Report from the Commission to the budgetary authority on guarantees covered by the general budget - Situation at 30 June 2007 {SEC(2008) 18}
Date: 2008-02-19
Institutions: European Commission
Subjects: Community loan, EU Member State, budgetary reserve (EU), general budget (EU), investment protection, report, third country

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 19.2.2008 
COM(2008) 2 final 

REPORT FROM THE COMMISSION 

to the budgetary authority on guarantees covered by the general budget 
Situation at 30 June 2007 

{SEC(2008) 18} 

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TABLE OF CONTENTS 

Introduction and types of covered operations .............................................................. 4 

New legal bases............................................................................................................ 4 

Events since the last report at 31 December 2006 ....................................................... 5 

Data on risks covered by the Budget ........................................................................... 5 

Definition of risk .......................................................................................................... 5 

Risk linked to Member States ...................................................................................... 6 

Risk linked to third countries ....................................................................................... 7 

Global risk covered by the Budget............................................................................... 8 

Evolution of risk........................................................................................................... 8 

Defaults, activation of Budget guarantees and arrears................................................. 9 

Payments from cash resources ..................................................................................... 9 

Payments from the Budget ........................................................................................... 9 

Activation of the Guarantee Fund for external actions .............................................. 10 

Guarantee Fund for external actions .......................................................................... 10 

Recoveries .................................................................................................................. 10 

Assets ......................................................................................................................... 10 

Target amount ............................................................................................................ 10 

Evaluation of risks: Economic and financial situation of the third countries benefiting 
from the most important EU loan operations............................................................. 10 

Introduction ................................................................................................................ 10 

Turkey ........................................................................................................................ 11 

Brazil .......................................................................................................................... 11 

Egypt .......................................................................................................................... 11 

South Africa ............................................................................................................... 11 

Morocco ..................................................................................................................... 12 

Tunisia........................................................................................................................ 12 

Lebanon...................................................................................................................... 12 

Ukraine....................................................................................................................... 13 

1. 

2. 

3. 

4. 

4.1. 

4.2. 

4.3. 

4.4. 

4.5. 

5. 

5.1. 

5.2. 

5.3. 

6. 

6.1. 

6.2. 

6.3. 

7. 

7.1. 

7.2. 

7.3. 

7.4. 

7.5. 

7.6. 

7.7. 

7.8. 

7.9. 

7.10.1  Serbia ......................................................................................................................... 13 

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7.10.2  Montenegro ................................................................................................................ 13 

7.11. 

Jordan ......................................................................................................................... 13 

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1. 

INTRODUCTION AND TYPES OF COVERED OPERATIONS 

This  report  is  submitted  pursuant  to  Article  130  of  the  Financial  Regulation  which  requires 
the  Commission  to  report  to  the  European  Parliament  and  to  the  Council  twice  a  year  on 
budgetary  guarantees  and  the  corresponding  risks1.  It  is  completed  by  a  Commission  Staff 
Working Paper with a set of detailed tables and explanatory notes (the "Annex")2. 

The risks covered by the budget of the European Union ("the Budget") derive from a variety 
of lending and guarantee operations which can be divided into two categories: loans granted 
by the European Communities with macroeconomic objectives, i.e. macro-financial assistance 
("MFA")  loans  to  third  countries,  and  loans  with  microeconomic  objectives  (Euratom  loans 
and most importantly European Investment Bank ("EIB") external lending3). These operations 
have been covered since 1994 by the Guarantee Fund for external actions ("the Fund")4 which 
was  set  up,  among  other  things,  to  limit  the  budgetary  impact  stemming  from  calls  on 
guarantees  given  by  the  Budget  for  lending  operations  in  third  countries.  If  there  are 
insufficient resources in the Fund, recourse will be made to the Budget. 

