Proposal for a DECISION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL providing macro-financial assistance to the Kyrgyz Republic
Date: 2011-12-20
Institutions: European Commission
Subjects: EU aid, Kyrgyzstan, balance of payments, economic stabilisation, financial aid, macroeconomics, reflation, social problem

EUROPEAN COMMISSION 

Brussels, 20.12.2011 
COM(2011) 925 final 

2011/0458 (COD) 

Proposal for a 

DECISION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL 

providing macro-financial assistance to the Kyrgyz Republic 

{SEC(2011) 1619 final} 

 
 
  
 
EXPLANATORY MEMORANDUM 

(1) 

Context of the proposal 

110 

•  Grounds for and objectives of the proposal  

In 2009, the Kyrgyz Republic was hit by the global crisis. Shortly after, its economic 
problems were aggravated by a popular revolt, which in April 2010 deposed the regime 
of  President  Bakiyev  under  allegations  of  corruption  and  lack  of  democracy.  In  a 
vacuum  of  power,  inter-ethnic  violence  erupted  in  June  2010  in  the  South  of  the 
country,  leaving  close  to  470  people  dead  and  about  300,000  displaced.  In  spite  of 
these  tragic  events,  the  new,  interim  government  secured  an  approval  vote  for 
democratic  reforms  in  a  constitutional  referendum  held  on  27  June  2010.  The  new 
Constitution, 
the  parliament.  Free 
parliamentary elections were held in October 2010 establishing the first parliamentary 
democracy in the region. Elections resulted in a broad coalition government. While the 
political situation remains fragile, presidential elections took place on 30 October 2011 
and a newly elected president took office on 1 December 2011, while the government 
is leading a steady process of democratisation and reform that stands in contrast to the 
political situation in the neighbouring countries of Central Asia. 

in  particular,  strengthens 

the  powers  of 

In  support  to  the  pro-democratic  Kyrgyz  authorities'  efforts  to  alleviate  the 
consequences of the tragic events, the international community pledged support for the 
country  at  a  donors'  conference  in  July  2010.  The  EU  was  among  the  major  donors. 
The  IMF  extended  help  to  the  Kyrgyz  Republic  in  2010  with  a  three-month  Rapid 
Credit Facility. In June 2011, the IMF agreed with the Kyrgyz Republic authorities on 
a  follow-up  arrangement  (an  Extended  Credit  Facility)  in  the  amount  of  USD  106 
million in support of a comprehensive economic adjustment and reform programme for 
the period mid-2011 to mid-2014. 

In  2010,  the  President  and  the  Minister  of  Finance  of  the  Kyrgyz  Republic  formally 
requested  the  EU  macro-financial  assistance  (MFA)  to  complement  the  support  from 
the IMF.  

In  this  context,  the  Commission  has  assessed  the  macroeconomic  situation  and 
financing needs of the Kyrgyz Republic. The main conclusions of the assessment are 
that  last  year’s  tragic  political  events  and  the  related  social  and  reconstruction 
expenditure have left important external and fiscal financing needs for the period 2011-
12. While these needs are being partly covered by the international community, there 
are still substantial residual needs. 

In  order  to  supplement  the  resources  made  available  by  the  IMF,  the  Commission 
proposes  providing  a  MFA  in  the  amount  of  up  to  EUR  30  million  to  the  Kyrgyz 
Republic to be disbursed half in loans and half in grants. The current account deficit is 
projected to remain at around 8% of GDP in 2011 and 2012 before gradually declining 
to about 5% of GDP by 2014. Based on the projections for the current account, private 
capital  inflows  and  official  financing  (excluding  budgetary  support  operations),  the 
IMF programme estimates a balance of payments financing gap of USD 271 million in 
2011 and of USD 149 million in 2012. After deducting net financing from the IMF and 
disbursements  of  budgetary  support  operations  from  the  World  Bank,  this  leaves  a 
residual  external  financing  gap  of  some  USD  330  million  for  the  two  years,  to  be 

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covered  by  other  donors.  The  proposed  MFA  operation  (EUR  30  million)  would 
correspond to about 12.4% of the residual external financing gap for 2011-12. 

Providing MFA to the Kyrgyz Republic, in parallel to the implementation of the IMF 
ECF arrangement and to the provision of financial support by other multilateral (World 
Bank) and regional (Asian Development Bank and EurAsEC Anti-Crisis Fund) donors, 
would be justified on the following grounds: 

–  Helping to cover the country's estimated balance of payments financing gap; 

–  By supporting the adoption of an appropriate macroeconomic and structural reform 
framework,  MFA  can  both  underpin  economic  and  political  stability  and  increase 
the effectiveness of interventions through other EU support instruments; 

–  Contributing  to  maintaining  economic  stability  in  the  country  during  this  critical 
period  helps  the  pro-democracy  authorities  to  prevent  the  reoccurrence  of  inter-
ethnic violence which would have negative political and economic spillover effects 
on the other countries of the region; 

–  EU political and economic support to the Kyrgyz Republic’s incipient parliamentary 
democracy  would  provide  a  political  signal  of  strong  EU  support  to  democratic 
reforms  in  Central  Asia,  consistent  with  the  EU  policy  towards  the  region  spelled 
out  in  the  Strategy  for  Central  Asia  for  2007-2013  and  with  statements  by  EU 
leaders; 

–  Such support would also be consistent with the emphasis on strengthening the link 
between  EU  external  assistance  and  progress  with  democracy  and  human  rights, 
made  more  explicit  recently  in  the  context  of  the  last  review  of  the  ENP  and  in 
March 2011 Joint Communication on the Southern neighbourhood; 

–  In the same vein, it would signal to the other countries in the region that the EU is 
ready  to  support  countries  like  the  Kyrgyz  Republic,  embarking  on  a  clear  path 
towards democratisation and political reforms, in moments of economic difficulties. 

In  this  context,  and  given  the  EU’s  strong  political  support  for  Kyrgyz  incipient 
parliamentary  democracy,  the  Commission  considers  that  the  political  and  economic 
pre-conditions  for  a  MFA  operation  of  a  moderate  amount  are  satisfied.  While  the 
Kyrgyz Republic is out of the normal geographical scope of MFA, the Genval criteria 
foresee,  in  exceptional  circumstances,  the  possibility  of  approving  operations  outside 
that  area.  The  EU  MFA  would  aim  at  contributing  to  covering  the  country's  external 
financing needs, as identified in cooperation with the IMF in the context of the IMF's 
ECF.  

The proposed MFA would support the economic reform agenda of the government as 
agreed  with  the  international  donor  community.  It  would  reduce  the  short-term 
financial  vulnerability  still  faced  by  the  economy,  while  supporting  reform  measures 
aimed  at  achieving  a  more  sustainable  balance  of  payments  and  budgetary  situation 
over the short-term. The assistance would also promote policy measures to strengthen 
public finance management (building on measures supported by the ongoing the EU's 
sectoral  budgetary  support  operation),  tax  reforms  to  underpin  fiscal  sustainability  as 
well as measures to strengthen the banking system. 

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The proposed new MFA would be exceptional and limited in time and is intended to 
run  in  parallel  to  the  IMF  ECF.  It  would complement  support  from  international  and 
bilateral donors. 

120 

•  General context 

The marked deceleration in growth experienced by the Kyrgyz economy in 2009 (GDP 
slowed  down  from  an  average  rate  of  8.5%  in  2007-08  to  2.3%  in  2009)  was  a 
consequence  of  several  external  shocks,  including  a  fall  in  remittances  from  migrant 
workers, lower demand for exports and shrinking direct and other foreign investments. 
Before the dramatic events of 2010, economic growth was expected to rebound in 2010 
to  4.5-5.5%.  However,  the  2010  April  popular  revolt  and,  more  importantly,  the 
escalation of the ethnic conflict in June led to a serious deterioration in the economic 
outlook. Border closures, notably with Kazakhstan, hampered trade, while the security 
situation  markedly  impacted  tourism  and  partly  disrupted  agricultural  production. 
Economic activity contracted by 10% in the second quarter of 2010. For the year as a 
whole, real GDP declined by 1.4%. GDP expanded again by 5.5% in the first half of 
2011 as the agricultural and mining sectors and remittances recovered.  

