REPORT FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN PARLIAMENT on the implementation of macro-financial assistance to third countries in 2011
Date: 2012-06-28
Institutions: European Commission
Subjects: Armenia, Bosnia and Herzegovina, EU aid, EU control, Georgia, Kyrgyzstan, Moldova, Serbia, Ukraine, financial aid, terms for aid

EUROPEAN COMMISSION 

Brussels, 28.6.2012  
COM(2012) 339 final 

REPORT FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN 
PARLIAMENT 

on the implementation of macro-financial assistance to third countries in 2011 

{SWD(2012) 181 final} 

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TABLE OF CONTENTS 

1. 

2. 

2.1. 

2.2. 

3. 

3.1. 

3.2. 

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

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

Developments in 2011.................................................................................................. 4 

MFA Framework Regulation ....................................................................................... 4 

Macro-financial assistance operations in 2011 ............................................................ 5 

Overview ...................................................................................................................... 5 

Individual operations in the beneficiary countries in 2011 .......................................... 6 

3.2.1.  Western Balkans........................................................................................................... 6 

3.2.1.1.  Bosnia and Herzegovina............................................................................................... 6 

3.2.1.2.  Serbia............................................................................................................................ 7 

3.2.2.  Eastern Neighbourhood Countries ............................................................................... 7 

3.2.2.1.  Armenia........................................................................................................................ 7 

3.2.2.2.  Georgia ......................................................................................................................... 8 

3.2.2.3.  The Republic of Moldova ............................................................................................ 8 

3.2.2.4.  Ukraine ......................................................................................................................... 9 

3.2.3.  Central Asia................................................................................................................ 10 

3.2.3.1.  The Kyrgyz Republic ................................................................................................. 10 

4. 

4.1. 

4.2. 

4.3. 

5. 

Ensuring a proper use of MFA funds: operational assessments, PEFA and Ex-
post evaluations .......................................................................................................... 10 

Operational assessments............................................................................................. 10 

Public Expenditure and Financial Accountability assessments ................................. 11 

Ex-post evaluations .................................................................................................... 11 

Requests for assistance and future Commission proposals; budgetary situation ....... 12 

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REPORT FROM THE COMMISSION TO THE COUNCIL AND THE 
EUROPEAN PARLIAMENT 

on the implementation of macro-financial assistance to third countries in 2011 

1. 

INTRODUCTION 

The  report  provides  a  general  overview  of  the  implementation  of  the  EU's  macro-
financial assistance (MFA) to third countries in 2011. It describes the overall context in 
which  MFA  operations  were  approved  and  implemented,  includes  information  on  the 
most recent operations in the countries neighbouring the EU, provides a short outlook on 
possible  future  operations  and  their  budgetary  impact  and  presents  general  statistics  on 
the various MFA operations carried over the last ten years. 

MFA,  as  part  of  the  EU's  external  assistance  framework,  is  an  instrument  designed  for 
countries close to the EU, addressing exceptional external financing needs in the form of 
balance of payment support. Its objective is to strengthen macroeconomic and financial 
stability in candidate and potential candidate countries and in countries in the European 
neighbourhood, while encouraging the implementation of appropriate structural reforms. 
It  complements  and  is  conditional  to  the  existence  of  an  adjustment  and  reform 
programme with the IMF. MFA takes either the form of loans, for which the Commission 
borrows  the  necessary  funds  in  capital  markets  and  on-lends  them  to  the  beneficiary 
country, and/or, in specific circumstances, grants, financed by the EU budget. 

The  year  2011  was  characterised  by  the  continuous  implementation  of  existing  MFA 
operations, while no new MFA operation was approved by the Council and Parliament. 
Crucially, in July 2011 the Commission proposed a new Framework Regulation on MFA 
and discussions were launched in the Council and the Parliament. The outcome of these 
discussions will be important for the future of MFA as a strategic emergency instrument 
helping  to  stabilise  the  economies  of  countries  close  to  the  EU.  A  decision  on  the 
Framework  Regulation  by  the  co-legislators  is  expected  for  the  second  half  of  2012  or 
2013.  

The report also contains a section on the operational assessments, Public Expenditure and 
Financial Accountability (PEFA) studies and ex-post evaluations conducted in countries 
receiving MFA. In 2011, the Commission finalised, with the support of consultants, two 
operational  assessments  and  conducted  two  PEFA  studies  in  countries  with  MFA 
programmes.  The  Commission  also  launched  three  ex-post  evaluations  of  completed 
MFA operations.  

Finally,  the  report  provides  information  on  new  requests  for  MFA  and  possible  new 
Commission MFA proposals in the pipeline, including their budgetary implications. 

