Proposal for a Council Decision providing macro- financial assistance to Albania
Date: 1998-09-03
Institutions: European Commission
Subjects: Albania, Community loan, balance of payments, economic reconstruction, financial aid

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels,  03.09.1998 
COM(1998) 507  final 

98/0273  (CNS) 

Proposal for a 

COUNCIL DECISION 

providing macro-financial  assistance 
to Albania 

(presented by the Commission) 

EXPLANATORY  MEMORANDUM 

1. 

INTRODUCTION 

After  the  breakdown  of the Communist  regime,  in  1992" the Albanian  authorities  initiated  efforts 
of  macroeconomic  stabilisation  and  structural  adjustment  under  IMF-supported  programmes. 
Until  mid  1995,  the  country  made  important  progress  in  liberalising  the economy  and  initiating 
essential  structural  reforms.  In  this  context,  Albania  benefited  from  two  Community  macro-
financial  assistance  initiatives  to  comfort  the  country's  official  reserve  position,  respectively  of 
ECU  70 million  (decided  in September  1992) and  ECU 35 million  (decided  in November  1994). 

From  mid-1995,  however,  the  pace  of  reform  slowed  down,  important  budgetary  policy 
slippages  appeared,  inflation  rose  and  the  current  account  deficit  worsened.  The  collapse  of  a 
in  late  1996  triggered  widespread  rioting  and  the  central 
number  of  pyramid  schemes 
Government  lost control  over  large  parts of the country. Civil  society  was seriously  affected  and 
economic  activity  was  severely  disrupted.  The  nature  and  extent  of  the  Albanian  crisis 
confirmed  the  existence  of  major  deficiencies  of  the  financial  sector,  of  the  institutional  and 
legislative  framework,  and  more  generally  of  normal  state  functions,  including  the  provision  of 
security  and  the administration  of justice. 

The  international  community  was  mobilised  and  three  meetings  were  convened  (a  high-level 
meeting  on  May  26  1997,  the  International  Conference  on  Albania  on  July  31  1997  and  the 
Ministerial  Conference  on  October  17  1997)  to  assist  the  Albanian  authorities  in designing  and 
implementing  the  recovery  from  the  crisis.  In  June  1997  elections  were  held  in  Albania  and  in 
July  a  new  Government  took  office.  Since  then  the  country  has  made  considerable  efforts  to 
address  the  serious  effects  of  the  crisis  and  its  underlying  structural  determinants.  The 
Government  has  generally  succeeded  in  improving  the  security  situation, although  public  order 
and  security  are not yet  fully  assured  in certain  parts of the country. The regional  context  is also 
a  reason  for  concern,  as  there  is  a  risk  that  the  situation  in  the  Kosovo  may  have  spill-over 
effects  on  Albania, despite  the  resolute  moderating  role of the present  Albanian  Government. 

Albania  has  successfully  implemented  a  six-month  (October  1997-Mareh  1998)  emergency 
programme,  under  which  it has taken  the  first  urgent  measures  to  recover  from  the aftermath  of 
the  crisis.  Building  upon  the  positive  results  achieved  and  in  line  with  the  recovery  strategy  set 
out  in  the  paper  "Albania  -  Directions  for  Recovery  and  Growth"  (jointly  prepared  by  the 
European  Commission,  the  World  Bank  and  the  EBRD,  in  consultation  with  the  IMF),  the 
Albanian  authorities  have  reached  an  understanding  with  the  IMF  on  a  medium-term 
macroeconomic  and  structural  reform  programme.  The  programme  is  backed  by  an  Enhanced 
Structural  Adjustment  Facility  (ESAF), adopted  by the  Board  of the IMF on May  13 1998. 

On  March  19  1998,  at  a  G-24  Meeting  in  Brussels,  the  IMF  and  the  World  Bank  outlined 
Albania's  medium-term  programme.  The  IMF 
international 
community  to  help  ease,  at  this  critical  juncture,  the  country's  external  financing  constraints 
under  the first year of the  programme. The  Albanian  authorities are now seeking  such  support. 

the  need  for  the 

indicated 

2. 