The  fiscal  deficit  increased  from  3.5%  of  GDP  in  2009  to  6.5%  of  GDP  in  2010, 
reflecting  the  budgetary  cost  of  the  crisis-related  measures  and  the  negative  effect  of 
weaker  economic  activity.  However,  due  to  a  lack  of  capacities  to  implement 
reconstruction projects the actual deficit was significantly lower than a deficit of 12% 
of GDP forecasted by the IMF. Part of the unrealised spending in 2010 was transferred 
to 2011, contributing to the expansion of the planned budget deficit to 7.6% of GDP. 
Energy projects financed  by the soft loans from neighbouring countries could add an 
additional 0.7 percentage point of GDP to the 2011 budget deficit. The increase in the 
deficit  also  reflects  the  government’s  decisions  to  maintain  the  pension  increases 
granted by the previous government and to increase wages for teachers and health care 
employees to bring them from below the subsistence level. The IMF considers that the 
temporary deterioration of the fiscal position in 2011 contributes  to underpinning  the 
economic recovery and is understandable from a political viewpoint. At the same time, 
the  IMF  programme  assumes  a  considerable  effort  of  fiscal  consolidation  for  the 
remainder  of  the  programme  period.  In  September  2011,  the  IMF  staff  preliminary 
agreed with the government to tighten further the medium-term fiscal targets under the 
ECF  programme,  with  the  fiscal  deficit  (excluding  energy  infrastructure  projects) 
declining gradually from about 8% of GDP in 2011 to 3.8% of GDP by 2014.  

A jump in the global food and energy prices led to a spike of a year-on-year inflation 
from  0%  at  the  end  of  2009  to  22.7%  in  June  2011.  While  food  and  energy  prices 
explain most of the acceleration in inflation, there is also evidence that price pressures 
have  begun  to  spill  over  to  other  products.  The  central  bank  has  tightened  monetary 
policy substantially since the mid-2010. As part of its tightening measures, the central 
bank has stepped up its sales of short-term notes, raised reserve requirements from 8% 
to  9%,  and  increased  the  discount  rate  from  2.7%  in  mid-2010  to  over  13%  in 
September  2011.  These  measures  are  gradually  starting  to  work  as  according  to  the 
IMF forecast headline inflation is expected to decline from 17.5% in August 2011 to 
13% by the end of 2011. 

The  external  position  of  the  very  open  Kyrgyz  economy  remains  vulnerable  due  to 
volitility  in  terms  of  trade,  which  leaves  the  financing  of  the  large  current  account 

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deficit uncertain. Indeed, the balance of payments difficulties emerged already in 2008, 
because  of  a  hike  in  imported  commodity  prices  and  a  drop  in  electricity  exports. 
Prices of imported commodities went up again in 2010. Moreover, in 2010 agricultural 
exports  and  services  such  as  tourism  and  transit  transportation  were  hit  by  the 
shutdown of the borders by the neighbouring countries, due to security concerns. The 
current account deficit is projected to reach around to 8% of GDP in 2011 and 2012. 
This  is  based  on  the  assumption  of  external  donor  financing,  covering  the  (above 
mentioned) USD 330 million residual external financing gap (after financing from the 
IMF and budgetary support operations by the World Bank).  

The nominal value of foreign exchange reserves reached USD 1.9 billion by September 
2011, but the import coverage ratio by the foreign exchange reserves declined from 4.9 
months in 2009 to an estimated 4 months in mid-2011, as the nominal value of imports 
grew faster than foreign exchange reserves. While the import coverage ratio is close to 
an  appropriate  level  based  on  conventional  assumptions,  the  IMF  estimates  that 
reserves  would  fall  below  advisable  levels  in  the  absence  of  official  balance  of 
payment  support.  Moreover,  the  external  position  remains  highly  vulnerable  to 
exogenous shocks linked to fluctuations in international commodity prices. 

The  central  bank  operates  a  managed  floating  exchange  rate  regime,  allowing  the 
exchange  rate  to  adjust  in  case  of  substantial  pressures  or  shocks  while  aiming  at 
maintaining a competitive exchange rate. In the context of the global financial crisis, 
the exchange rate came under significant downward pressure between August 2008 and 
August 2009. This was followed by a period of relative exchange rate stability between 
September  2009  and  June  2010.  Since  then,  the  national  currency  has  tended  to 
depreciate at a moderate pace. The current level of the exchange rate is estimated by 
the IMF to be broadly in line with fundamentals. 

In  response  to  last  year's  political  events  and  their  economic  implications,  the 
international  community  organised  a  High  Level  Donors  Meeting  for  the  Kyrgyz 
Republic on 27 July 2010 in Bishkek. At this conference, donors committed to provide 
USD  1.1  billion  in  emergency  support  by  the  end  of  2011.  The  EU  was  among  the 
major  donors,  pledging  EUR  117.9  million  for  support  in  a  number  of  critical  areas. 
The  World  Bank  pledged  USD  200  million,  including  two  emergency  operations:  a 
USD  70  million  Emergency  Recovery  Project  and  an  Economic  Recovery  Support 
Operation  (ERSO)  in  the  amount  of  USD  30  million.  The  Asian  Development  Bank 
(ADB) pledged USD 100 million in the form of a budgetary support operation known 
as Emergency Assistance for Recovery and Reconstruction. The Kyrgyz Republic has 
also requested support of USD 106.7 million from the Eurasian Economic Community 
(EurAsEC)  Anti-Crisis  Fund  (in  the  form  of  a  soft  loan).  However,  the  loan 
disbursement is being repeatedly delayed.  

The  IMF’s  Rapid  Credit  Facility  (RCF)  of  SDR  22.2  million  was  implemented  in 
September-December 2010. The authorities met all the targets of the RCF programme, 
building a good track-record for the follow-up programme. However, not being a full- 
fledged  upper  credit  tranche  arrangement  and  being  of  a  very  short-term  nature,  the 
RCF was not sufficient for the Commission to be able to consider at that stage putting 
forward an MFA proposal. The IMF in June 2011 agreed with the Kyrgyz authorities 
on  an  Extended  Credit  Facility  (ECF)  of  SDR  66.6  million  (USD  106  million)  in 
support  of  a  three-year  programme  of  macroeconomic  adjustment  and  structural 
reforms.  The  ECF  established  a  framework  for  medium-term  economic  policies  and 

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n 

140 

reforms. The IMF reached a staff level agreement with the Kyrgyz authorities on the 
first  review  of  the  ECF  in  September  2011,  envisaging  even  more  ambitious  fiscal 
consolidation  measures  in  light  of  better  than  expected  economic  and  fiscal 
performance.  

The Kyrgyz Republic, with support from several donors (the EC, the ADB, the World 
Bank  and  the  UN)  prepared  a  Country  Development  Strategy  (CDS)  for  2012-14, 
which has already been approved by the government. The CDS cover a wide range of 
policy areas ranging from judicial macroeconomic policy to public order and judicial 
reform and trade and environmental policy. 

•  Existing provisions in the area of the proposal 

None 

•  Consistency with the other policies and objectives of the Union 

EU cooperation with the Kyrgyz Republic is based on a Partnership and Cooperation 
Agreement (PCA) that entered into force in 1999. The EU grants Generalised System 
of Preferences (GSP) treatment to the Kyrgyz Republic. 

The EU Foreign Affairs Council, in its conclusions on the Kyrgyz Republic of 26 July 
2010,  welcomed the  efforts  of the  new Kyrgyz  government  to  establish  a  democratic 
institutional framework and invited the Commission to 'continue providing assistance, 
including new assistance programmes, to the Kyrgyz authorities in the implementation 
of  their  reform  programme  and  to  contribute  to  sustainable  economic  and  social 
development  of  the  country'.  In  October  2010,  High  Representative  and  Commission 
Vice-President Ashton welcomed the peaceful conduct of the Parliamentary elections 
and  reiterated  that  the  EU  stands  ready  to  assist  the  Kyrgyz  Republic,  including  in 
promoting economic recovery.  

The European Commission pledged up to EUR 117.9 million of assistance to Kyrgyz 
Republic  at  the  July  2010  High  Level  Donors  Meeting.  The  sources  of  the  funding 
include crisis instruments, such as the Instrument for Stability, Humanitarian Aid, and 
the  Development  Cooperation  Instrument  (DCI)  and  allocations  under  a  number  of 
thematic  budget  lines.  The  assistance  focuses  mainly  on  rural  development  and 
agricultural  sector,  the  education  sector,  social  security  and  legal  reforms.  The  EU 
intends to provide sectoral budget support to the Kyrgyz Republic under the DCI for a 
total  of  EUR  33  million  over  the  period  2011  –  2013  to  support  reforms  in  social 
protection,  education  and  public  financial  management.  Disbursements  under  these 
programmes and projects are taking place over the medium-term and are conditional on 
the  implementation  of  agreed  actions  by  the  Kyrgyz  authorities.  The  MFA,  by 
supporting  the  adoption  of  an  appropriate  macroeconomic  and  structural  reform 
framework, would support the effectiveness of the above interventions. 

