EUROPEAN COMMISSION Brussels, 19.7.2022 SWD(2022) 192 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 2021 {COM(2022) 341 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 Introduction4 Background analysis of beneficiaries of macro-financial assistance5 1.Georgia5 1.1.Macroeconomic performance5 1.2.Implementation of macro-financial assistance6 1.3.Structural Reforms7 2.Moldova10 2.1.Macroeconomic performance10 2.2.Implementation of macro-financial assistance11 2.3.Structural Reforms12 3.Ukraine15 3.1.Macroeconomic performance15 3.2.Implementation of macro-financial assistance17 3.3.Structural Reforms18 4.Jordan21 4.1.Macroeconomic performance21

4.2.Implementation of macro-financial assistance22 4.3.Structural reforms23 5.Tunisia26 5.1.Macroeconomic performance26 5.2.Implementation of macro-financial assistance28 5.3.Structural Reforms28 6.Albania32 6.1.Macroeconomic performance32 6.2.Implementation of macro-financial assistance33 6.3.Structural reforms34 7.Bosnia & Herzegovina37 7.1.Macroeconomic performance37 7.2.Implementation of macro-financial assistance38 7.3.Structural reforms39 8.Kosovo42 8.1Macroeconomic performance42 8.2.Implementation of macro-financial assistance43 8.3.Structural reforms43 9.Montenegro46 9.1.Macroeconomic performance46

9.2.Implementation of macro-financial assistance47 9.3.Structural reforms48 10.North Macedonia51 10.1.Macroeconomic performance51 10.2.Implementation of macro-financial assistance52 10.3.Structural reforms53 11.Ex post evaluations of Macro-Financial Assistance operations55 Annex 1: MFA operations by date of decision, 1990-202158 Annex 2: Status of disbursements made by date of decision at end-December 202159 Annex 3: MFA amounts authorised* by year, 2005-2021 (EUR million)65 Chart 3A: MFA amounts authorised by year, 2006-2021 (EUR million)65 Chart 3B: MFA amounts authorised by region, 2006-2021 (%)65 Annex 4: MFA amounts disbursed by year, 2006-2021 (EUR million)66 Chart 4A: MFA amounts disbursed by year, 2006-2021 (EUR million)66 Chart 4B: MFA amounts disbursed by region, 2006-2021 (%)66 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 2021. In 2021, MFA operations under Decision (EU) 2020/701, which aimed to support partners with the economic fallout from the COVID crisis, were further implemented. Seven of the programmes launched between 2020 and 2021 were successfully completed, with the disbursement of the second and final tranche for the following countries: North Macedonia, Kosovo, Montenegro, Jordan, Moldova, Ukraine and Albania. On the other hand, the MFA operation for Georgia, was only partially disbursed, with the cancellation by the Commission of the second tranche. The two remaining programmes for Bosnia and Herzegovina and Tunisia were started in 2021. Tunisia received the second disbursement on 25 May 2022, thus successfully completing the operation upon completion of the policy conditions agreed in the MoU. On the other hand, the second tranche for Bosnia and Herzegovina was not disbursed due to limited reform implementation at the end of the availability period.

Besides the financial assistance foreseen in context of the COVID-19 pandemic, the implementation of a third regular MFA programme for Jordan was also taken forward, with the release of the second tranche on 20 July 2021. In 2021, the Commission also received two official requests for new MFA operations to Moldova and Ukraine, that materialised in 2022. 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 2006‑2021, by year and by region.

Background analysis of beneficiaries of macro-financial assistance 1.Georgia 1.1.Macroeconomic performance Following a year of pandemic-related contraction, the economy started to rebound strongly since April 2021. GDP rose by an estimated 10.4% in 2021. The recovery has been driven by household consumption and exports. On the supply side, the rebound is the strongest in services, while agricultural output has declined. The unemployment rate in Georgia decreased to 19% in the fourth quarter of 2021, down by 1.4 percentage points compared to the same period of 2020. Consumer price inflation accelerated to 13.9% in December 2021, which was the highest monthly figure since 2011, and then eased to 11.8% in March 2022. Inflation was largely driven by high global energy prices, rising food prices and increased utility costs after the removal of subsidies. The central bank increased the policy rate by 250 basis points in the course of 2021, from 8% to 10.5%. The Georgian currency, the lari, appreciated in the course of 2021 by 14% against the euro and 6% against the US dollar, after a depreciation by respectively 20% and 13% in 2020. The general government deficit has reached 6.3% of GDP in 2021, slightly lower than 7% of GDP foreseen in the revised budget law, thanks to stronger-than-projected tax revenues. The ratio of public debt to GDP decreased to 52% of GDP at the end of 2021 from 62% at end-2020. Georgia’s balance-of-payments position remains negative. The current account deficit remains high, although it has slightly improved to an equivalent of 9.8% of GDP in 2021 from 12.5% of GDP in 2020. Among its main components, very high merchandise trade deficit (almost 20% of GDP) was partially counterbalanced by a record high inflow of remittances – 13% of GDP (USD 2.4 billion in 2021) and improved balance of services thanks to partial recovery of tourism, which is an important sector in Georgia (corresponding to 8% of GDP in the pre COVID context). High current account deficit is financed by continuing (albeit slow) inflow of foreign direct investment and, most importantly, by high volumes of grants and concessional loans committed by the international partners. Georgia’s international reserves have increased from USD 3.9 billion at the end of 2020 to USD 4.3 billion at end-2021 (4.5 months of imports cover), partially thanks to an allocation of USD 286 million from the IMF as part the global allocation of Special Drawing Rights. For 2022, Georgia’s GDP growth for 2022 was revised downwards following Russia’s invasion of Ukraine and is now forecast between 3% and 5%. The war in Ukraine affects Georgia through several channels including increased geopolitical risk in the whole region, trade disruptions, inflationary pressures, lower inflow of tourists and dwindling remittances. The National Bank of Georgia expects that consumer price inflation will moderate gradually from the second quarter of 2022 as the impact of the temporary factors diminishes and that it will approach the 3% target in the first half of 2023. Depending on the pace with which the economy recovers, the authorities intend to bring the fiscal deficit down by unwinding the temporary COVID-19 support and containing current spending pressures. The 2022 budget envisages the deficit of 4.3% of GDP; from 2023, the deficit is to be brought down below 3%, in line with Georgia’s fiscal rule. Georgia - Macro-Economic Indicators Georgia 2017 2018 2019 2020 2021 latest 2021 Ref Real GDP, % change 4.8 4.8 5.0 -6.8 10.4 end-21 Consumer price inflation, %, end of period 6.7 1.5 7.0 2.4 13.9 end-21 Key monetary policy rate, %, end of period 7.3 7.0 9.0 8.0 10.5 end-21 Unemployment rate, LFS, % 21.6 19.2 17.6 18.5 20.6 Q4 General government balance, % of GDP -0.5 -0.8 -1.8 -9.2 -6.3 end-21 Gross public debt, % of GDP 39.9 39.9 41.2 62.2 52.0 end-21 Current account balance, % of GDP -8.1 -6.8 -5.5 -12.5 -9.8 end-21 Official international reserves, USD billion 3.0 3.3 3.5 3.9 4.3 end-21 International reserves, months of imports 3.4 3.6 4.7 4.6 4.6 end-21 Gross external debt, % of GDP 106.6 101.3 106.6 129.5 117.0 end-21 Net foreign direct investment, % of GDP 10.5 5.5 5.9 3.7 4.4 end-21 Sources: National authorities; Commission staff calculations 1.2.Implementation of macro-financial assistance 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 was 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 was additionally 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. Several structural reforms have been implemented as conditions of the MFA. However, the second instalment was cancelled by the Commission following the decision of Georgia to refrain from requesting it, and in view of the non-fulfilment of one of the most important policy conditions related to the judicial system. The MFA programme was 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 final one in April 2021. In April 2022 the IMF has reached a staff-level agreement with the Georgian authorities on a new three-year Stand-by Arrangement (SBA) in the amount of about $290 million. 1.3.Structural Reforms Georgia’s structural reform agenda focuses in particular on the continuous implementation of the Association Agreement with the EU, conditionalities agreed with its international partners such as the IMF, the World Bank and the EU, as well as on the domestic development agenda. The implementation record in 2021 was good in some areas, such as corporate governance, energy and labour market (with all these three areas supported by the MFA conditionalities) as well as in public financial management, while setbacks took place in the judicial reform. In terms of improving the corporate governance, the Georgian Parliament adopted in August 2021 a new comprehensive company law, aimed at regulating corporate relations and approximating the legislation to the EU directives. Corporate governance standards for state-owned enterprises (SOEs) have been developed by the Ministry of Finance with support of the IMF and the World Bank and adopted in September. The Ministry of Finance has also published a report on implementation of the OECD SOE guidelines by 10 major SOEs. Regarding the labour market, the amended Labour Code entered into force from the beginning of 2021. The amendments concern, inter alia, the scope of labour rights, occupational health and safety, collective redundancies, anti-discrimination and gender equality. Also from 2021, the law on Labour Inspectorate changed the latter’s status to an agency, with increased number of staff and expanded mandate. In the field of energy, following the adoption of the laws on energy efficiency and on energy performance of buildings in 2020, the government adopted in 2021 the secondary laws on minimum energy efficiency requirements and on the methodology for calculating energy performance of buildings, implementing the EU acquis in this area. However, the start of enforcement of energy efficiency in buildings was postponed to July 2022 and the launch of organised power market was pushed back to March 2022. In public financial management (PFM), Georgia has successfully implemented its PFM strategy for 2019-22. The key achievements include the introduction of medium-term budget framework, application of IPSAS standards in financial statements, reforms of tax and customs, with introduction of automatic VAT refund and a risk-based approach. The methodology of internal audit has been elaborated according to the IIA standards, and capacity building of audit units is ongoing, especially in municipalities. In the area of justice, some setbacks for reforms took place. Notably, two successive legislative amendments on Supreme Court appointments did not fully comply with the corresponding Venice Commission recommendation, notably as concerns the lack of a meaningful right of appeal. In spite of these procedural shortcomings, 11 (out of 28) Supreme Court judges were appointed in 2021 and for lifetime tenures. The amendments to the Law on Common Courts adopted in December 2021 restrict the independence of judges by making it easier to remove judges from cases, by restoring the possibility to transfer a judge to another court without his/her consent and by the adding new formal grounds for disciplinary liability.









