COMMISSION STAFF WORKING DOCUMENT Ex-ante evaluation statement Accompanying the document Proposal for a DECISION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL providing further macro-financial assistance to Georgia
Date: 2017-09-29
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: Community loan, EU aid, European neighbourhood policy, Georgia, economic policy, economic reform, economic stabilisation, financial aid, macroeconomics

EN 

   EN 

   EUROPEAN COMMISSION  Brussels, 29.9.2017  SWD(2017) 321 final   COMMISSION STAFF WORKING DOCUMENT Ex-ante evaluation statement  Accompanying the document  Proposal for a  DECISION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL  providing further macro-financial assistance to Georgia  {COM(2017) 559 final}  
 
 
Ex-ante evaluation statement 

EU Macro-Financial Assistance to Georgia 

TABLE OF CONTENTS 

1.  PROBLEM ANALYSIS AND NEEDS ASSESSMENT ..................................................................... 3 

1.1  Introduction ................................................................................................................. 3 

1.2  Georgia’s macroeconomic situation ............................................................................ 4 

1.3  Structural reform challenges ........................................................................................ 6 

1.4  IMF and other donor support ....................................................................................... 8 

1.5  Georgia’s external financing needs ........................................................................... 10 

2.  OBJECTIVES AND MONITORING INDICATORS OF THE MACRO-FINANCIAL ASSISTANCE ...... 12 

2.1  Objectives .................................................................................................................. 12 

2.2  Monitoring indicators ................................................................................................ 12 

3.  DELIVERY MECHANISMS AND RISK ASSESSMENT................................................................ 12 

3.1  Delivery mechanisms ................................................................................................ 12 

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

4.  ADDED VALUE OF EU INVOLVEMENT ................................................................................. 15 

5.  ASSESSMENT OF CRITERIA APPLICABLE TO MACRO-FINANCIAL ASSISTANCE .................... 15 

5.1  Exceptional Character and Limited Time-frame ....................................................... 15 

5.2  Political preconditions and EU-Georgia relations ..................................................... 16 

5.3  Complementarity ....................................................................................................... 16 

5.4  Conditionality ............................................................................................................ 16 

5.5  Financial discipline .................................................................................................... 17 

6.  EVALUATION AND COST-EFFECTIVENESS ........................................................................... 17 

6.1  Evaluation .................................................................................................................. 17 

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

Annex:   Assessment on Georgia’s political reforms prepared by the European External 

Action Service 

2 

 
 
 
1.

1.1 

PROBLEM ANALYSIS AND NEEDS ASSESSMENT 

Introduction 

Georgia continues to face a weak external environment which, through reduced exports and 
remittances, has contributed to relatively subdued GDP growth of 2.7% in 2016 (compared to 
2.9% in 2015 and 4.6% in 2014). GDP growth is projected to increase gradually to 3.5% in 
2017, supported by consumption and investment. Regional and global growth is also expected 
to  pick  up  in  2017,  but  will  remain  subject  to  downside  risks  of  geopolitical  instability, 
protectionism and volatility in the financial markets. 

Georgia’s fiscal deficit remains significant (4.1% of GDP in both 2016 and, as expected by 
the International Monetary Fund (IMF), in 2017). The public debt-to-GDP ratio has increased 
from 35.6% in 2014 to 44.6% in 2016, mainly due to the fact that around 80% of public debt 
is  denominated  in  foreign  currency,  and  the  national  currency  (the  Georgian  lari,  GEL)  has 
depreciated  sharply  during  that  period.  Moreover,  Georgia’s  balance-of-payments  position 
remains vulnerable due to a very large current account deficit (12.4% of GDP in 2016) and 
high external debt (111.8% of GDP in 2016). Georgia’s foreign exchange reserves have been 
broadly stable in absolute terms since 2011, totalling USD 2.8 billion at end-2016, but reserve 
needs  have  been  increasing  according  to  the  composite  IMF  metric.  Therefore,  reserves  are 
currently below the level estimated by the IMF to be adequate.1 Georgia also continues to face 
the  impacts  of  the  ongoing  adaptation  to  the  requirements  of  the  Deep  and  Comprehensive 
Free  Trade  Area  (DCFTA)  with  the  EU,  which,  along  with  opportunities,  also  entail 
adjustment costs. 

In  this  context,  on  12  April  2017  Georgia  and  the  IMF  agreed  a  three-year  (2017-2020) 
extended arrangement under the Extended Fund Facility (EFF). The EFF represents 100% of 
Georgia’s quota in the Fund (SDR 210.4 million, or about USD 285 million). The aim of the 
EFF programme is to support an economic reform programme which will help Georgia reduce 
economic vulnerabilities, and promote higher and more inclusive economic growth.  

The government of Georgia also requested Macro-Financial Assistance (MFA) from the EU 
in  June  2017.2  In  light  of  this  request  and  the  economic  situation  in  the  country,  the 
Commission is submitting to the European Parliament and the Council a proposal for MFA to 
Georgia,  based  on  Article  212  of  the  TFEU.  The  proposal  is  for  an  amount  of  up  to  EUR 
45 million, of which EUR 35 million are in the form of loans and EUR 10 million in the form 
of grants.  

The  proposed  new  MFA  operation  is  the  third  one  after  Georgia’s  military  conflict  with 
Russia  in  August  2008.  In  October  2008,  the  EU  pledged  two  MFA  operations  of  EUR  46 
million each at the International Donors’ Conference in Brussels. The first of those operations 
(EUR 46 million, fully in the form of grants) was implemented in 2009-2010 and the second 
(again EUR 46  million, half in  grants and half loans) in  2015-2017. The last  tranche of the 
2015-2017 MFA operation was disbursed in May 2017. 

The proposed new MFA will help Georgia cover part of the residual external financing needs 
for  the  period  of  2017-2020,  which  are  estimated  at  USD  752  million  (EUR  671  million).3 
The  operation  will  reduce  the  economy’s  short-term  balance  of  payments  and  fiscal 
vulnerabilities. It will be designed and implemented in coordination with the adjustment and 
reform programmes Georgia has agreed with the IMF and the World Bank, as well as with the 
reforms  agreed  in  the  context  of  the  EU’s  budget  support  operations  and  the  DCFTA 
agreement.  

1   As measured by the composite reserve adequacy measure of the IMF. 
2   Letter of 16 June 2017 from the acting Finance Minister Giorgi Tabuashvili to Commissioner Moscovici. 
3   All conversions in this document are based on a EUR/USD exchange rate of 1.12. 

3 

 
 
                                                            
The disbursement of the assistance is envisaged to take place in two tranches. This could take 
place in 2018, or possibly in 2019, depending on when the legislative process is concluded; 
the  pace  of  negotiations  and  ratification  of  the  Memorandum  of  Understanding  and, 
thereafter, its implementation; as well as progress made with the IMF programme. 

The present note first assesses Georgia’s macroeconomic situation and policies as well as key 
structural reform challenges. It then describes the current IMF programme (for 2017-2020), as 
well as other support provided by foreign donors, and assesses Georgia’s external financing 
needs for the period 2017-2020. Finally, the note presents the main features of the envisaged 
MFA operation and its consistency with the criteria applicable to MFA operations. 

1.2 

Georgia’s macroeconomic situation 

The  macroeconomic  outlook  for  Georgia  remains  vulnerable.  The  ongoing  fiscal 
consolidation  could  weaken  domestic  demand  and  lower  economic  growth  in  Georgia.  In 
addition, the Georgian  economy  faces  broader  risks due to an uncertain regional and global 
economic outlook, external  imbalances (notably, a large and still increasing  current account 
deficit and significant external debt) as well international reserves that are below the adequate 
level. 

The  economic  slowdown  in  the  region  and  the  fact  that  the  currencies  of  major  trading 
partners  have  depreciated  sharply  since  late  2014  have  weighed  on  Georgia’s  exports  and 
remittances.  This  contributed  to  a  deceleration  of  economic  growth  to  2.7%  in  2016,  from 
2.9%  in  2015  and  4.6%  in  2014.  Georgia’s  GDP  growth  in  2016  was  mainly  driven  by 
investment,  while  private  consumption  remained  subdued,  reflecting  the  reduction  in 
disposable  income  induced  by  the  increase  in  the  domestic-currency  value  of  households’ 
repayment obligations on US dollar-denominated loans in a context of sharp depreciation of 
the  lari.  GDP  growth  is  projected  to  increase  gradually,  to  3.5%  in  2017,  supported  by 
consumption  and  investment,  and  to  5.0%  in  2020  (the  end  of  the  recently-agreed 
arrangement with the IMF).4 

The  exchange  rate  (USD/GEL  period-average)  moved  from  1.77  in  2014  to  2.27  in  2016, 
meaning  around  22%  depreciation  of  the  Georgian  lari.  The  effects  of  this  volatility  are 
amplified by the still high dollarisation of the Georgian economy, where 70% of deposits and 
65%  of  loans  were  denominated  in  US  dollars  in  2016.  Despite  this,  the  banking  sector  – 
which is dominated by two institutions controlling around two-thirds of total banking assets – 
has  generally  remained  resilient,  reporting  sufficient  capital  and  liquidity.  The  non-banking 
sector is growing fast, albeit from a low base. 

