EUROPEAN COMMISSION

Brussels, 11.7.2023

SWD(2023) 244 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 2022

{COM(2023) 409 final}

List of abbreviations

Contents

Introduction

Background analysis of beneficiaries of macro-financial assistance

1.Moldova4

1.1Macroeconomic performance4

1.2Implementation of macro-financial assistance……6 

1.2.1 Recent macro-financial assistance operations…………………………….………...…….....6

1.2.2Policy conditionality7

2.Ukraine10

2.1Macroeconomic performance10

2.2Implementation of macro-financial assistance13

2.2.1 Recent macro-financial assistance operations………………………………………....…...13

2.2.2Policy conditionality16

3.Jordan22

3.1Macroeconomic performance22

3.2Implementation of macro-financial assistance24

3.2.1 Recent macro-financial assistance operations…………………….………………...……...24

3.2.2Policy conditionality25

4.Tunisia

4.1Macroeconomic performance29

4.2Implementation of macro-financial assistance32

4.2.1 Recent macro-financial assistance operations………………….…………………...……...32

4.2.2Policy conditionality32

5.Bosnia & Herzegovina

5.1Macroeconomic performance36

5.2Implementation of macro-financial assistance38

5.2.1 Recent macro-financial assistance operations…………………….………………...……...38

5.2.2Policy conditionality39

Annex 1: MFA operations by date of decision, 1990-202142

Annex 2: Status of disbursements made by date of decision at end-December 202243

Annex 3: MFA amounts authorised* by year, 2005-2022 (EUR million)49

Chart 3A: MFA amounts authorised by year, 2006-2022 (EUR million)49

Chart 3B: MFA amounts authorised by region, 2006-2022 (%)49

Annex 4: MFA amounts disbursed by year, 2006-2022 (EUR million)50

Chart 4A: MFA amounts disbursed by year, 2006-2022 (EUR million)50

Chart 4B: MFA amounts disbursed by region, 2006-2022 (%)50

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 2022  1 .

In 2022, the two remaining MFA operations under Decision (EU) 2020/701, which aimed to support 10 partner countries in dealing with the economic fallout from the COVID-19 crisis, were concluded. Tunisia received the second disbursement on 25 May 2022, thus successfully finishing the operation upon fulfilment of the policy conditions agreed in the Memorandum of Understanding (MoU). However, the second instalment for Bosnia and Herzegovina was not disbursed due to limited reform implementation by the end of the availability period.

Besides the financial assistance planned in the context of the COVID-19 pandemic, the implementation of the third regular MFA programme for Jordan was also carried out. The third and final instalment remained available until April 2023 and the programme was successfully completed by then.

After the completion of all the 10 operations under the COVID-19 MFA package, the focus shifted to the support provided in the context of Russia’s war of aggression against Ukraine in 2022, notably to Ukraine itself but also to Moldova. Financial support to North Macedonia was also considered and was later proposed at the start of 2023. In these extraordinary circumstances, MFA forcefully demonstrated its continuing relevance and flexibility in allowing the EU to extend sizeable short-term financial support to countries in the EU Neighbourhood that have been strongly affected by the war or its economic fallout.

For each beneficiary country, the report provides more detailed information on: (i) their macroeconomic and financial situation; (ii) the implementation of their MFA operations; and (iii) the policy conditionality attached to the MFA operations under analysis.

The annexes include overview tables detailing the effective disbursements of MFA operations since 1990 by date of adoption of the related decisions, as well as tables detailing MFA commitment and payment amounts in 2006‑2021, by year and by region  2 .

Background analysis of beneficiaries of macro-financial assistance  3

1.Moldova

The Moldovan economy has been severely affected by Russia’s invasion of Ukraine, as well as the protracted energy crisis and a drought in the summer. These caused a deep recession in 2022. Spiking inflation eroded households’ disposable income and loss of confidence due to the war significantly reduced investment. On the fiscal side, the high energy prices necessitated further spending on subsidies to the most vulnerable consumers and increased the budget deficit. The current account deficit also increased, driven by a sizeable negative trade balance. In light of these developments, Moldova received increased financial support from its international partners, including the EU via MFA. The EU also granted Moldova candidate status on 23 June 2022, thus supporting its ambition of further deepening Moldova's political association and economic integration with the EU.

1.1Macroeconomic performance

Following a significant post-pandemic recovery of real GDP by 13.9% in 2021, the Moldovan economy was severely impacted by Russia’s invasion of Ukraine. Real GDP plummeted by 5.9% in 2022. The recession was driven by 4% and 6% falls in household consumption and investment respectively. On the production side, a drought in the summer caused agricultural output (which accounts for about 10% of Moldova’s GDP) to decline by 25%. Despite a relatively strong export performance, high import prices contributed to an overall negative contribution of net exports to growth.

Inflation in Moldova accelerated markedly in 2022 and peaked at 34.6% in October compared to 5.1% in 2021. This was driven by high energy and food prices. Demand-side pressures eased somewhat in the second half of 2022, but high credit growth in the first half also contributed to the accelerating inflation. Strong inflationary pressures caused the central bank to tighten its monetary policy stance with three upward revisions of the key interest rate (by a cumulative 15 pps) in 2022 to 21.5%. Inflation had slowed (albeit moderately) by the end of the year to 30.2% and this allowed the base rate to be reduced to 20%.

On the fiscal side, Moldova’s budget deficit widened to 5.2% of GDP in 2022 (1.9% in 2021) but remained below the 6.2% of GDP that was anticipated in the budgetary revision in August. Revenues and international support (including in the form of grants) were better than projected, but the increased spending on energy (through subsidies for the most vulnerable households) had a marked impact on Moldova’s public finances. The authorities expect the budget deficit to widen to 6% of GDP in 2023 due to energy support via the Energy Vulnerability Reduction Fund as well as public salary and pensions increases, which are deemed necessary to partly cushion the effects of high inflation.

Moldova’s public debt-to-GDP ratio is lower than that of most of its regional peers, but it did increase by 4 pps to 36.3% of GDP in 2022. The latest IMF programme review (April 2023) states that there is still a moderate risk of debt distress in Moldova due to high sensitivity to external shocks. About 95% of Moldova’s public external debt is owed to multilateral creditors on concessional terms. Moldova not only has limited access to international debt markets but has also found it increasingly difficult to borrow on the domestic market. Moldova has only been able to borrow at very short maturities and at historically high nominal interest rates (in the range of 20% to 22% per annum as of November 2022), increasing the roll-over risks of the debt. 

On the external side, the current account deficit remained high in 2022 at 15.7% of GDP. This was largely driven by a high negative trade balance of 34.5% of GDP. However, remittances remained broadly stable at 13.7% of GDP despite initial fears that transfers from abroad (especially Russia and the Commonwealth of Independent States) would fall markedly. Notwithstanding the war-related uncertainty, net FDI (at 3.7% of GDP for 2022 as a whole) returned to its pre-pandemic levels, when much of it was due to reinvested earnings and carry-over effects from the previous year.

After some volatility in the foreign exchange market due to Russia’s invasion of Ukraine, Moldova’s foreign currency reserves have been rebuilt to high levels (USD 4.5 billion in February 2023, which corresponds to 5 months of imports).

The economy is set to make a moderate recovery in 2023 with a stronger rebound expected in 2024. This is likely to be underpinned by an increase in agricultural output (although subject to weather-related risks) as well as higher investment and stronger household consumption as real incomes increase due to falling inflation. The planned high budget deficit also suggests that the government will increase fiscal support (including continuing to support the most vulnerable in society but a gradual reorientation of government resources towards infrastructure projects). The positive impact of war-fleeing migrants on the employment rate in 2022 is likely to fade away in the coming years. Moldova’s trade activity is set to be further affected by regional disturbances. However, lower energy import prices, increased long-term energy security thanks to solid reform implementation and the projected recovery of economic activity among key trading partners suggest that the country’s high current account deficit will gradually narrow in the future.

