COMMISSION STAFF WORKING DOCUMENT Background Analysis per beneficiary Accompanying the document REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on the implementation of macro-financial assistance to third countries in 2013
Date: 2014-06-24
Institutions: European Commission
Subjects: Bosnia and Herzegovina, Georgia, Jordan, Kyrgyzstan, Tunisia, Ukraine, balance of payments assistance, economic development, economic reform, economic situation, economic statistics, macroeconomics, structural adjustment













EUR-Lex - 52014SC0193 - EN











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52014SC0193

COMMISSION STAFF WORKING DOCUMENT Background Analysis per beneficiary Accompanying the document REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on the implementation of macro-financial assistance to third countries in 2013 /* SWD/2014/0193 final */









List of Abbreviations
 CEFTA || Central European Free Trade Agreement 
 CPI || Consumer Price Index 
 DCFTA || Deep and Comprehensive Free Trade Area 
 EC || European Community 
 ECF || Extended Credit Facility 
 EFF || Extended Fund Facility 
 EU || European Union 
 EUR || Euro 
 FDI || Foreign Direct Investment 
 GDP || Gross Domestic Product 
 GSP || Generalised System of Preferences 
 IMF || International Monetary Fund 
 LFA || Loan Facility Agreement 
 MFA || Macro-Financial Assistance 
 MoU || Memorandum of Understanding 
 PFM || Public Finance Management 
 PPP || Public Private Partnership 
 SBA || Stand-By Arrangement 
 SDR || Special Drawing Rights 
 USD || Dollar of the United States of America 
 VAT || Value Added Tax 
 WTO || World Trade Organisation 
Table of Contents
INTRODUCTION    
Background
Analysis of Beneficiaries of Macro-financial Assistance    
1.         Bosnia and Herzegovina............................................................................... 5
1.1.     Executive
summary............................................................................................ 5
1.2.     Macroeconomic performance............................................................................. 5
1.3.     Structural reforms.............................................................................................. 6
1.4.   Implementation of macro-financial
assistance.................................................... 7
2.         Georgia............................................................................................................ 9
2.1.     Executive
summary............................................................................................ 9
2.2.     Macroeconomic performance............................................................................. 9
2.3.     Structural reforms............................................................................................ 10
2.4.   Implementation of macro-financial
assistance.................................................. 11
3.         Jordan............................................................................................................ 13
3.1.     Executive
summary.......................................................................................... 13
3.2.     Macroeconomic
performance........................................................................... 13
3.3.     Structural
reforms............................................................................................ 14
3.4.     Implementation
of macro-financial assistance................................................. 15
4.         The Kyrgyz Republic.................................................................................. 18
4.1.     Executive
summary.......................................................................................... 18
4.2.     Macroeconomic performance........................................................................... 18
4.3.     Structural
reforms............................................................................................ 19
4.4.     Implementation
of macro-financial assistance................................................. 20
5.         Tunisia............................................................................................................ 23
5.1.     Executive
summary.......................................................................................... 23
5.2.     Macroeconomic
performance........................................................................... 23
5.3.     Structural
reforms............................................................................................ 24
5.4.     Implementation
of macro-financial assistance................................................. 25
6.         Ukraine.......................................................................................................... 28
6.1.     Executive
summary.......................................................................................... 28
6.2.     Macroeconomic performance........................................................................... 28
6.3.     Structural
reforms............................................................................................ 29
6.4.     Implementation
of macro-financial assistance................................................. 30
              Introduction
This working
document is published in parallel with the Report from the Commission to the
European Parliament and the Council on the implementation of macro-financial
assistance (MFA) to third countries in 2013. It provides economic and financial
information regarding the situation of countries having benefitted from MFA in
2013, as well as more detailed information on the implementation of MFA operations
in those countries. Statistical data on the different macro-financial
assistance decisions adopted since 1990, by date and by regions, are included
in annexes. Total amounts of MFA commitments and payments over the period
2003-2013, by year and by region, are also provided.
              Background Analysis of Beneficiaries of
Macro-financial Assistance

1.       Bosnia and Herzegovina
1.1.    Executive summary

Following
a drop in economic activity in 2012 (-0.9% GDP growth), the economy of Bosnia and Herzegovina started to recover in 2013 with an estimated real GDP growth of
1.5%. Strong export-led growth coupled with stagnating imports led to a
narrowing of external imbalances. Thus, the current account deficit reached an
estimated 6.7% of GDP in 2013, down from some 9.7% of GDP the year before.
Budget planning and fiscal coordination have improved, but the composition of
spending remains a concern. The 24-month Stand-By Arrangement (SBA) programme
with the IMF of about EUR 400 million remains on track despite the temporary
interruption in the operations of the Federation’s Ministry of Finance as of
end-December 2013, which deterred the timely disbursement of the sixth tranche
of EUR 48 million. In January 2014, a nine-month extension (until June 2015) as
well as an increase of the programme by some EUR 300 million were granted, to
address elevated financing needs in late 2014.
The
EU MFA to Bosnia and Herzegovina (a loan facility of up to EUR 100 million,
Council Decision 2009/891/EC of 30 November 2009) was initially set to expire
in November 2012. Until then, no disbursement under this assistance had been
made, since the IMF programme had turned into a non-disbursing one, and one of
the two policy conditions attached to the disbursement of the first tranche was
not fulfilled. However, following the agreement of a new SBA with the IMF and
the authorities' steps towards improving public finance sustainability, the
European Commission extended the availability period by one additional year,
until 7 November 2013. The disbursement of the first instalment of the MFA of
EUR 50 million took place on 19 February 2013, while the second tranche was
disbursed on 26 September 2013.

1.2.    Macroeconomic
performance

After
entering negative territory in 2012 (-0.9% GDP growth), economic growth gained
some momentum during 2013 and is set to have reached 1.5%, being positively
affected by the recovery of the main trading partners of Bosnia and
Herzegovina. However, the export-led resumption of economic growth masked the
stagnation of private consumption alongside a tepid growth of investment. The
already high and rising unemployment along with stagnant employment levels
continued to have negative repercussions on domestic demand in spite of
increasing wages. Industrial production increased by 6.6% in 2013, driven by
the expansion of exports, after contracting by 5.3% in 2012. The economic
recovery did not translate into improvements on the labour market: the level of
employment stagnated at some 45% and the registered unemployment rate only marginally
edged down to 44.5%, partly as a result of continued labour shedding in the
private sector, notably in construction. 
As
regards the current account deficit, after its considerable widening in 2011
and 2012, when it reached 9.7% of GDP, it decreased to 6.7% of GDP in 2013.
This narrowing was mainly driven by a lower trade deficit (30.5% of GDP) and to
a lesser extent by a higher surplus of the services balance. Moreover, the
development of the net factor income balance (+14.6%) exerted a positive impact,
while the current transfer balance has turned into deficit (- 1.8%). On the
financing side, net FDI inflows decreased to 2.1% of GDP in 2012, but increased
slightly to some 2.6% of GDP in the four quarters to September 2013, thus still
insufficient to cover the current account deficit. Official foreign exchange
reserves experienced a substantial increase by 8.6% in 2013, covering around
six months of imports.
Following
a downward trend in the first half of the year, inflation turned negative in
August 2013 (-0.3%), for the first time since November 2009. The downward
adjustment was triggered by sluggish domestic demand and declining food,
transport and energy prices. Thus, annual inflation in 2013 remained in
negative territory and amounted to -0.1%. The monetary policy of the Central
Bank of Bosnia and Herzegovina continued to be conducted under a currency board
arrangement, with the euro as the anchor currency, enjoying a high level of
confidence and credibility.
The
fiscal position mildly improved in the first three quarters of 2013. The
consolidated budget posted a slightly higher surplus of 0.7% of GDP over the
period, compared to the same period in 2012[1]. Consolidated
revenue decreased marginally by 0.2% year-on year in January-September 2013,
mainly because higher social security contributions were offset by a decrease
in grants and other non-tax revenue (down by 4.6%), while collection of tax
revenue and social contributions was marginally lower. Consolidated
expenditures posted a decrease of 1.1%. The wage bill of the government and the
subsidies fell by 1.5% and 12.3%, respectively, while social spending
stagnated. The composition of public spending remains a concern: current
expenditures represented a very high 95.2% of total expenditures in the first
three quarters of 2013, while capital spending remains very low and even
decreased by 0.6% from the previous year.

1.3.    Structural reforms

After
the pace of structural reforms slowed down in 2011 and 2012, partly because of
the lengthy government formation after the October 2010 general elections, some
reform measures have been implemented since early 2013 in order to strengthen
public finance management, leading to improved budget planning and fiscal
coordination. Moreover, the State and the Entities adopted their 2014 budgets
before the expiration of the previous budget year, thus confirming the
continuing practice since 2012 of stronger reliability of public finances and
the planning and decision-making of economic agents. The Global Framework for Fiscal
Policies 2014-2016 by the Fiscal Council was adopted with some delay in
September 2013, still enabling the timely preparation of the 2014 budget.
However, the quality of public finances remained low with a high share of
current expenditures, at the expense of growth enhancing capital expenditures. 
Private
sector development continues to be hampered by an unfavourable business
environment. Bosnia and Herzegovina lags behind its peers, as notably indicated
by its ranking in the World Bank Doing Business report. Starting a business,
enforcing contracts, access to financing and political instability are
considered to be among the most problematic factors for doing business in the
country. Furthermore, a dysfunctional labour market and the low quality of human
capital remain key concerns. 
In
the World Bank's 2014 Doing Business Report, Bosnia and Herzegovina ranks 131st 
in terms of ease of doing business (down from 130th in the previous
year), out of 185 countries covered, lagging well behind its regional peers.
Main obstacles relate to construction permits, starting a business and
enforcing contracts. At the same time, in the Global Competitiveness Report of
the World Economic Forum, Bosnia and Herzegovina ranks 91st
(dropping 3 places in a year) among 144 countries. Access to financing, and
political instability are indicated as the most problematic factors for doing
business in the country.

