REPORT FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN PARLIAMENT on the implementation of macro-financial assistance to third countries in 2010
Date: 2011-07-07
Institutions: European Commission
Subjects: EU aid, economic reform, financial aid, financial cooperation, financial management, third country

EUROPEAN COMMISSION 

Brussels, 7.7.2011 
COM(2011) 408 final 

REPORT FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN 
PARLIAMENT 

on the implementation of macro-financial assistance to third countries in 2010 

{SEC(2011) 873 final} 
{SEC(2011) 874 final} 

 
 
  
 
TABLE OF CONTENTS 

1. 

2. 

2.1. 

2.2. 

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

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

Dealing with the lingering consequences of the global recession................................ 3 

Establishing new rules for macro-financial assistance operations ............................... 4 

2.2.1.  MFA Framework Regulation ....................................................................................... 4 

2.2.2.  Criteria on the use of loans and grants in MFA operations.......................................... 5 

3. 

3.1. 

3.2. 

Macro-financial assistance Operations in 2010 ........................................................... 5 

Overview ...................................................................................................................... 5 

Individual operations in the beneficiary countries in 2010 .......................................... 6 

3.2.1.  Western Balkans........................................................................................................... 6 

3.2.1.1.  Bosnia and Herzegovina............................................................................................... 6 

3.2.1.2.  Kosovo1 ........................................................................................................................ 6 

3.2.1.3.  Serbia............................................................................................................................ 7 

3.2.2.  Eastern Neighbourhood Countries ............................................................................... 7 

3.2.2.1.  Armenia........................................................................................................................ 7 

3.2.2.2.  Georgia ......................................................................................................................... 8 

3.2.2.3.  The Republic of Moldova ............................................................................................ 8 

3.2.2.4.  Ukraine ......................................................................................................................... 9 

3.2.3.  Mediterranean Neighbourhood Countries.................................................................... 9 

3.2.3.1.  Lebanon........................................................................................................................ 9 

4. 

4.1. 

4.2. 

4.3. 

5. 

Ensuring a proper use of MFA funds: operational assessments, PEFA and Ex-
post Evaluations ......................................................................................................... 10 

Operational assessments............................................................................................. 10 

Public Expenditure and Financial Accountability assessments ................................. 10 

Ex-post evaluations .................................................................................................... 11 

Requests for assistance and future Commission proposals ........................................ 11 

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1. 

INTRODUCTION 

The  report  provides  a  general  overview  of  the  implementation  of  the  instrument  of  EU 
macro-financial  assistance  (MFA)  to  third  countries  in  2010.  It  describes  the  overall 
context in which MFA operations were approved and implemented, includes information 
on the most recent operations in the countries neighbouring the EU and presents general 
statistics on the various MFA operations carried over the last ten years. 

The year 2010 was one of the most active years in the operation of the MFA instrument 
since the beginning of the decade, reflecting the impact of the global economic crisis and 
of the slow exit from the crisis for the EU's neighbourhood. It was also the first year of 
operation  of  MFA  in  the  new  legal  environment  created  by  the  entry  into  force  of  the 
Lisbon Treaty. 

The  report  also  briefly  discusses  the  main  objectives  of  the  proposal,  currently  under 
preparation,  of  a  Framework  Regulation  for  MFA,  a  proposal  that  is  expected  to  be 
submitted to the Parliament and the Council this year. It also explains the methodology 
that  the  Commission  uses  for  deciding  between  the  use  of  loans  and  grants  in  the 
individual MFA operations that it proposes.  

The report also contains a section on the operational assessments, Public Expenditure and 
Financial Accountability (PEFA) studies and ex-post evaluations conducted in countries 
receiving MFA. The Commission has, since 2004, carried out operational assessments of 
the financial circuits and procedures related to MFA in each of the recipient countries, in 
response to the recommendation of the Court of Auditors. The Financial Regulation also 
requires  the  Commission  to  conduct  ex-post  external  evaluations  of  its  programmes.  In 
2010,  the  Commission  conducted,  with  the  support  of  consultants,  three  follow-up 
operational  assessments  and  one  PEFA  study  in  countries  of  operation.  As  no  MFA 
operations had been completed in 2009, no ex-post evaluations were initiated in 2010.  

Finally,  the  report  provides  information  on  new  requests  for  MFA  and  possible  new 
Commission MFA proposals in the pipeline. 