ECONOMIC  DKVI  IOPMI  NTS  AI T IR  nit;  cuisis  AND  TIIK  SIX  MONTH  KMKRGENCY 

PROGRAMME (OCTOUKR 1997-MARClI 1998) 

While  the  crisis  only  marginally  affected 
the  output  of  the  agricultural  sector  (which 
accounts  for  over  half  of  01)1'),  industrial  output  collapsed  in  the  first  half  of  1997.  As  a 
result,  for  1997  as  a  whole  real  GDP  is  estimated  to  have  declined  by  8 %.  Inflation  surged 

to  50 %.  Fiscal  revenues  fell  and  the  domestically  financed  fiscal  deficit,  which  was  already 
high  before  the  crisis  (10.5  %  of  GDP  in  1996),  increased  to  13  %  of  GDP.  Remittances 
from  abroad,  which  amounted  to  US$  490  million  in  1996, were  halved  to  US$  250  million 
in  1997. 

Throughout  the  crisis  the  Albanian  authorities  maintained  a  cautious  reserve  policy.  Despite 
the  sharp  fall  in the exchange  rate of the  lek, they  refrained  from  intervening  in the market  with 
a  few  exceptions  for  very  limited  amounts.  Having  fluctuated  heavily  during  the  crisis, the  lek 
depreciated  by  some  40  %  relative 
to  its  end-1996  value.  Official  reserves  at  end-December 
1997  were  US$  306  million.  Starting  in  October,  the  authorities  satisfactorily  implemented  a 
six-month  emergency  programme  agreed  with  the  IMF.  Budgetary  performance  under  the 
emergency  programme  was  also  satisfactory:  revenue  collection  increased,  also  because  of  an 
improved  system  of customs  collection  set  in place with  technical  assistance  from  the  European 
Community.  The  quantitative  benchmarks  of  the  programme  were  met  and  in some  cases  even 
outperformed. 

Structural  reforms  were  also  launched  under  the  emergency  programme.  Initial  measures  were 
taken  to  establish  a  functioning  land  market  and  to  restructure  the  state-owned  banking  sector 
(one  bank  has been  liquidated,  a second  bank  will  be administrated  by a foreign  chief  executive 
in  view  of  privatisation  or  liquidation  in  the  second  half  of  1998,  while  the  last  bank  has 
temporarily  discontinued  credit  operations).  With  regard  to  institutional  development  and  the 
two 
reform  of 
achievements  are worth  mentioning:  the  State  Control  Service  was  transformed  into  a  Supreme 
Audit  Institution  and  a  new  organic  law  for  the  budget  will  be  presented  to  the  Parliament  in 
early June  1998. 

the  public  administration,  where  substantial  progress 

is  still  required, 

The  Government  has taken  steps  to  solve  the  problems  which  arose  from  the pyramid  schemes. 
Technical  assistance  to this end  is being provided  by a group of donors  (including the  European 
Community)  and  it  is being  managed  by the  World  Bank  through  a trust  fund.  The  Government 
appointed  administrators  of  international  repute  to  manage,  in  the  interest  of  the  claimants,  the 
five companies  which  had  operated  pyramid  schemes  and  have  not  yet  been  declared  bankrupt. 
In  February  1998  the  administrators  submitted  to  the  Council  of  Ministers  a  report  presenting 
estimates  of  the  value  of  the  retrievable  assets.  The  foreign  administrators  are  now  proceeding 
to  the  recovery  of  the  assets,  which  will  be  the  only  possible  source  of  compensation  for  the 
claimants.  A  law  establishing  the  principles  for  the  distribution  of  the  recovered  assets  was 
submitted  to  Parliament  at  the  end  of  April.  Legislation  preventing  the  resurgence  in the  future 
of any such  companies  is being elaborated,  including  a Law on Money  Laundering. 

3. 

T HE  MEDIUM-TERM  ECONOMIC  REFORM  PROGRAMME 

The  macroeconomic  objectives  of  the  IMF-supported  medium  term  macroeconomic  and 
structural  reform  programme  arc  to  revive  rapid  economic  growth  (targeting  annual  GDP 
growth  of  8 %  on  average  during  the  programme  period),  pursue  the  reduction  of  the  inflation 
rate  to  10 %  at  the  end  of  1998 and  to  the  level  of  Albania's  main  trading  partners  by the  year 
2001,  contain  the  external  deficit  at 
sustainable  levels  and  maintain  a  sufficient  level  of 
reserves.  In  order  to  achieve  the  inflation  reduction  foreseen  over  the  medium-term,  it  is 
necessary  to continue  the reduction  of the fiscal  deficit.  Accordingly, the authorities will cut  the 
domestically  financed  deficit  to 6.5  % of GDP  in  1998 (as established  in the  1998 budget) and 5 
%  in  1999, through  an  overhaul  of  direct  taxation  and  continued  restraint  in  expenditures.  The 
Central  Bank  will  maintain  real  positive  deposit  rates and  enforce  strict credit ceilings on  banks 
whose portfolio  contains a high  ratio of non-performing  loans. 