1.4.   Implementation of
macro-financial assistance

In November 2009, the Council approved a
MFA of up to EUR 100 million in the form of loans[2]. The
assistance aimed at alleviating the impact the economic crisis had on Bosnia and Herzegovina's stressed budgetary and external position and at contributing to
fill the remainder of the external and budgetary financing gap identified in
the IMF programme. The European Commission agreed on the economic policy
conditions with the Bosnian authorities in a MoU that was signed in November
2010. The disbursement was conditional upon a satisfactory track record in the
implementation of the SBA with the IMF, as well as upon a positive evaluation
by the European Commission of progress made with respect to a number of
structural reforms. The specific policy conditions stressed public finance
management issues, statistics and budgetary procedures. The detailed financial
terms of the assistance were spelled out in a Loan Agreement which was signed
in November 2010 and ratified by the Bosnia and Herzegovina's Presidency in
August 2011.
The
availability of the MFA was initially to expire on 7 November 2012. By then, no
disbursement had been made as key conditions were not met. In fact, the IMF
programme had turned de facto into a non-disbursing one since October 2010.
Moreover, one of the two policy conditions attached to the disbursement of the
first MFA tranche – the approval of the Global Framework of Fiscal Policies by
the Fiscal Council of Bosnia and Herzegovina - was not fulfilled.
In
October 2012 the European Commission adopted a decision[3]
to extend the availability period of the EU macro-financial assistance to Bosnia and Herzegovina by one additional year, until 7 November 2013. This extension was
motivated by the authorities' previous steps towards improving public finance
sustainability, the adoption of a new SBA by the IMF Board on 26 September
2012, as well as the difficult budget and balance of payments situation of the
country.
Following
the receipt of a compliance report on the fulfilment of the structural reform
criteria related to the first instalment in November 2012 and of a request for
funds in January 2013, the European Commission disbursed the first tranche of
EUR 50 million on 19 February 2013. The second and last tranche of equal amount
was disbursed on 26 September 2013 on the back of the IMF programme remaining
on track and satisfactory compliance with the policy conditions laid down in
the MoU.
 SUMMARY STATUS OF ECONOMIC REFORM BOSNIA AND HERZEGOVINA (BIH) 
 1. Price liberalisation Most prices are liberalised even though a number of administered prices remain, for example for utilities, including electricity and gas. 
 2. Trade liberalisation BiH started WTO accession negotiations in 1999. In July 2008, the Stabilisation and Association Agreement with the EU was signed and the Interim Agreement entered into force. BiH is part of the CEFTA agreement. 
 3. Exchange rate regime In 1997, the Central Bank of Bosnia and Herzegovina established a currency board with the Deutsche Mark as the anchor currency which has functioned smoothly since. With the introduction of the euro, the Bosnian Convertible Mark was pegged at 1.95583 to the euro, exchange rate which has remained unchanged since. 
 4. Foreign direct investment Net FDI reached a peak in 2007 (when the telecommunications company of Republika Srpska was privatised). Since the outbreak of the crisis in 2008, FDI inflows hover around 2% of GDP and reached some 1.9% of GDP in 2013. FDI has been mainly related to a few sectors (e.g. energy, banking) and some privatisation transactions, as green-field investment is still hampered by a difficult business environment. 
 5. Monetary policy The Central Bank of Bosnia and Herzegovina is responsible for operating the currency board arrangement, which limits the scope of monetary policy basically to adjustments of minimum reserve requirements. 
 6. Public finances The quality of public finances in Bosnia and Herzegovina remains low. The ratio of general government expenditure to GDP continuously increased in recent years from 39% in 2005 to 41.7% in 2012. Moreover, expenditures remain concentrated in current expenditures, in particular wages and social benefits, and are only slowly shifted towards growth-enhancing areas. The fiscal balance of the general government was positive until 2007, but the general government has been posting fiscal deficits since 2008, although some fiscal consolidation was evident in the last couple of years. The bulk of public expenditures is spent at entity level, while the federal government accounts for about 9% of consolidated expenditures. 
 7. Privatisation and enterprise restructuring Progress in privatisation and enterprise restructuring has remained limited, especially in the Federation despite annually recurring plans to restart privatisation. 
 8. Financial sector reform The financial sector is dominated by banks. Overall, the sector remains sound and stable; however, the continuing deterioration of the loans portfolio along with constantly decreasing profitability of the banking sector poses a downward risk over the last couple of years. 

2.       Georgia
2.1.    Executive summary

Georgia's
economic growth slowed down from 6.2% in 2012 to 3.2% in 2013 due to political
tensions, worsening global environment and government under-spending.
Continuing the deflationary trends from 2012, consumer prices fell on average by
0.5%. The fiscal deficit increased slightly to 1.3 % of GDP in 2013. On the
external side, the situation has somewhat improved but imbalances still
persist. The current account decreased to 6.1% of GDP and the level of external
debt is estimated to reach 81.8% of GDP at year-end. In the last quarter of
2013, economic activity picked-up. This positive trend continued in early 2014
(growth in January and February was 8% and 5.4% year-on-year respectively),
underpinned by both foreign and domestic demand. In an attempt to
make economic growth more inclusive, the government initiated a series of
reforms in the social sector in 2013. It redirected part of its spending from
capital to social expenditures and started establishing the universal
healthcare system. It also began to increase pensions, social assistance
allowances and education spending. 
Following a
successful implementation of an IMF arrangement in 2008-2011, the authorities
agreed on a follow-up programme. The agreement, which was approved in April
2012 and successfully concluded in April 2014, foresaw potential support of SDR
250 million (EUR 294 million). However, the authorities treated the programme as
precautionary, not drawing the funds available,. Negotiations are ongoing on a
successor arrangement with the IMF. 
In
August 2013, the European Parliament and the Council adopted a decision for a
MFA programme to Georgia for a total of EUR 46 million, to be provided equally
in loans and grants. The adoption of this decision, which had been proposed by
the Commission in January 2011, was delayed by a procedural disagreement
between the two co-legislators but finally took place in August 2013. Since no
disbursements have been carried out under the IMF programme that expired in
April 2014, negotiations to finalize the MoU have been put on hold  However, should
the Georgian authorities agree with the IMF on a successor programme entailing
the use of the Fund's resources, negotiations on the MoU could be reactivated
and MFA funds subsequently disbursed  

 2.2.   Macroeconomic performance

Georgia's
economy remarkably recovered after the 2009 recession, recording an annual
average growth of 6.5% in 2010-2012. In the second half of 2012, the Georgian
economy started to slow down due to post-election uncertainties, a weak
external environment and lower government
spending, which depressed domestic demand and led to a sharp contraction in
construction activity, one of the vital sectors of the economy. Nevertheless,
after a slow start of the year, the economy gradually recovered in 2013. GDP
growth reached 3.2% for the whole year, after picking-up at 6.9% in the last
quarter. This strong economic rebound continued into 2014, with growth reaching
8%  and 5.4% year-on-year in January and February, respectively. 
Consumer
prices fell by 0.5% on average in 2013. The deflation reflected subdued
domestic demand, declining food and administered energy prices as well as a
lagged effect of the appreciation of the nominal exchange rate, which
contributed to the decrease of the imported inflation. In response, the National
Bank of Georgia loosened the monetary policy stance and reduced the key policy
rate to a record-low 3.75% in August 2013. This contributed to a 16% expansion
of banks’ loan portfolio in 2013, excluding exchange rate effects. In
combination with the recovery in economic activity, this led to the resurgence
of moderate inflationary pressures, with inflation reaching 3.5% year-on-year
in March 2014. In February, the National Bank reacted by increasing the refinancing
rate to 4%, which is a first increase since February 2011. 
In 2013, the fiscal
deficit reached 1.3% of GDP. Lower revenues were partly offset by lower
government spending caused by procedural delays in public infrastructure
projects. At the same time, expenditures for social outlays were increased by
about 3% of GDP. The government remained committed to fiscal consolidation. 
Although the
current account deficit fell to 6.1% of GDP at the end of 2013, from 11.7% of
GDP in 2012, Georgia's external vulnerabilities still remain the main risks to
the economy. The improvement in the current account reflects weaker
import demand due to economic slowdown, combined with the resumption of exports
to Russia, successful tourist season and growing workers' remittances.
Financing
of the external deficit was mostly ensured by debt, and the level of external
debt is estimated to have reached 81.8% of GDP at the end of 2013. International
reserves stayed almost unchanged throughout 2012 and 2013, reaching USD 2.9
billion at year-end 2013 (around 3.4 months of next year's imports). Elevated
external risks are somewhat mitigated by continued access to donors' assistance
as well as the ongoing IMF programme.
Following the
completion of an IMF arrangement that ran from 2008 to 2011, the authorities
agreed with the IMF on a follow-up programme with the objective of (i) guarding
against risks stemming from the unsettled global enviroment and high external
debt payments, and (ii) supporting the successful completion of the adjustment
process following the 2008-2009 crisis. A new 24-month programme, in the form
of a Stand-By Arrangement and a concessional Stand-By Credit Facility, was
approved in April 2012. Under the agreement, Georgia could have borrowed up to
SDR 250 million (EUR 294 million) over the programme period, evenly distributed
between the two instruments. However, the authorities decided to treat the
agreement as precautionary and did not borrow from it. The IMF programme
expired in April 2014 and the Georgian authorities are negotiating a successor
programme with the IMF, . 

2.3.    Structural reforms

Georgia has
implemented a series of important structural reforms and has substantially improved
its business environment in the past few years. In 2013, Georgia climbed yet another position in the World Bank's Doing Business 2014 survey, now ranking
8th out of 189 countries. It is considered one of the best countries
to start a business, register property and deal with construction permits.
Nevertheless, there is room for improvement in areas such as access to finance,
protection of property rights, access to electricity and resolution of
insolvency. With regards to trade, Georgia initialled in November 2013 an
Association Agreement (AA) with the EU, which foresees the establishment of a
Deep and Comprehensive Free Trade Area (DCFTA). The AA is expected to be signed
in 2014.  
However, the
benefits of economic growth and structural reforms have not yet reached the
wider population. The unemployment rate remains high at about 15% and the labour
market continues to show some significant weaknesses. A revised Labour Code,
which aims at better balancing the interests of employers and employees, was
adopted by the Parliament in June 2013. Poverty rates stayed high, in
particular in the rural parts of the country, where subsistence farming is
predominant. Inequality is among the highest in the region, with a GINI
coefficient above 0.4. In an effort to make economic growth more inclusive, the
government redirected part of the public spending from capital to social
expenditures in 2013. It started with the establishment of the universal
healthcare system in March 2013. The government has also begun to increase
pensions, social assistance allowances and education spending. 
In early 2014,
the government released its draft socio-economic development strategy
("Georgia 2020"), which outlines social and economic development
priorities and targets over the period 2014-2020. Measures aim at supporting
sustainable and inclusive growth, employment and competitiveness. The
government is also planning to establish the "Entrepreneurship Development
Agency" to support SMEs and start-up businesses, as well as the
Competition Agency (in April 2014), following the adoption of competition law (draft
law was submitted to the Parliament in March). Also, in order to encourage
domestic and international investment, a USD 6 billion private
"Co-investment Fund" was established in September 2013. 
As regards
financial stability, in order to mitigate the risk associated with the high
level of dollarization, the central bank adopted in June 2013 a number of
measures aimed at discouraging non-resident deposits and reducing the level of
dollarization of the financial sector. 