Moldova – macroeconomic indicators

1.2 Implementation of macro-financial assistance

1.2.1 Recent macro-financial assistance operations

Moldova has benefited from 3 MFA operations since 2014. The EU approved a total of EUR 350 million under these MFAs for Moldova, of which EUR 260 million has been disbursed so far. Overall progress has been positive, but the challenging political situation has hindered full implementation of, and disbursements under, the 2017-2020 operation 4 , for which the third and final instalment was cancelled because the conditions agreed in the MoU were not fulfilled before the MFA’s availability period ended. After the outbreak of the COVID-19 pandemic, Moldova also benefited from the EU’s EUR 3 billion COVID-19 MFA package to 10 enlargement and neighbourhood countries, of which EUR 100 million in loans was allocated to Moldova. Currently, in the context of a protracted energy crisis and challenging geopolitical situation, which has put additional pressure on Moldova’s macroeconomic stability, the country continues to benefit from an ongoing MFA, which is well on track, and a proposal has been made to increase it (approval by the European Parliament and Council is pending).

The authorities officially requested a new MFA in November 2021 in response to the gas crisis in Moldova during which the price of gas imported from Russia increased by 5 to 6 times compared to the previous import price, heavily impacting the economy and contributing to higher financing needs. The EU agreed to a new operation for Moldova of EUR 150 million (EUR 120 million in loans and EUR 30 million in grants). The European Parliament and Council adopted this new MFA on 6 April 2022 5 and the MoU entered into force on 18 July 2022 after its ratification by the Moldovan parliament. Moldova’s successful completion of the corresponding policy conditions (concerning the rule of law and fight against corruption, financial sector governance and energy sector reforms) allowed the first instalment to be disbursed on 1 August 2022. 

On 9 March 2023, the authorities submitted to the Commission a compliance statement on the progress made in meeting the conditions for the second instalment of the ongoing MFA. The Commission assessed that four of the six actions have been fully completed and the other two have been broadly fulfilled. These two concern Action 8 on the assessment of the judiciary and prosecution self-administration bodies (pre-vetting) and Action 9 on the new customs code. 6 Based on an overall positive assessment, the Commission disbursed the grant and loan components in April and early May respectively. The final instalment is expected to be disbursed in 2024.

Russia’s war on Ukraine and its severe impact on the Moldovan economy (particularly its aggravation of the ongoing energy crisis and the large inflow of war-fleeing migrants) prompted Moldova to request an increase in the ongoing operation on 11 March 2022. The Commission has responded to this request for additional assistance (especially in the form of grants) by supplementing the existing MFA with a further EUR 75 million via budget support under an existing state-building and resilience contract (disbursed in July 2022).

However, despite the additional assistance, the Moldovan economy continued to face considerable challenges at the end of 2022 due, in particular, to the energy crisis. The supply and affordability of energy as well as a deteriorating external position (including volatility in the foreign currency reserves throughout 2022) caused Moldova’s external financing needs to increase considerably. On 23 January 2023 and after careful assessment of Moldova’s macroeconomic position, the Commission adopted a proposal for an increase of the MFA for Moldova by an additional EUR 145 million (EUR 100 million in loans and EUR 45 million in grants). This increment is to be disbursed in two additional instalments (ideally in the third and fourth quarters of 2023) subject to the fulfilment of new policy conditions to be added to the existing MoU. The European Parliament and Council adopted this additional MFA assistance on 14 June 2023.

This MFA support is provided in conjunction with the resources from international financial institutions and bilateral donors, including the IMF. On 21 December 2021, the IMF approved a new programme for Moldova of USD 558 million under the Extended Credit Facility/Extended Fund Facility (ECF/EFF). Further to the significant impact of Russia’s war on Ukraine on the Moldovan economy, the ECF/EFF arrangement was increased by USD 260 million on 11 May 2022. In April 2023, the IMF concluded its third programme review, in which it assessed overall progress as positive (while granting a waiver on one performance criteria related to the accumulation of external arrears due to the temporary nature of the breach and corrective measures that had been put in place). The IMF notes the authorities’ strong ownership of, and firm commitment to reforms, which justifies the IMF’s further support.

1.2.2 Policy conditionality

In line with the broad objectives of cooperation between the EU and Moldova under the Association Agreement and the Deep and Comprehensive Free Trade Area (DCFTA) Agreement 7 (provisionally applied from 1 September 2014, fully applied from 1 July 2016), the ongoing MFA operation has focused on several key areas of reform (e.g. the fight against corruption and the rule of law, public finance management and financial sector governance, strengthening the business climate and – in view of the energy crisis – important energy sector reforms). The Moldovan authorities have been making good progress on meeting the policy conditions so far, thus allowing two subsequent MFA disbursements. 

The Moldovan authorities have made significant progress in a number of areas, such as criminal asset recovery, following the bank fraud crisis in 2014 (including by improving international cooperation and adopting a new asset recovery programme). This was an important set of conditions, particularly given that a waiver had been granted to Moldova under the previous COVID-19-related MFA operation for a condition on updating the previous 2018 asset recovery strategy. Moreover, further conditions under the MFA call on the Moldovan authorities to improve the institutional structure of the various anti-corruption agencies, including a clear delimitation of competences between the Anti-Corruption Prosecutors Office and the National Anti-Corruption Agency.

Moldova has made significant progress in terms of public finance management (PFM) and a new PFM strategy is now in place. This was based on an extensive assessment process in close cooperation with international partners and followed by an open public consultation process. As regards public finances, the authorities have sought to address the chronic issue of budget execution by adopting new legislation on public investment projects, which should help Moldova improve its planning of capital budgets.

The rule of law and justice sector reforms are long-standing priorities for EU-Moldova cooperation and are also supported by the MFA. Moldova has scored poorly for judicial independence and transparency in the past. Therefore and in line with recommendations by the Venice Commission and best international practices, the authorities have launched a comprehensive assessment for members of the judiciary and prosecution self-administration bodies (pre-vetting). This process has not yet been finalised, but significant progress has been made with the assessment of the Superior Council of Magistracy and the Superior Council of Prosecutors. The pre-vetting process will continue in accordance with a new vetting concept adopted by the Ministry of Justice in February 2023.

Important progress has also been made in improving Moldova’s medium- to long-term energy security. The protracted energy crisis that began in October 2021 exposed several structural weaknesses in the energy sector in Moldova and these were aggravated when energy deliveries (of both gas and electricity) were cut due to Russia’s invasion of Ukraine. The Moldovan authorities have significantly increased the country’s gas storage capacity and have made a commitment to make further progress towards transposing the unbundling regulations (Moldova’s key commitment under the Energy Security Secretariat).

Finally and in line with the DCFTA, the authorities have also implemented important amendments to the new customs code and have adopted an implementing regulation that permits it to enter into force (this has been postponed to 2024).

The increase of the ongoing MFA will further support reform implementation, taking stock of the progress already made and identifying areas for improvement. The accompanying policy conditions will aim to ensure further effort on the pre-vetting process as well as continuation of the important work on the customs code to take all the measures necessary for its entry into force on 1 January 2024. The conditions will also be closely aligned with Moldova’s efforts in relation to its candidate status (i.e. the nine agreed steps spelled out in the Opinion on Moldova’s application for membership of the EU  8 ). Further progress on this is expected on a number of points, such as the rule of law and good governance, and anti-corruption). The MFA also remains consistent with the government’s long-term objectives.

1.Ukraine

Russia’s war of aggression is taking a heavy toll on Ukraine, whose macroeconomic performance was muted already in peace times. In these unprecedented circumstances, the international community, including the EU and its Member States, has affirmed its solidarity and ensured the provision of adequate resources so that Ukraine can maintain its core state functions and macroeconomic stability. The EU’s MFA to Ukraine in 2022 has been generous with a commitment of EUR 7.2 billion of highly concessional loans (including a subsidy on interest rate payments under its emergency and exceptional MFA packages). This support has been provided on an ad hoc basis, so the Commission proposed the establishment of the MFA+ instrument for Ukraine (adopted by the EU’s co-legislators on 14 December 2022) to provide the financial support in 2023 in a more structured and predictable manner. The candidate status granted by the European Council on 23 June 2022 anchors Ukraine firmly to its path to join the EU.

