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 2020
Date: 2021-07-08
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: European neighbourhood policy, coronavirus disease, epidemic, foreign investment, gross domestic product, macro-financial assistance, macroeconomics, public debt, structural adjustment, third country

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 8.7.2021  SWD(2021) 178 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 2020 {COM(2021) 375 final}  
 
 
LIST OF ABBREVIATIONS 

AA 

CPI 

Association Agreement 

Consumer price index 

DCFTA 

Deep and Comprehensive Free Trade Area 

EC 

ECF 

EEU 

EFF 

EFTA 

EIB 

ENP 

ENI 

EU 

EUR 

FATF 

FDI 

FSAP 

GDP 

IMF 

MFA 

MoU 

OECD 

OJ 

PFM 

PPP 

SBA 

SDR 

SOE 

SREP 

TFEU 

VAT 

WTO 

y-o-y 

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 

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 

Treaty on the Functioning of the European Union 

Value added tax 

World Trade Organisation 

year-on-year 

1 

 
 
 
 
 
 
 
 
 
CONTENTS 

Introduction .................................................................................................................................................. 4 

Background analysis of beneficiaries of macro-financial assistance ........................................................ 5 

1.  Georgia .................................................................................................................................................. 5 

1.1.  Macroeconomic performance ..................................................................................................... 5 
Implementation of macro-financial assistance ............................................................................ 6 
1.2. 
1.3.  Structural Reforms ...................................................................................................................... 7 

2.  Moldova ................................................................................................................................................. 9 

2.1.  Macroeconomic performance ..................................................................................................... 9 
2.2. 
Implementation of macro-financial assistance .......................................................................... 10 
2.3.  Structural Reforms .................................................................................................................... 11 

3.  Ukraine ................................................................................................................................................ 13 

3.1.  Macroeconomic performance ................................................................................................... 13 
3.2. 
Implementation of macro-financial assistance .......................................................................... 14 
3.3.  Structural Reforms .................................................................................................................... 15 

4. 

Jordan ................................................................................................................................................. 18 

4.1.  Macroeconomic performance ................................................................................................... 18 
4.2. 
Implementation of macro-financial assistance .......................................................................... 19 
4.3.  Structural reforms ..................................................................................................................... 20 

5.  Tunisia ................................................................................................................................................. 23 

5.1.  Macroeconomic performance ................................................................................................... 23 
Implementation of macro-financial assistance .......................................................................... 24 
5.2. 
5.3.  Structural Reforms .................................................................................................................... 25 

6.  Albania ................................................................................................................................................ 27 

6.1.  Macroeconomic performance ................................................................................................... 27 
6.2. 
Implementation of macro-financial assistance .......................................................................... 28 
6.3.  Structural reforms ..................................................................................................................... 29 

7.  Bosnia & Herzegovina ....................................................................................................................... 31 

7.1.  Macroeconomic performance ................................................................................................... 31 
7.2. 
Implementation of macro-financial assistance .......................................................................... 32 
7.3.  Structural reforms ..................................................................................................................... 33 

8.  Kosovo* ............................................................................................................................................... 35 

8.1  Macroeconomic performance ................................................................................................... 35 
Implementation of macro-financial assistance .......................................................................... 36 
8.2. 
8.3.  Structural reforms ..................................................................................................................... 37 

9.  Montenegro ......................................................................................................................................... 39 

9.1.  Macroeconomic performance ................................................................................................... 39 
9.2. 
Implementation of macro-financial assistance .......................................................................... 40 
9.3.  Structural reforms ..................................................................................................................... 40 

10.  North Macedonia ................................................................................................................................ 43 

10.1.  Macroeconomic performance ................................................................................................... 43 

2 

 
10.2.  Implementation of macro-financial assistance .......................................................................... 44 
10.3.  Structural reforms ..................................................................................................................... 45 
Annex 1: MFA operations by date of decision, 1990-2020 .................................................................. 47 
Annex 2: Status of disbursements made by date of decision at end-December 2020 .......................... 47 
Annex 3: MFA amounts authorised* by year, 2005-2020 (EUR million) ........................................... 54 
Chart 3A: MFA amounts authorised by year, 2006-2020(EUR million) ............................................. 54 
Chart 3B: MFA amounts authorised by region, 2006-2020 (%) .......................................................... 54 
Annex 4: MFA amounts disbursed by year, 2006-2020 (EUR million) ............................................... 55 
Chart 4A: MFA amounts disbursed by year, 2006-2020 (EUR million) .............................................. 55 
Chart 4B: MFA amounts disbursed by region, 2006-2020 (%) ............................................................ 55 
Annex 5: Outstanding amounts in respect of MFA operations disbursed (as at 31 December 2020) .. 56 

3 

 
INTRODUCTION 

This  Staff  Working  Document  complements  the  Commission’s  report  to  the  European 
Parliament and the Council on the implementation of macro-financial assistance (MFA) 
to third countries in 2020.1 

2020  was  an  exceptional  year  for  MFA.  The  year  was  firstly  characterised  by  the 
conclusion  of  three  MFA  operations  in  the  Eastern  neighbourhood:  Ukraine  MFA-IV, 
Georgia  MFA-III  and  Moldova,  as  well  as  the  adoption  of  a  new,  follow-up  operation 
with Jordan (MFA-III) in the Southern neighbourhood. Furthermore, in the context of the 
COVID-19 pandemic, on 25 May 2020 the European Parliament and the Council adopted 
a  EUR 3  billion  MFA  package  to  10  enlargement  and  neighbourhood  partners  to  help 
them  to  limit  the  economic  fallout  of  the  coronavirus  pandemic2.  Implementation  is 
ongoing. 

For each beneficiary country, the report provides more detailed information on: (i) their 
macroeconomic and financial situation; (ii) implementation of their MFA operations, and 
(iii) progress in accomplishing their structural reforms agenda.  

The annexes include overview tables on the effective disbursements of MFA operations 
since 1990 by date of adoption of the decisions, as well as tables on MFA commitment 
and payment amounts in 2006-2020, by year and by region.3 

1   This document is based on information available up to May 2021. 

2   Decision (EU) 2020/701, OJ L 165, 27.5.2020, p. 31–37 

3   The  document  and  the  annexes  distinguish  between  authorised  amounts,  which  refer  to  the  amounts 
made  available  to  the  beneficiary  country  as  per  the  MFA  Decision,  and  disbursed  amounts,  which 
refer to the amounts actually extended to the beneficiary country.  

4 

 
 
 
                                                           
BACKGROUND ANALYSIS OF BENEFICIARIES OF MACRO-FINANCIAL ASSISTANCE

4 

1. 

GEORGIA 

1.1. Macroeconomic performance 

Georgia’s GDP contracted by 6.2% in 2020. The outbreak of the coronavirus brought a 
severe recession from the second quarter of the year. GDP declined by  12.3%  year-on-
year in Q2, followed by a smaller contraction by 5.6% year-on-year in Q3. The situation 
deteriorated  again  due  to  a  new  wave  of  COVID-19  cases  and  the  reintroduction  of 
restrictions in November. All sectors of the economy apart from agriculture and mining 
contracted in 2020, with the most severe drop in the sector of hotels and restaurants. The 
unemployment rate in  Georgia increased to  20.4% in  the fourth  quarter  of 2020, up by 
3.6 percentage points compared to the same period of 2019. 

Consumer price inflation decreased to 2.4% year-on-year in December 2020 from 7% in 
December 2019 but then resurged to 7.2% in March 2021. Despite falling inflation and 
taking into account the uncertain economic outlook, the central bank cut the refinancing 
rate  only  slightly  in  the  course  of  2020,  from  9%  to  8%  and  more  recently  raised  it  to 
8.5%  in  March  2021.  This  reflects,  inter  alia,  pressures  stemming  from  the  Georgian 
currency, the lari, depreciating by 20% against the euro and by 13% against the US dollar 
in 2020.   

The general  government deficit reached 9.3% of GDP in  2020, slightly  higher than the 
8.5% of GDP foreseen in the revised budget law. The difference is due to the additional 
support  package  announced  in  response  to  the  new  containment  measures  in  the  last 
weeks of the year. The ratio of public debt to GDP increased to 62% at the end of 2020 
from 41% at end-2019.  

Georgia’s balance-of-payments position deteriorated in 2020. The current account deficit 
increased  from  USD  1  billion  in  2019  to  USD  1.97  billion  in  2020,  corresponding  to 
12.4% of GDP. The factor that had the strongest impact on the current account position 
was a dramatic fall in revenues from tourism, which had amounted to over USD 3 billion 
in  2019  and  dropped  to  USD  0.5  billion  in  2020.  On  the  other  hand,  Georgia’s 
merchandise trade deficit narrowed. The increased current  account deficit was financed 
by continuing (albeit slower) inflow of foreign direct investment and, most importantly, 
by  increased  volumes  of  grants  and  concessional  loans  from  the  international  partners, 
including the EU. 

Georgia’s international reserves remained broadly stable in recent months, totalling USD 
3.9  billion  at  the  end  of  October  2020  (corresponding  to  around  5  months  of  imports), 
having increased from USD 3.5 billion at end-2019.  

For 2021, most forecasts envisage a GDP recovery by 3.5-4%, but this outlook is highly 
uncertain.  It  depends notably on the evolution  of the pandemic in  Georgia and in  other 
countries, on the continuation of the fiscal stimulus in 2021, and on the size of financial 
inflows from abroad, especially revenues from tourism and remittances.  

4 This section quotes statistics supplied by national authorities and other relevant sources. 

5 

 
 
 
 
                                                           
Georgia - Macro-Economic Indicators 

Georgia 
Real GDP, % change 

Consumer price inflation, %, end of period 

Key monetary policy rate, %, end of period 

Unemployment rate, LFS, % 

General government balance, % of GDP 

Gross public debt, % of GDP 

Current account balance, % of GDP 

Official international reserves, USD billion 

International reserves, months of imports 

Gross external debt, % of GDP 

Net foreign direct investment, % of GDP 

2016 
2,9 

1,8 

6,5 

21,7 

-1,3 

40,3 

-12,5 

2,8 

3,5 

2017 
4,8 

6,7 

7,3 

21,6 

-0,8 

39,9 

-8,0 

3,0 

3,4 

2018 
4,9 

1,5 

7,0 

19,2 

-0,7 

39,9 

-6,8 

3,3 

3,6 

2019 
5,0 

7,0 

9,0 

17,6 

-2,7 

41,2 

-5,5 

3,5 

4,7 

2020 
-6,2 

2,4 

8,0 

18,5 

-9,3 

62,2 

-12,4 

3,9 

5,2 

105,3 

106,6 

101,3 

106,6 

127,7 

8,2 

10,5 

5,5 

5,9 

3,7 

Sources: National authorities; IMF; World Bank; Commission 
staff calculations 

1.2. Implementation of macro-financial assistance 

The MFA-III operation launched in 2018 was completed with disbursement of the second 
and  last  tranche  in  November  2020.  The  amount  of  this  tranche  was  EUR  25  million, 
including EUR 5 million in the form of grants and EUR 20 million in loans. 

Following an official request from Georgia for a new MFA in the context of the COVID-
19 pandemic crisis, the European Parliament and the Council approved a EUR 3 billion 
COVID-19 MFA package in  May 2020, including up to  EUR 150 million for Georgia. 
The  Memorandum  of  Understanding  (MoU)  and  the  Loan  Facility  Agreement  (LFA) 
relating to this MFA operation were signed and ratified by the Georgian Parliament on 30 
September  2020.  The  MoU  entered  into  force  on  30  September  2020,  and  the  LFA 
entered into force on 20 October 2020. 

In accordance with the MoU, the assistance is to be provided in two instalments. The first 
instalment (EUR 75 million) was subject to the general political pre-conditions for MFA 
(respect  for  effective  democratic  mechanisms,  including  a  multi-party  parliamentary 
system, the rule of law and human rights) and the IMF programme remaining on track, 
and it was disbursed in November 2020. The second instalment of EUR 75 million will 
additionally be subject to fulfilment of a set of policy conditions laid down in the MoU in 
the  field  of  public  procurement,  pension  system,  company  law,  governance  of  state-
owned enterprises, judicial system, energy efficiency and the labour market.  

These  MFA  programmes  are  provided  in  conjunction  with  the  resources  from 
international financial institutions and bilateral donors including the IMF5, under its four-
year Extended Fund Facility (EFF) programme with Georgia approved in April 2017 and 

5  MFA  is  always  subject  to  a  disbursing  IMF  programme.  Beneficiary  countries  with  an  IMF  Stand-by 
Arrangement  or  a  programme  under  the  Extended  Fund  Facility  (or  similar  arrangement  with  an  IMF-
accompanied adjustment and reform programme) must in principle keep their IMF programme on track, as 
indicated  by  successful  reviews.  In  the  context  of  the  COVID-19  crisis,  MFA  is  exceptionally  available 
also to countries that benefit from emergency funding from the IMF, such as through the Rapid Financing 
Instrument (RFI), which comes in a single IMF disbursement.  

6 

 
 
 
 
 
 
 
 
 
 
 
 
 
                                                           
augmented  in  2020  (to  a  total  of  approx.  EUR  690  million).  All  reviews  under  this 
programme  have  been  successfully  approved  by  the  IMF  Board,  including  the  most 
recent, eighth and final one in April 2021.  

1.3. Structural Reforms  

Georgia’s  structural  reform  agenda  focuses  in  particular  on  improving  the  business 
environment,  labour  market,  energy  and  transport.  The  Georgian  authorities  intend  to 
complement structural reforms with fiscal reforms, strengthening of the financial sector, 
as well as continuous implementation of the Association Agreement with the EU.  

In  terms  of  improving  the  business  environment,  the  Georgian  Parliament  adopted  in 
September 2020 a new insolvency law supporting adequate protection of creditor rights 
and timely and efficient insolvency processes in line with international standards. A new 
company law, aimed at  regulating corporate relations and approximating the legislation 
to  the  EU  directives,  has  been  submitted  to  the  Parliament.  The  authorities  have 
continued improving the revenue administration, e.g. by automatic refund of VAT credits 
(since November 2020), development of IT strategy and a risk-based approach.  

Regarding  the  labour  market,  Georgia  implemented  several  policy  actions  from  the 
National  Strategy  of  Labour  and  Employment  Policy,  adopted  in  December  2019.  This 
included  the  adoption  of  the  Law  on  Employment  Services  in  July  2020,  adoption  of 
substantial amendments to the Labour Code in September 2020 and strengthening of the 
labour inspection.  

In  the  field  of  energy,  the  Georgian  Parliament  adopted  in  May  2020  laws  on  energy 
efficiency and on energy performance of buildings, implementing the EU acquis in this 
area.  Despite 
infrastructure 
development plans. As regards transport, several new sections of the East-West Highway 
were completed in 2020, while the construction on the remaining sections is underway.  

the  authorities  have  advanced 

the  pandemic, 

their 

In the financial sector, the National Bank of Georgia is strengthening the regulatory and 
supervisory framework. In particular, the implementation of the resolution framework for 
financial  institution  advanced  in  2020,  with  adoption  of  the  relevant  secondary 
legislation.  

Georgia  continues  to  implement  the  measures  and  obligations  resulting  from  the 
Association Agreement with the EU, including the Deep and Comprehensive Free Trade 
Area  (DCFTA).  The  recent  Association  Implementation  Report  of  February  2021  
concludes  that  while  alignment  to  the  EU  acquis  and  European  standards  has  broadly 
continued,  further  efforts  are  needed  in  particular  to  consolidate  democracy  after  the 
recent elections and to advance the reform of the judiciary.  

Georgia’s  national  reform  agenda  is  supported  by  MFA  conditionality.  For  example, 
conditions  of  the  current  MFA  operation  notably  require  an  adoption  of  the  company 
law,  improvements  of  the  judicial  system,  as  well  as  reforms  in  the  field  of  the  labour 
market, energy efficiency, governance of state-owned enterprises public procurement and 
pension system. 

7 

 
 
 
STATUS OF ECONOMIC REFORMS — GEORGIA 

1. Price liberalisation  

Prices are largely market-driven. 

2. Trade regime 

Georgia (a WTO member since 2000) 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. Georgia also has FTAs with its other key trading partners such as Turkey and 
China. 

3. Exchange rate regime 

There is a  floating  exchange  rate for  the  lari,  with limited  official  intervention by  the  National 
Bank of Georgia. There are no restrictions on current international transactions and Georgia does 
not operate capital controls. 

4. Foreign direct investment 

Georgia has a liberal regime for FDI and unlimited repatriation of capital and profits. FDI inflows 
in recent years  have consistently been among the highest in the region, although they declined to 
some 4% of GDP in 2020. 

5. Monetary policy 

The main monetary policy objective of the Central Bank of Georgiais price stability. The Bank is 
currently  applying  an  inflation-targeting  regime,  with  a  target  of  3%  for  2019-2022.  The 
effectiveness of monetary policy is significantly constrained by the high level of dollarisation: as 
of end-2020, 55% of loans and 61% of deposits were denominated in foreign currency. 

6. Public finances and taxation 

The  public  finance  management  system  is  essentially  sound  and  transparent.  Further  needed 
reforms  are  ongoing  to  strengthen  public  investment  management  and  manage  contingent 
liabilities  from  state-owned  companies  and  public-private  partnerships.  Public  revenues  are 
constrained by the Constitution, which prescribes a referendum for the introduction of new taxes 
or the raising of tax rates (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, with their number falling from around 
1,300  in  2009  to  around  350  currently,  including  some  50  public  corporationa  and  some  300 
government entities. The government, with support of the IMF and the World bank, has recently 
started a reform of remaining SOEs aimed at improving their transparency and efficiency.  

8. Financial sector  

Georgia’s financial sector is small and dominated by banks, which hold more than 90% of total 
financial sector assets. However, banking sector credit to the economy amounts to only around 
60% of GDP. The sector is concentrated, with the two largest banks, out of 16 in total, holding 
around two thirds of the assets. Georgia’s banking sector has a low-risk profile and has generally 
remained resilient, reporting sufficient capital and liquidity. The capital adequacy ratio stood at 
17.6% in December 2020. The share of nonperforming loans to total gross loans was very low at 
2.3% at the end of 2020 (by IMF's methodology). 

8 

 
 
2. 

MOLDOVA 

1.4. Macroeconomic performance 

On the back of the pandemic and drought in the summer, Moldova’s economy contracted 
by  7%  in  2020.  Much  of  it  can  be  accounted  for  by  the  fall  in  final  consumption 
(significantly affected by the household sector), with an effect of -5.8 percentage points 
on the GDP. Gross capital formation also contracted, although less profoundly by 2.1% 
and with relatively low impact on the GDP (-0.5 percentage points). On the supply side, 
due to the extreme weather conditions, agriculture was among the most affected sectors, 
with output down by over a quarter compared to 2019, followed by wholesale and retail 
trade.  The  government  introduced  a  series  of  measures  to  mitigate  the  effects  of  the 
pandemic-induced crisis, including increases in social spending, temporary tax deferrals 
and  monetary  easing.  However,  the  overall  level  of  support  was  rather  moderate, 
accounting for about 1% of GDP.  

In  2020  inflation  continued  to  moderate  in  Moldova.  While  in  January,  the  annual 
inflation rate stood at 6.8%, it decreased significantly throughout the year, reaching 0.4% 
by  December,  therefore,  falling  below  the  target  level  set  by  the  National  Bank  of 
Moldova at 5% ±1.5 percentage points. The strong disinflationary trend was a result of 
the  global  recession,  including  the  falling  oil  prices,  as  well  as  a  sharp  decline  in 
domestic  demand.  In  response  to  this,  and  to  cushion  the  economic  fallout  of  the 
pandemic, the central bank cut the base rate five times in 2020, such that in November it 
reached a historic low of 2.7%.  

Owing to increased spending on pandemic-related measures, the initial budget for 2020, 
projected at 3% of GDP, was amended several times throughout last year, up to 8% with 
the September revision. However, because of underspending (annulment, optimization or 
underperformance of several spending programmes), by the end of 2020, the fiscal deficit 
narrowed to 5.3%. In December, the Moldovan authorities passed a new budget law for 
2021, albeit in a manner that led to domestic controversies, without proper consultation 
and lack of a transparent approval process. The 2021 state budget projects an increase of 
the deficit to 6.5% of GDP, over half of which (58%) is to be financed with the support 
from International Financial Institutions.  