The  programme  also  envisages  an  ambitious  structural  reform  agenda.  Amongst  the  foremost 
priorities  is  to  rigorously  pursue  reforms  in  the  banking  sector  and  to  secure  and  enforce 
property  rights. The  Bank  Asset  Resolution  Trust,  which Was  recently  established  by  law,  is  to 
begin  operations  shortly.  Banking  legislation  is being  revised  and a new Banking  Law and  a  law 
on  collateral  will  be  finalised  in  the  first  programme  year  with  technical  assistance  from  the 
IMF.  Additional  efforts  will  be  made  with  regard  to  the  enforcement  of  legislation.  The 
supervisory  framework  is  being  reviewed  and  capital  adequacy  requirements  and  licensing 
requirements  for  banks will  be reformulated  and  strengthened. 

Other  areas  of  reform  include  the  public  administration,  agricultural  reform  with  particular 
emphasis  on  the  land  market  reform  and  the  implementation  of  the  new  privatisation  strategy. 
The  Government  will  pursue  its  Public  Administration  Reform  Programme,  in  line  with  the 
recommendations  of  the  European  Commission  and  the  World  Bank.  With  the  approval  by 
Parliament  of  a  package  of  laws  clarifying  and  simplifying  the  legal  framework  for  land 
transactions,  all  obstacles  to  the  creation  of  a  functioning  agricultural  land  market  should  have 
been  removed  and  the  Government  will  now  have  to  implement  the  measures  it  has taken. The 
privatisation  strategy,  approved  by  Parliament  in  March  1998, envisages  the  sale  or liquidation 
of  all  remaining  small  and  medium-sized  enterprises  by  the  end  of'1998,  the  liberalisation  of a 
number  of strategic  sectors  (telecommunications,  power, oil and  gas, mining, transport), and the 
subsequent  opening of the state-owned  companies  to investors during the first programme year. 

4. 

THE  NEED  FOR  COMPLEMENTARY  FINANCIAL  SUPPORT  AND  PROPOSED  COMMUNITY 

MACRO-FINANCIAL  ASSISTANCE 

Despite  progress  made  in  economic  recovery  and  macroeconomic  stabilisation,  Albania's 
balance  of payments  remains  fragile.  Exports  can  only  increase  gradually, while the pick-up  in 
economic  activity  and  the accrued  needs  for  reconstruction  and  investment  have already  started 
inducing  a  rise  in  imports.  The  increase  in  private  remittances  is  a  major  unknown,  since  it  is 
linked  to  improvements  in  security  and  the  development  of  a  sound  financial  sector.  As  for 
foreign  direct  investment,  it  will  clearly  depend  upon  creating  and  maintaining  a  secure  and 
stable environment  for  economic  stability. 

Moreover,  although  in  December  1993  Albania  rescheduled  its  short-term  obligations  and  in 
March  1994  it  repaid  in  full  its  medium-term  debts  to  Paris  Club  creditors,  it  still  has  to 
reconcile  and  eventually  reschedule  its debts  vis-à-vis  Russia  (now a member of the Paris Club) 
and  a  number  of  non-Paris  Club  countries  (China,  former  Yugoslavia,  the  Czech  Republic,  the 
Slovak  Republic  and  Romania).  Arrears  with  Russia  are  estimated  (at  this  stage  and  subject  to 
reconciliation)  at  some  US$  141  million  (principal  and  interest). The  medium-term  programme 
will  pave  the way  to the solution  of these  issues. 

