Progress towards meeting the economic criteria for EU accession : the EU Commission’s 2013 assessments.
Date: 2014-01-20
Institutions: Directorate-General for Economic and Financial Affairs
Subjects: Albania, Bosnia and Herzegovina, Iceland, Kosovo, Montenegro, North Macedonia, Serbia, Türkiye, accession criteria, accession to the European Union, economic analysis, medium-term forecast, pre-accession strategy, structural adjustment

ISSN 1725-3209

EUROPEAN  
ECONOMY

Occasional Papers 166 | December 2013

Progress towards meeting the economic criteria for 
EU accession: the EU Commission’s 2013 assessments 

Economic and 
Financial Affairs

Occasional Papers are written by the Staff of the Directorate-General for Economic and Financial 
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Commission.  

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Reproduction is authorised provided the source is acknowledged. 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
European Commission 

Directorate-General for Economic and Financial Affairs 

Progress towards meeting the 
economic criteria for EU accession:  

the EU Commission's 2013 assessments  

EUROPEAN ECONOMY 

    Occasional Papers 166 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CONTENTS 

Introduction 

Progress towards meeting the economic criteria for EU accession: 
the EU Commission's 2013 assessments 

1. 

2. 

Iceland 
1.1. 
1.2. 

The existence of a functioning market economy 
The capacity to cope with competitive pressure and market forces 
within the Union 

1.3.  Conclusions 
the former Yugoslav Republic of Macedonia 
2.1. 
The existence of a functioning market economy 
2.2. 
The capacity to cope with competitive pressure and market forces 
within the Union 

2.3.  Conclusions 

3.  Montenegro 

3.1. 
3.2. 

The existence of a functioning market economy 
The capacity to cope with competitive pressure and market forces 
within the Union 

3.3.  Conclusions 
Serbia 
4.1. 
4.2. 

The existence of a functioning market economy 
The capacity to cope with competitive pressure and market forces 
within the Union 

4.3.  Conclusions 
Turkey 
5.1. 
5.2. 

The existence of a functioning market economy 
The capacity to cope with competitive pressure and market forces 
within the Union 

4. 

5. 

5.3.  Conclusions 

6.  Albania 
6.1. 
6.2. 

The existence of a functioning market economy 
The capacity to cope with competitive pressure and market forces 
within the Union 

6.3.  Conclusions 

7.  Bosnia and Herzegovina 

7.1. 
7.2. 

The existence of a functioning market economy 
The capacity to cope with competitive pressure and market forces 
within the Union 

7.3.  Conlusions 

8.  Kosovo* 
8.1. 
8.2. 

The existence of a functioning market economy 
The capacity to cope with competitive pressure and market forces 
within the Union 

8.3.  Conclusions 

A.1. Abbreviations 

1 

5 

6 
6 

10 
12 
13 
13 

17 
19 
20 
20 

24 
26 
27 
27 

32 
34 
35 
35 

40 
41 
43 
43 

47 
49 
51 
51 

55 
57 
58 
58 

62 
64 
65 

_______________ 
*  This designation is without prejudice to positions on status, and is in line with UNSCR 1244/1999 and the ICJ Opinion on 

the Kosovo declaration of independence. 

iii 

 
 
LIST OF TABLES 

1.1. 
2.1. 

3.1. 
4.1. 
5.1. 
6.1. 
7.1. 
8.1. 

Iceland - Main economic trends 
the former Yugoslav Republic of Macedonia -  
Main economic trends 
Montenegro - Main economic trends 
Serbia - Main economic trends 
Turkey - Main economic trends 
Albania - Main economic trends 
Bosnia and Herzegovina - Main economic trends 
Kosovo* - Main economic trends 

7 

14 
21 
28 
36 
44 
52 
59 

iv 

 
 
 
 
 
INTRODUCTION 

In this Occasional Paper the Directorate General for Economic and Financial Affairs brings together 
into a single document the economic chapters of the 2013 European Commission's Progress Reports, 
i.e.  the  Staff  Working  Documents  for  each  candidate  country  and  potential  candidate  for  EU 
accession.( 1) The Commission prepared reports for the five candidate countries the former Yugoslav 
Republic  of  Macedonia,  Iceland,  Montenegro,  Serbia  and  Turkey  as  well  as  for  the  three  potential 
candidates  Albania,  Bosnia  and  Herzegovina,  and  Kosovo.  The  European  Commission  adopted  the 
Progress Reports on 16 October 2013.   

This introduction explains the methodology  underlying these Reports that the Commission has been 
following since 1997 in order to carry out these assessments. 

The  purpose  of  this  Occasional  Paper  is  to  facilitate  the  work  of  those  scholars,  researchers  and 
analysts of the enlargement process,  who are  mainly interested in  the economic aspects. As such, it 
represents  only  a  part  of  the  overall  progress  made  by  the  candidate  countries  and  the  potential 
candidates towards meeting the accession criteria. A proper full-fledged assessment of progress made 
under all examined aspects can be found in the 2013 Progress Reports.  

The methodology of the Progress Reports  

In  1993,  the  Copenhagen  European  Council  identified  the  economic  and  political  requirements 
candidate countries will need to fulfil to join the EU.  It also concluded that accession could take place 
as soon as they were capable of fulfilling them.   

The criteria are: 

− 

− 

− 

the  political  criteria  -  stability  of  institutions  guaranteeing  democracy,  the  rule  of  law,  human 
rights, and respect for and protection of minorities; 

the economic criteria - the existence of a functioning market economy as well as the capacity to 
cope with competitive pressure and market forces within the Union; 

the institutional criteria - the ability to take on the obligations of membership including adherence 
to the aims of political, economic and monetary union, which includes the whole range of policies 
and measures that constitute the acquis of the Union. Candidate countries must adopt, implement 
and  enforce  the  acquis.  This  requires  the  administrative  capacity  to  transpose  European 
Community  legislation  into  national  legislation,  to  implement  it  and  to  effectively  enforce  it 
through appropriate administrative and judicial structures.  

The European Commission first assessed progress made by the then candidate countries with respect 
to  these  criteria  in  the  1997  Opinions.    Thereafter,  the  Commission,  at  the  request  of  the  Council, 
submitted annual Regular  Reports (as of 2005 called Progress Reports) to the Council  assessing the 
further progress achieved by each country on their fulfilment. These reports have served as one of the 
elements for the Council to take decisions on the conduct of negotiations and on the definition of the 
pre-accession strategy. Since 2005, also the potential candidate countries are assessed according to the 
same format and methodology. 

(1)  In the case of  Iceland, the Commission's staff working document (SWD) contains a brief assessment of compliance with 
the  accession  criteria,  covering  progress  made  by  Iceland  in  the  period  September  2012  to  May  2013,  when  the  new 
Icelandic government decided to cease contributing to the SWD. This Occasional Paper however contains the full-fledged 
economic assessment as prepared by ECFIN staff. 

1 

 
                                                           
The economic sub-criteria 

Regarding the economic criteria, the Commission  has examined progress achieved during each  year 
on  the  basis  of  a  number  of  sub-criteria  applied  since  1997.  According  to  these  the  existence  of  a 
functioning market economy requires that: 

−  equilibrium  between  demand  and  supply  is  established  by  the  free  interplay  of  market  forces; 

prices, as well as trade, are liberalised; 

−  significant barriers to market entry (establishment of new firms) and exit (bankruptcies) are absent; 

− 

the legal system, including the regulation of property rights, is in place; laws and contracts can be 
enforced; 

−  macroeconomic  stability  has  been  achieved  including  adequate  price  stability  and  sustainable 

public finances and external accounts; 

−  broad consensus exists about the essentials of economic policy; 

− 

the  financial  sector  is  sufficiently  well  developed  to  channel  savings  towards  productive 
investment. 

The capacity to withstand competitive pressure and market forces within the Union is assessed on the 
basis of the following factors:  

− 

the  existence  of  a  functioning  market  economy,  with  a  sufficient  degree  of  macroeconomic 
stability for economic agents to make decisions in a climate of stability and predictability; 

−  a sufficient amount, at appropriate costs, of human and physical capital, including infrastructure, 

education and research, and future developments in this field; 

− 

− 

− 

the  extent  to  which  government  policy  and  legislation  influence  competitiveness  through  trade 
policy, competition policy, state aids, support for SMEs, etc.; 

the degree and the pace of trade integration a country achieves with the Union before enlargement.  
This applies both to the volume and the nature of goods already traded with Member States; 

the  proportion  of  small  firms,  partly  because  small  firms  tend  to  benefit  more  from  improved 
market access, and partly because a dominance of large firms could indicate a greater reluctance to 
adjust. 

It is important to note that these conditions do not serve as a simple checklist.  First, the interplay and 
interaction  of  all  conditions,  and  their  mutually  reinforcing  effects  on  the  economy,  are  pertinent.  
Second, there is an important time dimension involved.  Meeting the economic criteria requires deep 
and lasting structural reforms that take time to be accomplished.  The issue of track record becomes 
then very relevant.  In this context, the concept of track record means the irreversible, sustained and 
verifiable implementation of reforms and policies for a long enough period to allow for a permanent 
change in the expectations and behaviour of economic agents and for judging that achievements will 
be lasting. 

2 

 
 
The conclusions of the reports 

The conclusions of the assessments in the economic chapters are provided at the end of each country 
section in this publication.  An important difference in the nature of the Progress Report's conclusions 
for candidate countries on the one hand and potential candidates on the other hand should be noted.  
Namely, in the case of candidate countries the conclusions summarise the state of compliance with the 
Copenhagen economic criteria (= level of compliance),  while in the case of the potential candidates 
they rather refer to the progress achieved towards compliance. The reason for this is that for candidate 
countries  the  Commission  has  already  assessed  the  level  of  compliance  for  the  first  time  in  its 
opinions on the countries' EU membership applications.  This exercise has not yet been undertaken for 
the potential candidates, and therefore the assessment and the conclusions can naturally only refer to 
further progress achieved rather than to level of compliance.   

3 

 
 
 
 
Progress towards meeting the economic 
criteria for EU accession: the EU Commission's 
2013 assessments 

  
 
 
1. 

ICELAND 

In examining economic developments in Iceland, the Commission’s approach has been guided by the 
conclusions of the European Council in Copenhagen in June 1993, which stated that membership of 
the  Union  requires  the  existence  of  a  functioning  market  economy  and  the  capacity  to  cope  with 
competitive pressure and market forces within the Union. 

1.1. 

THE EXISTENCE OF A FUNCTIONING MARKET ECONOMY 

Economic policy essentials 

There  is  a  broad  political  consensus  among  political  parties  on  maintaining  the  key  essentials  of  a 
market  economy  and  the  preservation  of  a  welfare  state.  The  authorities  continued  to  proceed  with 
domestic debt restructuring, financial sector stabilisation and fiscal consolidation. Despite some fiscal 
slippage,  the  authorities  maintained  a  reasonable  track  record  of  keeping  previously  announced 
policies and other commitments. The country submitted its third Pre-Accession Economic Programme 
(PEP) in January; its fiscal strategy targets a marked reduction of the public debt ratio to around 80 % 
of GDP by 2015. Overall, a broad consensus on economic policy essentials has been maintained. 

Macroeconomic stability 

In  2012,  the  Icelandic  economy  recovered  for  the  second  consecutive  year  from  a  sharp  recession, 
albeit  with  decelerating  dynamics.  Average  GDP  growth  fell  to  1.4  %,  down  from  2.7  %  the  year 
before.  In  particular,  investment  growth  slowed  markedly.  Private  consumption  remained  rather 
strong,  increasing  by  2.4  %  year-on-year,  slightly  weaker  than  the  year  before.  Public  consumption 
remained  constrained.  Annual  export  growth  lost  some  momentum  during  the  year.  Import  growth 
slowed, from 6.7 % in 2011 to 4.7 % in 2012, probably reflecting weaker investment. Data on the first 
half of 2013 point to GDP growth of 2.2%, mainly driven by private consumption, while investment 
remained  weak.  Tourism  was  an  important  source  of  growth.  Average  per  capita  income  (in 
Purchasing  Power  Standards)  remained  at  112  %  of  the  EU  average  in  2012.  Overall,  the  economy 
continued to recover, but uncertainties regarding the growth dynamics have persisted. 

Iceland’s external imbalances were lower than a year before. However, in the second quarter of 2013 
most components of the balance-of-payments deteriorated again. The trade balance deteriorated from 
a surplus in the first quarter of some 6% of the quarter's GDP to a slight deficit of 0.5% in the second 
quarter,  mainly  due  to  a  drop  in  export  earnings.  Commodity  imports  declined  too,  but  to  a  lesser 
extent,  probably  reflecting  continuously  weak  domestic  investment.  The  service  balance  benefitted 
from solid tourism revenues. When external accounts are corrected for hypothetical interest payments 
(on loans that will probably be written off), the ‘underlying’ current account is largely balanced.  

The stock of external debt declined but still remains high. When correcting for foreign debt of banks 
and holding companies in winding-up proceedings, the external debt stock increased from 156 % of 
GDP in mid-2012 to some 160 % in the second quarter of 2013. Iceland’s net international investment 
position  stood  at  minus  60  %  of  GDP  at  end-2012,  which  is  still  rather  high.  Iceland’s  balance  of 
payments  situation  remained  sheltered  by  capital  controls.  Foreign  exchange  reserves  dropped 
between September 2012 and July2013, from 30 % of GDP to some 26 % of the estimated full-year 
GDP. Overall, recent estimates of Iceland’s net international investment position suggest a continued 
reduction in external indebtedness, but the level is still high. Risks and vulnerabilities with respect to 
Iceland’s external financial position remain pronounced. 

6 

 
Progress towards meeting the economic criteria for EU accession: the EU Commission's 2013 assessments 

Table 1.1:
Iceland - Main economic trends

Gross domestic product
Private consumption
Gross fixed capital formation
Unemployment
Employment 
Wages
Current account balance
Direct investment (FDI, net)
CPI, average
Interest rate (3 months)
Stock markets
Exchange rate ISK/EUR
Nominal eff. exchange rate
General government balance
General government debt

Ann. % ch
Ann. % ch
Ann. % ch
%
Ann. % ch
Ann. % ch
% of GDP
% of GDP
Ann. % ch
% p.a.
Index
Value
Index
% of GDP
% of GDP

2008
1,2
-7,8
-20,4
3,0
0,9
8,1
-24,6
30,5
12,7
15,84
3.510
127,58
135,2
-13,5
70,5

2009
-6,6
-15,0
-51,4
7,2
-6,2
3,9
-11,5
-18,2
12,0
11,28
465
172,15
98,1
-9,9
87,9

2010
-4,1
0,1
-9,4
7,5
-0,3
4,8
-8,0
20,7
5,4
6,79
563
161,62
100,0
-10,1
93,0

2011
2,7
2,6
14,3
7,1
0,0
6,8
-6,3
7,7
4,0
4,26
602
161,20
100,0
-5,6
99,1

2012
1,4
2,4
5,0
6,0
1,1
7,8
-5,5
31,6
5,2
5,51
649
160,75
97,6
-3,8
96,4

2013 H1
2,3
1,2
-13,0
5,6
2,6
5,4
-0,4
5,0
3,8
6,18
758
162,45
97,95
-2,8
N.A.

Sources: Thomson Reuters/Ecow in, Eurostat

Labour market conditions continued to improve. For the year 2012 as a whole, the unemployment rate 
dropped  to  6  %,  from  7  %  in  2011.  The  number  of  long-term  unemployed  was  year-on-year  18  % 
lower in the first half of 2013. The share of long-term unemployed in total unemployed declined too, 
from  29  %  in  the  fourth  quarter  to  some  20%  in  mid-2013.  Long-term  unemployment  accounts  for 
about 1.1 % of the total labour force. Seasonally adjusted unemployment dropped to 4.7 % from 6 % 
the previous year. Employment rose in the first half by 1.6 % year-on-year, compared to 0.5 % a year 
before. Overall, the labour market has strengthened but the share of long-term unemployed and youth 
unemployment among total unemployed is still significantly higher than before the crisis. 

Wage pressures continued to ease. Average real wages dropped by 0.6 % in the fourth quarter of 2012, 
as compared  with a 3.6 % increase in 2011. However, due to rather high real  wage increases in the 
first half of 2012, the annual average wage increase remained fairly stable at 2½ %. In the first seven 
months  of  2013,  the  year-on-year  rise  in  real  wages  remained  lower  than  before,  at  some  1.6  %. 
Overall, despite a rather solid increase in real wages, employment growth remained rather strong. 

Monetary and exchange rate policy was largely in line with Iceland’s economic situation. The Central 
Bank  continued  to  officially  operate  under  an  inflation  targeting  regime  to  keep  consumer  price 
inflation  under  2.5  %  with  a  tolerance  band  of  1.5  %  in  both  directions.  Policy  rates  remained 
unchanged  since  November  2012  at  5-6  %.  The  Central  Bank  announced  that  further  interest  rate 
decisions would largely depend, among other things, on wage settlement agreements in late 2013 and 
early 2014. Annual inflation dropped from the 2012 peak of 6.5 % in April to 3.3 % during April to 
June, but rose again to 3.8 % and 4.3 % in July and August, respectively. The persistently higher than 
targeted  inflation  risks  entrenching  inflationary  expectations  at  a  rather  high  level.  Bringing  down 
inflation towards the Central Bank target remains a challenge. 

Some further steps were taken to implement the capital liberalisation strategy, such as trying to reduce 
the  stock  of  non-resident  króna  holdings,  estimated  at  some  25  %  of  GDP.  Once  offshore  holdings 
have  been  significantly  reduced,  it  is  planned  to  ease  capital  controls.  In  early  2013,  the  authorities 
deleted  from  the  foreign  exchange  law  the  2013  deadline  for  lifting  capital  controls.  This  should 
increase the incentive for offshore króna holders to sell off their ISK assets. Overall, some steps have 
been taken to prepare for the lifting of capital controls. However, progress has been very limited so 
far. 

Fiscal policy remained geared towards fiscal consolidation. The 2012 deficit  was  further reduced to 

7 

  
 
 
European Commission 

Progress towards meeting the economic criteria for EU accession: the EU Commission's 2013 assessments 

3.4 % of GDP, but remained significantly above its initial target of 1.7 % of GDP. This loosening of 
fiscal  ambitions  reflected  weaker-than-expected  economic  growth  and  the  decision  to  increase 
spending, in particular on public sector wages, to accommodate rising wage demands largely driven 
by persistently higher-than-expected inflation. Nevertheless, the 2012 budget managed to reduce the 
deficit by 2.2 percentage points of GDP. In the first half of 2013, the annualised general government 
deficit was at around 2.9 % of GDP, compared to a deficit of around 2.7 % the year before. However, 
this  points  to  difficulties  in  meeting  the  initial  target  of  a  largely  balanced  budget  in  2013.  Overall, 
despite continued fiscal consolidation, the speed of adjustment is behind target. 

In  view  of  the  still  highly  uncertain  global  outlook  and  in  particular  given  the  new  government’s 
ambitious reform programme, risks to the fiscal consolidation strategy have increased. Furthermore, 
little  progress  has  been  achieved  in  strengthening  Iceland’s  budgetary  framework  with  a  view  to 
improving effective control of spending by government agencies. Contingent liabilities in the form of 
government guarantees for basically three public companies remain significant, amounting to some 77 
% of GDP by end-2012. In view of the high level of public debt, fiscal space remains very limited. So 
far, capital controls have provided public finances with the benefit of artificially lower interest rates 
than  could  otherwise  be  expected  in  view  of  the  level  of  indebtedness.  Overall,  fiscal  risks  have 
increased and expenditure-based fiscal consolidation remains a particular challenge. 

Gross  general  government  debt  increased  again  in  the  first  quarter  of  2013  to  107  %  of  GDP, 
compared  to  99  %  in  2012  and  around  30  %  before  the  crisis.  Further  progress  has  been  made  in 
professionalising  medium-term  public  debt  management.  The  average  maturity  profile  of  the  public 
debt portfolio was further extended to 6.4 years by the end of 2012, reducing rollover risks. The new 
medium-term debt management strategy (2013-16) plans to reduce central government debt to below 
70 % of GDP by 2016 and to below 60 % in the long term. Overall, in view of the high level of public 
debt, the authorities have taken some steps to reduce refinancing risks. 

The policy mix continued to focus on exchange rate stabilisation, fiscal consolidation, and domestic 
debt restructuring, which supported the recovery. However, the post-crisis recovery is not completed 
yet. Despite a reduction in annual inflation, current levels and expectations have remained above the 
Central  Bank’s  target.  Maintaining  a  largely  stable  exchange  rate  and  proceeding  with  fiscal 
consolidation  remain  major  challenges.  So  far,  macroeconomic  stabilisation  has  greatly  benefited 
from capital account restrictions but the negative effects of those controls, such as lowering Iceland’s 
attractiveness  to  foreign  investors  and  limiting  investment  possibilities,  are  increasingly  evident. 
Developing a strategy and proceeding  with preparing the  ground  for the removal of capital controls 
remain key policy challenges. 

Interplay of market forces 

Private sector activities account for nearly 80 % of Iceland’s value added. However, as a result of the 
crisis,  the  state  has  become  an  important  player  in  the  financial  sector,  maintaining  nearly  full 
ownership of one of  the three  market-dominant commercial banks and a  minority  stake  in the other 
two systemic banks. Furthermore, the state has full ownership of the Housing Financing Fund and also 
of  sectors  such  as  energy  production  and  transmission,  postal  services  and  broadcasting.  It  has  also 
kept its position as a large investor in the savings banks system, although the importance of the system 
has declined significantly. There are currently no plans to privatise state companies in those sectors. 
Prices  of  goods  and  services  continued  to  be  mostly  determined  by  supply  and  demand  conditions, 
with the exception of agriculture, where the level of import protection remained high. Overall, market 
mechanisms are to a large extent driven by free prices. Public ownership remains significant in some 
sectors and there are no plans for privatisation. 

8 

 
Progress towards meeting the economic criteria for EU accession: the EU Commission's 2013 assessments 

Market entry and exit 

Iceland’s  business  environment  has  remained  supportive  of  the  country’s  economic  recovery.  In 
general, starting but also closing a company is facilitated by low bureaucratic hurdles and a generally 
efficient administration. However, high barriers to entry remain in place for fishing, agriculture and 
energy,  which  are  not  covered  by  the  EEA  Agreement.  The  continued  economic  recovery  had  a 
positive effect on company start-ups. In the first half of 2013 the number of new companies was about 
8  %  higher  than  a  year  before,  compared  to  an  annual  increase  of  3  %  in  2012.  However,  total 
registrations  are  still  markedly  lower  than  before  the  crisis.  Bankruptcy  proceedings  are  generally 
straightforward. The crisis put a large part of the corporate sector under severe financial distress and 
insolvency levels in 2012 were still 50 % higher than before the crisis. In the first half of 2013, the 
number of insolvent companies  was some 40 % lower than a year earlier, but was still significantly 
higher  than  before  the  crisis.  Overall,  despite  generally  low  entry  barriers,  low  bureaucratic  hurdles 
and  an  efficient  administration,  significant  barriers  to  market  entry  remain  in  key  strategic  sectors, 
such  as  fisheries.  Market  exit  has  been  functioning  well,  supporting  economic  adjustment  and 
structural change. 

Legal system 

The  legal  system  continued  to  support  an  investment  climate  that  is  generally  business-friendly,  by 
providing  comprehensive  property  registration,  and  good  protection  and  enforcement  of  property 
rights.  In  principle,  this  clear,  stable  and  transparent  framework  allows  economic  agents  to  take 
economic decisions in a situation of legal certainty. However, the existence of capital controls restricts 
the full use of property rights and uncertainties concerning the lifting of these controls remains.   

Financial sector development 

The  financial  sector  made  good  progress  with  its  post-crisis  consolidation  process.  Private  sector 
deleveraging and bank balance sheet repair continued. Household debt declined further to 109 % of 
GDP, as compared with its peak of 130 % in 2009. Corporate debt declined to 194 % of GDP, after 
peaking at 380 % at end-2008. However, private households and businesses still have limited access 
to  fresh  financing.  The  recapitalisation  of  the  country’s  three  systemic  banks  is  largely  completed, 
with an increase in the three banks’ total capital adequacy ratio from 22 % at the end of 2011 to some 
25 % in mid-2013, well above the minimum requirement of 16 %. The number of banks has decreased 
slightly. All banks are operating only at domestic level. The three largest commercial banks together 
with the  Housing Financing  Fund represent a  market share of 92 %. The government retains nearly 
full ownership of one of the banks and minority stakes in the other two banks. No progress was made 
with privatising the state shares in the banking sector. All banks remained profitable, with returns on 
equity at 14 % at the end of 2012, compared to 7 % a year before. However, cost-to-income and cost-
to-asset ratios are rather high, pointing to relatively low efficiency. Interest rates on deposits remain 
distorted by capital controls, providing a competitive advantage to domestic banks. 

The  share  of  non-performing  loans  continued  to  decrease  significantly,  from  23  %  at  end-2011  to 
around 10 % by mid-2013.  On the funding side, banks continued to rely mainly on domestic deposits, 
since foreign direct investment and access to foreign credit remained limited, except for the sovereign. 
Overall, banking sector and debt restructuring  has  made good progress, but significant  uncertainties 
remain with respect to banks’ asset quality. 

Some further progress has been made in strengthening bank regulatory and supervisory practices. In 
autumn 2012, new rules for liquidity coverage were adopted. Banks started to report this data in early 
2013. Reporting of this data will become obligatory during 2013. However, after a strong increase in 
supervisory  capacities,  now  the  efficiency  of  those  institutions  needs  to  be  strengthened,  aligning 
Icelandic banking sector regulation with best international practices and standards.  

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Progress towards meeting the economic criteria for EU accession: the EU Commission's 2013 assessments 

The  non-banking  financial  system  mainly  consists  of  the  state-owned  Housing  Financing  Fund, 
pension  funds,  insurance  companies  and  mutual,  investment  and  institutional  funds.  The  Housing 
Financing Fund received another € 81  million public capital injection, bringing its capital adequacy 
ratio  to  3.2  %  of  risk-weighted  assets.  However,  this  is  still  far  below  the  5  %  long-term  target. 
Overall, efforts have continued to strengthen the shock resilience and prudential standards of Iceland’s 
financial sector. Improving the sustainability of the Housing Financing  Fund’s operations remains a 
challenge. 

Domestic  equity  markets  regained  some  ground  as  channels  of  financial  intermediation,  after  the 
heavy  losses  in  the  aftermath  of  the  crisis.  Turnover  in  the  equity  market  rose  by  29  %  in  2012, 
compared  to  an  increase  of  20  %  the  year  before.  Market  capitalisation  increased  to  some  23  %  of 
GDP at end-2012, compared to 20 % in mid-2012 and around 120 % of GDP before the crisis. The 
bond market, on the other hand, shrank in the second half of 2012, leading to a decline in the 2012 
trading  volume  of  10.7  %,  which  brought  the  volume  down  to  about  137  %  of  GDP.  The  market 
continues  to  be  dominated  by  government  and  government-guaranteed  bonds.  Overall,  domestic 
financial markets have somewhat recovered.  

1.2. 

THE  CAPACITY  TO  COPE  WITH  COMPETITIVE  PRESSURE  AND  MARKET  FORCES  WITHIN  THE 
UNION  

Existence of a functioning market economy 

After  the  boom-and-bust  financial  sector  turbulences,  the  economy  has  made  further  progress  in 
regaining  a  sufficient  degree  of  macroeconomic  stability,  which  would  allow  economic  agents  to 
make decisions in a climate of stability and predictability. The legal framework, law enforcement and 
institutional  and  administrative  capacities  are  well  developed. The  financial  sector  has  made  further 
progress in addressing crisis-related imbalances. However, the efficient allocation of resources is still 
impeded  by  extensive  capital  restrictions,  and  high  barriers  to  market  entry  for  foreign  nationals  in 
some  sectors.  Overall,  improving  the  functioning  of  financial  markets  by  lifting  the  capital  controls 
remains a particular challenge. 

Human and physical capital 

Iceland’s  economy  benefits  from  a  relatively  highly  educated  labour  force  and  a  high  labour 
participation rate. About 79 % of Iceland’s working-age population were active in the labour market 
in the first half of 2013, which is high in international comparison, but slightly lower than before the 
crisis.  Some  25  %  of  the  population  have  completed  tertiary  education,  and  some  38  %  secondary 
education.  Even  during  the  crisis,  the  authorities  continued  to  allocate  around  8  %  of  GDP  to 
education, while private households bear only around 10 % of the total costs of their education. As a 
result of the crisis, skill  mismatches appeared,  which the  authorities tried to address  with additional 
training.  Good  skills  and  proficiency  in  foreign  languages  also  facilitated  outmigration  during  the 
crisis,  which helped to reduce labour market pressure. Overall, Iceland is endowed  with a relatively 
well educated, trained and flexible labour force. 

Capital investment dropped markedly in the aftermath of the 2008 crisis and has not recovered since. 
In  2012  and  the  first  half  of  2013,  investment  accounted  for  only  about  14.4  %  and  13  %  of  GDP, 
respectively, close to historic lows. Private investment declined by 23 % in 2012 and by 19 % in the 
first quarter of 2013. Public investment declined by 17 % year-on-year in 2012, falling to only 1.8 % 
of GDP, compared to a long-term average of around 3.7 % of GDP. This decline in public but also 
private  investment  reflects  the  impact  of  the  crisis,  uncertainty  concerning  the  global  economy,  but 
also to some extent the continued uncertainties with regard to Iceland’s lifting of capital controls. As a 
result  of  the  small  size  of  the  economy,  capital  investment  tends  to  be  volatile  and  is  often 

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Progress towards meeting the economic criteria for EU accession: the EU Commission's 2013 assessments 

concentrated in a limited number of sectors, in particular capital-intensive energy-related investment 
projects  or  the  fishing  industry.  Foreign  direct  investment  amounted  to  28  %  of  GDP  in  2012, 
compared to 7.7 % the year before. The accumulated stock of FDI represented nearly 100 % of GDP 
in 2012, compared to 95 % the year before. Spending on R&D as a percentage of GDP is rather high, 
at around 3 % in 2012. Overall, the capital stock suffered from low private and public investment in 
the aftermath of the financial crisis. Investment is concentrated in a few sectors. 

Sector and enterprise structure 

The  effects  of  the  crisis  have  accelerated  structural  change,  with  a  sharp  increase  in  the  share  of 
tourism and transport and a decline in financial services. Some high-tech industries, such as software, 
pharmaceuticals  and  biotechnology,  have  gained  in  importance.  However,  Iceland’s  economy 
continues to rely heavily on aluminium, fisheries and fish processing, accounting for roughly 30 % of 
the country’s value added and some 80 % of export earnings. Services account for two thirds of the 
economy  and  almost  three  quarters  of  employment.  The  importance  of  tourism  has  been  steadily 
increasing, accounting for 28 % of total export earnings in the first half of 2013, a result of the 15 % 
increase in foreign tourism income since 2012. The share of marine products and primary aluminium 
products remained stable at 80 % of merchandise exports, while the share of services, mainly travel 
and transport, rose from around 35 % of total exports in 2011 to about 38 % in 2012. The importance 
of small and  medium-sized  firms in the economy remains  significant, accounting for some 70 % of 
employment  and  output.  Overall,  post-crisis  adjustment  accelerated  structural  change.  In  particular 
tourism  has  gained  in  importance.  However,  Iceland’s  overall  degree  of  economic  diversification  is 
low.   

State influence on competitiveness 

The  level  of  state  subsidies  remained  at  1.7  %  of  GDP  in  2012,  largely  reflecting  continued 
government support for the relatively small agriculture sector through government subsidies, import 
protection, and a system of production quotas.  Certain  industries such as energy and fishing remain 
protected  from  foreign  ownership.  The  telecommunication  sector  is  liberalised  and  privately  owned 
while government interventions remain limited to infrastructure investments in remote areas. Overall, 
the level of state aid is rather high and state participation remains significant in some areas, including 
the banking sector. 

Economic integration and convergence with the EU 

Iceland is a small open economy with total trade in goods and services representing around 112 % of 
GDP. Iceland’s trade integration with the EU is high, with more than 70 % of total exports in 2012 
being  shipped  towards  EU  destinations,  although  the  share  dropped  from  78  %  a  year  before.  The 
composition of exports is dominated by a limited set of products, in particular maritime products and 
aluminium.  However,  in  late  2012  and  early  2013  the  trend  towards  strong  growth  in  exports  of 
services,  i.e.  tourism,  continued.  The  import  structure  is  more  diversified,  reflecting  Iceland's 
dependence on a wide range of goods and commodities. Some 44 % of imports originate in the EU. 
FDI inflows originate almost exclusively from EU partner countries. However, after strong progress in 
the first decade of this century, investment integration has lost momentum, partly due to the effects of 
capital controls. Overall, integration with the EU in the areas of trade and investment remained high. 

