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 2021
Date: 2022-07-19
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: European neighbourhood policy, economic stabilisation, macro-financial assistance, macroeconomics, multiannual financial framework, structural adjustment, third country

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 19.7.2022  SWD(2022) 192 final  COMMISSION STAFF WORKING DOCUMENT Background Analysis per beneficiary country Accompanying the document REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on the implementation of macro-financial assistance to third countries in 2021 {COM(2022) 341 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 ............................................................................................................................................... 10 

2.1.  Macroeconomic performance ................................................................................................... 10 
2.2. 
Implementation of macro-financial assistance .......................................................................... 11 
2.3.  Structural Reforms .................................................................................................................... 12 

3.  Ukraine ................................................................................................................................................ 15 

3.1.  Macroeconomic performance ................................................................................................... 15 
3.2. 
Implementation of macro-financial assistance .......................................................................... 17 
3.3.  Structural Reforms .................................................................................................................... 18 

4. 

Jordan ................................................................................................................................................. 21 

4.1.  Macroeconomic performance ................................................................................................... 21 
4.2. 
Implementation of macro-financial assistance .......................................................................... 22 
4.3.  Structural reforms ..................................................................................................................... 23 

5.  Tunisia ................................................................................................................................................. 26 

5.1.  Macroeconomic performance ................................................................................................... 26 
Implementation of macro-financial assistance .......................................................................... 28 
5.2. 
5.3.  Structural Reforms .................................................................................................................... 28 

6.  Albania ................................................................................................................................................ 32 

6.1.  Macroeconomic performance ................................................................................................... 32 
6.2. 
Implementation of macro-financial assistance .......................................................................... 33 
6.3.  Structural reforms ..................................................................................................................... 34 

7.  Bosnia & Herzegovina ....................................................................................................................... 37 

7.1.  Macroeconomic performance ................................................................................................... 37 
7.2. 
Implementation of macro-financial assistance .......................................................................... 38 
7.3.  Structural reforms ..................................................................................................................... 39 

8.  Kosovo1 ................................................................................................................................................ 42 

8.1  Macroeconomic performance ................................................................................................... 42 
Implementation of macro-financial assistance .......................................................................... 43 
8.2. 
8.3.  Structural reforms ..................................................................................................................... 43 

9.  Montenegro ......................................................................................................................................... 46 

9.1.  Macroeconomic performance ................................................................................................... 46 

1     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. 

2 

 
                                                           
9.2. 
Implementation of macro-financial assistance .......................................................................... 47 
9.3.  Structural reforms ..................................................................................................................... 48 

10.  North Macedonia ................................................................................................................................ 51 

10.1.  Macroeconomic performance ................................................................................................... 51 
10.2.  Implementation of macro-financial assistance .......................................................................... 52 
10.3.  Structural reforms ..................................................................................................................... 53 

11.  Ex post evaluations of Macro-Financial Assistance operations...................................................... 55 

Annex 1: MFA operations by date of decision, 1990-2021 .................................................................. 58 
Annex 2: Status of disbursements made by date of decision at end-December 2021 .......................... 59 
Annex 3: MFA amounts authorised* by year, 2005-2021 (EUR million) ........................................... 65 
Chart 3A: MFA amounts authorised by year, 2006-2021 (EUR million) ............................................ 65 
Chart 3B: MFA amounts authorised by region, 2006-2021 (%) .......................................................... 65 
Annex 4: MFA amounts disbursed by year, 2006-2021 (EUR million) ............................................... 66 
Chart 4A: MFA amounts disbursed by year, 2006-2021 (EUR million) .............................................. 66 
Chart 4B: MFA amounts disbursed by region, 2006-2021 (%) ............................................................ 66 

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 2021.2 

In  2021,  MFA  operations  under  Decision  (EU)  2020/701,  which  aimed  to  support 
partners  with  the  economic  fallout  from  the  COVID  crisis,  were  further  implemented. 
Seven of the programmes launched between 2020 and 2021 were successfully completed, 
with the disbursement of the second and final tranche for the following countries: North 
Macedonia, Kosovo, Montenegro, Jordan, Moldova, Ukraine and Albania. On the other 
hand, the MFA operation for Georgia, was only partially disbursed, with the cancellation 
by the Commission of the second tranche.  

The two remaining programmes for Bosnia and Herzegovina and Tunisia were started in 
2021.  Tunisia  received  the  second  disbursement  on  25  May  2022,  thus  successfully 
completing the operation upon completion of the policy  conditions agreed in  the MoU. 
On the other hand, the second tranche for Bosnia and Herzegovina was not disbursed due 
to limited reform implementation at the end of the availability period.  

Besides  the  financial  assistance  foreseen  in  context  of  the  COVID-19  pandemic,  the 
implementation  of  a  third  regular  MFA  programme  for  Jordan  was  also  taken  forward, 
with the release of the second tranche on 20 July 2021.  

In 2021, the Commission also received two official requests for new MFA operations to 
Moldova and Ukraine, that materialised in 2022.  

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 2006-2021, by year and by region.3 

2   This document is based on information available up to June 2022. 

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 ASSISTANCE4 

1. 

GEORGIA 

1.1. Macroeconomic performance 

Following  a  year  of  pandemic-related  contraction,  the  economy  started  to  rebound 
strongly since April 2021. GDP rose by an estimated 10.4% in 2021. The recovery has 
been driven by household consumption and exports. On the supply side, the rebound is 
the strongest in services, while agricultural output has declined. The unemployment rate 
in  Georgia  decreased  to  19%  in  the  fourth  quarter  of  2021,  down  by  1.4  percentage 
points compared to the same period of 2020. 

Consumer price inflation accelerated to 13.9% in December 2021, which was the highest 
monthly figure since 2011, and then eased to 11.8% in March 2022. Inflation was largely 
driven by high global energy prices, rising food prices and increased utility costs after the 
removal of subsidies. The central  bank increased the policy rate by  250  basis points in 
the course of 2021,  from  8% to  10.5%. The Georgian  currency, the lari, appreciated in 
the  course  of  2021  by  14%  against  the  euro  and  6%  against  the  US  dollar,  after  a 
depreciation by respectively 20% and 13% in 2020. 

The  general  government  deficit  has  reached  6.3%  of  GDP  in  2021,  slightly  lower  than 
7%  of  GDP  foreseen  in  the  revised  budget  law,  thanks  to  stronger-than-projected  tax 
revenues. The ratio of public debt to GDP decreased to 52% of GDP at the end of 2021 
from 62% at end-2020.  

Georgia’s  balance-of-payments  position  remains  negative.  The  current  account  deficit 
remains high, although it has slightly improved to an equivalent of 9.8% of GDP in 2021 
from 12.5% of GDP in 2020. Among its main components, very high merchandise trade 
deficit  (almost  20%  of  GDP)  was  partially  counterbalanced  by  a  record  high  inflow  of 
remittances – 13% of GDP (USD 2.4 billion in 2021) and improved balance of services 
thanks  to  partial  recovery  of  tourism,  which  is  an  important  sector  in  Georgia 
(corresponding to 8% of GDP in the pre COVID context). High current account deficit is 
financed  by  continuing  (albeit  slow)  inflow  of  foreign  direct  investment  and,  most 
importantly,  by  high  volumes  of  grants  and  concessional  loans  committed  by  the 
international partners.  

Georgia’s international reserves have increased from USD 3.9 billion at the end of 2020 
to  USD  4.3  billion  at  end-2021  (4.5  months  of  imports  cover),  partially  thanks  to  an 
allocation  of  USD  286  million  from  the  IMF  as  part  the  global  allocation  of  Special 
Drawing Rights.  

For  2022,  Georgia’s  GDP  growth  for  2022  was  revised  downwards  following  Russia’s 
invasion of Ukraine and is now forecast between 3% and 5%. The war in Ukraine affects 
Georgia  through  several  channels  including  increased  geopolitical  risk  in  the  whole 
region,  trade  disruptions,  inflationary  pressures,  lower  inflow  of  tourists  and  dwindling 
remittances.  

The  National  Bank  of  Georgia  expects  that  consumer  price  inflation  will  moderate 
gradually  from  the  second  quarter  of  2022  as  the  impact  of  the  temporary  factors 
diminishes and that it will approach the 3% target in the first half of 2023. Depending on 
the  pace  with  which  the  economy  recovers,  the  authorities  intend  to  bring  the  fiscal 

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

5 

 
                                                           
deficit  down  by  unwinding  the  temporary  COVID-19  support  and  containing  current 
spending pressures. The 2022 budget envisages the deficit of 4.3% of GDP; from 2023, 
the deficit is to be brought down below 3%, in line with Georgia’s fiscal rule.  

Georgia - Macro-Economic Indicators 

Georgia 

2017 

2018 

2019 

2020 

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 

4.8 
6.7 
7.3 
21.6 
-0.5 
39.9 
-8.1 
3.0 
3.4 
106.6 
10.5 

4.8 
1.5 
7.0 
19.2 
-0.8 
39.9 
-6.8 
3.3 
3.6 
101.3 
5.5 

5.0 
7.0 
9.0 
17.6 
-1.8 
41.2 
-5.5 
3.5 
4.7 
106.6 
5.9 

-6.8 
2.4 
8.0 
18.5 
-9.2 
62.2 
-12.5 
3.9 
4.6 
129.5 
3.7 

2021 
latest 
10.4 
13.9 
10.5 
20.6 
-6.3 
52.0 
-9.8 
4.3 
4.6 
117.0 
4.4 

2021 Ref 

end-21 
end-21 
end-21 
Q4 
end-21 
end-21 
end-21 
end-21 
end-21 
end-21 
end-21 

Sources: National authorities; Commission staff calculations 

1.2. Implementation of macro-financial assistance 

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 was to be provided in two instalments. The 
first instalment (EUR 75 million) was subject to the general political pre-conditions for 
MFA 
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.  

for  effective  democratic  mechanisms, 

(respect 

The second instalment of EUR 75 million was additionally 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.  Several  structural  reforms  have  been  implemented  as 
conditions  of  the  MFA.  However,  the  second  instalment  was  cancelled  by  the 
Commission following the decision of Georgia to refrain from requesting it, and in view 
of  the  non-fulfilment  of  one  of  the  most  important  policy  conditions  related  to  the 
judicial system. 

The MFA programme was provided in conjunction with the resources from international 
financial  institutions  and  bilateral  donors  including  the  IMF5,  under  its  four-year 

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 

6 

 
 
 
 
 
 
 
 
 
                                                           
 
Extended  Fund  Facility  (EFF)  programme  with  Georgia  approved  in  April  2017  and 
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 final one 
in  April  2021.  In  April  2022  the  IMF  has  reached  a  staff-level  agreement  with  the 
Georgian authorities on a new three-year Stand-by Arrangement (SBA) in the amount of 
about $290 million. 

1.3. Structural Reforms  

focuses 

reform  agenda 

the  continuous 
Georgia’s  structural 
implementation of the Association Agreement with the EU, conditionalities agreed with 
its international partners such as the IMF, the World Bank and the EU, as well as on the 
domestic  development  agenda.  The  implementation  record  in  2021  was  good  in  some 
areas, such as corporate governance, energy and labour market (with all these three areas 
supported by the MFA conditionalities) as well as in public financial management, while 
setbacks took place in the judicial reform.  

in  particular  on 

In  terms  of  improving  the  corporate  governance,  the  Georgian  Parliament  adopted  in 
August 2021 a new comprehensive company law, aimed at regulating corporate relations 
and approximating the legislation to the EU directives. Corporate governance standards 
for state-owned enterprises (SOEs) have been developed by the Ministry of Finance with 
support  of  the  IMF  and  the  World  Bank  and  adopted  in  September.  The  Ministry  of 
Finance has also published a report on implementation of the OECD SOE guidelines by 
10 major SOEs.  

Regarding  the  labour  market,  the  amended  Labour  Code  entered  into  force  from  the 
beginning  of  2021.  The  amendments  concern,  inter  alia,  the  scope  of  labour  rights, 
occupational  health  and  safety,  collective  redundancies,  anti-discrimination  and  gender 
equality. Also from 2021, the law on Labour Inspectorate changed the latter’s status to an 
agency, with increased number of staff and expanded mandate. 

In  the  field  of  energy,  following  the  adoption  of  the  laws  on  energy  efficiency  and  on 
energy performance of buildings in 2020, the government adopted in 2021 the secondary 
laws  on  minimum  energy  efficiency  requirements  and  on  the  methodology  for 
calculating  energy  performance  of  buildings,  implementing  the  EU  acquis  in  this  area. 
However,  the  start  of  enforcement  of  energy  efficiency  in  buildings  was  postponed  to 
July 2022 and the launch of organised power market was pushed back to March 2022.  

In public financial management (PFM), Georgia has successfully implemented its PFM 
strategy  for  2019-22.  The  key  achievements  include  the  introduction  of  medium-term 
budget framework, application of IPSAS standards in financial statements, reforms of tax 
and customs, with introduction of automatic VAT refund and a risk-based approach. The 
methodology  of  internal  audit  has  been  elaborated  according  to  the  IIA  standards,  and 
capacity building of audit units is ongoing, especially in municipalities.  

In  the  area  of  justice,  some  setbacks  for  reforms  took  place.  Notably,  two  successive 
legislative  amendments  on  Supreme  Court  appointments  did  not  fully  comply  with  the 
corresponding  Venice  Commission  recommendation,  notably  as  concerns  the  lack  of  a 
meaningful  right  of  appeal.  In  spite  of  these  procedural  shortcomings,  11  (out  of  28) 
Supreme Court judges were appointed in 2021 and for lifetime tenures. The amendments 
to the Law on Common Courts adopted in December 2021 restrict the independence of 
judges  by  making  it  easier  to  remove  judges  from  cases,  by  restoring  the  possibility  to 

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.  

7 

 
                                                                                                                                                                            
transfer a judge to another court without his/her consent and by the adding new formal 
grounds for disciplinary liability.  

8 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 4-5% of GDP in 2020-21. 

5. Monetary policy 

The main monetary policy objective of the National Bank of Georgia is price stability. The Bank 
is  applying  an  inflation-targeting  regime,  with  a  target  of  3%.  The  effectiveness  of  monetary 
policy is significantly constrained by the high level of dollarization: as of end-2021, 51% of loans 
and 60% of deposits were denominated in foreign currency. 

6. Public finances and taxation 

The  public  finance  management  system  is  essentially  sound  and  transparent.  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, 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 
1300  in  2009  to  a  still  sizeable  number  of  around  350  currently,  including  some  50  public 
corporations and some 300 government entities. The government, with support of the IMF and 
the  World  Bank,  has  started  a  reform  of  the  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  highly  concentrated,  with  the  two largest  banks,  out  of  16  in  total, 
holding around three quarters 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  19.6% at the end of 2021. The share of nonperforming loans in total gross loans 
was very low at 5% at the end of 2021. 

9 

 
 
2. 

MOLDOVA 

2.1 Macroeconomic performance 

In  2021,  the  Moldovan  economy  marked  a  strong  recovery  after  a  recession  caused  by 
the  pandemic.  Real  GDP  growth  amounted  to  13.9%  in  2021,  much  of  it,  however, 
reflecting the low base effect. The recovery was driven, in particular, by a strong rebound 
in household consumption, supported by higher credit and wage growth, as well as stable 
remittances.  On  the  supply  side,  most  sectors  expanded  compared  to  2020,  excluding 
construction.  Agriculture,  as  well  as  wholesale  and  retail  trade,  marked  the  strongest 
contribution  to  growth.  The employment  rate remained low in  2021, at  41%, reflecting 
the relatively high level of inactivity and the prevalence of the informal sector.  

On the back of growing food and energy prices, inflation surged in 2021. It finished at 
14% by the end of the year, and further accelerated to 22% by end-Q1 2022. In response 
to strong inflationary pressure, the National Bank of Moldova raised its key policy rate, 
up  to  12.5%  in  March  2022.  As  result  of  the  Russian  invasion  on  Ukraine,  inflation  is 
forecast  to  further  rise,  prompting  the  central  bank  to  continue  with  the  monetary 
tightening.  The  persistently  high  energy  prices  and  supply  chain  disruptions  (in 
particular, for food and agricultural products) are assumed to have the strongest effect on 
inflation going forward.  

Moldova’s fiscal deficit came in better than projected, at 1.9% of GDP, in 2021. This is 
broadly comparable to the pre-pandemic level. The low budget deficit can be accounted 
for  underspending  and  some  optimisation  measures  introduced  by  the  government,  as 
well  as  higher  revenues,  driven  by  the  recovery  (up  by  23%  compared  to  2020). 
However, in  2022, Moldova’s fiscal  position is  set  to  deteriorate. As  a result of slower 
growth, revenues are expected to fall, while the high inflow of refugees suggests higher 
expenditures.  Tentative  forecasts  project  a  deficit  of  8%  of  GDP,  compared  to  6%  of 
GDP  adopted  under  the  Budget  Law  2022  last  year.  The  bulk  of  the  widening  deficit 
reflects  Moldova’s  effort  to  mitigate  the  current  crisis,  while  possible  further  tensions 
over  gas  supply  (resulting  in  increasing  prices  and  further  compensations  to  the  most 
vulnerable consumers) may exercise additional pressure.   