This report is prepared in accordance with the Council and joint Council and Parliament 
decisions  regarding  MFA  operations.  It  follows  the  reports  presented  in  the  previous 
years.  It  is  accompanied  by  two  Commission  Staff  Working  Documents,  one 
(SEC(2011)873  final)  providing  more  detailed  information  and  analysis  of  the 
macroeconomic  context  and  implementation  of  individual  MFA  operations  and  one 
(SEC(2011)  874  final)  explaining  in  more  detail  the  methodology  used  by  the 
Commission to decide between the use of loans and grants in MFA operations. 

Background 

1.1. 

Dealing with the lingering consequences of the global recession 

The  global  economic  and  financial  crisis  of  2008-2009,  which  affected  profoundly  the 
emerging economies of the European Union's neighbourhood, resulted in a sharp increase 
of international donor support to the area, in particular from the IMF. It also resulted in a 
surge  in  requests  for  financial  support  from  the  EU,  including  in  the  form  of  MFA.  A 
number  of  these  requests  translated  in  actual  support  programmes  designed  to  help 

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countries deal with the negative implications of the global crisis. Four such programmes 
in favour of Bosnia and Herzegovina, Serbia, Armenia and Georgia were decided by the 
EU Council of Ministers at the end of 2009. In 2010, two more programmes, in favour of 
Ukraine  and  the  Republic  of  Moldova,  were  decided  by  the  EU  legislators  –  this  time 
jointly by the Council and the Parliament – in response to the requests submitted in 2009.  

In  2010,  the  global  economic  and  financial  crisis  receded.  The  advanced  economies, 
including  those  of  the  European  Union,  started  growing  again,  which  translated  into 
higher  demand  for  the  exports  of  their  trading  partners,  including  the  countries  of  the 
EU's  neighbourhood.  Thus,  growth  in  the  countries  of  the  Western  Balkans  and  of  the 
Eastern Neighbourhood resumed, sometimes in an impressive way. Yet, despite the start 
of  the  recovery,  the  effects  of  the  global  crisis  and  of  the  resulting  shocks  on  the 
economies  of  the  region,  including  the  weak  external  financial  positions,  have  not 
disappeared. Thus, the scope remains for donor support to many countries of the Eastern 
Europe and the Western Balkans.  

In  2009  and  2010  the  countries  of  the  EU's  Mediterranean  Neighbourhood  had  shown 
more resilience to the crisis than Western Balkan and Eastern ENP partners. The ongoing 
political turmoil in the South Mediterranean could change this in 2011.  

1.2. 

Establishing new rules for macro-financial assistance operations 

1.2.1.  MFA Framework Regulation 

As  early  as  2003,  the  European  Parliament  identified  the  lengthy  decision-making 
process – decisions on individual MFA operations were taken on a case-by-case basis by 
the  Council,  after  consultation  of  the  Parliament  –  as  one  of  the  main  shortcomings  of 
MFA.  Also,  the  Parliament  stressed  the  need  for  a  transparent  legal  basis  for  the 
instrument of MFA as a whole. Since the entry into force of the Lisbon Treaty, legislative 
decisions  on  individual  MFA  operations  are  taken  by  the  Parliament  and  the  Council 
under  the  ordinary  legislative  procedure  (co-decision).  This  can  further  lengthen  the 
decision-making process. The Lisbon Treaty has therefore added an element of urgency 
to  the  need  to  streamline  the  procedure  for  adopting  MFA  decisions.  In  addition,  as 
highlighted  by  the  global  financial  crisis,  dealing  effectively  with  macroeconomic  and 
financial emergency situations requires a crisis response instrument that can be deployed 
quickly and efficiently.  

Responding  to  these  developments,  the  preparation  of  a  legislative  proposal  of  a  MFA 
Framework  Regulation  was  included  in  the  Commission  Work  Programme.  This 
proposal is expected to be submitted to the Parliament and the Council shortly.  

Under  the  proposed  future  Framework  Regulation,  the  decision-making  procedure  for 
MFA would become similar to that of other external financing instruments, whereby the 
Commission  has  competence  for  adopting  decisions  to  grant  MFA  to  eligible  third 
countries  under  the  supervision  of  a  committee  of  Member  State  representatives.  This 
approach  should  streamline  the  decision-making  for  individual  MFA  operations  so  that 
the  instrument  can  better  help  beneficiary  countries  to  adopt,  in  due  time,  programmes 
that include an appropriate mix of adjustment measures and external financial support.  

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The Regulation under preparation also consolidates in a formal legal instrument the rules 
guiding MFA operations, defined until now in Council conclusions (the so-called Genval 
criteria). The forthcoming Commission proposal essentially confirms these criteria, while 
updating and clarifying some of them.  

