Commission staff working document  accompanying the Proposal for a Decision of the European Parliament and of the Council granting an EU guarantee to the European Investment Bank against losses under loans and guarantees for projects outside the EU {COM(2010) 174 final}
Date: 2010-04-21
Institutions: European Commission
Subjects: European Investment Bank, credit guarantee, foreign policy, operation of the Institutions

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EUROPEAN COMMISSION 

Brussels, 21.4.2010 
SEC(2010) 443 final 

COMMISSION STAFF WORKING DOCUMENT 

accompanying the 

Proposal for a 

DECISION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL 

granting an EU guarantee to the European Investment Bank against losses under loans 
and guarantees for projects outside the EU 

{COM(2010) 174 final} 

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   EN 

 
 
 
  
 
 
 
 
 
 
 
TABLE OF CONTENTS 

1. 

2. 

2.1. 

2.2. 

2.3. 

3. 

INTRODUCTION ....................................................................................................... 4 

EIB ACTIVITY IN SUPPORT OF CLIMATE CHANGE ......................................... 4 

The political context and rationale............................................................................... 4 

Types of climate change projects................................................................................. 5 

Geographical scope of EIB intervention under the Climate Change Mandate ............ 7 

BACKGROUND INFORMATION ON ICELAND, BELARUS, LIBYA, IRAQ 
AND CAMBODIA ...................................................................................................... 8 

3.1. 

Iceland .......................................................................................................................... 8 

3.1.1.  Political Situation and bilateral relations with the EU ................................................. 8 

3.1.2.  Democracy, Human Rights and Fundamental Freedoms situation.............................. 9 

3.1.3.  Macroeconomic situation and investment needs........................................................ 10 

3.1.4.  Presence of other IFIs................................................................................................. 11 

3.2. 

Belarus ....................................................................................................................... 11 

3.2.1.  Political Situation and bilateral relations with the EU ............................................... 11 

3.2.2.  Democracy, Human Rights and Fundamental Freedoms situation............................ 11 

3.2.3.  Macroeconomic situation and investment needs........................................................ 12 

3.2.4.  Presence of other IFIs................................................................................................. 12 

3.3. 

Libya .......................................................................................................................... 13 

3.3.1.  Political Situation and bilateral relations with the EU ............................................... 13 

3.3.2.  Democracy, Human Rights and Fundamental Freedoms situation............................ 14 

3.3.3.  Macroeconomic situation and investment needs........................................................ 15 

3.3.4.  Presence of other IFIs................................................................................................. 16 

3.4. 

Iraq ............................................................................................................................. 16 

3.4.1.  Political Situation and bilateral relations with the EU ............................................... 16 

3.4.2.  Democracy, Human Rights and Fundamental Freedoms situation............................ 17 

3.4.3.  Macroeconomic situation and investment needs........................................................ 17 

3.4.4.  Presence of other IFIs................................................................................................. 18 

3.5. 

Cambodia ................................................................................................................... 18 

3.5.1.  Political Situation and bilateral relations with the EU ............................................... 18 

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3.5.2.  Democracy, Human Rights and Fundamental Freedoms situation............................ 19 

3.5.3.  Macroeconomic situation and investment needs........................................................ 19 

3.5.4.  Presence of other IFIs................................................................................................. 20 

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1. 

INTRODUCTION 

This  Staff  Working  Document  accompanies  the  legislative  proposal1  following  the  mid-term 
review  of  the  EIB  external  mandate.  It  aims  at  providing  further  details  on  two  new  elements 
introduced in the proposal, namely: 

(1) 

(2) 

the EIB activity in support of climate change under the EUR 2 bn optional mandate; 

the  rationale  to  support  the  proposal  to  activate  the  EIB  external  mandate  for  Iceland, 
Belarus, Libya, Iraq and Cambodia. 

2. 

EIB ACTIVITY IN SUPPORT OF CLIMATE CHANGE 

In line with the findings of the mid-term review, the proposed decision foresees the activation of 
the optional mandate of the EUR 2 bn for 2011-2013 for EIB financing activities in support of 
the fight against climate change across all regions covered by the mandate. 

The use of the optional mandate in support of the fight against climate change is seen as a key 
means  of  reinforcing  EIB  and  Commission  cooperation  in  support  of  key  EU  external  policies 
going  forward  under  the  mandate.  Practically  this  cooperation  will  be  implemented  through 
jointly  developed  strategies  and  loan-grant  blending  mechanisms.  Furthermore,  it  should  be 
noted  that  this  use  of  the  optional  mandate  is  a  complement  to  the  EIB's  EUR  3  bn  own-risk 
Facility for Energy Sustainability and Security of Supply (ESF). 

The EIB will work in parallel, and where appropriate in cooperation, with international financial 
institutions (IFIs) and European Bilateral Finance Institutions (EBFIs) and existing multilateral 
initiatives such as the Climate Investment Fund and the Clean Technology Fund. 

The EIB will cooperate closely with Commission staff, both in headquarters and Delegations, in 
particular to support monitoring and alignment of EIB activities under the optional mandate with 
the development policies of the beneficiaries' countries and regions. 

2.1. 

The political context and rationale 

Climate  change  is  a  major  threat  to  sustainable  development  in  all  regions  of  the  world. 
Scientific evidence provides unequivocal proof of the human footprint on the global climate and 
the adverse consequences that will ensue.  

Against this background, the United Nations Climate Change Conference ("Copenhagen climate 
conference")  took  place  in  Copenhagen,  Denmark,  in  December  2009.  The  goal  agreed  in  the 
Copenhagen Accord of keeping the increase in global temperature to below 2 degrees Celsius 
relative  to  the  pre-industrial  temperature  cannot  be  achieved  by  emission  reductions  by 
developed  countries  alone.  It  will  also  require  mitigation  actions  by  developing  countries  with 
the help of financial support from developed countries, which will be complemented by support 
for  developing  countries'  adaptation  to  the  unavoidable  effects  of  global  warming.  In  the 
Copenhagen  Accord,  developed  countries  committed  to  supporting  developing  country  climate 
action through fast-start funding of close to USD 30 bn between 2010 and 2012, to which the EU 

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COM(2010) 174. 

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will contribute EUR 7.2 bn (EUR 2.4 bn annually for 2010 to 2012), and by aiming to mobilise 
USD  100  bn  by  2020  from  a  variety  of  public  and  private  sources  for  developing  countries 
climate-related needs.  

It is in this context that the Commission proposes that the optional mandate under the external 
mandate be used by the EIB to reinforce the EU's contribution to fighting climate change. 

2.2. 

