Ex post evaluation of the MFA operation in the Former Yugoslav Republic of Macedonia

Transcription

1 Ex post evaluation of the MFA operation in the Former Yugoslav Republic of Macedonia Final report Client: European Commission, DG ECFIN Submitted by In consortium with Evaluation team: Albert de Groot Christian Hiddink Malgorzata Markiewicz Artur Radziwill Marjan Nikolov Marek Dabrowski Rotterdam, 31 July 2006

2

3 ECORYS Nederland BV P.O. Box AD Rotterdam Watermanweg GG Rotterdam The Netherlands T +31 (0) F +31 (0) E netherlands@ecorys.com W Registration no ECORYS Macro & Sector Policies T +31 (0) F +31 (0) SKH/AG12916finrep

4 SKH/AG12916finrep

5 Table of contents Acronyms and abbreviations 9 Preface 11 Executive Summary 13 Background 13 Evaluation objective and approach 13 Impact on macroeconomic stabilisation 14 Impact on external sustainability 14 Impact on structural reforms 15 Impact on alleviation of the social consequences of the Kosovo crisis 16 Design and implementation: Findings, conclusions and recommendations 16 1 Evaluation objective and approach Purpose of the evaluation Evaluation approach and method Structure of the report 21 2 Background to the MFA operation History of the MFA operation Relative importance of MFA 24 3 Impact on macroeconomic stabilisation Introduction Macroeconomic objectives of intervention Gross impact actual macroeconomic outcomes Introduction Specific aspects Selection of indicators Macroeconomic developments set against the objectives Conclusions Counterfactual Alternative arrangements Outcomes Conclusions Net impact on macroeconomic stabilisation Conclusions Indirect macroeconomic effects of structural conditionality Unexpected macroeconomic results 45 SKH/AG12916finrep

6 3.8 Summary 46 4 Impact on external sustainability Introduction Gross impact actual evolution of external sustainability indicators Identification of major risk factors Projections of external sustainability baseline and sensitivity analysis MFA contribution to medium to long-term external sustainability prospects 51 5 Impact on structural reforms Introduction Structural objectives of the intervention Relevance of structural objectives Introduction Right conditions? Conclusion Gross impact actual structural reform outcomes Introduction Progress in the selected areas of reform Conclusion Counterfactual Introduction Counterfactual arrangements Net impact on structural reforms Analysing the net impact of MFA Conclusion Impact of complementarity with other EU instruments Unexpected impact on structural reforms 77 6 Structural reforms: case studies Case study I: Privatisation and liquidation Case study II: Wage decompression 83 7 Impact on alleviation of the social consequences of the Kosovo crisis Introduction The social consequences of economic disruption Objectives of intervention Gross impact analysing observed consequences in relation to objectives Conclusions Counterfactual Net impact on alleviation of the social consequences of the Kosovo crisis Impact of coherence with complementary instruments Conclusions Summary 95 8 Design and implementation: Findings, conclusions and recommendations Introduction Design and implementation features Findings 97 SKH/AG12916finrep

7 8.3 Conclusions and recommendations for future MFA operations Conclusions and recommendations Two dilemmas 103 Annexes 105 Annex 1: Collected and consulted literature 107 Annex 2: People interviewed in the field phase 111 Annex 3: Historic overview MFA intervention 113 Annex 4: IMF and World Bank interventions 121 Annex 5: Trade developments Annex 6: Methodology for counterfactual modelling 129 Annex 7: Structural conditions in the MoU 133 Annex 8: Structural conditions in the SMoU 135 Annex 9: Linking MFA MoU conditions to IMF/WB + compliance 137 Annex 10: Linking MFA SMoU conditions to IMF/WB + compliance 139 SKH/AG12916finrep

8 SKH/AG12916finrep

9 Acronyms and abbreviations APL BoP CARDS CAS CCFF CDAD CG CMEA CPI DEM DFID DG ECFIN EBRD EC ECA ECHO EFC EFF EIB eop ERL/C ESAF EU FDI FESAL/C GCR GFSY GDP HCI HDI IBRD ICR IDA IFI IFS IEO IMF Adaptable Programme Loan (World Bank) Balance of payments Community Assistance for Reconstruction, Development and Stability in the Balkans (European Union assistance programme to the western Balkans) Country Assistance Strategy (World Bank) Compensatory and Contingency Financing Facility (IMF) Central Donor Assistance Database Consultative Group (meeting) Council for Mutual Economic Assistance (former Soviet bloc) Consumer Price Index Deutsche Mark (German Mark) Department for International Development (Great Britain) Directorate General for Economic and Financial Affairs European Bank for Reconstruction and Development European Commission European Court of Auditors EC Humanitarian Aid Office Economic and Financial Committee Extended Fund Facility (IMF) European Investment Bank end of period Economic Recovery Credit/Loan (World Bank) Enhanced Structural Adjustment Facility (IMF) European Union Foreign direct investment Financial and Enterprise Sector Adjustment Loan/Credit (World Bank) Global Competitiveness Report, World Economic Forum Government Finance Statistics Yearbook (IMF) Gross domestic product Head Count Index (UNDP) Human Development Index (UNDP) International Bank for Reconstruction and Development (World Bank, nonconcessional) Implementation Completion Report (World Bank) International Development Association (World Bank, concessional) International Financial Institution International Finance Statistics (IMF) Independent Evaluation Office (IMF) International Monetary Fund Ex post evaluation of the MFA operation in the Former Yugoslav Republic of Macedonia 9

