Proposal for a Council Decision providing macro-financial assistance to Georgia (SEC(2005)1449)
Date: 2005-11-14
Institutions: European Commission
Subjects: EU aid, Georgia, aid system, economic stabilisation, financial aid

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 14.11.2005 
COM(2005)571 final 

2005/0224(CNS) 

. 

Proposal for a 

COUNCIL DECISION 

providing macro-financial assistance to Georgia 

(SEC(2005)1449) 

. 

(presented by the Commission) 

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EXPLANATORY MEMORANDUM 

1)  CONTEXT OF THE PROPOSAL 

110 

•  Grounds for and objectives of the proposal 

The Commission proposes to provide macro-financial assistance to Georgia in the form 
of a grant with a view to supporting the government's economic reform programme and 
helping the country reduce external indebtedness, thereby improving external and fiscal 
sustainability over the medium-term. 

The proposed macro-financial assistance will be limited in time, complement support 
from  the Bretton  Woods Institutions,  bilateral donors and the Paris Club, and will be 
conditional,  in  particular,  on  progress  in  the  implementation  of  the  IMF-supported 
PRGF arrangement. This operation will take place at a time when EU-Georgia relations 
are  entering  a  phase  of  deeper  integration  through  the  inclusion  of  Georgia  in  the 
European Neighbourhood Policy.  

120 

•  General context 

Following the Rose Revolution of November 2003 a comprehensive economic reform 
process  has  been  launched  in  Georgia,  aimed  at  reviving  growth,  improving  the 
business  environment  and  reducing  poverty.  Significant  emphasis  has  been  put  on 
fighting corruption and strengthening the rule of law. 

Despite  the  progress  made  so  far,  Georgia  continues  to  face  a  significant  current 
account  deficit  and  a  high  debt-to-GDP  ratio,  which,  albeit  declining  gradually, 
represent  a  heavy  burden  on  the  budget.  The  current  account  deficit  is  projected  to 
widen  in  2005  to  about  12  percent  of  GDP  (7.6  percent  in  2004),  owing  to  robust 
import  demand  in  the  pipeline  construction  and  other  investment  projects,  before 
easing to around 7 percent in 2006. Anticipated privatisation deals could bring about a 
significant boost to private capital inflows to finance the wider current account deficit. 
External public and publicly guaranteed debt remains fairly stable in nominal terms at 
around  USD  1.85  billion,  equivalent  to  36  percent  of  GDP  at  end-2004.  Domestic 
public  debt,  consisting  of  Treasury  bills  and  debt  to  the  National  Bank  of  Georgia, 
amounted  to  about  9  percent  of  GDP  in  2004.  Interest  payments  and  amortisation 
represented  some  13  percent  of  general  government  expenditure 
in  2004, 
corresponding  to  2.5  percent  of  GDP.  Domestic  expenditure  arrears,  which  totalled 
nearly 5 percent of GDP before the Rose Revolution, are expected to be fully repaid by 
end-2006.  

Real GDP grew by 6.2 percent in 2004 and is projected to grow by 8.5 percent in 2005 
(GDP  growth  was  6.8  percent  year-on-year  in  the  first  half  of  2005).  As  the  current 
stimulus from oil and gas pipeline construction will tend to wane over time, adherence 
to structural reforms is needed to support robust growth in the economy. The 12-month 
inflation  has  been  increasing  somewhat,  reaching  7.5  percent  at  end-2004.  For  2005, 
the authorities aim to achieve an end-year inflation rate of 7 percent. This will require 
careful  management  of  the  government's  discretionary  spending  in  addition  to  the 
National Bank's commitment to an appropriately tight monetary stance.  

Fiscal performance improved significantly in 2004, but a more expansionary stance has 

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been decided for 2005. In 2004, the government managed to increase tax revenues by 
an  impressive  four  percentage  points  of  GDP  (from  14.5  to  18.2  percent  of  GDP) 
which  highlights  the  Georgian  authorities'  remarkable  anti-corruption  drive.  As  a 
result,  the  general  government  posted  a  surplus  of  2.3  percent  of  GDP  on  a 
commitment  basis,  while  on  a  cash  basis  the  payment  of  expenditure  arrears  led  to  a 
deficit  of  0.2  percent.  In  2005  large  increases  in  expenditure  are  planned  against  the 
backdrop  of  anticipated  privatisation  revenues.  The  general  government  deficit  is 
projected to increase to 4.8 percent of GDP on a cash basis. Supported by a rebound in 
investor confidence, yields on Treasury bills have declined to approximately 10 percent 
from over 50 percent at late 2003. 

