COMMISSION STAFF WORKING DOCUMENT Background analysis per beneficiary Accompanying the document REPORT FROM THE COMMISSION on the implementation of macro-financial assistance to third countries in 2012
Date: 2013-06-17
Institutions: European Commission
Subjects: Armenia, Bosnia and Herzegovina, EU aid, Georgia, Kyrgyzstan, Ukraine, aid recipient, financial aid

EUROPEAN 
COMMISSION 

Brussels, 17.6.2013  
SWD(2013) 211 final 

COMMISSION STAFF WORKING DOCUMENT 

Background analysis per beneficiary 

Accompanying the document 

REPORT FROM THE COMMISSION 

on the implementation of macro-financial assistance to third countries in 2012 

{COM(2013) 426 final} 

EN 

   EN 

 
 
 
 
  
 
 
LIST OF ABBREVIATIONS 

CEFTA 

CPI 

DCFTA 

Central European Free Trade Agreement 

Consumer Price Index 

Deep and Comprehensive Free Trade Area 

EC 

ECF 

EFF 

EU 

EUR 

FDI 

GDP 

GSP 

IMF 

MFA 

MoU 

SDR 

USD 

VAT 

WTO 

European Community 

Extended Credit Facility 

Extended Fund Facility 

European Union 

Euro 

Foreign Direct Investment 

Gross Domestic Product 

Generalised System of Preferences 

International Monetary Fund 

Macro-Financial Assistance 

Memorandum of Understanding 

Special Drawing Rights 

Dollar of the United States of America 

Value Added Tax 

World Trade Organisation 

 
 
 
 
TABLE OF CONTENTS 

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

BACKGROUND ANALYSIS OF BENEFICIARIES OF MACRO-FINANCIAL 

ASSISTANCE............................................................................................................. 5 

1. 

2. 

3. 

4. 

5. 

BOSNIA AND HERZEGOVINA ............................................................................... 5 
1.1. 
Executive summary ............................................................................. 5 
1.2.   Macroeconomic performance .............................................................. 5 
1.3.  
Structural reforms ................................................................................ 6 
1.4.        Implementation of macro-financial assistance .................................... 7 
ARMENIA............................................................................................................ 9 
2.1. 
Executive summary ............................................................................. 9 
2.2.  Macroeconomic performance .............................................................. 9 
Structural reforms .............................................................................. 10 
2.3. 
2.4. 
Implementation of macro-financial assistance .................................. 11 
GEORGIA .......................................................................................................... 14 
Executive summary ........................................................................... 14 
3.1. 
3.2.   Macroeconomic performance ............................................................ 14 
3.3. 
Structural reforms .............................................................................. 15 
Implementation of macro-financial assistance .................................. 16 
3.4. 
UKRAINE .......................................................................................................... 18 
4.1.  
Executive summary ........................................................................... 18 
4.2.  Macroeconomic performance ............................................................ 18 
Structural reforms .............................................................................. 19 
4.3. 
4.4. 
Implementation of macro-financial assistance .................................. 20 
THE KYRGYZ REPUBLIC ................................................................................... 23 
5.1. 
Executive summary ........................................................................... 23 
5.2.  Macroeconomic performance ............................................................ 23 
Structural reforms .............................................................................. 24 
5.3. 
Implementation of macro-financial assistance .................................. 26 
5.4. 

ANNEXES ........................................................................................................................ 28 

3 

 
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  2012.  It  provides  economic  and  financial 
information regarding the situation of countries having benefitted from MFA in 2012, 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  annexes.  Total  amounts  of  MFA 
commitments and payments over the period 2003-2012, by year and by region, are also 
provided. 

4 

 
 
BACKGROUND  ANALYSIS  OF  BENEFICIARIES  OF  MACRO-FINANCIAL 
ASSISTANCE 

1. 

BOSNIA AND HERZEGOVINA 

1.1.  Executive summary 

In 2012, the economy of Bosnia and Herzegovina, negatively affected by the worsened 
external environment, entered into recession, with an estimated real GDP contraction of 
0.7%. The external imbalances have been growing again after slightly decreasing in the 
earlier crisis period. The current account deficit reached an estimated 9.4% of GDP, as a 
result  of  falling  exports  of  goods.  Budget  planning  and  fiscal  coordination  have 
improved, but the composition of spending remains a concern. Against the background of 
rising macroeconomic imbalances and growing concerns about macroeconomic stability, 
the authorities agreed on a new Stand-By Arrangement with the IMF of about EUR 400 
million in September 2012. 

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) was initially set to expire 
in November 2012. Until then, no disbursement under this assistance had been made, due 
to  the  non-fulfilment  of  the  specific  conditions  attached  to  it.  However,  given  that  the 
authorities had reached an agreement with the IMF about a new Stand-By-Arrangement 
and had taken steps towards improving public finance sustainability, and in view of the 
difficult  budget  and  balance  of  payments  situation  of  the  country,  the  European 
Commission extended the availability period of the MFA to Bosnia and Herzegovina by 
one  additional  year,  until  7  November  2013.  The  disbursment  of  the  first  instalment 
under  the  MFA,  in  the  amount  of  EUR  50  million,  took  place  in  early-2013.  The 
disbursement of the second instalment could take place in the second half of 2013, under 
the  conditions  that  the  IMF  programme  remains  on  track  and  that  the  specific  policy 
conditions laid down in the Memorandum of Understanding are met. 

1.2.   Macroeconomic performance 

After a mild recovery from the initial effects of the global economic crisis, the economy 
entered  negative  territory  again  in  2012,  when  real  GDP  shrank  by  an  estimated  0.7%, 
partly  as  of  result  of  the  severe  winter  conditions  in  early-2012  and  the  drought  in  the 
summer. The economy had registered a growth rate of around 1% in each of the previous 
two years. In 2012, tight lending conditions, stagnant wages and the implementation of 
fiscal  consolidation  measures  had  negative  repercussions  on  domestic  demand.  At  the 
same  time,  the  worsened  external  environment  –  due  to  the  EU  sovereign  debt  crisis  – 
resulted in falling exports, which had a negative impact on growth. Industrial production 
fell by 5.2% in 2012, compared with a 5.6% growth a year ealier. This  was  due  to  the 
simultanenous  underperformance  of  the  mining  sector  (-4.9%)  and  the  manufacturing 
industry (-4.7%), while the output of the energy sector contracted at an even higher rate 
(-7.1%). Alongside falling economic activity, the level of employment dropped by 0.4% 
and  the  registered  unemployment  rate  reached  44.5%  at  the  end  of  2012,  as  a  result  of 
continued labour shedding in the private sector, notably in construction. 

After its strong deterioration in 2011, the current account deficit continued  to widen in 
2012  albeit  at  a  moderated  pace,  reaching  an  estimated  9.4%  of  GDP.  This  further 
deterioration  was  mainly  driven  by  a  growing  trade  deficit  (32.4%  of  GDP)  and,  to  a 
lesser extent, by a lower surplus of the services balance. The higher trade deficit was only 
partially  offset  by  increased  surpluses  in  net  factor  income  (+8.1%)  and  the  current 
transfer  balance  (+2.3%).  Even  though  starting  from  a  very  low  basis,  net  FDI  inflows 
soared by 70.6% in 2012 to an estimated 3.5% of GDP – a level still insufficient to cover 

5 

 
 
the  current  account  deficit.  Official  foreign  exchange  reserves  rose  slightly  by  1.3%, 
covering around five months of imports. 

Consumer  price  inflation  has  been  rather  volatile  in  the  course  of  2012.  Following  a 
downward trend in the first half of the year leading to a 30-month low rate  of  1.4% in 
July,  it  rebounded  to  2.3%  in  September-October,  triggered  by  rising  food  prices. 
However, the moderating transport and housing prices exerted some downward pressure 
on the overall price level in the country, and annual inflation decelerated to 1.9% towards 
the  end  of  the  year.  This  brought  the  12-month  moving  average  inflation  rate  down  to 
2.1%,  compared  to  3.7%  in  2011.  Overall,  depressed  domestic  demand  contributed  to 
low consumer price inflation. 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. 

The  fiscal  position  mildly  improved  in  the  first  three  quarters  of  2012,  since  the 
consolidated  budget  posted  a  slightly  higher  surplus  of  0.5%  of  GDP  over  the  period, 
compared to the same period in 2011. Consolidated revenue increased by 1.8% year-on-
year  in  January-September  mainly  because  of  higher  grants  and  other  non-tax  revenue 
(up  by  15%),  while  collection  of  tax  revenue  and  social  contributions  rose  only 
marginally.  Consolidated  expenditures  expanded  at  a  slightly  lower  rate  of  1.6%.  The 
wage  bill  of  the  government  and  subsidies  fell  by  0.7%  and  6.4%,  respectively,  while 
social spending rose only marginally due to the continued fiscal restriction. However, the 
composition  of  public  spending  remains  a  concern:  current  expenditures  represented  a 
very  high  98.5%  of  total  expenditures  in  the  first  three  quarters  of  2012,  while  capital 
spending, even though increased by 27.6% from the prior year, remained extremely low. 

