Commission staff working document accompanying the report from the Commission on the implementation of macro-financial assistance to third countries in 2007 {COM (2008) 520}
Date: 2008-08-18
Institutions: European Commission
Subjects: EU aid, economic reform, financial aid, financial cooperation, financial management, report, third country

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Brussels, 18.8.2008 
SEC(2008) 2381 

COMMISSION STAFF WORKING DOCUMENT 

ACCOMPANYING THE REPORT FROM THE COMMISSION ON THE 
IMPLEMENTATION OF MACRO-FINANCIAL ASSISTANCE TO THIRD 
COUNTRIES IN 2007 

{COM (2008) 520} 

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CAMEL 

CBA 

CEECs 

CPI 

EC 

LIST OF ABBREVIATIONS 

Capital,  assets,  management,  earnings,  liquidity  (parameters  used  in 
international system for rating banks) 

Currency Board Arrangement 

Central and East European Countries 

Consumer Price Index 

European Community 

EGPRSP 

Economic Growth and Poverty Reduction Strategy Paper 

EIB 

ESAF 

EU 

EUR 

FDI 

FESAL 

FOREX 

FYROM 

GDP 

IFIs 

IMF 

MFA 

NIS 

PRGF 

SAA 

SAF 

SBA 

SOE 

USD 

VAT 

WTO 

European Investment Bank 

Enhanced Structural Adjustment Facility 

European Union 

Euro 

Foreign Direct Investment 

Financial and Enterprise Structural Adjustment Loan 

Foreign Exchange 

The former Yugoslav Republic of Macedonia 

Gross Domestic Product 

International Financial Institutions 

International Monetary Fund 

Macro-Financial Assistance 

New Independent States 

Poverty Reduction and Growth Facility (formerly ESAF) 

Stabilisation and Association Agreement 

Structural Adjustment Facility 

Stand-By Arrangement 

State Owned Enterprise 

Dollar of the United States of America 

Value Added Tax 

World Trade Organisation 

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TABLE OF CONTENTS 

COMMISSION STAFF WORKING DOCUMENT WORKING PAPER FROM THE 
COMMISSION SERVICES ON THE IMPLEMENTATION OF MACRO-FINANCIAL 
ASSISTANCE TO THIRD COUNTRIES IN 2007 .................................................................. 1 

List of Abbreviations.................................................................................................................. 2 

Introduction ................................................................................................................................ 4 

Horizontal Section...................................................................................................................... 4 

1. 

Western Balkans........................................................................................................... 4 

Country Sections ........................................................................................................................ 5 

2. 

2.1. 

2.2. 

2.3. 

2.4. 

Kosovo (UNSC 1244) .................................................................................................. 5 

Executive summary...................................................................................................... 5 

Macroeconomic performance....................................................................................... 5 

Structural reforms......................................................................................................... 6 

Implementation of macro-financial assistance............................................................. 7 

Horizontal section ...................................................................................................................... 9 

3. 

4. 

4.1. 

4.2. 

4.3. 

4.4. 

5. 

5.1. 

5.2. 

5.3. 

5.4. 

6. 

6.1. 

6.2. 

6.3. 

6.4. 

Eastern Neighbourhood Countries ............................................................................... 9 

Georgia....................................................................................................................... 11 

Executive summary.................................................................................................... 11 

Macroeconomic performance..................................................................................... 11 

Structural reforms....................................................................................................... 12 

Implementation of macro-financial assistance........................................................... 14 

Republic of Moldova.................................................................................................. 16 

Executive summary.................................................................................................... 16 

Macroeconomic performance..................................................................................... 16 

Structural reforms....................................................................................................... 18 

Implementation of macro-financial assistance........................................................... 19 

Lebanon...................................................................................................................... 22 

Executive summary.................................................................................................... 22 

Macroeconomic performance..................................................................................... 22 

Structural reforms....................................................................................................... 23 

Implementation of macro-financial assistance........................................................... 25 

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INTRODUCTION 

This working document is published in parallel with the Report from the Commission to the 
Council and to the European Parliament on the implementation of macro-financial assistance 
to  third  countries  in  2007.  This  document  provides  economic  and  financial  information 
regarding  the  situation  of  the  beneficiary  countries.  Statistical  data  sorting  the  different 
macro-financial assistance decisions since 1990, by date and by regions, are included in the 
annex.  

HORIZONTAL SECTION 

1. 

WESTERN BALKANS  
The  countries  of  the  Western  Balkans1
  have  moved  closer  to  the  EU.  This  reflects 
progress, albeit uneven, in reforms and in meeting established criteria and conditions. 
During  2007,  Stability  and  Association  Agreements2  have  been  signed  with 
Montenegro and initialled with Bosnia-Herzegovina and Serbia. Important steps have 
also  been  taken  in  regional  cooperation,  such  as  the  establishment  of  the  Regional 
Cooperation  Council  which  replaced  the  Stability  Pact.  The  generally  positive 
economic  development  of  the  region  continued  throughout  2007.  The  GDP  growth 
rate was quite balanced throughout the region, ranging between 6% and 7%, with the 
exception of Kosovo (3.5%). Inflationary tensions further decreased during the first 
half of 2007, whereas in some countries (especially Serbia, Montenegro and Kosovo) 
the  CPI  saw  a  sharp  increase  in  the  third  and  fourth  quarter,  mainly  due  to 
international food and energy price developments. However, the overall annual CPI 
increase came down to 3.9% on average. External imbalances remained significant, 
with  an  average  current  account  deficit  of  some  14.6%  of  GDP  in  2007.  General 
government  balances  turned  on  average  from  a  small  surplus  in  2006  to  a  small 
deficit of 0.8% of GDP in 2007 (excluding Kosovo), with only Montenegro posting a 
surplus. State building, good governance, administrative and judicial reform, rule of 
law  including  the  fight  against  corruption  and  organised  crime,  socioeconomic 
development,  and  civil  society  development,  remain  key  reform  priorities  for  the 
Western Balkans.  

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2 

The  aggregated  data  are  non-weighted  averages  and  include  the  candidate  countries  Croatia  and  the 
former  Yugoslav  Republic  of  Macedonia,  the  potential  candidate  countries  Albania,  Bosnia-
Herzegovina, Montenegro and Serbia, and Kosovo (under UNSCR 1244). 
SAAs with fYROM (since 2004), Croatia (2005) and Albania (2006) had already been in force. 

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COUNTRY SECTIONS 

2. 

KOSOVO (UNSC 1244) 

2.1. 

Executive summary 

The economic situation in Kosovo remains difficult: Its GDP per capita of around € 
1,200  is  one  of  the  lowest  in  Europe3.  After  a  sharp  increase  of  GDP  in  the 
immediate  post-war  period,  boosted  by  foreign  reconstruction  assistance  and 
remittances,  growth  has  been  sluggish  and  negatively  affected  by  declining  donor 
support.  

On 17 February 2008, the territory declared its independence from Serbia. It has been 
recognised  since  then  by  a  majority  of  the  EU  member  states,  the  US,  some 
neighbouring  countries,  and  some  other  countries  throughout  the  world.  In  its 
Conclusions on Kosovo of 18 February, the Council has reaffirmed its commitment 
to  fully  and  effectively  support  the  European  perspective  for  the  Western  Balkans 
and asked the Commission to use community instruments to promote economic and 
political development.  

The Council approved in November 2006 MFA budget support of up to € 50 million. 
Yet, in 2006 and 2007 the budget execution led to the disappearance of the foreseen 
financing  gap,  mainly  due 
than  expected  revenues  and  capital 
underspending.  Consequently,  the  payment  of  the  assistance  has  been  postponed, 
probably  to  the  second  half  of  2008  or  2009.  The  conditionality  attached  to  this 
assistance was agreed between the Commission and the authorities of Kosovo and a 
Memorandum of Understanding was accordingly signed in December 2007. 

to  higher 

2.2.  Macroeconomic performance 

For 2007, latest estimates point to GDP growth of around 3.5%. This is considerably 
higher than the authorities' initial assumption for the budget 2007 of 1% growth. This 
higher growth is partly due to the delays in the status settlement with the accordingly 
delayed dismantling of UNMIK and its adverse effect on domestic demand. Private 
consumption  had  a  positive  impact  on  growth.  Overall,  growth  seems  to  become 
more robust compared to previous years, but remains low compared to countries in 
the region and considering the very low starting point. 

The  number  of  registered  job  seekers  continued  to  increase  in  2007  to  332,000 
persons  as  a  yearly  average,  up  by  8,500  compared  to  2006.  Long-term 
unemployment remains particularly high, indicating limited dynamics and flexibility 
of  the  Kosovan  economy  and  labour  market.  However,  the  informal  economy 
remains  sizable  and  seems  to  employ  many  of  the  officially  unemployed.  The 
unemployment rate is estimated at around 45%.  

After years of low –at times even negative- inflation, it accelerated in the second half 
of 2007 mainly due to food prices, reaching y-o-y rates of 10-11% in the last quarter. 
However,  given  a  fairly  low  inflation  in  the  first  half  of  the  year,  average  annual 
inflation stood at 4.5% in 2007. Assuming that the food price hike will persist over 

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There  are  indications,  though,  for  a  substantial  upward  revision  of  official  GDP  data.  However,  the 
resulting GDP per capita of approximately EUR 1,500 would still be comparatively low. 

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the medium term, it may turn into a severe negative shock to disposable household 
income in Kosovo.  

The  monetary  framework  remains  anchored  on  the  use  of  the  euro  as  legal  tender. 
The  Central  Banking  Authority,  therefore,  cannot  implement  any  independent 
monetary or exchange rate policy. Its role lies in supervising the financial sector and 
monitoring liquidity in the banking sector and credit expansion, with liquidity ratios 
and  reserve  requirements  as  main  policy  tools.  Despite  conservative  prudential 
requirements, annual credit growth accelerated to 41% by the end 2007 (November 
data;  loans  to  non-financial  corporations),  and  34%  (loans  to  private  households), 
respectively.  Interest  rates  remained  fairly  high  in  2007  with  rates  for  short-term 
business loans ranging between 13% and 17% over the year.  

The trade deficit widened to 57% of GDP in 2007, mainly due to a very weak export 
base.  The  current  account  deficit  for  2007  is  estimated  at  24%  of  GDP  (including 
foreign  assistance),  after  17%  in  2006.  It  is  mainly  financed  by  remittances  and 
increasing foreign direct investment related to privatisations. Kosovo currently does 
not assume any sovereign debt servicing obligations. This situation would change if, 
as  foreseen  by  the  Ahtisaari  proposals,  some  sovereign  loans  currently  serviced  by 
Serbia  would  be  transferred  to  Kosovo.  The  amount  of  sovereign  debt  to  be 
transferred  to  Kosovo  is  still  uncertain  and  will  remain  so  for  some  time  –  it  will 
most likely be determined by arbitration. Present estimates range around € 840m, or 
36% of GDP, with a high margin of uncertainty.  