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(2) 

Consultation of interested parties and impact assessment 

•  Consultation of interested parties 

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MFA  is  provided  as  an  integral  part  of  the  international  support  to  the  economic 
stabilisation  and  recovery  programme  of  the  Kyrgyz  Republic.  The  Commission 
services  cooperated  closely  with  the  IMF  and  WB  in  the  preparations  for  the  High 
Level Donors Meeting and consultations on the implementation of the pledged package 
have  been  held  with  the  multilateral  and  bilateral  donors.  In  the  preparation  of  this 
proposal for MFA, the Commission services have consulted the International Monetary 
Fund.  The  Commission  consulted  the  EU  Member  States  in  the  Economic  and 
Financial  Committee  and  in  the  Financial  Counsellors  Working  Party  before 
submitting  its  proposal  for  MFA.  The  Commission  has  also  been  in  regular  contact 
with the Kyrgyz authorities. 

•  Collection and use of expertise 

An  Operational  Assessment  verifying  the  quality  and  reliability  of  the  Kyrgyz 
Republic's public financial circuits and administrative procedures will be carried out by 
the Commission with the assistance of external experts. 

•  Impact assessment 

The MFA and the economic adjustment and reform programme attached to it will help 
alleviate  the  Kyrgyz  Republic's  short-term  financing  needs  while  supporting  policy 
measures  aimed  at  strengthening  medium-term  balance  of  payments  and  fiscal 
sustainability  and  raising  sustainable  growth  as  agreed  with  the  IMF.  It  will  notably 
help  improve  the  efficiency  and  transparency  of  public  finance  management.  An  ex-
ante evaluation was carried out and accompanies this proposal. It analysis the macro-
economic  situation,  the  reform  challenges,  the  risks  and  the  EU  added  value  of  this 
operation. 

(3) 

Legal elements of the proposal 

305 

•  Summary of the proposed action 

The  European  Union  shall  make  MFA  available  to  the  Kyrgyz  Republic  for  a  total 
maximum amount of EUR 30 million, half of which will be provided as loans and half 
as  grants.  The  assistance  will  contribute  to  cover  the  Kyrgyz  Republic's  residual 
external  financing  needs  in  2012,  as  identified  by  the  Commission  based  on  the 
estimates of the IMF.  

The  assistance  is  planned  to  be  disbursed  in  2012  in  two  equal  instalments,  each  of 
them consisting of a grant and a loan element. The assistance will be managed by the 
Commission.  Specific  provisions  on  the  prevention  of  fraud  and  other  irregularities, 
consistent with the Financial Regulation, are applicable. The disbursement of the first 
instalment  is  expected  to  take  place  in  the  first  semester  of  2012.  The  second 

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instalment,  conditional  on  a  number  of  policy  measures,  could  be  disbursed  in  the 
second semester of 2012. 

As  usual  with  the  MFA  instrument,  the  disbursements  would  be  conditional  on 
successful  programme  reviews  under  the  IMF's  financial  arrangement  (the  ECF).  In 
addition, the Commission and the Kyrgyz authorities would agree on specific structural 
reform  measures  in  a  Memorandum  of  Understanding.  The  Commission  will  target 
structural reforms aimed at improving the overall macroeconomic management and the 
conditions  for  sustainable  growth  (e.g.  targeting  the  transparency  and  efficiency  of 
public finance management, fiscal reforms and the financial stability). 

The decision to disburse half of the proposed assistance in grants and the other half in 
loans  is  justified  by  Kyrgyz  level  of  development  (as  measured  by  its  per-capita 
income) and debt indicators. It is also consistent with the treatment given to the Kyrgyz 
Republic by the World Bank, the Asian Development Bank and the IMF, as an IDA-
only country with access to these institutions' financing facilities in highly concessional 
terms.  

310 

•  Legal basis 

The legal basis for this proposal is Article 209 TFEU as the Kyrgyz Republic should be 
considered as being a developing country in the sense of Article 208 TFEU. According 
to  the International  Monetary  Fund,  the  Kyrgyz  Republic  falls  under  the  category  of 
"emerging  and  developing  economies";  according  to  the  World  Bank,  the  Kyrgyz 
Republic  is  part  of  the  group  of"  low-income  economies"  and  "IDA  countries"; 
according  to  the  UN-OHRLLS1,  the  Kyrgyz  Republic  falls  under  the  category  of 

1 

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6 

7 

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UN  Office  of  the  High  Representative  for  the  Least  Developed  Countries,  Landlocked  Developing 
Countries and Small Island Developing States. 
Article 5 of Council Regulation (EC, Euratom) No 480/2009 of 25 May 2009 establishing a Guarantee 
Fund for external action (codified version). The provisioning is appropriated from "the provisioning of 
the Guarantee Fund" (budget line 01 04 01 14). 
OJ C […], […], p. […]. 
Position of the European Parliament of … 2012 and Decision of the Council of … 2012. 
OJ L 55, 28.2.2011, p. 13. 
UN  Office  of  the  High  Representative  for  the  Least  Developed  Countries,  Landlocked  Developing 
Countries and Small Island Developing States. 
OJ L 248, 16.9.2002, p. 1. Regulation as amended by Regulation (EC, Euratom) No 1995/2006 (OJ L 
390, 30.12.2006, p. 1). 
ABM: Activity-Based Management – ABB: Activity-Based Budgeting. 
As referred to in Article 49(6)(a) or (b) of the Financial Regulation. 
Details  of  management  modes  and  references  to  the  Financial  Regulation  may  be  found  on  the 
BudgWeb site: http://www.cc.cec/budg/man/budgmanag/budgmanag_en.html 
As referred to in Article 185 of the Financial Regulation. 
Diff. = Differentiated appropriations / Non-diff. = Non-Differentiated Appropriations. 
EFTA: European Free Trade Association.  
Candidate countries and, where applicable, potential candidate countries from the Western Balkans. 
Year N is the year in which implementation of the proposal/initiative starts (2012). 
Technical  and/or  administrative  assistance  and  expenditure  in  support  of  the  implementation  of  EU 
programmes and/or actions (former "BA" lines), indirect research, direct research. 
Year N is the year in which implementation of the proposal/initiative starts. 
Outputs are products and services to be supplied (e.g.: number of student exchanges financed, number 
of km of roads built, etc.). 
As described in Section 1.4.2. "Specific objective(s)…" 

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"landlocked-developing  country";  according  to  the  OECD/Development  Assistance 
Committee, the Kyrgyz Republic is in the list of "other low income countries". 

329 

•  Subsidiarity principle 

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The proposal falls  under  the  mixed competence  of the EU. The subsidiarity principle 
applies to the extent that the objectives of restoring short-term macroeconomic stability 
in  the  Kyrgyz  Republic  cannot  be  sufficiently  achieved  by  the  Member  States  alone 
and can therefore be better achieved by the European Union. The main reasons are the 
budgetary  constraints  faced  at  the  national  level  and  the  need  for  strong  donor 
coordination in order to maximise the scale and effectivenes of the assistance.  

•  Proportionality principle 

The  proposal  complies  with  the  proportionality  principle:  it  confines  itself  to  the 
minimum  required  in  order  to  achieve  the  objectives  of  short-term  macroeconomic 
stability and does not go beyond what is necessary for that purpose.  

As identified by the Commission based on the estimates of the IMF in the context of 
the  ECF  Arrangement,  the  amount  of  the  assistance  corresponds  to  12.4%  of  the 
residual financing gap for the period 2011-2012. This is consistent with standard rules 
on  burden-sharing  for  MFA  operations.  Given  the  assistance  pledged  to  the  Kyrgyz 
Republic  by  other  bilateral  and  multilateral  donors  and  creditors,  it  is  deemed  an 
appropriate level of burden-sharing for the EU. 

•  Choice of instruments 

Other  instruments  would  not  be  adequate,  because,  in  the  absence  of  a  framework 
regulation for the Macro-Financial Assistance instrument, ad hoc European Parliament 
and Council decisions under Article 209 or 212 TFEU are the right legal instruments 
for this assistance. 

