COMMISSION STAFF WORKING PAPER Ex-ante evaluation statement on EU macro-financial assistance to the Kyrgyz Republic
Date: 2011-12-20
Institutions: European Commission
Subjects: EU aid, Kyrgyzstan, democratisation, economic recession, economic reconstruction, economic stabilisation, financial aid, loss

EUROPEAN COMMISSION 

Brussels, 20.12.2011 
SEC(2011) 1619 final 

COMMISSION STAFF WORKING PAPER 

Ex-ante evaluation statement on EU macro-financial assistance to the Kyrgyz Republic

Accompanying the document 

Proposal for a 

DECISION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL 

providing macro-financial assistance to the Kyrgyz Republic 

{COM(2011) 925 final} 

 
 
 
 
  
 
 
Ex-ante evaluation statement 

EU Macro-financial assistance to the Kyrgyz Republic 

TABLE OF CONTENTS 

1. 

1.1. 

1.2. 

1.3. 

1.4. 

1.5. 

2. 

2.1. 

2.2. 

3. 

3.1. 

3.2. 

4. 

5. 

5.1. 

5.2. 

5.3. 

5.4. 

5.5. 

6. 

6.1. 

6.2. 

7. 

Problem analysis and needs assessment....................................................................... 3 

Introduction .................................................................................................................. 3 

The Kyrgyz Republic's macro-economic situation ...................................................... 4 

IMF and other donor support ....................................................................................... 6 

The Kyrgyz Republic's external financing needs......................................................... 8 

Structural reform challenges ...................................................................................... 11 

Objectives and related indicators of the macro-financial assistance.......................... 13 

Objectives................................................................................................................... 13 

Indicators.................................................................................................................... 13 

Delivery mechanisms and risk assessment................................................................. 13 

Delivery mechanisms ................................................................................................. 13 

Risk assessment.......................................................................................................... 14 

Added value of EU involvement ................................................................................ 15 

Genval criteria on macro-financial assistance............................................................ 16 

Exceptional Character and Limited Timeframe ......................................................... 16 

Political preconditions................................................................................................ 16 

Complementarity........................................................................................................ 17 

Conditionality............................................................................................................. 17 

Financial Discipline.................................................................................................... 17 

Planning of future monitoring and evaluation............................................................ 17 

Monitoring.................................................................................................................. 18 

Evaluation................................................................................................................... 18 

Achieving cost-effectiveness...................................................................................... 18 

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1. 

PROBLEM ANALYSIS AND NEEDS ASSESSMENT 

1.1. 

Introduction 

The Kyrgyz Republic was hit by the global crisis in 2009 and went through a popular revolt in 
2010.  In  April  2010,  the  regime  of  President  Bakiyev  was  deposed  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,  in  particular,  strengthens  the  powers  of  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.  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. 

The  crisis  adversely  affected  economic  activity  and  the  government's  fiscal  position.  It 
brought  about  substantial  expenditures  to  finance  emergency  reconstruction  and  social 
reconciliation. In response to these events and their economic implications, the international 
community pledged USD 1.1 billion at a donor conference for the Kyrgyz Republic organised 
on  27  July  2010  in  Bishkek.  The  EU  was  among  the  major  donors  with  about  EUR  120 
million. In early May 2011, the IMF agreed with the Kyrgyz authorities on a USD 106 million 
Extended  Credit  Facility  (ECF)  in  support  of  a  three-year  programme  of  macroeconomic 
adjustment and structural reforms. This arrangement was approved by the IMF Board on 20 
June 2011.  

In 2010, the President and the Minister of Finance of the Kyrgyz Republic formally requested 
the EU macro-financial assistance (MFA) to complement the financing 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, although the fall in GDP 
and  the  deterioration  in  the  fiscal  position  in  2010  were  less  pronounced  than  initially 
expected,  last  year’s  tragic  political  events  and  the  related  social  and  reconstruction 
expenditure  have  left  important  external  and  fiscal  financing  needs  for  the  period  2010-12. 
While  these  needs  are  being  partly  covered  by  the  international  community,  there  are  still 
substantial residual needs, not least since the pledge from the Eurasian Economic Community 
(EurAsSEC) Anti-Crisis Fund has yet to be confirmed.  

Given  the  EU’s  strong  political  support  for  the  Kyrgyz  Republic’s  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  and  duly 
justified circumstances the possibility of approving operations outside that area1. In this case, 
a  MFA  operation  seems  justified  by  the  strength  of  the  political  and  economic  reform 
momentum in the country and by its position in a region of strategic economic and political 
importance for the EU. It 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. Strengthening the 

1 

This  would  not  be  the  first  exceptional  MFA  operation  in  Central  Asia:  already  in  2000,  the  Council 
approved one for Tajikistan, consisting of a combination of a long-term loan of EUR 60 million and of 
a grant of EUR 35 million grant. The grant component of the assistance was disbursed over a period of 
five years. 

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link  between  EU  foreign  assistance  and  progress  with  democracy  and  human  rights  would 
also  be  consistent  with  the  last  review  of  the  European  Neighbourhood  Policy  and  with  the 
March 2011 Joint Communication on a new response to a changing neighbourhood. 

Therefore,  the  Commission  is  submitting  to  the  European  Parliament  and  to  the  Council  a 
proposal for a MFA to the Kyrgyz Republic in the amount of EUR 30 million. The EU MFA 
would  aim  at  contributing  to  covering  the  country's  external  financing  needs  in  2012  as 
identified in cooperation with the IMF in the context of the IMF ECF programme. It would be 
disbursed in two tranches between during 2012.  

The  assistance  would  be  provided  half  in  grants  and  half  in  loans  to  take  into  account  the 
Kyrgyz  Republic’s  low  per  capita  income,  debt  indicators  and  access  to  the  concessional 
facilities of the Bretton Woods institutions and other financial institutions. The proposed new 
MFA would be exceptional and limited in time and is intended to run in parallel to the IMFs 
ECF.  

The  new  MFA  would  contribute  to  help  the  Kyrgyz  Republic  to  address  the  lingering 
economic consequences of the global recession and of the ethnic conflict. It would reduce the 
short-term  financial  vulnerability  still  faced  by  the  economy,  while  supporting  reform 
measures  (including  those  in  the  IMF  and  World  Bank  programmes)  aimed  at  achieving  a 
more  sustainable  balance  of  payments  and  budgetary  situation  over  the  medium-term.  The 
proposed assistance would complement the EUR 117.9 million pledged by the EU at the July 
2010 donor conference to deal with humanitarian, reconstruction and social protection needs.  

