Report from the Commission to the Council and the European Parliament - Report from the Commission to the Council and the European Parliament on the implementation of macro-financial assistance to third countries in 2006 {SEC(2007) 1083}
Date: 2007-09-03
Institutions: European Commission
Subjects: EU aid, economic reform, financial aid, financial cooperation, financial management, report, third country

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 3.9.2007 
COM(2007) 493 final 

REPORT FROM THE COMMISSION TO THE COUNCIL AND 
THE EUROPEAN PARLIAMENT 

Report from the Commission to the Council and the European Parliament 
on the implementation of macro-financial assistance to third countries in 2006 

{SEC(2007) 1083} 

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TABLE OF CONTENTS 

Report from the Commission to the Council and the European Parliament on the 
implementation of macro-financial assistance to third countries in 2006.................................. 1 

1. 

2. 

2.1. 

2.2. 

Introduction .................................................................................................................. 3 

OVERVIEW ................................................................................................................ 3 

Background .................................................................................................................. 3 

Macro-Financial Assistance in 2006............................................................................ 4 

2.2.1.  New decisions .............................................................................................................. 4 

2.2.2.  Disbursements .............................................................................................................. 4 

2.3. 

Synthesis of the most recent operations in the beneficiary countries .......................... 5 

2.3.1.  Western Balkans........................................................................................................... 5 

2.3.2.  New Independent States............................................................................................... 5 

3. 

3.1. 

3.2. 

Geographical distribution and evaluations of macro-financial assistance ................... 7 

Geographical distribution............................................................................................. 7 

Evaluations................................................................................................................... 7 

3.2.1.  Armenia........................................................................................................................ 7 

3.2.2.  Romania ....................................................................................................................... 7 

3.2.3.  The former Yugoslav Republic of Macedonia............................................................. 8 

3.3. 

Improving financial management in beneficiary countries: the operational 
assessments .................................................................................................................. 8

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1. 

INTRODUCTION 

This report provides a general overview of the EC macro-financial assistance to third 
countries  including  historical  background,  a  summary  of  the  operations  in  2006, 
information regarding the most recent operations in the Western Balkans and in the 
New Independent States and statistical tables of the different operations carried out 
since 1990. 

The last recent trends of EC macro-financial operations together with the results of 
the  three  ex-post  evaluations  that  have  been  carried  out,  respectively  in  2005  and 
2006, are included in this report. The objective of these evaluations is to assess the 
impact  on  the  relevant  aspects  of  the  economic  stabilisation  process  and  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. In addition, 
two new ex-post evaluations are being conducted. The final reports should be made 
available at the end of 2007. 

Moreover,  as  regards  the  recommendation  of  the  Court  of  Auditors  in  their  special 
report  of  March  2002  on  improvement  of  financial  management  in  the  beneficiary 
countries, the Commission has carried out since 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 are being duly taken into account in the elaboration of the policy 
conditions attached to the implementation of this assistance. 

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(2007…)  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. MFA incorporates 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 2006 

During  the  period  2000-2006,  seventeen  decisions  have  been  approved  for  a  total 
amount of EUR 960 million. The Balkans countries (The former Yugoslav Republic 
of  Macedonia,  Bosnia  and  Herzegovina,  Serbia  and  Montenegro  including  Kosovo 
and Albania) have benefited from thirteen assistance 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 783 million out of 960 million. 

2.2.1.  New decisions 

Two decisions have been adopted by the Council in 2006. 

On  24th  January,  the  Council  decided  (2006/40/EC)  to  provide  macro-financial 
assistance to Georgia of up to EUR 33.5 million in the form of grants. 

On 30th November, the Council decided (2006/880/EC) to provide macro-financial 
assistance to Kosovo1 of up to EUR 50 million in the form of grants. 

Moreover, the Commission adopted on 9 October 2006 a proposal to provide macro-
financial assistance to Moldova of up to EUR 45 million (grant only) and presented it 
to  the  Council.  This  proposal  was  adopted  by  the  Council  on  16  April  2007 
(2007/259/EC). 

2.2.2.  Disbursements 

Disbursements of Macro-financial assistance amounted to a total of EUR 61 million 
in 2006 of which EUR 42 million in the form of grants: EUR 13 million for Albania, 
EUR 7 million for Tajikistan, EUR 22 million for Georgia (two tranches of EUR 11 
million). 