2.4.   Implementation of
macro-financial assistance

The EU pledged
up to EUR 500 million of support for Georgia's economic recovery at a
International Donor Conference in Brussels in October 2008, in the aftermath of
the military conflict with Russia. The pledge included two potential MFA operations,
amounting to EUR 46 million each. The first part was successfully implemented
in 2009-2010. In January 2011, the Commission made a proposal for a second MFA
programme of EUR 46 million, to be provided evenly in grants and loans.
However, the adoption of this decision was delayed by disagreements between the
two co-legislators (European Parliament and Council) over the procedure to be
used for the adoption of the Memorandum of Understanding (MoU), which lays down
the economic policy measures to be undertaken by the country benefiting from
the MFA. The decision was finally adopted in August 2013 by the European
Parliament and the Council, following a formal conciliation process[4]. The
Georgian authorities have not used the IMF programme that expired in April 2014. As
a result, negotiations
for finalising the MoU have been put on hold and no MFA disbursement has been
carried out. However, should the Georgian authorities agree with the IMF on a
successor arrangement entailing the use of the Fund's resources, negotiations
on the MoU could be reactivated and MFA funds subsequently disbursed. 
 
 Summary Status of Economic Reform - Georgia 
 1. Price liberalisation Prices are largely free. 
 2. Trade regime Georgia has a liberal trade policy. Import tariffs have been abolished on around 85% of products. There are no quantitative restrictions on imports or exports. Since July 2005 Georgia has benefited from the EU Generalised System of Preferences (GSP), the GSP+. In November 2013, the EU and Georgia initialed the AA (including the DFTA) which is expected to be signed in 2014.  
 3. Exchange regime There is a floating exchange rate of the lari with limited official intervention by the National Bank of Georgia. There are no restrictions on current international transactions in conformity with Article VIII of the IMF’s Articles of Agreement. 
 4. Foreign direct investment Adequate overall legislation. Unlimited repatriation of capital and profits. 
 5. Monetary policy The main monetary policy objective of the National Bank of Georgia is price stability. The Bank is currently applying an inflation-targeting regime. The price growth target is set at 6% for 2012-14, 5% for 2015 and will afterwards gradually be reduced to 3%. The effectiveness of the monetary policy is significantly constrained by the high level of dollarization of the economy, as the FX deposits to non-bank sector's share in total deposits stood at 60% at the end of 2013, a slight decrease from 64% a year earlier. 
 6. Public finances and taxation The public finance management system is essentially sound and transparent, although further reforms are still needed in areas such as internal financial control and audit. New legislation limiting the budget deficit to 3% of GDP, public debt to 60% of GDP and public spending to 30% of GDP came into force in January 2014. 
 7. Privatisation and enterprise restructuring Most state-owned enterprises have been privatised. Privatisation receipts are expected to have declined to 0.6% of GDP in 2013 from an estimated 1% in 2012. 
 8. Financial Sector There were 21 banks at end-2013, including 20 foreign-controlled banks and two branches of non-resident banks. The share of non-performing loans decreased by 1/5 year-on-year to 7.5% at end-2013. The capital adequacy ratio increased slightly from 17% at the end of 2012 to 17.2% at the end of 2013. The net profit of the banking sector at the end of 2013 was three times bigger than in 2012, resulting in an increase of the return on assets to 2.6% (from 1% in 2012) and the return of equity to 14.9% (from 5.8% in 2012). Credit and deposits rose by 21% and 26% respectively year-on-year, after rising by 13% in 2012. 

3.       Jordan
3.1.    Executive summary

Despite its exposure
to heightened regional instability and to a number of exogenous shocks, the
Jordanian economy continued to expand in 2013, albeit at a slow pace. Real GDP
growth reached 3.3%, compared with 2.7% in 2012 and inflation was contained at
low levels allowing a more accommodative monetary policy stance in early 2014.
External sector indicators improved on the back of substantial current and
capital inflows, notably from Gulf Cooperation Council (GCC) countries.
However, public finances performed worse than expected, broadly reflecting the
fiscal burden of the gas supply problems and the cost of the Syrian refugees'
crisis. Progress with structural reforms has been mixed with the adoption of a
revised income tax law being significantly delayed. 
Macroeconomic
stability was underpinned by a 36-month, USD 2 billion Stand-By Arrangement
(SBA) agreed with the IMF in August 2012. The programme
with the IMF has broadly remained on track, although several reviews were
completed with delays. Delays with the implementation of a number of measures
prevented the IMF staff from concluding its third review, which was combined
with the fourth review undertaken during a mission conducted in March 2014.    
Following an
official request for MFA in December 2012, the Commission adopted on 29 April
2013 a proposal for a decision providing MFA of up to EUR 180 million to Jordan in the form of a medium-term loan. The decision[5] was adopted
by the Parliament and the Council on 11 December 2013. The negotiations on the
Memorandum of Understanding listing the economic policy measures to be
undertaken by the Jordanian authorities and the Loan Facility Agreement related
to this MFA operation were concluded in early 2014, and the two documents were
signed on 18 March 2014. The MFA to Jordan is
meant to complement the funds provided by the IMF under the SBA and is
envisaged to be released in two instalments during 2014. 

3.2.    Macroeconomic performance

During the last three years, Jordan has been severely affected by a number of exogenous shocks, notably the escalating
Syrian refugee crisis and the persistent gas supply problems in the Egyptian
pipeline. Combined with higher international energy prices and the weak global
environment, these factors have put pressure on the fiscal and external
accounts of the country. Despite this adverse background, the Jordanian economy
kept expanding in 2013, with a GDP growth estimated at 3.3%. A similar growth
rate is expected for 2014, reflecting higher public investments and domestic
consumption, as well as a recovery in exports.
Consumer price
inflation subsided to 3% at the end of 2013 from 6.5% the year before,
despite some upward pressure from the adjustment in energy tariffs and
consumption by Syrian refugees. In light of this, the Central Bank
of Jordan lowered its key interest rate by 25 basis points in mid-January 2014
(to 4.25%).

Despite
courageous fiscal
consolidation measures taken by the government during 2013, the central
government deficit, including grants but also the transfer to the loss-making
state-owned electric power company NEPCO, climbed to 14.6% of GDP in 2013 from
8.9% the prior year, substantially overshooting the initially forecast level of
9.1% of GDP. Persistent gas supply problems, weak income tax performance,
increased debt repayments of public utilities and the fiscal impact of the
refugee crisis were the main factors behind this deterioration. As a result of
increased borrowing, public debt climbed to 87.7% of GDP by the end of 2013. 
Lower energy
imports and higher current transfers contributed to the improvement of the
current account balance, which recorded a deficit of 11.1% of GDP in 2013, down
from 17.3% of GDP the year before. International reserves more than doubled in
2013, reaching USD 12.4 billion by the end of the year (more
than 5 months of prospective imports), a comfortable level according to the
IMF. This reflected higher grant receipts, the issuance of international bonds
with US Treasury guarantees and a strong trend of de-dollarization.

3.3.    Structural reforms

Assisted by the
IMF financial arrangement, the authorities continued to implement an ambitious
structural reform agenda aimed at correcting macroeconomic imbalances and at
contributing to more inclusive and sustainable growth. Reforms broadly focused
on the improvement of the investment and trade framework, the
reinforcement of social security and the restructuring of the energy sector, including
through the elimination of fuel subdidies and the introduction of a system of
cash transfers to compensate the affected households. Also, legislation
entailing a significant reform of the income tax regime has been submitted to
parliament.
Fiscal
consolidation at the level of the central government, as well as efforts to
reduce the operating loss of the national electricity company (NEPCO),
continued throughout 2013 in line with the IMF programme. The reform of energy
subsidies has progressed swiftly. Following the virtual elimination of fuel
prices in November 2012, electricity tariff adjustments took place in August
2013 and January 2014, as part of the authorities' medium-term energy strategy
to bring NEPCO to cost recovery by 2017. Electricity price increases were
implemented in a targeted manner, exempting poor and middle-class consumers.
Despite these welcome reform efforts, slippages have been reported in several
areas. The adoption of the revised income tax law – scheduled for September
2013− has been postponed to 2014. Taxpayers' filing compliance improved
significantly in 2013, but fell short of the targets set by the IMF programme. Albeit
with a delay, the authorities proceeded in 2013 with the licensing of the first
credit bureau and with the establishment of a quarterly reporting system for
arrears.
The
above-mentioned energy strategy was announced in October 2013. Following the
adoption in April 2012 of the new Law on Renewable Energy and Energy
Efficiency, the government adopted on 16 June 2013 a National Energy Efficiency
Action Plan, which benefited from technical assistance from the EU. The
government further prepared by-laws to help implement this law, including a
by-law on energy efficiency and on renewable energy pricing that could
pave the way for new private sector investments. The signing in
July 2013 of a leasing agreement for a floating storage and re-gasification
unit is another welcome development, which could facilitate the establishment
of a Liquefied Natural Gas (LNG) terminal, thus reducing dependency on
unreliable supplies of gas from Egypt.
As
regards reforms in the area of social security, progress has been mixed. The
Social Security Law enabling the establishment of a maternity and unemployment
fund was adopted in January 2014, a welcome development as it makes the pension
systems more sustainable over the long-term. It also makes the creation of the
unemployment and maternity fund permanent. Furthermore, the authorities
established in early 2013 a cash transfer system to compensate the most
vulnerable population for the fuel price subsidy reform of 2012. Although this
initiative lacked sufficient targeting (with more than 80% of the total
population being compensated), it represents a welcome development as it allows
the elimination of a very costly fuel subsidy system (implying significant net
savings for the budget) and is a step towards the strengthening of the
relatively weak social safety net in Jordan. With financial support
from the World-Bank-led Deauville Partnership Transition Fund, the authorities have
progressed with the establishment of a national unified registry, which
combines different databases and helps to classify households by a number of
income and wealth indicators. This registry should eventually allow the
authorities to improve the targeting of their social assistance programmes
(including the programme set up to compensate for the removal of fuel
subsidies). 

