EUROPEAN COMMISSION Brussels, 8.7.2021 SWD(2021) 178 final COMMISSION STAFF WORKING DOCUMENT Background Analysis per beneficiary country Accompanying the document REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on the implementation of macro-financial assistance to third countries in 2020 {COM(2021) 375 final}



List of abbreviations AA Association Agreement CPI Consumer price index DCFTA Deep and Comprehensive Free Trade Area EC European Community ECF Extended Credit Facility EEU Eurasia Economic Union EFF Extended Fund Facility EFTA European Free Trade Association EIB European Investment Bank ENP European neighbourhood policy ENI European neighbourhood instrument EU European Union EUR Euro FATF Financial Action Task Force FDI Foreign direct investment FSAP Financial sector assessment programme GDP Gross domestic product IMF International Monetary Fund MFA Macro-financial assistance MoU Memorandum of Understanding OECD Organisation for Economic Cooperation and Development OJ Official Journal of the European Union PFM Public finance management PPP Public‑private partnership SBA Stand-By Arrangement SDR Special drawing rights SOE State-owned enterprise SREP Supervisory review and evaluation process TFEU Treaty on the Functioning of the European Union VAT Value added tax WTO World Trade Organisation y-o-y year-on-year Contents Introduction Background analysis of beneficiaries of macro-financial assistance 1.Georgia 1.1.Macroeconomic performance 1.2.Implementation of macro-financial assistance 1.3.Structural Reforms 2.Moldova 2.1.Macroeconomic performance 2.2.Implementation of macro-financial assistance 2.3.Structural Reforms 3.Ukraine 3.1.Macroeconomic performance 3.2.Implementation of macro-financial assistance 3.3.Structural Reforms 4.Jordan 4.1.Macroeconomic performance

4.2.Implementation of macro-financial assistance 4.3.Structural reforms 5.Tunisia 5.1.Macroeconomic performance 5.2.Implementation of macro-financial assistance 5.3.Structural Reforms 6.Albania 6.1.Macroeconomic performance 6.2.Implementation of macro-financial assistance 6.3.Structural reforms 7.Bosnia & Herzegovina 7.1.Macroeconomic performance 7.2.Implementation of macro-financial assistance 7.3.Structural reforms 8.Kosovo* 8.1Macroeconomic performance 8.2.Implementation of macro-financial assistance 8.3.Structural reforms 9.Montenegro 9.1.Macroeconomic performance

9.2.Implementation of macro-financial assistance 9.3.Structural reforms 10.North Macedonia 10.1.Macroeconomic performance 10.2.Implementation of macro-financial assistance 10.3.Structural reforms Annex 1: MFA operations by date of decision, 1990-2020 Annex 2: Status of disbursements made by date of decision at end-December 2020 Annex 3: MFA amounts authorised* by year, 2005-2020 (EUR million) Chart 3A: MFA amounts authorised by year, 2006-2020(EUR million) Chart 3B: MFA amounts authorised by region, 2006-2020 (%) Annex 4: MFA amounts disbursed by year, 2006-2020 (EUR million) Chart 4A: MFA amounts disbursed by year, 2006-2020 (EUR million) Chart 4B: MFA amounts disbursed by region, 2006-2020 (%) Annex 5: Outstanding amounts in respect of MFA operations disbursed (as at 31 December 2020) Introduction This Staff Working Document complements the Commission’s report to the European Parliament and the Council on the implementation of macro-financial assistance (MFA) to third countries in 2020. 2020 was an exceptional year for MFA. The year was firstly characterised by the conclusion of three MFA operations in the Eastern neighbourhood: Ukraine MFA-IV, Georgia MFA-III and Moldova, as well as the adoption of a new, follow-up operation with Jordan (MFA-III) in the Southern neighbourhood. Furthermore, in the context of the COVID-19 pandemic, on 25 May 2020 the European Parliament and the Council adopted a EUR 3 billion MFA package to 10 enlargement and neighbourhood partners to help them to limit the economic fallout of the coronavirus pandemic. Implementation is ongoing. For each beneficiary country, the report provides more detailed information on: (i) their macroeconomic and financial situation; (ii) implementation of their MFA operations, and (iii) progress in accomplishing their structural reforms agenda.

The annexes include overview tables on the effective disbursements of MFA operations since 1990 by date of adoption of the decisions, as well as tables on MFA commitment and payment amounts in 2006‑2020, by year and by region.

Background analysis of beneficiaries of macro-financial assistance 1.Georgia 1.1.Macroeconomic performance Georgia’s GDP contracted by 6.2% in 2020. The outbreak of the coronavirus brought a severe recession from the second quarter of the year. GDP declined by 12.3% year-on-year in Q2, followed by a smaller contraction by 5.6% year-on-year in Q3. The situation deteriorated again due to a new wave of COVID-19 cases and the reintroduction of restrictions in November. All sectors of the economy apart from agriculture and mining contracted in 2020, with the most severe drop in the sector of hotels and restaurants. The unemployment rate in Georgia increased to 20.4% in the fourth quarter of 2020, up by 3.6 percentage points compared to the same period of 2019. Consumer price inflation decreased to 2.4% year-on-year in December 2020 from 7% in December 2019 but then resurged to 7.2% in March 2021. Despite falling inflation and taking into account the uncertain economic outlook, the central bank cut the refinancing rate only slightly in the course of 2020, from 9% to 8% and more recently raised it to 8.5% in March 2021. This reflects, inter alia, pressures stemming from the Georgian currency, the lari, depreciating by 20% against the euro and by 13% against the US dollar in 2020. The general government deficit reached 9.3% of GDP in 2020, slightly higher than the 8.5% of GDP foreseen in the revised budget law. The difference is due to the additional support package announced in response to the new containment measures in the last weeks of the year. The ratio of public debt to GDP increased to 62% at the end of 2020 from 41% at end-2019. Georgia’s balance-of-payments position deteriorated in 2020. The current account deficit increased from USD 1 billion in 2019 to USD 1.97 billion in 2020, corresponding to 12.4% of GDP. The factor that had the strongest impact on the current account position was a dramatic fall in revenues from tourism, which had amounted to over USD 3 billion in 2019 and dropped to USD 0.5 billion in 2020. On the other hand, Georgia’s merchandise trade deficit narrowed. The increased current account deficit was financed by continuing (albeit slower) inflow of foreign direct investment and, most importantly, by increased volumes of grants and concessional loans from the international partners, including the EU. Georgia’s international reserves remained broadly stable in recent months, totalling USD 3.9 billion at the end of October 2020 (corresponding to around 5 months of imports), having increased from USD 3.5 billion at end-2019. For 2021, most forecasts envisage a GDP recovery by 3.5-4%, but this outlook is highly uncertain. It depends notably on the evolution of the pandemic in Georgia and in other countries, on the continuation of the fiscal stimulus in 2021, and on the size of financial inflows from abroad, especially revenues from tourism and remittances. Georgia - Macro-Economic Indicators Georgia 2016 2017 2018 2019 2020 Real GDP, % change 2,9 4,8 4,9 5,0 -6,2 Consumer price inflation, %, end of period 1,8 6,7 1,5 7,0 2,4 Key monetary policy rate, %, end of period 6,5 7,3 7,0 9,0 8,0 Unemployment rate, LFS, % 21,7 21,6 19,2 17,6 18,5 General government balance, % of GDP -1,3 -0,8 -0,7 -2,7 -9,3 Gross public debt, % of GDP 40,3 39,9 39,9 41,2 62,2 Current account balance, % of GDP -12,5 -8,0 -6,8 -5,5 -12,4 Official international reserves, USD billion 2,8 3,0 3,3 3,5 3,9 International reserves, months of imports 3,5 3,4 3,6 4,7 5,2 Gross external debt, % of GDP 105,3 106,6 101,3 106,6 127,7 Net foreign direct investment, % of GDP 8,2 10,5 5,5 5,9 3,7 Sources: National authorities; IMF; World Bank; Commission staff calculations 1.2.Implementation of macro-financial assistance The MFA-III operation launched in 2018 was completed with disbursement of the second and last tranche in November 2020. The amount of this tranche was EUR 25 million, including EUR 5 million in the form of grants and EUR 20 million in loans. Following an official request from Georgia for a new MFA in the context of the COVID-19 pandemic crisis, the European Parliament and the Council approved a EUR 3 billion COVID-19 MFA package in May 2020, including up to EUR 150 million for Georgia. The Memorandum of Understanding (MoU) and the Loan Facility Agreement (LFA) relating to this MFA operation were signed and ratified by the Georgian Parliament on 30 September 2020. The MoU entered into force on 30 September 2020, and the LFA entered into force on 20 October 2020.

In accordance with the MoU, the assistance is to be provided in two instalments. The first instalment (EUR 75 million) was subject to the general political pre-conditions for MFA (respect for effective democratic mechanisms, including a multi-party parliamentary system, the rule of law and human rights) and the IMF programme remaining on track, and it was disbursed in November 2020. The second instalment of EUR 75 million will additionally be subject to fulfilment of a set of policy conditions laid down in the MoU in the field of public procurement, pension system, company law, governance of state-owned enterprises, judicial system, energy efficiency and the labour market. These MFA programmes are provided in conjunction with the resources from international financial institutions and bilateral donors including the IMF, under its four-year Extended Fund Facility (EFF) programme with Georgia approved in April 2017 and augmented in 2020 (to a total of approx. EUR 690 million). All reviews under this programme have been successfully approved by the IMF Board, including the most recent, eighth and final one in April 2021. 1.3.Structural Reforms Georgia’s structural reform agenda focuses in particular on improving the business environment, labour market, energy and transport. The Georgian authorities intend to complement structural reforms with fiscal reforms, strengthening of the financial sector, as well as continuous implementation of the Association Agreement with the EU. In terms of improving the business environment, the Georgian Parliament adopted in September 2020 a new insolvency law supporting adequate protection of creditor rights and timely and efficient insolvency processes in line with international standards. A new company law, aimed at regulating corporate relations and approximating the legislation to the EU directives, has been submitted to the Parliament. The authorities have continued improving the revenue administration, e.g. by automatic refund of VAT credits (since November 2020), development of IT strategy and a risk-based approach. Regarding the labour market, Georgia implemented several policy actions from the National Strategy of Labour and Employment Policy, adopted in December 2019. This included the adoption of the Law on Employment Services in July 2020, adoption of substantial amendments to the Labour Code in September 2020 and strengthening of the labour inspection. In the field of energy, the Georgian Parliament adopted in May 2020 laws on energy efficiency and on energy performance of buildings, implementing the EU acquis in this area. Despite the pandemic, the authorities have advanced their infrastructure development plans. As regards transport, several new sections of the East-West Highway were completed in 2020, while the construction on the remaining sections is underway. In the financial sector, the National Bank of Georgia is strengthening the regulatory and supervisory framework. In particular, the implementation of the resolution framework for financial institution advanced in 2020, with adoption of the relevant secondary legislation. Georgia continues to implement the measures and obligations resulting from the Association Agreement with the EU, including the Deep and Comprehensive Free Trade Area (DCFTA). The recent Association Implementation Report of February 2021 concludes that while alignment to the EU acquis and European standards has broadly continued, further efforts are needed in particular to consolidate democracy after the recent elections and to advance the reform of the judiciary. Georgia’s national reform agenda is supported by MFA conditionality. For example, conditions of the current MFA operation notably require an adoption of the company law, improvements of the judicial system, as well as reforms in the field of the labour market, energy efficiency, governance of state-owned enterprises public procurement and pension system.









