EN    EN EN 
 
EN    EN  COMMISSION OF THE E UROPEAN COMMUNITIES 
Brussels, 29.10.2009 
SEC(2009) 1459 
  
COMMISSION STAFF WORKING DOCUMENT 
Ex ante evaluation statement – Macro-financi al Assistance to Bosnia and Herzegovina 
 
Accompanying document to the 
 
Proposal for a COUNCIL DECISION providing ma cro-financial assistance to Bosnia and 
Herzegovina 
 
{COM(2009)596} 
 
EN 2   EN Table of Contents 
1. Problem analysis and needs assessment....................................................................... 3 
1.1. Background ................................................................................................................ .. 3 
1.2. Recent economic developments and prospects ............................................................ 4 1.3. The Government's economic and fiscal reform agenda ............................................... 6 1.4. External and budgetary financing needs in Bosnia and Herzegovina.......................... 8 2. Objectives and Related Indicators of  the macro-finantial 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 Community involvement .................................................................. 11 5. Genval criteria............................................................................................................ 1 1 
6. Planning future monitoring and evaluation................................................................ 13 6.1. Monitoring................................................................................................................ .. 13 
6.2. Evaluation................................................................................................................ ... 13 
7. Achieving cost-effectiveness...................................................................................... 13 
 
EN 3   EN 1. PROBLEM ANALYSIS AND NEEDS ASSESSMENT  
1.1. Background 
Bosnia and Herzegovina relies on external m acro-economic assistance to face the current 
crisis and to restore the sustaina bility of its fiscal and external accounts. In recent years, the 
country followed an unsustainable growth m odel characterised by high domestic demand, fed 
by high credit growth, external fi nancing and expansionary pro-cyclical fiscal policies. This 
was increasingly accompanied by macroeconomi c imbalances, in particular a widening 
current account deficit, which exacerbated Bosnia and Herze govina's exposure to the global 
economic and financial crisis. As in most  emerging economies, medium-term growth 
prospects have been severely dampened, a nd the economy will be in recession in 2009. 
Economic activity started to fall in the final quart er of 2008 and continued this fall in the first 
half of 2009. Trade dynamics slowed significan tly and only the re-opening of a large oil 
refinery in December 2008 prevents country-w ide industrial output to fall into double-digit 
negative year-on-year growth ra tes. Annual inflation rates turn ed negative in May 2009 and 
the country's official foreign exchange reserves  shrank fast. Financial stability was threatened 
in October 2008 when some 12% of depos its were withdrawn in only one month. 
Nonetheless, the situation in the domestic financial market stabilised quickly. Credit growth 
has been flat since September 2008 and deposits have been shrinking.  
The constitutional set-up of the country followi ng the Dayton/Paris peace agreement with two 
largely autonomous entities, th e Muslim-Croat Federation of Bo snia and Herzegovina and the 
Serbian Republika Srpska, has important impact s on the fiscal framework of the country, as 
the main fiscal competence lies with the entitie s. Due to a more ambitious privatisation and 
structural reform agenda, the fiscal space was larger in the Republika Srpska than in the Federation. Nevertheless, fiscal  policy has been pro-cyclical  in both entities and fiscal 
discipline was loosened in previous years when especially social transfers and public sector 
wages were unsustainably increased. The system  of generous non-targeted benefits for war 
veterans, demobilised soldiers and other social  groups and their wide-s pread misuse continued 
to be a drag on the budget, especially in th e Federation where social transfers absorb 
approximately one third of the budget.  
In early 2009, the repercussions of the econom ic slowdown were increasingly felt in public 
budgets. In an attempt to mitigate this effect , the National Fiscal Council unblocked some 
EUR 90 million from succession funds of former Yugoslavia's assets which are part of the 
central bank's reserves. Nonetheless, this pr oved to be insufficient as public finances 
increasingly came under stress on the b ack of falling revenues and high spending 
commitments. Faced with the deteriorating economic environment and the legacy of poor 
fiscal policies, the authoritie s of all government levels, repr esented by the National Fiscal 
Council, therefore concluded in early May 2009 negotiations with  the Internati onal Monetary 
Fund on a Stand-By Arrangement. The authorities committed to rebalance the budgets and to adopt a three-year budget fram ework as prior action before the EUR 1.15 billion loan for a 
three-year period was approve d by the IMF board on 8 July 2009. The first instalment of 
around EUR 203 million was disbursed immediately afterwards and was channelled to the 
budgets of the Federation (2/3) and the Repub lika Srpska (1/3). The proposed Community 
macro-financial assistance will contribute to covering Bosn ia and Herzegovina's residual 
external financing needs in 2010 as identified by the Internati onal Monetary Fund and may be 
channelled to the budgets in order to alleviate acute budgetary needs. 
 
