COMMISSION STAFF WORKING DOCUMENT Background Analysis per beneficiary country 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 2015
Date: 2016-06-10
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: EU aid, Georgia, Jordan, Kyrgyzstan, Tunisia, Ukraine, economic stabilisation, financial aid, macroeconomics, structural adjustment

EN 

   EN 

   EUROPEAN COMMISSION  Brussels, 10.6.2016  SWD(2016) 192 final   COMMISSION STAFF WORKING DOCUMENT Background Analysis per beneficiary country 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 2015 {COM(2016) 376 final}  
 
 
AA 

CIS 

CPI 

LIST OF ABBREVIATIONS 

Association Agreement 

Commonwealth of Independent States 

consumer price index 

DCFTA 

deep and comprehensive free trade area 

EC 

ECF 

EEU 

EFF 

EFTA 

EIB 

ENP 

ENI 

EU 

EUR 

FATF 

FDI 

FSAP 

European Community 

Extended Credit Facility 

Eurasia Economic Union 

Extended Fund Facility 

European Free Trade Association 

European Investment Bank 

European Neighbourhood Policy 

European Neighbourhood Instrument 

European Union 

euro 

Financial Action Task Force 

foreign direct investment 

financial sector assessment programme 

GAFTA 

Great Arabic Free Trade Area 

GCC 

GDP 

IMF 

MFA 

MoU 

OECD 

OJ 

PFM 

PPP 

SBA 

SDR 

SOE 

SREP 

USD 

TFEU 

VAT 

WTO 

y-o-y 

Gulf Cooperation Council 

gross domestic product 

International Monetary Fund 

macro-financial assistance 

memorandum of understanding 

Organisation for Economic Cooperation and Development 

Official Journal of the European Union 

public finance management 

public-private partnership 

stand-by arrangement 

Special drawing rights 

state-owned enterprise 

supervisory review and evaluation process 

United States dollar 

Treaty on the Functioning of the European Union 

value added tax 

World Trade Organisation 

year-on-year 

2 

 
 
CONTENTS 

INTRODUCTION 

BACKGROUND  ANALYSIS  OF  BENEFICIARIES  OF  MACRO-FINANCIAL 
ASSISTANCE 

1. 
GEORGIA .................................................................................................................... 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. 
JORDAN ...................................................................................................................... 9 
2.1    Executive summary .................................................................................................... 9 
2.2    Macroeconomic performance ..................................................................................... 9 
2.3    Structural reforms ..................................................................................................... 10 
2.4. 
Implementation of macro-financial assistance ........................................................ 11 
THE KYRGYZ REPUBLIC ........................................................................................... 14 
3. 
3.1.  Executive summary ................................................................................................. 14 
3.2.   Macroeconomic performance .................................................................................. 14 
3.3.  Structural reforms .................................................................................................... 15 
Implementation of macro-financial assistance ........................................................ 16 
3.4. 
TUNISIA .................................................................................................................... 18 
4. 
4.1.    Executive summary ................................................................................................. 18 
4.2.    Macroeconomic performance .................................................................................. 18 
4.3.    Structural reforms .................................................................................................... 19 
4.4.    Implementation of macro-financial assistance ........................................................ 20 
5. 
UKRAINE .................................................................................................................. 22 
5.1.  Executive summary ................................................................................................. 22 
5.2.   Macroeconomic performance .................................................................................. 22 
5.3.  Structural reforms .................................................................................................... 24 
Implementation of macro-financial assistance ........................................................ 25 
5.4. 

3 

 
 
INTRODUCTION 

This  staff  working  document  is  published  in  parallel  with  the  Commission’s  Report  to 
the  European  Parliament  and  the  Council  on  the  implementation  of  macro-financial 
assistance  (MFA)  to  third  countries  in  2015.  It  provides  economic  and  financial 
information  regarding  the  situation  of  the  beneficiary  countries  and  more  detailed 
information on the implementation of MFA operations in those countries. Statistical data 
on  the  MFA  decisions  adopted  since  1990,  by  date  and  by  region,  are  set  out  in  the 
annexes, as are total MFA commitment and payment amounts in 2005-2015, by year and 
by region. 

4 

 
BACKGROUND ANALYSIS OF BENEFICIARIES OF MACRO-FINANCIAL ASSISTANCE 

1.  GEORGIA 

1.1.  Executive summary 

The  recession  in  Russia,  the  economic  slowdown  in  other  CIS  countries  and  sharp 
depreciations  in  the  currencies  of  major  trade  partners  since  the  end  of  2014  reduced 
Georgian exports and remittances sharply, leading to a deceleration of GDP growth from 
4.6 % in 2014 to 2.8 % in 2015. The lari lost a quarter of its value between November 
2014 and December 2015, and external vulnerabilities increased. Despite the slowdown 
in domestic demand, the large lari depreciation and falling oil prices, the current account 
deficit widened to close to 12 % of GDP in 2015, while external debt increased to over 
100 %  of  GDP  due  to  valuation  effects,  and  foreign  exchange  reserves  are  covering 
around  three  months  of  next  year’s  imports.  Notwithstanding  a  difficult  economic 
situation,  the  Government  pursued  a  relatively  responsible  fiscal  and  tight  monetary 
policy,  and  allowed  the  exchange  rate  to  depreciate  to  help  absorb  the  external  shock. 
Despite  a  high  rate  of  dollarisation,  the  banking  system  remains  sound  and  well 
capitalised, reflecting also the careful supervision and regulation by the central bank. 

In  July  2014,  the  authorities  signed  a  three-year  IMF  stand-by  arrangement  (SBA)  for 
USD 154 million.  Most  of  the  funds  (80 %)  were  disbursed  in  2014.  Subsequently, 
disbursements  were kept on hold due to postponement of the completion of the second 
programme  review,  which  was  closely  linked  to  the  Georgian  parliament’s  plans  to 
remove  banking  supervision  from  the  national  bank  and  transfer  it  to  a  newly  created 
Financial Supervision Agency. The IMF team re-visited Tbilisi in November and started 
discussions on the second and third programme reviews, which are not yet concluded. 

In  2013,  the  European  Parliament  and  the  Council  adopted  a  decision  on  an  MFA 
programme to Georgia for a total of EUR 46 million, to be provided equally in loans and 
grants  and  disbursed  in  two  tranches.  The  first  tranche  was  disbursed  in  spring  2015. 
Disbursement  of  the  second  tranche  was  planned  for  immediately  after  the  summer  of 
2015,  but  delayed  following  the  postponement  of  the  second  review  of  the  IMF 
programme.  As  Georgia  fulfils  all  policy  conditions  for  disbursement  of  the  second 
tranche,  the  approval  of  the  IMF  programme  review  would  allow  the  second  MFA 
disbursement to go ahead.  

1.2.   Macroeconomic performance 

Georgia’s real GDP growth slowed from 4.6 % in 2014 to 2.8 % in 2015, mainly due to 
rapid deterioration of the regional environment from the second half of 2014, which led 
to  a  sharp  fall  in  Georgia’s  exports  and  reduced  inflows  of  worker  remittances.  Under 
external  pressure,  the  lari  lost  26 %  of  its  value  against  the  dollar  between  November 
2014  and  December  2015.  Consumer  price  inflation  picked  up  in  2015  (to  4.9 %  in 
December)  as  a  result  of  the  pass-through  effect  of  lari  depreciation  on  prices  and 
increases  in  electricity  tariffs,  which  outweighed  lower  oil  prices  and  weak  domestic 
demand.  To  fight  inflation,  the  national  bank  tightened the monetary  stance,  increasing 
its key policy rate seven times in 2015 so that it reached 8 % in December. 

The  fiscal  deficit  widened  from  2.9 %  of  GDP  in  2014  to  over  3.3 %  in  2015, 
significantly  above  the  target  of  3.3%  agreed  under  the  IMF  programme.  The 
deterioration  reflects  the  overrun  in  expenditures,  especially  in  the  area  ofproject 
spending,  while  revenues  over-performed,  despite  the  economic  slowdown,  thanks  to 
improved  tax  administration,  rising  inflation  and  the  lari  depreciation,  which  boosted 
import-related VAT revenue. The public debt increased from 35.5 % of GDP in 2014 to 

5 

 
41.2 %, due mainly to the valuation effects of exchange rate depreciation (three quarters 
of the public debt is denominated in foreign currency). Fiscal policy also faces multiple 
challenges.  Revenue  collections  are  constrained  by  the  Georgian  constitution,  which 
rules out the introduction of new taxes and increases in the existing tax rate, except for 
excises,  without  approval  by  referendum.  At  the  same  time,  expenditures  are  under 
pressure  from  increasing  costs  relating  to  the  introduction  of  the  universal  healthcare 
(UHC) scheme and rising spending on pensions, targeted social assistance and education. 
In  the  coming  period,  pressures  will  also  arise  from  spending  relating  to  the  pension 
reform. 

External vulnerabilities increased. The current-account deficit widened to 11.7 % of GDP 
in 2015, from 10.6 % in 2014, despite a slowing economy, the sharp depreciation of the 
lari and falling oil prices. After staying at around 80 % of GDP since 2008 (83 % of GDP 
at the end of 2014), external debt jumped due to lari depreciation, to 107 % of GDP in 
2015.  Foreign  exchange  reserves  dropped  from  USD  2.7  billion  in  December  2014  to 
USD 2.5 billion in December 2015, covering about three months of next year’s imports. 

Georgia’s  banking  system  is  well  capitalised  and  sound.  Its  Basel  II  capital  adequacy 
ratio is 17.5 % and the liquidity ratio is 36 %. Due to the high level of dollarisation in the 
banking system (two thirds of loans are in USD), the lari’s depreciation against the US 
dollar had a negative impact on the level of non-performing loans (NPLs), which stayed 
at relatively low levels (though rising to 5.6 % at the end of 2015, from 4.7 % at the end 
of  2014).  However,  if  NPLs  start  to  rise  faster  in  the  future,  the  banking  system  is 
expected to have sufficient buffers to withstand pressures. 

1.3.   Structural reforms 

Georgia  has  implemented  a  series  of  important  structural  reforms  and  substantially 
improved its business environment in the past few years. In 2015 (as in 2014), it ranked 
24th out of 189 countries in the World Bank’s Doing Business report. It is considered one 
of the best countries  when it  comes to  starting a business, registering property, dealing 
with  construction  permits,  getting  credit  and  enforcing  contracts.  Nevertheless,  there  is 
room  for  improvement  in  areas  such  as  access  to  electricity,  resolving  insolvency  and 
trading across borders. 

Despite slow economic growth, the situation on the Georgian labour market has slowly 
improved  and  the  unemployment  rate  fell  from  14.6 %  in  2013  to  12.4 %  in  2014. 
National business surveys confirm that this positive trend continued in 2015. However, 
high youth unemployment and large urban/rural disparities remain a challenge. Poverty, 
though still high, continued to decrease, mostly thanks to the government raising targeted 
social  assistance  and  pension  benefits.  The  UHC  scheme  had  been  introduced  in  2013 
(see above) and its coverage was expanded to the whole population in 2014. While this 
was  a  welcome  move,  it  put  pressures  on  the  budget,  so  the  government  conducted  a 
survey in 2015 (also as part of the MFA conditionality), the results of which will serve as 
a basis for further improving the operation and financial management of the scheme. In 
addition,  the  Ministry  of  Labour,  Health  and  Social  Affairs  boosted  its  capacity  to 
improve the quality of the health services. 

Georgia  has  started  preparatory  work  for  the  introduction  of  a  proper  pension  system. 
The  plan  is  to  introduce  the  first  ‘pay  as  you  go’  public  pillar,  which  would  be 
earnings-related,  instead  of  the  present  system  of  flat  subsistence  pensions.  Given  the 
constitutional  restrictions  on  raising  revenue,  funding  of  the  transition  cost  of  this 
pension reform will be a significant challenge in the coming period.  