As  a  result  of  import  compression  and  lower  energy  prices,  the  current  account  deficit 
narrowed to 6.6% of GDP, compared to 9.3% in 2019. Moreover, as the value of imports 
is almost double, the sharp, but similar decrease of both imports (-7.3%) and exports (-
10.6%) during the COVID-19 pandemic contributed to a contraction of the trade deficit. 

An improved current account balance, in addition to financial assistance from the EU and 
the  IMF,  as  well  as  central  bank  interventions,  resulted  in  a  significant  increase  of 
international  reserves  by  nearly  24%,  reaching  3.8  billion  at  the  end  of  the  year.  Total 
external debt has accelerated in 2020 to 69.7% of GDP, up from 61.7% in 2019. 

In 2020, despite the shock, the fall in remittances (which make about 15% of Moldova’s 
GDP)  was  relatively  low  by  2.4%.  FDI,  which  has  been  at  low  levels  since  the  bank 
fraud crisis in 2014, further declined last year, reaching 0.6% of GDP. 

The economy is expected to recover modestly in 2021 (GDP is forecast to grow by about 
4.5% according to the IMF). However, the macroeconomic performance of Molodva this 
year will largely depend on the epidemiological situation, including the vaccine rollout, 
and external support.  

9 

 
 
Moldova - Macro-Economic Indicators 

Moldova 
Real GDP, % change 

Consumer price inflation, %, end of period 

Key monetary policy rate, %, end of period 

Unemployment rate, LFS, % 

General government balance, % of GDP 

Gross public debt, % of GDP 

Current account balance, % of GDP 

Official international reserves, USD billion 

International reserves, months of imports 

Gross external debt, % of GDP 

Net foreign direct investment, % of GDP 

2016 
4,4 

2,4 

9,0 

4,1 

-1,6 

36,9 

-3,5 

2,2 

4,9 

74,8 

0,9 

2017 
4,7 

7,3 

6,5 

4,0 

-0,6 

32,7 

-5,7 

2,8 

5,3 

70,4 

1,4 

2018 
4,3 

0,9 

6,5 

3,0 

-0,8 

30,1 

-10,3 

3,0 

5,4 

63,8 

2,2 

2019 
3,6 

7,5 

5,5 

5,1 

2020 
-7,0 

0,4 

2,7 

3,8 

-1,5 

-5,3 (est) 

27,4 

-9,3 

3,1 

6,2 

61,7 

3,8 

32,9 

-6,6 

3,8 

n.a. 

69,7 

0,6 

Sources: National authorities; IMF; World Bank; Commission staff calculations 

1.5. Implementation of macro-financial assistance 

In  September  2017,  the  European  Parlament  and  the  Council  adopted  the  decision  to 
provide  EUR  100  million  of  Macro-financial  Assistance  (MFA)  to  the  Republic  of 
Moldova. The EU-Moldova MoU was signed on 24 November 2017, outlining a series of 
economic policy conditions attached to the assistance. The MoU and related documents 
(LFA, grant agreement) entered into force on 18 January 2018.  

The  first  disbursement  of  EUR  30  million  (out  of  which  EUR  20  million  in  loans  and 
EUR 10 million in grants) was initially put on hold, due to challenging polticial situation, 
and it was only paid in October 2019, following a change of government and a renewed 
reform  effort.  Similarly,  the  second  instalment  was  made  available  to  Moldova  after 
some  disucssions  with  regard  to  the  political  pre-conditions.  To  that  end,  a  letter  was 
handed  over  the  Moldovan  Prime  Minister  in  February  2020  with  eight  short-term 
actions to be implemented by the authorities and help assess the political pre-conditions 
in  a  favourable  manner.  After  a  positive  opinion,  the  decision  for  the  second 
disbursement was made on 9 June 2020. The payment proceeded in two parts, on 16 July 
a EUR 20 million loan, and on 1 August a EUR 10 million grant component. The third 
and  final  tranche  of  the  programme  was  cancelled  because  not  all  related  policy 
conditions  were  satisfied  before  18  July  2020,  when  the  MFA  expired.  The  MFA  was 
linked  to  a  four-year  IMF  programme  of  Extended  Credit  Facility/Extended  Fund 
Fcaility (ECF/EFF) in the amount of SDR 129.4 million (about USD 178.7 million). The 
final  sixth  review  of  the  programme,  togther  with  article  IV  consultations,  was 
successfully concluded in March 2020.  

In  2020,  as  part  of  the  COVID-19  MFA  package  adopted  in  May  2020,  the  European 
Parliament  and  the  Council  agreed  on  a  new  one-year  MFA  programme  of  EUR  100 
million  to  Moldova.  The  first  instalment  (EUR  50  million)  was  subject  to  the  general 
political pre-conditions for MFA (respect for effective democratic mechanisms, including 
a multi-party parliamentary system, the rule of law and human rights) and was disbursed 
on 25 November 2020. The second disbursement is conditional on Moldova successfully 
fulfilling  all  policy  conditions  agreed  with  the  EU  in  the  MoU.  The  conditionality 
focuses  in  particular  on  reforms  in  the  area  of  public  finance  management,  good 
governance and fight against corruption, as well as on improving the business climate. 

In  addition,  the  Moldovan  authorities  need  to  ensure  a  positive  dialogue  with  the  IMF 
and possible adoption of a new reform programme. In July 2020, a staff-level agreement 

10 

 
 
 
 
 
 
 
 
was  signed  for  a  three-year  ECF/EFF  programme  of  USD  558  million.  The  IMF 
Executive  Board  decision  was  expected  in  September,  however,  it  has  been  repeatedly 
postponed  due  to  significant  delays  in  the  implementation  of  the  programme’s  prior 
actions, as well as  worrying political  developments  (such as the uncertainty around the 
11  July  2021  snap-elections  and  backsliding  on  some  key  economic  reforms). 
Discussions might have to start about a new IMF programme, yet little progress has been 
made so far.  

1.6. Structural Reforms  

The overall framework guiding the process of structural reforms in Moldova is set out in 
the  commitments  made  under  the  Association  Agreement  with  the  European  Union, 
including the Deep and Comprehensive Free Trade Agreement.   

Due  to  the  pandemic,  the  reform  progress  in  2020  has  been  moderate,  and  towards  the 
end  of  the  year  it  was  marked  by  some  worrying  developments  in  the  Moldovan 
parliament,  as  well  as  the  resignation  of  the  government  in  December.  The  outlook 
remains  mixed  as  political  instability  in  Moldova  continues  to  weigh  on  the  country’s 
capacity  to  undertake  reforms,  where  a  way  forward  could  be  the  formation  of  a  new 
Parliament through possible snap-elections.  

However, Moldova continues to benefit from the effects of the reform progress achieved 
over  the  past  few  years.  Monetary  and  fiscal  policies  had  been  strengthened  and 
substantial structural economic reforms had been carried out. 

The banking sector in  Moldova has been  going through a major restructuring since the 
banking crisis triggered by large-scale money laundering and bank fraud in 2014-2015. 
Unfit shareholders have been removed from a large number of banks and the control of 
the three remaining systemic banks has been taken  over by international  actors. A new 
banking  law  entered  into  force  on  1  January  2018.  The  law  introduced  an  updated 
regulatory  and  supervision  framework  in  line  with  Basel  III  standards.  In  2019,  new 
capital  adequacy  requirements  in  line  with  the  EU’s  CRDIV/CRR  package  were 
approved. As a result of the banking sector reforms, including in particular the regulatory 
and supervisory framework, Moldovan banks have become more resilient and safe.  

Some positive developments related to the fight  against corruption were noted in 2020, 
including the increase of the annual budget of its anti-corruption institutions such as the 
National  Integrity  Authority,  the  Criminal  Asset  Recovery  Agency  and  the  Financial 
Investigation  Unit;  as  well  as  the  adoption  of  the  new  Strategy  for  Ensuring  the 
Independence and Integrity of the Justice Sector 2021-2024; and the adoption of the law 
on Anti-Money Laundering sanctions. In addition, on 28 May 2020, Moldova joined the 
Istanbul  Anti-Corruptuon  Action  Plan  of  the  Anti-Corruption  Netowork  of  the  OECD. 
Nonetheless, as regards the recovery of the assets involved in the 2014 bank fraud, legal 
proceedings against key actors continue to be slow, and progress in recovering assets, in 
particular from outside of Moldova, has been limited. 

Moldova’s reform efforts are further supported by the MFA conditionality. The COVID-
19  MFA  in  place  focuses  in  particular  on  actions  related  public  finance  management, 
good  governance  and  the  fight  against  corruption  as  well  as  improving  the  business 
climate. Under the MoU, the Moldovan authorities agreed, among others, to update the 
bank  fraud  criminal  asset  recovery  strategy.  improve  the  efficiency  of  the  National 
Integrity  Authority,  and  make  amendments  to  the  Moldovan  Consitution  regarding  the 
selection  of  the  lay  members  to  the  Superior  Council  of  Magistracy  (in  line  with 
recommendations from the Venice Commission). 

11 

 
 STATUS OF ECONOMIC REFORMS — REPUBLIC OF MOLDOVA 

1. Price liberalisation 

Most prices are market-driven, but regulated prices continue to exist for electricity, natural gas, 
water and sanitation, housing and medical services and rail and urban passenger transport. 

2. Trade regime 

Moldova (a WTO member since 2001) has a liberal trade regime. The EU and the Republic of 
Moldova have developed a close trading relationship over the years. This led to the conclusion of 
an Association Agreement, including a DCFTA, which was signed on 27 June 2014 and entered 
fully into force on 1 July 2016. 

3. Exchange rate regime 

The  National  Bank  of  Moldova  follows  a  flexible  exchange  rate  policy  and  intervenes  on  the 
market  to  smooth  excessive  volatility,  while  letting  the  exchange  rate  operate  to  help  absorb 
external shocks.  

4. Foreign direct investment 

There  are  no  controls  on  inward  investment.  Some  efforts  have  been  made  to  stimulate  FDI, 
notably through the creation of Free Economic Zones. The DCFTA has created further stimulus 
to  FDI  from  the  EU.  Some  positive  examples  of  progress  exist,  primarily  in  the  automotive 
sector. 

5. Monetary policy 

As  part  of  the  medium-term  monetary  policy  strategy  adopted  in  December  2010,  the  central 
bank  targets inflation  of  5%  annually  (measured  by  the  consumer  price  index), with a  possible 
deviation  of  ±1.5  percentage  points.  The  Central  Bank  considers  this  optimal  in  its  efforts  to 
maintain price-stability, while supporting the growth performance over the medium term. 

6. Public finances and taxation 

In  2018,  a  12%  flat  rate  income  tax  was  introduced  (the  earlier  system  had  two  rates:  7%  and 
18%) and the social contribution rate was decreased from 23% to 18%. To compensate for these 
changes, a set of measures to strengthen revenue was introduced in 2019, including an increase in 
VAT  rates.  However,  in  the  context  of  the  COVID-19  pandemic  VAT  levels  for  some  key 
sectors, inclding the hotel industry and restuarants were lowered from 15% to 12%, with possible 
further reductions in the future.   

7. Privatisation and enterprise restructuring 

In  the  past  few  years,  Moldova  has  gradually  sought  to  privatise  state-owned  assets  and 
enterprises.  In  2018,  the  national  airline  Air  Moldova,  the  gas  transmission  company 
Vestmoldtransgaz, a tobacco producer and a number of other smaller properties were privatised. 
Additionally, the Law on State-Owned Enterprise and Municipal Enterprise adopted in late 2017 
aims to strengthen governance and transparency of SOEs. However, limited progress was noted 
on the privatization agenda in 2020.  

8. Financial sector 

The financial sector reform is one of the major successes of the last period. Major achievements 
include the liquidation of the  three  banks  involved in  the  2014  bank  fraud  (while investigation 
and asset recovery of the fraud has been less successful), strengthened governance and increased 
international  ownership  in  remaining  systemic  banks,  and  an  introduction  of  a  strengthened 
regulatory  and  supervisory  framework  for  banks  (aligning  with  Basel  III  standards)  and  non-
financial institutions, particularly in the insurance sector.  

12 

 
3. 

UKRAINE 

1.7. Macroeconomic performance 

The  COVID19-related  economic  crisis  hit  Ukraine  less  severely  than  earlier  expected. 
After  a  y-o-y  plunge  by  11.4%  in  the  second  quarter  of  2020,  the  decline  in  real  GDP 
moderated  to  3.5%  and  3%  in  the  third  and  fourth  quarters,  respectively.  Overall,  the 
economy shrank by 4.0% in 2020. The recession did not affect all sectors equally. Over 
2020,  the  contraction  was  strongest  in  agriculture  (-11.5%)  and  in  industry  (-4.5%). 
Retail and construction continued to expand by 8.4% and 5.6% respectively. 

The social impact of the economic recession, especially on the labour market, has been 
contained so far. The rate of unemployment increased from 8.2% in 2019 to 9.5% at the 
end  of  2020.  Annual  nominal  wage  growth  slowed  down  to  almost  zero  in  April  2020 
before rebounding to 15.6% in December. In light of the 5% consumer prices inflation in 
2020, this implies a rather sustained catching-up in real terms. The average wage reached 
about  EUR  430  in  December  2020.  Even  though  part  of  that  increase  is  due  to 
exceptional year-end benefits, its contribution to better standards of living is also evident. 

the  achievements 

The  COVID19-related  crisis  reversed 
the  area  of  fiscal 
consolidation.  Ukraine  had  managed  to  bring  its  fiscal  deficit  below  or  around  2%  of 
GDP consistently over the previous three years. Total government expenditure increased 
by 16.2% in 2020, which combined with an expansion of revenues by 6.5% only led to 
the  significant  deterioration  of  the  deficit  to  5.3%  of  GDP.  Although  expenditure 
increases  affected  all  areas,  they  were  strongest  in  public  support  to  economic  activity 
(+70%),  healthcare  (+37%)  and  defence  (+13%).  These  developments  challenge  the 
medium-term sustainability of public finances. 

in 

To  finance  the  deficit,  Ukraine  received  support  from  the  international  financial 
institutions of about  USD 3.3 billion  in 2020 (USD 2.1 billion from the IMF and EUR 
1.1  billion  from  the  EU).  The  government  also  borrowed  record  amounts  from  the 
international markets last year – EUR 1.25 billion in January and USD 2.6 billion in July. 
In  addition  to  these  sources  of  financing,  the  Treasury  issued  the  equivalent  of  €7.7 
billion  in  domestic  hryvna-denominated  bonds  (17%  above  the  2019  volumes)  at  an 
average  yield  of  10.2%,  i.e.  673  basis  points  below  the  cost  of  new  domestic  debt  in 
2019. 

Although  monetary  policy  has  remained  unchanged  since  the  appointment  of  a  new 
Governor of the National Bank of Ukraine (NBU) in mid-2020, money supply started to 
expand  and  inflation  is  accelerating.  The  NBU  responded  by  increasing  its  key  policy 
rate by 50 basis points to 6% since mid-June 2020. Consumer price inflation decelerated 
to  below  3%  from  February  to  October,  before  increasing  steeply  to  5%  in  December 
2020 and 8.5% in March 2021, thereby missing again the mid-term y-o-y inflation target 
of 5%. Base money and the broader aggregate M3 increased by a staggering 24.8% and 
28.6%,  respectively,  much  above  the  2019  figures.  Simultaneously,  the  hryvna,  which 
had appreciated by 14.7% against the USA dollar in 2019, depreciated by almost 19% in 
2020. The depreciation took place in the context of a rather non-interventionist policy by 
the  central  bank,  which  bought  only  $1  billion  in  2020,  as  opposed  to  $7.9  billion  the 
year before. Going forward, these monetary developments pose risks to price stability. 

The  crisis-driven  contraction  of  economic  activity  resulted  in  imports  declining 
significantly  stronger  than  exports.  As  a  result,  the  current  account  has  moved  from  a 
deficit  of  2.7%  of  GDP  in  2019  to  a  sizable  surplus  in  2020  (4.3%  of  GDP).  Fresh 
incoming  foreign  direct  investment,  i.e.  excluding  reinvested  earnings,  notoriously  low 

13 

 
already prior to the crisis, further declined to around 0.5% of GDP in 2020. Confidence 
in  the  domestic  currency  remained  broadly  stable,  as  evidenced  by  the  record  year-end 
level of the official international reserves (above USD 28 billion, representing more than 
five  months  of  imports).  Going  forward,  three  main  risks  might  challenge  the 
government’s forecast of economic growth in excess of 4% in 2021. First, difficulties to 
rein  in  government  spending,  over-inflated  beyond  the  increase  in  revenues  in  2020, 
might  distort  economic  growth.  Second,  monetary  funding  of  the  government  deficit, 
coupled with a revival of credit expansion to the private sector, could lead to mounting 
inflationary pressures, thereby suggesting that economic growth might be nominal only, 
without  a  real  positive  effect  on  standards  of  living.  Third,  long-term  growth  depends 
crucially  on  stable  flows  of  domestic  and  foreign  investment  that  depend  crucially  on 
much needed structural reforms – to fight corruption and to improve the judiciary and the 
business climate – which the government, though committed, struggles to implement. 

Ukraine - Macro-Economic Indicators 

Ukraine 
Real GDP, % change 

Consumer price inflation, %, end of period 

Key monetary policy rate, %, end of period 

Unemployment rate, LFS, % 

General government balance, % of GDP 

Gross public debt, % of GDP 

Current account balance, % of GDP 

Official international reserves, USD billion 

International reserves, months of imports 

Gross external debt, % of GDP 

Net foreign direct investment, % of GDP 

Source: National authorities  

2016 
2,4 

12,4 

14,0 

9,3 

-2,3 

80,9 

-1,5 

15,5 

3,0 

120,7 

4,1 

2017 
2,5 

13,7 

14,5 

9,5 

-1,4 

71,8 

-2,2 

18,8 

3,2 

102,9 

3,3 

2018 
3,4 

9,8 

18,0 

8,8 

-1,9 

60,9 

-3,3 

20,8 

3,3 

87,7 

3,4 

2019 
3,2 

4,1 

13,5 

8,2 

-2,2 

50,2 

-2,7 

25,3 

4,9 

79,0 

3,4 

2020 
-4,0 

5,0 

6,0 

9,5 

-5,3 

60,8 

4,3 

29,1 

5,6 

80,8 

-0,7 

1.8. Implementation of macro-financial assistance  

Since  2014,  a  total  of  EUR  4.4  billion  was  disbursed  to  Ukraine  under  five  MFA 
operations.  

The  fourth  MFA  operation  (MFA  IV)  of  EUR  1  billion  in  loans  was  adopted  by  the 
European  Parliament  and  the  Council  in  July  2018,  and  was  successfully  completed  in 
May  2020.  The  MoU  and  the  Loan  Agreement  were  signed  in  September  2018,  and 
ratified by Ukraine in November 2018. The first disbursement under MFA IV (EUR 500 
million) was made in December 2018 after Ukraine fulfilled the policy conditions, which 
covered the areas of fight against corruption, public finance management, governance of 
state-owned  companies  and  privatisation  of  small  companies.  Notably,  as  part  of  the 
implementation  effort  of  MFA  IV  first  tranche  conditions,  Ukraine  made  significant 
progress  in  the  areas  of  anti-corruption  policy  that  had  blocked  the  planned  third 
disbursement under MFA III. The second instalment (EUR 500 million) was disbursed in 
May  2020,  after  the  single  outstanding  prior  action  (on  strengthening  financial  sector 
safeguards  from  the  December  2019  staff-level  agreement  reached  between  the 
Ukrainian authorities and the IMF on a new EFF programme) had been implemented. 