Types of climate change projects  

This section describes the types of projects appropriate for EIB funding under the new climate 
change mandate. 

innovative 

low  carbon 

in  early  stage  of 
For  adaptation  projects  and 
commercialisation,  the  resources  of  the  EIB  should  be  complemented  with  concessional  funds 
available  under  the  EU  budget  (including  for  technical  assistance),  where  possible  and 
appropriate, and depending upon the availability of grant finance for blending. It should be noted 
that  Adaptation  and  Research,  Development  and  Innovation  (RDI)  projects  normally  do  not 
generate  sufficient  financial  revenues  and  need  a  high  degree  of  subsidisation.  For  the  same 
reason,  such  projects  are  not  yet  well  represented  in  the  Bank’s  existing  project  pipeline. 
Realistically, the majority of the projects are expected to focus on mitigation actions. 

technologies 

The Commission and the EIB will agree on operational guidelines containing detailed criteria to 
assess  and  prioritise  projects  and  programmes  eligible  for  funding  under  the  climate  change 
mandate.  This  process  will  assess  the  potential  of  projects  for  innovation,  potential  for 
replication,  with  a  view 
the  mandate. 
the 
Complementarity  of  funding  with  the  Clean  Development  Mechanism  and  other  existing 
multilateral facilities will also be a factor for consideration. 

to  maximising 

lending  under 

impact  of 

The  following  list  includes  the  types  of  projects  appropriate  for  EIB  funding  under  the  new 
mandate.  This  list  will  be  reviewed  yearly  and  revised  to  take  account  of  technology 
development and diffusion. 

Energy efficiency  

All projects meeting the energy efficiency definition of the EIB that result in: 

–  An increase in energy efficiency of at least 20% from the baseline2; 

–  An increase in energy efficiency of less than 20% from the baseline2, provided that the energy 

savings justify at least 50% of the investment cost; or 

–  Investments  in  cogeneration  (Combined  Heat  and  Power  -  CHP)  provided  they  meet  the 

energy efficiency criteria defined in Directive 2004/8/EC. 

Examples of eligible projects would include CHP plants and district heating systems, and energy 
efficiency investments in buildings and industrial facilities.  

2 

As measured using the EIB methodologies for the assessment of the EIB induced carbon footprint. 

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Renewable energy  

Projects  from  renewable  non-fossil  sources  such  as  wind,  solar,  aero-thermal,  geothermal, 
hydrothermal and ocean energy, hydropower, biomass, landfill gas, sewage treatment plant gas 
and biogases – and related infrastructure subject to EU policy definition. 

Hydro  above  20 MW,  biomass  and  biofuels  and  related  infrastructure  may  not  be  considered 
climate change projects when their net carbon balance is to be presumed positive (i.e. resulting in 
an increase in emissions of GHGs) at the time of appraisal2. 

Transport 

All transport projects that contribute to reducing emissions from the transport sector. Examples 
of eligible projects would be metro, tramways, bus rapid transit, rail, inland waterway and short 
sea shipping, as well as investments in rolling stock, vessels, and associated equipment. 

Forestry and land use  

Projects  aimed  at  protecting  existing  forests  and  reducing  emissions  from  deforestation  and 
forest  degradation  and  biological  carbon  sequestration  projects.  Examples  of  eligible  projects 
would  be  projects  aiming  at  reducing  deforestation  and  forest  degradation,  afforestation, 
reforestation,  forest  and  cropland  and  grazing  land  management,  reduced  tillage,  and 
revegetation. The EIB will verify that projects provide genuine and lasting benefits for climate 
change  -  for  example,  that  they  do  not  simply  lead  to  additional  deforestation  activities 
elsewhere. 

Research, Development and Innovation (RDI) 

low-carbon 

technologies 

Innovative 
in  early  stages  of  commercialisation  and  related 
manufacturing  processes,  goods  and  services,  and  research  and  development.  Examples  of 
eligible  sectors  would  be  photovoltaic,  off-shore  wind,  concentrated  solar  power,  second 
generation  biofuels,  low-emission  car  engines,  other  RDI  projects  in  the  areas  of  emission 
reduction and energy efficiency in the transport sector, and carbon capture and storage. 

Adaptation 

Adaptation  projects,  including  disaster  preparedness  and  prevention,  intended  primarily  as 
measures to increase resilience to the adverse impacts of climate change, when these measures 
both exceed EUR 20 mn in value or account for at least 50% of total project costs. Examples of 
eligible  projects  would  be  flood  control  and  drought  management  measures,  and  measures  to 
increase the climate resilience of vulnerable infrastructure or areas (e.g. coasts). Other types of 
adaptation  projects  than  "hard"  infrastructure  will  be  considered.  Examples  include  "green 
infrastructure" in coastal or flood-prone areas and in drought-prone areas, in particular projects 
restoring the quality of ecosystem services that can protect against effects of climate change. 

For  adaptation  as  well  as  for  mitigation  projects,  the  resources  of  the  EIB  should  be 
complemented where possible with concessional funds available under the EU budget, through 
the  efficient  and  consistent  blending  of  grants  and  loans  for  climate  change  financing  in  the 
context of EU external assistance. 

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Other 

•  Projects  that  reduce  emissions  of  industrial  greenhouse  gases  when  they  reduce  such 
emissions by at least 20,000 tons/year of CO2e (carbon dioxide equivalent) from the baseline  

•  Methane  capture  or  avoidance  projects  when  they  reduce  emissions  by  at  least  20,000 

tons/year of CO2e from the baseline; 

•  Carbon funds and other funds that promote energy efficiency and renewable energy. 

Examples  of  eligible  projects  would  be  N2O,  PFC,  HFC,  and  SF6  projects;  industrial  plant 
modernisation; landfill gas flaring, composting and other methane capture or avoidance projects 
from solid waste treatment facilities and waste water treatment plants. 

In the case of fossil fuel power generation, any new investments should be made in such a way 
as to facilitate substantial reductions in emissions by adopting best available technologies with 
substantial  improvements  in  energy  efficiency  and  readiness  for  implementation  of  carbon 
capture and storage (see CCS directive 2009/31/EC, point (47)). A practical working definition 
of "substantial" and "CCS-ready" will be defined under the operational guidelines mentioned in 
this section. 

2.3. 

Geographical scope of EIB intervention under the Climate Change Mandate 

It may be useful to explain in more detail how the ESF, the EIB's own-risk EUR 3 bn Facility for 
Energy Sustainability and Security of Supply, and the funds under EIB external lending mandate 
are expected to complement each other. 

The  ESF  is  available  for  ACP,  ALA,  Neighbourhood  countries  and  South  Africa.  It  is  not 
available for Pre-accession countries and Russia. The ESF only allows for ordinary EIB lending 
at  own  risk  (without  EU  guarantee),  which  excludes  sovereign  lending  to  countries  with  a 
speculative  credit  rating.  It  also  excludes  certain  sub-sovereign  or  private  borrowers  in 
investment  grade  countries.  Countries  of  EIB  operations3  where  sovereign  lending  is  possible 
under  ESF  are  currently  Brazil,  Chile,  China,  India,  Israel,  Kazakhstan,  Mexico,  Peru,  Tunisia 
and the Republic of South Africa. In line with the recommendations of the Steering Committee 
of Wise Persons, in these countries climate change lending to the government, to other borrowers 
with  government  guarantee  or  to  sub-sovereign  or  private  borrowers  with  equivalent 
creditworthiness, should be made under the ESF. However there is also the potential for lending 
to  sub-sovereign  or  private  borrowers  in  those  countries  which  need  to  be  covered  by  the 
Commission guarantee. 