1.2.2.  Criteria on the use of loans and grants in MFA operations 

Another  aspect  of  the  Commission's  methodological  work  on  the  MFA  instrument  in 
2010  was  the  review  of  the  broad  criteria  for  the  choice  of  the  appropriate  form  of 
support, i.e. medium- to long-term loans, grants, or a combination of both, in individual 
MFA  operations.  Building  on  the  practices  developed  over  the  years,  the  Commission 
refined  and  clarified  its  methodological  approach.  Starting  from  the  premise  that  MFA 
should,  by  default,  take  the  form  of  loans,  the  approach  provides  guidance  on  which 
countries  could  be  considered  for  MFA  grants.  It  is  based  on  objective  indicators 
concerning the level of development and the debt sustainability of beneficiary countries, 
consistent with the practice applied by the international financial institutions (IFIs).  

2. 

MACRO-FINANCIAL ASSISTANCE OPERATIONS IN 2010 

2.1. 

Overview  

In 2010, the Commission completed the implementation of three MFA programmes: two 
programmes decided back in 2006 and 2007 for, respectively, Kosovo and Lebanon and 
one of the four programmes approved by the Council on 30 November 2009, the one for 
Georgia. The Kosovo and Lebanon operations were implemented only in par: the second 
instalments  of  the  assistance  were  not  disbursed.  The  MFA  operation  for  Georgia  was 
implemented  in  full,  and  the  Commission  prepared  a  follow-up  programme.  Under  the 
other three operations decided in November 2009, in favour of Bosnia and Herzegovina, 
Serbia and Armenia, no disbursements took place in 2010 and in early 2011, reflecting 
delays  in  agreeing  the  economic  conditions  of  the  programmes  and  in  completing  the 
necessary administrative and legal procedures in the beneficiary countries.  

Also,  in  2010  two  first  legislative  decisions  on  MFA  under  the  Lisbon  Treaty  were 
adopted by the co-legislators: programmes for Ukraine (EUR 500 million, in loans) and 
for  the  Republic  of  Moldova  (EUR  90  million,  in  grants).  The  release  of  the  first 
instalment under the operation for the Republic of Moldova took place already in 2010. 
The  new  loan  for  Ukraine,  if  implemented  in  full,  will  be  the  largest  ever  MFA 
operation.2  

Given  the  size  of  the  two  MFA  operations  adopted,  the  year  2010  was  a  peak  year  in 
terms  of  MFA  commitments  (see  Table  1  and  Charts  1a  and  1b).  The  total  amount  of 
funds committed under the programmes approved since the start of the latest economic 

2 

The EUR 500 million available under the July 2010 decision for Ukraine will be combined with 
EUR  110  million  that  remained  undisbursed  from  the  2002  MFA  decision  for  this  country, 
implying  an  operation  of  a  maximum  amount  of  EU  610  million.  This  will  imply  the  second 
largest MFA programme ever decided. The largest MFA operation – a loan facility of EUR 870 
million for Hungary decided in 1990 – was suspended after the release of the first instalment of 
EUR 260 million. 

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crisis exceeded EUR 1 billion, which is more than the combined amount under all MFA 
programmes approved between 2001 and 2008. Also, in these two years, the total amount 
of  MFA  loans  approved  exceeded  by  far  the  total  amount  of  MFA  grants.  Finally,  the 
two  new  operations  have  also  re-balanced  the  geographical  repartition  of  MFA 
commitments  in  favour  of  the  EU's  Eastern  Neighbourhood,  at  the  expense  of  the 
Western Balkans. 

The  other  important  development  of  2010  is  a  recovery  in  terms  of  disbursements,  to 
over EUR 100 million (see Table 2 and Charts 2a and 2b). The annual amount of MFA 
payments made in 2010 was the highest annual amount since 2003.  

2.2. 

Individual operations in the beneficiary countries in 2010 

2.2.1.  Western Balkans 

2.2.1.1.  Bosnia and Herzegovina 

In  July  2009  the  IMF  had  concluded  with  the  authorities  a  EUR  1.1  billion  Stand-By 
Arrangement  (SBA)  in  support  of  an  economic  programme  aimed  at  correcting  the 
external  and  fiscal  imbalances  resulting  from  the  global  crisis.  On  30  November  2009, 
the EU decided to complement the SBA with a MFA of up to EUR 100 million, in loans 
(Council decision 2009/891/EC).  