2.1Macroeconomic performance

2.2Implementation of macro-financial assistance 

2.2.1 Recent macro-financial assistance operations

Between 2014 and 2021, five consecutive MFA operations provided a total of EUR 5.6 billion to Ukraine, out of which EUR 5.0 billion was disbursed effectively  10 . In response to economic and social challenges arising from the geopolitical tensions in late 2021 / early 2022 and the security threats on the border between Ukraine and Russia which subsequently escalated in the latter’s unjustified war of aggression against Ukraine, the Commission tabled a proposal for a sixth, emergency, MFA to Ukraine of up to EUR 1.2 billion on 1 February 2022. The Decision granting this emergency MFA 11  operation entered into force on 3 March 2022 and the first instalment of EUR 600 million was disbursed in two tranches on 11 and 18 March 2022. The second instalment of EUR 600 million followed in mid-May. In the context of the disbursement of this instalment, the Commission concluded that the Ukrainian authorities had, overall, taken action to implement the agreed conditionality. However, the war constitutes force majeure that impeded the effective and full completion of the structural policy measures. The Commission, as an exceptional response to Ukraine’s acute financing needs and since the conditionality was not achievable at that stage for reasons of force majeure, and having consulted the Member States’ Committee for Macro-financial Assistance, nonetheless decided to proceed with the disbursement of the second instalment as a matter of urgency.

As a part of the EU’s extraordinary support to Ukraine, namely to make a sizeable contribution to the financing of Ukraine’s immediate funding needs in the context of Russia’s unprovoked and unjustified war of aggression, the Commission proposed on 1 July 2022 a new EUR 1 billion MFA operation for Ukraine in the form of a highly concessional long-term loan. This proposal was the first part of the exceptional MFA support of up to EUR 9 billion announced in the Commission’s Communication on Ukraine Relief and Reconstruction of 18 May 2022 12 and endorsed by the European Council of 23-24 June 2022 13 . The exceptional MFA aimed to provide immediate financial assistance in a situation of acute funding needs and to ensure macroeconomic stability and the continued functioning of the most critical functions of the Ukrainian state, which had to increasingly resort to printing money and drawing down its foreign reserves in the second quarter of 2022. The European Parliament and the Council swiftly adopted the Decision to grant Exeptional MFA over EUR 1 billion on 12 July 2022 14 , making use of all available procedural flexibilities that could speed up the process. The Commission and Ukraine signed the related MoU on 19 July, which made it possible to disburse the whole of this first part of the exceptional MFA support in two tranches in early August 2022.

On 7 September 2022, the Commission proposed a second MFA operation of EUR 5 billion in loans under the exceptional MFA package. The European Parliament and the Council adopted the MFA Decision on 20 September 2022 15 , once again using all available procedural opportunities to speed up the process. After the entry into force of the MoU on 4 October, a first instalment of EUR 2 billion was disbursed to Ukraine on 18 October. The second disbursement of EUR 2.5 billion followed on 22 November 2022. The third and final payment of EUR 500 million took place on 14 December 2022. The exceptional MFA operations, which brought the EU’s support to Ukraine since the beginning of the war up to a total of EUR 7.2 billion, were vital to maintaining macroeconomic stability in the country.

Some changes have been introduced to the support under the exceptional MFA package relative to the standard MFA set-up, in order to adapt the instrument to the immense uncertainty and extraordinarily challenging war environment. First, a dedicated reporting system to ensure the efficient, transparent and accountable use of MFA funds was set up with the first part of the exceptional MFA support and has been used in the operations since then. In a departure from the usual practice of conducting an operational assessment (OA) of the country’s financial and administrative circuits before the conclusion of the MoU, the OA for this operation was conducted during the implementation of the operation and jointly with the following second part of the exceptional MFA support and for the MFA+ instrument. Second, as regards structural policy conditionality, no requirements (other than the set-up of the reporting system) were attached to the first exceptional MFA operation because the disbursement was made in a single instalment and given the urgency of the financing needs. The release of the funds under the second part of the exceptional MFA support was subject to a carefully chosen and limited set of relevant and feasible policy conditionality aiming at strengthening the country’s resilience and economic stability, improving the business climate, reinforcing the rule of law and governance, and ensuring Ukraine’s energy security. To reflect the extraordinarily challenging war environment, the full completion of policy actions attached to the disbursements was required only for the final instalment, with previous disbursements being only subject to satisfactory progress towards the implementation of those actions. Third, both exceptional MFA operations were not conditional on the presence of a disbursing IMF arrangement, because such support was not possible in the condition then prevailing. However, the MFA was provided in very close coordination with the IMF and other IFIs on support to Ukraine. Moreover, the successful implementation of the reform agenda underpinning the exceptional MFA demonstrated the authorities’ resumed ability to implement targeted policy measures despite the adverse circumstances. The IMF Executive Board was later in a position to approve the Ukrainian authorities’ request for programme monitoring with board involvement (PMB) on 19 December 2022. This four-month PMB, a non-disbursing programme, was tailored to Ukraine’s exceptional war circumstances, with a view to helping the authorities implement prudent macroeconomic policies during this particularly difficult period and catalysing donor-financing. Fourth, setting up the exceptional MFA operations in a highly concessional manner has reduced the impact on the country’s debt sustainability. Exceptionally, an interest rate subsidy and a waiver of administrative costs have been granted to relieve the country of interest rate repayments. In conjunction with a maximum average maturity of 25 years, the EU has made every effort to ensure the most favourable terms and conditions for the loan in order to alleviate the fiscal burden on the country, thus making the support as grant-like as possible. Fifth, taking into account the exceptionally high level of risk and uncertainty in the war context, the provisioning rate of 9% generally applied for MFA loans to countries addressing a balance of payment crisis has been considered to be inadequate for the exceptional MFA support. A coverage rate of 70% was therefore set in order to contain the risk implied by this additional MFA to Ukraine, in line with the principles of sound financial management. The composition of this coverage was allocated to paid-in provisioning of 9% from the EU budget and callable guarantees from Member States for a further 61% of the outstanding loan amounts.

On 9 November 2022, in view of the ongoing war and Ukraine’s continuing external financing needs, the Commission presented a proposal for a new instrument, Macro-Financial Assistance+, to channel up to EUR 18 billion in highly concessional loans to Ukraine in 2023 in a predictable, continuous, orderly and timely manner. The European Parliament and Council swiftly approved the MFA+ Regulation on 14 December 2022 16 . Unlike standard MFA operations, and to reflect the war circumstances in Ukraine, this MFA+ instrument provides several layers of further increased flexibility. Reflecting the realities of the war, the instrument drew on the design of conditionality under the second exceptional MFA operation, so that full completion of policy actions attached to the disbursements will be required only for the final instalment, with previous disbursements requiring satisfactory progress towards the implementation of those actions. Again, the implementation of the reporting system introduced with the first exceptional MFA is continued. Moreover, the MoU and its conditionality could be reviewed and, if necessary, amended at mid-term (summer 2023) if the war’s continuing development so requires. Furthermore, the MFA+ instrument is likewise not conditional on a disbursing programme by the IMF, but close cooperation with the IMF on the economic analysis and consistency of policy actions with those recommended by the IMF will continue. The concessional nature of the support is strengthened through longer maturities of up to 35 years and an interest rate subsidy. Finally, the loans to Ukraine are being covered by a guarantee from the headroom of the EU’s budget, instead of by guarantees from the EU budget or the Member States (as was the case for previous MFA operations to Ukraine since the outbreak of the war).

The following table gives an overview of the various flexibility elements of the two exceptional MFA operations and the MFA+ instrument and contrasts them with the standard elements that typically apply to MFA operations.

2.2.2 Policy conditionality

Before Russia’s war of aggression against Ukraine, the emergency MFA identified four priority policy areas for reform: PFM, governance and the rule of law, improving the business climate, and sector reforms and SOEs. The eight policy measures underpinning the operation, which have been identified as feasible in the short term, are aimed at completing the governance reform of SOEs, improving the business environment for small and medium-sized enterprises, completing the anti-corruption infrastructure and ensuring functioning market mechanisms in the energy sector. The emergency MFA has clearly shown the limitations imposed by the war but there is also ongoing acknowledgement of the importance of a relevant reform agenda in order to underpin the financial assistance. The exceptional MFA therefore focused on a more limited list of particularly pressing policy objectives: economic resilience and stability, governance and the rule of law, and energy. The seven policy measures are considered to be not only highly relevant in the war context and for the preparation of the country’s recovery and reconstruction but also achievable even in the current extremely challenging circumstances. They are aimed at guaranteeing the continuous functioning of the most critical state functions. These policy actions remain relevant and have been expanded into 20 structural measures in four areas under the MFA+ instrument for support to Ukraine in 2023 (macro-financial stability, structural reforms and good governance, rule of law, and energy), but the post-war reconstruction phase will involve a much wider range of priorities.

