EN    EN EN 
 
EN    EN  EUROPEAN COMMISSION 
Brussels, 13.1.2011 
SEC(2010) 1617 final 
  
COMMISSION STAFF WORKING DOCUMENT 
 
Ex-ante evaluation statement on further macro-financial assistance to Georgia 
   Accompanying document to the   Proposal for a Decision of the European Parlia ment and of the Council providing further  
macro-financial assistance to Georgia 
 
COM(2010) 804 final  
 
EN 2   EN Ex-ante evaluation statement 
Further macro-financial assistance to Georgia 
 
TABLE OF CONTENTS  
 
1. PROBLEM ANALYSIS AND NEEDS ASSE SSMENT _________________________________3  
1.1. INTRODUCTION ______________________________________________________________3  
1.2. GEORGIA 'S MACRO -ECONOMIC SITUATION _________________________________________4  
1.3. IMF  STAND -BY ARRANGEMENT AND OTHER DONOR SUPPORT __________________________7  
1.4. GEORGIA 'S EXTERNAL FINANCING NEEDS __________________________________________8  
2. OBJECTIVES AND RELATED INDICATORS OF THE MACRO-FINANCIAL 
ASSISTANCE _______________________________________________________________________9  
2.1. OBJECTIVES _________________________________________________________________9  
2.2. INDICATORS _______________________________________________________________10  
3. DELIVERY MECHANISMS AND RISK ASSESSMENT _____________________________10  
3.1. DELIVERY MECHANISMS ______________________________________________________10  
3.2. RISK ASSESSMENT ___________________________________________________________11  
4. ADDED VALUE OF EU INVOLVEMENT _________________________________________12  
5. GENVAL CRITERIA ON MACRO-FINANCIAL ASSISTANCE_______________________13  
5.1. EXCEPTIONAL CHARACTER AND LIMITED TIMEFRAME _______________________________13  
5.2. POLITICAL PRECONDITIONS ____________________________________________________13  
5.3. COMPLEMENTARITY _________________________________________________________14  
5.4. CONDITIONALITY ___________________________________________________________15  
5.5. FINANCIAL DISCIPLINE _______________________________________________________15  
6. PLANNING OF FUTURE MONITORING AND EVALUATION_______________________16  
6.1. MONITORING _______________________________________________________________16  
6.2. EVALUATION _______________________________________________________________16  
7. ACHIEVING COST-E FFECTIVENESS ___________________________________________16  
 
EN 3   EN 1. PROBLEM ANALYSIS AND NEEDS ASSESSMENT  
1.1. Introduction 
The EU completed in early August 2010 the disbursement of a EUR 46 million macro-
financial assistance (MFA) operation to Georgi a approved by the Council in November 2009. 
The assistance, which was provided in the form of  grants, was part of a pledge of two possible 
EU funded MFA operations of the same amount  made by the European Commission at the 
International Donors' Co nference of October 20081. The approval of the second MFA was 
conditional on the continued exis tence of external financing needs over and above those 
covered by the IMF arrangement.  
In a letter from 10 May 2010, the Ge orgian Minister of Finance re quested the activation of the 
second part of the EC pledge, amounting to EUR 46 million. In this context, a European 
Commission team visited Georgia in early Sept ember to assess the country's macroeconomic 
situation and prospects in 2010-11, focusing on the balance of payments and budgetary needs.  
The Commission considers that the activation of the second pa rt of the MFA pledged in 2008 
is warranted. Although the Georgian economy is recovering (following the double shock 
caused by the military conflict with Russia of A ugust 2008 and the global financial crisis), the 
balance of payments and budgetary position rema in weak and vulnerable. In particular, the 
lingering effects of the conflict with Russia, incl uding the blockade of most direct trade with 
this country and the failure of foreign direct investment (FDI) inflows to recover to their pre-
crisis level, combined with a still very sizeab le current account deficit and substantial debt 
repayment obligations (with a serious bunching expected for 2012-14), leave the balance of 
payments fragile.  
In this context, the Commission proposes a further MFA to Georgia, amounting to EUR 46 
million. The EU MFA would be aimed at contri buting to covering the country's external 
financing needs in 2009-11, as id entified in cooperation with th e IMF in the context of the 
IMF Stand-By Arrangement (SBA) of USD 1.17 billion, in place since October 2008. The proposed assistance would be provided ha lf in grants and half in loans. 
The new MFA would contribute to help Ge orgia to address the lingering economic 
consequences of the conflict with Russia and the global crisis. The new MFA will support the 
economic reform agenda of the government. It would reduce the short-term financial vulnerability still faced by the economy, while  supporting reform measures (including those 
in the IMF and World Bank programmes) aimed at achieving a more sustainable balance of 
payments and budgetary situation over the medium-term. The a ssistance would also promote 
policy measures to strengthen public finance ma nagement (building on those of the previous 
operation and of the EU's sectoral budgetary sup port operation), as well as measures to foster 
economic and financial integration with the EU , in particular by ex ploiting the potential 
                                                
 
1  The total assistance pledged at this Donors’ Confer ence by the EC amounted to up to EUR 500 million and 
was aimed at supporting the Georgian economy in th e aftermath of the August  2008 armed conflict with 
Russia and in the context of the global financial crisis. 
 
