Commission staff working document accompanying the report from the Commission to the Council and the European Parliament on the implementation of macro-financial assistance to third countries in 2008  {COM (2009) 514}
Date: 2009-10-08
Institutions: European Commission
Subjects: EU aid, economic reform, financial aid, financial cooperation, financial management, report, third country

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 8.10.2009 
SEC(2009) 1279 

COMMISSION STAFF WORKING DOCUMENT 

ACCOMPANYING THE REPORT FROM THE COMMISSION TO THE COUNCIL 
AND THE EUROPEAN PARLIAMENT ON THE IMPLEMENTATION OF MACRO-
FINANCIAL ASSISTANCE TO THIRD COUNTRIES IN 2008 

{COM (2009) 514}

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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 

UNSCR  

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 

United Nations Security Council Resolution 
Value Added Tax 

World Trade Organisation 

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TABLE OF CONTENTS 

COMMISSION STAFF WORKING DOCUMENT ACCOMPANYING THE REPORT 
FROM THE COMMISSION ON THE IMPLEMENTATION OF MACRO-FINANCIAL 
ASSISTANCE TO THIRD COUNTRIES IN 2008 .................................................................. 1 

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

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

1. 

1.1. 

1.2. 

1.3. 

1.4. 

2. 

2.1. 

2.2. 

2.3. 

2.4. 

3. 

3.1. 

3.2. 

3.3. 

3.4. 

4. 

4.1. 

4.2. 

4.3. 

4.4. 

Kosovo (under UNSCR 1244/99) ................................................................................ 4 

Executive summary...................................................................................................... 4 

Macroeconomic performance....................................................................................... 4 

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

Implementation of macro-financial assistance............................................................. 6 

Republic of Moldova.................................................................................................... 9 

Executive summary...................................................................................................... 9 

Macroeconomic performance....................................................................................... 9 

Structural reforms....................................................................................................... 10 

Implementation of macro-financial assistance........................................................... 12 

Georgia....................................................................................................................... 14 

Executive summary.................................................................................................... 14 

Macroeconomic performance..................................................................................... 14 

Structural reforms....................................................................................................... 15 

Implementation of macro-financial assistance........................................................... 17 

Lebanon...................................................................................................................... 19 

Executive summary.................................................................................................... 19 

Macroeconomic developments................................................................................... 19 

Structural reforms....................................................................................................... 21 

Implementation of macro-financial assistance........................................................... 22 

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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  2008.  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.  

1. 

KOSOVO (UNDER UNSCR 1244/99) 

1.1. 

Executive summary 

The  IMF  and  the  Kosovo  authorities  suggest  a  real  GDP  growth  of  around  5¼%  in  2008 
which would mean a continuation of the upward trend observed in previous years. However, 
the general picture that Kosovo lags behind its neighbours and that growth is too sluggish to 
meet the substantial development needs remains unchanged. GDP per capita – some €1,800 in 
2008 - is still one of the lowest in Europe.  

On 17 February 2008, Kosovo declared independence and was subsequently recognised by 22 
EU Member States, the US, Japan and a number of other non-EU countries. On 15 June 2008, 
the new Kosovo Constitution came into force. In July 2008, Kosovo applied for membership 
to the IMF and the World Bank and became a member of both institutions on 29 June 2009 

The Council approved in November 2006 MFA budget support of up to € 50 million (Council 
Decision  2006/880/EC).  Yet,  the  foreseen  budget  financing  gap  has  so  far  not  materialised, 
mainly  due  to  higher  than  expected  revenues  and  capital  under-spending.  In  addition,  an 
agreement with the IMF on fiscal policies has so far not been achieved, which is a preliminary 
condition for the release of the assistance. Consequently, the assistance remains outstanding. 
However, it is expected that the conditions for disbursement may be fulfilled in the course of 
2009,  taking  into  account  IMF  membership  and  the  deteriorating  economic  situation  which 
will have repercussions on Kosovo's budget. The conditionality attached to this assistance was 
agreed between the Commission and the authorities of Kosovo in 2007 and a Memorandum of 
Understanding was accordingly signed in December 2007. 

1.2.  Macroeconomic performance 

Growth is estimated to have been relatively strong at 5¼% in 2008, after 4.1% in 2007. Main 
contributors to growth were sustained donor activity, workers' remittances, and a significant 
increase in public investment. As Kosovo's integration into global markets is limited and its 
financial sector is rather shallow and poorly developed, the impact of the international crisis 
has  been  limited  so  far.  The  use  of  the  euro  as  legal  tender  shelters  Kosovo  from  currency 
depreciation  and  financial  sector  indicators  remained  robust.  The  falling  prices  for 
commodities,  while  reducing  the  size  of  the  trade  deficit,  are  an  additional  risk  factor  for 
fiscal  revenue  projections.  As  a  consequence,  government  finances  may  come  under  stress 
towards the end of the year, with fiscal reserves – currently still at a favourable level – falling 
below required prudent levels. 

Strong domestic demand and deterioration in the terms of trade widened the current account 
deficit  (after  foreign  assistance)  to  an  estimated  22½%  of  GDP,  compared  to  17%  in  2007. 
FDI net inflows are estimated to have reached only 9.3% of GDP in 2008, down from 12.3% 
of  GDP  in  2007,  partly  due  to  a  virtual  standstill  in  the  privatisation  process  in  the  first  8 

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months  of  2008  after  the  shift  of  authority  from  UNMIK  to  the  newly  created  institutions 
under the Kosovo Constitution. 

The coverage ratio of exported to imported goods (12-month moving average) has gradually 
increased  albeit  at  a  very  low  level  from  8.5%  in  2006  to  9.4%  in  2007  and  11.2%  in 
September  2008.  However,  the  reduction  of  export  demand  experienced  since  autumn  2008 
has  dramatically  reduced  Kosovo's  exports  which  fell  by  over  13%  year-on-year  in  the  last 
quarter  2008.  Overall,  the  value  of  exports  and  imports  in  2008  increased  by  18.7%  and 
22.3% respectively over 2007. The European Union and the countries of CEFTA remain the 
main trading partners of Kosovo.  

The monetary framework remains anchored on the use of the euro as legal tender. The Central 
Bank of Kosovo (CBK), 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. The banking sector has shown only few signs of distress in 2008, and financial 
intermediation has progressed continuously. At the end of 2008, annual deposit growth stood 
at  24.4%  and  credit  growth  at  32.7%.  The  banking  system  consists  of  eight  banks  which 
mainly engage in domestic deposit-taking and lending. 

Inflation decelerated sharply during the final months of 2008, due mostly to falling food and 
energy  prices,  lowering  twelve-month  CPI  inflation  to  0.5%  in  December  from  its  peak  of 
14% in May-July. The persistence of this deflationary tendency cannot be ruled out in the first 
half  of  2009  as  base  effects  will  continue  to  put  downward  pressure  on  the  measured  price 
level. Average annual inflation in 2008 stood at 9.4%, after 4.4% in 2007 and 0.6% in 2006.  

Remittances have so far kept up well and, until the end of 2008, have not shown any signs of 
weakening  (officially  recorded  remittances  stand  at  around  10%  of  GDP,  however  the  true 
figure  -recorded  and  unrecorded-  is  considered  to  be  closer  to  20%  of  GDP).  Migrant 
remittances  constitute  a  major  source  of  income  for  Kosovo  which  could  dry  out  when 
workers  are  laid  off  in  host  countries  as  the  economic  crisis  affects  the  sectors  in  which 
migrants typically work, such as construction, manufacturing as well as restaurants and hotels. 
The government estimates remittances to amount to around €450 million in 2008 1.  

Unemployment  remains  very  high  in  Kosovo  with  significant  differences  between  genders. 
The  results  of  the  Labour  Force  Survey  2007  (published  in  August  2008)  revealed  rates  of 
unemployment  at  43.6%  (male  38.5%,  female  55.2%),  of  activity  at  46.5%  (male  65.2%, 
female  28.3%)  and  of  employment  at  26.2%  (male  40.1%,  female  12.7%).  However,  the 
significant size of the informal sector may somehow distort the actual picture. The fact that 
most  of  the  unemployment  is  long-term  aggravates  the  alarming  situation  on  the  labour 
market. 

