Proposal for a DECISION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL providing further macro-financial assistance to Georgia
Date: 2018-01-04
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

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   EUROPEAN COMMISSION  Brussels, 4.1.2018  COM(2017) 559 final/2 2017/242 (COD)  CORRIGENDUM This document corrects document COM(2017) 559 final of 29.09.2017. Concerns all language versions. Addition of three words in Article 4(1) on page 12 and deletion of one word and correction of another word in Article 4(3) on page 12. The text shall read as follows:  Proposal for a DECISION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL providing further macro-financial assistance to Georgia {SWD(2017) 321}  
 
 
EXPLANATORY MEMORANDUM 

1. 

• 

CONTEXT OF THE PROPOSAL 

Reasons for and objectives of the proposal 

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) 
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.  Georgia  also  continues  to 
adapt 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 
on  16 June  2017.  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 (2) 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 external financing needs for the 
period  of  2017-2020,  which  are  estimated  at  USD  752  million  (EUR  671 million).1  The 
the  economy’s  short-term  balance  of  payments  and  fiscal 
operation  will  reduce 
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.  

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All conversions in this document are based on a EUR/USD exchange rate of 1.12. 

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As  further  elaborated  in  the  Commission  Staff  Working  Document  accompanying  this 
proposal,  the  Commission  considers,  based  also  on  the  assessment  of  the  political  situation 
made by the European External Action Service (EEAS), that the political and economic pre-
conditions for the proposed MFA operation are satisfied. 

• 

General context  

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).  

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. 

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. 

Although  the  current  account  deficit  has  mainly  been  financed  by  inflows  of  foreign  direct 
investment, 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.  

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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). 

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. 

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  aimed  at  addressing  the  country’s  high  levels  of  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.  Public  debt  also  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. 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  reform  that  entered 
into force in January 2017 and are ready to take additional measures if needed.  

The fiscal consolidation is complemented by the structural reform agenda which focuses on 
improving business environment, education and public administration as well as investing in 
infrastructure.  Additional  measures 
the 
management of risks stemming from public-private partnerships and state-owned enterprises), 
strengthening of the financial sector (for instance, introducing a deposit guarantee scheme and 
improving  regulatory,  supervisory  and  resolution  frameworks  for  banks),  as  well  as  the 
ongoing adaptation to the requirements of the DCFTA. 

include  fiscal  reforms  (notably, 

improving 

The IMF’s projections of March 2017 point towards significant external financing needs for 
the period of 2017-2020, with the total external financing gap estimated at USD 752 million 
(USD 256 million in 2017, USD 222 million in 2018, USD 183 million in 2019 and USD 91 
million  in  2020).  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.  

The  proposed  MFA  operation  of  EUR  45  million  (around  USD  50  million),  in  addition  to 
EUR  23  million  (around  USD  26  million)  disbursed  under  the  previous  MFA  operation  in 
May  2017,  would  cover  10%  of  the  total  estimated  financing  gap  and  33%  of  the  residual 

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financing  gap  (after  deducting  net  IMF  financing  and  the  expected  disbursement  of  World 
Bank policy-based loans). 

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).  

• 

Existing provisions in the area of the proposal 

Decision  No  778/2013/EU  providing  previous  macro-financial  assistance  to  Georgia  in  the 
amount  of  EUR  46  million  (half  in  grants  and  half  in  loans)  was  adopted  by  the  European 
Parliament  and  the  Council  on  12  August  2013.2  The  assistance  was  fully  implemented  in 
2015-2017, with the last disbursement in in May 2017. 

• 

Consistency with the other policies and objectives of the Union policies 

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  EU  Single  Support 
Framework  (SSF)  identifies  the  priority  sectors  of  cooperation  with  Georgia,  funded  by  the 
European  Neighbourhood  Instrument  (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. 

Countries that are covered by the ENP are eligible for MFA. The EU MFA will complement 
the  grants  mobilised  under  the  ENI  and  other  EU  programmes  and  in  particular  the 
conditionality  envisaged  under  the  budget  support  packages  being  implemented  by  the  EU. 
By  supporting  the  adoption,  by  the  Georgian  authorities,  of  an  appropriate  framework  for 
macroeconomic  policy  and  structural  reforms,  the  EU’s  MFA  will  enhance  the  added  value 
and effectiveness of the EU’s overall financial interventions, including through other financial 
instruments. 

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. 

