EN    EN EN 
 
EN    EN  COMMISSION OF THE E UROPEAN COMMUNITIES 
Brussels, 16.10.2009 
SEC(2009) 1310 final 
  
COMMISSION STAFF WORKING DOCUMENT 
Ex ante evaluation statement Macr o-financial assistance to Georgia 
  
Accompanying document to the 
  
Proposal for a Council decision providing macro-financial assistance to Georgia 
    
COM(2009) 523 final 
 
EN 2   EN Ex ante evaluation statement 
Macro-financial assistance to Georgia 
 
EN 3   EN Table of Contents 
1. Problem analysis and needs assessment....................................................................... 4 
1.1. Background ................................................................................................................ .. 4 
1.2. Economic outlook and macroeconomic policy framework.......................................... 4 1.3. Balance of payments financing needs .......................................................................... 6 2. Objectives and related indicators of  the macro-financial assistance............................ 9 
2.1. Objectives................................................................................................................ ..... 9 
2.2. Indicators................................................................................................................ ...... 9 
3. Alternative delivery mechanis ms and risk assessment .............................................. 10 
3.1. Delivery mechanisms ................................................................................................. 10 3.2. Risk assessment.......................................................................................................... 1 0 
4. Added value of Community involvement .................................................................. 10 5. Genval criteria on macro- financial assistance............................................................ 11 
5.1. Exceptional Character and Limited Timeframe ......................................................... 11 5.2. Political pre-conditions .............................................................................................. 11 5.3. Complementarity of EC Instruments.......................................................................... 12 5.4. Conditionality............................................................................................................ . 12 
5.5. Financial discipline .................................................................................................... 13  
6. Lessons from the past................................................................................................. 14 7. Planning of future monitoring and evaluation............................................................ 14 7.1. Monitoring................................................................................................................ .. 14 
7.2. Evaluation................................................................................................................ ... 14 
8. Achieving cost-effectiveness...................................................................................... 15 
 
EN 4   EN 1. PROBLEM ANALYSIS AND NEEDS ASSESSMENT  
1.1. Background 
Until August 2008, when the military conflict with Russia started, Georgia's macro-
economic performance had been very strong. Georgia's real growth figures have been 
above 9% in 2005 and 2006 and 12% in 2007. A nd also for the first half of 2008 the 
real growth rate remained robust at 8.6%  annual growth. The military conflict with 
Russia undermined the strong growth performance of the early 2000s.  
The IMF Board approved in mid-Septem ber 2008 an 18-month stand-by arrangement 
for USD 750 million which constitutes excep tional access at 300 pe rcent of Georgia's 
quota. Given the need to replenish intern ational reserves of the National Bank of 
Georgia (NBG) in the immediate aftermat h of August 2008 crisis, the arrangement 
was frontloaded and enabled Georgia to draw USD 250 million from the Fund upon the Board approval of the programme.  
Georgia received strong support from th e international donor community at the 
Brussels Donor Conference on 22 October 2008 that was jointly organised by the 
European Commission and the World Bank. In  total, USD 4.5 billion was pledged in 
post-conflict support to Georgia, including up to EUR 500 million from the European 
Community for the period of 2008-2010. The pledged assistance was based on a 
Joint Needs Assessment by the World Bank and the United Nations. The European 
Commission proposes to provide  macro-financial assistance to Georgia in the form 
of grant instalments with a view of supporting Georgia's balance of payments, 
amounting to a maximum total amount of EU R 46 million. This assistance is part of 
a comprehensive Community package of up to EUR 500 million to support Georgia's 
economic recovery in the aftermath of th e August 2008 armed conflict with Russia. 
The Community macro-financial assistance will contribute to covering Georgia's 
residual external financing needs in 2009-2010 as identified by the International 
Monetary Fund. The funds will be channelled to the state budget of Georgia to help 
meet budgetary needs.  
1.2. Economic outlook and macro economic policy framework 
The continued Russian military presence in  South Ossetia and Abkhazia means that 
these regions remain outside the control of the Georgian authorities. Apart from the 
direct damage caused by the conflict, the en suing displacement of people, contraction 
in liquidity, capital outflows, weakening of  confidence and decline in tourism took a 
toll on economic activity. The global financia l crisis that became manifest in late 
2008-early 2009 further aggravated Georgian  economic fundamentals (see Table 1 
below).  
The crisis affects Georgia in the situa tion when a further aggravation of socio-
economic indicators could be very painfu l: registered unemployment that usually 
strongly underestimates the real figure has been at over 13% of the labour force in 
2005-2007. For the last two years no offici al unemployment figures have been 
provided by public statistic authorities. The authori ties put poverty rate when 
measured as 60% of median income of the population at 24% for 2005-2007. 
 
