Report from the Commission to the Council and the European Parliament - Report form the Commission to the Council and the European Parliament on the implementation of the macro financial assistance to third countries in 2007 {SEC(2008) 2381}
Date: 2008-08-18
Institutions: European Commission
Subjects: EU aid, economic reform, financial aid, financial cooperation, financial management, report, third country

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 18.8.2008 
COM(2008) 520 final 

REPORT FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN 
PARLIAMENT 

Report form the Commission to the Council and the European Parliament 
on the implementation of the macro financial assistance to third countries in 2007 

{SEC(2008) 2381}

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TABLE OF CONTENTS 

REPORT FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN 
PARLIAMENT Report form the Commission to the Council and the European Parliament on 
the implementation of the macro financial assistance to third countries in 2007 ...................... 1 

1. 

2. 

2.1. 

2.2. 

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

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

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

Macro-Financial Assistance in 2006............................................................................ 3 

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

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

2.3. 

Synthesis of the most recent operations in the beneficiary countries .......................... 4 

2.3.1.  Western Balkans........................................................................................................... 4 

2.3.2.  Eastern Neighbourhood Countries ............................................................................... 5 

2.3.3.  Mediterranean countries............................................................................................... 5 

3. 

3.1. 

3.2. 

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

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

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

3.2.1.  Tajikistan...................................................................................................................... 7 

3.2.2.  Bosnia and Herzegovina .............................................................................................. 8 

3.3. 

Improving financial management in beneficiary countries: the operational 
assessments .................................................................................................................. 9

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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  2007, 
information  regarding  the  most  recent  operations  in  the  Western  Balkans,  the  New 
Independent States and Mediterranean countries together with statistical tables of the 
different operations carried out since 1990. 

The  recent  trends  of  EC  macro-financial  operations  with  the  results  of  the 
evaluations that have been carried out in 2007 are also 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.  

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,  several  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(2008)  2381)  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 
implement 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 2006 

During  the  period  2000-2007,  nineteen  decisions  have  been  approved  for  a  total 
amount of EUR 1085 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 

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makes the Balkans countries the main beneficiaries of MFA with a total of assistance 
amounting to a maximum of EUR 783 million out of 1085 million. 

2.2.1.  New decisions 

Two decisions have been adopted by the Council in 2007. 
On  16th  April,  the  Council  decided  (2007/259/EC)  to  provide  macro-financial 
assistance to Moldova of up to EUR 45 million in the form of grants. 
On  10th  December,  the  Council  decided  (2007/860/EC)  to  provide  macro-financial 
assistance to Lebanon of up EUR 80 million (EUR 50 million in the form of loans 
and EUR 30 million in the form of grants). 

2.2.2.  Disbursements 

Disbursements  of  macro-financial  assistance  amounted  to  EUR  20  million  for 
Moldova. 

2.3. 

Synthesis of the most recent operations in the beneficiary countries 

2.3.1.  Western Balkans 

The Council adopted on 30 November 2006 a decision to provide a Macro-financial 
assistance (MFA) to Kosovo (UNCS 1244/1999), as  proposed by the Commission, 
in  form  of  budget  support  (grants,  up  to  €  50  million).  However,  the  budgetary 
situation  turned  out  differently  than  initially  foreseen.  The  signing  of  the 
Memorandum of Understanding and the Grant Agreement between the Commission 
and  the  Kosovar  authorities,  represented  by  UNMIK,  was  finalised  in  December 
2007, so that the MFA can be disbursed during the course of 2008-2009 if conditions 
are met, as agreed, in two tranches of € 30 million and € 20 million, respectively. In 
September  2007,  the  authorities have  produced a revised version of the MTEF1 for 
the period 2008-2010. The disbursement is subject to the existence of a financing gap 
which did not materialise in 2007 and a number of specific conditions related to the 
framework of fiscal and economic policies, public financial management and control, 
privatization and liquidation of State-owned enterprises, and statistics. 