In  2010,  the  economy  of  Bosnia  and  Herzegovina  was  moderately  recovering  from  the 
recession experienced in 2009. The recovery was driven by exports, reflecting the strong 
economic  growth  of  some  of  the  country's  main  trading  partners.  The  export  growth 
resulted  in  the  narrowing  of  the  current  account  deficit  and  in  a  build  up  of  a  more 
comfortable level of foreign reserves, leading to a decrease of Bosnia and Herzegovina's 
external  financing  needs  throughout  2010  (as  estimated  by  the  IMF).  Against  this 
background, after the successful conclusion of the second and third reviews of the IMF 
programme in October (the programme remained on-track in 2010), the central bank did 
not  draw  funds  available  under  the  third  tranche,  reflecting  its  comfortable  level  of 
foreign exchange reserves. In early 2010, the Commission negotiated a Memorandum of 
Understanding  (MoU)  and  the  Loan  Agreement  (LA)  with  the  authorities  laying  down 
the economic policy conditionality of the assistance. Following a delayed agreement on 
this  MoU  by  the  state  and  the  two  entities,  the  MoU  and  the  LA  were  signed  in 
November  2010,  after  the  general  elections.  The  ratification  of  the  LA  was,  however, 
further delayed until 2011, awaiting the newly elected parliaments to become functional. 
Disbursements are expected to take place in the course of 2011. 

2.2.1.2.  Kosovo3 

The economy of Kosovo continued growing in 2010 after expanding already in 2009 by 
2.9%,  mainly  driven  by  public  expenditure.  There  are  increasing  risks  to  the  growth 
outlook as the fiscal expansion that has been underpinning it is reaching its limits. 

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The exceptional financial assistance in favour of Kosovo in the form of EUR 50 million 
budget  support  grants  dating  back  to  2006  (Decision  2006/880/EC  of  30  November 
2006)  was  initially  to  expire  in  December  2009.  In  December  2009,  the  Commission 
decided to extend the availability period of the programme by one additional year, until 
11 December 2010. In July 2010, Kosovo's government reached an agreement with the 
IMF on an economic programme supported by an 18-month Stand-By Arrangement. This 
was the last pending condition for the release of the first instalment under the EU MFA 
programme. Thus the Commission disbursed in September 2010 the first EUR 30 million 
grant tranche. Following the dissolution of the Kosovo Parliament in November, the IMF 
could not complete the first review of the SBA programme before the end of 2010. The 
Commission  was  therefore  not  in  a  position  to  assess  whether  the  agreement  with  the 
IMF  remained  on  track,  which  was  a  key  condition  for  the  release  of  the  outstanding 
second  tranche  of  EUR  20  million.  The  availability  of  the  assistance  expired  in 
December 2010 and could not be renewed.  

2.2.1.3.  Serbia 

Following  a  3.5%  drop  of  output  in  real  terms  in  2009,  the  Serbian  economy  began  to 
recover  in  2010.  The  economic  upturn  in  2010  (+1.8%)  was  largely  driven  by  foreign 
demand  while  domestic  consumption  and  investment  remained  constrained.  As  an 
economic  recovery  was  gradually  underway  in  Serbia's  main  trading  partners,  and  the 
dinar continued to depreciate, export activity boomed. The IMF programme worth EUR 
3 billion which ran between May 2009 and April 2011 remained on track and the IMF 
Board  successfully  completed  all  seven  reviews  of  the  programme.  In  view  of  the 
improved balance of payments situation, the Serbian central bank drew upon only half of 
the available SBA funds. 

Following the approval by the Council of a MFA loan facility of up to EUR 200 million 
at  the  end  of  2009  (Council  Decision  2009/892/EC  of  30  November  2009),  the 
Commission  and  the  Serbian  authorities  signed  in  July  2010  a  MoU  which  set  out  the 
conditionality of this assistance. The Loan Agreement was signed in December. In view 
of the reduction of the planned drawings by the Serbian authorities of IMF resources, the 
Commission  informed  the  Economic  and  Financial  Committee  in  July  2010  that  it  was 
planning to scale down the EU assistance and to disburse only its first tranche (EUR 100 
million). The Committee endorsed the Commission's approach. Following the ratification 
of the MFA LA in March 2011, the Commission is preparing the release of this tranche, 
expected to take place in summer 2011. 

2.2.2.  Eastern Neighbourhood Countries 

2.2.2.1.  Armenia 

In 2010, the Armenian economy recovered somewhat from the sharp downturn of 14.2% 
in  2009;  yet,  the  pace  of  recovery  remained  modest,  with  real  GDP  growing  by  2.6%. 
Also, the recovery in both the current account and foreign investments remained muted. 
Thus  the  external  financing  needs  remain  substantial  and  support  by  the  international 
community  remains  necessary  to  re-create  conditions  for  sustained  growth.  It  is  in  this 
context  that  the  Armenian  government  continued  the  implementation  of  the  economic 
stabilisation and reform programme supported by the international donor community. 