Georgia has made some progress in the area of public finance management (PFM), also 
as  part  of  the  MFA  conditionality,  notably  by  establishing  a  training  centre  to  raise 

6 

 
awareness  of  public  procurement  legislation  and  procedures  among  public  agencies 
organising  tenders  and  potential  bidders.  The  Law  on  the  State  Audit  Office  was 
amended in order to protect its operational independence, but enforcement of the law will 
still need to improve. 

As regards the financial sector, substantial progress was made in developing risk-based 
supervision and adapting regulations to the Basel II guidelines on capital adequacy. On 
the basis of the banks’ reports determining the level of capital they need to guard against 
overall  credit  risks,  the  central  bank  completed  the  supervisory  review  and  evaluation 
process (SREP) for the two largest banks (accounting for 60 % of total banking assets) in 
2015,  also  as  part  of  MFA  conditionality.  Following  the  SREPs,  the  central  bank  sent 
banks recommendations on how to improve their risk models. The remaining SREPs will 
be  completed  in  2016.  Georgia  is  also  considering  introducing  a  deposit  insurance 
scheme.  In  summer  2015,  the  Georgian  Parliament  initiated  the  transfer  of  banking 
supervision functions from the central bank to a newly established Financial Supervisory 
Agency  (FSA).  This  has  held  up  the  second  IMF  programme  review  and  consequently 
the  disbursement  of  the  second  MFA  tranche.  The  Parliament  passed  the  legislation  in 
the  autumn,  overruling  the  President’s  veto,  but  the  Constitutional  Court  suspended  its 
implementation  pending  a  final  verdict  (the  legal  deadline  is  summer  2016),  leaving 
banking supervision with the central bank.  

1.4.  Implementation of macro-financial assistance 

The EU pledged up to EUR 500 million of support for Georgia’s economic recovery at 
an International Donor Conference held in Brussels in October 2008 in the aftermath of 
the military conflict with Russia. The pledge included two potential MFA operations, for 
EUR 46 million  each,  the  first  of  which  was  successfully  implemented  in  2009-2010. 
The second MFA programme is ongoing and the support is being provided in the form of 
grants  and  loans  (in  even  proportions).  It  was  proposed  by  the  Commission  in  January 
2011, but procedural disagreements between the co-legislators meant that adoption was 
delayed  until  August  2013.  The  MoU,  the  loan  facility  agreement  (LFA)  and  the  grant 
agreement  were  signed  and,  where  necessary,  ratified  by  the  Georgian  parliament  in 
December 2014. 

The  first  MFA  tranche  was  disbursed  in  January  (EUR  13  million  in  grants)  and  April 
2015  (EUR  10  million  in  loans)  on  the  basis  that  Georgia  had  a  good  track  record  of 
implementing  the  IMF  programme  (as  attested  by  the  successful  first  review  under  the 
Stand-by Arrangement in January). The second tranche (EUR 23 million) was due to be 
disbursed  immediately  after  the  summer  of  2015,  but  has  been  delayed  following  the 
postponement  of  the  second  review  of  the  IMF  programme.  The  IMF  decision  was 
closely linked to the Georgian parliament’s plan to remove banking supervision from the 
central  bank  and  place  it  with  the  FSA.  When  the  IMF  re-started  discussions  on  the 
second  and  third  reviews  in  November,  the  Commission  conducted  a  review  mission 
which confirmed compliance with the conditionality for the disbursement of the second 
MFA tranche. Therefore, as soon as the IMF Board approves the second and third review 
of the programme, the EU should be able to disburse the second tranche.   

7 

 
 
 
STATUS OF ECONOMIC REFORM — GEORGIA 

1. Price liberalisation 

Prices are largely free. 

2. Trade regime  

Georgia has a liberal trade policy, with no quantitative restrictions on imports or exports. In 
June  2014,  it  signed  an  Association  Agreement  with  the  EU,  including  a  deep  and 
comprehensive free trade area (DCFTA) agreement, which entered into force in September 
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 
accordance with Article VIII of the IMF’s Articles of Agreement. 

4. Foreign direct investment 

Georgia has a liberal regime for FDI and unlimited repatriation of capital and profits.  

5. Monetary policy 

The  National  Bank’s  main  monetary  policy  objective  is  price  stability.  The  Bank  is 
currently  applying  an  inflation-targeting  regime,  with  a  target  of  5 %  for  2016.  The 
effectiveness  of  monetary  policy  is  significantly  constrained  by  the  high  level  of 
dollarisation: FX loans accounted  for 64.2 % of banks’ total loans at the end of 2015, up 
from 60.3 % a year earlier. 

6. Public finances and taxation 

The  PFM  system  is  essentially  sound  and  transparent,  although  further  reforms  are  still 
needed in areas such as internal financial control and audit. Public revenues are constrained 
by the constitution (Article 94), while the budget deficit, public debt and public spending 
are capped by the Liberty Act, in force since January 2014, at 3 %, 60 % and 30 % of GDP 
respectively. 

7. Privatisation and enterprise restructuring 

Most  state-owned  enterprises  (SOEs)  have  been  privatised.  Privatisation  receipts  are 
expected to have declined from 0.5 % of GDP in 2014 to an estimated 0.4 % in 2015. 

8. Financial sector 

There were 19 banks at the end of December 2015, including 17 foreign-controlled banks 
and one branch of a non-resident bank. Foreign capital accounted for about 80 % of banks’ 
total paid-in capital. The five largest banks represented about 78 % of total banking assets. 
Amendments  to  the  Organic  Law  on  the  National  Bank  of  Georgia,  to  transfer  banking 
supervision  functions  from  the  central  bank  to  a  newly  established  Financial  Supervisory 
Agency,  were  adopted  by  the  Georgian  parliament  in  September  and  subsequently 
suspended  by  the  Constitutional  Court  in  October  2015.  Pending  a  final  verdict,  banking 
supervision remains with the central bank. 

8 

 
2. 

JORDAN 

2.1. 

    Executive summary 

The  Jordanian  economy  slowed  down  to  2.4 %  in  2015,  on  the  back  of  continuing 
conflicts in Iraq and Syria affecting tourism exports and business confidence. Consumer 
prices  fell  by  -0.9%  in  2015,  helped  by  sharp  declines  in  fuel  and  transport  prices. 
Despite lower oil prices, the primary government deficit (excluding grants and transfers 
to  NEPCO,  the  electricity  company,  and  WAJ,  the  Jordanian  water  authority)    is 
estimated  at  around  5.2  %  of  GDP  in  2015,  up  from  4.5  %  of  GDP  in  2014.  This 
underlines Jordan’s fragile fiscal position as the country continues to depend on foreign 
grants. Lower oil prices were the key driver of the improvement in the current-account 
deficit (excluding grants), which is estimated to have shrunk to 11.7 % of GDP for 2015 
(from  12.1 %  in  2014),  despite  weaker  exports  and  tourism.  In  December  2015, 
international  reserves  in  foreign  currency  stood  at  a  comfortable  level  of  USD  14.7 
billion, equivalent to 6.8 months of the next year’s imports. 

Macroeconomic  stability  was  underpinned  by  a  USD 2 billion  SBA  which  was  agreed 
with  the IMF in  August  2012 and satisfactorily completed in  August 2015. Since then, 
the Jordanian authorities have been in talks with the IMF on a new programme. 

In  2015, the  Commission  implemented  an  MFA  programme  of  EUR 180 million  in  the 
form  of  medium-term  loans.  The  first  tranche  (EUR  100  million)  was  disbursed  on 
10 February and the second (EUR 80 million) on 15 October 2015. This operation helped 
Jordan to address the negative macroeconomic impact of the Syrian conflict as well as of 
exogenous  economic  shocks.  At  the  Supporting  Syria  and  the  Region  Conference 
(London, 4 February 2016), the international community pledged around USD 10 billion 
to countries affected by the refugee crisis. This included a EUR 2.4 billion pledge by the 
European Commission, which in turn entailed a new MFA operation to Jordan subject to 
the  relevant  pre-conditions.  The  Jordanian  authorities  expressed  interest  in  a  follow-up 
MFA operation and sent a formal request for such assistance in March 2016. 

2.2.  Macroeconomic performance 

Despite  several  exogenous  shocks  (major  disruptions  in  gas  flows  from  Egypt,  deep 
conflicts in Syria and Iraq), the Jordanian economy has proven resilient in recent years, 
thanks  to  prudent  macroeconomic  policies  and  substantial  financial  support  from  the 
international community. However, with continuing conflicts in Iraq and Syria affecting 
tourism, exports and business confidence, GDP growth slowed down to  2.4 % in 2015, 
from 3.1 % in 2014. Unemployment remains high: after declining from 12.6 % in 2013 to 
11.9 % in 2014, it rose to 13.8 % in the third quarter of 2015 and around twice as high 
among young people and women. 

With sharp falls in fuel and transport prices, inflation is estimated to have dropped to  -
0.9 %  in  2015,  although  core  inflation  is  about  3 %,  reflecting  demand  from  Syrian 
refugees.  As  regards  monetary  policy,  the  Central  Bank  of  Jordan  (CBJ)  reduced  the 
rediscount  (policy)  rate  from  4.25 %  in  early  2015  to  3.75 %  in  July  2015,  as  the  CPI 
turned negative and lending growth to the private sector remained subdued. This decision 
was also motivated by the comfortable level of international reserves and expectations of 
a  narrowing  current-account  deficit.  Growing  confidence  in  the  dinar  helped  to  reduce 
the dollarisation ratio from 26.4 % in October 2014 to 24.4 % in October 2015. 

Despite lower oil prices, fiscal consolidation did not advance in 2015. The slowdown of 
the  economy,  combined  with  shortfalls  in  sale  tax,  led  to  an  increase  of  the  primary 
government  deficit (excluding  grants  and transfers  to  NEPCO,  the  electricity  company, 

9 

 
and WAJ, the Jordanian water authority)  to around 5.2 % of GDP in 2015, up from 4.5 
%  of  GDP  in  2014.  This  highlights  Jordan’s  fragile  fiscal  position  as  the  country 
continues to be dependent on foreign grants, which amounted to around 1.8 % of GDP in 
2015With  NEPCO  continuing  to  make  steady  progress  toward  operating  balance,  the 
combined deficit of the central government and NEPCO reached 6.1% of GDP in 2015 
from 9.2% in 2014. On the back of substantial official borrowing (notably from the IMF 
and  the  World  Bank)  and  the  issuing  of  international  bonds  with  guarantees  from  the 
United  States,  public  debt  increased  from  87 %  of  GDP  in  2013  to  89 %  at  the  end  of 
2014 and an estimated 93 % by the end of 2015. 

Despite  weak  exports  and  tourism,  the  current-account  deficit  (excluding  grants)  is 
estimated  to  have  shrunk  to  11.7 %  of  GDP  for  2015,  from  12.1 %  in  2014,  thanks  to 
lower  oil  prices.  Taking  account  of  the  fall  in  grants  received,  the  current  deficit  is 
estimated to have increased from 6.8 % of GDP in 2014 to 9.9 % in 2015. In December, 
international  reserves  in  foreign  currency  stood  at  a  comfortable  level  of  USD  14.7 
billion, equivalent to 6.8 months of the next year’s imports. Credit to the private sector 
continued to improve and banking sector indicators remained sound. 

2.3.  Structural reforms 

The authorities continued to implement an ambitious structural reform agenda aimed at 
correcting macroeconomic imbalances and contributing to more inclusive and sustainable 
growth. In this context, in May 2015 the government published Jordan 2025, a 10-year 
economic  blueprint  to  support  comprehensive  and  sustainable  economic  development 
and  strengthen  social  cohesion.  Progress  with  structural  reforms  in  2015  was 
underpinned  by  various  programmes  with  international  donors,  in  particular  the 
arrangement with  the IMF and the MFA programme with  the EU. Reforms  focused on 
improving the investment and trade framework, PFM and the fight against corruption, tax 
policy  and  administration,  policies  to  foster  employment,  and  the  restructuring  of  the 
energy sector, inter alia through the elimination of fuel subsidies and the introduction of 
a system of cash transfers to compensate households. 