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 4-5% of GDP in 2020-21. 5. Monetary policy The main monetary policy objective of the National Bank of Georgia is price stability. The Bank is applying an inflation-targeting regime, with a target of 3%. The effectiveness of monetary policy is significantly constrained by the high level of dollarization: as of end-2021, 51% of loans and 60% of deposits were denominated in foreign currency. 6. Public finances and taxation The public finance management system is essentially sound and transparent. 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, 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 1300 in 2009 to a still sizeable number of around 350 currently, including some 50 public corporations and some 300 government entities. The government, with support of the IMF and the World Bank, has started a reform of the 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 highly concentrated, with the two largest banks, out of 16 in total, holding around three quarters 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 19.6% at the end of 2021. The share of nonperforming loans in total gross loans was very low at 5% at the end of 2021. 2.Moldova 2.1Macroeconomic performance In 2021, the Moldovan economy marked a strong recovery after a recession caused by the pandemic. Real GDP growth amounted to 13.9% in 2021, much of it, however, reflecting the low base effect. The recovery was driven, in particular, by a strong rebound in household consumption, supported by higher credit and wage growth, as well as stable remittances. On the supply side, most sectors expanded compared to 2020, excluding construction. Agriculture, as well as wholesale and retail trade, marked the strongest contribution to growth. The employment rate remained low in 2021, at 41%, reflecting the relatively high level of inactivity and the prevalence of the informal sector. On the back of growing food and energy prices, inflation surged in 2021. It finished at 14% by the end of the year, and further accelerated to 22% by end-Q1 2022. In response to strong inflationary pressure, the National Bank of Moldova raised its key policy rate, up to 12.5% in March 2022. As result of the Russian invasion on Ukraine, inflation is forecast to further rise, prompting the central bank to continue with the monetary tightening. The persistently high energy prices and supply chain disruptions (in particular, for food and agricultural products) are assumed to have the strongest effect on inflation going forward. Moldova’s fiscal deficit came in better than projected, at 1.9% of GDP, in 2021. This is broadly comparable to the pre-pandemic level. The low budget deficit can be accounted for underspending and some optimisation measures introduced by the government, as well as higher revenues, driven by the recovery (up by 23% compared to 2020). However, in 2022, Moldova’s fiscal position is set to deteriorate. As a result of slower growth, revenues are expected to fall, while the high inflow of refugees suggests higher expenditures. Tentative forecasts project a deficit of 8% of GDP, compared to 6% of GDP adopted under the Budget Law 2022 last year. The bulk of the widening deficit reflects Moldova’s effort to mitigate the current crisis, while possible further tensions over gas supply (resulting in increasing prices and further compensations to the most vulnerable consumers) may exercise additional pressure. Public debt remained broadly unchanged in 2021, at 32.6% of GDP. However, on the back of increased borrowing from its international partners in the face of the current crisis and growing liquidity pressures on the domestic market, public debt is forecast to grow considerably, exceeding 40% of GDP in 2022. Moldova’s external position deteriorated considerably last year. The current account deficit almost doubled to 11.3% of GDP from 6.6% in 2020. The growing trade deficit was the key driver, with imports (+ 32.5%) outpacing exports (+ 27.5%). Going forward, the deficit will be further impacted by the ongoing Russian invasion on Ukraine. With disruptions to supplies from Russia, Ukraine and the region overall, prices for imports will grow. Much will also depend on Moldova’s ability to redirect some of its exports to the EU market. In 2021, foreign exchange reserves remained broadly stable and high at USD 3.9 billion by end-year, supported by the allocation of the IMF special drawing rights in August 2021. However, after some initial volatility in the exchange markets and the central banks intervention, international reserves declined, down to USD 3.6 billion in February 2022 (or 8 months worth of imports), limiting Moldova’s buffers to respond to the growing economic pressure. As a result of the Russian invasion of Ukraine, growth in Moldova is projected to slow down considerably. Tentative estimates by the authorities indicate a GDP at 0.3% in 2022, with some risk of a recession if the war drags on. With low growth and rising inflation Moldova is also set for a possible prolonged stagflation going forward. Key downside risks also include growing fiscal pressure, as well as further disruptions to trade and remittances, in particular, from Russia and the CIS region. Moldova is currently the highest per capita recipient of the war refugees, which puts significant pressure on public finances, while growing tensions around southern Ukraine (especially around the city of Odessa) and possible spill over effects to Moldova may further aggravate the country’s stability. Therefore, to restore confidence and provide for an additional boost to the Moldovan economy, an international support conference was organised in early April 2021, where the participants pledged over EUR 600 million of funds to increase the country’s financial resilience. Moldova - Macro-Economic Indicators Moldova 2017 2018 2019 2020 2021 latest 2021 Ref Real GDP, % change 4.7 4.3 3.6 -7.0 13.9 end-21 Consumer price inflation, %, end of period 7.3 0.9 7.5 0.4 13.9 end-21 Key monetary policy rate, %, end of period 6.5 6.5 5.5 2.7 10.5 end-21 Unemployment rate, LFS, % 3.2 2.8 4.3 3.4 2.6 end-21 General government balance, % of GDP -0.6 -0.8 -1.4 -5.1 -1.9 end-21 Gross public debt, % of GDP 32.7 30.1 27.4 33.1 32.6 end-21 Current account balance, % of GDP -5.7 -10.3 -9.3 -6.6 -11.3 end-21 Official international reserves, USD billion 2.8 3.0 3.1 3.8 3.9 end-21 International reserves, months of imports 5.3 5.4 6.2 7.6 8.0 end-21 Gross external debt, % of GDP 70.4 63.8 61.7 69.7 64.1 end-21 Net foreign direct investment, % of GDP 1.4 2.2 3.8 0.6 0.3 end-21 Sources: National authorities; IMF; World Bank; Commission staff calculations 2.2Implementation of macro-financial assistance As part of the COVID-19 MFA package adopted in May 2020, the EU agreed on a new EUR 100 million MFA programme for Moldova, complementing the IMF emergency programme of USD 235 million (adopted in April 2020). Given the emergency context, the first instalment was not attached to any policy conditions, with the exception of the political pre-condition of respect for democratic mechanisms, the rule of law and human rights as well as further progress in the implementation of the Association Agreement and the Deep and Comprehensive Free Trade Area (DCFTA) agreement. The first disbursement of EUR 50 million was made on 25 November 2020. Following the elections in July 2021, and given the renewed reform momentum, Moldova successfully fulfilled the policy actions for the second disbursement, with the exception of one condition, on asset recovery, which required a waiver (and on which the Commission consulted with the Member States Committee for Macro-Financial Assistance, receiving no objections). The second instalment was disbursed on 8 October 2021. Following the energy crisis that began in October 2021, and given the on-going post-pandemic recovery, on 19 November 2021, the Moldovan authorities requested a new MFA operation. After careful assessment of the financing needs, the Commission prepared a proposal for a new MFA of up to EUR 150 million, with EUR 120 million in medium-term loans, and a EUR 30 million grants component. The proposal was adopted by the Commission on 4 January 2021. The European Parliament and the Council finally adopted the Decision providing macro-financial assistance to the Republic of Moldova on 6 April 2022. The MFA will be disbursed in three instalments following the implementation of policy actions in the field of good governance, rule of law, fight against corruption, energy sector reforms and further progress on asset recovery (following up on previous MFA operations). In view of the increased pressure on the Moldavian economy from Russia’s invasion of Ukraine, Moldova requested further support from the EU, especially in the form of grants. The Commission had considered to complement the standing MFA with additional assistance via budget support in the amount of EUR 53 million. The MFA will come in conjunction with the IMF programme adopted in December 2021 of Extended Credit Facility/Extended Fund Facility USD 558.3 million. The programme will aim to further strengthen Moldova’s reform effort in some of the key areas, including the rule of law and fight against corruption and it will focus on fiscal and financial governance.

