission 
services propose to limit the macro-financial assistance to the Republic of Moldova to EUR 90 million for the period 2010-2011. This corresponds currently to some 27% of the residual financing gap fo reseen after IMF and World Bank support 
identified by the IMF for the years 2010 a nd 2011. Data on the balance-of-payments 
gap are by nature volatile. Additionally, additional bilateral financing may 
EN 14   EN materialise in the course of the programme  that cannot yet be included in current 
programme assumptions. 
Concerning sound financial management, th e Commission services  are taking action 
in order to fulfil the requirements of the Financial Regulation. The Commission will 
update the Operational Assessment (OA) of th e reliability of fina ncial circuits and 
administrative controls at the Ministry of  Finance and the National Bank of Moldova 
conducted in 2007, in the context of the pr evious programme of macro-financial 
assistance. Based on the OA report's fi ndings, the Commission services will 
determine whether the framework for sound financial management is sufficiently effective in the Republic of Moldova. Als o, the results of the OA will contribute to 
the definition of appropriate conditionality in the area of  public finance management. 
6. P
LANNING OF FUTURE MONITORING AND EVALUATION  
This assistance is of exceptional and macr o-economic nature and its monitoring and 
evaluation will be undertaken in line with the standard Commission procedures.  
6.1. Monitoring 
Monitoring will involve the re view of reports and data provided by the authorities 
and by the organisation of review mi ssions to the Republic of Moldova by 
Commission staff. Although this assistance  is centrally managed, where appropriate, 
the EU Delegation in Chisinau will also  be called to provide reporting. The 
monitoring of the action by the Commission serv ices will take place on the basis of 
macro-economic and structural policy indica tors, which are to be agreed with the 
authorities of the Republic of Moldova in  a Memorandum of Understanding. In this 
process, the Commission services will also  monitor key areas of the public finance 
management system, as identified in the upda te of the Operational Assessment so as 
to have the relevant information on any changes in the control environment. 
An annual report to the European Pa rliament and to the Council on the 
implementation of macro-financial assistance  is foreseen in the proposed text for a 
Decision of the European Parliament and of the Council. 
6.2. Evaluation 
Two to three ex-post evalua tions of macro-financial assistance operations are 
planned per year in the Multi-annual Ev aluation Programme of the Economic and 
Financial Affairs Directorat e-General. An ex-post evaluation of the proposed macro-
financial assistance to the Republic of Mol dova will be launched within a period of 
two years after the comp letion of the operation. A provision for the ex-post 
evaluation is included in the proposed legal basis for the programme, and in the Memorandum of Understanding. Budget appr opriations from the macro-economic 
assistance budget line will be used for this evaluation.  
EN 15   EN 7. ACHIEVING COST -EFFECTIVENESS  
In implementing the programme, the Commission will be guided by the following 
principles:  
• As soon as the European Parliament a nd the Council have adopted the proposal, 
the Commission will negotiate with the au thorities of the Republic of Moldova a 
Memorandum of Understanding laying out th e conditions for the release of the 
EU assistance, as well as  a grant agreement. Each instalment of the proposed 
assistance will be made available by th e Commission to the Republic of Moldova 
on the basis of a satisfact ory track record of the implementation of the IMF 
programme and the economic policy and fi nancial conditions attached to the 
assistance.  
• In negotiating specific policy conditions , the Commission will draw on all the 
expertise, including of the Internationa l Monetary Fund and the World Bank and 
of bilateral and multilateral aid agencies active in the Republic of Moldova. In 
addition, the Commission will aim at synergies with other EU policies and instruments (in particular EN PI as indicated above) that  could be used to support 
the implementation by the beneficiary of th e relevant measures (notably in the 
area of public finance management). Wh ere appropriate, links to any related 
action under the European Neighbourhood Poli cy or Eastern Partnership and to 
findings of the Progress Reports on the Republic of Moldova would be 
established.