In
the area of investment, the government has made steps towards the
implementation of the new Law on Public Private Partnerships (PPPs) that
aims to align the regulatory framework with international best
practices. An important development towards the improvement of the institutional
and regulatory framework for investment was Jordan's adherence in 2013 to the
OECD's Declaration on International Investment
and Multinational Enterprises. However, progress with implementing the OECD
recommendations, including through the adoption of the new Investment Law and
of a series of relevant by-laws, has been slow. The new
Investment law, which aims at simplifying the institutional framework for
investment, streamlining investment incentives and facilitating access by
foreign investors, was initially submitted to Parliament in September
2012, but was withdrawn and resubmitted in June 2013, following an
inter-ministerial dispute on the issue of tax incentives. This
law has not yet been adopted by the Parliament and some of its objectives can
only be attained through amendments of relevant by-laws.
In
2013, Jordan made further progress in the preparation of a Deep Comprehensive
Free Trade Area (DCFTA) with the EU, and a sustainability impact
assessment will be carried out in 2014. Jordan already has a Free Trade
Agreement with the EU. Jordan has made further progress in the preparation of
an Agreement on Conformity Assessment and Acceptance of industrial products
(ACAA) that would enable some Jordanian products (electrical products, toys, gas
appliances and pressure equipment) to enter the EU market without additional
technical controls. Nevertheless, negotiations are still to be launched.
In order to
maintain a high growth rate in an unfavourable external environment, the
authorities should build on the sustained pace of structural reforms and pursue
an even more ambitious agenda to further improve the business environment and
enhance competitiveness. 

3.4.    Implementation of
macro-financial assistance

Following an
official request for MFA in December 2012, the Commission adopted on 29 April
2013 a proposal for a decision providing MFA of up to EUR 180 million to Jordan in the form of a medium-term loan. The decision[6] was adopted
by the Parliament and the Council on 11 December 2013. The Memorandum of
Understanding listing the economic policy measures to be undertaken by the
Jordanian authorities and the Loan Facility Agreement were signed on 18 March
2014. This
assistance
is meant to complement the funds provided by the IMF under the SBA and is
envisaged to
be disbursed in 2014 in two tranches, of EUR 100 million and EUR 80 million
respectively. The disbursement of the first tranche will be conditional on the
IMF programme being on track, whereas the disbursement of the second tranche
will be also subject to the fulfilment of a set of agreed upon policy
conditions.
The MFA conditions aim to support reforms in the areas of public
finance management and taxation, social security, labour markets, investment
and trade framework, and the energy sector.
As part of the
preparations for this MFA operation, an operational assessment mission took
place in Amman in April 2013 to assess the reliability of the country's
financial and administrative circuits. The assessment covered the PFM areas of
budget preparation, coverage and classification;
budget execution; public internal financial control; external audit and Supreme
Audit Institution; public procurement (central level); cash and public debt
management; central bank of Jordan; and overall implementation of PFM reforms. 
The
assessment concluded that the PFM framework in Jordan is reasonably sound.
However, a number of weaknesses remain, including in relation to the
legislative framework. One area of with scope for improvement is that of budget
planning and execution, where, despite the recent
introduction of the Treasury Single Account (TSA), performance could be further
enhanced. There is also a need to strengthen internal control in line
ministries, including through increased training and staffing. In
terms of debt management, the current medium-term strategy provides a strong
foundation for the management of external and domestic debt. The operational
assessment also stressed the need to review the Central Bank law.
 Summary Status of Economic Reform - Jordan 
 1. Price liberalisation Prices are largely free but there are oligopolistic conditions in several economic sectors. Electricity tariffs and prices for some basic foodstuffs are still subjected to administrative controls. 
 2. Trade regime Jordan has a relatively liberal trade regime. It acceded to the WTO in 2000 and ratified an association agreement with the EU in 2002. Jordan is also one of the EU's partners countries, which could benefit from an agreement on a Deep Comprehensive Free Trade Area (DCFTA). Jordan is a member of both the Great Arabic Free Trade Area (GAFTA) and the Agadir Agreement and has also concluded FTAs with the US, Turkey, Syria, the European Free Trade Association (EFTA), and Singapore. 
 3. Exchange rate regime Since October 1995, Jordan has adopted the pegged exchange rate system, whereby the Jordanian Dinar is pegged to the U.S Dollar. 
 4. Foreign direct investment Despite Jordan's adherence to the OECD's Declaration on International Investment and Multinational Enterprises in 2013, a number of restrictions on foreign investment remain, notably in the sectors of telecommunications, transport, wholesale trade and retail, and construction. Jordan’s overall scoring under the OECD's FDI Regulatory Restrictiveness Index is significantly higher than the average of countries having signed the declaration. There is a need to clarify, unify and improve the investment institutional framework, including through legislative amendments. 
 5. Monetary policy The mission of the Central Bank of Jordan is to ensure monetary and financial stability by (i) maintaining price stability, (ii) protecting the value of the Jordanian Dinar, and (iii) contributing to an attractive investment environment and a sound macroeconomic environment through an interest rate structure consistent with the level of economic activity in the country. 
 6. Public Finances and Taxation A draft Income Tax Law aimed to boost tax collections while increasing the progressivity of taxation has been submitted to Parliament, although its adoption has been delayed. Efforts to improve tax administration, including through the modernisation of the tax management system, have continued. A revised Audit Bureau law (which awaits approval by Parliament) represents another positive step in the area of PFM.  
 7. Privatisation and enterprise restructuring Privatization in Jordan started in 1986 in the aftermath of an economic crisis and has significantly progressed since. Direct state ownership nevertheless remains significant in the mining sector and in public utilities. The authorities continue to introduce various measures to eliminate excessive regulation. 
 8. Financial Sector The financial sector is relatively well developed and dominated by banks, which are overall profitable and well-capitalised. Banks have already implemented Basel II and the authorities are now testing their capacity to implement Basel III. However, the narrow and shallow institutional investors' base limits the development of the domestic capital markets. At the same time, the adoption of an Islamic (Sukuk) Financing Law in 2012 marks a welcome change in the Jordanian financing industry and should enhance domestic liquidity. 

4.       The
Kyrgyz Republic
4.1.    Executive summary

After a decline
in GDP of 0.9% in 2012 due to a 40% contraction in gold production because of
geological issues at Kumtor, the largest gold mine in the country, the economy
rebounded in 2013. GDP growth is estimated to have reached 7.8% in 2013, driven
by a rebound in gold production (and despite a 25% decline in the gold price in
2013) and a strong performance in the non-gold sector. Inflation remained under
control in 2013, at an estimated 7.0%. The
Government of the Kyrgyz Republic managed to slightly out-perform fiscal
targets for 2013 with a fiscal deficit of 5.2% of GDP, thanks to stronger than
expected growth and large imports, which led to better performance in VAT and
income taxes. The current account deficit is also expected to narrow to 10.4%
in 2013, helped by the recovery in gold output and lower food and fuel prices.
External public debt slightly decreased to an estimated 44.6% of GDP by
year-end 2013. The level of gross reserves declined to 3.3 months of imports
from 3.7 one year before, as a result of increased imports. The Kyrgyz Republic is broadly on track with the ongoing IMF programme (Extended
Credit Facility of USD 102.3 million, three year
programme running from June 2011 until June 2014). 
In
the wake of ethnic and political violence which resulted in a sharp drop in
economic activity and a sizable external financing gap, the EU pledged to
support the recovery of the Kyrgyz Republic at an international donor
conference in Bishkek in July 2010. This led to the adoption by the Commission
of a
proposal for a decision to provide to the Kyrgyz Republic MFA of up to EUR 30
million (EUR 15 million in loans and EUR 15 million in grants) on
20 December 2011. This exceptional MFA operation, i.e.
outside the normal geographical scope of the MFA instrument, was justified by
the strength of the pro-democratic political and economic reform momentum in
the country and by its position in a region of economic and political
importance for the EU. In parallel, the IMF agreed with the Kyrgyz authorities
in June 2011 on a three-year programme supported by an ECF arrangement of USD
102.3 million. The adoption of the MFA decision finally took place in
October 2013, after being delayed for two years by a procedural disagreement
between the two co-legislators (see Section 4.4). Should
the ongoing discussions on MFA documents be successful, both
tranches could possibly be disbursed in 2014. However,
the fact that the current IMF programme is expiring in June 2014 is increasing
the risk that disbursement will not take place as planned