Average  labour  productivity  improved  slightly  in  2012.  However,  wage  increases  were  above 
productivity growth, which further pushed up unit labour costs by some 5.7 % in 2012, compared to a 
4.7 % increase the year before. The exchange rate depreciated in 2012 by 6.6 % against the euro. It 
remained  fairly  stable  in  nominal  effective  terms,  but  appreciated  slightly  in  real  effective  terms. 
According  to  estimates,  the  real  exchange  rate  remains  some  20  %  below  its  pre-crisis  average. 
Overall, Iceland still benefits from strong price competitiveness vis-à-vis its main trading partners.  

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Progress towards meeting the economic criteria for EU accession: the EU Commission's 2013 assessments 

1.3.  CONCLUSIONS 

As regards the economic criteria, Iceland can be considered a functioning market economy. However, 
financial  sector  weaknesses  and  capital  movement  restrictions  still  impede  an  efficient  allocation  of 
resources.  Iceland  should  be  able  to  cope  with  competitive  pressures  and  market  forces  within  the 
Union  over  the  medium  term,  provided  that  it  continues  to  address  current  structural  weaknesses 
through appropriate macroeconomic policies and structural reforms. 

Iceland’s economy continued to recover, albeit at a decelerating pace. So far, the recovery has been 
largely  supported  by  private  consumption,  while  investment  remained  weak.  Low  investment 
translated  into  low  import  growth,  which  helped  to  maintain  a  surplus  in  the  trade  balance  and  a 
largely balanced underlying current account. Record increases in tourist revenues largely compensated 
a weaker export performance. The labour market situation improved, leading to a significant reduction 
in  unemployment.  Nevertheless,  unemployment  among  the  young  population  and  long-term 
unemployed remain a policy challenge. 

Inflationary  pressures  subsided  slightly  in  the  first  half  of  2013.  However,  annual  inflation  is  still 
clearly above the central bank’s target of 2.5 %. Despite continued fiscal consolidation, the speed of 
adjustment  has  slowed  down  further.  Fiscal  risks  persist  due  to  spending  pressures  and  sizeable 
contingent  liabilities.  Public  debt  levels  remain  high.  Financial  sector  consolidation  made  progress, 
although debt restructuring of private households and companies is not completed yet. The efficiency 
of  financial  sector  supervision  is  still  not  in  line  with  international  standards.  In  some  sectors 
competition  remained  limited,  either  as  a  result  of  legal  entry  restrictions  or  of  substantial  state 
involvement, hampering investment and the growth potential of those sectors. 

Capital  controls  continue  to  lead  to  distortions  in  the  financial  and  capital  markets  and  impede 
Iceland’s  investment  climate  and  thus  growth  potential.  Preparing  a  detailed  strategy  on  how  to  lift 
these  restrictions  and  proceeding  with  necessary  measures,  while  preserving  exchange  rate  stability 
remains a key challenge. An ad-hoc group on the removal of capital controls, including experts from 
the European Central Bank, the Commission and the International Monetary Fund was set-up in June 
2012  at  the  request  of  the  Icelandic  government,  within  the  framework  of  accession,  to  assess 
prospects for lifting these controls. 

12 

 
2. 

THE FORMER YUGOSLAV REPUBLIC OF MACEDONIA 

In  examining  economic  developments  in  the  former  Yugoslav  Republic  of  Macedonia,  the 
Commission’s  approach  was  guided  by  the  conclusions  of  the  European  Council  in  Copenhagen  in 
June 1993, which stated that membership of the Union requires the existence of a functioning market 
economy and the capacity to cope with competitive pressure and market forces within the Union. 

2.1. 

THE EXISTENCE OF A FUNCTIONING MARKET ECONOMY 

Economic policy essentials 

Domestic consensus on the fundamentals of economic policies was broadly maintained, even though 
the  parliament  adopted  the  2013  central  government  budget  under  controversial  circumstances. 
Macroeconomic stability was preserved against the background of a continuously challenging external 
environment and high unemployment.  

The  2013  Pre-accession  Economic  Programme  (PEP)  for  the  period  2013-2015  was  submitted  in 
January 2013 and outlines key economic, fiscal and structural policies and planned reform measures. 
The  key  objectives  remain  promotion  of  growth  and  employment.  The  World  Bank  accorded  €155 
million under the Public Expenditure Policy based guarantee programme in January 2013, to help the 
country  secure  a  foreign  commercial  loan  for  the  financing  of  the  2013  central  government  budget 
deficit. Cooperation  with the  international  financial institutions continued as planned. The country’s 
two-year arrangement under the IMF’s Precautionary and Liquidity Line ended on 18 January 2013. 
Overall, a broad consensus on the fundamentals of economic policies was maintained. 

Macroeconomic stability 

The  economy  has  gradually  returned  to  growth,  after  the  economic  situation  had  deteriorated 
somewhat  during  2012.  The  output  declined  by  0.2%  in  2012,  mainly  due  to  lower  private 
consumption  and  a  worsening  merchandise  trade  balance,  while  investment  growth  continued  to  be 
strong. The economy has recovered gradually since the third quarter 2012, and in the second quarter 
2013 GDP growth reached 3.9% compared to a year earlier. This was carried by strong increases in 
investment, even though its growth slowed down, from an average 16% in 2012, to an average 8.2% 
in the first half of 2013. Private consumption contributed to growth in the second quarter, for the first 
time since the beginning of 2012, as did the trade balance, through strong exports of goods of newly 
established  foreign  investors.  Encouraging  signals  emerged  from  industrial  production,  which 
increased by 2.2% in the first seven months of the year, compared to the same period a year earlier, 
after a 2.8% drop in 2012. Average per capita income in purchasing power standards stayed at 35% of 
the EU-27 level. Overall, the renewed growth of the economy remains narrowly based on investment, 
with  only  gradual  strengthening  of  the  external  sector  and  also  marginal  support  from  private 
consumption. 

External imbalances increased in 2012, with the difficult global environment leaving its mark on the 
current account deficit, which increased to 3.9% in 2012, up from 3% in 2011. This was mainly due to 
a widening merchandise trade deficit, which reached 24% of GDP. Its financing relied increasingly on 
foreign credit, as net foreign direct investment (FDI) inflows declined by about two thirds in 2012 to 
1.4% of GDP, on account of large outflows of intercompany loans. Private transfers remained strong 
at some 21% of GDP, with the share of workers’ remittances resilient. In the first half of 2013, FDI 
inflows picked up again, reaching 2.7% of GDP, 21%  higher than  in the same period a  year earlier 
(how much). However, private transfers declined by 11% to about 18% of GDP.  

Gross external debt rose to 65% of GDP at the end of the first quarter 2013, from 62% a year earlier. 
The increase was driven mainly by government external financing, which raised public external debt 

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Progress towards meeting the economic criteria for EU accession: the EU Commission's 2013 assessments 

to  27.3%  of  GDP,  compared  to  24.4%  a  year  earlier.  Private  external  debt,  including  intercompany 
lending,  increased  by  0.9  percentage  points  to  38.4%.  The  international  reserve  position  weakened 
slightly.  At  the  end  of  August,  foreign  reserves  amounted  to  €2.1  billion  or  about  26%  of  GDP, 
compared to 30% of GDP a year earlier. The reserves covered about 4 months of prospective imports 
of goods and services, which is slightly less than a year earlier. Overall, there is at present limited risk 
to  macroeconomic  stability  from  the  external  side.  The  current  account  balance  has  been  gradually 
improving with a pick-up in export activity, yet it is increasingly relying on foreign credit financing, 
with uncertain prospects for the development of private transfers. 

Table 2.1:
The former Yugoslav Republic of Macedonia - Main economic trends

Gross domestic product
Private consumption
Gross fixed capital formation
Unemployment
Employment 
Wages
Current account balance
Direct investment (FDI, net)
CPI
Interest rate (3 months)
Stock markets
Exchange rate MKD/EUR
Nominal eff. exchange rate
General government balance
General government debt

Ann. % ch
Ann. % ch
Ann. % ch
%
Ann. % ch
Ann. % ch
% of GDP
% of GDP
Ann. % ch
% p.a.
Index
Value
Index
% of GDP
% of GDP

2008
5,1
7,4
5,4
33,8
3,2
8,7
-12,8
6,1
8,3
5,30
5.149
61,26
100,6
-0,9
20,7

2009
-0,9
-4,7
-4,3
32,2
3,4
14,1
-6,8
2,0
-0,8
N.A.
2.497
61,28
106,6
-2,7
23,8

2010
2,9
2,1
-2,7
32,0
1,5
1,0
-2,1
2,2
1,6
N.A.
2.472
61,51
106,0
-2,5
25,8

2011
2,8
2,9
12,3
31,4
3,1
1,2
-3,0
4,5
3,9
N.A.
2.407
61,53
106,9
-2,5
28,4

2012
-0,4
-1,2
16,0
31,0
0,4
0,2
-3,9
1,0
3,3
N.A.
1.890
61,53
108,3
-3,8
34,0

2013 H1
3,4
0,3
8,2
29,4
4,3
1,4
-3,2
1,2
3,6
N.A.
1.822
61,63
108,6
N.A.
N.A.

Sources: Thomson Reuters/Ecow in, Eurostat

Unemployment remained persistently high, in particular youth and long-term unemployment, pointing 
to deep-rooted structural impediments in the labour market. There was some gradual improvement in 
the official employment and unemployment rates. In June 2013, total unemployment stood at 28.8% 
of the labour force, having declined by 2.4 percentage points compared to a year earlier. For workers 
aged  15  to  24  years,  the  unemployment  rate  reached  51.7%,  down  from  54.9%  a  year  earlier.  The 
employment  rate  increased  to  40.7%,  compared  to  38.8%  a  year  earlier.  The  recorded  employment 
creation derives to a large part from an increase in part-time and self-employed occupations, and from 
a rise in public sector employment. Overall, in spite of some incremental improvement in the official 
labour  market  figures,  labour  market  policy  had  limited  success  in  addressing  the  persistently  high 
unemployment. Structural challenges in the labour market remain to be tackled. 

Monetary policy remained consistent and adequate given the economic environment and the situation 
of the domestic banking sector. The exchange rate policy and the de facto peg to the Euro continued to 
be  an  integral  part  of  the  central  bank’s  strategy  targeting  price  stability.  In  order  to  support  the 
economic recovery and combat sluggish credit growth, the central bank relaxed monetary conditions 
at several occasions since the beginning of 2013. It lowered two key policy rates: the maximum rate 
on central bank bill auctions, from 3.75% to 3.25%; and the 7-day deposit rate, from 2% to 1.50%%. 
The  interest  rate  on  overnight  deposits  was  reduced  from  1%  to  0.75%.  It  also  eased  reserve 
requirements  for  loans  to  net  exporters  and  to  energy  producers.  Consumer  price  inflation  was 
markedly  higher  than  a  year  before,  with  an  average  inflation  in  the  first  eight  months  of  2013  of 
3.5%, compared to 2.5% in the same period a year earlier. Higher prices for electricity and food, but 
also higher administrative prices were the main drivers bringing year-on-year inflation to above 4% in 
the  last  months  of  2012.  As  of  July,  regulated  electricity  prices  for  households  were  lowered.  With 
energy  costs  abating,  more  recent  inflationary  pressures  derived  mainly  from  domestic  factors,  in 

14 

 
 
Progress towards meeting the economic criteria for EU accession: the EU Commission's 2013 assessments 

particular  adverse  climate  conditions  impacting  on  food  prices.  Overall,  monetary  policy  remained 
stability-oriented. Energy costs and food prices were the main drivers of rising inflation. 

Fiscal  discipline  was  relaxed  in  2012,  and  the  quality  of  public  spending  deteriorated  further.  The 
general  government  budget  deficit  reached  3.8%,  thus  overshooting  even  the  revised  deficit  target, 
which the authorities had raised by 1 percentage point to 3.5% in autumn. Another budget rebalancing 
reduced mainly investment spending, due to severe revenue shortfalls. Total expenditure as share of 
GDP  rose  from  31%  in  2011  to  34%  in  2012,  and  is  estimated  to  reach  35%  in  2013.  The  primary 
government budget deficit rose to 3.1% of GDP in 2012, compared to 1.7% in 2011. Capital spending 
was  almost  unchanged  in  2012  compared  to  2011,  at  12%  of  total  expenditure,  or  just  over  4%  of 
GDP, projected to decline to 11.3% of total expenditure in 2013, or 3.9% of GDP. The share of social 
transfers  in  total  expenditure  declined  slightly  in  2012,  to  44.7%  from  45.2%  a  year  earlier,  and  is 
projected to stay largely unchanged in 2013. As a share of GDP, social transfers increased somewhat, 
to 15% of GDP, up by 0.4 percentage points.  

The  2013  budget  foresees  a  slight  reduction  in  the  deficit,  to  3.5%,  based  on  rather  optimistic 
expectations of strong growth of revenues, which are projected to be 7.2% higher than in 2012. Yet, 
after the first seven months of 2013, the central government budget deficit amounted to over 80% of 
the  targeted  full-year  deficit.  This  was  mainly  on  account  of  repayment  of  arrears  in  VAT  returns, 
contracted  works,  and  social  benefits,  which  led  to  an  increase  in  expenditures  in  the  first  seven 
months  of  about  6%  compared  to  the  same  period  2012.  The  government  started  settling  the 
outstanding amounts as of September 2012.  

Even though government debt is still at a moderate level, the increases over the last years give rise to 
concern.  Central  government  debt  stood  at  33.6%  of  GDP  by  the  end  of  July  2013,  compared  to 
27.8% at end-2011. Moreover, as the budget of the newly created public enterprise for state roads was 
excluded from the central budget as of 2013, its debt is no longer included in central government debt. 
Overall,  fiscal  governance  and  fiscal  discipline  deteriorated  and  would  benefit  from 
the 
implementation of a medium-term strategy.  

The policy mix slightly deteriorated. While monetary policy provided key support for macroeconomic 
stability, fiscal discipline weakened and the debt ratio further increased. Public finance could make a 
bigger  contribution  to  stability,  for  example  by  better  aligning  spending  priorities  with  structural 
challenges,  and  by  focusing  on  growth-enhancing  capital  expenditure.  Furthermore,  the  fast  rise  in 
mainly foreign financed debt increases the country’s vulnerability.  

Interplay of market forces 

The role of the public sector in the economy remained largely unchanged. In terms of value added, the 
private sector accounted for about 85%, as in 2012. The asset value of fully or partly state-controlled 
enterprises increased to 15.7% of GDP in mid-2013, compared to 12.7% a year earlier, due to capital 
increases in public companies. The number of fully-owned state companies increased from 12 to 15, 
due  to  restructuring  in  the  public  sector.  The  majority  of  state  capital  is  concentrated  in  five 
companies,  which  are  mainly  public  utilities.  The  share  of  public  sector  employment  in  total 
employment remained stable at about 25%.  Administered and regulated prices continued to account 
for some 13% of the Consumer Price Index (CPI) basket. In general, regulated prices, which account 
for  about  12%  of  the  CPI  basket,  usually  cover  costs,  while  administered  prices,  such  as  for  water 
supply and waste disposal, usually do not fully cover costs. Overall, the economy is mainly driven by 
the  private  sector,  with  the  role  of  the  state  remaining  limited,  even  though  share  of  the  public 
ownership increased slightly. 

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Progress towards meeting the economic criteria for EU accession: the EU Commission's 2013 assessments 

Market entry and exit 

The  business  environment  was  further  improved  through  the  simplification  of  business  registration 
and operation, for example by the establishment of a one-stop shop system for domestic and foreign 
investors. While companies enjoy a low  level of taxation,  corporate liquidity suffered in 2012 from 
the accumulation of government arrears for VAT refunds and contracted works. Implementation of the 
third  (reduction  of  administrative  burdens)  and  fourth  phase  (SME  measures)  of  the  ‘regulatory 
guillotine’ project continued, and procedures for obtaining construction licenses were simplified. 

There  has  been  more  limited  progress  on  reforming  market  exit  procedures.  The  deletion  from  the 
central  registry  of  companies  that  were  not  operational  for  a  long  time  has  started.  However, 
improving  exit  options  through  facilitated  bankruptcy  procedures  proves  more  challenging.  In  May 
2013,  an  amendment  to  the  Law  on  Bankruptcy  was  adopted,  which  foresees  an  acceleration  of 
proceedings.  Yet,  the  number  of  bankruptcy  procedures  between  October  2012  and  July  2013  was 
lower  by  29%  compared  to  a  year  earlier.  The  average  duration  of  voluntary  company  liquidation 
diminished  only  slightly.  Overall,  while  business  registration  and  operation  was  further  facilitated, 
weaknesses  in  bankruptcy  and  liquidation  procedures  continue  to  pose  a  significant  impediment  to 
investment and access to finance.  

Legal system  

The legal system  was further strengthened in some parts, notably the clearance rates of courts at all 
levels  improved  and  there  are  no  significant  backlogs  remaining.  However,  the  overall  duration  of 
court proceedings remains a concern. The registration of real estate property is finalised and the land 
register covers 100% of the country’s territory. The authorities implemented a number of reforms to 
reduce  the  work  load  of  courts,  in  particular  through  the  transfer  of  enforcement  cases  to  private 
bailiffs.  While  the  legal  and  financial  independence  of  some  regulatory  and  supervisory  bodies  has 
been  further  strengthened  in  formal  terms,  the  impact  on  the  business  environment  has  remained 
limited. Institutional and administrative capacities, such as insufficiently skilled human resources and 
insufficient physical resources continue  to hamper the proper functioning of some of these agencies 
like  the State  Appeals  Commission  for Public Procurement and the  State  Audit Office.  Overall, the 
legal system for a functioning market economy is largely in place, yet weaknesses related to lengthy 
procedures, contract enforcement and corruption remain.  

Financial sector development 

The  economic  weight  of  the  banking  sector  remained  stable,  with  total  assets  of  commercial  banks 
amounting  to  about  87%  of  GDP.  The  sector  remains  highly  concentrated,  with  two  thirds  of  total 
assets owned by the three largest banks, the biggest bank alone accounting for about a quarter of total 
assets.  

Liquidity  and  solvency  of  the  banking  sector  proved  resilient  to  the  subdued  global  economic  and 
market environment. The average ratio of liquid to total assets improved throughout 2012, and stood 
at 29.6% at the end of the first quarter 2013, compared to 26.5% a year earlier. Liquid assets cover 
just over half of household deposits, slightly less than a year earlier. Regulatory capital in relation to 
risk-weighted assets stood at a comfortable 17.3% at the end of the second quarter. 

The  credit  growth  continued  to  decelerate.  Annual  growth  of  credit  to  the  private  sector  has  been 
declining  since  May  2012  reaching  3.5%  at  end-July  2013.  Growth  was  driven  almost  entirely  by 
loans to households, which increased by 7.8%. Credit growth to corporates declined to 0.5%, against 
the  backdrop  of  a  further  deteriorating  quality  of  corporate  loan  portfolios.  The  share  of  non-
performing loans (households and corporates) in total loans stood at 12.3% at the end of June 2013, 
compared  to  10%  a  year  earlier,  with  the  largest  share  accounted  for  by  corporate  loans.  Given  the 

16 

 
Progress towards meeting the economic criteria for EU accession: the EU Commission's 2013 assessments 

easing  of  monetary  policy  earlier  this  year,  it  appears  that  impediments  to  faster  credit  growth  lie 
outside the transmission mechanism of monetary policy, and are possibly rooted in a combination of 
strong  adverse  risk  perceptions  of  lenders,  and  a  lack  of  quality  investment  projects  on  the  demand 
side.  In  spite  of  the  deteriorating  portfolio  quality,  banks  managed  to  avoid  significant  losses  in 
profitability.  Performance  was  somewhat  weaker  in  the  second  quarter  2013  than  a  year  earlier,  as 
manifested by the decline in the return on assets (0.2%, compared with 0.4% a year earlier) and in the 
return on equity (1.8% compared with 3.2%). Lending in foreign currency decreased somewhat, but 
still accounts for close to 40% of total loans outstanding, which poses a potential stability risk given 
the de facto currency peg. 

The  relevance  of  non-banking  financial  intermediaries  is  generally  low,  at  just  over  10%  of  total 
sector assets, or 8% of GDP. Pension funds hold just over 4% of total assets and experienced strong 
asset growth in the reporting period. Assets in the mandatory fully funded pension insurance grew by 
30%  between  February  2012  and  February  2013,  and  those  of  the  voluntary  fully  funded  pension 
insurance by about 66%. The insurance sector continued to account for less than 4% of total assets. 4 
new insurance brokers and 3 new agencies entered the market in 2012. While gross written premiums 
increased by over 3%,  their share in GDP  was almost unchanged, at over 1.4%, compared to 2011. 
The  insurance  sector  remained  well  capitalised,  solvent,  and  even  improved  its  technical  provision 
coverage  from  96%  in  2011  to  103%.  Overall,  the  financial  sector  remained  well  capitalised  and 
liquid. However, credit growth was sluggish and non-performing loans increasingly pose a challenge. 

2.2. 

THE  CAPACITY  TO  COPE  WITH  COMPETITIVE  PRESSURE  AND  MARKET  FORCES  WITHIN  THE 
UNION 

Existence of a functioning market economy 

While  persistently  high  unemployment  points  to  serious  difficulties  to  the  functioning  of  the  labour 
market, overall macroeconomic stability has been maintained. The quality of public finance planning 
and management has deteriorated further, with productive investment remaining below needs. Market 
entry procedures have improved, while the reform of market exit procedures still needs to gain pace. 
Enforcement of contracts remains difficult, which impacts negatively on the business environment. 

Human and physical capital endowment 

Further  steps  were  taken  towards  improving  the  infrastructure  and  the  quality  of  education  at  all 
levels, such as the recruitment of about 250 additional teachers for primary and secondary schools for 
the  academic  year  2012/13;  investment  in  the  education  infrastructure;  and  a  reinforced  focus  of 
secondary  school  curricula  on  entrepreneurial  skills.  Yet,  the  general  qualification  of  the  workforce 
remains  low,  and  matching  the  skills  of  graduates  with  the  needs  of  potential  employers  remains  a 
major  challenge.  A  strategy  for  vocational  training  reform  was  adopted,  and  practical  experience 
during  education  was  made  mandatory.  There  was  little  progress  in  implementing  the  adopted 
reforms. 

The country’s capital stock remains low and relatively outdated given the underinvestment of the past. 
Gross fixed capital formation was strong in the last quarter of 2012, at 36% of GDP, partly due to a 
boost in public capital spending, but fell to 26% of GDP in the first half of 2013. Public investment 
stayed at over 5% of GDP in 2012. It was concentrated on transport and utilities infrastructures, with 
some  investment  also  in  the  physical  infrastructure  of  education.  Its  impact  on  growth  and 
employment  is,  however,  difficult  to  assess  due  to  lack  of  recent  disaggregated  data  and 
implementation details. Spending is not sufficiently focused on building a knowledge-based society, 
but is used for less productive purposes, such as the decoration of the capital. Weak implementation 
capacity  continues  to  impede  the  authorities’  efforts  to  add  to,  and  to  modernise  the  public  capital 

17 

  
 
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Progress towards meeting the economic criteria for EU accession: the EU Commission's 2013 assessments 

stock. Foreign direct investment, which in the past was more evenly distributed among manufacturing 
and  services  sectors,  shifted  towards  more  traditional  manufacturing  sectors  recently.  The  stock  of 
foreign investment amounted to just below 50% of GDP in mid-2013, down from 53% a year earlier. 
Overall,  there  was  some  gradual  progress  in  addressing  reform  needs  in  the  education  system.  The 
capital stock remains modest and public spending was not sufficiently focussed on growth-enhancing 
activities. 

Sector and enterprise structure 

In  2012,  the  economic  activity  shifted  slightly  from  the  industrial  sectors  to  services  activities.  The 
share of the mining, manufacturing and utilities sectors in total value added declined from 21.3% in 
2011  to  just  under  20%  in  2012,  while  the  share  of  financial  and  community,  social  and  personal 
services rose from 18.9% to 19.6%. The enterprise structure remained largely unchanged in 2012. The 
share of SMEs (national definition) in total private sector employment increased slightly compared to 
2011.  Access  to  finance  was  eased  somewhat  by  the  use  of  the  credit  line  from  the  European 
Investment Bank. However, SME development continues to be impeded by poor access to financing. 
Competition  in  the  network  industries  remains  constrained  by  the  small  number  of  incumbent 
suppliers.  In  spite  of  some  improvements  in  employment  registration,  the  informal  sector  remains 
sizeable  and  poses  a  challenge  for  policymakers,  as  it  reduces  the  tax  base  and  the  efficiency  of 
economic  policies.  Overall,  the  enterprise  structure  remained  largely  unchanged,  with  further  SME 
development  hampered  mainly  by  difficult  access  to  finance.  There  has  been  limited  progress  in 
tackling the large informal sector. 

Some further progress towards diversification into manufacturing activities with higher value added is 
evidenced by the export structure, partly reflecting the new operations of a few foreign investors. The 
share of machinery and transport equipment in total exports amounted to 9.9% in 2012, an increase by 
2  percentage  points  compared  to  2011.  Still,  clothing,  chemicals,  and  manufactured  iron  and  steel 
products account for almost half of exports. Overall, in 2012, 70% of total exports were accounted for 
by  15  products.  Overall,  some  gradual,  further  diversification  of  economic  production  is  visible  in 
terms of value added and exports. 

State influence on competitiveness 

Government’s  influence  on  the  economy’s  competitiveness  remains  limited  and  is  mainly  exerted 
through  direct  subsidies  to  and  tax  exemptions  for  companies,  including  in  particular  foreign 
investors, and through active labour market programmes. Official data points to a decline in state aid 
in 2012 to about 0.1% of GDP, from about 0.4% in 2011. Reporting on state aid and comparability 
with EU standards remain limited. The legal framework for state aid was strengthened by the adoption 
of  regulations  on  regional  aid,  horizontal  aid  and  Services  of  General  Economic  Interest.  Yet,  their 
impact remains limited given the low reporting awareness in state aid providers. Overall, while state 
aid  laws  have  been  strengthened,  there  is  a  lack  of  transparency  about  implementation  details  and 
amounts due to shortcomings in reporting.  

Economic integration and convergence with the EU 

The country’s total trade in goods and services remained largely unchanged in 2012, at about 128% of 
GDP. Trade integration with the EU progressed further: over 73% of total exports were destined to the 
EU in the first half of 2013, compared to 65% a year earlier. FDI from the EU accounts for close to 
80%  of  total  FDI  stock,  with  the  Netherlands,  Austria,  Slovenia  and  Greece  as  the  biggest  foreign 
investors, providing over half of the total foreign investment stock. Labour productivity declined by 
1% in 2012. Price competitiveness also remained broadly unchanged: the real effective exchange rate, 
adjusted  by  the  consumer  price  index,  appreciated  slightly,  on  average,  by  about  0.2  percentage 
points.  Wage  developments  were  not  conducive  to  a  pick  up  in  private  consumption:  in  the  first 

18 

 
Progress towards meeting the economic criteria for EU accession: the EU Commission's 2013 assessments 

quarter 2013, real net wages dropped by an average 2.3% on the year. Overall, trade integration with 
the  EU  is  quite  advanced.  The  export  structure  continues  to  improve,  even  though  traditional 
manufacturing  products  still  dominate.  International  price  competitiveness  remained  largely 
unchanged. 

2.3.  CONCLUSIONS 

In  terms  of  the  economic  criteria,  the  country  remains  well  advanced  and,  in  some  areas,  has  made 
further progress towards becoming a functioning market economy. The country should be able to cope 
with competitive pressures and market forces within the Union in the medium term, provided that it 
vigorously implements its reform programmes in order to reduce significant structural weaknesses. 

Economic  activity  stagnated  in  2012,  with  growth  resuming  in  the  first  half  of  2013.  Against  the 
background  of  a  challenging  external  environment,  macroeconomic  stability  was  preserved. 
Unemployment remains very high, especially among young people. The rising deficit and public debt 
levels increased the country’s vulnerability.  

Measures  need  to  be  undertaken  in  order  to  address  the  underlying  reasons  for  the  high 
unemployment, in particular tackling the skills mismatch. The sustainability of public finances needs 
to be strengthened. Fiscal policy needs to be aligned with the country’s structural reform priorities and 
oriented  towards  growth  enhancing  spending.  The  introduction  of  a  medium  term  fiscal  framework 
and strategic planning would contribute to strengthening fiscal discipline. Further efforts are needed to 
effectively  implement  public  financial  management,  in  order  to  ensure  the  most  efficient  and 
transparent use of public and EU resources. To secure more private sector investment, further efforts 
are needed to improve the business environment, which is negatively affected by corruption, as well 
as lengthy and costly market exit procedures. The informal sector remains an important challenge. 

19 

  
 
3.  MONTENEGRO 

In examining economic developments in Montenegro, the Commission’s approach was guided by the 
conclusions of the European Council in Copenhagen in June 1993, which stated that membership of 
the  Union  requires  the  existence  of  a  functioning  market  economy  and  the  capacity  to  cope  with 
competitive pressure and market forces within the Union. 

3.1. 

THE EXISTENCE OF A FUNCTIONING MARKET ECONOMY 

Economic policy essentials 

In  January  2013,  the  country  presented  its  second  Pre-accession  Economic  Programme  (PEP), 
covering  the  period  2013-2015.  The  priority  is  still  to  strengthen  fiscal  and  financial  stability  as  a 
prerequisite  for  long-term  economic  growth.  Overall,  the  political  consensus  on  market  economy 
fundamentals and economic policy was broadly maintained. 

Macroeconomic stability 

After  two  years  of  moderate  growth,  the  economy  entered  into  recession  in  2012.  Real  GDP 
contracted  by  2.5%,  pulled  downward  by  the  poor  performance  of  industry,  construction,  transport, 
financial services and agriculture. Industrial production contracted by 7% year-on-year, driven by the 
decline  in  manufacturing,  particularly  the  metals  industry.  On  the  expenditure  side,  private 
consumption and investments remained  weak, due to stagnant disposable income and the decline of 
construction  works.  Net  exports  had  a  positive  impact  on  growth  with  stronger  tourism  partly 
compensating for the fall in merchandise exports (-18% year-on-year). The average per-capita income 
in purchasing power standards represented 42% of the EU-27 average in 2012. 

The economy came out of recession in 2013 with real GDP expanding by 1.1% in the first quarter of 
2013, and by 3.4% in the second quarter thanks to the positive performance of industrial production, 
and notably utilities. Other sectors, like construction, forestry, transportation, and retail trade recorded 
annual  expansion  but  their  overall  contribution  to  growth  remains  limited.  GDP  growth  slowed 
somewhat  in  the  second  quarter  of  2013.  In  the  first  half  of  2013,  industrial  output  grew  by  10.4% 
year-on-year, maintaining a similar pace in July and August too. In the first six months of 2013 the 
value  of  finalised  construction  works  recorded  1.8%  annual  growth,  and  the  number  of  tourists 
increased by 4% year-on-year, supporting 6.5% year-on-year increase of retail sales. However, private 
domestic  demand  still  remains  subdued  due  to  the  contraction  of  wages,  low  credit  and  a  stagnant 
labour market. Overall, growth has been largely driven by external demand and one-off base effects, 
compensating for a still weak domestic demand. 

In  2012,  the  merchandise  trade  deficit  widened  to  44%  of  GDP  from  40.4%  of  GDP  a  year  before. 
The increase in tourism revenues and higher surpluses from transfers of Montenegrin workers abroad 
did not suffice to fully compensate for the expansion of the trade deficit. As a result, the 2012 current 
account deficit 19% of GDP. In the four quarters to June 2013, the current account deficit narrowed to 
some  16%  of  GDP  as  the  aggregated  balances  of  services,  current  transfers  and  income  were  in 
surplus  while  the  trade  deficit  contracted  as  a  result  of  the  improvement  in  the  energy  balance.  In 
2012,  after  two  consecutive  years  of  contraction,  net  foreign  direct  investment  (FDI)  climbed  by 
16.6% year-on-year to 14.7% of GDP. In the  four quarters to June 2013, net FDI totalled 14.2% of 
GDP. Net errors and omissions remain a substantial source of finance, related to unrecorded revenues 
from  tourism,  remittances  and  other  unregistered  cash  payments  totalling  7.7%  of  GDP  in  2012. 
Overall, despite some improvement, external imbalances still remain very large. 