Although the unemployment rate in Georgia (11.8% at end-2016) has been on a downward 
trend since 2009 (16.9%), it remains an important challenge. While employment opportunities 
have  been  created  in  new  growth  sectors,  especially  in  tourism  and  other  services,  high 
unemployment persists due to challenges associated with skills mismatch and large regional 
disparities. Georgia also lacks an unemployment benefit scheme. 

In terms of the external sector, Georgia’s current account deficit further deteriorated in 2016 
to 12.4% of GDP (from 12.0% of GDP in 2015 and 10.6% in 2014) and, as noted, remains a 
major source of vulnerability. The current account deficit widened in 2014-2016, despite the 
slowdown  in  economic  growth,  as  the  weakness  of  exports  more  than  compensated  for  the 
weak  domestic  demand  for  imports,  resulting  in  a  larger  trade  in  goods  deficit.  The  current 
account deficit is expected to worsen further to 12.9% in 2017, before decreasing modestly to 
11% in 2020, according to IMF programme projections. The very large current account deficit 
is  mainly  driven  by  the  trade  in  goods  deficit  which  is  only  partly  offset  by  the  trade  in 
services surplus and income and transfers from abroad, including remittances. 

4  

For selected macroeconomic data here and below in the section, please also refer to Table 1. 

4 

 
                                                            
Although the current account deficit has mainly been financed by inflows of  foreign direct 
investment  (FDI),  the  latter  is  expected  to  decrease  slightly  from  11%  of  GDP  in  2016  to 
10.3%  of  GDP  in  2017  and  remain  at  a  similar  level  until  2020.  Moreover,  debt-creating 
financial inflows have also contributed to the financing of the current account deficit. Hence, 
Georgia’s  external  debt,  which  hovered  around  80%  of  GDP  in  2008-2014,  has  increased 
significantly  in  the  following  years,  to  111.8%  of  GDP  at  end-2016.  The  external  debt  is 
projected to increase further, to 120.2% in 2020. As most foreign debt is denominated in US 
dollar, the lari depreciation has played an important role in this increase.  

The National Bank of Georgia (NBG) has generally refrained from large interventions in the 
foreign  exchange  market  and  allowed  the  lari  to  depreciate.  This  has  allowed  gross 
international  reserves  to  remain  stable  overall,  totalling  USD  2.7  billion  at  end-February 
2017 (about 3 months of next year’s imports). The recently-agreed IMF programme targets a 
54% increase in reserves, from USD 2.8 billion at end-2016 to USD 4.2 billion in 2020 (about 
4 months of import cover). 

Table 1: Georgia – Selected macroeconomic indicators, 2015-2020 

Sources: IMF and Commission staff estimates, Geostat 

*  The  overall  fiscal  balance  will  be  further  adjusted  by  0.4 percentage  points  to  3.5%  of  GDP  in 
2019 and by 0.5 percentage points to 3.1% of GDP in 2020. However, it is not yet clear whether 
these adjustments will come from the revenue or the expenditure side.  

Regarding  monetary  policy,  the  NBG  remains  committed  to  price  stability  (inflation 
targeting  regime,  with  a  target  for  headline  consumer  price  inflation  of  5%  in  2016,  4%  in 
2017  and  3%  from  2018  onwards,  and  a  flexible  exchange  rate).  In  order  to  limit  inflation, 
mainly  as  a  result  of  the  lari  depreciation  and  increases  in  electricity  tariffs,  the  NBG 
increased its main policy rate (the refinancing rate) eight times in 2015, up to 8%. In 2016, in 
line with the economic slowdown and abating inflationary pressures (and even a brief period 
of falling prices), the NBG gradually reduced the key policy rate to 6.5%. However, in 2017, 
with an increase in inflationary pressures (mainly due to increases in excise taxes and a pick-

5 

2017201820192020Proj.Proj.Proj.Proj.National AccountsReal GDP growth        2.9         2.7         3.5         4.0         4.5          5.0 Consumer price index, period average        4.0         2.1         5.7         2.4         3.0          3.0 GDP per capita (in USD)3,800 3,800 3,700 4,000 4,300 4,700 Unemployment rate (in per cent)       12.0        11.8 Consolidated government operationsRevenue and grants28.128.629.328.628.528.6Expenses31.932.733.432.432.432.2Overall fiscal balance*-3.8-4.1-4.1-3.8-3.9-3.6Public debt 41.444.945.546.747.246.9   o/w foreign-currency denominated32.535.535.937.337.837.8External sectorCurrent account balance -12.0-12.4-12.9-12.5-11.5-11.0Gross international reserves, end of period (in billion 2.52.83.13.43.84.2   - In months of next year’s imports of 2.73.03.33.53.74.1Foreign direct investment, net 9.011.010.310.19.910.4Nominal exchange rate (period average, USD/GEL)1.772.272.3720152016(Annual percentage change, unless otherwise indicated)(In per cent of GDP, unless otherwise indicated) 
 
 
 
 
up in global commodity prices), the NBG raised the refinancing rate two times: from 6.5% to 
6.75% (in January 2017) and to 7% (in May 2017). 

The  period-average  inflation  (consumer  price  index,  CPI)  decelerated  to  2.1%  in  2016, 
compared  to  4.0%  in  2015.  CPI  is  projected  to  increase  to  5.7%  in  2017,  in  line  with  the 
increase  of  excise  duties  which  entered  into  force  in  January  2017,  but  should  decrease  to 
3.0%  in  2018  and  remain  at  a  similar  level  in  2019  and  2020.  The  planned  reduction  of 
inflation  is  key,  in  order  to  avoid  the  need  to  further  increase  interest  rates  that  would 
negatively affect consumption and investment, raising doubts about the growth outlook. 

Following  a  long  period  of  fiscal  consolidation  since  2009,  the  fiscal  deficit  of  the  general 
government started to widen in 2015 (3.8% of GDP), partly as a result of an increase in social 
spending,  which,  according  to  preliminary  analysis  by  the  World  Bank,5  has  had  a  broadly 
positive  impact  on  poverty  and  inequality,  but  also  reflecting  the  negative  impact  of  the 
economic  slowdown  on  tax  revenues.  The  budgetary  position  further  deteriorated  in  2016, 
with the government deficit estimated by the IMF at 4.1% of GDP, as a result of both weaker-
than-expected revenues and spending increases ahead of the October parliamentary elections 
(mainly in defence, public transport, infrastructure and healthcare). The fiscal deficit (which 
was  projected  to  increase  further,  to  around  6%  of  GDP  this  year,  before  the  new  IMF 
programme  was  agreed)  is  now  forecast  to  remain  at  the  same  level  (4.1%)  in  2017  and  to 
decrease gradually afterwards, reaching 3.1% in 2020.  

The country has been financing its deficits mainly through external borrowing (roughly half 
of  the  total  –  much  of  it  from  official  creditors  on  below-market  terms),  followed  by 
privatisation  proceeds  and  domestic  borrowing  (in  what  remains  a  shallow  market).  Public 
debt increased to an estimated 44.6% of GDP in 2016 (from 35.6% in 2014) and is expected 
to rise further, peaking at around 47% in 2019, before decreasing gradually afterwards.  

The fiscal strategy of the Georgian authorities is based on further consolidation. Notably, the 
Georgian  authorities  plan  to  reduce  current  spending  (a  reduction  in  the  wage  bill  and 
administrative expenses, efficiency gains in healthcare spending, and new spending controls 
on  local  governments),  whilst  increasing  capital  spending,  mainly  in  infrastructure,  and 
introducing  a  second  (funded)  pillar  of  the  pension  system.6  On  the  revenue  side,  the 
Georgian  authorities  have  increased  taxes  (notably,  excise  duties  on  tobacco  products, 
vehicles and fuel) to compensate for revenue losses due to the corporate income tax reform7 
and are ready to take additional measures if needed. 