In the  first  programme  year  under  the  ESAF  (April  1998-March  1999), the  IMF would  provide 
some  USS  16 million  to  Albania,  a third  of  the  country's  quota.  In addition,  the  World  Bank  is 
likely  to  provide  financial  support  to  Albania  amounting  to  US$  17.5  million  (US$  7.5  million 
second  instalment  of  the  financial  sector  loan  and  US$  10 million  first  instalment  of  a  US$  20 
million  Structural  Adjustment  Credit). 

The  residual  financing  gap  (after  IMF  and  World  Bank  contributions)  for  the  first  year  of  the 
ESAF  is estimated  at  US$ 202.5  million.  This  is expected  to be  filled  by some  US$  141  million 
through  Paris  Club  debt  relief,  as  well  as  by  complementary  financing  from  bilateral  donors. 
Assuming  that  the  Government  were  to  obtain  favourable  terms  on  the  rescheduling  of  arrears 
which  it has requested  to the  Paris  Club, this  would  leave a remaining  external  financing  gap  of 
US$ 62 million, to be covered  by complementary  bilateral  support. 

Some  of the  pledges  already  made  at the  Donors'  Conference  on  October  22  1997  should  help 
cover  part  of this  amount,  but  the  IMF  has  estimated  that  new  balance-of-payments  and  budget 
support  for  an amount of US$ 30-35  million  would  be needed to close the remaining gap. 

The  Community  has  so  far  committed  ECU  24.5  million  targeted  support  to  the  1998  budget 
under  the  PHARE  Special  Assistance  (ECU  14.5  million)  and  under  the  Community  Food 
Security  programme  (ECU  10  million).  The  first  instalment  (ECU  5  million)  of  the  Food 
Security  assistance  was disbursed  under the emergency  programme. 

It is now proposed  that the Community  make available to Albania  a balance of payments  loan  of 
up  to  ECU  20  million.  The  Community's  support  under  the  first  year  of  the  ESAF  would  thus 
reach  up  to  ECU  39.5  million,  taking  into  account  the  targeted  support  to  the  1998  budget 
provided  under the  PIIARF. Special  Assistance  and  under  the  second  instalment  (5  MECU) of the 
Food  Security  assistance. 

When  the  long-term  loan  is  considered  in  combination  with  the  grant  support  provided  under 
the  PHARE  Special  assistance  and  the  Food  Security  programme,  the  overall  degree  of 
concessionality  of the  Community  assistance  package  to  Albania  appears  to be appropriate.  On 
the  one  hand,  Albania's  debt-servicing  capacity  will  remain  limited,  especially  over  the  next 
few years. On the other  hand,  it is important  to take  into account: 

(i) the  high  degree  of concessionality  of  previous  Community  assistance  to  Albania  which  until 
now took exclusively  the form  of grants; 

(ii)  the  fact  that  the  IMF  and  the  World  Bank,  as  well  as  some  bilaterals,  are  supporting 
Albania's  balance of payments  with  loans (albeit  soft  loans); 

(iii)  the  expected  gradual  increase  of  Albania's  debt-servicing  capacity  over  the  medium/long 
term  through the  implementation  of economic  reform  programmes; 

(iv) and the need to encourage  financial  discipline. 

5.  MAIN  FEATURES  OF THE LOAN 

The  Commission  proposes  to  make  available  to  Albania  a balance  of payments  facility  of  up 
to  ECU  20  million  with  a  maximum  duration  of  fifteen  years.  This  duration  of  the  loan  is 
consistent  with  the  medium  and  long-term  balance  of  payments  outlook  for  Albania,  which 
is expected  to face  substantial  financing  needs  in the  years to  come. The  assistance would  be 
granted  in  the  context  of the  present  ESAF  and  would  complement  resources  made  available 
by the  International  Financial  Institutions and  other  bilateral  donors. 

The  assistance  would  be released  in two  instalments, subject  to a satisfactory  track  record  of the 
programme  agreed  with  the  IMF  and. to  the  fulfilment  of  additional  specific  conditions, 
consistent  with  this  programme,  notably  progress  in  the  implementation  o(  the  PllARF  Special 
Assistance. 

As  in  the  case  of  similar  operations  in  favour  of other  partner  countries,  the  Community  would 
provide  the  funds  through  market  borrowing  with  a  guarantee  by  the  general  budget.  Albania 
would  subsequently  borrow  from  the Community.  The  borrowing  and  lending operations  would 
be perfectly  matched  and  without  risk  for the  Community. 

