EUROPEAN COMMISSION

Brussels, 7.7.2020

SWD(2020) 125 final

COMMISSION STAFF WORKING DOCUMENT

Background Analysis per beneficiary country

Accompanying the document

REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL

on the implementation of macro-financial assistance to third countries in 2019

{COM(2020) 296 final}

COMMISSION STAFF WORKING DOCUMENT

Background Analysis per beneficiary country

Accompanying the document

REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL

on the implementation of macro-financial assistance to third countries in 2019

List of abbreviations

Contents

Introduction

Background analysis of beneficiaries of macro-financial assistance

1.Tunisia

1.1.Macroeconomic performance

1.2.Structural reforms

1.3.Implementation of macro-financial assistance

2.Jordan

2.1.Macroeconomic performance

2.2.Structural reforms

2.3.Implementation of macro-financial assistance

3.Moldova

3.1.Macroeconomic performance

3.2.Structural reforms

3.3.Implementation of macro-financial assistance

4.Georgia

4.1.Macroeconomic performance

4.2.Structural reforms

4.3.Implementation of macro-financial assistance

5.Ukraine

5.1. Macroeconomic performance

5.2. Structural reforms

5.3 Implementation of macro-financial assistance

Annexes

Annex 1: Selected macroeconomic indicators by country

Annex 2: MFA operations by date of decision, 1990-2019

Annex 2A: Status of disbursements made by date of decision at end-December 2019

Annex 2B: Status of disbursements made by region at end-December 2019 (in millions of €)

Annex 3: MFA amounts authorised by year, 2005-2019 (EUR million)

Chart 3A: MFA amounts authorised by year, 2006-2019 (EUR million)

Chart 3B: MFA amounts authorised by region, 2006-2019 (%)

Annex 4: MFA amounts disbursed by year, 2006-2019 (EUR million)

Chart 4A: MFA amounts disbursed by year, 2006-2019 (EUR million)

Chart 4B: MFA amounts disbursed by region, 2006-2019 (%)

Annex 5: Outstanding amounts in respect of MFA operations disbursed (as at 31 December 2019)

Introduction

This Staff Working Document complements the Commission’s report to the European Parliament and the Council on the implementation of macro-financial assistance (MFA) to third countries in 2019. 1

Over 2019, two countries in the Southern Neighbourhood, Jordan and Tunisia, benefited from macro-financial assistance disbursements. The year was also characterised by the first disbursement in Moldova, and progress in the implementation of the ongoing MFA programmes in Georgia and Ukraine in the Eastern Neighbourhood. For each beneficiary country, the report provides more detailed information on: (i) their macroeconomic and financial situation; (ii) progress in accomplishing their structural reforms agenda; and (iii) implementation of their MFA operations.

The annexes include overview tables on the effective disbursements of MFA operations since 1990 by date of adoption of the decisions and by region, as well as tables on MFA commitment and payment amounts in 2006‑2019, by year and by region. 2

Background analysis of beneficiaries of macro-financial assistance 3

1.Tunisia

1.1.Macroeconomic performance

The Tunisian economy remained subdued and grew at an estimated 1% rate in 2019, following the improvement in 2018 (2.7%) and the meagre 1.4% average annual expansion over the 2015-17 period. Growth remained fragile, in line with weak external demand and the moderation in domestic consumtion and investment, At sectoral level, growth was affected by the stagnation in agricultural production and the drop in manufacturing and non-manufacturing industries, despite positive trends in services. Growth remained insufficient to reduce unemployment, which remained persistently high at around 14.9% at the end of 2019 (with much higher rates for female and youth) despite a a slight contraction in the number of unemployed.

Inflation averaged 6.7% in 2019, after reaching a 7.8% decade-high in June 2018. As a response to mounting inflation, the Central Bank of Tunisia increased its base interest rate twice in 2018, first in April (from 5% to 5.75%) and then in June (to 6.75%). It subsequently raised its rate in February 2019 to 7.75%, bringing real interest rates to positive territory. After a period of relatively prolonged depreciation, the dinar appreciated against main foreign currencies in 2019.

The fiscal deficit is estimated at around 3.5% in 2019, as revised in the 2019 Supplementary Finance Law, against a 4.9% deficit in 2018, and is expected to reach 3% in the 2020 Finance Law. The improvement is largely attributed to the good performance of State’s own resources (up by about 16% in 2019) driven by the sharp increase in tax revenues (+17.9%), in particular direct taxes (+39.5%) compared to 2018. Operating expenses also rose (up 11.6%), mostly due to an increase in wage costs of 13.5% and goods and services expenditure (+32.8%), while investment remained subdued. The increase in the public service wage bill reamins high, at 14.5% of GDP in 2019, compared to 14% in 2018 and 14.8% in 2017.

Total public debt is expected to have reached a level of 72.2% of GDP at the end of 2019, down from 77.9% of GDP at the end of 2017. Debt service costs had once again a considerable impact on total expenditures in 2019 increasing by 38.5% compared to 2018. The stock of external public debt is mostly denominated in euros (55.7%) and is mainly due to multilateral organisations at 48.9%, followed by debt to the financial markets (35.6%) and debt granted within the framework of bilateral cooperation (15.5%). Tunisia issued Eurobonds for EUR 700 million in July 2019, with a yield of 6.37% and a maturity of seven years.

The balance of payments improved in 2019 and the current account deficit stood at TND 10 billion, or 8.8% of GDP at the end of the year (against a record high 11.1% of GDP in 2018). The trade deficit continued to widen in nominal terms (+2%), with a broadening energy balance representing around 40% of the total. Excluding energy, the trade balance deficit narrowed slightly with a a drop in both exports and imports of 5.2% and 8.5%, respectively, at constant prices. Export revenues increased (7%) due to the rise in export prices. The country also recorded strong increases in the receipts generated by tourism (+35.7%) and labor income (+15%). There has also been an improvement in foreign reserves, which, after a record low of 69 days of imports in September 2018, reached 112 days of imports in February 2020.