1.3 

Structural reform challenges 

The  key  element  of  Georgia’s  structural  reform  agenda  is  the  so-called  Four  Point  Reform 
Plan which focuses on improving business environment, education and public administration 
as well as investment in infrastructure. The Georgian authorities intend to complement these 

5   World Bank Group: Georgia: Recent Trends and Drivers of Poverty Reduction, August 2016. 
6  

In  the  current  one-pillar  system,  pension  benefits  consist  of  a  lump  sum  paid  to  all  citizens  aged  over  60 
(women) and 65 (men), regardless of the number of years worked. The reform which should be proposed to 
the Parliament in June 2017 would introduce a second, earnings-related pillar beside the basic lump sum and 
would  be  financed  through  social  security  contributions  by  the  government,  the  employee,  and  his/her 
employer,  amounting  to  2%  of  the  employee’s  salary  for  each  of  the  three  contributors.  The  reform  is 
foreseen to take effect in January 2018, bringing the cost of the pension system to 21-22% of the budget, up 
from around 18% of the budget in 2016. In addition, the government is considering a possibility to introduce 
a third (privately funded) pillar. 

7   As of January 2017, the corporate income tax only applies to distributed profits, while reinvested or retained 
profits are exempted from taxation. To cover the cost of the reform, estimated at cumulative 1.7% of GDP 
over  2017  and  2018,  excise  taxes  on  tobacco,  imported  cars  and  oil  products  were  also  raised  in  January 
2017. These increases in taxes and other adjustment measures should compensate the cost of the corporate 
income tax reform. 

6 

 
                                                            
structural reforms with fiscal reforms and strengthening of the financial sector. An additional 
challenge is the ongoing adaptation to the requirements of the DCFTA with the EU. 

The first leg of the Four Point Reform  Plan  aims at  improving  the  business environment. 
Notably,  the  Georgian  authorities  plan  to  reform  the  insolvency  law,  to  ensure  an  adequate 
restructuring  framework  for  viable  businesses,  and  to  introduce  International  Financial 
Reporting Standards (IFRS) for financial reporting by corporations. In addition, the Georgian 
authorities  plan  to  continue  the  land  reform  by  extending  the  application  of  a  special  rule 
which  simplifies  the  land  registration  process.  The  land  reform  should  contribute  to  rural 
development  through  increased  efficiency  in  agricultural  production,  by  simplifying  land 
transactions and facilitating the use of land as collateral for borrowing. 

The  second  leg  of  the  Reform  Plan  concerns  education  reform.  The  Georgian  authorities 
plan  to  improve  the  education  system,  by  setting  curriculum  standards,  and  introducing 
vocational training and adult learning. This reform should help to address the skills mismatch 
which is one of the main structural weaknesses of the Georgian economy and contributes to 
high unemployment.  

As part of the third leg of the Reform Plan, the Georgian authorities plan to make the public 
administration  more  efficient.  This  will  notably  involve  containing  the  wage  bill  and 
administrative  expenses,  improving  the  targeting  of  subsidies  and  of  social  assistance 
programmes, and introducing a one-stop shop for all government services. These changes are 
expected  to  improve  the  business  environment  further  (aside  from  the  measures  under  the 
dedicated first leg of the Reform Plan) and create fiscal space for investment. 

The  fourth  leg  of  the  Reform  Plan  covers  investment  in  infrastructure  (highways,  ports, 
airports and railways). Additional and better infrastructure is expected to help Georgia utilise 
its  potential  of  a  transit  country  between  Europe  and  Asia,  support  the  development  of  the 
growing tourism sector, and in this way create new economic opportunities for all citizens. 

The  Georgian  authorities  intend  to  complement  structural  reforms  with  fiscal  reforms. 
Notably, the Georgian authorities plan to improve the management of fiscal risks stemming 
from public-private partnerships (PPPs) and state-owned enterprises (SOEs). Regarding PPPs, 
the  Georgian  authorities  will  submit  a  law  by  end-2017,  which  will  establish  reporting  and 
monitoring  government  exposure  on  PPPs  as  well  as  cap  such  government  exposure. 
Regarding  SOEs,  the  Georgian  authorities  will  expand  the  analysis  of  contingent  liabilities 
associated  to  such  enterprises,  as  part  of  the  Fiscal  Risk  Statement  accompanying  the  2018 
budget.  The  Georgian  authorities  also  plan  to  tighten  budget  lending,  e.g.  to  SOEs,  by 
requiring a reasonable expectation of commercial returns on new operations. 

In the financial sector, the Georgian authorities plan to introduce a deposit guarantee scheme 
and to improve regulatory, supervisory and resolution frameworks for banks. In April 2017, 
the Georgian Parliament approved legislative amendments that invalidate the effects of a 2014 
law  establishing  a  new  financial  supervision  agency.  In  this  way,  the  Georgian  authorities 
have  reaffirmed  the  independence  of  the  NBG,  reverting  to  the  original  legal  framework 
whereby the responsibility for financial supervision is assigned to the NBG, as recommended 
by the international financial institutions and the EU.  

The issue of high dollarisation will continue to be addressed by introducing liquidity coverage 
ratio limits, with preferential treatment of liabilities denominated in the national currency. On 
the supply side, the Georgian authorities also plan to develop the capital markets, notably by 
starting  to  publish  the  calendar  of  government  bond  issuances  to  develop  a  benchmark, 
upgrading  the  trading  infrastructure  of  the  Georgian  Stock  Exchange  and  introducing 
derivatives. On the demand side, the Georgian authorities plan to introduce a second (funded) 
pillar of the pension system, which is also intended to create demand for long-term financial 
instruments denominated in the national currency. In addition, the Georgian  authorities plan 

7 

 
to  introduce  mandatory  third-party  vehicle  insurance,  to  support  the  development  of  the 
insurance sector. 

Another  set  of  structural  reform  challenges  stems  from  DCFTA  implementation,  in 
particular the removal of non-tariff barriers and the approximation of rules and standards to 
the EU that come with it. In the long term, this should have a positive impact on the Georgian 
economy, by increasing competition, creating a more predictable and transparent legal setting, 
and improving the business climate. However, recent analysis8 suggests that the net benefits 
of the DCFTA are highly asymmetric along the time dimension, with high costs in the short 
and  medium  term,  and  benefits  accruing  mostly  in  the  longer  term.  Also,  the  effects  of 
DCFTA  implementation  are  likely  to  be  uneven  across  regions  and  economic  sectors,  with 
less competitive regions and sectors facing higher adjustment costs and/or smaller benefits. In 
order  to  address  these  challenges,  the  Georgian  authorities  and  the  EU  will  continue 
supporting  private  sector  competitiveness,  for  instance,  as  part  of  a  project  financed  by  the 
EU4Business  initiative  and  the  EBRD,  aimed  at  strengthening  Georgian  SMEs  and  their 
ability to export in high potential areas, such as agriculture and the hospitality sector.  

1.4 

IMF and other donor support 

Since 1994, Georgia has benefited from several arrangements with the IMF in support of its 
economic adjustment programmes.  The last one, a three-year Stand-By Arrangement (SBA) 
with a total access of SDR 100 million (about USD 154 million, or 67% of Georgia’s quota), 
was approved by the IMF Executive Board in July  2014. 80%  of the funds under this SBA 
were  released  in  two  tranches  that  same  year,  following  the  first  programme  review.  No 
further  reviews  were  completed  under  this  programme,  for  several  reasons,  notably 
disagreements  between  the  IMF  and  the  Georgian  authorities  on:  (i)  the  transfer  of 
responsibility for banking supervision from the central bank to the new financial supervision 
agency (which was seen as a politically motivated assault on central bank independence at the 
time); (ii) the fiscal strategy in the context of a growing fiscal deficit; and (iii) the failure by 
the  Georgian  authorities  to  put  in  place  a  clear  legal  framework  for  the  granting  of  state 
guarantees, including for PPPs. As noted in the previous section, issue (i) regarding the role of 
the central bank has since been resolved. Likewise, a new government, which took office after 
the  elections  in  October  2016,  has  committed  to  tackling  issues  (ii)  and  (iii),  as  part  of  its 
reform programme. 

In  this  context,  in  April  2017,  the  IMF  Executive  Board  approved  a  three-year  EFF 
programme of SDR 210.4 million (about USD 285 million, or 100% of the quota), which will 
support  the  reform  programme  of  the  Georgian  authorities,  aimed  at  promoting  higher  and 
more  inclusive  growth  while  maintaining  macroeconomic  stability.  In  terms  of  fiscal 
consolidation,  the  IMF notably  insisted  on  the need  for  measures  to  offset  the  loss  in  fiscal 
revenues due to the corporate income tax reform as well as the government’s ambitious public 
investment  programme.  The  programme  is  underpinned  by  an  agreement  on  a  deficit 
reduction path from 4.1% of GDP in 2016 to 3.1% of GDP in 2020, which is projected to help 
to put public debt on a downward path from end-2019.  