Public  debt  remained  broadly  unchanged  in  2021,  at  32.6%  of  GDP.  However,  on  the 
back  of  increased  borrowing  from  its  international  partners  in  the  face  of  the  current 
crisis and growing liquidity pressures on the domestic market, public debt is forecast to 
grow considerably, exceeding 40% of GDP in 2022.  

Moldova’s  external  position  deteriorated  considerably  last  year.  The  current  account 
deficit almost doubled to 11.3% of GDP from 6.6% in 2020. The growing trade deficit 
was the key driver, with imports (+ 32.5%) outpacing exports (+ 27.5%). Going forward, 
the  deficit  will  be  further  impacted  by  the  ongoing  Russian  invasion  on  Ukraine.  With 
disruptions  to  supplies  from  Russia,  Ukraine  and  the  region  overall,  prices  for  imports 
will grow. Much will also depend on Moldova’s ability to redirect some of its exports to 
the EU market.  

In 2021, foreign exchange reserves remained broadly stable and high at USD 3.9 billion 
by  end-year,  supported  by  the  allocation  of  the  IMF  special  drawing  rights  in  August 
2021.  However,  after  some  initial  volatility  in  the  exchange  markets  and  the  central 
banks intervention, international reserves declined, down to USD 3.6 billion in February 
2022  (or  8  months  worth  of  imports),  limiting  Moldova’s  buffers  to  respond  to  the 
growing economic pressure.  

10 

 
As a result of the Russian invasion of Ukraine, growth in Moldova is projected to slow 
down  considerably.  Tentative  estimates  by  the  authorities  indicate  a  GDP  at  0.3%  in 
2022,  with  some  risk  of  a  recession  if  the  war  drags  on.  With  low  growth  and  rising 
inflation  Moldova  is  also  set  for  a  possible  prolonged  stagflation  going  forward.  Key 
downside  risks  also  include  growing  fiscal  pressure,  as  well  as  further  disruptions  to 
trade  and  remittances,  in  particular,  from  Russia  and  the  CIS  region.  Moldova  is 
currently  the  highest  per  capita  recipient  of  the  war  refugees,  which  puts  significant 
pressure on public finances, while growing tensions around southern Ukraine (especially 
around  the  city  of  Odessa)  and  possible  spill  over  effects  to  Moldova  may  further 
aggravate  the  country’s  stability.  Therefore,  to  restore  confidence  and  provide  for  an 
additional  boost  to  the  Moldovan  economy,  an  international  support  conference  was 
organised in early April 2021, where the participants pledged over EUR 600 million of 
funds to increase the country’s financial resilience.  

Moldova - Macro-Economic Indicators 

Moldova 

2017 

2018 

2019 

2020 

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 

4.7 
7.3 
6.5 
3.2 
-0.6 
32.7 
-5.7 
2.8 
5.3 
70.4 
1.4 

4.3 
0.9 
6.5 
2.8 
-0.8 
30.1 
-10.3 
3.0 
5.4 
63.8 
2.2 

3.6 
7.5 
5.5 
4.3 
-1.4 
27.4 
-9.3 
3.1 
6.2 
61.7 
3.8 

-7.0 
0.4 
2.7 
3.4 
-5.1 
33.1 
-6.6 
3.8 
7.6 
69.7 
0.6 

2021 
latest 
13.9 
13.9 
10.5 
2.6 
-1.9 
32.6 
-11.3 
3.9 
8.0 
64.1 
0.3 

2021 Ref 

end-21 
end-21 
end-21 
end-21 
end-21 
end-21 
end-21 
end-21 
end-21 
end-21 
end-21 

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

2.2 Implementation of macro-financial assistance  

As part of the COVID-19 MFA package adopted in May 2020, the EU agreed on a new 
EUR 100  million  MFA  programme  for  Moldova,  complementing  the  IMF  emergency 
programme of USD 235 million (adopted in April 2020). Given the emergency context, 
the first instalment was not attached to any policy conditions, with the exception of the 
political pre-condition of respect for democratic mechanisms, the rule of law and human 
rights  as  well  as  further  progress  in  the  implementation  of  the  Association  Agreement 
and  the  Deep  and  Comprehensive  Free  Trade  Area  (DCFTA)  agreement.  The  first 
disbursement of EUR 50 million was made on 25 November 2020.  

Following  the  elections  in  July  2021,  and  given  the  renewed  reform  momentum, 
Moldova successfully  fulfilled the policy actions for the second disbursement, with  the 
exception of one condition, on asset recovery, which required a waiver (and on which the 
Commission  consulted  with  the  Member  States  Committee  for  Macro-Financial 
Assistance, receiving no objections). The second instalment was disbursed on 8 October 
2021.  

Following  the  energy  crisis  that  began  in  October  2021,  and  given  the  on-going  post-
pandemic  recovery,  on  19  November  2021,  the  Moldovan  authorities  requested  a  new 
MFA  operation.  After  careful  assessment  of  the  financing  needs,  the  Commission 
prepared a proposal for a new MFA of up to EUR 150 million, with EUR 120 million in 
medium-term loans, and a EUR 30 million grants component. The proposal was adopted 

11 

 
 
 
 
 
 
 
 
 
 
 
 
by the Commission on 4 January 2021. The European Parliament and the Council finally 
adopted  the  Decision  providing  macro-financial  assistance  to  the  Republic  of  Moldova 
on  6  April  2022.  The  MFA  will  be  disbursed  in  three  instalments  following  the 
implementation  of  policy  actions  in  the  field  of  good  governance,  rule  of  law,  fight 
against  corruption,  energy  sector  reforms  and  further  progress  on  asset  recovery 
(following  up  on  previous  MFA  operations).  In  view  of  the  increased  pressure  on  the 
Moldavian  economy  from  Russia’s  invasion  of  Ukraine,  Moldova  requested  further 
support from the EU, especially in the form of grants. The Commission had considered to 
complement  the  standing  MFA  with  additional  assistance  via  budget  support  in  the 
amount of EUR 53 million.  

The MFA will come in conjunction with the IMF programme adopted in December 2021 
of Extended Credit Facility/Extended Fund Facility USD 558.3 million. The programme 
will  aim  to  further  strengthen  Moldova’s  reform  effort  in  some  of  the  key  areas, 
including  the  rule  of  law  and  fight  against  corruption  and  it  will  focus  on  fiscal  and 
financial governance.   

2.3 Structural Reforms  

In 2021, reform implementation in Moldova has been mixed. Due to a political stalemate 
in the first half of the year, progress on reforms has been slow or fragmented. However, 
following the parliamentary elections in July, the authorities have considerably increased 
their  efforts.  A  new  ambitious  reform  agenda  was  put  in  place  “Moldova  in  the  good 
times, 2021-2025” with key objectives including fight against corruption and the rule of 
law,  good  governance,  economic  development  as  well  as  strong  commitment  to  asset 
recovery and the investigation of the 2014 bank fraud.  

With  all  political  branches  in  the  country  aligned  (including  the  Presidency,  the 
Parliament, and the Government) Moldova was also able to successfully fulfil the policy 
conditions  agreed  under  the  COVID-19  MFA  programme,  with  the  exception  of  one 
action  –  on  asset  recovery,  which  required  a  waiver.  Nonetheless,  good  progress  was 
achieved in  several  sectors, including public procurement,  anti-corruption, customs and 
smuggling as well as further justice sector reforms.  

In addition, 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  Area  agreement  (DCFTA). 
The last Association Council meeting took place on 28 October 2021, and it concluded 
that  Moldova  has  made  some,  albeit  moderate  progress,  yet,  with  a  clear  “window  of 
opportunity” for further action.  

Among others, Moldova remains committed to the implementation of the Public Finance 
Management  Strategy  (PFM)  2013-2020  (which  has  been  extended  last  year)  and  the 
authorities  have  made  some  important  reforms  including  on  increasing  the  accuracy  of 
revenue  projections,  mid-term  budgetary  framework  process,  regulatory  framework  for 
financial  management  and  internal  control.  Some  important  steps  were  also  made  as 
regards  Public  Administration  Reform  (PAR),  especially  on  salary  management  and 
policy  coordination by the State Chancellery. Nonetheless,  the institutional  step-up and 
administrative capacity remains an urgent issue.  

Moldova  has  also  advanced  on  the  fight  against  corruption.  For  example,  the  annual 
budget  of  its  anti-corruption  institutions,  including  the  National  Integrity  Authority 
(NIA),  the  Criminal  Asset  Recovery  Agency  and  the  Financial  Investigation  Unit  has 

12 

 
been  increased.  Moreover,  in  line  with  the  COVID-19  MFA  conditionality,  the 
authorities have made adjustments to the assets- and conflict-of-interest declarations. 

On financial sector stability, in September 2020, Parliament adopted the Law providing 
for a transfer of supervision powers from the National Commission for Financial Markets 
to the National Bank of Moldova, taking effect as of 2023. The legislation was adopted 
in  the  context  of  a  constantly  increasing  credit  portfolio  of  non-banking  and  credit 
institutions combined with a weak supervision of the insurance market. The Parliament 
also adopted the long-awaited changes to the Law on insurance, transposing to some of 
the EU Solvency II Directive. Nonetheless, the financial stability of the insurance sector 
remains  generally  at  risk.  For  example,  the  authorities  have  not  advanced  on  the 
implementation  of  proper  supervisory  audits  by  international  auditors  or  on  fixing 
shareholders transparency in several systemic insurance companies.  

Moldova’s reform implementation will also be further supported by the IMF programme 
and  the  new  MFA  operation.  In  particular,  the  MFA  will  seek  to  target  several  key 
sectors,  notably,  including  the  rule  of  law  and  fight  against  corruption,  financial  sector 
stability,  improving  the  business  climate,  as  well  as  the  much  needed  energy  sector 
reforms, given the on-going gas crisis. 

13 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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,  including  the  hotel  industry  and  restaurants  were  lowered  from  15%  to  12%,  with 
possible further reductions in the future. In line with the Association Agreement, Moldova is to 
align VAT regulations with the EU VAT Directives.  

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 since then.  

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.  However,  further  progress  on  the 

14 

 
recovery of the stolen assets is missing, with overall few proceedings and trials completed.  

3. 

UKRAINE 

3.1 Macroeconomic performance 

the  war, 

Even  before 
the  macroeconomic  performance  of  Ukraine  had  been 
disappointing. The 2021 real GDP still lagged 6 percent behind the 2012 level. Following 
a milder than expected recession of 4% in 2020, the overall disappointing annual growth 
of  3.4%  in  2021  kept  the  economy  below  its  pre-pandemic  size.  The  index  of  key 
sectors’ output slowed down its recovery in the second half of 2021 and exhibited high 
volatility  towards  year-end.  Industry  stagnated  (+1.9%)  in  2021,  while  construction 
(+6.8%),  retail  (+10.7%)  and  agriculture  (+14.4%)  were  the  main  drivers  of  growth. 
Gross  fixed  capital  formation  declined  to  12.4%  of  GDP,  which  is  less  than  half  the 
investment  effort  in  peer  economies.  Bringing  investment  to  sustainably  higher  levels 
will be among the formidable challenges of the reconstruction period. 

After  an  initial  deterioration  during  the  recession,  unemployment  started  to  decrease  in 
2021.  The  return  to  economic  growth  brought  about  a  reduction  of  the  unemployment 
rate from 10.5% in Q1 2021 to 9.7% in Q3. The annual growth of real wages accelerated 
in the first half of the year before slowing down (from 16.5% in Q2 to 7.9% in Q4) under 
the combined effect of high inflation and low investment. The future level and dynamics 
of wages will be determined by the net  effect  of the war-driven capital  destruction and 
the  exodus-driven  labour  scarcity.  The  longer-term  impact  of  the  war  on  the  labour 
market  will  depend  on  the  success  of  the  refugees’  integration  abroad  and  on  their 
willingness to return to their home country. The extent of the capital destruction and the 
prospects for reconstruction, which will drive labour productivity, and hence wages, will 
play a key role.  

In an attempt to conserve the stock of foreign reserves for the war mobilisation effort, the 
NBU  declared  the  hryvnia  unconvertible  on  24  February  and  suspended  the  inflation-
targeting  framework  for  the  duration  of  the  conflict.  The  NBU  prohibited  private 
transactions in foreign exchange (forex), suspended its sales of forex, and fixed its forex 
purchase rate at the last pre-invasion exchange rate of hryvnia 29.15 for one USD with a 
view to reducing the uncertainty around the foreign exchange rate. To ease the hindrance 
on  imports,  some  restrictions  on  the  use  of  forex  bank  accounts  were  lifted  in  early 
March. In the new war context, two factors drive monetary policy, namely the unlimited 
liquidity  provision  to  banks,  aimed  at  continuing  to  preserve  financial  sector  stability, 
and the standing promise to acquire war government bonds in case of insufficient private 
interest. The NBU announced its intention to keep its main refinancing rate at 10% until 
the end of the war. 

Inflation is expected to deviate further from its pre-war target of 4% to 6%. The growth 
rate of the money supply in the broad sense (aggregate M3) had accelerated to 32.7% in 
November  2020,  before  slowing  down  to  12.0%  in  December  2021,  thanks  to  the 
cumulative  policy  rate  hikes  of  400  basis  points.  Yearly  consumer  and  producer  prices 
inflation  reached  10%  and  69%  respectively  in  December  2021.  Inflation  is  set  to 
accelerate  in  the  war  context  of  worsened  scarcity  of  goods  and  services  and 
accommodative  monetary  policy.  Due 
loss  of  confidence,  official 
international reserves contracted by more than 11% from USD 30.9 billion in December 
2021 to USD 27.5 billion (3.9 months of 2021 imports) in February 2022. However, the 
progressive  disbursement  of  the  almost  USD  3  billion  of  overall  pledged  financial 

to  growing 

15 

 
support to  Ukraine by  IFIs and bilateral  donors  as of March 2022 should help  mitigate 
the reduction of the official international reserves as a result of the war effort. 

Having lost access to international capital markets, Ukraine has to rely on official foreign 
support  and  monetary  financing.  The  government  Eurobond  yields  reached  prohibitive 
levels already in mid-January. In the first two months of 2022, the issuance of new bonds 
in  the  domestic  market  barely  reached  a  roll-over  rate  of  23%  in  hryvnia  and  4%  in 
foreign  currency.  In  the  current  situation  of  martial  law,  the  government  plans  to  issue 
war bonds for the equivalent of USD 13.7 billion in 2022, with maturities between 1 and 
15 years, with a targeted yield of 11%. The treasury issued bonds for USD 1.7 billion in 
March, compared to scheduled redemptions of USD 0.7 billion, implying a net issuance 
of  USD  1  billion.  Domestic  banks,  acting  as  primary  dealers,  bought  about  USD  1.0 
billion of the war bonds. The NBU acquired the remaining USD 0.7 billion. 

The scale of the deterioration of the fiscal outlook depends on the duration of the conflict 
and its  impact  on economic activity. The invasion set  an end to  previous consolidation 
gains,  which  were  already  compromised  by  the  response  to  the  Covid  crisis.  The  2021 
public deficit stood at 3.4% of GDP, which is 1.7 percentage points better than initially 
planned. Public revenues and expenditure increased by 20.7% and 15.6% respectively in 
2021.  The  consolidated  public  debt  decreased  to  55%  of  GDP  from  61%  in  2020 
(reflecting the 30% growth in the nominal GDP). These debt dynamics are set to reverse 
in the context of the war. The significant military, humanitarian and other expenses put 
additional pressure on government expenditure, while tax collection is about to contract 
significantly (reportedly by one third in March; and about 50% in April and May). In an 
effort to hold back the increase in the deficit, expenditures are carefully prioritised, which 
cause  a  different  composition  of  spending,  with  further  expected  reduction  in  capital 
expenditure  (investment),  whilst  the  government  continues  to  provide  basic  social 
spending as  well as service its foreign debt obligations, e.g. paying a EUR 300 million 
coupon on its Eurobonds in early March. 

The  current  account  recorded  a  deficit  in  2021  and  the  outlook  is  uncertain.  After  a 
surplus of USD 5.3 billion in 2020, the current account registered a deficit of USD 2.6 
billion, or 1.3% of GDP, in 2021. Future developments are extremely uncertain. Exports 
are  set  to  suffer  from  activity  interruptions,  legislative  bans  and  transport  and  supply 
chain  difficulties.  Population  outflows  and  purchasing  power  erosion  might  compress 
imports.  As  regards  remittances,  the  dramatic  changes  in  population  make  them 
unpredictable, with more than 12 million having fled their homes and about 5.5 million 
left the country by end April. The stock of foreign direct investment recovered notably in 
2021,  with  reinvested  earnings  being  the  primary  driver.  New  incoming  FDI  reached 
USD  2.6  billion,  complemented  by  reinvested  earnings  of  USD  4.2  billion.  Portfolio 
investments  by  foreigners  also  contributed  towards  a  net  capital  inflow  of  USD  1.0 
billion,  which  is  matched  by  an  increase  in  corporate  indebtedness.  Other  investments, 
mostly driven by the hoarding of foreign cash and by trade credits abroad, contributed to 
a net capital outflow by USD 6.0 billion. 