10 MFA MKD MoF MoU NBRM OBNOVA PAR PC PDPL PEIR PFM PGI PHARE PIT PRGF PRO PSMAL/C REER SAA SBA SFRY SMEs SMP SMoU SSO UN UNDP USAID VAT WB WDI WTO Macro-Financial Assistance (EC) Macedonian Denar Ministry of Finance Memorandum of Understanding (EC) National Bank of the Republic of Macedonia (Central Bank) Aid to the countries in former Yugoslavia (meaning restruction in Serbo- Croation) Public administration reform Performance criteria (IMF) Programme Development Policy Lending (World Bank) Public Expenditure and Institutional Review (World Bank) Public finance management Poverty Gap Index Poland and Hungary Assistance for Restructuring of their Economics Personal income tax Poverty Reduction and Growth Facility (IMF) Public Revenue Office Public Sector Management Adjustment Loan/Credit (World Bank) Real effective exchange rate Stabilisation and Association Agreement (EC) Stand-by Arrangement (IMF) Socialist Federal Republic of Yugoslavia Small and medium-sized enterprises Staff Monitored Programme (IMF) Supplementary Memorandum of Understanding (EC) State Statistical Office United Nations United Nations Development Programme United States Agency for International Development Value-added tax World Bank World Development Indicators (World Bank) World Trade Organisation 10 Ex post evaluation of the MFA operation in the Former Yugoslav Republic of Macedonia

11 Preface A consortium led by ECORYS Netherlands was contracted to carry out an ex post evaluation of the Macro-Financial Assistance (MFA) operation to the Former Yugoslav Republic of Macedonia. The team would like to express its gratitude to all government officials and other people in the country, to staff members of the International Monetary Fund (IMF) and World Bank (WB) in Washington and Skopje, and European Commission (EC) officials in Brussels and Skopje. Their cooperation and willingness to contribute to this evaluation supported us to gain a good understanding of the facts and events at the time of the MFA operation. We would also like to thank the Steering Committee for its constructive comments during the whole period of this evaluation. The responsibility for this report remains ours. Albert de Groot (ECORYS, the Netherlands, albert.degroot@ecorys.com) Christian Hiddink (ECORYS, the Netherlands, christian.hiddink@ecorys.com) Malgorzata Markiewicz (CASE, Poland, mmark@case.com.pl) Artur Radziwill (CASE, Poland, artur@case.com.pl) Marjan Nikolov (CEA, Former Yugoslav Republic of Macedonia, markmar2000@yahoo.com) Marek Dabrowski (CASE, Poland, marek@case.com.pl) Ex post evaluation of the MFA operation in the Former Yugoslav Republic of Macedonia 11

12

13 Executive Summary Background 1. This is a report of the evaluation of the second Macro-Financial Assistance (MFA) granted to the Former Yugoslav Republic of Macedonia by the European Commission (EC). This MFA was disbursed in four tranches in the period The total disbursement funds were 98 million. The MFA comprised a loan element of 50 million and a grant element of 48 million. The size of the MFA was substantial, ranging from 0.3% of GDP in 2001 to 1.1% of GDP in A primary stimulus for the MFA was the potentially large economic cost of the Kosovo conflict. The conditions attached to the MFA conformed with conditions contained in agreements between the Government and the International Monetary Fund (IMF) and the World Bank (WB). 2. A first tranche of 30 million was disbursed in December 2000, following a new arrangement with the IMF and after the signature of a Memorandum of Understanding (MoU) between the EC and the Government. The disbursement of further tranches was postponed because of an internal security crisis in the first half of This crisis came to an end with the conclusion of the Ohrid Framework Agreement in August that year. 3. Subsequent to the Ohrid Framework Agreement and to agreement on a Staff Monitored Programme with the IMF, the EC disbursed the second tranche of 22 million in January In September 2002, a Supplemental Memorandum of Understanding (SMoU) was signed. The third tranche of 20 million was released in May/June 2003, after the approval of a Stand-by Arrangement (SBA) with the IMF. The fourth tranche of 26 million was released in December 2003 after the EC concluded that the conditions of the SMoU were largely fulfilled. 4. MFA should be seen as one component of a larger EC support package to improve stability in the region, and to assist the Government to fulfil its international obligations on its way to EU accession. In the disbursement period , MFA formed up to half of total EC assistance. The Stabilisation and Association Agreement (SAA) with the EC came into force on 1 April 2004, and in December 2005 the EU Council granted candidate status. Evaluation objective and approach 5. The objectives of the evaluation of MFA are to assess the impact of the MFA and to derive key lessons, which can be applied to future MFA interventions. The evaluation Ex post evaluation of the MFA operation in the Former Yugoslav Republic of Macedonia 13