4.2.    Macroeconomic performance

After a decline
in GDP of
0.9% in 2012 due to a 40% contraction in gold production because of geological
issues at Kumtor, the largest gold mine in the country, the economy rebounded
in 2013. GDP growth is estimated to have reached 7.8% in 2013, driven by a
rebound in gold production (and despite a 25% decline in the gold price in
2013) and a strong performance in the non-gold sector – in particular in the
transport, retail trade and construction sectors. As a result of the
continuously tight monetary policy conducted by the National Bank of the Kyrgyz
Republic (NBKR), inflation remained under control in 2013 at an estimated 7.0%,
slightly below the 7.5% recorded in 2012. 
The
Government of the Kyrgyz Republic managed to slightly out-perform fiscal
targets for 2013 with a fiscal deficit estimated at 5.2% of GDP,
thanks to stronger than expected growth and large imports, which led to better
performance in VAT and income taxes. Besides, non-tax revenues from profits of
state-owned enterprises were also stronger than expected.
The current
account deficit is also estimated to have narrowed to 10.4% of GDP in 2013 from
15.3% the year before, helped by the recovery in gold output (partly mitigated
by decreasing gold production) and lower food and fuel prices. External public
debt slightly decreased from 46.8% of GDP at year-end 2012 to an estimated
44.6% of GDP at year-end 2013. The level of gross reserves declined to an
estimated 3.3 months of imports at year-end 2013 from 3.7 one year before, as a
result of increased imports.
In the banking
sector, credit to the private sector increased by an estimated 36% year-on-year
at end-September 2013. As a result of the strong credit expansion, capital
adequacy and liquidity ratios have declined, but remain comfortable. The
non-performing loans continued to fall, partly because of high credit growth,
and represented 5.9% of total loans in June 2013.
As regards the
outlook for 2014, GDP growth, even though strong, is projected to decrease to
6.5% in 2014, as a consequence of the economic slowdown in Russia and the
ensuing lower remittances (remittances account for about 30% of GDP, and 95% of
them are from Russia) and, to a lesser degree, lower trade revenues (exports to
Russia account for about 13% of total exports). Besides, the Kyrgyz economy
remains vulnerable to uncertainty on the gold production created by the
ongoing Kyrgyz authorities' dispute with Centerra on Kumtor, the largest gold
mine in the country. The current account deficit is expected
to widen to 15.7% of GDP in 2014, as a result of significant
imports of equipment necessary for large public and private infrastructure
projects (construction of a hydro-power dam, a thermal power plant, a
north-south highway and a gas pipeline from Turkmenistan to China),
which are largely expected to be financed through concessional loans for public
investment programs and FDI.
The financing
gap of the Kyrgyz Republic (estimated at USD 130.7 million) was covered in 2013
by budget support from the EU, the World Bank and others, and IMF ECF
disbursements. As regards 2014, the financing gap is forecast to reach USD
139.3 million. Some recurring funding from the US will be discontinued with the
closure in June 2014 of the Manas logistical airbase used by the US for its operations in Afghanistan (USD 120 million yearly rent for the airbase, plus about USD 60
million of associated services).
The Kyrgyz Republic is broadly on track with the ongoing IMF programme (Extended
Credit Facility of USD 102.3 million, three year
programme running from June 2011 until June 2014). The programme
is foreseen to be completed successfully in June 2014.

4.3.    Structural reforms

Political
uncertainty arose from the breakup of the coalition government in August 2012.
However, the new government quickly endorsed the ongoing essential structural
reforms, continuing the Kyrgyz authorities' efforts to improve the business
climate to become one of the most advanced countries in Central Asia in terms
of economic reforms. The 2013 World Bank Doing
Business report ranked the Kyrgyz Republic at the 68th place out of 189 with
regard to the ease of doing business (an improvement of two places from the
ranking of 2012), while the regional average of Eastern Europe and Central Asia stood at 71. However, the Kyrgyz Republic still faces serious structural
weaknesses, in particular in the areas of cross border trading, taxes'
collection, access to the reliable and affordable electricity and insolvency
resolution.
Further efforts are also necessary to fight corruption. 
The political
events of 2010 hindered progress in public finance management (PFM) reforms,
but this situation has been reversed. One of the main weaknesses in PFM is the
system of external audit, an area which requires longer term support in the
form of capacity building. The Law on the Chamber of Accounts (supreme audit
institution) is broadly adequate but the capacity of this institution needs to
be developed. The Commission is considering providing technical assistance in
this area. The Kyrgyz government is also finalizing a "Procurement
Law", which aims at strengthening public procurement practices, another
source of concern. A significant PFM improvement in 2013 was the fact that the
tax policy unit was transferred back to the Ministry of Finance, which ensures
that all strategic fiscal policy matters are under the responsibility of the
same Ministry.
Kyrgyzstan is a
member of the WTO and is a very open economy, with a trade-to-GDP ratio of about
140%. The bulk of its exports goes to Russia (about 13% of its exports in 2012)
and other CIS countries (39% of exports), and in particular Kazakhstan and Uzbekistan. As regards imports, the largest trading partners are Russia (about 33% of total imports in 2012, of which 40% is fuel) and China (22% of total imports). In
October 2011, Kyrgyzstan applied for membership of a trilateral customs union
(CU) between Russia, Kazakstan and Belarus. The main benefits Kyrgyzstan could obtain from entering this CU, apart from possible foreign policy considerations, are
to preserve the supply of oil and gas from Russia and Kazakhstan at favourable prices and to limit the risk of
disruptions in trade flows with those important trading partners. Joigning the
CU would however entail a number of significant costs. First, it could
jeopardize the Kyrgyz relationship with the WTO,
since the CU has a relatively high Common External Tariff (CET). What is more, a high CET would diminish Kyrgyzstan's ability to import and
re-export inexpensive Chinese goods (the Kyrgyz Republic is the main
re-exporter of Chinese goods to CIS countries),
restricting the important transit trade with China, which provides employment to thousands of people in Kyrgyzstan. 
The banking
system was severely affected by the crisis. In April 2010, seven banks were
put under temporary administration. Subsequently, two banks were released from temporary
administration, four were placed under conservatorship and the biggest one -
Asia Universal Bank - was nationalised and separated into a "bad
bank" and a "good bank" (called Zalkar Bank). After several
failed attempts, the Kyrgyz authorities finally managed to privatise
the Zalkar Bank in late 2013. The banking crisis also revealed
deficiencies in the resolution powers of the NBKR, and its exposure to
interference by the government and the courts. Consequently, banking
regulations are being amended and upgraded to a Banking Code (submitted to the Kyrgyz
parliament in September 2013), to strengthen the NBKR’s supervision, early
intervention and resolution powers and to guarantee its independence. Overall,
the domestic financial sector remains underdeveloped, governance remains weak, lending interest rates are high and a significant part of
loans and deposits are denominated in foreign currency. 

4.4.    Implementation of macro-financial
assistance

The
sharp drop in economic growth and the worsening of the external position in
2010, which were caused by the above described external shocks and internal
political and ethnic conflicts, led to a sizable external financing gap. In an
international donor conference in July 2010, the EU pledged to support the
country's recovery. In June 2011, the IMF agreed with the Kyrgyz
authorities on a three-year programme to be supported
by an ECF of USD 102.3 million. The Kyrgyz government requested MFA support
from the EU in October 2010, asking for a grant in the order of EUR 30 million
to cover part of the external financing gap. On 20 December 2011, the
Commission submitted to the European Parliament and to the Council a proposal
for a decision to provide MFA to the Kyrgyz Republic, consisting for EUR 15
million of loans and for EUR 15 million of grants. Besides covering part of the
external financing gap, this exceptional MFA operation, i.e. outside the normal
geographical scope of the MFA instrument, was justified by the strength of the
pro-democratic political and economic reform momentum in the country and by its
position in a region of economic and political importance for the EU. 
In order to
ensure that the Kyrgyz public finance management system provided sufficient
safeguards for the provision of MFA, the Commission undertook an Operational
Assessment (OA) of the Kyrgyz financial circuits and procedures in June 2012.
The OA mission concluded that, despite weaknesses in internal and external
audit and the need for further improvements in several other areas, the Public
Finance Management system in the Kyrgyz Republic was sufficiently solid to
provide reasonable assurance about the use of MFA funds. 
However, the
adoption of the MFA decision was delayed by a disagreement between the two
co-legislators (European Parliament and Council) over the procedure to be used
for the
adoption of the Memorandum of Understanding (MoU), which lays down
the economic policy measures to be undertaken by the country benefiting from
the MFA.
A
compromise solution was finally found in the context of the negotiations on the
MFA Framework Regulation and the conciliation procedure for the MFA decision
for Georgia,
and the decision providing MFA to the Kyrgyz Republic was finally adopted on 22
October 2013[7].
The Commission
is now
finalizing with the Kyrgyz authorities the MFA-related documents (MoU, Loan
Facility Agreement and Grant Agreement). This process took longer than usual as
certain legal issues had to be addressed. The disbursement
of MFA funds will be conditional on the satisfactory implementation of the MoU
conditions. These
conditions
are expected to focus on PFM reforms, as well as measures in the banking
sector, in the investment and business environment and on trade policy. 
Subject to an
agreement with the Kyrgyz authorities on the MFA-related documents (MoU, Loan
Facility Agreement, Grant Agreement), MFA funds could be disbursed in 2014.
However, the fact that the current IMF programme is expiring in June 2014 is increasing
the risk that disbursement will not take place as planned. 
 Summary Status of Economic Reform - Kyrgyz Republic 
 1.   Price liberalisation Most prices are liberalised while administered prices are maintained for some utilities. 
 2.   Trade liberalisation The Kyrgyz Republic is a member of the WTO since 1998 and is a very open economy, with a trade-to-GDP ratio of about 140%. The bulk of its non-gold exports goes to Kazakhstan and Russia – which are members of a trilateral customs union (CU), that also includes Belarus. In April 2011, the Kyrgyz Republic applied for membership of this CU. However, entering the CU may clash with some of the Kyrgyz Republic's WTO commitments, since the CU currently has a relatively higher Common External Tariff (CET). 
 3.   Exchange rate regime The National Bank of the Kyrgyz Republic (NBKR) operates a managed floating exchange rate regime allowing the exchange rate to adjust in case of substantial pressures or shocks, while aiming at maintaining a competitive exchange rate. The NBKR will continue to refrain from intervening in the foreign exchange market, except in case of excessive volatility (which happened once in 2013). 
 4.   Foreign direct investment FDI and other private capital inflows were negatively affected by the global recession, but started to recover in 2010. They are expected to significantly increase over the period 2014-2017, as a result of large infrastructure projects foreseen to be mostly financed through concessional loans for public investment programs and FDI. 
 5.   Monetary policy The main objective of the NBKR is to guarantee price stability, while maintaining the purchasing power of the national currency. The NBKR continued to maintain a tight monetary policy stance in 2013, in order to keep a single-digit inflation. 
 6.   Public finances The IMF programme assumes additional efforts of fiscal consolidation for the rest of the programme period, with the fiscal deficit targeted to further decline to 4.1% of GDP in 2014. Revenues are expected to benefit from improved tax collection and administration, while public sector reforms are foreseen to result in lower expenditures.. 
 7.   Privatisation and enterprise restructuring The political change in 2010 led to the reversal of some privatisation deals in the energy and telecommunication sectors, made under the previous regime, due to allegations of nepotism and corruption. In 2011, government initiated privatisation in telecommunication and banking sectors. In the banking sector, after several failed attempts, the Kyrgyz authorities finally managed to privatise the large Zalkar Bank in late 2013. 
 8.   Financial sector reform The banking crisis in 2010 revealed deficiencies in the resolution powers and degree of independence of the NBKR. Consequently, banking regulations have been amended and upgraded to a Banking Code (submitted to the Parliament in September 2013), which strengthen the NBKR’s early intervention and resolution powers. 