1.2. Structural reforms

A number of structural challenges and imbalances hinder the Tunisian economy to develop its potential, despite a higher degree of sector diversification than other middle-income countries in the region. Economic activities are mostly clustered along the coast, leaving the interior regions less economically and socially developed. A perceived excess of bureaucracy acts as a discouraging factor to private investment and limited measures have been also taken to combat informality. Beyond the need to reduce the regulatory burden, other remaning challenges point to adressing vested interests, improving the business environment and increasing competition across the economy in order to attract investors. As long as the civil service remains the most attractive employment option, private entrepreneurship might also remain underdeveloped.

The previous Tunisian government had committed to an ambitious plan of reforms, which aimed to address most of the bottlenecks hampering growth in the country. However, the structural reform process progressed at a slow pace, also concerning some measures that were linked to the implementation of MFA II and the IMF programme. Structural reforms supported under the arrangement include measures to improve the business climate, broaden access to finance and reduce corruption. Reform progress has also been influenced by the electoral cycle notably during the second half of 2019 (legislative and presidential elections).

The Parliament adopted the new Organic Budget Law (Loi Organique du Budget, LOB), on 31 January 2019, as well as a new law on the Cour des Comptes (CdC) reflecting the provisions in the new Constitution. These measures were also supported as part of the conditionality for the MFA-II programme.

Additional measures were taken to ensure budget sustainability, including the approval of the reform law for the public pension fund (CNRPS) in April 2019. The law will improve the financial situation of the CNRPS thanks to an increase in the retirement age (from 60 to 62) and higher contributions. Some wage bill containment measures also continued in the public sector, with hiring limits (replacement rate of 25%) in the context of the decisions on the gradual increase in the retirement age and the salary increases for the civil service in January 2019 (to take place in 2019 and 2020). The government, within the framework of the IMF programme, also applied some measures to reduce energy subsidies (by 0.5% of GDP) between March and May 2019, including increases of fuel prices and utility tariffs for some customers.

Work towards the enhancement of state-owned enterprises’ (SOEs’) efficiency had limited advances in 2019 (including the implementation of the performace contract for Tunisair and enhanced monitoring), although containing contingent risks from SOEs remains a priority. Further delays also took place regarding the operationalisation of the National Anticorruption and Good Governance Authority.

There were some advances regarding financial supervision through the central bank. In the area of tax governance computerisation of the tax administration continued, and international cooperation by the Tunisian tax authorities to combat money laundering and the financing of terrorism strengthened. The EU approved Tunisia’s removal from the grey list of non-cooperative tax jurisdictions in March 2019.

Following the adoption of the new law aimed to reform the social security system (Loi Amen) in 2018, there were advances regarding the survey of the households benefitting from the main social transfer programmes and an action plan was presented for the implementation of reforms aimed at improving the effectiveness and sustainability of the country's social protection system, in line with the MFA-II objectives.

The online system of public procurement "TUNEPS" (Tunisian e-procurement system) became compulsory for procurements by central government units as from September 2018 (ministries, non-administrative public institutions and public enterprises) and for other public institutions and the Local Government from 1 September 2019, becoming the only means for public procurement.

In June 2019 a Transversal Law to Improve the Business Climate entered into force. The objective is to modify 16 existing laws and 4 legal codes in order to simplify procedures and address legal obstacles, with the ultimate goal to promote foreign investment. Tunisian authorities admit that the law was designed to a large extent to improve Tunisia’s ranking in the World Bank Doing Business report. The government also started implementing the Start-up Act adopted in 2018 and a simplification of administrative authorisations.

Negotiations on the EU-Tunisia Deep and Comprehensive Free Trade Agreement (DCFTA) were launched on 13 October 2015 and limited progress was achieved in 2019 through only one negotiation round in May 2019. At the end of November 2018, the Government introduced, with no previous notice to trade partners, a number of trade restrictive measures that were finally repealed in mid-2019.

Reform implementation was more challenging and had limited progress during the final months of the year, mostly due to the demanding electoral calendar (presidential elections on September 15, parliamentary elections on October 6 and a presidential run-off on October 13) and, subsequently, the protracted formation of a new government that only took office at the end of February 2020.

1.3.Implementation of macro-financial assistance

In February 2016, following a request from Tunisia, the Commission submitted a proposal to the European Parliament and the Council to grant a second MFA operation to Tunisia (MFA II) for a maximum of EUR 500 million, in the form of medium-term loans, which would follow a first MFA operation implemented between 2014 and 2017. The legislative decision on this new operation was adopted in July 2016 4 and the draft Memorandum of Understanding (MoU) was agreed on with the Tunisian authorities in December 2016.

The MoU and the loan facility agreement were signed on 27 April 2017. Following the Tunisian Parliament’s ratification on 28 July 2017, the MoU entered into force on 11 August 2017. The first instalment of EUR 200 million was disbursed on 25 October 2017 and was only conditional on good progress under the IMF’s Extended Fund Facility.

The second and third instalments of MFA II were conditional on a number of measures, listed in the MoU, whose focus spans from public finance management and fiscal policy, through the social security system and the labour market, to the improvement of the business climate. Throughout 2018 and 2019, including the review missions in March and July 2019, the Commission held meetings and follow-up exchanges with the Tunisian authorities in order to gather information, assess compliance and provide additional technical support to Tunisian services to enable the fulfilment of the pending MoU conditions required for the disbursement of the second and third instalments. Following the fulfilment of these policy commitments, the EU approved the release of the second disbursement of EUR 150 million on 24 June 2019. The third and final instalment (EUR 150 million) was approved on 30 October and disbursed in November 2019, thus effectively concluding the programme.