This report is prepared in accordance with the Council and joint Council and Parliament 
decisions  regarding  MFA  operations.  It  follows  the  reports  presented  in  the  previous 
years.  It  is  accompanied  by  a  Commission  Staff  Working  Document  (SWD(2012)  181 

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final) providing more detailed information on and analysis of the macroeconomic context 
and implementation of individual MFA operations. 

2. 

BACKGROUND 

2.1. 

Developments in 2011 

The  global  economic  and  financial  crisis  of  2008-2009,  which  affected  profoundly  the 
emerging  economies  of  the  European  Union's  neighbourhood,  resulted  in  a  surge  of 
requests  for  financial  support  from  the  EU,  including  in  the  form  of  MFA.  Four  such 
programmes  in  favour  of  Bosnia  and  Herzegovina,  Serbia,  Armenia  and  Georgia  were 
decided by the EU Council of Ministers at the end of 2009 and the earlier approved MFA 
for  Kosovo*  was  extended  by  one  year  in  2009.  In  2010,  two  more  programmes,  in 
favour  of  Ukraine  and  the  Republic  of  Moldova,  were  decided  by  the  EU  legislators  – 
this time, following the entry into force of the Lisbon treaty, jointly by the Council and 
the Parliament. The operations for Georgia and Kosovo were finalised in 2010. In 2011 
and  early  2012,  the  Commission  completed  the  implementation  of  the  programmes  for 
Serbia, Armenia and Moldova and continued the preparations for the implementation of 
the programmes for Bosnia and Herzegovina and Ukraine.  

The  overall  economic  situation  in  2010  and,  to  some  extent,  in  the  first  half  of  2011, 
improved  considerably  and  eased  somewhat  the  pressure  on  the  balance  of  payments 
position  for  MFA  eligible  countries.  Therefore,  in  2011  only  two  new  proposals  were 
adopted  by  the  Commission,  namely  for  Georgia  in  January  2011  and  for  the  Kyrgyz 
Republic in December 2011. These proposals have since been under consideration by the 
Parliament and the Council. However, the decision-making process has been delayed due 
to a difference of views between the co-legislators on the legally appropriate procedure 
under which the Member States committee should be consulted on the Memorandum of 
Understanding of the MFA programme. 

In the second half of  2011,  triggered by the sovereign debt  crisis, the conditions in  the 
global  financial  markets  became  markedly  more  difficult.  In  addition,  the  Arab  Spring 
and  the  resulting  political  and  economic  upheavals  in  the  Arab  Mediterranean  partner 
countries1  put  heightened  pressure  on  the  budgets  and  the  external  positions  in  these 
economies. These developments are expected to lead to an increased demand for MFA in 
2012. A first case has been the renewed request by the Egyptian Government in February 
2012 to initiate a MFA operation for EUR 500 million. The Commission is in the process 
of estimating, in liaison  with  the  IMF, Egypt's residual external financing  needs with a 
view to the possible adoption of a proposal for a MFA to this country.  

*  

1 

This designation is without prejudice to positions on status, and in line with UNSCR 1244 and the 
ICJ Opinion on the Kosovo Declaration of Independence. 
For background information on recent economic developments in the Southern neighbours, see 
also "The EU's neighbouring economies: coping with new challenges", Occasional Papers no. 86 / 
November 2011, DG ECFIN, European Commission 
(http://ec.europa.eu/economy_finance/publications/occasional_paper/2011/index_en.htm ) 

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2.2.  MFA Framework Regulation 

As  early  as  2003,  the  European  Parliament  identified  the  lengthy  decision-making 
process – decisions on individual MFA operations were taken on a case-by-case basis by 
the  Council,  after  consultation  of  the  Parliament  –  as  one  of  the  main  shortcomings  of 
MFA.  Also,  the  Parliament  stressed  the  need  for  a  transparent  legal  basis  for  the 
instrument  of  MFA  as  a  whole.  Since  the  entry  into  force  of  the  Lisbon  Treaty  on  1 
December 2009, legislative decisions on individual MFA operations have been taken by 
the  Parliament  and  the  Council  under  the  ordinary  legislative  procedure  (co-decision), 
resulting  in  a  rather  lengthy  decision-making  process.  This  has  increased  the  calls  for 
streamlining  the  procedure  for  adopting  MFA  decisions.  As  it  has  been  highlighted  by 
the  financial  and  debt  crisis,  dealing  effectively  with  macroeconomic  and  financial 
emergency situations requires a crisis response instrument that can be deployed quickly 
and efficiently.  