Structural reforms focus on improving the business climate, reducing the energy sector 
quasi-fiscal  deficit  and  fighting  poverty.  The  new  streamlined  tax  code  which  took 
effect in January 2005 was one of the first major reforms of the new government aimed 
at  improving  the  business  climate.  A  new  customs  code  is  under  preparation  and  an 
overhaul of the licence system is also underway. The civil service has been downsized 
substantially in the early stages of the reinvigorated reform process, paving the way for 
higher  salaries  in  the  public  sector.  Privatisation  has  been  resumed  on  a  wide  scale, 
including land and remaining large-scale industrial assets. Restoring the technical and 
financial viability of the energy sector remains perhaps the most difficult area still to be 
tackled. Quasi-fiscal losses of the power sector are estimated at around 4.5 percent of 
GDP. Given that the share of population living under the minimum subsistence level is 
hardly  changed  at  52.5  percent,  poverty  reduction  is  at  the  heart  of  the  government's 
reform  programmes  in  social  protection,  health  and  education,  building  on  improved 
economic  fundamentals.  The  Georgian  poverty  reduction  strategy  (the  Economic 
Development and Poverty Reduction Program EDPRP) was presented by the previous 
government to the Executive Boards of IDA and the IMF in September 2003. 

In the context of the European Neighbourhood Policy, EU-Georgia relations are bound 
to deepen through closer economic integration. The European Neighbourhood Action 
Plan, to be agreed between the EU and Georgia, is expected to include macroeconomic 
stability,  measures  to  improve  the  investment  climate  as  well  as  legislative  and 
regulatory approximation with the EU among the priority areas. 

The  Executive  Board  of  the  International  Monetary  Fund  approved  in  June  2004  a 
three-year arrangement under the Poverty Reduction and Growth Facility (PRGF) in an 
amount of SDR 98 million. Thereafter, the Paris Club creditors agreed in July 2004 to a 
restructuring of Georgia's bilateral official debt on the Houston terms. This Paris Club 
agreement  consolidates  about  USD  160  million  due  on  bilateral  official  debts 
contracted  by  Georgia  before  November  1999,  consisting  of  arrears  and  maturities 
falling  due  from  June  2004  to  December  2006.  The  new  Government  of  Georgia 
received  strong  support  from  the  international  community  also  at  the  donors' 
conference co-chaired by the European Commission and the World Bank in June 2004. 
At the donors' conference, the Commission pledged a total assistance amount of EUR 
125 million, including an indicative amount of EUR 33.5 million in the form of macro-
financial assistance for 2005/2006 subject to agreement by the EU Member States. 

In  the  period  1998-2004,  the  Community  made  available  to  Georgia  exceptional 
financial  assistance  consisting  of  a  loan  of  EUR  110  million  (disbursed  in  July  1998 
after  Georgia  had  settled  arrears  of  EUR  131  million  to  the  Community)  and  a  total 
grant of EUR 65 million (of which only EUR 31.5 million was committed and paid by 

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end-2004).  For  most  of  this  period  the  Georgian  authorities  did  not  have  a  working 
financing arrangement with the IMF or they did not meet all specific EC conditions on 
structural  reforms  when  the  IMF-supported  program  was  on  track.  The  political 
situation  remained  unfavorable  to  reforms  until  the  Rose  Revolution  of  November 
2003. As a result, the Commission was not in a position to release the grant component 
of the assistance as planned and, accordingly, Georgia's outstanding debt towards the 
Community  (EUR  85.5  million)  remains  well  above  the  targets  set  at  the  time  of  the 
preparation of the exceptional financial assistance. 