EN 4   EN According to the latest household budget surv ey from 2007 18.6% of the population in Bosnia 
and Herzegovina can be regarded as poor, vi rtually unchanged since the beginning of the 
decade despite robust economic growth. The project ed decline in GDP is likely to affect poor 
parts of the population particular ly hard. However, in the c ontext of the IMF programme it 
was agreed to replace the highly inefficient sy stem of non-targeted social transfers by a 
means-tested scheme over the medium-term which is meant to target those really in need. 
This may alleviate the impact of the crisis  on poor households over the medium term. 
1.2. Recent economic developments and prospects 
Between 2003 and 2008 real GDP grew by 6% in an annual average. This strong economic 
growth was accompanied by a widening current acc ount deficit and increas ing private sector 
debt. Although exports grew rapidly, domestic demand grew even faster which resulted in 
very high import levels and c onsequently a trade deficit re aching about 38% of GDP in 2008. 
Foreign direct investments (FDI) were quite vola tile in recent years, closely linked to the 
privatisation agenda. In 2008, FDI accounted fo r 5.5% of GDP, declining sharply (by 55%) 
compared to 2007, mainly as the result of a high base due to major privatisation deals 
implemented in 2007. Domestic overheating and external imbalances have been exacerbated 
by expansionary fiscal policies and a worsening fiscal position since 2006. The fiscal balance 
of the consolidated government sector moved from a surplus of 2.2% of GDP in 2006 to a 
small deficit of 0.1% of GDP in 2007 and then  further to a deficit of 4% of GDP in 2008. 
In 2008, real GDP growth fell to 5.5% from 6.8% in 2007. The global economic and financial 
crisis started to reveal its  impact on Bosnia and Herze govina in the last quarter 2008. 
Economic activity in the construction, metal a nd automobile industries, but also in the 
services sector slowed down and companies st arted to lay off workers. The slowdown of 
economic activity continued in 2009, as domestic demand contract ed. Nonetheless, available 
short-term indicators such as industrial production suggest a rath er mixed situation: While in 
the Federation of Bosnia and He rzegovina (which accounts fo r roughly two thirds of the 
country's economy) industrial production fell by  10.4% annually in the first half of 2009, it 
grew by 17.1% in the Republika Srpska (which accounts for roughly the remaining third of the economy). However, the increase in the Republika Srpska is almost entirely due to the re-opening of an oil refinery in December 2008.  
The current account deficit widened to 14.7% of GDP in 2008, up from 12.7% in 2007, 
mainly driven by developments of global prices  and internal demand during the first half of 
2008. It was more or less equally financed by fo reign direct investments and drawings of new 
loans from abroad. While the trade deficit was still slightly growing in 2008, the development 
of other components of the current account showed  somehow reversing trends as compared to 
previous years: The income balance incr eased by only 3.5% (24% in 2007) and current 
transfers fell by 6.7% (after an increase of  11.3% in 2007), mainly because of falling 
remittances that dropped by 4%. However, tr ade dynamics slowed down towards the end of 
2008 on the back of reduced demand, with imports  shrinking faster than  exports. The monthly 
trade deficit improved for the first time in more  than two years in N ovember 2008. In the first 
half of 2009, the drop in imports (25.3%) exceeded the one in exports (23.4%), resulting in an 
improvement of the trade deficit by 26.7%. C onsequently, the current account deficit more 
than halved year-on-year in the first quarter , falling to only around 10% of GDP. This drop 
was mainly due to developments in trade described above, but al so a slightly rising current 
transfer balance contributed to it, as remittan ces were 6.4% higher year-on-year. In the first 
half of 2009, FDI shrank by 32% yea r-on-year as a result  of worsened invest ors' sentiments in 
 
