Proposal for a Council Decision providing exceptional Community financial assistance to Kosovo
Date: 2006-05-12
Institutions: European Commission
Subjects: EU aid, Kosovo, economic aid, economic reconstruction, financial aid

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 12.05.2006 
COM(2006) 207 final 

2006/0068 (CNS) 

Proposal for a 

COUNCIL DECISION 

providing exceptional Community financial assistance to Kosovo 

(presented by the Commission) 

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EXPLANATORY MEMORANDUM 

1)  CONTEXT OF THE PROPOSAL 

110 

•  Grounds for and objectives of the proposal 

The Commission proposes to provide exceptional financial assistance to Kosovo in the 
form of a grant with a view to alleviating the financial situation of Kosovo, supporting 
the  development  of  a  sound  economic  and  fiscal  framework,  facilitating  the 
continuation  and  strengthening  of  essential  administrative  functions  and  addressing 
public investment needs.  

The proposed macro-financial assistance will be limited in time, complement support 
from  the  World  Bank  (through  IDA  funds)  and  other  bilateral  donors,  and  will  be 
conditional on progress in the implementation of a number of measures, in particular in 
area of public finance, to be defined in close consultation with the IMF and the World 
Bank.  This  assistance  would  provide  crucial  bridge  support  before  a  settlement  of 
Kosovo’s  status.  It  would  be  unrelated  to  new  status  arrangements  and  not  pre-empt 
further EC and international support likely to be required upon status resolution beyond 
2007.  

120 

•  General context 

In June 2005, the Special Representative of the Secretary General (SRSG) and Head of 
UNMIK,  Mr  Jessen-Petersen,  addressed  to  the  Presidents  of  the  World  Bank  and  the 
European Commission a request for new exceptional financial assistance in the form of 
budget  support.  The  Commission  indicated  that  it  would  propose  further  support  to 
Kosovo,  provided  that  a  reliable  needs  assessment  in  the  form  of  a  comprehensive 
Medium-Term Expenditure Framework was established, agreed with the International 
Monetary Fund (IMF), and confirming the existence of a financing gap. 

The  economic  situation  in  Kosovo  is  bleak:  Kosovo  has  a  per-capita  GDP  of  around 
EUR 1,230, the lowest in the region. According to World Bank estimates, around 37% 
of the population live in poverty, with around 15% living in extreme poverty. The level 
of registered unemployment is high, around 44%, even though the real unemployment 
rate is most probably lower due to a sizeable informal economy. Growth has been weak 
over  the  recent  years  and  insufficient  in  view  of  the  Kosovo’s  considerable 
development needs. After a sharp increase of GDP in the immediate post war period, 
boosted  by  reconstruction  assistance,  growth  is  now  negatively  affected  by  declining 
donor support.  

Economic  developments  in  2004  and  2005  reflected  this  trend  and  the  lack  of 
dynamism of the economy. GDP growth reached in 2004 estimated 4.1%, on the back 
of a substantial rise in public expenditure towards the end of the year. In 2005 GDP is 
estimated  to  have  shrunk  by  0.2%.  Also  due  to  the  weakness  in  economic  activity, 
inflation  has  been  very  moderate.  Inflation  had  been  negative  in  the  second  half  of 
2004 and first part of 2005, and the consumer price index fell by 1.9% on average in 
2005. Owing to a considerable trade deficit, the current account balance has continued 
to post high deficits (close to 26% of GDP in 2003 and 2004), and provisional data for 
2005  suggest  a  further  deterioration  to  over  29%  of  GDP.  Given  the  absence  of 

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sizeable foreign direct investment inflows, the financing of the current account deficit 
continued to rely on foreign assistance in form of project support (around 23% of GDP 
in 2004 and 2005) and, to a lesser extent, on private capital transfers (around 15% of 
GDP in 2005).  

Given Kosovo’s present status under UN Security Council 1244, its specific monetary 
regime  and  the  absence  of  any  reliable  balance-of-payments  statistics  -existing 
information  is  based  on  IMF  estimates-,  Kosovo’s  external  financing  needs  are 
assessed through, and driven by, public sector needs.  

After  an expansionary fiscal stance in 2004, budget consolidation is taking place and 
the budget deficit has come down to around 2.8% in 2005, down from 5.4% of GDP in 
2004 and below planned levels owing to lower than foreseen capital expenditure. The 
foreseeable  exhaustion  of  accumulated  cash  deposits,  which  currently  finance  the 
budget deficit, and the impossibility for the Provisional Institutions of Self Government 
(PISG) under the current UN mandate to finance the deficit through public borrowing 
imply that deficits, even of a lower level, would rapidly become unsustainable.  