The  execution  of  the  budget  in  2007  was  characterised  by  a  one-off  exceptional 
revenue  of  € 75 million  for  the  licence  of   a  second  mobile  phone  operator,  higher 
revenue  collection  and  a  continuously  weak  spending  record,  especially  on  capital 
items.  Preliminary  data  point  to  an  annual  budget  surplus  of  6.5%  of  GDP.  As  a 
result,  the  cash  balance  of  the  government  rose  from  around  € 200 million  at  the 
beginning of 207 to more than € 400 million  (16% of GDP) by the end of the year 
2007.  However,  the  high  budget  surplus  may  turn  out  to  be  of  a  quite  temporary 
nature and masks a weaker structural budgetary position because it partly stems from 
one-off measures and is subject to substantial budgetary risks, partly also related to 
status settlement. 

2.3. 

Structural reforms 

The  privatisation  process  of  socially-owned  enterprises  continued  in  2007.  The 
Kosovo  Trust  Agency  (KTA)  is  reported  to  have  tendered  around  545  New 
Companies  and  that  343  sales  contracts  have  been  signed  by  the  end  of  2007.  The 
total  amount  realised  from  these  sales  contracts  signed  is  over  308  million  Euros. 
However,  since  December  2007  the  signing  of  contracts  has  been  interrupted, 
because  KTA  is  reflecting  on  a  recent  Special  Chamber  judgement  in  relation  to 
privatisation  of  property.  This  judgement  may  have  an  effect  on  the  privatisation 
process  because  it  puts  in  question  some  elements  of  the  currently  implemented 
UNMIK  Regulations  on  the  Establishment  of  KTA  which,  according  to  the  ruling, 
violate  the  European  Convention  for  the  Protection  of  Human  Rights  and 
Fundamental Freedoms by limiting the rights of former property owners. 

The  restructuring  of  publicly-owned  enterprises  remains  one  of  the  biggest 
challenges of structural policy. Infrastructure remained insufficient and often of poor 
quality. In particular, the situation in the energy sector is critical - the power supply 
infrastructure  remained  unreliable,  with  frequent  power  cuts,  affecting  economic 

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activity  at  large.  Furthermore,  the  efficiency  of  the  judiciary  system  and  law 
implementation  remained  low  and  only  little  progress  was  made  in  enforcement  of 
court rulings and the establishment of property rights. 

2.4. 

Implementation of macro-financial assistance 

On  30  November  2006  the  Council  adopted  a  decision  providing  Kosovo  with 
macro-financial assistance in the form of budget support (grants, up to € 50 million). 
This  followed  a  needs  assessment,  prepared  by  UNMIK  and  the  Provisional 
Institutions  of  Self  Government  (PISG),  and  coordinated  with  the  Commission,  the 
IMF  and  the  World  Bank.  This  assessment  (the  "Medium-Term  Expenditure 
Framework"  -  MTEF)  foresaw  that  by  end  2006  or  early  2007  the  situation  of  the 
budget  would  become  unsustainable  without  donors  support,  as  cash  reserves 
financing  the  deficit  were  expected  to  dry  up.  This  assistance  was  thus  initially 
conceived as bridge support, to be topped up by another package from the EC and 
other international donors upon status settlement.  

However,  the  general  government  balance  for  2006  and  2007  turned  out  very 
differently than initially foreseen: after a surplus of 3.6% of GDP in 2006, an even 
higher  surplus  6.5%  of  GDP)  was  preliminarily  recorded  for  2007,  mainly  due  to 
good revenue performance and under-spending of budgeted capital expenditure, due 
to the weak planning and implementation capacity for investment projects.  

Therefore, the outstanding EC support remains available, but it will, unlike initially 
foreseen, not serve as bridge support pending status settlement. A donor's conference 
is  planned  to  take  place  on  11  July  2008  to  address  Kosovo's  financing  needs. 
Payments of EC budget support are now expected to take place towards the end of 
2008 or in 2009.  

Meanwhile,  the  Commission  and  the  authorities  of  Kosovo  have  agreed  on  the 
Memorandum  of  Understanding  (MoU)  laying  out  the  policy  conditions  for  this 
assistance to be met and signed it in December 2007. This MoU stipulates that the 
assistance  will  be  paid  if:  (i) budgetary  financing  needs  occur;  (ii) the  authorities 
reach  an  understanding  or  arrangement  with  the  IMF  in  support  of  sustainable 
economic  and  fiscal  policies  and  implement  it  properly;  and  (iii) policy  conditions 
attached to this assistance, mainly in the area of public finance reform, management 
and control, are satisfactorily met.  

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SUMMARY STATUS OF ECONOMIC REFORM  

1.  Price liberalisation 
The  price  setting  mechanism  is  basically  free.  The  authorities  do  not  intervene,  even  in  the  case  of 
housing prices. Current governance arrangements as regards publicly-owned enterprises, which remain 
under the authority of UNMIK – Pillar IV, normally ensure the absence of government interference in 
the  price  setting  mechanism  of  their  services.  However,  the  government  intervened  in  one  case  by 
refusing a raise in electricity prices proposed by the electricity regulator. 

2.  Trade liberalisation 
Regional  trade  integration  and  liberalisation  continued.  In  2007,  the  Central  European  Free  Trade 
Agreement  came  into  force  between  Albania,  Bosnia  and  Herzegovina,  Croatia,  Kosovo  (UN  1244), 
the former Yugoslav Republic of Macedonia, Moldova, Montenegro and Serbia.  

3.  Exchange regime 
Kosovo continued to use the euro as sole legal tender. The Central Banking Authority of Kosovo is in 
charge of regulating foreign exchange operations, providing payments services and supervising banks 
and other financial institutions.  

4.  Foreign Direct Investment 
FDI  inflows  continued  to  increase  slightly  in  2007,  mainly  related  to  the  privatisation  process.  FDI 
inflows, including privatisation proceeds, are estimated to have reached 12% of GDP in 2007.  

5.  Monetary policy 
The  monetary  framework  remained  anchored  on  the  use  of  the  euro  as  sole  legal  tender  (see  also 
section 3 above).  

6.  Public Finance 
The  authorities  finalised  a  revised  Medium-Term  Expenditure  Framework  in  September  2007.  The 
execution  of  the  budget  in  2007  was  characterised  by  high  revenues  and  low  capital  spending. 
Preliminary data point to an annual 2007 budget surplus of 6.5% of GDP. However, the high budget 
surplus  may  turn  out  to  be  of  a  quite  temporary  nature  and  masks  a  weaker  structural  budgetary 
position  because  it  partly  stems  from  one-off  measures  and  is  subject  to  substantial  budgetary  risks, 
partly related to status settlement (i. e. debt servicing). 

7.  Privatisation and Enterprise Restructuring 
The  privatisation  of  socially-owned  enterprises  continued  successfully  in  2007.  However,  since 
December  2007  the  signing  of  contracts  has  been  interrupted,  because  the  Kosovo  Trust  Agency  is 
reflecting on a recent Special Chamber judgement which may affect the privatisation process because it 
puts in question some elements of the currently implemented UNMIK Regulations. 

8.  Financial Sector Reform 
The  financial  sector  in  Kosovo  appeared  to  be  sound,  profitable  and  well  capitalised.  It  is  entirely 
private  and  mostly  foreign-owned.  In  December  2007,  two  local  banks  merged  and  a  full  banking 
license was granted to a Turkish owned institute. Altogether, 10 commercial banks operate in Kosovo. 
Credit  supply  is  sufficient  and  banks  have  widened  their  range  of  products.  However,  competition 
remained limited. 

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HORIZONTAL SECTION 

3. 

EASTERN NEIGHBOURHOOD COUNTRIES 

Economic growth in the New Independent States (NIS), which is for some years now 
the  second  fastest  growing  region  in  the  world  (behind  East  Asia),  accelerated  in 
2007 from  about 7.5% to  nearly 8.5%. The fastest growing economy is once again 
Azerbaijan  (plus  25%).  In  all  the  other  countries  of  the  region  but  one  (Moldova) 
GDP increased by more than 7%. In Moldova, the economic growth was more than 
8%  in  the  first  half  of  2007  but  it  was  finally  reduced  to  only  3%,  due  to  a  severe 
drought  in  summer  2007.  The  factors  behind  this  growth  differ  from  country  to 
country,  but  in  the  majority  of  them,  including  the  two  largest  economies  of  the 
region, Russia and Ukraine, growth is driven primarily by domestic demand, boosted 
by  profits  of  the  enterprises,  credit  expansion  and  fiscal  stimulation.  Several 
countries  of  the  region  are  benefitting  also  from  high  commodity  prices  (notably, 
energy) or capital transfers, mainly private.  

The  improving  general  economic  conditions  allowed  a  strong  fiscal  expansion  in  a 
number  of  countries  of  the  region,  which,  as  a  rule,  led  to  the  reduction  of  budget 
surpluses  (e.g.  Russia,  Kazakhstan,  Belarus)  or  to  the  widening  of  deficits  (e.g. 
Ukraine  Georgia).  Despite  the  worsening  fiscal  balances,  the  overall  trend  for  the 
reduction of the public debt as part of GDP continued in 2007. One otable exception 
to  this  rule  was  Tajikistan,  where  due  to  the  launch  of  large  infrastructure  projects 
financed  by  concessional  credits  extended  by  the  Chinese  Ex-Im  Bank  the  budget 
moved  from  a  surplus  to  a  deficit  of  more  than  6%  of  GDP,  and  the  public  debt 
increased from 37 to over 40% of GDP.  

One of the effects of the fiscal loosening was its contribution to the acceleration of 
inflation. The other factors behind this inflation surge – price rises were again over 
10% or approaching this figure in the majority of the countries of the region – are the 
international  price  rises  and  the  monetary  expansion  fuelled  by  the  capital  inflows 
resulting  from  either  commodity  exports,  foreign  direct  investments,  or  private 
capital transfers, in particular remittances from workers abroad. 

The  region's  variable  endowment  in  natural  resources  translates  in  a  very  variable 
situation of the balance of payments – strong trade and current account surpluses for 
energy  exporters,  strong  deficits  for  energy  importers.  Overall,  demand-led  import 
growth  increased  faster  than  exports,  and  therefore  on  average  the  current  account 
balances  in  the  region  have  deteriorated,  with  the  current  account  surpluses  going 
down  (both  as  percentage  of  GDP  and  in  absolute  numbers),  and  current  account 
deficits  widening,  sometimes  to  very  high  proportions  of  GDP  (Georgia  –  nearly 
20%,  Moldova  –  nearly  16%).  However,  these  deficits  are  generally  comfortably 
financed by capital inflows, including foreign direct investments, on the rise in all the 
countries of the region. 

Progress  in  structural  reforms  has  been  uneven  across  the  region  and  the 
implementation of second-phase institutional reforms supporting markets and private 
enterprise  is  still  little  advanced  in  most  NIS.  Among  the  current  and  past 
beneficiaries  of  the  Community  macro-financial  assistance,  Georgia  was  probably 
the  one  to  advance  most.  Also,  Georgia  is,  together  with  Armenia,  the  two  front-
runners in terms of the creation of a favourable business environment conducive to 

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investments and growth. This overall good record in implementing market reforms is 
translating  in  a  strong  growth  performance:  both  countries  registered  double-digit 
economic growth in 2007. 

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4. 

GEORGIA 

4.1. 

Executive summary 

Economic growth accelerated to about 12% in 2007, supported by inflows of foreign 
direct  investment  which  comfortably  financed  a  widening  current  account  deficit. 
Strong  growth  in  financial  intermediation  and  infrastructure  investment  enhanced 
growth prospects in several sectors of the economy. 