EN 4   EN offered by the future Association Agreemen t, which aims at concluding a Deep and 
Comprehensive Free Trade Agreement (DCFTA)2 between the two parties. 
The proposed new MFA would be exceptional and limited in time and is intended to run in 
parallel to the SBA. It would complement s upport from international and bilateral donors. 
 
1.2. Georgia's macro-economic situation  
In the aftermath of the double sh ock of the military conflict with Russia of  August 2008 and 
the global crisis, the Georgian economy is show ing signs of recovery. Following two years of 
low or negative growth, 2010 is expected to see a revival of economic activity. While 2009 
saw a contraction of real GDP by 3.9%, the firs t half of 2010 recorded a strong growth of 
6.6% (on an annual basis). Manuf acturing and transportation reco rded the strongest increases, 
of 21% and 15% respectively. While  the latest official projecti ons and those included in the 
latest IMF Staff Report (issued in June 2010) expect real GDP to grow by 4.5% this year, 
VAT turnover data for the first half of the y ear suggest that growth may be significantly 
higher (probably in the order of 6 to 7 percen t). Despite the recovery  gaining ground already 
in late 2009, economic growth ha s not yet been translated into  an improved situation on the 
labour market. The unemployment rate remained  at a worryingly high level of 16.9% in 2009. 
On the back of the economic recovery, the gove rnment has decided to tighten its budgetary 
and monetary policies. While the budget defici t reached 9.2% of GDP in  2009, the plan is to 
reduce it to 6.3% of GDP in 2010 and to 4.8% of GDP in 2011. However, there are reasons to 
assume that in 2010 an even higher degree of fiscal consolidatio n can be achieved: the 
authorities have introduced an explicit expenditure ca p, which implies that  a higher level of 
budgetary revenues would be translated into a stronger reduction of the budget deficit. Tax 
revenues in the second quarter of 2010 have b een higher than what the last IMF review 
forecasted. Based on this trend, they could be at least 5% higher in 2010 than projected in the 
IMF programme, and under the above-mentioned cap  would be fully saved, resulting in a 
lower than programmed deficit. For 2011, the aut horities are planning to reduce real spending 
by 3% relative to 2010. By 2013, th e government aims at reducing the budget deficit to 3% of 
GDP, implying a reduction of at least 6 percenta ge points of GDP relative to the 2009 peak. 
Monetary policy began to be tightened in the summer, with policy interest rate being somewhat increased, to keep infl ation under control. This process is expected to continue. On 
the back of economic recovery annual CPI inflati on is expected to pick up from its low of 3% 
at end-2009 to over 8% by end-2010. A further r eason for the strong incr ease in inflation is 
the fact that almost half of th e CPI basket in Georgia consists  of food items, so that recent 
increases of cereals prices, especially those of  wheat, previously imported from Russia, are 
expected to feed into the higher CPI. For the years 2010- 2012, the monetary authorities 
foresee a target average inflation rate of 7%. 
While the economic recovery seems to be taking hold, the economic situation remains 
vulnerable as the financing of the large cu rrent account deficit remains uncertain. Although 
the crisis, by weakening domestic demand, cont ributed to a halving of  the current account 
                                                
 
2  While negotiations on the Association Agreement were launched in July 2010, negotiations on the Deep and 
Comprehensive Free Trade Agreement have been delaye d due to insufficient progress in key trade-related 
reforms. Significant progress by Georgia in implementing the EC's key recommendations in the areas of 
technical barriers to trade, competiti on policy, food safety and intellectua l property rights is a precondition 
for the launching of negotiations. 
 
EN 5   EN deficit in 2009 (from 22.7% in 2008 to 11.7% of GDP), the deficit remains very large. The 
current account deficit is proj ected to reach 12.0% of GDP in 2010 and the situation is not 
expected to improve in 2011. The trade deficit, which is projected to reach 22.8% of GDP in 
2010, is the main driver of the large current a ccount deficit. The sharp contraction in the 
country's industrial and agricultu ral exports caused by the global crisis was reinforced by the 
trade embargo on some Georgian products impos ed by Russia in 2006 and extended in 2008. 
Georgian exports to the EU countries have re mained low and the possibilities offered by the 
GSP+ remain under-exploited. Wh ile a certain trade re-orientation and changes in export 
profile have recently taken place,  Georgia's exports continue to  lack diversification: three 
quarters of exports in the first quarter of 2009 were mineral product s, including metals. 
Overall, Georgian export performan ce remains far below its potential.  
 
Table 1: Georgia – Selected ma croeconomic indicators, 2008-2012  
 
 
 