EN 5   EN the context of the global economic crisis. Offici al foreign exchange reserves declined by 
16.8% until June 2009 since their peak in Septem ber 2008. However, they still stand at 23% 
of GDP, covering more than five months of imports. 
Tensions on the global financia l markets spilled over to the country and resulted in a "mini 
bank-run" in October 2008 when some EUR 420 million of deposits (some 12% of the stock of deposits) were withdrawn. Foreig n parent banks injected liquidity  to their local subsidiaries 
and the Central Bank of Bosnia and Herzegovina reacted firmly and adequately by inter alia 
gradually reducing the minimum reserve requi rements for banks so that the situation 
stabilised quickly. The value of  guaranteed bank deposits was more than doubled in a first 
step to around € 10,200 in early 200 9 and a further increase is pl anned with the support of the 
EBRD. Despite the repercussions of the global financial crisis  on Bosnia and Herzegovina, 
the financial sector remained sound and well- capitalised and its liquidity position was not 
seriously undermined. It is based on a rela tively conservative business model and has 
weathered the effects of the global financial crisis well. 
Annual credit growth is still positive (5.6% in June 2009) but  has come down significantly 
from the excessive rates of between 25% and 30% recorded until July 2008. Between 
September 2008 and June 2009 the stock of loans grew by only 1%. Both private enterprises 
and households reported a moderation of their i ndebtedness' growth. Restrictions came from 
both the demand and supply side. Total depos its decreased by 9.8% from their peak in 
September 2008 until June 2009, after the monthly deposit growth had always been positive 
since the introduction of the currency board in 1997. The drop was mainly caused by 
withdrawals from private sector agents. As a result, deposits fell by 6. 2% year-on-year in 
June. Due to the falling deposits, the loans to deposit ratio increased fr om 110% in September 
to 124% in June.  
Bosnia and Herzegovina's monetary policy is based on a currency board arrangement with the 
euro as the anchor currency. The arrangeme nt enjoys a high level of confidence and 
credibility and has functioned smoothly since its induction in  1997. It has so far also 
succeeded under the hard peg to the euro in sh eltering the economy from balance sheet risks 
caused by fluctuations in the exchange rate a nd a currency mismatch in the loan portfolio. 
The annual country-wide change of the consum er price index turned negative in May 2009 
and fell to -1.8% in June, down from its p eak of nearly 10% in July 2008. The 12-month 
moving average inflation rate fell to 3.8% in June, compared to 7.4% in 2008.  
The outlook for the current year and beyond remains difficult. The macroeconomic scenario 
depicted in the IMF programme for 2009 is char acterised by zero cred it growth, low FDI and 
fiscal retrenchment, leading to  a sharp drop in domestic dema nd, equally distributed between 
investment and consumption. GDP is expected to contract by 3% in 2009 and only slightly 
pick up by 0.5% in 2010. This is on account of a sharp drop in external and domestic demand 
(limited access to credit, recession in the EU). According to IMF calculations, the consolidated fiscal deficit w ill reach 4.7% of GDP in the current year and then gradually 
decrease to 4.0% in 2010 and 2.7% in 2011. The current account defici t will fall from 14.7% 
of GDP in 2008 to 9.7% in 2009 and 9.5% in 2 010. Both imports and exports will decrease, 
and so will remittances and capital inflows, incl uding FDI which are set to reach 50% of their 
2008 level and roughly one third of the average of the years 2004-2008. No privatisation proceeds are foreseen for 2009. A drop of official  foreign exchange reserves by 9% year-on-
year is assumed and inflation is expected to be  low at 1.6%, roughly in line with the euro area. 
 