In terms of structural reforms, the benchmarks attached to the new EFF programme notably 
include the submission to Parliament of legislation establishing a second pillar of the pension 
system, deposit insurance as well as reporting and a ceiling of exposure on PPPs. Structural 
reform benchmarks also include measures aimed at strengthening financial supervision and at 
developing  capital  markets.  In  addition  to  fiscal  consolidation  and  structural  reforms,  the 

8   See, for instance, Amat Adarov and Peter Havlik, ʻBenefits and Costs of DCFTA: Evaluation of the Impact 
on  Georgia,  Moldova  and  Ukraine’,  The  Vienna  Institute  for  International  Economic  Studies  (wiiw), 
20 January  2017,  available  at:  https://wiiw.ac.at/benefits-and-costs-of-dcfta-evaluation-of-the-impact-on-
georgia-moldova-and-ukraine-dlp-4111.pdf. 

8 

 
                                                            
programme  is  also  expected  to  unlock  additional  multilateral  and  bilateral  financing  for 
Georgia over the programme period (2017-2020). 

The  World  Bank  has  been  a  key  development  partner  for  Georgia  since  1992,  supporting 
investment  projects  and  the  reform  agenda  in  various  sectors.  In  2014,  Georgia  graduated 
from the International Development Association (IDA), which offers concessional loans and 
grants  to  the  poorest  countries,  to  become  an  International  Bank  for  Reconstruction  and 
Development (IBRD)-only borrower. 

As of April 2017, the World Bank has a portfolio of 13 active projects under implementation 
in  Georgia,  with  a  total  commitment  of  USD  739  million.  Although  the  World  Bank’s 
investment  portfolio  is  mainly  in  infrastructure,  its  overall  partnership  with  Georgia  is 
broader.  Activities  in  other  areas  reflect  the  two  active  Development  Policy  Operations 
(DPOs). The Second Programmatic Inclusive Growth DPO – of EUR 47.2 million approved 
in  April  2017  –  targets  improvements  in  the  public  sector  (oversight  of  public  institutions, 
improved budgeting, a framework for civil service reform, improved coverage and quality of 
social  services,  and  strengthened  monitoring  of  outcomes).  The  Second  Private  Sector 
Competitiveness DPO – of EUR 44.6 million approved in July 2017 – aims to increase private 
sector competitiveness (through business environment reforms, financial sector deepening and 
diversification,  and  increasing  firms’  capacity  to  innovate  and  export).  The  World  Bank  is 
also  active  in  Georgia  through  the  International  Finance  Corporation  (IFC)  which  finances 
and provides advice for private sector projects. Since 1995, the IFC has provided around USD 
1.6 billion in long-term financing for the private sector in Georgia.  

The  Asian  Development  Bank  (ADB)  has  been  supporting  Georgia’s  development  since 
2007. Approved sovereign loans to Georgia total around USD 1.8 billion: USD 900 million 
from the concessional Asian Development Fund (ADF) and USD 885 million from ordinary 
capital  resources  (OCR).  In  January  2017,  Georgia  graduated  from  concessional  ADF 
resources,  as  it  is  now  classified  as  a  middle-income  country.  However,  Georgia  is  still 
eligible  for  the  regular  OCR  lending,  of  which  the  indicative  resources  available  for  2017-
2019 amount  to  USD 600 million. The ADB also  provides direct financial assistance  to the 
non-sovereign public sector and the private sector in Georgia. Non-sovereign ADB loans to 
Georgia total USD 330 million. 

The  European  Bank  for  Reconstruction  and  Development  (EBRD)  has  invested  close  to 
EUR  3 billion  in  Georgia  since  1994.  As  of  August  2017,  the  EBRD  had  an  outstanding 
portfolio  of  EUR  719  million,  with  74  active  operations.  According  to  its  new  strategy  in 
Georgia  for  2017-2021,  the  EBRD  will  continue  supporting  private  sector  development 
through  innovation,  enhanced  value  added  and  convergence  with  DCFTA  standards  and 
obligations;  financial  sector  development  through  deepening  of  financial  intermediation  as 
well  as  local  currency  and  capital  markets;  inter-regional  connectivity,  notably  through 
investments  under  PPPs;  and  renewable  energy,  resource  efficiency  and  climate  change 
adaptation. 

The  European  Investment  Bank  (EIB)  has  been  active  in  Georgia  since  2010  and  has 
provided  to  the  country  EUR  700 million  of  loans.  For  instance,  the  EIB  is  funding  several 
sections of an East-West highway that will connect Georgia’s border with Azerbaijan in the 
east with Batumi on the Black Sea. The latest section of the highway is funded with a EUR 
49.5 million loan signed in February 2016. The EIB also finalised a EUR 100 million deal in 
October  2015  to  rehabilitate  the  waste-water  network  and  construct  a  new  waste-water 
treatment plant in Kutaisi. 

In addition to multilateral financing, Georgia also benefits from bilateral official loans. As of 
June 2017, the outstanding stock of Georgia’s external bilateral government debt was around 
USD 785 million, the main sources of financing being Germany (with an outstanding stock of 
loans  of  around  USD  275  million),  Japan  (USD  205  million),  France  (USD  110  million, 

9 

 
notably  through  the  French  development  agency,  Agence  Française  de  Développement 
(AFD)) and Russia (USD 75 million). 

The  European  Neighbourhood  Instrument  (ENI)  funds  the  EU’s  regular  cooperation 
assistance to Georgia,  covering  budget support, technical assistance, project implementation 
and policy advice. The total indicative ENI allocation to Georgia for 2014-2020 is EUR 610-
746 million. The EU Single Support Framework (SSF) identifies the priority sectors of ENI-
funded  cooperation  with  Georgia.  Future  support,  from  2017,  will  focus  on  (i)  economic 
development and  market opportunities (including smart,  sustainable and inclusive economic 
growth);  (ii)  strengthening  institutions  and  good  governance  (including  the  rule  of  law  and 
security);  (iii)  connectivity,  energy  efficiency,  environment  and  climate  change;  and  (iv) 
mobility and people-to-people contacts (including support to the continuous implementation 
of the visa liberalisation benchmarks and to vocational education and training). 

Georgia also benefits from the Neighbourhood Investment Facility (NIF) which pools grant 
resources from the EU budget and the EU Member States and, in this way, helps to leverage 
loans  from  European  financial  institutions  as  well  as  contributions  from  partner  countries 
themselves. During the period of 2008-2017, the NIF contributed around EUR 86 million to 
ten projects in Georgia, mainly in energy, transport and water/ sanitation sectors. 

As further discussed in section 4 below, the proposed MFA will support efforts to establish a 
stable macroeconomic framework and improve economic governance in Georgia. In this way, 
the proposed MFA will complement the standard EU aid packages mobilised under the ENI 
and NIF, and will enhance the added value and effectiveness of the EU’s involvement through 
those standard financial instruments. 

1.5 

Georgia’s external financing needs 

The projections produced by the IMF in March 2017, in the run up to the agreement on the 
new  EFF  programme,  point  towards  significant  external  financing  requirements  for  the 
programme  period  (2017-2020).  The  total  external  financing  gap  for  this  period  is 
estimated at USD 752 million (see Table 2). This financing gap can broadly be attributed to 
three factors: a relatively large current account deficit, the need to increase foreign exchange 
reserves, and significant expected debt amortisation requirements.  

As  explained  in  the  section  describing  the  macroeconomic  situation,  Georgia’s  current 
account deficit further deteriorated in 2016 to 12.4% of GDP (from 12.0% of GDP in 2015 
and 10.6% in 2014) and remains a major source of vulnerability. The current account deficit is 
expected  to  worsen  further  to  12.9%  in  2017,  before  decreasing  gradually  to  11%  in  2020. 
The very large current account deficit is mainly driven by the trade in goods deficit which is 
only  partly  offset  by  surplus  in  trade  in  services,  as  well  as  primary  and  secondary  income 
(transfers from abroad, including remittances).  

The  second  factor  contributing  to  the  estimated  external  financing  gap  is  the  significant 
external  debt  amortisation.  In  particular,  the  repayments  of  public  external  debt  are 
expected to  accelerate from 1.2%  of  GDP in  2017 to  the average  of 1.7%  of GDP  per year 
during the period of 2018-2020 and peak at 4.2% of GDP in 2021, one year after the end of 
the  recently  agreed  IMF  programme.  While  other  components  of  the  capital  and  financial 
account,  notably  FDI  and  loans,  cover  the  current  account  deficit,  they  are  not  enough  to 
finance the necessary increase in Georgia’s foreign exchange reserves. 