After having increased in 2021, international reserves has come under moderate pressure 
since the war started, which has so far been offset by official foreign support. The overall 
balance of payments implied an increase in the official international reserves by USD 2.5 
billion in 2021 (after a rise by USD 3.0 billion in 2020). The annual change in the stock 
of reserves is attributable primarily to the extraordinary allocation of additional SDRs by 
the  IMF  for  USD  2.73  billion  in  August  2021.  In  the  first  two  months  of  2022,  the 
official  international  reserves  declined  by  more  than  USD  3  billion,  which  was  later 
compensated for in March thanks to the disbursement of official foreign support. 

16 

 
Notwithstanding a remarkable macroeconomic stability in the context of the war, future 
challenges relate to its immediate impact and the post-war reconstruction of the country. 
Inflation is expected to become a significant challenge, due to direct monetary financing 
of  wartime  public  spending,  soaring  energy  and  food-price  inflation,  hindrances  on 
foreign trade and capital movement,  and worsened scarcity of resources.  It  could  reach 
several multiples of the Central Bank’s pre-war medium-term target level of 5%, which 
was missed already prior to the conflict. In addition to the severe human suffering caused 
by  the  Russian  invasion,  the  war  will  inevitably  also  leave  deep  economic  scars. 
Estimates of the final permanent loss of productive capacity (capital and infrastructure) 
and durable goods (housing) depend on the duration and extent of the conflict and range 
already in  between 150-600 billions of US  dollars. The many difficulties with  carrying 
out economic transactions in the context of martial law, including numerous export bans 
and  price  controls,  will  amplify  the  short-term  impact  on  economic  activity,  with  GDP 
set  to  decline  steeply  (available  forecasts  ranging  between  25%  and  50%,  crucially 
depending on the underlying assumption of the length and possible (de)escalation of the 
war). 

Ukraine - Macro-Economic Indicators 

Ukraine 

2017 

2018 

2019 

2020 

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 

2.5 
13.7 
14.5 
9.5 
-1.4 
71.8 
-2.2 
18.8 
3.2 
102.9 
2.3 

3.4 
9.8 
18.0 
8.8 
-1.9 
60.9 
-3.3 
20.8 
3.3 
87.7 
1.8 

3.2 
4.1 
13.5 
8.2 
-2.2 
50.2 
-2.7 
25.3 
4.8 
79.0 
1.5 

-4.0 
5.0 
6.0 
10.1 
-5.4 
60.8 
3.4 
29.1 
4.9 
80.8 
0.1 

2021 
latest 
3.4 
10.0 
10.0 
9.7 
-3.4 
55.4 
-1.3 
27.5 
6.1 
69.3 
1.3 

2021 Ref 

end-21 
end-21 
end-21 
Q3 
end-21 
end-21 

2021 
Feb-2022 
Dec-2021 
2021 
2021 

Sources: National authorities; Commission staff calculations 

3.2 Implementation of macro-financial assistance  

Between 2014 and 2021, five consecutive MFA operations provided a total of EUR 5.6 
billion to Ukraine, out of which EUR 5.0 billion were disbursed effectively.6 In response 
to  economic  and  social  challenges  arising  from  the  geopolitical  tensions  in  late 
2021/early 2022 and the security threats at the border between Ukraine and Russia which 
subsequently culminated in the latter’s unjustified invasion of Ukraine, the Commission 
tabled a proposal for a sixth, emergency, MFA to Ukraine of up to EUR 1.2 billion on 1 
February  2022.  The  Decision  granting  this  emergency  MFA  entered  into  force  on  3 
March and the first instalment of EUR 600 million was disbursed in two tranches on 11 
and 18 March. The second instalment followed in mid-May. 

This emergency MFA was provided in conjunction with the resources from international 
financial  institutions  and  bilateral  donors  that  stepped  up  their  support  to  Ukraine  in  a 
closely  coordinated  manner  since  the  invasion.  In  a  joint  statement  from  1  March,  the 

6  The  third  EUR  600  million  tranche  of  MFA  III  could  not  be  disbursed  due  to  the  expiration  of  its 
availability period in January 2018 with four structural policy conditions, our of 21, having not been 
implemented. 

17 

 
 
 
 
 
 
 
 
 
 
 
 
                                                           
World  Bank  and  the  IMF  announced  the  preparation  of  additional  support  packages  of 
USD 3 billion and USD 1 billion, respectively, to be disbursed swiftly within two weeks. 
Subsequently, to be able to access the maximum possible emergency financing of USD 
1.4  billion  (50%  of  its  quota  in  the  IMF)  through  the  Rapid  Financing  Instrument, 
Ukraine  requested  the  suspension  of  its  current  Stand-By-Arrangement.  Other  IFIs  and 
bilateral donors have also come forward. In March, the EIB disbursed a budgetary loan 
of EUR 668 million, and the EBRD allocated a resilience package of EUR 2 billion. The 
total  volume  of  pledged  official  international  support,  excluding  humanitarian  and 
military  aid,  reached  USD  15.5  billion  as  of  early  May,  albeit  most  taking  time  to 
become available (around USD 4.6 billion disbursed thus far). 

3.3 Structural Reforms 

Prior  to  the  invasion  of  Ukraine  by  Russia  on  24  February  2022,  the  emergency  MFA 
identified  three  priority  policy  areas:  economic  resilience  and  stability,  governance  and 
rule  of  law,  and  energy.  The  seven  policy  measures,  identified  as  feasible  in  the  short 
term, aim at completing the governance reform of state-owned enterprises, improving the 
business  environment  for  small  and  medium  enterprises,  finalising  the  anti-corruption 
infrastructure and ensuring functioning market  mechanisms in  the energy sector. While 
these reforms remain relevant, the post-war reconstruction phase will face a much wider 
range of priorities.  

Since  the  political  transition  in  2014,  Ukraine  embarked  on  an  ambitious  and  wide-
ranging  reform  programme.  This  programme  has  been  guided  by  continuous 
implementation of the Association Agreement with the EU and supported by large-scale 
financial and technical assistance provided by the EU and other multilateral and bilateral 
partners.  Ukraine  managed  to  push  through  reforms  in  a  variety  of  sectors,  although 
overall  progress  has  been  uneven.  The  main  obstacles  to  faster  reform  implementation 
were the complex domestic political environment, the lack of political will to implement 
ambitious  reforms  in  certain  sectors,  and  the  opposition  by  vested  interests,  some  of 
which continue to exert influence on policy-making in the country. Combining a strong 
ownership  of  the  reconstruction  efforts  with  a  firm  wish  to  join  the  EU,  provides  an 
opportunity to tackle these challenges and enable Ukraine to ‘build back better’.   

In the area of public finance management, the track record is rather favourable. New laws 
improved  the  fiscal  governance  by  introducing  medium-term  budgeting  and  by 
strengthening  programme-based  budgeting.  The  reorganised  State  Tax  Service  and 
Customs  Service  are  now  fully  operational.  More  recent  actions  in  this  area  included, 
inter alia, enhancing the VAT monitoring system based on risk management, developing 
the methodology of electronic tax audit and the use of new IT solutions in customs. To 
improve  tax  compliance,  the  authorities  started  the  gradual  deployment  of  electronic 
software tax registrars in 2020. At the same time, the State Fiscal Service, considered as 
an  old-style  tax  police  with  a  disruptive  effect  on  business,  has  been  replaced  by  the 
recently established Bureau for Economic Security. 

Governance  reforms  resulted  in  the  set-up  of  new  anti-corruption  institutions:  the 
National  Anti-Corruption  Bureau  (NABU),  the  National  Agency  for  the  Prevention  of 
Corruption (NAPC), the Specialised Anti-Corruption Prosecutor Office (SAPO) and the 
High  Anti-Corruption  Court  (HACC).  After  a  difficult  start,  these  institutions  have 
started to prove their effectiveness: in the last two years, the HACC issued 45 decisions 
in  cases  investigated  and  prosecuted  by  NABU  and  SAPO  respectively,  80%  of  which 
led to convictions for bribery, embezzlement of public funds, abuse of office and other 
corruption  offenses.  The  most  recent  legislative  changes  in  this  field  aimed  at 
strengthening  the  institutional  independence  of  NABU  and  enhancing  the  credibility  of 

18 

 
the  selection  process  of  its  head.  However,  the  anti-corruption  infrastructure,  though 
functioning,  remains  fragile  and  prone  to  political  attacks.  For  instance,  disputes 
prevented the nomination of the SAPO’s  head,  thereby depriving the institution  from  a 
stable strategic management.   

In spite of  reform efforts  since 2016, the current judicial system  suffers  from  very low 
levels  of  public  trust  due  to  systemic  corruption,  low  efficiency  of  the  courts,  poor 
management  of  resources  and  insufficient  transparency.  This  is  considered  as  a  key 
impediment to investment and economic growth. The recently adopted laws address two 
key  judicial  self-governance  bodies,  namely  the  High  Council  of  Judges  (through 
integrity  vetting)  and  the  High  Qualification  Commission  of  Judges  that  pre-selects 
judges for Ukrainian courts. However, challenges remain, including in the Constitutional 
Court. The attestation of prosecutors at both regional and local levels  was completed in 
2021. Nevertheless, some 2000 cases challenging the  attestation  are pending in  various 
courts. 

Important  measures  were  launched  in  order  to  improve  corporate  governance  and 
transparency of state-owned companies and banks. For instance, their supervisory boards 
have been granted appropriate powers and are required to have a majority of independent 
members, to be selected on a competitive and transparent basis. However, the adherence 
to the corporate governance framework worsened in 2021, while its strict implementation 
has become practically impossible in the context of the war. The Ministry  of Economy 
drafted  in  the  second  half  of  2021  and  sent  to  the  Parliament  a  draft  law  on  corporate 
governance of state-owned enterprises in line with the OECD guidelines, but its adoption 
is still pending. 

The  energy  sector  also  witnessed  comprehensive  reforms,  aimed  at  introducing  the 
liberalised  gas  and electricity market  model inspired by the  EU Third Energy Package. 
Ukraine  transposed  the  majority  of  the  relevant  EU  gas  and  electricity-related  sector 
acquis in 2015-17. This legislation provided, inter alia, for a stronger role of the market 
in  the  energy  sector,  for  unbundling  generation  and  supply  from  its  transmission  and 
distribution and for strengthening of the energy regulator. A number of issues hamper the 
functioning  of  and  competition in  the market.  In  view of the international energy price 
hikes,  mounting  debts  and  payment  arrears  in  both  gas  and  electricity  sector  are  of 
particular concern. Secure, competitive and sustainable provision of energy, which is of 
key importance for the resilience of the economy, has improved since Ukraine has joined 
the EU grid in late February 2022. 

Given  the  mixed  progress  with  reform  implementation,  major  challenges  remain  in 
relation  to  further  reform  of  the  judicial  system,  corporate  governance,  energy  and 
reducing  the  regulatory  burden.  Addressing  these  remaining  challenges  as  part  of  a 
comprehensive  effort  to  tackle  the  multiple  challenges  resulting  from  the  ongoing  war 
and  its  destructive  impact  on  Ukraine’s  productive  capacity  and  economic  structures, 
once  the  situation  stabilises,  will  be  crucial  to  rebuild  the  economy  better  and  attract 
investors to underpin a sustainable economic recovery. 

19 

 
 
 
 
 
 
STATUS OF ECONOMIC REFORMS — UKRAINE 

1.  Price liberalisation 

Prices  are  largely  market  driven.  Regulated  prices  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. In the war context, the government has introduced price 
caps for essential goods. 

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. In the war context, the 
government introduced export bans on essential goods. 

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-targeting framework. 
NBU interventions on the foreign exchange market aim at reducing exchange rate volatility and 
influence  the  country’s  stock  of  official  reserves.  In  the  war  context,  the  NBU  introduced 
stringent  capital  controls  that  it  has  released  partially,  which  resulted  in  the  de  facto 
inconvertibility of the hryvnia. 

4.  Foreign direct investment (FDI) 

Some restrictions on FDI-related flows exist, such as a ban on the purchase of agricultural land 
by  foreigners,  despite  progress  with  the  farmland  sales  reform  that  started  in  2020.  Capital 
controls  that  affect  foreign  investment  activity  persist,  despite  steps  towards  their  gradual 
elimination. The  net inflow  of  FDI  amounted  to  around  3-4%  of  GDP  in  the  years  2016-2019, 
turned slightly negative in 2020, but recovered to 3.6% in 2021. 

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  2021  consumer  price  inflation 
increased  to  10%  from  5%  a  year  before,  due  to  rising  global  energy  prices,  strong  consumer 
demand and increases in production costs. The central bank increased its key policy rate to 10% 
in January 2022. In the war context, the NBU suspended the operation of the inflation-targeting 
framework and subjected monetary policy to the twin objectives of ensuring full liquidity of the 
banking sector and purchasing war bonds that have remained unsubscribed by banks. 

6.  Public finances and taxation 

Prior to the COVID-19-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 5.4% of GDP in 2020 
and 3.4% of GDP in 2021. In the war context, due to public revenue contraction and mounting 
military spending, public deficit is set to increase substantially. 

7.  Privatisation and enterprise restructuring 

Despite ambitious privatisation plans, no major sales of state assets took place in 2021. A number 
of independent supervisory boards have been established in major enterprises, for which updated 
ownership policies have been adopted. The legal amendments to align the SOE framework with 
the OECD Guidelines on Corporate Governance of SOEs have been submitted to the Parliament, 
but not adopted yet. 

20 

 
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 remained comfortable before the war, despite significant purchases of domestic 
government  bonds  to  finance  the  public  deficit.  The  very  high  (although  decreasing)  share  of 
non-performing loans, above 30%, and the governance of state-owned banks remain two major 
challenges. In the war context, banks continue to function normally without any negative impact 
from a higher liquidity risk. The war-driven economic destruction and recession will result in a 
significant  build-up  of  non-performing  loans,  which  will  seriously  challenge  banks’  capital 
buffers. 

4. 

JORDAN  

4.1 Macroeconomic performance  

Jordan  remains  relatively  stable  in  an  otherwise  turbulent  region.  The  impact  of  the 
COVID-19 pandemic has been somewhat cushioned by the authorities’ measures to save 
lives, protect the vulnerable and safeguard jobs, but the social and economic costs have 
been  high.  Successive  COVID-19  waves  and  the  wipe-out  of  tourism  have  taken  a 
significant  human  and  economic  toll,  with  unemployment  rising  to  record  highs  and 
fiscal and external deficits widening further.  

Tentative signs of economic recovery showed throughout 2021, as real GDP increased by 
2.2% compared to -1.6% in 2020. Economic growth was driven by recovering domestic 
demand and higher government expenditure. The gradual return to work in all economic 
sectors supported the expansion. For the external sector, tourism income and total exports 
contributed  to  growth.  In  absolute  terms,  the  strongest  recovery  was  observed  in  the 
finance, real estate and business services sector as well as in manufacturing. The tourism 
sector  is  recovering,  but  was  still  operating  below  pre-pandemic  level  in  2021. 
Unemployment  spiked  to  25%  at  the  in  the  first  quarter  of  2021  (19%  in  2019)  and 
decreased  to  23.2%  by  Q3  2021.  Unemployment  remains  particularly  high  for  women 
and youth.  

The pandemic is delaying fiscal consolidation, and although improvements are starting to 
be  visible  in  2021,  the  fiscal  deficit  and  public  debt  remain  elevated.  The  fiscal  deficit 
(including  foreign  grants)  stood  at  5.1%  of  GDP  by  November  2021,  an  improvement 
over  the  7%  of  GDP  in  2020.  The  narrowing  of  the  deficit  was  due  to  the  pickup  in 
domestic  revenues,  including  higher  tax  revenues,  which  outpaced  the  increase  in 
expenses.  

Total  public  sector  debt  reached  110.3%  of  GDP  by  the  end  of  November  2021, 
compared to 94% of GDP in 2019 (105.2% of GDP in 2020). When excluding the debt 
holding by the Social Security Investment Fund, public debt stood at  88.5% of GDP in 
November  2021.  The  National  Electricity  Company  (NEPCO)  and  Water  Authority 
(WAJ) remain highly indebted. Although the increase in debt is a source of concern, the 
IMF  assessed  Jordan’s  public  debt  as  being  sustainable  in  December  2021.  Most  of 
Jordan’s external public debt was denominated in USD to which the Jordanian currency 
is pegged.  