1.3.   Structural reforms 

After gaining momentum in 2009 and early 2010, the pace of structural reforms slowed 
down  in  2011  and  2012,  partly  because  of  the  lengthy  government  formation  after  the 
October  2010  general  elections.  Some  reform  measures  were  implemented  in  order  to 
strengthen  public  finance  management,  leading  to  improved  budget  planning  and  fiscal 
coordination. The State and the Entities1 adopted their 2013 budgets before the expiration 
of the previous budget year. This was a welcomed improvement compared with previous 
practices  of  late  budget  laws  endorsement  and  temporary  fiscal  arrangements,  which 
weakened  the  reliability  of  public  finances  and  the  planning  and  decision-making  of 
economic agents. The adoption of the Global Framework for Fiscal Policies 2013-2015 
by the Fiscal Council in June 2012, after the lack of a medium-term fiscal programme at 
country  level  for  a  couple  of  years,  was  another  welcome  development.  It  inter  alia 
facilitated the timely preparation of the budgets. However, the quality of public finances 
remained  low  with  a  high  share  of  current  expenditures,  at  the  expense  of  growth-
enhancing capital expenditures.  High labour taxation continued to hamper job creation 
and labour market participation. 

Against  the  background  of  rising  fiscal  and  external  imbalances  and  growing  concerns 
for  macroeconomic  stability,  the  authorities  elaborated  in  mid-2012  an  economic 
programme which aimed, inter alia, at safeguarding fiscal sustainability through further 
fiscal  consolidation  and  structural  fiscal  reforms.  The  programme  was  supported  by  a 
new Stand-By Arrangement with the IMF of about EUR 400 million, adopted by the IMF 
Board in September 2012. 

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 weak federal government. 

6 

 
                                                            
In the World Bank's 2013 Doing Business Report, Bosnia and Herzegovina ranks 126th in 
terms of ease of doing business (125th in the previous year), out of 185 countries covered, 
lagging  well  behind  its  regional  peers.  Main  obstacles  are  dealing  with  construction 
permits,  starting  a  business  and  enforcing  contracts.  In  the  Global  Competitiveness 
Report of the World Economic Forum, Bosnia and Herzegovina ranks 88th (climbing 12 
places in a year) among 144 countries. Access to financing, and political instability are 
indicated as the most problematic factors for doing business in the country. 

1.4.   Implementation of macro-financial assistance 

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  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 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. 

The availability of the MFA was to expire on 7 November 2012. No disbursement had 
been made as key conditions were not met. The IMF programme had turned de facto into 
a non-disbursing one since October 2010 due to the political standstill. Moreover, 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 fulfilled. 

After duly consulting the Economic and Financial Committee which raised no objection 
to  the  proposed  action,  the  European  Commission  adopted  on  29  October  2012  a 
Decision  (2012/674/EU)  to  extend  the  availability  period  of  the  EU  macro-financial 
assistance  to  Bosnia  and  Herzegovina  by  one  additional  year,  until  7  November  2013. 
This extension was motivated by the authorities' previous steps towards improving public 
finance  sustainability,  the  adoption  of  a  new  Stand-By-Arrangement  by  the  IMF  Board 
on 26 September 2012, as well as the difficult budget and balance of payments situation 
of  the  country.  Consequently,  the  MoU  was  extended  until  7  November  2013  by  an 
addendum  signed  by  the  Bosnia  and  Herzegovina’s  authorities  and  the  European 
Commission on 21 November 2012. 

Following  the  receipt  of  a  compliance  report  on  the  fulfilment  of  the  structural  reform 
criteria  related  to  the  first  instalment  in  November  2012  and  of  a  request  for  funds  in 
January  2013,  the  European  Commission  disbursed  the  first  instalment  of  MFA  in  the 
amount of EUR 50 million in February 2013. 

Provided that the IMF programme remains on track and that all policy conditions as laid 
down in the MoU for the second tranche are fulfilled, the second disbursement of the EU 
MFA could take place in the second half of 2013. 

7 

 
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.  With  the 
introduction of the euro, the Bosnian Convertible Mark was pegged at 1.95583 to the euro, 
exchange rate which has remained unchanged since.  

4.  Foreign direct investment  
Net  FDI  reached  a  peak  in  2007  (when  the  telecommunications  company  of  Republika 
Srpska was privatised). A downward trend followed in the next couple of years (with the 
net  FDI  even  becoming  negative  in  the  first  half  of  2010),  and  FDI  slightly  recovered  in 
2011  and  2012,  reaching  around  3.5%  of  GDP  in  2012.  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 39% in 2005 
to  46.3%  in  2010,  before  slightly  decreasing  to  45.5%  in  2011.  Moreover,  expenditure 
remained concentrated in current expenditure, in particular 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 public 
expenditures is spent at entity level, while the federal government accounts for about 9% of 
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.  Overall,  the  sector  remains  sound  and  stable 
despite the continuing deterioration of loan portfolios' quality over the last couple of years.  

8 

 
 
 
2.  ARMENIA 

2.1.  Executive summary 

The Armenian economy continued to strengthen in 2012. GDP growth rate reached 7.2% 
in 2012, a further increase from the already solid growth rate of 4.7% registered in 2011. 
The  strengthening  of  growth  in  2012  was  mainly  driven  by  an  increase  in  private 
consumption and exports. However, the inflow of investments continued to weaken, due 
to the difficult global financial environment.  

The current financial arrangement with the International Monetary Fund (IMF) under the 
Extended Fund Facility and Extended Credit Facility (EFF/ECF) was signed in 2010 and 
is expected to expire in mid-2013. In December 2012, the Executive Board of the IMF 
successfully  completed  its  fifth  review  of  Armenia’s  economic  performance  under  this 
arrangement and concluded that the programme remains broadly on track.  

In  early  2012  the  Commission  completed  the  implementation  of  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 MFA conditions contributed to reforms in 
the  areas  of  public  debt,  pensions,  tax  systems  and  public  finance  management.  In 
February  2013,  the  Armenian  authorities  requested  from  the  EU  a  new  MFA.  At  the 
same time, the Armenian authorities have requested from the IMF a new financing that 
would replace the current EFF/ECF arrangement.  

2.2.  Macroeconomic performance 

After a large shock that affected the Armenian economy in the global financial crisis in 
2009, the economic activity started its gradual recovery in 2010 and 2011. In 2012, the 
recovery  continued  to  strengthen,  as  the  GDP  growth  rate  reached  7.2%,  accelerating 
from 4.7% in 2011.  

The  strengthening  of  growth  in  2012  was  mainly  driven  by  an  increase  in  private 
consumption  and  exports.  Private  consumption  growth  accelerated  in  2012,  reaching 
10.2%, compared to 2.4% in 2011. On the negative side, investments, both domestic and 
foreign,  continued  to  weaken,  pointing  at  Armenia's  slowing  growth  prospects.  Gross 
fixed capital formation decreased by 7.7% in 2012 after dropping by 4.7% in 2011. FDI 
inflows contracted by 7%, after dropping by 8% in 2011. 

At  the  sectoral  level,  particularly  strong  growth  was  recorded  in  mining,  financial 
services  and  transportation  services,  each  of  these  sectors  registering  in  2012  a  growth 
rate of 14.5%, 23.6% and 14.8%, respectively. Also, agriculture grew by 9.3% thanks to 
favourable weather conditions, an important change over 2011.  

After reaching a peak of 19.0% in 2010, the unemployment rate fell to 18.4% in 2011. 
Led by strong economic activity in 2012, the reduction of the jobless rate continued in 
2012,  falling  to  17.3%.  Youth  unemployment  remains,  however,  very  high,  reaching 
almost 40% in 2011. 

After  inflation  rates  in  the  range  of  7-8%  in  2010  and  2011,  consumer  price  growth 
moderated steeply in 2012 (2.6%), mostly as a result of favourable food price dynamics 
on global markets and a bumper harvest in the country. By May 2012, CPI inflation had 
eased to 0.5% year-on-year, but it rebounded slightly thereafter, as a result of the increase 
in world energy prices. Moderate inflationary pressures are expected in the medium term. 
The  Central  Bank  of  Armenia  has  kept  the  policy  rate  steady  at  8%  since  September 
2011. 

9 

 
The  authorities  continued  the  fiscal  consolidation,  and  the  fiscal  position  improved 
further  in  2012.  Last  year,  the  budget  deficit  is  estimated  to  have  declined  to  2.1%  of 
GDP,  from  2.8%  in  2011  and  4.6%  in  2010.  The  decreasing  deficit  reflects  mainly 
spending  restraint,  while  the  revenue  performance  remained  weak.  Tax  revenues 
increased by 0.6% of GDP supported by increases of the personal and corporate income 
taxes as well as of the excise tax. However the tax-to-GDP ratio remained low at 17.1%. 
At  the  same  time,  the  public  debt  remains  on  an  upward  path,  reflecting  on-going 
borrowing from international financial institutions. It reached 44.3% of GDP at the end 
of 2012, up from 42.2% a year earlier.  