According  to  the  latest  statistical  data  from  the  IMF  and  the  Central  Banking 
Authority  of  Kosovo,  GDP  growth  was  around  3.5%  in  2007,  in  contrast  to  a  1% 
growth  assumption  adopted  by  the  authorities  for  the  budget  2007  planning.  This 
situation is partly due to the delays in the status settlement with less adverse effect on 
domestic demand from the dismantling of UNMIK. Private sector consumption has 
had  a  positive  impact  on  growth.  Overall,  growth  seems  to  become  more  robust 
compared to previous years, but remains low compared to the other countries of the 
region.  
Inflation jumped to an average annual rate of 4.5% in 2007. The sharp rise in CPI2 
was  fuelled  by  the  growth  of  food  prices,  which  have  a  42.5%  share  in  the  CPI 
basket.  

Export  growth  increased  in  the  second  half  of  2007.  However,  the  export  base 
remains  very  weak,  so  that  the trade  deficit  has  further  widened  in  2007  to  around 
60%  of  GDP.  For  2007,  a  current  account  deficit  (including  foreign  assistance)  of 

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Medium term expenditure framework 
Consumer price index 

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24%  of  GDP  is  expected.  Kosovo  currently  does  not  assume  any  sovereign  debt 
servicing obligations. 

Kosovo's  budgetary  situation  is  marked  by  a  high  degree  of  volatility  and 
unpredictability.  The  execution  of  the  budget  in  2007  was  characterised  by  an 
opening  cash  balance  taken  over  from  2006  at  around  € 200 million,  a  one-off 
exceptional  revenue  of  € 75 million  for  the  licence  of  a  second  mobile  phone 
operator,  an  improved  performance  in  revenue  collection  and  a  continuously  weak 
spending  record,  especially  on  capital  items.  The  annual  budget  surplus  2007  is 
estimated  at  € 150  million.  However,  the  budgetary  position  in  Kosovo  remains 
precarious and the surplus may turn out to be of a quite temporary nature and masks 
a  weaker  structural  budgetary  position  as  it  half  stems  from  one  single  one-off 
measure  (see  above)  and  is  subject  to  substantial  budgetary  risks,  related  i.  a.  to 
status  settlement,  unresolved  property  rights,  environmental  issues,  the  precarious 
energy  situation  and  possible  liabilities  stemming  from  the  privatisation  process. 
Additionally, Kosovo's development needs remain enormous. 

2.3.2.  Eastern Neighbourhood Countries 

In  2007,  the  Commission  implemented  two  programmes  of  macro-financial 
assistance in favour of the countries of the region.  

Under  the programme in favour of  Georgia  for  an  amount  of  EUR  33.5  million  in 
grants,  adopted  in  January  2006,  the  Commission  conducted  the  review  of  the 
conditions for the disbursement of the third and last tranche (the disbursements of the 
first and the second tranche of a total amount of EUR 23 million had been made in 
2006.) The review was not completed and no payment was made because one of the 
specific conditions for the release of the tranche was not met: the law regarding the 
organisation of the external audit was not passed as foreseen by the Parliament. 

The Commission started the implementation of a new macro-financial assistance to 
Moldova, decided by the Council on 16 April 2007. The new MFA amounts to EUR 
45  million  in  grants  and  is  linked  to  Moldova's  Poverty  Reduction  and  Growth 
Facility  (PRGF)  arrangement  with  the  IMF.  The  first  tranche  of  the  assistance 
amounting  to  EUR  20  million  was  disbursed  in  October  2007.  The  remaining  two 
tranches are expected to be disbursed in 2008. 

This programme is designed to 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 in prices for natural gas 
imported  from  Russia  and  restrictions  on  Moldova’s  exports  of  wine  and  several 
agricultural  products).  The  Community  macro-financial  assistance  complements 
financing from the IFIs and bilateral donors and budget support provided by the EU 
under  the  Food  Security  Programme  and  the  European  Neighbourhood  and 
Partnership Instrument (ENPI). 

2.3.3.  Mediterranean countries  

On  10  December  2007  the  Council  approved  a  programme  of  macro-financial 
assistance  in  favour  of  Lebanon;  with  a  view  to  supporting  Lebanon's  domestic 
efforts  of  post-war  reconstruction  and  sustainable  economic  recovery,  and  in  this 
way, alleviating the financial constraints on the implementation of the government's 
economic  programme.  The  Decision  provides  for  a  EUR  80  million  package 
consisting of a EUR 30 million grant and a EUR 50 million loan.  