This conditionality should be seen against the backdrop of the ambitious and wide-ranging reform programme that Ukraine embarked upon after the political transition in 2014. This programme was guided by continuous implementation of the association agreement with the EU and supported by large-scale financial and technical assistance provided by the EU and other multilateral and bilateral partners. Ukraine managed to make progress with reforms in a variety of sectors, although overall progress has been uneven. The main obstacles to faster reform implementation before the war were the complex domestic political environment; the lack of political will to implement ambitious reforms in certain sectors; and opposition from vested interests, some of which continue to influence policymaking in the country. Strong ownership of the reconstruction efforts combined with a firm wish to join the EU are providing an opportunity to tackle these challenges and to enable Ukraine to ‘build back better’.

In the area of public finance management, the track record of reforms supported by MFA operations is rather favourable. New laws have improved fiscal governance by introducing medium-term budgeting and by strengthening programme-based budgeting. The reorganised State Tax Service and Customs Service are now fully operational. More recent actions in this area have included enhancing the VAT-monitoring system based on risk management, developing the electronic tax audit methodology and using new IT solutions in the customs service. To improve tax compliance, the authorities started the gradual deployment of electronic software tax registrars in 2020. In addition, the State Fiscal Service, which was seen as an old-style tax police that disrupted business activity, has been replaced by the recently established Bureau for Economic Security.

Governance reforms have resulted in the setting up of new anti-corruption institutions: the National Anti-Corruption Bureau (NABU), the National Agency for the Prevention of Corruption (NAPC), the Specialised Anti-Corruption Prosecutor Office (SAPO) and the High Anti-Corruption Court (HACC). After a difficult start, these institutions have started to prove their effectiveness: in the last 2 years, the HACC has issued 45 decisions in cases that had been investigated and prosecuted by either NABU and SAPO. 80% of these decisions have led to convictions for bribery, embezzlement of public funds, abuse of office and other corruption offences. The most recent legislative changes in this field are underpinned by the MFA and are aimed at strengthening the institutional independence of NABU and enhancing the credibility of the selection process of its head. However, although the anti-corruption infrastructure is functioning, it remains fragile and prone to political attacks. For instance, disputes prevented the nomination of the SAPO’s head until summer 2022, thereby depriving the institution of stable strategic management.

In spite of reform efforts since 2016, the current judicial system suffers from very low levels of public trust due to systemic corruption, the low efficiency of the courts, poor management of resources and insufficient transparency. This is considered to be a key impediment to investment and economic growth. The recently adopted laws address two key judicial self-governance bodies: the High Council of Judges (through integrity vetting) and the High Qualification Commission of Judges, which preselects judges. Challenges nevertheless remain, including in the Constitutional Court. The attestation of prosecutors at both regional and local levels was completed in 2021. Nevertheless, around 2 000 challenges to the attestation are pending in various courts.

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

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

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

2.Jordan

GDP growth was resilient in 2022 and is projected to remain solid in 2023/2024, driven by the recovering tourism sector. Inflation has remained contained, but high unemployment persists. The budget deficit narrowed slightly in 2022 on the back of fiscal consolidation measures, but public debt remains high. Progress with reforms was recorded for several action points of the MFA conditionality. The MFA to Jordan was successfully concluded in 2023, with the disbursement of the third and final instalment in May 2023.

3.1Macroeconomic performance 

Jordan continues to be partly shielded from the immediate effects of Russia’s war of aggression against Ukraine because it has long-term gas supply agreements with Egypt and large cereal reserves. Wheat and barley reserves are sufficient for more than 12 months and no shortage has been recorded. Jordan’s reliance on multiple suppliers assures its food security.

Economic growth stabilised at 2.7% y-o-y during the first three quarters of 2022; the same growth rate is also expected to have been recorded for the whole year (after 3.1% in 2021). Growth was mainly driven by the strong improvement in external sector factors, such as tourism income and total exports. Jordan benefited in particular from higher demand for its phosphate and potash products following Russia’s invasion of Ukraine; both are used in the production of fertilisers.

Activity in the tourism sector recovered to pre-pandemic levels. Tourism revenue increased by 110% y-o-y to reach USD 5.8 billion (12% of GDP) in 2022, thereby surpassing the pre-pandemic level of 2019. The number of tourists grew by 90% y-o-y, reaching 1.4 million visitors in 2022.

The unemployment rate remained stable at a very high 23.1% in Q3-2022. Women’s unemployment rate increased from 30.8% in Q3‑2021 to 33.1% in Q3-2022, while men’s unemployment rate decreased from 21.2% to 20.5% during the same period. Youth unemployment (for the 15-24 age group) remains a challenge, as the rate reached 46.9% in Q3‑2022. Unemployment also remains high among university graduates (29.3% in the same period).

Inflation as measured by the Consumer Price Index (CPI) was a comparatively limited 4.4% in 2022 (up from 1.3% in 2021). The increase was mainly driven by price hikes for fuel and lighting (25.6%) and transportation (5.6%) due to the increase in global energy prices in 2022. Following Russia’s invasion of Ukraine, the Jordanian authorities temporarily froze local petrol prices in February 2022. The later removal of these subsidies (in response to an IMF demand) triggered widespread and violent protests. The King responded by instructing the government to freeze the kerosene tax during the winter 2022/23, in an effort to ease the financial burden on the population. Food price inflation remained contained at 3.5% in 2022. The greatest increases were recorded for oils at 8.5%, vegetables and legumes at 5.4% and cereal at 4.3%. The increase for cereals was relatively low thanks to Jordan’s large cereal stocks and bread subsidies.

In view of the international monetary tightening throughout 2022 and into 2023, the Central Bank of Jordan (CBJ) raised its interest rates on all monetary policy instruments by 425 basis points in eight steps. The most recent hike at the beginning of 2023 brought the main rate up to 6.75%. Given the Jordanian dinar’s peg to the USD, the CBJ’s decision to raise the interest rate was necessary (even if inflationary pressures were relatively limited) in order to be in line with the US Federal Reserve’s monetary policy tightening and to avoid pressures on capital flows.

The budget deficit (including foreign grants) was 4.2% of GDP during the first 11 months of 2022 (5.3% of GDP in 2021). Excluding grants, it was 6.6% of GDP (7.8% of GDP in 2021). Domestic revenue increased by 9.0%, mainly thanks to higher revenues from the income and value added taxes and from mining. Expenditure increased by 6.8%, in particular due to an increase in interest payments, military expenditures and compensation of civil servants. Military expenditure continued to be the largest current expenditure item (32% of total expenditure), followed by the salaries and wages of civil servants (21%) and pensions and transfers (19%). The temporary freeze in local petrol prices cost USD 635 million (1.3% of GDP).

Public debt remained stable at 110.9% of GDP in November 2022 (110.2% of GDP in 2021). When excluding the funds borrowed from the Social Security Investment Fund (SSIF), total public debt stood at 88.2 % of GDP in November (88.6% of GDP in 2021). The authorities are committed to reducing the latter ratio to 80% of GDP by 2027. The IMF assessed the debt ratio (excluding the funds borrowed from the SSIF) as sustainable in its most recent report from December 2022.

The current account deficit widened to 12.7% of GDP during the first three quarters of 2022 (8.5% of GDP during the same period of 2021), driven by a strong increase in imports of goods in value terms (in particular of energy and cereals) that brought the deficit in trade in goods to 25.9% of GDP. The strong recovery of the tourism sector boosted the balance in trade in services to a surplus of 4.2% of GDP, thus mitigating the impact of the trade balance on the overall current account balance.

Remittances by Jordanians abroad mitigated the current account deficit. During the first three quarters of 2022, they amounted to roughly USD 3 billion (8.4% of GDP), 10% more than the pre-pandemic level. An estimated 790 000 Jordanians live abroad, roughly one third in Saudi Arabia, followed by the United Arab Emirates, the United States, Kuwait, Qatar and the rest of the world.

Economic growth is projected to remain solid at 2.7% in 2023 (IMF projection in December 2022), the same rate as in 2022, as the continuing post-pandemic recovery is expected to offset slower global growth and tighter global financial conditions. Fiscal policy is expected to continue its consolidation course, narrowing the budget deficit by broadening the tax base and improving the efficiency and targeting of social measures. The consolidation is nevertheless planned to be very gradual, in light of the challenging global economic environment and the very high unemployment, in order to protect the fragile recovery and avoid further social tensions.