Budgetary  developments  in  Kosovo  have  been  quite  volatile  and  hard  to  predict  in  recent 
years.  The  primary  balance  turned  from  a  deficit  of  3.1%  of  GDP  in  2005  to  surpluses  of 
2.5% in 2006 and even 7.2% in 2007. 2008 is expected to show a deficit of around 1.3% of 
GDP  after  both  current  and  capital  spending  increased  substantially.  The  estimated  budget 
outcome  for  2008  displays  revenues  just  slightly  below  the  level  of  2007.  In  2008  tax 
revenues  increased  by  8.6%  compared  to  2007.  On  the  spending  side,  capital  investment 

1 

Remittances  are  therefore higher  than  foreign  assistance  (estimated  at  €375  million  in 2008).  Foreign 
assistance  to  Kosovo  is  however  unlikely  to  be  substantially  affected  by  the  international  financial 
crisis. Donors have made explicit commitments (mentioning specific amounts) at the donor conference 
for a period up to 2011. 

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spending  rose  by  more  than  70%  in  2008.  The  execution  rate  of  capital  expenditures  is 
estimated at 80% which could only be reached thanks to a dramatic acceleration of spending 
in the last two months of 2008 when almost half of the funds appropriated for the whole year 
were allocated. However, also subsides and transfers increased by more than 40% compared 
to  2007.  At  the  end  of  2008,  the  government's  cash  balance  (reserves)  amounted  to  the 
equivalent of 5 months of public expenditure. 

1.3. 

Structural reforms 

Regulatory authorities have been set up for all major network and commodity industries, but 
their capacity remains weak. There have been few changes in the enterprise structure, which 
remains  dominated  by  micro-enterprises.  However,  development  of  the  financial  sector  has 
helped  to  increase  the  share  and  dynamism  of  the  services  sector.  In  several  instances,  the 
potential  positive  effects  of  liberalisation  have  not  been  able  to  materialise  due  to  weak 
corporate governance.  

In October 2008 the board of the new Privatisation Agency of Kosovo (PAK) approved the 
business plan for the remainder of the year. This, together with the establishment of the new 
salary scheme, enabled PAK to recruit its staff and to resume the privatisation of state owned 
enterprises which had basically come to a standstill in the first three quarters of 2008. Three 
new waves of privatisations of socially owned enterprises were launched.  

The  restructuring  of  publicly-owned  enterprises  remains  one  of  the  biggest  challenges  of 
structural  policy.  Infrastructure  remains  insufficient  and  often  of  poor  quality.  The  energy 
sector remains crucial for Kosovo's economic development. Energy supplies suffer from the 
poor governance structure and weak management of the energy provider KEK combined with 
underinvestment, despite constant high subsidies from the budget, vested interests and weak 
political will to change the situation. Theft and non-payment of bills continue to be tolerated 
and contribute to inefficient use of a scarce resource, even though some improvements have 
been noted in the billing and collection rate after the introduction of new measures in some 
pilot districts in the third quarter of 2008 that include the set-up of a revenue protection unit 
and the introduction of bonus system. The collection rate reached 91% in 2008, after 79% in 
2007.  The  government  pursues  the  privatisation  of  KEK  which  includes  generation  and 
distribution  and  the  construction  of  a  new  power  plant.  Furthermore,  the  efficiency  of  the 
judiciary  system  remained  low  and  only  little  progress  was  made  in  enforcement  of  court 
rulings and the establishment of property rights. 

1.4. 

Implementation of macro-financial assistance 

On 30 November 2006 the Council adopted a decision (2006/880/EC) 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 bridging support, to be topped up by another package from the EC 
and other international donors upon status settlement.  

However, the general government balance for the years 2006-2007 turned out very differently 
than  initially  foreseen  and  resulted  in  surpluses  of  2.5%  of  GDP  in  2006  and  even  7.2%  in 
2007. The expected budget deficit of 1.3% in 2008 could be financed from the cash balance. 

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Therefore, the outstanding EC support remains available, but it will, unlike initially foreseen, 
not serve as bridging support pending status settlement.  

A donor conference addressing Kosovo's socio-economic development took place on 11 July 
2008  and  resulted  in  pledges  of  €1.2  billion  out  of  which  €  100  million  possible  additional 
MFA  and  €  358  million  additional  support  from   the  EU  Instrument  for  Pre-Accession 
(IPA).As regards the already approved € 50  million MFA operation, payments of EC budget 
could  take  place  towards  the  end  of  2009  and/or  in  2010.  Given  the  expected  slowdown  in 
economic  activities  and  related  downside  risks  to  the  budget,  a  significant  financing  gap  is 
likely  to  materialise  throughout  the  year.  Revenues  may  be  negatively  affected  as  imports 
may  be  much  lower  in  value  mainly  due  to  lower  prices2.  Besides,  given  the  tighter  credit 
markets  and  weak  international  demand,  the  government  may  not  be  able  to  implement  the 
planned  privatisation  agenda.  In  addition,  the  prospects  for  the  authorities  of  reaching  an 
agreement  with  the  IMF  on  sound  fiscal  policies  in  2009  –  the  other  main  condition  for 
disbursement – have significantly improved. 

2 

Some two thirds of public revenues depend on revenues collected via the taxation of imports. 

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SUMMARY STATUS OF ECONOMIC REFORM  

Price liberalisation 

1. 
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 ensure the 
absence of government interference in the price setting mechanism of their services.  

Trade liberalisation 

2. 
Regional trade integration and liberalisation continued. In 2007, the Central European Free Trade 
Agreement  came  into  force  between  Albania,  Bosnia  and  Herzegovina,  Croatia,  Kosovo  (under 
UNSCR 1244/99),  the  former  Yugoslav  Republic  of  Macedonia,  Moldova,  Montenegro  and 
Serbia. In December 2008, Kosovo started using new customs stamps that were not recognised by 
Serbia and Bosnia-Herzegovina. Efforts to resolve this trade dispute are ongoing. 

Exchange rate regime 

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

Foreign direct investment 

4. 
FDI net inflows are estimated to have reached only 9.3% of GDP in 2008, down from 12.3% of 
GDP in 2007, partly due to a virtual standstill in the privatisation process in the first eight months 
of  2008  after  the  shift  of  authority  from  UNMIK  to  the  newly  created  institutions  under  the 
Kosovo Constitution.  

Monetary policy 

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

Public finance 

6. 
The authorities finalised a revised Medium-Term Expenditure Framework in June 2008, prior to 
the donor conference in July. The execution of the budget in 2008 was characterised by relatively 
high revenues and a substantial increase in capital spending. Preliminary data point to an annual 
2008 budget deficit of 1.3% of GDP.  

Privatisation and enterprise restructuring 

7. 
The privatisation of socially-owned enterprises came to a standstill during the first three quarters 
of 2008 due to the transformation of the Kosovo Trust Agency that operated under UNMIK Pillar 
IV  to  the  Privatisation  Agency  of  Kosovo.  The  restructuring  of  publically-owned  enterprises 
remains one of the major challenges of government actions in Kosovo.  

Financial sector reform 

8. 
The banking sector has shown only few signs of distress in 2008, and financial intermediation has 
progressed continuously. Overall, the sector is sound, profitable and well capitalised, based on a 
very conservative banking model with the bulk of  business carried out domestically. Both credit 
and deposit growth have slightly decelerated towards the end of 2008, but remained at comfortable 
levels. Altogether, eight commercial banks operate in Kosovo.  

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2. 

REPUBLIC OF MOLDOVA 

2.1. 

Executive summary 

investments,  financed  by  capital 

Moldova's  economy  grew  more  than  7%  in  2007,  driven  once  again  by  household 
inflows  from  abroad  (including 
consumption  and 
remittances). Yet, the financial crisis started affecting the economy already at the end of 2008, 
and  the  situation  deteriorated  further  in  2009.  Inflationary  pressures  that  had  developed  in 
2007 and early 2008 on the back of high global commodity prices abated in the second half of 
2008  and  the  economy  entered  into  deflation  in  early  2009.  In  the  run-up  to  parliamentary 
elections  scheduled  of  April  2009,  the  authorities  relaxed  gradually  the  fiscal  stance.  They 
also postponed the introduction of crucial structural reforms necessary to adjust to the crisis 
environment.  At  the  same  time,  the  implementation  of  the  National  Development  Strategy 
(replacing  the  Economic  Growth  and  Poverty  Reduction  Strategy)  and  of  the  EU-Moldova 
ENP Action Plan continued. In April 2009, the Commission issued the second progress report 
on the implementation of the ENP.  

