Report from the Commission to the Council and the European Parliament on the implementation of macro-financial assistance to third countries in 2005 {SEC(2006)938}
Date: 2006-07-14
Institutions: European Commission
Subjects: EU aid, Western Balkans, development aid, financial aid, financial cooperation, report, third country

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 14.7.2006 
COM(2006) 391 final 

REPORT FROM THE COMMISSION TO THE COUNCIL AND 
THE EUROPEAN PARLIAMENT 

on the implementation of macro-financial assistance to third countries in 2005 

{SEC(2006)938} 

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1. 

INTRODUCTION 

The  report  on  implementation  of  EC  macro-financial  assistance  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  review  (working  document  of  the 
Commission services SEC(2006)938) providing economic and financial information 
regarding  the  beneficiary  countries  is  released  in  parallel.  As  for  the  present 
Communication it provides a general overview of the EC macro-financial assistance 
to  third  countries  with  historical  background,  a  summary  of  the  operations  in  2005 
and a synthesis of the economic situation of the beneficiary countries. 

Special attention is paid in part 3 to a summary of 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.  More  details,  at  country  level,  are  available  in  the  accompanying  working 
document of the services. 

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  2005,  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  prior  to  the 
disbursement of the assistance. The conclusions of these assessments concern mainly 
budget process, treasury organisation and control of public expenses (further details 
are provided in the working document). They entail recommendations that are being 
duly  taken  into  account  in  the  elaboration  of  the  policy  conditions  attached  to  the 
implementation of this assistance.  

The  ex-post  evaluation  carried  out  in  order  to  measure  the  impact  of  MFA  in 
Armenia has been completed in 2005. In addition, two new ex-post evaluations are 
being  conducted  with  the  assistance  of  a  specialised  firm  in  Romania  and  fYRoM. 
Their final reports should be made available at the end of 2006. 

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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 (IFI’s) 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.  

2.2.  Macro-Financial Assistance in 2005 

During the period 2000-2005, the Balkans countries (Former Yugoslav Republic of 
Macedonia,  Kosovo,  Bosnia  y  Herzegovina,  Serbia  and  Montenegro  and  Albania) 
have  benefited  from  twelve  assistances  decisions  of  the  Council.  This  makes  the 
Balkans  countries  the  main  beneficiaries  of  MFA  with  a  total  of  assistance 
amounting to a maximum of EUR 733 million. 

2.2.1.  New decisions 

No new decision has been adopted by the Council in 2005. 

It  has  however  to  be  noted  that  Commission  adopted  on  14 November 2005  a 
proposal to provide macro-financial assistance to Georgia of up to EUR 33.5 million 
(grant only). This proposal has been adopted by the Council in January 2006. 

2.2.2.  Disbursements 

Disbursements  of  Macro-financial 
total  of 
EUR 66.5 million  of  which  EUR 51.5  million  in  the  form  of  grants;  EUR 3 million 
for  Albania,  EUR 1.5 million  for  Armenia,  EUR 15 million  for  Bosnia  y 
Herzegovina,  EUR 25 million  for  Serbia  and  Montenegro,  EUR 7 million  for 
Tajikistan. 

assistance 

amounted 

to 

a 

Assistance disbursed in the form of loans, amounted to EUR 15 million to Serbia and 
Montenegro. 

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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 
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 2000-2005 Council Decisions. 

A specificity of the decisions of the 2000-2005 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 
previous  years,  MFA  is  aimed  not  only  at  promoting  macroeconomic  stabilisation 
but  also  at  supporting  the  recipient  governments'  programmes  of  structural  reform. 
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  2005  (totalling  around  EUR 6.1 billion) -  and 
Graph 2a - for actual amounts disbursed (totalling over EUR 5.1 billion) - show the 
important concentration of the assistance in the Central and East European Countries 
(around  54 %  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  2000-2005)  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 

Economic  growth  was  sustained  in  2005  in  the  Western  Balkans  with  an  average 
5.2 % GDP growth, except in Kosovo where growth was according to IMF estimates 
negative  (-1.5 %  of  GDP).  Inflation  was  moderate,  except  in  Serbia  where  price 
tensions resumed. Fiscal consolidation progressed with General Government deficits 
reduced  by  1 %  of  GDP  and  on  average  brought  close  to  balance,  but  however 
remained  in  Albania  and  Kosovo  in  the  range  of  3.5 %  to  4 %  of  GDP.  As  in 
previous  years,  external  imbalances  were  still  a  challenge  to  macroeconomic 
stability.  For  the  region  as  a  whole,  the  trade  deficit  was  high  at  around  27 %  of 
GDP. The average current account deficit is estimated to have come down to around 
12 %  of  GDP  in  2005  (from  12.5 %  in  2004).  The  size  of  this  deficit  is  particular 
element  of  vulnerability  in  Bosnia  and  Herzegovina,  where  it  is  estimated  around 
20 %  of  GDP.  Wage  levels  in  Western  Balkan  countries  remained  a  concern  to 
competitiveness,  particularly  in  fully  euroised  economies  such  as  Montenegro  and 
Kosovo, and call for a flexible interplay of market adjustment mechanisms.  

