Public finances in the Western Balkan countries deteriorated during the COVID-19 crisis, so bringing public debt down to safer levels while continuing to support economic recovery amidst increased uncertainty is now a regional priority. While fiscal policymakers were engaged in mitigating a deeper impact of the pandemic and subsequent crises, there is now limited fiscal space to support declining potential growth and sustainability concerns loom in several countries. Limited fiscal space also poses risks for implementing and maintaining much-needed public investment projects necessary for economic convergence with the European Union (EU) as well as progressing on the digital and green transitions. In addition, rising uncertainty globally, including in the EU (as a major trading partner), calls for fiscal buffers, so countries can use fiscal policy for countercyclical purposes and to ensure the most effective and efficient use of public resources to support economic recovery. This is further accentuated by accelerated monetary tightening that has increased the financing costs for governments. Strengthening fiscal prudence as well as fiscal governance will be a critical signal to markets on pricing sovereign risks.
EU enlargement prospects and associated legislative harmonization with the Acquis Communautaire are an important anchor for structural and institutional reforms in the Western Balkans. Fiscal governance that includes both fiscal responsibility frameworks and infrastructure governance, among else, is at the core of the EU accession agenda, as underlined in the EU annual country reports. As part of the accession negotiations, candidate countries need to demonstrate they are functioning market economies (an economic criterion for accession). From a fiscal policy perspective, this means that the countries of the Western Balkans need to improve planning, oversight, and transparency in the management of public finances, enhance effectiveness in delivering their fiscal policy, as well as apply fiscal rules and ensure effective use of budgetary resources through better infrastructure governance. These improvements are expected to contribute to the sustainability of these countries’ public finances. From a legal perspective, sufficient progress implies effective harmonization with the EU Directive on requirements for budgetary frameworks of the Member States from November 2011—part of Chapter 17 of the Acquis.
In December 2022, the European Union and the World Bank signed a Trust Fund Administration Agreement to implement four-year technical assistance on Strengthening Fiscal Governance in the Western Balkans. The implementation of this technical assistance will be pursued in a spirit of a partnership between the European Commission (DG NEAR, DG ECFIN) and the World Bank. A regular review process will be used to systematically share the achievements and progress to facilitate flexibility to adjust country level engagements based on the initial phase of the diagnostics and changes in country-level economic circumstances.
The objective of this technical assistance is to support the Western Balkan countries to enhance their fiscal responsibility frameworks and strengthen infrastructure governance by enhancing public investment (PIM) and public asset management (PAM) with a sectoral and institutional focus. Support would focus on capacity development, policy reforms and implementation support for more effective fiscal responsibility frameworks such as rules and institutions, macroeconomic forecasting, fiscal risk reporting, and the efficiency of public spending, including capital spending. Capacity development in the areas of infrastructure governance would go beyond the PIM reform implementation agenda at the central policy institutions and include understanding and addressing the key service delivery challenges at the sectoral level, designing a roadmap for the public asset management together with policy and implementation tools, and supporting resilience of infrastructure governance in the Western Balkans, thereby contributing to economic convergence with the EU. Technical assistance will be implemented at both the country and regional levels.