The financing arrangement with the IMF concluded in May 2006 and supported by the Fund's 
PRGF (Poverty Reduction and Growth Facility) remained on track until the very end of 2008, 
allowing  the  IMF  Board  to  complete  in  July  2008  the  fourth  programme  reviews.  The  fifth 
programme review, planned for January 2009, was delayed in view of the deterioration of the 
economic situation and in the run-up to parliamentary elections in April 2009. Later (in May 
2009), the PRGF arrangement expired. Despite the delay and later the expiration of the PRGF 
arrangement  without  any  follow  up,  the  EU  macro-financial  assistance  programme  was 
completed  successfully  as  all  the  conditions  pertaining  to  the  release  of  the  assistance  had 
been met.  

2.2.  Macroeconomic performance 

Economic activity in Moldova, severely affected by the 2007 drought, rebounded strongly in 
2008. In the first three quarters of last year, real GDP increased by 7.6%. The deceleration of 
activity in the last months of 2008 resulting from the global financial turmoil did not affect 
too seriously the overall 2008 result: growth was still 7.2%. Data by sector of origin indicate 
that  Moldova’s  improved  performance  in  2008  is  mainly  attributable  to  agriculture  whose 
output increased by more than one-third (after a similar decline in 2007) and to the services 
sector,  mainly  trade  and  transport.  At  the  same  time,  industrial  output  increased  only 
marginally, by 0.3%, after a small decline in 2007, and the production of services expanded 
by  less  than  4%,  after  a  14%  growth  in  2007.  The  increase  in  output  of  tradable  sectors 
(industry and agriculture) in 2008 (contrary to 2007) does not mean any fundamental change 
in  Moldova's  growth  model  which  is  based  on  the  transfer  of  resources  from  abroad  to 
accommodate  fast  growing  domestic  demand.  Like  in  previous  years,  for  most  of  2008, 
disposable income continued growing, reflecting strong wage growth and the accommodative 
monetary policy of the National Bank of Moldova (NBM). Once again, the trade deficit was 
financed by capital from abroad: remittances from Moldovans abroad (still close to one-third 
of GDP) maintained the current account deficit at around 16% of GDP; growing foreign direct 
investment (FDI – about 11% of GDP for the second year in a row) or bank credit financed 
the current account deficit.  

Despite this overall benign picture, the global financial crisis started affecting the Moldovan 
economy in the last months of 2008. The first elements of the crisis were (a) the deceleration 
of  trade  growth,  reflecting  both  lower  demand  of  main  Moldova's  trading  partners  (Russia, 
Ukraine,  Belarus  and  the  EU,  all  hit  by  the  crisis  at  varying  degrees)  and  fading  access  to 
trade  finance,  and  (b)  lower  remittances  and  FDI  inflows.  The  contraction  of  external  trade 

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accelerated  sharply  in  the  beginning  of  2009:  in  the  first  quarter,  exports  and  imports  were 
respectively 18 and 25% below their level in the corresponding period of 2008. There are also 
indications that the contraction of remittances is equally accelerating.  

The  impact  of  the  contraction  of  trade  on  the  domestic  economy  is  reflected  in  the  very 
substantial drop of industrial production in the first quarter 2009. Industrial output was down 
nearly  25%  on  its  level  in  the  same  period  of  2008.  It  is  expected  that  the  agricultural 
production will also contract as most of Moldova's agricultural exports will be affected by low 
demand in its partner countries. 

The  result  of  this  double  external  shock  was  the  building  up  of  pressures  on  the  financial 
sector  and  the  national  currency.  Given  that  at  the  same  time  the  international  commodity 
prices eased  (which led  gradually to a very  sharp  slowdown  of  inflation,  from  17%  in  May 
2008  to  little  more  than  7%  in  December  of  that  year  and  close  to  zero  in  April  2009),  the 
NBM could intervene in both relaxing somewhat the monetary policy to provide liquidity to 
the financial sector and to use part of the country's official reserves to defend the exchange 
rate of the Moldovan leu. Between September 2008 and February 2009, the NBU cut its main 
refinancing rate from 18.5% to 11%; at the same time, the official reserves were reduced by 
nearly 40% (the bulk of this reduction took place in 2009).  

As the pressure on the exchange rate could so far be contained, Moldova's depositors did not 
attempt to withdraw their bank deposits. Also, Moldovan banks' exposure to foreign creditors 
is relatively modest. Thus the country's banking system was not put under strong pressure by 
the changing credit environment.  

The vulnerability of the economy has been further compounded in 2008, when, in the run-up 
to parliamentary elections in April 2009, the authorities implemented a less restrictive fiscal 
policy:  in  2008,  the  general  government  deficit,  although  still  modest,  was  clearly  above 
target.  In  the  situation  of  the  unfolding  financial  and  economic  crisis,  the  authorities  also 
refused  to  make  any  adjustment  to  lower  fiscal  revenue,  which  had,  by  the  time  of  the 
elections,  led  to  the  near  depletion  of  government  deposits.  It  also  prevented  them  from 
drawing  the  two  last  instalments  under  the  PRGF  (Poverty  Reduction  and  Growth  Facility) 
financing arrangement with the IMF that expired in May 2009.  

2.3. 

Structural reforms 

In  2008,  the  Moldovan  government  continued  the  implementation  of  the  National 
Development Strategy (NDS) adopted in 2007. The NDS, which reflects largely the priorities 
of the EU-Moldova ENP Action Plan, adopted in February 2005 for a period of three years 
and  subsequently  extended.  The  NDS  is  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).  

In  March  2008,  the  Government  issued  a  progress  report  on  the  implementation  of  the 
National  Strategy  on  employment  for  the  period  2007-2015.  In  December  2008,  the  ILO 
performed the audit of the labour inspection to assess its capacities and signed a decent work 
country programme with Moldova for the years 2008-2011. The programme, developed with 
the  participation  of  the  social  partners,  focuses  on  better  labour  administration,  effective 
employment  policy  formulation  and  on  the  development  of  sound  social  security  policies 
based on social dialogue.  

Moldova  continued  its  preparations  for  the  negotiation  of  an  Agreement  on  Conformity 
Assessment and Acceptance of Industrial Products. Moldovan legislation was harmonised to 
several  sectoral  EU  directives  and  the  country  continued  adopting  several  EU  and  ISO 

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standards. In June 2008, the government adopted a decree on the State Main Inspectorate for 
Market  Surveillance,  Metrology  and  Consumer  Protection.  Market  surveillance  remains  an 
area with many challenges.  

The new developments in company law and establishment include changes in legislation on 
Registration  of  Legal  Persons  and  Individual  Entrepreneurs  and  the  creation,  in  November 
2008, of a “Licensing Agency”, a one-stop shop for issuing more than 80 different licenses. 
At  the  same  time,  business  operators  continue  facing  practical  difficulties  in  the  area  of 
business  regulations,  such  as  VAT  refund  (despite  the  adoption  of  new  regulations), 
acquisition of land or issuing of construction permits.  

In  the  field  of  financial  services,  some  limited  progress  was  made  in  strengthening  the 
framework of supervision (notably when the National Bank issued new recommendations to 
the commercial banks on how to improve their internal audit procedures), in the improvement 
of the inter-bank payments and in legislation on mortgages. In August 2008 the IMF’s revised 
Financial Sector Assessment Programme (FSAP) provided a new set of recommendations on 
the  strengthening  of  financial  services.  The  National  Commission  on  the  Financial  Market 
(NCFM),  as  a  unified  supervision  authority  for  non-banking  financial  services,  prepared  a 
Strategy  for  the  Development  of  the  Non-Banking  Financial  Sector  in  2009-2011.  Since 
October 2008, the NCFM can issue, suspend and withdraw licenses for activity in the areas of 
insurance,  administration  of  assets  of  non-state  pension  funds,  and  savings  and  loan 
associations.  