Jordan - macroeconomic indicators

3.2Implementation of macro-financial assistance

3.2.1 Recent macro-financial assistance operations

Between 2014 and 2022, three consecutive MFA operations provided a total of EUR 880 million in loans to Jordan. The EU has maintained its support to Jordan throughout the difficult years of the pandemic. Indeed, following Jordan’s request for further MFA on 11 July 2019, on 6 September 2019 the Commission adopted a proposal for a new, follow-up MFA to Jordan to the amount of EUR 500 million in loans. The co-legislators adopted the proposal on 15 January 2020. The assistance was disbursed in three instalments over 2020-2023.

Later, when the COVID-19 pandemic hit the already struggling Jordanian economy, the authorities requested further MFA on 21 April 2020. In turn, as part of the COVID-19 MFA package adopted on 25 May 2020, the co-legislators agreed to a top-up MFA programme of EUR 200 million for Jordan, in addition to the EUR 500 million made available under the MFA-III programme.

The new (combined) MFA comes on top of the EUR 380 million of MFA provided to Jordan since 2014 under Decisions (EU) 2013/1351 and 2016/2371. The MoU between the EU and Jordan, which underpins the recent MFA operation and its top-up, was endorsed by the Member States Committee for MFA on 27 July 2020. It entered into force on 2 October 2020.

The first instalment (EUR 250 million in loans) was subject to the general political precondition for MFA and the IMF programme remaining on track. It was disbursed on 25 November 2020. The second and third instalments were also subject to the implementation of specific policy conditionality agreed between Jordan and the EU in the MoU. The programme’s policy conditionality focused primarily on improving PFM and fighting corruption, and on reforms in the utilities sector, social and labour market policy and governance. The second instalment (EUR 250 million in loans) was disbursed on 20 July 2021. A waiver was granted for one condition (relating to steps to implement of an electronic invoicing system to fight tax evasion), following consultation of the Member States Committee for Macro-financial Assistance and with the expectation that this condition would be fulfilled once the reforms required for the third instalment had been implemented (as turned out to be the case). The decision to disburse the third and final instalment (EUR 200 million in loans) was adopted by the Commission on 31 March 2023. A waiver was granted for one condition (relating to amendments to the Illicit Enrichment Law) following consultation of the Member States Committee for Macro-financial Assistance because only the fourth sub-action was carried out by the end of the MFA availability period. However, given the progress made and ongoing process, the Commission considered that it was justified to grant a waiver for this condition. The third instalment was disbursed on 3 May 2023.

The support under these MFA operations is provided in conjunction with the resources from international financial institutions and bilateral donors, including the IMF. On 25 March 2020, the IMF approved a four-year Extended Fund Facility (EFF) programme with Jordan. This was initially for roughly USD 1.3 billion (270% of Jordan’s quota) but was augmented twice in 2021-2022 to about USD 1.49 billion (334% of Jordan’s quota). The IMF approved the fifth review of the EFF in December 2022, making about USD 343 million immediately available. This brings total IMF disbursements to Jordan since the start of 2020 to about USD 1.7 billion (including around EUR 366 million in emergency assistance to Jordan under the Rapid Financing Instrument to help the country deal with the impact of the COVID-19 pandemic in May 2020). Jordan’s public debt remained high at 113.2% of GDP in 2022, but it was assessed as sustainable by the IMF in December 2022.

3.2.2Policy conditionality 

The policy actions included in the MoU are in line with the reform commitments taken by Jordan in the context of the EU-Jordan Partnership Priorities and other EU support instruments, as well as the adjustment programmes agreed with the IMF and the World Bank. Taking Jordan’s Five-year Reform and Growth Matrix as a guideline for the design of the policy programme in the MoU ensured that the Jordanian authorities owned the reform process and avoided overburdening their (limited) administrative capacities.

The MFA’s policy conditionality falls into the following thematic areas: public finance management (PFM); reforms in the utilities sector; social and labour market policy; and governance. The conditions aim to address key weaknesses of the Jordanian economy, as well as to mitigate the economic and social impact stemming from regional conflicts and the presence of a large number of Syrian refugees in the country. The conditionality was also chosen in order to build on the reform progress of the two previous MFA operations. For the disbursement of the third and final instalment, 14 conditions needed to be fulfilled. The Jordanian authorities (broadly) fulfilled all but one condition, for which a waiver was granted.

Jordan made significant progress with respect to PFM, in particular by continuing the work on the electronic invoicing system, in order to improve tax compliance. The e-invoicing system was developed by a contractor in 2022 and launched in January 2023. Another achievement was the launch of the National Registry of Investment Projects (NRIP), which became operational in June 2022, after the handover from the developer. The NRIP was introduced to increase the transparency and efficiency of public investments.

Progress was also recorded on utilities reforms. With the aim of improving transparency and promoting functional unbundling of the government-owned National Electric Power Company (NEPCO) and also supporting its financial sustainability, NEPCO started publishing annual financial statements in 2022 for the accounting year 2021, based on separate and independent accounting for each area of operations. Jordan also made progress in identifying water leakages and reducing losses from non-revenue water, as it launched projects – in close cooperation with international aid and donor organisations – to increase accounting for water usage.

Social and labour market policies were advanced under the MFA with the installation of small solar energy stations in at least 4 000 economically vulnerable households and extending the social assistance programme. With a view to developing the digital skills of youth and improve their employment prospects, the government adopted a national plan for digital skills training.

The authorities have advanced some governance reforms in line with the MFA conditionality, but important challenges remain in order to reduce corruption. Amendments to the Investment Law were adopted in 2022 to increase the transparency of tax incentives to businesses. The amendments also simplify administrative and governance structures, in particular the duties and authorities of the Ministry of Finance. The authorities did not fulfil the condition on the Illicit Enrichment Law. Amendments to the Law were adopted in 2021, but these did not include all the points of the MFA condition and a waiver was therefore granted in March 2023, before the end of the availability period.

Besides the MFA conditionality, the government has launched important reform projects. In June 2022, the government laid out its Economic Modernisation Vision. The plan envisions creating a million new jobs, raising the standard of living and boosting economic growth over the next 10 years.

Jordan’s reform agenda is underpinned by the Government’s Economic Priorities Programme (GEPP) 2021-2023, the comprehensive Five-Year Reform Matrix 2018-2022, which was extended to 2025, and the Government’s Indicative Executive Programme (GIEP). The GEPP addresses key challenges in the labour market and private sector, with 53 targets mainly derived from the Matrix and the GIEP.

3.Tunisia

Economic growth slowed due to Russia’s war of aggression against Ukraine and rising commodity prices exacerbated economic vulnerabilities in a challenging political context. This was compounded by rising inflation, worsening budget and trade deficits and balance of payment pressures. The implementation of COVID-19 MFA conditionality and subsequent disbursement of the final EUR 300 million helped address macroeconomic imbalances. Delivering on the prior actions required to obtain a new IMF programme remains paramount in order to restore macroeconomic stability and encourage donor assistance, including additional MFA.

4.1Macroeconomic performance

Growth slowed in 2022 to 2.5% from a relatively mild post-pandemic rebound of 4.4% in 2021. Real GDP grew by 1.8% in Q4 2022 on an annual basis and Tunisia is not expected to regain its 2019-output level before 2024, reflecting the weakness in domestic consumption and investment, amid rising prices and uncertainty regarding the socio-economic situation. Private investment remains subdued, with confidence impacted by the complex political situation, sluggish domestic demand, and limited export demand for Tunisian products. Declared investment projects in industry and services fell by 4.8% in 2022.

Growth in 2022 remained subdued in several sectors. It was driven by a partial recovery in domestic and tourism but there were strong declines in key areas such as construction (-10%), oil and gas extraction (-10.5%) and bad harvests leading to lacklustre growth in agriculture (2%). Economic activity benefited from a growth in manufacturing (6.6%) combined with more moderate increases in services (2.6%). External demand, notably from Europe, continued to support the mechanical, electrical and textile industries, with increases also in the sectors linked to tourism (hotels and transport).

The weak recovery in the economy brought a slight decrease in unemployment, which fell to 15.2% in Q4 2022, from 15.3% in Q3 2022 and 16.2% in Q4 2021, but remained particularly high for university graduates (24%), youth (38.8%) and women (20.1%). Employment remains concentrated in the services sector (53%), manufacturing industries (20%) and agriculture (14%). The participation rate went up slightly to 46.5% in Q4 2022 but remained below pre-pandemic levels. It remains significantly lower for women (28.2%) than for men (65.7%).