EN 6   EN Table 1: Key macroeconomic data 
Indicators  2008 2009 2010 2011 2012
GDP real growth  5.5 -3.0 0.5 4.0 6.0
Investments, % GDP  24.4 20.2 23.1 24.8 24.9
CPI inflation (average), %  7.4 1.6 2.3 2.5 2.5
      
Public Finance      
Revenue and grants (% GDP)  45.8 45.0 45.9 45.9 45.7
Expenditure (% GDP)  49.9 49.7 49.9 48.6 47.3
Fiscal Balance, after grants (% GDP)  -4.0 -4.7 -4.0 -2.7 -1.5
      
External Position      
Current account balance (% GDP)  -14.7 -9.7 -9.6 -9.5 -9.1
Gross reserves (months of imports)  5.5 4.7 4.5 4.4 4.5
      
Debt      
Public Debt (% GDP)  27.8 34.7 39.8 40.3 38.0
External debt service (% of exports)  8.0 11.3 12.3 12.5 11.5
Source: IMF 
1.3. The Government's economic  and fiscal reform agenda 
The strategic setting for reforms in Bosnia and Herzegovina has been a nd is to large extent 
defined by the ongoing work on Bosnia and Herze govina’s integration into the EU. The EU 
provides guidance to the authoritie s of Bosnia and Herzegovina on re form priorities as part of 
the European Partnership which was adopted  in February 2008. The Stabilisation and 
Association Agreement (SAA) was signed in Ju ne 2008, together with an Interim Agreement 
which focuses on trade and trade -related areas. The Interim Agr eement entered into force on 1 
July 2008. Bosnia and Herzegovina has developed an Action Plan and established joint bodies 
between the State level and Entity institutions for implementation of the SAA and the Interim Agreement. The National Fiscal Council st arted operating in September 2008 and has 
gradually taken over a coordinati ng role for fiscal policies.  
 
EN 7   EN The programme with the IMF that was negotia ted by the National Fisc al Council included a 
set of prior actions: a) the adoption of rebala nced budgets in the Federation and the Republika 
Srpska and savings in the 2009 st ate budget; b) the increase of  excise taxes; and c) the 
adoption of a global budgetary framework. Fiscal  adjustments are aimed at bringing down the 
consolidated budget deficit from 7.8% of GDP without modification to 4.7% of GDP. 
Adjustments amount to 2.3% of GDP on the expe nditure side, the bulk of which (1.7% of 
countrywide GDP or EUR 212 million) is to be borne by the Federation, while the Serb 
Republic contributes 0.5% of GDP (EUR 60 million, including municipalities and health 
funds) and the state level 0.2% of GDP (EUR 20  million). Corrections take place mainly via 
reductions of wages, allowanc es and social transfers. Cu rrent spending is reduced by 
approximately 10% while capital expenditures are not affected. On the revenue side, a law of 
increased excises on tobacco, coff ee and petroleum was adopted and entered into force as of 1 
July 2009. It has an estimated impact of  EUR 83 million in 2009 (0.7% of GDP).  
In addition, the global medium-term budgetary fra mework was adopted by the National Fiscal 
Council on 29 June despite opposition from the st ate level that voted against it. The state 
Minister of Finance and Treas ury explained his refusal in a letter to the international 
community, stating that the adopted document was not a real fiscal framework because 
relevant data were missing, and that the share of the state level from indirect taxes in 2010 
would be too low. 
Additional commitments to be implemented afte r the adoption of the SBA include structural 
reforms, especially in the Federation where n eeds are highest while th e Republika Srpska had 
already carried out more ambitious structural re forms in recent years. Public administration 
reforms in both entities will be pursued and th e coordinating National Fiscal Council will be 
strengthened. It was agreed that the Federa tion would move forward with privatisation, 
reform its system of rights-based transfers to a means-tested system, pursue pension reforms 
and centralise its system of registration, co ntrol and collection of  taxes and social 
contributions. Concerning the financial sector supervision, the authorities will set up a 
Standing Committee for Financial Stability co mprising the Banking Agencies, the Central 
Bank, the National Fiscal Council and the Deposit Insura nce Agency, in order to improve the Box 1 – Short-term measures of fiscal  adjustment under the IMF programme 
 
Measures on the expenditure side  are intended to save EUR 292 milli on (2.3% of GDP). These include:  
 