EN 6   EN In 2008, when the Georgian current account deficit was practically the double of its current 
size, Georgia experienced much higher net in flows of FDI (amounting to USD 1.5 bn) that 
allowed financing about half of the large curre nt account deficit. Duri ng the crisis of 2008-09, 
the inflows of public sector financing, incl uding the financial support of International 
Financial Institutions and bilateral donors, partia lly replaced the decreased FDI inflows. But, 
for 2010-11, the financing of the current account is  still uncertain. FDI inflows, which were 
expected to recover, are now projected to d ecline even further in 2010. FDI inflows reached a 
meagre USD 75 million in the first quarter of 2 010 and their moderate recovery of the second 
quarter (when they attained USD 200 million) w ill not allow them to reach even their 2009 
level of USD 750 million. Only slow recovery in FDI inflows is expected in 2011. This 
disappointing performance of FDI inflows puts at risk the financing of the current account and 
the build up of international cu rrency reserves and shows that  foreign investor confidence, 
which experienced a dramatic blow due to the military conflict with Russia in 2008, has still 
not returned. It also reflects the loss of steam of the privatisa tion process as many of the most 
attractive state companies and asse ts have already been sold. At  the same time, the official 
donor financing agreed at th e 2008 International Donors' Conference has largely been 
disbursed as much of it was frontloaded. Th is means that in 2010-2011 Georgia will face a 
shortage of FDI inflows while public s ector financing will partly dry up.  
By December 2009, international reserves ha d recovered from a trough of USD 1.5 billion 
reached during the crisis to USD 2.1 billion, or 4 .1 months of the next year’s imports. Yet, in 
the course of the first half of 2010, the level of reserves decreased  again. In the first half of 
2010, the monetary authorit ies intervened somewhat  more actively in the exchange markets as 
depreciation pressures on the local currency we re considered to be temporary. However, in 
June 2010 the authorities let the exchange rate to depreciate by 8% against the USD. Since 
then, no significant depreciation pressures have  been observed and the authorities could 
reduce their level of intervention. By th e end of September 2010, the level of gross 
international reserves held by the National Bank of Georgia was at USD 2.1 billion, which the 
IMF considers suboptimal in the medium term, pa rticularly since it has partly been achieved 
by borrowing from the IMF. Net international re serves are at an even more worrying level, 
having actually declined from USD 850 milli on in September 2008 to USD 740 million in 
September 2010. Moreover, there is a risk that  the higher current demand for the local 
currency experienced since July proves a seasonal phenomenon as stronger capital inflows related to the tourism receipts and remittances inflows might dry up in the winter. This, in 
turn, could lead to renewed depreciation pressu res on the exchange rate market. Thus, while 
currently the pressures on the exchange market seem to be absent, they might re-appear later during the year and in early 2011 when tourism receipts and remittances inflows subside due 
to their seasonality. 
Even long before the 2008 crisis , Georgia's financial system has been characterised by a 
widespread dollarization. Despite a recent decrease in the level of dollarisation from its peak 
of 75%, about 70% of bank loans are still held in foreign currency. This contributes to the 
reluctance of the monetary authorities to let th e exchange rate to strongly depreciate as the 
majority of loans are unhedged, with creditor in come being paid in local currency. To re-
establish the effectiveness of the monetary polic y tools of the NBG, mone tary authorities have 
recently taken measures to promote the de- dollarisation of the economy and have reduced 
their level of intervention in  the exchange rate market.  
A further vulnerability in the balance of paymen ts relates to the high le vel of external public 
debt and a significant need for a debt roll-over in the coming years. External public sector 
debt increased from only around 21% of GDP in 2008, to around 32% of GDP in 2009 and is 
 
EN 7   EN expected to reach 41% of GDP in 2010. While th e majority of the external public debt has 
medium and long-term maturities, substantia l external debt repayment obligations will 
become due in 2012-15. Amortisations will rise markedly in 2013, when they are expected to 
amount to USD 750 million, reflecting the repa yment of the Eurobond of USD 500 million 
issued in 2008 as well a substantial repurchas es under the IMF’s Stand-By Arrangement. This 
is expected to push up the debt service on medium- and long-term public debt to the 
equivalent of 40% of exports in 2013.  
1.3. IMF Stand-By Arrangement and other donor support 
In September 2008, the IMF a pproved an 18-month Stand-By Arrangement for Georgia, 
worth USD 750 million. In 2009, Georgia drew an amount equivalent  to USD 410 million. 
During the third programme re view, approved by the IMF Ex ecutive Board in  August 2009, 
the Stand-By Arrangement was extended until  14 June 2011 and the financing package 
increased by about USD 424 million, bringing th e total Stand-By Arrangement programme to 
USD 1.17 billion. In 2010, the IMF plans to dis burse USD 446 million to Georgia, of which 
USD 298 million to the budget. The programme remains on-track: on 9 July 2010, the IMF 
Board completed the sixth review of the IMF Stand-By Arrangement, concluding that 
performance under the programme has been broa dly satisfactory. The Bo ard granted a waiver 
for the non-observance of the end-June quantitative performan ce criterion on the floor on net 
international reserves of the central bank and a waiver of applicability of the end-June performance criterion on the ceiling on cash deficit of the consolidated government
3. The 
Board welcomed the fast pace of public defici t reduction that the Georgian authorities are 
aiming at for 2010. It qualified th e recent tightening of moneta ry policy as an appropriate 
reaction warranted by downwards pressures on th e domestic currency. Despite the fact that 
the economic recovery is gaining strength, the Board pointed out the ri sks associated with 
weak FDI inflows. Overall, the Board conclude d that Georgia is in a good position to meet the 
objectives of the programme, which are to secu re macroeconomic stability and growth based 
on private sector financing and investment. The completion of the sixth review of the Stand-
By Arrangement allowed for an immediate purch ase by Georgia of an equivalent of USD 74.8 
million.  
The next IMF review, which combines the seve nth and the eight reviews, is scheduled for 
November 2010. Its successful conclusion will tr igger a new IMF disbursement of about USD 
150 million at the end of 2010. In 2011, two fu rther tranches, amounting to around USD 53 
million each, will be disbursed.  
The World Bank has also been actively involv ed in the rehabilitation of the Georgian 
economy. The Country Partnership Strategy pa ckage endorsed in September 2009 envisages 
Bank Group financing of USD 740-900 million for the period of 2010-13. This includes the 
remaining IDA-15 financing, IBRD financing and IFC investments and lending. Development 
policy lending has been the co re element of World Bank stra tegy in Georgia. Following a 
successful track record of reforms under 8 Poverty Reduction Support Operations, a 
programmatic series of three Development Policy Operations (DPOs) is currently being implemented. The first DPO, amounting to USD 85 million, was launched in July 2009. The 
second DPO, of USD 50 million, was approved by the Board in July 2010. The DPO program 
series aim at mitigating the economic downt urn and facilitating recovery and preparing 
Georgia for post-crisis growth. They promote policy and institutional reforms in: (i) public 
                                                