Therefore,  vigorous  fiscal  adjustment  is  a  high  priority.  In  October  2005,  IMF  staff 
agreed with the authorities of Kosovo on a fiscal framework for the remainder of 2005 
and for 2006. Reflecting the recommendations by the IMF, a Letter of Intent (LOI) and 
a  Memorandum  of  Economic  and  Financial  Policies  were  signed  in  November  2005, 
committing the government to considerable fiscal tightening. According to the LOI, the 
deficit  would  need  to  remain  below  3%  of  GDP  in  2006.  Real  expenditure  growth 
would  be  kept  below  0.5%  and  the  number  of  government  employees  be  reduced, 
allowing  for  a  redeployment  of  public  expenditure  with  a  higher  share  of  capital 
outlays.  Following  this  agreement  with  the  IMF,  the  authorities  of  Kosovo  have 
prepared a Medium-Term Expenditure Framework (MTEF) for the period 2006-2008. 
The  establishment  of  an  MTEF  has  been  a  long-standing  request  of  the  donor 
community and a pre-condition for any further EC macro-financial assistance.  

The submitted MTEF anticipates the budget deficit to be close to the upper limit of 3% 
of  GDP  foreseen  in  the  LOI,  and  to  reach  respectively  EUR  76  million  and  EUR  67 
million  in  2006  and  2007.  Owing  to  lower  than  foreseen  expenditure  in  2005,  cash 
reserves have remained substantial and may finance a large share of the deficit in 2006. 
Nevertheless, upon exhaustion of these reserves, urgent financing needs are expected to 
arise towards the end of 2006 and particularly in 2007 when the budget deficit would 
need to be entirely financed from external support in order to keep cash reserves at a 
minimum of around EUR 50 million. This amount is the contingency amount deemed 
appropriate  by  the  authorities  of  Kosovo  and  the  IMF  for  the  management  of  budget 
treasury operations without running the risk of a payments crisis. Accordingly, external 
financing needs, subject to possible adjustments in the upcoming revised version of the 
MTEF,  are  expected  to  amount  to  EUR  14  million  in  2006  and  EUR  67  million  in 
2007. 

Under its current status, Kosovo cannot become a member of the IMF and the World 
Bank and therefore cannot borrow from them. However, IMF staff maintains a regular 
dialogue  with  the  authorities  of  Kosovo  and  the  World  Bank  manages  IDA  grants  (a 
USD  20  million  18-months  envelope,  which  was  renewed  in  mid-2005).  Given  the 
rapid depletion of government bank deposits, the inability to borrow and in the absence 
of  IMF  and  World  Bank  funding  -with  the  exception  of  the  above-mentioned  IDA 

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grants- Kosovo’s budget deficit in 2006 and 2007 will, pending further changes, have 
to  rely  on  donors’  support.  In  order  to  address  these  needs,  the  Commission  deems 
appropriate  to  make  available  to  Kosovo  macro-financial  assistance  in  the  form  of 
grants of around EUR 50 million. 

The  Community  has  already  found  it  an  appropriate  measure  to  help  ease  Kosovo's 
financial  constraints  in  exceptionally  difficult  circumstances  and,  under  Council 
Decisions 2000/140/EC and 2001/511/EC, provided exceptional financial assistance in 
the form of straight grants amounting to EUR 35 million and EUR 30 million in 2000 
and  2001  respectively.  The  last  payment  under  such  assistance  was  released  in 
December 2002. 

130 

•  Existing provisions in the area of the proposal 

Council  Decision  2000/140/EC  of  14  February  2000  providing  exceptional  financial 
assistance to Kosovo1. 

Council  Decision  2001/511/EC  of  27  June  2001  providing  exceptional  financial 
assistance to Kosovo2.  

140 

•  Consistency with other policies and objectives of the Union 

Kosovo  is  integrated  in  the  bilateral  framework  of  EU  relations  with  the  Western 
Balkans.  While  the  conclusion  of  a  Stabilisation  and  Association  agreement  is  not 
possible  under  the present status, a close  monitoring of  bilateral relations takes place 
through  high  level  meetings  in  the  Stabilisation  and  Association  Track  Mechanism 
(STM).  

In  the  European  Partnership  for  Kosovo  adopted  in  December  2005,  the  Council 
identified key short term and medium term priorities for Kosovo, as regards economic 
policy  very  much  in  line  with  IMF  priorities  as  well.  These  priorities  reflect  the 
particular  stage  of  development  of  Kosovo  and  are  tailored  to  its  specific  needs. 
Kosovo  is  expected  to  respond  to  the  European  Partnership  by  producing  a  revised 
Action plan with a timetable and administrative and budgetary details on how it intends 
to  address  the  European  Partnership’s  priorities.  Progress  in  their  implementation  is 
monitored regularly by the European Commission, notably in the Progress Reports and 
through  the  structures  under  the  Stabilisation  and  Association  Process.  The  latest 
Progress Report on Kosovo3 was published by the Commission in November 2005 and 
notably  reported  on  developments  of  the  political  situation  and  relations  between  the 
EU and Kosovo. 