5.       Tunisia
5.1.    Executive summary

The Tunisian economy has been negatively affected by the domestic
unrest that followed the 2011 revolution, regional instability (notably the war
in Libya), and a weak international environment, particularly in the euro area,
with which Tunisia maintains strong trade and financial links. The economy experienced
a recession in 2011 and, despite the moderate economic recovery witnessed in
2012, when tourism and FDI rebounded and economic activity picked up, the
macroeconomic situation has worsened in 2013 and remains very vulnerable. In
particular, the fiscal and balance of payments situations have deteriorated
quite markedly, generating important financing needs. A number of structural
reforms would need to be addressed by the authorities, particularly in the
financial sector, tax reform, reduction of the subsidies' bill and the
introduction of social safety nets, all of which are proceeding slower than
anticipated
Against this background, the Tunisian authorities reached in
mid-April 2013 an agreement with the International Monetary Fund (IMF) on a
24-month Stand-By Arrangement (SBA) in the amount of USD 1.75 billion, which
was approved by the IMF Board on June 2013. In this context, the Tunisian
government requested MFA from the EU in the amount of EUR 500 million in August
2013. In response, on 5 December the Commission adopted a proposal for a
decision granting a MFA to Tunisia for up to EUR 250 million, in the form of a
loan to be disbursed in three tranches during 2014 and the first half of 2015.
After discussions in the Parliament and Council, the amount was increased to
EUR 300 million and the decision was adopted by the co-legislators in May 2014.

5.2.    Macroeconomic performance

In
2013, the continuation of the political crisis and governmental stalemate
through the end of the year, combined with a bad cereal harvest and weak
external demand, had a strong impact on real GDP growth, which is expected to
be limited to 2.6%, against an initial IMF programme projection of 4%. While
inflation has remained relatively stable compared to 2012, finishing 2013 at
6%, end-year inflationary pressures (particularly in food and beverages) and
the weakening of the currency led the central bank to increase its reference
interest rate by 50 bps to 4.5% on 25 December 2013. 
The
latest estimates pointed towards a fiscal deficit of 8.8% of GDP in 2013, much
higher than the 7.3% originally estimated under the IMF programme. However, the
deferral of payments worth up to 3% of GDP and significant under-implementation
of the capital expenditure budget allowed the government to reduce the deficit
to 6.2% of GDP, based on estimates produced by the IMF in the context of the 1st
and 2nd programme reviews (published in February 2014). The budget
for 2014, approved by the parliament on 30 December 2013, aims at reducing the
deficit to 6.9% of GDP. However, it is based on relatively optimistic
assumptions for GDP. Besides, some of the planned measures whose impact was
reflected in the budget (notably the introduction of a tax on motor vehicles)
have been subsequently scrapped under the pressure of some affected social
groups.
The
general government debt increased moderately to 45% of GDP in 2013. It is
projected to increase markedly to 51.7% of GDP by the end of 2014 and to peak
at 54.1% of GDP in 2016, before reversing the trend. Debt service remains at a
manageable 6.5% of total budget expenditures, or 1.9% of GDP.
On
the external side, at about 8.2% of GDP, the current account deficit is
estimated to have significantly exceeded the amount initially projected by the
IMF for 2013 (7.5% of GDP), mainly due to the widening of the trade deficit as
exports were restrained by sluggish demand in the EU, which takes almost 70% of
Tunisia's exports. In addition, tourism and worker remittances remained weaker
than expected (1.7% and 4.1% year on year growth, respectively). Regarding net
foreign direct investment (FDI), following a 68% decrease after the 2011
revolution, it picked up in 2012 to reach USD 1.7 billion, 35% above 2010
levels, before dropping in 2013 by 42% (to USD 1 billion) mainly due to the
domestic political turmoil.
All
this was combined with a substantial shortfall in external official financing
in 2013. The cancellation of the USD 500 million loan initially envisaged by
the African Development Bank (due to its concerns over exposure to the Northern
African region) and the postponement of the planned issuance of USD 1 billion
in Sukuk bonds must be added to the decision of the IMF to delay the USD 500
million disbursement related to the 1st and 2nd reviews
of the IMF programme, and the decision by the World Bank to delay the
disbursement of their USD 250 million Development Policy Loan. On the other
hand, Qatar provided in December 2013 official financing of USD 500 million as
balance of payments' support in the form of a deposit at the Tunisian central
bank. Against this backdrop, authorities reduced their stock of government
deposits at the central bank from about 6% of GDP at end-2012 to an estimated
2.3% of GDP by end-2013.
In
this context, reserves are estimated to have ended 2013 close to USD 6.8
billion, at barely 3 months of imports, which compares to an initial target of
USD 9.0 billion under the IMF programme, and the Tunisian Dinar (TND) has
depreciated by around 10% against the euro in 2013, despite the central bank's
efforts to contain the slide. 
Moreover,
a substantial portion of the residual external financing gap for 2014 and 2015
remains to be covered (even taking into account the fact that some
disbursements are being shifted from 2013 to 2014), and the identified sources
of financing or their precise size remain to be confirmed (i.e.: issuance of
Sukuk bonds, Samurai and US bond guarantees).

5.3.    Structural reforms

The
2011 crisis had a negative impact on a number of key banks, notably the public
ones, (more exposed to the hard-hit tourism sector), which suffered a
deterioration in the quality of their asset portfolio. In response, the central
bank relaxed its regulatory requirements to allow banks to reschedule loans for
companies affected by the recession and injected large amount of liquidity in
the banking system. As a result, most banks became heavily dependent on central
bank’s refinancing. A key objective of the IMF programme is to address these
vulnerabilities in the banking sector. The reforms are however facing delays,
and there are discrepancies regarding the extent of the recapitalisation needs.
The financial, social and institutional audits of the three major public banks
(BNA, BH, and STB) have been significantly delayed and are now expected to be
finalised in March 2014. These three banks account for about 40% of total
banking system assets, are hampered by weak lending practices and governance
problems, and were severely impacted by the economic distress that followed the
revolution. The strategic decision on what to do with these banks has also been
postponed until after the audits are finalised. 
Preparations
for the creation of an Asset Management Company (AMC) to take over banks'
non-performing loans (NPLs), particularly from the tourist sector, are on-going,
but additional discussions are needed and the IMF is considering including it
as a structural benchmark. Out of 21 commercial banks, 15 are significantly
exposed to the tourism sector, with one main state-owned bank (STB) being by
far the largest holder of NPLs in this sector. The importance of NPLs to the
tourist sector results from a period of over-lending and over-construction that
was followed by the exhaustion of a model based on low-cost, tourist operator
stays, as well as from the negative effect of political instability and
insecurity (including occasional terrorist attacks on tourist resorts) on the
sector. The AMC would purchase the bad loans from the banks at a significant
discount in exchange for government-guaranteed bonds redeemable at the end of
the AMC life-span (estimated at 8-10 years). 
Progress
with the reform of the strongly regressive price subsidy system has also been limited,
as it follows a gradual, piece-meal approach and lacks for now a clear plan to
create a parallel compensatory safety net structure. The IMF programme
structural benchmarks related to this crucial reform have not been met yet, in
particular the introduction of compensatory social safety nets, which has now
been delayed to end-March 2014. The Deauville Partnership Transition Fund has
approved in October 2013 a USD 4.7 million project to help Tunisia develop a
unified registry system of potential beneficiaries, which is essential to be
able to put in place a targeted cash transfer programme to compensate poor households
for the elimination of energy subsidies.
The
reform of the tax system has advanced in some areas, but a comprehensive
overhaul has been postponed to 2014. In line with the new investment code
approved by Cabinet in November 2013, a major tax reform is the reduction of
the onshore corporate tax from 30% to 25%, as well as the increase of the
offshore tax to 10% from 0%, with the objective of reducing the current
disparity in the tax treatment of the two sectors. The reform of the income tax,
which aims at reducing the number of tax exemptions and the system's generally
regressive nature, has so far been limited. Among the reform measures the
authorities have already introduced in the 2014 Budget Law are; an increase in
the minimum threshold under the personal income tax from 2.500 TND to 5.000
TND; a 2-year surcharge tax of 1% on incomes exceeding 20.000 TND; the taxation
of dividends under the personal income tax; a temporary tax on high-end
vehicles (which was later dropped in January 2014 amid social protests) and a
sharp limit on tax transactions to curb corruption and tax evasion.
Participatory working groups have been set up since June 2013 with a view to
developing a comprehensive revision of the tax system in 2014, but not to be
implemented before 2015.
Other
economic reforms are slowly progressing with donor support. A new Investment
Code has been submitted to Parliament following a participatory consultation
approach. Nevertheless, the Code does address important imbalances in the
current sectorial dichotomy of the economy and helps to lay the ground for
additional reforms. A decree reforming public procurement procedures was
proposed in November 2013 (but has been delayed for approval until April 2014),
as was another one addressing the governance of State-owned banks. While both
seem to go in the right direction, they fall short of proposing a comprehensive
set of reforms, following rather a gradual incremental approach. A new
Competition Law and a Bankruptcy Law are also being prepared.