Following the political regime change in late 2003, the new government embarked on a 
strong adjustment and reform programme. The main components of the government's 
economic  policy  agenda  include  fiscal  consolidation  and  sound  public  finance 
management,  restructuring  and  reform  of  the  public  administration,  reinvigoration  of 
privatisation  and  rehabilitation  of  the  energy  sector.  Decisive  action  has  been 
undertaken to fight against corruption and tax evasion. A new liberal tax code has been 
effective since January 2005 and further measures to improve the business climate are 
on the government agenda. Macroeconomic stability has been maintained with robust 
growth and subdued inflation. This reform drive bodes well for the implementation of 
the poverty reduction strategy. Given these commendable improvements in the overall 
economic policy environment, the Commission deems appropriate to make available to 
Georgia  macro-financial  assistance  in  the  form  of  grants  through  re-programming  of 
the uncommitted grant amount of EUR 33.5 million. 

130 

•  Existing provisions in the area of the proposal 

Council Decision of 17 November 1997 providing exceptional financial assistance for 
Armenia and Georgia (97/787/EC). 

Council  Decision  of  20  March  2000  amending  Decision  97/787/EC  providing 
exceptional  financial  assistance  for  Armenia  and  Georgia  in  order  to  extend  it  to 
Tajikistan (2000/244/EC). 

The  present  proposal  for  a  new  legal  basis  for  macro-financial  assistance  to  Georgia 
entails reprogramming of the uncommitted and undisbursed grant amount of EUR 33.5 
million out of EUR 65 million which had been earmarked for Georgia under the total 
ceiling of  EUR 130 million (Article 1(3) as amended by Decision 2000/244/EC). 

140 

•  Consistency with other policies and objectives of the Union 

EU-Georgia relations are entering a phase of deeper integration through the inclusion 
of  Georgia  in  the  European  Neighbourhood  Policy.  The  Community's  assistance  to 
Georgia  through  the  macro-financial  assistance  instrument  would  contribute  to  the 
strengthening  of  the  bilateral  relations  at  a  time  when  a  European  Neighbourhood 
Action Plan, currently under negotiation, will be entering the implementation phase. It 
is  envisaged  that  from  2007  onwards  the  European  Neighbourhood  and  Partnership 
Instrument  will  become  available  to  Georgia,  allowing  assistance  also  in  the  form  of 
budget support, whereas the macro-financial assistance instrument will be deployed in 
the  interim  period,  aiming  at  improving  medium-term  debt  sustainability  and 

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219 

229 

230 

supporting the government's reform programme.  

2)  CONSULTATION OF INTERESTED PARTIES AND IMPACT ASSESSMENT 

•  Consultation of interested parties 

The  Georgian authorities requested further macro-financial assistance from the EC in 
2004.  The  Commission  services  have  been  in  contact  with  the  authorities  and  the 
International  Monetary  Fund  during  the  preparation  of  the  present  Commission 
proposal to discuss the modalities of the assistance. The Commission has consulted the 
Economic  and  Financial  Committee  before  submitting  its  proposal.  Following  the 
adoption  of  the  Council  Decision,  the  Commission  services  will  negotiate  a 
Memorandum of Understanding with the Georgian authorities to lay down in detail the 
implementation modalities of the assistance.  

•  Collection and use of expertise 

There was no need for external expertise. 

•  Impact assessment 

Because  the  macro-financial  assistance  is  a  policy-based  instrument,  it  is  particularly 
well-suited to support the efforts of the Georgian government to improve the external 
and fiscal debt sustainability in the short-to-medium run. 

By providing further macro-financial assistance in the form of grants, the Community 
will continue supporting Georgia's economic reform programmes. In the short-run, the 
macro-financial  assistance  will  help  the  authorities  to  improve  the  external  financial 
position of Georgia through a reduction in the country's net debtor position towards the 
Community. In the medium-run, the macro-financial assistance will foster external and 
fiscal  debt  sustainability  by  encouraging  the  authorities  to  implement  appropriate 
macro-economic and structural policies. 

3)  LEGAL ELEMENTS OF THE PROPOSAL 

305 

•  Summary of the proposed action 

The Community shall make available to Georgia macro-financial assistance in the form 
of grants over a two-year period. The assistance will be made available in at least two 
instalments over the period 2006-2007 conditional on (i) the implementation of a set of 
measures  to  be  jointly  agreed  with  the  government  and  (ii)  a  satisfactory 
implementation  by  Georgia  of  the  IMF-supported  economic  programme.  The  grant 
payments are also linked to early debt repayments by Georgia of its outstanding debt 
towards  the  Community.  The  assistance  is  managed  by  the  Commission  which  shall 
agree  with  the  authorities  the  specific  economic  policy  and  financial  conditions 
attached to the payment of the grant instalments. Specific provisions on the prevention 
of fraud and other irregularities, consistent with the Financial Regulation, will be duly 
taken into account. 

