Proposal for a COUNCIL DECISION amending Council Decision 1999/733/EC providing supplementary macro-financial assistance to the former Yugoslav Republic of Macedonia

(presented by the Commission)

EXPLANATORY MEMORANDUM

1. Background

On 8 November 1999, the Council of the European Union decided to provide to the former Yugoslav Republic of Macedonia (fYRoM)) supplementary macro-financial assistance of up to EUR 80 million, comprising a loan element of up to EUR 50 million and a grant element of up to EUR 30 million (Council Decision 1999/733/EC).

This assistance was decided in the wake of the Kosovo crisis and the related large economic costs. The objective of this assistance has been to support the balance of payments and help ease the country's external financial constraints, comforting the implementation of structural reforms and helping to alleviate the social consequences of the economic disruptions caused by the conflict in Kosovo. The assistance has been conditional upon a satisfactory track record in the adjustment and reform programme of fYRoM in the framework of an IMF Stand-by Arrangement.

The implementation of this assistance was delayed due to difficulties with reaching agreement on a new Stand-by Arrangement between the authorities and the IMF. It was finally approved by the IMF Board in November 2000. After consultation of the Economic and Financial Committee (EFC), a Memorandum of Understanding (MoU) was signed on 19 December 2000 setting out the economic policy conditions attached to the second tranche of this assistance. The disbursement for the first tranche of EUR 30 million was made in December 2000 ( EUR 20 million grant and EUR 10 million loan).

2. Recent economic developments

In 2000, macroeconomic developments were broadly satisfactory, as GDP growth reached 5.1%. But economic growth started to decline in the second half of last year. In 2000 inflation picked up, as the CPI increased by 5.8% year-on-year (6.1% end-of-period) against a fall in the CPI of 1.1% in 1999. Government finances were particularly strong, as the general government budget balance amounted to a surplus of some 3.5% of GDP, notably owing to significantly stronger-than-expected tax receipts. The current account deficit stood at 3.4% of GDP (including grant assistance), little changed from the year before. The import coverage continued to increase and amounted to some 3.5 months of imports at the end of 2000 whereas the external debt ratio also increased and reached 45.7% of GDP.

In early 2001 the slowdown in economic activity continued and was even more pronounced, as the political and security crisis, which had erupted in the country in February, linked to the armed confrontations between the security forces and ethnic Albanian armed groups deepened further. The crisis constituted an important factor behind the unsatisfactory macroeconomic developments recorded in the first half of the year, inter alia through disturbances to foreign trade. Preliminary figures suggest a fall in real GDP of 3.8% year-on-year in the first quarter of 2001.

Inflationary pressures have been receding in the first months of the year and annual CPI inflation stood at 3.2% in April. Since the outbreak of the crisis the National Bank has intervened repeatedly in defence of the Denar, which is pegged to the DM/Euro. With a view to deterring speculation against the Denar the bank has also tightened the monetary policy stance to reduce liquidity. The defence of the Denar exchange rate has implied a fall in currency reserves during the first six months of the year. On the other hand, the recent sale of the national telecom company to the Hungarian company MATAV provoked an inflow in the order of USD 320 million.

Government finances have deteriorated markedly as a result of the crisis as well as of increased spending in late December 2000. As a result of the crisis in March 2001, central government expenditures on "goods and other services" had increased by 120% year-on-year (albeit monthly figures are subject to fluctuation). Tax revenues are also negatively influenced by the crisis and the related drop in economic activity: in March central government tax revenues were 11% lower year-on-year. The previously envisaged swing in the fiscal stance from a comfortable surplus in 2000 to a very manageable deficit in 2001 of some 1.2% of GDP will not materialise; rather indications are for a swing in the order of magnitude of 10 percentage points of GDP from a very substantial surplus in 2000 to a deficit of some 6% of GDP in 2001.