The  external  situation  remains  fragile.  Despite  significant  adjustment  since  2009,  the 
current account deficit is large. It decreased slightly to 10.7% of GDP in 2012 (10.9% in 
2011), underlining a critical need to strengthen competitiveness. Remittances continued 
to increase, though at a slower pace, due to the subdued growth in Russia. In 2012 they 
grew by 7.7%, well below the 24.6% increase in 2011. Exports, mostly driven by mining 
and agriculture, increased by 3.5% in 2012 (in 2011, export growth had reached 24.3%). 
The trade deficit remained high, 24.3% of GDP. Further narrowing the current account 
deficit  is  crucial  as  the  FDI  continued  to  weaken:  it  shrank  by  7%  in  2012  after 
contracting by 8% in 2011. Thus, despite an improvement in the current account deficit, 
the  bulk  of  the  external  financing  needs  continued  to  be  covered  by  the  international 
community. 

2.3.  Structural reforms 

In  2012,  the  authorities  continued  to  implement  structural  reforms  focused  on  business 
environment  improvements  and  deregulation,  through  changes  in  legislation  and 
strengthening the relevant administrative capacities. The fundamental laws on technical 
regulation,  standardization,  accreditation  and  measurement  were  adopted  in  February 
2012. They are intended to support export diversification and competitiveness, but would 
need  to  be  supported  by  further  measures.  In  particular,  in  the  competition  area,  the 
government 
including 
amendments  to  the  competition  act,  to  step  up  enforcement  efforts.  In  the  area  of  tax 
administration,  the  authorities  continue  to  implement  measures  to  simplify  and 
streamline the reporting process.  

to  parliament  shortly 

legal  changes, 

to  propose 

intends 

Deepening  the  financial  sector  is  a  priority  for  the  authorities,  as  a  number  of  reforms 
have  been  introduced  lately.  In  the  banking  sector,  greater  provisioning  and  risk 
weighting of foreign assets were introduced to limit further dollarization. Pension reform 
that should result in a better mobilisation of domestic financial resources is on track and 
scheduled to be introduced in 2014.  

The  country's  market-friendly  reform  efforts  have  been  recently  acknowledged  by  the 
World Bank, which rated Armenia 32nd (out of 185 states) for the ease of doing business. 
The country thus advanced 18 positions in the ranking due to strong improvements in the 
electricity availability, investor protection and tax payment areas. 

to  further 

In  order  to  maintain  high  growth  rates  in  an  unfavourable  external  environment,  the 
authorities should build on the sustained structural reform pace and pursue an even more 
the  business  environment  and  enhance 
ambitious  agenda 
competitiveness.  They  should  also  focus  on  trade  deepening.  A  positive  step  in  this 
direction  was  made  in  2012,  when  Armenia  launched  negotiations  on  a  Deep  and 
Comprehensive  Free  Trade  Agreement  (DCFTA)  with  the  EU,  which  was  the  starting 
point  in  the  country's  reform  process  especially  in  the  areas  of  sanitary  and  phyto-
sanitary issues, technical barriers to trade and protection of intellectual property rights. 

improve 

10 

 
Other  important  challenges  Armenia  faces  include  promoting  inclusive  and  sustainable 
growth, diminishing poverty rates, decreasing corruption and diversifying the economic 
activity  while  facing  its  geopolitical  difficulties,  being  a  landlocked  country  with  two 
closed borders out of four.  

2.4.  Implementation of macro-financial assistance 

The implementation of the macro-financial assistance programme approved back in 2009 
and which consisted of a loan of EUR 65 million and of a grant of EUR 35 million was 
completed in February 2012, with the release of the loan part of the second instalment.2  

The conditionality linked to this MFA programme included specific policy measures in 
the  areas  of  public  debt  management,  pension system,  public  internal  financial  control, 
external  audit,  public  procurement,  tax  policy,  tax  administration,  and  customs  policy. 
The  developments  having  taken  place  in  2012  and  in  early  2013  in  the  policy  areas 
targeted by the MFA programme are detailed below. 

In the area of public internal financial control, the implementation of the Government’s 
Public Finance Management  (PFM)  reform strategy continued to progress. As of  2012, 
52  government  entities  were  equipped  with  Internal  Audit  systems.  Armenia  adopted  a 
tax policy strategy for 2013–15 and a tax administration strategy for 2012–14 focused on 
expanding the scope of e-filing. A new compulsory income tax, merging social security 
deductions and private insurance payments, entered into effect in January 2013. Armenia 
also integrated the tax and customs information systems through new software.  

In February 2013, the Commission received a request from the Armenian authorities for 
a new MFA programme for 2013–14. In fact, the IMF estimated in the Article IV report 
published in December 2012 that Armenia will be facing an important external financing 
gap  in  this  period.  Since  the  current  IMF  arrangement  under  EFF/ECF  signed  in  2010 
will be completed in June 2013, a possible new MFA programme will be conditional on 
an agreement between the IMF and the Armenian authorities on a new IMF programme, 
negotiations on which started in April 2013, together with the final review of the 2010-13 
EFF/ECF programme. In December 2012, the Executive Board of the IMF successfully 
completed  its  fifth  review  of  Armenia’s  economic  performance  under  that  programme. 
The decision enabled the authorities to draw an additional SDR 33.5 million (about EUR 
38.8 million), bringing total disbursements under the arrangements to SDR 211.8 million 
(about EUR 245.3 million). 

2   For  a  detailed  account  of  the  implementation  of  the  programme,  please  see  Report  on  the 
implementation  of  MFA  to  third  countries  in  2011  and  the  Commission  Staff  Working  document 
accompanying the Report (COM(2012) 339 final and SWD(2012) 181 final, of 26 June 2012). 

11 

 
                                                            
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. 
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  borders  and  the  oligarchic  structure  of  the  private 
sector hampers growth potential and competitiveness, which however slightly improved in 
2012. Investors' protection, payment of taxes, access to finance and corruption remain 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 63%. 

6. Public Finances and Taxation 

Even though the public debt management has been strengthened (partly as an effect of MFA 
conditionality),  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 taxpayers' reporting system.   

7. Privatisation and enterprise restructuring  

Armenia  has  made  significant  progress  in  privatisation  and  some  progress  in  competition 
policy. According to the EBRD, the privatisation in the industry 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,  which  was  launched  in 
November 2011).  

12 

 
 
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.  

13 

 
3.  GEORGIA 

3.1.  Executive summary 

Despite  the  worsening  global  environment,  Georgia's  economy  expanded  by  an 
impressive  6.1%  in  2012,  a  slight  moderation  from  the  7.2%  GDP  growth  achieved  in 
2011. Economic activity was strong for most of the year, save for the last quarter when 
growth moderated markedly due to weakening external demand, but also the uncertainty 
arising  from  the  political  transition  following  the  October  parliamentary  elections.  The 
budget  deficit  is  estimated  at  3.0%  of  GDP  in  2012  (an  improvement  from  the  3.5% 
initial target) due to one-off revenue gains and prudent expenditure policies. At the same 
time,  falling  global  food  prices  and  weak  demand-side  pressures  led  to  a  steep 
disinflation throughout the year - consumer prices declined by 0.9% on average in 2012. 
This enabled  the  central bank to continue its  monetary  easing cycle. Strong investment 
demand widened the trade deficit and was therefore a key factor behind the high current 
account  deficit  (at  11.4%  in  2012).  At  the  same  time,  net  FDI  declined  by  one-third 
during the year. This was compensated by increased borrowing, which ultimately led to 
an increase of the gross external debt of the country to 84.2% of GDP at the end of 2012.  

Following  a  successful  implementation  of  an  IMF  arrangement  in  2008-2011,  the 
authorities  agreed  on  a  follow-up  programme  to  support  the  completion  of  the 
macroeconomic  adjustment  programme,  but  also  to  insure  against  risks  stemming  from 
the  unsettled  global  environment.  The  agreement  approved  in  April  2012  foresees 
potential support of SDR 250 million (EUR 294 million). Until now, the programme has 
been precautionary, since no funds have been withdrawn so far.  