Georgia’s foreign exchange reserves have been stable in absolute terms in the past few years, 
totalling  USD  2.8  billion  at  end-2016  (about  3  months  of  import  cover).  However,  reserve 
needs  have  been  rising.  Therefore,  reserves  currently  represent  only  88%  of  the  IMF’s 
composite reserve adequacy measure. In fact, one of the main aims of the recently agreed EFF 
programme is to help Georgia increase reserves to an adequate level. Compared to 2016, the 

10 

 
reserves should increase by 54% to USD 4.2 billion in 2020 (about 4 months of import cover). 
This is projected to be equivalent to 110% of the IMF composite reserve adequacy measure 
for  countries  with  a  floating  exchange  rate  regime.  The  IMF  deems  exceeding  100%  of  its 
measure  to  be  warranted  by  the  additional  risks  stemming  in  particular  from  high 
dollarisation.  

The targeted increase in foreign exchange reserves and the combined balance of the current 
account  and  the  capital  and  financial  account  produce  an  overall  external  financing  gap  of 
USD 752 million for the period 2017-2020. 

As  noted  above,  the  IMF  programme  approved  in  April  2017  makes  USD  285  million 
available to Georgia. However, the net disbursements of IMF funds will amount to only USD 
171 million over the programme period of 2017-2020. The difference between gross and net 
flows  reflects  repurchases  from  previous  IMF  arrangements  falling  due  during  this  period. 
The  World  Bank,  in  turn,  is  expected  to  make  new  disbursements  of  USD  350  million  to 
Georgia over the period of 2017-2020. 

Table 2: Georgia’s External Financing Gap and Potential Financing Sources 

Sources: Latest IMF staff estimates and projections (March 2017) and Commission staff calculations 

*   Disbursement of the last tranche of the 2015-2017 MFA operation. 
**   Depending on the pace of the legislative process and, thereafter, the implementation of the MFA 
operation, the disbursement of the proposed assistance may also be split between 2018 and 2019. 

In total, contributions from the Bretton Woods institutions (the IMF and the World Bank) are 
expected  to  reduce  the  external  financing  gap  by  around  70%,  leaving  a  residual  external 
financing gap of USD 231 million for the period 2017-2020. Therefore, the proposed MFA 
operation  of  EUR  45  million  (USD  50  million),  in  addition  to  EUR  23 million  (USD  26 
million)  disbursed  under  the  previous  MFA  operation  in  May  2017,  would  cover  32.9%  of 
the estimated residual financing gap. Such proportion would be consistent with the principles 
of  fair  burden-sharing  among  donors  and  value  added  of  the  EU’s  MFA,  as  required  in  the 
Joint Declaration  of 12  August 2013 of  the Parliament and the Council on Macro-Financial 
Assistance.  Specifically,  covering  almost  one-third  of  the  residual  financing  gap  seems 
consistent  with  the  “more  for  more”  principle  of  the  European  Neighbourhood  Policy, 
considering that Georgia is among the EU’s associated countries and arguably a long-standing 
and consistent reform performer in the Eastern neighbourhood.  

11 

USD million2017201820192020Total 2017-20201. Current account balance-1,775-1,849-1,836-1,905-7,3652. Capital and financial account balance1,8231,9422,0762,2648,1053. Overall balance (1+2)48932403597404. Reserves (“-“ indicates increase)-304-315-423-450-1,4925. Overall External Financing Gap -256-222-183-91-7526. Exceptional Financing by the IMF and the World BankNet IMF disbursements69273441171Disbursements by the World Bank100100100503507. Residual Financing Gap-87-95-490-231Financing of the gapEU MFA26*50**76Agence Française de Développement6262Asian Development Bank5050100Total identified sources88100500238Total MFA as % of the residual gap for 2017-202032.9 
 
 
 
Other key contributions to covering the residual financing gap include budget support grants 
from  the  French  development  agency,  AFD  (of  USD  62 million  in  2017),  and  the  Asian 
Development  Bank (expected to  amount  to  USD 100 million in  2018-2019).  Looking at the 
total identified financing gap, the proposed MFA amount would cover only 10% of the gap 
for 2017-2020, with other donors – including those mentioned in the preceding sentence, as 
well as the IMF and World Bank – covering 90%. 

2.

OBJECTIVES AND MONITORING INDICATORS OF THE MACRO-FINANCIAL 
ASSISTANCE 

2.1 

Objectives 

The objectives of the proposed MFA operation are to:  

(i)  contribute  to  covering  the  external  financing  needs  of  Georgia  in  the  context  of  a 
sizeable  external  financing  gap  brought  about  by  a  relatively  large  current  account 
deficit,  significant  external  debt  amortisation,  and  the  need  to  build  up  foreign 
exchange reserves; 

(ii)  support the fiscal consolidation and external stabilisation efforts in the context of the 

recently agreed IMF programme; 

(iii)  support  structural  reform  efforts  aimed  at  improving  the  overall  macroeconomic 
management,  strengthening  economic  governance  and  transparency,  and  improving 
conditions for sustainable growth; 

(iv)  facilitate  and  encourage  efforts  by  the  Georgian  authorities  to  implement  measures 
identified  under  the  EU-Georgia  Association  Agreement  and  in  the  context  of  the 
bilateral  cooperation  programmes,  support  regulatory  convergence  and  economic 
integration with the EU and strengthen the EU’s economic policy dialogue with the 
authorities. 

2.2 

Monitoring 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:  

(i)  progress  with  macroeconomic  and  financial  stabilisation,  notably  by  assessing  the 

degree of adherence to the IMF programme; and  

(ii)  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 Georgian authorities. 

3.

3.1 

DELIVERY MECHANISMS AND RISK ASSESSMENT 

Delivery mechanisms 

The MFA operation under consideration would amount to a maximum of EUR 45 million 
(about USD 50 million). The Commission proposes to provide the amount of the assistance in 
the  form  of  a  medium-term  loan  of  up  to  EUR  35  million  and  grants  of  up  to  EUR  10 
million.  Given  the  proposed  size  of  the  operation,  the  Commission  is  considering  releasing 
the assistance in two instalments.9 The first tranche would be composed of a loan element of 

9   Depending on the pace of the legislative process and, thereafter, the implementation of the MFA operation, 
the disbursement of the proposed assistance may take place in 2018 or be split between 2018 and 2019. 

12 

 
 
 
                                                            
EUR  15  million  and  a  grant  element  of  EUR  5  million,  and  the  second  tranche  of  a  loan 
element of 20 million and a grant element of EUR 5 million. 

While the proposed amount is significant in terms of its share in the coverage of the residual 
financing (32.9%, as noted in the section describing Georgia’s external financing needs), it is 
important to ensure its value added, notably by providing the EU with sufficient leverage to 
promote progress with reforms. At the same time, disbursements under the MFA programme 
will  be  conditional  on good  progress  with  both  the  IMF  programme  and  the  specific  policy 
conditionality that will be agreed with the EU in the Memorandum of Understanding in the 
context of the proposed MFA operation. 

The inclusion of a grant element is consistent with the methodology for determining the use 
of  grants  and  loans  in  EU  MFA,  as  endorsed  by  the  Economic  and  Financial  Committee  in 
January  2011.10  These  criteria  cover  the  level  of  economic  and  social  development  (as 
measured  by  the  Gross  National  Income  (GNI)  per  capita  and  the  poverty  ratio)  and  debt 
sustainability,  and  have  to  be  cross-checked  against  the  classification  of  a  country  by  other 
multilateral donors, notably the Bretton Woods institutions. 

In  terms  of  economic  and  social  development,  Georgia  is  a  lower  middle-income  country, 
with the GNI per capita of USD 3,810 in 2016.11 In addition, the incidence of poverty remains 
high  in  Georgia  by  regional  standards,  with  25.3%  of  population  living  below  the  World 
Bank’s relative poverty line,12 compared to the average of 7.3% in the EU Eastern Partnership 
countries. 

In terms of debt sustainability, Georgia’s level of public debt is considered as sustainable by 
the  IMF  (based  on  its  latest  Debt  Sustainability  Analysis,  produced  in  the  context  of  the 
recently  agreed  EFF  programme).  However,  Georgia’s  public  debt  ratios  have  increased 
significantly, partly due to the depreciation of the lari. The public debt-to-GDP ratio increased 
from 35.6% at end-2014 to 44.6% at end-2016 and is expected to further rise to about 48% in 
2018 before gradually decreasing again. The  same is true for Georgia’s external debt which 
hovered around 80% of GDP in 2008-2014 but increased significantly in the following years, 
to 111.8% of GDP at end-2016, and is projected to increase further, to 120.2% by 2020. The 
high and increasing level of external debt, together with high dollarisation, remains a major 
source of vulnerability of the Georgian economy, and thus argues in favour of maintaining the 
grant element in the proposed MFA operation. 