1.2. 

The Kyrgyz Republic's macro-economic situation  

The  marked  deceleration  in  growth  experienced  by  the  Kyrgyz  economy  in  2009  (GDP 
growth  slowed  down  from  an  average  rate  of  8.5%  in  2007-8  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  foreign  investments.  Before  the  dramatic  events  of 
2010,  economic  growth  was  expected  to  rebound  in  2010  to  4.5-5.5%.  However,  the  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. 
On the positive side, after a very sharp contraction in the first half of 2010, economic growth 
recovered in the second half of the year and, for the year as a whole, real GDP is estimated to 
have declined by only 1.4% compared to the 3.5% decline the IMF had projected in August 
2010. According to the preliminary estimates of the Kyrgyz authorities, real GDP expanded 
by 6.5% in the first seven months of 2011, while the IMF predicts GDP growth to reach about 
7% for the year as a whole, as the agricultural and mining sectors and remittances recover.  

The  fiscal  deficit  rose  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  on  tax  revenues.  This  was,  however,  a  much  smaller  deterioration  than  foreseen  in 
August 2010 by the IMF in the context of the RCF programme, which assumed a deficit of 
12% of GDP. Despite a shortfall in donor support, the fiscal deficit was lower due to a lack of 
capacities to implement reconstruction projects. However, part of the unrealised spending in 
2010  is  being  transferred  to  2011,  contributing  to  the  expansion  of  the  forecasted  budget 
deficit to 7.6% of GDP (excluding energy infrastructure projects). The increase in the deficit 
also  reflects  the  government’s  decisions  to  maintain  the  pension  increases  granted  by  the 
previous government and to triple wages for teachers and health care employees as from the 
second half 2011, which is estimated to increase the public wage bill by 3 percentage points 
of  GDP  in  2011  despite  a  planned  10%  reduction  in  the  number  of  public  employees.  The 

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wages of education and health care public employees were very low and, in the current times 
of  economic  stress  and  political  difficulty,  the  authorities  decided  to  use  some  of  the 
budgetary room created by a lower than initially programmed deficit to bring them to a more 
acceptable  level.  The  privatisation  of  a  telecommunication  company  Kyrgyz  Telecom  is 
planned,  although  there  is  some  uncertainty  about  whether  the  revenues  will  be  received  in 
2011. 

The  IMF  considers  that  the  moderate  deterioration  of  the  fiscal  position  in  2011  was 
understandable  from  a  political  viewpoint  and  would  contribute  to  underpin  the  economic 
recovery.  At  the  same  time,  the  IMF  programme  assumes  a  considerable  effort  of  fiscal 
consolidation  for  the  remainder  of  the  programme  period,  with  the  fiscal  deficit  (excluding 
energy  infrastructure  projects)  targeted  to  decline  gradually  to  4.4%  of  GDP  by  20142.  In 
particular,  tax  collection  is  planned  to  be  strengthened  i.a.  by:  removing  turnover  tax 
exemptions on electricity, heating, and natural gas for commercial users and VAT exemptions 
on communication services; strengthening customs administration and shifting from weight-
based to price-based customs valuation; reforming excise taxation on tobacco and alcohol. 

Table 1: The Kyrgyz Republic – Selected macroeconomic indicators, 2009-2012 

Real Sector

GDP (US$, millions)
GDP per-capita (in US$)
Real GDP growth (change in %)

Fiscal indicators

Total revenues (% of GDP)
Total expenditures and net lending (% of GDP)
General government balance (% of GDP)

excluding energy infrastructure projects

Gross public debt (% of GDP)

Monetary sector

Inflation (average)
Inflation (end-year)
Credit to the private sector (% of GDP)
Broad money (% change, end of period)
Dolarisation of the bank deposits
Dolarisation of the loans

External sector

Current account balance
Trade balance in goods and services (% of GDP)
FDI (net, % of GDP)

External vulnerability

External public debt outstanding (% of GDP)
Debt service as % of exports of good and services
External financing of the budget deficit (% of GDP)
International reserves (in moths of imports)

Source: IMF staff estimates 

2009
actual

2010
preliminary

2011

2012

2013

2014

projections

4683
880
2,9

32,1
36,1
-3,5
-3,5
58

6,8
0
12,9
20,9
58,7
59,6

0,7
-21,1
4

52,8
3,2
7,4
4,9

4615
863
-1,4

31,7
38,1
-6,5
-6,5
62,6

7,8
18,9
13
21,1
55,7
52,9

-2,1
-29,8
5,1

57,3
3,6
3,2
4,2

5187
960
6

5695
1044
6

6187
1123
6

6766
1216
5,8

34,6
42,3
-7,6
-7,6
56,5

20
13
13
15,7
54,2
51,7

-8,7
-35
4,2

51
2,8
5,2
4,1

32,3
39,4
-7,1
-6,2
56,1

8,7
8
13,4
16,2
52,7
51,5

-8,2
-35
4,2

50,3
2,5
3,7
3,9

31,6
38,5
-6,9
-5,6
57,5

7,5
7,5
15,2
19,7
na
na

-6,1
33,4
4,2

50,5
2,4
3,9
3,8

31,2
38
-6,8
-4,4
58,4

7,5
7,1
16,4
20,5
na
na

-5,4
31,2
4,2

50,1
2,3
3,8
3,8

The  IMF  programme  and  the  budget  for  2011  assume  that  the  government  receives  about 
USD 270  million  in  the  form  of  external  budgetary support (both grants and loans, see also 
1.3). This sum includes, in particular, about USD 30 million from the IMF (part of the Fund's 
monies that will be allocated to budget support), USD 30 million from the World Bank, USD 
50.6  million  from  the  Asian  Development  Bank  and  USD  106.7  million  from  the  Eurasian 
Economic  Community  (EurAsEC)  Anti-Crisis  Fund.  It  also  includes  substantial  budget 

2 

The IMF staff level agreement of September 2011 with the Kyrgyz authorities on the first review of the 
ECF tentatively envisages reducing the fiscal deficit further to 3.8% of GDP by 2014 (excluding energy 
projects). 

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financing  from  the  EU,  to  be  provided  in  the  form  of  both  sector  budget  support  under  the 
Development Cooperation Instrument3 and MFA. 