Unemployment remains very high at nearly 20%, practically unchanged since 2010 according to the 
Labour Force Surveys. In 2012, labour market participation improved marginally to 50% compared to 

20 

 
Progress towards meeting the economic criteria for EU accession: the EU Commission's 2013 assessments 

49%  a  year  before.  Regional  disparities  are  significant.  In  the  coastal  and  central  regions,  the 
unemployment rate is 10% and 15.6% respectively, but it rises to 36.7% in northern Montenegro. At 
national  level,  both  the  number  of  employed  and  the  number  of  unemployed  persons  increased  by 
2.6%  year-on-year  in  2012.  Long-term  unemployment  remains  a  serious  concern,  since  68%  of 
unemployed  persons  have  been  out  of  work  for  more  than  two  years.  Unemployment  particularly 
affects  the  young  (15-24  years),  who  account  for  more  than  40%  of  the  total.  Poor  labour  market 
dynamics have also been reflected in wage moderation. Average gross wages contracted in real terms 
by 3% in 2012 and by 1% in the first half of 2013. Overall, a poorly performing labour market with 
low  participation  and  high  unemployment  rates,  particularly  among  the  young  and  the  long-term 
unemployed, remains a serious challenge. 

Table 3.1:
Montenegro - Main economic trends

Gross domestic product
Private consumption
Gross fixed capital formation
Unemployment
Employment 
Wages
Current account balance
Direct investment (FDI, net)
CPI
Interest rate (3 months)
Stock markets
Exchange rate EUR/EUR
Nominal eff. exchange rate
General government balance
General government debt

Ann. % ch
Ann. % ch
Ann. % ch
%
Ann. % ch
Ann. % ch
% of GDP
% of GDP
Ann. % ch
% p.a.
Index
Value
Index
% of GDP
% of GDP

2008
6,9
N.A.
N.A.
16,8
6,3
N.A.
-49,8
18,9
7,4
N.A.
19.947
1,00
N.A.
-0,4
29,0

2009
-5,7
-12,9
-30,1
19,1
4,8
2,3
-27,9
35,8
3,4
N.A.
13.303
1,00
N.A.
-5,7
38,2

2010
2,5
2,0
-18,5
19,7
-7,1
10,5
-23,0
17,5
0,5
N.A.
13.993
1,00
N.A.
-4,9
40,9

2011
3,2
4,2
-10,3
19,7
0,8
-2,1
-17,7
12,0
3,1
2,27
11.896
1,00
N.A.
-5,4
45,9

2012
-2,5
-3,2
-3,3
19,7
2,1
-3,3
-18,7
14,7
4,1
5,32
9.091
1,00
N.A.
-5,6
54,0

2013 H1
2,3
N.A.
N.A.
19,2
5,1
-1,0
-16,6
14,2
2,2
3,34
9.784
1,00
N.A.
-1,9
53,6

Sources: Thomson Reuters/Ecow in, Eurostat

Unilateral euroisation implies that there is limited  scope for  monetary policy discretion.  Changes  in 
reserve requirements remained the key tool for steering liquidity in the financial system. The Central 
Bank  of  Montenegro  (CBM)  did,  however,  test  the  scope  for  curbing  lending  interest  rates  in 
November  2012.  Rates  on  new  corporate  and  household  loans  were  capped,  during  a  six-month 
period, at 14% and 15% respectively. The measure mostly provided relief for those new property or 
tourism  investment  loans  whose  rates  were  above  these  thresholds.  Yet,  the  CBM  decided  not  to 
renew  the  measure.  At  aggregated  level,  the  weighted  average  lending  interest  rate  contracted 
moderately, from 11.3% in October 2012 to 10.3% until June 2013. 

Average consumer price inflation accelerated somewhat to 4.1% in 2012 compared with 3.1% a year 
earlier, on the back of administrative price increases for electricity and water as well as higher or new 
excises on tobacco, alcohol, carbonated drinks and coffee. Inflationary pressures eased in the first six 
months  of  2013  as  consumer  disposable  income  contracted  due  to  a  personal  income  tax  hike  in 
February 2013. The consumer price index declined further to 2.2% in June, down from 3.9% a year 
before,  as  a  result  of  the  deceleration  of  prices  of  housing  (which  includes  utilities),  alcoholic 
beverages and tobacco, transport, as well as restaurants and hotels. In July, when the upper VAT rate 
was increased, CPI inflation accelerated to 2.7% year-on-year, but declined again to 2.2% in August. 
The impact of the VAT hike on inflation remained marginal as the tax increase did not apply to items 
benefitting from the reduced rate (i.e. some 50% of the consumer basket). Overall, inflation remains 
moderate. 

In  2012,  despite  fiscal  consolidation  efforts,  the  government  had  difficulties  meeting  its  budgetary 
targets. The budget deficit remained high, at 5.6% of GDP, considerably higher than the deficit target 

21 

  
 
 
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Progress towards meeting the economic criteria for EU accession: the EU Commission's 2013 assessments 

of 2.4% GDP, reflecting weaker than expected growth together with the activation of state guarantees 
and the accumulation of tax arrears. General government spending broadened to 47% of GDP, from 
45% a year before representing a substantial deviation from the planned figure of 41%. Social security 
transfers  increased  moderately  (by  0.7%)  driven  by  the  increase  in  military  pension  beneficiaries, 
while public sector gross wages decreased marginally. 

In  the  first  half  of  2013,  the  government  pursued  fiscal  consolidation  through  a  set  of  new  fiscal 
measures,  including  a  freeze  on  pensions  and  limits  on  salary  increases  for  public  enterprises  and 
members of the parliament. Revenue measures consisted of increases of the personal income tax rate 
from 9% to 15% for salaries above the national average, and as of July, of the upper VAT rate. In the 
first  half of the  year, total revenue  grew by 5.3%  year-on-year, supported by accelerating economic 
activity, higher tax rates and more efficient collection, while saving measures reduced expenditures by 
5.2% year-on-year. As a result, the general government deficit fell to 1.9% of annual GDP, compared 
with 3.9% in the same period a year before. The stock of cumulated tax arrears since the outbreak of 
the crisis is estimated at some 11% of GDP. 

In  July  2013,  prompted  by  the  Finance  Ministry,  the  Commercial  Court  launched  bankruptcy 
proceedings  for  the  aluminium  factory  KAP.  The  government  took  over  some  of  KAP’s  debts 
totalling some 3% of GDP, when two state guarantees were called. The Ministry of Finance managed 
to  postpone  parts  of  the  debt  payment  to  2014.  In  view  of  strengthening  fiscal  discipline  the 
government  proposed  in  July  2013  a  budget  and  fiscal  responsibility  law  (i.e.  fiscal  rules),  setting 
upper limits for public debt and budget deficit at 60% and 3% of GDP respectively. The bill, which is 
yet to be adopted by parliament, also foresees an independent fiscal council (within the existing state 
audit institution) to evaluate the government’s economic policy and report to the parliament. Overall, 
fiscal  risks  remain  high.  The  fiscal  position  of  the  government  remains  challenged  by  substantial 
contingent liabilities and growing debt. 

In 2012, the public debt increased to 54% of GDP. External indebtedness expanded by 22% year-on-
year  in  2012  and  accounts  for  three  quarters  of  total  public  debt.  State  guarantees  amounted  to  an 
additional 12% of GDP at the end of 2012. The public debt climbed to 52.5% in August following the 
activation  of  KAP’s  state  guarantees.  Given  the  shallowness  of  the  domestic  financial  markets, 
Montenegro largely relies on foreign markets to finance its debt. Overall, roll-over needs keeps rising, 
together with the risks related to dependence on foreign investor sentiment. 

The  limited  scope  for  monetary  and  exchange  rate  policies  and  the  country’s  vulnerable  external 
situation imply a strong role for fiscal and structural policies in safeguarding macro-financial stability. 
In that sense, the recent efforts to strengthen fiscal consolidation represent a further step to improve 
the  policy  mix.  However,  ensuring  fiscal  sustainability,  coping  with  a  weak  external  position,  and 
public debt reduction, especially after the KAP bankruptcy, remain major challenges. 

Interplay of market forces 

In  2012,  the  state  had  majority  ownership  in  some  30  companies,  some  of  them  in  the  process  of 
liquidation  or  bankruptcy.  The  most  important  ones  are  concentrated  in  network  industries  and  the 
aluminium-bauxite conglomerate. The tenders for the dairy Zora and part of the agricultural company 
Montepranzo  were successfully closed. However, the  sales of the publishing  house Pobjeda and the 
institute  for  physical  therapy  failed.  The  government  renegotiated,  and  in  two  cases  cancelled,  the 
sales  contracts  of  hotels  whose  new  owners  failed  to  invest  in  them.  Some  companies,  like 
Montenegro Post and a few attractive state-owned tourist resorts, are being successfully developed as 
concessions  under  public-private  partnership  schemes.  Overall,  the  privatisation  process,  while 
relatively  advanced,  suffered  some  setbacks  due  to  unsatisfactory  investors’  offers  and  some 
cancellations due to failures in post-privatisation investment. 

22 

 
Progress towards meeting the economic criteria for EU accession: the EU Commission's 2013 assessments 

In  2012  fuel  prices  were  removed  from  the  list  of  administered  prices  and  their  aggregated  weight 
reduced in the harmonised index of consumer prices basket to 5.5%, from 10.7% a year before. At the 
beginning of 2013, the domestic energy market was further opened after the liberalisation of prices for 
large industrial consumers. In 2013, the  weight of administrative prices in the consumer basket  was 
revised upwards to 7.4% after electricity and bread were given greater weight in the annual household 
budget survey. Overall, the influence of the state in price dynamics remains limited. 

Market entry and exit 

In  2012,  3 540  new  businesses  were  registered,  or  6.5%  less  than  in  2011.  However,  a  more 
favourable  environment  in  the  first  half  of  2013  reversed  the  trend,  with  new  registrations  rising  to 
2 367, or 21% more than in the same period a year before. Montenegro has made some improvements 
in  terms  of  the  environment  for  starting  a  business.  After  the  introduction  of  electronic  business 
registration in May 2012, further measures to facilitate registration were implemented at regional level 
too.  An  electronic  portal  was  opened  to  simplify  procedures  for  granting  business  licences  and  to 
reduce the cost of and the time required for obtaining permits. In spring 2013, the parliament adopted 
amendments  to  the  law  on  spatial  planning  and  construction,  shortening  deadlines  for  issuing 
construction permits, increasing the number of ‘objects of public interest’ exempted from communal 
fees and utility charges during construction, and introducing government oversight of municipal fees. 
Concerning market exit, in 2012 the number of liquidations totalled 1 894, declining 9.4% compared 
to  2011.  However,  in  the  first  half  of  2013  the  number  of  liquidations  rose  to  1 067,  increasing  by 
25%  year-on-year.  The  time  to  clear  bankruptcy  is  estimated  at  two  years,  with  a  recovery  rate  of 
43%. Overall, procedures for  market entry  were further simplified,  while some limited progress has 
been achieved in making bankruptcy proceedings less cumbersome. 

Legal system 

Judicial  proceedings,  in  particular  to  enforce  commercial  contracts,  are  reported  to  be  slow  and 
burdensome.  Some  progress  has  been  made  on  simplifying  government  legislation  and  using 
regulatory impact analysis. After the introduction of a ‘regulatory guillotine’ in 2012, less than half of 
the  relevant  recommendations  have  been  followed  so  far.  In  order  to  streamline  caseload,  the 
parliament adopted a law on out-of-court enforcement of commercial contracts by bailiffs. However, 
the implementing legislation for it is not complete. A land register is in place but modernisation of the 
land registry is still under way. The Tax Administration is tackling the informal economy mostly by 
stepping  up  surveillance  of  undeclared  economic  activities.  In  June  2013,  the  law  on  prevention  of 
illegal business came into force. To prevent tax evasion, the law limits cash transactions (including for 
salaries), increases banks transparency on money transactions, and prohibits the establishment of new 
business  for  owners  of  companies  undergoing  bankruptcy  proceedings.  Overall,  further  efforts  are 
required  to  improve  the  legal  system  and  tackle  corruption  with  the  aim  of  improving  the  business 
environment. 

Financial sector development 

The withdrawal of foreign parent bank funding from Montenegrin bank deposits abated towards the 
end of 2012 thanks to calmer financial markets and stronger deposit growth (9% year-on-year in 2012 
and in the  first  half of 2013; compared to 1.5% in 2011). In 2012, the guarantee for banks deposits 
was raised from €35 000 to €50 000. After several years of contraction, bank lending started to grow 
in  2013,  expanding  by  4.6%  year-on-year  in  the  first  half  of  the  year.  The  ratio  of  non-performing 
loans (NPL) increased to 16.9% of total loans at the end of 2012 compared with 15.5% a year earlier. 
At the end of 2012, loan-loss provisions covered 40% of NPLs, which net of provisions represented 
68%  of  banks’  capital.  Following  the  introduction  in  January  2013  of  international  accounting 
standards (IAS/IFRS), loans previously recorded as losses are required to be transferred back onto the 

23 

  
 
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Progress towards meeting the economic criteria for EU accession: the EU Commission's 2013 assessments 

banks’ balance sheets. In the first half of 2013, the NPL ratio worsened, reaching 18.5% at the end of 
June. 

Following the central bank’s recommendations resulting from the stress tests performed in 2012, three 
banks raised their capital by the end of the year. However, at the end of 2012 the aggregate capital of 
commercial  banks  fell  by  5.4%  year-on-year  as  lenders  wrote  off  losses.  Consequently,  the  capital 
adequacy ratio (CAR) declined to 14.7% at the end of 2012 compared to 16.5% a year before. In the 
first six months to June 2013, bank’s capital expanded by 4%, improving the CAR to 15.5%. Some 
83% of banks’ capital remains foreign-owned and 2.7% in public ownership. Banks’ return on assets 
and on equity remained  negative in 2012, at 2.1% and 18.3% respectively, reflected in  the  negative 
profitability of the financial sector in 2012, with an aggregated loss of €56 million compared with a €3 
million loss a year earlier. The rebound of economic activity in the first six months of 2013 conveyed 
positive  return  on  assets  and  on  equity  of  banks  (1.3%  and  9.2%  respectively),  along  with  an 
aggregated profit of €18.5 million. Overall, the banking sector continues to deleverage, increasingly 
relying on deposits to fund their loans. The high level of non-performing loans still weighs on credit 
supply, constraining investments and growth. 

The  domestic  non-bank  financial  sector  remains  shallow.  The  insurance  segment  recorded  3.2% 
annual  growth  in  2012,  supported  by  government  subsidies  on  insurance  for  agriculture.  Insurance 
companies’ gross premium represents some 2% of GDP. Non-life insurance continues to dominate its 
product  structure  with  a  market  share  of  86%  compared  with  14%  for  life  premiums.  Leasing 
contracts offer an aggregated  value of around 4% of GDP. However,  most of these contracts (97%) 
are  for  the  purchase  of  vehicles  rather  than  productive  equipment.  The  stock  exchange’s  annual 
turnover fell by 44.6% to €32.7 million in 2012, after increasing by 7.6% to €59 million a year earlier. 
Overall,  the  small  size  of  the  domestic  financial  market  makes  the  country  highly  dependent  on 
external financing, and therefore, vulnerable to shifts in market conditions. 

3.2. 

THE  CAPACITY  TO  COPE  WITH  COMPETITIVE  PRESSURE  AND  MARKET  FORCES  WITHIN  THE 
UNION 

Existence of a functioning market economy 

Macroeconomic stability was broadly preserved. The country came out of recession in 2013 driven by 
external demand. Domestic demand remains subdued and the unemployment rate high. Credit started 
to slowly flow back into the economy, but the high level of non-performing loans still weigh on bank 
capitalisation  and  hence,  on  credit  supply.  External  imbalances,  albeit  declining,  still  remain  very 
high.  The  government  pursued  further  fiscal  consolidation  measures.  However,  the  fiscal  position 
weakened burdened by substantial liabilities from the bankrupt aluminium industry. 

Human and physical capital endowment 

Employers  complain  about  the  lack  of  university  graduates  with  the  right  set  of  skills.  However, 
further  reform  of  the  education  and  vocational  training  systems  has  been  delayed  due  to  budgetary 
constraints.  So  far,  government  efforts  are  focused  on  subsidies  for  employers  to  recruit  those  with 
more difficulties into the labour market as well as young graduates without working experience. The 
large number of workers in early retirement remains a particular issue for the sustainability of public 
finances.  Overall,  more  efforts  are  needed  to  promote  skills  in  order  to  build  the  capacity  of 
businesses to meet international competitive pressure. 

A substantial part of investment in infrastructure is funded externally through FDI and international 
financial institutions. Work on the power transmission line for the interconnection project with Italy 
started in 2013 and will develop the local and regional electricity markets. The construction of several 

24 

 
Progress towards meeting the economic criteria for EU accession: the EU Commission's 2013 assessments 

small hydropower plants is under way, and in June 2013, a tender for additional concessions on eight 
watercourses was launched. Work on two wind power plants has been delayed pending the release of 
the urban plans. In July 2013 the Podgorica-Niksic railway line, linking the two largest cities together 
with the steel factory and bauxite mines to the port of Bar, was reopened after several years’ closure 
for  upgrading.  In  the  tourism  sector,  the  second  phase  of  Porto  Montenegro  and  work  in  Lustica 
peninsula  and  Kumbor  are  ongoing.  Overall,  capacity  increase  in  transport,  energy,  and  tourism 
sectors are setting the basis for future exports and overall growth performance. 

In  2012,  gross  expenditure  on  research  and  development  (R&D)  represented  some  0.4%  of  GDP, 
roughly the same as a year before. The private sector accounts for barely 27% of this figure. Overall, 
although  public  institutions  participate  actively  in  European  research  programmes,  private  sector 
involvement remains limited (See Chapter 25 — Science and research). 

Sector and enterprise structure 

The  development  of  a  regional  electricity  market  is  under  way,  and  includes  preparation  of  the 
interconnection infrastructure between the Italian and Balkan peninsulas through Montenegro and new 
connections between regional power systems, increased capacity and the establishment of the South-
East  European  Coordinated  Auction  Office  in  Podgorica.  In  May  2013,  the  government  signed  a 
memorandum of understanding  with  Albania, Croatia and  Bosnia and Herzegovina as a preliminary 
step towards developing a domestic  gas  market connected  to the Ionic-Adriatic pipeline. The postal 
market has been formally liberalised. The restructuring of Montenegro Airlines is being implemented 
before  re-listing  the  company  for  privatisation.  The  future  of  the  aluminium  industry  remains 
uncertain.  The  company  is  bankrupt  and  (if  accepted)  a  restructuring  plan  would  still  require 
substantial  investment  and  subsidies.  Overall,  Montenegro’s  industrial  structure  is  shifting  from 
aluminium towards energy. At the same time, the overall structure of the economy is shifting towards 
services.  In  2012,  a  breakdown  of  average  employment  by  sectors  showed  76%  of  workers  to  be 
employed in services, of which 24% were employed in wholesale and retail trade. Industry accounted 
for  18%  (with  7%  in  manufacturing,  6%  in  construction,  2.4%  in  utilities  and  1%  in  mining),  and 
agriculture  (including  forestry  and  fishing)  5.6%.  Overall,  the  expansion  of  the  service  sector  is 
mostly in the non-tradable sector. 

Small and medium-sized enterprises (SMEs) find it difficult to access credit. Public-sector support for 
SMEs  remains  limited.  The  value  of  financial  relief  provided  by  the  state  Investment  and 
Development Fund (IDF) to SMEs in 2012 was €14 million. The IDF also provides some credit lines 
for  start-ups  and  factoring  facility.  Some  public  support  is  also  available  to  organise  public  export 
promotion  programmes,  including  participation  in  trade  fairs,  trade  missions  and  market  research 
studies. 

The informal sector is large and is fuelled by weaknesses in tax and expenditure policies and in law 
enforcement, including the fight against corruption. In an effort to reduce the informal economy, the 
government strengthened controls on excise goods, retail trade records and the labour market. Overall, 
credit constraints and unfair competition from the large informal sector remain major challenges for 
the development of SMEs. 

State influence on competitiveness 

In  2012,  the  government  allocated  €42  million  or  1.3%  of  GDP  in  state  aid,  of  which  84%  was 
allocated to Montenegro Airlines. Yet, the state aid report does not cover the support to KAP for the 
supply in electricity, state guarantees or tax arrears. Parliament’s decision in April 2013 to keep loss-
making KAP going implies that state aid would continue until the company is thoroughly restructured 
or liquidated. Under the Stabilisation and Association Agreement and EU competition rules, any state 
aid must be temporary and accompanied by compensatory measures, and depends on a restructuring 

25 

  
 
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Progress towards meeting the economic criteria for EU accession: the EU Commission's 2013 assessments 

plan ensuring the long-term viability of the company. Overall, state aid has been largely concentrated 
on two companies: KAP and Montenegro Airlines. 

Economic integration and convergence with the EU 

In 2012, Montenegro’s trade openness fell by 4% to 69% of GDP, due to the contraction of exports. 
Sales  to  Italy,  Hungary  and  Greece  plunged  by  between  60%  and  90%  over  the  year,  reducing  the 
EU’s share to 36.8% of Montenegro’s total trade in 2012, from 41.3% the year before. The CEFTA 
countries increased their share to 47.5% of Montenegro’s total trade in 2012, from 44% a year earlier. 
In the six months to June 2013, the share of trade with the EU and CEFTA decreased marginally to 
36.4% and 47.1% respectively. In 2012, the EU accounted for 50% of total investment in Montenegro. 
Russia is still the single largest investor in Montenegro,  with 25% of total FDI, of  which 82% is in 
real  estate.  CEFTA  countries  accounted  for  5%  of  total  net  FDI.  The  reduction  of  production  costs 
through wage moderation preserved Montenegro’s external competitiveness to some extent. Overall, 
trade integration with the EU remains high. 

3.3.  CONCLUSIONS 

As regards the economic criteria, Montenegro has made some further progress towards a functioning 
market  economy.  The  country  should  be  able  to  cope  with  competitive  pressures  and  market  forces 
within  the  Union  over  the  medium  term,  provided  that  it  continues  to  address  current  weaknesses 
through appropriate macroeconomic policies and structural reforms. 

After  entering  in  recession  in  2012,  the  country  came  out  of  recession  in  2013.  The  resilience  of 
tourism and foreign direct investments (FDI) together with an increase of electricity exports supported 
the recovery, compensating for a weak domestic demand. The current account deficit is declining, but 
still  remains  very  high.  In  July,  the  aluminium  producer  KAP  was  put  into  bankruptcy  procedure, 
which  represents  a  risk  to  public  finances,  in  view  of  the  considerable  size  of  contingent  liabilities. 
Unemployment remained very high. Credit growth turned positive after four years of contraction, but 
the high levels of non-performing loans still weigh on bank capitalisation and hence, on credit supply.  

To cope with the existing economic challenges and to reduce external imbalances, Montenegro needs 
to strengthen competitiveness, by improving productivity and attracting further FDI into more sectors 
than  tourism  and  real  estate.  The  establishment  of  a  sound  business  environment  continues  to  be 
hampered by the weak rule of law and corruption. The high unemployment rate requires bridging the 
gap  between  supply  and  demand  of  labour  skills  and  allowing  more  independent  wage  setting  at 
company  level.  It  also  requires  the  strengthening  of  the  public  employment  service  in  order  to 
implement the activation policies and establish an inclusive and efficient labour  market. Authorities 
should consider objectively the viability of the aluminium conglomerate under market conditions and 
the  best  possible  solution  without  exacerbating  the  pressure  on  public  finances.  The  path  of  fiscal 
consolidation  should  be  continued,  including  efforts  to  collect  tax  arrears.  The  high  level  of  non-
performing loans remains a matter of concern and calls for a reinforced banking supervision enforcing 
adequate provisioning. The informal sector remains an important challenge. 

26 

 
4. 

SERBIA 

In  examining  economic  developments  in  Serbia,  the  Commission’s  approach  was  guided  by  the 
conclusions of the European Council in Copenhagen in June 1993, which stated that membership of 
the  Union  requires  the  existence  of  a  functioning  market  economy  and  the  capacity  to  cope  with 
competitive pressure and market forces within the Union. 

4.1. 

THE EXISTENCE OF A FUNCTIONING MARKET ECONOMY 

Economic policy essentials 

In January 2013, the government submitted to the European Commission its Pre-Accession Economic 
Programme (PEP) for the period 2013-2015. The programme foresees a mild and plausible recovery 
by 2% in 2013 and further, rather optimistic, acceleration of real GDP growth to 3.5% and 4% in the 
following two years. A fiscal consolidation package, mostly on the revenue side, was adopted in the 
autumn  of  2012.  Revenue  underperformance  and  expenditure  pressures  led  to  another  set  of 
consolidation measures in July and to a rebalancing of the budget, increasing the 2013 deficit target 
from  the  initial  3.6%  of  GDP  to  an  estimated  5.3%  of  GDP.  Some  steps  to  address  the  numerous 
obstacles to growth have been taken, but the adoption and implementation of a number of important 
structural reforms has been delayed. The pre-cautionary Stand-By Arrangement (SBA) with the IMF 
expired in March 2013, without being activated and no new arrangement has been concluded. Overall, 
in  view  of  the  difficult  economic  situation,  economic  reforms  have  progressed  slowly.  Achieving  a 
sustainable fiscal position and tackling the numerous obstacles to growth remains a challenge. 

Macroeconomic stability 

In  2012,  Serbia  went  through  another  recession  and  the  economy  contracted  by  1.7%.  Domestic 
demand  weakened  significantly  in  the  last  quarter  when  private  consumption  fell  by  2%  and  gross 
fixed capital formation by 3.4%. Loose fiscal policy, which had boosted government expenditure and 
led to a strong public consumption growth in the pre-election period, was reversed by the year’s end 
and exports remained the only driver of growth. Real GDP grew by 2.1% in the first and by 0.7% in 
the  second  quarter.  However,  economic  growth  has  been  uneven,  concentrated  in  few  sectors,  and 
employment stagnated. Private consumption has continued to decrease and import growth lost pace. 
Activity in key sectors such as construction and retail trade continued to decline. Average per capita 
income in purchasing power standards stood at 35% of the EU average in 2012, unchanged from the 
year  before.  Overall,  the  economy  is  slowly  emerging  from  another  recession  but  growth  remains 
weak and narrowly based. 

The  economy  is  still  facing  significant  external  imbalances.  In  2012,  the  current  account  deficit 
increased  to  10.5%  of  GDP,  driven  mainly  by  an  expanding  trade  deficit.  However,  this  trend  was 
reversed  by  the  end  of  the  year  and,  in  the  first  half  of  2013  the  annualised  current  account  deficit 
shrank  by  half  in  euro  terms  to  an  estimated  5.7%  of  GDP.  By  July,  exports  of  goods  and  services 
were  up by 20% in euro terms, explaining the bulk of the  current account adjustment  while, due to 
falling  domestic  demand,  imports  remained  subdued.  Despite  a  slowdown  in  the  EU  economies 
hosting significant Serbian diaspora, private remittances increased strongly by 13% in the first seven 
months. 

External financial flows have been volatile and government borrowing replaced private sector inflows 
as the main source of financing of the current account deficit. Due to significant outflows, net foreign 
direct investment fell to 0.8% of GDP in 2012. It gained some ground in 2013, but remained far below 
pre-crisis  levels,  as  domestic  risks  and  weak  EU  economy  supressed  inflows.  Wholesale  trade, 
construction and financial services sectors attracted more than half of all net foreign investment in the 
country,  while  inflows  into  sectors  that  could  potentially  boost  export  capacity  remained  marginal. 

27 

 
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Progress towards meeting the economic criteria for EU accession: the EU Commission's 2013 assessments 

Portfolio  investment  increased  as  a  result  of  significant  government  borrowing  (three  rounds  of 
eurobonds  denominated  in  US  dollars,  totalling  about  €2.5  billion).  In  the  first  half  of  2013,  banks 
continued  to  reduce  their  foreign  liabilities.  The  central  bank  foreign  exchange  reserves  stood  at  a 
comfortable  €10.7  billion  in  August,  covering  more  than  seven  months’  worth  of  imports.  Private 
sector  external  debt  has  remained  fairly  stable;  however,  since  September,  rising  government 
indebtedness has kept total external debt high, at 83.7% of GDP by the end of June. Overall, external 
imbalances  have  been  falling  but  remain  significant.  Government  borrowing  replaced  private  sector 
inflows as the main source of financing of the current account deficit. 

Table 4.1:
Serbia - Main economic trends

Gross domestic product
Private consumption
Gross fixed capital formation
Unemployment (>15 years old)  %
Employment (registered) 
Wages (average, net real)
Current account balance
Direct investment (FDI, net)
CPI (end of period)
Interest rate (3 months)
Stock markets
Exchange rate RSD/EUR
Nominal eff. exchange rate
General government balance
General government debt
* Q1

Ann. % ch
Ann. % ch
Ann. % ch

Ann. % ch
Ann. % ch
% of GDP
% of GDP
Ann. % ch
% p.a.
Index
Value
Index
% of GDP
% of GDP

2008
3,8
6,8
8,5
13,6
-0,1
4,5
-18,8
5,7
8,6
5,20
2.604
81,94
96,9
-2,6
29,2

2009
-3,5
-2,7
-22,1
16,1
-6,1
1,0
-7,2
4,7
6,6
13,40
1.197
94,08
89,6
-4,5
34,7

2010
1,0
-1,0
-5,5
19,2
-3,6
7,4
-7,6
3,1
10,3
10,85
1.283
103,48
79,3
-4,7
44,5

2011
1,6
-1,2
8,4
23,0
-3,1
11,1
-9,2
5,9
7,0
12,56
1.270
102,01
81,8
-4,9
48,2

2012
-1,7
-2,0
-3,4
23,9
-1,1
9,2
-10,6
0,8
12,2
12,50
932
113,52
74,1
-6,4
59,3

2013 H1
1,5
-1,5
10,7
24.1*
-0,6
6,0
-7,7
2,3
9,8
9,69
1.042
111,81
74,5
-5,1
60,7

Sources: Thomson Reuters/Ecow in, Eurostat

In 2012, the unemployment rate increased to a record high of 23.9%. According to the April Labour 
Force Survey, the employment rate reached an eleven-year low, while the activity rate edged slightly 
up but was still very low at 47.9%. Only about one person in three above the age of 15 was employed. 
Employment  in  the  unreformed  public  sector  remained  largely  intact.  Long-term  and  youth 
unemployment  have  been  persistently  high  and  unemployment  is  very  high  almost  everywhere 
throughout the country. There are a number of restrictions related to severance payments, duration of 
fixed-term  employment,  industry-wide  collective  agreements,  termination  of  employment,  payroll 
calculation and compensations which are obstacles to job creation and reduce labour flexibility. The 
first  signs  of  economic  recovery  in  2013  did  not  spill  over  to  the  labour  market.  The  number  of 
registered  employed  continued  to  fall  and  registered  unemployment  crept  up.  Since  September  last 
year, gross and net wages have been declining in real terms. In the first seven months of 2013, real 
wages fell by 4.3% on average. Departing from regular indexation rules, due to the difficult economic 
situation, the government increased wages in the public sector by 2% in October and April although, 
at  11%  of  GDP  in  2012,  total  government  spending  on  wages  and  salaries  remains  relatively  high. 
Overall,  unemployment  is  very  high  and  sustainable  employment  creation  represents  a  major 
challenge. Labour market rigidities are significant. 

The monetary policy framework remained unchanged and the National Bank of Serbia reconfirmed its 
commitment  to  inflation  targeting.  In  November,  parliament  passed  amendments  to  the  Law  on  the 
National  Bank,  which  aimed  at  correcting  some  of  the  amendments  of  August  2012,  which  had 
undermined  the  independence  of  the  central  bank.  Until  April,  annual  inflation  remained  at  double-
digit levels, spurred by a legacy from 2012 of depreciating currency, hikes in indirect taxes and high 
food  prices,  and  the  inflation  target  (4%  ±1.5  percentage  points)  was  missed  by  a  wide  margin. 
However,  since  November  monthly  inflation  rates  have  come  down,  averaging  0.2%  in  the  period 
until August, due to weak domestic demand, mostly stable exchange rate and delayed adjustments in 

28 

 
 
Progress towards meeting the economic criteria for EU accession: the EU Commission's 2013 assessments 

administered  prices.  These  factors,  along  with  base  effects  and  food  price  moderation  because  of 
better agricultural season, supported rapid disinflation over the summer and inflation fell to 7.3% in 
August. 