2.3Structural Reforms In 2021, reform implementation in Moldova has been mixed. Due to a political stalemate in the first half of the year, progress on reforms has been slow or fragmented. However, following the parliamentary elections in July, the authorities have considerably increased their efforts. A new ambitious reform agenda was put in place “Moldova in the good times, 2021-2025” with key objectives including fight against corruption and the rule of law, good governance, economic development as well as strong commitment to asset recovery and the investigation of the 2014 bank fraud. With all political branches in the country aligned (including the Presidency, the Parliament, and the Government) Moldova was also able to successfully fulfil the policy conditions agreed under the COVID-19 MFA programme, with the exception of one action – on asset recovery, which required a waiver. Nonetheless, good progress was achieved in several sectors, including public procurement, anti-corruption, customs and smuggling as well as further justice sector reforms. In addition, 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 Area agreement (DCFTA). The last Association Council meeting took place on 28 October 2021, and it concluded that Moldova has made some, albeit moderate progress, yet, with a clear “window of opportunity” for further action. Among others, Moldova remains committed to the implementation of the Public Finance Management Strategy (PFM) 2013-2020 (which has been extended last year) and the authorities have made some important reforms including on increasing the accuracy of revenue projections, mid-term budgetary framework process, regulatory framework for financial management and internal control. Some important steps were also made as regards Public Administration Reform (PAR), especially on salary management and policy coordination by the State Chancellery. Nonetheless, the institutional step-up and administrative capacity remains an urgent issue. Moldova has also advanced on the fight against corruption. For example, the annual budget of its anti-corruption institutions, including the National Integrity Authority (NIA), the Criminal Asset Recovery Agency and the Financial Investigation Unit has been increased. Moreover, in line with the COVID-19 MFA conditionality, the authorities have made adjustments to the assets- and conflict-of-interest declarations. On financial sector stability, in September 2020, Parliament adopted the Law providing for a transfer of supervision powers from the National Commission for Financial Markets to the National Bank of Moldova, taking effect as of 2023. The legislation was adopted in the context of a constantly increasing credit portfolio of non-banking and credit institutions combined with a weak supervision of the insurance market. The Parliament also adopted the long-awaited changes to the Law on insurance, transposing to some of the EU Solvency II Directive. Nonetheless, the financial stability of the insurance sector remains generally at risk. For example, the authorities have not advanced on the implementation of proper supervisory audits by international auditors or on fixing shareholders transparency in several systemic insurance companies. Moldova’s reform implementation will also be further supported by the IMF programme and the new MFA operation. In particular, the MFA will seek to target several key sectors, notably, including the rule of law and fight against corruption, financial sector stability, improving the business climate, as well as the much needed energy sector reforms, given the on-going gas crisis.