The central bank has tightened monetary policy substantially since the mid-2010, responding 
to  an  acceleration  in  inflation  due  to  a  sharp  increase  in  the  global  prices  of  fuel  and  food 
(foodstuff constitute 48% of CPI basket in the Kyrgyz Republic). Year-on-year inflation has 
spiked from 0% at the end of 2009 to 22.7% in June 2011. While food and energy prices (and, 
thus, external factors) 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  acknowledged 
that the planned fiscal  expansion  in 2011 against a  background of a  rather robust economic 
recovery  was  significantly  increasing  inflation  risks.  As  part  of  its  tightening  measures,  the 
central bank has stepped up its sales of short-term notes (doubling its stock) in order to mop-
up excess liquidity. It also increased reserve requirements from 8% to 9% in March 2011 and 
indicated  that  it  was  ready  to  raise  them  to  10%  if  need  be.  The  discount  rate  has  been 
increased from 2.7% in mid-2010 to over 13% as of September 2011. 

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,  with  the  Kyrgyz  som,  the  national  currency, 
depreciating by 25% against the US dollar 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  som  has  tended  to  depreciate  at  a  moderate  pace  but  not  enough  to 
compensate for the acceleration in inflation, which has resulted in a significant appreciation of 
real effective exchange rate. However, the current level of the exchange rate is estimated by 
the IMF to be broadly in line with fundamentals. 

1.3. 

IMF and other donor support 

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 providing 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 areas4. 

In early May 2011, an IMF staff mission agreed with the Kyrgyz authorities on a three-year 
programme to be supported by an Extended Credit Facility (ECF) in the amount of SDR 66.6 
million  (about  USD  106  million,  or  75%  of  the  Kyrgyz  quota  in  the  Fund).  The  IMF 
Executive  Board  approved  it  on  20  June  2011.  Under  the  programme,  annual  real  GDP 
growth stays close to 6%, inflation declines gradually from current heights of over 20% to 8% 
in  2013  respectively,  the  deficit  of  the  general  government  (excluding  energy  infrastructure 
projects) declines from 7.6 of GDP in 2010 to 4.4% of GDP in 2014, and the current account 
deficit  declines  from  over  8%  in  2012-2013  to  5.4%  of  GDP  in  2014.  The  ECF's  structural 
reform  conditionality  is  focused  on  tax  (abolition  of  exemptions)  and  customs  measures, 
increasing fiscal transparency and strengthening the financial sector (including by endowing 
the  central  bank  with  adequate  powers  to  resolve  banking  problems).  The  ECF  is  a 
macroeconomic  stabilisation  instrument  and  a  follow-up  arrangement  to  the  IMF’s  Rapid 
Credit Facility (RCF) of SDR 22.2 million implemented in September-December 2010. The 

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A programme targeting reforms in social protection and public finance management. 
This  includes  emergency  humanitarian  assistance,  support  for  the  establishment  of  a  democratic 
constitutional  framework,  judicial  reform  and  the  rule  of  law,  and  support  for  socio-economic 
development, social protection and educational reform. 

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authorities  met  all  the  targets  of  the  RCF  programme,  building  a  good  track-record  for  the 
follow-up programme5.  

The World Bank pledged USD 200 million at the donor conference, including two emergency 
operations:  a  USD  70  million  Emergency  Recovery  Project  (disbursed  in  the  form  of 
budgetary support) and additional financing for a National Road Rehabilitation Project in the 
amount of USD 10 million. An Economic Recovery Support Operation (ERSO) in the amount 
of  USD  30  million,  also  for  budget  support,  was  approved  by  the  World  Bank's  Executive 
Board in August 2011. The ERSO will support government efforts to strengthen public sector 
governance (including anti-corruption measures) and address urgent social and reconstruction 
needs.  Another  important  budget  support  operation  is  the  Health  and  Social  Protection 
SWAP,  which  is  being  topped  up  with  an  additional  USD  24  million  to  finance  activities 
related to last year’s conflict in the Southern provinces of Osh and Jalalabad. As the Kyrgyz 
Republic  is  a  low-income  country,  all  World  Bank  support  to  it  is  provided  under  highly 
concessional IDA terms, both IDA grants and concessional loans. In particular, the ERSO is 
provided in the form of a mix of grants (45%) and IDA loans6 (55%). The mix between grants 
and loans within IDA financing is determined with reference to recipient country's risk of debt 
distress,  the  level  of  GNI  per  capita,  and  creditworthiness  for  IBRD  borrowing.  Recipients 
with a high risk of debt distress receive 100 percent of their financial assistance in the form of 
grants and those with a medium risk of debt distress receive about 50 percent in the form of 
grants. To note that World Bank IDA loans are also highly concessional entailing repayment 
over 40 year, a 10-years grace period, zero interest and a small service charge. At the start of 
2011, the IDA had 19 active projects in the Kyrgyz Republic, totaling USD 303 million. The 
World  Bank  is  also  involved  in  40  multi-donor  trust  funds  (managing  20  of  them),  which 
amount to close to USD 100 million. IFC and MIGA are also active in the Kyrgyz Republic. 

The  Asian  Development  Bank  (ADB)  pledged  USD  100  million  at  the  July  2010  donor 
conference in the form of a budgetary support operation known as Emergency Assistance for 
Recovery  and  Reconstruction,  which  combines  soft  loans  (on  Asian  Development  Fund 
terms7) and grants in equal parts. The concessional nature of the loans is similar to the one of 
the  World  Bank.  The  operation  was  approved  by  the  ADB  in  September  2010  but 
disbursements  were  delayed  and  part  of  them  moved  to  2011.  Out  of  these  funds,  USD  46 
million are in the form of budgetary support and were disbursed in February 2011. The rest 
have been used to finance the reconstruction of houses in the provinces of Osh and Jalalabad. 
In addition,  the  ADB  is  planning  the  disbursement  of  USD  20  million  in  the last  quarter of 
this  year  under  ADB's  Investment  Climate  Improvement  Program  (ICIP),  which  could, 
however, be delayed until the first quarter of 2012. This would be the second (ICIP II) of a 
series  of  three  such  operations,  the  first  of  which  was  implemented  in  2009.  A  third  such 
operation (ICIP III), also of USD 20 million, is planned for the second half of 2012. 

The  Kyrgyz  Republic  has  also  requested  support  from  the  Eurasian  Economic  Community 
(EurAsEC)  Anti-Crisis  Fund  (in  the  form  of  a  soft  loan).  However,  the  amount  under 
discussion  (which  was  initially  USD  260  million)  was  later  reduced  to  USD  106.7  million, 
and  its  disbursement  repeatedly  delayed.  While  the  IMF  programme  assumes  the  full 

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However,  not  being  a  fully  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 putting forward an MFA 
proposal. Instead, the Commission had to wait until agreement of the ECF was reached, an agreement 
which was delayed for months, partly reflecting delays in the formation of a new government following 
the October 2010 elections. 
Repayment over 40 year, 10-year grace period, zero interest and a small service charge. 
ADF loans have 40-year maturities and 10-year grace periods (as IDA loans) and carry an interest rate 
for 1% for the first 10 years and of 1.5% for the remaining 30 years. 