In 2020, as part of the COVID19 MFA package adopted in May 2020, Ukraine became 
eligible for a fifth MFA programme of up to EUR 1.2 billion. The MoU was negotiated 

14 

 
 
 
 
 
 
 
 
 
 
 
 
 
during the summer and entered into force on 14 September 2020, after ratification by the 
national  parliament  and  signature  by  the  President.  The  first  instalment  (EUR  600 
million) was subject to the general political pre-conditions for MFA (respect for effective 
democratic  mechanisms,  including  a  multi-party  parliamentary  system,  the  rule  of  law 
and human rights) and the IMF programme remaining on track, and was disbursed on 9 
December  2020.  The  disbursement  of  the  second  tranche,  is  also  conditioned  on  the 
successful implementation of the eight structural policy measures to which Ukraine has 
committed  in  the  MoU,  covering  the  four  areas  of  public  finance  management,  fight 
against  corruption,  improvement  of  the  business  climate,  and  sectoral  policies  and 
governance of state-owned enterprises. 

These MFA programmes are provided in conjunction with the resources from the IMF. In 
October  2018,  Ukraine  and  the  IMF  agreed  at  staff  level  on  a  14-month  Stand-By 
Arrangement of USD 3.9 billion. The SBA replaced Ukraine’s previous Extended Fund 
Facility  (EFF)  programme  to  provide  an  anchor  for  economic  policies  during  2019  (an 
election year). The IMF Board approved the Stand-by Arrangement in December 2018, 
with  a  first  disbursement  of  USD  1.4  billion.  To  help  Ukraine  pursue  its  reform 
programme, especially given the COVID19-related challenges, the IMF Board approved 
a  new  18-month  USD  5  billion  Stand-By  Arrangement  on  9  June  2020,  out  of  which 
USD 2.1 billion were disbursed immediately. 

1.9. Structural Reforms  

With  the  political  transition  in  2014,  Ukraine  embarked  on  an  ambitious  and  wide-
ranging  reform  programme.  Despite  the  difficult  external  environment  and  significant 
internal  challenges,  Ukraine  managed  to  push  through  reforms  in  a  variety  of  sectors, 
notably  as  part  of  the  policy  programmes  attached  to  the  EU  MFA,  the  IMF  and  the 
World  Bank  assistance.  Following  a  slowdown  in  reform  momentum  in  2016-17,  the 
year 2019 saw renewed reform activity. The need for the authorities to provide a quick 
response  to  the  COVID19-related  crisis,  together  with  political  dissensions  in  the  first 
months of 2020, slowed down the implementation of reforms. In addition to headwinds 
resulting from relevant decisions by the Supreme Court and volatile political support in 
the Parliament, the government seems to have lost the reform momentum, which impacts 
negatively its compliance record with commitments to the IMF and the EU.  

In  the  field  of  public  financial  management,  the  track  record  is  rather  favourable.  New 
laws  adopted  in  2018  improved  the  fiscal  governance  by  introducing  medium-term 
budgeting and by strengthening programme-based budgeting. The State Tax Service and 
Customs Service, created in 2018 and effectively reorganised in 2019 and early 2020, are 
now fully operational, even though the quarantine conditions have not allowed yet for an 
open and transparent selection of their senior management. To improve tax compliance, 
the  authorities  started  the  gradual  deployment  of  electronic  software  tax  registrars  in 
2020,  to  be  fully  adopted  by  all  businesses  by  2025.  However,  the  initially  successful 
example of transparent public procurement by the Health Ministry proved unsustainable 
during the response to the COVID-19 crisis and have, so far, failed to stimulate a positive 
impetus to other line ministries. 

As  regards  the  fight  against  corruption,  the  2020  achievements  are  rather  meager.  The 
Supreme  Court  declared  the  compulsory  electronic  asset  declaration  system  for  public 
officials  in  breach  of  data  protection  requirements  and  anti-constitutional.  Its  operation 
has therefore been suspended. The Court also declared anti-constitutional the presidential 
appointment  of  the  head  of  the  National  Anti-Corruption  Bureau  of  Ukraine  (NABU). 
This created legal uncertainty with respect to NABU’s operation. Moreover, no progress 
has  been  made  with  strengthening  the  judiciary  and  the  effectiveness  of  fighting 

15 

 
corruption, despite non-negligible progress with the attestation of prosecutors at regional 
and local level. On the way to dismantling the tax police, a modern bureau for economic 
and financial investigations was created in early 2021 and awaits operationalisation. 

In  order  to  improve  corporate  governance  of  Ukrainian  state-owned  enterprises, 
independent  supervisory  boards  have  been  established  at  least  in  the  ten  largest 
enterprises  and  further  supervisory  board  members  are  being  selected.  Successful 
consultations with the OECD led to draft amendemnts, pending parliamentary approval, 
to  the  legal  framework  of  corporate  governance  for  state-owned  enterprises.  Also,  the 
state ownership policies have been reviewed and updated for the ten largest state-owned 
companies. In the absence of successful large-scale privatisations, Ukraine has improved 
its legal framework for privatisation and has launched a successful electronic platform of 
sales of small companies and assets, ProZorro.Sale.  

In  the  energy  sector,  the  authorities  and  the  energy  regulator  progressed  on 
implementation of the electricity market law. The electricity retail market was opened to 
large  consumers  from  January  2019  and  the  wholesale  electricity  market  was  opened 
from July 2019, although a number of issues hamper the functioning of and competition 
in the market. Although the government removed the public sector obligation in the retail 
gas market for households in 2020, a price cap was introduced as of February 2021 for 
the duration of the heating season. Despite the removal of penalties and charges that were 
hampering the free choice of a gas provider, the market is far from being liberalised, with 
one single provider controlling more than 90% of the supply to final consumers.  

Finally, given the limited progress in 2020 with reform implementation, major challenges 
remain  related  to  demonopolisation,  impartial  protection  of  property  rights,  cutting 
vested  oligarchic  interests  and  reducing  the  regulatory  burden.  Addressing  these 
remaining challenges is crucial to improve the business climate and to attract and retain 
investors. The sustainability and inclusiveness of economic growth in Ukraine depend on 
the extent to which these remaining structural bottlenecks to investment are successfully 
removed. 

16 

 
 
 
STATUS OF ECONOMIC REFORMS — UKRAINE 

1.  Price liberalisation 

Prices  are  largely  market  driven.  Regulated  prives  for  gas  and  electricity  for  households  were 
abolished in 2020, although price caps on gas for households were temporarily re-introduced for 
the duration of the 2021 heating season.  

2.  Trade regime 

Ukraine  joined  the  WTO  in  May  2008.  The  EU-Ukraine  Association  Agreement  entered  into 
force  on  1 September 2017.  The respective  provisions  as  regards the  Deep  and Comprehensive 
Free Trade Area (DCFTA) have been in application since January 2016. 

3.  Exchange rate regime 

Since the decision to abandon the currency peg in February 2014 the National Bank of Ukraine 
(NBU) has been implementing  a managed float regime within an inflation targetting framework. 
NBU interventions on the foreign exchange market aim at reducing exchange rate volatility and 
influence the country’s stock of official reserves. 

4.  Foreign direct investment (FDI) 

Some restrictions on FDI-related flows exist, such as a ban on the purchase of agricultural land to 
foreigners, in spite of farmland sales reform started in 2020. Capital controls that affect foreign 
investment activity persist, despite steps towards their gradual elimination. The net inflow of FDI 
amounted to 3-4% of GDP in previous years but turned negative in 2020.  

5.  Monetary policy 

The central bank’s primary objective is to achieve and maintain price stability under an inflation 
targeting  framework  (5%  +/-  1  percentage  point).  The  end-year  2020  consumer  price  inflation  
reached precisely 5% but subsequently increased to 8.5% in March 2021 under the influence of a 
significant increase in the supply of money. The cenytral bank increased its key policy rate by 50 
basis points in March 2021. 

6.  Public finances and taxation 

Public  revenues  reached  32.8%  of  the  Ukrainian  GDP  in  2020.  Prior  to  the  COVID19-related 
crisis,  Ukraine  had  made  significant  progress  in  the  consolidation  of  its  public  finances,  and 
managed to bring its fiscal deficit persistently below 2% of GDP since 2017. However, due to the 
stabilisation policy response, the deficit reached 5.3% in 2020 and is expected to remain around 
5% in the  coming  years due  to the  permanent  nature  of  the  pension and  wage increases. Thus, 
fiscal consolidation remains a priority to alleviate risks to medium-term sustainability.  

7.  Privatisation and enterprise restructuring 

Despite ambitious privatisation plans, no major sales of state assets took place in 2020. A number 
of independent supervisory boards have been established in major enterprises, for which updated 
ownership policies have been adopted. The government prepares legal amendments to align SOE 
framework in line with the OECD Guidelines on Corporate Governance of SOEs.  

8.  Financial sector 

The NBU has significantly improved its supervisory standards over the last years. The soundness 
of the banking sector has been strengthened, with an aggregate capital adequacy ratio above 20%. 
Banks’  liquidity  remains  comfortable,  despite  significant  purchases  of  domestic  government 
bonds  to  finance  the  2020  public  deficit.  The  very  high  share  of  non-performing  loans,  above 
45% on average, and the governance of state-owned banks remain two major challenges.  

17 

 
4. 

JORDAN  

1.1. Macroeconomic performance  

The COVID-19 pandemic is severely affecting an already struggling Jordanian economy. 
The  strict  containment  measures  imposed  by  the  authorities  in  March  2020  helped  to 
contain the health crisis,  but  the social  and economic costs have been high. To support 
the  economy,  the  authorities  implemented  a  timely  package  of  growth-friendly  policy 
measures,  including  reducing  temporarily  the  tax-burden  on  businesses  and  individuals 
and the Central Bank of Jordan’s (CBJ) move to increase liquidity for commercial banks, 
ease debt burdens and support SMEs. A phased reopening of the society started in April 
2020, but the second surge in COVID-19 cases since autumn 2020 led to more restrictive 
measures again. 

In 2020, real GDP contraction in 2020 was limited to 1.6%, after years of only subdued 
2%  growth.  The fall in  GDP is  explained by  a  negative (yet  divergent)  performance in 
the  majority  of  the  sectors,  particularly:  Hotel  and  Restaurants  (-8.2%),  Transport, 
Storage  &  Communications  (-5.2%),  Construction  (-3.8%)  and  Social  &  Personal 
Services  (-3.3%).  The  economic  downturn  caused  unemployment  to  spike  to  a  record 
24.7% in the fourth quarter of 2020, up from 19.3% in the first quarter. Unemployment 
remains  highest  amongst  youth  of  15-19  years  (62.1%)  and  youth  of  20-24  years 
(47.9%), women (32.8%) and university degree holders (27.8%). 

The monetary environment has been resilient, supported by a sizable and timely stimulus 
enacted by the CBJ early  on in  the crisis  to  support credit to  the economy and support 
SMEs and individuals. The CBJ's gross foreign reserves (including gold and SDRs) have 
remained  strong,  amounting  to  USD  15.6  billion,  covering  around  11  months  of  the 
Kingdom's imports as at end-2020. Inflation dropped to historic lows, particularly during 
the  lockdown  period  in  Q2  2020.  Indeed,  the  consumer  price  index  increased  by  only 
0.1% in 2020, down from 0.6% recorded in 2019. 

Fiscal  slippages  continue  and  were  further  amplified  by  the  pandemic.  The  general 
budget deficit (including grants) deteriorated to 5.8% of GDP in the first ten months of 
2020 (from 4.3% in the same period of 2019), as the lockdown and restrictions imposed 
to  contain  the  virus  translated  into  lower  domestic  revenues  (-11.6%)  and  higher  total 
expenditures (+2.7%). Jordan’s gross public debt stood at 105.1% of GDP at the end of 
November  2020,  up  from  95.2%  of  GDP  at  the  end  of  2019.  The  National  Electricity 
Company  (NEPCO)  and  Water  Authority  (WAJ)  remain  highly  indebted.  Although  the 
increase is  a certain  source of concern, the  IMF  assessed Jordan’s public debt  as being 
sustainable in December 2020. 

The  current  account  deficit  increased  to  8%  of  GDP  in  2020  (from  2.1%  of  GDP  in 
2019),  and  becomes  more  pronounced  without  grants.  The  trade  deficit  decreased  by  a 
significant  16.5%  in  2020  when  compared  to  2019,  as  imports  slummed  (-11.3%). 
Exports  decreased  by  4.5%  during  2020,  as  the  increase  in  national  exports  was  more 
than offset by the decline in re-exports. The important tourism sector was hit the hardest. 
The  thriving  sector  (which  accounted  for  18%  of  GDP  and  employment  in  2019),  was 
closed to wiped out during the pandemic. Despite the supportive measures taken by the 
authorities  (e.g.  temporarily  reduced  consumption  tax  rates  on  tourism),  international 
travel receipts decreased by 72.5% during the first three quarters of 2020 compared to the 
same period of 2019. Furthermore, remittances decreased by 9.7% over the same period. 
Foreign Direct Investment (FDI) remained low at 1.6% of GDP in 2020, well below the 
12.7% average that prevailed over 2005-2010, before the onset of the Syrian crisis. 

18 

 
Notwithstanding  significant  uncertainty  surrounding  the  evolution  of  the  pandemic,  the 
economy is expected to gradually recover in 2021 (latest IMF forecast: +2%), except for 
tourism and remittances, for which recovery is expected to take longer. 

Jordan - Macro-Economic Indicators  

Jordan 
Real GDP, % change 
Consumer price inflation, %, end of period 
Key monetary policy rate, %, end of 
period 
Unemployment rate, LFS, % 
General government balance, % of GDP 
Gross public debt, % of GDP 
Current account balance, % of GDP 
Official international reserves, USD billion 
International reserves, months of imports 
Gross external debt, % of GDP 
Net foreign direct investment, % of GDP 

Sources: National authorities; IMF; World 
Bank 

2016 
2,0 
0,8 

3,8 
15,3 
-3,2 
92,0 
-9,6 
14,8 
8,1 
68,2 
3,9 

2017 
2,0 
3,2 

5,0 
18,3 
-2,5 
92,8 
-10,6 
15,0 
7,8 
71,1 
4,9 

2018 
1,9 
3,7 

5,8 
18,6 
-2,4 
92,9 
-6,9 
12,9 
6,8 
72,9 
2,2 

2019 
2,0 
0,6 

5,0 
19,1 
-3,3 
95,2 
-2,1 
13,9 
9,8 
72,1 
1,5 

2020  2020 Ref 
-1,6 
0,1 

Q4-2020 
oct-20 
nov-20 

3,5 
24,7 
-5,8 
105,1 
-8,0 
15,6 
11,0 
82,9 
1,6 

1.2. Implementation of macro-financial assistance 

The EU has maintained its support to Jordan throughout the difficult year 2020. Indeed, 
following  the  Kingdom’s  request  for  further  MFA  on  11  July  2019,  the  Commission 
adopted  on  6  September  2019  a  proposal  for  a  new,  follow-up  MFA  to  Jordan  in  the 
amount of EUR 500 million in loans. The proposal was adopted by co-legislators on 15 
January  2020.  The  assistance  is  to  be  implemented  in  three  instalments  over  2020  and 
2021.  

Later  in  2020,  when  the  COVID-19  pandemic  hit  the  already  struggling  Jordanian 
economy, the authorities requested further MFA on 21 April 2020. In turn, as part of the 
COVID-19-MFA  package  adopted  on  25  May  2020,  the  European  Parliament  and  the 
Council  agreed  on  a  MFA  programme  of  EUR  200  million  to  Jordan  (reinforcing  the 
resources made available under MFA-III).  

The new (combined) MFA  comes on top  of the EUR 380 million  of MFA provided to 
Jordan since 2014, under Decisions (EU) 2013/1351 and 2016/2371. The MoU between 
the EU and Jordan, which oversees both MFA operations, was endorsed by the Member 
states committee on MFA on 27 July 2020. It then entered into force on 2 October 2020 
upon signature, whilst the LFA entered into force on 7 October 2020.  

The first instalment (EUR 250 million in loans) was subject to the general political pre-
conditions  for  MFA  (respect  for  effective  democratic  mechanisms,  including  a  multi-
party parliamentary system, the rule of law and human rights) and the IMF programme 
remaining on track. It was disbursed on 25 November 2020. The second instalment (EUR 
250 million in loans) and the third instalment (EUR 200 million in loans) are, in addition, 
subject  to  the  specific  policy  conditionality  agreed  between  Jordan  and  the  EU  in  the 
MoU.  The  programme’s  policy  conditionality  focuses  primarily  on  improving  public 
finance management, fighting corruption, and on reforms in the utilities sector, social and 
labour market policy, and governance. 

19 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The policy actions included in the MoU are in line with the reform commitments taken 
by  Jordan  in  the  context  of  the  EU-Jordan  Partnership  Priorities  and  other  EU  support 
instruments, as well as the adjustment programmes agreed with the IMF and the World 
Bank.  Taking  Jordan’s  “Five-Year  Reform  and  Growth  Matrix”  as  a  guideline  for  the 
design of the policy programme in the MoU ensures ownership of the reform process by 
the Jordanian authorities and avoids overburdening of (limited) administrative capacities. 
The impact of the COVID-19 pandemic on implementation timelines is reflected in the 
fact that the second tranche of the assistance is linked to a more limited set of conditions 
that are achievable in a short(er) time period under a still challenging context.   

These  MFA  programmes  are  provided  in  conjunction  with  the  resources  from  the  IMF 
under  its  four-year  Extended  Fund  Facility  (EFF)  programme  with  Jordan  approved  on 
25 March 2020 (EUR 1.2 billion, 270% of quota). On 20 May 2020 the IMF also made 
available  around  EUR  366  million  in  emergency  assistance  to  Jordan  under  the  Rapid 
Financing Instrument to help the country deal with the impact of the pandemic. The IMF 
Board  completed  the  first  review  under  the  EFF  in  December  2020,  releasing  around 
USD 148 million immediately, and bringing total IMF disbursements to Jordan in 2020 
to USD 689 million. A staff level agreement on the second review was reached in March 
2021,  with  the  IMF  noting  that  the  “program  remains  firmly  on  track,  with  strong 
progress  on  key  reforms”.  Under  this  review,  the  authorities  have  requested  an 
augmentation  of  Fund  access  of  USD  200  million.  The  agreement  is  subject  to  the 
approval of the IMF’s Board.  

1.3. Structural reforms  

In 2020, the short-term policy priorities of the Kingdom were shifted to health and social 
protection,  as  the  authorities  sought  to  mitigate  the  effects  of  the  pandemic.  The 
government  implemented  a  timely  package  of  growth-friendly  policy  measures, 
including  reducing  temporarily  the  tax  burden  on  businesses  and  individuals  and  the 
Central Bank’s move to increase liquidity for commercial banks, ease debt burdens and 
support  SMEs  (see  Section  1.2).  At  the  same  time,  despite  the  sizeable  challenges 
brought  by  the  COVID-19  pandemic  and  the  ongoing  Syrian  crisis,  the  Jordanian 
authorities remain committed to their structural reform agenda and the conditionality in 
the MFA programme.   

The Kingdom’s reform agenda is underpinned by a number of strategies, namely Vision 
2025,  the  Jordan  Economic  Growth  Plan,  and  the  comprehensive  Five-Year  Reform 
Matrix  (2018-2022).  The  Matrix  prioritises  deep  structural  reforms  needed  to  stimulate 
inclusive and sustainable growth and job creation, and achieve fiscal stability. Despite a 
delayed start, Jordan is progressing well with the implementation of the Reform Matrix. 
By  end-2020,  the  implementation  rate  stood  at  47%.  Delayed  implementation  is 
concentrated  in  four  sectors,  namely  water,  public  transport,  energy  and  agriculture.  In 
2020, the Jordanians launched the mid-term review of the Matrix, aiming to update it for 
the  years 2021-2022 and prioritise new areas.  The priorities  moving  forward  are in  the 
areas  of  trade  facilitation,  investments,  export,  water,  agriculture,  tourism  and 
transportation.  The  Reform  Matrix  is  being  consulted  with  different  stakeholders,  and 
should be approved by government sometime during 2021. 