Project  finance  or  technical  assistance  would  not  be  suitable  or  sufficient  to  address 
these  macroeconomic  objectives.  The  key  value  added  of  the  MFA  in  comparison  to 
other EU instruments would be to alleviate the external financial constraint and to help 
create  a  stable  macroeconomic  framework,  including  by  promoting  a  sustainable 
balance  of  payments  and  budgetary  situation,  and  an  appropriate  framework  for 
structural  reforms.  By  helping  to  put  in  place  an  appropriate  overall  framework  for 
macroeconomic  and  structural  policies,  MFA  can  increase  the  effectiveness  of  the 
actions  financed  in  the  Kyrgyz  Republic  under  other,  more  narrowly  focused  EU 
financial instruments.  

(4) 

Budgetary implications 

401 

The  grant  element  of  the  assistance  (EUR  15  million)  would  be  financed  from 
commitment  appropriations  of  the  2012  budget,  under  the  budget  line  01  03  02 
(Macroeconomic assistance), with payments taking place in 2012. 

In line with the Guarantee Fund Regulation2, the provisioning of the Guarantee Fund is 
expected to take place in 2014 and to amount to a maximum of EUR 1.35 million. This 
corresponds to 9% of the EUR 15 million loan expected to be disbursed in 2012. 

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(5) 

Additional information 

•  Review/revision/sunset clause 

533 

The proposal includes a sunset clause. The proposed MFA would be made available for 
two years, starting from the first day after the entry into force of the Memorandum of 
Understanding. 

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2011/0458 (COD) 

Proposal for a 

DECISION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL 

providing macro-financial assistance to the Kyrgyz Republic 

THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION, 

Having regard to the Treaty on the Functioning of the European Union, and in particular Article 209 
thereof, 

Having regard to the proposal from the European Commission3,  

After transmission of the draft legislative act to the national parliaments, 

Acting in accordance with the ordinary legislative procedure4, 

Whereas: 

(1) 

(2) 

(3) 

(4) 

Cooperation  with  the  EU  is  based  on  a  Partnership  and  Cooperation  Agreement  (PCA)  that 
entered into force in 1999. The EU grants Generalised System of Preferences (GSP) treatment 
to the Kyrgyz Republic. 

Kyrgyz  economy  has  been  affected  by  the  international  financial  crisis  in  2009  and  by  the 
ethnic  violence  of  June  2010,  which  disrupted  economic  activities,  creating  substantial  public 
expenditure  needs  for  reconstruction  and  social  assistance,  and  resulted  in  important  external 
and budgetary financial gaps.  

At  the  High  Level  Donors  Meeting  held  in  July  2010,  the  international  community  pledged 
USD 1.1 billion in emergency support to assist in the recovery of the Kyrgyz Republic. The EU 
announced that it would provide up to EUR 117.9 million as financial assistance at this High 
Level Donors Meeting. 

The  EU  Foreign  Affairs  Council,  in  its  conclusions  on  the  Kyrgyz  Republic  of  26  July  2010, 
welcomed  the  efforts  of  the  new  Kyrgyz  government  to  establish  a  democratic  institutional 
framework  and  invited  the  Commission  to  "continue  providing  assistance,  including  new 
assistance  programmes,  to  the  Kyrgyz  authorities  in  the  implementation  of  their  reform 
programme and to contribute to sustainable economic and social development of the country". 

(5) 

EU political and economic support to the Kyrgyz Republic’s incipient parliamentary democracy 
will  provide  a  political  signal  of  strong  EU  support  to  democratic  reforms  in  Central  Asia, 

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(6) 

(7) 

(8) 

(9) 

consistent with the EU policy towards the region spelled out in the Strategy for Central Asia for 
2007-2013 and with statements by EU leaders. 

The economic adjustment and reform process of the Kyrgyz Republic is supported by financial 
assistance  from  the  International  Monetary  Fund  (IMF).  In  June  2011,  the  Kyrgyz  authorities 
agreed with the three-year IMF Extended Credit Facility of SFR 66.6 million in support of the 
country.  

The  EU  intends  to  provide  sectoral  budget  support  to  the  Kyrgyz  Republic  under  the 
Development Cooperation Instrument for a total of EUR 33 million over the period 2011 – 2013 
to support reforms in social protection, education and public financial management. 

The  Kyrgyz  Republic  requested  in  2010  EU  macro-financial  assistance  in  view  of  the 
worsening economic situation and outlook.  

Given  that,  after  taking  into  account  macroeconomic  support  from  the  IMF  and  the  World 
Bank,  there  is  still  a  residual  financing  gap  in  the  balance  of  payments,  and  given  the 
vulnerability  of  the  external  position  to  exogenous  shocks  which  requires  maintaining  an 
appropriate level of the foreign exchange reserves, macro-financial assistance is considered an 
appropriate  response  to  the  Kyrgyz  Republic's  request  under  the  current  exceptional 
circumstances.  The  EU's  macro-financial  assistance  programme  to  the  Kyrgyz  Republic 
(hereinafter  "the  Union's  macro-financial  assistance")  would  support  the  country's  economic 
stabilisation  and  the  structural  reform  agenda,  supplementing  the  resources  being  made 
available under the IMF's financial arrangement. 

(10)  The  Union's  macro-financial  assistance  should  not  merely  supplement  programmes  and 
resources from the IMF and the World Bank, but should also ensure the added value of Union's 
involvement. 

(11)  The  Commission  should  ensure  that  the  Union's  macro-financial  assistance  is  legally  and 
substantially  in  line  with  the  measures  taken  within  the  different  areas  of  external  action  and 
other relevant Union policies. 

(12)  The specific objectives of the Union's macro-financial assistance should strengthen efficiency, 
transparency  and  accountability  of  the  public  finance  management  in  the  Kyrgyz  Republic. 
These objectives should be regularly monitored by the Commission. 

(13)  The conditions underlying the provision of the Union's macro-financial assistance should reflect 

the key principles and objectives of the Union’s policy towards the Kyrgyz Republic. 

(14) 

In  order  to  ensure  efficient  protection  of  the  EU’s  financial  interests  linked  to  this  macro-
financial  assistance,  it  is  necessary  that  the  Kyrgyz  Republic  adopt  appropriate  measures 
relating to the prevention of, and the fight against, fraud, corruption and any other irregularities 
linked  to  this  assistance.  It  is  also  necessary  that  the  Commission  provide  for  appropriate 
controls and that the Court of Auditors provide for appropriate audits. 

(15)  The release of the EU's financial assistance is without prejudice to the powers of the budgetary 

authority. 

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(16)  The  assistance  should  be  managed  by  the  Commission.  In  order  to  ensure  that  the  European 
Parliament and the Economic and Financial Committee are able to follow the implementation of 
this  Decision,  the  Commission  should  regularly  inform  them  of  developments  relating  to  the 
assistance and provide them with relevant documents. 

(17) 

In  order  to  ensure  uniform  conditions  for  the  implementation  of  this  Decision,  implementing 
powers  should  be  conferred  on  the  Commission.  Those  powers  should  be  exercised  in 
accordance with Regulation (EU) No 182/2011 of the European Parliament and of the Council 
of 16 February 2011 laying down the rules and general principles concerning mechanisms for 
control by Member States of the Commission's exercise of implementing powers5.  

(18)  Economic  policy  conditions,  to  be  laid  down  in  a  Memorandum  of  Understanding,  will  be 
attached  to  the  Union's  macro-financial  assistance.  In  order  to  ensure  uniform  conditions  of 
implementation  and  for  reasons  of  efficiency,  the  Commission  should  be  empowered  to 
negotiate such conditions with the Kyrgyz authorities under the supervision of the Committee of 
the Member States foreseen by Regulation (EU) No 182/2011. The fact that the assistance is of 
a limited maximum amount provides for the due justification required by the second sentence of 
Article  2(3)  of  Regulation  (EU)  No  182/2011  to  subject  the  adoption  of  the  Memorandum  of 
Understanding to the advisory procedure. 

(19)  According to the International Monetary Fund, the Kyrgyz Republic falls under the category of 
"emerging  and developing  economies"; according  to the World  Bank, the Kyrgyz Republic is 
part  of  the  group  of"  low-income  economies"  and  "IDA  countries";  according  to  the  UN-
OHRLLS6, the Kyrgyz Republic falls under the category of "landlocked-developing country"; 
according to the OECD/Development Assistance Committee, the Kyrgyz Republic is in the list 
of "other low income countries". Therefore, the Kyrgyz Republic should be considered as being 
a developing country in the sense of Article 208 TFEU, which justifies the choice of Article 209 
TFEU as a legal basis for this Decision. 

HAVE ADOPTED THIS DECISION: 

Article 1 

1. 

2. 