- On the state level  (EUR 20 million): a reduction of spending on wages by 8%, meal allowances by 
35% and vacation allowances by 20%; 
- In the Federation  (EUR 212 million): a 10% reduction of all budget users and of all transfers to 
different social groups; a ceiling of 1% of the av erage wage on meal allowances; a reduction of the 
vacation allowance to 50% of the average wage from 75% of the individual wage; a suspension of 
allowances for participation in commissions, overtime work and contractual services, additional 
savings by cantons, municipalities and social funds; 
- In the Republika Srpska  (EUR 60 million): a reduction of the salaries of highest paid civil servants by 
10%; lowering daily allowances for business trips; unifying the rulebook on compensation; a hiring 
freeze for one year; reduction of veteran and disability benefits; expenditure cuts on wages in 
municipalities and health funds; a redefinition of early retirement requirements. 
 
Measures on the revenue side  are intended to raise an additi onal EUR 83 million (0.7% of GDP): 
- Increased excises on tobacco, coffee and petroleum 
 
EN 8   EN exchange of information, the analytical capac ity and crisis preparedness and management. 
Last but not least, the au thorities will conti nuously adhere to the Currency Board 
Arrangement as constituted under the law.  
1.4. External and budgetary financing needs in Bosnia and Herzegovina 
Under the assumptions of the IMF programme, aiming at keeping the official foreign 
exchange reserves at their level of end- May 2009, gross financing needs of EUR 1,411 
million in 2009 will produce a financing gap of approximately EUR 433 million. For 2010, a 
strong adjustment programme will reduce the budget's financing needs substantially, thus 
allowing maintaining reserves to the equivalent  of 4.5 months of pros pective imports of goods 
and services. With the current account conti nuing to adjust and roll-over rates and FDI 
improving due to enhanced confidence in economi c policies and the projected recovery in the 
world economy, gross financing needs during 2011 and the first half of 2012 are projected to 
decline substantially. The total financing ga p under the program would amount to EUR 1,488 
million. The IMF will provide about EU R 1,145 million (600% of quota) during the 
programme period, while the World Bank has indicated commitments of EUR 189 million.  
In this context the Commission is proposing an MFA operation for Bosnia and Herzegovina 
amounting to a maximum of EUR 100 million. Gi ven Bosnia and Herzegovina's moderate 
level of indebtedness it is deemed  appropriate to provide this a ssistance in the form of loans. 
The assistance is intended to  contribute to covering the re sidual financing needs in 2010 — 
beyond World Bank and IMF assistance — and w ould correspond to 77% of the projected 
EUR 130 million needed as identified by the IMF. The remainder of EUR 30 million will 
come from other sources, including London Club debt deferment. Given the time profile of 
the needs, the IMF support will be more or less equally distributed during the programme 
period, while more than half of the World Bank support will be disbursed in 2009 and the 
macro-financial assistance is pl anned in two tranches for 2010.  
Table 2: Summary of Financing Needs 
  2008 2009* 2010* 
 (in millions of euro) 
Gross financing requirement 1,986 1,411 1,471 
Current account deficit 1,842 1,201 1,234 
Amortisation 143 211 237 
Government (excl. IMF) 60 114 117 Other 83 97 120 
    
Financing 1,986 1,411 1,471 Capital transfers 202 218 230 
Foreign direct investments 529 258 500 
Net bank financing 655 82 50 Foreign loans 590 210 315 
Government 380 215 245 
Other 210 -5 70 Gross international reserves (- = increase) 206 287 -75 
Other -199 -76 -111 
    Financing gap … 433 563 
 
EN 9   EN Fiscal … 433 292 
Augmentation of reserves … 0 271 
IMF … 305 382 World Bank … 103 51 
EU … 0 100 
Other (including London Club) … 24 30     
    
