EUROPEAN COMMISSION

Brussels, 17.6.2024

SWD(2024) 150 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 2023

{COM(2024) 240 final/2}

List of abbreviations

Contents

Introduction

Background analysis of beneficiaries of macro-financial assistance

1.Moldova

1.1 Implementation of macro-financial assistance

1.1.1 Recent macro-financial assistance operations    

1.1.2 Policy conditionality    

2.Ukraine

2.1 Implementation of macro-financial assistance

2.1.1 Recent macro-financial assistance operations    

2.1.2 Policy conditionality    

3.Jordan

3.1 Implementation of macro-financial assistance

3.1.1 Recent macro-financial assistance operations    

3.1.2    Policy conditionality    

4.North Macedonia

4.1 Implementation of macro-financial assistance

4.1.1 Recent macro-financial assistance operations    

4.1.2    Policy conditionality    

Annex 1: MFA operations by date of decision, 1990-2023

Annex 2: Status of disbursements made by date of decision at end-December 202339

Annex 3: MFA amounts authorised by year, 2006-2023 (EUR million)

Annex 4: MFA amounts disbursed by year, 2006-2023 (EUR million)

Introduction

This staff working document (SWD) complements the Commission’s report to the European Parliament and the Council on the implementation of macro-financial assistance (MFA) to third countries in 2023 1 .

In light of the prolonged war and the increased funding requirements of Ukraine, 2023 saw the implementation of an exceptional support package to Ukraine. This provided a new highly concessional loan of EUR 18 billion under an ‘MFA+’ operation. The operation was disbursed in monthly instalments throughout the year, with the last instalment concluded in December, conditional on Ukraine meeting ongoing political prerequisites, carrying out satisfactory reporting and completing 20 structural policy conditions. This was the largest MFA support ever provided to a country, making it a natural focus in this edition of the annual report and corresponding SWD.

The ongoing MFA operation for Moldova was increased via a ‘top-up’. The aim was to continue supporting the country by helping bridge its external financing gap in an increasingly challenging economic situation, which was exacerbated by Russia’s continued war of aggression in Ukraine. The decision was adopted by Parliament and entered to force in September, with the first additional instalment disbursed in October 2023.

In May 2023, the ongoing MFA to Jordan was successfully concluded with the disbursement of the third and final instalment. An MFA operation for North Macedonia was proposed by the Commission in January 2023 and adopted in June. The Commission gave a positive evaluation to North Macedonia’s statement of compliance and the disbursement of the first instalment is planned for May 2024.

For each beneficiary country, the report provides more detailed information on: (i) implementation of the corresponding MFA operations; and (ii) the underlying policy conditionality and progress regarding its implementation.

The annexes include overview tables on disbursements of MFA operations since 1990 by date of adoption of the decisions, and tables on MFA commitment and payment amounts in the period 2006‑2023, by year and by region 2 .

Background analysis of beneficiaries of macro-financial assistance 3

1.Moldova

The Moldovan economy turned the corner in 2023 after five consecutive quarters of contraction, with the preliminary estimate of real GDP growth of 0.7% in 2023 after the sharp contraction of -5.0% in 2022. Growth returned in the third quarter of 2023, on the back of a strong rebound in the agricultural sector, following the severe drought in the previous year, and notable gains in the IT industry, which is emerging as one of the economy’s most dynamic sectors. In addition, inflation was on a downward trend throughout 2023, falling steeply from 28.7% on average in 2022 to 13.4% in 2023. Moldova was significantly affected by the start of the Russian war of aggression against neighbouring Ukraine in 2022 and the ensuing energy and food price shocks. These events severely diminished households’ purchasing power, eroded investor confidence and undermined export growth. On the fiscal side, the high energy prices required additional spending on subsidies for the most vulnerable consumers and ultimately resulted in a widening of the budget deficit, which narrowed slightly to 5% of GDP in 2023. The current account deficit also increased, driven by a sizeable negative trade balance but narrowed in 2023 while remaining significant. The Commission’s 2023 Autumn Forecast projected a current account deficit of 13.3% in 2023 4 . In light of these developments, Moldova received increased financial support from its international partners, including the EU, whose support took the form of macro-financial assistance. Reflecting how Moldova’s economy continued to be directly and indirectly hit by Russia’s continued war of aggression in Ukraine, in June 2023 the EU decided to increase its ongoing support. The EU granted Moldova candidate status in June 2022, supporting its ambition for future EU integration. In December 2023, EU leaders decided to open accession negotiations with Moldova, inviting the Council to adopt the negotiation framework once Moldova had taken the relevant steps on rule of law and anti-corruption as set out in the Commission’s report.

1.1 Implementation of macro-financial assistance

1.1.1 Recent macro-financial assistance operations

Since 2014, Moldova has received assistance under three MFA operations. A total of EUR 495 million was made available under the corresponding MFA operations, of which EUR 332.5 million have so far been disbursed. Overall, progress has been positive, although full implementation and disbursements under the 2017-2020 operation (covered by Decision (EU) 2017/1565) were hindered by the challenging political situation in the country at the time. This resulted in the third and final instalment being cancelled, as the MFA’s availability period ended before the conditions agreed in the MoU were fulfilled. Following the outbreak of the pandemic, Moldova also received assistance under the EU’s EUR 3 billion COVID-19 MFA package to 10 enlargement and neighbourhood countries. Currently, against the backdrop of the challenging geopolitical situation and risks to energy security, which put additional pressure on Moldova’s macroeconomic stability, the country continues to benefit from an ongoing MFA that first entered into force on 18 July 2022.