The Council Regulation establishing the Fund (the "Fund Regulation"5), which was adopted 
in  1994,  was  first  amended  in  1999.  Following  a  second  amendment  of  the  Council 
Regulation which was adopted in 2004 by the Council, the Fund's coverage is withdrawn if 
third countries become Member States. The Budget directly covers loans or guaranteed loans 
to Member States. 

2. 

NEW LEGAL BASES 

In the framework of the 2006 Council Decision6 to grant a renewed Community guarantee to 
the  EIB  against  losses  under  loans  and  loan  guarantees  for  projects  outside  the  Community 
(EIB external mandate 2007-2013, hereinafter the "new general mandate"), the Commission 
and  the  EIB  signed  a  Guarantee  Agreement  and  a  Recovery  Agreement  in  August 20077, 
laying down the detailed provisions and procedures relating to the Community Guarantee and 
the recovery of claims following a call on the Guarantee. The Guarantee Agreement covers 
EIB financing operations signed after 17 April 2007, the date of approval of the new general 
mandate by the EIB Board of Governors. 

There were no new decisions on MFA loans or Euratom loans in the first half of 2007. 

1 

2 
3 

4 

5 

6 
7 

COM(2007)454  and  SEC(2007)1050  make  up  the  previous  report  on  the  guarantees  covered  by  the 
Budget at 31 December 2006. 
SEC(2007)[…]. 
The figures concerning the EIB mandates are displayed in Table A1 and references to legal bases are 
listed in Table A4 of the Annex. 
For the most recent report on the Fund, see COM(2006)695 "Comprehensive Report on the functioning 
of the Guarantee Fund" and the annexed staff working document (SEC(2006)1460). 
Council Regulation (EC, Euratom) No 2728/94 of 31 October 1994 establishing a Guarantee Fund for 
external  actions,  OJ  L  293,  12.11.1994,  p.1,  as  amended  by  Council  Regulation  (EC,  Euratom) 
No 1149/1999  of  25 May 1999,  OJ  L  139,  2.6.1999,  p.  1,  Council  Regulation  (EC,  Euratom) 
No 2273/2004  of  22 December 2004,  OJ  L  396,  31.12.2004,  p.  28,  and  Council  Regulation  (EC, 
Euratom) No 89/2007 of 30 January 2007, OJ L 22, 31.1.2007, p. 1.  
Council Decision (EC) No 1016/2006 of 19 December 2006, OJ L 414, 30.12.2006, p. 95. 
C/2007/3592. 

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3. 

EVENTS SINCE THE LAST REPORT AT 31 DECEMBER 2006 

There were no disbursements under MFA loans during the first half of 2007. 

Regarding  Euratom  loans,  disbursement  of  a  first  tranche  of  EUR 39 million  took  place  in 
March 2007 for the financing of a safety upgrade of Unit 2 of the Khmelnitsky and Unit 4 of 
the Rovno Ukrainian nuclear power plants (K2R4) under the loan agreement of 2004 (EUR 
equivalent of USD 83 million Loan Facility Agreement). 

During the first half of 2007, the EIB pursued its activity under the general mandate decided 
in  the  framework  of  the  2000-2006  Financial  Perspective,  (hereinafter  "the  current  general 
mandate").  Moreover,  on  28 June 2007, 
loan  contract  of 
EUR 30 million with the Republic of Moldova under the Council Decision No 2005/48 of 22 
December  2004  granting  a  Community  guarantee  to  the  EIB  against  losses  under  loans  for 
certain types of projects in Russia, Ukraine, Republic of Moldova and Belarus (hereinafter the 
"Russia, Ukraine, Republic of Moldova and Belarus mandate"). 

the  EIB  signed  a  first 

As  mentioned  under  Section  2  above,  the  new  Guarantee  Agreement  with  the  EIB  covers 
financing operations signed after 17 April 2007. However, no operations had been signed by 
the EIB under the new general mandate as of 30 June 2007. 

4. 

DATA ON RISKS COVERED BY THE BUDGET 

4.1. 

