2024 economic reform programmes of Albania, Bosnia and Herzegovina, Georgia, Kosovo, Moldova, Montenegro, North Macedonia, Serbia and Türkiye : the Commission’s overview & country assessments.
Date: 2024-07-12
Institutions: Directorate-General for Economic and Financial Affairs
Subjects: Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia, Serbia, Türkiye, economic analysis, economic development, economic governance (EU), economic policy, economic reform, economic situation, enlargement of the Union, fiscal policy, macroeconomics, report

ISSN 2443-8014 (online)

Economic Reform 
Programmes of Albania, 
Bosnia and Herzegovina, 
Georgia, Kosovo*, Moldova, 
Montenegro, North 
Macedonia, Serbia and 
Türkiye: 

The Commission’s overview        
& country assessments

INSTITUTIONAL PAPER 288 | JUNE 2024

EUROPEAN ECONOMY

Economic and 
Financial Affairs 

European  Economy  Institutional  Papers  are  important  reports  analysing  the  economic  situation  and 
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Luxembourg: Publications Office of the European Union, 2024 

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European Commission  
Directorate-General for Economic and Financial Affairs  

2024 Economic Reform Programmes of Albania, Bosnia and 
Herzegovina, Georgia, Kosovo*, Moldova, Montenegro, North 
Macedonia, Serbia and Türkiye:  
The Commission’s overview and country assessments 

* 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. 

EUROPEAN ECONOMY                                                                                    Institutional Paper 288 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CONTENTS 

Introduction 

Part I:  Horizontal Overview of the 2024 Programmes 

1.  Horizontal Overview of the 2024 Programmes 

Introduction 

1.1. 
1.2.  Macroeconomic and fiscal developments and outlook 
1.3. 
1.4.  Main challenges 

Implementation of the policy guidance adopted in 2023 

Part II:  Country analysis 

1.  Albania 

1.1.  Executive summary 
1.2.  Economic outlook and risks 
1.3.  Public finance 
1.4.  Main macro-relevant structural challenges 
1.5. 
Annex 1: Overview of the implementation of the policy guidance adopted at the Economic and Financial 

The policy guidance 

Dialogue in 2023 

Annex 2 : Compliance with programme requirements 

2.  Bosnia and Herzegovina 
2.1.  Executive summary 
2.2.  Economic outlook and risks 
2.3.  Public finance 
2.4.  Main macro-relevant structural challenges 
2.5. 
Annex 1: Overview of the implementation of the policy guidance adopted at the Economic and Financial 

The policy guidance 

Dialogue in 2023 

Annex 2: Compliance with programme requirements 

3.  Georgia 

3.1.  Executive summary 
3.2.  Economic outlook and risks 
3.3.  Public finance 
3.4.  Key structural challenges and reform priorities 
3.5. 
Annex: Compliance with programme requirements 

The policy guidance 

4.  Kosovo* 

4.1.  Executive summary 
4.2.  Economic outlook and risks 
4.3.  Public finance 
4.4.  Main macro-relevant structural challenges 
4.5. 
Annex 1: Overview of the implementation of the policy guidance adopted at the Economic and Financial 

The policy guidance 

Dialogue in 2023 

Annex 2: Compliance with programme requirements 

1 

3 

4 
4 
4 
8 
9 

13 

14 
14 
15 
18 
24 
27 

28 
35 

36 
36 
37 
41 
45 
48 

49 
55 

56 
56 
58 
62 
68 
77 
79 

80 
80 
81 
84 
89 
92 

93 
100 

v 

 
 
 
 
 
5.  Moldova 

5.1.  Executive summary 
5.2.  Economic outlook and risks 
5.3.  Public finances 
5.4.  Key structural reform areas 
5.5. 
The policy guidance 
Annex: Compliance with programme requirements 

6.  Montenegro 

6.1.  Executive summary 
6.2.  Economic outlook and risks 
6.3.  Public finance  
6.4.  Main macro-relevant structural challenges 
6.5. 
Annex 1: Overview of the implementation of the policy guidance adopted at the Economic and Financial 

The policy guidance 

Dialogue in 2023 

Annex 2: Compliance with programme requirements 

7.  North Macedonia 

7.1.  Executive summary 
7.2.  Economic outlook and risks 
7.3.  Public finance 
7.4.  Main macro-relevant structural challenges 
7.5. 
Annex 1: Overview of the implementation of the policy guidance adopted at the Economic and Financial 

The policy guidance 

Dialogue in 2023 

Annex 2: Compliance with programme requirements 

8.  Serbia 

8.1.  Executive summary 
8.2.  Economic outlook and risks 
8.3.  Public finance 
8.4.  Main macro-relevant structural challenges 
8.5. 
Annex 1: Overview of the implementation of the policy guidance adopted at the economic and financial 

The policy guidance 

dialogue in 2023 

Annex 2: Compliance with programme requirements 

9.  Türkiye 

9.1.  Executive summary 
9.2.  Economic outlook and risks 
9.3.  Public finance 
9.4.  Key structural challenges and reform priorities 
9.5. 
Annex 1: Overview of the implementation of the policy guidance adopted at the Economic and Financial 

The policy guidance 

Dialogue in 2023 

Annex 2: Compliance with programme requirements 

LIST OF TABLES 

Economic Reform Programmes 2024 – key indicators 
Economic Reform Programmes 2024 – fiscal indicators 

I.1.1. 
I.1.2. 
II.1.1.  Albania - comparison of macroeconomic developments and forecasts 
II.1.2.  Albania - financial sector indicators 

vi 

101 
101 
103 
106 
111 
113 
114 

115 
115 
116 
119 
125 
128 

129 
133 

134 
134 
135 
139 
145 
147 

148 
153 

154 
154 
156 
159 
165 
168 

169 
176 

177 
177 
179 
182 
186 
191 

193 
199 

11 
12 
16 
18 

 
 
 
 
 
 
II.1.3.  Albania - composition of the budgetary adjustment (% of GDP) 
II.2.1.  Bosnia and Herzegovina - comparison of macroeconomic developments and forecasts 
II.2.2.  Bosnia and Herzegovina - financial sector indicators 
II.2.3.  Bosnia and Herzegovina - composition of the budgetary adjustment (% of GDP) 
II.3.1.  Georgia - macroeconomic developments 
II.3.2.  Georgia - financial sector indicators 
II.3.3.  Georgia - composition of the budgetary adjustment (% of GDP) 
II.4.1.  Kosovo - macroeconomic developments 
II.4.2.  Kosovo - financial sector indicators 
II.4.3.  Kosovo - composition of the budgetary adjustment (% of GDP) 
II.5.1.  Moldova - comparison of macroeconomic developments and forecasts 
II.5.2.  Moldova - financial sector indicators 
II.5.3.  Moldova - composition of the budgetary adjustment (% of GDP) 
II.6.1.  Montenegro - comparison of macroeconomic developments and forecasts 
II.6.2.  Montenegro - financial sector indicators 
II.6.3.  Montenegro - composition of the budgetary adjustment (% of GDP) 
II.7.1.  North Macedonia - comparison of macroeconomic developments and forecasts 
II.7.2.  North Macedonia - financial sector indicators 
II.7.3.  North Macedonia - composition of the budgetary adjustment (% of GDP) 
II.8.1.  Serbia - comparison of macroeconomic developments and forecasts 
II.8.2.  Serbia - financial sector indicators 
II.8.3.  Serbia - composition of the budgetary adjustment (% of GDP) 
II.9.1. 
II.9.2. 
II.9.3. 

Türkiye - comparison of macroeconomic developments and forecasts 
Türkiye - financial sector indicators 
Türkiye - composition of the budgetary adjustment (% of GDP) 

LIST OF GRAPHS 

GDP growth: revisions from previous ERP (difference in pps) 
contributions to real GDP growth (in pps) 
projected evolution of current account balances (% of GDP) 
fiscal adjustment 2023-2026 (% of GDP) 
projected changes in budget balance and general government debt, 2023-26 
overall implementation 2021-23 
PG implementation scores 2021-2023 

I.1.1. 
I.1.2. 
I.1.3. 
I.1.4. 
I.1.5. 
I.1.6. 
I.1.7. 
II.1.1a.  Albania - current account balance (% GDP) 
II.1.1b.  Albania - real effective exchange rate (CPI based, index) 
II.2.1a.  Bosnia and Herzegovina - current account balance (% GDP) 
II.2.1b.  Bosnia and Herzegovina - real effective exchange rate (index) 
II.3.1a.  Georgia- current account balance (% GDP) 
II.3.1b.  Georgia - real effective exchange rate (index) 
II.4.1a.  Kosovo - current account balance (% GDP) 
II.4.1b.  Kosovo - real effective exchange rate (2010 = 100) 
II.5.1a.  Moldova - current account balance (% GDP) 
II.5.1b.  Moldova - real effective exchange rate (index) 
II.6.1a.  Montenegro - current account balance (% GDP) 
II.6.1b.  Montenegro - real effective exchange rate (CPI based, 2010 = 100) 
II.7.1a.  North Macedonia - current account balance (% GDP) 
II.7.1b.  North Macedonia - real effective exchange rate, (CPI based, total economy, 2010 = 100) 
II.8.1a.  Serbia - current account balance (% GDP) 
II.8.1b.  Serbia - real effective exchange rate (CPI based, index) 
II.9.1a.  Türkiye - current account balance (% GDP) 
II.9.1b.  Türkiye - real effective exchange rate (CPI based, index) 

20 
38 
40 
43 
60 
62 
63 
82 
84 
85 
104 
106 
107 
117 
119 
120 
137 
139 
141 
157 
159 
160 
180 
182 
183 

4 
5 
5 
7 
8 
8 
9 
17 
17 
40 
40 
61 
61 
83 
83 
105 
105 
118 
118 
138 
138 
158 
158 
181 
181 

vii 

 
 
 
INTRODUCTION 

Economic  governance  is  a  key  aspect  of  the  EU  enlargement  process,  mirroring  efforts  in  the  EU  to 
strengthen  economic  policy  coordination  and  multilateral  surveillance  under  the  European  Semester. 
The Economic and Financial Dialogue between the EU and the enlargement countries aims to prepare 
the latter for their future participation in the multilateral surveillance in the EU, also by strengthening 
their  institutional  and  analytical  capacities.    The  dialogue  is  based  on  medium-term  Economic  and 
Reform  Programmes  (ERPs)  submitted  annually  by  each  candidate  country  and  potential  candidate. 
Since  2015,  the  dialogue  has  provided  jointly  agreed  and  targeted  policy  guidance  for  the  partner 
countries  on  macro-fiscal  and  structural  reforms.  The  policy  guidance  aims  to  strengthen 
macroeconomic  stability,  boost  the  countries’  growth  prospects  and  promote  their  progress  towards 
meeting the economic accession criteria. In order to avoid duplications and overlaps with the Reform 
Agendas under the new Growth Plan for Western Balkans ( 1), the 2024 policy guidance for the Western 
Balkans focuses on macro-fiscal, monetary and financial matters.   

In  early  2024,  Albania,  Bosnia  and  Herzegovina,  Kosovo,  Montenegro,  North  Macedonia,  Serbia  and 
Türkiye  submitted  their  tenth  Economic  Reform  Programmes  covering  the  period  2024-2026,  while 
Georgia and Moldova presented their first programmes ( 2). Ukraine, while also a candidate country for 
EU  membership,  was  not  asked  to  submit  an  ERP  to  avoid  duplications  with  its  overarching  Ukraine 
Plan. 

This  paper  contains  the  Commission  staff’s  assessments  of  the  ERPs  for  2024-2026,  preceded  by  a 
horizontal overview summarising the key findings from a cross-country  perspective, and taking stock 
of  the  implementation  of  the  country-specific  policy  guidance  adopted  in  2023.  The  cut-off  date  for 
the assessments was 11 April 2024.   

Comments would be gratefully received and should be sent to: 

Directorate-General for Economic and Financial Affairs 
Economies of candidate and pre-candidate countries 
European Commission 
B-1049 Brussels  

or by e-mail to Uwe.Stamm@ec.europa.eu.  

(1)    In  November  2023,  the  Commission  proposed  a  Growth  Plan  for  the  Western  Balkans,  whereby  Reform  Agendas  of  th 
Western  Balkans  will  set  out  specific  structural  reforms,  while  additional  EU  financial  support  is  conditional  on  their 
successful implementation.  

(2)  The  Economic  Reform  Programmes  can  be  found  at  https://ec.europa.eu/neighbourhood-enlargement/enlargement-

policy/policy-highlights/economic-governance_en 

1 

 
 
 
 
 
 
Part I 
Horizontal Overview of the 2024 Programmes 

 
 
1.  HORIZONTAL OVERVIEW OF THE 2024 PROGRAMMES 

1.1. 

INTRODUCTION 

Based on the Commission’s assessments of the 2024 economic reform programmes (ERPs), this note 
provides an overview of the economic situation and outlook for the countries of the Western Balkans, 
Georgia, Moldova and Türkiye, and discusses the main challenges that they are facing. The note serves 
as a background for the Economic and Financial Dialogue between the EU and the candidate countries 
and potential candidates taking place in spring 2024. 

1.2.  MACROECONOMIC AND FISCAL DEVELOPMENTS AND OUTLOOK 

Graph I.1.1: GDP growth: revisions from previous 
ERP (difference in pps)

2

1

0

-1

-2

Albania

Bosnia and
Herzegovina

Kosovo

Montenegro

North
Macedonia

Serbia

Türkiye

2023

2024

2025

Source: ERPs.

In  2023,  most  countries  of  the  region (3)  recorded  a  slowdown  in  growth  due  to  tighter 
financing conditions and weaker external demand. Overall, however, the economies continued to 
show  some  resilience  in  the  face  of  multiple  recent  shocks.  After  surging  in  2022,  consumer  price 
inflation  fell  significantly  in  most  countries  as  global  commodity  prices  dropped  while  central  banks 
with monetary autonomy tightened their policy stance. In Türkiye, inflation remained very high despite 
some first results brought about by a determined policy shift and much-needed monetary tightening. 
The  main  drivers  underpinning  the  region’s  economic  growth  in  2023  included  a  successful  tourism 
season  (particularly  in  Albania,  Georgia  and  Montenegro)  alongside  consumer  spending,  which  was 
supported  by  growing  real  wages  amid  falling  inflation,  and,  in  some  countries,  robust  foreign  direct 
investment inflows. Unlike most countries, Georgia’s and Montenegro’s strong growth performance was 
partly  thanks  to  large  inflows  of  migrants  and  capital,  particularly  from  Russia.  Compared  to  2022, 

(3)  For this note, the ‘region’ refers to all ERP partners, i.e. the Western Balkans, Moldova, Georgia and Türkiye. Ukraine is also 
candidate  country  for  EU  membership,  but  it  was  not  asked  to  submit  an  ERP  to  avoid  duplications  with  its  overarching 
Ukraine  Plan.  This  plan,  adopted  as  part  of  the  Ukraine  Facility,  includes  reforms  that  strengthen  macroeconomic  and 
financial stability. Ukraine participates in the Economic and Financial Dialogue as an observer. 

4 

 
 
 
  
 
Part I 
Horizontal Overview of the 2024 Programmes 

economic growth slowed down in 2023 but remained buoyant in Montenegro, Türkiye, Kosovo, Albania 
and Georgia, while it picked up in Serbia and Moldova in the second half of the year. By contrast, GDP 
growth  was  slower  in  Bosnia  and  Herzegovina  and  North  Macedonia,  partly  due  to  weak  external 
demand and, in the case of the latter, sluggish investment.   

Most  ERPs  expect  GDP  growth  rates  to  stabilise  or  gradually  pick  up  in  2024-2026,  while 
uncertainties  and  downside  risks  remain  significant.  Growth  projections  have  mostly  been 
revised downwards from last year’s ERPs (see Graph I.1.1.). Expected average GDP growth rates during 
the ERP period range from slightly above 3% in Bosnia and Herzegovina and Montenegro to close to 
4%  in  Albania,  Serbia  and  Moldova  and  at  or  above  4.5%  in  North  Macedonia,  Kosovo,  Türkiye  and 
Georgia. Most countries project a slightly accelerating GDP growth profile in 2024-2026. Kosovo’s GDP 
growth is expected to slow  slightly in 2026,  but from a relatively high  rate in 2025 compared to its 
regional  peers.  Montenegro  significantly  outperformed  the  previous  ERP’s  GDP  growth  forecast  in 
2023, but its economic expansion is projected to moderate in 2024-2026 because of slower growth in 
investment  and  in  household  spending.  For  most  countries  (except  North  Macedonia  and  Moldova), 
average GDP growth rates over the ERP period are projected to be markedly lower compared to the 3-
year 2021-2023 period, which was characterised by a robust post-pandemic recovery (see Graph I.1.2). 
The  main  growth  drivers  in  the  Western  Balkans,  Moldova,  Georgia  and  Türkiye  are  projected  to  be 
consumer  spending  and  investment.  Investment’s  contribution  to  GDP  growth  in  2024-2026  is 
expected  to  be  particularly  strong  in  Kosovo  (2.5  percentage  points  (pps))  and  North  Macedonia  (2.9 
pps),  partly  due  to  high  public  capital  spending,  which  appears  somewhat  optimistic  unless  existing 
weaknesses in public investment management are tackled quickly. In most countries of the region, net 
exports are projected to contribute negatively to GDP growth. 

14

12

10

8

6

4

2

0

-2

-4

-6

5.8

3
2
-
1
2
0
2
e
g
a
r
e
v
A

Graph I.1.2: contributions to real GDP growth (in pps)

8.4

6.6

4.6

3.9

4.4

3.1

8.4

7.1

3.0

4.6

4.2

3.9

3.2

5.1

3.6

3.9

4.5

6
2
-
4
2
0
2
e
g
a
r
e
v
A

3
2
-
1
2
0
2
e
g
a
r
e
v
A

6
2
-
4
2
0
2
e
g
a
r
e
v
A

3
2
-
1
2
0
2
e
g
a
r
e
v
A

6
2
-
4
2
0
2
e
g
a
r
e
v
A

3
2
-
1
2
0
2
e
g
a
r
e
v
A

6
2
-
4
2
0
2
e
g
a
r
e
v
A

3
2
-
1
2
0
2
e
g
a
r
e
v
A

6
2
-
4
2
0
2
e
g
a
r
e
v
A

3
2
-
1
2
0
2
e
g
a
r
e
v
A

6
2
-
4
2
0
2
e
g
a
r
e
v
A

3
2
-
2
2
0
2
e
g
a
r
e
v
A

6
2
-
4
2
0
2
e
g
a
r
e
v
A

3
2
-
1
2
0
2
e
g
a
r
e
v
A

6
2
-
4
2
0
2
e
g
a
r
e
v
A

3
2
-
1
2
0
2
e
g
a
r
e
v
A

6
2
-
4
2
0
2
e
g
a
r
e
v
A

Source: ERPs.

Albania

Bosnia-
Herzegovina

Kosovo

Montenegro

North
Macedonia

Serbia

Georgia

Moldova

Türkiye

Private consumption

Government consumption

Gross fixed capital formation

Changes in inventories

Net exports

GDP growth (%)

Overall,  risks  are  related  to  an  uncertain  global  outlook  and  geopolitical  developments, 
which affect external demand, financing conditions and the further evolution of commodity 
prices.  Such  external  uncertainties  are  compounded  by  homegrown  risks,  such  as:  (i)  slow 
implementation  of  reforms;  (ii) a  limited  fiscal  space  restricting  the  response  to  unexpected  adverse 
shocks to the economy; (iii) slower-than-expected implementation of public infrastructure projects; and 
(iv) constraints  on  private  investment  resulting  from  higher  financing  costs  and  weaknesses  in  the 
business  climate.  Most  programmes  include  risk  analyses  and  alternative  growth  scenarios,  albeit 
rarely well developed.  

In 2023, current account balances improved significantly thanks to lower import prices and, 
for  some  countries,  stronger  revenues  from  tourism.  The  improvement  was  particularly 
substantial  in  North  Macedonia,  Moldova  and  Serbia,  which  were  the  countries  hardest  hit  by  the 
energy crisis in 2022. Most programmes project a further narrowing of external deficits over the ERP 

5 

   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
European Commission 
Institutional Paper 

Graph I.1.3: projected evolution of current account balances 
(% of GDP)

AL

BA

GE

XK

MD

ME

MK

RS

TR

5

0

-5

-10

-15

-20

2023
2026
2022

Source: ERPs and National Bank of Moldova.

period ( 4) (see Graph I.1.3.) (5). Conversely, in Serbia, North Macedonia and Kosovo, the current account 
deficit  is  set  to  widen  slightly  over  2024-2026  because  of  a  marked  pick-up  in  domestic  demand 
driving  up  imports.  Inflows  of  foreign  direct  investment  (FDI)  remained  robust  in  most  countries  in 
2023,  covering  a  large  part  or  all  of  the  external  deficit.  Most  ERPs  expect  this  trend  to  continue. 
However, whereas some countries benefit from strong inflows into tradable sectors and the resulting 
increase  in  export  capacities  (e.g.  Serbia)  or  from  well  diversified  FDI  inflows  into  various  economic 
sectors  (e.g.  Georgia),  in  others  (e.g.  Montenegro  and  Kosovo)  FDI  tends  to  be  concentrated  in  real 
estate or other non-tradable activities with little impact on external competitiveness. In Türkiye, policy 
tightening, along with the envisaged rebalancing of growth, is set to curb external imbalances, but FDI 
inflows  (at  1%  of  GDP  in  2023)  remain  significantly  below  the  country’s  potential.  In  Moldova,  FDI 
inflows continue to suffer because of the effects of Russia’s war of aggression against neighbouring 
Ukraine.  Improving  the  business  climate  and  facilitating  exports  could  help  all  countries  to  better 
benefit  from  nearshoring  trends,  and  attract  more  FDI  and  broaden  the  export  base,  underpinning  a 
sustainable expansion, modernisation, and long-term financing of the economy.   

The banking sectors have generally withstood recent shocks quite well. Lending to the private 
sector has continued to grow at a strong rate in nominal terms in some countries, although real credit 
growth  has  remained  negative  in  most  cases  due  to  high  inflation  and  tighter  financing  conditions. 
Banking systems have maintained solid capital and favourable liquidity positions, and profitability has 
further  improved  thanks  to  wider  interest  margins  and  a  continued  decrease  in  non-interest  costs. 
Asset quality indicators have remained positive thus far, with the ratio of non-performing loans (NPLs) 
to total loans not showing a significant increase based on available data. Georgia, Kosovo and Türkiye 
reported  the  lowest  NPL  ratios  below  2%  (based  on  the  latest  available  2023  data),  while  Albania, 
Montenegro and Moldova had NPL ratios exceeding 5%. As nominal credit growth has been strong, in 
some cases it masks an increase in the stock of NPLs, as seen in Albania, Serbia and Türkiye. The ratio 
of stage 2 loans to total loans, which could indicate a potential accumulation of risks, has increased in 
North Macedonia and Serbia, and it has ranged from 5% in Georgia to almost 15% in Moldova despite 
a  decline  in  2023  (data  available  up  to  Q4-2023,  with  no  data  available  for  Albania).  Overall, 
provisioning  is  generally  adequate,  although  Montenegro  currently  has  the  second  highest  NPL  ratio 
and the lowest NPL coverage ratio among central, eastern, and south-eastern European peers. 

(4)  Moldova’s ERP does not provide projections for the current account balance.  
(5) 

In Graph 3, 4 and 5, the two-letter abbreviations stand for the following partners: AL - Albania, BA - Bosnia and Herzegovina, 
GE - Georgia, XK - Kosovo, MD - Moldova, ME - Montenegro, MK - North Macedonia, RS - Serbia, and TR - Türkiye. 

6 

 
   
Part I 
Horizontal Overview of the 2024 Programmes 

Budget  outcomes  varied  across  the  countries  in  2023,  with  fiscal  consolidation  gaining 
ground in the Western Balkans. In several countries (Serbia, Montenegro, Albania, Moldova, Georgia 
and Kosovo), the budget balance outperformed targets and in some cases also improved compared to 
2022  thanks  to  robust  revenue  growth,  less  need  for  energy  support,  and  lower-than-budgeted 
amounts of capital spending. At the same time, the deficit remained large in Türkiye due to pressing 
expenditure  needs  related  to  post-earthquake  reconstruction  and  pre-election  spending  and  in  North 
Macedonia due to social and capital spending. The government debt-to-GDP ratio continued to fall in 
most  countries  due  to  a  favourable  snowball  effect,  as  the  impact  of  high  nominal  GDP  growth 
outweighed rising interest costs. A positive primary balance also helped reduce the debt ratio in Bosnia 
and Herzegovina, Kosovo and Albania. 

Graph I.1.4: fiscal adjustment 2023-2026
(% of GDP)

e
n

i
l
c
e
D

.

p
x
E
/
e
s
a
e
r
c
n

I

.
v
e
R

/
e
n

i
l
c
e
D

.
v
e
R

e
s
a
e
r
c
n

I

.

p
x
E

6

4

2

0

-2

-4

AL

BA

GE

XK

MD

ME

MK

RS

TR

Change in total revenue

Change in total expenditure

Change in budget balance

Source: ERPs.

Most fiscal scenarios project an expenditure-based fiscal consolidation (see Graph I.1.4.). The 
phasing  out  of  energy  support  measures  and,  in  the  case  of  Türkiye,  the  end  of  post-earthquake 
reconstruction spending will help lower expenditure. However, interest costs rising further will have the 
opposite  effect.  Overall,  the  fiscal  measures  to  back  up  the  planned  expenditure  restraint  are  not 
always clearly defined. In all the countries assessed except Moldova, the budget deficit is expected to 

Graph I.1.5: projected changes in budget balance and
general government debt, 2023-26

)
P
D
G

f
o
%

(

t
b
e
d
G
G

MD 2023

MK 2023

MK 2026

MD 2026

TR 2023

ME 2026

AL 2023

AL 2026

RS 2023

GE 2023

RS 2026

GE 2026

TR 2026

XK 2026

ME 2023

BA 2023

BA 2026

XK 2023

80

70

60

50

40

30

20

10

-7

-6

-5

-4

-3

-2

-1

0

1

Budget balance (% of GDP)

Source: ERPs.

7 

   
 
 
 
 
 
 
 
 
 
   
 
 
 
 
European Commission 
Institutional Paper 

fall below 3% of GDP by 2026 (see Graph I.1.5.). Improvements in the budget balance in 2023-2026 
are particularly noticeable in Türkiye, Moldova and North Macedonia. In Moldova, the steep decline in 
revenue as a percentage of GDP is driven primarily by a projected steep fall in external aid in the form 
of grants, while real GDP growth is projected to outstrip growth in spending on public sector wages and 
social benefits. In Kosovo and Montenegro, the budget deficit is projected to increase. In Kosovo, this is 
driven  by  the  planned  substantial  rise  in  public  investment  after  3  years  of  fiscal  consolidation; 
however, compliance with the deficit rule is expected to continue. Montenegro also expects its budget 
balance to deteriorate compared to the exceptionally good outcome in 2023, which was partly thanks 
to  one-off  revenues.  On  the  revenue  side,  the  Western  Balkan  countries  expect  the  revenue  ratio  to 
remain at or slightly decrease from the historically high levels achieved in 2023.   

Most ERPs project the debt-to-GDP ratio to stabilise or fall in 2024-2026. In most cases, the 
combination  of  a  moderating  but  still  debt-decreasing  snowball  effect  and  an  emerging  primary 
surplus  (resulting  from  fiscal  consolidation  efforts)  is  driving  the  decline  in  the  debt  ratio.  Kosovo’s 
debt ratio is set to increase but remain low at slightly above 20% in 2026, due to, among other things, 
a narrow domestic investor  base and lack of access to international debt markets, which  continue to 
constrain financing options. 

1.3. 

IMPLEMENTATION OF THE POLICY GUIDANCE ADOPTED IN 2023 

Every  year  since  2015,  the  Economic  and  Financial  Dialogue  has  adopted  targeted  policy 
guidance (PG) for all partners. The PG represents the participants’ shared view on the short-term 
policy  measures  that  should  be  implemented  to  address  macro-fiscal  vulnerabilities  and  structural 
obstacles  to  growth.  The  PG’s  underlying  rationale  is  similar  to  that  of  the  country-specific 
recommendations  adopted  under  the  European  Semester  for  EU  Member  States.  The  Commission 
evaluates the implementation of the PG in the following year’s ERP assessments (6) 

Graph I.1.6: overall implementation 2021-23

45.7%

43.0%

41.3%

2021

2022

2023

35.2%

34.1%

30.7%

23.6%

24.6%

21.9%

50%

45%

40%

35%

30%

25%

20%

15%

10%

5%

0%

No/limited implementation

Partial implementation

Substantial/full
implementation

The  level  of  implementation  of  last  year’s  PG  increased  somewhat  when  compared  with 
that for 2022. The average score across the Western Balkans and Türkiye increased from 40.9 out of 

(6)  The  detailed evaluation  of  individual  PG  items  can  be  found  in  the  Commission’s  ERP  assessments.  Georgia  and  Moldova 

participated in the dialogue for the first time in 2024 and therefore no PG had been adopted for them in 2023. 

8 

  
 
 
   
 
Part I 
Horizontal Overview of the 2024 Programmes 

100  for  the  implementation  of  the  PG  adopted  in  2022  to  44.2  in  2023 ( 7).  The  share  of  policy 
recommendations  that  saw  only  limited  or  no  implementation  fell,  while  those  that  have  been 
substantially  or  fully  implemented  inched  up  (see  Graph  I.1.6.).  Still,  the  former  group  continued  to 
outweigh the latter by a wide margin, pointing to the need to substantially step up implementation of 
reforms. The Growth Plan for the Western Balkans, adopted by the Commission on 8 November 2023, 
aims  to  incentivise  socio-economic  reforms  and  the  Western  Balkan  countries’  preparations  for  EU 
membership through increased financial assistance and  by  bringing forward some of the benefits of 
EU accession. Therefore, the plan is expected to complement and support the policy guidance adopted 
at the Economic and Financial Dialogue.  

Compared  with  last  year,  most  countries  have  managed  to  improve  their  performance  or 
maintain it at the same level. The improvement was especially strong in Türkiye, reflecting the bold 
steps it has taken since mid-2023, which have been focused on stabilisation and policy normalisation. 
However, Türkiye continued to lag behind most of the Western Balkans in terms of the overall country 
score  (see  Graph  I.1.7.).  The  implementation  score  has  also  improved  for  North  Macedonia,  which 
achieved  the  best  performance,  as  well  as  for  Montenegro  and  Bosnia  and  Herzegovina.  Overall,  the 
implementation  of  the  policy  guidance  adopted  in  2023  is  assessed  as  ‘partial’  (8)  for  all  partners 
except Türkiye, where it remained ‘limited’ (with a score below 37.5). 

Graph I.1.7: PG implementation scores 2021-2023

PG 2021 scores

PG 2022 scores

PG 2023 scores

55.6

51.4

47.2

43.1

38.9

37.5

36.1

70

60

50

40

30

20

10

0

North
Macedonia

Serbia

Albania

Kosovo Montenegro Bosnia and
Herzegovina

Türkiye

1.4.  MAIN CHALLENGES 

First, fiscal policy should support the ongoing disinflationary process in 2024, help achieve 
prudent  medium-term  fiscal  positions  and  rebuild  largely  depleted  fiscal  buffers.  The 
economies  of  the  Western  Balkans,  Georgia  and  Türkiye  proved  resilient  in  the  face  of  the  various 

(7)  For  a  detailed  description  of  the  methodology  used  to  assess  PG  implementation,  see  Section  1.3  of  the  Commission’s 
is  available  at 

Overview  and  Country  Assessments  of 
https://ec.europa.eu/info/publications/economy-finance/2017-economic-reform-programmes-commissions-overview-and-
country-assessments_en. 

the  2017  Economic  Reform  Programmes.  This 

(8)  The assessment categories are as follows: limited (0-37.5), partial (37.5-62.5), substantial (62.5-87.5) and full (87.5-100) 

implementation. 

9 

 
  
  
 
 
European Commission 
Institutional Paper 

global challenges, despite a relatively limited fiscal stimulus in many cases. The phasing-out of energy 
support  measures in the context of lower energy  prices  should help improve budget  balances. At the 
same  time,  interest  costs  are  expected  to  rise  as  maturing  public  debt  is  rolled  over  amid  tighter 
financing conditions, while lower nominal GDP growth will provide less support to debt reduction in the 
coming years. Careful fiscal planning is even more important in countries with no monetary autonomy 
and  which  therefore  have  limited  tools  to  manage  aggregate  demand  and  achieve  price  stability.  A 
well-calibrated  return  to  a  more  prudent  fiscal  position  appears  warranted  in  the  medium  term  to 
ensure  a  gradual  debt  reduction  and  to  rebuild  fiscal  buffers.  In  Moldova,  which  suffered  a  severe 
downturn in 2022 and only returned to growth in the second half of 2023, fiscal adjustment will need 
to be gradual and preserve growth-enhancing spending to support the nascent economic recovery. 

Second,  continued  efforts  should  also  be  made  to  maintain,  or  in  some  cases  shift,  budgets 
towards a more growth-oriented composition to better support the economic recovery and the 
green transition. Public investment is expected to be stepped up or kept at a relatively high level in many 
countries. To effectively maximise the growth-enhancing impact of such investments, greater expenditure 
efficiency  and  thorough  cost-benefit  analysis  of  investment  projects  are  key.  This  involves  improving 
investment  management,  including  project  planning  and  selection.  Furthermore,  partners  should  prioritise 
sustainable and inclusive growth by investing in infrastructure, technology and innovation.  

Third,  it  is  essential  that  fiscal  consolidation  plans  are  supported  by  comprehensive 
medium-term  fiscal  strategies  and  well-defined  measures.  The  failure  to  control  current 
expenditures, particularly on public wages, pensions, and social benefits, has been a recurring issue in 
many  countries  and  could  impede  fiscal  adjustment  efforts.  Therefore,  it  is  necessary  to  strengthen 
multiannual  budgetary  planning,  establish  or  increase  fair,  transparent  and  sustainable  public  wages 
and  pension  systems,  and  improve  the  targeting  of  social  benefits.  As  a  common  priority,  reforms 
should  involve  tax  administrations  in  order  to  increase  the  capacity  to  generate  public  revenue, 
broaden the tax base and reassess distorting, ineffective, and costly tax exemptions. Ongoing efforts 
need to be strengthened to better monitor and address fiscal risks arising from inefficient state-owned 
enterprises, public guarantees, and public-private partnerships.  

Fourth,  fiscal  governance  should  be  strengthened  via  credible  fiscal  rules,  independent  fiscal 
institutions, and more binding medium-term budgeting where the administrative capacity exists 
to  do so. There  have recently been some encouraging  steps across the Western  Balkans in these  areas, 
which  should  be  further  built  upon  in  the  coming  years.  Strengthening  fiscal  governance  would  signal  a 
strong  commitment  from  the  authorities  to  prudent  fiscal  policies,  thereby  reducing  the  country  risk 
premium  and  sovereign  borrowing  costs.  To  improve  public  debt  management,  partners  should  further 
develop their government security markets, particularly by expanding the range of instruments denominated 
in local currency (which is envisaged in Georgia and Serbia). 

All  economies  face  similar  structural  challenges  and  bottlenecks  to  increase  productivity 
and long-term growth. Most partners struggle with corruption, unpredictability in their legal systems 
and slow legal procedures. Weaknesses in the regulatory and institutional environment hamper private 
sector development. Several economies also face problems with still sizeable and unprofitable state-
owned  enterprises,  leading  to  resource  misallocation  and  unfair  competition.  The  widespread  grey 
economy also undermines competition, hinders the efficient allocation of state and private resources, 
and  reduces  tax  revenues  and  funding  for  social  security  systems.  The  green  transition  is  a  major 
challenge  for  all  these  countries,  with  their  electricity  sectors  typically  dependent  on  polluting  fossil 
fuels  and  outdated  energy  infrastructure,  which  have  a  negative  impact  on  energy  security  in  some 
countries.  A  shift  towards  renewable  energy  sources,  diversification  of  energy  sources  and 
improvements in energy efficiency will be needed to meet targets for greenhouse gas reductions and 
improve  resilience  in  the  face  of  energy  price  shocks  but  will  require  large  investments.  Despite 
positive labour market developments and growth in employment rates in most economies, the activity 
rates are still low overall and unemployment rates relatively high. Active labour market policies are not 
sufficiently  targeted  at  population  groups  most  in  need.  Structural  skills  mismatches  persist,  due  to 
under-investment  in  human  capital  and  weak  education  systems,  including  outdated  curricula  and 
mismatches  between  vocational  education  and  training  and  the  needs  of  the  labour  market.  Low 

10 

Part I 
Horizontal Overview of the 2024 Programmes 

productivity, in combination with an underdeveloped transport infrastructure and weak private sector, 
typically results in a narrow and low-value-added export base.  

Table I.1.1:
Economic Reform Programmes 2024 – key indicators

2020

2021

2022 2023e

2024

2025

2026

Real GDP growth (% change)     

Albania

Bosnia and Herzegovina

Georgia

Kosovo

Moldova

Montenegro

North Macedonia

Serbia

Türkiye

Albania
Bosnia and Herzegovina

Georgia

Kosovo

Moldova

Montenegro

North Macedonia

Serbia

Türkiye

Albania
Bosnia and Herzegovina

Georgia

Kosovo

Moldova

Montenegro

North Macedonia

Serbia

Türkiye

Albania
Bosnia and Herzegovina

Georgia

Kosovo

Moldova

Montenegro

North Macedonia

Serbia

-3.3

-2.9

-6.3

-5.3

-8.3

-15.3

-4.7

-0.9

1.9

8.9

7.3

10.6

10.7

13.9

13.0

4.5

7.7

11.4

4.9

3.8

10.4

5.2

-5.0

6.4

2.2

2.5

5.5

3.5

2.0

6.5

3.9

2.0

5.8

2.3

2.5

4.4

Unemployment rate (% LFS)

12.2
15.9
18.5

25.9

3.8

18.4

16.6

9.7

12.1
17.4
20.6

20.7

3.2

16.9

15.6

11.0

11.3
15.4
17.3

12.6

3.2

14.7

14.4

9.7

10.6
13.2
16.6

:

:

13.2

12.8

9.6

13.1

12.0
Current account balance (% of GDP)

10.4

10.1

-8.7
-2.8

-7.7
-1.8

-12.5

-10.3

-7.0

-7.7

-26.1

-2.9

-4.1

-4.5

-8.7

-12.6

-9.2

-2.8

-4.2

-0.9

-6.0
-4.5

-4.5

-10.2

-17.4

-12.9

-6.2

-6.9

-5.4

-4.7
-4.3

-4.6

-6.8

-1.2

-2.5

-4.0

Inflation (CPI annual % change)

1.6
-1.1
5.2

0.2

3.8

-0.8

1.2

1.6

2.0
2.0
9.6

3.3

5.1

2.5

3.2

4.1

6.7
14.0
11.9

11.6

28.7

13.0

14.2

11.7

4.8
6.2
2.6

5.1

13.6

9.0

9.5

12.3

3.7

2.9

5.2

4.6

3.5

3.8

3.4

3.5

4.0

10.2
11.9
16.2

:

:

12.6

11.9

9.3

10.3

-4.8
-3.7

-4.8

-7.9

3.9

3.0

5.0

4.8

4.0

3.0

4.8

4.0

4.5

9.8
10.5
15.9

:

:

12.0

11.0

8.9

9.9

-4.5
-3.0

-4.6

-7.9

4.0

3.4

5.0

4.4

4.2

2.9

5.5

4.3

5.0

9.5
9.1
15.7

:

:

11.6

10.1

8.0

9.3

-4.3
-2.8

-4.3

-7.4

-2.4

-3.8

-3.1

3.0
3.1
2.8

2.7

5.0

5.0

3.5

4.6

-2.4

-4.1

-2.6

3.0
2.2
3.0

2.3

5.0

3.4

2.0

3.0

15.2

-2.3

-4.3

-2.3

3.0
1.9
3.0

2.3

5.0

2.5

2.0

3.0

8.5

:

:

:

:

-12.7

-13.1

-12.0

-10.9

Türkiye
Turkey
e: estimate.
LFS:  labour force survey.
Sources: Economic Reform Programme (ERP) 2024 for 2022-2026, CCEQ for 2020 and 2021, 

12.3
39 2

64.3
35 0

65.0
33 0

19.6
36 5

33.0
31 0

national sources for Georgia and Moldova for 2020 and 2021. 

Note: CCEQ: DG ECFIN publication 'EU Candidate and Potential Candidate Countries' Economic 
Quarterly'

11 

 
 
   
 
 
 
European Commission 
Institutional Paper 

Table I.1.2:
Economic Reform Programmes 2024 – fiscal indicators

2020

2021

2022 2023e

2024

2025

2026

Albania
Bosnia and Herzegovina

Georgia

Kosovo

Moldova

Montenegro

North Macedonia

Serbia

Türkiye

Albania

Bosnia and Herzegovina

Georgia

Kosovo

Moldova

Montenegro

North Macedonia

Serbia

Türkiye

Total revenue * (% of GDP)

25.9
41.6

27.0

25.4

31.4

44.6

28.4

41.0

29.6

27.5
41.0

27.1

27.7

32.0

44.3

30.0

43.2

28.0

26.8
39.8

30.9

27.9

33.4

39.2

32.1

43.7

27.8

28.0
41.9

31.4

29.1

32.9

44.3

33.7

42.5

30.2

Total expenditure * (% of GDP)

32.6

46.8

35.9

33.0

36.7

55.7

36.4

49.0

32.5

32.1

41.3

33.0

28.9

33.9

46.2

35.3

47.4

30.3

30.4

38.7

33.1

28.4

36.6

42.9

36.5

46.9

28.6

30.2

42.2

34.4

29.3

38.8

43.8

38.5

45.3

36.7

27.8
41.9

32.6

28.7

31.3

44.1

33.7

42.6

31.2

30.3

42.5

35.1

31.4

36.0

47.5

37.1

44.8

37.2

General government balance (% of GDP) 

Albania
Bosnia and Herzegovina
Georgia
Kosovo
Moldova
Montenegro

North Macedonia

Serbia

Türkiye

Albania
Bosnia and Herzegovina

Georgia

Kosovo

Moldova

Montenegro

North Macedonia

-6.7
-5.2
-8.9
-7.6
-5.3
-11.1
-8.0

-8.0

-2.9

-4.6
-0.3
-5.9
-1.2
-1.9
-1.9
-5.3

-4.1

-2.3

-3.7
1.0
-2.2
-0.5
-3.2
-3.7
-4.4

-3.2

-0.8

-2.2
-0.4
-3.0
-0.2
-5.9
0.5
-4.8

-2.8

-6.5

General government debt (% of GDP) 

74.3
36.1

59.5

22.4

36.6

105.3

50.8

74.5
33.9

49.0

21.5

32.6

82.5

52.0

64.5
28.3

39.5

20.0

35.0

69.3

50.4

61.5
26.7

38.2

17.3

37.2

62.2

50.2

-2.5
-0.6
-2.5
-2.7
-4.6
-3.4
-3.4

-2.2

-6.0

59.8
25.6

38.0

18.8

37.0

61.6

52.0

27.8
41.3

32.0

28.2

30.8

43.3

33.5

42.5

31.2

29.8

41.4

34.3

30.9

34.6

46.2

36.5

44.0

34.2

-2.1
-0.1
-2.3
-2.7
-3.8
-2.9
-3.0

-1.5

-3.0

59.3
24.6

37.8

20.4

35.9

61.3

50.3

57.0

Serbia
Türkiye
e: estimate.
* 2020 and 2021 data from Ministry of Finance. 
Sources: Economic Reform Programme (ERP) 2024 for 2022-2026, CCEQ for 2020 and 2021,

30.8

33.3

35.2

39.4

40.4

55.6

53.3

51.7

56.5

50.7

34.6

27.8
40.9

31.4

28.1

29.9

42.8

33.1

42.3

31.2

29.9

40.7

33.5

30.1

33.3

45.2

36.1

43.8

33.7

-2.1
0.3
-2.2
-1.9
-3.4
-2.4
-3.0

-1.5

-2.5

58.9
23.0

37.6

21.4

34.2

61.0

50.2

50.0

33.2

national sources for Georgia and Moldova for 2020 and 2021. 

Note: CCEQ: DG ECFIN publication 'EU Candidate and Potential Candidate Countries' Economic 
Quarterly'

12 

 
 
   
 
 
Part II 
Country analysis 

 
 
1.  ALBANIA 

1.1.  EXECUTIVE SUMMARY 

Following 2 years of strong economic expansion, Albania’s real GDP growth moderated but 
exceeded expectations in 2023, and the economic reform programme (ERP) projects growth 
to gather pace in 2024-2026. Helped by exceptional performance in the tourism sector and rising 
investments,  the  economy  expanded  by  3.4%  in  2023.  The  labour  market  registered  positive 
developments with increases in employment and wages, which supported consumption. Helped by the 
tourism  boom,  the  current  account  deficit  continued  to  decrease  to  historically  low  levels.  The  ERP 
projects economic growth to accelerate from 3.7% in 2024 to 4% in 2026 on the back of increasing 
domestic demand and rising exports led by a further expansion of tourism. Net exports are expected to 
contribute positively to GDP growth, which might be somewhat optimistic as rising domestic demand 
might  boost  imports  more  than  forecast;  while  the  external  environment  remains  challenging  with 
subdued growth in the EU economy. Inflation declined on the back of external factors and also due to 
the central bank tightening its policy stance. The ERP expects inflation to already meet the 3% target in 
2024.  A  higher  labour  force  participation  rate  is  expected  to  be  the  main  driver  of  labour  supply 
growth, while the unemployment rate is projected to decrease gradually to 9.5% in 2026.  

Albania’s fiscal position improved in 2023, and the ERP aims to continue realising surpluses 
in the primary balance in the medium term. In 2023, the budget deficit narrowed to 1.4% of GDP, 
better  than  expected  on  the  back  of  strong  revenue  growth  but  also  due  to  lower  than  planned 
execution  of  public  investments.  The  primary  balance  turned  positive.  The  ERP  projects  the  budget 
deficit  to  widen  to  2.5%  of  GDP  in  2024  on  the  back  of  higher  spending  on  public  wages,  social 
insurance  and  interest  costs.  However,  the  primary  balance  is  projected  to  remain  in  surplus,  in  line 
with the fiscal rule. In 2025-2026, a lower expenditure-to-GDP ratio is projected to lower the budget 
deficit to just above 2% of GDP and further increase the primary surplus. The government debt ratio 
fell  by  more  than  expected  in  2023,  reflecting  a  positive  primary  balance  and  favorable  snowball 
effect. It is projected to continue its downward path in future, but at a more moderate pace.  

The main challenges facing Albania are the following: 

•  While revenues as a share of GDP increased in 2023, the ratio remains low compared to 
other  countries  in  the  region.  After  a  1  percentage  point  (pp.)  increase  in  2023,  the  ERP 
projects public revenues to remain constant at 27.8% of GDP over 2024-2026 and tax revenue to 
increase marginally. The planned fiscal consolidation is important in the face of elevated financing 
needs  and  should  be  better  underpinned  by  increasing  the  tax  revenue  ratio,  including  by 
implementing an updated medium-term revenue strategy. A higher tax revenue ratio is crucial for 
supporting  investments  in  both  physical  and  human  capital,  and  for  firmly  anchoring  the 
downward  trend  of  public  debt.  There  is  also  scope  for  increasing  the  effectiveness  of  budget 
spending  by  continuing  to  reform  public  investment  management,  including  public-private 
partnerships (PPPs). 

• 

Fiscal  risks  continue  to  stem  from  arrears  and  state-owned  enterprises  (SOEs), 
particulary  in the energy  sector.  Arrears continued to accumulate throughout 2023 (1.2% of 
total expenditure at the end of the year). Reducing their stock and preventing their re-emergence 
remains  a  challenge.  Contingent  liabilities  stem  from  SOEs,  PPPs  and  ongoing  court  cases.  The 
state-owned  energy  utilities  are  reliant  on  government  support  either  via  guarantees  or  loans, 
which  is  a  source  of  fiscal  risks.  Increased  transparency  and  higher  managerial  accountability 
would  increase  SOEs’  fiscal  performance  and,  in  turn,  reduce  their  reliance  on  budget  support. 
While the Ministry of Finance has  stepped up fiscal risk  monitoring, further  progress  in this area 
remains important.  

14 

 
Part II 
Country analysis, Albania 

•  Other key challenges are  linked  to addressing the informal economy, labour  shortages 
and skills, and improving connectivity and energy security. Informality remains widespread, 
while  the  business  environment  needs  further  improvements.  Informality  impacts  many  sides  of 
the Albanian economy, affecting the business climate and fair competition as well as reducing the 
tax  base  and  hindering  economic  growth  overall.  Given  its  pervasiveness,  tackling  informality 
requires  a  multifaceted  approach.  Furthermore,  fighting  informality  and  improving  the  business 
environment should help stem the tide of emigration. Steady emigration flows over the past few 
years are shrinking the workforce. While the labour market registered positive developments with 
increases in employment and wages, the continued brain drain and labour shortages pose issues. 
Albania  has  a  very  high  rate  of  low-skilled  adults  and  high  rates  of  early  school  leaving. 
Furthermore,  it  needs  to  address  the  infrastructure  gaps  and  improve  connectivity.  The  energy 
sector  is  volatile,  with  hydro-electricity  production  dependent  on  rainfall  and  reliant  on  budget 
support. These challenges are expected to be addressed through key structural reforms identified 
in the country’s reform agenda under the new Growth Plan for the Western Balkans. 

Implementation  of  the  policy  guidance  set  out  in  the  conclusions  of  the  Economic  and 
Financial Dialogue of May 2023 has been partial. Fiscal consolidation accelerated and a positive 
primary  balance  was  achieved,  as  envisaged.    Two  budget  revisions  have  been  undertaken  via 
normative acts, which is not  in line with the  policy  guidance. The end-of-year target for the stock of 
arrears  was  achieved  (because  of  budget  amendments  that  reallocated  spending  for  arrears 
clearance),  but  throughout  2023  arrears  continued  to  accumulate  above  the  quarterly  targets.  To 
increase  tax  revenues,  a  new  law  on  income  tax  was  adopted.  Albania  established  a  national  single 
project pipeline, but PPPs still need to be integrated into it. Expenditure on education, health and social 
protection  increased  in  nominal  terms  while  the  methodology  for  data  collection  and  processing  on 
public  expenses  dedicated  to  R&D  was  not  finalised.  The  Bank  of  Albania  continued  tightening 
monetary  policy,  while  the  regulation  on  collecting  data  from  banks  on  their  exposures  to  the  real 
estate sector has entered into force. The Albanian power exchange ALPEX went live in April 2023, and 
a new law on renewables was adopted. The piloting of the Youth Guarantee scheme was launched in 
October 2023 in three regions (Tirana, Shkodra and Vlora). An indexation mechanism of the economic 
aid scheme still needs to be put in place. 

1.2.  ECONOMIC OUTLOOK AND RISKS 

Albania’s  economic  growth  was  robust  in  2023,  exceeding  the  projections  of  the  previous 
ERP. The economy grew by 3.3% year-on-year in the first three quarters of 2023, and by an estimated 
3.4% in the year as a whole, undepinned by strong domestic demand and exceptional performance by 
the tourism sector, which reached new heights with over 10 million foreign arrivals in 2023 (which is 
well  above  the  pre-pandemic  level).  Consumption,  investments  and  net  exports  all  made  positive 
contributions to growth. Public consumption growth was supported by higher wages in the public sector 
(due to public sector wage reform). Private consumption grew slower than in the previous year, while 
investment  witnessed  a  substantial  increase,  spurred  by  private  investments.  Exports  have  been 
supported by a surge in service exports, which offset the decline in goods exports. On the production 
side,  services  and  construction  were  the  main  drivers  of  growth,  while  the  industrial  sector  suffered 
somewhat in 2023 due to a mix of factors, including the appreciation of the exchange rate. While the 
real  GDP  growth  rate  moderated  in  2023  compared  to  2022,  it  exceeded  expectations  and  the 
projections of the previous ERP. 

The ERP projects GDP growth to accelerate to 3.7% in 2024 and increase to almost 4% in 
2025-2026.  In  the  baseline  scenario,  domestic  demand  is  expected  to  be  the  key  driver  of  growth, 
with  positive  contributions  from  private  and  public  consumption  as  well  as  investments.  Further 
support  for  GDP  growth  is  projected  to  come  from  net  exports,  mainly  tourism  services.  Exports  of 
goods  and  services  are  forecast  to  have  robust  performance,  with  average  real  growth  of  5.2%  per 
year  in  2024-2026,  while  imports  of  goods  and  services  are  projected  to  expand  at  a  slower  pace 
(3.7% on average). Investments are expected to continue  growing  but at slower  pace in 2024-2025, 
before  accelerating  in  2026.  Their  GDP  growth  contribution  is  projected  to  average  0.8  percentage 

15 

 
European Commission 
Institutional Paper 

points  (pps)  per  year.  From  the  supply  side,  all  major  economic  sectors  are  expected  to  expand. 
Employment is expected to rise by an average of 0.3% per year in 2024-2026, gradually reducing the 
unemployment rate to 9.5% in 2026. A higher labour force participation rate is expected to remain the 
main  driver  of  labour  supply,  given  the  shrinking  population  (caused  by  high  emigration  and  low 
fertility rates). The ERP estimates a zero output gap in 2024 and a slightly negative output gap (-0.1%) 
in  2025-2026.  The  plan  contains  an  alternative  downside  scenario,  which  assumes  that  real  GDP 
growth is 1.5 pps lower each year compared to the baseline projections. 

Table II.1.1:
Albania - comparison of macroeconomic developments and forecasts

Real GDP (% change)
Contributions:
- final domestic demand
- change in inventories
- external balance of goods and services
Employment (% change)
Unemployment rate (%)
GDP deflator (% change)
CPI inflation (%)
Current account balance (% of GDP)
General government balance (% of GDP)
Government gross debt (% of GDP)

2022

2023

2024
COM ERP COM ERP COM ERP COM ERP COM ERP
4.8
4.0

2025

2026

n.a.

4.9

3.5

3.7

3.9

3.5

3.1

3.7

3.2
0.0
0.2
2.4

3.3
0.0
-0.2
1.8

4.3
0.0
-0.8
2.4

6.5
1.9
-3.5
4.8

6.5
3.6
3.5
1.8
0.0
0.0
-3.5
0.3
0.3
4.8
0.3
0.5
11.3 11.3 10.5 10.6 10.2 10.2
9.8
9.7
1.1
1.5
6.7
3.0
3.0
-6.0
-4.5
-4.8
-3.7
-2.1
-2.5
64.6 64.5 62.5 61.5 61.2 59.8 60.9 59.3

3.8
0.0
-0.1
2.0
9.9
2.8
2.9
-4.9
-2.3

4.5
4.8
-4.7
-2.2

9.9
6.7
-6.0
-3.7

6.2
4.6
-4.9
-2.2

3.1
3.5
-5.1
-2.2

n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.

4.0
0.0
0.1
0.2
9.5
1.1
3.0
-4.3
-2.1
58.9

Sources: Economic Reform Programme (ERP) 2024, Commission Autumn 2023 forecast.

The baseline GDP growth scenario is subject to external and domestic risks, with projections 
for net exports on the optimistic side. Compared to the previous year, the ERP revises GDP growth 
downwards  by  0.1  pps  for  2024,  while  the  estimated  growth  for  2025  remains  unchanged. 
Nevertheless, the baseline scenario for 2024 is more positive than the Commission’s autumn forecast 
and above international ones. The divergence narrows for 2025, and the estimates are broadly in line. 
The  key  difference  for  both  years  stems  from  net  exports’  contributions  to  growth,  which  exceed 
historical averages in the ERP. In the Commission forecast, net exports are projected to subtract from 
GDP  growth  mainly  because  of  decreasing  goods  exports,  which  are  affected  by  large  currency 
appreciation,  base  effects  and  falling  external  demand  for  construction  materials.  Furthermore,  the 
external environment is challenging, with increased uncertainty amid geopolitical tensions and subdued 
growth  in  the  EU  economy.  The  ERP  baseline  scenario  also  assumes  a  deceleration  in  import  growth 
over  2024-2026,  which  may  turn  out  to  be  more  modest  than  expected  given  the  projected 
consumption and investment dynamics. (9) This in turn may lead to smaller than expected net exports. 
On the production side, the ERP expects the contribution of agriculture, forestry and fishing to growth 
to  exceed  historical  averages  (following  an  insignificant  contribution  in  2023),  although  it  fails  to 
present  the  underlying  factors.  When  presenting  the  downside  scenario,  the  ERP  mentions  domestic 
and  external  risks:  negative  developments  linked  to  the  lending  to  the  economy,  eurozone  economic 
performance  with  subsequent  effects  on  exports  of  goods  and  services,  remittances,  various  foreign 
capital  flows,  changes  in  exchange  rates  and  interest  rates,  and  slower  implementation  of  planned 
structural reforms. 

Inflation eased in 2023 and is projected to decline further in 2024-2026. The average annual 
inflation rate eased from 6.7% in 2022 to 4.8% in 2023. Inflationary pressures have receded on the 
back of falling energy and food prices in international markets as well as the sizeable appreciation of 
the domestic currency (10.6% year-on-year in December 2023 against the euro), which helped cushion 
the impact of foreign price pressures. Domestic inflationary pressures have remained elevated in the 

(9)  The ERP does not provide details on the impact of disposable income growth and tourism growth on imports of goods and 

services. 

16 

 
 
   
 
 
 
Part II 
Country analysis, Albania 

second  half  of  2023  as  a  result  of  expanding  domestic  demand,  tight  labour  market  and  increased 
production  costs  due  to  higher  wages,  with  the  latter  also  boosted  by  sizeable  public  sector  wage 
increases.  The  Bank  of  Albania  continued  tightening  its  monetary  policy  stance  in  order  to  anchor 
inflation expectations and lower inflation. The main policy rate was raised in 2 steps in 2023: to 3% in 
March, and further to 3.25% in November 2023. The ERP expects inflation to gradually decline towards 
the Bank of Albania’s target of 3% in 2024. Inflation is projected to remain on a downward path on the 
back  of  moderated  foreign  inflationary  pressures,  currency  appreciation,  monetary  tightening  and  a 
decreasing trend of medium-term inflation expectations. Recent price developments were benign, with 
inflation already falling below the target in February 2024 (2.6%). However, domestic price pressures 
may resurface.   

External competitiveness and current account 

Graph II.1.1a: Albania - current
account balance (% GDP)

20

10

0

-10

-20

-30

2022

2023

2024

 Services balance
Current account balance (rhs)

2026

2025
 Goods balance
Net FDI (rhs)

10

5

0

-5

-10

160

155

150

145

140

135

130

125

Graph II.1.1b: Albania - real effective
exchange rate (CPI based, index)

Appreciation

Depreciation

2019

2020

2021

2022

2023

Source: Economic Reform Programme (ERP) 2024.

Source: Economic Reform Programme (ERP) 2024.

The  current  account  deficit  continued  to  decrease  in  2023,  and  the  ERP  projects  further 
improvements in the coming years. In the first three quarters of 2023, the current account posted 
a surplus, outperforming the results of the same period in the previous year. Performance in the fourth 
quarter was weaker, with the full-year balance turning negative. Nevertheless, reflecting higher inflows 
from  tourism  and  remittances,  the  overall  2023  current  account  deficit  is  expected  to  be  at  a 
historically low level (4.7% of GDP according to the ERP), continuing the positive trend of recent years. 
After a small increase in 2024, the current account deficit is projected to follow a downward path from 
4.8% of GDP in 2024 to  4.3% of GDP in 2026. This improvement is based on an increasing services 
surplus led by tourism-related services, and a slight narrowing of the goods trade deficit (as a share of 
GDP).  Overall,  the  current  account  developments  are  more  optimistic  than  in  last  year’s  ERP,  which 
assumed  higher  current  account  deficits  for  both  2024  and  2025  (5.6%  of  GDP  and  5.1%  of  GDP 
respectively). The difference in the scenarios is driven by this year ERP’s higher assumed surpluses in 
the services balance and narrower deficits in the trade balance (both as a share of GDP).  

Net  foreign  direct  investment  (FDI)  inflows  are  set  to  decrease  somewhat  as  a  share  of 
GDP, but still fully cover the current account deficit in 2024-2026. Net FDI increased by 6.8% 
year-on-year  in  January-September  2023,  whereas  gross  FDI  inflows  increased  by  10.6%.  The 
financial sector  was the main contributor to FDI growth in those three  quarters. Portfolio investment 
flows reflected a growth in liabilities of non-residents, namely in the second quarter of 2023 when a 
Eurobond was issued. As a share of GDP, net FDI decreased from 6.7% in 2022 to 5.9% in 2023, and is 
expected  to  gradually  decline  to  6%  of  GDP  in  2026.  Generally,  FDI  inflows  are  linked  to  the 
construction  sector  and  tourism-related  investment  projects.  As  tourism  is  expected  to  continue 
expanding in the medium term, capital inflows are set to remain steady. FDI inflows are projected to 
cover  the  current  account  deficit  in  2024-2026.  Albania’s  net  international  investment  position  was 
negative  at  -45.4%  of  GDP  in  2023,  narrowing  from  -49.5%  of  GDP  in  2022.  External  debt  is 
estimated to have dropped to about 47.7% of GDP in 2023 on the back of nominal GDP growth and 
the appreciation of the lek against the euro. The Bank of Albania’s risk analysis shows that the external 
debt ratio is sensitive to currency depreciation and to rising interest rates. These risks are mitigated by 
ample international reserves, which came to EUR 5.8 billion (or about 28% of GDP) at the end of 2023, 
covering 7 months of imports of goods and services and over three times the short-term external debt. 

17 

   
European Commission 
Institutional Paper 

Table II.1.2:
Albania - financial sector indicators

Total assets of the banking system (EUR million)
Foreign ownership of banking system (%) *
Credit growth (%, average)
Deposit growth (%, average)
Loan-to-deposit ratio (end of period)
Financial soundness indicators (%, end of period)
     - non-performing loans to total loans
     - regulatory capital to risk-weighted assets
     - liquid assets to total assets
     - return on equity
     - foreign exchange loans to total loans

2020

2022

2023
2021
2019
12 380 13 156 14 980 16 426 19 427
64.7**
68.8
2.6
6.9
1.9
8.5
56.5
54.8

66.2
11.2
8.0
56.1

78.4
3.0
2.5
55.6

69.4
6.1
5.8
54.7

8.4
18.3
15.1
13.5
50.1

8.1
18.3
13.6
10.7
48.5

5.7
18.0
13.3
12.9
48.8

5.0
18.1
11.0
12.3
49.3

4.7
19.4
30.1
17.3
44.2

* foreign equity ownership of total banks' equity.
** September 2023, latest month reporting data.
Sources: Economic Reform Programme (ERP) 2024, IMF, Bank of Albania.

Banking  sector  capitalisation  remains  above  the  regulatory  minimum,  while  profitability 
improved significantly. At the same time, vulnerabilities are linked to credit risk, the sovereign-bank 
nexus  and  cybersecurity  risks.  At  aggregate  level,  banks  had  a  capital  adequacy  ratio  of  19.4%  in 
December 2023, which is well above the Albanian minimum requirement of 12%. Banks’ profitability 
improved significantly in 2023 driven by higher net interest income. The return on assets came to 2.2% 
in December  2023, up from  1.4% a year earlier,  while the return to equity increased  to 17.3% from 
12.3%. On the back of rising interest rates and given the high share of variable rate loans (about 75% 
of  the  banks’  loan  portfolio),  credit  risks  need  to  be  closely  monitored.  As  a  mitigating  factor,  the 
appreciation of the lek supported strong performance in foreign debt repayments, offsetting the effect 
of interest rate rises. The ratio of non-performing loans to total loans (NPL ratio) declined from 5% in 
2022  to  4.7%  at  the  end  of  2023  –  the  lowest  level  recorded  since  the  beginning  of  the  global 
financial crisis in 2008. Another source of vulnerability is banks’ exposure to sovereign risk given the 
high share of government securities among their assets. The increase in the stock of loans decelerated 
in 2023 mainly due to an exchange rate-driven contraction in foreign currency loans. Credit growth in 
lek accelerated strongly (driven by real estate loans and mortgage loans). Foreign deposits grew in the 
banking sector, partly reflecting high inflows from tourism and FDI. The Bank of Albania continued to 
work on strengthening the bank resolution framework. Furthermore, to monitor banks’ exposures to the 
real estate sector, the Bank of Albania approved an act in October 2023 that regulates data reporting 
from  the  banking  sector (10).  Overall,  within  the  financial  system  the  banking  sector  continues  to 
dominate, with almost 91% of total assets.  

1.3.  PUBLIC FINANCE 

Fiscal  performance  improved  in  2023,  with  the  budget  deficit  falling  to  1.4%  of  GDP.  The 
deficit  was  lower  than  in  2022  (3.7%  of  GDP),  reflecting  a  better  performance  of  government 
revenues,  a  higher  GDP  denominator  and  a  small  increase  in  expenditures.  According  to  budget 
implementation data,  budgetary revenues increased by 12.3% in 2023, driven  by  strong tax revenue 
growth  (10.6%  year-on-year).  All  tax  categories  registered  increases  except  national  taxes.  Profit  tax 
and personal income tax saw exceptional rises of 35.4% and 28.7% respectively, while VAT revenues 

(10)  From  2024,  banks  will  report  on  a  quarterly  basis  on  lending  for  residential  housing,  and  annually  on  exposures  to 

commercial real estate. 

18 

 
 
   
 
 
 
 
 
 
Part II 
Country analysis, Albania 

were  only  slightly  above  the  previous  year’s  level  (0.5%  increase).  This  is  because  the  strong 
appreciation of the lek reduced the VAT calculation base for imported goods, which in turn dampened 
revenues from VAT on imports. Total expenditures increased by much less than total revenues (3.6%). 
Spending on wages increased significantly, by 19.2%, on the back of public wage reform ( 11). Interest 
expenditures jumped by 20.1%, while capital expenditures registered subdued growth of only 6% ( 12). 
Overall, total revenues as a share of GDP were up from 26.8% in 2022 to 27.8% in 2023. The revenue 
ratio was slightly lower than what the ERP projected (13) (28% in 2023). Total expenditure as a share 
of GDP was also lower than expected, at 29.2% (down from 30.4% in 2022).  

The 2023 fiscal outturn  was better than planned in the revised budget, but  mainly on the 
back  of  lower  public  investments.  In  2023,  the  government  introduced  two  budget  amendments 
outside of the regular revision process (facilitated through normative acts) that were not triggered by 
unexpected events. The initial budget revision took place in October 2023. It involved the reallocation 
of unexecuted capital expenditure funds between programmes and clearing a large part of the arrears 
stock.  The  second  revision  in  mid-December  introduced  a  number  of  changes  but  kept  the  budget 
deficit  unchanged  from  the  original  target,  at  2.4%  of  GDP ( 14).  The  fiscal  outturn  was  better  than 
expected, with a budget deficit of 1.4% of GDP and a primary surplus of 0.7% of GDP. Total revenues 
came to 99% of planned budget revenues, while the execution rate of total spending was 96% of the 
annual  plan.  Nevertheless,  the  overall  better  performance  reflects  under-execution  in  capital 
expenditures ( 15).  

While fiscal consolidation remains a priority, the ERP projects a widening budget deficit in 
2024, followed by an improvement in 2025-2026. Following exceptional increases in revenues in 
the last 2 years, the ERP projects public revenues as a share of GDP to remain constant at 27.8% over 
2024-2026,  with  a  gradually  increasing  tax  revenue  ratio  (0.1-0.2  pps  of  GDP  per  year)  offset  by 
falling non-tax revenues and grants as a share of GDP. VAT revenues, personal income tax, excise tax 
and profit tax are key categories of budget revenues, accounting for about 59% of total revenues in 
2024-2026. They are all expected to remain stable as a share of GDP over 2024-2026, at 8.7%, 2.7%, 
2.6% and 2.2% of GDP respectively. Social and health contributions are set to remain flat at 6.5% of 
GDP  for  this  period,  and  at  23%  of  total  revenues.  On  government  spending,  the  ERP  projects  total 
expenditures as a share of GDP to increase marginally to 30.3% in 2024, while in 2025-2026 they are 
projected  to  fall  to  29.8%  and  to  29.9%  respectively,  underpinning  the  improvement  in  the  budget 
balance  over  2025-2026.  In  particular,  the  narrowing  of  the  deficit  from  2.5%  in  2024  to  2.1%  in 
2025-2026  is  mainly  driven  by  a  decrease  in  capital  expenditure  (by  0.5  pps  of  GDP)  and  lower 
spending  on  operations  and  maintenance  as  a  share  of  GDP.  The  primary  balance  is  forecast  to  be 
positive in 2024 (in line with the fiscal rule) and increase gradually over 2025-2026. While this path is 
in line with last year’s programme, the primary balance projections are lower than in the previous ERP. 
The  general  government  debt  ratio  is  expected  to  decline  gradually  from  59.8%  of  GDP  in  2024  to 
58.9% in 2026.  

(11)  Public sector reform aims to increase public sector wages in several phases, starting in 2023. The salary increase policy will 

cost the state budget ALL 39.1 billion, an effect that will be fully felt from 2025 onwards. 

(12)  Capital expenditures represent 17.6% of total expenditures, while current expenditures make up 81% of total expenditures. 

(13)  The budget law requires Albania to use a projected nominal GDP not higher than the latest available IMF forecast for fiscal   
 purposes.  The  ERP expected  nominal  GDP to  be ALL 2311.7  billion  in  2023,  some  6.2%  higher than the original  estimate   
 used for the budget preparation (of ALL 2176.1 billion). 

(14)  In particular, the amended budget reallocated unspent funds of around 0.9% of GDP (ALL 20 billion). It provided support to 
vulnerable  people;  it  distributed  unconditional  grants to  municipalities  (0.1%  of  GDP or nominally  ALL 2  billion)  to  pay  off 
arrears and it allocated ALL 250 million to 1144 public employees involved in the EU screening and negotiation process.  

(15)  At the end of 2023, the execution rate of capital expenditures was 88%. In November 2023, the execution rate of capital 
expenditures was even lower at 54%, while current expenditures had an execution rate of 87%. The overall underspending 
prompted a budget revision in mid-December, which facilitated reallocations. 

19 

 
 
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Table II.1.3:
Albania - composition of the budgetary adjustment  (% of GDP)

Revenues
    - Taxes and social security contributions
    - Other (residual)
Expenditure
    - Primary expenditure*
       of which:
       Gross fixed capital formation
       Consumption
       Transfers & subsidies
       Other (residual)
    - Interest payments
Budget balance
    - Cyclically adjusted
Primary balance
    - Cyclically adjusted
Gross debt level

2022

2023

2024

2025

2026

26.8
22.2
4.6
30.4
28.6

6.2
8.3
11.6
2.5
1.9
-3.7
-3.8
-1.8
-2.0
64.5

28.0
23.0
5.0
30.2
28.0

6.8
8.6
11.1
1.5
2.2
-2.2
-2.3
0.0
-0.1
61.5

27.8
23.2
4.6
30.3
27.6

6.3
8.9
11.6
0.8
2.7
-2.5
-2.5
0.2
0.2
59.8

27.8
23.4
4.4
29.8
27.0

5.8
8.7
11.6
0.9
2.8
-2.1
-2.0
0.8
0.8
59.3

27.8
23.5
4.3
29.9
26.9

5.7
8.7
11.5
0.9
3.1
-2.1
-2.1
0.9
1.0
58.9

Change:
2023-26
-0.2
0.5
-0.7
-0.3
-1.1

-1.1
0.2
0.4
-0.5
0.9
0.1
0.2
0.9
1.0
-2.5

* Excluding arrears clearance.
Sources: Economic Reform Programme (ERP) 2024, Commission calculations.

The  2024  budget  targeted  a  primary  surplus  of  0.2%  of  GDP,  while  the  revised  budget 
commits Albania to slightly better performance with a 0.4% surplus. The budget plan aims to 
increase  tax  revenues  (including  social  contributions)  by  about  6%,  or  as  a  share  of  GDP  by  0.2  pps 
compared  to  2023  budgeted  figures.  The  ERP (16)  states  that  the  projected  revenues  from  taxes, 
customs  and  insurance  contributions  take  into  account  the  effects  of  economic  growth,  new  fiscal 
policies as well as the effects of improving the tax and customs administration. This is accompanied by 
legal  changes  that  aim  to  increase  the  level  of  voluntary  compliance  of  taxpayers  with  the  law.  All 
main categories (except profit tax and property tax) were projected to increase compared to the 2023 
budgeted figures: a 5.6% increase in VAT revenues, 7.8% in excise tax, 16.4% in personal income tax, 
8%  in  national  taxes  and  other  taxes,  2.5%  in  customs  tax  and  9.2%  in  social  and  health  insurance 
contributions. The substantial increase in personal income tax revenues is mainly driven by the wage 
reform in the public sector, the increase in the number of employees and higher average salaries in the 
private  sector. ( 17)  Nevertheless,  total  revenue  as  a  share  of  GDP  was  set  to  remain  unchanged 
compared to the 2023 outcome at 27.8% as the small increase in the tax revenue is offset by a fall in 
grant  revenue  compared  to  2023  when  the  one-off  EU  energy  budget  support  was  disbursed.  In  the 
budget, total expenditure was planned at 30.3% of GDP in 2024, which is 1.1 pps higher than the 2023 
outcome. This rise is driven by personal expenditures that were set to increase by 0.6 pps to 4.9% of 
GDP.  This  reflects  the  second  phase  of  the  public  sector  wage  increase  planned  in  July  2024,  and 
driven by interest  payments  that were projected to reach 2.7% of GDP (from 2.1% of GDP in 2023), 
including a reserve to mitigate potential risks from interest rate and exchange rate fluctuations. Capital 
spending was planned at 5.3% of GDP, which is in line with the level of capital expenditure realised in 
2023. Overall, the original 2024 budget targeted a deficit of 2.5% of GDP, while the primary balance 
was  set  to  reach  a  small  surplus  of  0.2%  of  GDP.  Nevertheless,  the  budget  was  revised  in  February 
2024 via a normative act, increasing the level of ambition with respect to the surplus of the primary 

(16)  The ERP figures were in line with the budget plan adopted in December 2023. 

(17)  Other  relevant  factors  specified  to  be  taken  into  account  for  the  projected  increase  in  the  personal  income  tax  are:  i) 
increase  in  income  from  tax  on  dividends,  tax  on  leasing,  tax  on  professional  services;  ii)  increase  in  income  from  the 
inclusion in the scheme of taxing income from tourism and accommodation of entities that are not registered and declared 
as accommodation units. 

20 

 
 
  
 
 
 
Part II 
Country analysis, Albania 

balance,  which  is  now  set  to  reach  0.4%  of  GDP,  while  the  revised  deficit  target  is  slightly  lower  at 
2.4%. ( 18) 

BOX II.1.1: THE 2024 BUDGET AND THE REVISED BUDGET 

*  On 7 December 2023, Parliament adopted the  2024 budget law, targeting a deficit of 2.5% of 

projected GDP and a positive primary balance of 0.2% of GDP. 

*      On  21  February  2024,  the  Council  of  Ministers  approved  a  normative  act  amending  the  2024 
budget. The revised budget targets a slightly lower budget deficit of 2.4% of projected GDP and a 
slightly higher primary balance surplus of 0.4% of GDP.  

*   Revenues for 2024 were revised upwards, to about ALL 687 billion or 28.2% of GDP (from 27.8% 
in the original budget), while total expenditures were also revised upwards but the increase was 
smaller, to ALL 744 billion or 30.6% of GDP (from 30.3% in the original budget). 

*   The normative act also included a new State Guarantee Instrument of ALL 4 billion to support the 
Cut,  Make  &  Trim  garment  industry,  which  was  affected  by  exchange  rate  strengthening.  This 
instrument helps businesses secure the necessary financing from banks via state guarantees. 

  Table: Main measures in the budget for 2024 

Revenue measures* 

Expenditure measures** 

•  Taxation on self-employed professionals, 

excises indexation, increasing of excise duty 
for cigarettes, gambling law (overall 
estimated impact: ALL 7 billion, or 0.3% of 
GDP)       

•  Salary increase for employees in health, 
education and public administration 
(estimated impact: ALL 11 bn, or 0.5% 
of GDP, permanent measure) 

*  Estimated impact on general government revenues. 
** Estimated impact on general government expenditure. 

Source: ERP 

General government debt  fell by more than expected in 2023 and is projected to continue 
its  downward  path,  but  at  a  much  slower  pace.  On  the  back  of  a  primary  balance  surplus  and 
high nominal GDP growth in 2023, the public debt ratio fell by 5.3 pps to 59.2% of GDP in 2023, which 
is below the ERP projection of 61.5%. Furthermore, general government debt also decreased slightly in 
nominal  terms  (from  ALL 1378  billion  in  2022  to  ALL 1369  billion  in  2023).  Domestic  debt  accounts 
for  about  54%  of  the  total  debt  stock,  while  foreign  debt  amounts  to  46%  (September  2023). 
Assuming a higher initial level at the end of 2023, the ERP projected the public debt ratio to decrease 
by a cumulative 2.5 pps in 2024-2026, reaching 58.9% of GDP at the end of 2026. Guaranteed debt, 
which is fully accounted for in the public debt stock, decreased from 2.4% of GDP in 2022 to 1.8% of 
GDP in 2023.  

The public debt maturity structure improved slightly in 2023, but risks linked to refinancing short-term 
debt and interest rates remain. Short term debt – with maturity of less than 1 year – decreased slightly 
in 2023 but remains elevated at about 17% of total debt. Furthermore, within the domestic debt stock, 
the share of debt maturing  within 1 year is about  32%,  while the  share of  debt  falling  due within  5 
years is 36%. In this context, the tightening of financing conditions and the shallow domestic market 

(18)  The  early  budget  revision  was  motivated  by  the  need  to  allocate  funds  for  the  newly  established  ministries,  such  as  the 
Ministry  of  Economy,  Culture,  and  Innovation.  The  upward  revision  in  tax  revenues  reflects  the  better-than-expected 
performance of these revenues up to the point of the revision, leading to higher annual revenue forecast for 2024 compared 
to the autumn projections underlying the original budget, the macro-fiscal framework, and the ERP. 

21 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
European Commission 
Institutional Paper 

for government securities pose risks. Meanwhile, foreign debt consists mainly of long-term loans and 
long-term bonds (5-, 7- and 10-year Eurobonds issued in international markets). While this mitigates 
refinancing  risks,  external  debt  poses  exchange  rate  risk.  To  mitigate  the  exchange  rate  risk,  the 
medium-term debt strategy limits foreign currency-denominated public debt to 50% of the total public 
debt  stock,  and  0.7%  of  GDP  has  to  be  earmarked  in  the  budget  as  a  reserve  to  offset  the  fiscal 
impact of exchange rate fluctuations. In June 2023, Albania tapped international markets and issued 
its sixth Eurobond worth EUR 600 million, with a 5-year maturity, 5.9% coupon and a primary yield of 
6.125%.  The  bond  generated  strong  demand  with  an  order  book  of  over  EUR 1.3  billion.  The  bond’s 
proceeds  will  be  used  to  cover  part  of  the  government’s  financing  needs  in  2023  and  2024,  which 
remain  elevated.  The  cost  of  debt  increased  on  the  back  of  rising  interest  rates.  In  particular,  the 
average cost for domestic debt reached 4.62% at the end of September 2023, increasing by 57 basis 
points  compared  to  the  end  of  2022.  As  regards  the  foreign  debt  portfolio,  due  to  the  increase  in 
international market interest rates, the average cost was expected to be 3.4% in 2023, increasing by 
100 basis points compared to the end of 2022. 

BOX II.1.2: DEBT DYNAMICS 

Albania

Composition of changes in the debt ratio (% of GDP)
2024
59.8
-1.7

2022
64.5
-10.0

2023
61.5
-3.0

Gross debt ratio [1]

Change in the ratio

Contributions [2]:

   1. Primary balance
   2. 'Snowball effect'
       Of which:

       Interest expenditure

       Growth effect
       Inflation effect

   3. Stock-flow adjustment

1.8
-7.7

1.9
-3.1
-6.4
-4.2

0.0
-2.5

2.2
-2.1
-2.7
-0.5

-0.2
-0.3

2.7
-2.2
-0.9
-1.2

2025
59.3
-0.5

2026
58.9
-0.4

-0.8
0.0

2.8
-2.2
-0.6
0.3

-0.9
0.2

3.1
-2.3
-0.6
0.4

[1]   End of period. 
[2]  The 'snowball effect' captures the impact of interest expenditure on accumulated

      debt, as well as the impact of real GDP growth and inflation on the debt ratio

      (through the denominator).

      The stock-flow adjustment includes differences in cash and accrual accounting, 

      accumulation of financial assets, and valuation and other effects.

Source: Economic Reform Programme (ERP) 2024, Commission calculations.

The debt ratio fell in 2023, 
driven by a strong snowball 
effect due to still high 
inflation and robust GDP 
growth. Furthermore, a 
negative stock flow 
adjustment related to the 
use of cash reserves helped 
reduce the debt stock. In 
future, primary surpluses 
are set to support a 
continued reduction in the 
debt ratio, while the 
snowball effect is expected 
to moderate as inflation 
abates and interest costs 
rise. The table is based on 
the values provided in the 
ERP. However, due to the 
much larger than expected 
debt reduction in 2023, the 
debt path is expected to 
shift  to a lower level. 

Fiscal  risks  stem  from  public  guarantees  to  state-owned  enterprises  (SOEs)  such  as  hydroelectricity 
providers,  from  onlending  and  from  arrears.  Over  75%  of  the  state  guarantee  stock  belongs  to  the 
energy  sector.  The  state-owned  energy  utilities’  dependence  on  regular  government  support  (either 
guarantees or loans) is a source of fiscal risks. While public guarantees to SOEs are fully included in 
the stock of public debt at the date of issuance – an approach that mitigates risks to the budget – this 
has  implications  for  government  debt. ( 19)  Budgetary  support  to  energy  SOEs  increased  in  2022  as 
adverse  weather  conditions  caused  a  decline  in  domestic  electricity  production  and  import  costs 
surged. Albania’s reliance on hydropower exposes it to fluctuations in rainfall and to increasing climate 
risks  for  which  mitigation  measures  still  need  to  be  developed.  The  governance  system  of  SOEs  has 
gaps with respect to international standards, reflected also in the weak financial viability of some of 

(19)  As such, public debt increases with the issuance of public guarantees. 

22 

 
 
Part II 
Country analysis, Albania 

these companies. (20) Better transparency (21) and greater managerial accountability would increase the 
financial performance of SOEs and in turn reduce their reliance on budget support. ( 22) The government 
also  faces  fiscal  risks  from  on-lending  as  a  result  of  gaps  in  its  risk  assessment.  The  recurring 
accumulation  of  public  sector  arrears  remains  a  challenge.  Despite  reductions  in  the  overall  stock, 
arrears persist, particularly related to investment projects and court cases. Meanwhile, there are also 
contingent  liabilities  related  to  PPPs,  but  they  are  not  measured  in  a  comprehensive  manner  and  as 
such are neither properly assessed nor adequately monitored.  

BOX II.1.3: SENSITIVITY ANALYSIS 

The  ERP  presents  the  dynamics  of  fiscal  key  indicators  over  2024-2026  under  three  different 
scenarios: baseline, optimistic and pessimistic.  

The alternative scenarios are constructed with varied economic growth assumptions for each year. In 
particular, the real GDP growth rates that underpin the optimistic and pessimistic scenarios deviate by 
+0.5 pps and -1.5 pps respectively from the baseline growth scenario of 3.7% in 2024 and its average 
rate of 3.9% in 2025-2026. 

In  the  optimistic  scenario,  total  revenues  as  a  share  of  GDP  are  identical  to  the  baseline  scenario. 
Capital spending as a share of GDP is expected to remain very close to the baseline (0.1-0.2 pps higher 
than the baseline), while current spending as a share of GDP is gradually being reduced (ultimately 0.5 
pps lower than in the baseline in 2026). The fiscal deficit is smaller in the optimistic scenario only in 
2025  and  2026.  The  ERP  explains  that  generally,  there  is  an  expectation  of  a  more  robust  fiscal 
consolidation  in  the  optimistic  scenario  and  a  fiscal  deficit  relaxation  in  the  pessimistic  scenario, 
reflecting a countercyclical response to different assumed dynamics of the economic cycle. 

Nevertheless,  in  the  pessimistic  scenario  fiscal  policy  easing,  compared  to  the  baseline,  would  be 
implemented  to  the  extent  that  key  public  finance  parameters  (such  as  the  debt-to-GDP  ratio  and 
primary  balance)  simultaneously  adhere  to  the  fiscal  rules  in  the  Organic  Budget  Law.  In  the 
pessimistic scenario, the revenue ratio is assumed to be 0.5 pps below the baseline. Capital spending in 
2024-2026 is reduced  compared to the baseline by  0.7  percent of GDP on average  each year,  while 
current  expenditure  is  about  0.1  pps  above  the  baseline.  Interest  expenditure  (in  nominal  terms  and 
also  as  a  share  of  GDP)  is  assumed  to  be  lower  in  the  pessimistic  scenario  compared  to  the  other 
scenarios  in  2025-2026.  The  fiscal  deficit  is  set  to  be  higher  (0.1-0.2  pps)  than  in  the  baseline 
scenario, except in 2025 when it is lower.  

The public debt ratio is set to decrease in all three scenarios, including in the pessimistic one, although 
the reduction is marginal (0.1 pps). Furthermore, the primary balance is non-negative in all scenarios. 

The  government  is  working  on  a  new  public  finance  management  (PFM)  strategy,  which  is 
expected to be adopted in the first half of 2024. This would be the third PFM strategy, following 
the  2014-2020  PFM  and  the  one  in  2019-2022.  According  to  the  ERP,  PFM  reforms  need  to  be 
continued  in  order  to  increase  the  effectiveness  of  budget  spending  and  create  a  more  productive 
environment  for  expenditure  in  the  medium-  and  long  term.  Nevertheless,  in  the  ERP  there  are  no 
details on its content and no indication on the starting date for implementation. A first draft of the PFM 

(20)  In line with OECD findings. See Competitiveness Outlook 2024 (forthcoming). 

(21)  There  is  limited  transparency  with  respect  to  the  financial  performance  of  SOEs.  Furthermore,  SOEs  benefit  from  direct 
subsidies  from  their  line  ministries,  with  limited  transparency  regarding  what  activities  these  subsidies  are  expected  to 
finance. 

(22)  Currently there is no central overview of the state’s portfolio of SOEs, with information on their size, employment or financial 

returns. 

23 

 
 
European Commission 
Institutional Paper 

strategy  document  was  expected  to  be  finalised  in  December  2023.  In  the  last  stage  following 
consultations, the document is to be approved by the Council of Ministers, which is expected in the first 
half of 2024. Progress has been made to reform public investment management as the national single 
project pipeline (NSPP) list has been prepared, updated and approved by the Decision of the Council of 
Ministers in July 2023. To facilitate medium-term budget planning, a ranking of these projects based 
on  their  strategic  importance,  maturity  and  financing  is  yet  to  be  completed.  The  necessary  legal 
amendments  to  integrate  public-private  partnerships  into  the  NSPP  and  into  the  regular  public 
investment management cycle are also outstanding. The authorities are working on publishing a fiscal 
risk statement as a stand-alone document. They also plan to set up a separate department within the 
Ministry of Finance tasked with fiscal risk monitoring. 

The  ERP  envisages  an  incremental  increase  in  the  tax  revenue  ratio  over  2025-2026,  but 
better  outcomes  could  be  achieved  with  more  decisive  revenue-enhancing  reforms  and  a 
broader  tax  base.  The  medium-term  revenue  strategy  (MTRS),  drafted  in  2021,  has  not  been 
officially  adopted  yet  and  the  authorities  have  asked  the  IMF  for  help  in  updating  the  existing  plan, 
also taking into account  recent developments such as the growing importance of the tourism  sector. 
Good progress was made in recent years on adopting tax policy measures in line with the MTRS, but 
some measures, such as a review of the property tax, remain outstanding. However, the main focus of 
the  authorities  in  the  upcoming  period  will  be  on  improving  tax  administration,  including  improved 
information  exchange,  the  use  of  IT  tools  and  capacity  increase.  The  initial  aim  of  the  MTRS  was  to 
increase  the  tax  revenue  ratio  by  2.5  pps  compared  to  its  2019  level.  Of  this,  1.5  pps  is  yet  to  be 
achieved according to the authorities’ own calculations. Raising more revenue is all the more important 
as Albania needs to invest more in physical and human capital to accelerate its convergence with EU 
income levels. However, according to the ERP projections  the improvement of the fiscal balance over 
2025-2026  is  set  to  be  achieved  mainly  through  a  reduction  of  the  expenditure  ratio  driven  by  a 
decrease in capital spending and in spending on operation and maintenance as a share of GDP.      

ERP  medium-term  fiscal  planning  is  in  line  with  the  fiscal  rules.  Overall,  the  assumed  fiscal 
path of a widening deficit in 2024 and an improvement in subsequent years would ensure continuing 
surpluses  in  the  primary  balance  and  a  decreasing  debt-to-GDP  ratio,  in  compliance  with  the  fiscal 
rules set by law. Compliance with the primary balance rule was achieved in 2023, a year ahead of the 
legal obligation entering into force. The importance of this rule is reflected in the fact that the primary 
surplus is projected to play an increasing role in ensuring continued debt reduction in 2024-2026.  

1.4.  MAIN MACRO-RELEVANT STRUCTURAL CHALLENGES 

In  November  2023,  the  Commission  proposed  a  New  Growth  Plan  for  the  Western 
Balkans ( 23) with the aim of supporting the region’s economic convergence and accelerating 
the accession process. The plan involves a Reform and Growth Facility (EUR 2 billion in grants, EUR 4 
billion  in  loans)  that  is  to  be  disbursed  in  2024-2027  as  investment (24)  and  budget  support  in 
exchange for implementing reforms that are to be set out in reform agendas prepared by the Western 
Balkan partners. The New Growth Plan is therefore an important tool to increase reform incentives to 
boost  growth  and  convergence.  In  this  context,  with  a  view  to  ensuring  an  integrated  surveillance  of 
Albania’s economy, this chapter briefly outlines the main structural challenges facing the country. 

The informal economy is  sizeable in  Albania and the level of informality in employment is 
also  high.  Latest  studies (25)  show  that  the  informal  economy  amounted  to  27.2%  of  GDP  in  2019. 
The International Labour Organization estimates that as much as 56.7% of total employment may be 

(23)  https://neighbourhood-enlargement.ec.europa.eu/enlargement-policy/new-growth-plan-western-balkans_en. 

(24)  Infrastructure  investments  need  to comply  with  the EU environmental acquis,  national  and  international  nature  protection 
and water management obligations, ensure public participation and consultation, and guarantee high quality environmental 
impact assessment reports that include cumulative impacts on nature and biodiversity. 

(25)  IMF Albania 2022 Article IV Staff Report. 

24 

 
 
Part II 
Country analysis, Albania 

informal  in  Albania (26).  At  the  same  time,  the  Albanian  State  Statistics  Institute  estimates  that  the 
informal employment accounts for 29.4%, excluding the agricultural sector. ( 27) Informal employment 
takes different forms such as undeclared work, envelope wages and lower official reported wages with 
remaining wages paid in cash. Among the economic sectors, agriculture is the sector with the highest 
level of informal employment, followed by wholesale and retail trade, and then construction. With the 
expansion  of  tourism  supported  by  better  access  to  global  booking  channels,  hospitality  is  a  fertile 
ground for the informal market as there is a large share of accommodation not registered. 

Informality  impedes  fair  competition  among  businesses,  reduces  the  tax  base  and  hinders 
economic  growth.  Informality  penalises  companies  that  are  tax-compliant,  reducing  fair  market 
competition. The process of fiscalisation as a major reform undertaken by the tax administration has 
enabled  the  declaration  and  real-time  tracking  of  sales  and  purchase  transactions  carried  out  by 
taxpayers. This process has helped increase the correct declaration by the businesses that make real 
financial  declarations  of  their  economic  activity,  but  informality  still  remains  a  challenge,  as  some 
businesses  will  continue  with  informal  invoicing  and  under-declaration,  remaining  part  of  the  grey 
economy. Furthermore, informal activity often occurs due to exclusion factors, where those with lower 
skills and education in less productive sectors rely on subsistence income, specifically in agriculture and 
other  sectors  where  enforcement  is  weak.  High  informality  is  reflected  in  the  low  tax  base  and 
revenue-to-GDP.  Compared  to  other  Balkan  countries,  Albania  has  been  lagging  behind  in  the  tax 
revenue-to-GDP  ratio.  Low  revenues  to  the  state  affect  the  provision  of  public  goods  such  as 
infrastructure, education and health. In the ERP, the government included a measure on strengthening 
the  fight  against  informality.  It  aims  to  reduce  the  compliance  gap  linked  to  VAT,  reduce  undeclared 
work and under-declaration of wages, and reduce tax fraud. While details are missing on the concrete 
efforts  that  are  to  be  undertaken  towards  these  objectives,  among  the  measures  that  were  put 
forward for 2024 were the integration and use of data from different tax administration systems and 
the campaign of registration for VAT purposes. 