On  the  external  side,  the  current  account  deficit  widened  to  12.1%  of  GDP  in  the  first 
three  quarters  of  2021  (after  7.8%  of  GDP  during  the  same  period  in  2020),  with  the 
recovery  in  merchandised  imports  outpacing  the  recovery  in  exports.  Higher  imports 
were  observed  in  particular  for  transport  equipment  &  spare  parts,  crude  oil  and 

21 

 
petroleum  product,  the  latter  two  being  imported  mainly  from  Saudi  Arabia,  UAE  and 
Iraq. Higher prices for fuel imports also contributed to the current account deficit, even 
though partly offset by price increases for fertilizer and phosphate exports. For services, 
the  important  tourism  receipts  recovered,  but  stayed  below  their  pre-pandemic  levels. 
Foreign direct investment picked up slightly to 2.3% of GDP in 2021, reaching the pre-
pandemic level again. 

The monetary environment has been resilient, supported by the sizeable stimulus enacted 
by the Central Bank of Jordan (CBJ) early on in  the crisis. The support continued over 
2021, when in March 2021 the CBJ expanded the size of its subsidised lending scheme 
for  SMEs  and  extended  the  deferment  on  debt  repayments  by  affected  borrowers  to 
banks.  The  CBJ's  gross  foreign  reserves  (including  gold  and  SDRs)  have  remained 
strong,  amounting  to  USD  18  billion  at  the  end  of  2021,  covering  an  estimated  8.2 
months of Jordan’s imports of goods  and services.  Inflation measured by the consumer 
price  index  increased  to  2.4%  y-o-y  in  December  2021,  with  an  average  inflation  of 
slightly  above  1  for  the  whole  year  2021.  Price  increases  towards  the  end  of  the  year 
were observed in particular for food, meat and poultry, and transportation.  

As  the  uncertainty  surrounding  the  evolution  of  the  pandemic  declines,  the  economic 
recovery is expected to strengthen in 2022 (latest IMF forecast: +2.4%), also on the back 
of stronger growth in export markets and a continued recovery in tourism. 

Russia’s war on Ukraine has mainly indirect effects on Jordan. The direct trade exposure 
is  limited  as  only  1.1%  of  all  goods  exports  go  to  Russia  and  Ukraine  and  3.3%  of 
Jordan’s  goods  imports  come  from  Russia  and  Ukraine.  The  government  stated  that  it 
had wheat stock sufficient to cover the local demand for 14 months and barley reserves 
to  cover  more  than  ten  months.  By  contrast,  Jordan  being  an  energy  importer,  global 
price pressures on energy commodities will have negative repercussions on the country. 

Jordan - Macro-Economic Indicators  

Jordan 

2017 

2018 

2019 

2020 

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 

2.0 
3.2 
5.0 
18.3 
-2.5 
92.8 
-10.6 
15.0 
7.8 
71.1 
4.9 

1.9 
3.7 
5.75 
18.6 
-2.4 
92.9 
-6.9 
12.9 
6.8 
72.9 
2.2 

2.0 
0.6 
4.0 
19.1 
-3.3 
95.2 
-2.1 
13.9 
9.8 
72.1 
1.5 

-1.6 
0.1 
2.5 
22.7 
-7.0 
106.5 
-8.0 
15.6 
11.0 
82.1 
1.6 

2021 
latest 

2.2 
2.4 
2.75 
23.2 
-5.1 
110.3 
-12.1 
18.0 
9.5 
85.5 
0.9 

2021 Ref 

end-21 
end-21 
Mar-2022 
end-21 
Jan-Nov 
Nov-2021 

Jan-Sep 
end-21 
end-21 

est. 2021 
est. 2021 

Sources: National authorities; Commission staff calculations 

4.2 Implementation of macro-financial assistance 

The  EU  has  maintained  its  support  to  Jordan  throughout  the  difficult  years  of  the 
pandemic.  Indeed,  following  Jordan’s  request  for  further  MFA  on  11  July  2019,  on  6 
September  2019  the  Commission  adopted  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 being implemented in three instalments 
over 2020-2023.  

22 

 
 
 
 
 
 
 
 
 
 
 
 
Later, 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 top-up MFA programme of EUR 200 million to Jordan, in addition to the EUR 500 
million 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 for 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  and  third 
instalments 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.  The  second  tranche 
(EUR 250 million in loans) was disbursed on 20 July 2021. A waiver was granted for one 
condition (relating to steps towards the implementation of an electronic invoicing system 
to fight tax evasion) following consultation of the Member States Committee for Macro-
financial  Assistance;  yet,  this  condition  would  be  fulfilled  if  all  reforms  for  the  third 
tranche are implemented. The third tranche (EUR 200 million in loans) remains available 
until April 2023.  

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.  

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 1.1 billion, 270% of quota), which was later increased to around 
EUR 1.3 billion (equivalent to 312 % of Jordan’s 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. By 
December  2021,  the  IMF’s  total  disbursement  to  Jordan  since  the  start  of  2020  were 
brought to around EUR 1 billion. The EFF programme remains on track, with the third 
review  completed  on  time  in  December  2021.  In  the  context  of  that  review,  the  IMF 
assessed Jordan’s public debt as sustainable. 

4.3 Structural reforms  

During  the  pandemic,  Jordan’s  short-term  policy  priorities  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. Yet, despite the sizeable challenges brought by the COVID-19 pandemic 

23 

 
and  the  ongoing  Syrian  crisis,  the  Jordanian  authorities  remain  committed  to  their 
structural reform agenda and the conditionality in the MFA programme. 

Jordan’s  reform  agenda  is  underpinned  by  Government’s  Economic  Priorities  Program 
(GEPP) 2021-2023, the comprehensive Five-Year Reform Matrix 2018-2022, which was 
extended  to  2024,  and  the  Government’s  Indicative  Executive  Program  (GIEP).  The 
GEPP addresses key challenges in the labour market and private sector, with 53 targets 
mainly  derived  from  the  Matrix  and  the  GIEP.  The  Matrix  prioritises  deep  structural 
reforms  needed  to  stimulate  inclusive  and  sustainable  growth  and  job  creation,  and 
achieve fiscal stability. Its pillars comprise reforms in the areas of revenue mobilization 
and  debt  management,  public  sector  efficiency,  private  sector  development,  labour 
markets. social safety, infrastructure, utilities and tourism. The mid-term review in 2020 
revealed  that  46%  of  reforms  had  been  implemented,  yet  delays  were  observed  in 
particular  for  the  transport  and  utilities  pillars.  In  parallel,  the  GIEP  includes  the 
government’s  vision  for  political,  social  and  economic  development  that  targets 
economic growth, employment creating and poverty reduction. It goes beyond the Matrix 
in the areas of fighting corruption and the green and digital agenda.  

Despite  the  setbacks  brought  along  by  the  pandemic  and  the  uneven  success  in 
implementing reforms, Jordan still achieved important milestones in 2021. These include 
(but  are  not  limited  to)  the  following  steps  taken  by  the  Jordanian  government:  i) 
adopting the amendments to the organic budget law, to improve the fiscal framework, ii) 
issuing  secondary  legislation  to  accompany  the  implementation  of  the  Public  Private 
Partnership  legislation,  iii)  adopting  an  electricity  tariff  reform,  and  iv)  adopting  the 
income  tax  system  in  development  zones.  Furthermore,  in  the  area  of  taxation,  Jordan 
continued  to  strengthen  tax  administration  (including  tax  compliance),  to  enhance  the 
capacity  of  the  ISTD  and  to  shift  the  important  tax  services  online.  On  top,  Jordan 
ratified the Multilateral Convention on Mutual Administrative Assistance in Tax Matters 
(to tackle cross-border tax evasion and avoidance) in 2021. Yet, progress in other crucial 
reform areas  was  less  visible, for instance the  still pending  adoption of amendments  to 
the  Investment  Law  to  address  tax  arbitrage  and  transfer  pricing  abuses.  Furthermore, 
amendments  to  the  Illicit  Enrichment  Law  have  been  adopted,  but  important  elements 
relevant to the MFA conditionality were not included in the final version. 

24 

 
 
 
 
 
 
 
 
 
 
 
 
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; now extended to 2018-2024), 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 

While Jordan has taken efforts to broaden the tax base, there remain structural weaknesses 
which limit tax revenue mobilisation, including: a number of differentiated corporate tax 
segments, 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.  

25 

 
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.  

5. 

TUNISIA 

5.1 Macroeconomic performance 

The  economy  saw  only  a  partial  recovery  in  2021  following  the  deep  recession,  with 
GDP growth reaching 3.1% in 2021 after an 8.7% contraction in 2020. Activity remained 
negatively  affected,  across  sectors,  by  the  effect  of  containment  measures  and  the  only 
partial recovery in domestic and global demand, including tourism, which remained far 
below  pre-pandemic  levels  (-3.9%  in  2021,  after  plummeting  over  39%  in  2020)  amid 
pandemic  waves  and  political  instability.  The  rebound  has  been  more  subdued  than 
expected, partly due to a decline in agricultural output (-4.6% in 2021, mostly due to the 
poor  olive  harvest)  and  lacklustre  growth  in  services.  With  some  exceptions  (energy 
(+21.7%) and mining (+19.6%)), output in most sectors remains behind its pre-pandemic 
level  despite  growth  in  the  textile  and  clothing  (+7.7%),  electrical  and  mechanical 
(+10.9%) and construction (+7.2%). Overall, the country is unlikely to  regain its 2019-
output level before 2023. Investment is down, with confidence impacted by the complex 
political situation, sluggish domestic demand and limited export demand from Tunisian 
products.  Declared  investment  projects  in  industry  and  services  fell  by  42%  in  2021  (-
26% compared to 2019). GDP at the end-year was still 4.6 percentage points lower than 
that of the last quarter of 2019. 

The improving demand benefited the mechanical, electrical and textile industry, mostly 
back  to  pre-pandemic  output,  with  substantial  increases  also  in  the  mining  and  oil 
sectors. Agriculture contracted, partially under the base effects of the excellent harvest in 
2020,  while  transport  and  tourism  services  (notably  hotel  and  restaurants)  only 
experienced a partial  recovery, underlining the country’s vulnerability to the pandemic. 
In addition to the limited policy buffers, the complex political situation has  exacerbated 
vulnerabilities  in  the  economy.  The  downturn  continued  to  put  severe  pressure  on 
employment (up to 18.4% in Q3 2021, but much higher for youth, university graduates 
and women), as well as on social stability.  

Monetary  policy  conditions  remained  stable,  with  the  key  policy  rate  at  6.25%,  amid 
sustained  high  inflationary  pressures.  Inflation  increased  sizably,  in  line  with  global 
trends, and reached 6.6% year-on-year in December 2021. It should remain high in 2022 
due  to  stronger  demand,  the  ongoing  depreciation  of  the  dinar  and  the  effects  of  the 
monetary financing of the fiscal deficit. Credit growth has accelerated but almost entirely 
driven  by  loans  to  the  State  (+41.2%)  that  are  probably  crowding  out  credit  to  private 
sector (+5.9%, considerably lower than in previous years). The banking sector remained 
stable, with improvements in liquidity levels, although the non-performing loans ratio for 
the ten largest banks deteriorated slightly to 11% at end-H1 (10.7% end-2020) and will 
likely weaken further with the expiry of some COVID support measures by end-2021. 

Following  the  sharp  increases  in  fiscal  deficit  and  public  debt  in  2020,  the  deficit 
remained  high,  estimated  at  8.3%  of  GDP  in  2021  but  contracted  slightly  as  revenues 

26 

 
 
increased  sizably  (+12%),  mostly  due  to  the  good  performance  of  indirect  taxes.  The 
fiscal stance redress was also partly due to more limited increases in public expenditure 
(+6.3%),  despite  a  significant  rise  in  wages  (5.2%)  which  represent  over  half  of  total 
expenditure outside debt service. The deficit has been mostly financed through domestic 
borrowing and Central Bank purchases, thus likely contributing to inflation and crowding 
out credit to the private sector. Public debt kept increasing to an estimated 86% of GDP 
and sovereign credit ratings have further deteriorated. Debt service costs also increased 
significantly (over 12% of GDP) and a tight refinancing calendar put further pressure on 
debt  sustainability,  emphasizing  the  need  for  fiscal  consolidation.  The  country’s 
sovereign  debt  rating  has  further  deteriorated,  downgraded  to  Caa  level  by  Moody’s  in 
2021, its second downgrade in a year, maintaining a negative outlook). 

The  2022  budget  assumes  a  growth  assumption  of  2.6%  and  an  average  price  of  75 
dollars per barrel of oil. The budget deficit in 2022 would be 8.5 MTD, around 6.2% of 
GDP.  The  budget  also  foresees  financing  needs  of  nearly  20  MTD  to  cover  budgetary 
and  cash  requirements.  This  will  be  in  the  form  of  external  borrowing  of  about  12.6 
MTD (3.9 billion euros, above 10% of GDP) and internal borrowings of 7.3 MTD (2.3 
billion  euros).  Monetizing  the  financing  gap  would  considerably  increase  the  pace  of 
central bank financing and accelerate the drawdown in foreign reserves.  

Tunisia’s  balance-of-payments  position  remains  negative,  although  the  current  account 
pressure lessened in the first nine months of 2021, mostly due to the increase in income 
transfers  from  Tunisians  residing  abroad  (+45%)  and  the  increase  in  tourism  receipts 
(+6.5%). This allowed the reduction of external financing needs despite the worsening of 
the  trade  deficit  (+18%,  consistent  with  higher  energy  prices  and  weak  demand  for 
exports) and the drop in services exports, set to continue in the final quarter. The dinar 
depreciated  slightly  against  the  euro  in  2021  (under  1%),  while  Tunisia’s  international 
reserves  dropped  from  EUR  8  billion  at  the  end of  2020  to  EUR  7  billion  at  end-2021 
(around 4.2 months  of imports), partially sustained through the  IMF SDR allocation of 
around USD 650 million in 2021. 

Tunisia’s economic outlook remains highly vulnerable, in a context of still high political 
uncertainty,  limited  policy  space  and  sizeable  macroeconomic  imbalances  due  to  long-
term  structural  issues  intensified  by  the  economic  impact  of  COVID-19  and,  more 
recently,  the  indirect  impact  of  Russia’s  invasion  of  Ukraine.  In  addition,  the  country 
needs  to  address  the  social  impact  of  these  events  and  the  continuous  impact  of  the 
pandemic,  as  well  as  the  structural  problems  underpinning  its  low  growth  rate  (low 
investment,  low  productivity,  rigid  business  environment).  The  adopted  budget  and 
current  economic  plans  do  not  yet  reflect  a  structured  response  to  the  acute  fiscal  and 
public debt distress that the country is facing. Given the large financing needs estimated 
in the 2022 budget (around EUR 5.6 billion, including almost EUR 4 billion in external 
financing)  the  country  will  need  a  new  IMF  programme,  accompanied  by  a  reform 
program and additional bilateral and multilateral financing. 

27 

 
 
 
 
 
 
Tunisia - Macro-Economic Indicators  

Tunisia 

2017 

2018 

2019 

2020 

2021 
latest 

2021 Ref 

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 

1.9 
6.2 
5.0 
15.5 
-6.2 
70.4 
-10.3 
5.6 
2.5 
86.2 
2.0 

2.6 
7.5 
6.8 
15.5 
-4.8 
77.9 
-11.2 
5.3 
2.7 
99.7 
2.5 

1.3 
6.0 
7.8 
14.9 
-3.3 
67.9 
-8.4 
7.5 
4.5 
97.3 
2.1 

-8.7 
4.9 
6.3 
17.4 
-9.7 
77.8 
-6.5 
9.2 
5.4 
100.9 
1.5 

3.1 
6.6 
6.3 
18.4* 
-8.3* 
85.6* 
-6.3* 
8.0 
4.4 
96.3* 
1.2* 

end-21 
end-21 
end-21 

Q3 
end-21 
end-21 
end-21 
end-21 
end-21 
end-21 

Nov-2021 

Sources: National authorities; IMF; WB; Commission staff calculations; *Latest available or forecast 

5.2 Implementation of macro-financial assistance 

Since 2014, a total of EUR 1.4 billion have been made available to Tunisia under three 
MFA operations, MFA-I (2015-2017, EUR 300 million), MFA-II (2017-2019, EUR 500 
million) and, as part of the MFA package adopted in the context of COVID-19, the latest 
MFA-III  programme  of  EUR  600  million,  with  a  duration  of  one  year  since  entry  into 
force.  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 was 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 Tunisian authorities have clearly accelerated 
efforts  to  comply  with  the  agreed  conditions  in  the  late  stages  of  the  programme  to 
successfully conclude the pending reforms, with all conditions either fulfilled or broadly 
fulfilled. Notwithstanding some concerns in relation to the political precondition, a letter 
from the authorities setting out commitments on a political calendar this year enabled the 
second tranche to be disbursed on 25 May 2022.    

The  assistance  was  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. 