In terms of classification by the Bretton Woods institutions, Georgia is no longer eligible 
for concessional financing from either the Poverty Reduction and Growth Trust (PRGT, the 
concessional  arm  of  the  IMF)  or  the  IDA  (the  concessional  arm  of  the  World  Bank). 
However,  Georgia’s  graduation  from  concessional  financing  by  these  multilateral  donors  is 
relatively recent, and this is reflected by the fact that IDA credits still represent 63% of the 
outstanding World Bank lending to Georgia. 

Overall, Georgia meets the criteria for receiving MFA grants, notably due to the combination 
of  relatively  modest  GNI  per  capita  and  high  indebtedness  (both  public  debt  and  external 
debt). This conclusion is also supported by the high incidence of poverty, in particular in rural 

10   Commission  Staff  Working  Document  accompanying 

the 
implementation of Macro-Financial Assistance to third countries in 2010: Criteria for determining the use of 
loans and grants in EU Macro-Financial Assistance, SEC(2011) 874 final. 

the  Commission  on 

the  report  from 

11   Based on the World Bank’s Atlas 2016 figures (GNI per capita is the gross national income, converted to 
US dollars using the World Bank Atlas method, divided by the population). However, Georgia’s GNI per 
capita  remains  close  to  the  threshold  of  USD  3,955  separating  lower  and  upper  middle-income  countries, 
and Georgia was classified as an upper middle-income country for a single year in 2015. 

12   Latest available (2014) data on the poverty headcount ratio at USD 3.10 a day (at purchasing power parity in 

2011), as a percentage of population. 

13 

 
                                                            
areas,  and  the  fact  that  Georgia  has  graduated  from  concessional  lending  by  the  Bretton 
Woods institutions only recently. However, this graduation argues in favour of prioritising the 
loan element.  

Therefore, the Commission proposes to provide the bulk (78%) of the proposed MFA in the 
form  of  loans.  As  usual,  these  loans  will  have  favourable  conditions  in  terms  of  long 
maturities (of up to 15 years) and a low interest rate (the rate at which the EU, benefiting from 
its AAA rating, borrows the funds in the international capital markets). Also, the proposal is 
consistent  with  a  gradual  decrease  of  the  grant  element  in  MFA  operations  to  Georgia  (the 
grant  element  constituted  100%  of  the  MFA  amount  in  2009-2010,  50%  in  2014-2016,  and 
would constitute around 22% of the proposed MFA operation). 

3.2 

Risk assessment 

There are fiduciary, credit, policy and political risks related to the proposed MFA operation. 

There is a risk that the MFA could be used in a fraudulent way. As MFA is not designated to 
specific expenses by Georgia (contrary to project financing, for example), this risk is related 
to  factors  such  as  the  general  quality  of  management  systems  in  the  central  bank  and  the 
ministry of finance, administrative procedures, control and oversight functions, the security of 
IT systems and the appropriateness of internal and external audit capabilities. 

To  mitigate  the  risks  of  fraudulent  use  several  measures  will  be  taken.  First,  the  Loan 
Agreement  and  the  MFA  Grant  Agreement  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 specific account of the National Bank of Georgia.  

Moreover, in line with the requirements of the Financial Regulation, the Commission services 
have  carried  out  an  Operational  Assessment  of  the  financial  and  administrative  circuits  of 
Georgia  to  ascertain  that  the  procedures  in  place  for  the  management  of  programme 
assistance,  including  MFA,  provide  adequate  guarantees.  The  preliminary  findings  from  a 
mission conducted by a consultancy company for the purposes of this Operational Assessment 
were received in September 2017. They indicate that the current status of the administrative 
and  financial  circuits  of  Georgia  is  adequate  for  managing  a  new  MFA  operation  although 
some weaknesses remain. The draft final report on this Operational Assessment is expected to 
be  received  in  November  2017.  Developments  in  that  area  will  continue  to  be  closely 
monitored  also  through  the  regular  progress  reports  on  public  finance  management  (PFM) 
reforms produced by the EU Delegation in Tbilisi.  

The  Commission  is  also  using  budget  support  assistance  to  help  the  Georgian  authorities 
improve their PFM systems, and these efforts are strongly supported by other donors. 

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.  

A  second  risk  stems  from  the  possibility  that  Georgia  will  fail  to  service  the  financial 
liabilities  towards  the  EU  stemming  from  the  proposed  MFA  loans  (default  or  credit  risk), 
which could be caused for example by a significant additional deterioration of the balance of 
payments and fiscal position of the country. This risk is mitigated, however, by the fact that 
the EU’s MFA would be part of an international package of official assistance led by the IMF 
that is supporting an adjustment and reform programme aimed at restoring fiscal and balance 
of  payments  sustainability  through  the  implementation  of  a  series  of  policy  measures, 
included those  to  be  agreed in  the Memorandum of  Understanding between  the EU and the 
Georgian  authorities.  Moreover,  the  risks  for  the  EU  budget  are  cushioned  by  the  EU’s 
Guarantee Fund for external actions. 

14 

 
Another key risk to the operation stems from the regional geopolitical situation, in particular 
due to Georgia’s still difficult relations with Russia and the breakaway regions of Abkhazia 
and South Ossetia. A worsening of this regional geopolitical situation could have a negative 
impact on Georgia’s macroeconomic stability, affecting the IMF programme performance and 
the disbursement and/or repayment of the proposed MFA.  

Finally,  the  Georgian  economy  faces  other  broader  risks  due  to  an  uncertain  regional  and 
global economic outlook. Regional and global growth is expected to pick up in 2017, but will 
remain subdued and subject to downside risks of protectionism, volatile financial markets and 
potential  appreciation  of  the  US  dollar.  If  these  risks  materialise,  they could  result  in  lower 
economic growth in Georgia which, coupled with persistently high inequality and a relatively 
limited social safety net, could weigh on the budget and reduce domestic support for structural 
reforms. 

Having made a thorough assessment of the risks, the Commission services consider that there 
are sufficient grounds and guarantees to proceed with the proposed MFA to Georgia.  

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

4.

ADDED VALUE OF EU INVOLVEMENT 

The Union’s financial support to Georgia reflects the country’s strategic importance to the EU 
in  the  context  of  the  ENP.  The  MFA  instrument  is  a  policy-based  instrument  that  aims  to 
alleviate  short-  and  medium-term  external  financial  needs.  As  a  part  of  the  overall  EU 
package  of  assistance,  it  would  contribute  to  support  the  Union’s  objectives  of  economic 
stability  and  economic  development  in  Georgia.  By  supporting  the  authorities’  efforts  to 
establish  a  stable  macroeconomic  framework  and  improve  economic  governance,  the 
proposed assistance would help improve the effectiveness of other EU financial assistance to 
the country, including budgetary support operations. 

The  EU’s  MFA  would  also  complement  the  standard  EU  aid  packages  mobilised  under  the 
ENI.  By  supporting  the  adoption,  by  the  Georgian  authorities,  of  an  appropriate  framework 
for  macroeconomic  policy  and  structural  reforms,  the  EU’s  MFA  would  enhance  the  added 
value and effectiveness of the EU’s involvement through other financial instruments. 

5.

5.1 

ASSESSMENT OF CRITERIA APPLICABLE TO MACRO-FINANCIAL ASSISTANCE

13 

Exceptional Character and Limited Time-frame 

The  proposed  MFA  operation  would  be  exceptional,  aiming  to  support  the  restoration  of  a 
sustainable  external  finance  situation  of  Georgia.  It  would  run  in  parallel  to  the  recently 
agreed IMF programme covering the period of 2017-2020. The proposed MFA would have an 
availability period of 2.5 years from the entry into force of a Memorandum of Understanding, 
as part of conditionality requirements described below. Such a timeframe is expected to cover 
part of the IMF programme period. 

Against this background, the proposed MFA is expected to be implemented in 2018, with the 
disbursement  of  the  two  instalments  in,  respectively,  the  first  and  the  second  half  of  that 
year.14  While  in  the  short-term  Georgia  faces  substantial  external  financing  needs,  the 
macroeconomic and structural adjustment programme agreed with the IMF and supported by 

13   Established  Commission  practice  in  line  with  the  Joint  Declaration  by  the  European  Parliament  and  the 
Council adopted together with Decision No 778/2013/EU of the European Parliament and of the Council of 
12 August 2013 providing further macro-financial assistance to Georgia, OJ L 218, 14.8.2013, p. 15. 

14   Depending on the pace of the legislative process and, thereafter, the implementation of the MFA operation, 
the disbursement of the proposed assistance may take place in 2018 or be split between 2018 and 2019. 

15 

 
 
 
                                                            
the  proposed  MFA  is  expected  to  gradually  strengthen  Georgia’s  balance  of  payments 
position.  

