COMMISSION STAFF WORKING DOCUMENT Background analysis per beneficiary Accompanying the document Report from the Commission to the Council and the European Parliament on the implementation of macro-financial assistance to third countries in 2011
Date: 2012-06-28
Institutions: European Commission
Subjects: Armenia, Bosnia and Herzegovina, EU aid, EU control, Georgia, Kyrgyzstan, Moldova, Serbia, Ukraine, economic situation, financial aid, structural adjustment, terms for aid

EUROPEAN COMMISSION 

Brussels, 28.6.2012 
SWD(2012) 181 final 

COMMISSION STAFF WORKING DOCUMENT 

 Background analysis per beneficiary 

Accompanying the document 

Report from the Commission to the Council and the European Parliament on the 
implementation of macro-financial assistance to third countries in 2011 

{COM(2012) 339 final} 

EN 

   EN 

 
 
 
 
  
 
LIST OF ABBREVIATIONS 

Central European Free Trade Agreement 

Consumer Price Index 

Deep and Comprehensive Free Trade Area 

European Community 

Economic and Financial Committee 

European Investment Bank 

Emergency Post-Conflict Assistance 

European Union 

Euro 

Foreign Direct Investment 

Gross Domestic Product 

Generalised System of Preferences 

International Monetary Fund 

Instrument for Pre-Accession 

Macro-Financial Assistance 

Memorandum of Understanding 

Public Internal Financial Control 

Special Drawing Rights 

Stand-By Arrangement of the IMF 

Small and Medium-sized Enterprises 

Dollar of the United States of America 

Value Added Tax 

World Trade Organisation 

CEFTA 

CPI 

DCFTA 

EC 

EFC 

EIB 

EPCA 

EU 

EUR 

FDI 

GDP 

GSP 

IMF 

IPA 

MFA 

MoU 

PIFC 

SDR 

SBA 

SME 

USD 

VAT 

WTO 

 
 
 
 
TABLE OF CONTENTS 

1.  BOSNIA AND HERZEGOVINA............................................................................... 4 

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

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

1.3.  Structural reforms.............................................................................................. 5 

1.4. 

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

2.  SERBIA....................................................................................................................... 6 

2.1.  Executive summary ........................................................................................... 6 

2.2.  Macroeconomic performance............................................................................ 6 

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

2.4. 

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

3.  ARMENIA .................................................................................................................. 6 

3.1.  Executive summary ........................................................................................... 6 

3.2.  Macroeconomic performance............................................................................ 6 

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

3.4. 

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

4.  GEORGIA ................................................................................................................... 6 

4.1.  Executive summary ........................................................................................... 6 

4.2.  Macroeconomic performance............................................................................ 6 

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

4.4. 

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

5.  MOLDOVA................................................................................................................. 6 

5.1.  Executive summary ........................................................................................... 6 

5.2.  Macroeconomic performance............................................................................ 6 

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

5.4. 

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

6.  UKRAINE ................................................................................................................... 6 

6.1.  Executive summary ........................................................................................... 6 

6.2.  Macroeconomic performance............................................................................ 6 

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

6.4. 

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

7.  THE KYRGYZ REPUBLIC ....................................................................................... 6 

7.1.  Executive summary ........................................................................................... 6 

3 

 
7.2.  Macroeconomic performance............................................................................ 6 

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

7.4. 

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

4 

 
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  (MFA)  to  third  countries  in  2011.  It  provides  economic  and  financial 
information regarding the situation of the beneficiary countries as well as more detailed 
information on the implementation of MFA operations in those countries. Statistical data 
on the different macro-financial assistance decisions adopted since 1990, by date and by 
regions, are included in the annex. 

WESTERN BALKANS 

1. 

BOSNIA AND HERZEGOVINA 

1.1.  Executive summary 

In  2011,  the  economy  of  Bosnia  and  Herzegovina  continued  its  recovery,  with  a  real 
GDP  growth  of  1.6%,  driven  primarily  by  external  demand  and  slightly  increasing 
domestic demand. The external imbalances have been growing again after a decrease in 
the earlier crisis period. The current account deficit reached an estimated 8.7% of GDP, 
mainly triggered by the recovery of imports of goods. Further fiscal consolidation took 
place, both on the revenue and expenditure side. However, no agreement was reached on 
the  Global  Framework  of  Fiscal  Policies  2012-2014  between  the  entities  and  the  state 
level1, thus weakening the soundness and credibility of the fiscal policy outlook. 

No funds were disbursed in 2011 under the current EU MFA to Bosnia and Herzegovina 
(a  loan  facility  of  up  to  EUR  100  million,  Council  Decision  2009/891/EC  of  30 
November  2009).  The  political  stalemate  which  followed  the  October  2010  general 
elections  did  not  allow  for  programme  discussions  under 
the  IMF  Stand-By 
Arrangement,  to  which  the  MFA  is  linked.  The  Stand-By  Arrangement,  even  if  not 
officially declared by the IMF as being off-track, has in fact been non-functional since 15 
October 2010, when the last programme review was made. The disbursement of the EU 
MFA can take place in 2012, under the conditions that the IMF programme is being re-
the  Memorandum  of 
the  specific  policy  conditions  under 
launched  and 
Understanding are being met. 

that 

1.2.  Macroeconomic performance 

The  economic  recovery,  which  started  in  2010  with  a  real  GDP  growth  of  0.7%, 
accelerated  slightly  in  the  course  of  2011  and  GDP  growth  has  reached  1.6%.  Rising 
external  demand  remained  a  key  contributor  to  the  expansion  of  the  economy,  but  the 
growth  of  exports  slowed  down  towards  the  end  of  the  year,  reflecting  the  economic 
downturn in some of Bosnia and Herzegovina's main trading partners. In 2011, domestic 
demand also picked up, supported by a stable inflow of remittances and an accelerated 
growth  of  private  credits.  Industrial  production  soared  by  5.6%  in  2011  due  to  the 

1  Bosnia  and  Herzegovina  is  composed  of  two  first-order  administrative  divisions  (entities)  -  the 
Federation  of  Bosnia  and  Herzegovina  and  Republika  Srpska,  each  having  its  own  (entity) 
government, linked by a federal government. 

5 

 
                                                 
excellent  performance  of  the  mining  sector  (15.6%)  and  the  manufacturing  industry 
(5%),  while  the  energy  sector  expanded  at  a  lower  rate  (2%).  Despite  the  economic 
recovery, unemployment grew to 43.8% at the end of 2011, due to some labour shedding 
in the private sector, most notably in construction. 

After  the  improvements  registered  in  the  previous  couple  of  years,  the  current  account 
deficit surged by 58.8% in 2011, reaching an estimated 8.7% of GDP. The deterioration 
was mainly driven by the expansion of the trade deficit (+12.3%) and, to a lesser extent, 
by the falling surpluses in the income and services balances. Imports of goods soared by 
14% caused by the recovery of domestic demand. The expansion of the trade deficit was 
only partially offset by a slight increase in the surplus of current transfers (+2.5%). Net 
FDI  inflows  more  than  doubled  in  2011,  even  though  from  an  extremely  low  basis, 
reaching an estimated 2.3% of GDP, thus being insufficient to cover the current account 
deficit. Official foreign exchange reserves fell marginally by 0.5%, covering around five 
months of imports. 

Annual inflation accelerated to 3.7% in 2011, as compared to 2.1% in the previous year. 
The major contributors to  the acceleration of the consumer price growth were the food 
(6%)  and  transport  (7.5%)  prices,  reflecting  the  rising  food  and  crude  oil  prices  on  the 
global markets. Inflation in 2011 was also driven by a hike in the excise duty on tobacco. 
The  monetary  policy  of  the  Central  Bank  continued  to  be  conducted  under  a  currency 
board  arrangement,  with  the  euro  as  the  anchor  currency,  enjoying  a  high  level  of 
confidence  and  credibility.  As  of  February  2011,  the  minimum  reserve  requirement  for 
short-term deposits was lowered from 14% to 10% in order to boost the liquidity of the 
banking sector. 

The  consolidated  budget  posted  a  marginal  deficit  of  0.4%  of  GDP  in  2011  against  a 
deficit of 2.5% of GDP a year earlier. Consolidated revenues increased by 2.5% on the 
higher collection of tax revenues (+3.6%) and social contributions (+4.1%). In Republika 
Srpska,  the  (flat)  income  tax  rate  was  increased  from  8%  to  10%  as  of  2011,  the  non-
taxable  income  threshold  was  abolished,  while  the  overall  social  contribution  rate  was 
increased  from  30.6%  to  33%  of  the  gross  salary.  Consolidated  expenditures  fell  by 
1.6%, mainly due to the contraction of capital expenses (-31.4%) and purchases of goods 
and services (-20.2%). At the same time, the wage bill and expenditures for subsidies and 
transfers  (mainly  social  benefits)  expanded  by  5%  and  14%,  accounting  for  29%  and 
44.4% of the overall expenditures, respectively. 

1.3.  Structural reforms 

After  gaining  momentum  in  2009  and  early  2010  at  the  recommendation  of  the 
international financial institutions (IMF, WB) and agreed structural reform conditionality 
linked  to  the  budgetary  support,  the  pace  of  structural  reforms  slowed  down  in  2011, 
partly  because  of  the  lengthy  government  formation  after  the  October  2010  general 
elections.  Some  structural  reforms  were  implemented  in  order  to  strengthen  the  public 
finance management. However, the quality of public finances remained low with a high 
and  further  rising  share  of  current  expenditures,  at  the  expense  of  growth-triggering 
capital expenditures.  High labour taxation continued to hamper job creation and labour 
market participation, while increasing the incentives for grey job market. 

The private sector's share in GDP has remained stable at around 60% of GDP in 2011. 
The privatisation process, which stalled even before the crisis period, did not advance in 

6 

 
the course of 2011. In Republika Srpska, slightly over two-thirds of the initial stock of 
state-owned  capital  intended  for  privatisation  had  been  denationalised  by  end-2011, 
broadly  unchanged  from  a  year  earlier.  In  the  Federation,  several  attempts  to  privatise 
some  of  the  companies,  which  had  been  included  in  the  revised  denationalisation  plan, 
failed  because  of  lack  of  investors’  interest.  Less  than  45%  of  the  Federation’s  state-
owned capital initially foreseen for privatisation had been sold by end-2011. The planned 
restructuring  and  liquidation  of  socially-owned  enterprises  made  slow  progress.  Most 
prices  are  liberalised,  even  though  a  number  of  administered  prices  remain  (e.g.  for 
utilities, including electricity and gas). 
In the World Bank's 2012 Doing Business Report, Bosnia and Herzegovina ranks 125th in 
terms of ease of doing business (127th in the previous year), out of 183 countries covered, 
lagging  well  behind  its  neighbours.  Main  obstacles  identified  are  in  dealing  with 
construction  permits,  starting  a  business  and  enforcing  contracts.  In  the  Global 
Competitiveness Report of the World Economic Forum, Bosnia and Herzegovina ranks 
100th (climbing two places in a year) among 142 countries. Access to financing, tax rates 
and  inefficient  government  bureaucracy  are  named  as  the  most  problematic  factors  for 
doing business in the country.   

1.4.  Implementation of macro-financial assistance 

The political stalemate which followed the October 2010 general elections did not allow 
for programme discussions under the IMF Stand-By Arrangement2, to which the MFA is 
linked. The Stand-By Arrangement, even if not officially declared by the IMF as being 
off-track,  has  in  fact  been  non-functional  since  15  October  2010,  when  the  last 
programme review was made. A total amount of around EUR 385 million was disbursed 
under the IMF programme back in 2009-2010, with 100% of these funds transferred to 
the entity budgets. 

In November 2009, the EU Council approved a MFA of up to EUR 100 million in the 
form of loans. The assistance aims at alleviating the impact that the economic crisis had 
on Bosnia and Herzegovina's stressed budgetary and external position and at contributing 
to fill the remainder of the external and budgetary financing gap as identified in the IMF 
programme. The European Commission agreed the economic policy conditions with the 
Bosnian  authorities  in  a  Memorandum  of  Understanding  (MoU)  that  was  signed  in 
November 2010. The disbursement is conditional upon a satisfactory track record in the 
implementation  of  the  current  Stand-By  Arrangement  with  the  IMF,  as  well  as  upon  a 
positive  evaluation  by  the  European  Commission  of  progress  made  with  respect  to  a 
number  of  structural  reforms.  The  specific  policy  conditions  stressed  public  finance 
management issues, statistics and budgetary procedures. The detailed financial terms of 
the  assistance  were  spelled  out  in  a  Loan  Agreement  which  was  signed  in  November 
2010 and ratified by the Bosnia and Herzegovina's Presidency in August 2011. 

No  MFA  funds  were  disbursed  during  2011  as  the  conditions  for  the  release  of  funds 
were not met: The IMF programme turned into a non-disbursing one since October 2010. 
What is more, one of the two policy conditions attached to the disbursement of the first 
MFA  tranche  -  the  approval  of  the  Global  Framework  of  Fiscal  Policies  by  the  Fiscal 
Council of Bosnia and Herzegovina - was not met. This Framework is a key instrument 

2   EUR  1.15  billion  loan  (13%  of  GDP;  600%  of  the  quota)  for  a  three-year  period,  approved  by  the 

Fund on 8 July 2009. 

7 

 
                                                 
for  medium-term  budgetary  planning  and  an  indispensable  element  of  the  annual 
budgetary process, of particular relevance in Bosnia and Herzegovina given the federal 
structure of the country. 

Some progress was, however, made in the fulfilment of policy conditions in the area of 
public finance management. These conditions were mostly derived from the findings of 
the  operational  assessment  of  financial  circuits  and  procedures  in  Bosnia  and 
Herzegovina carried out in November 2009, for example as regards the full functioning 
of the Central Harmonisation Unit and the management of public domestic debt. 

Provided  that  the  IMF  programme  becomes  functional  again  and  that  all  policy 
conditions  as  laid  down  in  the  MoU  for  the  first  tranche  are  fulfilled,  the  first 
disbursement of the EU MFA could take effect in 2012. 

8 

 
SUMMARY STATUS OF ECONOMIC REFORM 
BOSNIA AND HERZEGOVINA (BIH) 

1.  Price liberalisation  

Most  prices  are  liberalised  even  though  a  number  of  administered  prices  remain,  for 
example for utilities, including electricity and gas.  

2.  Trade liberalisation  

BiH  started  WTO  accession  negotiations  in  1999.  In  July  2008,  the  Stabilisation  and 
Association  Agreement  with  the  EU  was  signed  and  the  Interim  Agreement  entered  into 
force. BiH is part of the CEFTA agreement. 

3.  Exchange rate regime  

In 1997, the Central Bank of Bosnia and Herzegovina established a currency board with the 
Deutsche Mark as the anchor currency which has functioned smoothly since then. With the 
introduction of the euro, the Bosnian Convertible Mark was pegged at 1.95583 to the euro 
and has remained unchanged since then.  

4.  Foreign direct investment  

Net  FDI  reached  a  peak  in  2007  (when  the  telecommunications  company  of  Republika 
Srpska was privatised), followed a downward trend in the next couple of years (with the net 
FDI  even  becoming  negative  in  the  first  half  of  2010)  and  slightly  recovered  in  2011, 
reaching around 2.3% of GDP. FDI has been mainly related to privatisation transactions, as 
green-field investment is still hampered by a difficult business environment.  

5.  Monetary policy  

The  Central  Bank  of  Bosnia  and  Herzegovina  is  responsible  for  operating  the  currency 
board  arrangement  which  limits  the  scope  of  monetary  policy  basically  to  adjustments  of 
minimum reserve requirements.  