14 is based on the Generic Evaluation Questions from the Guidelines for the ex post evaluation of MFA operations. The evaluation questions focused on three impacts: (1) on macroeconomic stabilisation, (2) on the sustainability of the external financial position, and (3) on structural reforms to the economy. In these three core areas, unexpected and indirect effects are also taken into account. Furthermore, the implications of the design and implementation of the operation are considered. For this evaluation one additional evaluation question was formulated relating to the contribution of MFA to the alleviation of the social consequences of the economic disruption caused by the Kosovo conflict. 6. The evaluation employed five main evaluation instruments: (1) data collection and analysis, (2) a literature review, (3) a preparatory pre-interview questionnaire, (4) indepth interviews with key informants, and (5) macroeconomic modelling. Impact on macroeconomic stabilisation 7. In formulating a counterfactual scenario, we assessed the most likely behaviour of other donors and the policy response of the Government in the absence of MFA. A tighter balance of payments (BoP) and fiscal situation ( straightjacket ) was taken as the counterfactual scenario against which the impact of the MFA was evaluated. The prevailing view was that neither the IMF nor other donors would provide compensation in the event of no MFA. 8. Most interviewees assumed that the authorities would have been able to maintain macroeconomic stability without the MFA, and a tough policy response could have been expected. The Government s response would, however, have depended on the overall budgetary situation and level of external pressure, mainly from the IMF. Based on a comparison of the actual (gross impact) and counterfactual scenarios, we conclude that MFA resulted in a relaxing of the BoP and budgetary constraints and allowed for slightly higher economic growth rates in the period. Without MFA, the recession in 2001 would have been longer and deeper. Nevertheless, the direct net impact on the macroeconomic variables was small to moderate and revealed mainly in More important was the indirect impact of MFA disbursements on macroeconomic stabilisation. Continued EC support sent a clear signal to the authorities in Skopje as to EU commitment to closer relations with the country. While conjecture, this probably helped the conduct of the restrictive macroeconomic policies which maintained stabilisation despite a series of adverse events at the time. Impact on external sustainability 10. The external financial situation did not exhibit any trend during the period of MFA intervention, but did fluctuate substantially. In 1999 and 2000, mainly because of a large increase in private and official transfers, the current account deficit was reduced. During the security crisis in 2001, the balance of payments deteriorated because of declining exports, a slump in private transfers, and limited official transfers. However, a large foreign direct investment (FDI) inflow from the privatisation of Macedonian 14 Ex post evaluation of the MFA operation in the Former Yugoslav Republic of Macedonia

15 Telecom in 2001 covered a large part of the BoP gap. After the security crisis in 2001, the current account deficit remained high. 11. There are currently no serious short-term threats to the external sustainability of the country. However, despite this generally positive outlook, there are important risks. The most important factor for long-term sustainability is the systematic pursuit of structural reforms resulting in economic growth rates above those achieved in the past. If the pace of structural reforms is too slow, the external position of the country could become unsustainable. 12. There are a number of channels through which MFA intervention could have contributed to medium-to-long-term external sustainability: reducing short-term disturbances, with potential long-term consequences; ensuring better medium-term macroeconomic management; and enhancing long-term growth prospects. Naturally, the MFA instrument, with its primary goal of filling a foreseen residual financing gap, had the strongest impact in the short to medium term, while the long-term growth bonus was rather uncertain. The overall impact of the intervention on medium-to longterm sustainability was unambiguously positive; however, our analysis indicated that the size of this impact is limited. Impact on structural reforms 13. The structural conditions for the MFA were formulated in six reform areas: (1) public finance management, (2) the financial sector, (3) trade policy, (4) privatisation and liquidation, (5) private sector development, and (6) public administration reform. There was broad consensus among all stakeholders about the required structural reforms. However, local authorities did not always recognise immediately the benefits of all reforms. With the benefit of hindsight, most local stakeholders agreed that the MFA conditions were relevant and supportive to the reform process. 14. The IMF and World Bank led the support in most reform areas and played a leading role in selecting the required policy actions and in formulating the conditions. Therefore, the EC could base nearly all its structural conditions on existing IMF (Extended Fund Facility/Poverty Reduction and Growth Facility (EFF/PRGF) and SBA, respectively) and World Bank conditionality, with the exception of two conditions on trade policy. 15. Over the last five years, the Government has made progress in most reform areas covered by the structural conditions of the MFA, but the situation is different for each area. For most areas, the security crisis clearly interrupted and postponed reform activities. Furthermore, the lack of judicial reforms has meant a serious bottleneck in many areas. 16. All stakeholders confirmed that without MFA it is plausible that the structural reforms agreed on with the IMF and the World Bank would have been implemented. Therefore, the impact of the MFA on structural reform appeared to be limited. We could not find any evidence proving an operational reinforcing effect, i.e. an impact of the MFA conditions on reform achievements. Nevertheless, we received strong Ex post evaluation of the MFA operation in the Former Yugoslav Republic of Macedonia 15