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disbursement of this loan in 2011, the funds will not be disbursed until after the presidential 
elections  in  the  Kyrgyz  Republic  at  the  end  of  October  2011  and  there  are  considerable 
uncertainties concerning the disbursement of these funds. 

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 Instrument for Stability - IfS8 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. The EU intends to provide Sector 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 beneficiary authorities. 

The Kyrgyz Republic, with support from several donors (the EC, the ADB, the World Bank 
and the UN), is preparing a Country Development Strategy (CDS) for 2012-14, to be adopted 
by  the  Parliament  in  September-October  2011.  The  CDS  will  cover  a  wide  range  of  policy 
areas  ranging  from  judicial  macroeconomic  policy  to  public  order  and  judicial  reform  and 
trade and environmental policy. 

1.4. 

The Kyrgyz Republic's external financing needs 

In  2010  the  current  account  experienced  a  marked  deterioration,  moving  from  a  temporary 
surplus  of  0.7%  of  GDP  in  2009  to  a  deficit  of  2.1%  of  GDP  (or  3.8%  excluding  official 
transfers).  The  deficit  was  projected  to  increase  to  8.7%  of  GDP  in  2011  and  stay  high  at 
8.2%  of  GDP  in  2012  before  gradually  declining  to  5.4%  of  GDP  by  2014.  The  balance  of 
payments difficulties emerged already in 2008 (when the current account deficit temporarily 
reached  8.1%  of  GDP),  because  of  a  hike  in  imported  commodity  prices  (by  20%  in  2007-
2008) and a drop in electricity exports, reflecting a major shortfall in domestic hydro-power 
capacity due to low water levels. Prices of imported commodities went up again in 2010 (by 
25%).  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. In addition, the value of oil imports was driven up by the 100% temporary 
export tax on oil products imposed by Russia in April 2010 (and abolished in February 2011). 
The deterioration in the current account was, however, partially mitigated by higher price of 
gold,  the  Kyrgyz  Republic's  main  export.  In  2011,  growth  in  remittances  and  the  sustained 
high  price  of  gold  may  lead  to  a  marginally better current account situation. These  inflows, 
however, are vulnerable to the economic situation in Russia (main origin of remittances) and 
global market developments. Moreover, as borders reopen and the economy recovers, imports 
are rebounding strongly, outpacing the growth of exports. The recovery of domestic demand 
and high prices of oil (accounting for one quarter of imports) will therefore limit the expected 
decline  in  the  current  account  deficit  during  2011  and  2012.  In  the  long  term,  the  planned, 
foreign-financed  energy  infrastructure  projects  to  secure  energy  supply  to  the  South  of  the 
country, with construction costs of around 4.5% of GDP by 2014, contain a very high import-
element and hence will limit the decline in the current account deficit position. 

8 

The IfS intervenes in the area of conflict prevention, crisis management and peace building. In 2010 a 
Democratisation  and  Stabilisation  package  was  put  in  place  for  a  total  amount  of  EUR  7,2  mn  for 
emergency  humanitarian  assistance,  support  for  the  establishment  of  a  democratic  constitutional 
framework, judicial reform and the rule of law. 

EN 

8 

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Foreign  direct  investment  and  other  private  capital  inflows  were  negatively  affected  by  the 
2009  global  crisis  but  began  to  recover  in  2010  despite  the  political  crisis.  Under  the  IMF 
programme, the capital and financial accounts are expected to show an average annual surplus 
of  about  USD  400  million  during  2011-14,  reflecting  sizable  external  loans  for  public 
investment  projects,  including  loans  by  the  EurAsEC  and  China  for  energy  projects,  and 
steadily increasing FDI (which is projected to average USD 250 million per annum, or about 
4.2% of GDP). 

The nominal  value  of the 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 the official 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.  Under  the  ECF  programme  reserves  are 
targeted  to  increase  from  USD  1.7  billion  at  end  2010  to  2.3  billion  at  end-2014,  but  this 
implies a slight reduction in the import coverage ratio.  

Reflecting the disbursement of official loans, the Kyrgyz Republic's external public debt rose 
from about 41% of GDP at end-2008 to over 57% of GDP at end-2010. The Kyrgyz Republic 
is negotiating with Russia a swap of early post-soviet era debt (USD 193.5 million) against a 
military  factory  but  the  deal  has  not  been  closed  yet.  The  Kyrgyz  Republic  first  had  to  pay 
USD 14.5 million to clear arrears on this debt in April 2011. It has recently paid over USD 0.2 
million  to  settle  obligations  on  the  similar  debt  with  Belarus  as  part  of  a  debt  restructuring 
agreement and has agreed with Turkey on USD 49.5 million debt write-offs. The government 
will also take loans from China on preferential terms to the tune of USD 450 million over the 
next years for the energy projects (including USD 208 million for the next two years).  

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9 

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Table 2. External Financing Requirements in 2011 and 2012 (in USD million) 

2011

2012

in million USD

1. Current  account balance

Trade balance
Services
Income (net)
Net transfers (excluding external budget support)

2. Capital account and financial account

Capital account (net)
Financial account

Medium and long term loans, net
Foreign direct investment
Commercial banks

3. Errors and omissions

4. Overall balance (1+2)

5. Gross reserves (-increase)

6. Overall financing needs (4+5)

7. Exceptional financing by the IMF and WB

IMF purchases
World Bank (gross)

-453
-1640
-175
-198
1559

349
289
60
-149
219
-10

0

-104,0

-167,0

271,0

59,8
29,8
30,0

-464
-1849
-145
-251
1780

361
-1
362
-107
240
15

0

-104,0

-45,0

149,0

29,7
29,7
na

8. Residual financing gap after IMF and WB (6 – 7)

211,2

119,3

Financing of the residual financing gap
The EU Budget Support program
EURASEC anti-crisis fund
Asian Development Bank
Others

The EU MFA (EUR 15 mn for each year)

Memorandum item

Total MFA as % of the residual financing gap for 2011-2012

Sources: IMF and Commission staff estimates 

16,4
106,7
50,6
10,0

20,5

17,1
na
na
na

20,5

12,4

Based  on  the  above-  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 covered by other donors. The assumed donor financing 
includes,  as  indicated  already,  contributions  from  the  ADB,  the  EurAsEC  Anti-Crisis  Fund 
(still to be confirmed), other bilateral donors, and finally the EU. The disbursements under the 
EU sectoral budget support programmes in 2011-12 are expected to amount to EUR 12 and 
12.5  million  respectively  (USD  33.5  million  for  the  two-year  period).  A  MFA  operation 
amounting  to  EUR  30  million  (USD  41  million)  would  correspond  to  about  12.4%  of  the 
residual external financing gap for 2011-12. 