Reflecting how Moldova’s economy was directly and indirectly further hit by Russia’s war of aggression in Ukraine, on 24 January 2023 the Commission adopted a proposal to increase the ongoing MFA to Moldova by EUR 145 million, of which up to EUR 100 million in loans and EUR 45 million in grants (the ‘additional MFA’). In June 2023, Parliament and the Council adopted a corresponding decision covering the additional assistance (Decision 2023/4597 final). This additional financial assistance under the MFA comes as part of a larger EU support package to Moldova announced by the Commission President in November 2022. This also contained EUR 105 million to be disbursed in 2023 and beginning of 2024 via a budget support operation.

The support under these MFA operations is provided in conjunction with the resources from international financial institutions and bilateral donors, including the International Monetary Fund. In May 2022, the IMF’s December 2021 programme for Moldova of USD 558 million under the Extended Credit Facility/Extended Fund Facility (ECF/EFF), was increased by USD 260 million in view of the significant impact on the Moldovan economy of Russia’s war on Ukraine. In December 2023, the IMF concluded its fourth programme review, assessing overall progress as positive. The IMF noted the authorities’ strong ownership of, and firm commitment to, reforms, which warranted the Fund’s further support. The Executive Board also approved extending the ECF/EFF arrangements by 6 months until 19 October 2025. In addition, the board approved a new arrangement Under the Resilience and Sustainability Facility (RSF) of about US$173 million. This arrangement was to support Moldova’s efforts to strengthen its resilience against climate shocks, support energy sector reforms, enhance domestic financial-sector preparedness and mobilise sustainable finance.

On 21 December 2023, the former governor of the National Bank of Moldova, Octavian Armașu, was abruptly and unexpectedly dismissed. The procedure by which the former governor was dismissed is a source of concern and may pose risks to the independence of the central bank. Technical discussions with both the EU and the IMF have followed on the importance of good economic governance, strengthening central bank independence and following due processes, notably as regards the appointment and dismissal of a central bank governor.

1.1.2 Policy conditionality

In line with the broad objectives of EU-Moldova cooperation under the Association Agreement and the Deep and Comprehensive Free Trade Area (DCFTA) Agreement, the ongoing MFA operation, including the additional MFA, focuses on several key areas of reform. These include the fight against corruption and the rule of law, public finance management, public-sector and financial-sector governance, strengthening the business climate, and in view of the energy crisis, important energy sector reforms. Until now, the authorities have been making good progress on meeting the policy conditionality, enabling three subsequent MFA disbursements under the ongoing operation.

Several conditions under the MFA call on the authorities to advance the fight against corruption. This involves improving the institutional structure of the various anti-corruption agencies, including a clear delimitation of competences between the Anti-Corruption Prosecutor’s Office and the National Anti-Corruption Agency and establishing task forces to fight high-level corruption and organised crime.

The rule of law and justice sector reforms are long-standing priorities under EU‑Moldova cooperation, e.g., under the EU-Moldova Association Agreement and supported by the MFA. In particular, Moldova has been scoring poorly on judicial independence and transparency. In line with Venice Commission recommendations and best international practices, the authorities have launched a comprehensive assessment of the members of the self-governing bodies of judges and prosecutors (‘pre‑vetting’). Although the process is not yet complete, significant progress has been made on the assessment of the Superior Council of Magistracy and the Superior Council of Prosecutors. Completion of the pre-vetting of candidates for the Superior Council of Magistrates and the Superior Council of Prosecutors and the bodies/colleges of the Councils has been postponed. It is now expected under the last disbursement of the ongoing MFA before its availability ends in January 2025.

Moldova has made significant progress on strengthening public finance management (PFM). It has a new PFM strategy in place, supported by extensive assessment, in close cooperation with international partners, and followed by an open public consultation. To address the chronic issue of budget under-execution, especially for capital expenditure, the authorities have also implemented new legislation on public investment projects, intended to help Moldova improve its planning of capital budgets and increase execution of public investments.

Several actions under the current MFA are designed to strengthen and improve Moldova’s business climate. The country has taken important steps to set priorities and actions in this area. These involve adopting the digital transformation strategy and the national programme for the promotion of entrepreneurship and increasing competitiveness, including improving access to finance for local businesses. In spring 2024, Moldova is expected to adopt an overarching national strategy for the development of the economy. The strategy will focus on the internationalisation of local businesses and the promotion of foreign direct investment.

Important progress has also been made to improve Moldova’s medium- to long-term energy security and develop sustainable energy markets. The protracted energy crisis that began in October 2021 exposed several structural weaknesses in Moldova’s energy sector, aggravated by Russia’s weaponization of energy (Russia cut off energy deliveries to Moldova at the time of its invasion of Ukraine). The authorities have significantly increased the country’s gas storage capacity, diversified gas supply, adopted concrete plans to prepare for the heating seasons and have committed to making further progress on unbundling to strengthen the country’s energy market (Moldova’s key commitment under the Energy Security Secretariat). Moldova is also seeking to facilitate the market for renewable energy, e.g., by transposing the EU Renewable Energy Directive.

Finally, in line with the DCFTA, the authorities implemented important amendments to the new Customs Code and adopted the implementing regulation. As a result, the Code entered into force on 1 January 2024.

With Moldova being a new candidate for EU membership, progress on MFA conditions can also help bring the country closer to the EU and support not only its economic convergence but also its alignment with the EU acquis. To that effect, further progress on the rule of law, good governance and anti-corruption is particularly important. Progress on the relevant MFA conditionality also helps Moldova advance on its implementation of the recommendations in the annual enlargement report and the Economic Reform Programme. The MFA also remains in line with the government’s long-term objectives.