Despite  the  setbacks  brought  along  by  the  pandemic,  and  the  uneven  success  in 
implementing reforms, the Kingdom still achieved important milestones in 2020. These 
include (but are not limited to) the following steps taken by the Jordanian Government: i) 
submitted  to  parliament  an  amended  draft  organic  budget  law,  to  improve  the  fiscal 
framework,  ii)  submitted  to  parliament  amendments  to  the  Illicit  Enrichment  Law,  to 
tackle  corruption,  iii)  requested  a  comprehensive  Fiscal  Transparency  Evaluation,  to 

20 

 
enhance  fiscal  transparency,  and  iv)  approved  amendments  that  enhance  Anti-Money 
Laundering/Combating the Financing of Terrorism. Furthermore, in the area of taxation, 
Jordan  maintained  efforts  to  strengthen  tax  administration  (including  tax  compliance), 
successfully shifted the majority of tax services online, enhanced coordination and data 
sharing between tax and customs agencies, and established a “gold list” of tax compliant 
companies.  On  top,  in  September  2020,  Jordan  signed  the  Multilateral  Convention  on 
Mutual Administrative Assistance in Tax Matters (to tackle cross-border tax evasion and 
avoidance), and is in the process of ratifying it.  

At the same time, progress in other crucial reform areas was less visible. These include 
delays in the submission to parliament of amendments to the Investment Law to address 
tax  arbitrage  and  transfer  pricing  abuses,  the  adoption  of  a  plan  to  reform  electricity 
tariffs  and  the  implementation  of  a  digital  track-and-trace  monitoring  system  to  reduce 
cigarette smuggling.  

Going  forward,  the  tasks  of  the  new  government  (ushered  in  October  2020)  will  be  to 
address  Jordan’s  pre-existing  vulnerabilities,  namely  debt  sustainability,  energy  tariff 
reform  (where a  complex web of cross-subsidisation distorts incentives); labour market 
reform  (in  particular  to  promote  youth  and  female  labour  participation);  and  improve 
competition, governance and transparency. 

21 

 
 
 
STATUS OF ECONOMIC REFORMS — JORDAN   

1. Price liberalisation 

Prices  are  largely  market-driven,  but  there  are  oligopolistic  conditions  in  several  sectors.  Fuel 
subsidies  were  eliminated  in  November  2012.  Electricity  tariffs  and  prices  for  some  basic 
foodstuffs are still subject to administrative controls. In 2017 the government adopted an automatic 
adjustment of electricity tariffs based on fuel prices and abolished subsidies on bread. 

2. Trade regime 

Jordan has a relatively liberal trade regime. It joined 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 potentially 
benefit  from  a  DCFTA  agreement.  It  is  a  member  of  both  the  Greater  Arabic  Free  Trade  Area 
(GAFTA) and the Agadir Agreement and has also concluded FTAs with the United States, Syria, 
the European Free Trade Association (EFTA) and Singapore. On 19 July 2016, the EU approved a 
10-year relaxation of rules of origin for a wide range of industrial products produced in 18 selected 
special economic zones in Jordan, provided that each company uses a  minimum share of Syrian 
refugee labour in the production. 

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.  It  signed  the  OECD’s  Declaration  on  International 
Investment and Multinational Enterprises in 2013. As part of the Five-Year Reform Matrix (2018-
2022),  Jordan  made  good  progress  in  adopting  progressive  economic  liberalisation  policy  that 
favours foreign investment (e.g.: opening of 22 service sectors to full foreign ownership in 2019 
and implementation of the Jordan Customs National Single Window System).  

5. Monetary policy 

The CBJ enjoys an independent and autonomous corporate identity, although its capital is owned 
entirely  by  the  government.  Its  main  monetary  policy  tools  are  fixing  the  interest  on  monetary 
policy instruments and open market operations. The CBJ has developed a credible track record of 
maintaining exchange rate stability, while also ensuring price stability and promoting growth. 

6. Public finances and taxation 

The  taxation  system  shows  a  number  of  structural  weaknesses  which  limit  tax  revenue 
mobilisation,  including:  a  number  of  differentiated  corporate  tax  segments,  widespread  tax 
exemptions, a narrow general sales tax base and capacity constraints in tax administration. There is 
scope  for revenue  mobilisation  policies including  strengthening  tax  administration  and  digitising 
tax collection.  

7. Privatisation and enterprise restructuring 

Privatisation  started  in  1986  in  the  aftermath  of  an  economic  crisis  and  has  made  significant 
progress  since  then.  Nevertheless,  direct  state  ownership  in  certain  sectors  such  as  mining  and 
public utilities remains significant.  

8. Financial sector 

The  financial  sector  is  relatively  well  developed  and  dominated  by  banks,  which  are  generally 
profitable and well capitalised. Banks have already started implementing Basel III. However, the 
narrow  and  shallow  institutional  investor  base  restricts  the  development  of  domestic  capital 
markets. The Central Bank implements a financial inclusion strategy to increase access to and the 
use and quality of financial services.  

22 

 
 
5. 

TUNISIA 

1.4. Macroeconomic performance 

Tunisia’s economic performance severely deteriorated in 2020 following the outbreak of 
COVID-19  and  the  related  lockdown  measures  imposed  by  the  authorities  to  halt  the 
spread of the pandemic. Several fiscal and monetary measures were adopted to mitigate 
the  economic  impact,  including  fiscal  stimulus  measures  (representing  around  2.3%  of 
GDP,  with  another  2%  in  off-budget  measures  and  guarantees)  and  the  easing  of 
monetary  policy,  in  an  attempt  to  bolster  activity,  protect  businesses  and  employment 
while ensure additional financing for healthcare needs. The country faced the recession 
with limited policy buffers and the downturn has put severe pressure on employment and 
social stability. 

In 2020, GDP declined by 8.8% driven by sharp contractions in private consumption and 
investment,  in  addition  to  the  drop  in  trade  volumes.  Almost  all  sectors  contracted, 
notably those linked to external demand and global value chains such as tourism (hotel & 
catering  -43.6%  yoy),  transport  (-28%)  or  manufacturing  (-9.3%)  with  only  agriculture 
and  fisheries  making  small  positive  contributions  to  growth.  Tourism  collapsed  due  to 
mobility  restrictions,  with  revenues  down  by  64%  y-o-y,  in  line  with  the  over  80% 
decrease in overnight stays, underlining the country’s vulnerability to the pandemic. The 
economic downturn also caused a sharp increase in the unemployment rate to 17.4% in 
December 2020, with women particularly affected (24.9%).   

Monetary  policy  eased  further,  as  the  central  bank  lowered  its  key  interest  rate  by  125 
basis  points  to  6.25%  in  two  steps  (March  and  October  2020),  in  an  attempt  to  bolster 
activity. The banking sector remains stable but suffers from low liquidity and the central 
bank  supported  the  sector,  introducing  additional  refinancing  instruments  elligible 
collaterals. It also supported the private sector, requesting banks to defer loan repayments 
or  suspend  a  number  of payments  and  fees.  In  October  2020,  the  parliament  allowed  a 
direct monetary financing plan from the central bank to the government budget. Inflation 
remains high but on a downward trend, at 5.7% on yearly average and 4.9% year-on-year 
in  December  2020.  Core  inflation,  excluding  food  and  energy,  decelerated  slightly  but 
remained at persistently high levels (+4.3%) notwithstanding the slump in demand. 

The fiscal  stance has  deteriorated markedly in  2020, with  the fiscal  deficit widening to 
10.4% of GDP (with the IMF estimating a higher 11.5%), as revenues collapsed (-5.3%) 
and  social  expenditure  increased.  Provisional  data  show  that  the  impact  of  reduced 
activity  was  particularly  negative  on  VAT  collection  (-7.6%)  and  corporate  taxes  (-
18.6%).  Public  expenditure  increased  by  15.5%,  due  to  the  growth  in  current 
expenditure, notably in salaries (+14.5%) and debt service (+16.6%). Wage expenditure 
(around 17.4% of GDP) will remain critical to control the deficit ahead. This was partly 
compensated by the moderation in  transfers, mostly  falling fuel  subsidies (-42%)  given 
lower oil prices. Public debt has subsequently increased to 83.5% of GDP in 2020 (with 
the IMF posting 87.6%, up almost 16 pps from last year) and debt service costs increased 
significantly  (+15.9%).  The  deficit  has  been  increasingly  covered  though  domestic 
borrowing  (over  four  times  that  of  2019)  and  to  a  lesser  extent  by  external  financing. 
However,  external  debt  still  represents  66%  of  the  total  debt  stock,  but  mainly  from 
international partners at  concessional  rates. The  IMF considers Tunisia’s public debt as 
sustainable, given continued strong policy implementation, although sustainability risks 
increased substantially in 2020.  

The current  account  deficit narrowed but  remained elevated at  around 6.8% of GDP in 
2020. Its main determinant was the narrowing of the trade deficit (-34.4%) following the 

23 

 
slump in imports at a faster pace than that of exports (-18.7% and -11.7%, respectively). 
This  reflects  lower  domestic  demand  and  global  energy  prices,  with  a  weaker  external 
demand hitting exports. External imbalances persist and record remittances (+13%) only 
compensated partly the substantial  drop in  tourism  revenues (-64% compared to  2019). 
There was a substantial  drop in  foreign direct  investment  inflows (-28.8% compared to 
2019, to around 1.5% of GDP). At the end of the 2020, foreign reserves stood at USD 8.5 
billion, equivalent to around 5.2 months of imports.  

The  economy  is  expected  to  recover  modestly  in  2021  (latest  IMF  forecast:  3.8%), 
dependent  on the evolution of the pandemic in the country and its major partners, with 
some rebound in domestic demand and most sectors hit by the crisis. 

Tunisia - Macro-Economic Indicators  

Tunisia 
Real GDP, % change 
Consumer price inflation, %, end of period 
Key monetary policy rate, %, end of period 
Unemployment rate, LFS, % 
General government balance, % of GDP 
Gross public debt, % of GDP 
Current account balance, % of GDP 
Official international reserves, USD billion 
International reserves, months of imports 
Gross external debt, % of GDP 
Net foreign direct investment, % of GDP 

2016 
1,2 
4,2 
4,3 
15,5 
-6,1 
62,3 
-8,8 
6,0 
3,0 
75,2 
1,5 

2017 
1,9 
6,2 
5,0 
15,4 
-6,2 
70,8 
-10,3 
5,6 
2,5 
86,6 
2,0 

2018 
2,7 
7,5 
6,8 
15,5 
-4,8 
77,9 
-11,1 
5,3 
2,7 
98,8 
2,5 

2019 
1,0 
6,0 
7,8 
15,2 
-3,5 
72,5 
-8,4 
7,5 
4,5 
97,4 
2,1 

2020 
-8,8 
4,9 
6,3 
17,6 
-10,4 
83,5 
-6,8 
9,2 
5,2 
*98,7 
1,5 

Source: National authorities; Commission staff calculations; *Latest available-Q2 

1.5. Implementation of macro-financial assistance 

Since 2014, a total of EUR 800 million have been made available to Tunisia under two 
MFA operations, MFA-I (2015-2017, EUR 300 million) and MFA-II (2017-2019, EUR 
500 million). Moreover, as part of the MFA package adopted in the context of COVID-
19, the European Parliament and the Council agreed on a new MFA programme of EUR 
600  million  to  Tunisia.  The  MoU  and  the  LFA  were  signed  on  24  November  2020, 
ratified by the Tunisian Parliament on 15 April 2021 and entered into force on 11 May 
2021, upon publication in the Tunisian Official Gazette. 

The  programme’s  policy  conditionality  focuses  primarily  on  four  thematic  areas:  (i) 
public  finance  management  and  civil  sector  reform;  (ii)  reforms  in  state-owned 
enterprises; (iii) social protection; (iv) and investment climate. 

The  MFA  is  to  be  provided  in  two  tranches  of  EUR  300  million  each.  The  first 
instalment, subject to the general political pre-conditions for MFA (respect for effective 
democratic  mechanisms,  including  a  multi-party  parliamentary  system,  the  rule  of  law 
and human rights) was disbursed on 1 June 2021. The second instalment is expected to 
be disbursed in the second half of 2021, once the policy conditions are met.  

The  assistance  is  meant  to  complement  resources  made  available  by  other  donors 
including  the  IMF,  under  its  Rapid  Financing  Facility  programme  with  Tunisia  of 
USD745 million (around 685 million) approved on 10 April 2020. 

24 

 
 
 
 
 
 
 
 
1.6. Structural Reforms  

Reform implementation had very limited progress in 2020, mostly due to the effects of 
the COVID-19 pandemic and the country’s challenging political situation following the 
2019  presidential  and  parliamentary  elections  that  resulted  in  a  fragmented  political 
landscape.  The  protracted  formation  of  a  new  government,  that  only  took  office  at  the 
end of February 2020, was followed by continued instability and additional government 
changes  in  September  2020  and  January  2021,  which  de  facto  halted  the  long-term 
reform agenda. 

In  2020,  the  short-term  policy  priorities  of  the  country  focused  on  pandemic  response. 
The government approved some fiscal stimulus measures to try to mitigate the negative 
impact of the crisis, in an exceptional effort to protect businesses and employment, while 
ensuring  additional  financing  for  healthcare  needs.  The  Central  Bank  eased  monetary 
policy  and  liquidity  management,  while  the  parliament  approved  a  direct  monetary 
financing  plan  from  the  Central  Bank  to  the  government  budget.  It  also  announced  a 
package  to  support  the  private  sector,  requesting  banks  to  defer  payments  on  existing 
loans  and  suspend  any  fees  for  electronic  payments  and  withdrawals.  Over  the  reform 
agenda, the  authorities have also  continued work to  set  up a national  digital  registry of 
needy families, a key component to establish a better-targeted cash transfer system  and 
reforming  subsidies.  At  the  end  of  2020,  the  government  also  introduced  a  number  of 
fiscal  measures  in  the  2021  Finance  Law,  including  the  amendment  of  the  transfer 
pricing rules and the establishment of a single standard corporate tax rate of 15%. 

The  crisis  has  exacerbated  Tunisia’s  reform  paralysis,  in  a  context  of  rising  structural 
challenges  and  deep  imbalances  between  regions  and  sectors.  A  strong  and  credible 
reform  plan  is  needed  to  foster  growth  and  restore  a  sustainable  fiscal  and  external 
financial situation, without which the IMF now assesses that public debt would become 
unsustainable.  Debt  sustainability  risks  are  compounded  by  real  exchange  rate  and 
financing  risks,  as  well  as  SOE  contingent  liabilities  and  guarantees,  so  an  ambitious 
medium-term reform programme is absolutely essential to support recovery and inclusive 
growth,  foster  subdued  investment  and  guarantee  fiscal  and  external  sustainability.  A 
perceived excess of bureaucracy also acts as a discouraging factor to private investment 
and  limited  measures  have  been  also  taken  to  combat  informality.  Other  remaining 
challenges  include  addressing  vested  interests,  improving  governance  and  the  business 
environment,  as  well  as  increasing  competition  across  the  economy  in  order  to  attract 
private  investors,  including  in  emerging  sectors  such  as  digitalization  and  renewable 
energies. 

The country will likely remain in a vulnerable position over the coming years, due to vast 
structural  weaknesses,  high  financing  needs,  reliance  on  external  funding,  and  risk  of 
domestic and external shocks. Reforms should aim to restore sustainable macroeconomic 
positions and address relevant items for public expenditure such as the exceptionally high 
civil service wage bill, the targeting of energy subsidies and SOE liabilities that appear to 
crowd  out  much-needed  social  expenditure  and  growth-enhancing  public  investment. 
Such reforms should also aim to foster inclusive growth through private sector initiative 
and  competition,  in  a  context  where  the  country  will  probably  still  need  substantial 
support from external partners in the coming years. 

25 

 
 
 
 
STATUS OF ECONOMIC REFORMS — TUNISIA  

1. Price liberalisation 
Most  prices  are  market-driven,  but  regulated  prices  exist  for  fuel,  electricity,  transport  and  food 
products. The government started reducing its energy subsidies in 2017 and some minor changes 
took place in 2018 and 2019. Additional reforms are expected, while preserving social tariffs for 
poor households and improving social safety nets, where better targeting is also needed. 
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. The negotiations for an EU-Tunisia DCFTA started in 2016 but 
have been shown little progress since 2019. Technical contacts took place in 2020 on the possible 
accession to the revised rules of the Pan-Euro-Med convention on rules of origin. Tunisia ratified 
the African Continental Free Trade Area Free on 30 November 2020. 

3. Exchange rate regime 

The Central Bank of Tunisia changed its operational framework for exchange rate policy in 2012 
to make rates more flexible, providing multiple-price foreign exchange auctions since August 2018 
and net foreign exchange purchases since May 2019. Despite officially floating, the IMF classifies 
the de facto exchange rate arrangement as crawl-like. 

4. Foreign direct investment 

The  implementation  of  the  2016  investment  law  continued  in  2018/19,  namely  through  the 
operationalisation of the Investment Authority, reforms for the off-shore regime and legislation to 
improve the business climate and investment attractiveness, although the process was interrupted 
by the outbreak of the Covid-19 pandemic. Tunisia was officially removed from the list of “gray” 
jurisdictions of the Financial Action Task Force (FATF) in October 2019. 

5. Monetary policy 

The Central Bank of Tunisia is independent and its mandate is to ensure price stability. However,  
the parliament approved a derogation of the article 25 of the CBT statutes in 2020, allowing for the 
first  time  a  direct  monetary  financing  plan  to  the  government  budget,  interest-free  facility  for  a 
maturity up to 5 years, of which one year’s grace. 

6. Public finances and taxation 

Public expenditure is mostly devoted to salaries and subsidies, crowding out investment and other 
budget priorities. Efforts will be needed to restrain the wage bill, untargeted subsidies and SOEs 
liabilities,  while  expanding  and  better  targeting  social  expenditure.  The  2021  Budget  introduced 
some fiscal measures, including the amendment of the transfer pricing rules and a single standard 
corporate  tax  rate  but  further  reforms  are  needed  to  widen  the  base,  improve  collection,  reduce 
evasion and rebalance the tax burden. The system could also benefit from enhanced international 
information exchanges and elimination of distortions with the off-shore sector. 

7. Privatisation and enterprise restructuring 

The privatisation and restructuring of public banks and SOEs has long been under discussion but 
little  progress  has  been  made,  faced  with  strong  opposition  from  vested  interests.  Despite  some 
progress with transparency, significant governance and financial challenges remain. There are over 
100 SOEs (including seven of the ten largest firms in the country) covering most sectors and often 
with a monopoly position. The sector remains burdened with debt (around 40% of GDP in 2019 for 
the 30 major ones), government guarantees, and arrears, which were exacerbated by the pandemic. 

8. Financial sector 

The  financial  sector  has  been  supported  by  accommodating  policies  from  the  CBT  and  relief  in 
prudential provisions, but the full impact of the pandemic is yet to be observed. The sector entered 
the  crisis  with  some  underlying  vulnerabilities,  including  high  non-performing  loans,  substantial 
exposure  to  credit  risk  to  affected  sectors  and  SOEs,  relatively  shallow  capital  buffers  and  tight 
liquidity. Strengthening its resilience and broaden access to finance remain key challenges. 

26 

 
6. 

ALBANIA 

1.7. Macroeconomic performance 

Albania  was  hit  by  two  major  shocks  in  quick  succession:  after  a  strong  earthquake  in 
November 2019, the first COVID-19 infections were discovered in early March 2020. In 
2020,  Albania  managed  the  COVID-19  pandemic  with  a  short  strict  lockdown  and  a 
rapid  expansion  of  its  very  limited  hospital  capacity.  However,  due  to  rising  infections 
since  February  2021,  the  Government  tightened  restrictions  again.  The  vaccination 
campaign is ongoing since January 2021.  

The Albanian government and the Bank of Albania took swift actions to support business 
and  households,  which  prevented  an  increase  in  unemployment  and  kept  the  external 
position  and  the  financial  sector  relatively  stable.  The  government  disbursed  direct 
assistance of 1% of GDP, in addition to providing sovereign guarantees of about 1.65% 
of  GDP  to  affected  businesses,  while  the  Bank  of  Albania  lowered  its  policy  rate, 
provided liquidity and faciliated loan payment deferrals and loan restructurings. 