The Joint Communication of 29 September 2016 of the HRVP and the Commission to the European Parliament and the Council also envisaged the possibility of granting further macro-financial assistance to Tunisia, if appropriate, on the basis of an assessment of the country’s economic and financial needs.

The fourth review of the International Monetary Fund (IMF) programme under the Extended Fund Facility (EFF) was approved by the Board on 28 September 2018, based on the attainment of all Quantitative Performance Criteria, on the fulfilment of two out of three Structural Benchmarks, and on the engagements taken by the Tunisian authorities to implement energy and fuel price increases in the remainder of the year (prior actions).

The fifth review mission, initially planned for November 2018, finally took place in March/April 2019. A staff-level agreement was reached on 17 April 2019. The authorities and IMF staff agreed on policy and reform steps to ensure that the budget deficit target of 3.9% of GDP (before grants) for 2019 could be met to contain the high public debt and elevated financing needs.

On June 12, 2019, the Executive Board of the completed the fifth review of Tunisia’s economic programme. The Board also approved the authorities’ request for a number of waivers of non-observance, granted on the ground of the corrective measures undertaken by the authorities. Tunisia subsequently received a sixth disbursement of approximately SDR 177 million (around USD 245 million). This brought the total disbursement under the EFF to about USD 1.6 billion, helping to unlock additional financing from Tunisia’s other external partners.

Overall, reform implementation was rather challenging throughout 2018 and 2019, which had an impact in the relative slowdown of the reviews and the fulfilment of agreed measures for both the MFA and the IMF programme. While staff-level and technical exchanges continued during the final months of the year, the expected IMF reviews were also delayed due to the electoral calendar. The succesive review did not take place during the year, as it was expected to happen only after the September and October 2019 elections and a new government had taken office, which eventually only occurred in 2020.

2.Jordan

1.1.Macroeconomic performance 

Regional instability continued to act as a drag on Jordan’s economy and to weigh on its external and fiscal positions. During the first three quarters of 2019, real GDP remained largely stable at around 2% year on year. This was not enough to prevent an increase in unemployment, which rose during the third quarter of 2019 to 19.1%, compared to 18.6% during the same quarter in 2018.

During 2019, the Central Bank of Jordan reduced the re-discount rate in three equal steps: from 5.75% to 5.50% on 4 August, to 5.25% on 19 September and to 5% on 30 October. This broadly mirrored the decrease in Fed’s rate on 31 July, 18 September and 30 October, given the peg of the Jordanian dinar to the US dollar. This decline coincided with the easing of inflationary pressures, as at the end of 2019 the consumer prices increased only by 0.3% compared to an increase of 4.5% in 2018.

Progress in fiscal consolidation was not sustained. In the first eleven months of 2019, the general budget deficit, including foreign grants, increased to 4.5% of GDP compared 3.5% of GDP in the same period of 2018. This was the result of 4.9% increase in total expenditures which outweighed the 0.9% increase in total revenues (including grants).

Jordan’s gross public debt increased to 97.6% of GDP at the end of November 2019 compared to 94.4% of GDP at the end of 2018. The external public debt amounted to around 40.7% of GDP at end-November 2019. Around 73% of Jordan’s external public debt was denominated in USD with which the Jordanian currency is pegged while around half of Jordan’s external public debt is held by official sector creditors. 

Exports grew by 8.6% in value terms, as opposed to a decline in the value of imports by 5.5% in the first ten months of 2019. Combined with an increase in travel receipts (9.9%), this contributed to the narrowing of the current account deficit to 3.4% of GDP (or 4.8% of GDP excluding grants) in the first nine months of 2019 from 9.3% of GDP in the same period in 2018.

External financing conditions have turned less favourable. Foreign direct investment inflows continued the decline of previous years to reach a net inflow of JOD 473.1 million during the first three quarters of 2019 compared to a net inflow of JOD 542.5 million during the same period of 2018.

Thus, in November 2019, gross foreign currency reserves (including gold and SDRs) stood at USD 13.7 billion (equivalent to around 7.4 months of next year’s imports). Given the vulnerability of the external position, the elevated risks from regional conflicts, the exchange rate peg and exposure to oil price shocks, the current level of reserves should be preserved or increased to help the country withstand possible shocks stemming from the factors mentioned above.  

1.2.Structural reforms

During 2019, the authorities continued efforts for the implementation of their reform agenda in order to reduce macro-economic imbalances and to generate employment. This reform agenda is comprehensive and draws on strategies that have been adopted in previous years as well as in 2019.

Strategies adopted in previous years include the “Jordan 2025” — a 10‑year economic blueprint published in May 2015 —, the “Jordan Economic Growth Plan 2018-2022” (JEGP) — aiming to revitalise growth in specific sectors — and the National Strategy for Human Resources Development. Strategies developed more recently include the National Social Protection Strategy adopted in 2019 as well as the Path to Revival for 2019–20 (widely known as the Renaissance plan), which aims at strengthening the rule of law, increasing productivity and enhancing solidarity. In addition, structural reforms were complemented by programmes agreed with international donors (in particular, the IMF and the World Bank) and the EU (including the MFA II). Finally, acknowledging the need for more and deeper structural reforms, the government embarked on a more ambitious, comprehensive and wide-ranging reform programme which was prepared in collaboration with the World Bank and presented during the “London Initiative” conference in February 2019. This reform programme – the so-called Five-Year Reform and Growth Matrix – aims to preserve macro-economic stability, to increase Jordan’s growth prospects, to make the economy more competitive and export-led and to attract new investment.

Overall, Jordan’s efforts delivered only uneven success as the reform process was challenged by regional instability, the low growth environment, rising unemployment, as well as by domestic political and social tensions. The latest caused delays in reform implementation as well as policy reversals in some cases, notably in tax policies and the adjustment in electricity and water tariffs.