EN 

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1.5. 

Structural reform challenges 

Banking sector: the banking system was severely affected by the crisis. In April 2010, seven 
banks  were  put  under  temporary  administration,  although  the  problems  were  mostly 
concentrated in the largest bank (the Asia Universal Bank, AUB), which accounted for 44% 
of  banking  system  deposits.  Subsequently,  two  banks  were  released  from  temporary 
administration,  four  were  placed  under  conservatorship  and  AUB  was  nationalised  and 
separated  into  a  "bad  bank"  and  a  "good  bank"  (called  Zalkar  Bank).  The  assets  of  Zalkar 
Bank  are  being  audited  to  get  a  clearer  picture  of  their  value.  If  the  audit  confirms  the 
solvency of Zalkar Bank, the authorities intend to privatise this bank. If the audit concludes 
that the bank is insolvent, the authorities intend to start bankruptcy procedures and dispose of 
its  assets  and  liabilities.  The  authorities  will  cover  the  losses  from  AUB  restructuring 
operations. The IMF estimates that these losses, which will be covered by issuing state bonds, 
will amount to up to 0.6% of GDP in 2011. 

On the positive side, a run on deposits was avoided and the four banks under conservatorship 
now  account  only  for  3%  of  system  deposits.  Capital  adequacy  ratios  remained  at  elevated 
levels (of over 30%), but non-performing loans rose to 13.8% of total loans by March 2011. 
The credit expansion remains  tame and credit to private sector stands at only 13%  of  GDP. 
The  domestic  financial  sector  remains  underdeveloped,  lending  interest  rates  are  high  and 
about 50% of loans and deposits are denominated in foreign currency (mostly USD).  

The banking crisis has revealed deficiencies in the bank resolution powers and degree of de 
facto  independence  of  the  central  bank,  including  its  exposure  to  interference  by  the 
government  and  the  courts.  Consequently,  banking  regulations  are  being  amended  and 
upgraded to a Banking Code to strengthen the central bank’s early intervention and resolution 
powers, while the IMF program address issue of the independence of the central bank. 

Public finance management (PFM): on-going work is based on a medium-term PFM reform 
action plan for 2009-2013 adopted by the government in 2009, which was in turn based on the 
Public Expenditure and Financial Accountability (PEFA) study undertaken in 2009. The PFM 
action plan is being supported by a Multi-Donor Trust Fund (MDTF)9. The political events of 
2010  hindered  progress  in  PFM  reforms  over  the  last  year  and  a  half,  but  this  situation  has 
been reversed. An IMF technical assistance mission examined PFM issues in August 2011. A 
PEFA  update  is  envisaged  for  2013.  The  World  Bank  is  planning  to  undertake  a  Public 
Expenditure Review in 2012. 

One  of  the  main  weaknesses  in  PFM  is  the  system  of  external  audit  and  this  area  requires 
longer  term  support  in  capacity  building.  The  Law  on  the  Chamber  of  Accounts  (supreme 
audit  institutions)  is  broadly  adequate  but  the  capacities  of  this  institution  need  to  be 
developed. The World Bank is providing technical assistance in this area. Public procurement 
is another source  of concern. An  amended law on public procurement is supposed to tackle 
some  o  the  deficiencies  but  has  yet  to  be  assessed  by  international  experts.  A  specialised 
agency on public procurement has been abolished and the Ministry of Finance is in charge of 
procurement  issues  for  the  time  being.  While  there  has  been  tangible  progress  on  internal 
audit  in  some  line  ministries  (notably  in  the  Ministry  of  Health  supported  by  the  World 
Bank’s  Health  and  Social  Protection  project), 
there  remains  significant  room  for 
improvement. 

9 

The MDTF, which is managed by the World Bank, was established in 2009 with contributions from the 
EU, Sweden (SECO), Switzerland (SIDA), the UK (DFID) and the World Bank. The EU is contributing 
EUR 2.8 mn to MDTF out of total USD 4.6 mn. 

EN 

11 

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Poverty  alleviation:  the  Kyrgyz  Republic  is  a  poor  country,  with  a  2010  GNI  per  capita 
income of 880 international US dollars, i.e. well below the World Bank’s official criteria for 
IDA  eligibility  of  less  than  1,175  USD  per  capita  income.  The  dynamics  of  poverty 
alleviation  were  rather  favourable  before  the  outset  of  the  global  recession  and  internal 
shocks.  During  2000-08,  the  extreme  poverty  ratio  declined  by  an  average  of  4  percentage 
points  per  year  while  general  poverty  declined  by  an  average  of  3.8  percentage  points  per 
year.  However,  by  2008  around  6%  of  population  still  lived  in  extreme  poverty  and  32% 
under  the  general  poverty  threshold.  Moreover,  poverty  ratios  in  the  rural  areas  are  much 
higher (51% of people living under the poverty threshold) and significant gender disparities in 
poverty  levels  persist10.  Also,  the  2010  events  and  the  recent  spike  in  food  and  energy 
inflation are expected to result in a partial reversal of the previous gains in the fight against 
poverty. The UNDP estimates that general poverty increased by 4.3 percentage points in 2010 
as a result of hike in energy and food prices. On the other hand, the government’s fiscal policy 
plans  should  contribute  to  the  poverty  reduction  efforts.  Overall  social  spending  is 
safeguarded  under  the  IMF  programme  and  targeted  social  assistance  programmes  (notably 
the  so-called  Unified  Monthly  Benefit  and  Monthly  Social  Benefit  programmes)  will  be 
reinforced. 