16 indications of a political reinforcing effect on reforms in trade policy, privatisation and to a lesser extent in public finance management. Moreover, many stakeholders shared the perception of a more general reinforcing effect of the MFA on successful implementation of the IMF and World Bank programmes through the use of crossconditionality. 17. Programme complementarities between the MFA conditions and other EC support programmes (PHARE, OBNOVA and CARDS) existed to a limited extent in some of the reform areas. The impact of complementarities between the MFA and other EC programmes was probably most significant for private sector development and trade policy. Impact on alleviation of the social consequences of the Kosovo crisis 18. In the Council Decision on MFA to the Former Yugoslav Republic of Macedonia it was stated that MFA should contribute to alleviation of the social consequences of the economic disruptions caused by the conflict in Kosovo. 19. The short-term economic effects of the Kosovo crisis were much smaller than initially foreseen. First, the inflow of refugees was quickly constrained and most refugees returned home within a few months. Secondly, the country benefited from large exports to Kosovo and the high demand for services. Since there were no budgetary tensions and most of the refugees quickly left the country again, the social consequences of the crisis on the poverty situation were relatively small. 20. Social issues were indirectly addressed in the general economic indicators of the MFA, such as budget indicators and employment. However, the structural conditions in the MoU and SMoU did not make any direct link to social issues. Indirectly, social issues were targeted with structural conditions on privatisation and SME development through their impact on employment. 21. We conclude that the net effect of MFA on alleviating the social consequences of economic and political disruptions was not significant. We further conclude that most of the implicit MFA objectives regarding alleviation of the social consequences (relating to an increase in employment, real wages and budgetary expenditures) were achieved, partly because of MFA, but also because of complementary support operations from other donors. Design and implementation: Findings, conclusions and recommendations 22. Based on our analysis and interpretations in this ex post evaluation of the MFA operation to the Former Yugoslav Republic of Macedonia, we draw conclusions on the performance of MFA and formulate recommendations for future MFA operations. 23. The rationale for an MFA intervention is the need to fill a foreseen residual financing gap. Addressing structural issues through the MFA should always be secondary. However, based on our assessment of the events related to disbursement of the MFA 16 Ex post evaluation of the MFA operation in the Former Yugoslav Republic of Macedonia

17 tranches, we gained the impression that for some tranches the rationale of MFA shifted from residual gap filling to structural issues and conditions. The objectives for MFA should be clearly specified and presented more explicitly. Also, the possible hierarchy of objectives should be set out more clearly. 24. In the period , the Government seemed to have significant difficulties in implementing a large number of reforms in all six areas in a relatively short time frame. In this period, the IMF programmes went off-track and the implementation of reforms was repeatedly postponed. A more focused approach with a limited number of conditions might be considered under such circumstances. 25. Given the role of the EC within the donor community and the limited capacity within the Directorate General for Economic and Financial Affairs (DG ECFIN) to deal in depth with all the structural reform issues, its choice for cross-conditionality appears to have been logical and pragmatic. However, taking account of the limited proof we found for reinforcing effects per reform area, and the complications arising from using too many conditions, a more selective use of cross-conditionality could improve the efficiency of the impact on structural reforms. We suggest including primarily conditions that have directly measurable links with the core objective of MFA, i.e. filling a foreseen residual financing gap. 26. In response to the changed circumstances, the EC adapted its structural conditions for disbursement of the second tranche of MFA. The European Court of Auditors (ECA) criticised this re-interpretation of the structural conditions of the MFA. It bears repeating that the rationale for an MFA intervention is to fill an external financing gap and to reduce short-term macroeconomic imbalances. It should be investigated to what extent MFA procedures could be made less rigid to allow modification of some terms and conditions within the original agreement. 27. The topping up of MFA by 18 million of grants in December 2001 resulted not only in a higher amount of total MFA, but also softened the average terms of the MFA. This contributed to an increased willingness to implement the IMF reform programmes. When deciding on the terms of MFA, the EC should not only pay attention to its own support, but should also take into consideration the terms of the total support package to a country. 28. MFA was one of the components of a larger EC support package. In the disbursement period , MFA formed up to half of total EC assistance. In spite of the fact that in the country the EC support was perceived as an entity, in our analysis we only found support for the impact of complementarity between MFA and other EC support programmes for private sector development and trade policy. If cross conditionality is applied with conditions of the IMF and/or World Bank, frequently these conditions are already supported by IFI-led implementation projects and programmes. However, if the EC has explicit preference for more EU specific conditions within MFA, it should ensure that other EU programmes provide technical assistance to help in the design and monitoring of these conditions. Ex post evaluation of the MFA operation in the Former Yugoslav Republic of Macedonia 17

18 18 Ex post evaluation of the MFA operation in the Former Yugoslav Republic of Macedonia

19 1 Evaluation objective and approach 1.1 Purpose of the evaluation The objective of Macro-Financial Assistance (MFA) in the Former Yugoslav Republic of Macedonia is to support the country s economic reform efforts and transition towards a market economy by complementing the financing of International Financial Institutions (IFIs) in the context of IMF-supported economic programmes. Under its Financial Regulation (art. 27.4), the European Commission (EC) is legally obliged to evaluate its main programmes, including MFA. The main objectives of the ex post evaluation of MFA are to assess its impact and to derive key lessons for future MFA interventions. The evaluation assesses the effects of the last MFA operation in the Former Yugoslav Republic of Macedonia from 1999 to Although the evaluation is by nature backward looking, forward-looking aspects are also considered in the report to enable the EC to draw key lessons which can be applied to future MFA interventions, and/or the possible need for a reorientation of the present approach. 1.2 Evaluation approach and method The evaluation is based on five Generic Evaluation Questions, but unexpected and indirect effects are also taken into account. The five generic questions are therefore open questions. Table 1.1 presents the Generic Evaluation Questions, in accordance with the Guidelines for the ex post evaluation of MFA operations. The Generic Evaluation Questions comprise a number of sub-questions that provide the key elements needed to respond to the core question. Table 1.1 Generic Evaluation Questions from the Guidelines No. Q1 Q2 Q3 Q4 Q5 Evaluation Question To what extent has the MFA been effective in terms of the short-term macroeconomic stabilisation of the country concerned? To what extent has the MFA been effective in terms of supporting structural reform? What have been the indirect and/or unexpected effects of the MFA? To what extent has the MFA contributed to returning the external financial situation of the country concerned to a sustainable path over the medium to longer term? How has the way in which the MFA operation was designed and implemented conditioned its effectiveness and efficiency? Ex post evaluation of the MFA operation in the Former Yugoslav Republic of Macedonia 19