Nevertheless, some important reforms for enhancing growth performance were completed in 2019. The government opened 22 new economic sectors to foreign investments and accelerated efforts to reduce the regulatory burden in trade. A new land legislation simplified and reduced requirements for liquidating land in the case of disputes, while a new by-law for construction in the Amman Municipality introduced more consistent regulation and sustainable zoning strategies. New visas for entry to Jordan were issued including business, tourism, medical and study visas. Also, new regulations were issued facilitating the entrance of high skilled labour to Jordan. Provisions aiming at the automation of registration processes as well as at the simplification of municipal and enviromental linces were passed in the context of the Investor Journey. Six pilot government entities started to implement the Regulatory Predictability Framework to improve the overall governance of private sector-related policymaking, reduce regulatory uncertainty, and enhance predictability. Last, secondary legislation was introduced in relation to three important laws that had passed already in 2018 (on secured lending, on business insolvency and on business inspections). The above reforms enabled Jordan to climb to the 75th position in World Bank’s Report on Doing Business for 2020 (which assess progress in 2019) from the 104th position the year before. Nevertheless, in the first three quarters of 2019, net FDI to Jordan shrunk by 12.7% compared to the respective period in 2018.

A significant achievement was the adoption (in collaboration with the World Bank) of an Electricity Roadmap which entailed measures to reform the electricity sector in Jordan as well as to ensure the financial sustainability of the electricity company (NEPCO). In this context, an electricity bill recovery mechanism was adopted and enforced to settle payment arrears.

Another important reform (supported by the MFA-II) was the adoption, in May 2019, of a unified public procurement by-law which provides for the establishment of a central policy and oversight unit and an independent mechanism for handling complaints.

On the other hand, progress in other crucial reform areas was less visible. The strategy for fiscal consolidation had not been formally adopted by the end of 2019 and in essence was replaced by the new IMF programme which was approved by the IMF Executive Board on 25 March 2020. The strategy for revenue mobilisation was not adopted within 2019 and neither was the strategy for enhancing tax administration. The organic law on public finance management structures was not finalised in 2019. Furthermore, the governance frameworks for Public Investment Management and Public-Private Partnerships had not been legislated in 2019, implying delays to their operationalisation. Similarly, key decisions for the electricity sector (cross-subsidisation of electricity tariffs, re-negotiation of the Purchase Power Agreements) were deferred to 2020. The above reforms are expected to be implemented in the context of the new IMF programme (and in the context of the World Bank programme approved in June 2019 for Public-Private Partnerships).

1.3.Implementation of macro-financial assistance

On 14 December 2016, the co-legislators adopted a decision 5 to provide additional MFA to Jordan (MFA II) of up to EUR 200 million, entirely in loans, as a follow-up to the EUR 180 million operation completed in 2015. The MoU between the EU and Jordan was signed on 19 September 2017.

The first disbursement (EUR 100 million) was subject to the general political pre-condition for MFA (respect for effective democratic mechanisms, including a multi-party parliamentary system, the rule of law and human rights) and the IMF programme remaining on track. It was disbursed on 17 October 2017.

The second and final instalment (EUR 100 million) was subject, aside from the political preconditions and good progress with the IMF programme, to specific policy conditionality agreed between Jordan and the EU in the MoU. These policy conditions aim to strengthen Jordan’s economy in the areas of the public finance management, the tax policy, the social safety nets, the educational system and the professional training and the labour market policies with an aim at increasing employment opportunities for both Jordanian citizens and Syrian refugees living in Jordan. The second instalment was disbursed on 3 July 2019 as all conditions were met.

Indeed, on 1 May 2019, Jordan adopted a new by-law on public procurement, having drawn on technical advice from the World Bank. The new by-law addressed the issue of the appeals system by foreseeing a two-layer system for examining complaints. This marked the compliance with the last remaining condition of the MFA-II programme.

The second review under the IMF programme was completed on 6 May 2019 by the IMF Executive Board after the provision by the international community of sufficient financial assurances to cover Jordan’s external financing gap for the period 2019-2020.

The adoption of a new by-law on public procurement and the completion of the second programme review by the IMF Board enabled the Commission to adopt, on 24 June 2019, the decision for the second and last disbursement (EUR 100 million) of the MFA-II programme. The actual disbursement of the funds took place on 3 July 2019.

During 2019, the economy continued to operate in an environment of weak growth and low investments. As a result of this, considerable external financing needs re-emerged. At the ‘London Initiative’ conference in February 2019 and following on from that, Jordan received from the international community additional financing commitments of about USD 5 billion for the period 2019-2023 to meet financing needs, improve debt sustainability and give the necessary breathing space for critical reforms.

In this context, the Commission received, on 11 July 2019, a request for a new MFA programme (of EUR 500 million) by the Jordanian authorities. In response, on 6 September 2019 the Commission adopted a proposal for a third MFA programme for Jordan, in the amount of EUR 500 million in loans. The proposal was adopted by the European Parliament and the Council on 15 January 2020. It envisages the disbursement of EUR 300 million in 2020 and of EUR 200 million in June 2021, depending on programme implementation. Following the adoption of the programme, Commission staff engaged in discussions with the Jordanian authorities on the conditions of the programme which will be included in the MoU. An agreement on the programme conditions will enable the Commission to move ahead with the first disbursement, if the related pre-conditions are met.

On 30 January 2020, the IMF and Jordan reached a staff-level agreement on a four-year arrangement under the Extended Fund Facility (EFF) for around USD 1.3 billion. This agreement was approved by the Executive Board on 25 March 2020.