5.3 Structural Reforms  

Reform  implementation  had  very  limited  progress  in  the  past  years,  mostly  due  to  the 
country’s  challenging  political  situation  and  the  effects  of  the  COVID-19  pandemic, 
which  came  at  a  time  when  Tunisia  was  already  facing  serious  macroeconomic 
imbalances.  After the 2019 presidential  and legislative elections,  a fragmented political 
landscape,  continued  instability  and  frequent  government  changes,  already  halted  the 
implementation  of  the  reform  agenda.  In  2021,  following  this  period  of  protracted 
institutional  crisis,  President  Kaïs  Saïed  controversially  invoked  Art.  80  of  the 

28 

 
 
 
 
 
 
 
 
 
 
 
 
constitution  to  seize  emergency  powers  at  the  end  of  July,  suspended  parliament  and 
dismissed  the  Prime  Minister.  Following  the  publication  of  a  political  roadmap  in 
December 2021, a new Constitution should be adopted through referendum (expected in 
July 2022), while legislative elections should take place in December 2022.  

The  absence  of  a  clear  economic  plan  has  increased  uncertainty  around  reforms,  with 
downcast prospects on the broad consensus needed to implement them. Additionally, the 
ongoing pandemic has shifted both  the attention and the country’s limited capacities to 
short-term  response.  A  nationwide  Covid-19  vaccination  campaign  was  launched  in 
March  2021,  but  the  health  infrastructure  remained  overloaded  throughout  the  year  in 
most regions, while lock downs and travel restriction were still prevalent, notably during 
the first half of the 2021.   

Notwithstanding these challenges, the authorities have hastened the reforms agreed under 
the  MFA  over  the  past  months  and  consistently  underlined,  e.g.  during  the  visits  to 
Tunisia by Commissioner Vàrhelyi and the European Parliament Committee on Foreign 
Affairs’ members in early 2022, the country's firm commitment to democratic values and 
respect for human rights and to implementing the announced political calendar for 2022.   

The  policy  conditions  contained  in  the  MFA  MoU  aimed  to  address  key  structural 
weaknesses  of  the  Tunisian  economy,  as  well  as  to  mitigate  the  economic  and  social 
impact  stemming  from  the  COVID-19  emergency.  These  reforms  are  ever  more 
important  as  Tunisia  is  suffering  from  an  increasingly  deteriorating  socio-economic 
situation  which,  after  the  shock  of  the  COVID  crisis  is  now  further  aggravated  by  the 
impact  of  Russia’s  aggression  against  Ukraine,  notably  in  terms  of  energy  and  food 
security.  Tunisia  therefore  requires  urgent  assistance  in  order  to  mitigate  the  economic 
fall-out,  the  ultimate  goal  being  to  support  the  Tunisian  people  at  this  particularly 
delicate moment and thus contribute to stabilising the country. The EU’s macro-financial 
assistance is intended to contribute exactly to this objective.  

The government approved some fiscal stimulus measures to try to mitigate the negative 
impact of the crisis in 2020, with some additional measures in the 2021 budget to support 
the  most  affected  enterprises  and  sectors,  especially  the  tourism,  as  well  as  the  most 
vulnerable.  The  Central  Bank  continued  its  accommodative  monetary  policy  and 
liquidity  management,  also  extending  the  deferral  of  loan  repayments  for  the  tourism 
sector. The Central Bank also continued with the monetary financing approved at the end 
of  2020  (a  TND  2.8  billion  direct  monetary  financing  plan  from  the  CBT  to  the 
government budget). 

The government did not introduce major reforms in either the complementary budget law 
for  2021  or  the  2022  budget  law.  Both  laws  were  adopted  by  Presidential  decree;  in 
absence  of  a  Parliament,  with  little  to  no  formal  consultation  with  social  partners.  The 
2021  Budget  had  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  2022  budget  law  approved  more  targeted  fiscal  audits  and  a  new  “tax 
amnesty” provision, as a way to reduce the very substantial backlog of unpaid tax debt. 
Additionally, in early 2022, a number of timid reform measures were taken up, including 
the  resumption  of  price  adjustments  for  fuel  and  energy  (not  applied  since  April  2021) 
and  the  adoption  of  a  timeline  and  mechanism  for  further  subsidy  adjustments.  In 
addition,  the  budget  law  includes  a  number  of  measures  to  encourage  early  retirement 
and extended leave for civil servants, in view of a medium-term reduction of the payroll, 
although previous versions of similar measures had little impact. 

29 

 
The economic, political and sanitary crises have aggravated Tunisia’s reform paralysis, in 
a context of deep structural challenges and rising macroeconomic imbalances.  The new 
government has been working on an economic reform plan that would underpin the IMF 
programme. A strong and credible reform plan is needed to foster growth and restore a 
sustainable  fiscal  and  external  financial  situation,  without  which  the  IMF  already 
assessed  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.  

However, while a broad concept note on reforms has been prepared, including some of 
the expected reform axes (public payroll, subsidies, SOEs, tax policy and administration 
efficiency),  negotiations  with  the  IMF  have  not  officially  started  and  no  information  is 
available on its possible implementation. Also, no formal discussions on the reform plan 
with  social  partners  have  taken  place  publicly.  In  this  uncertain  context,  the  perceived 
excess  of  bureaucracy  and  lack  of  capacity  in  the  public  sector  continue  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’s vulnerabilities will likely linger over the coming years, due to the subdued 
growth,  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 near future. 

30 

 
 
 
 
 
 
 
 
 
 
 
 
 
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 between 2018-2020. Additional reforms are ongoing, 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.  The  African  Continental  Free  Trade  Area  officially 
entered  into  force  on  January  1,  2021,  but  a  lot  of  technical  work  is  still  required  for  its 
implementation. The revised rules of the Pan-Euro-Med convention on rules of origin started to be 
applied in September 2021. 

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  October  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  2022  Budget  introduced 
some  minor fiscal measures, including  more targeted fiscal audits (verification ponctuelle) and a 
new “tax amnesty” provision, as a way to reduce the very substantial backlog of unpaid tax debt. 
However,  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 further 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.  Additional 
work  ongoing  on  some  corporate  governance  reforms,  with  few  actual  achievements.  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, exacerbated by the crisis. 

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 

31 

 
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. 

6. 

ALBANIA 

6.1 Macroeconomic performance 

Albania was hit less hard by the crisis in 2020 than feared, by 3.5%, about half of what 
the government had expected at the beginning of the pandemic. The drop was less strong 
because  of  a  relative  increase  in  regional  tourism  and  supportive  fiscal  and  monetary 
policies, namely financial  support to  business  and households, a record low policy rate 
and temporary measures to support the financial sector’s liquidity and stability. In 2021, 
the economic rebound has been stronger than expected, the economy grew by 8.5% and 
recovered  above  pre-crisis  levels  in  most  segments.  A  strong  rebound  of  exports 
including tourism, high  public investment  including post-earthquake reconstruction and 
the continued accommodative policy, all supported the recovery. This helped the labour 
market  to  recover  almost  all  of  the  ground  lost  during  the  COVID-19  crisis  and  the 
unemployment rate decreased to 11.6% in 2021.  

Strong  increases  of  domestic  and  international  food  prices  in  addition  to  increasing 
energy prices in the second half of 2021 pushed the annual inflation rate to 2% in 2021, 
and above 4% in the early months of 2022. In response to the rising inflation, the Bank of 
Albania (BoA) raised its record-low policy rate of 0.5% to 1% in March 2022 for the first 
time  since  it  was  lowered  in  March  2020.  It  continued  to  provide  liquidity  to  the 
economy  throughout  2021,  but  terminated  most  of  its  temporary  measures,  aimed  at 
supporting  lending  activities.  The  financial  market  remained  stable,  lending  activity 
picked  up  and  portfolio  quality  improved  as  the  ratio  of  non-performing  loans  to  total 
loans, dropped to 6.2% at the end of 2021.  

The fiscal deficit, at 4.5% of GDP, was 2.3 percentage points lower than planned because 
of strong revenue growth, underspending of the capital budget and a substantially higher 
nominal  GDP  than  projected.  Notwithstanding  a  Eurobond  issuance  to  pre-finance  the 
2022 balance, and additional public guarantees for the state-owned electricity distributor, 
this led to a decrease in the debt-to-GDP ratio to 73.2%, much below the earlier estimate 
of 80.1%. In 2022, the government continues to provide substantial support to the state-
owned electricity distributor to shield households and SMEs from the impact of the spike 
in international electricity prices. 

The  external  position  of  the  economy  has  strongly  improved  in  2021.  The  current 
account  shortfall  decreased  from  8.7%  of  GDP  in  2020  to  7.7%  of  GDP  in  2021, 
supported  by  the  recovery  of  the  services  balance.  FDI  inflows  in  terms  of  GDP 
remained  below  pre-crisis  level,  but  still  financed  about  80%  of  the  current  account 
deficit,  while  financial  inflows  from  the  MFA,  budget  support  and  other  soft  loans  in 
addition to a new Eurobond of EUR 650 million provided additional external financing. 
External  debt,  mostly  consisting  of  long-term  government  debt  decreased  slightly  from 
64.3% of GDP in 2020 to 63.1% in 2021, mainly due to the expanded GDP denominator. 
Foreign exchange reserves continued to increase to USD 5.1 billion in 2021, equivalent 
to  almost  9  months  of  imports,  and  to  provide  an  adequate  safeguard  against  adverse 
shocks.  The  stability  of  the  external  position  of  the  economy  was  also  reflected  in  the 
foreign  exchange  market,  where  the  exchange  rate  of  ALL  against  major  currencies 
returned to its pre-2020 trend of continuous gradual appreciation in 2021. 

32 

 
 
Russia’s invasion of Ukraine is affecting import prices and supply of certain staple foods, 
which  depend  heavily  on  Russian  and  Ukrainian  sources,  while  in  other  respects 
Albania’s economic relations with that region are very limited. However, the uncertainty 
and impact on the external economic environment are likely to dampen investment and 
consumption,  which  reduces  growth  expectations  from  about  4%  to  about  3%  in  2022 
and 2023. The government plans a provision of around EUR 230 million (called “Social 
Resistance Package” of  ALL 26 billion, 1.8% of GDP) to  keep  administered  electricity 
prices stable for households and SMEs, as prices for imported electricity are rising, and 
to  provide  additional  support  to  vulnerable  households  and  farmers  for  facing  the 
increasing fuel and food prices.  

Growth expectations for 2022 and 2023 are dampened by the mainly indirect impact of 
Russia’s  war  against  Ukraine,  because  Albania  has  little  direct  exposure  to  both 
countries. Uncertainty, the impact on EU growth and its effects on Albania’s trade with 
the  EU  and  rising  food  and  energy  prices  are  the  key  factors  of  the  European 
Commission’s  downward  revision  of  its  forecasts  for  Albania’s  economy  to  between 
2.7% and 3.2% growth in 2022 and 2023, respectively. In addition, the increasing food 
and  energy  prices  have  prompted  the  government  to  provide  additional  support  to 
households and SMEs, which is set to postpone to 2023 a more significant improvement 
in government finances. 

Albania - Macro-Economic Indicators 

Albania 
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: WIIW, National authorities  

2017 
3.8 
1.8 
1.3 
13.7 
-2.0 
70.2 
-7.5 
3.3 
6.7 
68.8 
8.6 

2018 
4.0 
1.8 
1.0 
12.3 
-1.6 
67.7 
-6.8 
3.7 
7.0 
65.1 
8.0 

2019 
2.1 
1.2 
1.0 
11.5 
-1.9 
65.8 
-7.9 
3.5 
6.5 
60.0 
7.5 

2020 
-3.5 
1.1 
0.5 
11.7 
-6.7 
74.5 
-8.7 
4.4 
9.6 
64.3 
6.7 

2021 
8.5 
3.7 
0.5 
11.6 
-4.5 
73.2 
-7.7 
5.1 
8.8 
63.1 
6.6 

2021 Ref 
2021 
December 
December 
2021 
2021 
2021 
2021 
December 
December 
December 
2021 

6.2 Implementation of macro-financial assistance 

Following the powerful earthquakes in November 2019 and the challenges brought along 
by  the  COVID-19  pandemic,  Albania  officially  requested  MFA  on  15  April  2020.  In 
response,  as  part  of  the  COVID-19  MFA  package  adopted  in  May  2020,  the  European 
Parliament  and  the  Council  agreed  on  an  MFA  programme  for  Albania  of  EUR  180 
million. The MoU and the LFA were signed on 3 November 2020 and entered into force 
on 3 November 2020 and on 26 January 2021, respectively.  

The programme’s policy conditions aimed to address some of the weaknesses in public 
finance  management,  the  financial  sector,  good  governance  and  the  fight  against 
corruption and social protection policies. 

The MFA was 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  and  human 
rights),  and  was  disbursed  on  31  March  2021.  The  second  and  final  instalment  was 

33 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
disbursed  on  5  November  2021,  after  Albania  had  fulfilled  the  attached  policy 
conditions. 

The  assistance  was  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. 

6.3 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. The latter had 
been  integrated  into  the  draft  negotiating  framework  that  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  2021  Albania  Report.  They  partially 
implemented  the  recommendations  of  the  12  July  2021  Joint  Conclusions  of  the 
Economic and Financial Dialogue between the EU and the Western Balkans and Turkey, 
which reflected some of the MFA policy conditions: (i) the development  of the MTRS 
progressed  and  some  of  its  taxation  measures  are  to  be  implemented  in  2022  (ii) 
reporting  and  clearance  of  arrears  progressed;  (iii)  effective  measures  and  close 
supervision preserved financial sector stability and the NPL-ratio decreased substantially.  

The government aligned the AML/CFT legislation with EU requirements as agreed, but 
Albania needs to improve the enforcement of the legislation before FATF will take it out 
of  its  close  monitoring.  The  reform  of  the  Public  Finance  Management  (PFM)  system 
(since  2014)  continued.  The  extended  PFM  strategy  for  2019-2022  was  revised  to 
address the impact of the pandemic and to gradually return, in the medium-term, to the 
original  reform path. The revised strategy was  approved and published in March 2021. 
Despite  continuing  training  and  assistance  to  improve  public  investment  management, 
long-agreed  institutional  reforms  like  the  unification  of  the  selection  and  approval 
process of public investment projects were not implemented.  

The government took temporary measures to increase benefits under the Economic Aid 
scheme and began a process to review their adequacy with a view to adjusting them. A 
recent  initiative  aims  to  foster  social  inclusion  and  labour  market  integration  of  the 
scheme’s  beneficiaries,  but  social  services  are  scarce.  Albania  established  an  inter-
ministerial  task  force  to  develop  a  Youth  Guarantee  implementation  plan  and  started 
developing tools to regularly monitor the labour market and skills needs. There was only 
limited progress made on increasing the capacities of  municipalities for social services. 
The  government  took  steps  to  increase  healthcare  coverage  for  the  sizeable  number  of 
uninsured people in the country, but access to healthcare is still limited due to high out-
of-pocket payments and a shortage of doctors, especially in rural and remote areas.  

Good progress was made with the continued implementation of judicial reform and the 
vetting process, which advanced steadily, despite the impact of the COVID-19 pandemic. 

34 

 
 
 
A strategic, comprehensive approach to reducing informality is still to be developed but 
on-line  tax  payments  reduced  opportunities  for  corruption  while  the  implementation  of 
electronic  invoicing  (“Fiscalisation”)  since  2021  helps  to  reduce  informality.  Business 
support  services  suffer  from  limited  funding,  but  Albania  has  continued  to  facilitate 
business  registration  procedures  and  licensing  through  the  e-government  portal.  The 
2021-2027 Business and Investment Development Strategy (BIDS) was adopted in 2021 
as  well  as  an  Action  Plan  covering  SME  skills  development,  innovation,  sustainable 
growth,  and  conditions  for  attracting  foreign  investment.  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.  

35 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 operational independence of the State aid Commission (SAC) has not yet been 
ensured.  Electricity  prices  are  not  yet  fully  liberalised.  Since  1  January  2021,  all  distribution 
customers  connected  to  35kV,  but  only  part  of  those  supplied  at  20  kV  level  benefit  from  an 
unregulated market. Albania’s government established  in March 2022 a “Transparency Board”, 
which sets retail commodity prices based on fixed profit margins in an effort to curb speculation 
with international commodity prices. 

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  necessary 
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 2021 to 2022.  

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, the country 
still  needs  to  increase  its  administrative  capacity  and  to  continue  addressing  persisting 
weaknesses (e.g. low revenue mobilisation and non-transparent 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 SOEs 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 

36 

 
the banking sector and complicate the transmission of monetary policy.  

7. 

BOSNIA & HERZEGOVINA 

7.1 Macroeconomic performance 

Economic output recovered in 2021, increasing by 7.1% y-o-y, mainly thanks to stronger 
external  demand,  private  consumption,  but  also  support  from  significant  external 
financing.  However,  investment  growth  remained  muted,  reflecting  COVID-19-related 
uncertainties, but also persistent domestic political tensions. On the production side, the 
main  drivers  of  the  recovery  were  services,  in  particular  accommodation  and  food 
services, as well as transportation and storage and trade. Backed by strengthening growth 
and governmental support measures, employment recovered in the second half of 2021, 
but still reached 17.4% of the labour force when looking at the whole year. However, in 
the  fourth  quarter  of  2021,  the  unemployment  rate  had  dropped  to  16.1%.  The  overall 
labour  force  continued  to  decline,  partly  as  a  result  of  a  persistent  brain  drain.  The 
sizeable  informal  sector  has  probably  been  much  more  affected  by  the  pandemic  than 
administrative data suggests.  