There  are  a  number  of  “Non-ESF-countries”  with  high  demand  for  climate  change  projects 
which  can  likely  not  be  met  under  the  respective  sub-ceilings  of  the  current  regional-based 
mandates and/or EIB own risk facilities. Notably, it is expected that the bulk of lending under the 
optional mandate will be in the following countries4: Albania, Bosnia and Herzegovina, Belarus 
(if eligible), Colombia, Georgia, Indonesia, Egypt, former Yugoslav Republic of Macedonia, the 
Republic  of  Moldova,  Morocco,  Philippines,  Russia,  Serbia,  Turkey,  Ukraine,  Uruguay  and 

3 

4 

Countries  which  are  theoretically  eligible,  but  where  the  EIB  does  not  operate  currently  for  different 
reasons are not included, namely Brunei, Malaysia, Singapore, South Korea and Thailand. 
A special case is Croatia, which can be fully covered by the Pre-Accession Facilities. 

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Vietnam. This does not prevent the EIB from financing projects in other countries eligible under 
the EIB external mandate which are not mentioned here above. 

There  are  also  a  number  of  low-income  and  HIPC  countries  with  considerable  needs  and 
potential,  but  where  only  concessional  lending  is  possible  for  the  public  sector:  Bangladesh, 
Bolivia, Honduras, Kyrgyzstan, Laos, Maldives, Nicaragua and Tajikistan. Sovereign lending in 
these countries will only be possible if and when loan-grant blending mechanisms are used. 

A first assessment by EIB staff reveals potential demand far in excess of the EUR 2 bn available, 
spread widely over 20-25 countries. 

The  EIB  should  ensure  a  balanced  distribution  of  the  financing  operations  signed  under  the 
Climate  Change  Mandate  across  the  regions  covered  by  the  overall  mandate  by  the  end  of  the 
period 2011-2013. 

3. 

BACKGROUND  INFORMATION  ON  ICELAND,  BELARUS,  LIBYA,  IRAQ 
AND CAMBODIA 

The  Commission  proposes  to  activate  the  EIB  external  mandate  for  some  additional  countries, 
namely Iceland, Belarus, Libya, Iraq and Cambodia. The current relations of the EU with these 
countries  and  the  rationale  for  the  activation  of  the  mandates  for  these  countries  are  explained 
below. 

3.1. 

Iceland 

3.1.1.  Political Situation and bilateral relations with the EU 

Iceland became an independent republic on 17 June 1944. Iceland and the European Union have 
been cooperating extensively across a broad range of areas over the last 40 years. Iceland joined 
the  European  Free  Trade  Association  (EFTA)  in  1970  and  has  had  a  bilateral  Free  Trade 
Agreement with the EEC since 1972. Iceland has been a party to the agreement on the European 
Economic  Area  (EEA)  since  its  entry  into  force  in  1994.  The  EEA  provides  a  framework  for 
regular meetings between Iceland and the EU at political level, including the twice-yearly EEA 
Council meeting of Foreign Ministers.  

As an EEA state, Iceland has effectively participated in the single market for over 15 years. This 
required  it  to  adopt  a  considerable  part  of  European  Union  law.  The  EFTA  Surveillance 
Authority (ESA) regularly monitors Iceland’s performance under the EEA Agreement. Overall, 
Iceland  has  a  satisfactory  track  record  in  implementing  its  EEA  obligations.  Starting  in  1981, 
regular  meetings  have  taken  place  between  the  European  Parliament  and  the  Committee  of 
Members of Parliament of EFTA Countries. Since the entry into force of the EEA Agreement, 
these  relations  have  been  institutionalised  in  the  EEA  Joint  Parliamentary  Committee.  In 
addition,  bilateral  meetings  between  Icelandic  parliamentarians  and  Members  of  the  European 
Parliament take place on a regular basis.  

Iceland  contributes  to  reducing  social  and  economic  disparities  in  Europe  through  the  EEA 
Grants.  For  the  period  2004-2009,  Iceland  provided  approximately  EUR  29  mn  for  project 
funding  in  a  number  of  EU  Member  States  through  EEA  Grants.  Iceland  has  been  associated 
with  the  development  of  the  Schengen  agreements  since  1996  and  has  applied  its  provisions 
since 2001. This means that Iceland has abolished internal border controls with other Schengen 
area countries. Common rules and procedures are applied with regard to visas for short stays and 

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border  controls.  Within  the  Schengen  area,  Iceland  participates  in  extensive  cooperation  and 
coordination between police services and judicial authorities. 

In 2008, more than 54 % of Iceland’s imports came from the EU and 76 % of its exports went to 
the EU. The main export items are fish and other marine products although, as a share of total 
exports,  this  category  declined  to  40  %  in  2007.  Exports  of  manufactured  goods  have  been 
growing  rapidly,  led  by  aluminium  and  medical  and  pharmaceutical  products.  Exports  of 
services increased significantly in the years before the crisis. Services account for almost 35 % of 
total export revenues.  

Recent political and economic developments in Iceland have been defined by the impact of the 
global  financial  crisis  on  the  Icelandic  economy.  General  elections  in  April  2009  resulted  in  a 
centre-left coalition comprising the Social Democratic Alliance and the Left-Green Movement. 
The authorities have been introducing unpopular measures, viewed as necessary to deal with the 
crisis  that  this  new  government  inherited.  The  coalition  has  managed  to  hold  together  whilst 
dealing with difficult negotiations over the politically charged issue of compensation to the UK 
and  the  Netherlands  to  repay  insured  depositors  with  Icesave,  the  online  branch  of  the  failed 
bank, Landsbanki. However, this Icesave agreement was rejected in March 2010 by the Icelandic 
public through a referendum. New negotiations may lead to improvements, from Iceland's point 
of view, in the settlement of the Icesave issue. 

Following Iceland’s membership application, the Commission proposed that Iceland be included 
as  a  beneficiary  for  pre-accession  financial  support  under  the  Instrument  for  Pre-Accession 
Assistance. Such support would aim to foster institution and capacity building of the  Icelandic 
administration  mainly  through  the  Technical  Assistance  and  Information  Exchange  Instrument 
and twinning.  

3.1.2.  Democracy, Human Rights and Fundamental Freedoms situation 

Iceland  is  a  functioning  democracy  with  strong  institutions.  It  is  a  parliamentary  republic  with 
deeply-rooted  traditions  of  representative  democracy  and  division  of  powers.  Its  constitutional 
and  legal  order  and  governing  institutions  are  stable.  The  separation  of  powers  between  the 
legislature, the executive and the judiciary is respected.  

The  government  is  subject  to  effective  parliamentary  control;  its  ministers  are  accountable  for 
their acts. Municipal authorities function efficiently. Iceland’s judiciary is of a high standard and 
the judicial system is well established. The effective independence of the judiciary, in particular 
the procedure for judicial appointments, is, however, a matter of concern.  

Iceland’s  public  administration  is,  in  general,  efficient  and  free  from  political  interference.  A 
public  administration  reform  process  was  initiated  in  October  2009.  Following  the  financial 
crisis,  certain  questions  have  been  raised  concerning  possible  conflicts  of  interest  in  Iceland’s 
public life, such as close links between the political class and the business community, especially 
in light of the country’s small population and isolated location. Immediately following the crisis, 
a  Special  Investigation  Commission  and  a  Special  Prosecutor  were  set  up  to  investigate  and 
prosecute alleged criminal acts in the context of the bank collapse. Investigations are under way. 
Against this background, mechanisms will, where appropriate, need to be strengthened to reduce 
the  scope  for  conflict  of  interest.  Iceland  has  a  comprehensive  system  for  safeguarding 
fundamental rights and there is a high level of cooperation with international mechanisms for the 
protection of human rights. 