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, including the hotel industry and restaurants were lowered from 15% to 12%, with possible further reductions in the future. In line with the Association Agreement, Moldova is to align VAT regulations with the EU VAT Directives. 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 since then. 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. However, further progress on the recovery of the stolen assets is missing, with overall few proceedings and trials completed. 3.Ukraine 3.1Macroeconomic performance Even before the war, the macroeconomic performance of Ukraine had been disappointing. The 2021 real GDP still lagged 6 percent behind the 2012 level. Following a milder than expected recession of 4% in 2020, the overall disappointing annual growth of 3.4% in 2021 kept the economy below its pre-pandemic size. The index of key sectors’ output slowed down its recovery in the second half of 2021 and exhibited high volatility towards year-end. Industry stagnated (+1.9%) in 2021, while construction (+6.8%), retail (+10.7%) and agriculture (+14.4%) were the main drivers of growth. Gross fixed capital formation declined to 12.4% of GDP, which is less than half the investment effort in peer economies. Bringing investment to sustainably higher levels will be among the formidable challenges of the reconstruction period. After an initial deterioration during the recession, unemployment started to decrease in 2021. The return to economic growth brought about a reduction of the unemployment rate from 10.5% in Q1 2021 to 9.7% in Q3. The annual growth of real wages accelerated in the first half of the year before slowing down (from 16.5% in Q2 to 7.9% in Q4) under the combined effect of high inflation and low investment. The future level and dynamics of wages will be determined by the net effect of the war-driven capital destruction and the exodus-driven labour scarcity. The longer-term impact of the war on the labour market will depend on the success of the refugees’ integration abroad and on their willingness to return to their home country. The extent of the capital destruction and the prospects for reconstruction, which will drive labour productivity, and hence wages, will play a key role. In an attempt to conserve the stock of foreign reserves for the war mobilisation effort, the NBU declared the hryvnia unconvertible on 24 February and suspended the inflation-targeting framework for the duration of the conflict. The NBU prohibited private transactions in foreign exchange (forex), suspended its sales of forex, and fixed its forex purchase rate at the last pre-invasion exchange rate of hryvnia 29.15 for one USD with a view to reducing the uncertainty around the foreign exchange rate. To ease the hindrance on imports, some restrictions on the use of forex bank accounts were lifted in early March. In the new war context, two factors drive monetary policy, namely the unlimited liquidity provision to banks, aimed at continuing to preserve financial sector stability, and the standing promise to acquire war government bonds in case of insufficient private interest. The NBU announced its intention to keep its main refinancing rate at 10% until the end of the war. Inflation is expected to deviate further from its pre-war target of 4% to 6%. The growth rate of the money supply in the broad sense (aggregate M3) had accelerated to 32.7% in November 2020, before slowing down to 12.0% in December 2021, thanks to the cumulative policy rate hikes of 400 basis points. Yearly consumer and producer prices inflation reached 10% and 69% respectively in December 2021. Inflation is set to accelerate in the war context of worsened scarcity of goods and services and accommodative monetary policy. Due to growing loss of confidence, official international reserves contracted by more than 11% from USD 30.9 billion in December 2021 to USD 27.5 billion (3.9 months of 2021 imports) in February 2022. However, the progressive disbursement of the almost USD 3 billion of overall pledged financial support to Ukraine by IFIs and bilateral donors as of March 2022 should help mitigate the reduction of the official international reserves as a result of the war effort. Having lost access to international capital markets, Ukraine has to rely on official foreign support and monetary financing. The government Eurobond yields reached prohibitive levels already in mid-January. In the first two months of 2022, the issuance of new bonds in the domestic market barely reached a roll-over rate of 23% in hryvnia and 4% in foreign currency. In the current situation of martial law, the government plans to issue war bonds for the equivalent of USD 13.7 billion in 2022, with maturities between 1 and 15 years, with a targeted yield of 11%. The treasury issued bonds for USD 1.7 billion in March, compared to scheduled redemptions of USD 0.7 billion, implying a net issuance of USD 1 billion. Domestic banks, acting as primary dealers, bought about USD 1.0 billion of the war bonds. The NBU acquired the remaining USD 0.7 billion. The scale of the deterioration of the fiscal outlook depends on the duration of the conflict and its impact on economic activity. The invasion set an end to previous consolidation gains, which were already compromised by the response to the Covid crisis. The 2021 public deficit stood at 3.4% of GDP, which is 1.7 percentage points better than initially planned. Public revenues and expenditure increased by 20.7% and 15.6% respectively in 2021. The consolidated public debt decreased to 55% of GDP from 61% in 2020 (reflecting the 30% growth in the nominal GDP). These debt dynamics are set to reverse in the context of the war. The significant military, humanitarian and other expenses put additional pressure on government expenditure, while tax collection is about to contract significantly (reportedly by one third in March; and about 50% in April and May). In an effort to hold back the increase in the deficit, expenditures are carefully prioritised, which cause a different composition of spending, with further expected reduction in capital expenditure (investment), whilst the government continues to provide basic social spending as well as service its foreign debt obligations, e.g. paying a EUR 300 million coupon on its Eurobonds in early March. The current account recorded a deficit in 2021 and the outlook is uncertain. After a surplus of USD 5.3 billion in 2020, the current account registered a deficit of USD 2.6 billion, or 1.3% of GDP, in 2021. Future developments are extremely uncertain. Exports are set to suffer from activity interruptions, legislative bans and transport and supply chain difficulties. Population outflows and purchasing power erosion might compress imports. As regards remittances, the dramatic changes in population make them unpredictable, with more than 12 million having fled their homes and about 5.5 million left the country by end April. The stock of foreign direct investment recovered notably in 2021, with reinvested earnings being the primary driver. New incoming FDI reached USD 2.6 billion, complemented by reinvested earnings of USD 4.2 billion. Portfolio investments by foreigners also contributed towards a net capital inflow of USD 1.0 billion, which is matched by an increase in corporate indebtedness. Other investments, mostly driven by the hoarding of foreign cash and by trade credits abroad, contributed to a net capital outflow by USD 6.0 billion. After having increased in 2021, international reserves has come under moderate pressure since the war started, which has so far been offset by official foreign support. The overall balance of payments implied an increase in the official international reserves by USD 2.5 billion in 2021 (after a rise by USD 3.0 billion in 2020). The annual change in the stock of reserves is attributable primarily to the extraordinary allocation of additional SDRs by the IMF for USD 2.73 billion in August 2021. In the first two months of 2022, the official international reserves declined by more than USD 3 billion, which was later compensated for in March thanks to the disbursement of official foreign support. Notwithstanding a remarkable macroeconomic stability in the context of the war, future challenges relate to its immediate impact and the post-war reconstruction of the country. Inflation is expected to become a significant challenge, due to direct monetary financing of wartime public spending, soaring energy and food-price inflation, hindrances on foreign trade and capital movement, and worsened scarcity of resources. It could reach several multiples of the Central Bank’s pre-war medium-term target level of 5%, which was missed already prior to the conflict. In addition to the severe human suffering caused by the Russian invasion, the war will inevitably also leave deep economic scars. Estimates of the final permanent loss of productive capacity (capital and infrastructure) and durable goods (housing) depend on the duration and extent of the conflict and range already in between 150-600 billions of US dollars. The many difficulties with carrying out economic transactions in the context of martial law, including numerous export bans and price controls, will amplify the short-term impact on economic activity, with GDP set to decline steeply (available forecasts ranging between 25% and 50%, crucially depending on the underlying assumption of the length and possible (de)escalation of the war). Ukraine - Macro-Economic Indicators Ukraine 2017 2018 2019 2020 2021 latest 2021 Ref Real GDP, % change 2.5 3.4 3.2 -4.0 3.4 end-21 Consumer price inflation, %, end of period 13.7 9.8 4.1 5.0 10.0 end-21 Key monetary policy rate, %, end of period 14.5 18.0 13.5 6.0 10.0 end-21 Unemployment rate, LFS, % 9.5 8.8 8.2 10.1 9.7 Q3 General government balance, % of GDP -1.4 -1.9 -2.2 -5.4 -3.4 end-21 Gross public debt, % of GDP 71.8 60.9 50.2 60.8 55.4 end-21 Current account balance, % of GDP -2.2 -3.3 -2.7 3.4 -1.3 2021 Official international reserves, USD billion 18.8 20.8 25.3 29.1 27.5 Feb-2022 International reserves, months of imports 3.2 3.3 4.8 4.9 6.1 Dec-2021 Gross external debt, % of GDP 102.9 87.7 79.0 80.8 69.3 2021 Net foreign direct investment, % of GDP 2.3 1.8 1.5 0.1 1.3 2021 Sources: National authorities; Commission staff calculations