6.  Public finances  

The quality of public finances in Bosnia and Herzegovina remains low. The ratio of general 
government expenditure to GDP continuously increased in recent years from 37.1% in 2005 
to 44.4% in 2010. Moreover, expenditure remained concentrated in current expenditure, in 
particular  on  wages  and  social  benefits  and  was  not  shifted  towards  growth-enhancing 
areas. The fiscal balance of the general government was positive until 2007, but high fiscal 
deficits materialised in 2008 and 2009, while some fiscal consolidation was evident in the 
last couple of years. The bulk of the public expenditures are spent at entity level, while the 
federal government accounts for about 9% of the consolidated expenditures. 

7.  Privatisation and enterprise restructuring  

Progress in privatisation and enterprise restructuring has remained limited, especially in the 
Federation. 

8.  Financial sector reform  

The financial sector is dominated by banks. The sector remained overall sound and stable 
despite the continuing deterioration of loan portfolio's quality over the last couple of years.  

9 

 
2. 

SERBIA 

1.5.  Executive summary 

In 2011, the economic recovery continued, with GDP growth of 1.6% fuelled by a surge 
in  investment  activity.  However,  towards  the  end  of  the  year  Serbia's  recovery  came 
under pressure, as a result of the difficult international economic environment. Faced by 
slowing  export  growth,  the  current  account  deficit  widened  to  around  9.5%  of  GDP. 
Moreover, the budgetary deficit approached 5% of GDP and turned out to be higher than 
initially  targeted,  due  to  revenue  shortfalls.  With  the  aim  of  anchoring  macroeconomic 
stability  as  well  as  the  structural  reform  commitments  during  the  forthcoming  election 
in  September  2011  a  follow-up  precautionary  Stand-By 
cycle,  Serbia  signed 
Arrangement  (SBA)  with  the  IMF  in  the  total  amount  of  EUR  1.1  billion,  covering  18 
months, effective from 1 October. The European Commission assessed in its opinion on 
Serbia's  application  for  EU  membership  of  12  October  that  the  country  had  taken 
important  steps  towards  establishing  a  stable  and  viable  market  economy,  but  further 
efforts  would  be  necessary  for  restructuring  the  economy  and  improving  the  business 
environment. Serbia was granted candidate country status by the European Council on 1 
March 2012. 

In November 2009, a macro-financial assistance loan facility of up to EUR 200 million 
was  made  available  to  Serbia  under  the  Council  Decision  2009/892/EC,  in  view  of  the 
adverse effects of the global crisis. The objective of this assistance was to complement 
the resources from International Financial Institutions in helping the government address 
the  external  financing  gap.  Conditions  for  disbursements  included  establishment  of 
quantitative  fiscal  rules  and  provisions  regarding  Public  Internal  Financial  Control.  In 
light  of  the  gradual  economic  recovery,  lower  foreign  financing  needs  and  the  scaling 
down of the IMF assistance by half, the European Commission decided to disburse only 
50%  of  the  available  MFA  amount,  i.e.  EUR 100  million  on  12  July  2011,  which 
completed the MFA programme.  

1.6.  Macroeconomic performance 

Serbia's economy has recovered from the 2009 recession, with GDP up by 1% in 2010 
and strengthening further by 1.6% in 2011. However, the export-driven recovery began 
to  lose  momentum  in  the  second  quarter  of  2011  amid  the  progressive  downturn  in 
Serbia's  main  trading  partners.  Private  consumption  remained  constrained  by  eroded 
disposable incomes due to a jobless recovery and high inflation. Yet, overall the stimulus 
from domestic demand strengthened owing to a surge in investment, mainly based on a 
revival  of  construction,  the  first  time  since  2009.  Industrial  production  growth 
decelerated  during  2011  in  the  light  of  the  deteriorating  economic  outlook,  to  1.8%, 
down from 3% a year earlier. 

Driven by imports of intermediate and capital goods in support of a rally in investment 
activity,  import  growth  rebounded  towards  the  end  of  2011.  At  the  same  time,  export 
expansion withered with softening external demand despite the depreciation of the dinar 
(RSD) later in the year, which led to an increase of the current account deficit to around 
9.5% of GDP, up from around 7.5% in the two preceding years, but still well below the 
levels  of  over  20%  before  2009.  However,  dependence  on  external  financing  remained 
high. In 2011, foreign currency inflows picked up and the quality of external financing 

10 

 
improved. FDI increased more than twofold, reaching almost EUR 1.6 billion. Portfolio 
investment of the same amount was also considerably higher compared to the previous 
year, but was almost entirely related to inflows into debt securities. The private sector's 
external  liabilities  halved,  as  companies  and  banks  continued  to  deleverage  during  the 
year. By the end of the year, foreign exchange reserves with the National Bank of Serbia 
(NBS) increased to EUR 12 billion, sufficient to cover more than 10 months of imports. 
Serbia's  total  external  debt  remained  relatively  stable  at  close  to  EUR  24  billion, 
accounting for around ¾ of GDP. 

Inflationary pressures, which had been building up from the middle of 2010 and peaked 
in April 2011 at close to 15%, subsided thanks to easing of commodity and food prices,  
the limited impact of hikes in administered prices and subdued private consumption. By 
the  end  of  2011,  CPI  inflation  declined  to  7%  from  10.3%  in  2010,  but  was  still  well 
above  the  upper  boundary  of  the  3-6%  target  band  for  the  end  of  the  year,  set  by  the 
NBS. Although the dinar was on a depreciating trend in the second half of 2011, over the 
year  the  RSD/EUR  exchange  rate  strengthened  by  about  1.5%,  also  as  result  of  higher 
capital  inflows.  As  inflation  was  subsiding  and  the  dinar  was  strengthening,  the  NBS 
abandoned the tightening of monetary conditions. The reference interest rate, which had 
been hiked to 12.5% in April 2011, was slashed to 9.75% by the end of the year.  

Despite  an  economic  upswing  in  2011,  the  situation  on  the  labour  market  deteriorated 
further. The unemployment rate soared to 24.4%. Following a two-year nominal freeze, 
indexation of public sector salaries (and pensions) was re-introduced as of January 2011, 
and three adjustments were carried out during the year. Nevertheless, overall growth of 
net wages remained contained at 0.2% in real terms. 

In  2011,  public  finances  were  under  pressure,  as  revenues  underperformed  given  the 
slower-than-expected economic upturn, the elimination of an ad-hoc 10% tax on mobile 
services  and  the  ongoing  lowering  of  customs  tariffs,  in  line  with  the  trade  agreement 
under the Stability and Association Agreement with the EU. The situation remained tense 
also  on  the  expenditure  side,  as  a  two-year  temporary  nominal  freeze  of  public 
administration  salaries  and  pensions  came  to  an  end.  The  automatic  stabilisers  were 
allowed  to  act  fully  through  social  assistance  spending  and  subsidies,  which  were 
provided in response to the weak labour market performance and poor living conditions. 
A  supplementary  budget,  adopted  in  October,  allowed  for  an  increase  in  the  planned 
deficit  by  0.3  percentage  points,  to  4.5%  of  GDP,  based  on  the  fiscal  rule  which 
determines the deficit target according to expected GDP growth. Revisions of the budget 
were  also  prompted  by  the  adoption  of  the  bill  on  the  financing  of  local  governments, 
which inter alia increased the share of income tax that municipalities retain from 40% to 
80%. The government secured budgetary financing by raising USD 1 billion through an 
issuance of the first 10-year eurobond in the international market. The budget deficit in 
2011  was  close  to  5%  of  GDP  and  the  government  debt-to-GDP  ratio  went  above  the 
threshold of 45%. After parliamentary elections in May 2012, the new government will 
need to present a fully-fledged programme of fiscal consolidation in order to reduce the 
level of government debt below 45% of GDP. 

1.7.  Structural reforms 

Serbia  has  taken  important  steps  towards  transforming  its  economy,  but  structural 
rigidities  persist  and  mar  the  economic  performance.  Market  mechanisms  remain 

11 

 
hampered  by  legal  uncertainty,  red  tape,  heavy  state  involvement,  and  insufficient 
competition.  

Substantial  progress  has  already  been  made  towards  improving  the  quality  of  public 
finances.  With  the  aim  of  strengthening  fiscal  discipline,  the  government  adopted 
amendments to the budget system law in late September 2010, which also constituted a 
structural  reform  measure  under  the  MFA.  In  this  context,  a  multi-annual  budgetary 
process,  which  is  supposed  to  underpin  a  more  rigorous  and  efficient  medium-term 
planning,  has  been  formalised.  The  established  numerical  fiscal  rules  and  procedures 
determine 
improved 
the  path  of  expenditure-driven  fiscal  consolidation,  while 
procedures  and  the  setting-up  of  a  fiscal  council  are  deemed  to  anchor  fiscal 
responsibility. Together with the new pension law, which extends the working period and 
age for assuming pension rights, tightens up the rules on early retirement and adjusts the 
indexation mechanism, this may enhance the long-term sustainability of public finances. 

State influence remains high, with the private sector currently accounting for around 60% 
of GDP and total employment. It is largely a consequence of the unfinished privatisation 
and/or  liquidation  of  socially  and  state  owned  enterprises  and  local  utilities,  which  has 
been  ongoing  since  2001.  Moreover,  a  wave  of  renationalisations  has  been  underway 
recently.  While  important  steps  were  taken  towards  establishing  legal  predictability, 
including  by  the  recent  adoption  of  a  law  on  restitution,  the  business  environment 
continues to be constrained by weak enforcement of the rule of law. Complex legislation 
and  lengthy  procedures  for  enforcing  court  decisions,  in  particular,  undermine 
confidence  among  economic  investors  and  hinder  investment.  A  number  of  barriers  to 
doing  business  persist,  due  to  the  delays  or  flaws  in  the  implementation  of  a 
comprehensive  regulatory  reform,  dubbed 
the  "regulatory  guillotine".  Lack  of 
competition  in  certain  sectors  and  significant  infrastructure  bottlenecks  are  a  further 
challenge for Serbia's economic potential. Structural rigidities also inhibit the functioning 
of the labour market, reflected in high unemployment and the very low participation rate, 
as well as the major mismatch between demand for and supply of a skilled workforce. 

1.8.  Implementation of macro-financial assistance 

A loan facility of up to EUR 200 million was made available to Serbia under the Council 
Decision 2009/892/EC, granting MFA in view of the adverse effects of the global crisis. 
The  objective  of  this  assistance  was  to  complement  the  resources  from  International 
Financial Institutions in helping the government address the external financing gap. The 
availability of MFA funds was originally ensured for a two-year period from the first day 
after the entry into force of a Memorandum of Understanding (MoU), signed on 5 July 
2010, detailing a set of economic policy conditions for the disbursement of assistance. 

The MoU stipulates that the loan would be released in two equal instalments of EUR 100 
million  each  upon  a  satisfactory  track  record  in  the  implementation  of  the  economic 
recovery programme supported under the IMF Stand-By Arrangement (SBA), as well as 
upon the fulfilment of specific conditions related to each tranche.  The disbursement of 
the  first  instalment  was  conditional  on  strengthening  the  fiscal  responsibility,  notably 
through  the  establishment  of  quantitative  fiscal  rules  and  provisions  regarding  Public 
Internal  Financial  Control.  In  light  of  the  gradual  economic  recovery,  lower  foreign 
financing  needs  and  the  scaling  down  of  the  planned  IMF  assistance  by  half,  the 
Commission  decided  to  disburse  accordingly  only  50%  of  available  MFA  amount,  i.e. 

12 

 
 
the  first  EUR 100  million 
requirements. 

tranche,  subject 

to  compliance  with  conditionality 

On 15 April 2011, Serbia submitted to the European Commission a request to consider 
the release of the first MFA loan instalment, accompanied by a Report on the fulfilment 
of the structural reform criteria related to the first tranche. Subsequently, the Commission 
reviewed the compliance with conditionality requirements, deemed that Serbia provided 
reasoned  justification  of  progress,  and  released  EUR  100  million  under  the  MFA  loan 
facility to Serbia on 12 July 2011. The SBA agreement with the IMF remained on track 
throughout  the  programme  period.  Between  January  2009  and  April  2011,  Serbia 
maintained  a  satisfactory  fulfilment  of  the  performance  criteria  and  structural 
benchmarks,  leading  the  IMF  to  conclude  seven  programme  reviews  with  the 
recommendation  for  a  release  of  the  planned  instalments.  However,  starting  from  the 
third  review  in  March  2010,  the  Serbian  authorities  drew  upon  the  available  amounts 
only  partially  as  they  managed  to  maintain  foreign  exchange  reserves  at  a  comfortable 
level.  By  the  expiry  of  the  SBA  on  15  April,  the  total  disbursements  under  the  SBA 
amounted to EUR 1.51 billion, i.e. roughly half of the programme's funds. Accordingly, 
with  the  disbursement  of  half  of  the  originally  foreseen  MFA  funds  in  July  2011,  the 
operation was completed. 

13 

 
SUMMARY STATUS OF ECONOMIC REFORM - SERBIA 

1.  Price liberalisation 

Administered  prices  account  for  more than 20% of the CPI inflation basket, with regulated 
energy prices accounting for around half of this share. The government continues to control 
prices  of  public  utilities,  either  through  government  bodies  or  sectoral  regulators.  The 
government also sets the limit on increases in the price of communal and public city transport 
services, which are under the control of the local authorities. 

2.  Trade liberalisation 

In  December  2009,  the  EU  unblocked  the  Interim  Agreement  which  Serbia  had  been 
implementing  unilaterally  since  January  2009.  Since  2010,  the  ratification  process  of  the 
Stabilisation  and  Association  Agreement  signed  in  April  2008  has  been  underway.  By  the 
end of 2011, 24 Member States have ratified the Agreement. 

3.  Exchange rate regime 

The monetary policy setting fosters a managed float of the dinar. Nevertheless, the National 
Bank of Serbia (NBS) has been intervening regularly in the interbank market. 

4.  Foreign direct investment 

There  are  no  controls  on  inward  direct  investment.  By  end-2011,  net  FDI  inflows  reached 
EUR 1.6 billion (EUR 860 million in 2010). 

5.  Monetary policy 

The  NBS  has  been  committed  to  inflationary  targeting  since  2006.  It  sets  a  broad  band 
around  the  targeted  CPI  inflation  rate.  The  main  policy  instrument  is  the  two-week  repo 
interest rate. From mid-2011, the stance has been relaxed, as the NBS abandoned tightening 
of  monetary  conditions  in  the  face  of  signs  that  inflation  is  slowing  and  the  dinar  is 
strengthening. The reference interest rate, which had been hiked to 12.5% in April 2011, was 
slashed to 9.75% by the end of the year. 

6.  Public finance 

In 2011, the slow and fragile economic recovery prompted the adoption of a supplementary 
budget.  The  revised  Law  on  the  budget  system  and  the  amendments  to  the  pension  law, 
adopted in 2010, which aimed at improving the quality of public finances, are in line with the 
MFA conditionality requirements. 

7.  Privatisation and enterprise restructuring 

Privatisation and/or liquidation of socially and state owned enterprises and local utilities has 
stalled or even gone backwards, against the background of unfavourable market conditions. 
Economic restructuring remains a major challenge in Serbia's transition to a market economy. 

8.  Financial sector reform 

The  banking  sector  is  generally  sound,  but  vigilance  is  required  due  to  the  impaired  loan 
portfolio  of  the  banks  and  a  considerable  exposure  to  exchange  rate  risks.  Non-banking 
financial  institutions  and  capital  markets  play  a  limited  role  in  the  financing  of  domestic 
companies. 

14 

 
 
 
EASTERN NEIGHBOURHOOD COUNTRIES 

3. 

