Report from the Commission to the Council and the European Parliament on the implementation of macro-financial assistance to third countries in 2004 {SEC(2005) 747}
Date: 2005-06-08
Institutions: European Commission
Subjects: Western Balkans, development aid, financial aid, financial cooperation, report, third country

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 8.6.2005 
COM(2005) 245 final 

REPORT FROM THE COMMISSION TO THE COUNCIL AND 
THE EUROPEAN PARLIAMENT 

on the implementation of macro-financial assistance to third countries in 2004 

{SEC(2005) 747}. 

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1. 

INTRODUCTION 

This report provides a general overview of the EC macro-financial assistance to third 
countries  with  historical  background,  a  summary  of  the  operations  in  2004,  and  a 
synthesis of the economic situation of the beneficiary countries. 

Special attention is paid in part 3 to the relevant aspects of the economic stabilisation 
process  and  to  the  implementation  of  structural  reforms  in  the  recipient  countries. 
Progress in this respect also reflects the degree to which the corresponding economic 
policy conditions attached to the EC macro-financial assistance have been met. 

Moreover,  as  regards  the  recommendation  of  the  Court  of  Auditors  in  the  special 
report  of  March  2002  on  improvement  of  financial  management  in  the  beneficiary 
countries,  the  Commission  has  carried  out  in  2004,  with  the  assistance  of  an  audit 
firm,  operational  assessments  of  the  financial  circuits  and  controls  organisation 
related to macro-financial assistance in every beneficiary country. The conclusions of 
these  assessments  will  be  duly  taken  into  account  in  the  elaboration  of  the  policy 
conditions attached to the implementation of this assistance. 

In  addition,  an  ex-post  evaluation  is  being  conducted  by  an  external  consultant  in 
order to measure the impact of MFA operations in Armenia. The final report will be 
made  available  in  2005.  Further  ex-post  evaluations  will  be  carried  out  in  the 
beneficiary countries by specialised firms selected following an open call for tenders. 

This  report  is  submitted  in  accordance  with  the  Council  decisions  regarding 
Community macro-financial or exceptional financial assistance to third countries and 
follows  on  from  the  reports  presented  in  previous  years.  A  more  detailed  report 
(working  document  of  the  Commission  services  SEC(2005)  747)  providing 
economic and financial information regarding the beneficiary countries is released in 
parallel. 

2. 

OVERVIEW 

2.1. 

Background 

Macro-financial assistance (MFA) supports the political and economic reform efforts 
of  the  beneficiary  countries  and  is  implemented  in  association  with  support 
programmes from the IMF and the World Bank. It has continued to incorporate a set 
of principles reaffirmed by the Council in its conclusions of 8 October 2002, which 
underline  the  exceptional  character  of  this  assistance,  its  complementarity  to 
financing from the International Financial Institutions (IFIs) and its macroeconomic 
conditionality.  In  particular,  Community  MFA  has  supported  efforts  by  recipient 
countries  to  bring  about  economic  reforms  and  structural  changes.  In close  co-
ordination  with  the  IMF  and  the  World  Bank,  it  has  promoted  policies  that  are 
tailored  to  specific  country  needs  with  the  overall  objective  of  stabilising  the 
financial situation and establishing market-oriented economies.  

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2.2.  Macro-Financial Assistance in 2004. 

During  the  period  2000-2003,  the  Balkans  countries  (former  Yugoslav  Republic  of 
Macedonia,  Kosovo,  Bosnia  &  Herzegovina,  Serbia  and  Montenegro  and  Albania) 
have  benefited  from  nine  assistance  decisions  of  the  Council.  This  tendency  was 
confirmed in 2004 with three new MFA decisions concerning respectively Albania, 
Serbia and Montenegro and Bosnia & Herzegovina. This situation makes the Balkans 
countries the main beneficiaries of MFA for 2000-2004 with a total of new decisions 
amounting to a maximum of EUR 733 million. 

2.2.1.  New decisions 

Regarding  the  Western  Balkans,  the  Council  has  adopted  three  new  Decisions  in 
2004. 