Trade  issues:  the  Kyrgyz  Republic  is  a  member  of  the  WTO  and  is  a  very  open  economy, 
with  a  trade-to-GDP  ratio  of  almost  140%.  The  bulk  (40%  in  2010)  of  its  exports  goes  to 
Kazakhstan  and  Russia  –  which  are  members  of  a  trilateral  customs  union  (CU),  also 
including  Belarus.  In  April  2011,  the  Kyrgyz  Republic  applied  for  membership  of  this  CU. 
However, the economic impact of such a decision has yet to be properly assessed, while the 
negotiations over the terms of joining the CU may take some time, i.e. from two to five years. 
The main benefits the Kyrgyz Republic expects to obtain from entering this CU, apart from 
possible  foreign  policy  considerations,  is  to  preserve  the  supply  of  oil  supplies  from  Russia 
and  Kazakhstan  at  favourable  prices  and  to  limit  the  risk  of  disruptions  in  trade  flows  with 
those  important  trading  partners  (such  as  last  year’s  temporary  border  closure  with 
Kazakhstan). 

Entering  the  CU  would  entail  a  number  of  significant  costs.  First,  it  might  clash  with  the 
Kyrgyz  Republic's  WTO  commitments,  as  the  Kyrgyz  Republic  would  be  the  only  CU 
member  with  WTO  membership  (depending  on  progress  in  the  WTO  accession  process  of 
Russia).  Since  the  CU  has  a  relatively  high  Common  External  Tariff  (CET),  the  Kyrgyz 
Republic would have to compensate other WTO members. More importantly, joining the CU 
would  restrict  the  important  transit  trade  with  China.  Since  both  China  and  the  Kyrgyz 
Republic  are  WTO  members,  the  Kyrgyz  Republic  imports  Chinese  goods  cheaply  (gray 
imports  are  also  pervasive)  and  re-exports  them  to  neighbouring  countries,  with  which  the 
Kyrgyz Republic has a free trade agreement under the CIS framework. A possible demise of 
open air markets serving such trade is a very sensitive social issue, since according to various 
estimates  the  two  biggest  markets  provide  direct  and  indirect  employment  up  to  100,000 
people. 

10 

The  Kyrgyz  Republic.  Second  progress  report  on  the  millennium  development  goals,  UNDP  The 
Kyrgyz Republic, 2011. 

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2. 

OBJECTIVES AND RELATED INDICATORS OF THE MACRO-FINANCIAL ASSISTANCE 

2.1. 

Objectives 

The objectives of the proposed MFA operation are to:  

•  Contribute  to  covering  the  external  financing  needs  of  the  Kyrgyz  Republic  and  to 

alleviating budgetary financing needs. 

•  Support the fiscal consolidation effort and external stabilisation in the context of the IMF 

programme. 

•  Support  structural  reform  efforts  aimed  at  improving  the  overall  macroeconomic 
management (e.g. targeting the transparency and efficiency of public finance management 
and the financial stability) and at improving conditions for sustainable growth. 

2.2. 

Indicators 

The  fulfilment  of  the  objectives  of  the  assistance  will  be  assessed  by  the  Commission, 
including in the context of the ex-post evaluation (see below), on the basis of the following 
indicators:  

•  Progress with macroeconomic and financial stabilisation, notably by assessing the degree 

of adherence to the IMF-supported programme.  

•  Progress with the implementation of structural reforms, notably the specific policy actions 
identified  as  conditions  for  disbursement  of  the  assistance,  which  will  be  included  in  a 
Memorandum of Understanding, to be negotiated between the Commission and the Kyrgyz 
authorities.  Conditions  will  include  structural  measures  most  relevant  for  ensuring 
macroeconomic stability, e.g. measures in the field of public finance management reforms 
and reforms to strenthgten the financial sector. 

3. 

DELIVERY MECHANISMS AND RISK ASSESSMENT 

3.1. 

Delivery mechanisms 

The  proposed  new  MFA  would  amount  to  EUR  30  million.  Regarding  the  form  of  the 
assistance, the Commission proposes to disburse it half in loans and half in grants11. 

The Kyrgyz Republic clearly falls in the group of countries qualifying for grant support. Its 
per capita income is well below the World Bank's threshold for IDA eligibility (1,175 USD 
per capita) and its poverty ratios are high (with over 30% of people living below the general 
poverty line and over 50% in the rural areas). Due to the events in 2010, poverty ratios, after 
progress in previous years, are likely to have again deteriorated, also linked to a hike in the 
price  of  foodstuff's.  Debt  ratios  all  exceed  the  recommendable  benchmark  levels  (with  the 
exception  of  the  debt  service  ratio,  reflecting  the  large  share  of  concessional  debt).  The 
proposed  form  of  the  assistance  is  also  consistent  with  the  way  the  IFIs  treat  the  Kyrgyz 
Republic. Indeed, the World Bank, the Asian Development Bank (ADB) and the IMF all treat 
this country as a fully concessional assistance country, rather than as a blended country. The 
EU  methodology  establishes  for  such  countries  a  presumption  of  including  concessional 

11 

See Commission Staff Working Paper SEC(2011) 874 of 7 July 2011 on criteria for determining the use 
of loans and grants in EU MFA. According to these criteria the Kyrgyz Republic would even qualify for 
a full grant. However, initial feedback by Member States underlined their preference for a 50-50 split 
between the grant and loan components. 

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13 

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assistance,  provided  that  also  the  other  two  criteria  (high  poverty  levels  and  low  debt 
sustainability) are met. 

In the case of the World Bank, support under IDA terms consists of the mix of grants (45%) 
and  IDA  concessional  loans  (55%).  The  ADB  uses  a  similar  split  between  grants  and 
concessional  loans  for  countries  eligible  to  benefit  from  the  Asian  Development  Fund  (the 
concessional arm of the ADB). However, one should bear in mind that the loan components 
of the World Bank and ADB support are much more concessional than loans provided by the 
EU under the MFA instrument. The WB IDA loans entail repayment over 40 year, a 10-years 
grace period, zero interest and a small service charge. The ADB provides soft loans with 40-
years maturities, 10-years grace period and an interest rate of 1% for the first 10 years and of 
1.5%  for  the  remaining  30  years.  The  IMF  ECF  (SDR  66.6  million)  carries  a  zero  interest 
rate, with a grace period of 5 and half years, and a final maturity of 10 years. 

These  conditions  result  in  a  grant  element  of  the  loan  part  of  the  World  Bank  and  ADB 
financing packages of about 75% and close to 85% for the whole packages, including the part 
provided  in  grants.  In  the  case  of  the  IMF  assistance  through  the  ECF,  the  grant  element  is 
smaller  (amounting  to  around  30%).  In  this  context,  it  should  be  noted  that  under  the  IMF 
arrangement the Kyrgyz Republic is not allowed to take up loans with a grant element lower 
than 35%. 