5.4.    Implementation of
macro-financial assistance

Following
the adoption by the Commission on 5 December 2013 of a proposal for a decision
granting MFA to Tunisia of EUR 250 million, the co-legislators have decided, in
agreement with the Commission, to amend the Commission's proposal to increase
the assistance to EUR 300 million. The decision was approved in May 2014. 
In
parallel, DG ECFIN staff has launched negotiations (February 2014) with the
Tunisian authorities on the Memorandum of Understanding, which lays down the
economic policy conditions to the disbursement of the second and third tranches
of MFA funds. These negotiations are expected to conclude shortly after the
signature of the decision.
 SUMMARY STATUS OF ECONOMIC REFORM – TUNISIA 
 1. Price liberalisation Most prices are free, but regulated prices prevail for some fuels, electricity, transport and food products.   
 2. Trade regime Tunisia joined the WTO in 1995, and was the first Mediterranean country to sign an Association Agreement with the EU, in July 1995. Tariff dismantling under the Agreement was completed in 2008. 
 3. Exchange rate regime The CBT changed its exchange rate policy operational framework in 2012 to make the rate more flexible. However, the Tunisia Dinar is not fully convertible as there are limitations for convertibility for capital account transactions. 
 4. Foreign direct investment Since 1972, FDI has benefited from the introduction of an offshore regime, offering incentives to exporting enterprises. This regime was reinforced by the promulgation of the Investment Incentives Code. This approach has, however, shown its limitations over the last decade, as the favourable treatment accorded to the offshore sector has come at the expense of other sectors subject to much heavier restrictions in 1993. 
 5. Monetary policy The Central Bank of Tunisia's (CBT) mandate is to ensure price stability and inflation. It is an independent institution although since the revolution the new Government has prioritised a review of legislation and regulations to strengthen its independence and good governance. It acts as regulator and supervisor of the financial sector; both functions are being currently strengthened under the IMF programme, and thanks to EU and World Bank support. 
 6. Public finances and taxation Central government expenditure made up nearly 29.5% of GDP in 2013. Nearly 42% of this was expenditure on wages and salaries. Transfers and subsidies represented around 7% of GDP, of which the bulk are energy subsidies totalling 4.7% of GDP. The remainder is composed of food (1.8% of GDP) and transport subsidies (0.4% of GDP). Both the subsidy system and the current complex and regressive tax system are undergoing a reform overhaul as part of the ongoing IMF programme which should be detailed and approved throughout 2014. 
 7. Privatisation and enterprise restructuring Following the 2011 revolution, privatisation has grinded to a halt as it is mainly associated with questionable practices and processes of the ancient regime. A process of repossession and sale of assets belonging to the previous ruling elite continues underway. 
 8. Financial sector The country’s three public banks represent 40% of total banking system assets, and they are hampered by weak lending practices, governance issues and an excessive exposure to a tourism sector that has been severely impacted since the revolution. All this has increased vulnerabilities in the sector. An IMF/World Bank Financial System Stability Assessment carried out in 2012 alerted that the banking system had recapitalisation needs of around 2% of GDP, although authorities are confident the needs are barely half that figure and have therefore taken limited remedial action. Under the IMF programme, a number of structural benchmarks address a gradual reform process to improve the overall quality and stability of the larger financial sector. 

6.       Ukraine
6.1.    Executive summary

Ukraine is
suffering from serious macroeconomic imbalances and the on-going political
turmoil is increasing the risks to the economy. After five consecutive quarters
of decline, real GDP grew by 3.3% year-on-year in the last quarter of 2013,
leading to a flat growth for the year. Inflation
entered a negative territory, at -0.2% in 2013 and the fiscal deficit increased
to 6.5% of GDP. While the overall public debt level looked manageable by
international standards (41% of GDP in 2013), Ukraine faced a peak of debt
repayments in 2013 and was faced with the challenge of rolling over its debt at
sustainable interest rates, until the authorities received USD 3 billion in
financial support from Russia in December. The current account continued to
deteriorate to an estimated deficit of 9.25% of GDP on account of decreased
exports. Official reserves declined to only 2 months of next year's imports by
end-February 2014, as a result of the large current account deficit, pressure
on the hryvnia and significant debt repayments in the last quarter of 2013. In
the first months of 2014, the economic situation deteriorated further as a
result of the acute political crisis. GDP is estimated to have contracted by
3%-4% year-on-year in January and February 2014 and inflation picked up due to
a significant hryvnia depreciation.      
In
July 2010, against the backdrop of a persistent external financing gap and in
order to support the economic reform process in the country, the European
Parliament and the Council adopted a decision providing MFA of up to EUR 500
million to Ukraine, in the form of loans. In combination with the EUR 110
million still available from the MFA decision adopted in 2002, this created an
MFA package of up to EUR 610 million in loans, to be disbursed in three
tranches. This programme was not implemented in 2013 as one of the key
conditions – an
IMF arrangement being in place – was not met. Indeed, after the
expiration of the previous USD 15.4 billion SBA in December 2012, the Ukrainian
authorities failed to negotiate a successor IMF programme. However, the
preparation for the implementation of the MFA continued in 2013. The Memorandum
of Understanding (MoU) laying down the policy conditions for the disbursement
of the assistance and the Loan Agreement (LA) were signed in March 2013. In
March 2014 they were also ratified by the Ukrainian Parliament. 
In
light of the political developments of early 2014 and the further deterioration
of Ukraine's balance-of-payments situation, a new MFA operation for Ukraine was approved by the Council under the urgency procedure (article 213 TFEU) in April
2014. The new programme consists of a loan of up to EUR 1 billion. Its
disbursement is conditional on an IMF arrangement being in place and on the
implementation of a number of policy conditions agreed upon in a Memorandum of
Understanding that was negotiated with the Ukrainian authorities in April and is
foreseen to be signed and ratified by the Ukrainian parliament in May. The IMF
Board approved a 24-month Stand-By Arrangement for Ukraine in April 2014 of up
to USD 17 billion, essentially allowing to start disbursing both the 2002/2010
MFA operation and the 2014 MFA operation. 

6.2.    Macroeconomic performance

GDP growth in Ukraine decelerated to 0% in 2013 after a marginal increase of 0.2% in 2012. The slowdown
was mainly a result of a bad harvest, declining steel exports and delayed
domestic reforms. Following five consecutive quarters of decline, real GDP grew
by 3.3% year-on-year in the last quarter of 2013. However, the on-going
political turmoil is derailing the apparent incipient recovery. Due
to serious political and security tensions, growth slowed down markedly in
early 2014, to an estimated -3% to -4% year-on-year in January and February. 
Inflation
remained low throughout 2013. After declining significantly from 8.0% in 2011
to only 0.6% in 2012, it stayed almost flat (-0.2%) in 2013, held down by
decreasing food prices and the tight monetary policy run by the
central bank in an attempt to limit pressures on the exchange rate. This trend
was reversed in early 2014, when inflation picked up at the beginning of the
year as a result of hryvnia depreciation. Price dynamics in 2014 will depend on
possible increases in gas tariffs, related to IMF programme conditionality, and
on whether the national bank's focus will shift to inflation targeting in the
medium term.
The fiscal
situation deteriorated further in 2013. The general government deficit,
including the operational deficit of the state-owned
natural gas importer Naftogaz, was equal to 6.5% of GDP in 2013
resulting from generous energy subsidies (7% of GDP) and the economic slowdown.
Naftogas'
deficit reached about 2% of GDP in 2013, and will continue to remain at
similarly high levels until the government implements gas price increases. The
public debt ratio has increased significantly in recent years, to approximately
41% of GDP at the end of 2013 from only 12% of GDP in 2007. 
The
current account also continued to deteriorate in 2013 to an estimated deficit
of over 9% of GDP (compared to 8.1% of GDP in 2012), as a result of decreased exports
due to weak external demand and impaired competitiveness. Ukraine
deliberately counteracted this trend by lowering gas imports and by introducing
car import duties. Net FDI is estimated to have dropped further from
5.0% of GDP in 2012 to 2.6% of GDP in 2013 due to the unfavourable business
environment and political uncertainty. External debt is estimated to have remained
elevated at 76.7% of GDP in 2013. Official reserves declined by 16% to USD 20.4
billion in the course of 2013, as a result of the large current account
deficit, pressure on the hryvnia and significant debt repayments in the last
quarter of 2013. This negative trend continued in 2014 when reserves dropped
further to only USD 15.5 billion at end-February (about 2 months
of next year's import cover). The hryvnia depreciated by 25% in
February 2014 compared to the official exchange rate, in spite of the capital
control measures introduced by the central bank. The banking sector remains
stable and solvent at the moment, but further significant devaluation of the hryvnia
could impose a great risk to its stability due to portfolio and capital base
deterioration. 

6.3.    Structural reforms

Ukraine's
achievements in the implementation of structural reforms remained below
expectations in 2013. Despite the ambitious President's Reform Programme for
2010-2014 and the "Programme to Accelerate Economic Develeopment"
2013-2014, the investment climate deteriorated further. These challenges are
reflected in Ukraine's low ratings, by regional comparison, in a number of
comparative studies, including the Transparency International Corruption
Perceptions Index (144th out of 177), the Economic Freedom Index
(Heritage Foundation, 155th out of 178) and the Press Freedom Index
(Reporters Without Borders, 127th out of 180). While Ukraine
improved markedly in World Bank's "Doing Business 2014" report (jump
from 137th in 2013 to 112th place in 2014), mainly in the
areas of dealing
with construction permits and registering property, it sank nine places in the
global competitivness index (from 73rd in 2013 to 84th
place in 2014) as the business climate continued to suffer from red tape,
corruption and a poor legislative environment.
In
the area of public finance management, the progress has not been satisfactory.
Positively, a reworked Public Finance Management Strategy and an accompanying
Action Plan were approved in October 2013 and the procedure for a
constitutional amendment expanding the remit of the Accounting Chamber of
Ukraine (ACU) to audit the revenue side of the budget was initiated. However, the
implementation of the new public procurement law adopted in July 2010 has been
unsatisfactory – in the past two years, the framework for public procurement
became even less transparent, as the number of exemptions from the public
procurement law further increased. More work also needs to be done to create an
effective system of public internal financial control and to improve the
budgeting system. 
As
regards the fight against corruption, a national anticorruption strategy was
adopted in 2011. However, anti-corruption legislation is still not in line with
European and international standards, and Ukraine continues to lack an
independent anti-corruption body. Regarding the tax policy, in August 2013, Ukraine amended the Tax Code Law to allow the government to reintroduce the use of
promissory notes to make VAT refund payments. This intention was confirmed in
December 2013 when the 2014 Budget Law was submitted to the parliament
including provisions for issuing promissory notes for this purpose. This
decision runs contrary to the conditionality of the MoU associated with the EUR
610 million MFA operation.
Progress in
reforming the energy sector was also insufficient in 2013. Ukraine's energy sector is dominated by large state-owned operators, most notably oil and
gas monopolist Naftogaz. This entails significant problems of governance and
transparency, with grave repercussions for the state budget and the economy as
a whole due
to heavy government spending on subsidies (7% of GDP) and the non-market
pricing policies of Naftogaz (selling natural gas to households and
utilities at prices which are significantly below cost-recovery levels). Gas
tariff reform will be a major challenge in 2014.
Although,
prima facie, the banking sector is still considered stable and solvent at the
time of writing this report, it is vulnerable to a further deterioration of the
political and economic situation in the country. In the first two months of
2014, the deposit base fell by some 10%. Non-performing loans (NPLs) were high
at 13% of total gross loans at the end of 2013 and are posing a great risk to
the financial system, also in light of the recent hryvnia depreciation. Other
challenges weighing on the banking system are the weak legal framework, the
high level of fragmentation (180 banks), the lack of stable long-term funding,
and the high exposure of banks to the volatile real estate/construction and
retail sectors. Regarding banking supervision, despite recent improvements,
significant weaknesses persist. Although the national bank is regularly
conducting stress tests, there is a need to do a more thorough asset quality
review and introduce International Financial Reporting Standards.
In
2011, Ukraine concluded the negotiations with the EU on an Association
Agreement, including a Deep and Comprehensive Free Trade Area (DCFTA). The
Agreement was initialled in 2012 and was expected to be signed at the November
2013 Eastern Partnership Vilnius Summit. However, shortly before the Summit preparations for signature were suspended by the government. Following the change of
government in February 2014, Ukraine and the EU signed the political part of
the Association Agreement on 21 March 2014. The remaining part of the
Agreement, and notably the economic part (including the DCFTA), is foreseen to be
signed separately, after the presidential elections scheduled on 25 May 2014. In
order to support the Ukrainian economy the EU is unilaterally applying
autonomous trade measures since April 2014. These measures, which grant to Ukraine the same benefits as the DFCTA, notably by giving to Ukraine preferential access to the EU
market, will expire, at the latest, on 1 November 2014.
 