In  2020,  Albania’s  GDP  contracted  by  3.3%,  as  the  pandemic-related  domestic  and 
international  restrictions  caused  large  losses  in  tourism  and  manufacturing.  The  good 
performance of the large agricultural  and construction sectors buffered the downturn of 
the economy,  which began showing signs of a moderate recovery in the last  quarter of 
2020. Unemployment (15-65) increased slightly from 12% at the end of 2019 to 12.3% 
by  the  end  of  2020  and  labour  market  participation  decreased  to  68.3%,  with  women 
having been more affected than men on both accounts.  

In  addition  to  lowering  the  policy  rate  to  0.5%  in  March  2020,  the  Bank  of  Albania 
(BoA) provided liquidity to the banking system to keep up lending to the private sector, 
enhanced its operational capacities to guarantee a sufficient cash supply to the economy, 
suspended banks’ dividend payments until end-2021 and facilitated electronic payments. 
Between  March  and  August  2020,  the  BoA  temporarily  facilitated  the  deferral  of  loan 
instalments  to  help  borrowers  hit  by  the  crisis  and  allowed  banks  to  restructure  loans 
without  additional  provisioning,  but  accompanied  by  increased  reporting  requirements. 
The  still  high  non-performing  loans  ratio  continued  to  decrease,  to  8.1%  by  the  end  of 
2020,  even  after  the  moratorium  of  loan  repayments  ended,  a  sign  for  the  sector’s 
stability and the prudent loan restructuring. Inflation rose slightly from 1.4% in 2019 to 
an average of 1.6% in 2020.  

The government revised the 2020 budget four times to accommodate the revenue losses 
from  a  8.5%  drop  in  tax  revenue  and  a  9.1%  expenditure  increase  for  the  support 
packages,  additional  funding  for  the  health  sector  and  post-earthquake  reconstruction. 
Compared with 2019, the revenue ratio decreased from 27.4% to 26.5% of GDP, while 
the expenditure ratio climbed from 29.3% in 2019 to 33.4% of GDP. Overall the fiscal 
deficit  increased  sharply  from  1.9%  of  GDP  in  2019  to  6.9%  of  GDP  in  2020  and  the 
public  debt  ratio  climbed  by  about  10  pps  to  76.1%  of  GDP,  including  the  actual 
provision  of  the  sovereign  guarantees  of  the  government  (about  EUR  110  million  or 
1.65% of GDP foreseen) for loans to enterprises affected by the pandemic. 

The current account deficit widened by about 1 pp. to 8.9% of GDP at the end of 2020, 
due to the strong contraction of typical inflows from tourism, exports of goods as well as 
a  significant  decline  in  remittances,  all  reflecting  the  pandemic  impact.  However,  as 
imports dropped for the same reasons as exports, the trade balance improved slightly (the 
trade  deficit  decreased  16%  y-o-y).  Capital  inflows  from  a  Eurobond  issue  and 
concessional  loans  have  helped  to  finance  the  external  shortfall  even  as  FDI  inflows 

27 

 
dropped.  Overall,  the  exchange  rate  depreciated  only  1.6%.  Gross  external  debt  is 
estimated at 65.8% of GDP at end-2020, up from 60.4% one year earlier, but Albania’s 
vulnerability  from  an increasing external  debt ratio is  mitigated by  solid  forex reserves 
and dominance of concessional debt.  

In  2021,  a  recovery  of  private  consumption,  investment  and  exports  from  a  low  base, 
coupled  with  an  exceptionally  high  level  of  public  investment  in  post-earthquake 
reconstruction,  are  expected  to  boost  real  GDP  growth  to  some  5.5%.  The  government 
plans for a limited reduction of the fiscal deficit and public debt to support the economic 
recovery  and  address  the  elevated  needs  for  health  care,  vaccination  and  social 
assistance.  

Albania - Macro-Economic Indicators 

Albania 
Real GDP, % change 
Consumer price inflation, %, end of 
period 
Key monetary policy rate, %, end of 
period 
Unemployment rate (15-65), LFS, % 
General government balance, % of 
GDP 
Gross public debt, % of GDP 
Current account balance, % of GDP 
Official international reserves, USD 
billion 
International reserves, months of 
imports 
Gross external debt, % of GDP 
Net foreign direct investment, % of 
GDP 

Sources: WIIW, National authorities  

2016 
3,3 

2017 
3,8 

2018 
4,1 

2019 
2,2 

2020 
-3,3 

2020 Ref 

2,2 

1,8 

1,8 

1,1 

1,1 

December 

1,3 
15.6 

-1,8 
72,4 
-7,6 

1,3 
14.1 

-2,0 
70,2 
-7,5 

1,0 
12.8 

-1,6 
67,7 
-6,8 

1,0 
12.0 

-1,9 
66,3 
-8,0 

0,5 
12.3 

-6,90 
76,1 
-8,9 

December 

Q4-2020 

2,9 

3,3 

3,7 

3,5 

4,4 

December 

7,2 
73,5 

6,7 
68,8 

7,0 
65,2 

6,5 
60,4 

9,7 
65,8 

Q4-2020 

9,3 

8,8 

8,5 

8,4 

7,1 

Q4-2020 

1.8. Implementation of macro-financial assistance 

Following the powerful earthquakes in November 2019 and the challenges brought along 
by the COVID-19 pandemic, Albania oficially requested MFA on on 15 April 2020. In 
response,  as  part  of  the  COVID19-MFA  package  adopted  May  2020,  the  European 
Parliament  and  the  Council  agreed  on  an  MFA  programme  to  Albania  of  EUR  180 
million.  

The Member States Committee on MFA delivered a positive opinion on 24 June 2020 on 
the  MoU.  However,  the  Albanian  legislation  requires  a  lengthy  authorisation  and 
ratification  process  of  these  kind  of  loan  agreements,  which  delayed  the  signature  of 
MoU  and  the  LFA  to  3  November  2020.  While  the  MoU  entered  into  force  upon 
signature  on  3  November,  the  LFA  had  to  be  ratified  by  the  Albanian  parliament  and 
entered  into  force  on  26  January  2021.  The  programme’s  policy  conditions  aim  to 
address some of the weaknesses in public finance management, the financial sector, good 
governance and fight against corruption and social protection policies. 

The MFA is to be provided in two tranches of EUR 90 million each. The first instalment 
was  subject  to  the  general  political  pre-conditions  for  MFA  (respect  for  effective 
democratic  mechanisms,  including  a  multi-party  parliamentary  system,  the  rule  of  law 

28 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
and human rights), and was disbursed in March 2021. The second instalment is expected 
to be disbursed in the second half of 2021, once the policy conditions are met.  

The  assistance  is  meant  to  complement  resources  made  available  by  other  donors 
including  the  IMF,  under  its  Rapid  Financing  Facility  programme  RFI  with  Albania  of 
EUR 174 million, approved on 10 April 2020. The IMF deemed important that Albania 
maintains  an  adequate  reserve coverage,  given  its vulnerability  to  external  shocks  and 
endorsed the government’s policy measures and the related increase of the fiscal deficit 
and  public  debt  as  adequate  in  view  of  the  reduced  revenues  and  additional  spending 
needs on reconstruction of earthquake damages and to limit the impact of COVID-19. 

1.9. Structural reforms  

In  March  2020,  the  European  Council  decided  to  open  accession  negotiations  with 
Albania,  but  before  formally  launching  negotiations  with  the  first  intergovernmental 
conference,  Albania  ought  to  implement  a  number  of  specific  conditions,  including  the 
adoption  of  electoral  reform,  continued  implementation  of  judicial  reform,  and 
strengthening  the  fight  against  corruption  and organised crime. These key  priorities for 
Albania have been integrated into the draft negotiating framework, which the European 
Commission presented to Member States on 1 July 2020. The EU-Albania Stabilisation 
and  Association  Council  of  1  March  2021  noted  that  Albania  fulfilled  the  specific 
conditions and is ready to hold the first intergovernmental conference. 

The  Albanian  authorities  continued  their  efforts  to  address  structural  obstacles 
highlighted  in  the  European  Commission’s  2020  Albania  Report  and  the  19  May  2020 
Joint  Conclusions  of  the  Economic  and  Financial  Dialogue  between  the  EU  and  the 
Western  Balkans  and  Turkey.  The  delivery  of  public  services  and  the  administrative 
burden on business continued to improve with the expansion of e-services, VAT refunds 
were  disbursed  fully  and  in  time  to  SMEs  and  the  overall  stock  of  arrears  did  not 
increase.  Preparation  continued  for  introducing  the  “fiscalization”  in  2021,  obliging 
business to use electronic invoicing and registration of sales, which will directly help the 
Tax Administration to obtain real-time and accurate data and lower informal transactions. 
The  reform  of  the  Public  Finance  Management  (PFM)  system  (since  2014)  continued 
with the implementation of the updated PFM reform strategy for 2020-2022, albeit taking 
into account the negative impact of the earthquake and the COVID-19 pandemic without 
changing the objectives.   

As  the  previous  Business  and  Investment  Development  Strategy  (BIDS)  has  expired  in 
2020,  the  Ministry  of  Finance  and  Economy  (MOFE)  is  designing  a  new  BIDS  and 
Action Plan for the period 2021-2027, for the development of SMEs and investment. End 
of 2020, the Albanian government began to consult on the draft start-up law and develop 
the concept of a new “Online Ecosystem Portal” to facilitate access to financing for start-
ups  and  innovations.  However,  the  adoption  of  the  draft  Unified  Law  on  Investment, 
which will align Albanian legislation with international standards, is postponed to 2022 
and  despite  recent  institutional  changes  in  the  state  cadastre,  only  limited  progress  has 
been made in clearing ownership conflicts over land titles.  

Efforts should be stepped up to combat informality and level the playing field for private 
companies  by  improving  public  investment  management,  simplifying  tax  system  and 
procedures  and strengthening the capacity of the public administration. Further reforms 
are  also  needed  to  enhance  legal  enforcement  of  contracts  by  resolving  issues  with 
property rights and the bailiff system. 

29 

 
 
 
 
 
 
STATUS OF ECONOMIC REFORMS — ALBANIA 

1. Price liberalisation 
The vast majority of prices are not subject to regulation and Albania reports very  low levels of 
state aid, but the state aid commission needs more independence. Electricity prices are regulated 
by  the  energy  regulator,  and  in  May  2020,  the  country  amended  the  Power  Sector  Law  with a 
view  to  improving  compliance  with  the  EU  energy  legislation  and  allowing  for  effective 
unbundling of the distribution system operator. 

2. Trade regime 
Albania  joined  the  WTO  in  2000.  In  2006,  Albania  signed  the  Stabilization  and  Association 
Agreement  (SAA)  with  the  EU.  The  agreement,  which  was  ratified  in  2009,  liberalized  trade 
relations  between  the  EU  and  Albania  in  terms  of  tariff  barriers  for  agricultural  and  industrial 
goods.  Since  2007  the  country  is  a  member  of  the  multilateral  Central  European  Free  Trade 
Agreement (CEFTA). 

3. Exchange rate regime 
The Bank of Albania commits to a free-floating exchange rate regime, where supply and demand 
movements in the foreign exchange markets determine the value of the domestic currency against 
other currencies. The Bank intervenes regularly in the markets with the purpose of maintaining 
adequate levels of foreign reserves on a pre-set schedule of auctions. 

4. Foreign direct investment 
Overall, foreign and domestic investors are treated equally in Albania, with the exception of the 
acquisition  of  real  estate,  which  the  government  has  committed  to  address,  but  the  necessaray 
legislative adjustment is still pending. A new “unified investment law” has been drafted, which 
will improve the protection of foreign and domestic investors in line with Albania’s international 
investment  agreements  and  ensures  that  investors’  rights  can  be  enforced  through  courts  and 
international arbitration. The government postponed the adoption of the law from 2020 to 2021.  

5. Monetary policy 
The primary objective of the central bank, as set out in the Law on the Bank of Albania (BoA), is 
to  achieve  and  maintain  price  stability.  BoA  is  financially  independent  and  has  sufficient 
instruments,  competence  and  administrative  capacity  to  function  effectively  and  to  conduct  an 
efficient monetary policy. The monetary policy is conducted with a standard set of instruments: i) 
open market operations; ii) standing facilities; iii) required minimum reserves and within a free-
floating exchange rate regime. 

6. Public finances and taxation 
Albania follows an orderly budget preparation cycle, publishes timely relevant data and its public 
finance  management  has  all  main  components  in  place.  Since  2014,  the  PFM  reform  strategy, 
which has been extended to 2022, addresses weaknesses and progress was achieved with regard 
to transparency, arrears, tax administration and monitoring of fiscal risks. However, it still needs 
additional  capacity  and  to  continue  addressing  persisting  weaknesses  (eg:  low  revenue 
mobilisation and intransparent public investment management).  

7. Privatisation and enterprise restructuring 
Overall  state-owned  enterprises  (SOEs)  are  not  dominant  in  the  Albanian  economy  and 
concentrated in the energy sector but lack transparency and effective oversight, and rely on state 
funding. Monitoring of the sector improved with the growing capacity of the Ministry of Finance 
and  Economy’s  fiscal  risk  unit  but  still  needs  to  expand  to  cover  the  large  number  of  Public-
Private-Partnerships (PPPs) and SOE`s in the energy and water sector. 

8. Financial sector 
Albania’s  banking  sector  is  well  capitalized,  liquid  and  profitable.  Banks’  relatively  large 
exposure to government securities (averaging 25% of their assets) and the high use of Euro in the 
economy (half of all bank loans and deposits are denominated in euro), continue to pose risks to 
the banking sector and complicate the transmission of monetary policy.  

30 

 
7. 

BOSNIA & HERZEGOVINA 

1.1. Macroeconomic performance 

When  the  COVID-19  pandemic  hit  Bosnia  and  Herzegovina  in  early  March  2020,  its 
economy  was  already  in  a  phase  of  a  slowdown,  with  GDP  growth  having  decelerated 
from 3.3% in 2018 to 2.8% in 2019. This was largely the result of a deteriorating external 
environment  and  a  sustained  domestic  political  stalemate,  delaying  overdue  structural 
reforms  and  investment.  During  2020  and  in  response  to  the  COVID-19  crisis,  the 
authorities adopted supplementary budgets, envisaging additional spending of up to 2½% 
of GDP,  providing additional health spending but  also  tax relief and income support to 
households and enterprises.  

Due to the COVID-19 crisis, economic output dropped by 4.5% y-o-y in 2020. The main 
factors behind the economic contraction were declining tourism revenues, lower private 
consumption and investment due to lockdown measures and decreasing remittances, and 
weaker external  demand. The unemployment rate had been on a downward trend since 
2014,  dropping  from  27.5%  to  15.7%  in  2019.  Due  to  the  COVID-19  pandemic, 
unemployment rose again, but so far only slightly, reaching 16.6% in the fourth quarter 
of 2020. Unemployment remains an important challenge, in particular for young people 
(around 23% unemployment in the age group of 15-24 years). There is also a substantial 
brain  drain,  with  a  high  share  of  the  qualified  and  mobile  labour  force  leaving  for  job 
opportunities abroad, which has a negative impact  on the country’s  growth  potential in 
the medium-term. Annual consumer price inflation turned negative during 2020, largely 
due  to  low  domestic  price  pressures  as  well  as  decreasing  prices  of  energy  imports. 
Average inflation decreased from 1.4% in 2018 to 0.6% in 2019 and to  -1.1% in 2020. 
International  institutions expect  only  a moderate GDP recovery in  the post-crisis  years, 
of some 3.5% and 3.25% in 2021 and 2022, respectively. 

The country’s monetary regime is defined since 1997 by the country’s exchange rate peg 
to  the  euro  as  the  anchor  currency.  This  approach  has  served  the  economy  well  so  far. 
However,  it  also  implies  that  the  burden  of  adjustment  to  external  shocks  has  to  be 
accommodated by other policy areas, in particular fiscal policy, necessitating the build-
up  of  sufficient  fiscal  buffers  and  a  stronger  emphasis  on  medium-term  stability,  and 
structural reforms to improve the functioning of markets. In response to the COVID-19 
crisis, the banking agencies adopted a loan repayment moratorium for restructuring credit 
arrangements  for  individuals  and  legal  entities  that  were  severely  affected  by  the  
pandemic.  This  moratorium  expired  on  December  31,  2020.  Banking  Agencies  also 
asked banks to closely monitor portfolios’ exposures and to consider additional customer 
relief.  Furthermore,  a  temporary  suspension  of  dividends  or  bonuses  was  applied  to  all 
banks,  although  the  restriction  on  bonuses  was  relaxed  at  end-2020.  The  country’s 
nominal effective exchange rate appreciated markedly during the last 5 years, mainly due 
to exchange rate movements of the euro vis-à-vis the US dollar, the Turkish lira and the 
Russian  rouble.  However,  in  real  terms,  the  effective  exchange  rate  remained  more 
stable, benefitting from the country’s low inflation rate. Like in the case of other Western 
Balkan countries,  the degree of euroisation is  rather high (39% of deposits  and 51%  of 
private sector loans were denominated in euro as of January 2021). 

Public finances benefitted in recent years from strong revenue growth, but also repeated 
delays in implementing investment spending due to political stalemates. This resulted in 
fiscal  surpluses,  reaching  some  2%  of  GDP  in  2018  and  2019.  The  spending  structure 
still is dominated by the public sector’s wage bill and transfer payments, while the level 
of  public  investment  remained  very  low,  reflecting  among  others  administrative 
weaknesses in implementing planned investment projects. There is a significant degree of 

31 

 
non-alignment with EU public sector accounting standards, which strongly impedes the 
assessment of the country’s actual fiscal  position. As a result, both  the deficit and debt 
ratio could be significantly higher than reported. Due to the COVID-19 crisis, the deficit 
is estimated to have increased markedly, reaching 4%-5% of GDP in 2020. In 2021, the 
deficit  could  come  back  to  about  2½%  of  GDP.  According  to  the  IMF,  the  country’s 
public debt can be considered to be sustainable, although there are downside risks, such 
as contingent liabilities, in particular in the area of public enterprises. 

Bosnia and Herzegovina’s balance-of-payments position remained largely unchanged in 
2020,  as  lower  exports,  in  particular  of  tourism  services,  and  a  sharp  drop  in  workers’ 
remittances,  which  in  recent  years  amounted  to  some  10%  of  GDP,  were  more  than 
compensated by lower imports. Nevertheless, remittances provided substantial support to 
household incomes, in particular in the lower income groups. As a result, the trade deficit 
of  goods  and  services  remained  at  some  15%  of  GDP.  Net  foreign  direct  investment 
remained low at some 2% of GDP in 2020, largely consisting of reinvested earnings. 

Bosnia & Herzegovina - Macro-Economic Indicators 

Bosnia and Herzegovina 
Real GDP, % change 

2016 
3,1 

2017 
3,2 

2018 
3,7 

2019 
2,8 

2020 
-4,5 

2020 Ref 

Consumer price inflation, %, end of period 

-0,5 

Key monetary policy rate, %, end of period* 

n.a. 

0,7 

n.a. 

Unemployment rate, LFS, % 

25,4 

20,5 

General government balance, % of GDP 

1,2 

2,6 

Gross public debt, % of GDP 

Current account balance, % of GDP 

Official international reserves, USD billion 

International reserves, months of imports 

Gross external debt, % of GDP 

40,4 

36,1 

-4,8 

-4,8 

5,0 

7,2 

6,3 

7,1 

71.2 

66.8 

Net foreign direct investment, % of GDP 

2,1 

2,7 

1,6 

n.a. 

18,4 

2,2 

34,2 

-3,3 

6,6 

7,3 

66.0 

2,8 

0,2 

n.a. 

15,7 

1,9 

-1,6 

n.a. 