The foreseen exceptional financial assistance complements the Community Assistance 
for Reconstruction, Development and Stabilisation (CARDS) programme which since 
2001  has  been  the  main  EC  financial  instrument  for  co-operation  for  the  Western 
Balkan  countries,  and  for  Kosovo  in  particular.  The  EC  annual  CARDS  assistance 
programme  allocated  to  Kosovo  amounted  to  EUR  65.28  million  in  2003,  EUR  74.5 
million  in  2004  and  EUR  79  million  in  2005.  The  CARDS  main  priorities  for 

1 
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3 

OJ L 47, 19.2.2000, p. 28. 
OJ L 183, 6.7.2001, p. 42. 
SEC(2005) 14333 of 9.11.2005. 

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2005-2006  are  Democratic  Stabilisation,  including  refugee  return,  civil  society  and 
media;  Good  governance  and  Institution  Building,  including  judicial  reform,  police, 
organised  crime,  asylum  and  migration,  public  administration  reform,  customs  etc; 
Economic  and  Social  development,  including  trade,  infrastructure,  environment, 
education and finally Participation in Community Programmes. Furthermore, with its 
funding  of  Pillar  IV  of  UNMIK,  the  EU  is  supporting  the  revitalisation  of  economic 
activity  in  Kosovo  and  creating  the  conditions  for  a  modern,  open  economy.  EC 
funding for UNMIK (Pillar IV) has amounted to some EUR 103 million since 1999. 

2)  CONSULTATION OF INTERESTED PARTIES AND IMPACT ASSESSMENT 

•  Consultation of interested parties 

The Special Representative of the Secretary General and Head of UNMIK, Mr Jessen-
Petersen, requested further financial assistance from the EC in June 2005. Commission 
services  have  been  in  contact  with  the  authorities  of  Kosovo  (UNMIK  and  the 
Provisional Institutions of Self Government), the International Monetary Fund and the 
World  Bank  and  bilateral  donors  during  the  preparation  of  the  present  Commission 
proposal to discuss assistance needs. The Commission has consulted the Economic and 
Financial  Committee  before  submitting  its  proposal.  Following  the  adoption  of  the 
Council  Decision,  the  Commission  services  will  negotiate  a  Memorandum  of 
Understanding with the authorities of Kosovo to lay down in detail the implementation 
modalities of the assistance.  

•  Collection and use of expertise 

There was no need for external expertise. 

•  Impact assessment 

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229 

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Because macro-financial assistance is a policy-based instrument, it is particularly well-
suited  to  support  the  efforts  of  the  authorities  of  Kosovo  to  improve  the  fiscal 
sustainability in the short-to-medium run. 

By  providing  further  exceptional  financial  assistance  in  the  form  of  grants,  the 
Community  will  continue  supporting  Kosovo's  economic  reform  programmes.  In  the 
short-run,  this  assistance  will  help  the  authorities  of  Kosovo  to  ensure  the  financial 
sustainability  of  Kosovo’s  budget.  In  the  medium-run,  this  exceptional  financial 
assistance  will  also  contribute  to  strengthening  the  transparency  and  sustainability  of 
public  finances,  enhancing  fiscal  discipline  and  management,  and  implementing 
structural reforms. 

3)  LEGAL ELEMENTS OF THE PROPOSAL 

305 

•  Summary of the proposed action 

The Community shall make available to Kosovo exceptional financial assistance in the 
form of grants over a two-year period. The assistance will be made available in two –
or, if appropriate, three- instalments over the period 2006-2008. The assistance will be 
managed  by  the  Commission  which  shall  agree  with  the  authorities  of  Kosovo  the 
specific economic policy and financial conditions attached to the payment of the grant 

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310 

329 

331 

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341 

342 

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instalments.  Specific  provisions  on  the  prevention  of  fraud  and  other  irregularities, 
consistent with the Financial Regulation, will be duly taken into account.  

•  Legal basis 

Article 308 of the EC Treaty 

•  Subsidiarity principle 

While Member States may provide bilateral macro-financial assistance, a Community 
macro-financial assistance grouping the efforts of all Member States is a simpler and 
more efficient economic and financial instrument. 

•  Proportionality principle 

The proposal complies with the proportionality principle for the following reason(s). 

The  assistance  will  be  fully  consistent  with  the  macroeconomic  targets  already  set  in 
the  LOI  and  Memorandum  of  Economic  and  Financial  Policies  agreed  with  the  IMF 
and  signed  in  November  2005,  or  any  subsequent  arrangements  or  understandings 
reached with the IMF. As regards specific conditions attached to the disbursement of 
the grant instalments, the Commission intends to focus on a limited number of areas, 
including in particular public finance management.  

While  bilateral  donors  will  be  encouraged  to  provide  complementary  support  either 
through  budget  or  project  support,  the  exact  burden  sharing  with  bilateral  donors 
cannot  at  this  stage  be  assessed  and  will  be  linked  to  the  broader  context  of  a  full-
fledged donors support exercise expected to take place upon status resolution. 