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310 

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331 

332 

341 

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401 

•  Legal basis 

Article 308 of the Treaty 

•  Subsidiarity principle 

The proposal falls under the exclusive competence of the Community. The subsidiarity 
principle therefore does not apply. 

•  Proportionality principle 

The proposal complies with the proportionality principle for the following reason(s): 

The  assistance  will  be  fully  consistent  with  the  macroeconomic  targets  already  set  in 
the IMF supported PRGF arrangement. As regards specific conditions attached to the 
disbursement  of  the  grant  instalments,  the  Commission  intends  to  focus  on  a  limited 
number of areas, including in particular public finance management. 

The  amount  of  the  assistance  is  reprogrammed  following  the  expiry  of  the 
implementation period of the exceptional financial assistance to Georgia and therefore 
remains within the ceiling provided for in the previous legal basis. This is deemed an 
appropriate level of burden sharing for the Community, given the assistance provided 
to Georgia by bilateral creditors and the international donor community in general. 

•  Choice of instruments 

Proposed instruments: other. 

Other means would not be adequate for the following reason(s): 

In the absence of a framework regulation for the macro-financial assistance instrument, 
ad hoc Council decisions under Article 308 of the Treaty are the only available legal 
instrument for this assistance. 

4)  BUDGETARY IMPLICATION 

EUR  33.5  million  to  be  committed  under  budget  line  01  03  02  01  "Macroeconomic 
assistance for partner countries of eastern Europe and central Asia". 

5)  ADDITIONAL INFORMATION 

•  Review/revision/sunset clause 

533 

The proposal includes a sunset clause. 

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2005/0224(CNS) 

Proposal for a 

COUNCIL DECISION 

providing macro-financial assistance to Georgia 

THE COUNCIL OF THE EUROPEAN UNION, 

Having regard to the Treaty establishing the European Community, and in particular Article 
308 thereof, 

Having regard to the proposal from the Commission1, 

Having regard to the opinion of the European Parliament2, 

Whereas: 

(1) 

(2) 

(3) 

(4) 

Council Decision 97/787/EC3 provides for exceptional financial assistance to Armenia 
and Georgia in the form of long-term loans and grants. 

Council  Decision  2000/244/EC4  amending  Council  Decision  97/787/EC  provides  for 
exceptional financial assistance to Tajikistan and extends the implementation period of 
the assistance to Armenia and Georgia until 2004. 

In case of Georgia, the objectives of the assistance have not been fully met, owing to 
an unsatisfactory economic policy environment in the country during most part of the 
implementation period.  

Therefore,  only  EUR  31.5  million  of  the  total  grant  allocation  of  EUR  65  million  to 
Georgia was committed and paid under the exceptional financial assistance. 

1 
2 
3 
4 

OJ C […], […], p. […]. 
OJ C […], […], p. […]. 
OJ L 322, 25.11.1997, p. 37. 
OJ L 77, 28.3.2000, p. 11. 

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(5) 

(6) 

(7) 

(8) 

(9) 

The  present  authorities  of  Georgia  are  committed  to  economic  stabilisation  and 
structural  reforms,  supported  by  the  International  Monetary  Fund  (IMF)  through  a 
three-year  arrangement  under  the  Poverty  Reduction  and  Growth  Facility  (PRGF) 
which was approved on 4 June 2004 in a total amount of SDR 98 million. Thereafter, 
the  Paris  Club  creditors  agreed  on  21  July  2004  to  a  restructuring  of  Georgia’s 
bilateral official debt on the Houston terms.  

The  new  Government  of  Georgia  received  strong  support  from  the  international 
community also at the donors’ conference held in Brussels on 16 June 2004.  

The  World  Bank  approved  in  June  2004  a  USD  24  million  Reform  Support  Credit 
(RSC),  and  will  continue  its  assistance  to  Georgia  under  a  new  Country  Partnership 
Strategy in the form of Poverty Reduction Support Operations (PRSO).   