Status of economic reforms — Georgia 1. Price liberalisation Prices are largely market-driven. 2. Trade regime Georgia (a WTO member since 2000) has a liberal trade policy, with no quantitative restrictions on imports or exports. In June 2014, it signed an Association Agreement with the EU, including a deep and comprehensive free trade area (DCFTA) agreement, which entered into force in September 2014. Georgia also has FTAs with its other key trading partners such as Turkey and China. 3. Exchange rate regime There is a floating exchange rate for the lari, with limited official intervention by the National Bank of Georgia. There are no restrictions on current international transactions and Georgia does not operate capital controls. 4. Foreign direct investment Georgia has a liberal regime for FDI and unlimited repatriation of capital and profits. FDI inflows in recent years have consistently been among the highest in the region, although they declined to some 4% of GDP in 2020. 5. Monetary policy The main monetary policy objective of the Central Bank of Georgiais price stability. The Bank is currently applying an inflation-targeting regime, with a target of 3% for 2019-2022. The effectiveness of monetary policy is significantly constrained by the high level of dollarisation: as of end-2020, 55% of loans and 61% of deposits were denominated in foreign currency. 6. Public finances and taxation The public finance management system is essentially sound and transparent. Further needed reforms are ongoing to strengthen public investment management and manage contingent liabilities from state-owned companies and public-private partnerships. Public revenues are constrained by the Constitution, which prescribes a referendum for the introduction of new taxes or the raising of tax rates (Article 94), while the budget deficit, public debt and public spending are capped by the Liberty Act, in force since January 2014, at 3%, 60% and 30% of GDP, respectively. 7. Privatisation and enterprise restructuring Most state-owned enterprises (SOEs) have been privatised, with their number falling from around 1,300 in 2009 to around 350 currently, including some 50 public corporationa and some 300 government entities. The government, with support of the IMF and the World bank, has recently started a reform of remaining SOEs aimed at improving their transparency and efficiency. 8. Financial sector Georgia’s financial sector is small and dominated by banks, which hold more than 90% of total financial sector assets. However, banking sector credit to the economy amounts to only around 60% of GDP. The sector is concentrated, with the two largest banks, out of 16 in total, holding around two thirds of the assets. Georgia’s banking sector has a low-risk profile and has generally remained resilient, reporting sufficient capital and liquidity. The capital adequacy ratio stood at 17.6% in December 2020. The share of nonperforming loans to total gross loans was very low at 2.3% at the end of 2020 (by IMF's methodology). 2.Moldova 1.4.Macroeconomic performance On the back of the pandemic and drought in the summer, Moldova’s economy contracted by 7% in 2020. Much of it can be accounted for by the fall in final consumption (significantly affected by the household sector), with an effect of -5.8 percentage points on the GDP. Gross capital formation also contracted, although less profoundly by 2.1% and with relatively low impact on the GDP (-0.5 percentage points). On the supply side, due to the extreme weather conditions, agriculture was among the most affected sectors, with output down by over a quarter compared to 2019, followed by wholesale and retail trade. The government introduced a series of measures to mitigate the effects of the pandemic-induced crisis, including increases in social spending, temporary tax deferrals and monetary easing. However, the overall level of support was rather moderate, accounting for about 1% of GDP. In 2020 inflation continued to moderate in Moldova. While in January, the annual inflation rate stood at 6.8%, it decreased significantly throughout the year, reaching 0.4% by December, therefore, falling below the target level set by the National Bank of Moldova at 5% ±1.5 percentage points. The strong disinflationary trend was a result of the global recession, including the falling oil prices, as well as a sharp decline in domestic demand. In response to this, and to cushion the economic fallout of the pandemic, the central bank cut the base rate five times in 2020, such that in November it reached a historic low of 2.7%. Owing to increased spending on pandemic-related measures, the initial budget for 2020, projected at 3% of GDP, was amended several times throughout last year, up to 8% with the September revision. However, because of underspending (annulment, optimization or underperformance of several spending programmes), by the end of 2020, the fiscal deficit narrowed to 5.3%. In December, the Moldovan authorities passed a new budget law for 2021, albeit in a manner that led to domestic controversies, without proper consultation and lack of a transparent approval process. The 2021 state budget projects an increase of the deficit to 6.5% of GDP, over half of which (58%) is to be financed with the support from International Financial Institutions. As a result of import compression and lower energy prices, the current account deficit narrowed to 6.6% of GDP, compared to 9.3% in 2019. Moreover, as the value of imports is almost double, the sharp, but similar decrease of both imports (-7.3%) and exports (-10.6%) during the COVID-19 pandemic contributed to a contraction of the trade deficit. An improved current account balance, in addition to financial assistance from the EU and the IMF, as well as central bank interventions, resulted in a significant increase of international reserves by nearly 24%, reaching 3.8 billion at the end of the year. Total external debt has accelerated in 2020 to 69.7% of GDP, up from 61.7% in 2019.

In 2020, despite the shock, the fall in remittances (which make about 15% of Moldova’s GDP) was relatively low by 2.4%. FDI, which has been at low levels since the bank fraud crisis in 2014, further declined last year, reaching 0.6% of GDP. The economy is expected to recover modestly in 2021 (GDP is forecast to grow by about 4.5% according to the IMF). However, the macroeconomic performance of Molodva this year will largely depend on the epidemiological situation, including the vaccine rollout, and external support. Moldova - Macro-Economic Indicators Moldova 2016 2017 2018 2019 2020 Real GDP, % change 4,4 4,7 4,3 3,6 -7,0 Consumer price inflation, %, end of period 2,4 7,3 0,9 7,5 0,4 Key monetary policy rate, %, end of period 9,0 6,5 6,5 5,5 2,7 Unemployment rate, LFS, % 4,1 4,0 3,0 5,1 3,8 General government balance, % of GDP -1,6 -0,6 -0,8 -1,5 -5,3 (est) Gross public debt, % of GDP 36,9 32,7 30,1 27,4 32,9 Current account balance, % of GDP -3,5 -5,7 -10,3 -9,3 -6,6 Official international reserves, USD billion 2,2 2,8 3,0 3,1 3,8 International reserves, months of imports 4,9 5,3 5,4 6,2 n.a. Gross external debt, % of GDP 74,8 70,4 63,8 61,7 69,7 Net foreign direct investment, % of GDP 0,9 1,4 2,2 3,8 0,6 Sources: National authorities; IMF; World Bank; Commission staff calculations 1.5.Implementation of macro-financial assistance In September 2017, the European Parlament and the Council adopted the decision to provide EUR 100 million of Macro-financial Assistance (MFA) to the Republic of Moldova. The EU-Moldova MoU was signed on 24 November 2017, outlining a series of economic policy conditions attached to the assistance. The MoU and related documents (LFA, grant agreement) entered into force on 18 January 2018. The first disbursement of EUR 30 million (out of which EUR 20 million in loans and EUR 10 million in grants) was initially put on hold, due to challenging polticial situation, and it was only paid in October 2019, following a change of government and a renewed reform effort. Similarly, the second instalment was made available to Moldova after some disucssions with regard to the political pre-conditions. To that end, a letter was handed over the Moldovan Prime Minister in February 2020 with eight short-term actions to be implemented by the authorities and help assess the political pre-conditions in a favourable manner. After a positive opinion, the decision for the second disbursement was made on 9 June 2020. The payment proceeded in two parts, on 16 July a EUR 20 million loan, and on 1 August a EUR 10 million grant component. The third and final tranche of the programme was cancelled because not all related policy conditions were satisfied before 18 July 2020, when the MFA expired. The MFA was linked to a four-year IMF programme of Extended Credit Facility/Extended Fund Fcaility (ECF/EFF) in the amount of SDR 129.4 million (about USD 178.7 million). The final sixth review of the programme, togther with article IV consultations, was successfully concluded in March 2020. In 2020, as part of the COVID-19 MFA package adopted in May 2020, the European Parliament and the Council agreed on a new one-year MFA programme of EUR 100 million to Moldova. The first instalment (EUR 50 million) was subject to the general political pre-conditions for MFA (respect for effective democratic mechanisms, including a multi-party parliamentary system, the rule of law and human rights) and was disbursed on 25 November 2020. The second disbursement is conditional on Moldova successfully fulfilling all policy conditions agreed with the EU in the MoU. The conditionality focuses in particular on reforms in the area of public finance management, good governance and fight against corruption, as well as on improving the business climate. In addition, the Moldovan authorities need to ensure a positive dialogue with the IMF and possible adoption of a new reform programme. In July 2020, a staff-level agreement was signed for a three-year ECF/EFF programme of USD 558 million. The IMF Executive Board decision was expected in September, however, it has been repeatedly postponed due to significant delays in the implementation of the programme’s prior actions, as well as worrying political developments (such as the uncertainty around the 11 July 2021 snap-elections and backsliding on some key economic reforms). Discussions might have to start about a new IMF programme, yet little progress has been made so far. 1.6.Structural Reforms The overall framework guiding the process of structural reforms in Moldova is set out in the commitments made under the Association Agreement with the European Union, including the Deep and Comprehensive Free Trade Agreement. Due to the pandemic, the reform progress in 2020 has been moderate, and towards the end of the year it was marked by some worrying developments in the Moldovan parliament, as well as the resignation of the government in December. The outlook remains mixed as political instability in Moldova continues to weigh on the country’s capacity to undertake reforms, where a way forward could be the formation of a new Parliament through possible snap-elections. However, Moldova continues to benefit from the effects of the reform progress achieved over the past few years. Monetary and fiscal policies had been strengthened and substantial structural economic reforms had been carried out. The banking sector in Moldova has been going through a major restructuring since the banking crisis triggered by large-scale money laundering and bank fraud in 2014-2015. Unfit shareholders have been removed from a large number of banks and the control of the three remaining systemic banks has been taken over by international actors. A new banking law entered into force on 1 January 2018. The law introduced an updated regulatory and supervision framework in line with Basel III standards. In 2019, new capital adequacy requirements in line with the EU’s CRDIV/CRR package were approved. As a result of the banking sector reforms, including in particular the regulatory and supervisory framework, Moldovan banks have become more resilient and safe. Some positive developments related to the fight against corruption were noted in 2020, including the increase of the annual budget of its anti-corruption institutions such as the National Integrity Authority, the Criminal Asset Recovery Agency and the Financial Investigation Unit; as well as the adoption of the new Strategy for Ensuring the Independence and Integrity of the Justice Sector 2021-2024; and the adoption of the law on Anti-Money Laundering sanctions. In addition, on 28 May 2020, Moldova joined the Istanbul Anti-Corruptuon Action Plan of the Anti-Corruption Netowork of the OECD. Nonetheless, as regards the recovery of the assets involved in the 2014 bank fraud, legal proceedings against key actors continue to be slow, and progress in recovering assets, in particular from outside of Moldova, has been limited. Moldova’s reform efforts are further supported by the MFA conditionality. The COVID-19 MFA in place focuses in particular on actions related public finance management, good governance and the fight against corruption as well as improving the business climate. Under the MoU, the Moldovan authorities agreed, among others, to update the bank fraud criminal asset recovery strategy. improve the efficiency of the National Integrity Authority, and make amendments to the Moldovan Consitution regarding the selection of the lay members to the Superior Council of Magistracy (in line with recommendations from the Venice Commission). Status of economic reforms — Republic of Moldova 1. Price liberalisation Most prices are market-driven, but regulated prices continue to exist for electricity, natural gas, water and sanitation, housing and medical services and rail and urban passenger transport. 2. Trade regime Moldova (a WTO member since 2001) has a liberal trade regime. The EU and the Republic of Moldova have developed a close trading relationship over the years. This led to the conclusion of an Association Agreement, including a DCFTA, which was signed on 27 June 2014 and entered fully into force on 1 July 2016. 3. Exchange rate regime The National Bank of Moldova follows a flexible exchange rate policy and intervenes on the market to smooth excessive volatility, while letting the exchange rate operate to help absorb external shocks. 4. Foreign direct investment There are no controls on inward investment. Some efforts have been made to stimulate FDI, notably through the creation of Free Economic Zones. The DCFTA has created further stimulus to FDI from the EU. Some positive examples of progress exist, primarily in the automotive sector. 5. Monetary policy As part of the medium-term monetary policy strategy adopted in December 2010, the central bank targets inflation of 5% annually (measured by the consumer price index), with a possible deviation of ±1.5 percentage points. The Central Bank considers this optimal in its efforts to maintain price-stability, while supporting the growth performance over the medium term. 6. Public finances and taxation In 2018, a 12% flat rate income tax was introduced (the earlier system had two rates: 7% and 18%) and the social contribution rate was decreased from 23% to 18%. To compensate for these changes, a set of measures to strengthen revenue was introduced in 2019, including an increase in VAT rates. However, in the context of the COVID-19 pandemic VAT levels for some key sectors, inclding the hotel industry and restuarants were lowered from 15% to 12%, with possible further reductions in the future. 7. Privatisation and enterprise restructuring In the past few years, Moldova has gradually sought to privatise state-owned assets and enterprises. In 2018, the national airline Air Moldova, the gas transmission company Vestmoldtransgaz, a tobacco producer and a number of other smaller properties were privatised. Additionally, the Law on State-Owned Enterprise and Municipal Enterprise adopted in late 2017 aims to strengthen governance and transparency of SOEs. However, limited progress was noted on the privatization agenda in 2020. 8. Financial sector The financial sector reform is one of the major successes of the last period. Major achievements include the liquidation of the three banks involved in the 2014 bank fraud (while investigation and asset recovery of the fraud has been less successful), strengthened governance and increased international ownership in remaining systemic banks, and an introduction of a strengthened regulatory and supervisory framework for banks (aligning with Basel III standards) and non-financial institutions, particularly in the insurance sector. 3.Ukraine 1.7.Macroeconomic performance