Inflation has risen noticeably, with higher international commodity prices and depreciation exacerbating supply bottlenecks. It reached 10.4% in February 2023 (the highest in almost two decades), speeding up across product groups and eroding the purchasing power of households and investment. Core inflation (excluding food and energy) increased to 8.1% at the end of 2022, while prices rose at double digit rates not only for food (14.6%) but also for transport and services. Inflation is expected to ease as commodity prices decelerate but will probably remain high due to the weakness of the Tunisian dinar, supply bottlenecks and expected tax increases combined with lower food and energy subsidies.

Monetary policy has tightened in line with global trends. High inflationary pressures caused the central bank to increase its key policy rate by 75 basis points to 8.0% in December 2022. Credit growth slowed in 2022 and remains driven by loans to the State (12.1%), while credit to private sector grew by 4.7%. The banking sector remained stable and profitability rebounded to near pre-pandemic levels in the first half of 2022. The average non-performing ratio of the nine largest banks increased by 150 basis points y‑o‑y to 11.7% at the end of Q2 2022. The sector average also increased to 13.1%. Banks remain highly exposed to government debt, with regulatory capital requirements that permit limited absorption in a high sovereign risk environment. Given the lack of access to international markets, monetary financing might pose a risk in 2023 and exacerbate financial sector threats by increasing holdings of public debt securities and SOE debt, unless swift progress is made in securing support from international partners.

The dinar has been depreciating against the dollar and the euro since early 2021. This trend accelerated in 2022 (-9% against the USD) but was partly reversed in early 2023. Pressures on hard currency liquidity due to increases in the energy and import bill were still partly eased by reserves and a strong inflow of remittances.

The budget deficit remained stable at high levels in 2022 and amounted to 7.6% of GDP. Revenues increased sizably (22.2%) – partly due to higher taxes (16.6%) helped by inflation, excise duties and grants, and partly due to high oil and pipeline revenues (234%). This was in a context of ongoing increases in public expenditure (16.4%), notably in financial charges (26%) but also in transfers (42.4%). These, together with wages (4.7%), represent over 77% of expenditure. The 2023 budget assumes a slowdown in real GDP growth to 1.8% and an average price of USD 89 per barrel of oil. The 2023 budget also projects a budget deficit of around 5.2% of GDP on the back of strong reductions in subsidies and the public sector wage bill (as agreed with the IMF) as well as a move to raise revenue by 12.5% through large tax increases (including a new tax on high-end real estate).

Tunisia’s limited access to external financing puts additional pressure on public finances. The budget foresees financing needs of over 17% of GDP in 2023, including external borrowing of about EUR 4 billion, at a time when the country might still find it difficult to access international markets and the domestic market is stretched by the State crowding out private investment. The main external financing alternatives (mostly from Gulf countries) also come with unfavourable conditions. Monetising the financing gap would potentially fuel inflation and the drawdown in foreign reserves.

Public debt remains high amid rising concerns about its level. It reached 79.4% of GDP in 2022, slightly down on the back of nominal growth. External debt, mostly concessional, still represents around 58% of the total public debt. In January 2023, Moody’s downgraded Tunisia’s rating to Caa2 with a negative outlook because the current absence of comprehensive financing to meet the government’s large funding needs raises the default risk.

The current account deficit deteriorated markedly due to high commodity prices in 2022. The trade deficit increased by 40% to the highest value in more than two decades due to a very high energy bill. The impact on the current account balance was partly offset by the recovery in tourist receipts (up 83.1%). Both exports and imports rose significantly (23.4% and 31.7% respectively), but the rise in commodity prices and the profound impact of the war in Ukraine on oil and food import prices put pressure on the balance of payments. As a result, the current account deficit increased to an estimated 8.6% of GDP at the end of 2022 (6.1% a year earlier), despite the strong growth in remittances (12.3%). FDI increased by 18.4% to an estimated 1.2% of GDP in 2022 but remained below pre-pandemic levels.

Foreign reserves decreased despite strong remittance inflows. They went down to around 3.1 months of imports in January 2023 (compared with 4 months a year earlier and 5.5 months at the end of 2020). This weakened confidence and reduced the buffer in the context of Tunisia's large external imbalances and dependence on foreign inflows. The pressure on the dinar against the dollar, a tight external debt repayment schedule and the rising import bill increased pressure on the reserves, despite higher tourism revenues and relatively resilient external capital flows.

Downside risks loom large for the Tunisian economy. The economic outlook has deteriorated, prompting questions about debt sustainability and reflecting heightened fiscal and external liquidity risks. Tunisia’s growth rate is expected to remain among the region’s weakest in 2023. The slowdown in Europe will hit exports growth and inflationary pressures are likely to remain as the authorities gradually reduce food and fuel subsidies and international prices remain high. This might in turn place further pressure on private spending and fuel rising social tensions.

The urgent implementation of a reform plan supported by the IMF is necessary to restore macroeconomic stability and foster sustainable growth. The authorities’ reform plan aims to address key structural challenges, including better targeting of subsidies, the high public sector wage bill, a fairer tax system and reforming SOEs. It requires a new IMF programme as an anchor to facilitate additional international assistance (including EU MFA). Broad-based support by key domestic stakeholders would ensure a more inclusive and sustainable growth path and thus facilitate further external support. However, unless reform implementation is stepped up, further protracted delays in securing a new IMF programme during the year will probably continue to put pressure on public finances and erode foreign exchange reserves, exacerbating existing risks.

Tunisia - macroeconomic indicators

4.2Implementation of macro-financial assistance

4.2.1 Recent macro-financial assistance operations

Since 2014, a total of EUR 1.4 billion in highly concessional loans has been made available to Tunisia under three MFA programmes: MFA-I (2015-2017, EUR 300 million), MFA-II (2017-2019, EUR 500 million) and, as part of the MFA package adopted in the context of COVID-19, the latest MFA-III programme of EUR 600 million, with a duration of 1 year from entry into force. The MoU and the LFA were signed on 24 November 2020, ratified by the Tunisian Parliament on 15 April 2021 and entered into force on 11 May 2021, upon publication in the Tunisian Official Gazette.

The programme’s policy conditionality focused primarily on four thematic areas: (i) PFM and civil sector reform; (ii) reforms in SOEs; (iii) social protection; and (iv) investment climate.

The MFA was provided in two instalments of EUR 300 million each. The first instalment was subject to the general political precondition for MFA (respect for effective democratic mechanisms, including a multi-party parliamentary system, the rule of law and human rights) and was disbursed on 1 June 2021. The required policy reforms for the disbursement of the second instalment were either fulfilled or at least broadly fulfilled in the first months of 2022. Notwithstanding concerns in relation to the political precondition, following a careful assessment of the situation and a letter from the authorities providing assurances and setting out commitments on a political calendar, the second and final instalments were disbursed on 25 May 2022.

The assistance was meant to complement resources made available by other donors, including the IMF under its EUR 685 million Rapid Financing Facility programme with Tunisia approved on 10 April 2020.

Tunisia requested additional EU MFA of EUR 1.2 billion in November 2022 to support financing needs in the context of a slow post-pandemic recovery and the impact of Russia’s aggression against Ukraine. This followed the staff level agreement reached with the IMF for a new EFF (4 years, USD 1.9 billion) in October 2022. However, the IMF programme had not yet been adopted at the end of April 2023 due to the need for additional financing assurances and completion of prior actions. Due to the escalating crisis, the country’s external residual financing gap is very sizeable and the implementation of reforms to address the country’s vulnerabilities has become even more urgent. Based on a careful assessment of MFA pre-conditions and Tunisia’s external financing needs, the Commission is preparing a possible proposal for a new MFA to be adopted in 2023 once the IMF programme is in place.

4.2.2 Policy conditionality

The policy conditions contained in the MoU of the latest MFA operation, adopted as part of the MFA package adopted in the context of COVID-19, aimed to address key structural weaknesses of the Tunisian economy, as well as to mitigate the economic and social impact of the COVID-19 emergency. These reforms were all the more important as reform implementation had been very limited in recent years, mostly due to the country’s challenging political situation  19 and the effects of the COVID-19 pandemic. These led to an increasingly deteriorating socio-economic situation and serious macroeconomic imbalances that have now been aggravated by the impact of Russia’s war of aggression against Ukraine, notably in terms of energy and food security. Notwithstanding these challenges, the authorities hurried through the reforms agreed under the MFA in early 2022.