EN 5   EN  2007 2008 2009 2010 2011 2012 2013 2014
Prel. Proj. Proj. Proj. Proj. Proj. Proj.
(Annual percentage change, unless otherwise indicated) 
National accounts  
Real GDP growth 12.3 2.1 -4.0 2.0 4.0 5.0 5.0 5.0
Population (million) 1/ 4.4 4.4 4.4 4.4 4.4 4.4 4.4 4.4
Consumer price index, period average 9.2 10.0 1.8 3.2 4.0 5.0 5.0 5.0Consumer price index, end-of-period 11.0 5.5 3.4 3.0 5.0 5.0 5.0 5.0
GDP per capita (US$) 2,324 2,924 2,497 2,457 2,570 2,780 3,007 3,236
Poverty rate (in percent) 21.3 … … … … … … …
Unemployment rate (in percent) 13.3 16.5 … … … … … …
Investment and saving
Investment 25.7 22.5 19.0 20.5 21.5 22.0 22.0 22.0
   Public 3.4 4.3 7.1 5.5 5.3 5.1 4.9 5.1
   Private 22.3 18.2 11.9 14.9 16.3 16.9 17.1 16.8
Gross national saving 8.1 -0.1 2.9 3.9 5.5 7.0 8.1 9.5
   Public 4.2 2.2 -0.2 -0.5 1.5 1.8 2.4 2.5
   Private 3.8 -2.4 3.1 4.4 4.0 5.2 5.7 7.0
Saving-investment balance -19.6 -22.7 -16.1 -16.6 -16.0 -14.9 -13.8 -12.5
Consolidated government operations
Revenue 29.3 30.7 29.6 26.9 26.9 25.7 25.7 25.7
Expenses 25.0 28.5 29.8 27.3 25.4 23.9 23.2 23.2
Operating balance 4.2 2.2 -0.2 -0.5 1.5 1.8 2.4 2.5
Capital spending and net lending 9.0 8.6 9.3 6.9 6.3 5.8 5.3 5.4
Overall balance -4.7 -6.3 -9.4 -7.3 -4.8 -4.0 -2.9 -2.9
Statistical discrepancy 0.1 0.2 0.0 0.0 0.0 0.0 0.0 0.0
Total financing 4.6 6.2 9.4 7.3 4.8 4.0 2.9 2.9
Domestic -0.8 -2.5 2.8 -0.4 1.5 1.0 1.5 2.6
External 0.2 5.0 4.2 6.4 2.3 2.3 1.0 0.1
Privatization receipts 5.2 3.7 2.5 1.3 1.0 0.7 0.4 0.2
Gap 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Monetary sector
Reserve money 25.6 -4.5 15.0 12.0 … … … …
Broad money (including foreign exch. deposits) 49.6 7.0 -2.0 15.0 … … … …
Commercial bank credit to the private sector 71.3 31.0 -5.8 7.1 … … … …
External sector 
Exports of goods and services (percent of GDP) 31.1 28.7 26.8 30.7 32.6 33.2 33.8 34.1
Annual percentage change 24.7 15.9 -20.1 12.0 11.8 10.8 10.1 9.1
Imports of goods and services (percent of GDP) 57.9 58.3 49.8 54.6 55.5 54.3 53.2 52.0
Annual percentage change 34.1 26.7 -27.1 7.5 6.8 6.4 5.9 5.8
Net imports of oil (in US$) 556.3 762.5 503.4 564.0 614.1 658.2 701.9 741.2
Current account balance (in millions of US$) -2,009 -2,915 -1,768 -1,782 -1,813 -1,837 -1,838 -1,795
In percent of GDP -19.6 -22.7 -16.1 -16.6 -16.0 -14.9 -13.8 -12.5
Gross international reserves (in millions of US$) 1,361 1,480 1,708 1,942 2,115 2,124 1,950 1,913
In months of next year's imports of goods and services 2.2 3.2 3.5 3.7 3.8 3.6 3.1 2.9
Foreign direct investment (percent of GDP) 17.1 12.2 8.3 9.7 10.8 11.2 11.2 11.2
Average exchange rate (lari per dollar) 1.66 1.48 … … … … … …
   Source: Georgian authorities; and Fund staff estimates.
   1/ Excludes Abkhazia residents.(Annual percentage change, unless otherwise indicated)  Table 1. Georgia: Selected Macroeconomic Indicators, 2007–14
 