Efforts  to  reduce  the  operating  loss  of  the  national  electricity  company  (NEPCO) 
continued throughout 2015, in line with the IMF programme. Helped by lower oil prices 
and new energy-efficient power plants, NEPCO’s operating losses are estimated to have 
fallen to 4 % of GDP in 2015, from 4.6 % in 2014. However, the authorities deferred the 
announced  15 %  increase  of  NEPCO’s  electricity  tariffs,  despite  the  low  inflation 
environment  in  late  2015.  Although  the  current  low  oil  prices  can  support  a  balanced 
budget, this is a departure from NEPCO’s cost-recovery strategy, which involves annual 
tariff increases until 2017. 

The reform of energy subsidies has progressed swiftly. Following the elimination of fuel 
subsidies in 2012 and their replacement by a cash transfer scheme, the authorities have 
aimed (in line with MFA conditionality) to improve the targeting of this scheme creating 
additional  fiscal  savings.  Progress  in  this  direction  was  substantial  in  2015,  with  the 
establishment  of  a  special  unit  responsible  for  the  development  and  operation  of  a 
national unified registry, one of the conditions attached to the EU’s MFA operation. 

Progress was achieved in PFM, as stipulated by relevant MFA conditions. The authorities 
strengthened  internal  financial  controls  by  adopting  regulations  that  define  better  the 
concept of internal control and internal audit, and expand training. Visible progress was 
also made with the adoption of an income tax law in January 2015. However, although 
the law increased progressivity, it failed to expand the tax base and its contribution to tax 
revenues (0.5 % of GDP) was more modest than initially planned. 

10 

 
The  adoption  of  relevant  legislation  for  the  permanent  operation  of  the  Unemployment 
Fund and the Maternity Fund was a key reform encouraged by the MFA programme; it 
strengthens  the  social  safety  net,  protects  the  unemployed  and  facilitates  women’s 
participation in the labour market. 

The authorities took important steps to improve trade and investment frameworks on the 
basis of MFA conditionality.  Following the adoption of a new investment law in 2014, 
they  advanced  in  2015  with  the  adoption  of  comprehensive  by-laws  which  clarify  tax 
exemptions and incentivise investments in specific economic sectors (including transport, 
tourism  and  agriculture).  In  line  with  best  practice,  they  also  established  a  new 
public-private partnerships (PPP) unit in the Ministry of Finance, which will be dealing 
with the preparation, management and monitoring of PPP projects. Lastly, they adopted 
an  amended  law  on  standardisation  and  metrology,  paving  the  way  for  easier 
standardisation and accreditation of industrial products. 

Progress  on  the  audit  bureau  law  was  unsatisfactory.  Although  steps  were  taken  to 
achieve some of the objectives (adopting certain INTOSAI standards, withdrawing from 
pre-audit activities, enhancing financial independence), a new audit bureau law has yet to 
be adopted by the Jordanian parliament. 

2.4.  Implementation of macro-financial assistance 

On 29  April 2013, following Jordan’s official  request  for MFA in  December 2012,  the 
Commission adopted a proposal for a decision to provide MFA of up to EUR 180 million 
in  the  form  of  a  medium-term  loan.  The  decision  was  adopted  by  the  European 
Parliament  and  the  Council  on  11  December  2013.  The  assistance  was  meant  to 
complement  IMF  funds  under  the  three-year  SBA  that  started  in  August  2012.  It  was 
justified  by  the  negative  macroeconomic  impact  the  Syrian  conflict  was  having  on 
Jordan,  notably  through the  fiscal  cost  of  hosting  refugees  and  the  exogenous  shock  of 
major disruptions to gas flows from Egypt. 

In early 2014, negotiations were concluded on the MoU setting out the economic policy 
measures to be taken by the Jordanian authorities, and on the LFA, both of which were 
signed in March 2014. These MFA conditions aimed to support reforms in the areas of 
PFM and taxation, social security, labour markets, the investment and trade framework, 
and  the  energy  sector.  The  first  tranche  of  the  MFA  operation  (EUR  100  million)  was 
disbursed  on  10  February  and  the  second  (EUR  80  million)  on  15 October  2015. 
Cooperation with the Jordanian authorities was good and the conditions attached to the 
MFA  programme  were  broadly  fulfilled,  with  the  exception  of  that  regarding  the  audit 
bureau law, for which a waiver was granted. Good progress was also recorded with the 
implementation  of  the  IMF  programme,  which  was  successfully  completed  in  August 
2015.   

the 

international  community  decided  at 

In  November  2015,  the  government  published  the  Jordanian  economic  response  to  the 
Syrian  crisis:  piloting  the  holistic  approach,  a  strategy  paper  calling  for  more  support 
from  the  international  community  to  address  the  consequences  of  the  Syrian  crisis.  In 
response, 
the  London  Conference 
(4 February 2016) to pledge around USD 10 billion for countries affected by the refugee 
crisis (Syria,  Jordan,  Lebanon  and  Turkey). This  included a EUR 2.4  billion pledge by 
the European Commission, which entailed a possible new MFA operation to Jordan. The 
Jordanian authorities expressed interest in a follow-up MFA operation and sent a formal 
request  for  such  assistance  in  March  2016.  Following  completion  of  the  IMF  SBA  in 
August 2015, the authorities have been in talks with IMF staff on a new programme with 
an emphasis on structural reforms. 

11 

 
 
 
STATUS OF ECONOMIC REFORM — JORDAN  

1. Price liberalisation 
Prices  are  largely  free,  but  there  are  oligopolistic  conditions  in  several  sectors.  Electricity 
tariffs  and  prices  for  some  basic  foodstuffs  are  still  subject  to  administrative  controls.  The 
government  did  not  implement  fully  the  annual  increases  in  electricity  tariffs  as  outlined  in 
the medium-term energy strategy. 
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.  It is also one of the EU’s partner countries that 
could benefit from a DCFTA agreement. It is a member of both the Great Arabic Free Trade 
Area  (GAFTA)  and  the  Agadir  Agreement  and  has  also  concluded  FTAs  with  the  USA, 
Turkey, Syria, the European Free Trade Association (EFTA) and Singapore.  
3. Exchange rate regime 
Since October 1995, the dinar has been pegged to the US dollar.  
4. Foreign direct investment 
Jordan  is  largely  open  to  foreign  investment.  Its  signing-up  to  the  OECD’s  Declaration  on 
International Investment and Multinational Enterprises in 2013 and the enactment of several 
laws (on income tax, investment, competition and customs) in recent years have significantly 
improved  its  attractiveness  to  foreign  investors.  However,  investors  have  complained  about 
land ownership restrictions, minimum capital requirements, equity ownership restrictions and 
restrictions  on  foreign  investment  in  certain  sectors,  such  as  the  wholesale  and  retail  trade. 
They  have  also  reported  hidden  costs  due  to  bureaucratic  red  tape,  vague  regulations  and 
conflicting jurisdictions.  
5. Monetary policy 
The Central Bank of Jordan has become more independent. Its main monetary policy tools are 
the certificates of deposits (CD) through which it influences retail interest rates in the banking 
system. The Central Bank  has developed a credible track record of ensuring price stability, 
maintaining exchange rate stability and promoting growth. 
6. Public finances and taxation 
A  new  income  tax  law  aimed  at  boosting  tax  revenue  while  increasing  the  progressivity  of 
taxation  was  adopted  in  January  2015,  after  long  delays.  Although  progressivity  has 
improved, the law fails to lower the exemption threshold for individuals and its contribution 
to tax revenues (0.5 % of GDP) is more modest than initially planned. 
7. Privatisation and enterprise restructuring 
Privatisation started in 1986 in the aftermath of an economic crisis and has made significant 
progresssince  then.  Nevertheless,  direct  state  ownership  in  the  mining  sector  and  public 
utilities  remains  significant.  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 generally 
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  restricts  the  development  of  domestic  capital  markets.  In  2012, 
Jordan adopted an Islamic (sukuk) financing law. 

12 

 
 
 
3.  KYRGYZ REPUBLIC 

3.1.  Executive summary  

The  Kyrgyz  economy  has  shown  resilience  in  the  face  of  adverse  external  economic 
circumstances,  particularly  in  the  CIS  region.  In  2015,  GDP  growth  reached  3.5 %, 
thanks  to  the  solid  performance  of  the  agricultural  and  service  sectors,  and  inflation 
remained  stable  at  3.4 %.  The  balance  of  payments  situation  remains  vulnerable, 
reflecting  a structurally large  current-account  deficit.  The  deepening  economic  crisis  in 
Russia and sluggish performance in other CIS countries dampened exports and depressed 
imports  via  lower  remittances.  Thus,  the  current-account  balance  is  expected  to  have 
improved  only  slightly  to  16.0 %  of  GDP  in  2015,  from  16.8 %  in  2014.  Total 
international reserves declined to USD 1.78 billion by the end of 2015, or 3.7 months of 
forecast imports, down from USD 1.96 billion or 4.4 months at the end of 2014. 

On  8  April  2015,  the  IMF  Executive  Board  approved  a  new  three-year  arrangement 
under  the  Extended  Credit  Facility  (ECF)  for  a  sum  equivalent  to  SDR  66.6  million 
(75 %  of  quota,  or  about  USD  92.4  million).  In  December,  the  IMF  successfully 
completed  the  first  programme  review,  which  enabled  the  immediate  disbursement  of 
SDR 9.514 million (USD 13.2 million). 

In December 2011, the Commission adopted a proposal to provide the Kyrgyz Republic 
with  MFA  of  up  to  EUR 30 million  (EUR  15  million  in  loans  and  EUR  15  million  in 
grants).  The  proposal  was  adopted  by  the  European  Parliament  and  the  Council  on  22 
October  2013.  This  exceptional  MFA  operation,  i.e.  outside  the  normal  geographical 
scope  of  the  MFA  instrument,  was  justified  by  the  strength  of  pro-democratic  political 
and  economic  reform  momentum  in  the  country  and  by  the  economic  and  political 
importance of the region for the EU. The first tranche of EUR 15 million was disbursed 
in two instalments: EUR 10 million in grants in June 2015 and EUR 5 million in loans in 
October 2015. The grant element of the second tranche was disbursed in February 2016 
and the loan element was disbursed on 13 April 2016. 

3.2.   Macroeconomic performance 

In  2015,  the  Kyrgyz  economy  registered  3.5 %  GDP  growth  (3.6 %  in  2014),  while 
non-gold  GDP  growth  was  somewhat  more  robust  (4.5 %),  thanks  to  the  solid 
performance  of  the  agricultural  and  service  sectors.  The  new  government  pursued  a 
policy  of  fiscal  expansion  to  stimulate  economic  activity;  as  a  result,  the  overall  fiscal 
deficit  reached  5.4 %  of  GDP,  as  compared  with  3.9 %  in  2014.  A  significant 
acceleration in spending combined with an adverse exchange-rate effect caused a steady 
build-up in the public debt stock, which reached 68.0 % of GDP at year-end 2015. Most 
of it was held in foreign currency, albeit owed to official creditors at long maturities and 
concessional interest rates. 

As  a  result  of  a  tighter  monetary  stance  and  the  impact  on  household  consumption  of 
lower  remittance  inflows,  the  headline  inflation  rate  fell to  3.4 %  (y-o-y)  in  December, 
down  from  10.5 %  in  December  2014.  The  depreciation  of  the  Russian  rouble  and  the 
Kazakhstani tenge relative to the US dollar put considerable pressure on the som. In spite 
of  central  bank  interventions  in  the  foreign-exchange  market,  the  som  lost  29 %  of  its 
value  in  dollar  terms  in  2015.  The  depreciation  was  accompanied  by  a  further 
dollarisation  of  the  economy,  with  foreign  currency  deposits  in  banks  accounting  for 
65.6 % of total deposits at year-end 2015, up from 56.3 % in 2014. 