The  business  environment  needs  further  improvement,  including  through  reforms  on  the 
rule of law, better public procurement, digitalisation of cadastre services, better consumer 
protection  and  more  electronic  payments.  Progress  has  been  made  in  improving  the  business 
climate.  For  example,  surveys  shows  that  businesses’  satisfaction  with  public  services  improved  in 
2021 and 2022, supported by a higher level of digitalisation. A new ‘council of enterprises’, composed 
of  public  and  private  sector  representatives,  has  been  set  up  to  improve  consultation  of  small  and 
medium-sized enterprises (SMEs). To reduce informality and support fair competition, cash limits were 
introduced  for  business-to-business  transactions.  Nevertheless,  inefficiencies  and  delays  in  dealings 
with  the  administration  persist.  The  regulatory  framework  is  excessively  complex  and  subject  to 
changes, while dealing with the tax administration is perceived as burdensome. Irregularities in public 
procurement procedures are still perceived as an obstacle for businesses. Digitalising the cadastre still 
needs to be completed and there are discrepancies in the information on property deeds. Businesses in 
Albania see corruption as the biggest factor in the existence of the hidden economy. Key enablers of a 
favourable  business  climate  include  the  strengthening  of  the  implementation  of  the  justice  and 
anticorruption  reform  measures  as  they  have  considerable  potential  to  trigger  economic 
transformation,  reducing  the  informal  economy  and  corruption.  Other  crucial  elements  include  the 
adoption  of  the  unified  investment  law  (which  is  delayed),  putting  in  place  adequate  consumer 
protection laws and reducing cash payments. 

While  the  labour  market  situation  has  improved,  brain  drain  and  labour  shortages  pose 
problems.  The  labour  market  registered  positive  developments  with  increases  in  employment  and 
wages  in  2023.  The  employment  rate  for  the  population  aged  15  to  64  was  67.7%  in  Q3-2023, 
reflecting  an  increase  compared  to  2022.  The  labour  force  participation  rate  continued  to  increase, 
peaking at 76.1% in Q3-2023. Nevertheless, the unemployment rate (15-64 years) remained elevated 
at  11%  in  Q3-2023  despite  improvements,  while  youth  unemployment  was  22%  in  Q3-2023.  These 

(26)  Based on the Labor Force Survey of 2020– 2021. 

(27)  Informality is very high in agriculture and thus estimates are significantly higher when accounting for this sector. 

25 

 
European Commission 
Institutional Paper 

figures are much higher than the EU-27 averages. The gender gap in labour force participation remains 
significant,  despite  improvements.  Steady  emigration  flows  since  2015  are  shrinking  the  workforce. 
Since the pandemic, Albania has lost an estimated 20 000 inhabitants per year, and the trend is likely 
to  continue ( 28).  This  is  causing  a  continual  brain  drain,  particularly  in  the  case  of  young  people  that 
have  been  leaving  for  higher-paid  jobs  in  the  EU.  Businesses  have  increasing  concerns  about  labour 
shortages  and  report  that  finding  skilled  labour  is  challenging,  particularly  in  remote  areas  of  the 
country. 

Albania  has  a  very  high  rate  of  low-skilled  adults  and  high  rates  of  early  school  leaving. 
There are significant rural-urban and socio-economic differences in access to education, and the early 
school  leaving  rate  remains  the  highest  among  candidate  countries  and  potential  candidates  after 
Türkiye, amounting to 17.5% in 2021 (vs 9.6% in the EU in 2022). Participation in adult learning over 
the past 12 months has been very low compared to the EU. The overall level of digital skills (23.80% in 
2021) is the lowest among all candidate countries and far below the EU average (53.92%). Worryingly, 
about 27% of young people are not in education, employment or training, which is almost double the 
EU  average.  The  quality  of  education  and  training  is  still  low,  as  illustrated  by  the  latest  OECD  PISA 
results  in  2022 ( 29):  a  significant  number  of  students  in  Albania  are  not  acquiring  the  basic  skills  in 
reading,  mathematics  and  science  needed  to  fully  engage  in  a  knowledge-based  society  after 
completing  compulsory  education.  In  this  sense,  Albania  needs  to  scale  up  its  efforts  to  improve 
student performance, especially among those from disadvantaged families, those living in rural areas, 
and  those  belonging  to  ethnic  minorities.  Furthermore,  reorienting  young  people  to  better  match 
market needs would improve the employability of the workforce. The authorities undertook a number 
of efforts in  supporting vocational education and training (VET), but further progress is required. The 
number of people attending VET schools is still low compared to other countries in the region and in 
the EU. The main goal and the most complex challenge of the VET system is still to update, expand and 
adapt  the  VET  offer  to  the  needs  of  the  labour  market  in  order  to  reduce  the  skills  mismatch. 
Furthermore,  despite  efforts  the  engagement  of  the  private  sector  in  the  VET  system  is  still  in  its 
infancy. 

Risks of poverty and social exclusion are very high, and the capacity of the social protection 
system to reduce them is low. Albania has the highest rate of poverty and social exclusion (46.2% 
in 2020) among all EU Member States and candidate countries for which data are available. Although 
there  is  a  social  assistance  scheme,  the  allowances  have  low  adequacy.  The  capacity  of  local 
governments to provide social care is very low, but the situation is receiving more attention from the 
central government, which is funding new services. The pension system has almost universal coverage, 
albeit  with  low  pensions.  Around  600 000  adults,  mainly  informal  workers,  do  not  have  health 
insurance. 

Albania  needs  to  address  the  infrastructure  gaps  and  improve  connectivity.  Public 
investments  have  been  mainly  focused  on  road  infrastructure  rather  than  other  modes  of  transport. 
Nevertheless, work is ongoing to build and rehabilitate railways, including train stations. (30) Improving 
physical transport infrastructure, especially along the main connectivity corridors, remains essential as 
this  will  translate  into  significant  improvements  on  safety  and  reduced  journey  times  for  exported 
goods. Main interventions will occur in key trans-European transport network (TEN-T) corridors, such as 
Corridor VIII and the  Mediterranean Corridor, which are  vital for the transit of goods  and  passengers 
between Albania, the EU and other Western Balkan countries. Digital interconnectivity infrastructure is 
another  area  of  investment,  with  the  government  aiming  to  complete  investments  for  connecting 
regional networks with European broadband networks. 

Albania  continues  to  be  hampered  by  inefficiencies  in  the  energy  sector,  including 
insufficient security of supply. While electricity in Albania is produced 100% from renewables, the 

(28)  IMF Albania 2022 Article IV Staff Report. 

(29)  Albania had the second lowest score of the five Western Balkan economies that participated in the PISA 2022.  

(30)  Investment in rail infrastructure increased significantly from 2019 to 2022 but it is still outweighed by investment into road 

infrastructure. 

26 

 
Part II 
Country analysis, Albania 

energy  sector  is  volatile  and  its  hydro-electricity  production  is  dependent  on  rainfall.  The  majority  of 
the  total  net  domestic  production  is  generated  from  the  plants  owned  by  the  state-owned  company 
KESH, while the other part is generated by independent and priority generation plants. The energy SOEs 
are  dependent  on  budget  support  (subsidies,  on-lending  and  guarantees),  while  some  energy 
infrastructure  needs  upgrading.  Overall,  Albania  remains  a  net  importer  of  electricity.  Besides  better 
efficiency  in  energy  use,  the  deployment  of  solar  and  wind  resources  will  improve  Albania’s  energy 
security  and  reduce  its  vulnerability  to  climate  change  impacts.  Furthermore,  better  governance  of 
energy  SOEs  would  help  improve  financial  performance  and  strengthen  the  resilience  of  the  energy 
system.  

1.5.  THE POLICY GUIDANCE 

JOINT CONCLUSIONS OF THE ECONOMIC AND FINANCIAL DIALOGUE BETWEEN THE EU AND THE 
WESTERN BALKANS PARTNERS, TÜRKIYE, GEORGIA, REPUBLIC OF MOLDOVA AND UKRAINE 

The Economic and Financial Dialogue between the EU and the Western Balkans Partners, Türkiye, Georgia, 
Republic of Moldova and Ukraine 

Brussels, 14 May 2024 

… 

In light of this assessment, Participants hereby invite Albania to:  

1.      Ensure compliance with the fiscal rules laid down in the Organic Budget Law requiring a non-negative  
          primary  balance  and  a  downward  path  of  the  public  debt-to-GDP  ratio,  and  accelerate  the  pace  of     
          fiscal consolidation in case of better-than-expected economic and revenue performance. Reduce the  
          emergence of new arrears and the overall outstanding stock, ensuring that arrears do not exceed 2%  
          of total expenditure by end-2024. Increase tax revenue as a share of GDP in a growth-friendly way,  
          including  by  improving  tax  administration,  increasing  registrations  for  VAT,  and  reducing  undeclared  
          work and tax fraud; revise the Medium-Term Revenue Strategy and ensure its implementation.  

2.          Improve  fiscal  risk  analysis  by  building  capacity  in  the  related  new  department,  establishing  a  risk  
          management  methodology  and  publishing  a  comprehensive  Fiscal  Risk  Statement  that  covers  state  
          guarantees, on-lending to public entities and risks stemming from SOEs and PPPs and identifies risk  
          mitigation  measures.  Increase  SOE  transparency  and  accountability  by  publishing  their  annual  
          financial  performance  reports.  Facilitate  the  implementation  of  the  National  Single  Project  Pipeline  
          (NSPP),  including  by  ranking  the  projects  on  the  list;  and  advance  the  integration  of  PPPs  into  the  
          NSPP.  

3.      Ensure a sufficiently tight monetary policy stance as long as necessary to anchor inflation expectations  
         at levels consistent with price stability, underpinned by a thorough assessment of price developments  
         and  possible  second-round  effects  and  by  publishing  additional  indicators  of  underlying  price  
         pressures.  Enhance  risk-based  supervision  in  line  with  best  international  and  European  practices,  
         including  by  further  strengthening  the  reporting  framework  across  the  banking  system,  applying  
         macroprudential  measures  to  mitigate  risks  and  improve  data  collection  to  enable  a  comprehensive  
         assessment of financial sector risks. Continue to promote saving and borrowing in domestic currency,  
         limit unhedged lending and the use of foreign currency in the real economy, with all signatories of the  
         Memorandum of Cooperation taking appropriate action. 

27 

 
 
 
 
 
 
European Commission 
Institutional Paper 

ANNEX 1:   OVERVIEW  OF  THE  IMPLEMENTATION  OF  THE  POLICY  GUIDANCE  ADOPTED  AT  THE 

ECONOMIC AND FINANCIAL DIALOGUE IN 2023 

Every year since 2015, the Economic and Financial Dialogue between the EU and the Western Balkans 
and Turkey has adopted targeted policy guidance for all partners in the region. The guidance represents 
the participants’ shared view on  the policy measures that should  be implemented to address macro-
fiscal  vulnerabilities  and  structural  obstacles  to  growth.  The  underlying  rationale  of  the  guidance  is 
similar to that of the country-specific recommendations usually adopted under the European Semester 
for  EU  Member  States.  Implementation  of  the  guidance  is  evaluated  by  the  Commission  in  the 
following year’s ERP assessments.  

The following table presents the Commission’s assessment of the implementation of the 2023 policy 
guidance  jointly  adopted  by  the  EU  and  the  Western  Balkans  and  Turkey  at  their  Economic  and 
Financial Dialogue at ministerial level on 16 May 2023.  

Overall: Partial implementation (47.2%) (31) 

2023 policy guidance (PG) 

Summary assessment 

There was partial implementation of PG 1: 

PG 1:  
Achieve  as  envisaged  a  non-negative  primary 
targeted 
in  2023  while  providing 
balance 
support  to  vulnerable  households  and  firms  if 
needed  to  cushion  the  impact  of  high  energy 
prices  and,  thereafter,  implement  the  medium-
term budgetary plan aiming to reduce the public 
debt ratio and increase the primary surplus while 
using  the  regular  revision  process  for  budget 
amendments. 

1)  Substantial  implementation:  In  2023,  the 
primary  balance  achieved  a  positive  outcome. 
Support  to  vulnerable  households  and  firms  was 
limited  compared  to  2022  as  the  energy  sector 
performed  better.  Furthermore,  according  to  the 
ERP there were no  untargeted subsidies allocated 
to  state-owned  electricity  enterprises.  The  public 
debt as a share of GDP declined to59.2% in 2023, 
from 64.5% in 2022. In October 2023 the budget 
was  revised  through  a  normative  act  and  not 
through  the  regular  revision  process  for  budget 
amendments – this is not in line with the PG. The 
revision 
accumulated 
throughout  2023  and  reallocated  unexecuted 
capital expenditure funds. Furthermore, there was 
another  budget  revision  in  December  2023,  also 
via a normative act. 

addressed 

arrears 

Keep  general  government  arrears 
in  each 
quarter  of  2023  at  maximum  2.5%  of  total 
expenditure and below 2.4% of total expenditure 
at end-2023. 

2) Partial implementation: The stock of arrears 
amounted to 1.83% at the end of Q1-2023, 2.67% 
at  the  end  of  Q2-2023,  2.91%  in  Q3-2023  and 
1.16%  in  Q4-2023.  Thus,  the  annual  target  of 
‘2.4% of total expenditure at end-2023’ was met. 
While this is progress, the accumulation of arrears 
throughout  2023  above  the  set  quarterly  targets, 
and  their  clearance  in  October  and  December 
2023 via budget amendments, are not in line with 
the  agreed  PG.  Overall,  there  seems  to  be  no 
systematic  approach  to  prevent  arrears  from 

(31)  For  a  detailed  description  of  the  methodology  used  to  assess  policy  guidance  implementation,  see  Section  1.3  of  the 
programmes: 
reform 
programmes-commissions-overview-and-

Commission’s 
https://ec.europa.eu/info/publications/economy-finance/2017-economic-reform 
country-assessments_en 

assessments 

economic 

overview 

country 

2017 

and 

the 

of 

28 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Inform  decisions  about  new  state  guarantees 
and on-lending to public entities by a systematic 
risk assessment. 

PG 2: 

Continue  measures  to  increase  tax  revenue  as 
share  in  GDP  in  a  growth-friendly  way  while 
taking into account the results of a broad public 
consultation on tax policies.  

Complete  procedures  to  fully  establish  the 
national  single  project  pipeline  (NSPP)  and 
advance  the  necessary  legal  amendments  to 
fully integrate PPPs into the NSPP. 

Part II 
Country analysis, Albania 

building up. 

for 

Program, 

3)  Limited  implementation:  The  Ministry  of 
Finance envisages strengthening the analysis and 
evaluation  of  the  risks  and  budget 
impacts 
stemming  from  guarantees  and  on-lending  to 
public  entities.  In  this  respect,  it  intends  to 
collaborate  with  the  World  Bank,  to  receive 
assistance through the Government Debt and Risk 
Management 
a 
providing 
framework 
comprehensive 
guarantees  and  on-lending,  underpinned  by  a 
formalised  assessment  methodology  focused  on 
the  risk  management  of  existing  and  potential 
future  portfolio.  Discussions  with  the  World  Bank 
have been initiated. The Ministry of Finance made 
legal  changes  for  setting-up  a  unit  specialised  in 
collecting  back  unpaid  obligations  of  borrowing 
entities stemming from on-lending operations and 
guaranteed  loans.  The  unit  is  expected  to  be  set-
up in 2024.  

developing 
for 

There was partial implementation of PG 2. 

1)  Partial  implementation:  Tax  revenues,  as  a 
share of GDP increased in 2023.  At the beginning 
of 2023, a new law ‘On Income Tax’ was discussed 
and approved in Parliament. It contains a series of 
measures from the medium-term revenue strategy 
(MTRS), 
linked  to  the  field  of  direct  taxes. 
Furthermore,  a  new  law  ‘On  property  tax’  was 
drafted  but  it  is  not  envisaged  to  be  adopted 
sometime  soon.  Overall,  in  the  last  years  the 
government  made  progress 
implementing 
measures from the MTRS and currently it plans to 
review the strategy.  

in 

2)  Substantial  implementation:  In  February 
2023,  the  Instruction  of  the  Minister  of  Finance 
No.  4  determined  the  financial  limit  (threshold) 
above  which  projects  are  eligible  to  enter  the 
NSPP.  Projects  classified  as  non-strategic  and 
have  a  total  value  below  the  threshold  are 
submitted for evaluation and approval only to the 
Ministry of Finance. These projects are not part of 
the  NSPP  list  and  the  procedures  followed  for 
these 
identification, 
preparation  and  approval  are  simpler.  Projects 
classified  as  strategic  require  in-depth  analyses 
for  the  processes  of  identification  of  the  project, 
preparation,  submission  of  documents  and 
evaluation  until  the  final  approval.  These  projects 
are  submitted  for  evaluation  to  the  Ministry  of 
Finance  and  to  the  State  Agency  for  Strategic 
Programming  and  Aid  Coordination.  For  these 

investment  projects  on 

29 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
European Commission 
Institutional Paper 

Increase spending on education, social protection 
and health as a percent of total expenditure and 
issue  instructions  for  data  collection  on  public 
expenditure on R&D. 

PG 3: 

Continue  to  carefully  assess  and  analyse  price 
developments, including by publishing additional 
indicators  of  underlying  price  pressures,  and 
ensure  a  sufficiently  tight  monetary  policy 
stance to preserve price stability in the medium 
term,  including  by  further  tightening  monetary 
policy, if needed. 

30 

this  option  with 

projects,  full  feasibility  studies  are  required.  The 
final approval of the new investment projects that 
are  to  be  financed  is  done  by  the  Ministry  of 
Finance  within  the  framework  of  the  Medium-
Term  Budgeting  Programme.  Regarding  the  form 
of  financing,  if  private-public  partnership  (PPP)  is 
an  option,  a  justification  should  be  provided  by 
comparing 
financing 
standards. Regarding the content of the feasibility 
study,  all  financing  options  should  be  presented 
and  detailed.  The  NSPP  list  has  been  prepared, 
updated  and  approved  by  the  Decision  of  the 
Council  of  Ministers  on  26.07.2023.  The  Ministry 
of Finance and Economy started to work on a new 
law to replace Law No. 125/2013 ‘On Concessions 
and  Private  Public  Partnership  PPP’.  The 
development of a methodology for the evaluation 
of  new  concessions/PPPs  will  be  part  of  the  new 
law.  

the 

In 

Limited 

implementation: 

3) 
2023, 
expenditure  on  education,  and  social  protection 
increased  in  nominal  terms.  Due  to  the  wage 
reform, there has been increases in the salaries of 
employees  in  public  administration.  In  2024  the 
average salaries of teachers and medical staff are 
foreseen  to  increase  significantly  on  the  back  of 
the  second  stage  of  the  public  wage  reform. 
Nevertheless, the budget on education, health and 
social  protection  remains  in  line  with  the  average 
levels  of  previous  years.  In  the  2024  budget, 
health expenditures as a share of total expenditure 
comes  to  9.3%  (higher  than  8.6%  in  2023,  but 
lower  than  9.6%  in  2022).  Social  protection  as  a 
share  of  total  expenditure  is  foreseen  to  increase 
to  29%  in  2024  from  about  28%  in  2023,  while 
education  increases  by  0.4  pps  year-on-year  to 
7.5%  in  2024.  No  progress  on  data  collection  on 
R&D  public  expenditure.  Work  is  still  underway  on 
designing the methodology for data collection and 
processing on public expenses dedicated to R&D. 
There was partial implementation of PG 3. 

1) Partial implementation: The Bank of Albania 
has not started to publish additional indicators of 
underlying  price  pressures  yet.  It  continued  to 
normalise monetary policy but slowed the pace of 
inflationary 
tightening 
pressures,  rising  risks  and  accelerating  credit 
growth 
it  consistently 
communicated its readiness to tighten further in a 
data-dependent manner and in line with the fiscal 
stance and exchange rate developments. 

lek.  Nevertheless, 

persistent 

despite 

in 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Part II 
Country analysis, Albania 

reporting  and 

Strengthen  further 
risk 
the 
management  frameworks  across  the  banking 
system to ensure an accurate reporting of asset 
quality,  to  further  reduce  obstacles  to  NPL 
resolution and to  reduce  data gaps in particular 
as regards the real estate sector. 

Continue the implementation of measures aimed 
at  promoting  saving  and  borrowing  in  domestic 
currency, limit unhedged lending and the use of 
foreign  currency  in  the  real  economy,  with  all 
signatories  of  the  Memorandum  of  Cooperation 
taking appropriate action. 

PG 4: 

Develop  business  support  services  to  create  a 
business environment to nurture SMEs’ greening 
transition,  further  accelerate  SME  digitalisation 
insolvency 
and  e-commerce,  offer 
prevention policies to SMEs at risk, and ensure a 
coherent  and  predictable  application  of  the 
property law. 

robust 

2) Substantial implementation:  A guideline for 
reporting  in  line  with  European  Banking  Authority 
standards is under consultation. The Regulation to 
improve  data  collection  on  the  exposures  of  the 
banking  system  to  the  real  estate  sector  has 
entered into force. Significant progress was made 
in  the  resolution  of  the  bailiff  impasse,  although 
problems  remain  with  its  operationalisation.  The 
introduction  of  IFRS  9  standards,  planned  for 
2023, has been postponed. 

3)  No  implementation:  While  the  Bank  of 
Albania  implemented  measures  taken  in  line  with 
the  Memorandum  of  Cooperation  earlier,  the 
government  made  no  progress  and  has  no  plans 
to  introduce  measures  to  increase  the  use  of  the 
national currency. 

There was limited implementation of PG 4. 

1)  Limited  implementation:  Further  efforts  are 
needed  to  improve  business  support  services,  for  
SME  on  the  green  transition  and  digitalisation, 
including  e-commerce.  Albania  has  completed  an 
analysis  of  the  green  economy,  identifying  areas 
such  as  renewable  energy  and  the  Cut,  Make  & 
Trim  (i.e.  clothing)  manufacturing  as  sectors  with 
potential  for  action  on  the  green  economy.  More 
efforts  from  the  institutions  and  support  to  the 
private sector are needed. Uncertainty remains on 
property titles, hampering investments.. 

Enhance  energy  resilience  and  diversification 
towards  green  energy  transition  to  implement 
the Green Agenda, notably the electricity, energy 
efficiency and climate acquis. 

  2)  Partial  implementation:  The  Albanian  power 
exchange  ALPEX  established  by  the  transmission 
system operators of Albania and Kosovo went live 
on  12  April  2023.  The  new  Renewables  Law 
adopted in March, brings a series of innovations to 
the electricity sector. A transition to net billing for 
self-consumed renewables was scheduled to start 
on  1  January  2024.  Progress  has  been  made  in 
the  implementation  of  the  national  renewable 
energy  action  plan  through  implementation  of  PV 
plants (240 MW, Karavasta and Spitalla). Progress 
has  been  achieved  with  the  auction  on  PV  plants 
and  wind  farms.  The  government  has  imposed 
obligatory measures, requiring a 15% reduction in 
electricity 
energy 
managers are responsible for monitoring progress 
and reporting. There is not yet a dedicated funding 
mechanism for energy efficiency, and a long-term 
building  renovation  strategy  has  not  yet  been 
adopted. 

consumption.  Nominated 

Implement within 2024 the adopted climate and 
energy targets based on the National Energy and 
Climate  Change  Plans,  (NECP)  as  part  of  the 

3)  Limited  implementation:  The  2030  climate 
in  national 
targets  are  yet 

to  be  defined 

31 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
European Commission 
Institutional Paper 

2030 decarbonisation roadmap, and ensure that 
the Renewable Energy Operator is operational by 
end  2023,  in  line  with  the  renewables  law  that 
was adopted on 23/3/2023. 

legislation,  but  these  have  been  defined  in  the 
NECP.  The  updated  NECP,  including  the  new 
targets,  is  expected  to  be  enacted  by  2024.  The 
Renewable  Energy  Operator  has  not  yet  been 
established. 

PG 5: 

There was partial implementation of PG 5. 

research 

cooperation  between 

innovative 
Encourage 
organisations, 
and 
businesses 
academia,  as  foreseen 
in  the  Strategy  on 
Business  and  Investment  Development  2021-
2027,  by  continuing  to  increase  science  and 
research funding, and by creating the conditions 
for  the  development  of  business  incubation 
programmes. 

Conduct a Youth Guarantee pilot and analyse its 
performance,  and  in  parallel  review  and  adjust 
the  functioning  and  operational  structure  of  the 
National  Agency  for  Employment  and  Skills 
(NAES)  to  accommodate  the  service  delivery  of 
the  Youth  Guarantee  and  develop  a  set  of 
quality offers. 

32 

in 

the 

1) Partial implementation: Albania adopted the 
National  Strategy  for  Research,  Science  and 
Innovation  2023-2030  in  September  2023.  In 
2023,  the  National  Agency  for  Science,  Research 
and  Innovation  opened  the  first  call  for  joint 
academia-business  projects 
field  of 
innovation  and  10  joint  projects  were  awarded. 
Albania  was  included  for  a  second  consecutive 
year in the European Innovation Scoreboard as an 
emerging  innovator.  However,  it  experienced  a 
decrease in its score. Albania advanced in drafting 
the  Smart  Specialisation  Strategy,  which 
is 
expected  to  be  adopted  in  the  first  half  of  2024.  
Despite the efforts that the  country is making on 
innovation, Albania needs to substantially increase 
funding on science and research. The new Law on 
include  Open  Science, 
Science,  which  will 
knowledge  valorisation,  research  infrastructure 
and  facilities,  and  will  support  a  stronger  R&I 
ecosystem  aligned  with  the  European  Research 
Area policy agenda priorities, is still to be adopted. 

2)  Substantial  implementation:  The  National 
Implementation  Plan  for  the  Youth  Guarantee 
Scheme was approved by the Council of Ministers. 
The  piloting  of  the  Youth  Guarantee  Scheme  was 
launched  by  October  2023  and  its  full-scale 
implementation  will  take  place  in  three  regions  – 
Tirana,  Shkodra  and  Vlora  –  in  2023-2024.  Initial 
progress  states  that  120  young  people  not  in 
education,  employment  or  training  have  been 
identified  and  are  receiving  services  according  to 
their  development  plan.  Public  Employment 
Services (PES) employees were trained in January 
2024 through the EU-IPA funded programme. The 
Youth  Guarantee  website  has  been  designed  but 
not  launched  yet.  An  initial  restructuring  of  the 
National  Agency  for  Employment  and  Skills  was 
completed.  However, 
and 
adjustment  should  be  done  based  on  the  pilot 
phase.  A  further  strengthening  of  the  PES  offices 
beyond the pilot regions needs to be implemented 
to  accommodate  a  service  delivery  of  the  Youth 
Guarantee and quality offers.  

another 

review 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
in 

invest 

the  outputs  of 

the  Labour  Market 
Use 
Observatory  to 
labour  market 
improve  the 
relevance  of  vocational  education  and  training 
(VET), 
its  quality  and  ensure 
cooperation  with  the  private  sector;  focus  on 
building  skills  of  youth  and  adults,  with  a 
particular  focus  on  digital  skills  to  support  the 
expanding  communications  and 
technology 
sector. 

Part II 
Country analysis, Albania 

It 

and 

new 

3)  Partial  implementation:  The  Labour  Market 
is  now 
Observatory  was  established  and 
operational. 
analyses 
processes 
administrative  data  generated  by  the  General 
Directorate  of  Taxes  and  the  National  Agency  for 
Employment  and  Skills,  and  can  display  data  by 
occupation,  gender  and  region.  Based  on  the 
labour  market  data,  the  observatory  and  other 
instruments  such  as 
tracking  of  VET 
the 
employment 
a 
graduates/certificates, 
promotion  programme  (ALMP)  related  to  the 
provision 
(through  outsourcing)  of  advanced 
training  in  the  field  of  ICT  (programming)  was 
in  2023.  As  at  Oct  2023,  1 875 
drafted 
unemployed  jobseekers  had  been  trained  free  of 
charge  by  public  VET  centres  on  the  digital 
curriculum  (short-term  course  with  the  5  basic 
digital  competencies  according  to  the  EU  Digital 
Competencies 
inter-
institutional  working  group  was  established  to 
identify  challenges  and  increase  participation  in 
VET  programmes,  and  a  regulation  was  adopted 
on  transferring  from  universities  to  vocational 
education  schools  and  on  making  the  registration 
process 
– 
https://aftesi.al/  –  has  been  created  to  help  all 
students who wish to receive detailed information 
about  VET  in  Albania.  Further  efforts  are  needed 
to strengthen cooperation with the private sector. 

dedicated  website 

Framework  2.0). 

easier. 

An 

A 

PG 6:  

By 2024, establish a mechanism for the annual 
indexation  of  the  ‘Economic  Aid’  benefits  to 
ensure their adequacy based on the assessment 
carried out. 

There was partial implementation of PG 6. 

1)  Limited  implementation:  Limited  progress 
was  made  in  this  regard.  However,  this  remains 
one  of  the  priorities  under  the  National  Strategy 
on  Social  Protection  2024-2030,  which  was 
adopted  in  March  2024.  The  annual  indexation 
mechanism of the Economic Aid scheme is part of 
the measures under the draft National Strategy on 
Social Protection 2024-2030.  

Ensure  sustainability  of  the  newly  created 
services  and  encourage  the  creation  of  new 
services  within  the  increase  of  the  allocation  to 
the  National  Social  Fund,  especially  in  the 
municipalities  offering  the  least  number  of 
social services and with lower resources. 

2)  Partial  implementation:  The  Social  Fund 
budget  for  2023  has  increased.  However,  the  full 
absorption/disbursement  of  the  amount  from  the 
municipalities  remains  a  concern,  particularly  the 
need for clear sectorial instructions.   The  Ministry 
of Health and Social Protection, with support from 
external 
currently 
reviewing the Social Fund. Subject to the results of 
this evaluation, the Ministry will consider reviewing 
the  Decision  of  the  Council  of  Ministers  on  the 
Social  Fund  –  particularly  on  the 
level  of 
contributions from municipalities and the financial 
sustainability of services. In certain municipalities, 

technical  assistance, 

is 

33 

 
 
 
 
 
 
 
 
 
 
 
 
European Commission 
Institutional Paper 

social  service  provision  is  still  lacking  or  is  very 
low. 

Exit 

Continue  the  cooperation  with  NAES  on  the 
‘Economic  Aid’ 
refer 
beneficiaries  to  the  services  offered  by  NAES, 
and  in  particular  analyse  and  address  the 
reasons  for  refusal  to  take  on  offers  of 
employment or training. 

Strategy 

to 

3)  Substantial  implementation:  Progress  has 
been made on implementing the exit strategy for 
recipients  of  economic  aid.  A  Joint  Order ( 32) 
between  the  Minister  of  Health  and  Social 
Protection  and  the  Minister  of  Finance  and 
Economy  was  signed  in  January  2022  for  the 
referral  mechanism  for  employment  and  social 
family  members 
integration  of  working-age 
benefiting  from  the  economic  aid  scheme.  The 
order  builds  on  the  referral  model  initially  piloted 
for  3  months  in  Elbasan.  In  2022,  a  special 
tripartite  commission  was  established,  composed 
of  the  Regional  Office  for  Social  Services,  the 
Regional  Office 
for 
Employment  Skills  and  the  Department  for  Social 
Services  in  Elbasan.  This  model  has  been  rolled 
out  to  the  12  regions,  entailing 
immediate 
assistance  and  support  from  the  Ministry  in 
cooperation  with  the  national  agencies  (SSS  and 
the National Agency for Employment and Skills). A 
protocol  for  referral  is  now  in  place,  and  the 
regional  stakeholders  are 
the 
profiling  of  working-age  beneficiaries.  Social 
mentoring is part of the individual plans prepared 
to  support  the  reintegration  of  economic  aid 
beneficiaries.  The  reasons  for  refusing  to  take  on 
offers  of  employment  or  training  are  also 
recorded,  analysed  and  addressed 
through 
targeted support measures. 

for  National  Agency 

implementing 

(32)  Joint Order No. 52 of 26.01.2022. 

34 

 
 
 
 
 
 
 
 
 
 
 
 
Part II 
Country analysis, Albania 

Annex 2: COMPLIANCE WITH PROGRAMME REQUIREMENTS 

The government of Albania submitted the 2024-2026 ERP to the Commission on 15 January 2024. 

Inter-ministerial coordination 

The drafting and  preparation of the 2024-2026 ERP  was coordinated by the Ministry  of Finance and 
Economy, with contributions from various ministries and agencies.  

Stakeholder consultation 

The  2024-2026  ERP  was  discussed  at  the  Investment  Council  on  15  December  2023,  whereby 
representatives  from  business  associations,  development  partners  and  other  interested  stakeholders 
were present. The Investment Council is chaired by the Minister of Finance and Economy and supported 
by its Technical Secretariat.  

Macroeconomic framework 

The  programme  presents  a  clear  and  concise  picture  of  past  economic  developments  and  covers 
relevant data available at the time of  submission. The information  provided is coherent,  concise and 
well  structured.  The  macroeconomic  framework  provides  a  good  basis  for  policy  evaluation  and 
discussions.  The  ERP  does  not  provide  an  analysis  of  labour  productivity,  skills  shortages,  migration, 
brain drain or details on key investment projects or the investment environment. Statistical tables were 
complete. 

Fiscal framework 

The  fiscal  framework  is  detailed,  in  line  with  stated  policy  objectives  and  consistent  with  the  ERP 
macroeconomic framework. The information about discretionary measures planned for 2024 and 2025 
is rudimentary and fragmented. There is no analysis on the long-term sustainability of public finances 
(demographic developments, pensions, health expenditure). The ERP lacks details on expenditure plans, 
in  particular  for  capital  expenditure.  Fiscal  data  do  not  yet  meet  Euopean  System  of  Accounts  (ESA) 
2010 requirements. Soon after the ERP was submitted, the budget for 2024 was revised in February 
2024,  including  the  fiscal  projections  for  2025-2026.  The  revenue  projections  were  revised  upwards 
and are now closer to the optimistic scenario presented under the sensitivity analysis in the ERP.  

Structural reforms 

The chapter on structural reforms follows the ERP guidance note. The ERP does not make a clear link 
between  the  analysis  of  the  challenges  facing  the  economy,  the  proposed  reforms  and  the 
corresponding budget allocations. A dedicated section provides information on the implementation of 
the  policy  guidance  for  2023.  Reporting  on  the  progress  of  2023  structural  reform  measures  is 
generally  of  good  quality.  There  is  also  a  table  reporting  on  the  implementation  of  the  structural 
reform  measures from the  previous ERP (2023-2025),  but information on implementation is missing 
for some measures. 

35 

 
 
2.  BOSNIA AND HERZEGOVINA 

2.1.  EXECUTIVE SUMMARY 

After  an  economic  slowdown  in  2023,  the  economic  reform  programme  (ERP)  expects  GDP 
growth to rebound in 2024-2026, mainly driven by exports and investments. In 2023, weaker 
external demand,  higher interest rates and still high inflationary pressures resulted in a slowdown in 
economic growth (estimated at 2% in the programme). The ERP projects GDP growth to accelerate to 
around 3% in 2024 and 2025 and to 3.4% in 2026, benefiting from rebounding exports and increasing 
private  and  public  investment.  In  line  with  expected  international  price  developments,  inflation  is 
projected to fall to around 1.9% by 2026. An expected rebound in foreign demand, especially tourism, 
and  subdued  import  growth  are  projected  to  reduce  the  current  account  deficit  to  2.8%  of  GDP  by 
2026. Foreign direct investment inflows are expected to remain stable at around 2% of GDP. Risks are 
mainly  on  the  downside  due  to  the  programme’s  optimistic  projections  for  export  growth  amid  a 
generally bleak global environment surrounded by considerable uncertainty and weak investment. The 
expected decline in inflation also appears optimistic given recent high wage pressures, partly reflecting 
labour shortages due to substantial emigration.  

The  fiscal  framework  projects  expenditure-driven  fiscal  consolidation,  leading  to  a  small 
budget surplus in 2026. In view of recently adopted permanent expenditure measures, this 
benign scenario appears optimistic. On the revenue side, a shift in the growth drivers from private 
consumption to exports and investment is projected to lower the revenue-to-GDP ratio by 1 percentage 
point  in  2024-2026.  On  the  expenditure  side,  mostly  unspecified  measures  to  contain  public 
consumption and ‘other’ spending, along with lower investment expenditure, are expected to reduce the 
spending-to-GDP ratio by 1.6 percentage points (pps). However, the ERP’s fiscal framework is neither 
based  on  adopted  budgets  nor  on  a  politically  approved  medium-term  strategy.  The  planned  drop  in 
public investment is in contrast to the policy recommendations jointly adopted since 2015. For 2024, 
the  programme  expects  a  slight  increase  in  the  deficit  to  0.6%  of  GDP  (mainly  due  to  higher  social 
spending). In  2025, lower spending on  public investment  and  collective consumption (by 0.4  pps and 
0.3 pps respectively) is projected to almost balance the budget, while additional spending restraint in 
2026  is  set  to  result  in  a  slight  surplus  of  0.3%  of  GDP.  The  debt  ratio  is  expected  to  decline  from 
26.7%  of  GDP  in  2023  to  23%  in  2026,  while  interest  costs  are  expected  to  remain  at  1%  of  GDP, 
benefiting from the low debt level and high share of concessional lending. The reliability of the fiscal 
framework is reduced by a lack of political support and weak alignment with EU accounting standards, 
in particular on the definition of the general government. As a result, both the deficit and debt ratios 
may be higher than reported. Overall, despite the relatively low level of public debt, the fiscal scenario 
presented does not properly address the challenges the country is facing, in particular in view of the 
moderate  growth  outlook,  high  investment  needs  and  challenges  involved  in  moving  towards  EU 
accession. 

The main challenges facing Bosnia and Herzegovina are the following: 

•  A  lack  of  cooperation  among  the  country’s  stakeholders  and  highly  fragmented 
competences severely undermine country-level economic governance. The country’s ability 
to formulate consistent, countrywide short- and medium-term economic and fiscal objectives and 
strategies  is  seriously  impeded  by  a  high  degree  of  institutional  fragmentation,  insufficient 
cooperation  among  key  stakeholders,  and  excessively  politicised  decision-making  processes. 
Furthermore, economic analysis and policy formulation suffers from a lack of accurate and timely 
empirical data. 

•  Fiscal policy lacks a growth-enhancing perspective. Public spending tends to focus on poorly 
targeted,  short-term  social  transfers,  while  neglecting  medium-term  investment  needs  in  areas 
such as education, infrastructure and the environment. The level of public investment is low in view 
of the country’s needs and its implementation is often uncoordinated, insufficiently prioritised and 

36 

 
Part II 
Country analysis, Bosnia and Herzegovina 

slow. Public investment would need a substantial and sustained boost to move the economy onto a 
higher  growth  trajectory.  Revenue  collection  is  affected  by  a  sizeable  informal  economy  and 
insufficient transparency of taxable income.  

•  Other  structural  challenges  are  in  the  rule  of  law,  the  business  environment  and 
inefficient  public  enterprises,  the  green  and  digital  transition,  human  capital,  and 
fundamental  democratic  reforms.  A  difficult  business  environment  and  weaknesses  in  the 
country’s  single  economic  space  are  key  factors  driving  poor  labour  market  outcomes,  while 
holding back improvements in competitiveness and living standards. A persistent issue is the lack 
of political ambition to tackle regulatory burden and corruption. Digital transformation is lagging 
behind  in  both  business  and  in  the  public  administration.  A  more  focused,  urgent  approach  is 
needed from the authorities on the green and digital transition. These challenges are expected to 
be addressed through key structural reforms identified in the country’s reform agenda under the 
new Growth Plan for the Western Balkans. 

Implementation  of  the  policy  guidance  set  out  in  the  conclusions  of  the  Economic  and 
Financial  Dialogue  of  May  2023  has  been  partial.  Some  effort  has  been  made  to  cushion  the 
impact  of  external  shocks  and  increase  public  investment.  Limited  action  has  been  taken  to  improve 
the  efficiency  of  tax  collection  or  the  reporting  of  contingent  liabilities.  The  analytical  capacities  of 
governmental institutions have remained limited, including in the field of statistics. With a two-and-a-
half  year  delay,  a  new  central  bank  governing  board  has  been  appointed.  Partial  progress  has  been 
achieved  on  simplifying  business  registration, 
licensing  and  permitting  procedures  and  on 
strengthening the  coordination mechanisms for employment policies.  However, no  progress  has been 
made on harmonising them countrywide, nor in developing a system to monitor and forecast the skills 
needs  in  the  labour  market.  Work  on  reforming  the  governance  of  state-owned  enterprises  (SOEs)  is 
still at an early stage. A first draft of a single integrated energy and climate plan for lowering carbon 
emissions  has  been  prepared.  However,  only  limited  progress  has  been  achieved  on  adopting  state-
level  legislation  for  electricity  and  gas  and  ensuring  their  harmonisation  at  entity  level.  Agreed 
measures to improve access to early childhood education and care services for children/families from 
vulnerable backgrounds and in rural areas have been partially implemented. 

2.2.  ECONOMIC OUTLOOK AND RISKS 

After  a  strong  rebound  from  the  pandemic-induced  recession,  economic  activity  slowed  in 
2023, reflecting a deteriorating international environment and the impact of high inflation. 
Annual  output  growth  slowed  from  3.8%  in  2022  to  1.6%  in  2023 ( 33),  which  is  currently  a  weaker 
outcome  than  the  ERP  estimate  of  2.0%.  To  some  extent,  this  slowdown  reflects  a  base-year  effect 
after  strong  post-pandemic  growth  in  2021  and  2022,  but  also  weaker  than  expected  external 
demand,  while  domestic  demand  has  so  far  performed  better  than  expected.  The  main  drivers  of 
growth  in  2023  were  private  consumption,  but  also  exports  and  gross  investment  (including 
inventories).  Furthermore,  relatively  low  interest  rates  and  an  expansionary  fiscal  policy  supported 
economic  growth  despite  a  deteriorating  international  environment.  The  labour  market  remained 
resilient despite the slowing economy. Registered employment growth decelerated from 2.3% in 2022 
to  1.4%  in  2023,  while  the  unemployment  rate  –  as  measured  by  the  labour  force  survey  (LFS)  – 
dropped from 15.4% in 2022 to 13.2% in 2023. Anecdotal evidence points to a significant outflow of 
migrant workers, leading to a declining labour force. This already leads to labour supply shortages in 

(33)  Macroeconomic  and 

the  ERPs   
themselves;  if  available,  preliminary  macroeconomic  and  fiscal  outturn  data  for  2022  and  2023  have  been  
taken from the relevant national sources (national statistical office, Ministry of Finance, central bank). 

forecasts  covering  2023-26  have  been 

fiscal  estimates  and 

taken 

from 

37 

 
 
 
 
 
European Commission 
Institutional Paper 

some sectors, such as construction but also health services. Youth unemployment (age group 15-24) 
returned  to  pre-COVID-19  levels,  dropping  to  a  still  high  rate  of  30.1%  in  2023.  A  relativly  high 
inactivity rate among women contributes to an overall rather low activity rate. 

Table II.2.1:
Bosnia and Herzegovina - comparison of macroeconomic developments and forecasts

Real GDP (% change)
Contributions:
- final domestic demand
- change in inventories
- external balance of goods and services
Employment (% change)
Unemployment rate (%)
GDP deflator (% change)
CPI inflation (%)
Current account balance (% of GDP)
General government balance (% of GDP)
Government gross debt (% of GDP)

2023

2022

2024
COM ERP COM ERP COM ERP COM ERP COM ERP
3.9
3.4

2026

2025

n.a.

3.8

2.0

2.9

3.0

2.0

2.3

1.5

5.3
1.6
2.3
2.1
0.5
0.2
-2.9
1.7
0.5
1.0
1.0
1.5
:
15.4
10.5
12.2
9.5
2.4
14.0 14.0
2.2
-4.6
-4.5
-3.0
-0.4
-0.1
1.0
29.2 28.3 26.5 26.7 27.0 25.6 26.5 24.6

2.0
0.4
0.5
1.4
11.9
2.6
3.1
-3.7
-0.6

0.9
0.6
0.5
1.5
13.2
4.4
6.2
-4.3
-0.4

2.7
0.0
-0.4
1.0
:
2.0
3.0
-3.8
-0.5

2.5
0.1
-0.5
1.4
:
2.4
3.5
-4.0
-1.5

2.9
-0.3
-1.4
1.3
:
6.5
6.5
-4.5
-0.5

n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.

2.5
0.4
0.5
1.6
9.1
2.1
1.9
-2.8
0.3
23.0

Sources: Economic Reform Programme (ERP) 2024, Commission Autumn 2023 forecast.

The  programme  expects  largely  investment-driven  output  growth  acceleration,  from  2.0% 
in 2023 to 3.4% in 2026. Compared to last year’s programme, the baseline scenario expects similar 
growth dynamics for 2024 and 2025. This brings average output growth during the 3-year programme 
period  to  3.1%,  compared  to  2.5%  expected  in  the  previous  programme.  This  growth  performance  is 
higher than the country’s main trading partners such as the EU. Key factors in the country’s stronger 
growth  performance  are  exports,  increasing  by  8.3%  a  year  on  average,  and  investment,  which  is 
expected  to  increase  by  5.2%  on  average,  benefiting  from  increased  spending  on  infrastructure  and 
energy  projects.  On  potential  growth,  the  2024  ERP  estimates  a  rate  of  3.0%  over  the  programme 
period. This results in slightly negative output gaps in 2024 and 2025, which are projected to close in 
2026. The programme presents an alternative macroeconomic scenario, which assumes less dynamic 
external demand and higher inflation. This would reduce average annual GDP growth compared to the 
baseline scenario  by  0.7  pps to  2.4% on average in 2024-2026, mainly as a result of lower exports 
and investment and significantly higher inflation in 2024. On internal risks, the programme points to 
complex  decision-making  and  slow  reform  implementation  as  potential  downside  risks.  However, 
domestic risks in particular are assessed only in a qualitative way. There are no estimates provided on 
the fiscal impact of this adverse scenario. 

The ERP’s overall growth path appears to be on the optimistic side, in particular in view of 
the currently more pessimistic international outlook. Despite Bosnia and Herzegovina’s average 
growth  of  about  3%  on  average  over  the  last  10  years,  the  programme’s  macroeconomic  growth 
trajectory  of  around  3%  appears  ambitious.  In  particular,  the  composition  of  growth  with  a  strong 
reliance on external demand and investment appears optimistic, given the country’s traditionally strong 
role of private consumption as a key driver of growth. In view of the programme’s assumptions on the 
external  environment,  the  country’s  projected  export  performance  suggests  significant  market  share 
gains, which would have benefited from a  more  detailed explanation. Given the country’s weak track 
record  of  reform  implementation,  the  programme  appears  to  be  rather  optimistic  in  expecting  that 
structural  reforms  will  translate  into  higher  private  and  public  investment.  As  in  previous  years,  the 
macro scenario is more optimistic about public investment than the fiscal framework. For example, in 
the  macroeconomic  framework  public  investment  is  expected  to  increase  by  more  than  7%  in  real 
terms in 2024-2026. According to the programme’s fiscal framework, public investment is expected to 
decline by around 2.5% in real terms.  

38 

 
 
   
 
 
Part II 
Country analysis, Bosnia and Herzegovina 

The programme expects a swift drop in inflationary pressures. Price pressures started to mount 
in 2022, especially after Russia’s invasion of Ukraine, which resulted in higher energy and food prices. 
Consumer  price  inflation  reached  a  peak  in  October  2022  with  a  year-on-year  increase  of  17.4%, 
which moderated significantly in 2023, reaching 3.5% in December 2023. On average, consumer price 
inflation  was  6.5%  in  2023,  compared  to  14%  in  2022.  The  programme  expects  average  annual 
inflation  to  decline  to  3.1%  in  2024,  easing  to  2.2%  and  1.9%  in  2025  and  2026  respectively.  This 
profile  is  somewhat  more  optimistic  for  2024  and  2025  compared  to  the  Commission  forecast.  The 
ERP  expects  lower  import  prices,  in  particular  for  energy  and  food,  to  be  the  main  factor  behind  the 
deceleration in inflation. Unfortunately, it does not elaborate on possible domestic factors for inflation. 
The  absence  of  an  official  core  inflation  series  and  the  late  update  of  the  CPI  weights  is  another 
impediment to assess the country’s price dynamics. Bosnia and Herzegovina’s currency peg to the euro 
has  served  the  country  well  so  far,  but  also  limits  the  central  bank’s  ability  to  influence  price 
developments. The  country  has a track record of  relatively low inflationary pressures,  which to  some 
extent  might  reflect  the  country’s  below-potential  growth  performance.  Nevertheless,  there  are  also 
some upward risks to the programme’s inflation scenario. Recent relatively generous wage agreements 
and  increases  in  mimimum  wages  not  only  reflected  rapidly  rising  energy  and  food  prices,  but  also 
labour supply bottlenecks due to an increasing scarcity of qualified workers.  

The  current  account  balance  projection  is  based  on  optimistic  assumptions  about  export 
demand, in particular tourism exports. After a sharp increase – largely driven by import prices – in 
the current account deficit to 4.5% of GDP in 2022, the programme expects a similar deficit (-4.3% of 
GDP)  for  2023.  However,  thanks  to  strengthening  export  demand  and  decelerating  import  prices,  the 
ERP  projects  a  continuous  reduction  in  the  deficit,  from  3.7%  of  GDP  in  2024  to  2.8%  in  2026.  This 
appears optimistic, in view of the country’s import elasticities. Furthermore, the programme does not 
mention  the  likely  negative  impact  of  the  introduction  of  the  Carbon  Border  Adjustment  Mechanism 
(CBAM)  on  the  country’s  external  balances.  As  in  previous  years,  the  programme  expects  that  the 
deficit  in  the  balance  of  goods  and  services  will  be  largely  financed  by  a  stable  inflow  of  current 
transfers, primarily consisting of workers’ remittances, accounting for more than 10% of GDP. Foreign 
direct investment inflows are expected to be between 2¼% and 2½% of GDP, covering the bulk of the 
current  account  deficit.  This  assumption  is  on  the  cautious  side,  given  that  foreign  direct  investment 
inflows  were  around  3%  in  2022  and  2023.  After  a  rather  low  inflow  of  greenfield  investment  in 
recent years, there seems to be some stronger interest among  foreign investors in  hypdropower and 
solar  power  generation.  Furthermore,  a  number  of  international  financial  institutions  are  supporting 
investment  in  the  country’s  transport  infrastructure.  However,  the  country’s  cumbersome  business 
environment,  fragmented  internal  market  and  political  uncertainty  so  far  appear  to  have  impeded  a 
stronger inflow of foreign capital.  

The country’s external competitiveness deteriorated recently as a result of an appreciation of 
the real effective exchange rate. However, this largely reflects the strengthening of the euro, to which 
the domestic currency, the KM is pegged, against the Turkish lira and the Russian rouble. Furthermore, 
wage increases have been relatively high recently, which could exert upward pressure on the country’s 
export prices. Recent wage increases could also have a negative effect on the country’s international 
price competitiveness.  

External competitiveness and current account 

39 

 
 
European Commission 
Institutional Paper 

20

10

0

-10

-20

-30

Graph II.2.1a: Bosnia and Herzegovina - current 
account balance (% GDP)

2022

2023

2024

 Services balance

2025
 Goods balance

2026

Current account balance (rhs)

Net FDI (rhs)

4

2

0

-2

-4

-6

100

95

90

Graph II.2.1b: Bosnia and Herzegovina -
real effective exchange rate (index)

Appreciation

Depreciation

2019

2020

2021

2022

2023

Bosnia and Herzegovina

EA19

Source: Economic Reform Programme (ERP) 2024.

Source: Central Bank of Bosnia and Herzegovina, and ECB.

The country’s banking sector has remained stable so far. Government measures have helped to 
prevent potential turbulence due to COVID-19 and Russia’s full-scale war of aggression. However, the 
issuance  of  public  guarantees,  partly  as  a  result  of  increased  activities  of  the  entities’  development 
banks, has also raised public sector contingent liabilities. The sector’s health is regularly supervised by 
stress test assessments performed by the two entities’ banking supervisory agencies. Nevertheless, the 
Bosnian  banking  industry  remains  subject  to  systemic  risk.  The  legal  framework  for  Systemically 
Important Banks (SIBs) in Bosnia and Herzegovina is not yet harmonised with international standards. 
Moreover,  the  complexity  of  the  institutional  set-up  contributes  to  hindering  adequate  banking 
supervision. For instance, the Standing Committee for Financial Stability, pivotal for the supervision of 
the Bosnian financial system, does not convene regular meetings and has not met since March 2022. 
Nominal  credit  growth  accelerated  slightly  in  2023,  reaching  4.6%    by  the  end  of  December  2023, 
while in real terms credit growth remained mostly negative in this period. This partly also reflects the 
tightening of credit conditions in recent years. Deposit growth accelerated to 7.2% by the end of the 
year,  leading  to  an  increase  in  deposits  as  a  share  of  GDP  and  pointing  to  an  improving  liquidity 
situation among households  and businesses. The non-performing loans (NPL) ratio decreased  further 
to 43.8% at the end of 2023, and the ratio of foreign-denominated loans to total loans also continued 
to decline. However, in some smaller, domestically owned banks, NPL ratios appear to be significantly 
higher. The country’s two supervisory agencies extended measures to contain the increase in domestic 
lending  rates,  which  helped  to  preserve  the  households’  repayment  capacity.  However,  such  an 
intervention introduces  distortions to the financial  market’s allocation mechanism and  should remain 
temporary.  In  view  of  the  country’s  fragmented  financial  supervision,  a  countrywide  financial  safety 
net would strengthen the country’s shock resilience.  

Table II.2.2:

Bosnia and Herzegovina - financial sector indicators

Total assets of the banking system (EUR million)
Foreign ownership of banking system (%)
Credit growth (average)
Deposit growth ** (average)
Loan-to-deposit ratio *** (end of period)
Financial soundness indicators (%, end of period)
     - non-performing loans to total loans
     - regulatory capital to risk-weighted assets
     - liquid assets to total assets
     - return on equity
     - foreign exchange loans to total loans

2020

2022

2023

2019
2021
16 621 16 824 18 121  19 137 19 932*
84.7
74.3*
82.2
4.6
1.7
5.7
7.2
10.1
9.3
75
77
89

74.2
4.2
5.9
76

83.1
1.1
5.6
83

7.4
18.0
29.2
9.1
53.9

6.1
19.2
28.6
5.6
53.9

5.8
19.6
30.7
9.6
50.2

4.5
19.6
30.5
12.0
43.3

3.8
19.7
29.0
15.0
37.6

* Q3. 
** Total deposit growth.
*** Non-interbank loans to customer deposits.
Sources: Central Bank of Bosnia and Herzegovina, Supervisory banking agencies, CBBH calculation.

40 

   
 
 
  
 
 
Part II 
Country analysis, Bosnia and Herzegovina 

2.3.  PUBLIC FINANCE  

As  in  2022,  the  budgetary  performance  in  2023  benefited  from  stronger  than  anticipated 
revenue growth. This allowed a signficant increase in (primarily current) spending, while still meeting 
the  2023  ERP’s  initial  fiscal  target.  Based  on  provisional  data,  the  programme  estimates  that  total 
revenue rose by 12.1% in 2023, compared to an 8% anticipated increase in the previous programme. 
Total spending is projected to have increased by 16.1%, compared with last year’s 8.7% estimate. The 
2024  programme  therefore  estimates  a  budgetary  surplus  of  0.4%  of  GDP,  which  is  in  line  with  the 
last year’s target. Official fiscal data for 2023, prepared by the central bank, is expected by November 
2024  .  The main factor behind the better than expected  revenue performance is broad-based:  social 
contributions, benefiting from higher wages and increased employment, rose by 14.3% and contributed 
5.1 pps to the 12% revenue increase. Indirect taxes rose by 8.3% against a nominal GDP increase of 
6.5%.  Profit  taxes  benefited  from  high  energy  prices,  leading  to  significant  profits  in  the  electricity 
producing industry. On the spending side, the main elements were strong increases in social transfers 
(+20.3%)  and  collective  consumption  (+14.4%),  accounting  for  some  70%  of  the  total  spending 
increase. Capital spending was 18.1% higher than in 2023. This led to an increase in public investment 
from 3.5% of GDP in 2021 to 3.9% in 2023. However, due to the rather low level of investment, this 
increase  contributed  only  1.8  pps  to  the  overall  spending  increase  of  16.1%.  Compared  to  the  initial 
budget plans for 2023, the main deviation on the revenue side was higher than expected income from 
social contributions, which were 5% higher than expected. On the spending side, the main unplanned 
expenditure  increases  were  social  transfers,  which  were  7.4%  higher  than  initially  planned,  while 
capital spending was 13% lower than initially budgeted. Overall, the reasons for the fiscal deviations 
are  structural,  but  also  due  to  ad  hoc  decisions.  The  cautious  revenue  estimates  are  a  structural 
feature  of  the  country’s  budgetary  process,  while  the  inflation-driven  excess  revenues  were  largely 
unexpected. On the  spending side, the additional spending is largely  due to  discretionary decisions in 
response to unexpected events, such as high energy prices or the availability of unplanned revenues.  

41 

 
 
 
 
European Commission 
Institutional Paper 

BOX II.2.1: BOSNIA AND HERZEGOVINA’S FISCAL ARCHITECTURE 

Bosnia and Herzegovina’s public finances consist of four independent budgetary institutions made 
up by two ‘entities’ (the Federation and Republika Srpska), accounting in 2022 for 58% and 34% of 
total fiscal spending, the Brčko District, accounting for 1.7% of total spending, and the country-level 
institutions, accounting for 6.5% of total spending.  

There are no countrywide fiscal rules in place. Only one of the four budgetary entities has adopted a 
deficit and debt rule. However, according to the country’s fiscal council law there is a countrywide 
fiscal coordination body, the Fiscal Council, although it is neither independent nor has any authority 
to influence policy decisions of the four budgetary institutions. This coordinating body is tasked with 
preparing, in coordination with the four fiscal institutions, an agreed Global Fiscal Framework. This 
provides  a  3-year  medium-term  revenue  and  expenditure  framework  with  coordinated  fiscal 
objectives. However, in practice it is often finalised only once the two largest fiscal institutions – the 
two entities – have completed their budgetary planning process.  

As a result, the country’s overall fiscal strategy can be described as the sum of the often-diverging 
fiscal  policies  of  the  two  key  budgetary  spenders,  i.e.,  the  Federation  entity  and  the  Republika 
Srpska  entity.  In  recent  years,  Republika  Srpska  entity  has  often  applied  a  significantly  more 
expansionary fiscal stance. As a result, their public debt levels differ considerably.  

Three  out  of  the  four  budgetary  institutions,  accounting  for  95%  of  total  spending,  pursue 
independent  fiscal  policies.  The  fourth  budget  institution  primarily  covers  the  administrative 
expenses  of  the  country’s  state-level  institutions,  such  as  the  Council  of  Ministers,  state-level 
ministries or the country’s foreign representations.  

The budgets for the central governments of Republika Srpska entity and Brčko District were adopted 
in December 2023, while the budget for the Federation entity followed on 25 January. The budget 
for the country-wide institutions still is not adopted. The Global Fiscal Framework was adopted on 
25 January. Unfortunately, information on all these budgets has not been included in the ERP. 

Due  to  the  late  adoption  of  the  country’s  medium-term  fiscal  strategy  (the  Global  Fiscal 
Framework),  the  programme  presents  only  projections  for  2024-2026  based  on  historic 
trends  and  basic  assumptions. On  the  revenue  side,  the  programme  expects  a  gradual  decline  in 
the revenue-to-GDP ratio (from a preliminary 41.9% in 2023 to 40.9% in 2026), mainly as a result of 
a declining share of private consumption in GDP. Due to indirect tax revenue increasing at a rate below 
nominal GDP growth, the share of tax revenue in GDP is expected to decline by 0.6 pps between 2023 
and 2026. The share of income from social contributions is expected to increase by 0.1 pps, reflecting 
the effects of measures taken in 2023. On the expenditure side, the ERP expects a 1.6 pps decline in 
the  spending  ratio  mainly  driven  by  low  growth  in  public  consumption  and  ‘other’  expenditure,  with 
these two spending categories each decreasing by 0.6 pps. The growth in public investment spending is 
projected to remain below nominal GDP growth, with a 0.4 pps fall in investment in 2023-2026 to just 
3.6%  of  GDP.  Relatively  low  investment  spending  is  not  in  line  with  the  country’s  needs  and  also 
conflicts  with  the  policy  guidance  jointly  agreed  since  2015.  Based  on  these  assumptions,  the  ERP 
expects  a  moderate  deficit  in  2024  (0.6%  of  GDP),  a  largely  balanced  budget  in  2025  and  a  slight 
surplus  (0.3%  of  GDP)  in  2026.  The  general  government  deficits  in  2024  and  2025  are  largely  the 
result of deficits in Republika Srpska, while the Federation’s  budget is expected to be in surplus. The 
Republika Srpska entity indicates that part of the deficits are expected to be financed by concessional 
lending  from  international  financial  institutions  (IFIs).  However,  in  the  past  this  source  of  financing 
often did not materialise. The programme’s fiscal stance (the change in the cyclically adjusted primary 
balance) targets a slight fiscal impulse of 0.2% in 2024  and  slight negative fiscal impulses in 2025 
and 2026, when the economy is projected to be at its potential output level or slightly above.  

The programme projects a slight increase in the general government deficit to 0.6% of GDP 
(+0.2  pps)  for  2024  mainly  as  a  result  of  higher  social  transfers,  while  the  main  revenue 
and spending positions have been kept largely unchanged as a percentage of GDP. However, 
this  is  just  a  programme  estimate  –  when  the  ERP  was  drafted,  only  one  of  the  four  main  budget 

42 

 
Part II 
Country analysis, Bosnia and Herzegovina 

users,  Republika  Srpska’s  central  government,  covering  about  one  quarter    of  the  country’s  total 
spending, had adopted its 2024 budget,. The programme expects total revenues to increase by 5.7%, 
while expenditures are projected to increase by 6.3% mainly due to higher spending on social transfers 
(+8.8%)  and  collective  consumption  (+5.4%).  Capital  spending  is  expected  to  increase  by  7%, 
increasing public investment spending as a share of GDP only slightly from 3.9% in 2023 to 4.0% in 
2024. Significant savings on ‘other expenses’ (-0.2 pps of GDP) are projected, which unfortunately are 
not described in further detail. Overall, this benign fiscal scenario appears optimistic in view of recently 
adopted permanent expenditure measures. 

Table II.2.3:

Bosnia and Herzegovina - composition of the budgetary adjustment  (% of GDP)

Revenues
    - Taxes and social security contributions
    - Other (residual)
Expenditure
    - Primary expenditure
       of which:
       Gross fixed capital formation
       Consumption
       Transfers & subsidies
       Other (residual)
    - Interest payments
Budget balance
    - Cyclically adjusted
Primary balance
    - Cyclically adjusted
Gross debt level

2022

2023

2024

2025

2026

39.8
35.9
3.9
38.7
38.1

3.5
16.5
16.0
2.1
0.6
1.0
0.7
1.6
1.3
28.3

41.9
37.7
4.2
42.2
41.3

3.9
17.7
18.0
1.6
0.9
-0.4
-0.4
0.6
0.6
26.7

41.9
38.0
3.9
42.5
41.5

4.0
17.7
18.4
1.4
1.0
-0.6
-0.6
0.4
0.4
25.6

41.3
37.7
3.6
41.4
40.4

3.6
17.4
18.2
1.3
1.0
-0.1
-0.1
0.9
0.9
24.6

40.9
37.4
3.5
40.7
39.7

3.6
17.1
17.9
1.1
1.0
0.3
0.2
1.2
1.1
23.0

Change:
2023-26
-1.0
-0.2
-0.7
-1.6
-1.6

-0.3
-0.6
-0.2
-0.6
0.0
0.6
0.5
0.7
0.6
-3.6

Sources: Economic Reform Programme (ERP) 2024, Commission calculations.

The  relatively  low  debt  level  suggests  that  there  is  fiscal  space  to  support  stronger 
investment and growth. The  programme expects a continuous and stable decline in the debt ratio 
for  2024-2026,  from  26.7%  of  GDP  in  2023  to  23%  in  2026.  The  main  debt-reducing  factors  are 
primary surpluses with a 2.5 pps cumulative debt-reducing impact in 2024-2026. Real GDP growth and 
inflation  lead  to  a  further  debt  reduction  of  2.2  pps  and  1.7  pps  respectively.  Interest  costs  are 
estimated  to  amount  to  1%  of  GDP  per  year,  increasing  the  debt  ratio  by  3  pps  over  the  3-year 
programme  period.  Due  to  tightening  financial  conditions,  the  implicit  interest  rate  registered  a 
significant  increase  from  2.1%  in  2022  to  3.5%  in  2023.  The  ERP  calculations  imply  a  moderate 
further increase in the implicit interest rate to 4% in 2024 and to 4.1% in 2025 and 2026. 

Overall,  the  country’s  debt  level  is  relatively  low  and  benefits  from  low  financing  costs 
thanks to a high share of IFI funding, with the World Bank, the European Investment Bank and the 
European Bank for Reconstruction and Development accounting for 27.2%, 23.7% and 11.7% of total 
external public debt respectively in 2023. IMF debt sustainability analyses and stress tests point to an 
overall  sustainable  public  debt  situation,  with  only  a  moderate  risk  in  the  event  of  a  banking  sector 
crisis.   

43 

 
 
   
 
 
 
European Commission 
Institutional Paper 

BOX II.2.2: DEBT DYNAMICS 

Bosnia and Herzegovina
Composition of changes in the debt ratio (% of GDP)

Gross debt ratio [1]
Change in the ratio
Contributions [2]:

   1. Primary balance
   2. 'Snowball effect'
       Of which:
       Interest expenditure
       Growth effect
       Inflation effect

   3. Stock-flow adjustment

[1]  End of period.

2022
28.3
-3.7

2023
26.7
-1.7

2024
25.6
-1.0

2025
24.6
-1.0

2026
23.0
-1.6

-1.6
-3.1

0.6
-1.1
-2.7
1.1

-0.6
-0.8

0.9
-0.5
-1.2
-0.3

-0.4
-0.4

1.0
-0.7
-0.7
-0.2

-0.9
-0.3

1.0
-0.7
-0.6
0.2

-1.2
-0.3

1.0
-0.8
-0.5
-0.1

[2]  The 'snowball effect' captures the impact of interest expenditure on accumulated

      debt, as well as the impact of real GDP growth and inflation on the debt ratio

      (through the denominator).

      The stock-flow adjustment includes differences in cash and accrual accounting, 

      accumulation of financial assets, and valuation and other effects.

Source: Economic Reform Programme (ERP) 2024, Commission calculations.

Risks  to  the  programme’s  fiscal  scenario  appear  to  be  tilted  towards  higher  than  planned 
deficits and a shift of spending towards social transfers. While the country has a track record of 
cautious revenue assumptions, there is a risk that upcoming municipal elections could lead to further 
increases in public consumption and social transfers. In addition, recently adopted permanent (social) 
expenditure measures risk either resulting in significantly higher deficits during the programme period, 
or  requiring  substantial  spending  cuts  in  other  areas.  Furthermore,  economic  growth  could  be  lower 
than expected, resulting in lower than anticipated revenue growth. As in previous years, there is a risk 
that planned investment increases will not materialise due to weak implementation capacities or the 
priorisation of available funds to finance additional social transfers. 

BOX II.2.3: SENSITIVITY ANALYSIS 

The  ERP’s  sensitivity  analysis  refers  the  programme’s  alternative  scenario  and  its  assumption  of 
higher inflation. This leads to largely unchanged GDP nominal growth rates, which should limit the 
impact of lower growth on tax revenues. Unfortunately, the programme does not elaborate on the 
possible  effects  of  lower  growth  and  higher  inflation  on  the  spending  side,  for  example  the 
additional  costs  of  unemployment  benefits  or  a  higher  public  wage  bill  due  to  higher  wage 
increases.  

Overall, the sensitivity analysis appears to be incomplete and is on the optimistic side. Although the 
annex  tables  contain  data  on  contingent  liabilities,  there  is  no  analysis  of  this  topic.  The  level  of 
contingent liabilities is expected to drop from 3.5% of GDP in 2023 to 2.9% in 2024. This appears 
to  be  rather  low.  No  fallback  fiscal  positions  are  mentioned.  There  is  also  no  data  on  long-term 
projections on contingent liabilities and future health and pension expenditures.  

The  quality  of  public  finances  and  budget  planning  remains  low.  There  is  no  countrywide 
coordination  of  lower-level  fiscal  policies.  The  country’s  public  finances  continue  to  be  plagued  by  a 

44 

 
 
 
 
 
Part II 
Country analysis, Bosnia and Herzegovina 

lack of medium-term planning and a strong focus on social transfers. In addition, the fiscal situation of 
publicly owned  companies,  many of  which continue to rely on  state support, is far from transparent. 
The  programme  does  not  present  sufficient  plans  to  improve  the  spending  structure.  As  in  previous 
years, it also lacks a sustained pro-growth focus. This approach is not in line with the policy guidance 
jointly adopted in the last 7  years,  which called for  higher investment spending and a more  growth-
oriented fiscal policy.  

The  country’s  fiscal  framework  continues  to  suffer  from  weak  coordination  of  a  highly 
fragmented fiscal system, lengthy decision procedures and low-quality fiscal data. There is 
neither a countrywide fiscal rule nor an independent fiscal council in the sense of the EU acquis. There 
is  currently  no  credible  or  effective  ex  ante  medium-term  fiscal  framework  –  in  contrast  to  existing 
legislation, a countrywide fiscal framework is only adopted once the main fiscal entities have adopted 
their  own  budgets.  Budget  planning  is  often  based  on  outdated  information  and  tends  to 
underestimate revenue performance, leading to supplementary budgets adopted in the second half of 
the  year  to  adjust  spending  on  updated  revenue  estimates.  Due  to  frequent  delays  in  the  budget 
adoption process, spending in the first few months of the year is often based on the previous year’s 
spending, which poses substantial problems during times of high inflation. The availability, quality and 
timeliness of fiscal data is rather poor, the result of a highly fragmented fiscal set-up and regulations, 
weak  compliance  with  existing  standards  and  insufficent  cooperation  among  the  numerous 
stakeholders.  There  is  a  significant  degree  of  non-alignment  with  EU  public  sector  accounting 
standards, particularly for publicly owned enterprises, which seriously impedes the assessment of the 
country’s  actual  fiscal  position.  As  a  result,  both  the  deficit  and  debt  ratio  could  be  significantly 
different  than  reported.  The  central  bank  implements  an  EU-supported  project  to  improve  the 
accounting  of  historic  general  government  data.  The  programme  mentions  intentions  in  one  of  the 
three  regional  governments  to  improve  their  risk  assessment,  although  it  fails  to  provide  sufficient 
details.  

2.4.  MAIN MACRO-RELEVANT STRUCTURAL CHALLENGES 

In  November  2023,  the  Commission  proposed  a  New  Growth  Plan  for  the  Western 
Balkans (34) with the aim of supporting the region’s economic convergence and accelerating 
the accession process. The plan involves a Reform and Growth Facility (EUR 2 billion in grants, EUR 4 
billion  in  loans)  that  is  to  be  disbursed  in  2024-2027  as  investment (35)  and  budget  support  in 
exchange for implementing reforms that are to be set out in reform agendas prepared by the Western 
Balkan partners. The New Growth Plan is therefore an important tool to increase reform incentives to 
boost  growth  and  convergence.  In  this  context,  with  a  view  to  ensuring  an  integrated  surveillance  of 
Bosnia and Herzegovina’s economy, this chapter briefly outlines the main structural challenges facing 
the country. 

A  slow  pace  of  catching-up  with  EU  living  standards  points  to  significant  structural 
weaknesses.  Bosnia  and  Herzegovina  has  a  small  open  economy.  GDP  growth  averaged  3% 
over the last decade, which is low when taking into account the country’s relatively low GDP per capita 
of  about  one  third  of  the  EU-27  average.  The  main  underlying  reason  for  the  country’s  moderate 
growth performance is the slow speed of structural reforms.  

Economic  governance  is  weak  and  highly  politicised,  with  frequent  delays  in  overdue 
structural reforms due to political stalemate and disputes, often related to the fragmented 
distribution  of  competences.  Bosnia  and  Herzegovina’s  short-and  medium-term  track  record  in 
adopting  and  implementing  overdue  structural  economic  reforms  remains  poor,  in  particular  on 

(34)  https://neighbourhood-enlargement.ec.europa.eu/enlargement-policy/new-growth-plan-western-balkans_en. 

(35)  Infrastructure  investments  need  to comply  with  the EU environmental acquis,  national  and  international  nature  protection 
and water management obligations, ensure public participation and consultation, and guarantee high quality environmental 
impact assessment reports that include cumulative impacts on nature and biodiversity. 

45 

 
 
European Commission 
Institutional Paper 

countrywide measures. The  main reasons for this are a lack of political commitment  and insufficient 
cooperation  among  key  stakeholders,  together  with  highly  politicised  decision-making  processes  and 
institutional  fragmentation.  Implementation  of  the  policy  guidance  jointly  adopted  each  year  at  the 
Economic and Financial Dialogue with the EU remains limited and lags behind its peers. 

Political  leaders  and  judicial  institutions  are  failing  to  tackle  widespread  corruption. 
Transparency  International  ranks  Bosnia  and  Herzegovina  108th  out  of  180  countries  in  its  2023 
Corruption  Perception  Index,  making  it  the  worst  performer  in  the  Western  Balkans.  Just  14%  of 
businesses surveyed in Bosnia and Herzegovina say that the fight against corruption there is effective 
– a lower proportion than any other country in the region – and a higher proportion of businesses than 
in  any  other  Western  Balkans  country  had  to  make  irregular  payments.  Important  measures  in  this 
respect  would  be  to  develop  comprehensive  anti-corruption  strategies  and  action  plans  for  the  state 
level, the two entities and the Brcko district, to amend (at the state-level and the RS entity) or adopt (at 
the level of the Federation entity) whistleblower protection laws in line with international standards, to 
ensure the  registration and  disclosure of the beneficial ownership of legal entities and to  strengthen 
the capacity to effectively investigate, prosecute and adjudicate high-level corruption cases.  

A difficult business environment and weaknesses in the country’s single economic space are 
key  factors  driving  poor  labour  market  outcomes  and  holding  back  improvements  in 
competitiveness. Businesses that wish to operate across the entire economy still face technical and 
administrative obstacles and frequently need to obtain the same licences or permits in each entity or 
local  government  area  and  pay  a  range  of  different  taxes  and  fees,  hindering  the  operation  of  an 
effective  single  economic  space.  This  increases  the  costs  of  establishing  a  company,  protects 
incumbent  companies  from  competition  and  deters  investors.  Over  half  of  businesses  in  Bosnia  and 
Herzegovina  identify  burdensome  procedures,  paperwork  and  cost  as  a  major  obstacle  to  obtaining 
licences,  a  higher  proportion  than  in  any  other  country  in  the  region  and  well  above  the  regional 
average  of  35%.  Businesses  in  Bosnia  and  Herzegovina  were  also  more  likely  than  in  any  other 
Western Balkans country to cite the lack of a fully digitised process for applications and approvals of 
licences as a major obstacle, with 76% of businesses indicating it to be at least a ‘moderate’ obstacle, 
compared with a regional average of 49% (Balkan Business Barometer 2022). Public sector spending is 
not coordinated on a country level and is routinely driven by short-term considerations, often focusing 
on  upcoming  elections.  Overall,  the  public  sector,  in  particular  many  of  the  still  substantial  public 
enterprises, are oversized and inefficient and pose substantial fiscal risks for the already constrained 
public finances.  

The overall quality of education remains inadequate despite sizeable spending. According to 
data from  2021, public spending on education accounted for some  4% of  GDP. When adding  private 
spending  and  support  by  foreign  donors,  the  overall  amount  is  nearly  5%  of  GDP.  However,  the 
education system fails to provide Bosnia and Herzegovina’s labour force with the skills and knowledge 
necessary for smooth integration into the labour market. Inadequate education is an important factor 
behind the particularly high youth unemployment rate (30.1% in 2023), more than twice the country’s 
overall  unemployment  rate.  Insufficient  coordination  among  the  numerous  stakeholders  results  in  a 
lack  of  common  standards  for  various  levels  of  education  and  differences  in  the  quality  of  teacher 
training  and  performance  evaluation.  Insufficient  coordination  is  a  problem  that  exists  not  only 
between  the  entities  but  also  within  the  Federation  entity  among  the  various  cantons.  Teaching 
curricula continue to be outdated and are still not sufficiently aligned with the country’s needs. There 
has  been  little  change  in  levels  of  educational  attainment  in  recent  years.  There  is  a  large  share  of 
low-skilled people in the  population. Upskilling  strategies  to increase the skill levels of the  workforce 
are not sufficiently developed and also lack sufficient providers. This is to some extent a supply issue, 
but  also  a  structural  problem,  reflecting  a  weak  training  system  and  a  lack  of  coordination  with  the 
private  sector  and  public  employment  services.  Participation  in  early  childhood  education  and  care  is 
significantly lower than in the EU and elsewhere in the region. Furthermore, access to Early Childhood 
Development (ECD) centers is insufficient. The illiteracy rate continues to be around 3%, largely as a 
result  of  a  relatively  high  illiteracy  rate  among  women.  Bosnia  and  Herzegovina's  irregular  and 
inconsistent  participation  in  international  assessments,  such  as  the  Programme  for  International 
Student  Assessment  (PISA)  or  the  Trends  in  International  Mathematics  and  Science  Study  (TIMSS) 
prevents the country’s from better understanding educational trends and challenges.  

46 

Part II 
Country analysis, Bosnia and Herzegovina 

Bosnia and Herzegovina is lagging behind in the digital transition. Businesses in the country 
are  the  least  satisfied  of  any  in  the  Western  Balkans  with  the  digitalisation  of  public 
services.  Only  around  60%  of  small  businesses  have  a  web  page  and  only  18%  are  active  in  e-
commerce. In line with the Digital Agenda for the Western Balkans and the Economic and Investment 
Plan,  improvements  to  the  administrative  environment  for  firms  would  include  the  digital 
transformation  of  government  services  for  businesses,  including  e-signature,  e-registration  of 
businesses  and  e-construction  permits.  Economy-wide  implementation  of  service  digitalisation  is  still 
hampered  by  the  lack  of  political  ownership  and  coordination  between  the  different  levels  of 
government, which also leads to the allocation of insufficient budgetary resources for implementation. 
The  lack  of  interoperable  information  systems  across  entities  and  different  levels  of  government  in 
Bosnia and Herzegovina is a major obstacle to developing economy-wide digital government services. 
Countrywide  harmonisation  of  e-signature  and  the  related  coordination,  cooperation  and  data 
exchange between different administrations is still needed. The country has yet to adopt a new law on 
electronic identification and trust services for electronic transactions with a single supervisory body for 
the  whole  country,  in  line  with  the  EU  acquis.  This  would  accelerate  the  digital  transformation  and 
allow for easier integration into regional and international markets.  

Moving  away  from  coal-based  electricity  and  improving  energy  efficiency  requires 
legislation and investments. Bosnia and Herzegovina has one of the most energy-intensive output 
generation processes in the  Western Balkans and remains heavily reliant on lignite coal. The level of 
emissions  from  coal-fired  power  plants  is  therefore  a  major  concern.  A  reliable  and  secure  energy 
supply  is  still  impeded  by  the  lack  of  a  single  regulatory  framework  to  attract  investment  in  a  low-
carbon energy  sector.  Adopting laws on renewable energy and energy efficiency should be a priority, 
together with state-level legislation on electricity and natural gas with which the entities must comply. 
Bosnia  and  Herzegovina  should  also  design  and  implement  a  comprehensive  building  renovation 
strategy to improve energy efficiency. Furthermore, there is a need to prepare for the planned phased 
implementation of the EU Carbon Border Adjustment Mechanism (CBAM) entering into force in 2026. 
Lack  of  progress  in  these  areas  contributes  to  the  poor  business  environment  and  will  prolong  the 
move to decarbonisation, the transition to renewables and improved energy efficiency that the current 
energy crisis has made even more urgent. 

47 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
European Commission 
Institutional Paper 

2.5.  THE POLICY GUIDANCE 

JOINT CONCLUSIONS OF THE ECONOMIC AND FINANCIAL DIALOGUE BETWEEN THE EU AND 
THE WESTERN BALKANS PARTNERS, TÜRKIYE, GEORGIA, REPUBLIC OF MOLDOVA AND 
UKRAINE 

The Economic and Financial Dialogue between the EU and the Western Balkans Partners, Türkiye, 
Georgia, Republic of Moldova and Ukraine 

Brussels, 14 May 2024 

… 

In light of this assessment, Participants hereby invite Bosnia and Herzegovina to: 

1. 

2. 

3. 

Adopt  the  Global  Fiscal  Framework  in  time  so  that  it  provides  effective  guidance  for  the 
budget preparations of all budgetary entities (i.e., the BiH Institutions, the Federation entity, 
the  RS  entity  and  the  Brcko  district)  and  ensure  the  timely  adoption  of  the  budgets  of  all 
entities.  Increase  the  share  of  government  capital  spending  in  GDP  by  adopting  measures 
improving  public  investment  management  and  allowing  for  an  accelerated  implementation 
of  those  investment  projects  that  have  been  subject  to  a  clear  positive  cost-benefit 
assessment.  In  order  to  strengthen  the  efficiency  of  tax  collection,  improve  the  effective 
exchange  of  taxpayer  information  between  the  country’s  tax  authorities,  and  in  particular, 
clarify the constitutional competence for establishing a central (i.e.  country-wide) registry of 
bank accounts of private individuals, in line with the EU acquis. 

Include  in  the  forthcoming  ERP  2025-2027  (i)  a  first  assessment  of  fiscal  risks  and 
contingent liabilities related to publicly owned enterprises, and (ii) concrete policy measures 
to manage such risks and contain the emergence of new contingent liabilities. With a view to 
improving the quality of data aggregation and reporting, strengthen the analytical capacities 
of all institutions responsible for fiscal accounting and planning, and improve the procedures 
for  preparing  the  ERP  in  order  to  ensure  a  timely  submission  and  compliance  with  the 
requirements. Continue to strengthen the country’s capacities in the areas of macroeconomic 
statistics,  regional  accounts,  labour  force  survey  and  government  finance  statistics,  in 
particular by agreeing on the national account sectorisation, and increase efforts to improve 
the coverage and timeliness of all statistics.  

Continue  to  thoroughly  assess  price  developments,  supported  by  the  statistical  offices 
through  improving  price  statistics,  including  a  timely  publication  of  CPI  weights  and 
developing  and  publishing  core  inflation  series.  Continue  to  safeguard  the  integrity  of  the 
currency board arrangement and the independence of the central bank. Enhance risk-based 
supervision in line with best international and European practices, phase out the temporary 
measures  potentially  affecting  market  mechanisms  in  setting  interest  rates,  initiate  the 
setting  up  of  a  single  resolution  fund  and  improving  data  collection  to  enable  a 
comprehensive assessment of financial sector risks. 

48 

 
 
 
 
 
 
Part II 
Country analysis, Bosnia and Herzegovina 

ANNEX  1:  OVERVIEW  OF  THE  IMPLEMENTATION  OF  THE  POLICY  GUIDANCE  ADOPTED  AT  THE 

ECONOMIC AND FINANCIAL DIALOGUE IN 2023  

Every year since 2015, the Economic and Financial Dialogue between the EU and the Western Balkans 
and  Turkey  has  adopted  targeted  policy  guidance  for  all  partners  in  the  region.  The  guidance 
represents  the  participants’  shared  view  on  the  policy  measures  that  should  be  implemented  to 
address macro-fiscal vulnerabilities and structural obstacles to growth. The underlying rationale of the 
guidance  is  similar  to  that  of  the  country-specific  recommendations  usually  adopted  under  the 
European  Semester  for  EU  Member  States.  Implementation  of  the  guidance  is  evaluated  by  the 
Commission in the following year’s ERP assessments.  

The following table presents the Commission’s assessment of the implementation of the 2023 policy 
guidance  jointly  adopted  by  the  EU  and  the  Western  Balkans  and  Turkey  at  their  Economic  and 
Financial Dialogue at ministerial level on 16 May 2023.  

Overall: Partial implementation (37.5%) (36)  

2023 policy guidance (PG) 

Summary assessment 

PG 1:  
Use the available fiscal space in the 2023 
budget  for  targeted  support  to  vulnerable 
households and firms if needed to cushion 
the impact of high energy prices.  

There was limited implementation of PG 1:  

1)  Partial  implementation:  Funds  from  the  EU 
Energy Support Package, amounting to about 0.3% of 
GDP, have been distributed by all governmental levels 
for  households  and  energy  efficiency  measures  (for 
households  and  micro-,  small  and  medium-sized 
enterprises).  However,  a  lot  of  the  available  fiscal 
space  was  actually  used  for  permanent  increases  of 
wages  and  pensions  while  the  targeting  of  social 
support  measures  has  been 
limited. 
Furthermore,  instead  of  using  this  opportunity  for 
establishing  a  more  permanent  system  of  improved 
social  targeting,  the  chosen  approach  was  more  of  a 
one-time nature.    

rather 

Increase  the  share  of  government  capital 
spending  in  GDP  by  measures  improving 
public  investment  management  and  an 
accelerated 
those 
investment projects that have been subject 
cost-benefit 
a 
to 
assessment.  

implementation  of 

positive 

clear 

information 

In  order  to  improve  the  efficiency  of  tax 
collection, ensure an effective exchange of 
taxpayer 
the 
country’s  tax  authorities,  and  in  particular, 
clarify  the  constitutional  competence  for 
establishing  a  central  (i.e.  country-wide) 
registry  of  bank  accounts  of  private 

amongst 

2)  Limited  implementation:  According  to  the  ERP, 
capital  spending  have  increased  in  2023,  from  3.5% 
to  3.9%  of  GDP,  but  this  is  not  yet  confirmed  by 
budget  execution  data.  According  to  adopted  entity 
budgets,  public  investment  spending  is  set  to  decline 
investment 
in  2024.  Steps 
management have remained limited. 

improve  public 

to 

3) Limited implementation: No progress was made 
on  improving  the  efficiency  of  tax  collection  or 
improving  data  exchange  between  the  four  tax 
administrations in Bosnia and Herzegovina in 2023. As 
in the previous year, there were also no steps taken to 
clarify  the  constitutional  competence  for  establishing 
a  central  (i.e.  countrywide)  registry  of  bank  accounts 

(36)  For  a  detailed  description  of  the  methodology  used  to  assess  policy  guidance  implementation,  see  Section  1.3  of  the 
Commission’s  Overview  and  Country  Assessments  of  the  2017  Economic  Reform  Programmes  available  at 
https://ec.europa.eu/info/publications/economy-finance/2017-economic-reform-programmes-commissions-overview-and-
country-assessments_en. 

49 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
European Commission 
Institutional Paper 

individuals, in line with the EU acquis 

of private individuals 

PG 2:  

There was limited implementation of PG 2: 

Prepare  a  report  on  contingent  liabilities, 
and  a  strategy  on  how  to  contain  the 
emergence  of  new  contingent  liabilities,  in 
particular  in  publicly  owned  enterprises, 
and manage risks related to existing ones. 

for 

Treasury,  of 

Finance  and 

Strengthen  the  analytical  capacities  of 
institutions 
fiscal 
responsible 
accounting, in particular of the BiH Ministry 
of 
the 
Federation’s  Ministry  of  Finance  and  the 
Ministry  of  Finance  of  RS  with  a  view  to 
improving  the  quality  of  fiscal  accounting 
including 
the 
preparation  of  the  ERP  and  improve  the 
procedures  for  preparing  the  ERP  in  order 
timely  submission  and 
to  ensure  a 
compliance with the requirements.  

required 

those 

for 

1) Partial implementation: In the RS, the first report 
on  fiscal  risks  of  public  companies  for  2022  was 
completed  in  the  third  quarter  of  2023.  The  report 
addresses  the  fiscal  risks  of  20  public  enterprises  of 
special  interest.T  All  hospitals  in  FBiH  are  now 
regularly  reporting  on  arrears  to  the  FBiH  MoHs,  and 
the  joint  commission  with  representatives  from  MoF, 
MoH and PMs office is overseeing the implementation 
of 
consolidation  and 
financial 
restructuring in health sector in FBiH. In RS around 15 
primary  health  centers  were 
into  the 
their  arrears  cleared.  The  RS 
Treasury,  and 
Government has invited the remaining primary health 
centers  to  be  included  into  the  Treasury  system.  This 
means  that  all  arrears  in  primary  health  centers  will 
be  cleared  by  end  2025,  and  hence  more  financial 
discipline introduced.  

the  Law  on 

included 

Limited 

2) 
Comprehensive 
implementation: 
technical  assistance,  financed  by  the  EU,  has  been 
provided  to  all  stakeholders.  However,  the  practical 
impact on the quality of fiscal accounting and the ERP 
limited,  and  the  ERP  was  again 
has  remained 
submitted with a signficant delay. The capacity of the 
fiscal 
BiH  MoFT  dealing  with 
accounting has been slightly increased.  

theERP-related 

to  strengthen 

Continue 
the  country’s 
capacities  in  the  areas  of  macroeconomic 
statistics,  regional  accounts,  labour  force 
survey  and  government  finance  statistics, 
and 
improve  the 
coverage and timeliness of all statistics. 

increase  efforts 

to 

the  classification  of 

3)  Limited  implementation:  The  country  still  needs 
to  prepare  and  agree  on  a  master  plan  for  national 
accounts  and  on 
regions 
equivalent  to  NUTS  classification.  The  labour  force 
survey  is  produced  regularly.  Progress  was  made  in 
the  government  finance  statistics,  however  efforts 
should  be  continued  to  expand  data  availability  and 
increase  quality.  Central  Bank  staff  are  working 
twinning  project,  and 
closely  with  a  statistics 
important  improvements  are  being  made.  Substantial 
efforts  are  still  needed  to  improve  coverage  and 
timeliness of all statistical data, and priority should be 
given  in  the  areas  of  national  accounts,  excessive 
deficit procedure and government finance statistics.  

50 

 
 
 
 
 
 
 
 
 
 
Part II 
Country analysis, Bosnia and Herzegovina 

PG 3: 

There was partial implementation of PG 3: 

Continue  to  carefully  assess  and  analyse 
price  developments,  supported  by  the 
statistical  offices  through  improving  price 
statistics,  including  a  timely  publication  of 
CPI weights and developing and publishing 
core inflation series. 

1)  Partial  implementation:  While  the  central  bank 
kept  monitoring  carefully  the  evolution  of  price 
dynamics,  the  limitations  due  to  data  availability 
remain.  The  statistical  office  does  not  publish  a  core 
inflation  series  and  the  weights  of  the  CPI  are 
outdated and published with unusually long lags. This 
complicates  and  constrains  a  proper  assessment  of 
price developments. 

frameworks  across 

Strengthen  further  the  reporting  and  risk 
management 
the 
banking  system  to  ensure  an  accurate 
reporting  of  asset  quality,  further  reduce 
institutional  and  legal  obstacles  to  NPL 
resolution,  reduce  data  gaps  in  particular 
as  regards  the  real  estate  sector  and 
initiate setting up a single resolution fund. 

Safeguard  the  integrity  of  the  currency 
board  arrangement  and  the  independence 
of  the  central  bank,  in  particular  appoint 
Governing Board  members without further 
delay. 

With  a  view  to  improving  the  business 
environment  and  preparing  for  integration 
into  the  single  market,  engage  with  work 
related  to  the  second  cluster,  further 
simplify  business  registration, 
licensing 
and  permitting  procedures  and  harmonise 
them  across  the  country  with  a  view  to 
digitalising them in the near future. 