Source: IMF 
The severe contraction of external financ ing inflows, including export receipts, 
remittances and foreign direct investment , combined with the tightening of bank 
credits, depressed domestic demand. This tr anslated in a sharp fall of both domestic 
output and imports. For 2009, the IMF forecas ts real GDP contraction at 4%.  
The external vulnerability of Georgian econo my has been visible in its monetary and 
exchange rate policy. The central bank le gislation was amended in the Spring 2008 
to establish price stability as the NBG’s core objective to be implemented with a 
 
EN 6   EN monetary policy framework of inflati on-targeting. Yet, during the August 2008 
conflict, the authorities had announced a tempor ary peg of the lari to the US dollar in 
order to provide a confid ence-boosting anchor. Howeve r, interventions in the 
exchange markets proved unable to count er the pressure on the lari which had 
resurfaced as the global financial crisis d eepened in the autumn. Consequently, in 
early November 2008 the authorities allo wed it to rapidly de preciate –by around 
17%– against the US dollar. More recently, seeing consumer inflation decreasing due 
to decreasing domestic demand, the NBG focu sed on providing sufficient liquidity to 
the banking system, while at the same time intervening to limit the depreciation of the lari so as to support consumer confiden ce. The de facto peg to the dollar has been 
relaxed and the NBG is likely to resume a managed float of the lari with no 
predetermined path.  
The economic slowdown has also resulted in  a deterioration of the fiscal position. 
Already in 2008, the general government defi cit had widened from 4.7% of GDP to 
more than 6.3%, despite significantly larger  official grants. This deficit could be 
comfortably financed, through both privatisat ion receipts and official credits (in 
particular, from the World Bank and the US).  For 2009, the government's objective is 
to maintain a comparable level of fiscal deficit, which would be consistent with the 
available financing (again, mainly extern al). In view of th e shortfall of budget 
revenues, to achieve this objective, the Georgian authorities are constrained to 
substantially reduce the capital spending in the budget, thus reducing also 
government's ability to provide fiscal s timulus and act counter-cyclically. Also, 
amidst general risk aversion towards em erging markets, public borrowing in the 
international financial markets became prac tically impossible: country risk measured 
by international bond yield sp reads have been high. 
On the back of economic difficulties, th e first review of the IMF stand-by 
arrangement (SBA) was completed in Decem ber 2008. At that time, in view of a 
relatively limited direct im pact on the economy of th e August war, a relatively 
positive outlook for foreign direct investment in 2009 and the fear to damage investor confidence in the country, the auth orities decided not to draw the second 
tranche under the SBA. However, subseque ntly the economic situation worsened 
again as the result of the stronger-than-an ticipated impact on Georgia of the global 
economic crisis. In these conditions, to limit the impact of the economic slowdown, the Georgian authorities deci ded to take full advantage of potential donor financing. 
Thus, upon the completion of the second review of the IMF's SBA in March, Georgia drew two instalments under the arrangement , an amount equivalent to some USD 
187 million. The third programme review under the SBA was approved by the IMF Board on the 6
th of August 2009. The main result of th is review is th e extension of 
the duration of the SBA until June 2011 and the increase in the financing package by 
SDR 270 million (about USD 424 mill ion). Also, Georgia will be able to draw some 
USD 148 million immediately. 
1.3. Balance of payments financing needs 
A residual external financi ng gap was identified by the original IMF assessment 
presented to the IMF Board of Directors in September 2008. This original assessment 
has constituted the basis for EU's MFA pledge and Commissi on's MFA programme 
proposal that would cover 13% of the residu al financing gap. The latest projections 
made by the IMF in the cont ext of the second programme  review (completed in 
 