The  European  Union  shall  make  macro-financial  assistance  available  to  the  Kyrgyz  Republic 
for a maximum amount of EUR 30 million, with a view to supporting the country's economic 
stabilisation  and  covering  its  balance  of  payments  needs  as  identified  in  the  current  IMF 
programme. Of this amount, up to EUR 15 million shall be provided in the form of loans and 
up  to  EUR  15  million  in  the  form  of  grants.  The  release  of  the  proposed  macro-financial 
assistance  is  subject  to  the  approval  of  the  2012  Budget  by  the  budgetary  authority.  The 
Commission  is  empowered  to  borrow  the  necessary  resources  on  behalf  of  the  European 
Union in order to finance the loan component of the Union's macro-financial assistance. The 
loan shall have a maximum maturity of 15 years. 

The  release  of  the  Union's  financial  assistance  shall  be  managed  by  the  Commission  in  a 
manner  consistent  with  the  agreements  or  understandings  reached  between  the  IMF  and  the 
Kyrgyz Republic and with the key principles and objectives of economic reforms set out in the 
the  EU-Kyrgyz  Rzepublic  Partnership  and  Cooperation  Agreement  and  in  the  Strategy  for 
Central Asia for 2007-2013. The Commission shall regularly inform the European Parliament 

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and  the  Economic  and  Financial  Committee  of  developments  in  the  management  of  the 
assistance and provide them with relevant documents. 

The European Union financial assistance shall be made available for two years starting from 
the  first  day  after  the  entry  into  force  of  the  Memorandum  of  Understanding  referred  to  in 
Article 2(1). 

Article 2 

The Commission, acting in accordance with the advisory procedure referred to in Article 6(2), 
shall  be  empowered  to  agree  with  the  authorities  of  the  Kyrgyz  Republic  on  the  economic 
policy and financial conditions attached to the European Union macro-financial assistance, to 
be  laid  down  in  a  Memorandum  of  Understanding  which  shall  include  a  timeframe  for  their 
fulfilment (hereafter the 'Memorandum of Understanding'). The economic policy and financial 
conditions  set  out  in  the  Memorandum  of  Understanding  shall  be  consistent  with  the 
agreements  or  understandings  referred  to  in  Article  1(3).  These  conditions  will  aim,  in 
particular,  at  strengthening  the  efficiency,  transparency  and  accountability  of  the  assistance, 
including  public  finance  management  systems  in  the  Kyrgyz  Republic.  Progress  in  attaining 
these objectives shall be regularly monitored by the Commission. The detailed financial terms 
of  the  assistance  shall  be  laid  down  in  the  Grant  Agreement  and  the  Loan  Agreement  to  be 
agreed between the Commission and the authorities of the Kyrgyz Republic.  

During the implementation of the European Union financial assistance, the Commission shall 
monitor  the  soundness  of  the  Kyrgyz  Republic's  financial  arrangements,  the  administrative 
procedures  and  the  internal  and  external  control  mechanisms  which  are  relevant  to  such 
assistance and the adherence to the agreed timeframe. 

The  Commission  shall  verify  at  regular  intervals  that  the  economic  policies  of  the  Kyrgyz 
Republic are in accordance with the objectives of the Union's macro-financial assistance and 
that the  agreed  economic  policy conditions are  being satisfactorily fulfilled. In doing so, the 
Commission shall coordinate closely with the IMF and the World Bank, and, when required, 
with the Economic and Financial Committee.  

Article 3 

Subject  to  the  conditions  of  paragraph  2,  the  European  Union  financial  assistance  shall  be 
made available by the Commission to the Kyrgyz Republic in two instalments, each of them 
consisting of a loan and a grant element. The size of each instalment shall be laid down in the 
Memorandum of Understanding.  

The  Commission  shall  decide  on  the  release  of  the  instalments  subject  to  a  satisfactory 
implementation  of  the  economic  policy  conditions  agreed  in  the  Memorandum  of 
Understanding.  The  disbursement  of  the  second  instalment  shall  not  take  place  earlier  than 
three months after the release of the first instalment. 

The European Union funds shall be paid to the National Bank of the Kyrgyz Republic. Subject 
to provisions to be agreed in the Memorandum of Understanding, including a confirmation of 

3. 

1. 

2. 

3. 

1. 

2. 

3. 

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residual budgetary financing needs, the Union funds may be transferred to the Treasury of the 
Kyrgyz Republic as the final beneficiary. 

Article 4 

1. 

2. 

3. 

4. 

5. 

The borrowing and lending operations related to the loan component of the European Union 
assistance  shall  be  carried  out  in  euro  using  the  same  value  date  and  shall  not  involve  the 
European Union in the transformation of maturities, in any exchange or interest rate risks, or 
in any other commercial risk. 

The Commission shall take the necessary steps, if the Kyrgyz Republic so requests, to ensure 
that  an  early  repayment  clause  is  included  in  the  loan  terms  and  conditions  and  that  it  is 
matched by a corresponding clause in the terms and conditions of the borrowing operations.  

At the request of the Kyrgyz Republic and where circumstances permit an improvement of the 
interest  rate  of  the  loan,  the  Commission  may  refinance  all  or  part  of  its  initial  loan  or 
restructure  the  corresponding  financial  conditions.  Refinancing  or  restructuring  operations 
shall be carried out in accordance with the conditions set out in paragraph 1 and shall not have 
the effect of extending the average maturity of the loan concerned or increasing the amount of 
capital outstanding at the date of the refinancing or restructuring. 

All  costs  incurred  by  the  European  Union  which  are  related  to  the  borrowing  and  lending 
operations under this Decision shall be borne by the Kyrgyz Republic.  

The European Parliament and the Economic and Financial Committee shall be kept informed 
of developments in the operations referred to in paragraphs 2 and 3. 

Article 5 

The  European  Union  financial  assistance  shall  be  implemented  in  accordance  with  the  provisions  of 
Council  Regulation  (EC,  Euratom)  No  1605/2002  of  25  June  2002  on  the  Financial  Regulation 
applicable  to  the  general  budget  of  the  European  Communities7  and  its  implementing  rules.  In 
particular,  the  Memorandum  of  Understanding,  the  Loan  Agreement  and  the  Grant  Agreement  to  be 
agreed with the authorities of the Kyrgyz Republic shall provide for appropriate measures in relation to 
the  prevention  of,  and  the  fight  against,  fraud,  corruption  and  other  irregularities  affecting  the 
assistance. In order to ensure greater transparency in the management and disbursement of funds, the 
Memorandum of Understanding, the Loan Agreement and the Grant Agreement shall also provide for 
controls, including on-the-spot checks and inspections, to be carried out by the Commission, including 
the  European  Anti-Fraud  Office.  Those  documents  shall,  in  addition,  provide  for  audits,  including 
where appropriate on-the-spot audits, by the Court of Auditors. 

1. 

The  Commission  shall  be  assisted  by  a  committee.  That  committee  shall  be  a  committee 
within the meaning of Regulation (EU) No 182/2011. 

Article 6 

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2. 

1. 

2. 

Where  reference  is  made  to  this  paragraph,  Article  4  of  Regulation  (EU)  No  182/2011  shall 
apply. 

Article 7 

By 30 June of each year, the Commission shall submit to the European Parliament and to the 
Council  a  report  on  the  implementation  of  this Decision  in  the  preceding  year,  including  an 
evaluation  thereof.  The  report  shall  indicate  the  connection  between  the  economic  policy 
conditions  as  laid  down  in  the  Memorandum  of  Understanding,  the  Kyrgyz  Republic’s  on-
going  economic  and  fiscal  performance  and  the  Commission’s  decisions  to  release  the 
instalments of the assistance.  

No later than two years after the expiry of the availability period referred to in Article 1(4), the 
Commission shall submit to the European Parliament and to the Council an ex post evaluation 
report. 

Article 8 

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

Done at Brussels,  

For the European Parliament 
The President 

For the Council 
The President 

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LEGISLATIVE FINANCIAL STATEMENT 

1. 

FRAMEWORK OF THE PROPOSAL/INITIATIVE  

1.1.  Title of the proposal/initiative  

1.2.  Policy area(s) concerned in the ABM/ABB structure 

1.3.  Nature of the proposal/initiative  

1.4.  Objective(s)  

1.5.  Grounds for the proposal/initiative  

1.6.  Duration and financial impact  

1.7.  Management method(s) envisaged  

2. 

MANAGEMENT MEASURES  

2.1.  Monitoring and reporting rules  

2.2.  Management and control system  

2.3.  Measures to prevent fraud and irregularities  

3. 