Georgia's IMF-supported economic program remained on on-track, allowing the IMF 
Board  to  complete  the  fifth  and  sixth  (final)  reviews  under  the  PRGF  (Poverty 
Reduction  and  Growth  Facility)  arrangement  in  February  and  August  2007. 
Currently,  the  IMF  continue  post-program  monitoring  in  Georgia  but  no  new 
financing needs have been identified. 

Uneven progress was made by Georgia during the past year in the implementation of 
the agreed policy measures in public finance management. Therefore, the payment of 
the final grant instalment of the macro-financial assistance was still pending at end-
2007 the enactment of a new law on external audit.  

In  April  2008,  a  first  progress  report  on  the  EU-Georgia  European  Neighbourhood 
Policy  Action  Plan  was  adopted,  informing  the  next  directions  in  the  deepening  of 
the political and economic relations as well as in closer cooperation in many sectors. 

4.2.  Macroeconomic performance 

Strong  economic  performance  continued  in  2007,  unabated  by  Russia's  economic 
embargo  and  higher  energy  import  prices.  After  large-scale  privatisation  and  the 
completion of oil and gas pipeline projects, foreign capital inflows now contribute to 
growth  in  several  other  areas  of  the  economy.  Construction  and  financial 
intermediation  in  particular  have  been  driving  economic  growth  that  accelerated  to 
about  12%  in  2007  against  9.4%  in  2006.  Mining  and  trade  were  other  sectors  of 
rapid  growth.  Infrastructure  investment  on  transport  and  electricity  generation  also 
facilitates  robust  growth  in  the  economy.  Nominal  GDP  is  estimated  to  be  about 
USD 10 billion (about USD 2300 per capita). 

Central  bank  legislation  is  being  amended  to  establish  price  stability  as  the  main 
objective of the National Bank of Georgia, to be pursued through a monetary policy 
framework of inflation targeting. This will mean that the lari will be allowed to float 
more  freely  with  minimal  interventions  by  the  NBG.  Although  the  acceleration  of 
consumer  price  inflation  in  2007  to  11%  partly  owes  to  international  commodity 
price  trends,  the  rapid  growth  in  monetary  aggregates  did  raise  more  concern  for 
inflationary  pressures.  Accordingly,  the  NBG  considerably  tightened  the  monetary 
stance. Bank assets grew from 30.7% of GDP to 43.5% by end-2007. As rapid credit 
growth continues to drive economic growth, systemic financial sector development is 
upmost  important  also  for  macroeconomic  stability.  Higher  monetisation  of  the 
economy is nevertheless a sign of enhanced confidence of businesses and the public.  

Demand  for  imports  increased  in  line  with  growing  incomes  and  brisk  investment 
activity,  leading  to  a  widening  trade  deficit  of  about  28%  of  GDP.  The  import  bill 
was also increased because of more expensive natural gas imports from Russia and 
Azerbaijan.  Exports  revenue  growth,  although  held  back  by  the  economic  embargo 
by  Russia  of  Georgian  exports,  was  supported  by  high  world  market  prices  for 
metals.  Foreign  capital  inflows  (mostly  foreign  direct  investment)  financed  the 

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current  account  deficit  of  nearly  20%.  Workers'  remittances  transferred  through 
banks  increased  by  83%  from  2006  (64%  originating  from  Russia).  Net  FDI  is 
estimated at about 15% of GDP in 2007.  

For the first time, international reserves of the National Bank of Georgia surpassed 
the level equivalent to three months of imports. Georgia's total external debt is at a 
low level of 17% of GDP as public external debt has not been increased in nominal 
terms and the private sector (the leading banks) have gained access to international 
capital  markets  only  in  the  past  two  years.  In  January  2008,  Standard  &  Poor's 
confirmed  a  positive  outlook  for  Georgia's  sovereign  credit  rating  (B+).  The 
sovereign  credit  rating  is,  however,  constrained  by  a  narrow  economic  structure, 
external  imbalances  and  political  risks  which  also  stem  from  Georgia's  relatively 
weak institutional framework. 

Public spending was increased over the year in several supplemental budgets as tax 
revenues  continued  to  perform  strongly  as  a  result  of  robust  nominal  GDP  growth 
and a strengthened tax administration. The tax revenues to GDP ratio is estimated at 
25% which is a marked step up from the  average of 20% in 2004-2006. A  priority 
was given to defence spending which surged to 30% of total spending in 2007 (9% of 
GDP).  The  public  protests  in  November  2007  prompted  the  government  to  revise 
spending  priorities  for  2008,  allocating  more  resources  to  pensions,  salaries  and 
social  and  employment  programmes.  Defence  spending  is  projected  to  account  for 
19% of total public expenditures in 2008. Public debt (about 28% of GDP) and fiscal 
deficits (below 3% of GDP) are under control, and the implementation of a planned 
new fiscal rule would further ensure that balanced budgets are the norm in the future. 
Any budget surplus would be saved in special funds retained for future development 
projects. 

4.3. 

Structural reforms 

The  government's  efforts  to  tackle  corruption  and  to  deregulate  the  economy 
continued  to  show  results  in  several  areas,  as  reflected  in  the  World  Bank's  Doing 
Business  Report.  The  World  Bank  ranks  Georgia's  business  environment  in  18th 
place in the world, a further improvement from the 37th place from 2006. Equally, 
according to the Transparency International, perceptions on the extent of corruption 
showed a reduction from the previous year, and Georgia's score improved from 2.8 
(out of max 10) to 3.4. 

Putting  in  place  new  liberal  legislative  frameworks  in  taxation  and  customs, 
inspection,  permits,  certification  and  standardisation  has  improved  the  business 
environment,  and  the  main  challenge  now  is  to  strengthen  the  public  institutions 
which  are  tasked  with  their  implementation.  Another  major  priority  for  reform 
concerns the independence and accountability of the judiciary and law enforcement, 
which  has  become  under  focus  for  instance  in  the  context  of  property  rights' 
violations.  Other  positive  developments  include  legislative  changes  in  2007  to 
shorten  the  maximum  time  for  bankruptcy  proceedings  to  five  months.  Corporate 
governance  has  been  strengthened  to  provide  better  investor  protection  also  for 
minority shareholders. 

Georgia  conducts  a  liberal  trade  policy  in  a  multilateral  setting,  having  abolished 
most import tariffs apart from some agricultural goods and construction materials. In 
2007 Georgia finalised negotiations with Turkey on a free trade agreement which has 
not yet been implemented. Georgia qualifies for the EU's enhanced trade preferences 

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under the GSP+. Although the overall tax burden on businesses is already fairly low 
(corporate  income  tax  is  reduced  to  15%),  the  government  has  launched  free 
industrial zones (for instance in the Black Sea port of Poti) that would offer special 
tax and regulatory regimes. Georgia's export potential is not realised because of the 
lack  of  capacity  to  implement  sufficient  regulatory  frameworks.  The  bottlenecks 
concern  sanitary  and  phyto-sanitory  systems,  conformity  assessment,  technical 
regulations and standards of industrial goods, whereas concerning imports to Georgia 
technical regulations of OECD countries are fully recognised as such by Georgia. 

The  impressive  economic  growth  record  has  not  yet  improved  the  aggregate 
employment situation markedly as large shifts of labour from the public sector to the 
private  sector  have  been  underway.  The  government  has  launched  short-term 
traineeship programmes in cooperation with the private sector. For a sustainable job 
creation,  the  employers'  requirements  for  skills  and  training  need  to  be  better 
addressed  in  the  reforms  of  vocational  and  higher  education.  Unemployment  has 
been  fairly  stable  at  about  14%.  The  relatively  large  share  of  agriculture  (55%  of 
total employment) continues to be a prominent feature of the Georgian economy. The 
small  plot  sizes  and  low  productivity  are  straining  the  agricultural  sector's 
contribution to poverty reduction.  

Extreme poverty (10.7% in 2006) and the overall poverty rate (31%) are declining as 
a  result  of  government's  measures  such  as  targeted  poverty  benefits  and  higher 
pensions.  The  targeting  of  the  social  assistance  still  needs  to  be  improved  and  the 
government  has  now  a  database  to  help  the  targeting.  Initially,  the  share  of  the 
extreme poor receiving the targeted social benefit was estimated by the World Bank 
at  25%  (2006).  This  share  is  planned  to  increase  to  at  least  60%.  The  impact  of 
higher  gas  tariffs  is  mitigated  through  voucher  schemes  and  lifeline  tariffs  but  the 
higher living costs (especially food and energy) put a pressure on most households. 
Social and education spending has been increased, reaching about one third of total 
public spending in 2008. 

Since  the  Georgian  government  is  committed  to  limit  the  role  of  the  state  in  every 
respect,  efforts  are  focused  mostly  on  improving  service  delivery  by  involving  the 
private  sector.  The  government  is  for  instance  implementing  an  ambitious  health 
sector reform in cooperation with private sector operators. Over three years, 100 new 
privately managed hospitals will be in operation. A new health insurance scheme will 
be put in place in 2008. Given that the government departments and  agencies  have 
been in a flux and subject to frequent management changes, the civil service reform 
has not been rooted yet. In the process, some areas such as the statistics department 
have  become  seriously  under-resourced.  In  public  finance  management,  the  reform 
process has advanced in parallel both in budget planning and preparation as well as 
in treasury management and has now reached a stage where the internal control and 
external  oversight  functions  also  need  to  be  addressed  in  order  to  have  a  balanced, 
modern public finance management system. 

The EU and Georgia are implementing the European Neighbourhood Policy Action 
Plan  which  was  endorsed  by  the  EU-Georgia  Cooperation  Council  in  November 
2006.  The  first  progress  report  was  made  public  in  April  2008.  In  the  economic 
policy  area,  the  Commission  has  conducted  a  feasibility  study  on  a  possible  free 
trade area with Georgia so as to inform the future directions for the enhancement of 
bilateral trade relations and the improvement of the business and investment climate 
in Georgia.  

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4.4. 

Implementation of macro-financial assistance 

On 24 January 2006 the EU Council decided to provide macro-financial assistance to 
Georgia  up  to  EUR  33.5  million  in  grants  (Decision  2006/41/EC,  published  in  the 
Official  Journal  of  28  January  2006).  The  first  and  second  grant  instalments  were 
paid in 2006 (EUR 22 million in total). In parallel, Georgia reduced the amount of its 
outstanding debt to the Community to EUR 57.5 million. Under the macro-financial 
assistance, the Commission focused its policy dialogue with the Georgian authorities 
on  public  finance  management.  In  this  context  the  Commission  has  cooperated 
closely  with  the  World  Bank  which  is  also  supporting  the  strengthening  of  public 
sector  accountability,  efficiency  and  transparency  under  its  series  of  Poverty 
Reduction  Support  Operations  (PRSO).  During  2007,  the  Commission  monitored 
progress  in  the  areas  of  budget  planning,  budget  execution,  internal  controls  and 
internal  audit  as  well  as  external  audit  as  had  been  agreed  in  the  Memorandum  of 
Understanding.  

