Proposal for a COUNCIL DECISION amending Decision 2001/549/EC of 16 July 2001 providing macro-financial assistance to the Federal Republic of Yugoslavia

(presented by the Commission)

EXPLANATORY MEMORANDUM

On 16 July 2001, the Council of the European Union decided to provide to the Federal Republic of Yugoslavia (FRY) a macro-financial assistance of up to EUR 300 million, comprising a loan element of up to EUR 225 million and a grant element of up to EUR 75 million (Council Decision 2001/549/EC).

The main objective of this assistance is to contribute to bolstering the country's economic, social and political stability, as well as enhancing its important role as a factor of stability in the region after the political and democratic changes that occurred in the FRY in the last quarter of 2000. In particular, this assistance will ease the country's external financial constraints and support the balance of payments. This assistance is now being implemented by the Commission Services.

However, the financial situation in the FRY in the second half of 2001 appears to be more constrained than previously envisaged. This is largely due to delays in the Serbian privatisation process. The delay is mainly linked to the need to implement a new transparent framework for privatisation agreed with the World Bank, as well as to the postponement of the privatisation of one cement company due to the opposition by workers.

As a result, previously budgeted estimated privatisation receipts in the Serbian budget have been revised downwards substantially under the IMF programme which will reduce expected FDI receipts and will put additional strain on the balance of payments. Based on revised estimates of the Serbian budget, the IMF has identified a fiscal gap of around YuD 9 billion (around EUR 150 million or 1.3% of GDP) in 2001. This comes on top of the part of the budgeted deficit that is expected to be covered by foreign grants and loans (some EUR 150 million that have largely been firmly committed in the context of the FRY Donors Conference in June 2001).

The IMF has therefore agreed with the authorities that, on top of the external financing needs already identified under the programme, additional foreign financing will be required to close the new financing gap in the second half of 2001. Furthermore, in order to allow increasing foreign exchange reserve to benefit the budget, the IMF staff agreed with the authorities to raise the 0.6% limit for government borrowing from the banking sector by 0.2% of GDP.

If additional external financial assistance is not forthcoming, there is a serious risk of increased vulnerability of the FRY economy caused by either a further and unsustainable compression of overall spending in line with fewer resources available and/or delays in implementing necessary economic and structural reforms as a result of increasing public irritation.

Against this background, it seems appropriate for the Community to help easing the new financial constraints that the FRY is facing at this crucial juncture by amending Council Decision 2001/549/EC, thereby augmenting the total amount by EUR45 million to up to EUR 345 million. In view of the high indebtedness of the FRY (above 140% of GDP) and its limited borrowing capacity, it is proposed to provide this additional amount in the form of a grant, raising the overall grant component of this assistance to up to EUR 120 million. The corresponding increase of the Community assistance will be based on the understanding that other donors will undertake similar efforts to provide complementary financial support.

2001/0258 (CNS)

Proposal for a COUNCIL DECISION amending Decision 2001/549/EC of 16 July 2001 providing macro-financial assistance to the Federal Republic of Yugoslavia

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 of the Commission [1],

[1] OJ C

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

[2] OJ C

Whereas:

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

(2) Council Decision 2001/549/EC [3] provides for macro-financial assistance to be made available to the Federal Republic of Yugoslavia with a view helping this country meet its external financing needs and supporting the authorities' reform efforts.

[3] OJ L 197, 21.7.2001, p.38

(3) The Federal Republic of Yugoslavia is likely to require significant additional external financing over and above official financing which could be provided by the International Monetary Fund, the World Bank and bilateral donors.

(4) An increase in the grant component of the Community's macro-financial assistance to the Federal Republic of Yugoslavia is an appropriate measure to help, with other donors, ease the country's financial constraints.

(5) The Treaty does not provide, for the adoption of this Decision, powers other than those of Article 308.

HAS DECIDED AS FOLLOWS:

Sole Article

Article 1 (3) of Decision 2001/549/EC is replaced by the following:

"3. The grant component of this assistance shall amount to a maximum of EUR 120 million".

Done at,

For the Council

The President

FINANCIAL STATEMENT

1. Title of Operation

Macro-financial assistance to the Federal Republic of Yugoslavia.

2. Budget heading involved

B7-548: Macro-financial assistance to the Western Balkans

3. Legal basis

Article 308 of the Treaty

4. Description and justification of the action

a) Description of the action

Increase of the grant element of Community macro-financial assistance to the Federal Republic of Yugoslavia to ease the country's additional external financing needs.

b) Justification of the action

Identification of additional external financing needs over and above identified official financing which could be provided by the IMF, the World bank and bilateral donors. The sustainability of the beneficiary country's economic stabilisation and reform achievements heavily depends on external financial assistance from official sources at concessional terms.

5. Classification of the expenditure

Non compulsory, differentiated.

6. Nature of the expenditure

All of the proposed increase in aid will be in the form of a straight grant (100% subsidy).

7. Financial impact

a) Method of calculation

The evaluation of the amount of the assistance deemed necessary is based on the present estimates of the beneficiary country's residual external financing needs.

b) Effect of the action on intervention credits

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

c) Financing of intervention

The proposed increase in assistance to be provided by this modification is to be financed within the limits of Category 4 of the present Financial Perspective (in million EUR), as follows:

// 2001

Commitment appropriations // 45

Payment appropriations // 45

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 with the Economic and Financial Committee and in liaison with the IMF services, that the macro-economic policies implemented in these countries are satisfactory and that the specific conditions attached to this assistance are fulfilled.

The assistance will be liable to verification, control and auditing procedures under the responsibility of the Commission, including the European Antifraud Office (OLAF), and the European Court of Auditors.

9. Elements of cost-effectiveness analysis

a) Grounds for the operation and specific objectives

By supporting FRY's macro-economic reform efforts and complementing financing by the International Community provided to this country in the context of the IMF-supported programme, this assistance would underpin its transition towards a market economy.

The present assistance will only be mobilised on the proviso that the beneficiary country fully discharges its outstanding due financial obligations towards the Community and the European Investment Bank.

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 stabilisation and reform programme that the beneficiary country is implementing.

The monitoring of the action by the Commission services will take place on the basis of a genuine system of macro-economic and structural policy indicators to be agreed with the authorities of the beneficiary country. The Commission services will also remain in close contact with the IMF and World Bank services to benefit from their assessment of the recipient country's stabilisation and reform.

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.