Commission staff working document - Ex ante evaluation statement - Macro-financial assistance to Serbia Accompanying document to the Proposal for a Council Decision providing macro-financial assistance to Serbia {COM(2009) 513 final}
Date: 2009-10-08
Institutions: European Commission
Subjects: EU aid, Serbia, economic conditions, economic stabilisation, financial aid, financial cooperation

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 8.10.2009 
SEC(2009) 1311 final 

COMMISSION STAFF WORKING DOCUMENT 

Ex ante evaluation statement - Macro-financial assistance to Serbia 

Accompanying document to the 

Proposal for a COUNCIL DECISION providing macro-financial assistance to Serbia 

{COM(2009) 513 final}

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Table of Contents 

1. 

1.1. 

1.2. 

1.3. 

1.4. 

2. 

2.1. 

2.2. 

3. 

3.1. 

3.2. 

4. 

5. 

6. 

6.1. 

6.2. 

7. 

Problem analysis and needs assessment....................................................................... 3 

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

Recent economic developments and prospects ............................................................ 4 

The Government programme of socio-economic reforms ........................................... 6 

Serbia's financing needs ............................................................................................... 6 

Objectives and Related Indicators of the macro-finantial assistance ........................... 8 

Objectives..................................................................................................................... 8 

Indicators...................................................................................................................... 8 

Alternative delivery mechanisms and risk assessment ................................................ 8 

Delivery mechanisms ................................................................................................... 8 

Risk assessment............................................................................................................ 9 

Added value of Community involvement .................................................................. 10 

Genval criteria ............................................................................................................ 10 

Planning future monitoring and evaluation................................................................ 11 

Monitoring.................................................................................................................. 11 

Evaluation................................................................................................................... 12 

Achieving cost-effectiveness...................................................................................... 12 

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1. 

PROBLEM ANALYSIS AND NEEDS ASSESSMENT 

1.1. 

Background 

Serbia  relies  on  external  macro-economic  assistance  to  face  the  current  crisis  and  to  restore 
the sustainability of its fiscal and external accounts. Pro-cyclical fiscal policies in recent years 
and high current account deficits, further aggravated by rapid credit growth (mostly foreign-
currency  denominated)  also 
indebtedness 
exacerbated  Serbia's  exposure  to  the  current  global  crisis.  As  in  most  emerging  economies, 
medium-term  growth  prospects  have  been  severely  dampened,  and  the  economy  will  be  in 
recession in 2009. 

to  growing  private-sector  foreign 

leading 

Economic activity fell sharply in the final quarter of 2008 and slumped in the first few months 
of 2009 as external adjustment has started. Growth in the last quarter declined to 2.8% year-
on-year  as  compared  to  an  average  growth  rate  of  6.5%  in  the  previous  three  quarters. 
Estimates  for  the  first  quarter  of  2009  are  even  more  negative:  industrial  output  is  17.6% 
lower and exports and imports declined by 22.4% and 25.3% respectively in the first quarter 
of 2009 compared to the same period of the previous year. Registered unemployment already 
increased by 4.6 percentage points since October 2008.  

However, inflation remains high and only fell below 10% in March, on the back of exchange 
rate depreciation and regulated price adjustments, leaving little room for the central bank to 
loosen monetary policy to support credit and economic activity. The dinar depreciated about 
20% against the euro since September 2008, but it has been largely stable since the beginning 
of 2009. 

Fiscal outturns have been weaker than expected. Budget revenues in the first quarter of 2009 
were 7.2% lower than in the same period the previous year, while budget expenditures were 
just 0.6% lower. As a result of these developments the Government prepared and Parliament 
approved  a  Supplementary  Budget  in  May  2009  which  provides  for  a  substantial  fiscal 
adjustment  of  EUR  1.1  billion.  Nevertheless,  Serbia  will  need  to  find  a  way  to  finance  the 
fiscal deficit of about EUR 800 million.  

