Ex Post Evaluation of the Macro- Financial Assistance to Serbia Final Report Ex Post Evaluation of the Macro-Financial Assistance to Serbia The information and view set out in this report are those of the author(s) and do not necessarily reflect the official opinion of the Commission. The Commission does not guarantee the accuracy of the data included in this study. Neither the Commission nor any person acting on the Commission’s behalf may be held responsible for the use which may be made of the information contained therein. This study exists in English only and can be downloaded from the website http://ec.europa.eu/economy_finance/evaluation/index_en.htm A great deal of additional information is available on the Internet. It can be accessed through the Europa server (ec.europa.eu) KC-01-13-694-EN-N © European Union, 2013 Reproduction is authorised provided the source is acknowledged November 2013 2 Ex Post Evaluation of the Macro-Financial Assistance to Serbia Table of Contents Table of Contents .............................................................................................. 3 Glossary of terms .............................................................................................. 4 Executive summary ........................................................................................... 6 Our evaluation approach ...................................................................................10 Our operational approach ...............................................................................16 History and context of MFA operations ................................................................28 Historical and institutional context on the eve of the 2000s .................................28 Serbian economy in 2000-2008: persistent structural weaknesses, growing macroeconomic imbalances.............................................................................31 MFA: rationale, objectives and logic of intervention...............................................35 The rationale for MFA operations to Serbia........................................................35 The objectives of the 2009 – 2011 MFA operations in Serbia ...............................36 2009 – 2011 Macro-Financial Assistance: logic of intervention.............................38 MFA contribution to short-term macroeconomic stabilisation in Serbia.....................48 MFA objectives for short-term macroeconomic stabilisation and their relevance to the needs of the Serbian economy ...................................................................48 Serbian macroeconomic evolution before and after MFA: 2010-2013 ....................49 Counterfactual analysis...................................................................................65 MFA impact on structural reforms .......................................................................78 Gross structural effects of the MFA: structural reforms in 2010-2012 ...................79 Counterfactual analysis: net impact of the MFA on structural reforms ...................87 Case study: pensions and pension reforms in Serbia ..........................................93 Case study: the establishment of the rule-based fiscal framework......................101 MFA effects on external financial sustainability ...................................................109 Evolution of Serbia’s external financial sustainability indicators..........................109 Quantitative assessment of the external financial and public debt sustainability evolution 2010-2012 ....................................................................................121 MFA contribution to medium-long term external financial sustainability ..............126 Macro-Financial Assistance design and implementation........................................129 Synergies with the Instrument for Pre-Accession (IPA) budget support...............129 Synergies with IMF and World Bank programmes.............................................132 MFA volume, structure and timing of disbursement ..........................................133 Conclusions and recommendations for future MFA operations...............................135 Main findings...............................................................................................135 Recommendations for future MFA operations...................................................137 Appendix A – Our approach to the Delphi interviews ...........................................139 Appendix B – Questionnaire for structured interviews..........................................154 Appendix C – Our modelling approach...............................................................161 Appendix D – List of persons interviewed...........................................................175 Appendix E – list of literature and data sources ..................................................178 November 2013 3 Ex Post Evaluation of the Macro-Financial Assistance to Serbia Abstract The ex-post evaluation of the Macro-Financial Assistance (MFA) to Serbia assesses the effects of the MFA on the macroeconomic stabilisation and structural reforms in the recipient country. The Macro-Financial Assistance (MFA) to Serbia was awarded in 2009 to alleviate the country’s external financing difficulties, in the form of a loan conditional on the implementation of specific policy conditions. The loan was disbursed by a single tranche of EUR 100 million in 2011. The present report presents the macroeconomic context of the operation, assesses the macroeconomic impact of the MFA, the implementation of structural reforms in line with the MFA policy conditions, the evolution of the external financial sustainability indicators of the Serbian economy following MFA, the interaction of the MFA with the other components of the international financial assistance to Serbia, and the added value of the MFA with respect to the latter. The evaluation findings are based on the interviews with Serbian officials, representatives of international financial institutions and of the European Commission, the results of the Delphi analysis, a review of the documentation relevant to the operation and macroeconomic modelling. The study presents and summarizes the results of the evaluation and draws recommendations for future operations. L'évaluation ex-post de l'Assistance macrofinancière (AMF) à la Serbie évalue les effets de l’AMF sur la stabilisation macroéconomique et les réformes structurelles dans le pays bénéficiaire. L'Assistance macrofinancière (AMF) à la Serbie a été accordée en 2009 pour atténuer les difficultés de financement extérieur du pays, sous forme d’un prêt conditionné à l’adoption de conditionnalités spécifiques. Le prêt a été versé en une seule tranche de 100 millions d'euros en 2011. Le présent rapport présente le contexte macro-économique de l'opération, évalue l'impact macroéconomique de l'AMF, examine la mise en œuvre des réformes structurelles en lien avec les conditionnalités de l'AMF, l'évolution des indicateurs de solidité financière extérieure de l'économie serbe suite à l'AMF, l'interaction de l'AMF avec les autres composantes de l'aide financière internationale à la Serbie, et la valeur ajoutée de l'AMF à l'égard de celle-ci. Les résultats de l'évaluation sont basés sur des entretiens avec des responsables serbes, les représentants des institutions financières internationales et de la Commission européenne, les résultats de l'analyse Delphi, l’examen de la documentation relative à l’opération et la modélisation macroéconomique. L'étude présente et résume les résultats de l'évaluation et tire des recommandations pour les opérations à venir. November 2013 4 Ex Post Evaluation of the Macro-Financial Assistance to Serbia Glossary of terms EU – European Union DG ECFIN – Directorate General for Economic and Financial Affairs of the European Commission FDI – Foreign Direct Investment FDR – Fiscal Deficit Rule IMF – International Monetary Fund IPA – Instrument for Pre-Accession MFA – Macro-Financial Assistance MoU – Memorandum of Understanding NBS – National Bank of Serbia PIFC – Public Internal Financial Control PIO – Pension & Disability Insurance Fund of Serbia SBA – Stand-By Arrangement WB – World Bank November 2013 5 Ex Post Evaluation of the Macro-Financial Assistance to Serbia Executive summary The Macro-Financial Assistance (MFA) to Serbia was awarded by the Council of the European Union Decision 2009/892/EC on the 30 of November 2009. The 2009 – 2011 MFA was the third provided to Serbia since two MFA operations had already been undertaken in 2001 – 2002 and in 2002 – 2006 to the benefit of Federal Republic of Yugoslavia and State Union of Serbia and Montenegro respectively, entities of which the Republic of Serbia was constitutive at these periods. The decision to grant the Macro-Financial Assistance 2009 – 2011 was linked to the International Monetary Fund (IMF) financial assistance to Serbia. The MFA Memorandum of Understanding states that disbursement of funds in the framework of the MFA operations is conditional to the satisfactory track record in the implementation of the ongoing Stand-By Arrangement referring to the 2009 – 2011 SBA). Another pre-criterion to disbursement was a positive evaluation, by the European Commission, of the progress made in the implementation of structural reforms. In addition, the MFA was conceived to be complementary to the IMF and World Bank funding, and the volume of funds for the MFA was determined based on the IMF forecasts of the Serbian economy’s needs.