Progress on public financial management and civil service reform was achieved by freezing recruitment in the public sector and putting in place a scheme to make it easier for civil servants to change posts within the public sector. Regarding the commitment to cap wage increases, the total payroll cost was fixed at a level that corresponds to a 5.7% increase – i.e. below inflation. Furthermore, a regime of remote working for State, local authority and establishment agencies, public companies and bodies was implemented. A study on the evaluation of the administrative timetable was launched and finalised, proposing the options of continuous schedules with and without reducing annual working time. Tax audits were strengthened by the introduction of spot checks. With a view to phasing out energy subsidies, a technical committee was set up to design and implement the mechanisms and propose adjustments. A ministerial order was issued to improve and control LPG distribution channels. Finally, the fuel price adjustment mechanism was reactivated, followed by upward price revisions in February and March 2022.

Regarding the governance of state-owned enterprises, progress towards a merit-based appointment system has been made by fixing the principles relating to the choice, performance evaluation and dismissal of administrators. An SOE director’s guide has been developed to improve the directors’ performance and professionalism. Moreover, a decree has been prepared for the appointment of business leaders based on the principles of transparency and equality of choice between candidates and taking gender equality into consideration. Finally, the government has published a report on the financial situation of SOEs appended to the 2022 finance law, as well as the relevant audited financial statements.

On social protection, the authorities established the Higher Council for Social Development, setting out its powers, composition and operating methods. A unified multisectoral action plan has been developed, covering the roles and responsibilities for the development of ID documents and digital authentication. Finally, new digital health cards for beneficiaries of assistance programmes have been printed and distributed.

Regarding the investment climate, facilitating the digitalisation of the legal constitution of private limited liability companies has advanced considerably, in parallel with ongoing work on the investment platform. A new portal has been developed and validated. The government has also developed and adopted an action plan outlining the stages and timetable to harmonise the classification of economic activities.

4.Bosnia & Herzegovina

After a post-pandemic rebound in 2021, economic activity decelerated in 2022 while higher import prices caused inflationary pressures to rise markedly. The labour market and the financial sector remained resilient, however. On 15 December 2022, the EU’s Member States approved the Commission’s recommendation   20  to grant candidate country status to Bosnia and Herzegovina, on the understanding that the steps specified in the Commission’s recommendation are taken in order to strengthen the rule of law, the fight against corruption and organised crime, migration management and fundamental rights.

5.1Macroeconomic performance

Economic activity slowed down during 2022 from 7.1% in 2021 to 4.0% in 2022. The main drivers of growth were exports, gross investment (including inventories) and private consumption. Due to strong imports and decelerating exports, the growth contribution of net exports continued to be negative. On the production side, the main sources of growth were services (particularly trade, transport and tourism), as well as IT and communication and manufacturing. High-frequency data indicate that the deceleration of economic activity during the second half of 2022 also continued in the first months of 2023.

Tourism continued to recover from the COVID‑19-related decline. By the end of 2022, the number of arrivals and overnight stays had nearly reached pre-COVID-19 levels.

The labour market remained resilient in 2022. According to labour market surveys, unemployment dropped to 14.9% in the third quarter of 2022, compared with 16.4% in the same period of 2021. Youth unemployment (for the 15-24 age group) fell to 36.2% in the third quarter of 2022 from 37.8% a year earlier. The current level is therefore similar to youth unemployment rates before the COVID-19 pandemic. The number of registered employed continued to increase during most of 2022, although at a decelerating pace, growing by 2.4% y-o-y in the first 11 months of 2022. The main job-creating sectors continued to be wholesale and retail trade as well as manufacturing.

Consumer price inflation continued to increase in 2022, reaching 14% on average during the year, compared with an annual average of 2% in 2021. However, after reaching a peak of 17.4% in October, inflation abated slightly in the last 2 months of 2022. The main inflation drivers were higher prices for food and non-alcoholic beverages, which account for one third of the consumer basket and are responsible for around half of the CPI increase. Price rises for transport, which accounts for nearly 13% of the basket, were responsible for around 20% of the CPI increase.

The country’s external accounts deteriorated slightly during 2022, largely due to higher import prices for energy and decelerating export growth. In 2022, the current account deficit increased to 4.3% of GDP (2.4% in 2021). Trade in commodities trade remained strong in nominal terms, with the value of goods exports being 25.9% higher in 2022 than a year earlier while imports increased by 32.6%. The main export destinations continued to be Germany, Croatia, Serbia, Austria and Italy, which together account for about two thirds of total exports. Net FDI inflows remained low at 2.5% of GDP in 2022 (2.3% in 2021). A large part of those FDI inflows is reinvested earnings. Official foreign exchange reserves remained high in 2022, but their coverage of imports of goods and services dropped to 7.2 months in December, mainly due to the higher value of imports.

The financial sector has remained stable. Annual credit growth continued to accelerate slightly in Q3-2022, reaching 4.5% y-o-y (4.3% in Q2-2022). In October and November, lending continued to increase by 4.5% and 4.3%, -mainly driven by bank loans to households and to private companies, which account for 50% and 40% of total loans respectively. Bank deposit growth recovered from a sharp drop of 4.4% in Q2 and accelerated to 5.5% in Q3, mainly due to deposit increases by the public sector, while household deposits continued to decline. The ratio of non-performing loans to total loans continued to decline to 4.9% at the end of Q3 (5.5% a year earlier). The ratio of non-performing loans covered by loan-loss provisions stood at 79.6% in Q3 (77.7% in Q2 and 80.2% in Q3-2021). Banking sector profitability continued to improve. The return-on-equity (ROE) ratio rose to 12.6% in Q3 (11.8% in Q2). The return on assets (ROA) ratio also improved in Q3 marginally to 1.6%. The banking system’s overall capital-adequacy ratio remained high at 19.2% in Q3 (19.3% in Q2). This continues to be well above the regulatory minimum of 12%. However, there are sizeable differences among the country’s 21 banks and pockets of vulnerability remain.

The country’s nominal effective exchange rate has appreciated markedly during the last 5 years, mainly due to exchange rate movements of the euro vis-à-vis the US dollar, the Turkish lira and the Russian rouble. However, the effective exchange rate has remained more stable in real terms, benefiting from the country’s so far relatively low inflation rate, with headline inflation of 0.8% on average in the five-year period 2017-2021. However, headline inflation rose to 14% in 2022, reflecting not only high import prices but also steep increases in domestic food prices. As for other Western Balkan countries, the degree of euroisation is rather high (35% of deposits and 41% of loans were denominated in euro in December 2022).

The general government’s fiscal position improved from a deficit of 5.3% of GDP in 2020 to a deficit of 0.3% in 2021, largely reflecting the post-pandemic economic recovery. For 2022, no annual consolidated general government data have been published so far. The spending structure is still dominated by the public sector’s wage bill and transfer payments, while the level of public investment remained very low, reflecting a number of factors such as administrative weaknesses in implementing planned investment projects. During the first 11 months of 2022, revenue from countrywide-collected indirect taxes registered high nominal growth (+14.7% y-o-y), largely reflecting high inflation. This revenue category accounts for nearly half of total revenues. Preliminary entity-level expenditure data point to a strong increase in 2022 for public sector wages, pensions and social transfers.

The public debt-to-GDP ratio stood at 30% at the end of September 2022 (34.4% at the end of 2021). An important reason for the fall in the ratio was strong nominal GDP growth, while the absolute level of public debt continued to increase slightly. Headline public debt is low, but there are sizeable contingent liabilities (particularly in the area of public enterprises). Moreover, there is a significant degree of non-alignment with EU public sector accounting standards, which makes it very difficult to assess the country’s actual fiscal position. As a result, both the deficit and debt ratio could be significantly higher than reported.

In February 2023, the rating agency Standard & Poor's affirmed its sovereign credit rating of Bosnia and Herzegovina at ‘B’ and upgraded the outlook from stable’ to ‘positive’, citing the recent relatively swift government formation process as an important factor for this more positive assessment. Moody’s latest rating from July 2022 remained at ‘B3, with a stable outlook’.

In its latest outlook from April 2023, the IMF has maintained its rather low GDP growth projection for 2023 of 2.0%. As a result of an expected only moderate recovery of the global economy, Bosnia-Herzegovina's growth outlook is subdued –particularly if the newly elected governments do not manage to overcome their persistent internal political stalemates, which are preventing the country from agreement and implementation long overdue structural reforms, such as strengthening the rule of law and improving the business environment.