The  banking  system  has  weathered  the  external  shocks  so  far,  although  credit  has  largely 
stagnated. The large share of FX or FX-indexed loans in the portfolios of Serbian banks is a 
cause of concern (about 69% of all loans) and NPLs are increasing. However, the risks have 
been  tempered  somewhat  by  the  banking  system’s  large  share  of  liquid  assets  (23.6%  as  of 
February  2009)  and  substantial  capital  buffers  (Capital  Adequacy  Ratio  of  26%  as  of 
October).  

The  crisis  threatens  hard  won  gains  in  poverty  reduction  and  living  standards.  The  severe 
decline in GDP growth projected for Serbia is likely to have substantial impacts. A significant 
share of Serbia’s population has consumption levels just above the national poverty line. Data 
from the most recent living standard measurement survey shows that even a 5% decrease in 
the  incomes  of  those  above  the  poverty  line  will  increase  poverty  by  1.2  percentage  points, 
roughly  90,000  more  people;  a  large  share  of  Serbia’s  population  is  therefore  highly 
vulnerable.  Moreover,  many  poor  people  who  were  on  the  verge  of  moving  out  of  poverty 
will find themselves falling back.  

On  16  January  2009,  the  Executive  Board  of  the  IMF  approved  a  15  month  Stand-by 
Arrangement (SBA) for Serbia for SDR 350.8 million. The SBA was a precautionary program 

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amounting to 75% of Serbia’s quota. In the following weeks, the continued deterioration of 
the macroeconomic environment led the authorities to seek a strengthened economic program 
that could be supported by an extension and augmentation of the Stand-By Arrangement.  

On 26 March the Government and an IMF staff mission reached agreement on an enhanced 
arrangement for some SDR 2.6 billion (around EUR 3 billion). The program period would be 
extended  to  27  months  and  the  arrangement  would  no  longer  be  considered  precautionary. 
This program  was  discussed and approved  by the IMF Board on 15 May 2009. Core of the 
program is a large and balanced fiscal adjustment package to contain the 2009 deficit to 3% of 
GDP. The adjustment would come from cuts in recurrent expenditure and nominal freezes—
though social spending will be largely protected—and mostly temporary revenue increases. A 
second component of the Program is that foreign banks have been asked to provide voluntary 
assurances  to  broadly  maintain  their  commitment  to  Serbia  and  keep  their  subsidiaries  well 
capitalized. 

1.2. 

Recent economic developments and prospects 

The  economy  grew  strongly  until  2008,  fuelled  by  aggregate  demand,  and  on  the  back  of 
significant  economic  changes  since  2000.  Real  growth  of  Gross  Domestic  Product  (GDP) 
averaged 6.2% in 2007 and 2008. Growth was fuelled by high demand linked to a significant 
credit  boom,  expansionary  fiscal  policies,  increases  in  real  wages,  and  rapid  increases  in 
exports.  Output  has  risen  by  nearly  50%  since  2000,  as  the  corporate  sector  started  to  post 
profits and the banking sector was restructured. The positive supply response also appears to 
reflect increases in productivity and output of recently privatised and new firms, as evidenced 
by the particularly rapid rates of output growth in precisely those sectors which have recently 
undergone  extensive  privatisation  (e.g.,  steel,  cement,  retail  trade,  rubber,  tobacco,  dairy, 
sugar, and banking) or attracted foreign investors. 

Strong  economic  growth  was  accompanied  by  a  widening  current  account  deficit  and 
increasing  private  sector  debt.  Although  exports  grew  rapidly,  domestic  demand  grew  even 
faster  which  resulted  in  very  high  import  levels  and  consequently  a  trade  deficit  reaching 
about 22% of GDP. The current account deficit reached 17.1% of GDP in 2008, up from 8.7% 
in  2005.  In  2008,  FDI  reached  an  estimated  5.4%  of  GDP  and  the  outflow  of  portfolio 
investment was equal to 0.3% of GDP. A large surplus in the capital account boosted gross 
international  reserves  through  the  first  quarter  of  2008,  when  reserves  reached  EUR  10.8 
billion (or 9 months of imports). Later in the year, reserves declined somewhat and at the end 
of the year were EUR 9.2 billion (or 7.4 months of import).  