3.Moldova

1.4.Macroeconomic performance

In 2019, GDP increased by 3.6% in real terms after a significant slowdown in the fourth quarter. Growth in the first three quarters of 2019 was driven by a surge in investments and a rise in household consumption supported by growing real wages. The slowdown in the fourth quarter of 2019 was caused by a cut in public investments and consumption due to a set of fiscal measures introduced in August and that the effects on demand of a cut in tax rates introduced in October 2018 were fading. On the supply-side, main contributors to growth in 2019 were construction (up by 15.919.0%), wholesale and retail trade (5.7%), IT (9.2%), and industry (2.4.8%) together adding 3.5 percentage points to the growth figure. Agriculture was contracting with 0.2% in 2019.

Inflation accelerated quickly in 2019 to 7.5% in December (year-on-year), following a depreciation of the currency, decreases in the rates of personal income taxes and social contributions, and large increases in public sector wages. It is however expected that inflation will decline in 2020 towards the target of the National Bank of Moldova of 5% ±1.5% as the impact of the factors driving inflation in 2019 will fade. The National Bank decreased the base interest rate by two percentage points to 5.5% in December 2019.

Following fiscal stabilisation in the 2017-2018, the fiscal situation deteriorated in the first half of 2019 due to a set of election-related reforms and an interruption of external financing. Some measures to stabilise the fiscal situation were however adopted in August 2019 as part of an agreement with the IMF. Following these corrective measures, the budget deficit for 2019 ended at of 1.5% of GDP. Public debt was 31.0% of GDP in Q3 2019. About 80% of the public debt is long-term, mostly with IFIs and the rest with bilateral official creditors.

The 12-month rolling current account deficit widened significantly in the last years to 11.5% of GDP in the third quarter 2019 compared to 5.8% of GDP in 2017. The deterioration reflects stronger growth in non-energy imports due to increased consumption demand. However, the value of imports has stagnated in the second half of 2019 and increased by only 1% in 2019. Exports increased by 3% in 2019 driven by higher trade with Turkey and Russia. The growth of exports to the EU, which had increased quickly in the last years, stopped in 2019 and exports to the EU remained at the same level as in 2018.

Foreign direct investment has been significantly lower than before the 2014/2015 crisis in the last years. In 2019, however, the inflow of FDI increased to much higher figures (5.1% of GDP in the third quarter on a 12-month basis), related to a Eurobond issued by a large Moldovan company in the agricultural sector registered in Cyprus. The growth of remittances has stabilised at around 15% of GDP in the last years, a level lower than before the 2014 crisis.

The reserves level is still well above the target stipulated in the IMF programme, as the central bank continued to build up international reserves in the last years reaching USD 3.1 billion at the end of 2019 or about five months of imports of goods and services. Total external debt has continued to decrease, reaching 63.0% of GDP at the end of September 2019, down from 66.0% of GDP at end-2018.

1.5.Structural reforms

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

The reform progress in 2019 has been mixed and to a large extent influenced by the change of governments in June 2019 and then again in November.

Monetary and fiscal policies have been strengthened in the last years and substantial structural economic reforms have been carried out.

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

Some positive developments related to the fight against corruption were noted in 2019, including an increase of the annual budget of anti-corruption institutions like the National Integrity Authority, the Criminal Assets Recovery Agency and the Financial Investigation Unit, the development of a draft Justice Sector Reform Strategy for the years 2020–2023, and the establishment in June 2019 by the Parliament of a new commission to investigate all circumstances of the 2014 banking fraud. However, legal proceedings against key actors involved in the bank fraud continue to be slow and progress in recovering assets, in particular from outside of Moldova, has been limited.

1.6.Implementation of macro-financial assistance

On 13 September 2017, the European Parliament and the Council adopted the decision to provide EUR 100 million of MFA to the Republic of Moldova. In a joint statement by the European Parliament, the Council and the Commission, adopted together with the decision, it was recalled that, in light of the initiatives related to the changes of the electoral system in the Republic of Moldova, a pre-condition for granting macro-financial assistance is that the beneficiary country respects effective democratic mechanisms, including a multi-party parliamentary system and the rule of law and guarantees respect for human rights. The Commission and the European External Action Service were tasked with monitoring the fulfilment of this pre-condition throughout the lifecycle of the macro-financial assistance.

A MoU with the Moldovan authorities outlining a set of economic policy conditions was signed in Brussels on 24 November 2017. The MoU and related documents (loan facility agreement, grant agreement) entered into force on 18 January 2018.

The 28 policy conditions of the MoU focus on five areas of reform: public sector governance, governance and supervision of the financial sector, fight against corruption and money laundering, energy sector reforms and improving the business climate and implementation of the DCFTA.

In July 2018, the release of the first instalment of MFA of EUR 30 million (of which EUR 20 million in loans and EUR 10 million in grants) was put on hold as the political pre-condition was not met, following a number of worrying developments, including the invalidation of the results of the mayoral elections in Chisinau, pointing to a serious democratic backsliding in Moldova. 

Following the change of government in June 2019 and renewed reform efforts, the EU released the first instalment in October 2019. One final remaining MoU condition of the second disbursement related to public procurement in utility companies (Action 13) was fulfilled in January 2020. However, the second instalment has not yet been disbursed pending the fulfillment of certain actions in connection with the political pre-conditions, specifically related to anti-corruption, reforms in the justice sector, and investigation of the 2014 bank fraud. The MFA programme expires in July 2020.

The IMF programme, consisting of ECF/EFF arrangements in a total amount of SDR 129.4 million (about USD 178.7 million, or 75% of the Republic of Moldova’s quota) was approved on 7 November 2016. After the programme was off track following the adoption of the controversial fiscal package in July 2018, the fourth and fifth reviews were concluded in September 2019, which made available SDR 24 million (about USD 33.8 million). The IMF Executive Board adopted the final sixth review of the programme in March 2020, concluding that the programme has been broadly successful in achieving its objectives, with comprehensive reforms having rehabilitated the banking system and strengthened financial sector governance, entrenching macro-financial stability.