20 The terms of reference for this evaluation also define an additional evaluation question relating to the MFA s contribution to alleviating the social consequences of the economic disruption caused by the Kosovo conflict (see Table 1.2). Table 1.2 Additional evaluation question No. Q6 Evaluation Question To what extent did the assistance contribute to alleviating the social consequences of the economic disruptions caused by the conflict in Kosovo? The evaluation questions broadly focus on three core areas of effects: 1. effects concerning macroeconomic stabilisation; 2. impact of structural reforms on the economy; 3. sustainability of the external financial situation. Each of these core areas focuses on the effects over specific time spans: macroeconomic developments are assessed on short-term effects (up to two years after the initial disbursement); structural effects on the economy and institutions on short and mediumterm effects (up to four years after the initial disbursement); and the external financial situation on medium to long-term effects (three years or more after the initial disbursement). In order to attribute effects to the MFA operation, we follow a three-step approach in accordance with the Guidelines for the ex post evaluation of MFA operations. The first step is to identify the types of short-term macroeconomic effects and short and mediumterm structural effects on the economy and institutions, and pinpoint plausible cause-andeffect relations between assistance and its effects. The second step is to establish a counterfactual scenario, and the third step involves determining the effect of the operation, which for the macroeconomic and structural effects is the difference between the observed effect and the counterfactual scenario. Unexpected and indirect effects, as well as the consequences of programme design, are considered too. To quantify the net effects of the MFA intervention, a quantitative model is employed. The modelling approach helps to ascertain the counterfactual short-term macroeconomic outcomes in the absence of the MFA intervention, compare these counterfactual outcomes with the actual outcomes and therefore establish the net effect of the MFA intervention. We also analyse how the MFA has contributed to medium to long-term external financial sustainability. The evaluation employed five main evaluation instruments: data collection and analysis; a literature review (see Annex 1); a preparatory pre-interview questionnaire; in-depth interviews with key informants (see Annex 2); macroeconomic modelling. 20 Ex post evaluation of the MFA operation in the Former Yugoslav Republic of Macedonia

21 During the evaluation we faced a number of challenges and risks: no readily identifiable outputs; implicit or imprecise objectives; problem of timing for observing some intended effects; interviewees limited memory of intervention; limitations of the quantitative modelling. 1.3 Structure of the report This final report is structured as follows. Chapter 1 introduces the evaluation s purpose and approach. Chapter 2 provides background and context information on the MFA operation in the Former Yugoslav Republic of Macedonia. The MFA intervention is also discussed in the context of international assistance to the country, specifically interventions by the International Monetary Fund and the World Bank. Chapter 3 analyses the impact of MFA on macroeconomic stabilisation, while chapter 4 gives a forward-looking analysis of the impact on external sustainability. Chapter 5 discusses the impact of MFA on structural reforms. These chapters present the core of the evaluation. In particular, they include the mapping of the objectives and the expected effects of the assistance. For each (set of) structural condition(s) effect indicators are proposed. Chapter 6 discusses two case studies on privatisation/liquidation and wage decompression (part of public administration reform (PAR)). These two case studies provide a more indepth analysis of the cause-and-effect relationship. Chapter 7 deals with the impact of MFA on the alleviation of the social consequences of the Kosovo crisis. Finally, chapter 8 considers the implications of the design and implementation of the operation on its efficiency and effectiveness. This analysis leads to the conclusions and recommendations to be taken into consideration when a meta-analysis is made of a number of evaluations of MFA operations, to identify future improvements to the MFA instrument. Ex post evaluation of the MFA operation in the Former Yugoslav Republic of Macedonia 21