2)  Limited  implementation:  The  reporting  and  risk 
management  frameworks  were  gradually  enhanced, 
inter alia by improving the legislation governing credit 
risk management and classification of exposures. The 
bank resolution framework is still not fully operational 
and  needs  to  be  strengthened  further.  While  the  two 
banking  agencies  have  continued  to  co-operate 
smoothly  following  harmonised  approaches,  there  is 
still a lack of a single resolution fund. In addition, the 
remaining  obstacles  of  an  effective  non-performing 
loans  (NPL)  resolution  framework  have  not  been 
addressed, 
out-of-court 
restructurings and amending the tax treatment of NPL 
sales to specialised companies. 

facilitating 

such 

as 

3)  Full  implementation:  The  central  bank  continued 
to  ensure  full  convertibility  of  the  domestic  currency 
by  backing  monetary  liabilities  with  net  foreign 
exchange  reserves.  In  addition,  after  two  and  a  half 
years  of  uncertainty,  a  new  governing  board  of  the 
central  bank  has  been 
the 
appointment of a new governor. 

including 

formed, 

There was limited implementation of PG 4: 

1) Limited implementation:  
Engagement  with  work  related  to  the  second  cluster, 
i.e., progress with aligning with internal market acquis, 
has been limited. Electronic registration of businesses 
is  functioning  in  the  Republika  Srpska  and  in  Brčko 
District, whilst in the Federation digitalisation of court 
documents  has  been  finalised  and  pilot  projects  in 
Sarajevo,  Mostar and Travnik registration  courts have 
been  established,  although  electronic  registration  is 
still not working. As a result, the registers are not fully 
functional  or  have  not  been  connected,  and  a  way  of 
coordination has not been established. Efforts are still 
needed  to  harmonise  company  law  at  country  level. 
Administrative  procedures  have  yet  to  be  simplified, 
and some initiatives are taken in both entities on the 
issuance  of  e-construction  permits  (pilot  project  in 
Banja  Luka  and  Gradiska  in  the  RS  entity  and 
facilitation of inspections in Ze-Do Canon).  

51 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
European Commission 
Institutional Paper 

Adopt  the  law  on  electronic  identity  and 
trust  services  for  electronic  transactions 
with a  single supervisory body in line with 
the EU acquis and ensure that the Indirect 
Taxation  Authority,  whose  ability  to  fulfil 
role  must  be 
its  vital  country-wide 
the 
maintained,  begins 
authorised 
(AEO) 
concept and starts preparations for joining 
the Common Transit Convention.  

implementing 
operator 

economic 

There  were 

implementation: 

2)  No 
some 
discussions,  but  these  were  interrupted  and  then 
restarted. But there are no concrete drafts of the law, 
and a working group has not been formed to draft the 
law, 

resources,  while 

3)  Partial  implementation.  Oversight  units  in  both 
entities  have  been  set  up,  in  the  General  Secretariat 
and  the  Ministry  of  Finance.  In  the  RS  entity,  units 
the 
have  allocated  human 
Federation  entity  the  recruitment  process  is  still 
ongoing. No countrywide register exists. The register in 
the Federation entity is accurate and publicly available 
and  incudes  major  key  performance  indicators  and 
organisational  information.  In  the  RS  entity,  the 
registry  is  outdated  (from  2015)  with  very  limited 
information.  There  is  some  progress  on  contingent 
liabilities, with a first report on fiscal risks in the RS. 

in 

There was partial implementation of PG 5: 

1)  Partial  implementation:  The  first  draft  of  the 
(NECP)  was 
national  energy  and  climate  plan 
submitted  to  the  Energy  Community  secretariat 
(ENCS)  in  mid-2023.  The  country  is  currently  in  the 
process of addressing the comments on the plan. The 
aim  is  of  adopting  it  by  30  June  2024  (which  is  the 
legal deadline for the adoption). 

2)  Limited  implementation:  A  working  group  for 
drafting  a  new  law  on  electricity  and  gas  was 
established  in  October  2023.  The  authorities  are 
currently preparing a first draft of the law.  

3)  Partial 
implementation:  All  authorities  are 
currently finalising the building renovation strategies.  

together 

enterprises 

the  governance  of  public 
Strengthen 
enterprises  by  updating  the  registers  in 
both  entities  to  ensure  they  include  all 
with 
public 
statements, 
comprehensive 
audits  and  organisational 
information; 
allocate adequate human resources to the 
central oversight units in both entities; and 
the  contingent 
prepare  a 
liabilities  related  to  public  enterprises  and 
a strategy to manage these fiscal risks. 

report  on 

financial 

the 

and 

Balkans 

In  line  with  the  Green  Agenda  for  the 
Energy 
Western 
Community  Treaty,  adopt  and  begin 
implementing  a  single  integrated  energy 
and  climate  plan  for  lowering  carbon 
emissions  through  increases  in  renewable 
energy and energy efficiency. 

Adopt  State  level  legislation  for  electricity 
and gas and ensure the full harmonisation 
of  laws  at  entity  level  in  these  areas  to 
prevent  further  delays  in  the  opening  and 
operating  of  the  energy  market  and 
establishment  of  a  day-ahead  electricity 
market. 

Design  and  implement  a  comprehensive 
building renovation strategy at all levels of 
authority to improve energy efficiency and 
including 
reduction  measures, 
demand 
required 
incentives  for 
legislation  and 
private sector and households 

52 

 
 
 
 
 
 
 
 
 
 
 
 
 
Strengthen  the  coordination  mechanisms 
within  the  country  as  regards  employment 
policies  and  establish  an  inter-ministerial 
task force involving relevant ministries, their 
agencies  and  stakeholders  to  develop  and 
finalise  a  Youth  Guarantee  Implementation 
Plan, 
its 
implementation. 

initiate 

adopt 

and 

it, 

Develop  a  system  to  monitor  and  forecast 
the  skills  needs  in  the  labour  market  to 
facilitate  the  alignment  of  the  education 
and  training  systems  and  of  reskilling  and 
upskilling  provision  to  labour  market  needs. 

Improve access to early childhood education 
and  care  services  towards  children/families 
with  vulnerable  backgrounds  and  in  rural 
areas. 

Part II 
Country analysis, Bosnia and Herzegovina 

There was limited implementation of PG 6: 

to  develop 

the  Youth  Guarantee 

1)  Partial  implementation:  The  institutions  have 
coordinated their joint work, depending on the political 
outlet, and have established an  inter-ministerial task 
force 
(YG) 
Implementation  Plan.  The  drafting  process  is  still 
ongoing,  as  there  have  been  serious  delays  in  the 
Federation  entity  due  to  late  nomination  of  their  YG 
coordinator  and  political  stalemate  caused  by 
elections.  The  Republika  Srpska  entity  and  Brčko 
District  have  advanced  significantly.  They  have 
already prepared their draft  action plans (to form an 
integral  part  of  the  overall  YG  Implementation  Plan 
for Bosnia and Herzegovina) and are now waiting for 
the Federation entity to catch up with them and work 
on the comprehensive plan. 

2) No implementation: No progress 

programme 

3) Partial implementation: Bosnia and Herzegovina 
has  announced  measures  to  address  the  issue  of 
deinstitutionalisation  through  the  draft  roadmap.  It 
aims  to  end  institutional  care,  improve  the  system 
through a set of measures to plan the transformation, 
downsizing  and/or  closure  of  residential  institutions, 
while  establishing  diverse  other  childcare  services 
regulated  by  rights-based  and  outcome-oriented 
standards.  These  measures  are  promising,  but  have 
not been implemented yet. Implementation should be 
monitored.  The  planned  measures  should  be 
addressed  in  the  coming  period  also  under  the  EU-
independent 
to 
funded 
living/community  living  of  people  with  disabilities 
and/or  children  without  parental  care.  The  activities 
pertaining  to  the  development  of  tools  for  early 
detection,  intervention  and  support  for  children  and 
adults  at  risk  of  social  exclusion  aim  to  ensure  the 
inclusion  of  children  with  disabilities.  It  ensures  their 
optimal  development  thanks  to  the  reform  of  the 
assessment, referral and monitoring system. The child 
and  the  entire  family  are  also  offered  timely  and 
coordinated support from local and other institutions. 
The implementation of this activity will ensure that all 
children  have  equal  development  conditions  and 
system  support.  The  measure  also  encompasses  the 
ongoing 
training  of  professional  bodies  and 
coordinators from the social protection, education and 

support 

53 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
European Commission 
Institutional Paper 

health  sectors,  as  well  as  the  establishment  of  an 
electronic  database  on  children  with  disabilities.  This 
database  will  serve,  among  other  things,  to  gather 
data  on  the  needs  for  the  establishment  of  social 
services in real time. 

54 

 
Part II 
Country analysis, Bosnia and Herzegovina 

ANNEX 2:   COMPLIANCE WITH PROGRAMME REQUIREMENTS  

The Council of Ministers adopted and submitted the 2024-2026 ERP on 28 February 2024, i.e. 7 weeks 
after  the  deadline.  The  quality  of  the  programme  and  the  delay  in  submission  point  to  continuing 
significant weaknesses in administrative coordination and policy formulation. The  document still falls 
short  of  being  comprehensive  and  internally  consistent  and  lacks  an  overall  strategic  vision.  The 
readability of the document could be further improved. Bosnia and Herzegovina needs to strengthen its 
coordination capacity on economic policy, build consistent political support for the ERP and increase its 
visibility and coherence.  

The  macroeconomic  framework  is  based  on  rather  old  data.  The  fiscal  framework  contains  neither 
details on adopted budgets nor a politically approved medium-term fiscal scenario. Instead, the fiscal 
outlook is based on historic trends and assumptions. 

Inter-ministerial coordination  

The  preparation  of  the  ERP  was  centrally  coordinated  by  the  Directorate  for  Economic  Planning.  The 
Council  of  Ministers  adopted  the  activity  plan  -  which  empowered  the  Directorate  to  coordinate  the 
drafting process - only on 9 November 2023.  

Stakeholder consultation  

No countrywide stakeholder consultation took place.  

Macroeconomic framework  

The  description  of  recent  macroeconomic  performance  suffers  from  a  lack  of  up-to-date  data.  The 
macroeconomic framework is still not fully consistent with other parts of the programme, particularly 
the fiscal framework. The reasoning behind the chosen policy approach and the links to the overarching 
policy  strategy  are  not  sufficiently  explained.  This  is  partly  a  reflection  of  the  country’s  insufficient 
administrative capacity and lack of cooperation among the various stakeholders. 

Fiscal framework  

The programme continues to lack a consistent, complete and sufficiently detailed presentation of the 
country’s  fiscal  policy  for  2024  and  its  budgetary  plans  for  2025-2026.  This  seriously  impedes  the 
analysis  of  countrywide  fiscal  developments.  Public  investment  projections  in  the  fiscal  part  are  still 
not consistent with the macroeconomic framework. The requested links to structural reforms are still 
largely  missing.  The  rationale  for  the  policy  approach  taken  and  underlying  measures  are  not 
sufficiently  developed.  The  programme  provides  hardly  any  quantitative  analysis  of  budgetary 
measures. The compilation and presentation of fiscal data is not yet in line with the European System 
of Accounts (ESA 2010). The submission of the fiscal notification is still in an experimental phase.  

55 

 
3.  GEORGIA 

3.1.  EXECUTIVE SUMMARY 

Following  robust  GDP  growth  of  7.5%  in  2023,  the  Economic  Reform  Programme  (ERP) 
expects  growth  to  remain  solid  at  around  5%  over  2024-2026,  close  to  potential  output 
growth. Investment and consumption (both private and public) were the main growth drivers in 2023. 
On  the  supply  side,  growth  in  2023  was  driven  by  services  and  construction,  while  manufacturing 
declined reflecting weaker global demand. The exceptionally strong growth performance in 2021-2023 
was partly due to temporary factors related to post-pandemic recovery and the unusually large inflows 
of  skilled  migrants  and  money  transferred  from  Russia  following  Russia’s  full-scale  invasion  against 
Ukraine.  Many  of  these  migrants  work  remotely  for  foreign  companies  and  brought  part  of  their 
savings with them. Their arrival triggered the creation of new businesses, particularly in the IT sector, 
stimulated domestic consumption and wage growth, but also led to currency appreciation and a spike 
in  the  rental  market.  However,  the  number  of  migrants  appears  to  have  peaked  in  2023  and  has 
already started to drop. The risk of their sudden reversal appears limited, considering that a significant 
share of the migrants are expected to stay in Georgia. While wage growth remained strong at the end 
of  2023,  given  the  skills  shortages  in  the  labour  market,  the  inflows  of  funds  have  not  fuelled 
significant macroeconomic imbalances, also thanks to the prudent policy response of the authorities.   

Looking ahead, economic growth is set to be supported by the expected easing of monetary 
policy, low inflation, increasing wages and a continuous inflow of remittances. Consumption 
and investment are expected to remain the main growth drivers in 2024-2026, while the contribution 
of net exports is expected to remain negative. Supported by the projected economic expansion, labour 
market outcomes are set to continue improving, albeit slowly and from a weak initial position. Inflation 
moderated  to  below  1%  in  late  2023,  due  to  the  tightening  of  monetary  policy,  falling  global 
commodity prices and the appreciation of the Georgian currency. Price growth is expected to stabilise 
around  the  central  bank’s  target  of  3%  from  the  second  half  of  2024  onwards  as  the  downward 
pressures  on  prices  ease.  The  current  account  deficit  is  benefiting  from  an  expansion  of  incoming 
tourism and is much lower than before the pandemic. The ERP envisages it stabilising at below 5% of 
GDP  over  the  programme  period,  but  the  external  balance  remains  vulnerable  due  to  a  weak  export 
base, which is highly sensitive to swings in global demand, and the large money transfers from abroad. 
The  economic  scenario  in  the  ERP  seems  plausible  overall  but  is  subject  to  a  high  degree  of 
uncertainty,  linked  specifically  to  the  geopolitical  risks  affecting  the  large  tourism  sector  and  further 
dampening global growth.   

The ERP’s fiscal scenario projects a gradual decrease in the general government deficit and 
public debt-to-GDP ratios, with both projected to stay well below the respective targets set 
by the national fiscal rules. Similar to 2022, the general government deficit ( 37) in 2023 (2.2% of 
GDP) turned out to be significantly lower than the 3% of GDP planned for in the budget. This reflected 
stronger-than-projected  tax  revenue  growth  thanks  to  the  booming  economy  and  one-off  factors 
linked to increases in fees charged by general government entities. Public debt eased slightly to 38.2% 
of GDP at the end of 2023 on the back of high nominal GDP growth and remains well below the 60% 
of GDP national threshold and also below the safety limit of 40% of GDP imposed by the authorities to 
avoid exceeding the above threshold if there are external shocks. The ERP envisages revenues peaking 
in  2024  on  the  back  of  mostly  permanent  tax  measures  with  a  decrease  afterwards  largely  due  to 
other revenues being lower. At the same time, the expenditure ratio is set to rise in 2024 as a result of 
an indexation of wages and social expenditure reflecting past inflation, ongoing reforms of health care 
and social protection, and higher interest cost. A gradual decrease in public expenditure is projected in 

(37)  The general government deficit in 2023 has been updated after the adoption of the ERP and amounted to 2.2% of GDP. The 

deficit is defined in the ERP in the same way as in Georgia’s budget laws.      

56 

 
 
Part II 
Country analysis, Georgia 

the following two years largely due to lower investments, as key infrastructure projects are reaching 
completion.  Investment  is  nonetheless  expected  to  remain  well  above  the  EU  average,  reflecting 
Georgia’s  large  investment  needs,  especially  in  transport  and  energy  infrastructure.  The  general 
government deficit and the public debt ratios are projected to moderate slightly in the medium term, 
allowing  for  a  gradual  build-up  of  buffers  against  the  national  deficit  ceiling  of  3%  of  GDP.  This  is 
prudent given the  heightened  global uncertainty and tight international financing environment, which 
could result in lower external demand and therefore affect Georgia’s economic and fiscal performance. 
The  fiscal  policy  stance  is  expected  to  move  from  a  broadly  neutral  setting  in  2024  to  a  counter-
cyclical stance in 2025, with a small negative fiscal impulse. The authorities continue to improve the 
already  sound  fiscal  governance  framework,  while  reducing  the  very  high  share  of  foreign  currency 
debt. 

The main challenges facing Georgia are the following:  

• 

• 

In  a  medium-term  perspective,  Georgia  faces  the  challenge  of  ensuring  sufficient 
financing for priority outlays such as social protection, education and healthcare, along 
with investments in infrastructure and R&D to underpin productivity growth and reduce 
the significant regional disparities. Given the constitutional restrictions on increasing the main 
taxes, the authorities are pursuing a strategy of broadening the tax base through identifying and 
quantifying  tax  expenditures,  where  in  2024  they  plan  to  publish  an  analysis  of  the  large 
agricultural sector and implementation is expected to start under the 2025 budget. The authorities 
are also preparing a medium-term revenue strategy to identify and address the impact of longer-
term challenges posed by the demographic and climate developments on public finances.  

In the area of public finance management, there is room to make further improvements. 
Efforts to make public investment more efficient hinge crucially on the capacity and expertise in 
the  relevant  line  ministries  in  charge  of  public  investment  projects,  which  remains  limited. 
Therefore,  the  authorities  plan  to  introduce  a  new  electronic  tool  that  would  allow  for  closer 
monitoring of public investments at all stages and help prepare the required analyses. On public 
debt, the main challenges relate to the high share of foreign currency denominated debt and the 
relatively  small  market  for  local  currency  debt.  To  address  these,  the  ERP  presents  steps  to 
continue issuing benchmark bonds and boosting the capacity of primary dealers. These efforts are 
anchored  in  a  broader  strategy  to  develop  the  local  capital  market.  As  regards  state-owned 
enterprises, the authorities adopted the public corporation reform strategy in December 2022. The 
implementation  of  this  strategy  and  the  adoption  of  the  law  on  public  corporations  have  been 
delayed.  However,  the  authorities  are  making  progress  on  improving  the  fiscal  oversight  over 
state-owned  enterprises  included  in  the  general  government  sector  by  gradually  bringing  their 
cash management under the Single Treasury Account. 

•  Georgia’s  competitiveness  is  hampered  as  its  economy  and  exports  are  dominated  by 
low  value  added  sectors,  with  low  productivity  in  agriculture,  high  informality  and 
shortcomings in economic governance. Georgia’s value chains are still dominated by low-value 
sectors  and  the  country’s  export  base  remains  narrow.  Agriculture,  a  key  sector  in  terms  of 
employment, faces  major  competitiveness challenges, such as those related to land  registry and 
land  management,  low  productivity  and  fragmentation.  Long-overdue  reforms  in  irrigation  are 
starting  while  land  management  reform  is  well-advanced.  However,  the  share  of  the  informal 
economy  remains  considerable,  especially  in  the  agricultural  sector.  Addressing  informality 
requires  a  comprehensive,  government-wide  approach  that  encompasses  tax,  labour,  social  and 
financial policies. The governance and institutional environment in Georgia is favourable overall to 
economic  development,  yet  some  challenges  persist,  particularly  as  regards  the  political 
independence  of  institutions  and  the  fight  against  high-level  corruption.  These  points  are  also 
included  in  the  nine  steps  set  out  in  the  Commission  Communication  on  EU  Enlargement  of 
8 November 2023  as  well  as  in  Chapters  23  and  24  of  the  annual  country  report  on 

57 

European Commission 
Institutional Paper 

enlargement (38).  No  strategic  vision  on  fighting  corruption  is  in  place.  Access  to  finance  has 
improved in recent years, and is better than in peer economies, but many SMEs still consider this a 
major  obstacle,  e.g.  in  the  agricultural  sector.  Non-effective  enforcement  of  regulations  on  food 
safety is another reason for Georgia’s weak exports to the EU.  

•  Georgia faces numerous challenges in the area of connectivity linked to energy security, 
as  well  as  market  opening  and  integration,  infrastructure  in  the  maritime,  road  and 
railway  sectors  and  in  the  digital  area.  It  relies  heavily  on  fossil  fuel  imports.  The  rich 
renewable  electricity  production  is  to  be  further  diversified  and  ramped  up.  The  unbundling  and 
opening of the electricity market need to be finalised. While energy intensity has dropped, further 
energy efficiency measures would bring significant gains, especially in buildings. There is not yet a 
national  carbon  pricing  or  emission  trading  scheme.  The  quality  of  road  transport  is  yet  to  be 
improved. Continued investments, in particular to promote the extended trans-European transport 
network, railway links, ports, road infrastructure maintenance, rolling rail stock and intermodal and 
logistic  capacities  as  well  implementation  of  the  railway  strategy  are  needed.  Access  to  digital 
infrastructure  has  improved,  but  some  regions  lag  behind  and  there  is  no  overarching  digital 
strategy.   

•  Georgia  also  faces  challenges  in  the  areas  of  labour  market,  social  protection  and 
healthcare.  The  labour  market  is  characterised  by  high  unemployment  and  low  employment 
rates, especially for women  and young people. The mismatch between  workers’ skills and labour 
market needs is affecting people’s income and employment opportunities, and the country’s ability 
to  boost  productivity.  Vocational  education  and  training  are  provided  in  both  public  and  private 
institutions,  but  there  is  only  a  modest  level  of  enrolment  and  drop-out  rates  are  high.  Poverty 
rates  are  decreasing  but  inequalities  persist  and  social  safety  nets  are  very  limited.  Access  to 
healthcare services is gradually improving, but out-of-pocket expenditures remain high. 

This first ERP submitted  by Georgia since it became an EU candidate country in December 
2023 is overall of high quality. This reflects the Georgian authorities’ strong technical expertise in 
public  finance  management  and  strategic  planning.  The  Commission  welcomes  the  fact  that  Georgia 
chose to also present its structural policy plans in the ERP, which was not compulsory considering this 
was the first submission under very tight deadlines and the life cycle of strategy preparation could not 
be fully taken into account (such as an inclusive consultation process or a breakdown of measures per 
year).  The  ERP  very  much  builds  on  the  existing  strategic  government  documents,  such  as  the 
Development  Strategy  of  Georgia  –  Vision  2030,  medium-term  budgetary  planning  as  well  as 
numerous  sectoral  strategies  and  action  plans,  ensuring  the  strong  alignment  and  coherence  of 
Georgian policy planning. 

3.2.  ECONOMIC OUTLOOK AND RISKS 

In  2023,  Georgia’s  GDP  growth  was  robust  reaching  7.5% ( 39),  driven  by  consumption  and 
investment,  although  it  slowed  down  from  the  two-digit  expansion  recorded  in  2021  and 
2022. Investment and consumption (both  private and  government) became main  growth  drivers last 
year. They were stimulated by improved business confidence, rising wages and falling inflation, as well 
as  the  impetus  provided  by  the  spending  of  migrants  from  Russia.  The  contribution  of  net  exports 
turned  negative  in  2023  as,  despite  growing  revenues  from  tourism,  lower  external  demand  (amid 
weak global growth) led to a decrease in domestic exports, while imports increased. On the supply side, 
the value added in services and construction increased significantly, driven by high domestic demand, 
while manufacturing declined. The strong economic activity led to improvements in the labour market 

(38)  The  European  Council  decided  to  grant  the  status  of  candidate  country  to  Georgia  on  15 December 2023,  on  the 

understanding that these steps are taken. 

(39)  The preliminary GDP growth estimate for 2023 published by the statistical office in February 2024 was 7%, subsequently  

revised to 7.5%, while the estimate reported in the ERP was 6.5% (see Table 1).  

58 

 
 
Part II 
Country analysis, Georgia 

although  it  remains  rather  weak.  The  unemployment  rate  decreased  by  0.9  percentage  points  (pps) 
year-on-year  to  16.4%  in  2023.  Labour  market  participation  increased  but  remains  at  a  low  level. 
Following a moderate rise in previous years, the average level of wages increased strongly in 2023, by 
some  15%  in  real  terms  and  faster  than  labour  productivity,  which  grew  by  4.5%.  According  to  the 
central bank, strong wage dynamics were caused by the good financial results of Georgian companies, 
which enabled salary rises that could compensate for rising living costs, especially housing rents in the 
main  cities  partially  driven  by  the  inflow  of  migrants.  In  combination  with  faster-than-expected 
disinflation, high nominal wage dynamics brought real wage growth into double digits last year. 

The  ERP  forecasts  a  still  robust  economic  growth  of  around  5%  on  average  over  2024-
2026. The drivers of growth are expected to change over the forecast period. In 2024, investment is 
expected to bring the strongest contribution to growth, while private consumption is set to be the main 
growth  driver  afterwards  once  base  effects  subside.  Net  exports  are  expected  to  make  a  negative 
contribution to growth. On the production side, the output of industry and construction is expected to 
grow at 7-8% on average, faster than services which were the most dynamic part of the economy in 
recent years. In 2023, the output gap estimated in the ERP was positive at 1.4% of GDP, implying that 
the actual output exceeded the potential one last year. It is expected to gradually close in the coming 
years.  Supported  by  the  projected  steady  economic  expansion,  the  number  of  people  employed  is 
expected  to  grow  each  year  by  1.2%  on  average.  The  unemployment  rate  is  projected  to  continue 
falling, by 0.3 pps annually, to an average 15.7% in 2026. Despite these improvements, labour market 
outcomes are expected to remain challenging, given the existing skills mismatches, regional disparities 
and a large informal sector. Wage dynamics are expected to slow down from the two-digit real growth 
in 2023 to 5.5% on average in real terms in 2024-2026, which would be slightly higher than average 
productivity growth in that period (4%).  

The macroeconomic scenario presented in the ERP appears plausible, although it is subject 
to  significant  uncertainty.  However,  the  composition  of  growth  may  turn  out  differently.  In 
particular, the expected substantial slowdown in the growth of private consumption in 2024, followed 
by  its  acceleration  in  the  following  years,  seems  rather  unlikely  to  materialise  given  the  envisaged 
continuous,  although  slower,  wage  growth  and  credit  dynamics.  Likewise,  the  expected  sharp 
deceleration  in  private  investment  from  2025  does  not  appear  fully  plausible  in  light  of  high 
investment needs and expected gradual reduction of interest rates. The ERP rightly underlines that the 
economic  outlook  is  subject  to  a  high  degree  of  uncertainty  and  identifies  several  main  risk  factors. 
Most of them  relate to the external environment, including the impact of Russia’s war of aggression 
against Ukraine and Georgia’s economic links with Russia which, in contrast to most countries in the EU 
and  its  neighbourhood,  have  had  a  positive  impact  on  the  economy  thus  far.  Among  these  risks,  the 
ERP  mentions  and  briefly  analyses  the  potential  impact  of  a  decrease  in  remittances,  a  decline  in 
foreign tourism, a slowdown in global economic growth and trade turnover, as well as regional political 
and economic risks. As regards domestic risks, the ERP only mentions renewed price pressure leading 
to  a  tighter-than-expected  monetary  policy,  while  other  uncertainties,  for  instance  a  possibility  of 
continued high wage growth weighing on competitiveness, or political risks, are not analysed. The risks 
presented in the ERP are translated into two alternative scenarios, one negative and one positive. In the 
negative  scenario,  GDP  growth  in  2024-2026  would  be  almost  3  pps  lower  on  average  than  in  the 
baseline. In this case, the budget deficit would be higher by a half of a percentage point at the end of 
the programme period but would still comply with the 3% of GDP fiscal rule.  

59 

 
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Institutional Paper 

Table II.3.1:
Georgia -  macroeconomic developments

Real GDP (% change)
Contributions:
- final domestic demand
- change in inventories
- external balance of goods and services
Employment (% change)
Unemployment rate (%)
GDP deflator (% change)
CPI inflation (%)
Current account balance (% of GDP)
General government balance (% of GDP)
Government gross debt (% of GDP)

Source: Economic Reform Programme (ERP) 2024.

2022
10.4

2023
6.5

2024
5.2

2025
5.0

2026
5.0

-7.2
9.0
8.6
5.4
17.3
9.1
11.9
-4.5
-2.2
39.5

11.6
-2.8
-2.3
2.0
16.6
3.1
2.6
-4.6
-3.0
38.2

5.4
0.5
-0.7
1.5
16.2
3.0
2.8
-4.8
-2.5
38.0

5.4
-0.1
-0.3
1.1
15.9
3.0
3.0
-4.6
-2.3
37.8

5.2
0.1
-0.4
1.0
15.7
3.0
3.0
-4.3
-2.2
37.6

Consumer  price  inflation  fell  below  1%  year-on-year  in  the  second  half  of  2023  but  is 
expected to pick up and then stabilise at around the 3% target from the second quarter of 
2024.  The  sharp  decrease  in  inflation  (from  9.8%  in  December  2022  to  0.6%  in  June  2023  and 
further  to  0%  in  January  2024)  can  be  attributed  to  several  factors:  tight  monetary  policy  of  the 
National  Bank  of  Georgia,  falling  global  commodity  prices  (especially  for  energy  and  food)  and  the 
impact  of  the  appreciation  of  the  Georgian  currency,  the  lari.  The  central  bank  started  to  gradually 
loosen its tight monetary policy stance in May 2023, lowering the policy rate five times by 275 basis 
points in total, to 8.25% in March 2024. The central bank expects continuing price pressures stemming 
from services, partly related to wage growth, which is set to push inflation back to the target in coming 
months. The demand-side  pressures are expected to  gradually drop due to the dampening impact of 
monetary  policy  and  inflation  is  forecast  to  converge  towards  the  3%  target  during  2024.  Monetary 
policy is expected to ease rather gradually, as reducing policy rates would spur further lending and add 
to  the  pressures  from  high-wage  growth.  This  scenario  appears  plausible  overall.  Nevertheless,  the 
central bank underlines that there are inflationary risks related to the geopolitical situation and other 
risk  factors.  In  particular,  the  central  bank  intends  to  tighten  its  monetary  policy  in  case  of  rapid 
outflows  of  foreign  currency  if  Russian  migrants,  who  came  to  Georgia  after  Russia’s  invasion  of 
Ukraine, leave the country after the end of the war.  

The current account deficit is much lower than before the pandemic and the ERP envisages 
it  stabilising  below  5%  of  GDP,  but  the  external  balance  and  position  remains  highly 
vulnerable to swings in global demand and geopolitical factors. One of the main vulnerabilities 
concerns  merchandise trade, which reflects a narrow and low value added export base. In  2023, the 
trade in goods deteriorated to a deficit of 21% of GDP. Domestic exports (i.e. excluding re-exports) of 
goods decreased last year, due to a stronger lari as well as reduced external demand and lower prices 
for  commodities  such  as  metals  and  fertilisers,  which  constitute  a  substantial  share  of  Georgia’s 
exports.  At  the  same  time  re-exports,  mainly  of  cars,  increased (40).  On  the  other  hand,  exports  of 
services,  especially  tourism  and  IT  services,  grew  dynamically,  leading  to  a  surplus  in  the  services 
balance of 11% of GDP. The ERP forecasts an almost equal increase in exports and imports of  both 
goods  and  services  by  9%  a  year  on  average,  which  may  underestimate  the  growth  potential  of  the 
services sector, especially tourism and IT, while the value of exports depends on external demand and 
is difficult to forecast. Since the start of Russia’s war of aggression against Ukraine, Georgia recorded 
a high inflow of money transfers from abroad (15% of GDP in 2023). These transfers include both the 
traditionally  substantial  remittances  from  Georgians  working  abroad  and  financial  inflows  related  to 
migrants  from  Russia,  many  of  whom  work  remotely  for  foreign  companies.  The  ERP’s  baseline 
scenario  envisages  these  transfers  continuing  to  grow,  especially  the  traditional  remittances,  but 

(40)  In 2023, re-exports represented 54% of Georgia’s exports, with cars accounting for over a half of this percentage.  

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Country analysis, Georgia 

transfers  related  to  migrants  may  diminish  rapidly  if  the  geopolitical  situation  changes.  Many 
components  of  the  current  account  are  subject  to  downside  risks  identified  in  the  ERP’s  negative 
scenario,  but  the  programme  does  not  quantify  the  impact  of  this  scenario  on  the  current  account 
balance and its components.  

Foreign direct investment (FDI) inflows, traditionally very high, are gradually decreasing as 
a share of GDP, while international reserves remained broadly stable. FDI inflows are expected 
to  decrease  from  5.5%  of  GDP  in  2023  to  4.1%  in  2026,  which  would  almost  fully  finance  the 
expected  current account deficit. However, among the FDI components, reinvested  profits, stimulated 
by tax benefits (41), play an increasing role, more important than that of greenfield investment. Georgia 
has  a  strongly  negative  net  international  investment  position  and  a  relatively  high  external  debt, 
although both have decreased considerably in the last two years due to the appreciation of the lari (to 
-99%  and  79%  of  GDP,  respectively,  as  of  September  2023).  The  ERP  envisages  a  stabilisation  of 
external debt in EUR terms in the coming years, which would lead to its gradual decrease as a share of 
GDP, given the projected positive nominal GDP growth. Despite the large financial inflows to Georgia, 
the level of gross official foreign reserves remained almost unchanged in 2023 and amounted to USD 
5  billion  at  the  end  of  the  year,  corresponding  to  almost  100%  of  the  IMF’s  Assessing  Reserve 
Adequacy metrics. Gross reserves reached their peak in  August 2023 and  have  decreased since then 
reflecting, among other factors, the interventions of the central bank to stabilise the currency in view 
of the regulatory uncertainty over the application of international sanctions. The ERP envisages official 
reserves increasing to over USD 7 billion in 2026, which seems on the high side. 

External competitiveness and current account 

20

10

0

-10

-20

-30

Graph II.3.1a: Georgia- current account balance 
(% GDP)

2022

2023

2024

 Services balance

2025
 Goods balance

2026

Current account balance (rhs)

Net FDI (rhs)

8

6

4

2

0

-2

-4

-6

160
150
140
130
120
110
100
90
80
70
60

Source: Economic Reform Programme (ERP) 2024.

Graph II.3.1b: Georgia -
real effective exchange rate (index)

Appreciation

Depreciation

2019

2020

2021

2022

2023

Georgia

EA19
Source: Economic Reform Programme (ERP) 2024 and ECB.

The Georgian banking sector remains sound overall. According to data from the National Bank of 
Georgia, the banking system’s capital adequacy ratio stood at a comfortable 22.6% at the end of 2023 
and most lenders remained very profitable (reaching an aggregate 24.7% return on equity). The asset 
quality of the sector as a whole remains strong, with the ratio of non-performing loans to total loans 
remaining  broadly  unchanged  at  a  low  1.8%.  The  high  dollarisation  of  both  assets  and  liabilities 
remains  a  structural  weakness  of  the  banking  system,  although  overall  it  has  decreased  over  recent 
years. The share of loans in foreign currencies decreased substantially as the central bank raised the 
reserve  requirements  for  foreign  currency  loans  in  2022  and  raised  the  floor  for  foreign  currency 
lending to unhedged borrowers in 2023, although it increased somewhat in 2023, amounting to 41.6% 
by the end of the year. The level of dollarisation for deposits is higher but quickly fell to 51% by the 
end  of  2023  from  56%  a  year  earlier.  Access  to  finance  has  improved  in  recent  years  but  is  still 
considered a major obstacle by many SMEs. The size of financial intermediation, measured by the ratio 
of loans to the private sector to GDP, was 64% at the end of  2023, against 90% of GDP in the EU, 
while being  higher than in peer enlargement countries. Credit  growth accelerated from  12.1% at the 
end of 2022 to 17.2% at the end of 2023 (excluding the effect of exchange-rate fluctuations) for both 
corporate and retail loans, while being stronger for the latter. The central bank expects some decrease 

(41)  Since  2017,  Georgia  has  adopted  the  Estonian  corporation  tax  model,  under  which  corporate  taxes  are  only  levied  when 

dividends are distributed, creating strong incentives to reinvest earnings.  

61 

   
 
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Institutional Paper 

in  demand  for  business  loans  during  the  programme  period,  while  demand  for  consumer  loans  is 
expected  to  remain  dynamic,  spurred  by  new  regulatory  changes  facilitating  access  to  them  and  by 
high demand for housing, including from foreigners.    

Table II.3.2:

Georgia - financial sector indicators

Total assets of the banking system (EUR million)
Foreign ownership of banking system (%)
Credit growth (average)
Deposit growth * (average)
Loan-to-deposit ratio (end of period)
Financial soundness indicators (%, end of period)
     - non-performing loans to total loans
     - regulatory capital to risk-weighted assets
     - liquid assets to total assets
     - return on equity
     - foreign exchange loans to total loans

* Total deposit growth.
Sources: Central Bank of Georgia.

2022

2020

2023
2021
2019
14 646 14 144 17 264 24 336 26 901
86.2
18.2
12.2
1.2

87.4
12.1
29.6
1

86.6
9
20.8
1.1

86.6
16.2
9.3
1.2

17.2
12.4
1

1.9
19.5
19.2
17.7
55.1

2.3
17.6
20.4
1.8
55.3

1.9
19.6
20.2
30.4
50.6

1.5
20.3
22.8
24.6
40.4

1.8
22.6
22.4
24.7
41.6

The  capital  market  is  still  underdeveloped,  and  the  authorities  plan  to  develop  it.  The 
capitalisation  and  liquidity  of  the  Georgian  Stock  Exchange  are  limited,  with  a  total  market 
capitalisation  of  GEL  5.2  billion  (6.5%  of  GDP)  by  the  end  of  February  2024.    Development  of  the 
domestic capital market in line with the 2023-2028 capital market development strategy is considered 
as a priority by the authorities and it has been included among the six selected structural reforms in 
the  ERP.  The  envisaged  reform has  two  main  goals.  The  first  is  increasing  the  quantity  and  types  of 
securities  on  the  market,  with  a  focus  on  government  securities  in  local  currency.  The  second  is  the 
deepening of the investor  base, including the reform of insurance and the  private  pension system to 
add new institutional investors to the market.    

3.3.  PUBLIC FINANCE  

The  fiscal  deficit  amounted  to  2.2%  of  GDP  in  2023,  the  same  as  a  year  earlier.  The 
outcome  is  0.8  percentage  point  better  than  planned  for  2023.  In  October  2023,  the 
government  revised  the  budget  in  line  with  the  better  than  expected  revenue  growth  amid  robust 
economic  activity  and  the  identification  of  additional  financing  needs.  The  budget  deficit  ceiling  was 
raised  to  3.0%  of  GDP  (previously  2.9%).  This  reflected  a  largely  unchanged  nominal  budget  deficit 
target and a slight downward projection for the nominal GDP due to a lower deflator. The projected tax 
proceeds  were  revised  up  by  GEL  520  million  (0.7%  of  GDP).  On  the  expenditure  side,  an  additional 
increase  of  GEL  250  million  (0.3%  of  GDP)  was  factored  in  for  pensions  and  social  assistance  for 
children. Additional funding was provided for reconstruction following the damage caused by summer 
floods and for other priority areas. According to figures for the execution of the 2023 budget, general 
government proceeds increased by 16.2% on the year, well outpacing the average inflation. Apart from 
the buoyant economic activity, revenue growth was supported by increases in fees for state services as 
well as by merging the corporate income tax (15%) with the dividends tax (5%). Expenditures rose by 
15.0%  year-on-year  in  2023,  fuelled  by  a  rise  in  current  spending  and  still  strong  growth  of  capital 
outlays. 

The ERP envisages a moderate pace of fiscal consolidation leading to a headline deficit of 
2.2%  of  GDP  in  2026.  The  programme’s  key  objective,  as  stated  by  the  authorities,  is  directing 
investment towards developing infrastructure and providing employment to the population, as well as 
financing priority areas such as pensions, social security, healthcare, education and agriculture. Another 
objective is ensuring that the budget deficit and the general government debt stay within the limits set 

62 

 
 
   
 
 
 
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Country analysis, Georgia 

by the fiscal rules so that fiscal policy contributes to the country’s economic stability. According to the 
programme, the revenue ratio is projected to increase sharply in 2024 (by 1.2 pps when compared with 
the 2023 budget plan), thanks to the robust and revenue-conducive economic activity and discretionary 
measures, in particular increases in the revenues related to the gambling tax and the profit tax in the 
banking sector, before receding gradually to 31.4% of GDP in 2026. Personal income tax revenues are 
projected to remain close to 8% of GDP during the programme period, which is a significant increase 
compared to the 2010-2019 levels. A similar shift, although of a slightly lower magnitude, is expected 
for corporate tax revenues, reflecting expectations for higher company profitability. VAT revenues are 
expected to remain the key revenue item with a share of around 10.7% of GDP in 2024-2026, which is 
similar  to  that  share  before  the  COVID-19  pandemic.  At  the  same  time,  the  share  of  the  non-tax 
revenues  in  the  economy  is  projected  to  decline  considerably  in  the  next  few  years.  Overall,  tax 
proceeds are projected to be more than 3 pps higher than their pre-2020 levels throughout the period 
covered by the ERP.  

Expenditures are projected to peak at 35.0% of GDP in 2024 before retreating to 33.5% in 
2026, a figure that is still substantially higher than the 2010-2019 levels. The decline during 
the programme period will be almost entirely explained by a reduced share of capital outlays, as major 
infrastructure projects, particularly the construction of the East-West highway, are nearing completion. 
Still, capital expenditure is  set to remain rather  high, approaching  7% of GDP in 2026, reflecting the 
country’s significant investment needs and the government’s focus on these. The ERP also envisages a 
gradual rise in the spending ratio for wages and social benefits as well as for interest payments. This 
reflects a policy of increasing public-sector salaries to bring them closer to those in the private sector, 
and  of  increasing  pensions  in  line  with  the  indexation  scheme  that  was  introduced  in  2021. 
Expenditures  for  subsidies  are  projected  to  ease  slightly  but  will  remain  high  from  a  historical 
perspective at 2.4% of GDP in 2026. The ERP envisages a slightly positive (pro-cyclical) fiscal impulse 
in  2024  as  the  cyclically-adjusted  budget  deficit  is  expected  to  increase  over  the  year.  It  would  be 
followed  by  counter-cyclical  policies  in  2025  and  2026,  which  could  help  the  authorities  to  build 
further fiscal buffers.  

Table II.3.3:

Georgia - composition of the budgetary adjustment  (% of GDP)

Revenues
    - Taxes and social security contributions
    - Other (residual)
Expenditure
    - Primary expenditure
       of which:
       Gross fixed capital formation
       Consumption
       Transfers & subsidies
       Other (residual)
    - Interest payments
Budget balance
    - Cyclically adjusted
Primary balance
    - Cyclically adjusted
Gross debt level

2022

2023

2024

2025

2026

30.9
25.1
5.8
33.1
32.6

9.0
10.2
11.1
2.3
1.1
-1.6

31.4
25.6
5.9
34.4
33.6

8.8
10.7
11.5
2.6
1.5
-2.3

32.6
26.7
5.8
35.1
33.8

8.5
11.0
11.7
2.6
1.8
-2.2

32.0
26.6
5.4
34.3
32.7

7.8
10.9
11.7
2.4
1.8
-2.2

31.4
26.3
5.1
33.5
31.9

7.0
10.9
11.6
2.4
1.9
-2.2

Change:
2023-26
0.5
1.2
-0.6
0.5
-0.7

-2.0
0.6
0.5
0.1
0.8
-0.6

-0.8

-1.1

-0.6

-0.5

-0.3

0.5

39.5

38.2

38.0

37.8

37.6

-1.9

Sources: Economic Reform Programme (ERP) 2024, Commission calculations.

The 2024 budget, which  was passed by the Parliament on 15 December 2023, envisages a 
general government deficit of 2.5% of GDP. The budget is based on the assumption that there will 
be real GDP growth of 5.2% and a GDP deflator of 3.0% in 2024. The authorities expect the revenue-
to-GDP  ratio  to  increase  significantly  to  32.6%  due  to  further  growth  of  tax  proceeds,  in  particular 
personal income tax. This could be attributed to the considerable wage growth throughout 2023, which 

63 

 
 
  
 
 
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is likely to be sustained in 2024 due to the hike in public-sector wages and the still robust economic 
activity  that  exerts  upward  pressure  on  private  sector  wages.  On  discretionary  measures,  the 
authorities  expect  to  mobilise  an  additional  GEL  400  million  (0.5%  of  GDP)  in  revenues  in  2024 
through changes related to the gambling sector (an increase of the gross gambling revenue rate and a 
higher  withdrawal  fee).  In  addition,  a  methodological  change  in  the  way  the  loss  reserve  for  the 
banking  sector  is  calculated  is  expected  to  bring  additional  and  one-off  revenue  of  GEL  170  million 
(0.22% of GDP). The ERP assumes an increase of 0.6 pps in the spending ratio in 2024 that would be 
driven  by higher expenditure on interest payments, wages and  social benefits. At the  same time, the 
share of capital spending in GDP is to decline as some of the large-scale public investment projects are 
being finalised. Overall, both revenues and spending are projected to grow at double-digit rates in real 
terms in 2024, similar to the pattern in the previous year. 

The  ERP  projects  a  very  gradual  decrease  in  the  general  government  debt  ratio  to  levels 
that  appear  appropriate  to  safeguard  debt  sustainability.  Public  debt  is  expected  to  remain 
slightly below 40% of GDP, a level which the authorities consider ‘safe’, that is providing enough fiscal 
space for fiscal stimulus in case of a shock. Therefore, public debt is projected to stay well below the 
60%-of-GDP  ceiling  set  in  Georgia’s  fiscal  rule  over  the  course  of  the  programme (42).  Georgia  has 
access  to  both  the  domestic  and  international  financial  markets.  At  the  end  of  2023,  the  average 
maturity of the public debt is favourable, as the country traditionally relies on long-term concessional 
funding from international financing institutions, which constitutes close to 70% of the total liabilities. 
Public debt is prone to significant exchange-rate risks due to the high reliance on external financing. As 
of the end of November 2023, 72.6% of the debt was denominated in foreign currency. This ratio has 
decreased in recent years (from around 80% at the end of 2021), mainly due to the sharp appreciation 
of  the  local  currency  but  also  due  to  the  authorities’  efforts  to  increase  the  share  of  domestic 
financing, a key objective of Georgia’s debt management strategy. Developing the investor base in the 
local capital  market is also among the  structural reforms identified  by the authorities in the ERP. To 
this  end,  they  plan  to  further  boost  the  capacity  of  primary  dealers  and  increase  the  share  of  non-
resident  investors  in  government  bonds  and  securities.  Work  is  also  ongoing  on  developing  a 
methodology  to  establish  an  optimal  interest  rate  structure  for  the  government  debt  portfolio.  While 
the  ERP  does  not  elaborate  on  the  country’s  financing  needs,  it  notes  that  debt  servicing  costs  are 
relatively low –– traditionally around 5-6% of total spending (with an increase to 6.7% in 2023). Given 
the  high  reliance  on  institutional  lenders,  upholding  good  governance  standards  and  maintaining  a 
positive track record in complying with policy conditions agreed with international institutions is critical 
as an anchor for foreign investments and ensuring access to financial market.   

(42)  The definition of public debt under Georgia’s fiscal rule includes the general government gross debt and liabilities incurred 

under public-private partnership (PPP) contracts. At the end of 2023, PPP liabilities amounted to 0.1% of GDP. 

64 

 
BOX II.3.1: DEBT DYNAMICS 

Part II 
Country analysis, Georgia 

0.3
-0.9

0.5
-1.0

0.7
-1.1

1.4
-1.9

1.2
-7.0

Contributions [2]:

Change in the ratio

Gross debt ratio [1]

2025
37.8
-0.2

2026
37.6
-0.2

2024
38.0
-0.1

2023
38.2
-1.3

2022
39.5
-10.2

   1. Primary balance

1.1
-4.3
-3.8
-4.4

       Interest expenditure

   3. Stock-flow adjustment

       Growth effect
       Inflation effect

   2. 'Snowball effect'
       Of which:

Composition of changes in the debt ratio (% of GDP)

debt 
The 
in 
trajectory 
the 
is 
ERP 
based  on  an 
expected 
annual  growth 
rate  of  slightly 
above  8%  for 
nominal 
the 
GDP, broadly in 
line 
with 
historical 
patterns. 
Furthermore, 
the 
incorporates 
the 
technical 
assumption  of 
a 
stable 
exchange  rate 
over 
the 
programme 
period.  Long-
term interest rates are projected to hover around 5%. In 2022, Georgia’s debt-to-GDP ratio declined 
sharply due to robust real growth, high inflation and strong appreciation of the local currency, which 
explains the large stock-flow adjustment in the year. This was followed by a much lower decrease 
of  the  debt  ratio  in  2023,  reflecting  the  ongoing  real  growth  of  the  economy  and  the  inflation 
effect,  which  was  somewhat  countered  by  the  primary  budget  deficit  and  interest  payments.  The 
stock-flow adjustment also helped reduce the debt ratio in 2023.  

[2]  The 'snowball effect' captures the impact of interest expenditure on accumulated

      The stock-flow adjustment includes differences in cash and accrual accounting, 

      debt, as well as the impact of real GDP growth and inflation on the debt ratio

Source: Economic Reform Programme (ERP) 2024, Commission calculations.

      accumulation of financial assets, and valuation and other effects.

      (through the denominator).

1.8
-1.8
-1.1
0.2

1.9
-1.7
-1.0
0.4

1.8
-1.8
-1.1
0.3

1.5
-2.3
-1.1
-0.8

[1]  End of period.

ERP 

The ERP projects that the debt ratio will inch down marginally in the medium term, supported by a 
gradual narrowing of the primary deficit. While the ‘snow-ball’ effect is expected to continue to lead 
to  a  lower  debt  ratio,  the  magnitude  is  expected  to  diminish  in  2024-2026  due  to  a  rise  in  the 
projected interest expenditures. Unlike in 2022 and 2023, the stock-flow adjustment is expected to 
lead  to  the  debt  ratio  slightly  increasing  by  the  end  of  2026.  As  mentioned  above,  the  exchange 
rate, which historically has been an important factor behind Georgia’s public debt-to-GDP dynamics 
due to the high share of foreign currency debt, is assumed to remain stable under the ERP.  

Risks  to  the  fiscal  scenario  are  moderate.  They  relate  mainly  to  the  growth  path  of  the 
economy but also the high volatility to external shocks. For example, debt levels decreased by 
some  20  pps  between  2020  and  2023,  driven  by  the  high  nominal  GDP  growth  and  the  significant 
appreciation  of  the  local  currency  that  ensued  during  the  post-COVID-19  recovery  period  and 
intensified  following  Russia’s  invasion  of  Ukraine  due  to  the  massive  inflows  of  funds.  On  the 
downside,  lower-than-projected  GDP  growth  due  to  negative  external  shocks  could  impact  revenues, 
leading to a  higher fiscal  deficit and  public  debt  ratio. Tighter financing conditions could also  have a 
detrimental  impact  on  the  budget  and  public  debt,  including  its  refinancing.  A  significant  risk  stems 
from  the  possibility  that  some  of  the  Russian  citizens  who  settled  in  Georgia  following  the  Russia’s 
invasion of Ukraine could exit the country together with the associated capital outflows. There are also 
risks related to the structure of the Georgian economy, due in particular to the high share of tourism in 
the economy. As regards public debt, the high foreign-exchange exposure remains a key risk. However, 
it  is  somewhat  mitigated  by  the  ongoing  progress  made  by  the  authorities  on  reducing  the  share  of 
external borrowing. Most of the above-mentioned risks are recognised and well elaborated in the ERP. 

65 

European Commission 
Institutional Paper 

An  area  that  could  merit  a  more  detailed  analysis  is  the  possible  capital  outflows  associated  with  a 
potential exit of Russian citizens and businesses that entered the country as of 2022.  

On  the  upside,  Georgia’s  macroeconomic  forecasts  have  a  track  record  of  being  rather 
conservative.  This  usually  results  in  higher  nominal  growth  than  initially  projected.  Accelerating 
structural reforms that would anchor and speed up the country’s path towards EU membership could 
boost the economy. The authorities have a sound track record in implementing prudent fiscal policies 
despite  the  numerous  external  shocks  the  country  faced  in  the  last  decade.  Georgia  had  been 
compliant with its fiscal rules until 2020. Due to the economic shock from the COVID-19 pandemic and 
the government’s response in the form of significant support for both households and businesses, the 
budget deficit significantly exceeded the corresponding 3%-of-GDP ceiling in 2020 and 2021, while the 
public debt  ratio marginally surpassed the  60% target by the end of  2021. Following this temporary 
shock,  compliance  with  the  fiscal  rules  was  restored  in  2022.  While  the  ERP  does  not  provide 
information about contingency risks due to possible financial rescue operations, state guarantees, and 
accumulation  of  debt  of  SOEs,  it  highlights  the  low  (0.1%  of  GDP)  exposure  to  public-private 
partnerships liabilities.   

BOX II.3.2: SENSITIVITY ANALYSIS 

The sensitivity analysis in the ERP explores the impact of changes in key macroeconomic indicators 
on the budget deficit in 2024. In a scenario in which both growth and inflation significantly exceed 
the baseline (real GDP growth of 9.7%, consumer price inflation of 6.2%), the general government 
deficit would be lowered by 1.1% of GDP, with the bigger part (0.9% of GDP) related to the higher 
level of economic activity that is expected to  boost revenues. Conversely, a negative shock  (3.8% 
GDP  contraction  and  a  deflation  of  0.6%)  would  widen  the  2024  deficit  by  2  pps,  leading  to  a 
breach  of  the  country’s  3%-of-GDP  fiscal  rule  on  the  budget  deficit.  Again,  the  drop  in  economic 
output would be the driving factor in this case – it is estimated to lower revenues by 1.7% of GDP. 
The sensitivity analysis also includes scenarios that involve an interest and an exchange-rate shock. 
In both cases, the expected budgetary impact is relatively small.  

On  public  debt,  the  ERP  refers  to  the  debt  sustainability  analysis  carried  out  annually  by  the 
authorities  and  included  in  the  budget  documentation.  This  analysis  tests  various  shocks  –  real 
interest rate, real GDP growth, primary deficit, nominal exchange-rate shock, a combined shock and 
a  contingent  liability  shock.  In  almost  all  cases,  the  public  debt  ratio  initially  increases  before 
resuming  a  downward  trend.  The  biggest  increase  (of  more  than  10  pps)  is  witnessed  in  the 
scenario  of  a  currency  shock  (30%  depreciation  of  the  local  currency).  This  reflects  the  very  high 
share of general government debt in foreign currency (around 73% of the total at the end of 2023).  

Georgia  has  a  high  share  of  spending  on  economic  affairs  and  on  public  order,  while 
spending  on  social  expenditure  and  healthcare,  and  to  a  lesser  extent  general  public 
services,  is  very  low.  Benefiting  from  higher-than-expected  revenues  in  2022  and  2023,  the 
authorities have allocated additional funding to support social inclusion and capital expenditures. While 
maintaining  a  gradual  fiscal  consolidation,  the  ERP  envisages  increased  financing  for  human  capital 
and social security in the medium term. As a result, the share of spending on education is projected to 
record its  biggest increase by 2026, to  4.5% from a low base of 3.7% of GDP in 2023 (EU: 5.0% of 
GDP in 2021). This reflects plans to rehabilitate education facilities and construct new ones as well as 
increase the salaries in the sector. Spending on social security (namely increasing pensions in line with 
the 2021 indexation rules as well as disability pensions) and on healthcare is also set to grow at a high 
rate, from a relatively low base of less than 10% of GDP for both (EU: around 27% of GDP in 2022). 
The programme also provides for a gradual increase in the expenditure for environmental protection. 
At the same time, the share of capital outlays is to  gradually decline  but  will remain at a  high level 
from  a  historical  perspective.  The  ERP  further  assumes  a  significant  rise  in  expenditures  for  public-
sector salaries to ensure that they do not fall below 80% of private sector wages. Regarding revenues, 

66 

 
 
Part II 
Country analysis, Georgia 

the  main  source  continues  to  be  VAT  proceeds,  followed  by  personal  income  tax  revenues.  The 
authorities  do  not  collect  social  security  contributions  and  provide  a  flat-rate  pension  (one  rate  to 
people below 70 and another to people aged 70 and above). There is rather limited space for revenue 
adjustments given the current very strict fiscal rules that require a referendum for any tax increases 
(save  for  excise  taxes;  see  more  below).  In  view  of  these  constraints,  the  authorities  are  pursuing  a 
strategy of broadening the tax bases through identifying and  quantifying tax expenditures. Following 
an estimate of VAT and income tax expenditures, they are now focusing on a sectoral analysis, where 
implementation is expected to start with the large agricultural sector.  

Georgia  has  a  well-developed  fiscal  framework  and  the  ERP  plans  continued  reforms  to 
further  strengthen  it  and  improve  monitoring  of  fiscal  risks.  As  part  of  the  public  finance 
management  (PFM)  reform,  the  authorities  introduced  a  new  public  investment  management  (PIM) 
methodology as well as indexation rules for public-sector salaries and pensions. To step up monitoring 
of  fiscal  risks,  the  authorities  included  part  of  state-owned  enterprises  (the  non-commercial  ones, 
classified as part of the general government and not as public corporations) in the budget as of 2023 
and started assessing fiscal risks related to climate change and population ageing. Some of the PFM 
reforms presented in the ERP include, among others, the approval of a medium-term revenue strategy 
(MTRS) and further work on fully incorporating the non-commercial SOEs into the general government 
statistics. The MTRS is expected to identify and address the impact of longer-term challenges posed by 
the  demographic  and  climate  developments  on  public  finances,  which  is  important  for  strengthening 
Georgia’s fiscal sustainability. As regards SOEs, the authorities adopted the public corporation reform 
strategy  in  December  2022.  The  strategy’s  implementation  and  the  approval  of  the  law  on  public 
corporations  has  been  delayed  amid  lack  of  consensus  on  the  content  of  the  law  and  on  the  issue 
which entity should carry out the ownership function. However, the authorities are making progress on 
improving the fiscal oversight over state-owned enterprises included in the general government sector, 
by  gradually bringing their cash management  under the  Single Treasury  Account. In the area of PIM, 
Georgia introduced an updated methodology for assessing investment projects in February 2023. One 
of the  main challenges for its application relates to the capacity of line ministries’ staff to carry out 
good quality cost-benefit analysis of projects. An electronic PIM system is planned to be introduced and 
integrated into the electronic budget management system.  

The  fiscal  path  as  set  out  in  the  ERP  complies  with  the  national  fiscal  rules  on  budget 
deficit  and  public  debt.  These  rules  are  regulated  by  the  Organic  Law  ‘Economic  Liberty  Act’  from 
2011, which sets a ceiling for the consolidated budget deficit at 3% of GDP and for the state debt at 
60% of GDP. The ‘revenue rule’ allows for the adoption of a new tax or an increase in tax rates (except 
excise) only after a referendum ( 43). The authorities have a strong track record in complying with the 
fiscal  rules  despite  recurrent  adverse  external  shocks.  They  activated  the  escape  clauses ( 44)  to  the 
rules  with  the  COVID-19  pandemic  in  2020  but  managed  to  comply  with  the  requirements  again  in 
2022,  partly  due  to  the  exceptional  factors  that  have  characterised  Georgia’s  growth  performance 
since  2021.  Georgia’s  fiscal  accounting  is  based  on  the  government  finance  statistics  manual  from 
2014 developed by the IMF. The authorities plan to align with the ESA 2010 in the future. However, the 
ERP does not provide a tentative timeline or corresponding steps to be taken to achieve this objective. 
The Parliamentary Budget Office (PBO), which provides budget analysis and macro-fiscal projections, is 
considered by the authorities as Georgia’s independent fiscal institution. A self-assessment in line with 
the OECD Principles for Independent Fiscal Institutions carried out by the PBO in 2022 indicated several 
areas  for  improvement,  including  the  PBO’s  official  mandate,  legal  guarantees  of  independence  and 
autonomy, the strengthening of skills in quantitative analysis, and the need to add an advisory council. 

(43)  This rule is valid until 2030. 

(44)  The  escape  clause  ensures  fiscal  policy  flexibility  in  case  of  economic  recession  or  emergency  situations.  It  also  sets the 

timeline (3 years) within which the parameters need to return within the general limits. 

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3.4.  KEY STRUCTURAL CHALLENGES AND REFORM PRIORITIES 

Strong economic growth has resulted in Georgia being upgraded to an upper-middle income 
country,  while  overall  productivity  is  improving  due  to  a  structural  shift  to  a  service 
economy.  Real  GDP  per  capita  grew  by  an  average  of  4.7%  during  the  last  10  years  (2014-2023), 
making  Georgia one of the fastest growing economies in the  region. In the  same  period, the  poverty 
rate declined from 23.5% to 15.6%, but inequality remains high. Capital accumulation and total factor 
productivity has driven Georgia’s growth since the 2010s, as the economy diversified towards services 
and  to  some  extent  manufacturing.  The  structure  of  gross  output  is  as  follows:  20%  manufacturing, 
13%  wholesale  and  retail,  12%  construction,  7%  transportation  and  storage,  6%  real  estate,  6% 
agriculture,  and  36%  other  sectors,  mostly  services.  Following  a  severe  contraction  caused  by  the 
pandemic in 2020, the recovery was faster than in other Eastern neighbourhood countries, helped by 
tourism, exports, and remittances.  

The Commission has conducted an independent analysis of Georgia's economy and identified 
the  main  structural  challenges  to  competitiveness  and  inclusive  growth,  drawing  on 
Georgia’s own ERP and other sources. The analysis highlights several structural challenges across 
many sectors. The three most significant challenges are:  

- addressing key factors behind low competitiveness, in particular those linked to the dominance of low 
value  added  sectors  in  the  economy,  low  productivity  in  agriculture,  informality,  and  shortcomings  in 
economic governance; 

- enhancing connectivity, especially by strengthening the energy system, further developing transport 
infrastructure and furthering digital reforms;  

- addressing weaknesses in Georgian labour market including by improving the quality and relevance 
of education and professional skills development, and strengthening the social protection system and 
healthcare services. 

Tackling  corruption,  reducing  political  polarisation,  advancing 
‘de-oligarchisation’, 
strengthening  the  rule  of  law,  undertaking  judicial  reforms  and  boosting  the  capacity  and 
independence of public institutions is essential to promote competitiveness.  The delays and 
lack of transparency in court proceedings impact on business decisions, while lack of independence of 
public  institutions  may  impact  the  credibility  of  policies,  including  macroeconomic  management. 
Addressing  these  fundamental  concerns  is  a  prerequisite  for  the  successful  transformation  of  the 
Georgian  economy.  These  points  also  form  part  of  the  nine  steps  set  out  in  the  Commission 
Communication  on  EU  Enlargement  of  8 November 2023  as  well  as  in  Chapters  23  and  24  of  the 
annual  country  report  on  enlargement ( 45).  The  European  Council  decided  to  grant  the  status  of 
candidate country to Georgia on 15 December 2023, on the understanding that these steps are taken. 

While the Georgian economy continues to experience several obstacles to inclusive growth 
and  competitiveness,  properly  targeted  reforms  on  the  three  key  structural  challenges 
offer  the  biggest  potential  for  economic  resilience,  inclusive  growth  and  competitiveness. 
The  Commission  welcomes  that  Georgia  has  broadly  identified  the  same  three  key  structural 
challenges  in  Chapter  V  of  its  ERP.  However,  there  are  some  differences  in  understanding  over  the 
prioritisation and substance of reforms, especially for the key structural challenge on competitiveness 
and on social policy and human capital. 

Key challenge #1: Addressing key factors behind low competitiveness linked to a dominance 
of  low  value  added  sectors  in  the  economy  and  exports,  low  productivity  in  agriculture, 
informality and shortcomings in economic governance 

While  Georgia  has  managed  to  attract  significant  foreign  direct  investment  over  recent 
years, the country’s value chains are still dominated by low-value sectors. The stock of FDI in 

(45)  2023 Georgia Enlargement Report: https://op.europa.eu/s/zhxt. 

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Country analysis, Georgia 

Georgia,  at  106%  of  GDP,  is  higher  than  in  the  other  Eastern  neighbourhood  countries  and  is 
significantly above the EU average (68%). Foreign investments are well diversified and are mostly in 
energy,  financial  services,  real  estate,  manufacturing,  and  trade.  Georgia’s  industrial  production  is 
dominated  by  low  value-added  sectors,  especially  commodities  (predominantly  metals)  and  food 
processing.  Georgia's  export  base  remains  narrow  and  Georgian  exports  to  the  EU  mostly  consist  of 
mineral products, chemical products and textiles (46).  

Agriculture, a key sector for employment, faces major competitiveness challenges, including 
low  productivity  and  fragmentation.  The  share  of  people  working 
is 
disproportionately  high,  compared  with  the  sector’s  contribution  to  value  added,  even  if  this  has 
decreased in  recent years.  This  suggests  continued low productivity in the  sector which  still relies on 
small-scale  farming  with  an  untapped  potential  to  move  up  the  value  chain  in  food  processing. 
Employment in agriculture amounted to around 18% of total employment in 2022, thus including the 
informal  rural  household  workforce  this  makes  the  sector  the  biggest  employer  in  the  country.  The 
small size of farms, limited business and investment opportunities, weak land markets (grappling with 
unclear and unregistered ownership and lack of strategic management of state land) and fragmented 
supply chain logistics, due also to Georgia’s geographic location, contribute to these outcomes.  

in  agriculture 

These  challenges  are  recognised  in  Georgia’s  agricultural  policy,  which  is  governed  by  the 
2021-2027  strategy  for  agriculture  and  rural  development.  The  Ministry  of  Environmental 
Protection and Agriculture is responsible for implementing the strategy. Also, as part of addressing the 
important needs in terms of land reform, the National Agency for Sustainable Land Management and 
Land Use Monitoring was established in 2020. It aims to conduct an inventory of land resources and 
develop a land information system. 

Adding to the potential of its agricultural sector, Georgia has rich water resources, but they 
are unequally distributed while irrigation systems are outdated and need to be significantly 
overhauled. The availability of renewable freshwater per capita is consistently the highest among the 
EU’s  eastern  neighbouring  countries  but  Georgia’s  climate  diversity  requires  better  distribution  and 
management  of  water  resources.  Ongoing  major  reforms  on  the  management  of  water  used  for 
irrigation  are  driven  by  a  tariff  revision  introducing  the  principle  of  cost  recovery  to  reduce  the 
government  subsidies  and  to  follow  the  tariff  recommendations  from  the  Georgian  National  Energy 
and Water Supply Regulatory Commission. Yet the tariff setting methodology still needs improvement, 
while implementation timeline is to be defined. The law on water resources management was adopted 
in  2023  but  will  only  enter  into  force  in  2026.  Furthermore,  there  are  ongoing  pilot  projects  to  help 
implement  this  tariff  reform  based  on  the  existing  recommendations  from  the  Georgian  National 
Energy and Water Supply Regulatory Commission. By the end of 2025, the new tariffs are expected to 
be implemented to promote sustainable water use in agriculture and ensure the long-term solvency of 
the  Georgian  Amelioration  Estate  Company.  Soil  deterioration  is  recognised  by  the  ERP  as  another 
major  challenge  with  several  pieces  of  legislation  outlined  for  finalisation  and  adoption,  which  then 
require swift implementation to help address the growing problem. 

The share of the informal economy remains considerable. The ERP notes the significance of 
informal  employment  but  does  not  address  explicitly  challenges  linked  to  the  informal 
economy. The informal economy estimates  vary greatly,  but its level  remains  sizeable despite likely 
decreasing due to strong economic growth in recent years. Around one third of workers are employed 
informally,  many  of  them  in  agriculture  or  in  seasonal  jobs.  Informality  in  Georgia  is  closely  linked 
to: the country’s economic structure with agriculture, construction, and tourism being dominant sectors, 
a  very  large  amount  of  self-employment,  a  lack  of  unemployment  benefits,  a  high  reliance  on 
remittances and a high share of cash payments coupled with a low level of public services and social 
protection. It is also linked to the high share of the population living of subsistence farming. Informality 
significantly  reduces  the  country’s  tax  revenues,  exacerbates  poor  working  conditions,  cements 
inequality and distorts competition.  

(46)  European Commission:  
      https://policy.trade.ec.europa.eu/eu-trade-relationships-country-andregion/countriesandregions/georgia_en. 

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Addressing 
informality  requires  a  comprehensive,  government-wide  approach  that 
encompasses  tax,  labour,  social  and  financial  policies.  Georgia  is  undertaking  several  steps  to 
tackle  informal  employment  through  the  re-established  labour  inspectorate,  revenue  measures,  and 
strengthened  links  between  social  and  employment  services.  However,  no  comprehensive  strategy  to 
fight  informality  exists.  In  the  short  term,  a  systemic  approach  is  needed  to  better  understand  and 
measure  the  informal  economy  consistently  with  best  international  practices  and  methodology.  This 
also  requires  an  inter-agency  working  group  to  be  set  up  that  involves  relevant  government 
stakeholders, with the aim of drafting a strategy and action plan to address this complex issue using a 
whole-of-government approach. 

The  SME  policy  environment  in  Georgia  is  generally  considered  to  be  conducive  to 
investment and supportive for business development, but firm-level productivity and export 
growth  has  been  underwhelming.  Georgia  ranks  among  the  world’s  best  performers  according  to 
international  indices  on  doing  business  and  openness  to  FDI.  Opening  a  business  in  Georgia  can  be 
done  swiftly,  with  little  red  tape.  As  documented  in  the  2024  edition  of  the  SME  Policy  Index  for 
Eastern  Partner  countries  published  by  the  OECD  and  EBRD,  since  2020,  Georgia’s  performance  has 
further improved in ten out of twelve SME Policy Index dimensions. Particular progress has been made 
with  regards  to  the  institutional  and  policy  framework,  SME  internationalisation,  and  monitoring  and 
evaluation of SME support  services. There is also a level playing field between domestic and foreign 
investors.  Insolvency  proceedings  have  improved  since  2021.  A  strategy  for  SMEs  development  over 
2021-2025 is being implemented. Georgia has also made progress towards the systematic application 
of regulatory impact assessments, even if the methodology for SME-specific impact assessment tests 
has  still  not  been  adopted.  Women  entrepreneurship  policies  were  strengthened,  including  with  the 
state  concept  on  the  economic  empowerment  of  women.  Trade  openness  has  constantly  been 
increasing  since  the  1990s.  The  government  agency  ‘Enterprise  Georgia’  has  an  export  assistance 
programme to promote the growth of export-oriented SMEs. On the other hand, studies indicate that 
total  factor  productivity  growth  at  firm  level  has  been  stagnant,  which  indicates  low  innovativeness 
and  low  competition  in  many  sectors.  Firm  capabilities  such  as  digitalisation,  ability  to  innovate  and 
adopt technology, and managerial quality are quite low. Georgia’s merchandise export basket remains 
unsophisticated  and  dominated  by  primary  products  and  resource-based  manufactures,  which  grew 
significantly  in  share  and  now  account  for  more  than  60%  of  the  total  (excluding  re-exports). 
Integration into global value chains continues to be very limited.  

Non-effective enforcement of regulations on food safety remain one of the key reasons for 
Georgia’s weak export performance towards the EU. Necessary certification for EU markets and 
high  transport  cost  are  key  challenges  for  Georgian  exports  to  the  EU.  Some  60%  of  DCFTA-related 
legislation  has  already  been  adopted,  but  many  local  producers  are  not  ready  to  implement  these 
provisions. In addition, due to a weak surveillance system, the competent authorities cannot deliver the 
full  necessary  level  of  assurances  which  hampers  Georgian  exports  in  several  agricultural  products. 
Enhancing  implementation  of  already  aligned  legislation  by  strengthening  surveillance  capacity  and 
diagnostic resources of regional and local services as well as providing assistance to companies in the 
application of food safety standards would help to address this weakness. 

Access to finance has improved in recent years but is still considered as a major obstacle 
by many SMEs including in the agricultural sector. The size of financial intermediation, measured 
by the ratio of loans to non-financial sector and households to GDP, reached 64% at the end of 2023, 
one of the  highest in the  region  but below the  90% of  GDP in the EU. Overall, access to  bank loans 
continues  to  be  a  major  obstacle  for  many  small  and  medium  enterprises,  for  instance  due  to 
substantial  collateral  requirements  and  the  large  informal  sector,  while  non-bank  sources  of  finance 
are largely absent. To overcome this obstacle, the authorities have some programs to facilitate access 
to finance for the private sector through credit guarantees, subsidising interest rates subsidies on bank 
loans, and other instruments. Yet, start-up funding remains limited, and would require the development 
of new solutions, including crowding-in private investment. The implementation of the reform to ease 
the  use  of  movable  collateral  for  secured  transactions  would  also  be  an  important  step  to  facilitate 
SMEs’ access to finance. As a new measure aimed at stimulating lending to very small companies, the 
Parliament  approved  a  law  on  micro-banks  which  entered  into  force  in  July  2023  and  targets 
especially the agricultural sector. 

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Country analysis, Georgia 

The  governance  and  institutional  environment  in  Georgia  are  favourable  overall  to 
economic  development,  although  some  challenges  persist.  Georgia  scored  well  on  regulatory 
quality (close to EU average) and government effectiveness, as  measured  by the 2022 World Bank’s 
Worldwide Governance Indicators. However, challenges persist as regards judicial reform, the adverse 
impact  of  political  polarisation  on  business  confidence,  and  a  large  degree  of  political  control  over 
public  institutions  and  their  limited  transparency.  While  Georgia  has  a  comparatively  low  level  of 
perceived corruption, some challenges related to the business environment remain. Georgia was ranked 
49th out of 180 countries in the 2023 Transparency International corruption perception index. Stalled 
judicial reform and inefficiencies in the court system are  also considered as weaknesses in terms of 
protecting  property  rights,  and  therefore  pose  obstacles  to  Georgia’s  investment  climate.  Further 
efforts are needed to tackle high-level corruption, in particular, to address the challenge of large-scale 
vested interests and their influence in the political, judicial and economic spheres. Therefore, it will be 
important to move ahead with implementing the nine steps outlined in the Commission Communication 
on EU Enlargement of 8 November 2023. 

The most recent anti-corruption strategy and action plan covered the period of 2019-2020 
and  no  strategic  vision  has  been  adopted  since.  Georgia  lacks  a  comprehensive  and  strategic 
approach  to  continuing  its  anti-corruption  efforts.  In  the  context  of  the  ERP  and  in  line  with 
recommendations made in the annual country report on enlargement, it seems warranted for Georgia 
to,  among  other  things,  develop  and  adopt  an  anti-corruption  risk  assessment,  strategy  and  action 
plan,  ensuring  they  are  comprehensively  implemented  through  realistic  timelines,  adequate  funding 
and monitoring mechanisms. 

Reform measure 1: Domestic capital market development, is focused on two major directions, (i) 
increasing  the  type,  quantity,  and  availability  of  securities  (increase  in  supply);  and  (ii)  developing  a 
domestic  investor  base.  While  this  is  an  important  reform,  it  is  further  analysed  under  the  fiscal 
framework part of the ERP.  

Reform measure 2: Improved food security though upgraded irrigation and drainage systems 
outlines  the  reform  of  agriculture  and  rural  development,  focusing  on  finalisation  of  a  unified  land 
information system based on numeric technologies. A first version of the information system including 
the land registry will be released in 2024, while the full system should be finalised in 2025. There are 
plans to introduce a satellite monitoring system and create land use and land cover data, accompanied 
by necessary legal changes. The ERP sets out that the land management monitoring system will cover 
70% of the country’s territory by 2027, with full coverage expected by 2030. A monitoring and control 
system  for  soil  will  be  introduced,  together  with  modern  provisions  on  soil  protection  and  pasture 
management.  

Strengthening  land  management  information  and  irrigation  systems  is  one  of  the  critical 
building  blocks  for  making  Georgia’s  agricultural  sector  more  competitive.  This  reform  is 
crucial not only for securing investments in the agri-value chains but also ensuring the traceability of 
agricultural  products  and  strengthening  right-based  management  systems  for  common  natural 
resources.  

Key  challenge  #2:  Enhancing  connectivity  in  particular  by  strengthened  energy  system, 
further development of transport infrastructure and digital reforms. 

Georgia  relies  heavily  on  imports  of  fossil  fuels.  Domestic  energy  production  covers  about  one 
fifth of Georgia’s energy demand, and mostly comes from hydropower and bioenergy. All natural gas, 
hard coal, and most oil products are imported. According to the International Energy Agency (IEA), the 
final energy mix is relatively diverse compared with other countries in the region. In 2022, natural gas 
accounted  for  42%  of  country’s  energy  consumption  followed  by  oil  products  (27%)  and  electricity 
(22%).  The  remainder  was  covered  by  renewables  (5%)  and  coal  (4%).  Net  imports  in  total  energy 
supply rose from 47% in 2002 to 81.4% in 2020 to meet rising energy demand. About 80% of natural 
gas is imported from Azerbaijan, while almost a half of oil products are imported from Russia, which is 
not in line with EU energy security policy, which prioritises a phase-down in imports of fossil fuels from 
Russia.  Measures  ensuring  emergency  gas  and  oil  storage  and  capacities  for  gas  cross-border 
connections  need  to  be  finalised,  while  access  to  the  global  liquefied  natural  gas  market  has  been 

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strengthened.  Georgia  is  currently  finalising  its  first  National  Energy  and  Climate  Plan,  which  would 
provide  it  with  an  overarching  strategy  until  2030  to  address  energy  security  and  transition  and  a 
roadmap to achieve its climate change mitigation objectives. 

Renewable policy is mostly based on hydroelectric plants. As of 2021, the share of renewable 
energy  in  electricity  production  was  a  highly  impressive  81%,  provided  by  hydropower  and  one  wind 
farm.  Further  fast  and  large-scale  development  of  renewables  is  hampered  by  structural  factors. 
However,  it  is  necessary  to  take  full  advantage  of  the  deployment  of  the  planned  Black  Sea  electric 
cable.  Permitting  procedures  should  be  simplified  and  streamlined  to  enable  faster  deployment.  The 
electricity market still needs to be fully liberalised. Institutionally, the energy sector is considered stable 
and  reliable  and  has  been  largely  unbundled  since  the  mid-1990s.  Since  2023,  the  government  has 
had two private auctions for renewables.  

While energy intensity  has dropped, buildings consume more than 30% of total energy. As 
energy  efficiency  in  buildings  is  low,  Georgia  has  prioritised  access  to  finance  for  energy-efficient 
renovation  and  support  to  innovative  new  practices.  In  2020,  Georgia  adopted  laws  on  energy 
efficiency and on the energy performance of buildings, which will introduce energy audits and energy 
performance  certificates.  Since  then,  15  by-laws  have  been  passed,  with  strengthened  energy-
efficiency requirements for new buildings in place since July 2023 and following a transition period for 
major reconstructions. Further by-laws are being finalised, and their implementation is strengthened. 

The  European  Commission  would  consider  that  it  is  time  to  make  progress  on  the 
implementation  of  a  national  carbon  pricing  or  emission  trading  scheme.  With  the 
implementation of the EU’s Carbon Border Adjustment Mechanism (CBAM) planned for 2026, which will 
directly impact Georgia’s substantial exports to Europe, especially those related to fertilisers and steel, 
the  Ministry  of  Environmental  Protection  and  Agriculture  is  preparing  legislation  (to  be  approved  in 
2024)  to  introduce  a  monitoring,  reporting  and  verification  system  as  a  first  step.  Its  objective  is  to 
strengthen the private sector’s capacity in this regard in 2025.  

The quality of road transport remains suboptimal. In 2021, the total length of the road network 
was about 21 000 kilometres, but only the few express roads or motorways are in good condition. Poor 
transport  infrastructure  caused  by  inadequate  maintenance  and  trucks  with  excessive  load  hampers 
internal  and  external  connectivity  and  impacts  road  safety.  The  government’s  action  on  road 
infrastructure  is  focused  on  constructing  the  missing  part  of  the  East-West  Highway  (part  of  the 
European route E60), with one of the sections completed in late 2023. 

Continued  investments  are  needed,  in  particular  to  promote  the  extended  trans-European 
transport  network,  railway  links,  ports,  road  infrastructure  maintenance,  rolling  rail  stock 
and inter-modal and logistic capacities as well as to implement the railway strategy. These 
will  have  to  be  paired  with  further  measures  to  attract  private  sector  participation,  institutional 
capacities  and  operational  effectiveness  and  soft  measures,  in  particular  to  improve  road  safety.  In 
addition,  active  engagement  within  the  Transport  Community,  in  which  Georgia  is  currently  an 
observing  participant,  remains  essential  and  offers  Georgia  the  chance  to  further  align  itself  with 
transport  acquis  and  more  closely  integrate  its  transport  market  with  the  EU.  In  early  2024,  Georgia 
established the regional observatory on road safety in Tbilisi. 

Access  to  digital  infrastructure  has  improved  substantially,  but  some  regions  lag  behind. 
According to Eurostat, 88.4% of Georgian households have internet access as of 2022. However, high-
speed  and  affordable  internet  for  some  rural,  remote,  and  high  mountainous  areas  remains  a 
challenge. Digital connectivity is largely supported by bilateral programmes and by the Log-in Georgia 
project  supported  by  the  EIB  and  the  World  Bank  as  well  by  EU’s  Economic  and  Investment  Plan ( 47) 
Flagships.  In  2023,  Georgia  adopted  a  law  on  infrastructure  sharing  to  provide  incentives  for  more 
investment in the roll-out of broadband connectivity in rural areas. Broadband affordability is a still a 

(47)  More  on  the  Economic  and  Investment  Plan  in  the  Joint  Staff  Working  Document  on  Recovery,  resilience  and  reform: 

swd_2021_186_f1_joint_staff_working_paper_en_v2_p1_1356457_0.pdf (europa.eu).  

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Country analysis, Georgia 

challenge  and  internet  speed  in  firms  needs  to  be  improved.  According  to  the  International 
Telecommunication Union, 69% of Georgia’s population lack basic skills to use the internet.  

Georgia  lacks  an  overarching  digital  strategy.  The  ERP  outlines  the  challenges  in  strengthening 
the digital economy considering the digital gap between urban and rural areas, high service prices, lack 
of  digital  skills  and  the  absence  of  an  institutional  coordination  mechanism  and  of  a  comprehensive 
vision.  It  also  underlines  the  opportunity  offered  by  the  Black  Sea  submarine  digital  cable  to  be 
developed  under  the  EU  economic  and  investment  plan.  The  ERP  then  highlights  the  priority  of 
investing  in  broadband  infrastructure  to  bridge  the  urban-rural  gaps,  assessing  the  private  sector’s 
need  to  service  this,  and  explore  the  potential  of  infrastructure  sharing  as  a  driver  for  more  public-
private  investment  in  the  field.  This  will  also  allow  for  the  creation  of  data  centres  and  potential 
investment  in  cutting-edge  technology  such  as  high-performance  computing  and  cloud  services.  The 
ERP  also  highlights  the  opportunities  to  boost  digital  skills  among  the  SME  workforce,  digitally 
empower  women,  young  people  and  vulnerable  people,  as  well  as  promote  entrepreneurship  in  the 
field,  as  a  lever  for  economic  diversification  and  to  unlock  Georgia’s  untapped  potential  in  digital 
innovation. Digitalisation policies are included in several policy documents, like the National Broadband 
Development Strategy 2020-2025, Georgia’s Development Strategy: Vision 2030 and the government 
programme  for  2021-2024  ‘Towards  Building  a  European  State’.  However,  affordability  of  fixed 
broadband lines remains an issue. The 2021-2024 cybersecurity strategy is partially aligned with the 
EU  acquis  on  the  use  of  electronic  identities  and  qualified  electronic  trust  services  (e-IDAS).  Digital 
skills  are  covered  by  various  policy  documents  and  initiatives.  From  early  2024,  the  government  has 
renewed work on the digital health strategy. To fully benefit from the planned Black Sea digital cable, 
an overarching strategy and coordinated efforts from line ministries and agencies are needed. 

Reform  measure  3:  Renewable  energy  and  energy  efficiency  recalls  the  priority  to  establish 
Georgia as an electricity hub. It also underlines the importance of investments in the modernisation of 
infrastructure,  energy  production  and  networks  to  address  the  country’s  own  foreseeable  growth  in 
demand as well as to promote the necessary ecosystem to fully benefit from the direct access to the 
European electricity market that would be provided by the Black Sea electricity cable. While extensive 
investments are planned and necessary to ensure the extension and reliability of the networks, this will 
also require further integration into the EU energy market, significant steps in alignment with the EU 
acquis and synchronisation with its network. In particular, it will be important to open the market as set 
out  in  its  commitment  with  the  Energy  Community  but  also  further  move  ahead  in  unbundling  its 
transmission system operators in electricity and gas. 

On  energy  production,  the  ERP  rightly  highlights  the  opportunities  offered  by  further 
developing  renewable  energy  sources.  The  government  could  already  auction  1 500 MW  of 
production,  with  800 MW  underway  or  completed.  The  objective  is  to  reach  6 000 MW  of  installed 
capacity by 2030 – nearly doubling it compared to 2021. However, with the bulk already concentrated 
in  hydropower,  it  will  be  important  to  increase  the  share  of  solar  and  wind  to  reduce  the  impact  of 
seasonality that affects some hydro power plants and the possible impact of climate change as well as 
mitigate  environmental  and  social  impacts.  Infrastructure  investments  need  to  comply  with  the  EU 
environmental acquis, national and international nature protection and water management obligations, 
ensure  public  participation  and  consultation,  and  guarantee  high  quality  environmental  impact 
assessment reports that include cumulative impacts on nature and biodiversity. 

With  energy  intensity  dropping  but  buildings  still  consuming  more  than  30%  of  total  energy,  energy 
efficiency remains a priority including in the ERP. Hundreds of energy auditors are being trained to help 
implement this reform and discussions are ongoing on how to further strengthen access to finance in 
this regard. 

Reform measure 4: Enhanced connectivity, recognises the importance of strengthening Georgia’s 
logistics and inter-modal transport capacities, especially as they relate to the shift from road to railway 
and ports. According to the government, in 2023, the number of containers shipped increased by 40%, 
to reach 700 000 TEUs ( 48). This measure outlines the extensive investments carried out and planned in 

(48)  Twenty-foot equivalent units. 

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infrastructure  both  for  national  and  local  roads  as  well  as  the  extended  Trans-European  Transport 
Networks  (TEN-T)  connectivity,  via  the  East-West  Highway,  with  EU  support.  In  terms  of  maritime 
connection, it highlights the planned deep seaport of Anaklia, as well as the increase of ferry services 
across the Black Sea. Georgia also outlines measures that have been taken to strengthen institutional 
capacities and agencies in the railway and road transportation sectors.  

To  ensure  a  resilient  digital  transformation  that  leaves  no  one  behind  and  seize  the  full  opportunity 
offered by the Black Sea digital cable, a broad and strategic vision effectively coordinated by a clearly 
identified  state  institution  is  important  to  broaden  the  potential  of  the  digital  economy,  roll  out  e-
governance  effectively,  strengthen  the  skills  base  and  ensure  compliance  with  EU  digital  and 
cybersecurity standards. Because of its strategic location in the South-Caucasus region, Georgia would 
also  benefit  from  being  further  aligned  with  the  EU  standards  related  to  digitalisation  of  transport 
corridors, as a means to boost trade and become further integrated into the Digital Single Market. The 
government’s plan to develop and adopt a national digital strategy, mirroring the EU Digital Compass 
would be a further step in aligning Georgia with EU standards in the context of the accession process 
and ensure a coordinated approach to mainstream initiatives supported by different donors, the private 
sector and international financial institutions.   

Key challenge #3: Addressing weaknesses in Georgian labour market including by improving 
the  quality  and  relevance  of  education  and  professional  skills  development,  and 
strengthening the social protection system and healthcare services. 

The Georgian labour market has several structural weaknesses. The unemployment rate stood 
at  16.4%  in  2023,  although  this  is,  down  from  17.3%  in  2022,  and  20.6%  in  2021.  In  addition,  the 
employment  rate  is  structurally  low  at  only  %.  54%.  This  is  partly  due  to  high  informal  employment 
(28.4% of non-agricultural employment, of which 33.4% for men and 22.5% for women), and a high 
share  of  population  involved  in  subsistence  farming.  The  employment  rate  is  particularly  low  for 
women (43.5% compared to 62.2% for men) while the share of young people neither in employment 
nor in education or training (NEETs) of 30.7% is particularly high (for 15-29 years old; the EU average 
is 11.7%). The unequal participation of women in the labour market, compared to men, leads to human 
capital  being  underused  and,  according  to  the  World  Bank,  an  opportunity  loss  of  economic  output 
equivalent to 11.3% of GDP. Self-employment is high (one third of total number of employed people) 
but  decreasing  steadily.  Still,  almost  4  out  of  5  employed  people  in  rural  areas  are  self-employed, 
mostly  in  agriculture.  Involvement  of  social  partners  in  developing  and  implementing  labour  market 
measures is crucial for their success. 

Overall,  there  is  a  need  to  increase  labour  market  participation  and  training  for  under-
represented groups, such  as NEETs, women, and people with disabilities, including those in 
remote  areas.  Further  enhancing  pre-primary  education  and  establishing  institutionalised  childcare 
systems  would  be  a  way  of  both  supporting  women's  labour  force  participation  and  improving 
education  outcomes.  Georgia  drafted  the  2024-2028  National  Strategy  of  Labour  and  Employment 
Policy, which sets out specific goals and objectives in the areas of labour and employment, specifically 
covering  enforcement  of  labour  standards  through  labour  inspections,  social  dialogue,  labour  market 
integration  of  vulnerable  groups,  labour  migration,  education,  gender  equality,  social  protection  and 
entrepreneurial-economic policy. The timely adoption and implementation of the strategy remains key. 

Despite the high level of unemployment and inactivity, companies struggle to find the skills 
they  need  in  the  labour  market.  The  low  quality  of  education  and  insufficient  matching  of  skills 
development  with  labour  market  needs  is  affecting  people’s  income  and  employment  opportunities, 
and the country’s ability to boost productivity. Georgia carried out significant reforms in the education 
sector in the mid-2000s. Public spending on education has reached 3.3% of GDP in 2022 (4.7% in EU) 
and early school leaving is in line with the EU average. Nonetheless, outcomes point to weaknesses in 
the  system.  With  education  systems  worldwide  being  significantly  disrupted  by  the  COVID-19 
pandemic, Georgia’s performance in the 2022 PISA assessment was slightly better in relative terms (its 
performance in science improved by a single point and its  rate of  decline in  maths and reading was 
below the average decline rate). However, Georgia is still among the bottom 25 countries in terms of 
ranking in all three domains (mathematics, reading and sciences), and regional disparities remain high. 

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This would suggest the need to carry out a comprehensive assessment of reforms needed to improve 
the quality of the education outcomes.  

Vocational  education  and  training  (VET)  are  provided  in  both  public  and  private  institutions,  but 
enrolments  are  modest  and  drop-out  rates  are  high.  Georgia  aims  to  promote  private-sector 
involvement  in  work-based  learning  and  dual  education.  Creating  partnerships  with  businesses  is  a 
guiding  principle  in  Georgia’s  technical  and  VET  reform.  In  2021,  the  Vocational  Skills  Agency  was 
established by the Ministry of Education and Science and Georgian Chamber of Commerce and Industry 
to  promote  interaction  and  partnership  with  private  sector.  Two  new  strategies,  the  2022-2027  VET 
strategy and career management services strategy for all formal education levels, are expected to be 
approved  in  2024.  However,  the  transition  from  vocational  education  programmes  into  the  labour 
market  remains  a  big  challenge,  relating  to  the  quality  of  VET,  alignment  with  labour  market  needs, 
lack of human and financial resources, and development of key competences.  

Poverty  rates  are  decreasing,  but  inequalities  persist,  and  social  safety  nets  are  very 
limited. The poverty rate dropped from 20% before the COVID-19 pandemic to around 15% in 2023, 
but  the  Gini  coefficient  stands  at  0.34,  suggesting  significant  and  persistent  inequalities,  particularly 
between  urban  and  rural  populations.  In  recent  years,  the  government  has  taken  steps  towards 
implementing significant social protection reforms. Among other measures, the government introduced 
a  Targeted  Social  Assistance  Programme  in  2006  and  targeted  child  allowances  in  2015.  Overall, 
spending on social protection (5.7% of GDP in 2022) remains below the average spending in Europe 
and  Central  Asia.  The  country  has  a  very  low  minimum  wage  in  place  and  the  social  allowance  for 
extremely poor people is also low (at most EUR 100 per family per month). The universal pension was 
increased  in  2023,  but  still  it  only  provides  relatively  small  benefits.  Georgia  has  no  unemployment 
insurance  and  employees  pay  very  little  in  social  contributions.  In  the  private  sector,  there  is  no 
obligation for firms to provide paid maternity leave. The government on the other hand provides a one-
off state allowance of maternity/child adoption benefits, which was increased from approximately EUR 
340 to EUR 680 in 2023. In a further initiative providing parental support, secondary school teachers 
can  now  receive  100%  of  their  salary  during  maternity  leave.  Adopting  a  comprehensive  and 
sustainable  social  protection  system,  including  unemployment  and  minimum  income  benefits,  is 
included in the recommendations addressed to Georgia in the 2023 Enlargement Package. 