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Armenia's  agreement  with  the  IMF  dates  back  to  March  2009,  when  the  IMF  Board 
approved a 28-month SBA of USD 820 million. In June 2010, the SBA was replaced by 
a  new  three-year  programme  under  the  Extended  Fund  Facility  (EFF)  and  the 
concessional  Extended  Credit  Facility  (ECF).  Taking  into  account  the  disbursements 
made  under  the  SBA,  total  access  of  Armenia  to  IMF  resources  in  2009-2013  is 
estimated to around USD 950 million. On 30 November 2009, the EU Council adopted a 
Decision on the provision of MFA to Armenia amounting to EUR 100 million, including 
EUR 35 million in grants and EUR 65 million in loans (Council Decision 2009/890/EC). 
With  a  view  to  implementing  this  decision,  the  Commission  and  the  authorities  of 
Armenia agreed in December 2010 on the MoU and the related legal documents (Loan 
and Grant Agreements), which were signed in February 2011. The disbursements under 
the MFA programme are scheduled to take place in 2011.  

2.2.2.2.  Georgia 

In  2010,  the  EU  completed  the  implementation  of  the  MFA  programme  for  Georgia 
approved  by  the  Council  in  November  2009  (Council  Decision  2009/889/EC  of  30 
November 2009). The assistance of EUR 46 million, provided in the form of grants, was 
part of a pledge of two possible EU funded MFA operations of the same amount made by 
the  Commission  at  the  International  Donors'  Conference  of  October  2008.  The  aim  of 
these operations was to help Georgia overcome the impact of the double shock caused by 
the  2008  military  conflict  with  Russia  (and  related  trade  blockade)  and  the  global 
financial crisis. Since September 2008, Georgia has been successfully implementing an 
economic programme agreed with the IMF and supported by IMF funding. 

Following  the  disbursement  of  the  first  tranche  of  the  2009  assistance  programme  in 
December 2009 and January 2010, the second tranche of EUR 23 million was disbursed 
in  August  2010.  The  release  of  the  tranche  was  made  possible  by  the  successful 
implementation by the Georgian authorities of the structural reform policies, in particular 
in the area of public finance management, agreed in 2009 to serve as conditions for the 
release of the assistance.  

At the same time, the Commission started the preparation of the second MFA operation. 
This second MFA pledged in 2008 was conditional on the continued existence of external 
financing  needs  over  and  above  those  covered  by  the  IMF  arrangement.  Based  on  a 
thorough  assessment  of  Georgia'  financing  needs,  and  building  on  the  successful 
completion of the previous MFA operation, the Commission adopted in January 2011 a 
proposal  for  the  activation  of  the  second  part  of  the  MFA  pledged  in  2008.  The 
Commission's proposal foresees a combination of grants (for half of the total amount of 
assistance)  and  loans.  The  new  programme  will  support  the  continuation  of  reforms  in 
some of the the key areas of structural reform, including public finance management. The 
joint European Parliament and Council Decision is expected in summer 2011. 

2.2.2.3.  The Republic of Moldova 

The Commission had started preparing a MFA programme for the Republic of Moldova 
already in 2009, when a new pro-reform coalition formed a government and developed a 
new ambitious reform agenda. This work, conducted in close coordination with the IFIs, 
continued  in  the  beginning  of  2010,  after  the  approval  by  the  IMF  Executive  Board  in 

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January  2010  of  a  three-year  ECF-EFF  financing  arrangement,  and  resulted  in  the 
submission  to  the  European  Parliament  and  the  Council  of  a  proposal  for  a  MFA 
amounting  to  EUR  90  million,  in  grants,  to  be  disbursed  in  three  tranches  in  2010  and 
2011.  The  Commission's  proposal  was  finally  approved  by  the  co-legislators  on  20 
October  2010  (Decision  938/2010/EU).  Following  the  adoption  of  the  MFA  legislative 
decision, the Commission and the authorities finalised the negotiations on the economic 
policy conditions of the assistance. The agreement on the MoU allowed the Commission 
to disburse already in December 2010 the first tranche of EU MFA, of EUR 40 million. 

In  2010,  the  Moldovan  economy  started  to  recover,  after  the  contraction  of  2009.  Yet, 
Moldova's external accounts remain weak, which implies that international donor support 
remains an important factor in maintaining macro-economic stability and supporting the 
government's  reform  agenda.  EU  MFA  will  complement  financial  resources,  totalling 
around  USD  1.4  billion,  provided  by  the  IMF,  the  World  Bank,  other  multilateral 
creditors and official bilateral donors, and the EU, in the form of EIB loans and sectoral 
budget support.  