In June 2008 the parliament approved legislation to transfer all functions of tax control, tax 
assessment and tax collection to the Main State Tax Inspectorate (MSTI) and to allow for the 
right  to  write  off  uncollectible  tax  arrears.  The  effects  of  the  introduction  of  zero-rate 
corporate tax for reinvested profits introduced in January 2008 in terms of new FDI remains 
to be evaluated. 

In  the  area  of  competition  policy,  the  National  Agency  for  the  Protection  of  Competition 
(NAPC)  still  faces  difficulties  to  conduct  investigations  and  prosecute  anti-competitive 
business  practices.  The  adoption  of  the  new  legislation  on  competition  was  still  pending  in 
parliament. A new draft law on State Aid is still under examination by the government.  

In  the  area  of  public  procurement,  In  March  2008,  Moldova  adopted  an  action  plan  for  the 
free public procurement portal, in place since January 2008. A governmental Commission on 
Public Procurement was established in May 2008. The administrative capacity of the Agency 
for  Material  Resources,  Public  Procurement  and  Humanitarian  Aid  was  increased  over  the 
reporting period. Public procurement was, together with the legislation on social benefits and 
public  internal  financial  control,  one  of  the  areas  targeted  by  the  macro-financial  assistance 
programme implemented in 2008 (see below).  

New laws on accounting and auditing entered into force in January 2008. The new accounting 
law provides for the compulsory use of international financial reporting standards (IFRS) by 
public  interest companies as from  January 2009.  The  National  Strategy  for  Development  of 
Accounting and Auditing for 2008-2011 is under preparation. The strategy will be based on 
the relevant EU Directives and IFRS. Still, the capacity of regulatory agencies for enforcing 
accounting  standards  should  be  reinforced.  The  Council  of  Auditors  started  its  activity  and 
works closely with the association of auditors. Finally, the government approved amendments 
to the audit law in October 2008. 

In the area of management of public finances, amendments to the law on Budget Systems and 
Processes were introduced in June 2008 and entered into force in January 2009. The new law 

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provides for accountability in the management of public funds and for the implementation of 
a system of internal audit. A strategy for the development of public internal financial control 
in 2007-2009 was approved in January 2008. An internal audit charter was also published in 
January 2008, while an amendment to the law on Budget Systems and Processes in July 2008 
provided a legal basis for public internal financial control.  

On  enterprise  policy,  a  renewed  strategy  for  development  of  small-  and  medium-sized 
enterprises  (SMEs)  was  prepared.  In  July  2008,  the  Parliament  adopted  a  law  on  Public-
Private Partnerships. Mechanisms for its implementation are being finalised.  

Yet,  in  2008  and  early  2009,  the  authorities  postponed  number  of  crucial  structural  reforms 
necessary to adjust to the crisis environment. Particular areas where the authorities made little 
progress include the reforms necessary to widen the tax base, financial sector reforms whose 
weaknesses are threatening the financial stability, and the reform of the utilities sectors, still 
weighing on the government spending. 

Also,  Moldova  achieved  last  year  less  progress  than  planned  in  reforming  the  social 
protection system. Social programmes remain a major component of the public expenditure: 
about two thirds of Moldova’s State budget is spent on health, education and social assistance. 
Last year was no exception to this, as social spending – including wages and pensions – was 
increased  in  view  of  the  2009  parliamentary  elections.  The  new  system  of  income  support 
covering part of the utility costs of the population based on means-tested individual incomes, 
whose preparation had started in 2007, was introduced in October 2008, as planned. However, 
the  old  system  based  on  population  categories  was  still  maintained  for  a  transition  period. 
Progress was also limited in the pension reform. 

2.4. 

Implementation of macro-financial assistance 

In 2008 the Commission continued the implementation of the Council Decision  of 16 April 
2007  on  macro-financial  assistance  for  the  Republic  of  Moldova  (Decision  2007/59/EC, 
published in the Official Journal of 28 April 2008). The assistance was 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.  Under  the  decision,  the 
Commission had made the first payment in October 2007. In 2008, the Commission disbursed 
the  second  and  the  third  and  final  tranche,  respectively  in  June  2008  (EUR  10  million)  and 
December 2008 (EUR 15 million). In this way, the assistance was fully disbursed by the end 
of  2008.  Each  disbursement  had  been  preceded  by  a  programme  review.  Both  reviews 
concluded  that  the  Republic  of  Moldova  was  implementing  the  policies  agreed  in  the 
Memorandum of Understanding in a satisfactory way.  

In  the  course  of  the  implementation  of  the  programme,  that  is  now  being  a  subject  of  an 
independent evaluations (whose findings will be made available before the end of 2009), the 
Commission  services  promoted  synergies  with  other  Commission-run  programmes,  in 
particular  budget  support  financed  under  the  European  Neighbourhood  and  Partnership 
Instrument, and with interventions by the IMF and the World Bank.  

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SUMMARY STATUS OF ECONOMIC REFORM 

Price liberalisation 

1. 
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. 
For  most  of  2008,  limited  official  intervention  by  the  National  Bank  of  Moldova.  Later  in 
2008 and in early 2009, increasing sales of foreign exchange to avoid depreciation of the leu. 
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. FDI increased to over 9% of GDP in 2007-8 but is expected to 
go down substantially with the economic crisis. 

Monetary policy 

5. 
The  National  Bank  of  Moldova  is  gradually  moving  to  inflation  targeting  but  inflationary 
pressures  in  2007-early  2008,  mostly  resulting  from  capital  inflows,  did  not  allow  a 
meaningful deceleration of inflation. Inflation decelerated to transform into deflation in early 
2009.  The  National  Bank  has  gradually  cut  interest  rates.  There  are  fears  that  it  will  relax 
monetary policy further to compensate for reduction in revenue due to crisis.  

Public Finance 

6. 
Budget revenue hit by economic crisis in late 2008-2009. For most of 2008, fiscal policy was 
relaxed in the run-up to parliamentary elections. Yet, for 2008 as a whole, the budget deficit 
remained  moderate.  Public  debt  continued  contracting,  but  this  trend  may  change  in  2009. 
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, but less than expected.  

Financial Sector Reform 

8. 
Restructuring  and  consolidation  of  the  financial  sector  progressed,  with  significant  foreign 
investments.  Further  strengthening  is  crucial  in  the  context  of  the  financial  and  economic 
crisis.  

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3. 

GEORGIA 

3.1. 

Executive summary 

Georgian growth performance in 2008 is characterised by a strong contrast between the first 
and the second halves of the year. Military conflict with Russia and the global financial and 
economic crisis undermined the strong growth performance of Georgian economy of the first 
half  of  the  year.  On  the  annual  basis,  its  real  GDP  grew  by  only  2.1%  in  2008  and  a  GDP 
contraction of 2.5% is expected for 2009. The vulnerabilities of the financial system strongly 
limited the access to liquidity weakening domestic consumption while a drop in foreign direct 
investment inflows also negatively contributed to growth accounting.  

Large  macroeconomic  imbalances  such  as  high  current  account  deficit  could  be  bridged 
through important inflows of international donor financing. 

A new IMF SBA programme was adopted in September 2008 and Georgia drew on the first 
tranche of the SBA of USD 250 million. The MFA programme of EUR 33.5 million put in 
place  by  a  Council  decision  of  24th  of  January  2006  expired  at  the  end  of  2008.  The  third 
MFA tranche of EUR 11.5 million originally planned to be released in autumn 2007 could not 
be  disbursed  because  one  of  the  conditions  agreed  in  the  Memorandum  of  Understanding  – 
the  enactment  of  a  new  law  on  the  supreme  external  audit  institution  –  was  not  met  by  the 
Georgian in 2008. 

3.2.  Macroeconomic performance 

In  the  first  half  of  2008,  before  the  outbreak  of  the  military  conflict  with  Russia  in  August 
2008, real GDP growth was strong in Georgia. In the first two quarters of 2008, GDP growth 
rates reached 9.1% and 8.3% year on year, respectively. Yet, the military conflict that erupted 
in  August  and  the  global  financial  and  economic  crisis  that  started  in  the  USA  but  spread 
around the world in Autumn 2008 both had a negative impact on Georgian growth from the 
third  quarter.  Real  GDP  decreased  by  3.9%  and  2.5%  in  the  third  and  fourth  quarter  of  the 
year, respectively, bringing the real GDP growth for 2008 to 2.1%. The strong deceleration of 
real  growth  has  been  due  to  several  factors.  First,  there  was  a  lower  net  inflow  of  foreign 
direct  investment  in  2008  when  compared  to  the  previous  year.  The  net  FDI  of  USD  1.3 
billion still accounted for 10% of country's GDP, but was substantially below its level of USD 
2.0 billion in 2007. The second factor behind this development has been the drop in domestic 
demand.  Yet,  despite  remittances  remaining  strong  domestic  demand  decreased  due  to 
tightening of domestic credit and ailing consumer confidence.  