The universal healthcare system is mostly provided by private providers, with high out-of-
pocket expenditure. Public spending on healthcare is above many low- and middle-income countries 
in the Europe and Central  Asia region,  but below the  EU  average and low in absolute terms. 86% of 
hospitals  are  owned  by  for-profit  private  entities,  while  the  rest,  mostly  specialised  hospitals,  are 
operated by public institutions. Out-of-pocket expenditures are high and are still the largest source of 
health financing for the general population (51% vs 16% in the EU). Universal healthcare coverage has 
been implemented in Georgia for the past decade, with around 82% of the population being covered. 
The universal health coverage programme primarily focuses on protecting poor households (i.e. those 
with  an  annual  income  threshold  of  approximately  EUR  13 600)  with  an  expanded  benefits  package, 
and the rest of the population with a basic set of publicly funded benefits. Outpatient care is increasing 
but remains low. In 2022, the country adopted the National Healthcare Strategy of Georgia 2022-2030 
and its action plan in 2022, with an overall goal to improve the health status of the population through 
universal access to healthcare services and equitable distribution of financial burdens.  

Reform measure 5: Improved Healthcare of the Population aims to improve the health status of 
the population, through universal access to health services, improved quality of the services, and equal 
sharing  of  the  financial  burden.  The  government  is  working  to  improve  the  effectiveness  of  social 
spending  through  stronger  intersectoral  dialogue  and  an  improved  institutional  framework.  This 
includes the protection of all citizens from social and financial risks and to ensure wider coverage of 
the  health  services.  Georgia  is  planning  to  introduce  modern  reimbursement  methods  in  the  field  of 
specialised healthcare services (e.g. result-oriented payment). The reform measure also aims to reduce 
out-of-pocket  costs  and  improve  access  to  high-quality,  efficient,  and  safe  medicinal  products.  This 
reform measure is relevant and contributes to the broader goal of establishing a comprehensive social 
protection system. Recent initiatives, such as the introduction of Diagnostic Related Groups to improve 

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health provider payment mechanisms and External Reference Pricing, have provided improvements in 
the quality of outpatient care and brought significant savings. 

Reform measure 6: Education includes three broad actions for the 2024-2026 period: (i) ensure a 
high-quality,  supportive  and  development-oriented  care  and  educational  process  by  all  early  and 
preschool care and education institutions; (ii) provide a  highly effective, relevant and  student-centred 
learning  experience  for  every  student  in  secondary  school,  enabling  the  student  to  fully  develop 
academic, personal, social and learning competencies; and (iii) provide vocational education services in 
response  to  current  demands  and  challenges.  While  all  these  measures  are  relevant  to  improve  the 
quality  and  relevance  of  education  and  professional  skills  development,  translating  the  reforms  into 
specific  measures  to  be  achieved  in  the  following  years  is  needed  along  with  ensuring  improved 
alignment between the high degree of enrolment in the higher education sector with the actual labour 
market  needs.  Georgia  needs  to  upgrade  its  education  system  to  build  strong  foundational  and 
transferable skills from early ages and to ensure market-relevance of its tertiary education. 

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Country analysis, Georgia 

3.5.  THE POLICY GUIDANCE 

JOINT CONCLUSIONS OF THE ECONOMIC AND FINANCIAL DIALOGUE BETWEEN THE EU AND 
THE WESTERN BALKANS PARTNERS, TÜRKIYE, GEORGIA, REPUBLIC OF MOLDOVA AND 
UKRAINE 

The Economic and Financial Dialogue between the EU and the Western Balkans Partners, Türkiye, 
Georgia, Republic of Moldova and Ukraine 

Brussels, 14 May 2024 

… 

In light of this assessment, Participants hereby invite Georgia to:  

1. 

2. 

3. 

4. 

Ensure  that  the  2024  budget  deficit  is  within  the  target  set  in  the  budget  law,  and 
implement the medium-term plan to reduce the deficit with a view to building fiscal buffers. 
In order to improve efficiency of the tax policy, publish the tax expenditure analysis of the 
agricultural  sector  and  prepare  concrete  budgetary  recommendations  to  implement  its 
findings,  and  continue  work  on  analysing  the  economic  and  fiscal  impact  of  all  tax 
expenditures. Adopt and publish the medium- term revenue strategy and make progress on 
its implementation.  

With a view to improving the quality of the assessment of public investment projects, further 
enhance staff skills in preparing these assessments and introduce an electronic system for 
the  management of  public investments.  In line  with the public debt management  strategy, 
continue efforts to develop the government security market, in particular by expanding the 
range  of  instruments  denominated  in  local  currency  as  an  important  step  towards  further 
development  of  capital  markets.  In  order  to  improve  the  monitoring  framework  and  cash 
management,  continue  the  process  of  improving  fiscal  oversight  over  state-owned 
enterprises (classified as general government units) by bringing the accounts of the largest 
enterprises under the Single Treasury Account.  

Ensure a  sufficiently tight  monetary policy stance as long as necessary to anchor inflation 
expectations at levels consistent with price stability, underpinned by a thorough assessment 
of potential second-round effects. Ensure the independence of the central bank, including by 
adhering to proper appointment procedures and sound central bank governance. Continue to 
enhance  risk-based  supervision  in  line  with  best  international  and  European  practices,  as 
well as to promote the use of the domestic currency and to limit unhedged lending. 

With a view to strengthening competitiveness and exports in the agricultural sector, finalise 
the  architecture  of  the  land  information  system  and  make  progress  on  extending  its 
coverage.  Advance  with  the  irrigation  sector  reform  including  the  revision  of  water  tariffs. 
With  a  view  to  addressing  the  informal  economy  in  a  holistic,  government-wide  manner, 
encompassing tax, labour, social and financial policies, undertake steps towards preparing a 
policy  plan,  by  establishing  a  dedicated  inter-  ministerial  Working  Group  and  elaborating 
sectoral and risk assessment. 

5. 

Adopt  a  legal  framework  for  supporting  Energy  efficiency  and  Renewable  Energy  roll  out, 
improve the security of energy supply by finalising and adopting legislation on establishing 
strategic  oil  reserves,  continue  to  liberalise  the  energy  market  by  finalising  and  adopting 

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legislation  on  unbundling  of  transmission  system  operators  in  electricity  and  ensuring 
electricity market opening by launching intra-day and day-ahead markets and preparing for 
the balancing  market. To support the  country’s  climate commitments, adopt the Integrated 
National  Energy  Climate  Action  Plan  and  develop  draft  legislation  to  introduce  the 
Monitoring, Reporting and Verification system thus approximating national legislation to the 
EU  legal  acts.  To  support  the  country’s  transit  potential,  continue  reforms  and  ensure 
implementation  of  investments  in  transport  infrastructure  (ports,  railways,  road  transport), 
build capacities within relevant transport agencies including through active cooperation with 
donors.  To  strengthen  digitalisation  and  productivity  of  the  economy,  adopt  an  
overarching  digital  strategy  and  enhance  coordination  among  digitalisation  governance 
agencies and relevant ministries.  

6. 

To  improve  labour  market  outcomes  and  social  inclusion,  adopt  and  ensure  an  effective  
implementation of the  Labour and Employment Policy strategy, paying special attention to 
internally  displaced  persons  and  under-represented  groups,  such  as  women,  people  with 
disabilities, and NEETs, including in remote areas. To strengthen Georgia’s human capital and 
reduce skills mismatches in the labour market, conduct and finalise - with the support of the 
European  Training  Foundation  -  a  diagnostic  of  the  education  system,  including  vocational 
education  and  training.  To  reduce  regional  disparities  and  social  inequalities  including 
through strengthened equity, access and efficiency of health care and the social safety net, 
extend universal health coverage further. 

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ANNEX: COMPLIANCE WITH PROGRAMME REQUIREMENTS 

The  Economic  Reform  Programme  2024-2026  was  endorsed  by  the  Government  of  Georgia (49)  and 
submitted to the Commission on 15 January 2024. The ERP includes both a presentation of the macro-
fiscal framework and of a selected number of structural reforms that the authorities consider focusing 
on in the next few years. Given the significant time constraints in preparing the programme, the ERP 
was based on documents and processes already in place in the Georgia’s fiscal governance and policy 
planning. The chapter on structural reforms, which was submitted on a voluntary basis, covers selected 
measures from the Government Strategic Document, ‘Vision 2030 – Development Strategy of Georgia’. 
Both  the  macro-fiscal  framework  and  the  structural  reform  part  broadly  reflect  the  key  components 
requested by the Commission. 

Inter-ministerial coordination 

The  ERP  is  coordinated  by  the  Ministry  of  Finance,  which  worked  closely  with  the  other  public 
institutions  in  preparing  the  ERP.  The  authorities  noted  that  the  date  for  submitting  the  ERP  to  the 
Commission  was  suboptimal  given  the  absence  of  final  budgetary  and  national  accounts  figures  for 
the  past  year  and  the  winter  holiday  period  that  posed  a  significant  challenge  to  the  authorities  in 
submitting the programme in good time.   

Stakeholder consultation 

Given  the  time  constraints,  independent  experts  were  not  consulted  on  the  ERP.  There  was  also  no 
public consultation on the programme either. However, the government documents and strategies that 
were used as a backbone for preparing the ERP underwent such consultations. 

Macroeconomic framework 

The  macroeconomic  part  of  the  ERP  was  prepared  on  the  basis  of  Georgia’s  medium-term  fiscal 
framework  for  2024-2027  (called  ‘Basic  Data  and  Directions’) ( 50),  which  was  submitted  to  the 
Parliament  as  part  of  the  2024  budget  package  and  the  2024  State  Budget  approved  by  the 
Parliament  on  15  December 2023.  It  describes  the  past  economic  developments  based  on  the 
available  data  and  includes  an  updated  medium-term  macro-fiscal  framework.  The  programme 
presents  a  clear  and  concise  picture  of  past  and  expected  main  future  economic  developments.  The 
presented framework is coherent and consistent, although it does not provide a detailed explanation of 
the  factors  behind  the  figures  presented.  It  describes  both  an  alternative  positive  and  negative 
macroeconomic scenario, although in a very succinct manner. 

Fiscal framework 

The major policy documents underpinning the fiscal framework are listed. The link between the fiscal 
framework and specific priorities is well presented. The programme contains references to obligations 
to 
under 
recommendations from the first enlargement country report published in November 2023. 

the  EU-Georgia  Association  Agreement, 

though  does  not  yet  make 

reference 

While the ERP covers all components required by the Commission, the estimated fiscal impact of the 
key  revenue  and  expenditure  measures  is  not  elaborated  upon  sufficiently.  The  programme  would 
benefit  from  a  more  detailed  analysis  of  budget  implementation  in  2023  (compared  both  to  the 
previous  year  and  the  2023  budget  plan)  as  well  as  a  more  comprehensive  explanation  of  the  key 
factors expected to influence the fiscal outcomes in 2024-2026. The ERP does not mention any one-
off expenditure  measures to be implemented in 2024.  Georgia’s fiscal reporting does not follow ESA 
2010 standards, and therefore does not  meet the Commission’s fiscal notification requirements. The 
authorities  mention  in  their  programme  plans  to  align  to  ESA  2010  but  have  not  provided  a  specific 
timeline to that end. 

(49)  Government Decree #41 (15 January 2024) on ‘On endorsement of the Economic Reform Programme (2024-2026)’. 

(50)  ‘Basic Data and Directions’, https://www.mof.ge/5653.  

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4.  KOSOVO* 

4.1.  EXECUTIVE SUMMARY  

Following  some  slowdown  in  economic  activity  in  2023,  Kosovo’s  economic  reform 
programme (ERP) expects GDP growth to pick up, mainly on the back of a robust increase in 
private and public investment. Annual output growth eased to a still buoyant 3.3% in 2023 from 
4.3% in 2022, primarily due to the negative contribution of the external sector to GDP growth. The ERP 
baseline scenario projects an annual average GDP growth of 4.6% in 2024-2026, which appears to be 
overly  optimistic.  In  particular,  the  strong  increase  in  investment,  a  key  growth  driver  in  the  ERP 
scenario, is likely to face  constraints. These  constraints are related to weak planning and insufficient 
implementation  capacity  for  public  investment  projects  and  an  uncertain  economic  environment  for 
private  investment.  Major  downside  risks  to  this  outlook  stem  from  less  dynamic  growth  in  Kosovo’s 
main  EU  (and  non-EU)  trading  partners,  tighter  financing  conditions,  an  acceleration  of  emigration 
flows following the EU visa liberalisation and lower-than-expected financial inflows from the diaspora. 

After 3 years of substantial fiscal consolidation, the ERP expects a strong fiscal impulse in 
2024,  while  ensuring  compliance  with  the  deficit  rule  in  2024-2026.  Supported  by  strong 
revenue  growth,  the  headline  budget  deficit  fell  to  0.2%  of  GDP  in  2023,  continuing  the  fiscal 
consolidation that started in 2021. Public capital spending increased substantially compared to 2022 
but fell short of budget  plans.  The 2024  budget expects  the  headline deficit to  rise to 2.7% of  GDP, 
implying  a  strong  fiscal  stimulus  mainly  through  an  arguably  very  ambitious  surge  in  public 
investment.  However,  the  deficit  (according  to  the  fiscal  rule  definition)  would  not  exceed  the 
prescribed  ceiling  of  2%  of  GDP.  The  ERP  expects  the  headline  deficit  to  remain  unchanged  in  2025 
and to fall to 1.9% of GDP in 2026. The public debt ratio is set to increase but remain low at slightly 
above 20% in 2026. However, the domestic public debt investor base remains narrow and Kosovo does 
not have access to international debt markets. 

The main challenges facing Kosovo are the following:  

• 

• 

The projected compliance with the deficit rule will serve as an anchor for fiscal policy 
but necessitates further reforms. Implementing the planned large increase in capital spending 
while containing current expenditure remains key. Budgetary transparency and accountability could 
be improved  by  further reducing  blanket allocations. Compliance with the  2% deficit  ceiling over 
2024-2026 could also be strengthened through policies to broaden the revenue base. A review of 
existing tax exemptions and preferential tax rates and the reduction of loopholes and exemptions 
through amendments to tax legislation would help mobilise revenues.  

The  significant  increase  planned  in  public  investment  requires  comprehensive  reforms 
to improve project planning and implementation. Despite the authorities’ continued efforts, 
Kosovo has made little progress in strengthening public investment management. Concrete steps, 
such as those recommended under the IMF’s updated Public Investment Management Assessment 
(PIMA),  could  improve  the  execution  of  capital  spending.  Fiscal  risks  related  to  publicly  owned 
enterprises (POEs) could  be  mitigated by improving their governance and  financial oversight and 
accountability.  This  can  be  advanced  by  steps  such  as  approving  and  publishing  annual 
performance reports for POEs and by adopting amendments to the POE Law. 

•  There  are  key  structural  obstacles  to  competitiveness  and  inclusive  growth.  Structural 
bottlenecks,  such  as  the  high  administrative  burden  for  businesses  and  citizens,  lack  of  proper 
resolution  of  commercial  disputes  and  limited  access  to  finance,  continue  to  have  a  negative 
impact on fair competition in Kosovo. The large informal  economy reduces  budget revenues and 
hinders  investment  and  business  development,  thereby  constraining  economic  growth.  The 
insufficient and unreliable supply of energy gives rise to significant costs for businesses while also 
putting pressure on public finance. The education system does not adequately equip students with 

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the  necessary  skills  required  by  the  labour  market.  This  market  is  characterised  by  low 
participation  and  high  unemployment  rates,  in  particular  for  women  and  young  people.  Weak 
labour-market  outcomes  contribute  to  continuously  high  emigration.  These  challenges  are 
expected  to  be  addressed  through  key  structural  reforms  identified  in  Kosovo’s  reform  agenda 
under the new Growth Plan for the Western Balkans. 

The implementation of the policy guidance set out  in the conclusions of the  Economic and 
Financial  Dialogue  of  May  2023  has  been  partial.  Strong  public  revenue  growth  substantially 
improved the budget balance. Compliance with the fiscal rule’s deficit ceiling of 2% of GDP is expected 
to  continue  in  2024.  The  measures  to  mitigate  the  impact  of  the  energy  crisis  on  vulnerable 
households and businesses were mostly well-targeted. The law on public-sector salaries that came into 
force in February 2023, combined with a suitable value of the wage coefficient set by the government, 
ensured that the public wage bill did not exceed its legal ceiling. At the same time, actual spending on 
the  war  veterans’  pension  scheme  slightly  breached  its  prescribed  legal  ceiling.  Tax  revenue  grew 
strongly,  partly  due  to  improved  tax  compliance  and  some  formalisation  gains,  but  there  was  little 
progress on reviewing tax exemptions. Financial oversight of POEs has improved but work to set up a 
fiscal  oversight  body  has  not  advanced.  Investment  management  also  remains  a  major  weakness. 
Kosovo  finalised  its  first  competitive  auction  for  renewable  energy  projects,  however  the  Law  on 
Renewable Energy Sources is still pending adoption. Medium to long-term measures planned in the EU 
Energy Support Package are still to be implemented. Limited progress has been achieved in the area of 
electricity  market  liberalisation  with  the  first  day-ahead  market  auction  for  electricity  delivery  in 
Kosovo  held  by  ALPEX ( 51).  Kosovo  continued  efforts  to  reduce  informality  by  implementing  planned 
activities,  adopting  a  new  action  plan  and  relevant  legislation.  Necessary  steps  to  complete  the 
restructuring  of  SME  and  investment  promotion  agencies  were  taken,  however  their  finalisation 
depends on a Constitutional Court decision. A roadmap for implementing key reforms to the education 
system  was  not  developed.  Kosovo  has  started  implementing  a  dual  education  system.  However  the 
vocational  education  and  training  (VET)  profiles  remain  largely  unaligned  with  labour  market  needs. 
The restructuring of the public employment services is still underway, and further legislative steps and 
adequate budget allocation are needed to implement the Youth Guarantee and deliver relevant active 
labour market measures. 

4.2.  ECONOMIC OUTLOOK AND RISKS 

Kosovo’s economic growth moderated in 2023 mainly due to weaker external demand. Real 
GDP growth softened to 3.3% in 2023 ( 52), compared to 4.3% ( 53) in 2022. The key factor behind the 
deceleration was the negative contribution of net exports to growth, reflecting a notable slowdown in 
real exports growth. GDP growth was driven by an acceleration in private consumption growth on the 
back of rising real wages, higher bank lending and a slight increase in (net) remittances as a share of 
GDP.  Also  public consumption growth  picked-up, largely due to higher public-sector wages.  Growth in 
2023 was also supported by a strong increase in public investment.  

The ERP’s baseline scenario projects a robust acceleration in real GDP growth in 2024-2025 
before easing in 2026. Real GDP  growth is set to  pick-up to 4.6% in  2024 and further to 4.8% in 
2025, before slowing to 4.4% in 2026. This acceleration is expected to be driven by a surge in public 
investment in  2024 (+23.1% year-on-year). Public investment looks  set to  benefit from: (i) improved 

(51)  Albanian  Power  Exchange  –  ALPEX  (Bursa  Shqiptare  e  Energjisë  Elektrike)  is  a  joint  venture  company  owned  by  the 

Transmission System Operators of Albania (OST) and Kosovo (KOSTT). 

(52)  Macroeconomic and fiscal estimates and forecasts covering the period 2023-26 have been taken from the ERPs themselves; 
if  available,  preliminary  macroeconomic  and  fiscal  outturn  data  for  2023  have  been  taken  from  the  relevant  national 
sources  (Kosovo  Agency  of  Statistics  (KAS),  Ministry  of  Finance,  Labour  and  Transfers  (MoFLT)  and  the  Central  Bank  of 
Kosovo (CBK)). 

(53)  In December 2023, the Kosovo Agency of Statistics (KAS) revised the real GDP growth rate for 2022 downwards, to 4.3% 

(from 5.2%). 

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implementation  of  future  project  appraisal  and  selection,  (ii)  implementation  of  the  administrative 
instruction already approved in May 2023, requiring budget organisations to include expropriation costs 
as  part  of  their  project  envelopes,  and  (iii)  ensuring  that  technical  evaluation  and  documentation  on 
new  externally  financed  projects  is  finalised  before  signing  the  corresponding  financial  agreements. 
Private  investment  is  also  expected  to  increase  by  8.7%  y-o-y  due  to  government  support  and  the 
private  sector’s  improving  balance  sheets.  Private  consumption  is  set  to  grow  by  2.6%  in  2024  and 
3.4% on average, in 2025-2026, supported by higher bank lending and public-sector wages as well as 
lower  inflation.  Public  consumption  is  projected  to  increase  by  6.2%  in  2024,  followed  by  a  more 
moderate pace, due to the planned increase in public sector salaries. Real exports are set to increase 
by 6.5% in 2024 and continue growing vigorously, by 7.2% on average in 2025-2026. In line with the 
envisaged robust investment increase, imports are expected to grow strongly, by 6.7% in 2024, before 
slowing to a pace of around 5% on average, in 2025-2026. As a result, the ERP projects net exports to 
provide  negative  contributions  to  GDP  growth  over  the  programme  period;  the  largest  in  2024  (-2.1 
pps.) followed by a diminishing trend in 2025-2026. The programme expects the output gap to remain 
zero in 2024 and to turn positive thereafter, as real growth is projected to exceed the potential growth 
rate (estimated at 4.5%). 

Table II.4.1:
Kosovo - macroeconomic developments

Real GDP (% change)
Contributions:
- final domestic demand
- change in inventories
- external balance of goods and services
Employment (% change)
Unemployment rate (%)
GDP deflator (% change)
CPI inflation (%)
Current account balance (% of GDP)
General government balance (% of GDP)
Government gross debt (% of GDP)

Source: Economic Reform Programme (ERP) 2024.

2022
5.2

2023
3.9

2024
4.6

2025
4.8

2026
4.4

2.8
-0.3
2.8
5.4
12.6
6.7
11.6
-10.2
-0.5
20.0

1.0
0.3
2.6
:
:
5.5
5.1
-6.8
-0.2
17.3

6.2
0.5
-2.1
:
:
3.0
2.7
-7.9
-2.7
18.8

5.4
0.5
-1.1
:
:
2.5
2.3
-7.9
-2.7
20.4

4.1
0.5
-0.2
:
:
2.3
2.3
-7.4
-1.9
21.4

The ERP’s baseline scenario appears overly optimistic and is beset by high uncertainty. GDP 
growth rates for 2024 and 2025 have been markedly revised downward from the previous year. Still, 
the growth path looks rather optimistic and much above the 4% average annual expansion projected 
by  the  IMF.  In  particular,  the  strong  recovery  in  investment  is  likely  to  face  constraints  due  to  an 
uncertain  economic  environment  for  private  investment,  as  well  as  persistent  weaknesses  in  the 
planning, selection and management of public investment. The ERP itself notes that macro-fiscal risks 
remain high due to the linkages between Kosovo’s economy and international partners through foreign 
trade  and  remittances  inflows.  Further  increases  in  global  energy  and  food  prices  -  due  to  the 
escalation  of  Russia’s  full-scale  war  of  aggression  against  Ukraine  and  geopolitical  tensions,  a  tight 
monetary  policy  stance  and  the  associated  deceleration  of  economic  activity  in  the  euro  area  -  will 
likely cause a further slowdown in inflows of remittances and will negatively affect external demand. 
Significant domestic risks stem from outdated power generation capacity and high import costs, which 
may result in new power cuts and higher energy subsidies as well as a pick-up in emigration flows due 
to the EU visa liberalisation. The ERP’s ‘low growth’ scenario results in an average annual growth rate 
of  around  2.3%  in  2024-2026,  which  appears  more  realistic  than  the  baseline.  The  scenario’s  main 
assumptions  are  an  under-execution  of  public  investment,  lower  foreign  demand,  a  decline  in 
remittances and higher financing costs for the banking sector. The programme would benefit from the 
inclusion  of  a  comparison  between  its  medium-term  growth  projections  and  the  potential  output 
growth estimates. 

After a significant  moderation in 2023, average inflation is  expected to decline further in 
2024-2026. Consumer price inflation decelerated substantially in the course of 2023, averaging 4.9% 

82 

 
 
   
 
 
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Country analysis, Kosovo* 

for the year as a whole (compared to 11.6% in 2022) and falling to as low as 2.2% in February 2024. 
The key driver of moderating inflation was lower commodity prices in international markets. The ERP 
expects  average  annual  inflation  to  decrease  further  to  2.7%  and  2.3%  in  2024  and  2025-2026, 
respectively,  on  the  back  of  the  continued  slowdown  in  global  commodity  prices.  The  ERP’s  inflation 
projection  is  more  optimistic  than  the  IMF  forecast  of  an  annual  inflation  rate  of  3.5%  in  2024.  The 
programme rightly acknowledges the external risk of any intensification in the war in Ukraine and the 
fallout  from  this  on  commodity  prices  and  external  demand,  as  well  as  other  geopolitical  tensions 
(such  as  those  around  the  Red  Sea).  This  would  leave  Kosovo  exposed  to  renewed  inflationary 
pressures  caused  by  higher  import  prices  for  food,  agricultural  and  energy  products,  the  latter 
potentially exacerbated by shortfalls in domestic electricity production. Inflation risks also come from 
demand  pressures  due  to  higher  public-sector  salaries  and  pensions  that  were  included  in  the  2024 
budget, and a potential increase in social benefits. 

The current account deficit narrowed significantly in 2023, but the ERP projects it to widen 
over  the  programme  period  as  domestic  demand  picks  up.  The  continued  rebound  of  services 
exports,  coupled  with  the  energy-balance-driven  decline  in  the  merchandise  trade  deficit,  resulted  in 
the current account deficit narrowing to 7.6% of GDP in 2023 from 10.3% in 2022. Diaspora tourism 
from Western  Europe and exports of IT services  fuelled a 1.4 pps. increase in the services surplus to 
16.9%  of  GDP.  At  the  same  time,  despite  the  moderate  fall  in  goods  exports,  the  traditionally  high 
merchandise trade  deficit narrowed by  0.6  pps. to 47.6% of GDP, mainly due to a notable decline in 
energy imports, reflecting falling energy prices globally. The primary income surplus widened to 1.9% 
of  GDP  in  2023  from  1.3%  in  2022.  Remittances  increased  by  0.2  pps.  to  13.9%  of  GDP,  and  are 
forecast  to  follow  historical  trends  in  2024-2026  with  an  annual  average  growth  of  5%.  Errors  and 
omissions  (2.9%  of  GDP)  may  reflect  unrecorded  services  exports  and  remittances,  so  the  actual 
current  account  deficit  could  be  smaller  than  the  official  estimates.  The  ERP  expects  the  current 
account deficit to widen to 7.9% of GDP in 2024. This appears plausible, given the expected increase in 
imports,  reflecting  rising  domestic  demand  and  higher  investment.  A  slight  decrease  in  the  deficit  to 
7.6% of  GDP on average in  2025-2026 appears to be in line with the  projected improvement in the 
overall trade deficit, mainly on the back of higher external demand. 

External competitiveness and current account 

Graph II.4.1a: Kosovo - current account balance 
(% GDP)

40

20

0

-20

-40

-60

2023

2022
 Services balance
Current account balance (rhs)

2024

2026

2025
 Goods balance
Net FDI (rhs)

10

5

0

-5

-10

-15

120

115

110

105

100

95

90

Graph II.4.1b: Kosovo - real effective exchange 
rate (2010 = 100)

Appreciation

Depreciation

2019

2020

2021

2022

2023

Kosovo

EA19

Source: Economic Reform Programme (ERP) 2024.

Source: Economic Reform Programme (ERP) 2024 and ECB.

Net  foreign  direct  investment  increased  slightly  in  2023  and  covered  some  90%  of  the 
current account deficit, on the back of financial inflows from the diaspora into real estate. 
Net foreign direct investment inflows grew to 6.8% of GDP in 2023 from 6.3% in 2022, covering most 
(89%) of the current account deficit. The bulk was directed to non-tradeable activities, with real estate 
and  financial  and  insurance  services  accounting  for  61%  and  21%  of  all  foreign  direct  investment 
inflows  respectively,  doing  little  to  improve  export  capacity.  The  ERP  projects  that  net  foreign  direct 
investment  inflows  will  be  roughly  stable  at  EUR 0.6 billion  over  the  programme  period.  Due  to  the 
projected  increase  in  nominal  GDP,  these  inflows  are  therefore  expected  to  gradually  decrease  from 
5.8% of GDP in 2024 to 5.1% in 2026, which is not sufficient to fully cover the current account deficit. 
Kosovo’s  net  international  investment  position  slightly  deteriorated  to  -18.8%  of  GDP  in  2023, 
compared  to  almost  -18%  in  2022.  Around  two  thirds  of  gross  liabilities  consist  of  foreign  direct 

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investment, limiting external vulnerabilities. Reserve assets are largely stable at just above 2 months 
of imports over the ERP period. 

Table II.4.2:

Kosovo - financial sector indicators

Total assets of the banking system (EUR million)
Foreign ownership of banking system (%)
Credit growth (%, average)
Deposit growth (%, average)
Loan-to-deposit ratio (end of period)
Financial soundness indicators (%, end of period)
     - non-performing loans to total loans
     - regulatory capital to risk-weighted assets
     - liquid assets to total assets
     - return on equity
     - foreign exchange loans to total loans

Source: Central Bank of Kosovo.

2019
4 761
86.7
10.7
12.6
77.6

2.0
15.9
38.7
18.9
0.1

2020
5 365
86.5
7.7
12.2
74.5

2.7
16.5
39.8
14.0
0.1

2021
5 960
85.5
11.2
13.8
76.5

2.1
15.3
37.4
17.6
0.1

2022
6 762
84.9
17.4
10.8
78.3

2.0
14.8
36.5
20.6
0.3

2023
7 542
84.3
14.1
13.9
80.2

2.0
15.8
34.7
19.7
0.2

The mainly foreign-owned banking sector remained resilient and continued  to expand at a 
robust pace. Annual bank lending growth decelerated to an average of 14.1% in 2023 from 17.4% in 
2022,  largely  driven  by  slower  growth  in  credit  to  businesses,  reflecting  tighter  financing  conditions. 
New loans to households, mostly for spending purposes, grew vigorously. The growth of bank deposits 
picked-up to an average of almost 14% in 2023 from 10.8% in 2022. Financial soundness indicators 
remained satisfactory, e.g. the loan-to-deposit ratio and non-performing loan (NPL) ratio (54) stood at 
80.2%  and  2%,  respectively  at  end-2023.  While  bank  profitability  has  slightly  declined,  with  the 
average return-on-equity ratio falling to 19.7% in 2023 from 20.6% in 2022, the risks in the banking 
sector seem contained. Still, asset quality should be monitored closely in the context of higher interest 
rates and tighter liquidity. The ERP does not provide quantified forecasts for the financial sector but its 
underlying  assumption  is  of  a  moderate  increase  in  NPLs  during  2024,  necessitating  increased 
provisioning  for  credit  risks.  Despite  the  fact  that  new  mortgage  lending  to  households  declined  in 
2023,  compared  to  relatively  strong  growth  a  year  before,  it  would  also  appear  appropriate  to 
strengthen surveillance of the housing market, including by compiling residential sector statistics using 
bank loan data.  

4.3.  PUBLIC FINANCE 

Fiscal consolidation continued in 2023 with a further reduction in the headline deficit due 
to  strong  revenue  performance  and  despite  a  surge  in  public  investment  spending.  The 
headline budget deficit stood at 0.2% of GDP in 2023, which corresponds to a surplus of 0.6% of GDP 
under the fiscal rule definition (55). The headline deficit outturn was lower than in 2022 (0.5% of GDP) 
and  significantly  undershot  the  target  of  3.6%  set  in  the  revised  2023  budget.  The  lower  deficit 
resulted primarily from a strong increase in government revenue (+14.4% year-on-year), partly due to 
improved  tax  compliance  and  some  formalisation  gains.  Tax  revenue  increased  by  13%  y-o-y,  with 
direct and indirect tax income growing healthily by 18.4% and 11.1%, respectively. Public expenditure 

(54)  The stable NPL ratio was also supported by the denominator effect, i.e. continued credit growth. 

(55)  The fiscal rule places a cap on the fiscal deficit of 2% of forecast GDP, excluding capital projects financed by privatisation 
proceeds  and  donors  (‘investment  clause’).  This  exemption  for  donor-financed  investments  can  be  invoked  until  2026, 
provided the public debt ratio remains below 30% of GDP. A further rule stipulates that the increase in the public wage bill 
cannot exceed nominal GDP growth. Government deposits used as fiscal buffers are legally required to stay at 4.5% of GDP 
as  long  as  the  government  uses  privatisation  proceeds.  The  debt  rule  requires  that  public  and  publicly  guaranteed  debt 
cannot exceed 40% of GDP. 

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grew by 13.2% year-on-year due to a strong increase in capital spending (almost 33%), even though it 
only reached around 68% of the revised budget allocation, reflecting overoptimistic targets and weak 
implementation  capacity.  The  execution  of  overall  current  expenditure  was  roughly  in  line  with  the 
revised  budget  plan.  Wages  and  allowances  recorded  a  strong  increase  of  17.3%  y-o-y  due  to  the 
implementation of the new law on salaries in the public sector since February 2023, while spending on 
goods and services rose by almost 16%. Government deposits fell to 2.4% of GDP, from 3.2% in 2022, 
reflecting  higher  nominal  GDP,  a  shortfall  of  external  budget  support  financing  and  a  sizeable  net 
negative domestic debt issuance. 

The  ERP  objective  for  2024-2026  is  to  maintain  stable  public  finances  and  comply  with 
fiscal rules, while supporting the economy mainly through higher capital spending. Over the 
programme period, public revenue is set to decline by 1.0 pp. to 28.1% of GDP by 2026, mainly due to 
a  decrease  in  non-tax  revenue,  while  tax  revenue  is  projected  to  rise  marginally  in  2024  before 
stabilising at 25.6% of GDP in 2025-2026. Public expenditure is projected to increase by 0.7% of GDP 
over the ERP period to 30.1% in 2026, largely based on a very sizeable (2.2 pps.) upfront increase in 
capital spending in  2024,  which  brings public investment  to around 8% of GDP, at  which level it will 
remain  over  the  programme  period.  Current  spending  is  set  to  fall  gradually  by  1.1  pp.  to  21.6%  in 
2026, driven by lower spending on goods and services as well as wages and salaries while transfers 
and subsidies are projected to remain stable as a percentage of GDP. After a large increase in 2024, 
the  headline  deficit  and  the  deficit  as  per  the  fiscal  rule  definition  are  set  to  remain  unchanged  in 
2025, compared to 2024, at 2.7% and 2% of GDP respectively, while they are projected to fall to 1.9% 
and  1.5%  of  GDP,  respectively,  in  2026.  The  implied  fiscal  impulse  of  2.5 pps.  in  2024  seems 
appropriate  to  support  economic  activity  given  the  economic  slowdown  in  2023  and  the  sizeable 
uncertainty  surrounding external demand as  well as the  emergence of a negative output  gap before 
fiscal consolidation gradually resumes in 2025-2026.  

Table II.4.3:

Kosovo - composition of the budgetary adjustment  (% of GDP)

Revenues
    - Taxes and social security contributions
    - Other (residual)
Expenditure
    - Primary expenditure
       of which:
       Gross fixed capital formation
       Consumption
       Transfers & subsidies
       Other (residual)
    - Interest payments
Budget balance
    - Cyclically adjusted
Primary balance
    - Cyclically adjusted
Gross debt level

2022

2023

2024

2025

2026

27.9
25.2
2.7
28.4
28.0

4.7
11.4
11.9
0.0
0.4
-0.5
-0.9
-0.1
-0.5
20.0

29.1
25.7
3.4
29.3
29.1

5.9
12.1
11.0
0.0
0.4
-0.2
-0.2
0.2
0.2
17.3

28.7
25.9
2.8
31.4
31.0

8.1
12.5
10.1
0.2
0.4
-2.7
-2.7
-2.3
-2.3
18.8

28.2
25.6
2.6
30.9
30.4

8.1
12.0
10.1
0.2
0.5
-2.7
-2.8
-2.2
-2.3
20.4

28.1
25.6
2.5
30.1
29.6

7.8
11.4
10.1
0.2
0.5
-1.9
-2.1
-1.4
-1.5
21.4

Change:
2023-26
-1.0
-0.2
-0.9
0.7
0.5

1.9
-0.7
-0.9
0.2
0.1
-1.7
-1.8
-1.7
-1.8
4.2

Sources: Economic Reform Programme (ERP) 2024, Commission calculations.

The  2024  budget  aims  to  provide  a  significant  fiscal  impulse,  primarily  through  a  large 
increase  in  investment  spending,  albeit  with  sizeable  risks  surrounding  its  execution.  The 
2024  budget  projects  public  revenue  to  be  28.7%  of  GDP,  slightly  lower  than  the  2023  outturn  of 
29.1% of GDP. Tax revenue is expected to increase marginally to 25.9% of GDP, supported by higher 
GDP growth, a further reduction in the informal economy and improved tax compliance. Grants are set 
to  decrease  significantly  by  62.5%  year-on-year,  reflecting  base  effects  due  to  the  EUR  75  million 
(0.8% of 2023 GDP) energy-crisis-related budget support from the EU in 2023. The assumed small rise 

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in the tax revenue-to-GDP ratio looks plausible, due to authorities’ initiatives to further strengthen tax 
compliance  and  tackle  the  informal  sector ( 56).  Total  expenditure  is  planned  to  increase  to  31.4%  of 
GDP from 29.3% in 2023, mainly due to a 2.2 pps. rise in public investment spending. Compared to the 
2023  outturn,  capital  spending  is  set  to  increase  by  around  53%.  Such  a  strong  increase  appears 
overly  optimistic,  given  the  previous  track  record  in  implementing  spending,  and  would  require  a 
comprehensive  overhaul  of  the  institutional  framework  for  investment  planning  and  management. 
Moreover, such a  strong surge in public investment is also not in line with the projections underlying 
the current IMF stand-by arrangement, which expects a small increase in capital spending in 2024 to 
6.1% of GDP from 6% in 2023. Current expenditure is set to decrease by 0.5 pps. to 22.6% of GDP in 
2024  reflecting  the  government’s  intention  to  gradually  decrease  less  growth-enhancing  budget 
allocations  as  well  as  better  targeting  of  energy-crisis  related  temporary  support  to  vulnerable 
consumers. Spending on goods and services is expected to grow by 0.6 pps. to 4.9% of GDP as a result 
of  reclassifications  from  capital  to  current  expenditure,  mainly  in  the  Ministry  of  Defense. 
Notwithstanding the planned increase in the salary coefficients as foreseen in the Law on salaries of 
public officials that came into force in February 2023, the wage bill is expected to decrease by 0.2 pps. 
to  7.6%  of  GDP.  Debt  interest  payments  are  set  to  remain  unchanged  at  0.4%  of  GDP  in  2024.  The 
2024 budget includes a 1.3% of GDP allocation for contingencies, of which 0.7% of GDP is a blanket 
allocation.  This  is  significantly  lower  than  in  the  2023  budget  (2.7%  of  GDP).  Still,  such  blanket 
allocations  undermine  fiscal  transparency  and  budget  planning  unless  they  are  justified  as  part  of  a 
concrete  risk  assessment  framework.  The  headline  deficit  is  forecast  to  rise  to  2.7%  of  GDP,  which 
would keep the deficit (as measured according to the fiscal rule’s definition) at the prescribed ceiling of 
2%  of  GDP.  Government  cash  deposits  are  planned  to  decline  slightly  to  1.7%  of  GDP  from  2.4%  in 
2023, which is still in line with the fiscal rule, as no privatisation proceeds are planned.  

While general government debt is projected to remain low, weaknesses linked to a narrow 
investor  base  and  a  lack  of  market  access  remain. On  the  back  of  a  marginal  primary  surplus 
and high nominal GDP growth, the debt-to-GDP ratio decreased by 3.5 pps. to 17.2% in 2023. This is 
well below the 2023 ERP projection of 22.6% and the fiscal rule ceiling of 40%. However, the figures 
do not factor in the liability from COVID-19-related tax-free withdrawals of 10% of  pension savings 
from the Kosovo Pension Saving Trust (KPST), which the government started reimbursing in 2023 (57). 
Domestic debt decreased significantly by almost 13% in 2023 and is held by a narrow investor base. 
The KPST is the largest investor and accounts for 46% of the domestic debt stock (down from 49% in 
2022). The KPST still has room to buy new bond issuances in the coming years, but it is approaching 
the  legal  limit (58).  The  appointment  of  new  Board  members  in  July  2023  allowed  KPST  to  resume 
participation in the auction of Kosovo government securities in August. The share held by commercial 
banks fell slightly to 24% from 25%; the share held by the Central Bank of Kosovo increased to 22% 
in  2023,  from  19%  a  year  earlier.  Foreign  debt  rose  by  around  8%  in  2023  and  consists  of 
concessional  financing  from  international  financial  institutions,  such  as  the  IMF,  the  World  Bank,  the 
European  Investment  Bank  and  the  European  Bank  for  Reconstruction  and  Development.  The  ERP 
projects a 1.6 pps. increase in the public debt ratio in 2024 to 18.8% of GDP and a continued gradual 
drift upwards to 21.4% of GDP in 2026. It projects government deposits to hover around 1.7% of GDP 
in 2024-2026, notably lower than the level expected in the previous year’s ERP, which may not provide 
sufficient capacity to absorb potential new shocks. The lack of an international credit rating and access 
to  international  debt  markets  implies  a  need  to  diversify  the  investor  base  to  ensure  adequate 
financing.  This  could  include  insurance  companies,  non-financial  private  firms  and  possibly  retail 
investors,  including  among  the  diaspora,  which  together  currently  hold  only  8%  of  domestic  debt. 
Kosovo is receiving technical assistance from the U.S Agency for International Development (USAID) to 
prepare  an  assessment  for  obtaining  a  sovereign  credit  rating  from  one  of  the  three  leading 
international credit rating agencies. 

(56)  The  Tax  Administration  of  Kosovo  (TAK)  announced  a  new  action  plan  to  reduce  informality  in  July  2023,  and  a  tax 

procedures law was adopted by the government in December 2023. 

(57)  The IMF estimates the liability to KPST to be 1.8% of 2020 GDP. 

(58)  Government securities should not exceed 30% of KPST assets. 

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BOX II.4.1: DEBT DYNAMICS 

Part II 
Country analysis, Kosovo* 

0.1
-1.9

2.3
-0.8

2.2
-0.8

-0.2
-1.3

2026
21.4
1.0

2022
20.0
-1.6

2023
17.3
-2.7

2024
18.8
1.5

2025
20.4
1.7

       Interest expenditure

Gross debt ratio [1]
Change in the ratio
Contributions [2]:

   1. Primary balance
   2. 'Snowball effect'
       Of which:

Kosovo
Composition of changes in the debt ratio (% of GDP)

The  primary  balance 
is  projected  to  turn 
negative in 2024 and 
maintain a (gradually 
in 
shrinking)  deficit 
2024-2026,  which  is 
expected  to  drive  the 
moderate  increase  in 
the  public  debt  ratio 
over the same period. 
This  debt-increasing 
factor  is  set  to  be 
partly  offset  by  the 
impact  of  buoyant 
economic 
growth 
to  a  more 
and, 
extent, 
limited 
Interest 
inflation. 
expenditure 
is 
forecast  to  stay  low 
and  rougly  stable  at 
in 
0.5%  of  GDP 
2024-2026.  Slightly 
positive contributions to the debt-to-GDP ratio are expected to come from stock-flow adjustments 
in 2025 and 2026, although their origins are not explained in the ERP. 

[2]  The 'snowball effect' captures the impact of interest expenditure on accumulated

      The stock-flow adjustment includes differences in cash and accrual accounting, 

      debt, as well as the impact of real GDP growth and inflation on the debt ratio

Source: Economic Reform Programme (ERP) 2024, Commission calculations.

      accumulation of financial assets, and valuation and other effects.

       Growth effect
       Inflation effect

   3. Stock-flow adjustment

      (through the denominator).

0.4
-0.7
-1.0
-1.2

0.4
-0.7
-0.5
0.0

0.5
-0.8
-0.4
0.2

0.5
-0.8
-0.4
0.4

0.4
-1.0
-1.3
0.2

[1]  End of period.

1.4
-0.8

Significant risks and uncertainties surround the fiscal scenario. Fiscal projections are likely to 
underestimate current spending, while the assumption of a surge in capital spending in 2024 appears 
unrealistically large. On the spending side, the decrease in the allocation for transfers and subsidies as 
a percentage of GDP seems rather benign, even if the elimination of untargeted government electricity 
subsidies, following the increase in electricity tariffs in March 2023, is taken into account. There is a 
risk that transfers and subsidies might decrease less than the targeted 1.4% or even increase in 2024, 
compared to the 2023 outcome, due to the repetition of initiatives such as raising basic pensions with 
one-off top-ups and child benefits (59), while existing schemes might prove more costly than expected. 
In particular, spending on war veteran pensions has repeatedly breached the legal cap of 0.7% of GDP 
in the absence of a reclassification of beneficiaries. The law adopted on 13 July 2023, which decouples 
war veterans’ pensions from the minimum wage, would help contain overspending risks. However, the 
law is currently being reviewed by the constitutional court (following a request by the opposition) and it 
will not be decreed by the President before the court’s ruling is received. The planned decrease in the 
wage  bill also looks optimistic  given the previous track record in this area. The  projected increase of 
more than 50% in capital spending, compared to the 2023 outturn, seems overly ambitious given the 
track record in previous years and limited progress in improving planning, selection and management 
capacities for public investment.  

Additional  fiscal  risks  stem  from  poor  financial  oversight  and  accountability  as  well  as 
weak governance of  Publicly  Owned Enterprises (POEs) which could require  (further) large 

(59)  These initiatives were taken in December 2023 with a fiscal cost of around EUR 69 million. The child benefits are not laid 
down  in  the  respective  legislation  yet  (apart  from  the  Law  on  budget  appropriations),  while  basic  pension  top-ups  are 
implemented based on ministerial decisions. 

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subsidies (60)  from  the  budget.  Despite  recent  improvements  in  monitoring  the  fiscal  risks 
emanating from POEs’ operation, the approval of their annual performance report for 2022 has been 
delayed and the law that regulates their corporate governance has become obsolete as it is not aligned 
with recognised international standards. In mid-December 2023, the Assembly adopted a law for the 
creation of a sovereign fund managing state assets which, once established, is set to have a key role in 
improving  the  management  and  financial  performance  of  POEs ( 61).  The  2024  budget  includes  an 
allocation  of  only  EUR 3  million  for  reimbursing  the  COVID-19-related  10%  withdrawal  of  pension 
savings  from  the  Kosovo  Pension  Saving  Trust  (KPST) ( 62),  thereby  requiring  higher  allocations  in  the 
following years’ budgets to meet this liability. On the revenue side, the projected rise in tax revenue of 
around  9%  in  2024  looks  plausible,  with  revenue  gains  expected  to  come  from  further  reduction  in 
informality and improved tax compliance. However, the ERP does not outline any reforms to widen the 
tax base. Overly optimistic GDP growth projections are also a downside risk for revenue.  

BOX II.4.2.: SENSITIVITY ANALYSIS 

The ERP analyses the sensitivity of the debt-to-GDP ratio to three specific shocks: 

1) 

2) 

If the deficit rule is followed and there is a slowdown in GDP growth of 1 percentage point in 
2027-2036, debt would increase to 34.9% of GDP by the end of 2036 instead of 32.8% in the 
baseline scenario  

If the deficit rule is not followed and the primary balance deteriorates by 1 percentage point of 
GDP in 2027-2036 due to higher spending, debt would increase to 37.7% of GDP by the end of 
2036, i.e. 4.9 percentage points higher than in the baseline scenario.  

3)  No compliance with the deficit rule and a 1 percentage point increase in interest rates on loans, 
would bring the debt-to-GDP ratio to 38.8% by the end of 2036, i.e. 6 percentage points higher 
than in the baseline scenario.  

The sensitivity analysis highlights the importance of complying with the 2% deficit rule, which acts 
as  a  debt  stabiliser.  Moreover,  in  view  of  the  expected  termination  of  financing  from  privatisation 
funds in the medium term, it is important to keep current expenditure under control. 

The  efficiency  of  public  spending  suffers  from  long-standing  issues  such  as  inappropriate 
targeting and transparency of social transfers. Although temporary energy-crisis related support 
for  vulnerable  households  and  firms  was  mostly  well-targeted  through  means-testing  procedures,  a 
large share of specific category-based social transfers, including war-related pensions, which are non-
contributory and financed from the budget, do not directly focus on reducing poverty.  

Strengthening  public  investment  management  would  support  a  shift  to  a  more  growth-
enhancing budget structure. According to IMF estimates Kosovo has lower relative levels of capital 
stock  than  peer  countries (63)  and  a  lower  growh  rate  in  its  real  public  capital  stock ( 64).  Weaknesses 

(60)  The  MoFLT  cannot  provide  the  exact  amount  of  subsidies  and  capital  transfers  to  POEs,  as  it  is  not  possible  to  generate 
consolidated reports in the Kosovo Financial Management Information System (KFMIS) that capture all financial transactions 
to POEs, thereby posing a fiscal risk and undermining  fiscal transparency. 

(61)  The law on the establishment of a sovereign fund is being reviewed by the constitutional court.  

(62)  The framework provides for five annual instalments of EUR 20 million each as of 2023. Only EUR 5 Million were disbursed in 

2023.  

(63)  Albania, Bosnia and Herzegovina, Croatia, Montenegro, North Macedonia, Serbia, and Slovenia. 

(64)  Public capital stock in 2019 for Kosovo was estimated at 49.2% of GDP while it was at 82.3% for Albania, 75% for Croatia, 
73.9%  for  Bosnia  and Herzegovina, 63.4%  for  Montenegro,  57.4%  for  Slovenia  and  34.5%  or  Serbia.  Kosovo’s  real  public 
capital stock growth was negative on average during 2014–2019. In contrast, real capital stock growth was estimated to be 
growing solidly for the peer countries in the region. 

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Country analysis, Kosovo* 

persist  at  the  planning  phase  of  public  investment  projects.  Many  of  the  projects  do  not  undergo  a 
proper appraisal and selection process as set out in the administrative instructions on project selection 
and the related public investment programme manual. Furthermore, the administrative instructions do 
not  integrate  a  climate-awareness  perspective  in  the  appraisal  and  selection  of  capital  projects.  The 
latter are therefore not ready for implementation when approved. Project oversight is also weak, which 
impedes corrective action when needed. On a positive note, steps were taken to unlock the potential of 
project implementation, including through the Ministry of Finance Labour and Transfers (MoFLT) budget 
circular,  which  requires  budget  organisations  to  include  expropriation  costs  as  part  of  the  project 
envelope.  Furthermore,  technical  evaluation  and  documentation  on  new  externally-financed  projects 
should  be  finalised  before  the  corresponding  financial  agreements  are  signed.  Shortcomings  in 
managing public investment could be addressed by establishing the linkages among the e-procurement 
and  Kosovo  Financial  Management  Information  (KFMIS)  systems,  as  recommended  under  the  IMF’s 
updated public investment management assessment.  

Continued  tax  policy  reforms  are  essential  to  strengthen  the  revenue  base.  Kosovo’s  tax 
regime  is  plagued  with  numerous  tax  exemptions,  preferential  tax  rates  and  special  regimes,  all  of 
which  erode  the  tax  base.  For  this  reason,  it  is  necessary  to  undertake  and  publish  a  review  of  tax 
expenditure  quantifying  the  revenue  foregone  on  account  of  these  practices.  Furthermore,  to  reduce 
loopholes  and  exemptions  the  government  is  preparing  amendments  to  the  legislation  on  personal 
income tax (PIT), corporate income tax (CIT) and value added tax (VAT). These tax policy reforms are 
essential  for  raising  revenue  to  compensate  for  the  expected  loss  in  customs  revenue  due  to  the 
implementation  of  the  free  trade  agreement  with  Türkiye  and  the  Stabilisation  and  Association 
Agreement with the EU. 

The  existing  system  of  fiscal  rules  provides  the  main  anchor  for  fiscal  policy  while 
safeguarding high out-of-budget capital spending. The 2024 budget appropriately aims to keep 
the deficit (according to the fiscal rule’s definition) at the prescribed ceiling of 2% of GDP. The deficit is 
expected  to  remain  unchanged  in  2025  before  decreasing  to  1.5%  of  GDP  in  2026.  However,  the 
enforcement  of  the  fiscal  framework  suffers  from  the  unfinished  reclassification  of  war  veteran 
pension  beneficiaries  and  continuously  expanding  social  commitments.  According  to  the  fiscal  rule 
definition,  the  exemption  from  the  2%  deficit  ceiling  of  capital  projects  financed  by  privatisation 
proceeds  and  donors  can  be  invoked  up  until  2026,  provided  that  public  debt  remains  below  the 
prescribed  ceiling  of  30%  of  GDP.  Despite  the  planned  increase  in  the  salary  coefficients  due  to  the 
implementation of the law on salaries of public officials, the wage bill is expected to decline by 0.2 pps. 
to  7.6%  of  GDP  in  2024,  so  the  wage  bill  rule  will  be  respected.  The  proper  functioning  of  Kosovo’s 
fiscal  framework  is  also  conditional  on  the  quality  of  macro-financial  statistics,  which  require 
substantial further improvement. Fiscal governance would also benefit from setting-up an independent, 
fiscal oversight body. It is therefore regrettable that the authorities do not seem to have the intention 
of advancing towards the establishment of a Fiscal Council. 

4.4.  MAIN MACRO-RELEVANT STRUCTURAL CHALLENGES  

In  November  2023,  the  Commission  proposed  a  New  Growth  Plan  for  the  Western 
Balkans (65) with the aim of supporting the region’s economic convergence and accelerating 
the accession process. The plan involves a Reform and Growth Facility (EUR 2 billion in grants, EUR 4 
billion  in  loans)  that  is  to  be  disbursed  in  2024-2027  as  investment ( 66)  and  budget  support,  in 
exchange for implementing reforms that are to be set out in Reform Agendas prepared by the Western 
Balkan partners. The New Growth Plan is therefore an important tool for increasing reform incentives 

(65)  https://neighbourhood-enlargement.ec.europa.eu/enlargement-policy/new-growth-plan-western-balkans_en. 

(66)  Infrastructure  investments  need  to comply  with  the EU environmental acquis,  national  and  international  nature  protection 
and water management obligations, ensure public participation and consultation, and guarantee high quality environmental 
impact assessment reports that include cumulative impacts on nature and biodiversity. 

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to boost growth and convergence. In this context, with a view to ensuring an integrated surveillance of 
Kosovo’s economy, this chapter briefly outlines the main structural challenges facing Kosovo.  

Kosovo’s  corporate  structure  is  dominated  by  family-owned  small  and  micro  companies 
mostly operating in the services sector. The services sector dominates economic activity, providing 
around 45% of gross value added in 2022 and 73% of employment. Besides travel services driven by 
the diaspora, which dominate the services sector, the ICT sector has also been growing at a fast pace. 
The  share  of  industry  in  gross  value  added  stands  at  almost  20%.  Mining  only  accounts  for  a  small 
share of GDP due to under-investment over the past three decades, while the manufacturing base is 
narrow.  Kosovo  is  weakly  integrated  into  global  value  chains,  with  goods  exports  comprising  mostly 
low-value-added,  unsophisticated  products.  Foreign  direct  investment,  which  could  improve  the 
competitiveness of the economy has mostly gone into non-tradeable sectors, primarily real estate.  

Kosovo  faces  challenges  in  its  business  environment.  The  regulatory  and  institutional 
environment remains a key obstacle to private-sector development and competition. Kosovo’s economy 
struggles  with  a  large  informal  sector,  weak  rule  of  law  and  corruption,  all  of  which  impede  its 
attractiveness  for  foreign  and  domestic  investors.  A  high  administrative  burden  for  businesses  and 
citizens,  weak  law  enforcement  and  dispute  settlement  and  limited  access  to  finance  continue  to  be 
serious development obstacles despite government programmes to improve the business environment. 
The  Commercial  Court,  which  became  fully  operational  in  August  2022,  is  expected  to  increase  the 
efficiency  of  the  judicial  system (67)  in  settling  commercial  disputes,  but  the  court  still  faces  a  large 
backlog of cases. Despite some new initiatives undertaken by the Kosovo Credit Guarantee Fund, the 
lack of easily accessible and affordable credit continues to be a barrier to companies’ growth, due to 
banks’ stringent loan requirements, which affect mostly smaller companies. 

Widespread  informal  activity  impedes  economic  development.  According  to  estimates,  the 
informal sector accounts for around 30% of GDP. First, it reduces the tax base, limiting the fiscal space 
to  invest  more  in  priority  areas  such  as  education,  health  and  infrastructure.  Second,  it  creates  an 
uneven playing field among businesses and is a deterrent for additional, much-needed private-sector 
investment,  including  foreign  direct  investment.  Unfair  competition  from  informal  businesses  has 
consistently been identified as a major obstacle to doing business in Kosovo (World Bank et al, 2019a; 
EBRD, 2016) (68). Informality also impairs the competitiveness and export potential of Kosovo’s private 
sector:  firms  operating  in  the  informal  sector  have  more  difficulty  accessing  finance  and  tend  to 
engage less in research and development and innovation and to hire fewer workers. Lastly, workers in 
informal sectors have more limited (or no) access to social protection and additional benefits, and are 
therefore more vulnerable when they lose their job or leave the labour market. Their access to training 
is also negatively affected, which exacerbates the inadequacy of skills in the workforce and contributes 
to the migration of specialised and skilled workers to markets where better labour and wage conditions 
can be found. Conversely, the lack of social and other benefits in formal employment – given the lack 
of structures to provide them – discourages many informal employers and employees from formalising 
working arrangements. 

The supply of energy is unreliable and insufficient to meet rapidly growing demand and is 
one of the main constraints on Kosovo’s competitiveness, curbing productivity. The reliability 
of energy supply is still below the average for Europe and Central Asia. Despite some improvements, 
Kosovo ranks 90th in the world for ease of getting electricity (69). The lack of energy security gives rise 
to significant costs for business and represents one of the biggest obstacles to attracting high-quality 

(67)  The court is efficient in communicating its results to the public through a user-friendly online portal, improving transparency 

efforts. 

(68)  The 2019 Enterprise Survey put informality as the single most pressing obstacle perceived by business in      Kosovo, with 
26% surveyed companies listing it first, well above the 19% of surveyed firms in the region selecting this option (WB et al., 
2019).  Similarly,  according  to  the  2016  business  environment  and  enterprise  performance  survey  (BEEPS  V),  competition 
from informal competitors was signalled as the single most important issue in Kosovo. In all, 66% of firms reported that 
having to compete against firms in the informal sector was a major issue, the highest among all 30 countries covered in 
BEEPS V (the average was 39%). (EBRD, 2016) 

(69)  World Bank (2020b), Doing Business 2020: Comparing Business Regulation in 190 economies. 

90 

 
Part II 
Country analysis, Kosovo* 

foreign direct investment while also putting pressure on public finance. Kosovo also suffers from high 
technical and commercial losses in distribution and transmission grids, which stood at around 25% in 
2021. More than 90% of electricity is produced by two outdated, unreliable and highly polluting lignite 
power  plants,  which  the  government  plans  to  refurbish.  The  share  of  renewables  in  electricity 
generation  is  rising,  but  remains  small.  Their  roll-out  is  expected  to  accelerate  through  the  energy 
strategy  adopted  in  March  2023  and  the  law  on  renewable  energies,  which  has  passed  the  first 
Assembly  reading.  The  National  Energy  and  Climate  Plan  (NECP),  which  should  include  the  Energy 
Community Secretariat’s recommendations, is pending the final adoption by the government. 

The digital transformation of the economy is advancing step by step, but the digitalisation 
of public services is still at an early stage. 100% of households nationwide have access to fixed 
broadband electronic communications infrastructure. Fixed access internet penetration is estimated to 
be 129% of households, compared to 89% in the EU, and mobile telephony penetration is around 98% 
of  the  population.  Kosovo  has  a  small  but  rapidly  growing  ICT  sector,  particularly  in  the  export  of 
software  development,  smart  phone  application  development  and  web  design.  Despite  some 
improvements  in  implementing  e-commerce  programmes,  there  seems  to  be  little  progress  in 
increasing  the  adoption  of  e-commerce  practices  among  SMEs.  The  Digital  Agenda  strategy  covering 
the  period  up  to  2030  was  approved  by  the  government  at  end-June  2023.  It  provides  a 
comprehensive  framework  for  digital  transformation,  including  5G  technologies  and  the  digital 
transformation of businesses and public services. 

The  labour  market  situation  remains  challenging  while  the  education  system  is  not 
adequately aligned with labour market needs. Only around 40% of the working-age population is 
active while the unemployment rate is persistently high. The share of young people (aged 15-24) not in 
employment,  education  or  training  (NEET)  was  very  high  in  2022,  at  33%,  far  above  other  Western 
Balkan peers. An increasing  challenge is emigration,  with current estimates ( 70)  suggesting that  more 
than  one  third  of  the  polulation  lives  abroad  as  more  educated  and  young  people  are  seeking 
employment there. There are also significant gender differences in the labour market as around 80% 
of  working-age  women  are  economically  inactive  while  those  who  are  economically  active  are  less 
likely than men to be employed. Capacity and staffing issues in the employment agency and the public 
employment services are delaying the implementation of the "Youth Guarantee" plan and other labour 
market support schemes. Despite some educational reforms, scores on the OECD’s 2022 Programme 
for International Student Assessment (PISA) are very low and unemployment among tertiary education 
graduates is still high, pointing to the inadequate quality and relevance of education. The 2022-2026 
education strategy, adopted in October 2022, aims to raise the quality of pre-university education and, 
in  particular,  to  harmonise  education  and  professional  training.  It  also  fully  recognises  the  need  to 
develop  a  real-time  information  system  and  forecasting  on  labour  market  needs,  as  well  as  a 
standardised methodology for labour market research. This commitment has yet to be translated into 
action. 

(70)  D. Hazer, T. Cela, A. Krasniqi and V. Cenaj (2021), Economic and Tourist Effects of External Migration in Kosovo, Journal of 
Environmental Management and Tourism, 12(2): 50 (available at: https://journals.aserspublishing.eu/jemt/article/view/5979). 

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4.5.  THE POLICY GUIDANCE 

JOINT CONCLUSIONS OF THE ECONOMIC AND FINANCIAL DIALOGUE BETWEEN THE EU AND 
THE WESTERN BALKANS PARTNERS, TÜRKIYE, GEORGIA, REPUBLIC OF MOLDOVA AND 
UKRAINE 

The Economic and Financial Dialogue between the EU and the Western Balkans Partners, Türkiye, 
Georgia, Republic of Moldova and Ukraine 

Brussels, 14 May 2024 

… 

In light of this assessment, Participants hereby invite Kosovo to:  

1. 

2. 

3. 

Implement the foreseen shift in the 2024 budget spending structure from current to capital 
expenditure while ensuring compliance with the fiscal rules. Increase budgetary transparency 
by further reducing blanket allocations. Enhance the revenue side by reducing loopholes and 
exemptions  through  amendments  to  tax  legislation,  including  personal  income  tax  (PIT), 
corporate income tax (CIT) and value added tax (VAT).  

Undertake  and  publish  a  review  of  tax  expenditure  quantifying  the  size  of  the  revenue 
forgone from all exemptions, preferential rates and special regimes. Improve the execution 
rate  of  capital  spending  including  by  establishing  the  linkages  between  the  e-procurement 
and  Kosovo  Financial  Management  Information  System  (KFMIS)  systems,  following  the 
recommendations      made  under  the  IMF’s  updated  Public  Investment  Management 
Assessment. Improve financial    oversight and accountability of Publicly Owned Enterprises 
(POEs) by approving and publishing their annual performance report; adopt amendments to 
the POEs’ Law to improve their corporate governance.  

Continue  to  thoroughly  assess  price  developments  and  possible  second-round  effects  and 
stand  ready  to  use  the  limited  tools  available  under  the  chosen  monetary  framework  to 
ensure  price      stability.  Continue  efforts  to  ensure  that  core  areas  of  the  central  bank  are 
adequately staffed, particularly by finding ways to attract and retain skilled staff. Enhance 
risk-based  supervision  in  line  with  best  international  and  European  practices,  including  by 
further strengthening the monitoring toolkit and the reporting framework across the banking 
system  and  improving  data  collection  to  enable  a  comprehensive  assessment  of  financial 
sector risks. 

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Part II 
Country analysis, Kosovo* 

Annex  1:  Overview  of  the  implementation  of  the  policy  guidance  adopted  at  the  Economic  and 
Financial Dialogue in 2023 

Every year since 2015, the Economic and Financial Dialogue between the EU and the Western Balkans 
and Turkey has adopted targeted policy guidance for all partners in the region. The guidance represents 
the participants’ shared view on  the policy measures that should  be implemented to address macro-
fiscal  vulnerabilities  and  structural  obstacles  to  growth.  The  underlying  rationale  of  the  guidance  is 
similar to that of the country-specific recommendations usually adopted under the European Semester 
for  EU  Member  States.  Implementation  of  the  guidance  is  evaluated  by  the  Commission  in  the 
following year’s ERP assessments.  

The following table presents the Commission’s assessment of the implementation of the 2023 policy 
guidance  jointly  adopted  by  the  EU  and  the  Western  Balkans  and  Turkey  at  their  Economic  and 
Financial Dialogue at ministerial level on 16 May 2023. 

Overall: Partial implementation (43.1%) (71) 
2023 policy guidance (PG) 

PG 1:  

If  needed,  use  the  available  fiscal  space  in  the 
2023  budget  to  provide  well-targeted  and 
temporary  energy  crisis-related  support  to 
vulnerable  households  and  businesses  whilst 
ensuring compliance with the 2% deficit ceiling 
of the fiscal rule as envisaged by the ERP.  

Summary assessment 

There was partial implementation of PG 1. 

1)  Substantial  implementation:  In  2023,  the 
government  allocated  and  implemented  around 
EUR 30  million  (0.3%  of  GDP)  to  temporary 
energy-crisis  related  support  for  vulnerable 
households and firms by subsiding: a) electricity 
bills to mitigate the impact of tariff increases; b) 
the  purchase  of  energy  efficient  equipment;  c) 
monthly electricity bills of around 200 thousand 
households  which  saved  energy,  compared  to 
the  same  period  a  year  before,  by  double  the 
rate  of  saving.  These  measures  were  well-
targeted,  because  public  authorities  examined 
each beneficiary’s application based on a means 
test, 
transfering 
financial  support.  Nevertheless,  the  one-off 
transfers  to  basic  pension  and  child  allowance 
beneficiaries,  totalling  around  EUR  69  million 
(0.7%  of  GDP)  at  end-2023,  were  not  targeted. 
Supported 
anticipated 
implementation  of  capital  projects  and  solid 
the  headline  budget 
revenue  performance, 
deficit fell to an estimated 0.2% of GDP in 2023, 
which  corresponds  to  a  surplus  of  0.6%  of  GDP 
under the fiscal rule definition.  

instead  of  automatically 

slower 

than 

by 

Ensure  that  spending  on  war  veteran  pensions 
as  well  as  public-sector  salaries  according  to 
the  new  wage  law  comply  with  the  prescribed 
legal ceilings.  

2)  Partial  implementation:  While  the  Law  on 
salaries  of  public  officials,  which  had come  into 
force  on  9 February  2023,  set  the  value  of  the 
wage  coefficient  at  EUR  105  for  2023,  the 
increase  of  EUR  113  million  in  the  public  wage 

(71)  For  a  detailed  description  of  the  methodology  used  to  assess  policy  guidance  implementation,  see  Section  1.3  of  the 

Commission’s  Overview  and  Country  Assessments  of  the  2017  Economic  Reform  Programmes.  This  is  available  at    
https://ec.europa.eu/info/publications/economy-finance/2017-economic-reform-programmes-commissions-overview-and-
country-assessments_en. 

93 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
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bill was lower than nominal GDP growth in 2022, 
thus the wage bill rule was respected. 

re-classifying 

In  relation  to  war  veteran  pensions,  there  has 
been  no  progress 
the 
in 
beneficiaries  list.  The  law  adopted  on  13  July 
2023,  which  decouples  war  veterans’  pensions 
from  the  minimum  wage,  would  help  contain 
overspending  risks.  However,  the  law  is  being 
currently  reviewed  by  the  constitutional  court 
and  it  will  not  be  decreed  by  the  President 
before the court’s ruling is received. There was a 
slight breach of the legal ceiling of 0.7% of GDP 
in  2023  as  actual  expenditure  for  this  pension 
scheme  exceeded  the  annual  budget  allocation 
by  EUR  0.84  million  and  amounted  to  almost 
0.8%  of  GDP.  However,  this  is  lower  than  the 
actual expenditure of 2022 (0.9% of GDP). 

Undertake  and  publish  a 
tax 
expenditure quantifying the size of the revenue 
forgone  from  all  exemptions,  preferential  rates 
and special regimes. 

review  of 

PG 2: 

Increase  the  execution  rate  of  capital  spending 
by  implementing  the  recommendations  made 
under the IMF’s Public Investment Management 
Assessment.  

94 

3) Limited implementation: The World Bank is 
providing  technical  assistance  to  the  MoFLT  to 
prepare a comprehensive tax expenditure report. 
In December 2023, the  government  published a 
fiscal 
report 
developments  in  2022.  The  report  provides  a 
preliminary  quantification  of  the  size  of  the 
revenues  forgone  due  to  some  of  the  tax 
exemptions and reduced rates in 2022. 
There was limited implementation of PG 2:  

summarising 

the  main 

implementation:  Despite 

the 
1)  Partial 
authorities’  efforts, 
the  under-execution  of 
capital  expenditure  remains  a  challenge  for 
Kosovo.  The  execution  rate  increased  only  to 
around 68% in 2023, from 60% in 2022, but the 
year-on-year  increase  in  public  capital  spending 
was  substantial  at  almost  33%.  This  outcome 
benefited  from:  i)  the  re-operationalisation  of 
the  Procurement  Review  Body  board  in  late 
2022;  ii)  the  implementation  of  the  Law  on 
public  works  support,  adopted  at  the  end  of 
2022,  compensating  contractors  up  until  mid-
2023 for higher project costs resulting from very 
high inflation at the time; iii) the budget circular 
requiring  budget 
approved 
organisations  to  include  expropriation  costs  as 
part  of  the  project  envelopes.  The  IMF’s  Public 
Investment  Management  Assessment 
(PIMA) 
update in June 2023 assessed that while several 
been 
recommendations 
previous 
remains, 
implemented, 
significant 
the 
particularly  at  the  planning  stage  of 
project 
investment 
appraisal,  investment  planning,  and  the  MoFLT 
review  function  are  priorities.  Specifically,  many 
of the projects do not undergo a proper appraisal 

in  May  2023 

Strengthening 

cycle. 

have 

work 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Improve  financial  oversight  and  accountability 
of  Publicly  Owned  Enterprises  (POEs),  including 
by  approving  and  publishing  their  annual 
performance report.  

Part II 
Country analysis, Kosovo* 

and  selection  process  as  set  out 
in  the 
administrative  instructions  on  project  selection 
and  the  related  public  investment  programme 
manual.  These  projects  are  therefore  not  ready 
for implementation when approved. 

to 

report 

the  central  POEs) 

2)  Limited  implementation:  The  annual  POEs 
performance 
for  2022  has  been 
submitted by the Ministry of Economy (in charge 
of  supervising 
the 
government  and  its  approval  is  pending.  The 
2021  performance  monitoring 
report  was 
approved by the government in December 2022 
and  has  been  published  on  the  Ministry  of 
Economy’s  website,  in  Albanian  only.  During  the 
reporting  period, 
the  Ministry  of  Finance 
continued  to  include  the  fiscal  risk  analysis  for 
the  main  central  POEs  in  the  medium-term 
expenditure  framework  (MTEF),  annual  budget 
and  the  ERP.  A  stand-alone  annual  fiscal  risk 
analysis  was  also  published  in  November  2023. 
The  fiscal  risk  analysis 
includes  the  POEs 
overseen by the Ministry of Economy as well as 
the Kosovo Electricity, Transmission,  Market and 
System  Operator  (KOSTT),  which  is  overseen  by 
the Assembly. However, the analysis is limited to 
high-risk POEs, excluding other companies. As of 
Q1-2022  a  quarterly  report  on  the  financial 
situation  of  POEs  has  been  available  on  the 
Ministry  of  Finance’s  website,  with  better  data 
quality.  A  section  on  POEs’  borrowing  is  also 
included in the quarterly debt report (in line with 
the requirements of the new Law on state debt, 
adopted  in  December  2022).  The  Ministry  has 
also  started  assessing  fiscal  risks  on  loans  that 
law  on  the 
are  requested  by  POEs.  The 
establishment of a sovereign fund  was adopted 
by the Asembly in mid-December 2023, but it is 
being  reviewed  by  the  constitutional  court, 
following  a  request  by  the  opposition.  The 
sovereign fund is expected to take over six POEs 
to  strenghten  their  management  and  attract 
private  capital.  The  fund  will  operate  as  an 
the 
autonomous  public 
concept 
supervision  of 
document  has  been 
the 
to 
government  by  the  relevant  working  group,  but 
there  were  no  developments  in  amending  the 
law  on  POEs  with  the  aim  of  aligning  their 
corporate 
recognised 
governance 
international standards.  

the  Assembly.  A 
submitted 

institution  under 

with 

Review  the  options  paper  on  the  establishment 

3)  No  implementation:  The  government  has 

95 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
European Commission 
Institutional Paper 

of an independent body for fiscal oversight and 
inform the Commission about the follow-up.  

not  taken  any  steps  to  set  up  the  independent 
body for fiscal oversight, following finalisation of 
the options paper on the matter. 

PG 3:  

There  was  substantial  implementation  of  PG 

3. 

1)  Substantial  implementation:  The  central 
bank  carefully  monitored  the  evolution  of  price 
dynamics.  However,  no  macroprudential  tools 
have so far been used, for instance to curb credit 
growth.  Fiscal  policy  as  the  main  tool  for 
demand management remained prudent overall. 

is 

in 

2)  Substantial  implementation:  The  central 
bank 
the  process  of  a  functional 
reorganisation in line with the new Strategic Plan 
and intends to strengthen core policy areas also 
by  recruiting  additional  experts.  Efforts  to 
enhance  macroeconomic 
stress-test 
modelling  capacities  are  ongoing.  Nonetheless, 
given the low starting point, efforts will need to 
continue.  Increasing  the  attractivity  of  positions 
in  core  areas  is  key  to  attracting  and  retaining 
skilled staff. 

and 

3)  Partial  implementation:  Asset  quality  is 
reported in accordance with IFRS9, the NPL ratio 
remained 
low,  with  adequate  provisioning. 
Reporting  of  the  liquidity  coverage  ratio  in  line 
with  Basel  III  started  in  January  2023.  In 
addition, the central bank initiated more frequent 
and detailed risk and liquidity reporting by banks. 
The  central  bank  plans  to  amend  legislation  to 
enable  the  development  of  a  secondary  market 
for  NPLs.  Initial  steps  have  been  taken  to 
address  data  gaps  in  the  real  estate  property 
sector, but significant further progress is needed 
to allow for improved surveillance. 

There was partial implementation of PG 4. 

1)  Partial  implementation.  Kosovo  launched 
its inaugural solar auction in May 2023. Overall, 
the  auction  was  considered  a  success,  with  six 
companies  submitting  offers.  The  process  was 
the 
deemed  open  and 
government being responsive to various requests 
from  interested  investors.  Additionally,  in  March 
2023 the government approved the new Energy 
Strategy for 2022-2031 and its implementation 
plan,  setting  ambitious  targets  for  renewable 
energy sources. However, the Law on Renewable 

transparent,  with 

Continue  to  carefully  assess  and  analyse  price 
developments  and  stand  ready  to  use  the 
the  chosen 
limited 
monetary framework to ensure price stability.  

tools  available  under 

Continue  efforts  to  ensure  that  core  areas  of 
the central bank, including financial stability and 
banking  supervision,  are  adequately  staffed  to 
the  central  bank’s  analytical  and 
deepen 
technical capacities.. 

Strengthen  further  the  reporting  and  risk 
management  frameworks  across  the  banking 
system to ensure an accurate reporting of asset 
quality,  further  reduce  remaining  obstacles  to 
in 
NPL  resolution  and  reduce  data  gaps 
particular as regards the real estate sector. 

PG 4:  

In  line  with  the  Green  Agenda  for  the  Western 
Balkans,  enhance  energy 
resilience  and 
transition  by  completing  the  legal  framework 
and launch the pilot auction on renewables. 

96 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
Implement the 2023 Energy support action plan 
including energy efficiency measures.  

resilience,  modernise 
operationalise 
and 

the 
Improve  system 
electricity 
the 
grids 
wholesale  day-ahead  and  intra-day  electricity 
price  markets  on  the  path  toward  retail 
electricity market liberalisation.  

PG 5:  

Increase  the  implementation  rate  of  the  action 
plan  of  the  2019–2023  National  Strategy  for 
the  Prevention  and  Combating  of  Informal 
Economy, Money Laundering, Terrorist Financing 
and Financial Crimes. 

to 

incentivise 

Continue 
formalisation  of 
employment  and  businesses  and  address  tax 
evasion  in  identified  high-risk  sectors  through 
better inter-institutional cooperation. 

Part II 
Country analysis, Kosovo* 

Energy  Sources  is  still  pending  adoption  by  the 
Assembly (72). 

2)  Partial  implementation.  Through  the  75 
million  EU  Energy  Support  Package  for  Kosovo, 
the  government  implemented  various  measures 
in 2023 to  mitigate the effects of  rising energy 
prices on  households and businesses. By end of 
2023,  approximately  €30  million  had  been 
executed  on  implementing  different  measures, 
to  save 
incentivising  households 
including 
energy,  subsidies  for  insulating  houses  and 
installing  energy-efficient  heating  equipment  in 
both  households  and  businesses.  Targeted 
support  was  provided  to  families  under  the 
Social Assistance Scheme, including subsidies for 
biomass and their energy  bills.  Medium to long-
term  measures  planned 
in  the  EU  Energy 
Support Package are still to be implemented. 

3) Limited implementation. The go-live of the 
day-ahead  electricity  market  to  be  operated  by 
the  Albanian  power  exchange  ALPEX,  as  well  as 
day-ahead market coupling of Kosovo – Albania, 
has  been  operationalised.  The  bulk  supply 
agreement  between  Kosovo  Energy  Corporation 
(KEK) and the universal supplier KESCO is still in 
place.  This  impedes  the  further  development  of 
the wholesale market. 
There was partial implementation of PG 5:  

1) Partial implementation. In March 2023, the 
Ministry  of  Finance  published  the  2021-2022 
annual  report  on  the  implementation  of  the 
National  Strategy  of  Kosovo  for  the  Prevention 
and  Combating  of  Informal  Economy,  Money 
Laundering,  Terrorist  Financing  and  Financial 
Crimes  2019-2023.  According  to  the  report,  of 
71  activities,  44 
them)  were 
implemented, while 27 (38% of them)  have not 
been  implemented  yet.  The  2022-2023  annual 
report is still being prepared. 

(62%  of 

2)  Partial  implementation.  In  July  2023,  the 
Tax  Administration  of  Kosovo  (TAK)  adopted  a 
new  annual  action  plan  to  reduce  the  informal 
economy  with  the  focus  on  addressing  the 
incorrect or non-declaration and non-payment of 
personal  income  tax  obligations,  and  to  identify 
the  high-income  taxpayers  who  do  not  file  or 
incorrectly  file  personal  income  tax  obligations 
by  using  information  from  different  sources.  In 

(72)  The Law has passed first Assembly reading while a second reading is pending. 

97 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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Simplify  the  system  of  licenses  and  permits, 
and  complete  the  restructuring  of  SME  and 
investment  promotion  agencies  and  ensure 
adequate resources. 

PG 6:  

Develop  a  roadmap  for  the  implementation  of 
key  reforms  of  the  education  system,  including 
the  recommendations  under  the  ETF  Rapid 
Education Diagnosis.  

98 

to 

improve 

addition, 
revenue  mobilisation 
through  digitalised  processes,  TAK  launched  3 
new digital services for taxpayers (in total there 
are  11  online  services  available),  one  of  which 
allows taxpayers to report on tax irregularities. In 
December 2023, the Assembly adopted the Law 
on  Administration  of  Tax  Procedures.  This  law 
amended the legal requirement on a number of 
issues that impact the formalisation of economic 
activities  or  undeclared  work, 
such  as 
requirements to pay all salaries electronically to 
financial institutions, or employment contracts to 
be  concluded  and  be  notified  to  TAK  a  day 
before  the  employee  starts  working.  It  also 
regulated  important  sharing  and  information 
gathering with third parties, such as commercial 
banks, and partner countries. Other amendments 
include 
cash 
transactions to EUR 300 Euro.  

requirement 

reduce 

the 

to 

of 

implementation 

3)  Partial  implementation.  According  to  the 
annual report covering the 2022-2023 period on 
the  2022-2027 
the 
government  program  on  prevention  and 
reduction  of  administrative  burden  (ABR),  10 
activities  have  been  undertaken  to  develop 
methodologies  or  other  tools  to  implement  the 
programme,  such  as  analyses,  guides  and 
catalogues.  The  analysis  of 
independent 
institutions,  which  includes  110  permits,  has 
begun,  including  a  digitalisation  analysis  for 
another 150 permits. The implementation of the 
ABR  programme  is  progressing  in  accordance 
with  the  timelines  set  in  the  programme.  The 
Law  on  sustainable  investment  has  passed  all 
Assembly  procedures  and  the  Office  of  the 
Prime  Minister  has  consulted  stakeholders  and 
put 
for 
organisation.  However,  the  restructuring  has  to 
wait  for  the  Constitutional  Court’s  decision,  as 
the  Law  was  challenged  for  interpretation  by 
some opposition parties. Funds were allocated in 
the  2024  budget  law  for  both  agencies,  as 
the  2024-2026  Medium-Term 
planned 
Expenditure Framework (MTEF). 
There was limited implementation of PG 6:  

in  place  a  proposed 

structure 

in 

1)  No  implementation.  The  government  has 
developed  the  2022-2026  National  Education 
Strategy,  published  in  September  2022,  but  it 
has not been updated since the Rapid Education 
Diagnosis  was  published 
in  2023,  and  no 
roadmap  has  been  developed.  In  addition,  the 
organisation  chart  of  the  Ministry  of  Education, 
Science,  Technology  and  Innovation  (MESTI)  is 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Align  education,  particularly  higher  education 
programmes  and  vocational  education  and 
training,  with  labour  market  needs  by  closely 
cooperating  with  the  business  community,  to 
further develop the employment barometer and 
skills barometer.  

Speed  up  the  ongoing  restructuring  of  public 
employment  services  and  significantly  increase 
their  capacity  to  provide  relevant  services  in 
particular in  view of the implementation of the 
Youth  Guarantee  and  the  delivery  of  relevant 
the 
active 
unemployed  and  those  at  risk  of  becoming 
unemployed. 

labour  market  measures 

for 

Part II 
Country analysis, Kosovo* 

still  pending  approval.  Additional  resources  for 
several departments, such as digital department 
and  monitoring,  have  not  been  allocated. 
Implementation  of  support  for  early  childhood 
education,  which  includes  the  development  and 
implementation  of  new  curricula,  has  not  yet 
started. 

implementing 

implementation.  Kosovo  has 
2)  Limited 
started 
the  dual  education 
approach  (51%  of  learning  done  in  companies) 
based  on  the  example  of  Germany,  Austria, 
Switzerland  and  the  positive  experiences  of  its 
diaspora.  The  reform  effort  is  being  supported 
by  a  task  force  on  dual  education.  Reforms  to 
ensure  that  the  VET  system  aligns  with  labour 
market needs are ongoing. However, VET profiles 
offered  by  vocational  schools  remain  largely 
unaligned  with  occupational  standards  and 
labour  market  demands.  The  authorities  have 
the  number  of  scholarships  for 
increased 
students, 
science, 
including  women 
technology,  engineering,  and  mathematics 
(STEM),  to  address  the  skills  mismatch.  The 
Ministry  of  Education,  Science,  Technology  and 
Innovation  has  launched  a  campaign  for  the 
image  of  vocational  education  and  training,  to 
promote  the  benefits  of  a  dual  education 
system. 

in 

steps 

include 

3) Partial implementation. The piloting phase 
of  the  Youth  Guarantee  has  started  in  two 
municipalities. Staff recruitment in the respective 
local  employment  agency  offices  is  ongoing. 
However, there exists for now no quality offer to 
help  the  young  people  supported  under  the 
scheme. The  necessary 
the 
approval  of  the  Active  Labour  Market  Measures 
(ALMMs) regulation and allocating budget to the 
Youth Guarantee implementation. 
The 2023–2027 Employment Strategy has been 
finalised,  although  adoption  is  still  pending.  A 
new  Law  on  employment  is  still  in  the  drafting 
process and will include provisions regulating the 
employment agency and delivery of employment 
services. The draft Law on Youth was adopted by 
the government in the reporting period. 
The  restructuring  of  the  Employment  Agency  is 
still underway, and budget has been increased to 
procure  training,  adapt  training  programmes  to 
the  needs  of  the  market  and  use  the  training 
centres more efficiently. 

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Annex 2: Compliance with programme requirements 

The  government  adopted  the  Economic  Reform  Programme  for  2024-2026  and  submitted  it  to  the 
Commission  on  16 January  2024,  within  the  set  deadline.  It  is  in  line  with  the  previously  approved 
medium-term  fiscal  strategy  and  national  development  strategy.  No  components  of  the  ERP  are 
lacking. 

Inter-ministerial coordination 

The ERP was centrally coordinated, with the Ministry of Finance, Labour and Transfers as the National 
Coordinator for Kosovo, in close cooperation with the Strategic Planning Office in the Prime Minister’s 
Office. They were supported by policy area coordinators from the line ministries. The inter-ministerial 
coordination process worked well.  

Stakeholder consultation 

The draft ERP was made available online with 2 weeks for stakeholders to provide their feedback, in 
line with the rules on minimum criteria for public consultation. Commission staff dealing with the ERP 
held  consultations  with  representatives  from  civil  society  organisations,  business  organisations, 
international  financial  institutions  and  donors.  Written  comments  are  annexed  to  the  ERP  with  an 
indication of whether they have been accepted or rejected, though they include only comments from 
one agency within the Prime Minister’s Office. 

Macroeconomic framework 

The  baseline  scenario  projects  a  robust  acceleration  of  economic  activity,  which  appears  to  be 
optimistic and requires a careful assessment. External assumptions are based on the projections made 
in the Commission’s autumn forecast and the  IMF’s October 2023 World Economic Outlook. The ERP 
assessment of macro projections is based on ERP annex data. The programme provides an alternative 
‘low  growth’  scenario.  This  is  useful  to  illustrate  the  likely  impact  on  Kosovo’s  economy  of  some 
expected developments and risks, such as underspending in capital investment, lower foreign demand, 
a decline in remittances and higher financing costs for the banking sector. The forecasts for the labour 
market and the financial sector are still lacking. 

Fiscal framework 

The fiscal projections are based on the adopted 2024 budget. For 2024, the ERP forecasts a decreased 
public revenue-to-GDP ratio, whereas public expenditure is set to increase from the 2023 level, mainly 
due to a large surge in capital investment. Some of the 2023-2024 fiscal data are not consistent with 
the  main  text.  The  ERP  provides  a  useful  debt  sustainability  analysis  with  three  negative  shock 
scenarios. 

100 

 
 
5.  MOLDOVA 

5.1.  EXECUTIVE SUMMARY  

The Moldovan economy started to  turn the corner in 2023 after five consecutive quarters 
of  contraction,  and  the  ERP  projects  a  gradually  strengthening  recovery  over  the 
programme  period  2024-2026.  Moldova  was  significantly  affected  by  the  Russian  war  of 
aggression against neighbouring Ukraine as well as a severe drought in 2022 and the ensuing energy 
and  food  price  shocks.  These  events  severely  diminished  households’  purchasing  power,  eroded 
investor confidence and undermined export growth.  Growth returned in the third quarter of 2023, on 
the  back  of  a  strong  rebound  in  the  agricultural  sector  (following  the  severe  drought  in  the  previous 
year)  and  significant  expansion  in  the  IT  industry,  which  has  emerged  as  one  of  the  most  dynamic 
sectors  in  the  economy  since  2022.  The  ERP,  the  first  submitted  by  Moldova  since  it  became  an  EU 
candidate country in June 2022, projects real GDP growth of 3.5% in 2024 on the back of continued 
strong  agricultural  exports  and  growing  private  consumption  as  real  wages  continue  to  recover.  The 
ERP  projects  that  the  recovery  will  accelerate  in  2025  and  2026.  The  outlook  suggests  continued 
improvements  in  labour  market  outcomes,  characterised  by  a  persistently  low  employment  rate  and 
high levels of informal employment. Inflation surged in 2022 before decelerating almost as rapidly in 
2023,  thanks  to  falling  global  food  and  energy  prices  and  a  timely  monetary  policy  response.  It  has 
now  returned  to  the  central  bank’s  target  range  of  5%  +/-  1.5  percentage  points  and  is  expected  to 
remain  there  over  the  course  of  the  forecast  horizon  (i.e.  until  the  end  of  2026).  The  easing  of 
monetary policy, which started at the end of 2022, should also support the recovery while fiscal policy 
focuses  on  gradually  correcting  the  high  general  government  deficits.  Although  the  ERP  does  not 
present  projections  for  the  development  of  the  current  account  balance,  the  Commission’s  2023 
autumn  forecast  projected  that  Moldova’s  current  account  balance  would  decrease,  due  to  lower 
energy  import  prices  and  somewhat  stronger  growth  in  external  demand  in  the  coming  years.  The 
scenario  presented  in  the  ERP  is  plausible  though  subject  to  a  number  of  significant  downside  risks 
related to developments in neighbouring Ukraine, the country’s continued vulnerability to energy price 
shocks and weaker growth prospects in the country’s main trading partners. 

The ERP plans a gradual and front-loaded reduction of the deficit as the economic recovery 
takes  hold,  targeting  a  deficit  of  4.6%  of  GDP  in  2024  which  will  narrow  further  in  2025 
and  2026.  Moldova’s  public  finances  significantly  deteriorated  in  2023  (a  deficit  of  5%  of  GDP 
compared  with  3.2%  of  GDP  in  2022),  reflecting  weak  growth  and  the  high  cost  of  measures  to 
support  households.  Nevertheless,  the  budgetary  outcome  was  significantly  better  than  the  planned 
deficit  of  5.9%  of  GDP.  This  was  largely  due  to  (i)  under-execution  of  expenditure  and  revenue 
overperformance  due  to  high  inflation;  and  (ii)  the  overestimated  negative  impact  of  a  sizeable  tax 
relief for small and medium-sized enterprises implemented from 2023. This negative impact has not 
yet materialised and constitutes a risk for 2024. After the slight reduction in the deficit (compared to 
the outturn) in  2024, the ERP projects  more  significant falls in the  future, dropping to 3.8% in 2025 
and  3.4%  in  2026.  Although  the  ERP  does  not  present  an  estimate  of  the  cyclically  adjusted  deficit, 
fiscal policy in 2024 and 2025 appears to appropriately balance the need to correct high deficits with 
the objective of supporting the nascent recovery. The bulk of the adjustment will be on the expenditure 
side,  as  support  to  households  to  mitigate  the  impact  of  high  energy  prices  is  phased  out  or  made 
more efficient and better targeted. In 2025 and 2026, revenues will decline less quickly as a share of 
GDP than expenditure, though changes to the tax regime for cars and a new tax expenditure to support 
SME investment are set to undermine revenue growth towards the end of the forecast horizon. Crucial 
growth-enhancing  public  capital  expenditure  continued  to  be  under-executed  in  2023,  albeit  by  less 
than  in  previous  years,  and  a  promising  public  investment  management  reform  underpins  the  ERP’s 
projections  of  increased  investment  in  2025  and  2026.  After  peaking  at  37.2%  of  GDP  in  2023,  the 
public debt ratio is expected to fall slightly in 2024 followed by steeper reductions in 2025 and 2026, 
in  part  on  account  of  the  narrowing  primary  deficit  and  stronger  economic  growth.  A  relatively  large 

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share  of  public  debt  (60%)  is  denominated  in  foreign  currency,  which  exposes  public  finances  to 
exchange rate risks. However, a large part of the debt has been extended by multilateral creditors at 
highly favourable terms.   