Definition of risk 

The risks borne by the Budget derive from the outstanding amount of capital and interest in 
respect of guaranteed operations. 

Defaulting  operations  will  be  covered  by  the  Fund  when  they  are  linked  to  third  countries 
(70%  of  the  total  outstanding  amount  guaranteed  as  of  30 June 2007)  and  directly  by  the 
Budget where Member States are involved (loans to or for the benefit of projects in Member 
States account for the remaining 30% of the total outstanding amount). The large proportion 
of  guaranteed  loans  linked  to  Member  States is the result of the recent enlargement rounds. 
According  to  Article 1,  third  paragraph  of  the  Fund  Regulation,  once  a  country  becomes  a 
Member State, the risk on the loans is transferred from the Fund to the Budget. 

For  the  purpose  of  this  report,  two  methods  are  used  for  evaluating  the  risks  borne  by  the 
Budget (either directly or indirectly via the Fund): 

–  The  method  of  calculating  the  total  amount  of  capital  outstanding  for  the  operations 
concerned on a given date including accrued interest. This methodology gives the level of 
risk supported by the Budget on a given date. 

–  The budgetary approach defined as "the annual risk borne by the Budget" is based on the 
calculation  of  the  maximum  amount  which  the  Community  would  have  to  pay  out  in  a 
financial year assuming that all guaranteed loans are in default8. 

8 

For the purpose of this calculation, it is assumed that defaulting loans are not accelerated, i.e. only due 
payments are taken into account (see also Section 1 of the Annex). 

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Table 1: Total outstanding amounts covered as of 30 June 2007 in EUR million 

Outstanding 
Capital 

Accrued Interest 

Total 

% 

Member States* 

MFA 

Euratom 

EIB 

309 

436 

4 224 

Sub-total Member States* 

4 969 

Third Countries 

MFA 

Euratom 

EIB 

568 

39 

10 901 

Sub-total third countries 

11 508 

Total 

16 477 

2 

5 

38 

46 

7 

0 

116 

124 

170 

311 

441 

4 262 

5 014 

575 

39 

11 018 

11 632 

2% 

3% 

26% 

30% 

3% 

0% 

66% 

70% 

16 647 

100% 

*  This risk is directly covered by the Budget and includes Bulgaria and Romania as they have joined the EU on 

01.01.2007. 

Tables  A1,  A2,  A3  and  A4  of  the  Annex  provide  more  detailed  information  on  these 
outstanding amounts, in particular in terms of ceiling, disbursed amounts or guarantee rates. 

4.2. 

Risk linked to Member States 

Current risks on Member States result from loans granted prior to accession. 

In  the  second  half  of  2007,  the  Budget  will  bear  a  risk  linked  to  Member  States  of 
EUR 398 million  including  Bulgaria  and  Romania  as  they  have  joined  the  Union  on 
1 January 2007.  Table 2  shows  that  these  two  states  are  ranked  first  and  second  in  terms  of 
their outstanding amount. 

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Table  2:  Ranking  of  the  Member  States  according  to  the  exposure  with  regard  to  the 
maximum risk borne by the budget in the second half of 2007 (EUR million) 

Ranking 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

Country 

Romania 

Bulgaria 

Poland 

Czech Republic 

Slovakia 

Hungary 

Slovenia 

Cyprus 

Latvia 

Lithuania 

Estonia 

Malta 

Total 

2nd Half of 2007 

119.7 

90.4 

48.7 

45.7 

35.1 

19.7 

19.6 

7.8 

4.7 

3.6 

2.4 

0.5 

% 

30.1% 

22.7% 

12.2% 

11.5% 

8.8% 

5.0% 

4.9% 

2.0% 

1.2% 

0.9% 

0.6% 

0.1% 

398.0 

100.0% 

The risk on Member States concerns all Members States involved in the last two enlargements 
with maturities ending 2031. 

4.3. 