In January 2011, the Commission adopted a decision for a MFA programme to Georgia 
for a total of EUR 46 million, to be provided equally in loans and grants. The proposal 
was  part  of  a  pledge  made  by  the  European  Commission  at  a  donor  conference  in 
October 2008 for two possible MFA operations, amounting to EUR 46 million each. The 
first MFA operation was successfully implemented in 2009-2010. As for the second one, 
its approval has been delayed by disagreements between the two co-legislators (European 
Parliament  and  Council)  over  the  procedure  to  be  used  for  the  adoption  of  the 
Memorandum  of  Understanding,  which  lays  down  the  economic  policy  measures  to  be 
undertaken by the country benefiting from the MFA. While the two co-legislators agree 
with  the  substance  of  the  proposal,  this  procedural  dispute  has  entailed  thorough 
discussions, which should lead to a decision in mid 2013.   
3.2.   Macroeconomic performance3 

Georgia's  economy  demonstrated  a  remarkable  recovery  after  the  2009  recession, 
recording  a  6.5%  annual  average  growth  in  2010-2012  that  was  underpinned  by  sound 
macroeconomic  policies  and  market-oriented  reforms.  Significant  donor  assistance 
pledged in the  aftermath  of  the  2008  conflict with Russia was also instrumental to that 
end. In 2012, GDP growth slowed down to 6.1% from 7.2% a year earlier and remained 
predominantly  supported  by  strong  investment  activity.  Household  demand  has  also 
favourably affected economic performance. Private consumption was encouraged by an 
on-going wage increase coupled with a steep disinflation, robust credit growth for most 
of the year, and a booming tourist sector. Economic activity moderated significantly  in 
the final quarter of 2012, with a GDP growth of only 2.8%. This reflected a worsening 
global environment but also the uncertainty arising from the change of power following 
the October elections. Despite robust economic growth, the unemployment rate remains 

3  

The territories of Abkhazia and South Ossetia are excluded from the analysis due to lack of data.  

14 

 
                                                            
elevated  at  15.1%  in  2011  (down  from  16.3%  a  year  earlier)  due  to  a  high  structural 
unemployment.  

In  marked  contrast  with  the  high  inflationary  environment  in  the  previous  two  years, 
there was an impressive disinflationary trend in 2012 that was mainly due to lower food 
prices worldwide. Demand-side pressures remained subdued as the booming economy is 
still mainly the result of high investment activity. The CPI was in the deflationary area 
for most of the year, with the average price decline reaching 0.9% in 2012. In the absence 
of  any  inflationary  pressures,  the  National  Bank  of  Georgia  continued  its  easing  cycle 
and reduced the key policy rate by cumulative 150 basis points to 5.25% at the end of the 
year.  Another  50  basis  points  reduction  followed  in  February  2013,  which  was 
necessitated  by  weaker  economic  activity.  However,  the  monetary  policy  transmission 
mechanism remains constrained by the high dollarization ratio. 

In the fiscal area, the budget deficit came at a better-than-expected 3.0% of GDP in 2012 
(initial target of 3.5%) due to a combination of one-off revenues (namely a dividend by 
the  state  railway  company  Georgian  Railways)  and  restrained  expenditures  by  the  new 
government in the final quarter of the year. The 2013 budget targets a further tightening 
of the fiscal deficit to 2.8% of GDP, which, however, will be accompanied by a reduced 
fiscal flexibility, as the share of capital expenditures will be curtailed at the expense of 
growing recurrent spending for rising pensions and social benefits.  

Georgia's  external  vulnerabilities  remain  prominent.  The  current  account  deficit 
amounted  to  11.4%  of  GDP  in  2012,  declining  from  12.7%  in  2011.  The  merchandise 
trade deficit widened due to a strong investment demand and a weak export base, which 
were only partially compensated by rising tourism proceeds and growing, although at a 
slower pace, remittances. Net FDI declined by a third in the first three quarters of 2012 to 
USD 603 million (3.8% of GDP). This resulted in growing reliance on debt financing and 
the  country's  gross  external  debt  rose  to  84.2%  of  GDP  at  the  end  of  the  year.  After  a 
significant rise in 2011, international reserves were almost unchanged throughout 2012, 
reaching  USD  2.9  billion  at  end-year  (or  around  3.7  months  of  next  year's  imports). 
Elevated  external  risks  are  somewhat  mitigated  by  the  on-going  access  to  donor 
assistance as well as a new programme concluded with the IMF in April 2012. 

Following the completion of an IMF arrangement that ran from end-2008 to mid-2011, 
the authorities agreed with the IMF on a follow-up programme whose objectives are to 
guard  against  risks  stemming  from  the  unsettled  global  enviroment  and  high  external 
debt payments as well as to support the successful completion of the adjustment process 
following the 2008-2009 crisis. The IMF approved the new 24-month programme, in the 
form of a Stand-By Arrangement and a concessional Stand-By Credit Facility, in April 
2012.  Under  the  agreement,  Georgia  could  borrow  up  to  SDR  250  million  (EUR  294 
million) over the programme period, evenly distributed between the two instruments. The 
authorities have decided to treat the agreement as precautionary and have not withdrawn 
any funds for the time being. The IMF carried out its first mission review in November 
and December 2012, concluding that performance under the programme has been good. 

3.3.  Structural reforms 

Georgia, which has succesfully developed several important structural reforms in the past 
few  years,  continued  on  this  path  in  2012,  although  at  a  slower  pace  due  to  the 
parliamentary elections and the following political transition. The country climbed three 

15 

 
positions in the World Bank's Doing Business index4. 2013 ranking to the 9th place (out 
of 185 countries). Georgia's pro-business policy efforts, including numerous institutional 
and  regulatory  reforms,  made  it  the  top  performer  globally  since  2005  in  terms  of 
improving the business enviroment, according to the World Bank. Reforms have covered 
various  areas  such  as  fiscal  sustainability,  public  finance  management,  public 
procurement,  taxation  and  customs  regulations,  among  others.  The  central  bank's 
prudential instruments have been strenghtened, including through transition to risk-based 
supervision.  However,  concerns  about  the  independence  of  the  institution  emerged 
following the October elections, although they have not materialised for the time being. 
In order to encourage private investment, the authorities set up in 2011 a public financial 
institution, the Partnership Fund, which is expected to play an important role as part of 
the strategy of the new government to encourage economic activity. A special fund will 
also  be  established  to  support  the  development  of  the  large  agricultural  sector  in  the 
country. In 2012, Georgia steadily advanced in the talks on the establishment of a Deep 
and  Comprehensive  Free  Trade  Area  (DCFTA)  with  the  EU.  In  line  with  the  policy  of 
the  new  government,  trade  with  Russia  is  likely  to  be  revived,  opening  new  export 
possibilities. However, the very weak export base indicates the need for more vigorous 
measures  to  support  export-oriented  sectors  and  to  benefit  from  the  country's 
comparative  advantage  in  terms  of  closer  trade  integration  with  the  EU  and  Russia. 
Progress  is  still  needed  in  complying  with  core  ILO  conventions,  even  though  positive 
developments have recently been registered in this respect. 

3.4.  Implementation of macro-financial assistance 

The  EU  pledged  up  to  EUR  500  million  support  for  Georgia's  economic  recovery  at  a 
International  Donor  Conference  in  Brussels  in  October  2008,  in  the  aftermath  of  the 
military  conflict  with  Russia.  The  pledge  included  two  potential  MFA  operations, 
amounting to EUR 46 million each. The first part was successfully implemented in 2009-
2010. The Commission made in January 2011 a proposal for a second MFA programme 
of EUR 46 million, to be provided evenly in grants and loans. However, the adoption of 
this  decision  has  been  delayed  by  disagreements  between  the  two  co-legislators 
(European Parliament and Council) over the procedure to be used for the adoption of the 
Memorandum  of  Understanding,  which  lays  down  the  economic  policy  measures  to  be 
undertaken by the country benefiting from the MFA. While the two co-legislators agree 
with the substance of the proposal, this procedural dispute related to the entry into force 
of  the  new  "comitology"  regulation  in  March  20115  has  entailed  thorough  discussions, 
which are foreseen to result in a decision in mid 2013.  

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  85%  of 
products.  In September  2006,  the  number  of  tariff  bands  on  imported  goods  was  reduced 

4   The 2013 WB index covers ten topics related to the operation of a local business: starting a business, 
dealing with construction permits, getting electricity, registering a property, getting a credit, protecting 
investors, paying taxes, trading across borders, and enforcing contracts 

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

16 

 
                                                            
from  16  to  3  (0%,  5%  and  12%).  The  maximum  tariff  of  12%  is  applied  to  those 
agricultural  products  and  building  materials  which  compete  with  domestic  goods.  The 
average  weighted  tariff  is  estimated  to  be  1.5%.  There  are  no  quantitative  restrictions  on 
imports and exports.  

Since July 2005, under the EU Generalised System of Preferences (GSP), Georgia has been 
benefiting  from  the  tariff  preferences  of  the  special  incentive  arrangement  for sustainable 
development  and  good  governance  covering  7,200  items,  the  GSP+.  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 agreement foresees the establishment of a DCFTA, 
for  which  the  negotiations  started  in  February  2012.  This  will  provide  a  framework  for 
improving  the  trade  environment  in  Georgia  with  the  objective  of  strengthening  the 
country's economic and trade profile, thereby boosting both trade and investment.  