The main challenges facing Moldova are the following: 

• 

Fiscal  policy  will  need  to  increase  much-needed  public  investment  to  support  the 
nascent economic recovery and at the same time ensure fiscal sustainability via a fiscal 
adjustment that protects growth-enhancing spending. Moldova faces a range of significant 
macroeconomic  risks,  including  those  related  to  Russia’s  war  of  aggression  against  Ukraine  and 
energy  supply  risks  that  have  recently  re-emerged.  The  planned  reduction  of  the  fiscal  deficit  is 
therefore  helpful  in  building  buffers  to  mitigate  future  risks  to  the  public  finances.  Public 
investment,  although  set  to  increase  steadily  from  2024  to  2026,  remains  well  below  the  EU 
average and substantially below the level required to accelerate the country’s convergence to EU 
income levels, in part due to persistent under-execution. The planned increase in public investment 
is underpinned by the expected implementation of the ‘single project pipeline’ (a key reform to the 
public investment management system) throughout the programme period. There is also scope to 
improve Moldova’s capacity to produce macroeconomic and fiscal forecasts, including the cyclically 
adjusted fiscal balance, in order to better inform fiscal policy in light of the business cycle. 

•  Given  the  limited  fiscal  space  and  competing  spending  priorities,  public  finance 
management  reforms  offer  scope  to  broaden  the  revenue  base  and  improve  the 
efficiency  of  public  expenditure.  To  that  end,  the  authorities  plan  to  continue  to  pursue 
progress  on  the  public  finance  management  strategy  for  2023-2030,  in  particular  through 
measures  to  improve  tax  compliance  and  broaden  the  tax  base.  Tax  expenditure  reform  is 
expected to identify measures to be phased out. Spending reviews, another relevant tool to create 
fiscal space, have seen uneven progress in recent years. The authorities are currently finalising a 
review of healthcare spending. Publishing the report following this review and setting out a clear 
implementation  plan  for  reforms  to  healthcare  spending  would  support  the  credibility  of  the 
authorities’  efforts  and  strengthen  the  process  for  reviews  in  other  major  areas  of  expenditure. 
Similarly, assessing the efficiency of programmes which support access to finance for businesses, 
which  remains  persistently  low,  would  ensure  that  they  are  more  effective  and  represent  good 
value  for  money.  Last  but  not  least,  Moldova  grapples  with  a  large  and  loss-making  sector  of 
state-owned enterprises, which appear not to be adequately captured in the perimeter of general 
government at present. The authorities embarked on an ambitious reform of the sector in 2023. 
Progressing with further implementation steps in 2024, in particular on implementing the results 
of the ‘triage’ exercise and governance reforms, would be important for mitigating the fiscal risks 
and creating a level playing field for all businesses. 

Moldova  is  facing  a  number  of  structural  challenges  as  it  seeks  to  promote  inclusive 
growth, competitiveness and convergence with EU income levels. Even though Moldova did not 
yet include a section on structural reforms in its first ERP as this was voluntary, the Commission has 
drawn on its long-standing engagement with the country, including through  different macro-financial 
assistance operations as well as the 2023 enlargement report, to identify some of the major structural 
challenges  that  Moldova  faces.  Firstly,  persistently  low  levels  of  public  investment  remain  a  major 
obstacle  that  prevents  the  country  from  meeting  its  large  investment  and  infrastructure  needs.  In 
addition,  labour  force  participation  remains  very  low,  and  the  shortage  of  skilled  labour  and  skills 
mismatches,  along  with  a  large  informal  sector,  represent  a  major  bottleneck  for  businesses  and 
foreign investors. Despite impressive efforts to mitigate the implications of the recent energy crisis, the 
developments  in  the  energy  sector  continue  to  pose  significant  risks  to  public  finances.  Finally, 
following a short but strong recovery after the pandemic, Russia’s war of aggression against Ukraine 
has  had  a  strong  negative  impact  on  investment  sentiment  in  Moldova,  compounding  pre-existing 
challenges linked to corruption, the rule of law, low levels of economic diversification and low-quality 
public services.  

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Country analysis, Moldova 

5.2.  ECONOMIC OUTLOOK AND RISKS  

The  Moldovan  economy  started  to  turn  the  corner  in  2023,  with  growth  rebounding  in  the 
third  quarter  of  the  year  after  five  consecutive  quarters  of  contraction.  Real  GDP  grew  by 
0.7% in 2023 according to the official preliminary estimate. The economy has been heavily impacted 
by  a  series  of  compounding  shocks,  in  particular  to  energy  and  food  prices.  These  shocks  include  an 
energy crisis beginning in late 2021, the start of Russia’s full-scale war of aggression against Ukraine, 
and  a  severe  drought  in  2022.  Despite  the  timely  response  of  fiscal  and  monetary  policy,  these 
developments  triggered  economic  uncertainty  and  high  inflation,  both  of  which  weighed  on  demand. 
Output in the first half of 2023 fell by 2.3% year-on-year as falling real wages continued to weigh on 
private  consumption,  and  agricultural  exports  suffered  following  the  poor  harvest  in  2022.  However, 
real GDP grew by 2.6% year-on-year in the third quarter largely thanks to a stronger harvest in 2023 
driving  growth  in  exports  while  imports  continued  to  lag.  Real  wages,  having  continued  to  fall  in  the 
first quarter of 2023, began growing in the second quarter of the year on the back of quickly falling 
inflation.  This  contributed  to  slight  year-on-year  growth  in  household  consumption  in  the  fourth 
quarter,  the  first  in  nearly  two  years.  As  a  result  of  the  sharp  decline  in  inflation,  the  central  bank 
began  cutting  interest  rates  in  a  series  of  seven  steps  from  a  peak  of  21.5%  in  December  2022  to 
3.75% in March 2024. The current account balance improved strongly in 2023 to a deficit of 11.9% of 
GDP,  having narrowed  by over 5 percentage  points compared to 2022  due to depressed demand for 
imports and lower energy prices. 

The  ERP  presents  a  steadily  strengthening  economic  recovery,  with  real  output  growth  of 
3.5%  in  2024  accelerating  to  4.0%  in  2025  and  4.2%  in  2026.  Growth  in  2024  is  set  to  be 
driven primarily by private consumption, as real incomes recover thanks to inflation stabilising within 
the  central  bank’s  inflation  target  and  lending  picking  up  modestly  in  the  context  of  accommodative 
monetary policy. The ERP projects that a recovery in investment will support stronger growth in 2025 
and  2026,  though  stronger  private  investment  is  contingent  on  a  stabilisation  of  the  situation  in 
neighbouring Ukraine. The ERP presents a gradually narrowing negative output gap in 2023 and 2024, 
before closing in 2025 and turning positive in 2026. 

The macroeconomic scenario presented in the ERP is plausible though subject to downside 
risks related to the high uncertainty about the further economic fallout from Russia’s full-
scale war of aggression against Ukraine, energy dependencies and growth prospects in the 
country’s main trading partners. While real GDP growth in the fourth quarter of 2024 was slower 
than  implied  in  the  scenario,  this  was  driven  by  changes  in  inventories,  whereas  household 
consumption and investment nevertheless posted year-on-year growth. The scenario relies in part on a 
strong  uptick  in  investment  in  2025  and  2026.  Reforms  in  train  to  improve  the  execution  of  the 
government’s capital budget may support public investment in those years. Nevertheless, it is likely to 
take  time  before  the  impact  of  those  reforms  can  be  fully  seen.  A  strong  increase  of  private 
investment  will  depend  heavily  on  developments  in  Ukraine,  though  private  investment  will  also  be 
supported  by  lower  interest  rates  thanks  to  the  disinflation  that  took  place  in  2023  as  well  as  a 
number  of  government  business-support  programmes.  The  ERP  scenario  is  broadly  aligned  with  the 
Commission’s autumn forecast 2023 though the ERP assumes a slightly weaker growth in 2024 and 
2025.  The  divergences  reflect  both  different,  but  still  plausible  assumptions  about  the  strength  of 
exports  and  the  responsiveness  of  imports  to  final  demand  growth,  as  well  as  the  authorities’  lower 
planned public investment in 2024 compared to 2023. 

Starting from a weak initial situation, the labour market has shown modest improvements 
over  the  past  year,  though  the  labour  market  participation  rate  remains  well  below  the 
regional average. Improvements were marked by a 2.8 percentage point year-on-year increase in the 
employment rate to 44.1% in Q3 2023, largely driven by an employment increase in agriculture thanks 
to  favourable  weather  conditions  in  2023  compared  to  the  drought  in  2022.  The  labour  force 
participation rate exhibited a similar increase, though fell back slightly in the fourth quarter of 2023 to 
44.7%.  Unemployment  increased  slightly  to  4.9%  at  the  end  of  2023.  While  unemployment  remains 

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low it now is well above the levels before Russia’s full-scale invasion of Ukraine. Other factors which 
may have led to improvements in the last 2 years may include the return of workers from Russia and 
Ukraine and the impact of Ukrainian refugees, contributing to a 1% boost in the labour force in the first 
half of 2023.  

Looking  ahead,  the  ERP  projects  minor  increases  in  the  employment  rate  throughout  the 
reporting  period,  primarily  supported  by  a  positive  economic  outlook  and  rises  in  nominal  wages 
boosting overall demand in the economy. The projected employment rate of 44.8% in 2026 is in line 
with  the  government’s  objective  of  reaching  a  45%  employment  rate,  which  appears  within  reach 
considering the stron outturn of Q3 2023.  

Table II.5.1:
Moldova - comparison of macroeconomic developments and forecasts
2024
COM ERP COM ERP COM ERP COM ERP COM ERP
-4.6
4.2

2025

2022

2026

2023

-5.0

n.a.

2.0

3.5

4.0

0.7

2.9

4.1

Real GDP (% change)
Contributions:
- final domestic demand
- change in inventories
- external balance of goods and services
Employment (% change)
Unemployment rate (%)
GDP deflator (% change)
CPI inflation (%)
Current account balance (% of GDP)
General government balance (% of GDP)
Government gross debt (% of GDP)

2.9
0.2
-1.4
2.8
4.6
8.6

-6.1
4.6
1.7
-6.2
2.1
0.0
0.0
2.2
-1.5
-0.4
0.4
-1.0
2.2
:
:
2.1
3.1
:
:
3.2
18.2 19.3
6.3
11.6
28.7 28.7 13.4 13.6
5.0
-16.6 -17.4 -13.4
:
-3.3
-5.7
-3.4
-3.2
35.3 35.0 35.3 37.2 37.5 37.0 37.4 35.9 n.a. 34.2

4.5
0.0
0.0
1.5
4.3
6.3
4.7
-10.1
-4.6

4.2
0.0
-0.2
:
:
6.3
5.0
:
-3.8

4.0
0.0
-0.5
:
:
5.8
5.0
:
-4.6

5.2
0.0
0.3
1.4
4.0
5.0
4.7
-9.1
-3.6

n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.

:
-5.9

Sources: Economic Reform Programme (ERP) 2024, Commission Autumn 2023 forecast.

Inflation  has  been  on  a  downward  trend  throughout  2023,  falling  steeply  from  28.7%  on 
average in 2022 to 13.4% in 2023. In response to the surge in inflation in 2022, the National Bank 
of Moldova increased its base rate to a peak of 21.5% in August 2022. Easing inflationary pressures 
subsequently allowed for a series of rate cuts starting in December that year, ultimately bringing the 
base rate to 3.75% in March 2024. Inflation re-entered the central bank’s target range of 5%  +/− 1.5 
percentage points in October 2023, with the deceleration driven in particular by falling food and energy 
prices as well as the appreciation of the leu. The ERP expects average inflation to continue to fall in the 
first half of 2024 given (i) the continued decline in imported inflation (including through lower energy 
prices);  (ii)  relatively  moderate  domestic  demand;  and  (iii)  further  declines  in  food  prices  due  to  the 
stronger harvest. Inflation is expected to tick up again in the second half of 2024 as domestic demand 
picks  up,  and  in  particular  as  government  support  to  households  to  pay  energy  bills  diminishes  and 
certain administered prices for electricity increase. The central bank projects inflation to then continue 
to  decline  modestly  in  the  first  three  quarters  of  2025  where  the  central  bank’s  inflation  forecast 
horizon ends. 

The ERP does not present projections for the development of the current account balance, 
where  developments  in  2023  suggest  a  narrowing  but  still  significant  deficit.  The 
Commission’s 2023 autumn forecast projected a current account deficit of 13.3% in 2023, narrowing 
to 11.7% in 2024 driven in particular by lower energy import prices and stronger export growth as a 
result  of  the  successful  harvest  in  2023,  with  the  deficit  narrowing  further  to  10.8%  in  2025. 
Remittances as a share of GDP are projected to remain relatively high, albeit at a significantly lower 
level than  before 2022.  Moldova’s  current account balance is structural, reflecting its strong  reliance 
on  agricultural  and  low  value-added  manufacturing  exports  as  well  as  its  dependence  on  energy 
imports.  The  recent  significant  worsening  was  primarily  due  to  the  surge  in  the  price  of  imported 
energy, and  while Moldova has taken significant steps to improve energy security, its vulnerability to 
price fluctuations remains significant. 

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Country analysis, Moldova 

The  ERP  suggests  that  there  has  been  a  significant  decline 
in  price  and  cost 
competitiveness  in  2023  and  that  the  leu  is  significantly  overvalued.  Wages  have  risen 
steadily in recent years and the real effective exchange rate (REER) has been on a consistent upward 
trajectory since 2015-2016. Average nominal earnings increased by 15.5% annually in 2022, though 
this increase was overtaken by skyrocketing inflation in 2022 leading to a sharp decline in real wages 
by  about  13%.  Both  minimum  wages  and  public  sector  salaries  further  increased  in  2023  while 
inflation  has  been  declining,  leading  to  a  slight  recovery  of  real  wages  by  3.4%.  Modest  productivity 
growth could not compensate for the higher real wages resulting in a general increase in unit labour 
costs.  The  rise  in  unit  labour  costs  in  Moldova  has  outpaced  rises  in  regional  neighbour  countries, 
although  unit  labour  costs  in  Moldova  remain  below  the  regional  average.  The  sharp  increase  of  the 
REER starting in Q2 of 2021 partly reflected the Balassa-Samuelson effect (i.e., an adjustment of the 
equilibrium REER for Moldova as a catching-up economy). The productivity differential with Moldova’s 
main trading partners was gradually declining until the end of 2021, suggesting a catching up process. 
However,  the  ERP  suggests  a  large  REER  gap  in  recent  years  reaching  a  peak  in  the  second  half  of 
2023.  This,  in  fact,  suggests  that  the  leu  is  overvalued.  The  latest  IMF  estimations  suggest  an 
overvaluation of the leu of about 22% in 2022. Moldova’s share of world exports increased only very 
marginally  between  2016  and  2022.  The  steep  increase  in  the  REER  last  year  could  weigh  on 
Moldova’s exports more heavily in the coming years. Moldova’s exports continue to be characterised by 
labour-intensive  and  low-productivity  sectors  such  as  agricultural  outputs  and  textiles.  This 
underscores the relevance of price and cost competitiveness especially in the short run. In recent years 
high  productivity  ICT  services  have  become  a  more  significant  share  of  Moldova’s  exports,  a  trend 
which, if sustained, could help make its export base less sensitive to price/cost competitiveness. 

External competitiveness and current account 

Graph II.5.1a: Moldova - current account 
balance
(% GDP)

20

10

0

-10

-20

-30

2019

2020

2021

 Services balance

2022
 Goods balance

2023

Current account balance (rhs)

Net FDI (rhs)

Source: National Bank of Moldova and IMF.

0
-2
-4
-6
-8
-10
-12
-14
-16
-18

190
185
180
175
170
165
160
155
150
145
140
135

Graph II.5.1b: Moldova -
real effective exchange rate (index)

Appreciation

Depreciation

110
108
106
104
102
100
98
96
94
92
90

2020

2019
Moldova
Source: Economic Reform Programme (ERP) 2024 and ECB.

2022

2023

2021

EA19

The  mainly  foreign-owned  banking  sector  remained  stable  throughout  the  pandemic  and 
ongoing geopolitical crisis. Bolstered by a series of measures taken by the central bank in response 
to a major banking fraud in 2014, the capital adequacy, liquidity and profitability of commercial banks 
have remained elevated or have risen in recent years. As of Q3 2023, capitalisation, at 30%, remains 
well above the regulatory minimum, and the liquidity coverage ratio, at 256%, exceeds the prescribed 
100% limit  by a large  margin. This is partly driven  by  remaining legacies from the aftermath of the 
bank  fraud  case.  Two  banks,  for  instance,  still  hold  additional  sizeable  capital  and  liquidity  buffers 
against potential losses from ongoing litigation. In addition, reserve requirement ratios were increased 
in 2022 to counter inflation. They were then relaxed in 2023 in response to falling inflation though not 
returning to pre-2022 levels. This slight relaxation did not yet lead to increased lending to the private 
sector. The sector’s increased profitability in recent years can primarily be attributed to the growth in 
interest  income  and  fees.  The  ERP  outlines  a  set  of  amendments  to  the  legal  framework  to  support 
financial stability and intermediation while further aligning its legal framework to the EU acquis. 

Bank lending to households and businesses is at a relatively low level. While both credit and 
deposit growth have been volatile in recent years, deposits, especially in domestic currency, recorded 
the  highest  growth  in  2023  since  2019.  Conversely,  credit  growth  experienced  its  lowest  increase  of 

105 

   
 
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less  than  4%  reflecting  the  sluggish  recovery  and  still  high  uncertainty.  This  led  to  a  decline  in  the 
loan-to-deposit ratio to 56.1% the lowest level in the last 5 years. According to the IMF, credit to the 
economy is projected to stand at a relatively low 21.4% of GDP, a decrease by 1.9 percentage points 
from  2022.  Currency  substitution  is  declining,  with  the  share  of  deposits  held  in  foreign  currencies 
further declining by 3 percentage points to 36.8% in 2023. The share of non-performing loans (NPLs), 
continued to decline in 2023, falling by 0.8 percentage points from 6.4% in 2022 (due to a drop in the 
last  quarter  of  2023),  possibly  reflecting  the  slight  economic  recovery  towards  the  end  of  the  year. 
Both supply of and demand for credit are being hampered by uncertainty about the future impacts of 
Russia’s  war  of  aggression  in  Ukraine  and  the  economic  outlook  coupled  with  new  regulations  about 
responsible lending. In addition, the lack of bankable businesses and the high level of informality in the 
economy further limits credit to the private sector. The government has, however, taken decisive steps 
to  improve  access  to  finance  through  several  support  programmes  providing  guarantees  as  well  as 
interest  subsidy  measures.  The  impact  of  such  programmes  in  the  current  context  is  still  to  be 
evaluated, including the risks of contingent liabilities.  

Table II.5.2:

Moldova - financial sector indicators

Total assets of the banking system (EUR million)
Foreign ownership of banking system (%)
Credit growth (%, average)
Deposit growth * (%, average)
Loan-to-deposit ratio (%, end of period)
Financial soundness indicators (%, end of period)
     - non-performing loans to total loans
     - regulatory capital to risk-weighted assets
     - liquid assets to total assets
     - return on equity
     - foreign exchange loans to total loans

* Total deposit growth.
Sources: Central bank of Moldova.

5.3.  PUBLIC FINANCES  

2020

2022

2019
2023
2021
4708.0 4912.0 5897.4 6446.2 7952.5
88.9
3.7
19.9
56.1

86.6
13.1
16.5
57.3

86.6
23.5
13.1
62.6

87.1
13.9
7.7
59.1

88.9
9.4
5.4
64.9

8.5
24.8
50.6
14.6
33.3

7.4
27.3
50.7
8.7
30.5

6.1
25.9
48.6
12.3
26.5

6.4
29.2
52.2
17.0
30.5

5.6
30.0
54.5
16.3
25.8

The  under-execution  of  expenditure,  together  with  a 
less  significant  revenue 
overperformance, led to a budget deficit of about 5.0% of GDP in 2023, significantly better 
than  the  planned  deficit  of  5.9%.  Revenue  overperformance  compared  to  the  2023  amended 
budget  was  driven  in  particular  by  corporate  income  tax  and  excise  duties  which  offset  shortfalls  in 
VAT and grants. The ERP does not provide an analysis for this general overperformance, though it may 
reflect  weaknesses  in  revenue  projections  in  the  context  of  high  inflation.  In  particular,  the  expected 
negative impact of a new 0% tax rate on reinvested SME income did not materialise in 2023, having 
been estimated at MDL 1.2 billion or about 2% of total tax revenue. The ERP now expects this negative 
impact to extend into the next 2 fiscal years. Strong performance from the above-mentioned revenue 
categories  compensated  for  a  shortfall  in  the  level  of  grants  from  foreign  donors.  Compared  to  the 
outturn  in  2022,  revenue  excluding  grants  was  9.5%  higher  in  2023  as  a  result  of  (i)  a  mix  of  tax 
increases,  in  particular  in  excise  duties  in  accordance  with  commitments  under  the  EU-Moldova 
Association  Agreement;  and  (ii)  underlying  factors  including  rising  public  sector  wages  and  high 
inflation. 

Expenditures,  both  current  and  capital,  were  under-executed  compared  to  the  amended 
2023  budget.  General  government  current  expenditure  was  96%  of  the  revised  2023  budget,  with 
shortfalls  in  particular  in  goods  and  services  but  also  the  wage  bill.  More  detailed  breakdowns  of 
expenditure outturn by policy sector are not yet available. More importantly, central government capital 
expenditure (i.e. excluding local government capital expenditure for which consolidated data are not yet 

106 

 
 
   
 
 
 
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Country analysis, Moldova 

available)  was  83.4%  of  the  amended  2023  budget,  a  significant  shortfall  but  an  improvement 
compared  with  2022  reflecting  more  realistic  spending  targets  including  a  downward  revision  in  the 
amended budget in 2023. Compared to 2022, total expenditure was significantly higher (18%) driven 
in particular by much higher social transfers in the form of compensation for households to mitigate 
the  impact  of  the  energy  crisis.  In  addition,  public  sector  wages  increased  significantly  in  2023,  and 
interest payments nearly doubled due to higher rates on foreign loans and higher issuance of T-bills. 

Table II.5.3:

Moldova - composition of the budgetary adjustment  (% of GDP)

Revenues
    - Taxes and social security contributions
    - Other (residual)
Expenditure
    - Primary expenditure
       of which:
       Gross fixed capital formation
       Consumption
       Transfers & subsidies
       Other (residual)
    - Interest payments
Budget balance
    - Cyclically adjusted
Primary balance
    - Cyclically adjusted
Gross debt level

2022

2023

2024

2025

2026

33.4
30.0
3.3
36.6
35.6

1.2
:
16.0
18.4
1.0
-3.2
:
-2.2
:
35.0

32.9
29.3
3.6
38.8
37.0

1.2
:
16.6
19.3
1.8
-5.9
:
-4.2
:
37.2

31.3
29.2
2.1
36.0
34.4

1.0
:
15.2
18.2
1.5
-4.6
:
-3.1
:
37.0

30.8
29.1
1.7
34.6
33.3

1.5
:
14.8
17.0
1.3
-3.8
:
-2.5
:
35.9

29.9
28.3
1.5
33.3
32.0

1.7
:
14.2
16.1
1.2
-3.4
:
-2.1
:
34.2

Change:
2023-26
-3.5
-1.7
-1.8
-3.3
-3.6

0.5
:
-1.8
-2.3
0.2
-0.2
:
0.1
:
-0.8

Sources: Economic Reform Programme (ERP) 2024, Commission calculations.

The  ERP presents a fiscal strategy which aims to increase much-needed public investment 
to  support  the  nascent  economic  recovery  and  at  the  same  time  ensures  fiscal 
sustainability  via  a  fiscal  adjustment  that  protects  growth-enhancing  spending.  The  ERP 
projects a gradual, though front-loaded, narrowing of the deficit, to 4.6% of GDP in 2024 and to 3.8% 
in  2025,  with  a  smaller  decline  to  3.4%  in  2026.  Revenue  as  a  share  of  GDP  is  expected  to  shrink 
steadily from 32.9% of GDP in 2023 to 29.9% in 2026, driven by lower reliance on donor funding and 
a revenue-decreasing reform of car taxation in 2026. Expenditure is projected to decline more quickly 
as a share of GDP over this period, driven in particular by slower nominal growth in both the wage bill 
and social transfers. The latter reflects in part the phasing out and better targeting of compensation 
for high energy bills in 2024. The ERP projects a decline in public investment in 2024, in part reflecting 
more  realistic  targets  as  a  result  of  a  new  effort  to  reform  public  investment  management  which 
strengthens the role of the Ministry of Finance in ensuring that projects included in the annual budget 
are mature. Public investment is projected to begin increasing again in 2025 and 2026. The ERP does 
not  provide  an  estimate  of  the  cyclically  adjusted  balance.  However,  considering  the  large  positive 
output gap expected in 2026, and what was only a slight decrease in the headline deficit in that year, 
the projected fiscal stance might result in a pro-cyclical fiscal expansion in that year. 

Expenditure  measures  in  the  2024  budget  include  several  potentially  growth-enhancing 
measures to improve the efficiency of spending, although the ERP only provides estimates of the 
quantitative impact of a few of these measures. Better targeting of the Energy Vulnerability Reduction 
Fund to reach the most vulnerable parts of the population and a move away from covering energy bills 
to  income  support  is  expected  to  improve  the  efficiency  of  the  fund.  This  will  possibly  lead  to  lower 
expenditure, while all other social protection expenditures previously covered by local budgets will be 
centralised under the national government. An additional spending measure in 2024 will increase the 
one-off childbirth allowance. Among other professions, teachers’ salaries will be increased significantly 

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following central government salary increases in previous years. Public investment ( 73) is projected to 
reach  2.4%  of  GDP  reflecting  a  decrease  compared  with  2023,  possibly  indicating  a  more  realistic 
planning  of  the  capital  budget,  bringing  it  back  to  its  pre-pandemic  level  and  below  regional  peers. 
Support for business remains a key priority, with several measures aiming to promote investments and 
access to finance such as the ‘373’ interest subsidy programme and the Credit Guarantee Fund. 

Revenue measures for 2024 are expected to be relatively minor, with the exception of a tax 
expenditure to support investment by SMEs which was implemented in 2023 but the impact 
of  which  is  expected  now  in  2024  and  future  years.  The  introduction  of  the  0%  tax  on  non-
distributed income for SMEs introduced in 2023 was expected to lead to a revenue loss amounting to 
0.4% of GDP, which did not occur. Nevertheless, this impact is now expected in 2024 and 2025 instead. 
The ERP does not provide an estimate of the impact of the new customs code which came into force 
on 1 January 2024. However, the 2024 budget incorporates a decline in revenue from customs duties 
compared to 2023 amounting to about 0.1% of GDP. The ERP does not provide cost estimates for the 
other revenue and expenditure measures for 2024, nor does it describe how these measures align with 
the government’s priorities. For 2026, the ERP presents a significant drop in excise duties as a share of 
GDP resulting from the change in the taxation of cars from the excise regime to the VAT system. 

BOX II.5.1: THE 2024 BUDGET 

Following the presentation of the draft budget on 1 December 2023, the 2024 budget was adopted 
by the Moldovan Parliament  on 22 December  2023.  According to the annual budget calendar, the 
government is supposed to submit the draft budget by 15 October and parliament should adopt it 
by  1  December.  The  2024  budget  aims  to  achieve  a  fiscal  deficit  of  4.6%  of  GDP  and  a  primary 
deficit of 3.1% of GDP. 

The budget provides for a 10-15% salary increase for teachers, police officers and workers in the 
judiciary.  Compensation  of  energy  bills  through  the  Energy  Vulnerability  Reduction  Fund  will 
continue, albeit at lower amounts and with better targeting. The one-off allowance for the birth of a 
child will be increased. 

Total revenue is expected to fall to 31.3% of GDP in 2024 due to a sharp decline in grant revenues 
(from 2.2% of GDP in 2023 to 0.7% of GDP in 2024) and a fall in foreign trade taxes as a result of 
the  new  customs  code.  Total  expenditure  is  expected  to  fall  to  35.9%  of  GDP,  driven  in  part  by 
savings  on  measures  that  had  been  implemented  to  support  households  and  businesses  facing 
elevated energy bills in 2022 and 2023.  

After peaking in 2023, the public debt ratio is expected to fall slightly in 2024 followed by 
steeper reductions in 2025 and 2026. The debt ratio grew by 2.2 percentage points to 37.2% of 
GDP in 2023, driven by the large primary deficit and higher interest payments on short-term domestic 
debt,  with  inflation  helping  to  mitigate  the  increase.  The  ERP  projects  a  backloaded  reduction  in  the 
public  debt,  beginning  with  a  modest  decline  of  0.2  percentage  points  in  2024  before  falling  more 
steeply  in  2025  (by  1.1  percentage  points)  and  2026  (by  1.7  percentage  points).  This  decline  is 
primarily driven by the deficit reduction in these years as well as by projected lower interest rates on 
domestic  debt  as  monetary  policy  eases.  The  large  stock-flow  adjustment  contributing  to  the  falling 
public debt ratio throughout the ERP time horizon is not explained. 

Although  most  of  Moldova’s  public  sector  debt  stock  was  extended  on  concessional  terms 
by multilateral lenders, there was a modest increase in the share of domestic borrowing in 
2023.  A  large  share  (59.5%)  of  Moldova’s  debt  is  denominated  in  foreign  currency,  contributing  to 
significant exchange rate risk. At the same time, the average maturity (8.9 years) and conditions of the 
external  public  debt  are  favourable  given  that  currently  about  60%  of  public  debt  is  owed  to 
multilateral  institutions  including  the  IMF,  the  World  Bank  and  the  EU.  Debt  repayment  needs  on 

(73)  Public investment is defined as the acquisition of fixed assets by the general government (item 31) in the annual budget 

execution reports of the national public budget. 

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Country analysis, Moldova 

external debt will increase moderately in 2024 in part due to a revolving loan from the EBRD in 2022 
to both finance emergency gas supplies and build up a strategic gas reserve. Domestic debt issuance 
continues  to  consist  largely  of  T-bills  maturing  within  1  year  due  to  the  underdeveloped  domestic 
financial  market  and  prohibitively  high  interest  rates  in  the  last  year,  though  the  government’s  debt 
management strategy includes plans to extend the average maturity of domestic debt to deepen the 
market for government debt and facilitate domestic finance. The first successful issuance of a 10-year 
domestic  bond  took  place  in  September  2023.  Interest  rates  on  longer-term  government  debt  have 
fallen sharply over the course of 2023 as a result of monetary policy easing, with the rate on 2-year 
bonds falling from 13% in January 2023 to 5.5% in January 2024.  

BOX II.5.2: DEBT DYNAMICS 

Moldova
Composition of changes in the debt ratio (% of GDP)

Gross debt ratio [1]
Change in the ratio
Contributions [2]:

   1. Primary balance
   2. 'Snowball effect'
       Of which:

       Interest expenditure
       Growth effect
       Inflation effect

   3. Stock-flow adjustment

[1]  End of period.

2022
35.0
2.5

2023
37.2
2.2

2024
37.0
-0.2

2025
35.9
-1.1

2026
34.2
-1.7

2.2
-3.1

1.0
1.4
-5.5
3.3

4.2
-2.4

1.8
-0.6
-3.6
0.4

3.1
-1.6

1.5
-1.2
-2.0
-1.7

2.5
-2.1

1.3
-1.3
-2.1
-1.5

2.1
-2.1

1.2
-1.4
-2.0
-1.7

[2]  The 'snowball effect' captures the impact of interest expenditure on accumulated

      debt, as well as the impact of real GDP growth and inflation on the debt ratio

      (through the denominator).

      The stock-flow adjustment includes differences in cash and accrual accounting, 

      accumulation of financial assets, and valuation and other effects.

Source: Economic Reform Programme (ERP) 2024, Commission calculations.

Major sources of risk to the public finances are related to the possible interruption of the 
current arrangement for natural gas supply from Russia to the Transnistrian region as well 
as  Moldova’s  vulnerability  to  economic  shocks  related  to  Russia’s  war  of  aggression  in 
Ukraine and climate change.  In 2023, the authorities agreed a continuation of the deal reached in 
December  2022  under  which  the  MGRES  power  plant,  located  in  the  Transnistrian  region,  will  supply 
about 90% of Moldova’s total projected volume of electricity supply in the summer period and 65% in 
the winter, when combined heat and power plants near Chișinău will provide the balance of demand. 
The price of supply remains unchanged at USD 66/MWh, below the prevailing average price in the EU. 
However,  the  MGRES  power  plant  relies  on  free  Russian  gas  which  transits  Ukraine  to  reach  the 
Transnistrian region. The current Ukraine-Russia gas transit agreement expires at the end of 2024, and 
it is not clear whether it will be possible to continue to import Russian gas to the Transnistrian region 
after  that  point.  A  failure  to  continue  gas  shipments  would  likely  have  fiscal  consequences  due  to 
increased  electricity  prices  and  possibly  serious  economic  disruption  to  the  Transnistrian  region  and 
Moldova at large. The authorities are examining the potential costs associated with this risk.  

In addition, Moldova’s economy continues to remain exposed to the effects of Russia’s war 
of aggression against Ukraine. Although food and energy prices declined markedly over the course 
of 2023, investor and consumer sentiment – therefore to some extent economic growth – will depend 

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Institutional Paper 

on  developments  in  neighbouring  Ukraine.  In  addition,  Moldova  remains  highly  exposed  to  risks 
associated  with  climate  change,  namely  drought  and  floods.  Extreme  weather  events  have  led  to 
significant losses in the past, including a 30% drop in agricultural production as a result of the drought 
in 2022. 

Although  the  ERP  itself  does  not  provide  an  overview  of  fiscal  risks  nor  a  corresponding 
sensitivity  analysis,  the  government  publishes  a  fiscal  risk  statement  with  the  annual 
budget.  For  2024,  the  government  has  identified  macroeconomic  shocks  and  negative  financial 
market  developments as elevated  risks, alongside the possibility that the government would need to 
bail-out state-owned enterprises, in a context in which 40% of state-owned enterprises reported losses 
in  2021  and  many  lack  adequate  corporate  governance  standards.  The  latest  analysis  of  fiscal  risks 
related  to  state-owned  enterprises  dates  from  2021,  though  the  authorities  have  been  taking  steps 
under the IMF programme to improve the financial reporting of state-owned enterprises to the Public 
Property Agency. The authorities have committed to including an assessment of climate-related risks in 
the next fiscal risk statement.  

The ERP presents a  number of credible improvements to the quality of public finances.  On 
the expenditure side, the relatively low level of potentially growth enhancing public investment is set to 
steadily  increase,  in  line  with  the  recommendations  of  the  first  enlargement  report  for  Moldova 
published by the Commission in November 2023. This would  be facilitated by the ongoing reform of 
the public investment management system, namely the establishment of a ‘single project pipeline’ for 
all investment projects regardless of financing source, vetted by the Ministry of Finance, for inclusion in 
the  medium-term  budgetary  framework  and  annual  budget.  Furthermore,  the  reform  of  the  Energy 
Vulnerability Reduction Fund  planned  for 2024 will shift towards  better targeted support and ensure 
that  the  model  for  support  incentivises  energy  savings,  leading  to  more  efficient  and  effective 
expenditure. Finally, the authorities are finalising a spending review into the health sector which should 
identify opportunities to increase efficiency in an important area of spending which amounted to 5.5% 
of GDP in 2023. 

On  the  revenue  side,  while  efforts  are  ongoing  to  broaden  the  tax  base  by  assessing  and 
eventually  eliminating  certain  tax  expenditures,  which  are  sizeable  in  Moldova,  the  ERP 
presents a number of measures which represent new tax expenditures. In 2022 and 2023, the 
authorities  published  a  tax  expenditure  report  focused  on  measuring  foregone  revenues.  The  report 
started  in  2022  with  income  taxes  and  VAT  and  expanded  to  other  taxes  including  excises,  import 
duties  and  real  estate  tax  in  2023.  The  authorities  have  committed  to  taking  this  analysis  one  step 
further  by  conducting  a  cost-benefit  analysis  of  existing  tax  expenditures  with  a  view  to  identifying 
measures to be phased out. However, the ERP presents measures for 2024 that seem to introduce new 
tax expenditures such as for certain luxury goods and deductions for expenditure by trade unions and 
employers’ organisations. 

The  numerical  fiscal  rule  is  not  respected,  and  while  the  conditions  for  activating  the 
escape clause remain in place, the  rule has been suspended for longer than the permitted 
period. The public finance law stipulates that the budget deficit, excluding grants, should not exceed 
2.5%  of  GDP,  though  capital  investment  financed  from  external  sources  can  be  excluded  from  the 
deficit. In 2018 and 2019, this fiscal rule was respected, but since 2020 the escape clause has been 
activated  on  the  grounds  a  decline  in  economic  activity  (2020-2021)  and  exceptional  circumstances 
endangering national security (2022-2024), although according to the law the escape clause may only 
be  activated  for  3  years  in  a  row.  The  planned  budget  deficits  for  2025  and  2026  also  exceed  the 
numerical  rule  though  not  when  excluding  foreign-financed  investment  projects.  The  Ministry  of 
Finance is now considering proposals to amend the fiscal rule which may be an opportunity to examine 
its appropriateness in promoting countercyclical fiscal policy. There are no immediate plans to set up 
an independent fiscal council given capacity constraints, though the authorities plan to re-examine the 
issue in 2026 (the previous analysis was done in 2015-2016). 

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5.4.  KEY STRUCTURAL REFORM AREAS 

Moldova's  first  ERP  submission  includes  only  the  macro-fiscal  framework,  while  information  on 
structural  challenges  and  reform  plans  were  optional  and  not  included  this  year.  The  Commission 
identified the following macro-relevant structural challenges in the 2023 enlargement report based on 
an independent analysis drawing on input and discussions with the authorities and other stakeholders.  

Moldova continues to struggle to properly identify, prioritise, evaluate, cost and implement 
public investment projects, leading to continual under-execution of the budget set aside for 
this purpose. In  2022, Moldova executed only about 60% of its budgeted public capital investment 
expenditure.  In  2023,  the  execution  of  capital  investment  improved,  but  foreign-financed  projects 
remain at risk of under-execution due to a lack of capacity to comply with the procedures and public 
procurement  processes  of  foreign  donors,  in  particular  international  financial  institutions.  Difficulties 
executing  public  investment  plans  limit  the  country  from  adequately  addressing  its  very  large 
infrastructure  needs,  including  those  related  to  energy  security,  transport  connectivity,  and  trade 
facilitation.  A  new  regulation  governing  the  identification,  selection  and  appraisal  of  all  public 
investment  projects  funded  from  any  source  (the  ‘single  project  pipeline’)  was  adopted  in  October 
2022.  

Moldova  was  hit  hard  by  an  energy  crisis  in  2021  which  worsened  in  2022  as  a  result  of 
Russia’s  war  in  Ukraine.  With  support  from  international  donors  and  the  EU,  Moldova  has  since 
made impressive efforts to reform its energy sector, adopting the EU energy law and diversifying its 
gas supply, leading to the phase out of gas imports from Russia. During the last heating seasons, the 
impact of the energy crisis on households was mitigated through the EU-funded Energy Vulnerability 
Reduction  Fund  that  provided  support  to  about  760,000  out  of  1.3  million  homes  in  2022-2023.  In 
2023, the government improved the targeting of the programme to increase its efficiency. In addition, 
for  the  2024-2025  heating  season  Moldova  intends  to  delink  the  support  from  energy  consumption, 
moving  from  covering  energy  bills  to  cash  transfers  thus  incentivising  energy  savings.    The  country 
continues to benefit from electricity at stable and low costs produced by the power plant MGRES in the 
Transnistrian  region  (territory  not  under  the  control  of  the  government  of  the  Republic  of  Moldova). 
This power plant runs on highly subsidised Russian gas which poses a major security of supply risk. In 
the  coming  months,  the  government  is  expected  to  prepare  an  analysis  on  the  fiscal  impact  of  a 
possible interruption of natural gas supply used for electricity generation. 

The shortage of skilled labour is a major issue for both private and public-sector employers, 
while  labour  force  participation  stands  at  a  relatively  low  level  and  skills  mismatches 
persist despite relatively high level of spending on education. The main reasons for low labour 
market participation include informal employment, (seasonal) work abroad, low salaries as compared 
to social benefits, the relevance of remittances, a  mismatch between the skill level of the workforce 
and what employers require and high level of home childcare preventing female employment. In 2023, 
a concept note on reforming the National Employment Agency was adopted. The employment support 
law  has  been  modified  to  incentivise  those  receiving  social  benefits  to  enter  the  job  market.  To 
increase  female  employment,  the  government  has  made  significant  efforts  to  increase  childcare 
services and to provide more benefits for parents, i.e., more flexible and higher maternity allowances 
as  well  as  paternity  leave.  In  addition,  the  government  is  developing  a  programme  to  combat 
undeclared  work,  and,  as  of  March  2023,  unannounced  inspections  were  allowed  in  cases  of 
undeclared  work.  A  new  director  of  the  State  Labour  Inspectorate  has  just  been  appointed  and  new 
inspectors have been hired.  

State-owned enterprises play an important role in the economy, and necessary reforms are 
still in the early stages. There are approximately 900 state-owned enterprises, while out of those a 
large  number  exist  on  paper  only.  In  2023,  a  triage  of  about  180  central  government  state-owned 
enterprises took place categorising them among:  1) those to be kept in state ownership, 2) those to be 
privatised  (either  immediately  or  following  restructuring),  and  3)  those  to  be  liquidated.  However,  no 
concrete actions have yet been taken to implement the results. In addition, the government set out a 
plan  to  improve  corporate  governance  of  state-owned  enterprises  and  accountability,  notably  by 

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adopting a model code of governance. Further steps included legal changes to set up audit committees 
at state-owned enterprises and to allow independent board members as well as the introduction of a 
process to professionalise boards through an improved selection process. 

Foreign  direct  investment  (FDI)  as  share  of  GDP  has  been  historically  relatively  low  in 
Moldova. Following a short but strong recovery after the pandemic, Russia’s war of aggression against 
Ukraine  has  had  a  strong  impact  on  investment  sentiment  in  Moldova,  with  most  foreign  investors 
halting  their  investment  plans.  Nevertheless,  there  are  signs  that  the  situation  has  been  stabilising 
since  the  beginning  of  2023.  FDI,  however,  has  been  concentrated  in  Moldova’s  so-called  free 
economic cones which benefit from special tax regimes with investments often having limited knock-
on  effect  on  the  local  economy.  The  government  supports  industry  and  technology  parks  to  attract 
foreign and local innovative companies as well as high skilled labour. A new programme dedicated to 
FDI  promotion  and  attraction  is  expected  to  be  adopted  in  2024.  The  main  implementing  agency, 
Moldova  Invest,  has  been  restructured  several  times  undergoing  the  latest  reform  in  2023.  Looking 
ahead,  the  main  measures  to  attract  FDI  will  need  to  include  qualification  of  the  labour  force, 
administrative support and aftercare services. In addition, the upcoming national strategy for economic 
development is expected to provide a broader vision to guide economic policy making, including a clear 
focus  on  promoting  FDI,  while  the  forthcoming  Growth  Plan  should  set  out  strategic  short-  and 
medium-term reform and investment priorities critical for economic convergence. 

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5.5.  THE POLICY GUIDANCE 

JOINT CONCLUSIONS OF THE ECONOMIC AND FINANCIAL DIALOGUE BETWEEN THE EU AND 
THE WESTERN BALKANS PARTNERS, TÜRKIYE, GEORGIA, REPUBLIC OF MOLDOVA AND 
UKRAINE 

The Economic and Financial Dialogue between the EU and the Western Balkans Partners, Türkiye, 
Georgia, Republic of Moldova and Ukraine 

Brussels, 14 May 2024 

… 

In light of this assessment, Participants hereby invite the Republic of Moldova to: 

1. 

2. 

Gradually reduce the fiscal deficit as the economic recovery takes hold, while building fiscal 
buffers to mitigate risks to the public finances; to that end, prepare an analysis on the fiscal 
impact  of  a  possible  interruption  of  natural  gas  supply  used  for  electricity  generation. 
Increase  public  investment  as  planned  in  the  ERP,  while  applying  the  new  single  project 
pipeline framework covering all investment projects regardless of financing source. Improve 
the  capacity  to  produce  macroeconomic  and  fiscal  forecasts,  in  particular  of  the  cyclically 
adjusted fiscal balance. 

Continue to broaden the tax base and improve tax compliance in line with the Public Finance  
Management Strategy 2023-2030. Finalise and publish the ongoing spending review of the 
health  sector  and  undertake  further  reviews  in  the  most  significant  areas  of  expenditure 
such  as  social  protection.  Review  the  main  programmes  supporting  businesses’  access  to 
bank finance such as the ‘373 interest subsidy programme’, the Fund for Entrepreneurship 
and  Economic  Growth  Investments  and  the  ‘Credit  Guarantee  Facility’  with  a  view  to 
improving  their  effectiveness  in    addressing  the  bottlenecks  to  provision  of  credit,  and 
assessing  their  potential  to  support  the  implementation  of  Environmental,  Social  and 
Governance  (ESG)  principles.  Take  steps  to  implement  the  results  of  the  state-owned 
enterprise  ‘triage’  exercise  and  ensure  the  implementation  of  recent  governance  reforms 
related to the professionalisation of boards and the establishment of audit    committees at 
state-owned enterprises. 

3. 

Ensure a  sufficiently tight  monetary policy stance as long as necessary to anchor inflation  
expectations at levels consistent with price stability, underpinned by a thorough assessment 
of  potential  second-round  effects  and  developing  an  inflation  expectations  survey.  Ensure 
the  independence  of  the  central  bank,  including  the  personal  independence  of  decision-
makers.  Enhance  risk-based  supervision  in  line  with  best  international  and  European 
practices,  including  by  further  strengthening  the  reporting  framework  across  the  banking 
system, harmonising the regulatory and supervisory landscape between the banking and the 
non-bank  financial  sector,  and  improving  data  collection  to  enable  a  comprehensive 
assessment of financial sector risks. 

113 

 
 
 
 
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ANNEX: COMPLIANCE WITH PROGRAMME REQUIREMENTS 

The  Economic  Reform  Programme  2024-2026  was  endorsed  by  the  Inter-ministerial  Committee  for 
Strategic  Planning,  chaired  by  the  prime  minister,  on  15  January  2024  and  submitted  to  the 
Commission the same day.  

As agreed in advance  with the Commission, the ERP  consists of the  macro-fiscal framework only, as 
Moldova  did  not  submit  the  chapters  on  structural  reforms  for  this  first  round.  The  macro-fiscal 
framework is missing a number of elements, namely an alternative macroeconomic scenario and the 
sections  on  the  structural  balance,  sensitivity  analysis,  and  the  sustainability  of  public  finances.  The 
Moldovan authorities alerted the Commission in advance that capacity constraints would prevent them 
from submitting these sections for this first round. 

Inter-ministerial coordination 

The  prime  minister  designated  the  Ministry  of  Finance  as  the  national  ERP  coordinator.  The  finance 
ministry worked closely with the Ministry of Economic Development and Digitalisation, the Ministry of 
Labour and Social Protection, the National Bank of Moldova and the National Bureau of Statistics in the 
preparation  of  the  ERP.  The  document  was  also  shared  with  experts  from  the  EU-funded  technical 
assistance  project  team  at  the  Ministry  of  Finance  for  their  input.  The  inter-ministerial  coordination 
worked well.  

Stakeholder consultation 

The draft ERP was sent to a leading independent Moldovan think tank for comments and suggestions. 
As  the  ERP  contains  only  the  macro-fiscal  framework  and  not  the  structural  reform  chapters,  the 
document was not submitted separately for public consultation this year. 

Macroeconomic framework 

The  programme  presents  a  clear  and  concise  picture  of  past  economic  developments,  though  it  is 
limited by a lack of available data for example in the presentation of current account developments. 
The  presented  framework  is  coherent  and  consistent,  though  it  does  not  provide  an  alternative 
macroeconomic scenario, nor does it provide a forecast for the external or financial sectors. 

Fiscal framework 

The major policy documents underpinning the fiscal framework are listed, though the link between the 
fiscal  framework  and  specific  priorities  could  be  made  more  explicit.  The  programme  contains 
references to obligations  under the EU-Moldova  Association Agreement, though it  does not yet make 
reference to recommendations from the first enlargement report published in November 2023. 

Key  revenue  and  expenditure  measures  are  generally  not  costed;  only  3  of  the  20  listed  measures 
identify  the  estimated  fiscal  impact  of  the  measure  in  question.  Budget  implementation  for  2023  is 
presented up to the end of October 2023, the latest available data at the time of drafting. Moldova’s 
fiscal  reporting  does  not  follow  ESA2010  standards,  and  therefore  does  not  meet  the  Commission’s 
fiscal notification requirements. 

114 

 
 
6.  MONTENEGRO 

6.1.  EXECUTIVE SUMMARY 

Montenegro continued to record high economic growth in 2023, which is set to slow down in 
2024-2026. A successful tourism season and strong private consumption, supported by a large inflow 
of foreign nationals, were the key drivers of economic growth in 2023, estimated at 5.8%. The main 
headwind  came  from  high  albeit  moderating  inflation,  while  tighter  financing  conditions  weighed  on 
investment. The baseline scenario set out in Montenegro’s economic reform programme (ERP) projects 
real GDP growth to slow to an annual average of 3.2% in 2024-2026, driven by domestic demand on 
the back of rising private and public consumption and recovering investment. Net exports are projected 
to provide only a marginal contribution to GDP growth as tourism services, which exceeded their 2019 
level  already  in  2023,  are  expected  to  decelerate  from  double-digit  growth.  The  balance  of  risks  is 
tilted  to  the  downside  as  inflation  might  fall  less  than  projected,  eroding  disposable  income,  while 
higher  financing  costs  could  negatively  affect  investment.  Imports  may  increase  by  more  than 
expected if investment plans, in particular the construction of the Bar - Bojare highway, are realised. 

The  ERP’s  fiscal  scenario  projects  a  sizeable  deterioration  of  the  budget  balance  in  2024 
and  a  gradual  deficit  reduction  in  the  following  2  years,  which  is  set  to  lead  to  a  modest 
pace  of  debt  reduction.  The  2023  budget  performed  much  better  than  expected  and  recorded  a 
surplus,  estimated  at  0.5%  of  GDP,  driven  by  strong  growth  in  indirect  taxes,  one-off  revenues  and 
lower-than-budgeted spending. The 2024 deficit is largely driven by strong increases in social transfers 
and capital spending. Budgetary adjustment in 2025-2026 is expected to rely on a sharp deceleration 
in public spending, which is projected to lead to a drop of 2.3 percentage points (pps) in the spending 
ratio and a small primary surplus in 2026.  However, the envisaged spending restraint appears overly 
optimistic and is  not  underpinned  by concrete  measures.  The  public debt  ratio, which  has fallen  very 
substantially in recent years, is set to continue declining but only slowly, to 61% of GDP in 2026. Debt 
refinancing needs remain large, peaking at 11% of GDP in 2025. 

The main challenges facing Montenegro are the following: 

•  High  mandatory  spending  and  a  limited  revenue  base,  together  with  upcoming  large 
debt repayment needs call for a stronger fiscal consolidation than envisaged in the ERP. 
Amid  external  and  internal  risks,  the  economic  outlook  is  positive  with  decelerating  but  stable 
growth in Montenegro. However, debt repayment needs are set to increase sharply, first in 2025 
and  later  in  2027  and  2029,  which,  coupled  with  tight  financing  conditions,  raise  vulnerabilities. 
Given  Montenegro’s  monetary  framework,  fiscal  policy  is  the  main  tool  to  manage  aggregate 
demand and support further disinflation. This calls for a comprehensive medium-term fiscal plan 
with conrete consolidation measures and a commitment to bring the debt ratio below 60% of GDP 
as  prescribed  by  the  fiscal  rule.  Broadening  the  tax  base,  streamlining  tax  exemptions  and 
incorporating  new  budget  revenue  initiatives  would  contribute  to  rebuilding  fiscal  buffers  and 
reducing public debt. Further fiscal space could be gained by reviewing and reforming mandatory 
spending on the public wage bill, social and health expenditure. 

• 

Improving  the  long-term  sustainability  of  public  finances  requires  strenghening  fiscal 
governance and the management of public investment. While fiscal rules are in place, they 
are weak and lack a strong enforcement mechanism. Major new spending initiatives have not been 
adequately  costed,  resulting  in  high  mandatory  expenditure.  Large  infrastructure  projects  need 
better  management  and  prioritisation  given  the  limited  fiscal  space  available.  Setting  up  an 
independent  fiscal  institution  would  help  strengthen  the  costing  of  new  initiatives  and  help 
improve fiscal discipline. Improving the oversight and risk management of state-owned enterprises 
(SOEs) would over time alleviate their burden to the budget. 

115 

 
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• 

Improving  the  business  environment,  fostering  private  sector  development,  advancing 
the  green  and  digital  transition,  and  developing  human  capital  are  the  key  structural 
challenges Montenegro is facing. There is a need to address, among others, weaknesses in the 
regulatory environment, informality, difficulties in access to finance and challenges in monitoring 
and  managing  SOEs.  Montenegro’s  energy  transition  plans  are  in  line  with  the  European  Green 
Deal,  implying  further  development  of  the  energy  sector  through  investements  in  green  energy 
and  decarbonisation.  Digitalisation  focuses  on  developing  digital  services  and  improving  cyber 
security.  Structural  labour  market  challenges,  including  persistently  low  rates  of  labour  market 
activity  and  high  unemployment,  especially  among  women,  young  people  and  the  low-skilled, 
continue  to  undermine  potential  growth  and  improvements  in  living  standards.  These  challenges 
are  expected  to  be  addressed  through  key  structural  reforms  identified  in  the  country’s  reform 
agenda under the new Growth Plan for the Western Balkans. 

The implementation of the policy guidance set out  in the conclusions of the  Economic and 
Financial  Dialogue  of  May  2023  has  been  partial.  In  2023,  the  fiscal  outcome  was  better  than 
envisaged  in  the  revised  budget  due  to  very  good  performance  of  indirect  tax  revenue  and  one-off 
revenue items. No new medium-term fiscal strategy has been adopted. Nor has progress been made 
on public investment management and the review of tax expenditures. Although a legal basis has been 
created to set up a Fiscal Council, the call for appointing Council members was unsuccessful due to an 
insufficient  number  of  applicants.  Montenegro  has  made  limited  progress  on  preparations  to  roll  out 
the Youth Guarantee implementation plan, on preparing a clear timeline and financial planning for the 
reform  of  the  social  and  child  protection  system,  and  on  developing  a  mechanism  to  continuously 
monitor  active  labour  market  measures.  The  government  adopted  a  programme  and  action  plan  for 
2024-2026 on supressing the informal economy. Progress was made on digitalisation but was limited 
on reforms related to the green agenda and to SOEs. 

6.2.  ECONOMIC OUTLOOK AND RISKS 

Montenegro’s  economy  continued  to  grow  strongly  in  2023,  exceeding  expectations.  Based 
on quarterly data, full-year real GDP increased by 6.0% year on year (y-o-y) in 2023, on the back of 
strong  growth  in  private  consumption  and  service  exports.  Growth  in  private  consumption  was 
supported  by  rising  wages  and  pensions  as  well  as  a  high  inflow  of  foreign  nationals  (in  particular 
Turks, Russians and Ukrainians). Exports were boosted by the continued strong growth in tourism. The 
main headwind came from high albeit moderating inflationary pressures reflecting both international 
and  domestic  factors.  Tight  monetary  conditions  weighed  on  investment.  The  ERP  estimates  annual 
growth  at  5.8%  in  2023  which  is  well  above  4.4%  as  projected  in  the  ERP  for  2022-2025 ( 74). 
Supported by a significant number of foreign workers, labour market conditions improved substantially 
with  the  average  unemployment  rate  falling  to  a  new  historical  low  of  12.2%  by  the  end  of  2023, 
down from 15.1% in the previous year. 

The  ERP’s  baseline  scenario  projects  GDP  growth  to  average  around  3.2%  in  2024-2026 
with a mildly decelerating trend. The ERP expects domestic demand to be the key driver of growth 
with  a  positive  albeit  decelerating  profile  of  private  and  public  consumption  as  well  as  investment. 
Higher  employment  and  wages  together  with  increased  pensions  are  set  to  support  private 
consumption while the recovery of investment is expected to be driven by new investment projects in 
energy, tourism and road infrastructure, notably a continuation of the construction of the Bar - Bojare 
highway.  Further  marginal  support  for  GDP  growth  is  projected  to  come  from  net  exports,  mainly 
tourism  services,  which  exceeded  their  pre-pandemic  level  already  in  2023,  and  are  forecast  to 
decelerate from double-digit growth. Import growth is also set to slow down from 10.6% in 2023 to an 
average  of  4.8%  in  2024-2026.  The  ERP  estimates  a  positive  output  gap  of  2.7%  in  2023  which  is 

(74)  Macroeconomic  and  fiscal  estimates  and  forecasts  covering  2023-2026  have  been  taken  from  the  ERPs  themselves;  if 
available, preliminary macroeconomic and fiscal outturn data for 2023 have been taken from the relevant national source 
(statistical office of Montenegro (MONSTAT), Ministry of Finance, central bank of Montenegro). 

116 

 
 
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Country analysis, Montenegro 

projected  to  decline  mildly  to  2.2%  in  2026.  Compared  to  the  previous  year,  the  ERP  revises  GDP 
growth downwards by 0.2 pps and 0.5 pps for 2024 and 2025 respectively. The ERP also contains an 
alternative downside scenario which assumes a deterioration in external environment and in particular 
a  slower  growth  in  the  EU.  The  resulting  fallout  on  investment  and  trade  -  including  lower  tourism 
activity  -  together  with  higher  inflation  and  interest  rates,  would  result  in  significantly  lower  GDP 
growth, ranging from 1.4% in 2024 to 1.7% in 2026.    

The  baseline  ERP  scenario  of  moderating  growth  is  plausible  though  somewhat  optimistic 
and  subject  to  external  and  domestic  risks.  The  baseline  growth  scenario  for  2024  is  more 
positive  than  the  Commission’s  autumn  forecast  but  the  divergence  narrows  in  2025.  The  key 
difference in 2024 stems from a  higher  growth of private consumption, which is  subject to a risk of 
inflation that is higher than the 5% assumed in the ERP. The downside scenario assumes inflation of 
7%  in  2024  which  would  lead  to  private  consumptuion  growing  by  only  1.4%.  Further  differences 
relate to the programme’s assumption on capital investment which is based on the implementation of 
a new investment cycle. The deceleration in import growth forecast for 2024 in the baseline scenario 
seems somewhat sharp given the projected consumption and investment dynamics, and Montenegro’s 
reliance on imports as a very small and open economy. The ERP rightly refers to external risks related 
to higher inflation, tight monetary conditions and slower global growth, including in the EU countries. 
Domestic risks stem from limited fiscal space, which constraints the response to unexpected adverse 
shocks to the economy. Positive risks relate to improvements in the domestic regulatory environment 
and progress on EU-related reforms. 

Table II.6.1:
Montenegro - comparison of macroeconomic developments and forecasts

Real GDP (% change)
Contributions:
- final domestic demand
- change in inventories
- external balance of goods and services
Employment (% change)
Unemployment rate (%)
GDP deflator (% change)
CPI inflation (%)
Current account balance (% of GDP)
General government balance (% of GDP)
Government gross debt (% of GDP)

2023

2022

2024
COM ERP COM ERP COM ERP COM ERP COM ERP
6.1
2.9

2026

2025

n.a.

6.4

5.8

3.8

3.0

4.9

2.7

2.3

2.7
0.0
0.2
1.8

n.a.
n.a.
n.a.
n.a.

2.7
0.0
-0.4
0.8

3.1
0.0
-0.5
2.2

6.8
0.0
-1.9
5.4

4.9
0.0
-1.1
2.2

7.1
0.0
-1.3
9.5

7.6
3.0
7.4
2.5
0.0
2.6
-3.5
0.0
-3.6
17.2 18.2
1.7
15.0 14.7 13.6 13.2 13.2 12.6 13.0 12.0 n.a. 11.6
n.a.
n.a.
n.a. 12.4 n.a.
1.8
11.9 13.0
n.a.
5.7
9.0
2.5
-13.3 -12.9 -12.6 -12.7 -12.3 -13.1 -12.1 -12.0 n.a.
-10.9
n.a.
-3.4
-5.2
-2.4
69.5 69.3 61.0 62.2 63.5 61.6 61.2 61.3 n.a. 61.0

n.a.
3.8

5.7
9.0

2.3
5.0

2.5
3.4

-3.7

-3.4

-2.9

-2.3

-3.5

0.5

Sources: Economic Reform Programme (ERP) 2024, Commission Autumn 2023 forecast.

Inflation  eased  in  2023  and  is  projected  to  decline  further  in  2024-2026.  Following  record 
growth in 2022, inflation steadily declined throughout 2023 from 16.2% y-o-y in January to 4.3% in 
December ( 75) and averaged 8.6% for the year as a whole. The ERP estimates a cumulative increase of 
prices in  2022-2023 of over 23% as  compared to 2021. Inflation has  been driven by surging global 
commodity prices, such as food and fuel, as well as domestic policy-induced increases of wages and 
pensions.  The  ERP  expects  the  average  inflation  rate  to  ease  further,  from  5%  in  2024  to  2.5%  in 
2026,  due  to  the  high  base  in  2023  and  stabilising  import  prices,  in  particular  for  food  and  fuels. 
Average wage growth is expected to be 5% in 2024 before levelling out to 4% in 2025-2026. The ERP 
rightly acknowledges external risks  which could lead to a resurgence of inflation while it offers little 
discussion on the domestic risks related to further fiscal stimulus measures such as a major increase 
in the minimum pension rate (52%) from January 2024 and other social transfers included in the 2024 
budget. 

(75)  In February 2024 inflation remained unchanged at 4.3% y-o-y. 

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The  ERP  projects  a  gradual  decrease  in  the  current  account  deficit.  In  2023,  the  current 
account  deficit  is  estimated  to  have  narrowed  to  11.4%  of  GDP  from  12.9%  in  2022  as  very  high 
growth  in  services  exports  (21%)  mitigated  a  decline  in  merchandise  exports  caused  by  weaker 
performance in metal exports. In near future, the ERP assumes stable growth in merchandise exports 
(6% in 2024-2026) combined with a slowdown in merchandise imports (from 11% in 2024 to 6.5% in 
2026). These dynamics are set to result in a widening deficit of goods trade which is projected to be 
mitigated by a growing surplus of services trade. Growth in services exports and imports are also set to 
slow  down  from  12%  and  8%  in  2024  to  9%  and  6%  in  2026,  respectively.  The  secondary  account 
surplus declined to 6.4% of GDP in 2023 and is projected to recover to 7.9% in 2026. Overall, the ERP 
projects the current account deficit to narrow from 13.1% in 2024 to 10.9% in 2026. This is a more 
cautious scenario than in the previous year’s ERP, which assumed a decline to 8.9% of GDP in 2025. A 
high  import  dependency  and  poor  diversification  of  the  production  base  remain  key  structural 
weaknesses of the Montenegrin economy. The assumption of higher imports growth in 2024 is in line 
with the projected investment profile. 

Though set to decline, foreign direct investment (FDI) inflows are expected to finance two 
thirds of the current account deficit. Net FDI inflows declined by 47% y-o-y in January-September 
2023, due to a combination of lower inflows of equity investment and inter-company debt (by 26% y-
o-y)  and  higher  outflows  (25%).  The  latter  was  mainly  driven  by  the  withdrawal  of  funds  by  non-
residents. More than a half of FDI inflows (53%) went into real estate. As a share of GDP, full-year net 
FDI inflows are estimated to have declined to 6.3% in 2023 from 13.2% the previous year. They are 
projected to increase to 7.8% of GDP in 2024 and to decline gradually to 7.1% of GDP in 2026. This 
profile implies that around two thirds of the current account deficit would be covered by FDI in 2024-
2026.  The  ERP  attributes  this  dynamic  to  a  ‘base  effect’  without  providing  a  more  substantial 
explanation. At the end of 2023,  Montenegro’s  net international investment position was negative at 
109% of GDP as compared to 130.4% by end-2024. The external debt declined to 140.8% of GDP in 
2023  (supported  by  the  denominator  effect,  as  GDP  increased  by  11.8%  in  nominal  terms  in  2022) 
from 165.8% in 2022.  

External competitiveness and current account 

30

0

-30

-60

Graph II.6.1a: Montenegro - current
account balance (% GDP)

2023
2022
 Services balance
Current account balance (rhs)

2024

2026

2025
 Goods balance
Net FDI (rhs)

15

0

110

105

-15

100

-30

95

90

Source: Economic Reform Programme (ERP) 2024.

Graph II.6.1b: Montenegro - real effective
exchange rate (CPI based, 2010 = 100)

Appreciation

Depreciation

2019
Montenegro

2020

2021
EA 19

2022

2023

Source: IMF and ECB.

The  banking  system  remains  stable  with  adquate  levels  of  liquidity  and  profitability.  Most 
temporary measures aimed at preserving the liquidity and solvency of domestic banks, adopted in the 
context of the spill-over effects of Russia’s invasion of Ukraine, expired during 2023. The central bank 
of Montenegro (CBM) strengthened the supervisory process in November by requiring credit institutions 
to  pass  the  conformity  check  before  paying  dividends.  As  a  precautionary  measure,  the  central  bank 
kept a repo line from the European Central Bank to address exceptional liquidity needs in the event of 
unforeseen circumstance. Banks continued to fund themselves mainly through domestic deposits which 
increased by 15.5% in 2023. Credit growth rose to 10.8% from 6.6% in the previous year. Borrowing 
costs increased with the nominal weighted average lending rate reaching 6.5% by the end of 2023 as 
compared  to  5.3%  at  the  beginning  of  the  year.  The  widening  spread  between  lending  and  deposit 
rates, reaching 623 basis points in Q3-2023 from 566 at the end of 2022, supported the profitability 
of the banking  sector: The return on assets increased to  2.6% from 1.7% over the  same period. The 

118 

   
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Country analysis, Montenegro 

non-performing loan ratio declined moderately to 5.0% of total loans at the end of 2023, as compared 
to 5.7% in 2022.  

Table II.6.2:
Montenegro - financial sector indicators

Total assets of the banking system (EUR million)
Foreign ownership of banking system (%)
Credit growth (%, average)
Deposit growth (%, average)
Loan-to-deposit ratio (end of period)
Financial soundness indicators (%, end of period)
     - non-performing loans to total loans
     - regulatory capital to risk-weighted assets
     - liquid assets to total assets
     - return on equity
     - foreign exchange loans to total loans

Source: Central Bank of Montenegro.

6.3.  PUBLIC FINANCE ( 76) 

2019
4 604
67.9
4.2
1.8
88.1

4.7
17.7
20.8
9.0
0.4

2020
4 587
80.3
5.0
-2.5
93.7

5.5
18.5
22.2
4.1
0.2

2021
5 329
80.0
6.6
12.8
80.0

6.2
18.5
26.4
4.6
0.2

2022
6 407
82.0
6.1
23.3
70.1

5.7
19.3
31.0
14.4
0.2

2023
6 735
83.7
10.8
15.5
74.8

5.0
20.3
23.7
19.8
0.1

Supported  by  extraordinary  revenue  growth,  the  2023  budget  outcome  substantially 
exceeded  the  target  envisaged  in  the  revised  budget.  The  initial  budget  set  the  general 
government  deficit  target  at  5.9%  of  GDP,  compared  to  the  2022  outcome  of  4.3%  ,  due  to  higher 
mandatory social spending and cautious assumptions on the revenue side. Following the amendment 
of  the  2023  budget  in  November  to  accommodate  much  stronger  growth  in  public  revenue  and 
allocate additional funds for energy, social and  health transfers and  public  wages, the overall deficit 
target was reduced significantly to 3.4% of GDP. The actual budget outcome is estimated to have been 
in surplus, at 0.5% of GDP, due to a combination of much higher revenue (44.3% of GDP versus 37.6% 
predicted  in  the  revised  budget)  and  less  pronounced  increase  in  spending  (43.8%  versus  40.9%  of 
GDP).  Public  revenue  growth  was  supported  by  high  consumer  spending  fuelled  by  a  large  inflow  of 
foreign  nationals,  high  inflation,  a  successful  tourism  season  and  improved  tax  discipline.  Revenues 
also benefited from an increase in social contributions following public sector wage increases as well 
as  one-off  revenues  related  to  the  economic  citizenship  programme,  the  termination  of  a  hedging 
arrangement (77) and the energy-related budget support from the EU. Overall, total revenues increased 
by 26.3% y-o-y or by 5.1 pps of GDP, while total  spending rose by 12.8% or 0.9 pps of GDP. Current 
expenditure increased by 17.2% y-o-y, driven by higher social transfers (23.6%), an increased wage bill 
(19.3%) and a surge in interest payments (34.9%). In parallel, capital spending declined by 9%, raising 
a question mark on the composition and quality of public spending. 

(76)  The assessment of the fiscal framework is based on a revised fiscal scenario provided to the Commission after the official 
ERP  submission,  and  not  on  the  fiscal  tables  presented  in  the  ERP.  The  revision  is  mainly  explained  by:  (i)  the  budget 
outcome  of  2023;  and  (ii)  revised  projections  for  the  local  government  sub-sector,  which  led  to  a  significant  revision  of 
general government finances. 

(77)  The  hedging transaction  in  the  form  of  cross-currency  swap  was  concluded  in the  amount of USD  818  million  covering  a 
loan  provided  by  Exim  China  Bank  with  a  maturity  of  14  years.  The  cross-currency  swap  operates  on  the  principle  of 
exchanging  euro  and  dollar  cash  flows  between  the  contracting  parties,  in  accordance  with  the  agreed  terms  and  in 
accordance  with  the  loan  repayment  plan  to  which the  hedging  arrangement is  linked.  The Ministry of  Finance  decided to 
keep the hedging arrangement until all four repayment instalments have been repaid and closest to the date of mandatory 
termination  i.e.  July  2023.  The  transaction  was  terminated  (by  the  outgoing  government)  in  early  June  2023  when  the 
market gain reached around USD 64 million.  

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Table II.6.3:
Montenegro - composition of the budgetary adjustment  (% of GDP)

Revenues
    - Taxes and social security contributions
    - Other (residual)
Expenditure
    - Primary expenditure
       of which:
       Gross fixed capital formation
       Consumption
       Transfers & subsidies
       Other (residual)
    - Interest payments
Budget balance
    - Cyclically adjusted
Primary balance
    - Cyclically adjusted
Gross debt level

2022

2023

2024

2025

2026

39.2
34.1
5.1
42.9
41.2

5.3
13.0
19.7
3.2
1.6
-3.7
-3.4
-2.1
-1.8
69.3

44.3
37.2
7.1
43.8
41.9

4.3
13.7
20.8
3.1
1.9
0.5
-0.1
2.4
1.8
62.2

44.1
38.7
5.4
47.5
45.5

5.2
13.6
22.7
4.1
2.0
-3.4
-4.3
-1.4
-2.3
61.6

43.3
38.5
4.8
46.2
43.9

5.0
12.8
22.4
3.7
2.2
-2.9
-3.8
-0.7
-1.6
61.3

42.8
38.2
4.6
45.2
42.7

5.1
12.3
22.1
3.2
2.5
-2.4
-3.1
0.2
-0.6
61.0

Change:
2023-26
-1.5
1.0
-2.5
1.3
0.7

0.7
-1.4
1.3
0.1
0.6
-2.8
-3.0
-2.2
-2.4
-1.3

Sources: Economic Reform Programme (ERP) 2024, Commission calculations.

While fiscal consolidation remains a priority, the ERP projects a worsening budget balance 
in  2024  (compared  to  the  actual  2023  outcome)  and  gradual  adjustment  in  the  next  2 
years.  A  number  of  ad  hoc  measures  in  previous  years ( 78)  weakened  the  tax  base  and  resulted  in 
higher  mandatory  spending.  The  ERP  sets  out  some  fiscal  consolidation  measures  which  contain 
reduced  discretionary  spending,  applying  stricter  criteria  for  the  selection  of  mature  investment 
projects  and  better  collection  of  revenue  as  well  as  the  expansion  of  the  tax  base.  All  new  spending 
measures  are  required  to  be  fiscally  neutral,  i.e.  financed  from  current  revenue  but  not  from  new 
borrowing.  This  concept  excludes  capital  expenditure  and  therefore  does  not  limit  the  extent  of  the 
deficit. Public revenue is set to level out from the record 44.3% of GDP in 2023 to 44.1% in 2024 and 
then  decline  to  42.8%  in  2026.  Other  (non-tax)  revenue,  which  was  supported  by  one-off  items  in 
2023, is set to decline from 7.1% to 5.4% of GDP in 2024 and to 4.6% in 2026. Key items supporting 
public revenue will remain VAT and excise duties, which are projected to account for around 74% of tax 
revenue in  2024-2026. The  share of social contributions  is set at nearly 20% of budget revenue for 
this  period. Public  spending is  set to increase from 43.8% of  GDP in 2023 to 47.5% in 2024 before 
declining to 45.2 % in 2026. The main items driving higher spending relate to growing social transfers 
and  capital  investment.  This  projected  path  would  result  in  a  sharp  widening  of  a  headline  deficit  to 
3.4% in 2024 and a gradual fall by 0.5 pps  per year thereafter. The primary  balance is  projected to 
achieve  a  surplus  of  0.2%  of  GDP  in  2026.  The  projected  fiscal  adjustment  is  backloaded,  but  more 
ambitious than last year’s programme which did not envisage any reduction of the primary deficit. The 
debt ratio is assumed to be on a declining path from 62.2% of GDP in 2023 to 61% in 2026 which is 
well  below  the  projections  of  the  previous  ERP.  Overall,  the  assumed  fiscal  path  of  a  substantial 
widening deficit in 2024 and a gradual adjustment in the subsequent years would result in exceeding 
the limits prescribed by the rules of fiscal responsibility (79) in 2024, but partially complying with them 
in 2025-2026. 

Driven  by  strong  growth  in  social  transfers  and  capital  spending,  the  general  government 
deficit  is  set  to  widen  in  2024.  Compared  to  the  2023  output,  government  revenue  is  set  to 

(78)  These  included  abolishing  the  mandatory  health  contributions,  introducing  a  non-taxable  share  of  wages,  introducing 
additional allowances for all children and for mothers of three or more children, large increases in minimum pensions and 
wage increases in the public sector. 

(79)  Numerical fiscal rules limit the general government deficit and debt to below 3% and 60% of GDP, respectively. 

120 

 
 
   
 
 
 
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decrease marginally, by 0.2  pps to 44.1% of GDP, although the  ‘other’ (non-tax) revenue  category is 
set to decline by 1.7 pps to 5.4% of GDP due to expiring one-off items. Tax revenue is set to increase 
by 1.5 pps to 38.7% of GDP, which seems rather optimistic given an exceptional performance in 2023. 
Nearly  half  of  government  revenue  is  projected  to  come  from  VAT  and  excise  duties,  which  would 
increase by 13% each and account together for 22.2% of GDP. While pension increases should support 
household  consumption  and  VAT  income,  further  additional  revenues  are  expected  thanks  to  higher 
legal trade in tobacco products, changes in the excise calendar and new excise duties on products with 
added sugar. Revenues from labour and corporate income taxation are projected to rise by 12% and 
9%,  respectively,  as  compared  to  2023,  in  line  with  economic  trends,  the  narrowing  of  the  informal 
economy and the ongoing adjustment of public wages. Revenues from social security contributions are 
expected to remain stable at 8.6% of GDP. Public spending is projected to increase by 3.7 pps to 47.5% 
of GDP, due to a strong increase in mandatory current spending, mainly driven by social transfers, and 
higher allocation for capital investment. Social benefit spending is planned to increase by 22.6% y-o-y, 
or by 2 pps to  14.4% of  GDP, reflecting the increase in the minimum  pension (52%)  and the regular 
pension indexation. The gross wage bill is assumed to remain roughly unchanged at 10.7% of GDP, but 
it  will  increase  by  5%  y-o-y  in  nominal  terms,  due  to  a  new  collective  bargaining  agreement  and  a 
higher number of workers employed. The capital budget is set at 5.2% of GDP, which is 1.1  pps higher 
than in 2023 due to the planned start of the second phase of the Bar-Boljare highway.  

BOX II.6.1: THE BUDGET FOR 2024 

*     On  28 December,  Parliament  of  Montenegro  adopted  the  2024  Budget  Law,  which  targets  a 
deficit of 3.4% of projected GDP, assuming real growth of 3.8% and inflation levelling out to 5%. 

  Table: Main measures in the budget for 2024 

Revenue measures* 

Expenditure measures** 

• 

Increasing the minimum pension to EUR 
450 (Estimated impact: 1.5% of GDP) 

•  Regular adjustment of pensions 
(Estimated impact: 0.8% of GDP) 

• 

• 

Increase in indirect revenues due to higher 
consumption supported by an increase in 
minimum pension to EUR 450 

(Estimated impact: 0.4% of GDP) 

Implementation of excise increase through 
regular excise calendar, and introducing the 
new excise product and suppressing the 
grey economy on tobacco market 

(Estimated impact: 0.6%) 

•  One-off change in non-tax revenue due the 
implementation of the economic citizenship 
programme 

(Estimated impact: 0.4% of GDP) 

• 

Implementation of the new Law on Games 
of Chance 

(Estimated impact: 0.3% of GDP) 

•  Returning the VAT rate on the pre-crises 
level from 7% to 21%, in the field of 
tourism and hospitality as of  1 January 
2024 

(Estimated impact: 0.2% of GDP) 

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*  Estimated impact on general government revenues. 
** Estimated impact on general government expenditure. 

Source: ERP. 

In  the  medium  term,  the  ERP  projects  that  budget  deficits  will  decline  as  a  result  of  the 
rapidly  decelerating  growth  of  public  spending.  The  budget  revenue  as  share  of  GDP  is  set  to 
decrease  from  a  high  level  due  to  decelerating  growth  of  tax  revenue  and  shrinking  other  revenues. 
Tax revenue is forecast to grow at some 4% in nominal terms in 2025-2026, supported by lower tax 
debt, an accelerating excise calender, the revision of the taxation of games of chance and measures to 
tackle informality. The budgetary adjustment should mainly be driven by a sharp deceleration of public 
spending, from an annual increase of 15% in 2024 to 2.7% in 2025 and 2.5% in 2026, leading to a 
2.3 pps drop in the spending ratio in 2025-2026. The ERP refers to the principle of controlled growth of 
current  spending  and  a  reduction  in  non-productive  spending,  but  the  assumptions  on  the  main 
spending items raise some concerns. Notably, the projection of an almost stable wage bill in nominal 
terms,  leading  to  a  0.5  of  GDP  reduction  per  year  might  prove  overly  optimistic  and  not  in  line  with 
historical wage trends and the inflation outlook in 2025-2026 which is likely to generate at least some 
wage  adjustments.  Social  transfers  are  projected  to  grow  by  5%  in  2025  and  4%  in  2026,  after  a 
major  increase  (22.6%)  in  2024.  This  assumption  seems  rather  optimistic,  as  an  average  pension  is 
indexed three times a year, resulting in a 39% increase by the end of 2024 ( 80). The capital budget is 
set to remain roughly stable at some 5% of GDP, which is above the level achieved in 2023, but in line 
with historical trends.  

After significant declines in recent years, the ERP projects the public debt ratio to decrease 
only moderately, to 61% of GDP in 2026, while financing needs are set to rise sharply. The 
ERP  estimates  that  total  public  debt  decreased  sharply,  to  62.2%  of  GDP  at  the  end  of  2023  from 
69.3%  in  the  previous  year.  Total  financing  needs  amounted  to  6.1%  of  GDP,  which  were  mainly 
covered  by  new  borrowing  (4.6%),  government  deposits  (0.9%  of  GDP)  and  privatisation  revenues 
(0.3%).  Despite  a  widening  primary  deficit  in  2024,  the  ERP  expects  the  public  debt  to  level  out  to 
61.6% of GDP, helped by GDP growth, inflation and negative stock-flow adjustments, the latter partly 
related  to  the  continued  use  of  government  deposits  to  meet  financing  needs.  In  2025-2026,  rising 
interest  expenditure  is  set  to  be  the  main  debt  ratio-increasing  factor  while  an  offseting  impact  is 
expected from GDP growth and inflation. The ERP projects a small primary deficit in 2025 which should 
turn into a surplus in 2026, contributing to a continued modest debt reduction. Debt repayment needs 
are set to rise sharply, from 4.8% of GDP in 2023 to 7.6% in 2024 and 11% of GDP in 2025, bringing 
gross  public  financing  needs  to  a  record  14.1%  of  GDP  in  2025.  The  surge  in  2025  is  driven  by  a 
maturing  Eurobond  (EUR  500  million  or  6.7%  of  projected  GDP)  which  needs  to  be  refinanced. 
Government  deposits,  which  stood  at  3.6%  of  GDP  in  September  2023,  are  planned  to  help  debt 
repayment by 1% of GDP in 2025-2026.  

A  new  hedging  arrangement  covers  currency  exchange  and  interest  rate  risks.  While  the 
average  debt maturity shortened by 2 years in 2020-2022, the termination of  hedging arrangement 
for a US dollar denominated loan from China in 2023 resulted in a significant increase in the average 
weighted  interest  rate  and  in  the  share  of  non-euro-denominated  debt  (to  around  20%  of  the 
total).While the share of debt with a fixed interest rate remained practically unchanged from previous 
year at 77.8% of the total, the share with a variable interest rate (22.2%), is mainly linked to Euribor, 
which  was  expected  to  result  in  higher  borrowing  costs  due  to  tightening  global  financial  conditions. 
This,  along  with  currency  exchange  risks,  has  been  addressed  by  concluding  a  new  hedging 
arrangement after the submission of the ERP. 

(80)  Following the 52% hike in the minimum pension rate to EUR 450 as of 2024, the government announced that there will be 

no regular adjustments of the minimum pension for the next 2 years. 

122 

 
 
 
 
BOX II.6.2: DEBT DYNAMICS 

Montenegro

Composition of changes in the debt ratio (% of GDP)

Gross debt ratio [1]

Change in the ratio
Contributions [2]:

   1. Primary balance

   2. 'Snowball effect'
       Of which:
       Interest expenditure

       Growth effect
       Inflation effect

2022
69.3
-14.7

2023
62.2
-7.1

2024
61.6
-0.6

2025
61.3
-0.3

2026
61.0
-0.3

2.1
-11.6

-2.4
-5.2

1.4
-1.6

0.7
-1.0

-0.2
-0.3

1.6
-4.5
-8.7
-5.2

1.9
-3.6
-3.5
0.5

2.0
-2.2
-1.3
-0.4

2.2
-1.8
-1.4
-0.1

2.5
-1.7
-1.1
0.1

   3. Stock-flow adjustment
[1]  End of period.
[2]  The 'snowball effect' captures the impact of interest expenditure on accumulated
      debt, as well as the impact of real GDP growth and inflation on the debt ratio
      (through the denominator).
      The stock-flow adjustment includes differences in cash and accrual accounting, 
      accumulation of financial assets, and valuation and other effects.

Source: Economic Reform Programme (ERP) 2024, Commission calculations.

Part II 
Country analysis, Montenegro 

favourable 
The 
snowball  effect  is  set 
to  moderate  sharply, 
as  nominal  GDP  and 
inflation  are  set  to 
slow 
down  while 
interest  costs  rise.  A 
continued  moderate 
debt  reduction  is  set 
to  be  ensured  by  the 
primary 
improving 
is 
balance,  which 
turn 
projected 
2026. 
in 
positive 
Using 
government 
cash deposits to repay 
maturing 
is 
projected  to  generate 
some 
downward 
stock-flow 
adjustments  in  2024 
that will decline in the 
following 2 years. 

debt 

to 

While  the  ERP  presents  a  broad  balance  of  risks  to  the  baseline  scenario,  some  risks 
deserve  deeper  consideration.  Political  risks  relate  to  geopolitical  tensions  and  the  internal 
environment,  which  could  lead  to  new  spending  pressures,  undermining  the  sustainability  of  public 
finance  and  credit  conditions  for  the  forthcoming  borrowing.  The  lack  of  a  comprehensive  fiscal 
strategy  creates a  risk of  further ad hoc measures, as shown  by the ongoing  discussion to raise the 
minimum  wage  up  to  EUR  700  and  increase  net  wages,  potentially  by  reducing  the  pension 
contribution  rate.  Such  decisions  would  constitute  a  major  risk  and  have  heavy  consequences  for 
Montenegro’s fiscal sustainability, requiring a substantial increase in indirect taxes to offset the costs. 
Given the 2023 output, public revenue is revised significantly upwards as compared the previous ERP, 
resulting  in  lower  government  deficits.  Spending  projections  signal  consolidation  attempts,  but  the 
underlying  assumption,  such  as  freezing  the  public  wage  bill,  lacks  credibility.  The  ERP  indicates 
positive  risks  to  the  baseline  scenario,  related  to  the  implementation  of  the  Growth  Plan  for  the 
Western  Balkans,  the  reform  of  the  Revenue  and  Customs  Administration,  strengthened  measures 
against the informal economy, the concession of Montenegro’s airports and the growth impact of the 
highway  construction.  Negative  risks  stem  from  possible  delays  in  the  implementation  of  structural 
reforms, adverse external trends, in particular inflation, and delays in the implementation of revenue-
supporting  measures.  Further  negative  risks  relate  to  possible  cost  overruns  in  highway  construction 
projects and contingent liabilities related to SOEs. There is also a specific issue concerning the revision 
of  future  statistical  data,  namely  that  alignment  with  the  European  System  of  Accounts  (ESA  2010) 
methodology  would  require  reclassifying  some  operations  of  public  companies  into  the  general 
government sector, potentially increasing deficit and debt levels.  

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BOX II.6.3: SENSITIVITY ANALYSIS 

The  ERP  includes  a  detailed  analysis  of  the  deficit,  with  a  comparison  between  baseline  and  low 
growth scenarios as well as with the previous ERP. The comparison of scenarios includes a detailed 
risk  matrix  identifying  potential  positive  and  negative  events  (see  above).  However,  a  detailed 
impact  of  each  single  risk  is  not  quantified;  only  their  total  effect  on  the  budget  balance,  as 
reflected in the alternative scenario. Under the low growth scenario, the general government deficit 
would widen from 1.2% of GDP in 2023 to 8.4% in 2024 and adjust to 6.4% in 2025. In addition, 
the public debt-to-GDP ratio would reach 76% of GDP by 2026 implying higher fiscal sustainability 
risks. 

Shortcomings  in  the  composition  of  public  finance  include  a  narrow  tax  base  and  high 
mandatory spending. Abolishing mandatory health contributions and introducing a non-taxable part 
of wages has substantially weakened the tax base ( 81), while growing public spending is mainly driven 
by current expenditure (86% of the total) leaving little space for capital investment. Public investment 
would also benefit from more efficient capital budgeting and implementation. While the ERP mentions 
the need to strengthen the tax base with a comprehensive tax reform, there is a risk that lowering the 
tax  wedge  on  labour  would  deliver  the  opposite  result  and  further  weaken  public  revenue.  Higher 
taxation  of  illegal  assets,  raising  excise  rates  for  goods  with  adverse  health  effects,  reducing  the 
informal economy and tax debt are all steps in the right direction, but it is unclear whether their impact 
would be sufficient to compensate for continuous growth of mandatory spending. The reforms of the 
pension and healthcare systems, renumeration of public employees, together with the reform of SOEs, 
are  essential  for  limiting  the  increase  of  current  spending  and  freeing  the  resources  for  investment 
projects (e.g. on education, infrastructure and  digitalisation), aimed at increasing  productivity and the 
competitiveness of the economy. 

Compliance  with  existing  fiscal  rules  requires  tighter  fiscal  consolidation  than  that 
envisaged  in  the  current  ERP.  The  current  medium-term  fiscal  planning  breaches  the  numerical 
rules  for  general  government  debt  for  the  entire  period,  while  the  general  government  deficit  is 
projected to fall below the limit of 3% of GDP in 2025-2026, partly due to overoptimstic assumptions 
on  containing  public  spending.  The  ERP  confirms  the  urgent  need  for  reforms  in  the  areas  of  health, 
social  benefits,  pensions  and  public  sector  wages,  which  are  indispensable  for  achieving  the  fiscal 
consolidation and  medium-term sustainability of  public  finance. The ERP also  suggests  considering a 
revision of existing fiscal rules, as they are too weak to anchor fiscal policy, and possibly introducing 
additional  rules  or  reinforcing  the  current  budgetary  planning  process.  A  requirement  for  fiscal 
neutrality,  which  was  applied  for  the  2024-2026  fiscal  planning,  could  be  institutionalised  while 
respecting  the  current  limit  for  budget  deficit  and  the  need  to  achieve  a  primary  surplus.  A 
commitment  to  anchor  public  debt  to  60%  of  GDP  could  be  a  useful  tool  in  strengthening  fiscal 
sustainability. Further support for monitoring the implementation of fiscal policy could come from the 
Fiscal  Council,  which  would  be  tasked  with  evaluating  new  measures  prior  to  their  adoption. 
Montenegro adopted the Law on budget and fiscal responsibility, creating the legal basis for setting up 
the Fiscal Council. However, the public call for Council members has so far failed and the government 
plans to relaunch a call in 2024. 

(81)  Given the importance of the tourism industry, Montenegro’s tax mix is very dependent on revenues from taxes on goods and 
services, accounting for 62.6% of total tax revenues in 2021. For comparison, taxes on goods and services average to 49.2% 
and  32.1%  in  WB6  economies  and  OECD  countries,  respectively.  As  a  share  of  GDP,  VAT  revenues  account  for  19.9%  in 
Montenegro, which is almost twice as much as the OECD average of 10.6%. OECD (2022). 

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6.4.  MAIN MACRO-RELEVANT STRUCTURAL CHALLENGES  

In  November  2023,  the  Commission  proposed  a  New  Growth  Plan  for  the  Western 
Balkans (82) with the aim of supporting the region’s economic convergence and accelerating 
the accession process. The plan involves a Reform and Growth Facility (EUR 2 billion in grants, EUR 4 
billion  in  loans)  that  is  to  be  disbursed  in  2024-2027  as  investment (83)  and  budget  support  in 
exchange for implementing reforms that are to be set out in reform agendas prepared by the Western 
Balkan partners. The New Growth Plan is therefore an important tool to increase reform incentives to 
boost  growth  and  convergence.  In  this  context,  with  a  view  to  ensuring  an  integrated  surveillance  of 
Montenegro’s economy, this chapter briefly outlines the main structural challenges facing the country.  

Montenegro’s  comparative  advantage  is  due  to  its  geographical  location,  climate  and 
landscape.  Its  small  and  open  economy  is  service-oriented  and  largely  focused  on  tourism  as  the 
principle  source  of  income.  Services  account  for  nearly  80%  of  all  exports,  while  foreign  tourists 
directly  generate  over  20%  of  the  country’s  GDP.  Given  the  country’s  reliance  on  one  sector  and  its 
small size, the economy remains vulnerable to external shocks and the challenges of climate change.  

An  improved  business-oriented  institutional  and  regulatory  environment  would  facilitate 
private sector development. A burdensome regulatory and institutional environment hinders private 
sector dynamism as well as domestic and  foreign investment and  provides incentives, specifically to 
micro and small enterprises, to engage in undeclared work and transactions. This is compounded by the 
excessively  complex  legal  framework,  weak  law  enforcement (84),  a  lack  of  transparency  in 
administrative decision making and financial burden from local taxation and para-fiscal charges.  

Pushing  forward  reforms  and  privatising  SOEs  and  improving  their  governance  and 
profitability remain a challenge. Insufficient performance of SOEs translates into fiscal risks and a 
potential  increase  in  public  spending  within  limited  fiscal  space.  The  caretaker  government  stepped 
back  from  previous  plans  to  formulate  the  State’s  ownership  strategy  and  set  out  a  portfolio  of  key 
companies  that  should  remain  in  state  possession,  as  well  as  to  improve  the  management  practices 
and financial performance of SOEs. As there was no political agreement on the direction and scope of 
such reforms, the government also stepped back from its plans for setting up a holding company to 
manage and reform SOEs (85), and limited the scope of its 2022 measures to set up a small unit in the 
Ministry  of  Finance  to  monitor  fiscal  risks  related  to  SOEs.  The  performance  of  Montenegro’s  SOEs, 
including  those  at  the  local  level,  could  be  enhanced  by  establishing  a  legal  SOE  framework,  which 
would  incorporate  principles  of  good  corporate  governance,  and  transforming  SOE  management 
structures, eliminating political patronage and improving financial performance to reduce fiscal risks.  

