Commission staff working document - Ex ante evaluation statement - Macro-financial assistance to Georgia - Accompanying document to the Proposal for a Council Decision providing macro-financial assistance to Georgia COM(2009) 523 final
Date: 2009-10-16
Institutions: European Commission
Subjects: EU aid, Georgia, economic conditions, economic stabilisation, financial aid, financial cooperation

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 16.10.2009 
SEC(2009) 1310 final 

COMMISSION STAFF WORKING DOCUMENT 

Ex ante evaluation statement Macro-financial assistance to Georgia 

Accompanying document to the 

Proposal for a Council decision providing macro-financial assistance to Georgia 

COM(2009) 523 final 

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Ex ante evaluation statement 

Macro-financial assistance to Georgia 

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Table of Contents 

Problem analysis and needs assessment....................................................................... 4 

Background .................................................................................................................. 4 

Economic outlook and macroeconomic policy framework.......................................... 4 

Balance of payments financing needs .......................................................................... 6 

Objectives and related indicators of the macro-financial assistance............................ 9 

Objectives..................................................................................................................... 9 

Indicators...................................................................................................................... 9 

Alternative delivery mechanisms and risk assessment .............................................. 10 

Delivery mechanisms ................................................................................................. 10 

Risk assessment.......................................................................................................... 10 

Added value of Community involvement .................................................................. 10 

Genval criteria on macro-financial assistance............................................................ 11 

Exceptional Character and Limited Timeframe ......................................................... 11 

Political pre-conditions .............................................................................................. 11 

Complementarity of EC Instruments.......................................................................... 12 

Conditionality............................................................................................................. 12 

Financial discipline .................................................................................................... 13 

Lessons from the past................................................................................................. 14 

Planning of future monitoring and evaluation............................................................ 14 

Monitoring.................................................................................................................. 14 

Evaluation................................................................................................................... 14 

Achieving cost-effectiveness...................................................................................... 15 

1. 

1.1. 

1.2. 

1.3. 

2. 

2.1. 

2.2. 

3. 

3.1. 

3.2. 

4. 

5. 

5.1. 

5.2. 

5.3. 

5.4. 

5.5. 

6. 

7. 

7.1. 

7.2. 

8. 

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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. And 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-September 2008 an 18-month stand-by arrangement 
for USD 750 million which constitutes exceptional access at 300 percent of Georgia's 
quota.  Given  the  need  to  replenish  international  reserves  of  the  National  Bank  of 
Georgia  (NBG)  in  the  immediate  aftermath  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  the  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 EUR 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 the 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 macroeconomic 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 ensuing displacement of people, contraction 
in liquidity, capital outflows, weakening of confidence and decline in tourism took a 
toll  on  economic  activity.  The  global  financial  crisis  that  became  manifest  in  late 
2008-early  2009  further  aggravated  Georgian  economic  fundamentals  (see  Table  1 
below).  

The  crisis  affects  Georgia  in  the  situation  when  a  further  aggravation  of  socio-
economic  indicators  could  be  very  painful:  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  official  unemployment  figures  have  been 
provided  by  public  statistic  authorities.  The  authorities  put  poverty  rate  when 
measured as 60% of median income of the population at 24% for 2005-2007. 

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 Table 1. Georgia: Selected Macroeconomic Indicators, 2007–14

National accounts
Real GDP growth
Population (million) 1/
Consumer price index, period average
Consumer price index, end-of-period
GDP per capita (US$)
Poverty rate (in percent)
Unemployment rate (in percent)

Investment and saving

Investment
   Public
   Private
Gross national saving
   Public
   Private
Saving-investment balance

Consolidated government operations

Revenue
Expenses

Operating balance

Capital spending and net lending

Overall balance
Statistical discrepancy
Total financing 

Domestic
External
Privatization receipts
Gap

Monetary sector
Reserve money
Broad money (including foreign exch. deposits)
Commercial bank credit to the private sector

External sector 

Exports of goods and services (percent of GDP)

Annual percentage change

Imports of goods and services (percent of GDP)

Annual percentage change 

Net imports of oil (in US$)
Current account balance (in millions of US$)

In percent of GDP

Gross international reserves (in millions of US$)

In months of next year's imports of goods and services

Foreign direct investment (percent of GDP)
Average exchange rate (lari per dollar)

   Source: Georgian authorities; and Fund staff estimates.