Responding  to  these  developments,  the  Commission  adopted  a  proposal  for  the 
Framework Regulation on 4 July 20112. The main objectives of the proposal are: (i) to 
make  macro-financial  assistance  more  effective  through  a  swifter  and  more  efficient 
decision-making  process;  (ii)  to  align  the  decision-making  process  with  that  of  other 
instruments, mainly related to external relations; (iii) to formalise the rules governing the 
instrument and give the European Parliament co-ownership of them; and (iv) to update 
and simplify some of the rules. 

The  main  features  of  the  proposal  are:  (i) decisions  granting  macro-financial assistance 
would be taken by the Commission through an implementing act under the control of a 
Member  States  committee;  (ii)  the  Genval  criteria,  which  were  laid  down  in  various 
Council Conclusions and were also supported by the European Parliament Resolution of 
2002, would be reaffirmed in a regulation and would therefore become legally binding; 
(iii) some of the criteria would be updated or clarified, in particular those relating to the 
threshold for MFA operations with respect to the residual financing gap, the geographical 
eligibility (in order to formally recognise the existence of the EU Neighbourhood policy 
in the MFA context) and the choice between grants and loans in MFA operations. 

Discussions  were  conducted  both  in  the  Council  and  the  Parliament.  The  Council 
finalised its first conclusions in December 2011 (in a so-called "general approach"). The 
Parliament commissioned a study on the effectiveness of MFA and, in the beginning of 
2012,  discussed  a  report  on  the  Commission  proposal  in  the  International  Trade 
Committee. It is expected that the decision on the proposal will be taken in the second 
half of 2012 or in 2013.  

2 

Commission proposal for a regulation of the European Parliament and of the Council lying down 
general  provisions  for  Macro-Financial  Assistance  to  third  countries  -  COM(2011)  865  final, 
4.7.2011. 

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3. 

MACRO-FINANCIAL ASSISTANCE OPERATIONS IN 2011 

3.1. 

Overview  

In 2011, the MFA operation for Serbia adopted in 2009 was completed. In July 2011, the 
first  tranche  of  the  assistance,  a  EUR  100  million  loan,  was  disbursed  to  the  Serbian 
authorities, closing this MFA operation, as the second tranche of the same amount was 
cancelled due to Serbia's lower external financing needs and its decision not to draw fully 
on programmed IMF disbursements. Regarding the MFA to Armenia, the Memorandum 
of Understanding was signed in February 2011 and the first tranche – a EUR 14 million 
grant and a EUR 26 million loan – was disbursed in July 2011. The disbursement of the 
second  tranche  –  a  EUR  21  million  grant  and  a  EUR  39  million  loan  –  was  agreed  in 
December.  The  grant  part  was  effectively  disbursed  on  27  December  2011,  while  the 
loan part was paid on 9 February 2012.  

With  respect  to  the  MFA  to  Moldova,  the  Commission  released  the  second  tranche  (a 
EUR 20 million grant) in September 2011. The release of the third tranche could not take 
place  before  the  end  of  2011,  as  originally  foreseen,  since  several  conditions  had  not 
been met. The tranche was eventually disbursed in early April 2012. The implementation 
of the MFA to Ukraine, approved in 2010, which, together with the funds available from 
a previous operation approved in 2002, amounts to EUR 610 million in loans, was further 
delayed due to the lack of agreement with the Ukrainian authorities on certain conditions 
of  the  Memorandum  of  Understanding.  The  first  tranche  of  the  MFA  operation  for 
Bosnia  and  Herzegovina,  approved  in  2009  (amounting  to  up  to  EUR  100  million  in 
loans),  was  not  disbursed  in  2011  due  to  non-compliance  with  one  of  the  first  tranche 
conditions. 

In 2011, the Commission submitted two formal proposals for new MFA operations to the 
co-legislators: the proposal to extend MFA to Georgia for EUR 23 million in grants and 
EUR  23  million  in  loans,  adopted  on  13  January  2011;  and  the  proposal  to  extend  an 
exceptional  MFA  to  the  Kyrgyz  Republic  for  EUR  15  million  in  grants  and  EUR  15 
million in loans, adopted on 20 December 2011. These proposals have since been under 
consideration by the European Parliament and the Council. However, the decision by the 
co-legislators  on  the  MFA  Georgia  has  been  delayed  due  to  the  above  mentioned 
contentious legal issue. 

3.2. 