 
3  Consolidated government is defined as the central government, local governments, extra-budgetary funds 
and Legal Entities of Public Law that provide general government services.  
 
EN 8   EN finances, including improving effi ciency and effectiveness of public expenditures, and public 
investment; (ii) social protection, including targ eting and scaling up of the safety net system, 
pensions, and improving health coverage for the poor, and (iii) specific m easures to further  
improve the investment climate, including policy reforms related to the modernisation of tax 
and customs administration. The third DPO, in th e order of USD 25 million, is expected to be 
approved in the summer of 2011. 
The overall support package for 2008-2010 pledge d by the international donor community at 
the 2008 Donors' Conference amounted to USD 4.5 billion, including USD 1 billion from the 
USA, USD 200 million from Japan, USD 173 milli on from the EU Member States and USD 
2.4 billion from the Multilateral Financial Inst itutions. The total public sector commitment 
amounted to USD 2.6 bn and the disbursements rela ted to this commitment  have been largely 
frontloaded. According to the recent progress report of the United Nations and the World 
Bank on Georgia's Joint Needs Assessment, for the period from October 2008 to March 2010, 
donor commitments related to the general budget support have been honoured to 91%4.  
1.4. Georgia's external financing needs 
Table 2 below summarises Georgia's external  financing needs for the period 2009-11. The 
current account deficit is projected to remain very large, amounting to about between 12% 
and 13% of GDP in both 2010 and 2011. Projected net inflows in the capital and financial 
account, which were very negatively affected by the crisis and its aftermath, would only 
partly cover this difference. This reflects in pa rt, as noted, developments in FDI, which after 
having declined in 2009-10, are expected to re cover only gradually in 2011 due to lingering 
political uncertainties and the loss of steam of the privatisation process.  Moreover, consistent 
with the IMF programme, a targeted rebuilding of official foreign exchange reserves is 
assumed.  
All this leaves considerable external financi ng needs, to be covered by exceptional financing 
from the IFIs and bilateral donors. Based on the estimates provided by the IMF, total 
financing needs for the three years (2009-11) , excluding those covere d by private and non 
crisis-related official inflow s, amount to around USD 2.4 billion. Out of this amount, the 
Breton Woods institutions are expected to provide around USD 1.5 billion, including some 
USD 900 million for the peri od 2010-11. The proposed new MFA would amount to EUR 46 
million and, together with the last MFA ope ration, would cover around 14% of the residual 
financing needs for the period 2009-11 (around USD 850 million).  
 
                                                 
4  The overall disbursement ratio to the public sector was of 44% of commitments. The disbursement ratio 
ranged from 91% for budget support,  89% for the activities related to th e internally disp laced persons and 
12% for infrastructure. For the banking sector, the disbursement ratio was 66%. 
 
EN 9   EN Table 2: Georgia – External Fina ncing Requirements and Sources, 2009-2011  
2009 2010 2011
   in million USD
1Current account balance1-1.378 -1.478 -1.594
Trade balance -2.399 -2.591 -2.661
Services 332 364 426Income (net) -150 -244 -287
Net transfers
1839 993 928
      
2 Capital and financial account 1.090 673 1.172
         Capital account (net) 180 233 99
         Financial account 910 440 1.073
               Foreign direct investment (net) 765 659 884               Private sector borrowing (net) (excl FDI) -68 -149 232
               Public sector
 1,2213 -70 -43
3 Errors and omissions 54 2 0
4 Gross reserves (- increase) -616 -205 -95
5 Overall financing needs (1+2+3+4) -851 -1.007 -5176 Exceptional IFI financing 614 685 227
IMF purchases 340 450 106
World Bank (gross) 274 235 121
7 Residual financing gap (after IMF/WB)        -237 -322 -290
Financing of the gap
     ADB 105 149 160
     USA 19 26 65
     Other bilateral donors 12 32 9
     EU structural budget support (ENPI) 78 46 25
                                                                                    in million EUR 
     EU MFA                                                         15 54 23
            New proposed MFA for 2010-11 23 23
          MFA approved in November 2009 15 31
Memorandum item
Total MFA as % of the residual gap for 2009-11
314
Sources: IMF staff projections and Commission's estimates
1 Excludes crisis-related official grants and loans
2 Includes monetary authorities and general go vernment. Includes repayments to the IMF.
3 Assuming exchange rate of euro vis-à-vis the US dollar of 1.3  
2. OBJECTIVES AND RELATED INDICATORS OF THE MACRO -FINANCIAL ASSISTANCE  
2.1. Objectives 
The objectives of the propos ed MFA operation are to:  
• Contribute to covering the external financ ing needs of Georgia and to alleviating 
budgetary financing needs. 
 