The  balance-of-payments  situation  of  the  country  remains  vulnerable,  reflecting  a 
structurally large current-account deficit. Non-gold exports and imports fell during 2015 

13 

 
in US dollar terms, reflecting the weakening regional economic environment. Although 
exports are projected to have declined faster than imports by volume, the significant drop 
in import prices helped narrow the trade deficit by 37.9 %. However, this improvement 
in the trade balance was offset by a decline in transfers (mostly remittances). Thus, the 
current-account deficit remains very large, representing 16.0 %  of GDP in 2015. Total 
international reserves contracted to USD 1.78 billion by the end of 2015, or 3.7 months 
of forecast imports, down from USD 1.96 billion or 4.4 months at the end of 2014. 

3.3.  Structural reforms 

The  Kyrgyz  Parliament  adopted  a  sustainable  development  programme  in  December 
2013,  in  the  context  of  the  implementation  of  the  2013-2017  National  Sustainable 
Development Strategy. The programme focuses on improving the business environment, 
reforming  the  public  sector,  strengthening  the  financial  system  and  addressing 
infrastructure  development  needs  with  a  view  to  achieving  high,  broad-based  and 
inclusive  growth  and  reducing  poverty.  It  also  highlights  the  need  for  additional 
financing from donors to ensure full implementation. 

The  Private  Sector  Development  Strategy  approved  in  February  2015  should  give  new 
impetus  to  reforms.  It  targets  the  removal  of  impediments  to  business  activity  and 
improvements  in  the  investment  climate.  It  should  also  bolster  current  reforms  in  the 
financial sector, such as the introduction of a credit registry system, PPPs and inspections 
as part of regulatory reform. 

The authorities continue to take measures to strengthen the banking system in accordance 
with  the  2013  FSAP  update.  These  include  a  decision  to  harmonise  minimum  capital 
requirements by raising banks’ paid-in capital in three steps by 2017, and adoption of a 
new  Banking  Code.  In  addition,  finalising  the  audit  of  the  debt  resolution  agency 
(DEBRA) remains a priority, so that DEBRA and the banks under its receivership can be 
liquidated  without  delay.  The  Kyrgyz  Republic  has  received  financing  from  the  World 
Bank  for  consulting  services  on  the  audit  of  DEBRA  and  bankrupt  banks  under  its 
receivership. 

With respect to PFM, the authorities have put in place the basic legal framework for the 
introduction of a single treasury account, in line with the MoU with the EU in the context 
of the MFA programme. 

The  authorities  have  enacted  a  new  public  procurement  law  and  an  ‘anti-money 
laundering/combating  the  financing  of  terrorism’  law  consistent  with  the  2012  financial 
sector  assessment  programme  (FATF)  standard.  The  new  law  will  remove  loopholes  in 
public procurement, decrease opportunities for corruption and increase ‘value for money’ 
from public funds. The authorities also intend to submit a request to join the Council of 
Europe’s Criminal Law Convention on Corruption with a view to becoming a member of 
the Group of States against Corruption (GRECO). 

On 12 August 2015, the Kyrgyz Republic formally joined the Eurasia Economic Union 
(EEU).  The  government  has  notified  the  WTO  Secretariat  of  a  review  of  tariffs  in 
relation  to  the  country’s  membership  in  the  Eurasian  Union  and  is  now  preparing  to 
negotiate with WTO members. 

3.4.  Implementation of macro-financial assistance 

The sharp drop in economic growth and the worsening of the external position in 2010, 
which were caused by external shocks and internal political and ethnic conflicts, led to a 
sizeable  external  financing  gap.  At  an  international  donor  conference  in  July  2010,  the 
EU  pledged  to  support  the  country’s  recovery.  The  Kyrgyz  authorities  requested  MFA 

14 

 
support  from  the  EU  in  October  2010.  Following  agreement  on  an  IMF  programme  in 
the  Commission  adopted  an  MFA  proposal  for  a  maximum  of 
June  2011, 
EUR 30 million  (EUR  15  million  in  grants  and  EUR  15  million  in  loans)  on 
20 December 2011, to be disbursed in two tranches. 

The  adoption  of  the  MFA  decision  was  delayed  by  a  disagreement  between  the 
co-legislators (European Parliament and Council) over the procedure to be used for the 
adoption  of  the  MoU.  A  compromise  was  found  in  June  2013  and  the  decision  was 
formally  adopted  on  22  October  2013.  The  relevant  MoU,  grant  agreement  and  LFA 
were signed in October 2014 and ratified by the Kyrgyz parliament in February 2015. 

On  22  May  2015,  following  agreement  in  April  on  a  new  IMF  programme  under  the 
ECF, the Commission adopted a decision to release the first MFA tranche. The first grant 
instalment of EUR 10 million was disbursed on 11 June and the first loan instalment of 
EUR 5 million on 15 October. 

Considering  the  satisfactory  progress  of  the  Kyrgyz  authorities  in  implementing  policy 
conditionality  under  the  MFA  programme  and  theirsatisfactory  track  record  with  the 
implementation of the IMF programme (as confirmed by the successful first programme 
review completed on 4 December), the Commission approved the release of the second 
tranche  (grant  of  EUR  5  million  and  loan  of  EUR  10  million)  on  25 January  2016  and 
disbursed it in the first half of 2016. 

15 

 
 
 
STATUS OF ECONOMIC REFORM — KYRGYZ REPUBLIC 

  Price liberalisation 

Most prices are liberalised, but administered prices are maintained for some utilities. 

  Trade liberalisation 

The  Kyrgyz  Republic  has  been  a  member  of  the  WTO  since  1998  and  has  a  very  open 
economy,  with  a  trade-to-GDP  ratio  of  about  140 %.  The  bulk  of  its  non-gold  exports  go  to 
Kazakhstan  and  Russia.  In  December  2014,  it  signed  an  accession  agreement  with  the 
Russian-led EEU, thereto grouping Russia, Belarus, Kazakhstan and Armenia. 

  Exchange rate regime  

The National Bank of the Kyrgyz Republic (NBKR) operates a managed floating exchange rate 
regime allowing the exchange rate to adjust to substantial pressures or shocks while aiming to 
maintain a competitive exchange rate.  

  Foreign direct investment 

FDI  is  focused  mainly  on  large  infrastructure  projects,  notably  in  the  transport  and  energy 
sectors,  which  are  mostly  financed  through  concessional  loans  for  public  investment 
programmes and FDI (notably from Russia and China). 

  Monetary policy 

The NBKR’s  main  objective is to guarantee price  stability, while  maintaining  the purchasing 
power  of  the  national  currency.  It  aims  to  keepthe  inflation  range  within  5  to  7 %  in  the 
medium term.  

  Public finances 

Public  finances  suffer  from  corruption  and  a  narrow  tax  base,  as  a  result  of  a  large  informal 
economy (estimated in official statistics at 20 % of GDP, but potentially much larger).  

  Privatisation and enterprise restructuring 

Political  change  in  2010  led  to  the  reversal  of  some  of  the  previous  administration’s 
privatisation  deals  in  the  energy  and  telecommunications  sectors,  due  to  allegations  of 
nepotism  and  corruption. 
the 
telecommunications  and  banking  sectors.  After  several  failed  attempts,  the  authorities  finally 
managed to privatise the large Zalkar Bank in late 2013. 

initiated  privatisation 

the  government 

In  2011, 

in 

  Financial sector reform 

The  2010  banking  crisis  revealed  deficiencies  in  the  NBKR’s  resolution  powers  and 
independence.  Consequently,  banking  regulations  have  been  amended  and  upgraded  to  a 
Banking  Code,  which  would  strengthen  the  NBKR’s  powers  of  early  intervention  and 
resolution.  However,  while  a  new  Banking  Law  was  submitted  to  the  Kyrgyz  parliament  in 
August 2015, the Code has not yet been adopted. 

16 

 
 
 
 
 
4. 

TUNISIA 

4.1.  Executive summary 

In parallel with a protracted and fragile political transition since the 2011 revolution, the 
Tunisian  economy  has  suffered  from  continual  domestic  unrest,  regional  instability 
(including  the  impact  of  the  Libyan  conflicts)  and  a  weak  international  environment 
(particularly in the euro area). These unfavourable developments substantially weakened 
its growth performance and its fiscal and balance-of-payments positions. In 2015, largely 
as a result of the negative economic impact of terrorist attacks (particularly on tourism, 
the  transport  sector  and  investment)  and  of  production  disruptions  due to  social  unrest, 
growth  was  much  weaker  than  originally  projected,  while  the  situation  negatively 
affected  an  already  vulnerable  balance  of  payments  and  fiscal  position,  creating 
significant financing needs. 

In  June  2013,  the  IMF  Board  approved  a  24-month  SBA  with  Tunisia  for 
USD 1.75 billion,  which  was  subsequently  extended  until  December  2015;  a  successor 
arrangement is currently being negotiated. In this context, in May 2014, the EU approved 
complementary  MFA  of  EUR  300  million 
loans,  of  which 
EUR 200 million  was  disbursed  in  two  equal  tranches  in  May  and  December  2015 
respectively. It is expected that the remaining EUR 100 million will be disbursed during 
the course of 2016. 

the  form  of 

in 

In August 2015, in the context of a worse economic and balance of payments position, 
characterised  by  growing  financial  needs,  Tunisia  asked  the  EU  for  additional  MFA 
support.  In  response  to  this  request,  in  February  2016  the  Commission  adopted  a 
proposal for a new MFA operation of up to EUR 500 million in loans, which could be 
approved abound mid-2016. 

4.2.  Macroeconomic performance 

Following two years of stable, but low GDP growth in the context of the IMF programme 
(2.3 % in 2013 and 2014), growth in 2015 is estimated at about 0.3 %, as compared with 
a  forecast  of  3 %  at  the  beginning  of  the  year.  Tunisia’s  economy  suffered  a  strong 
setback  largely  as  a  consequence  of  the  terrorist  attacks  of  2015,  which  affected  key 
economic sectors. This downward revision was influenced by the negative effect of the 
attacks on the tourism sector (which contributes about 7 % of GDP and occupies around 
15 % of the workforce), the transport sector (also contributing about 7 % of GDP, 20 % 
of  which  depends  on  tourist  traffic)  and  on  foreign  investors’  sentiment,  coupled  with 
disruptions in phosphate production, transport and other sectors (due to work stoppages 
and strikes). Growth will not be sufficient to make a significant dent on unemployment, 
which remains high (15 %), particularly among the young and graduates (over 30 %) and 
women  (21.6 %).  Furthermore,  employment  in  the  informal  economy  still  accounts  for 
around 50 % of workers aged between 15 and 24. 

Inflation  averaged  5.5 %  in  2014  and  is  on  a  downward  trend,  in  view  of  declining 
international  commodity  prices,  stable  domestic  food  production,  the  weakening  of 
domestic demand and a prudent monetary policy. Headline inflation is expected to have 
moderated to an average of 4.9 % in 2015 and to stay at around 4 % over the next five 
years.  After  tightening  monetary  policy  between  2012  and  mid-2014  in  response  to 
inflationary  pressures  and  the  deterioration  in  external  and  fiscal  balances,  the  central 
bank cut its benchmark rate by 50 basis points (to 4.25 %) last October, to help reignite 
faltering GDP growth amid slowing CPI inflation. 

17 

 
As regards public finances, Tunisia achieved  a certain degree of  fiscal consolidation in 
2014,  as  the  structural  fiscal  balance  (which  notably  excludes  banking  recapitalisation 
costs  and  other  one-off  items)  declined  from  5.1 %  of  GDP  in  2013  to  4.2 %  in  2014. 
However, in 2015, the structural deficit is estimated to have increased to 4.7 % of GDP, 
driven largely by expenditure measures taken in the aftermath of the terrorist attacks and 
despite expenditure savings generated by the lower-than-expected oil prices. Meanwhile, 
general  government  debt  continued  to  increase,  reaching  50 %  of  GDP  in  2014,  and  is 
forecast to peak at 61 % of GDP by the end of 2018, before the trend starts to reverse. 
Also, a substantial increase in public debt amortisations is scheduled for the coming two 
years (from about USD 600 million in 2015 to over USD 1.4 billion in 2017 and almost 
USD 1.2 billion in 2018). 