EN 7   EN March 2009) suggest that de spite the macro-economic ad justments that took place 
since the original assessment of Georgia' s external financing needs, fundamentally, 
external position of Georgia remains highly fragile (see Table 1). For 2009, the current account deficit is projected to decr ease, yet it is still  expected to reach 
approximately 16% of GDP. At the same time,  Georgia's main source of financing of 
this current account deficit – foreign direct investments and remittances – dramatically fell since the crisis year 2008: if in 2007 Georgia could attract USD 
1.75 billion foreign direct i nvestment, in 2008, the amount of  FDI inflows was scaled 
down attaining EUR 1.56 billion. For 2009, th e forecast of IMF was revised down to 
USD 0.9 billion and even this figure might  be too optimistic. Also, other private 
sector investment was scaled  down significantly in the latest IMF projections for 
2009. 
At the time of the preparation of the programme, the IMF estimated that Georgia's 
external financing needs for the peri od 2008-2010 not covered by the resources 
expected from the IMF would be about USD 650 million. Based on this estimated external financing gap, the Commission pl edged macro-financia l assistance of EUR 
46 million. MFA from the EU would cover about 13% of the residual financing 
needs in 2009-2010. 
The more severe than anticipated decline in economic activity si nce the beginning of 
2009 is translating in significant changes in the external accounts (see Table 2). The 
latest IMF's projections of Georgia's ba lance of payments in 2009-2010 point to a 
combination of narrowing trade and current account deficits and much lower private 
capital inflows. The contraction of the pr ojected net capital inflows reflects several 
factors, including lower foreign direct investment inflows and higher credit 
amortisation. All in all, the currently pr ojected Georgia's external financing needs 
resulting from these developments are not substantially differe nt from what was 
expected in September 2008.  
Table 2: Geor gia - External Financin g Requirements
in million USD
Projections Sept. 2008 Est. Projections July 2009
2008 2009 2010 2008 2009 2010
Total financing needs, before donor financing -1.303 -976 -567 -573 -1.079 -890
Current account balance -2.757 -2.618 -2.513 -2.851 -1.768 -1.782
Capital outflows: repayment of long term debt -494 287 -89 -363 -699 -501
Private financing sources 1.817 1.840 2.231 2.329 1.597 1.627
Foreign direct investment (net) 1.237 1.198 1.452 1,564 907 1.046
Other (*) 443 21
Change in reserves (- increase) 131 -485 -196 -131 -230 -234
Available donor financing as identified by IMF 1.103 651 442 571 1.076 900
Public sector project grants and loans 753 326 367 314 668 525
Long-term loan disbursements to public sector 615 92 181 227 466 384
Incl. new Donor Conference commitments 342 158
IMF SBA 350 325 75 257 408 375
Residual financing needs -200 -325 -125 -3 10
Residual financing needs before new commitments -345 -148
Source: IMF and Commission calculations
(*)   Including receipts of bond issuance, change in arrears and advance repayments.  
These projections remain extremely uncerta in and the financing needs may well be 
substantially higher reflecting significant downside risks. In particular, foreign direct 
investment estimates have been revised down from above 10% to 8.3% of GDP for 
2009. Also, should import demand pick up and approach its 2008 level over the 
 
EN 8   EN course of 2009 (imports are currently some 30% below th eir 2008 level), the stock of 
international currency reserves can be e xpected to go down very quickly. At the 
same time, while the level of gross reserves  is relatively comfor table (they approach 
three months of imports), the foreign liabil ities of the Georgian  banking sector are 
larger.  
Large amounts of assistance pledged at the October 2008 Donor Conference, 
including the EU macro-fina ncial assistance, appear to be sufficient to cover 
Georgia's currently estimated external fi nancing needs, even if much of donor 
support promised at that time still needs to be confirmed, or its timing still needs to 
be clarified. As a result, the projections of the financing requirements for 2009-2010 
made by the IMF do not show any residua l financing gap. This was indeed the 
objective of the Donor Confer ence. At the same time, the financing gap might re-
emerge should the assistance pledged, also including the EU MFA, not materialise.  
In addition to the external balance of payments financing needs, also budgetary needs 
remain high. The deepening of the gl obal economic and financial crisis has 
diminished the prospects for a rapid econom ic recovery in Georgia. Unemployment 
and poverty levels are expected to in crease in 2009 and 2010. The World Bank's 
Joint Needs Assessment projected an in crease in poverty and unemployment rates 
over these two years. Furthermore, in th e aftermath of the military conflict with 
Russia, Georgian government is under pressu re to meet the needs arising from the 
increased number of internally displa ced persons. The EU's macro-financial 
assistance, intended to be allocated to the financing of the deficit of the state budget 
could to some extent help preserve the le vels of public social expenditure and could 
ensure that the existing social safety net remains operational.  
Finally, also the issue of de bt sustainability is important in this context. Debt 
sustainability analysis of the IMF shows that several years of  strong growth and 
prudent debt management have reduced  significantly Georgia’s external 
vulnerability. Public and publicly guaranteed  external debt fell from 50% of GDP in 
2000 to about 17.5% of GDP in 2007. The conce ssionality of the pub lic external debt 
increased over the period as Georgia benefited from access to multilateral creditors. The declining trend stopped in Spring 2008 when Georgia accessed for the first time the Eurobond market. The IMF-supported programme accommodates higher external borrowing and sovereign guarantees also in 2009 and 2010 on the account of the 
public infrastructure projects which are in tended to support growth in the post-
conflict economic environment. Accordingly, external public debt is projected to 
peak in 2009 at 32% of GDP. The external public debt service will remain however 
manageable although the maturity st ructure may pose some challenges for 
repayment/rollover at particular points of time. Despite a relative low debt 
vulnerability of the countr y, public debt repayment will  become acute in 2009. The 
total Georgian public outsta nding debt to the European Community amounts to EUR 
57.5 million as of end-December 2008. Georgia pa id back a part of its previous MFA 
loan amounting to EUR 22 million on July 24
th 2009 (the interest of EUR 654 
thousand is still outst anding and overdue). 
 