The COVID19-related economic crisis hit Ukraine less severely than earlier expected. After a y-o-y plunge by 11.4% in the second quarter of 2020, the decline in real GDP moderated to 3.5% and 3% in the third and fourth quarters, respectively. Overall, the economy shrank by 4.0% in 2020. The recession did not affect all sectors equally. Over 2020, the contraction was strongest in agriculture (-11.5%) and in industry (-4.5%). Retail and construction continued to expand by 8.4% and 5.6% respectively. The social impact of the economic recession, especially on the labour market, has been contained so far. The rate of unemployment increased from 8.2% in 2019 to 9.5% at the end of 2020. Annual nominal wage growth slowed down to almost zero in April 2020 before rebounding to 15.6% in December. In light of the 5% consumer prices inflation in 2020, this implies a rather sustained catching-up in real terms. The average wage reached about EUR 430 in December 2020. Even though part of that increase is due to exceptional year-end benefits, its contribution to better standards of living is also evident. The COVID19-related crisis reversed the achievements in the area of fiscal consolidation. Ukraine had managed to bring its fiscal deficit below or around 2% of GDP consistently over the previous three years. Total government expenditure increased by 16.2% in 2020, which combined with an expansion of revenues by 6.5% only led to the significant deterioration of the deficit to 5.3% of GDP. Although expenditure increases affected all areas, they were strongest in public support to economic activity (+70%), healthcare (+37%) and defence (+13%). These developments challenge the medium-term sustainability of public finances. To finance the deficit, Ukraine received support from the international financial institutions of about USD 3.3 billion in 2020 (USD 2.1 billion from the IMF and EUR 1.1 billion from the EU). The government also borrowed record amounts from the international markets last year – EUR 1.25 billion in January and USD 2.6 billion in July. In addition to these sources of financing, the Treasury issued the equivalent of €7.7 billion in domestic hryvna-denominated bonds (17% above the 2019 volumes) at an average yield of 10.2%, i.e. 673 basis points below the cost of new domestic debt in 2019. Although monetary policy has remained unchanged since the appointment of a new Governor of the National Bank of Ukraine (NBU) in mid-2020, money supply started to expand and inflation is accelerating. The NBU responded by increasing its key policy rate by 50 basis points to 6% since mid-June 2020. Consumer price inflation decelerated to below 3% from February to October, before increasing steeply to 5% in December 2020 and 8.5% in March 2021, thereby missing again the mid-term y-o-y inflation target of 5%. Base money and the broader aggregate M3 increased by a staggering 24.8% and 28.6%, respectively, much above the 2019 figures. Simultaneously, the hryvna, which had appreciated by 14.7% against the USA dollar in 2019, depreciated by almost 19% in 2020. The depreciation took place in the context of a rather non-interventionist policy by the central bank, which bought only $1 billion in 2020, as opposed to $7.9 billion the year before. Going forward, these monetary developments pose risks to price stability. The crisis-driven contraction of economic activity resulted in imports declining significantly stronger than exports. As a result, the current account has moved from a deficit of 2.7% of GDP in 2019 to a sizable surplus in 2020 (4.3% of GDP). Fresh incoming foreign direct investment, i.e. excluding reinvested earnings, notoriously low already prior to the crisis, further declined to around 0.5% of GDP in 2020. Confidence in the domestic currency remained broadly stable, as evidenced by the record year-end level of the official international reserves (above USD 28 billion, representing more than five months of imports). Going forward, three main risks might challenge the government’s forecast of economic growth in excess of 4% in 2021. First, difficulties to rein in government spending, over-inflated beyond the increase in revenues in 2020, might distort economic growth. Second, monetary funding of the government deficit, coupled with a revival of credit expansion to the private sector, could lead to mounting inflationary pressures, thereby suggesting that economic growth might be nominal only, without a real positive effect on standards of living. Third, long-term growth depends crucially on stable flows of domestic and foreign investment that depend crucially on much needed structural reforms – to fight corruption and to improve the judiciary and the business climate – which the government, though committed, struggles to implement. Ukraine - Macro-Economic Indicators Ukraine 2016 2017 2018 2019 2020 Real GDP, % change 2,4 2,5 3,4 3,2 -4,0 Consumer price inflation, %, end of period 12,4 13,7 9,8 4,1 5,0 Key monetary policy rate, %, end of period 14,0 14,5 18,0 13,5 6,0 Unemployment rate, LFS, % 9,3 9,5 8,8 8,2 9,5 General government balance, % of GDP -2,3 -1,4 -1,9 -2,2 -5,3 Gross public debt, % of GDP 80,9 71,8 60,9 50,2 60,8 Current account balance, % of GDP -1,5 -2,2 -3,3 -2,7 4,3 Official international reserves, USD billion 15,5 18,8 20,8 25,3 29,1 International reserves, months of imports 3,0 3,2 3,3 4,9 5,6 Gross external debt, % of GDP 120,7 102,9 87,7 79,0 80,8 Net foreign direct investment, % of GDP 4,1 3,3 3,4 3,4 -0,7 Source: National authorities 1.8.Implementation of macro-financial assistance Since 2014, a total of EUR 4.4 billion was disbursed to Ukraine under five MFA operations. The fourth MFA operation (MFA IV) of EUR 1 billion in loans was adopted by the European Parliament and the Council in July 2018, and was successfully completed in May 2020. The MoU and the Loan Agreement were signed in September 2018, and ratified by Ukraine in November 2018. The first disbursement under MFA IV (EUR 500 million) was made in December 2018 after Ukraine fulfilled the policy conditions, which covered the areas of fight against corruption, public finance management, governance of state-owned companies and privatisation of small companies. Notably, as part of the implementation effort of MFA IV first tranche conditions, Ukraine made significant progress in the areas of anti-corruption policy that had blocked the planned third disbursement under MFA III. The second instalment (EUR 500 million) was disbursed in May 2020, after the single outstanding prior action (on strengthening financial sector safeguards from the December 2019 staff-level agreement reached between the Ukrainian authorities and the IMF on a new EFF programme) had been implemented. In 2020, as part of the COVID19 MFA package adopted in May 2020, Ukraine became eligible for a fifth MFA programme of up to EUR 1.2 billion. The MoU was negotiated during the summer and entered into force on 14 September 2020, after ratification by the national parliament and signature by the President. The first instalment (EUR 600 million) was subject to the general political pre-conditions for MFA (respect for effective democratic mechanisms, including a multi-party parliamentary system, the rule of law and human rights) and the IMF programme remaining on track, and was disbursed on 9 December 2020. The disbursement of the second tranche, is also conditioned on the successful implementation of the eight structural policy measures to which Ukraine has committed in the MoU, covering the four areas of public finance management, fight against corruption, improvement of the business climate, and sectoral policies and governance of state-owned enterprises. These MFA programmes are provided in conjunction with the resources from the IMF. In October 2018, Ukraine and the IMF agreed at staff level on a 14-month Stand-By Arrangement of USD 3.9 billion. The SBA replaced Ukraine’s previous Extended Fund Facility (EFF) programme to provide an anchor for economic policies during 2019 (an election year). The IMF Board approved the Stand-by Arrangement in December 2018, with a first disbursement of USD 1.4 billion. To help Ukraine pursue its reform programme, especially given the COVID19-related challenges, the IMF Board approved a new 18-month USD 5 billion Stand-By Arrangement on 9 June 2020, out of which USD 2.1 billion were disbursed immediately. 1.9.Structural Reforms With the political transition in 2014, Ukraine embarked on an ambitious and wide-ranging reform programme. Despite the difficult external environment and significant internal challenges, Ukraine managed to push through reforms in a variety of sectors, notably as part of the policy programmes attached to the EU MFA, the IMF and the World Bank assistance. Following a slowdown in reform momentum in 2016-17, the year 2019 saw renewed reform activity. The need for the authorities to provide a quick response to the COVID19-related crisis, together with political dissensions in the first months of 2020, slowed down the implementation of reforms. In addition to headwinds resulting from relevant decisions by the Supreme Court and volatile political support in the Parliament, the government seems to have lost the reform momentum, which impacts negatively its compliance record with commitments to the IMF and the EU. In the field of public financial management, the track record is rather favourable. New laws adopted in 2018 improved the fiscal governance by introducing medium-term budgeting and by strengthening programme-based budgeting. The State Tax Service and Customs Service, created in 2018 and effectively reorganised in 2019 and early 2020, are now fully operational, even though the quarantine conditions have not allowed yet for an open and transparent selection of their senior management. To improve tax compliance, the authorities started the gradual deployment of electronic software tax registrars in 2020, to be fully adopted by all businesses by 2025. However, the initially successful example of transparent public procurement by the Health Ministry proved unsustainable during the response to the COVID-19 crisis and have, so far, failed to stimulate a positive impetus to other line ministries. As regards the fight against corruption, the 2020 achievements are rather meager. The Supreme Court declared the compulsory electronic asset declaration system for public officials in breach of data protection requirements and anti-constitutional. Its operation has therefore been suspended. The Court also declared anti-constitutional the presidential appointment of the head of the National Anti-Corruption Bureau of Ukraine (NABU). This created legal uncertainty with respect to NABU’s operation. Moreover, no progress has been made with strengthening the judiciary and the effectiveness of fighting corruption, despite non-negligible progress with the attestation of prosecutors at regional and local level. On the way to dismantling the tax police, a modern bureau for economic and financial investigations was created in early 2021 and awaits operationalisation. In order to improve corporate governance of Ukrainian state-owned enterprises, independent supervisory boards have been established at least in the ten largest enterprises and further supervisory board members are being selected. Successful consultations with the OECD led to draft amendemnts, pending parliamentary approval, to the legal framework of corporate governance for state-owned enterprises. Also, the state ownership policies have been reviewed and updated for the ten largest state-owned companies. In the absence of successful large-scale privatisations, Ukraine has improved its legal framework for privatisation and has launched a successful electronic platform of sales of small companies and assets, ProZorro.Sale. In the energy sector, the authorities and the energy regulator progressed on implementation of the electricity market law. The electricity retail market was opened to large consumers from January 2019 and the wholesale electricity market was opened from July 2019, although a number of issues hamper the functioning of and competition in the market. Although the government removed the public sector obligation in the retail gas market for households in 2020, a price cap was introduced as of February 2021 for the duration of the heating season. Despite the removal of penalties and charges that were hampering the free choice of a gas provider, the market is far from being liberalised, with one single provider controlling more than 90% of the supply to final consumers.