ESTIMATED FINANCIAL IMPACT OF THE PROPOSAL/INITIATIVE  

3.1.  Heading(s)  of  the  multiannual  financial  framework  and  expenditure  budget  line(s) 
affected  

3.2.  Estimated impact on expenditure  

3.2.1. Summary of estimated impact on expenditure  

3.2.2. Estimated impact on operational appropriations  

3.2.3. Estimated impact on appropriations of an administrative nature 

3.2.4. Compatibility with the current multiannual financial framework 

3.2.5. Third-party participation in financing  

3.3.  Estimated impact on revenue

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LEGISLATIVE FINANCIAL STATEMENT 

1. 

FRAMEWORK OF THE PROPOSAL/INITIATIVE  

1.1. 

Title of the proposal/initiative  

Proposal  for  a  Decision  of  the  European  Parliament  and  of  the  Council  providing  macro-
financial assistance to the Kyrgyz Republic 

1.2. 

Policy area(s) concerned in the ABM/ABB structure8 

Policy area:  Title 01 – Economic and Financial Affairs 

Activity: 

03 – International economic and financial affairs 

1.3. 

Nature of the proposal/initiative  

X The proposal/initiative relates to a new action  

(cid:133) The proposal/initiative relates to a new action following a pilot project/preparatory action9  

(cid:133) The proposal/initiative relates to the extension of an existing action  

(cid:133) The proposal/initiative relates to an action redirected towards a new action  

1.4. 

Objectives 

1.4.1.  The Commission's multiannual strategic objective(s) targeted by the proposal/initiative  

"To promote prosperity beyond the EU" 

The major area of DG ECFIN related activity pertains to:  

Developing,  monitoring  and  implementing  macro-financial  assistance  for  partner  third 
countries, in co-operation with the relevant international financial institutions.  

1.4.2. 

Specific objective(s) and ABM/ABB activity(ies) concerned  

Specific objective No 3: "Providing macro-financial assistance to third countries in resolving 
their balance of payment crises and restoring external debt sustainability" 

ABM/ABB  activity(ies)  concerned:  International  Economic  and  Financial  Relations,  global 
governance. 

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1.4.3.  Expected result(s) and impact 

The proposed assistance consists of an EU loan of EUR 15 million and a grant of up to EUR 
15 million to the Kyrgyz Republic (the grant to be financed from the General Budget), with a 
view to contributing to a more sustainable balance of payments situation. Both loan and grant 
component of the assistance will be disbursed in two instalments. The assistance will help the 
country  overcome  the  economic  and  social  hardships  endured  as  a  result  of  the  etchnic  and 
political  violence  and  the  consequences  of  the  global  financial  crisis.  It  will  also  promote 
structural reforms aimed at raising sustainable economic growth and improving public finance 
management.  

An  ex-ante  evaluation  (see  the  Staff  Working  Document  accompanying  the  Commission 
proposal) was carried out by Commission services in September-October 2011. It concluded 
that the EU macro-financial assistance was warranted.  

1.4.4. 

Indicators of results and impact  

The authorities, notably the Ministry of Finance of the Kyrgyz Republic, will be required to 
report  on  a  set  of  indicators  to  the  Commission  services  on  a  regular  basis.  They  will  also 
provide a comprehensive report on the compliance with the agreed policy conditions ahead of 
the disbursement of the second instalment of the assistance.  

The Commission services will continue to monitor public finance management, following the 
operational  assessment  of  the  financial  circuits  and  administrative  procedures  that  will  be 
carried  out  in  the  Kyrgyz  Republic  in  preparation  of  this  operation.  The  Delegation  of  the 
European Union to the Kyrgyz Republic will also provide regular reporting on issues that are 
relevant  for  the  monitoring  of  the  assistance.  The  Commission  services  will  remain  in  close 
contact with the IMF and the World Bank to benefit from their insights from their on-going 
activities in the Kyrgyz Republic.  

The present operation will be subject to ex-post evaluation within two years after the expiry of 
its implementation period.  

An annual report to the Council and European Parliament is foreseen in the proposed decision 
of the European Parliament and the Council, comprising an assessment of the implementation 
of this assistance operation.  

1.5. 

Grounds for the proposal/initiative  

1.5.1.  Requirement(s) to be met in the short or long term  

The disbursement of the assistance will be conditional upon a satisfactory track record in the 
implementation  of  the  present  three-year  arrangement  agreed  between  the  Kyrgyz  Republic 
and  the  IMF  under  the  Fund's  Extended  Credit  Facility  (ECF).  In  addition,  the  Commission 
shall agree with the Kyrgyz authorities on a number of specific policy conditions which have 
to be met before the second instalment is released by the Commission. These policy measures 
shall be consistent with agreements reached by the Kyrgyz Republic with the IMF. Before the 

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release  of  the  assistance,  the  Commission  services,  in  co-operation  with  the  national 
authorities, shall verify that the policy conditions have been fulfilled.  

1.5.2.  Added value of EU involvement 

The  Kyrgyz  Republic  is  the  country  in  the  region  committed  to  democratic  reforms.  By 
helping the country overcome the economic shock caused  by  the global  recession and inter-
etchnic  conflict,  the  proposed  MFA  will  contribute  to  promoting  macroeconomic  stability, 
economic reforms and political progress in the country. By complementing the resources made 
available by the international financial institutions, the EU and other donors, it contributes to 
the overall effectiveness of the package of financial support agreed by the international donor 
community in the aftermath of the crisis.  

In addition to the financial impact of the MFA, the proposed programme will strengthen the 
government's reform commitment and its aspiration towards closer relations with the EU. This 
result will be achieved, inter alia, through appropriate  conditionality for  the disbursement of 
the  assistance.  In  a  larger  context,  the  programme  will  signal  to  the  other  countries  in  the 
region  that  the  EU  is  ready  to  support  countries  like  the  Kyrgyz  Republic,  embarking  on  a 
clear path towards democratization and political reforms, in moments of economic difficulties.  

1.5.3.  Lessons learned from similar experiences in the past 

Recent  external  evaluations  of  macro-financial  assistance  programmes  indicate  that  the 
practice  of  selecting  a  limited  number  of  key  structural  reforms  has  been  successful  and 
suggests  continuing  this  practice  with  adequate  monitoring  and  close  policy  dialogue  being 
maintained throughout the implementation period of the assistance.  

1.5.4.  Coherence and possible synergy with other relevant instruments 

The  EU  was  among  the  major  donors  in  the  July  2010  donor  conference  and  pledged  EUR 
117.9 million for support in a number of critical areas. Part of these commitments came under 
emergency instruments (such as the Instrument for Stability – IfS - and ECHO humanitarian 
aid).  Another  part,  coming  mostly  from  the  allocation  under  the  Development  Cooperation 
Instrument  (DCI)  and  allocations  under  a  number  of  thematic  budget  lines,  consisted  in  the 
increase and the acceleration of disbursements under already approved programmes/projects. 
The  assistance  focuses  mainly  on  rural  development  and  agricultural  sector,  the  education 
sector,  social  security  and  legal  reforms.  Support  provided  under  the  DCI  includes  a  Sector 
Policy Support Programme (SPSP) in the amount of EUR 33 million over the period 2011 – 
2013 to support reforms in social protection, education and public financial management. The 
key value added of the MFA in comparison to other EU instruments would be to help create a 
stable macroeconomic framework, including by promoting a sustainable balance of payments 
and budgetary situation, and an appropriate framework for structural reforms.  

MFA does not provide a regular financial support nor is meant to support the economic and 
social development of the recipient countries. The MFA is to be discontinued as soon as the 
country's  external  financial  situation  has  been  brought  back  into  a  sustainable  path. 
Afterwards, regular EU cooperation assistance instruments are meant to take over, notably the 
direct budget support provided under the DCI. 

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MFA  is  also  meant  to  be  complementary  to  interventions  by  the  international  financial 
institutions;  in  particular  the  IMF  supported  adjustment  and  reform  programmes.  The 
assistance  of  macroeconomic  nature  is  released  only  if  economic  and  financial  policy 
conditions are fulfilled.  

1.6. 

Duration and financial impact  

X Proposal/initiative of limited duration  

–  X  Proposal/initiative in effect: for 2 years from the entry into force of the Memorandum of 

Understanding, as stated in Art 1(4) of the proposed Decision. 

–  X  Financial  impact  from  2012  to  2014  (provisioning  of  the  Guarantee  Fund  and  ex-post 

evaluation) 

(cid:133) Proposal/initiative of unlimited duration 

–  Implementation with a start-up period from YYYY to YYYY, 

–  followed by full-scale operation. 