   1/ Excludes Abkhazia residents.

Source: IMF 

2007

2008
Prel.

2009
Proj.

2010
Proj.

2011
Proj.

2012
Proj.

2013
Proj.

2014
Proj.

(Annual percentage change, unless otherwise indicated) 

12.3
4.4
9.2
11.0
2,324
21.3
13.3

25.7
3.4
22.3
8.1
4.2
3.8
-19.6

29.3
25.0
4.2
9.0
-4.7
0.1
4.6
-0.8
0.2
5.2
0.0

2.1
4.4
10.0
5.5
2,924
…
16.5

-4.0
4.4
1.8
3.4
2,497
…
…

2.0
4.4
3.2
3.0
2,457
…
…

4.0
4.4
4.0
5.0
2,570
…
…

5.0
4.4
5.0
5.0
2,780
…
…

5.0
4.4
5.0
5.0
3,007
…
…

22.5
4.3
18.2
-0.1
2.2
-2.4
-22.7

30.7
28.5
2.2
8.6
-6.3
0.2
6.2
-2.5
5.0
3.7
0.0

19.0
7.1
11.9
2.9
-0.2
3.1
-16.1

29.6
29.8
-0.2
9.3
-9.4
0.0
9.4
2.8
4.2
2.5
0.0

20.5
5.5
14.9
3.9
-0.5
4.4
-16.6

26.9
27.3
-0.5
6.9
-7.3
0.0
7.3
-0.4
6.4
1.3
0.0

21.5
5.3
16.3
5.5
1.5
4.0
-16.0

26.9
25.4
1.5
6.3
-4.8
0.0
4.8
1.5
2.3
1.0
0.0

22.0
5.1
16.9
7.0
1.8
5.2
-14.9

25.7
23.9
1.8
5.8
-4.0
0.0
4.0
1.0
2.3
0.7
0.0

22.0
4.9
17.1
8.1
2.4
5.7
-13.8

25.7
23.2
2.4
5.3
-2.9
0.0
2.9
1.5
1.0
0.4
0.0

5.0
4.4
5.0
5.0
3,236
…
…

22.0
5.1
16.8
9.5
2.5
7.0
-12.5

25.7
23.2
2.5
5.4
-2.9
0.0
2.9
2.6
0.1
0.2
0.0

(Annual percentage change, unless otherwise indicated) 

25.6
49.6
71.3

-4.5
7.0
31.0

15.0
-2.0
-5.8

12.0
15.0
7.1

…
…
…

…
…
…

…
…
…

…
…
…

31.1
24.7
57.9
34.1
556.3
-2,009
-19.6
1,361
2.2
17.1
1.66

28.7
15.9
58.3
26.7
762.5
-2,915
-22.7
1,480
3.2
12.2
1.48

26.8
-20.1
49.8
-27.1
503.4
-1,768
-16.1
1,708
3.5
8.3
…

30.7
12.0
54.6
7.5
564.0
-1,782
-16.6
1,942
3.7
9.7
…

32.6
11.8
55.5
6.8
614.1
-1,813
-16.0
2,115
3.8
10.8
…

33.2
10.8
54.3
6.4
658.2
-1,837
-14.9
2,124
3.6
11.2
…

33.8
10.1
53.2
5.9
701.9
-1,838
-13.8
1,950
3.1
11.2
…

34.1
9.1
52.0
5.8
741.2
-1,795
-12.5
1,913
2.9
11.2
…

The  severe  contraction  of  external  financing  inflows,  including  export  receipts, 
remittances  and  foreign  direct  investment,  combined  with  the  tightening  of  bank 
credits, depressed domestic demand. This translated in a sharp fall of both domestic 
output and imports. For 2009, the IMF forecasts real GDP contraction at 4%.  