Georgian authorities have expressed their intention to pursue early debt repayments to 
the Community with a view to improving debt sustainability. 

As  EU-Georgia  relations  are  developing  within  the  framework  of  the  European 
Neighbourhood  Policy,  which  is  expected  to  lead  to  deeper  economic  integration, 
Community  support  to  the  government’s  economic  reform  programme  is  considered 
appropriate. 

(10)  Making  available  an  amount  equivalent  to  the  uncommitted  grant  amount  of  the 
exceptional financial assistance, which would support the country’s economic reforms 
and  help  reduce  external  indebtedness,  is  an  appropriate  contribution  by  the 
Community  to  the  implementation  of  poverty  reduction  and  growth  strategies  in 
Georgia. 

(11) 

In order to ensure efficient protection of the Community’s financial interests linked to 
the  present  macro-financial  assistance,  it  is  necessary  to  provide  for  appropriate 
measures  by  Georgia  related  to  the  prevention  of  and  to  the  fight  against  fraud, 
corruption and any other irregularities linked to this assistance, as well as for controls 
by the Commission and audits by the Court of Auditors. 

(12)  The Commission services, with the support of duly mandated external experts, carried 
out  in  October  2004  an  operational  assessment  of  the  financial  circuits  and 
administrative procedures at the Ministry of Finance of Georgia and the National Bank 
of Georgia to ascertain the existence of a framework for sound financial management. 

(13)  The release of this grant assistance is without prejudice to the powers of the budgetary 

authority. 

(14)  The  Commission  has  consulted  the  Economic  and  Financial  Committee  before 

submitting its proposal. 

(15)  The Treaty does not provide for the adoption of this Decision powers other than those 

of Article 308, 

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HAS DECIDED AS FOLLOWS: 

Article 1 

1. 

2. 

3. 

1. 

2. 

3. 

4. 

1. 

The  Community  shall  make  available  to  Georgia  macro-financial  assistance  in  the 
form  of  straight  grants  to  a  maximum  amount  of  EUR  33.5  million  with  a  view  to 
supporting economic reforms and helping the country improve debt sustainability.  

This  Community  financial  assistance  shall  be  managed  by  the  Commission  in 
consultation  with  the  Economic  and  Financial  Committee  and  in  a  manner  fully 
consistent with the agreements reached between the IMF and Georgia. 

The  Community  financial  assistance  shall  be  made  available  for  two  years  starting 
from  the  first  day  after  the  entry  into  force  of  this  decision.  However,  if 
circumstances  so  require,  the  Commission,  after  consultation  of  the  Economic  and 
Financial Committee, may decide to extend the availability period by a maximum of 
one year. 

Article 2 

The  Commission  is  empowered  to  agree  with  the  authorities  of  Georgia,  after 
consultation with the Economic and Financial Committee, the economic policy and 
financial conditions attached to this assistance, to be laid down in a Memorandum of 
Understanding. These conditions shall be consistent with the agreements referred to 
in Article 1(2). 

During  the  implementation  of  the  Community  assistance,  the  Commission  shall 
monitor the soundness of Georgia’s financial circuits, administrative procedures and 
internal  and  external  control  mechanisms  which  are  relevant  for  this  Community 
macro-financial assistance. 

The  Commission  shall  verify  at  regular  intervals  that  the  government’s  economic 
policies are in accordance with the objectives of this assistance and that the agreed 
economic policy and financial conditions are being fulfilled. 

The  grant  amount  shall  be  made  available  to  Georgia  in  at  least  two  instalments 
insofar as the net debtor position of the beneficiary towards the Community has been 
reduced, as a rule, by at least a similar amount.  

Article 3 

Subject to Article 2(4), the first grant instalment shall be released on the basis of a 
satisfactory implementation of the economic programme supported by the IMF under 
the Poverty Reduction and Growth Facility; the second and any further instalments 
shall be released on the basis of a satisfactory implementation of the IMF-supported 
economic programme and any other measures agreed with the Commission as set out 
in  Article  2(1),  and  not  before  one  quarter  after  the  release  of  the  previous 
instalment. 

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2. 