Turning to the balance of payments, the current-account deficit widened further in 2014, 
reaching  8.9 %  of  GDP  as  compared  with  8.3 %  in  2013,  and  remained  unsustainably 
high  in  2015,  despite  the  decline  in  oil  prices,  weaker  domestic  economic  activity  and 
improved  export  performance.  The  negative  effects  on  tourism  of  the  Sousse  terrorist 
attack  contributed  to  the  current  account  deficit  being  pushed  back  towards  8.8 %  of 
GDP. Private capital inflows in Tunisia have also weakened since 2011, contributing to 
the vulnerabilities of the balance of payments.  Net FDI, which averaged almost 5 % of 
GDP in 2005-2010, fell to just over 2 % in the last two years. In this context of a large 
current-account  deficit  and  weaker  capital  inflows,  Tunisia  had  increasingly  to  rely  on 
official  financial  inflows.  In  2015,  Tunisia  also  managed  to  cover  part  of  its  external 
financing gap by issuing in January 2015 a 10-year, USD 1 billion eurobond at 5.75 %, 
which  was  oversubscribed  by  international  investors  despite  not  including  a  sovereign 
guarantee by a foreign donor. 

Official  foreign  exchange reserves ended  2015 at USD  7.5 billion, or  the equivalent  of 
barely  three  months  of  imports.  This  is  well  below  the  USD  8.2  billion  the  IMF  had 
foreseen  for  the  end  of  the  year  in  the  context  of  the  6th  review  of  the  programme 
(completed  in  September  2015)  and  compares  with  a  USD  10.1  billion  reserve  target 
under the original programme. External debt increased from 48 % of GDP in 2011 to an 
estimated 56.2 % in 2014, and it is expected to peak at 72.3 % of GDP in 2018 before the 
trend starts to reverse. Tunisia’s sovereign ratings have been downgraded several times 
since 2011, the last time in 2014 (from Ba2 to Ba3 by Moody’s and from BB to BB- by 
Standard & Poor’s). 

4.3.  Structural reforms 

Tunisia  continues  to  face  significant  structural  reform  challenges.  While  it  enjoyed  a 
period  of relatively  high  per  capita economic growth  in  2000-2010 (one of the highest 
among the oil importers in the Middle East and North Africa), it continues to suffer from 
a number of structural deficiencies. In particular, it relies excessively on export-oriented, 
low  value-added  industry  located  near  the  coast,  which  contributes  to  an  unbalanced 
pattern  of  regional  economic  development  and  suffers  from  rigid  labour  markets  and 
skills  mismatches,  which  contributes  to  high  unemployment,  particularly  among  young 
people.  Coupled  with  perceptions  of  a  lack  of  transparency  and  weak  economic 
governance,  the  growth  model  has  resulted  in  an  unfair  distribution  of  economic  gains 
across the population. 

As in 2014, progress on structural reform was mixed. Ambitious reforms such as the new 
Investment  Code  were  marred  by  a  protracted  period  of  stakeholder  consultation  (this 
lasted  about  two  years),  before  finally  being  adopted  by  the  Tunisian  parliament  in 
December  2015.  Similarly,  following  a  two-year  consultation  process  on  tax  reform 
(prepared  with  IMF  technical  assistance),  some  important  measures,  also  supported  by 

18 

 
the  EU  MFA  operation,  were  incorporated  in  the  2016  budget  law.  Other  economic 
reforms, particularly relating to the business climate, were hampered by the delays in the 
legislative agenda. Nevertheless, the adoption of the law on competition in August 2015 
and the PPP law in December, and progress on the bankruptcy law, which was adopted 
by the cabinet in November, are encouraging developments. There has also been progress 
in the recapitalisation of the three major public banks and on the new central bank law, a 
condition under the EU MFA operation. A revised banking law (also an MFA condition), 
including  key  aspects  such  as  a  banking  resolution  mechanism,  new  prudential 
regulations  and  improved  governance,  and  new  bank  bankruptcy  provisions,  is  also 
awaiting  parliamentary  approval.  This  law  also  provides  for  the  creation  of  a  deposit 
guarantee scheme, which is part of MFA conditionality. 

Overall,  reform  progress  has  been  constrained  by  the  delicate  political  transition, 
although  the  recent  positive  momentum  is  encouraging  and  the  government  remains 
committed to pursuing a positive reform path. The bulk of the groundwork for some key 
reforms  (notably  on  tax  policy  and  administration,  improvement  of  the  business  and 
investment  climate,  and  reform  of  the  financial  sector)  has  been  substantial  and  should 
pave  the  way  for  the  implementation  of  deeper  reforms.  Full  implementation  of  other 
reforms  (e.g. price  subsidy  reform  and  the  improvement  of  the  social  safety  net)  will 
require further intermediate steps, strong political commitment and support. 

4.4.  Implementation of macro-financial assistance 

The Tunisian parliament’s ratification of the legal documents on 4 March 2015 enabled 
the Commission to proceed with the implementation of the EUR 300 million of MFA1, 
which is being disbursed in three equal tranches of EUR 100 million. The first tranche, 
disbursed  in  May,  was  conditional  on  good  progress  under  the  IMF’s  SBA.  With  the 
MoU  conditions  having  been  satisfied  in  the  course  of  October  and  November  and  the 
6th review of the IMF programme having been successfully completed on 30 September, 
the Commission disbursed the second tranche of the assistance in December 2015. It is 
expected  that  the  third  and  last  tranche  of  EUR  100  million  will  be  disbursed  in  the 
course of 2016, provided that the policy conditions under the MoU are met.  

In  February  2016,  following  a  request  from  Tunisia,  the  Commission  submitted  to  the 
European  Parliament  and  the  Council  a  proposal  to  grant  a  second  MFA  operation  to 
Tunisia,  for  a  maximum  of  EUR  500  million,  in  the  form  of  medium-term  loans.  The 
new operation could be adopted in mid-2016 and would be disbursed in three tranches in 
2016 and 2017. 

1   Decision No 534/2014/EU of the European Parliament and of the Council of 15  May 2014 providing 

macro-financial assistance to the Republic of Tunisia (OJ L 151, 21.5.2013). 

19 

 
 
 
                                                            
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  1995.  Tariff  dismantling  under  the  Agreement  was 
completed in 2008. 
3. Exchange rate regime 
The Central Bank of Tunisia changed its operational framework for exchange rate policy in 
2012  to  make  the  rate  more  flexible.  The  Tunisian  dinar  is  fully  convertible  for  current 
account  transactions  but  there  are  still  limitations  on  its  convertibility  for  capital  account 
transactions. 
4. Foreign direct investment 

to  exporting  enterprises.  These  arrangements  were  reinforced  with 

Since  1972,  FDI  has  benefited  from  the  introduction  of  offshore  arrangements  offering 
incentives 
the 
promulgation of the Investment Incentives Code. The approach has shown its limitations over 
the  last  decade,  however,  as  the  favourable  treatment  accorded  to  the  offshore  sector  has 
come at the expense of other sectors subject to much heavier restrictions imposed in 1993. 
5. Monetary policy 

The  Central  Bank’s  mandate  is  to  ensure  price  stability  and  inflation.  It  is  an  independent 
institution and since the revolution the government has undertaken a review of the legislation 
and regulations to strengthen its independence and good governance. It acts as regulator and 
supervisor of the financial sector; both functions are currently being strengthened under the 
IMF  programme  and  thanks  to  EU  and  World  Bank  support.  A  new  law  sent  in  November 
2015  to  the  Tunisian  parliament  for  adoption  will  strengthen  the  Central  Bank’s 
governance,  establish  its  function  as  a  lender  of  last  resort  and  create  a  deposit 
guarantee scheme. 
6. Public finances and taxation 

Central government expenditure made up nearly 28.4 % of GDP in 2015. Nearly 47 % of this 
was expenditure on wages and salaries. Transfers and subsidies, of which the bulk are energy 
and  food  subsidies,  represented  around  5.2 %  of  GDP.  Both  the  subsidy  system  and  the 
current complex and regressive tax system are undergoing protracted reform. 
7. Privatisation and enterprise restructuring 

Privatisation  almost  ground  to  a  halt  following  the  2011  revolution,  partly  because  it  is 
associated with questionable practices and processes under the previous administration. The 
repossession and sale of assets belonging to the previous ruling elite are ongoing.  
8. Financial sector 

The  country’s  three  largest  public  banks,  which  represent  40 %  of  total  banking  system 
assets, are hampered by weak lending practices, governance issues and excessive exposure to 
the  tourism  sector,  which  has  been  severely  impacted  since  the  revolution.  All  this  has 
increased  vulnerabilities  in  the  sector.  An  IMF/World  Bank  financial  system  stability 
assessment in 2012 warned that the banking system had recapitalisation needs of around 2 % 
of  GDP,  but  the  recapitalisation  carried  out  in  2015  finally  amounted  to  1 %.  Given  the 
negative impact of the 2015 terrorist attacks on the tourism sector, additional financing needs 
for  these  banks  are  likely  to  arise  in  the  short  to  medium  term.  A  revised  banking  law, 
including  key  aspects  such  as  a  banking  resolution  mechanism,  new  prudential  regulations, 
and  improved  governance  and  new  bank  bankruptcy  provisions,  is  awaiting  parliamentary 
approval. 

20 

 
 
 
 
 
5.  UKRAINE 

5.1.  Executive summary 

In  2015,  Ukraine’s  recession  deepened.  The  decline  in  real  GDP  reached  9.9 %  as  a 
result of weak consumer confidence and loss of productive capacity associated with the 
armed conflict in the east of the country. As the conflict subsided, at least provisionally, 
and  substantial  international  financial  support  had  been  made  available,  Ukraine’s 
economy showed signs of stabilisation in the second half of the year. As a result of an 
acute currency crisis in early 2015 and sharp increases in gas and electricity tariffs, CPI 
inflation  exceeded  60 %  year-on-year  in  April  before  subsiding  substantially  thanks  to 
reinforced currency controls and strong monetary policy tightening. 

The high inflation environment supported budget revenue growth in nominal terms and, 
coupled with conservative expenditure policies, contributed to a significant reduction of 
the budget deficit to 1.6 % of GDP in 2015. Despite fiscal consolidation, public debt rose 
by 10 percentage points on the year to nearly 80 % of GDP at the end of the year, as a 
result  of  the  ongoing  currency  depreciation.  At  the  same  time,  Ukraine’s  external 
adjustment continued, as the deficit on the current account went down to 0.2 % of GDP 
in  2015  on  the  back  of  ongoing  sharp  import  contraction,  which  outpaced  the  parallel 
decline  in  exports  (in  terms  of  both  volume  and  prices).  The  pace  of  private  capital 
outflows  slowed  over  the  course  of  the  year  as  macroeconomic  stabilisation  started  to 
take hold. Meanwhile, official assistance flows enabled Ukraine to replenish the stock of 
gross international reserves, to USD 13.3 billion at the end of 2015, from USD 7.5 billion 
a  year  earlier2.  As  part  of  the  four-year  IMF  programme  launched  in  March  2015, 
Ukraine  reached  an  agreement  with  private  creditors  over  the  restructuring  of  USD  19 
billion  of  external  debt.  This  involved  maturity  extension  and  debt  relief  of 
approximately  USD  3  billion.  In  the  meantime,  Ukraine  failed  to  agree  on  the 
restructuring  of  a  USD  3  billion  eurobond  held  by  Russia  and  defaulted  on  this 
instrument on its maturity in December 2015. 

In January 2015, in view of Ukraine’s rapidly deteriorating economic situation and weak 
balance-of-payments position as a result of the armed conflict in the eastern part of the 
country, the Commission proposed a new MFA operation of up to EUR 1.8 billion in the 
form of loans to be disbursed in three equal tranches of EUR 600 million. This followed 
two  MFA  programmes  (MFA  I  and  MFA  II)  initiated  in  2014  for  a  combined 
EUR 1.61 billion.  The  new  operation  was  adopted  by  the  European  Parliament  and  the 
Council  in  April  2015  and  entered  into  force  in  July,  following  completion  by  the 
Ukrainian authorities of all legislative procedures. The first tranche under MFA III was 
disbursed  in  July.  It  followed  the  disbursement  of  the  final  remaining  tranche  of  EUR 
250  million  from  the  previous  operations  in  April.  In  total,  therefore,  the  EU  extended 
MFA for EUR 850 million to Ukraine in 2015. 