Individual operations in the beneficiary countries in 2011 

3.2.1.  Western Balkans 

3.2.1.1.  Bosnia and Herzegovina 

A MFA to Bosnia and Herzegovina of up to EUR 100 million, in the form of loans, was 
approved  by  the  EU  Council in  2009  (Council  Decision  2009/891/EC  of  30  November 
2009).  The  relevant  Memorandum  of  Understanding (MoU) and Loan Agreement were 
signed in November 2010, while – partly because of the lengthy government formation 
after  the  October  2010  general  elections  –  the  Loan  Agreement  was  ratified  by  the 
Bosnian Presidency only in August 2011. No MFA funds were disbursed during 2011, as 
not all the conditions attached to the first tranche and agreed in the MoU were fulfilled. 
In  addition,  the  IMF  Stand-By  Arrangement  has  effectively  been  non-functional  since 

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October  2010.  Still,  some  progress  was  achieved  on  the  fulfilment  of  MFA  policy 
conditions in the area of public financial management. As soon as the IMF programme 
becomes functional again and all policy conditions as laid down in the MoU are fulfilled, 
the disbursement of the MFA could be carried out. 

In  2011,  following  the  marginal  (0.7%)  growth  in  2010,  the  economy's  expansion 
accelerated slightly to an estimated 1.6%, driven by rising exports and slightly increasing 
domestic  demand.  Some  further  fiscal  consolidation  took  place  in  2011,  despite  a 
persistent  weak  quality  of  public  finances.  External  imbalances  have  been  on  the  rise 
again, with the current account deficit reaching 8.7% of GDP. 

3.2.1.2.  Serbia 

A MFA loan facility of up to EUR 200 million was made available to Serbia under the 
Council  Decision  2009/892/EC,  in  view  of  the  adverse  effects  of  the  global  crisis.  The 
objective of this assistance was to complement the resources from International Financial 
Institutions  in  helping  the  government  address  the  external  financing  gap.  In  light  of 
Serbia's gradual economic recovery, lower foreign financing needs and the scaling down 
of the IMF assistance by half, the European Commission decided to disburse only half of 
the available MFA amount, i.e. EUR 100 million. The transfer of funds took place on 12 
July  2011,  completing  this  MFA  operation.  The  MFA  conditionality  supported  an 
overhaul  of  the  public  finance  management,  notably  through  the  establishment  of 
quantitative fiscal rules and new provisions regarding Public Internal Financial Control. 

In 2011, the economic recovery continued, with GDP growth of 1.6%, fuelled by a surge 
in investments. However, towards the end of the year growth came under pressure owing 
to the difficult global economic environment. In the face of slowing export growth, the 
current account deficit widened to around 9.5% of GDP. Moreover, the budgetary deficit 
approached 5% of GDP, which was higher than initially targeted, largely due to revenue 
shortfalls. 

3.2.2.  Eastern Neighbourhood Countries 

3.2.2.1.  Armenia 

In late 2010, the Commission and the Armenian authorities agreed on the conditions for 
the MFA programme of EUR 100 million (EUR 35 million in grants and EUR 65 million 
in loans) decided back in November 2009. The Memorandum of Understanding and the 
Loan and Grant Agreements were signed in February 2011 and ratified by the Armenian 
authorities  in  May  2011.  The  first  instalment,  amounting  to  EUR  40  million,  was 
released in June 2011, while the release of the second instalment, amounting to EUR 60 
million  took  place  in  December  2011  for  the  grant  element  and  February  2012  for  the 
loan element. 

In 2011, the Armenian economy continued to recover; real GDP grew by 4.6%, driven by 
an  increase  in  remittances  and  exports.  However,  the  inflow  of  investments  weakened. 
Despite a reduction of the current account deficit from 14.7% of GDP in 2010 to 10.9% 
of GDP in 2011, a large part of the external financing needs had to be financed by the 
external partners. In 2011, Armenia started to implement its new three year (2011-2013) 
economic stabilisation programme, supported, inter alia, by the IMF under the Extended 

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Fund  Facility  (EFF)  and  the  concessional  Extended  Credit  Facility  (ECF)  for  a  total 
amount  of  EUR  278  million.  In  December  2011,  the  Executive  Board  of  the  IMF 
completed  its  third  review  of  Armenia’s  economic  performance  under  the  programme, 
which  enabled  the  authorities  to  draw  an  additional  SDR  36.2  million  (about  EUR  42 
million). The MFA conditionality was helpful in advancing reforms in the areas of public 
debt,  pensions,  tax  and  customs  administration,  public  financial  management  and 
taxation policy. 

3.2.2.2.  Georgia 

The  comprehensive  EU  package  of  up  to  EUR  500  million  to  support  Georgia's 
economic  recovery,  pledged  at  the  October  2008  International  Donor  Conference  in 
Brussels, in the aftermath of the August 2008 conflict with Russia, included two potential 
MFA  operations,  amounting  to  EUR  46  million  each.  The  first  part  was  successfully 
implemented during 2009-2010. For the second part, the Commission adopted a proposal 
for further MFA to Georgia on 13 January 2011.  