2.Ukraine

Russia’s full-scale war of aggression is taking a heavy toll on Ukraine, whose macroeconomic performance was muted already in peace times. Under these unprecedented circumstances, the international community, and notably the European Union and its Member States, have demonstrated their solidarity and steadfast support. In particular, Ukraine’s financing gap for 2023 was closed thanks to considerable support from international partners, in particular the EU’s macro-financial assistance+ (MFA+), which provided a total of EUR 18 billion in highly concessional loans, thus making the EU’s financial contribution the largest by any international partner in 2023 and since the start of Russia’s war of aggression in general.

Since the beginning of 2023, the economy has regained some ground, with the National Bank of Ukraine estimating real GDP growth at 5.7% following the GDP decline of close to 30% in 2022. This better-than-expected rebound reflects multiple factors, including the rapid revival of the energy system. Overall, this relatively strong performance underscores the adaptability and resilience of Ukrainian consumers and businesses amidst the challenges of a war environment. While official reserves suffered a depletion by almost USD 9 billion in the first months of the war, the subsequent sizeable international financial support helped restore the reserves to almost USD 38.5 billion by end-2023. This allowed the national bank to start monetary easing in mid-2023, with a series of rate cuts bringing it down to 16% in December 2023, and to gradually remove some of the foreign exchange restrictions introduced in the aftermath of the invasion. Confidence in the hryvnia strengthened further throughout 2023. Against this backdrop, Ukraine avoided further direct monetary financing of the state budget in 2023. This is also a condition under the IMF programme. In addition, on 3 October 2023, the national bank shifted to a managed float system for the hryvnia, marking the first important step towards liberalising the exchange rate according to the bank’s ‘Strategy for easing FX restrictions, transition to greater exchange rate flexibility and return to inflation targeting’ 5 .

The IMF Executive Board approved on 31 March 2023 a 48-month Extended Fund Facility (EFF) arrangement with access to SDR 11.6 billion (equivalent to USD 15.6 billion, or about 577 per cent of Ukraine’s quota). The authorities’ IMF-supported programme aims to: (i) anchor policies that sustain fiscal, external, price and financial stability at a time of exceptionally high war-related uncertainty; (ii) support economic recovery; and (iii) enhance governance and strengthen institutions to promote long-term growth in the context of reconstruction and Ukraine’s path to EU accession. Two programme reviews were successfully completed in 2023, and there was a further review in the first quarter of 2024, with a solid track record in meeting the IMF’s conditions. This allowed access to close to USD 4.5 billion at end-2023 and close to USD 5.4 billion at end-March 2024.

In November 2023, the European Commission issued a recommendation to open accession negotiations with Ukraine. In December 2023, EU leaders decided to open accession negotiations with Ukraine and invited the Council to adopt the negotiation framework once Ukraine had taken the relevant steps set out in the Commission’s report of 8 November 2023.

2.1 Implementation of macro-financial assistance

2.1.1 Recent macro-financial assistance operations

Since the start of Russia’s war of aggression against Ukraine, overall support from the EU and the Member States to Ukraine and to cater for the needs of Ukrainians fleeing the war has reached over EUR 98 billion 6 . In 2022 alone, Ukraine received EUR 7.2 billion in macro-financial assistance from the EU. Emergency MFA loans of EUR 1.2 billion were disbursed in two tranches in March and May 2022, just weeks after the start of the war. Also in 2022, the EU adopted two exceptional MFA operations in loans for Ukraine of up to EUR 1 billion and an additional one of up to EUR 5 billion; these were fully disbursed. The legal acts governing the exceptional MFA operations included the possibility to provide a subsidy to cover the interest rate costs related to the loans upon request by the Ukrainian authorities, making the loans even more favourable. Given Ukraine’s timely submission of such a request and the availability of budgetary resources under Regulation (EU) 2021/947(3), the Commission confirmed to the Ukrainian Minister of Finance on 29 June 2023 the granting of an interest rate subsidy for the charges due in the year 2023 and again in 2024 (from which onwards the necessary funds are provided through the Ukraine Facility).

On 9 November 2022, the Commission made a formal proposal for a regulation of the European Parliament and of the Council establishing an instrument to provide support to Ukraine for 2023 (macro-financial assistance+) 7 . Parliament and the Council adopted the MFA+ Regulation on 14 December 2022 and it entered into force on 17 December 8 . The MFA+ instrument ensured more predictable, continuous, orderly and timely financing of up to EUR 18 billion in highly concessional loans to help Ukraine meet its short-term funding needs in 2023. Policy conditionality and stringent reporting requirements, as reflected in the memorandum of understanding, remained attached to the disbursements.

The Member State Committee on Macro-Financial Assistance endorsed the MoU underpinning this exceptional MFA operation in its meeting on 9 January 2023. The MoU featured a total of 20 policy conditions in the areas of macro-financial stability, structural reforms and good governance, the rule of law and energy, carefully selected to ensure both feasibility and relevance. Ukraine and the European Commission signed the MoU on 16 January, and it entered into force on the same day. Disbursement of the first instalment of EUR 3 billion took place on 17 January 2023. The disbursement was conditional on Ukraine’s continued fulfilment of the political pre-condition and satisfactory implementation of the reporting requirements. Disbursement of the following instalments is additionally linked to progress on implementing the structural policy conditionality agreed in the MoU. Disbursement of the second instalment of EUR 1.5 billion took place on 21 March. The third instalment was provided in three tranches of EUR 1.5 billion, disbursed on 25 April, 23 May, and 22 June respectively. This followed the EEAS and the Commission’s favourable assessment of Ukraine’s satisfactory progress towards meeting the agreed conditionality. In the same vein, the fourth instalment was disbursed in monthly tranches of EUR 1.5 billion each on 25 July, 22 August and 22 September, again based on a favourable assessment of progress with the conditionality. The fifth and penultimate instalment provided for two monthly tranches of EUR 1.5 billion, each with disbursements taking place on 23 October and 22 November.