Assistance disbursed in the form of loans amounted to EUR 10 million to Bosnia and 
Herzegovina and EUR 9 million to Albania. 

1 

As defined in UNSCR 1244/99. 

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2.3. 

Synthesis of the most recent operations in the beneficiary countries 

2.3.1.  Western Balkans 

A EUR 60 million MFA operation in favour of Bosnia and Herzegovina approved 
by the Council on 5 November 2002 (and amended by the Council on 7 December 
2004)  came  to  an  end  in  February  2006,  with  the  disbursement  of  the  EUR  10 
million  loan  component  of  the  last  tranche.  The  grant  component  had  already  been 
released in 2005 upon satisfactory fulfilment of conditionality requirements. 

The  assistance  to  Serbia  and  Montenegro  of  up  to  EUR  200  million  (EUR  120 
million grant and EUR 80 million loan), which the Council of Minister had approved 
on 5 November 2002 and 25 November 2003, expired on 30 June 2006. Out of this 
assistance, EUR 155 million (EUR 100 million grant and EUR 55 million loan) had 
been disbursed in four tranches prior to 2006. The loan element of the fourth tranche 
of  EUR  15  million  could  not  be  paid  in  the  first  half  of  2006  as  intended,  as  the 
authorities  did  not  complete  before  the  expiry  date  on  30  June  2006  the  legal 
conditions required for the loan disbursement. In July, after Montenegro became an 
independent country, the authorities of Montenegro and of Serbia were also formally 
notified by the Commission of its decision not to disburse the fifth and final tranche 
of  this  assistance  for  an  amount  of  EUR  30  million  (EUR  20  million  in  grant  and 
EUR  10  million  in  loan)  due  to  the  strong  improvements  of  the  external  financing 
situation in Serbia and Montenegro in 2006. Hence, EUR 45 million were cancelled. 

The EUR 25 million MFA operation in favour of Albania launched in 2004 has also 
been concluded in 2006. The EUR 3 million grant component of the first tranche was 
paid in November 2005, and the EUR 9 million loan component of the first tranche 
was disbursed on 23 March 2006. The second and final EUR 13 million grant tranche 
of the assistance was disbursed on 31 July 2006, following a favourable assessment 
by  the  Commission  of  Albania's  progress  in  reforming  key  areas  such  as  public 
finance  management,  public  administration,  financial  sector,  business  environment 
and private sector development.  

In  May  2006,  the  Commission  submitted  to  the  Council  a  proposal  of  exceptional 
financial  assistance  of  up  to  EUR  50  million  in  the  form  of  grants,  to  support 
Kosovo's expected budget financing needs. The Council adopted the decision on 30 
November. This assistance is conceived as bridge support pending a comprehensive 
assessment  of  needs  upon  status  settlement  of  Kosovo.  Commission  staff  went  on 
mission  to  Pristina  at  the  end  of  the  year  to  review  financing  needs  with  the 
authorities  of  Kosovo  and  examine  possible  conditions  to  be  attached  to  this 
assistance.  

2.3.2.  New Independent States  

Macro-financial assistance multi-annual programmes were decided in 1997 and 2000 
in favour of Armenia, Georgia and Tajikistan. The last disbursement to Tajikistan (a 
grant  of  EUR  7  million)  was  made  in  October  2006.  The  last  disbursements  to 
Georgia  and  Armenia  had  been  made  in  2004  and  2005.  This  multi-annual 
programme is now completed. 

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The Council adopted, in January 2006, a new macro-financial assistance programme 
in  favour  of  Georgia  for  an  amount  of  EUR  33.5  million  in  grants.  This  new 
programme is linked to early repayment by Georgia of the country's debt to the EU. 

The payments of the first and second tranche (EUR 11.5 million each) were made in 
August and December 2006.  

The  Council  had  decided  in  2002  to  grant  macro-financial  assistance  to  Ukraine 
(EUR 110 million in loans). In the absence of working financing arrangement with 
the  IMF,  the  implementation  of  the  programme  has  never  started.  As  there  is  no 
expiration  date  in  the  corresponding  Council  Decision,  this  programme  can  (in 
principle) be reactivated in the future. 