The central bank responded to the elevated inflation by tightening its stance, raising the key interest 
rate in every month from September (10.5%) to February (11.75%). As inflationary pressures started 
dissipating, in May the bank lowered its key rate by half a percentage point, to 11.25%, followed by 
another  cut  to  11.00%  in  June.  Reduced  political  risks,  improving  external  accounts  and  tighter 
monetary  policy  have  broadly  stabilised  the  exchange  rate.  From  September  to  April,  the  dinar 
appreciated vis-à-vis the euro by around 4% and, although this trend was reversed in early June, by 
early  September  2013  the  dinar  was  still  stronger  than  a  year  ago.  The  central  bank  continued 
interventions  to  smoothen  excessive  daily  volatility  on  the  foreign  exchange  market.  In  view  of  the 
high  degree  of  euroisation  of  the  economy  and  significant  pass-through  effects  on  inflation,  the 
relatively  stable  exchange  rate  played  a  significant  role  in  stabilising  inflation.  Overall,  inflationary 
pressures have receded, helped by a stronger dinar, subdued domestic demand and a better agricultural 
season. However, inflation remains inherently volatile, heavily dependent on unstable food prices and 
exchange rate fluctuations. 

In  2012,  an  election  year,  budget  expenditures  went  off-track  across  almost  all  major  categories, 
reaching  their  highest  level  in  years.  Most  importantly,  previous  small  gains  in  expenditure 
consolidation, in particular in compensation of employees, subsidies and pensions, have been wiped 
out.  In  a  revised  budget,  adopted  in  September  2012,  the  new  government  took  a  number  of 
consolidation  measures,  mostly  on  the  revenue  side.  Nevertheless,  the  deficit  overshot  by  far  the 
initial  target  of  4.25%  and  reached  6.4%  of  GDP  and  was  even  higher  if  expenditure  on  bank 
recapitalisations and called guarantees are taken into account. 

Building on the measures adopted in the autumn, the 2013 budget envisaged a sharp deficit reduction 
to 3.6% of GDP. However, tax revenue underperformed from the beginning of the year, putting this 
target beyond reach. By the end of April, the general government deficit stood at 46% of the planned 
for the year. The higher than expected deficit prompted another round of measures in May and led to a 
full  budget  revision,  adopted  by  the  parliament  in  July.  The  May  measures  were  mainly  on  the 
revenue  side  and  included  a  reduction  of  the  wage  tax  and  increases  of  employees’  social  security 
contribution and of the property tax base. The July revision raised the annual deficit target from 3.6% 
to an estimated 5.3% of GDP. It envisaged cuts in ministries’ expenditure allocations, fixed indexation 
of wages and salaries by 0.5% in October 2013 and increases in some outlays. The government also 
adopted a public sector reform programme, including an action plan to finalise enterprise restructuring 
by  mid-2014. By the end of August, total revenue declined by 4.1%,  while public expenditure have 
been  kept  largely  in  check  and  declined  by  5.8%  in  real  terms.  However,  quasi-fiscal  expenditure, 
related  to  bank  recapitalisations  and  payments  on  called  guarantees,  have  been  significant, 
undermining  budget  transparency  and  weighing  heavily  on  public  finances.  Overall,  a  series  of 
measures,  mostly  on  the  revenue  side,  failed  to  deliver  the  expected  reduction  of  the  deficit. 
Expenditure  inefficiencies  and  the  high  level  of  spending  on  wages  and  pensions  still  need  to  be 
addressed in a systematic way. 

Fiscal  rules  were  breached  and  government  debt  significantly  exceeded  the  45%  of  GDP  limit, 
reaching  close  to  60%  in  2012.  In  line  with  legislative  requirements,  the  government  presented  a 
programme of reducing  government debt, according to  which, and in a rather optimistic  scenario, it 
will take until 2020 until the debt falls again below the 45% threshold. In 2013, the high budget deficit 
and  new  government  borrowing  continued  to  push  the  debt  up.  Since  the  beginning  of  the  year, 
government-guaranteed  debt  and  called  guarantees  have  also  increased,  reflecting  continued 
government  support  of  loss-making  public  enterprises.  Taking  advantage  of  the  favourable 
international environment and declining  interest rates on the domestic  government bonds  market, in 
April the government prepaid some €330 million of its obligations towards the London Club. Interest 

29 

  
 
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Progress towards meeting the economic criteria for EU accession: the EU Commission's 2013 assessments 

payments to service the debt went up by 55% to 2.0% of GDP in 2012 and increased further in 2013. 
Overall,  the  adoption  and  implementation  of  a  credible  medium-term  fiscal  adjustment  programme, 
backed by systemic reforms of the public sector to restore fiscal sustainability and stem further rise in 
the government debt, is urgently needed. 

Recent fiscal consolidation efforts have been mainly on the revenue side where the space for further 
measures  has  been  largely  exhausted,  with  the  exception  of  decreasing  costly  tax  expenditures  and 
improving collection. Some small steps have been taken to reduce and restructure current expenditure 
and to tackle  spending  inefficiencies but the big and  unreformed public  sector remains  a significant 
drain on the budget. High export growth has softened the effects of depressed domestic demand and 
reduced  external  imbalances,  relieving  some  of  the  depreciating  pressures  on  the  dinar.  Inflation 
decelerated  but  monetary  policy  continues  to  be  restricted  by  unstable  food  prices,  irregular 
administered price adjustments and the high degree of euroisation of the economy. Overall, achieving 
a proper policy mix is still a challenge. Revenue-based fiscal adjustment has largely reached its limits 
and monetary policy efficiency remains constrained. 

Interplay of market forces 

Due to changes in consumer prices’ basket, the proportion of administered prices fell by 2 percentage 
points  to  20%.  Since  the  beginning  of  the  year,  gas  prices  were  adjusted  twice,  while  a  planned 
electricity  price  increase  was  postponed  several  times  until  August,  when  the  price  was  raised  on 
average  by  11.3%  (10.9%  for  households).  As  of  2013,  the  electricity  and  gas  markets  have  been 
liberalised  for  big  consumers  connected  to  the  transmission  network  which  need  to  buy  energy  at 
strictly market prices. The government continued to control prices of some public utilities indirectly 
by setting a limit on increases in the prices of communal and public city transport services which are 
under  the  control  of  the  local  authorities.  In  November,  the  government  adopted  new  criteria  for 
wholesale and retail price formation for medicines for human consumption issued on prescription. The 
government  decree  which  capped  retail  margins  at  10%  for  basic  foodstuffs  expired  at  the  end  of 
2012. Overall, price liberalisation has advanced but state control over prices remains significant. 

in  major  sectors  such  as  energy, 

The  state  holds  predominant  stakes 
transport  and 
telecommunications.  Some  legislative  efforts  were  made  to  improve  the  operation  of  public 
companies,  which  continued  to  be  poorly  managed,  largely  overstaffed  and  loss  making.  A  law  on 
public  companies  was  adopted,  setting  criteria  and  delineating  a  procedure  for  the  appointment  of 
companies’ management. The government continued to provide state guarantees for liquidity loans to 
major  companies  and  ‘ad  hoc’  subsidies  to  selected  manufacturing  state-owned  enterprises  to  cover 
capital  investment  in  modernising  their  equipment.  Some  of  the  large  state-owned  companies  have 
been  tendered  (unsuccessfully)  for  privatisation  or  are  in  the  process  of  setting  up  strategic 
partnerships with foreign investors. In April, with significant support from the state, the government 
partially re-started production in the loss-making steel mill in Smederevo. 

In  order  to  revive  the  privatisation  of  socially  owned  enterprises,  the  Law  on  Privatisation  was 
amended  in  December  2012,  enabling  creditors’  forced  collection  of  their  claims  against  entities 
subject to privatisation after 30 June 2014. An action plan to restructure 179 of these companies was 
adopted in June, with a view to privatising the viable ones (fully or partially) and selling off assets and 
initiating bankruptcy procedures for those enterprises that have no market prospects. In line with the 
plan, a bankruptcy procedure for 26 enterprises has already been initiated. Overall, some steps have 
been  taken  to  revive  the  privatisation  process,  especially  regarding  enterprises  undergoing 
restructuring.  The  state  presence  in  the  economy  remains  significant  and  state-owned  companies 
continued to accumulate losses. 

30 

 
Progress towards meeting the economic criteria for EU accession: the EU Commission's 2013 assessments 

Market entry and exit 

The  introduction  of  the  ‘one-stop  shop’  business  registration  system  in  2009  has  significantly 
improved  the  efficiency  and  speed  of  the  registration  procedure.  As  of  October  2012,  the  fee  for 
obtaining  a  company  registration  code,  assigned  by  the  Statistical  Office,  was  abolished.  However, 
market entry is still hampered by lengthy and costly procedures for granting various permits, notably 
construction  permits.  With  amendments  to  the  Law  on  Planning  and  Construction,  adopted  in  late 
December,  the  requirement  for  converting  use  rights  into  ownership  rights  in  order  to  receive  a 
construction permit, for land obtained through privatisation, was abolished for one year. In May, the 
Constitutional Court suspended the execution of this provision until determining its constitutionality. 
In  the  first  half  of  2013,  the  number  of  companies  with  blocked  accounts  reached  44.7  thousand, 
marking  a  drop  of  around  25%  since  September.  Overall,  red  tape  and  difficulties  in  obtaining 
construction permits continue to be important obstacles for business expansion. 

Legal system 

While  the  legal  basis  has  developed  further,  the  implementation  of  laws  needs  to  be  seriously 
strengthened. The uneven and slow enforcement of laws has an impact on the cost of doing business. 
The backlog in the courts is still substantial and companies — aware of the limitations of the system 
—  often  avoid  using  the  courts  as  a  legal  solution  to  their  problems.  Enforcement  of  restitution 
legislation,  which  is  expected  to  improve  legal  clarity  over  real  estate  ownership,  is  ongoing.  By 
August 2013, about 25% of all submitted claims were resolved. A new Law on Public Procurement, 
increasing  transparency  and  including  measures  to  prevent  corruption  and  conflicts  of  interest,  was 
adopted  in  December.  The  informal  economy  remains  strong  and  is  a  major  hindrance  to  fair 
competition  and  business  development.  Corruption  harms  the  business  environment,  although  the 
fight against it has intensified. Overall, legal predictability and enforcement of court decisions remain 
weak. Some progress  has been  made in improving property rights. Further concrete  steps should be 
taken swiftly to improve the business environment. 

Financial sector development 

Part  of  the  banking  system  has  been  under  stress,  which  has  prompted  state  intervention,  costly 
recapitalisations  and  consolidation  of  state-owned  banks.  In  October,  parliament  passed  a  law 
allowing assets and liabilities from problematic state-owned banks to be transferred to viable banks. 
On this basis, the cases of two troubled banks (Agrobanka and Development Bank of Vojvodina) have 
been  resolved  with  unlimited  coverage  of  deposits.  Further  steps  in  bank  consolidation  were  made 
when Telenor Serbia, a major telecom operator in the country, took over the local KBC Banka, while 
Société Générale Bank assumed KBC’s clients and portfolio. A total of 31 banks  were  operating in 
mid-2013  —  two  less  than  a  year  earlier.  The  banking  sector  continued  to  dominate  the  financial 
system, accounting for 93% of total assets in 2012. Within the banking sector, foreign-owned banks 
are preponderant. As of June, there were 21 foreign banks, accounting for three quarters of the assets, 
almost 80% of lending and 70% of all bank deposits. There were also seven banks controlled by the 
state  and  only  three  small  private  banks.  Financial  intermediation  remained  broadly  unchanged  and 
banking sector assets amounted to 91.8% of GDP by the end of 2012. 

Capital adequacy indicators improved and the regulatory capital to risk-weighted assets of the system 
stood at 20.2% in June, well above the required minimum of 12%. The level of Euroisation remained 
high,  with  about  81%  of  deposits  and  72%  of  households  and  enterprises  loans  denominated  in  or 
linked to foreign currency. Lending activity decelerated significantly and, excluding the exchange rate 
effect, domestic lending growth fell to 1% in June. Corporate loans declined the most, especially after 
subsidised lending was suspended due to exhaustion of funds, while household lending increased only 
marginally. Commercial banks opted for low-risk investments, increasing their holdings at the central 
bank and reducing external liabilities. A weak labour market and falling incomes have undermined the 

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Progress towards meeting the economic criteria for EU accession: the EU Commission's 2013 assessments 

growth  of  non-monetary  sector  deposits,  which  has  steadily  decelerated.  The  quality  of  the  loan 
portfolio worsened, mainly in its corporate sector segment, and the gross non-performing loans ratio 
reached 19.9% in June. In December, the central bank amended its Decisions on Risk  Management 
and on the Classification of Bank Balance Sheet Assets and Off-balance Sheet Items with the aim of 
facilitating the resolution of accumulated non-performing loans. Following the closure of Agrobanka, 
which  had  made  significant  losses,  bank  profitability  improved.  Still,  a  number  of  small  banks, 
holding  a  combined  market  share  of  around  15%,  continued  to  run  losses.  Overall,  banking  sector 
capitalisation  and  liquidity  indicators  remained  strong.  However,  credit  growth  stagnated,  non-
performing loans are high and vulnerabilities need to be addressed. 

The main index of the Belgrade Stock Exchange BelexLine has increased by 28% (from September) 
by  early  April,  before  losing  more  than  half  of  this  gain  during  the  summer.  The  insurance  sector 
remains underdeveloped, with a ratio of total premiums to GDP at 1.8% and per capita premiums of 
about  €75.  The  sector  is  dominated  by  non-life  insurance,  which  accounted  for  80.7%  of  total 
premiums. The number of insurance companies remained unchanged at 28, of which 24 were engaged 
exclusively  in  insurance  business  and  4  in  reinsurance.  Most  of  the  companies  (21)  were  under 
majority  foreign ownership and they dominated the  market  with a share of 90.8% in life premiums, 
57.6% in non-life premiums, 68.8% in total assets and 65.5% in employment. The insurance sector’s 
share  of  total  financial  sector  assets  increased  slightly,  to  4.5%  in  2012.  The  assets  controlled  by 
voluntary pension funds have increased but are still marginal at 0.5% of GDP, while the importance 
and operations of leasing companies continued to decline. Overall, the  non-banking  financial  sector 
remains underdeveloped. 

4.2. 

THE  CAPACITY  TO  COPE  WITH  COMPETITIVE  PRESSURE  AND  MARKET  FORCES  WITHIN  THE 
UNION 

Existence of a functioning market economy 

State presence in the economy remains significant, while the private sector is weak and unprotected as 
the rule of law is not systematically observed. Economic reforms have progressed slowly. Domestic 
and external deficits remain high and there are significant structural rigidities and obstacles to growth. 
Overall,  the  functioning  of  market  mechanisms  remains  hampered  by  distortions  and  legal 
uncertainty. 

Human and physical capital 

The gap between supply and demand of skilled workforce remains and the education system continues 
to  educate  a  workforce  that  does  not  necessarily  correspond  to  the  needs  of  the  economy.  As  a 
consequence, the main features of the labour market are high unemployment of people with lower and 
intermediate  education,  and  high  long-term  and  youth  unemployment.  In  October  2012,  the 
government  adopted  an  education  strategy,  which  envisages  a  number  of  measures  to  improve  the 
quality of education at all levels by 2020. However, action plans for implementing the strategy have 
so  far  not  been  drafted  and  funding  is  constrained  by  the  need  to  pursue  expenditure-based  fiscal 
consolidation.  Active  labour  market  programmes  remain  underfunded  and  do  not  seriously  address 
youth  and  long-term  unemployment.  Overall,  the  education  strategy  is  ambitious  but  its 
implementation is a challenge. 

Serbia  continues  to  need  significant  investment  to  improve  and  upgrade  its  physical  infrastructure, 
which has been neglected for many years. Government investment increased to 3.7% of GDP in 2012 
but remains low and declined by 37% in real terms in the first eight months of 2013. Works on major 
transport corridors are progressing  slowly, delayed in part  by land expropriation issues, overlapping 
competencies of different institutions and lack of project documentation. Energy efficiency continues 

32 

 
Progress towards meeting the economic criteria for EU accession: the EU Commission's 2013 assessments 

to be low and energy infrastructure, in particular electricity generation and distribution, needs further 
investment.  Steps  have  been  taken  to  secure  foreign  financing  for  big  infrastructure  projects  in  the 
transport  and  energy  sectors,  which  may  help  to  speed  up  work  on  strategically  important  projects. 
Greenfield foreign direct investment (FDI) has been  marginal, despite continued provision of costly 
government subsidies. Overall, the physical infrastructure needs substantial investment. Government 
investment  is  constrained  by  the  tight  financial  conditions  and  the  urgent  need  of  further  fiscal 
consolidation. Securing financing for large transport and energy projects need to be in line with public 
debt sustainability. 

Sectoral and enterprise structure 

Following  particularly  bad  weather  in  the  winter  and  a  drought  in  the  summer,  in  2012  the  value 
added  in  agriculture  declined  by  17%  and  its  share  of  gross  value  added  dropped  to  10.4%  from 
10.8% a year earlier. Industry’s share also fell, from 29.3% to 28.7%, while services increased their 
share  to  61%  of  GDP.  Employment  remained  roughly  unchanged  across  the  sectors.  The  informal 
sector,  driven  by  labour  law  rigidities  and  taking  advantage  of  weaknesses  in  tax  and  expenditure 
policies and in law enforcement, remained significant. Overall, the economy is dominated by services, 
although agriculture’s share remains high. The informal sector is a significant challenge. 

State influence on competitiveness 

State aid reported in 2012 was 7% higher than in 2011, representing 2.6% of GDP. Of the total state 
aid granted in 2012, 35.8% was regional aid, 13.6% was in the form of other horizontal aid, 22% was 
sectoral aid, and 28.6% went to agriculture. There was very little aid given to training and to research 
and development. Most of the aid was given in subsidies (close to 60%) or as tax incentives (32.6% of 
total).  State-controlled,  monopolistic  structures  remain  in  a  large  number  of  sectors  and  the  state 
continued to subsidise heavily the transport sector, which received almost a fifth of all aid. State aid 
control needs to be enforced consistently and the exemption from state aid rules given to enterprises 
that are being privatised still needs to be abolished. New state aid measures need to be systematically 
notified before being put into force. The Commission for State Aid Control still has to demonstrate its 
independence  through  ex  post  controls  and  use  of  the  provision  on  recovery  of  unlawful  state  aid. 
Overall,  the  state  continues  to  substantially  influence  competitiveness  by  providing  significant  and 
wide-ranging forms of state aid. 

Economic integration with the EU 

The EU remains Serbia’s main trading partner, accounting for 58.1% of its total exports and 58.2% of 
its imports in 2012. Shares of both Serbia’s exports to the EU and imports from the EU have increased 
slightly  in  comparison  to  2011.  Serbia’s  exports  to  the  EU  have  grown  faster  than  its  imports, 
resulting  in  an  increase  in  the  export  to  import  ratio  vis-à-vis  the  EU  from  48%  in  2009  to  60%  in 
2012. The CEFTA countries accounted for 32.4% of total exports and 10.4% of total imports in 2012. 
The share of net FDI inflows from the EU in total net FDI inflows stood at 64% in 2012. The average 
real  gross  wage  growth  was  1%  in  2012,  while  average  labour  productivity  growth  was  negative, 
translating into an increase in real unit labour costs. In real effective terms (deflated by inflation), the 
dinar depreciated on average by 7.7% in 2012. However, the depreciating trend was turned around in 
August 2012 and by August 2013 the dinar strengthened by 10.4%. Overall, trade integration with the 
EU remained high. 

33 

  
 
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Progress towards meeting the economic criteria for EU accession: the EU Commission's 2013 assessments 

4.3.  CONCLUSIONS 

As regards the economic criteria, Serbia has made some progress towards establishing a functioning 
market economy. Serbia needs to make significant efforts in restructuring its economy so as to cope in 
the medium-term with the competitive pressures and market forces within the Union. 

In 2012, Serbia  went through another recession and  the economy contracted by 1.7%. High exports 
growth has softened the effects of depressed domestic demand and led to a mild and uneven recovery 
in the first half of 2013. A series of fiscal consolidation efforts were taken mostly on the revenue side. 
The process of restructuring state-owned enterprises was revived. Some progress has been made with 
regards to fighting corruption and improving property rights. 

Growth remains narrowly based and the first signs of economic recovery in 2013 did not spill over to 
the labour market. Unemployment and the budget deficit remain very high. Rigidities persisted on the 
labour market and sustainable employment creation represents a major challenge. The adoption of a 
credible medium-term fiscal adjustment programme is still lacking. State presence in the economy is 
significant and state-owned companies continued to accumulate big losses. Serbia needs to continue 
improving the business environment and should make strong efforts to develop a competitive private 
sector. The functioning of market mechanisms is hampered by legal uncertainty and corruption. The 
informal sector remains an important challenge. 

34 

 
5. 

TURKEY 

In  examining  economic  developments  in  Turkey,  the  Commission’s  approach  was  guided  by  the 
conclusions of the Copenhagen European Council in June 1993, which stated that membership of the 
Union  requires  the  existence  of  a  functioning  market  economy  and  the  capacity  to  cope  with 
competitive pressure and market forces within the Union. 

5.1. 

THE EXISTENCE OF A FUNCTIONING MARKET ECONOMY 

Economic policy essentials 

The Pre-Accession Economic Programme (PEP) for 2013-15, submitted to the Commission in January 
2013, is based on the assumption of relatively moderate growth and a further reduction of the current 
account deficit. However, even in this relatively optimistic scenario, the external deficit remains large. 
Combined  with  a  precarious  external  debt  structure,  it  makes  Turkey  vulnerable  to  capital  flow 
reversals, either in the context of increasing global risk aversion regarding emerging market assets, or 
as a result of a rise in perceived country-specific risks. The fragmentation of responsibilities between 
government bodies continues to complicate the coordination of budgeting and medium-term economic 
policy-making. However, it seems that economic policies have not been affected by internal conflicts 
and  tensions  in  recent  times.  Overall,  the  consensus  on  economic  policy  essentials  has  apparently 
been preserved. 

Macroeconomic stability 

In 2012, the Turkish economy continued a slowdown which had started in the middle of the previous 
year. Year-on-year growth rates declined gradually from 5.3% in the fourth quarter of 2011 to 1.4% in 
the fourth quarter of 2012. In seasonally adjusted quarter-on-quarter terms, real GDP barely grew in 
the  second  half  of  2012.  Annual  GDP  growth  dropped  from  8.8%  in  2011  to  2.2%  in  2012.  The 
slowdown was combined with a rebalancing of growth from domestic demand to export-led growth. 
Private consumption and investment declined by 0.6% and 4.8%, respectively. Export volumes, on the 
other hand, accelerated to an annual growth rate of 16.7%. Most of this impressive rise was, however, 
accounted for by extraordinary exports of non-monetary gold to Iran. Import volumes stagnated as a 
consequence of the retrenchment in domestic demand. The only domestic demand component which 
added to GDP growth in 2012 was public spending. Public consumption and investment expanded by 
6.1% and 9.3%, respectively. 

In  the  first  half  of  2013,  overall  domestic  demand  started  to  recover,  not  least  due  to  strongly 
increasing  public  spending,  particularly  investment.  Private  investment,  however,  continued  to 
contract. Consumer spending returned to a moderate growth path helped by some decline in interest 
rates.  Export  growth  fell  back  to  3.2%  year-on-year  as  gold  exports  declined  sharply  from  the 
previous year’s levels. Import growth of 9.5% reflects to a large extent surging gold imports. The net 
result  from  the  contributions  of  the  various  components  was  3.7%  year-on-year  GDP  growth  in  the 
first half. In seasonally adjusted quarter-on-quarter terms, GDP growth increased from 0.2% growth in 
the fourth quarter of 2012 to 1.5% in the first quarter and to 2.1% in the second quarter of 2013. In 
2012,  the  per  capita  GDP  of  Turkey  (PPP  adjusted)  amounted  to  56%  of  the  EU  average,  up  from 
52% in 2011. Overall, the economic slowdown has ceased and economic activity has re-accelerated in 
the first half of 2013. 

35 

 
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Progress towards meeting the economic criteria for EU accession: the EU Commission's 2013 assessments 

Table 5.1:
Turkey - Main economic trends

Gross domestic product
Private consumption
Gross fixed capital formation
Unemployment
Employment 
Wages
Current account balance
Direct investment (FDI, net)
CPI
Interest rate (3 months)
Stock markets
Exchange rate TRY/EUR
Nominal eff. exchange rate
General government balance
General government debt

Ann. % ch
Ann. % ch
Ann. % ch
%
Ann. % ch
Ann. % ch
% of GDP
% of GDP
Ann. % ch
% p.a.
Index
Value
Index
% of GDP
% of GDP

2008
0,7
-0,3
-6,2
11,0
1,3
11,5
-5,4
2,3
10,4
18,04
37.582
1,91
91,7
-2,2
39,5

2009
-4,8
-2,3
-19,0
14,1
0,4
9,9
-2,0
1,2
6,3
10,68
37.510
2,16
82,8
-7,0
45,5

2010
9,2
6,7
30,5
12,0
6,2
11,8
-6,2
1,0
8,6
7,95
59.484
2,00
86,2
-2,6
42,4

2011
8,8
7,7
18,0
9,8
6,7
9,7
-9,7
1,8
6,5
9,09
60.751
2,33
74,1
-2,2
39,8

2012
2,2
-0,6
-2,7
9,2
3,0
11,5
-6,0
1,1
8,9
10,31
63.731
2,31
72,4
-2,3
37,9

2013 H1
3,7
4,2
3,0
9,7
4,3
11,2
-6,3
0,9
7,1
11,76
82.351
2,38
N.A.
0,6
N.A.

Sources: Thomson Reuters/Ecow in, Eurostat

The  current  account  has  continued  to  register  a  large  deficit,  which  leaves  the  Turkish  currency 
vulnerable  to  sudden  loss  of  investor  confidence.  In  conjunction  with  the  softening  of  domestic 
demand and strong export growth, the current account narrowed significantly from 9.7% of GDP in 
2011 to 6.0% in 2012. Most importantly, imports of goods declined by 1.5%, while exports of goods 
surged  by  13.9%  in  value  terms.  The  balance  of  payments  data  for  the  first  half  of  2013  suggest  a 
reversal of this trend, as  goods exports increased  much  more moderately (2.8%  year-on-year)  while 
goods imports recovered strongly (7.1%). The 12-month cumulative current account deficit has risen 
back  up  to  6.6%  of  GDP.  However,  Turkey’s  foreign  trade  data  have  been  distorted  by  strong 
fluctuations in exports and imports of non-monetary gold in recent years. Net exports of gold in 2012, 
corresponding to 0.7% of GDP, were succeeded by large net imports in the first six months of 2013. 

The  bulk  of  the  current  account  deficit  was  financed  by  portfolio  investments  in  2012,  while  net 
inflows of foreign direct investments covered a relatively small proportion (17.8%) of the deficit. The 
high degree of dependence on shorter-term capital inflows exposes Turkey to changes in global risk 
appetite. The central bank’s foreign exchange reserves increased from €56 billion at the end of 2011 
to €78 billion at the end of 2012 and further to €94 billion at the end of June 2013 (16% of GDP). The 
gross foreign debt rose by 10.8% in the course of 2012, but expressed as a proportion of GDP it fell 
by  1.8  percentage  points  to  42.5%.  Overall,  the  external  imbalances  have  remained  significant  and 
their  short-term  financing  makes  the  country  vulnerable  to  sudden  changes  in  global  investor 
sentiment. 

The  labour  market  performed  relatively  well  in  2012  despite  the  economic  slowdown.  For  the 
population aged 20-64, the annual unemployment rate fell from 8.8% in 2011 to 8.2% as employment 
rose  by  3.0%.  The  employment  rate  increased  by  0.6  percentage  points  to  52.8%  while  the  labour 
force participation rate increased by 0.2 percentage points to 57.4%. When economic growth picked 
up in the first six months of 2013, average employment accelerated to a growth rate of 4.1% year-on-
year. Nevertheless, the average unemployment rate was 0.4 percentage points higher year-on-year in 
this period because the labour force rose even faster than employment. 

While the employment rate was 75.0% for men in 2012, it was as low as 30.9% for women. Despite 
the low proportion of the female population actively looking for work, the female unemployment rate 
is higher than the male unemployment rate. In addition, about one third of women who are considered 
as  employed  are  unpaid  family  workers  in  the  agricultural  sector.  The  efficient  functioning  of  the 
labour market continues to be impeded by a lack of flexibility, regarding labour contracts for instance, 

36 

 
 
Progress towards meeting the economic criteria for EU accession: the EU Commission's 2013 assessments 

and undeclared work remains a widespread practice. Overall, employment has continued to grow at a 
robust  rate  and  unemployment  edged  down  in  2012,  but  the  female  employment  rate  has  remained 
very low. 

In the context of a generally strengthening currency and the slowing down of the economy, consumer 
price inflation decreased from 10.5% at the end of 2011 to 6.2% at the end of 2012. This outcome was 
above  the  central  bank’s  year-end  target  of  5%  but  within  its  tolerance  band  of  +/-  2%  around  the 
target. While core goods inflation  was trending downward in 2012, services inflation  was relatively 
stable.  In  the  first  eight  months  of  2013,  increases  in  unprocessed  food  prices,  tax  adjustments  for 
tobacco products, and the lira depreciation over the summer months have pushed up inflation. Overall, 
inflation was reduced noticeably in 2012, but has picked up again more recently and remains above 
the central bank’s target. 

The central bank  has continued to apply and refine the  unconventional  monetary policy framework, 
adopted  in  late  2010,  in  which  inflation  and  macro-financial  stability  are  the  main  targets.  In  the 
conduct of monetary policy, the bank is attaching a reference value of 15% to credit growth, defined 
as  the  year-on-year  change  in  bank  credit  to  the  non-financial  sector.  It  also  targets  the  floating 
exchange  rate  of  the  Turkish  lira  by  aiming  to  dampen  short-term  volatility  and  by  responding  to 
exchange rate movements which are considered to constitute excessive appreciations or depreciations 
of  the  lira.  As  regards  the  instruments  of  monetary  policy,  a  wide  variety  of  tools  is  applied  in  a 
complex interplay, including reserve requirement ratios and a mix of various repo facilities. Following 
a period with a relatively tight monetary stance to cool down an overheating domestic economy, the 
central  bank  adopted  a  more  accommodative  stance  in  the  second  half  of  2012,  when  economic 
activity  had  stabilised  and  the  Turkish  lira  had  appreciated  noticeably.  The  interest  rate  corridor 
between  the  central  bank’s  overnight  borrowing  and  lending  rates  has  been  moved  gradually 
downward and narrowed from 5-11.5% to 3.5-6.5% between September 2012 and May 2013. Within 
the same period, the central bank’s policy rate (the one-week repo rate) was cut in three steps from 
5.75%  to  4.5%  with  a  view  to  supporting  the  domestic  economy  and  containing  further  currency 
appreciation. The Turkish lira appreciated by 7.8% in the course of 2012 in real effective terms and by 
a  further  1.5%  over  the  first  five  months  of  2013.  Since  May,  Turkey’s  financial  markets  and  the 
Turkish  lira  have  come  under  severe  downward  pressure  in  the  context  of  anticipated  changes  in 
international  monetary conditions, domestic political unrest and the civil  war in neighbouring Syria. 
Net capital inflows in the first five months of the year have been succeeded by significant net capital 
outflows.  In  response,  the  central  bank  has  intervened  directly  in  the  foreign  exchange  market  by 
selling  foreign  exchange  reserves  equal  to  €6.7  billion  in  June-August.  It  has  also  raised  the  upper 
band of the interest rate corridor (the lending rate) by a combined 125 basis points to 7.75%. Overall, 
the  central  bank  continued  to  pursue  multiple  objectives  within  an  unconventional  and  complex 
monetary  policy  framework  that  hampers  transparency  and  predictability.  The  policy  stance  was 
adjusted frequently in response to changing domestic and international conditions.  