The European Parliament's plenary voted on the proposal on 10 May 2011 and adopted a 
legislative resolution with some amendments that primarily aimed at reflecting the entry 
into force of the new "comitology" regulation in March 20113. Since the adoption by the 
European  Parliament  of  its  position,  the  inter-institutional  discussions  between  the 
Council and the Parliament have not been successful. While the Parliament favors the use 
of the advisory procedure for the Committee of the Member States on the Memorandum 
of Understanding, as originally proposed by the Commission, the Council argues that, as 
a matter of principle, the examination procedure should apply.  

Real  GDP  grew  by  6.3%  in  2010  and  by  7%  in  2011,  but  is  expected  to  slightly 
decelerate in 2012 due to the difficult global economic environment. The IMF Stand-By 
Arrangement  ran  from  September  2008  to  June  2011.  It  contributed  to  fiscal 
consolidation, progress with structural reforms and return to growth. Starting from July 
2010, the authorities treated the arrangement as precautionary and did not request the last 
installments.  Despite  the  improvement  experienced  since  2009,  Georgia's  balance-of-
payments  position  remains  vulnerable,  with  the  current  account  deficit  remaining  large 
(equivalent to 11.7% of GDP in 2011), FDI inflows remaining significantly below their 
pre-2008 conflict levels and substantial external debt service obligations being foreseen 
for  2013-2014).  The  authorities  agreed  in  March  2012  on  a  new  two-year  programme 
with  the  IMF,  which  will  be  of  a  precautionary  nature.  While  the  existence  of  a 
disbursing IMF programme is a precondition for the activation of the EU MFA operation, 
there  is  a  probability  that  IMF  funds  could  still  be  used  over  the  duration  of  the 
programme, given the difficult international financial environment. 

3.2.2.3.  The Republic of Moldova 

On 20 October 2010, the European Parliament and the Council adopted a decision on the 
provision to the Republic of Moldova of a MFA amounting to EUR 90 million, in grants, 
to  be  disbursed  in  three  tranches  in  2010  and  2011  (Decision  No  938/2010/EU).  The 

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Regulation  (EC)  No  182/2011  of  the  European  Parliament  and  of  the  Council  of  16  February 
2011. 

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assistance was extended in the context of an economic programme supported by a three-
year EFF-ECF financing arrangement approved by the IMF Executive Board in January 
2010.  Following  the  agreement  on  the  MoU,  the  Commission  disbursed  already  in 
December  2010  the  first  tranche  of  EUR  40  million.  The  second  tranche  of  EUR  20 
million was disbursed in September 2011, after the Commission had assessed compliance 
with the conditionality in June. The payment of the third MFA tranche could not be made 
until the end of the 2011, as originally planned, because progress in complying with the 
conditions  of  the  third  tranche  had  been  deemed  as  insufficient.  However,  following 
additional progress in the implementation of reforms by the Moldovan authorities, a new 
assessment  made  by the Commission  in February 2012 found that compliance with the 
conditionality reached a satisfactory level, which allowed the Commission to disburse the 
third and last MFA tranche of EUR 30 million in April 2012. 

The  economy  recovered  after  the  severe  economic  downturn  in  2009  and  rebounded 
strongly  in  both  2010  and  2011.  However,  the  deterioration  of  the  external  economic 
environment  led  to  a  slowdown  in  economic  activity  in  the  fourth  quarter  of  2011;  the 
slowdown is likely to continue in 2012. The IMF programme remained on track and the 
international  donor  support,  including  the  EU  MFA,  was  an  important  factor  in 
maintaining  macroeconomic  stability  and  supporting  the  government's  reform  agenda. 
Moldova undertook an ambitious fiscal consolidation by reducing the budget deficit from 
6.3% of GDP in 2009 to 2.4% of GDP in 2011 and it is set to be further reduced to 0.9% 
of GDP in 2012, mainly by cutting public spending. The MFA conditionality was helpful 
in  advancing  reforms  in  the  areas  of  budget  preparation  and  execution,  optimisation  of 
public  finances  and  public  debt  management,  financial  stability  and  financial  sector 
reform, public procurement and central bank legislation. 

3.2.2.4.  Ukraine 

The EU’s co-legislators adopted a Decision in July 2010 to provide EUR 500 million of 
MFA  to  Ukraine  (Decision  388/2010/EU  of  7  July  2010).  Together  with  the  EUR  110 
million  that  remained  available  under  the  MFA  Decision  of  2002  (Council  Decision 
2002/639/EC of 12 July 2002), this would allow for a potential MFA operation of up to 
EUR  610  million.  However,  the  negotiations  on  the  policy  conditions  related  to  the 
disbursement  of  this  assistance,  which  include  measures  in  the  areas  of  public  finance 
management (PFM), tax and customs administration, energy sector reform and financial 
sector  regulation  have  not  yet  been  concluded.  While  there  has  been  progress  in 
converging towards a Memorandum of Understanding (MoU) that will be acceptable to 
both  parties,  disagreement  on  some  key  issues,  including  the  remit  of  the  Accounting 
Chamber of Ukraine (the country's supreme audit institution), could not be overcome. In 
the  absence  of  a  signed  Memorandum  of  Understanding  and  Loan  Agreement,  no 
disbursements were made in 2011. 

