Proposal for a Council Decision on additional macro-financial assistance to Serbia and Montenegro amending Decision 2002/882/EC providing further macro financial assistance to the Federal Republic of Yugoslavia
Date: 2003-08-18
Institutions: European Commission
Subjects: Community loan, Serbia and Montenegro, donation, financial aid

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 18.8.2003
COM(2003) 506 final

2003/0190 (CNS)

Proposal for a

COUNCIL DECISION

on additional macro-financial assistance to Serbia and Montenegro
amending Decision 2002/882/EC providing further macro financial assistance to the
Federal Republic of Yugoslavia

(presented by the Commission)

EXPLANATORY MEMORANDUM

Over  the  past  two  to  three  years,  the  authorities  of  Serbia  and  Montenegro  have  achieved
remarkable  results in economic  reform  and  stabilisation. Macro-economic stability has been
achieved  and  preserved,  and  important  structural  reforms  have  begun.  The  privatisation  of
socially-owned  enterprises  through  auctions  and  tenders  has  progressed  well,  and  the
restructuring of the industrial and financial sector has been initiated.

Despite the current difficult situation in the country following the assassination of the Serbian
Prime  Minister  on  11  March  2003,  the  authorities  continue  to  be  committed  to  economic
reforms.  The  country  has  remained  relatively  stable  throughout  the  state  of  emergency,
introduced  for  some  weeks  after  the  assassination.  It  seems  that  the  institutions,  notably  in
Serbia proper, absorbed this shock and that political reforms of the last years were not put in
jeopardy,  though  judicial  and  media  reforms  and  the  fight  against  corruption  need  to  be
continued vigorously.

The process of economic reform and stabilisation has been supported through the provision of
EC  macro-financial  assistance.  A  first  package  of  €345  million  was  decided  in  July  and
December  2001  and  implemented  in  2001/2002.  On  5  November  2002,  the  Council  of  the
European Union decided to provide to the country further macro-financial assistance of up to
€130 million,  comprising  a  loan  element  of  up  to  €55  million  and  a  grant  element  of  up  to
€75 million  (Council  Decision  2002/882/EC).  The  main  objective  of  this  assistance  is  to
ensure  a  sustainable  balance  of  payments  situation  and  to  strengthen  the  country’s  foreign
reserve position. A first tranche of this assistance amounting to €40 million was disbursed in
December 2002 (grant part of €30 million) and February 2003 (loan part of €10 million).

Following  the  assassination,  the  Serbian  Finance  Minister  requested  additional  macro-
financial  support  from  the  international  community  on  the  basis  of  first  estimates  by  the
Serbian  government  according  to  which  economic  prospects  for  2003  had  significantly
worsened. The Commission announced at the GAERC of 14 April its readiness to front-load
the  remaining  EC  macro-financial  with  a  relatively  large  second  tranche,  subject  to
conditionality,  and  to  propose  additional  EC  macro-financial  support  with  a  view  to
comforting any additional balance of payments needs that could be identified by the IMF later
in the year. The Council “welcomed the proposals by…the Commission  (and) …invited the
competent bodies to rapidly examine these proposals with a view to early decisions”.

Meanwhile Commission services have finalised the second tranche review and concluded that
conditionality  has  been  met  to  a  satisfactory  degree.  Following  the  completion  of  internal
consultations, the second tranche of €65 million, comprising a grant  element of €35 million
and a loan element of €30  million, is expected to be  disbursed in August 2003.  This would
leave an amount of €25 million for the third tranche, including a grant element of €10 million.

Moreover, the IMF recently announced at the meeting of the Working Level Steering Group
for the Western Balkans on 19 June in Brussels that it had eventually revised its balance of
payments  projections  for  2003  and  identified  additional  financing  needs.  Indeed,  following
the assassination of the Serbian Prime Minister, the external outlook of the country appears to
be more uncertain. There are considerable downside risks with regard to balance of payments
developments  and  in  particular  with  respect  to  the  size  of  private  capital  inflows,  including
foreign direct investments, while important financing needs continue to put a heavy strain on
the  economy.  Although  the  authorities  of  Serbia  and  Montenegro  have  so  far  implemented
policies in line with the current IMF programme, additional external financial support seems

2

essential to reach the agreed macro-economic targets with respect to growth, inflation, fiscal
and current account balances for 2003, and to continue the reform process.

According to  the  revised  IMF  projections,  there  is  now  a  higher  residual  external  financing
gap of some $321 million (after  IFIs), that is expected to be  filled through EC and bilateral
macro-financial  assistance,  including  debt  relief  from  creditors  (i.e.  capitalisation  of
moratorium  interest).  It  should  be  noted  that  out  of  this  gap,  an  amount  of  around
$200 million has already been committed, including an equivalent of $113 million under the
current EC macro-financial assistance package. Against this background, it seems appropriate
for the Community to help comforting the identified additional balance of payments needs by
amending  Council  Decision  2002/882/EC,  thereby  augmenting  the  total  amount  by
€70 million to up to €200 million. It is expected that the remaining gap could be filled through
additional bilateral assistance. The additional amount could be used to top up the third tranche
which  could  be  disbursed  in  two  sub-tranches,  subject  to  an  agreement  on  a  Supplemental
Memorandum  of  Understanding  specifying  appropriate  conditionality  to  support  specific
reforms,  which  could  include  enterprise  and  banking  sector  restructuring  and  economic
harmonisation.

In  view  of  the  exceptional  circumstances,  the  high  level  of  indebtedness  of  Serbia  and
Montenegro  in  comparison  with  other  countries  of  the  region  and  its  limited  borrowing
capacity,  it  is  proposed  to  provide  a  significant  share  (i.e.  €45  million)  of  this  additional
amount in the form of a grants and the remainder (i.e. €25 million) in the form of a loan. The
latter  would  carry  a  maturity  of  15  years  and  a  grace  period  of  10  years  as  foreseen  in  the
original package. 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.