In accordance  with  the  Guarantee  Fund  mechanism,  the  budgetary  implications  of  the  decision 
to  make  available  assistance  of  up  to  ECU  20  million  to  Albania  would  imply  an  ECU  2.8 
million  provisioning  of  the  Fund,  to  be  drawn  from  the  1998  reserve  for  guarantees  relating  to 
external  actions. 

Proposal  for a 

COUNCIL  DECISION 

providing  macro-financial  assistance 
to  Albania 

THE COUNCIL  OF THE  EUROPEAN  UNION, 

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

Having  regard  to the proposal  of the  Commission, 

Having  regard  to the opinion  of the  European  Parliament1, 

Whereas  the  Commission  has  consulted  the  Monetary  Committee  before  submitting  its 
proposal; 

Whereas  Albania  has  made  substantial  progress  on  the  path  to  recovery  from  the  effects  of 
the  economic  and  social  crisis  of  early  1997;  whereas  it  has  successfully  implemented  an 
economic  recovery  programme  to address the  immediate effects  of the crisis; 

Whereas  trade,  commercial  and  economic  links  between  the  Community  and  Albania  are 
developing  within the framework  of the Co-operation  Agreement; 

Whereas  Albania  has  agreed  with 
International  Monetary  Fund  (IMF)  on  a 
comprehensive  set  of  stabilisation  and  policy  reform  measures  to  be  supported  by  a  loan 
under the  Enhanced  Structural  Adjustment  Facility  (ESAF); 

the 

Whereas  Albania  has  agreed  with  the  World  Bank  on  a  set  of  measures  supporting  banking 
reform  and  employment  promotion,  which  are  backed  by  a  highly  concessional 
Rehabilitation  Loan;  whereas  it  is  intended  that  a  Structural  Adjustment  Credit  will  support 
further  structural  adjustment  measures; 

Whereas  Albania  is undertaking  fundamental  reforms  to promote  economic  reform  and build 
institutions  with  a  strong  implementation  capacity;  whereas  the  focus  of  reforms  will  be 
strongly  centred  on  institution-building,  on  public  administration  and judicial  reforms,  on the 
development  of  a  strong  and  performing  banking  sector,  on  the  establishment  of  a 
functioning  agricultural  land  market  and  accelerating  enterprise  privatisation;  whereas  the 
Government  is  firmly  committed  to  a speedy  winding  up of  the  pyramid  scheme  companies 
and  to combating  corruption; 

Whereas  the  authorities  of  Albania  have  requested  financial  assistance  for  the  first  year  of 
the  medium-term  programme  from  the  international  financial  institutions,  the  Group  of  24 
industrialised  countries  (G-24),  and  the  Community;  whereas  over  and  above  the  estimated 
financing  which  would  be  provided  by  the  IMF  and  the  World  Bank,  an  important  residual 
financing  gap  remains  to  be  covered;  whereas  Paris  Club  rescheduling  and  undisbursed 

pledges  made  at  the  Donors'  Conference  in  October  1997  should  help  cover  part  of  the 
external  financing  needed during the first  year of the medium-term  programme; 

Whereas  assistance  from  the  Community  shall  be  instrumental  in  supporting  Albania's 
institutional  and  structural  reforms;  whereas  a  Community  long-term  loan  to  Albania  is  an 
appropriate  measure  to  help  ease  the  country's  external  Financial  constraints,  support  the 
balance  of payments and  strengthen  the  reserve  position; 

Whereas  Albania  is a  low-income  country  eligible  to highly concessional  loans and  facilities 
from  the  World  Bank  and the  IMF; whereas  the  Community  will  provide  under the first  year 
of  the  medium-term  programme  ECU  19.5  million  support  to the  budget  in the  form  grants 
through  the  PHARE  Special  Assistance  and  the  Community  Food  Security  programme; 
whereas,  in  these  circumstances,  the  proposed  ECU  20  million 
loan  allows  overall 
Community  macro-financial  support  under  the  first  arrangement  under  the  ESAF  to  reach 
an appropriate  degree of concessional ity; 

Whereas the Community  loan should  be managed  by the  Commission; 

Whereas  the  Treaty  does  not  provide,  for  the  adoption  of  this  decision,  powers  other  than 
those of Article 235, 

HAS DECIDED AS  FOLLOWS: 

Article 1 

1. 