The  informal  economy  is  a  major  obstacle  to  the  inclusive,  sustainable  growth  and  the 
competitiveness  of  Montenegro.  The  informal  sector  is  fuelled  by  deficiencies  in  the  institutional 
and regulatory environment, labour market weaknesses, insufficient enforcement capacity of the public 
authorities,  corruption  and  tax  non-compliance.  The  impact  of  the  informal  economy  is  particularly 
harmful for SMEs that operate legally and microenterprises in the services sector, which dominate the 
economy.  These  smallest  companies  perceive  informal  competition  as  the  most  costly  obstacle  to 
doing  business.  The  costs  of  the  informal  economy  and  corruption  are  also  higher  for  innovative 

(82)  https://neighbourhood-enlargement.ec.europa.eu/enlargement-policy/new-growth-plan-western-balkans_en 

(83)  Infrastructure  investments  need  to comply  with  the EU environmental acquis,  national  and  international  nature  protection 
and water management obligations, ensure public participation and consultation, and guarantee high quality environmental 
impact assessment reports that include cumulative impacts on nature and biodiversity. 

(84)  There are considerable challenges in dispute settlement in Montenegro, despite progress in implementing reforms. The time 
to  resolve  a  commercial  dispute  has  been  consistently  increasing  and  the  commercial  court  is  still  challenged  by  weak 
enforcement and limited implementation capacity. Similarly, the Constitutional court spent 6 months without a quorum and 
there is still one vacancy to be filled, which could increase the backlog of cases. 

(85)  The  SOE  Montenegro Works,  which  was  created  in  August  2021  and  tasked  with  monitoring  SOEs’  financial  performance, 

was liquidated in July 2022. 

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companies, which  particularly hinders the development of sectors of the economy that are based on 
knowledge  and  skills.  Effective  policies  to  reduce  informality  would  help  create  a  supportive 
environment for the SME sector, enabling it to also benefit from the presence of skilled migrant labour 
in  the  country.  The  ERP  sets  out  measures  aimed  at  strengthening  the  business  environment  and 
supressing the informal economy, such as introducing a new integrated IT system for  public revenue 
management and streamlining trade in goods and services. 

Montenegro’s green transition remains at an early stage. The national energy and climate plan 
is under development and expected to be adopted in 2024. The plan is expected to align with the 2030 
energy  and  climate  targets  approved  by  the  Energy  Community  Ministerial  Council  in  2022.  As  EU 
Member States move towards greener economies, Montenegro would benefit from aligning its policies 
with  those  of  the  EU.  This  would  strengthen  its  competitiveness  during  the  accession  process  (for 
example  on  the  Carbon  Border  Adjustment  Mechanism),  and  ultimately  help  it  cope  with  increased 
market pressures. It should notably implement the Energy Community’s Decarbonisation Roadmap and 
put  in  place  a  carbon  pricing  instrument  compatible  with  the  EU  ETS,  along  with  a  reliable  and 
transparent  framework  for  monitoring,  reporting  and  verifying  greenhouse  gas  emissions.  While  the 
use of renewable energy sources is high (some 43% of the electricity production in 2020 came from 
renewable  sources,  mostly  hydropower  and  biomass)  Montenegro  could  leverage  its  natural 
endowments  in  hydro,  solar  and  wind  power,  increasing  energy  production  and  exports,  while  also 
helping to achieve the country’s climate goals, and supporting the achievement of coal phase out.  

The  pace  of  investment  in  digital  infrastructure  is  slow.  The  telecoms  operator  auctioned  5G 
spectrum  and  awarded  it  to  three  major  operators  in  December  2022,  but  a  framework  for  5G 
cybersecurity  requirements  is  still  pending.  All  three  operators  are  obliged  to  activate  5G  in  every 
municipality  by  the  end  of  2024,  providing  5G  coverage  to  50%  of  population  by  2026.  Access  to 
broadband  networks  is  key  to  digitalising  the  economy  and  public  services,  and  to  implementing 
Montenegro’s smart specialisation strategy in the ICT sector. By May 2022, some 82% of Montenegrin 
households  were  located  in  areas  with  high-speed  broadband  connection  available  (defined  as  30 
Mbit/s),  but  actual  take-up  was  much  lower  at  only  around  48%  of  households.  Meanwhile,  19%  of 
households  were  still  without  internet  access  in  2021,  despite  it  being  technically  available.  In  rural 
areas, 37% of households were without internet access. The main goal of the national broadband plan 
is to provide a higher percentage of household coverage by fixed broadband internet access at a speed 
of 100Mbps. 

The digitalisation of the public sector, and the development of transactional e-government 
services  for  the  public  and  for  businesses  feature  prominently  among  the  government’s 
priority  reforms,  as  set  out  in  a  series  of  important  strategic  documents (86).  Although 
digitalisation gained additional momentum during the COVID-19 pandemic ( 87), state authorities failed 
to  produce  tangible  improvements.  The  cyberattacks  during  in  the  second  half  of  2022  seriously 
disrupted the government’s digital services and brought the issue of cybersecurity to the forefront, but 
it consequently left little space for improvements to e-governance. The ERP refers to digitalisation and 
cyber security measures, which are expected to result in the digitalisation of the public administration 
and  to  strengthen  cyber  security  and  broadband  infrastructure  through  a  multidisciplinary  approach. 
This  reform  measure  should  improve  confidence  in  digital  services,  increase  the  efficiency  of  public 
services and contribute to productivity growth. 

With  the  economic  recovery,  labour  market  indicators  also  continued  to  improve  and 
surpassed  pre-crisis  levels,  but  structural  challenges  remain.  According  to  the  labour  force 
survey  (LFS),  the  average  unemployment  rate  fell  to  12.2%  in  Q4-2023,  down  from  13.4%  a  year 
earlier, while the employment rate also increased to 63.8%, up from 59.6%, the previous year. Despite 

(86)  2022-2026 digital transformation strategy, 2022-2026 strategy for the digitalisation of the education system, 2022-2026 

cybersecurity strategy and the Law on electronic documents. 

(87)  In  2022  Montenegro  implemented  the  new  customs  law,  requiring  electronic  data  processing  for  information  exchange 
among customs authorities and economic entities. This improves efficiency in customs procedures, leading to a more secure 
and digitally streamlined trade environment for both businesses and the government agencies. 

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these  improvements,  the  2023  LFS  results  once  again  confirmed  large  regional  disparities,  with  the 
unemployment  rate  standing  at  3.5%  in  the  tourism-heavy  coastal  region,  at  7.7%  in  the  central 
region,  and  at  29.2%  in  the  poorer  northern  region.  The  gender  gap  narrowed  somewhat,  but  the 
activity  rate  of  women  (63.6%)  remained  significantly  below  that  of  men  (77.5%).  Remaining  major 
structural challenges are youth unemployment, standing at 23.7% for the population aged 15-24, and 
long-term  unemployment,  as  76.1%  of  all  unemployed  have  been  looking  for  a  job  for  more  than 
12 months. The most vulnerable groups on the labour market remain women, young people, Roma and 
low-skilled  workers,  with  Roma  and  people  with  disabilities  facing  particular  challenges  in  accessing 
the  labour  market.  While  some  support  is  available  for  these  groups  by  way  of  employment  and 
education programmes, these do not seem effective in supporting these groups to better prepare for or 
integrate  into  the  labour  market.  Despite  ongoing  reform  efforts,  the  public  employment  service’s 
capacity  for  job  mediation  remains  weak  and  lacks  a  continuous  monitoring  of  active  labour  market 
policies,  which  in  turn  prevents  the  design  of  quality,  targeted  and  effective  employment  activation 
measures. The Employment Agency of Montenegro’s reform and readiness remain key challenges and 
are  important  for  not  only  implementing  the  Youth  Guarantee,  but  also  for  ensuring  a  healthy,  well-
functioning labour market in the long term. 

A  mismatch  of  skills  remains  a  significant  challenge,  particularly  for  graduates  of 
vocational education and training (VET) or higher education, despite some recent efforts to 
improve  the  transition  from  education  and  training  to  the  labour  market.  The  quality  and 
relevance  of  the  entire  education  system  and  the  lack  of  practical  experience  of  VET  and  higher 
education  graduates  are  long-standing  challenges.  A  high  share  of  people  transitioning  from  VET 
programmes to higher education and other programmes are less suited to market needs. Occupational 
mismatches  (i.e.  over-qualification)  are  highest  for  people  with  tertiary  education  (around  14%). 
Although tertiary educational attainment is still lower than the EU average, the labour market cannot 
absorb the numbers of tertiary graduates in certain areas, such as business and humanities. However, 
there is still a shortage of medical and STEM graduates (ETF, 2019), demonstrating the need to step up 
the  smart  specialisation  strategy.  Montenegro’s  entrepreneurial  lifelong  learning  strategy  for  2020-
2024,  the  National  Partnership  and  the  Innovation  Fund  are  expected  to  help  address  these  skills 
shortages.  Furthermore,  the  strategy  for  the  development  of  vocational  education  in  Montenegro 
(2020-2024),  along  with  its  action  plans,  outlines  measures  to  overcome  workforce  skills  shortages 
and  to  improve  the  efficiency  and  the  effectiveness  of  the  VET  system  and  lifelong  learning.  The 
reform  of  career  guidance  services  at  all  levels  leave  further  space  for  development  (ETF,  2022). 
Montenegro has committed to the Western Balkans agenda on innovation, research, education, culture, 
youth  and  sport,  which  is  expected  to  guide  its  reform  efforts.  Lifelong  learning  and  adult  education 
with  up-  and  re-skilling  has  not  yet  played  a  sufficiently  prominent  role,  including  in  facilitating  the 
green  and  digital  transitions.  Given  the  very  high  share  of  long-term  unemployment,  developing  and 
implementing these measures remains essential. 

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Institutional Paper 

6.5.  THE POLICY GUIDANCE 

JOINT CONCLUSIONS OF THE ECONOMIC AND FINANCIAL DIALOGUE BETWEEN THE EU AND 
THE WESTERN BALKANS PARTNERS, TÜRKIYE, GEORGIA, REPUBLIC OF MOLDOVA AND 
UKRAINE 

The Economic and Financial Dialogue between the EU and the Western Balkans Partners, Türkiye, 
Georgia, Republic of Moldova and Ukraine 

Brussels, 14 May 2024 

… 

In light of this assessment, Participants hereby invite Montenegro to: 

1. 

2. 

Adopt  an  appropriately  tight  fiscal  stance  in  2024  to  comply  with  the  budget  target  and 
support  further  disinflation,  and  use  revenue  overperformance  for  deficit  reduction  and 
accumulation  of  government  deposits.  Adopt  a  medium-term  fiscal  strategy,  including 
concrete  consolidation  measures  supporting  the  achievement  of  a  non-negative  primary 
balance  and  the  public  debt  ratio  not  exceeding  60%  of  GDP  by  2026.  Elect  and  appoint 
members of the fiscal  council, and ensure and make  publicly available a proper costing of 
new fiscal initiatives. 

Based on an analysis of the economic and fiscal impact of all tax expenditures to be shared 
with  the  Commission,  prepare  concrete  budgetary  recommendations  to  reduce  tax 
expenditure  (such  as  exemptions,  deductions,  credits,  deferrals).  Improve  SOE  oversight  by 
producing  and  publishing  the  related  fiscal  risk  assessments.  Implement  the  public 
investment  management  assessment  (PIMA)  recommendations,  prioritising  key  public 
infrastructure  works  within  the  available  fiscal  space  while  avoiding  exceptions  regarding 
project selection. 

3.            Continue  to  thoroughly  assess  price  developments  and  possible  second-round  effects,  and    

stand  ready  to  use  the  limited  tools  available  under  the  chosen  monetary  framework  to 
ensure price stability. Progress with the implementation of secondary legislation for the Law 
on  Credit    Institutions  and  the  Law  on  Resolution  of  Credit  Institutions  and  transpose  the 
Bank Recovery and Resolution Directive II. Further enhance risk-based supervision in line with 
best international and European practices, including by improving data collection to enable a 
comprehensive assessment of financial sector risks. 

128 

 
 
 
 
 
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Country analysis, Montenegro 

ANNEX 1:   OVERVIEW  OF  THE  IMPLEMENTATION  OF  THE  POLICY  GUIDANCE  ADOPTED  AT  THE 

ECONOMIC AND FINANCIAL DIALOGUE IN 2023 

Every year since 2015, the Economic and Financial Dialogue between the EU and the Western Balkans 
and  Turkey  has  adopted  targeted  policy  guidance  for  all  partners  in  the  region.  The  guidance 
represents  the  participants’  shared  view  on  the  policy  measures  that  should  be  implemented  to 
address macro-fiscal vulnerabilities and structural obstacles to growth. The underlying rationale of the 
guidance  is  similar  to  that  of  the  country-specific  recommendations  usually  adopted  under  the 
European  Semester  for  EU  Member  States.  Implementation  of  the  guidance  is  evaluated  by  the 
Commission in the following year’s ERP assessments.  

The following table presents the Commission’s assessment of the implementation of the 2023 policy 
guidance  jointly  adopted  by  the  EU  and  the  Western  Balkans  and  Turkey  at  their  Economic  and 
Financial Dialogue at ministerial level on 16 May 2023. 

 Overall: partial implementation (38.9%) (88) 
2023 policy guidance (PG) 

PG 1:  

Adopt  an  appropriately  tight  fiscal  stance  in 
2023 
to  help  disinflation,  while  providing 
targeted  support  to  vulnerable  households  and 
firms, if needed. 

2024 

budget, 

Adopt  a  new  medium-term  fiscal  strategy  with 
concrete 
the 
consolidation  measures 
the 
achievement of a non negative primary balance 
from  2025,  and  a  reduction  of  the  public  debt 
ratio over the medium-term. 

supporting 

including 

Ensure  proper  costing  of  new  fiscal  initiatives 
before considering them for adoption. 

Summary assessment 

There was limited implementation of PG 1: 

1) Substantial implementation: In early 2023 
the  caretaker  government  adopted  some 
structural measures to support budget revenue. 
Good  economic  performance,  supported  partly 
by the inflow of foreign nationals, resulted in a 
strong  increase  in  budget  revenue  making  it 
possible  to  achieve  a  small  surplus  -  a  much 
better  outcome  than  planned  in  the  revised 
budget.  The  decision  to  increase  minimum 
pensions 
vulnerable 
households. 

the  most 

supports 

2)  Limited  implementation:  A  medium-term 
fiscal  strategy,  including  concrete  consolidation 
measures,  has  not  been  adopted.  Fiscal 
projections  set  out  in  the  2024  budget  foresee 
the  continued  moderate  reduction  of  the  public 
debt-to-GDP  ratio,  while  the  primary  balance  is 
projected  to  become  positive  in  2026.  But  the 
unerlying  measures  to  achieve  the  required 
speding restraint are not well developed.  

3)  No  implementation:  Important  initiaves, 
such as the 52% increase in minimum pension, 
were  not  accompanied  by  a  proper  cost 
assessment. 

(88)  For  a  detailed  description  of  the  methodology  used  to  assess  policy  guidance  implementation,  see  Section  1.3  of  the   
Commission’s  overview  and  country  assessments  of  the  2017  economic  reform  programmes,  available  at:   
https://ec.europa.eu/info/publications/economy-finance/2017-economic-reform-programmes-commissions-overview-and-
country-assessments_en. 

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PG 2: 

There was limited implementation of PG2. 

Implement  the  public  investment  management 
assessment 
recommendations, 
prioritising key public infrastructure works within 
the  available 
fiscal  space  while  avoiding 
exceptions regarding project selection. 

(PIMA) 

1)  Limited  implementation:  In  cooperation 
with  the  IMF,  the  Ministry  of  Finance  set  key 
priorities  and  agreed  technical  assisstance  to 
improve the capital budget planning. 

Adopt  amendments  to  the  Law  on  Budget  and 
Fiscal  Responsibility  and  take  concrete  steps 
towards setting up a fiscal council. 

Based on an analysis of the economic and fiscal 
impact of all tax expenditures to be shared with 
the  Commission,  prepare  concrete  budgetary 
recommendations  to  reduce  tax  expenditure 
credits, 
(such  as  exemptions,  deductions, 
deferrals). 
PG 3:  

Continue  to  carefully  assess  and  analyse  price 
developments,  stand  ready  to  use  the  limited 
tools  available  under  the  chosen  monetary 
framework to ensure price stability 

reporting  and 

risk 
the 
Strengthen  further 
management  frameworks  across  the  banking 
system to ensure an accurate reporting of asset 
quality  and  continue  to  reduce  data  gaps  in 
particular as regards the real estate sector. 

2) Substantial implementation: Amendments 
to  the  Law  on  budget  and  fiscal  responsibility 
were  adopted.  The  government  launched  a 
public  call  for  members  of  the  Fiscal  Council, 
but  it  was  unsuccessful  due  to  an  insufficient 
number of applicants. A new call is expected in 
Q1-2024  and  the  Fiscal  Council  should  be  set 
up by the end of 2024. 

3) No implementation: With technical support 
from  the  IMF,  a  review  of  Montenegro’s  tax 
exemptions  was  carried  out  in  2021.  However, 
no  concrete  steps  were  taken  to  prepare  an 
economic  impact  analysis/quantification  of  the 
scale of tax exemptions.  

There was substantial implementation of PG 
3: 

1)  Partial  implementation:  The  central  bank 
carefully  monitored  developments 
in  price 
dynamics  and  observed  some  increases  in 
lending  rates  and  slowing  credit  growth.  Fiscal 
policy  that  led  to  large  net  wage  increases 
added  to  underlying  inflationary  pressures.  So 
far 
used 
bank 
macroprudential tools, which are among the few 
tools  it  has  at  its  disposal  to  influence  lending 
activity and therefore also inflation. 

central 

has 

not 

the 

conducted 

2) Substantial implementation: Following the 
completion  of  all  Asset  Quality  Review  follow-
ups,  on-site 
to 
checks  were 
determine  the  correctness  of  capital  adequacy 
(NPLs) 
calculations.  Non-performing 
continued  to  decline.  On  the  real  estate  sector, 
the  central  bank  created  an  indicator  on  the 
departure  of 
its 
fundamentals  to  monitor  financial  system  risk. 
Some data gaps remain. 

real  estate  prices  from 

loans 

Continue  to  improve  and  implement  legislation 
to  further  align  with  the  EU  framework  on 
regulation  and  supervision,  including  on  deposit 
insurance,  and  accelerate  efforts  to  provide 

3) Substantial implementation: Progress was 
made  on  key  legislation  that  further  aligns 
Montenegro's  regulation  and  supervision  with 
the current EU framework, including on enabling 

130 

 
 
 
 
 
 
 
 
 
 
 
 
 
viable  and  timely  solutions  for  swift  and 
effective NPL resolution. 

Part II 
Country analysis, Montenegro 

raised 

institutions, 

regulations  to  implement  the  Law  on  credit 
institutions.  The  coverage  ratio  of 
insured 
incrementally. 
deposits  has  been 
Following the adoption of the Law on resolution 
of  credit 
the  CBM  prepared 
resolution  plans,  determined  the  minimum 
requirement for own funds and eligible liabilities 
(MREL),  and  set  up  a  Resolution  Fund  which  it 
manages.  However,  progress  on  legislation  and 
actions  to  strengthen  the  broad  institutional 
framework  for  efficient  insolvency  has  been 
limited, with an inter-agency working  group set 
up by the CBM needing to be actively resumed. 

PG 4:  

There was limited implementation of PG 4. 

the 

institutional  and 

Improve 
regulatory 
environment  and  enhance  energy  resilience  and 
transition to implement the Green Agenda.  

Further  digitalise  and  simplify  administrative 
procedures  for  micro,  small  and  medium 
enterprises  and  prioritise  cybersecurity,  data 
protection  and  business  continuity  for  e-
government services.  

laws 

1)  Limited  implementation:  Preparation  of 
the National Energy and Climate Plan (NECP) is 
significantly  delayed.  Preparatory  work  on  two 
is  underway.  Some 
climate-related 
activities  have  been  undertaken  to  facilitate 
preparation of laws on energy and cross border 
exchange  of  electricity  and  gas.  Several 
secondary  legislation  acts  on  energy  efficiency 
is  still 
were  adopted,  but 
lagging. The energy projects, Montenegro Energy 
Efficiency  Project  and  Promotion  of  Energy 
Efficiency in Public Buildings are underway. 

implementation 

support 

the  government 

implementation:  Montenegro 
2)  Limited 
joined Digital Europe programme in June 2023, 
but 
for  SMEs 
participating  in  the  calls  for  proposals  is  not 
specified.  The  launch  of  a  new  government  e-
portal has been postponed to the end of 2024. 
Initial activities to establish a new cybersecurity 
architecture,  including  a  cybersecurity  agency 
and a secure data centre are underway. 

Prepare  a  roadmap  for  reforming  state-owned 
enterprises (SOEs), prepare a framework for the 
monitoring  and  management  of  SOEs  and 
develop  objective  criteria  for  the  selection  of 
their management bodies.  

PG 5:  

Based  on  the  results  of  the  informal  economy 
survey,  establish  an  action  plan  to  reduce 
informality. 

3)  Limited  implementation:  Initial  activities 
for development of a new regulatory framework 
for SOEs have been carried out. The analysis of 
a  current 
legal  framework  remains  to  be 
completed.  Adoption  of  the  strategy  on  state 
ownership,  the  roadmap  for  reforms  of  SOE 
governance and the related legislative proposals 
are yet to be drafted. 
There was partial implementation of PG 5. 

1)  Full  implementation:  In  December  2023, 
the  government  adopted  a  programme  for 
supressing  the  informal  economy  for  2024-
2026, with an accompanying action plan. 

Ensure  cooperation  between  central  and  local 

implementation:  While  some 
2)  Limited 
forms of cooperation between central and local 

131 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
European Commission 
Institutional Paper 

authorities  to  implement  the  plan,  including 
prevention  and  incentives  to  legalise  informal 
businesses and employees.  

authorities  have  been  announced  within  the 
newly  adopted  programme  for  supressing  the 
informal economy, the implementation is yet to 
take place. 

Develop  an  analysis  of  the  inspection  services 
and of the relevant legal framework to optimise 
the  inspector’s  work,  minimising  discretionary 
decisions  and  inconsistences  in  the  inspection 
powers.  

3)  Limited  implementation:  A  number  of 
actions targeting the inspection services and the 
scrutiny  of    the  relevant  legal  framework  has 
been  announced  within  the  newly  adopted 
programme 
informal 
economy.  However,  the  analytical  work  and 
foreseen  actions  should  start  in  mid-2024  and 
be finalised in 2025. 

supressing 

the 

for 

PG 6:  

There was limited implementation of PG6. 

Prepare activities for the implementation of the 
Youth Guarantee pilot planned for 2025, analyse 
its  performance,  and  in  parallel  identify  and 
implement necessary structural, operational and 
organisational  changes  to  ensure  that  the 
Employment  Agency  of  Montenegro  is  prepared 
for  the  service  delivery  of  the  fully-fledged 
Youth Guarantee as well as its other functions.  

implementation: 

1)  Limited 
The  new 
government  (re)appointed  a  working  group  to 
coordinate the Youth Guarantee implementation 
plan  (YGIP)  as  well  as  a  new  Youth  Guarantee 
coordinator.  The  YGIP  (revised  version  from 
October  2023)  is  to  be  adopted  in  April  2024. 
Activities  to  prepare  the  pilot  are  progressing 
slowly.  The  digitalisation  of  the  agency  has 
started  with  the  development  of  a  single  IT 
system.  This  takes  the  form  of  an  application-
based,  modular  built  platform,  organised  to 
enable all of the agency’s business processes. It 
aims  to  serve  as  a  single  gateway  for 
employment  for  all  sectors  and  sections  of  the 
Employment Service, as well as for the general 
public  and  companies,  and  -  through  data 
sharing - for other public administration bodies, 
both  at  national  and  local  level.  The  system  is 
planned to be up and running before the end of 
2024. 

Continue  efforts  to  reform  the  provision  of 
active  labour  market  policy  measures  with  an 
emphasis  on  their  labour  market  relevance, 
including  work-based  learning,  and  establish  a 
continuous  monitoring  mechanism  that  will 
enable  evidence-based  active  labour  market 
policy design.  

Based  on  the  Roadmap  of  reforms  on  social 
assistance  and  social  and  child  protection 
services 
in  Montenegro,  establish  a  clear 
timeline and financial planning for the reform of 
the social and child  protection system and  start 
implementing the reforms.  

132 

Limited 

implementation: 

2) 
The 
implementation  of  the  roadmaps,  methodology 
and  manuals  for  the  design,  implementation 
and monitoring of ALMMs has yet to take place. 
Capacity  building  activities  for  the  Employment 
Agency 
the 
implementation  of  the  Youth  Guarantee  were 
identified. 

of  Montenegro 

staff 

for 

3) Limited  implementation: A new  social and 
child  protection  strategy  is  under  preparation, 
but the new Law on social and child protection, 
aimed at improving the quality and financing of 
services provided at national and local level, has 
not  yet  been  drafted.  The  adoption  of  the  Law 
on  the  disability  determination  system 
is 
planned for Q4-2024. 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Part II 
Country analysis, Montenegro 

ANNEX 2: COMPLIANCE WITH PROGRAMME REQUIREMENTS 

The  government  of  Montenegro  submitted  its  2024-2026  economic  reform  programme  to  the 
Commission on 12 January 2024. 

Inter-ministerial coordination 

The  Ministry  of  Finance  coordinated  the  work  to  prepare  the  2024  ERP.  An  inter-ministerial  working 
group involved all relevant ministries.  

Stakeholder consultation 

The  national  ERP  coordinator  organised  an  initial  consultation  on  the  design  of  ERP  measures  in 
November  2023.  Another  public  consultation  on  the  draft  ERP  took  place  in  December  2023,  and 
included a roundtable discussion with members of the public.   

Macro framework 

The  programme  presents  a  clear  and  concise  picture  of  past  economic  developments  and  covers 
relevant data available at the time of  submission. The information  provided is coherent,  concise and 
well structured. The macroeconomic framework is coherent, consistent and sufficiently comprehensive 
and provides a good basis for policy evaluation and discussions. Statistical tables were not complete in 
the first submission and were subsequently revised several times. 

Fiscal framework 

The fiscal framework is well detailed, in line with stated policy objectives and consistent with the ERP 
macroeconomic  framework.  However,  fiscal  projections  were  revised  due  to  inaccurate  budgetary 
planning  of  local  governments.  After  correcting  the  projections  for  local  governments,  the  factors 
behind the ERP’s projected revenues and expenditures are in line with the existing legislative measures, 
and  are  presented  clearly.  Montenegro’s  fiscal  reporting  does  not  follow  ESA2010  standards,  and 
therefore does not meet the Commission’s fiscal notification requirements. 

Structural reforms 

The  structural  reform  parts  of  the  ERP  respect  the  guidance  note.  A  dedicated  section  provides 
information on the implementation of the policy guidance for 2023. Reporting on the progress of 2023 
structural  reform  measures  is  generally  of  good  quality.  The  2024-2026  ERP  sets  out  six  major 
reforms, indicating the underpinning measures, as well as the costing of structural reforms. 

133 

 
 
7.  NORTH MACEDONIA 

7.1.  EXECUTIVE SUMMARY  

Following  sluggish  economic  activity  in  2023,  the  economic  reform  programme  (ERP) 
optimistically projects growth to gradually accelerate to above 5% in 2026. Coping with the 
repercussions  of  the  cost-of-living  crisis  and  weak  external  demand,  the  post-pandemic  economic 
recovery remained slow. Annual GDP growth dropped to 1% in 2023, mainly reflecting muted domestic 
investment. Domestic demand was driven by private consumption, which benefited from an increase in 
remittances and a rebound in real wage growth from July 2023, in line with gradually abating inflation. 
Supported by tighter monetary policy and abating foreign price pressures, headline inflation continued 
to ease gradually to 3% in February 2023 from its peak of 19.8% in October 2022. Real GDP growth is 
expected  to  strengthen  to  an  annual  average  of  4.4%  in  2024-2026,  mainly  as  increased  public 
infrastructure  spending  would  support  domestic  demand.  External  demand  is  also  set  to  pick  up,  but 
the  external  balance  would  have  a  negative  contribution  to  growth,  albeit  gradually  less  so  over  the 
programme’s  timeframe.  The  ERP’s  growth  scenario  appears  optimistic,  partly  as  there  are  large 
deficiencies in public investment management and in the regulatory framework for attracting private 
co-financing,  in  addition  to  downward  risks  due  to  geopolitical  uncertainties,  including  continued 
problems with supply of input factors and global commodity price developments. 

The  2023  budget  deficit  was  above  the  government’s  target  and  higher  than  the  2022 
outcome. Mainly as a result of weaker than projected GDP growth and in spite of revenue-enhancing 
tax measures and the phasing out of some energy support measures, the general government budget 
deficit,  at  4.9%  of  GDP,  was  above  the  government’s  target  of  4.8%  as  well  as  above  the  2022 
outcome (4.4%). The ERP projects gradual fiscal consolidation, with the deficit falling by 1.6 percentage 
points (pps) between 2023 and 2026. The primary deficit would shrink to its pre-COVID level (0.9% of 
GDP)  by  2026.  Fiscal  consolidation  is  projected  be  driven  entirely  by  savings  in  current  expenditure, 
notably in government consumption as well as subsidies and social transfers. The revenue-to-GDP ratio 
is also expected to decline somewhat over the programme’s timeframe. Public debt is projected to rise 
above  60%  of  GDP  in  2024,  partly  due  to  the  financing  needs  of  major  transport  infrastructure 
projects (Road Corridor 8 and 10d), and to drop thereafter. 

The main challenges facing North Macedonia are the following: 

• 

Fiscal  consolidation  needs  to  advance  to  restore  fiscal  space  and  ensure  compliance 
with fiscal rules. The 2022 Organic Budget Law (OBL) requires the  fiscal  deficit to not exceed 
3%  of  GDP  as  of  2025.  In  2024,  the  government  plans  to  lower  the  deficit  to  3.4%,  mainly  by 
expenditure  savings  deriving,  inter  alia,  from  phasing  out  energy  subsidies  and  reforming 
agricultural subsidies. These measures need to be rigorously adhered to, and fiscal slippages in an 
election  year  should  be  avoided.  On  the  revenue  side,  ongoing  implementation  of  the  2020  tax 
reform  package  is  an  important  step  in  increasing  public  revenue  and  should  be  extended  with 
further  tax  base-broadening  measures.  Also  in  view  of  the  increasing  fiscal  risks,  strengthening 
fiscal governance, in particular through the provisions of the OBL that will fully enter into force in 
2025, would facilitate the return to a  more prudent fiscal position. In this  regard, swift adoption 
and  implementation  of  the  OBL  by-laws  is  essential,  as  is  capacity-building  in  the  new  Fiscal 
Council’s secretariat, so that the Fiscal Council can fully take up its functions.  

•  Addressing large infrastructure investment needs requires substantial improvements in 
the management of public investment. The country’s capital stock is ageing rapidly, impacting 
negatively  on  the  already  weak  productivity  growth.  The  government  is  intent  on  addressing  the 
substantial gaps in public infrastructure in the medium-term and is raising capital expenditure to 
above  5%  of  GDP.  However,  capacities  for  managing  investments  according  to  established 
methodologies  is  weak,  which  calls  for  a  swift  implementation  of  the  2021  public  investment 
management (PIM) action plan. The new PIM unit in the Ministry of Finance still needs to become 

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Country analysis, North Macedonia 

fully  operational  and  adopt  joint  methodologies  and  criteria  for  the  appraisal,  selection  and 
monitoring of investment projects applicable to all public sector entities. An increase in fiscal risks, 
partly  stemming  from  the  major  construction  projects  carried  out  by  state-owned  enterprises, 
which may need state guarantees for borrowing or are poorly governed, require the centralisation 
and  improvement  of  their  monitoring.  The  need  to  raise  additional  private  funding  requires  new 
financing structures and an adequate legal and regulatory framework to control associated fiscal 
risks, in particular with regard to public-private partnerships.  

•  Key  structural  challenges  are  linked  to  the  skills  mismatch  in  the  labour  market,  the 
informal economy, a large infrastructure investment gap, and the need to progress with 
the  green  transition.  The  education  system  does  not  adequately  equip  young  people  with  the 
key  competences  that  they  need  to  actively  participate  in  the  regular  labour  market.  Persistent 
structural  problems  of  the  labour  market,  such  as  low  participation  rates,  especially  for  women, 
and high youth unemployment dampen productivity growth. Substantial infrastructure investment 
needs, a large informal economy, low innovation activity and digitalisation gaps are undermining 
the  competitiveness  of  domestic  companies.  Managing  the  green  transition  and  meeting  the 
greenhouse  gas  reduction  targets  set  out  in  the  European  Green  Deal  requires  large-scale 
investment  and  regulatory  and  legal  adjustments.  North  Macedonia’s  economy  relies  heavily  on 
coal-fired  electricity  production,  and  the  shift  towards  renewable  energy  sources,  as  well  as 
improvements  in  energy  efficiency,  are  likely  to  be  costly.  These  challenges  are  expected  to  be 
addressed through key structural reforms identified in the country’s reform agenda under the new 
Growth Plan for the Western Balkans. 

The implementation of the policy guidance set out  in the conclusions of the  Economic and 
Financial  Dialogue  of  May  2023  has  been  partial.  The  government  has  implemented  adequate 
measures to protect the households and firms that were most affected by the commodity price shock. 
The Parliament adopted amendments to several tax laws, cutting tax expenditures and broadening the 
revenue  base.  The  new  Fiscal  Council  has  been  set  up  and  its  rulebook  and  statutes  have  been 
adopted. However, the Council’s secretariat is not yet operational, due to recruitment obstacles. A new 
PIM  Department  has  been  set  up  in  the  Ministry  of  Finance,  but  the  draft  law  on  public-private 
partnerships has not yet been adopted by the government. The Central Bank has tightened monetary 
policy to combat inflation until September 2023, and it has taken further measures to increase the use 
of the local currency. Key legal changes to safeguard the National Bank’s independence were adopted 
by  the  government  and  submitted  to  the  Parliament.  The  government  adopted  a  new  strategy  to 
formalise  the  informal  economy  as  well  as  the  smart  specialisation  strategy,  meant  to  strengthen 
research  and  innovation.  It  has  also  enhanced  the  digitalisation  of  public  services.  The  new  Energy 
Efficiency  Fund  was  given  a  legal  basis  and  now  needs  to  be  made  operational.  Furthermore,  the 
government  adopted  three  key  laws  on  education,  strengthened  active  labour  market  policies  and 
improved the coordination between labour market institutions. 

7.2.  ECONOMIC OUTLOOK AND RISKS 

The  post-pandemic  recovery  of  the  economy  remains  slow.  Annual  GDP  growth  fell  to  1%  in 
2023 from 2.2% in 2022.  Domestic demand was driven  by private  consumption, bolstered by strong 
growth  in  wages,  with  real  wages  rebounding  again  after  July  2023  in  line  with  gradually  abating 
inflation,  and  rising  remittances.  Still,  domestic  demand  growth  remained  weak  overall.  Gross  capital 
formation  dropped  starkly,  mainly  as  a  result  of  a  draw-down  of  inventories,  which  had  posted  a 
strong  built-up  in  the  preceding  year,  as  businesses  were  faced  with  uncertainty  about  the  future 
course of commodity prices. Public consumption also declined as fiscal support measures were being 
phased out and operational cost was cut in the government’s endeavour to bolster fiscal consolidation. 
Net  exports,  driven  by  a  steep  decline  in  commodity  imports,  and  in  spite  of  a  simultaneous,  energy 
crisis-related strong drop in metal exports, made a positive contribution to GDP growth.   

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The programme’s baseline scenario predicts that real GDP growth will accelerate during the 
ERP’s  lifetime.  Growth  is  expected  to  strengthen  over  the  programme’s  timeframe,  mainly  as 
increased public infrastructure spending would support domestic demand. The economy is projected to 
grow  by  an  average  of  4.4%  per  year  between  2024  and  2026,  expanding  by  as  much  as  5.5%  in 
2026  (with  projections  for  2024  and  2025  somewhat  lower  than  in  the  previous  programme) (89). 
Growth of domestic demand is expected to accelerate gradually, while the external balance would have 
a  negative  contribution  to  growth,  albeit  gradually  less  so  over  the  programme’s  timeframe.  Private 
consumption growth is set to pick up gradually each year, to reach 3.7% in 2026, about the pre-COVID-
19  5-year  average,  and  investment  is  expected  to  increase  strongly,  by  8.7%  y-o-y  on  average.  The 
output  gap  is  projected  to  narrow  gradually,  but  to  remain  negative  throughout  the  programme’s 
timeframe. This is in contrast to the  previous  programme, which expected the output  gap to  close in 
2024-2025, but seems plausible given that the previous programme assumed higher GDP growth for 
2023. Export growth is projected to accelerate each year from 2023 in line with an expected recovery 
in foreign demand. This, together with accelerated investment growth, would also spur imports (+5.9% 
y-o-y on average in 2024-2026), but by less than exports (+6.2%).  

The baseline scenario is usefully complemented by two alternative  scenarios. Assuming that 
annual  export  growth  turns  out  to  be  lower  by  1.8  pps  per  year  in  2024-2028,  compared  to  the 
baseline scenario and implying a negative impact on the growth of domestic demand, average annual 
output growth would be lower by 0.6 pps over this period. The second, domestic risks scenario assumes 
weaker growth of investment, by an average of 2.2 pps per year, in response to lower implementation 
of public infrastructure projects and a withdrawal of fiscal support for private enterprises. This would 
also lead to average annual output growth that is 0.6 pps lower than the baseline scenario.  

The ERP baseline scenario seems optimistic given the downside risks weighing on domestic 
demand. The government projects economic growth to be driven by a large surge in private and public 
investment  over  the  programme’s  timeframe.  This  expectation  is  subject  to  a  number  of  risks. 
Deficiencies in public investment management and fiscal risk monitoring may impact negatively on the 
strength and the efficiency of public capital spending. This also  concerns the planned  introduction of 
structural  financing  instruments,  such  as  public-private  partnerships,  where  a  2022  draft  law  that 
addresses  shortcomings  of  the  current  system  has  still  not  been  adopted  by  the  government.  Still, 
domestic  demand  is  plausibly  expected  to  benefit  from  the  large  increase  in  government  capital 
expenditure,  as  the  financially  important  Corridor  8  and  10d  infrastructure  projects,  carried  out  by 
foreign contractors, have a large domestic component, which would induce spillovers to the domestic 
economy.  Moreover,  the  macroeconomic  and  fiscal  outlook  continues  to  be  affected  by  high 
uncertainty related to the further potential economic fallout from Russia’s full-scale war of aggression 
against  Ukraine  (particularly  on  energy  supply  and  inflation)  and  renewed  tightening  of  financing 
conditions that could restrain domestic demand.  

(89)  The programme’s projections also deviate from those of the May 2023 Fiscal Strategy, which assumes an average annual 

growth rate of 4.9% between 2024 and 2026. The programme does not offer an explanation for these divergences. 

136 

 
Part II 
Country analysis, North Macedonia 

Table II.7.1:
North Macedonia - comparison of macroeconomic developments and forecasts

Real GDP (% change)
Contributions:
- final domestic demand
- change in inventories
- external balance of goods and services
Employment (% change)
Unemployment rate (%)
GDP deflator (% change)
CPI inflation (%)
Current account balance (% of GDP)
General government balance (% of GDP)
Government gross debt (% of GDP)

2023

2022

2024
COM ERP COM ERP COM ERP COM ERP COM ERP
2.1
5.5

2025

2026

n.a.

2.2

2.3

3.4

4.8

2.0

2.7

2.8

4.2
0.0
-1.3
1.6

2.6
-1.4
0.8
0.9

4.0
-0.1
-1.2
1.4

5.0
n.a.
-1.5
2.0

2.3
n.a.
0.0
-0.3

4.8
n.a.
-2.6
-0.2

3.1
5.2
3.5
n.a.
-4.4
-0.4
0.5
3.0
14.2 14.4 13.8 12.8 13.7 11.9 13.5 11.0
8.0
2.0
7.7
14.2 14.2
2.0
-5.9
-2.4
-6.2
-4.5
-3.0
-4.4
50.9 50.4 51.0 50.2 51.7 52.0 51.1 50.3

14.2
9.5
-3.5
-4.8

8.9
9.5
-1.2
-4.8

6.0
3.5
-2.4
-3.4

8.1
4.1
-3.6
-3.8

8.0
2.1
-2.4
-3.5

n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.

5.7
n.a.
-0.1
3.3
10.1
2.0
2.0
-2.3
-3.0
50.2

Sources: Economic Reform Programme (ERP) 2024, Commission Autumn 2023 forecast.

Inflationary  pressures  are  expected  to  decrease  further  in  2024,  and  then  to  stabilise  at 
2%. North Macedonia is a small and open economy with a de facto currency peg, so its price level is 
largely determined by international price developments. After rising to 14.1% in 2022, average annual 
inflation declined to 9.4% in 2023, largely reflecting the drop in global commodities prices, and, later in 
the year, a  gradual abatement of second-round effects on domestic sectors. While  headline inflation 
reached  single-digit  territory  in  mid-2023,  core  inflation  remained  sticky  throughout  2023.  By  early 
2024,  the  inflation  differential  with  the  euro  area  had  narrowed  considerably.  The  Central  Bank 
tightened its monetary stance by raising the key policy rate in 14 steps from 1.25% as of April 2022 to 
6.3%  in  September  2023.  The  government  introduced  a  number  of  regulatory  measures  to  contain 
food  price  inflation  and  subsidised  the  electricity  costs  of  households  and  small  business.  Food  and 
energy together account for  almost 60% of the domestic CPI structure and  price increases for these 
two  categories  explain  about  75%  of  headline  inflation,  which  is  much  higher  than  in  the  euro  area. 
The programme projects that annual average consumer price inflation will drop to 3.5% in 2024 before 
falling  to  its  long-term  average  of  2%  in  2025  and  2026.  This  is  mainly  based  on  a  projected 
slowdown in second-round effects of recent rises in commodity prices on domestic sectors. While the 
programme’s assumptions about global price developments seem plausible in the medium term, recent 
increases  in  wages  and  pensions,  resulting  from  the  new  indexation  formula  for  pensions  and 
minimum  wages (90),  which  links  their  adjustment  not  only  to  price  developments,  but  also  to  gross 
average  wage  developments,  are  increasing  domestic  risks  to  price  stability.  Average  gross  monthly 
wages  rose  by  15.3%  y-o-y  in  2023.  In  2024,  the  government  expects  nominal  wages  to  post 
somewhat  lower  growth,  but  to  still  rise  significantly  (8.4%  y-o-y),  mainly  as  a  result  of  the  March 
2023 increase in the  minimum wage, which, in turn, implies further increases in public sector wages 
and in pensions. The programme expects the increase in nominal wages to slow down to 6.1% per year 
over the remainder of the programme’s horizon.  

The current account balance has improved substantially and external vulnerabilities remain 
contained. As a large energy importer, North Macedonia’s trade balance deteriorated sharply in 2022 
in response to the energy crisis. As energy prices have come down substantially from their peak while 
domestic  production  of  electricity  increased,  the  current  account  swung  into  surplus  in  2023, 
amounting to 0.7% of GDP at end-year. This improvement was also supported by an increase in current 
transfer inflows, even though the surplus in the services trade balance dropped. The ERP projects the 
current  account  deficit  to  stabilise  as  of  2024  at  a  level  of  around  2.4%  of  GDP.  The  merchandise 

(90)  The Minimum Wage Law was amended in this regard in March 2022. The minimum wage was raised by 12% starting from 
April 2023, and will be adjusted again in March 2024 to reflect last year’s increase in gross nominal wages and in the cost   
of living. 

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trade deficit, which narrowed in 2023 by 8 pps y-o-y to 18.9% of GDP, is expected to narrow further 
between until  2026, reflecting the projected pick-up in global trade, even as import growth is also set 
to accelerate in line with the pick-up in domestic demand. The services surplus would rise, mainly as 
exports of IT services related to the major road infrastructure works (which are carried out largely by 
foreign  firms)  would  strengthen.  These  improvements  would,  however,  be  over-compensated  by  a 
projected drop in current transfers (to below their pre-COVID-19 5-year average of 6.7% of GDP) and a 
widening primary income deficit during this period ( 91). After record high inflows in 2022 (5.8% of GDP), 
the programme expects foreign direct investment (FDI) to remain at around its  pre-COVID-19 5-year 
average (3.5% of GDP) throughout the programme’s lifetime, fully financing the current account deficit 
during  this  period.  This  assumption  is  plausible,  underpinned  by  ongoing  ‘nearshoring’  (foreign 
companies relocating production facilities closer to their main markets in the EU) and by the positive 
prospect of EU accession.  

External  debt  is  sustainable  and  its  structure  poses  little  risk.  Gross  external  debt,  excluding 
central bank transactions, stood at 73.3% of projected GDP at the end of Q3-2023 (-6.3 pps y-o-y) (92). 
Long-term debt accounted for the bulk of the total (70%). A high level (the programme estimates an 
average of 42.3% over the programme’s timeframe) of total external debt is made up of intercompany 
loans  and  trade  credits,  which  are  a  less  risky  and  more  flexible  category  of  debt.  Regarding  the 
structure of general government external debt, about 65% is accounted for by Eurobonds (2022) and 
about 72% is at fixed rate (2022). The ERP projects gross external debt to increase slightly between 
2023  and  2026,  mainly  due  to  growing  intercompany  loans,  which  are  an  important  instrument  for 
improving liquidity for foreign-owned companies. Foreign reserves increased strongly in 2023, mainly 
due  to  Central  Bank  interventions  in  the  foreign  exchange  market.  At  the  end  of  2023,  they  were 
17.5% higher y-o-y and equivalent to over 4 months of prospective imports of goods and services. The 
CPI-deflated  real  effective  exchange  rate  (REER),  as  a  measures  of  external  competitiveness, 
appreciated  by  5.6%  in  2023,  continuing  the  trend  seen  in  previous  years.  Nominal  unit  labour  cost 
(ULC) rose by some 8% in 2023, reflecting the strong rise in nominal wages in a context of subdued 
productivity growth. 

External competitiveness and current account 

Graph II.7.1a: North Macedonia - current 
account balance (% GDP)

10

0

-10

-20

-30

2022

2023

2024

 Services balance
Current account balance (rhs)

2026

2025
 Goods balance
Net FDI (rhs)

6

0

-6

115

112

109

-12

106

-18

103

100

Graph II.7.1b: North Macedonia -
real effective exchange rate,
(CPI based, total economy, 2010 = 100)

Appreciation

Depreciation

2019

2020

2021

2022

2023

Source: Economic Reform Programme (ERP) 2024.

Source: Economic Reform Programme (ERP) 2024, Central Bank.

The banking sector remains well-capitalised and liquid. Banks’ capital adequacy ratio, already at 
comfortable  levels,  increased  further  to  17.4%,  with  a  high  share  of  profits  going  into  capitalisation. 
Liquidity in the banking sector, already high, improved further. Annual growth of deposits accelerated 
in 2023, to 8.4% on average in October and November, driven by deposits in domestic currency. At the 
same time, bank lending to the private sector lost some momentum in 2023, increasing by 5.2% y-o-y 
in  Q4,  partly  reflecting  lower  corporate  financial  needs  due  to  the  drop  in  energy  prices.  Foreign-
currency-denominated loans amounted to some 42% of total loans at the end of Q4, having decreased 

(91)  The programme does not sufficiently explain the projection for the drop in remittances. 

(92)  For  end-23,  the  programme  (external  debt  sustainability  analysis  drafted  by  the  Central  Bank  based  on  their  own  GDP 
projections)  projects  gross  external  debt  to  have  increased,  on  an  annual  basis,  on  account  of  higher  borrowing  by  the 
government and public enterprises. 

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only marginally from the previous year’s level. The funding of loans by deposits remained solid, with 
the loan-to-deposit ratio for non-financial clients at 81.6% at the end of the year. To bolster deposits 
in local currency, the Central Bank further increased the differential between reserve requirements on 
deposits in local and in foreign currency ( 93). To support  financial stability, the Parliament passed the 
new law on bank resolution in October 2023 which sets up a bank resolution fund and guidelines for 
the  process  of  bank  resolution,  with  the  Central  Bank  as  the  responsible  body.  As  an  important 
macroprudential  measure,  the  Central  Bank  introduced  a  counter-cyclical  capital  buffer  of  0.5%  of 
exposures  by  banks,  applicable  from  August  2023,  with  further  adjustments,  based  on  cyclical 
systemic risk assessments and credit growth, in January (to 0.75%). Aiming to improve credit demand 
quality in the housing market, a new debt-service to income ratio and a loan-to-value ratio have been 
in  application  since  July  2023.  Prices  in  the  housing  market  have  been  rising  at  double-digit  growth, 
and credit risks have been increasing given the substantial share of variable rate mortgages. The ratio 
of non-performing to total loans (financial and non-financial sector) dropped slightly y-o-y, to 2.8% at 
the  end  of  2023,  and  loan-loss  provisioning  improved  further.  Banking  sector  concentration  remains 
moderate,  with  some  56%  of  assets  held  by  the  three  biggest  banks  in  2023.  9  of  the  sector’s  13 
banks are predominantly under foreign ownership. 

Table II.7.2:

North Macedonia - financial sector indicators

Total assets of the banking system (EUR million)
Foreign ownership of banking system (%)
Credit growth (%, average)
Deposit growth (%, average)
Loan-to-deposit ratio (end of period)
Financial soundness indicators (%, end of period)
     - non-performing loans to total loans
     - regulatory capital to risk-weighted assets
     - liquid assets to total assets
     - return on equity
     - foreign exchange loans to total loans

Sources: National Bank of North Macedonia, IMF.

2019
8 945
72.8
7.2
9.6
83.8

4.8
14.8
31.9
11.7
42.3

2020
9 490
75.0
6.4
7.8
82.0

3.4
15.3
32.5
11.3
42.3

2022
2021
10 363 11 103
77.7
76.3
9.6
5.8
4.2
8.3
85.5
81.8

3.2
15.8
32.4
12.9
41.2

2.9
16.6
30.0
12.2
43.2

2023
12131
78.8
6.2
9.1
81.6

2.8
17.2
31.8
16.1
42.2

7.3.  PUBLIC FINANCE 

The 2023 budget deficit  was higher  than the 2022 outcome, mainly as a result of  weaker 
than  projected  GDP  growth.  The  full-year  fiscal  deficit  in  2023  amounted  to  4.9%  of  estimated 
GDP,  slightly  above  the  target  (4.8%),  and  considerably  higher  than  in  2022  (4.4%).  It  exceeded  the 
2023 deficit target set in the previous year’s programme. The expenditure ratio rose by substantially 
more  than  the  revenue  ratio  in  2023.  A  budget  reallocation  became  necessary  in  September  2023, 
mainly  to  accommodate  higher  public  sector  wages  and  pensions  and  higher  social  transfers,  while 
leaving  the  deficit  target  unchanged ( 94).  The  reallocation  also  reassigned  funds  to  new  anti-crisis 
support  measures  to  help  households  and  companies  cope  with  the  still  elevated  cost-of-living  and 
production  input  prices.  In  this  process,  capital  expenditure  allocations  were  slashed  by  7.7%  and  a 
budget  reserve  of  EUR  225  million,  intended  in  the  2023  budget  for  energy  support,  was  partly 
reallocated.  Revenues  increased  by  14%  y-o-y,  boosted  by  a  one-off  “solidarity  tax”  on  excess 
corporate profits, which was adopted in 2022 and not included in the 2023 budget. Revenue from this 
tax amounted to an additional 0.6% of GDP (EUR 76 million). Current expenditure was driven by high 

(93)  Starting in June 2022, the National Bank had raised the reserve requirement on FX deposits by 3 pps. 

(94)  The new requirements followed from the July 2023 public sector wage agreement and the rise in minimum wages in March 

2023, which drove a 8.4% increase in pensions as of March 2023 due to the new indexation methodology. 

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transfer  payments,  yet  at  the  same  time  the  government  also  reduced  untargeted  crisis  support 
measures. The total expenditure ratio in terms of GDP  (37.9%) turned out  higher than anticipated in 
the  previous  programme  (37.4%).  Among  social  benefits,  transfers  to  the  pensions  fund  posted  a 
particularly  high  increase,  by  14.8%  y-o-y.  Transfers  to  the  health  fund  rose  by  11%.  Support  to 
mitigate  high  energy  costs  to  households  and  companies,  which  implied  almost  universal  energy 
subsidies in 2022, via transfers to the domestic electricity producer ESM, was restructured and made 
more targeted, partly as a result of reforms of the electricity market (95). Moreover, the allocations for 
ESM  in  2023  were  partly  unused  and  reallocated.  Subsidies  to  ESM  still  amounted  to  some  0.8%  of 
projected GDP in 2023. ( 96) The government also adjusted the VAT on electricity for households from 
the reduced 5% rate to 10% as from 1 January 2023, (97) and reverting it to the standard rate of 18% 
from 1 July 2023. 

Execution of capital expenditure reached a record high in 2023. Despite the cut in the budget 
reallocation, implemented capital expenditure was 52% higher in 2023 than in 2022, reaching 97% of 
the government’s target, well above the average of the previous 5 years (83%). A large amount was 
spent  on  first  payments  towards  the  construction  of  the  Corridor  8  and  10d  road  infrastructure 
projects ( 98). 

The  programme’s  fiscal  scenario  projects  a  gradual  reduction  of  the  budget  deficit  in  the 
medium  term  based  on  lower  current  expenditure.  Between  2023  and  2026,  the  public 
expenditure ratio is projected to decline from 38.5% of GDP (government projection in the programme) 
to 36.1% (-2.4 pps), driven by an adjustment of current spending, while capital spending is set to stay 
at an average level of 5.5% of GDP over the programme period. The general government revenue ratio, 
already  low  by  regional  comparison  (outcome  2023:  33%  of  estimated  GDP,  compared  to  33.7%  as 
projected  by the  programme), is projected to remain at just below 34% of GDP in  2024 and to drop 
gradually to 33.1% of GDP in 2026. As a result, the budget deficit is projected to fall by some 1.9 pps 
to  3%  of  GDP  between  2023  and  2025-2026  (in  line  with  the  fiscal  rule).  The  primary  deficit  is 
projected  to  decrease  by  2.3  pps  in  this  period,  reaching  its  pre-COVID  level  of  0.9%  in  2026 ( 99).  A 
large  contribution  to  consolidation  is  expected  in  the  programme’s  later  years  from  social  transfers, 
which,  while  rising  as  a  share  of  GDP  in  2024,  are  expected  to  drop  thereafter  until  2026  by  a 
cumulative  0.9  pps.  This  projection  is  not  underpinned  by  concrete  policy  changes,  however.  Rather, 
through recent measures on revising the indexation of pensions, the government increased mandatory 
spending  on  social  transfers  for  the  medium  term.  The  ERP’s  projection  for  the  development  of  the 
cyclically-adjusted primary budget deficit between 2024 and 2026 points to fiscal tightening in 2024 
(1.7  pps)  and  in  2025  (0.4  pps),  and  an  impulse  of  0.4  pps  in  2026,  all  this  while  the  output  gap  is 
expected to remain negative.  

(95)  In 2022, the government changed the electricity block tariff structure, but prices for households remain heavily subsidised.  
Effective on 1 January 2024, the government implemented, as part of new prior actions agreed with the IMF in relation to  
the PLL, reforms of the electricity market which included higher prices charged by ESM and a gradual reduction in the size of 
the regulated market (for which ESM is the mandatory supplier). 

(96)  IMF estimate. In the 2024 budget, these allocations were cut, in the context of policies agreed with the IMF under the 2022 

PLL, to an estimated 0.3% of GDP.  

(97)  The planned increase from 5% to 10% had been postponed from July 2022 to January 2023. 

(98)  The 2023 budget had allocated EUR 243 million for the construction of part of Road Corridor VIII and XD by the Bechtel-

Enka consortium.  

(99)  Compared  to  the  previous  programme,  the  primary  balance  is  projected  to  improve  earlier  in  the  cycle.  The  previous 
programme  had  assumed  a  return of  the  primary  balance  to  its  pre-COVID  level by  2027  -  1  year  later than  the  current 
programme. 

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Table II.7.3:

North Macedonia - composition of the budgetary adjustment  (% of GDP)

Revenues
    - Taxes and social security contributions
    - Other (residual)
Expenditure
    - Primary expenditure
       of which:
       Gross fixed capital formation
       Consumption
       Transfers & subsidies
       Other (residual)
    - Interest payments
Budget balance
    - Cyclically adjusted
Primary balance
    - Cyclically adjusted
Gross debt level

2022

2023

2024

2025

2026

32.1
28.7
3.3
36.5
35.4

4.2
10.3
20.8
0.0
1.1
-4.4
-3.6
-3.3
-2.4
50.4

33.7
29.7
4.0
38.5
37.0

6.4
10.4
20.2
0.0
1.5
-4.8
-3.5
-3.3
-2.1
50.2

33.7
29.7
4.0
37.1
35.4

5.5
10.6
19.3
0.0
1.7
-3.4
-2.1
-1.7
-0.4
52.0

33.5
29.6
3.9
36.5
34.5

5.4
10.1
19.0
0.0
2.0
-3.0
-2.0
-1.0
0.0
50.3

33.1
29.3
3.8
36.1
34.1

5.7
9.8
18.6
0.0
2.0
-3.0
-2.4
-1.0
-0.4
50.2

Change:
2023-26
-0.6
-0.4
-0.2
-2.4
-2.9

-0.7
-0.5
-1.7
0.0
0.5
1.8
1.2
2.3
1.7
-0.1

Sources: Economic Reform Programme (ERP) 2024, Commission calculations.

The 2024 budget benefits from further tax reforms and lower energy subsidies. The general 
government fiscal deficit is projected to drop to 3.4% of GDP in 2024. According to the programme’s 
projections, the general government’s total revenue ratio will stay at 33.7% of projected GDP in 2024, 
while  the  expenditure  ratio  is  expected  to  drop  by  1.4  pps  to  37.1%  of  GDP.  Revenues  in  2024  are 
expected  to  be  boosted  by  the  full-year  effect  of  earlier  tax  measures  and  a  number  of  further  tax 
reforms  that  took  effect  on  1 January.  A  notable  example  is  the  Law  on  profit  tax,  enacted  in 
September 2023, which eliminates the tax exemption for: (i) sport donations; (ii) profits of entities with 
revenues not exceeding 3 million MKD per year; and (iii) life insurance premiums paid by employers on 
behalf  of  and  at  the  expense  of  employees.  Other  reforms  to  broaden  the  tax  base  include 
amendments to the Law on excise taxes (October 2023), to the VAT Law (September 2023) and to the 
Decree  on  motor  vehicle  taxation,  which  entered  into  force  on  1 January  2024 ( 100).  In  parallel,  two 
revenue-increasing one-off measures in force in 2023 expired, namely the solidarity tax adding 1.7% 
of total 2023 revenue, and the EU energy budget support amounting to 1.6% of total 2023 revenue. 
The  ERP  includes  an  estimate  of  tax  expenditures  for  the  most  important  tax  categories,  based  on 
2022 data, as well as a projection until 2028, in line with the respective requirement of the OBL. ( 101) 
On the expenditure side, capital expenditure is projected to drop somewhat as a share of GDP in 2024, 
compared  to  2023  (-0.9pps).  The  government  expects  subsidies  to  drop  by  1.2pps  y-o-y  in  2024, 
mainly on account of lower energy and agricultural subsidies (102). Social transfers are expected to rise 
slightly  (+0.3pp  of  GDP).  Further  savings  on  the  expenditure  side  are  arising  from  a  pre-funding 
payment,  out  of  2023  budgetary  savings,  on  the  major  multi-year  road  infrastructure  project  (Road 
Corridor 8/10d) allocations for 2024, amounting to 0.2% of GDP.  

(100) According  to  a  World  Bank estimate,  the  changes  in  direct  taxation,  value  added  tax,  excise  duties  and  taxation  of  motor 

vehicles would lead to additional tax revenues of about 0.7% of GDP per year.  

(101) The OBL requires the government to present a report to the Parliament every year, as of 2025, on foregone revenue from 
tax expenditure, to accompany the Final Account of the State Budget for the previous year. The May 2023 fiscal strategy 
also  includes  a  report  and  a  table  on  tax  expenditures,  which  does  not  seem  consistent  with  the  ERP  figures.  This 
discrepancy between the two documents should have been clarified in the ERP. 

(102) The  extent  of  the  expected  reduction  of  subsidies  appears  large,  compared  to  the  IMF  estimate,  which  projects  the  most 
recent energy reform measures to yield savings of some 0.5 pps, and the reform of agricultural subsidies to yield another 
0.2 pps, i.e.savings of 0.7 pps y-o-y in 2024 in total. 

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The fiscal scenario  is subject to substantial risks. First, there is considerable  uncertainty about 
the total costs of the large Corridor 8/10d project. A fiscal risk assessment by an external contractor is 
not  likely  to  be  finalised  before  the  summer.  Second,  given  the  low  progress  on  improving  the 
management  of  public  infrastructure,  including  the  centralised  monitoring  of  fiscal  risks  across  the 
public  sector,  implementation  of  the  ambitious  capital  expenditure  agenda  may  again  remain  behind 
the target, or capital expenditure might be cut in a budget reallocation in favour of current expenditure 
increases.  This  is  particularly  likely  in  the  run-up  to  the  elections.  Third,  estimated  savings  from  the 
electricity  market  reform  depend  not  only  on  the  government’s  implementation  of  these  reform 
measures,  but  also  on  global  developments  affecting  electricity  prices.  Therefore,  continued  (even  if 
reduced)  subsidies  for  the  domestic  electricity  producer  continues  to  pose  a  fiscal  risk.  Further  fiscal 
risks might arise from current energy investment projects by ESM meant to diversify power supply for 
electricity generation and benefiting from government guarantees. Lastly, the mandatory indexation of 
minimum  wages,  which  is  raising  average  wages  (and  therefore  also  public  sector  wages)  and  the 
indexation of pensions create uncertainty as to their size, given dependence on both price and nominal 
wage developments in the economy.  

BOX II.7.1: DEBT DYNAMICS 

North Macedonia
Composition of changes in the debt ratio (% of GDP)

Gross debt ratio [1]
Change in the ratio
Contributions [2]:

   1. Primary balance
   2. 'Snowball effect'
       Of which:

       Interest expenditure

       Growth effect
       Inflation effect

   3. Stock-flow adjustment

[1]   End of period. 

2022
50.4
-1.0

2023
50.2
-0.1

2024
52.0
1.8

2025
50.3
-1.7

2026
50.2
-0.1

3.3
-3.5

1.1
-1.0
-3.6
-0.8

3.3
-3.6

1.5
-1.0
-4.0
0.1

1.7
-2.6

1.7
-1.6
-2.7
2.7

1.0
-1.3

2.0
-2.3
-1.0
-1.4

1.0
-1.5

2.0
-2.6
-0.9
0.4

[2]  The 'snowball effect' captures the impact of interest expenditure on accumulated

      debt, as well as the impact of real GDP growth and inflation on the debt ratio

      (through the denominator).

      The stock-flow adjustment includes differences in cash and accrual accounting, 

      accumulation of financial assets, and valuation and other effects.

Source: Economic Reform Programme (ERP) 2024, Commission calculations.

The  ERP  projects 
that 
general 
government  gross 
debt  will  peak  in 
2024  at  52%  of 
GDP 
before 
declining  to  50.3% 
in 2025 and further 
to  50.2%  in  2026. 
While 
the 
projection for 2024 
is  similar  to  the 
one  in  last  year’s 
programme, 
the 
projection for 2025 
now  more 
is 
The 
optimistic. 
primary 
budget 
deficit  is  projected 
to  narrow  by  a 
total  of  2.3  pps  in 
2023-2026,  with  a 
corresponding 
in 
reduction 

the 
extent it contributes to the increase in the debt ratio. Reflecting expectations of a further decline of 
inflation  to  its  long  term  average  in  2024,  the  debt-decreasing  impact  of  inflation  is  projected  to 
diminish  after  2025,  while  the  effect  from  real  growth  is  forecast  to  increase  and  to  become  the 
main debt-reducing factor. Interest payments are expected to have a stronger debt-driving impact, 
assuming rising refinancing costs, while the contribution from stock-flow adjustments is projected to 
turn negative in 2025, possibly in response to a  drawdown of government deposits  at the Central 
Bank to meet a part of large upcoming financing needs.  

General government debt is projected to remain above 50% of GDP during the programme’s 
lifespan. At the end of 2023, general government debt amounted to 53.3% of estimated GDP (+2.8 
pps y-o-y). In March 2023, the government issued a Eurobond of EUR 500 million, mainly to refinance 

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the July repayment of a previous Eurobond. In December, EUR 93 million was disbursed as part of a 
World Bank development policy loan on top of around EUR 165 million disbursed as part of the IMF PLL 
second tranche ( 103). Given the uncertainty about some foreign funding in  the middle of the year, the 
government decided to increase domestic borrowing instead, and the share of domestic borrowing in 
total  financing  rose  to  42.6%  from  31.3%  in  2022.  In  2023,  only  72.3%  of  planned  foreign  inflows 
were realised. A negative primary balance as well as stock-flow adjustments will lead to an increase in 
the debt ratio in 2024 (see the box above). Public debt, which includes the debt of public enterprises, 
amounted to 62.2% of estimated GDP in 2023. The programme expects public debt to decline to below 
60% only by 2025, and to continue falling in 2026. Guaranteed debt, mainly for public enterprises and 
most of it external public  debt with  government  guarantees, amounted to 8.5% of estimated GDP in 
2023 and is expected to rise further in 2024, as the government envisages rising costs for energy and 
road infrastructure projects that are carried out by public enterprises. However, it is projected to decline 
gradually  thereafter,  to  5.9%  of  GDP  in  2028 (104).  The  ERP  estimates  that  gross  financing  needs  in 
2024 will amount to some 8.5% of projected GDP (down from 10.6% in 2023), rising to 9.6% in 2025 
and  9.9%  in  2026 ( 105).  Financing  obligations  are  expected  to  be  met  through  domestic  and  foreign 
borrowing (including Eurobonds), donor support from international financial institutions (IFI), EU macro-
financial assistance, and new financing instruments such as green bonds.  

The structure of general government debt implies moderate risks. External debt accounted for 
some 60% of total general government debt at the end of 2023. This has remained unchanged since 
2020. Foreign currency debt accounted for 71% of total general government debt (some 5 pps lower 
than  1  year  earlier)  and  the  share  of  euro-denominated  debt  as  a  proportion  of  total  debt  stood  at 
65%. Risks stemming from exchange rate depreciation are mitigated by the de facto currency peg to 
the euro. Regarding interest  rate risk,  North  Macedonia’s  public  debt strategy stipulates that at least 
60% of total debt must be at fixed interest. Moreover, the government further extended the maturities 
of domestic issues, which was beneficial in light of higher than initially planned domestic financing in 
2023.  

BOX II.7.2: SENSITIVITY ANALYSIS 

The programme includes a sensitivity analysis of the fiscal deficit based on three parameters, in line 
with the alternative macroeconomic scenarios. The first parameter is GDP growth. If average annual 
real  GDP  growth  is  lower  than  projected,  by  1.3 pps  in  2024-2028,  the  budget  deficit  would 
increase  by  an  average  of  0.7 pps  per  year  compared  with  the  baseline  projections.  The  second 
parameter is capital expenditure. Lower capital expenditure (about 70% realisation compared with 
the  baseline)  would  imply  an  annual  reduction  in  GDP  growth  of  0.6 pps  and  an  average  annual 
increase in the deficit of 0.3 pps, mainly on account of the negative impact on tax revenue. The third 
parameter  is  tax  collection.  If  tax  collection  falls  by  5%  per  year,  this  would  increase  the  budget 
deficit to 3.8% on average in 2023-2027 (compared with 4.2% in the same risk scenario set out in 
last year’s programme for the period 2022-2026). The programme also assesses the exposure of 
the debt portfolio to interest rate risks (if interest rates rise in 2024 by 1 pp more than assumed in 
the  baseline  scenario,  the  debt-servicing  cost  would  surge  by  7.4%  in  2024,  compared  to  the 
baseline  scenario),  and  the  impact  of  a  10%  depreciation  of  the  euro  with  respect  to  other 
currencies in the portfolio (leading to a 0.7% increase in debt-servicing cost in 2023). The impact on 
debt developments stemming from a deterioration in these two parameters is more pronounced in 
2023 than projected in last year’s programme for 2023. 

(103) Table 4.7 in the ERP presents the composition of deficit financing in 2024 as projected earlier in the year, including a higher 
level of foreign inflows than materialised in the end. The amount of foreign loans in 2022 was also significantly lower than 
projected in last year’s ERP. This meant that the government had to draw down its deposits at the Central Bank - rather than 
replenishing them, as anticipated, in view of the large foreign debt repayments that were due in 2023. 

(104) These projections are in contrast to the previous programme, which assumed that guaranteed debt would peak at 9.5% in 

2024 and decline by more in 2025. 

(105) The IMF estimates that gross financing needs in 2025 and 2026 will stand at around 13% of GDP each year, rising from 

some 10.8% in 2024. 

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The  expenditure  structure  is  gradually  shifting  towards  an  increased  share  of  capital 
expenditure.  Social  transfers,  including  pension  payments  (taking  into  account  the  new  pension 
indexation formula and the planned ad hoc pension increase in 2023) (106) amounted to some 47% of 
total  expenditure  in  2023,  while  capital  expenditure  accounted  for  14%,  much  above  its  10-year 
average. The share of capital expenditure is projected to  rise to  14.8% of total expenditure in 2024, 
and  then  to  15.9%  in  2026.  Social  transfers  are  expected  to  decline  gradually  in  the  mid-term,  to 
43.1%  of  total  expenditure  by  2026.  However,  further  shifting  the  focus  from  current  to  growth-
enhancing  capital  spending  in  the  budget  can  only  be  successful  with  improved  PIM  capacities  and 
enhanced  and  centralised  monitoring  of  fiscal  risks  across  the  public  sector.  Capacities  for  public 
investment management remain weak. While the Ministry of Finance set up a new Department for PIM, 
recruitment  and  capacity-building  are  advancing  only  slowly.  Progress  on  developing  a  standard 
methodology  for  project  design  and  appraisal,  ensuring  an  efficient  selection  of  public  investment 
projects,  needs  to  accelerate.  Currently,  while  projects  funded  by  external  donors  follow  the  relevant 
procedures,  which  often  vary  between  institutions,  procedures  followed  for  domestically  funded 
projects are determined by respective budget units. 

There are plans to better involve the private sector in the financing of public infrastructure, 
such as through public-private partnerships (PPPs). To improve the legal framework for PPPs, the 
government has finalised a draft law, reviewed by the European Commission, which includes provisions 
for  better  management  of  fiscal  risks  and  for  a  harmonisation  of  terms  and  conditions  of  PPP 
contracts. It addresses a number of shortcomings in the current legal framework governing PPPs and 
concessions,  such  as  a  lack  of  detailed  administrative  guidelines  on  selecting,  implementing  and 
managing  PPP  projects;  and  also  limited  central  oversight  (each  contracting  authority  sets  its  own 
contract  formats  and  terms  and  conditions).  A  suitable  regulatory  framework  for  PPPs  would  extend 
the  government’s  choices  of  funding  and  thus  contribute  to  modernising  the  ageing  public 
infrastructure.  Overall,  fiscal  risk  monitoring  remains  incomplete  and  fragmented  among  institutions. 
Currently, fiscal risks, such as contingent liabilities arising from PPPs financed by municipalities, are not 
systematically reported to the central government.  ( 107)  

The adoption of implementing acts under the new Organic Budget Law (OBL) is progressing 
slowly. The OBL, which was passed by the Parliament in September 2022 and will enter into force in 
its  entirety  by  1 January  2025  introduces  fiscal  rules (108)  and  a  Fiscal  Council  and  strengthens  the 
medium-term budget procedure. Fiscal Council members have been appointed by the Parliament and 
have taken up work assignments, although there have been some challenges in recruting staff to the 
Council’s  secretariat.  Adoption  of  the  OBL’s  32  by-laws,  for  which  the  government  drafted  an  action 
plan,  including  the  essential  by-law  on  budget  classification,  and  the  introduction  of  an  IFMIS 
(Integrated  Information  System  for  Financial  Management)  to  ensure  the  smooth  implementation,  is 
progressing  slowly.  The  OBL  contains  provisions  that  are  crucial  to  improving  the  fiscal  framework, 
such as strengthening  public investment  management by attributing a central role to  the  Ministry of 
Finance  in  selecting  new  investment  projects.  The  new  law  also  calls  for  better  monitoring  and 
presentation  of  fiscal  risks  in  the  public  sector,  by  giving  the  new  Fiscal  Council  a  key  role  in  this 
respect, and by mandating an assessment of fiscal risks as part of the mid-term fiscal strategy.  

(106) Pension expenditure accounted for 32.7% of total current expenditure in 2023 (+1.3 pps y-o-y). 

(107) The new Organic Budget Law requires the government to include a description of fiscal risks (at a minimum, those pertaining 
to the government’s contingent liabilities) in the annual fiscal strategy; and the Fiscal Council to assess fiscal risks relating 
to a number of bodies, including public enterprises and public-private partnerships. 

(108) The  new  Organic  Budget  Law  introduces  a  3%  limit  for  the  general  government  deficit  and  a  60%  limit  for  general 

government debt (in principle applicable since 2023, but suspended in response to an escape clause until 2025). 

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7.4.  MAIN MACRO-RELEVANT STRUCTURAL CHALLENGES 

In  November  2023,  the  Commission  proposed  a  New  Growth  Plan  for  the  Western 
Balkans (109) with the aim of supporting the region’s economic convergence and accelerating 
the accession process. The plan involves a Reform and Growth Facility (EUR 2 billion in grants, EUR 4 
billion  in  loans)  that  is  to  be  disbursed  in  2024-2027  as  investment ( 110)  and  budget  support  in 
exchange for implementing reforms that are to be set out in reform agendas prepared by the Western 
Balkan partners. The New Growth Plan is therefore an important tool to increase reform incentives to 
boost growth and convergence. In this context, with a view to ensuring an integrated surveillance of the 
economy  of  North  Macedonia,  this  chapter  briefly  outlines  the  main  structural  challenges  facing  the 
country. 

Low  productivity  growth  has  negatively  affected  convergence  with  the  EU  in  the  past 
decade.  After  a  steady,  though  gradual  catching  up  with  EU  living  standards  prior  to  the  financial 
crisis, the pace of convergence has slowed down considerably in the past decade. North Macedonia’s 
GDP per capita stood at 42% of the EU average in 2022, only slightly up from 38% in 2018. Structural 
problems of the labour market, the skills mismatch between labour market requirements and graduate 
qualifications, a large informal economy, low innovation activity, as well as substantial infrastructure 
investment  needs  to  boost  the  competitiveness  of  the  domestic  economy  are  among  the  factors 
restraining productivity growth. 

Structural challenges in the labour market are posing increasing risks to economic growth 
and inflation. The labour market proved resilient throughout COVID-19 and the recent cost-of-living 
crisis, thanks to multiple government support measures. However, long-term features, such as: (i) low 
participation  rates  (around  53%),  in  particular  for  women  (around  42%);  (ii)  high  outflows  from  the 
labour  force  due  to  emigration;  (iii)  high  youth  unemployment;  and  (iv)  the  skills  mismatch,  are 
increasingly  impacting  on  macroeconomic  and  price  developments  as  well  as  heightening  fiscal  risks 
through the evolution of public sector wages and pensions.  

While the number of higher education graduates is rising, the skills they obtain often do not 
meet  labour  market  requirements.  North  Macedonia  has  made  good  progress  in  increasing  the 
proportion  of  people  with  higher  education,  but  curricula  are  not  well  suited  to  equipping  graduates 
with skills to match labour demand. Insufficient funds impedes the implementation of the 2018-2025 
education strategy, which also targets the skills problem. Public spending on education, at less than 4% 
of  GDP,  remains  below  the  EU  average.  Moreover,  spending  is  inefficient,  mainly  on  account  of 
outdated  formulas  for  the  redistribution  of  public  education  funds  by  the  municipalities,  and 
intersectoral coordination needs to be improved. The envisaged annual report on the implementation of 
the education strategy, which should include recommendations for a new formula for higher education 
funding,  has  not  yet  been  published.  The  percentage  of  adults  participating  in  learning  was  2.6%  in 
2020,  which  is  significantly  below  the  EU-27  average  of  10.8%  (2021).  The  further  development  of 
qualifications is key to bringing medium-skilled and low-skilled people into the labour market. In 2023, 
the  government  adopted  a  new  Law  on  vocational  education  and  training  (VET),  a  new  Law  on 
secondary education, and a Law on adult education, all of which adress some of these shortcomings in 
the education system. However, the new Law on Labour Relations, which would extend labour market 
regulation to non-standard forms of  working such as teleworking  has not yet been adopted, and the 
setting up of regional VET centres, as envisaged in the new VET law, has been slow.  

The high level of informality in the economy distorts the level playing field for business. The 
informal economy causes competitive distortions for domestic companies. According to IMF estimates, 

(109) https://neighbourhood-enlargement.ec.europa.eu/enlargement-policy/new-growth-plan-western-balkans_en 

(110) Infrastructure  investments  need  to comply  with  the EU  environmental acquis,  national  and  international nature  protection 
and water management obligations, ensure public participation and consultation, and guarantee high quality environmental 
impact assessment reports that include cumulative impacts on nature and biodiversity. 

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it could account for as much as 38% of GDP ( 111). The number of informal employees as a proportion 
of  total  employees  is  estimated  to  have  decreased  from  18.6%  in  2018  to  13%  in  2022.  The  main 
forms  of  informality  are  unregistered  labour  and  partially  undeclared  wages.  Implementation  of  the 
government’s  2018  strategy  and  action  plan  to  combat  the  informal  economy  remains  sluggish, 
particularly  on  the  formalisation  of  undeclared  workers.  To  address  informality,  the  programme 
proposes  a  new  model  for  the  formalisation  of  seasonal,  temporary  and  occasional  work,  but  it  is 
rather vague - although it does acknowledge that the lack of coordination between the involved public 
institutions is an obstacle. In September 2023, the government adopted the new (2023-2027) strategy 
for  formalisation  of  the  informal  economy  with  an  action  plan  until  2025.  The  strategy  aims  at 
reducing the size of the informal economy to some 26% of GDP by the end of 2027. The tax reforms 
adopted by the government at the end of 2022 strengthen the tax-paying culture and thereby fight the 
informal economy, which could be reinforced further by streamlining para-fiscal charges. Moreover, the 
provision  of  State  aid  continues  to  suffer  from  a  lack  of  transparency,  which  may  distort  the  level 
playing field for companies. This could be improved by setting up a proper register and by reducing the 
high number of aid providers. 

Low  digitalisation  and  muted 
innovation  activity  restrain  the  competitiveness  of 
businesses.  The  economy  would  benefit  from    increased  access  to  broadband,  an  expansion  of  e-
government services and the development of digital skills. The percentage of households with internet 
access  at  home  increased  by  10.1 pps.  between  2017  and  2021,  to  83.6%.  A  fixed  broadband 
connection to the internet is used by 88% of household users, and by 92% of businesses with 10 or 
more  employees,  but  smaller  companies  still  face  obstacles (112).  More  effort  needs  to  be  made  to 
improve digital skills, including by: (i) setting up a national framework for digital skills for students and 
teachers; (ii) increasing  IT tools in  primary and secondary schools; and (iii) expanding  access to fast-
speed internet to small business and to non-urban areas. R&D activity remains low: at 0.4% of GDP, 
including a small share (0.1% of GDP) from the private sector, the economy’s expenditure on research 
and innovation remains significantly below the EU average. Allocations to the Fund for Innovation and 
Technological  Development  and  its  programmes  have  increased,  but  their  effectiveness,  design  and 
methodology could benefit from an independent evaluation. (113) Links between businesses and others 
involved  in  innovation  are  very  weak.  In  December  2023,  the  government  adopted  the  new  smart 
specialisation strategy, which includes a strategy for innovation and measures to boost the economy’s 
research and innovation potential. 

improving  energy  efficiency  requires 

Decarbonising  the  economy  and 
large-scale 
investments and regulatory and legal adjustments. North Macedonia’s economy relies heavily on 
coal-fired  electricity  production.  Renewable  energy  accounted  for  only  17.3%  of  energy  sources  in 
2021  and  –  as  the  planned  law  on  biofuels  has  not  yet  been  adopted  –  the  share  of  renewables  in 
transport  remains  negligible  (0.15%  in  2020).  In  the  post-pandemic  period,  North  Macedonia  has 
managed to increase domestic electricity production, thus reducing its dependence on energy imports. 
North Macedonia adopted its National Energy and Climate Plan (NECP) in 2022. It aims to increase the 
share of renewable energy sources in gross domestic energy consumption to 38% by 2030. The shift 
towards renewable energy sources, as well as improvements in energy efficiency, to meet targets for 
greenhouse  gas  reductions  set  under  the  European  Green  Deal  will  require  significant  investments. 
Timely  introduction  of  a  carbon  tax  to  prepare  for  the  full  implementation  of  the  carbon  border 
adjustment  mechanism  (CBAM)  in  North  Macedonia  can  contribute  to  meeting  the  emissions  targets. 
Well-managed public investment and improved access to private investments, such as through a risk-
mitigating framework for public-private partnerships would also facilitate the green transition.  

(111) The IMF figure is at the upper range of estimates. 

(112) However, despite overall progress in fixed and mobile broadband penetration, rural areas continue to face challenges due    
to uneven broadband development. In April 2023, only 15.3% of households in underserved rural areas had access to high-
speed broadband, compared to 69.8% in well-served areas. 

(113) In 2022, the Fund underwent a compliance audit by the State Audit Office, which identified several compliance issues that 
remain to be addressed. Namely, the audit concluded that there is a need to reinforce the FITD’s financial governance, align 
its support programmes with policy priorities, and improve performance indicators for its financial instruments. 

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7.5.  THE POLICY GUIDANCE 

JOINT CONCLUSIONS OF THE ECONOMIC AND FINANCIAL DIALOGUE BETWEEN THE EU AND THE 
WESTERN BALKANS PARTNERS, TÜRKIYE, GEORGIA, REPUBLIC OF MOLDOVA AND UKRAINE 

The Economic and Financial Dialogue between the EU and the Western Balkans Partners, Türkiye, Georgia, 
Republic of Moldova and Ukraine 

Brussels, 14 May 2024 

… 

In light of this assessment, Participants hereby invite the Republic of North Macedonia to: 

1.  

Implement  the  2024  budget  as  adopted  and  ensure  the  fiscal  target  is  met,  in  particular  by 
controlling  wage  spending  and  reducing  energy  subsidies  (as  foreseen  under  the  current  IMF 
programme);  adopt  the  budget  for  2025  in  a  timely  manner  and  in  line  with  the  fiscal  rules. 
Strengthen  the  administrative  capacity  for  the  regular  preparation  and  publication  of  the  tax 
expenditure report and explore all options to further broaden the tax base. Introduce an integrated 
approach for reducing the build-up of arrears of public sector entities, through putting in place an 
Integrated Financial Management Information System and by setting up an effective system for 
monitoring of fiscal risks in the Ministry of Finance, including the fiscal risks stemming from SOEs 
and arrears. 

 Ensure timely implementation of the new Organic Budget Law (OBL) in its entirety by 2025, by      

2. 
              adopting  the  necessary  by-laws,  in  particular  on  budget  classification  and  on  the  statement  on  
              fiscal  policy;  and  by  updating  the  manual  on  macro-fiscal  projections.  To  improve  public  
              investment  management,  adopt  a  methodology/guidelines  for  appraisal  of  projects,  in  line  with  
              the  recommendations  of  the  IMF  and  the  World  Bank,  and  ensure  sufficient  training  of  staff  in  
              the  new  PIM  department  of  the  Ministry  of  Finance.  To  enhance  private  sector  financing  of  
              public  infrastructure  projects  based  on  a  suitable  regulatory  framework,  adopt  the  Law  on  
              Public Private Partnership. 

3.            Ensure  a  sufficiently  tight  monetary  policy  stance  as  long  as  necessary  to  anchor  inflation  
              expectations  at  levels  consistent  with  price  stability  and  support  the  peg,  underpinned  by  a  
              thorough  assessment  of  potential  second-round  effects.  Safeguard  the  independence  of  the  
              central  bank  in  its  key  statutory  tasks,  including  in  staffing  and  wage  issues,  by  excluding  the  
              national  bank  from  the  scope  of  all  related  laws  on  administrative  servants  and  public  sector  
              employees.  Further  enhance  risk-based  supervision  in  line  with  best  international  and  European  
              practices,  including  by  operationalising  the  Bank  Resolution  Law  by  amending  by-laws  and  
              building  capacity  ahead  of  implementation,  upgrading  the  deposit  insurance  law,  further  
              implementing  measures  to  promote  the  role  of  the  domestic  currency  and  improving  data  
              collection,  notably  on  real  estate,  to  enable  a  comprehensive  assessment  of  financial  sector  
              risks. 

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ANNEX 1:   OVERVIEW  OF  THE  IMPLEMENTATION  OF  THE  POLICY  GUIDANCE  ADOPTED  AT  THE 

ECONOMIC AND FINANCIAL DIALOGUE IN 2023 

Every year since 2015, the Economic and Financial Dialogue between the EU and the Western Balkans 
and Turkey has adopted targeted policy guidance for all partners in the region. The guidance represents 
the participants’ shared view on  the policy measures that should  be implemented to address macro-
fiscal  vulnerabilities  and  structural  obstacles  to  growth.  The  underlying  rationale  of  the  guidance  is 
similar to that of the country-specific recommendations usually adopted under the European Semester 
for  EU  Member  States.  Implementation  of  the  guidance  is  evaluated  by  the  Commission  in  the 
following year’s ERP assessments.  

The following table presents the Commission’s assessment of the implementation of the 2023 policy 
guidance  jointly  adopted  by  the  EU  and  the  Western  Balkans  and  Turkey  at  their  Economic  and 
Financial Dialogue at ministerial level on 16 May 2023. 

Overall: Partial implementation (55.6%) (114) 

2023 policy guidance (PG) 

Summary assessment 

PG 1:  

There was partial implementation of PG1: 

Continue  to  provide  targeted  and  temporary 
support  to  vulnerable  households  and  firms  to 
cushion  the  impact  of  the  energy  crisis,  if 
needed, and at the same time start to phase out 
untargeted subsidies to the energy sector.  

Use  any  revenue  overperformance  or  spending 
under-execution  compared  to  the  2023  budget 
to reduce the deficit. 

1)  Substantial  implementation:  Support  to  mitigate 
high  energy  costs  to  households  and  companies,  which 
implied  almost  universal  energy  subsidies  in  2022  via 
transfers  to  the  domestic  electricity  producer  ESM,  was 
restructured  and  made  more  targeted.    The  authorities 
reviewed  the  block  tariffs  for  electricity  to  increase 
progressivity  and  better  target  subsidies.  Subsidies  to 
ESM  still  amounted  to  some  0.8%  of  projected  GDP  in 
2023,  but    the  government  adopted  measures  that  will 
likely reduce these subsidies in 2024 to 0.3% of GDP.  

2)  Limited  implementation:  The  government  has 
committed, as part of new prior actions agreed with the 
IMF  in  late  2023,  to  use  unused  allocations  under  the 
revised budget from the 2023 to pre-fund payments for 
road  project  Corridor8/10d,or  other  capital  expenditure, 
but not current expenditure. Furthermore, the authorities’ 
policy  agenda  focuses  on  continued  deficit  reduction 
towards reaching the 3% ceiling prescribed by the OBL by 
2025. However, earlier in the year (budget reallocation in 
July) under-execution of the large allocation for subsidies 
for  the  domestic  electricity  producer  ESM  under  the 
original  budget  were  used  to  pay  for  other  current 
expenditure 
items.  Untapped  allocations  for  capital 
expenditure were reassigned to pay, i.a. for higher public 
sector  wages,  pensions,  health  fund  transfer  in  the 
September reallocation. 

(114) For  a  detailed  description  of  the  methodology  used  to  assess  policy  guidance  implementation,  see  Section  1.3  of  the 
Commission’s  Overview  and  Country  Assessments  of  the  2017  Economic  Reform  Programmes.  This  is  available  at 
https://ec.europa.eu/info/publications/economy-finance/2017-economic-reform-programmes-commissions-overview-and- 
country-assessments_en. 

148 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
in 

Foresee 
fiscal  plan 
the  medium-term 
accompanying  the  2024  budget  a  gradual 
reduction  of  the  primary  deficit-to-GDP  ratio  to 
its pre-crisis (2019) level by the end of the ERP 
period. 

PG 2:   

Accelerate  the  implementation  of  the  Public 
in 
Investment  Management  Action  Plan, 
particular  by  ensuring  the  new  Department  for 
Public Investment Management in the Ministry of 
Finance  becomes  fully  staffed  and  operational, 
and  submit  the  new  public-private  partnership 
(PPP) law and the Law on  concessions of  goods 
of  general 
interest  to  the  Parliament  for 
adoption.  

Adopt and submit to the parliament the next set 
of  revenue-enhancing  measures,  as  announced 
by the Concept for Tax Policy Reforms.  

Take the necessary legislative and organisational 
steps to enable the new Fiscal Council to take up 
operations  with  regard  to  the  2024  budget  and 
the  new  fiscal  strategy,  in  particular  by  swift 
appointment of its three members and provision 
of premises and administrative services. 

Part II 
Country analysis, North Macedonia 

3)  Substantial  implementation:  The  fiscal  strategy 
forecasts a reduction of the budget deficit from: 4.6% of 
GDP in 2023, 3.4% in 2024, 3.0% in 2025, 3.0% in 2026, 
2.8  %  in  2027  and  2.5%  in  2028.  The  primary  budget 
balance  would  also  drop,  yet  the  pre-COVID  level  would 
only just be reached in 2026: 3.2% of GDP in 2023, 1.7% 
in 2024, 1.0% in 2025, 0.9% in 2026, 0.6% in 2027 and 
0.4% in 2028. It is also not clear which concrete revenue 
or  expenditure  measures  would  underpin  the  2.3  pps 
consolidation of the primary  balance between 2023 and 
2026. 

There was substantial implementation of PG 2: 

1) Partial implementation: The new PIM Department at 
the Ministry of Finance has recruited some staff (at end-
January:  6  out  of  14  posts  have  been  filled,  mainly  by 
redeployment from other departments) and has begun to 
develop  project  appraisal  capabilities.  The  2  draft  laws 
have  not  yet  been  submitted  to  the  Parliament.  The 
Commission  had  sent  its  comments  on  the  draft  law  on 
public-private  partnership  to  the  government  in  summer 
2023.  

the  Parliament  adopted 

2)  Full  implementation:  The  Parliament  adopted  in 
September  2023  the  amendments  to  the  Law  on  VAT, 
amendments to the Law on  Profit Tax and the new Law 
on  Solidarity  Tax.  The  amended  laws  aim  to  expand  the 
tax  base  and  streamline  tax  exemptions  and  are  in  line 
with  the  principles  of  the  Tax  System  Reform  Strategy, 
adopted  in  December  2020.  The  government  submitted, 
in  December  2023 
and 
amendments to the Law on  Excise Taxes, the Decree on 
motor  vehicle taxation, applicable as of 1 January 2024 
and  with  the  effect  of  broadening  the  tax  base.  No. 
199/23.  However,  the  government  dropped  plans  to 
reintroduce  progressive  income  taxation,  which  was  first 
introduced  in  2019  and  then  put  on  hold,  with  10%  tax 
rates  remaining  as  flat  rate  for  taxation  of  personal 
income tax and 15% for the income gained from games 
of chance. 

3)  Partial  implementation:  The  Parliament  appointed 
the  members  of  the  new  Fiscal  Council  in  September 
2023.  The Statute was adopted by the Fiscal Council on 
30  January  2024.  The  Rulebook  was  adopted  on  12 
October 2023. The Fiscal Council also already performed 
a  number  of  tasks,  including  issuing  an  opinion  to  the 
Parliament’s budget committee at end-November. Yet, as 
of  25  January,  no  formal  recruitment  to  the  Secretariat 
of 
taken  place.  Further 
operationalisation  of  the  Fiscal  Council  is  stalled  for  the 
moment: the Council requires approval from the Ministry 
of  Information  for  starting  the  recruitment  procedure. 
Ahead  of  the  general  elections,  no  formal  employment 

the  Fiscal  Council  has 

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to 

can  take  place  at  the  Council.  However,  the  President 
plans 
recruit  via  an  alternative  administrative 
procedure  candidates  already  employed  in  the  public 
sector. Employees of the Fiscal Council have the status of 
public  sector  employess,  which  limits  the  remuneration 
the Council can offer. Therefore, the President requested 
the  Ministry  of  Finance  to  amend  the  respective  law  for 
Fiscal  Council  employees  to    have  the  same  status  as 
Central Bank employees. This procedure is ongoing. 