18 

4,0 

December 

estimate 

32,8 

36,4 

Q3-2020 

-3,1 

-3,2 

7,0 

7,8 

63.6 

2,0 

8,4 

9,4 

66.9 

1,90 

December 

Q3-2020 

* Banks use the Euribor as a reference 
Sources: WIIW, Central Bank, BiH Agency for Statistics 

1.2. Implementation of macro-financial assistance 

Following an official request for MFA from Bosnia and Herzegovina on 14 April 2020 in 
the  context  of  the  COVID-19  pandemic,  the  European  Parliament  and  the  Council 
approved in May 2020 the COVID-19 MFA package, including a new MFA programme 
of EUR 250 million to Bosnia and Herzegovina. The MoU and the LFA were signed on 
15 January 2021, and will enter into force once the ratification process in the country is 
complete and upon publication in the Official Gazette. 

The MFA will be provided in two instalments. The first instalment (EUR 125 million) is 
subject to the general political pre-conditions for MFA (respect for effective democratic 
mechanisms,  including  a  multi-party  parliamentary  system,  the  rule  of  law  and  human 
rights) and could be released after the MoU enters into force. The second tranche (EUR 
125  million)  will  be  released  not  earlier  than  three  months  after  the  release  of  the  first 
tranche and is subject to the fulfilment of a set of policy conditions agreed in the MoU. 
The  policy  measures  fall  into  the  following  four  thematic  areas:  economic  governance 

32 

 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
and  institution  building,  financial  sector  stability,  transparency  and  fight  against 
corruption and a better functioning of the labour market. 

The  assistance  is  meant  to  complement  resources  made  available  by  other  donors 
including  the  IMF,  under  its  Rapid  Financing  Facility  programme  of  EUR  330  million 
approved on 9 April 2020.  

1.3. Structural reforms  

The  country  submitted  an  EU  membership  application  in  February  2016.  In  May  2019 
the  European  Commission  issued  the  Opinion  on  the  application,  which  was 
subsequently endorsed by the Council in December 2019. The Opinion identifies 14 key 
priorities  for  the  country  to  fulfil  in  order  to  be  recommended  for  the  status  of  EU 
candidate  country.  These  priorities  lie  in  the  areas  of  democracy  and  functionality  of 
institutions, rule of law, fundamental rights and public administration reform.  

The  authorities  continued  their  efforts  to  address  structural  obstacles  highlighted  in  the 
European  Commission’s  Bosnia  and  Herzegovina  2020  Report  and  the  19  May  2020 
Joint  Conclusions  of  the  Economic  and  Financial  Dialogue  between  the  EU  and  the 
Western  Balkans  and  Turkey.  Notwithstanding  some  progress  on  improving  the 
financing  of  the  pension  system,  the  overall  quality  of  public  finances  remained  very 
low, with substantial spending inefficiencies, particularly in the health sector, and a poor 
targeting of social  transfers. The level of public  investment  remained very  low, largely 
due  to  administrative  weaknesses,  such  as  inadequate  project  appraisal,  weak  project 
management and lack of transparency during execution. Some progress has been made in 
preparing the restructuring of the railway company in the Republika Srpska entity, which 
could reduce the fiscal burden of this company to the country’s taxpayers. 

Efforts continued to facilitate business registration while some steps have been taken to 
strengthen the support for foreign investors. Improvements in the area of rule of law and 
the functioning of the judiciary have remained very limited. Despite the improved degree 
of  registration  in  the  labour  market  by  increasing  labour  market  controls,  the  informal 
economy  remains  large,  at  some  25-35%  of  GDP.  Although  official  data  on  recorded 
state aid points to a relatively low and declining level of support of some 0.9% of GDP in 
2019, a number of public and private companies benefit indirectly from the accumulation 
of  payment  arrears  of  taxes  and,  in  particular  social  security  contributions.  Draft 
legislation on the Personal Income Tax as well as on social security contributions with a 
view to reduce the tax wedge has been prepared, but has not been adopted yet. 

The country participated for the first time in the 2018 PISA study and the results indicate 
that the students’ performance ranks not only well below the OECD average, but is also 
low  when  compared  with  some  countries  in  the  Western  Balkan  region.  Political 
uncertainties  negatively  affected  transport  and  energy  infrastructure  investment  while 
necessary steps for modernising the regulation of the energy and transport markets were 
further  delayed.  As  a  result,  the  markets  for  electricity  and  gas  remain  fragmented  and 
dominated by key incumbent companies.  

The  privatisation  and/or  restructuring  of  state-owned  enterprises  (SOEs)  would  reduce 
the fiscal burden and have positive effects on other businesses and competition. A further 
movement  to  overcome  the country’s internal institutional and economic fragmentation 
by strengthening a common internal market within Bosnia and Herzegovina would help 
improve the quality of the business environment. Also, simplifying business registration, 
licensing and permitting, introducing e-signatures and improving bankruptcy laws would 
support the post-COVID-19 economic recovery. 

33 

 
STATUS OF ECONOMIC REFORMS — BOSNIA & HERZEGOVINA 

1. Price liberalisation 
There  is  a  wide  range  of  administrated  prices  in  Bosnia  and  Herzegovina.  During  the  COVID-19 
pandemic,  the  authorities  introduced  temporary  price  freezes  and  “fair”  profit  margins  for  certain 
commodities,  such  as  food  and  hygenic  articles,  but  also  oil  products.  There  is  no  information 
available on the weight of administrated prices in the country’s consumer basket. 

2. Trade regime 
In  December  2006,  Bosnia  and  Herzegovina  signed  the  Central  European  Free  Trade  Agreement 
(CEFTA),  which  became  operational  in  November  2007.  In  June  2008,  the  country  signed  the 
Stabilization and Association Agreement (SAA) with the European Union which officially entered 
into force on June 1, 2015. 

3. Exchange rate regime 
Bosnia  and  Herzegovina  runs  a  currency  board arrangement,  with the  convertible  mark  pegged  to 
the euro at an exchange rate fixed by the Law on the Central Bank. 

4. Foreign direct investment 
About  two  thirds  of  the  country’s  stock  in  FDI  is  originating  from  EU  countries.  A  countrywide 
strategic  framework  to  encourage  foreign  direct  investments  is  not  yet  in  place.  The  Republika 
Srpska  entity  adopted  procedures  for  granting  direct  investments  incentives  and  transferred  the 
responsibility  for  foreign  direct  investments  to  the  Ministry  of  Economy  and  Entrepreneurship  in 
order to better connect foreign investors with domestic firms. 

5. Monetary policy 
The Central Bank's objective is to keep the domestic currency stable which is in contrast with the 
primary  objective  of  monetary  policy  in  the  EU,  price  stability.  This  approach  has  served  the 
economy well so far. However, it also implies that the burden of adjustment to external shocks has 
to be accommodated by other policy areas, in particular a responsible fiscal policy, necessitating the 
build-up of sufficient fiscal buffers and a stronger emphasis on medium-term stability, and structural 
reforms to improve the functioning of markets.  

6. Public finances and taxation 
Due to the weaknesses of country-wide fiscal data, the country’s overall fiscal position is difficult to 
assess.  The  reporting  of  public  sector  data  in  line  with  the  European  System  of  National  and 
Regional Accounts (ESA 2010) remains very limited and the alignment of the underlying statistical 
framework with ESA 2010 requirements and definitions is still very low. Fiscal rules remain at the 
level of one of country’s two entities and there is still no independent fiscal institution to monitor 
and  coordinate  fiscal  policy  of  the  various  stakeholders.  The  medium-term  budgetary  framework 
remains insufficiently developed and underused as a policy-guiding instrument. In the taxation area, 
some progress was made with the signing of the OECD/Council of Europe Multilateral Convention 
on  Mutual  Administrative  Assistance  in  Tax  Matters  (MAC).  The  Parliament  of  Bosnia  and 
Herzegovina ratified the MAC in June 2020.  

7. Privatisation and enterprise restructuring 
The  privatisation  process  is  still  not  complete  and  restructuring  efforts  have  made  little  progress. 
Attempts  to  sell  earmarked  public  companies  have  been  largely  unsuccessful.  The  due  diligence 
procedures for two local telecommunication companies have been completed. Strategic sectors such 
as  transport  and  energy  are  still  dominated  by  poorly  managed  and  often  inefficient  state-owned 
companies.  

8. Financial sector 
The financial sector has remained largely stable despite some negative effects from COVID-19, but 
a  high  degree  of  complexity  and  fragmentation  in  the  institutional  and  regulatory  set-up  is 
hampering  banking  supervision.  The  sector  consists  of  a  few  large,  mainly  foreign  owned  banks, 
accounting for some two thirds of the sector, a limited number of smaller, local banks and two state-
owned development banks. The number of banks (23) is high in relation to the market size.  

34 

 
8. 

KOSOVO* 

8.1 Macroeconomic performance 

The COVID-19 pandemic took a heavy toll on Kosovo’s macroeconomic performance in 
2020. Sluggish  growth at  the beginning of the  year  evolved into a  recession  due to  the 
pandemic-related lockdown and travel restrictions. Based on quarterly data for 2020, the 
provisional  estimate  of  annual  GDP  contraction  is  3.9%.  The  main  drivers  of  the 
contraction were severely falling service exports and investment. The IMF estimates an 
annual  contraction  of  6%  in  2020.  The  recession  was  somewhat  mitigated  by  rising 
government spending and faltering imports.  
In response to the crisis, the government adopted an emergency package in spring, which 
was later enlarged to the Economic Recovery Programme, amounting in total to 5.2% of 
the  2020  GDP.  The  main  measures  were  increased  allocations  for  the  health  system, 
higher wages for medical and emergency workers, higher social transfers and subsidies 
for vulnerable households, support for formal and informal employment  and support to 
firms in the form of salary subsidies and easier access to borrowing. The labour market 
situation,  which  had  been  a  concern  already  before  the  outbreak  of  COVID-19, 
deteriorated  in  the  second  quarter,  but  rebounded  somewhat  in  summer  with  the 
unemployment rate standing at  a similar level  (24.6%) compared  to  the same period of 
2019.  Employment  and  labour  force  participation  rates  declined  slightly  to  30%  and 
40%, respectively. 
Despite the COVID-19 crisis, the mostly foreign-owned banking sector remained stable 
in  2020.  In response to  the crisis,  the Central  Bank of Kosovo (CBK) allowed for a 3-
month loan repayment moratorium in spring and loan restructurings of up to one year in 
June-September. These measures helped contain the need for banks’ loan-loss provisions 
and  supported  credit  growth,  which  has  decelerated,  but  remained  at  7.1%  y-o-y  in 
December as compared to an average of 10.8% over the previous two years. The growth 
of deposits declined to 8.6% y-o-y in September, but rebounded to 11.5% in December, 
which  is  in  line  with  the  average  of  10.9%  over  the  previous  two  years.  Financial 
soundness indicators in the banking sector remained satisfactory. For the banking system 
as a whole, the ratio of liquid  assets to  short-term  liabilities stood at  36.1% in  October 
and  the  capital  adequacy  ratio  was  at  16.9%,  both  standing  well  above  the  regulatory 
minima of 25% and 12%, respectively. Despite lower bank profitability, with the average 
return-on-equity  ratio  declining  to  14%  in  2020  from  18.9%  in  2019,  the  risks  in  the 
banking sector seem contained. 
In line with contracting economic activity, average annual inflation declined to 0.2% in 
2020  with  negative  monthly  readings  since  July.  A  positive  contribution  to  inflation 
came  from  food  prices  while  negative  contributions  came  from  energy  prices  and  the 
elimination of import tariffs on goods from Serbia and Bosnia and Herzegovina in April 
2020. 
Falling tax revenues and rising public spending led to  a deteriorating fiscal  outcome in 
Kosovo. The headline deficit widened to 7% of GDP in 2020 from 2.9% in the previous 
year.  Tax  revenue  contracted  by  9.3%  while  the  public  spending  rose  by  6.5%  as 
compared  to  the  outcome  of  2019.  The  large  deficit  resulted  in  a  steep  increase  in  the 
public debt-to-GDP ratio, which is estimated to have reached 21.8% in 2020 from 17.5% 
in the previous year. The IMF assesses public debt as sustainable but points to relatively 

* This designation is without prejudice to positions on status, and is in line with UNSCR 1244(1999) and 

the ICJ Opinion on the Kosovo declaration of independence. 

35 

 
                                                           
large  financing  needs  and  vulnerabilities  arising  from  the  absence  of  external  market 
access. 
The current account deficit is estimated to have widened to 7.1% of GDP in 2020 from 
5.6%  in  2019.  The  main  driver  was  a  severe  decline  in  service  exports,  which 
considerably  outweighed  an  increase  in  exports  of  goods  and  led  to  overall  exports 
contracting to 25.4% of GDP from 29.3% in 2019. Due to travelling restrictions, workers' 
remittances,  which  were  sent  via  official  channels,  increased  by  15.4%  and  stood  at 
13.9%  of  GDP  in  2020,  partly  offsetting  the  trade  deficit.  On  the  financing  side,  net 
inflows of FDI increased to 5% of GDP due to lower profit repatriation in the financial 
sector. In contrast, gross FDI declined by 10% in 2020. Official reserves were covering 
3.2 months of imports at the end of 2020. 
While  the  outlook  is  surrounded  by  high  uncertainties  related  to  the  evolution  of  the 
pandemic, the IMF projects economic growth to recover to 4.5% in 2021, which is in line 
with the average growth rate observed over the past five years. 
Kosovo - Macro-Economic Indicators 

Kosovo 
Real GDP, % change 
Consumer price inflation, %, end of period 
Key monetary policy rate, %, end of period 

Unemployment rate, LFS, % 
General government balance, % of GDP 
Gross public debt, % of GDP 
Current account balance, % of GDP 
Official international reserves, USD billion 
International reserves, months of imports 
Gross external debt, % of GDP 
Net foreign direct investment, % of GDP 

2016 
4.1 
1.3 
7.2 

27.5 
-1.1 
14.4 
-7.9 
0.6 
3.5 
33.2 
3.6 

2017 
4.2 
0.5 
6.8 

30.5 
-1.3 
16.6 
-5.4 
0.7 
3.3 
32.6 
4.0 

2018 
3.8 
2.9 
6.0 

29.6 
-2.9 
16.9 
-7.6 
0.8 
2.9 
30.3 
4.0 

2019 
4.9 
1.1 
6.4 

25.7 
-2.9 
17.5 
-5.6 
0.9 
2.8 
31.0 
3.6 

2020  
-3.9 
0.1 
6.0 

24.6 
-7.0 
21.8 
-7.1 
1.0 
3.2 
35.0 
5.0 

2020 Ref 

December 
December 
Q3-2020 

December 

Sources: WIIW, National authorities  

1.5. Implementation of macro-financial assistance 

Following an official request for MFA from Kosovo on 8 April 2020 in the context of the 
COVID-19 pandemic, the European Parliament and the Council approved in May 2020 
the COVID-19 MFA package, including a new MFA programme of EUR 100 million to 
Kosovo. The MoU and the LFA entered into force on 8 September 2020.   
The  programme’s  policy  conditionality  focuses  primarily  on  strengthening  public 
finance, enhancing financial stability, tackling informality, advancing the rule of law, and 
improving employment prospects for the youth.  
The MFA is to be provided in two tranches of EUR 50 million each. The first instalment 
was  subject  to  the  general  political  pre-conditions  for  MFA  (respect  for  effective 
democratic  mechanisms,  including  a  multi-party  parliamentary  system,  the  rule  of  law 
and  human  rights)  and  was  disbursed  on  6  October  2020.  The  second  instalment  was 
disbursed on 1 June 2021, after Kosovo fulfilled the attached policy conditions. 
The  assistance  is  meant  to  complement  IMF  funds  (EUR  52  million)  under  the  Rapid 
Financing Facility (RFI) (50% of Kosovo quota in the Fund), approved on 10 April 2020. 
The  IMF acknowledges the urgency of external  and fiscal  financing  gaps and points to 
Kosovo’s  commitment  to  macroeconomic  stability.  COVID-19  mitigation  measures, 
including  a  temporary  suspension  of  the  fiscal  rule,  are  deemed  as  appropriate,  given 
Kosovo’s commitment to reinstate the fiscal rule once the pandemic recedes. 

36 

 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
1.6. Structural reforms  

Despite the challenges posed by the pandemic, the country’s authorities continued their 
efforts  to  tackle  structural  obstacles  highlighted  in  the  European  Commission’s  2020 
Kosovo Report and the 19 May 2020 Joint Conclusions of the Economic and Financial 
Dialogue  between  the  EU  and  the  Western  Balkans  and  Turkey.  With  respect  to  the 
business  environment,  progress  has  been  made  in  streamlining  business  registration  as 
the  implementation  of  the  unique  identifier  number  (UIN)  for  enterprises  started  in 
February  2020.  A  general  inspection  reform  is  ongoing  with  the  aim  of  reducing  the 
number of (overlapping) inspections from 36 to 15. The central register for permits and 
licences is  still being updated. The adoption of the  Law on voluntary mediation  (2019) 
contributed to the progress of contract enforcement while some progress was achieved in 
bringing  the  procedures  for  notification  of  State  aid  closer  to  the  EU  acquis  and  in 
staffing the state aid department.  

The quality of education remains a concern, as it does not provide students with the skills 
currently required by the labour market, which translates into very long school-to-work 
transitions and intermittent or permanent periods of informal employment. Kosovo made 
some progress  in  improving road infrastructure, but  there are large  gaps in railway and 
energy infrastructure. In April 2020, the approval of the connection agreement between 
the  European  Network  of  Transmission  Systems  Operators  of  electricity  (Entso-e)  and 
Kosovo’s transmission system operator (KOSTT) marked a major development towards 
Kosovo’s  integration  in  regional  energy  networks.  Although  investments  in  renewables 
are  gradually  increasing,  Kosovo  remains  reliant  on  a  predominantly  coal-based, 
outdated and unreliable energy production system. The digitalisation of the economy is 
gradually  advancing  as  Kosovo  achieved  the  mid-term  targets  of  its  2013-2020  digital 
agenda. 

Going forward, Kosovo  faces the challenge to  streamline its social  security system  and 
revise the war veteran pension scheme in order to address concerns related to its fairness 
and  fiscal  sustainability.  Improving  the  governance  and  economic  performance  of 
publicly owned enterprises (POEs) would reduce fiscal risks. The business environment 
would  benefit  from  advancing  reforms  related  to  the  functioning  of  the  judicial  system 
and  from  further  steps  on  the  fight  against  widespread  corruption,  informality  and  tax 
evasion.  Active  labour  market  measures  seem  essential  to  support  employment  and 
increase labour force participation, coupled with stronger incentives for workers to join 
formal  employment.  Accelerating  sustainable  investments  in  infrastructure  and  energy 
would  enable  Kosovo  to  improve  the  reliability  of  energy  supply,  reduce  pollution  and 
speed up its green transition. 

37 

 
 
 
STATUS OF ECONOMIC REFORMS — KOSOVO 

1. Price liberalisation 
Price formation is liberalised with a few exceptions. Administrative prices are limited to public 
utilities,  medical  services  co-payments,  parking,  driving  lessons,  some  postal  services,  national 
parks, school textbooks, pre-primary education, public kindergarten, motor vehicle insurance and 
administrative  fees.  The  regulatory  agency  sets  electricity  prices  for  households  using  as  a 
reference the Hungarian energy exchange HUDEX. Fuel prices are  updated in accordance with 
their fluctuations on international oil market and the euro/dollar exchange rate. 

2. Trade regime 
Kosovo  is  a  small  and  open  import-dependent  economy.  Exports  are  dominated  by  tourism 
services to the diaspora. Kosovo’s Stabilisation and Association Agreement with the EU entered 
into  force  in  2016.  Kosovo  is  at  an  early  stage  of  preparation  for  applying  for  WTO  observer 
status.  Trade  under  free  trade  agreements  (FTAs)  accounts  for  about  80%  of  foreign  trade.  In 
June 2020 Kosovo completely abolished the 100% tariffs on goods imports originating in Serbia 
and  Bosnia  and  Herzegovina,  which  were  in  violation  of  the  Central  European  Free  Trade 
Agreement (CEFTA) and hampered the development of a regional economic area (REA) in the 
Western Balkans.  

3. Exchange rate regime 
Kosovo unilaterally introduced the Deutsche Mark in 1999, and subsequently the euro in 2002, as 
sole legal tender. 