•  Choice of instruments 

Proposed instruments: other. 

Other means would not be adequate for the following reason: 

In the absence of a framework regulation for the macro-financial assistance instrument, 
ad hoc Council decisions under Article 308 of the Treaty are the only available legal 
instrument for this assistance. 

4)  BUDGETARY IMPLICATION 

Such  assistance  would  be  financed  from  commitment  appropriations  in  2006  under 
budget line 01 03 02 02 (Macro-financial assistance to the Western Balkans). Should 
the 2006 commitment appropriations be not sufficient to cover the entire operation, the 
remaining amount will be committed under the 2007 budget once approved. Payments 
will take place mainly or exclusively in 2007. 

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5)  ADDITIONAL INFORMATION 

•  Review/revision/sunset clause 

533 

The proposal includes a sunset clause. 

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2006/0068 (CNS) 

Proposal for a 

COUNCIL DECISION 

providing exceptional Community financial assistance to Kosovo 

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 Commission4, 

Having regard to the opinion of the European Parliament5, 

Whereas: 

(1) 

(2) 

(3) 

(4) 

(5) 

The  United  Nations  Security  Council  (UNSC)  adopted  Resolution  1244  (1999)  on 
10 June  1999  aiming  at  promoting  the  establishment,  pending  a  final  settlement,  of 
substantial  autonomy  and  self-government  in  Kosovo  within  the  former  Federal 
Republic of Yugoslavia.  

The  International  Community,  basing  itself  upon  Resolution  1244,  has  set  up  an 
international  security  presence  (KFOR)  and  an  interim  civil  administration  -  the 
United  Nations  Interim  Mission  in  Kosovo  (UNMIK).  UNMIK  consists  of  four 
components (Pillars) and the European Union is funding the fourth Pillar responsible 
for  economic  reconstruction  and  development.  UNMIK,  and  particularly  Pillar  IV 
thereof,  has  achieved  substantial  progress  in  setting  up  an  institutional,  legal  and 
policy  framework  conducive  to  the  creation  of  a  sound  economy  based  on  market 
principles.  

Since its establishment, UNMIK has transferred significant areas of competence to the 
Provisional Institutions of Self Government (PISG). In particular, responsibility for the 
budget  has  been  transferred  from  UNMIK  to  the  Ministry  of  Economy  and  Finance 
within  the  PISG,  with  the  Special  Representative  of  the  UN  Secretary  General 
retaining the ultimate power of approving the budget. 

On 24 October 2005, the UN Security Council approved the UN Secretary General’s 
proposal to launch the political process to determine the future status of Kosovo.  

The  authorities  of  Kosovo  entitled  to  receive  Community  assistance  and  responsible 
for  agreeing  to  and  fulfilling  the  financial  and  economic  conditions  attached  to  this 

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OJ C , , p. . 
OJ C , , p. . 

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assistance  are  therefore  UNMIK  and  the  PISG  or,  when  the  future  status  of  Kosovo 
will  have  been  determined,  the  institution  or  institutions  designated  to  take  on  these 
tasks and responsibilities.  

(6)  Within  the  Stabilisation  and  Association  process,  which  is  the  framework  for  EU 
relations  with  the  region,  it  is  desirable  to  support  efforts  to  sustain  political  and 
economic stabilisation in Kosovo, with a view to evolving towards the development of 
a  full  cooperation  relationship  with  the  Community  making  the  European  future  of 
Kosovo more tangible. 

(7) 

(8) 

(9) 

The  Community  has  already  found  it  an  appropriate  measure  to  help  ease  Kosovo's 
financial  constraints  in  exceptionally  difficult  circumstances  and,  under  Council 
Decision  2000/140/EC  of  14  February  2000  providing  exceptional  Community 
assistance to Kosovo6 and Council Decision 2001/511/EC of 27 June 2001 on further 
exceptional financial assistance to Kosovo7, provided exceptional financial assistance 
in  the  form  of  straight  grants  amounting  to  EUR  35  million  and  EUR  30  million  in 
2000 and 2001 respectively. The last payment under such assistance was released in 
December 2002. 

In November 2005 the authorities of Kosovo agreed with the International Monetary 
Fund (IMF) a Letter of Intent and a Memorandum of Economic and Financial Policies 
laying  out  a  fiscal  framework  for  2006,  including  medium-term  orientations.  They 
completed in the beginning of March 2006 a Medium-Term Expenditure Framework. 
The  framework  identifies  budget  and  off-budget  financing  needs  in  2006-2008. 
Accordingly, it is estimated that budget external financial assistance of some EUR 81 
million -respectively EUR 14 million in 2006 and EUR 67 million in 2007- would be 
needed until the end of 2007. 

Although  economic  activity  resumed  after  the  conflict,  Kosovo  is  at  a  low  level  of 
economic development. Kosovo is not in a position to borrow either domestically or 
on the international financial market and under its current status it is not eligible for 
membership  in  the  international  financial  institutions.  It  may  therefore  not  benefit 
from lending assistance associated with their programmes. 