Georgia's  trade  relations  in  2008  have  been  characterised  by  continuous  low  level  of 
diversification  and  a  high  concentration  of  exports  in  commodities  and  chemical  products. 
Georgia's  strong  export  sectors  are  ferrous  metals,  copper  and  fertilisers.  This  high 
concentration  of  exports  in  commodities  has  been  due  to  the  rehabilitation  of  a  number  of 
large industrial metal producers and the rise of global prices for iron ore. On the other hand, 
since  the  Russian  boycott  of  2006,  Georgia  could  not  take  full  advantage  of  its  competitive 
wine  production  despite  its  successful  expansion  in  the  Ukrainian  and  Kazakh  markets.  In 
2008,  the  share  of  alcoholic  beverages  in  Georgia’s  exports  diminished  from  5%  to  3%  of 
exports. Georgia's trade also remained highly imbalanced: the trade deficit remained at close 
to one third of GDP. Also, as remittances did not grow as fast as trade (even if both imports 
and exports experienced a decrease at the end of the year), the current account deficit widened 
from  19.6%  of  GDP  in  2007  to  almost  22.6%  in  2008.  While  in  the  recent  past  the  current 
account was comfortably financed by private capital flows (FDI and bank credits), in 2008 it 
was public money provided by the international donor community that had to be used to cover 

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the  financing  gap.  By  the  end  of  the  year,  country's  external  vulnerability  remained  high  as 
gross reserves covered only 2.1 months of the following year imports thus remaining below 
the three-month benchmark. 

As  far  as  the  monetary  policy  is  concerned,  early  in  the  year,  the  Central  Bank  of  Georgia 
continued its policy of inflation targeting; yet inflation remained volatile. A part of this high 
inflation volatility is due to the August military crisis that put headline consumer inflation at 
its two-year-high of almost 13% in August. While the end of period inflation was only 5.5%, 
the average annual consumer price inflation for 2008 accelerated to 10.1%. The August 2008 
military  conflict  also  meant  a  correction  of  the  exchange  rate  policy.  A  slow  long-term 
appreciation  of  the  lari  (GEL)  vis-à-vis  the  USD  was  reversed  and  the  National  Bank  of 
Georgia  had  to  intervene  to  mitigate  the  depreciation  of  the  currency.  During  the  military 
conflict, the authorities announced a temporary peg of the lari to the USD in order to provide 
a confidence-boosting anchor. In September, Georgia increased its reserve level by drawing 
on  the  first  tranche  of  USD  250  million  under  the  IMF  stand-by-arrangement.  However, 
interventions in the exchange markets during October and November 2008 proved unable to 
counter  the  pressure  on  the  lari  which  resurfaced  as  the  global  financial  crisis  deepened. 
Consequently,  in  early  November  2008,  the  authorities  allowed  the  lari  to  depreciate  –  by 
around 17%– against the US dollar.  

The fiscal deficit widened in 2008 to 6.4% of GDP up from 4.7% in 2007. Fiscal easing that 
went in parallel with tax reduction was the strategy of Government of Georgia to counter the 
negative economic effects of the military conflict with Russia and of the global financial and 
economic  crisis  of  2008.  The  budgetary  deficit  was  however  be  financed  comfortably  by 
using international donor financing as well as the issue of a sovereign Eurobond of USD 500 
million (EUR 390 million) in April 2008. As far as public indebtedness is concerned, despite 
its slight increase from 17.5% to 20.7% of GDP during 2007-2008 periods, the level of public 
debt is not considered as worrying.  

The economic stimulus package of the Georgian authorities for 2008-2009 that includes a tax 
decrease and numerous infrastructure projects accounts to GEL 2.2 billion (EUR 1 billion) as 
of June 2009. A large part of the economic recovery package and of the re-financing of the 
banking sector came from donor financing in 2008. The total pledge of the international donor 
community in October 2008 Brussels donor conference amounted to USD 4.5 billion. Out of 
this amount, USD 403 million was disbursed to the public sector and USD 204 million to the 
private sector already during the course of 2008. The EU disbursed EUR 182 million in 2008 
to  contribute  to  Georgia's  recovery.  This  support  has  been  a  combination  of  budgetary 
support, sectoral programs, humanitarian aid and crisis related instruments.  

3.3. 

Structural reforms 

Already  early  in  2008,  the  country's  authorities  stepped  up  their  efforts  to  strengthen  the 
regulatory  framework  of  the  financial  system.  A  Financial  Supervisory  Agency  (FSA)  was 
established  in  May  2008  following  the  Global  Competitiveness  of  the  Financial  Services 
Sector Act adopted in March 2008. Among the tasks of the FSA is to monitor, report on the 
quality  of  financial  intermediation  and  to  perform  on-site  inspections.  As  an  independent 
body, it also assesses the quality of the banking assets and conducts contingency planning for 
bank resolution. Despite these important reforms in the financial sector, the global financial 
and  economic  crisis  has  not  left  Georgia  untouched.  At  first  sight,  the  Georgian  banking 
system  remained  robust  in  2008  with  the  ratio  of  non-performing  loans  remaining 
substantially below the FSA requirements. The capital adequacy ratio that measures the risk 
of bank deposits in relation to bank equity slightly decreased in comparison to two previous 

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years  but  remained  high  at  16-17%.  The  banking  system  follows  Basel  I  principles  for 
banking supervision.  

However, despite the up-beat picture that some of the financial sector indicators provide, the 
Georgian banking sector is characterised by a high level of fragility. This is linked to the fact 
that the banking sector is highly dollarized with 60% of domestic bank lending taking place in 
foreign currency. This is a challenge as currency depreciation directly affects banks' portfolios 
as loan repayment capacity weakens – many corporate and retail clients have unhedged loans. 
Furthermore,  although  the  majority  of  bank  borrowing  is  long-term,  the  share  of  short-term 
borrowing has recently strongly increased and the banking debt maturing in 2009 is estimated 
at USD 700 million. Although banks are expected to be able to roll-overt a large part of their 
debt through lending from the IFIs, this short-term debt further increases the vulnerability of 
the  sector.  As  a  short-term  measure,  the  EBRD  had  already  to  step  in  to  recapitalise  two 
systemic banks. In addition, certain risks might only materialise in the medium term: if lower 
depositor  confidence  expressed  in  deposit  withdrawals,  the  limited  access  to  international 
markets  and  the  increased  risk  aversion  among  banks  remain  the  features  of  the  Georgian 
banking  system  as  it  has  been  the  case  in  late  2008-early  2009,  this  can  pose  a  systemic 
challenge to the functioning of the financial sector overall. 

As far as the further economic integration of the Georgian economy is concerned, to achieve a 
sustainable  external  position  and  diversified  economic  fundamentals,  intensifying  trade 
relations  with  its  direct  neighbours  and  with  EU  countries  is  an  absolute  necessity  for 
Georgia.  Georgia  already  has  free  trade  agreements  (FTA)  with  the  CIS  countries  and  with 
Turkey, one of its main trade partners. With the EU, a unilateral preferential trade agreement 
is in place. A feasibility study for a more advanced form of trade integration between the EU 
and Georgia, a deep and comprehensive FTA, was finalised after the fact-finding mission of 
Commission services to Georgia in October 2008. It was handed over to the Georgian side in 
March 2009. Georgian authorities still project to start negotiations later in 2009.  

As  far  as  industrial  policy  and  fostering  of  entrepreneurship  is  concerned,  the  government 
strengthened  its  industrial  zones.  To  further  develop  the  enterprise  policy  a  'Cheap  credit' 
programme was launched. Furthermore, the 'Invest in Georgia' forum took place in June 2008. 
According to Transparency International that develops and monitors the index of corruption 
perception, Georgia's position in 2008 improved in comparison to its 2007 level to 67th place 
up from 79th position.  