Bosnia & Herzegovina - macroeconomic indicators

5.2Implementation of macro-financial assistance

5.2.1 Recent macro-financial assistance operations

Following an official request for MFA from Bosnia and Herzegovina on 14 April 2020 in the context of the COVID-19 pandemic, the European Parliament and the Council approved in May 2020 the COVID-19 MFA package, including a new MFA programme of EUR 250 million in loans for Bosnia and Herzegovina. The MoU and the LFA were signed on 15 January 2021 and entered into force on 9 June 2021.

The MFA was to be provided in two instalments. The first instalment (EUR 125 million) was subject to the general political precondition for MFA (respect for effective democratic mechanisms, including a multi-party parliamentary system, the rule of law and human rights) and was disbursed on 7 October 2021. The second instalment (EUR 125 million) was subject to the fulfilment of a set of policy conditions agreed in the MoU. The policy measures fell into the following four thematic areas: economic governance and institution building, financial sector stability, transparency and fight against corruption and better functioning of the labour market. Given the limited implementation of reforms (Bosnia and Herzegovina had implemented only two of the nine reforms agreed in the MoU), the second instalment of the operation was not disbursed by the end of the availability period in mid-June 2022 and was cancelled through a Commission Decision 21   adopted on 6 July 2022.

The MFA assistance was meant to complement resources made available by other donors, including the IMF, under its Rapid Financing Facility programme of EUR 330 million approved on 20 April 2020.

5.2.2Policy conditionality

During 2022, political disputes continued to paralyse political decision taking, leading to a further deterioration in cooperation at entity level and to disagreements on implementing countrywide reforms in line with EU-accession requirements. As a result, economic reforms in general remained blocked, including those which had been agreed in the context of the MFA operation. This particularly affected agreed policy conditions that either required improved cooperation and coordination among the country’s stakeholders or tried to strengthen the functioning of countrywide institutions. As a result, even simple requirements, such as organising regular meetings of already existing countrywide institutions, were not fulfilled. In the area of financial markets, the authorities adopted the required deposit insurance law, which will strengthen the sector’s shock resilience in times of stress in the financial markets. With respect to maintaining the central bank’s independence and the integrity of the currency board, some high-ranking politicians proposed measures which would have undermined this requirement. However, the central bank’s independence and the integrity of the currency board arrangement were ultimately not touched. The functioning of the central bank’s governing board was impeded by delays to the appointment of crucial board members that forced the central bank to function with a temporary technical mandate. The MFA operation also included a requirement to develop and discuss in the parliament amendments to the current law on the High Judicial and Prosecutorial Council (HJPC), with a view to establishing a system of verification of asset declarations of judges and prosecutors and members of the HJPC. If adopted, those amendments would have improved the country’s alignment with the EU acquis in the judicial area, which would have improved the judiciary’s resilience against corruption. Here too, the country’s authorities failed to present the required amendments to the parliament. The requirements to lower the tax wedge in the Federation entity, which could have helped to lower the costs of labour and thus helped to stimulate employment, were not adopted by the entity’s parliament. In addition, agreed measures to improve the capacity of the country’s employment office, which would have helped to reduce chronically high unemployment, were not carried out. Overall, of the nine agreed policy measures under the MFA operation, only one was fully implemented and one was partially implemented.

Annex 1: MFA operations by date of decision, 1990-2022 22

   
Annex 2: Status of disbursements made by date of decision at end-December 2022 23

Annex 3: MFA amounts authorised* by year, 2006-2022 (EUR million) 24

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

Chart 3A: MFA amounts authorised by year, 2014-2022 (EUR million)

Chart 3B: MFA amounts authorised by region, 2006-2022 (%)

Annex 4: MFA amounts disbursed by year, 2006-2022 (EUR million)

Chart 4A: MFA amounts disbursed by year, 2014-2022 (EUR million)

Chart 4B: MFA amounts disbursed by region, 2006-2022 (%)

(1)  This document is based on information available up to 5 May 2023.

(2)  The document and the annexes distinguish between authorised amounts (the amounts made available to the beneficiary country as stated in the decisions providing MFA) and disbursed amounts (the amounts actually paid to the beneficiary country).

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

(4)  Decision (EU) 2017/1565 of the European Parliament and of the Council of 13 September 2017 on providing macro-financial assistance to the Republic of Moldova (OJ L 242, 20.9.2017, p. 14–21)

(5)  Decision (EU) 2022/563 of the European Parliament and of the Council of 6 April 2022 providing macro-financial assistance to the Republic of Moldova (OJ L 109, 8.4.2022, p. 6–12)

(6)  The four actions assessed as fulfilled were Action 4 (establishing a procedure to identify eligible public investment projects for funding), Action 5 (new Public Finance Management Reform Strategy), Action 6 (selection process for vacancies in anti-corruption and anti-money laundering institutions) and Action 7 (national programme on asset recovery)

(7)   EUR-Lex - 22014A0830(01) - EN - EUR-Lex (europa.eu)

(8)  Commission Opinion on the Republic of Moldova’s application for membership of the European Union, 17 June 2022.  Opinion on Moldova's application for membership of the European Union (europa.eu)

(9)  A precondition for granting MFA is the beneficiary country’s adherence to effective democratic mechanisms. These include having a multi‐party parliamentary system, observing the rule of law and respecting human rights.

(10)  The third EUR 600 million instalment of MFA-III could not be disbursed because 4 of the 21 structural policy conditions had not been implemented when the availability period expired in January 2018.

(11)  Decision (EU) 2022/313 of the European Parliament and the Council of 24 February 2022 providing macro-financial assistance to Ukraine, OJ L 55, 28.2.2022, p. 4–11.

(12) Communication from the European Commission to the European Parliament, the European Council, the Council, the European Economic and Social Committee, and the Council of the Regions – Ukraine Relief and Reconstruction,  EUR-Lex - 52022DC0233 - EN - EUR-Lex (europa.eu)

(13)  Conclusions of the European Council meeting of 23 and 24 June 2022, pdf (europa.eu)

(14)  Decision (EU) 2022/1201 of the European Parliament and of the Council of 12 July 2022 providing exceptional macro-financial assistance to Ukraine OJ L 186, 13.7.2022, p. 1–7

(15)  Decision (EU) 2022/1628 of the European Parliament and of the Council of 20 September 2022 providing exceptional macro-financial assistance to Ukraine, reinforcing the common provisioning fund by guarantees by Member States and by specific provisioning for some financial liabilities related to Ukraine guaranteed under Decision No 466/2014/EU, and amending Decision (EU) 2022/1201, OJ L 245, 22.9.2022, p. 1–13

(16)  Regulation (EU) 2022/2463 of the European Parliament and of the Council of 14 December 2022 establishing an instrument for providing support to Ukraine for 2023 (macro-financial assistance +), OJ L 322, 16.12.2022, p. 1–14.

(17)  A waiver was granted for Action 2 in 2021, as the project had run into initial difficulties because tenders could not be awarded due to insufficient technical capacity on the part of domestic contenders for developing the system. Action 2 would implicitly be later fulfilled by Action 9, which aims at the full roll-out of the electronic invoicing system.

(18)  The adopted amendments to the Illicit Enrichment Law of 2021 do not sufficiently address the measures included under the MFA condition; only one out of four sub-actions was fulfilled by the end of the MFA availability period. However, given that the process is ongoing and given the progress made with the Illicit Enrichment Law (as compared with its previous unamended version), the Commission considered that it was justified to grant a waiver for this condition.

(19)  Following the controversial seizure of power by President Saied in 2021 and the publication of a political roadmap in early 2022, a new constitution was adopted through a referendum in July 2022 and two rounds of parliamentary elections took place in December 2022 and January 2023. However, the votes were characterised by the boycott of opposition parties and very low participation rates, reconfirming Tunisians’ disinterest and prompting doubts regarding the legitimacy of both the Tunisian parliament and the President’s authority.

(20)      Council Conclusion on enlargement and the stabilisation and association process, European Council Conclusions, 15 December 2022.

(21)      Commission implementing decision of 6.7.2022 on the cancellation by the European Union of macro-financial assistance to Bosnia and Herzegovina in the amount of EUR 125 million, SJ-031 C(2022) 4866 final.

(22)  MFA+ statistics also included in the year 2022.

(23)  MFA+ statistics included in the year 2022, for information only.

(24)  MFA+ statistics also included in the year 2022.