To secure release of the full amount of support available under the instrument, Ukraine had to fulfil or broadly fulfil all structural policy conditions agreed in the MoU (rather than demonstrating progress in this respect, as had been the case for the previous instalments). Against the background of a positive corresponding assessment, the Commission adopted a decision on 15 December 2023 to release the sixth and final instalment of EUR 1.5 billion to Ukraine; this was disbursed on 21 December 2023. By disbursing the total amount available under the MFA+ instrument, the EU provided a crucial contribution to financing Ukraine’s substantial external funding gap in 2023 in the current unprecedented circumstances. The EU was the international partner making the highest financial contribution to Ukraine in 2023.

In contrast to the standard MFA set-up, the MFA+ instrument was not made conditional on an International Monetary Fund disbursing programme (no arrangement was in place at the time). However, it benefited from close cooperation with the Fund. In early 2023, the IMF adopted changes to its financing assurances policy that addressed previous barriers to designing an ‘upper credit tranche’- quality adjustment programme in situations of exceptionally high uncertainty 9 . These changes allowed for the IMF’s closer engagement with Ukraine, notably through the new four-year Extended Fund Facility (EFF) arrangement worth SDR 11.6 billion, i.e., about USD 15.6 billion, approved by the IMF Executive Board on 31 March 2023. On 11 December, the IMF Executive Board concluded the second review of the EFF arrangement, which paved the way for another disbursement of about USD 890 million. For the Commission, very close cooperation with the IMF and other competent international financial institutions on support to, and on economic and policy analysis of, Ukraine remains a priority.

The MFA+ instrument strengthened the concessional nature of the EU’s support to Ukraine through a 10-year grace period with no repayment of the principal before 2033, a longer-than-usual loan maturity of up to 35 years, and a possible subsidy of the interest rate costs at least until end of 2027. This high degree of concessionality of financing under the MFA+ helped to contain fiscal pressures. To illustrate this positive development, analysis by the Ukrainian Ministry of Finance indicated that the cost of funding state debt decreased over the first 8 months of 2023 by 0.92 percentage points to 6.95%. In parallel, the average maturity of Ukraine’s state and state-guaranteed debt has increased by almost 11 months since the beginning of the year, to 9.35 years 10 . The IMF considers Ukraine’s public debt to be sustainable on a forward-looking basis. This is contingent on strong policy commitments and assurances for highly concessional lending during and after its programme, and on credible assurances of debt relief.

Using the Commission’s diversified funding strategy, mobilisation and disbursements under the MFA+ are more cost-effective and agile. Finally, the loans to Ukraine are guaranteed by the headroom of the EU’s budget, instead of through provisions and national guarantees as it was the case for the two exceptional MFA disbursed in 2022. That way the MFA+ avoids further pressure on an EU budget already strained by provisioning with complex arrangements involving a multitude of ad hoc national guarantees, as was the case with the exceptional MFA support to Ukraine in 2022. A discussion of the budgetary treatment of the MFA+ instrument can be found in a box in the annual report.

The MFA+ Regulation envisaged the possibility of a mid-term review of the policy conditions included in the MoU. This is in contrast to a regular MFA operation and is in recognition of the extraordinary challenges of implementing an ambitious reform agenda during wartime. To monitor progress and evaluate implementation risks, the Commission was in regular exchange with the Ukrainian authorities on this issue and held dedicated discussions in May, July and September assessing the continued feasibility of the agreed conditionality. These discussions confirmed Ukraine’s strong and continued commitment to reform implementation and led to an assessment (based on information at that time) that fulfilment of all policy conditions in the MoU appeared overall feasible by year-end without any changes to the MoU. While some implementation risks remained under the challenging circumstances, these appeared manageable and related mostly to uncertainties over the timeline of the legislative pipeline. In hindsight this assessment proved adequate, as Ukraine fulfilled or broadly fulfilled all policy conditions in time for the last instalment, disbursed in December 2023.

The unique characteristics of the MFA+ are due to the exceptional situation of providing unprecedented amounts of loans to a war-torn country 11 . In this respect, the MFA+ does not constitute a generally applicable precedent for future MFA operations. These will typically be guided by the principles in the 2013 Joint Declaration, a legally non-binding declaration in which Parliament and the Council set out guiding principles for MFA operations. In the case of the MFA+ instrument, the increased flexibilities such as in the design of the conditionality have proven highly advantageous without any apparent detrimental impact on the incentive structure. It also proved advantageous to: (i) base the release of the assistance on progress rather than completion of policy conditions before the end of the programme; and (ii) have flexible sequencing by means of indicative timelines. It is not possible to assess the effect of forgoing a formal link to a disbursing IMF programme, as de facto standard conditions already prevailed from March 2023 when the EFF arrangement was put in place and subsequently implemented with success. Nevertheless, putting the EU support in place before the IMF programme reflects the exceptional situation and is not to be seen as a precedent. As usual for MFA operations, an ex post evaluation will assess the results and efficiency of the completed support under the MFA+ instrument and the extent to which it contributed to the aims of the assistance. The evaluation will be performed not later than 2 years after the end of the assistance’s availability period.