2. 

3. 

1. 

2. 

The  Community  shall  make  available  to  Albania  a  long-term  loan  facility  of  a 
maximum  principal  amount  of  up  to  ECU  20  million  with  a  maximum  maturity  of 
fifteen  years,  with  a view  to ensuring  a  sustainable  balance  of  payments  situation  and 
consolidating the country's  reserve  position. 

To  this  end  the  Commission  is  empowered  to  borrow,  on  behalf  of  the  European 
Community,  the  necessary  resources  that  will  be  placed  at  the  disposal  of  Albania  in 
the form  of a loan. 

This  loan will  be managed  by the  Commission  in close consultation  with the Monetary 
Committee  and  in  a  manner  consistent  with  any  agreement  reached  between  the  IMF 
and  Albania. 

Article 2 

The  Commission 
is  empowered  to  agree  with  the  authorities  of  Albania,  after 
consultation  with  the  Monetary  Committee,  the  economic  and  institutional  policy 
conditions  attached  to  the  loan.  These  conditions  shall  be  consistent  with  the 
agreements  referred  to in Article  1(3). 

The  Commission  shall  verify  at  regular  intervals,  in  collaboration  with  the  Monetary 
Committee  and  in  co-ordination  with  the  IMF,  that  the  economic  and  institutional 
policy  in  Albania  is  in  accordance  with  the  objectives  of  this  macro-financial 
assistance  and  that  its conditions are being  fulfilled. 

Article 3 

1. 

2. 

The  macro-financial  assistance  shall  be made available to Albania  in two  instalments., 
Subject  to the provisions  of Article  2, the  first  instalment  shall  be released  on the  basis 
of  a  successful  completion  of  the  mid-term  review  of  the  first  year  of the  programme 
supported  by a 3-year  ESAF arrangement between  the IMF and  Albania. 

Subject  to  the  provisions  of  Article  2,  the  second  instalment  shall  be  released  on  the 
basis  of a satisfactory  track  record  in the  implementation  of the  ESAF  programme and 
not before  one quarter after  the disbursement  of the first instalment. 

3. 

The funds  shall  be paid to the Central  Bank of Albania. 

Article 4 

1. 

2. 

3. 

4. 

5. 

The  borrowing  and  lending operations  referred  to in Article  1  shall  be carried  out  using 
the  same  value  date  and  must  not  involve  the  Community  in  the  transformation  of 
maturities,  in any exchange  or interest  rate risks, or any other commercial  risk. 

The  Commission  shall  take  the  necessary  steps,  if  Albania  so  requests,  to  ensure  that 
an  early  repayment  clause  is included  in the  loan  terms and  conditions, and that  it may 
be  exercised. 

At  the  request  of  Albania,  and  where  circumstances  permit  an  improvement  in  the 
interest  rate  on  the  loan,  the  Commission  may  refinance  all  or  part  of  its  initial 
borrowings  or  restructure  the  corresponding  financial  conditions.  Refinancing  or 
restructuring  operations  shall  be  carried  out  in  accordance  with  the  conditions  set  out 
in  paragraph  1 and  shall  not  have  the  effect  of  extending  the  average  maturity  of  the 
borrowing  concerned  or  increasing  the amount, expressed  at the current  exchange rate, 
of capital  outstanding  at the date of the refinancing  or restructuring. 

All  related  costs  incurred  by  the  Community  in  concluding  and  carrying  out  the 
operation  under this  Decision  shall  be borne by  Albania. 

The  Monetary  Committee  shall  be  kept  informed  of  developments  in  the  operations 
referred  to in paragraphs 2 and  3 at least once a year. 

Articles 

At  least  once  a year  the  Commission  shall  address  to the  European  Parliament  and  to 
the  Council  a  report,  which  will  include  an  evaluation  on  the  implementation  of  this 
Decision. 

Done at 

For the Council 
The President 

FINANCIAL  STATEMENT 

1. 

Title of Operation 

Macro-financial  assistance to Albania. 

2. 

Budget heading  involved 

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

3. 

Legal  basis 

Article 235 of the Treaty 

4. 