ARMENIA 

1.9.  Executive summary 

In 2011, the Armenian economy continued to recover: real GDP grew by 4.6% driven by 
a recovery in remittances and exports. The fiscal deficit was narrowed to 3.1% of GDP 
from  4.9%  of  GDP  in  2010.  However,  the  inflow  of  investments  continued  to  weaken, 
due  to  the  difficult  global  financial  environment.  Thus,  despite  an  improvement  in  the 
current account deficit, the bulk of the external financing needs continued to be covered 
by the international community.  

In  December  2011,  the  Executive  Board  of  the  International  Monetary  Fund  (IMF) 
successfully  completed  its  third  review  of  Armenia’s  economic  performance  under  a 
programme  supported  by  Extended  Fund  Facility–  and  Extended  Credit  Facility 
arrangements.  The  decision  enabled  the  authorities  to  draw  an  additional  SDR  36.2 
million (about EUR 42 million), bringing total disbursements under the arrangements to 
SDR 144.8 million (about EUR 168 million).3 

In  2011  and  early  2012,  the  Commission  implemented  the  macro-financial  assistance 
programme, approved back in 2009. The MFA to Armenia, consisting of a loan of EUR 
65 million and of a grant of EUR 35 million, was released in two instalments: the first 
instalment in July 2011; the second instalment in December 2011 (grant component) and 
in  February  2012  (loan  component).  The  conditions  linked  to  the  MFA  contributed  to 
reforms  in  the  areas  of  public  debt,  pensions,  tax  systems  and  public  finance 
management. 

1.10.  Macroeconomic performance 

The current macroeconomic situation has greatly improved compared to the 2009 crisis. 
After  a  modest  rebound  in  2010  (2.1%)  the  GDP  growth  rate  reached  4.6%  in  2011, 
reflecting  improved  conditions  in  mining,  manufacturing  and  services,  as  well  as  a 
rebound  in  agriculture.  The  recovery  in  the  Russian  economy,  albeit  slowing,  added  to 
the  growth  rates,  as  Russia  was  an  important  source  of  investments  and  remittances. 
However,  the  recovery  remained  fragile  as  Armenia  depended  strongly  on  remittances 
(of  around  7%  of  GDP)  and  may  therefore,  in  the  future,  suffer  from  activity  difficult 
international  economic  environment,  in  particular  in  the  EU.  In  2011,  the  average 
inflation  rate  was  7.7%,  slightly  lower  than  in  2010  (8.2%).  The  headline  inflation 
reached  its  peak  of  11.5%  in  March  2011  mostly  due  to  the  global  price  movements. 
Reacting  to  the  soaring  inflation  rates  in  the  beginning  of  2011,  the  Central  Bank  of 
Armenia (CBA) increased the policy rates. The rates where again cut in September as the 
inflation  pressures  receded,  mostly  due  to  a recovery in agriculture, diminishing global 
price  pressures  and  limited  private  spending.  Twelve-month  inflation  was  4.7%  in 
December 2011.  

3  The  three-year  SDR 266.8  million  (about  EUR  309.2  million)  EFF  and  ECF  arrangement  with  Armenia  was 

approved by the IMF’s Executive Board on 28 June 2010 

15 

 
                                                 
The central government fiscal  deficit in 2011 was 3.1% of GDP, well below the initial 
target of 3.9% of GDP. The tax-to-GDP ratio remained low, at 16.4%, indicating high tax 
evasion  and  problems  in  the  tax  and  customs  administration.  The  public  debt-to-GDP 
ratio  increased  to  42%  in  2011  (from  39.2%  in  2010),  as  a  result  of  counter-cyclical 
measures and the flow of financial assistance in the form of loans from the international 
community.  The  external  debt  represented  around  88%  of  the  total  public  debt,  thus 
creating important exchange rate vulnerabilities. 

Driven by the relatively strong export growth along with growth in remittances (27.7% 
and  26.2%  respectively),  the  current  account  deficit  is  expected  to  narrow  to  10.9%  of 
GDP  in  2011  from  14.7%  of  GDP  in  2010.  Foreign  direct  investment  continued  to 
decrease and reached 4.4% of GDP (from 6% in 2010), or EUR 321 million for the full 
year.  Net  international  reserves  slightly  increased  (by  3.7%)  in  comparison  with  2010 
and reached EUR 862 million. Gross international reserves represented about 4.5 months 
of  imports  of  goods  and  services.  The  capital  adequacy  ratios  remained  high,  around 
20%.  The  credit  growth  accelerated  along  with  the  recovery.  In  2011  credit  grew  by 
37.1%, though the credit-to-GDP ratio stayed low – 30%. Foreign currency credit growth 
was particularly  high –  46.7%, increasing further the already high dollarization rate; in 
2011, 61% of outstanding credits were denominated in foreign currency.  

The global slowdown is expected to impact Armenia's economy through slowing growth 
in  remittances,  diminishing  export  demand,  lower  resource  prices,  diminishing  fiscal 
revenues and declining capital inflows.  

1.11.  Structural reforms 

Armenia has implemented  significant structural reforms, which resulted in high growth 
rates for a series of years prior to the economic crisis, but important challenges remain. 
Current government's priorities in structural reforms are improving the business climate, 
poverty reduction, fiscal and debt sustainability and financial stability.   

The  structural  reform  process  has  gained  momentum  in  the  context  of  the  financial 
assistance by the international community that linked its support to reforms in areas like 
business  environment,  tax  administration,  social  policy,  public  finances  and  financial 
sector stability. For example, conditions for the disbursement of MFA tranches included 
specific policy measures in the areas of public debt management, pension system, public 
internal  financial  control,  external  audit,  public  procurement,  tax  policy  and  tax 
administration, and customs policy. 

In the area of business environment, several important pieces of legislation were adopted. 
A  new  law  reorients  the  inspection  agencies  to  risk-based  oversight,  at  the  same  time 
increasing  transparency  and  decreasing  corruption  opportunities.  Legislation  that 
increases  the  power  of  the  competition  committee  was  adopted  in  2011.  An  electronic 
system  has  been  established  in  business  registration,  tax  filing  and  legal  proceedings, 
inter alia.  

To  ensure  fiscal  consolidation  and  place  the  debt  on  a  downward  path,  the  authorities 
have  strengthened  the  Medium  Term  Expenditure  Framework  and  reinforced  the  new 
debt  management  strategy  by  introducing  Debt  Management  and  Financial  Analysis 
System software. In collaboration with the World Bank, the authorities have undertaken 
the restructuring of the Finance Ministry's Public Debt Management Department.  

16 

 
In  the  area  of  tax  administration,  measures  have  been  taken  to  reduce  corruption  and 
increase tax compliance by simplifying and streamlining reporting requirements and by 
applying regulation consistently to all taxpayers through published normative acts. The 
frequency of tax reporting and payments has been decreased and an e-filing system and 
call and service centres for taxpayers have been established.  

In  the  area  of  social  policies,  the  government  is  developing,  in  collaboration  with  the 
World  Bank,  an  integrated  system  for  the  provision  of  social  services.  Also,  it  is 
implementing  a  pension  reform:  a  new  legal  framework  including  the  compulsory  and 
voluntary funded pensions has been adopted. 

One  source  of  vulnerability  of  the  banking  sector  is  foreign  currency  lending  whose 
growth  continues  to  exceed  the  overall  credit  growth  (see  above).  The  authorities  have 
taken  steps  to  manage  the  credit  risks,  i.e.  in  raising  risk  weights  and  provisioning  for 
foreign currency loans, improving the stress testing methodology and developing a credit 
risk model.  

1.12.  Implementation of macro-financial assistance 

The  EU  MFA  programme,  put  in  place  in  close  coordination  with  the  IMF,  was 
conceived  as  part  of  the  external  financing  provided  to  Armenia  to  cover  the  country's 
balance of payments needs in 2010-2011. It was also aimed at supporting the economic 
adjustment  and  reform  programme  of  the  Armenian  authorities  designed  to  achieve 
sustainable medium-term growth. The assistance consisted of a loan of EUR 65 million 
and of a grant of EUR 35 million, to be disbursed in two tranches. Owing to delays in the 
finalisation of negotiations between the Commission and the Armenian authorities on the 
conditions for the release of the assistance4 and of the ratification of the Memorandum of 
Understanding and the Loan and Grant Agreements (the process was only completed in 
May 2011), the implementation of the assistance did not start before summer 2011. The 
first  instalment  of  the  assistance,  amounting  to  EUR  40  million  (a  grant  of  EUR  14 
million and a loan of EUR 26 million), was released in July 2011. The second instalment, 
amounting to EUR 60 million (a grant of EUR 21 million and a loan of EUR 39 million), 
took place in December 2011 for the grant part and in February 2012 for the loan part. 

The  release  of  the  second  tranche  was  conditional  on  the  respect  of  the  economic 
programme  agreed  between  the  Armenia  and  the  IMF  and  on  the  completion  of 
economic  policy  measured  laid  down  in  the  Memorandum  of  Understanding.  As 
mentioned above, the conditions included specific policy measures in the areas of public 
debt management, pension system, public internal financial control, external audit, public 
procurement,  tax  policy  and  tax  administration,  and  customs  policy.  The  Commission 
conducted  a  conditionality  review  mission  in  October  2011  and  concluded  that  all  the 
conditions for the release of the assistance were met. 

In the area of debt management, the authorities progressed in developing a debt strategy 
and putting to place a modern debt recording service in the Ministry of Finance. In the 
area of internal audit, the Central Harmonisation Department, established in August 2010 
and  responsible  for  development  and  monitoring  of  financial  management,  control  and 

4 The agreement on the conditions was reached in late 2010 but the Memorandum of Understanding was signed only in 

February 2011. 

17 

 
                                                 
internal  audit,  was  strengthened.  In  the  area  of  external  audit,  the  MFA  supported  the 
adoption of an Action Plan 2011-2016 by the Chamber of Control aiming at bringing its 
working methods closer to international standards.  

In 2011, the government adopted a tax System Reform Programme for 2011-2013. The 
programme includes numerous measures improving the tax administration in the areas of 
risk-based  tax  audits,  development  of  economic  databases,  e-filing,  human  resource 
management,  combating  of  the  tax  evasion.  The  measures  are  expected  to  improve  the 
tax collection for fiscal consolidation and debt sustainability purposes.  

The  MFA  programme  targeted  two  measures  supporting  Armenia's  efforts  to  create  an 
open  and  transparent  trading  environment,  in  the  areas  of  taxation  of  imports  and 
customs valuation. 

18 

 
 SUMMARY STATUS OF ECONOMIC REFORM - ARMENIA 

1. Price liberalisation 
Prices are largely free but there are oligopolistic conditions in many sectors of the economy. 
2. Trade regime 
Armenia is a WTO member since 2003. The tariff structure is simple, all tariffs are bound 
and  the  applied  average  tariff  is  2.7%.  In  2009,  Armenia  qualified  for  the  EU  GSP+.  In 
March  2012  the  EU  launched  DCFTA  negotiations  with  Armenia.  Although  sufficient 
progress  has  been  achieved  by  Armenia  in  order  to  start  DCFTA  negotiations,  trade  and 
trade-related reforms should be continued, in particular the adoption and implementation of 
relevant horizontal or vertical legislation in the key regulatory areas of Technical Barriers to 
Trade (TBT), Sanitary and Phytosanitary Standards (SPS) and Intellectual Property Rights 
(IPR).  Armenia  has  made  progress  in  the  application  of  the  WTO  compliant  customs 
valuation  methods,  which  was  a  condition  in  the  MFA  operation.  Monitoring  of  effective 
application will be continued in this area. 
3. Exchange rate regime 
After  the  March  2009  devaluation  of  the  Armenian  dram,  the  central  bank  announced  the 
adoption  of  a  free  floating  exchange  rate  regime.  However,  the  exchange  rate  market  is 
small  and  highly  volatile,  and  the  central  bank  often  undertakes  foreign  exchange 
interventions to limit exchange rate volatility.  
4. Foreign direct investment 
Overall,  Armenia  has  a  liberal  trade  and  investment  regime.  The  country's  land-locked 
geographical  position  with  two  closed  boarders  and  the  oligarchic  structure  of  the  private 
sector  hampers  growth  potential  and  competitiveness  which  slightly  improved  in  2011. 
Investor's protection, payment of taxes, access to finance and corruption appear as points of 
concern. 
5. Monetary policy 
The Central Bank of Armenia follows an inflation targeting regime to conduct the monetary 
policy.  The  impact  of  monetary  policy  decisions  on  the  economy  is  limited  because  the 
domestic money market is not sufficiently developed and the rate of dollarization of deposits 
is close to 63%. 
6. Public Finances and Taxation 
The  public  debt  management  has  been  strengthened  (also  as  an  effect  of  MFA 
conditionalites)  but  there  is  room  for  improvement.  The  government  has  created  a  Central 
Harmonisation Unit that provides monitoring of financial management and control functions 
and internal audit. Efforts have also been made to strengthen tax and customs administration 
by simplifying the taxpayer reporting system.   
7. Privatisation and enterprise restructuring  
Armenia has shown an important progress in privatisation and some progress in competition 
policy.  According  to  the  EBRD  the  privatisation  in  the  industry  sector  is  complete,  and 
enterprises face very few market distortions from government subsidies or formal trade 
barriers.  The  authorities  continue to introduce various measures to eliminate excessive 
regulation  (reduction  of  required  licences,  initiative  of  regulatory  guillotine  initiative 
that was launched in November 2011).  
8. Financial Sector 
The banking sector in Armenia is relatively small (banking assets represent around 50% of 
GDP)  but  well  capitalised  and  deposit-funded.  It  consists  mainly  of  private  banks.  The 
authorities have enhanced the risk management and supervisory frameworks in the banking 
sector,  including  contingency  planning.  Prudential  regulations  on  higher  capital  and 
provisioning  requirements  on  foreign  currency  loans  were  issued.  Future  efforts  should 
focus  not  only  on  enhancing  financial  stability  but  also  on  reducing  obstacles  to  credit 
growth and financial intermediation.  

19 

 
 
4. 

GEORGIA 

1.13.  Executive summary 

Following the double shock of the military conflict with Russia of August 2008 and the 
2008-2009  global  crisis,  the  Georgian  economy  recovered  strongly  in  both  2010  and 
2011.  In  line  with  its  commitments,  the  country  has  maintained  a  prudent  fiscal  and 
monetary  policy  stance,  increased  the  flexibility  of  its  exchange  rate  and  continued  to 
make  progress  with  its  structural  reform  agenda.  The  fiscal  deficit  was  reduced  from 
9.2% of GDP in 2009 to 3.6% of GDP in 2011. Although the current account deficit as a 
share of GDP has halved compared to the pre-crisis period, it remains large at 11.7% of 
GDP in 2011.  

Between September 2008 and June 2011, Georgia implemented an economic adjustment 
programme  agreed  with  the  IMF  and  supported  by  IMF  funding  (under  a  SBA).  The 
programme  was  completed  successfully  and  until  July  2010  an  amount  equivalent  to 
SDR  577.1  million  (about  EUR  640  million)  was  disbursed.  After  July  2010,  the 
authorities  treated  the  arrangement  as  precautionary  and  did  not  draw  the  installments 
that  became  available.  In  March  2012,  the  Georgian  authorities  agreed  on  a  two-year, 
precautionary  programme  with  the  IMF  that  will  enable  Georgia  to  draw  up  to  SDR 
250mn (EUR 290mn), if needed.   

The Commission adopted a proposal for MFA to Georgia on 13 January 2011 amounting 
to EUR 46 million, half in grants and half in loans. The assistance was part of a pledge of 
two possible MFA operations of the same amount made by the European Commission at 
the  International  Donors'  Conference  of  October  2008.  The  first  MFA  operation  was 
successfully implemented in 2009-10. Since the adoption by the European Parliament of 
its position at first reading in May 2011, the inter-institutional discussions between the 
Council  and  the  Parliament  have  not  made  progress,  reflecting  a  difference  of  views 
regarding a question of procedure, namely on whether the consultation on the draft MoU 
of  the  Committee  of  Member  States  should  be  done  under  the  examination  or  the 
advisory procedure. 