Risk linked to third countries 

In the second half of 2007, the Fund will bear a maximum risk related to third countries of 
EUR 714 million. The top ten countries according to their total outstanding are listed below. 
They account for 82% of the risk borne by the Fund in the second half of 2007. The economic 
situation of these countries is analyzed and commented in Section 7 below. 

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Table 3: Ranking of the 10 most important third countries according to the exposure 
with regard to the maximum risk borne by the Fund in the second half of 2007 
(EUR million) 

Ranking 

Country 

2nd Half of 2007 

% of the total 
maximum risk 

1 

2 

3 

4 

5 

6 

7 

8 

9 

Turkey 

Brazil 

Egypt 

South Africa 

Morocco 

Tunisia 

Lebanon 

Ukraine 

Serbia and Montenegro9

10 

Jordan 

100.9 

82.7 

75.2 

69.0 

61.0 

58.5 

54.2 

36.6 

24.5 

21.8 

14.1% 

11.6% 

10.5% 

9.7% 

8.5% 

8.2% 

7.6% 

5.1% 

3.4% 

3.1% 

Total of the 10 

584.3 

81.8% 

The Fund covers the guaranteed loans of 40 countries and 2 regional entities with maturities 
ending 2037. Details by country are provided in Table A2 of the Annex. 

4.4. 

Global risk covered by the Budget 

In  total,  the  Budget  will  cover  in  the  second  half  of  2007  an  amount  of  EUR 1 112 million 
representing the amounts due during this period, where 36% are due by Member States (see 
Table A2 in the Annex). 

4.5. 

Evolution of risk 

The  risk  towards  Member  States  should  decrease  in  future  as  the  loans  to  Member  States 
under Euratom, MFA or EIB guaranteed lending are reimbursed (see Graph A1 in Section 1.3 
of the Annex). 

9 

Now the Republic of Serbia and the Republic of Montenegro. 

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MFA loans to third countries are subject to individual decisions by the Council. A proposal by 
the Commission for granting an MFA loan of EUR 50 million and a grant of EUR 30 million 
to  Lebanon  was  adopted  on  20 August 2007  and  has  been  forwarded  to  the  European 
Parliament for consultation and to the Council for decision. 

The Euratom lending to Member States or in certain eligible non-member countries (Russian 
Federation,  Armenia,  Ukraine)  has  a  ceiling  of  EUR 4 billion  of  which  around  85%  have 
already been used. The remaining margin is about EUR 600 million. Under the existing loan 
agreement  of  2004  to  K2R4  in  Ukraine  (EUR  equivalent  of  USD 83 million  Loan  Facility 
Agreement), two further tranches may be disbursed in 2008 (see Section 3 above). 

Under  the  existing  EIB  mandates  preceding  the  new  general  mandate,  an  amount  of 
EUR 8 067 million remains to be disbursed under signed loans. This amount will mostly be 
linked to the current general mandate10. At the end of July, the EIB signed a loan agreement 
of  EUR 200  million  with  Ukraine  under  the  Russia,  Ukraine,  Republic  of  Moldova  and 
Belarus mandate. This mandate and the current general mandate expired on 31 July 200711. 

The  most  important  item  that  will  impact  the  risk  for  the  Budget  in  future  is  the  recent 
Community  guarantee  granted  to  the  EIB  under  the  new  general  mandate.  The  Community 
guarantee  is  restricted  to  65%  of  the  aggregate  amount  of  credit  disbursed  and  guarantees 
provided under EIB Financing Operations, less amounts reimbursed and plus all related sums, 
with a maximum ceiling of EUR 27 800 million12. 

In  Section  1.3  of  the  Annex,  Graph A2  presents  simulations  of  some  scenarios  of 
disbursements  under  the  mandates  preceding  the  new  general  mandate,  as  well  as  the  new 
general  mandate,  as  those  disbursements  have  a  strong  impact  on  the  provisioning  of  the 
Fund. 

5. 

DEFAULTS, ACTIVATION OF BUDGET GUARANTEES AND ARREARS 

5.1. 