4.Georgia

1.7.Macroeconomic performance

In 2019, Georgia’s real GDP is estimated to have increased by 5.2%, driven by both domestic and external demand. In terms of demand components, private consumption and net exports were the main drivers of growth, bolstered by lari depreciation, expansion of credit and higher remittances. On the supply side, Georgia’s economic growth is mainly fuelled by growth in services (especially ICT, transport and and trade).

The unemployment rate in Georgia has been on a downward trend since 2009 (18.3%) but it remains high (11.1% in the third quarter of 2019) despite robust economic growth. Skills mismatch and large regional disparities are important challenges. The fiscal deficit of the general government has increased from below 0.9% of GDP in 2018 to over 3% of GDP in 2019, according to the preliminary data, mainly due to high capital expenditures for infrastructure. The ratio of public debt to GDP was around 46% in 2019, increasing from 42% of GDP in 2018.

Consumer price inflation accelerated to 7% in December 2019 from 1.5% a year before on the back of currency depreciation, higher prices of tobacco and some foodstuffs. The central bank has reacted by raising the refinancing rate by a cumulative 250 basis points in the second half of the year. In consequence of this decision, inflation has started falling again since January 2020.

Regarding the exchange rate, the Georgian lari has depreciated by 6% against the euro and by 8% against the US dollar in 2019. Given the decreasing but still high dollarisation (63% of deposits and 57% of loans were denominated in US dollars as of end-2018), Georgia remains vulnerable to exchange rate risk.

Georgia’s current account deficit narrowed by more than a half to USD 351 billion in the first three quarters of 2019, This represents 3% of GDP in this period. This outcome reflects a combination of growing merchandise exports (10% year-on-year) and stable imports. Exports were boosted by solid demand from major trading partners and also supported by the lari depreciation. A smaller deficit in income payments, a slightly improved surplus in services and an increased inflow of remittances also contributed to the substantial current account adjustment.

Foreign direct investment (7.5% GDP in the first three quarters of 2019) remains the main source of inflows. Georgia’s international reserves have been increasing in recent years, totalling USD 3.5 billion at end-2019 (almost 4 months of import cover).

1.8.Structural reforms

Georgia’s structural reform agenda focuses on further improving the business environment and education, as well as investing in infrastructure. The Georgian authorities intend to complement structural reforms with fiscal reforms, strengthening of the financial sector, as well as deepening trade relations with the rest of the world.

In terms of improving the business environment, the Georgian authorities are preparing a new insolvency law supporting adequate protection of creditor rights and timely and efficient insolvency processes in line with international standards. A new Company Law has been drafted to regulate corporate relations and to approximate the legislation to the EU directives; it still needs to be submitted to the Parliament. The authorities have continued improving the revenue administration, e.g. by automatically processing VAT declarations and refunding VAT credits. The authorities are also pursuing land reform, with the Law on Agricultural Land adopted in June.

As part of the education reform, the Georgian authorities plan to improve the education system by setting curriculum standards and formalising vocational education and training. The authorities have begun implementing the teachers’ retirement scheme, with about 6,400 out of the 12,000 eligible teachers choosing to retire; a second round is ongoing. The government announced also a new education programme, with a declared increase of state funding to 6% of GDP by 2022.

Georgia continues investing in transport infrastructure, despite some delays. The authorities have signed the remaining contracts required for the construction of the East-West highway and and began construction on the critical section of the North-South highway corridor. The contract with a Georgian consortium for the development of Anaklia deepwater port was cancelled in January 2020 due to insufficient funding and lack of government guarantees for project-related loans.

In the financial sector, the National Bank of Georgia is strengthening the regulatory and supervisory frameworks for banking, non-banking, payments, and capital and securities markets, and resumed publishing a yearly Financial Stability Report in September 2019. The authorities plan to adopt legislation that makes the emergency liquidity assistance and banking resolution frameworks consistent with best international practice. The authorities are developing the country’s capital markets. Georgia introduced a second (funded) pillar of the pension system with effect from January 2019 and plans to introduce mandatory third-party vehicle insurance, which would support the development of the insurance sector.

In terms of deepening trade relations, aside from its Association Agreement with the EU, which includes the creation of a Deep and Comprehensive Free Trade Area (DCFTA) and other existing Free Trade Agreements (FTA), the authorities continue their efforts to advance new FTAs, including with the United States and India.

Georgia’s national reform agenda is supported by MFA conditionality. For example, conditions of the current MFA operation notably require an improved public investment management framework, continuation of land registration and education reforms, introduction of mandatory third-party vehicle insurance, submission to the Parliament of a new Company Law, and reducing direct procurement.

1.9.Implementation of macro-financial assistance

The first and second MFA operations for Georgia were pledged at the International Donors’ Conference in Brussels in October 2008, following Georgia’s military conflict with Russia in August 2008. The first operation of EUR 46 million, fully in the form of grants, was implemented in 2009-2010. The second operation of EUR 46 million, half in grants and half in loans, was implemented in 2015-2017.

In June 2017, Georgia requested further MFA from the EU. The European Parliament and the Council adopted the Decision on further MFA for up to EUR 45 million (EUR 10 million in grants and EUR 35 million in loans) in April 2018. Aside from covering part of Georgia’s financing needs and supporting structural reforms, further MFA complements IMF funds (USD 290 million) under a an Extended Fund Facility (EFF) programme with Georgia, approved in April 2017 and recently extended to April 2021. Following the entry into force of the MoU and the accompanying agreements, the first instalment of EUR 20 million (EUR 5 million in grants and EUR 15 million in loans) was disbursed to Georgia in December 2018.