EN 10   EN • Support the fiscal consolidation effort and external stabilisati on in the context of 
an IMF programme. 
• Support structural reform efforts aime d at raising sustainable growth and 
increasing the transparency and effici ency of public finance management. 
• Facilitate and encourage efforts by the authorities of Georgia to implement 
measures identified under the EU-Georgia ENP Action Plan and the Eastern Partnership so as to promote closer ec onomic and financial integration with the 
EU, also in line with the plan to co nclude a DCFTA between the two parties. 
2.2. Indicators 
The fulfilment of the objectives of the assistance will be assessed by the 
Commission, including in the context of th e ex-post evaluation (see below), on the 
basis of the following indicators:  
• Progress with macroeconomic and financia l stabilisation, not ably by assessing the 
degree of adherence to th e IMF-supported programme. 
• Progress with the implementation of structural reforms, notably the specific policy 
actions identified as conditions for dis bursement of the assistance, which are 
included in the aforementioned Memora ndum of Understand ing. Particular 
emphasis will be put on the implementa tion of measures aimed at raising 
economic growth potential and improving public finance management.  
• Progress in developing economic and financial integration and regulatory 
harmonisation with the EU.  
• Progress in implementing of the prioriti es identified in the EU-Georgia ENP 
Action Plan and the Eastern Partnership.   
3. D
ELIVERY MECHANISMS AND RISK ASSESSMENT  
3.1. Delivery mechanisms 
The proposed new MFA would amount to EUR 46 m illion, consistent with the pledge the EC 
made at the October 2008 International Donor s' Conference. Regarding the form of the 
assistance, the Commission proposes to disburse half of the e nvisaged amount in grants and 
the other half in loans.  
The full use of grants in the previous opera tion had to be underst ood as an exceptional 
decision justified by the very difficult circum stances Georgia found itself in late 2008. Given 
Georgia’s level of development (a s measured by its per capital income5) and debt indicators, 
and the recent improvement in the country's econo mic situation, it would not be reasonable to 
                                                 
5  Georgia's per capita GDP wa s at EUR 1,774 in 2009, somewhat below Arme nia's level of EUR 1921, but substantially 
above the level of Moldova, the poorest among the Eastern Pa rtnership countries, with per capita GDP amounting to 
EUR 1,091. 
 
EN 11   EN expect the full amount of the assistance to be provided in grants. The blend of grants and 
loans would also be justified when considering that Georgia has been a blend country for the 
World Bank since January 2009. For the upcomi ng World Bank operations, the country is 
expected to receive one third of the World Bank assistance in  the form of the IDA lending, 
while two thirds of the assistan ce are expected to be provide d on IBRD terms. At the same 
time, there are reasons to provide part of the a ssistance as a grant. Georgia's public debt trends 
remain a matter of concern. Also, in the OE CD Development Assist ance Committee (DAC) 
List of official development ai d recipients, Georgia is positi oned in the lower middle income 
country group. Furthermore, Georgia is scheduled to  repay the last part of  its debt towards the 
EU's6 previous MFA operations, amounting to EUR 13.6 million, in July 2011. Providing part 
of the assistance in the form of grant would he lp ensure a timely debt repayment towards the 
EU. 
MFA is an untied and undedicated macroeco nomic support instrument, which helps the 
beneficiary country meet its external financ ing needs, and may contribute to alleviating 
budgetary financing needs. The funds would be pa id to the National Bank of Georgia. Subject 
to provisions to be agreed in the Memorandum  of Understanding, including a confirmation of 
residual budgetary financing needs, the funds ma y be transferred to the Treasury of Georgia 
as the final beneficiary.  
3.2. Risk assessment 
There are fiduciary, policy, repayment and po litical risks related to the proposed MFA 
operation.  
There is a risk that the macro-financial assistan ce, which is not dedicate d to specific expenses 
(contrary to project financing, for example), c ould be used in a fraudulent way. In general 
terms, this risk is related to factors such as  quality of financial circuits and management 
systems in the central bank and the ministry of finance, administrative procedures, control and 
oversight functions, security of IT systems and adequate internal and external audit 
capabilities.  
To mitigate the risks of fraudulent use several me asures will be taken. First, the Memorandum 
of Understanding, the Grant and Loan Agreem ents will comprise a set of provisions on 
inspection, fraud prevention, audits, and recovery  of funds in case of fraud or corruption. 
Also, the assistance will be paid to a dedi cated account at the National Bank of Georgia 
(NBG). Moreover, before the agreement on th e Memorandum of Understanding is reached, 
the Commission services will conduct, with the support of extern al consultants, an 
Operational Assessment, in order to assess the reliability of financial circuits and 
administrative procedures that are relevant to this type of assistance and will determine 
whether the framework for sound financial mana gement of macro-fina ncial assistance is 
sufficiently effective in Georgia. In the light of  this assessment, specific mechanisms applying 
to the management of the funds by the benefici aries may be introduced in agreement with the 
national authorities. The Commission may also us e other assistance instru ments at its disposal 
to help the beneficiary authorities improve th eir public finance management systems if this 
area is not sufficiently covered by other donors. Against this background, special 
conditionalities on improving public finance management will poten tially be required. 
Finally, the assistance will be liable to verifi cation, control and auditing procedures under the 
                                                 