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3.1.3.  Macroeconomic situation and investment needs 

Against  the  backdrop  of  global  financial  turmoil,  the  collapse  of  Iceland’s  vulnerable  banking 
sector  pushed  the  economy  into  a  deep  recession.  The  national  currency  fell  sharply  in  value, 
considerably  pushing  up  import  prices,  thereby  causing  a  potentially  alarming  situation  for  a 
country highly dependent on international trade. Furthermore, the weakening currency strongly 
increased  foreign  debt  burdens.  The  government  sought  the  assistance  of  the  international 
community to stabilise the foreign exchange market and restore currency credibility.  

As a result of the crisis, GDP decreased significantly in the first half of 2009, with a contraction 
of  5.5%  year-on-year.  The  sharp  drop  in  domestic  demand  has  fallen  largely  on  imports.  The 
decline  in  domestic  consumption  was  somewhat  cushioned  by  automatic  stabilisers.  The 
unemployment rate increased sharply from 2.5%, in the third quarter of 2008, to 9.0% in April 
2009. It stood at 8.2% in December 2009, but is expected to rise again in 2010. Both youth and 
long-term  unemployment  have  soared,  with  the  low-skilled  labour  force  mostly  affected.  The 
share of long-term unemployed (over 12 months) among all unemployed has reached 21%. The 
highest  employment  losses  were  in  the  construction  industry.  Migration  out  of  Iceland  has 
emerged as an issue. Wages did not follow soaring inflation and fell by over 6% in real terms in 
the  first  half  of  2009.  The  fall  was  much  more  marked  in  the  private  sector  than  in  the  public 
sector.  

The current account deficit shrank to about 2% of GDP during the first half of 2009. The trade 
balance has shifted into surplus, reflecting weak domestic demand. Strongly negative net interest 
receipts  —  a  reflection  of  Iceland’s  external  debt  burden  —  have  offset  the  trade  surplus  and 
kept the overall current account in deficit.  

After  peaking  in  January  2009  at  21.9%,  inflation  rates  declined  in  response  to  the  gradual 
stabilisation  of  the  króna,  the  drop  in  demand  and  falling  house  prices,  falling  to  11.3  %  in 
December 2009. However, until December 2009 the króna continued to depreciate, providing the 
main  impetus  for  inflation  in  2009.  Credit  conditions  have  become  very  tight  and  enterprises 
have little access to bank loans or other sources of financing. Investment has halved, reflecting 
severe  credit  constraints.  After  the  collapse  of  the  Icelandic  banking  sector  and  the  ensuing 
economic crisis, the implementation of the IMF programme is starting to produce first signs of 
stabilisation.  

As the state of the Icelandic economy is rather grim the EIB mandate, once extended to Iceland, 
could address a series of investment needs in the country and also attract further private sector 
investments.  Iceland  has  recently  seen  a  dramatic  drop  in  investments  following  the  crisis  and 
faces  urgent  needs  in  all  sectors  and  particularly  in  sectors  such  as  renewable  energy.  In  the 
context  of  EU’s  policy  of  engagement  with  Iceland  and  Iceland's  need  for  profound  economic 
reform in the aftermath of the collapse of its financial sector and the following economic crisis, 
EIB  lending  to  Iceland  is  paramount,  in  all  sectors  currently  covered  by  the  EIB  mandate  (in 
particular energy and environment), to contribute to further sustainable diversification away from 
the  fisheries  and  to  support  its  compatibility  with  European  market  economies’  standards  and 
continued ability to sustain global competition. 

Currently EIB activity in Iceland takes place under the EFTA facility, under which the EIB lends 
to  EFTA  countries  at  its  own  risk  (i.e.  without  EC  guarantee)  and  within  certain  limits.  The 
facility was agreed by the EIB Board of Governors in 1994, following a joint request of the EU 
and EFTA Ministers of Finance in December 1993 to the EIB to start granting loans to the EFTA 
countries in the context of the joint growth initiative championed by both the EU and EFTA. In 

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November  2005,  the  EIB  assigned  a  further  EUR  800  mn  to  its  own  risk  facility  in  favour  of 
EFTA member countries (limited to investment grade structures), thus bringing it to EUR 2.5 bn 
until  31  December  2009.  The  investments  made  in  Iceland  within  this  framework  during  the 
period  2000-2009  amount  to  EUR  581  mn.  The  EFTA  facility  was  extended  in  2009  to  cover 
2010-2014 with an amount of EUR 800 mn. 

3.1.4.  Presence of other IFIs 

On 19 November 2008, the International Monetary Fund (IMF) approved a two-year IMF stand-
by  arrangement  for  an  amount  of  EUR  1.4  bn,  EUR  560  mn  of  which  was  made  available 
immediately  and  the  remainder  to  be  disbursed  in  instalments  of  EUR  105  mn,  following  the 
conclusion of IMF programme reviews. The arrangement is scheduled to end in May 2011.  

While  Iceland  does  not  borrow  from  the  World  Bank  Group,  Iceland  partners  with  IFC  in  the 
delivery  of  technical  and  advisory  services  in  the  developing  world  aimed  at  reducing  poverty 
through private sector growth, in particular in the countries of the former Soviet Union.  

Iceland also holds a 0.9% share in the Nordic Investment Bank and is also a country of operation 
for this Bank. 

3.2. 

Belarus 

3.2.1.  Political Situation and bilateral relations with the EU 

In  October  2008,  following  a  series  of  positive  steps  taken  by  authorities  on  the  path  of 
democratisation,  the  EU  reviewed  its  Belarus  policy  into  one  of  gradual  and  positive 
engagement.  This  flexible  and  pragmatic  approach  has  led  to:  (1)  increased  contacts  at  higher 
levels;  (2) expanded policy  dialogues on  sectoral cooperation issues; (3)  doubling of the  ENPI 
financial allocation and further progressive increases in allocation foreseen; (4) the preparation 
of a proposal of macro-financial assistance; (5) the inclusion of Belarus in the multilateral track 
of the Eastern Partnership; (6) the starting of work on a joint interim plan in support of reforms 
to be implemented by Belarus and on a visa facilitation/readmission mandate.  

When the Eastern Partnership was established in May 2009, Belarus was already included in its 
multilateral dimension, where it is very active and constructive, working out joint projects with 
neighbours. 

With  EC  support,  Belarus  is  currently  a  partner  eligible  for  grant  funding  in  the  Northern 
Dimension  Environmental  Partnership  -  NDEP  (where  EIB,  NEFCO,  NIB  and  EBRD 
participate),  has  signed  an  MoU  under  the  Northern  Dimension  Transport  and  Logistics 
Partnership – NDTLP, and has applied for membership to the wider Northern Dimension policy. 

In this context, extending the EIB mandate to Belarus would be in line with EU’s engagement 
policy with Belarus. 

3.2.2.  Democracy, Human Rights and Fundamental Freedoms situation 

On 17 November 2009, the Council of Ministers of the EU (GAERC) regretted the recent lack of 
significant  progress  in  addressing  its  concerns  in  the  area  of  human  rights  and  fundamental 
freedoms.  Consequently,  it  decided  to  extend  existing  restrictive  measures  until  October  2010. 
At the same time, the Council decided to extend the suspension of the application of the travel 
restrictions imposed on certain officials of Belarus.  

