Audit criticises European Commission monitoring of aid to Moldova

Audit criticises European Commission monitoring of aid to Moldova
By bne IntelliNews September 5, 2016

EU supported programmes on strengthening the public administration in Moldova were not sufficiently aligned with Moldovan strategies and their potential benefit was reduced because the Commission did not fully use its power to set preconditions for payment, the European Court of Auditors has concluded in a special report

The technical recommendations from the auditors come at a time when the political impetus in favour of the Eastern Partnership is moving downward on the EU’s agenda amid political obstacles in the recipient states and fatigue generated by the lack of progress. Moldova will hold presidential elections this year and polls indicate pro-Russian candidate Igor Dodon might win. Dodon says he plans to revise the Association Agreement with the EU and place it on the same level as Moldova’s partnership with the Eurasian Economic Union.

The court admits there were “significant challenges in implementing assistance for Moldova”. Public institutions suffer from excessive bureaucracy, a lack of focus on core functions, a high turnover of staff, and, consequently, low efficiency, according to the audit. Corruption also remains an issue.

“The combination of political and macroeconomic instability, weak governance and public administration significantly reduces the European Commission’s leverage to encourage reform,” said Hans Gustaf Wessberg, the member of the European Court of Auditors responsible for the report.

The Court of Auditors recommends that the Commission strengthen the use of conditionality and performance indicators when it decides to disburse tranches of the funds to the Moldovan government. 

The auditors’ report does not bode well for Moldova’s budget planning this year, since the government expects EU grants of around 2.7% of GDP. Under the current political circumstances, the Commission might prefer to delay a decision on this support until after the International Monetary Fund (IMF) decides on its new agreement for Moldova, and maybe after the October 30 presidential elections.

The government expects the Commission to disburse the annual sector budget support (SBS) plus the money not paid in 2015 - around MDL3.6bn (€180mn) altogether - this year. The government envisaged a 3.2% of GDP budget deficit before the talks with the IMF in August and the structure of the revised budget, resulting from the negotiations with the Fund on a three-year agreement, has not yet been released.

Upon the signing of a staff-level agreement with the Fund, Romania disbursed the first, €60mn, tranche of a €150mn loan and the government expects another tranche by the end of the year. But the European Commisison might be inclined to wait until the endorsement of the agreement is signed by the Fund’s board.

The board is expected to discuss the agreement in October, but this depends on a series of pre-requisite actions to be taken by the government in Chisinau. The to do list sketched with the Fund has not been released, but it reportedly includes the settlement of the MDL13.6bn (10% of GDP) emergency aid extended by the central bank to three failed banks.

Since 2007, Moldova has been allocated EU aid amounting to €782mn, €37 per capita or 1.35% of the period’s GDP. The budget support funds and additional support accounted for some 74% of the allocations, while the rest was given for specific projects.

The allocations were stopped by the Commission in July 2015, after the siphoning of $1bn from Moldovan banks was revealed in late 2014, and following a half-year political crisis prompted by the parliamentary elections in November 2014.

The Commission could have been more stringent when assessing whether conditions had been fulfilled and the granting of additional incentive‐based funds was not fully justified, the Court of Auditors concluded.

The auditors make a number of recommendations to the Commission for improving EU assistance to Moldova, including to use the early warning system more rigorously to prevent or mitigate risks, to better link budget support programmes to national strategies, and strengthen the use of conditionality and performance indicators. The court also called on the commission to link additional incentive‐based funds more clearly to demonstrable progress, coordinate projects and sector budget support programmes, and to ensure the sustainability of projects by more systematically assessing the capacity and political commitment of public authorities to sustain outcomes.

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