1.14.  Macroeconomic performance 

Following the double shock of the military conflict with Russia of August 2008 and the 
2008-2009  global  economic  crisis,  the  years  2010  and  2011  witnessed  a  revival  of  the 
economic activity. After a contraction of the economy by 3.8% in 2009, real GDP grew 
by  6.3%  in  2010  and  by  7%  in  2011.  However,  the  economic  recovery  has  had  only 
limited impact on the labour market, with unemployment rate – the highest in the region 
– remaining above 16% in 2010. 

Inflation  (7.1  %  in  2010)  accelerated  in  2011  due  to  increased  international  prices  for 
food and gas and reached 8.5%. On the back of the economic recovery, the government 
tightened its budgetary and monetary policies. In line with the government commitment 
in  the  framework  of  the  IMF  Stand-By  Arrangement  and  of  the  ENP  Action  Plan,  the 
fiscal deficit was reduced from 9.2% of GDP in 2009 to 3.6% in 2011. A 2012 budget 
entailing a deficit of 3.5% of GDP was approved in December 2011.  

Georgia's external sector remains fragile due to a large – and widening – current account 
deficit: it was estimated at 11.7% of GDP in 2011, against 10.3% of GDP in 2010. The 
trade  deficit,  at  22.2%  of  GDP  in  2010,  further  increased  in  2011  to  23.7%  of  GDP. 

20 

 
Georgia's exports continue to suffer from the trade embargo imposed by Russia in 2006. 
The  high  trade  deficit  was  partly  offset  by  growing  tourism  revenues  and  current 
transfers (remittances). Recovering FDI and official assistance also helped financing the 
current  account  deficit.  In  2011,  FDI  was  estimated  to  reach  EUR  650  million  (around 
6.3% of GDP), against EUR 440 million (5% of GDP) in 2010. However, FDI remains 
well below the levels that it had reached before the 2008 conflict with Russia. 

Official reserves increased from USD 2.3 billion (EUR 1.75 billion) at end-2010, to USD 
2.8 billion (EUR 2.25 billion) at end-2011 (around 4 months of imports). Gross external 
debt  increased  rather  markedly  in  2009-10,  reaching almost 85%  of  GDP at the end of 
2010 before retreating to 77.7% of GDP at the end of 2011. The authorities reduced the 
sovereign  debt  amortization  burden  for  2013  through  the  placement  of  a  USD  500mn 
Eurobond in April 2011 that was used to redeem the bulk of a maturing bond in the same 
amount issued in 2008. Still, external debt payments will grow significantly in 2012-14 
to reflect the repurchases under the IMF's Stand-By Agreement.  

The  IMF  Stand-By  Arrangement  that  ran  from  November  2008  expired  in  June  2011. 
The  IMF  SBA  contributed  to  fiscal  consolidation,  progress  with  structural  reforms  and 
return to growth. The programme was completed successfully. In January 2011 the IMF 
Executive Board completed successfully the seventh and the eighth programme reviews 
and  in  June  2011  the  ninth  and  final  review,  but  the  authorities  did  not  draw  the 
instalments  that  became  available,  treating  the  programme  as  precautionary  since  July 
2010.  In March 2012, the authorities reached an agreement with the IMF on a new 24-
month Stand-By Arrangement and Standby Credit Facility. The programme, approved by 
the IMF's Board in April, enables Georgia to borrow up to SDR 250mn (EUR 290mn), 
evenly  divided  between  the  two  arrangements.  For  the  time  being,  the  authorities  will 
treat  the  agreement  as  precautionary.  While  the  existence  of  a  disbursing  IMF 
programme  is  a  precondition  for  the  activation  of  the  EU  MFA  operation,  there  is  a 
probability that IMF funds could still be used over the duration of the programme, given 
the still vulnerable balance of payments position and the difficult international financial 
environment. The pre-condition for a MFA payment would then be fulfilled. 

1.15.  Structural reforms 

Since  the  2003  Rose  Revolution  Georgia  has made significant progress in a number of 
legal  and  regulatory  reforms.  Georgia  is  well  advanced  towards  a  functioning  market 
economy with liberalised price setting and free capital and trade flows. The tax system 
has  been  simplified  and  public  finance  management  brought  closer  to  international 
practices.  The  customs  regime  has  been  liberalised,  while  important  anti-corruption 
measures  have  been  taken  and  the  regulatory  business  environment  has  substantially 
improved.  

As  far  as  the  business  climate  is  concerned,  the  country  showed  an  impressive 
performance. Its anti-corruption and pro-business policy efforts were again recognised by 
the World Bank's Doing Business Report: Georgia's overall ranking improved from 17th 
to 16th, in particular due to improvement in starting a business, access to credit, investor 
protection  and  paying  taxes.  The  country  also  continued  implementing  a  new  tax  code 
approved in September 2010 that simplified taxation regime for SMEs. In addition, the 
Economic  Liberty  Act,  adopted  in  2011,  but  scheduled  to  come  into  force  in  2014, 
introduces a several fiscal rules: the budget deficit is limited to 3% of GDP, public debt 
to 60% of GDP and public spending is capped at 30% of GDP. 

21 

 
The country is about to adopt a new strategy for its future economic development. A ten-
point  strategic  economic  plan  presented  by  the  government  in  October  2011  sets  out 
major  policy  objectives  to  improve  economic  and  business  climate.  Infrastructure, 
educational  system  and  agriculture  were  pointed  out  as  main  policy  priorities.    The 
proposed MFA with Georgia envisages supporting reform efforts in the areas of public 
finance  management,  trade,  energy  and  the  financial  sector.  The  National  Bank  of 
Georgia  continued  to  strengthen  its  monetary  policy  and  introduced  tighter  prudential 
regulations.  Several  large  investments  in  the  country's  infrastructure,  in  particular  in 
energy and transport, are being pursued. At the same time, the country continues to face 
challenges  such  as  ensuring  compliance  with  core  ILO  conventions.  Progress  in 
strenghtening labour rights is also relevant for the recently initiated talks on a deep and 
comprehensive free trade area with the EU. 

1.16.  Implementation of macro-financial assistance 

The  comprehensive  EU  package  of  up  to  EUR  500  million  to  support  Georgia's 
economic  recovery,  pledged  at  the  October  2008  International  Donor  Conference  in 
Brussels, in the aftermath of the August 2008 conflict with Russia, included two potential 
MFA  operations,  amounting  to  EUR  46  million  each.  The  first  part  was  successfully 
implemented during 2009-2010. The implementation of this operation as part of a wider 
package  of 
the  IMF  financial 
arrangement,  supported 
the  successful  macroeconomic  adjustment  and  recovery 
experienced  by  Georgia  during  this  period,  while  fostering  progress  in  PFM  reforms 
based on the agenda of the government. 

international  assistance, 

in  particular 

including 

For the second part, the Commission adopted a proposal for further MFA to Georgia on 
13 January  2011.  The European Parliament's plenary voted on the proposal on 10 May 
2011 and adopted a legislative resolution with amendments which were fully accepted by 
the  Commission  and  incorporated  in  the  text.  These  amendments  primarily  aimed  at 
reflecting the entry into force of the new "comitology" regulation in March 20115. Since 
the adoption by the European Parliament of its position, the inter-institutional discussions 
between the Council and the Parliament have not been concluded due to a difference of 
views regarding a question of procedure. This reflects different interpretations of how the 
comitology regulation adopted in March 2011 should be applied to the MFA operation. 
While the Parliament favors the use of the advisory procedure for the consultation of the 
Committee  of  Member  States  on  the  MoU,  as  originally  proposed  by  the  Commission, 
the Council argues that, in principle, the examination should apply.  

The  proposed  assistance  would  be  provided  half  in  grants  and  half  in  loans.  The  new 
MFA  will  support  the  economic  reform  agenda  of  the  government.  It  would  promote 
policy  measures  to  strengthen  public  finance  management  (building  on  those  of  the 
previous  operation  and  of  the  EU's  sectoral  budgetary  support  operation),  as  well  as 
measures  to  foster  economic  and  financial  integration  with  the  EU,  in  particular  by 
exploiting  the  potential  offered  by  the  future  Association  Agreement,  which  aims  at 
concluding a Deep and Comprehensive Free Trade Agreement between the two parties. It 
would also promote reforms in the energy and financial sectors. 

5  Regulation (EC) No 182/2011 of the European Parliament and of the Council of 16 February 2011. 

22 

 
                                                 
In the context of the preparation of the new MFA operation, the Commission conducted 
at  the  end  of  2010  an  operational  assessment  (OA)  of  the  financial  procedures  and 
circuits. Its findings suggest that significant efforts have been made in Georgia since the 
OA  conducted  in  2004-2005  to  build  a  functional  and  transparent  public  finance 
management  system,  compliant  with  international  standards.  This  reform,  which  was 
supported,  as  noted,  by  the  conditionality  of  the  MFA  operation  implemented  in  2009-
2010,  has  translated  in  progress  in  the  areas  of  public  procurement,  programme-based 
budgeting  as  well  as  external  audit.  Also,  the  customs  and  tax  environment  has  been 
simplified.  Yet,  the  OA  report  noted  a  need  for  further  measures  in  areas  including 
budget  planning,  debt  management,  public  internal  financial  control,  external  audit  and 
public procurement. 

23 

 
 SUMMARY STATUS OF ECONOMIC REFORM - GEORGIA 

1. Price liberalisation  

Prices are largely free. 

2. Trade regime  
Georgia  has  a  liberal  trade  policy.  Import  tariffs  have  been  abolished  on  around  90%  of 
products.  In  September  2006,  the  number  of  tariff  bands  on  imported  goods was reduced 
from 16 to three. 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 1.5%. Non-tariff barriers are allowed for environmental, security and health 
reasons only. There are no quantitative restrictions on imports and exports.  
Since  December  2005,  under  the  EU  Generalised  System  of  Preferences  (GSP),  Georgia 
benefits  from  the  generous  tariff  preferences  of  the  special  incentive  arrangement  for 
sustainable development and good governance covering 7200 items, the GSP+. However, 
Georgia's  GSP+  utilisation  rate  has  been  declining.  In  May  2010,  the  mandate  for  the 
negotiations of the Association Agreement between the EU and Georgia was approved. In 
the  area  of  trade,  the  new  agreement  would  foresee  the  establishment  of  a  deep  and 
comprehensive free trade area and negotiations were started in February 2012. 

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

4. Foreign direct investment 
Adequate overall legislation. Unlimited repatriation of capital and profits.  

5. Monetary policy 
Central  Bank's  main  policy  objective  is  price  stability.  The  stated  inflation  target  of  the 
monetary authorities is 6%. In practice, the stability of the exchange rate of the lari against 
the USD seems to take precedence over the aim of domestic inflation control.  

6. Public finances and taxation 
The  public  finance  management  system  is  essentially  sound  and  transparent,  although 
further progress is still needed in some areas such as internal financial control and audit and 
external audit. A new tax and customs code was introduced as well as a number of reforms 
in  external  and  internal  audit,  programme-based  budgeting  and  public  procurement.  New 
legislation to come into force in 2014 limits the budget deficit to 3% of GDP, public debt to 
60% of GDP and public spending to 30% of GDP. 

7. Privatisation and enterprise restructuring  

The  majority  of  state-owned  enterprises  have  been  privatised.  Privatisation  receipts 
amounted to 1.1% of GDP in 2010 and increased to estimated 1.6% in 2011. 

8. Financial Sector  
There  are  19  banks  in  Georgia  with  foreign  investors  holding  significant  stakes  in  the 
Georgian  banking  industry.  The  share  of  non-performing  loans,  defined  as  loans  in 
substandard, doubtful, and loss loan categories, declined to 8.6% at the end of 2011 from 
12.5% of total loans at the end of 2010. Capital adequacy and provisioning rules in Georgia 
are more conservative than Basel standards. The capital adequacy ratio stood at 17% and 
the  return  on  assets  improved  to  a  comfortable  2.9%  at  the  end  of  2011.  Domestic  credit 
grew by close to 24% during 2011. 

24 

 
 
5. 

MOLDOVA 

1.17.  Executive summary 

After  a  severe  downturn  in  2009,  the  economy  staged  a  robust  recovery  and  grew  by 
7.1% in 2010 and by 6.4% in 2011. The expected slowdown in global economic activity 
is likely to bring growth down to about 3.5% in 2012.  

In  2011,  several  structural  reforms  were  implemented  in  order  to  improve  the  business 
climate,  strengthen  the  public  finance  management  and  reduce  state  presence  in  the 
economy. Moldova came second among the top ten global reformers in the World Bank's 
"Doing Business Report 2012", rising from 99th to 81st in the global ranking. 

A Legislative Decision (938/2010/EU) to provide EUR 90 million of MFA in grant aid to 
Moldova was adopted on 20 October 2010. The EU MFA was disbursed in three tranches 
in December 2010, September 2011 and April 2012. The MFA helped trigger reforms in 
the areas of budget preparation and execution, optimisation of public finances and public 
debt management, financial stability and financial sector reform, public procurement and 
central bank legislation. 

1.18.  Macroeconomic performance 

The global crisis in 2008/09 hit the Moldovan economy hard. GDP contracted by 6% in 
2009.  The  sharp  fall  in  external  financing  sources  exposed  a  severe  external  financing 
gap.  Helped  by  the  IMF  financing  arrangement  and  exceptional  donor  assistance 
including the EU MFA, the economy staged a robust recovery and grew by 7.1% in 2010 
and by 6.4% in 2011. In 2011, growth was driven both by strong domestic demand and 
booming exports. Domestic demand was fuelled by remittances growing at around 18% 
y-o-y and domestic credit rising at about 27% y-o-y. Industrial production grew by 7.4% 
in 2011 and the economic activity recovered in all sectors to its pre-crisis levels, except 
for  construction  and  transport  of  goods.  Exports  increased  by  44%  aided  by  new 
production  capacities  and  better  access  to  the  EU  and  CIS  markets.  The  average 
unemployment  rate  declined  from  7.4%  in  2010  to  6.7%  in  2011,  below  its  long  term 
average. However, Moldova experienced a slowdown in economic activity in the fourth 
quarter of 2011 and real GDP growth is projected to decelerate to around 3.5% in 2012. 

Average inflation inched up to 7.6% in 2011 driven by the increase in administered and 
food prices. Inflation peaked in the middle of the year and the National Bank of Moldova 
(NBM) hiked the policy rate by 3 percentage points and the reserve requirement ratio by 
6 percentage points in response to rising inflationary pressures. In late 2011, the inflation 
outlook improved6 and the NBM eased again the policy stance by cutting its key policy 
rate  by  550  basis  points  (in  several  steps)  until  February  2012  from  a  peak  of  10%  to 
4.5%. The fiscal consolidation process continued in 2011 with a budget deficit of 2.4% 
of  GDP  that  is  envisaged  to  be  further  reduced  to  0.9%  of  GDP  in  2012.  The  current 
account deficit rose by around 3% of GDP to 11.4% of GDP in 2011. In particular, the 
deficit  of  external  trade  in  goods  and  services  widened  by  about  25%  from  2010  and 
reached close to USD 2.9 billion in 2011. However, the financing of the current account 
deficit  improved  due  to  higher  net  FDI  and  better  access  to  external  finance  by  the 

6 According to the NBM's projections, inflation may subside below the official target of 5+/- 1% in 2012.  

25 

 
                                                 
private sector, which was complemented by official inflows, primarily from the IMF. As 
a consequence, the level of international reserves reached about USD 2 billion at the end 
of 2011, covering around 4.5 months of imports.  