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The  Council  also  stated  that  subject  to  progress  in  Belarus  in  the  areas  of  democracy,  human 
rights and rule of law, it stood ready to take steps towards upgrading contractual relations with 
Belarus.  This  broad  policy  was  confirmed  by  the  European  Parliament  resolution  of  10  March 
2010 on the situation of civil society and national minorities in Belarus, which notes that, if the 
Belarusian  authorities  adhere  to  fundamental  human  rights  and  democracy-related  criteria, 
Belarus will benefit inter alia from the effective utilisation of EIB instruments. 

While  the  Commission  recommends  extending  EIB  eligibility  to  Belarus,  the  start  of  EIB 
operations in the country will not be automatic but will continue to be linked to progress toward 
democracy,  in  conformity  with  the  Council  conclusions  of  17  November  2009  on  Belarus  and 
with the European Parliament resolution of 10 March 2010 on the situation of civil society and 
national  minorities  in  Belarus.  These  conditions  will  be  further  specified  in  the  regional 
operational guidelines. 

3.2.3.  Macroeconomic situation and investment needs 

The state of Belarusian economy is rather grim. Although the negative effects of the economic 
crisis are less dramatic in Belarus compared with its Eastern neighbours, it essentially remains a 
planned  economy  that  needs  deep  reform  and  modernisation,  and  extensive  new  investment. 
Once the mandate is extended to Belarus, the EIB could address a series of investment needs in 
the  country,  while  also  helping  to  promote  private  sector  investment.  EIB  lending  to  Belarus 
could  prove  crucial  (in  particular  in  the  energy,  transport  and  environmental  sectors),  to 
contribute  to  sustainable  modernisation  of  the  country’s  post-soviet  industrial  and  agricultural 
economy and turn it into one more able to compete on the European and global markets.  

3.2.4.  Presence of other IFIs 

On 31 January 2010 there were six active loans by the International Bank for Reconstruction and 
Development (IBRD) in Belarus constituting a total commitment of USD 473 mn (6% of the total 
external public debt) and outstanding disbursement amounting to USD 257 mn. 

Since  Belarus  became  a  member  of  the  IFC,  the  institution  invested  in  several  projects  in  the 
financial,  agribusiness  and  manufacturing  sectors.  Despite  the  difficulties  of  the  business 
environment  in  Belarus,  IFC  will  continue  to  seek  opportunities  to  invest  in  Belarus's  private 
sector  with  the  participation  of  strategic  investors.  IFC  has  been  actively  involved  in  advisory 
work in Belarus since 1993, initially focusing on the privatization of small businesses. Currently, 
IFC  concentrates  its  advisory  efforts  on  small  and  medium  enterprise  development  and 
improvement  of  the  investment  climate.  Currently,  there  are  7  active  investment  projects  with 
IFC  support,  while  only  one  advisory  project  is  currently  implemented  (Belarus  Energy 
Efficiency Survey Project). 

In  early  2009,  the  International  Monetary  Fund  (IMF)  agreed  a  Stand-by  Arrangement  of 
initially  SDR  1.6  bn  (USD  2.46  bn)  to  help  Belarus  cope  with  the  global  financial  crisis.  This 
represented  around  31%  of  the  country's  external  public  debt.  As  the  economic  situation 
deteriorated,  this  amount  was  increased  to  SDR  2.27  bn  (USD  3.52  bn)  by  mid-2009, 
representing  around  44.6%  of  the  external  public  debt.  Within  this  Stand-By  Arrangement 
ending  in  March  2010,  the  total  disbursements  so  far  amount  to  USD  2.88  bn.  Related  to  the 
existing  IMF  programme,  on  23  of  June  2009  a  letter  was  sent  by  the  Minister  of  Finance  of 
Belarus  to  the  economic  and  monetary  affairs  Commissioner  asking  for  macro-financial 
assistance  (MFA)  for  Belarus.  The  Commission  is  currently  considering  submitting  to  the 
Parliament and Council a proposal for an MFA to Belarus in the form of a loan. 

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EBRD  is  mainly  investing  in  the  private  sector  to  encourage  the  transition  of  Belarus  towards 
democracy,  a  pluralistic  society  and  market  economy.  Currently,  EBRD  is  involved  in  24 
projects (infrastructure, corporate sector, financial sector and energy) contributing with EUR 244 
mn (59%) to the total amount of the projects (EUR 385 mn). The financial sector represents half 
of  the  EBRD  projects  portfolio  (47%)  while  other  sectors  respectively  account  for  18% 
(infrastructure),  22%  (corporate  sector)  and  13%  (Energy).  On  10  December  2009,  the  EBRD 
adopted a revised country strategy for Belarus to address key transition challenges including, (i) 
development  of  private  micro-  small-  and  medium-sized  enterprises  (MSMEs);  (ii) 
implementation  of  a  transparent  privatisation  programme;  (iii)  liberalisation  of  trade;  (iv) 
improvements  in  energy  efficiency;  and  (v)  commercialisation  of  municipal  infrastructure  and 
improvements in environmental standards. In particular, beyond the previously existing support 
to  SMEs,  the  strategy  includes  several  activities  related  to  the  support  for  privatisation/pre-
privatisation  activities  in  Belarus  and  to  trade  facilitation.  Moreover,  given  the  clear  need  to 
interact  with  the  Belarusian  government  and  with  state-owned  companies,  credit  lines  to  the 
private sector through financial intermediaries were extended to include commercially oriented 
state-own banks. Finally, energy efficiency, sustainable and renewable energy as well as power 
infrastructure  were  also  included  as  priority  areas.  The  strategy  outlines  a  calibrated  strategic 
approach  to  allow  the  EBRD  to  increase  its  engagement  with  Belarus  on  the  basis  of  concrete 
implementation  of  sector-specific  reforms  designed  to  promote  the  further  development  of  a 
market economy. 

As  it  does  not  have  an  ENP  Action  Plan  in  force,  Belarus  is  not  eligible  under  the 
Neighbourhood  Investment  Facility  (NIF)  that  operates  with  pooled  grant  resources  of  the  EU 
budget  and  Member  States,  which  are  used  to  leverage  IFIs  loan  financing,  except  in  case  of 
projects of cross-border and regional nature to which the Union attaches particular interest and 
following an unanimous decision of the NIF Board. 

3.3. 

Libya 

3.3.1.  Political Situation and bilateral relations with the EU 

Since  the  lifting  of  international  sanctions  in  2003,  the  EU  has  developed  a  policy  of  gradual 
engagement with Libya, which is a key country in such areas as the fight against terrorism, peace 
and security in Africa, illegal immigration in the Mediterranean Sea and energy. A key milestone 
was  the  October  2007  Council  decision  to  start  negotiations  on  a  Framework  Agreement  with 
Libya.  Negotiations  on  the  Framework  Agreement  started  in  November  2008.  So  far,  the 
atmosphere of the negotiations is positive and constructive, and preliminary agreement has been 
reached on many aspects of the draft agreement.  

The EU’s overarching objective is to continue this policy of active engagement with Libya and 
conclude  negotiations  on  the  Framework  Agreement  as  soon  as  possible.  This  will  lead  to  the 
establishment of a long-term and durable EU-Libya partnership; it will also pave the way for a 
more  sustained  support  by  the  EU  of  the  modernisation  process  launched  by  Libya.  The 
Framework  Agreement  is  a  key  tool  for  promoting  the  EU’s  interest,  as  well  as  establishing 
dialogue  and  cooperation  on  difficult  issues  like  human  rights,  where  Libya’s  record  is  still 
unsatisfactory. 