In  2011,  Ukraine's  economic  recovery  continued,  with  a  relatively  strong  growth 
performance  and  inflation  largely  under  control.  However,  since  mid-2011,  balance  of 
payments  trends  have  clearly  deteriorated,  obliging  the  National  Bank  of  Ukraine  to 
spend  USD  6.2  billion  of  its  reserves  between  August  and  December  to  defend  the 
exchange  rate.  The  USD  15  billion  IMF  programme  went  off-track  in  2011  due  to 
disagreements  over  the  budget  and  lack  of  progress  in  important  structural  reforms 
agreed  under  the  Stand-By  Arrangement,  including  the  adjustment  of  gas  and  heating 

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tariffs.  Delays  in  the  adjustment  of  energy  tariffs  pose  significant  risks  for  the  fiscal 
outlook as well. As no disbursements of official external financial support were made in 
2011 and banks decreased their risk exposure, access to international capital markets has 
become more difficult. At the same time, progress with structural reforms has been slow. 
While the public procurement and gas laws passed in 2010 and the legislation on pension 
reform adopted in 2011 were all steps in the right direction, implementation has been in 
some  cases  weak,  or,  in  the  case  of  public  procurement,  the  law  was  subsequently 
watered  down  by  amendments.  Progress  with  PFM  reform  has  been  particularly 
disappointing  and  Ukraine's  business  environment  remained  weak,  as  reflected  in  a 
significant  downgrading  in  2011  of  the  country's  positions  in  the  World  Bank's  Doing 
Business ranking and the Transparency International Corruption Index4. 

3.2.3.  Central Asia  

3.2.3.1.  The Kyrgyz Republic 

On 20 December 2011, the Commission submitted to the European Parliament and to the 
Council a proposal for a MFA to the Kyrgyz Republic on an exceptional basis. In 2010, 
the Kyrgyz Republic had experienced a sharp drop of economic growth and a worsening 
of the external position, due to external shocks and internal political and ethnic conflicts, 
which had led to a sizable external financing gap. In an international donor conference in 
July 2010, the EU pledged to support the recovery after the end of the ethnic conflict. In 
June 2011, the IMF agreed with the Kyrgyz authorities on a three-year programme, to be 
supported by an ECF arrangement. However, the external position remained vulnerable 
and  the  existence  of  a  considerable  residual  external  financing  gap  for  2011-2013  was 
confirmed by the IMF and the Commission. In addition, the exceptional MFA operation, 
i.e. outside the normal geographical scope of MFA, was justified by the strength of the 
pro-democratic  political  and  economic  reform  momentum  in  the  country  and  by  its 
position  in  a  region  of  economic  and  political  importance  for  the  EU.  The  proposal  is 
being  discussed  by  the  Parliament  and  Council  in  the  context  of  the  legislative  co-
decision procedure.  

In 2011, economic growth recovered to 5.7% from the sharp slowdown in 2009 and 2010 
and the balance of payments deficit eased to an estimated 3.1% of GDP helped by strong 
remittances  and  the  high  price  of  gold  exports.  However,  the  difficult  global  economic 
environment  started  to  have  a  negative  impact  on  remittances  and  exports  in  the  last 
months of 2011. Inflation was brought down from over 20% (year-on-year) in mid-2011 
to 5.7% by the end of 2011. The Government managed to reach its fiscal targets for 2011. 
The  Kyrgyz  authorities  also  met  all  targets  of  the  IMF  ECF  programme  agreed  for  the 
end of 2011.  

4 

Insufficient progress with PFM,  together with uncertainties  over  the  macroeconomic  framework 
(including the off-track status of the IMF programme), led the European Commission to delay the 
disbursement of budgetary support operations at the end of 2011.  

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4. 

ENSURING A PROPER USE OF MFA FUNDS: OPERATIONAL ASSESSMENTS, PEFA 
AND EX-POST EVALUATIONS 

4.1. 

Operational assessments  

In  line  with  the  requirements  of  the  EU  Financial  Regulation  to  perform  inspections 
before disbursing funds to recipient countries, the Commission, with the help of external 
consultants, carries out operational assessments (OAs) to obtain reasonable assurances on 
the  functioning  of  administrative  procedures  and  financial  circuits  of  the  recipient 
countries. 