The  NBM  intervened  occasionally  in  the  foreign  exchange  market  to  smooth  the 
appreciation of the leu and replenish the official reserves. The leu appreciated by 3.6% 
against  the  USD  and  by  6.4%  against  the  EUR  in  nominal  terms  in  2011.  The  real 
effective exchange rate appreciated by about 10 percentage points (using December 2000 
as  the  base  period).  The  banking  system  remained  stable  and  well  capitalised  with  a 
capital adequacy  ratio  at  a  high  level above 30%. The large amount of non-performing 
loans declined from 16.4% of all loans in 2009 to 9.7% as of October 2011, but balance 
sheet vulnerabilities still remain. 

On  29  January  2010,  the  IMF  agreed  to  provide  financial  assistance  of  SDR  369.6 
million  (EUR  420  million)  spread  over  three  years  under  the  Fund's  Extended  Fund 
Facility  (EFF)  and  the  concessional  Extended  Credit  Facility  (ECF).  The  IMF 
programme  remained  on  track  and  the  IMF  Executive  Board  completed  the  fourth 
reviews of the EFF and ECF arrangements in February 2012. 

1.19.  Structural reforms 

In  2011,  several  structural  reforms  were  implemented  in  order  to  improve  the  business 
climate,  strengthen  the  public  finance  management  and  reduce  state  presence  in  the 
economy.  MFA  conditionality  helped  in  this  context  to  push  through  some  structural 
reforms  in  the  areas  of  public  finance  reforms,  financial  stability  and  financial  sector 
reforms, and legislative and regulatory convergence with the EU.  

Moldova came second among the top ten global reformers in the World Bank's "Doing 
Business Report 2012", rising from 99th to 81st in the global ranking. Starting a business 
became  easier  with  the  establishment  of  a  one-stop  shop  at  the  State  Registration 
Chamber;  enforcement  of  judgments  became  more  efficient  with  the  introduction  of 
private  bailiffs;  insolvency  law  was  amended  in  order  to  grant  priority  to  secured 
creditors; and the establishment of the country’s first private credit bureau improved its 
credit  information  system.  Moldova  still  ranks  poorly  in  the  areas  of  construction 
permits,  cross-border  trading  and  protecting  investors.  However,  the  one-stop  shop 
legislative  package  includes  also  measures  to  improve  the  issuance  of  construction 
permits and a working group is currently developing a building code. The reform of the 
judiciary  with  the  help  of  the  EU  sector  budget  support  will  contribute  to  the 
strengthening of the rule of law in Moldova. 

In  the  area  of  public  finance  management,  Moldova  passed  legislation  to  improve  the 
budget  preparation  and  execution  and  is  implementing  a  new  financial  management 
system.  The  reform  of  the  loss-making  energy  sector  advanced  as  the  energy  regulator 
brought retail energy tariffs in line with costs and as measures were taken to strengthen 
payment discipline in the sector, including a new policy on bill collection. However, the 
Chisinau  municipality  continued  to  accumulate  arrears  to  the  heating  supplier  which  is 
nearly  bankrupt.  The  energy  sector  reform  framework  (developed  together  with  the 
World Bank) was adopted and it is at the implementation phase now. The reform of the 
education  sector  aiming  at  optimizing  the  number  of  schools  and  pupils  per  class 
continued with legislative amendments that are now awaiting adoption in the Parliament.  

26 

 
The  privatisation  process  continued  with  a  number  of  small  companies;  revenues  from 
privatisation amounted to around MDL 118 million in 2011. The list of assets not subject 
to  privatisation  was  reduced  from  165  to  107  companies.  Large  privatisations  in  the 
telecommunication (Moldtelecom), transport (Air Moldova) and financial sectors (Banca 
de Economii) are under preparation. The NBM established new reporting requirements – 
as a result of the transition to International Financial Reporting Standards IFRS starting 
from 2012 – and set new prudential limits for the banking sector. A gradual increase of 
the minimum capital adequacy ratio will take place from the current 12% to 16% as of 
June 2012, 18% as of June 2013 and 20% as of June 2014. 

1.20.  Implementation of macro-financial assistance 

A Legislative Decision (938/2010/EU) to provide EUR 90 million of MFA in grant aid to 
Moldova was adopted on 20 October 2010. The EU MFA was disbursed in three tranches 
in 2010, 2011 and early 2012. The first tranche of EUR 40 million was disbursed at the 
end  of  December  2010.  The  second  MFA  tranche  of  EUR  20  million  was  disbursed  in 
September 2011, after the Commission had assessed compliance with the conditionality 
in  June.  The  payment  of  the  third  MFA  tranche  could  not  be  done  until  the  end  of  the 
2011,  as  originally  planned,  because  progress  in  complying  with  the  conditions  of  the 
third tranche had been deemed as insufficient. However, a new assessment made by the 
Commission  in  February  2012  found  that  compliance  with  the  conditionality  reached  a 
satisfactory  level,  which  allowed  the  Commission  to  disburse  the  third  and  last  MFA 
tranche of EUR 30 million in April 2012. 

The  objective  of  EU  MFA  was  to  help  bridge  the  external  financing  gap  and  to  bring 
about structural reforms which will stabilise the Moldovan economy and raise potential 
growth. In this respect, EU MFA was tied to a number of structural reform criteria in the 
areas  of  public  finance  reforms,  financial  stability  and  financial  sector  reforms,  and 
legislative and regulatory convergence with the EU. 

EU  MFA  led  to  the  preparation  of  a  new  law  on  public  finances,  the  improvement  of 
budget planning, preparation and execution, and the preparation of a census of all public 
sector employees  in order to optimize public sector employment and its wage bill. The 
Public  Procurement  Agency  received  new  powers  and  put  forward  legislation  to  bring 
public procurement closer to EU standards. The financial sector stability improved as the 
government 
regulatory  and  supervisory 
to  define 
responsibilities  for  leasing  and  micro-credit  institutions.  The  government  proposed 
Central Bank legislation closer to the principles of the Treaty on the Functioning of the 
European Union, in particular with respect to central bank independence and restriction 
on monetary financing. 

introduced 

legislation 

the 

27 

 
 SUMMARY STATUS OF ECONOMIC REFORM - MOLDOVA 

1. Price Liberalisation 
Prices are regulated on utilities and some public services. There are price controls on electricity, 
natural gas, water supply and sanitation, housing and medical services, rail and urban passenger 
transport, and postal services.  
2. Trade regime 
Moldova  (a  WTO  member  since  2001)  has  a  liberal  trade  regime.  Since  2006,  Moldova  has 
been a member of the Central European Free Trade Agreement; it has also concluded bilateral 
free trade agreements with all CIS countries but Tajikistan. Since March 1, 2008 Moldova has 
benefited  from  Autonomous  Trade  Preferences  (ATP+)  with  the  EU  as  a  result  of  the 
implementation  of  policies  in  the  areas  of  sustainable  development,  good  governance  and 
customs  administration.  Moldova  started  negotiations  with  the  EU  on  an  Association 
Agreement in January 2010 and the negotiations for the creation of a deep and comprehensive 
free trade area in February 2012.  
3. Exchange regime 
The exchange rate regime has been a managed float since 2008. The National Bank of Moldova 
(NBM)  intervenes  in  the  domestic  foreign  exchange  interbank  market  in  order  to  smooth  out 
sharp fluctuations of the Moldovan leu against the US dollar. The NBM publishes information 
on its interventions. 
4. Foreign Direct Investment 
There  are  no  controls  on  inward  investment.  Net  FDI  inflows  amounted  to  3.9%  of  GDP  in 
2011, up from 3.4% of GDP in 2010.  
5. Monetary policy 
The primary objective of monetary policy is price stability. The central bank adopts an annual 
inflation  target  and  uses  the  base  interest  rate  as  the  main  policy  instrument.  The  NBM 
announced an inflation target of 5 percent with a narrow ±1 percent deviation band. 
6. Public Finances  
The Moldovan government is implementing several measures to consolidate public finances, in 
particular to reduce public expenditure and increase its efficiency and to increase tax revenue, 
notably by improving public finance management and rationalising public sector employment. 
Public expenditure has been reduced from 45.3% of GDP in 2009 to 38.7% of GDP in 2011. In 
2012, the corporate income tax was reintroduced at a rate of 12% and some excise duty rates 
were increased. 
7. Privatisation and enterprise restructuring 
Moldova has gradually sought to privatize state owned assets and enterprises. The private sector 
accounts for around 60% of GDP. Privatisation revenues amounted to only about 0.2% of GDP 
in 2011. Large privatisations in the areas of telecommunication (Moldtelecom), transport (Air 
Moldova) and finance (Banca de Economii) are under preparation. 
8. Financial sector 
Moldova's  bank-based  financial  system  remains  generally  sound.  The  sector  was  largely 
insulated  from  the  global  financial  crisis  due  to  limited  access  of  local  banks  to  international 
capital markets, but deposits fell and the asset quality deteriorated at the beginning of the crisis. 
Currently, the banking sector enjoys a capital adequacy ratio at a high level, above 30%. The 
large amount of non-performing loans declined from 16.4% of all loans in 2009 to 9.7% as of 
October 2011, but balance-sheet vulnerabilities still remain. Recently the NBM established new 
reporting  requirements  –  as  a  result  of  the  transition  to  the  International  Financial  Reporting 
Standards (IFRS) starting from 2012 – and set new prudential limits for the banking sector.  

28 

 
 
6. 

UKRAINE 

1.21.  Executive summary 

In  2011,  Ukraine's  economic  recovery  continued,  with  a  relatively  strong  growth 
performance  and  inflation  largely  under  control.  Foreign  exchange  reserves  are  still  at 
comfortable levels, despite having decreased in the second half of 2011, and the National 
Bank  managed  to  further  stabilise  the  exchange  rate.  However,  risks  for  the  economic 
outlook  for  2012  are  on  the  downside  as  the  balance  of  payments  has  weakened 
significantly  since  mid-2011  and  the  unwillingness  of  delays  in  the  adjustment  of 
domestic  energy  prices  pose  serious  risks  in  the  fiscal  policy  area.  Moreover,  the  IMF 
programme  has  gone  off-track  and  access  to  international  capital  markets  has  become 
much more difficult.  

Ukraine's  progress  in  achieving  important  structural  reforms  and  implementing  the 
Association  Agenda  priorities  remained  limited,  despite  some  progress  in  public 
procurement  and  gas  sector  legislation,  pension  reform  and  the  stabilisation  of  the 
banking  sector.  The  government  failed  to  increase  retail  energy  prices  towards  cost 
recovery  levels  and  thus  meet  the  IMF's  conditions  for  a  resumption  of  disbursements 
under  the  Stand-By  Arrangement.  The  operating  environment  for  businesses,  which  is 
hampered  by  non-transparent  bureaucratic  procedures,  a  lack  of  administrative 
implementation  and  enforcement  capacity  and  continued  constraints  in  companies’ 
access to credit, deteriorated further.  

Against  the  backdrop  of  a  persistent  external financing gap and in order to support the 
economic  reform  process  in  the  country,  the  EU  adopted  in  July  2010  a  decision 
providing up to EUR 610 million of MFA to Ukraine. In combination with the EUR 110 
million  still  available  from  the  MFA  decision  of  2002,  this  implied  a  potential  MFA 
package of up to EUR610 million.  The European Commission started to negotiate with 
the Ukrainian authorities in July 2010 the policy conditions related to the release of this 
assistance. Unfortunately, progress in these negotiations has been slow and difficult. The 
draft Memorandum of Understanding (MoU) contains policy measures in the key areas 
of  public  finance  management, 
the 
harmonisation  of  financial  regulation.  While  there  has  been  substantial  progress  in  the 
negotiations  on  the  MoU,  there  are  still  some  key  points  of  divergence,  notably  in  the 
areas  of  external  audit  and  the  energy  sector.  Disbursements  of  MFA  in  2012  are 
conditional on the successful conclusion of these negotiations, as well as a resumption of 
drawings  on  IMF  support  by  Ukraine  under  its  current  Stand-By  Arrangement  on  the 
basis of positive assessments by the IMF of the country’s reform progress.  

taxation,  energy  sector  reform 

trade  and 

1.22.  Macroeconomic performance 

Ukraine's  economy  performed  well  in  regional  comparison  in  2011,  with  real  GDP 
growth reaching 5.2%, after 4.2% in 2010. It thus continued its recovery after the parallel 
balance of payments and banking crises of 2009, when output contracted by nearly 15%. 
Growth  in  2010  and  2011  was  initially  export-led  but  was  increasingly  fuelled  by 
stronger domestic demand. However, real growth is expected to slow as a consequence 
of  the  more  challenging  global  economic  environment  and  of  the  worsening  domestic 
business climate. The IMF decreased its growth forecast to 3% for 2012, with the World 
Bank expecting a mere 2.5% and risks being on the downside. 

29 

 
Positively,  the  National  Bank  of  Ukraine  (NBU)  managed  to  control  inflation  well  in 
2010 and 2011. Following three years of double-digit increases in consumer prices, year-
on-year  headline  inflation  came  down  from  9.1%  in  December  2010  to  4.6%  in 
December  2011,  mainly  due  to  falling  food  prices  as  international  commodity  prices 
dropped and Ukraine benefitting from a good harvest.  

Regarding fiscal policy, the general government deficit (excluding the deficit of the state-
owned oil and gas company Naftogas) was brought down to 2.7% of GDP in 2011 after 
5.7%  in  2010  and  6.3%  in  2009,  supported  by  a  strong  revenue  performance,  while 
budget  spending  remained  cautious.  However,  the  deficit  of  Naftogas  continues  to 
represent  a  major  risk  for  the  budget,  since  some  of  the  gas  tariff  increases  for 
households  and  utilities  foreseen  in  the  IMF  programme  have  yet  to  be  implemented. 
Naftogas'  deficit  reached  1.6%  of  GDP  in  2011  (after  1.4%  of  GDP  in  2010),  bringing 
the overall general government deficit to 4.3% of GDP, thus exceeding the 3.5% deficit 
target initially foreseen by agreements with the IMF. General government debt increased 
further in 2011, reaching 35.3% of GDP at the end of the year.  

The current account deficit widened in 2011, reaching USD 9.3 billion or 5.6% of GDP, 
reflecting higher prices for imported energy and the strength of domestic demand in the 
face of a slowdown in global demand. The deficit is only partially covered by foreign 
direct  investment  (FDI),  which  only  improved  marginally  in  2011  despite  capital 
inflows following the privatisation of the telecommunications company Ukrtelecom and 
increased investment in preparation of the European football championship in summer 
2012. Moreover, Ukraine's access to the international capital markets has become much 
more  difficult  since  the  middle  of  2011,  reflecting  the  worsening  global  financial 
environment and doubts about Ukraine's macroeconomic and structural reform outlook. 
While  Ukraine  had  managed  to  raise  a  combined  USD  4.8  billion  through  sovereign 
Eurobonds between September 2010 and June 2011 in a context of declining sovereign 
spreads, it has not issued any new international bonds since then. In the absence of IMF 
funding and of a favourable gas deal with Russia, Ukraine is likely to face difficulties in 
raising  external  funding  to  cover  its  financing  needs  in  2012.  On  top  of  government 
financing  needs  (to  cover  the  deficit  plus  the  scheduled  debt  amortisations)  of  an 
estimated USD 13.2 billion, the private sector will have to redeem approximately USD 
45 billion in foreign debt in 2012.  

Doubts about the balance of payments led to some speculation on a devaluation of the 
currency in the third quarter of 2011. As a result, the NBU had to intervene substantially 
to  defend  the  currency,  losing  USD  6.2  billion  of  its  reserves  between  August  and 
December. In 2011 as a whole, currency reserves decreased from USD 34.6 billion to 
USD 31.8 billion at year end, which cover about four months of imports. Recent trends 
point  to  renewed  net  currency  outflows  as  European  banks  decrease  their  exposure  to 
risk as a result of the sovereign debt crisis. 