A short-term priority is to establish the EU’s credibility as a reliable partner for Libya in the fight 
against illegal immigration. Libya has taken tough measures which have led to a sharp fall in the 
number of illegal immigrants reaching Europe after transiting through Libya.  

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In line with its policy of engagement with Libya, the EC is developing its financial cooperation 
with  Libya.  This  started  with  the  launch,  in  November  2004,  of  the  ‘EU  HIV  Action  Plan  for 
Benghazi’  (BAP).  So  far,  the  EU’s  support  for  the  BAP  has  amounted  to  EUR 8.5  mn,  with  a 
further  commitment  of  EUR 2  mn  to  follow  in  2010.  In  2008,  the  Commission  decided  to 
provide EUR 1 mn to support development of a 2009-2013 National HIV Strategy. In 2009, the 
EC decided to allocate EUR 10 mn for a project aiming to strengthen border control at Libya’s 
southern borders. It has also provided assistance to the International Organisation for Migration 
and the UN High Commissioner for Refugees, using successive thematic instruments (AENEAS 
and ‘Thematic Programme on Migration and Asylum’).  

For the 2011-2013 period, the EC decided in March 2010 to allocate EUR 60 mn for the bilateral 
programme  under  the  ENPI,  which  would  target  the  following  sectors:  trade  facilitation  and 
improvement  of  the  business  environment;  health;  institutional  strengthening  and  capacity 
building in public sector bodies (in particular on sustainable development issues) and migration. 

3.3.2.  Democracy, Human Rights and Fundamental Freedoms situation 

Since  1977,  Libya  has  been  a  ‘Jamahiriya’,  which  is  a  form  of  direct  democracy  under  which 
power  is  entrusted  to  the  people  through  their  participation  in  local  basic  popular  congresses 
(BPCs).  Each  BPC  elects  a  representative  to  the  General  People’s  Congress,  which  is  the 
country’s supreme legislative body and appoints the General People’s Committee (the cabinet). 
The Leader of the Revolution, Muammar al-Gaddafi, still retains strong influence. 

Civil  society  organisations  and  a  few  non-governmental  organisations  have  developed  over 
recent  years,  but  on  a  modest  scale.  Press  freedom  has  improved.  However,  freedom  of 
association  and  freedom  of  expression  remain  restricted  and  there  are  still  numerous  reported 
abuses of human rights. Nevertheless, recently, there have been some positive developments. On 
15 October 2009, Libya released 88 Islamist prisoners and announced plans to demolish the Abu 
Selim prison, often used to hold political detainees. The prison is notorious for the death of more 
than  1.000  prisoners  in  1996.  The  closure  of  Abu  Slim  constitutes  a  longstanding  demand  of 
Human Rights  defenders. The government has taken steps to grant compensation to victims of 
the 1996 repression. 

In  November,  the  Libyan  authorities  announced  a  reform  of  Libya's  penal  code.  Under  the 
amended  penal  code,  Libyan  citizens  would  have  the  right  to  create  civil  associations  on  the 
condition  that  they  are  apolitical.  Moreover,  the  amended  penal  code  would  limit  the  death 
penalty  to  those  convicted  of  premeditated  murder  and  of  committing  acts  of  terrorism.  Under 
the existing code, which dates back to 1953, 21 crimes are punishable by death including drug 
trafficking and attacks on the security of the state. 

Also,  Libya  allowed  Human  Rights  Watch  (HRW)  to  launch  a  report  on  Libya's  rights  record 
from  Tripoli  in  December  this  year.  This  is an  unprecedented  move  by  the  Libyan  authorities, 
which  had  hitherto  prevented  any  sort  of  criticism  of  the  regime  from  inside  the  country. 
Simultaneously,  the  Kadhafi  Foundation  presented  a  very  critical  report  on  the  human  rights 
situation in Libya. The report denounces cases of torture and ill-treatment in Libyan prisons and 
complains  about  the  control  exerted  by  the  regime  over  media  and  civil  society.  The  report 
underlines that all media operating in Libya belong to the state. It also calls on the authorities to 
develop  a  “transparent”  investigation  of  the  1996  massacre  in  the  Abu  Salim  prison.  This 
constitutes  the  first  report  on  human  rights  published  by  the  Kadhafi  Foundation  since  its 
creation in 1999. 

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3.3.3.  Macroeconomic situation and investment needs 

The Libyan economy depends heavily on the hydrocarbon sector, which constitutes around two 
thirds of its GDP and provides around 95% of export revenue and 80% of government revenue. 
The  international  economic  sanctions  imposed  both  by  the  United  Nations  (1992-99)  and  the 
United States (1986-2006) had serious effects on the productivity of all sectors and in particular 
of  the  oil  fields.  Since  the  ending  of  the  sanctions  Libya  has  begun  a  process  of  economic 
reforms in order to modernise the economy, expand its oil and gas industry and reintegrate with 
the international community. Initial steps include applying for World Trade Organization (WTO) 
membership,  cautiously 
two 
telecommunication  companies.  Economic  activity  remains  relatively  concentrated  in  the  oil 
sector.  Growth  outside  of  this  sector  is  from  government  investment  and  consumption, 
agriculture and tourism.  

subsidies  and  privatising 

two  banks  and 

reducing 

The global economic crisis had only a mild impact on the Libyan economy as a result of the low 
economic diversification, the lack of exposure of domestic banks to the global financial system 
and to liquidity from the recycling of oil revenues. Nevertheless, GDP growth declined in 2009 
to  around  2.1%,  mostly  due  to  an  expected  1.5%  reduction  in  oil  production.  However,  major 
public  expenditure  on  infrastructure  projects,  mainly  on  construction  utilities  and  transport, 
helped to sustain non-oil growth at around 6%. The vulnerability of the Libyan economy to oil 
price shocks remains its biggest challenges. The fiscal surplus narrowed significantly to around 
10% in 2009 from 24% in 2008 as a result of lower oil prices, while the non-oil fiscal balance 
presents large deficit. Similarly, the current account surplus narrowed to around 16.8 % of GDP 
in  2009  from  some  40.7 %  of  GDP  in  2008.  Libya's  external  financial  position  is  strong  with 
foreign  reserves  of  USD  103  bn  at  the  end  of  2009  while  Libya's  Sovereign  Wealth  Fund 
manages investments of around USD 66 bn, the majority of which are held in cash instruments. 
Libya has also recently considerably increased the provision of external foreign grants to other 
African lower-income countries.  

Revenues from the energy sector, coupled with a small population and an extended network of 
direct  and  indirect  subsidies  give  Libya  the  second  highest  GNI  per  capita  in  PPP  in  Africa, 
which  is  higher  than  some  EU  member  states.  Although  only  part  of  it  flows  down  to  lower 
income groups, extreme poverty is mostly absent.  

Libya's investment needs are currently focused on the following areas: 

•  Economic  diversification:  There  is  a  need  to  identify  and  promote  potential  sectors  of 
comparative advantage in Libya, such as financial services, information/communication, and 
tourism. 

