Statement by Ms B. Kauffmann on behalf of the European Commission (Directorate General for Economic and Financial Affairs)

First of all, I would like to use the occasion to commend UNMIK and the Kosovo authorities for the remarkable progress that has been achieved since June 1999. Kosovo has certainly become a different place: physically, institutionally and economically.

• Starting virtually from zero, UNMIK achieved an extraordinary increase of domestic revenue collection ensuing from a combination of economic growth, a broadening of the tax base inter alia by introducing new and modern taxes and improved tax compliance.

• Seven banks are operating in Kosovo, providing for basic financial products.

• A number of commercial laws have been enacted so as to create a stable and reliable business environment.

• The Kosovo Trust Agency has been established, to allow the more efficient use of the assets of public and socially owned enterprises.

The European Community has supported this process with substantial assistance. Parallel to project assistance under OBNOVA and CARDS, as well as other sources, which was mentioned this morning, the European Community supported the Kosovo budget with a first exceptional financial grant assistance of € 35 million in 2000. Another exceptional grant assistance of up to €30 million was approved in June 2001, of which a first tranche of €15 million was released already in September 2001. I am pleased to say today that we expect to disburse the remaining €15 million by the end of this year, now that economic policy conditions have been met.

It is a sign of "normalisation" that we are increasingly talking about a medium-term framework and important strategic decisions, rather than how to solve the problems over the next 12 months. But this also means a great challenge and responsibility for all parties involved.

Kosovo needs economic growth to create employment and to reduce unemployment. Kosovo needs economic growth to further increase public revenues, which will allow it to continue public investment and to provide needed public and social services. And Kosovo also needs growth to become an attractive location for investment.

To achieve the growth scenario, a number of elements are of paramount importance for the Kosovo decision-makers, which have already been mentioned by previous speakers.

• To move towards sustainable finances, public spending needs to contain recurrent outlays, notably for wages and salaries, to improve the efficiency of spending and to re-allocate funds towards investment.

• Rapid progress will need to be made in the control and restructuring of public enterprises, which not only pose a drain on the budget but also a threat to economic development. In this context, I think for instance of a reliable supply of energy, water and telecommunication services.

• So as to reap the benefits of a vibrant private sector, a decisive implementation of economic reforms, including privatisation, will be a litmus test for the future. In our view, the speed of adopting commercial laws, for instance, needs to be accelerated. Moreover, a favourable business environment will require, aside from the establishment of regulatory frameworks, effective law enforcement and the respect of rule of law.

Continued support from the World Bank and IMF will be needed in this process. In particular, we would encourage UNMIK and the PISG to agree on a policy programme with the IMF. This programme could be monitored by the IMF for donors. This would not only underpin the credibility of the envisaged programme but also facilitate the availability of budget support from donors.

We agree that, given the past under-investment and damages, continued donor assistance is necessary. However, Kosovo must shoulder from its own resources an increasing share of its capital investment expenditure. This applies to the maintenance of past donor funded projects as well as for complementary and new projects, which will require a clear and sometimes painful prioritisation.

On our side, we will continue to support Kosovo through various means. Given its continued investment needs, however, it seems critical for Kosovo's long-term development to prepare Kosovo to get access to other sources of finance.

In this context, we are examining at a technical level whether and under which conditions the European Investment Bank (EIB) could provide loans to Kosovo enterprises and entities (whether public or private).

• In our assessment, this would require a mandate from the EU Council of Ministers.

• For a project to qualify for a loan, the EIB would also have to be satisfied with its economic, technical, environmental and financial viability.

• Moreover, this raises complex legal, political and economic questions: Among other things, the issue of appropriate guarantees would need to be solved satisfactorily and Kosovo's medium- and long-term capacity to service additional debt would need to be ascertained.

Realistically, a solution is therefore not likely in the short term and in any case the potential loan volume concerned could not replace IFI involvement more generally.

Thank you for your attention.

¹ Kosovo (Federal Republic of Yugoslavia) - UNSCR 1244