– 

– 

– 

On 29th April, the Council decided (2004/580/EC) to provide macro-financial 
assistance  to  Albania  (composed  of  a  grant  of  EUR  16  million  and  a  loan  of 
EUR 9 million). 

On 7th December, the Council decided to extend previous Decisions providing 
further  macro-financial  assistance  to  Serbia  and  Montenegro  (2004/862/EC) 
and to Bosnia & Herzegovina ( 2004/861/EC) 

Regarding  the  NIS,  no  new  Council  decision  was  made  in  2004  whereas  the 
Commission  adopted  on  10th  December  2004  a  Communication  on  the 
implementation  of  macro-financial  assistance  in  Armenia,  Tajikistan  and 
Georgia. 

2.2.2.  Disbursements 

Disbursements of Macro-financial assistance amounted to a total of EUR 32 million 
of  which  EUR 22 million  exclusively  in  the  form  of  grants;  EUR  10  million  for 
Serbia  and  Montenegro,  EUR  5.5  million  for  Armenia  (these  operations  have  been 
made  on  the  basis  of  procedures  initiated  in  2003  but  finalised  in  2004)  and 
EUR 6.5 million for Georgia. 

Assistance disbursed in the form of loans amounted to EUR 10 million to Bosnia & 
Herzegovina. 

Disbursement  of  EUR 7 million  in  grants  for  Tajikistan  and  of  EUR 15 million  in 
loans  for  Serbia  and  Montenegro  have  been  initiated  in  2004  but,  due  to  technical 
reasons, the financial transfer has been postponed to 2005. 

2.3. 

Trends and geographical distribution of macro-financial assistance. 

The EC MFA is intended to support macroeconomic stabilisation of the beneficiary 
countries and ease their balance of payments (and budget) difficulties. It plays also a 
very  useful  role  in  promoting  structural  reform.  Over  the  years,  the  number  of 
countries  to  which  it  was  appropriate  for  the  Community  to  extend  such  support 
expanded, as a growing number of countries neighbouring the EU faced balance of 
payments  difficulties  and  committed  themselves  to  rigorous  programmes  of 
economic reform. This led to a change in the geographic balance of assistance from 

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the  early  years,  when  most  beneficiary  countries  were  countries  in  Central  and 
Eastern Europe. As a result of the conflicts in the Western Balkans, in particular the 
Kosovo  conflict  of  1999  and  of  the  political  changes  in  Serbia  and  Montenegro 
(formerly, the FRY), a clear tendency for a relative increase in MFA to the countries 
of the Balkans developed through the 1999-2004 Council Decisions. 

A specificity of the decisions of the 2000-2004 period is indeed the substantial share 
of grant support in the total amount decided: 41 % instead of 6 % over the 1990-1999 
period.  The  new  grant/loan  proportion  of  the  assistance  packages  reflects  the 
assessment made by the EU bodies of the relative degree of poverty of the recipient 
countries  and  of  their  limited  debt  servicing  capacity.  As  observed  already  in  2000 
and 2001, MFA is aimed not only at promoting macroeconomic stabilisation but also 
the  recipient  governments'  programmes  of  structural  reform. 
at  supporting 
Consistently,  MFA  has  been  effectively  combined  with  assistance  from  the 
PHARE/ISPA,  TACIS  or  CARDS  programmes  with  a  view  to  strengthening  the 
institutional  capacity  that  was  essential  to  the  success  of  the  structural  reform 
process. 