The  Commission  submitted  to  the  Council,  in  October  2006,  a  proposal  for  a  new 
MFA programme for Moldova in the context of a new PRGF2 arrangement with the 
IMF. The final Decision  was adopted by the Council  on 16  April 2007. Under this 
programme,  the  Commission  should  disburse  in  2007-2008  a  total  amount  of  EUR 
45 million in grants. This programme will help Moldova implementing its economic 
programme and contribute to cover the country’s external financing needs linked to 
external  shocks  faced  by  Moldova’s  economy  (primarily,  the  increase  of  prices  for 
natural gas imported from Russia and restrictions on Moldova’s exports of wine and 
several  agricultural  products).  The  Community  macro-financial  assistance  will 
complement  new  financing  from  the  IFIs  and  bilateral  donors  and  budget  support 
provided by the EU under the Food Security Programme and by the new European 
Neighbourhood and Partnership Instrument (ENPI).  

2 

Poverty Reduction and Growth Facility. 

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3. 

GEOGRAPHICAL  DISTRIBUTION  AND  EVALUATIONS  OF  MACRO-FINANCIAL 
ASSISTANCE 

3.1. 

Geographical distribution 

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.  The  highest  volumes  of  MFA 
operations were decided and disbursed in the years immediately after the changes in 
the countries of the Central and Eastern Europe. 

Over  the  years,  the  number  of  countries  to  which  the  Community  extended  such 
support  expanded,  as  a  growing  number  of  countries  neighbouring  the  EU  faced 
balance  of  payments  difficulties  and  committed  themselves  to  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.  Hence,  since  2000,  MFA  has  been  exclusively  provided  to  the 
Western Balkans (83% of the decisions from 2000 to 2006) and to the NIS countries.  

3.2. 

Evaluations 

According to the financial regulation the Commission has implemented an evaluation 
programme in order to assess the impact of MFA in each of the beneficiary countries. 
The analyses are carried out by external consultants selected by open call for tenders. 
At  the  end  of  2006  three  ex-post  evaluation  have  been  completed  in  Armenia, 
Romania  and  former  Yugoslav  Republic  of  Macedonia  by  two  different  firms.  The 
main observations are the following: 

3.2.1.  Armenia 

The  evaluation  concluded  that  the  assistance  contributed  to  the  short-term 
macroeconomic  stabilisation, 
the  external  financial  situation  and 
contributed to the alleviation of social hardship in the short-term. On the other hand, 
MFA was not totally effective for supporting economic and institutional reforms in 
the short and medium term. As a consequence, the impact of MFA on the financial 
situation of Armenia appears limited. 

improved 

3.2.2.  Romania 

The MFA operation contributed directly to improve the financial sustainability of the 
country  in  the  medium  and  long  term  prospect  and  supported  policies  in  order  to 
introduce  market  economy  principles.  Romania  benefited  of  several  assistance 
programmes in the context of pre-accession policies, hence it is difficult to determine 
exactly the impact of MFA operations in isolation from the rest of the programmes. 

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3.2.3.  The former Yugoslav Republic of Macedonia 

MFA operations had a positive effect on the balance of payments of the country and 
contributed  to  relax  budgetary  constraints.  They  also  led  to  a  slightly  higher 
term  external 
economic  growth.  The 
sustainability is positive, however, the analysis indicated that the size of this impact 
is limited. 

impact  of  MFA  on  medium-to-long 

In each case the decision of the Commission to release the funds instilled confidence 
in the economy of these countries and thus contributed to the improvement of their 
business environment. 

3.3. 

Improving  financial  management  in  beneficiary  countries:  the  operational 
assessments 

Since  2004  a  total  of  7  operational  assessments  were  carried  out  in  the  countries 
benefiting  from  macro-financial  assistance  (Albania,  Armenia,  Tajikistan,  Serbia-
Montenegro,  Bosnia–Herzegovina,  Georgia  and  Kosovo).  The  work  programme  of 
each  operational  assessment  was  elaborated  in  accordance  with  the  SIGMA3 
methodology,  in  co-operation  with  the  consulting  firm  Deloitte.  The  investigations 
focus on the one hand on the independence of the Central Banks and the functioning 
of their accounting departments. On the other hand, they examine the Ministries of 
Finance (on the budget process, the treasury departments, the internal audit, human 
resources  and  IT  departments).  The  functioning  of  the  external  audit  institutions  is 
also systematically reviewed in order to assess their control methodology. 