EN 9   EN 2. OBJECTIVES AND RELATED INDICATORS OF THE MACRO -FINANCIAL ASSISTANCE  
2.1. Objectives 
The general objectives  of the proposed macro-financia l assistance operation are to:  
• Contribute to the financing of Georgia's external financing needs (reserve build-
up) in the context of a significant deteri oration of Georgia's external accounts 
brought about by the military conflict with  Russia and subsequently the economic 
and financial crisis;  
• Support Georgia to meet its acute budgetary needs; 
• Help Georgia alleviate the financial c onstraints on the implementation of the 
stabilisation programme supported by the stand-by arrangement with the IMF and 
aiming at rebuilding international reserves , avoiding liquidity disruptions and re-
installing investor confidence;  
• Facilitate and encourage efforts of th e authorities of Georgia to implement 
reforms identified under the EU -Georgia ENP Action Plan.  
Linked to these general objectives of the programme, specific objectives in terms of 
financial and structural reforms will be detailed during the implementation of the 
programme and will be laid down in the Memorandum of Understanding that the 
Commission will negotiate with the authorities of Georgia.  
2.2. Indicators 
Several types of indicators will be used in the implementation of the programme 
The fulfilment of the general objectives of  the programme will be assessed in the 
context of the ex-post evaluation of the programme. The standard impact indicators  
of external and fiscal sustainability will be used.  
The fulfilment of the specific objectives  of the programme will be monitored 
throughout the implementation period of the as sistance and evalua ted together with 
the general objectives. Impact indicators rela ted to particular structural reforms will 
be defined in the context of the programme’s evaluation. 
To monitor the programme, the Commission will use two types of result indicators : 
• Adherence to IMF-supported programmes; it will be a sine qua non for the 
implementation of the assistance; 
• Specific indicators in the areas of relevant  structural reforms; those indicators 
linked to specific structural policy c onditionality will be specified in the 
aforementioned Memorandum of Understandin g, to be agreed with the Georgian 
authorities. 
 