2.2.2.4.  Ukraine 

Ukraine’s  economy  entered  a  phase  of  recovery  in  2010  with  a  return  to  economic 
growth,  lower  domestic  inflation,  a  stabilisation  of  the  hryvnia,  a  replenishment  of 
official  foreign  exchange  reserves  and  a  narrowing  of  the  public  deficit.  However,  the 
rebound  in  investment  remained  timid,  while  the  current  account  has  swung  back  into 
deficit,  raising  some  doubts  about  the  medium-term  sustainability  of  the  recovery  and 
prolonging the country’s dependency on official external financial support. Against this 
backdrop, the EU’s co-legislators adopted a Decision in July 2010 to provide EUR 500 
million  of  MFA  to  Ukraine  (Decision  388/2010/EU  of  7  July  2010).  This  was  the  first 
MFA operation approved after the entry into force of the Lisbon Treaty according to new 
rules (co-decision of the Council and Parliament). This EU MFA supplements the SDR 
10 billion being  made  available by the  IMF in  the  context  of the SBA  approved on 29 
July 2010 (in replacement of an earlier SBA approved in November 2008). 

In 2010, the European Commission launched negotiations with the Ukrainian authorities 
on the policy conditions associated with a MFA loan package of up to EUR 610 million, 
combining  the  amounts  available  under  the  MFA  Decision  of  2010  and  that  of  2002 
(Council  Decision  2002/639/EC  of  12  July  2002).  However,  progress  with  the 
negotiation  of  these  policy  conditions  (which  are  expected  to  include  measures  in  the 
areas  of  public  finance  management,  tax  and  customs  administration,  energy  and 
financial  sector  regulations)  have  been  slow,  delaying  the  implementation  of  this 
operation.  

2.2.3.  Mediterranean Neighbourhood Countries  

2.2.3.1.  Lebanon 

The MFA programme for Lebanon, consisting of a grant of EUR 30 million and a loan of 
EUR 50 million, was approved in 2007 (Council Decision 2007/860/EC of 10 December 
2007).  The  first  tranche  under  this  programme,  corresponding  to  half  of  the  amount  of 
both  the  grant  and  loan  components,  was  disbursed  in  December  2008  (the  grant  part) 

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and  June  2009  (the  loan  part).  The  disbursement  of  the  second  tranche  could  not  take 
place before the original date of expiry of the programme (21 December 2009), owing to 
the  failure  of  the  authorities  to  meet  the  conditions  agreed  with  the  Commission  in  the 
MoU. The lack of progress in implementing the structural reforms reflected the lack of 
political  consensus  within  the  fragile  coalition  government  and  the  near-paralysis  of 
legislative activity for most of 2008 and 2009, despite the parliamentary elections of June 
2009.  

At  the  end  of  2009,  the  Commission  proposed  to  extend  the  availability  period  for  the 
release of the second tranche until 21 December 2010, through an addendum to the MoU. 
This addendum was, however, never ratified by the Lebanese authorities. Also, very little 
progress  was  made  in  2010  in  implementing  the  structural  reforms,  several  of  which 
constituted conditions for the release of the second instalment under the EU MFA. Thus, 
the  MFA  to  Lebanon  expired  in  December  2010.  The  expiration  of  the  programme 
without  being  implemented  in  full  reflects  also  the  lack  of  a  successor  IMF  financial 
arrangement  to  the  Fund's  Emergency  Post-Conflict  Assistance  (EPCA)  II  programme, 
which  expired  in  June  2009,  as  well  as  the  improvement  of  Lebanon’s  balance  of 
payments position. Indeed, the Lebanese economy showed great resilience to the global 
financial  crisis  despite  the  politically  uncertain  environment,  with  buoyant  economic 
activity and an improved external financial position.  

3. 

ENSURING A PROPER USE OF MFA FUNDS: OPERATIONAL ASSESSMENTS, PEFA 
AND EX-POST EVALUATIONS 

3.1. 

Operational assessments  

In  line  with  the  requirements  of  the  Financial  Regulation  related  to  the  EU  budget  to 
perform inspections before disbursing funds to recipient countries, the Commission, with 
the  help  of  external  consultants,  carries  out  operational  assessments  (OAs)  to  obtain 
reasonable  assurances  on  the  functioning  of  administrative  procedures  and  financial 
circuits of the recipient countries. 

The  OAs  focus  on  the  procedures  and  the  organisation  of  the  ministries  of  finance  and 
central banks and, more specifically, on the management of accounts receiving EU funds. 
In  addtion,  special  attention  is  given  to  how  external  audit  institutions  work,  their 
independence, their work programmes and the effectiveness of their controls. In the most 
recent  OAs  an  analysis  of  existing  procedures  in  the  procurement  agencies  was  also 
undertaken.  