The most frequent recommendations regard the Ministry of Finance and the necessity 
to  implement  single  treasury  accounts,  appropriate  accounting  systems  and  written 
procedures. The capacity of the internal control, in each case, had to be strengthened 
and  special  training  sessions  were  recommended.  In  some  cases,  macro-economic 
forecast departments appear insufficient to fulfil their role. The independence of the 
external audit institutions was not considered as sufficient. 

In  most  cases,  the  assessments  concluded  that  "The  framework  for  sound  financial 
management  is  effective".  The  most  serious  weaknesses  detected  during  these 
missions  have  been  addressed  in  the  MoU,  with  short  deadlines  to  correct  the 
situation. In the case of Bosnia and Herzegovina where the MoU was already signed, 
prior  actions  were  defined  to  be  taken  before  further  disbursements  such  as  the 
strengthening of the internal control department within the Ministry of Finance and 
the  adoption  of  instructions  containing  minimal  requirements  regarding  the 
segregation  of  duties  as  regards  accounting,  authorizing  and  payment  functions. 
Follow-up missions have been undertaken (Albania, Armenia, Tajikistan, Georgia) in 
order  to  assess  the  improvements  implemented  in  the  national  administrations 
following the initial recommendations.  

Three  years  after  the  beginning  of  these  operational  assessments  and  despite  some 
delays  in  the  implementation  of  the  requested  modifications,  the  Commission  has 
noticed real improvements in the public finance management of all these countries, 

3 

Support for Improvement in Governance and Management in Central and Eastern Europe Countries. 

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such  as  the  implementation  of  single  treasury  accounts  or  the  adoption  of  written 
procedures within the different Ministries of Finance. 

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Table 1. Macro-financial assistance, 1990-2006
Maximum amounts authorised, millions euro

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Totals

By region
Central European Candidate Countries
Western Balkans
NIS
Mediterranean

870

1.220

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

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)

Bosnia (40) 
fYRoM (30)

70

70

25

25

45
Serbia and 
Montenegro 
(45) 

16
    Albania 
(16)

50
33,5

3.305
1.088
991,5
788

0

83,5

6.172,5

830,5

83,5
Kosovo (50) 
Georgia 
(33,5)

(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

620

480

555

255

0

15

460

393

150

180

208

70 25

0

83,5

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Graph 1b. MFA 1990-2006, authorisations 
Distribution by region

Mediterranean
12%

NIS
16%

Western 
Balkans
18%

Central 
European 
Candidate 
Countries
54%

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Graph 1c. MFA 2000-2006, authorisations 
Distribution by region

NIS
18%

 Western
Balkans
82%

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Table 2: Macro-financial assistance, 1990-2006 

Disbursements, millions euro 

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Totals

By region
Central European Candidate Countries
Western Balkans
NIS
Mediterranean

350

695

705
35

438

Total amounts disbursed

350

695

1.178

out of which, straight grants

63

270
35

305

35

70

25
150

245

80
15
135
100

330

15

40
20
115

175

20

70
25
100

195

250
15
156

421

18

40
25
71

136

28

160
105

265

85

312
80

392

105

Israel (28) 
Albania (35)

Albania

Albania

Albania

Armenia (8) 
Georgia (10)

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

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.

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

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

130
11

141

50
146
7

203

20
12

32

141
Armenia (11) 
Kosovo (15) 
Serbia and 
Montenegro 
(115)

85
Bosnia (25, 
Serbia and 
Montenegro 
(35), fYRoM 
(18), 
Tajikistan (7)

22
Serbia and 
Montenegro 
(10) 
Armenia (5,5) 
Georgia( 6,5)

58
8,5

66,5

51,5

Serbia and 
Montenegro 
(25) 
Bosnia(15) 
Albania(3) 
Armenia (1,5) 
Tajikistan (7) 

32
29

2.780
973
750
688

61

5.190,0

710,5

42
Albania (13) 
Tajikistan (7) 
Georgia (22)

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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

141 203

32 66,5 61

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Graph 2b. MFA 1990-2006, disbursements, 
Distribution by region

Mediterranean
13%

NIS
14%

 Western
Balkans
19%

14 

Central 
European 
Candidate 
Countries
54%

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Graph 2c. MFA 2000-2006, disbursements, 
Distribution by region

NIS
13%

²

 Central
 European
 Candidate
Countries
18%

Western Balkans
69%

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