4. Foreign direct investment 
Kosovo is open to FDI; its only FDI restrictions relate to acquiring and exchange of property and 
agricultural  land. The economy  relies  on  net inflows of foreign  direct investment (FDI),  which 
finance a large share of persistent current account deficit. Net FDI inflows showed resilience in 
2020, partly as a result of decreased profit repatriation of  the financial sector. 

5. Monetary policy 
The Central Bank of Kosovo was established in 2008 with functions mostly related to banking 
supervision  and  running  the  payment  system,  the  only  effective  monetary  instrument  being  its 
reserve requirement policy. 

6. Public finances and taxation 
Kosovo’s total revenue-to-GDP ratio is rather low, at 26.5% of GDP in 2019, relying mainly on 
indirect  taxes.  Reforms  to  modernise  and  digitalise  the  tax  administration  are  progressing.  The 
Tax  Administration  has  developed  a  good  taxpayer  service  focus,  in  particular  with  the 
widespread use of e-filing and e-payment. However, most of the adjustment needs to happen on 
the spending side, by making social spending more efficient and improving the implementation 
of capital projects. 

7. Privatisation and enterprise restructuring 
The  privatisation  process  of  socially-owned  enterprises  is  advancing  very  slowly.  The 
Privatisation Agency (PAK) in 2019 sold 222 of 400 planned SOE assets to the value of EUR32 
million. Since the PAK board began operating, 48 of 589 SOEs have been put into liquidation, 
while 15 liquidation proceedings were concluded. 

8. Financial sector 
Overall, the financial sector remains stable with adequate capitalisation and comfortable liquidity 
buffers. Due to the reprogramming measures undertaken by the CBK, the ratio of non-performing 
loans  remained  low  at  2.7%  in  October  2020.  Banks  continued  to  be  financed  by  deposits, 
predominantly from households. 

38 

 
 
 
9. 

MONTENEGRO 

1.7. Macroeconomic performance 

After a relatively soft first wave of COVID-19 infections in spring 2020, a much bigger 
and extended second wave followed soon after. The shock had widespread effects across 
the economy, depressing not only tourism and retail services, but also trade, investment 
and  public  finances.  As  a  result,  the  economy  plunged  by  15.2%  y-o-y  in  2020.  The 
labour  market  is  recording  growing  unemployment  as  well  as  an  increasing  share  of 
economically inactive population. As a result, the unemployment rate reached 21.5% at 
the end of December 2020, compared to 16.1% a year earlier. To support the households 
and  the  economy,  the  authorities  have  implemented  –so  far–  five  economic  support 
packages,  including  wage  subsidies  and  temporary  tax  reductions  for  businesses  and 
individuals,  while  the  Central  Bank  introduced  several  measures  to  support  banking-
sector liquidity and facilitate loan restructuring for both households and businesses. 

Credit  growth  kept  decelerating  due  to  increased  COVID-19  related  uncertainties  and 
growing  unemployment.  Although  the  central  bank  of  Montenegro  cut  the  minimum 
reserve requirement ratio by 2 pps. to help banks increase their liquidity and boost their 
lending  potential,  bank  lending  growth  eased  to  3.2%  y-o-y  in  December  from  4.5%  a 
year  before.  Overall,  the  banking  sector  has  so  far  proved  resilient  to  the  COVID-19 
crisis, with banks’ capital adequacy ratio comfortably above the regulatory minimum and 
the level of impaired loans stabilised thanks to payment deferrals and loan restructuring. 
The deflationary trend which commenced in March 2020 persisted during the rest of the 
year.  Consequently,  the  decline  in  consumer  prices  (HICP)  averaged    0.8%  in  2020, 
compared to an increase by 0.5% a year earlier. Lower oil prices, combined with subdued 
domestic demand related to the coronavirus were the key disinflationary factors. 

The  combination  of  the  pandemic-induced  decline  in  tax  revenues  and  higher  COVID-
19-related  spending  deepened  Montenegro’s  budget  deficit.  Thus,  in  2020,  the  general 
government registered a cash deficit of 11.0% of GDP, compared to the revised budget 
plan’s deficit target of 7.2% of GDP for the whole year. The deficit expansion came after 
budget  revenues  fell  by  13.1%  y-o-y  in  2020,  while  expenditures  rose  by  4.8%  y-o-y. 
Revenues in nearly all categories, except for corporate tax income, were lower compared 
to the same period of 2019. The spending increase was driven by higher expenditure in 
the health sector, as well as spending on wage subsidies. In contrast, capital expenditure 
fell by 30.6% y-o-y. The stock of public debt surged to 105.1% of GDP in 2020, up from 
76.5% of GDP a year before. On 9 December, the government issued a EUR 750 million 
(or 16% of GDP) seven-year Eurobond with an interest rate of 2.875%. The bond issue 
aims to help the government cover its financing needs for 2021 and 2022. 

The  current  account  usually  posts  strong  surpluses  in  Q3  due  the  tourism  receipts 
generated during the peak of the summer tourist season. However, due to the COVID-19 
pandemic  revenues  from  tourism  fell  sharply,  which  meant  that  the  usual  inflows  to 
partly  offset  the  chronically  large  merchandise  trade  deficit  did  not  materialise. 
Consequently,  Montenegro's  current  account  deficit  jumped  to  26%  of  GDP  in  2020, 
compared to 15% of GDP in the same period one year earlier. The increase in the deficit 
was mainly due to the much lower surplus in the services account. Moreover, the surplus 
in  the  secondary  account  also  contracted  as  the  coronavirus  crisis  negatively  affected 
remittances.  The  primary  account  recorded  some  moderate  increase.  The  merchandise 
trade deficit contracted by 2.6 pps. y-o-y to 39% of GDP in 2020, due to the sharp import 
decline  in  the  period.  Foreign  direct  investment  inflows  remained  resilient,  with  a  net 
inflow of EUR 468 million (corresponding to 11.0% of GDP) during 2020 compared to 
7.5%  of  GDP  in  2019.  In  December  2020,  gross  foreign  currency  reserves  (including 

39 

 
gold  and  SDRs)  stood  at  EUR  1.7  billion,  which  is  equivalent  to  around  8  months  of 
imports of goods and services. 

Montenegro - Macro-Economic Indicators 

Montenegro 

Real GDP, % change 

Consumer price inflation, %, end of period 

Key monetary policy rate, %, end of period 

Unemployment rate, LFS, % 

General government balance, % of GDP 

Gross public debt, % of GDP* 

2016 

2017 

2018 

2019 

2.9 

1.0 

6.7 

17.7 

-3.6 

64.4 

4.7 

1.9 

6.2 

16.1 

-5.3 

64.2 

5.1 

1.6 

5.8 

15.2 

-3.9 

70.1 

4.1 

1.0 

5.5 

15.1 

-2.0 

76.5 

Current account balance, % of GDP 

-16.2 

-16.1 

-17.0 

-15.0 

Official international reserves, USD billion 

International reserves, months of imports 

0.7 

3.6 

1.0 

3.7 

1.1 

4.0 

1.5 

5.1 

2020 

-15.2 

-0.9 

5.8 

18.4 

-11.0 

105.1 

-26.0 

2.1 

8.2 

Gross external debt, % of GDP 

162.6 

160.6 

163.2 

167.9 

199.0 

Net foreign direct investment, % of GDP 

5.2 

11.5 

8.9 

7.5 

11.0 

2020 Ref 

December 

December 

December 

* Gross external public debt 
Sources: WIIW, National authorities  

1.8. Implementation of macro-financial assistance 

Following an official request for MFA from Montenegro on 15 April 2020, the European 
Parliament  and  the  Council  agreed  on  an  MFA  programme  to  Montenegro  of  EUR  60 
million in loans, as part of the COVID-19 MFA package adopted in May 2020. The MoU 
and the LFA were signed on 28 August 2020, and entered into force on 28 August 2020 
and on 15 September 2020, respectively. 

The programme’s policy conditionality focuses primarily on strengthening public finance 
and  the  fight  against  corruption,  enhancing  financial  stability,  improving  the  business 
environment, and reforming social protection.  

The MFA is to be provided in two tranches of EUR 30 million each. The first instalment 
was  subject  to  the  general  political  pre-conditions  for  MFA  (respect  for  effective 
democratic  mechanisms,  including  a  multi-party  parliamentary  system,  the  rule  of  law 
and  human  rights)  and  was  disbursed  on  6  October  2020.  The  second  instalment  was 
disbursed on 1 June 2021, after Montenegro fulfilled the attached policy conditions.  

The  assistance  is  meant  to  complement  IMF  funds  (EUR  75  million)  under  the  Rapid 
Financing  Facility  (RFI)  (100%  of  Montenegro’s  quota  in  the  Fund),  approved  on  24 
June  2020.  The  IMF  acknowledges  that  given  the  current  health  emergency  the 
authorities are not in a position to design or implement a Fund-supported programme at 
this  time,  and  points  to  the  country’s  intentions  to  pursue  sound  fiscal  and  economic 
policies,  as  well  as  its  track  record  of  cooperation  with  the  Fund,  of  servicing  its 
obligations and its access to international capital markets. 

1.9. Structural reforms  

Despite the challenges posed by the COVID-19 pandemic, Montenegro has continued to 
show its commitment to  its accession path  and delivered  further  tangible  results in  key 
areas.  On  30  June  2020,  eight  years  after  the  launch  of  accession  negotiations  with 

40 

 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Montenegro, the EU opened the last negotiating chapter (competition policy). At present, 
all  33  chapters  are  opened  for  negotiation,  3  of  which  have  already  been  provisionally 
closed. Montenegro continued to implement the action plans for rule of law (chapters 23 
and  24)  and  other  strategic  documents  in  this  area.  It  worked  towards  addressing  the 
outstanding  challenges  highlighted  in  the  European  Commission’s  2020  Montenegro 
Report, and the 19 May 2020 Joint Conclusions of the Economic and Financial Dialogue 
between the EU and the Western Balkans and Turkey. 

As  regards  specific  structural  reforms,  the  main  challenges  posed  by  COVID-19 
highlighted the need to  strengthen the public health  sector, preserving  employment and 
improving social protection, enhancing the business environment and providing support 
to  the  private  sector.  The  pandemic  put  the  health  system  under  stress,  revealing 
persistent  under-funding  and  weak  capacities  to  cope  with  the  crisis.  Following 
improvements in the labour market in the pre-crisis years, the pandemic also put jobs at 
risk,  including  in  the  informal  sector.  Underfunded,  inadequate  and  insufficiently 
targeted social  assistance and unemployment benefit schemes became further stretched. 
The crisis also underlined the need to review the social protection system with the aim of 
improving its coordination with employment activation and its capacity to reduce social 
exclusion and poverty. Businesses, in particular SMEs, self-employed and small family 
enterprises were considerably affected by the pandemic, requiring urgent support, such as 
provision of liquidity and further easing the regulatory and tax burdens.  

The  effectiveness  of  support  measures  depends  on  good  governance,  coordination  and 
inclusiveness,  taking  into  consideration  the  large  informal  sector.  Work  on  legislative 
alignment  with  EU  acquis  and  institution-building  continued  across  the  board,  with 
certain  remaining  challenges,  including  in  the  area  of  judicial  reform.  The  COVID-19 
pandemic created additional challenges in  this area  and contributed to  certain  objective 
delays  in  Montenegro’s  work  on  its  rule  of  law  agenda.  Concerning  judicial  reform, 
Montenegro is making further progress to develop and promote the system of alternative 
dispute settlement  resolution and on the judiciary’s  IT system. An analysis to  feed into 
the  new  strategy  for  rationalisation  of  the  judicial  network  is  underway.  It  remains 
important that Montenegro does not reverse earlier achievements on judicial reform and 
that it continues building track records, in particular on the fight against corruption and 
organised crime, while ensuring genuine independence of all the respective institutions. 

41 

 
 
 
STATUS OF ECONOMIC REFORMS — MONTENEGRO 

1. Price liberalisation 
Price formation is liberalised with a few exceptions. Administrative prices are limited to public 
utilities,  maintenance  charges  in  buildings,  medical  services  co-payments,  parking,  driving 
lessons,  postal  services,  national  parks,  school  textbooks,  pre-primary  education,  public 
kindergarten,  motor  vehicle  insurance  and  administrative  fees.  The  regulatory  agency  sets 
electricity  prices for  households  using  as  a reference the  Hungarian  energy  exchange  HUDEX. 
Fuel prices are updated in accordance with their fluctuations on international oil market and the 
euro/dollar exchange rate. 

2. Trade regime 
Montenegro is a small and open import-dependent and services-orientated economy. The country 
ratified  a  Stabilisation  and  Association  Agreement  with  the  EU  in  2007,  entering  into  force  in 
2010.  In  2012,  Montenegro  joined  the  WTO.  Trade  under  regional  trade  agreements  (RTAs) 
continues  to  account  for  more  than  80%  of  total  foreign  trade.  Montenegro  participates in  five 
RTAs with a total of 41 economies. Montenegro does not apply any export duties. 

3. Exchange rate regime 
Montenegro  unilaterally  introduced  the  Deutsche  Mark  in  1999,  and  subsequently  the  euro  in 
2002, as sole legal tender. 

4. Foreign direct investment 
Montenegro is open to FDI; its only FDI restrictions relate to the ownership of land and assets 
within one kilometre of the border line and agricultural land. The economy relies substantially on 
net  inflows  of  foreign  direct  investment,  given  its  large  net  external  liability  position  and 
persistent  current  account  deficits.  FDI  flows  showed  resilience  in  2020,  and  supported  the 
continuation of ongoing investments, in particular within the energy sector. 

5. Monetary policy 
The  Central  Bank  of  Montenegro  was  established  in  2000  with  functions  mostly  related  to 
banking  supervision  and  running  the  payment  system,  the  only  effective  monetary  instrument 
being its reserve requirement policy. 

6. Public finances and taxation 
Montenegro’s total revenue-to-GDP ratio is relatively high, averaging 43.5% in the period 2007-
2019.  Reforms  to  modernise  and  digitalise  the  tax  administration  are  well  advanced,  with  the 
introduction of fiscal electronic invoices since January 2021. Most of the fiscal adjustment needs 
to happen on the spending side, by reducing the size of the state (local as well as national) and 
making social and health spending more efficient. 

7. Privatisation and enterprise restructuring 
The  privatisation  process  is  practically  completed,  with  only  a  few  companies  in  transport, 
tourism and utilities sectors still under state ownership.  

8. Financial sector 
Overall, the sector appears stable, liquid and well capitalised. The strong liquidity position of the 
banks before the COVID-19 crisis helped mitigate some of the negative effects from the decline 
of liquid assets. The Central Bank of Montenegro introduced several moratoria on the repayment 
of  loans  and  cut  the  rates  on  the  reserve  requirement  by  2  pps.  to  help  banks  increase  their 
potential  liquidity  and  boost  their  lending  potential.  However,  the  very  shallow  institutional 
investor base restricts the development of domestic capital markets. 

42 

 
 
 
 
 
 
10. 

NORTH MACEDONIA 

1.10. 

Macroeconomic performance 

In  2020,  North  Macedonia’s  accelerating  economic  growth  and  positive  outlook  were 
brought  to  an  abrupt  halt  by  the  COVID-19  pandemic.  The  number  of  cases  went  up 
rapidly,  and  wide-ranging  containment  measures,  including  shop  closures  and  curfews, 
dampened  domestic  demand.  Lower  foreign  demand  due  to  the  global  recession  and 
supply  chain  disruptions  affecting  the  production  of  automotive  components  hit  the 
external sector. As a result, real GDP dropped by an estimated 4.5% in 2020. Beginning 
in March, the government has adopted five packages of support measures so far, which 
include wage subsidies, tax deferrals, and interest-free loans. The labour market held up 
well,  supported  by  government  support  to  employers.  In  the  third  quarter,  employment 
dropped  by  1.8%  y-o-y,  while  the  labour  force  diminished  by  2.4%  y-o-y,  reflecting 
discouraged  workers  and  transition  to  the  informal  economy.  The  unemployment  rate 
declined  to  16.5%.  The  activity  rate  (15-64  years)  decreased  slightly,  to  65%, 
backtracking on the gradual increases of past years.  

The central bank supported bank lending and asset quality through regulatory easing and 
gradual  cuts  in  the policy  rate to  the historic low of 1.5%.  In March, the bank lowered 
reserve requirements for loans to the most affected sectors, and in May it expanded the 
range of securities accepted from banks as collateral in liquidity-increasing operations. It 
also  allowed  commercial  banks  to  temporarily  ease  credit  standards,  including  two 
moratoriums  allowing  for  temporary  deferral  of  loan  repayments.  In  addition,  banks 
could raise the threshold for loans to reach non-performing status (from 90 to 150 days). 
These  measures  helped  to  sustain  credit  growth  to  the  non-governmental  sector,  which 
attained 6.5% on average in 2020, and to  further lower the non-performing loan (NPL) 
ratio, to 3.4% at end-2020. Banks remain well-capitalised, as own funds were bolstered 
through reinvestment of earnings throughout 2020. Capital adequacy increased to 15.5% 
at  end-2020.  Annual  inflation  amounted  to  1.1%  on  average.  Moderate  pressures  arose 
from food prices and core inflation, while energy prices acted in the opposite direction. 

The  crisis  left  a  deep  mark  on  public  finances  in  2020.  The  general  government  fiscal 
deficit almost  quadrupled, to  8.2%  of GDP,  given the decline in  economic activity  and 
additional  expenditure  and  foregone  revenue  from  anti-crisis  measures.  Government 
revenue  declined  by  6.9%  y-o-y,  while  current  expenditure  increased  by  13.9%.  The 
strongest  drop  in  revenue  came  from  VAT  income,  while  revenue  from  social 
contributions  was  boosted  by  government  subsidies  to  employers’  contributions. 
Financing  needs  for  the  government’s  four  support  packages  in  2020  necessitated  a 
budget  reallocation  in  April,  cutting  the  originally  planned  amount  for  capital 
expenditure  by  15%,  and  two  budget  revisions,  in  May  and  October,  which  raised 
allocations  for  transfer  payments  by  cumulatively  13%.  On  account  of  heavy  external 
funding  to  bridge  the  government’s  crisis-induced  financing  gap  in  2020,  the  general 
government  debt  level  has  increased  sharply  to  51%  of  GDP  (+10.4  pps  y-o-y).  Public 
debt, which additionally includes the borrowing of the heavily indebted Public Enterprise 
for State Roads, amounted to 61% of GDP. 

The  current  account  deficit  increased  slightly  in  2020,  to  3.5%  of  GDP,  as  the 
merchandise  trade  deficit  widened  and  private  transfers  from  abroad  declined.  The 
shortfall was not covered by FDI inflows, which were some 40% lower y-o-y, on account 
of  significant  outflows  of  intercompany  debt,  and  amounted  to  only  1.9%  of  GDP, 
compared  to  3.1%  one  year  earlier.  External  debt  rose  to  81%  of  GDP  at  end-2020, 
mainly  on  account  of  the  heavy  government  borrowing  abroad.  Apart  from  assistance 
provided by the IMF, the World Bank, and the EU, foreign financing includes a six-year 

43 

 
EUR  700  million  Eurobond  issued  in  May  2020.  These  inflows  bolstered  foreign 
exchange reserves, which covered some 4.6 months’ worth of prospective imports at end-
2020.  The  share  of  intercompany  debt  and  trade  credits,  which  are  less  volatile 
components of foreign debt, remained high, at some 40% of total external debt.  

Provided the pandemic is receding and no new containment measures are introduced in 
the  country,  the  economy  is  expected  to  recover  in  2021  (latest  IMF  forecast  for  real 
GDP  growth  in  2021:  5.5%),  based  on  a  rebound  of  domestic  demand.  Households’ 
disposable  income  would  be  bolstered  by  the  recovery  of  remittances,  and  public 
investment is projected to increase significantly.  