(10) 

In  view  of  current  arrangements  under  UNSC  Resolution  1244,  given  Kosovo’s 
relatively  low  level  of  economic  development  and  its  precarious  public  finance  and 
external  accounts,  financial  assistance  from  the  Community  in  the  form  of  straight 
grants, in liaison with other donors, continues to be the appropriate form of support. 

(11)  Such assistance will provide crucial bridge support pending a settlement of Kosovo’s 
status. It would be unrelated to new status arrangements under negotiation and not pre-
empt  further  Community  and  international  support  likely  to  be  required  upon  status 
resolution beyond 2007. 

(12)  The release of this grant assistance is without prejudice to the powers of the Budgetary 

authority. 

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7 

OJ L 47, 19.2.2000, p. 28. 
OJ L 183, 6.7.2001, p. 42. 

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(13)  This  financial  support  should  be  provided  after  verifying  whether  the  financial  and 
economic conditions to be agreed with the authorities of Kosovo upon approval of this 
Council Decision can be satisfactorily fulfilled. 

(14) 

In order to ensure efficient protection of the Community's financial interests linked to 
the present financial assistance, it is necessary to provide for appropriate measures by 
Kosovo in relation to the prevention of and fight against fraud and other irregularities 
linked to this assistance, as well as for controls by the Commission and audits by the 
Court of Auditors. 

(15)  This  assistance  should  be  managed  by  the  Commission  in  consultation  with  the 

Economic and Financial Committee. 

(16)  The Treaty does not provide, for the adoption of this Decision, powers other than those 

of Article 308. 

HAS DECIDED AS FOLLOWS:  

1. 

2. 

3. 

1. 

2. 

Article 1 

The Community shall make available to Kosovo an exceptional financial assistance 
in the form of a grant of up to EUR 50 million with a view to alleviating the financial 
situation  in  Kosovo,  supporting  the  development  of  a  sound  economic  and  fiscal 
framework, facilitating the continuation and strengthening of essential administrative 
functions and addressing public investment needs.  

This  Community  financial  assistance  shall  be  managed  by  the  Commission  in 
consultation with the Economic and Financial Committee and in a manner consistent 
with the agreements or understandings reached between the IMF and the authorities 
of Kosovo. 

The  Community  financial  assistance  shall  be  made  available  for  two  years  starting 
from  the  first  day  after  the  entry  into  force  of  the  Memorandum  of  Understanding 
referred  to  in  Article  2(1).  However,  if  circumstances  so  require,  the  Commission, 
after consultation of the Economic and Financial Committee, may decide to extend 
the availability period by a maximum of one year. 

Article 2 

The  Commission  is  empowered  to  agree  with  the  authorities  of  Kosovo,  after 
consultation with the Economic and Financial Committee, the economic policy and 
financial conditions attached to this assistance, to be laid down in a Memorandum of 
Understanding.  These  conditions  shall  be  consistent  with  the  agreements  or 
understandings referred to in Article 1(2). 

Before proceeding with the actual implementation of the Community assistance, the 
Commission  shall  monitor 
financial  circuits, 
administrative  procedures,  internal  and  external  control  mechanisms  which  are 
relevant to this Community macro-financial assistance. 

the  soundness  of  Kosovo's 

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3. 

1. 

2. 

3. 

The Commission shall verify at regular intervals, in collaboration with the Economic 
and Financial Committee and in coordination with the IMF, that economic policies in 
Kosovo are in accordance with the objectives of this assistance and that the agreed 
economic policy and financial conditions are being satisfactorily fulfilled. 

Article 3 

The  assistance  shall  be  made  available  by  the  Commission  to  Kosovo  in  two  or,  if 
appropriate,  three  instalments.  The  first  instalment  shall  be  released  after  the  entry 
into force of the Memorandum of Understanding referred to in Article 2(1), and on 
the basis of a satisfactory assessment of the monitoring referred to in Article 2(2).  

The second and any further instalments shall be released on the basis of a satisfactory 
compliance with the economic policy and financial conditions referred to in Article 
2(1),  and  not  before  three  months  have  elapsed  since  the  release  of  the  previous 
instalment. 

The  funds  shall  be  paid  to  the  Ministry  of  Economy  and  Finance  of  the  PISG,  or 
when  the  future  status  of  Kosovo  will  have  been  determined,  to  the  institution 
designated  to  take  on  its  tasks  and  responsibilities,  exclusively  in  support  of 
Kosovo’s budgetary financing needs.  