22

23 2 Background to the MFA operation 2.1 History of the MFA operation This evaluation refers to the second 1 Macro-Financial Assistance granted to the Former Yugoslav Republic of Macedonia in 1999 and disbursed in On November , the European Union (EU) Council approved assistance of 80 million, comprising a loan element of 50 million and a grant of 30 million. The direct reason for providing MFA was the potentially large economic cost of the Kosovo conflict. It was expected that the local economy would be severely affected by the crisis because of refugee flows and balance of payments (BoP) financing problems. In 1999, the IMF estimated the BoP financing gap at US$510 million, while the pledges amounted to about half this amount. Eventually, the first tranche of MFA was disbursed in December 2000 (see Table 2.1), following agreement on a new IMF arrangement (Extended Fund Facility (EFF)/Poverty Reduction and Growth Facility (PRGF)) and signature of the Memorandum of Understanding (MoU) between the EC and the Government of the Former Yugoslav Republic of Macedonia. The conditions attached to the MFA were in accordance with conditions contained in the agreements with the IMF and the World Bank. Table 2.1 The four tranches of the second MFA operation in the Former Yugoslav Republic authorised in 1999 Tranche Date Grant (million ) Loan (million ) 1 st December 2000/January nd January rd May/June th December Total In February 2001, the country was affected by an internal security crisis, which destroyed its stability and imposed substantial economic costs. The government budget financed additional military expenditure and financial support for internally displaced people. The internal crisis came to an end with the conclusion of the Ohrid Framework Agreement by the main political parties in August that year. Implementation of the agreement imposed significant costs on the budget. Constitutional amendments were necessary, as well as the development of decentralised government and an increase in minority ethnic representation in public administration. 1 The first MFA (of 40 million) to the former Yugoslav Republic of Macedonia was granted in The first tranche of 25 million was released in September 1997, and the second tranche of 15 million in February Ex post evaluation of the MFA operation in the Former Yugoslav Republic of Macedonia 23

24 Linked to the security crisis, the IMF programme went off track and the Government officially requested its cancellation. Instead, a six-month Staff Monitored Programme (SMP) was agreed in the final months of 2001 and introduced on January The SMP did not contain any obligations for structural reforms and was without the support of any IMF credit facility, but provided a framework for further donors assistance. In response to the Ohrid Framework Agreement and agreement on the SMP, the EC took two measures. In December 2001 it amended the EU Council Decision on MFA of 1999, and in January 2002 it disbursed the second tranche of MFA. The initial Council Decision only permitted the EC to commit grants up to the year In the amended Council Decision, the implementation period for MFA was extended to the end of 2003 and the grant element of MFA was increased by 18 million. On 9 April 2001, the EU and the Former Yugoslav Republic of Macedonia signed a Stabilisation and Association Agreement (SAA), after more than two years of negotiations. The ratification was completed in 2003 and the SAA agreement came into force on 1 April Its political significance was considerable, as it conferred on the country the status of potential candidate, opening up the possibility of future accession to the EU. The SMP was officially launched in January 2002 and lasted six months. A donors meeting took place in March Donors pledged a total of 307 million. In September 2002, a Supplementary Memorandum of Understanding (SMoU) was signed between the EC and the Government, setting general rules for cooperation and stipulating conditions for disbursing the third and fourth tranches. In the final months of 2002, the reform process went thought a difficult period, mainly because of autumn general elections, the formation of a new Government, and prolonged discussions on the approval of the 2003 budget and the new Stand-by Arrangement (SBA). The SBA was approved in April Consequently, the third tranche of MFA was released. After the EC concluded that the conditions of the SMoU were largely fulfilled, the fourth tranche was released in December In December 2005, the EU Council granted candidate status. The country s strong interest in EU accession and the EC s close monitoring of the reform process gave the Government clear incentives to implement the necessary economic reforms. For a more detailed historic overview, see Annex Relative importance of MFA The Former Yugoslav Republic of Macedonia received other support from the IMF, the World Bank and a number of bilateral donors. The size of MFA has been substantial, ranging from 0.3% of gross domestic product (GDP) in 2001 to 1.1% of GDP in Table 2.2 gives an overview of the financial assistance received by the country during the evaluation period. The average share of MFA in total assistance was approximately 10% in the disbursement period Ex post evaluation of the MFA operation in the Former Yugoslav Republic of Macedonia

25 Table 2.2 Overview of total assistance to the Former Yugoslav Republic of Macedonia in the period (in millions of ) Total support official transfers loans EU MFA 15* loan grant MFA as % of total MFA as % of GDP MFA as % of gross reserves * Disbursement of an earlier MFA This table is based on EC reports on the implementation of MFA to third countries, , and on IMF balance of payments statistics The MFA was closely linked to IMF and World Bank assistance. Their disbursements are presented in Table 2.3. For a more detailed overview of IMF and World Bank assistance, see Annex 4. Table 2.3 illustrates that the MFA was of considerable (quantitative) importance in the period compared with the IMF and World Bank disbursement. Table 2.3 IMF, World Bank and EC (MFA) disbursement IMF (million US$) World Bank (million US$) n.a. n.a. n.a. European Union MFA (million ) The MFA should also be seen as one of the components of a larger EC support package. This package was provided not only to alleviate the consequences of the Kosovo crisis, but also to improve stability in the region and to assist the Government to fulfil its international obligations on its way to EU accession. Table 2.4 gives an overview of all substantial EC assistance instruments received by the Former Yugoslav Republic of Macedonia. It shows that MFA has been relatively important in the total EC package. In the disbursement period , MFA comprised up to 52% of total EC assistance. 2 3 Data for 2003 are based on estimations and for 2004 on projections. Excluding IMF credits. Ex post evaluation of the MFA operation in the Former Yugoslav Republic of Macedonia 25

26 Table 2.4 Total EC assistance to Former Yugoslav Republic of Macedonia in the period (millions of ) Assistance PHARE + OBNOVA CARDS ECHO Rapid Reaction Mechanism Media Democracy & Human Rights Other 12.2 MFA Total MFA as % of total EC assistance Source: EC Delegation to the Former Yugoslav Republic of Macedonia, CARDS programme ec.europe.eu 26 Ex post evaluation of the MFA operation in the Former Yugoslav Republic of Macedonia

