Report from the Commission to the Council and the European Parliament on the implementation of macro-financial assistance to third countries in 2008 {SEC(2009) 1279}
Date: 2009-10-08
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, 8.10.2009 
COM(2009) 514 final 

REPORT FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN 
PARLIAMENT 

on the implementation of macro-financial assistance to third countries in 2008 

{SEC(2009) 1279} 

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REPORT FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN 
PARLIAMENT 

on the implementation of macro-financial assistance to third countries in 2008 

{SEC(2009) 1279} 

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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 
2008 ............................................................................................................................................ 2 

1. 

2. 

2.1. 

2.2. 

2.3. 

Introduction .................................................................................................................. 4 

Overview ...................................................................................................................... 4 

Background .................................................................................................................. 4 

Macro-Financial Assistance in 2008 ............................................................................ 4 

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

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

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

2.3.3.  Mediterranean countries............................................................................................... 6 

3. 

3.1. 

3.2. 

Geographical distribution and evaluations of macro-financial assistance ................... 6 

Geographical distribution............................................................................................. 6 

Evaluations ................................................................................................................... 6 

3.2.1.  Albania ......................................................................................................................... 7 

3.2.2.  Serbia and Montenegro ................................................................................................ 7 

4. 

5. 

Improving financial management in beneficiary countries: the operational 
assessments................................................................................................................... 7 

Requests and future Commission proposals................................................................. 8

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1. 

INTRODUCTION 

This report provides a general overview of the EU macro-financial assistance to 
third countries, including historical background, a summary of the operations in 
2008,  information  regarding  the  most  recent  operations  in  the  candidate  and 
potentially  candidate  countries  as  well as  in  Neighbourhood  countries  together 
with statistical tables of the different operations carried out since 1990. 

The results of the recent evaluations that have been carried out in 2008 are also 
included in this report. The objective of the evaluations is to assess the impact of 
macro-financial assistance 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 procedures 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 
third 
countries and follows on from the reports presented in previous years. A more 
detailed  report  (working  document  of  the  Commission  services  SEC(2009…) 
providing  economic  and  financial  information  regarding  the  beneficiary 
countries is released in parallel. 

to 

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  close  co-ordination  with  the  IMF  and  the 
World  Bank,  Community  MFA,  tailored  to  specific  country  needs,  has 
supported  several  third  countries  with  the  overall  objective  of  stabilising  the 
financial situation and establishing market-oriented economies.  

2.2.  Macro-Financial Assistance in 2008 

No new decision was adopted by the Council in 2008. 

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Disbursements  of  macro-financial  assistance  amounted  to  EUR  25  million  for 
the  Republic  of  Moldova  in  the  form  of  grant  and  EUR  15  million  also  in  the 
form of grant for Lebanon.  

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

2.3.1. Western Balkans 

Kosovo  

The  only  ongoing  MFA  operation  in  the  Western  Balkans  is  a  budget  support 
grant to Kosovo (under UNSCR 1244/99) of an up to EUR 50 million approved 
by  the  Council  in  November  2006  (Council  Decision  2006/880/EC,  O.J. 
L339/36, 6.12.2006). As conditions agreed in a Memorandum of Understanding 
(MoU)  signed  with  the  authorities  in  December  2007  for  the  release  of  this 
assistance have not been met, the full amount of EUR 50 million could not be 
released  in  2008  and  remains  outstanding.  On  11  July  2008  however,  in  a 
Donors'  Conference  chaired  by  the  Commission  to  support  Kosovo's  financing 
needs for the period 2008-2011, the Commission made a conditional pledge of 
additional MFA support of up to EUR 100 million, also in the form of budget 
support grants.  

Montenegro and Serbia 

to  Decisions  2001/549/EC  and  2002/882/EC1  authorising 

On 2 October 2008, the Council adopted Decision  2008/784/EC  establishing a 
separate  liability  of  Montenegro  and  reducing  proportionately  the  liability  of 
Serbia with regard to the long-term loans granted by the Community to the State 
Union of Serbia and Montenegro (formerly the Federal Republic of Yugoslavia) 
pursuant 
the 
Commission  to  sign  a  separate  loan  agreement  with  the  authorities  of 
Montenegro.  This  decision  is  the  mere  outcome  of  the  independence  of 
Montenegro  in  June  2006  and  of  an  agreement  reached  between  Serbia  and 
Montenegro in July 2006 to allocate external liabilities among the two separate 
states.  It  is  not  creating  any  new  obligations  for  the  Community  and  has  no 
budgetary implications. 

Once  a  separate  loan  agreement  with  Montenegro  was  concluded  and  entered 
into force, Serbia's current liabilities were readjusted by an exchange of letters 
between the Commission and Serbia.  

2.3.2. Eastern Neighbourhood Countries  

The Republic of Moldova 

In 2008, the Commission completed the implementation of the macro-financial 
assistance programme decided by the Council on 16 April 2007 totalling EUR 
45  million.  The  second  and  third  instalment,  respectively,  EUR  10  and  15 
million, were released in June and December 2008. The programme was part of 
the financing package in support of the government's arrangement with the IMF 
under  the  Poverty  Reduction  and  Growth  Facility  (PRGF)  dating  back  to  May 
2006 and expiring in May 2009.  