Payments from cash resources 

The Commission draws on its cash resources in order to avoid delays and resulting costs in 
servicing its borrowing operations when a debtor is late in paying the Commission13. 

5.2. 

Payments from the Budget 

No  appropriation  was  requested  under  Budget  Article  01 04 01,  "European  Community 
guarantees for lending operations", as no default was recorded in the first half of 2007. 

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12 

13 

See Section 1.3 of the Annex. 
The next report (situation at 31 December 2007) will focus on the state of play with detailed figures at 
the date of expiration. 
Broken down into a basic ceiling of a fixed maximum amount of EUR 25 800 million and an optional 
mandate of EUR 2 000 million. 
See  Article  12  of  Council  Regulation  (EC, Euratom)  No.  1150/2000  of  22  May  2000,  as  amended, 
implementing Decision 94/728/EC, Euratom, on the system of the Communities' own resources. 

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5.3. 

Activation of the Guarantee Fund for external actions 

In  the  event  of  late  payment  by  the  beneficiary  of  a  loan  (third  countries)  granted  or 
guaranteed by the Community, the Fund is called on to cover the default within three months 
of the date on which payment is due.14 

During the first half of 2007, the Fund was not called. 

The total arrears at 30 June 2007, i.e. penalty interests with the Republic of Argentina, amount 
to  USD 1 718 493.12;  thereof  USD 1 448 433.44  (EUR  equivalent  1 072 516.43)  are  still  to 
be  recovered  by  the  Fund.  As  the  Fund  was  not  called  for  the  remaining  difference,  this 
amount is due to the EIB. The Commission and the EIB have on several occasions reminded 
the  Argentinean  authorities  of  the  need  to  fully  clear  these  arrears  before  the  resumption  of 
new  EIB  lending  operations  in  the  country.  Discussions  on  this  issue  will  continue  in  the 
framework of the next meeting of the EU-Argentina macroeconomic dialogue. 

6. 

GUARANTEE FUND FOR EXTERNAL ACTIONS

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6.1. 

Recoveries 

No recovery occurred in the first half of 2007. 

6.2. 

Assets 

At 30 June 2007, the net assets of the Fund amounted to EUR 1 119 961 441.29. 

6.3. 

Target amount 

The Fund has to reach an appropriate level (target amount) set at 9% of the total outstanding 
capital  liabilities  arising  from  each  operation,  plus  accrued  interest.  The  ratio  between  the 
liabilities 
capital 
Fund's 
(EUR 11 632 230 697.97) within the meaning of the Fund Regulation was 9.6%. 

(EUR 1 119 961 441.29) 

outstanding 

resources 

and 

At year-end 2006, the Fund resources were already higher than the target amount. According 
to  the  new  provisioning  rules  adopted  by  the  Council  on  30 January 200716,  a  surplus  of 
EUR 125.75 million was inserted in the Preliminary Draft Budget of 2008. 

7. 

EVALUATION  OF  RISKS:  ECONOMIC  AND  FINANCIAL  SITUATION  OF  THE  THIRD 
COUNTRIES BENEFITING FROM THE MOST IMPORTANT EU LOAN OPERATIONS 

7.1. 

Introduction 

Previous sections of the report provide information on quantitative aspects of the risk borne 
by the Budget. However, the quality of the risks which depend on the type of operation and 
the standing of the borrowers (see Section 4.3 above) should also be assessed. Tables on the 

14 
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16 

For more details, see Section 1.4.3 of the Annex. 
Annual  Report  from  the  Commission  on  the  Guarantee  Fund  and  its  Management  in  2006: 
COM(2007)362 and SEC(2007)869. 
Council Regulation (EC, Euratom) No 89/2007 of 30 January 2007, OJ L 22, 31.1.2007, p. 1. 

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country risk evaluation are presented separately in the Commission  Staff  Working  Paper.  A 
summary  of  this  analysis  is  provided  below  for  the  ten  countries  having  the  highest  annual 
risk to the Budget in the second half of 2007. Section 2 of the Annex provides an analysis of 
five further countries. 