27 3 Impact on macroeconomic stabilisation 3.1 Introduction In this chapter we analyse the impact of MFA on macroeconomic stabilisation. Table 3.1 presents the evaluation questions, which we elaborate on in the sequence as given in the table. This analysis is summarised in section 3.8. Table.3.1 Relevant evaluation questions for analysing the impact on macroeconomic stabilisation Impact on macroeconomic stabilisation Q1.1 What are the short and medium-term macroeconomic objectives of the assistance? Q1.2 To what extent have the short and medium-term macroeconomic objectives of the assistance been achieved? Q0.1 What arrangements would have been implemented if the MFA had not been granted? Q0.2 What are the structural and macroeconomic effects of the most likely implementation scenario(s)? Q1.3 What has been the contribution of the grants and/or loans provided by the MFA operation to the achievement of MFA objectives? Q3.1 What, if any, has been the contribution of actions arising as a result of the structural conditionality criteria to the achievement of the short and medium-term macroeconomic objectives of the assistance (i.e. the indirect effects of structural conditionality criteria)? Q3.2 Has the assistance given rise to any unexpected short and medium-term macroeconomic effects? What were they and how did they occur? 3.2 Macroeconomic objectives of intervention Q1.1: What are the short and medium-term macroeconomic objectives of the assistance? Two EU Council Decisions on MFA to the Former Yugoslav Republic of Macedonia (1999/733/EC and 2001/900/EC) described the circumstances in the country at that time as extremely difficult, firstly because of the Kosovo crisis (1999) and then the security crisis (2001). In response to these circumstances, in 1999 the EC decided to provide MFA with the objective of supporting the BoP and to ease the country s external financial constraints. The MFA was also intended to contribute to the implementation of structural reforms and to alleviating the social consequences of the economic disruption caused by the conflict in Kosovo. Both Council Decisions stated the objectives of MFA as being to: cover the financing gap in order to strengthen the country s reserve position; ensure sustainable BoP; and support policy objectives attached to the Government s reform programme. Ex post evaluation of the MFA operation in the Former Yugoslav Republic of Macedonia 27

28 The MFA was closely linked to the IMF programmes targeting macroeconomic stabilisation. Two IMF programmes were of importance in the context of this MFA operation. First, the EFF/PRGF agreed in November 2000 formed the basis for disbursement of the first tranche of MFA and, secondly, the SBA agreed in April 2003 formed the basis for the third tranche. The MoU stipulated that the first instalment would be released on the basis of an agreement between the Former Yugoslav Republic of Macedonia and the IMF on a macroeconomic programme. The second and any further instalments would be released on the basis of a satisfactory track record in the country s adjustment and reform programme, and not before three months after the release of the first instalment. Given this close link to IMF programmes, we assume that the MFA replicated the objectives of the IMF arrangements in terms of macroeconomic stabilisation. 3.3 Gross impact actual macroeconomic outcomes Q1.2: To what extent have the short and medium-term macroeconomic objectives of the assistance been achieved? Introduction To answer questions related to achievement of the MFA objectives, we compare the MFA objectives with actual macroeconomic developments by means of quantitative analysis. In order to do this, we use macroeconomic indicators which can indicate progress in fulfilment of the objectives. To be able to make a realistic assessment, we first describe the context in which execution of the MFA took place. Finally, we assess the macroeconomic developments on the basis of the selected indicators Specific aspects The starting situation After achieving independence in 1991, the Former Yugoslav Republic of Macedonia started a transition process, but was exposed to adverse external events for most of the 1990s, such as political disintegration, armed conflicts resulting from the breakdown of trade relations within former Yugoslavia, UN trade sanctions against Serbia and Montenegro, and a Greek trade embargo related to the dispute about the name of the country. In 1996, the country entered a period of slow economic recovery and hesitant structural reforms. The Government was able to restore macroeconomic stability and managed to stop the declining trend in economic activity, which was common in all transition countries. Growing economic activity resulted in an import boom and an increased current account deficit, which reached 7.5% of GDP in This deficit was mostly financed with concessionary borrowing from IFIs. As a result, the level of foreign exchange reserves was not substantially affected. 28 Ex post evaluation of the MFA operation in the Former Yugoslav Republic of Macedonia