6   This is the last outstanding re payment related to the loan of EUR 110 million  provided to Georgia in 1998.  
 
EN 12   EN responsibility of the Commission, including the European Antifraud Office (OLAF), and the 
European Court of Auditors. 
There is also a risk that the Government of Georgia will not comply with the IMF programme 
conditions, as the programme targets may turn ou t more difficult to reach than assumed and as 
political conditions in the country may change. However, the authorities have so far shown 
strong commitment to work with International Financial Institutions to implement the reform 
agenda. The positive experience of implementation under the previous MFA operation in Georgia bodes well in this respect. 
There is also a risk, albeit limited, of a non-repayment of the loan component. The 
macroeconomic adjustment and reform programme supported by the proposed MFA 
operation and the IMF's Stand-By Arrangement shoul d mitigate this risk, to the extent that it 
helps restore balance of payments and fiscal sustainability. Also, the provisioning of the 
Budget Guarantee Fund for extern al lending of the EU, in line  with the rules governing the 
Guarantee Fund mechanism, is aimed at addressing possible adverse implications related to a non-repayment of the loan.  
Consolidation of the democratic reforms and ins titutions is at the core of the EU’s relations 
with Georgia. There are some s hortcomings in the independence of the judiciary and there is a 
need to strengthen a pluralistic media landscape.  The ongoing process of constitutional reform 
is encouraging but there are uncertainties c oncerning the final direct ion that it will take. 
National parliamentary elections are scheduled for 2012, while presidential elections are due 
in 2013. Overall, risks of political instability or  backtracking of democratic reforms remain 
manageable. Finally, a failure to find a peaceful resolution of the military conflict with Russia 
represents a significant political risk. 
Having made a thorough assessment of the risks, the Commission services consider that there 
are sufficiently strong grounds to proceed with the MFA to Georgia.  
The Commission services will maintain close contacts with the authorities during the 
implementation of the macro-financial assistan ce in order to address quickly any concerns 
that may arise.  
4. A
DDED VALUE OF EU INVOLVEMENT  
Georgia is a strategically key partner country  of the EU within the European neighbourhood. 
By helping the country overcome the economic shock caused by the conflict with Russia and the global crisis, the proposed MFA will contribute to promote macroeconomic and political stability in the Eastern Partne rship region and closer econo mic and political ties between 
Georgia and the EU. By complementing the re sources made available by the international 
financial institutions and other donors, it cont ributes to the overall effectiveness of the 
package of financial support agreed by the inte rnational donor community in the aftermath of 
the crisis.  
In addition to the financial impact of the MF A, the proposed programme will strengthen the 
government's reform commitment and its aspira tion towards closer re lations with the EU. 
This result will be achieved, inter alia, through appropriate cond itionality for the disbursement 
of the assistance. By emphasising certain refo rms that are of particular importance for 
 
EN 13   EN promoting regulatory convergence and econo mic integration with  the EU, the MFA 
contributes to the objectives of  the EU-Georgia Action Plan.  
In a wider context, the proposed action fits well into the EU’s general approach towards 
Georgia, which is one of a stronger engagement , as reflected in the opening of negotiations on 
an Association Agreement, a key component of which will be the conclusion of the Deep and 
Comprehensive Free Trade Area.  
5. GENVAL CRITERIA ON MACRO -FINANCIAL ASSISTANCE  
In October 2002, the Council reconfirmed a set of  principles for the use of the European 
Union's macro-financial assi stance (Genval criteria)7. The five criteria are: (i) the exceptional 
character of the assistance, (ii) its complementar ity to financing of the International Financial 
Institutions (IFIs), (iii) the existence of policy conditionality attached to the assistance, (iv) 
the existence of politica l pre-conditions and, finally (v) strong financial discipline that needs 
to accompany the MFA. 
5.1. Exceptional Character and Limited Timeframe  
The MFA under preparation will be exceptional a nd limited in time and will run in parallel to 
the IMF Stand-By Arrangement. Georgia’s financ ing gap in the balance of payments has its 
origin in the loss of investor  confidence as a result of th e armed conflict of autumn 2008, 
combined with the existence of a large current account defi cit. The global financial and 
economic crisis brought an additional layer of un certainty to the prospects of recovery of 
Georgia’s economy. The government’s  aim has been to attract fi nancing from the IFIs to 
boost public infrastructure investment in the short- term so as to maintain as much as possible 
economic growth until private capital inflows are resumed. However, the FDI inflows are 
expected to remain subdued in la te 2010 and recover only slowly in 2011.  Against this 
background and given the expected time of a pproval of the programme, the assistance is 
expected to be implemented during 2011. The disbur sement of the first instalment could take 
place in the first quarter of 2011. The second in stalment, conditional on a number of policy 
measures, could be disbursed in the third quarter of 2011. 
 