•  Raising the productivity and mechanisation in the agricultural sector: Climatic conditions and 
poor  soil  severely  limit  agricultural  output,  so  that  Libya  imports  about  75%  of  its  food. 
Significant  resources  are  needed  in  desalinization  projects/research  to  meet  growing  water 
demands. 

•  Improving health and education systems: Health conditions are poor in Libya partly due to the 
sanctions  of  previous  years.  Also,  the  scarcity  of  scientific  and  technically-skilled  staff 
remains a core human resource issue. 

•  General infrastructure projects: Libya has embarked on a huge (USD 84 bn) public investment 
programme  for  the  upgrade  of  its  dilapidated  infrastructure.  Although  Libya's  financial 

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position  is  comfortable,  the  participation  of  private  funds  or  loans  in  financing  could  help 
improve the efficiency of public spending. 

Other  overarching  political  priorities  include  employment  creation  and  public  administration 
capacity building. 

3.3.4.  Presence of other IFIs 

There are currently no active loans by the IBRD nor is there activity by the IFC. There are also 
no  IMF  loans.  African  Development  Bank  (AfDB)  activity  in  Libya  is  limited  to  non-lending 
operations. Currently, the AfDB approved its participation in the Capacity Building Support for 
Export project. 

As it does not have an ENP Action Plan in force, Libya is not eligible under the NIF, except in 
cross-border  and  regional  projects  to  which  the  Union  attaches  particular  interest,  following  a 
unanimous decision of the NIF Board. 

3.4. 

Iraq 

3.4.1.  Political Situation and bilateral relations with the EU 

The European Union is moving steadily towards reinforcement of its relations with Iraq. Given 
Iraq’s  important  role  in  the  region  and  potential  as  a  trading  partner,  the  EU  sees  the  mutual 
benefits of developing ties between the EU and Iraq. Political and trade ties are developing and 
the EU warmly welcomes a strengthened partnership in all spheres. The national elections held 
on  7  March  2010  showed  Iraq’s  commitment  to  democracy  and  reconfirmed  EU’s  will  to 
continue enhanced cooperation with the country. 

A major  step forward  in relations will  be the EU-Iraq Partnership and Cooperation Agreement 
which should be signed in the course of 2010. Negotiations were concluded in November 2009. 
Once in force, the Agreement will lay a solid foundation for further cooperation between the two 
partners  in  a  wide  range  of  fields,  including  the  facilitation  and  promotion  of  trade  and 
investment  as  well  a  formalised  political  dialogue.  In  parallel,  the  Memorandum  of 
Understanding  on  a  “Strategic  Energy  Partnership”  was  signed  in  January  2010;  this  also 
illustrates the strengthening relationship in this important area. 

In terms of support, almost EUR 1 bn has been committed by the EU since 2003, in addition to 
substantial contributions from EU Member States. The EU will continue to play a significant role 
in supporting the Iraqi government in its efforts to bring stability, security and prosperity to all 
its citizens. 

In  line  with  the  European  Union’s  strategic  objectives  for  its  relations  with  Iraq,  the  EU  is 
currently  passing  to  regular  development  cooperation  and  multi-annual  programming  of 
assistance  (the  Country  Strategy  Paper  2011-13  is  under  preparation).  The  focus  in  the  future 
will be on helping Iraq to better use its own resources, through capacity building activities.  

The  EU  also  welcomed  the  Government  of  Iraq’s  forward-looking  approach  to  sustainable 
development,  including  through  formulation  of  comprehensive  policies  aiming  at  economic 
growth  and  social  progress  (Iraq’s  major  economic  indicators  show  that  economic  growth  is 
likely  to  strengthen  in  2010-2011  and  reach  an  annual  average  of  6.4%).  More  foreign  direct 
investment  in  a  range  of  oil  and  infrastructure  projects  is  foreseen,  and  the  fiscal  deficit  is 
expected to narrow as oil revenues recover. 

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3.4.2.  Democracy, Human Rights and Fundamental Freedoms situation 

Although the overall situation is improving, Iraq continues to be faced with some serious human 
rights  problems.  These  include  the  use  of  death  penalty  (reintroduced  in  May  2009  –  under 
which  77  persons  were  executed  by  the  end  of  2009),  prolonged  periods  of  detention  in  the 
absence  of  charges,  allegations  of  torture  and  ill-treatment  of  detainees  and  violence  against 
human rights defenders or minorities. The situation of women and children has also been a cause 
of particular concern for the EU. 

In  this  regard,  it  is  worth  noting  that  Iraq  has  undergone  the  UN  Universal  Periodic  Review 
(UPR)  this  year,  in  the  context  of  which  the  human  rights  situation  was  assessed  by  the  UN 
Human Rights Council (in February 2010). 

The Iraqi government prepared a national report (with UN assistance) that contained information 
on  Iraq’s  efforts  to  meet  its  human  rights  obligations  under  international  law  and  identified 
challenges and improvements to be made. Following the review session in Geneva, the working 
group of the HRC prepared a country report on Iraq, incorporating Member States’ comments, 
which was adopted in a plenary session. 

So  far,  the  Iraqi  government  accepted  77%  of  the  176  recommendations  proposed  by  the 
Member States in the country report. The UN support project will continue to engage in the UPR 
process by helping the government and civil society implement a country-wide awareness raising 
campaign and a national conference on the outcome and follow up of the UPR recommendations 
for  Iraq.  The  EU  will  also  continue  to  support  Iraq  in  its  efforts  to  improve  the  human  rights 
situation  (through  Commission-financed  projects  and 
likely  further  extension  of 
EUJUSTLEX’s mandate). 

the 

The  EU  has  however  also  taken  note  of  positive  democratic  developments  in  Iraq  such  as 
elections (provincial, regional-Kurdistan Region, in 2009, as well as general election in March 
2010), which are important milestones in the process of consolidation of Iraq's new democracy. 
Moreover,  the  inclusion  of  provisions  for  minority  representation  in  the  electoral  law  and  the 
adoption of the Convention against Torture are illustrative of Iraqi efforts to build a democratic 
state with enhanced respect for human rights. 

3.4.3.  Macroeconomic situation and investment needs 

Even  in  2009  economic  growth  in  Iraq  reached  4.5%,  albeit  down  from  7.8%  in  2008.  The 
expectations are that growth will accelerate to 6.0% in 2010. After several years of high fiscal 
surpluses,  the  public  balance  was  in  deficit  in  2009,  mainly  due  to  lower  oil  revenues.  On  the 
back of a likely recovery in global growth, higher oil prices are expected to help Iraq achieve a 
government surplus in 2010. The current account, that largely mirrors movements in oil export 
receipts which constitute 98% of total export earnings, is also expected to record a strong surplus 
in 2010. 

Consumer price growth has been low since early 2008, thanks to falling global commodity prices 
that  lowered  import  costs  and  dampened  inflationary  expectations.  Falling  fuel  and  transport 
costs  even  pushed  Iraq  into  deflation  in  2009  when  consumer  prices  fell  by  an  average  2.8%. 
With  inflation  low  and  the  US  dollar  strengthening,  the  Iraqi  dinar  appreciated  in  an  orderly 
fashion thanks to interventions by the central bank. 