Finally, given the limited progress in 2020 with reform implementation, major challenges remain related to demonopolisation, impartial protection of property rights, cutting vested oligarchic interests and reducing the regulatory burden. Addressing these remaining challenges is crucial to improve the business climate and to attract and retain investors. The sustainability and inclusiveness of economic growth in Ukraine depend on the extent to which these remaining structural bottlenecks to investment are successfully removed.











Status of economic reforms — Ukraine 1.Price liberalisation Prices are largely market driven. Regulated prives for gas and electricity for households were abolished in 2020, although price caps on gas for households were temporarily re-introduced for the duration of the 2021 heating season. 2.Trade regime Ukraine joined the WTO in May 2008. The EU-Ukraine Association Agreement entered into force on 1 September 2017. The respective provisions as regards the Deep and Comprehensive Free Trade Area (DCFTA) have been in application since January 2016. 3.Exchange rate regime Since the decision to abandon the currency peg in February 2014 the National Bank of Ukraine (NBU) has been implementing a managed float regime within an inflation targetting framework. NBU interventions on the foreign exchange market aim at reducing exchange rate volatility and influence the country’s stock of official reserves. 4.Foreign direct investment (FDI) Some restrictions on FDI-related flows exist, such as a ban on the purchase of agricultural land to foreigners, in spite of farmland sales reform started in 2020. Capital controls that affect foreign investment activity persist, despite steps towards their gradual elimination. The net inflow of FDI amounted to 3-4% of GDP in previous years but turned negative in 2020. 5.Monetary policy The central bank’s primary objective is to achieve and maintain price stability under an inflation targeting framework (5% +/- 1 percentage point). The end-year 2020 consumer price inflation reached precisely 5% but subsequently increased to 8.5% in March 2021 under the influence of a significant increase in the supply of money. The cenytral bank increased its key policy rate by 50 basis points in March 2021. 6.Public finances and taxation Public revenues reached 32.8% of the Ukrainian GDP in 2020. Prior to the COVID19-related crisis, Ukraine had made significant progress in the consolidation of its public finances, and managed to bring its fiscal deficit persistently below 2% of GDP since 2017. However, due to the stabilisation policy response, the deficit reached 5.3% in 2020 and is expected to remain around 5% in the coming years due to the permanent nature of the pension and wage increases. Thus, fiscal consolidation remains a priority to alleviate risks to medium-term sustainability. 7.Privatisation and enterprise restructuring Despite ambitious privatisation plans, no major sales of state assets took place in 2020. A number of independent supervisory boards have been established in major enterprises, for which updated ownership policies have been adopted. The government prepares legal amendments to align SOE framework in line with the OECD Guidelines on Corporate Governance of SOEs. 8.Financial sector The NBU has significantly improved its supervisory standards over the last years. The soundness of the banking sector has been strengthened, with an aggregate capital adequacy ratio above 20%. Banks’ liquidity remains comfortable, despite significant purchases of domestic government bonds to finance the 2020 public deficit. The very high share of non-performing loans, above 45% on average, and the governance of state-owned banks remain two major challenges. 4.Jordan 1.1.Macroeconomic performance The COVID-19 pandemic is severely affecting an already struggling Jordanian economy. The strict containment measures imposed by the authorities in March 2020 helped to contain the health crisis, but the social and economic costs have been high. To support the economy, the authorities implemented a timely package of growth-friendly policy measures, including reducing temporarily the tax-burden on businesses and individuals and the Central Bank of Jordan’s (CBJ) move to increase liquidity for commercial banks, ease debt burdens and support SMEs. A phased reopening of the society started in April 2020, but the second surge in COVID-19 cases since autumn 2020 led to more restrictive measures again. In 2020, real GDP contraction in 2020 was limited to 1.6%, after years of only subdued 2% growth. The fall in GDP is explained by a negative (yet divergent) performance in the majority of the sectors, particularly: Hotel and Restaurants (-8.2%), Transport, Storage & Communications (-5.2%), Construction (-3.8%) and Social & Personal Services (-3.3%). The economic downturn caused unemployment to spike to a record 24.7% in the fourth quarter of 2020, up from 19.3% in the first quarter. Unemployment remains highest amongst youth of 15-19 years (62.1%) and youth of 20-24 years (47.9%), women (32.8%) and university degree holders (27.8%). The monetary environment has been resilient, supported by a sizable and timely stimulus enacted by the CBJ early on in the crisis to support credit to the economy and support SMEs and individuals. The CBJ's gross foreign reserves (including gold and SDRs) have remained strong, amounting to USD 15.6 billion, covering around 11 months of the Kingdom's imports as at end-2020. Inflation dropped to historic lows, particularly during the lockdown period in Q2 2020. Indeed, the consumer price index increased by only 0.1% in 2020, down from 0.6% recorded in 2019. Fiscal slippages continue and were further amplified by the pandemic. The general budget deficit (including grants) deteriorated to 5.8% of GDP in the first ten months of 2020 (from 4.3% in the same period of 2019), as the lockdown and restrictions imposed to contain the virus translated into lower domestic revenues (-11.6%) and higher total expenditures (+2.7%). Jordan’s gross public debt stood at 105.1% of GDP at the end of November 2020, up from 95.2% of GDP at the end of 2019. The National Electricity Company (NEPCO) and Water Authority (WAJ) remain highly indebted. Although the increase is a certain source of concern, the IMF assessed Jordan’s public debt as being sustainable in December 2020. The current account deficit increased to 8% of GDP in 2020 (from 2.1% of GDP in 2019), and becomes more pronounced without grants. The trade deficit decreased by a significant 16.5% in 2020 when compared to 2019, as imports slummed (-11.3%). Exports decreased by 4.5% during 2020, as the increase in national exports was more than offset by the decline in re-exports. The important tourism sector was hit the hardest. The thriving sector (which accounted for 18% of GDP and employment in 2019), was closed to wiped out during the pandemic. Despite the supportive measures taken by the authorities (e.g. temporarily reduced consumption tax rates on tourism), international travel receipts decreased by 72.5% during the first three quarters of 2020 compared to the same period of 2019. Furthermore, remittances decreased by 9.7% over the same period. Foreign Direct Investment (FDI) remained low at 1.6% of GDP in 2020, well below the 12.7% average that prevailed over 2005-2010, before the onset of the Syrian crisis. Notwithstanding significant uncertainty surrounding the evolution of the pandemic, the economy is expected to gradually recover in 2021 (latest IMF forecast: +2%), except for tourism and remittances, for which recovery is expected to take longer. Jordan - Macro-Economic Indicators Jordan 2016 2017 2018 2019 2020 2020 Ref Real GDP, % change 2,0 2,0 1,9 2,0 -1,6 Consumer price inflation, %, end of period 0,8 3,2 3,7 0,6 0,1 Key monetary policy rate, %, end of period 3,8 5,0 5,8 5,0 3,5 Unemployment rate, LFS, % 15,3 18,3 18,6 19,1 24,7 Q4-2020 General government balance, % of GDP -3,2 -2,5 -2,4 -3,3 -5,8 oct-20 Gross public debt, % of GDP 92,0 92,8 92,9 95,2 105,1 nov-20 Current account balance, % of GDP -9,6 -10,6 -6,9 -2,1 -8,0 Official international reserves, USD billion 14,8 15,0 12,9 13,9 15,6 International reserves, months of imports 8,1 7,8 6,8 9,8 11,0 Gross external debt, % of GDP 68,2 71,1 72,9 72,1 82,9 Net foreign direct investment, % of GDP 3,9 4,9 2,2 1,5 1,6 Sources: National authorities; IMF; World Bank 1.2.Implementation of macro-financial assistance The EU has maintained its support to Jordan throughout the difficult year 2020. Indeed, following the Kingdom’s request for further MFA on 11 July 2019, the Commission adopted on 6 September 2019 a proposal for a new, follow-up MFA to Jordan in the amount of EUR 500 million in loans. The proposal was adopted by co-legislators on 15 January 2020. The assistance is to be implemented in three instalments over 2020 and 2021. Later in 2020, when the COVID-19 pandemic hit the already struggling Jordanian economy, the authorities requested further MFA on 21 April 2020. In turn, as part of the COVID-19-MFA package adopted on 25 May 2020, the European Parliament and the Council agreed on a MFA programme of EUR 200 million to Jordan (reinforcing the resources made available under MFA-III). The new (combined) MFA comes on top of the EUR 380 million of MFA provided to Jordan since 2014, under Decisions (EU) 2013/1351 and 2016/2371. The MoU between the EU and Jordan, which oversees both MFA operations, was endorsed by the Member states committee on MFA on 27 July 2020. It then entered into force on 2 October 2020 upon signature, whilst the LFA entered into force on 7 October 2020. The first instalment (EUR 250 million in loans) was subject to the general political pre-conditions for MFA (respect for effective democratic mechanisms, including a multi-party parliamentary system, the rule of law and human rights) and the IMF programme remaining on track. It was disbursed on 25 November 2020. The second instalment (EUR 250 million in loans) and the third instalment (EUR 200 million in loans) are, in addition, subject to the specific policy conditionality agreed between Jordan and the EU in the MoU. The programme’s policy conditionality focuses primarily on improving public finance management, fighting corruption, and on reforms in the utilities sector, social and labour market policy, and governance. The policy actions included in the MoU are in line with the reform commitments taken by Jordan in the context of the EU-Jordan Partnership Priorities and other EU support instruments, as well as the adjustment programmes agreed with the IMF and the World Bank. Taking Jordan’s “Five-Year Reform and Growth Matrix” as a guideline for the design of the policy programme in the MoU ensures ownership of the reform process by the Jordanian authorities and avoids overburdening of (limited) administrative capacities. The impact of the COVID-19 pandemic on implementation timelines is reflected in the fact that the second tranche of the assistance is linked to a more limited set of conditions that are achievable in a short(er) time period under a still challenging context.