MFA  is  an  untied  and  undesignated  macroeconomic  support  instrument,  which  helps  the 
beneficiary  country  meet  its  external  financing  needs,  and  may  contribute  to  alleviating 
budgetary  financing  needs.  The  funds  would  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  residual  budgetary  financing  needs,  the  funds  may  be  transferred  to  the 
Treasury of Kyrgyz Republic as the final beneficiary.  

3.2. 

Risk assessment 

There are fiduciary, policy and political risks related to the proposed MFA 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 the quality of financial circuits and management 
systems in the central bank and the ministry of finance, administrative procedures, control and 
oversight  functions,  the  security  of  IT  systems  and  the  appropriatedness  of  internal  and 
external audit capabilities.  

To mitigate the risks of fraudulent use several measures will be taken. First, the Memorandum 
of  Understanding  and  the  Grant  and  Loan  Agreements  will  comprise  a  set  of  provisions  on 
inspection,  fraud  prevention,  audits,  and  recovery  of  funds  in  case  of  fraud  or  corruption. 
Also, the assistance will be paid to a dedicated account at the National Bank of the Kyrgyz 
Republic (NBKR). Moreover, before the agreement on the Memorandum of Understanding is 
reached, the Commission services will conduct, with the  support  of external consultants, an 
Operational  Assessment,  in  order  to  assess  the  reliability  of  financial  circuits  and 
administrative  procedures  that  are  relevant  to  this  type  of  assistance  and  will  determine 
whether  the  framework  for  sound  financial  management  of  macro-financial  assistance  is 
sufficiently  effective  in  the  Kyrgyz  Republic.  In  the  light  of  this  assessment,  specific 
mechanisms applying to the management of the funds by the beneficiaries may be introduced 
in  agreement  with  the  national  authorities.  The  Commission  is  also  using  budget  support 
assistance instrument to help the Kyrgyz authorities improve their public finance management 
systems  and  these  efforts  are  strongly  supported  by  other  other  donors.  Against  this 
background, special conditionalities on improving public finance management will potentially 

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be  required.  Finally,  the  assistance  will  be  liable  to  verification,  control  and  auditing 
procedures  under  the  responsibility  of  the  Commission,  including  the  European  Antifraud 
Office (OLAF), and the European Court of Auditors.  

There is also a risk that the Government of 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. However, 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.  

The main risks to the proposed operation relate to a possible reactivation of the inter-ethnic 
tension and political instability and an insufficient implementation of the fiscal consolidation 
programme agreed with the IMF. The Kyrgyz Republic also remains vulnerable to negative 
changes in terms of trade stemming from possible exogenous shocks.  

Consolidation of the democratic reforms and institutions in establishing the first parliamentary 
democratcy in the region is at the core of continued social and economic progress. While the 
country  is  preparing  for  an  orderly  conduct  of  the  presidential  elections  scheduled  for  30 
Octorber  2011  to  transfer  power  to  the  democratically  elected  head  of  state,  political  risks 
remain  manageable,  given  recent  impressive  efforts  of  Kyrgyz  authorties  to  establish 
legitimate democtratic institutions.  

Having made a thorough assessment of the risks, the Commission services consider that there 
are sufficiently strong grounds to proceed with the MFA to Kyrgyz Republic.  

The  Commission  services  will  maintain  close  contacts  with  the  authorities  during  the 
implementation  of  the  macro-financial  assistance  in  order  to  address  quickly  any  concerns 
that may arise.  

4. 

ADDED VALUE OF EU INVOLVEMENT 

The Kyrgyz Republic is the country in the region most 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 and 
political  progress  in  the  country.  By  complementing  the  resources  made  available  by  the 
international  financial  institutions,  bilateral  donors  and  other  EU  financial  institutions,  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. 

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5. 

GENVAL CRITERIA ON MACRO-FINANCIAL ASSISTANCE 

In  October  2002,  the  Council  reconfirmed  a  set  of  principles  for  the  use  of  the  European 
Union's macro-financial assistance (Genval criteria)12. The five criteria are: (i) the exceptional 
character of the assistance; (ii) its complementarity to financing of the International Financial 
Institutions  (IFIs);  (iii)  the  existence  of  policy  conditionality  attached  to  the  assistance;  (iv) 
the  existence  of  political  pre-conditions;  and  (v)  strong  financial  discipline  that  needs  to 
accompany the MFA.  

5.1. 

Exceptional Character and Limited Timeframe  

The proposed MFA operation will be exceptional and limited in time and will run in parallel 
to the IMF's ECF, even with a shorter time span than the ECF itself. Against this background 
and given the expected time of approval of the programme, the assistance is expected to be 
implemented in  2011-2012. The disbursement of the first tranche could take place beginning 
of 2012. The second tranche, conditional on a number of policy measures, could be disbursed 
in  the  third  or  fourth  quarter  of  2012.  While  in  the  short-term  the  country  faces  substantial 
balance  of  payments  financing  needs,  the  macroeconomic  and  structural  adjustment 
programme agreed with the IMF and supported by the proposed MFA is expected to produce 
a gradual strengthening of the balance of payments and fiscal positions.  

5.2. 

Political preconditions  

While the Kyrgyz Republic lies outside the primary geographical scope of the instrument of 
MFA, normally reserved to pre-accession and neighbourhood countries, a MFA operation is 
justified by the existence of substantial external financing needs, the strength of the political 
and  economic  reform  momentum  in  the  country  and  by  its  position  in  a  region  of  strategic 
economic  and  political  importance  for  the  EU.  In  political  terms,  MFA  is  reserved  to  third 
countries  that  respect  democracy  and  human  rights  and  with  which  the  EU  maintains  close 
political  and  economic  links.  The  Kyrgyz  Republic  has  emerged  as  the  first  parliamentary 
democracy  in  Central  Asia  following  the  recent  constitutional  reforms  and  has  conducted 
reasonably  fair  and  free  parliamentary  elections.  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.  

Presidential  elections  were  carried  out  on  30  October  2011.  The  election  observation 
delegation  of  the  European  Parliament  stated  in  a  preliminary  report  that  "the  delegation 
positively  assessed  the  voting  procedures  on  election  day  but  would  like  to  underline  the 
necessity to improve the voter registration system to further increase public confidence in the 
electoral  system".  In  a  statement  on  the  elections  the  High  Representative  and  Commission 
Vice-President Ashton underlined "the EU's readiness to continue its support for the necessary 
reforms  in  the  country,  in  particular  in  the  areas  of  rule  of  law  and  socio-economic 
development,  which  should  go  hand-in-hand  with  further  national  reconciliation,  consistent 
progress on democratic reforms and full respect for human rights in Kyrgyzstan". 