After a drop in the overall price level by 1.1% in 2020, annual consumer price inflation 
turned  positive  in  the  second  quarter  of  2021  (1.4%  on  average),  reaching  6.3%  in 
December,  which  brought  the  average  CPI  increase  to  2%  for  the  whole  of  2021.  In 
January  and  February,  12-months  inflation  accelerated  further  to  7.0%  and  8.1%, 
respectively. The main factors for the acceleration were higher costs for transport and to 
an  increasing  extent  rising  prices  for  food  and  non-alcoholic  beverages.  International 
institutions expect only a moderate GDP recovery in the post-crisis years, of some 2½%-
3%,  arguing  that  the  post-Covid  crisis  recovery  is  going  to  fade  out  while  persistent 
political tensions have a negative bearing on the domestic growth dynamics, in particular 
on (foreign and domestic) investment.  

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.  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 so far low inflation rate. Like in the case of other 
Western Balkan countries, the degree of euroisation is rather high (37% of deposits and 
47% of private sector loans were denominated in euro as of December 2021). 

The general government’s fiscal position deteriorated from a surplus of 1.9% of GDP in 
2019 to a deficit of 5.3% of GDP in 2020, reflecting the economic impact of the COVID-
19 crisis as well as additional governmental anti-crisis measures amounting to some 4% 
of GDP. For 2021, no consolidated general government data have been published so far. 
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.  Public 
debt ratio rose from 32% of GDP at the beginning of the COVID-19 crisis to some 35% 
in  the  second  half  of  2020  and  has  largely  remained  on  this  level  since  then.  The 
country’s  public  debt  can  be  considered  to  be  sustainable,  although  there  are  downside 

37 

 
risks, such as contingent liabilities, in particular in the area of public enterprises. There is 
a significant degree of 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.  

The current account deficit narrowed from 3.8% in 2020 to 2.1% of GDP in 2021, largely 
thanks to an improvement in the trade balance of goods and services, as export revenues 
increased more substantially than the value of imports. Workers’ remittances, accounting 
for up to 12% of GDP, remained stable throughout the crisis. Net FDI inflows increased 
to  2.1%  of  GDP  in  2021,  still  largely  consisting  of  reinvested  earnings.  The  foreign 
exchange reserves continued to increase, partly reflecting the inflow of foreign COVID-
19  related  financial  assistance.  This  led  to  an  increase  in  the  reserve  coverage  to  more 
than  9  months’  worth  of  imports  of  goods  and  services,  by  end-2021.  The  3-year  IMF 
EFF agreement, agreed in 2016 but on hold since 2018, has been terminated. Instead, in 
April  2020,  the  IMF  provided  a  EUR  333  million  loan  through  its  Rapid  Financing 
Instrument  (RFI).  Furthermore,  in  August  2021,  the  IMF  agreed  to  increase  its  SDR 
allocations,  which  added  EUR  305  million  to  Bosnia  and  Herzegovina’s  envelope.  In 
February 2022, the rating agency Standard & Poor's affirmed its sovereign credit rating 
of  Bosnia  and  Herzegovina  as  "B  with  stable  outlook".  Moody’s  rating  from  August 
2020 is "B3, with a stable outlook".  

The outlook is surrounded by high uncertainties related to the evolution of the pandemic 
as  well  as  high  food  and  energy  prices,  stemming  from  the  spillovers  of  Russia’s 
invasion  of  Ukraine.  In  its  spring  forecast,  the  IMF  has  revised  downwards  economic 
growth rate to 2.5% and 2.3% in 2022 and 2023, respectively. 

Bosnia & Herzegovina - Macro-Economic Indicators 

Bosnia and Herzegovina 
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 

* Banks use the Euribor as a reference 

2017 
3.2 
0.7 
n.a. 
20.5 
2.6 
34.2 
-4.8 
6.3 
7.1 
66.8 
2.3 

2018 
3.7 
1.6 
n.a. 
18.4 
2.2 
32.7 
-3.3 
6.6 
7.3 
65.6 
2.9 

2019 
2.8 
0.3 
n.a. 
15.7 
1.9 
31.7 
-2.8 
7.0 
7.8 
63.1 
1.5 

2020 
-3.1 
-1.6 
n.a. 
15.9 
-5.3 
35.4 
-3.8 
8.4 
10.0 
64.3 
1.7 

2021 
7.1 
6.3 
n.a. 
17.4 
n.a. 
35.5 
-2.1 
9.3 
9.3 
60.1 
2.1 

2021 Ref 
2021 
December 

2021 

2021 
2021 
December 
December 
December 
2021 

Sources: WIIW, Central Bank, Bosnia & Herzegovina Agency for Statistics 

7.2 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 for Bosnia and Herzegovina. The MoU and the LFA were signed on 
15 January 2021 and entered into force on 9 June 2021. 

The MFA was to be provided in two instalments. The first instalment (EUR 125 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 

38 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
and human rights) and was disbursed on 7 October 2021. The second tranche (EUR 125 
million)  was  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 
and  institution  building,  financial  sector  stability,  transparency  and  fight  against 
corruption  and  a  better  functioning  of  the  labour  market.  Given  the  limited  reform 
implementation, with only two out of nine reforms foreseen in the MoU implemented by 
Bosnia  and  Herzegovina,  the  second  tranche  of  the  operation  was  not  disbursed  by  the 
end of the availability period.  

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 20 April 2020.  

7.3 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.  

Economic  policy  suffered  from  a  further  deteriorating  cooperation  at  entity  level  and 
disagreements  on  implementing  country-wide  reforms  in  line  with  EU-accession 
requirements.  In  terms  of  quality  of  public  finances,  policy  decisions  are  primarily 
focused  on  short-term  issues,  while  the  spending  structure  is  still  plagued  by  a  strong 
emphasis  on  current  spending  for  wages  and  transfers,  and  investment  continued  to  be 
neglected.  The  country's  business  environment  is  still  hampered  by  numerous  and 
lengthy  procedures,  political  interference,  corruption  and  diverging  rules  in  different 
parts  of  the  country,  complicating  the  operation  of  companies  and  creating  additional 
costs. Despite some progress in improving the degree of registration in the labour market 
by increasing labour market controls, the informal sector may still account for up to one 
third of GDP. In 2021, as part of the COVID-19 crisis support package, many companies 
benefitted  from  discretionary  state  assistance.  In  combination  with  the  accumulation  of 
payment arrears of taxes and, in particular social security contributions, the level of de-
facto state aid appears to have been significant. 

Teaching curricula still continue to be outdated and are still not sufficiently aligned with 
the country’s needs.  The country participated  for the first  time in  the 2018 PISA study 
and  the  results  indicate  that  the  students’  performance  ranks  well  below  the  OECD 
average, in particular with respect to the minimum skills, which is a clear impediment for 
the country’s competitiveness and growth potential. COVID-19, as well as delays in the 
implementation of investment projects due to political disputes, had a negative impact on 
investment in transport and energy infrastructure while necessary steps for updating 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.  

Establishing  an  effective  governance  system  would  improve  the  performance  of  state-
owned enterprises (SOEs), with positive spill-over effects to the private sector and whole 
economy.  Overcoming  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.  Ensuring  an  effective  exchange  of 
taxpayer information between the country’s tax authorities, and in particular creating in 

39 

 
line with the EU acquis a central (i.e. country-wide) registry of bank accounts of private 
individuals would improve the efficiency of tax collection. 

40 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 hygienic articles, but also oil products. 

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.  Bosnia  and 
Herzegovina  is  still  lacking  a  countrywide  strategic  framework  to  encourage  foreign  direct 
investments and to improve the business environment.  

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  poor  quality  of  country-wide  fiscal  data,  the  country’s  overall  fiscal  position  is  still 
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  limited.  Fiscal  rules 
remain  at  the  level  of  one  of  the  country’s  two  entities  and  there  is  still  no  independent  fiscal 
institution  to  monitor  and  enforce  compliance  with  countrywide  fiscal  rules.  The  medium-term 
budgetary  framework  remains  insufficiently  developed  and  underused  as  a  policy-guiding 
instrument.  In  the  taxation  area,  Bosnia  and  Herzegovina  ratified  the  OECD/Council  of  Europe 
Multilateral Convention on Mutual Administrative Assistance in Tax Matters (MAC) and deposited 
the  instrument  of  ratification  in  September  2020.  The  convention  entered  into  force  on  1  January 
2021. 

7. Privatisation and enterprise restructuring 
No  significant  progress  was  achieved  in  proceeding  with  the  privatisation  process.  Due  to  the 
COVID-19  crisis,  measures  to  restructure  or  to  dissolve  public  enterprises  remained  very  limited. 
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.  

41 

 
8. 

KOSOVO* 

8.1 Macroeconomic performance 

Following a deep recession in 2020, Kosovo’s economy rebounded sharply in 2021 due 
to  renewed travel  mobility  and immense support from  the diaspora.  Based on quarterly 
data, the provisional estimate of annual GDP growth is 10.5%. Growth was driven by a 
rebound of financial flows from diaspora through tourism services, remittances and real 
estate  investment.  Further  stimulus  came  from  government  consumption  due  to  the 
implementation of COVID-19 related measures. The unemployment rate stood at 25.8% 
in the first quarter of 2021, which is similar to the annual average of 25.9% in 2020. The 
Labour Force Survey did not release the data on further quarters, but tax administration 
data suggest employment gains in line with the recovery. 

In  February  2021,  the  Central  Bank  of  Kosovo  (CBK)  issued  a  third  guide  on  loan 
restructuring in nine months, which helped banks to avoid increasing provisions. Timely 
regulatory  forbearance  and  large  inflows  from  the  diaspora  supported  rapid  credit 
growth, in particular to households. Bank loan growth accelerated to 11.2% in 2021 from 
7.1% a year earlier. Deposit growth picked up to 13.8% from 12.2% in 2020. Financial 
soundness  indicators  have  remained  satisfactory,  e.g.,  the  loan-to-deposit  and  the 
non-performing loans (NPLs) ratios stood at 79% and 2.3% respectively, in November. 
The largely foreign-owned banking sector remains stable and profitable. 

During 2021 inflation was on a rising trend from 0.6% y-o-y in the first quarter to 6.7% 
in December. The main drivers were rising food and energy prices. Most energy prices 
are regulated in Kosovo, while domestic production is not sufficient to cover the demand. 
High  electricity  prices  in  Europe  have  severely  affected  export-oriented  mining 
enterprises  and  other  consumers.  High  import  costs,  increased  electricity  consumption 
and  insufficient  domestic  power  generation,  exacerbated  by  the  partial  shutdown  of 
Kosovo B power plant, resulted in daily power cuts in December. 

In line with the recovery, in 2021 the headline budget deficit narrowed to 1.4% of GDP, 
on  the  back  of  an  extraordinary  increase  in  government  revenues,  estimated  to  have 
grown  by  26.8%  as  compared  to  the  2020  outcome.  Public  spending  increased  by  a 
moderate  2.5%.  The  execution  of  capital  spending  reached  75.8%  of  the  revised 
allocation, while the recurrent expenditure was roughly in line with the revised budget. In 
2021, the debt-to-GDP ratio is estimated to have increased to 23.4% from 22.4% a year 
earlier.  The  IMF  assesses  public  debt  as  sustainable,  but  points  to  a  narrow  base  of 
domestic investors and vulnerabilities arising from the absence of external market access. 

The current account deficit is estimated to have widened to 9.2% of GDP in 2021 from 
7%  in  2020.  The  main  driver  was  a  large  surge  in  goods  imports,  which  offset  good 
export performance and led the merchandise trade deficit to widen to 53% of GDP. The 
key  factor  offsetting  the  merchandise  trade  deficit  is  remittances,  which  increased  by 
20% in 2021 and amounted to 15.8% of GDP. Further unofficial remittances are reflected 
in larger errors and omissions (2.5% of GDP) in 2021. On the financing side, net inflows 
of FDI performed well and amounted to 5% of GDP, which was partially supported by 
the ban on dividend distribution. The reserve assets covered 3 months of imports in the 
third quarter of 2021, down from 3.2 at end-2020. 

* 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. 

42 

 
                                                           
The outlook is surrounded by high uncertainties related to the evolution of the pandemic 
as  well  as  high  food  and  energy  prices,  stemming  from  the  spillovers  of  Russia’s 
invasion  of  Ukraine.  In  its  spring  forecast,  the  IMF  has  revised  downwards  economic 
growth rate to 2.8% in 2022.  

Kosovo - Macro-Economic Indicators 

Kosovo 

2017 

2018 

2019 

2020 

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 

* figures refer to a 4 quarters moving average 

Sources: WIIW, National authorities  

4.8 
0.5 
6.8 
30.5 
-1.3 
16.4 
-5.5 
0.7 
3.3 
32.9 
4.0 

3.4 
2.9 
6.0 
29.6 
-2.9 
17.0 
-7.6 
0.8 
2.9 
30.5 
4.1 

4.8 
1.1 
6.4 
25.7 
-2.9 
17.6 
-5.7 
0.9 
2.8 
31.2 
3.6 

-5.3 
0.1 
6.0 
25.9 
-7.6 
22.4 
-7.0 
1.0 
3.2 
37.2 
5.1 

2021 
latest 
10.5 
6.7 
5.8 
25.8 
-1.4 
22.5 
-9.2 
0.8 
3.0 
37.0 
5.0 

2021 Ref 

2021 
December 
December 
Q1 
December 
December 
2021 
December 
Q3 
December 
Q3* 

8.2 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 for 
Kosovo. The MoU and the LFA entered into force on 8 September 2020.   

The  programme’s  policy  conditionality  focused  primarily  on  strengthening  public 
finance,  enhancing  financial  stability,  tackling  informality,  advancing  the  rule  of  law 
strategy, and improving employment prospects for the youth.  

The MFA was 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  and  final  instalment  was 
disbursed on 1 June 2021, after Kosovo had fulfilled the attached policy conditions. 

The assistance was 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 acknowledged the urgency of external and fiscal financing gaps and pointed to 
Kosovo’s  commitment  to  macroeconomic  stability.  COVID-19  mitigation  measures, 
including  a temporary suspension of the fiscal  rule, were deemed as  appropriate,  given 
Kosovo’s commitment to reinstate the fiscal rule once the pandemic recedes. 

8.3 Structural reforms  

Despite  the  challenges  posed  by  the  ongoing  pandemic,  the  country’s  authorities 
continued  their  efforts  to  tackle  structural  obstacles  highlighted  in  the  European 
Commission’s  2021  Kosovo  Report  and  the  12  July  2021  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  to  achieve  30% 
reduction  of  the  administrative  burden  over  the  next  eight  years,  as  Kosovo  initiated  a 

43 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
baseline  measurement  identifying  all  administrative  burdens  on  businesses.  A  general 
inspection  reform  is  ongoing  with  the  aim  of  reducing  the  number  of  (overlapping) 
inspections from 36 to 15. There was some success in tackling informality and improving 
voluntary compliance, as the number of registered workers increased in the construction 
sector  due  to  financial  incentives  to  join  formal  employment.  The  authorities  have 
established an inventory of aid schemes, as provided in the Stabilisation and Association 
Agreement  (SAA)  while  in  response  to  the  COVID-19  crisis,  state  aid  to  public  and 
private companies increased.  

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. There are still 
large  gaps  in  road,  railway  and  energy  infrastructure.  Kosovo  made  some  progress  in 
improving  road  infrastructure  while  the  country  achieved  a  significant  decline  in  road 
fatalities (53.7%) in 2010-2020. As the country remains reliant on a predominantly coal-
based, outdated and unreliable energy production system, further options are explored in 
order to diversify energy supply. Preparatory work is continuing for the connection and 
expansion of the Trans-Adriatic gas pipeline. Assessment of the interconnection between 
Kosovo  and  Albania  has  been  already  completed,  while  a  pre-feasibility  study  for  the 
Kosovo-North  Macedonia  pipeline  is  still  ongoing.  Some  progress  was  made  in 
renewables  as  in  2020  Kosovo  achieved  its  target  share  of  energy  from  renewable 
sources,  which  rose  to  25.7%  in  gross  final  energy  consumption.  Following  the 
appointment  of  the  boards  of  directors,  the  Energy  Efficiency  (EE)  fund  became 
operational while some progress was made in extending EE support schemes in private 
and public buildings. The digitalisation of the economy is progressing as after achieving 
the mid-term targets of its 2013-2020 digital agenda, Kosovo is preparing a new strategy 
for 2021-2030. The implementation of a 5-year project, aiming to bridge the urban-rural 
digital infrastructure divide, and investing in the remote areas which are not attractive for 
private investors, is continuing. 

Going forward, Kosovo faces the challenge to revise the war veteran pension scheme in 
order  to  improve  the  cost-efficiency  and  fairness  of  the  social  security  schemes. 
Improving  the  quality  of  public  spending  by  reforming  the  public  wage  system  and 
addressing  bottlenecks  in  the  management  of  capital  investment  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,  increase  labour  force  participation  and  motivate  workers  to  join 
formal employment. Accelerating sustainable investments in energy infrastructure would 
enable Kosovo to improve the reliability of energy supply, reduce pollution and speed up 
its green transition. 