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In  December  2007,  the  Commission  and  the  Government  of  Lebanon  decided  that 
the  assistance  would  be  disbursed,  at  a  later  stage,  in  two  tranches,  of  EUR  40 
million each. 

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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. 
The year 2007 shows an evolution in this trend with a Decision from the Council in 
favour of Lebanon.  

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  under  the  supervision  of  a  "Steering  Committee".  Since 
2004, a total of 5 evaluations have been carried out. Two evaluations were completed 
in 2007 regarding Tajikistan and Bosnia & Herzegovina. The main observations are 
the following:  

3.2.1.  Tajikistan 

The evaluation assessed the Macro-Financial Assistance (MFA) granted to Tajikistan 
by  the  European  Commission  (EC)  as  a  specific  part  of  the  global  MFA  operation 
granted  earlier  to  Armenia  and  Georgia.  The  MFA  consisted  of  a  loan  of  EUR  60 
million  and  a  grant  of  EUR  35  million  that  was  intended  for  disbursement  in  five 
successive equal tranches (EUR 7 million each) during the period 2001-2004. 

The  net  impact  of  the  MFA  operation  on  macroeconomic  stabilization  appears  to 
have been rather limited. MFA brought a marginal improvement in economic growth 
and inflation over the period 2001-2006. The results of quantitative modeling suggest 
that  MFA  contributed  approximately  a  cumulative  1.5  percentage  point  increase  in 
GDP  in  this  period.  By  decreasing  the  cost  of  foreign  debt  servicing  it  allowed 
budget expenditure to be shifted to domestic use. 

The  impact  of  MFA  on  long-term  external  sustainability  is  positive  but  small.  The 
channels  where  it  was  relatively  easy  to  identify  the  direct  contribution  of  MFA 
appear  to  play  a  relatively  small  part  in  the  long-term  perspective.  This  applies  to 
both the debt-relief element of the operation and slightly higher GDP resulting from 
MFA.  In  the  long  term,  other  issues  related  to  improved  economic  governance 
appear more important. 

Although the expected effects of the structural conditionalities of the MFA operation 
have  been  achieved,  their  effect  remains  relatively  limited.  The  most  evident  and 

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strongest effect on structural reforms was observed in the case of the two EC-specific 
conditionalities, which had sizeable consequences on the implementation of reforms 
related to public finance management. 

3.2.2.  Bosnia and Herzegovina 

The evaluation assessed Macro-Financial Assistance (MFA) provided to Bosnia and 
Herzegovina (BiH) in the period from November 2002 to February 2006. The MFA 
includes  a  loan  element  of  up  to  €  20  million  and  a  grant  element  of  up  to  €  40 
million.  The  MFA  operation  coincided  with  an  IMF  Stand-by  Arrangement  which 
was in place from August 2002 till February 2004. MFA was explicitly linked to this 
Stand-by Arrangement. 

MFA  has  influenced  medium-to-long-term  external  sustainability  through  various 
channels.  The  primary  channel  is  via  macroeconomic  stability,  and  impact  on 
economic  growth.  Another  channel  is  through  institution  building,  to  which  the 
structural conditionalities of MFA have contributed. 

The overall package of structural conditions has influenced the sustainability of the 
reforms  by  improving  the  country's  institutions,  accelerating  privatization  and 
creating  a  treasury  system  and  an  effective  custom  and  tax  administration.  The 
reforms  in  customs  and  tax  policy  and  administration  have  contributed  to  further 
irreversible  reforms  like  the  introduction  of  valued-added  tax  (VAT)  in  2006.  As 
such,  the  structural  component  of  MFA  has  improved  the  country's  economic 
stability and growth potential in the short and medium term 

In  both  Bosnia  and  Herzegovina  and  Tajikistan  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. 

Evaluations of Serbia - Montenegro and Albania are on-going and their final reports 
should be made available in the third quarter of 2008. 