Only  limited  progress  can  be  reported  in  the  field  of  employment  and  social  protection.  In 
2008, 23.6% of Georgia’s population lived in poverty, while the official unemployment rate 
stood  at  13.3%.  To  improve  the  socio-economic  situation,  several  policy  initiatives  were 
launched  in  the  field  of  employment  and  social  policy.  In  January,  a  programme  'Georgia 
without  poverty'  for  the  period  2008-2012  was  adopted.  In  this  framework,  a  number  of 
reforms  of  the  social  safety  net  as  well  as  of  pension  and  health  systems  were  flagged  out. 
Old-age pensions were doubled in the course of 2008 but they still remained at a very low - 
below subsistence - level. Social security spending amounted to about one third of the overall 
budgetary  spending  but  the  welfare  system  of  Georgia  is  strongly  means-tested  with  a  low 
effectiveness of social transfers. The poor are also eligible to free health care but the share of 
the  population  eligible  to  this  programme  remains  very  low.  Overall,  the  social  security 
system  of  Georgia  is  heavily  underdeveloped  and  does  not  provide  sufficient  protection  for 
the old, poor and sick.  

During the election campaign, the government stepped up its initiatives in the field of active 
labour market policies. One initiative is the programme to stimulate job creation in rural areas 

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set  up  in  February  2008.  To  enhance  professional  qualifications  of  the  unemployed  the 
government  also  launched  a  'Vocational  training  and  retraining'  programme.  A  National 
Professional  Agency  became  operational  in  January  2008  and  the  elaboration  of  the  reform 
strategy in the field of vocational education and training followed in December 2008 after an 
international conference.  

In  the  field  of  public  finance  management,  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 but 
annual budgetary plans are still not well integrated into the multi-annual programme. In the 
field of external auditing, a new law on the Chamber of Control, the supreme audit institution, 
was approved by the Parliament in January 2009. Internal auditing, on the other hand, is still 
weak in Georgia as there are few common procedures and standards.  

In the field of taxation, although the current level of taxation in Georgia 2008 is in line with 
its regional neighbours, further tax reductions are planned for the coming years. The tax code 
was  amended  by  the  Parliament  to  further  reduce  income  and  dividend  tax  rates.  The 
important reform of 2008 was unifying the income and the social contributions taxes. While 
in 2007, a flat 12% income tax and 20% social contribution tax applied, in 2008, these two 
taxes  were  merged  and  their  rate  was  decreased  to  25%.  The  government  of  Georgia  also 
further  decreased  the  corporate  profit  tax  from  20%  to  15%.  Furthermore,  the  Parliament 
approved a legal commitment to fiscal surpluses from 2009 but granted an exception for 2009 
in  light  of  the  economic  crisis.  The  usefulness  of  an  explicit  fiscal  rule  that  forces  the 
government to run budget surplus is debated as it might be considered too rigid.  

3.4. 

Implementation of macro-financial assistance 

The  macro-financial  assistance  programme  of  EUR  33.5  million  put  in  place  by  a  Council 
decision  of  24  of  January  2006  expired  at  the  end  of  2008.  The  first  and  second  grant 
instalments amounting to EUR 22 million in total were paid in 2006. The third MFA tranche 
amounting to EUR 11.5 million could not be disbursed as the Commission could not conclude 
successfully  the  programme  review  owing  to  the  non-fulfilment  of  one  condition  for  the 
disbursement  of  the  last  tranche  specified  in  the  Memorandum  of  Understanding  on  MFA 
negotiated  in  2006,  namely  the  enactment  of  the  new  law  on  the  Chamber  of  Control.  This 
new law, the preparation of which had started already in 2006, was only adopted in January 
2009.  

In  September  2008,  following  the  conflict  with  Russia,  Georgia  asked  the  Commission  for 
additional macro-financial assistance in the context of a new economic programme and of a 
new financing arrangement with the IMF. In October, at the Donor Conference organised by 
the  Commission  and  the  World  Bank,  the  Commission  indicated  that  it  was  considering 
proposing  a  new  MFA  to  Georgia  amounting  to  EUR  46  million,  in  the  form  of  grants. 
Shortly  after  the  Donor  Conference,  the  Commission  has  started  the  preparation  of  the  new 
proposal.  

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SUMMARY STATUS OF ECONOMIC REFORM 

Trade regime 

1. 
Liberal trade policy. Georgia has been member of the WTO since June 2002. Import tariffs have 
been abolished on 90% of products. 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). There are no quantitative restrictions on imports and exports. 
A  preferential  trade  regime  (GSP)  is  in  place  with  USA,  Canada,  Japan,  Switzerland  and 
Norway,  a  GSP+  that  covers  7200  items  is  in  place  with  the  EU  since  2005.  A  free  trade 
agreement with CIS countries and Turkey agreed since 1st November 2008. 

Exchange regime 

2. 
Floating  exchange  rate  of  the  lari  with  limited  official  intervention  by  the  National  Bank  of 
Georgia. During the military conflict, the authorities announced a temporary peg to the USD and 
there have been strong interventions in the forex market during August-December 2008. 
There are no restrictions on current international transactions in conformity with Article VIII of 
the IMF’s Articles of Agreement. 

Foreign Direct Investment 

3. 
Adequate  overall  legislation.  Unlimited  repatriation  of  capital  and  profits.  Net  inflows  of  FDI 
about  12.2%  of  GDP  (2008  estimate).  The  four  largest  contributor  countries  are  UK,  US, 
Kazakhstan and Turkey, they together contributed to 55% of overall FDI inflows in 2008. 

Monetary policy 

4. 
Central  bank's  main  policy  objective  is  the  price  stability  to  be  pursued  through  inflation 
targeting. Inflation spike was registered during the military crisis, yet it decreased at the end of 
the year due to overall growth decline and the end-year inflation was low at 5%. 

Public Finance 

5. 
A  new  liberal  tax  code  is  effective  as  of  January  1,  2005.  Over  the  period  of  2004-2008,  the 
number of taxes was reduced from 21 to 6. In 2008, the corporate profit tax was reduced from 
20% to 15%, while income and social tax merged into one income tax of 25%. The tax code was 
further amended and included measures related to improvement of tax collection. Tax revenue to 
the  budget  amounted  to  30.7%  of  GDP  in  2008,  while  these  were  only  25%  in  2007. 
Expenditure  including  capital  and  net  lending  amounted  to  37.1%  of  GDP  implying  a  fiscal 
deficit of 6.4%. 

Vocational education and training 

6. 
To  deal  with  structural  unemployment  especially  among  women  and  the  economically 
vulnerable part of the population and to be better prepared for the challenges of the knowledge 
economy,  the  authorities  stepped  up  their  efforts  in  the  policy  field  of  vocational  training  and 
life-long  learning.  A  National  Professional  Agency  was  set  up  and  a  policy  programme  in 
vocational training was elaborated in the course of the year. 

Financial Sector  

7. 
The  majority  of  Georgia's  commercial  banks  are  foreign  owned.  Since  the  beginning  of  the 
global  crisis,  the  EBRD  had  to  step  in  to  recapitalise  two  systemic  banks.  A  high  level  of 
fragility  in  the  Georgian  banking  sector  is  linked  to  the  fact  that  the  banking  sector  is  highly 
dollarized  with  60%  of  domestic  bank  lending  taking  place  in  foreign  currency.  This  is  a 
challenge as currency depreciation directly affects banks' portfolios as loan repayment capacity 
weakens – many corporate and retail clients have unhedged loans.  

EN 

18 

   EN 

 
4. 

LEBANON 

Mediterranean  Countries  taking  part  in  the  European  Neighbourhood  Policy  are  eligible  for 
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). 

4.1. 

Executive summary 

For  a  large  part  of  2008  the Lebanese  economy  continued  its  rapid  recovery  from  the  2006 
conflict with Israel in a context of continuous political stalemate. Nevertheless with a delay, 
the economy started to suffer from the impact of the global crisis. Real GDP growth reached 
over 8% on average in 2008 but is expected to decrease markedly in 2009. Inflation declined 
after the surge until mid-2008 against the background of soaring food and energy commodity 
prices.  Partly  reflecting  reconstruction  needs,  the  current  account  deficit  remained  high,  at 
more  than  10%  of  GDP.  In  2008,  the  fiscal  deficit  and  debt  ratios  declined  slightly,  even 
though the debt ratio remained very high at more than 160% of GDP. However, in the first 
quarter of 2009 public finances deteriorated rapidly on the back of expenditure increases. 