44 

 
 
 
 
 
 
 
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.  

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 increased in 2021, on 
the back of the diaspora investment in real estate. 

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,  relying  mainly  on  indirect  taxes,  increased  to  28.7%  of 
GDP  in  2021,  due  to  strong  economic  performance  and  some  formalisation  gains.  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.  In  2020,  the 
Privatisation  Agency  (PAK)  sold  only  93  SOE  assets  in  the  value  of  around  EUR  8  million, 
compared to 222 sold assets in  2019, in the  value  of  EUR  32  million.  During  2020,  36  of 589 
SOEs have been put into liquidation, while only one liquidation proceeding dated from 2014 was 
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  2.3%  at  end-2021.  Banks  continued  to  be  financed  by  deposits, 
predominantly from households. 

45 

 
9. 

MONTENEGRO 

9.1 Macroeconomic performance 

Montenegro’s economy recorded very strong growth in 2021 without fully recovering its 
pre-pandemic  level.  The  rebound  was  driven  by  a  robust  revival  of  tourism  and  its 
positive spill over effects across the economy. Consequently, in 2021, real GDP soared 
by 12.4% y-o-y, compared to a contraction of 15.3% a year earlier. Net exports were by 
far the main driver of  growth. The extraordinary (81%  y-o-y) increase in exports came 
mainly  on  the  back  of  surging  tourism  revenue,  boosting  private  consumption  but  also 
imports,  given  the  strong  dependency  of  the  Montenegrin  economy  on  foreign  goods. 
Government consumption growth increased to 1.5% in 2021, from 0.8% the year before, 
even  as  some  COVID-19  economic  support  measures  started  to  expire.  However, 
investment activity remained weak, declining by 10% y-o-y, after contracting by 12% a 
year earlier.  

The  labour  market  has  particularly  suffered  from  the  negative  effects  of  the  pandemic. 
Despite  several  state-support  packages  to  preserve  jobs,  employment  kept  contracting 
since  the  outbreak  of  the  pandemic  in  March  2020  until  June  2021,  when  the  trend 
reversed. Thus, in 2021, the average unemployment rate declined to 16.9%, down from 
18.4%  a  year  earlier.  So  far,  the  authorities  have  implemented  five  economic  support 
packages  to  support  the  households  and  the  economy,  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. 

The  stability  of  the  banking  system  has  been  reinforced  compared  to  the  pre-pandemic 
levels. The Central Bank of Montenegro carried out an asset quality review (AQR) for all 
domestic  banks  according  to  the  ECB  methodology.  Results  confirmed  the  stability  of 
the domestic banking system. During the COVID-19 pandemic, the central bank adopted 
ten  packages  of  temporary  measures  aimed  at  preserving  the  liquidity  and  solvency  of 
domestic  banks.  As  a  result,  the  balance  sheets  of  domestic  banks  recorded  significant 
growth  in  2021.  Bank  lending  and  deposits  grew  strongly,  by  9.8%  and  20.9%  y-o-y 
respectively, at the end of 2021. The solvency ratio totalled 18.5% in 2021, well above 
the statutory minimum of 10%. However, there are risks from a possible increase of non-
performing  loans  (NPLs)  as  a  consequence  of  the  COVID-19  crisis  on  corporates  and 
households, as loan moratorium expired in December 2021. The share of non-performing 
loans  in  total  loans  increased  to  6.2%  at  the  end  of  2021,  compared  to  5.5%  the  year 
before.  

Higher food and energy prices kept generating inflationary pressures. Consequently, the 
rate of inflation rose further to 4.6% y-o-y in December 2021, in contrast to 0.9% price 
contraction  a  year  earlier.  To  reduce  the  impact  of  high  electricity  prices,  the 
Montenegrin  state  power  company  (EPCG)  prepared  a  EUR  4.5  million  plan  to  lower 
households’ electricity bills by offering a 12.5% discount in the first half of 2022. 

The strong recovery of economic activity helped improving budget performance too.  In 
2021, the general government deficit declined by 57% y-o-y, to 1.9% of GDP, reflecting 
a  strong  recovery  of  tax  revenue,  a  sharp  reduction  in  capital  spending,  and  somewhat 
lower current expenditure. As a result, the budget deficit remained 48% below the plan in 
2021.  The  improved  fiscal  performance  and  repayment  of  maturing  Eurobonds  helped 
reducing noticeably the public debt stock to 83.3% of GDP in 2021, compared to 105.3% 
of  GDP  at  the  end  of  2020.  The  structure  of  the  public  debt  remains  favourable,  with 

46 

 
97%  in  euros  and  2.3%  in  US  dollars.  Moreover,  74.3%  of  total  debt  presents  fixed 
interest rates. 

The recovery of the tourism sector brought  a sharp reduction of Montenegro’s external 
imbalances.  The  distribution  of  COVID-19  vaccines  and  the  reopening  of  borders  in 
early 2021 were key  factors for achieving  a successful  tourism season. The increase in 
the  number  of  visitors  boosted  the  export  of  services,  giving  rise  to  a  surplus  in  the 
services account of 19.5% of GDP in 2021, compared to 4.2% a year before. The primary 
and secondary income accounts also recorded surpluses, thanks in particular to a stronger 
inflow of remittances from abroad. The merchandise trade deficit contracted marginally 
to 39.0% of GDP, compared to 39.2% of GDP a year earlier, in spite of a strong rebound 
of imports. Overall, the current account deficit recorded a significant decline to 9.2% of 
GDP  in  2021,  compared  to  a  26.1%  gap  a  year  earlier.  For  the  same  period,  net  FDI 
inflows  totalled  11.2%  of  GDP,  covering  the  current  account  deficit.  Repayment  of 
government  maturing  debt  in  2021  reduced  the  foreign  debt  stock  as  well  as  foreign 
exchange  reserves.  At  the  end  of  2021,  international  reserves  totalled  36.9%  of  GDP, 
equivalent to 7.3 months of prospective imports of goods and services. 

The outlook is surrounded by high uncertainties related to the evolution of the pandemic 
as well as high food and energy prices, and the impact on the tourism sector stemming 
from  the  spillovers  of  Russia’s  invasion  of  Ukraine.  In  its  spring  forecast,  the 
Commission  has  revised  downwards  Montenegro’s  economic  growth  rate  to  3.8%  in 
2022. 

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* 
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 

* Gross external public debt 

Sources: WIIW, National authorities  

2017 
4.7 
1.9 
6.2 
16.1 
-5.3 
64.2 
-16.1 
1.0 
3.7 
160.6 
11.5 

2018 
5.1 
1.6 
5.8 
15.2 
-3.9 
70.1 
-17.0 
1.1 
4.0 
163.7 
8.9 

2019 
4.1 
1.0 
5.5 
15.1 
-2.0 
76.5 
-14.3 
1.5 
5.1 
169.0 
7.5 

2020 
-15.3 
-0.9 
5.3 
17.9 
-11.1 
105.3 
-26.1 
2.1 
8.2 
224.1 
11.1 

2021 
12.4 
4.6 
5.2 
16.9 
-1.9 
83.3 
-9.2 
1.9 
7.3 
188.0 
11.2 

2021 Ref 
2021 
December 
December 
2021 
2021 
2021 
2021 
December 
December 
December 
2021 

9.2 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 for 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.  

47 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The MFA was 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  and  final  instalment  was 
disbursed on 1 June 2021, after Montenegro had fulfilled the attached policy conditions.  

The assistance was 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 acknowledged that given the health emergency the authorities were 
not in a position to design or implement a Fund-supported programme at that time, and 
pointed 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. 

9.3 Structural reforms  

Despite  the  challenges  posed  by  the  ongoing  COVID-19  pandemic,  Montenegro  has 
continued  to  show  its  commitment  to  its  accession  path  and  delivered  further  tangible 
results in key areas. At present, 33 negotiating chapters have been opened, of which three 
have  been  provisionally  closed.  Overall  progress  in  the  accession  negotiations  depends 
on progress in the area of rule of law, as per the requirements set out in the Negotiating 
Framework as well as the revised methodology formally accepted by Montenegro in the 
Intergovernmental  Conference  held  on  22  June  2021.  Progress  towards  meeting  the 
interim  benchmarks  set  in  the  rule  of  law  Chapters  23  and  24  will  be  key  to  achieve 
further  progress  in  the  negotiations  overall,  no  further  chapters  will  be  provisionally 
closed before this milestone is reached.  

Montenegro  worked  towards  addressing  the  outstanding  challenges  highlighted  in  the 
European  Commission’s  2021  Montenegro  Report,  and  the  12  July  2021  Joint 
Conclusions of the Economic and Financial Dialogue between the EU and the Western 
Balkans and Turkey. In August 2021 the government decided to establish a company  – 
Montenegro  Works  –  whose  task  will  be  to  oversee  and  analyse  the  financial 
performance of SOEs and to ensure that reforms to increase their efficiency are properly 
implemented. In the context of improving the business environment the number of local 
taxes  and  fees  has  been  cut.  In  addition,  a  registry  of  fiscal  and  para-fiscal  charges  on 
state and local level  was established in March 2021, facilitating business  processes and 
increasing transparency. The first electronic public procurement system was launched in 
January 2021. The government’s fight against wide spread informality continued in 2021 
with  the  deployment  of  new  systems  of  electronic  fiscal  invoices  and  for  electronic 
management and security printing of excise stamps. In order to enhance the transparency 
of public support granted to businesses and employees and prevent undue state aid, the 
government set up in November 2020 a public register of COVID-19 related measures. 

Montenegro’s  education  system  is  facing  numerous  challenges.  Schoolchildren  lag 
behind international peers according to numerous ratings. There is a chronic occupational 
mismatch  in  relation  to  labour  market  opportunities  while  the  COVID-19  pandemic 
contributed to a rapid development of the digitalisation of the education system but not of 
its  quality.  Concerning  judicial  reform,  Montenegro  continues  to  make  efforts  towards 
the  development  and  promotion  of  alternative  dispute  settlement  as  well  as  on  the 
judiciary’s  IT  system.  The  Ministry  of  Justice  has  published  an  analysis  which  should 
serve  as  a  basis  for  preparation  of  a  new  strategy  for  rationalisation  of  the  judicial  
network.  However,  no  concrete  steps  have  been  taken  in  this  respect  yet.  It  remains 
important that Montenegro does not reverse earlier achievements on judicial reform and 

48 

 
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. 

49 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 persistent current account deficits. Investments 
remained resilient, recording double-digit levels during the pandemic. 

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 43.7% in the period 2007-
2021.  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. The ongoing merger of the tax, customs, and 
games  of  chance  administrations  into  a  single  Revenue  Administration  entity  has  faced 
challenges, including organizational and staffing issues. 

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.  At  present,  there  are  around  40  state-
owned  enterprises  in  Montenegro,  with  fixed  assets  estimated  between  70  to  100%  of  GDP. 
Authorities  envisage  strong  reforms  to  the  SOE  sector  through  ‘Montenegro  Works’,  a  new 
holding company to effectively manage performance and the privatization agenda of the sector. 

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 adopted nine packages of temporary measures, 
including several loan moratoria, reduction in reserve requirement rates and a ban on dividends 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. 

50 

 
10. 

NORTH MACEDONIA 

10.1 Macroeconomic performance 

Bolstered  by  government  support,  the  economy  embarked  on  a  solid  recovery,  amidst 
accelerating  inflationary  pressures  in  2021.  After  a  major  economic  recession  in  2020, 
real output increased by 4% y-o-y in 2021 driven by domestic demand. Strong real wage 
growth,  stable  inflows  from  remittances  and  cash  exchanges  as  well  as  substantial 
governmental  support  measures,  bolstered  household’s  disposable  incomes.  However, 
investment  remained  below  the  pre-COVID  level.  Both,  exports,  benefitting  from  the 
recovery  of  foreign  demand,  and  imports,  driven  by  firming  domestic  demand,  surged. 
The labour market proved resilient, benefitting from government measures, such as wage 
subsidies.  Employment  increased,  and  the  unemployment  rate  dropped  further,  partly 
because  of  a  continued  drop  in  the  labour  force.  The  Central  Bank  maintained  its 
accommodative monetary stance throughout 2021, keeping the key policy rate at 1.25% 
to  which  it  had  lowered  in  March  2021.  Inflation  picked  up  gradually  during  2021, 
reaching  4.9%  y-o-y  in  December  2021.  As  a  result,  annual  average  inflation  rose  to 
3.2% in 2021, compared to 1.2% the year before, driven by rising prices for energy and 
food.  In  April  2022,  the  Central  Bank  started  monetary  tightening  by  raising  the  key 
policy rate by 25bps to 1.5%.   

In  March,  the  Bank  adjusted  reserve  requirements  on  liabilities  in  local  and  foreign 
currency, effective as of June, to counteract the build-up of euro deposits. Credit growth 
to  the  non-governmental  sector  attained  5.8%  on  average  in  2021.  Notwithstanding  the 
phasing  out  of  regulatory  mitigation  measures,  such  as  loan  moratoria,  asset  quality 
improved  throughout  the  year,  with  the  non-performing  loan  (NPL)  ratio  dropping  to 
3.1% at end-2021. Banks remain well-capitalised, as own funds were bolstered through 
reinvestment of earnings also throughout 2021. Capital adequacy, at 15.8% at end-2021, 
was above its level from one year earlier.  

The fiscal deficit narrowed in 2021, turning out lower than budgeted in the revised plan, 
according  to  preliminary  data  from  the  Finance  Ministry  (5.4%  of  projected  GDP 
compared  to  an  expected  6.5%).  This  came  on  account  of  income  from  taxes  and 
contributions  exceeding  the  plan  by  2%,  but  also  as  capital  expenditure  execution 
reached only 79% of the budget – the latter had been raised by 24% in the July budget 
revision,  when  the  government  also  raised  the  deficit  target  from  4.9%  to  6.5%  of 
projected  GDP.  Still,  compared  to  2020,  capex  execution  was  higher  by  45.2%. 
Compared  to  the  2020  outcome,  revenue  was  higher  by  15.3%  y-o-y,  and  expenditure 
increased by 5.7% y-o-y. General government debt amounted to 51.9% of projected full-
year GDP, the same level as one year earlier. The public debt level (which includes the 
debt of public enterprises) stood at 60.9%, also about the same as at end-2020.     

External vulnerabilities increased somewhat as of Q4 in light of the deteriorating energy 
trade balance. The current account deficit amounted to 3.5% of GDP in 2021, marginally 
above  the  previous  year’s  level,  but  widened  in  the  first  quarter  of  2022  due  to  an 
increasing merchandise trade deficit. Private transfers regained their pre-COVID levels in 
2021,  bringing  total  secondary  income  to  17.2%  of  GDP.  The  primary  income  deficit 
remained at 4.8% of GDP. Net FDI inflows amounted to 3.7% of GDP in 2021, higher 
than  one  year  earlier  (1.5%).  In  July  2021,  the  government  repaid  the  2014  Eurobond 
worth EUR 500 million, which it had refinanced through a new, its 8th Eurobond (EUR 
700 million) issued in March. The government received the second tranche of MFA from 
the EU (EUR 80 million), as well as special SDRs from the IMF totalling some EUR 160 
million.  This, in  addition to  domestic sources,  largely covered 2021 financing needs.  It 
also  contributed  to  the  rise  in  gross  external  debt,  which,  excluding  central  bank 

51 

 
transactions amounted to  82% of GDP at  end-year. Financing operations also  bolstered 
foreign exchange reserves, which covered some 4.6 months of prospective imports at the 
end of 2021.  

Given larger than previously expected energy imports and downward revisions to foreign 
effective  demand,  the  economic  recovery  is  likely  to  progress  less  vigorously  than 
projected  in  the  autumn.  Following  downward  revisions  of  2022  real  GDP  growth  by 
IFIs (World Bank: 2.7%; IMF: 3.2%), COM is also likely to revise its previous (autumn 
2021)  projections.  Domestic  demand  would  be  driving  growth  in  2022,  with  private 
consumption,  in  spite  of  price  pressures  weighing  on  purchasing  power,  sustained  by 
rising  wages  (minimum  wage  rise  of  18%  as  of  March  2022)  and  pensions  (new 
indexation to pensions increase taking into account wage developments).  

The outlook is surrounded by high uncertainties related to the evolution of the pandemic 
as  well  as  high  food  and  energy  prices,  stemming  from  the  spillovers  of  Russia’s 
invasion  of  Ukraine.  In  its  spring  forecast,  the  Commission  has  revised  downwards  its 
projection for GDP growth in 2022 to 3.0% from 3.9% in the autumn forecast. 