7.2. 

Turkey 

In Turkey, annual GDP growth amounted to 5.3% in the first half of 2007, down from 6.1% 
in 2006. The current account deficit narrowed slightly to 7.8% of GDP from 7.9% of GDP in 
2006.  Gross  FDI  inflows  reached  5%  of  GDP  in  2007,  and  about  two  thirds  targeted  the 
financial  sector.  In  the  previous  year,  the  external  debt  of  the  country  increased  by  about 
5 percentage points to roughly 45% of GDP by mid-2007. At the same time, public debt fell 
to 61% of GDP from 68% of GDP in mid-2006. 

7.3. 

Brazil 

Brazil's economy continues to pick up. After accelerating to 3.7% in 2006, annual economic 
growth  is  expected  to  reach  about  4¾%  in  2007.  The  main  driver  of  growth  is  domestic 
demand, which continues to benefit from the substantial monetary easing. Private investment 
is notably growing rapidly. While remaining below the central bank's target of 4.5%, inflation 
pressures  have  risen  somewhat  recently  as  a  result  of  a  spike  in  food  prices  and  some 
weakening  of  the  currency  in  connection  to  the  recent  turbulence  in  the  financial  markets. 
While  strong  domestic  demand  has  led  to  surging  import  growth  and  previous  currency 
appreciation has dampened export growth, the current account has remained in surplus thanks 
to improving terms-of-trade (due to rising commodity prices) and solid volume expansion in 
commodity exports. The current account remains in surplus. Brazil's external vulnerability has 
eased with its external debt ratios declining significantly. The external debt-over-GDP ratio, 
in particular, has  decreased from 40.8% in 2002  to currently  around 16%.  Efforts  to  reduce 
public  external  indebtedness  are  paying  off:  credit-rating  agencies  have  upgraded  Brazil's 
sovereign  credit  and  interest  spreads  are  at  historically  low  levels.  Despite  recent  progress 
public debt remains high at around 45% of GDP and current public expenditure is rising fast. 

7.4. 

Egypt 

The economic growth of Egypt accelerated from 4.5% in fiscal year 2005 to 7.1% in fiscal 
year  2007  underpinned  by  foreign  direct  investments  and  exports  of  goods  and  services 
(especially tourism). Inflation surged again to double digits in fiscal year 2007, after having 
been reduced to a single digit in the fiscal year 2006. A positive sign was the slowdown of 
unemployment in the recent year. But unemployment remains relatively high as a percentage 
of  the  labour  force.  Despite  the  strong  economic  growth  and  the  sale  of  (semi-)state  owned 
enterprises  the  general  government  deficit  hardly  narrowed  (9.2%  in  fiscal  year  2007 
compared with 7.7% for fiscal year 2006). Consequently, the gross government debt remained 
above  100%  of  GDP.  Reforms  in  the  financial  sector  are  progressing.  Sound  fiscal  policy 
combined with adequate monetary policy will have positive effects on job creation. 

7.5. 

South Africa 

Real  GDP  of  South  Africa  grew  by  4.75  %  and  4.5  %  in  the  first  two  quarters  of  2007, 
indicating  that  conditions  for  business  remained  favourable,  in  particular  for  construction, 
agriculture,  financial  services  and  transport.  Growing  disposable  income  and  wealth  effects 
from  rising  asset  prices  also  boosted  private  consumption.  In  2006  the  Central  Bank  has 

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increased the refinancing rate (REPO) from 7.0% to 9.0% to keep inflation within a 3% to 6% 
range. The current account deficit expanded to 7 % and 6.5% in the first two quarters of 2007, 
largely driven by strong domestic demand leading to stronger volume growth in imports than 
exports.  The  deficit  was  more  than  covered  by  large  portfolio  inflows,  mainly  equity. 
International  reserves  have  increased  to  above  USD  28  billion  in  mid  2007  accounting  for 
3.4 months of imports of goods and services. 