The OAs focus on PFM systems, in particular on the procedures and the organisation of 
the ministries of finance and central banks and, more specifically, on the management of 
accounts receiving EU funds. In addition, special attention is given to how external audit 
institutions  work,  their  independence,  their  work  programmes  and  the  effectiveness  of 
their  controls.  In  the  most  recent  OAs,  an  analysis  of  existing  procedures  in  the 
procurement agencies was also undertaken.  

In 2011, the Commission finalised the OA in Georgia. The main conclusions of this OA 
are  reported  in  the  accompanying  Commission  Staff  Working  Document  (SWD(2012) 
181 final). 

4.2. 

Public Expenditure and Financial Accountability assessments 

The Commission is seeking complementarity with the other diagnostic tools in the area 
of  PFM  in  countries  benefitting  from  donor  support.  In  this  context,  the  Public 
Expenditure  and  Financial  Accountability  (PEFA)  programme,  founded  in  2001  as  a 
multi-donor partnership and involving, inter alia, the European Commission, the World 
Bank and the IMF, is a particularly suitable framework.  

In recent years, PEFA studies have been completed for a number of countries receiving, 
or  potentially  eligible  for,  MFA:  Armenia  (2008),  Belarus  (2009),  Georgia  (2008), 
Kosovo (2009), the Kyrgyz Republic (2009), the Republic of Moldova (2008), Morocco 
(2009) and Serbia (2010). The Commission co-authored, together with the World Bank, 
the  PEFA  studies  of  Georgia  and  Morocco  and  contributed  directly  to  several  other 
studies.  

In 2011, the Commission contributed to a PEFA assessment of Ukraine, in cooperation 
with the World Bank (the Bank was the lead agency), and conducted, also in cooperation 
with the World Bank (this time as a lead agency), a PEFA assessment of Moldova. 

The  finding  of  these  PEFA  studies  will  complement  the  latest  OAs  of  the  financial 
procedures in these two countries. They will be useful in supporting the implementation 
of  ongoing  MFA  operations,  notably  with  a  view  to  the  monitoring  of  conditions  on 
PFM.  

4.3. 

Ex-post evaluations 

To assess the impact of MFA and in line with the Financial Regulation, the Commission 
conducts ex-post evaluations of MFA programmes. The conclusions of these evaluations 

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are taken into account in strengthening MFA management practices. The main objectives 
of  the  ex-post  evaluations  are:  to  analyse  the  economic  impact  of  the  MFA  on  the 
economy  of  the  recipient  country  and,  in  particular  on  the  sustainability  of  its  external 
position; and, to assess the added value of the EU intervention. 

In 2011, two new ex-post evaluations were launched to evaluate the recently completed 
MFA  operations  with  Lebanon  and  Georgia.  In  the  beginning  of  2012,  an  ex-post 
evaluation for the MFA with Kosovo was initiated.  

5. 

REQUESTS  FOR  ASSISTANCE  AND  FUTURE  COMMISSION  PROPOSALS; 
BUDGETARY SITUATION 

The majority of MFA operations implemented in 2011 was completed in 2011 or in early 
2012 (Serbia, Armenia, the Republic of Moldova). The two remaining programmes (the 
operations with Ukraine and Bosnia and Herzegovina) are expected to be implemented in 
2012 and 2013, subject to good progress with regard to the policy conditionalities. The 
new programme for Georgia, still under consideration by the co-legislators, is expected 
to be approved in mid-2012. Similarly, the proposed MFA for the Kyrgyz Republic could 
be approved in the second half of 2012.  

The  current  pipeline  of  MFA  operations  for  2012-2013  includes  a  possible  programme 
for  Kosovo.  After  the  expiration  of  the  previous  programme  in  2010,  a  new  operation 
would  respond  to  the  conditional  pledge  made  by  the  EU  at  the  June  2008  donor 
conference on Kosovo, for an amount of up to EUR 100 million.  

In  addition,  a  new  operation  could  be  anticipated  for  Armenia.  It  would  follow  the 
recently  completed  programme  and  would  be  aimed  at  helping  the  country  cover  the 
residual  external  financing  gap  foreseen  for  2013,  complementing  the  resources  made 
available by the IMF under the existing ECF/EFF financing arrangement. 

Given the short-term financing needs in some of the Southern Neighbourhood countries 
undergoing political changes, it is no surprise that, in February 2012, the EU receveived a 
request for MFA from Egypt. The amount being requested is EUR 500 million, of which 
a  small  part  could  be  disbursed  in  the  form  of  a  grant  to  take  into  account  Egypt's 
relatively  low  per  capita  income.  The  MFA  would  complement  the  funds  to  be  made 
available  by  the  IMF  and  other  donors  to  help  strengthen  Egypt's  balance  of  payments 
during a period of challenging political transition. The Commission is in the process of 
estimating, in liaison with the IMF, Egypt's residual external financing needs with a view 
to the possible adoption of an MFA proposal to this country. 