These MFA programmes are provided in conjunction with the resources from the IMF under its four-year Extended Fund Facility (EFF) programme with Jordan approved on 25 March 2020 (EUR 1.2 billion, 270% of quota). On 20 May 2020 the IMF also made available around EUR 366 million in emergency assistance to Jordan under the Rapid Financing Instrument to help the country deal with the impact of the pandemic. The IMF Board completed the first review under the EFF in December 2020, releasing around USD 148 million immediately, and bringing total IMF disbursements to Jordan in 2020 to USD 689 million. A staff level agreement on the second review was reached in March 2021, with the IMF noting that the “program remains firmly on track, with strong progress on key reforms”. Under this review, the authorities have requested an augmentation of Fund access of USD 200 million. The agreement is subject to the approval of the IMF’s Board. 1.3.Structural reforms In 2020, the short-term policy priorities of the Kingdom were shifted to health and social protection, as the authorities sought to mitigate the effects of the pandemic. The government implemented a timely package of growth-friendly policy measures, including reducing temporarily the tax burden on businesses and individuals and the Central Bank’s move to increase liquidity for commercial banks, ease debt burdens and support SMEs (see Section 1.2). At the same time, despite the sizeable challenges brought by the COVID-19 pandemic and the ongoing Syrian crisis, the Jordanian authorities remain committed to their structural reform agenda and the conditionality in the MFA programme. The Kingdom’s reform agenda is underpinned by a number of strategies, namely Vision 2025, the Jordan Economic Growth Plan, and the comprehensive Five-Year Reform Matrix (2018-2022). The Matrix prioritises deep structural reforms needed to stimulate inclusive and sustainable growth and job creation, and achieve fiscal stability. Despite a delayed start, Jordan is progressing well with the implementation of the Reform Matrix. By end-2020, the implementation rate stood at 47%. Delayed implementation is concentrated in four sectors, namely water, public transport, energy and agriculture. In 2020, the Jordanians launched the mid-term review of the Matrix, aiming to update it for the years 2021-2022 and prioritise new areas. The priorities moving forward are in the areas of trade facilitation, investments, export, water, agriculture, tourism and transportation. The Reform Matrix is being consulted with different stakeholders, and should be approved by government sometime during 2021. Despite the setbacks brought along by the pandemic, and the uneven success in implementing reforms, the Kingdom still achieved important milestones in 2020. These include (but are not limited to) the following steps taken by the Jordanian Government: i) submitted to parliament an amended draft organic budget law, to improve the fiscal framework, ii) submitted to parliament amendments to the Illicit Enrichment Law, to tackle corruption, iii) requested a comprehensive Fiscal Transparency Evaluation, to enhance fiscal transparency, and iv) approved amendments that enhance Anti-Money Laundering/Combating the Financing of Terrorism. Furthermore, in the area of taxation, Jordan maintained efforts to strengthen tax administration (including tax compliance), successfully shifted the majority of tax services online, enhanced coordination and data sharing between tax and customs agencies, and established a “gold list” of tax compliant companies. On top, in September 2020, Jordan signed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (to tackle cross-border tax evasion and avoidance), and is in the process of ratifying it. At the same time, progress in other crucial reform areas was less visible. These include delays in the submission to parliament of amendments to the Investment Law to address tax arbitrage and transfer pricing abuses, the adoption of a plan to reform electricity tariffs and the implementation of a digital track-and-trace monitoring system to reduce cigarette smuggling. Going forward, the tasks of the new government (ushered in October 2020) will be to address Jordan’s pre-existing vulnerabilities, namely debt sustainability, energy tariff reform (where a complex web of cross-subsidisation distorts incentives); labour market reform (in particular to promote youth and female labour participation); and improve competition, governance and transparency.