5.2.   Macroeconomic performance 

In  2015,  Ukraine’s  recession  deepened.  The  decline  in  real  GDP  reached  9.9 %  in  real 
terms, as compared with 6.6 % a year earlier. This strong drop in output was fuelled by 
weak  consumer  confidence  and  loss  of  productive  capacity  as  a  result  of  the  armed 
conflict in the eastern part of the country. In addition, economic activity was negatively 
affected  by  a  weaker  harvest,  the  slump  in  global  commodity  prices  and  Russia’s 
obstructive trade policies. As the conflict subsided, at least provisionally, and substantial 

2   In  2015,  Ukraine  received  more  than  USD  10  billion  of  official  financial  support,  of  which 
USD 6.5 billion was from the IMF. The other major creditors were the EU, the United States and the 
World Bank, each of which extended around USD 1 billion. 

21 

 
                                                            
international financial support was made available, Ukraine’s economy showed signs of 
stabilisation  in  the  second  half  of  the  year.  The  annual  pace  of  economic  contraction 
eased significantly and in Q3 quarter-on-quarter growth was reported for the first time in 
two years. 

An acute currency crisis in early 2015, coupled with sharp increases in gas and electricity 
tariffs, pushed CPI inflation up to more than 60 % year-on-year in April. In response, the 
National Bank of Ukraine (NBU) introduced pervasive currency controls and raised the 
key  policy  rate  by  16  percentage  points  to  30 %.  These  restrictive  measures  yielded 
results and, in the absence of demand-side pressures, consumer price growth moderated 
to 20.9 % year-on-year in March 2016. It is expected to furtner slow down in the course 
of  the  year  on  the  back  of  favourable  base  effects  and  weak  demand-side  pressures.  In 
October 2015, in view of the improved inflationary prospects, the NBU lowered the key 
policy rates by a cumulative eight percentage points, to 22 %. 

Budgetary  execution  came  in  well  above  expectations  in  2015  as  a  result  of  strong 
nominal  revenue  growth  (driven  largely  by  the  higher-than-anticipated  inflation)  and 
tight expenditure policies. The consolidated budget deficit amounted to 1.6 % of GDP in 
2015, well below the 4.2 % target agreed with the IMF and a significant improvement on 
the 4.5 % fiscal gap in 2014. In addition, the authorities were successful in significantly 
reducing  the  operational  deficit  of  the  Naftogaz  gas  company  to  an  estimated  1.5 %  of 
GDP  in  2015,  from  5.6 %  a  year  earlier.  Despite  the  stronger-than-projected  fiscal 
outcome,  public  debt  metrics  worsened  further  in  the  course  of  2015,  as  general 
government  debt,  including  state  guarantees,  reached  79.4 %  of  GDP  at  the  end  of  the 
year, up from 69.4 % a year earlier and 39.9 % at the end of 2013. Given the high foreign 
exchange component  (70 %  of  the  total  debt), the  increase was  again  driven  mainly  by 
the ongoing depreciation of the local currency. Stronger deterioration was averted by the 
conclusion  of  a  debt  restructuring  deal  with  private  bondholders  and  other  creditors, 
which  resulted  in  debt  relief  of  approximately  USD  3  billon.  The  deal  also  involved  a 
maturity extension of some USD 19 billion of debt,  thus significantly easing Ukraine’s 
liquidity constraints over the short to medium term.   

On  the  external  side,  Ukraine’s  current  account  continued  its  adjustment,  albeit  mainly 
due  to  a  sharp  contraction  of  imports,  which  slightly  outpaced  the  drop  in  exports  (in 
terms of both volume and prices). The current-account deficit shrank to 0.2 % of GDP in 
2015, from 3.4 % a year earlier and 9.0 % in 2013. The pace of private capital outflows 
slowed over the course of 2015 as macroeconomic stabilisation started to take hold. Net 
FDI  rebounded  strongly  to  USD  3  billion,  albeit  mostly  as  a  result  of  the  ongoing 
recapitalisation  in  the  banking  sector  (rather  than  fresh  greenfield  investment). 
Meanwhile,  official  assistance  flows  enabled  Ukraine  to  replenish  its  stock  of  gross 
international reserves — to USD 13.3 billion at the end of 2015 from USD 7.5 billion a 
year  earlier.  Successful  debt  restructuring  by  the  sovereign  and  corporate  sectors  and 
ongoing  deleveraging  by  businesses  and  banks  resulted  in  a  decrease  in  Ukraine’s 
external debt in 2015 in absolute US dollar terms.However, gross external debt-to-GDP 
ratio increased by nearly 40 percentage points in 2015 to 131 % at the end of the year as 
a result of the declining GDP in US dollar terms. 

Supported  by active  central  bank policies and gradual macroeconomic stabilisation,  the 
banking sector witnessed the first signs of recovery in 2015. Deposit growth, in particular 
in local currency, was recorded for most of the year. As a result, the liquidity position of 
the sector improved and thus the NBU scaled down its financial support. Despite these 
positive  developments,  credit  activity  remained  weak,  while  ongoing  high  loan-loss 
provisions  led  to  a  further  increase  in  the  cumulative  loss  for  the  sector  to  UAH 57.3 
billion,  which  translated into a 5.1 %  negative  return on assets.  The proportion  of non-

22 

 
performing  loans  reached  25.6 %  at  the  end  of  Q3 2015,  up  from  19 %  at  the  end  of 
2014. 

5.3.  Structural reforms 

In  2015,  Ukraine  made  progress  on  its  wide-ranging  reform  agenda,  benefiting  from 
significant financial and technical assistance from multilateral and bilateral creditors. The 
new MFA operation launched by the EU in 2015 focused on reforms in six areas: PFM, 
governance  and  transparency  (including  anti-corruption,  public  administration  and 
reform of SOEs), energy, the financial sector, the business environment, and social safety 
nets. In the course of the year, there was progress with reforms in all these areas, albeit at 
a slower-than-expected pace on several occasions. 

legislation 

regards  PFM, 

the  authorities  adopted 

transparency, 
As 
non-discrimination  and  competition  in  the  area  of  public  procurement.  In  September 
2015,  public  access  to  evaluation  records  was  improved  with  the  introduction  of 
amendments  to  the  public  procurement  law.  In  December,  the  Ukranian  parliament 
adopted a law on e-procurement. The new law on the Accounting Chamber of Ukraine 
(ACU),  the  supreme  external  audit  institution  in  the  country,  entered  into  force  in 
August.  Apart  from  extending  the  ACU’s  remit  to  SOEs,  the  law  strengthened 
transparency and public accountability by providing for the publication of audit reports. 

fostering 

The adoption of the 2016 budget was accompanied by significant changes to the tax and 
budget  codes  aimed  at  improving  tax  administration  and  increasing  fiscal-policy 
transparency and credibility by reducing discretionary powers for budgetary amendments 
throughout  the  year.  Following  lengthy  discussions,  the  authorities  failed  to  reach  an 
agreement on a comprehensive tax reform, but they did take the first real steps towards 
the much-needed broadening of the tax base. In view of a sharp fall in payroll taxes that 
significantly increased the pension fund deficit, further measures are needed to broaden 
taxation and restructure pension system financing3. 

Ukraine established a national anti-corruption bureau in April. The bureau did not start 
investigations  until  the  end  of  2015,  however,  due  to  a  significant  delay  in  the 
appointment  of  the  specialised  anti-corruption  prosecutor,  which  finally  took  place  in 
November.  There  was  also  considerable  delay  with  the  establishment  of  the  third  new 
anti-corruption institution, the National Agency for Prevention of Corruption. Despite the 
launch  of  the  procedure  for  the  appointment  of  its  top  management  in  May  2015,  the 
selection was finalised only in March 2016. 

At  the  end  of  2015,  Ukraine  made  the  first  step  towards  major  public  administration 
reform  by  adopting  a  civil  service law.  This  should  be  bolstered  by the  introduction  of 
the  necessary  primary  and  secondary  legislation  and  the  adoption  of  a  comprehensive 
strategy  for  the  reform  of  the  public  administration.  Significant  progress  was  also 
achieved  in  improving  SOE  transparency  and  governance.  The  authorities  launched 
regular reporting on the biggest SOEs and initiated a process for merit-based managerial 
appointments.  In  a  move  to  strengthen  reporting  obligations,  a  list  of  companies  to  be 
converted from unitary to joint stock companies was adopted and financial audits were 
launched. Despite ambitious plans, the privatisation process did not start in 2015, as there 
was insufficient political support for the requisite legislative changes. 

3   As  of  2016,  a  single  social  security  contribution  of  22 %  has  replaced  the  various  individual 
contributions totalling nearly 41 % on average and the 3.6 % social security contribution by employees 
has  been  abolished.  The  reform  is  aimed  at  encouraging  competitiveness  and  reducing  the  high 
incidence of informal work (estimated at over 40 % in 2015). 

23 

 
                                                            
In  the  energy  sector,  reform  efforts  included  the  introduction  of  a  new  gas  market  law 
and  changes  to  secondary  legislation  for  its  successful  implementation.  The  new  law 
should  serve  as  a  basis  for  the  reform  of  the  sector  and  the  restructuring  of  Naftogaz. 
Efforts  continued  to  adjust  the  unviable  energy  subsidy  model  and  thus  strengthen 
Naftogaz’  financial  position.  As  a  result,  residential  gas  and  electricity  tariffs  were 
increased significantly. In order to protect vulnerable households from this increase, an 
existing  subsidy  scheme  was  strengthened  and  extended  to  cover  some  5.4  million 
households as of early January 2016. While gas sector reforms advanced at a steady pace, 
there  was  little  progress  in  other  key  areas  related  to  the  energy  reform,  such  as  the 
adoption  of  a  new  law  on  the  energy  market  regulator  and  the  introduction  of  a  new 
electricity market law, which did not place in 2015 as initially expected. 

The  NBU  continued  the  process  of  banking  sector  consolidation  and  clean-up  by 
intervening  in  a  number  of  lenders  that  faced  financing  shortfalls,  while  further 
improving the operational and financial capacity of the deposit guarantee fund. Measures 
were taken to strengthen the capital base of commercial banks and to downsize related-
party lending. 

5.4.  Implementation of macro-financial assistance 

In  January,  in  view  of  Ukraine’s  rapidly  deteriorating  economic  situation  and  weak 
balance-of-payments position as a result of the armed conflict in the eastern part of the 
country,  the  Commission  proposed a  new  MFA  operation  consisting  of  a loan  of  up  to 
EUR 1.8 billion,  to  be  extended  in  three  equal  tranches  of  EUR  600  million.  The 
European  Parliament  and  the  Council  adopted  the  proposal  in  April  2015.  The  MoU 
laying down the agreed policy measures attached to the programme was signed in May 
and ratified by the Ukrainian parliament in June. In July, the Commission (on behalf of 
the  EU)  made  the  first  disbursement  of  EUR 600  million.  In  the  meantime,  in  April,  it 
completed MFA I (an operation for a total of EUR 610 million which had been launched 
immediately after the economic crisis in Ukraine unfolded in early 2014), with the third 
and  final  disbursement  of  EUR 250 million.  The  two  earlier  tranches,  for  a  combined 
EUR 360 million, had been disbursed in 2014. 

Overall, the Commission thus extended MFA for EUR 850 million to Ukraine in 2015, 
bringing  total  MFA  disbursements  to  EUR  2.21  billion4.  Ukraine  can  still  access  two 
tranches of EUR 600 million from MFA III. This assistance is conditional on successful 
implementation  of  the  policy  measures  specified  in  the  MoU  and  continuous  progress 
with  the  IMF  programme  for  Ukraine  —  a  four-year  extended  fund  facility  of  around 
USD  17.5  billion,  which  the  IMF  Board  approved  in  March  2015.  The  first  USD  4.9 
billion  was  disbursed  in  March  and  a  further  USD 1.7 billion  in  August,  following  the 
successful first  review of the programme. If the second review (launched in September 
2015)  is  completed  successfully,  Ukraine  will  be  able  to  draw  on  another  USD  1.7 
billion. 