There was substantial implementation of PG 3. 

1)  Full  implementation:  The  NBRNM  has  carefully 
monitored  develpments  in  price  dynamics.  To  curb 
inflation,  the  NBRNM  has  withdrawn  liquidity,  increased 
reserve  requirements,  and  raised  policy  rates  by  more 
than the increases in the euro area, thus also maintaining 
a  substantive  interest  rate  differential  in  support  of  the 
peg. 

PG 3:  

Continue  to  carefully  assess  and  analyse  price 
developments  and  ensure  a  sufficiently  tight 
monetary policy stance to preserve price stability 
in  the  medium  term, 
including  by  further 
tightening monetary policy, if needed.  

reporting  and 

Strengthen  further 
risk 
the 
management  frameworks  across  the  banking 
system to ensure an accurate reporting of asset 
quality,  further  reduce  institutional  and  legal 
obstacles  to  swift  and  effective  NPL  resolution, 
continue  to  reduce  data  gaps  in  particular  as 
regards  the  real  estate  sector  and  further 
implement measures to promote the role of the 
domestic 
relevant 
stakeholders.  

involving  all 

currency, 

Safeguard  the  National  bank’s  independence  in 
its  key  statutory  tasks,  including  in  staffing  and 
wage  issues,  by  adopting  the  amended  law  on 
the  National  bank,  and  excluding  the  National 
bank  from  the  scope  of  all  related  laws  on 
administrative  servants  and  public  sector 
employees. 

implementation:  Key 

2)  Substantial 
laws  and 
regulations  improved.  In  January  2024  the  new  decision 
on  the  methodology  for  credit  risk  management  started 
to  be  applied,  introducing  a  new  definition  of  non-
performing  loans  in  line  with  the  EU  one.  A  range  of 
borrower-based  macroprudential  measures  were 
introduced to curb potential risks in the real estate sector, 
and  the  counter-cyclical  capital  buffer  was  raised.  Data 
gaps remain in the real estate sector, although the State 
Statistical Office is working on improving the real estate 
price  index.  The  Law  on  the  National  Bank  still  needs  to 
the  NBRNM’s 
be  amended 
macroprudential  mandate.  To  further  align  with  EU 
regulations,  a  Law  on  bank  resolution  was  passed  in 
October 
reserve 
The  NBRNM 
requirements  on  a  differentiated  basis  in  line  with  its 
denarisation strategy. 

clearly  establish 

adjusted 

2023. 

to 

3) Partial implementation: The proposed amendments 
to  the  national  bank  law  to  exclude  NBRNM  staff  from 
the  status  of  administrative  servants  were  adopted,  but 
the  amendments  to  also  exclude  the  NBRNM  from  the 
scope  of  the  laws  on  administrative  servants  and  public 
sector  employees  are  still  outstanding.  Passing  these 
amendments  remains  important  for  safeguarding  the 
NBRNM’s 
in  employment 
conditions. 

independence, 

including 

PG 4:  

There was partial implementation of PG 4. 

Adopt  and  commence  with  the  implementation 
of the new Strategy for formalising the informal 
economy  2023-2025,  with  an  action  plan  and 

1) Partial implementation: The 2023-2025 strategy 
and action plan for formalisation of the informal 
economy were adopted in June 2023. Implementation of 

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ensure high-level political commitment.  

measures is slow. 

implementing 

Adopt  and  start 
the  Export 
Promotion  Strategy  and  Smart  Specialisation 
Strategy/Action Plan to enhance competitiveness 
in  global  value  chains  of 
integration 
and 
domestic companies.  

2)  Limited  implementation:  The  smart  specialisation 
strategy  and  action  plan  were  adopted  in  December 
2023. 
is  yet  to  start.  The  export 
promotion  strategy  has  been  drafted,  but  has  not  yet 
been adopted by the government. 

Implementation 

Continue  the  digitalisation  of  public  services  for 
businesses  and  citizens  by  upgrading  the  e-
portal for services. 

3)  Partial  implementation:  The  digitalisation  of  public 
services for businesses and citizens continues by way of 
further  services  being  made  available  on  the  e-portal 
(www.uslugi.gov.mk).  246  services  are  available  to 
citizens/businesses  online. 

PG 5: 

There was limited implementation of PG 5. 

To  enhance  energy  resilience  and  transition 
towards  implementing  the  Green  Agenda,  re-
organise  and  strengthen  state 
institutions 
dealing  with  energy  policy  and  in  particular 
increase  the  technical/engineering  capacity  of 
the  Energy  Department 
in  the  Ministry  of 
Economy and the Energy Agency.  

Adopt the law on  biofuels, secondary legislation 
to  the  energy  efficiency  law,  the  long  term 
buildings  renovation  strategy  and  the  legal  and 
regulatory  framework  for  the  establishment  of 
the Energy Efficiency Fund as well as establish a 
Renewable Energy Guarantee of Origin scheme. 

for 

the  Management  Board 

1)  Limited  implementation:  The  Minister  of  Economy 
adopted  the  Plan  for  Reorganisation  of  the  Ministry  of 
Economy No. 04-3663/1 of 29 July 2022, after holding a 
meeting  with 
the 
reorganisation. The plan includes setting up a new Energy 
Directorate  rather  than  reinforcing  the  current  Energy 
Unit  with  increased  staff.  The  Ministry  of  Economy  can 
employ  five  additional  members  of  staff  in  the  Energy 
Department and five additional members of staff in the 
Energy  Agency.  Recruitment  is  ongoing.  Only  one  person 
has  been  newly  employed  in  the  Energy  Department  of 
the  Ministry  of  Economy.  Institutional  capacities  in  both 
institutions remain insufficient for carrying out their legal 
obligations. 

2)  Limited  implementation:  The  USAID  Connect  for 
Growth  project  prepared  the  gap  analyses  for  the  Clean 
Energy  Package  directives.  Regulations  have  been 
prepared  and  legislation  on  new  energy  and  renewable 
energy  sources  is  being  drafted.  The  public  consultation 
on both the draft Energy Law and the draft Law on RES 
was  launched  in  mid-December  2023.  An  EU  project    is 
under  way  to  support  the  Ministry  in  preparing  the 
secondary energy efficiency legislation. Work commenced 
on  the  Biofuels  report  in  August  2023,  with  research 
undertaken and consultations with relevant stakeholders.  
The  draft  report  was  issued  in  September  2023  as  a 
basis  for  discussions  with  the  Energy  Department  to 
determine  the  most  appropriate  amendments  to  the 
current draft Biofuels Law to reflect the latest updates to 
the  body  of  EU  law  in  this  area.  The  institutional  model 
for the Fund has been agreed: it will be developed under 
the Development Bank of North Macedonia (DBNM) as a 
commissioned fund. The Law on DBNM was amended on 
3 October 2023, providing a legal basis for setting up the 
Fund  under  the  DBNM.  In  December  2023,  the  final 

151 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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Institutional Paper 

Establish  a  governance  mechanism  for  Just 
Transition  from  Coal,  including  an  operational 
Inter-ministerial  Committee  with  involvement  of 
local actors. 

version  of  the  Fund’s  10-year  work  strategy  was 
prepared.  The  agreement  on  the  establishment  of  the 
fund, its operational manual and a 5-year business plan 
are  expected  to  be  finalised  in  January  2024  and 
submitted to the government for adoption and signature.  

3)  Partial  implementation:  In  line  with  the  Just 
Transition roadmap, the government set up a Council for 
the Just Transition in October 2023. However, the Council 
is not yet operational. Three working groups were created 
on  energy  transition,  economic  transitions  and  skills 
relevant 
development,  with  participation  from 
ministries and state-owned enterprises. 

the 

PG 6:  

There was partial implementation of PG 6. 

Finalise  the  new  Law  on  vocational  education 
and  training  (VET),  Law  on  secondary  education 
and  the  Law  on  adult  education  as  well  as 
provide  a  yearly  report  for  improving  higher 
education,  including  recomendations  for  a  new 
formula for the financing of higher education.  

Building on the steps taken, strengthen access to 
active  labour  market  policies,  in  particular  for 
low-skilled unemployed and people in vulnerable 
situations.  

finalised  by 

1)  Substantial  implementation:  The  three  laws  have 
been 
in 
parliamentary  procedure.  The  report  of  June  2022-June 
2023  has  been  completed.  A  new  formula  for  the 
financing of higher education is under development. 

the  government  and  are 

implementation  of  active 

2)  Partial  implementation:  The  government  continued 
with  the 
labour  market 
measures.  The  IPA  funded  project,  carried  out  by  the 
Employment Service Agency, expanded the target groups 
to include all vulnerable groups. Measures include a pilot 
of  the  second  chance  programme  with  more  than  100 
participants to date.  

increase  the  capacity  of  and 
Continue  to 
cooperation  between  the  employment  agencies 
and centres for social work as well as education 
and  training  institutions  to  provide  integrated 
services  and  measures  for  improvement  of 
inclusion in the labour market. 

3) Partial implementation: Cooperation continued to 
improve, as  the IPA-funded project (carried out by 
Employment Service Agency), includes capacity-building 
activities for  the Agency and the Social Work Centres. 
The project helps the beneficiaries better address the 
needs of low-skilled and vulnerable people, and increase 
their employability and employment. 

152 

 
 
 
 
 
 
 
 
 
 
 
Part II 
Country analysis, North Macedonia 

ANNEX 2: COMPLIANCE WITH PROGRAMME REQUIREMENTS 

The government of North Macedonia submitted the 2024-2026 ERP on 18 January 2024. None of its 
components are missing.  

Inter-ministerial coordination 

The  Ministry  of  Finance  of  North  Macedonia  coordinated  the  preparation  of  the  ERP  and  an  inter-
ministerial working group comprised of several ministries, agencies and other offices were involved in 
this work. The ERP includes an annex listing the institutions and individuals involved in its preparation. 
The government formally endorsed the ERP on 16 January 2024. The coordination process worked well 
and the attendance to technical meetings was high.  

Stakeholder consultation  

The  ERP’s  2024-2026  draft  structural  reforms  were  posted  on  the  Ministry  of  Finance’'s  website  on 
15-29 December 2023,  and  interested  parties  were  invited  to  send  written  contributions.  The  written 
comments and suggestions are set out in an annex to the ERP. 

The government of North Macedonia submitted the 2024-2026 ERP on 18 January 2024. None of its 
components are missing.  

Macroeconomic framework  

The  macroeconomic  framework  is  coherent  and  consistent,  while  somewhat  optimistic.  The  ERP 
presents two alternative scenarios compared to the baseline: (i) assuming lower export growth; and (ii) 
assuming weaker investment. It does not include a low-growth scenario combining both domestic and 
external risks. The ERP’s sensitivity analysis would have benefited from a more comprehensive impact 
assessment,  including  on  employment,  deficit  and  debt.  The  external  sector  outlook  is  described  in 
detail and an analysis of external debt sustainability is provided in the annex.  

Fiscal framework  

The ERP is based on the latest budget projections following the latest budget reallocation and on the 
fiscal data available at the end of Q3. It includes: (i) information on the expected budgetary impact of 
new policy measures; (ii) an analysis of the budget balance's sensitivity to lower GDP, lower execution 
of  capital  expenditure,  and  lower  collection  of  revenue;  (iii)  an  analysis  of  public  debt's  sensitivity  to 
changes  in  interest  rates  and  exchange  rates;  and  (iv)  a  short  assessment  of  the  long-term 
sustainability of public finances based on a number of assumptions, including population ageing.  

Structural reforms 

The chapter on structural reforms has been prepared in line with the ERP guidance note. Reform areas 
that have not or  have only partly been identified as key  challenges in Section 5.1. should  have been 
analysed  more  in  depth  in  Section  5.2.  Reform  areas  are  fully  costed  and  integrated  into  the  fiscal 
framework.  More  effort  is  needed  to  quantify  the  impact  of  each  measure.  The  description  of  the 
implementation  risks  and  mitigation  measures  continues  to  improve.  Reform  measures  have  been 
prioritised in line with the key structural challenges that have been identified. Tables 9-11 in the annex 
have  been  properly  completed.  The  implementation  reports  of  the  2023-2025  ERP’s  policy  guidance 
and Table 11 in the Annex are well prepared. The attributed scores largely reflect the implementation 
level. Contributions received  by external  stakeholders  during the  consultation process  are annexed to 
the ERP. 

153 

 
8.  SERBIA 

8.1.  EXECUTIVE SUMMARY 

Serbia’s economy remained resilient in 2023 and growth is forecast to accelerate slightly in 
2024-2026. GDP growth picked up in the second half of 2023, reaching 2.5% ( 115) for the year as a 
whole,  helped  by  decelerating  inflation  and  strong  foreign  direct  investment  (FDI)  inflows.  The 
economic reform programme (ERP) projects economic growth to gradually pick up to 3.5% in 2024 and 
about 4.0% in 2025-2026, broadly returning to its potential growth rate. Consumer price inflation was 
on a declining trend in the second half of 2023, averaging 12.1% for the year as a whole. Inflation is 
expected to return to within the central bank's target band (3% ±1.5 percentage points (pps)) in mid-
2024.  Relatively  buoyant  exports  and  lower  energy  import  volumes  and  prices  contributed  to  the 
substantial reduction in the current account deficit, from 6.9% of GDP in 2022 to 2.6% in 2023. The 
external deficit is expected to widen again to about 4% of GDP in the coming years as imports are set 
to  increase  in  line  with  rising  private  consumption  and  investment.  The  ERP  projections  are  overall 
plausible, but the growth outlook is, as elsewhere, subject to a series of downside risks associated with 
geopolitical tensions and global trade disruptions. 

The  fiscal  strategy  projects  a  gradually  decreasing  fiscal  deficit  and  public  debt.  In  2023, 
according to preliminary outcome data from the Ministry of Finance, general government deficit fell by 
about  one  percentage  point  (pp.)  to  2.2%  of  GDP (116),  which  is  better  than  expected  despite  ad hoc 
measures  to  raise  pensions,  social  transfers  and  public  sector  wages.  Revenue  growth  outperformed 
projections,  and  fiscal  support  to  state-owned  energy  utilities  was  lower  than  planned.  The  2024 
budget targets a  moderate  further  deficit reduction (compared to the ERP-estimated  2023 outcome) 
as taxes are boosted by robust labour income growth while expenditures are assumed to be lower than 
GDP  growth,  helped  by  lower  energy-related  subsidies.  Further  gradual  expenditure-based  fiscal 
consolidation  is  projected  to  bring  the  budget  deficit  down  to  1.5%  of  GDP  in  2025-2026,  in 
compliance  with  the  new  deficit  rule ( 117).  The  debt-to-GDP  ratio  decreased  by  3.3 pps  to  52.3%  in 
2023 ( 118) and the ERP projects it to moderately decline further to reach 50% of GDP in 2026. There 
was  substantial  progress  on  fiscal  reforms  in  2023,  but  some  significant  fiscal  risks,  including  those 
related to state-owned enterprises (SOEs), persist. 

The main challenges facing Serbia are the following: 

•  Medium-term fiscal targets need to be both better anchored by a strict application of 
the  new  framework  of  fiscal  rules  and  backed  up  by  credible  medium-term  fiscal 
planning. Serbia has been able to successfully navigate the economic challenges of recent years 
and is well placed to go on achieving good macro-fiscal results. The planned reduction of the fiscal 
deficit is in line with the new fiscal rules and is key to rebuilding fiscal buffers in the medium term. 
This could also be enhanced by further improvements in medium-term budgeting, including public 
investment  planning.  This  is  especially  needed  to  counter  the  various  expenditure  pressures  that 
risk  emerging  in  the  medium  term,  also  due  to  very  ambitious  investment  plans,  such  as  those 
related  to  the  ‘Leap  into  the  Future  2027’  and  EXPO  2027  projects.  The  budget  also  lacks  a 
detailed overview of tax expenditures and subsidies to SOEs. 

(115) According to the Statistical Office of Serbia. ERP also projected GDP growth of 2.5% for 2023. 

(116) ERP projected a 2.8% deficit. 

(117) The deficit rule consists of a general government deficit ceiling set by reference to the level of debt (3% of GDP if debt is 
below 45% of GDP; 1.5% of GDP if debt is below 55% of GDP; 0.5% if debt is below 60% of GDP; and 0% if debt is above 
60% of GDP). 

(118) ERP projected 53.3% of GDP. 

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Country analysis, Serbia 

• 

There is scope for better monitoring of fiscal risks arising from public support to state-
owned  enterprises  (SOEs),  and  to  address  them.  Enduring  fiscal  risks  relate  particularly  to 
SOEs,  which  in  past  years  required  large  amounts  of  public  fiscal  support.  In  spite  of  recent 
progress linked to the new SOE management law, several actions are still to be completed in the 
coming  years,  such  as  adopting  related  by-laws,  restructuring  companies,  ensuring  sound 
corporate governance, and improving transparency. The Ministry of Finance’s Department of Fiscal 
Risk  Monitoring  has  an  important  role  to  play  in  analysing  and  making  transparent  the  related 
fiscal risks. 

•  A public sector wage reform is crucial to attract and retain talent in the public sector. 
Many of the ongoing reforms are held back by a lack of staff with appropriate qualifications in the 
public  service.  This  is  partly  due  to  the  relatively  low  wage  levels  that  can  be  paid  for  highly 
qualified positions, as the wage structure is very compressed. 

•  Other  main structural challenges lie in the areas of business environment and private 
sector development, the green and digital transitions, human capital, and fundamental 
democratic  and  judicial  reforms.  Weaknesses  in  the  rule  of  law,  including  the  fight  against 
corruption,  and  inconsistent  state-aid  and  public  procurement  procedures  subject  to  exemptions 
impede the business environment. The development of a strong corporate sector is also hampered 
by  the  widespread  presence  of  inefficient  SOEs  in  the  economy  and  the  significant  informal 
economy.  The  energy  sector,  dominated  by  SOEs,  remains  inefficient  and  suffers  from  outdated 
infrastructure  and  over-reliance  on  coal.  There  is  still  scope  to  raise  employment  to  EU  average 
levels, reduce skills mismatches, improve education and training, including upskilling and reskilling, 
and  mitigate  brain  drain.  Serbia  has  made  good  progress  on  digital  transformation  across  the 
economy and intends to tackle some of the remaining gaps (in areas such as digital infrastructure 
and  cybersecurity,  public  sector  e-services  and  education).  These  challenges  are  expected  to  be 
addressed through key structural reforms set out in the country’s reform agenda under the New 
Growth Plan for the Western Balkans. 

Implementation of the policy guidance set out in the conclusions of the May 2023 Economic 
and  Financial  Dialogue  has  been  partial.  The  planned  public  deficit  reduction  is  in  line  with  the 
fiscal  rule.  However,  the  extraordinary  rise  in  pensions  contributed  to  pushing  pension  expenditure 
above the 10% of GDP target. An action plan for strengthening medium-term budgeting was adopted, 
but in practice medium-term plans still lack credibility as they are subject to frequent ad hoc changes 
and  do  not  systematically  cover  all  public  investments.  Even  though  the  new  electronic  public  wage 
and  employment  registry  has  progressed,  the  public  sector  wage  system  reform  is  delayed  to  2025. 
Tax administration reform has, despite certain dealys in the past, been progressing broadly in line with 
the ERP 2023 timeline, but retaining and attracting qualified staff has become a persistent challenge. 
Fiscal risk monitoring has made steady progress but capacities need to increase further to manage the 
fiscal  risks,  especially  those  related  to  SOEs.  SOE  reforms  made  crucial  progress  following  the 
September  2023  adoption  of  the  law  on  management  of  SOEs.  However,  the  lack  of  sufficient 
personnel  within  the  administration  to  ensure  the  law's  implementation  and  to  draft  the  necessary 
secondary  by-laws  might  become  an  obstacle  for  further  progress.  The  central  bank  continued  to 
tighten its monetary policy stance and the authorities have continued to enhance the banking sector’s 
regulatory  and  supervisory  framework.  Timely  consultation  of  businesses  ahead  of  adopting  new 
legislation  needs  further  improvement.  Public  investment  management  continues  to  make  possible 
numerous exemptions from the standard procedures, thereby impeding a unified, comprehensive and 
transparent system for investment planning and management. Issues persist in competition and State 
aid  and  in  public  procurement  due  to  special  laws  and  intergovernmental  agreements.  The  national 
energy  and  climate  plan  (NECP),  which  should  include  the  Energy  Community  Secretariat’s 
recommendations,  has  yet  to  be  adopted,  while  various  energy  infrastructure  projects  are  ongoing 
including to address Serbia’s over-reliance on Russian energy supply. Russia continues to control many 
strategic  assets  in  the  energy  sector.  Concerning  the  labour  market,  the  adequacy  of  social  benefits 
remains  low  and  improvements  in  vocational  education  progress  slowly.  While  the  Youth  Guarantee 
Implementation Plan has been adopted, its implementation has yet to start. 

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8.2.  ECONOMIC OUTLOOK AND RISKS 

GDP  growth  picked  up  in  2023.  Preliminary  outcome  data  indicates  that  GDP  growth  accelerated 
from 1.5% year-on-year (y-o-y) in the first half of the year to 3.5% in Q3 and Q4, with the total for the 
year at 2.5% ( 119), which is in line with the ERP scenario. Growth was driven by net exports (also helped 
by lower energy imports driven by base effects from 2022). Private consumption picked up gradually 
over  the  year,  helped  by  decelerating  inflation,  and  investments  were  boosted  by  strong  FDI  inflows. 
Inventories  made  a  negative  contribution  to  growth.  On  the  supply  side,  the  fastest  growth  was 
recorded in the construction sector, agriculture, and in information and communication. Growth in other 
main economic sectors was also positive, notably even accelerating in industry and mining towards the 
end  of  the  year.  In  the  ERP,  the  unemployment  rate  is  projected  to  have  remained  broadly  stable  at 
9.6% in 2023 on average, compared to 9.7% in the previous year. At the same time, the employment 
rate of the population aged 15 years and above was projected to have risen by 0.5 pps y-o-y to 50.7%. 

The  ERP’s  baseline  scenario  forecasts  a  gradual  acceleration  in  GDP  growth.  GDP  growth  is 
expected  to  gradually  pick  up  to  3.5%  in  2024  and  4.0%  in  2025  (similar  to  the  projection  in  the 
previous  ERP)  and  4.3%  in  2026,  thus  broadly  returning  to  pre-2020  rates.  This  acceleration  is 
expected to be mostly driven by a sharp recovery in private consumption as inflation normalises while 
income  growth  maintains  its  momentum.  Gross  fixed  capital  formation  is  set  to  expand  further, 
growing  on  average  by  over  6%.  Reflecting  the  rise  in  domestic  demand,  imports  are  expected  to 
recover somewhat faster than exports, with a negative contribution to GDP growth from net exports in 
2024  before  it  turns  neutral  in  2025-2026.  The  ERP  estimates  the  output  gap  to  have  been  slightly 
negative in 2023 (-0.4%), turning slowly neutral by 2026, as the economy is assumed to expand only 
slightly above its potential growth rate. Supported by steady economic expansion, the unemployment 
rate is  projected to continue  its gradual downward trend,  reaching 9.3% of the labour  force in 2024 
and 8% in 2026. 

The baseline scenario seems plausible, overall, with conservative growth estimates being in 
tune with a generally bleak global outlook subject to risks. The growth outlook continues to be 
subject  to  a  degree  of  uncertainty  about  the  further  economic  impact  of  Russia’s  full-scale  war  of 
aggression  against  Ukraine  and  global  trade  disruptions.  Still,  the  macroeconomic  scenario  appears 
plausible overall. The projected 3.5% growth in 2024 appears well achievable, in particular as growth 
picked up already in the last quarters of 2023 and Serbia weathered well the negative global shocks 
over  recent  years.  The  expected  moderate  gradual  pickup  in  consumption,  investment,  exports  and 
imports  in  2024-2025  appears  reasonable,  assuming  inflation  will  slow  down.  The  projections  for 
potential  growth  also  appear  to  be  reasonable  as  the  expected  moderate  growth  of  total  factor 
productivity  is  supported  by  foreign  direct  investment  (FDI)  inflows,  domestic  innovative  activity, 
digitalisation,  and  structural  reforms.  The  specialised  exhibition  EXPO  2027  to  be  held  in  Belgrade 
implies a boost to public investment in the coming years, which is however not specifically analysed in 
the ERP. In addition, in January 2024 (after the ERP finalisation), Serbia's President announced a ‘Leap 
into the Future 2027’ plan, which presents major public investment programmes. While many of these 
investments were already previously planned and thus included in the macroeconomic scenario, some 
ambiguity  and  lack  of  transparency  exists  on  the  exact  investment  plans  ahead.  Overall,  additional 
public  investments  might  boost  economic  growth  further,  but  potentially  at  the  expense  of  higher 
public deficits (discussed in Section 3), and risks of overheating, especially in the construction sector. 
Furthermore, the choice of the investment areas is key to actually achieving higher economic growth 
potential  and  other  aims,  such  as  the  green  transition,  which  appears  to  be  less  prioritised  in  the 
current ‘Leap Into the Future 2027’ project list. 

(119) Macroeconomic  and  fiscal  estimates  and  forecasts  covering  the  period  2023-2026  have  been  taken  from  the  ERPs 
themselves; if available, preliminary macroeconomic and fiscal out-turn data for 2023 have been taken from the relevant 
national sources (Statistical Office, Ministry of Finance, Central Bank). 

156 

 
 
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Country analysis, Serbia 

Table II.8.1:
Serbia - comparison of macroeconomic developments and forecasts

Real GDP (% change)
Contributions:
- final domestic demand
- change in inventories
- external balance of goods and services
Employment (% change)
Unemployment rate (%)
GDP deflator (% change)
CPI inflation (%)
Current account balance (% of GDP)
General government balance (% of GDP)
Government gross debt (% of GDP)

2022

2023

2024
COM ERP COM ERP COM ERP COM ERP COM ERP
2.5
4.3

2025

2026

n.a.

2.5

2.5

3.5

4.0

2.2

3.1

3.7

1.2
-0.3
1.3
0.3
9.4

3.2
0.8
-1.5
2.2
9.7

3.1
4.0
1.2
0.4
0.0
-1.9
-1.0
0.1
3.2
2.3
1.0
1.4
9.4
8.9
9.6
10.4 10.4 11.4 11.4
3.6
11.9 11.7 12.7 12.3
3.0
-6.9
-4.1
-2.5
-3.2
-1.5
-2.8
55.6 55.6 52.2 53.3 51.2 51.7 50.1 50.7

4.5
-0.1
-1.0
0.4
9.3
4.6
4.6
-3.8
-2.2

3.2
-0.1
0.0
0.5
9.0
3.6
5.5
-3.5
-2.2

3.7
0.0
0.1
0.6
8.6
3.9
3.6
-3.3
-1.5

-6.9
-3.2

-3.3
-2.8

n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.

4.3
-0.1
0.1
1.2
8.0
2.9
3.0
-4.3
-1.5
50.0

Sources: Economic Reform Programme (ERP) 2024, Commission Autumn 2023 forecast.

The  ERP’s  economic  risk  analysis  sees  the  main  downside  risks  from  the  international 
environment. No fundamentally domestic risks have been included in the ERP’s risk analysis section 
(for  example,  higher  than  assumed  domestic  inflation  pressures).  Macroeconomic  risks  are  seen  to 
come  mainly  from  Russia’s  war  of  aggression  against  Ukraine,  prices  of  global  energy  products  and 
global disruptions to supply  chains. The ERP’s alternative GDP scenario assumes a new shock on the 
energy  market,  higher  inflation,  lower  real  disposable  income,  lower  economic  growth  in  the  EU, 
additional financial disturbances, and a deepening of uncertainty. These developments would increase 
production costs and reduce the potential to invest in further production capacities. As a consequence, 
the expected volume of foreign trade would be reduced. Economic growth in Serbia would be lower by 
1.7 pps  in  2024  than  in  the  baseline  scenario,  largely  on  account  of  reductions  in  export  activity, 
investment  and  private  consumption.  In  2025  and  2026,  differences  from  the  original  expectations 
would be relatively smaller due to a gradual recovery of the economy from shocks. 

Consumer price inflation continued to abate in 2023 and is expected to return to within the 
central  bank's  target  band  in  mid-2024.  Annual  consumer  price  inflation  decelerated  to  5,6%  in 
February 2024; 2023; it was 12.1% for the year 2023 on average. Annual inflation was notably driven 
by  food  prices,  but  they  decelerated  strongly  later  in  2023  as  global  food  prices  eased  and  base 
effects  dissipated.  Rapid  increases  in  electricity  and  gas  tariffs  (24%  and  33%  respectively),  as 
included in the stand-by arrangement with the IMF, were estimated by the central bank to have directly 
raised inflation by 1.3 pps in 2023. There are no such extraordinary rises planned for the coming years. 
Core  inflation  (excluding  energy,  food,  alcohol  and  tobacco)  was  lower  in  2023  at  9.1%.  The  ERP 
expects inflation to decline to within the central bank’s target tolerance band of 3% ±1.5 pps in mid-
2024,  with  annual  average  inflation  projected  at  4.6%  in  2024  and  down  to  3%  in  2025-2026.  The 
central bank expects disinflation to be supported by the effects of monetary tightening, falling inflation 
expectations and lower imported inflation (food and industrial products). Countering these effects, the 
National Bank of Serbia (NBS) expects global oil prices to still exert some inflationary pressures. 

The dinar’s exchange rate against the euro has remained stable, with the NBS allowing for 
minimal volatility and countering some appreciation pressures. NBS foreign exchange reserves 
increased consistently in 2023, reaching EUR 25 billion in January 2024, a surge by about 40% y-o-y, 
covering 6.8 months of imports of goods and services. In line with its long-standing policy of exchange 
rate stabilisation, the central bank continued to intervene frequently in the foreign exchange  market. 
Dinar  exchange  rate  appreciation  pressures  prevailed  in  2023,  with  NBS  buying  a  record  amount  of 
EUR 3.9 billion net in the domestic foreign exchange market. The dinar appreciated only marginally by 
0.1% y-o-y against the euro by the end of 2023. The last time that the NBS raised its key policy rate 
was  in  July  2023,  by  25  basis  points  to  6.5%,  leaving  it  unchanged  after.  Due  to  high  surplus  dinar 

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liquidity in the banking sector, the required reserve ratios were raised, in September 2023, for the first 
time  since  2015 ( 120).  The  aim  of  the  required  reserve  increases  was  to  support  the  monetary 
tightening and to stimulate the dinar and long-term sources of bank financing through differentiation 
of required reserve ratios, depending on the currency and maturity of liabilities. 

The  current  account  deficit  narrowed  sharply  from  6.9%  of  GDP  in  2022  to  2.6%  in 
2023 (121),  reflecting  the  easing  of  the  energy  crisis.  The  current  account  deficit  narrowed 
continually over the course of 2023, helped by base effects as electricity imports were extraordinarily 
high in 2022, due to high import prices and unexpected domestic supply disruptions, while both factors 
abated  in  2023.  Despite  the  slowdown  in  external  demand,  goods  and  services  exports  continued  to 
grow in 2023, as a result of past investments made to expand production in Serbia. Merchandise trade 
in 2023 grew slightly in EUR value (+3.7%) while imports decreased (-4.8%) in value, which resulted in 
the  deficit  in  goods  trade  decreasing  by  about  one  third.  A  surplus  in  the  services  trade  balance 
improved very strongly by 30% y-o-y in 2023, driven by ICT, transport and business services’ exports. 
The  surplus  in  services  covered  almost  half  of  the  deficit  in  goods  trade.  The  primary  income  deficit 
increased  substantially  by  about  30%  y-o-y  in  2023,  mainly  reflecting  higher  dividend  and  interest 
payments.  The  large  increase  in  secondary  income  surplus  in  2022  (largely  reflecting  remittances) 
petered out in 2023 and has turned to a slight decrease y-o-y. According to the ERP’s projections, the 
current account deficit is set to widen again to about 4% of GDP over 2024-2026 due to the projected 
rise in investments and consumption. 

External competitiveness and current account 

10

0

-10

-20

Graph II.8.1a: Serbia - current account balance
(% GDP)

Graph II.8.1b: Serbia - real effective exchange 
rate (CPI based, index)

100

95

90

85

80

140

135

130

125

120

Appreciation

Depreciation

2019
EA 19 (lhs)

2020

2021

2022

2023

Serbia (rhs)

Source: Economic Reform Programme (ERP) 2024 and ECB.

2022

2023

2024

2025

2026

 Services balance
Current account balance (rhs)

 Goods balance
Net FDI
Source: Economic Reform Programme (ERP) 2024.

Inflows  of  FDI  continue  to  make  a  major  contribution  to  raising  the  economy’s  productive 
capacity  and  competitiveness.  FDI  inflows  increased  to  record  levels  in  absolute  terms  of 
EUR 4.5 bn in 2023 (6.1% of GDP), covering multiple times the current account deficit. Around 60% of 
FDI  was  channelled  into  tradable  sectors:  manufacturing;  construction  and  mining  industries; 
professional, scientific, innovation and technical activities; real estate; and trade. By country, based on 
data for Q1-Q3 2023, most FDI continued to originate from European countries (68%), notably those 
of the EU (around 53%), but the share from China has rapidly increased over recent years and is now 
the largest single country source of FDI (25% of the total inflow in Q1-Q3 2023). The ERP projects that 
strong  FDI  inflows  will  be  maintained  (at  around  5%  of  GDP  on  average  per  year),  driven  by  the  EU 
integration process, along with bilateral and multilateral free trade agreements (Central European Free 
Trade Agreement, European Free Trade Association, Eurasian Economic Union, China). This is expected 
to drive an increasing openness of the Serbian economy  and its  greater integration into global trade 
flows.  The  stock  of  net  FDI  accounts  for  a  very  high  share  (97%  in  Q2-2023)  of  Serbia’s  net 
international  investment  position.  The  high  share  of  FDI  in  net  foreign  liabilities,  coupled  with  the 

(120) Required reserve ratio on foreign exchange base rose by 3 pps each, to 23% and 16%, for liabilities with agreed maturities 
of below and over 2 years, respectively. The percentages of dinar allocations of foreign exchange required reserve rose by 8 
pps each,  to  46%  and  38%,  depending  on  the  maturity  of  liabilities. Required  reserve  ratios on  dinar  base rose  by  2  pps 
each, to 7% and 2%, depending on the maturity of liabilities. 

(121) ERP projected 2.5% of GDP, which is very similar to the actual outcome. 

158 

   
 
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relatively high level of foreign exchange reserves, reduces Serbia’s vulnerability to external shocks. The 
ERP expects that foreign exchange reserves will cover around 6 months’ worth of imports throughout 
the programme’s duration. 

Serbia’s  financial  sector  remained  stable.  The  ratio  of  non-performing  loans  (NPLs)  remained 
stable, near to its historic low, at 3.2% in December 2023. The capital adequacy ratio of the banking 
sector  (regulatory  capital  to  risk-weighted  assets)  stayed  flat  in  Q3-2023  at  22.2%.  As  regards 
liquidity ratios, both the share of liquid assets to total assets (40%, +0.3 pps quarter-on-quarter) and 
the  share  of  liquid  assets  to  short-term  liabilities  (51.7%,  +0.1 pps  quarter-on-quarter)  further 
increased marginally in Q3-2023. Higher net interest income boosted bank profitability to record highs, 
reaching 2.6% (for RoA) and 19.3% (for RoE) in Q3-2023. In September 2023, the NBS decided to cap 
interest rates for a wide range of mortgage loans with the aim of supporting people with mortgages 
and  reducing  the  risk  of  NPLs.  This  is  estimated  by  NBS  to  cost  the  banking  sector  about  10%  of 
projected  net  profits,  which  they  were  deemed  to  be  able  to  absorb  given  the  current  high  level  of 
profitability. The ERP states that this measure will be phased out at the end of 2024, but keeping this 
market intervention in the short-term is crucial to limit its negative spillovers.  

Table II.8.2:

Serbia - financial sector indicators

Total assets of the banking system (EUR million)
Foreign ownership of banking system (%)
Credit growth (%, average)
Deposit growth (%, average)
Loan-to-deposit ratio (end of period)
Financial soundness indicators (%, end of period)
     - non-performing loans to total loans
     - regulatory capital to risk-weighted assets
     - liquid assets to total assets
     - return on equity
     - foreign exchange loans to total loans *

* Includes both denominated and indexed positions.
Note: data for December 2023 are preliminary.
Sources: ERP 2024, National Bank of Serbia.

2020

2022

2023
2021
2019
45 838 50 775 56 748 61 122 67 323
87.0
9.1
14.4
0.88

86.0
12.3
15.0
0.91

83.4
10.9
8.4
0.88

75.7
9.7
12.9
0.96

1.7
11.4
0.79

4.1
23.4
36.0
9.8
67.1

3.7
22.4
37.3
6.5
64.7

3.6
20.8
37.7
7.8
63.2

3.0
20.2
37.5
13.9
65.5

3.2
21.4
41.0
18.1
59.7

Driven  by  the  higher  interest  rates  and  tighter  credit  standards,  loan  growth  has  slowed 
down. Annual lending growth in the non-financial sector slid to -0.4% in November 2023, with loans to 
households  still  growing  slightly  and  corporate  loans  contracting.  In  Q4-2023,  the  interest  rate  on 
newly  approved  dinar  household  loans  amounted  to  12.5%  (euro  indexed  at  6.3%)  and  on  corporate 
loans  8.3%  (euro  indexed  7.1%).  Both  corporate  and  household  deposits  continued  to  rise,  especially 
dinar-denominated  deposits  due  to  the  interest  rate  differential  compared  to  euro  deposits.  Looking 
ahead, the ERP projects annual lending growth to recover modestly to 3% in 2024, below GDP growth 
rates. Overall, the financial market is dominated by bank financing, with other instruments like bonds, 
shares and hedging instruments being less developed,  which constrains the financing  capacity of the 
economy and potentially channels more private savings towards real-estate. 

8.3.  PUBLIC FINANCE 

In 2023, the fiscal outcome was better than expected. The ERP projects the general government 
deficit to have decreased from 3.2% of GDP in 2022 to 2.8% in 2023. Due to the very high nominal 
GDP growth, the revenue-to-GDP ratio was expected to have decreased by 1.2 pps compared to 2022, 
while total spending decreased by 1.7 pps. According to preliminary data from the Ministry of Finance, 
the  general  government  deficit  decreased  even  more  to  2.2%  of  GDP  in  2023.  The  better-than-
expected outcome is explained by higher than planned revenues in 2023 (especially corporate income 
tax, an initially unplanned rise in excise rates, road tolls, and an overall stronger labour market) and by 

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lower  subsidy  needs  to  the  state-owned  energy  companies.  Compared  to  the  original  budget,  the 
overall expenditure commitments were even raised by a late-year supplementary budget, with ad hoc 
measures to raise pensions, subsidies for agriculture (instead of the energy sector), one-off payments 
for children and additional wage rises in education and health. Capital expenditures remained relatively 
high, at 7.2% of GDP in 2023. The level of subsidies remained elevated at 2.7% of GDP. 

Table II.8.3:

Serbia - composition of the budgetary adjustment  (% of GDP)

Revenues
    - Taxes and social security contributions
    - Other (residual)
Expenditure
    - Primary expenditure
       of which:
       Gross fixed capital formation
       Consumption
       Transfers & subsidies
       Other (residual)
    - Interest payments
Budget balance
    - Cyclically adjusted
Primary balance
    - Cyclically adjusted
Gross debt level

2022

2023

2024

2025

2026

43.7
38.9
4.8
46.9
45.4

7.4
17.6
15.3
5.0
1.5
-3.2
-3.4
-1.7
-1.9
55.6

42.5
37.6
4.9
45.3
43.5

7.2
17.4
16.2
2.6
1.9
-2.8
-2.7
-0.9
-0.8
53.3

42.6
38.0
4.6
44.8
42.7

6.8
17.6
16.2
2.1
2.1
-2.2
-2.0
-0.1
0.1
51.7

42.5
38.0
4.4
44.0
41.8

6.5
17.4
16.2
1.7
2.2
-1.5
-1.4
0.6
0.7
50.7

42.3
38.0
4.2
43.8
41.4

6.6
17.4
15.8
1.6
2.3
-1.5
-1.5
0.8
0.8
50.0

Change:
2023-26
-0.3
0.5
-0.7
-1.5
-2.0

-0.6
0.0
-0.4
-1.0
0.5
1.3
1.2
1.8
1.7
-3.3

Sources: Economic Reform Programme (ERP) 2024, Commission calculations.

The ERP plans to reduce the fiscal deficit to 1.5% of GDP in 2025-2026, in line with the new 
deficit rule. This is in line  with what was planned in the previous year's  ERP.  It is consistent with a 
gradual  fall  in  the  debt-to-GDP  ratio  to  about  50%  in  2025-2026.  The  overall  planned  fiscal  stance 
appears  appropriate  to  ensure  medium-term  fiscal  sustainability.  The  tightening  of  the  cyclically-
adjusted  primary  balance  is  expected  to  be  frontloaded  in  2024-2025,  with  no  change  in  2026.  The 
ERP  expects  a  gradual  slight  0.3 pps  decline  in  the  revenue  ratio  over  2023-2026,  explained  by  a 
decline  in  non-tax  revenues,  based  on  the  conservative  exclusion  of  extraordinary  non-tax 
revenues (122). At the same time, tax revenues are expected to remain stable at 38% of GDP in 2025-
2026. The improvement in the fiscal balance is driven by a strong decrease in the expenditure-to-GDP 
ratio over 2023-2026. The decreasing spending ratio (-1.5 pps between 2023 and 2026) results from 
the planned gradual reduction of support to the state-owned energy utilities (-0.5 pps); the decreasing 
share  of  capital  expenditure  from  a  high  base  (-0.6 pps);  and  the  declining  costs  of  energy  crisis 
measures  (-0.5 pps).  Public  wages  are  assumed  to  be  at  10%  of  GDP  over  the  coming  years,  in  line 
with the maximum limit in the fiscal rules. Pension expenditure is estimated to rise sharply from 9% of 
GDP in 2022 to 9.6% of GDP in 2023 and further to 10.6% of GDP in 2024 and then abate slightly to 
10.4%  of  GDP  by  2026,  still  above  the  10%  of  GDP  target  set  in  the  fiscal  rules.  The  extraordinary 
indexation of pensions (5.5%) in November 2023 is reflected in these projections. Interest expenditure 
is projected to rise significantly, as the effective interest rate on public debt is set to rise with the debt 
rollover process. 

For 2024, the budget targets a deficit of 2.2% of GDP. The revenue ratio to GDP is projected to 
rise  marginally  by  0.1 pps,  while  the  expenditure  ratio  is  set  to  decline  by  0.5 pps.  The  rise  of  the 
revenue ratio in 2024 is largely explained by social contributions revenues, reflecting the assumption 

(122) Ordinary non-tax revenues include various fees, charges, revenues of bodies, etc. that are generated at a broadly steady rate 
over  the  year  but  with  some  seasonal  variations.  Extraordinary  non-tax  revenues  include  profits  of  public  companies  and 
agencies, budget dividends, etc. 

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that  labour  income  grows  significantly  faster  than  GDP.  Only  some  relatively  small  gradual  tax 
adjustments are planned to take effect in 2024, concerning income tax scales and excises, also made 
in previous years. A further small increase in the tax-exempt part of gross salaries is planned (costing 
0.1% of GDP). This tax cut would help to lower the currently relatively high tax wedge on low-income 
earners ( 123).  To  make  informal  labour  less  attractive,  there  may  be  grounds  in  the  coming  years  for 
raising the threshold further and above the inflation rate. The budget also envisages adjusting excises 
for inflation in January and a further 8% hike in October 2024, raising revenues by 0.4% of GDP. On 
the  expenditure  side,  pensions  are  set  to  increase  further  by  14.8%  as  of  January  2024  and  public 
sector wages by 10%, bringing the share of the latter to 10% of GDP, the upper limit set in domestic 
fiscal  rules.  Capital  investment  spending  is  set  at  6.8%  of  GDP,  a  relatively  high  level,  as  in  the 
previous year. The expected net budget loans to the state-owned energy sector are set to decline by 
around 0.3% of GDP, as the energy crisis is assumed to relent. 

The ERP  expects the public debt  ratio to continue declining gradually, due to  high nominal 
GDP  growth  and  an  improving  primary  balance.  The  general  government  debt-to-GDP  ratio 
decreased from 55.1% in 2022 to 52.3% of GDP ( 124) in 2023; in the ERP, this is expected to decline 
further to 50% of GDP by 2026 (about 3 pps lower than the previous year’s ERP estimate, due to the 
expected  better outcome in  2023, and  carrying over to future years). The  decline in the debt ratio is 
largely  driven  by  the  GDP  growth  effect  and  the  gradually  decreasing  but  still  noticeable  impact  of 
inflation.  In  addition,  as  the  primary  balance  is  expected  to  turn  positive  in  2025,  it  would  also 
contribute to the fall in the  debt ratio in the later years  of the ERP. These  debt-reducing effects are 
expected to be partly offset by higher interest expenditure (rising by 0.4 pps of GDP over 2023-2026) 
and a large positive stock-flow adjustment (over 1 pp. of GDP in both 2025 and 2026). These stock-
flow adjustments are included in the fiscal forecast as a precautionary assumption covering potential 
risk scenarios. Therefore, the reduction in the debt ratio could be even faster than planned in the ERP if 
such fiscal risks do not materialise. 

(123) The  high  tax  wedge  is  explained  by  relatively  high  social  taxes  and  little  progressivity  in  income  tax.  Although  Serbia's 
personal  income  tax  (PIT)  has  a  progressive  rate  for  a  higher  tax  bracket,  most  wage  earners  fall  within  the  same  tax 
bracket. Serbia levies a rate of 10% on wage income up to six times the average annual salary and 15% for income above 
that threshold. Serbia has one of the highest social security contributions rates in the Western Balkans region at 35.4%. 

(124) The ERP projected 53.3% of GDP. 

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BOX II.8.1: DEBT DYNAMICS 

Serbia
Composition of changes in the debt ratio (% of GDP)

Gross debt ratio [1]
Change in the ratio
Contributions [2]:

   1. Primary balance
   2. 'Snowball effect'
       Of which:
       Interest expenditure
       Growth effect
       Inflation effect

   3. Stock-flow adjustment

2022
55.6
-1.5

2023
53.3
-2.3

2024
51.7
-1.6

2025
50.7
-1.0

2026
50.0
-0.7

1.7
-5.0

1.5
-1.3
-5.2
1.8

0.9
-4.9

1.9
-1.2
-5.6
1.7

0.1
-1.9

2.1
-1.7
-2.3
0.1

-0.6
-1.5

2.2
-1.9
-1.7
1.2

-0.8
-1.0

2.3
-2.0
-1.4
1.1

[1]   End of period, in accordance Government debt as defined by the national methodology.

      This includes all government-guaranteed debt and non-guaranteed local government debt.

      It differs from government debt according to the national methodology (set out in the 

      Public Debt Law), which does not include non-guaranteed local government debt.

[2]  The 'snowball effect' captures the impact of interest expenditure on accumulated

      debt, as well as the impact of real GDP growth and inflation on the debt ratio

      (through the denominator).

      The stock-flow adjustment includes differences in cash and accrual accounting, 

      accumulation of financial assets, and valuation and other effects.

Source: Economic Reform Programme (ERP) 2024, Commission calculations.

The large proportion of foreign currency-denominated debt (about 80% of the debt stock in 
Q3-2023) exposes government debt to exchange rate risks. The ERP presents a debt sensitivity 
analysis,  which  shows  debt  trends  under  different  exchange  rate  scenarios.  Broadly,  a  10% 
appreciation or depreciation would result in the debt ratio at 45% or 53% of GDP, respectively. This risk 
is nevertheless mitigated by the authorities’ exchange rate stabilisation policy, which is underpinned by 
ample  official  foreign  exchange  reserves.  The  recently  adopted  reinforced  rules-based  framework 
designed to better anchor fiscal policy would also play an important role in reinforcing medium-term 
debt sustainability. Overall, the ERP sets an aim to reduce the exposure to variable interest obligations, 
where possible. In mid-2023, fixed interest debt made up about 70% of the total. Debt management 
aims  to  develop  flexibility  in  terms  of  market  choice  (domestic  or  international),  debt  currency  and 
financing  instruments.  The  most  recent  debt  issuance  is  geared  towards  covering  the  EXPO  2027 
financing  needs,  raising  150 bn  dinars,  or  EUR 1.3 bn,  representing  1.8%  of  GDP.  The  8-year  dinar-
denominated  bonds  were  issued  in  several  smaller  batches,  with  yield  rates  declining  in  each  new 
issuance, from 6.39% in October 2023 to 6.12% in February 2024. 

The short-term fiscal risks appear balanced, while structural downside fiscal risks are likely 
to  persist  in  the  medium  term.  In  the  short  term,  the  fiscal  projection  appears  to  face  balanced 
risks.  While  some  uncertainty  surrounds  the  GDP  outlook,  mostly  due  to  global  factors,  this  risk  is 
balanced by economic activity already picking up speed in late 2023 and its strong carry-over effect to 
2024. Revenue projections remain plausible, with the elasticity of revenues to tax bases assumed to be 
neutral  and  the  revenue  forecast  not  relying  on  one-off  revenue  items  or  shrinking  of  the  grey 
economy.  Both  the  new  electronic  fiscalisation  model  and  the  transition  to  electronic  invoicing  have 
been  completed  and  constitute  an  upside  risk  due  to  their  expected  impact  on  shrinking  the  grey 
economy, increasing VAT collection, and improving the tax control process. On the expenditure side, as 

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in  previous  years,  new  non-budgeted  ad  hoc  expenditure  measures  could  be  announced.  Keeping 
expenditure  growth  below  the  nominal  growth  of  GDP  might  be  challenging.  Public  investments, 
already relatively large, might turn out even higher than planned in the ERP for the coming years. The 
investments  needed  for  the  specialised  EXPO  2027  and  the  ‘Leap  into  the  Future  2027’ 
programme (125)  (announced  after  the  ERP  was  finalised)  imply  large  public  capital  spending  in  the 
coming years. Most of the announced investment projects were already previously planned, but there is 
nevertheless  some  uncertainty  if  the  new  plans  would  necessitate  additional  spending.  Further 
substantial  public  investments  can  lead  to  unforeseen  expenditure  rises,  as  construction  prices  could 
also rise in an already tight market. The investment-led boost to the economy (resulting in higher GDP) 
might  actually  create  additional  public  expenditure  pressures  in  other  areas  as  well,  like  social 
spending, via risks of higher inflation. This was the case in 2023, when additional social support was 
given to vulnerable groups whose incomes failed to keep up with inflation. 

The  weak  governance  of  SOEs  and  their  strong  presence  in  the  economy  remains  a  major 
fiscal risk, but some progress has been made. The fiscal support needs were unexpectedly high in 
2022 due to the energy crisis but fiscal transfers were significantly lower in 2023, notably also helped 
by  the  IMF  programme-mandated  energy  tariff  increases.  There  remains  a  need  to  to  establish  an 
automatic  tariff  adjustment  system.  Overall,  many  SOEs  in  Serbia  (not  only  energy  related)  do  not 
achieve  significant  profitability  and  therefore  pose  a  fiscal  risk  if  market  conditions  deteriorate.  A 
major  achievement  was  the  adoption  in  September  2023  of  the  new  law  on  SOE  governance,  which 
will enter into force in September 2024. A number of by-laws have yet to be adopted. However, there 
is still a lack of  capacity within the national administration to ensure full implementation of the law 
and to draft the necessary secondary by-laws. Technical assistance in the drafting process of some of 
the by-laws is ongoing and provided by the EBRD. It is important to focus on implementing structural 
reforms across all SOEs and not just the most problematic ones like Elektroprivreda Srbije (EPS) and 
Srbijagas (126). 

The Ministry of Finance has a leading role in monitoring fiscal risks, making steady progress 
in its  work. The  main task  of the  Department  for Monitoring of Fiscal Risks is the strengthening of 
both  legislation  and  the  methodological  framework,  capacity  building,  and  development  of  technical 
tools and models necessary  for monitoring and assessment of fiscal risks. The  purpose is that these 
activities result in risk identification and assessment and lead to proposals for exit strategies. Further 
progress  in  its  capacities  is  important  with  a  view  to  better  analysing  and  managing  fiscal  risks, 
especially  related  to  SOEs,  and  to  make  the  work  transparent  by  publishing  its  reports.  Further 
immediate plans include developing a more structured analysis (with World Bank methodology) in the 
form of a ‘fiscal risk statement’. 

Serbia  has  issued  relatively  large  guarantees  over  the  past  decades,  linked  to  SOEs.  The 
issued guarantees in their total amount are included in the public debt. They have reduced gradually 
from 9.5% of debt stock in 2015 to 5.2% by September 2023. The activated guarantees, with a deficit 
effect on the budget, are estimated in the budget bill to amount to 0.3% of GDP in 2023. Recognising 
the risks from  guarantees, the government  has taken  steps to limit the issuance of  new guarantees. 
Amendments  to  the  Law  on  Public  Debt  prohibit  the  issuance  of  new  guarantees  for  loans  for  the 
purposes  of  liquidity.  Amendments  to  the  Law  on  the  Development  Fund  of  the  Republic  of  Serbia 
disallowed  any  further  issuance  of  a  counter-guarantee  for  guarantees  issued  by  the  Development 
Fund.  A  large  number  of  SOEs,  which  are  the  biggest  beneficiaries  of  guarantees,  are  planned  to 
undergo a restructuring process in collaboration with international financial institutions. 

The  ERP  also  acknowledges  substantial  fiscal  risks  arising  from  court  decisions,  which 
result in fines and damages payable by government bodies. In 2022, these expenses amounted 

(125) The 'Leap into the Future 2027' plan technically also includes the EXPO 2027 investments, but the two were announced at   

different times. 

(126) As regards EPS and Srbijagas in particular, it appears essential to effectively address governance challenges and implement 
structural reforms despite the expected short-term improvements in financial outcomes resulting from the recent increases 
in electricity and gas prices. 

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to  RSD 26.8  billion  (0.4%  of  GDP),  and  they  reached  RSD 18.9  billion  (0.2%  of  GDP)  over  January  to 
September 2023. Potential obligations may also arise from the legacy of the Socialist Federal Republic 
of  Yugoslavia  (e.g.  from  ongoing  complaints  by  employees  of  former  socially-owned  enterprises,  or 
unpaid  wages).  As  in  previous  years,  the  programme  does  not  mention  the  restitution-related 
obligations  of  EUR 2 billion  (around  3%  of  2022  GDP)  concerning  properties  confiscated  by  the 
communist government after the Second World War. The government confirmed the arrangements for 
monetary  compensation  in  2021  and  the  first  government  bonds  specifically  relating  to  this  were 
issued  in  January  2022  and  January  2023  (to  a  value  of  EUR 69 million  (0.1%  of  GDP)  and 
EUR 40 million (0.05% of GDP) respectively). 

Serbia  has  relatively  high  public  investments,  at  7.2%  of  GDP  in  2023,  which  underscores 
the importance of public investment management and public procurement. Major investment 
needs  relate  to  the  green  transition,  including  energy  infrastructure,  and  to  transport.  In  September 
2023,  the  government  adopted  a  new  Decree  on  capital  projects,  which  makes  some  steps  in  the 
direction of a single and clear overall view of the current and planned investments in Serbia. However, 
the Decree falls short of developing a genuine single system for public investment management and 
foresees  important  exemptions.  Discussions  are  to  be  launched  between  Serbia  and  the  European 
Commission to establish a time-bound action plan to remedy this. A significant share of public funds 
for  capital  investment  is  still  spent  without  proper  checks  to  ensure  compliance  with  public 
procurement, State aid and technical standards. This is particularly true for big infrastructure projects 
financed  by  loans  granted  mostly  by  non-EU  countries  thorugh  intragovernmental  agreements. 
Investment  decisions  are  still  often  taken  without  the  appropriate  feasibility  studies,  cost-benefit 
analysis and environmental impact assessments necessary to ensure the sound use of public funds. A 
robust process for transparent appraisal and selection of public investment projects is a priority, given 
Serbia’s significant infrastructure needs and long pipeline of future projects, including projects for the 
green and digital transition, and for the diversification of the energy sector. 

Reform of the tax administration progressed well in 2023, but staffing issues remain. The 
implementation  of  of  the  tax  administration  reform  has  continued.  In  May  2022,  a  new  fiscalisation 
model  (e-fiscalisation)  was  introduced.  The  system  is  expected  to  contribute  to  the  reduction  of 
discrepancy  with  taxpayers  and  to  a  lower  number  of  negative  audit  opinions.  The  system  for  an 
electronic  exchange  of  invoices  (e-invoices)  was  implemented  in  early  2023.  Procurement  of  an 
information system is still to be conducted. An ongoing project analyses the VAT gap, with preliminary 
results  showing  that  it  was  considerably  reduced  compared  to  2018.  Work  is  ongoing  for  a  cross-
analysis  of  personal  property  and  income.  The  development  plan  of  the  tax  administration  itself 
envisages the hiring of more staff with higher qualifications, which is currently hindered by inadequate 
salaries  for  some  categories  of  employees,  relative  to  the  private  sector.  The  independence  and 
transparency of the tax administration also has to be strengthened. While the tax administration has a 
distinct legal status and its own operating budget, it has yet to establish an independent management 
board. 

The current public sector wage system does not in practice make it possible to effectively 
attract  higher  paid  categories  of  employees,  given  the  built-in  strong  wage  compression. 
The wage scales are firmly set by law, while being very compressed with about a 1 to 4 ratio from the 
lowest  to  the  highest  wage  band.  The  public  sector  wage  system  reform  has  been  repeatedly 
postponed and is now scheduled for 2025. Some progress was made in preparatory steps as the new 
central electronic public wage and employment registry (Iskra) became operational for some sectors in 
2022 and  was rolled out to  most of the public sector (except  military, security and  higher education 
institutions)  by  the  end  of  2023.  Iskra  would  make  it  possible  to  analyse  different  reform  scenarios 
and identify the most problematic areas, which could be the basis for specific reform steps. 

The  newly  instituted  domestic  fiscal  rules (127)  constitute  well  designed  anchors  for  fiscal 
policy,  but  some  challenges  have  emerged  in  their  interpretation  and  implementation, 

(127) Fiscal  rules  were  adopted  in  December  2022.  The  central  rule  consists  of  a  general  government  deficit  ceiling  set  by 
reference to the level of debt (3% of GDP if debt is below 45% of GDP; 1.5% of GDP if debt is below 55% of GDP; 0.5% if 
debt is below 60% of GDP; and 0% if debt is above 60% of GDP). This deficit rule has already been adopted but will only 

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specifically regarding the target on pension expenditure. One of the fiscal rules targets pension 
expenditure at 10% of GDP as an equilibrium point, and envisages an adjustment mechanism if this is 
exceeded  due  to  indexation  rules  or  other  economic  factors.  In  2023,  pension  expenditure  was 
projected  to  reach  only  9.6%  of  GDP.  However,  the  automatic  indexation  of  pensions  was  set  to 
increase the ratio to above 10% in 2024 and 2025 (when GDP growth is projected to abate while the 
pension index has a lagged impact from the previous very inflationary years). This would then in turn 
trigger a lower indexation as a  corrective measure.  Nevertheless, the  government decided to give an 
additional ad hoc rise in pensions with the end-2023 supplementary budget, which further pushed the 
pensions-to-GDP  ratio above the  10% boundary in the coming years. This is estimated in the ERP to 
reach  10.6%  of  GDP  in  2024  and  10.8%  in  2025  before  coming  down  to  10.4%  in  2026.  The 
discretionary rise of pensions in 2023 can be seen to go against the spirit of the fiscal rules; avoiding 
deviations in the future would help increase the credibility of the new system of fiscal rules. It would 
also  seem  appropriate  to  improve  the  medium-term  perspective  for  implementing  fiscal  rules  by 
strengthening medium-term budgeting. Also, should the rules be deemed to have been breached, there 
is currently no enforcement mechanism provided for in the fiscal rules. 

The  parliamentary  and  public  vetting  of  the  state  budget  is  occasionally  lacking 
transparency.  While  the  annual  budgets  are  adopted  broadly  in  line  with  the  normal  legislative 
procedure, the mid-year amending budgets are often adopted using the urgent procedure. The share of 
non-assigned expenditures that are allocated in the budget to reserves is relatively high, limited by law 
at  4%  of  total  spending.  This  makes  possible  the  taking  of  substantial  ad hoc  spending  decisions 
during the fiscal year. Typically, the unused budgetary funds are also reassigned towards the end of 
the year and spent in an untransparent way. Neither the 2023 amending budget nor the 2024 budget 
provide a sufficient level of transparency regarding the breakdown of capital transfers and guarantees 
to  SOEs,  in  particular  to  EPS  and  Srbijagas.  The  budget  is  also  lacking  a  detailed  overview  of  tax 
expenditures,  which  complicates  understanding  of  how  government  spending  through  the  tax  code 
affects  overall  revenue  and  the  distribution  of  related  benefits.  On  the  positive  side,  there  was  a 
meaningful  parliamentary  debate  on  the  2024  budget  and  the  government  also  submitted  to 
parliament the final annual budget execution report for 2022. The well-established Fiscal Council has 
continued  to  function  properly  and  produce  independent  fiscal  assessments  and  recommendations. 
However,  the  mandate  of  some  Fiscal  Council  members  expired  in  mid-2023  and  has  not  been 
officially renewed. 

8.4.  MAIN MACRO-RELEVANT STRUCTURAL CHALLENGES 

In  November  2023,  the  Commission  proposed  a  New  Growth  Plan  for  the  Western 
Balkans (128) with the aim of supporting the region’s economic convergence and accelerating 
the accession process. The plan involves a Reform and Growth Facility (EUR 2 billion in grants, EUR 4 
billion  in  loans)  that  is  to  be  disbursed  in  2024-2027  as  investment ( 129)  and  budget  support  in 
exchange for implementing reforms that are to be set out in reform agendas prepared by the Western 
Balkan partners. The New Growth Plan is therefore an important tool to increase reform incentives to 

enter  into  force  in  2025  because  specific  deficit  targets  for  2023  and  2024  had  already  been  agreed  in  the  stand-by 
arrangement  with  the  IMF.  The  new  rules  also  include  a  cap  on  the  general  government  wage  bill  at  10%  of  GDP  and  a 
modified  rule  for  pension  indexation  for  which  the  calculation  methodology  will  vary  according  to  the  ratio  of  pension 
expenditure  to  GDP.  Pensions  are  indexed  in  line  with  average  earnings  if  they  represent  less  than  10%  of  GDP.  If  they 
represent between 10% and 10.5% of GDP, then the indexation rate is the total of half the growth rate for average earnings 
and half the inflation rate (the ‘Swiss formula’). If they represent more than 10.5% of GDP, then they are indexed in line with 
inflation. 

(128) https://neighbourhood-enlargement.ec.europa.eu/enlargement-policy/new-growth-plan-western-balkans_en. 

(129) Infrastructure  investments  need  to comply  with  the EU environmental acquis,  national  and  international  nature  protection 
and water management obligations, ensure public participation and consultation, and guarantee high quality environmental 
impact assessment reports that include cumulative impacts on nature and biodiversity. 

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boost  growth  and  convergence.  In  this  context,  with  a  view  to  ensuring  an  integrated  surveillance  of 
Serbia’s economy, this chapter briefly outlines the main structural challenges facing the country. 

Serbia’s  business  environment  has  seen  positive  developments  with  the  regulatory 
administrative burden easing, yet substantial structural challenges persist. Exports have been 
a  major  driver  of  growth,  both  manufacturing  and  services  (ICT,  transport).  Manufacturing  has 
modernised and diversified in recent years, but traditional industry, notably the energy sector, has not 
undergone  sufficient  opening  or  restructuring.  The  underperformance  of  these  sectors  continues  to 
hinder Serbia’s competitiveness and economic growth potential, a vulnerability accentuated during the 
recent energy crisis. To achieve sustained higher growth rates, Serbia should capitalise on opportunities 
within  the  single  market  while  ensuring  a  level  playing  field  for  all  companies.  Long-term  economic 
growth  and  improved  living  standards,  approaching  those  of  the  EU,  hinge  on  the  consistent 
implementation of structural reforms across multiple areas. 

Fundamental  areas  such  as  rule  of  law,  the  fight  against  corruption,  and  improving  the 
functioning  of  democratic  institutions  are  key  foundations  for  the  business  environment. 
The Serbian legal framework is prone to unexpected and non-transparent changes, frequently without 
consultation procedures, which can be detrimental to business. Shortcomings are noted in the quality, 
independence  and  efficiency  of  the  justice  system.  An  efficient  and  independent  judicial  system  is  a 
prerequisite for a predictable investment- and business-friendly environment. Businesses also raise the 
issue of the lack of both reliability in contract enforcement and expertise among judges, particularly in 
complex  areas  of  law  such  as  competition,  intellectual  property,  or  taxation,  which  leads  to 
inconsistency in rulings.  Moreover, the business environment remains  hampered  by red tape, political 
interference  and  limited  public  administration  efficiency.  Serbia’s  legal  framework  for  fighting 
corruption  and  dealing  with  economic  crime  and  abuse  of  office  is  largely  in  place,  but  its 
implementation is lacking, also due to understaffing. A particularly critical area is public procurement 
where the level of competition in the public procurement process remains limited. Serbia ranked 104th 
out of 180 countries in the 2023 corruption perception index compiled by Transparency International, 
thus continuing the negative trend of rankings that have been steadily deteriorating since 2018, when 
Serbia  ranked  87th.  In  its  annual  country  report  under  the  enlargement  package,  the  Commission 
closely monitors the issues of strengthening the rule of law and fighting corruption. 

Economic  growth  and  the  development  of  a  strong  corporate  sector  is  hampered  by  the 
widespread informal economy and the significant share of inefficient SOEs in the economy. 
Driving  forces  behind  the  informal  economy  include  high  taxes  and  high  social  contributions  on  the 
lowest salaries, a lack of financial resources and favourable loans, parafiscal charges, hidden tax fees, 
and red tape. The consequences are tax evasion, market distortion, unfair competition, and inefficient 
resource  allocation.  To  address  the  problem,  Serbia  adopted  its  "Programme  for  combating  the  grey 
economy 2023-25" along with an Action Plan in 2023. As noted above in Section 3, Serbia somewhat 
lowered  income  taxation  in  2023  and  2024,  which  also  lowered  the  tax  wedge  somewhat.  E-
fiscalisation  and  e-invoicing  systems,  which  were  rolled  out  in  2022-2023,  provide  for  real-time 
tracking  of  the  issuance  of  fiscal  receipts,  enabling  the  tax  office  to  better  monitor  and  counter  tax 
evasion.  The  role  of  the  State  in  the  economy  remains  significant  with  large  and  inefficient  SOEs 
dominating  many  sectors,  including  energy,  transport,  utilities,  telecommunications,  infrastructure, 
mining,  and  extraction  of  natural  resources,  and  distorting  competition  also  in  sectors  like 
manufacturing,  tourism,  retail  trade.  Many  of  Serbia’s  SOEs  do  not  apply  corporate  governance  rules 
and operate with low efficiency and high costs. Serbia’s new Law on SOEs can be an considered as an 
important  first  step  to  improve  the  management  of  the  SOE  sector  but  it  needs  to  be  fully 
implemented to have the desired effects. Improving the efficiency of SOEs would give a boost to the 
economy,  and  reduce  the  strain  on  public  finances.  Structural  challenges  also  remain  for  state  aid, 
competition  and  public  procurement,  where 
implemented 
inconsistently or with exceptions, negatively impacting competition. 

legislative  frameworks  are  often 

The  energy  sector  remains  inefficient  and  suffers  from  outdated  infrastructure  and  over-
reliance  on  coal.  Most  energy  companies  are  state-owned  and  have  relied  to  a  varying  degree  on 
state budget subsidies. The Serbian energy market is not fully compliant with the Energy Community 
Treaty or the EU acquis and continues to hamper competitiveness and Serbia’s ability to attract much-

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needed  private  investment,  in  particular  in  the  renewables  sector.  Energy  infrastructure  is  largely 
outdated  and  the  energy  supply  continues  to  rely  mostly  on  coal  with  high  carbon  intensity  and 
pollution (130). This constrains Serbia’s economic growth potential as EU Member States move towards 
greener economies and the carbon  border adjustment  mechanism (CBAM) is being implemented. The 
Energy  Community’s  Decarbonisation  Roadmap  is  still  to  be  fully  implemented  in  Serbia,  to  comply 
with the Energy Community climate and energy targets, and Serbia should strive towards establishing 
a carbon  pricing instrument  compatible  with the EU Emissions Trading System. Furthermore, Serbia’s 
dependence on Russia in the energy  sector is the  highest in the Western  Balkans  with Russia having 
majority  control  of  Serbia’s  gas  infrastructure  and  oil  industry.  However,  in  order  to  reduce  the 
dependence on Russian gas, the gas interconnector between Serbia and Bulgaria was finalised in late 
2023  and  construction  of  an  interconnector  with  North  Macedonia  is  in  preparation.  The  ERP  rightly 
recognises the importance of greening Serbia’s energy sector and fully opening the energy market. A 
notable achievement was the establishment of an intraday electricity market in July 2023 (the first in 
the  Western  Balkans).  Serbia  has  launched  a  housing  renovation  programme  to  increase  energy 
efficiency  in  residency  buildings,  which  has  however  seen  a  slow  start.  Electricity  and  gas  prices  in 
Serbia were raised substantially in 2023, which has also likely negated the need for state subsidies in 
those sectors in the short term. Work to promote a just transition is in its infancy and proceeding too 
cautiously. 

Serbia  has  made  substantial  progress  on  digital  transformation  across  the  economy. 
Digitalisation remains a key priority for the government and will be given a further boost also via the 
Reform  Agenda.  The  action  plan  under  the  2023-2025  e-government  development  programme  was 
adopted  in  April  2023,  with  the  objective  to  improve  the  quality  of  public  services  by  ensuring 
interoperability, efficient coordination, project management and legal certainty over e-government use, 
and  to  foster  the  use  of  open  data.  The  e-government  national  portal  is  continuously  upgraded  with 
new services, serving as a one-stop shop for e-government services and as a central point of access 
for businesses and the general public. Serbia’s communications infrastructure still requires systematic 
improvement of both regulation and investment. Broadband roll-out is too slow, preventing the uptake 
of e-government and business services, and slowing down the digital transformation of the economy. 
The  lack  of  comprehensive  legal  and  regulatory  reforms  hinders  private  sector  investments  in  high-
speed  communications  networks.  There  was,  however,  some  progress  with  the  connection  of  public 
institutions  and  150 000  households  to  fast  broadband  and  speeds  of  100Mbps.  Supported  by  the 
inflow  to  Serbia  of  Russian  citizens  with  related  skills,  the  robust  growth  of  the  information  and 
communication sector continued, with exports of ICT services one of the main export drivers. 

While the labour market has improved markedly over the past decade, there is still room to 
raise  employment  to  EU  average  levels.  The  current  Serbian  employment  rate  of  69.3%  of  the 
population  aged  20-64  is  substantially  below  the  average  of  74.6%  in  the  EU.  Serbia  has  a  high 
prevalence of long-term unemployment. Compared to the EU average, a higher share of young people 
are  neither  in  employment  nor  in  education  or  training (131).  Outmigration  represents  a  considerable 
challenge for the labour market. Despite wide-ranging reforms in the past, the quality of education and 
training is still weak; enhancing and reorienting them to better match market needs would improve the 
employability  of  the  workforce  and  Serbia’s  potential  to  attract  higher  value-added  investments.  A 
lower  share  of  the  Serbian  population  has  basic  or  above-basic  overall  digital  skills  compared  to  EU 
average,  which  can  impact  individuals'  employability  as  the  labour  market  places  an  increasing 
emphasis  on  these  skills.  According  to  the  results  of  the  OECD's  2022  Programme  for  International 
Student  Assessment  (PISA)  tests,  students  in  Serbia  scored  less  than  the  OECD  average  in 
mathematics,  reading  and  science,  but  were  the  top  performer  among  the  Western  Balkan  6. 
Compared to 2012 and 2018 PISA testing, the scores have not changed significantly. 

(130) Energy is the main source of pollution in Serbia. Annual average concentrations of PM2.5 reached 20.5 µg/m3 in 2021, one 

of the highest levels in Europe and more than four times higher than WHO recommended levels of 5 µg/m3. 

(131) 11.2% in EU vs 15.3% in Serbia of the population aged 15-29. 

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8.5.  THE POLICY GUIDANCE 

JOINT CONCLUSIONS OF THE ECONOMIC AND FINANCIAL DIALOGUE BETWEEN THE EU AND 
THE WESTERN BALKANS PARTNERS, TÜRKIYE, GEORGIA, REPUBLIC OF MOLDOVA AND 
UKRAINE 

The Economic and Financial Dialogue between the EU and the Western Balkans Partners, Türkiye, 
Georgia, Republic of Moldova and Ukraine 

Brussels, 14 May 2024 

… 

In light of this assessment, Participants hereby invite Serbia to: 

1. 

2. 

Keep an appropriately tight fiscal stance in 2024 to help disinflation and strictly adhere to 
the new fiscal rules in order to enhance their credibility. Implement the action plan for 2023-
2026 to strengthen medium-term budgeting, inter alia by developing tools and methodology 
for  a  stable  strategic  fiscal  planning.  Appoint  members  of  the  Fiscal  Council  following  the 
recent expiry of some of their mandates. 

Adopt  the  necessary  by-laws  to  fully  implement  the  new  SOE  law  and  strengthen  SOE 
governance,  reducing  the  associated  fiscal  risks.  Reinforce  fiscal  risk  analysis  and 
management  capacity,  fully  implement  the  risk  methodology  and  publish  comprehensive 
fiscal  risk  reports.  Building  on  progress  with  the  electronic  public  wage  and  employment 
registry,  implement  the  preparatory  steps  towards  an  appropriately  designed  public  sector 
wage system reform. 

3.      Ensure a sufficiently tight monetary  policy stance  as long as necessary to anchor inflation  
expectations at levels consistent with price stability, underpinned by a thorough assessment 
of  possible  second-round  effects.  Further  enhance  risk-based  supervision  in  line  with  best 
international  and  European  practices,  including  by  further  strengthening  the  reporting 
framework  across  the  banking  system,  phase  out  temporary  measures  affecting  market 
mechanisms  in  setting  mortgage  interest  rates  and  foster  NPL  resolution  including  by 
further developing the secondary  market for NPLs. Continue efforts to  promote the  use of 
the  domestic  currency,  including  by  enhancing  long-term  financing  in  domestic  currency, 
further encouraging forex hedging and raising awareness of risks related to forex lending. 

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ANNEX 1:   OVERVIEW  OF  THE  IMPLEMENTATION  OF  THE  POLICY  GUIDANCE  ADOPTED  AT  THE 

ECONOMIC AND FINANCIAL DIALOGUE IN 2023 

Every year since 2015, the Economic and Financial Dialogue between the EU and the Western Balkans 
and Turkey has adopted targeted policy guidance for all partners in the region. The guidance represents 
the participants’ shared view on  the policy measures that should  be implemented to address macro-
fiscal  vulnerabilities  and  structural  obstacles  to  growth.  The  underlying  rationale  of  the  guidance  is 
similar to that of the country-specific recommendations usually adopted under the European Semester 
for  EU  Member  States.  Implementation  of  the  guidance  is  evaluated  by  the  Commission  in  the 
following year’s ERP assessments.  

The following table presents the Commission’s assessment of the implementation of the 2023 policy 
guidance  jointly  adopted  by  the  EU  and  the  Western  Balkans  and  Turkey  at  their  Economic  and 
Financial Dialogue at ministerial level on 16 May 2023. 

Overall:  Partial implementation (51.4%) (132) 

2023 policy guidance (PG) 

Summary assessment 

Keep an appropriately tight fiscal stance in 2023 
to help disinflation, including by reducing budget 
support to energy SOEs, while providing targeted 
and temporary support to vulnerable households 
and  companies  if  needed  to  cushion  the  impact 
of high energy prices; and plan a further gradual 
reduction  in  the  deficit  in  the  2024  budget  and 
in  the  medium-term  fiscal  framework  in  line 
with  the  stand-by  arrangement  commitments 
and the new fiscal rules. 

Contain  overall  spending  on  wages  as  a 
percentage  of  GDP  in  line  with  the  new  fiscal 
rule and continue the preparatory steps towards 
an  appropriately  designed  public  sector  wage 
system reform. 

Strengthen  medium-term  budgeting  via  the 
development  of  a  corresponding  time-bound 
action  plan  and  the  implementation  of  its  first 

There was substantial implementation of PG 
1: 

1)  Substantial  implementation:  The  planned 
deficit  reduction  conforms  with  the  stand-by 
arrangement  concluded  with  the  IMF  and  the 
domestic fiscal rule deficit target. Fiscal support 
to energy SOEs was reduced in 2023. The 2023 
fiscal deficit outcome was better than expected. 
However,  the  ad hoc  supplementary  budget  in 
November  2023  provided  for  a  fiscal  stimulus, 
which  goes  against  the  policy  of  helping 
disinflation.  Also,  the  extraordinary  rise 
in 
pensions contributed to further pushing pension 
expenditure above 10% of GDP, set in the fiscal 
rules as an equilibrium target. 

2)  Substantial 
implementation:  Overall 
spending  on  wages  as  a  percentage  of  GDP  is 
projected  to  remain  stable  at  10%  in  2024-
2026,  in  line  with  the  fiscal  rules.  The  public 
sector  wage  system 
is  delayed, 
postponed  to  2025.  On  the  positive  side,  the 
new  central  electronic  public  wage  and 
employment  registry  (Iskra)  was  rolled  out  to 
most  of  the  public  sector  (except  military, 
security  and  higher  education  institutions)  at 
the end of 2023. This is as an important step in 
preparing the delayed wage system reform. 

reform 

(132) For  a  detailed  description  of  the  methodology  used  to  assess  policy  guidance  implementation,  see  Section  1.3  of  the    
Commission’s  Overview  and  Country  Assessments  of  the  2017  Economic  Reform  Programmes.  This  is  available  at 
https://ec.europa.eu/info/publications/economy-finance/2017-economic-reform-programmes-commissions-overview-and-
country-assessments_en. 

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steps. 

Implement the tax administration reform 
according to the ERP 2023 timeline. 

fiscal 

risk  analysis  capacity, 

Reinforce 
in 
particular  on  SOEs,  and  make  the  resulting 
reporting publicly available in the fiscal strategy 
updates in spring and autumn. 

Continue  the  deployment  of  the  SOE  ownership 
and  management  strategy  2021-2027  by 
implementing  the  remaining  steps  of  the  time-
bound action plan 2021-2023 and preparing the 
new  time-bound  action  plan  for  2024-2027  to 
improve  the  governance  of  SOEs  and  reduce 
related fiscal risks. 

170 

3) Partial implementation: An action plan for 
strengthening  the  medium-term  expenditure 
framework  for  the  period  2023-2026  was 
prepared  and  adopted  with 
the  aim  of 
introducing  more 
efficient  medium-term 
budgeting. In 2023, fiscal limits were defined in 
strategic  documents, 
in  accordance  with 
Article 50 of the Budget Law for 2024. However, 
is 
the 
undermined  by  frequent  ad hoc  changes  to 
spending and a limited  political commitment to 
medium-term strategic fiscal planningplanning. 

of  medium-term 

planning 

role 

There was substantial implementation of PG 
2: 

for 

This 

Substantial 

The 
implementation: 
1) 
implementation  of 
tax  administration 
the 
reform  continued  in  the  framework  of  the 
"Transformation  Programme  of 
the  Tax 
the  period  2021-25, 
Administration" 
including. 
toward 
included 
improvement  of  business  processes,  improved 
risk assessment  practices and  capacity  building 
of  existing  staff.  However,  the  implementation 
information  system 
of  the  new 
(COTS) planned for 2023-2024, has not started 
yet. Attracting and retaining qualified personnel 
remains a challenge. 

integrated 

efforts 

necessary 

for  monitoring 

2)  Partial  implementation:  The  Ministry  of 
Finance’s  Department  for  Monitoring  of  Fiscal 
Risks  has made  steady progress in its work. Its 
main task is the strengthening of the legislation 
and  the  methodological  framework,  capacity 
building, and development of technical tools and 
models 
and 
assessment  of  fiscal  risks.  The  department’s 
work  is  based  on  the  Uniform  Methodology, 
adopted  in  2021,  prepared  with  the  assistance 
of  the  World  Bank.  Further  expanding  the 
capacities  of  the  department  is  still  needed  to 
analyse  and  manage  fiscal  risks,  especially 
related  to  state-owned  enterprises  (SOEs),  and 
to  make  the  work  transparent  by  publishing  its 
and 
reports, 
a 
comprehensive fiscal risk statement. 

stand-alone 

including 

Substantial 

implementation: 

3) 
The 
government  adopted  a  new  SOE  Governance 
Law developed together with the IMF, based on 
OECD  principles.  The  new  law  applies  as  of 
September 2024, and work is  underway on the 
remaining  by-laws  required  to  enact  the  new 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Part II 
Country analysis, Serbia 

including 

law, with the support of the  European Bank for 
Reconstruction  and  Development  and  the  IMF. 
the 
Reformative  actions  started, 
transformation  of  several  SOEs  into  joint  stock 
companies.  Reforms  in  EPS  are  under  way;  a 
new  supervisory  board  has  been  appointed  but 
a  transformation  plan  has  yet  to  be  adopted. 
Other  SOEs  have  so  far  seen  far  less  or  no 
reformative  action,  including  Srbijagas,  EDS, 
Posta Srbije and others. The remaining steps of 
the  time-bound  action  plan  2021-2023  were 
rolled over to the action plan 2024-2025, which 
remains to be adopted. 

There  was  substantial  implementation  of 
PG3: 
1)  Full  implementation:  The  central  bank 
continued to tighten its monetary policy stance, 
increasing  the  policy  rate  further  in  several 
steps. In addition, to support the tightening and 
increase 
of 
transmission 
mechanism – particularly to absorb some of the 
excess  liquidity  –  required  reserve  rates  were 
raised.  These  measures  have  contributed  to 
bringing  inflation  on  a  steep  downward  path 
and to keeping inflation expectations anchored. 

efficiency 

the 

and 

supervisory 

Substantial 

implementation: 

2) 
The 
authorities  have  continued  to  enhance  the 
regulatory 
framework. 
Following  a  gap  analysis  of  the  Serbian  legal 
framework  for  banks  relative  to  the  EU,  the 
regulatory framework for liquidity coverage has 
been  aligned.  This  is  to  be  followed  by  the 
limit  for  the 
introduction  of  a  regulatory 
leverage  ratio  and  requirements  for  prudential 
reserves.  There  was  no  progress  on  reducing 
remaining  obstacles  to  non-performing  loan 
(NPL) resolution, such as further facilitating the 
sale  of  retail  NPLs  or 
judiciary 
processes,  but  asset  quality  continued  to 
improve.  The  authorities  have  strengthened  the 
database on mortgaged real estate valuations. 

improving 

Substantial 

implementation: 

3) 
The 
authorities continued fostering the development 
of  local  bond  markets  and  encouraged  dinar-
growth. 
denominated 
loan 
deposit 
Nevertheless,  currency  substitution 
remains 
high.  Measures  put  in  place  include:  i)  lower 
reserve  requirements  on  dinar  sources  while 
remunerating  reserves  in  dinars;  ii)  mandatory 
down-payment  ratios  for  FX  loans,  iii)  systemic 
risk  buffers  and  iv)  higher  capital  requirements 

and 

171 

Continue  to  carefully  assess  and  analyse  price 
developments  and  ensure  a  sufficiently  tight 
monetary  policy  stance 
to  preserve  price 
stability  in  the  medium  term,  including  by 
further tightening monetary policy, if needed.  

Strengthen  further  the  reporting  and  risk 
management  frameworks  across  the  banking 
system  as  well  as  an  accurate  reporting  of 
asset quality, further upgrade NPL resolution by 
reducing  obstacles  in  the  judiciary,  improving 
bankruptcy  procedures  and  facilitating  out-of-
recent 
court  settlement,  and  building  on 
progress further reduce remaining data gaps in 
particular as regards the real estate sector. 

Continue  efforts  to  promote  the  use  of  the 
domestic currency, including by enhancing long-
term  financing  in  domestic  currency,  further 
raising 
encouraging 
awareness of risks related to forex lending. 

hedging 

forex 

and 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
European Commission 
Institutional Paper 

on  banks’  new  FX  lending  to  corporates.  In 
addition,  the  legal  framework  for  auctioning 
dinar-denominated  securities  through  Euroclear 
has been finalised. The first auction through this 
system is to be launched in 2024. 

Further  improve  transparency  in  the  adoption 
and implementation of legislation, particularly by 
ensuring a timely consultation of businesses and 
social partners on new legislation affecting their 
operations,  including  on  temporary  legislative 
acts 
impacting  established  supply-chains  of 
importing or exporting companies. 

Continue  to  ensure  a  harmonised  approach  for 
prioritising  and  monitoring  all  investments  and 
basing 
feasibility 
studies, cost-benefit analysis and environmental 
impact assessments. 

investment  decisions  on 

competition,  equal 

treatment,  non-
Apply 
discrimination  and  transparency  principles  in 
public  procurement  and  State  aid  procedures  in 
line with the EU acquis for all public investment 
projects  regardless  of  the  financing  source  and 
ensure a consistent and transparent track record 
demonstrating  the  operational  independence  of 
the Commission for State Aid Control. 

172 

very 

systematically.  Certain 

consultations  and  with 

There was limited implementation of PG4: 
1) Limited implementation: While an increase 
in  the  percentage  of  legislation  undergoing 
consultations  has  occurred,  the  overall  level 
remains  low  and  timely  consultation  is  not 
applied 
secondary 
legislation  affecting  daily  operations  of 
companies  continue  to  be  adopted  hastily  with 
short 
no 
implementation  deadlines.  Despite  the  legal 
obligation to provide information on the results 
of  public  consultations, 
reports  are  not 
systematically  published,  nor  are  explanations 
systematically  provided  on  the  acceptance  or 
not  of  comments  received.  CSOs  continue  to 
report 
for  public 
consultations  is  not  sufficient,  and  that  their 
comments  on  draft  laws  of  public  interest  are 
not considered. Furthermore, the practice of the 
Parliament  in  2023  to  adopt  huge  number  of 
laws  in  one  session  with  almost  no  time  for 
substantive debate of MPs about the substance 
and  the  impact  of  the  proposed  drafts  is 
another  very  problematic  dimension  in  the 
process of adoption of laws. 

time  given 

that 

the 

2)  No  implementation:  In  September  2023, 
the  Government  adopted  a  new  decree  on 
it  does  not 
capital  projects.  However, 
sufficiently address long-standing concerns and 
recommendations,  as  it  continues  to  allow  for 
numerous  exemptions.  As  such,  it  does  not 
provide  for  the  establishment  of  a  unified, 
comprehensive  and  transparent  system  for 
capital  investment  planning  and  management, 
in  line  with  international  standards  and  best 
practices. A regulation adopted in October 2023 
on  projects  of  special  importance,  continues  to 
allow  for  ambiguity  regarding  the  selection 
criteria, economic justification and prioritisation 
of  public  investments.  The  “projects  of  special 
importance”  are  one  of 
the  exemptions 
foreseen by the decree on capital projects. 

3)  No  implementation:  The  law  on  special 
procedures for linear infrastructure projects was 
repealed  in  July  2023.  However,  in  October 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Part II 
Country analysis, Serbia 

2023,  a  new  special  law  was  adopted,  with  a 
similar  approach,  for  the  preparation  of  EXPO 
2027 in Belgrade, containing an exemption from 
public  procurement  legislation.  On  the  basis  of 
this  law,  in  February  2024,  the  government 
adopted a decree setting the public procurement 
rules for EXPO 2027 that is not aligned with the 
EU  acquis  and  thus  raises  serious  concerns.  In 
addition,  the  law  on  the  use  of  renewable 
energy  sources  introduces  derogations  from 
legislation pertaining to public procurement and 
public-private partnerships and concessions; the 
law  was  used  as  a  basis  to  adopt  a  decree  on 
the  selection  of  a  strategic  partner  for  the 
construction  of  large-scale  solar  power  plants. 
Issues  persist  regarding  competition  and  State 
aid  provided  through  fiscal  State  aid  schemes, 
special laws and intergovernmental agreements. 
The Commission for State Aid Control still needs 
to  continue  building  up  a  track  record  of 
demonstrable operational independence. 

There was partial implementation of PG5: 

1) Partial implementation: The NECP is to be 
adopted  by  the  Ministry  of  Mining  and  Energy  
before June 2024, with the final approval of the 
government. The Energy Community Secretariat 
published its  comments on Serbia's draft  NECP 
in November 2023, stressing the need for more 
ambitious  targets  for  renewables  and  energy 
interconnector  between 
efficiency.  The  gas 
Serbia  and  Bulgaria  (IBS)  was  completed  in 
December  2023,  and  the  permitting  procedure 
is  ongoing.  The  IBS  pipeline  would  provide 
diversification of  gas sources.  Increased  use of 
natural  gas  should  lower  carbon  emission  by 
reduced  use  of  coal  in  electricity  production. 
Regarding  the  Trans-Balkan  Electricity  Corridor, 
section  III  construction  permits  were  obtained 
and the preparation of technical documentation 
was completed. The start of the construction of 
section  III  is  expected  in  2024,  following  the 
completion  of  preparatory  steps,  and,  whereas 
the  construction  permit  was  obtained  for 
Section  IV.  Work  is  ongoing  to  finalise  the  Just 
Transition  Diagnostics  Study  and  action  plan 
financed by the EBRD. 
implementation:  Serbia 
2)  Substantial 
successfully 
round  of 
auctions in June 2023 (wind 400 MW and solar 
50 MW),  and  the  connection  agreements  with 
networks  have  been  signed.  The  government 
has  also  chosen  the  strategic  partnerpartners 

the  first 

launched 

173 

Adopt  the  national  energy  and  climate  plan  in 
line  with  the  Green  Agenda  for  the  Western 
Balkans and international commitments. Further 
modernise  energy 
lower 
the  green 
carbon  emissions 
transition  also  in  the  light  of  the  upcoming  EU 
Carbon Border Adjustment Mechanism (CBAM).  

infrastructure  and 
to  accelerate 

from 

(RES), 

sources 

overdependence 

Reduce 
individual 
countries,  accelerate  renewables  and  energy 
efficiency,  including  launching  first  auctions  for 
renewable  energy 
further 
developing  the  administrative  entity  for  energy 
efficiency, and the sustainability of the financing 
mechanism. Continue to implement the price and 
tariff reform, as well as other reforms related to 
energy  SOEs,  in  line  with  Serbia’s  commitments 
under the stand-by arrangement agreed with the 
IMF in December 2022. 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
European Commission 
Institutional Paper 

further 

liberalise 

To 
the  energy  market, 
accelerate  the  unbundling  of  all  energy  utilities 
in line with the EU acquis and, for the gas sector 
in  line  with  Serbia’s  Action  Plan;  as  regards 
Gastrans, ensure that the regulatory regime is in 
compliance  with  EU  acquis  and  the  Action  plan 
developed for the opening in December 2021 of 
Cluster  4  for  Energy,  Climate  and  Transport  in 
the EU accession negotiations. 

(UGT  Renewables  and  Hyundai  Engineering)  to 
develop  1 GW  of  solar  power  plant  by  2028. 
The  gas  interconnector  between  Serbia  and 
Bulgaria (IBS) was completed in December and 
is  expected  to  contribute  to  reducing  Serbia’s 
dependence on Russia in this area. In 2023, the 
price of electricity and gas was increased three 
times  in  line  with  Serbia’s  commitments  under 
the stand-by arrangement. A new energy pricing 
mechanism  is  under  development  as  agreed 
with the IMF. The restructuring of EPS continued 
while assistance to other SOEs from the energy 
sector  was  delayed.  fullFull  implementation  of 
the  EPS  restructuring  plan  is  still  pending.  The 
for  Energy  energy 
financing  mechanism 
efficiency  measures  as  well  as  human 
capacities  for  the  management  of  national 
funds  remain  weak.  The  legislative  gap  related 
to  the  energy  efficiency  of  buildings  needs  to 
be 
accelerate 
in 
completed 
implementation  of 
long-term  building 
renovation strategy. 

order 

the 

to 

law 

The 

gas. 

establishes 

3)  Partial  implementation:  Amendments  to 
the Law on Energy were adopted in July 2023 in 
line  with  the  provisions  from  the  EU  Third 
Energy  Package,  and  among  others, 
the 
provisions  of  Directive  2009/72  from  the 
common rules for the internal electricity market 
and  common  rules  for  the  internal  market  of 
the 
natural 
Commission 
for  Energy  Networks  as  an 
independent  and  autonomous  body  of  the 
Republic  of  Serbia  that 
is  responsible  for 
electricity 
operation 
controlling 
transmission  system  operators  and  natural  gas 
transmission  system  operators  founded  by  the 
Republic of Serbia, or in majority ownership. The 
Commission  started  its  activity  in  November 
2023  but  has  yet  to  become  fully  operational. 
The final certification of Transportgas Srbija and 
Yugorosgaz 
is  still  pending  as  well  as 
certification of storage operators. 

the 

of 

Reduce  poverty  by  substantially  increasing  the 
adequacy  of  benefits  of  the  Financial  Social 
Assistance  (FSA)  scheme  for  individuals  and 
families  with  children  and  by  increasing  the 
untaxable wage base close or equal to the level 
of the minimum salary for workers.  