EN 10   EN 3. ALTERNATIVE DELIVERY MECHANISMS AND RISK ASSESSMENT  
3.1. Delivery mechanisms 
Macro-financial assistance is an untie d and undedicated m acro-economic support 
instrument, which helps the beneficiary coun try meet its external financing needs, 
including through a reinforcem ent of gross international reserves. Macro-financial 
assistance can be provided either in the form  of a loan, a grant or a combination of 
the two.  
The Commission considers appropriate to prov ide the total of this assistance in the 
form of a grant in view of Georgia's pers isting external vulnerability and taking into 
account significant amounts of loans that we re pledged in the Donors’ Conference, 
including from the European Investment  Bank under the Community guarantee fund 
(to cover Georgia's large infrastructure investment needs). The funds will be 
channelled to the state budget of Georgia.  The euro-denominated grant is converted 
into local currency by the cen tral bank and transferred to  the single treasury account 
as EC's budget support to Georgia.  
3.2. Risk assessment 
Among economic risks, there is a risk that  the macro-financial assistance could be 
used in a fraudulent way as any other type of assistance. In general terms, this risk is 
related to factors such as central bank i ndependence, quality of management systems 
and administrative procedures, control a nd oversight functions in the financial 
circuits, security of IT systems, and adequa te internal and extern al audit capabilities. 
Further risks to Georgia’s post-conflict ec onomic recovery now relate to a prolonged 
impact of the international financial crisis  on foreign direct investment and other 
private capital inflows. Furthermore, Georgia's current dependence on external 
financing represents a risk in the medium term. 
Political risks also remain high: tensions  have recently arisen in the domestic 
political context given that some promin ent figures from the government coalition 
that came in power after the peaceful Ro se Revolution of November 2003 have now 
joined the opposition and have been demonstrating against the government since the 9 April 2009, with the demand for Presiden t Saakashvili’s resigna tion. Continuation 
and consolidation of the democratic refo rms and institutions, media freedom and 
human rights are issues at the core of the EU ’s relations with Georgia, as outlined in 
the EU-Georgia ENP Action Plan. A further political risk is a continued frequent 
reshuffling of Ministers a nd other government officials that distracts from policy 
planning and implementation. 
A more positive development has been Georgia’s recent interest in regulatory 
alignment with the EU in trade and invest ment related areas, leading possibly to a 
deep and comprehensive free trade agreement with the EU when the conditions are met.  
4. A
DDED VALUE OF COMMUNITY INVOLVEMENT  
The Community financial support to Ge orgia's economic rec overy reflects the 
country's strategic importance to the EU in the context of the European 
 
EN 11   EN Neighbourhood Policy and the newly establis hed Eastern Partnership. International 
donors pledged a total of EUR 3.4 billion in Post-C onflict Support to Georgia at a 
joint European Commission/World Bank Conf erence held in Bru ssels on 22 October 
2008. The European Commission pledged up to  EUR 500 million subject to review 
based on the pace of recovery and evolution of the Georgian economy. The EU Member States pledged in addition EU R 131 million. The European Investment 
Bank can envisage lending to Georgia up to EUR 250 million in the medium-term.  
The instrument of macro-financial assistance  is included in the overall EC package 
of assistance on the grounds of establ ishing synergies with  the IMF-supported 
economic programme to which the in strument is directly linked.  
5. G
ENVAL CRITERIA ON MACRO -FINANCIAL ASSISTANCE  
The Council reconfirmed a set of principl es on the use of the Community's macro-
financial assistance instrument (so calle d Genval criteria) on 8 October 2002. These 
criteria underline the excepti onal character of the assistan ce, its complementarity to 
financing from the International Fina ncial Institutions (IFIs) and policy 
conditionality attached to the assistance.  Political pre-conditions are defined for 
prospective recipients of the assistance, taking also into account their geographical 
proximity to the EU. Finally, financial di scipline is established through the annual 
budget appropriations. 
5.1. Exceptional Character and Limited Timeframe 
The overall EC package to Georgia covers  the years 2008-2010 but given the high 
uncertainty on the pace of th e recovery, the European Commission announced in the 
October 2008 Donor Conference th at it will review the si tuation in twelve months 
based on the evolution of the Georgian econom y so as to determine later the possible 
use of the EC assistance te ntatively foreseen for 2010. In this setting, the macro-
financial assistance instrument was deemed  an appropriate component in the EC 
package given its contingency on the ultimate use by Georgia of IMF funds. 
Georgia’s financing gap in the balance of payments has its origin in the loss of 
investor confidence as a result of the armed conflict that broke out in early August. The international financial crisis whic h has affected emerging economies since 
September - October 2008 brought an additiona l layer of uncertainty  to the prospects 
of recovery of Georgia’s economy. The government’s aim has been to attract 
financing from the IFIs to boost public infras tructure investment in the short-term so 
as to maintain as much as possible econom ic growth until private capital inflows are 
resumed. Against this background, the m acro-financial assist ance earmarked for 
2009 is proposed to be disbursed in  the course of 2009 and early 2010.  
5.2. Political pre-conditions 
MFA is reserved to the third countries that are geographically close to the EU 
territory and that respect democracy and hum an rights. With these countries, the EU 
has important political, economic and commerci al ties. Georgia fulfils this criterion. 
The extraordinary European Council held  in Brussels on 1 September 2008 decided 
inter alia to step up relations with Ge orgia. During the Prague Summit on 7 May 
 