Tables 1 and 2, and their accompanying Graphs 1a and 2a underline the exceptional 
character of the EC MFA. The highest volumes of MFA operations were decided and 
disbursed  in  the  years  immediately  after  the  changes  in  the  political  and  economic 
systems of the countries of Central and Eastern Europe. Since then, the fluctuations 
in  the  amounts  of  MFA  reflect  decisions  taken  on  a  case-by-case  basis  after  an 
assessment of the macro-economic situation and residual external financing needs of 
the  potential  beneficiary  countries.  Graph  1a  -  for  net  amounts  of  operations 
decided over the whole period from 1990 to 2004 (totalling over EUR 6 billion) - and 
Graph  2a  -  for  actual  amounts  disbursed  (totalling  over  EUR 5 billion) -  show  the 
important concentration of the assistance in the Central and East European Countries 
(around  55  %  of  total  macro-financial  assistance  decided  over  the  last  14 years). 
However, MFA to these countries was progressively phased out in parallel with their 
progress  in  macroeconomic  adjustment  and  reform.  More  recently,  MFA  has  been 
mainly  provided  to  the  Western  Balkans  (63.5  %  of  the  operations  decided  from 
1999 to 2002 and 84% for 2000-2004) and some low income NIS. The relatively low 
amounts  for  the  Mediterranean  countries  (13  %  of  the  overall  amounts  authorised, 
but no new authorisation since 1996) should be considered against the background of 
other  forms  of  macroeconomic  support  made  available  to  these  countries  (notably, 
the MEDA Structural Adjustment Facilities). 

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3. 

SYNTHESIS  OF  THE  ECONOMIC  SITUATION  AND  REFORM  IN  BENEFICIARY 
COUNTRIES 

3.1.  Western Balkans 

Growth  in  2004  in  the  Western  Balkans1  is  estimated  at  around  4.5%,  following  a 
slowdown in 2002-2003, partly due to declining donor support and the end of post-
war  reconstruction.  Albania,  Bosnia  and  Herzegovina,  and  Serbia  and  Montenegro 
were  expected  to  post  growth  rates  of  at  least  5%.    However  growth  remained 
relatively  subdued  in  the  former  Yugoslav  Republic  of  Macedonia  and  in  Kosovo.  
Economic  stabilisation  continued  over  2003-2004.    Inflation  eased  further  in  2004, 
down to 5.6% on average.  After marked improvements in the previous years, fiscal 
consolidation  advanced  very  unevenly  across  countries.  The  general  government 
deficit (after grants) was expected to reach on average around 2.7%, a level overall 
similar as in 2003. 

External imbalances  remain  a  challenge to  macroeconomic  stability.  For  the  region 
as a whole, the merchandise trade deficit remained high in 2003-2004 (some 25% of 
GDP).  The  average  current  account  deficit  is  estimated  at  around  12%  of  GDP  in 
2004  and  thereby  slightly  higher  than  in  2003.  This  implies  that  a  number  of 
countries  continued  to  rely  on  donors’  assistance  to  finance  their  external  deficits, 
and  it  remained  an  important,  even  though  steadily  declining,  source  of  foreign 
currency  earnings.  In  2003,  grants  reached  2.2%  of  GDP  in  the  former  Yugoslav 
Republic  of  Macedonia,  2.6%  in  Albania,  2.4%  in  Serbia  and  Montenegro.  While 
Kosovo is a particular case, with foreign assistance of 40.7% of GDP in 2003, one of 
the many challenges for the local economy will be to weather the sharply declining 
trend of this assistance.  

Most  of  the  core  legislative  framework  of  a  market  economy  has  been  introduced. 
While  the  former  Yugoslav  Republic  of  Macedonia  and  Albania  have  made 
significant progress in the process of large enterprise restructuring and privatisation, 
the  situation  of  loss-making  public  enterprises  remains  particularly  difficult  in 
Kosovo, Bosnia and Herzegovina as well as Serbia and Montenegro and will trigger 
continuous  tensions  on  the  budget  as  well  as  further  job  losses.  The  reform  of  the 
public  administration  and  the  management  of  public  finances  also  pose  important 
challenges  over  the  medium term. Significant  improvements  have  been  recorded in 
this  area  in  2004,  e.g.  the  reform  of  customs  and  tax  administration  in  Bosnia  and 
Herzegovina  in  2004,  and  progress  towards  cash  based  budgeting  in  Kosovo. 
Implementation  of  legislation  remains  severely  hampered  throughout  the  region  by 
weak institutions, in particular in the judiciary.  

3.2. 

New Independent States  

The  economic  performance  of  most  New  Independent  States  (NIS)  remained  very 
strong in 2004, with an aggregate output increase of over 7.5%.  