3.2Implementation of macro-financial assistance Between 2014 and 2021, five consecutive MFA operations provided a total of EUR 5.6 billion to Ukraine, out of which EUR 5.0 billion were disbursed effectively. In response to economic and social challenges arising from the geopolitical tensions in late 2021/early 2022 and the security threats at the border between Ukraine and Russia which subsequently culminated in the latter’s unjustified invasion of Ukraine, the Commission tabled a proposal for a sixth, emergency, MFA to Ukraine of up to EUR 1.2 billion on 1 February 2022. The Decision granting this emergency MFA entered into force on 3 March and the first instalment of EUR 600 million was disbursed in two tranches on 11 and 18 March. The second instalment followed in mid-May. This emergency MFA was provided in conjunction with the resources from international financial institutions and bilateral donors that stepped up their support to Ukraine in a closely coordinated manner since the invasion. In a joint statement from 1 March, the World Bank and the IMF announced the preparation of additional support packages of USD 3 billion and USD 1 billion, respectively, to be disbursed swiftly within two weeks. Subsequently, to be able to access the maximum possible emergency financing of USD 1.4 billion (50% of its quota in the IMF) through the Rapid Financing Instrument, Ukraine requested the suspension of its current Stand-By-Arrangement. Other IFIs and bilateral donors have also come forward. In March, the EIB disbursed a budgetary loan of EUR 668 million, and the EBRD allocated a resilience package of EUR 2 billion. The total volume of pledged official international support, excluding humanitarian and military aid, reached USD 15.5 billion as of early May, albeit most taking time to become available (around USD 4.6 billion disbursed thus far). 3.3Structural Reforms Prior to the invasion of Ukraine by Russia on 24 February 2022, the emergency MFA identified three priority policy areas: economic resilience and stability, governance and rule of law, and energy. The seven policy measures, identified as feasible in the short term, aim at completing the governance reform of state-owned enterprises, improving the business environment for small and medium enterprises, finalising the anti-corruption infrastructure and ensuring functioning market mechanisms in the energy sector. While these reforms remain relevant, the post-war reconstruction phase will face a much wider range of priorities. Since the political transition in 2014, Ukraine embarked on an ambitious and wide-ranging reform programme. This programme has been guided by continuous implementation of the Association Agreement with the EU and supported by large-scale financial and technical assistance provided by the EU and other multilateral and bilateral partners. Ukraine managed to push through reforms in a variety of sectors, although overall progress has been uneven. The main obstacles to faster reform implementation were the complex domestic political environment, the lack of political will to implement ambitious reforms in certain sectors, and the opposition by vested interests, some of which continue to exert influence on policy-making in the country. Combining a strong ownership of the reconstruction efforts with a firm wish to join the EU, provides an opportunity to tackle these challenges and enable Ukraine to ‘build back better’. In the area of public finance management, the track record is rather favourable. New laws improved the fiscal governance by introducing medium-term budgeting and by strengthening programme-based budgeting. The reorganised State Tax Service and Customs Service are now fully operational. More recent actions in this area included, inter alia, enhancing the VAT monitoring system based on risk management, developing the methodology of electronic tax audit and the use of new IT solutions in customs. To improve tax compliance, the authorities started the gradual deployment of electronic software tax registrars in 2020. At the same time, the State Fiscal Service, considered as an old-style tax police with a disruptive effect on business, has been replaced by the recently established Bureau for Economic Security. Governance reforms resulted in the set-up of new anti-corruption institutions: the National Anti-Corruption Bureau (NABU), the National Agency for the Prevention of Corruption (NAPC), the Specialised Anti-Corruption Prosecutor Office (SAPO) and the High Anti-Corruption Court (HACC). After a difficult start, these institutions have started to prove their effectiveness: in the last two years, the HACC issued 45 decisions in cases investigated and prosecuted by NABU and SAPO respectively, 80% of which led to convictions for bribery, embezzlement of public funds, abuse of office and other corruption offenses. The most recent legislative changes in this field aimed at strengthening the institutional independence of NABU and enhancing the credibility of the selection process of its head. However, the anti-corruption infrastructure, though functioning, remains fragile and prone to political attacks. For instance, disputes prevented the nomination of the SAPO’s head, thereby depriving the institution from a stable strategic management. In spite of reform efforts since 2016, the current judicial system suffers from very low levels of public trust due to systemic corruption, low efficiency of the courts, poor management of resources and insufficient transparency. This is considered as a key impediment to investment and economic growth. The recently adopted laws address two key judicial self-governance bodies, namely the High Council of Judges (through integrity vetting) and the High Qualification Commission of Judges that pre-selects judges for Ukrainian courts. However, challenges remain, including in the Constitutional Court. The attestation of prosecutors at both regional and local levels was completed in 2021. Nevertheless, some 2000 cases challenging the attestation are pending in various courts. Important measures were launched in order to improve corporate governance and transparency of state-owned companies and banks. For instance, their supervisory boards have been granted appropriate powers and are required to have a majority of independent members, to be selected on a competitive and transparent basis. However, the adherence to the corporate governance framework worsened in 2021, while its strict implementation has become practically impossible in the context of the war. The Ministry of Economy drafted in the second half of 2021 and sent to the Parliament a draft law on corporate governance of state-owned enterprises in line with the OECD guidelines, but its adoption is still pending. The energy sector also witnessed comprehensive reforms, aimed at introducing the liberalised gas and electricity market model inspired by the EU Third Energy Package. Ukraine transposed the majority of the relevant EU gas and electricity-related sector acquis in 2015-17. This legislation provided, inter alia, for a stronger role of the market in the energy sector, for unbundling generation and supply from its transmission and distribution and for strengthening of the energy regulator. A number of issues hamper the functioning of and competition in the market. In view of the international energy price hikes, mounting debts and payment arrears in both gas and electricity sector are of particular concern. Secure, competitive and sustainable provision of energy, which is of key importance for the resilience of the economy, has improved since Ukraine has joined the EU grid in late February 2022. Given the mixed progress with reform implementation, major challenges remain in relation to further reform of the judicial system, corporate governance, energy and reducing the regulatory burden. Addressing these remaining challenges as part of a comprehensive effort to tackle the multiple challenges resulting from the ongoing war and its destructive impact on Ukraine’s productive capacity and economic structures, once the situation stabilises, will be crucial to rebuild the economy better and attract investors to underpin a sustainable economic recovery.







Status of economic reforms — Ukraine 1.Price liberalisation Prices are largely market driven. Regulated prices 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. In the war context, the government has introduced price caps for essential goods. 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. In the war context, the government introduced export bans on essential goods. 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-targeting framework. NBU interventions on the foreign exchange market aim at reducing exchange rate volatility and influence the country’s stock of official reserves. In the war context, the NBU introduced stringent capital controls that it has released partially, which resulted in the de facto inconvertibility of the hryvnia. 4.Foreign direct investment (FDI) Some restrictions on FDI-related flows exist, such as a ban on the purchase of agricultural land by foreigners, despite progress with the farmland sales reform that started in 2020. Capital controls that affect foreign investment activity persist, despite steps towards their gradual elimination. The net inflow of FDI amounted to around 3-4% of GDP in the years 2016-2019, turned slightly negative in 2020, but recovered to 3.6% in 2021. 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 2021 consumer price inflation increased to 10% from 5% a year before, due to rising global energy prices, strong consumer demand and increases in production costs. The central bank increased its key policy rate to 10% in January 2022. In the war context, the NBU suspended the operation of the inflation-targeting framework and subjected monetary policy to the twin objectives of ensuring full liquidity of the banking sector and purchasing war bonds that have remained unsubscribed by banks. 6.Public finances and taxation Prior to the COVID-19-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 5.4% of GDP in 2020 and 3.4% of GDP in 2021. In the war context, due to public revenue contraction and mounting military spending, public deficit is set to increase substantially. 7.Privatisation and enterprise restructuring Despite ambitious privatisation plans, no major sales of state assets took place in 2021. A number of independent supervisory boards have been established in major enterprises, for which updated ownership policies have been adopted. The legal amendments to align the SOE framework with the OECD Guidelines on Corporate Governance of SOEs have been submitted to the Parliament, but not adopted yet. 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 remained comfortable before the war, despite significant purchases of domestic government bonds to finance the public deficit. The very high (although decreasing) share of non-performing loans, above 30%, and the governance of state-owned banks remain two major challenges. In the war context, banks continue to function normally without any negative impact from a higher liquidity risk. The war-driven economic destruction and recession will result in a significant build-up of non-performing loans, which will seriously challenge banks’ capital buffers. 4.Jordan 4.1Macroeconomic performance