Status of economic reforms — Jordan 1. Price liberalisation Prices are largely market-driven, but there are oligopolistic conditions in several sectors. Fuel subsidies were eliminated in November 2012. Electricity tariffs and prices for some basic foodstuffs are still subject to administrative controls. In 2017 the government adopted an automatic adjustment of electricity tariffs based on fuel prices and abolished subsidies on bread. 2. Trade regime Jordan has a relatively liberal trade regime. It joined the WTO in 2000 and ratified an Association Agreement with the EU in 2002. It is also one of the EU’s partner countries that could potentially benefit from a DCFTA agreement. It is a member of both the Greater Arabic Free Trade Area (GAFTA) and the Agadir Agreement and has also concluded FTAs with the United States, Syria, the European Free Trade Association (EFTA) and Singapore. On 19 July 2016, the EU approved a 10-year relaxation of rules of origin for a wide range of industrial products produced in 18 selected special economic zones in Jordan, provided that each company uses a minimum share of Syrian refugee labour in the production. 3. Exchange rate regime Since October 1995, the dinar has been pegged to the US dollar. 4. Foreign direct investment Jordan is largely open to foreign investment. It signed the OECD’s Declaration on International Investment and Multinational Enterprises in 2013. As part of the Five-Year Reform Matrix (2018-2022), Jordan made good progress in adopting progressive economic liberalisation policy that favours foreign investment (e.g.: opening of 22 service sectors to full foreign ownership in 2019 and implementation of the Jordan Customs National Single Window System). 5. Monetary policy The CBJ enjoys an independent and autonomous corporate identity, although its capital is owned entirely by the government. Its main monetary policy tools are fixing the interest on monetary policy instruments and open market operations. The CBJ has developed a credible track record of maintaining exchange rate stability, while also ensuring price stability and promoting growth. 6. Public finances and taxation The taxation system shows a number of structural weaknesses which limit tax revenue mobilisation, including: a number of differentiated corporate tax segments, widespread tax exemptions, a narrow general sales tax base and capacity constraints in tax administration. There is scope for revenue mobilisation policies including strengthening tax administration and digitising tax collection. 7. Privatisation and enterprise restructuring Privatisation started in 1986 in the aftermath of an economic crisis and has made significant progress since then. Nevertheless, direct state ownership in certain sectors such as mining and public utilities remains significant. 8. Financial sector The financial sector is relatively well developed and dominated by banks, which are generally profitable and well capitalised. Banks have already started implementing Basel III. However, the narrow and shallow institutional investor base restricts the development of domestic capital markets. The Central Bank implements a financial inclusion strategy to increase access to and the use and quality of financial services. 5.Tunisia 1.4.Macroeconomic performance Tunisia’s economic performance severely deteriorated in 2020 following the outbreak of COVID-19 and the related lockdown measures imposed by the authorities to halt the spread of the pandemic. Several fiscal and monetary measures were adopted to mitigate the economic impact, including fiscal stimulus measures (representing around 2.3% of GDP, with another 2% in off-budget measures and guarantees) and the easing of monetary policy, in an attempt to bolster activity, protect businesses and employment while ensure additional financing for healthcare needs. The country faced the recession with limited policy buffers and the downturn has put severe pressure on employment and social stability. In 2020, GDP declined by 8.8% driven by sharp contractions in private consumption and investment, in addition to the drop in trade volumes. Almost all sectors contracted, notably those linked to external demand and global value chains such as tourism (hotel & catering -43.6% yoy), transport (-28%) or manufacturing (-9.3%) with only agriculture and fisheries making small positive contributions to growth. Tourism collapsed due to mobility restrictions, with revenues down by 64% y-o-y, in line with the over 80% decrease in overnight stays, underlining the country’s vulnerability to the pandemic. The economic downturn also caused a sharp increase in the unemployment rate to 17.4% in December 2020, with women particularly affected (24.9%). Monetary policy eased further, as the central bank lowered its key interest rate by 125 basis points to 6.25% in two steps (March and October 2020), in an attempt to bolster activity. The banking sector remains stable but suffers from low liquidity and the central bank supported the sector, introducing additional refinancing instruments elligible collaterals. It also supported the private sector, requesting banks to defer loan repayments or suspend a number of payments and fees. In October 2020, the parliament allowed a direct monetary financing plan from the central bank to the government budget. Inflation remains high but on a downward trend, at 5.7% on yearly average and 4.9% year-on-year in December 2020. Core inflation, excluding food and energy, decelerated slightly but remained at persistently high levels (+4.3%) notwithstanding the slump in demand. The fiscal stance has deteriorated markedly in 2020, with the fiscal deficit widening to 10.4% of GDP (with the IMF estimating a higher 11.5%), as revenues collapsed (-5.3%) and social expenditure increased. Provisional data show that the impact of reduced activity was particularly negative on VAT collection (-7.6%) and corporate taxes (-18.6%). Public expenditure increased by 15.5%, due to the growth in current expenditure, notably in salaries (+14.5%) and debt service (+16.6%). Wage expenditure (around 17.4% of GDP) will remain critical to control the deficit ahead. This was partly compensated by the moderation in transfers, mostly falling fuel subsidies (-42%) given lower oil prices. Public debt has subsequently increased to 83.5% of GDP in 2020 (with the IMF posting 87.6%, up almost 16 pps from last year) and debt service costs increased significantly (+15.9%). The deficit has been increasingly covered though domestic borrowing (over four times that of 2019) and to a lesser extent by external financing. However, external debt still represents 66% of the total debt stock, but mainly from international partners at concessional rates. The IMF considers Tunisia’s public debt as sustainable, given continued strong policy implementation, although sustainability risks increased substantially in 2020. The current account deficit narrowed but remained elevated at around 6.8% of GDP in 2020. Its main determinant was the narrowing of the trade deficit (-34.4%) following the slump in imports at a faster pace than that of exports (-18.7% and -11.7%, respectively). This reflects lower domestic demand and global energy prices, with a weaker external demand hitting exports. External imbalances persist and record remittances (+13%) only compensated partly the substantial drop in tourism revenues (-64% compared to 2019). There was a substantial drop in foreign direct investment inflows (-28.8% compared to 2019, to around 1.5% of GDP). At the end of the 2020, foreign reserves stood at USD 8.5 billion, equivalent to around 5.2 months of imports. The economy is expected to recover modestly in 2021 (latest IMF forecast: 3.8%), dependent on the evolution of the pandemic in the country and its major partners, with some rebound in domestic demand and most sectors hit by the crisis. Tunisia - Macro-Economic Indicators Tunisia 2016 2017 2018 2019 2020 Real GDP, % change 1,2 1,9 2,7 1,0 -8,8 Consumer price inflation, %, end of period 4,2 6,2 7,5 6,0 4,9 Key monetary policy rate, %, end of period 4,3 5,0 6,8 7,8 6,3 Unemployment rate, LFS, % 15,5 15,4 15,5 15,2 17,6 General government balance, % of GDP -6,1 -6,2 -4,8 -3,5 -10,4 Gross public debt, % of GDP 62,3 70,8 77,9 72,5 83,5 Current account balance, % of GDP -8,8 -10,3 -11,1 -8,4 -6,8 Official international reserves, USD billion 6,0 5,6 5,3 7,5 9,2 International reserves, months of imports 3,0 2,5 2,7 4,5 5,2 Gross external debt, % of GDP 75,2 86,6 98,8 97,4 *98,7 Net foreign direct investment, % of GDP 1,5 2,0 2,5 2,1 1,5 Source: National authorities; Commission staff calculations; *Latest available-Q2

1.5.Implementation of macro-financial assistance Since 2014, a total of EUR 800 million have been made available to Tunisia under two MFA operations, MFA-I (2015-2017, EUR 300 million) and MFA-II (2017-2019, EUR 500 million). Moreover, as part of the MFA package adopted in the context of COVID-19, the European Parliament and the Council agreed on a new MFA programme of EUR 600 million to Tunisia. The MoU and the LFA were signed on 24 November 2020, ratified by the Tunisian Parliament on 15 April 2021 and entered into force on 11 May 2021, upon publication in the Tunisian Official Gazette. The programme’s policy conditionality focuses primarily on four thematic areas: (i) public finance management and civil sector reform; (ii) reforms in state-owned enterprises; (iii) social protection; (iv) and investment climate. The MFA is to be provided in two tranches of EUR 300 million each. The first instalment, subject to the general political pre-conditions for MFA (respect for effective democratic mechanisms, including a multi-party parliamentary system, the rule of law and human rights) was disbursed on 1 June 2021. The second instalment is expected to be disbursed in the second half of 2021, once the policy conditions are met. The assistance is meant to complement resources made available by other donors including the IMF, under its Rapid Financing Facility programme with Tunisia of USD745 million (around 685 million) approved on 10 April 2020. 1.6.Structural Reforms Reform implementation had very limited progress in 2020, mostly due to the effects of the COVID-19 pandemic and the country’s challenging political situation following the 2019 presidential and parliamentary elections that resulted in a fragmented political landscape. The protracted formation of a new government, that only took office at the end of February 2020, was followed by continued instability and additional government changes in September 2020 and January 2021, which de facto halted the long-term reform agenda. In 2020, the short-term policy priorities of the country focused on pandemic response. The government approved some fiscal stimulus measures to try to mitigate the negative impact of the crisis, in an exceptional effort to protect businesses and employment, while ensuring additional financing for healthcare needs. The Central Bank eased monetary policy and liquidity management, while the parliament approved a direct monetary financing plan from the Central Bank to the government budget. It also announced a package to support the private sector, requesting banks to defer payments on existing loans and suspend any fees for electronic payments and withdrawals. Over the reform agenda, the authorities have also continued work to set up a national digital registry of needy families, a key component to establish a better-targeted cash transfer system and reforming subsidies. At the end of 2020, the government also introduced a number of fiscal measures in the 2021 Finance Law, including the amendment of the transfer pricing rules and the establishment of a single standard corporate tax rate of 15%. The crisis has exacerbated Tunisia’s reform paralysis, in a context of rising structural challenges and deep imbalances between regions and sectors. A strong and credible reform plan is needed to foster growth and restore a sustainable fiscal and external financial situation, without which the IMF now assesses that public debt would become unsustainable. Debt sustainability risks are compounded by real exchange rate and financing risks, as well as SOE contingent liabilities and guarantees, so an ambitious medium-term reform programme is absolutely essential to support recovery and inclusive growth, foster subdued investment and guarantee fiscal and external sustainability. A perceived excess of bureaucracy also acts as a discouraging factor to private investment and limited measures have been also taken to combat informality. Other remaining challenges include addressing vested interests, improving governance and the business environment, as well as increasing competition across the economy in order to attract private investors, including in emerging sectors such as digitalization and renewable energies. The country will likely remain in a vulnerable position over the coming years, due to vast structural weaknesses, high financing needs, reliance on external funding, and risk of domestic and external shocks. Reforms should aim to restore sustainable macroeconomic positions and address relevant items for public expenditure such as the exceptionally high civil service wage bill, the targeting of energy subsidies and SOE liabilities that appear to crowd out much-needed social expenditure and growth-enhancing public investment. Such reforms should also aim to foster inclusive growth through private sector initiative and competition, in a context where the country will probably still need substantial support from external partners in the coming years.