The  prospect  of  activating  the  instrument  of  MFA  for  some  of  the  Mediterranean 
countries was explicitly confirmed in the joint Communication by the Commission and 
the  High  Representative  of  the  EU  for  Foreign  Affairs  and  Security  Policy  "A 
Partnership  for  Democracy  and  Shared  Prosperity  with  the  Southern  Mediterranean" 
adopted on 8 March 2011. 

Table 1 below provides an overview of commitments and payments of MFA grants for 
2011 and 2012 (indicative). The forecast for 2012 is of a very preliminary nature and will 

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depend  on  various  factors  which  are  outside  of  the  control  of  the  Commission.  The 
pipeline of grant operations for 2012 is broadly consistent with the budgetary ceilings for 
2012,  taking  into  account  that  some  of  the  planned  operations  will  only  be  financially 
committed in 2013. With regard to loans, the total outstanding amount for MFA lending 
operations was equal to EUR 569.8 million at the end of 2011. This sum is covered by 
the Guarantee Fund for external actions5, which is maintained at 9% of the outstanding 
amount. The Fund covers not only MFA loans, but also Euratom loans and EIB loans to 
third countries and is provisioned from the EU Budget. For MFA lending operations, this 
would correspond to about EUR 51 million as part of the Guarantee Fund at the end of 
2011. 

Table 1: MFA commitments and payments in 2011-2012 in EUR 

Appropriated commitments for grants in the budget

104.868.567

2011

Commitments, total

OAs, PEFA studies, ex-post evaluations
MFA Georgia (proposed)
MFA Kyrgyz Republic (proposed)
MFA Egypt (possible)
MFA Kosovo (possible, end-2012 or 2013)

393.476
393.476

2012 (indicative)
95.550.000

88.350.000
350.000
23.000.000
15.000.000
50.000.000
t.b.d.

Uncommitted budget allocations

104.475.091

n.a.

Appropriated MFA grant payments in the budget

88.552.647

79.050.000

Payments, total

OAs, PEFA studies, ex-post evaluations
MFA Armenia
MFA Moldova
MFA Georgia (proposed, first payment)
MFA Kyrgyz Republic (proposed, first payment)
MFA Egypt (possible, first payment)

55.236.767
236.767
35.000.000
20.000.000

74.350.000
350.000

30.000.000
11.500.000
7.500.000
25.000.000

Unused allocations for grant payments

33.315.880

4.700.000

Loan MFA disbursements, total

126.000.000

705.000.000

Armenia
Serbia
Other, including Ukraine, BiH (active) and Egypt (possible)

26.000.000
100.000.000

39.000.000

666.000.000  

5 

For more information, please see the Report from the Commission to the European Parliament and 
the Council on guarantees covered by the general budget (issued semi-annually). 

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Table 2: MFA amounts authorised by year during 2002-2011 in EUR million  

By region
Western Balkans
NIS
Mediterranean
Total amounts authorised1
Loans
Grants

2002*

2003

2004

2005

2006

2007

2008

2009

2010

2011

     Total

190
18

208
78
130

70

25

70
25
45

25
9
16

0

50
33,5

83,5
0
83,5

45
80
125
50
75

300
146

446
365
81

590

590
500
90

0
0
0

635
832,5
80
1547,5
1027
520,5

0

* Net amount for Ukraine taking into account new loan of EUR 110 million together with simultaneous cancellationof EUR 92 million out of the EUR 150 million 

 decided in 1998 and grant for Moldova of EUR 15 million and simultaneous cancellation of the EUR 15 million loan decided in 2000

1 More detailed information is available in the statistical data of the working document

Chart 2a: MFA amounts authorised by year during 2002-2011 in EUR million 

Chart 2b: MFA amounts authorised by regions in 2002-2011 

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Table 3: MFA amounts disbursed by year during 2002-2011 in EUR million  

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

    Total

By region
Central European Candidate Countries
Western Balkans
NIS
Mediterranean
Total amounts disbursed1
Loans
Grants

130
11

141
0
141

50
146
7

203
118
85

20
12

32
10
22

58
8,5

66,5
15
51,5

32
29

61
19
42

20

20
0
20

25
15
40
0
40

15,3
25
40,3
25
15,3

30
70,7

100,7
0
100,7

50
516
279,5
40
885,5
313
572,5

100
81

181
126
55

1 More detailed information is available in the statistical data of the working document

Chart 3a: MFA amounts disbursed by year during 2002-2011 in EUR million 

Chart 3b: MFA amounts disbursed by regions in 2002-2011 

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