The second (final) instalment of EUR 25 million (EUR 5 million in grants and EUR 20 million in loans) is subject, aside from the political preconditions and good progress with the IMF programme, to specific policy conditionality agreed between Georgia and the EU in the MoU. These policy conditions aim to strengthen the Georgian economy in the areas of public financial management, the financial sector, social and labour market policies, and the business environment. The disbursement of the second instalment will take place when Georgia meets all relevant conditions. Georgia has implemented the majority of the reforms envisaged under the MFA; the main outstanding condition relates to the law on enterpreneurs being submitted to Parliament.

5.Ukraine

5.1. Macroeconomic performance

After the economic and financial crisis from 2014-2015, which had its seeds in ill-designed government deficits engineered during the preceding two-year long stagnation, the economy of Ukraine renewed with continuous and accelerating growth, which reached almost 4% in 2019. While the economic revival has been demand-driven, gross fixed capital formation has remained low at its historically subdued level of about 17% of GDP. The economic expansion occurred primarily in the construction, agricultural and retail sectors, while industrial output has been lagging behind. The unemployment rate decreased to 8.5% in the second quarter of 2019 from its peak at 10.1% in early 2017. Thanks to a year-on-year growth rate of 16.4% in October 2019, implying an increase in real terms of about 11%, the average nominal wage reached the equivalent of around USD 430.

Consumer price inflation stabilised quicker than expected and went below the 5% mid-term target for the first time in December 2019. This allowed the National Bank of Ukraine (NBU) to pursue its policy of aggressively cutting the main refinancing rate, which declined from 18% in mid-March 2019 to 11% as from end-January 2020. The monetary easing aims to expand bank credit to the private sector, which has been stagnating since 2016.

The Ukrainian economy remained very open to the world, with combined exports and imports in excess of its annual GDP. Consistent with accelerating growth and strengthened internal demand, the trade deficit has widened to the pre-crisis level of around 9% of GDP. The Association Agreement with the European Union has triggered structural changes that show a stronger integration of the economy of Ukraine with the West. For instance, remittances from abroad fully finance the trade deficit, and represent more than four times foreign direct investment. Thanks to the overall positive developments in the balance of payments since 2015, international official reserves were replenished and exceeded USD 25 billion, i.e. more than 4 months of imports, at the end of 2019. The revived capital inflows and improved confidence also strengthened demand for the domestic currency, which appreciated by 16% in 2019 and prompted the NBU to intervene in the forex market to purchase USD 7.9 billion of liquidity, almost six times more than in 2018.

In this positive macroeconomic context, the government of Ukraine managed to take control of its public finances. Starting from 2015, the State successfully cut its consolidated fiscal deficit by half and maintained it below or very close to the two-percent threshold. Thanks to economic growth, but also to inflation, the state and state-guaranteed debt declined from 97% of GDP in 2016 to 56% of GDP in 2019. The government is following a successful medium-term debt strategy of extending the maturity, diversifying the currency and reducing the cost of its indebtedness. The latest Eurobond issuance from end-January 2020, with a ten-year maturity and a yearly yield of 4.5% in EUR, was over-subscribed six times. Relative to half a year ago, the corresponding seven-year yield eased by more than 280 basis points. Credit-rating agencies have shared investors’ improved confidence. Fitch and S&P upgraded their sovereign rating from B- to B on 6 and 27 September 2019 respectively. Moody’s issued a positive outlook on 22 November 2019. In line with these assessments, the cost of domestically funded public debt was almost halved last year, from 19% in early 2019 to 10% in January 2020.

In sum, the latest macroeconomic developments in Ukraine feature stable and accelerating real growth, abating inflation, restored demand for the national currency, lower interest rates and generally improved investors’ confidence. The macro-financial situation of Ukraine stabilised in late 2017 already and has been strengthening since then. However, confidence eroded abruptly, and yields on Eurobonds almost tripled in March 2020, due to higher uncertainty trigerred by the government reshuffle from end-February, and especially by the outburst of the coronavirus-related crisis. While the situation has stabilised in early April, it is unlikely that the government could finance all its funding needs in 2020 on domestic and international financial markets. Moreover, economic risks and challenges remain in the form of possible policy and confidence reversals, a sizable debt-repayment burden in 2020 and 2021, the need for a sustained increase in investment to close a significant gap in capital accumulation, and sought-after improvements in the business environment, notably concerning rule of law and competition.

5.2. Structural reforms

With the political transition in 2014, Ukraine embarked on an ambitious and wide-ranging reform programme. Despite the difficult external environment and significant internal challenges, Ukraine managed to push through reforms in a variety of sectors, notably as part of the policy programmes attached to the EU MFA, the IMF and the World Bank assistance. Following a slowdown in reform momentum in 2016-17, the year 2019 saw renewed reform activity.

In the field of public financial management, the authorities decided in December 2018 to consolidate current central and regional tax and customs units of the State Fiscal Service into two separate legal entities: a State Tax Service and a Customs Service. The actual reorganisation of these services took place in late 2019 and early 2020. In order to increase the transparency of the tax system, the Ministry of Finance started issuing clarifications on tax legislation where there is a risk of inconsistent interpretation. Moreover, new laws adopted in 2018 strengthened the fiscal governance by introducing medium-term budgeting and by strengthening program-based budgeting.

As regards the fight against corruption, a law establishing the High Anti-Corruption Court, considered a missing element in the anticorruption enforcement chain, was adopted in June 2018. The court became fully operational in 2019. The authorities also operationalised the compulsory electronic asset declaration system for public officials and performed a complete check of more than 1,000 highly relevant declarations. The company registration process was updated and all useful databases were connected to ensure effective verification of information, including on companies’ beneficial ownership, by the various corruption-fighting agencies in Ukraine. In order to ensure an improved framework for fighting and preventing money laundering, Ukraine adopted in December 2019 an anti-money laundering law in line with the EU-Ukraine Association Agreement.