The process of privatisation, which is at a different stage of progress in the countries, 
has overall progressed at an uneven pace in the Western Balkans. While a number of 
large  sales  took  place,  it  has  encountered  significant  delays  in  some  countries, 
notably Albania and Serbia. Enterprise restructuring, notably as regards loss making 
public-owned  enterprises,  was  as  in  the  previous  years  again  delayed  by  protracted 
decisions  and  poor  management.  Enforcement  of  property  rights  and  contracts 
continued  to  encounter  considerable  difficulties  throughout  the  region  owing  to 
weaknesses  in  the  judiciary.  The  latter  continued  to  have  wide  ranging  economic 
consequences and to hinder business decisions, notably investment, and market exit. 
The large informal sector remained a source of uneven competition and tax evasion.  

However,  the  conditionality  linked  to  ongoing  MFA  operations  was  fully  met  and 
allowed  for  disbursements  in  Albania,  Bosnia  and  Herzegovina  and  Serbia  and 
Montenegro.  In  these  countries,  progress  in  reforms  took  place  in  the  public 
administration, notably in the field of financial control and audit. More generally, a 
strengthening  of  tax  collection  has  been  observed  through  measures  such  as  the 
introduction  of  a  VAT  system  as  well  as  an  anti  corruption  strategy  and  the  fight 
against tax-evasion. Finally, the banking sector has been subject to structural reforms 
through a wide privatisation process while the presence of foreign banks has become 
preponderant. 

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3.2. 

New Independent States  

Economic growth in most of the New Independent States (NIS) remained very strong 
in 2005, making the area the second fastest growing region in the world, behind East 
Asia. The aggregate output increase in the NIS was close to 7 %. The most common 
factors  behind  growth  are  high  commodity  prices  and  domestic  demand  fuelled  by 
private transfers, in particular workers’ remittances.  

Growth  in  Russia,  by  far  the  region’s  largest  economy,  remained  strong,  albeit 
showing  signs of  deceleration. In  2005 real GDP increased by 6.4 %, after 7.2 % a 
year before. The somewhat weakening growth performance despite continuing high 
prices  of  Russia’s  main  export  resources (Russia is the world’s second oil exporter 
and the world's first gas exporter) is explained by more rapid increase in production 
costs  than  in  productivity  and  by  low  investment  and  capacity  constraints. 
Nevertheless, during the second half of 2005, the slowdown in investment (domestic 
and foreign) was reverted. In Ukraine, a negative terms of trade shock (import prices 
of energy increasing while world market prices on metal exports tumbled), combined 
with sluggish investment under an uncertain government policy environment led to a 
hard landing, after an exceptional 2004 performance. In 2005, real GDP growth rate 
was just 2.4 %, down from 12.1 % in 2004.  

Among the other countries of the region, the most impressive growth performance in 
2005  was  registered  by  the  resource-rich  Azerbaijan,  where,  following  the 
development of the oil production (largely due to foreign investments) and the start 
of  the  operation  of  the  new  pipeline  to  the  Turkish  Mediterranean  port  of  Ceyhan, 
GDP  increased  by  more  than  26 %.  Impressive  growth  was  also  registered  in 
Armenia  (+13.9 %  in  2005)  where  the  economic  expansion  is  driven  mainly  by 
domestic demand, buoyed by foreign investments, remittances and private transfers. 
Growth performance in nearly all the other countries of the region exceeded that of 
Russia:  at  least  9 %  in  Kazakhstan,  Belarus  and  Georgia;  Moldova,  Tajikistan  and 
probably  Turkmenistan  (where  the  official  statistics  indicating  a  20 %  growth  are 
widely believed to be grossly inflated).  

Fiscal  policies  remained  tight  in  the  majority  of  the  countries  of  the  region  and 
inflation  pressures  were  generally  kept  under  control.  Several  countries  registered 
substantial fiscal surpluses on the back of strong tax revenue from exports of energy 
or  imports  of  consumer  goods.  Current  account  developments  have  been  mixed. 
Resource-rich  countries  have  generally  registered  strong  growth  in  trade  surpluses, 
compensated sometimes by increasing deficits of the incomes and services accounts. 
At  the  same  time,  energy-importing  countries  have  seen  their  trade  deficits  widen; 
yet this has not translated into the worsening of the current accounts since growth in 
trade  deficits  was  generally  compensated  by  increases  in  either  private  or  public 
transfers  or,  more  often,  remittances.  The  only  exception  is  Ukraine  whose  current 
account surplus was cut from a record 10.5 % of GDP in 2004 to about 5 % in 2005. 
External  debt  ratios  were  reduced  in  most  of  the  NIS  reflecting  growth  of  nominal 
GDP.  Also,  one  country  (the  Kyrgyz  Republic)  was  granted  debt  reduction  by  the 
Paris Club of official creditors. Several NIS are still critically dependent on external 
financing by multilateral or bilateral donors to approach financial sustainability. 