Memorandum Item: Gross Domestic Product (in millions of euro) 12,550 12,423 12,801 
Source: IMF staff estimates 
*2009 and 2010 data are forecasts. 
Besides the external financing gap, the IM F also identifies uncovered budgetary financing 
needs: Without adjustment, the consolidated  budget deficit would reach 7.8% of GDP in 
2009. The IMF and the authorities have agreed to reduce it to 4.7% of GDP in the current year 
(EUR 584 million) and to 4.0% of GDP in 2010 (EUR 512 million). Available domestic and 
foreign financing adds up to 1.2% of GDP in 2009 (EUR 150 million) and to 1.7% of GDP in 
2010 (EUR 220 million). This would leave an  uncovered budgetary financing gap as 
calculated by the IMF of 3.5% of GDP in 2009 (EUR 435 million) and 2.3% of GDP in 2010 (EUR 294 million), before the intervention of the international community. 
The IMF funds will be disbursed to the Cent ral Bank. The first tranche of around EUR 200 
million was disbursed in July and the second one  of almost EUR 100 m illion is planned for 
December 2009. These funds are e xpected to be allocated en tirely to the budgets of the 
Federation (2/3) and the Republika Srpska (1/3).  As the heavy burden on the budget will ease 
out, in 2010 only part of the EUR 375 million that  will be disbursed is expected to be 
channelled to the budgets, while the remai nder would be kept at the Central Bank to 
strengthen foreign reserves. 
2. O
BJECTIVES AND RELATED INDICATORS OF THE MACRO -FINANTIAL ASSISTANCE  
2.1. Objectives 
The objectives of the proposed macro-fina ncial assistance operati on are the following: 
• Contribute to covering Bosnia and Her zegovina's external financing needs; 
alleviate budgetary financing needs; 
• Support the fiscal consolidation effort in the context of an IMF programme; 
• In this respect, help Bosnia and Herze govina reduce the financ ial constraints on 
the implementation of its comprehensive socio-economic reform programme; 
• Facilitate and encourage efforts of the au thorities of Bosnia and Herzegovina to 
implement measures identified und er the European Partnership; 
• Reinforce the EU's role in the economic policy dialogue with the authorities of 
Bosnia and Herzegovina on the programme of reforms. 
 
EN 10   EN Detailed macro-economic and structural reform  objectives will be fu rther defined in the 
context of a Memorandum of Understanding, to be agreed with the authorities. 
2.2. Indicators 
To monitor the fulfilment of the objectives of the programme throughout the implementation 
period of the assistance, the Commissi on will use two types of indicators: 
• Adherence to the IMF-supported programme ; it will be a condition sine qua non 
for the implementation of the assistance; 
• Progress in the implementation of specific actions that will be part of the 
conditions for disbursement. Those actions will be specified in the aforementioned 
Memorandum of Understanding. They will be  consistent with the policy lines 
anchored in the IMF programme, as well as the European Partnership Priorities. 
3. ALTERNATIVE DELIVERY MECHANISMS AND RISK ASSESSMENT  
3.1. Delivery mechanisms 
Given Bosnia and Herzegovina's moderate level of indebtedness it is deemed appropriate to 
provide the foreseen macro-financial assistance in the form of loans. 
Macro-financial assistance is an untied and undedicated macroeconomic support, which helps 
the beneficiary meet its external financing need s, and may contribute to  alleviating budgetary 
financing needs. The loan will be denominated in euro and transferred to the Central Bank which converts it into local currenc y. The loan may then be fully or partly transferred to the 
budgets of the Federation and the Republika Srps ka. Moreover, as experienced with similar 
operations, including in Bosnia and Herzegovina , the economic policy conditionality attached 
to this support streng thens the stabilisation and reform process. 
3.2. Risk assessment 
There are both fiduciary and po licy risks related to this macr o-financial assistance operation.  
There is a risk that this assistance, which is not dedicated to specific expenses (contrary to 
project financing, for example), would be used in a fraudulent way, like any other type of 
assistance. Generally speaking, this  risk is related to factors su ch as the independence of the 
central bank, the quality of systems and procedures related to the management, control and oversight functions in the financial circuits and processing of such assistance, IT security and 
internal/external audit capacity of  the beneficiary authorities.  
To mitigate the risks of fraudulent use, seve ral measures will be taken. The Memorandum of 
Understanding and the loan 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 Central Bank of Bosnia and Herzegovina. 
Moreover, before the agreement on the Me morandum of Understa nding 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 sound financial management of macro-financial assistance is sufficiently 
effective in Bosnia and Herzegovina (for detail s, see Financial Statement, section 7). In the 
 