In contrast  to the preceding  years, the  fiscal target  was  missed in 2012 due to expenditure overruns 
and an economic slowdown which was faster than the authorities expected. The central government’s 
budget deficit widened from 1.4% of GDP in 2011 to 2.0% (the original target was 1.5%). The lack of 
timely information on the fiscal balance of general government continues to reduce the transparency 
of  overall  public  finances.  Central  government  revenues  from  indirect  taxes  fell  short  of  budget,  as 
private  consumption  contracted  while  central  government  expenditures,  particularly  for  the 
compensation  of  public  employees,  rose  faster  than  planned.  The  expenditure  overruns  were  also 
caused by government transfers to state-owned enterprises as a result of delayed price adjustments in 
the energy sector. In the first six months of 2013, the fiscal performance improved, with the central 
government’s 12-month rolling budget deficit falling to 1.3% of GDP in June, as compared with an 
unambitious  2013  deficit  target  of  2.2%.  A  surge  in  revenues  reflects  the  recovery  in  economic 
activity and the indirect tax hikes from last September. Non-interest expenditures have also increased 
strongly,  not  least  for  public  investment,  in  spite  of  a  projected  decline  in  capital  spending  as  a 

37 

  
 
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Progress towards meeting the economic criteria for EU accession: the EU Commission's 2013 assessments 

proportion of GDP in 2013 in Turkey’s 2013-15 Pre-Accession Economic Programme. Part of the rise 
in  non-interest  expenditures  has  been  offset  by  a  decline  in  interest  expenses.  Although  general 
government  debt  (for  which  data  are  available)  increased  marginally  in  absolute  terms  in  2012,  the 
debt-to-GDP ratio fell from 39.1% at the end of 2011 to 36.2% at the end of 2012 due to high nominal 
GDP growth. Over the same period, the average maturity of the outstanding debt stock was extended 
from 55 to 69 months while the average borrowing rate was reduced from 9.8% to 6.4%. Overall, the 
fiscal performance suffered from continuing expenditure overruns, but was satisfactory regarding the 
sustainability  of  public  debt.  There  was  no  progress  on  increasing  the  transparency  of  the  fiscal 
framework and adopting a fiscal rule. 

The tightening of monetary policy from the summer of 2011 onwards contributed to lowering output 
growth to a  more sustainable level and to reducing  inflation and the large current account deficit in 
2012. The reorientation of monetary policy towards easing between mid-2012 and May 2013 seems to 
have  been  similarly  helpful  in  stimulating  a  re-acceleration  of  economic  activity  in  the  first  half  of 
2013. It remains to be seen how the renewed monetary tightening in the summer of 2013 will affect 
the real economy. Fiscal policy has been less responsive to macroeconomic needs in the recent past as 
public expenditures have become more rigid. This has reduced the ability of fiscal policy to contribute 
to  a  more  balanced  macroeconomic  policy  mix,  thereby  putting  an  excessive  burden  on  monetary 
policy  to  deliver  on  multiple  targets.  The  adoption  of  a  strong  fiscal  rule  would  not  only  enhance 
budgetary transparency but also provide a fiscal anchor and enhance credibility. Fiscal policy also has 
an  important  role  to  play  in  increasing  domestic  saving  and  thereby  reducing  Turkey’s  reliance  on 
external financing. The dependence on capital inflows is a macroeconomic vulnerability which makes 
Turkey  prone  to  boom-bust  cycles.  Overall,  the  Turkish  economy  remains  vulnerable  to  bouts  of 
financial  uncertainty  and  changes  in  global  risk  sentiment  and  there  is  scope  for  improving  the 
macroeconomic policy mix. 

Interplay of market forces 

The share of directly administered prices in the Consumer Price Index (CPI) basket has remained at 
the relatively low level of 4.5%. However, food and alcohol prices, which together make up more than 
25% of the consumer basket, are highly sensitive to policy and administrative decisions. For transport 
and  energy  (natural  gas  and  electricity),  automatic  pricing  mechanisms  are  applied  in  principle, 
linking end-user prices to a cost-based methodology. In practice, however, the government continues 
to  set  end-user  prices,  thereby  effectively  suspending  the  automatic  pricing  mechanisms.  There  has 
been some reduction in cross-subsidisation between consumers in the wholesale and retail electricity 
markets.  

There  has  been  limited  progress  in  the  restructuring  and  transparency  of  state-owned  enterprises 
related to the privatisation of energy generation and distribution assets. The private sector’s share in 
GDP  decreased  somewhat  as  private  investment  contracted  while  public  investments  continued  to 
expand.  As  investors’  access  to  long-term  external  financing  improved  in  2012,  the  pace  of 
privatisations increased, but remained below initial targets. The total volume of completed deals more 
than doubled, to €2.34 billion (0.4% of GDP), as compared with 2011, but was still less than half the 
average 2005-08 level. The secondary public offering of the state-owned Halkbank represented 65% 
of the privatisation revenue. The tender for the privatisation of highways and bridges was cancelled as 
the government refused offers. Privatisation tenders continued in early 2013, particularly in the energy 
sector.  Overall,  there  has  been  no  progress  in  price  liberalisation  as  the  government  continues  to 
interfere in the price-setting mechanism in key sectors. Privatisation has re-accelerated, but remains at 
a relatively low level. 

38 

 
Progress towards meeting the economic criteria for EU accession: the EU Commission's 2013 assessments 

Market entry and exit 

In 2012, the number of newly-established businesses fell by 6.7% as compared with the previous year. 
Starting a business in Turkey requires six separate procedures, takes six days, and costs 10.5% of per 
capita income on average. Some fees are still not transparent, such as those for the official registration 
of a company’s articles and accounts. Trade registry fees remain significant. Obtaining a construction 
permit  is  still  very  cumbersome  and  time-consuming.  The  number  of  businesses  closing  down  or 
being  liquidated  fell  by  13.9%  as  compared  with  2011.  Closing  a  business  remains  expensive  and 
time-consuming.  Insolvency  procedures  take  about  3.3  years  and  recovery  rates  —  at  23.6%  on 
average  —  remain  very  low.  Overall,  market  entry  conditions  are  satisfactory,  while  market  exit 
remains costly and long, and insolvency proceedings are still heavy and inefficient. 

Legal system 

A reasonably well-functioning legal system, including in the area of property rights, has been in place 
for several years. Enforcement of commercial contracts is still a rather lengthy process, partly because 
commercial  court  judges  are  insufficiently  specialised.  Out-of-court  dispute  settlement  mechanisms 
are seldom  used,  major exceptions being the insurance  sector, tax and customs. The judicial system 
and administrative capacity could be further improved. Overall, the legal system continues to function 
relatively well, but no progress has been observed. 

Financial sector development 

Banks  have  continued  to  dominate  the  financial  sector  with  their  share  of  the  sector’s  total  assets 
remaining at 88%, while the share of the relatively small insurance sector (including private pensions) 
increased from 4.0% in 2011 to 4.6% in 2012. The value of banking sector assets increased from 94% 
of  GDP  in  2011  to  97%  in  2012.  The  share  of  state-owned  banks  in  total  banking  sector  assets 
decreased  from  25.5%  in  2011  to  23.1%  in  2012.  After  the  partial  privatisation  of  Halkbank,  the 
state’s  share  in  the  bank  decreased  from  75%  to  51.1%.  The  share  of  foreign-owned  banks  (where 
international banks either have a controlling share or have an equal partnership with a local partner) 
decreased slightly from 41.6% in 2011 to 41.3% in 2012. 

In  tune  with  the  monetary  policy  stance,  credit  expansion  continued  to  slow  down  in  the  first  three 
quarters  of  2012.  Following  the  switch  to  a  more  accommodative  monetary  policy,  the  foreign-
exchange adjusted loan portfolio of banks started to accelerate again in November 2012 and reached a 
growth  rate  of  23.1%  year-on-year  at  the  end  of  June  2013.  The  banks’  loan-to-deposit  ratio  has 
increased by 7 percentage points year-on-year to 106% in May 2013. 

The  banking  sector  maintained  an  adequate  profitability  performance  in  2012  and  the  first  seven 
months of 2013. Its capital adequacy ratio decreased from 16.3% in July 2012 to 15.9% in July 2013, 
which is still significantly above the regulatory target of 12%. The share of non-performing loans in 
total  banking  sector  loans  has  remained  broadly  stable  at  just  below  3%  (2.8%  in  July  2013).  The 
Financial Stability Committee, established in June 2011 under the chairmanship of the Deputy Prime 
Minister in charge of the economy, has monitored the functioning of the financial system, including 
systemic  risks  and  their  management.  Parliament  adopted  the  long-awaited  Capital  Markets  Law, 
which  aims  at  further  harmonising  the  legislative  framework  in  securities  markets  and  investment 
services. Overall, the financial sector has performed well and has continued to demonstrate resilience. 

39 

  
 
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Progress towards meeting the economic criteria for EU accession: the EU Commission's 2013 assessments 

5.2. 

THE  CAPACITY  TO  COPE  WITH  COMPETITIVE  PRESSURE  AND  MARKET  FORCES  WITHIN  THE 
UNION 

Existence of a functioning market economy 

Turkey’s growth performance in a context of global economic volatility in recent years confirms the 
economy’s improved fundamentals and enhanced resilience to shocks. However, the large structural 
current account deficit and relatively high inflation indicate the persistence of significant underlying 
imbalances  in  the  Turkish  economy.  Overall,  the  functioning  of  market  mechanisms  has  remained 
appropriate. 

Human and physical capital 

The educational reform programme, which is a key component of the 2007-13 National Development 
Plan,  is  coming  to  an  end.  It  sets  two  key  priorities  for  education  modernisation  and  reform: 
increasing  the  responsiveness  of  education  to  demand  and  enhancing  the  quality  of  the  education 
system.  Some  progress  can  be  recorded. The  literacy  rate  increased  from  88%  in  2010  to  90.8%  in 
2011.  The  schooling  ratios  have  increased  at  all  levels  of  education,  in  particular  at  tertiary 
(university)  level.  Important  gaps  persist  regarding  the  schooling  ratios  for  girls,  especially  in 
secondary  education.  Participation  in  higher  education  remains  low  by  international  standards.  The 
effects of extending compulsory education from 8 to 12 years as from the 2012-13 school year remain 
to  be  seen.  Overall,  reforms  and  increased  spending  on  education  have  so  far  generated  a  positive 
impact on educational attainment and schooling rates, but significant problems remain with regard to 
gender equality and the quality of education. 

Total investment decreased from 21.8% of GDP in 2011 to 20.3% in 2012, entirely due to the slump 
in private investments, which fell from 18.0% of GDP in 2011 to 16.4% in 2012. Public investments 
continued to increase and their share in GDP rose from 3.8% in 2011 to 3.9% in 2012. Gross foreign 
direct  investment  (FDI)  inflows  to  Turkey  decreased  from  €11.5 billion  in  2011  to  €7.7 billion  in 
2012.  Although  the  official  aim  of  the  government  is  to  increase  expenditures  on  research  and 
development to 2% of GDP, the actual outcomes remain much lower; R&D expenditure amounted to 
just  0.86%  of  GDP  in  2011.  Modest  progress  was  made  in  the  upgrading  of  the  transport 
infrastructure, including a 1.9% extension of the motorway network between 2010 and 2011. Overall, 
improvements in the country’s physical capital have been modest. 

Sectoral and enterprise structure 

While output growth had clearly outstripped employment growth in 2011, overall employment in the 
Turkish economy increased by 3.0% in 2012, i.e. significantly faster than output growth. The sectoral 
breakdown of employment growth shows a clear shift towards the services sector, the share of which 
in total employment went up by 1.3 percentage points to 49.4%. The proportions of total employment 
accounted  for  by  agriculture,  industry  and  construction  declined  to  24.6%,  19.1%  and  6.9% 
respectively. As a proportion of GDP, services increased by 1.2 percentage points, whereas all other 
sectors declined. 

There has been some progress in the liberalisation of the network industries. A new electricity market 
law entered into force on 30 March 2013 which aims at improving market competition and alignment 
with  the  acquis.  In  the  market  for  natural  gas,  the  energy  regulator  granted  import  licences  to  four 
private companies, increasing the private sector’s market share to 20%. However, further progress is 
needed  in  the  programme  to  liberalise  the  natural  gas  market  by  reducing  the  monopolistic  market 
share  of  state-owned  BOTAŞ.  There  was  progress  in  the  telecommunications  market  with  the 
adoption  of  regulations  to  improve  competition  and  transparency.  Overall,  the  liberalisation  of 
network industries gathered some pace. 

40 

 
Progress towards meeting the economic criteria for EU accession: the EU Commission's 2013 assessments 

State influence on competitiveness 

The  legislation  implementing  the  State  Aid  Law,  originally  scheduled  to  be  enacted  by  September 
2011, has been postponed for a second time. The State Aid Authority still needs to establish a formal 
state  aid  inventory.  It  is  also  expected  to  enact  an  action  plan  for  aligning  all  state  aid  schemes, 
including the 2012 incentives package, with the acquis. The legal framework for public procurement 
continued to comprise  various exemptions and is still not in line  with the EU acquis. Overall, there 
has been no progress in enhancing the transparency of state aid. 

Economic integration with the EU 

The openness of the economy, as measured by the value of exports and imports of goods and services 
as a percentage of GDP, increased from 56.6% in 2011 to 58% in 2012. The EU’s share in Turkey’s 
total  trade  decreased  from  40.8%  in  2011  to  37.7%  in  2012.  Its  share  in  Turkey’s  exports  declined 
particularly strongly from 46.2% to 38.8%, mainly due to depressed demand conditions in the EU and 
the surge in Turkey’s gold exports to Iran. Its share in Turkey’s imports decreased more moderately, 
from  37.8%  to  37%.  The  EU  remained  by  far  the  largest  source  of  FDI  in  Turkey,  with  a  share  of 
71.3%  in  2012.  Foreign  capital  investment  inflows  originating  from  the  EU  countries  —  excluding 
real  estate  —  fell  from  €8.2 billion  in  2011  to  €5.5 billion  in  2012.  Overall,  trade  and  economic 
integration with the EU remained high. 

Labour productivity declined in general in 2012, with employment increasing more than twice as fast 
as  output.  For  industry,  where  sector  data  are  available,  production  per  hour  declined  by  2.0% 
between  the  fourth  quarter  of  2011  and  the  fourth  quarter  of  2012.  Over  the  same  period,  hourly 
labour costs in industry increased by 8.0%. This implies a rise in unit labour costs of around 10%. At 
the  same  time,  the  Turkish  lira  appreciated  by  7.8%  in  real  terms.  Overall,  Turkey’s  international 
price  competitiveness  declined  significantly  in  2012  due  to  rising  unit  labour  costs  and  currency 
appreciation. 

5.3.  CONCLUSIONS 

As regards the economic criteria, Turkey is a functioning market economy. It should be able to cope 
with  competitive  pressure  and  market  forces  within  the  Union  in  the  medium  term,  provided  that  it 
accelerates the implementation of its comprehensive structural reform programme. 

Following strong growth rates of around 9% in the preceding two years, Turkish GDP growth slowed 
down to 2.2% in 2012. This was accompanied by a rebalancing of growth from domestic demand to 
foreign trade, a temporary narrowing of the current account deficit, and a decline of inflation. In the 
first  half  of  2013,  GDP  growth  strengthened  again  to  3.7%.  At  the  same  time,  the  current  account 
deficit has widened again and consumer prices have reaccelerated. Public debt as a share of GDP has 
continued to recede and is now  clearly below 40%. Since  May, due to domestic and  global factors, 
financial markets have come under pressure which led to immediate reactions by the central bank with 
a view to stabilising the exchange rate and containing capital outflows. 

Turkey’s  recent  economic  performance  illustrates  both  the  high  potential  and  the  continuing 
imbalances of the economy. On the external side, the reliance on sustained capital inflows to finance a 
large structural current account deficit makes Turkey vulnerable to changes in global risk sentiment, 
resulting in large exchange rate fluctuations and boom-bust cycles in economic activity.  Addressing 
this vulnerability calls for measures to increase national saving and fiscal policy has an important role 
to play in this respect. The adoption of a fiscal rule would enhance budget transparency, provide an 
important  fiscal  anchor  and  enhance  credibility.  Relatively  high  inflation  continues  to  be  a  major 
challenge.  A  rebalancing  of  the  macroeconomic  policy  mix  would  be  helpful  to  ease  the  burden  on 

41 

  
 
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Progress towards meeting the economic criteria for EU accession: the EU Commission's 2013 assessments 

monetary policy. For the medium to longer term, it is essential that the functioning of the markets for 
goods,  services  and  labour  is  improved  through  structural  reforms  to  increase  international 
competitiveness. 

42 

 
6.  ALBANIA 

In  examining  economic  developments  in  Albania,  the  Commission’s  approach  was  guided  by  the 
conclusions of the European Council in Copenhagen in June 1993, which stated that membership of 
the  Union  requires  the  existence  of  a  functioning  market  economy  and  the  capacity  to  cope  with 
competitive pressure and market forces within the Union. 

6.1. 

THE EXISTENCE OF A FUNCTIONING MARKET ECONOMY 

Economic policy essentials 

The main political parties agree on the key essentials of a market economy, despite a tense political 
environment. Macroeconomic stability was broadly preserved, but vulnerabilities remain. The budget 
deficit exceeded the target in 2012. This led to the statutory debt ceiling of 60% of GDP enshrined in 
the  budget  law  being  breached  and  abolished.  The  privatisation  process  suffered  certain  setbacks. 
Albania  submitted  its  seventh  Economic  and  Fiscal  Programme,  for  2013-15,  in  January.  The 
programme’s  medium-term  macroeconomic  scenario  is  optimistic.  Its  coverage  of  risks  to  the 
macroeconomic  and  budgetary  outlook  is  insufficient,  and  the  approach  to  addressing  structural 
obstacles to growth lacks a clear strategy and targeted policy measures. Overall, the consensus on the 
main fundamentals of a market-oriented economy has been maintained. 

Macroeconomic stability 

According  to  preliminary  data,  economic  growth  slowed  to  1.6%  in  2012  from  3.1%  a  year  earlier. 
Financial  constraints,  low  confidence  among  consumers  and  investors  and  the  presence  of  spare 
production capacity held back private consumption and investment spending. Total gross fixed capital 
formation  decreased  by  around  5%  in  2012  compared  with  the  previous  year.  Migrant  workers’ 
remittances increased slightly, by some 1.6% in 2012, but dropped by 33% on an annual basis in the 
first  six  months  of  2013.  Private  consumption  remained  at  low  levels.  Net  exports  were  the  main 
contributor to economic growth, with foreign sales holding up while imports declined. After falling in 
four consecutive quarters, economic sentiment indicators started to climb in late 2012 and early 2013, 
but real GDP only grew by 1.7% in the first quarter of 2013 in annual terms, reflecting still sluggish 
domestic spending. Foreign demand continued to contribute positively to growth. Per capita GDP in 
purchasing  power  standards  was  estimated  at  30%  of  the  EU-27  average  in  2012,  unchanged  from 
2011. Overall, while growth remained positive, Albania experienced a slowdown in 2012 due to weak 
private domestic spending, which also extended to the first quarter of 2013. 

External  imbalances  improved,  as  exports  proved  resilient  while  weak  domestic  demand  depressed 
imports. The current account deficit narrowed to 10.5% of GDP in 2012 from 13% a year earlier on 
the  back  of  a  contracting  (but  still  large)  trade  deficit.  Imports  fell  by  5.2%  compared  with  the 
previous  year.  Exports  grew  by  a  marginal  0.9%,  as  an  8.5%  increase  in  merchandise  exports  was 
largely offset by a fall in services export. The effect of the improved trade performance outweighed 
negative  changes  in  the  income  and  current  transfer  balances.  The  trend  towards  a  narrowing  trade 
deficit continued  in the  first seven  months of 2013  when  merchandise exports, driven  by a buoyant 
energy  sector,  expanded  by  18.4%  in  annual  terms,  while  imports  of  goods  declined  by  5%.  The 
current account deficit stood at 10.1% of GDP in the four quarters to June. 

Net  foreign  direct  investment  (FDI)  inflows  remained  at  the  same  level  in  2012  as  in  2011  and 
financed some 70% of the current account deficit, up from 60% in 2011. Total capital account inflows 
fell by 11.3% on an annual basis in 2012, but the overall balance of payments  was positive and the 
stock of international reserves increased by 4.2%, covering about 4.5 months of imports. In the first 
half of 2013, FDI inflows increased by 12.3% in annual terms. Overall, the current account deficit has 

43 

 
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Progress towards meeting the economic criteria for EU accession: the EU Commission's 2013 assessments 

been  narrowing  but  remains  a  source  of  vulnerability,  especially  in  view  of  the  potential  adverse 
impact of the volatile external environment on inflows of FDI and migrant workers’ remittances. 

Labour  market  conditions  improved  somewhat  during  2012,  but  the  registered  unemployment  rate 
remained  high  at  13%  on  average,  down  slightly  from  13.4%  in  2011.  Employment  grew  by  2.8% 
both due to more private-sector, non-agricultural jobs and a higher estimated number of employees in 
the agricultural sector. In the first half of 2013, unemployment remained stable at 12.8%. Long-term 
unemployment  accounts  for  around  two  thirds  of  total  jobseekers,  reflecting  its  structural  nature. 
Labour  market  statistics  continue  to  be  weak  and  are  distorted  by  a  large  informal  sector.  Overall, 
there  was  a  slight  improvement  in  the  labour  market  but  the  informal  sector  remains  large  and 
unemployment is persistently high. 

Table 6.1:
Albania - Main economic trends

Gross domestic product
Private consumption
Gross fixed capital formation
Unemployment
Employment 
Wages, public sector
Current account balance
Direct investment (FDI, net)
CPI
Interest rate (3 months)
Stock markets
Exchange rate LEK/EUR
Nominal eff. exchange rate
General government balance
General government debt
* Q1

Ann. % ch
Ann. % ch
Ann. % ch
%
Ann. % ch
Ann. % ch
% of GDP
% of GDP
Ann. % ch
% p.a.
Index
Value
Index
% of GDP
% of GDP

2008
7,5
9,8
12,9
12,8
2,9
8,3
-15,5
7,5
3,4
6,24
N.A.
122,39
N.A.
-5,5
54,8

2009
3,3
6,2
-2,3
13,6
-5,9
11,9
-15,3
8,2
2,3
N.A.
N.A.
131,82
N.A.
-7,0
59,5

2010
3,8
5,7
-1,3
13,7
-0,1
6,7
-11,5
8,9
3,6
N.A.
N.A.
137,48
N.A.
-3,1
58,5

2011
3,1
7,2
4,2
13,4
2,3
7,0
-13,0
8,1
3,5
N.A.
N.A.
140,07
N.A.
-3,6
60,3

2012
1.6e
8,0
-4,7
12,9
3,6
7,3
-10,8
7,9
2,0
5,16
N.A.
138,83
N.A.
-3,5
62,9

2013 H1
1,4
N.A.
N.A.
12,8
1,4
5,9
-10,4
8,0
2,4
4,91
N.A.
140,02
N.A.
-3,5
64,1

Sources: Thomson Reuters/Ecow in, Eurostat

Macroeconomic stability continued to be enhanced by a sound monetary policy, which was successful 
in keeping inflation low and anchoring inflation expectations. The average inflation rate decelerated 
from  3.5%  in  2011  to  2%  in  2012,  which  corresponds  to  the  lower  end  of  the  Bank  of  Albania’s 
(BoA) target range of 2-4%. Low inflation reflected the negative output gap, well-anchored inflation 
expectations and the absence of supply-side shocks. Driven mostly by fluctuating food prices, annual 
inflation  decelerated  from  2.5%  in  the  first  quarter  of  2013  to  2.2%  in  the  second  quarter.  In  the 
absence of inflationary pressures and in an effort to stimulate growth, the BoA undertook several cuts 
in the key interest rate, bringing it to a historic low of first 3.75% in January and subsequently to 3.5% 
in  July.  The  rate  cut  was  swiftly  reflected  in  interbank  rates,  the  primary  market  for  government 
security and also in deposit rates. However, the pass-through to lending rates remains limited due to 
increased risk premia amid a growing share of non-performing loans. 

The  degree  of  euroisation  of  the  financial  system  has  slightly  decreased  but  remains  high.  Foreign, 
mostly  euro-denominated  loans  stood  at  61%  of  total  credit  outstanding  in  July,  down  from  64%  a 
year earlier,  while the  share  of foreign currency-denominated deposits in the total deposit stock  fell 
from 49% to 47% in the same period. Such high euroisation inhibits monetary policy’s effectiveness 
and  could  expose  banks  to  currency  mismatches  or  indirect  credit  risks;  it  is  therefore  a  potential 
source of instability in the financial system. 

Albania  maintains  a  floating  foreign  exchange  regime,  unchanged  since  1992.  The  Albanian  lek 
continued  to  remain  stable  in  2012,  marking  a  slight  appreciation  by  0.9%  against  the  euro.  In  the 
second  quarter  of  2013,  the  Albanian  currency  depreciated  slightly  against  the  euro  by  around  1% 

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Progress towards meeting the economic criteria for EU accession: the EU Commission's 2013 assessments 

year-on-year.  Overall,  monetary  policy  remained  sound,  inflation  decelerated  and  exchange  rate 
stability was broadly preserved. 

The government deficit reached 3.4% of GDP in 2012, exceeding the 3% target in the initial budget 
but remaining slightly lower than the 2011 deficit of 3.5%. Disappointing revenue performance meant 
that  new  budgetary  targets  had  to  be  set  by  the  November  Normative  Act.  Overall,  revenues 
underperformed by some 7% in 2012 compared with the initial budget, as the largest items, VAT and 
excise tax revenues, fell significantly short of the initial targets, reflecting sluggish domestic demand. 
Revenue  slippages  were  only  partly  offset  on  the  expenditure  side,  where  the  largest  cuts  affected 
capital  spending,  down  by  some  12%  compared  to  the  initial  target  and  by  the  same  order  of 
magnitude  compared  with  2011.  In  the  wake  of  weak  revenue  collection,  the  total-revenue-to-GDP 
ratio  fell  to  24.5%  from  25.1%  in  2011,  while  the  total-expenditure-to-GDP  ratio  fell  to  28.0%  in 
2012 from 28.6% a year earlier. Public capital expenditure accounted for just 4.6% of GDP compared 
to 5.4% in 2011. 

The fiscal stance in 2013 is more expansionary. The 2013 budget envisaged a deficit of 3.5% of GDP, 
based on an optimistic assumed economic growth of 3.1%. The fiscal deficit (without the receipt from 
the privatisation of three hydro-power plants) in the first seven months was almost 130% higher than 
in  the  same  period  of  the  previous  year,  reaching  some  98%  of  its  full  year  target.  In  the  period 
January  to  July,  revenue  from  indirect  taxes  declined  significantly,  reflecting  still  fragile  domestic 
demand, lower imports and the effect of recent VAT exemptions. Expenditure was 10.4% higher than 
in the same period the year before, mainly due to the rapid increase in capital expenditure. Overall, 
budgetary planning continues to be weak, reflecting optimistic revenue projections and leading to the 
need for rebalancing. 

Public  debt  increased  from  59.4%  of  GDP  in  2011  to  62.9%  by  the  end  of  2012,  exceeding  the 
statutory  ceiling  of  60%,  which  was  abolished  in  December.  Some  three  fifths  of  the  public  debt  is 
domestic but it continues to  show a short-term bias (around half of  it  has a  maturity of  one  year or 
less)  which  requires  frequent  re-financing.  Households’  share  of  purchases  of  public  debt  securities 
continued  to  increase,  but  the  bulk  of  the  domestic  debt  is  still  held  by  banks,  which  could  pose  a 
challenge if they decide to reduce their government debt holdings and also exposes banks to sovereign 
risk. Although the weighted average yield on domestic debt has been gradually decreasing, at such a 
high level, public debt remains a source of macro-financial vulnerability. The estimated large amount 
of  public  sector  arrears  continue  to  represent  additional  government  liabilities,  leading  to  financial 
difficulties along the credit chain and contributing to the high level of non-performing loans. Overall, 
the relatively high and increasing government debt and its short-term bias are a cause for concern, as 
they  represent  a  source  of  macro-financial  vulnerability,  especially  following  the  abolition  of  the 
statutory debt ceiling. The accumulation of public arrears reflects serious weaknesses in public finance 
management. 

In the area of tax administration, there were improvements in the electronic tax payment and tax filing 
system,  but  the  effects  on  tax  collection  remain  to  be  seen.  Measures  have  also  been  adopted  to 
exempt imports of machinery, equipment and raw materials used for certain investments from VAT, 
and  to  introduce  a  non-taxable  income  limit  for  personal  income  tax.  Delays  in  the  VAT  refund 
procedure continue to put an additional burden on businesses. 

Overall,  macroeconomic  stability  has  been  maintained.  Low  inflation  and  anchored  inflation 
expectations created room for monetary policy easing, but the pass-through to the economy remains 
limited. The fiscal stance in 2013 is expansionary, contributing to a further increase in the relatively 
high level of public debt, which remains a source of macro-financial vulnerability. Fiscal planning and 
predictability remain a concern, especially following the abolition of the debt anchor. Unemployment 
remains  high.  External  imbalances  have  narrowed  but  are  still  high,  reflecting  persisting  structural 
weaknesses. 

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Interplay of market forces 

The  private  sector  remains  dominant  and  continues  to  account  for  about  80%  of  GDP.  The 
privatisation  process  suffered  setbacks  with  the  unsuccessful  sale  of  Albpetrol,  a  state-owned  oil 
company,  and  of  the  remaining  public  stake  in  Albtelecom,  a  partly  privatised  telecommunication 
firm.  No  progress  was  made  on  the  privatisation  of  INSIG,  the  state  insurance  company.  The 
previously  privatised  power  distributor  CEZ  Shpërndarje  returned  into  state  hands  after  the  energy 
regulator  revoked  its  distribution  licence  and  appointed  an  administrator,  on  the  grounds  that  the 
Czech-owned  company  had  failed  to  meet  contractual  obligations.  The  dispute  will  be  settled  by 
international arbitration. 

There has been some progress as regards attracting greenfield investment in the energy sector with 11 
new  agreements  signed  in  2012  to  construct  and  operate  hydropower  plants  (HPPs).  The  output  of 
privately-owned  small  HPPs  surged  by  76%  year-on-year  in  2012,  raising  their  share  of  total 
electricity generation to 5.6% in 2012, from 3.4% a year earlier. In February the privatisation of three 
small HPPs was completed, for a total of €109.5 million. Overall, state involvement in the economy 
remains limited and is mainly concentrated in water supply, transport and energy. 

Market entry and exit 

Business registration and licensing continued to perform well through the established network of one-
stop  shops.  Some  improvement  was  made  to  the  business  registration  system  by  making  the 
notarisation  of  incorporation  documents  optional.  In  2012  the  number  of  new  businesses  registered 
grew by 8% year-on-year; they make up 12% of all active enterprises. 

A  registry  of  certified  bankruptcy  administrators  was  set  up  and  23  bankruptcy  administrators  were 
licensed until April. However, the time taken and procedures for market exit remain slow. In 2012 the 
number  of  requests  for  voluntary  business  closures  went  up  by  14%  from  a  year  earlier.  Overall, 
Albania  has  made  incremental  improvements  to  its  well-functioning  procedures  for  starting  a 
business. Market exit procedures remain slow. 

Legal system 

In the area of property rights implementing legislation on registration of immovable property has been 
adopted.  However,  first  registration  of  properties  is  yet  to  be  completed.  Further  efforts  are  also 
needed in the area of property restitution and compensation and in the legalisation of buildings that 
did  not  have  permission.  Amendments  to  the  Civil  Procedure  Code  were  adopted  in  April  to  allow 
easier  recovery  of  collateral.  Cases  of  collateral  recovery  rose  significantly  in  2012,  along  with  the 
number  of  private  bailiff  offices.  However,  the  full  impact  of  the  new  legal  measures  has  yet  to  be 
assessed. Overall, there has been some progress in the legal system but proper implementation needs 
to be ensured. Uncertainties over property ownership, delays in court procedures and weaknesses in 
the rule of law continue to be detrimental to the business environment. 

Financial sector development 

The banking sector continued to dominate the financial system, accounting for 93.6% of all financial 
system  assets  and  87.9%  of  GDP  —  3  percentage  points  higher  than  in  2011.  It  is  dominated  by 
foreign capital and remains highly concentrated, with the five largest banks holding about 68% of the 
total credit portfolio and 74% of total deposits. Total credit to the economy amounted to around 41% 
of GDP, suggesting that there is significant scope for deeper financial intermediation. Credit growth 
fell to 7.4% in 2012 from 11.7% in 2011, and has recently fallen faster, with annual credit growth at 
1.6% in the first quarter of 2013 and just 0.7% in the second quarter. 

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Weak  lending,  affecting  both  households  and  investors,  reflects  tighter  credit  standards  applied  by 
banks  amid  a  high  and  rising  share  of  non-performing  loans  and  subdued  credit  demand  due  to 
economic  uncertainties.  In  an  effort  to  reinvigorate  lending,  the  BoA  adopted  specific  regulatory 
changes  in  March  aiming  at  releasing  financial  resources  for  banks  and  channelling  them  towards 
lending to the private sector, but so far credit growth has not picked up. 

