(NMS)? - IMF
EU funds: What can the Western Balkans learn from the New Member States (NMS)? Robert Sierhej, International Monetary Fund Regional Office in Warsaw October, 2007
Outline:
An overview of available funds
•
Comparing IPA and pre-accession in the NMS Prospects for after-accession
Lessons from the NMS
•
•
Institutional and legal frameworks Challenges in economic policy
Conclusions
•
IPA commitments for Western Balkans Instrument for pre-accession assistance (IPA) (EU commitments, millions of Euro) 2007
2008
2009
2007-2009
138.5
146
151.2
436
Macedonia, FYR
59
70
82
211
Albania
61
71
81
213
Bosnia & Herzegovina
62
75
89
226
Montenegro
31
33
33
97
Serbia
187
191
195
572
Kosovo
63
65
66
194
463
504
546
1513
Croatia
Total
Source: European Commission (EC).
While IPA is lower than preaccession in the NMS… IPA and pre-accession commitments (annual average per country, Euro million) 350 300 250 200 150 100 50 0 WB
Source: EC, staff estimates
NMS10
…its economic significance is broadly comparable IPA and pre accession assistance in NMS (commitments in percent of GDP) 2.5
2.0
1.5 Weighted average 1.0
0.5
0.0 Croatia
Serbia
Source: EC, IMF, staff estimates
Bosnia and Herzegovina
Albania
Macedonia
Montenegro
Kosovo
NMS 10
And this may be just the beginning Comparison of pre-accession and post-accession funds in NMS (in percent of GDP) 4
3
2
1
0 Pre-accession Source: EC, Eurostat, staff estimates
2004-06
2007-13
How to manage the increasing EU funds?
NMS developed two models: • “Baltic model”: single institution (MoF) acting as both managing and paying authority • “CE5 model”: different managing and payment authorities—MoF detached from managing role • Different role of regional authorities: the strongest in Poland, the largest country among NMS
It is hard to judge which model works better NMS: Absorption of EU structural funds (claims for interim EU refunds as of June 2007, in percent of 2004-06 commitments) 60% 50% 40% 30% 20% 10% 0% SI
HU
EE
Source: National authorities, EC, staff estimates
LT
SK
PL
LV
CZ
Poland’s case shows that complex initial setups may evolve… Poland: Initial Managing Authorities for EU-financed Operating Programs 1. Ministry of Economy
2. Ministry of Agriculture Industry
Fishery
Human Resource Development Cohesion funds (coordinating) 3. Ministry of Infrastructure
Rural Development 4. Ministry of Environment
Transport Cohesion funds (transport)
5. Local governments
Regional development
Cohesion funds (environment)
…to streamlined versions to ensure more efficient coordination Poland: Modified Managing Authorities for EU-financed Programs 1. Ministry of Regional Development
2. Ministry of Agriculture Industry
Human Resource Development
Fishery
Cohesion funds Transport 3. Local governments
Regional development
Rural Development
Poland: Legal and regulatory changes followed a similar route Poland: Measures to improve absorption of EU funds: Payment system
* more frequent and simplified submission of refund claims * accelerated certification of payments * simplified (one-stage) verification of invoices
Legal framework
* simplified public procurement rules * no court appeals on bids below Euro 60,000 * no ministerial regulations required in all program documents
"Political" suasion
* government monthly monitoring of absorption progress against planned targets
EU funds may be a challenge for fiscal policy
A simple framework for assessing the fiscal impact of EU transfers. (1) EU related receipts budget compensation refunds on EU projects (2) EU related expenditures contribution to EU spending on EU projects national co-financing Direct fiscal impact=(1)-(2) (3) Domestic spending substituted by EU transfers Adjusted fiscal impact (1)-(2)+(3)
Hungary: Fiscal impact of EU transfers (in percent of GDP) 2004
2005
2006
2007 budget
Transfers from EU
0.8
0.9
1.3
1.9
Expenditure on EU projects
0.4
0.9
1.3
1.8
Co-financing
0.2
0.4
0.7
0.7
Contribution to EU
0.6
0.8
0.8
0.8
Direct fiscal impact
-0.4
-1.3
-1.5
-1.3
Substituted spending 1/
0.2
0.7
1.1
1.5
Adjusted fiscal impact
-0.2
-0.6
-0.4
0.2
1/ Estimate: includes cohesion funds, CAP transfers, and co-financing.