1  

This covers Albania, Bosnia and Herzegovina, the former Yugoslav Republic of Macedonia (fYRoM), 
Serbia and Montenegro and Kosovo. 

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Thanks to high commodity prices, notably those of hydrocarbons and metals, GDP in 
the  region’s  dominant  economy,  Russia,  grew  by  nearly  7%,  despite  a  marked 
slowdown  towards  the  end  of  the  year.  Growth  continues  to  be  driven  mainly  by 
external  demand,  while  domestic  consumption 
to 
improvements  in  net  disposable  income.    The  slower  pace  of  growth  of  Russian 
aggregate  economic  activity  in  the  third  quarter  of  2004  was  a  result  of  a  reduced 
pace of expansion of gross investment in fixed capital and further real decline in net 
exports of goods and services. In contrast, the pace of aggregate consumption growth 
held up well.  

remains  strong 

thanks 

Several other CIS countries registered much higher growth rates. In Ukraine, GDP 
growth exceeded 12%, after already more than 9% the year before. Growth in several 
other  countries  of  the  region  (Belarus,  Armenia,  Azerbaijan,  Tajikistan, 
Kazakhstan,  Georgia)  approached  or  exceeded  10%.  The  weakest  economic 
performance was that of Moldova where growth was still about 6%. Most of these 
countries have in common to benefit from sustained external demand in some of their 
main markets, notably Russia (for the smaller NIS) and China (particularly important 
for  Ukraine’s  steel  exports)  and  from  strong  domestic  demand  fuelled  by  workers’ 
remittances  (the  single  largest  post  of  the  current  account  in  some  of  the  poorest 
countries  of  the  region).  Also,  some  NIS  benefit  from  high  commodity  prices  and 
significant  investments  in  natural  resource  sectors  (Kazakhstan,  Azerbaijan)  and 
from  large  official  (Georgia,  Tajikistan,  Kyrgyz  Republic)  or  private  (Armenia) 
external financing.  

In most countries of the region, inflationary pressures remained under control despite 
strong  growth  of  base  money  resulting  from  reserve  build-up  (resulting  on  its  turn 
from large inflows of foreign exchange originating from commodity exports and/or 
workers’ remittances). Fiscal policies remained tight in the majority of the countries 
of the region. Several countries registered substantial fiscal surpluses; a large share 
of  tax  revenue  of  some  oil-producing  countries  was  put  aside  in  the  stabilisation 
funds  (particularly  in  Russia).  Current  account  developments  have  been  mixed.  On 
one  hand,  booming  exports  in  the  two  largest  economies  of  the  region  (Russia  and 
Ukraine)  and  in  the  majority  of  smaller  natural  resource-exporting  countries  have 
translated  into  record  current  account  surpluses  (about  10%  of  GDP  in  Russia  and 
Ukraine).  On  the  other  hand,  many  oil-importing  countries  have  seen  their  current 
account  deficits  widen  further.  Several  NIS  still  depend  strongly  on  external 
financing by International Financial Insitutions and bilateral donors and are still far 
from having achieved financial sustainability. 

Progress in transition has been very uneven across the region and the implementation 
of  second-phase  institutional  reforms  supporting  markets  and  private  enterprise  is 
only  starting  in  most  NIS.  Among  the  beneficiaries  of  the  Community  macro-
financial  assistance,  Armenia  and  Ukraine  are  the  most  advanced.  Also,  in  2004 
Georgia  embarked  on  a  strong  adjustment  and  reform  programme  after  the  regime 
change  in  late  2003.  At  the  same  time,  there  was  little  progress  in  Moldova  where 
widespread  state  interference  and  serious  governance  failures  undermine  the 
investment climate and remain important obstacle to sustaining growth and poverty 
reduction. The implementation of the measures foreseen in the EU-Moldova Action 
Plan recently adopted in the context of the European Neighbourhood Policy will be 
the test of Moldova’s readiness to pursue decisively and effectively a genuine market 
reform agenda. 