3. Exchange regime 

There  is  a  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 

The  major  monetary  policy  objective  of  the  National  Bank  of  Georgia  is  to  ensure  price 
stability.  Other  objectives,  pursued  only  if  they  do  not  contradict  with  the  price  stability 
goal,  incude  support  to  the  financial  system  of  the  country  and  promotion  of  economic 
growth.  The  Bank  is  currently  applying  an  inflation-targeting  regime.  The  price  gowth 
target  set  for  2012-14  is  6%  and  will  be  gradually  reduced  afterwards  to  3%.  The 
effectiveness of the monetary policy is significantly constrained by the high dollarization of 
the economy. The dollarization ratio of deposits to the non-bank sector amounted to 64 % 
at the end of 2012, increasing from 60% a year earlier. 

6. Public finances and taxation 

The  public  finance  management  system  is  essentially  sound  and  transparent,  although 
further  reforms  are  still  needed  in  areas  such  as  internal  financial  control  and  audit.  New 
legislation foreseen to come into force in 2014 will limit 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  has  been  privatised.  Privatisation  receipts  are 
expected to have declined to 0.5% of GDP in 2012 from estimated 1.6% in 2011. 

8. Financial Sector  

There were 19 banks at end-2012, including 14 foreign-controlled banks and 3 branches of 
non-resident  banks.  The  share  of  foreign  capital  in  the  banks'  paid-in  capital  was 
approximately  75%  at  end-2012.  The  share  of  non-performing  loans  increased  by  0.7% 
year-on-year to 9.3% at end-2012. The capital adequacy ratio remained unchanged on the 
year at 17.0%. The net profit of the banking sector more than halved in 2012, resulting in a 
reduction of the return on assets to 1.0% (from 2.9% at end-2011) and the return of equity 
to  5.8%  (17.3%).  Both  credit  and  deposits  rose  by  approximately  13%  year-on-year  in 
2012, after a 23% rise in 2011. 

17 

 
4.  UKRAINE 

4.1.   Executive summary 

In 2012, real GDP growth in Ukraine decelerated to a mere 0.2% compared to 5.2% in 
2011,  mainly  as  a  result  of  a  deteriorating  external  environment,  lower  demand  for 
Ukrainian  metal  exports  as  well  as  low  investment  levels.  Despite  the  slowdown  in 
growth  and  deflationary  tendencies,  the  National  Bank  of  Ukraine  kept  the  monetary 
policy  very  tight  in  an  attempt  to  fend  off  devaluation  pressures  on  the  local  currency. 
External vulnerabilities were growing as the current account deficit widened to 8.3% of 
GDP  and  currency  reserves  declined  by  almost  one  fourth  in  2012.  The  fiscal  deficit 
widened  to  5-6%  of  GDP  in  2012,  after  4.2%  in  2011,  mainly  due  to  fiscal  loosening 
ahead of the parliamentary elections and the rising level of energy subsidies 

Ukraine's  progress  in  achieving  important  structural  reforms  and  implementing  the 
priorities  of  the  EU-Ukraine  Association  Agenda,  foreseen  to  prepare  and  facilitate  the 
implementation  of  the  Association  Agreement  with  the  EU,    remained  uneven.  Some 
improvements  took  place  in  the  energy  sector  and  in  the  stabilisation  of  the  banking 
system.  However,  the  government  failed  to  increase  retail  energy  prices  towards  cost 
recovery  levels  and  thus  meet  one  of  the  IMF's  conditions  for  a  resumption  of 
disbursements  under  the  Stand-By  Arrangement,  which  expired  in  December  2012. 
There  has  been  no  improvement  of  the  operating  environment  for  businesses,  which 
remains  hampered  by  red  tape,  corruption,  insufficient  rule  of  law  and  continued 
constraints in companies’ access to credit.  

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 500 million of MFA to Ukraine. In combination with the EUR 110 
million  still  available  from  the  MFA  decision  adopted  in  2002,  this  implied  a  potential 
MFA package of up to EUR 610 million.  The Memorandum of Understanding (MoU) 
laying down the policy conditions for the disbursement of the assistance as well as the 
Loan  Agreement  (LA)  were  signed  and  entered  into  force  in  March  2013.  The  MoU 
contains  policy  measures  in  the  key  areas  of  public  finance  management,  trade  and 
taxation,  energy  sector  reform  and 
the  harmonisation  of  financial  regulation. 
Disbursements  of  MFA  in  2013  are  conditional  on  the  approval  of,  and  good  progress 
under, a new financing arrangement to eb agreed with the IMF and, for the second and 
third  tranches,  on  satisfactory  progress  in  the  implementation  of  the  structural  policy 
conditions laid down in the MoU.  

4.2.  Macroeconomic performance 

Real GDP growth slowed significantly in 2012 to 0.2%, after reaching 5.2% in 2011 and 
4.2%  in  2010.  The  main  factors  explaining  this  slowdown  were  the  more  challenging 
global  economic  environment,  tight  monetary  policy,  and  the  worsening  domestic 
business  climate.  The  economy  would  presumably  have  entered  recession  if  the 
government had not sustained public investment in the run-up to the Euro 2012 football 
championship  and  loosened  fiscal  policy  before  the  October  2012  parliamentary 
elections. Still, construction plummeted by 14% year-on-year, and industrial production 
declined  by  1.8%,  according  to  preliminary  statistics.  Economic  activity  is  expected  to 
recover  only  slightly  in  2013  and  2014.  The  external  outlook  and  the  slow  progress  in 
improving  the  business  environment  continue  to  cloud  growth  prospects  and  make  the 
3.4%  GDP  growth  forecast  of  the  Ukrainian  government  for  2013  appear  overly 
optimistic.  

18 

 
Inflation was at its lowest level for a decade as of year-end 2012, reaching -0.2% year-
on-year, as food prices declined, administrative tariffs were kept flat, and as the National 
Bank of Ukraine (NBU) kept the refinancing rate high at 7.5%, with a view to limiting 
downward pressure on the exchange rate. However, this trend may be reversed in 2013, 
as a result, among other things, of a possible increase in gas tariffs for households – the 
main pre-condition of the IMF for a new stand-by arrangement. Price dynamics will also 
depend on whether the NBU's focus will shift to inflation targeting in the medium term. 
Its  current  focus  on  supporting  the  currency  has  resulted  in  a  decline  of  the  foreign 
exchange reserves by about one fourth in 2012, to USD 24.5 billion, which would cover 
2.8  months  of  imports.  While  administrative  measures  and  market  interventions  to 
stabilize the hryvnya provided some short-term relief, the currency peg is unsustainable 
in the medium term against the background of a persistently large current account deficit 
and slowing growth. As a consequence of the NBU's restrictive approach to the provision 
of  refinancing  to  banks,  overnight  inter-bank  interest  rates  exceeded  45%  in  the  third 
quarter of 2012, resulting in prohibitively high interest rates on credits to households and 
businesses. However, they later declined to about 25% at the end of 2012 as the liquidity 
situation in the banking system improved somewhat. 

While  Ukraine  successfully  reined  in  its  budget  deficit  following  the  2008-2009  crisis, 
recent trends have been less positive, and the overall budget deficit reached an estimated 
6% of GDP in 2012 after 4.2% in 2011. Apart from fiscal loosening ahead of the 2012 
parliamentary elections, an important factor contributing to the deficit is the state-owned 
oil  and  gas  company  Naftogas,  which  sells  natural  gas  to  households  and  utilities  at 
prices which are significantly below cost-recovery levels. Naftogas' deficit reached about 
1.7%  of  GDP  in  2012,  and  will  continue  to  remain  at  similarly  high  levels  unless  the 
government  implements  the  gas  price  increases  recommended  by  the  IMF.  The  public 
debt  ratio  has  increased  significantly  in  recent  years,  to  approximately  37%  of  GDP  at 
the  end  of  2012  from  only  12%  of  GDP  in  2007.  Although  it  remains  at  a  relatively 
manageable  level,  the  debt  ratio  may  further  increase  as  a  result  of  delays  in  the 
adjustment of gas prices and the slowdown in economic activity.  

The  balance  of  payments  situation  continued  to  deteriorate  in  2012,  with  the  current 
account deficit widening to 8.4% of GDP from 6.2% a year earlier, as a result of higher 
energy import prices and weak external demand for traditional Ukrainian exports, mainly 
steel, and despite a pickup of agricultural exports. There are also significant risks to the 
financial  account  if  foreign  banks  continue  to  deleverage  and  if  the  current  trend  of 
subdued FDI inflows, in the context of a deteriorating business climate, persists. FDI fell 
to  an  estimated  USD  6  billion  in  2012,  out  of  which  USD  5  billion  originated  from 
Cyprus, compared to USD 7 billion in 2011. Overall, Ukraine's vulnerability to external 
shocks, such as a new oil price spike or a slump in steel prices, remains high.  