5.2 

Political preconditions and EU-Georgia relations 

MFA  is  available  to  geographically  close  third  countries  that  respect  effective  democratic 
mechanisms  (including  a  multi-party  parliamentary  system)  and  the  rule  of  law  and  that 
guarantee human rights, and with which the EU maintains close political and economic links. 
Countries that are covered by the European Neighbourhood Policy (ENP), like Georgia, are in 
principle eligible for MFA. 

Political  preconditions:  A  pre-condition  for  granting  MFA  is  that  the  eligible  country 
respects effective democratic mechanisms, including a multi-party parliamentary system and 
the rule of law, and guarantees respect for human rights.  

Georgia  has  consolidated  its  democracy  and  the  rule  of  law,  as  well  as  further  reinforced 
respect for human rights. The latest parliamentary elections in October 2016 were competitive 
and  well-administered.  Regarding  the  judiciary,  Georgia’s  reforms  have  promoted  judicial 
independence, professionalism and accountability.  

EU-Georgia  relations:  The  EU  and  Georgia  have  developed  close  political  and  economic 
relations over the years, leading to the conclusion of the Association Agreement, including the 
DCFTA,  which  was  signed  in  2014  and  entered  into  force  in  July  2016.  This  Association 
Agreement,  which  has  replaced  the  previous  Partnership  and  Cooperation  Agreement,  will 
allow for political association and economic integration of Georgia with the EU. The Single 
Support  Framework  (SSF)  identifies  the  priority  sectors  of  EU  cooperation  with  Georgia 
under the ENI. The SSF for 2017-2020 is currently being finalised.  

Georgia’s  economic  ties  with  the  EU  are  already  well  developed.  In  2016,  the  EU  was  the 
main trading partner of Georgia, with a 32.6% share of trade, well ahead of other main trading 
partners (Turkey and Russia, with, respectively, 17.2% and 8.1% shares of trade). The EU is 
also Georgia’s main investment partner and donor. 

In view of the above, the political preconditions for an MFA to Georgia, including the aspect 
of political and economic closeness to the EU, may be considered to be satisfied.15  

5.3 

Complementarity 

The  proposed  MFA  would  complement  the  assistance  provided  by  other  multilateral  and 
bilateral donors in the context of the new IMF-sponsored economic programme. Based on the 
currently  available  information,  multilateral  and  other  donors  than  the  EU  are  expected  to 
cover  around  90%  of  the  estimated  external  financing  gap  for  the  period  of  2017-2020, 
ensuring reasonable burden-sharing. The EU’s MFA would also complement the standard EU 
aid  packages  mobilised  under  the  ENI.  The  proposed  MFA  would  contribute  to  the  EU’s 
leverage on policy  making in  Georgia, helping  the country  reduce economic vulnerabilities, 
and promote higher and more inclusive economic growth. 

5.4 

Conditionality 

Disbursements  under  the  proposed  MFA  operation  would  be  conditional  on  successful 
reviews under the IMF programme and on the effective drawing by Georgia on IMF funds. In 
addition, the Commission – on behalf of the EU – and the Georgian authorities would agree 
on  a  specific  set  of  structural  reform  measures,  to  be  defined  in  a  Memorandum  of 
Understanding.  These  reform  measures  would  support  the  authorities’  reform  agenda  and 
complement the programmes agreed with the IMF, the World Bank and other donors, as well 

15   A more comprehensive assessment of the satisfaction of the political preconditions for MFA, provided by 

the European External Action Service, is annexed to this document. 

16 

 
                                                            
as the policy programmes associated with the EU’s budget support operations. They would be 
consistent  with  the  main  economic  reform  priorities  agreed between the  EU  and  Georgia  in 
the context of the Association Agreement, including the DCFTA and the Association Agenda. 

The Commission will seek a broad consensus with the Georgian authorities, so as to ensure 
ownership  and  smooth  implementation  of  the  agreed  conditionality.  The  policy  conditions 
should address some of the weaknesses shown over the years by the Georgian economy and 
economic  governance  system.  Possible  areas  of  conditionality  could,  in  principle,  include 
reforms  aimed  at  reinforcing  social  safety  nets,  PFM,  strengthening  the  investment  climate 
and  supporting  the  implementation  of  the  DCFTA.  Any  conditionality  will  be  coordinated 
with the relevant international financial institutions, as well as the EU’s regular policy-based 
assistance instruments, notably budget support operations. 

5.5 

Financial discipline 

The planned assistance will be provided in the form of loans and grants. The loan part will be 
financed  through  a  borrowing  operation  that  the  Commission  will  conduct  on  behalf  of  the 
EU.  The  budgetary  impact  of  the  loan  assistance  will  correspond  to  the  provisioning  of  the 
EU’s  Guarantee  Fund  for  external  actions,  at  a  rate  of  9%  of  the  amounts  disbursed,  from 
budget  line  01  03  06  (Provisioning  of  the  Guarantee  Fund).  Assuming  that  the  two  loan 
disbursements  (of  EUR  15 million  for  the  first  tranche  and  EUR  20 million  for  the  second 
tranche)  will  be  made  in  2018,  the  provisioning  will  take  place  in  the  2020  budget,  in 
accordance  with  the rules  governing  the  guarantee  fund  mechanism,  for  an  amount  of  EUR 
3.15 million.  

The grant element of the assistance (EUR 10 million in total, i.e. EUR 5 million for each of 
the two tranches) will be financed from commitment appropriations of the 2018 budget, under 
the  budget  line  01  03  02  (Macro-Financial  Assistance),  with  payments  also  taking  place  in 
2018.16  

Based on current projections on the utilisation of the budget lines 01 03 02 and 01 03 06, the 
Commission assesses that the budgetary impact of the proposed MFA operation for Georgia 
can be accommodated. 
In line with the requirements of the Financial Regulation, the European Commission services 
are  currently  carrying  out,  as  noted,  an  Operational  Assessment  of  the  financial  and 
administrative  circuits  of  Georgia.  Developments  in  this  area  will  continue  to  be  closely 
monitored  also  through  the  regular  progress  reports  on  PFM  reforms  produced  by  the  EU 
Delegation in Tbilisi. 

6.

EVALUATION AND COST-EFFECTIVENESS 

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

6.1 

Evaluation 

Ex-post  evaluations  of  MFA  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 MFA to Georgia will be launched within a period of two 
years  after  the  availability  period  has  expired.  A  provision  for  the  ex-post  evaluation  is 
included  in  the  proposed  Decision  for  the  assistance  and  will  also  be  included  in  the 

16   As already indicated, depending on the pace of the legislative process and, thereafter, the implementation of 
the MFA operation, the disbursement of the proposed assistance may take place in 2018 or be split between 
2018 and 2019. 

17 

 
 
                                                            
Memorandum  of  Understanding.  Budget  appropriations  from  the  budget  line  for  macro-
financial assistance grants will be used for this evaluation.  

6.2 

Achieving cost-effectiveness 

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

(i)  Since  the  assistance  would  be  closely  coordinated  with  the  international  financial 
institutions,  which,  as  noted,  are  making  their  own  financial  contributions,  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  IMF  and  the  World  Bank,  and  to 
influence  their  conditionality  as  well  in  ways  that  will  take  into  account  the  EU’s 
views.  

(ii)  Providing  coordinated macroeconomic support  to  Georgia on behalf of the EU, the 
MFA  would  be  more  cost  efficient  than  the  provision  of  a  similar  total  amount  of 
financial support by EU Member States individually.  

(iii)  A substantial part of the proposed assistance would be provided in the form of loans, 
through which scarce budgetary funds are effectively leveraged, thus enhancing the 
impact of the EU budget. 

(iv)  Finally, 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 PFM).  

18 

 
ANNEX 

EUROPEAN EXTERNAL ACTION SERVICE 

Head of Division 
Eastern Partnership - Bilateral 

Brussels, 16 August 2017 
EURCA EAST 2 (2017) 4424462 (s) 

ASSESSMENT OF DEMOCRACY, HUMAN RIGHTS,  
RULE OF LAW AND POLITICAL REFORMS IN GEORGIA 

Georgia's current constitution provides for a semi-presidential democracy based on the rule of law, 
division  of  powers  including  independence  of  the  judiciary,  and  respect  for  human  rights.  The 
ongoing  revision  of  the  constitution  should  introduce  in  the  years  to  come  a  fully  proportional 
electoral  system  and  reinforce  pluralist  multi-party  democracy  in  the  country.  The  constitution, 
together with ordinary law, guarantees the freedom of the press/media, speech, religion, association 
and assembly. There is also a well-developed legal framework providing for free establishment and 
functioning of civil society organisations. 