Domestic overheating and external imbalances have been exacerbated by expansionary fiscal 
policies  and  rising  fiscal  deficits  between  2005  and  2008.  The  fiscal  balance  of  the 
consolidated government sector moved from a surplus in 2005 of 0.8% of GDP to a deficit of 
1.9% of GDP in 2007 - and then further to a 2.5% in 2008. A drop in fiscal revenues in 2008 
(from  42.4%  of  GDP  in  2007  to  40.9%)  contributed  to  the  rising  deficit.  Expenditures  also 
fell, but more slowly, to an estimated 43.4% of GDP in 2008. Serbia’s social insurance funds 
covering  health,  pensions  and  unemployment,  which  have  run  deficits  of  over  5%  of  GDP 
since 2007, were key factors in the deteriorating fiscal performance. Shortfalls in these funds 
were covered by transfers from the central government, with the largest transfer for pensions 
(5% of GDP in 2008).  

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Rapid  credit  growth  in  the  banking  sector  (primarily  in  FX-indexed  loans)  and  increased 
cross-border borrowing of domestic enterprises further contributed to the overheating of the 
economy.  While  deposits  grew,  lending  outpaced  the  growth  in  deposits  with  the  loan  to 
deposit ratio increasing from 99% at the end of 2007 to 125% at the end of 2008. In addition, 
since  2007  Serbian  enterprises  owe  more  to  parent  banks  than  to  local  banks  (by  20%)  and 
that  increased  further  to  stock  of  debt  to  foreign  banks  that  was  43%  higher  than  to  local 
banks at the end of 2008.  

Economic growth helped to reduce poverty, which fell from 12.7% of the population in 2004 
to 6.3% in 2008, translating to over 400,000 people rising above the poverty line. Increases in 
salaries, pensions, and social transfers, the main income sources for poor households, drove 
this  reduction.  These  improvements,  however,  are  not  even  throughout  Serbia:  poverty  is 
markedly higher in rural areas—home to about two thirds of all poor Serbians—and among 
vulnerable  groups,  particularly  refugees  and  internally  displaced  people.  Poverty  is  also 
strongly correlated with the education level of the head of household. 

Serbia’s  GDP  is  projected  to  decline  by  -2%  of  GDP  in  2009  and  to  remain  unchanged  in 
2010. This is on account of a sharp drop in external and domestic demand (limited access to 
credit, lower real wages and recession in the EU). The general government budget deficit is 
expected to widen in 2009 beyond the originally projected 1.75% to 3% of GDP. As the risks 
for GDP growth are  skewed  to  the  downside, the fiscal  situation  may  to deteriorate  further. 
Balance of payment needs remain subject to further adjustments.  

Table 1: Key Macroeconomic Data 

Indicators 

GDP real growth 

Investments, % GDP 

Retail price inflation (end-of-period), % 

Public Finance 

Revenues (% GDP) 

Expenditure (% GDP) 

Fiscal Balance, after grants (% GDP) 

External Position 

2008

2009

2010 

2011 

2012

5.6

23.4

6.8

40.9

43.5

-2.5

-2.0

22.3

10.0

40.5

43.5

-3.0

0.0 

3.0 

21.0 

22.2 

8.0 

7.0 

40.1 

41.8 

-1.7 

39.5 

40.7 

-1.2 

5.0

23.9

5.5

39.1

40.5

-1.4

CAD after grants (% GDP) 

-17.1

-13.0

-10.0 

Reserves (EUR billion) 

8.1

7.9

8.4 

-8.9 

8.6 

-7.4

9.7

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Debt 

Public Debt (% GDP) 

External debt (% GDP) 

31.6

63.6

33.0

77.6

34.4 

86.4 

32.3 

91.3 

30.3

88.7

1.3. 