4.3.  Structural reforms 

Ukraine's  achievements  in  the  implementation  of  structural  reforms  remained  below 
expectations in 2012. 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  investment  climate  deteriorated 
further. These challenges are reflected in Ukraine's low ratings, by regional comparison, 
in  a  number  of  comparative  studies,  including  the  World  Bank's  Doing  Business  Index 
(137th  out  of  185),  the  Transparency  International  Corruption  Perceptions  Index  (144th 
out  of  176),  the  Economic  Freedom  Index  (Heritage  Foundation,  161st  out  of  177)  and 
the Press Freedom Index (Reporters Without Borders, 126th out of 179). 

19 

 
Insufficient progress has been achieved in the area of public finance management. Apart 
from the insufficient remit and capacity of the Supreme Audit Institution (the Accounting 
Chamber of Ukraine, see section below), a key concern remains the public procurement 
system. While the public procurement law adopted in July 2010 was a step in the right 
direction,  the  public  procurement  system  is  not  in  line  with  European  standards  and  is 
weakened by an excessive number of exceptions, e.g. for state-owned enterprises. More 
work  also  needs  to  be  done  to  create  an  effective  system  of  public  internal  financial 
control  and  to  improve  the  budgeting  system.  As  regards  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 were part of the IMF programme have not been met.  

Another  important  area  where  significant  work  still  has  to  be  completed,  even  though 
some  progress  has  been  registered  recently,  is  the  reform  of  the  energy  sector.  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.  Some 
progress  has  been  made  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,  although  a  January  2012  deadline  for 
unbundling was missed. A law allowing for the unbundling to take place was adopted in 
April 2012, and progress was made in the regulation of the gas market, in line with the 
new gas law. On the other hand, progress in improving energy efficiency has been slow, 
mainly as a result of the  high subsidies for gas consumption.  

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 been relatively high at about 18 % over the 
last two years, and the deposit base resilient, albeit with some evidence of switching from 
local  currency  to  US  dollars.  One  issue  of  concern  is  the  high  percentage  of  non-
performing loans, which were estimated at between 14% and 48% in 2012, depending on 
the methodology applied. Loan growth has been negative and the market share of foreign 
banks decreased in 2012. 

On the positive side, the EU and Ukraine initialled the Association Agreement (AA) in 
March  2012,  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. 

4.4.  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 110 million loan available 
from Council Decision 2002/639/EC, this translates into a total amount of up to EUR 610 
million.  

20 

 
Discussions  on  the  Memorandum  of  Understanding  (MoU)  laying  down  the  economic 
policy  measures  to  be  undertaken  by  Ukraine  and  the  Loan  Agreement  (LA)  were 
launched in July 2010 by a mission of Commission staff to Ukraine. Negotiations took 
longer  than  expected  and  were  concluded  in  late  2012,  after  the  Ukrainian  authorities 
lifted their reservations on some key policy conditions. Both documents were signed in 
March  2013.  The  payment  of  the  first  tranche  (EUR  100  million)  is  conditional  on  the 
IMF arrangement currently negotiated by Ukraine being in place, and funds being drawn 
under this new IMF programme. The disbursement of the second and third tranches, of 
EUR 260 million and 250 million respectively, will also be subject to the fulfilment of 
the policy conditions laid down in the MoU,  which 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.  

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 646/2010/EU, which stipulate 
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).  

The PFM was a key element in the negotiations on the MoU. Apart from the framework 
for  public  procurement  (see  above),  a  major  point  of  discussions  has  been  Ukraine's 
current  legislation  on  external  audit,  which  should  be  brought  in  line  with  generally 
accepted  international  practices  and  the  Mexico  Declaration  of  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.  Positively,  the 
Ukrainian authorities agreed to remedy the situation during the last round of negotiations 
in  2012.  In  January  2013,  President  Yanukovich  introduced  a  draft  law  to  Parliament 
which would, if adopted, allow the ACU to audit the revenue side of the budget. 

The  issue  of  the  substantial  arrears  accumulated  on  VAT  refunds  is  closely  related  to 
PFM.  The  MoU  stipulates  that  these  arrears,  which  hurt  the  affected  exporters  and 
contribute  to  weaken  the  overall  investment  climate,  should  be  eliminated,  while 
improvements  in  tax  administration  should  prevent  a  recurrence  of  the  problem  in  the 
future. The MoU measures 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 
was done in 2010.  

As noted, the energy sector reform has accelerated recently. The MoU refers to Ukraine's  
commitment  to  fully  implement  the  EU  Directive  2004/55,  which  foresees  the 
unbundling  of  the  production,  transport  and  delivery  segments  of  gas  sector.  Although 
progress  has  been  uneven,  the  EU  and  the  World  Bank  are  in  close  contact  with  the 
Ukrainian authorities regarding the reform of Naftogas, Ukraine's oil and gas monopolist. 
Moreover,  the  MoU  contains  conditions  related  to  the  payment  discipline  of  utility 
consumers and the targetting of subsidies in the energy sector. 

21 

 
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  hryvnya  against  the  US 
dollar,  maintaining  an  exchange  rate  close  to  UAH  8  per  USD  throughout 2012.  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 throughout 2012. 

6.  Public finances  

General  government  expenditure  made  up  an  estimated  46%  of  GDP  in  2012.  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,  including  in  the  areas  of  public  procurement,  public  internal  financial 
control,  external  audit  and  VAT  refunds,  which  are  crucial  elements  of  the  MoU  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, mainly energy generating and distributing companies were privatised in 2012.  

8.  Financial sector reform  

At  the  end  of  2012,  176  banks  were  operating  in  Ukraine,  including  22  foreign-owned  banks. 
Consolidation and recapitalisation of the banking sector remain key priorities for Ukraine. The 
amount of non-performing loans remains high.  

22 

 
 
5. 

THE KYRGYZ REPUBLIC 

5.1.  Executive summary 

In  2012,  economic  growth  of  the  Kyrgyz  Republic  was  limited  to  0.9%,  significantly 
below  earlier  forecasts,  as  production  in  the  gold-mining  sector  sharply  contracted 
because  of  geological  issues.  Excluding  the  gold-mining  sector,  growth  reached  about 
4.8% in 2012, driven by manufacturing, construction and services, gradually recovering 
from  the  sharp  slowdown  in  2009  and  2010  caused  by  global  recession  and  internal 
political and ethnic conflicts. The current account deficit widened to an estimated 9% of 
GDP in 2012, reflecting a decline in gold exports and higher oil prices. Despite a tight 
monetary  policy,  inflation  reached  7.5%  by  the  end  of  2012  on  account  of  rising 
international fuel and food prices. The overall fiscal deficit declined to an estimated 5.3% 
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. 
However, the adoption of the decision on a MFA operation to the Kyrgyz Republic has 
been delayed by disagreements between the two co-legislators (European Parliament and 
Council) over the procedures to be used for its implementation. It can be expected that 
the MFA will be adopted by the co-legislators in 2013 and that a first disbursement could 
still take place in that year.  

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 2013 and 2014, which are partly due to the 
economic  disruptions  and  the  social  and  reconstruction  expenditure  for  alleviating  the 
consequences of the 2010 events, 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  IMF's  ECF  programme  has  been  sustained  so  far:  the  Kyrgyz 
Republic, in the framework of the third review of the programme conducted during the 
fall of 2012, was meeting all end-June 2012 quantitative programme targets, and all but 
one structural benchmarks.  

5.2.  Macroeconomic performance 

The  popular  revolt  in  April  2010  and,  more  importantly,  the  escalation  of  the  ethnic 
conflict  in  June  2010  had  a  strong  negative  impact  on  economic  growth  in  the  Kyrgyz 
Republic, resulting in a 0.5% decline in real GDP in 2010. In 2011, real GDP expanded 
by  5.7%,  supported  by  a  more  stable  political  situation,  and  the  recovery  of  the 

23 

 
 
agricultural  and  mining  sectors  as  well  as  of  remittances.  In  2012,  real  GDP  growth  is 
foreseen  to  be  limited  to  0.9%  ,  as  production  in  the  gold-mining  sector  sharply 
contracted  (-63%  in  the  first  nine  months  of  2012)  because  of  geological  issues  at  the 
major Kumtor gold mine. Excluding the gold-mining sector, growth reached an estimated 
4.8% in 2012, driven by manufacturing, construction and services. This trend is foreseen 
to continue in 2013 and, coupled with a sharp increase in gold production, is expected to 
result in a 7.5% real GDP growth in 2013.  