3

2003/0190 (CNS)

Proposal for a

COUNCIL DECISION

on additional macro-financial assistance to Serbia and Montenegro
amending Decision 2002/882/EC providing further 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 Commission1,

Having regard to the opinion of the European Parliament2,

Whereas:

(1)

(2)

(3)

(4)

(5)

(6)

1

2

3

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

Council  Decision  2002/882/EC3  provides  for  macro-financial  assistance  to  be  made
available to the Federal Republic of Yugoslavia with a view to ensuring a sustainable
balance of payments situation and strengthening the country’s reserve position.

On 4 February 2003 there was a constitutional change and the country is now called
Serbia and Montenegro.

Following  the  assassination  of  the  Serbian  Prime  Minister  on  11  March  2003,  the
external outlook of the country appears to be more uncertain, in particular with respect
to  the  size  of  private  capital  inflows,  including  foreign  direct  investments,  while
important financing needs continue to put a heavy strain on the economy.

Additional balance of payments needs in 2003 have been identified in the context of
the  current  IMF  programme  and  Serbia  and  Montenegro  will  require  significant
additional external financing in 2003 over and above official financing which could be
provided  by  the  International  Monetary  Fund,  the  World  Bank  and  other  donors,
including the Community.

An increase in Community macro-financial assistance to Serbia and Montenegro is an
appropriate  measure  to  help,  with  other  donors,  ease  the  country’s  financial
constraints.

OJ C …, …, p. …
OJ C …, …, p. …
OJ L 308, 9.11.2002, p. 25.

4

                                                
(7)

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

HAS DECIDED AS FOLLOWS:

Sole Article

1.

2.

In  Articles  1,  2,  3  and  4  the  term  “FRY”  is  replaced  by  the  term  “Serbia  and
Montenegro”.

Article 1 (2) of Decision 2002/882/EC is replaced by the following:

“2. The loan component of this assistance shall amount to a maximum principal of
€80  million  with  a  maximum  maturity  of  15  years.  To  this  end,  the
Commission  is  empowered  to  borrow,  on  behalf  of  the  Community,  the
necessary  resources  that  will  be  placed  at  the  disposal  of  Serbia  and
Montenegro in the form of a loan”.

3.

Article 1 (3) is replaced by the following:

“3. The  grant  component  of  this  assistance  shall  amount  to  a  maximum  of

€120 million.”

4.

In Article 3 (1) the first phrase is replaced by the following:

“1. The loan and  grant  component of  this assistance should  be  made  available  to

Serbia and Montenegro in at least three instalments”.

Done at Brussels, [date]

For the Council
The President

5

FINANCIAL STATEMENT

1.

TITLE OF OPERATION

Further macro-financial assistance to Serbia and Montenegro

2.

BUDGET HEADING INVOLVED

a)

Grant component of the assistance (in €)

CA

80 000 000

-

80 000 000

-

-

15 000 000

Budget line : B7-548

Initial Budget

Carry-over 2002/2003

Total for 2003

Bosnia and Herzegovina, first
grant tranche (Febr. 2003)

former Yugoslav Republic of
Macedonia, 
grant
tranche (May 2003)

third 

Bosnia 
third  grant 
2003)

and  Herzegovina,
(July
tranche 

Serbia 
second grant tranche

and  Montenegro,

Bosnia 
second grant tranche

and  Herzegovina,

former Yugoslav Republic of
Macedonia, 
grant
tranche

fourth 

Bosnia 
third grant tranche

and  Herzegovina,

PA

80 000 000

10 000 000

90 000 000

15 000 000

10 000 000

35 000 000

10 000 000

8 000 000

15 000 000

Available 
before action

appropriations

65 000 000

- 3 000 000

Serbia 
proposed 
macro-financial assistance

and  Montenegro,
increase  of  EC

Serbia and Montenegro, third
grant tranche

45 000 000

6

55 000 000

b)

Loan component of the assistance

BO-215  –  “EC  guarantee  for  the  borrowing  programmes  contracted  by  the
Community to provide assistance to the countries of 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  Community  macro-financial  assistance  to  Serbia  and  Montenegro  to
comfort identified additional balance of payments 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

a)

b)

Grant component: non-compulsory, differentiated.

Loan component: compulsory

6.

NATURE OF THE EXPENDITURE

a)

Straight grant (100% subsidy)

Potential activation of budget guarantee for the Community borrowing  aimed

b)
to fund the loan.

7

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.

For the loan component of the assistance, it is expected that the budget guarantee will
not be called.

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 Serbia and Montenegro.

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

c)

Financing of intervention

(i) Grant

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 €),
as follows:

2003

Commitment appropriations

45 000 000

Payment appropriations

45 000 000

(ii) Eventual call on the budget guarantee

(cid:1)  Recourse  to  the  Guarantee  Fund  established  by  Council  Regulation  (EC,
EURATOM)  no.  2728/94  of  31  October  1994,  most  recently  amended  by
Regulation no. 1149/1999 of 25 May 1999.

(cid:1)  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.

(cid:1)  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

8.

FRAUD PREVENTION MEASURES

The funds will be paid directly to the National Bank of Serbia 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.

Furthermore, during the implementation  of this  assistance,  the  Commission  or duly
authorised  representatives  may  carry  out  an  operational  assessment  of  financial
systems and controls of the Country.

Finally, 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  the  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 its transition towards
a market economy.

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.  In  particular,  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 independent ex-post evaluation of the assistance is expected to be carried out by
the Commission or duly authorised representatives and the authorities of the Country
are committed to supply all necessary information.

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 by nature and will not involve an increase in the number of
Commission staff.

9