There was limited implementation of PG 6: 

1)  No 
implementation:  There  were  no 
substantial  increases  in  2023,  only  inflation 
adjustments FSA was increased by 323 RSD and 
child allowance by 61 RSD. 

2)  Limited  implementation:  The  number  of 

174 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Continue  facilitating  school-to-work  transitions 
by  stepping  up  further  VET,  including  dual  VET, 
through  revised  curricula  and  the  provision  of 
infrastructure,  which  enables  the  acquisition  of 
practical skills. 

relevant 
in  co-operation  with  all 
Finalise, 
ministries,  their  agencies  and  stakeholders,  a 
Youth  Guarantee  Implementation  Plan,  adopt  it 
and initiate its implementation. 

Part II 
Country analysis, Serbia 

to  be 

developed  qualification  standards  in  secondary 
vocational  education  and  training  (VET)  has 
slowly  increased,  while  higher  education  is  yet 
the  development  of  qualification 
to  see 
linked  with  quality 
standards  and 
assurance  procedures 
in  higher  education. 
However, in order to  have a  meaningful impact 
on student skills development, this is still to be 
followed  by  the  development  of  modernised 
curricula, 
in 
classrooms.  Despite  some  increased  focus  on 
the  set-up  of  regional  VET  training  centres,  the 
VET  curriculum  generally  remains  outdated.  A 
major 
VET 
toward 
governance  was  the  opening  of  the  Office  for 
Dual  Education  and  the  National  Qualifications 
Framework (ODENQF) in November 2022. 

teacher  training  and  delivery 

improving 

advance 

The 

Partial implementation: 

3) 
Youth 
Guarantee Implementation Plan was adopted in 
December  2023,  which  a  piloting  of  the  Youth 
Guarantee 
The 
implementation of the Youth Guarantee has yet 
to start. 

from  2024 

to  2026. 

175 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
European Commission 
Institutional Paper 

ANNEX 2: COMPLIANCE WITH PROGRAMME REQUIREMENTS 

The  government  adopted  the  Economic  Reform  Programme  on  28 December  2023  and  formally 
submitted it to the Commission on 15 January 2024. The programme is in line with the medium-term 
fiscal strategy and the 2024 budget and covers 2024-2026. 

Inter-ministerial coordination 

Preparation of the 2024-2026 ERP was coordinated by the Ministry of Finance (the Minister of Finance 
was  appointed  as  national  coordinator).  A  number  of  other  institutions  also  contributed  through  a 
working group set up specifically for this task, including  the  National Bank of Serbia  (for the macro-
fiscal  part)  and  various  line  ministries  (for  the  part  on  structural  reform  measures).  Several  training 
courses for those involved in preparing the document were organised. As a novelty in these years' ERP 
cycle,  the  preparation  process  for  Chapters  2  and  5,  Tables  10a,  10b  and  11,  and  Addendum  2 
benefited from greater digitalisation through the ERP portal. ERP drafting benefited from financial and 
technical support from the governments of Switzerland and Germany, through the German Agency for 
International Cooperation (GIZ). 

Stakeholder consultation 

The national authorities involved stakeholders in the preparation of the document and from September 
to December 2023 held several rounds of consultation on the draft ERPSepember. Stakeholders were 
invited to provide comments through an online e-consultation portal. The final step in the consultation 
procedure  was  a  meeting  with  the  National  Convention,  which  brought  together  some  700  social 
partners, non-governmental organisations, business associations and other stakeholders in Serbia. The 
National  Convention  set  up  an  inter-sectoral  working  group,  which  examined  the  proposed  reform 
measures  and  then  submitted  comments  and  suggestions.  A  large  number  of  suggestions  and 
comments  of  interested  parties  from  the  previous  cycle  were  taken  into  account  in  the  current  ERP 
cycle. 

Macroeconomic framework 

The programme presents a clear and concise picture of past developments. It also covers all relevant 
data  at  the  time  of  drafting.  The  macroeconomic  framework  is  sufficiently  comprehensive  and 
coherent. The baseline macroeconomic scenario is broadly plausible and major uncertainties and risks 
are clearly outlined and recognised. The programme presents an alternative macro-fiscal scenario that 
results  in  lower  economic  growth  and  higher  budget  deficit  and  debt  levels.  The  alternative  scenario 
appears very relevant in view of the identified risks in a context of high global uncertainty. 

Fiscal framework 

The  fiscal  framework,  which  is  based  on  the  baseline  medium-term  macroeconomic  scenario,  is 
sufficiently  comprehensive  and  integrated  with  the  overall  policy  objectives.  Most  revenue  and 
expenditure  measures  are  sufficiently  explained,  although  the  budgetary  impact  of  some  of  them  is 
not  covered  in  sufficient  detail.  The  programme  does  not  contain  any  long-term  projections  of 
population  trends  or  of  the  implications  of  an  ageing  population  for  the  labour  market  and  public 
finances, notably as regards health and pension systems. [Significant further efforts would be needed 
to ensure that the fiscal data are compatible with the European System of Accounts 2010.] 

Structural reforms 

Reporting on implementation of the 2023-2025 structural reform measures is detailed and up to date. 
The  ERP  presents  six  broad  reform  areas  broken  down  into  various  specific  activities.  The  annexed 
tables have been filled in correctly. 

176 

 
 
9.  TÜRKIYE 

9.1.  EXECUTIVE SUMMARY 

The  ERP  projects  a  soft-landing  scenario  for  Türkiye,  with  economic  growth  slowing  down 
temporarily  and  imbalances  declining  on  the  back  of  a  welcome  macroeconomic  policy 
normalisation.  The  Turkish  economy  continued  expanding  in  2023,  with  real  GDP  growth  at  4.5%, 
slightly above the ERP projection but somewhat lower than in the previous year. Domestic demand was 
still very strong, fuelled by expansionary policies implemented before the May 2023 parliamentary and 
presidential  elections.  Economic  growth  is  projected  to  slow  to  4.0%  in  2024,  before  rebounding  to 
5.0% in 2026 as domestic demand growth cools down to more sustainable levels. The macroeconomic 
scenario  appears  more  plausible  than  last  year,  although  it  remains  somewhat  optimistic  about  the 
prospects  for  growth  in  the  medium  term.  The  projected  economic  rebalancing  will  be  helped  by  the 
ongoing policy normalisation that saw a very substantial monetary tightening: the Turkish central bank 
raised  its  key  policy  rate  between  June  2023  and  March  2024  from  8.5%  to  50.0%  and  has  taken 
steps  to  gradually  unwind  some  of  the  many  distortive  macroprudential  measures  that  were 
introduced to sustain the previous policy regime of extremely low real interest rates. Tighter economic 
policies  are  helping  to  curb  external  imbalances  and  capital  inflows  have  trickled  back.  This  has 
supported  the  exchange  rate  and  boosted  foreign-exchange  reserves.  However,  attracting  long-term 
capital remains a challenge. As inflation still remains very high (standing at close to 70% year-on-year 
in  early  2024),  maintaining  a  tight  monetary  policy  stance  remains  key  to  firmly  consolidating  the 
disinflation  process  and  anchoring  inflation  expectations.  The  banking  sector  so  far  has  adapted 
relatively smoothly to the changed policy environment. 

Corrective  measures  helped  contain  the  2023  budget  deficit,  and  the  ERP  projects  an 
expenditure-based  fiscal  consolidation  in  the  medium  term.  The  central  government  budget 
deficit  is  estimated  to  have  increased  to  5.2%  of  GDP  in  2023,  below  the  revised  target  of  6.4%  of 
GDP.  Nevertheless,  the  deficit  was  much  higher  than  in  the  previous  year  and  in  the  original  budget 
because  of  large  earthquake-related  costs  and  pre-election  spending  in  2023.  The  ERP  optimistically 
expects  the  primary  balance  to  improve  significantly  (by  5.1  percentage  points  between  2023  and 
2026)  and  to  reach  a  surplus  of  1.2%  of  GDP  by  2026.  The  fiscal  adjustment  relies  heavily  on  the 
expiration  of  earthquake-related  expenditure  (around  3%  of  GDP),  while  increasing  tax  revenue  and 
current  spending  at  the  expense  of  more  productive  capital  expenditure.  On  current  projections,  the 
2024 central government budget deficit is likely to be significantly below the target of 6.4% of GDP 
due to better revenue performance and under-execution of expenditure (mostly of earthquake-related 
spending).  The  ERP  projects  that  the  government  debt  ratio  will  hover  at  or  below  35%  of  GDP  in 
2024-2026,  helped  by  still-high  inflation,  strong  economic  growth,  and  a  projected  primary  surplus. 
Fiscal  risks  have  declined,  in  particular  due  to  steps  taken  to  unwind  the  FX-protected  lira  deposits 
scheme. At the same time, the weak institutional underpinnings of the budgetary framework and a lack 
of  fiscal  anchors  have  been  evident  in  the  series  of  decisions  that  substantially  increased 
non-discretionary government expenditure. 

The main challenges facing Türkiye are the following: 

•  Sustaining  a  sufficiently  tight  monetary  policy  until  it  consolidates  the  ongoing 
disinflation  process  and  durably  reduces  external  imbalances,  while  managing  a 
projected  steep  deceleration  in  domestic  demand.  Although  monthly  inflation  has  subsided 
strongly since last summer, inflation remains very high and the ERP forecasts that annual inflation 
will  fall  below  10%  only  in  2026.  Monetary  policy  will  therefore  need  to  remain  tight  for  the 
foreseeable future and to continue gradually unwinding the distortive macroprudential measures. 
Policy credibility should be further underpinned by strengthening central bank independence. 

177 

 
European Commission 
Institutional Paper 

•  Reducing  the  budget  deficit  and  improving  the  quality  of  public  finance.  Pre-election 
expenditure and earthquake-related spending have strained the budget and worsened its structure. 
The  authorities  already  took  some  measures  in  2023  to  correct  the  deficit,  and  they  expect  a 
sizeable  improvement  in  the  budget  balance  over  the  3  three  years,  which  would  support  the 
disinflation process. However, the budget deficit is still very high, while the quality and composition 
of expenditure could be made more growth friendly. Both the medium-term budgetary framework 
and the budget process are weak and prone to revisions. 

•  Raising  the  skills  level  to  increase  employment,  in  particular  of  women  and  young 
people.  The  employment  rate  (for  those  aged  15+)  slightly  increased  to  48.3%  in  2023,  from 
47.5%  in  2022.  However,  the  significant  gap  between  male  and  female  rates  of  employment 
persists.  In  2023,  the  employment  rate  for  men  was  65.7%  against  only  31.3%  for  women, 
leading to a wide gender-employment gap of 34.4 pps. To further facilitate the entrance and re-
entrance  of  women  into  the  labour  market,  Türkiye  needs  to  both  actively  encourage  women’s 
participation in on-the-job training and step up the provision of childcare facilities. Similarly, young 
people still face difficulties entering the formal labour market despite the significant decrease in 
the youth unemployment rate (15-24) from 19.4% in 2022 to 17.4% in 2023. The rate of young 
people  not  in  employment,  education  or  training  (NEET)  slightly  improved,  but  remains  high  at 
29.8% in 2023. Overall, there is a need to facilitate the  swift entrance of workers to the labour 
market  and  reduce  the  skills  gap  as  the  economy  develops,  especially  in  the  green  and  digital 
sectors. 

• 

institutional 
Improving  transparency  and  predictability 
in  the  regulatory  and 
in  digitalising 
environment  affecting  businesses.  Türkiye  has  been  making  progress 
government services for businesses, and has taken steps to develop alternative dispute-settlement 
mechanisms.  However,  improvement  is  still  needed  in  key  aspects  of  the  business  environment 
such as: (i) introducing effective measures to strengthen the rule of law; (ii) ensuring appropriate 
and  timely  contract  enforcement;  and  (iii)  improving  the  availability  and  functioning  of  dispute-
settlement  mechanisms.  Strengthening  the  legal  framework  for  state  intervention  by  making  it 
more transparent, accountable, and predictable is also a  crucial requirement for creating a  more 
favourable  business  environment.  The  persistent  and  serious  backsliding  in  the  judicial  system 
continues  to  undermine  business  trust  in  judicial  efficiency  and  independence.  Legislation  to 
implement State-aid rules is long overdue, and its absence hinders enforcement and transparency. 
Türkiye  still  lacks  preventive  and  anti-corruption  bodies,  and  serious  deficiencies  in  the  anti-
corruption  legal  framework  have  allowed  undue  political  influence  in  public  resource  allocation. 
Due to several exceptions permitted under the law, public procurement remains especially prone to 
corruption.  The  enforcement  of  intellectual  property  rights  continues  to  be  very  weak.  Access  to 
long-term  finance  for  small  and  medium-sized  enterprises  (SMEs)  remains  limited,  especially  in 
local currency. 

•  Pursuing  climate  neutrality,  energy  security  and  the  economy’s  green  transition,  in 
particular by boosting energy efficiency. The adoption of a new Climate Law and subsequent 
establishment  of  a  national  emissions  trading  system  (ETS)  aligned  with  the  EU  ETS  with  a 
sufficient  level  of  ambition  remain  crucial  for  the  economy’s  cost-effective  decarbonisation  and 
competitiveness. To support the objectives set out in Türkiye’s national energy plan (2023-2035), 
continued  coordination  between  energy  subsidies,  taxation  and  overall  green  policies  is  vital,  in 
particular  a  phase-out  of  fossil  fuel  subsidies  and  increased  taxation  weighing  on  fossil  energy 
compared  to  renewables.  In  the  context  of  ‘Climate  Change  Mitigation  Strategy  and  Action  Plan 
(2024-2030)’  and  ‘Climate  Change  Adaptation  Strategy  and  Action  Plan  (2024-2030)’,  Türkiye 
should  effectively  implement  a  long-term  low-emission  development  strategy  and  address  the 
energy-intensive  and  hard-to-abate  sectors  also  using  alternative  fuels  such  as  renewable 
hydrogen.  Türkiye  continues  to  turn  to  Russia  for  fossil-fuel  imports  and  nuclear  energy.  An 
increased  use  of  renewable-energy  sources  and  greater  energy  efficiency  are  essential  for  both 
transitioning  to  energy  that  is  sustainable  and  secure  and  dealing  with  the  risks  posed  by  the 
changing international energy market. Türkiye could help to lower energy dependency and create 
new  opportunities  for  businesses  by  further  encouraging  the  development  of  renewable-energy 

178 

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installations, in full compliance with its obligations under the Customs Union with the EU. Overall, 
much more ambitious climate and environment policies need to be established and implemented 
to create the necessary enabling environment for the transition to a more modern and competitive 
economy. 

Notwithstanding a welcome macroeconomic policy normalisation, the implementation of the 
policy  guidance  set  out  in  the  conclusions  of  the  Economic  and  Financial  Dialogue  of  May 
2023 has overall been limited. Monetary and fiscal policy tightened after the May 2023 elections. 
The  government  continued  providing  subsidies  to  state-owned  enterprises  in  the  energy  sector,  and 
took  measures  to  support  citizens  and  businesses  affected  by  the  earthquakes.  The  medium-term 
fiscal  consolidation  strategy  relies  largely  on  the  expiration  of  one-off  policy-support  measures. 
Contrary  to  policy  commitments,  there  are  still  many  tax  exemptions  and  tax-reduction  schemes  in 
place.  The  authorities  have  taken  steps  to  gradually  exit  the  FX-protected  deposits  scheme.  Recent 
policy documents have set a target of amending the public procurement law by the end of the second 
quarter  of  2024.  No  progress  was  made  towards  adopting  a  fiscal  rule  and  the  setting  up  of  an 
independent  body  to  monitor  its  implementation.  The  central  bank  took  steps  to  simplify  the  micro- 
and  macro-prudential  framework,  providing  more  guidance  and  reinforcing  its  communication.  The 
recommendation on carbon pricing has not materialised into concrete legislative changes to date due 
to  the  significant  delay  in  the  adoption  of  the  Climate  Law.  This  delay  has  impacted  the 
implementation  of  an  ETS  system.  Limited  reform  measures  have  been  announced  on  the  business 
regulatory environment, once again falling short of addressing key challenges. Some steps have been 
undertaken  to  streamline  commercial  disputes.  Similarly,  limited  measures  have  been  adopted  for 
NEETs to improve the quality and access to vocational education and training (VET). As regards support 
investments  for  care  in  the  earthquake-affected  regions,  the  need  for  healthcare  services  including 
mental  health  and  psychosocial  services  remains  unmet.  Additionally,  active  labour  market  policies 
aimed at faciliating women’s entrance to the labour market have had little structural impact thus far. 

9.2.  ECONOMIC OUTLOOK AND RISKS 

Economic  growth  and  domestic  demand  remained  robust  in  most  of  2023,  but  high-
frequency indicators point to a slowdown of economic activity at the  end of the year (133). 
Türkiye’s economic growth was strong but unbalanced last year, with a very strong domestic demand 
contribution  fuelled  by  expansionary  policies  (strong  consumer  lending  and  wage  increases) 
implemented before the May parliamentary and presidential elections. Real GDP growth was  4.5% in 
2023,  slightly  above  the  ERP  projection  but  somewhat  lower  than  the  5.5%  expansion  recorded  in 
2022.  Growth  in  household  consumption  decelerated  in  the  second  half  of  2023  but  remained  very 
strong, despite the tightening of monetary and fiscal policy. Trade sales growth decelerated further in 
the  second  half  of  2023,  and  industry  also  showed  signs  of  weakening  output,  after  reaching 
record-high  levels  of  production  in  the  previous  year.  Nevertheless,  investment  activity  picked  up  in 
2023, with buoyant machinery and equipment investment. The contribution of net exports to economic 
growth  was  negative,  both  because  of  the  high  real  growth  of  imports  and  because  of  declining 
exports,  which  were  held  back  by  subdued  foreign  demand  despite  a  modest  recovery  in  the  second 
half of the year. 

The ERP forecasts a ‘soft-landing’ scenario and a rebalancing of the Turkish economy, with 
domestic  demand  growth  slowing  down  to  more  sustainable  levels.  Economic  growth  is 
projected  to  moderate  to  4.0%  in  2024,  before  rebounding  to  5.0%  in  2026,  slightly  below  the 
estimates of last year’s programme. The strong deceleration in household consumption growth is seen 
as the main driver of economic rebalancing and the main check on excess demand. Public consumption 

(133) Macroeconomic  and  fiscal  estimates  and  forecasts  covering  the  period  2023-2026  have  been  taken  from  the  ERPs 
themselves.  If  available,  preliminary  macroeconomic  and  fiscal  outturn data  for  2023  have  been  taken  from  the  relevant 
national sources (Turkish Statistical Institute, Ministry of Treasury and Finance, Central Bank of the Republic of Türkiye). 

179 

 
 
 
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Institutional Paper 

and investment are also expected to support this rebalancing, albeit to a lesser extent. As a result, the 
contribution of net exports to growth is forecast to turn slightly positive in 2024-2026, as the recovery 
in  exports  consolidates  and  import  growth  moderates.  The  reliability  of  estimates  of  the  cyclical 
position of the economy  continues to be affected  by high domestic economic volatility and the large 
external shocks of recent years. Nonetheless, the ERP estimates that the output gap will turn negative 
as soon as 2024 and widen  further in the following years. Potential growth is  projected to be in the 
range  of  4.8-5.0%  in  2024-2026.  By  factors  of  production,  capital  (2.0  pps  per  year  on  average)  is 
forecast to remain the main growth driver, followed by employment (1.7 pps per year on average) and 
total  factor  productivity  (TFP)  (0.8  pps  per  year  on  average).  However,  the  programme  expects  the 
contribution of capital to decline at the expense of rising shares of employment and TFP. 

Table II.9.1:
Türkiye - comparison of macroeconomic developments and forecasts

Real GDP (% change)
Contributions:
- final domestic demand
- change in inventories
- external balance of goods and services
Employment (% change)
Unemployment rate (%)
GDP deflator (% change)
CPI inflation (%)
Current account balance (% of GDP)
General government balance (% of GDP)
Government gross debt (% of GDP)

2023

2022

2024
COM ERP COM ERP COM ERP COM ERP COM ERP
5.5
5.0

2025

2026

n.a.

5.5

4.4

4.0

4.5

4.2

3.5

4.0

3.1
0.0
0.5
2.4

8.5
1.4
-5.7
3.0

9.9
-2.5
-2.9
2.9

3.5
0.0
0.5
2.7
9.8

11.3 12.5
4.6
4.0
-7.0
-0.3
-0.5
-7.7
0.5
0.2
0.4
0.7
6.6
2.8
2.4
6.8
10.5 10.4 10.0 10.1 10.2 10.3
9.9
96.0 96.0 63.7 62.6 58.6 55.3 24.3 23.1
72.3 64.3 55.4 65.0 53.6 33.0 22.9 15.2
-5.4
-2.6
-2.3
-3.0
31.7 30.8 32.0 33.3 33.0 35.2 32.8 34.6

-4.0
-6.5

-5.4
-0.8

-3.1
-6.0

-4.0
-6.0

-2.9
-6.0

-2.7
-3.5

n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.

4.9
-0.2
0.3
3.1
9.3
13.4
8.5
-2.3
-2.5
33.2

Sources: Economic Reform Programme (ERP) 2024, Commission Autumn 2023 forecast.

The ERP’s macroeconomic scenario for 2024-2026 appears more plausible than the scenario 
that  Türkiye  set  out  in  the  previous  ERP,  although  its  projected  growth  path  remains 
somewhat  optimistic.  The  main  economic  policy  challenge  is  to  sustain  the  current  tight  economic 
policy  until  it  consolidates  the  ongoing  disinflation  process  and  durably  reduces  external  imbalances, 
while  managing the ongoing steep  deceleration of domestic  demand to avoid a  ‘hard landing’.  Given 
the  highly  uncertain  global  environment  and  the  need  for  a  tight  policy  stance,  the  ERP’s  growth 
assumptions  may  easily  be  tested,  calling  for  a  more  prudent  baseline  scenario.  The  forecast  export 
profile  looks  plausible,  although  it  is  subject  to  risks  related  to  the  growth  performance  of  major 
trading partners in the EU. The macroeconomic outlook continues to be affected by a high degree of 
uncertainty  related  to  the  economic  fallout  from  geopolitical  conflicts  in  the  region,  in  particular  the 
effects that these conflicts might have on energy supply and inflation. With the balance of risks tilted 
to the downside, the repeated failure to present an alternative scenario in the ERP remains a drawback 
of the programme. 

Decisive  policy  action  has  brought  some  results,  but  inflation  remains  very  high  and  the 
disinflation  process  will  be  lengthy.  Under  new  leadership,  the  central  bank  raised  its  key  policy 
rate  between  June  2023  and  March  2024  from  8.5%  to  50.0%,  to  positive  territory  in  ex-ante  real 
terms. It has also taken steps to unwind some of the many distortive macroprudential measures that 
were  introduced  to  sustain  the  previous  policy  regime  of  extremely  low  real  interest  rates.  The  new 
policies were instrumental in improving inflation expectations and external financing conditions, while 
strengthening  foreign-exchange  reserves  and  exchange-rate  stability.  Monthly 
inflation  has 
decelerated strongly to 2.9% month-on-month in December 2023 (with core inflation falling below the 
headline  rate),  although  due  to  base  effects  inflation  accelerated  in  year-on-year  terms  to  64.8%. 
Inflation  increased  in  early  2024,  as  expected,  but  remained  within  the  ‘expectations  corridor’  of  the 
central bank. The ERP forecasts that annual inflation will peak by mid-2024, before declining rapidly to 
33% (an ambitious target) at the end of the year, and to fall below 10% only in 2026. The authorities 

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Country analysis, Türkiye 

are  aware  that  they  need  to  maintain  a  tight  monetary  policy  stance  until  they  have  firmly 
consolidated  the  disinflation  process  and  anchored  inflation  expectations.  Although  monetary  policy 
transmission has improved significantly since summer 2024, restoring policy credibility in a sustainable 
manner would need to be further complemented and better underpinned by strengthening central bank 
independence. 

External competitiveness and current account 

Graph II.9.1a: Türkiye - current account balance
(% GDP)

10

5

0

-5

-10

2022

 Services balance
Current account balance (rhs)

2024

2023

2025
 Goods balance
Net FDI
Source: Economic Reform Programme (ERP) 2024.

2026

100

90

80

70

60

50

Graph II.9.1b: Türkiye - real effective exchange 
rate
(CPI based, index)

Appreciation

Depreciation

2019

2020

2021

2022

2023

Türkiye

EA 19

Source: Central Bank, ECB.

A tighter policy stance would help curb external imbalances. The current account deficit fell to 
4.1%  of  GDP  in  2023.  The  ERP  forecasts  a  steady  decline  in  the  deficit  to  2.3%  of  GDP  in  2026,  as 
lower  domestic  demand  crimps  import  growth  and  economic  stability  reduces  non-monetary  gold 
imports,  which  are  considered  a  safe  asset  in  times  of  heightened  volatility.  Energy-efficiency 
measures  and  lower  international  energy  prices  are  also  expected  to  reduce  the  energy  import  bill. 
After steady  gains in price competitiveness for about a  decade, the average CPI-based real effective 
exchange rate has remained broadly stable since early 2022, while the producer-price-based exchange 
rate  has  appreciated.  Türkiye’s  tradable  sector  has  expanded  to  new  markets  and  products  in  recent 
years.  Although it went through a year of sluggish  performance since the end of  2022,  due to weak 
external demand, goods exports rebounded in the last quarter of 2023, while exports of travel services 
reached historic highs in the summer. The ERP projects moderate export growth in the coming years, 
boosted by efforts to further develop Türkiye as an energy, financial, and logistics centre. 

Capital inflows have trickled back since the 2023 elections, but attracting long-term capital 
remains  a  challenge.  The  balance  of  payments  faces  relatively  low  financing  risks,  and  access  to 
foreign  finance  has  been  uninterrupted  even  in  times  of  economic  stress,  albeit  at  elevated  costs. 
Portfolio and other investment inflows have increased recently, attracted by the progress of economic 
policy  normalisation  since  the  2023  elections.  Short-term  financial  inflows  have  surged  from  a  very 
low level, making it possible to replenish foreign-exchange reserves, which reached a historically high 
level in 2023, although net reserves remained very low. The external debt roll-over ratio picked up to 
above  100%  for  both  the  banking  and  the  non-banking  sectors  by  the  end  of  2023.  The  open  net 
foreign-exchange position of non-financial companies improved further in 2023, while their short-term 
position remained in surplus. External debt declined to around 46% of GDP in 2023. The authorities are 
committed to reducing Türkiye’s reliance on volatile short-term capital inflows over the medium term. 
However,  FDI  inflows  (at  1%  of  GDP  in  2023)  remain  significantly  below  the  economy’s  potential. 
Türkiye will need to ramp up structural reforms and improve policy credibility if it wants to rely more 
on  FDI  to  underpin  a  sustainable  expansion,  modernisation,  and  the  long-term  financing  of  its 
economy. 

The  banking  sector  has  adapted  relatively  smoothly  to  the  changed  policy  environment. 
Since mid-2023, the central bank introduced new selective tightening measures to supress consumer 
lending  and  support  lending  for  exports,  investment,  and  SMEs.  As  a  result,  real  lending  declined, 
although  corporate  lending  in  lira  picked  up.  However,  the  pace  of  growth  in  credit-card  debt  has 
remained very high. The quality of the loan portfolio held by Turkish banks has remained satisfactory. 
The  non-performing  loan  ratio  fell  to  1.5%  in  2023  (although  this  percentage  was  still  affected  by 
forbearance  measures).  Loan-loss  provisioning  remained  high,  and  the  collection  of  impaired  loans 

181 

   
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Institutional Paper 

improved, helped by the high inflation. As economic activity is set to cool down in 2024, credit risk is 
likely to increase, especially for credit-card and SME loans which require close monitoring. Commercial 
banks have remained stable and well capitalised, although the 19.1% capital adequacy ratio in 2023 is 
also affected by forbearance measures and capitalisation of state-owned banks  remained in general 
lower.  Turkish  banks  had  shortened  the  average  duration  of  their  lira  loans  long  before  the  central 
bank  increased  interest  rates,  which  helped  their  adjustment  to  the  tighter  monetary  policy  stance. 
However, net interest margins fell, while profitability and returns on both assets and equity declined in 
2023. 

The  central  bank  has  taken  steps  to  gradually  simplify  the  macroprudential  framework. 
Since  June  2023,  there  has  been  a  new  period  of  tight  monetary  policy  and  Türkiye  has  begun  to 
address negative repercussions from earlier  macroprudential measures on the financial sector. Given 
this  situation,  the  authorities  proceeded  with  a  gradual  unwinding  of  some  of  these  measures.  The 
securities-maintenance  requirements  were  partially  removed  and  targets  to  convert  FX-protected 
deposits to ordinary lira deposits were abolished. The authorities also announced their intention to end 
in 2024 the FX-protected deposit scheme. This scheme had long had a direct and sizeable impact on 
the  budget  and  remains  a  significant  source  of  (contingent)  budget  liabilities,  after  it  was  fully 
transferred (deposits that were originally in turkish lira) to the central bank in July 2023. As a result of 
these steps, the share of lira deposits has increased markedly since September (when it was at 34.4%) 
to 42.2% in December, mainly due to a fall in FX-protected deposits. The central bank also took steps 
to sterilise the excess lira liquidity. Commercial banks continued to have high exposure to the central 
bank, due to significant FX swaps with it. 

Table II.9.2:
Türkiye - financial sector indicators

Total assets of the banking system (EUR million)
Foreign ownership of banking system (%)
Credit growth (%, average)
Deposit growth (%, average)
Loan-to-deposit ratio (end of period)
Financial soundness indicators (%, end of period)
     - non-performing loans to total loans *
     - regulatory capital to risk-weighted assets
     - liquid assets to total assets
     - return on equity
     - foreign exchange loans to total loans

* including the impact of write-offs.
** Q3.
Sources: Central Bank of Türkiye, IHS Markit.

2019
676
26.0
6.5
18.8
1.03

5.4
18.4
10.0
11.5
38.0

2020
678
25.0
28.4
36.4
1.04

4.1
18.8
9.4
11.4
34.0

2021
628
25.9
22.7
28.0
0.85

3.2
18.4
13.3
15.5
42.2

2022
724
24.9
56.0
78.3
0.79

2.1
19.4
11.6
49.9
32.6

2023
742
25.0
55.7
65.4
0.77

1.6
18.9
14.2
41.5
32.0**

9.3.  PUBLIC FINANCE 

Corrective measures adopted in  July 2023 have helped contain the increase in the budget 
deficit.  Preliminary  estimates  show  there  was  a  significant  increase  in  the  general  government  and 
central government deficits in 2023, both to around 5.2% of GDP. The central government deficit was 
1.2  pps. lower than the  revised target,  butwas  much higher than  both its level in 2022 (when it was 
only  1.0%  of  GDP)  and  the  original  budget  target  (3.5%  of  GDP).  This  was  because  of  the  large 
earthquake-related costs (3.7% of GDP) following the earthquakes in February  2023  (affecting more 
than  16%  of  the  population)  and  pre-election  spending  on  higher  salaries  and  pensions  in  2023. 
However, more than half of the recorded earthquake-related expenditure has not yet been effectively 
spent.  The  removal  of  the  age  requirement  for  early  retirement  added  nearly  1%  of  GDP  to  budget 
expenditure  in  2023,  challenging  the  sustainability  of  the  social  security  system.  In  July  2023,  the 

182 

 
 
   
 
 
 
 
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Country analysis, Türkiye 

authorities adopted a revised 2023 budget, including sizeable tax increases (on VAT, corporate income, 
special consumption,  motor  vehicle taxes, etc.) to cover some of the additional expenditure and limit 
the impact of this additional expenditure on the deficit. They have also transferred to the central bank 
the obligation to pay the guarantee on the FX-protected deposits that were originally in turkish lira. 

The  fiscal  scenario  of  the  ERP  targets  an  expenditure-based  consolidation  in  the  medium-
term.  The  ERP  expects  the  primary  balance  to  improve  significantly,  by  5.1 pps  between  2023  and 
2026, allowing it to reach a surplus of 1.2% of GDP by 2026. After the strong fiscal expansion in 2023, 
the programme projects that budget revenue will stabilise at a higher level, while primary expenditure 
is set to decline steeply from 2025 as earthquake-related spending falls. Subsidies are also projected 
to come down, in particular to state-owned enterprises in the energy sector. Total expenditure is set to 
fall by 3 pps in 2024-2026, but remain elevated, significantly above its pre-earthquake level, due to a 
significant  rise  in  interest  payments  (1.1 pps)  and  social  transfers  (2.1 pps)  to  cover  higher  pension 
expenditure related to the decision on early retirement. After peaking in 2023, government investment 
is  forecast  to  gradually  decline  to  2.5%  of  GDP  in  2025.  Overall,  the  back-loaded  fiscal  adjustment 
relies  heavily  on  the  expiration  of  the  earthquake-related  expenditure  (around  3 pps),  while  a 
significant rise in current spending is set to be compensated by both a greater tax-revenue ratio and 
lower capital expenditure. The authorities plan to support fiscal consolidation by pursuing ‘soft’ fiscal 
measures,  like  rationalising  public  expenditure,  systematising  spending  reviews,  broadening  the  tax 
base, and fighting the informal economy. Given the negative and growing output gap projected by the 
ERP, the forecast fiscal tightening would be pro-cyclical. The quality and credibility of the medium-term 
fiscal  consolidation  plan  continues  to  be  affected  by  a  failure  to  present  sufficiently  detailed  policy 
measures in the ERP. 

Table II.9.3:
Türkiye - composition of the budgetary adjustment  (% of GDP)

Revenues
    - Taxes and social security contributions
    - Other (residual)
Expenditure
    - Primary expenditure
       of which:
       Gross fixed capital formation
       Consumption
       Transfers & subsidies
       Other (residual)
    - Interest payments
Budget balance
    - Cyclically adjusted
Primary balance
    - Cyclically adjusted
Gross debt level

2022

2023

2024

2025

2026

27.8
22.3
5.6
28.6
26.5

2.9
12.2
5.2
6.3
2.2
-0.8
-0.3
1.4
1.9
30.8

30.2
24.5
5.7
36.7
34.1

3.1
14.5
7.6
9.0
2.6
-6.5
-5.6
-3.9
-3.0
33.3

31.2
26.2
5.1
37.2
34.2

2.7
14.8
8.4
8.3
3.1
-6.0
-5.5
-2.9
-2.4
35.2

31.2
26.0
5.2
34.2
30.7

2.6
14.4
7.2
6.6
3.5
-3.0
-2.8
0.4
0.6
34.6

31.2
26.0
5.1
33.7
30.0

2.5
14.2
7.2
6.1
3.7
-2.5
-2.5
1.2
1.2
33.2

Change:
2023-26
1.0
1.5
-0.5
-3.0
-4.1

-0.6
-0.3
-0.4
-2.8
1.1
4.0
3.1
5.1
4.2
-0.1

Sources: Economic Reform Programme (ERP) 2024, Commission calculations.

The 2024 budget is conservative and based on  more realistic macroeconomic assumptions 
than in the previous ERP, but addresses macroeconomic imbalances to a limited extent. The 
parliament  approved  the  2024  central  government  budget  on  25 December  2023,  planning  a  deficit 
for 2024 of 6.4% of GDP, which corresponds to a widening of the deficit by around 1 pp. compared to 
the 2023 outturn estimate. The budget is based on 4% real GDP growth and a GDP deflator of 55.3%. 
Total  revenue  is  forecast  to  increase  by  71.1%  and  expenditure  by  69.0%  in  comparison  to  the 
estimated  2023  budget  outturn.  Around  3%  of  GDP  is  allocated  to  earthquake-recovery  measures, 
which is somewhat lower than was allocated in in 2023. Government revenue and expenditure are both 
projected  to  increase,  with  higher  tax  revenue,  public  consumption,  social  transfers,  and  interest 

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payments.  Overall,  the  planned  budgetary  stance  and  structure  in  2024  is  not  sufficiently  tight  or 
sufficiently  supportive  of  the  stated  objective  of  macroeconomic  policy  to  reduce  inflation  and 
macroeconomic imbalances. However, given that the actual 2023 budget deficit and revenue outcome 
was better than the ERP estimate, the 2024 budget deficit could also turn out significantly below the 
target  of  6.4%  of  GDP  due  to  better-than-planned  revenue  performance  and  under-execution  of 
expenditure (mostly of earthquake-related spending). 

The 2024 budget is largely an extension of previous policies, and fiscal planning continues 
to be marred by ad-hoc measures. The key revenue and expenditure items mostly reflect policies 
adopted  in  July  2023  and  before  the  May  2023  elections.  However,  the  ERP  does  not  present  either 
detailed  estimates  of  the  budgetary  effects  of  these  measures  or  information  on  new  policies.  In 
addition,  some  of  the  one-off  measures  adopted  in  2023  to  finance  recovery  and  reconstruction 
efforts  (such  as  attracting  donations  from  the  central  bank,  state-owned  banks,  and  state-owned 
enterprises) are also not mentioned, although they should reduce 2024 revenue. Details are missing on 
the major decision taken in early 2023 to remove the age requirement for early retirement, which has 
profound long-term implications for social transfers and the sustainability of the pension system. In a 
continuation of previous practice, new ad hoc measures affecting the budget (like a higher indexation 
of some pensions in January 2024) were adopted after the formal adoption of the budget. 

BOX II.9.1: DEBT DYNAMICS 

Composition of changes in the debt ratio (% of GDP)

Gross debt ratio [1]
Change in the ratio
Contributions [2]:

   1. Primary balance
   2. 'Snowball effect'
       Of which:
       Interest expenditure
       Growth effect
       Inflation effect

   3. Stock-flow adjustment

[1]   End of period. 

2022
30.8
-10.9

2023
33.3
2.5

2024
35.2
1.9

2025
34.6
-0.6

2026
33.2
-1.4

-1.4
-18.3

3.9
-9.6

2.9
-9.1

2.2
-1.1
-19.4
8.8

2.6
-0.8
-11.4
8.2

3.1
-0.8
-11.4
8.1

-0.4
-4.1

3.5
-1.2
-6.3
3.9

-1.2
-1.6

3.7
-1.5
-3.9
1.4

[2]  The 'snowball effect' captures the impact of interest expenditure on accumulated

      debt, as well as the impact of real GDP growth and inflation on the debt ratio

      (through the denominator).

      The stock-flow adjustment includes differences in cash and accrual accounting, 

      accumulation of financial assets, and valuation and other effects.

Source: Economic Reform Programme (ERP) 2024, Commission calculations.

The  ERP  forecasts  that  government  debt  will  remain  broadly  unchanged.  In  2023,  the 
government  debt  ratio  declined  slightly  in  comparison  to  the  previous  year  to  29.5%  of  GDP  (the 
outcome  was  below  the  ERP  estimate),  helped  by  the  strong  denominator  effect  from  the  very  high 
inflation and the better budget deficit outturn. Nevertheless, net government debt increased to 21.2% 
of  GDP  from  16.8%  in  2022,  as  falling  net  assets  of  the  central  bank  drove  total  public  sector  net 
assets  down  to  their  lowest  level  in  decades.  High  inflation  is  expected  to  remain  the  main  debt-
reducing  factor  in  the  coming  years,  but  as  inflation  declines,  its  contribution  is  set  to  decrease 
substantially. The move to a primary surplus from 2025, and the projected real economic growth, are 
key factors supporting debt sustainability over the medium term, even if their combined debt-reducing 
effect  is  projected  to  be  lower  than  that  of  inflation.  Interest  payments  are  forecast  to  increase 

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substantially  and  reach  3.7%  of  GDP  in  2026,  but  these  are  likely  overestimated  in  view  of  the 
underlying  assumption  in  the  ERP  of  a  steady  and  significant  rise  in  the  implicit  interest  rate  on 
government  debt.  The  main  debt-increasing  contribution  until  2025  will  continue  to  come  from  the 
stock-flow  adjustments,  driven  by  the  depreciation  of  the  lira,  although  the  new  policy  stance  and 
lower  rate  of  inflation  are  expected  to  lead  to  both  a  markedly  slower  rate  of  lira  depreciation  and 
much smaller stock-flow adjustments. 

Debt metrics have improved but vulnerabilities remain. The authorities have taken measures to 
normalise  the  functioning  of  the  government  securities  market  by  reducing  regulatory  interventions 
that had previously forced commercial banks to  hold  government debt  denominated in lira (134).  As a 
result,  yields  on  government  bonds,  especially  at  the  short  end  of  the  yield  curve  have  increased 
markedly since mid-2023. On the other hand, Türkiye’s 5-year credit default swap spread has declined 
steadily since May 2023, from above 700 bps to under 300 bps at the end of 2023, although it is still 
above pre-2018 levels and that of peer countries. Reflecting continued liraisation efforts, the share of 
new domestic borrowing in lira remained very high at 86% in 2023, and the lira’s share in the stock of 
government debt went up marginally to 35.8%. The average time to maturity of the domestic central 
government debt stock increased to 3.8 years in 2023, while the average time to maturity for the total 
debt stock fell to 5.3 years, driven by a further decline in the maturity profile of the external debt stock 
to  6.6 years,  its  lowest  level  since  2005.  The  banking  sector’s  share  in  domestic  debt  holdings 
increased to a new high of 79%, and although non-resident investors have started to slowly return to 
the domestic government debt market, their share increased only marginally to 1.9% in 2023. Türkiye’s 
sovereign  credit-rating  outlook  improved  as  rating  agencies  noted  the  resolute  steps  taken  by  the 
government to normalise monetary policy. 

Fiscal  risks  have  declined  but  remain  non-negligible.  Some  of  these  risks  stem  from  the 
macroeconomic  environment  and  the  growth  assumption,  both  of  which  may  be  challenged  by:  (i) 
external geopolitical and economic developments; and (ii) the possibility that the intended tight policy 
stance cools down the economy faster or more than expected. On the positive side, the steps taken to 
unwind and completely terminate the FX-protected lira deposits scheme in 2024 will likely remove one 
of the biggest sources of fiscal risk. However, until the scheme expires fully, its significant costs will be 
borne  by  the  central  bank,  which  will  have  indirect  budgetary  implications  via  its  reduced  profit.  The 
monetary policy normalisation process will also bring additional costs related to the need to sterilise 
excessive  lira  liquidity.  Although  in  the  short-term  there  could  be  further  delays  in  post-earthquake 
reconstruction  efforts,  over  the  medium-term  the  risk  is  that  recovery  costs  may  exceed  budget 
estimates. Other risks stemming from contingent liabilities (like public-private partnerships and credit-
guarantee  schemes)  seem  manageable.  The  budget  also  contains  some  buffers,  like  the  relatively 
large  reserve  appropriations  (0.5%  of  GDP)  and  a  generally  prudent  revenue  and  expenditure 
estimates.  In  addition,  the  government’s  liquidity  preference  has  remained  high,  with  public  sector 
deposits and other financial assets at around 6% of GDP at end-2023. 

The  quality  of  public  finance  faces  challenges.  The  tax  increases  in  the  summer  of  2023  have 
reestablished the authorities’ commitment to fiscal discipline, which had been challenged by the pre-
election fiscal largesse in 2023. The ERP has maintained this commitment, although the marked rise in 
non-discretionary  expenditure  has  not  only  strained  public  finance  management,  but  undermined 
efforts  to  reduce  macroeconomic  imbalances  and  will  likely  require  years  to  reverse.  The  budget 
process  weakened  in  2023,  as  important  decisions  with  significant  budget  implications  were  taken 
without proper preparation and discussion, outside of the regular budget process. Public investment in 
human  and  physical  capital  is  low  and  is  expected  to  decline  further.  The  many  tax  exemptions  and 
reductions undermine the tax base. The consolidated framework for all public-private partnerships has 
yet to be adopted. It is expected that this framework will be fully integrated in the budget process and 
should  be  designed  to  improve  management  and  monitoring.  The  government  continued  to  use  the 
negotiated  procedure  in  its  procurement  deals  in  2023,  which  makes  it  possible  for  contracting 

(134) Terminating the securities maintenance practice linked to the FX-protected deposit scheme and lira deposits; reducing the 
securities maintenance ratio for foreign exchange liabilities from 5% to 4%; but also extending the securities maintenance 
based on loan growth for another 6 months until mid-2024. 

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authorities  to  limit  competition  and  transparency  by  referring  to  discretionary  criteria  that  cannot  be 
objectively  measured.  Further  steps  were  taken  in  2023  to  strengthen  the  system  of  public  internal 
financial control and improve administrative capacity. 

The  fiscal  framework  is  weak  and  lacks  anchors.  The  weak  institutional  underpinnings  of  the 
budgetary  framework  were  evident  in  the  series  of  decisions  taken  in  2023  that  substantially 
increased  non-discretionary  government  expenditure.  The  relatively  limited  budget  deficits  (net  of 
earthquake-related  effects)  thus  hide  a  fundamental  policy  weakness.  It  remains  a  weakness  in  the 
Turkish fiscal framework that there is a lack of national fiscal rules or independent fiscal institutions 
to: (i) monitor fiscal performance; (ii) review forecasts; and (iii) advise the government on fiscal policy 
matters.  In  addition,  the  medium-term  budget  framework  is  subject  to  frequent  changes  and  is  not 
sufficiently  credible  and  binding.  Macroeconomic  forecasts  underpinning  budgetary  planning  have 
become  more  realistic  but  would  benefit  from  more  transparency  about  the  estimated  effects  of 
various policy measures. 

9.4.  KEY STRUCTURAL CHALLENGES AND REFORM PRIORITIES 

The  Commission  has  conducted  an  independent  analysis  of  the  Turkish  economy  to  identify  the  key 
structural  challenges  the  country  faces  in  its  drive  to  boost  competitiveness  and  inclusive  growth.  In 
addition to the need to secure long-lasting macroeconomic stability and the ongoing post-earthquake 
recovery efforts, the Commission considers that the key structural challenges in relation to advancing 
competitiveness and long-term inclusive growth in Türkiye are: 

raising the skills level to increase employment, in particular of women and young people; 

improving  transparency  and  predictability  in  the  regulatory  and  institutional  environment  affecting 
businesses; and 

pursuing  climate  neutrality,  energy  security  and  the  economy’s  green  transition,  in  particular  by 
boosting energy efficiency. 

Türkiye needs to improve the rule of law and judicial independence and strengthen its institutions to 
promote competitiveness and attract foreign investments. Addressing these fundamental concerns is a 
prerequisite  for  successfully  transforming  the  economy.  Furthermore,  the  country  should  urgently 
adopt a Climate Law, notably to establish a domestic ETS aligned with the EU’s. 

Key structural challenge 1: Raising the skills level to increase employment, in particular of 
women and young people 

Türkiye’s labour  market indicators have remained on a positive upward trend in recent years with an 
increased  employment  rate  (among  those  aged  15+)  from  47.5%  in  2022  to  48.3%  in  2023.  The 
unemployment rate (15+) decreased from 10.4% in 2022 to 9.4% in 2023. The unemployment rate for 
women decreased from 13.4% in 2022 to 12.6% in 2023. However, the composite measure of labour 
underutilisation  increased  to  22.8%  in  2023  (31.0%  for  women)  due  to  higher  time-related 
underemployment. 

Despite  the  overall  economic  upturn,  the  significant  gap  between  male  and  female 
employment  persists.  In  2023,  the  employment  rate  for  men  was  65.7%  against  only  31.3%  for 
women,  leading  to  a  wide  gender-employment  gap  of  34.4  pps.  Female  labour-force  participation 
recorded  a  slight  increase  in  2023  but  remained  low  at  35.8%.  Barriers  in  certain  occupations, 
traditional  gender  roles,  and  a  lack  of  skills  continue  to  restrict  female  labour  force  participation.  In 
particular, limited childcare facilities remain a crucial challenge, and there are no dedicated measures 
to  step  up  their  provision.  The  disadvantaged  position  of  young  women  in  the  labour  market  has 
become  entrenched,  resulting  in  their  lack  of  participation  in  on-the-job  training  to  upgrade  their 
professional  skills.  Policies  aimed  at  the  activation  of  women  in  the  labour  market  have  been  too 
limited in scope and budget, yielding only limited results. 

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The youth unemployment rate (aged 15-24) significantly decreased from 19.4% in 2022 to 
17.4% in 2023, but young people still have difficulties entering the labour market. While the 
rate of young people who are not in education, employment or training (NEET) decreased from 32.3% 
in  2022  to  29.8%  in  2023,  it  remains  structurally  high,  especially  for  women  (36.4%).  The 
implementation  of  National  Youth  Employment  Strategy  and  Action  Plan  (2021-2023),  including 
activities to promote career guidance and vocational training, was completed by the end of 2023. No 
official  announcement  has  been  made  yet  for  the  extension  or  the  new  version  of  the  strategy  and 
action  plan.  Türkiye  must  upgrade  its  school,  tertiary,  and  vocational  training  system  to  provide  its 
young people with good employment opportunities and bring its NEET rate closer to the EU average of 
11.7% (2022). To  provide more economic opportunities for young people in Türkiye, especially young 
women, active labour market policies and activation schemes inspired by the EU Youth Guarantee are 
still needed. 

In  the  ERP  (2024-2026),  Türkiye  introduced  reform  measure  6  on  ‘Enhancing  and  improving  the 
employment services in line with the needs of the labour market’. This reform measure seeks to bring 
together  a  variety  of  activities  and  targets  to  ensure  that  the  Turkish  Employment  Agency  (İŞKUR) 
provides better employment services. The measure is very appropriate considering the need to improve 
employment  services  in  line  with  the  needs  of  the  labour  market.  The  measure’s  prioritisation  of 
women,  young  people  and  people  with  disabilities  is  also  highly  appreciated.  However,  the  planned 
activities were already deployed in previous years and suffer from a lack of strategic and innovative 
measures beyond the already established virtual employment fairs. Considering the advantages they 
provide, especially in reaching a high number of people, the organisation of virtual fairs is a relevant 
and  feasible  activity.  The  ‘Future  Professions’  measure  in  the  previous  ERP  (2023-2025),  could  have 
been incorporated under this measure considering the importance of digital skill development. 

Vocational education and training (VET) have the potential to facilitate swift entrances to 
the labour  market and reduce the skills gap as the economy develops, in particular in the 
green and digital sectors. The labour market uptake is better for VET-trained students than students 
with traditional tertiary-level education. In the secondary, technical and vocational schools, and in the 
vocational  training  centres  of  the  Ministry  of  National  Education,  curricula  are  being  updated.  These 
curricula  are  being  updated  according  to  the  occupational  standards  and  qualifications  developed  by 
Türkiye’s  Vocational  Qualifications  Authority  for  all  occupations  related  to  the  green  and  digital 
transformation.  Recognition  of  Prior  Learning  (RPL)  is  also  partly  implemented  in  the  Vocational 
Training Centres. However, for a full implementation of the RPL, this practice needs to be applied to all 
levels of occupations and needs to also be recognised by the formal VET institutions. More work-based 
learning, such as dual education, and a focus on practical skills, would help make VET education more 
practically  relevant  and  would  facilitate  school-to-work  transitions.  Businesses  in  Türkiye  struggle  to 
find staff with the right skills, leading to labour shortages, in particular in manufacturing and logistics, 
thus  hampering  the  further  growth  prospects  of  the  economy.  By  progressively  applying  EU  quality 
frameworks  for  traineeships (135)  and  apprenticeships ( 136),  Türkiye  could  improve  the  quality  and 
relevance of work-based learning opportunities and thus make VET more attractive to students. 

Türkiye  consistently  aligns  its  VET  policy  with  the  EU  Skills  Agenda  and  the  Osnabrück 
Declaration (2020), while leveraging EU technical and financial support to enhance  VET provisions. 
‘Improving the Quality of Vocational Education and Training Through Establishment of Sectoral Centres 
of  Excellence  Operation’  has  played  an  important  role  in  Türkiye’s  progress  towards  achieving  policy 
goals.  In  addition,  Türkiye’s  ongoing  collaboration  with  the  European  Training  Foundation  (ETF),  most 
recently through the ETF’s Network for Excellence, is instrumental in advancing VET excellence in line 
with EU initiatives. Türkiye also participated in the European Year of Skills, which is commendable. 

Reform measure 5 on ‘Skill-based  updating of curriculum at all levels  within the scope of  green and 
digital  transformation  and  developing  a  system  for  recognising  previous  learning  by  strengthening 
vocational training centres’ was introduced in the 2024 ERP. This is a very welcome reform step on the 

(135) Council recommendation of 10 March 2014 on a European Quality Framework for Traineeships. 

(136) Council recommendation of 15 March 2018 on a European Framework for Quality and Effective Apprenticeships. 

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country’s path towards the digital and green economy. However, it needs to be closely followed up by 
relevant authorities, especially in terms of updating of the curricula for all levels of education as part 
of the twin transition and aligning skills with the needs of the green and digital sectors. In addition, the 
measure comprises updates of curricula from pre-school to 8th grade, which is a running exercise that 
was already initiated under the Education Vision 2023 programme of the Turkish government. 

Key structural challenge 2: Improving transparency and predictability in the regulatory and 
institutional environment affecting businesses 

Despite the shift towards more conventional economic policies in the second half of 2023, 
several  structural  barriers  remain,  as  the  institutional  and  regulatory  environment  lacks 
predictability  and  transparency.  The  size  of  the  informal  economy  still  accounts  for  a  significant 
share of economic activity, and the government has therefore underlined the fight against the informal 
economy as a key priority in its 2024 budget. The persistent serious backsliding regarding the judicial 
system continues to undermine business trust in judicial efficiency and independence. The enforcement 
of  intellectual  property  rights  also  continues  to  be  very  weak.  Furthermore,  the  reform  of  the 
bankruptcy  system  has  yet  to  bring  results,  while  procedures  are  still  costly  and  slow,  with  a  low 
recovery rate. Türkiye has  made progress in digitalising government services  for businesses, and  has 
also  taken  steps  to  develop  alternative  dispute-settlement  mechanisms.  Nevertheless,  effective 
measures  to  strengthen  the  rule  of  law,  ensure  appropriate  and  timely  contract  enforcement,  and 
improve  the  availability  and  functioning  of  dispute-settlement  mechanisms  remain  key  actions  that 
must be implemented to improve the business environment. 

Strengthening  the legal framework for state intervention by making this framework more 
transparent, accountable, and predictable is also a key requirement for a more favourable 
business environment. The Customs  Union with the EU  requires Türkiye to set an independent and 
effective framework for state aid control. Increased state interference in the economy and the failure 
to  monitor  state  aid  prevents  the  market-based  consolidation  of  a  level  playing  field  for  businesses. 
Legislation  to  implement  State-aid  rules  is  long  overdue  in  Türkiye,  and  its  absence  hinders 
enforcement  and  transparency.  The  current  structure  for  monitoring  state  aid  is  not  complete, 
independent, or operational, and Türkiye has not yet formally set up a comprehensive and transparent 
state inventory of all aid schemes, despite the obligations stemming from the Customs Union. 

It  is  of  concern  that  the  Türkiye  Wealth  Fund  (TWF)  and  the  Savings  Deposits  Insurance 
Fund  (SDIF)  remain  largely  exempt  from  fiscal  discipline,  transparency  requirements, 
accountability and competition. These shortcomings contribute towards the disruption the smooth 
functioning of the market. Another factor causing disruption to Turkish financial markets is widespread 
distortion in the allocation of government contracts and assets. Türkiye still lacks preventive and anti-
corruption bodies, and serious deficiencies in the anti-corruption legal framework have allowed undue 
political  influence  in  public  resource  allocation.  Due  to  several  exceptions  permitted  under  public 
procurement  law,  public  procurement  remains  especially  prone  to  corruption.  Predictability  in  the 
institutional and regulatory environment is crucial to attracting foreign investment. Nevertheless, major 
obstacles discouraging  potential investors remain unaddressed. These obstacles include difficulties in 
getting approvals, weak enforcement of industrial and property rights, and hidden market restrictions. 

Despite  strong  economic  growth  in  2023  (4.5%),  access  to  long-term  finance  for  SMEs 
remains  limited.  SMEs  are  mostly  financed  through  short-term  loans  in  a  highly  inflationary 
environment. Türkiye has taken further steps to provide equity-based finance opportunities for early-
stage  companies  and  via  capital  markets.  However,  microfinancing  systems  (non-bank  financing)  are 
not  widespread,  and  the  current  macroeconomic  situation  with  high  inflation  rates  and  high  interest 
rates make access to long-term finance difficult for SMEs. 

Regarding  measure  2  on  ‘Promoting  Sustainable  Tourism  and  Branding’,  the  tourism  sector  is 
considered  as  one  of  Türkiye’s  globally  competitive  sectors,  and  tourism  revenues  contribute 
significantly to the development of the economy, the improvement of the trade  balance and thus to 
the  reduction  of  the  current  account  deficit.  However,  this  sector  is  highly  vulnerable  to  pandemics, 

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global  economic  and  political  developments,  natural  disasters,  and  rapidly  changing  consumer 
preferences. In this respect, the continuation and further development of this measure from previous 
ERPs is welcomed. For further improvements, sustainable  tourism activities and infrastructure  should 
be improved in the regions with important natural, historical and cultural assets (such as the Black Sea, 
and Eastern and Southeastern Anatolia). 

Key  structural challenge  3: Pursuing climate neutrality, energy  security and the  economy’s 
green transition, in particular by boosting energy efficiency 

Türkiye faces critical environmental and climate challenges, both in terms of mitigation and 
adaptation to climate change. In the recent years, a number of documents ( 137) have been adopted 
to comply with the policies of combating global climate change and to support green transformation in 
line with the European Green Deal.  However, Türkiye urgently needs to adopt a new Climate Law, in 
particular to establish a domestic ETS aligned with the EU’s. The environment-related government R&D 
budget, as a percentage of total government R&D, has been gradually decreasing since 2010. 

On energy, Türkiye announced ambitious goals when it published its national energy plan (2023-2035) 
in  January  2023.  The  declared  goal  is  to  increase  the  share  of  renewable  energy  in  primary  energy 
consumption  from  16.7%  currently  to  23.7%  in  2035,  and  the  share  of  nuclear  energy  from  zero  to 
5.9%  in  2035.  To  support  these  objectives,  it  will  be  vital  to  continue  coordination  between  energy 
subsidies,  taxation  and  overall  green  policies,  in  particular  a  phase-out  of  fossil  fuel  subsidies  and 
increased taxation weighing on fossil energy compared to renewablesIn the context of ‘Climate Change 
Mitigation Strategy and Action Plan (2024-2030)’ and ‘Climate Change Adaptation Strategy and Action 
Plan  (2024-2030)’,  Türkiye  should  effectively  implement  a  long-term  low-emission  development 
strategy and address the energy-intensive and hard-to-abate sectors also using alternative fuels such 
as  renewable  hydrogen.  Another  key  success  factor  for  rapid  decarbonisation  consists  in  redirecting 
domestic  financial  flows  towards  sustainable  investment.  Türkiye  has  taken  initial  steps  towards 
establishing a national sustainable finance taxonomy. This is an encouraging first step that should help 
mainstream sustainability across the entire Turkish financial sector. 

Türkiye  continues  to  be  an  important  transit  country  for  the  EU  but  continues  to  turn  to 
Russia  for  fossil-fuel  imports  and  nuclear  energy.  This  dependency,  combined  with  volatile 
international markets, has led to very high energy prices, which are among the key factors contributing 
to high inflation and putting  pressure on the state budget. Türkiye continues to invest  in becoming a 
natural gas hub thanks to the country’s existing infrastructure of pipelines, LNG terminals, gas-storage 
facilities,  a  gas  exchange,  and  a  balancing  system.  Achieving  a  balance  between  energy  security, 
growing  demand  and  decarbonisation  can  only  be  achieved  through  ensuring  affordable,  green  and 
stable  energy  supplies  for  sustainable  economic  development.  Increased  use  of  renewable-energy 
sources  and  greater  energy  efficiency  are  essential  for  transitioning  to  an  energy  system  that  is 
sustainable  and  secure,  and  for  dealing  with  the  risks  posed  by  the  changing  international  energy 
market. Therefore, much more ambitious climate and environment policies need to be established and 
implemented to create the necessary enabling environment for the transition to a  more modern and 
competitive  economy (138).  Further  encouragement  for  the  development  of  renewable-energy 
installations  (in  full  compliance  with  Türkiye’s  obligations  under  the  Customs  Union  with  the  EU)  can 
help to reduce energy dependency and create new opportunities for businesses. Additionally, as Türkiye 
outlined  in  the  ERP  (2024-2026),  green  and  circular  economy  goals,  including  new  laws,  must  be 
addressed. 

(137) They  include:  Türkiye’s  Green  Deal  Action  Plan  of  2021,  the  2021  Green  Growth  Technology  Roadmap,  the  Türki̇ye  Solar 
Energy  Technologies  Strategy  and  Roadmap  of  2022,  and  the  Türki̇ye  Hydrogen  Technologies  Strategy  and  Roadmap  of 
2023. For the green and digital transitions, TÜBİTAK’s Priority R&D and Innovation Areas Study (2022-2023) includes priority 
topics focusing on digitalisation and green technologies. 

(138) Infrastructure investments need to comply with the EU environmental acquis, national and international nature protection, 
and water management obligations, ensure public participation and consultation, and guarantee high quality environmental 
impact assessment reports that include cumulative impacts on nature and biodiversity. 

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In measure 3 on ‘Accelerating green transformation’, there are clear action points related to legislative 
steps to develop the green taxonomy, and to start a pilot implementation of the ETS. However, in the 
absence of the expected Climate Law, the timelines for these action points presented are not realistic 
without a clear supportive regulatory framework. The ETS should be compatible with the EU. Measure 1 
on ‘Supporting the modernisation of SMEs and increasing their efficiency and competitiveness through 
digital  transformation  and  green  transformation  in  the  manufacturing  industry’  is  a  positive  and 
welcome  reform  measure.  All  related  actions  under  this  measure  should  follow  an  integrated  and 
coordinated  approach  towards  the  green  and  digital  transformation  of  industry,  including  the 
establishment of clear climate policies. To facilitate this transformation, the preparation of a National 
Circular Economy Action Plan in Türkiye is encouraged, as the circular economy can also strengthen the 
industrial  base  and  foster  business  creation  and  entrepreneurship  among  SMEs.  Overall,  an 
improvement in the design of this measure can be observed compared with previous years. 

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9.5.  THE POLICY GUIDANCE 

JOINT CONCLUSIONS OF THE ECONOMIC AND FINANCIAL DIALOGUE BETWEEN THE EU AND 
THE WESTERN BALKANS PARTNERS, TÜRKIYE, GEORGIA, REPUBLIC OF MOLDOVA AND 
UKRAINE 

The Economic and Financial Dialogue between the EU and the Western Balkans Partners, Türkiye, 
Georgia, Republic of Moldova and Ukraine 

Brussels, 14 May 2024 

… 

In light of this assessment, Participants hereby invite Türkiye to: 

1. 

2. 

3. 

4. 

5. 

Maintain a tight macroeconomic policy mix until the disinflation process is firmly established. 
Use any revenue overperformance as well as fiscal buffers on the expenditure side to lower 
the  2024        budget  deficit  compared  to  the  ERP  target.  Present  a  medium-term  fiscal 
strategy  that  includes  specific  consolidation  measures  to  support  the  envisaged  gradual 
return to a primary surplus of at least 1% of GDP. 

Reduce  fiscal  risks  by  –  inter  alia –  gradually  phasing  out  the  FX  value  guarantees  on  lira 
time  deposits.  Expand  the  tax  base  by  streamlining  tax  exemptions  and  reductions  and 
reducing informality. Take gradual steps to phase out subsidies on fossil fuels. 

Ensure a sufficiently tight monetary policy stance to entrench further disinflation and anchor  
inflation expectations, continue the simplification of the complex macroprudential measures 
and  the  regulatory  framework  to  strengthen  monetary  transmission  while  maintaining 
financial  stability.  Underline  central  bank  independence  as  the  institutional  basis  for 
sustainably  achieving  price  stability  and  underpinning  monetary  policy  credibility.  Enhance 
risk-based  supervision  in  line  with  best  international  and  European  practices,  including  by 
further improving the transparency and efficiency of the regulatory framework by removing 
regulations  that  hamper  market-based  credit  allocation  and  loan  pricing,  and  enhance 
confidence by conducting transparent asset quality reviews and publish its methodology and 
outcomes. 

Implement legislation and enhance transparency, accountability, and predictability regarding  
state aid to maximise the benefit of the EU-Türkiye economic and trade relationship, as well 
as  to  achieve  a  meaningful  level-playing  field.  Adopt  effective  measures  to  further 
strengthen the rule of law, ensure adequate and timely contract enforcement and improve 
the availability and functioning of dispute settlement mechanisms. Track the implementation 
process of the action plan for the fight against the informal economy (2023-2025). 

Adopt  the  Climate  Law  focusing  on  enhancing  climate  governance,  fair  transition  and  the 
establishment of an Emission Trading System (ETS) aligned with the EU ETS. In the context 
of "Climate Change Mitigation Strategy and Action Plan (2024-2030)" and "Climate Change  
Adaptation Strategy and Action Plan (2024-2030)", effectively implement a long-term low-  
emission development strategy and address the energy-intensive and hard-to-abate sectors 
also using alternative  fuels such  as renewable  hydrogen.  Increase  the  resilience  against 

191 

 
 
 
 
 
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climate  change  and  disaster-related  risks, 
development. 

including  to  ensure  sustainable  urban 

6. 

Facilitate school-to-work transitions for young people who are not in education, employment 
or  training  (NEET)  by  ensuring  the  quality  and  inclusivity  of  the  school,  tertiary,  and 
vocational training system. Address the labour market gender gap – the difference between 
men and women – through the establishment of affordable childcare infrastructure beyond 
the  big  urban  centres  of  Türkiye,  and  through  raising  the  level  of  skills  for  women  by 
facilitating their participation in on- the-job training. Continue increasing the participation of 
adults  in  lifelong  learning,  aimed  at  the  development  of  a  skilled  labour  force  fit  for  the 
green and digital transitions. 

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ANNEX 1:   OVERVIEW  OF  THE  IMPLEMENTATION  OF  THE  POLICY  GUIDANCE  ADOPTED  AT  THE 

ECONOMIC AND FINANCIAL DIALOGUE IN 2023 

Every year since 2015, the Economic and Financial Dialogue between the EU and the Western Balkans 
and Turkey has adopted targeted policy guidance for all partners in the region. The guidance represents 
the participants’ shared view on  the policy measures that should  be implemented to address macro-
fiscal  vulnerabilities  and  structural  obstacles  to  growth.  The  underlying  rationale  of  the  guidance  is 
similar to that of the country-specific recommendations usually adopted under the European Semester 
for  EU  Member  States.  Implementation  of  the  guidance  is  evaluated  by  the  Commission  in  the 
following year’s ERP assessments.  

The following table presents the Commission’s assessment of the implementation of the 2023 policy 
guidance  jointly  adopted  by  the  EU  and  the  Western  Balkans  and  Turkey  at  their  Economic  and 
Financial Dialogue at ministerial level on 16 May 2023. 

 Overall: Limited implementation (36.1%) ( 139)  

2023 policy guidance 

Summary assessment 

PG 1: 

There was limited implementation of PG 1: 

Keep  an  appropriately  tight  fiscal 
stance  in  2023  to  help  disinflation, 
including  by  reducing  budget  support 
to  state-owned  enterprises 
in  the 
energy sector in view of the prevailing 
international  energy  prices,  while 
transparent 
timely  and 
providing 
the 
support 
to 
consequences 
February 
earthquakes. 

alleviating 
the 

of 

Fiscal 

implementation: 

policy  was 
1)  Partial 
expansionary  in  2023,  driven  by  earthquake-  and  pre-
electoral-related  expenditure.  However,  in  July,  the  2023 
budget was revised, including with sizeable tax increases to 
cover  some  of  the  additional  expenditure  and  limit  their 
impact on the deficit. The 2023 budget deficit was 5.2% of 
GDP, higher than in 2022 but lower than the revised target 
of 6.4% of GDP. Net of earthquake-related expenditure, the 
deficit  was  1.7%  of  GDP.  Subsidies  to  state-owned 
enterprises in the energy sector have declined in 2023 but 
remained  substantial  (the  state-owned  Petroleum  Pipeline 
Corporation BOTAŞ received TRY 74 billion through current 
transfers).  A  number  of  timely  and  transparent  fiscal 
measures  were  taken  to  support  citizens  and  businesses 
affected  by  the  February  2023  earthquakes 
(these 
measures  include  postponement  of  loan  instalments  and 
tax  liabilities,  and  an  increase  in  current  and  capital 
transfers). A total of TRY 950 billion was allocated in 2023 
for  the  recovery  and  reconstruction  of  earthquake-
damaged regions and the remediation of the effects of the 
February  earthquake,  exceeding  the  estimated  TRY  762 
billion. 

Present  a 
credible  medium-term 
strategy  to  support  the  envisaged 
gradual return to a primary surplus of 

2)  Limited  implementation:  The  ERP  projects  a  general 
government  primary  surplus  of  1.2%  of  GDP  in  2026, 
which  would  be  a  3.9  pp.  improvement  on  the  2023 

(139) For  a  detailed  description  of  the  methodology  used  to  assess  policy  guidance  implementation,  see  Section  1.3  of  the 
Commission’s  overview  and  country  assessments  of  the  2017  economic  reform  programmes.  This  is  available  at 
https://ec.europa.eu/info/publications/economy-finance/2017-economic-reform-programmes-commissions-overview-and-
country-assessments_en. 

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at least 1% of GDP. 

Expand  the  tax  base  by  streamlining 
tax exemptions and reductions. 

outcome.  In  addition  to  the  expiration  of  the  earthquake-
related  expenditure,  the  authorities  plan  to  pursue  ‘soft’ 
like  rationalising  public  expenditure, 
fiscal  measures, 
systematising  spending  reviews,  broadening  the  tax  base, 
and fighting the informal economy. Although the envisaged 
total  fiscal  adjustment  seems  plausible,  the  adjustment 
path is likely to be smoother than currently planned. 

3)  No  implementation:  In  recent  years,  Türkiye  has 
implemented  temporary  tax  cuts,  debt  restructuring,  and 
amnesty  programmes.  Contrary  to  commitments  made  in 
Turkish  policy  documents,  tax  restructuring  and  capital 
repatriation,  which  have  negative  consequences  for  long-
term  voluntary  tax  collection,  have  become  established 
practices.  The  government  also  passed  a  new  tax-
restructuring  bill  shortly  before  the  May  2023  elections. 
The  new  policy  documents 
the  Medium-Term 
Programme for 2024-2026 and the 12th Development Plan 
for  2024-2028)  seek  to  ensure  revenue  continuity  by:  (i) 
strengthening  tax  justice;  (ii)  broadening  the  tax  base;  (iii) 
increasing 
inactive 
exceptions,  exemptions  and  discounts;  and  (v)  updating 
laes on income, corporate, and value-added tax to increase 
the share of direct taxes in the medium term. 

(iv)  eliminating 

collection; 

(i.e. 

tax 

PG 2: 

There was limited implementation of PG 2: 

Reduce  fiscal  risks  by  –  inter  alia  – 
gradually  phasing  out  the  FX  value 
guarantees on lira time deposits. 

Revise  public  procurement  legislation 
to  further  align  it  with  the  2014  EU 
Directives  on  public  procurement, 
including  utilities,  concessions  and 
public private partnerships and reduce 
the  number  of  exemptions  that  are 
incompatible with the EU acquis. 

1)  Substantial  implementation:  The  authorities  have 
taken  a  series  of  measures  to  ensure  the  gradual  wind-
down  of  the  FX-protected  deposits  scheme  (through 
amendments  in  the  security  maintenance  facility  and 
reserve  requirements,  new  incentives  to  switch  from  FX 
deposits  to  TRY  deposits,  etc.).  They  have  also  announced 
that the scheme will come to a complete end in 2024. The 
volume  of  FX-protected  deposits  under  the  scheme  has 
been following a downward  trend  since  mid-August 2023, 
falling  from  TRY  3.4  trillion  down  to  TRY  2.5  trillion  as  of 
end-January 2024. 

implementation:  The 

2)  Limited 
law  on  public 
procurement  contains  many  exemptions  that  undermine 
the  transparency  and  accountability  of  public  expenditure. 
Furthermore,  Türkiye  continues  to  overuse  negotiated 
procedures,  which  allow  contracting  authorities  to  limit 
competition and transparency (regardless of any threshold) 
by referring to subjective criteria that cannot be objectively 
measured.  However,  recent  policy  documents  (i.e.  the 
Medium-Term  Programme  for  2024-2026  and  the  12th 
Development  Plan  for  2024-2028)  have  set  a  target  of 
amending  the  public  procurement  law  by  the  end  of  the 
second  quarter  of  2024  in  order  to:  (i)  digitalise  the 
legislation according to international norms and standards; 
(ii) update it with a purchasing approach that supports and 

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prioritises innovation and sustainability; and (iii) implement 
sectoral public procurement regulation. 

Prepare  an  options  paper  for  the 
possible  adoption  of  a  fiscal  rule  and 
the setting up of an independent body 
to monitor its implementation. 

3)  No 
implementation:  The  government  has  not   
disclosed  any  official  option  paper  for  the  possible 
adoption  of  a  fiscal  rule  and  the  setting  up  of  an 
independent body to monitor its implementation. 

PG 3: 

There was partial implementation of PG 3: 

interest 

Use  all  tools  of  the  central  bank, 
including 
rates,  more 
decisively  in  order  to  accelerate  the 
disinflation process and bring financial 
conditions  in  line  with  achieving  price 
stability  over  the  medium  term  and 
central bank independence. 

1)  Partial  implementation:  Interest  rates  have  been 
increased substantially and the monetary policy stance has 
been  tightened  on  account  of  various  metrics,  with 
important 
strengthen  monetary 
transmission and reinstating the policy rate as the primary 
instrument of monetary policy. However, no improvements 
have been made to strengthen central bank independence. 

taken 

steps 

to 

Provide  more  guidance  and  efficient 
communication  with  regards  policy 
tools  as  well  as  the  evaluations  of 
their  potential  effects  and  increase 
the  efficiency  of 
the  operational 
framework. 

2)  Substantial  implementation:  The  effectiveness  and 
consistency of the central bank’s policy and communication 
tools have improved since the policy shift as of June 2023. 
The  complex  system  of  macroprudential  and  regulatory 
measures  adopted 
in  recent  years,  which  hampered 
operational  efficiency  and  distorted  price  signals,  has 
started  to  be  unwound  and  simplified,  albeit  gradually  in 
the face of high risks to macro-financial stability. 

the 

transparency 

and 
Improve 
predictability  of  the  financial  sector 
regulatory  framework  by  aligning  it 
with  international  and  EU  standards, 
by 
and 
conducting  transparent  asset  quality 
reviews  and  publish  its  methodology 
and outcomes. 

confidence 

enhance 

3)  Partial  implementation:  Progress  has  been  made  in 
simplifying the macroprudential regulatory framework and 
improving  predictability,  although  some 
regulations 
constraining  market-based  asset  and  loan  pricing  and 
credit  allocation  remain  in  place.  Legislative  work  on 
compliance with the final elements of Basel III regulations 
has  been completed, with full implementation planned for 
2025 in line with the implementation schedule announced 
by the EU. There are no plans to conduct independent asset 
quality reviews and publish its methodology and outcomes. 

PG 4: 

There was limited implementation of PG 4: 

With  the  aim  to  improving  business 
environment,  further  strengthen  the 
rule of law and improve the regulatory 
consultation 
environment 
and 
mechanisms 
business 
organisations  and  social  partners  on 
relevant new legislation. 

with 

1) Limited implementation: The 12th Development Plan 
(2024-2028) was  published  in November  2023. Launched 
in  December  2022,  the  preparation  for  this  new  Plan 
involved  the  contribution  in  total  of  60  special  expert 
commissions and 27 working groups with the participation 
of  representatives  from  public  institutions,  academia, 
private  sector,  social  partners  and  civil  society.  Yet,  the 
results  of  these  consultations  and  expert  commission 
reports  are  not  publicly  available.  The  Coordination  Board 
for  the  Improvement  of  Investment  Environment  (YOIKK) 
continued its meetings with private sector and public sector 
stakeholders, with its last meeting held in December 2023. 

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The action plans of the Board and meeting conclusions are, 
however,  not  publicly  available.  Meanwhile,  there  has  not 
been  any  significant  improvement  in  the  use  of  social 
dialogue mechanisms to develop relevant legislation. 

Implement  legislation  and  enhance 
transparency  regarding  state  aid  to 
maximise  the  benefit  of  the  EU-
Türkiye 
trade 
relationship,  as  well  as  to  achieve  a 
meaningful level-playing field. 

economic 

and 

Increase the number and improve the 
efficiency  of  specialised  courts  for 
business,  with  a  view  of  streamlining 
commercial disputes. 

PG 5: 

Take  further  steps  to  implement  the 

196 

refusing 

to  pass 

the  effective 

the  necessary 

2)  No  implementation:  Since  the  enactment  of  Law  No. 
6015 on Monitoring and Supervision of State Aids, Türkiye 
has  actively  avoided  implementing  state  aid  control  by 
failing  to  establish  a  functional  organisational  structure 
implementing 
and 
legislation.  Instead  of  enforcing  Law  No.  6015  through 
secondary legislation, Türkiye established a new legislative 
structure  aimed  at 
implementation, 
coordination,  monitoring  and  evaluation  of  state  aid.  This 
new system does not aim to align with the EU acquis. The 
lack of independence in enforcing state aid legislation and 
the  lack  of  transparency  regarding  the  actual  amount  of 
state aid provided remain a source of concern. Yet, recent 
policy documents (i.e. the Medium-Term Programme 2024-
2026 and the 12th Development Plan for 2024-2028) set 
targets  for  establishing  a  state  aid  monitoring  system  in 
2028  to  simplify  state  aid,  ensure  coordination  among 
public  institutions,  prevent  duplication,  and  measure  the 
impact of state aid in order to prioritise new areas of aid. 

it 

is  foreseen 

in  2024  to  conduct 

3) Limited implementation: Regarding specialised courts, 
Türkiye indicated in bilateral technical meetings (at the last 
Sub-Committee  meeting  No.3) 
that  capacity-building 
programmes  are  in  place  for  specialised  courts,  while  the 
assignment  of  judges  and  prosecutors  to  these  courts 
continued.    Yet,  no  data  on  implementation  was  provided. 
The  Medium-Term  Programme  (2024-2026)  and  the  12th 
Development Plan (2024-2028) indicate the Government’s 
intention  to  strengthen  the  specialised  courts.  In  this 
respect, 
impact 
assessments  of  the  specialised  courts  to  determine  new 
areas  of  needs,  to  reinforce  these  courts  in  view  of 
improving the effectiveness of the investigations as well as 
to provide trainings for the judges and prosecutors involved 
in  these  specialised  courts.  A  Judicial  Reform  Strategy  is 
under  preparation,  with  a  view  of 
the 
accessibility  and  effectiveness  of  the  overall  judicial 
system. Türkiye has made wider use of alternative dispute 
settlement  mechanisms  over  the  last  years  in  an  attempt 
to  reduce  the  workload  of  the  judiciary  and  increase  its 
efficiency  (increase  from  1,160  voluntary  arbitration  files 
settled in 2015 to 469,829 files already in 2022 according 
to  Ministry  of  Justice’s  data).  Yet,  no  data  on  the 
implementation was provided in the ERP. 
There was partial implementation of PG 5: 

improving 

1)  Limited  implementation:  The  adoption  of  a  Turkish 
and 
Climate 

establishment 

critical 

Law 

for 

is 

 
 
 
 
 
 
 
 
 
 
 
 
ETS carbon pricing mechanism. 

Continue to ensure the steady growth 
of  renewables  (both  traditional  and 
hydrogen-based)  in  Türkiye’s  energy 
mix  and  reflect  this  objective  in  the 
country’s subsidies policy. 

Prioritise  energy  efficiency  for  new 
and  existing  buildings  in  order  to 
adapt to climate change, especially in 
light of the reconstruction efforts that 
will 
devastating 
earthquakes of 6 February 2023.  

follow 

the 

Part II 
Country analysis, Türkiye 

implementation  of  ETS  carbon  pricing  mechanism.  A  draft 
law has been prepared but has not been submitted yet to 
the Parliament. Efforts are ongoing for the development of 
the  ETS  system.  Meanwhile,  Türkiye  seems  to  be  focused 
primarily  on  EU  CBAM  effect  on  Turkish  exports  and 
minimising/ mitigating its cost. 

2) Partial implementation: Türkiye announced ambitious 
goals on renewable energy generation in its latest National 
Energy  Plan  (2023-2035).  The  plan  envisages  maximising 
solar and wind energy to achieve the country’s greenhouse 
gas emission targets. The  declared goal is to increase the 
share of renewable energy in primary energy consumption 
from  16.7%  to  23.7%  and  the  share  of  nuclear  energy 
from  zero  to  5.9%  by  2035.  Türkiye  also  published  a 
hydrogen  technologies  strategy  and  roadmap  strategic 
document, highlighting the role for green hydrogen on the 
road to achieve net-zero emission targets by 2053. 

3) Substantial implementation: Türkiye has tightened its 
energy  efficiency  and  renewable  energy  standards  in 
buildings  in  the  context  of  its  2053  climate  targets.  The 
second  National  Energy  Efficiency  Action  Plan  for  the 
period 2024-2030 was agreed at the end of 2023. In the 
buildings sector, Türkiye plans to achieve energy savings by 
at  least  30%  by  2030  for  public  buildings,  including 
hospitals and schools. Some national funding mechanisms 
are already initiated. This goal albeit ambitious was set not 
only  in  view  of  achieving  the  country’s  2053  climate 
targets but also in the light of the enormous reconstruction 
efforts following the February earthquakes. 

PG 6: 

There was limited implementation of PG 6: 

Support the school-to-work transitions 
and  the  activation  of  young  people 
who are not in education, employment 
or  training  (NEET)  and 
incentivise 
female  labour  market  participation 
fiscal 
through 
measures,  as  well  as 
through 
strengthened  efforts  on  the  provision 
of 
affordable 
childcare  infrastructure  beyond  the 
big urban centres of Türkiye. 

appropriate 

legislative 

and 

and 

1)  Limited  implementation:  Young  people,  especially 
women, still have difficulties in entering the labour market. 
While the NEET rate in the 3rd quarter of 2023 decreased 
to  24.7%  from  27.1%  in  the  same  quarter  of  2022,  it 
remains  high,  especially  for  women  (32.9%  in  the  3rd 
quarter of 2023). The incentives for additional employment 
continued  in  2023;  however  no  additional  legislative  and 
fiscal  measures  have  been  introduced  in  2023.  The 
implementation  of  National  Youth  Employment  Strategy 
and  Action  Plan  (2021-2023)  including  active  labour 
market  activities  on  career  guidance  and  vocational 
trainings  was  completed  by  the  end  of  2023.  An 
assessment  of  the  action  plan  is  expected  to  be  done 
before  the  end  of  the  1st  half  of  2024.  No  official 
announcement has made yet for the extension or the new 
version  of  the  strategy  and  action  plan.  The  limited  care 
services  is  still  a  major  challenge  for  female  labour  force 
participation. 

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investments  in  the  care  economy  in 
the  provinces  affected  by 
the 
to  provide 
in  order 
Earthquakes 
victims  with  health  and  care  services 
and  create  employment 
intensive 
opportunities, in particular for women. 

in 

Continue  increasing  the  participation 
of  adults 
in 
lifelong 
particular  to  reinforce  green  and 
digital  skills,  in  order  to  ensure  just 
transition.  

learning, 

to  avoid  health 

2)  Limited  implementation:  The  Ministry  of  Health 
provided healthcare services through undamaged hospitals, 
hospital stations, emergency units and primary health care 
units and also established field hospitals in the earthquake 
region.  Vaccination  and  reproductive  health  services  were 
conducted 
risks,  whilst  mobilised 
psychosocial  teams  provided  psychosocial  support  to 
individuals in the region. Though a rotational system where 
volunteer-based  public  health  workers  were  deployed  to 
the highly affected areas in shifts to combat public health 
threats,  the  health  workers  assigned  had  generally 
obtained limited trainings and experience in  responding to 
outbreaks,  disasters  and  public  health  emergencies. 
The  need  for  healthcare  services  including  mental  health 
and  psychosocial  services  remain  unmet.  Progress  is 
overall  limited  in  terms  of  strengthening  the  national 
capacity starting from earthquake affected provinces to all 
provinces  and  ensure  health  security.  A  number  of 
measures  were 
in  the  aftermath  of  the 
earthquakes  in  the  region,  such  as  community  benefit 
programs,  short-term  work  benefits  and  cash  wage 
support.  Implementing  employment  incentive  programs  in 
the  earthquake  region  has  been  identified  as  policy 
recommendations  in  “Türkiye  Earthquakes  Recovery  and 
Reconstruction  Assessment”,  however,  the  progress  is 
limited. 

introduced 

3) Partial implementation: According to the most recent 
data published by Turkish Statistical Institute, the Lifelong 
Learning participation rate in Türkiye increased from 2% in 
2006 to 6.7% in 2022, yet it is still below the EU target of 
15%.    The  recent  official  documents  such  as  the  Medium 
Term Programme (2024-2028) and the 12th Development 
Plan  (2024-2028)  reflect  the  Government’s  plan  to 
strengthen education and training capacity of the relevant 
centres,  especially  as  regards  green  and  digital  skills.  In 
this  respect,  it  is  foreseen  to  adopt  measures  to  increase 
the participation in lifelong learning and adapt skills to the 
needs arising with the green and digital transformation. 

198 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Part II 
Country analysis, Türkiye 

ANNEX 2: COMPLIANCE WITH PROGRAMME REQUIREMENTS 

Türkiye’s  2024-2026  ERP  was  submitted  to  the  Commission  on  15 January 2024.  Overall,  it  has 
followed the Commission’s guidance note. 

Inter-ministerial coordination 

Türkiye’s Presidency of Strategy and Budget has been responsible for central coordination of the ERP 
since 2019. The Presidency works closely with the Ministry of Treasury and Finance for for the sections 
of the ERP dealing with the macroeconomic outlook and public finance and with all other line ministries 
and institutions for the sections of the ERP dealing with structural reforms. 

Each  line  ministry  has  designated  a  coordinator  for  the  ERP,  which  has  helped  to  ensure  a  smooth 
inter-ministerial ERP coordination process. The proposed measures for the new ERP were discussed in a 
workshop  held  in  July  and  December  2023  by  the  Presidency  of  Strategy  and  Budget  with  the  ERP 
coordinators, experts responsible for the measures and Instrument for Pre-Accession Assistance (IPA) 
coordinators. Afterwards, the ERP coordinator remained in contact with the different line ministries and 
relevant institutions in the preparation of the document. 

Stakeholder consultation 

The line ministries and related institutions were involved in the preparation of the ERP document. It is 
mostly based on Long-Term Development Strategy (2024-2053) and 12th Development Plan (2024-
2028),  Medium  Term  Program  (MTP,  2024-2026)  and  2024  Presidential  Annual  Program.  The  12th 
national  development  plan  and  the  other  policy  documents  were  developed  in  a  broad  consultation 
process with stakeholders and experts (including private-sector representatives, NGOs, and academia). 
On 31 October 2023, the 12th Development Plan was approved by the General Assembly of the TGNA. 
During  one-year  period,  87  different  ad-hoc  committees  and  working  groups  were  set  up  to  obtain 
opinions and suggestions from various parts of society. Approximately 8,500 representatives from the 
public  sector,  private  sector,  academia  and  non-governmental  organisations  participated  in  these 
meetings  and  contributed  to  the  ongoing  studies.  In  addition,  high-level  participatory  meetings  were 
held  with  relevant  public  institutions,  academia,  civil  society  organisations,  professional  associations 
and the business community. An online citizens' survey was conducted with the participation of some 
43,000  citizens.  After  all  these  inputs,  the  development  plan  was  prepared  and  ERP  (2024-2026)  is 
fully aligned with these policy objectives and actions. 

As  part  of  the  preparations  for  structural  reforms,  workshops  were  held  in  July  2023  and  December 
2023  with  the  participation  of  all  relevant  public  institutions  and  organisations  in  cooperation  with 
Connecting  Europe  Facility.  Suggestions  on  the  scope  of  the  reform  measures  and  their  compliance 
were  made  with  the  current  guidelines  in  mind.  In  the  process  that  followed  the  meeting,  the 
institutions'  work  on  improving  the  measures  in  the  ERP  was  conducted  in  communication  with  the 
strategy and budget experts. The updated contributions were finalised as of January 2024. 

However, no specific consultations took place with external stakeholders on the draft ERP and no draft 
was  made  available  to  the  public  before  its  adoption.  No  training  programmes  were  organised  this 
year. The ERP document does not provide sufficient information on the feedback and how it has been 
worked in. Written comments were not annexed to the ERP. 

 Macroeconomic framework 

The chapter in the ERP on the macroeconomic framework broadly follows the outline provided in the 
guidance  note.  It  succinctly  covers  nearly  all  of  the  required  elements  with  one  major  exception  –  it 
does not present an alternative scenario. This is a repeat omission and a major drawback, especially in 
view  of  the  high  levels  of  domestic  and  global  uncertainty.  The  analysis  would  have  benefited  from 
better linkage between the macroeconomic and fiscal framework sections and with the macro-relevant 
structural reforms. The presentation and analysis of risks is rather schematic and could be expanded 
and deepened. 

199 

 
 
European Commission 
Institutional Paper 

Fiscal framework 

The chapter on the fiscal framework largely follows the outline provided in the guidance note. It covers 
all  major  elements  and  provides  information  on  the  2024  budget,  although  without  presenting 
information on the main discretionary fiscal measures (equal to or above 0.1% of GDP). The chapter 
also  lacks  detail  on  the  medium-term  plans  and  the  underlying  measures.  The  section  on  contingent 
liabilities  could  be  expanded  to  systematically  cover  all  sources  of  liability.  The  section  on  public 
finance  risks  could  be  further  developed.  The  fiscal  framework  chapter  could  be  expanded  to  cover 
elements related to fiscal rules and the medium-term budgetary framework. 

Structural reforms 

Reporting  on  most  of  the  implementation  of  the  policy  guidance  is  sufficient.  However,  in  some 
instances, outcome indicators such as total factor productivity, increase in value added, share of high 
technology products in exports, and so on, were not included to assess whether the reform measures 
met  their  objectives.  Furthermore,  the  assessment  of  full  implementation  was  delivered  to  some 
reform measures which did not reach the outlined initial targets. To improve future reporting, impact-
related and outcome indicators should be utilised. The maximum number of reforms (20) is respected; 
the  current  ERP  (2024-2026)  presents  a  total  of  6  measures.  However,  the  page  limit  (50)  is  not 
respected, as the section on the structural reform stretches to 74 pages. The ERP document includes 
the  two  Tables  9,  presented  as  8a  ‘Social  Scoreboard  Indicators’  and  8b  ‘Other  Selected  Indicators’, 
which  provide  some  information  requested  under  Table  9.  The  ERP  document  presents  ‘Table  10a: 
Costing of structural reform measure’ as ‘Table 9a’. The table contains information for each measure. 
The ERP document presents ‘Table 10b: Financing of structural reform measure’ as ‘Table 9b’. The ERP 
document also includes ‘Table 11: Reporting on the implementation of the structural reform measures 
of the ERP 2023-2025’, which is presented as ‘Table 10’. 

Regarding  Annex  2  table,  ‘links  between  reform  areas  and  relevant  policy  documents’,  the  links 
between the reform areas and the  relevant  policy documents need further elaboration (especially as 
regards the Enlargement Package). There is significant room for improvement. 

200 

 
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