5.2. Political preconditions  
MFA is reserved to the third c ountries that are geographically cl ose to the EU territory, that 
respect democracy and human ri ghts and with which the EU ha s important political, economic 
and commercial ties. Georgia is a presidential  democracy with regular, reasonably fair and 
free elections. Currently, under the 'second wa ve of democratic reforms', the State 
Constitutional Commission has prepared, as  part of an open and participatory process, a draft of the new Constitution with the aim of establishing a better system of checks and balances, a further separation of powers and a more inde pendent court system. The new Constitution is 
expected to be adopted by th e Parliament still this year. 
Georgia and the EU first esta blished contractual relations in 1996 through a Partnership and 
Cooperation Agreement which entered into force in 1999. EU-Georgia relations have become 
                                                
 
7 Council conclusions of 8 October 2002 on MFA and the accompanying letter of the Council President to the 
Commission President. 
 
EN 14   EN closer since the adoption of the five-year European Neighbourhood Policy Action Plan in 
November 2006. Russia’s invasion of Georgia in  August 2008 brought a se nse of urgency for 
the need to enhance EU-Georgia relations. Th e EU, under the French Presidency, brokered a 
ceasefire and committed significant diplomatic effo rts and financial resources to the delivery 
of immediate humanitarian aid and other assistan ce to the post-war recovery and continues to 
contribute importantly to the conflict resoluti on. An EU Monitoring Mission (EUMM) to the 
break-away regions of about 200 civili an observers has been deployed.  
The extraordinary European Council held in Brussels on 1 September 2008 decided inter alia 
to step up relations with Georgia. Negotiating di rectives for a future EU-Georgia Association 
Agreement that will replace the current Partnership and Cooperation Agreement were adopted by the Council on 10 May 2010. Negotiations star ted on 15 July 2010, while negotiations on a 
Deep and Comprehensive Free Trade Area, to be  established in the Association Agreement's 
framework, will be launched once the necessary pre-conditions for it have been met. During the Prague Summit on 7 May 2009, close EU-Geo rgia relations have entered a new phase 
with the launch of the Eastern Partnership of the European Uni on, a multilateral project 
endorsed by the Heads of state or government of  the 27 EU Member States and the six partner 
countries including Georgia. 
 
5.3. Complementarity 
The proposed MFA would supplement the assi stance being provided by the IMF in the 
context of the Stand-By Arrangement and by other donors, including th e World Bank, helping 
to cover part of the residual balance of payments fina ncing gap. The share of residual 
financing covered by the EU MFA would amount to 14% for the period 2009-11.  
Regarding the complementarity with other EU in struments, the EU package of assistance to 
Georgia includes programmed fund s under the ENPI envelope a nd crisis instruments (the 
Instrument for Stability, Humanitarian Aid a nd the Macro-Financial Assistance). The package 
also includes the costs for the EU Civilian  Monitoring Mission in Georgia. Through the 
programmed sectoral budget support, the ENPI e nvelope has so far supported reforms in the 
area of public finance management, criminal just ice sector, vocational ed ucation and training 
and regional development. For the period of 2011-2013 a new ENPI package of EUR 180 
million  has been allocated.  
 Project finance or technical a ssistance would not be suitable to address the macroeconomic 
objectives of the MFA. The key value adde d of the MFA in comparison to other EU 
instruments would be to alleviate the external fi nancial constraint and to  help create a stable 
macroeconomic framework, including by promoti ng a sustainable balance of payments and 
budgetary situation, and an appropri ate framework for structural reforms. By helping to put in 
place an appropriate overall framework for macr oeconomic and structural policies, MFA can 
increase the effectiveness of the actions fi nanced in Georgia under other, more narrowly 
focused EU financial instruments.  This positive effect is rein forced by the fact that MFA 
leverages its impact with the programmes of the IFIs, with which it is closely coordinated.  
 The MFA is to be discontinued as soon as the c ountry's external financial situation has been 
brought back into a sustainable path. Afterwards , regular EU assistance instruments are meant 
to take over, notably the direct budget support provided under the ENPI Regulation. 
 
 
EN 15   EN 5.4. Conditionality 
As usual with the MFA instrument, the disb ursements would be conditional on successful 
programme reviews under the IMF's Stand-By  Arrangement and Georgia’s subsequent 
decisions to draw funds. In addition, the Commission and the Georgian authorities would agree on specific structural reform measures  in a Memorandum of Understanding. In the 
context of the previous MFA operations, the Co mmission services have worked closely with 
the Georgian authorities on public finance management (PFM) reforms that aim at 
establishing a more transpar ent, coherent and accountable PFM system . While the policy 
conditionality of the last MFA operation referr ed exclusively to the PFM area, in the new 
MFA its scope would probably be  enlarged, notably to measur es aimed at fostering the 
economic and financial integration as well as  regulatory harmonisation with the EU in 
selected areas, under the ENP Action Plan and taking into account the new context created by 
the plan to conclude an Association Agreem ent. Following the successful implementation of 
the last MFA in which the Georgian authorit ies demonstrated the political will and the 
capacity to implement structural reforms, the Commission believes that also this second MFA operation would contribute to the implementation of the government's agenda of structural 
reforms. 
5.5. Financial Discipline 
Regarding the grant component of the proposed  assistance, aiming at the adoption of the 
European Parliament and Council decision on MFA to Georgia in the last quarter of 2010, the 
commitment appropriations in the 2011 EU budge t would be used to finance the MFA grant 
element. The planned appropriatio ns on the MFA budget line (01 03 02)
8 in 2011 are deemed 
sufficient to finance a grant amount of EUR 23 million to Georgia, subject to the final 
decision of the budgetary authority.  
The loan component of the proposed assistan ce would be financed through the borrowing 
operation that the Commission w ill conduct on behalf of the EU. The budgetary costs of the 
assistance will correspond to the provisioning, at a rate of 9%, of the amounts disbursed in the 
Budget Guarantee Fund for external lending of  the EU, from budget line 01 04 01 14 ("the 
provisioning of the Guarantee Fund"). Assuming th at the loan disburseme nts will be made in 
2011 for the amount of EUR 23 million and accor ding to the rules governing the Guarantee 
Fund mechanism, the provisioning will take place in the 2013 budget.  
 