Source:MoF, staff estimates
Demand impact: A very simplified approach D = α ( T + NC) - C – A ; α € {0,1} D - demand impact T - transfers received from EU NC - national co-financing of EU funds C - contributions paid to EU A - advances received α - degree of substitution between EU- related projects and domestic spending that would have happened anyway (depending on the implementation of additionality guidelines)
First round effect on demand depends on additionality assumptions Partial additionality (α= 0.55-0.65)
Full additionality (α=1) 4.5
4.5 4.0
4.0
2004-06 avg 2007-13 avg
3.5
3.5
3.0
3.0
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
0.0
-0.5
LT
EE
PL
SK
HU
LV
CZ
SI
Source: National authorities, staff estimates.
BG
RO
-0.5
2004-06 avg
2007-13 avg
LT HU PL EE SK LV CZ SI BG RO
Model-based estimates point at positive, albeit ambiguous, impact on growth Poland: Impact of cohesion policy on GDP level (deviation from baseline in %) 12 I m p le m e n t a t io n a l P h a s e (2 0 0 6 -2 0 1 5 )
T e r m in a t io n P h a s e (2 0 1 6 -2 0 2 0 )
10 EC O MO D
8
6
QU EST
4
H E R M IN
2
0 2006
2008
2010
2012
2014
2016
2018
2020
Source: J. Bradley, G. Untiedt, “Do economic models tell us anything useful about Cohesion Policy impacts?, 2007
EU transfers could also have negative side-effects
¾ ¾
If the recipient economy operates at its potential, the impulse from EU transfers could add to economic imbalances by: Creating pressure on wages and prices Leading to appreciation of the real effective exchange and undermining external competitiveness
Some conclusions based on the NMS’ experience:
9
9
9
IPA may be just a prelude to much larger funding, it is important to use it well: Institutional and regulatory frameworks should ensure efficient coordination and relatively high degree of flexibility. A possible negative budgetary impact should be considered and, if necessary, prevented by reprioritizing expenditures. The demand impulse from EU transfers needs to be managed carefully not to add macroeconomic imbalances
Outline:
An overview of available funds
•
Comparing IPA and pre-accession in the NMS Prospects for after-accession
Lessons from the NMS
•
•
Institutional and legal frameworks Challenges in economic policy
Conclusions
•
IPA commitments for Western Balkans Instrument for pre-accession assistance (IPA) (EU commitments, millions of Euro) 2007
2008
2009
2007-2009
138.5
146
151.2
436
Macedonia, FYR
59
70
82
211
Albania
61
71
81
213
Bosnia & Herzegovina
62
75
89
226
Montenegro
31
33
33
97
Serbia
187
191
195
572
Kosovo
63
65
66
194
463
504
546
1513
Croatia
Total
Source: European Commission (EC).
While IPA is lower than preaccession in the NMS… IPA and pre-accession commitments (annual average per country, Euro million) 350 300 250 200 150 100 50 0 WB
Source: EC, staff estimates
NMS10
…its economic significance is broadly comparable IPA and pre accession assistance in NMS (commitments in percent of GDP) 2.5
2.0
1.5 Weighted average 1.0
0.5
0.0 Croatia
Serbia
Source: EC, IMF, staff estimates
Bosnia and Herzegovina
Albania
Macedonia
Montenegro
Kosovo
NMS 10
And this may be just the beginning Comparison of pre-accession and post-accession funds in NMS (in percent of GDP) 4
3
2
1
0 Pre-accession Source: EC, Eurostat, staff estimates
2004-06
2007-13
How to manage the increasing EU funds?