The  government  faces  severe  policy  challenges  resulting  from  reconstruction  and  social 
needs,  the  large  public  debt  overhang,  and  the  drag  on  economic  activity  and  remittances 
stemming  from  the  global  crisis.  Implementation  of  the  ambitious  programme  of  structural 
reforms  concluded  in  the  aftermath  of  the  Paris  agreements  stalled  as  a  consequence  of 
political stalemate, which paralysed progress in legislative activity 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.  In 
November  2008  the  IMF  Executive  Board  agreed  on  a  follow-up  EPCA  assistance 
programme. 

implementing  a  European 
Since  January  2007,  Lebanon  and 
Neighbourhood  Policy  Action  Plan.  The  second  progress  report  on  the  Action  Plan 
implementation was issued by the Commission in April 2009. 

the  EU  have  been 

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),  to  be  disbursed  in  two  tranches.  The  first  tranche  of 
grants  and  loans  were  disbursed  in  December  2008  and  June  2009  respectively.  The 
remaining disbursements under the assistance programme are expected to take place in 2009; 
to the extent conditions are met. 

4.2.  Macroeconomic developments 

The latest economic indicators suggest a sharp deceleration of growth in Lebanon in the wake 
of the global financial crisis. Real GDP growth is expected to decrease to 2% in 2009, from 
the  8.5%  growth  estimated  to  have  been  reached  in  2008.  During  the  first  part  of  the  year, 
economic  activity  was  still  strong.  Economic  activity  and  the  financial  sector  proved 
remarkably  resilient  to  the  politically  uncertain  environment,  which  culminated  in  violent 
clashes before a deal on the formation of a transitional national unity government was struck 
in  May  2008.  But  the  negative  impact  of  the  global  financial  crisis  was  increasingly  felt 
towards  year  end,  in  the  first  instance  through  external  transmission  channels.  As  an  open 
economy, Lebanon is exposed to the crisis via the trade channel. Trade volumes decelerated 
rapidly  from  the  last  quarter  of  2008  onwards,  mirroring  the  slowdown  in  major  trading 
partners, notably Arab countries and the countries in the European Union, which account for 
around two-thirds of Lebanese exports.  

EN 

19 

   EN 

Another  important  channel  of  transmission  is  via  the  sizable  remittance  flows  of  Lebanese 
working  abroad,  estimated  at  24%  of  GDP  in  2007.  Strong  remittances  were  an  important 
factor supporting buoyant consumer expenditure during the recovery from the 2006 conflict 
between  Israel  and  Hezbollah.  From  the  third  quarter  of  2008  onwards,  remittance  inflows 
decreased markedly in view of the spreading slowdown and concomitant labour shedding in 
the Gulf region, where many Lebanese expatriates had been working. Against the background 
of a general increase in investor risk aversion, the planned issue of a government euro bond 
had to be postponed. Strong inflationary pressures abated somewhat in the latter part of 2008. 
Consumer prices as measured by the CPI increased by more than 10% in 2008, with inflation 
moderating starting from in the latter part of the year on the back of falling commodity prices. 
However, the delayed pass-through of commodity price shocks and inefficiencies and mark-
ups in the distribution chain add to upside risks. On the back of still relatively strong growth 
in 2008, the current account deficit widened to around 11% of GDP in 2008, from around 7% 
of GDP in 2007. The total external debt ratio is estimated to have declined only moderately, 
to 190% of GDP in 2008.  

The elevated external  debt  ratio goes hand in hand with a high public deficit and debt. The 
government budget balance (including grants) is estimated to have improved slightly in 2008, 
to a deficit of 10.0% of GDP (from 10.8% in 2007). But the public debt ratio remained high, 
even though in 2008 it declined strongly on the back of high nominal GDP growth, to 162% 
of GDP in 2008, from the peak of 180% of GDP in 2005. International support should help 
alleviate the pressure on public finances.  

As regards the economic outlook and risks attached, economic activity is expected to remain 
weak in the near term, with risks stemming from the degree to which the global downturn can 
be  mitigated  and  from  the  internal  political  situation.  The  high  external  deficit,  heavy  debt 
burden,  and  leveraged  financial  system  (with  private  sector  bank  deposits  accounting  for 
around 270% of GDP at end-2008) render the Lebanese economy and banking sector sensitive 
to conditions in global financial markets, notably liquidity. The fiscal situation is particularly 
vulnerable  to  a  stronger-than-expected  economic  slowdown  and  to  changes  in  investor 
confidence,  given  the  high  public  debt  level.  The  limited  progress  in  implementing  reforms 
makes it difficult to address the structural fiscal deficit. Return of Lebanese workers who have 
lost their jobs abroad will depress remittance inflows and add to the domestic labour supply 
(though those returning bring valuable skills and experience).  

On the positive side, the Lebanese economy has so far been quite resilient to the direct impact 
of  the  global  financial  crisis  on  the  financial  system,  in  particular  as  regards  the  effects  on 
banks. Lebanese banks have long-standing experience in operating in a strained economic and 
political environment, have had limited exposure to structured products under long-standing 
directives  by  the  central  bank  supervisors,  and  have  not  borrowed  heavily  on  international 
markets. The healthy development of the deposit base and a relatively strong reserve position 
helped sustain the currency peg to the US dollar as a strong nominal anchor. Thus, aggregate 
profits of listed banks increased by around 24% in 2008. To date, the construction sector has 
also held up well.  

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.  In  November  2008,  the  IMF  Board  approved  funding  an  additional  amount  of  SDR 
25.375 million under EPCA in support of the authorities' economic program for 2008-09. The 

EN 

20 

   EN 

IMF-supported  program  aims  to  further  reduce  the  government  debt-to-GDP  ratio,  build  up 
the international reserve buffer, and start implementation of key reforms. 

4.3. 

Structural reforms 

During  the  reporting  period  the  continued  political  divisions  and  consequent  paralysis  of 
legislative activity in the run-up to the June 2009 parliamentary elections held up progress on 
the  reform  agenda,  notably  on  key  aspects  of  the  Paris  III  programme.  The  economic 
headwinds make it difficult to proceed with intended privatisations and tax increases which in 
turn are weighing on already stretched public finances. The government is likely therefore to 
turn to the financial sector to meet its increasing financing needs. The election results of early 
June  2009  essentially  confirmed  the  previously  existing  political  balances  in  parliament.  It 
remains  to  be  seen  to  what  extent  a  newly  formed  government  will  be  able  to  implement 
reform measures resulting from the pledges made at the Paris III conference of January 2007.  

Against  this  background,  some  of  the  measures  that  were  adopted  aggravate  the  fiscal 
challenge  going  forward.  The  decision  to  substantially  increase  public  wages  retroactively 
from May 2008 runs counter to earlier commitments by the government to contain the wage 
bill. The minimum wage in both the public and private sector was increased by two thirds. In 
addition,  overall  salary  scales  and  public  pensions  were  raised  while  public  sector  wage 
increases  decided  around  the  turn  of  the  century  but  not  so  far  implemented  will  be  paid 
retroactively.  The  estimated  cost  to  the  Treasury  for  the  period  2009-2011  is  estimated  at 
around 3 percent of GDP per year. Several potential countervailing measures to raise revenue 
have been put on ice. Yet, the government did take advantage of the decline in oil prices to 
introduce  excises  on  gasoline.  The  government  continued  with  preparing  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, however not with concrete results. The 
intended  privatisations  of  state-owned  assets  have  been  postponed  in  view  of  the  difficult 
market circumstances.  