Status of economic reforms — Tunisia 1. Price liberalisation Most prices are market-driven, but regulated prices exist for fuel, electricity, transport and food products. The government started reducing its energy subsidies in 2017 and some minor changes took place in 2018 and 2019. Additional reforms are expected, while preserving social tariffs for poor households and improving social safety nets, where better targeting is also needed. 2. Trade regime Tunisia joined the WTO in 1995 and was the first Mediterranean country to sign an Association Agreement with the EU in 1995. The negotiations for an EU-Tunisia DCFTA started in 2016 but have been shown little progress since 2019. Technical contacts took place in 2020 on the possible accession to the revised rules of the Pan-Euro-Med convention on rules of origin. Tunisia ratified the African Continental Free Trade Area Free on 30 November 2020. 3. Exchange rate regime The Central Bank of Tunisia changed its operational framework for exchange rate policy in 2012 to make rates more flexible, providing multiple-price foreign exchange auctions since August 2018 and net foreign exchange purchases since May 2019. Despite officially floating, the IMF classifies the de facto exchange rate arrangement as crawl-like. 4. Foreign direct investment The implementation of the 2016 investment law continued in 2018/19, namely through the operationalisation of the Investment Authority, reforms for the off-shore regime and legislation to improve the business climate and investment attractiveness, although the process was interrupted by the outbreak of the Covid-19 pandemic. Tunisia was officially removed from the list of “gray” jurisdictions of the Financial Action Task Force (FATF) in October 2019. 5. Monetary policy The Central Bank of Tunisia is independent and its mandate is to ensure price stability. However, the parliament approved a derogation of the article 25 of the CBT statutes in 2020, allowing for the first time a direct monetary financing plan to the government budget, interest-free facility for a maturity up to 5 years, of which one year’s grace. 6. Public finances and taxation Public expenditure is mostly devoted to salaries and subsidies, crowding out investment and other budget priorities. Efforts will be needed to restrain the wage bill, untargeted subsidies and SOEs liabilities, while expanding and better targeting social expenditure. The 2021 Budget introduced some fiscal measures, including the amendment of the transfer pricing rules and a single standard corporate tax rate but further reforms are needed to widen the base, improve collection, reduce evasion and rebalance the tax burden. The system could also benefit from enhanced international information exchanges and elimination of distortions with the off-shore sector. 7. Privatisation and enterprise restructuring The privatisation and restructuring of public banks and SOEs has long been under discussion but little progress has been made, faced with strong opposition from vested interests. Despite some progress with transparency, significant governance and financial challenges remain. There are over 100 SOEs (including seven of the ten largest firms in the country) covering most sectors and often with a monopoly position. The sector remains burdened with debt (around 40% of GDP in 2019 for the 30 major ones), government guarantees, and arrears, which were exacerbated by the pandemic. 8. Financial sector The financial sector has been supported by accommodating policies from the CBT and relief in prudential provisions, but the full impact of the pandemic is yet to be observed. The sector entered the crisis with some underlying vulnerabilities, including high non-performing loans, substantial exposure to credit risk to affected sectors and SOEs, relatively shallow capital buffers and tight liquidity. Strengthening its resilience and broaden access to finance remain key challenges. 6.Albania 1.7.Macroeconomic performance Albania was hit by two major shocks in quick succession: after a strong earthquake in November 2019, the first COVID-19 infections were discovered in early March 2020. In 2020, Albania managed the COVID-19 pandemic with a short strict lockdown and a rapid expansion of its very limited hospital capacity. However, due to rising infections since February 2021, the Government tightened restrictions again. The vaccination campaign is ongoing since January 2021. The Albanian government and the Bank of Albania took swift actions to support business and households, which prevented an increase in unemployment and kept the external position and the financial sector relatively stable. The government disbursed direct assistance of 1% of GDP, in addition to providing sovereign guarantees of about 1.65% of GDP to affected businesses, while the Bank of Albania lowered its policy rate, provided liquidity and faciliated loan payment deferrals and loan restructurings. In 2020, Albania’s GDP contracted by 3.3%, as the pandemic-related domestic and international restrictions caused large losses in tourism and manufacturing. The good performance of the large agricultural and construction sectors buffered the downturn of the economy, which began showing signs of a moderate recovery in the last quarter of 2020. Unemployment (15-65) increased slightly from 12% at the end of 2019 to 12.3% by the end of 2020 and labour market participation decreased to 68.3%, with women having been more affected than men on both accounts. In addition to lowering the policy rate to 0.5% in March 2020, the Bank of Albania (BoA) provided liquidity to the banking system to keep up lending to the private sector, enhanced its operational capacities to guarantee a sufficient cash supply to the economy, suspended banks’ dividend payments until end-2021 and facilitated electronic payments. Between March and August 2020, the BoA temporarily facilitated the deferral of loan instalments to help borrowers hit by the crisis and allowed banks to restructure loans without additional provisioning, but accompanied by increased reporting requirements. The still high non-performing loans ratio continued to decrease, to 8.1% by the end of 2020, even after the moratorium of loan repayments ended, a sign for the sector’s stability and the prudent loan restructuring. Inflation rose slightly from 1.4% in 2019 to an average of 1.6% in 2020.

The government revised the 2020 budget four times to accommodate the revenue losses from a 8.5% drop in tax revenue and a 9.1% expenditure increase for the support packages, additional funding for the health sector and post-earthquake reconstruction. Compared with 2019, the revenue ratio decreased from 27.4% to 26.5% of GDP, while the expenditure ratio climbed from 29.3% in 2019 to 33.4% of GDP. Overall the fiscal deficit increased sharply from 1.9% of GDP in 2019 to 6.9% of GDP in 2020 and the public debt ratio climbed by about 10 pps to 76.1% of GDP, including the actual provision of the sovereign guarantees of the government (about EUR 110 million or 1.65% of GDP foreseen) for loans to enterprises affected by the pandemic. The current account deficit widened by about 1 pp. to 8.9% of GDP at the end of 2020, due to the strong contraction of typical inflows from tourism, exports of goods as well as a significant decline in remittances, all reflecting the pandemic impact. However, as imports dropped for the same reasons as exports, the trade balance improved slightly (the trade deficit decreased 16% y-o-y). Capital inflows from a Eurobond issue and concessional loans have helped to finance the external shortfall even as FDI inflows dropped. Overall, the exchange rate depreciated only 1.6%. Gross external debt is estimated at 65.8% of GDP at end-2020, up from 60.4% one year earlier, but Albania’s vulnerability from an increasing external debt ratio is mitigated by solid forex reserves and dominance of concessional debt. In 2021, a recovery of private consumption, investment and exports from a low base, coupled with an exceptionally high level of public investment in post-earthquake reconstruction, are expected to boost real GDP growth to some 5.5%. The government plans for a limited reduction of the fiscal deficit and public debt to support the economic recovery and address the elevated needs for health care, vaccination and social assistance. Albania - Macro-Economic Indicators Albania 2016 2017 2018 2019 2020 2020 Ref Real GDP, % change 3,3 3,8 4,1 2,2 -3,3 Consumer price inflation, %, end of period 2,2 1,8 1,8 1,1 1,1 December Key monetary policy rate, %, end of period 1,3 1,3 1,0 1,0 0,5 December Unemployment rate (15-65), LFS, % 15.6 14.1 12.8 12.0 12.3 General government balance, % of GDP -1,8 -2,0 -1,6 -1,9 -6,90 Gross public debt, % of GDP 72,4 70,2 67,7 66,3 76,1 Current account balance, % of GDP -7,6 -7,5 -6,8 -8,0 -8,9 Q4-2020 Official international reserves, USD billion 2,9 3,3 3,7 3,5 4,4 December International reserves, months of imports 7,2 6,7 7,0 6,5 9,7 Q4-2020 Gross external debt, % of GDP 73,5 68,8 65,2 60,4 65,8 Net foreign direct investment, % of GDP 9,3 8,8 8,5 8,4 7,1 Q4-2020 Sources: WIIW, National authorities 1.8.Implementation of macro-financial assistance Following the powerful earthquakes in November 2019 and the challenges brought along by the COVID-19 pandemic, Albania oficially requested MFA on on 15 April 2020. In response, as part of the COVID19-MFA package adopted May 2020, the European Parliament and the Council agreed on an MFA programme to Albania of EUR 180 million. The Member States Committee on MFA delivered a positive opinion on 24 June 2020 on the MoU. However, the Albanian legislation requires a lengthy authorisation and ratification process of these kind of loan agreements, which delayed the signature of MoU and the LFA to 3 November 2020. While the MoU entered into force upon signature on 3 November, the LFA had to be ratified by the Albanian parliament and entered into force on 26 January 2021. The programme’s policy conditions aim to address some of the weaknesses in public finance management, the financial sector, good governance and fight against corruption and social protection policies. The MFA is to be provided in two tranches of EUR 90 million each. The first instalment was subject to the general political pre-conditions for MFA (respect for effective democratic mechanisms, including a multi-party parliamentary system, the rule of law and human rights), and was disbursed in March 2021. The second instalment is expected to be disbursed in the second half of 2021, once the policy conditions are met. The assistance is meant to complement resources made available by other donors including the IMF, under its Rapid Financing Facility programme RFI with Albania of EUR 174 million, approved on 10 April 2020. The IMF deemed important that Albania maintains an adequate reserve coverage, given its vulnerability to external shocks and endorsed the government’s policy measures and the related increase of the fiscal deficit and public debt as adequate in view of the reduced revenues and additional spending needs on reconstruction of earthquake damages and to limit the impact of COVID-19. 1.9.Structural reforms In March 2020, the European Council decided to open accession negotiations with Albania, but before formally launching negotiations with the first intergovernmental conference, Albania ought to implement a number of specific conditions, including the adoption of electoral reform, continued implementation of judicial reform, and strengthening the fight against corruption and organised crime. These key priorities for Albania have been integrated into the draft negotiating framework, which the European Commission presented to Member States on 1 July 2020. The EU-Albania Stabilisation and Association Council of 1 March 2021 noted that Albania fulfilled the specific conditions and is ready to hold the first intergovernmental conference. The Albanian authorities continued their efforts to address structural obstacles highlighted in the European Commission’s 2020 Albania Report and the 19 May 2020 Joint Conclusions of the Economic and Financial Dialogue between the EU and the Western Balkans and Turkey. The delivery of public services and the administrative burden on business continued to improve with the expansion of e-services, VAT refunds were disbursed fully and in time to SMEs and the overall stock of arrears did not increase. Preparation continued for introducing the “fiscalization” in 2021, obliging business to use electronic invoicing and registration of sales, which will directly help the Tax Administration to obtain real-time and accurate data and lower informal transactions. The reform of the Public Finance Management (PFM) system (since 2014) continued with the implementation of the updated PFM reform strategy for 2020-2022, albeit taking into account the negative impact of the earthquake and the COVID-19 pandemic without changing the objectives. As the previous Business and Investment Development Strategy (BIDS) has expired in 2020, the Ministry of Finance and Economy (MOFE) is designing a new BIDS and Action Plan for the period 2021-2027, for the development of SMEs and investment. End of 2020, the Albanian government began to consult on the draft start-up law and develop the concept of a new “Online Ecosystem Portal” to facilitate access to financing for start-ups and innovations. However, the adoption of the draft Unified Law on Investment, which will align Albanian legislation with international standards, is postponed to 2022 and despite recent institutional changes in the state cadastre, only limited progress has been made in clearing ownership conflicts over land titles. Efforts should be stepped up to combat informality and level the playing field for private companies by improving public investment management, simplifying tax system and procedures and strengthening the capacity of the public administration. Further reforms are also needed to enhance legal enforcement of contracts by resolving issues with property rights and the bailiff system.