Uneven  progress  was  noted  in  the  reform  process.  Budget  planning  and  execution 
progressed smoothly following major reform efforts that had been started few years 
ago;  whereas  in  the  area  of  internal  controls  and  internal  audit  the  authorities  have 
not yet decided how to develop in Georgia a coherent legal framework in line with 
EU principles and in external audit the timeframe for the adoption of external audit 
standards  (INTOSAI)  has  not  been  decided  yet.  As  a  consequence  of  the  political 
turmoil  that  led  to  the  pre-term  presidential  elections  in  January  2008,  the 
parliament's legislative process was also affected so that the adoption of the Law on 
the  Chamber  of  Control  was  further  delayed  till  2008.  The  draft  bill  had  been 
submitted  to  the  parliament  in  2006.  Given  that  the  adoption  of  international 
standards  in  external  audit  will  be  an  important  step  in  the  process  of  democratic 
reforms  in  Georgia,  the  release  of  the  final  grant  instalment  of  the  macro-financial 
assistance (EUR 11.5 million) was pending the enactment of the Chamber of Control 
Law.  

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SUMMARY STATUS OF ECONOMIC REFORM 

Price liberalisation 

1. 
No administratively set prices exist outside the utilities sector. Administered prices account for 
about 5% of the CPI basket. 

Trade liberalisation 

2. 
Liberal  trade  policy.  Georgia  has  been  member  of  the  WTO  since  June  2002.  In  September 
2006, the number of tariff bands on imported goods was reduced from 16 to three (0%, 5%, and 
12%).  The  maximum  tariff  of  12%  is  applied  to  those  agricultural  products  and  building 
materials  which  compete  with  domestic  goods.  The  average  weighted  tariff  is  estimated  to  be 
1½%.  Non-tariff  barriers  allowed  for  environmental,  security  and  health  reasons  only  (in  line 
with  the  Partnership  and  Cooperation  Agreement  with  the  EU).  A  free  trade  agreement  with 
Turkey was agreed in late 2007. 

Exchange regime 

3. 
Floating  exchange  rate  of  the  lari  with  limited  official  intervention  by  the  National  Bank  of 
Georgia. No restrictions on current international transactions in conformity with Article VIII of 
the IMF’s Articles of Agreement. 

Foreign Direct Investment 

4. 
Adequate  overall  legislation.  Unlimited  repatriation  of  capital  and  profits.  Net  inflows  of  FDI 
about 15% of GDP (2007 estimate).  

Monetary policy 

5. 
The NBG has developed monetary policy instruments, e.g. by introducing in 2006 certificates of 
deposits.  The  securitisation  of  government  debt  held  by  the  NBG  also  introduced  marketable 
securities for the NBG's open market operations. Amendments to the central bank legislation are 
underway to enshrine price stability as the NBG's prime policy objective, to be pursued through 
inflation  targeting.  Dollarisation  of  the  economy  has  decreased  in  the  past  few  years  but  still 
remains high at 65% of total deposits. 

Public Finance 

6. 
Total fiscal revenues (including grants) estimated at 27% of GDP (2007), of which tax revenues 
25%  of  GDP.  Total  expenditure  and  net  lending  estimated  at  about  30%  of  GDP  (2007) 
implying  a  fiscal  deficit  of  3%  on  commitment  basis.  Under  the  Budget  System  Law,  which 
became effective on January 1, 2004, the treasury system is reformed, with a fully functioning 
Single Treasury Account as of January 2006. A medium-term expenditure framework is in place 
and is further developed with stronger policy content. A new liberal tax code is effective as of 
January 1, 2005.  

Privatisation and Enterprise Restructuring 

7. 
The  private  sector  now  accounts  for  about  80%  of  GDP  (against  65%  in  2005).  Small  scale 
privatisation  largely  completed  while  large  scale  privatisation  also  accelerated  significantly 
since 2004. New legislation adopted in 2005 on land privatisation.  

Financial Sector Reform 

8. 
There  are  17  operating  banks  (of  which  10  foreign-owned).  No  state-owned  banks.  Further 
consolidation  is  expected  as  the  minimum  capital  requirement  is  increased  to  GEL  12  million 
(approx.  EUR  4.5  million).  Banking  supervision  has  been  strengthened  in  the  past  few  years. 
The areas still to be addressed include "fit and proper" criteria for bank owners and managers, 
identification of "true" owners, monitoring of connected lending and consolidated supervision. 

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5.  REPUBLIC OF MOLDOVA 

5.1.  Executive summary 

The  economy  of  the  Republic  of  Moldova  continued  growing  in  2007  despite  a 
severe drought, but economic growth decelerated to just 3%. Moldova's surprisingly 
resilient  performance  is  supported  by  inflows  of  foreign  capital,  in  the  form  of 
remittances (primarily) and direct investment; Capital inflows more than financed a 
trade deficit approaching 50% of GDP.  

The inflows of capital from abroad have translated in inflationary pressures and in a 
persistent  and  even  accelerating  inflation,  despite  the  sterilisation  efforts  of  the 
National Bank of Moldova and restrictive fiscal policy (the budget deficit was very 
low and public debt as a share of GDP decreased markedly).  

The developments in 2007 suggest that Moldova's growth model based primarily on 
households demand fuelled by inflows of capital from Moldova’s workers abroad is 
gradually  changing.  An  increasing  part  of  remittances  seems  to  be  going  now  into 
investments,  and  not  just  household  consumption  and  residential  construction.  This 
gradual change is confirmed by a modest increase in output and employment in some 
manufacturing 
textiles)  where  Moldova  maintains  a 
competitive advantage due to its low labour costs, despite strong appreciation of the 
real exchange rate.  

industries  (particularly, 

Moldova's  financing  arrangement  with  the  IMF  concluded  in  May  2006  and 
supported  by  the  Fund's  PRGF  (Poverty  Reduction  and  Growth  Facility)  was  on 
track, allowing the IMF Board to complete in 2007 the second and third programme 
reviews.  The  World  Bank  is  currently  preparing  the  second  Poverty  Reduction 
Support Credit (PRSC 1 was disbursed in autumn 2006).  

The  Republic  of  Moldova  achieved  progress  in  several  areas  of  structural  reforms, 
including  trade  and  enterprise  policy,  competition,  financial  sector  regulation  and 
supervision  and  public  finance  management.  Yet,  the  business  conditions  and 
governance remain weak, and their improvement still remains a key challenge for the 
policy agenda. The government's expectations are that further progress in structural 
reforms  implemented  in  the  framework  of  the  new  National  Development  Strategy 
and  of  the  EU-Moldova  ENP  Action  Plan  will  gradually  translate  in  better 
governance and higher quality market institutions, and contribute to the improvement 
of the business conditions in Moldova. 

5.2.  Macroeconomic performance 

Moldova's economic performance in the recent period has been surprisingly strong in 
view of the external shocks faced by the country. In 2007, despite a severe drought 
that hit Moldova in summer and reduced agriculture’s output by nearly a quarter (by 
23.1%,  according  to  preliminary  figures),  the  country's  GDP  increased  by  3%.  The 
non-agricultural GDP is estimated to have increased by 8 to 9%. In the first half of 
2007, economic growth in Moldova had exceeded 8%.  

Like  in  the  past,  growth  is  exclusively  due  to  the  services  sectors,  notably 
construction  and  trade.  Industrial  production  as  a  whole  is  reported  to  have 
contracted  by  an  estimated  2.7%,  after  a  drop  of  nearly  5%  in  2006,  reflecting 

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primarily  the  adverse  conditions  in  which  food  industry  continued  to  operate 
(drought,  but  also  the  persistent  effects  of  the  Russian  ban  on  wine  exports 
introduced  in  2006,  which  are  being  overcome  only  gradually).  Yet,  there  are 
indications that new small-scale industries are developing and creating jobs (e.g. in 
the  textiles  sector).  Growth  is  mainly  driven  by  domestic  demand,  but  unlike  the 
previous years, growth in investments, both residential and, what is new, industrial, 
seems to be much stronger than growth in household consumption – more than 20% 
in 2007 against 4%.  

The  slowdown  in  the  output  of  the  tradables  sectors  (agriculture  and  industry)  and 
strong domestic demand translated in a further surge in imports, whose dollar value 
increased  in  2007  by  more  than  37%.  At  the  same  time,  growth  of  exports  (which 
had stagnated in 2006) was more modest (30%), which resulted in a widen ing of the 
trade deficit from USD 1.6 billion to 2.3 billion. Trade deficit is approaching 50% of 
Moldova’s  GDP.  This  deficit  was  again  only  partly  compensated  by  remittances 
from Moldova’s workers abroad (remittances are estimated to amount to about one-
third  of  GDP).  As  a  result,  for  a  third  year  in  a  row,  Moldova’s  current  account 
deficit increased and was in 2007 nearly 16% of GDP. This deficit seems, however, 
sustainable  in  the  short  run  as  capital  inflows,  in  the  form  of  foreign  direct 
investment (FDI) or credit to commercial banks or industrial enterprises (foreign debt 
of  the  non-government  sector  increased  in  2007  to  50%  of  GDP  from  40%  three 
years earlier), are well in excess of this amount. FDI almost doubled and exceeded 
9% of GDP in 2007, but remains low in absolute terms and per capita. Large capital 
inflows  have  also  translated  in  an  accumulation  of  international  reserves  of  the 
National Bank of Moldova (NBM) beyond the target of three months of imports set 
in the PRGF programme.  

Massive  capital  inflows  are  also  generating inflationary  pressures  which,  combined 
with the effects of the drought on food prices, prevented the NBM from meeting its 
objectives in terms of cutting down consumer price rises, despite its continued efforts 
to  sterilise  the  inflows  of  foreign  exchange.  Twelve-month  inflation  in  2007 
remained  well  above  the  10%  level,  at  more  than  13%;  it  accelerated  further  to 
15.6%  by  the  end  of  the  first  quarter  of  2008.  Accelerating  inflation,  together  with 
the  appreciation  of  the  exchange  rate  of  the  Moldovan  leu  (the  NBM  is  gradually 
shifting  towards  inflation  targeting  and  allowing  exchange  rate  appreciation)  is 
leading  to  loss  of  competitiveness  of  Moldova’s  economy.  The  leu’s  real  effective 
exchange rate appreciated by more than 10% in 2007. 

The  key  challenge  of  Moldova's  macroeconomic  policy  –  controlling  inflation  –  is 
constrained  by  weak  transmission  mechanisms  of  monetary  policy  and  by  huge 
developments  needs  (Moldova  remains  the  poorest  country  in  Europe).  Yet,  in  the 
near  future,  the  fiscal  policy  is  expected  to  continue  supporting  the  disinflation 
efforts  of  the  National  Bank.  In  2007,  the  budget  deficit  was  lower  than  planned  – 
just  a  quarter  of  a  percent  of  GDP  –  reflecting  primarily  stronger  revenue 
performance,  while  the  government  succeeded  to  keep  spending  increases  below 
revenue rises. Restrictive fiscal policy has also allowed a further reduction of public 
debt,  to  just  over  25%  of  GDP  (down  from  nearly  30%  the  year  before  and  nearly 
40%  in  2004).  The  bulk  of  this  debt  is  external  debt;  it  increased  slightly  in  dollar 
terms in 2007 but went down to less than 20% of GDP. 

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5.3. 