An  EU-Georgia  Association  Agreement,  including  a  Deep  and  Comprehensive  Free  Trade  Area 
(AA/DCFTA), was signed in 2014, provisionally applied from 1 September 2014 and entered into force 
on  1  July  2016.  The  Association  Agenda  coupled  with  the  Agreement  includes  numerous 
commitments of human rights, with concrete chapters of justice; democratic institutions (including 
elections, constitutional reform and decentralisation); law enforcement bodies; anti-torture and ill-
treatment; support to the Public Defender Office; gender equality and children’s rights. 

The  government's  reform  agenda  is  ambitious  and  has  recently  been  formalised  in  an  agreement 
with the IMF. In the region Georgia is a frontrunner in most chapters of EU cooperation. However, 
the  super  majority  of  the  Georgian  Dream  party  in  the  legislature  and  the  weak  position  of 
opposition parties increase the risk of a lack of consensus on some future reforms. 

Recent developments 

The October 2016 elections resulted in a landslide victory of the Georgian Dream, which secured a 
constitutional majority in parliament (115 out of 150 seats). They once again brought up the question 
of  proportional  gender  and  ethnic  minorities  representation.  Currently,  only  15%  of  Parliamentary 
seats  are  occupied by  women and  7%  by  national minorities  (according to  the 2014  census,  ethnic 
minorities make up 13.2%). Current financial incentives for political parties to include more women 
appear  to  be  ineffective  which  is  also  reflected  in  the  limited  number  of  women  in  the  ministerial 
positions (2 out of 18).  

In  January  2017,  the  main  opposition  party,  United  National  Movement  (UNM),  split  following 
tensions  between  the  faction  supportive  of  former  President  Mikheil  Saakashvili  (which  kept  the 

1 

 
 
 
 
 
 
 
 
 
 
 
 
UNM  denomination  and  has  6  seats  in  Parliament)  and  the  moderate  faction  (“The  Movement  for 
Liberty - European Georgia” with 21 seats in parliament), which further weakened the opposition.  

The rules for local elections have been reviewed, reducing the number of cities with direct mayoral 
elections. The next local elections (scheduled for October 2017) will be a test for European Georgia's 
capacity to attract the UNM's electorate.  

The parliamentary commission tasked with the preparation of the constitutional reform finalised its 
draft on 21 April 2017. The main changes proposed in the draft constitution include: introduction of a 
fully proportional system with a 5% threshold (without the possibility of electoral blocs and all votes 
for  parties  not  crossing  the  5%  threshold  to  be  allocated  to  the  winning  party);  weakening  of  the 
President (election by an assembly, reduced veto power, suppression of the National Security Council 
he  chairs  and  of  his  right  to  appoint  Supreme  Court  judges);  introduction  of  a  no-confidence 
procedure against the government (either by one-third of MPs or by the Prime Minister); no second 
term  for  the  Ombudsman;  stronger  independence  guarantees  for  the  Public  Broadcaster  and  the 
Prosecutor's Office; and marriage defined as a voluntary union between a man and a woman.  

The draft was submitted to the Venice Commission of the Council of Europe (VC) whose preliminary 
opinion  welcomed  the  general  direction  of  the  changes  but  went  against  some  specific  proposals 
concerning the rules regulating elections (e.g. the combination of three mechanisms: the "bonus" for 
the winning party, the 5% threshold and the prohibition of electoral blocs). The indirect election of 
the  President  was  not  criticised,  but  mentioned  as  another  factor  strengthening  the  need  for  high 
standards  in  the  parliamentary  electoral  system.  The  VC  preliminary  opinion  also  sent  a  strong 
message on the need for recognition of same-sex partnership in the lower level legislation. 

The  government  partially  followed  its  commitment  to  follow  VC  recommendations,  limiting  the 
scope of the vote bonus to 9% and agreeing that the President be elected by direct vote in 2018. But, 
facing the resistance of a large group of Georgian Dream (GD) parliamentarians, it had to take a last-
minute,  unilateral  decision  to  postpone  the  introduction  of  full  proportionality  to  2024.  The 
opposition  and  civil  society  perceive  this  as  a  move  fully  discrediting  all  previous  GD  declarations 
about working for consensus in an inclusive manner. This also prompted a negative reaction of the 
VC about the whole process and the apparent lack of consensus behind the major legislative project. 
The Parliament adopted constitutional amendments in a second reading on 23 June 2017 with 115 
votes. Opposition parties boycotted the session. Subsequently, the leaders of the ruling party made 
public commitments showing openness to try to reach a consensus with the opposition. Opposition 
parties have expressed their readiness to cooperate, as long as the ruling party agreed to introduce 
for the next 2020 parliamentary elections the fully proportional model of elections.  

Regarding  human  rights  and  good  governance,  Georgia  has  seen  some  positive  developments  in 
2016  and  2017.  Examples  include  implementation  of  the  Juvenile  Justice  Code  or  increased 
awareness  on  discrimination  and  domestic  violence.  A  national  Human  Rights  Strategy  and  Action 
Plan were adopted in 2014. The Action Plan 2016-2017 was adopted with a delay in June 2016. The 
anti-discrimination  bill  adopted  in  May  2014  needs  to  be  more  effectively  implemented.  Concerns 
remain in various fields, in particular regarding the rights of persons belonging to minorities. Other 
areas of concern are gender equality, domestic violence, and lack of accountability with regards to 
alleged  crimes  of  law  enforcement  officials.  The  Public  Defender's  Office  has  continued  to  be  very 
active  in  monitoring  the  human  rights  situation,  issuing  an  increased  number  of  recommendations 
and  special  reports  on  specific  topics.  The  Government  institutions  are  reporting  back  on  those 

2 

 
recommendations  which  can  be  seen  as  evidence  that  the  PDO  is  increasingly  accepted  in  its  role. 
The mandate of the PDO is expiring and a new one should be appointed by the end of 2017. 

A  series  of  radical  reforms  from  the  2000s  led  to  the  de-facto  elimination  of  petty  corruption  and 
violent crime. Georgia has also made progress in other areas of human rights and good governance, 
such  as  penitentiary  reform.  On  a  less  positive  tone,  though,  growing  consolidation  of  media 
ownership in few hands, together with low media revenues, resulted in an only 'partly free' rating for 
Georgia by Freedom House in 2016. 

The challenges stemming from the conflicts of the 90s and the 2008 conflict in Georgia remain high. 
The Georgian government is increasingly concerned by what it perceives as the slow but continuous 
annexation by Russia of the Georgian breakaway regions of Abkhazia and South Ossetia (closure of 
two  crossing  points  along  the administrative  boundary  lines  with  Abkhazia  in  March,  "elections"  in 
Abkhazia, "referendum" in South Ossetia to change the name in April, implementation of the 2015 
"treaties" with Russia). That said, the 40th round of the Geneva International Discussions took place 
on 20-21 June 2017 in a constructive atmosphere. With regard to the long-standing project to adopt 
a statement on non-use of force, parties were very close to an acceptable text, to which finally the 
Georgians could not agree 'at this stage'. They asked to postpone the issue to the October round. 

EU-Georgia relations 

Relations between the EU and Georgia are deep and multifaceted, encompassing gradual economic 
integration  and  deeper  political  cooperation.  Georgia  participates  in  many  EU  agreements  and 
programmes, and is among the best performers in approximation and implementation. 

With  a  view  to  facilitating  the  implementation  of  the  Association  Agreement  and  its  Deep  and 
Comprehensive  Free  Trade  Area,  the  EU  and  Georgia  agreed  in  2014  on  an  Association  Agenda, 
which provides a list of priorities for joint work through which the overarching objectives of political 
association and economic integration could be attained. This Agenda is currently being updated for 
the years 2017-2020. 

Visa  liberalisation  for  Georgia  entered  into  force  in  March  2017,  since  then,  55,000  citizens  of 
Georgia have travelled visa-free to the EU.  

Conclusions 

Georgia's constitution and organic legislation enshrine the principle of a multi-party democracy, the 
rule of law and respect for human rights. Also, the EU and Georgia have developed close institutional 
and  economic  ties  and  the  ongoing  implementation  of  the  Association  Agreement  signed  in  2014 
should help deepen them further.  

In consistency with the programme that Georgia recently signed with the IMF, the EU remains fully 
committed to supporting Georgia in its reform efforts together with other international donors. The 
envisaged financial assistance should help keep the current reform momentum. In this context, the 
European  External  Action  Service  stands  ready  to  provide  a  further  detailed  assessment  of  the 
situation  of  democracy,  human  rights,  rule  of  law  and  political  reforms  in  Georgia  throughout  the 
lifecycle of the proposed Macro-Financial Assistance operation, whose political preconditions may be 
considered as being fulfilled. 

3