In  2010,  the  Commission  conducted  OAs  in  Armenia,  the  Republic  of  Moldova  and 
Georgia.  The  main  conclusions  of  these  OAs  are  reported  in  the  Commission  Staff 
Working Document (SEC (2011) 873 final). 

3.2. 

Public Expenditure and Financial Accountability assessments 

The Commission is seeking complementarity with the other diagnostic tools in the area 
of  public  finance  management  in  countries  benefitting  from  donor  support.  In  this 
context,  the  Public  Expenditure  and  Financial  Accountability  (PEFA)  programme 

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founded  in  2001  as  a  multi-donor  partnership  involving,  inter  alia,  the  European 
Commission, the World Bank and the IMF is a particularly suitable framework.  

In recent years, PEFA studies have been completed for a number of countries receiving 
or potentially eligible to MFA: Armenia (2008), Belarus (2009), Georgia (2008), Kosovo 
(2009), the Kyrgyz Republic (2009), the Republic of Moldova (2008), Morocco (2009) 
and  Serbia  (2010).  The  Commission  co-authored,  together  with  the  World  Bank,  the 
PEFA studies of Georgia and Morocco and contributed directly to several other studies. 
In  2010,  the  Commission  conducted  a  PEFA  assessment  of  Lebanon  but  the  study  has 
not yet been finalised. At present, the Commission is preparing, together with the World 
Bank,  two  PEFA  studies,  updating  earlier  PEFA  assessments  of  Ukraine  (conducted  in 
2007) and the Republic of Moldova. 

The  finding  of  these  PEFA  studies  will  complement  the  latest  OAs  of  the  financial 
procedures  in  these  two  countries.  They  will  be  very  useful  in  supporting  the  ongoing 
MFA operations, notably the monitoring/design of conditions on PFM.  

3.3. 

Ex-post evaluations 

To assess the impact of MFA and in line with the Financial Regulation, the Commission 
conducts  ex-post  evaluations  of  the  MFA  programmes.  The  conclusions  of  the 
evaluations  are  being  taken  into  account  in  strengthening  MFA  management  practices. 
They  were  also  used  in  the  design  of  the  Framework  Regulation  for  MFA,  under 
preparation.  

In  2010,  no  new  ex-post  evaluations  were  launched  as  no  MFA  operations  were 
completed  in  2009.  Two  evaluations  initiated  in  2009  were  completed  in  2010:  the 
evaluations  of  the  MFA  programmes  for  Georgia  and  the  Republic  of  Moldova 
implemented, respectively, in 2006-2008 and 2007-2008. The results of these evaluations 
were  presented  in  the  2009  Annual  Report  on  the  implementation  of  MFA  to  third 
countries.  

Following the completion in August 2010 of the implementation of the MFA programme 
for Georgia and the expiry in December 2010 of the MFA programmes for Kosovo and 
Lebanon, the Commission is planning to launch in the course of 2011 ex-post evaluations 
of these three operations. 

4. 

REQUESTS FOR ASSISTANCE AND FUTURE COMMISSION PROPOSALS 

The MFA operations under implementation in 2011 comprise the programmes approved 
in  the  period  2009-2010  in  favour  of  Bosnia  and  Herzegovina,  Serbia,  Armenia,  the 
Republic  of  Moldova  and  Ukraine.  The  implementation  of  all  these  programmes,  with 
the exception of the one for Ukraine, is expected to be completed in 2011. Also, the new 
programme for Georgia, currently under consideration by the co-legislators, is expected 
to be approved shortly. This operation is also planned to be completed in 2011. 

The current pipeline of MFA operations planned or foreseen in 2011-2012 includes also a 
possible programme for Kosovo. After the expiration of the previous programme, a new 

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MFA operation would correspond to the conditional pledge made by the EU at the June 
2008 donor conference on Kosovo, for an amount of up to EUR 100 million, in grants. 

The Commission received in 2010 a request for assistance from the new authorities of the 
Kyrgyz  Republic.  An  initial  request  submitted  in  the  first  half  of  2009  by  the  previous 
administration  was  declared  ineligible  given  that  substantial  financing  committed  by 
Russia  had  resulted  in  the  elimination  of  a  residual  financing  gap.  This  new  request 
followed  the  2010  political  events  in  the  country.  The  Commission  is  currently  re-
assessing  the  economic  situation  and  financing  needs  of  the  Kyrgyz  Republic,  in  close 
contact with the IMF and in the context of a large mobilisation of official donors. 