Status of economic reforms — Albania 1. Price liberalisation The vast majority of prices are not subject to regulation and Albania reports very low levels of state aid, but the state aid commission needs more independence. Electricity prices are regulated by the energy regulator, and in May 2020, the country amended the Power Sector Law with a view to improving compliance with the EU energy legislation and allowing for effective unbundling of the distribution system operator. 2. Trade regime Albania joined the WTO in 2000. In 2006, Albania signed the Stabilization and Association Agreement (SAA) with the EU. The agreement, which was ratified in 2009, liberalized trade relations between the EU and Albania in terms of tariff barriers for agricultural and industrial goods. Since 2007 the country is a member of the multilateral Central European Free Trade Agreement (CEFTA). 3. Exchange rate regime The Bank of Albania commits to a free-floating exchange rate regime, where supply and demand movements in the foreign exchange markets determine the value of the domestic currency against other currencies. The Bank intervenes regularly in the markets with the purpose of maintaining adequate levels of foreign reserves on a pre-set schedule of auctions. 4. Foreign direct investment Overall, foreign and domestic investors are treated equally in Albania, with the exception of the acquisition of real estate, which the government has committed to address, but the necessaray legislative adjustment is still pending. A new “unified investment law” has been drafted, which will improve the protection of foreign and domestic investors in line with Albania’s international investment agreements and ensures that investors’ rights can be enforced through courts and international arbitration. The government postponed the adoption of the law from 2020 to 2021. 5. Monetary policy The primary objective of the central bank, as set out in the Law on the Bank of Albania (BoA), is to achieve and maintain price stability. BoA is financially independent and has sufficient instruments, competence and administrative capacity to function effectively and to conduct an efficient monetary policy. The monetary policy is conducted with a standard set of instruments: i) open market operations; ii) standing facilities; iii) required minimum reserves and within a free-floating exchange rate regime. 6. Public finances and taxation Albania follows an orderly budget preparation cycle, publishes timely relevant data and its public finance management has all main components in place. Since 2014, the PFM reform strategy, which has been extended to 2022, addresses weaknesses and progress was achieved with regard to transparency, arrears, tax administration and monitoring of fiscal risks. However, it still needs additional capacity and to continue addressing persisting weaknesses (eg: low revenue mobilisation and intransparent public investment management). 7. Privatisation and enterprise restructuring Overall state-owned enterprises (SOEs) are not dominant in the Albanian economy and concentrated in the energy sector but lack transparency and effective oversight, and rely on state funding. Monitoring of the sector improved with the growing capacity of the Ministry of Finance and Economy’s fiscal risk unit but still needs to expand to cover the large number of Public-Private-Partnerships (PPPs) and SOE`s in the energy and water sector. 8. Financial sector Albania’s banking sector is well capitalized, liquid and profitable. Banks’ relatively large exposure to government securities (averaging 25% of their assets) and the high use of Euro in the economy (half of all bank loans and deposits are denominated in euro), continue to pose risks to the banking sector and complicate the transmission of monetary policy. 7.Bosnia & Herzegovina 1.1.Macroeconomic performance When the COVID-19 pandemic hit Bosnia and Herzegovina in early March 2020, its economy was already in a phase of a slowdown, with GDP growth having decelerated from 3.3% in 2018 to 2.8% in 2019. This was largely the result of a deteriorating external environment and a sustained domestic political stalemate, delaying overdue structural reforms and investment. During 2020 and in response to the COVID-19 crisis, the authorities adopted supplementary budgets, envisaging additional spending of up to 2½% of GDP, providing additional health spending but also tax relief and income support to households and enterprises. Due to the COVID-19 crisis, economic output dropped by 4.5% y-o-y in 2020. The main factors behind the economic contraction were declining tourism revenues, lower private consumption and investment due to lockdown measures and decreasing remittances, and weaker external demand. The unemployment rate had been on a downward trend since 2014, dropping from 27.5% to 15.7% in 2019. Due to the COVID-19 pandemic, unemployment rose again, but so far only slightly, reaching 16.6% in the fourth quarter of 2020. Unemployment remains an important challenge, in particular for young people (around 23% unemployment in the age group of 15-24 years). There is also a substantial brain drain, with a high share of the qualified and mobile labour force leaving for job opportunities abroad, which has a negative impact on the country’s growth potential in the medium-term. Annual consumer price inflation turned negative during 2020, largely due to low domestic price pressures as well as decreasing prices of energy imports. Average inflation decreased from 1.4% in 2018 to 0.6% in 2019 and to -1.1% in 2020. International institutions expect only a moderate GDP recovery in the post-crisis years, of some 3.5% and 3.25% in 2021 and 2022, respectively. The country’s monetary regime is defined since 1997 by the country’s exchange rate peg to the euro as the anchor currency. This approach has served the economy well so far. However, it also implies that the burden of adjustment to external shocks has to be accommodated by other policy areas, in particular fiscal policy, necessitating the build-up of sufficient fiscal buffers and a stronger emphasis on medium-term stability, and structural reforms to improve the functioning of markets. In response to the COVID-19 crisis, the banking agencies adopted a loan repayment moratorium for restructuring credit arrangements for individuals and legal entities that were severely affected by the pandemic. This moratorium expired on December 31, 2020. Banking Agencies also asked banks to closely monitor portfolios’ exposures and to consider additional customer relief. Furthermore, a temporary suspension of dividends or bonuses was applied to all banks, although the restriction on bonuses was relaxed at end-2020. The country’s nominal effective exchange rate appreciated markedly during the last 5 years, mainly due to exchange rate movements of the euro vis-à-vis the US dollar, the Turkish lira and the Russian rouble. However, in real terms, the effective exchange rate remained more stable, benefitting from the country’s low inflation rate. Like in the case of other Western Balkan countries, the degree of euroisation is rather high (39% of deposits and 51% of private sector loans were denominated in euro as of January 2021). Public finances benefitted in recent years from strong revenue growth, but also repeated delays in implementing investment spending due to political stalemates. This resulted in fiscal surpluses, reaching some 2% of GDP in 2018 and 2019. The spending structure still is dominated by the public sector’s wage bill and transfer payments, while the level of public investment remained very low, reflecting among others administrative weaknesses in implementing planned investment projects. There is a significant degree of non-alignment with EU public sector accounting standards, which strongly impedes the assessment of the country’s actual fiscal position. As a result, both the deficit and debt ratio could be significantly higher than reported. Due to the COVID-19 crisis, the deficit is estimated to have increased markedly, reaching 4%-5% of GDP in 2020. In 2021, the deficit could come back to about 2½% of GDP. According to the IMF, the country’s public debt can be considered to be sustainable, although there are downside risks, such as contingent liabilities, in particular in the area of public enterprises. Bosnia and Herzegovina’s balance-of-payments position remained largely unchanged in 2020, as lower exports, in particular of tourism services, and a sharp drop in workers’ remittances, which in recent years amounted to some 10% of GDP, were more than compensated by lower imports. Nevertheless, remittances provided substantial support to household incomes, in particular in the lower income groups. As a result, the trade deficit of goods and services remained at some 15% of GDP. Net foreign direct investment remained low at some 2% of GDP in 2020, largely consisting of reinvested earnings. Bosnia & Herzegovina - Macro-Economic Indicators Bosnia and Herzegovina 2016 2017 2018 2019 2020 2020 Ref Real GDP, % change 3,1 3,2 3,7 2,8 -4,5 Consumer price inflation, %, end of period -0,5 0,7 1,6 0,2 -1,6 December Key monetary policy rate, %, end of period* n.a. n.a. n.a. n.a. n.a. Unemployment rate, LFS, % 25,4 20,5 18,4 15,7 18 General government balance, % of GDP 1,2 2,6 2,2 1,9 4,0 estimate Gross public debt, % of GDP 40,4 36,1 34,2 32,8 36,4 Q3-2020 Current account balance, % of GDP -4,8 -4,8 -3,3 -3,1 -3,2 Official international reserves, USD billion 5,0 6,3 6,6 7,0 8,4 December International reserves, months of imports 7,2 7,1 7,3 7,8 9,4 Q3-2020 Gross external debt, % of GDP 71.2 66.8 66.0 63.6 66.9 Net foreign direct investment, % of GDP 2,1 2,7 2,8 2,0 1,90 * Banks use the Euribor as a reference Sources: WIIW, Central Bank, BiH Agency for Statistics 1.2.Implementation of macro-financial assistance Following an official request for MFA from Bosnia and Herzegovina on 14 April 2020 in the context of the COVID-19 pandemic, the European Parliament and the Council approved in May 2020 the COVID-19 MFA package, including a new MFA programme of EUR 250 million to Bosnia and Herzegovina. The MoU and the LFA were signed on 15 January 2021, and will enter into force once the ratification process in the country is complete and upon publication in the Official Gazette. The MFA will be provided in two instalments. The first instalment (EUR 125 million) is subject to the general political pre-conditions for MFA (respect for effective democratic mechanisms, including a multi-party parliamentary system, the rule of law and human rights) and could be released after the MoU enters into force. The second tranche (EUR 125 million) will be released not earlier than three months after the release of the first tranche and is subject to the fulfilment of a set of policy conditions agreed in the MoU. The policy measures fall into the following four thematic areas: economic governance and institution building, financial sector stability, transparency and fight against corruption and a better functioning of the labour market. The assistance is meant to complement resources made available by other donors including the IMF, under its Rapid Financing Facility programme of EUR 330 million approved on 9 April 2020. 1.3.Structural reforms The country submitted an EU membership application in February 2016. In May 2019 the European Commission issued the Opinion on the application, which was subsequently endorsed by the Council in December 2019. The Opinion identifies 14 key priorities for the country to fulfil in order to be recommended for the status of EU candidate country. These priorities lie in the areas of democracy and functionality of institutions, rule of law, fundamental rights and public administration reform. The authorities continued their efforts to address structural obstacles highlighted in the European Commission’s Bosnia and Herzegovina 2020 Report and the 19 May 2020 Joint Conclusions of the Economic and Financial Dialogue between the EU and the Western Balkans and Turkey. Notwithstanding some progress on improving the financing of the pension system, the overall quality of public finances remained very low, with substantial spending inefficiencies, particularly in the health sector, and a poor targeting of social transfers. The level of public investment remained very low, largely due to administrative weaknesses, such as inadequate project appraisal, weak project management and lack of transparency during execution. Some progress has been made in preparing the restructuring of the railway company in the Republika Srpska entity, which could reduce the fiscal burden of this company to the country’s taxpayers. Efforts continued to facilitate business registration while some steps have been taken to strengthen the support for foreign investors. Improvements in the area of rule of law and the functioning of the judiciary have remained very limited. Despite the improved degree of registration in the labour market by increasing labour market controls, the informal economy remains large, at some 25-35% of GDP. Although official data on recorded state aid points to a relatively low and declining level of support of some 0.9% of GDP in 2019, a number of public and private companies benefit indirectly from the accumulation of payment arrears of taxes and, in particular social security contributions. Draft legislation on the Personal Income Tax as well as on social security contributions with a view to reduce the tax wedge has been prepared, but has not been adopted yet. The country participated for the first time in the 2018 PISA study and the results indicate that the students’ performance ranks not only well below the OECD average, but is also low when compared with some countries in the Western Balkan region. Political uncertainties negativel