12 

Council conclusions of 8 October 2002 on MFA and the accompanying letter of the Council President 
to the Commission President. 

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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. 

5.3. 

Complementarity 

The proposed MFA would supplement, as noted, the assistance being provided by the IMF (in 
the context of an ECF arrangement) and by other donors, helping to cover part of the residual 
balance of payments financing gap. The share of residual financing covered by the EU’s MFA 
(12,4%  for  the  period  2011-12)  would  be  consistent  with  the  Council's  guidelines.  The 
complementarity and fair burden-sharing criterion would therefore be fulfilled.  

Regarding  the  complementarity  with  other  EU  instruments,  the  key  added  value  of  MFA 
would  be  to  help  create  an  appropriate  macroeconomic  and  structural  reform  framework, 
which  can  increase  the  effectiveness  of  the  actions  financed  through  other  instruments  (see 
1.3). The PFM reform conditionality, to be attached to the MFA, would complement the PFM 
measures agreed in the context of the EU’s budget support operation in the social sector.  

5.4. 

Conditionality 

As  usual  with  the  MFA  instrument,  disbursements  would  be  conditional  on  successful 
programme reviews under the IMF arrangement. In addition, the Commission and the Kyrgyz 
authorities  would  agree  on  specific  structural  reform  measures  in  a  Memorandum  of 
Understanding. The areas of structural conditionality will be determined at a later stage, based 
on the government's current reform programme and the on-going cooperation of the donors, 
and in particular the EU, with the authorities. The Commission's current intention is to focus 
on  structural  measures  most  relevant  for  ensuring  macroeconomic  stability,  in  particular 
measures in the fields of public finance management, tax reform and financial sector reform.  

5.5. 

Financial Discipline 

Based  on  the  currently  foreseen  pipeline  of  possible  MFA  operations,  the  planned 
appropriations on the macroeconomic assistance budget line (01 03 02) for 2012 are deemed 
sufficient  to  finance  a  grant  of  EUR 15 million  to  the  Kyrgyz  Republic,  subject  to  the  final 
decision of the budgetary authority.  

The  2012  budget  is  not  approved  yet  but  the  Commission's  proposal  to  the  budgetary 
authority (draft budget), foreseeing for budget line 01 03 02 CA of EUR 105 million, has been 
reduced by the Council and the Parliament to EUR 95.550 million. Out of this amount, EUR 
23 million could be used for the grant component of the MFA to Georgia, which is still being 
discussed in the Council and the Parliament. There is still high uncertainty over possible new 
MFA operations to be launched in 2012. Two possible operations could be programmes for 
Egypt, in case the Egypt authorities review their plans for an agreement with the IMF, and for 
Armenia,  in  case  it  is  confirmed  that  despite  the  implementation  of  the  on-going  three-year 
arrangement with the IMF under the combination of the Fund's Extended Fund Facility (EFF) 
and ECF Armenia will still be facing substantial uncovered financing needs. In both cases, the 
Commission  would  envisage  proposing  a  mix  of  loans  and  grants,  with  higher  loan 
components. 

6. 

PLANNING OF FUTURE MONITORING AND EVALUATION 

This assistance is of exceptional and macroeconomic nature and its monitoring and evaluation 
will be undertaken in line with the standard Commission procedures.  

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6.1.  Monitoring 

Monitoring  will  involve  the  review  of  reports  and  data  provided  by  the  authorities  and  by 
review missions to the Kyrgyz Republic by Commission  staff. To monitor the  fulfilment of 
the objectives of the programme throughout the implementation period of the assistance, the 
Commission will use two types of indicators:  

•  Adherence  to  the  IMF-supported  programme,  including  compliance  with  macroeconomic 
performance  criteria  and  structural  reform  benchmarks  identified  under  the  ECF,  as 
reported by the IMF in the context of the regular review of the programme.  

•  Progress in the implementation of structural policy indicators, which are to be agreed with 
the  Kyrgyz  authorities  in  a  Memorandum  of  Understanding.  In  this  process,  the 
Commission services will monitor key areas of the public finance management system, as 
they  will  be  identified  in  the  update  of  the  Operational  Assessment,  so  as  to  have  the 
relevant  information  on  any  changes  in  the  control  environment.  Ahead  of  the 
disbursement of the second instalment, the authorities will be asked to submit a compliance 
statement in relation to the policy conditionalities. In addition, under the Memorandum of 
Understanding  monitoring  system,  the  authorities  will  be  required  to  submit  quarterly 
reports of certain economic and reform indicators.  

Although  this  assistance  is  centrally  managed,  where  appropriate,  the  EU  Delegation  in  the 
Kyrgyz Republic will also be called to provide reporting. An annual report, as well as regular 
information  on  developments  in  the  management  of  the  assistance,  to  the  European 
Parliament and to the Council are foreseen.  

6.2. 

Evaluation 

Ex-post evaluations of macro-financial assistance operations are foreseen in the Multi-Annual 
Evaluation Programme of the Commission's Directorate-General for Economic and Financial 
Affairs. An ex-post evaluation of the proposed macro-financial assistance to the the Kyrgyz 
Republic will be launched within a period of two years after the completion of the operation. 
A provision for the ex-post evaluation is included in the proposed Decision for the assistance, 
and will also be included in the Memorandum of Understanding. Budget appropriations from 
the macroeconomic assistance budget line will be used for this evaluation.  

7. 

ACHIEVING COST-EFFECTIVENESS 

The proposed assistance would entail a high degree of cost effectiveness for several reasons:  

•  First,  since  the  assistance  would  be  leveraged  by  that  provided  by  the  international 
financial  institutions,  with  which,  as  noted,  it  would  be  closely  coordinated,  its  ultimate 
impact  could  be  very  significant  compared  to  its  cost.  Moreover,  in  negotiating  specific 
policy  conditions,  the  Commission  will  be  able  to  draw  on  the  expertise  of  those 
institutions,  including  the  International  Monetary  Fund  and  the  World  Bank,  and  to 
influence their conditionality as well in ways that will take into account the EU's views.  

•  Second, providing a coordinated macroeconomic support to Kyrgyztan on behalf of the EU 
countries,  the  MFA  would  be  more  cost  efficient  than  the  provision  of  a  similar  total 
amount of financial support by EU Member States individually.  

•  Third, part of the assistance would be provided in the form of loans, the budgetary impact 

of which is more limited. 

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•  In  addition,  the  Commission  will  aim  at  achieving  synergies  with  other  EU  policies  and 
instruments used to support the implementation by the beneficiary of the relevant measures 
(notably in the area of public finance management).  

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