Structural reforms 

Moldova's  policy  agenda  is  increasingly  defined  by  the  government's  European 
ambitions.  In  2007,  the  government  adopted  a  new  policy  document,  the  National 
Development  Strategy  (NDS),  built  on  and  replacing  the  Economic  Growth  and 
Poverty  Reduction  Strategy  Paper  (EGPRSP)  adopted  in  2004.  The  NDS,  which 
reflects  largely  the  priorities  of  the  EU-Moldova  ENP  Action  Plan,  adopted  in 
February 2005 for a period of three years, is aimed at becoming the reference tool for 
defining  short-  and  medium-term  policy  government  priorities.  It  will  be 
accompanied  by  National  Developments  Plans,  prepared  for  three-year  periods, 
consistent  with  the  medium-term  budget  planning  in  the  framework  of  three-year 
Medium-Term  Expenditure  Frameworks  (MTEF).  This  is  indeed  a  very  welcome 
development since until recently the budget priorities were often disconnected from 
the proclaimed policy priorities.  

In  April  2008,  the  EU  published  the  second  progress  report  evaluating  the 
implementation of the EU-Moldova ENP Action Plan. The report identifies a number 
of positive developments in the field of structural reforms in 2007, some of which are 
reviewed below.  

In the area of trade policy, the Commission services concluded that the Republic of 
Moldova had made sufficient progress in improving its institutional framework and 
system  of  controls  and  certification  of  origin  of  goods  to  meet  the  formal 
requirements  for  receiving  additional  Autonomous  Trade  Preferences  (ATPs)  from 
the EU. The Commission’s proposal for granting additional ATPs to the Republic of 
Moldova was adopted in January 2008 and entered into force in March 2008. At the 
same  time,  while  Moldova's  trade  regime  remains  generally  open,  the  authorities 
have still not dismantled all the administrative restriction on trade. So, with the world 
prices  for  wheat  increasing,  proposals  to  limit  or  ban  wheat  exports  were  floated. 
Also,  a  new  cumbersome  system  of  approving  meat  and  dairy  imports  was 
introduced in 2007. This new system will be removed and no new restriction should 
in principle be introduced. 

In  the  area  of  enterprise  policy,  several  new  laws  were  adopted  in  2007  leading  to 
some  improvement  of  the  business  environment  (i.e.  Law  on  State  Registration  of 
Legal Entities and Individual Enterprises or Law on Joint Stock Companies). Also, 
the  government  decided  to  revitalize  the  privatisation  process  that  had  been  stalled 
for several years. So, the authorities are planning to speed up the privatisation of the 
telecom operator. 

Yet,  there  are  still  barriers  to  establishment  of  businesses,  in  particular  due  to  the 
heavy and sometimes arbitrary administrative requirements and controls imposed on 
investors. Not surprisingly, the business environment in Moldova is still perceived as 
not  attractive.  Indeed,  Moldova’s  ranking  in  the  World  Bank’s  Doing  Business 
survey remained essentially unchanged in 2007 (it even deteriorated slightly from the 
90th position in the 2007 Doing Business Report to the 92nd in the 2008 Report).  

In  the  area  of  financial  services,  progress  was  made  in  the  banking  regulation  and 
supervision. The Republic of Moldova continued to implement the recommendations 
of the IMF’s Financial Sector Assessment Programme (FSAP), but does not yet fully 
comply  with  them.  Referring  to  the  development  of  the  non-banking  financial 
intermediation  (insurance,  securities  markets),  some  progress  in  the  area  of 

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administrative  capacity  building  was  achieved  with  the  setting  up  of  a  new  central 
regulating authority. Also, new legislation was adopted in the area of insurance.  

In 2007 the Republic of Moldova took several measures to implement the 2006-2010 
Strategy for the Development of the Tax Service, such as the setting up of a Division 
for  combating  tax  fraud  and  the  strengthening  of  the  work  of  the  Large  Taxpayers 
Division. In April 2007 several amendments to the existing taxation legislation were 
approved.  A  0%  corporate  income  tax  on  undistributed  income  was  introduced  as 
from 1 January 2008 in replacement of all other investment incentives. Moreover, a 
possibility  for  capital  legalisation  will  remain  open  until  3  December  2008  and  a 
fiscal amnesty for tax liabilities from before January 2007 was decided.  

There  was  good  progress  on  competition  policy  through  the  establishment  of  the 
National  Agency  for  the  Protection  of  Competition  as  an  independent  authority 
(NAPC) in February 2007. A number of investigations were carried out in 2007 but 
to  be  fully  operational  the  NAPC  would  require  additional  budgetary  means  and 
trained personnel.  

Further progress was made with the entry into force in October 2007 of the new law 
on  public  procurement.  Sound  implementation  of  the  law,  along  the  lines  of  a 
specific  Action  Plan,  now  requires  the  reinforcement  of  the  administrative  and 
training  capacities  of  the  Public  Procurement  Agency  as  well  as  awareness-raising 
activities  of  the  contracting  authorities  and  the  stakeholders.  The  Republic  of 
Moldova is not yet party to the WTO agreement on Public Procurement. 

Progress can be noted in the field of internal and external audit and financial control 
and  accounting  with  the  entry  into  force  in  January  2008  of  new  laws  which 
contribute to bringing legislation closer into line with EU standards. 

5.4. 

Implementation of macro-financial assistance 

On  16  April  2007,  the  Council  adopted  a  decision  on  macro-financial  assistance  to 
the Republic of Moldova (Decision 2007/59/EC, published in the Official Journal of 
28 April 2008). Under the decision, Moldova will receive grants of a total amount of 
EUR  45  million,  in  three  instalments.  The  assistance  is  designed  to  contribute  to 
covering the country’s external financing needs in 2007-2008 identified by the IMF 
in  the  context  of  the  PRGF  arrangement  approved  in  May  2006.  It  will  be 
complementary  to,  inter  alia,  support  provided  by  the  Bretton  Woods  institutions 
(IMF  financing  under  the  PRGF  and  World  Bank’s  Poverty  Reduction  Support 
Credit)  and  budgetary  support  provided  by  the  EU  under  the  Food  Security 
Programme  (FSP)  and  the  European  Neighbourhood  and  Partnership  Instrument 
(ENPI).  

Prior  to  the  implementation  of  macro-financial  assistance,  the  Commission 
conducted an operational assessment (OA) of financial procedures and circuits in the 
Moldovan Ministry of Finance and in the National Bank. The results of the OA were 
one  of  the  inputs  to  the  policy  dialogue  with  the  authorities  of  the  Republic  of 
Moldova in the context of the implementation of macro-financial assistance that the 
Commission focused on public finance management. The particular areas identified 
in  the  course  of  this  dialogue  are  the  improved  financial  management  of  the  social 
benefits programmes (one of the top priorities of Moldova’s government in the social 
policy  area),  the  establishment  of  the  functioning  public  internal  financial  control 
system  (PIFC)  and  the  reform  and  strengthening  of  the  public  procurement.  In  all 

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three areas, the Commission has cooperated closely with the other donors involved, 
in particular the World Bank and the Commission’s EuropAid (implementing budget 
support under the FSP and the ENPI). 

The  Commission  made  one  disbursement  under  the  programme  in  2007:  the  first 
instalment  of  EUR  20  million  was  released  in  early  October.  The  Commission 
expects to disburse the second and the third tranches, amounting to respectively EUR 
10 and 15 million, before the end of 2008.  

EN 

20 

   EN 

SUMMARY STATUS OF ECONOMIC REFORM 

1. 
Price liberalisation 
Most prices have been liberalised. 

Trade liberalisation 

2. 
Relatively liberal international trade policy, but restrictions still exist on some key commodities. 
Moldova became a member of the WTO in June 2000. In early 2008 the EU granted the Republic 
of Moldova Autonomous Trade Preferences. 

Exchange regime 

3. 
Increasingly,  floating  exchange  rate  of  the  leu  with  limited  official  intervention  by  the  National 
Bank of Moldova. No restrictions on current international transactions in conformity with Article 
VIII of the IMF’s Articles of Agreement. 

Foreign Direct Investment 

4. 
Unlimited repatriation of capital and profits and no limitations on holding foreign currency bank 
accounts. Adequate overall legislation, but implementation is often problematic, which weakens 
the business climate. A new investment law introducing equal treatment of domestic and foreign 
investors adopted in 2004. FDI increased to over 9% of GDP in 2007 but is still modest. 

Monetary policy 

5. 
The  National  Bank  of  Moldova  is  gradually  moving  to  inflation  targeting  but  inflationary 
pressures in 2007, mostly resulting from capital inflows, did not allow a meaningful deceleration 
of inflation. Inflation again accelerated in the beginning of 2008. The National Bank expected to 
pursue a tighter policy course aimed at increasingly privileging control of inflation over exchange 
rate stability while still continuing to accumulate forex reserves, which exceeded for the first time 
the equivalent of three months of imports.  

Public Finance 

6. 
Budget  revenue  continued  increasing  in  2007  reflecting  rising  revenue  from  taxation  of 
consumption. As expenditure was also increased, the budget was still in small deficit (a quarter of 
a percentage point of GDP). Public external debt went down to less than 20% of GDP. Reform of 
Public  Finance  Management  continued,  with  progress  achieved  in  particular  in  developing  the 
Medium-Term  Expenditure  Framework,  in  moving  towards  the  single  Treasury  account,  in 
strengthening tax administration and in developing the system of public internal financial control.  

Privatisation and Enterprise Restructuring 

7. 
Structural  reforms  are  being  implemented  in  the  framework  of  the  National  Development  Plan 
(NDP)  and  the  EU-Moldova  ENP  Action  Plan.  Progress  is  being  achieved  in  strengthening 
bankruptcy procedures, management of state property and simplification and streamlining of the 
regulatory  environment  of  the  enterprises.  Yet  enforcement  remains  a  serious  concern  and 
business  environment  suffers  from  state  intervention  and  formal  and  informal  business 
restrictions. Also, the privatisation process was stalled for several years, only to be revitalized in 
2008. Other key areas of structural reforms – public administration and social protection reforms – 
progressed.  

Financial Sector Reform 

8. 
Restructuring  and  consolidation  of  the  financial  sector  progressed,  with  significant  foreign 
investments. Further strengthening is crucial to mobilize savings and promote investment.  

EN 

21 

   EN 

 
6.  LEBANON 

Mediterranean  Countries  taking  part  of  the  European  neighbourhood  Policy  are 
eligible to MFA under the Genval Criteria. Lebanon is the first country of this group 
benefiting from MFA since the balance of payments loan granted in 1994 to Algeria 
(Decision94/933/EC). 

6.1.  Executive summary 

The  economy  is  recovering  from  the  2006  conflict  with  Israel  in  a  context  of 
continuous political stalemate and recurrent outbreaks of violence. Real GDP growth 
in 2007 is estimated to 4%, a much better result than initially foreseen. Inflation has 
declined  despite  the depreciation of  the US dollar, to which the Lebanese pound is 
pegged.  Reflecting  reconstruction  needs,  the  current  account  deficit  is  estimated  to 
have increased to 10.7% of GDP. However, it is largely financed by official inflows 
and  foreign  direct  investment.  The  fiscal  deficit  was  contained  on  the  back  of 
stronger  than  projected  revenue  collection.  Public  debt-to-GDP  ratio  decreased 
slightly (to 171% by the end of 2007), but remains very high. 