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Table 1. Macro-financial assistance, 1990-2004

Maximum amounts authorised, millions euro

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Totals

By region

Central European Candidate Countries

870

1.220

Western Balkans

NIS

Mediterranean

588

Total amounts authorised

870

1.808

out of which, straight grants

28

410

70

480

70

255

35

130

200

620

35

0

255

255

15

15

Interest 
subsidies to 
Israel

Albania

Albania

250

40

265

555

95

Armenia 
and 
Georgia 
(95)

150

150

300

160

460

70

55

125

180

90

393

393

168

190

18 (a)

208

130

70

25

70

45

25

16

3.305

1.038

958

788

6.089

747

Bosnia (40) 
fYRoM (30)

Kosovo (35) 
Montenegro 
(20) 
Tajikistan 
(35) Moldova 
(15)

fYRoM (18) 
Serbia and 
Montenegro 
(120) Kosovo 
(30) 

Serbia and 
Montenegro 
(75) Bosnia 
(40) 
Moldova (15) 
(b)

Serbia and 
Montenegro 
(45) 

Albania (16)

(a) net amount taking into account (b) and, for Ukraine, new loan of EUR 110 million together with simultaneous cancellation of EUR 92 million out of the EUR 150 million loan decided in 1998.

(b) grant of EUR 15 million and simultaneous cancellation of the EUR 15 million loan decided in 2000

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Graph 1a. Maximum amounts authorised by year,
in EUR million

1.808

870

1990

1991

620

555

480

255

15

0

460

393

150

180

208

70

25

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Graph 1b. MFA 1990-2004, authorisations 
Distribution by region

Mediterranean
13%

NIS
16%

W estern 
Balkans
17%

Central 
European 
Candidate 
Countries
54%

Graph 1c. MFA 2000-2004, authorisations 
Distribution by region

NIS
16%

W estern 
Balkans
84%

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Disbursements, millions euro 

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Totals

By region

Central European Candidate Countries

350

695

Western Balkans

NIS

Mediterranean

270

35

705

35

438

Total amounts disbursed

350

695

1.178

305

out of which, straight grants

63

35

70

25

150

245

80

15

135

100

330

15

40

20

115

70

25

100

250

15

156

40

25

71

175

195

421

136

20

18

28

160

105

265

85

312

80

392

105

130

11

141

141

50

146

7

203

85

2.780

883

712

688

5.063

617

20

12

32

22

Israel (28) 
Albania 
(35)

Albania

Albania

Albania

Armenia 
(8) 
Georgia 
(10)

Armenia 
(4) 
Georgia 
(9) Bosnia 
(15)

Bosnia (10) 
fYRoM (20) 
Kosovo (35) 
Montenegro 
(20)

Bosnia (15) 
fYRoM (10) 
Kosovo (15) 
Serbia and 
Montenegro 
(ex FRY) (35) 
Georgia (6) 
Tajikistan (14) 

Armenia (11) 
Kosovo (15) 
Serbia and 
Montenegro 
(115)

Bosnia (25, 
Serbia and 
Montenegro 
(35), fYRoM 
(18), 
Tajikistan (7)

Serbia and 
Montenegro 
(10) 
Armenia (5,5) 
Georgia  (6,5)

NB: 2000 figures include disbursements in favour of Bosnia, fYRoM and Montenegro which, for technical reasons, took place in early January 2001.

       2001 figures include disbusements in favour of fYRoM and Tajikistan which, for technical reasons, took place in early January 2002.

       2002 figures include disbursements in favour of Bosnia and Tajikistan which, for technical reasons, took place in early 2003.

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Graph 2a. Amounts disbursed by year, 
in EUR million

1.178

695

350

305

245

330

421

175 195

136

392

265

203

141

32

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Graph 2b. MFA 1990-2004, disbursements, 
Distribution by region

Mediterranean
14%

NIS
14%

Western 
Balkans
17%

Central 
European 
Candidate 
Countries
55%

Graph 2c. MFA 2000-2004, disbursements, 
Distribution by region

Central 
European 
Candidate 
Countries
21%

NIS
10%

Western 
Balkans
69%

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