1.7.  Management mode(s) envisaged10  

X Centralised direct management by the Commission  

(cid:133) Centralised indirect management with the delegation of implementation tasks to: 

–  (cid:133)  executive agencies  

–  (cid:133)  bodies set up by the Communities11  

–  (cid:133)  national public-sector bodies/bodies with public-service mission  

–  (cid:133)  persons entrusted with the implementation of specific actions pursuant to Title V of the 
Treaty  on  European  Union  and  identified  in  the  relevant  basic  act  within  the  meaning  of 
Article 49 of the Financial Regulation  

(cid:133) Shared management with the Member States  

(cid:133) Decentralised management with third countries  

(cid:133) Joint management with international organisations (to be specified) 

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Comments  

Active  cooperation  will  be  sought  from  the  EEAS  headquarters  and  from  the  EU  Delegations  in  the 
monitoring of the assistance. 

2. 

MANAGEMENT MEASURES  

2.1.  Monitoring and reporting rules  

This  assistance  is  of  macroeconomic  nature  and  its  design  is  consistent  with  the  IMF-
supported  economic  programme.  The  monitoring  of  the  action  by  the  Commission  services 
will  take  place  on  the  basis  of  progress  in  the  implementation  of  the  ECF  arrangement  and 
specific  reform  measures  to  be  agreed  with  the  Kyrgyz  authorities  in  a  Memorandum  of 
Understanding. The authorities, notably the Ministry of Finance, will be required to report on 
a  set  of  indicators  to  the  Commission  services  on  a  quarterly  basis  and  will  provide  a 
comprehensive compliance report ahead of the disbursement of  the second instalment of the 
operation.  

The Commission services will continue to monitor public finance management, following the 
operational  assessment  of  the  financial  circuits  and  administrative  procedures  that  will  be 
carried  out  in  the  Kyrgyz  Republic  in  preparation  of  this  operation.  The  Delegation  of  the 
European Union to the Kyrgyz Republic will also provide regular reporting on issues that are 
relevant  for  the  monitoring  of  the  assistance.  The  Commission  services  will  remain  in  close 
contact  with  the  IMF  and  the  World  Bank  to  benefit  from  their  on-going  activities  in  the 
Kyrgyz Republic.  

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

2.2.  Management and control system  

2.2.1.  Risks identified  

There  are  fiduciary,  policy  and  political  risks  related  to  this  macro-financial  assistance 
operation.  

There is a risk that the macro-financial assistance, which is not dedicated to specific expenses 
(contrary  to  project  financing,  for  example),  could  be  used  in  a  fraudulent  way.  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.  

As regards policy risks, the main assumption is that the Government of the Kyrgyz Republic 
will remain committed to fiscal adjustment and compliance with its agreement with the IMF. 

EN 

21 

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This will be validated on the basis of IMF’s regular monitoring of performance indicators and 
structural benchmarks. There is, however, a risk that the Government of the Kyrgyz Republic 
will not comply with the IMF programme conditions, as the programme targets may turn out 
more  difficult  to  reach  than  assumed  and  as  political  conditions  in  the  country  may  change. 
Also, the Kyrgyz Republic remains vulnerable to negative changes in terms of trade stemming 
from possible exogenous shocks. Yet, the authorities have so far shown strong commitment to 
work  with  International  Financial  Institutions  to  implement  the  reform  agenda.  The  good 
track-record  under  the  previous  short-term  IMF  operation  in  Kyrgysztan  bodes  well  in  this 
respect. 

Further  risks  relate  to  a  possible  reactivation  of  the  inter-ethnic  tension  and  political 
instability.  The  country  conducted  presidential  elections  on  30  October  2011,  which  were 
conducted  peacefully  and  were  observed  by  an  International  Observation  Mission.  The 
political risks remain manageable, given recent impressive efforts of the Kyrgyz authorties to 
establish legitimate democtratic institutions. 

2.2.2.  Control method(s) envisaged  

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.  

2.3.  Measures to prevent fraud and irregularities  

The  Commission  services  have  put  in  place  a  programme  of  operational  assessments  of  the 
financial  circuits  and  administrative  procedures  in  all  third  countries  benefiting  from  the 
European  Union  macro-financial  assistance  in  order  to  fulfil  requirements  implied  by  the 
Financial  Regulation  applicable  to  the  General  Budget  of  the  European  Communities.  The 
conclusions of available IMF Safeguard Assessments and of other relevant reports of the IMF 
and the World Bank are also taken into consideration.  

In the Kyrgyz Republic, the Commission services, with the support of duly mandated external 
experts,  will  carry  out  an  operational  assessment  of  the  financial  circuits  and  administrative 
procedures at the Ministry of Finance and the central bank. This review will cover 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.  

The  proposed  legal  basis  for  macro-financial  assistance  to  the  Kyrgyz  Republic  includes  a 
provision  on  fraud  prevention  measures.  These  measures  will  be  elaborated  further  in  a 
Memorandum  of  Understanding.  It  is  envisaged  that  a  number  of  specific  policy  conditions 
will  be  attached  to  the  assistance,  mainly  in  the  area  of  public  finance  management,  with  a 
view to strengthening efficiency, transparency and accountability.  

In addition, the Commission intends to emphasise public finance management reforms in the 
policy conditionality attached to this operation.  

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3. 

3.1. 

Heading of 
multiannual 
financial 
framework 

4 

4 

ESTIMATED FINANCIAL IMPACT OF THE PROPOSAL/INITIATIVE  

Heading(s)  of  the  multiannual  financial  framework  and  expenditure  budget  line(s) 
affected  

•  Existing expenditure budget lines  

Budget line 

Type of  
expenditure

Contribution  

Number  
[Description………………………...……….] 

Diff./non-
diff. 
(12) 

from 
EFTA13 
countries 

from 
candidate 
countries14 

from third 
countries 

within the meaning 
of Article 18(1)(aa) 
of the Financial 
Regulation  

01 03 02  

Macroeconomic assistance  

01 04 01 14 

Provisioning of the Guarantee Fund  

Diff. 

NO 

NO 

NO 

NO 

Diff. 

NO 

NO 

NO 

NO 

The  Guarantee  Fund  for  external  actions  has  to  be  provisioned  according  to  the  Fund 
Regulation,  as  amended.  In  line  with  this  Regulation,  loans  are  based  on  the  outstanding 
amount at the end of a year. The provisioning amount is calculated at the beginning of the year 
"n" as the difference between the target amount and the Fund's net assets at the end of the year 
"n-1". This provisioning amount is introduced in the year "n" to the "n+1" preliminary budget 
and  effectively  paid  in  one  transaction  at  the  beginning  of  the  year  "n+1"  from  "the 
provisioning of the Guarantee Fund" (budget line 01 04 01 14). As a result, 9% (maximum of 
EUR 1.35 million) of the effectively disbursed amount will be considered in the target amount 
at the end of the year "n-1" for the calculation of the provisioning of the Fund.  

The budget entry ("p.m.") reflecting the budget guarantee for the loan (EUR 15 million) will 
be activated only in the case of an effective call on the guarantee. It is not expected that the 
budget guarantee be called.  

•  New budget lines requested: 

no 

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23 

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3.2. 

Estimated impact on expenditure  

3.2.1. 