29 The Kosovo crisis This short period of calmness and catching up was disrupted by the Kosovo crisis in 1999, when the country had to cope with the inflow of refugees and a loss of trade routes with the rest of Europe. In response to the Kosovo crisis, the international community decided to support countries in the region with additional funds to mitigate the cost for the population. On 5 May, an Emergency Joint G-24/CG (Consultative Group) meeting took place in Paris, chaired by the EC and the World Bank. Participants comprised donor nations and multilateral organisations. At this meeting, the IMF presented its macroeconomic forecast indicating an increase in the current account deficit of $220 million to $510 million in 1999, or 14.5% of GDP. In response, participants pledged substantial financial assistance amounting to $255 million. They further expressed their willingness to increase their financial support if the need should arise. These pledges comprised $149 million in loans, $81 million in grants and $25 million in withheld payments of matured obligations to Paris Club creditors. 4 In practice, the crisis lasted for a shorter time than expected and therefore its macroeconomic costs were very much less than forecast (see chapter 7). The World Bank provided the majority of the loans. In August 1999, the IMF approved a credit of $19 million under the Compensatory and Contingency Financing Facility (CCFF) to compensate for the shortfalls in export earnings resulting from the Kosovo crisis. The EU pledged exceptional budgetary support of 25 million 5 and MFA. On 8 November 1999, the EU Council approved this MFA of 80 million, comprising a loan element of 50 million and a grant element of 30 million. The security crisis At the beginning of 2001, the country was exposed to a security crisis, with deeper and more persistent macroeconomic effects. The country had to deal with internally displaced people and higher defence expenditure. With the support of the international community, the crisis ended with the conclusion of the Ohrid Framework Agreement in August A second donors conference was organised in March 2002 in Brussels to mobilise assistance for reconstruction and rehabilitation and to seek financing for budget and BoP gaps. Donors pledged 307 million and indicated another 271 million of assistance for general economic development in The economy contracted in 2001 and started to recover slowly only in IMF arrangements The relationship with the IMF is characterised by long gaps between successive IMF arrangements. There was no IMF arrangement in place during the Kosovo crisis and a new programme, the EFF/PRGF, was only approved in November As the first tranche of MFA was conditional on this arrangement, its disbursement was postponed until December 2000/January Ministry of Finance, Answer to questions related to the damage in the Republic of Macedonia caused by the recent crisis in the region, Skopje, 27 July, This support involved mobilising the reserves of the Community s budget for emergency assistance. The first and only tranche of this assistance of 12.2 million was disbursed on June 16, Ex post evaluation of the MFA operation in the Former Yugoslav Republic of Macedonia 29

30 In March 2001, the internal conflict interrupted the reform process. Non-compliance with the performance criteria meant that the IMF was not able to complete its mid-term review in June In the final months of 2001, the IMF formally cancelled the programme and agreed with the Government on a Staff Monitored Programme. This SMP, lasting six months, started on 1 January 2002 and was supposed to provide a bridge to a Stand-by Arrangement. Nevertheless, its review in spring 2002 did not have a successful outcome because of increased public spending linked to the upcoming elections in September. Negotiations on the SBA finally started at the end of 2002 with the new Government and were concluded in April Selection of indicators The MoU and SMoU both stated that the quantitative macroeconomic performance criteria and benchmarks attached to the MFA were to be those stipulated under the arrangements with the IMF. In response to this, the EC released the MFA tranches only after fulfilment of these criteria and benchmarks. These criteria and benchmarks supported achievement of the underlying macroeconomic objectives of the arrangements. They were similar in both IMF programmes (and therefore also in the MoU and SMoU), as the objectives of macroeconomic policy did not change. Table 3.2 shows these performance criteria for both IMF programmes, linked to the three MFA objectives. 30 Ex post evaluation of the MFA operation in the Former Yugoslav Republic of Macedonia

31 Table 3.2 Quantitative performance criteria in IMF programmes Objective Criteria of EFF/PRGF programme (2000) Criteria of SBA (2003) Minimum change in net foreign assets of Floor for net international reserves of the National Bank of the Republic of the NBRM To cover the BoP gap Macedonia (NBRM) (objective 1) Ceiling on net domestic assets of the NBRM Quarterly ceilings on new non-concessional medium and long-term external debt contracted or guaranteed with maturities of 1-15 years Ceiling on new non-concessional medium and long-term external debt contracted or guaranteed by the general Government or the NBRM with original maturities of more than 1 year Quarterly ceilings on new non-concessional Ceiling on new non-concessional medium and long-term external debt medium and long-term external debt To support BoP contracted or guaranteed with maturities of contracted or guaranteed by the sustainability 1-5 years general Government or the NBRM with (objective 2) maturities of 1-5 years Quarterly ceilings on short-term debt with maturities up to 1 year Ceiling on short-term external debt of the general Government or the NBRM with maturities of up to 1 year (stock), including guarantees for such debt Accumulation of external payments arrears on a continuous basis Accumulation of external payments arrears on a continuous basis Quarterly ceilings on transfers and net lending from the central government budget Ceiling on health fund arrears (indicative) to the extra-budgetary funds Accumulation of central government domestic arrears Ceiling on central government domestic arrears (indicative), excluding those to suppliers Ceiling on central government To support policy objectives of the domestic arrears (indicative), including those to suppliers Government s reform programme Quarterly ceilings on wage bill of the central government budget Ceiling on the central government wage bill (indicative) (objective 3) Quarterly ceilings on personnel expenditure Ceiling on personnel expenditure financed from special revenue accounts financed from special revenue accounts (indicative) Quarterly ceilings on net domestic assets of the banking system Ceiling on net domestic assets of the banking system (indicative) Quarterly ceilings on net domestic credit to the general Government from the banking system Ceiling on net domestic credit to the general Government from the banking system Nevertheless, these performance criteria and benchmarks from the IMF programmes are less useful in assessing the achievement of MFA objectives in the medium term because they are too specific and therefore do not provide an overall picture of the macroeconomic developments over time. Ex post evaluation of the MFA operation in the Former Yugoslav Republic of Macedonia 31