Article 4 

The  implementation  of  this  assistance  shall  take  place  in  accordance  with  the  provisions  of 
Council  Regulation  (EC,  Euratom)  No  1605/2002  of  25  June  2002  on  the  Financial 
Regulation  applicable  to  the  General  Budget  of  the  European  Communities8  and  its 
implementing  rules.  In  particular,  the  Memorandum  of  Understanding  referred  to  in  Article 
2(1)  shall  provide  for  appropriate  measures  by  Kosovo  related  to  the  prevention  of  and  the 
fight  against  fraud,  corruption  and  other  irregularities  linked  to  this  assistance.  It  shall  also 
provide for controls by the Commission, including the European Anti-Fraud Office (OLAF), 
with the right to perform on-the-spot checks and inspections, and for audits by the Court of 
Auditors, where appropriate, to be carried out on the spot. 

Article 5 

At  least  once  a  year  the  Commission  shall  submit  to  the  European  Parliament  and  to  the 
Council  a  report,  including  an  evaluation  on  the  implementation  of  this  Decision  in  the 
previous year. 

8 

OJ L 248, 16.9.2002, p. 1. 

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Article 6 

This  Decision  shall  take  effect  on  the  day  of  its  publication  in  the  Official  Journal  of  the 
European Union.  

Done at Brussels, 

For the Council 
The President 

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LEGISLATIVE FINANCIAL STATEMENT 

Policy area: Title 01 – Economic and Financial Affairs 

Activity: 03 – International economic and financial affairs 

TITLE OF ACTION: EXCEPTIONAL FINANCIAL ASSISTANCE TO KOSOVO 

1. 

BUDGET LINE(S) + HEADING(S) 

01 03 02 02 Macroeconomic assistance to the Western Balkans. 

2. 

OVERALL FIGURES  

2.1. 

Total allocation for action (Part B): EUR 50 million for commitment 

Budget  available  for  2006:  EUR  37.065  million  following  an  internal  transfer  of 
EUR  11  million  to  address  urgent  budgetary  needs  of  Georgia  under  budget  line 
01 03  02  01  (following  the  Council  approval  on  24  January  2006  of  Community 
macro-financial assistance of EUR 33.5 million in favour of Georgia9).  

2.2. 

Period of application: 

Start year: 2006, expiry year: 2008 

2.3. 

Overall multi-annual estimate of expenditure: 

(a) 

Indicative schedule of commitment appropriations/payment appropriations (financial 
intervention) (see point 6.1.1) 

€ Million 

2006 

2007 

2008 

Commitments 

50.000 
(*) 

Payments 

 - 

50.000 

 - 

(*) subject to a prior reinforcement of budget line 01 03 02 02 

Total 

50.000 

50.000 

(b) 

Technical and administrative assistance and support expenditure (see point 6.1.2) 

Commitments 

0.030 

0.030 

Payments 

0.030 

0.030 

0.060 

0.060 

9 

OJ L 25 of 28.1.2006. 

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13 

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Subtotal a+b 

Commitments 

50.030 

0.030

Payments 

0.030 

50.030

50.060 

50.060 

(c) 

Overall  financial  impact  of  human  resources  and  other  administrative  expenditure  
(see points 7.2 and 7.3) 

Commitments/ 
payments 

0.165 

0.165 

TOTAL a+b+c 

Commitments 

50.195  0.195 

payments 

0.195 

50.195 

0.330 

50.390 

50.390 

The  €50  million  grant  agreement  will  be  signed  after  a  reinforcement  in  commitment 
appropriations  and  the  corresponding  budget  commitment.  Should  a  grant  agreement  be 
required before such reinforcement has taken place, the assistance will be provided through a 
first grant agreement stemming from the 2006 available budget commitment. A second grant 
agreement will be signed for the remaining amount following either a 2006 reinforcement or 
through the 2007 budget appropriations once approved. 

2.4. 

Compatibility with financial programming and financial perspective 

The proposal is compatible with existing financial programming 

2.5. 

Financial impact on revenue 

The proposal has no financial implications on revenues 

3. 

BUDGET CHARACTERISTICS 

Type of expenditure 

New 

EFTA 
contribution 

Contributions 
from applicant 
countries 

Heading in 
financial 
perspective 

Non-
compulsory 

Differen-
tiated 

4. 

LEGAL BASIS  

NO 

NO 

NO 

No 4 

Article 308 of the Treaty 

EN 

14 

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5. 

DESCRIPTION AND GROUNDS 

5.1. 

Need for Community intervention 10 

5.1.1.  Objectives pursued 

The proposed assistance consists of a Community grant of up to EUR 50 million to 
Kosovo  (to  be  financed  from  the  General  Budget)  with  a  view  to  alleviating  the 
financial  situation  in  Kosovo,  supporting  the  development  of  a  sound  economic 
framework, facilitating the continuation and strengthening of essential administrative 
functions and addressing public investment needs.  

This assistance is complementary to the resources provided to Kosovo by the World 
Bank  (in  the  form  of  IDA  grants)  and  by  bilateral  donors  in  support  of  the 
authorities’ economic stabilisation and structural reform programme. 

5.1.2.  Measures taken in connection with ex ante evaluation  

An ex ante evaluation was carried out by Commission services in February 2006 (by 
Unit D1 of the Economic and Financial Affairs Directorate-General).  