Jordan remains relatively stable in an otherwise turbulent region. The impact of the COVID-19 pandemic has been somewhat cushioned by the authorities’ measures to save lives, protect the vulnerable and safeguard jobs, but the social and economic costs have been high. Successive COVID-19 waves and the wipe-out of tourism have taken a significant human and economic toll, with unemployment rising to record highs and fiscal and external deficits widening further. Tentative signs of economic recovery showed throughout 2021, as real GDP increased by 2.2% compared to -1.6% in 2020. Economic growth was driven by recovering domestic demand and higher government expenditure. The gradual return to work in all economic sectors supported the expansion. For the external sector, tourism income and total exports contributed to growth. In absolute terms, the strongest recovery was observed in the finance, real estate and business services sector as well as in manufacturing. The tourism sector is recovering, but was still operating below pre-pandemic level in 2021. Unemployment spiked to 25% at the in the first quarter of 2021 (19% in 2019) and decreased to 23.2% by Q3 2021. Unemployment remains particularly high for women and youth. The pandemic is delaying fiscal consolidation, and although improvements are starting to be visible in 2021, the fiscal deficit and public debt remain elevated. The fiscal deficit (including foreign grants) stood at 5.1% of GDP by November 2021, an improvement over the 7% of GDP in 2020. The narrowing of the deficit was due to the pickup in domestic revenues, including higher tax revenues, which outpaced the increase in expenses. Total public sector debt reached 110.3% of GDP by the end of November 2021, compared to 94% of GDP in 2019 (105.2% of GDP in 2020). When excluding the debt holding by the Social Security Investment Fund, public debt stood at 88.5% of GDP in November 2021. The National Electricity Company (NEPCO) and Water Authority (WAJ) remain highly indebted. Although the increase in debt is a source of concern, the IMF assessed Jordan’s public debt as being sustainable in December 2021. Most of Jordan’s external public debt was denominated in USD to which the Jordanian currency is pegged. On the external side, the current account deficit widened to 12.1% of GDP in the first three quarters of 2021 (after 7.8% of GDP during the same period in 2020), with the recovery in merchandised imports outpacing the recovery in exports. Higher imports were observed in particular for transport equipment & spare parts, crude oil and petroleum product, the latter two being imported mainly from Saudi Arabia, UAE and Iraq. Higher prices for fuel imports also contributed to the current account deficit, even though partly offset by price increases for fertilizer and phosphate exports. For services, the important tourism receipts recovered, but stayed below their pre-pandemic levels. Foreign direct investment picked up slightly to 2.3% of GDP in 2021, reaching the pre-pandemic level again. The monetary environment has been resilient, supported by the sizeable stimulus enacted by the Central Bank of Jordan (CBJ) early on in the crisis. The support continued over 2021, when in March 2021 the CBJ expanded the size of its subsidised lending scheme for SMEs and extended the deferment on debt repayments by affected borrowers to banks. The CBJ's gross foreign reserves (including gold and SDRs) have remained strong, amounting to USD 18 billion at the end of 2021, covering an estimated 8.2 months of Jordan’s imports of goods and services. Inflation measured by the consumer price index increased to 2.4% y-o-y in December 2021, with an average inflation of slightly above 1 for the whole year 2021. Price increases towards the end of the year were observed in particular for food, meat and poultry, and transportation. As the uncertainty surrounding the evolution of the pandemic declines, the economic recovery is expected to strengthen in 2022 (latest IMF forecast: +2.4%), also on the back of stronger growth in export markets and a continued recovery in tourism. Russia’s war on Ukraine has mainly indirect effects on Jordan. The direct trade exposure is limited as only 1.1% of all goods exports go to Russia and Ukraine and 3.3% of Jordan’s goods imports come from Russia and Ukraine. The government stated that it had wheat stock sufficient to cover the local demand for 14 months and barley reserves to cover more than ten months. By contrast, Jordan being an energy importer, global price pressures on energy commodities will have negative repercussions on the country. Jordan - Macro-Economic Indicators Jordan 2017 2018 2019 2020 2021 latest 2021 Ref Real GDP, % change 2.0 1.9 2.0 -1.6 2.2 end-21 Consumer price inflation, %, end of period 3.2 3.7 0.6 0.1 2.4 end-21 Key monetary policy rate, %, end of period 5.0 5.75 4.0 2.5 2.75 Mar-2022 Unemployment rate, LFS, % 18.3 18.6 19.1 22.7 23.2 end-21 General government balance, % of GDP -2.5 -2.4 -3.3 -7.0 -5.1 Jan-Nov Gross public debt, % of GDP 92.8 92.9 95.2 106.5 110.3 Nov-2021 Current account balance, % of GDP -10.6 -6.9 -2.1 -8.0 -12.1 Jan-Sep Official international reserves, USD billion 15.0 12.9 13.9 15.6 18.0 end-21 International reserves, months of imports 7.8 6.8 9.8 11.0 9.5 end-21 Gross external debt, % of GDP 71.1 72.9 72.1 82.1 85.5 est. 2021 Net foreign direct investment, % of GDP 4.9 2.2 1.5 1.6 0.9 est. 2021 Sources: National authorities; Commission staff calculations 4.2Implementation of macro-financial assistance The EU has maintained its support to Jordan throughout the difficult years of the pandemic. Indeed, following Jordan’s request for further MFA on 11 July 2019, on 6 September 2019 the Commission adopted 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 being implemented in three instalments over 2020-2023. Later, 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 top-up MFA programme of EUR 200 million to Jordan, in addition to the EUR 500 million 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 for 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 and third instalments 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 second tranche (EUR 250 million in loans) was disbursed on 20 July 2021. A waiver was granted for one condition (relating to steps towards the implementation of an electronic invoicing system to fight tax evasion) following consultation of the Member States Committee for Macro-financial Assistance; yet, this condition would be fulfilled if all reforms for the third tranche are implemented. The third tranche (EUR 200 million in loans) remains available until April 2023. 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. 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 1.1 billion, 270% of quota), which was later increased to around EUR 1.3 billion (equivalent to 312 % of Jordan’s 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. By December 2021, the IMF’s total disbursement to Jordan since the start of 2020 were brought to around EUR 1 billion. The EFF programme remains on track, with the third review completed on time in December 2021. In the context of that review, the IMF assessed Jordan’s public debt as sustainable. 4.3Structural reforms During the pandemic, Jordan’s short-term policy priorities 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. Yet, 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. Jordan’s reform agenda is underpinned by Government’s Economic Priorities Program (GEPP) 2021-2023, the comprehensive Five-Year Reform Matrix 2018-2022, which was extended to 2024, and the Government’s Indicative Executive Program (GIEP). The GEPP addresses key challenges in the labour market and private sector, with 53 targets mainly derived from the Matrix and the GIEP. The Matrix prioritises deep structural reforms needed to stimulate inclusive and sustainable growth and job creation, and achieve fiscal stability. Its pillars comprise reforms in the areas of revenue mobilization and debt management, public sector efficiency, private sector development, labour markets. social safety, infrastructure, utilities and tourism. The mid-term review in 2020 revealed that 46% of reforms had been implemented, yet delays were observed in particular for the transport and utilities pillars. In parallel, the GIEP includes the government’s vision for political, social and economic development that targets economic growth, employment creating and poverty reduction. It goes beyond the Matrix in the areas of fighting corruption and the green and digital agenda.

Despite the setbacks brought along by the pandemic and the uneven success in implementing reforms, Jordan still achieved important milestones in 2021. These include (but are not limited to) the following steps taken by the Jordanian government: i) adopting the amendments to the organic budget law, to improve the fiscal framework, ii) issuing secondary legislation to accompany the implementation of the Public Private Partnership legislation, iii) adopting an electricity tariff reform, and iv) adopting the income tax system in development zones. Furthermore, in the area of taxation, Jordan continued to strengthen tax administration (including tax compliance), to enhance the capacity of the ISTD and to shift the important tax services online. On top, Jordan ratified the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (to tackle cross-border tax evasion and avoidance) in 2021. Yet, progress in other crucial reform areas was less visible, for instance the still pending adoption of amendments to the Investment Law to address tax arbitrage and transfer pricing abuses. Furthermore, amendments to the Illicit Enrichment Law have been adopted, but important elements relevant to the MFA conditionality were not included in the final version.





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; now extended to 2018-2024), 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 While Jordan has taken efforts to broaden the tax base, there remain structural weaknesses which limit tax revenue mobilisation, including: a number of differentiated corporate tax segments, 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 5.1Macroeconomic performance The economy saw only a partial recovery in 2021 following the deep recession, with GDP growth reaching 3.1% in 2021 after an 8.7% contraction in 2020. Activity remained negatively affected, across sectors, by the effect of containment measures and the only partial recovery in domestic and global demand, including tourism, which remained far below pre-pandemic levels (-3.9% in 2021, after plummeting over 39% in 2020) amid pandemic waves and political instability. The rebound has been more subdued than expected, partly due to a decline in agricultural output (-4.6% in 2021, mostly due to the poor olive harvest) and lacklustre growth in services. With some exceptions (energy (+21.7%) and mining (+19.6%)), output in most sectors remains behind its pre-pandemic level despite growth in the textile and clothing (+7.7%), electrical and mechanical (+10.9%) and construction (+7.2%). Overall, the country is unlikely to regain its 2019-output level before 2023. Investment is down, with confidence impacted by the complex political situation, sluggish domestic demand and limited export demand from Tunisian products. Declared investment projects in industry and services fell by 42% in 2021 (-26% compared to 2019). GDP at the end-year was still 4.6 percentage points lower than that of the last quarter of 2019. The improving demand benefited the mechanical, electrical and textile industry, mostly back to pre-pandemic output, with substantial increases also in the mining and oil sectors. Agriculture contracted, partially under the base effects of the excellent harvest in 2020, while transport and tourism services (notably hotel and restaurants) only experienced a partial recovery, underlining the country’s vulnerability to the pandemic. In addition to the limited policy buffers, the complex political situation has exacerbated vulnerabilities in the economy. The downturn continued to put severe pressure on employment (up to 18.4% in Q3 2021, but much higher for youth, university graduates and women), as well as on social stability. Monetary policy conditions remained stable, with the key policy rate at 6.25%, amid sustained high inflationary pressures. Inflation increased sizably, in line with global trends, and reached 6.6% year-on-year in December 2021. It should remain high in 2022 due to stronger demand, the ongoing depreciation of the dinar and the effects of the monetary financing of the fiscal deficit. Credit growth has accelerated but almost entirely driven by loans to the State (+41.2%) that are probably crowding out credit to private sector (+5.9%, considerably lower than in previous years). The banking sector remained stable, with improvements in liquidity levels, although the non-performing loans ratio for the ten largest banks deteriorated slightly to 11% at end-H1 (10.7% end-2020) and will likely weaken further with the expiry of some COVID support measures by end-2021. Following the sharp increases in fiscal deficit and public debt in 2020, the deficit remained high, estimated at 8.3% of GDP in 2021 but contracted slightly as revenues increased sizably (+12%), mostly due to the good performance of indirect taxes. The fiscal stance redress was also partly due to more limited increases in public expenditure (+6.3%), despite a significant rise in wages (5.2%) which represent over half of total expenditure outside debt service. The deficit has been mostly financed through domestic borrowing and Central Bank purchases, thus likely contributing to inflation and crowding out credit to the private sector. Public debt kept increasing to an estimated 86% of GDP and sovereign credit ratings have further deteriorated. Debt service costs also increased significantly (over 12% of GDP) and a tight refinancing calendar put further pressure on debt sustainability, emphasizing the need for fiscal consolidation. The country’s sovereign debt rating has further deteriorated, downgraded to Caa level by Moody’s in 2021, its second downgrade in a year, maintaining a negative outlook).