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The banking sector remains weak. Its weak state and its limited role within the economy make it 
difficult to pursue an effective monetary policy. However, the Central Bank of Iraq has sought to 
manage  liquidity  in  the  economy  more  effectively  through  the  introduction  of  an  interbank 
market, a basic lending (or “intervention”) rate, minimum reserve requirements, a daily currency 
auction and a government securities market. After increasing interest rates several times between 
2006  and  2008,  the  central  bank  more  than  halved  its  Iraqi  dinar  policy  interest  rate  since 
February 2008 to 7%, citing the marked decline in inflation. However, inflationary pressures are 
now starting to build. 

Against this background, it is essential to stimulate economic growth in order to increase welfare 
levels, notably via stronger investment. 

3.4.4.  Presence of other IFIs 

On  25  February  2010,  the  IBRD  approved  the  First  Programmatic  Fiscal  Sustainability 
Development Policy Loan – DPL, in amount of USD 250 mn. This is the only IBRD active loan 
to Iraq. 

Currently,  IFC  is  involved  in  two  active  investment  projects,  without  participating  in  any 
advisory project. 

On 4 March 2010, the IMF approved a USD 3.6 bn loan to help Iraq to cope with the situation 
generated by the high deficits and falling government revenues due to lower than anticipated oil 
prices. 

3.5. 

Cambodia 

3.5.1.  Political Situation and bilateral relations with the EU 

Since 1997, bilateral relations between the EU and Cambodia are governed by the Cooperation 
Agreement  signed  between  the  EC  and  the  Kingdom  of  Cambodia.  This  agreement  covers 
various  political,  economic  and  sectoral  relations  (including  energy,  science,  physical 
infrastructure,  cooperation  in  the  field  of  sustainable  economic  cooperation,  cooperation  to 
improve  the  quality  of  life  and  standards  of  living  of  the  poorest  sections  of  the  population, 
measures  for  the  country’s  reconstruction,  creation  of  jobs,  cooperation  to  protect  the 
environment and manage natural resources sustainability). The main objective of this agreement 
is a political dialogue and an assessment of cooperation and trade relations. 

The  European  Union  is  increasingly  engaged  with  the  Cambodian  government  and  its  civil 
society in policy dialogue on human rights and democratisation and supporting the Rectangular 
Strategy  and  National  Strategic  Development  Plan  (the  national  poverty  reduction  strategy). 
Rapid progress has been made in decentralisation. Cambodia has taken the path of reforms and 
the EU wants to continue supporting this process both politically and financially. 

The economic downturn has not so far affected political stability: general elections took place in 
July 2008. There is currently peace and stability after thirty years of various degrees of civil war 
and the four –year khmer rouge regime. 

In  terms  of  financial  support,  almost  EUR  250  mn  has  been  committed  by  the  European 
Community since 2000 from the geographical instrument in addition to substantial contribution 
from  thematic  budget  lines  and  from  EU  Member  States.  The  EU  will  continue  to  play  a 

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significant role in supporting the Cambodian government in its efforts to bring stability, security 
and prosperity to all its citizens. 

In  line  with  the  EU's  strategic  objectives  to  strengthen  its  relations  with  Cambodia,  the  EU  is 
passing  to  regular  development  cooperation  and  multi-annual  programming  of  assistance  (the 
Country Strategy Paper 2011-13 is currently being prepared). The focus in the future will be on 
helping Cambodia to continue its democratic process, by supporting the better use and protection 
of its own resources through capacity building and the support of good governance and poverty 
reduction. 

The EU also welcomed the Government of Cambodia's forward-looking approach to sustainable 
development,  which  includes  the  formulation  of  comprehensive  policies  for  economic  growth 
and social progress. It should also be noted that the EU is working in the context of the Climate 
Change Alliance (Cambodia being one of the 5 pilot countries), which could benefit from EIB 
operations. 

3.5.2.  Democracy, Human Rights and Fundamental Freedoms situation 

In spite of significant improvements in the general plight of the Cambodian population, concerns 
over  the  development  of  human  rights  persist.  More  progress  is  needed,  which  the  EU  will 
continue  follow  closely.  Cambodia  has  ratified  18  of  the  24  international  human  rights 
instruments.  However,  there  is  a  gap  between  policy  and  practice.  While  the  Constitution  has 
embraced  human  rights  and  the  legal  framework  for  their  protection  is  largely  in  place, 
implementation  and  enforcement  are  lagging  behind  expectations  in  some  cases.  Some  lack  of 
independence  of  the  judiciary  from  political  and/or  financial  influence  is  one  of  Cambodia's 
structural weaknesses; the EU is supporting the necessary reforms in this context. In recent years 
economic growth has increased pressure on land and natural resources. These issues are part of 
the EU's policy dialogue with the Government and civil society. 

3.5.3.  Macroeconomic situation and investment needs 

The decade before the current crisis was largely a success story for Cambodia, with an average 
annual growth rate of 8% and a reduction of the poverty rate from 50% around 1995 to 30% in 
2007.  The  global  financial  crisis  hit  Cambodia  harder  than  many  other  ASEAN  countries.  In 
2009, Cambodian GDP is likely to have contracted by roughly 2%. Growth prospects for 2010 
are  mediocre  and  GDP  growth  is  forecast  to  be  around  4%  (with  downside  risks  clearly 
prevailing). The current account balance, which was almost stable until 2007, posted a double-
digit deficit in 2008 which is likely to have halved in 2009 to 5.5%. It is projected to widen again 
this year with rising average oil prices and relatively low receipts from tourism. The fiscal deficit 
widened sharply to almost 7% in 2009 and is expected to remain high. External debt has surged 
from less than 25% in 2008 to almost 30% of GDP in 2009. Against the backdrop of a deflating 
housing bubble, deteriorating bank balance sheets are a concern, particularly as this might result 
in a decline in credit availability which might hamper future growth. 

Investment needs are high in Cambodia given its tragic past and the fact that it only started to 
rebuild its infrastructure a decade ago. The housing boom of recent years also led to a relative 
neglect of other infrastructure investment compared with private housing, the bursting of which 
is stretching the balance sheet of Cambodian  banks. As a result, the need for outside investors 
bringing capital to the country is high. 

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3.5.4.  Presence of other IFIs 

The activity  of  the World Bank Group (WBG) in Cambodia focuses on key governance issues 
and  on  supporting  efforts  to  attain  the  Cambodia  Millennium  Development  Goals.  For  this 
purpose,  the  WBG  is  using  a  mix  of  IDA  loans,  grants  and  analytical  services.  At  the  end  of 
January 2010, the institution was involved in 22 projects, amounting in total amount to USD 333 
mn. 

IFC - has been in Cambodia since 1997, financing private sector investment, mobilizing private 
capital, and promoting private sector development through products and services that benefit the 
country’s micro, small, and medium-sized enterprises. The Advisory Services programme targets 
improvements  in  governance,  access  to  finance,  agribusiness  supply  chains,  and  private 
investment in power and transportation infrastructure, among others. IFC has invested USD 91 
mn in Cambodia, and expects to increase its annual investment to more than USD 50 mn by end 
of 2010. Currently, IFC is involved in five active investment projects. 

As  of  31  December  2008,  Cambodia  had  received  from  the  Asian  Development  Bank  (ADB) 
USD 1,031 mn in the form of loans (36 project loans and 13 program loans); USD 204 mn in 
grants from the Asian Development Fund grants (15 project grants and 1 programme grant); and 
USD 107 mn for 158 technical assistance projects, since joining the ADB in 1966. The majority 
have been provided since operations resumed in 1992. 

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