In order to improve corporate governance of Ukrainian state-owned enterprises, a number of independent supervisory boards have been established in several major enterprises in banking, energy, transport and postal sectors, and further supervisory board members are being selected. In the absence of successful large-scale privatisations, Ukraine has improved its legal framework for privatisation and has launched a successful electronic platform of sales of small companies and assets, ProZorro.Sale.

In the energy sector, the authorities and the energy regulator progressed on implementation of the electricity market law. The electricity retail market was opened to large consumers from January 2019 and the wholesale electricity market was opened from July 2019, although a number of issues hamper the functioning of and competition in the market. In December 2019, Ukraine and Russia signed an agreement that guarantees the transit of gas from Russia to the EU through Ukraine for a further five years.

The situation of the financial sector continues to improve, with strengthened capital and liquidity ratios, as well as higher profitability. While the very high share of non-performing loans (55%) remains a major challenge; a new insolvency law was approved in October 2018. In order to improve governance in state-owned banks (which account for more than half of the banking system’s assets), independent supervisory boards were set up and were filled with recognised experts by end-2019.

In the area of social policies, substantial progress has been made in the reform of healthcare financing, with the launch of the National Health Service which signed contracts with primary health providers. Household subsidy reforms progressed well with the launch of a subsidy monetisation (since early 2019 subsidies have been paid directly to households and no more to utility companies) and an eligibility verification. Ukraine also continued a pension reform started in 2017, in order to make the system less costly for the state while ensuring more adequate pension income for the majority of retirees.

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

5.3 Implementation of macro-financial assistance

In January 2015, the Commission proposed a MFA operation (the third one since 2014) consisting of loans of up to EUR 1.8 billion, to be made available in three equal instalments of EUR 600 million. This was done against the backdrop of Ukraine’s rapidly deteriorating economic situation and weak balance‑of‑payments position resulting from the armed conflict in the eastern part of the country. The co-legislators adopted the Commission proposal in April 2015. Two instalments of EUR 600 million each were disbursed to Ukraine in July 2015 and in April 2017. A third instalment of the same amount was also available to Ukraine under this MFA programme. Ukraine fulfilled 17 of the 21 policy commitments attached to this disbursement, including reforms in public finance management, public administration, the energy sector and the judiciary. However, Ukraine had not implemented several measures when the validity period of the MFA expired. These included two measures to fight corruption, notably the introduction of a mechanism to verify asset declarations submitted by public officials. As a result, the third instalment of this MFA was cancelled in January 2018.

In November 2017, Ukraine requested additional MFA from the EU to cover its external financing gap and support the authorities’ reform agenda. Following an assessment of this request, the Commission proposed a fourth Macro-Financial Assistance programme (MFA IV) in March 2018 of up to EUR 1 billion in the form of low-interest loans. The European Parliament and the Council adopted this proposal in July 2018. The Commission and Ukraine signed the MoU – setting specific policy conditions of the Macro-Financial Assistance programme – and the Loan Agreement in September 2018. Ukraine ratified the two documents in November 2018.

In October 2018, Ukraine and the IMF agreed at staff level on a 14-month Stand-By Arrangement of USD 3.9 billion. The SBA replaced Ukraine’s previous Extended Fund Facility (EFF) programme to provide an anchor for economic policies during 2019 (an election year). The IMF Board approved the Stand-by Arrangement in December 2018, with a first disbursement of USD 1.4 billion.

The first disbursement under MFA IV of EUR 500 million was made in December 2018 after Ukraine fulfilled the policy conditions, which covered the areas of fight against corruption, public finance management, governance of state-owned companies and privatisation of small companies. Notably, as part of the implementation effort of MFA IV first tranche conditions, Ukraine made significant progress in the areas of anti-corruption policy that had blocked the final disbursement under MFA III. The second instalment (of EUR 500 million) was disbursed in May 2020, after the single outstanding prior action (on strengthening financial sector safeguards from the December 2019 staff-level agreement reached between the Ukrainian authorities and the IMF on a new EFF programme) has been implemented.

Annexes

Annex 1: Selected macroeconomic indicators by country

MFA complements and is conditional on the existence of an adjustment and reform programme agreed with the International Monetary Fund (IMF). To facilitate comparability, this section thus quotes the latest IMF data available for the selected macroeconomic indicators. 6  

Annex 2: MFA operations by date of decision, 1990-2019

Annex 2A: Status of disbursements made by date of decision at end-December 2019

Annex 2B: Status of disbursements made by region at end-December 2019 (in millions of €)

Annex 3: MFA amounts authorised by year, 2005-2019 (EUR million)

Chart 3A: MFA amounts authorised by year, 2006-2019 (EUR million)

Chart 3B: MFA amounts authorised by region, 2006-2019 (%)

Annex 4: MFA amounts disbursed by year, 2006-2019 (EUR million)

Chart 4A: MFA amounts disbursed by year, 2006-2019 (EUR million)

Chart 4B: MFA amounts disbursed by region, 2006-2019 (%)

Annex 5: Outstanding amounts in respect of MFA operations disbursed (as at 31 December 2019)

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

(1)      This document is based on information available up to May 2020.

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

(3)  This section quotes statistics supplied by national authorities and other relevant sources.

(4)    Decision No 1112/2016/EU of the European Parliament and of the Council of 6 July 2016 providing further macro-financial assistance to Tunisia (OJ L186, 9.7.2016).

(5) Decision (EU) 2016/2371 of the European Parliament and of the Council of 14 December 2016 providing further macro-financial assistance to the Hashemite Kingdom of Jordan (OJ L 352, 23.12.2016, p. 18).

(6)  These may vary from the statistics quoted in the country-analysis section of this document.