The external vulnerability of Georgian economy has been visible in its monetary and 
exchange rate policy. The central bank legislation was amended in the Spring 2008 
to  establish  price  stability  as  the  NBG’s  core  objective  to  be  implemented  with  a 

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monetary  policy  framework  of  inflation-targeting.  Yet,  during  the  August  2008 
conflict, the authorities had announced a temporary peg of the lari to the US dollar in 
order  to  provide  a  confidence-boosting  anchor.  However,  interventions  in  the 
exchange  markets  proved  unable  to  counter  the  pressure  on  the  lari  which  had 
resurfaced  as  the  global  financial  crisis  deepened  in  the  autumn.  Consequently,  in 
early  November  2008  the  authorities  allowed  it  to  rapidly  depreciate  –by  around 
17%– against the US dollar. More recently, seeing consumer inflation decreasing due 
to decreasing domestic demand, the NBG focused 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 confidence. 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 deficit 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  privatisation  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  external).  In  view  of  the  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  stimulus  and  act  counter-cyclically.  Also, 
amidst  general  risk  aversion  towards  emerging  markets,  public  borrowing  in  the 
international financial markets became practically impossible: country risk measured 
by international bond yield spreads have been high. 

On  the  back  of  economic  difficulties,  the  first  review  of  the  IMF  stand-by 
arrangement  (SBA)  was  completed  in  December  2008.  At  that  time,  in  view  of  a 
relatively  limited  direct  impact  on  the  economy  of  the  August  war,  a  relatively 
positive  outlook  for  foreign  direct  investment  in  2009  and  the  fear  to  damage 
investor  confidence  in  the  country,  the  authorities  decided  not  to  draw  the  second 
tranche  under  the  SBA.  However,  subsequently  the  economic  situation  worsened 
again  as  the  result of  the  stronger-than-anticipated impact  on  Georgia  of the global 
economic crisis. In these conditions, to limit the impact of the economic slowdown, 
the Georgian authorities decided 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 6th of August 2009. The main result of this review is the extension of 
the duration of the SBA until June 2011 and the increase in the financing package by 
SDR 270 million (about USD 424 million). Also, Georgia will be able to draw some 
USD 148 million immediately. 

1.3. 

Balance of payments financing needs 

A  residual  external  financing  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 Commission's MFA programme 
proposal that would cover 13% of the residual financing gap. The latest projections 
made  by  the  IMF  in  the  context  of  the  second  programme  review  (completed  in 

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March  2009)  suggest  that  despite  the  macro-economic  adjustments  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  decrease,  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 investment, in 2008, the amount of FDI inflows was scaled 
down attaining EUR 1.56 billion. For 2009, the 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  period  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 pledged macro-financial 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 since the beginning of 
2009 is translating in significant changes in the external accounts (see Table 2). The 
latest  IMF's  projections  of  Georgia's  balance  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 projected net capital inflows reflects several 
factors,  including  lower  foreign  direct  investment  inflows  and  higher  credit 
amortisation.  All  in  all,  the  currently  projected  Georgia's  external  financing  needs 
resulting  from  these  developments  are  not  substantially  different  from  what  was 
expected in September 2008.  