Year-on-year inflation has been very volatile over the last few years, spiking from 0% at 
the end of 2009 to 22.7% in June 2011 because of a sharp increase in the global prices of 
food  and  fuel,  then  declining  to  5.7%  at  the  end  of  2011  thanks  to  an  easing  of  global 
food prices and a tightening of the monetary policy by the central bank (sales of short-
term notes in order to mop-up excess liquidity, an increased discount rate and increased 
reserve  requirements).  In  2012,  despite  a  still  tight  monetary  policy,  inflation  reached 
7.5%  as  a  result  of  economic  growth  (excluding  the  gold-mining  sector)  and  rising 
international food and fuel prices. 

In  2010,  the  fiscal  deficit  reached  6.3%  of  GDP,  reflecting  the  budgetary  cost  of  the 
crisis-related  measures  and  the  negative  effect  of  weaker  economic  activity  on  tax 
revenues. In 2011, a stronger revenue collection and delays in implementing post-conflict 
reconstruction projects led to a slight decrease of the budget deficit to 4.8% of GDP. In 
2012, the deficit increased to about 5.3% of GDP, despite stronger revenue growth, due 
to the impact of 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 55% of GDP at 
end-2010, reflecting new loans by international financial institutions and other donors. It 
has  gradually  been  decreasing  since,  reaching  about  47%  of  GDP  at  year-end  2012, 
mostly  thanks  to  debt  forgiveness  by  some  creditors  (most  recently  from  Russia  and 
Turkey).  

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 6.4% of GDP, as the conflict 
and  ethnic  violence  led  to  a  shutdown  of  the  borders  by  the  neighbouring  countries, 
which  had  a  negative  impact  on  agricultural  exports  and  services  such  as  tourism  and 
transit transportation. The current account remained at a similar level in 2011, at 6.3% of 
GDP,  as  strong  remittances  and  increased  earnings  from  gold  exports  were  more  than 
offset by increased domestic demand and imports for large energy and mining projects. 
For 2012, the current account deficit is expected to widen further to about 9% of GDP, 
reflecting  higher  oil  prices  and  a  decline  in  gold  exports.  Overall,  the  current  account 
position  remains  vulnerable  to  external  trade  shocks,  including  an  increase  in  prices  of 
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 annual surplus of USD 330 million, reflecting 
sizeable external loans for public investment projects and sustained FDI.  

Official foreign exchange reserves reached USD 1.97 billion (EUR 1.48 billion) by the 
end  of  2012,  and  the  import  coverage  ratio  by  the  foreign  exchange  reserves  declined 
from 4.0 months at year-end 2010 to an estimated 3.7 months at year-end 2012.  

5.3.  Structural reforms 

Political uncertainty arose from the breakup of the coalition government in August 2012. 
However,  the  new  government  quickly  took  over  the  ongoing  essential  structural 
reforms,  continuing  the  Kyrgyz  authorities'  efforts  to  improve  the  business  climate, 

24 

 
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  185  with  regard  to  the  ease  of  doing  business,  while  the  regional 
average of Eastern Europe and Central Asia stands at 74. 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. 
However,  despite  progress  with  reforms,  the  Kyrgyz  Republic  still  faces  serious 
structural weaknesses. Cross border trading,  taxes' collection and access to the reliable 
and  affordable  electricity  still  remained  very  problematic  areas.  Further  efforts  are  also 
necessary to strenghten property rights and fight corruption.  

The  banking  system  was  severely  affected  by  the  crisis.  The  level  of  nonperforming 
loans was almost 16% at the beginning of 2011, but has been gradually declining to 9.0% 
by  June  2012.  In  April  2010,  seven  banks  were  put  under  temporary  administration. 
Subsequently, two banks were released from temporary administration, four were placed 
under conservatorship and the biggest one - Asia Universal Bank - was nationalised and 
separated into a "bad bank" and a "good bank" (called Zalkar Bank). The role of the state 
in the banking system should be reduced, and there is a pressing need for the authorities 
to restore trust in the banking system through successful and transparent privatization of 
major  banks.  However,  several  attempts  by  Kyrgyz  authorities  to  privatise  the  Zalkar 
Bank  have  already  failed,  the  5th  auction  of  the  bank  being  cancelled  in  January  2013 
because of the lack of bidders. Should the sale of the bank not materialize, its liquidation 
may  be  the  only  remaining  option.  The  banking  crisis  also  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  domestic 
financial sector remains underdeveloped, lending interest rates are high and a significant 
part of loans and deposits are denominated in foreign currency.  

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 institution) is broadly adequate but 
the  capacities  of  this  institution  need  to  be  developed.  The  World  Bank  is  providing 
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  of  its  exports  (41%  in  2010,  32%  in  2011)  goes  to 
Uzbekistan,  Russia  and  Kazakhstan.  In  October  2011,  Kyrgyzstan  applied  for 
membership of a trilateral customs union (CU) between Russia, Kazakstan and Belarus. 
The  main  benefits  Kyrgyzstan  expects  to  obtain  from  entering  this  CU,  apart  from 
possible  foreign  policy  considerations,  is  to  preserve  the  supply  of  oil  and  gas  from 
Russia and Kazakhstan at favourable prices and to limit the risk of disruptions in trade 
flows with those important trading partners. Entering the CU would entail a number of 
significant  costs,  however.  First,  it  could  jeopardize  the  Kyrgyz  relationship  with  the 
WTO, since the CU has relatively high Common External Tariff (CET). What is more, a 
high  tariff  would  diminish  Kyrgyzstan's  ability  to  import  and  re-export  inexpensive 
Chinese  goods,  restricting  the  important  transit  trade  with  China,  which  provides 
employment to thousands of people in Kyrgyzstan.  

25 

 
5.4.  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 loans and EUR 15 million in grants.  

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.  

In order to ensure that the Kyrgyz public finance management system provides sufficient 
safeguards for the provision of MFA, the EC undertook an Operational Assessment (OA) 
of the Kyrgyz financial circuits and procedures in June 2012. The OA mission concluded 
that,  despite  weaknesses  in  internal  and  external  audit  and  the  need  for  further 
improvements  in  several  other  areas,  the  Public  Finance  Management  system  in  the 
Kyrgyz Republic was sufficiently solid to provide reasonable assurance about the use of 
the MFA funds to be provided by the EC.  

The disbursement of MFA will be conditional on the satisfactory implementation of the 
economic  programme  agreed  with  the  IMF  and  of  a  series  of  policy  measures  to  be 
agreed  between  the  Commission  and  the  Kyrgyz  authorities  in  a  Memorandum  of 
Understanding  (MoU).  The  MoU  conditions  are  expected  to  focus  on  PFM  reforms, 
coherent  with  the  PFM  conditions  attached  to  the  budget  support  programme  provided 
under the Development Cooperation Instrument and drawing on the recommendations of 
the OA, as well as measures in other key structural reform areas, including the banking 
sector. 

However, the adoption of the EC decision on a MFA operation to Kyrgyzstan has been 
delayed  by  disagreements  between  the  two  co-legislators  (European  Parliament  and 
Council) over the procedures to be used for its implementation. It can be expected that 
the MFA will be adopted by the co-legislators in 2013 and that a first disbursement could 
still take place in that year. 

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 2013. 

26 

 
 
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 ones 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. 

6.  Public finances  

The IMF programme assumes a considerable effort of fiscal consolidation for the remainder 
of  the  programme  period,  with  the  fiscal  deficit  targeted  to  decline  gradually  to  3.9%  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, but in the banking sector, progress has been very slow. In particular, several 
attempts by the Kyrgyz authorities to privatise the large Zalkar Bank have already failed, the 
5th auction of the bank being cancelled in January 2013 because of the lack of bidders. 

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. 

27 

 
 
ANNEXES 

28 

 
 
 
Hungary II
(Loan)

Bulgaria I 
(Loan)

Romania I
(Loan)

Israel1
(Loan)

Algeria I
(Loan)

Albania I
(Grant)

Bulgaria II
(Loan)

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 2012 (in millions of €) 

Authorisations

Disbursements

Country 

Date of
Decision

Reference of Maximum

Decision

amount

Dates of
disbursements

Amounts of
disbursements disbursed

Totals Undisbursed

Hungary I
(Loan)

22.02.90

90/83/EC

870

Czech and 
Slovak Federal Republic

25.02.91

91/106/EC

375

24.06.91

91/310/EC

180

24.06.91

91/311/EC

290

22.07.91

91/384/EC

375

260
(expired)

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

22.07.91

91/408/EC

187,5

Mar. 1992

187,5

187,5

23.09.91

91/510/EC

400

28.09.92

92/482/EC

70

19.10.92

92/511/EC

110

Jan. 1992
Aug. 1994

Dec. 1992
Aug. 1993

Dec. 1994
Aug .1996

Baltics
(Loans); of which:

23.11.92

92/542/EC

220

    Estonia
    Latvia
    Lithuania

Romania II
(Loan)

Moldova I
(Loan)

Romania III
(Loan)

Albania II
(Grant)

(40)
(80)
(100)