The  fiscal  balance  of  the  national  government  has  turned  into  a  surplus  of  0.6%  bringing 
government  debt  down  to  about  31%  of  GDP.  On  the  external  side,  the  economy  could  be 
adversely  affected  by  weaker  appetite  for  emerging  market  assets,  a  global  slowdown,  or  a 
sharp deterioration in the terms of trade. However, the country's strong fundamentals should 
limit the adverse impact of these shocks on the economy. Internal pressures might arise from 
high unemployment, high inequality, high HIV/AIDS prevalence, and high crime rates. 

7.6.  Morocco 

Morocco's  ambitious  economic  reform  program  is  beginning  to  bear  fruit.  The  economic 
fundamentals have strengthened, and macroeconomic conditions remain solid. End-2006 real 
GDP growth is 8.1%, mainly resulting from a bumper crop but due to bad weather conditions 
in  2007  the  GDP  growth  rate  will  slow  down  to  2.5%.  A  number  of  important  budget  and 
fiscal  reforms  have  shown  encouraging  results.  The  forecast  fiscal  deficit  (excluding 
privatisation receipts) for 2007 stands at 2.5% of GDP (up from 2.1% in 2006). Continuous 
expenditure pressures related to high oil and food subsidies (2.5% of GDP) are key reasons 
for a raising public deficit in 2007. The public debt-to-GDP ratio is expected to reach 58.0% 
of  GDP  end-2007.  Gross  official  reserves  are  expected  to  keep  increasing  to  reach  over 
USD 23 billion in 2007 (over 8 months of imports), up from close to USD 20 billion in 2006. 
Morocco had a series of nine arrangements with IMF between 1980 and 1993, but has not had 
an IMF-supported program since then and completed repaying its borrowing from the IMF in 
1997. 

7.7. 

Tunisia 

The economic growth of Tunisia accelerated from 4.0% in 2005 to 6.0% in 2007, originating 
from the agricultural, the non-textile manufacturing and the service sector. Despite the higher 
economic  growth,  unemployment  remained  high  at  around  14%.  Remarkably,  a  significant 
part of the unemployed people has a university degree. The central public deficit, excluding 
privatisations,  stabilized  around  3%.  The  prudent  fiscal  policy  along  with  a  tightening 
monetary  policy  has  been  beneficial  for  the  Tunisian  economy  because  inflation  remained 
moderate in 2007, at 3.0%. The higher oil prices did not lead to higher subsidies thanks to the 
phasing out of subsidies. Due to the higher economic growth the central government debt has 
regressed and is expected to continue this trend in the near future. Debt is currently however 
still above 50% of GDP, where the majority concerns foreign debt. Tunisia seems nonetheless 
quite  resilient  to  external  shocks  or  confidence  crises  due  to  the  long-term  structure  of  the 
external  debt.  The  expectations  are  that  the  prosperous  short  term  economic  outlook  will 
make the debt stock regress even to far below 50% of GDP soon. New privatization receipts 
are envisaged to be mainly used for debt amortization. 

7.8. 

Lebanon 

Lebanon  remains  one  of  the  most  indebted  countries  in  the  world  while  being  confronted 
with immediate reconstruction needs following the 2006 July war. The military conflict put an 

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additional pressure on the already vulnerable public finances and current account. As a result, 
the economy is estimated to have contracted in 2006 by 5% in real terms, the public deficit 
almost doubled compared to 2005 reaching 11% of GDP, and the government debt remained 
basically unchanged at 178% of GDP. The government adopted in January 2007 an ambitious 
and  comprehensive  medium-term  programme  of  socio-economic  reforms.  The  authorities 
presented  the  programme  at  the  International  Donors'  Conference  in  Support  for  Lebanon 
(Paris  III)  in  January  2007.  The  recently  agreed  IMF  financing  under  the  Emergency  Post-
Conflict Assistance (EPCA) reinforces the credibility of the programme, provides a means for 
close  monitoring  of  its  implementation  particularly  budget  support.  Yet,  2007  is  a  very 
difficult year as political instability and recurrent outbreaks of violence continue ahead of the 
presidential election in the period between September-November. 