5.1.3.  Measures taken following ex post evaluation 

No  ex-post  evaluation  of  past  Community  macro-financial  assistance  provided  to 
Kosovo has been carried out yet.  

5.2. 

Action envisaged and budget intervention arrangements 

This assistance will take the form of a straight grant which would be released in two 
or, if appropriate, three instalments. The first instalment is to be released on the basis 
of a Memorandum of Understanding to be agreed between the authorities of Kosovo 
and the Community. The subsequent instalment(s) shall be released on the basis of a 
satisfactory completion of the economic policy conditions and not before one quarter 
after  the  release  of  the  previous  instalment.  Given  the  nature  of  this  assistance  and 
the priority on fiscal consolidation, special emphasis of the conditionality is expected 
in area of  public finance, and would  be defined in close consultation with the IMF 
and the World Bank.  

Performance  indicators  of  a  macro-economic  nature  will  be  specified  in  the 
Memorandum of Understanding, to be agreed with the authorities of Kosovo. They 
will  follow  the  policy  lines  anchored  in  the  Letter  of  Intent  and  Memorandum  of 
Economic  and  Financial  Policies  signed  in  November  2005  and  any  subsequent 
understandings reached with the IMF. 

Accordingly,  before  the  disbursement  of  each  instalment  of  this  assistance,  the 
Commission  services,  in  co-operation  with  the  authorities  of  Kosovo  and  the  IMF 
staff,  shall  verify  that  the  performance  criteria  have  been  respected  or  new 
understandings have been reached. 

10 

For further information, see separate explanatory note. 

EN 

15 

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In addition, the Commission shall agree with the authorities of Kosovo a number of 
specific policy conditions which have to be met before the second and possible third 
further  grant  instalments  are  released  by  the  Commission.  These  policy  measures 
shall  be  consistent  with  agreements  or  understandings  reached  by  Kosovo  with  the 
IMF.  Subject  to  agreement  with  the  authorities  of  Kosovo,  it  is  envisaged  at  this 
stage  that  these  measures  would  have  a  particular  focus  on  public  finance 
management reform and administration. 

5.3.  Methods of implementation 

This assistance will be implemented in the form of centralised direct management by 
the Commission using regular staff. 

6. 

FINANCIAL IMPACT 

6.1. 

Total financial impact on Part B - (over the entire programming period) 

The  payments  of  the  assistance  from  budget  line  01  03  02  02  will  be  subject  to 
compliance  by  Kosovo  with  the  conditions  attached  to  the  assistance  as  described 
under 5.2.  

6.1.1.  Financial intervention 

Commitments (in € million to three decimal places) 

Breakdown 

2006 

Grant instalments to Kosovo 

50.000 

2007 

- 

2008 

TOTAL 

Total 

50.000 

50.000 

The  €50  million  grant  agreement  will  be  signed  after  a  reinforcement  in  commitment 
appropriations  and  the  corresponding  budget  commitment.  Should  a  grant  agreement  be 
required before such reinforcement has taken place, the assistance will be provided through a 
first grant agreement stemming from the 2006 available budget commitment. A second grant 
agreement will be signed for the remaining amount following either a 2006 reinforcement or 
through the 2007 budget appropriations once approved. 

6.1.2.  Technical  and  administrative  assistance,  support  expenditure  and  IT  expenditure 

(commitment appropriations) 

2006 

2007 

2008 

Total 

1) 
administrative assistance 

Technical 

and 

Technical 

a) 
offices 

assistance 

EN 

16 

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b)  Other 
administrative assistance: 

technical 

and 

- intra muros: 

- extra muros: 

of  which  for  construction 
and 
of 
maintenance 
computerised  management 
systems 

Subtotal 1 

2) Support expenditure 

a) 
Studies 
Assessments) 

(Operational 

0.030 

0.030 

0.060 

b) Meetings of experts 

c) Information and 
publications 

Subtotal 2 

TOTAL  0.030 

0.030 

0.060 

6.2. 

Calculation  of  costs  by  measure  envisaged  in  Part  B  (over  the  entire 
programming period)11 

Commitments (in € million to three decimal places) 

Type  
of outputs 
(projects, files ) 

Number of 
outputs 

Average unit 
cost 

(total for years 
1…n)  

Total cost 

(total for years 
1…n)  

1 

2 

3 

4=(2X3) 

Breakdown  

Action 1 

- Measure 1 

- Measure 2  

Action 2 

- Measure 1- 

- Measure 2 

- Measure 3 

etc. 

TOTAL COST 

11 

For further information, see separate explanatory note. 

EN 

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7. 

IMPACT ON STAFF AND ADMINISTRATIVE EXPENDITURE  

7.1. 

Impact on human resources 

The  tasks  related  to  the  management  of  the  assistance  will  be  carried  out  through 
staff redeployment, where necessary, and will not involve an increase in the number 
of Commission staff.  