The  government  continues  to  strike  a  careful  balance  between  reconstruction  and 
social needs, and the challenges resulting from the large public debt overhang. Fiscal 
policy  aims  at  containing  the  primary  deficit  while  accommodating  reconstruction 
and relief spending. Lebanon pursued its ambitious programme of structural reforms, 
but  the  difficult  political  context  and  the  paralysis  of  legislative  activity  limited 
progress in many fields.  

Lebanon's  financing  arrangement  with  the  IMF  concluded  in  April  2007  under  the 
Fund's  Emergency  Post-Conflict  Assistance (EPCA)  was  successfully  completed  in 
early 2008.  

Since  January  2007,  Lebanon  and  the  EU  are  implementing  an  European 
Neighbourhood  Policy  Action  Plan.  The  first  progress  report  on  the  Action  Plan 
implementation was issued by the Commission in April 2008, but it does not contain 
an overall assessment.  

In December 2007, the Council adopted a decision on a macro-financial assistance to 
Lebanon amounting to EUR 80 million – a combination of medium-term loans (EUR 
50  million)  and  grants  (EUR  30  million).  The  disbursements  under  the  assistance 
programme are expected to take place in 2008. 

6.2.  Macroeconomic performance 

In 2007, the economy of Lebanon continued its slow recovery from the 2006 conflict 
with Israel in a context of continuous political stalemate and recurrent outbreaks of 
violence.  Once  again,  it  showed  resilience  to  pressures,  which  was  reflected  in 
growth figures and financial conditions. Real GDP growth of 4% is well above the 
rates  initially  expected.  The  negative  impact  of  oil  price  increases  and  uncertain 
political  environment  was  broadly  compensated  by  boosted  regional  demand  and 
high financial aid from the region. Despite the difficult political situation, the current 
caretaker  government  of  Prime  Minister  Siniora  continues  to  ensure  the  regular 
administration of the country in accordance with the constitution. 

EN 

22 

   EN 

Fiscal outcomes in 2007 were better than expected at the beginning of the year. The 
budget deficit reached 11% of GDP, a result comparable to that of 2006. It exceeded 
initial targets on the back of stronger than projected revenue collection. Lower-than-
foreseen foreign financed capital expenditure (partly on account of delays in donors' 
disbursements) contributed to this fiscal over-performance. External grants and loans 
helped  to  achieve  a  primary  surplus  of  1.8%  of  GDP  (0.4%  without  foreign 
assistance).  Public  debt-to-GDP  ratio  decreased  to  171%  by  the  end  of  2007  from 
177% in 2006.  

The  deficit  is  expected  to  further  decrease  in  2008  although  risks  of  unforeseen 
expenditure,  such  as  security  measures  and  transfers  to  Electricité  du  Liban  on 
account of higher oil prices, remain. The 2008 Budget foresees an increase of VAT 
rate to 12% from the current 10% and of taxes on interest income from 5% to 7%, in 
line with the programme of reforms supported by the international donor community 
(agreed in the Paris III conference). Privatisation should reduce public debt by about 
30 percentage points of GDP.  

The  authorities  succeeded  in  maintaining  macro-economic  stability.  Despite 
pressures  on  reserves,  confidence  loss  and  deposits  outflows,  the  situation  was 
managed  and  confidence  restored  fairly  quickly.  Money  demand  has  remained 
robust.  Interest  rates  remained  unchanged.  Bank  deposits,  which  represent  almost 
three times the size of the GDP (out of which 77% in foreign currency), increased by 
10.5%. Profits of the banking sector rose by 10% compared to 2006. Gross reserves, 
excluding gold, remained stable. Saudi Arabia deposited once again early 2008 USD 
1  billion  at  Banque  du  Liban  to  bolster  monetary  and  financial  stability  in  the 
country.  The  value  of  Lebanon's  gold  reserves,  estimated  to  more  than  9  million 
ounces  of  gold,  surged  thanks  to  the  rise  in  price  of  the  metal  in  international 
markets. Inflation has declined compared to 2006 despite the depreciation of the US 
dollar, to which the Lebanese pound is pegged.  

Reflecting  reconstruction  needs,  the  current  account  deficit  is  estimated  to  have 
increased  to  10.7%  of  GDP  (2006:  6%)  on  account  of  a  higher  trade  deficit.  The 
current  account  deficit  is  largely  financed  by  official  inflows  and  sustained  foreign 
direct investment. 

In April 2007, the IMF Board approved Emergency Post-Conflict Assistance (EPCA) 
to Lebanon amounting to SDR 50.75 million. The full amount was disbursed shortly 
after, but the IMF continued monitoring the implementation of agreed policy actions. 
In April  2008, the  IMF  Board concluded that Lebanon has met comfortably all the 
indicative targets under EPCA. 

6.3. 

Structural reforms 

Lebanon  pursued  its  programme  of  structural  reforms  focused  on  privatisation, 
improvements in the business climate and opening of markets. However, the difficult 
political  context  and  the  paralysis  of  legislative  activity  limited  progress  in  many 
fields. The government took steps to prepare the ground for reforming the energy and 
social  sector  with  the  aim  of  limiting  open-ended  transfers  from  the  budget  while 
protecting  capital  and  social  expenditure.  Addressing  power  sector  losses  will 
contribute  to  fiscal  sustainability.  In  the  telecom  sector  measures  were  taken  to 
prepare for the corporatisation of Liban Telecom and for the privatisation of the two 
mobile  operators.  The  valuation  of  the  mobile  networks,  the  timing  of  the  auction, 

EN 

23 

   EN 

the impact of the privatisation on public finances and the role of parliament remain 
uncertain.  A  Telecommunication  Regulatory  Authority  was  also  created  to  ensure 
proper  competition  in  the  sector.  Progress  in  this  field  has  been,  however, 
controversial and slower than expected. The government approved end October 2007 
a  draft  law  on  competition  that  aims  to  increase  competition  by  fighting  monopoly 
and non-competitive arrangements. The Law foresees the creation of a Competition 
Council which would become the official reference for all related issues.  

Despite  some  progress  in  reforms,  Lebanon  regressed  in  the  overall  2007  World 
Bank  “Doing  Business"  rankings.  The  authorities  still  need  to  improve  investor 
protection  laws  and  the  system  to  enforce  commercial  contracts.  A  Business 
Registration  Simplification  project  that  aims  to  reduce  the  time  and  cost  of 
registering new companies is under preparation.  

The  financial  sector  continued  proving  its  resilience  to  shocks  despite  the  large 
public debt and significant external vulnerabilities. Its strength is attributed to three 
factors: (i) perceived implicit guarantee from donors; (ii) Lebanon's track record of 
having never defaulted on external debt or deposits and (iii) unique market structure 
for  Lebanese  debt  that  is  dominated  by  local  banks  and  dedicated  investors  and 
depositors.  

In  the  area  of  trade  policy,  Lebanon  did  not  succeed  in  2007  to  achieve  WTO 
membership.  Progress  in  negotiations  has  been  halted  by  the  paralysis  of  the 
legislative  activity.  In  the  meantime,  the  efforts  of  the  authorities  focused  on 
ensuring energy supply to the country under favourable conditions, which resulted in 
a renewed electricity agreement with Syria and an agreement with Egypt on natural 
gas imports. Some protectionist actions have also been taken in contradiction of the 
Arab Free Trade Agreement.  

Lebanon’s position in various governance rankings deteriorated compared to 2006. It 
lagged  behind  other  countries  in  the  southern  ENP  region  in  the  Transparency 
International Corruption perception Index in 2007 performing just slightly better than 
Egypt, Libya and Syria and at the same level as Algeria. Lebanon regressed as well 
in the rankings on the six World Bank governance indicators. On the other hand, the 
Ministry  of  Finance  was  among  the  winners  of  the  United  Nations  Public  Service 
Awards for 2007 for the category "Taxpayer Service". 

Regarding  public  finance  management,  the  government  reform  efforts  focused  on 
budget formulation and execution as well as medium-term planning and prioritisation 
of expenditures across ministries and public agencies. Measures aiming at improving 
cash management and implementing a single treasury account are a key part of the 
government’s  Medium-Term  Public  Financial  Management  Reform  Action  Plan.  A 
global income tax law was adopted by the Council of Ministers in November 2007 
but still requires parliamentary approval.  

The EU and Lebanon are implementing the European Neighbourhood Policy Action 
Plan which was adopted in January 2007. The first progress report was made public 
in April 2008. Because of the short period of implementation of the Action Plan, the 
Commission  did  not  give  an  overall  assessment  of  progress  for  any  of  the  areas  of 
cooperation, including the economic and financial partnership.  

EN 

24 

   EN 

6.4. 

Implementation of macro-financial assistance 

On 30 November 2006 the Council adopted a decision providing Kosovo with new 
On  20  August  2007,  the  Commission  adopted  a  proposal  for  a  Council  decision 
providing  macro-financial  assistance  to  Lebanon,  with  a  view  to  supporting 
Lebanon's public finances and balance of payments. The Commission proposed that 
the assistance would be in the form of a combination of a medium-term loan and a 
grant, of respectively EUR 50 and 30 million. The proposal was eventually adopted 
by the Council on 10 December 2007 (Council Decision 2007/860/EC, published in 
the  Official  Journal  on  21  December  2007).  The  assistance  seen  as  part  of  the  EC 
assistance  package  will  complement  support  from  the  Bretton  Woods  Institutions, 
bilateral  donors  (including  EU  Member  States  and  Arab  countries),  and  finally  the 
EU's own grants (under the ENPI) and loans (by the EIB). Macro-financial assistance 
is  conditional,  in  particular,  on  progress  in  the  implementation  of  the  IMF  EPCA 
arrangement and subsequent IMF-supported programmes.  

The EC macro-financial assistance aims primarily at supporting the authorities' effort 
of  fiscal  consolidation.  Thus,  the  specific  reform  measures  to  be  targeted  by  the 
programme focus on public finance management (PFM) and on two specific sectoral 
policies of particular importance for fiscal adjustment and debt reduction, namely the 
power sector and the social sector. 

In identifying the policy conditions of the assistance, the Commission staff used as 
inputs the government programme of reforms, specific sectoral strategies, such as the 
Medium Term Public Financial Management Reform Action Plan, the results of the 
Operational  Assessment  of  administrative  procedures  and  financial  circuits 
conducted by external experts for the Commission in October 2007 and discussions 
with  major  donors  on  the  reform  conditions  attached  to  budget  support.  The 
agreement on the conditions to be attached to the disbursement of the assistance was 
expected  to  be  finalised  in  April-May  2008.  The  Commission  intends  to  make  the 
disbursements before the end of 2008. 

EN 

25 

   EN 

SUMMARY STATUS OF ECONOMIC REFORM  

1.  Price liberalisation 
Most prices are free. 

2.  Trade liberalisation 
Liberal international trade policy, but protectionist measures are occasionally introduced. Lebanon is 
a founding member of GATT but it withdrew in 1949. It is now negotiating the accession to WTO.  

3.  Exchange regime 
Fixed  exchange  rate  (peg  to  the  USD).  No  restrictions  on  current  international  transactions  in 
conformity  with  Article  VIII  of  the  IMF’s  Articles  of  Agreement.  Lebanon  has  also  achieved  a 
substantial capital account convertibility. 