In general, the Albanian banking system remained well capitalised and liquid. The net results of the 
banking system in 2012 amounted to €26.71 million, reflecting a significant increase compared with 
the  previous  year.  The  capital  adequacy  ratio  increased  to  16.7%  in  May  from  15.6%  at  the  end  of 
2011, with each individual bank remaining above the 12% regulatory minimum. The ratio of liquidity 
assets  to  short-term  liabilities  as  of  the  end  of  December  2012  increased  to  36.7%,  comfortably 
exceeding the minimum regulatory requirement of 25%. Deposits were the main source of financing 
and  parent-bank  credit  lines  were  significantly  lower  than  at  the  end  of  2011,  strengthening  the 
banking system’s resilience to foreign shocks. However, banks’ exposure to credit risk has increased, 
as the ratio of non-performing loans rose further to 24.4% in the second quarter of 2013 compared to 
21.2%  a  year  earlier.  This  has  led  to  a  surge  in  loan  loss  provisioning,  up  by  24.3%  in  June  on  an 
annual basis.  

Total  assets  of  the  non-banking  financial  sector  stood  at  2.8%  of  GDP.  The  insurance  market,  in 
which foreign capital has a 50% stake, increased its gross written premium revenues by some 9% in 
2012 but its share of GDP remains low. The securities market focused on government bonds and saw 
two new investment funds start up. The voluntary pension market grew by 83% in 2012 from a very 
low  base  and  is  still  in  the  very  early  stages  of  development.  The  BoA  continued  to  strengthen  the 
regulatory and  supervisory  framework. It adopted regulations on  the core  management  principles of 
banks  and  foreign  bank  branches;  on  the  licensing  of  non-banking  financial  institutions;  on  risk-
management  of  non-banking  financial  institutions;  and  on  e-payment  instruments.  Overall,  the 
banking system remains  well  capitalised and liquid. However, non-performing loans remain a cause 
for concern, while the sharp deceleration of credit growth is detrimental to the economy. 

6.2. 

THE  CAPACITY  TO  COPE  WITH  COMPETITIVE  PRESSURE  AND  MARKET  FORCES  WITHIN  THE 
UNION 

Existence of a functioning market economy 

Macroeconomic  stability  was  maintained.  The  economic  slowdown  resulted  in  a  shrinking  current 
account  deficit,  but  external  imbalances  are  still  large,  reflecting  a  narrow  production  base.  Low 
inflation  reflects  the  lack  of  inflationary  pressures  and  well  anchored  inflation  expectations.  Fiscal 
policy remains constrained by the relatively large and growing public debt, much of which is short-
term and thus reinforces vulnerability. Fiscal planning continues to be weak and its predictability has 
deteriorated following the abolition of the debt anchor. 

Structural bottlenecks are an obstacle to growth. Despite some progress, weaknesses in property rights 
and  law  enforcement  continue  to  be  detrimental  to  the  business  environment.  The  labour  market  is 
characterised  by  persistently  high  unemployment.  The  privatisation  process  is  advanced  but  not  yet 
complete.  The  diversification  and  competitiveness  of  the  economy  are  still  low.  Overall,  although 
some progress was made on establishing a functioning market economy, Albania needs to consolidate 
its  public  finances  and  reduce  the  relatively  high  level  of  public  debt,  further  bolster  governance, 
enhance labour market performance, provide protection for property rights and strengthen the rule of 
law and the fight against corruption. 

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Progress towards meeting the economic criteria for EU accession: the EU Commission's 2013 assessments 

Human and physical capital 

Public expenditure on education is estimated to have accounted for around 3.2% of GDP in 2012 and 
is  expected  to  be  unchanged  in  the  2013  budget.  New  learning  standards  and  syllabuses  were 
introduced  in  secondary  education.  Public  spending  on  research  and  development  remained  at  low 
levels, at 0.03% of GDP in 2012 and 2013. The number of science laboratories increased in 2012. The 
level of collaboration between industry and universities remains weak. 

Public capital expenditure bore the burden of  the budget rebalancing and shrank by 12.8% in 2012, 
accounting for just 4.6% of GDP compared to 5.4% in 2011. It is projected to make up 5% of GDP in 
2013. The authorities identified education, healthcare, infrastructure, and agriculture as priority areas, 
but spending plans project a decline in public investment in these sectors in 2013. Road infrastructure 
remains the main beneficiary of public investment. According to estimates, total investment spending 
in the economy declined by around 5% in 2012 and decreased as a share of GDP from about 32% in 
2011 to 29.3%. 

Albania remains highly dependent on hydroelectric resources to ensure security of power supply. No 
progress  was  made  in  increasing  interconnection  capacity  with  other  countries.  Preparations  for  the 
construction  of  the  interconnection  with  Kosovo  were  re-launched  in  January.  Albania  was  able  to 
export electricity at the beginning of 2013 due to favourable weather conditions but continues to be a 
net  importer  of  electricity.  The  number  of  concessions  signed  in  the  energy  sector  increased,  while 
several irregularities in concession procedures were identified by the Supreme State Audit Institution.  

Overall,  there  is  significant  scope  for  redirecting  investment  into  growth-enhancing  areas  such  as 
telecommunications  and  human  capital,  and  for  better-focused  policies  promoting  innovation 
initiatives and cooperation between the education sector and industry. 

Sectoral and enterprise structure 

The Albanian economy continues to be dominated by the services sector, which accounted for around 
60% of gross value added (GVA) in 2012, followed by agriculture, providing around a fifth of GVA, 
and industry (11%), comprising both extractive industries and manufacturing. Manufacturing relies to 
a  large  extent  on  the  low  value-added  textile,  garment  and  leather  industries.  Following  a  deep 
contraction  by  about  13%  in  2012,  the  construction  sector’s  share  of  GVA  fell  to  below  9%. 
Agriculture continues to provide a very large proportion of jobs (around 50%), suggesting that there is 
still significant scope for productivity gains from sectoral shifts in employment. 

The sectoral composition of merchandise exports remained highly concentrated in 2012, with 84% of 
total exports accounted for by minerals, fuels and electricity (36%), textiles and footwear (29%) and 
construction materials and metals (19%). The minerals, fuels and electricity sector increased foreign 
sales by some 31% compared with 2011. 

Small  and  medium-sized  enterprises  (SMEs)  play  a  very  important  role  in  the  economy,  providing 
71%  of  official  employment,  although  weaknesses  in  their  operational  environment  persist.  In  the 
non-agricultural sector, SMEs account for 47% of exports and 68% of value added. 

Significant  weaknesses  continued  to  prevail  in  the  electricity  sector  in  terms  of  a  lack  of  financial 
viability, high levels of losses in the electricity network and distribution, low bill collection rates and 
tariffs below cost-recovery level. Dependence on hydropower continues to pose a substantial risk to 
the country’s electricity supply. 

The  sizeable  informal  sector  remains  a  substantial  problem  and  is  detrimental  to  the  business 
environment. The number of fiscal devices (cash registers) installed by businesses increased, but the 

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system  for  monitoring  their  use  in  practice  needs  to  be  strengthened.  The  number  of  suspected 
corruption cases referred to the prosecutor’s office by customs and tax investigation units increased. 
Overall,  the  structure  of  the  economy  remained  unchanged.  Albania’s  production  base  lacks 
diversification  in  terms  of  both  sectors  and  export  markets,  leaving  the  economy  vulnerable  to 
industry-specific  shocks.  Malfunctioning  persists  in  the  electricity  sector.  The  size  of  the  informal 
sector remains a challenge. 

State influence on competitiveness 

The ratio of state aid to GDP increased to 1.6% in 2012 from 1.3% the year before, with less distortive 
horizontal  (i.e.  non  sector-specific)  aid  continuing  to  account  for  the  bulk  of  state  aid  granted. 
Similarly  to  the  previous  year,  the  government  provided  a  loan  guarantee  to  the  state-owned  power 
generation company KESH to help it survive financial difficulties in late 2012 and early 2013. The 
unresolved problems of the electricity sector are an enduring drain on public resources. 

Economic integration with the EU 

Albania’s  openness  to  trade  decreased  somewhat  in  2012,  as  the  sum  of  total  imports  and  exports 
accounted for 87% of GDP in 2012 as compared with 92% in 2011, mainly on account of declining 
imports following the economic slowdown. The EU remains Albania’s main trading partner. Exports 
of  goods  to  the  EU  increased  by  13.4%  compared  with  2011  and  accounted  for  some  75%  of  total 
merchandise  exports,  while  imports  of  goods  from  the  EU  fell  by  5.1%  and  made  up  62%  of  total 
imports. From January to July, the trend towards a narrowing trade deficit with the EU continued as 
exports  of  goods  to  the  EU  surged  by  18.8%  over  the  previous  year,  while  in  the  same  period 
merchandise imports from the EU declined  slightly. Italy  remains the  single  most important trading 
partner, drawing more than half of Albanian merchandise exports and providing a third of its imports. 
The EU also remains the main source of inward investment in Albania, although its share of total FDI 
stock  has  declined  in  the  last  four  years.  The  pace  of  the  increase  in  trade  with  CEFTA  countries 
slowed, from some 27% in 2011 to around 3% in 2012, reflecting the overall deceleration of economic 
activity  in  the  region.  CEFTA  countries  accounted  for  some  13%  of  Albanian  merchandise  exports 
and 8% of its imports. The positive trend in net exports was supported by recent changes in the real 
effective exchange rate (REER), showing a moderate depreciation of the lek both in the last quarter of 
2012 (by 0.91%) and the first quarter of 2013 (by 0.55%). Overall, the EU remained Albania’s leading 
trade and investment partner. The pace of trade integration with CEFTA countries slowed. 

6.3.  CONCLUSIONS 

As  regards  the  economic  criteria,  Albania  made  some  further  progress  towards  becoming  a 
functioning market economy. Albania should be able to cope with competitive pressures and market 
forces within the Union in the medium term, provided that it accelerates structural reforms. 

Albania  has  maintained  macroeconomic  stability.  GDP  growth  decelerated  but  remained  positive 
mainly due to external demand. Low inflation created room  for  monetary policy easing to stimulate 
growth, but its transmission to the real economy is yet to be seen, as credit growth slowed amid high 
and rising  non-performing loans. The budget deficit remains  high and public debt increased further, 
leading to the statutory debt ceiling of 60% of GDP being breached and abolished. There was a slight 
improvement in the labour  market but unemployment remains high. The current account deficit has 
narrowed but remains large. The economy remains vulnerable to both domestic structural weaknesses 
and global economic volatility. 

Albania needs to complement stability-oriented fiscal and monetary policies with structural reforms to 
ensure long-term sustainable economic growth. Albania will have to address the high levels of budget 

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Progress towards meeting the economic criteria for EU accession: the EU Commission's 2013 assessments 

deficit and public debt and its short term bias. Moreover, it will need to improve fiscal predictability 
by  reducing  the  recurrent  overestimation  of  revenues  and  by  collecting  taxes  more  efficiently. 
Improving  the  business  and  investment  environment  is  essential  for  diversifying  the  economy  and 
boosting its long-term growth potential. This could, inter alia, be achieved by reinforcing the rule of 
law,  tackling  corruption  and  addressing  payment  arrears,  as  well  as  developing  infrastructure  and 
enhancing human capital. The informal sector remains an important challenge. 

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7. 

BOSNIA AND HERZEGOVINA 

In  examining  the  economic  developments  in  Bosnia  and  Herzegovina,  the  Commission’s  approach 
was  guided  by  the  conclusions  of  the  European  Council  in  Copenhagen  in  June  1993,  which  stated 
that  membership  of  the  Union  requires  the  existence  of  a  functioning  market  economy  and  the 
capacity to cope with competitive pressure and market forces within the Union. 

7.1. 

THE EXISTENCE OF A FUNCTIONING MARKET ECONOMY 

Economic policy essentials 

The  consensus  between  the  authorities  at  different  government  levels  on  the  economic  policy 
essentials has somewhat strengthened following the agreement on a medium-term countrywide fiscal 
framework.  The  performance  under  the  International  Monetary  Fund  (IMF)  Stand-By  Arrangement 
remained  broadly  satisfactory  until  June  2013  when  the  IMF  Board  approved  the  third  review.  The 
scope of the budgetary support operation planned by the  World Bank has been  narrowed due to the 
slow implementation and lack of tangible outcomes of legislated reforms in the area of cash transfers. 
A loan totalling €100 million under the EU macro-financial assistance instrument has been disbursed 
in two equal tranches in February and September, respectively, after a delay of one year and following 
a  satisfactory  compliance  with  the  attached  economic  policy  conditions.  In  January  2013,  the 
authorities submitted their seventh Economic and Fiscal Programme, covering the period 2013-2015, 
which foresees gradual economic recovery and simultaneous fiscal consolidation. Its macroeconomic 
scenario appears optimistic, while the fiscal and structural reform strategies remain fragmented and do 
not present a coherent nation-wide formulation of economic and fiscal policies. Overall, despite some 
slight improvement, the consensus on economic and fiscal policy essentials remains weak. 

Macroeconomic stability 

In 2012, the economy contracted by an estimated 1.1%, following a mild recovery in the previous two 
years.  The  deterioration  was  due  to  negative  developments  in  both  domestic  and  external  demand. 
Private consumption fell in 2012 due to falling real wages and employment and decelerating growth 
of  retail  lending.  At  the  same  time,  the  worsened  external  environment  resulted  in  falling  exports, 
which  combined  with  stagnating  imports  led  to  a  negative  contribution  of  net  exports  to  growth. 
Industrial  production  fell  by  5.3%  in  2012,  compared  with  5.9%  expansion  in  the  previous  year.  A 
mild economic recovery started in early 2013. Industrial output growth  in the  first seven  months of 
2013  averaged  6.8%  year-on-year  and  merchandise  exports  rebounded  markedly  by  close  to  8.5%, 
reflecting stronger economic activity, but also base effects. Per capita income, measured in purchasing 
power standards (PPS), decreased in year on year comparison at 28% of the EU-27 average in 2012 
from 30% in 2011. Overall, following a slight contraction in 2012, the economy started to recover in 
early-2013.  

After  a  significant  deterioration  in  2011,  the  current  account  deficit  grew  only  marginally  by  0.9% 
year on year, reaching 9.5% of GDP in 2012. The trade deficit increased by 1.2% and reached 32.7% 
of GDP, as exports fell by 1.9%,  while imports  stagnated.  The surplus in services  fell slightly  for a 
second consecutive year, thus contributing once again to a higher current account deficit. At the same 
time,  the  surpluses  in  the  net  current  transfers  and  income  accounts  increased  by  2.3%  and  8.1%, 
respectively, thus partially offsetting the negative developments in the goods and services balances. In 
the  first  half  of  2013,  rather  favourable  trade  developments  supported  a  further  narrowing  of  the 
current account balance.  

The current account deficit in 2012 was financed mainly by external borrowing and, to a lesser extent, 
by  foreign  direct  investment  (FDI).  As  a  share  of  GDP,  net  FDI  increased  to  3.5%  in  2012,  but 
remained well below pre-crisis levels. In the first six months of 2013 net FDI almost tripled compared 

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to  the  same  period  a  year  before.  Following  a  significant  decline  in  the  first  half  of  2012,  the  net 
foreign exchange reserves recovered in the second half of the year, positively influenced also by the 
drawing of two tranches under the Stand-By Arrangement with the International Monetary Fund. The 
stock  of  official  foreign  exchange  reserves  increased  slightly  by  0.6%  in  2012  and  rose  further  by 
6.6% year on year in the first seven months of 2013, covering around six months of imports. Bosnia 
and Herzegovina’s external public debt increased by 7.4% to 27.5% of GDP in 2012, while external 
private  debt  fell  slightly  over  the  year  and  reached  32.2%  of  GDP.  In  the  first  half  of  2013,  the 
external  public  debt  rose  further  by  5.8%  year  on  year.  The  World  Bank  group  remains  the  largest 
creditor,  while  public  international  creditors  account  for  over  90%  of  the  country’s  external  public 
debt. A large part of the debt is contracted on concessional terms with the average interest rate of all 
debt  being  at  only  1.44%.  Overall,  despite  some  improvements  in  2012  and  the  first  half  of  2013, 
external  imbalances  still remain elevated. The financing of  the deficit increasingly relied on foreign 
loans, leading to an increase in public gross external debt.  

Unemployment  remains  very  high  and  reached  28.6%  in  2012  from  28%  a  year  earlier.  Total 
employment levels stagnated through 2012 and marginally decreased (- 0.6%) year on year in the first 
half of 2013. Some employment gains in services and in the public sector could not compensate for 
continued labour shedding in large parts of the private sector, in particular in construction, mining and 
agriculture. The number of employees in the public administration continued to rise throughout 2012 
and  the  first  half  of  2013,  thus  further  increasing  the  size  of  the  already  large  public  sector.  . 
Unemployment  was  particularly  high  among  the  young  population  (63.1%  for  people  aged  between 
15 and 24). The very high unemployment rate and the sizeable difference between the registered and 
survey-based  labour  figures  suggest  the  existence  of  a  fairly  large  informal  labour  market  and 
significant structural rigidities, such as  high rates of social  security contributions, high labour taxes, 
and poorly targeted right-based benefits. Adjusted for inflation, the average gross wage fell by 0.5% in 
2012 and dropped further by  1.7% in the  first  half of 2013. Overall, labour  market conditions have 
remained difficult and structural rigidities have continued to hamper job creation.  

Table 7.1:
Bosnia and Herzegovina - Main economic trends

Gross domestic product
Private consumption
Gross fixed capital formation
Unemployment
Employment 
Wages
Current account balance
Direct investment (FDI, net)
CPI
Interest rate (3 months)
Stock markets
Exchange rate BAM/EUR
Nominal eff. exchange rate
General government balance
General government debt
* Q1

Ann. % ch
Ann. % ch
Ann. % ch
%
Ann. % ch
Ann. % ch
% of GDP
% of GDP
Ann. % ch
% p.a.
Index
Value
Index
% of GDP
% of GDP

2008
5,6
5,5
5,3
40,6
2,7
16,6
-14,2
5,3
7,4
N.A.
2.251
1,94
100,0
-2,2
N.A.

2009
-2,8
-4,6
-16,8
42,7
-2,8
8,2
-6,6
1,4
-0,4
N.A.
1.038
1,94
104,1
-4,4
N.A.

2010
0,7
0,1
-12,2
42,7
1,9
1,1
-6,2
2,1
2,1
N.A.
954
1,93
103,7
-2,5
39,3

2011
1,0
1,6
7,9
43,8
-1,6
4,4
-9,9
2,6
3,7
N.A.
979
1,93
104,6
-1,3
40,5

2012
-1,1
-0,8
1,5
45,9
0,1
1,5
-9,5
2,0
2,1
N.A.
737
1,93
105,6
-2,1
44,0

2013 H1
N.A.
N.A.
N.A.
44,6
-0,6
-0,2
-8.1
2,9
0,8
N.A.
776
1,94
106.1*
0,7
N.A.

Sources: Thomson Reuters/Ecow in, Eurostat

Inflation  pressure  eased  in  2012  and  early-2013.  Average  annual  consumer  inflation  moderated  to 
2.1% in 2012, as compared with 3.7% in 2011. The main factors behind the lower inflation were the 
decelerating food and transport prices, reflecting international price developments. The disinflationary 
trend  continued  in  2013,  with  annual  inflation  reaching  0.5%  in  July,  mainly  driven  by  price 
moderation  in  food,  housing  and  transport.  Price  decreases  were  recorded  in  clothing  and  footwear 
and health, while on the other hand, the new hike of excises on tobacco, effective from the beginning 

52 

 
 
Progress towards meeting the economic criteria for EU accession: the EU Commission's 2013 assessments 

of 2013, resulted in an 8.2% rise in tobacco prices. 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.  Monetary  policy  settings  have  remained  unchanged.  The 
growth of money supply moderated in the course of 2012 and monetary aggregate M2 increased by 
3.4%  at  end  of  the  year,  as  compared  with  a  5.8%  rise  in  2011.  Overall,  the  currency  board  has 
continued  to  function  well  and  monetary  and  financial  stability  have  been  preserved  while  inflation 
has moderated. 

Following  several  consecutive  years  of  fiscal  consolidation,  fiscal  imbalances  have  grown  again  in 
2012  and  2013,  in  parallel  with  the  worsened  external  environment  and  the  downturn  in  economic 
activity. The consolidated budget deficit increased to 2.1% of GDP -as compared with 1.3% in 2011-, 
due to higher expenditure growth (2.4%) which outstripped the rise of total revenue (0.9%). The share 
of  general  government  in  GDP  remained  relatively  high,  with  government  expenditure  at 
approximately  45%  of  GDP  and  revenue  at  about  44%  of  GDP.  Social  security  contributions  – 
accounting  for  over  1/3  of  the  overall  revenues  –  stagnated  in  year  on  year  comparison.  In  the 
meantime, all main expenditure categories increased during the year indicating some loosening of the 
fiscal  policy.  Purchases  of  goods  and  services  grew  by  3.2%,  while  expenditures  on  social  benefits 
increased by 1.5% and on wages declined by 0.4%, thus marginally decreasing their very high shares 
in overall expenditure. The composition of public spending remained highly unfavourable as current 
expenditure  represented  a  very  high  95%  of  total  expenditures,  while  capital  spending  remained 
extremely low despite a 22% nominal increase over the previous year. Fiscal imbalances widened in 
the  first  quarter  of  2013  mainly  on  the  back  of  lower  than  budgeted  revenues  from  indirect  taxes, 
largely due to unexpectedly high VAT refunds. Lower revenues were partly compensated for by lower 
current  spending  (e.g.  on  wages)  and  by  delays  in  the  implementation  of  some  public  investment 
projects.  The  rebound  of  economic  activity  was  felt  in  the  public  finances  in  the  second  quarter  of 
2013. On the other hand, the highway and road funds of both entities increased capital spending. The 
general government balance in the first six months of 2013 turned positive and amounted to 0.4% of 
annual GDP. Overall, the fiscal situation worsened in 2012 but improved slightly in the first half of 
2013, amid a persistently low quality of public finances. The composition of public spending remains 
a concern. Public finance management has been somewhat strengthened and important long-delayed 
reforms  have  been  initiated.  The  adoption  of  the  Global  Frameworks  for  Fiscal  Policies  2013-2015 
and 2014-2016 and despite a certain delay of the approval of the latter  -after the lack of a medium-
term fiscal programme at country level for a couple of years- improved fiscal coordination. The State 
and  the  Entities  adopted  their  2013  budgets  before  the  expiration  of  the  previous  budget  year.  This 
was a welcome 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.  Some  steps  have  been  taken  towards  strengthening  the 
sustainability of public finances in the Federation of Bosnia and Herzegovina. The Entity government 
has  adopted  in  June  2013  a  new  organic  budget  law,  introducing  fiscal  rules  and  providing  for  the 
establishment of a fiscal coordination body. The Federation Parliament endorsed in April 2013 a new 
law on privileged pensions providing for a comprehensive system that is financially sustainable and 
socially  fair.  Aiming  to  improve  the  long-term  sustainability  of  the  Entity’s  public  finances,  the 
Federation  government  has  endorsed  in  September  2013  a  strategy  for  contributory  pension  system 
reform.  However,  the  quality  of  fiscal  reporting  remains  low,  thus  impeding  proper  analysis  and 
policy  design.  Overall,  the  sustainability  and  credibility  of  fiscal  policy  in  Bosnia  and  Herzegovina 
have been somewhat strengthened but significant further efforts are still needed. 

General government debt, albeit still at a relatively moderate level, kept on growing. After rising for a 
fourth  consecutive  year  already,  it  exceeded  44%  of  GDP  at  end-2012  as  compared  with  40.9%  of 
GDP a year ago. This was entirely due to external public debt, expanding by 7.4% to a total of 27.9% 
of  GDP,  while  domestic  debt  fell  slightly  in  the  course  of  2012.  Both  Republika  Srpska  and  the 
Federation  continued  issuing  short-term  treasury  bills  and  long-term  government  bonds  to  finance 
budget deficits and debt repayment obligations. In most occasions, the offers have met relatively high 

53 

  
 
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Progress towards meeting the economic criteria for EU accession: the EU Commission's 2013 assessments 

demand  and  secured  relatively  favourable  conditions.  Public  debt  servicing  soared  over  twofold  in 
recent years and reached over 3% of GDP in 2012. Overall, even though the debt-to-GDP ratio is still 
relatively moderate, its upward trend needs to be monitored carefully.  

Overall,  financial  and  monetary  stability  have  been  preserved  as  the  low  inflation  environment  was 
maintained  and  the  currency  board  arrangement  continued  to  enjoy  a  high  level  of  confidence  and 
credibility.  However,  rising  fiscal  deficit,  substantial  external  imbalances  as  well  as  very  high 
unemployment continue challenging the overall macroeconomic stability. 

Interplay of market forces 

The private sector’s share in GDP is estimated to have remained broadly unchanged at around 60% of 
GDP in 2012. There has been no further progress with the privatisation agenda for a fifth consecutive 
year.  In  Republika  Srpska,  about  2/3  of  the  enterprises  intended  for  privatisation  have  been  sold 
already prior to the crisis, while some of the companies that were previously offered for sale and were 
not  privatised  were  forced  to  declare  bankruptcy.  In  the  Federation,  slightly  over  40%  of  the  initial 
stock of state-owned capital intended for privatisation had been sold by May 2013, unchanged from a 
year  earlier.  Most  prices  are  liberalised,  even  though  a  number  of  regulated  prices  remain  (e.g.  for 
utilities). Overall, the privatisation process which has stalled during the crisis period has not advanced 
in 2013. 

Market entry and exit 

Companies  are  still  required  to  register  in  both  Entities  before  they  can  do  business  in  the  whole 
country.  In  Republika  Srpska  an  ambitious  reform  -embracing  amendments  to  20  legal  acts  in  the 
entity-  introducing  a  one-stop-shop  business  registration  system  has  been  launched  targeting 
significant reduction of registration time (from 23 to 3 days), number of required procedures (from 11 
to  5)  and  business  start-up  costs  (from  €500-750  to  €200).  In  the  Federation,  a  new  Law  on 
Companies -enabling simplification and improvement of the business registration process in terms of 
reduction of time and streamlined processes and lowering the level of establishing capital- has been 
adopted  in  September  2013.  In  the  first  half  of  2013,  alongside  the  improved  external  environment 
and increased economic activity, the number of newly registered companies increased by 3.7% year-
on-year.  Slow  contract  enforcement,  limited  access  to  financing,  and  political  instability  are 
considered to be among the most problematic factors for doing business in the country. No progress 
has been  made in the field of  market exit. Overall, business registration system has been somewhat 
simplified but significant administrative barriers remain for private-sector development. 

The legal system 

No substantial improvements can be reported as regards the legal system in Bosnia and Herzegovina, 
which remains complex and challenging. The standard of legislation is relatively high in some areas; 
nevertheless the practical implementation of laws is often poor due to the weak enforcement capacity 
of  key  institutions.  The  judicial  system  often  does  not  function  efficiently  and  does  not  cover 
commercial  activities  adequately.  Enforcement  of  commercial  contracts  remains  a  lengthy  process, 
which involves 37 procedures and takes an average of 595 days, unchanged from the previous year. 
Overall, a weak rule of law, corruption, and unreliable contract enforcement continue to hamper the 
business environment.  

Financial sector development  

The financial system of Bosnia and Herzegovina remained dominated by the banking sector holding 
about  84%  of  total  assets  in  2012.  The  share  of  claims  on  the  private  sector  in  relation  to  GDP 
decreased marginally year on year to about 56% in July 2013. Twenty-eight banks are operating in the 

54 

 
Progress towards meeting the economic criteria for EU accession: the EU Commission's 2013 assessments 

country in 2013, compared with twenty-nine a year ago, as one bank’s license was revoked in early-
2013. There is one majority State-owned bank, while the rest are privately owned. Nineteen banks are 
under  foreign  ownership,  accounting  for  slightly  below  90%  of  the  total  banking  system  assets  in 
2012.  Banking  sector  assets  rose  by  2.8%  (July  2013  compared  with  July  2012),  accounting  for 
approximately 88% of GDP. 

The financial position of domestic banks has improved. The total net revenues of the banking sector 
surged to €91.8 million in 2012. However, banking profitability remained broadly unchanged in the 
first half of 2013 with the return on average equity and the return on average assets staying at 4.2% 
and  0.5%,  respectively  as  of  end-June  2013.  The  quality  of  the  loan  portfolio  deteriorated  further 
reaching alarmingly high levels. The share of non-performing loans soared by 1.6 percentage points 
year on year to 14.3% in the second quarter of 2013. The capital adequacy ratio increased to 17.7% in 
the  second  quarter  of  2013  up  from  16.7%  a  year  earlier,  comfortably  above  the  legal  minimum  of 
12%. Liquidity indicators deteriorated during the same period with the ratios of liquid to total assets 
falling  from  24.8%  to  24.1%  and  of  liquid  assets  to  short-term  financial  liabilities  from  43.5%  to 
42.2%.  Twenty-six  banks  are  participating  in  the  deposit  guarantee  scheme.  Its  coverage  level 
remained  unchanged  at  around  €18 000.  Overall,  despite  the  elevated  and  further  rising  non-
performing loan ratio, financial stability was safeguarded. 

The  financial  sector  has  not  been  very  supportive  to  growth  in  2012  and  early-2013.  Annual  total 
credit  growth  moderated  from  5.6%  in  2011  to  4.9%  at  the  end  of  2012  and  went  further  down  to 
2.5% year on year in July 2013, with total loans accounting for about 63% of GDP. Corporate lending 
has been stagnating throughout 2012 but there were signs of recovery in early-2013 as it grew by 2% 
year on year in July 2013. Retail lending has been moderating throughout the whole period and posted 
only a marginal growth of 1.8% in July 2013. Private sector credit may have been negatively affected 
by the high financing needs of the government, even if the magnitude of the potential crowding out is 
likely  to  be  rather  limited,  given  the  relatively  low  share  of  government  sector  in  total  credits.  The 
recovery  of  deposits  continued  though  at  further  moderating  rates.  Total  banking  deposits  reached 
53.1%  of  GDP  in  July  2013.  Households  remained  the  main  contributors  to  this  development, 
increasing their savings by 8.3% year on year. The total loans-to-deposits ratio slightly moderated to 
118.4% in July 2013. Overall, the financial  sector has  not  been very  supportive to growth, partially 
due to some crowding out. 

The  downward  correction  on  the  two  stock  markets  in  Bosnia  and  Herzegovina  continued.  The 
combined turnover of the bourses soared over twofold year-on-year, mainly influenced by the placed 
T-bills  issues  of  both  entity  governments.  The  combined  market  capitalisation  inched  up  to 
approximately  33%  of  GDP  from  around  30%  a  year  ago.  The  insurance  sector  remained  small, 
accounting  for  approximately  2.1%  of  GDP  in  2012.  The  annual  growth  of  premiums  accelerated 
slightly to 3.5% in 2012 from a 3.4% annual rise in 2011. The market was dominated by the non-life 
insurance segment, which accounted for 84.9% of the total. Twenty-six companies were operating on 
the market in 2012, up from twenty-five in the previous year. Overall, financial intermediation by the 
non-banking sector remained shallow. 

7.2. 

THE  CAPACITY  TO  COPE  WITH  COMPETITIVE  PRESSURE  AND  MARKET  FORCES  WITHIN  THE 
UNION 

Existence of a functioning market economy 

The  quality  of  public  finances  remains  low,  even  though  public  finance  management  has  been 
somewhat strengthened and some steps have been taken to improve public finances sustainability, in 
particular  in  the  Federation.  Unemployment  remains  very  high.  The  stalled  privatisation  process, 
along with the prevailing obstacles to private-sector development and the unfavourable composition of 

55 

  
 
European Commission 

Progress towards meeting the economic criteria for EU accession: the EU Commission's 2013 assessments 

budgetary  expenditures  continue  to  undermine  a  more  growth-oriented  allocation  of  resources.  No 
progress  has  been  made  towards  creating  a  single  economic  space  within  the  country.  Overall,  the 
functioning  of  market  mechanisms  remains  hampered  by  the  large  government  sector,  characterised 
by low spending efficiency and sizeable interference in the economy.  