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3.3. 

Improving  financial  management  in  beneficiary  countries:  the  operational 
assessments 

In  2007  two  new  operational  assessments  have  been  carried  out  in  Moldova  and 
Lebanon in addition to the seven former operational assessments completed between 
2004  and  2006  in  countries  benefiting  from  macro-financial  assistance  (Albania, 
Armenia, Serbia-Montenegro, Bosnia-Herzegovina, Georgia and Kosovo). The work 
programme  is  elaborated  in  co-operation  with  the  consulting  firm  Deloitte  and 
includes  information  contained  in  available  reports  issued  by  other  donors  and 
notably  the  PEFA  analyses.  Follow  up  missions  have  been  undertaken  (Albania, 
Armenia, Tajikistan and Georgia) in order to assess the improvements implemented 
in the national administrations following the first missions. 

The investigations focus on the one hand on the independence of the Central banks 
and  on  the  functioning  of  their  accounting  departments.  One  the  other  hand,  they 
examine  the  budget  process,  the  treasury  department,  the  internal  audit,  human 
resources  and  IT  departments  of  the  Ministries  of  Finance.  The  functioning  of  the 
external  audit  institutions  is  also  reviewed  in  order  to  assess  their  control 
effectiveness. 

The  conclusions  of  the  operational  assessments  are  communicated  to  the  national 
authorities  who  have  the  opportunity  to  comment  the  analysis  contained  in  the 
reports. 

For  each  country,  the  assessments  concluded  that  "The  framework  for  sound 
financial  management  is  effective"  based  on  the  consultant's  analyses  who  pointed 
out however the need for a number of improvements. The most serious weaknesses 
have  been  detected  in  the  Ministries  of  Finance  such  as  the  absence  of  a  single 
treasury  accounts,  appropriate  accounting  systems  and  written  procedures  or  to 
improve  the  procurement  procedures.  The  capacity  of  the  internal  control  had,  for 
every  Ministry,  to  be  strengthened  with  the  recruitment  of  skilled  auditors  and  the 
implementation of special training sessions. In some cases, macro-economic forecast 
departments appeared unable to fulfil their role and the independence of the external 
audit institutions was not considered as sufficient. 

With  a  view  to  improving  the  public  finance  management  of  the  beneficiary 
countries, recommendations have been addressed to the national authorities to correct 
weaknesses.  Some  of  these  recommendations  are  considered  as  prior  actions  that 
have to be fulfilled before disbursement can be made. This has been the case for the 
strengthening of the internal control department within the Ministry of Finance or the 
adoption  of instructions containing  minimal requirements regarding the segregation 
of duties as regards accounting, authorizing and payment functions.  

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

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Table 1. Macro-financial assistance, 1990-2007
Maximum amounts authorised, millions euro

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

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
1.036,5
868

45
80

0

83,5

125

6.297,5

905,5

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

75
Moldova 
(45) 
Lebanon 
(30)

(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

620

480

555

255

0

15

460

393

150

180

208

70 25

0

83,5 125

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Graph 1b. MFA 1990-2007, authorisations 
Distribution by region

Mediterranean
14%

NIS
17%

Western 
Balkans
17%

Central 
European 
Candidate 
Countries
52%

Graph 1c. MFA 2000-2007, authorisations 
Distribution by region

Mediterranean
7%

NIS
20%

Western Balkans

73%

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Table 2. Macro-financial assistance, 1990-2007
Disbursements, millions euro 

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

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

61

2.780
973
770
688

20

20

5.210

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

20
Moldova 
(20) 

730,5

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

1.178

695

305

245

330

421

392

175 195

265

136

141 203

32 66,5 61 20

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Graph 2b. MFA 1990-2007, disbursements, 
Distribution by region

Mediterranean
13%

NIS
15%

Western
Balkans
19%

Central 
European 
Candidate 
Countries
53%

Graph 2c. MFA 2000-2007, disbursements, 
Distribution by region

NIS
14%

Western Balkans
68%

 Central
 European
 Candidate
Countries
18%

EN 

13 

   EN