While MFA+ was thus successful as an instrument to provide predictable, continuous and timely financing to Ukraine in 2023, the EU’s approach to supporting Ukraine has evolved further and will from now on take place outside the MFA framework. To best respond to the scale and complexity of the challenges both for reconstruction and the reforms underpinning the enlargement process, Ukraine needs the EU’s sustained support. To this end, the Commission proposed in June 2023 to create a new instrument, the Ukraine Facility. This will provide predictable financial support for Ukraine over the 2024-2027 period, catering both for short-term state and recovery needs and medium-term reconstruction and modernisation of the country. The facility is designed as a flexible instrument adapted to the unprecedented challenges of supporting a country at war and ensuring predictability, transparency and accountability of the funds.  The facility is intended to provide up to EUR 50 billion from 2024 to 2027, in the form of both grants (up to EUR 17 billion) and loans (up to EUR 33 billion). The facility underscores the EU’s steadfast commitment to supporting Ukraine in the face of Russia’s ongoing war of aggression and on its path towards EU membership. The proposal was ultimately adopted by the co-legislators on 29 February 2024 12  made in and April, in which EUR 6.0 billion in total was paid out as bridge financing.

2.1.2 Policy conditionality

In light of the exceptional war circumstances, the MFA+ conditionality was structured differently from standard MFA conditions. From a technical point of view, a major difference is that the release of the bulk of the support was made conditional on progress towards implementing the policy conditions, with an only indicative timeline for their implementation in the MoU. Disbursement of the maximum amount of support under the instrument was then more traditionally linked to the Commission verifying fulfilment of all the policy conditions in the MoU. In practice, this meant that Ukraine had to fulfil or broadly fulfil all structural policy conditions agreed in the MoU by the time of the last instalment. And indeed, by the time of the last assessment in December 2023, the Commission found that Ukraine had fulfilled the structural policy conditionality agreed in the MoU notwithstanding the exceedingly difficult wartime environment. Specifically, Ukraine fulfilled 11 conditions and broadly fulfilled 9 conditions. This assessment of overall good progress on the reform agenda is also consistent with the findings of the IMF in its second review under the Extended Fund Arrangement. In the IMF review, which took place around the same time as the Commission assessment, the IMF commended the Ukrainian authorities’ programme performance and noted a sustained strong commitment to reforms.

Another important aspect in the design of policy conditionality under the MFA+ was that both the operation’s short timeframe (one year) and the war circumstances underscored the need to focus on a limited set of key reforms. In particular, it was imperative to be selective in terms of relevant, macro-critical conditions which also appeared feasible under the extraordinary circumstances. In addition to addressing Ukraine’s immediate short-term funding and rehabilitation needs, the conditionality was designed with a view to supporting Ukraine on its path towards European integration.

As a result, policy conditionality in the MFA+ focused on a limited list of especially pressing policy objectives: economic resilience and stability, governance and rule of law, and energy. This conditionality should be seen against the backdrop of the ambitious and wide-ranging reform programme Ukraine has embarked upon since the political transition in 2014. This programme has been guided by continuous implementation of the Association Agreement with the EU and supported by large-scale financial and technical assistance provided by the EU and other multilateral and bilateral partners. Ukraine managed to advance reforms in a variety of sectors, although overall progress has been uneven. The main obstacles to faster reform implementation prior to the war were the complex domestic political environment, the lack of political will to implement ambitious reforms in certain sectors, and opposition from certain vested interests, some of which continue to exert influence on policymaking in the country. Combining strong ownership of the reconstruction efforts with a firm wish to join the EU provides an opportunity to tackle these challenges and enable Ukraine to ‘build back better’.

On economic resilience and stability, Ukraine’s performance has been commendable. The Ukrainian authorities have taken all the legal steps needed to phase out a number of tax policy-related emergency measures taken in the early phase following Russia’s full-scale invasion. In the banking system, a fresh slate of independent supervisory board members of state-owned banks was appointed following a meritocratic and transparent selection procedure. The banking sector, which has remained stable and with ample liquidity since the outbreak of the war, is nevertheless facing a deterioration of its loan portfolio. Against this backdrop, the National Bank of Ukraine (NBU) prepared an assessment of the commercial banking sector’s asset quality. This involves two workstreams: (i) an independent asset quality review (AQR) of the whole banking sector, scrutinising the asset quality of systemically important banks in Ukraine; and (ii) an (in-house) assessment of the resilience of the largest banks and the banking system overall. This second stream, complementary to the ongoing work on the AQR, was launched by the NBU in April 2023. Furthermore, the legal regimes governing corporate bankruptcies and individual insolvencies were strengthened, including rules on ensuring full discharge of debt. The NBU has verified the ownership structures of insurers in the insurance market, thereby contributing to the sector’s transparency and integrity.

Action on structural reforms and good governance focused on strengthening Ukraine’s business climate. In this context, the authorities successfully embarked on a broad-based deregulation agenda to deregulate economic activity in line with the action plan approved on 31 January 2023, even going beyond this plan. Most notably, more than a thousand regulatory instruments were closely scrutinised in 2023, with work initiated and partially completed on abolishing 235 of them (more than one fifth) and optimising another 537 (more than half). Public procurement was developed further, developing reform strategies until 2025, through: (i) preparation of a draft law on procurement aiming to achieve EU harmonisation and (ii) further promotion of transparency through the continued functioning of the ProZorro e-procurement system. The operations of the customs administration were strengthened with improvements in its IT systems, HR management and anti-corruption measures. In its recent enlargement report, the Commission commended Ukraine for making good progress on the customs union in terms of alignment with the EU acquis, indicating a good level of preparation in this area. Still, further strengthening of institutional capacities is required in a multi-year effort to transform the State Customs Service into a fully modern, efficient, transparent and corruption-free institution. The process for selecting supervisory board members in state-owned enterprises was improved, with better screening of candidates for supervisory board positions (i.e. screening of applicants’ business reputation and integrity) and the addition of specific criteria for selecting independent members and state representatives on supervisory boards. Moreover, Ukraine prepared a draft law to align legislation with the Law on administrative procedures adopted shortly before the beginning of Russia’s war of aggression. The draft law, which had 500+ pages of text and comprised amendments to a three-digit number of existing sectoral laws, placed a significant strain on legislators’ capacity to process it in a timely fashion, but was approved at first reading on 20 December 2023. A transition period was granted to financial supervisory agencies to better account for the specificities of their roles in prudential supervision.