Other  possible  new  MFA  programmes  could  come  from  the  activation  of  the  requests 
submitted by Iceland and Belarus in 2009. An MFA operation in Iceland appears at this 
stage  unlikely  due  to  the  much  improved  external  outlook.  Moreover,  the  IMF 
programme  expires  in  August  2011  and  the  authorities  do  not  intend  to  request  a 
disbursing successor programme. While the balance of payments position of Belarus has 
deteriorated  significantly  since  the  beginning  of  2011,  the  EU's  response  to  a  possible 
request from Belarus, if and when the IMF negotiates with the country's authorities a new 
financing arrangement  (the  previous SBA expired in early 2010), will depend critically 
on  Belarus'  capacity  to  meet  the  political  pre-conditions  for  MFA,  notably  the  need  to 
guarantee  democratic  institutions  and  the  protection  of  human  rights.  These  pre-
conditions are currently not met.  

In addition, follow-up operations to the existing programmes (and in the context of the 
existing medium-term financing arrangements with the IMF expiring in 2013) could be 
anticipated for Armenia and the Republic of Moldova. 

In view of the likely short-term financing needs in some of the Southern Neighbourhood 
countries  undergoing  political  changes  (e.g.  Egypt  and  Tunisia),  there  is  also  a  strong 
possibility that the EU will be called to provide financial support, including in the form 
of  MFA,  for  some  of  the  most  affected  countries.  The  prospect  of  activating  the 
instrument of MFA for some of the Mediterranean countries was explicitly confirmed in 
the joint Communication by the Commission and the High Representative of the EU for 
Foreign Affairs and Security Policy "A Partnership for Democracy and Shared Prosperity 
with  the  Southern  Mediterranean"  adopted  on  8  March  2011.  As  noted  in  this 
Communication, and as it is the case for all MFA operations, two pre-conditions would 
have to be satisfied for the EU to be able to consider such assistance in the region: the 
existence of IMF arrangement and the confirmation by the Commission, in liaison with 
the IMF, of the existence of residual balance of payments financing needs. In the case of 
Egypt,  the  authorities  are  negotiating  a  programme  with  the  IMF  and  sent,  on  9  June 
2011, a formal request for complementary MFA to the Commission. The Commission is 
in the process of estimating, in liaison with the IMF, Egypt's residual external financing 
needs with a view to the possible adoption of a proposal for a MFA to this country. 

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Table 1: MFA amounts authorised by year during 2001-2010 in EUR million  

By region
Western Balkans
NIS
Mediterranean
Total amounts authorised1
Loans
Grants

2001

2002*

2003

2004

2005

2006

2007

2008

2009

2010

     Total

393

393
225
168

190
18

208
78
130

70

70
25
45

25

25
9
16

50
33,5

83,5
0
83,5

0

45
80
125
50
75

300
146

446
365
81

1028
832,5
80
1940,5
1252
688,5

590

590
500
90

0
0
0

* Net amount for Ukraine taking into account new loan of EUR 110 million together with simultaneous cancellationof EUR 92 million out of the EUR 150 million 

 decided in 1998 and grant for Moldova of EUR 15 million and simultaneous cancellation of the EUR 15 million loan decided in 2000

1 More detailed information is available in the statistical data of the working document

Chart 1a: MFA amounts authorised by year during 2001-2010 in EUR million 

590

446

393

208

70

25

0

125

83,5

0

2001

2002*

2003

2004

2005

2006

2007

2008

2009

2010

Chart 1b: MFA amounts authorised by regions in 2001-2010 

Mediterranean
4%

NIS
43%

Western Balkans
53%

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Table 2: MFA amounts disbursed by year during 2001-2010 in EUR million  

By region
Central European Candidate Countries
Western Balkans
NIS
Mediterranean
Total amounts disbursed1
Loans
Grants

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

    Total

312
80

392
287
105

130
11

141
0
141

50
146
7

203
118
85

20
12

32
10
22

58
8,5

66,5
15
51,5

32
29

61
19
42

20

20
0
20

25
15
40
0
40

15,3
25
40,3
25
15,3

30
70,7

100,7
0
100,7

50
728
279
40
1.097
474
623

1 More detailed information is available in the statistical data of the working document

Chart 2a: MFA amounts disbursed by year during 2001-2010 in EUR million 

392

203

141

66,5

61

32

40

40,3

20

100,7

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Chart 2b: MFA amounts disbursed by regions in 2001-2010 

Mediterranean
4%

NIS
25%

Central European 
Candidate 
Countries
5%

Western Balkans
66%

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