7.9. 

Ukraine 

In Ukraine, strong domestic demand drives robust economic growth while net exports have 
been  negative  for  two  years  now.  Real  GDP  growth  reached  8.4%  in  the  first  half  of  2007 
(7.1% in 2006 as a whole), supported by a strong credit growth and increases in real incomes. 
The current account turned negative at about 1.5% of GDP against a surplus of 3% the year 
before, driven by strong import demand and higher energy import prices. In 2007 the current 
account  deficit  is  projected  to  increase  to  about  3.5%  of  GDP  driven  by  imports'  growth, 
surpassing exports which nevertheless have benefited from high world steel prices (Ukraine's 
main  export  sector  accounting  for  40%  of  total  exports).  Ukraine's  public  external  debt 
declined  to  about  12%  of  GDP  (15%  in  2005),  while  the  private  sector's  better  access  to 
foreign  capital  markets  edged  the  total  external  debt  to  about  50%  of  GDP.  The  main  risks 
still  relate  to  the  turbulent  political  situation,  culminating  in  the  pre-term  parliamentary 
elections  of  September  2007.  Standard  &  Poor's  confirmed,  however,  Ukraine's  sovereign 
long-term credit rating at BB-, supported in particular by the low level of indebtedness. 

7.10.1  Serbia 

In  Serbia  annual  GDP  growth  amounted  to  around  8%  (in  real  terms)  for  the  first  half  of 
2007. The current account deficit widened to about 16% of GDP in the first half of the year. 
Net FDI inflows declined to about 4% of GDP in the same period and the external debt of the 
country amounted to about 60% of GDP at end-July 2007. Public debt declined to about 35% 
of  GDP  at  the  same  time,  due  to  debt  write-offs  and  early  repayments  to  international 
financial institutions. 

7.10.2  Montenegro 

In Montenegro annual GDP growth accelerated to 6.9% in the second quarter of 2007. The 
current  account  deficit  further  widened  to  31%  of  GDP  in  the  same  period,  driven  by  an 
increasing trade deficit. Net FDI inflows reached 28.2% of GDP in the second half of 2007. 
Public  debt  continued  to  decline  to  35.6%  of  GDP,  while  the  public  external  debt  of  the 
country amounted to 23.7% of GDP at the end of June 2007. 

7.11. 

Jordan 

The economy of Jordan continues to grow strongly in 2007, with real GDP growth estimated 
at  6%.  After  successfully  completing  a  series  of  IMF  supported  programmes,  Jordan  has 
maintained  close  relations  with  the  Fund  under  the  terms  of  Post-Program  Monitoring. 
Policies  have  been  consistent  with  the  authorities’  stated  goals  of  promoting  growth  while 

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consolidating  the  fiscal  position  in  order  to  reduce  the  public  debt/GDP  ratio.  The  fiscal 
adjustment  in  2005  and  2006  under  a  strategy  centred  on  eliminating  fuel  subsidies  and 
maintaining expenditure restraint brought the budget deficit (including grants) down to 2.7% 
of  GDP  in  2006  from  5%  in  2005.  On  the  account  of  prudent  fiscal  policies,  Jordan's  debt 
burden is also falling. In October 2007, the government signed  an agreement with the Paris 
Club to buy back USD 3.3 billion of its debts. The current account deficit for 2007 is expected 
to narrow slightly from 13.6% in 2006 to 13.4% of GDP (and compared to 17.8% in 2005). It 
continues  to  be  more  than  financed  by  exceptionally  high  capital  inflows,  including  foreign 
direct investments, remittances and portfolio inflows primarily from the region. 

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