NMS developed two models: • “Baltic model”: single institution (MoF) acting as both managing and paying authority • “CE5 model”: different managing and payment authorities—MoF detached from managing role • Different role of regional authorities: the strongest in Poland, the largest country among NMS
It is hard to judge which model works better NMS: Absorption of EU structural funds (claims for interim EU refunds as of June 2007, in percent of 2004-06 commitments) 60% 50% 40% 30% 20% 10% 0% SI
HU
EE
Source: National authorities, EC, staff estimates
LT
SK
PL
LV
CZ
Poland’s case shows that complex initial setups may evolve… Poland: Initial Managing Authorities for EU-financed Operating Programs 1. Ministry of Economy
2. Ministry of Agriculture Industry
Fishery
Human Resource Development Cohesion funds (coordinating) 3. Ministry of Infrastructure
Rural Development 4. Ministry of Environment
Transport Cohesion funds (transport)
5. Local governments
Regional development
Cohesion funds (environment)
…to streamlined versions to ensure more efficient coordination Poland: Modified Managing Authorities for EU-financed Programs 1. Ministry of Regional Development
2. Ministry of Agriculture Industry
Human Resource Development
Fishery
Cohesion funds Transport 3. Local governments
Regional development
Rural Development
Poland: Legal and regulatory changes followed a similar route Poland: Measures to improve absorption of EU funds: Payment system
* more frequent and simplified submission of refund claims * accelerated certification of payments * simplified (one-stage) verification of invoices
Legal framework
* simplified public procurement rules * no court appeals on bids below Euro 60,000 * no ministerial regulations required in all program documents
"Political" suasion
* government monthly monitoring of absorption progress against planned targets
EU funds may be a challenge for fiscal policy
A simple framework for assessing the fiscal impact of EU transfers. (1) EU related receipts budget compensation refunds on EU projects (2) EU related expenditures contribution to EU spending on EU projects national co-financing Direct fiscal impact=(1)-(2) (3) Domestic spending substituted by EU transfers Adjusted fiscal impact (1)-(2)+(3)
Hungary: Fiscal impact of EU transfers (in percent of GDP) 2004
2005
2006
2007 budget
Transfers from EU
0.8
0.9
1.3
1.9
Expenditure on EU projects
0.4
0.9
1.3
1.8
Co-financing
0.2
0.4
0.7
0.7
Contribution to EU
0.6
0.8
0.8
0.8
Direct fiscal impact
-0.4
-1.3
-1.5
-1.3
Substituted spending 1/
0.2
0.7
1.1
1.5
Adjusted fiscal impact
-0.2
-0.6
-0.4
0.2
1/ Estimate: includes cohesion funds, CAP transfers, and co-financing.
Source:MoF, staff estimates
Demand impact: A very simplified approach D = α ( T + NC) - C – A ; α € {0,1} D - demand impact T - transfers received from EU NC - national co-financing of EU funds C - contributions paid to EU A - advances received α - degree of substitution between EU- related projects and domestic spending that would have happened anyway (depending on the implementation of additionality guidelines)
First round effect on demand depends on additionality assumptions Partial additionality (α= 0.55-0.65)
Full additionality (α=1) 4.5
4.5 4.0
4.0
2004-06 avg 2007-13 avg
3.5
3.5
3.0
3.0
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
0.0
-0.5
LT
EE
PL
SK
HU
LV
CZ
SI
Source: National authorities, staff estimates.
BG
RO
-0.5
2004-06 avg
2007-13 avg
LT HU PL EE SK LV CZ SI BG RO
Model-based estimates point at positive, albeit ambiguous, impact on growth Poland: Impact of cohesion policy on GDP level (deviation from baseline in %) 12 I m p le m e n t a t io n a l P h a s e (2 0 0 6 -2 0 1 5 )
T e r m in a t io n P h a s e (2 0 1 6 -2 0 2 0 )
10 EC O MO D
8
6
QU EST
4
H E R M IN
2
0 2006
2008
2010
2012
2014
2016
2018
2020
Source: J. Bradley, G. Untiedt, “Do economic models tell us anything useful about Cohesion Policy impacts?, 2007
EU transfers could also have negative side-effects
¾ ¾
If the recipient economy operates at its potential, the impulse from EU transfers could add to economic imbalances by: Creating pressure on wages and prices Leading to appreciation of the real effective exchange and undermining external competitiveness
Some conclusions based on the NMS’ experience:
9
9
9
IPA may be just a prelude to much larger funding, it is important to use it well: Institutional and regulatory frameworks should ensure efficient coordination and relatively high degree of flexibility. A possible negative budgetary impact should be considered and, if necessary, prevented by reprioritizing expenditures. The demand impulse from EU transfers needs to be managed carefully not to add macroeconomic imbalances