Table 2: Georgia - External Financing Requirements

Total financing needs, before donor financing
Current account balance
Capital outflows: repayment of long term debt
Private financing sources

Foreign direct investment (net)

Other (*)
Change in reserves (- increase) 

Available donor financing as identified by IMF
Public sector project grants and loans
Long-term loan disbursements to public sector
Incl. new Donor Conference commitments 

IMF SBA

Residual financing needs
Residual financing needs before new commitments

Projections Sept. 2008
2009
-976
-2.618
287
1.840
1.198

2008
-1.303
-2.757
-494
1.817
1.237

2010
-567
-2.513
-89
2.231
1.452

131

1.103
753
615

350

-200

-485

651
326
92

325

-325

-196

442
367
181

75

-125

Est.
2008
-573
-2.851
-363
2.329
1,564
443
-131

571
314
227

257

in million USD

Projections July 2009

2009
-1.079
-1.768
-699
1.597
907
21
-230

1.076
668
466
342
408

-3
-345

2010
-890
-1.782
-501
1.627
1.046

-234

900
525
384
158
375

10
-148

Source: IMF and Commission calculations
(*)   Including receipts of bond issuance, change in arrears and advance repayments.

These projections remain  extremely uncertain 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 

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course of 2009 (imports are currently some 30% below their 2008 level), the stock of 
international  currency  reserves  can  be  expected  to  go  down  very  quickly.  At  the 
same time, while the level of gross reserves is relatively comfortable (they approach 
three  months  of  imports),  the  foreign  liabilities  of  the  Georgian  banking  sector  are 
larger.  

Large  amounts  of  assistance  pledged  at  the  October  2008  Donor  Conference, 
including  the  EU  macro-financial  assistance,  appear  to  be  sufficient  to  cover 
Georgia's  currently  estimated  external  financing  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  residual  financing  gap.  This  was  indeed  the 
objective  of  the  Donor  Conference.  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  global  economic  and  financial  crisis  has 
diminished the prospects for a rapid economic recovery in Georgia. Unemployment 
and  poverty  levels  are  expected  to  increase  in  2009  and  2010.  The  World  Bank's 
Joint  Needs  Assessment  projected  an  increase  in  poverty  and  unemployment  rates 
over  these  two  years.  Furthermore,  in  the  aftermath  of  the  military  conflict  with 
Russia,  Georgian  government  is  under  pressure  to  meet  the  needs  arising  from  the 
increased  number  of  internally  displaced  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 levels of public social expenditure and could 
ensure that the existing social safety net remains operational.  

Finally,  also  the  issue  of  debt  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 concessionality of the public 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  intended  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  structure  may  pose  some  challenges  for 
repayment/rollover  at  particular  points  of  time.  Despite  a  relative  low  debt 
vulnerability of the country, public debt repayment will become acute in 2009. The 
total Georgian public outstanding debt to the European Community amounts to EUR 
57.5 million as of end-December 2008. Georgia paid back a part of its previous MFA 
loan  amounting  to  EUR  22  million  on  July  24th  2009  (the  interest  of  EUR  654 
thousand is still outstanding and overdue). 

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2. 

OBJECTIVES AND RELATED INDICATORS OF THE MACRO-FINANCIAL ASSISTANCE 

2.1. 

Objectives 

The general objectives of the proposed macro-financial assistance operation are to:  

•  Contribute  to  the financing of Georgia's external financing needs  (reserve  build-
up)  in  the  context  of  a  significant  deterioration  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  constraints  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  the  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 assistance and evaluated together with 
the general objectives. Impact indicators related 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  conditionality  will  be  specified  in  the 
aforementioned Memorandum of Understanding, to be agreed with the Georgian 
authorities. 

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3. 

ALTERNATIVE DELIVERY MECHANISMS AND RISK ASSESSMENT 

3.1. 

Delivery mechanisms 

Macro-financial  assistance  is  an  untied  and  undedicated  macro-economic  support 
instrument,  which  helps  the  beneficiary  country  meet  its  external  financing  needs, 
including  through  a  reinforcement  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 provide the total of this assistance in the 
form of a grant in view of Georgia's persisting external vulnerability and taking into 
account significant  amounts  of  loans  that were 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 central 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 independence, quality of management systems 
and  administrative  procedures,  control  and  oversight  functions  in  the  financial 
circuits, security of IT systems, and adequate internal and external audit capabilities. 
Further risks to Georgia’s post-conflict economic 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  prominent  figures  from  the  government  coalition 
that came in power after the peaceful Rose 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 President Saakashvili’s resignation. Continuation 
and  consolidation  of  the  democratic  reforms  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  and  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  investment  related  areas,  leading  possibly  to  a 
deep and comprehensive free trade agreement with the EU when the conditions are 
met.  