The Government programme of socio-economic reforms 

The  strategic  setting  for  reforms  in  Serbia  has  been  and  is  to  large  extent  defined  by  the 
Poverty Reduction Strategy Paper and the ongoing work on Serbia’s integration into the EU. 
The latest strategic document that defines the agenda of EU integrations is the National Plan 
for Integration, in 2008. This detailed document explains the government’s priorities for the 
harmonization of Serbia’s institutional and legal framework with the EU. 

Given  the  weakening  external  environment  in  2009,  an  anti-crisis  plan  was  announced  in 
early  2009  and  a  supplementary  budget  was  adopted  in  May  2009.  Key  measures  are 
summarized in Box 1 below and include wage cuts for higher wage staff and a nominal freeze 
in the wages of all other public employees, a 15% cut in transfers to local governments, and 
sharp  reductions  in  the  discretionary  budget  of  all  budget  users.  The  revised  budget  will 
protect social spending and there will be an increased allocation for unemployment benefits. 

Box 1 - Serbian Government Measures of Fiscal Adjustment 

Measures on the expenditure side are intended to save RSD 74 billion (3.4% of GDP). These include:  
-  Cutting discretionary expenditures on goods and services, subsidies, capital and net lending of all 

budget users across all levels of government (RSD 60 billion) 

-  Wages freeze in the administration at all levels of government (RSD 13 billion). In addition  public 

employees with wages over RSD 40,000 per month will have their nominal wages cut by 10%; those 
with wages over RSD 100,000, by 15% (of the amount over RSD 40,000.) This measure should bring 
in an additional RSD 1-2 billion. 

Measures on the revenue side are intended to raise an additional RSD 26 billion (0.9% of GDP). These 
include: 

Increase of excises for fuel (RSD 4 billion) 
Increase in non-wage personal income tax (RSD 5 billion) 

-  The transfer of all net profits of public enterprises to the budget (RSD 5 billion) 
- 
- 
-  Temporary tax on use of mobile phones (RSD 3 billion) 
- 

Strengthening tax administration (RSD 7 billion) 

1.4. 

Serbia's financing needs 

External financing needs 
A significant external adjustment is forecast for the coming years. Although the demand for 
Serbian exports will fall significantly, imports are projected to drop even further, moderating 
Serbia’s  external  imbalance.  The  CAD  is  projected  to  fall  from  17.1%  of  GDP  in  2008  to 
about 8.8% by the end of 2011. Capital inflows are expected to cover about 75% of the CAD 
between 2009 and 2011. These movements in the current and capital accounts are consistent 
with a slight decline in foreign currency reserves in 2008 and 2009 and an increase of reserves 

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in  2010  and  2011.  A  return  to  2008  levels  is  forecasted  for  2011.  As  a  result,  the  overall 
financing gap between 2009 and 2011 is projected at EUR 3.6 billion. 

In  this  context  the  Commission  is  proposing  an  MFA  operation  for  Serbia  amounting  to  a 
maximum  of  EUR  200  million.  Given  Serbia's  moderate  level  of  indebtedness  it  is  deemed 
appropriate  to  provide  this  assistance  in  the  form  of  loans.  The  assistance  is  intended  to 
contribute to covering the residual financing needs in 2010 — beyond World Bank and IMF 
assistance  —  and  would  correspond  to  80%  of  the  projected  EUR  250  million  needed  as 
identified  by  the  IMF.  The  remaining  EUR  50  million  will  be  provided  as  Budget  Support 
under IPA. The MFA assistance would be released in two tranches during 2010. 