North Macedonia - Macro-Economic Indicators 

North Macedonia 
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: WIIW, National authorities  

2017 
1.1 
2.4 
3.3 
22.4 
-2.8 
47.7 
-1.0 
2.5 
4.1 
73.4 
1.8 

2018 
2.9 
0.8 
2.5 
20.7 
-1.1 
48.4 
-0.1 
3.0 
4.4 
73.0 
5.7 

2019 
3.9 
0.4 
2.3 
17.3 
-2.1 
49.4 
-3.3 
3.3 
4.6 
72.4 
3.5 

2020 
-6.1 
2.3 
1.5 
16.4 
-8.3 
59.9 
-3.4 
3.7 
5.3 
80.3 
1.9 

2021 
4.2 
4.9 
1.3 
15.8 
-5.4 
60.9 
-3.5 
3.7 
4.5 
81.4 
3.7 

2021 Ref 
2021 
December 
December 
2021 
2021 
December 
2021 
December 
December 
December 
2021 

10.2 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 COVID-19 MFA package adopted 
in 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  focused  primarily  on  strengthening  public 
finance  and  the  fight  against  corruption,  enhancing  financial  stability,  improving  the 
business environment, and reforming social protection.  

The  MFA  was  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 
was disbursed on 1 June 2021,  after North  Macedonia had  fulfilled the attached policy 
conditions. 

The assistance was 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 

52 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10 April 2020.  The  IMF acknowledged that  given the health emergency  the authorities 
were not in a position to design or implement a Fund-supported programme at that time, 
and pointed 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.  

10.3 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  ongoing  pandemic,  the  country’s  authorities 
continued to tackle structural obstacles highlighted in the European Commission’s 2021 
North  Macedonia  Report  and  the  12 July  2021  Joint  Conclusions  of  the Economic  and 
Financial  Dialogue  between  the  EU  and  the  Western  Balkans  and  Turkey.  The 
government  improved  fiscal  transparency,  notably  by  enhancing  the  reporting  on  the 
finances  of  public  enterprises  and  municipalities.  In  addition,  the  authorities  set  up  a 
dedicated  website  for  information  on  the  implementation  of  COVID-19  related  support 
measures,  including  the  main  beneficiaries.  However,  the  most  important  measure  to 
improve fiscal governance, the new Organic Budget Law, which contains provisions for 
fiscal rules and a fiscal council, was adopted by the government in December 2020, but 
has not  yet  been adopted by Parliament.  Moreover, its implementation depends heavily 
on  the  introduction  of  the  new  Integrated  Financial  Management  Information  System 
(IFMIS),  which  is  delayed.  With  a  view  to  improving  revenue  mobilisation,  the 
government  conducted  a  review  of  foregone  revenues  from  tax  deductions  in  direct 
income  taxation  and  preferential  VAT  rates,  in  line  with  the  2020-2023  Tax  System 
Reform  Strategy  adopted  in  December  2020.  Moreover,  the  authorities  adopted  an 
Action  Plan 
the 
recommendations  of  the  respective  2020  IMF  report.  The  government  has  also  started 
work on strengthening the framework for public private partnerships (PPP). 

investment  management,  based  on 

improving  public 

for 

In the context of improving the business environment authorities started streamlining the 
large array of parafiscal fees imposed on businesses by publishing, on a designated web 
page,  a  list  containing  377  parafiscal  charges  at  central  and  local  level  including  their 
value.  The  new  bankruptcy  law,  intended  to  facilitate  market  exit  by  reducing  the  cost 
and time of procedures,  is still under preparation while the implementation of the 2019 
Law on business inspections to ensure transparent unselective inspections, is protracted. 
The  country  adopted  a  comprehensive  Law  on  Energy  Efficiency,  transposing  the 
relevant EU directives, however the implementation is lacking. Shortcomings in the rules 
and institutions of state aid, including the lack of an updated state aid registry, have not 
been addressed, amplifying existing concerns about its efficiency and transparency.  

The need to modernise the country’s capital stock is increasing. Significant infrastructure 
and  private  sector  productivity  gaps  could  be  narrowed  through  higher  public 
investments in transport, energy, education and sustainable environmental infrastructure 
along  with  improved  planning  and  implementation.  Although  a  significant  reduction 
(about  10pps)  has  been  achieved  since  2018,  more  recently  supported  by  the 
government’s  Youth  Guarantee  scheme,  youth  unemployment  remains  high.  The  latter 
indicates  that  the  education  system  does  not  meet  the  needs  of  businesses.  Ongoing 
reforms in education, if stepped up, can help improve the situation. 

53 

 
 
STATUS OF ECONOMIC REFORMS — NORTH MACEDONIA 

1.  Price liberalisation 
In early 2020, the electricity market was fully liberalised, in line with the 2019 Law. Retail prices 
have been deregulated, except for the universal supplier for which the regulator (ERC) sets the 
price. Over 16,000 retail customers switched suppliers in 2020, more than twice than in the same 
period one year earlier. The natural gas market was liberalised in 2015. At the end of 2020, there 
were six licensed active natural gas suppliers and natural gas 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 
2.3% of GDP in the third quarter of 2021, slightly lower than one year earlier (2.8%). FDI flows 
are  mainly  channelled  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  30.6%  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. There has been little 
progress made in improving revenue mobilisation and collection in line with the 2020-2023 Tax 
System Reform Strategy adopted in December 2020. Due to the ongoing crisis, the structure of 
public finances remained heavily tilted towards current expenditure, notably transfer payments. 
Capital  expenditure  was  raised  in  a  budget  revision,  but  it  was  heavily  under-executed,  even 
though, in the 2021 budget, the government had introduced a new mechanism for budget users to 
improve  capital  expenditure  execution.  There  has  been  some  progress  in  increasing  the 
transparency  of  public  finances  in  recent  years,  in  particular  with  regard  to  municipalities  and 
public enterprises.  

7. Privatisation and enterprise restructuring 
In 2020, the number of companies in which the government held a stake remained the same 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 the GDP. 

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 
3.1% at the end of 2021. 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. These measures were gradually phased out during 2021. 

54 

 
11. EX POST EVALUATIONS OF MACRO-FINANCIAL ASSISTANCE OPERATIONS  

In  line  with  the  EU  Financial  Regulation  and  the  corresponding  MFA  decisions,  the 
Commission  conducts  ex  post  evaluations7  after  the  completion  of  MFA  operations  to 
assess their impact. The two main objectives of these evaluations are to: 

i. 

analyse  the  impact  of  MFA  on  the  beneficiary  country’s  economy,  and  in 
particular on the sustainability of its external position; and 

ii. 

assess the added value of the EU action. 

In January and April 2021, the Commission  published the staff working  documents for 
the ex post evaluations of MFA-I to Tunisia and MFA-III to Ukraine respectively.  

  MFA-I to Tunisia: The evaluation found that MFA-I was effective in helping to 
improve  Tunisia’s  Balance  of  Payments  position,  as  well  as  supporting  fiscal 
consolidation through highly concessional financial terms and policy conditions. 
The  MFA  covered  around  11.3%  of  the  residual  financing  gap  for  the  period 
2015-2016 and increased confidence in the Tunisian economy (by decreasing the 
market-based financing cost, and by helping to stabilise the national currency).  

MFA  policy  conditionality  covered  the  most  relevant  reform  challenges  in 
Tunisia,  namely:  taxation;  public-finance  management;  social-safety  net  (SSN); 
financial  sector;  public  statistical  system;  trade.  While  the  country  successfully 
delivered on all the agreed reform conditions, difficulties were encountered in the 
field of SSN and trade reforms. The fact that many conditions under MFA-I (in 
the tax, public-finance management, social-safety net and financial sectors) were 
subsequently taken further as part of MFA-II underlines the shared intention, by 
the  EU  and  Tunisian  Government,  to  concentrate  efforts  on  pushing  for  steady 
progress in these critical reform areas. 

  MFA-III to Ukraine: The evaluation found that MFA-III was highly relevant in 
terms  of  its  objectives,  financial  envelope  and  policy  conditions.  MFA 
conditionality addressed the main reform challenges in Ukraine, namely: public-
finance  management;  energy  sector;  business  environment;  governance  and 
transparency;  social-safety  net;  and  financial  sector.  Although  the  number  of 
conditions in MFA-III reflects the exceptional size of the assistance (more money 
for more reforms), a smaller number may have helped the authorities focus on key 
priorities  and  keep  ownership  high.  In  line  with  this  insight,  the  Commission 
chose a more focused approach to  the conditionality in  the subsequent  MFA-IV 
operation. 

Nonetheless,  MFA-III  proved  to  be  effective  in  supporting  fiscal  consolidation 
and helping Ukraine to improve its balance-of-payments position. The magnitude 
and favourable terms of the intervention allowed for fiscal savings, necessary for 
the  implementation  of  structural  reforms,  and  increased  confidence  in  the 
Ukrainian economy. The MFA intervention had both direct and indirect positive 
social  impacts  on  Ukrainian  population,  strengthening  the  social  safety  net  and 
protecting  low-income  households  against  higher  prices  resulting  from  energy 
reforms, through compensation schemes. Overall, the majority of social indicators 
has improved in the concerned period. Finally, MFA-III had a crucial role in the 
sustainability of Ukraine’s public debt through a variety of channels, including a 

7 All ex post evaluations are available on the Commission’s website: https://ec.europa.eu/info/evaluation-reports-

economic-and-financial-affairs-policies-and-spending-activities_en 

55 

 
                                                           
 
signalling  effect  that  acted  as  a  catalyst  for  additional  financial  support  and 
investor  confidence.  The  programme  allowed  for  fiscal  savings,  stemming  from 
the highly favourable loan terms, helping Ukraine to smooth its adjustment path 
and create fiscal space for reforms and sustained social spending. 

Furthermore, in 2021, the joint ex post evaluation of MFA-II interventions to Tunisia and 
Jordan was completed, as well as the meta-evaluation of 15 MFA operations8 concerning 
the  period  2010-2020.  The  meta-evaluation  assessed  the  principles  and  characteristics 
governing  the  MFA  instrument  and  aimed  to  provide  input  on  how  to  improve  its 
relevance, effectiveness, efficiency, value added and its ability to respond to the priorities 
of  EU  external  action.  The  accompanying  staff  working  documents  of  the  two 
evaluations are expected to be published in the first half of 2022. 

  MFA-II to Tunisia and Jordan: the external study concludes that the size, form 
and  timing  of  the  operations  were  relevant  and  appropriate  to  the  countries’ 
financing  needs,  providing  EU  added  value.  In  both  countries,  the  MFA  had  a 
positive  impact  on  debt  sustainability  and  played  a  positive  role  in  promoting 
macroeconomic  stabilisation.  The  conditionality  was  relevant,  focused  on  key 
reform  areas.  The  operations  supported  positive  change  in  some  reform  areas, 
despite  mixed  progress  in  some  other  specific  reforms.  From  a  regional 
perspective, it can be reasonably assumed that the positive impact and spill overs 
on  the  MENA  region  of  the  two  MFAs  were  relatively  limited  and  mostly 
associated with less measurable channels (confidence effect). 

  The  meta-evaluation  of  MFA  operations  2010-2020:  MFA  was  found  to  be 
overall  effective  in  stabilising  the  beneficiaries’  (external)  macroeconomic 
environment, especially in the short and medium-term. Notably, hard data in the 
individual ex-post evaluations show that: 

1.  Despite a challenging external environment at the inception of the respective 
MFA operations, market access could be maintained or regained in all cases;  
2.  Reserve  adequacy  and  current  accounts  mostly  improved  during  MFA 

operations, while inflation subsided.  

Larger  support  and  the  complementarity  of  expertise  and  policy  conditions 
between  the  Commission  and  the  IMF  in  synchronised  operations  made  the 
overall  assistance  more  impactful.  Also,  the  cooperation  increased  the  Union’s 
leverage to push for reforms.   

Some design features of MFA reinforce its effectiveness.  

1.  The  focus  on  countries  in  the  Union’s  direct  vicinity  and  the  strong 
ties  with  those  countries  help  ensure  that  MFA  policy  conditions  are 
relevant, can be met and that the instrument reaches its goals;  

2.  Moreover, the preference for loans and the standard availability period 
of  2.5  years  provide  for  an  overall  framework  conducive  to  reform 
incentives and implementation.  

8 MFAs to: Armenia (2011-2012); Bosnia and Herzegovina (2009-2013); Georgia (2006-2008); Georgia (2009-2010);  
Georgia  II  (2013-2017);  Jordan  (2014-2015);  Kosovo  (2006-2010);  Kyrgyz  Republic  (2013-2016);  Lebanon 
(2007-2010); Moldova (2007-2008); Moldova (2010-2012); Serbia (2009-2011); Tunisia I (2014-2017); Ukraine I 
and II (2014-2015); Ukraine III (2015-2017).  

56 

 
                                                           
At the same time, some factors appear to have reduced the MFA’s effectiveness, 
notably  the  long  procedure  for  authorising  MFA  operations  (both  as  regards 
lengthy ratification procedures in beneficiary countries and inefficiencies relating 
to the standard ordinary legislative procedure on the EU side), the inflexibility of 
the  MoU  and  its  conditionality  in  the  course  of  an  operation  (esp.  in  times  of 
significant  economic  and  political  change  in  the  beneficiary  country)  and  the 
limited size of some operations . 

MFA  has  been  also  a  relatively  (cost-)efficient  instrument.  For  the  Union,  the 
historical  absence of defaults during its more than 30  year long history  allowed 
the  9%  of  loan  provisioning  to  be  routinely  returned  to  the  budget.  For 
beneficiary countries, the high degree of loan concessionality provides substantial 
savings in comparison to market funding.  

The  evaluation  indicated  a  need  to  strengthen  the  visibility  of  the  MFA  in 
beneficiary countries. In this respect, the event organised by the Commission on 
16  November  2021,  on  the  occasion  of  the  30th  anniversary  of  the  instrument, 
provided  an  important  showcase  to  consolidate  the  awareness  around  the 
instrument  also  outside  the  European  Union.  High-level  representatives  from 
beneficiary countries, consultancy firms, EU delegations and Member States took 
part in the debate on what the MFA has achieved so far and possible strategies for 
the future.  

The design and implementation of the MFA were complementary and consistent 
with  other  Union  initiatives  and  IMF-operations  providing  financial  support  to 
beneficiaries.  Continuous  demand  for  MFA  operations  from  beneficiaries  and 
evaluation  reports demonstrate the persistent  relevance of the instrument (in the 
past  and  present)  and  the  reforms  it  promotes.  However,  there  is  scope  for 
increasing the visibility of the instrument. 

Finally,  the  framework  for  MFA  evaluations  was  found  to  be  appropriate  and 
useful. 

57 

 
Annex 1: MFA operations by date of decision, 1990-2021 

58 

 
 
 
Annex 2: Status of disbursements made by date of decision at end-December 2021 

59 

Status of effective disbursements as of end-December 2021 (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 
 
 
 
 
 
60 

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 
 
 
 
 
 
 
61 

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 
 
 
 
 
 
 
 
 
 
62 

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) 
 
 
63 

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 300.0 200.0(Loan)Jul. 2021200(ongoing) 
 
 
 
 
64 

 
 
 
 
 
 
 
Annex 3: MFA amounts authorised* by year, 2005-2021 (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, 2006-2021(EUR million) 

3 500,0

1 800,0

1 300,0

83,5125,0 0,0

590,0

446,0

256,0

0,0 0,0

1 045,0

700,0

100,0

0,0

0,0

2006

2008

2010

2012

2014

2016

2018

2020

Chart 3B: MFA amounts authorised by region, 2006-2021 (%) 

Neighbourhood 
South
26%

Pre-Accession
11%

Neighbourhood 
East 63%

…

65 

2006200720082009201020112012201320142015201620172018201920202021TotalBy 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  0.0 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 document 
 
 
  
 
 
Annex 4: MFA amounts disbursed by year, 2006-2021 (EUR million) 

Chart 4A: MFA amounts disbursed by year, 2006-2021 (EUR million) 

1 690,0 1 665,0

1 360,0

1 268,0

1 023,0

520,0

430,0

61,0 20,0 40,0 40,3

181,0

100,7

69,0 100,0

15,0

6
0
0
2

7
0
0
2

8
0
0
2

9
0
0
2

0
1
0
2

1
1
0
2

2
1
0
2

3
1
0
2

4
1
0
2

5
1
0
2

6
1
0
2

7
1
0
2

8
1
0
2

9
1
0
2

0
2
0
2

1
2
0
2

Chart 4B: MFA amounts disbursed by region, 2006-2021 (%) 

Other; 0%

Neighbourhood 
South; 24%

Accession and 
Pre-Accession; 
10%

Neighbourhood 
East; 66%

…

66 

2006200720082009201020112012201320142015201620172018201920202021TotalBy regionAccession and Pre-Accession  32.0  30.0  100.0  100.0  160.0  465.0  887.0Neighbourhood 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  650.0 5 646.0Neighbourhood South  15.0  25.0  380.0  400.0  400.0  250.0  550.0 2 020.0Other  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 1 665.0 8 583.0Loans  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 1 170.0 1 665.0 7 707.0Grants  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  0.0  371.01 More detailed information is available in the statistical data of the staff working document