4. 

ADDED VALUE OF COMMUNITY INVOLVEMENT 

The  Community  financial  support  to  Georgia's  economic  recovery  reflects  the 
country's  strategic  importance  to  the  EU  in  the  context  of  the  European 

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Neighbourhood  Policy  and  the  newly  established  Eastern  Partnership.  International 
donors  pledged  a  total  of  EUR  3.4  billion  in  Post-Conflict  Support  to  Georgia  at  a 
joint European Commission/World Bank Conference held in Brussels 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  EUR  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  establishing  synergies  with  the  IMF-supported 
economic programme to which the instrument is directly linked.  

5. 

GENVAL CRITERIA ON MACRO-FINANCIAL ASSISTANCE 

The  Council  reconfirmed  a set of principles on the use  of  the Community's  macro-
financial assistance instrument (so called Genval criteria) on 8 October 2002. These 
criteria underline the exceptional character of the assistance, its complementarity to 
financing 
(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  discipline  is  established  through  the  annual 
budget appropriations. 

International  Financial 

Institutions 

from 

the 

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 the recovery, the European Commission announced in the 
October  2008  Donor  Conference  that  it  will  review  the  situation  in  twelve  months 
based on the evolution of the Georgian economy so as to determine later the possible 
use  of  the  EC  assistance  tentatively  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  which  has  affected  emerging  economies  since 
September - October 2008 brought an additional 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 infrastructure investment in the short-term so 
as to maintain as much as possible economic growth until private capital inflows are 
resumed.  Against  this  background,  the  macro-financial  assistance  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 human rights. With these countries, the EU 
has important political, economic and commercial ties. Georgia fulfils this criterion. 
The extraordinary European Council held in Brussels on 1 September 2008 decided 
inter  alia  to  step  up  relations  with  Georgia.  During  the  Prague  Summit  on  7  May 

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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 governments 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  only  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  bilateral  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 Commission's MFA programme 
proposal that would cover 13% of the residual financing gap. The later evaluations of 
Georgia's financing needs confirm the original IMF assessment. 

5.4. 

Conditionality 

As  usual  with  the  macro-financial  assistance  instrument,  the  disbursements  will  be 
conditional  on  successful  programme  reviews  under  the  stand-by  Arrangement  and 
Georgia’s subsequent decisions to draw funds. In addition, the Commission and the 
Georgian  authorities  will  agree  on  some  specific  structural  reform  measures  in  a 
Memorandum of Understanding. Given the relatively short time span of the planned 
MFA operation, it is the Commission's intention 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  significant  progress  has  been  achieved  in 
several areas of the PFM reform in recent years, there remains some concern on the 
sustainability and capacity  given the frequent changes in the staff and management 
while the government is politically committed to a small government apparatus. 

The  Commission  services  have  worked  closely  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 Programme 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  remaining  challenges,  the  World  Bank  and  the 
European  Commission  financed  a 
joint  Public  Expenditure  and  Financial 
Accountability  (PEFA)  assessment  in  Georgia  in  2007-2008.  After  an  interruption 
due  to  the  August  conflict,  work  on  the  PEFA  was  completed  in  the  beginning  of 
2009.  The  final  report  was  presented  to  Georgia's  donor  community  in  February 
2009. In parallel and based on the PEFA findings, 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 reform efforts one step further, the Commission 
has  a  technical  assistance  project  in  the  Ministry  of  Finance  which  has  prepared  a 