On rule of law, steps were taken to improve the independence and integrity of the judicial system and the capacity of institutions combating corruption. Notably, spring 2023 saw the appointment of a new director of the National Anti-Corruption Bureau of Ukraine (NABU). In line with the parallel assessment in the Commission’s 2023 Enlargement Package, Ukraine completed MFA+-relevant actions towards re-establishing the High Council of Justice (HCJ) and the High Qualification Commission of Judges (HQCJ) based on sound frameworks for ethics and meritocratic selections. The Ukrainian authorities also developed a comprehensive strategic plan for 2023-2027 to reform the law enforcement system as part of the country’s security and defence sector. This was approved by presidential decree on 11 May 2023. A major step in strengthening the anti-money laundering and combating the financing of terrorism (AML/CFT) framework was achieved by adopting the resolution ‘On approval of the Methodology for identifying the ultimate beneficial owner by a legal entity’. This plays a key role in a comprehensive system verifying information on ultimate beneficial owners. Legislative amendments were introduced: (i) regarding criminal liability for the smuggling of all goods (above a threshold of UAH 1.13 million for excise goods and UAH 7.57 million for other goods); and (ii) authorising the Bureau of Economic Security to investigate smuggling crimes. The legislation was prepared by the Ministry of Justice with the support of international experts. Furthermore, the Specialised Anti-Corruption Prosecutor’s Office (SAPO) was strengthened by an improved management selection process, a new special disciplinary commission exclusively in charge of SAPO prosecutors, and a new bi-annual performance efficiency assessment conducted by an independent external assessment commission.

Considering the energy sector’s economic and political significance, including for energy security, the MFA+ featured a number of energy-related conditions. Notably, in line with a corresponding condition, the gas system was optimised, e.g. by ensuring full functioning of the supervisory board of Naftogaz, the certification of Ukrtransgaz as the gas storage operator, and the liquidation of the firm JSC ‘Main Gas Pipelines of Ukraine’. The firm was replaced by a new company ‘Operator of the Gas Transportation System of Ukraine’, which provides transportation of natural gas to consumers in Ukraine and in transit to the EU. An energy strategy until 2050 for Ukraine was prepared and approved by order of the government on 21 April 2023. The Ukrainian authorities also prepared emergency planning on the reconstruction and physical protection of critical energy infrastructure facilities and a comprehensive list of equipment needed for the energy system for the winter season. A strategy for the thermo-modernisation of buildings by 2050 was also prepared.

3.Jordan 

Economic growth was resilient in 2023, estimated at 2.6%, and is projected to slightly increase in 2024/2025, although significant downside risks have emerged. The escalations in the Middle East are expected to primarily impact the tourism sector, which was an important driver of growth in 2023. It remains to be seen if the sizeable share of potentially more resilient tourism involving Jordanian expats and tourists from the region could be a mitigating factor. Inflation slowed in 2023 (average inflation 2.0%) due to lower global energy prices and the central bank’s monetary tightening. Very high unemployment persists (21.4% in Q4), in particular among women and young people. The budget deficit remained stable in 2023 (6%, Jan-Nov); consolidation efforts did not lead to a decrease in the very high level of public debt (90% of GDP). The MFA to Jordan was successfully concluded in 2023, with the disbursement of the final instalment in May 2023, following overall good progress on the agreed policy reforms. Jordan requested an additional MFA operation, and in April the Commission put forward a proposal to support the country in an increasingly challenging regional situation. The proposal includes a broad-based policy reform agenda to strengthen the country’s resilience.

3.1 Implementation of macro-financial assistance

3.1.1 Recent macro-financial assistance operations

Between 2014 and 2023, three consecutive MFA operations provided a total of EUR 1 080 million in loans to Jordan. The EU has maintained its support to Jordan throughout the difficult years when Jordan faced multiple challenges related to the lasting Syrian refugee crisis starting in 2011 and the COVID-19 pandemic in 2020/2021, followed by commodity price shocks due to Russia’s war on Ukraine in 2022. 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 for an amount of EUR 500 million in loans (Decision (EU) 2020/33). The proposal was adopted by co-legislators on 15 January 2020 and 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 European Parliament and the Council agreed on a top-up MFA programme of EUR 200 million to Jordan (Decision (EU) 2020/701), in addition to the EUR 500 million made available under MFA-III.

The (combined) MFA of 2020 came 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 State Committee on Macro-Financial Assistance on 27 July 2020. It then entered into force on 2 October 2020.

The first instalment (EUR 250 million in loans) was subject to the general political pre‑condition that the MFA and the IMF programme had to remain on track. This first instalment was disbursed on 25 November 2020. The second and third instalments were subject to implementation of the specific policy conditionality agreed between Jordan and the EU in the MoU. The programme’s policy conditionality focused primarily on improving public finance management, fighting corruption, and on reforms in the utilities sector, social and labour market policy, and governance. Following an overall positive assessment of corresponding progress, the second instalment (EUR 250 million in loans) was disbursed on 20 July 2021. Following consultation of the Member State Committee on Macro-Financial Assistance, a waiver was granted for one condition (relating to steps towards implementing an electronic invoicing system to fight tax evasion); the expectation was that this condition would be fulfilled once the reforms required for the third instalment had been implemented (this indeed proved to be the case). The third and final instalment (EUR 200 million in loans) was disbursed on 3 May 2023, again following an overall positive assessment of reform progress. Again, following consultation of the Member State Committee for Macro-Financial Assistance, a waiver was granted for one condition (relating to amendments to the Illicit Enrichment Law) as only the fourth sub-action had been fulfilled by the end of the MFA availability period. Nevertheless, given the overall progress made and ongoing process, the Commission considered that it was justified to grant a waiver for this condition.