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Progress in transition has been uneven across the region and the implementation of 
second-phase  institutional  reforms  supporting markets  and  private  enterprise  is  still 
at its early stages in several NIS. Among the beneficiaries of the Community macro-
financial  assistance,  Moldova  was  probably 
in 
implementing structural reforms in the context of a comprehensive economic growth 
and poverty reduction strategy. Although much remains to be done to catch up with 
the most advanced countries of the region, this was a welcome change after several 
years of widespread state interference and poor governance. In Ukraine, the genuine 
reform commitment of the new political authorities who came to power in early 2005 
could  not  be  fully  translated  into  action  owing  to  political  uncertainties.  Armenia, 
Georgia  and  Tajikistan  continued  the  implementation  of  adjustment  and  reform 
Institutions.
programmes 

to  progress  most 

International 

supported 

Financial 

the  one 

the 

by 

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TECHNICAL ANNEX

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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

2005

Totals

By region

Central European Candidate Countries

870

1.220

Western Balkans

NIS

Mediterranean

588

410

70

255

35

130

200

255

15

Total amounts disbursed decided

870

1.808

480

0

620

255

15

Out of which, straight grants

28

70

35

250

40

265

555

95

150

150

300

160

460

70

55

125

180

90

Kosovo (35)
Montenegro 
(20)

Bosnia (40) Tajikistan (35)

70

25

3.305

1.038

958

788

70

45

25

16

0

6.089

747

393

393

168

190

18(a)

208

130

Serbia & 
Montenegro 
(35)

fyRoM (18) Bosnia (40)
Serbia &
Montenegro 
(120)

Serbia & 
Montenegro 
(45)

Albania(16)

Interest 
subsidies 
to Israel

Albania

Albania

Armenia and 
Georgia (95)

fyRoM (30) Moldova (15) Kosovo (30) Moldova (15)

(b)

       (a) net amount taking into account (b) and , for Ukraine, new loan of EUR 110 million together with simultaneous cancellation of 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

1808

870

620

480

555

0

255

15

460

393

150

180

208

70

25

0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Graph 1b. MFA 1990-2005 authorisations 
Distribution by region

Mediterranean
13%

NIS
16%

Western Balkans
17%

Central European 
Candidate Countries
54%

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Graph 1c. MFA 2000-2005, authorisations 
Distribution by region

NIS
16%

Western Balkans
84%

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1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Totals

Disbursements, millions euro

By region

Central European Candidate Countries

350

695

Western Balkans

NIS

Mediterranean

705

35

438

270

35

70

25

150

80

15

135

100

40

20

115

70

25

100

Total amounts disbursed

350

695

1.178

305

245

330

175

195

Out of which, straight grants

63

35

15

20

250

15

156

421

18

40

25

71

136

28

160

105

265

85

312

80

392

105

Bosnia (15)

fyRoM (10)

Armenia (4)

Bosnia (10)

Armenia (11)

Armenia (8)

fYRoM (20)

Kosovo (15)

Kosovo (15)

Israel (28)

Albania (35)

Albania

Albania

Albania

Georgia (9)

Kosovo (35)

Serbia &
Montenegro (ex
FRY)(35)

Serbia &
Montenegro
(115)

130

11

141

141

50

146

7

203

85

20

12

32

22

 -

58

8,5

2.780

941

720,5

688

66,5

5129,5

51,5

668,5

Serbia
Montenegro
(25)

Bosnia (25)

Serbia &
Montenegro
(35)

Serbia &
Montenegro
(10)

Georgia (10)

fyRoM (18)

Bosnia (15)

Bosnia (15) Montenegro (20)

Georgia (6)

Tajikistan (14)

Tajikistan (7)

Armenia (5,5)

Georgia (6,5)

Albania (3)

Armenia (1,5)

Tajikistan (7)

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

1178

695

350

305

245

330

421

175

195

136

392

265

203

141

32

66,5

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Graph 2b. MFA 1990-2005, disbursements, 
Distribution by region

Mediterranean
14%

NIS
14%

Western Balkans
18%

Central European 
Candidate Countries
54%

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Graph 2c. MFA 2000-2005, distursements, 
Distribution by region

NIS
11%

Central European 
Candidate Countries
19%

Western Balkans
70%

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