Table 2: Summary Table of External Financing Needs 

2008 

2009* 

2010* 

 (in billions of euros) 

Gross financing requirement 
 Debt amortization 
medium and long-term debt 
public sector (excl. IMF) 
commercial banks 
corporate sector 
short-term debt 
public sector (excl. IMF) 
commercial banks 
corporate sector 
Available Financing 
Net FDI 
Net portfolio investment 
Debt financing (commercial banks and corporate) 
Medium and long-term financing 
Commercial Banks 
Corporate Sector 
Short-term financing 
Commercial Banks 
Corporate Sector 
Gross reserves drawdown 
Other 
Financing Gap (**) 
Prospective IMF 
Prospective EU (**) 
Prospective World Bank 
Memorandum Items: 
Gross Domestic Product (in billions of euros) 

9.7 
3.6 
2.7 
0.1 
0.5 
2.0 
0.9 

9.7 
1.8 
-0.1 

4.7 
0.2 
4.5 
1.1 

1.6 
0.6 
0 

9.2 
5.0 
3.0 
0.1 
0.1 
2.8 
2.0 
0.0 
1.3 
0.7 
6.8 
1.0 
0.0 

2.5 
0.1 
2.4 
1.5 
1.0 
0.5 
1.1 
0.6 
2.4 
2.2 
0.1 
0.2 

8.0 
4.3 
2.7 
0.2 
0.2 
2.3 
1.5 
0.0 
1.0 
0.5 
7.0 
1.3 
0.0 

4.0 
0.5 
3.5 
1.5 
1.0 
0.5 

0.2 
1.0 
0.7 
0.3 
0.1 

34.3  

30.9  

30.5  

Source: World Bank and IMF staff estimates and Central Bank of SERBIA. 

*2009 and 2010 data are forecasts. 

** The IMF conventionally includes both EU IPA and MFA below the line in the financing of the balance-of-payments gap. However, 
IPA budget support is programmed aid and primarily address an internal budget financing gap rather than external balance-of-payments 
needs. The present ex-ante assessment thus assumes that it rather belongs to the "available financing" category and that the Financing Gap 
should be adjusted accordingly (Available Financing + EUR 100 million, Financing Gap – EUR 100 million over the period 2009-2010). 

Budgetary financing needs 

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The Government agreed on a 2009 budget rebalancing which was subsequently adopted by Parliament on 29 April, targeting a 3% of GDP 
fiscal deficit for 2009, instead of the 6% deficit estimated in the absence of rebalancing measures. The programme revision was approved 
by  the  IMF  Board  on  15  May  2009.  Latest  indications  as  of  early  July  suggest  that  that  economic  downturn  is  even  more  severe  than 
foreseen in the revised March assumptions, and revenue performance has been very poor in the first five months of the year. As the public 
deficit is now expected to exceed the target foreseen under the programme for the first half of 2009, this situation will require further fiscal 
adjustments in the form of additional expenditure cuts and revenue enhancing measures.  

2. 

OBJECTIVES AND RELATED INDICATORS OF THE MACRO-FINANTIAL ASSISTANCE  

2.1. 

Objectives 

The objectives of the proposed macro-financial assistance operation are the following: 

•  Contribute  to  covering  Serbia's  external  financing  needs;  alleviate  budgetary 

financing needs; 

•  Support the fiscal consolidation effort in the context of an IMF programme; 

•  In this respect, help Serbia reduce the financial constraints on the implementation 

of its comprehensive socio-economic reform programme; 

•  Facilitate and encourage efforts of the authorities of Serbia to implement measures 

identified under the European Partnership; 

•  Reinforce  the  EU  role  in  the  economic  policy  dialogue  with  the  Serbian 

authorities on the programme of reforms. 

Detailed  macro-economic  and  structural  reform  objectives  will  be  further  defined  in  the 
context of a Memorandum of Understanding, to be agreed with the authorities. 

2.2. 

Indicators 

To monitor the fulfilment of the objectives of the programme throughout the implementation 
period of the assistance, the Commission will use two types of indicators: 

•  Adherence to the IMF-supported programme; it will be a conditio sine qua non for 

the implementation of the assistance; 

•  Progress  in  the  implementation  of  specific  actions  that  will  be  part  of  the 
conditions for disbursement. Those actions will be specified in the aforementioned 
Memorandum  of  Understanding.  They  will  be  consistent  with  the  policy  lines 
anchored in the IMF programme, as well as the European Partnership Priorities. 