6.4.    Implementation of
macro-financial assistance

In
July 2010, against the backdrop of a persistent external financing gap and in
order to support the economic reform process in the country, the European
Parliament and the Council adopted a decision providing MFA of up to EUR 500
million to Ukraine[8]. In
combination with the EUR 110 million still available from the Council decision
adopted in 2002[9],
this translated into an MFA package of up to EUR 610 million in
loans, to be disbursed in three tranches. The
Memorandum of Understanding (MoU) laying down the policy conditions for the
disbursement of the assistance and the Loan Agreement (LA) were signed in March
2013 after lengthy negotiations. The two documents were eventually ratified by
the Ukrainian Parliament in March 2014.
However,
the programme could not be implemented in 2013 and in the first months of 2014
as one of the key conditions for it – an IMF arrangement being in place –
was not met after the expiration of the previous USD 15.4 billion SBA in
December 2012 (which was not fully implemented). 
In
addition to the existence of a disbursing IMF programme, the release of the
assistance, notably of the second and third tranches, of EUR 260 million and
250 million respectively, are subject to the fulfilment of a number of policy
conditions laid down in the MoU, which fall into four thematic areas: public
finance management (PFM); trade and taxation; energy; and financial sector reform.

Within the broad
area of PFM, the focus is on internal and external financial control, the fight
against corruption, as well as public procurement and external audit. In
particular, the Ukraine's Accounting Chamber (ACU) should be given the
authority to audit government revenue, including local governments,
extra-budgetary funds and state-owned enterprises. 
The issue of the
substantial arrears accumulated on VAT refunds is closely related to PFM. The
MoU stipulates that these arrears, which hurt the affected exporters and
contribute to weaken the overall investment climate, should be eliminated,
while improvements in tax administration should prevent a recurrence of the
problem in the future. The MoU conditions also commit the Ukrainian authorities
to clearing any arrears on VAT refunds either in cash or by netting them out
against obligations of the tax payers, thus avoiding their unorthodox clearance
through the issuance of VAT bonds, as was done in 2010. 
As noted, the
energy sector reform was stalled in 2013. The MoU refers to Ukraine's  commitment to fully implement the EU Directive 2004/55, which foresees the
unbundling of the production, transport and delivery segments of the gas
sector. Although progress on unbundeling has been uneven, the EU and the World
Bank are in close contact with the Ukrainian authorities regarding the reform
of Naftogaz, Ukraine's oil and gas monopolist. Moreover, the MoU contains
conditions related to the payment discipline of utility consumers and the
targetting of subsidies in the energy sector, neither of which has seen any
progress so far.
In
light of the political developments of early 2014 and of the deterioration of Ukraine's balance-of-payments situation, a proposal for a new MFA operation in favour of Ukraine, of up to EUR 1 billion in loans was approved by the Council in April 2014[10]. The
new programme consists of a loan of up to EUR 1 billion to be disbursed in two tranches
of EUR 500 million each. The first tranche is conditional only on an IMF
arrangement being in place, while the second tranche depends on the
implementation of a number of policy conditions agreed upon in a Memorandum of
Understanding that was negotiated with the Ukrainian authorities in April and is
foreseen to be signed and ratified by the Ukrainian parliament in May. The
conditionality of this second MFA programme relate to the same four sectors as
those linked to the 2002/2010 MFA programme, namely public finance
management (PFM); trade and taxation; energy; and financial sector reform. 
The
IMF Board approved a 24-month Stand-By Arrangement for Ukraine in April 2014 of
up to USD 17 billion, essentially unlocking the first tranches of both the 2002/2010
MFA operation and the 2014 MFA operation. Disbursements are pending.
 Summary Status of Economic Reform - Ukraine 
 1.   Price liberalisation Most prices are free, but regulated prices prevail for some utilities, notably gas, and in some other areas, including agricultural products and medicines (so called socially-sensitive goods). 
 2.   Trade liberalisation Ukraine joined the WTO in May 2008. However, export duties and quotas for individual products remain in force, and often create an uneven playing field and opportunities for rent-seeking, notably in the agricultural sector. Technical and administrative barriers to trade remain an obstacle for importers. Negotiations on a Association Agreement (AA), including a Deep and Comprehensive Free Trade Area (DCFTA) with the EU were concluded in 2011.The political part of the AA was signed in March while the remaining chapters, including provisions on the DCFTA are foreseen to be signed after the presidential elections. The EU is unilaterally applying autonomous trade measures since April 2014, which give the same benefits to Ukraine as the DFCTA and which will expire, at the latest, on 1 November 2014. 
 3.   Exchange rate regime In 2013 the National Bank of Ukraine (NBU) sustained the de-facto peg of the hryvnia against the US dollar, maintaining an exchange rate close to UAH 8 per USD throughout 2013. In February 2014, the NBU suspended the peg and the hryvnia depreciated significantly (more than 20% in February 2014). In agreement with the IMF, the NBU is now pursuing a policy of non-intervention, except in the case of significant exchange rate movements. 
 4.   Foreign direct investment FDI-related flows are largely liberalised. Some sectors, however, remain closed to foreign ownership, i.e. the gas transmission system and the agricultural land market. 
 5.   Monetary policy The National Bank of Ukraine is responsible for controlling the domestic money supply. In order to stabilize the exchange rate, the NBU implemented a tight monetary policy throughout 2013. 
 6.   Public finances General government expenditure made up an estimated 51% of GDP in 2013. Nearly three-quarters of Ukraine's government expenditure go towards wages and social transfers. Domestic gas prices for households and utilities are kept at an artificially low level of about 20-30% of cost recovery level, which results in a higher fiscal deficit. Ukraine still needs to implement key reforms in the public finance management sector, including in the areas of public procurement, public internal financial control, external audit and VAT refunds. 
 7.   Privatisation and enterprise restructuring State-owned companies, which are insufficiently controlled and not subject to external audit by the Supreme Audit Institution, continue to dominate certain sectors, in particular utilities. 
 8.   Financial sector reform At the end of 2013, 180 banks were operating in Ukraine, including 19 foreign-owned banks. Consolidation and recapitalisation of the banking sector remain key priorities for Ukraine. The amount of non-performing loans remains high (13% of total gross loans at the end of 2013).  
              Annexes
Annex 2: MFA amounts authorised by
year over 2003-2013 (in EUR million) 
Chart 2A: MFA amounts authorised by
year over 2003-2013 (in EUR million)
Chart 2B: MFA amounts authorised by
regions over 2003-2013
Annex
3: MFA amounts disbursed by year over 2003-2013 (EUR million) 
Chart
3A: MFA amounts disbursed by year over 2003-2013 (in EUR million)
Chart
3B: MFA amounts disbursed by regions over 2003-2013
[1]       Quarterly data do not include fiscal data from the cantonal
levels, thus, overestimating to some extent the fiscal balance.
[2]       Council Decision 2009/891/EC of 30 November 2009 providing
macro-financial assistance to Bosnia and Herzegovina (OJ L 320, 5.12.2009).
[3]       Commission Decision 2012/674/EU  of 29 October 2012.
[4]       Decision No 778/2013/EU of the European Parliament and of the
Council of 12 August 2013 providing further macro-financial assistance to Georgia (OJ L 218, 14.8.2013).
[5]       Decision No 1351/2013/EU of the European Parliament and of
the Council of 11 December 2013 providing macro-financial assistance to the
Hashemite Kingdom of Jordan (OJ L 341, 18.12.2013).
[6]       Decision No 1351/2013/EU of the European Parliament and of
the Council of 11 December 2013 on providing macro-financial assistance to the
Hashemite Kingdom of Jordan (OJ L 341, 18.12.2013).
[7]       Decision No 1025/2013/EU of the
European Parliament and of the Council of 22 October 2013 providing
macro-financial assistance to the Kyrgyz Republic (OJ L 283, 25.10.2013).
[8]       Decision No 646/2010/EU of the European Parliament and of the
Council providing macro-financial assistance to Ukraine (OJ L 179, 14.7.2010).
[9]       Council Decision 2002/639/EC of 12 July 2002 providing
supplementary macro-financial assistance to Ukraine (OJ L 209, 6.8.2002).
[10]     Council Decision No 2014/215/EU of 14 April 2014 providing
macro-financial assistance to to Ukraine (OJ L 111, 14.4.2014).