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PIFC1Gap Analysis. It compares internal audit and internal control in the government 
of  Georgia  with  EU  best  practices.  Based  on  the  Gap  Analysis,  the  Ministry  of 
Finance has prepared a first draft for a policy paper and an action plan in the area of 
PIFC. Although there are several forms of controls 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  decentralisation  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 deciding 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 Georgian government in a joint statement with 
the Commissioner Ferrero-Waldner on 20 January 2009. This statement lays out the 
political framework under which the EC post-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  possible  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  million  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  contract  services  to  update  the  Operational 
Assessment of 2005 on the reliability of financial circuits and administrative controls 
at the Ministry of Finance and the National Bank of Georgia. Close contacts are also 
maintained  with  the  IMF;  the  Fund  intends  to  conduct  an  update  of  the  2004 
safeguards  assessment  of  the  National  Bank  of  Georgia.  The  NBG  publishes  IFRS 
financial statements which have been externally audited in accordance international 
standards. The recent joint PEFA by the World Bank and the European Commission 
gives detailed information on Georgia’s budget preparation and execution as well as 
on  control  and  oversight  functions,  and  will  therefore  serve  as  the  basis  for  any 
specific controls to be launched in the context of the macro-financial assistance. 

1 

2 

The  EU’s  Public  Internal  Financial  Control  (PIFC)  framework.  The  PIFC  has  now  been  incorporated 
also  in  the  ENP  Action  Plans  with  the  partner  countries  following  its  application  in  the  candidate 
countries 
Commitment appropriations in a total amount of EUR 99 million (2009 PDB). 

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6. 

LESSONS FROM THE PAST 

Previous macro-financial assistance operations for Georgia have not yet been subject 
to  external  ex-post  evaluations.  However,  the  external  evaluations  of  MFA 
programmes  in  favour  of  a  number  of  partner  countries  (Romania,  Bosnia  and 
Herzegovina,  Albania,  former  Yugoslav  Republic  of  Macedonia,  Serbia,  Armenia 
and  Tajikistan)  focussed  on  the  following  five  dimensions:  relevance  of  the  MFA 
operation in relation to identified needs, effectiveness of the operations for the short-
term  macroeconomic  stabilisation,  unexpected  impacts  of  the  MFA  assistance, 
sustainability  of  MFA  financing  in  terms  of  country's  external  position  in  the 
medium to longer term, and finally, efficiency of MFA operations in terms of design 
and  implementation.  A  study  drawing  lessons  from  the  individual  evaluations  is 
currently being finalised and will be available on time for the start of the preparation 
of  the  implementation  phase  of  macro-financial  assistance  to  Georgia.  Also,  the 
Commission  has  recently  launched  an  evaluation  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 programme. The findings of both studies will 
be used by the Commission, in particular for the design of the conditionality of the 
proposed programme.  

7. 

PLANNING OF FUTURE MONITORING AND EVALUATION 

This assistance has a relatively short timeframe for implementation given the context 
of macro-economic stabilisation in the post-war economic situation compounded by 
the impact of the economic crisis. Monitoring 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  organisation  of  review  missions  to  Georgia  by  Commission 
staff.  Although  this  assistance  is  centrally  managed,  where  appropriate,  the  EC 
Delegation  in  Tbilisi  will  also  be  called  to  provide  additional  reporting.  The 
monitoring of the action by the Commission services will take place on the basis of 
macro-economic  and  structural  policy  indicators  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  Operational  Assessment  so  as  to  have  the  relevant 
information on any changes in the control environment. 

An  annual  report  to  the  European  Parliament  and  to  the  Council  on  the 
implementation of macro-financial assistance is foreseen in the proposed text of the 
Council Decision. 

7.2. 

Evaluation 

Two  to  three  ex-post  evaluations  of  macro-financial  assistance  operations  are 
planned  per  year  in  the  Multi-annual  Evaluation  Programme  of  the  Economic  and 
Financial Affairs Directorate-General. An ex-post evaluation of the proposed macro-
financial assistance will be launched in the future, upon completion of the operation. 

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A provision foreseeing the ex-post evaluation will be included 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  satisfactory  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 with 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 donors, 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. 

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