These MFA operations are 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 of initially roughly USD 1.3 bn (270% of quota). This was increased twice in 2021/2022 to about USD 1.49 bn (334% of Jordan’s quota) with a view to stepping up support to Jordan to cope with the impact of the pandemic on the population while hosting 1.3 million Syrian refugees. The IMF approved the sixth review of the EFF in June 2023, making about USD 32 million immediately available. This brings total IMF disbursements to Jordan for the period 2020 to 2023 to about USD 1.7 bn. The figure includes around USD 390 million in emergency assistance to Jordan under the Rapid Financing Instrument in May 2020 to help the country deal with the impact of the pandemic. By late 2023, with only a small amount left in the 2020 EFF following significant frontloading of disbursements, the IMF and Jordan agreed to terminate the programme early and replace it with a new EFF. In January 2024, the IMF Executive Board approved a new arrangement under the Extended Fund Facility (EFF) for Jordan for USD 1.2 billion covering the period 2024-2027. While Jordan’s public debt (net of social security corporation holdings of government debt) remained high at 90.6% of GDP in 2023, it was assessed as sustainable by the IMF in January 2024.

On account of the many different challenges faced by the country, in October 2023 the Jordanian authorities sent a request for a follow-up MFA, citing the challenging global economic prospects, restrictive credit conditions due to monetary tightening, high energy costs, inflationary pressures and the burden of the Syrian refugee crisis. The Commission presented a proposal for a new regular MFA operation of up to EUR 500 million in April to strengthen the country’s resilience and growth capacity and underpin its role as a stabilising factor in an increasingly unstable region 14 .

3.1.2Policy conditionality  

The policy actions included in the memorandum of understanding on the MFA operation of 2020 (including the top-up) were in line with Jordan’s reform commitments 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 designing the policy programme in the MoU ensured the Jordanian authorities’ ownership of the reform process and avoided overburdening their (limited) administrative capacities.

The policy conditionality of the MFA covered the following thematic areas: public finance management (PFM); reforms in the utilities sector; social and labour market policy; and governance. The conditions aimed to address key weaknesses of the Jordanian economy and mitigate the economic and social impact stemming from the regional conflicts and the presence of a large number of Syrian refugees in the country. The conditionality was also chosen to build on the reform progress of the two previous MFA operations. To secure disbursement of the third and final instalment (disbursed in 2023), 14 conditions needed to be fulfilled. The Jordanian authorities (broadly) fulfilled all but one condition, for which a waiver was granted, as mentioned above.

Jordan made significant progress on public finance management, in particular by continuing work on the electronic invoicing system, which aims 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 handover from the developer. The NRIP was introduced to increase the transparency and efficiency of public investments.

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

Social and labour market policies advanced under the MFA with the installation of small solar energy stations in at least 4 000 economically vulnerable households and the extension of the social assistance programme. To develop young people’s digital skills and improve their employment prospects, the government adopted a national plan on digital skills training.

The authorities advanced some governance reforms in line with the MFA conditionality, but important challenges remain to reduce corruption. Amendments to the Investment Law were adopted in 2022 to increase transparency for tax incentives to businesses. The amendments also simplified 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. While amendments to the law were adopted in 2021, these did not include all points under the MFA condition. As a result, a waiver was granted in March 2023, before the end of the availability period.

Besides the MFA conditionality, the government launched important reform projects. In June 2022, the government laid out its Economic Modernization Vision. The plan envisages the creation of one 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 economic priorities programme addresses key challenges in the labour market and private sector, with 53 targets mainly derived from the reform matrix and the indicative executive programme.

4.North Macedonia

The post-pandemic economic recovery in North Macedonia slowed in 2023, with annual GDP growth dropping to 1%. Domestic demand, while remaining weak overall, was driven by private consumption, bolstered by strong growth in wages, with real wages rebounding again since July 2023 in line with gradually abating inflation and rising remittances. Gross capital formation dropped starkly, mainly as a result of a draw-down of inventories, which had posted a strong built-up in the preceding year, as businesses were faced with uncertainty about the future course of commodity prices. Public consumption also declined as fiscal support measures were phased out and operational costs cut in the government’s endeavour to bolster fiscal consolidation. Net exports, driven by a steep decline in commodity imports, and in spite of a simultaneous energy crisis-related strong drop in metals exports, made a positive contribution to GDP growth. In 2024, GDP growth is expected to accelerate mildly, amidst some downside geopolitical and domestic risks on the back of large public investments and a pick-up in exports.

External vulnerabilities decreased in 2023. The current account balance, whose deficit surged to 6.1% of GDP in 2022 due to the energy crisis, improved gradually throughout 2023, with its 4-quarter moving average shifting from a deficit of 2.4% of GDP in Q1 to a surplus of 0.7% in Q4. As energy prices have come down substantially from their peak and domestic production of electricity increased, the merchandise trade deficit has narrowed significantly, by 7.6 points year on year to 18.9% of GDP.

At 4.9% of estimated GDP, the 2023 budget deficit was slightly higher than the government’s target (4.8%) and above the 2022 outcome (4.4%). This came mainly as a result of weaker than projected GDP growth. A budget reallocation became necessary in September, mainly to accommodate higher public-sector wages and pensions and higher social transfers, while leaving the deficit target unchanged. Revenues increased by 14% year on year, boosted by a one-off ‘solidarity tax’ on excess corporate profits. The government also gradually raised VAT on electricity for households back to the standard rate of 18% by 1 July. Current expenditure was driven by high transfer payments, yet at the same time the government also reduced untargeted crisis support measures. There was record high execution of capital expenditure in 2023: implemented capital expenditure in 2023 was higher by 52% compared to 2022 and amounted to 97% of the government’s target, well above the average of the previous 5 years (83%).