Draft  laws  on  WTO-related  issues,  pension  reform,  capital  market  reform  and  public 
procurement, and the reform of the heavily subsidised electricity tariff system have all been 
held up by the political deadlock. Insufficient progress was made in improving the business 
climate.  However,  Lebanon  continued  to  implement  the  2007  administrative  simplification 
programme, involving the Lebanese post office (aimed at establishing a one-stop shop in post 
offices  to  obtain  company  registration).  Some  progress  has  been  made  in  reducing 
administrative regulation while tax procedures have been simplified as from 2009. The central 
bank has continued to take steps to improve its operating procedures in financial services and 
towards  adopting  International  Financial  Reporting  standards.  Regarding  public  finance 
management,  measures  aimed  at  improving  budget  formulation  and  execution  as  well  as 
medium-term planning and prioritisation of expenditures along with efforts to improve cash 
management and implement a single treasury account, remain key parts of the Medium-Term 
Public Financial Management Reform Action Plan. But concrete measures carried out in 2008 
were limited; noteworthy ones include the setting up of a cash management unit and a public 
debt  department  within  the  Ministry  of  Finance.  The  preparation  of  a  modern  procurement 
code was launched recently, with international assistance. 

The  EU  and  Lebanon  are  implementing  the  European  Neighbourhood  Policy  Action  Plan 
which  was  adopted  in  January  2007.  The  second  progress  report  was  made  public  in  April 
2009.  In  the  overall  assessment  of  the  implementation  of  the  Action  Plan,  the  Commission 
noted that slow progress in economic reforms as well as in other fields (human rights, judicial 
reform, social sector reform, and regulatory has had an impact on the overall social, economic 

EN 

21 

   EN 

and  political  situation  in  the  country  as  well  as  on  the  dialogue  in  the  framework  of  the 
European Neighbourhood Policy. 

4.4. 

Implementation of macro-financial assistance 

In  2008  the  Commission  started  the  implementation  of  the  Council  Decision  2007/860/EC 
providing  macro-financial  assistance  of  EUR  80  million  in  the  form  of  a  combination  of  a 
medium-term loan and grant of EUR 50 and 30 million respectively. The assistance seen as 
part of the EC assistance package complements 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. Agreement on the conditions to be attached to the disbursement of 
the  assistance  was  reached  in  the  course  of  2008.  Subsequently,  the  EUR  15  million  first 
tranche of the grant was disbursed end-December 2008. The first tranche of a 5-year loan of 
EUR 25 million was disbursed on 4 June 2009. If conditions are met, the Commission intends 
to disburse second tranche at the end of 2009. 

EN 

22 

   EN 

SUMMARY STATUS OF ECONOMIC REFORM  

Price liberalisation 

1. 
Most prices are free. 

Trade liberalisation 

2. 
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.  

Exchange regime 

3. 
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 substantial capital account convertibility. 

Foreign Direct Investment 

4. 
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.  

Monetary policy 

5. 
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  due  to  foreign  inflows  into  Lebanon  in  the  wake  of  the  financial  crisis  and  partly 
because of higher gold prices (BdL holds a large gold stock). 

Public Finance 

6. 
Fiscal performance improved somewhat in 2008 Public finance management reform focuses 
on  budget  formulation  and  execution  and  medium-term  planning.  However,  in  early  2009 
public  finances  have  been  deteriorating  rapidly  due  to  increases  in  public  spending  and  a 
slowdown in the economy. 

Privatisation and Enterprise Restructuring 

7. 
Structural  reforms  programme  focuses  on  privatisation,  improvement  of  business  climate, 
privatisations,  and  opening  of  markets,  but  progress  has  been  stalled  due  to  the  political 
situation. 

Financial Sector Reform 

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

EN 

23 

   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 2008 (in millions of euro) 

Country 

Date of

Reference of

Council Decision Council Decision

Maximum
amount

Dates of
disbursements

Amounts of
disbursements

Totals

Authorisations

Disbursements

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

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)

EN 

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

22.12.94

94/939/EC

22.12.94

94/940/EC

10.04.95

95/132/EC

35

200

130

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

24 

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

Jul. 1996

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

   EN 

 
Country 

Date of

Reference of

Council Decision Council Decision

Maximum
amount

Dates of
disbursements

Amounts of
disbursements

Authorisations

Disbursements

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

   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)

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

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)

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

110

Totals

294,5

58

141,5

95

58

60

100

98

150

35

20

30

345

(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

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

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

EN 

25 

   EN 

 
 
Country 

Date of

Reference of

Council Decision Council Decision

Maximum
amount

Dates of
disbursements

Amounts of
disbursements

Totals

Authorisations

Disbursements

Serbia and Montenegro II (ex FRY) (7)

05.11.02

02/882/EC

130

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

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)

19.12.02

02/1006/EC

29.04.04

04/580/EC

15

25

Georgia II

        24.01.06

06/41/EC

33,5

Kosovo 

Moldova

Lebanon

TOTAL

30.11.06

06/880/EC

16.04.07

07/259/EC

10.12.07

07/860/EC

50

45

80
-------
6297

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)
Jun 2008 (grant)
Dec 2008 ( grant)

Dec 2008 (grant) 

30
10
35
30

10

15
25

15
10

10
15
10

3
9
13

11
11

20
10
15

15

105

25

50

20

60

25

22

45

15

11,5

50

15
-------
5251,0

65
-------
1046,0

(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 

26 

   EN 

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

Status of effective disbursements as of end-December 2008 (in millions of euro) 

Authorisations

Disbursements

Country 

Date of

Reference of

Council Decision Council Decision

Maximum
amount

Dates of
disbursements

Amounts of
disbursements

Totals

Czech and Slovak Federal Republic
(BOP loan)

25.02.91

91/106/EC

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)

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

23.11.92

92/542/EC

220

(40)
(80)
(100)

290

110

250

100

375

870

180

375

80

125

24.06.91

91/311/EC

19.10.92

92/511/EC

22.07.97

97/472/EC

08.11.99

99/731/EC

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

200

22.12.94

94/939/EC

130

-------
3305

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

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

135

(20)
(40)
(75)

290

110

250

100

375

610

180

375

80

125

150

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

EN 

27 

   EN 

 
Country 

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)

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)

Authorisations

Disbursem

Date of

Reference of

Council Decision Council Decision

Maximum
amount

Dates of
disbursements

Amounts of
disbursements

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

19.02.00

00/140/EC

27.06.01

01/511/EC

22.05.00

00/355/EC

70

35

20

60

40

80

18

35

30

20

16.07.01

10.12.2001

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

345

05.11.02

02/882/EC

130

modified by

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)

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

70

35

60

40

98

35

30

20

345

105

50

60

35
35

15
20

15
10
10
10
15

25
15

20
10
12
10
10
10
18
8

20
15

15
15

7
13

35
225
40
45

30
10
35
30

10

15
25

15
10
10

15
10

Bosnia II (6)
(BOP loan and grant)

05.11.02

02/883/EC

60

modified by

07.12.04

04/861/EC

April  2005 (loan)
Dec 2005 (grant)

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

June 2005 (grant)
Feb 2006 (loan)

EN 

28 

   EN 

 
 
Country 

Albania IV (8)
(loan and grant)

Kosovo  

TOTAL B

Authorisations

Disbursements

Date of

Reference of

Council Decision Council Decision

Maximum
amount

Dates of
disbursements

Amounts of
disbursements

Totals

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

3
9
13

29.04.04

04/580/EC

30.11.06

2006/880/EC

25

50

1088

-------

25

973

-------

(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

EN 

29 

   EN 

 
 
Country 

Date of

Reference of

Council Decision Council Decision

Maximum
amount

Dates of
disbursements

Amounts of
disbursements

Totals

Authorisations

Disbursements

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

375

00/244/EC

(58)

   Georgia

(175)

   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

(95)

55

45

15

15

15
(15)

85

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

200

15.10.98
12.07.02

98/592/EC
02/639/EC

12.07.02

02/639/EC

        21.01.06

      06/41/EC

150

110
(15)

33,5

Moldova

       16.04.07

     07/259/EC

45

TOTAL C

-------
1036,5

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
Jun 2008
Dec 2008

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
10
15

294,5

(58)

(141,5)

(95)

30

45

15

85

200

58

22

45

-------
794,5

EN 

30 

   EN 

 
 
Country 

Date of

Reference of

Council Decision Council Decision

Maximum
amount

Dates of
disbursements

Amounts of
disbursements

Totals

Authorisations

Disbursements

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

23.09.91

91/510/EC

22.12.94

94/938/EC

10.12.07

     07/860/EC

Jan. 1992
Aug. 1994

Nov. 1995

250
150

100

         Dec 2008

400

200

80
-------
867,5

6297

400

100

15
-------
702,5

5251,0

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.

EN 

31 

   EN