Georgia 

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OJ L 269, 10.10.2008, p. 8 

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The  programme  amounting  to  EUR  33.5  million  in  grants,  adopted  in  January 
2006, could not be completed. Under this programme, a total amount of EUR 23 
million had been disbursed in 2006. However, the review of the conditions for 
the  disbursement  of  the  third  and  last  tranche  could  not  be  completed  in  2008 
(like in 2007) as 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.  This  last  instalment  has  therefore  not  been 
disbursed,  and  the  programme  has  now  expired.  At  the  same  time,  in  October 
2008, at a Donor Conference held in Brussels, the Commission pledged a new 
MFA  programme  for  Georgia,  in  the  form  of  grants  of  up  to  EUR  46  million. 
The  support  was  pledged  in  the  context  of  the  international  effort  to  help 
Georgia overcome the consequences of the August 2008 conflict with Russia.  

2.3.3. Mediterranean countries  

Lebanon 

In December 2008, the Commission released the first grant instalment of EUR 
15 million  under  the programme of  macro-financial assistance approved on 10 
December  2007.  The  programme  consists  of  a  grant  of  EUR  30  million  and  a 
loan of EUR 50 million, both to be disbursed in two instalments. The payment 
of the first tranche of the loan (EUR 25 million) was finally made in early June 
2009.  The  second  tranche  is  planned  to  be  released  before  the  end  of  2009 
subject to the fulfilment of the conditionalities attached to this assistance 

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  first 
years of transition to democracy and market economy in the countries of 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 (73% of the decisions from 2000 to 2008) and to the NIS 
countries. The only exception was in 2007 when the Council adopted a Decision 
on an assistance programme in favour of Lebanon. 

3.2.  Evaluations 

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  an  open  call  for  tender  under  the 
supervision of a "Steering Committee". Since 2004, a total of 7 evaluations have 

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been  carried  out.  Two  evaluations  were  completed  in  2008  for  Albania  and 
Serbia and Montenegro; the main observations are the following:  

3.2.1. Albania 

The  evaluation  assessed  Macro  Financial  Assistance  (MFA)  provided  by  the 
European  Commission  to  Albania  in  the  period  April  2004  to  July  2006.  The 
MFA consisted of a loan of EUR 9 million and a grant of EUR 16 million that 
was disbursed in two tranches. 

Net  impact  on  macroeconomic  stabilisation  originated  from  a  direct  effect 
stemming from an increase of budgetary funds in 2006 and 2007, and an indirect 
effect resulting from channelling public wages through the banking sector which 
led to an increase in credit facilities. The accumulative effect on GDP growth in 
the  period  2004-2008  is  expected  to  be  between  0.1  and  0.6  percent.  This  is 
accompanied by a slightly higher inflation and minimally weaker Lek exchange 
rate. 

The evaluation concluded that the MFA had a very limited but positive impact 
on the medium and long term external sustainability prospects of Albania. Some 
positive effects can be ascribed to a small direct effect on economic growth in 
the  period  2004-2008.  MFA  impact  on  other  aspects  of  external  sustainability 
has been negligible. 

3.2.2. Serbia and Montenegro 

The  evaluation  assessed  Macro-Financial  Assistance  (MFA)  to  Serbia  and 
Montenegro provided in the period November 2002 to February 2006. 

The  MFA  operation  allowed  for  a  slightly  more  expansionary  macroeconomic 
policy which marginally improved economic growth performance. However, the 
direct short-term macroeconomic impact of the operation was very small. This 
was  mainly  because  of  the  relatively  small  size  of  the  operation.  Potentially, 
MFA  assistance  could  provide  more  substantial  impact  on  the  medium-term 
macroeconomic outlook through acceleration of structural reforms. 

The evaluation concluded that MFA had positively contributed to the medium to 
long-term  external  sustainability  prospects,  albeit  this  net  impact  was  likely 
limited  and  indirect.  The  primary  channel  through  which  MFA  acted  in  this 
respect appears to be the enforcement of structural reforms and improved overall 
macroeconomic management. 

Evaluations of MFA programmes for Georgia and the Republic of Moldova are 
on-going and their final reports should be made available in the third quarter of 
2009. In addition it has been decided to carry out a meta-evaluation in order to 
assess  the  global  impact  of  macro-financial  assistance.  The  first  results  of  this 
study are expected in the second semester of 2009. 

4. 