North Macedonia - Macro-Economic Indicators 

North Macedonia 
Real GDP, % change 

2016 
2,8 

2017 
1,1 

Consumer price inflation, %, end of period 

Key monetary policy rate, %, end of period 

Unemployment rate, LFS, % 

General government balance, % of GDP 

Gross public debt, % of GDP 

Current account balance, % of GDP 

Official international reserves, USD billion 

International reserves, months of imports 

Gross external debt, % of GDP 

Net foreign direct investment, % of GDP 

-0,3 

3,8 

23,7 

-2,7 

48,8 

-2,9 

2,5 

4,9 

74,7 

3,5 

2,4 

3,3 

22,4 

-2,8 

47,7 

-1,0 

2,5 

4,1 

73,4 

1,8 

Sources: WIIW, National authorities  

2020 Ref 

December 

December 

Q3-2020 

Q3-2020 

December 

2018 
2,9 

0,8 

2,5 

20,7 

-1,1 

48,4 

-0,1 

3,0 

4,4 

73,0 

5,7 

2019 
3,2 

0,4 

2,3 

17,3 

-2,2 

49,4 

-3,3 

3,3 

4,6 

72,7 

3,6 

2020 
-4,5 

2,3 

1,5 

16,5 

-8,1 

61,1 

-3,5 

3,7 

5,3 

N/A 

1,9 

1.11. 

Implementation of macro-financial assistance 

Following  an  official  request  for  MFA  from  the  authorities  on  15  April  2020,  the 
European  Parliament  and  the  Council  agreed  on  an  MFA  programme  to  North 
Macedonia of EUR 160 million in loans, as part of the COVID19-MFA package adopted 
May 2020. The MoU and the LFA were signed on 17 July 2020, and entered into force 
on 20 July 2020 and on 15 September 2020, respectively. 

The programme’s policy conditionality focuses primarily on strengthening public finance 
and  the  fight  against  corruption,  enhancing  financial  stability,  improving  the  business 
environment, and reforming social protection.  

The MFA is to be provided in two tranches of EUR 80 million each. The first instalment 
was  subject  to  the  general  political  pre-conditions  for  MFA  (respect  for  effective 
democratic  mechanisms,  including  a  multi-party  parliamentary  system,  the  rule  of  law 
and human rights) and was disbursed on 6 October 2020. The second instalment is was 
disbursed on 1 June 2021, after North Macedonia fulfilled the attached policy conditions. 

The assistance is  meant  to  complement  IMF funds  (EUR 176 million) under the Rapid 
Financing Facility (RFI) (100% of North Macedonia’s quota in the Fund), approved on 
10  April  2020.  The  IMF  acknowledges  that  given  the  current  health  emergency  the 
authorities are not in a position to design or implement a Fund-supported programme at 
this  time,  and  points  to  the  country’s  intentions  to  pursue  sound  fiscal  and  economic 

44 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
policies,  as  well  as  its  track  record  of  cooperation  with  the  Fund,  of  servicing  its 
obligations and its access to international capital markets.  

1.12. 

Structural reforms  

In  March  2020,  the  European  Council  decided  to  open  EU  accession  negotiations  with 
North  Macedonia  and  on  1  July  2020  the  European  Commission  presented  to  Member 
States a draft of the negotiating framework. Once the latter is adopted by the Council, the 
first intergovernmental conference (the formal start of the negotiations) will follow.  

Despite  the  challenges  posed  by  the  pandemic,  the  country’s  authorities  continued  to 
tackle  structural  obstacles  highlighted  in  the  European  Commission’s  2020  North 
Macedonia  Report  and  the  19  May  2020  Joint  Conclusions  of  the  Economic  and 
Financial Dialogue between the EU and the Western Balkans and Turkey. The work on 
sound budgetary policies and further alignment of fiscal policy with the EU Directive on 
Requirements  for  Budgetary  Frameworks  has  advanced  with  the  adoption  of  the  draft 
organic budget law by the government in December 2020, which is currently discussed in 
the Parliament. The draft organic budget law provides for, inter alia, the introduction of 
fiscal  rules,  the  establishment  of  an  independent  fiscal  council,  and  a  medium-term 
budgetary framework. The transparency of public finances was further improved through 
the  introduction  of  the  new  web  platform  ‘Open  Finances’,  which  documents  budget 
transactions of central  level  budget  users;  the quarterly publication of budget  execution 
of  municipalities,  at  consolidated  level;  as  well  as  revenue  and  expenditure  of  central 
level  public  enterprises.  The  government  adopted  an  action  plan  to  improve  the 
management of public investment, and, in the framework of the 2021 budget, introduced 
a  capital  expenditure  rule,  which  allows  for  reallocation  of  unused  funds  of  users  at 
specific  intervals,  in  order  to  improve  the  execution  of  budgeted  capital  expenditure. 
Also  in  December,  the  government  adopted  the  Tax  System  Reform  Strategy,  which 
aims, inter alia, at improving revenue collection.  

In the context of improving the business environment, in 2019, an amendment to the Law 
on Financial Discipline to further align it with the respective EU Directive on combatting 
late payment in commercial transactions as well as the new Law on business inspections 
to  ensure  transparent  unselective  inspections,  were  adopted.  The  national  e-services 
portal  became  operational  at  the  end  of  2019  and  a  register  of  parafiscal  charges  was 
established  in  2020.  The  new  bankruptcy  law,  intended  to  facilitate  market  exit  by 
reducing the cost and time of procedures, is still under preparation. The Energy Law, in 
force  since  January  2019,  liberalised  the  electricity  market  for  micro  and  small 
companies and households. In February 2020, the country adopted a comprehensive Law 
on Energy Efficiency, transposing the relevant EU directives. 

Shortcomings in the rules and institutions of state aid, including the lack of a proper state 
aid  registry, have not  been addressed, amplifying existing concerns  about its efficiency 
and transparency. There are still significant infrastructure and private sector productivity 
gaps  that  could  be  narrowed  through  higher  public  investments  in  transport,  energy, 
education  and  sustainable  environmental  infrastructure  (for  example,  water  and 
wastewater treatment, and solid waste management), along with improved planning and 
implementation.  The  persistently  high  level  of  youth  unemployment  indicates  that  the 
education system does not meet the needs of businesses. Ongoing reforms in education, 
if stepped up, can help improve the situation. 

45 

 
 
 
STATUS OF ECONOMIC REFORMS — NORTH MACEDONIA 

1.  Price liberalisation 
Tariffs  for  electricity  and  gas  are  set  by  the  Energy  Regulatory  Commission.  In  2019,  the 
regulation  of  electricity  prices  for  the  main  electricity  producer  (state-owned  company  ELEM) 
was  abolished.  However,  based  on  the  number  of  customers  eligible  to  choose  a  supplier, 
liberalisation  amounts  to  roughly  half  of  total.  By  the  end  of  November  2019  there  were  35 
licensed electricity suppliers and 61 licensed electricity traders. 

2. Trade regime 
North  Macedonia  became  a  member  of  the  Central  European  Trade  Agreement  (CEFTA)  in 
2000.  In  February  2001,  the  country  signed  a  Stabilization  and  Association  Agreement  (SAA) 
with  the  EU.  A  critical  component  of  the  SAA  is  a  preferential  trade  agreement  that  allows 
products  from  North  Macedonia  to  enter  the  European  Union  duty  free.  The  agreement  also 
provides for a gradual reduction of duty rates for EU products entering North Macedonia.  North 
Macedonia has been a member of WTO since 4 April 2003. 

3. Exchange rate regime 
There is a pegged exchange rate system to the euro. 

4. Foreign direct investment 
Large current account deficits are predominantly financed by net FDI inflows which amounted to 
1.9% of GDP in 2020, lower than one year earlier (3.2%). FDI flows are mainly channeled to the 
production of machinery and transport equipment, including automotive supplies. 

5. Monetary policy 
The primary objective of the National Bank of the Republic of North Macedonia (NBRNM) is to 
achieve  and  maintain  price  stability.  It  shall  support  the  general  economic  policies  without 
jeopardizing the achievement of primary objective and in conformity with the principle of open 
market economy and free competition. The NBRNM conducts an efficient monetary policy with 
a standard set of instruments within a stable exchange rate of the denar against the euro.  

6. Public finances and taxation 
At  30.7%  of  GDP  on  average  over  the  past  5  years,  the  revenue  ratio  is  low  by  regional 
comparison.  VAT  typically  accounts  for  about  one  fourth  of  total  revenue.  The  range  of  tax 
expenditures is large and the government has recently undertaken a stocktaking, including a fiscal 
impact calculation. In December, it adopted the Tax System Reform Strategy, which contains a 
number  of  revenue-raising  initiatives. The  structure of  public  finances is  heavily  tilted towards 
current expenditure, notably transfer payments. Budgeted capital expenditure is regularly cut in 
mid-year to make room for further current spending. There has been some progress in increasing 
the transparency of public finances in recent years.  

7. Privatisation and enterprise restructuring 
The number of companies in which the government held a stake remained the same in 2019 as in 
the  three  preceding  years  (16  companies  in  full  state  ownership  and  40  companies  in  partial 
ownership, most of these with a state ownership share of below 1% of issued capital.). The total 
value of state ownership in enterprises remained at 10.7% of GDP, according to government data. 

8. Financial sector 
The banking sector remains well capitalised and liquid. The quality of the loan portfolio has been 
improving gradually since end-2014, with the ratio of non-performing to total loans dropping to 
3.4%  at  the  end  of  2020,  while  provisioning  for  loan  losses  remains  high.  Regulatory  easing, 
including the possibility for banks to delay debtors’ due loan payments, bolstered bank lending 
and  asset  quality.  However,  a  rise  in  non-performing  loans  is  likely  once  these  measures  are 
phased out. 

46 

 
 
 
Annex 1: MFA operations by date of decision, 1990-2020 

47 

Country1990199119921993199419951996199719981999200020012002200320042005200620072008200920102011201220132014201520162017201820192020TotalNumber of operationsBulgaria2901102501007504Czech & Slovak Fed. Rep.3753751Estonia40401Hungary87018010502Latvia80801Lithuania1001001Romania375801252007804Slovakia1301301Algeria4002006002Israel187,5187,51Jordan18020070010804Lebanon80801Tunisia30050060014003Armenia581001582Belarus55551Georgia17533,5464645150495,56Moldova4515151545901001004258Ukraine85200150110500100018001000120060459Albania703520251803305Bosnia & Herzegovina60601002504704Kosovo (UNSCR 1244)3530501002154North Macedonia 4080181602984Montenegro2060802Serbia2002001Serbia & Montenegro345130705453Tajikistan95951Kyrgyz Republic30301Amount approved87018084800620255155231504601653933157025083,5125044659000256130018007001001045035001609416094No. of operations approved166062141543411022042003212120117777* MFA received before becoming EU Member StateAcecssion and Pre-AccessionCurrent Member States*Neighbourhood SouthMFA Operations 1990 - 2020 by Date of DecisionNeighbourhood EastOther 
 
Annex 2: Status of disbursements made by date of decision at end-December 2020 

48 

Status of effective disbursements as of end-December 2020 (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)Mar. 199320(20)(20)    Latvia(80)Mar. 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. 199620EU MACRO-FINANCIAL AND EXCEPTIONAL FINANCIAL ASSISTANCE TO THIRD COUNTRIES BY DATE OF DECISION 
 
 
49 

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/EC(375)(294.5)and Tajikistan2amended by(Loans and Grants)28.3.0000/244/EC Agreed amounts with the recipent countires:328294,533,5Armenia(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)6,5Tajikistan(95)Mar. 2001 (Loan)60(95)(Loan and Grant)Mar. 2001 (Grant)7Dec. 2001 (Grant)7Feb. 2003 (Grant)7May. 2005 (Grant)7Oct. 2007 (Grant)7 
 
 
 
 
50 

Ukraine15.10.9898/592/EC150July 1999585892(Loan)12.07.0202/639/ECAlbania22.04.9999/282/EC2020( Loan)Bosnia310.05.9999/325/EC60Dec. 1999 (Grant)1560(Loan and Grant)amended 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)45Ukraine12.07.0202/639/EC110May. 2014 100110(Loan) Amendment of Decision Nov. 2014 1098/592/ECamended byamended by 
 
 
51 

Serbia 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 101020Montenegro7 the rest was (ex FRY)paid underAmendment of Decision 02/882/EC (Grant)04/862/ECAlbania929.04.0404/580/EC25Nov. 2005 (Grant)325(Loan and Grant)Mar. 2006 (Loan)9July 2006 (Grant)13Bosnia807-12-200404/861/ECthe balance ofDec. 2004 (Loan)1035Amendment of Decision 02/883/ECJune 2005 (Grant)1502/883/EC (Loan and Grant)Feb. 2006 (Loan)10Serbia and 07.12.200404/862/ECthe balance ofApr. 2005 (Loan)1540Montenegro703/825/ECDec. 2005 (Grant)25(ex FRY)Amendment of Decision 02/882/EC (Loan and Grant)Georgia        24.01.0606/41/EC33,5Aug. 2006 112211,5(Grant)Dec. 2006 11Kosovo 30.11.0606/880/EC50Sep. 2010 303020(Grant)Moldova16.04.0707/259/EC45Oct. 2007 2045(Grant)Jun. 200810Dec. 2008 15Lebanon1010.12.0707/860/EC80Dec. 2008 (Grant) 154040(Loan and Grant)June 2009 (Loan)25Georgia30.11.0909/889/EC46Dec. 2009 15,346(Grant)Jan. 2010 7,7Aug. 2010 23Armenia1130.11.0909/890/EC100June 2011 (Grant)14100(Loan and Grant)July 2011 (Loan)26Dec. 2011 (Grant)21Feb. 2012 (Loan)39Bosnia and 30.11.0909/891/EC100Feb. 2013 50100Herzegovina (Loan)Oct. 2013 50Serbia 30.11.0909/892/EC200July 2011100100100(Loan) 
 
52 

Ukraine 29.06.10646/2010/EU500Nov. 2014 250500(Loan)Apr. 2015250Moldova20.10.10938/2010/EU90Dec. 2010 4090(Grant)Sep. 2011 20Apr. 2012 30Georgia12.08.13778/2013/EU46Jan. 2015 (Grant)1346(Loan and Grant)Apr. 2015 (Loan)10May 2017 (Grant)10May 2017 (Loan)13Kyrgyz Republic 22.10.131025/2013/EU30Jun. 2015 (Grant)1030(Loan and Grant)Oct. 2015 (Loan)5Feb. 2016 (Grant)5Apr. 2016 (Loan)10Jordan11.12.131351/2013/EU180Feb. 2015100180(Loan)Oct. 201580Tunisia15.5.14534/2014/EU300May 2015100300(Loan)Dec. 2015100July 2017100Ukraine14.04.142014/215/EU1 000,0June 20145001 000,0(Loan)Dec. 2014500Ukraine15.04.152015/601/EU 1 800,0July 20156001 200,0 600,0(Loan)Apr. 2017600Tunisia06.07.162016/1112/EU 500,0Oct. 2017200 500,0(Loan)June 2019150Oct. 2019150Jordan14.12.162016/2371/EU  200,0Oct. 2017100 200,0(Loan)July 2019100Moldova13.09.172017/1565/EU 100,0Oct. 201930 60,0 40,0(Loan and Grant)July 202030Georgia18.04.20182018/598/EU 45,0Dec. 201820 45,0(Loan and Grant)Nov. 202025Ukraine 04.07.20182018/947/EU1 000,0Dec. 2018 5001 000,0(Loan) May. 2020500Jordan17.01.20202020/33/EU 500,0Nov. 2020100 100,0 400,0(Loan)(ongoing) 
 
 
53 

COVID-19 MFA Package:Jordan25.05.20202020/701/EU 200,0Nov. 2020150 150,0 50,0(Loan)(ongoing)Tunisia25.05.20202020/701/EU 600,0 600,0(Loan)(ongoing)Georgia25.05.20202020/701/EU 150,0Nov. 202075 75,0 75,0(Loan)(ongoing)Moldova25.05.20202020/701/EU 100,0Nov. 202050 50,0 50,0(Loan)(ongoing)Ukraine25.05.20202020/701/EU1 200,0Dec. 2020600 600,0 600,0(Loan)(ongoing)Albania25.05.20202020/701/EU 180,0Mar. 202190 90,0 90,0(Loan)(ongoing)Bosnia and Herzegovina25.05.20202020/701/EU 250,0 250,0(Loan) (ongoing)Kosovo25.05.20202020/701/EU 100,0Oct. 202050 50,0 50,0(Loan)(ongoing)Montenegro25.05.20202020/701/EU 60,0Oct. 202030 30,0 30,0(Loan)(ongoing)North Macedonia25.05.20202020/701/EU 160,0Oct. 202080 80,0 80,0(Loan) (ongoing) 
 
 
 
Annex 3: MFA amounts authorised* by year, 2005-2020 (EUR million) 

*Authorised amounts refer to the amounts agreed to in the MFA Decisions, which may 
differ from the disbursed amounts (Annex 4).  

Chart 3A: MFA amounts authorised by year, 2006-2020(EUR million) 

Chart 3B: MFA amounts authorised by region, 2006-2020 (%) 

54 

200620072008200920102011201220132014201520162017201820192020TotalBy regionAccession and Pre-Accession  50,0  300,0  750,0 1 100,0Neighbourhood East  33,5  45,0  146,0  590,0  46,0 1 000,0 1 800,0  100,0 1 045,0 1 450,0 6 255,5Neighbourhood South  80,0  180,0  300,0  700,0 1 300,0 2 560,0Other  30,0  30,0Total amounts authorised   83,5  125,0  0,0  446,0  590,0  0,0  0,0  256,0 1 300,0 1 800,0  700,0  100,0 1 045,0  0,0 3 500,0 9 945,5Loans  0,0  50,0  0,0  365,0  500,0  218,0 1 300,0 1 800,0  700,0  60,0 1 035,0 3 500,0 9 528,0Grants  83,5  75,0  0,0  81,0  90,0  38,0  40,0  10,0  0,0  417,51 More detailed information is available in the statistical data of the staff working document2 Authorised amounts refer to the amounts agreed to in the MFA Decisions, which may differ from the disbursed amounts (Annex 3) 
 
 
 
 
Annex 4: MFA amounts disbursed by year, 2006-2020 (EUR million) 

Chart 4A: MFA amounts disbursed by year, 2006-2020 (EUR million) 

Chart 4B: MFA amounts disbursed by region, 2006-2020 (%) 

55 

200620072008200920102011201220132014201520162017201820192020TotalBy regionAccession and Pre-Accession  32,0  30,0  100,0  100,0  160,0  422,0Neighbourhood East  29,0  20,0  25,0  15,3  70,7  81,0  69,0 1 360,0  873,0  623,0  520,0  30,0 1 280,0 4 996,0Neighbourhood South  15,0  25,0  380,0  400,0  400,0  250,0 1 470,0Other  15,0  15,0  30,0Total amounts disbursed  61,0  20,0  40,0  40,3  100,7  181,0  69,0  100,0 1 360,0 1 268,0  15,0 1 023,0  520,0  430,0 1 690,0 6 918,0Loans  19,0  0,0  0,0  25,0  0,0  126,0  39,0  100,0 1 360,0 1 245,0  10,0 1 013,0  515,0  420,0 1 675,0 6 547,0Grants  42,0  20,0  40,0  15,3  100,7  55,0  30,0  23,0  5,0  10,0  5,0  10,0  15,0  371,01 More detailed information is available in the statistical data of the staff working document 
 
 
 
 
 
 
Annex  5:  Outstanding  amounts  in  respect  of  MFA  operations  disbursed  (as  at  31 
December 2020) 

Country 

   Ukraine 
   Tunisia 
   Jordan 
   Georgia 
   Moldova 
   Bosnia and Herzegovina 
   fYRoM 
   Armenia 
   Kosovo 
   Montenegro 
   Kyrgyzstan 
   Albania 
Total 

Outstanding capital in respect 
of MFA operations disbursed 
(in EUR millions)  

% of Total 

3.810,0 
800,0 
630,0 
133,0 
90,0 
82,0 
80,0 
65,0 
50,0 
30,0 
15,0 
1,8 
5.786,80 

65,8% 
13,8% 
10,9% 
2,3% 
1,6% 
1,4% 
1,4% 
1,1% 
0,9% 
0,5% 
0,3% 
0,0% 

Chart 5B: Country share of outstanding capital in respect of MFA operations disbursed  

56