1.23.  Structural reforms 

Ukraine's  progress  in  implementing  structural  reforms  remained  below  expectations  in 
2011.  Important  pieces  of  legislation  in  the  areas  of  the  judiciary,  public  procurement, 
civil service and fight against corruption were adopted, although not all legislation was 
drafted  taking  into  account  European  standards.  Despite  the  ambitious  Programme  for 
Economic Reforms for 2010-2014 (PER), which aims at unlocking Ukraine's long-term 
growth  potential  through  structural  reforms  in  most  sectors  of  the  economy,  the 

30 

 
investment  climate  deteriorated  further.  Ukraine's  ratings  in  the  World  Bank's  Doing 
Business report (153rd place in the 2012 ranking, 7 places worse than in 2011) and other 
international  rankings,  such  as  the  Transparency  International  Corruption  Perception 
index (152nd rank in 2011 after 134th a year before), worsened.  

Insufficient  progress  has  been  achieved  in  the  area  of  public  finance  management.  In 
particular,  the  remit  and  technical  capacity  of  the  Supreme  Audit  Institution  (the 
Accounting Chamber of Ukraine) is insufficient to ensure an appropriate level of control 
over  public  spending.  Moreover,  there  is  a  need  to  address  deficiencies  in  the  public 
procurement system. While the public procurement law adopted in July 2010 was a step 
in  the  right  direction,  it  has  yet  to  be  complemented  by  appropriate  legislation  and  the 
number of exceptions to the rule of using competitive tender procedures was excessive. 
Also, recent announcements by the government could endanger the independence of the 
Anti-Monopoly Committee as an appeals body for public procurement. More work also 
needs to be done to create an effective system of public internal financial control and to 
improve the budgeting system. In the area of the fight against corruption, new pieces of 
legislation were adopted in 2011. However, anti-corruption legislation is still not in line 
with European and international standards, and Ukraine continues to lack an independent 
anti-corruption  body.  Some  progress  was  made  to  deal  with  the  substantial  arrears  on 
VAT  refunds,  including  by  increasing  the  number  of  companies  receiving  automatic 
refunds  and  gradually  applying  a  risk-based  refund  system.  However,  the  problem  of 
significant arrears in VAT refunds persists, and the targets for their elimination that had 
been included in the IMF programme have not been met.  

Lack  of  progress  in  public  finance  management,  together  with  uncertainties  over  the 
macroeconomic  framework  (including  the  off-track  status  of  the  IMF  programme),  led 
the  European  Commission  to  delay  the  disbursement  of  direct  budgetary  support 
operations at the end of 2011. 

Another important area where progress has been insufficient is energy sector reform, as 
domestic  gas  prices  remain  significantly  below  cost  recovery  levels.  Moreover,  the 
energy sector as a whole is dominated by large state-owned operators, most notably oil 
and  gas  monopolist  Naftogas,  entailing  significant  problems  of  governance  and 
transparency. In July 2010, Ukraine adopted a new gas law, which was followed by its 
accession  to  the  European  Energy  Community  Treaty  (ECT)  in  December  2010. 
However,  little  progress  has  been  made  so  far  towards  implementing  key  obligations 
under  the  ECT,  notably  the  implementation  of  EU  Directive  55/2004,  foreseeing  the 
unbundling of the production, transport and delivery of natural gas. A law allowing for 
the unbundling to take place was adopted in April 2012; however, progress towards the 
implementation of obligations in line with this law is still pending.  

A positive step was the adoption of a Pension Reform Law in summer 2011.  The main 
measures aimed at lowering the Pension Fund's deficit are: increase in the retirement age, 
limiting  maximum  amounts  paid  in  special  pensions,  and  increase  in  the  minimum 
number of years worked to qualify for pensions. Once these measures are implemented, 
the government aims to introduce the second pillar of the pension reform.  

The  banking  sector  is  in  better  shape  than  in  2008,  when  the  economic  downturn  and 
simultaneous  credit  crunch  forced  several  banks  out  of  business.  Further  progress  has 
been made with the recapitalisation and rehabilitation of the banks affected by the 2009 
crisis. The average capital adequacy ratio has thus far been relatively high at 18 %, and 
the deposit base resilient, albeit with some evidence of switching from local currency to 

31 

 
US dollars. One issue of concern is the high percentage of non-performing loans, which 
are at 17% officially, although analysts estimate them to be over 30% of total loans. 

Positively,  the  EU  and  Ukraine  concluded  the  technical  part  of  negotiations  on  an 
Association  Agreement  (AA),  which  includes  a  Deep  and  Comprehensive  Free  Trade 
Area. The AA contains an ambitious reform agenda, foreseeing the approximation to the 
EU acquis in a number of areas. 

1.24.   Implementation of macro-financial assistance 

In  reaction  to  the  deterioration  of  the  economic  and  balance  of  payments  situation, 
Ukraine  requested  MFA  from  the  EU  in  February  2009.  In  response,  the  European 
Parliament and the Council adopted Decision 646/2010/EU on the provision of MFA of 
up to EUR 500 million in July 2010. Together with the EUR 110m loan available from 
Council Decision 2002/639/EC, this leaves, as noted, a total amount of up to EUR 610 
million.  

The  first  tranche  (EUR  100  million)  is  conditional  on  the  IMF  programme  being  on 
track. The disbursement of the second and third tranches, of EUR 260 million and 250 
million respectively, will be subject to fulfilment of a set of policy conditions as per the 
proposed  MoU,  which,  as  noted,  fall  into  four  thematic  areas:  public  finance 
management (PFM); trade and taxation; energy; and the harmonisation of financial sector 
regulation with that of the EU.  

Discussion  on  the  MoU  and  Loan  Agreement  (LA)  were  launched  in  July  2010  by  a 
Commission staff mission to Ukraine. Negotiations have taken longer than expected and 
were  continued  throughout  2011,  with  the  latest  round  of  negotiations  taking  place  in 
November  2011  in  Kiev.  Although  substantial  progress  has  been  made,  some 
fundamental disagreements remain in the PFM and energy reform areas. In parallel, talks 
on the Loan Agreement have been virtually concluded.  

Conditions  related  to  PFM  play  a  key  role  in  the  proposed  conditionality  of  this  MFA 
operation. This is in line with the provisions of Decision 388/2010/EU, stipulating that 
the conditions  of  this  operation  shall aim  at “strengthening the efficiency, transparency 
and  accountability  of  the  assistance,  including  in  particular  public  finance  management 
systems in Ukraine” and that “specific measures [are] to be implemented by Ukraine in 
relation  to  the  prevention  of,  and  the  fight  against,  fraud,  corruption  and  other 
irregularities  affecting  the  assistance”.  Within  the  broad  area  of  PFM,  the  focus  is  on 
internal  and  external  financial  control,  the  fight  against  corruption,  as  well  as  public 
procurement (an area which has also an important trade dimension).  

international  practices  and 

The PFM area has turned out to be a main stumbling block in negotiations on the MoU. 
The  main  problem  is  Ukraine's  legislation  on  external  audit,  which  is  not  in  line  with 
generally  accepted 
the 
International  Organisation  of  Supreme  Audit  Institutions  (INTOSAI).  In  particular, 
Ukraine's  Accounting  Chamber  (ACU)  has  no  right  to  audit  government  revenue,  nor 
local  governments,  extra-budgetary  funds  and  state-owned  enterprises.  Although 
constitutional  amendments  adopted  in  2004  gave  the  Accounting  Chamber  the  right  to 
audit  government  revenue,  the  necessary  amendments  to  the  laws  on  the  ACU  were 
never adopted and the constitutional amendments were cancelled in 2010.  

the  Mexico  Declaration  of 

32 

 
The other area of the conditionality proposed in the MoU where no agreement has been 
reached  is,  as  noted,  energy  sector  reform.  One  key  aspect  of  this  area  concerns  the 
reform  of  the  gas  sector.  Although  Ukraine  committed  to  fully  implementing  EU 
Directive  2004/55  by  1  January  2012  when  joining  the  ECT,  there  is  little  evidence  of 
progress  towards  unbundling  the  production,  transport  and  delivery  segments  of  gas 
sector  as  stipulated  by  the  Directive.  There  is  currently  no  agreement  on  the 
Commission's  proposal  to  include  a  policy  condition  related  to  the  need  to  implement 
above mentioned Directive.  

A  key  focus  of  the  envisaged  measures  in  the  area  of  taxation  is  addressing  the 
substantial  arrears  accumulated  on  VAT  refunds.  They  include  measures  to  eliminate 
these  arrears,  which  hurt  the  affected  exporters  and  contribute  to  weaken  the  overall 
investment  climate,  as  well  as  improvements  in  tax  administration  to  prevent  a 
recurrence of the problem in the future. The proposed measures would also commit the 
Ukrainian authorities to clearing any arrears on VAT refunds either in cash or by netting 
them  out  against  obligations  of  the  tax  payers,  thus  avoiding  the  unorthodox  clearance 
through the issuance of VAT bonds, as it was done in 2010.  

The implementation of the MFA package for Ukraine has been delayed not only because 
of the slow progress in the negotiations on the MoU but also because of the fact that the 
IMF programme remains, as noted, off-track. 

33 

 
 
SUMMARY STATUS OF ECONOMIC REFORM - UKRAINE 

1.  Price liberalisation  

Most prices are free, but regulated prices prevail for some utilities, notably gas, and in some 
other areas, including agricultural products and medicines (so called socially-sensitive goods). 

2.  Trade liberalisation  

Ukraine  joined  the  WTO  in  May  2008.  However,  export  duties  and  quotas  for  individual 
products remain in force, and often create an unlevel playing field and opportunities for rent-
seeking,  notably  in  the  agricultural  sector.  Technical  and  administrative  barriers  to  trade 
remain  an  obstacle  for  importers.  Positively,  negotiations  on  a  deep  and  comprehensive  free 
trade area with the EU were technically concluded in 2011. 

3.  Exchange rate regime  

The National Bank of Ukraine (NBU) sustains its de-facto peg of the Grivnya against the US 
dollar,  maintaining  an  exchange  rate  close  to  UAH  8:1  USD  throughout  2011.  The  IMF  has 
been requesting Ukrainian authorities to gradually introduce a floating exchange rate.  

4.  Foreign direct investment  

FDI-related  flows  are  largely  liberalised.  Some  sectors,  however,  remain  closed  to  foreign 
ownership, i.e. the gas transmission system and agricultural land market. 

5.  Monetary policy  

The  National  Bank  of  Ukraine  is  responsible  for  controlling  the  domestic  money  supply.  In 
order to stabilize the exchange rate, the NBU implemented a tight monetary policy especially 
in the second half of 2011. 

6.  Public finances  

General  government  expenditure  made  up  an  estimated  45%  of  GDP  in  2011.  Nearly  three-
quarters  of  Ukraine's  government  expenditure  goes  towards  wages  and  social  transfers.  As 
domestic  gas  prices  for  households  and  utilities  are  kept  at  an  artificially  low  level  of  about 
20% of import prices, the finances of state oil-and gas monopolist Naftogas are in dire straits, 
leading  to  a  higher  fiscal  deficit.  Ukraine  still  needs  to  implement  key  reforms  in  the  public 
finance  management  sector,  in  including  in  the  areas  of  public  procurement,  public  internal 
financial  control,  external  audit  and  VAT  refunds,  which  are  crucial  elements  of  the 
Memorandum of Understanding of the MFA programme. 

7.  Privatisation and enterprise restructuring  

State-owned  companies,  which  are  insufficiently  controlled  and  not  subject  to  external  audit 
by  the  supreme  audit  institution,  continue  to  dominate  certain  sectors,  in  particular  utilities. 
Some utility companies and the telecommunications company Ukrtelecom were privatised in 
2011, although there are questions concerning the transparency of the auctions.  

8.  Financial sector reform  

At the end of 2011, 176 banks were operating in Ukraine, including 22 foreign-owned ones. 
Consolidation and recapitalisation of the banking sector remain key priorities for Ukraine. The 
amount of non-performing loans is high at around 30-40%.  

34 

 
 
CENTRAL ASIA 

7. 

THE KYRGYZ REPUBLIC 

1.25.  Executive summary 

In  2011,  economic  growth  of  the  Kyrgyz  Republic  recovered  to  5.7%  from  the  sharp 
slowdown in 2009 and 2010 caused by global recession and internal political and ethnic 
conflicts. The current account deficit decreased to an estimated 3.1% of GDP (or 4.8% of 
GDP  excluding  official  transfers)  in  2011.  Inflation  was  brought  down  from  over  20% 
(y-o-y) in mid-2011 to 5.7% by the end of 2011 on account of the monetary tightening, 
rebound  in  domestic  agricultural  production  and  easing  of  global  food  prices.  The 
Government  managed  to  out-perform  fiscal  targets  for  2011  bringing  down  the  fiscal 
deficit in 2011 to an estimated 4.1% of GDP (excluding energy infrastructure projects), 
mostly due to a stronger revenue collection. 

On  20  December  2011,  the  Commission  adopted  a  proposal  for  a  Decision  by  the 
European  Parliament  and  the  Council  to  provide  MFA  of  up  to  EUR  30  million  to  the 
Kyrgyz Republic. The assistance will support the macroeconomic adjustment programme 
agreed between the Kyrgyz Republic and the IMF in June 2011, which is supported by a 
USD 106 million Extended Credit Facility (ECF). It will also support implementation of 
a number of reform measures to be agreed between the EU and the Kyrgyz Republic. 

The political events experienced by the Kyrgyz Republic in 2010, and in particular the 
inter-ethnic  violence  of  June  2010,  disrupted  the  Kyrgyz  economy  by  affecting  trade, 
tourism flows and agricultural production. The EU's MFA will contribute to covering the 
Kyrgyz Republic's external financing needs in 2012 and 2013, which are partly due to the 
economic  disruptions  and  the  social  and  reconstruction  expenditure  for  alleviating  the 
consequences  of  the  2010  political  event,  while  supporting  reform  measures  aimed  at 
achieving  a  more  sustainable  balance  of  payments  and  budgetary  situation  over  the 
medium-term. While the Kyrgyz Republic is out of the normal geographical scope of the 
EU's MFA instrument, the exceptional circumstances, including EU political support to 
the  Kyrgyz  Republic’s  incipient  parliamentary  democracy,  argue  in  favour  of  such  an 
operation. The proposed MFA would complement the funds pledged by the international 
community  at  the  donors  conference  organised  in  Bishkek  in  June  2010  in  support  of 
Kyrgyzstan's democratisation, reconstruction and social assistance policies, to which the 
EU was a major contributor. 

Progress under the ECF programme has been strong so far, with Kyrgyzstan meeting all 
programme targets in the framework of the first review of the programme, conducted at 
the end of 2011, and completing successfully the second review in April 2012. The MFA 
proposal  adopted  by  the  Commission  in  December  2011  is  being  discussed  by  the 
Parliament and Council under the legislative co-decision procedure.  

1.26.  Macroeconomic performance 

The marked deceleration in growth experienced by the Kyrgyz economy in 2009 (GDP 
growth  slowed  from  an  average  rate  of  8.5%  in  2007-8  to  2.3%  in  2009)  was  a 
consequence of several external shocks linked to the global recession, including a fall in 
remittances  from  migrant  workers,  disruptions  to  trade  flows  and  shrinking  foreign 

35 

 
investments.  The  popular  revolt  in  April  2010  and,  more  importantly,  the  escalation  of 
the ethnic conflict in June 2010 led to a contraction of the economic activity by 10% in 
the  second  quarter  of  2010.  Economic  growth  recovered  in  the  second  half  of  2010, 
however, limiting the decline in real GDP to only 0.5% in 2010 as a whole. In 2011, real 
GDP expanded by 5.7%, supported by a more stable political situation, and the recovery 
of the agricultural and mining sectors as well as of remittances. Real GDP is projected to 
increase by around 5% in 2012 and by 5.5% in 2013. 