To ascertain that the beneficiary has in place a sound financial management in line with the 
requirements of the Financial Regulation, th e Commission services continue regular 
monitoring and intend to conduct an Operationa l Assessment that would provide an updated 
report on the reliability of financial circuits and administrative controls at the Ministry of Finance and the National Bank of Georgia sinc e the last Operational Assessment (2005) and 
the joint WB-EU PEFA
9 study (2008).  
 
                                                 
8  Commitment appropriations amount  to EUR 98.9 million in 2010 an d to EUR 99.9 million in 2011. 
9  The joint Public Expenditure and Financial Accountability (PEFA) study by the World Bank and the 
European Commission gave detailed information on Georgia’s budget preparation and execution as well as 
on control and oversight functions. 
 
EN 16   EN 6. PLANNING OF FUTURE MONITORING AND EVALUATION  
This assistance is of exceptional and macroec onomic nature and its monitoring and evaluation 
will be undertaken in line with th e standard Commission procedures.  
6.1. Monitoring 
Monitoring will involve the review of reports and data provided by the authorities and by 
review missions to Georgia by Commission staff. To monitor the fulfilment of the objectives 
of the programme throughout the implementati on period of the assistance, the Commission 
will use two types of indicators: 
• Adherence to the IMF-supported pr ogramme, including compliance with 
macroeconomic performance criteria and st ructural reform benchmarks identified 
under the Stand-By Arrangement, as report ed by the IMF in the context of the 
regular review of the programme. 
• Progress in the implementation of structur al policy indicators,  which are to be 
agreed with the authorities of Georgia in  a Memorandum of Understanding. In this 
process, the Commission services will m onitor key areas of the public finance 
management system, as they will be identified in the update of the Operational Assessment, so as to have the relevant information on any changes in the control environment. Ahead of the disbursement of the second instalme nt the authorities 
will be asked to submit a compliance statement in relation to the MoU policy conditionalities. In additi on, under the MoU monitoring system, the authorities 
will be obliged to submit quarterly reports of certain economic and reform indicators. 
Although this assistance is centrally manage d, where appropriate, the EU Delegation in 
Georgia will also be called to provide reporti ng. An annual report to th e European Parliament 
and to the Council on the implem entation of MFA is foreseen in the proposed text for a 
Decision of the European Parliament and of the Council. 
6.2. Evaluation 
Ex-post evaluations of macro-fi nancial assistance operations ar e foreseen in the Multi-annual 
Evaluation Programme of the Co mmission's Directorate-Genera l for Economic and Financial 
Affairs. An ex-post evaluation of the proposed macro-financial assistance to the Georgia will 
be launched within a period of two years afte r the completion of the operation. A provision 
for the ex-post evaluation is included in th e proposed Decision for th e assistance, and will 
also be included in the Memorandum of Un derstanding. Budget appropriations from the 
macroeconomic assistance budget line will be used for this evaluation.  
7. A
CHIEVING COST -EFFECTIVENESS  
The proposed assistance would entail a high degree of cost effectiveness for several reasons:  
• First, since the assistance would be leve raged by that provide d by the international 
financial institutions, with which, as noted, it would be closely coordinated, its 
ultimate impact could be very significan t compared to its cost. Moreover, in 
 
EN 17   EN negotiating specific policy conditions, the Commission will be able draw on the 
expertise of those institutions, including the International Monetary Fund and the 
World Bank, and to influence their conditiona lity as well in ways that will take 
into account the EU's views. 
• Second, part of the assistance would be provided in the form of loans, the 
budgetary impact of which is, in  principle, more limited.  
• Third, by providing a coordinated macroeconom ic support to Geor gia on behalf of 
the EU countries, the MFA would be more cost efficient than the provision of a 
similar total amount of financial suppor t by EU Member States individually.  
• In addition, the Commission will aim at  achieving synergies with other EU 
policies and instruments (in particular EN PI as indicated above) used to support 
the implementation by the beneficiary of th e relevant measures (notably in the 
area of public finance management). Wher e appropriate, links to related actions 
under the European Neighbourhood Policy or Eastern Partnershi p and to findings 
of the ENP Progress Reports on Ge orgia would be established.