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Strengthening fiscal governance in the Western Balkans

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Public finances in Western Balkan countries have deteriorated during the COVID-19 crisis, so reducing public debt to safer levels while continuing to support economic recovery amid increased uncertainty is now a priority regional. As fiscal policymakers worked to mitigate the deeper impact of the pandemic and subsequent crises, the fiscal space available to support declining potential growth is now limited and sustainability concerns loom in several country. Limited fiscal space also presents risks for the implementation and maintenance of public investment projects essential for economic convergence with the European Union (EU) as well as for the advancement of the digital and green transitions. Furthermore, increasing uncertainty globally, including within the EU (as a major trading partner), requires fiscal reserves, so that countries can use fiscal policy for counter-cyclical purposes and ensure the most effective and efficient use of public resources to support economic recovery. This situation is further accentuated by the acceleration of monetary tightening which has increased financing costs for governments. Strengthening fiscal prudence as well as fiscal governance will constitute a crucial signal to the markets regarding the pricing of sovereign risks.

The prospects for EU enlargement and the associated legislative harmonization with Community acquis constitute an important anchor point for structural and institutional reforms in the Western Balkans. Fiscal governance, which includes both fiscal accountability frameworks and infrastructure governance, is at the heart of the EU accession agenda, as highlighted in the EU report. annual reports by country. As part of accession negotiations, candidate countries must demonstrate that they are viable market economies (an economic criterion for membership). From a fiscal policy perspective, this means that Western Balkan countries need to improve planning, monitoring and transparency in public financial management, increase the efficiency of their fiscal policy implementation, apply the budgetary rules and ensure efficient use of financial resources. budgetary resources through better infrastructure governance. These improvements should contribute to the sustainability of public finances in these countries. From a legal perspective, sufficient progress implies effective harmonization with the EU Directive on requirements for Member States’ budgetary frameworks of November 2011 – part of Chapter 17 of the Acquire.

In December 2022, the European Union and the World Bank signed a Trust Fund Administration Agreement to implement four-year technical assistance aimed at strengthening fiscal governance in the Western Balkans. The implementation of this technical assistance will continue in a spirit of partnership between the European Commission (DG NEAR, DG ECFIN) and the World Bank. A regular review process will be used to systematically share achievements and progress to facilitate the flexibility needed to adjust commitments at the national level based on the initial phase of diagnostics and changes in the economic situation at the national level.

The objective of this technical assistance is to help Western Balkan countries improve their fiscal accountability frameworks and strengthen infrastructure governance. by strengthening public investment (PIM) and public asset management (PAM) with a sectoral and institutional orientation. Support would focus on capacity development, policy reforms and support for the implementation of more effective fiscal accountability frameworks such as rules and institutions, macroeconomic forecasting, fiscal risk reporting and efficiency public spending, including investment spending. Capacity development in the areas of infrastructure governance would go beyond the PIM reform implementation agenda at the level of central policy institutions and would include understanding and addressing key service delivery challenges at the level sector, the design of a roadmap for the management of public assets as well as policy and implementation tools. and supporting the resilience of infrastructure governance in the Western Balkans, thereby contributing to economic convergence with the EU. Technical assistance will be implemented at national and regional levels.

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