The 2022 budget assumes a growth assumption of 2.6% and an average price of 75 dollars per barrel of oil. The budget deficit in 2022 would be 8.5 MTD, around 6.2% of GDP. The budget also foresees financing needs of nearly 20 MTD to cover budgetary and cash requirements. This will be in the form of external borrowing of about 12.6 MTD (3.9 billion euros, above 10% of GDP) and internal borrowings of 7.3 MTD (2.3 billion euros). Monetizing the financing gap would considerably increase the pace of central bank financing and accelerate the drawdown in foreign reserves. Tunisia’s balance-of-payments position remains negative, although the current account pressure lessened in the first nine months of 2021, mostly due to the increase in income transfers from Tunisians residing abroad (+45%) and the increase in tourism receipts (+6.5%). This allowed the reduction of external financing needs despite the worsening of the trade deficit (+18%, consistent with higher energy prices and weak demand for exports) and the drop in services exports, set to continue in the final quarter. The dinar depreciated slightly against the euro in 2021 (under 1%), while Tunisia’s international reserves dropped from EUR 8 billion at the end of 2020 to EUR 7 billion at end-2021 (around 4.2 months of imports), partially sustained through the IMF SDR allocation of around USD 650 million in 2021. Tunisia’s economic outlook remains highly vulnerable, in a context of still high political uncertainty, limited policy space and sizeable macroeconomic imbalances due to long-term structural issues intensified by the economic impact of COVID-19 and, more recently, the indirect impact of Russia’s invasion of Ukraine. In addition, the country needs to address the social impact of these events and the continuous impact of the pandemic, as well as the structural problems underpinning its low growth rate (low investment, low productivity, rigid business environment). The adopted budget and current economic plans do not yet reflect a structured response to the acute fiscal and public debt distress that the country is facing. Given the large financing needs estimated in the 2022 budget (around EUR 5.6 billion, including almost EUR 4 billion in external financing) the country will need a new IMF programme, accompanied by a reform program and additional bilateral and multilateral financing. Tunisia - Macro-Economic Indicators Tunisia 2017 2018 2019 2020 2021 latest 2021 Ref Real GDP, % change 1.9 2.6 1.3 -8.7 3.1 end-21 Consumer price inflation, %, end of period 6.2 7.5 6.0 4.9 6.6 end-21 Key monetary policy rate, %, end of period 5.0 6.8 7.8 6.3 6.3 end-21 Unemployment rate, LFS, % 15.5 15.5 14.9 17.4 18.4* Q3 General government balance, % of GDP -6.2 -4.8 -3.3 -9.7 -8.3* end-21 Gross public debt, % of GDP 70.4 77.9 67.9 77.8 85.6* end-21 Current account balance, % of GDP -10.3 -11.2 -8.4 -6.5 -6.3* end-21 Official international reserves, USD billion 5.6 5.3 7.5 9.2 8.0 end-21 International reserves, months of imports 2.5 2.7 4.5 5.4 4.4 end-21 Gross external debt, % of GDP 86.2 99.7 97.3 100.9 96.3* end-21 Net foreign direct investment, % of GDP 2.0 2.5 2.1 1.5 1.2* Nov-2021 Sources: National authorities; IMF; WB; Commission staff calculations; *Latest available or forecast 5.2Implementation of macro-financial assistance Since 2014, a total of EUR 1.4 billion have been made available to Tunisia under three MFA operations, MFA-I (2015-2017, EUR 300 million), MFA-II (2017-2019, EUR 500 million) and, as part of the MFA package adopted in the context of COVID-19, the latest MFA-III programme of EUR 600 million, with a duration of one year since entry into force. 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 was 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 Tunisian authorities have clearly accelerated efforts to comply with the agreed conditions in the late stages of the programme to successfully conclude the pending reforms, with all conditions either fulfilled or broadly fulfilled. Notwithstanding some concerns in relation to the political precondition, a letter from the authorities setting out commitments on a political calendar this year enabled the second tranche to be disbursed on 25 May 2022. The assistance was 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. 5.3Structural Reforms Reform implementation had very limited progress in the past years, mostly due to the country’s challenging political situation and the effects of the COVID-19 pandemic, which came at a time when Tunisia was already facing serious macroeconomic imbalances. After the 2019 presidential and legislative elections, a fragmented political landscape, continued instability and frequent government changes, already halted the implementation of the reform agenda. In 2021, following this period of protracted institutional crisis, President Kaïs Saïed controversially invoked Art. 80 of the constitution to seize emergency powers at the end of July, suspended parliament and dismissed the Prime Minister. Following the publication of a political roadmap in December 2021, a new Constitution should be adopted through referendum (expected in July 2022), while legislative elections should take place in December 2022. The absence of a clear economic plan has increased uncertainty around reforms, with downcast prospects on the broad consensus needed to implement them. Additionally, the ongoing pandemic has shifted both the attention and the country’s limited capacities to short-term response. A nationwide Covid-19 vaccination campaign was launched in March 2021, but the health infrastructure remained overloaded throughout the year in most regions, while lock downs and travel restriction were still prevalent, notably during the first half of the 2021. Notwithstanding these challenges, the authorities have hastened the reforms agreed under the MFA over the past months and consistently underlined, e.g. during the visits to Tunisia by Commissioner Vàrhelyi and the European Parliament Committee on Foreign Affairs’ members in early 2022, the country's firm commitment to democratic values and respect for human rights and to implementing the announced political calendar for 2022. The policy conditions contained in the MFA MoU aimed to address key structural weaknesses of the Tunisian economy, as well as to mitigate the economic and social impact stemming from the COVID-19 emergency. These reforms are ever more important as Tunisia is suffering from an increasingly deteriorating socio-economic situation which, after the shock of the COVID crisis is now further aggravated by the impact of Russia’s aggression against Ukraine, notably in terms of energy and food security. Tunisia therefore requires urgent assistance in order to mitigate the economic fall-out, the ultimate goal being to support the Tunisian people at this particularly delicate moment and thus contribute to stabilising the country. The EU’s macro-financial assistance is intended to contribute exactly to this objective.