EN 12   EN 2009, these close Georgia-EU relations have entered a new phase with the launch of 
the Eastern Partnership of the European Union, a multilateral project endorsed by the 
heads of 27 EU member states or govern ments and the six partner countries among 
which is Georgia.  
5.3. Complementarity of EC Instruments 
A macro-financial assistance can take place if it is complementary to IMF financing 
and to support of other donors. It can onl y take place when a residual external 
financing gap is identified over and above  the IFI resources and under the condition 
of a fair burden sharing with bilatera l donors. The complementarity condition is 
fulfilled in the case of an MFA for Georgia for 2009-2010. A residual external 
financing gap was identified by the IMF in  September 2008. This original assessment 
has constituted the basis for EU's MFA pledge and Commissi on's MFA programme 
proposal that would cover 13% of the residua l financing gap. The later evaluations of 
Georgia's financing needs confir m the original IMF assessment. 
5.4. Conditionality 
As usual with the macro-financial assist ance instrument, the disbursements will be 
conditional on successful programme revi ews under the stand-by Arrangement and 
Georgia’s subsequent decisions to draw funds. In addition, the Commission and the 
Georgian authorities will ag ree on some specific structural reform measures in a 
Memorandum of Understanding. Given the rela tively short time span of the planned 
MFA operation, it is the Commission's intentio n to continue policy dialogue with the 
authorities in the area of public finance management which has been under focus in 
the previous MFA operation. Although signi ficant progress has been achieved in 
several areas of the PFM reform in recent years, there remains some concern on the 
sustainability and capacity gi ven the frequent changes in  the staff and management 
while the government is politically committed to a small government apparatus. 
The Commission services have worked clos ely with the Georgian authorities in 
recent years on public finance management reforms in the context of previous 
macro-financial assistance, the EC’s Food Security Pr ogramme and since 2007 also 
the EC’s sector budget support under the ENPI. To take stock of the achievements of 
the Georgian authorities and the remain ing challenges, the World Bank and the 
European Commission financed a join t Public Expenditure and Financial 
Accountability (PEFA) assessment in Ge orgia in 2007-2008. Afte r an interruption 
due to the August conflict, work on the PEFA was completed in the beginning of 2009. The final report was presented to Ge orgia's donor community in February 
2009. In parallel and based on the PEFA findi ngs, the Finance Ministry prepared its 
own Reform Policy Vision 2009-2013 and Action Plan for 2009 on public finance 
management. This document can serve as the basis for agreeing on conditionality of the macro-financial assistance.  
To assist the authorities in taking the refo rm efforts one step further, the Commission 
has a technical assistance project in the Ministry of Finance which has prepared a 
 
EN 13   EN PIFC1Gap Analysis. It compares internal audi t and internal contro l in the government 
of Georgia with EU best practices. Base d on the Gap Analysis, the Ministry of 
Finance has prepared a first draft for a polic y paper and an action plan in the area of 
PIFC. Although there are several forms of cont rols already in place, the authorities 
and the donors both agree that this reform process will take time as it touches upon fundamental working methods and long- standing practices in the government, 
including striking a balance between decen tralisation and appropriate support and 
coordination by the Ministry of Finance. The continuation of the macro-financial 
assistance will provide an opportunity to strengthen the policy dialogue since the 
authorities are now in the process of decidi ng on an appropriate organisation of PIFC 
in the government.  
Finally, the delivery of the macro-financial assistance is conditional to the fulfilment 
of the commitments agreed to by the Geor gian government in a joint statement with 
the Commissioner Ferrero-Waldner on 20 Janua ry 2009. This statement lays out the 
political framework under which the EC pos t-conflict assistance to Georgia could be 
delivered.  
5.5. Financial discipline 
The Commission aims at the adoption of  the Council decision on MFA to Georgia 
before the end of 2009 so that the commitment appropriations in the 2009 
Community budget would be used to finance the MFA grant. Given the low likelihood of the adoption by the Council of other decisions on MFA involving large 
grant amounts in 2009 (the only possibl e programmes requiring use of grant 
appropriations are programmes in favour  of Armenia and Kosovo), the planned 
appropriations on the MFA budget line (01 03 02)
2 are deemed sufficient to finance a 
grant amount of EUR 46 milli on to Georgia, subject to the final decision of the 
budgetary authority. 
To ascertain that the beneficiary has in  place a sound financial management in line 
with the requirements of the Financial Regulation, the Commission services continue regular monitoring and intend to contr act services to upda te the Operational 
Assessment of 2005 on the reliab ility of financial circuits and administrative controls 
at the Ministry of Finance and the National Bank of Georgi a. Close contacts are also 
maintained with the IMF;  the Fund intends to conduc t an update of the 2004 
safeguards assessment of the National Ba nk of Georgia. The NBG publishes IFRS 
financial statements which have been exte rnally audited in accordance international 
standards. The recent joint PEFA by th e World Bank and the European Commission 
gives detailed information on Georgia’s budget  preparation and ex ecution as well as 
on control and oversight functions, and w ill therefore serve as the basis for any 
specific controls to be launched in the c ontext of the macro-financial assistance. 
                                                