March 1993
March 1993
July 1993
Aug. 1995

27.11.92

92/551/EC

80

Feb. 1993

13.06.94

94/346/EC

45

20.06.94

94/369/EC

125

28.11.94

94/773/EC

35

Dec. 1994
Aug. 1995

Nov. 1995
Sep. 1997
Dec. 1997

June 1995
29 
Oct. 1996

85
(expired)

(20)
(40)
(25)

250
150

35
35

70
40

20
40
50
25

80

25
20

55
40
30

15
20

400

70

110

135

(20)
(40)
(75)

80

45

125

35

 
 
100
(cancelled)

130
(cancelled)

25
(cancelled)

85

30

200

15

40

250

294,5

80,5

(58)

(141,5)

(33,5)

22.12.94

94/938/EC

200

Nov. 1995

100

100

Algeria II
(Loan)

Slovakia
(Loan)

Ukraine I
(Loan)

Belarus
(Loan)

Ukraine II
(Loan)

Moldova II
(Loan)

22.12.94

94/939/EC

130

July 1996

22.12.94

94/940/EC

85

Dec. 1995

10.04.95

95/132/EC

55

Dec. 1995

23.10.95

95/442/EC

200

Aug. 1996
Oct. 1996
Sep. 1997

25.03.96

96/242/EC

15

Dec. 1996

Former Yugoslav
Republic of Macedonia I
(Loan)

22.07.97

97/471/EC

40

Bulgaria III
( Loan)

22.07.97

97/472/EC

250

Sep. 1997
Feb. 1998

Feb. 1998
Dec. 1998

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)

375

(328)

(58)

(175)

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)

30 

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

 
 
   Tajikistan
   (Loan and grant)

(95)

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

Ukraine III
(Loan)

15.10.98
12.07.02

98/592/EC
02/639/EC

150

July 1999

Albania III
( Loan)

22.04.99

99/282/EC

20

Bosnia I3
(Loan and grant) modified by

10.05.99

99/325/EC

60

10.12.01

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 )

08.11.99

99/732/EC

200

19.02.00

00/140/EC

35

22.05.00

00/355/EC

20

Moldova III
(Loan)

10.07.00
19.12.02

00/452/EC
02/1006/EC

15

Kosovo II3
(Grant) 

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

27.06.01

01/511/EC

30

16.07.01

01/549/EC

345

modified by

10.12.01

01/901/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)

31 

(95)

58

92
(cancelled)

20

60

100

98

150

50

35

20

30

345

15
(cancelled)

60
7
7
7
7
7

58

15
10
10
10
15

40
60

20
10
12
10
10
10
18
8

100
50

20
15

7
13

15
15

225
35
40
45

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

12.07.02

02/639/EC

110

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

110
(ongoing)

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

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)

07/12/2004

04/861/EC

the balance of Dec. 2004 (loan)
June 2005 (grant)
Feb. 2006 (loan)

02/883/EC

07.12.2004

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

04/862/EC

the balance of April 2005 (loan)
Dec. 2005 (grant)

03/825/EC

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

10.12.07

07/860/EC

80

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

Dec. 2008 (grant) 
June 2009 (loan)

Lebanon10
(Loan and grant)

Georgia
(Grant)

30.11.09

09/889/EC

46

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

15,3
7,7
23

32 

15
(cancelled)

20
 the rest was 
paid under
04/862/EC

11,5
(expired)

20
(expired)

40
(expired)

25

35

40

22

30

45

40

46

 
 
Armenia11

30.11.09

09/890/EC

100

(Loan and grant)

June 2011 (grant)
July 2011 (loan)
Dec. 2011 (grant)
Feb. 2012 (loan)

14
26
21
39

100

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)
Apr. 2012 (grant)

40
20
30

90

100
(ongoing)

100
(expired)

500
(ongoing)

TOTAL

7440

5641

1799

1 Assistance to Israel includes a loan principal amount of € 160 million and grants of € 27.5 million in the form of interest su
2 Exceptional financial assistance, which includes a ceiling of € 245 million for the loans and a ceiling of € 130 million for t
  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

bsidie
he gran

33 

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

Status of effective disbursements as of end-December 2012 (in millions of €) 

Authorisations

Disbursements

Country 

Date of
Decision

Reference of
Decision

Maximum
amount

Dates of
disbursements

Amounts of
disbursements

Totals Undisbursed

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

Hungary II
(loan)

Romania I
(Loan)

Romania II
(Loan)

Romania III
(Loan)

Romania  IV
(Loan)

Slovakia
(Loan)

TOTAL A

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

3305

34 

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

260
(cancelled)

180

375

80

125

150

50

130
(cancelled)

2780

525

 
 
B. Western Balkans

Albania I
(Grant)

Albania II
(Grant)

Albania III
(Loan)

28.09.92

92/482/EC

70

28.11.94

94/773/EC

22.04.99

99/282/EC

35

20

Dec. 1992
Aug. 1993

June 1995
Oct. 1996

Bosnia I1
(Loan and grant)

10.05.99

99/325/EC

60

modified by

10.12.01

01/899/EC

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

Former Yugoslav Republic
of Macedonia I (Loan)

22.07.97

97/471/EC

40

Sep. 1997
Feb. 1998

Former Yugoslav Republic
of Macedonia II2
(Loan and grant)

08.11.99

99/733/EC

modified by

10.12.2001

01/900/EC

80

18

Kosovo I3
(Grant)

Kosovo II3
(Grant)

19.02.00

00/140/EC

35

27.06.01

01/511/EC

30

Montenegro3
(Grant budgetary support)

22.05.00

00/355/EC

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

35 

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

 
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
(ongoing)

100
(expired)

TOTAL B

1388

1103

285

C. New Independent States (NIS)

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

17.11.97
modified by
28.3.00

97/787/EC

00/244/EC

375
downsized to

294,5

80,5

   Armenia

   Georgia

   Tajikistan

Belarus
(Loan)

Moldova I
(Loan)

Moldova II
(Loan)

Moldova III
(Loan)

Moldova IV
(Grant)

(328)

(58)

(175)

(95)

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)

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

(58)

(141,5)

(33,5)

(95)

30

45

15

25
(cancelled)

15
(cancelled)

15
(cancelled)

10.04.95

95/132/EC

55

Dec. 1995

Dec. 1994
Aug. 1995

Dec. 1996

13.06.94

94/346/EC

45

25.03.96

96/242/EC

10.07.00
19.12.02

00/452/EC
02/1006 EC

15

15

19.12.02

02/1006/EC

15

36 

 
Ukraine I
(Loan)

Ukraine II
(Loan)

Ukraine III
(Loan)

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

Ukraine (Loan)

29.06.10

388/10//EU

500

Moldova (Grant)

20.10.10

938/2010/EU

90

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)
Feb. 2012 (loan)

Dec. 2010 (grant)
Sept. 2011 (grant)
Apr. 2012 (grant)

11
11

20
10
15

15,3
7,7
23

14
26
21
39

40
20
30

22

45

46

100

90

92
(cancelled)

110
(ongoing)

11,5
(expired)

500
(ongoing)

TOTAL C

1879,5

1030,5

849,0

D. Mediterranean countries

Israel11
(Structural adjustment soft loan)

22.07.91

91/408/EC

187,5

March 1992

187,5

187,5

Algeria I
(Loan)

Algeria II
(Loan)

Lebanon12

TOTAL D

TOTAL A+B+C+D

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
(expired)

867,5

7440

37 

727,5

140

5641

1799

 
 
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
  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

e grants

38 

 
 
Annex 2: MFA amounts authorised by year over 2003-2012 (in EUR million)  

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012      Total

By region
Western Balkans
Newly Independent States (NIS)
Mediterranean
Total amounts authorised1
Loans
Grants

70

25

70
25
45

25
9
16

0

50
33,5

83,5
0
83,5

45
80

125
50
75

300
146

446
365
81

590

590
500
90

0
0
0

0

445
814,5
80

0 1339,5
949
390,5  

Chart 2A: MFA amounts authorised by year over 2003-2012 (in EUR million) 

Chart 2B: MFA amounts authorised by regions over 2003-2012 

39 

 
 
 
 
 
 
 
 
Annex 3: MFA amounts disbursed by year over 2003-2012 (EUR million)  

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012     Total

By region
Central European Candidate Countries
Western Balkans
Newly Independent States (NIS)
Mediterranean
Total amounts disbursed1
Loans
Grants

50
146
7

203
118
85

20
12

32
10
22

58
8,5

66,5
15
51,5

32
29

61
19
42

20

20
0
20

25
15

40
0
40

15,3
25

40,3
25
15,3

30
70,7

100,7
0
100,7

100
81

181
126
55

69

69
39
30,0

50
386
337,5
40

813,5
352
461,5  

Chart 3A: MFA amounts disbursed by year over 2003-2012 (in EUR million) 

Chart 3B: MFA amounts disbursed by regions over 2003-2012 

40