Both imports and exports are at significantly lower levels than one year ago. In January-April exports were 11% lower year-on-year while imports were reduced by 28% year-on-year. The strong year-on-year fall in imports in the first four months of the year is largely explained by base effects caused by unusually strong imports in the corresponding months of 2000 before the introduction of VAT. The fall has been larger for imports than for exports and the trade balance has improved in comparison with the corresponding period in 2000. However, for 2001 as a whole it is expected that the trade balance and the current account will deteriorate in comparison with 2000. Although estimates are not finalised, the IMF has recently indicated that the residual external financing gap in 2001 could be in the order of US $ 85 million.

The authorities have also progressed with economic reforms, even though the crisis has slowed down the process. In particular, a tax reform was implemented in January 2001 lowering the personal income tax rates. The treasury system has also progressed and is nearing completion. In the area of financial sector reform, substantial progress was achieved, including through the enforcement of supervisory guidelines, the strengthening of bank legislation, and a corrective action programme for problem banks. Moreover, steps have been taken in the area of public administration reform, including the adoption of the Civil Servants Law in May 2001. In the area of privatisation, progress was more limited, which can be partly attributed to the crisis situation. The authorities remain committed to continued economic stabilisation and reform and are in close consultation with the IMF and the World Bank on the next steps to be taken.

3. Extension of the legal basis beyond the year 2000

The former Yugoslav Republic of Macedonia requires continued financial support from the Community and other bilateral and multilateral donors in support of its economic stabilisation and reform efforts. However, the underlying Council decision (1999/733/EC of 8 November 1999) was created in the wake of the Kosovo crisis assuming that an agreement on a stand-by programme was imminent. Accordingly, Article 1 (3) of the Council Decision stipulates that "the total grant component of this assistance shall amount to a maximum of EUR 30 million for the 1999 and 2000 period", whereas a similar timeframe is not stipulated for the loan part.

Against this background, it now appears necessary to amend the existing legal base, i.e. Council Decision 1999/733/CE, so as to allow the continued implementation of this assistance, and in particular the remaining grant component of EUR 10 million beyond the year 2000. In line with budgetary requirements, the amended Council decision would stipulate an expiry date of funds by 31 December 2002.

2001/0213 (CNS)

Proposal for a COUNCIL DECISION amending Council Decision 1999/733/EC providing supplementary macro-financial assistance to the former Yugoslav Republic of Macedonia

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community, and in particular Article 308 thereof,

Having regard to the proposal from the Commission [1],

[1] OJ C , , p. .

Having regard to the opinion of the European Parliament [2],

[2] OJ C , , p. .

Whereas:

(1) Council Decision 1999/733/EC [3] provides supplementary macro-financial assistance to the former Yugoslav Republic of Macedonia comprising a loan component of a maximum principal of EUR 50 million and a grant component of a maximum of EUR 30 million;

[3] OJ L 294, 16.11.1999, p. 31-32

(2) The implementation of this assistance was delayed due to difficulties in reaching agreement on a new Stand-by Arrangement between former Yugoslav Republic of Macedonia and the International Monetary Fund (IMF);

(3) The former Yugoslav Republic of Macedonia is committed to a continued economic stabilisation and reform path and continues to require external financial support in addition to what can be provided by International Financial Institutions;

(4) The existing Council decision 1999/733/EC does not permit the commitment of grant funds beyond the year 2000;

(5) The Commission has consulted the Economic and Financial Committee before submitting its proposal.

HAS DECIDED AS FOLLOWS:

Sole Article

Decision 1999/733/EC is hereby amended as follows:

1. Article 1 (3) shall be replaced by the following: "The grant component of this assistance shall amount to a maximum of EUR 30 million."

2. A new Article 6 shall be inserted: "This decision expires on 31.12.2002."

Done at Brussels,

For the Council

The President

FINANCIAL STATEMENT

1. Title of operation

Supplementary macro-financial assistance to the former Yugoslav Republic of Macedonia.

2. Budget heading involved

Grant component of the assistance

B7-548: Macro-economic assistance in favour of Western Balkan Countries.

Loan component of the assistance

Heading B0-211 reflecting the European Community guarantee for borrowing programmes contracted by the Community to provide financial assistance for non-member countries in Central and Eastern Europe.