EN 11   EN light of this assessment, specific mechanisms applying to the management of the funds by the 
beneficiaries may be introduced in agreement with the national authorities. The Commission 
may also use other assistance instruments at its disposal to help the beneficiary authorities 
improve their public finance management systems if this area is not su fficiently covered by 
other donors. 
Finally, the assistance will be liable to verifi cation, 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 assumption is  that the Governments of the different state 
levels of Bosnia and Herzegovina will remain committed to fiscal adjustment and remain in 
compliance with their agreement with the IMF. This will be validated on the basis of IMF’s 
quarterly monitoring of performance indicators a nd structural benchmarks. There is a risk that 
the political will to pursue agreed reforms at one  or the other level of government may fade as 
the pressure from lobby groups that are affect ed by the adjustment measures may rise.  
While seriously taking into accoun t these risks, the Commission se rvices consider that there 
are sufficiently strong grounds to proceed with MFA to Bosnia and Herzegovina. The Commission services will maintain close contacts with the authorities during the 
implementation of the macro-financial assistan ce in order to address quickly any concerns 
that may arise. 
4. A
DDED VALUE OF COMMUNITY INVOLVEMENT  
By providing financing complementary to re sources made available to Bosnia and 
Herzegovina by the IMF and the World Bank, the Community would support Bosnia and 
Herzegovina's domestic efforts of responding to  the impact of the current global economic 
crisis. It would encourage and strengthen th e implementation of the necessary and overdue 
structural reform and fiscal adjustment agenda. This will be particularly important in the areas 
targeted by the programme’s conditionality, in part icular the fiscal consolidation effort aimed 
at reducing public expenditures to a sustainable level.  
The macro-financial assistance is a policy-ba sed instrument and would therefore also 
contribute to support the Europe an Union’s strategy towards Bosnia and Herzegovina, in 
particular in the context of  the European Partnership.  
5. GENVAL CRITERIA  
The Commission services have given due cons ideration to the five Genval criteria.  
• Exceptional character: 
Bosnia and Herzegovina's financ ing requirements in 2009-2011 re sult from the country's high 
external and fiscal imbalances that severely  aggravated the impact of the global economic 
crisis on Bosnia and Herzegovina. The ongoing ec onomic adjustment, the anchor of the EU 
perspective and the conditionality of the IMF programme will contribute to reducing these 
imbalances over the medium term.  
The exceptional character of the foreseen MFA is  further stressed by the limited timeframe of 
the programme. The Commission services intend to limit the duration of the implementation 
 
EN 12   EN of the assistance to one year. When deciding about the disbursement of the funds under the 
MFA programme, the Commission services intend to  take into consider ation the progress in 
the implementation of the IMF programme and of the World Bank deve lopment policy loans. 
• Scope: 
Bosnia and Herzegovina is a po tential candidate country for EU  membership which respects 
democracy and human rights and as such can be considered as eligible  for EC MFA support. 
• Complementarity: 
The Community MFA will be complementary to the external financing coming from the 
International Monetary Fund a nd the World Bank. It will cove r the residual financing gap 
over and above the support of these institu tions by 77%. The remaining funds will be 
provided by other sources, including London Club de bt deferment. In this context and in the 
short run, MFA will both increase substantially th e European Union's leverage on Bosnia and 
Herzegovina's policy making bri nging the country onto a more sustainable path of economic 
and fiscal policies.  
• Conditionality: 
The macro-financial assistance to Bosnia and Herzegovina will  be linked to an IMF stand-by 
arrangement. As usual with this type of assi stance, disbursements under this macro-financial 
assistance will be subject to progress in the implementation of the IMF arrangement, in particular related to macroeconomic performance and structural adjustments. It will also be 
conditional upon further reform measures that  will be defined in the context of a 
Memorandum of Understanding to be jointly agreed betw een the Commission and the 
Bosnian authorities. 
Given the nature of the planned operation, in  defining the conditionality in the area of 
structural policies, particular 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 Bosnia and Herzegov ina is a potential candidate country, some 
measures with high priority on the EU integr ation agenda may also be included in the 
conditionality framework. In addition, the Co mmission may consider targeting specific 
sectoral policies of particular importance, iden tified as such in the European Partnership and 
2009 Progress Report. 
• Financial discipline: 
The Commission services propose to limit the macro-financial assistance to Bosnia and 
Herzegovina to up to EUR 100 million. This corre sponds currently to 77% of the amount (ex-
ante) of the residual financing gap foreseen after IMF and World Ba nk support as identified 
by the IMF for the year 2010. Forward looking data  on the balance-of-p ayments gap are by 
their very nature volatile. Additional bilateral financing may materialise in the course of the programme that cannot yet be included in the current programme assumptions. 
Concerning sound financial manage ment, the Commission services  are taking action in order 
to fulfil the requirements of  the Financial Regulation. Th e Commission will launch an 
Operational Assessment (OA) of the reliability of financial circuits and administrative 
controls at the Ministries of  Finance of the state level, the Federation and the Republika 
 