The government approved some fiscal stimulus measures to try to mitigate the negative impact of the crisis in 2020, with some additional measures in the 2021 budget to support the most affected enterprises and sectors, especially the tourism, as well as the most vulnerable. The Central Bank continued its accommodative monetary policy and liquidity management, also extending the deferral of loan repayments for the tourism sector. The Central Bank also continued with the monetary financing approved at the end of 2020 (a TND 2.8 billion direct monetary financing plan from the CBT to the government budget). The government did not introduce major reforms in either the complementary budget law for 2021 or the 2022 budget law. Both laws were adopted by Presidential decree; in absence of a Parliament, with little to no formal consultation with social partners. The 2021 Budget had 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 2022 budget law approved more targeted fiscal audits and a new “tax amnesty” provision, as a way to reduce the very substantial backlog of unpaid tax debt. Additionally, in early 2022, a number of timid reform measures were taken up, including the resumption of price adjustments for fuel and energy (not applied since April 2021) and the adoption of a timeline and mechanism for further subsidy adjustments. In addition, the budget law includes a number of measures to encourage early retirement and extended leave for civil servants, in view of a medium-term reduction of the payroll, although previous versions of similar measures had little impact. The economic, political and sanitary crises have aggravated Tunisia’s reform paralysis, in a context of deep structural challenges and rising macroeconomic imbalances. The new government has been working on an economic reform plan that would underpin the IMF programme. A strong and credible reform plan is needed to foster growth and restore a sustainable fiscal and external financial situation, without which the IMF already assessed 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. However, while a broad concept note on reforms has been prepared, including some of the expected reform axes (public payroll, subsidies, SOEs, tax policy and administration efficiency), negotiations with the IMF have not officially started and no information is available on its possible implementation. Also, no formal discussions on the reform plan with social partners have taken place publicly. In this uncertain context, the perceived excess of bureaucracy and lack of capacity in the public sector continue 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’s vulnerabilities will likely linger over the coming years, due to the subdued growth, 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 near future. 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 between 2018-2020. Additional reforms are ongoing, 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. The African Continental Free Trade Area officially entered into force on January 1, 2021, but a lot of technical work is still required for its implementation. The revised rules of the Pan-Euro-Med convention on rules of origin started to be applied in September 2021. 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 October 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 2022 Budget introduced some minor fiscal measures, including more targeted fiscal audits (verification ponctuelle) and a new “tax amnesty” provision, as a way to reduce the very substantial backlog of unpaid tax debt. However, 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 further 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. Additional work ongoing on some corporate governance reforms, with few actual achievements. 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, exacerbated by the crisis. 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

6.1Macroeconomic performance Albania was hit less hard by the crisis in 2020 than feared, by 3.5%, about half of what the government had expected at the beginning of the pandemic. The drop was less strong because of a relative increase in regional tourism and supportive fiscal and monetary policies, namely financial support to business and households, a record low policy rate and temporary measures to support the financial sector’s liquidity and stability. In 2021, the economic rebound has been stronger than expected, the economy grew by 8.5% and recovered above pre-crisis levels in most segments. A strong rebound of exports including tourism, high public investment including post-earthquake reconstruction and the continued accommodative policy, all supported the recovery. This helped the labour market to recover almost all of the ground lost during the COVID-19 crisis and the unemployment rate decreased to 11.6% in 2021. Strong increases of domestic and international food prices in addition to increasing energy prices in the second half of 2021 pushed the annual inflation rate to 2% in 2021, and above 4% in the early months of 2022. In response to the rising inflation, the Bank of Albania (BoA) raised its record-low policy rate of 0.5% to 1% in March 2022 for the first time since it was lowered in March 2020. It continued to provide liquidity to the economy throughout 2021, but terminated most of its temporary measures, aimed at supporting lending activities. The financial market remained stable, lending activity picked up and portfolio quality improved as the ratio of non-performing loans to total loans, dropped to 6.2% at the end of 2021. The fiscal deficit, at 4.5% of GDP, was 2.3 percentage points lower than planned because of strong revenue growth, underspending of the capital budget and a substantially higher nominal GDP than projected. Notwithstanding a Eurobond issuance to pre-finance the 2022 balance, and additional public guarantees for the state-owned electricity distributor, this led to a decrease in the debt-to-GDP ratio to 73.2%, much below the earlier estimate of 80.1%. In 2022, the government continues to provide substantial support to the state-owned electricity distributor to shield households and SMEs from the impact of the spike in international electricity prices. The external position of the economy has strongly improved in 2021. The current account shortfall decreased from 8.7% of GDP in 2020 to 7.7% of GDP in 2021, supported by the recovery of the services balance. FDI inflows in terms of GDP remained below pre-crisis level, but still financed about 80% of the current account deficit, while financial inflows from the MFA, budget support and other soft loans in addition to a new Eurobond of EUR 650 million provided additional external financing. External debt, mostly consisting of long-term government debt decreased slightly from 64.3% of GDP in 2020 to 63.1% in 2021, mainly due to the expanded GDP denominator. Foreign exchange reserves continued to increase to USD 5.1 billion in 2021, equivalent to almost 9 months of imports, and to provide an adequate safeguard against adverse shocks. The stability of the external position of the economy was also reflected in the foreign exchange market, where the exchange rate of ALL against major currencies returned to its pre-2020 trend of continuous gradual appreciation in 2021. Russia’s invasion of Ukraine is affecting import prices and supply of certain staple foods, which depend heavily on Russian and Ukrainian sources, while in other respects Albania’s economic relations with that region are very limited. However, the uncertainty and impact on the external economic environment are likely to dampen investment and consumption, which reduces growth expectations from about 4% to about 3% in 2022 and 2023. The government plans a provision of around EUR 230 million (called “Social Resistance Package” of ALL 26 billion, 1.8% of GDP) to keep administered electricity prices stable for households and SMEs, as prices for imported electricity are rising, and to provide additional support to vulnerable households and farmers for facing the increasing fuel and food prices. Growth expectations for 2022 and 2023 are dampened by the mainly indirect impact of Russia’s war against Ukraine, because Albania has little direct exposure to both countries. Uncertainty, the impact on EU growth and its effects on Albania’s trade with the EU and rising food and energy prices are the key factors of the European Commission’s downward revision of its forecasts for Albania’s economy to between 2.7% and 3.2% growth in 2022 and 2023, respectively. In addition, the increasing food and energy prices have prompted the government to provide additional support to households and SMEs, which is set to postpone to 2023 a more significant improvement in government finances. Albania - Macro-Economic Indicators Albania 2017 2018 2019 2020 2021 2021 Ref Real GDP, % change 3.8 4.0 2.1 -3.5 8.5 2021 Consumer price inflation, %, end of period 1.8 1.8 1.2 1.1 3.7 December Key monetary policy rate, %, end of period 1.3 1.0 1.0 0.5 0.5 December Unemployment rate, LFS, % 13.7 12.3 11.5 11.7 11.6 2021 General government balance, % of GDP -2.0 -1.6 -1.9 -6.7 -4.5 2021 Gross public debt, % of GDP 70.2 67.7 65.8 74.5 73.2 2021 Current account balance, % of GDP -7.5 -6.8 -7.9 -8.7 -7.7 2021 Official international reserves, USD billion 3.3 3.7 3.5 4.4 5.1 December International reserves, months of imports 6.7 7.0 6.5 9.6 8.8 December Gross external debt, % of GDP 68.8 65.1 60.0 64.3 63.1 December Net foreign direct investment, % of GDP 8.6 8.0 7.5 6.7 6.6 2021 Sources: WIIW, National authorities 6.2Implementation of macro-financial assistance Following the powerful earthquakes in November 2019 and the challenges brought along by the COVID-19 pandemic, Albania officially requested MFA on 15 April 2020. In response, as part of the COVID-19 MFA package adopted in May 2020, the European Parliament and the Council agreed on an MFA programme for Albania of EUR 180 million. The MoU and the LFA were signed on 3 November 2020 and entered into force on 3 November 2020 and on 26 January 2021, respectively. The programme’s policy conditions aimed to address some of the weaknesses in public finance management, the financial sector, good governance and the fight against corruption and social protection policies. The MFA was 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 on 31 March 2021. The second and final instalment was disbursed on 5 November 2021, after Albania had fulfilled the attached policy conditions. The assistance was 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. 6.3Structural 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. The latter had been integrated into the draft negotiating framework that 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 2021 Albania Report. They partially implemented the recommendations of the 12 July 2021 Joint Conclusions of the Economic and Financial Dialogue between the EU and the Western Balkans and Turkey, which reflected some of the MFA policy conditions: (i) the development of the MTRS progressed and some of its taxation measures are to be implemented in 2022