IMPROVING  FINANCIAL  MANAGEMENT  IN  BENEFICIARY  COUNTRIES:  THE 
OPERATIONAL ASSESSMENTS 

In  2008  one  follow-up  operational  assessment  was  carried  out  (in  Kosovo). 
Between  2004  and  2007,  seven  operational  assessments  were  completed  in 
countries benefiting from macro-financial assistance (Albania, Armenia, Serbia-
Montenegro,  Bosnia  and  Herzegovina,  Georgia  and  Kosovo).  The  work 

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programme of each operational assessment is elaborated in co-operation with a 
consulting  firm  and  includes  information  contained  in  available  reports  issued 
by  other  donors,  and  notably  the  PEFA  assessments.  Follow  up  missions  have 
been undertaken (in Albania, Armenia, Tajikistan, Georgia and Kosovo) 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  functioning  of  the  treasury 
departments,  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  which  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 that have been detected in the Ministries of Finance are the absence 
of  a  single  treasury  account,  of  appropriate  accounting  systems  and  written 
procedures,  or  the  low  quality  of  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.  

5. 

REQUESTS AND FUTURE COMMISSION PROPOSALS 

The  global  economic  and  financial  crisis  means  that  many  pre-accession  and 
neighbourhood  countries  are  faced  with  an  economic  slowdown  and  a 
deteriorating budget situation; in each of these countries a substantial financial 
gap is emerging. The IMF is the main institution dealing with the consequences 
of the economic crisis, particularly in view of the fact that it has benefited from 
a  substantial  increase  in  resources,  including  a  sizable  contribution  from 

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European  Union  Member  States.  While  the  IMF  will  be  in  the  lead  in 
responding  to  the  crisis  in  countries  neighbouring  the  European  Union,  the 
funding  it  is  providing  may  still  not  be  sufficient  to  cover  these  countries' 
external  financing  needs.  In  this  context,  EU  macro-financial  assistance  could, 
in  helping  to  narrow  the  external  financing  gaps  and  alleviate  pressure  on 
foreign  exchange  reserves  in  the  pre-accession  and  neighbourhood  countries, 
support economic stability and reforms in this region closely linked to the EU. 

Several pre-accession or neighbourhood countries have requested MFA from the 
EU.  Among  the  pre-accession  countries  Serbia,  Bosnia  and  Herzegovina  and 
Montenegro  have  in  recent  months  requested  new  macro-financial  assistance, 
either formally or informally. More requests from the Western Balkan countries 
cannot  be  excluded.  As  regards  neighbourhood  countries,  Georgia,  Ukraine, 
Armenia and most recently Belarus and the Republic of Moldova have requested 
macro-financial  assistance.  Finally  countries  not  belonging  to  the  immediate 
neighbourhood  of  the  EU  have  approached  the  Commission  with  requests  for 
MFA:  the  Kyrgyz  Republic  and  Tajikistan.  Also  Iceland  that  was  particularly 
affected  by  the  global  financial  crisis  (collapse  of  the  exchange  rate  and  of  its 
banking  system)  has  requested  for  financial  assistance  from  the  EU.  The 
Commission is examining these requests and - in the course of 2009 – is likely 
to make formal proposals for new MFA decisions for several of the requesting 
countries. 

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1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Totals

Table 1. Macro-financial assistance, 1990-2008
Maximum amounts authorised, millions euro

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

70

70

45

25

25

16

50
33,5

83,5

83,5

0

Kosovo (35) 
Montenegro 
(20) 
Tajikistan 
(35) Republic 
of Moldova 
(15)

fYRoM (18) 
Serbia and 
Montenegro 
(120) Kosovo 
(30) 

Serbia and 
Montenegro 
(75) Bosnia 
(40) 
Republic of 
Moldova (15) 
(b)

Bosnia (40) 
fYRoM (30)

Serbia and 
Montenegro 
(45) 

    Albania 
(16)

Kosovo (50) 
Georgia 
(33,5)

3.305
1.088
1.037
868

0

6.297,0

905,0

45
80

125

75

Republic 
of 
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

Graph 1a. Maximum amounts authorised by year,
in EUR million

1.808

480

620

555

255

0

15

460

393

150

180

208

70 25

0

83,5 125

0

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Graph 1b. MFA 1990-2008, authorisations 
Distribution by region
NIS
17%

Western 
Balkans
17%

Mediterranean
14%

Central 
European 
Candidate 
Countries
52%

Graph 1c. MFA 2000-2008, authorisations Distribution 
by region

NIS; 19%

; Mediterranean
8%

Western 
Balkans; 73%

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1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Totals

Table 2. Macro-financial assistance, 1990-2008
Disbursements, millions euro 

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

70

25
150

245

270
35

305

35

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

160

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) 

2.780
973
795
703

5.251

770,0

32
29

61

20

20

25
15

40

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

20
Republic of 
Moldova 
(20) 

40
Republic 
of 
Moldova 
(25) 
Lebanon 
(15)

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

1.178

695

305 245

330

421

392

175 195

136 160

203

141

32 66,5 61 20 40

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Graph 2b. MFA 1990-2008, disbursements, 
Distribution by region

Mediterranean
13%

NIS
15%

Western
Balkans
19%

Central 
European 
Candidate 
Countries
53%

Graph 2c. MFA 2000-2008,
disbursements, Distribution by region

Central 
European 
Candidate 
Countries
18%

NIS
14%

Western
Balkans
68%

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