4   This includes EUR 1.36 billion in MFA I and MFA II disbursements in 2014. 

24 

 
 
 
                                                            
STATUS OF ECONOMIC REFORM — UKRAINE 

  Price liberalisation 

While  most  prices  are  determined  freely,  regulated  prices  prevail  in  utilities  (notably  gas, 
heating, and electricity) and public transport. In 2015, utility prices were raised sharply with a 
view to bringing them gradually to cost-recovery levels.  

  Trade liberalisation 

Ukraine joined the WTO in May 2008. A DCFTA agreement with the EU entered provisionally 
into  force  in  2016.  In  February  2015,  in  the  context  of  a  worsening  balance-of-payments 
situation, Ukraine introduced temporary import surcharges on industrial (5 %) and agricultural 
products (10 %), which were then repealed at the end of the year. In November 2015, an export 
ban on wood entered into force which is considered inconsistent with both WTO and DCFTA 
provisions. 

  Exchange rate regime  

Following the decision to abandon the currency peg in February 2014, the NBU has resorted to 
a  managed  float  regime.  Continuous  pressures  on  the  local  currency  prompted  the  NBU  to 
introduce  various  administrative  measures  and  intervene  regularly  on  the  foreign  exchange 
market in an attempt to stem the depreciation. 

  Foreign direct investment 

FDI-related  flows  are  largely  liberalised,  but  restrictions  exist,  e.g. a  ban  on  the  purchase  of 
agricultural  land,  which  in  2015  was  extended  from  2016  to  2017.  Various  capital  controls 
exist that affect foreign investment activity. 

  Monetary policy 

The NBU continued to provide liquidity support while encouraging the return of deposits to the 
banking  system  and  attempting  to  maintain  foreign  exchange  market  equilibrium  in  an 
environment of high market volatility. 

  Public finances 

General  government  expenditures  remain  high  and  are  not  sufficiently  well  monitored,  but 
measures are being implemented to streamline outlays and improve control over them. On the 
revenue side, the tax base has been widened with changes to the Tax Code entering into force 
in 2016. Naftogaz’ operational deficit was reduced significantly in 2015. Major risks for public 
finances  stem  from  the  rapidly  increasing  financing  gap  for  the  pension  system  and  the  still 
weak tax base.  

  Privatisation and enterprise restructuring 

Measures  were  introduced  to  improve  corporate  governance  and  reporting  on  SOEs.  Despite 
ambitious  privatisation  plans,  the  need  to  develop  a  clear  strategy  and  legal  framework, 
together with a lack of political consensus, meant that a new round of privatisations did not get 
underway before the end of the year" 

  Financial sector reform 

In  2015,  the  NBU  continued  banking  sector  consolidation  and  clean-up,  bringing  down  the 
number of banks in Ukraine to 120 at the end of the year, from 163 at end-2014. Reform efforts 
focused  on  conducting  new  stress  tests  for  large  and  medium-sized  banks  and  on 
implementation of a comprehensive programme for unwinding related-party lending. 

25 

 
 
ANNEXES 

26 

 
 
27 

Status of effective disbursements as of end-December 2015 (in millions of €) AuthorisationsDisbursementsCountry Date ofReference ofMaximumDates ofAmounts ofTotalsUndisbursedDecisionDecisionamountdisbursementsdisbursementsdisbursedHungary22.02.9090/83/EC870Apr. 1990350610260(Loan)Feb. 1991260Czech and 25.02.9191/106/EC375Mar. 1991185375Slovak Federal RepublicMar. 1992190Hungary24.06.9191/310/EC180Aug. 1991100180(Loan)Jan. 199380Bulgaria24.06.9191/311/EC290Aug. 1991150290(Loan)Mar. 1992140Romania22.07.9191/384/EC375Jan. 1992190375(Loan)Apr. 1992185Israel122.07.9191/408/EC187.5Mar. 1992187.5187.5(Loan)Algeria23.09.9191/510/EC400Jan. 1992250400(Loan)Aug. 1994150Albania28.09.9292/482/EC70Dec. 19923570(Grant)Aug. 199335Bulgaria19.10.9292/511/EC110Dec. 199470110(Loan)Aug .199640Baltics23.11.9292/542/EC22013585(Loans); of which:    Estonia(40)March 199320(20)(20)    Latvia(80)March 199340(40)(40)    Lithuania(100)July 199350(75)(25)Aug. 199525Romania27.11.9292/551/EC80Feb. 19938080(Loan)Moldova13.06.9494/346/EC45Dec. 19942545(Loan)Aug. 199520Romania20.06.9494/369/EC125Nov. 199555125(Loan)Sep. 199740Dec. 199730Albania28.11.9494/773/EC35June 19951535(Grant)Oct. 199620Annex 1A - EU MACRO-FINANCIAL AND EXCEPTIONAL FINANCIAL ASSISTANCE TO THIRD COUNTRIES BY DATE OF DECISIONS 
 
28 

Algeria22.12.9494/938/EC200Nov. 1995100100100(Loan)Slovakia22.12.9494/939/EC130July 1996130(Loan)Ukraine22.12.9494/940/EC85Dec. 19958585(Loan)Belarus10.04.9595/132/EC55Dec. 1995303025(Loan)Ukraine23.10.9595/442/EC200Aug. 199650200(Loan)Oct. 199650Sep. 1997100Moldova25.03.9696/242/EC15Dec. 19961515(Loan)Former Yugoslav 22.07.9797/471/EC40Sep. 19972540Republic of MacedoniaFeb. 199815(Loan)Bulgaria22.07.9797/472/EC250Feb. 1998125250( Loan)Dec. 1998125Armenia, Georgia 17.11.9797/787/EC375294.580.5and Tajikistan2modified by(Loans and grants)28.3.0000/244/EC Agreed amounts with the recipent countires:(328)Armenia(58)Dec. 1998 (loan)28(58)   (Loan and grant)Dec. 1998 (grant)8Dec.  1999 (grant)4Feb. 2002 (grant)5.5Dec. 2002 (grant)5.5June 2004 (grant)5.5Dec. 2005 (grant)1.5Georgia(175)Jul. 1998 (loan)110(141.5)(33.5)   (Loan and grant)Aug. 1998 (grant)10Sep. 1999 (grant)9Dec. 2001 (grant)6Dec. 2004 (grant)6.5 
 
29 

Tajikistan(95)Mar. 2001 (loan)60(95)   (Loan and grant)Mar. 2001 (grant)7Dec. 2001 (grant)7Feb. 2003 (grant)7May. 2005 (grant)7Oct. 2007 (grant)7Ukraine15.10.9898/592/EC150July 1999585892(Loan)12.07.0202/639/ECAlbania22.04.9999/282/EC2020( Loan)Bosnia310.05.9999/325/EC60Dec. 1999 (grant)1560(Loan and grant)modified byDec. 1999 (loan)1010.12.0101/899/ECDec. 2000 (grant)10Dec. 2000 (loan)10Dec. 2001 (grant)15Bulgaria08.11.9999/731/EC100Dec. 199940100(Loan)Sep. 200060Former Yugoslav 08.11.9999/733/EC80Dec. 2000 (grant)2098Republic of18Dec. 2000 (loan)10Macedonia410.12.0101/900/ECDec. 2001 (loan)12(Loan and grant)Dec. 2001 (grant)10May 2003 (grant)10June 2003 (loan)10Dec. 2003 (loan)18Dec. 2003 (grant)8Romania08.11.9999/732/EC200June 200010015050(Loan)July 200350Kosovo519.02.0000/140/EC35Mar. 20002035(Grant )Aug. 200015Montenegro522.05.0000/355/EC20Aug. 2000720(Grant )Dec. 200013Moldova10.07.0000/452/EC1515(Loan)19.12.0202/1006/ECKosovo327.06.0101/511/EC30Sep. 20011530(Grant) Dec. 200215Serbia and 16.07.0101/549/EC345Oct. 2001 (loan)225345Montenegro6Oct. 2001 (grant)35(ex FRY)10.12.0101/901/ECJan. 2002 (grant)40(Loan and grant)Aug. 2002 (grant)45modified bymodified by 
 
30 

Ukraine12.07.0202/639/EC110May. 2014 (loan)100110(Loan) Modification of Decision Nov. 2014 (loan)1098/592/ECSerbia and 05.11.0202/882/EC130Dec. 2002 (grant)3010525Montenegro7Feb. 2003 (loan)10(ex FRY)Aug. 2003 (grant)35(Loan and grant)Aug. 2003 (loan)30Bosnia805.11.0202/883/EC60Feb. 2003 (grant)1525 the rest was (Loan and grant)Dec. 2003 (grant)10paid under04/861/ECMoldova19.12.0202/1006/EC1515(Grant)Serbia and 25.11.0303/825/EC70Dec. 2004 (grant)101020Montenegro7 the rest was (ex FRY)paid underModification Decision 02/882/EC (grant)04/862/ECAlbania929.04.0404/580/EC25Nov. 2005 (grant)325(Loan and grant)March 2006 ( loan)9July 2006 (grant)13Bosnia807/12/200404/861/ECthe balance ofDec. 2004 (loan)1035Modification Decision 02/883/ECJune 2005 (grant)1502/883/EC (grant and loan)Feb. 2006 (loan)10Serbia and 07.12.200404/862/ECthe balance ofApril 2005 (loan)1540Montenegro703/825/ECDec. 2005 (grant)25(ex FRY)Modification Decision 02/882/EC (Grant and loan)Georgia        24.01.0606/41/EC33.5August 2006 (grant)112211.5(Grant)Dec. 2006 (grant)11Kosovo (Grant)30.11.0606/880/EC50Sept. 2010 (grant)303020Moldova16.04.0707/259/EC45Oct. 2007 (grant)2045(Grant)June 2008 (grant)10Dec. 2008 ( grant)15Lebanon1010.12.0707/860/EC80Dec. 2008 (grant) 154040(Loan and grant)June 2009 (loan)25Georgia30.11.0909/889/EC46Dec. 2009 (grant)15.346(Grant)Jan. 2010 (grant)7.7August 2010 (grant)23 
 
31 

Armenia1130.11.0909/890/EC100June 2011 (grant)14100July 2011 (loan)26(Loan and grant)Dec. 2011 (grant)21Feb. 2012 (loan)39Bosnia and 30.11.0909/891/EC100Feb. 2013 (loan)50100Herzegovina (Loan)Oct. 2013 (loan)50Serbia (Loan)30.11.0909/892/EC200July 2011 (loan)100100100Ukraine (Loan)29.06.10646/2010/EU500Nov. 2014 (loan)250500Apr. 2015250Moldova (Grant)20.10.10938/2010/EU90Dec. 2010 (grant)4090Sept. 2011 (grant)20Apr. 2012 (grant)30Georgia12.08.13778/2013/EU46Jan. 2015 (grant)132323(Loan and grant)Apr. 2015 (loan)10(ongoing)Kyrgyz Republic 22.10.131025/2013/EU30Jun. 2015 (grant)101515(Loan and grant)Oct. 2015 (loan)5(ongoing)Jordan11.12.131351/2013/EU180Feb. 2015100(Loan)Oct. 201580Tunisia15.5.14534/2014/EU300May 2015100200100(Loan)Dec. 2015100(ongoing)Ukraine14.04.142014/215/EU1 000.0Jun. 20145001 000.0(Loan)Dec. 2014500Ukraine15.04.152015/601/EU 1 800.0Jul. 2015600 600.01 200.0(Loan)(ongoing)TOTAL10 796.08 189.02 427.04 Includes a loan principal amount of up to €50 million and grants of up to €48 million.5 Exceptional financial assistance.6 Includes a loan principal amount of €225 million and grants of €120 million.7 Includes a loan principal amount of €55 million and grants of €75 million.8 Includes a loan principal amount of €20 million and grants of €40 million.9 Includes a loan principal amount of €9 million and grants of €16 million.10 Includes a loan principal amount of €50 million and grants of €30 million.11 Includes a loan principal amount of €65 million and grants of €35 million.3 Includes a loan principal amount of up to €20 million and grants of up to €40 million.1 Assistance to Israel includes a loan principal amount of €160 million and grants of €27.5 million in the form of interest subsidies.2 Exceptional financial assistance, which includes a ceiling of €245 million for the loans and a ceiling of €130 million forthe grants. Out of the global amount of € 375 million, maximum amounts of € 58 million, € 175 million and € 95 million were actually agreed with the beneficiary countries 
 