Summary of estimated impact on expenditure  

Heading of multiannual financial 
framework:  

4 

The EU as a global partner 

EUR million (to 3 decimal places) 

DG: ECFIN 

(cid:121) Operational appropriations  

Number of budget line: 

01 03 02  

Number of budget line: 

01 04 01 14 

Appropriations 
administrative 
 from the envelope for specific programmes16  

an 

of 

Number of budget line: 

01 03 02  

TOTAL appropriations 
for DG ECFIN 

Year 
N15 

Year 
N+1 

Year 
N+2 

Year 
N+3 

… enter as many years as 
necessary to show the duration 
of the impact (see point 1.6) 

TOTAL 

15 
15 

Commitments 

Payments 

Commitments 

Payments 

(1) 

(2) 

(1a) 

(2a) 

nature 

financed 

Commitments 

Payments 

Commitments 

Payments 

(3) 

(3a) 

=1+1a 
+3 

=2+2a
+3a 

0.03 
0.03 

15.03 

15.03 

1.35 
1.35 

0.15 
0.15 

1.50 

1.50 

15 
15 
1.35 
1.35 

0.18 
0.18 

16.53 

16.53 

(cid:121) TOTAL operational appropriations  

Commitments 

Payments 

(4) 

(5) 

EN 

24 

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(cid:121)  TOTAL  appropriations  of  an  administrative  nature 
financed from the envelope for specific programmes  

(6) 

TOTAL appropriations  
under HEADING 4 
of the multiannual financial framework 

Commitments 

=4+ 6 

15.03 

Payments 

=5+ 6 

15.03 

1.50 

1.50 

16.53 

16.53 

EN 

25 

E

 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Heading of multiannual financial 
framework:  

5 

" Administrative expenditure " 

Year 
N 

Year 
N+1 

Year 
N+2 

Year 
N+3 

… enter as many years as 
necessary to show the duration 
of the impact (see point 1.6)  

TOTAL 

EUR million (to 3 decimal places) 

DG: ECFIN 

(cid:121) Human resources  
(cid:121) Other administrative expenditure  

0.038 

0.025 

0.013 

0.005 

0.013 

0.010 

TOTAL DG ECFIN 

Appropriations  

0.063 

0.018 

0.023 

TOTAL appropriations 
under HEADING 5 
of the multiannual financial framework  

(Total commitments  
= Total payments) 

0.063 

0.018 

0.023 

0.064 

0.040 

0.104 

0.104 

Year 
N17 

Year 
N+1 

Year 
N+2 

Year 
N+3 

… enter as many years as 
necessary to show the duration 
of the impact (see point 1.6) 

TOTAL 

EUR million (to 3 decimal places) 

TOTAL appropriations  
under HEADINGS 1 to 5 
of the multiannual financial framework  

Commitments 

15.093 

0.018 

1.523 

Payments 

15.093 

0.018 

1.523 

16.634 

16.634 

EN 

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3.2.2.  Estimated impact on operational appropriations  

–  (cid:133)  The proposal/initiative does not require the use of operational appropriations  

–  X  The proposal/initiative requires the use of operational appropriations, as explained below: 

Year 
N 

Year 
N+1 

Year 
N+2 

Year 
N+3 

… enter as many years as necessary to show the duration 
of the impact (see point 1.6) 

TOTAL 

Commitment appropriations in EUR million (to 3 decimal places) 

Indicate 
objectives 
and 
outputs  

Type of 
output18 

(cid:216) 

Average 
cost  
of the 
output 

r
e
b
m
u
N

s
t
u
p
t
u
o

f
o

SPECIFIC OBJECTIVE No 119… 

- Output 1 

Grant 
disbursements 

- Output 2  Operational 
assessment 

- Output 3 

- Output 4 

Ex-post 
evaluation 

Provisioning 
of guarantee 
fund 

7.5 

0.03 

0.15 

1.35 

Sub-total for specific objective N°1 

TOTAL COST 

2 

1 

3 

3 

Cost 

15 

0.03 

15.03 

15.03 

EN 

OUTPUTS 

r
e
b
m
u
N

s
t
u
p
t
u
o

f
o

Cost 

r
e
b
m
u
N

s
t
u
p
t
u
o

f
o

Cost 

r
e
b
m
u
N

s
t
u
p
t
u
o

f
o

Cost 

r
e
b
m
u
N

s
t
u
p
t
u
o

f
o

Cost 

r
e
b
m
u
N

s
t
u
p
t
u
o

f
o

Cost 

r
e
b
m
u
N

s
t
u
p
t
u
o

f
o

Cost 

Total 
number 
of 
outputs 

Total  
cost 

1 

1 

2 

2 

0.15 

1.35 

1.50 

1.50 

27 

2 

1 

1 

1 

5 

5 

15 

0.03 

0.15 

1.35 

16.53 

16.53 

EN 

 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3.2.3.  Estimated impact on appropriations of an administrative nature 

3.2.3.1.  Summary  

–  (cid:133)  The  proposal/initiative  does  not 

require 

the  use  of  administrative 

appropriations  

–  X  The  proposal/initiative  requires  the  use  of  administrative  appropriations,  as 

explained below: 

EUR million (to 3 decimal places) 

EN 

28 

   EN 

 
Year 
N 20 

Year 
N+1 

Year 
N+2 

Year 
N+3 

… enter as many years as necessary 
to show the duration of the impact 
(see point 1.6) 

TOTAL 

20 
21 

22 

23 
24 

25 

Year N is the year in which implementation of the proposal/initiative starts. 
Technical  and/or  administrative  assistance  and  expenditure  in  support  of  the  implementation  of  EU 
programmes and/or actions (former "BA" lines), indirect research, direct research. 
CA= Contract Agent; INT= agency staff ("Intérimaire"); JED= "Jeune Expert en Délégation" (Young 
Experts in Delegations); LA= Local Agent; SNE= Seconded National Expert. 
Under the ceiling for external personnel from operational appropriations (former "BA" lines). 
Essentially  for  Structural  Funds,  European  Agricultural  Fund  for  Rural  Development  (EAFRD)  and 
European Fisheries Fund (EFF). 
See points 19 and 24 of the Interinstitutional Agreement. 

EN 

29 

   EN 

 
 
                                                 
0.064 

0.040 

0.104 

HEADING 5 
of the multiannual 
financial framework 

Human resources  

0.038 

0.013 

0.013 

0.025 

0.005 

0.010 

0.063 

0.018 

0.023 

Other administrative 
expenditure  

Subtotal HEADING 5 
of the multiannual 
financial framework  

Outside HEADING 521 
of the multiannual 
financial framework  

Human resources  

Other expenditure  
of an administrative 
nature 

Subtotal  
outside HEADING 5 
of the multiannual 
financial framework  

TOTAL 

0.063 

0.018 

0.023 

EN 

30 

   EN 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3.2.3.2.  Estimated requirements of human resources  

–  (cid:133)  The proposal/initiative does not require the use of human resources  

–  X  The proposal/initiative requires the use of human resources, as explained below: 

Estimate to be expressed in full amounts (or at most to one decimal place) 

Year 
N 

Year 
N+1 

Year 
N+2 

Year 
N+3 

… enter as many years as 
necessary to show the 
duration of the impact 
(see point 1.6) 

(cid:121) Establishment plan posts (officials and temporary agents) 

XX 01 01 01 (Headquarters and Commission’s 
Representation Offices) 

0.3 

0.1 

0.1 

XX 01 01 02 (Delegations) 

XX 01 05 01 (Indirect research) 

10 01 05 01 (Direct research) 

(cid:121) External personnel (in Full Time Equivalent unit: FTE)22 

XX 01 02 01 (CA, INT, SNE from the "global 
envelope") 

XX 01 02 02 (CA, INT, JED, LA and SNE in the 
delegations) 

XX 01 04 yy 23 

- at Headquarters24 

- in delegations  

XX 01 05 02 (CA, INT, SNE - Indirect research) 

10 01 05 02 (CA, INT, SNE - Direct research) 

Other budget lines (specify) 

TOTAL 

0.3 

0.1 

0.1 

XX is the policy area or budget title concerned. 

The  human  resources  required  will  be  met  by  staff  from  the  DG  who  are  already  assigned  to 
management of the action and/or have been redeployed within the DG, together if necessary with any 
additional allocation which may be granted to the managing DG under the annual allocation procedure 
and in the light of budgetary constraints. 

Cost of the staff needed is estimated on the basis of 30% of the annual expenditure for an AD5 – AD12 
grade official. 

Description of tasks to be carried out: 

Officials and temporary agents 

Prepare  the  Memorandum  of  Understanding,  the  Loan  and  Grant  Agreements,  liaise 
with  the  authorities  and  the  IFIs,  liaise  with  external  experts  for  the  operational 
assessment and ex-post evaluation, conduct review missions and prepare Commission 
staff  reports,  prepare  Commission  procedures  related  to  the  management  of  the 
assistance. 

External personnel 

EN 

31 

   EN 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3.2.4.  Compatibility with the current multiannual financial framework  

–  X  Proposal/initiative is compatible the current multiannual financial framework. 

–  (cid:133)  Proposal/initiative will entail reprogramming of the relevant heading in the multiannual 

financial framework. 

–  (cid:133)  Proposal/initiative  requires  application  of  the  flexibility  instrument  or  revision  of  the 

multiannual financial framework25. 

3.2.5.  Third-party contributions  

–  The proposal/initiative does not provide for co-financing by third parties  

3.3. 

Estimated impact on revenue  

–  X  Proposal/initiative has no financial impact on revenue. 

–  (cid:133)  Proposal/initiative has the following financial impact: 

– 

– 

(cid:133) 

(cid:133) 

on own resources  

on miscellaneous revenue 

EN 

32 

   EN