The funds shall be paid to the National Bank of Georgia. The final recipient of the 
funds will be the Ministry of Finance of Georgia. 

Article 4 

The implementation of this assistance shall take place in accordance with the provisions of the 
Financial Regulation applicable to the General Budget of the European Communities and its 
implementing rules. In particular, the Memorandum of Understanding to be agreed with the 
authorities  of  Georgia  shall  provide  for  appropriate  measures  by  Georgia  related  to  the 
prevention of and to the fight against fraud, corruption and any other irregularities linked to 
this assistance. It will also provide for controls by the Commission, including the European 
Anti-Fraud Office (OLAF), with the right to perform on-the-spot checks and inspections, and 
for audits by the Court of Auditors, where appropriate, to be carried out on the spot. 

Article 5 

At  least  once  a  year,  before  September,  the  Commission  shall  submit  to  the  European 
parliament  and  to  the  Council  a  report,  which  will  include  an  evaluation  on  the 
implementation of this Decision in the previous year. 

Article 6 

This  Decision  shall  take  effect  on  the  day  of  its  publication  in  the  Official  Journal  of 
the European Union. 

Done at Brussels,  

For the Council 
The President 

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LEGISLATIVE FINANCIAL STATEMENT 

Policy area: Title 01 – Economic and Financial Affairs 

Activity: 03 – International economic and financial affairs 

TITLE OF ACTION: MACRO-FINANCIAL ASSISTANCE TO GEORGIA 

1. 

BUDGET LINE(S) + HEADING(S) 

01 03 02 01 “Macroeconomic assistance for the partner countries of eastern Europe 
and central Asia” 

2. 

OVERALL FIGURES  

2.1. 

Total allocation for action (Part B): € million for commitment 

€  42.050  million  (2005);  this  amount  includes  the  initial  budget  (€  24.200  million) 
and an internal transfer which is under preparation (€ 17.850 million) 

2.2. 

Period of application: 

Start year: 2005, expiry year: 2007 

2.3. 

Overall multiannual estimate of expenditure: 

(a) 

Schedule  of  commitment  appropriations/payment  appropriations 
intervention) (see point 6.1.1) 

(financial 

€ Million (to three decimal places) 

2005 

2006 

2007 

Commitments 

33.500 

Payments 

19.000 

14.500 

Total 

33.500 

33.500 

(b) 

Technical and administrative assistance and support expenditure (see point 6.1.2) 

Commitments 

0.050 

0.050 

Payments 

0.050 

0.050 

Subtotal a+b 

Commitments 

33.500 

0.050

0.050  

Payments 

19.050

14.550  

0.100 

0.100 

33.600 

33.600 

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(c) 

Overall  financial  impact  of  human  resources  and  other  administrative  expenditure  
(see points 7.2 and 7.3) 

0.165 

0.165 

0.330 

Commitments/ 
payments 

TOTAL a+b+c 

Commitments 

33.500  0.215 

0.215 

Payments 

19.215 

14.715 

33.930 

33.930 

2.4. 

Compatibility with financial programming and financial perspective 

The proposal is compatible with existing financial programming 

2.5. 

Financial impact on revenue 

The proposal has no financial implications on revenues 

3. 

BUDGET CHARACTERISTICS 

Type of expenditure 

New 

EFTA 
contribution 

Contributions 
from applicant 
countries 

Heading in 
financial 
perspective 

Non-
compulsory 

Differen-
tiated 

4. 

LEGAL BASIS  

NO 

NO 

NO 

No 4 

Article 308 of the Treaty 

5. 

DESCRIPTION AND GROUNDS 

5.1. 

Need for Community intervention 5 

5.1.1.  Objectives pursued 

The  proposed assistance aims at supporting economic reforms  and helping Georgia 
to further reduce its net debtor position towards the Community, thereby improving 
debt  ratios  and  fiscal  sustainability  over  the  medium-term.  This  assistance  is 
complementary to the resources provided by the International Financial Institutions 
and by bilateral donors. 

5 

For further information, see separate explanatory note. 

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5.1.2.  Measures taken in connection with ex ante evaluation  

An  ex  ante  evaluation  was  carried  out  by  Commission  services  in  September  2004 
and updated in July 2005.  