Human and physical capital  

Information  and  statistics  on  human  capital  remains  scattered  and  scarce,  thus  preventing  effective 
policy-making.  Although  enrolment  rates  in  higher  education  increased  slightly  in  the  2012-2013 
academic year, progress in the field of education has been very limited. The new coordination format 
for  education  reform,  which  had  been  agreed  in  2012,  is  not  effective  as  the  Conference  of  the 
education  ministers in Bosnia and Herzegovina,  foreseen to be held every  second  month,  met twice 
since  March  2012.  No  progress  has  been  made  with  regard  to  one  of  the  major  bottlenecks  of  the 
education system, namely the mismatch between the qualifications needed on the labour market and 
the profile of graduates coming out of the education and vocational training systems. Participation in 
the labour market is still very low, with an activity rate of 43.6% in 2013, as compared with 44% in 
the previous year. Overall, the proper functioning of the labour market continues to be hampered by 
structural rigidities and the weak performance of the education and training system. 

The  investment-to-GDP  ratio  remained  at  relatively  low  level  of  about  20.3%  in  2012,  slightly 
increasing in year on year comparison. Net FDI flows surged by 70.6% – albeit from a very low level 
–,  reaching  3.5%  of  GDP.  The  structure  of  FDI  inflows  improved  slightly  with  rising  green-field 
investments in tradables (manufacturing industry, in particular) at the expense of the financial sector. 
Some progress, however slow, can be reported in the improvement of the road and rail infrastructure 
on  the  Pan-European  corridor  Vc.  A  number  of  projects  of  rehabilitation  of  road  and  railway 
infrastructure  are  being  implemented.  Maintenance  and  upgrading  of  roads  continued,  but  progress 
was slow. Overall, despite the difficult external environment the country seems to have gained some 
attractiveness towards foreign investors. Infrastructure improved slightly, but still requires repairs and 
modernisation. 

Sector and enterprise structure 

Market liberalisation remains insufficient in many sectors as most utility providers still do not apply 
market prices. No progress has been made on unbundling electricity networks. There was some slight 
progress  towards  a  competitive  telecommunications  market.  New  licences  were  granted  for  internet 
services  and  network  operators.  The  level  of  broadband  internet  access  has  increased  marginally 
remaining at relatively low level of 11.2%. Overall, limited progress was achieved on liberalisation of 
network industries. 

There were no major shifts in the sectoral structure of the economy in 2012. Services accounted for 
71.2% of gross value added (up from 68.4% in 2011), industry for 20.1% (21.8%) and agriculture for 
7.7%  (8.4%).  The  share  of  construction  fell  for  a  fourth  consecutive  year  reaching  4.9%.  The 
traditionally  high  share  of  public  administration,  education  and  health  increased  slightly  to  23.3%. 
The large informal sector which is fuelled by weaknesses in tax and expenditure policies and in law 
enforcement,  including  the  fight  against  corruption,  remains  an  important  challenge.  Overall,  there 
have  been  no  major  changes  in  the  structure  of  the  economy.  The  informal  sector  is  an  important 
challenge. 

State influence on competitiveness 

No progress has been made in reducing the state’s influence in the economy. Direct budget subsidies 
to industry and agriculture increased to 1.6% of GDP in 2012, up from 1.5% in the previous year. In 
the first quarter of 2013, they decreased 21.3% year on year. Despite the establishment of a state aid 

56 

 
Progress towards meeting the economic criteria for EU accession: the EU Commission's 2013 assessments 

authority  and  the  appointment  of  a  secretariat,  both  are  not  fully  operational  as  implementing 
legislation  and  budget  remains  to  be  adopted.  Transparency  of  all  state  aid  granted  in  Bosnia  and 
Herzegovina  is  not  yet  ensured  as  the  country  fails  to  provide  comprehensive  state  aid  inventory 
consolidated at the country level. Overall, state aid remained high and the state continued to influence 
the economy through state-owned monopolies. 

Economic integration with the EU 

Bosnia and Herzegovina remains an open economy, in spite of some slight decline of trade openness 
in  2012.  Total  trade  (the  sum  of  the  volume  of  exports  and  imports  of  goods  and  services)  fell  to 
84.9% of GDP in 2012, as compared with 87% in 2011. The EU continues to be the country’s largest 
trading  partner.  Its  share  in  total  exports  has  decreased  marginally  to  59.8%,  while  the  share  in 
imports  has  grown  to  47.3%.  The  shares  of  the  other  main  trading  partner  -the  CEFTA  block-  fell 
slightly to 28.7% of total exports and 22.2% of total imports. In 2012, the real effective exchange rate 
based  on  the  country’s  20  largest  trading  partners  appreciated  slightly  by  0.4%  indicating  some 
marginal  price  competitiveness  losses.  The  share  of  FDI  stocks  from  the  EU  to  total  FDI  remained 
broadly  unchanged  and  stood  at  44.1%  in  2012.  Overall,  the  already  high  level  of  trade  integration 
with the EU increased further. 

7.3.  CONLUSIONS 

As regards the economic criteria, Bosnia and Herzegovina has made little further progress towards a 
functioning  market  economy.  Considerable  further  reform  efforts  need  to  be  pursued  with 
determination to enable the country to cope over the long-term with competitive pressure and market 
forces within the Union. 

The economy contracted by 1.1% in 2012. However, indicators for the first half of 2013 show some 
signs of recovery. Unemployment is still very high. The quality of public finances remained low, even 
though  public  finance  management  was  somewhat  strengthened.  Despite  some  slight  improvement, 
consensus  on  economic  and  fiscal  policy  essentials  remains  weak,  thus  impeding  reforms  at  the 
country level. The large and inefficient public sector with multiple overlapping competences on state, 
entity and municipal or cantonal level (especially in the Federation) continues to impose risk for fiscal 
sustainability.  An  inefficient  legal  and  judicial  system  hampers  enforcement  capacity  and  is  a  clear 
deterrent for investment and a source of corruption. 

The  composition  and  the  low  efficiency  of  public  spending  in  Bosnia  and  Herzegovina  remain  a 
concern. In this context, fiscal reporting needs to be further improved in order to increase the quality 
of  analysis  and  policy  design.  Structural  rigidities  such  as  the  excessive  labour  taxation  and  poorly 
targeted social transfers would require measures to spur labour demand. Authorities in the Federation 
should proceed with development of the pension reform. Given the high share of public companies in 
the economy, the authorities should reinvigorate privatisation, which has the potential to improve the 
fiscal situation and bring about more competition. The private sector needs to be supported by a sound 
business  environment,  most  notably  by  improving  contract  enforcement  and  establishing  a  single 
economic space in the country. The informal sector remains an important challenge. 

57 

  
 
8. 

KOSOVO* 

In  examining  economic  developments  in  Kosovo,  the  Commission’s  approach  was  guided  by  the 
conclusions of the European Council in Copenhagen in June 1993, which stated that membership of 
the  Union  requires  the  existence  of  a  functioning  market  economy  and  the  capacity  to  cope  with 
competitive pressure and market forces within the Union. 

8.1. 

THE EXISTENCE OF A FUNCTIONING MARKET ECONOMY 

Economic policy essentials 

Kosovo has further developed its relations with international financial institutions. It has continued to 
successfully implement the 20-month €105 million Stand-By Arrangement (SBA), negotiated with the 
International Monetary Fund (IMF) in April 2012. In December 2012, Kosovo became a member of 
the European Bank for Reconstruction and Development. In June 2013, Kosovo signed a Framework 
Agreement  with  the  European  Investment  Bank  (EIB),  which  allows  the  EIB  to  finance  projects  in 
Kosovo.  The  Fiscal  Surveillance  Mechanism  with  the  European  Commission  has  continued  with 
meetings  held  twice  a  year.  Kosovo  has  also  launched  preparations  for  an  Economic  and  Fiscal 
Programme, which is the standard economic surveillance procedure for potential candidates. In early 
May, the government of Kosovo adopted its medium-term expenditure framework, covering the years 
2014-2016.  Overall,  the  determination  to  pursue  market-oriented  economic  policies  has  been 
maintained and reforms accelerated in certain areas. 

Macroeconomic stability 

Kosovo’s economy has been less shielded from the adverse effects of the economic crisis in Europe 
than  in  past  years,  with  signs  of  an  economic  slowdown.  The  general  economic  situation  remains 
challenging  with  very  high unemployment. GDP growth came down  from 4.4% in 2011 to 2.5% in 
2012  and  is  likely  to  have  remained  subdued  in  the  first  half  of  2013  as  well.  More  prudent  fiscal 
policy  and  rapidly  decelerating  credit  growth  have  curbed  domestic  demand,  supressing  the 
investment  activity  in  particular.  Remittances,  a  major  driver  of  private  consumption,  started 
recovering only in the second half of 2012. The weak economic prospects in a number of countries 
with  significant  Kosovo  diaspora  increase  uncertainty.  Economic  statistics,  national  accounts  in 
particular,  remained  extremely  weak,  hampering  a  comprehensive  assessment  of  the  economic 
situation. GDP per capita(1) has reached €2 721 in 2012, equal to 11% of the EU-27 average, almost 
unchanged  over  its  level  in  2011.  Overall,  Kosovo’s  economic  growth  has  weakened  and  remains 
fragile. 

In 2012, the current account deficit (including official transfers) shrank to 7.7% of GDP, down from 
13.8%  of  GDP  in  2011.  Higher  current  transfers  and  lower  imports  of  goods  and  services  helped 
reduce  external  imbalances.  On  the  other  hand,  the  performance  of  exports  of  goods  deteriorated 
(down by 1.0% of GDP), as external demand and prices for metals and metal products, Kosovo’s main 
exports, declined. As a result, trade imbalances remained significant, with a trade deficit of 35.1% of 
GDP, reflecting an underdeveloped and narrow domestic production base.  

The surplus on the capital and financial account (excluding changes in reserve assets) stood at 13.2% 
of GDP in 2012. Net foreign direct investments declined to their lowest level since 2005 to 4.3% of 
GDP.  The  structure  of  investments  remained  broadly  unchanged,  with  about  half  of  all  incoming 
foreign  direct  investment  (FDI)  going  to  the  real  estate  and  construction  sectors,  12%  to  financial 
services, and only 13% channelled to manufacturing. The deficit in portfolio investments widened to 

*  This designation is without prejudice to positions on status, and is in line with UNSCR 1244/1999 and the ICJ Opinion on 

the Kosovo declaration of independence. 

(1)  A measure using PPS is not available for Kosovo. 

58 

 
                                                           
Progress towards meeting the economic criteria for EU accession: the EU Commission's 2013 assessments 

3.8% of GDP, but strong inflows of other investments, mostly currency and deposits, boosted reserve 
assets,  which  increased  by  5.4%  of  GDP.  Net  errors  and  omissions  remained  very  high  (4.8%  of 
GDP), close to their level in previous years. Overall, external imbalances have declined, although they 
are  still  very  high,  especially  in  merchandise  trade.  Net  inflows  from  foreign  direct  investment  fell 
markedly and continued to be channelled mainly in non-tradable sectors. 

Unemployment  is  very  high  at  35.1%,  according  to  Labour  Force  Survey  (January  to  June  2012), 
which,  due  to  methodological  changes,  does  not  allow  for  comparisons  with  previous  years.  The 
unemployment registry  was digitalised and launched in early 2012. The number of people officially 
registered  as  unemployed  decreased  by  about  22%.  However,  the  sharp  reduction  mainly  reflects 
changes in the registration system, rather than an improvement in the labour market situation. Most of 
the unemployed are unskilled (60%) and the number of unemployed with a university education has 
steadily increased. Structure of the labour market signals a mismatch between the skills needed on the 
labour market and those provided by the education system. Formal employment in the private sector 
increased slightly according to data on the number of contributors to the Kosovo Pension and Savings 
Trust  Fund.  The  available  statistics  do  not  provide  a  true  picture  of  the  labour  market,  particularly 
given the significant informal employment. Overall, information about the labour market is scarce and 
patchy. Unemployment has remained very high, with significant structural weaknesses and skill gaps 
in the labour market. There are few job opportunities, especially for new young entrants. 

The annual average rate of inflation was 2.5% in 2012. After having been elevated for several months 
in the second half of 2012, year-on-year inflation fell to 1.2% in August 2013. This moderation was 
mainly driven by the base effect and lower food and energy prices. Energy goods had a deflationary 
impact for the first time in last three years. Services inflation also came down markedly. Core inflation 
(non-food,  non-energy)  has  been  stable,  close  to  1%,  gravitating  around  its  long-term  average. 
Overall, inflation has declined and continued to be driven mainly by food and energy prices. 

Kosovo is  using the euro as its legal tender.  Consequently, the Central Bank of Kosovo (CBK)  has 
only limited policy instruments. The growth in broad money supply has declined markedly and stood 
at  4.6%  year-on-year  by  the  end  of  July  2013,  as  compared  to  9%  a  year  ago.  However,  the 
monetisation of the economy, measured by the ratio of average broad money to GDP, increased from 
40.7% in 2011 to 43% in 2012. The framework for providing emergency liquidity assistance became 
operational and the authorities funded a special reserve fund with €46 million. Overall, the monetary 
framework has continued to function relatively well. 

Table 8.1:
Kosovo - Main economic trends

Gross domestic product
Private consumption
Investment
Unemployment
Employment 
Wages
Current account balance
Direct investment (FDI, net)
CPI
Interest rate (3 months)
Stock markets
Exchange rate EUR/EUR
Real eff. exchange rate
General government balance
General government debt

Ann. % ch
Ann. % ch
Ann. % ch
%
Ann. % ch
Ann. % ch
% of GDP
% of GDP
Ann. % ch
% p.a.
Index
Value
Index
% of GDP
% of GDP

2008
7,2
8,6
15,3
47,5
-12,9
N.A.
-11,7
8,7
9,4
16,61
N.A.
1,00
N.A.
-0,1
N.A.

2009
3,5
2,1
10,7
45,4
8,7
N.A.
-9,3
7,0
-2,4
14,11
N.A.
1,00
N.A.
-0,7
7,7

2010
3,2
3,1
12,3
N.A.
N.A.
N.A.
-12,0
7,7
3,5
18,24
N.A.
1,00
N.A.
-2,6
7,6

2011
4,4
3,0
11,3
44,8
N.A.
N.A.
-13,8
7,9
7,3
18,13
N.A.
1,00
N.A.
-1,7
6,7

2012
2,5
2,8
-10,9
35,1
44,7
N.A.
-7,7
4,3
2,5
16,30
N.A.
1,00
N.A.
-2,6
8,3

2013 H1
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
-7,7
5,4
3,0
15,61
N.A.
1,00
N.A.
-2,6
8,6

Sources: Thomson Reuters/Ecow in, Eurostat, Local authorities

59 

  
 
 
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Progress towards meeting the economic criteria for EU accession: the EU Commission's 2013 assessments 

The 2012 budget deficit turned out close to target at 2.6% of GDP. Total revenue grew by only 1.8% 
and decreased to 26.9% of GDP from 27.3% in 2011. As economic activity cooled down, border taxes 
and non-tax revenue underperformed, while savings in spending on goods and services at central level 
and in non-highway capital expenditure compensated for lower revenues both at central and municipal 
level. Nevertheless, total expenditure increased by 5.3% for the year or by 0.7 percentage points, to 
29.6%  of  GDP.  Current  expenditure  reached  18.1%  of  GDP,  up  from  17.4%  in  2011,  driven  by 
increases  in  all  major  categories.  Capital  expenditure  and  net  lending  decreased  slightly  by  0.2 
percentage points, to 11.2% of GDP and more than 40% of these were spent on a single project, the 
highway to Albania. Government deposits available at the central bank increased from €160 million 
(3.4% of GDP) in 2011 to €216 million (4.4% of GDP) at the end of 2012. In 2012, the authorities 
started issuing domestic treasury bills with 3- and 6-month maturity, extended to one year maturity in 
April  2013.  Supported  by  excess  bank  liquidity  and  stringent  budgetary  execution,  yields  have 
steadily declined and fluctuated around 0.5% and 1.5% for 3-month and 6-month bills respectively, in 
the third quarter of 2013. Total government debt increased by €156 million, but remained low at 8.3% 
of  GDP  by  end-2012,  of  which  close  to  a  fifth  was  domestic  debt.  Budget  transparency  improved 
further and the Ministry of Finance started publishing quarterly information on government debt level 
and structure on its website. 

In December 2012, the Assembly adopted the 2013 budget, envisaging a €181 million (3.5% of GDP) 
consolidated deficit. The budget contains fiscal adjustment measures, mostly in raising additional non-
tax revenue from lignite royalties and one-off sale of telecoms licences. To guard against unforeseen 
fiscal  risks,  the  budget  also  includes  a  contingency  reserve  of  €20  million  in  unallocated  spending 
commitments.  An  allocation  of  about  0.5%  of  GDP  is  envisaged  for  launching  another  big, 
multiannual  road  transportation  project,  a  highway  linking  Pristina  with  Skopje.  The  2013  budget 
performance  was  broadly  on  track  by  the  end  of  July.  The  consolidated  deficit  was  €6.6  million, 
which is significantly lower than the corresponding period last year. Revenue growth was boosted by 
the  base  effects  and  domestic  tax  revenues.  By  the  end  of  July,  year-on-year  increase  in  total 
expenditure  was  1.3%.  Even  though  the  current  expenditures,  subsidies  and  transfers  increased 
significantly (by 1.6% of GDP), reduced non-highway capital spending kept the total expenditure at a 
modest level.  

In  April,  the  winning  bidder  for  the  privatisation  of  75%  of  the  state-owned  telecom  PTK  was 
selected.  However,  the  privatisation  process  has  experienced  delays,  with  the  ultimate  completion 
remaining uncertain. On the other hand, a number of initiatives with potentially significant impact on 
budget sustainability are being prepared in healthcare, municipal finance, and benefits to war veterans 
and political prisoners. In that regard, PTK is a key deal expected to bring €277 million to the budget. 

In July, with amendments to the law on public finance management and accountability, the parliament 
introduced  a  legally-binding  fiscal  rule  to  be  implemented  as  of  2014.  The  rule  envisages  a  2%  of 
GDP  ceiling  on  the  general  government  deficit.  Overall,  budget  performance  remained  broadly  on 
track, in a challenging economic and social environment, but further efforts are needed to limit budget 
exposure to a number of new expenditure initiatives. 

In  2012,  growth  and  domestic  demand  weakened,  as  some  of  the  major  factors  that  had  previously 
supported  it,  fiscal  expansion,  strong  remittances  and  buoyant  credit  growth,  were  curtailed  or 
decelerated. In the framework of an IMF-supported programme, significant steps have been taken to 
rein  in  government  spending  and  improve  financial  stability.  However,  significant  domestic  and 
external  imbalances  persist.  Structural  weaknesses  and  skills  gaps  in  the  labour  market  remain 
significant and there are few job opportunities, especially for young entrants, aggravating an already 
difficult  social  situation.  Overall,  Kosovo  managed  to  broadly  maintain  macroeconomic  and  fiscal 
stability, despite evident signs of weakening economic growth. Fiscal policy remained prudent and the 
macroeconomic  policy  mix  has  improved.  Further  significant  efforts  are  needed  to  improve  the 
structural characteristics of the economy.  

60 

 
Progress towards meeting the economic criteria for EU accession: the EU Commission's 2013 assessments 

Interplay of market forces 

Out  of  61  state-owned  enterprises,  44  are  managed  by  municipalities.  Among  those  centrally 
managed, six enterprises had operating profits in 2012. This includes the Kosovo Energy Corporation 
and the Post and Telecommunications of Kosovo (PTK), which also paid €45 million in dividends to 
the budget. A few companies in the transport, water and waste sectors have continued to suffer losses. 
They  have  remained  a  significant  drain  on  the  budget,  although  to  a  lesser  extent  than  in  previous 
years.  The  Privatisation  of  the  Kosovo  Electricity  Distribution  and  Supply  Company  (KEDS)  was 
successfully completed when Turkish consortium Calik-Limak took over the company in May 2013. 
The  privatisation  of  75%  of  shares  of  the  state-owned  telecom  PTK,  initially  envisaged  to  be 
concluded by July, is delayed. The Privatisation Agency of Kosovo (PAK) has continued privatising 
mainly  small  businesses.  Total  proceeds  from  the  beginning  of  the  privatisation  process  reached 
€574.4  million,  with  2012  proceeds  contributing  €16.7  million.  Limited  progress  has  been  made  in 
liquidating enterprises from PAK’s portfolio. In 2012, only two liquidation proceedings were closed 
and  179  firms  remain  in  the  process  of  liquidation.  Proceeds  from  asset  sales  of  enterprises  in 
liquidation  reached  €62.7  million,  of  which  €11.3  million  were  collected  in  2012.  Overall,  the 
privatisation of state-owned enterprises has progressed, although unevenly, while the privatisation and 
liquidation of enterprises from PAK’s portfolio lagged behind. 

Market entry and exit 

During 2012, 2 261 new businesses were registered, a rise of over 20% compared to the previous year. 
On the other hand, 334 businesses closed, or 16.7% more than in 2011. Businesses consider the lack 
of access  to finance, power cuts,  unfair competition (among local enterprises) and corruption as the 
main  obstacles  to  doing  business.  Overall,  weak  administration,  unreliable  electricity  supply  and 
deficient rule of law have continued to hinder private sector development even though some progress 
has been made with regard to market entry. 

Legal system 

The legal system has continued to suffer from poor accessibility and efficiency, delays and a backlog 
of  unresolved  cases.  Weak  enforceability  of  contracts  has  remained  one  of  the  main  concerns  of 
companies and investors in Kosovo. It is also one of the factors explaining the relatively high interest 
rates  charged  by  commercial  banks  to  the  private  sector.  It  has  contributed  to  the  rise  in  non-
performing loans. There has been some progress regarding the property rights infrastructure, although 
the  accuracy  of  data  could  be  further  improved.  While  expropriation  procedures  are  applied  in  a 
broadly satisfactory manner and property owners are mostly compensated, the authorities do not carry 
out proper consultation and notification of displaced owners. Registered transactions and  mortgages 
have continued to rise, indicating increasing use of property as collateral and acceptance by banks of 
cadastral records data for loan purposes. In 2012, the overall value of  mortgages increased by 49%, 
reaching €1.3 billion. Some land registry books remain in Serbia. An agreement on cadastral records 
was  reached  within  the  framework  of  the  Belgrade-Pristina  dialogue.  Appropriate  legislation  still 
needs to be passed to implement the agreement. Overall, there has been an increasing use of property 
as  collateral.  The  existing  legal  framework  is  underdeveloped  and  its  implementation  has  remained 
poor.  Difficult,  lengthy  and  costly  legal  enforcement  and  prevalent  corruption  has  continued  to 
hamper the business environment. 

Financial sector development 

In  2012,  Kosovo’s  financial  sector  expanded  by  8.5%  with  assets  worth  €3.8  billion.  The  banking 
sector  remained  predominant  and  accounted  for  74%  of  all  financial  sector  assets,  followed  by 
pension funds (19.5%). The total number of banks operating in Kosovo rose to nine in 2012, as a new 
bank entered the market. The number of pension funds (2) and insurance companies (13) has remained 

61 

  
 
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Progress towards meeting the economic criteria for EU accession: the EU Commission's 2013 assessments 

unchanged.  Concentration  of  the  banking  system  remains  high,  with  70%  of  assets  managed  by  the 
three largest banks. Almost 90% of the assets in the sector are held by banks under foreign ownership. 
Profits in the banking sector reached €19.2 million in 2012, a significant (46.7%) decrease compared 
to 2011. The proportion of non-performing loans rose to 7.6% of total loans on June, from 5.8% at the 
end of 2011. This is due to the deterioration in credit quality in the trade, real estate and construction 
sectors. Nonetheless, non-performing loans remain adequately provisioned and banks continue to hold 
considerable excess liquidity. 

More stringent regulatory requirements as regards capital, which took effect in the autumn 2012, have 
put  some  of  the  banks’  soundness  indicators  under  pressure.  Some  banks  fell  below  the  regulatory 
minimum of 12% and had to be recapitalised. However, the average capital adequacy ratio stood at 
16%  at  the  end  of  July  2013.  Amendments  to  the  deposit  insurance  law,  adopted  in  December, 
envisage an increase of the threshold for insured deposits from the current €2 000 to €5 000 by 2018. 
The  capital  of  the  Deposit  Insurance  Fund  has  been  strengthened  and  a  resolution  was  adopted  to 
increase its reserve fund to 8-9% of all insured deposits over a period of 14 years. 

In April 2013, the Constitutional Court issued a ruling that declared a number of articles of the 2012 
law  on  banks,  microfinance  institutions  and  non-bank  financial  institutions  incompatible  with  the 
Constitution.  The  articles  in  question  refer  to  the  possibility  for  NGO  microfinance  institutions  to 
become  joint  stock  companies.  Overall,  there  have  been  important  steps  to  strengthen  financial 
stability  and  supervision,  although  there  is  significant  scope  for  further  improvements.  Non-
performing  loans  increased  and  banks’  capital  adequacy  and  profitability  indicators  worsened, 
although the system as whole has remained rather stable. 

Credit activity decelerated strongly, from double-digit growth levels to around 4% by the end of 2012. 
However, the share of total loans and lease  financing in  GDP increased  marginally to  36.3%. Since 
the beginning of 2013, commercial banks have extended €87 million in new loans, 4% less than in the 
corresponding  period  the  previous  year.  The  decline  has  been  particularly  pronounced  in  new 
investment  loans  for  non-financial  corporations,  which  have  dropped  by  29%,  while  consumer  and 
mortgage loans increased strongly, by 45% and 17%, respectively. 

A survey conducted by the central bank showed that banks applied stricter criteria for loans, mostly 
due to a negative perception of the overall economic situation. Loans to the trade sector continued to 
dominate the loan portfolio, accounting for 36% of it by the end of June 2013. Lending continued to 
be  domestically  financed;  the  loans-to-deposits  ratio  fell  to  77.5%,  limiting  the  risks  of  crisis  spill-
over through cross-border financing. 

In 2012, deposits increased by 8.3%, amounting to €2.3 billion or 46.4% of GDP by the end of the 
year.  By  the  end  of  July,  growth  in  deposits  decelerated  and  remained  at  4.6%.  The  already  good 
liquidity position of the banking system has improved  further and commercial banks increased their 
holdings at the central bank to about €300 million. The average interest rate spread between loans and 
deposits  declined  slightly,  but  remained  at  a  high  9.85%  in  2012.  In  early  2013,  banks’  interest 
income growth turned negative for the first time ever, while interest expenditure and provisions have 
continued growing, reducing banks’ profitability. Overall, the deposit base has continued to increase 
at a robust rate, while lending activity has decelerated and lending conditions have remained tight. 

8.2. 

THE  CAPACITY  TO  COPE  WITH  COMPETITIVE  PRESSURE  AND  MARKET  FORCES  WITHIN  THE 
UNION 

Existence of a functioning market economy 

Macroeconomic  stability  has  been  largely  preserved,  against  the  backdrop  of  the  economic  crisis  in 

62 

 
Progress towards meeting the economic criteria for EU accession: the EU Commission's 2013 assessments 

Europe and persistently high domestic and external imbalances. In a difficult environment, some steps 
have  been  taken  to  strengthen  the  financial  system’s  framework,  improve  the  business  environment 
and  limit  budget  expenditure.  At  the  same  time,  significant  further  efforts  are  needed  to  develop  a 
competitive  private  sector  and  to  anchor  fiscal  sustainability.  Overall,  the  weak  rule  of  law,  a  large 
informal economy and an underdeveloped policy framework have continued to hamper the economy. 

Human and physical capital 

Some  progress  has  been  made  in  the  education  sector,  especially  as  regards  the  systems  and 
procedures  for  implementing  a  sector-wide  approach  to  education.  In  line  with  the  vocational 
professional education framework, new vocational training centres have been opened, curricula have 
been  reviewed  and  a  standardised  certificate  of  accreditation  has  been  developed  for  several 
vocational  occupations.  Education  has  remained  one  of  the  largest  government  programmes, 
accounting  for about 4% of  GDP. However, the resources allocated to it still remain relatively low. 
The modernisation of the public employment service has continued and the Employment Management 
Information System is operational, maintaining a database of jobseekers. Overall, there has been some 
progress  in  the  education  sector.  However,  it  is  still  affected  by  the  lack  of  adequate  facilities, 
maintenance and quality assurance. It is characterised by poor results which do not sufficiently meet 
the requirements of the labour market. Significant investment in human capital is necessary to support 
Kosovo’s socio-economic development. 

Total investment is estimated to have declined in 2012. Nevertheless, it stood at a relatively high level 
of around 31% of GDP. Government investments (predominantly in road infrastructure) have slightly 
increased  and  remained  high  at  11%  of  GDP,  while  there  appears  to  have  been  a  slump  in  private 
investment.  There  has  been  little  involvement  of  the  private  sector  in  key  areas  such  as  water  and 
wastewater,  road  and  railway  services.  The  construction  of  the  highway  (R7)  towards  Tirana  has 
continued and is scheduled for completion in 2013. Work on a new highway to Skopje is due to start 
towards the end of 2013, with an allocation of €28 million (0.5% of GDP), provided the revenue of 
the sale of PTK is available. In the area of energy infrastructure, The Calik  Limak consortium took 
over  the  Kosovo  Electricity  Distribution  and  Supply  Company  (KEDS)  in  May  2013  and  has 
committed  €300  million  to  modernise  and  operate  the  distribution  network.  Little  has  been  done  to 
improve  energy  efficiency.  Information  about  the  level  and  structure  of  private  investment  has 
remained scarce. Overall, besides road infrastructure, there were marginal improvements in physical 
capital.  Government  capital  spending  remained  focused  mostly  on  highway  construction,  at  the 
expense of other sectors’ needs. 

Sectoral and enterprise structure 

Kosovo’s enterprise sector remains dominated by small and micro-enterprises. Retail trade continues 
to be the dominant sector, with a share of 31.3% of all new enterprises, marking a small decline in the 
overall share in comparison to past years. There is a large informal sector fuelled by weaknesses in tax 
and expenditure policies and in law enforcement, including the fight against corruption and organised 
crime. It reduces the tax base and the efficiency of economic policies. Access to finance and its cost 
have  remained  a  challenge.  In  2013,  the  government  joined  an  EU-financed  project  which  supports 
export-oriented  micro  enterprises  and  SMEs.  The  project’s  objective  is  to  improve  their  technology 
and increase production capacity. Overall, the retail trade sector became slightly less dominant in the 
overall  enterprise  structure,  largely  because  of  the  growth  in  newly-registered  enterprises  in 
agriculture. The large informal sector continues to pose a major challenge. 

State influence on competitiveness 

Budget subsidies and capital transfers to publicly-owned enterprises (POEs) declined slightly, to about 
1.1% of GDP in 2012. Subsidies were granted to POEs in energy, railways, district heating, water and 

63 

  
 
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Progress towards meeting the economic criteria for EU accession: the EU Commission's 2013 assessments 

waste,  and  the  Trepča  Mines.  The  government  has  continued  with  the  grant  scheme  consisting  of 
coupled  payments  to  cereal  and  livestock  farmers  and  matching  grants  for  the  dairy,  fruit  and 
vegetables  sectors  at  farm  level.  In  2013,  the  government  extended  the  coupled  payment  to  other 
sectors  (e.g.  maize,  sunflower  and  horticulture)  and  extended  matching  grants  to  forestry,  irrigation 
schemes,  aromatic  plants  and  support  to  less  favoured  areas.  Within  the  energy  sector,  the  energy 
regulator  (ERO)  approved  an  increase  in  electricity  prices  of  8.9%  in  2012  and  refused  further 
increases  in  2013.  Overall,  state  interference  in  the  economy  has  declined,  but  remains  high.  The 
institutional framework to monitor and approve state aid has still not been established. 

Economic integration with the EU 

The openness of the economy, measured by the value of imports and exports of goods and services in 
relation  to  GDP,  has  remained  stable  around  71.2%.  The  share  of  exports  to  EU  Member  States 
decreased  in  comparison  to  2011.  It  accounted  for  almost  39.6%  of  total  exports  of  goods  (43%  in 
2011). The share of exports to Central European Free Trade Agreement (CEFTA) countries increased 
significantly  to  approximately  37.8%  of  total  exports  (26%  in  2011),  especially  on  account  of 
increased  exports  to  Albania  and  Montenegro.  EU  and  CEFTA  countries  have  remained  the  main 
origin of Kosovo’s imports, with shares of about 39% and 34% respectively. With about one third of 
overall  investments,  EU  countries  remain  the  biggest  investors  in  Kosovo.  Overall,  economic 
integration with the EU remains significant. 