3. 

ALTERNATIVE DELIVERY MECHANISMS AND RISK ASSESSMENT 

3.1. 

Delivery mechanisms 

Given  Serbia's  moderate  level  of  indebtedness  it  is  deemed  appropriate  to  provide  the 
foreseen macro-financial assistance in the form of loans. 

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Macro-financial assistance is an untied and undedicated macroeconomic support, which helps 
the  beneficiary  meet  its  external  financing  needs,  and  contributes  alleviating  budgetary 
financing  needs.  Moreover,  as  experienced  with  similar  operations,  including  in  Serbia,  the 
economic  policy  conditionality  attached  to  this  support  strengthens  the  stabilisation  and 
reform process. 

3.2. 

Risk assessment 

There are both fiduciary and policy risks related to this macro-financial assistance operation.  

There  is  a  risk  that  this  assistance,  which  is  not  dedicated  to  specific  expenses  (contrary  to 
project  financing,  for  example),  would  be  used  in  a  fraudulent  way,  like  any  other  type  of 
assistance. Generally speaking, this risk is related to factors such as the independence of the 
central  bank,  the  quality  of  systems  and  procedures  related  to  the  management,  control  and 
oversight functions in the financial circuits and processing of such assistance, IT security and 
internal/external audit capacity of the beneficiary authorities.  

To mitigate the risks of fraudulent use, several measures will be taken. The Memorandum of 
Understanding and the loan agreement will comprise a set of provisions on inspection, fraud 
prevention, audits, and recovery of funds in case of fraud or corruption. Also, the assistance 
will be paid to clearly  identified  accounts at the National Bank of Serbia. Moreover, before 
the  agreement  on  the  Memorandum  of  Understanding  is  reached,  the  Commission  services 
will assess the reliability of financial circuits and administrative procedures that are relevant 
to  this  type  of  assistance  and  will  determine  whether  the  framework  for  sound  financial 
management of  macro-financial  assistance is sufficiently effective in Serbia (for details, see 
Financial Statement, section 7). In the light of this assessment, specific mechanisms applying 
to the management of the funds by the beneficiaries may be introduced in agreement with the 
national authorities. The Commission may also use other assistance instruments at its disposal 
to  help  the  beneficiary  authorities  improve  their  public  finance  management  systems  if  this 
area is not sufficiently covered by other donors. 

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

As  regards  policy  risks,  the  main  assumption  is  that  the  Government  of  Serbia  will  remain 
committed  to  fiscal  adjustment  and  remain  in  compliance  with  its  agreement  with  the  IMF. 
This will be validated on the basis of IMF’s quarterly monitoring of performance indicators 
and structural benchmarks. There is a risk that the Government of Serbia will not comply with 
the IMF programme conditions, as the fiscal target may turn out more difficult to reach than 
assumed, in particular as the risks to the growth assumptions are clearly on the downside. 

While seriously taking into account these risks, the Commission services consider that there 
are  sufficiently  strong  grounds  to  proceed  with  MFA  to  Serbia.  The  large  financing  needs 
faced by Serbia in particular in 2009 and to a lesser extend in 2010 plead in favour of urgent 
action. 

The  Commission  services  will  maintain  close  contacts  with  the  authorities  during  the 
implementation  of  the  macro-financial  assistance  in  order  to  address  quickly  any  concerns 
that may arise. 

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4. 

ADDED VALUE OF COMMUNITY INVOLVEMENT 

By providing financing complementary to resources made available to Serbia by the Bretton 
Woods Institutions, the Community would support Serbia's domestic efforts of responding to 
the  impact  of  current  global  economic  crisis.  It  would  encourage  and  strengthen  the 
implementation  of  the  reform  programme.  This  will  be  particularly  important  in  the  areas 
targeted by the programme’s conditionality, in particular the fiscal consolidation effort aimed 
at  reducing  public  expenditures  to  a  sustainable  level.  Moreover,  the  effect  of  the 
Community’s  involvement  will  be  strengthened  as  a  result  of  the  synergy  with  other 
Community  programmes  aiming  at  supporting  Serbia's  dire  fiscal  situation,  in  particular 
exceptional IPA budget support grants (EUR 100 million to be provided in two instalments in 
2009 and 2010).  