5.1.3.  Measures taken following ex post evaluation 

No ex-post evaluation of the Community macro-financial assistance to Georgia has 
been carried out yet. A recent evaluation of a similar assistance to Armenia indicates 
that  notwithstanding  the  short-term  positive  impact  of  the  assistance  on  debt 
sustainability,  the  longer  term  impact  on  structural  reforms  is  less  evident.  These 
conclusions  point  to  the  need  to  focus  the  EC  policy  conditionality  on  a  smaller 
number of key reforms, on which adequate monitoring and close policy dialogue is 
maintained throughout the implementation period.  

5.2. 

Action envisaged and budget intervention arrangements 

This assistance will take the form of a straight grant of up to € 33.5 million (financed 
from  the  General  Budget),  to  be  released  in  at  least  two  instalments.  The 
disbursements  will  be  conditional  upon  a  satisfactory  track  record  in  the 
implementation  of  the  present  three-year  arrangement  agreed  between  Georgia  and 
the  IMF  under  the  Poverty  Reduction  and  Growth  Facility  (PRGF).  Before  the 
release  of  each  instalment,  the  Commission  services,  in  co-operation  with  the 
national  authorities  and  the  IMF  staff,  shall  verify  that  the  said  arrangement  is  on 
track. 

In addition, the Commission shall agree with the Georgian authorities on a number of 
specific policy conditions which have to be met before the release of the second and 
any  further  instalments.  These  conditions  shall  be  consistent  with  agreements 
reached by Georgia with the IMF.  

The grant instalments would be released only insofar as Georgia has made early debt 
repayments  on  its  outstanding  debt  to  the  Community.  The  exact  amounts  of  debt 
repayments,  to  be  agreed  with  the  authorities  in  a  Memorandum  of  Understanding, 
would, as a rule, be at least the same as the amounts of the grant instalments.  

5.3.  Methods of implementation 

This assistance will be implemented in the form of centralised direct management by 
the Commission using regular staff. 

6. 

FINANCIAL IMPACT 

6.1. 

Total financial impact on Part B - (over the entire programming period) 

The  total  grant  amount  corresponds  to  the  uncommitted  part  of  the  exceptional 
financial  assistance 
to  Georgia  under  Council  Decisions  97/787/EC  and 
2000/244/EC. Therefore, the overall ceiling stipulated in the previous legal basis is 
not exceeded by the present proposal. 

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6.1.1.  Financial intervention 

Commitments (in € million to three decimal places) 

Breakdown 

2005 

2006 

2007 

Grant instalments to Georgia  33.500 

TOTAL  33.500 

Total 

33.500 

33.500 

6.1.2.  Technical  and  administrative  assistance,  support  expenditure  and  IT  expenditure 

(commitment appropriations) 

2005 

2006 

2007 

Total 

1) 
administrative assistance 

Technical 

and 

2) Support expenditure 

a) 
Studies 
Assessments) 

(Operational 

0.050 

0.050 

0.100 

b) Meetings of experts 

c) Information and 
publications 

TOTAL 

0.050 

0.050 

0.100 

7. 

IMPACT ON STAFF AND ADMINISTRATIVE EXPENDITURE  

7.1. 

Impact on human resources 

The  tasks  related  to  the  management  of  the  assistance  will  be  carried  out  through 
staff redeployment, where necessary, and will not involve an increase in the number 
of Commission staff.  

Types of post 

Staff to be assigned to management of the 
action using existing and/or additional 
resources 

Number of 
permanent posts 

Number of 
temporary posts 

Total 

Description of tasks deriving from the 
action 

Officials 
temporary staff 

or 

1/3 

A 

B 

C 

Other human resources 

Total 

1/3 

1/3 

1/3 

prepare 

memoranda 

E.g. 
of 
understanding/grant  agreements,  liaise 
with  authorities  and  IFIs,  liaise  with 
operational 
external 
assessments,  conduct  review  missions, 
prepare  Commission  staff 
reports, 
Commission  procedures  related  to  the 
management of the assistance 

experts 

for 

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7.2. 

Overall financial impact of human resources 

Type of human resources 

Amount (€) 

Method of calculation *  

Officials 

Temporary staff 

Other human resources 

30,500 

1/3 x average annual expenditure for an 
A*5 – A*12 grade official 

(specify budget line) 

Total  30,500 

The amounts are total expenditure for twelve months. 