Year-on-year inflation spiked from 0% at the end of 2009 to 22.7% in June 2011, mostly 
due to a sharp increase in the global prices of fuel and food, with price pressures spilling 
over  to  other  products.  In  response,  the  central  bank  has  tightened  monetary  policy  in 
several steps since mid-2010. It increased its sales of short-term notes in order to mop-up 
excess liquidity, increased reserve requirements by 1 p.p. to 9% in March 2011 and rose 
the  discount  rate  from  2.7%  in  mid-2010  to  13.4%  in  the  third  quarter  of  2011.  This 
monetary  tightening,  but  also  the  rebound  in  domestic  agricultural  production  and  the 
easing of global food prices, resulted in a drop of year-on-year inflation to 5.7% by the 
end  of  2011.  For  2012,  the  inflation  is  expected  to  reach  around  8%,  as  strong 
remittances and increased government spending exert upward pressure on prices. 

In 2010, the fiscal deficit rose from 3.5% of GDP in 2009 to 6.3% of GDP, reflecting the 
budgetary cost of the crisis-related measures and the negative effect of weaker economic 
activity  on  tax  revenues.  However,  this  deficit  was  almost  half  of  the  one  originally 
budgeted  due  to  the  slow  implementation  of  post-conflict  reconstruction  projects.  In 
2011,  stronger  revenue  collection  and  further  delays  in  implementing  development 
projects led to a decrease of the budget deficit (excluding energy infrastructure projects) 
to  an  estimated  4.1%  of  GDP.  Tax  collection  increased  by  34%  (y-o-y)  in  2011, 
reflecting  stronger  economic  activity,  high  gold  prices  and  improvements  in  tax 
administration  and  customs  valuation.  For  2012,  the  projected  slight  increase  of  the 
deficit to 4.8% is largely caused by the government’s decision to increase pensions and 
wages  for  teachers  and  health  care  employees  from  below  the  subsistence  levels.  The 
Kyrgyz Republic's external public debt rose from about 41% of GDP at end-2008 to over 
57%  of  GDP  at  end-2010,  reflecting  the  disbursement  of  loans  by  the  international 
financial  institutions  and  other  donors.  This  level  fell  to  48.1%  of  GDP  by  the  end  of 
2011 due to debt forgiveness by some creditors and strong GDP growth.  

Balance of payments difficulties had emerged already in 2008, when the current account 
deficit  temporarily  reached  8.1%  of  GDP  because  of  a  hike  in  commodity  prices  of 
imports  (by  20%  in  2007-2008)  and  a  drop  in  electricity  exports,  reflecting  a  major 
shortfall  in  the  domestic  hydro-power  capacity.  After  declining  during  the  global 
financial crisis of 2009, prices of imported commodities went up again in 2010 (by 25%). 
Moreover,  in  2010,  agricultural  exports  and  services  such  as  tourism  and  transit 
transportation were hit by the shutdown of the borders by the neighbouring countries due 
to  security  concerns.  In  addition,  the  value  of  oil  imports  was  driven  up  by  a  100% 
temporary export tax on oil products imposed by Russia in April 2010 (and abolished in 
February  2011).  Consequently,  in  2010  the  current  account  experienced  a  marked 
deterioration, moving from a temporary surplus of 0.7% of GDP in 2009 to a deficit of 
7.2%  of  GDP.  In  2011,  the  deficit  eased  to  3.1%  of  GDP,  since  the  current  account 
benefitted from strong remittances and the increase in the price of gold exports. On the 
other  hand,  imports  grew  strongly  due  to  increased  domestic  demand  and  large  energy 
and mining projects. For 2012, the current account deficit is expected to widen again to 
4.8% of GDP as the difficult global economic environment will have a negative impact 

36 

 
on remittances and exports. Overall, the current account position remains vulnerable to 
possible  terms  of  trade  shocks,  including  an  increase  in  prices  for  imported  energy 
products.  

Foreign direct investment and other private capital inflows were negatively affected by 
the 2009 global crisis but began to recover in 2010, despite the political crisis. In 2012, 
the capital account is expected to show an average annual surplus of more than USD 400 
million,  reflecting  sizeable  external  loans  for  public  investment  projects  and  increasing 
FDI.  However,  vulnerabilities  persist  as  for  example  the  soft  loan  of  USD107  million 
from  the  EurAsEC  Anti-Crisis  Fund,  which  was  planned  for  2011,  has  not  yet  been 
granted. 

Official foreign exchange reserves reached USD 1.85 billion (EUR 1.33 billion) by the 
end  of    2011,  and  the  import  coverage  ratio  by  the  foreign  exchange  reserves  declined 
from 4.9 months in 2009 to an estimated 3.8 months end-2011, as the nominal value of 
imports grew faster than the official foreign exchange reserves.  

1.27.  Structural reforms 

The  Kyrgyz  authorities  have  made  serious  efforts  to  improve  the  business  climate, 
becoming  one  of  the  most  advanced  countries  in  Central  Asia  in  terms  of  economic 
reforms. The 2012 World Bank/IFC Doing Business survey ranks the Kyrgyz Republic at 
70th  place  out  of  183  with  regard  to  the  ease  of  doing  business,  while  the  regional 
average of Eastern Europe and Central Asia stands at 77. Over the last couple of years, 
improvements  were  made  in  easing  business  creation,  obtaining  credit  for  businesses, 
dealing  with  construction  permits,  registering  property  and  employing  workers.  Cross 
border trading, collecting taxes and access to the reliable and affordable electricity still 
remained  very  problematic  areas.  Despite  progress  with  reforms,  Kyrgyzstan  still  faces 
serious  structural  weaknesses,  such  as  widespread  unemployment  and  under-
employment, particularly of the youth. 

The  banking  system  was  severely  affected  by  the  crisis.  The  level  of  nonperforming 
loans was almost 16% at the beginning of 2011, but declined to 10% at the end-2011. In 
April  2010,  seven  banks  were  put  under  temporary  administration.  Subsequently,  two 
temporary  administration,  four  were  placed  under 
banks  were  released  from 
conservatorship  and  the  biggest  one  -  Asia  Universal  Bank  -  was  nationalised  and 
separated  into  a  "bad  bank"  and  a  "good  bank" (called  Zalkar Bank). The Zalkar Bank 
was confirmed to be solvent by the auditors and the authorities continue in their efforts to 
privatise  the  bank.  The  domestic  financial  sector  remains  underdeveloped,  lending 
interest rates are high and about 50% of loans and deposits are denominated in foreign 
currency. The banking crisis has revealed deficiencies in the bank resolution powers and 
a lack of de facto independence of the central bank, including its exposure to interference 
by the government and the courts. Consequently, banking regulations are being upgraded 
to  a  Banking  Code  to  strengthen  the  central  bank’s  early  intervention  and  resolution 
powers and to guarantee its independence. 

The  political  events  of  2010  hindered  progress  in  public  finance  management  (PFM) 
reforms, but this situation has been reversed. One of the main weaknesses in PFM is the 
system of external audit and this area requires longer term support in capacity building. 
The  Law  on  the  Chamber  of  Accounts  (supreme  audit  institutions)  is  broadly  adequate 
but the capacities of this institution need to be developed. The World Bank is providing 

37 

 
technical assistance in this area. Public procurement is another source of concern. While 
there has been tangible progress on internal audit in some line ministries (notably in the 
Ministry of Health supported by the World Bank’s Health and Social Protection project), 
there remains significant room for improvement.  

Kyrgyzstan is a member of the WTO and is a very open economy, with a trade-to-GDP 
ratio  of  almost  140%.  The  bulk  (40%  in  2010)  of  its  exports  goes  to  Kazakhstan  and 
Russia – which are members of a trilateral customs union (CU), also including Belarus.  
In April 2011, Kyrgyzstan applied for membership of this CU. However, the negotiations 
over  the  terms  of  joining  CU  may  take  quite  some  time  (from  two  to  five  years).  The 
main  benefits  Kyrgyzstan  expects  to  obtain  from  entering  this  CU,  apart  from  possible 
foreign policy considerations, is to preserve the supply of oil supplies from Russia and 
Kazakhstan  at  favourable  prices  and  to  limit  the risk of disruptions in trade flows  with 
those important trading partners (such as the temporary border closure with Kazakhstan 
during  the  political  events  of  2010).  Entering  the  CU  would  entail  a  number  of 
significant  costs,  however.    First,  since  the  CU  has  relatively  high  Common  External 
Tariff  (CET),  Kyrgyzstan  might  have  to  compensate  other  WTO  members  (possibly  in 
the form of a reduction in certain tariff lines). More importantly, joining the CU would 
restrict the important transit trade with China, which provides employment to thousands 
of people in Kyrgyzstan.  

1.28.  Implementation of macro-financial assistance 

The sharp drop of economic growth and the worsening of the external position in 2010, 
which  were  caused  by  the  above  described  external  shocks  and  internal  political  and 
ethnic  conflicts,  led  to  a  sizable  external  financing  gap.  In  an  international  donor 
conference  in  July  2010,  the  EU  pledged  to  support  the  recovery  after  the  end  of  the 
ethnic conflict. In June 2011, the IMF agreed with the Kyrgyz authorities on a three-year 
programme, to be supported by an ECF arrangement (about USD 106 million). The ECF 
established  a  framework  for  medium-term  economic  policy  and  reforms  with  adequate 
conditionality  and  monitoring  by  the  IMF  Executive  Board.  However,  the  external 
position  remained  vulnerable  and  the  existence  of  a  considerable  residual  external 
financing gap for 2011-2013 was confirmed by the IMF and the Commission.  

The Kyrgyz government requested EU MFA support in October 2010 asking for a grant 
in  the  order  of  EUR  30  million  to  cover  part  of  the  external  financing  gap.  On  20 
December  2011,  the  Commission  submitted  to  the  European  Parliament  and  to  the 
Council a proposal for a MFA to the Kyrgyz Republic on an exceptional basis, proposing 
EUR 15 million in grants and EUR 15 million in loans. 

In  addition  to  the  economic  justifications  above,  the  exceptional  MFA  operation,  i.e. 
outside the normal geographical scope of MFA, was justified by the strength of the pro-
democratic political and economic reform momentum in the country and by its position 
in a region of economic and political importance for the EU.  By supporting the adoption 
of  an  appropriate  macroeconomic  and  structural  reform  framework,  MFA  can  both 
underpin economic and political stability and increase the effectiveness of interventions 
through other EU support instruments  

The disbursement of MFA will also be conditional on the implementation of a series of 
policy measures to be agreed with the Commission in a Memorandum of Understanding 
(MoU). The MoU conditions are expected to focus on PFM reforms, coherent with the 

38 

 
PFM  conditions  attached  to  the  budget  support  programme  provided  under  the 
Development Cooperation Instrument, as well as measures in other key structural reform 
areas, including the banking sector and, possibly, taxation. 

In  terms  of  other  sources  of  financing  the  residual  financing  gap,  the  World  Bank,  the 
Asian Development Bank and also the bilateral EU programme, the latter through sector 
budget support, will provide funds which will help covering the external financing needs 
of the Kyrgyz Republic in 2012/13. 

39 

 
 
SUMMARY STATUS OF ECONOMIC REFORM - KYRGYZ REPUBLIC 

1.  Price liberalisation  
Most prices are liberalised while administered prices are maintained for some utilities. 

2.  Trade liberalisation  
The Kyrgyz Republic is a member of the WTO since 1998 and is a very open economy, with 
a trade-to-GDP ratio of almost 140%. The bulk of its non-gold exports goes to Kazakhstan 
and Russia – which are members of a trilateral customs union (CU), also including Belarus. 
In April 2011, the Kyrgyz Republic applied for membership of this CU. However, entering 
the CU may clash with some of the Kyrgyz Republic's WTO commitments, since the CU has 
currently  partly  higher  tariffs  than  the  once  bound  by  the  Kyrgyz  Republic  in  its  WTO 
commitments.  

3.  Exchange rate regime  
The central bank operates a managed floating exchange rate regime, allowing the exchange 
rate  to  adjust  in  case  of  substantial  pressures  or  shocks  while  aiming  at  maintaining  a 
competitive exchange rate. 

4.  Foreign direct investment  
Foreign direct investment and other private capital inflows were negatively affected by the 
global  recession,  but  began  to  recover  in  2010.  In  the  coming  years,  FDI  is  expected  to 
increase steadily, partly reflecting foreign financed energy investment projects. 

5.  Monetary policy 
The main target of the activities of the central bank is to guarantee price stability, while in 
practice  it  has  to  balance  this  with  its  task  of  maintaining  the  purchasing  power  of  the 
national currency, i.e. maintaining a competitive exchange rate. 

6.  Public finances  
The IMF programme assumes a considerable effort of fiscal consolidation for the remainder 
of  the  programme  period,  with  the  fiscal  deficit  (excluding  energy  infrastructure  projects) 
targeted  to  decline  gradually  to  3.8%  of  GDP  by  2014.  In  particular,  tax  collection  is 
planned  to  be  strengthened  by  removing  some  tax  exemptions,  strengthening  customs 
administration, shifting from weight-based to price-based customs valuation and reforming 
excise taxation on tobacco and alcohol. 

7.  Privatisation and enterprise restructuring  
The political change in 2010 led to the reversal of some privatisation deals in the energy and 
telecommunication sectors, made under the previous regime, due to allegations of nepotism 
and  corruption.  In  2011,  government  initiated  privatisation  in  telecommunication  and 
banking sectors.  

8.  Financial sector reform  
The banking crisis in 2010 revealed deficiencies in the resolution powers and degree of de 
facto  independence  of  the  central  bank,  including  its  exposure  to  interference  by  the 
government  and  the  courts.  Consequently,  banking  regulations  are  being  amended  and 
upgraded  to  a  Banking  Code  to  strengthen  the  central  bank’s  early  intervention  and 
resolution powers. 