4.  Foreign Direct Investment 
Unlimited  repatriation  of  capital  and  profits  and  no  limitations  on  holding  foreign  currency  bank 
accounts.  Legislation  is  overall  adequate  and  an  investment  development  authority  exists  but 
enforcement  of  contracts  sometimes  problematic  in  the  absence  of  commercial  courts  and 
independent judiciary.  

5.  Monetary policy 
The Banque du Liban (BdL)) uses a wide menu of monetary policy instruments to maintain financial 
stability  and  provide  liquidity  to  the  banking  sector.  It  also  occasionally  provides  financing  to  the 
government (on a temporary basis). The exchange rate peg is regarded as a key factor in maintaining 
financial  stability.  Gross  international  reserves  are  increasing,  partly  because  of  higher  gold  prices 
(BdL holda a large gold stock). 

6.  Public Finance 
Fiscal  performance  in  2007  was  better  than  planned  reflecting  rising  revenue  from  taxation  and 
delays in spending. Public finance management reform focuses on budget formulation and execution 
and medium-term planning. 

7.  Privatisation and Enterprise Restructuring 
Structural  reforms  programme  focuses  on  privatisation,  improvement  of  business  climate  and 
opening  of  markets,  but  progress  is  limited  due  to  the  political  situation.  Government  approved  a 
draft law on competition. Yet business environment rating of Lebanon regressed in 2007.  

8.  Financial Sector Reform 
Lebanon has a sophisticated and developed financial sector which proved resilient to shocks despite 
vulnerabilities.  

EN 

26 

   EN 

 
Annex 1A - COMMUNITY MACRO-FINANCIAL AND EXCEPTIONAL FINANCIAL ASSISTANCE
 TO THIRD COUNTRIES BY DATES OF COUNCIL DECISIONS
Status of effective disbursements as of end-December 2007 (in millions of euro) 

Country 

Date of

Reference of

Council Decision Council Decision

Maximum
amount

Dates of
disbursements

Amounts of
disbursements

Totals

Undisbursed

Dates of
repayments

Amounts of
repayments

Totals

Outstanding

Authorisations

Disbursements

Repayments

350
260

185
190

100
80

150
140

190
185

160

250

110

(20)
(40)
(50)

80

5

610

375

180

290

375

160

250

110

80

5

Apr. 95
févr-96

mars-98
déc-97

mars-98
déc-97

mars-98
déc-97

févr-99
mars-98

déc-97

déc-97
août-01

déc-01
août-03

mars-00
mars-00
juil-00
août-02

févr-00

From 12/2000
From 08/2001

nov-02
sept-04
déc-04

nov-02

Hungary I
(Structural adjustment loan)

22.02.90

90/83/EC

Czech and Slovak Federal Republic
(BOP loan)

25.02.91

91/106/EC

Hungary II
(BOP loan)

Bulgaria I 
(BOP loan)

Romania I
(BOP loan)

24.06.91

91/310/EC

24.06.91

91/311/EC

22.07.91

91/384/EC

260
( Suspended)

870

375

180

290

375

Apr. 1990
Feb. 1991

Mar. 1991
Mar. 1992

Aug. 1991
Jan. 1993

Aug. 1991
Mar. 1992

Jan. 1992
Apr. 1992

350
260

185
190

100
80

150
140

190
185

610

375

180

290

375

Israel   (1)
(Structural adjustment soft loan)

22.07.91

91/408/EC

187,5

Mar. 1992

187,5

187,5

Algeria I
(BOP loan)

Albania I
(BOP grant)

Bulgaria II
(BOP loan)

Baltics
(BOP loans)
of which :
    Estonia
    Latvia
    Lithuania

Romania II
(BOP loan)

Moldova I
(BOP loan)

Romania III
(BOP loan)

Albania II
(BOP grant)

Algeria II
(BOP loan)

Slovakia
(BOP loan)

Ukraine I
(BOP loan)

Belarus
(BOP loan)

Ukraine II
(BOP loan)

Moldova II
(BOP loan)

fYRoM I
(BOP loan)

Bulgaria III
(BOP loan)

23.09.91

91/510/EC

28.09.92

92/482/EC

19.10.92

92/511/EC

23.11.92

92/542/EC

27.11.92

92/551/EC

13.06.94

94/346/EC

400

70

110

220

(40)
(80)
(100)

80

45

20.06.94

94/369/EC

125

28.11.94

94/773/EC

22.12.94

94/938/EC

35

200

Jan. 1992
Aug. 1994

Dec. 1992
Aug. 1993

Dec. 1994
Aug .1996

Mar. 1993
Mar. 1993
Jul. 1993
Aug. 1995

Feb. 1993

Dec. 1994
Aug. 1995

Nov. 1995
Sep. 1997
Dec. 1997

Jun. 1995
Oct. 1996

250
150

35
35

70
40

20
40
50
25

80

25
20

55
40
30

15
20

Nov. 1995

100

22.12.94

94/939/EC

130

Jul. 1996

22.12.94

94/940/EC

10.04.95

95/132/EC

85

55

23.10.95

95/442/EC

200

25.03.96

96/242/EC

22.07.97

97/471/EC

15

40

22.07.97

97/472/EC

250

Dec. 1995

Dec. 1995

Aug. 1996
Oct. 1996
Sep. 1997

Dec. 1996

Sep. 1997
Feb. 1998

Feb. 1998
Dec. 1998

85

30

50
50
100

15

25
15

125
125

400

70

110

135

(20)
(40)
(75)

80

45

125

35

100

85

30

200

15

40

250

85
(Suspended)

(20)
(40)
(25)

100
(Suspended)

130
(Cancelled)

From 12/2001

25
(Suspended)

From 12/2001

From 08/2002
From 10/2002

From 10/2002
in 5 tranches

oct-08

févr-05
déc-05

150

110

25

(25)

40

125

100

85

30

200

15

40

250

EN 

27 

   EN 

 
Authorisations

Disbursements

Repayments

Country 

Date of

Reference of

Council Decision Council Decision

Maximum
amount

Dates of
disbursements

Amounts of
disbursements

Totals

Undisbursed

Dates of
repayments

Amounts of
repayments

Totals

Outstanding

Armenia, Georgia and Tajikistan (2)
(Structural adjustment loans and grants)
of which

17.11.97

97/787/EC

375

modified by

28.3.00

00/244/EC

294,5

80,5

138

   Armenia

   Georgia

   Tajikistan

Ukraine III
(BoP loan)

Albania III
(BOP loan)

Bosnia I  (3)
(BOP loan and grant)

Bulgaria IV
(BOP loan)

fYRoM II (4)
(BOP loan and grant)

Romania  IV
(BOP loan)

Kosovo I (5)
(Grant budgetary support)

Montenegro (5)
(Grant budgetary support)

Moldova III
(BOP loan)

Kosovo II (3)
(Grant budgetary support)

Serbia and Montenegro (ex FRY) I (6)
(BOP loan and grant)

Ukraine IV
(BOP loan)

(58)

(175)

(95)

Dec. 1998 (loan)
Dec. 1998 (grant)
Dec.  1999 (grant)
Feb. 2002 (grant)
Dec. 2002 (grant)
June 2004 (grant)
Dec 2005 ( grant)

Jul. 1998 (loan)
Aug. 1998 (grant)
Sep. 1999 (grant)
Dec. 2001 (grant)
Dec 2004 (grant)

Mar. 2001 (loan)
Mar. 2001 (grant)
Dec. 2001 (grant)
Feb. 2003 (grant)
May 2005 (grant)
Oct 2007 (grant)

150

Jul. 1999

15.10.98
12.07.02

98/592/EC
02/639/EC

22.04.99

99/282/EC

10.05.99

99/325/EC

modified by

10.12.01

01/899/EC

20

60

08.11.99

99/731/EC

100

08.11.99

99/733/EC

modified by

10.12.01

01/900/EC

80
18

08.11.99

99/732/EC

200

19.02.00

00/140/EC

22.05.00

00/355/EC

10.07.00
19.12.02

00/452/EC
02/1006/EC

27.06.01

01/511/EC

35

20

15

30

16.07.01

01/549/EC

345

modified by

10.12.01

01/901/EC

12.07.02

02/639/EC

Dec. 1999 (grant)
Dec. 1999 (loan)
Dec. 2000 (grant)
Dec. 2000 (loan)
Dec. 2001 (grant)

Dec. 1999
Sep. 2000

Dec. 2000 (grant)
Dec. 2000 (loan)
Dec. 2001 (loan)
Dec. 2001 (grant)
May 2003 (grant)
June 2003 (loan)
Dec. 2003 (loan)
Dec. 2003 (grant)

Jun. 2000
July 2003 (loan)

Mar. 2000
Aug. 2000

Aug. 2000
Dec. 2000

Sep. 2001
Dec. 2002

Oct. 2001
Oct. 2001
Jan. 2002
Aug. 2002

110

130

Dec. 2002 (grant)
Fev. 2003 (loan)
Aug. 2003 (grant)
Aug. 2003 (loan)

Serbia and Montenegro II (ex FRY) (7)

05.11.02

02/882/EC

modified by

25.11.03

03/825/EC

70

Dec 2004 (grant)

07.12.2004

04/862/EC

Bosnia II (8)

05.11.02

02/883/EC

60

modified by

7/12/2004

04/861/EC

Moldova IV

Albania IV (9)

Georgia II

Kosovo 

Moldova

Lebanon

TOTAL

19.12.02

02/1006/EC

29.04.04

04/580/EC

15

25

        24.01.06

06/41/EC

33,5

30.11.06

06/880/EC

16.04.07

07/259/EC

10.12.07

07/860/EC

50

45

80
-------
6404

April 2005 (loan)

Dec 2005 (grant)

Fev. 2003 (grant)
Dec. 2003 (grant)

Dec 2004 (loan)
Jun 2005 (grant)

Feb 2006 (loan)

Nov 2005 (grant)
March 2006 ( loan)
July 2006 (grant)

August 2006 (grant)
Dec 2006 (grant)

Oct 2007 (grant)

28
8
4
5,5
5,5
5,5
1,5

110
10
9
6
6,5

60
7
7
7
7
7

58

15
10
10
10
15

40
60

20
10
12
10
10
10
18
8

100
50

20
15

7
13

15
15

225
35
40
45

30
10
35
30

10

15
25

15
10

10
15
10

3
9
13

11
11

20

58

0

141,5

33,5

92
(Cancelled)

20

95

58

60

100

98

150

50

35

20

30

345

105

15
(Cancelled)

110

25

50

20

60

25

22

20

-------
5210,0

15

11,5

50

25

80
-------
1194,0

58

20

100

10

150

225

-------
2435

-------
2435

-------
1871

(1)
(2)

Assistance to Israel includes a loan principal amount of € 160 million and grants of € 27.5 million in the form of interest sub sidies.
Exceptional financial assistance, which includes a ceiling of euro 245 million for the loans and a ceiling of euro 130 million for the grants
Out of the global amount of euro 375 million, maximum amounts of euro 58 million, euro 175 million and euro 95 million were actually agreed with the beneficiary
 countries.
Includes a loan principal amount of up to € 20 million and grants of up to € 40 million.
Includes a loan principal amount of up to € 50 million and grants of up to € 48 million.