The  macro-financial  assistance  is  a  policy-based  instrument  and  would  therefore  also 
contribute  to  support  the  European  Union’s  strategy  towards  Serbia,  in  particular  in  the 
context of the European Partnership.  

5. 

GENVAL CRITERIA 

The Commission services have given due consideration to the five Genval criteria.  

•  Exceptional character: 

Serbia's financing requirements in 2009-2011 result from the impact of the global economic 
crisis  on  Serbia,  and  its  high  exposure  to  this  crisis  in  view  of  its  external  and  fiscal 
imbalances.  

The exceptional character of the foreseen MFA is further stressed by the limited timeframe of 
the programme. The Commission services intend to limit the duration of the implementation 
of the assistance to one year. In determining the actual amount of the tranches under the MFA 
programme,  the  Commission  services  intend  to  take  into  consideration  the  progress  in  the 
implementation of the IMF programme and of the World Bank development policy loans, as 
well as the timeframe of other main donors supporting Serbia with budget support, which still 
need to be identified. 

Scope:  

Serbia  is  a  potential  candidate  country  which  respects  democracy  and  human  rights  and  as 
such should be considered as eligible for EC MFA support. 

Complementarity: 

The  Community  MFA  will  be  complementary  to  external  financing  coming  from  two  main 
sources: (i) the Bretton Woods Institutions; and (ii) bilateral donors in case some preliminary 
financing  indications  can  be  confirmed  and  enable  for  disbursements  over  the  programme 
period. It should also be noted in this context that it is complementary to budgetary support 
expected to be provided under the Community IPA programme (EUR 100 million over 2009-
2010). In this context and in the short run, MFA will both increase substantially the European 
Union's  leverage  on  Serbia's  policy  making  and  strengthen  the  country’s  European 
orientations, and provide a highly valuable bridge financing to help the country weather the 
effects of the current economic crisis. 

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Conditionality: 

The macro-financial assistance to Serbia will be linked to an IMF stand-by arrangement. As 
usual with this type of assistance, disbursements under this macro-financial assistance will be 
subject to progress in the implementation of the IMF arrangement. It will also be conditional 
upon  specific  structural  reform  measures  that  will  be  further  defined  in  the  context  of  a 
Memorandum of Understanding to be jointly agreed between the Commission and the Serbian 
authorities. 

Given  the  nature  of  the  planned  operation,  in  defining  the  conditionality  in  the  area  of 
structural policies, particular attention will be paid to public finance management with a view 
to strengthening efficiency, transparency and accountability, and because of its importance for 
fiscal  consolidation.  As  Serbia  is  a  potential  candidate  country,  some  measures  with  high 
priority on the EU integration agenda may also be included in the conditionality framework. 
In  addition,  the  Commission  may  consider  targeting  specific  sectoral  policies  of  particular 
importance, identified as such in the European Partnership and 2009 Progress Report. 

Financial Discipline: 

The  Commission  services  propose  to  limit  the  macro-financial  assistance  to  Serbia  to  up  to 
EUR  200  million.  This  corresponds  currently  to  the  full  amount  (ex-ante)  of  the  residual 
financing gap foreseen after IMF and World Bank support identified by the IMF for the year 
2010.  Data  on  the  balance-of-payments  gap  are  by  nature  volatile.  Additionally,  additional 
bilateral financing may materialise in the course of the programme that cannot yet be included 
in the current programme assumptions. 