32 

Status of effective disbursements as of end-December 2015 (in millions of €) AuthorisationsDisbursementsCountry Date ofReference ofMaximumDates ofAmounts ofTotalsUndisbursedDecisionDecisionamountdisbursementsdisbursementsA. EU Accession countriesBaltics23.11.9292/542/EC22013585(Loans) of which :    Estonia(40)March 199320(20)(20)    Latvia(80)March 199340(40)(40)    Lithuania(100)July 199350(75)(25)Aug. 199525Bulgaria24.06.9191/311/EC290Aug. 1991150290(Loan)March 1992140Bulgaria19.10.9292/511/EC110Dec. 199470110(Loan)Aug. 199640Bulgaria22.07.9797/472/EC250Feb. 1998125250(Loan)Dec. 1998125Bulgaria08.11.9999/731/EC100Dec. 199940100(Loan)Sep. 200060Czech and 25.02.9191/106/EC375March 1991185375Slovak Federal RepublicMarch 1992190(Loan)Hungary22.02.9090/83/EC870Apr. 1990350610260(Structural adjustment loan)Feb. 1991260Hungary24.06.9191/310/EC180Aug. 1991100180(loan)Jan. 199380Romania22.07.9191/384/EC375Jan. 1992190375(Loan)Apr. 1992185Romania27.11.9292/551/EC80Feb. 19938080(Loan)Romania20.06.9494/369/EC125Nov. 199555125(Loan)Sep. 199740Dec. 199730Romania08.11.9999/732/EC200June 200010015050(Loan)July 200350Annex 1B - EU MACRO-FINANCIAL AND EXCEPTIONAL FINANCIAL ASSISTANCE TO THIRD COUNTRIES BY REGION 
33 

Slovakia22.12.9494/939/EC130July 1996130(Loan)TOTAL A3 305.02 780.0 525.0B. Western BalkansAlbania28.09.9292/482/EC70Dec. 19923570(Grant)Aug. 199335Albania28.11.9494/773/EC35June 19951535(Grant)Oct. 199620Albania22.04.9999/282/EC2020(Loan)Bosnia110.05.9999/325/EC60Dec. 1999 (grant)1560(Loan and grant)Dec. 1999 (loan)1010.12.0101/899/ECDec. 2000 (grant)10Dec. 2000 (loan)10Dec. 2001 (grant)15Former Yugoslav Republic 22.07.9797/471/EC40Sep. 19972540of Macedonia (Loan)Feb. 199815Former Yugoslav Republic08.11.9999/733/EC80Dec. 2000 (grant)2098of Macedonia2Dec. 2000 (loan)10(Loan and grant)10.12.200101/900/EC18Dec. 2001 (loan)12Dec. 2001 (grant)10May 2003 (grant)10June 2003 (loan)10Dec. 2003 (loan)18Dec. 2003 (grant)8Kosovo319.02.0000/140/EC35March 20002035(Grant)Aug. 200015Kosovo327.06.0101/511/EC30Sep. 20011530(Grant)Dec. 200215Montenegro322.05.0000/355/EC20Aug. 2000720(Grant budgetary support)Dec. 200013Serbia and Montenegro416.07.0101/549/EC345Oct. 2001 (grant)35345modified byOct. 2001 (loan)22510.12.200101/901/ECJan. 2002 (grant)40Aug.2002 (grant)45Serbia and Montenegro505.11.0202/882/EC130Dec. 2002 (grant)3010525Feb. 2003 (loan)10Aug. 2003 (grant)35Aug. 2003 (loan)3025.11.0303/825/EC (7)70Dec. 2004 (grant)10502007.12.0404/862/ECApril  2005 (loan)15Dec. 2005 (grant)25modified by(ex FRY)(Loan and grant)modified bymodified by(ex FRY) 
 
34 

Bosnia605.11.0202/883/EC60Feb. 2003 (grant)1560Dec. 2003 (grant)10Dec 2004 (loan)1007.12.0404/861/ECJune 2005 (grant)15Feb. 2006 (loan)10Albania829.04.0404/580/EC25Nov  2005 (grant)325Mar 2006 (loan)9Jul 2006 (grant)13Kosovo  (Grant)30.11.0606/880/EC50Sept. 2010303020Bosnia and 30.11.0909/891/EC100Feb. 2013 (loan)50100Herzegovina (Loan)Oct. 2013 (loan)50Serbia (Loan)30.11.0909/892/EC200July 2011 (loan)100100100TOTAL B1 388.01 203.0 185.0C. New Independent States (NIS)Armenia, Georgia 17.11.9797/787/EC375294.580.5and Tajikistan9modified bydownsized to(Loans and grants) 28.3.0000/244/ECAgreed amounts with the recipent countires:(328)Armenia(58)Dec. 1998 (loan)28(58)Dec. 1998 (grant)8Dec.  1999 (grant)4Feb. 2002 (grant)5.5Dec. 2002 (grant)5.5June 2004( grant)5.5Dec. 2005(grant)1.5Georgia(175)July 1998 (loan)110(141,5)(33,5)Aug. 1998 (grant)10Sep. 1999 (grant)9Dec. 2001 (grant)6Dec. 2004 (grant)6.5Tajikistan(95)March 2001 (loan)60(95)March 2001 (grant)7Dec. 2001 (grant)7Feb. 2003 (grant)7May 2005 (grant)7Oct 2006 (grant)7Belarus10.04.9595/132/EC55Dec. 1995 (loan)303025(Loan)Moldova13.06.9494/346/EC45Dec. 1994 (loan)2545(Loan)Aug. 1995 (loan)20Moldova25.03.9696/242/EC15Dec. 1996 (loan)1515(Loan)modified by(Loan and grant)(Loan and grant) 
 
 
35 

Moldova10.07.0000/452/EC1515(Loan)19.12.0202/1006 EC19.12.0202/1006/EC1515Ukraine22.12.9494/940/EC85Dec. 1995 (loan)8585(Loan)Ukraine23.10.9595/442/EC200Aug. 1996 (loan)50200(Loan)Oct. 1996 (loan)50Sep. 1997 (loan)100Ukraine15.10.9898/592/EC150July 1999 (loan)585892(Loan)12.07.0202/639/EC110May. 2014 (loan)100110Nov. 2014 (loan)10Modification of decision 98/592/ECGeorgia        21.01.06      06/41/EC33.5Aug. 2006 (grant)112211.5(Grant)Dec 2006 (grant)11Moldova       16.04.07     07/259/EC45     Oct. 2007 (grant)2045(Grant)June 2008 (grant)10Dec. 2008 (grant)15Georgia30.11.0909/889/EC46Dec. 2009 (grant)15.346Jan. 2009 (grant)7.7Aug. 2010 (grant)23Armenia10 (Loan and grant)30.11.0909/890/EC100June 2011 (grant)146139July 2011 (loan)26Dec. 2011 (grant)21Feb. 2012 (loan)39Ukraine (Loan)29.06.10646/2010/EU500Nov. 2014 (loan)250500Apr. 2015 (loan)250Moldova (Grant)20.10.10938/2010/EU90Dec. 2010 (grant)4090Sept. 2011 (grant)20Apr. 2012 (grant)30Georgia12.08.13778/2013/EU46Jan. 2015 (grant)132323(Loan and grant)Apr. 2015 (loan)10(ongoing)Kyrgyz Republic 22.10.131025/2013/EU30Jun. 2015 (grant)101515(Loan and grant)Oct. 2015 (loan)5(ongoing)Ukraine14.04.142014/215/EU1000Jun. 20145001000(Loan)Dec. 2014500Ukraine15.04.152015/601/EU 1800Jul. 20156006001200(Loan)(ongoing)TOTAL C4 755.53 239.5 316.0UkraineMoldova(Grant)(Loan) 
 
36 

D. Mediterranean countriesIsrael1122.07.9191/408/EC187.5March 1992187.5187.5(Structural adjustment soft loan)Algeria23.09.9191/510/EC400Jan. 1992250400(Loan)Aug. 1994150Algeria22.12.9494/938/EC200Nov. 1995100100100(Loan)Lebanon1210.12.07     07/860/EC80Dec. 2008 (grant)154040(Grant and Loan)June 2009 (loan)25Jordan11.12.131351/2013/EU180Feb. 2015100(Loan)Oct. 201580Tunisia15.5.14     534/2014/EU300May 2015100200100(Loan)Dec. 2015100(ongoing)TOTAL D1 347.5 927.5 240.0TOTAL A+B+C+D10 796.08 150.01 266.01 Includes a loan principal amount of €20 million and grants of €40 million.2 Includes a loan principal amount of up to €50 million and grants of up to €48 million.3 Exceptional financial assistance.4 Includes a loan principal amount of €225 million and grants of €120 million.5 Includes a loan principal amount of €55 million and grants of €75 million.5 Includes a loan principal amount of €20 million and grants of €40 million.6 Includes a loan principal amount of €25 million and grants of €45 million.8 Includes a loan principal amount of €9 million and grants of €16 million.10 Includes a loan principal amount of €65 million and grants of €35 million.11 Assistance to Israel includes a loan principal amount of ECU 160 million and grants of ECU 27,5 million in the form of interest subsidies.12 Includes a loan principal amount of €50 million and grants of €30 million.9 Exceptional financial assistance, which includes a ceiling of €245 million for the loans and a ceiling of €130 million for the grants. Out of the global amount of € 375 million, maximum amounts of € 58 million, € 175 million and € 95 million were actually agreed with the beneficiary countries.  
 
Annex 2: MFA amounts authorised by year, 2005-2015 (EUR million) 

Chart 2A: MFA amounts authorised by year, 2005-2015 (EUR million) 

Chart 2B: MFA amounts authorised by region, 2005-2015 (%) 

37 

20052006200720082009201020112012201320142015TotalBy region  0.0Western Balkans  50.0  300.0  350.0Newly Independent States (NIS)  33.5  45.0  146.0  590.0  76.0 1 000.0 1 800.0 3 690.5Mediterranean  80.0  180.0  300.0  560.0Total amounts authorised   0.0  83.5  125.0  0.0  446.0  590.0  0.0  0.0  256.0 1 300.0 1 800.0 4 600.5Loans  0.0  50.0  0.0  365.0  500.0  218.0 1 300.0 1 800.0 4 233.0Grants  83.5  75.0  0.0  81.0  90.0  38.0  367.5 
  
 
 
Annex 3: MFA amounts disbursed by year, 2005-2015 (EUR million) 

Chart 3A: MFA amounts disbursed by year, 2005-2015 (EUR million) 

Chart 3B: MFA amounts disbursed by region, 2005-2015 (%) 

38 

20052006200720082009201020112012201320142015TotalBy regionWestern Balkans  58.0  32.0  30.0  100.0  100.0  320.0Newly Independent States (NIS)  8.5  29.0  20.0  25.0  15.3  70.7  81.0  69.0 1 360.0  888.0  318.5Mediterranean  15.0  25.0  380.0  40.0Total amounts disbursed  66.5  61.0  20.0  40.0  40.3  100.7  181.0  69.0  100.0 1 360.0 1 268.0 2 038.5Loans  15.0  19.0  0.0  0.0  25.0  0.0  126.0  39.0  100.0 1 360.0 1 245.0 2 929.0Grants  51.5  42.0  20.0  40.0  15.3  100.7  55.0  30.0  23.0  377.5