Public debt, which includes the debt of public enterprises, stood at 62.2% (+2.5 points year on year) of estimated GDP at the end of 2023, while general government debt stood at 53.3% (+2.3 points). In March 2023, the government issued a Eurobond for an amount of EUR 500 million, mainly to refinance the July repayment of the 2016 Eurobond. In December, the government benefited from a EUR 93 million disbursement from a World Bank development policy loan (DPL), as well as a EUR 165 million disbursement as part of the second tranche under the ongoing IMF precautionary and liquidity line.

4.1 Implementation of macro-financial assistance

4.1.1 Recent macro-financial assistance operations

In 2020-2021, North Macedonia benefited from MFA worth EUR 160 million in loans under the EU’s EUR 3 billion package to 10 enlargement and neighbourhood countries under the COVID-19 MFA. Following an official request from North Macedonia 17 on 15 April 2020, the Commission adopted a proposal for a decision providing the country with macro-financial assistance of up to EUR 160 million. The decision was adopted by the European Parliament and the Council on 25 May 2020 18 . In accordance with the MoU, the assistance was provided in two equal instalments of EUR 80 million each. These were dependent on the fulfilment of nine policy measures laid down in the MoU aimed at addressing key weaknesses of the economy of North Macedonia and mitigating the economic and social impact of the COVID-19 pandemic. The policy measures focused on the following thematic areas: public finance management, financial stability, good governance and the fight against corruption, the business environment and social policy.

Against the backdrop of tighter global financial conditions, higher energy prices and higher-than-expected losses by the domestic, state-owned electricity producer, the government of North Macedonia asked for a new MFA on 19 April 2022. The Commission put this initial request on hold, mainly because the economy was still relatively resilient and because there seemed to be some other options to meet external financing needs in 2022. The authorities renewed their request on 18 October 2022. In April 2022, the government had already secured Staff Approval from the International Monetary Fund (IMF) for a 24-month precautionary and liquidity line (PLL) of up to EUR 530 million, which was officially approved by the IMF Executive Board on 22 November 2022. In response to North Macedonia’s high gross external financing needs in 2023 and uncertainties as to the availability and costs of external market financing, on 3 February 2023 the Commission adopted a proposal for a decision providing MFA to North Macedonia of up to EUR 100 million, in the form of a loan, based on Article 212 TFEU. The decision was adopted by Parliament on 13 June and by the Council on 10 July 2023 19 . Following the subsequent discussion and agreement with North Macedonia on the policy reforms set to underpin the new MFA operation, vetted by the Member State Committee in October 2023, the MoU entered into force on 2 February 2024, when the North Macedonian authorities fulfilled all internal legal requirements.

The operation will help address the economy’s short-term balance-of-payments needs and fiscal vulnerabilities and demonstrate the EU’s support for the country when addressing this challenging situation. Its design and implementation take account of the policy guidance agreed in the Joint Conclusions of the Economic and Financial Dialogue between the EU and the Western Balkans and Türkiye of 24 May 2022 20  and of the programme North Macedonia has agreed with the IMF 21 .

The disbursement is expected to take place in two instalments, the first of which is likely to take place on 8 May. The release of each instalment is conditional on: (i) North Macedonia making progress on implementing a number of policy measures agreed between the Commission and the authorities and listed in a memorandum of understanding; and (ii) a satisfactory track record implementing the IMF programme. The MoU containing 20 policy conditions focuses on policy reforms addressing fiscal governance, tax policy, the management of public investment, public-private partnerships, the business environment, education and the labour market, renewable energy sources and energy efficiency, judiciary reform, and the fight against corruption. The policy measures aim to address some of the most important weaknesses of the economy of North Macedonia and its economic governance system.

On 22 February 2024, the government sent a revised statement of compliance with the policy conditions required for disbursement of the first instalment of the MFA. This was assessed by the Commission and resulted in a disbursement on 8 May). Meanwhile, in January 2024 the IMF completed its first review under the PLL Arrangement and granted the government access to a second tranche of the PLL. The government plans to exit the PLL in November 2024 at the date of expiry of the arrangement.

4.1.2Policy conditionality

The policy conditions laid down in the MoU are in line with the policy guidance jointly adopted at the Economic and Financial Dialogue of May 2023 and with commitments undertaken under the 2022 IMF PLL. They build on the previous MFA and cover the following thematic areas: public finance, the business environment, education and labour markets, energy, the judiciary, good governance and the fight against corruption.

In line with the measures agreed under the MFA ahead of the first disbursement, a new Fiscal Council as provided for under the 2022 Organic Budget Law has been established. The North Macedonian Parliament appointed the Council’s six members, while the Rulebook and Statutes of the Council have also been adopted. The government set up a new Department for Public Investment Management in the Ministry of Finance to ensure centralised oversight of public-sector investment, including public enterprises, with the aim of improving the management of public investment. Parliament also adopted revenue-enhancing amendments to the laws on corporate taxation and on VAT, and adopted the new one-off solidarity tax 22 . On structural reforms, the government adopted a new strategy to reduce the size of the informal economy, as well as a smart specialisation strategy intended to strengthen research and innovation. In October 2023, the new Energy Efficiency Fund was given a legal basis; it now needs to be made operational. The government also adopted three key laws on education, and in December 2023 adopted a new judicial reform strategy.

Annex 1: MFA operations by date of decision, 1990-2023

Annex 2: Status of disbursements made by date of decision at end-December 2023