3. Legal basis

Article 308 of the Treaty.

4. Description and justification for the action

a) Description of the action

Provision of a Community loan (to be financed by Community borrowing in the international capital markets), in the amount of up to EUR50 million, and a grant of up to EUR30 million (to be financed by the general budget) to the former Yugoslav Republic of Macedonia with a view to supporting the authorities' reform efforts and alleviating the social consequences of the economic disruptions caused by the conflict in Kosovo.

A first tranche of EUR 20 million grant and EUR 10 million loan has already been disbursed in December 2000.

b) Justification for the action

The viability of the former Yugoslav Republic of Macedonia's external position depends on external financial assistance from official sources.

5. Classification of the expenditure

Grant component: non compulsory expenditure, differentiated.

Loan component: compulsory.

6. Nature of the expenditure

Straight grants (100% subsidy), which would be released in at least two successive instalments.

Potential activation of budget guarantee for the Community borrowing aimed to fund the loan to the former Yugoslav Republic of Macedonia.

7. Financial impact

a) Method of calculation

The evaluation of the amount of the assistance deemed necessary was based on the estimates of the former Yugoslav Republic of Macedonia's residual external financing needs.

For the loan component of this assistance, a token entry is proposed because it is expected that the budget guarantee will not be called, and in any case the amount and timing of any call on this budget line cannot be calculated in advance.

b) Effect of the action on intervention credits

The budget entry corresponding to the grant component of this assistance will be activated subject to compliance with a number of policy conditions to be agreed with the authorities of the former Yugoslav Republic of Macedonia.

The budget entry reflecting the budget guarantee for the loan component of this assistance will be activated only in the case of an effective call on the guarantee.

c) Financing of the intervention expenditure

(i) Grants

- The financing of the expenditure is available at B7-548.

The following schedule of appropriations is proposed (in million EUR):

>TABLE POSITION>

(ii) In case of call on the budget guarantee:

- Recourse to the Guarantee Fund established by Council Regulation (EC, EURATOM) n° 2728 of 31 October 1994.

- In case the Guarantee Fund did not contain sufficient resources, additional payments would be called up from the budget by transfer:

- of any margin remaining in the Reserve for guarantees;

- of any late payments to the budget for which the budget guarantee has been activated (under article 27(3) of the Financial Regulation);

- of any margin available under the ceiling of category 4 of the financial perspectives or redeployment therein.

- In order to fulfil its obligations, the Commission can provisionally ensure the debt service with funds from its treasury. In that case, Article 12 of the Council Regulation (EEC, Euratom) n° 1552/89 of 29.5.1989 will apply.

8. Fraud prevention measures

The funds will be paid directly to the Central Bank of the beneficiary country only after verification by the Commission Services, in consultation of the Economic and Financial Committee and in liaison with the IMF and World Bank Services, that the macro-economic policies implemented in the former Yugoslav Republic of Macedonia are satisfactory and that the specific conditions attached to this assistance are fulfilled.

9. Elements of cost-effectiveness analysis

a) Grounds for the operation and specific objectives

By supporting the former Yugoslav Republic of Macedonia's macroeconomic reform efforts and complementing financing by the International Community provided in the context of the IMF-supported programme, this assistance would ease the country's external financing constraints, would improve its growth prospects and would help it face the economic and social consequences of the conflicts in the region.

b) Monitoring and evaluation

This assistance is of macro-economic nature and its monitoring and evaluation is undertaken in the framework of the IMF-supported adjustment and reform programme that the former Yugoslav Republic of Macedonia is implementing.

The Commission services will monitor the action on the basis of a genuine system of macro-economic and structural policy indicators to be agreed with the authorities of the beneficiary country. They will also remain in close contact with the IMF and World Bank services and will benefit from their assessment of the former Yugoslav Republic of Macedonia's reform achievements.

An annual report to the European Parliament and to the Council is foreseen in the proposed Council decision, which will include an evaluation of the implementation of this operation.

10. Administrative expenditure

This action is exceptional in nature and will not involve an increase in the number of Commission staff.