 
1 The EU’s Public Internal Financial Control (PIFC)  framework. The PIFC ha s now been incorporated 
also in the ENP Action Plans with the partner countries following its application in the candidate 
countries 
2 Commitment appropriations in a total amount of EUR 99 million (2009 PDB). 
 
EN 14   EN 6. LESSONS FROM THE PAST  
Previous macro-financial assistance operations  for Georgia have not yet been subject 
to external ex-post evaluations. Howeve r, the external evaluations of MFA 
programmes in favour of a number of pa rtner countries (Romania, Bosnia and 
Herzegovina, Albania, former Yugoslav Republic of Macedonia, Serbia, Armenia 
and Tajikistan) focussed on the following five dimensions: re levance of the MFA 
operation in relation to identified needs, e ffectiveness of the operations for the short-
term macroeconomic stabilisation, unexp ected impacts of the MFA assistance, 
sustainability of MFA financing in terms of country's external position in the 
medium to longer term, and finally, efficien cy of MFA operations in terms of design 
and implementation. A study drawing lessons from the individual evaluations is 
currently being finalised and will be availabl e on time for the start of the preparation 
of the implementation phase of macro-fina ncial assistance to Georgia. Also, the 
Commission has recently launched an evalua tion of the MFA provided to Georgia 
under the Council Decision (2006/41/EC). This  study will also be completed on time 
for the launching of the current MFA progr amme. The findings of both studies will 
be used by the Commission, in particular fo r the design of the conditionality of the 
proposed programme.  
7. PLANNING OF FUTURE MONITORING AND EVALUATION  
This assistance has a relatively short timef rame for implementation given the context 
of macro-economic stabilisation in the post-war economic situation compounded by 
the impact of the economic crisis. Monito ring and evaluation will be undertaken in 
line with the standard Commission procedures.  
7.1. Monitoring 
The monitoring system will be ensured by the provision of reports and data by the 
authorities and by the organi sation of review missions to Georgia by Commission 
staff. Although this assist ance is centrally managed, where appropriate, the EC 
Delegation in Tbilisi will also be calle d to provide additional reporting. The 
monitoring of the action by the Commission serv ices will take place on the basis of 
macro-economic and structural policy indi cators which are to be agreed with the 
Georgian authorities in a Memorandum of  Understanding. The Commission services 
may also monitor key areas of the public finance management system, to be identified in the update of the Operationa l Assessment so as to have the relevant 
information on any changes in  the control environment. 
An annual report to the European Pa rliament and to the Council on the 
implementation of macro-financ ial assistance is foreseen in the proposed text of the 
Council Decision. 
7.2. Evaluation 
Two to three ex-post evalua tions of macro-financial assistance operations are 
planned per year in the Multi-annual Ev aluation Programme of the Economic and 
Financial Affairs Directorat e-General. An ex-post evaluation of the proposed macro-
financial assistance will be launched in the future, upon completion of the operation. 
 
EN 15   EN A provision foreseeing the ex -post evaluation will be in cluded in the Memorandum 
of Understanding. Financial resources for this evaluation will be drawn from the 
macro-economic assistance budget line. 
8. ACHIEVING COST -EFFECTIVENESS  
In implementing the assistance, the Commission will be guided by the following 
principles: 
• The assistance will be made available to Georgia in two instalments. Both grant 
instalments are released conditional on Georgia's satis factory track record in 
implementing the macro-economic programme supported by the IMF under the stand by arrangement and on satisfactory progress with some specific economic 
policy conditions which will be agreed w ith the authorities and laid down in the 
Memorandum of Understanding. 
• In negotiating the specific policy conditions, the Commission will streamline the 
measures with the strategies and reform plans of the Georgian government in 
close cooperation with the relevant d onors, notably the IMF and the World Bank. 
• This action is exceptional by nature and will not involve an increase in the number 
of Commission staff.