Description  and justification  of the action 

a) 

Description  of the  action 

Provision  of Community  loans (to be financed  by  Community  borrowings  in  the 
international  capital  markets)  in  the  amount  of  up  to  ECU  20  million,  to  the 
beneficiary  country  with a view to supporting  its Government's  reform  efforts. 

b) 

Justification  of (he action 

The sustainability  of the beneficiary  country's economic  and  institutional 
reforms  depends on external  financial  assistance  from  official  sources. 

5. 

Classification  of the  expenditure 

Obligatory 

6. 

Nature of the  expenditure 

Potential  activation  of  budget  guarantee  for  the  Community  borrowing  aimed  to  fund 
the  loan. 

7- 

Financial  impact 

a)  Method of  calculation 

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

A  token  entry  is  proposed  given  that  the  amount  and  timing  of  any  call  on  this 
budget  line  cannot  be  calculated  in  advance  and  because  it  is expected  that  the 
budget  guarantee  will  not be called. 

b) 

Effect  of the action  on intervention  credits 

Activated  only  in the case of an effective  call on the guarantee. 

c) 

Financing  of intervention  expenditure  in case of call on the budget  guarantee 

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  (EC, EURATOM)  n° 1552/89 of 29 May  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  with  the  Monetary 
Committee  and  in  liaison  with  the  IMF  and  World  Bank  services,  that  the  macro-
economic  policies  implemented  in these  countries  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  beneficiary  country'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  the transition  towards a market  economy. 

b)  Monitoring  anil  evaluation 

This assistance  is of macro-economic  nature and  its monitoring and evaluation  is 
undertaken  in  the  framework  oi" the  IMF-supported  adjustment  and  reform 
programme  that Albania  is  implementing. 

10 

The  Commission  services  will  monitor  the  action  on  the  basis  of  a  genuine 
system  of  macro-economic  and  institutional/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 economic  and institutional  reform achievements  in Albania. 

10- 

Administrative  expenditure 

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

11 

ANNEX 

BUDGETARY RESOURCES NECESSARY FOR THE PROVISIONING OF THE 
GUARANTEE FUND IN 1998 AND MARGIN UNDER THE RESERVE FOR LOANS 

AND LOAN GUARANTEES IN FAVOUR OF THIRD COUNTRIES 

(IN ECU MILLION) 

Operations 

Basis of the 
Calculation  , 

Provisioning of 
the Fund 2 

Reserve. 
Mârain 

Residual lending 
ÇPPaçtfr * 

Decided operations 

Project-related assistance 

EIB/CEEC 
EIB/PVDALA 
EIB/SOUTH AFR. 
EIB/MED 

Macro-financial assistance 

338,0 

2414 

665,7 
190,55 
17,5 
728,6 

93,2 
25,46 
2.45 
102.00 

244.8 
219.3 
216.9 
114.9 

Algeria (Suspension) 

-100 

-14.00 

128,9 

Proposed operations 

Project-related assistance 

BB/FYROM 5 
EIB/Turkey e 
EIB/ Croatia 6 
EIB/Bosnia87 
EURATOM6 

Macro-financial assistance 

Ukraine-Ill 5 
Albania 5 
Bosnia 5 

42 
105 
56 
7 
260 

150 
20 
30 

5.88 
14,70 
7,84 
0.98 
36,40 

21,00 
2,80 
4,20 

123.0 
108.3 
100,5 
99.5 
63.1 

42.1 
39,3 
35.1 

• 

301 
281 
251 

The basis of calculation represents 70% of the nominal amount of the EIB loans and 100% of the macro-financial assistance loans, 
According  to  the  provisioning  rules  provided  in  the  Council  regulation  (EC,  Euratom)  n"  2728/94  of 31 
October  1994.  The  Fund  having  reached  its  target  amount  in  1997,  the  rate  of  provisioning  for  new 
operations has been decreased from 15 % to 14%. 
Reserve amount in 1998 under the financial perspective, 
For 100% guarantee loans. 
Commission proposal. 
Tentative estimates. 
On the basis of loans to be signed in 1998 

te 

ISSN 0254-1475 

COM(98) 507 final 

DOCUMENTS 

EN 

11  oi  <H> 

Catalogue  number  :  ÇB-CO-98-5I5-KN-C 

ISBN  92-78-38859-9 

Office  for Official  Publications of ihe European  Communities 

L-2985 Luxembourg