8.3.  CONCLUSIONS 

As regards the economic criteria, Kosovo has made some progress towards establishing a functioning 
market economy. Considerable reforms and investments are needed to enable it to cope over the long 
term with competitive pressure and market forces. 

The challenging economic situation in the region and the EU has started to affect Kosovo’s economy, 
although  less  than  in  other  countries  of  the  region.  Kosovo’s  GDP  grew  by  2.5%  in  2012.  Fiscal 
policy has been prudent and budget performance has been on track. A legally binding fiscal rule was 
introduced,  to  be  implemented  in  2014.  Unemployment  has  remained  very  high.  Kosovo  has 
continued significant investments in its infrastructure.  

Continuous  efforts  are  needed  to  support  macroeconomic  stability  and  improvement  in  the  social 
situation.  Kosovo  needs  to  improve  its  competitiveness  and  business  environment,  and  support  the 
private  sector  so  as  to  reduce  unemployment.  A  sound  business  environment  demands  further 
measures to tackle the weak rule of law and corruption. Privatisation needs to continue. The informal 
sector remains an important challenge. 

64 

 
ANNEX 1 

BiH 

Bosnia and Herzegovina 

CBBH  Central Bank of Bosnia and Herzegovina 

CEFTA  Central European Free Trade Agreement 

CPI 

Consumer Price Index 

EBRD  European Bank for Reconstruction and Development 

EFPs 

Economic and Fiscal Programmes 

EU 

European Union 

EUR 

Euro 

FBiH 

Federation of Bosnia and Herzegovina 

FDI 

Foreign Direct Investment 

fYRoM  The former Yugoslav Republic of Macedonia 

GDP  Gross domestic product 

ILO 

International Labour Organization 

IMF 

International Monetary Fund 

MTEF  Medium-Term Expenditure Framework 

PEPs 

Pre-Accession Economic Programmes 

PRGF  Poverty Reduction and Growth Facility 

RS 

Republika Srpska 

SAA 

Stabilisation and Association Agreement 

SMEs  Small and Medium sized Enterprises 

SOEs  Socially owned enterprises 

UNSCR 1244  United Nations Security Council Resolution 1244 

65 

 
 
 
 
 
 
OCCASIONAL PAPERS 

The following papers have been issued. Copies may be obtained by applying to the address: 

European Commission 
Directorate-General for Economic and Financial Affairs 
Unit Communication  
N105 
B - 1049 Brussels, Belgium 
E-mail: Ecfin-Info@ec.europa.eu 

Occasional Papers can be accessed and downloaded free of charge at the following address: 

Hhttp://ec.europa.eu/economy_finance/publications/ 

No. 1 

No. 2 

No. 3 

No. 4 

No. 5 

No. 6 

No. 7 

No. 8 

No. 9 

The Western Balkans in transition (January 2003) 

Economic Review of EU Mediterranean Partners (January 2003) 

Annual Report on structural reforms 2003, by Economic Policy Committee (EPC) (April 2003) 

Key  structural  challenges  in  the  acceding  countries:  the  integration  of  the  acceding  countries  into  the 
Community’s economic policy co-ordination processes; by EPC (July 2003) 

The Western Balkans in transition (January 2004) 

Economic Review of EU Mediterranean Partners (March 2004) 

Annual report on structural reforms 2004 “reinforcing implementation”, by Economic Policy Committee (EPC) 
(March 2004) 

The Portuguese economy after the boom (April 2004) 

Country Study: Denmark – Making work pay, getting more people into work (October 2004) 

No. 10 

Rapid loan growth in Russia: A lending boom or a permanent financial deepening? (November 2004) 

No. 11 

The  structural  challenges  facing  the  candidate  countries  (Bulgaria,  Romania,  Turkey)  –  A  comparative 
perspective (EPC) (December 2004)  

No. 12 

Annual report on structural reforms 2005 “Increasing growth and employment” (EPC) (January 2005) 

No. 13 

Towards  economic  and  monetary  union  (EMU)  –  A  chronology  of  major  decisions,  recommendations  or 
declarations in this field (February 2005) 

No. 14 

Country Study: Spain in EMU: a virtuous long-lasting cycle? (February 2005) 

No. 15 

No. 16 

No. 17 

Improving 
(March 2005) 

the 

Stability 

and 

Growth 

Pact: 

the 

Commission’s 

three 

pillar 

approach  

The economic costs of non-Lisbon. A survey of the literature on the economic impact of Lisbon-type reforms 
(March 2005) 

Economic  Review  of  EU  Mediterranean  Partners:  10  years  of  Barcelona  Process:  taking  stock  of  economic 
progress (April 2005) 

No. 18 

European Neighbourhood Policy: Economic Review of ENP Countries (April 2005) 

 
 
No. 19 

The  2005  EPC  projection  of  age-related  expenditure:  agreed  underlying  assumptions  and  projection 
methodologies (EPC) (November 2005) 

No. 20 

Consumption, investment and saving in the EU: an assessment (November 2005) 

No. 21 

Responding to the challenges of globalisation (EPC) (December 2005) 

No. 22 

Report on the Lisbon National Reform Programmes 2005 (EPC) (January 2006) 

No. 23 

The Legal Framework for the Enlargement of the Euro Area (April 2006) 

No. 24 

Enlargement, two years after: an economic evaluation (May 2006) 

No. 25 

European Neighbourhood Policy: Economic Review of ENP Countries (June 2006) 

No. 26 

 What do the sources and uses of funds tell us about credit growth in Central and Eastern Europe? (October 
2006) 

No. 27 

Growth and competitiveness in the Polish economy: the road to real convergence (November 2006) 

No. 28 

Country Study: Raising Germany’s Growth Potential (January 2007) 

No. 29 

Growth, risks and governance: the role of the financial sector in south eastern Europe (April 2007) 

No. 30 

European Neighbourhood Policy: Economic Review of EU Neighbour Countries (June 2007) 

No. 31 

2006 Pre-accession Economic Programmes of candidate countries (June 2007) 

No. 32 

2006 Economic and Fiscal Programmes of potential candidate countries (June 2007) 

No. 33 

Main results of the 2007 fiscal notifications presented by the candidates countries  (June 2007) 

No. 34 

Guiding Principles for Product Market and Sector Monitoring (June 2007) 

No. 35 

Pensions schemes and projection models in EU-25 Member States (EPC) (November 2007) 

No. 36 

No. 37 

Progress  towards  meeting  the  economic  criteria  for  accession:  the  assessments  of  the  2007  Progress 
Reports (December 2007) 

The  quality  of  public  finances  -  Findings  of  the  Economic  Policy  Committee-Working  Group  (2004-2007) 
edited  by  Servaas  Deroose  (Directorate-General  Economic  and  Financial  Affairs)  and  Dr.  Christian  Kastrop 
(President  of  the  Economic  Policy  Committee  of  the  EU.  Chairman  of  the  EPC-Working  Group  "Quality  of 
Public  Finances"  (2004-2008).  Deputy  Director  General  "Public  Finance  and  Economic  Affairs",  Federal 
Ministry of Finance, Germany) (March 2008) 

No. 38 

2007  Economic  and  Fiscal  Programmes  of  potential  candidate  countries:  EU  Commission's  assessments   
(July 2008) 

No. 39 

2007 Pre-accession Economic Programmes of candidate countries: EU Commission assessments (July 2008) 

No. 40 

European neighbourhood policy: Economic review of EU neighbour countries (August 2008)  

No. 41 

The  LIME  assessment  framework  (LAF):  a  methodological  tool  to  compare,  in  the  context  of  the  Lisbon 
Strategy,  the  performance  of  EU  Member  States  in  terms  of  GDP  and  in  terms  of  twenty  policy  areas 
affecting growth (October 2008) 

 
No. 42  

2008 Fiscal notifications of candidate countries: overview and assessment   (November 2008) 

No. 43 

No. 44 

No. 45 

No. 46 

No. 47 

No. 48 

No. 49 

No. 50 

No. 51 

No. 52 

No. 53 

No. 54 

No. 55 

No. 56 

No. 57 

No. 58 

No. 59 

Recent  reforms  of  the  tax  and  benefit  systems  in  the  framework  of  flexicurity  by  Giuseppe  Carone,  Klara 
Stovicek,  Fabiana  Pierini  and    Etienne  Sail  (European  Commission,  Directorate-General  for  Economic  and 
Financial Affairs) (Febrauary 2009) 

Progress  towards  meeting  the  economic  criteria  for  accession:  the  assessments  of  the  2008  Progress 
Reports (European Commission, Directorate-General for Economic and Financial Affairs) (March 2009) 

The quality of public finances and economic growth: Proceedings to the annual Workshop on public finances 
(28 November 2008) edited by Salvador Barrios, Lucio Pench and Andrea Schaechter (European Commission, 
Directorate-General for Economic and Financial Affairs) (March 2009) 

The  Western  Balkans  in  transition  (European  Commission,  Directorate-General  for  Economic  and  Financial 
Affairs) (May 2009) 

The  functioning  of  the  food  supply  chain  and  its  effect  on  food  prices  in  the  European  Union  by  Lina 
Bukeviciute,  Adriaan  Dierx  and  Fabienne  Ilzkovitz (European  Commission,  Directorate-General  for  Economic 
and Financial Affairs) (May 2009) 

Impact of the global crisis on neighbouring countries of the EU by European Commission, Directorate-General 
for Economic and Financial Affairs (June 2009) 

Impact of the current economic and financial crisis on potential output (European Commission, Directorate-
General for Economic and Financial Affairs)   (June 2009) 

What drives inflation in the New EU Member States? : Proceedings to the workshop held on 22 October 2008 
(European Commission, Directorate-General for Economic and Financial Affairs) (July 2009) 

The EU's response to support the real economy during the economic crisis: an overview of Member States' 
recovery measures by Giuseppe Carone, Nicola Curci, Fabiana Pierini, Luis García Lombardero, Anita Halasz, 
Ariane  Labat,  Mercedes  de  Miguel  Cabeza,  Dominique  Simonis,  Emmanuelle  Maincent  and  Markus  Schulte 
(European Commission, Directorate-General for Economic and Financial Affairs) (July 2009) 

2009  Economic  and  Fiscal  Programmes  of  potential  candidate  countries:  EU  Commission's  assessments 
(European Commission, Directorate-General for Economic and Financial Affairs) (July 2009) 

Economic  performance  and  competition  in  services  in  the  euro  area:  Policy  lessons  in  times  of  crisis  by 
Josefa  Monteagudo  and  Adriaan  Dierx  (European Commission,  Directorate-General  for  Economic  and 
Financial Affairs) (September 2009) 

An  analysis  of  the  efficiency  of  public  spending  and  national  policies  in  the  area  of  R&D  by  A.  Conte,  P. 
Schweizer,  A.  Dierx  and  F.  Ilzkovitz  (European  Commission,  Directorate-General  for  Economic  and  Financial 
Affairs) (September 2009) 

2009 Pre-Accession Economic Programmes of candidate countries: EU Commission's assessments (European 
Commission, Directorate-General for Economic and Financial Affairs) (October 2009) 

Pension schemes and pension projections in the EU-27 Member States - 2008-2060 by the Economic Policy 
Committee (AWG) and Directorate-General Economic and Financial Affairs (October 2009) 

Progress  towards  meeting  the  economic  criteria  for  accession:  the  assessments  of  the  2009  Progress 
Reports (European Commission, Directorate-General for Economic and Financial Affairs) (November 2009) 

Cross-country  study:  Economic  policy  challenges  in  the  Baltics  (European Commission,  Directorate-General 
for Economic and Financial Affairs) (February 2010) 

The  EU's  neighbouring  economies:  emerging  from  the  global  crisis  (European Commission,  Directorate-
General for Economic and Financial Affairs) (April 2010) 

No. 60 

No. 61 

No. 62 

No. 63 

No. 64 

No. 65 

No. 66 

No. 67 

No. 68 

No. 69 

No. 70 

No. 71 

No. 72 

No. 73 

Labour  Markets  Performance  and  Migration  Flows  in  Arab  Mediterranean  Countries:  Determinants  and 
Effects  —  Volume  1:  Final  Report  &  Thematic  Background  Papers;  Volume  2:  National  Background  Papers 
Maghreb  (Morocco,  Algeria,  Tunisia);  Volume  3:  National  Background  Papers  Mashreq  (Egypt,  Palestine, 
Jordan,  Lebanon,  Syria)  by  Philippe  Fargues  &  Iván  Martín  (European  Commission,  Directorate-General  for 
Economic and Financial Affairs) (April 2010) 

The Economic Adjustment Programme for Greece  (European Commission, Directorate-General for Economic 
and Financial Affairs) (May 2010) 

The  pre-accession  economies 
 (European Commission, Directorate-General for Economic and Financial Affairs) (June 2010) 

the  global  crisis: 

from  exogenous 

in 

to  endogenous  growth?

2010  Economic  and  Fiscal  Programmes  of  potential  candidate  countries:  EU  Commission's  assessments 
(European Commission, Directorate-General for Economic and Financial Affairs) (June 2010) 

Short time working arrangements as response to cyclical fluctuations, a joint paper prepared in collaboration 
by  Directorate-General  for  Economic  and  Financial  Affairs  and  Directorate  General  for  Employment,  Social 
Affairs and Equal Opportunities (June 2010) 

Macro structural bottlenecks to growth in EU Member States (European Commission, Directorate-General for 
Economic and Financial Affairs) (July 2010) 

External  Imbalances  and  Public  Finances  in  the  EU  edited  by  Salvador  Barrios,  Servaas Deroose,  Sven 
Langedijk and Lucio Pench  (European Commission, Directorate-General for Economic and Financial Affairs) 
(August 2010) 

National fiscal governance reforms across EU Member States. Analysis of the information contained in the 
2009-2010  Stability  and  Convergence  Programmes  by  Joaquim Ayuso-i-Casals  (European Commission, 
Directorate-General for Economic and Financial Affairs) (August 2010) 

The  Economic  Adjustment  Programme  for  Greece:  First  review  –  summer  2010  (European Commission, 
Directorate-General for Economic and Financial Affairs (August 2010) 

2010  Pre-accession  Economic  Programmes  of  candidate  countries:  EU  Commission  assessments 
(European Commission, Directorate-General for Economic and Financial Affairs (September 2010) 

Efficiency  and  effectiveness  of  public  expenditure  on  tertiary  education  in  the  EU  (European Commission, 
Directorate-General  for  Economic  and  Financial  Affairs  and  Economic  Policy  Committee  (Quality  of  Public 
Finances) (November 2010) 

Progress and key challenges in the delivery of adequate and sustainable pensions in Europe (Joint Report by 
the  Economic  Policy  Committee  (Ageing  Working  Group),  the  Social  Protection  Committee  (Indicators  Sub-
Group)  and  the  Commission  services  (DG  for  Economic  and  Financial  Affairs  and  DG  Employment,  Social 
Affairs and Equal Opportunities), (November 2010)  

The Economic Adjustment Programme for Greece – Second review – autumn 2010 (European Commission, 
Directorate-General for Economic and Financial Affairs) (December 2010) 

Progress  towards  meeting  the  economic  criteria  for  accession:  the  assessments  of  the  2010  Progress 
Reports  and  the  Opinions  (European Commission,  Directorate-General  for  Economic  and  Financial  Affairs) 
(December 2010) 

No. 74 

Joint Report on Health Systems prepared by the European Commission and the Economic Policy Committee 
(AWG) (December 2010) 

No. 75 

No. 76 

No. 77 

No. 78 

No. 79 

No. 80 

No. 81 

No. 82 

No. 83 

No. 84 

No. 85 

No. 86 

No. 87 

No. 88 

No. 89 

No. 90 

No. 91 

No. 92 

flows 

Capital 
(European Commission, Directorate-General for Economic and Financial Affairs) (February 2011) 

to  converging  European  economies  – 

from  boom 

to  drought  and  beyond 

The Economic Adjustment Programme for Ireland (European Commission, Directorate-General for Economic 
and Financial Affairs) (February 2011) 

The  Economic  Adjustment  Programme  for  Greece  Third  review  –  winter  2011  (European Commission, 
Directorate-General for Economic and Financial Affairs) (February 2011) 

The Economic Adjustment Programme for Ireland—Spring 2011 Review (European Commission, Directorate-
General for Economic and Financial Affairs) (May 2011) 

The  Economic  Adjustment  Programme  for  Portugal    (European Commission,  Directorate-General  for 
Economic and Financial Affairs) (June 2011) 

2011  Pre-accession  Economic  Programmes  of  candidate  countries:  EU  Commission  assessments 
(European Commission, Directorate-General for Economic and Financial Affairs) (June 2011) 

2011  Economic  and  Fiscal  Programmes  of  potential  candidate  countries:  EU  Commission's  assessments 
(European Commission, Directorate-General for Economic and Financial Affairs) (June 2011) 

The  Economic  Adjustment  Programme  for  Greece  –  Fourth  review  –  spring  2011  (European Commission, 
Directorate-General for Economic and Financial Affairs) (July 2011) 

The Economic Adjustment Programme for Portugal - First Review - Summer 2011 
(European Commission, Directorate-General for Economic and Financial Affairs) (September 2011) 

Economic  Adjustment  Programme  for  Ireland—Summer  2011  Review  (European Commission,  Directorate-
General for Economic and Financial Affairs) (September 2011) 

Progress  towards  meeting  the  economic  criteria  for  accession:  the  assessments  of  the  2011  Progress 
Reports  and  the  Opinion  (Serbia)  (European Commission,  Directorate-General  for  Economic  and  Financial 
Affairs) (December 2011) 

The  EU's  neighbouring  economies:  coping  with  new  challenges  (European Commission,  Directorate-General 
for Economic and Financial Affairs) (November 2011) 

The  Economic  Adjustment  Programme  for  Greece:  Fifth  review  –  October  2011  (European Commission, 
Directorate-General for Economic and Financial Affairs) (November 2011) 

Economic  Adjustment  Programme  for  Ireland  —  autumn  2011  Review  (European Commission,  Directorate-
General for Economic and Financial Affairs) (December 2011) 

The Economic Adjustment Programme for Portugal - Second review - autumn 2011 (European Commission, 
Directorate-General for Economic and Financial Affairs) (December 2011) 

The  Balance  of  Payments  Programme  for  Romania.  First  Review  -  autumn  2011  (European Commission, 
Directorate-General for Economic and Financial Affairs) (December 2011) 

Fiscal  frameworks  across  Member  States:  Commission  services’  country  fiches  from  the  2011  EPC  peer 
review (European Commission, Directorate-General for Economic and Financial Affairs) (February 2012) 

Scoreboard  for  the  Surveillance  of  Macroeconomic  Imbalances  (European Commission,  Directorate-General 
for Economic and Financial Affairs) (February 2012) 

 
 
No. 93 

No.94 

No. 95 

No. 96 

No. 97 

No. 98 

Economic  Adjustment  Programme  for  Ireland  —  Winter  2011  Review  (European Commission,  Directorate-
General for Economic and Financial Affairs) (March 2012) 

The  Second  Economic  Adjustment  Programme  for  Greece  —  March  2012  (European Commission, 
Directorate-General for Economic and Financial Affairs) (March 2012) 

The  Economic  Adjustment  Programme 
(European Commission, 
(April 2012) 

Directorate-General 

for  Portugal  —  Third 

for 

Economic 

review.  Winter  2011/2012 
and 

Financial 

Affairs)                            

Economic  Adjustment  Programme  for  Ireland  —  Spring  2012  Review  (European Commission,  Directorate-
General for Economic and Financial Affairs) (June 2012) 

2012 Economic and Fiscal Programmes of Albania, Bosnia and Herzegovina: EU Commission's overview and 
country  assessments  (European Commission,  Directorate-General  for  Economic  and  Financial  Affairs) 
(June 2012) 

2012 Pre-accession Economic Programmes of Croatia, Iceland, the Former Yugoslav Republic of Macedonia, 
Montenegro,  Serbia  and  Turkey:  EU  Commission's  overview  and  assessments  (European Commission, 
Directorate-General for Economic and Financial Affairs) (June 2012) 

No. 99 

Macroeconomic  imbalances  –  Belgium  (European Commission,  Directorate-General  for  Economic  and 
Financial Affairs) (July 2012) 

No. 100 

Macroeconomic  imbalances  –  Bulgaria  (European Commission,  Directorate-General  for  Economic  and 
Financial Affairs) (July 2012) 

No. 101 

Macroeconomic imbalances – Cyprus (European Commission, Directorate-General for Economic and Financial 
Affairs) (July 2012) 

No. 102 

Macroeconomic  imbalances  –  Denmark  (European Commission,  Directorate-General  for  Economic  and 
Financial Affairs) (July 2012) 

No. 103 

Macroeconomic imbalances – Spain (European Commission, Directorate-General for Economic and Financial 
Affairs) (July 2012) 

No. 104 

Macroeconomic  imbalances  –  Finland  (European Commission,  Directorate-General  for  Economic  and 
Financial Affairs) (July 2012) 

No. 105 

Macroeconomic imbalances – France (European Commission, Directorate-General for Economic and Financial 
Affairs) (July 2012) 

No. 106 

Macroeconomic  imbalances  –  Hungary  (European Commission,  Directorate-General  for  Economic  and 
Financial Affairs) (July 2012) 

No. 107 

Macroeconomic  imbalances  –  Italy  (European Commission,  Directorate-General  for  Economic  and  Financial 
Affairs) (July 2012) 

No. 108 

Macroeconomic  imbalances  –  Sweden  (European Commission,  Directorate-General  for  Economic  and 
Financial Affairs) (July 2012) 

No. 109 

Macroeconomic  imbalances  –  Slovenia  (European Commission,  Directorate-General  for  Economic  and 
Financial Affairs) (July 2012) 

No. 110 

Macroeconomic imbalances – United Kingdom (European Commission, Directorate-General for Economic and 
Financial Affairs) (July 2012) 

No. 111 

The  Economic  Adjustment  Programme  for  Portugal.  Fourth  review  –  Spring  2012  (European Commission, 
Directorate-General for Economic and Financial Affairs) (July 2012) 

No. 112     Measuring  the  macroeconomic  resilience  of  industrial  sectors  in  the  EU  and  assessing  the  role  of  product 
market  regulations  (Fabio  Canova,  Leonor  Coutinho,  Zenon Kontolemis,  Universitat  Pompeu  Fabra  and 
Europrism  Research  (European Commission,  Directorate-General  for  Economic  and  Financial  Affairs) 
(July 2012) 

No. 113    

Fiscal Frameworks in the European Union: May 2012 update on priority countries (Addendum to Occasional 
Papers No.91) (European Commission, Directorate-General for Economic and Financial Affairs) (July 2012) 

No. 114    

Improving tax governance in EU Member States: Criteria for successful policies by Jonas Jensen and Florian 
Wöhlbier (European Commission, Directorate-General for Economic and Financial Affairs) (August 2012) 

No. 115   

 Economic  Adjustment  Programme  for 
Directorate-General for Economic and Financial Affairs) (September 2012) 

Ireland  —  Summer  2012  Review 

(European Commission, 

No. 116   

The  Balance  of  Payments  Programme  for  Romania.  First  Review  -  Spring  2012  (European Commission, 
Directorate-General for Economic and Financial Affairs) (October 2012) 

No. 117    

The  Economic  Adjustment  Programme  for  Portugal.  Fifth  review  –  Summer  2012  (European Commission, 
Directorate-General for Economic and Financial Affairs) (October 2012) 

No. 118    

The  Financial  Sector  Adjustment  Programme  for  Spain  (European Commission,  Directorate-General 
for Economic and Financial Affairs) (October 2012) 

No. 119 

Possible  reforms  of  real  estate  taxation:  Criteria  for  successful  policies 
Directorate-General for Economic and Financial Affairs) (October 2012) 

(European Commission, 

No. 120 

EU  Balance-of-Payments  assistance 
Directorate-General for Economic and Financial Affairs) (November 2012) 

for  Latvia:  Foundations  of  success 

(European Commission, 

No. 121 

Financial  Assistance  Programme  for  the  Recapitalisation  of  Financial  Institutions  in  Spain.  First  review  - 
Autumn  2012  (European Commission,  Directorate-General  for Economic  and  Financial  Affairs)  (November 
2012) 

No. 122 

Progress towards meeting the economic criteria for EU accession: the EU Commission's 2012 assessments 
(European Commission, Directorate-General for Economic and Financial Affairs) (December 2012) 

No. 123 

The  Second  Economic  Adjustment  Programme 
(European Commission, Directorate-General for Economic and Financial Affairs) (December 2012) 

for  Greece.  First  Review 

-  December  2012 

No. 124 

The  Economic  Adjustment  Programme  for  Portugal.  Sixth  Review  –  Autumn  2012  (European Commission, 
Directorate-General for Economic and Financial Affairs) (December 2012) 

No. 125 

The  Quality  of  Public  Expenditures  in  the  EU  (European Commission,  Directorate-General  for Economic  and 
Financial Affairs) (December 2012) 

No. 126 

Financial Assistance Programme for the Recapitalisation of Financial Institutions in Spain. Update on Spain's 
compliance  with  the  Programme  -  Winter  2013  (European Commission,  Directorate-General  for Economic 
and Financial Affairs) (January 2013) 

No. 127 

Economic  Adjustment  Programme  for 
Directorate-General for Economic and Financial Affairs) (January 2013) 

Ireland  —  Autumn  2012  Review 

(European Commission, 

No. 128 

Interim  Progress  Report  on  the  implementation  of  Council  Directive  2011/85/EU  on  requirements  for 
budgetary frameworks of the Member States. (European Commission, Directorate-General for Economic and 
Financial Affairs) (February 2013) 

No. 129 

Market  Functioning  in  Network  Industries  -  Electronic  Communications,  Energy  and  Transport.  (European 
Commission, Directorate General for Economic and Financial Affairs) (February 2013) 

No. 130 

Financial Assistance Programme for the Recapitalisation of Financial Institutions in Spain. Second Review of 
the  Programme  -  Spring  2013  (European  Commission,  Directorate  General  for  Economic  and  Financial 
Affairs) (March 2013) 

 
No. 131 

Economic  Adjustment  Programme  for  Ireland  –  Winter  2012  Review  (European  Commission,  Directorate 
General for Economic and Financial Affairs) (April 2013) 

No. 132 

Macroeconomic Imbalances – Bulgaria 2013 (European Commission, Directorate General for Economic and 
Financial Affairs) (April 2013) 

No. 133 

Macroeconomic Imbalances – Denmark 2013 (European Commission, Directorate General for Economic and 
Financial Affairs) (April 2013) 

No. 134 

Macroeconomic  Imbalances  –  Spain  2013  (European  Commission,  Directorate  General  for  Economic  and 
Financial Affairs) (April 2013) 

No. 135 

Macroeconomic  Imbalances  –  Finland  2013  (European  Commission,  Directorate  General  for  Economic  and 
Financial Affairs) (April 2013) 

No. 136 

Macroeconomic  Imbalances  –  France  2013  (European  Commission,  Directorate  General  for  Economic  and 
Financial Affairs) (April 2013) 

No. 137 

Macroeconomic Imbalances – Hungary 2013 (European Commission, Directorate General for Economic and 
Financial Affairs) (April 2013) 

No. 138 

Macroeconomic  Imbalances  –  Italy  2013  (European  Commission,  Directorate  General  for  Economic  and 
Financial Affairs) (April 2013) 

No. 139 

Macroeconomic  Imbalances  –  Malta  2013  (European  Commission,  Directorate  General  for  Economic  and 
Financial Affairs) (April 2013) 

No. 140 

Macroeconomic  Imbalances  –  Netherlands  2013  (European  Commission,  Directorate  General  for  Economic 
and Financial Affairs) (April 2013) 

No. 141 

Macroeconomic  Imbalances  –  Sweden  2013  (European  Commission,  Directorate  General  for  Economic  and 
Financial Affairs) (April 2013) 

No. 142 

Macroeconomic Imbalances – Slovenia 2013 (European Commission, Directorate General for Economic and 
Financial Affairs) (April 2013) 

No. 143 

Macroeconomic  Imbalances  –  United  Kingdom  2013  (European  Commission,  Directorate  General  for 
Economic and Financial Affairs) (April 2013) 

No. 144 

Macroeconomic  Imbalances  –  Belgium  2013  (European  Commission,  Directorate  General  for  Economic  and 
Financial Affairs) (April 2013) 

No. 145 

Member  States'  Energy  Dependence:  An  Indicator-Based  Assessment  (European  Commission,  Directorate 
General for Economic and Financial Affairs) (April 2013) 

No. 146 

Benchmarks  for  the  assessment  of  wage  developments  (European  Commission,  Directorate  General  for 
Economic and Financial Affairs) (May 2013) 

No. 147 

The Two-Pack on economic governance: Establishing an EU framework for dealing with threats to financial 
stability in euro area member states (European Commission, Directorate General for Economic and Financial 
Affairs) (May 2013) 

No. 148 

The  Second  Economic  Adjustment  Programme  for  Greece  –  Second  Review      –  May  2013  (European 
Commission, Directorate General for Economic and Financial Affairs) (May 2013) 

No. 149 

The Economic Adjustment Programme for Cyprus (European Commission, Directorate General for Economic 
and Financial Affairs) (May 2013) 

No. 150 

Building a Strengthened Fiscal Framework in the European Union: A Guide to the Stability and Growth Pact 
(European Commission, Directorate General for Economic and Financial Affairs) (May 2013) 

No. 151 

Vade mecum on the Stability and Growth Pact (European Commission, Directorate General for Economic and 
Financial Affairs) (May 2013) 

No. 152 

The 2013 Stability and Convergence Programmes: An Overview (European Commission, Directorate General 
for Economic and Financial Affairs) (June 2013) 

No. 153 

The  Economic  Adjustment  Programme  for  Portugal.  Seventh  Review  –  Winter  2012/2013  (European 
Commission, Directorate General for Economic and Financial Affairs) (June 2013) 

No. 154 

Economic  Adjustment  Programme  for  Ireland  -  Spring  2013  Review  (European  Commission,  Directorate 
General for Economic and Financial Affairs) (July 2013) 

No. 155 

Financial  Assistance  Programme  for  the  Recapitalisation  of  Financial  Institutions  in  Spain.  Third  Review  of 
the  Programme  –  Summer  2013  (European  Commission,  Directorate  General  for  Economic  and  Financial 
Affairs) (July 2013) 

No. 156      Overall  assessment  of  the  two  balance-of-payments  assistance  programmes  for  Romania,  2009-2013 

(European Commission, Directorate General for Economic and Financial Affairs) (July 2013)                                                                                     

No. 157 

No. 158 

2013  Pre-accession  Economic  Programmes  of  Iceland,  the  Former  Yugoslav  Republic  of  Macedonia, 
Montenegro,  Serbia  and  Turkey:  EU  Commission's  overview  and  assessments  (European  Commission, 
Directorate General for Economic and Financial Affairs) (July 2013) 

2013 Economic and Fiscal Programmes of Albania and Bosnia and Herzegovina: EU Commission's overview 
and  country  assessments  (European  Commission,  Directorate  General  for  Economic  and  Financial  Affairs) 
(July 2013) 

No. 159 

The Second Economic Adjustment Programme for Greece - Third Review – July 2013 (European Commission, 
Directorate General for Economic and Financial Affairs) (July 2013) 

No. 160 

The  EU's  neighbouring  economies:  managing  policies  in  a  challenging  global  environment  (European 
Commission, Directorate General for Economic and Financial Affairs) (August 2013) 

No. 161 

The  Economic  Adjustment  Programme  for  Cyprus  -  First  Review  -  Summer  2013  (European  Commission, 
Directorate General for Economic and Financial Affairs) (September 2013) 

No. 162 

Economic  Adjustment  Programme  for  Ireland  —  Summer  2013  Review  (European  Commission,  Directorate 
General for Economic and Financial Affairs) (October 2013) 

No. 163 

Financial  Assistance  Programme  for  the  Recapitalisation  of  Financial  Institutions  in  Spain.  Fourth  Review      
–  Autumn  2013  (European  Commission,  Directorate  General  for  Economic  and  Financial  Affairs) 
(November 2013) 

No. 164 

The  Economic  Adjustment  Programme  for  Portugal  -  Eighth  and  Ninth  Review  (European  Commission, 
Directorate General for Economic and Financial Affairs) (November 2013) 

No. 165 

Romania:  Balance-of-Payments  Assistance  Programme  2013-2015  (European  Commission,  Directorate 
General for Economic and Financial Affairs) (November 2013) 

No. 166 

Progress towards meeting the economic criteria for EU accession: the EU Commission's 2013 assessments 
(European Commission, Directorate General for Economic and Financial Affairs) (December 2013) 

 
 
 
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