7.3. 

Other administrative expenditure deriving from the action 

Amount € 

Method of calculation 

10,000 

125,000 

Two missions per year for two persons 

expenditure 
total 
Estimated 
€250,000 for the service contract 

of 

Budget line 

(number and heading) 

Overall allocation (Title A7) 

A0701 – Missions 

A07030 – Meetings 
A07031 – Compulsory committees 1 
A07032 – Non-compulsory committees 1 

A07040 – Conferences 

A0705 – Studies and consultations 

Other expenditure (specify) 

- An ex-post evaluation 

Information systems (A-5001/A-4300) 

Other expenditure - Part A (specify) 

Total  135,000 

The amounts are total expenditure for twelve months. 

1 Specify the type of committee and the group to which it belongs. 

I. 

II. 

Annual total (7.2 + 7.3) 

Duration of action 

III. 

Total cost of action (I x II) 

€ 165,500 

2 years 

€ 331,000 

8. 

FOLLOW-UP AND EVALUATION 

8.1. 

Follow-up arrangements 

This  assistance  is  of  macro-economic  nature  and  its  design  is  consistent  with  the 
IMF-supported economic programme. The monitoring will take place on the basis of 
progress  in  the  implementation  of  the  PRGF  arrangement  and  specific  reform 
measures to be agreed in a Memorandum of Understanding. The authorities will be 
required to report on a set of indicators on a regular basis.  

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The  Commission  services  will  continue  to  monitor  public  finance  management, 
following  the  operational  assessment  of  the  financial  circuits  and  administrative 
procedures  carried  out  in  preparation  of  this  proposal.  The  Delegation  of  the 
European  Commission  to  Georgia  will  provide  regular  reporting  on  issues  relevant 
for the monitoring of the assistance. The Commission services will remain in close 
contact with the IMF and the World Bank.  

8.2. 

Arrangements and schedule for the planned evaluation 

An  annual  report  to  the  European  Parliament  and  to  the  Council  is  foreseen  in  the 
proposed Council decision, comprising an assessment of the implementation of this 
operation.  Furthermore,  an  independent  ex-post  evaluation  of  the  assistance  by  the 
Commission or its duly authorised representatives is planned to be carried out after 
the expiry of the implementation period. 

9. 

ANTI-FRAUD MEASURES 

The Commission services have put in place an on-going programme of Operational 
Assessments  of  the  financial  circuits  and  administrative  procedures  in  all  third 
countries benefiting from the Community macro-financial assistance in order to fulfil 
requirements  of  the  Financial  Regulation  applicable  to  the  General  Budget  of  the 
European Communities. All available conclusions of the relevant reports of the IMF 
and the World Bank are also taken into consideration.  

In  Georgia,  the  Commission  services,  with  the  support  of  duly  mandated  external 
experts,  carried  out  in  October  2004  an  operational  assessment  of  the  financial 
circuits  and  administrative  procedures  at  the  Ministry  of  Finance  and  the  National 
Bank  of  Georgia.  This  review  covered  areas  such  as  management  structure  and 
organisation, management and control of funds, security of IT systems, internal and 
external audit capacity as well as the independence of the central bank. It concluded 
that  the  framework  for  sound  financial  management  of  the  Ministry  of  Finance  is 
effective  with  regard  to  budgetary  control,  but  needs  to  be  strengthened  and 
developed  with  regard  to  internal  control  within  budget  organisations  and  internal 
and  external  audit.  The  framework  for  sound  financial  management  within  the 
National Bank of Georgia is effective. 

The  proposed  legal  basis  for  macro-financial  assistance  to  Georgia  includes  a 
provision on fraud prevention measures. These measures will be elaborated further in 
a  Memorandum  of  Understanding.  It  is  envisaged  that  specific  policy  conditions 
aimed at strengthening efficiency, transparency and accountability will be attached to 
the assistance. 

The  macro-financial  assistance  will  be  liable  to  verification,  control  and  auditing 
procedures  under  the  responsibility  of  the  Commission,  including  the  European 
Antifraud Office (OLAF), and by the European Court of Auditors. 

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