Types of post 

Staff to be assigned to management of the 
action using existing and/or additional 
resources 

Number of 
permanent posts 

Number of 
temporary posts 

Total 

Description of tasks deriving from the 
action 

Officials 
temporary staff 

or 

1/3 

A 

B 

C 

Other human resources 

Total 

7.2. 

1/3 

Overall financial impact of human resources 

1/3 

1/3 

prepare 

memoranda 

E.g. 
of 
understanding  and  grant  agreements, 
liaise with the authorities and the IFIs, 
liaise  with  external  experts  for  the 
conduct 
operational 
review  missions 
prepare 
reports,  prepare 
Commission  staff 
Commission  procedures  related  to  the 
management of the assistance 

assessments, 
and 

Type of human resources 

Amount (€) 

Method of calculation *  

Officials 

Temporary staff 

Other human resources 

30,500 

1/3 x average annual expenditure for an 
A*5 – A*12 grade official 

(specify budget line) 

Total  30,500 

The amounts are total expenditure for twelve months. 

7.3. 

Other administrative expenditure deriving from the action 

Budget line 

(number and heading) 

Amount € 

Method of calculation 

EN 

18 

   EN 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10,000 

Two missions per year for two persons 

Overall allocation (Title A7) 

A0701 – Missions 

A07030 – Meetings 
A07031 – Compulsory committees 1 
A07032 – Non-compulsory committees 1 

A07040 – Conferences 

A0705 – Studies and consultations 

Other expenditure (specify) - An ex-post evaluation - 

125,000 

Estimated 
expenditure 
total 
€250,000 for the service contract 

of 

Information systems (A-5001/A-4300) 

Other expenditure - Part A (specify) 

Total  135,000 

The amounts are total expenditure for twelve months. 

1 Specify the type of committee and the group to which it belongs. 

I. 

II. 

Annual total (7.2 + 7.3) 

Duration of action 

III. 

Total cost of action (I x II) 

€ 165,500 

2 years 

€ 331,000 

8. 

FOLLOW-UP AND EVALUATION 

8.1. 

Follow-up arrangements 

This  assistance  is  of  macro-economic  nature  and  its  design  is  consistent  with  the 
Medium Term Expenditure Framework prepared by UNMIK. 

The monitoring of the action by the Commission services will take place on the basis 
of progress in the implementation of the MTEF and specific reform measures to be 
agreed  with  the  authorities  of  Kosovo  in  a  Memorandum  of  Understanding.  The 
authorities, notably the Ministry of Economy and Finance, will be required to report 
on a set of indicators to the Commission services on a regular basis.  

The  Commission  services  will  continue  to  monitor  public  finance  management, 
following  the  operational  assessment  of  the  financial  circuits  and  administrative 
procedures being carried out in Kosovo in preparation of this operation. The office of 
the  European  Commission  in  Pristina  will  also  provide  regular  reporting  on  issues 
that are relevant for the monitoring of the assistance. The Commission services will 
remain  in  close  contact  with  the  IMF  and  the  World  Bank  to  benefit  from  their 
expertise and activities in Kosovo.  

8.2. 

Arrangements and schedule for the planned evaluation 

An  annual  report  to  the  European  Parliament  and  to  the  Council  is  foreseen  in  the 
proposed Council decision, comprising an assessment of the implementation of this 

EN 

19 

   EN 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
assistance  operation.  Furthermore,  an  independent  ex-post  evaluation  of  the 
assistance  is  planned  to  be  carried  out  by  the  Commission  or  its  duly  authorised 
representatives one to two years after the expiry of the implementation period. 

9. 

ANTI-FRAUD MEASURES 

Commission  services  have  put  in  place  an  on-going  programme  of  Operational 
Assessments  of  the  financial  circuits  and  administrative  procedures  in  all  third 
countries benefiting from the Community macro-financial assistance in order to fulfil 
requirements  of  the  Financial  Regulation  applicable  to  the  General  Budget  of  the 
European Communities. All available conclusions of relevant reports of the IMF or 
the World Bank will also be taken into consideration.  

In  Kosovo,  the  Commission  services,  with  the  support  of  duly  mandated  external 
experts,  will  carry  out  in  the  first  half  of  2006  an  operational  assessment  of  the 
financial  circuits  and  administrative  procedures  of  the  beneficiary  authority.  This 
review will cover areas such as management structure and organisation, management 
and control of funds, security of IT systems, internal and external audit capacity.  

The  proposed  legal  basis  for  macro-financial  assistance  to  Kosovo  includes  a 
provision on fraud prevention measures. These measures will be elaborated further in 
a  Memorandum  of  Understanding  and  a  grant  agreement.  It  is  envisaged  that  a 
number of specific policy conditions will be attached to the assistance, mainly in the 
area  of  public  finance  management,  with  a  view  to  strengthening  efficiency, 
transparency and accountability. 

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

EN 

20 

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