(3)
(4)
(5) Exceptional financial assistance.
(6)
(7)
(8)
(9)

Includes a loan principal amount of € 225 million and grants of € 120 million.
Includes a loan principal amount of € 55 million and grants of € 75 million
Includes a loan principal amount of € 20 million and grants of € 40 million
Includes a loan principal amount of € 9million and grants of € 16 million

EN 

28 

   EN 

 
                                                            
 
Annex 1B - COMMUNITY MACRO-FINANCIAL AND EXCEPTIONAL FINANCIAL ASSISTANCE
 TO THIRD COUNTRIES BY REGION

Status of effective disbursements as of end-December 2007 (in millions of euro) 

Country 

Date of

Reference of

Council Decision Council Decision

Maximum
amount

Dates of
disbursements

Amounts of
disbursements

Totals

Undisbursed

Dates of
repayments

Amounts of
repayments

Totals

Outstanding

Authorisations

Disbursements

Repayments

A. EU Accession countries

Baltics
(BOP loans)
of which :
    Estonia
    Latvia
    Lithuania

Bulgaria I 
(BOP loan)

Bulgaria II
(BOP loan)

Bulgaria III
(BOP loan)

Bulgaria IV
(BOP loan)

23.11.92

92/542/EC

220

24.06.91

91/311/EC

19.10.92

92/511/EC

22.07.97

97/472/EC

08.11.99

99/731/EC

Czech and Slovak Federal Republic
(BOP loan)

25.02.91

91/106/EC

Hungary I
(Structural adjustment loan)

Hungary II
(BOP loan)

Romania I
(BOP loan)

Romania II
(BOP loan)

Romania III
(BOP loan)

Romania  IV
(BOP loan)

Slovakia
(BOP loan)

TOTAL A
B. Western Balkans

Albania I
(BOP grant)

Albania II
(BOP grant)

Albania III
(BOP loan)

Bosnia I  (1)
(BOP loan and grant)

fYRoM I
(BOP loan)

fYRoM II (2)
(BOP loan and grant)

22.02.90

90/83/EC

24.06.91

91/310/EC

22.07.91

91/384/EC

27.11.92

92/551/EC

20.06.94

94/369/EC

08.11.99

99/732/EC

22.12.94

94/939/EC

28.09.92

92/482/EC

28.11.94

94/773/EC

22.04.99

99/282/EC

10.05.99

99/325/EC

modified by

10.12.01

01/899/EC

22.07.97

97/471/EC

08.11.99

99/733/EC

modified by

10.12.2001

01/900/EC

(40)
(80)
(100)

290

110

250

100

375

870

180

375

80

125

200

130

-------
3305

70

35

20

60

40

80

18

Mar. 1993
Mar. 1993
Jul. 1993
Aug. 1995

Aug. 1991
Mar. 1992

Dec. 1994
Aug .1996

Feb. 1998
Dec. 1998

Dec. 1999
Sep. 2000

Mar. 1991
Mar. 1992

Apr. 1990
Feb. 1991

Aug. 1991
Jan. 1993

Jan. 1992
Apr. 1992

Feb. 1993

Nov. 1995
Sep. 1997
Dec. 1997

Jun. 2000
July 2003

Dec. 1992
Aug. 1993

Jun. 1995
Oct. 1996

Dec. 1999 (grant)
Dec. 1999 (loan)
Dec. 2000 (grant)
Dec. 2000 (loan)
Dec. 2001 (grant)

Sep. 1997
Feb. 1998

Dec. 2000 (grant)
Dec. 2000 (loan)
Dec. 2001 (loan)
Dec. 2001 (grant)
May 2003 (grant)
June 2003 (loan)
Dec. 2003 (loan)
Dec.) 2003 (grant)

20
40
50
25

150
140

70
40

125
125

40
60

185
190

350
260

100
80

190
185

80

55
40
30

100
50

35
35

15
20

15
10
10
10
15

25
15

20
10
12
10
10
10
18
8

110

(20)
(40)
(50)

150
140

185
190

350
260

100
80

190
185

80

mars-00
mars-00
juil-00
août-02

mars-98
déc-97

déc-01
août-03

févr-05
déc-05

mars-98
déc-97

Apr. 95
févr-96

mars-98
déc-97

févr-99
mars-98

févr-00

nov-02
sept-04
déc-04

85
(Suspended)

(20)
(40)
(25)

260
( Suspended)

135

(20)
(40)
(75)

290

110

250

100

375

610

180

375

80

125

150

50

Cancelled
(Jul. 1996)
-------
2780

130
Cancelled
-------
525

20
( Cancelled)

70

35

60

40

98

110

25

290

375

610

180

375

80

(25)

110

250

100

125

150

-------
760

20

40

10

EN 

29 

   EN 

 
Country 

Date of

Reference of

Council Decision Council Decision

Maximum
amount

Dates of
disbursements

Amounts of
disbursements

Totals

Undisbursed

Dates of
repayments

Amounts of
repayments

Totals

Outstanding

Authorisations

Disbursements

Repayments

Kosovo I (3)
(Grant budgetary support)

Kosovo II (3)
(Grant budgetary support)

Montenegro (3)
(Grant budgetary support)

Serbia and Montenegro I 
(ex FRY) (4)

Serbia and Montenegro II 
( ex FRY) (5)
(BOP loan and grant)

19.02.00

00/140/EC

27.06.01

01/511/EC

22.05.00

00/355/EC

16.07.01

10.12.2001

01/549/EC
modified by
01/901/EC

35

30

20

345

05.11.02

02/882/EC

130

modified by

Mar. 2000
Aug. 2000

Sep. 2001
Dec. 2002

Aug. 2000
Dec. 2000

Oct. 2001 (grant)
Oct. 2001 (loan)
Jan. 2002 (grant)
Aug.2002 (grant)

Dec. 2002 (grant)

Fev. 2003 (loan)

Aug. 2003 (grant)
Aug. 2003 (loan)

25.11.03

03/825/EC (7)

70

Dec 2004 (grant)

07.12.04

04/862/EC

April  2005 (loan)
Dec 2005 (grant)

Fev. 2003 (grant)
Dec. 2003 (grant)
Dec 2004 (loan)

June 2005 (grant)
Feb 2006 (loan)

Nov  2005 (grant)
Mar 2006 (loan)
Jul 2006 (grant)

Bosnia II (6)
(BOP loan and grant)

05.11.02

02/883/EC

60

Albania IV (8)
(loan and grant)

Kosovo  

TOTAL B

modified by

07.12.04

04/861/EC

29.04.04

04/580/EC

30.11.06

2006/880/EC

25

50

1088

-------

(1)  Includes a loan principal amount of € 20 million and grants of € 40 million.
(2)  Includes a loan principal amount of up to € 50 million and grants of up to € 48 million.
(3) Exceptional financial assistance.
(4)  Includes a loan principal amount of € 225 million and grants of € 120 million.
(5) Includes a loan principal amount of € 55 million and grants of € 75 million
(6) Includes a loan principal amount of € 20 million and grants of € 40 million
(7) Includes a loan principal amount of € 25 million and grants of € 45 million
(8) Includes a loan principal amount of € 9 million and grants of € 16 million

35

30

20

345

105

50

60

25

20
15

15
15

7
13

35
225
40
45

30
10
35
30

10

15
25

15
10
10

15
10

3
9
13

25

20

50

115

-------

973

-------

Oct.-16

225

-------

70

EN 

30 

   EN 

 
Country 

Date of

Reference of

Council Decision Council Decision

Maximum
amount

Dates of
disbursements

Amounts of
disbursements

Totals

Undisbursed

Dates of
repayments

Amounts of
repayments

Totals

Outstanding

Authorisations

Disbursements

Repayments

C. New Independent States (NIS)

Armenia, Georgia and Tajikistan (9)
(Structural adjustment loans and grants)
of which
   Armenia

17.11.97
modified by
28.3.00

97/787/EC

00/244/EC

   Georgia

   Tajikistan

Belarus
(BOP loan)

Moldova I
(BOP loan)

Moldova II
(BOP loan)

Moldova III
(BOP loan)

Moldova IV
(BOP grant)

Ukraine I
(BOP loan)

Ukraine II
(BOP loan)

Ukraine III
(BoP loan)

Ukraine IV
(BOP loan)

Georgia II

Moldova

TOTAL C

10.04.95

95/132/EC

13.06.94

94/346/EC

25.03.96

96/242/EC

10.07.00
19.12.02

00/452/EC
02/1006 EC

19.12.02

02/1006/EC

22.12.94

94/940/EC

23.10.95

95/442/EC

15.10.98
12.07.02

98/592/EC
02/639/EC

12.07.02

02/639/EC

        21.01.06

      06/41/EC

       16.04.07

     07/259/EC

7

5

5

375

(58)

(175)

(95)

55

45

15

15

15
(15)

85

200

150

110
(15)

33,5

45
-------
1143,5

Dec. 1998 (loan)
Dec. 1998 (grant)
Dec.  1999 (grant)
Feb. 2002 (grant)
Dec. 2002 (grant)
Jun 2004( grant)
Dec 2005(grant)

Jul. 1998 (loan)
Aug. 1998 (grant)
Sep. 1999 (grant)
Dec. 2001 (grant)
Dec. 2004 (grant)

Mar. 2001 (loan)
Mar. 2001 (grant)
Dec. 2001 (grant)
Feb 2003 (grant)
May 2005 (grant)
Oct 2006 (grant)

Dec. 1995

déc-94
Aug. 1995

Dec. 1996

Dec. 1995

Aug. 1996
Oct. 1996
Sep. 1997

Jul. 1999

Aug 2006
Dec 2006

      Oct 2007

28
8
4
5,5
5,5
5,5
1,5

110
10
9
6
6,5

60
7
7
7
7
7

30

25
20

15

85

50
50
100

58

11
11

20

294,5

80,5

(58)

0

(141,5)

(33,5)

(95)

30

45

15

85

200

58

22

20
-------
769,5

25
(Suspended)

From 12/2001

From 12/2000
From 08/2001

From 10/2002
in 5 tranches

From 12/2001

From 08/2002
From 10/2002

15
(cancelled)

15

92
(cancelled)

110

11,5

25
-------
374

D. Mediterranean countries

Israel   (10)
(Structural adjustment soft loan)

Algeria I
(BOP loan)

Algeria II
(BOP loan)

Lebanon

TOTAL D

TOTAL A+B+C+D

22.07.91

91/408/EC

187,5

Mar. 1992

187,5

187,5

Jan. 1992
Aug. 1994

Nov. 1995

250
150

100

23.09.91

91/510/EC

22.12.94

94/938/EC

10.12.07

     07/860/EC

400

200

80
-------
867,5

6404

400

100

-------
687,5

100
(Suspended)

80
-------
180

5210,0

1194,0

160

250

déc-97

déc-97
août-01

nov-02

160

250

2435

9)   Exceptional financial assistance, which includes a ceiling of euro 245 million for the loans and a ceiling of euro 130 million for the grants

Out of the global amount of euro 375 million, maximum amounts of euro 58 million, euro 175 million and euro 95 million were actually agreed with the
beneficiary countries

(10)    Assistance to Israel includes a loan principal amount of ECU 160 million and grants of ECU 27,5 million in the form of interesr subsidies.

138

30

40

15

85

200

58

-------
566

150

100

-------
250

1646

EN 

31 

   EN