40 

 
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 2011 (in millions of €) 

Authorisations

Disbursements

Country 

Date of
Decision

Reference of
Decision

Maximum
amount

Dates of
disbursements

Amounts of
disbursements disbursed

Totals

Undisbursed

22.07.91

91/408/EC

187,5

Mar. 1992

187,5

187,5

Hungary I
(Loan)

22.02.90

90/83/EC

870

Czech and 
Slovak Federal Republic

25.02.91

91/106/EC

375

Hungary II
(Loan)

Bulgaria I 
(Loan)

Romania I
(Loan)

Israel1
(Loan)

Algeria I
(Loan)

Albania I
(Grant)

Bulgaria II
(Loan)

24.06.91

91/310/EC

180

24.06.91

91/311/EC

290

22.07.91

91/384/EC

375

23.09.91

91/510/EC

400

28.09.92

92/482/EC

70

19.10.92

92/511/EC

110

Baltics
(Loans); of which:

23.11.92

92/542/EC

220

    Estonia
    Latvia
    Lithuania

Romania II
(Loan)

Moldova I
(Loan)

Romania III
(Loan)

(40)
(80)
(100)

80

45

27.11.92

92/551/EC

13.06.94

94/346/EC

20.06.94

94/369/EC

125

260
(cancelled)

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

400

70

110

135

(20)
(40)
(75)

80

45

125

250
150

35
35

70
40

20
40
50
25

80

25
20

55
40
30

Jan. 1992
Aug. 1994

Dec. 1992
Aug. 1993

Dec. 1994
Aug .1996

March 1993
March 1993
July 1993
Aug. 1995

Feb. 1993

Dec. 1994
Aug. 1995

Nov. 1995
Sep. 1997
Dec. 1997

41 

85
(cancelled)

(20)
(40)
(25)

 
 
 
 
Authorisations

Disbursements

Country 

Date of
Decision

Reference of
Decision

Maximum
amount

Dates of
disbursements

Amounts of
disbursements disbursed

Totals

Undisbursed

28.11.94

94/773/EC

35

June 1995
Oct. 1996

15
20

35

22.12.94

94/938/EC

200

Nov. 1995

100

100

22.12.94

94/939/EC

130

July 1996

Albania II
(Grant)

Algeria II
(Loan)

Slovakia
(Loan)

Ukraine I
(Loan)

Belarus
(Loan)

Ukraine II
(Loan)

22.12.94

94/940/EC

10.04.95

95/132/EC

85

55

23.10.95

95/442/EC

200

Moldova II
(Loan)

25.03.96

96/242/EC

Former Yugoslav 
Republic of Macedonia I
(Loan)

22.07.97

97/471/EC

15

40

Bulgaria III
( Loan)

22.07.97

97/472/EC

250

Armenia, Georgia 
and Tajikistan2
(Loans and grants)
 Agreed amounts with the recipent countires:

17.11.97
modified by
28.3.00

00/244/EC

97/787/EC

   Armenia
   (Loan and grant)

   Georgia
   (Loan and grant)

   Tajikistan
   (Loan and grant)

375

(328)

(58)

(175)

(95)

100
(cancelled)

130
(cancelled)

25
(cancelled)

85

30

200

15

40

250

294,5

80,5

(58)

(141,5)

(33,5)

(95)

85

30

50
50
100

15

25
15

125
125

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

110
10
9
6
6,5

60
7
7
7
7
7

Dec. 1995

Dec. 1995

Aug. 1996
Oct. 1996
Sep. 1997

Dec. 1996

Sep. 1997
Feb. 1998

Feb. 1998
Dec. 1998

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)

42 

 
 
 
Authorisations

Disbursements

Country 

Date of
Decision

Reference of
Decision

Maximum
amount

Dates of
disbursements

Amounts of
disbursements disbursed

Totals

Undisbursed

Ukraine III
(Loan)

15.10.98
12.07.02

98/592/EC
02/639/EC

150

July 1999

58

58

92
(cancelled)

20

Albania III
( Loan)

22.04.99

99/282/EC

20

Bosnia I3
(Loan and grant)

10.05.99
modified by
10.12.01

99/325/EC

60

01/899/EC

Bulgaria IV
(Loan)

08.11.99

99/731/EC

100

Former Yugoslav 
Republic of
Macedonia II4
(Loan and grant)

08.11.99

99/733/EC

modified by

10.12.01

01/900/EC

80
18

Romania  IV
(Loan)

Kosovo* I5
(Grant )

Montenegro5
(Grant )

Kosovo II3
(Grant) 

Serbia and 
Montenegro I6
(ex FRY)
(Loan and grant)

08.11.99

99/732/EC

200

19.02.00

00/140/EC

22.05.00

00/355/EC

35

20

15

30

16.07.01

01/549/EC

345

modified by

10.12.01

01/901/EC

Moldova III
(Loan)

10.07.00
19.12.02

00/452/EC
02/1006/EC

27.06.01

01/511/EC

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

Dec. 1999
Sep. 2000

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

June 2000
July 2003

Mar. 2000
Aug. 2000

Aug. 2000
Dec. 2000

Sep. 2001
Dec. 2002

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

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

60

100

98

150

50

35

20

30

345

15
(cancelled)

12.07.02
Ukraine IV
(Loan) Modification of Decision 
98/592/EC

02/639/EC

110

110

43 

 
 
 
Authorisations

Disbursements

Country 

Date of
Decision

Reference of
Decision

Maximum
amount

Dates of
disbursements

Amounts of
disbursements disbursed

Totals

Undisbursed

Serbia and 
Montenegro II7
(ex FRY)
(Loan and grant)

Bosnia II8
(Loan and grant)

05.11.02

02/882/EC

130

05.11.02

02/883/EC

60

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

Feb. 2003 (grant)
Dec. 2003 (grant)

30
10
35
30

15
10

105

25

25

 the rest was 
paid under
04/861/EC

Moldova IV
(Grant)

19.12.02

02/1006/EC

15

25.11.03

Serbia and 
Montenegro II7
(ex FRY)
Modification Decision 02/882/EC (grant)

03/825/EC

70

Dec. 2004 (grant)

10

10

15

20
 the rest was 
paid under
04/862/EC

11,5

20
(expired)

40

25

35

40

22

30

45

40

46

3
9
13

10
15
10

15
25

11
11

30

20
10
15

15
25

Albania IV9
(Loan and grant)

29.04.04

04/580/EC

25

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

Bosnia II8
Modification Decision 
02/883/EC (grant and loan)

7/12/2004

04/861/EC

the balance of
02/883/EC

Dec. 2004 (loan)
June 2005 (grant)
Feb. 2006 (loan)

07.12.2004

Serbia and 
Montenegro II7
(ex FRY)
Modification Decision 02/882/EC (Grant and loan)

04/862/EC

the balance of
03/825/EC

April 2005 (loan)
Dec. 2005 (grant)

Georgia II
(Grant)

        24.01.06

06/41/EC

33,5

August 2006 (grant)
Dec. 2006 (grant)

Kosovo (Grant)

30.11.06

06/880/EC

50

Sept. 2010 (grant)

Moldova
(Grant)

16.04.07

07/259/EC

45

Lebanon10
(Loan and grant)

10.12.07

07/860/EC

Georgia
(Grant)

30.11.09

09/889/EC

80

46

Oct. 2007 (grant)
June 2008 (grant)
Dec. 2008 ( grant)

Dec. 2008 (grant) 
June 2009 (loan)

Dec. 2009 (grant)
Jan. 2010 (grant)
August 2010 (grant)

15,3
7,7
23

44 

 
 
Authorisations

Disbursements

Country 

Date of
Decision

Reference of
Decision

Maximum
amount

Dates of
disbursements

Amounts of
disbursements disbursed

Totals

Undisbursed

Armenia11

30.11.09

09/890/EC

100

(Loan and grant)

June 2011 (grant)
July 2011 (loan)
Dec. 2011 (grant)

14
26
21

61

39

Bosnia and 
Herzegovina (Loan)

30.11.09

09/891/EC

100

Serbia (Loan)

30.11.09

09/892/EC

200

July 2011 (loan)

100

100

Ukraine (Loan)

29.06.10

338/2010/EU

500

Moldova (Grant)

20.10.10

938/2010/EU

90

Dec. 2010 (grant)
Sept. 2011 (grant)

40
20

60

100

100
(cancelled)

500

30

TOTAL

7440

5572

1868

1 Assistance to Israel includes a loan principal amount of € 160  million and grants of € 27.5 million in the form of interest su bsidies
2 Exceptional financial assistance, which includes a ceiling of € 245 million for the loans and a ceiling of € 130 million for t he grants
  Out of the global amount of € 375 million, maximum amounts of € 58 million, € 175 million and € 95 million 
   were actually agreed with the beneficiary countries
3 Includes a loan principal amount of up to €  20 million and grants of up to € 40 million
4 Includes a loan principal amount of up to €  50 million and grants of up to € 48 million
5 Exceptional financial assistance
6 Includes a loan principal amount of € 225 million and grants of € 120 million
7 Includes a loan principal amount of €  55 million and grants of € 75 million
8 Includes a loan principal amount of €  20 million and grants of € 40 million
9 Includes a loan principal amount of € 9 million and grants of € 16 million
10 Includes a loan principal amount of €  50 million and grants of € 30 million
11 Includes a loan principal amount of €  65 million and grants of € 35 million
* This designation is without prejudice to positions on status, and in line with UNSCR 1244 and the ICJ Opinion on 
     the Kosovo Declaration of Independence.

45 

 
                                                            
 
Annex  1B 
FINANCIAL ASSISTANCE TO THIRD COUNTRIES BY REGION 

-  COMMUNITY  MACRO-FINANCIAL  AND  EXCEPTIONAL 

Status of effective disbursements as of end-December 2011 (in millions of €) 

Country 

Date of
Decision

Reference of
Decision

Maximum
amount

Dates of
disbursements

Amounts of
disbursements

Totals Undisbursed

Authorisations

Disbursements

A. EU Accession countries

Baltics
(Loans) of which :
    Estonia
    Latvia
    Lithuania

Bulgaria I 
(Loan)

Bulgaria II
(Loan)

Bulgaria III
(Loan)

Bulgaria IV
(Loan)

23.11.92

92/542/EC

220

(40)
(80)
(100)

24.06.91

91/311/EC

290

19.10.92

92/511/EC

110

22.07.97

97/472/EC

250

08.11.99

99/731/EC

100

Czech and 
Slovak Federal Republic
(Loan)

25.02.91

91/106/EC

375

Hungary I
(Structural adjustment loan)

22.02.90

90/83/EC

870

24.06.91

91/310/EC

180

22.07.91

91/384/EC

375

27.11.92

92/551/EC

80

Feb. 1993

20.06.94

94/369/EC

125

08.11.99

99/732/EC

200

Nov. 1995
Sep. 1997
Dec. 1997

June 2000
July 2003

22.12.94

94/939/EC

130

July 1996

Hungary II
(loan)

Romania I
(Loan)

Romania II
(Loan)

Romania III
(Loan)

Romania  IV
(Loan)

Slovakia
(Loan)

TOTAL A

March 1993
March 1993
July 1993
Aug. 1995

Aug. 1991
March 1992

Dec. 1994
Aug. 1996

Feb. 1998
Dec. 1998

Dec. 1999
Sep. 2000

March 1991
March 1992

Apr. 1990
Feb. 1991

Aug. 1991
Jan. 1993

Jan. 1992
Apr. 1992

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)

85
(cancelled)
(20)
(40)
(25)

290

110

250

100

375

610

180

375

80

125

260
(cancelled)

150

50

130
(cancelled)

3305

2780

525

46 

 
 
 
 
Country 

Date of
Decision

Reference of
Decision

Maximum
amount

Dates of
disbursements

Amounts of
disbursements

Totals Undisbursed

Authorisations

Disbursements

B. Western Balkans

Albania I
(Grant)

Albania II
(Grant)

Albania III
(Loan)

28.09.92

92/482/EC

28.11.94

94/773/EC

22.04.99

99/282/EC

Bosnia I1
(Loan and grant)

10.05.99

99/325/EC

modified by

10.12.01

01/899/EC

Former Yugoslav Republic 
of Macedonia I (Loan)

22.07.97

97/471/EC

Former Yugoslav Republic
of Macedonia II2
(Loan and grant)

08.11.99

99/733/EC

modified by

10.12.2001

01/900/EC

Kosovo I3
(Grant)

Kosovo II3
(Grant)

19.02.00

00/140/EC

27.06.01

01/511/EC

Montenegro3
(Grant budgetary support)

22.05.00

00/355/EC

70

35

20

60

40

80

18

35

30

20

Serbia and Montenegro I4
(ex FRY)

16.07.01

10.12.2001

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

345

Serbia and Montenegro II5
(ex FRY)
(Loan and grant)

05.11.02

02/882/EC

130

modified by

25.11.03
07.12.04

03/825/EC (7)
04/862/EC

70

Bosnia II6
(Loan and grant)

05.11.02

02/883/EC

60

modified by

07.12.04

04/861/EC

47 

Dec. 1992
Aug. 1993

June 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)

March 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)
Feb. 2003 (loan)
Aug. 2003 (grant)
Aug. 2003 (loan)

Dec. 2004 (grant)
April  2005 (loan)
Dec. 2005 (grant)

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

June 2005 (grant)
Feb. 2006 (loan)

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

20
(cancelled)

70

35

60

40

98

35

30

20

345

105

25

50

20

60

 
 
 
Country 

Date of
Decision

Reference of
Decision

Maximum
amount

Dates of
disbursements

Amounts of
disbursements

Totals Undisbursed

Authorisations

Disbursements

Albania IV8
(Loan and grant)

29.04.04

04/580/EC

25

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

Kosovo  (Grant)

30.11.06

06/880/EC

50

Sept. 2010

3
9
13

30

25

30

Bosnia-Herzegoviona (Loan)

30.11.09

09/891/EC

100

Serbia (Loan)

30.11.09

09/892/EC

200

July 2011 (loan)

100

100

20
(expired)

100

100
(cancelled)

TOTAL B

1388

1103

285

C. New Independent States (NIS)

17.11.97
Armenia, Georgia 
and Tajikistan9
modified by
(Loans and grants) 
28.3.00
Agreed amounts with the recipent countires:

97/787/EC

00/244/EC

375
downsized to

   Armenia

   Georgia

   Tajikistan

Belarus
(Loan)

Moldova I
(Loan)

Moldova II
(Loan)

Moldova III
(Loan)

Moldova IV
(Grant)

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

294,5

80,5

(58)

(141,5)

(33,5)

(95)

30

45

15

25
(cancelled)

15
(cancelled)

15

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

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

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

Dec. 1995

Dec. 1994
Aug. 1995

Dec. 1996

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

(328)

(58)

(175)

(95)

55

45

15

15

15

48 

 
 
Country 

Ukraine I
(Loan)

Ukraine II
(Loan)

Ukraine III
(Loan)

Authorisations

Disbursements

Date of
Decision

Reference of
Decision

Maximum
amount

Dates of
disbursements

Amounts of
disbursements

Totals Undisbursed

22.12.94

94/940/EC

85

Dec. 1995

85

85

23.10.95

95/442/EC

200

Aug. 1996
Oct. 1996
Sep. 1997

200

50
50
100

15.10.98

98/592/EC

150

July 1999

58

58

Ukraine IV
(Loan)
Modification of decision 98/592/EC

12.07.02

02/639/EC

110

Georgia II

        21.01.06

      06/41/EC

33,5

Moldova

       16.04.07

     07/259/EC

45

Georgia

30.11.09

09/889/EC

46

Armenia10 (Loan and grant)

30.11.09

09/890/EC

100

Aug. 2006
Dec 2006

     Oct. 2007
June 2008
Dec. 2008

Dec. 2009 (grant)
Jan. 2009 (grant)
Aug. 2010 (grant)

June 2011 (grant)
July 2011 (loan)
Dec. 2011 (grant)

Ukraine (Loan)

29.06.10

388/10//EU

500

Moldova (Grant)

20.10.10

938/2010/EU

90

Dec. 2010 (grant)
Sept. 2011 (grant)

92
(cancelled)

110

11
11

20
10
15

15,3
7,7
23

14
26
21

40
20

22

11,5

45

46

61

39

500

60

30

TOTAL C

1879,5

961,5

918,0

D. Mediterranean countries

Israel11
(Structural adjustment soft loan)

Algeria I
(Loan)

Algeria II
(Loan)

Lebanon12

TOTAL D

TOTAL A+B+C+D

22.07.91

91/408/EC

187,5

March 1992

187,5

187,5

23.09.91

91/510/EC

400

Jan. 1992
Aug. 1994

250
150

400

22.12.94

94/938/EC

200

Nov. 1995

100

100

100
(cancelled)

10.12.07

     07/860/EC

80

Dec. 2008
June 2009

15
25

40

40

727,5

140

5572

1868

867,5

7440

49 

 
 
 
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
5 Includes a loan principal amount of € 20 million and grants of € 40 million
6 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
9 Exceptional financial assistance, which includes a ceiling of € 245 million for the loans and a ceiling of € 130 million for th e grants
  Out of the global amount of € 375 million, maximum amounts of € 58 million, € 175 million and € 95 million were
  actually agreed with the beneficiary countries
10 Includes a loan principal amount of € 65 million and grants of € 35 million
11 Assistance to Israel includes a loan principal amount of ECU 160 million and grants of ECU 27,5 million in the form of interest subsidies.
12 Includes a loan principal amount of € 50 million and grants of € 30 million

50