EN 13   EN Srpska, and the Central Bank of  Bosnia and Herzegovina. Ba sed on the OA report's findings, 
the Commission services will determine wh ether the framework for sound financial 
management is sufficiently effective in Bosnia  and Herzegovina. Also, the results of the OA 
will contribute to the definition of appropriate  conditionality in the area of public finance 
management. 
6. PLANNING FUTURE MONITORING AND EVALUATION  
This assistance is of exceptional and macr o-economic nature and its monitoring and 
evaluation will be undertaken in line w ith the standard Commission procedures. 
6.1. Monitoring 
The monitoring system will be ensured by the provi sion of reports and data by the authorities, 
as to be set out in the Memorandum of Un derstanding, and the organisation of review 
missions to Bosnia and Herzegovina by Commissi on staff. This assistance will be managed 
centrally. The Commission Delegation will also be called to provide  additional reporting, 
where appropriate. 
In particular, the monitoring of the action by the Commission services will take place on the 
basis of a system of macro-econo mic and structural policy indicators to be agreed with the 
authorities of Bosnia and Herzegovina. In th is process, the Commission services may also 
monitor key areas to be identi fied in the above-mentioned Operational Assessment on public 
finance management.  
An annual report to the European Parliament a nd to the Council on the implementation of this 
assistance is foreseen in the proposed text of the Council D ecision on MFA to Bosnia and 
Herzegovina. 
6.2. Evaluation 
In the context of DG ECFIN's Multi-annual Ev aluation Programme, two to three ex-post 
evaluations of MFA operations are planned per year. It is in this framework that an 
independent evaluation of the assistance will be carried out by duly authorised representatives of the Commission in due course. A provision foreseeing an ex-post evaluation will be 
included in the Memorandum of Understanding. Financial resour ces for this evaluation would 
be drawn from the corre sponding MFA budget line.  
7. A
CHIEVING COST -EFFECTIVENESS  
In implementing the programme, the Commission will be guided by the following principles:  
• The assistance will be made available by the Commission to Bosnia and 
Herzegovina in principle in two instalments.  Each instalment will be released on 
the basis of a satisfactory track reco rd in implementing the macro-economic 
agenda under the IMF-supported program me and the specific economic policy 
conditions attached to the assistance. The latter will be ne gotiated with the 
authorities as soon as possible and laid down in a Memorandum of Understanding 
concluded to this effect.  
 
EN 14   EN • As soon as the Council has adopted the proposal, the Commission will negotiate 
with the Bosnian Authorities a Memora ndum of Understanding laying out the 
conditions for the release of the EU assist ance, as well as a loan agreement. The 
disbursements of the proposed assistan ce by the Commission will further be 
conditional upon a satisfactory 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 
available expertise, including of the IM F, the World Bank and of bilateral and 
multilateral aid agencies active in the sa me areas. In addition, the Commission 
will aim at synergies with other Community  policies and instruments (notably the 
Instrument for Pre-Accession) that could be used to support the implementation 
by the beneficiary of the relevant measures  (notably in the ar ea of public finance 
management). Where appropriate, links to  any related action under the European 
Partnership or findings of the Progres s Reports can also be established.  
• This action is exceptional by nature and will not involve an increase in the number 
of Commission staff.