Concerning sound financial management, the Commission services are taking action in order 
to  fulfil  the  requirements  of  the  Financial  Regulation.  The  Commission  has  launched  an 
Operational  Assessment  (OA)  of  the  reliability  of  financial  circuits  and  administrative 
controls at the Ministry of Finance and the National Bank of Serbia. Based on the OA report's 
findings, the Commission services will determine whether the framework for sound financial 
management is sufficiently effective in Serbia. Also, the results of the OA will contribute to 
the definition of appropriate conditionality in the area of public finance management. 

6. 

PLANNING FUTURE MONITORING AND EVALUATION 

This  assistance  is  of  exceptional  and  macro-economic  nature  and  its  monitoring  and 
evaluation will be undertaken in line with the standard Commission procedures: 

6.1.  Monitoring 

The monitoring system will be ensured by the provision of reports and data by the authorities, 
as  to  be  set  out  in  the  Memorandum  of  Understanding,  and  the  organisation  of  review 
missions in Serbia by Commission staff. Although this assistance is centrally managed, where 
appropriate, Commission Delegation will also be called to provide additional reporting.  

In particular, the monitoring of the action by the Commission services will take place on the 
basis  of  a  system  of  macro-economic  and  structural  policy  indicators  to  be  agreed  with  the 
authorities of Serbia. In this process, the Commission services may also monitor key areas to 
be identified in the above-mentioned Operational Assessment on public finance management.  

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An annual report to the European Parliament and to the Council on the implementation of this 
assistance is foreseen in proposed text of the Council Decision on MFA to Serbia. 

6.2. 

Evaluation 

In  the  context  of  DG  ECFIN  Multi-annual  Evaluation  Programme,  two  to  three  ex-post 
evaluations  of  MFA  operations  are  planned  per  year.  It  is  in  this  framework  that  an 
independent evaluation of the assistance will be carried out by duly authorised representatives 
of  the  Commission  in  due  course.  A  provision  foreseeing  an  ex-post  evaluation  will  be 
included in the Memorandum of Understanding. Financial resources for this evaluation would 
be drawn from the corresponding MFA budget line.  

7. 

ACHIEVING COST-EFFECTIVENESS 

In implementing the programme, the Commission will be guided by the following principles:  

•  The assistance will be made available by the Commission to Serbia in principle in 
two  instalments.  Each  instalment  will  be  released  on  the  basis  of  a  satisfactory 
track  record  in  implementing  the  macro-economic  programme  under  the  IMF-
supported programme and the specific economic policy conditions attached to the 
assistance.  The  latter  will  be  negotiated  with  the  authorities  as  soon  as  possible 
and laid down in a Memorandum of Understanding concluded to this effect.  

•  . As soon as the Council has adopted the proposal, the Commission will negotiate 
with  the  Serbian  Authorities  a  Memorandum  of  Understanding  laying  out  the 
conditions  for  the  release  of  the  EU  assistance,  as  well  as  a  loan  agreement  .  In 
view of the likely disbursement of the IPA budget support second tranche in the 
first  half  of  2010,  cross-conditionality  may  be  considered  appropriate  for  the 
release of the MFA first tranche that is tentatively scheduled over the same period. 
The  second  tranche  of  the  proposed  assistance  will  be  made  available  by  the 
Commission  to  Serbia  on  the  basis  of  a  satisfactory  track  record  of  the 
implementation  of  the  IMF  programme  and  the  economic  policy  and  financial 
conditions attached to the assistance. 

•  In  negotiating  specific  policy  conditions,  the  Commission  will  draw  on  all  the 
expertise,  including  of  the  Bretton  Woods  Institutions  and  of  bilateral  and 
multilateral  aid  agencies  active  in  the  same  areas.  In  addition,  the  Commission 
will aim at synergies with other Community policies and instruments (notably IPA 
as  indicated  above)  that  could  be  used  to  support  the  implementation  by  the 
beneficiary  of  the  relevant  measures  (notably  in  the  area  of  public  finance 
management). Where appropriate, links to any related action under the European 
Partnership or findings of the Progress Reports can also be established.  

•  This action is exceptional by nature and will not involve an increase in the number 

of Commission staff.  

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