In view of the above, the political preconditions for granting MFA to Georgia, including the 
aspect  of  political  and  economic  closeness  to  the  EU,  may  be  considered  to  be  satisfied.  A 
detailed  assessment  of  the  satisfaction  of  the  political  criteria  for  MFA,  produced  by  the 
EEAS, is annexed to the Commission Staff Working Document accompanying the proposal.  

2 

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). 

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2. 

• 

LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY 

Summary of the proposed action 

The  MFA  operation  under  consideration  would  amount  to  a  maximum  of  EUR  45  million. 
The  Commission  proposes  to  provide  the  amount  of  the  assistance  in  the  form  of  medium-
term loans 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.3 The first tranche would indicatively be composed of a loan element of 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. 

The assistance will be managed by the Commission. Specific provisions on the prevention of 
fraud and other irregularities, consistent with the Financial Regulation, are applicable.  

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 
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 decision to disburse around 22% of the proposed assistance in grants (EUR 10 million out 
of a total of EUR 45 million) and the rest in loans is justified by Georgia’s level of economic 
and social development (as measured by the country’s per-capita income, with Georgia being 
classified  by  the  World  Bank  as  a  lower  middle-income  country,  and  the  incidence  of 
poverty), as well as by its relatively high indebtedness. Whilst Georgia is no longer eligible 
for  concessional  financing  from  either  the  IMF  or  the  World  Bank,  its  graduation from  this 
concessional financing is relatively recent. Nevertheless, this graduation argues in favour of 
prioritising the loan element. 

• 

Legal basis 

The legal basis for this proposal is Article 212 (2) TFEU.  

• 

Subsidiarity (for non-exclusive competence)  

is  respected  as 

The  subsidiarity  principle 
the  objectives  of  restoring  short-term 
macroeconomic  stability  in  Georgia  cannot  be  sufficiently  achieved  by  the  Member  States 
alone and can be better achieved by the European Union. The main reasons are the budgetary 
constraints faced at the national level and the need for strong donor coordination in order to 
maximise the scale and effectiveness of the assistance.  

• 

Proportionality 

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

3 

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. 

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As  identified  by  the  Commission  based  on  the  estimates  of  the  IMF  in  the  context  of  the 
Extended Fund Facility programme, the amount of the proposed new MFA, in addition to the 
last disbursement under the previous MFA operation in May 2017, corresponds to 10% of the 
total estimated financing gap for the period 2017-2020 and 33% of the residual financing gap 
(i.e. excluding the IMF’s net contributions and expected disbursements of World Bank policy-
based  loans).  This  is  consistent  with  standard  practices  on  burden-sharing  for  MFA 
operations,  taking  into  account  the  assistance  pledged  to  Georgia  by  other  bilateral  and 
multilateral donors.  

• 

Choice of the instrument 

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

3. 

• 

RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER 
CONSULTATIONS AND IMPACT ASSESSMENTS 

Consultation of interested parties 

MFA is provided as an integral part of the international support for the economic stabilisation 
of  Georgia.  In  the  preparation  of  this  proposal  for  MFA,  the  Commission  services  have 
consulted  with  the  IMF  and  the  World  Bank,  which  have  already  put  in  place  sizeable 
financing  programs  and  are  preparing  new  ones.  The  Commission  has  also  been  in  regular 
contact with the Georgian authorities. 

• 

Collection and use of expertise 

In line with the requirements of the Financial Regulation, the European Commission services 
have  carried  out  an  Operational  Assessment  of  the  financial  and  administrative  circuits  of 
Georgia in order 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.  

• 

Impact Assessment 

The  EU’s  macro-financial  assistance  is  an  exceptional  emergency  instrument  aimed  at 
addressing  severe  balance-of-payment  difficulties  in  third  countries.  Therefore,  this  MFA 
proposal is exempted from the requirement to carry out an Impact Assessment in accordance 
with the Commission’s Better Regulation Guidelines (SWD(2015) 111 final). 

More  generally,  the  Commission’s  MFA  proposals  build  on  lessons  learned  from  ex-post 
evaluations carried out on past operations in the EU’s neighbourhood. The new MFA and the 
economic adjustment and reform programme attached to it will help alleviate Georgia’s short-

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term financing needs while supporting policy measures aimed at strengthening medium-term 
balance  of  payments  and  fiscal  sustainability  and  raising  sustainable  growth,  thus 
complementing the programme agreed with the IMF. These 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. 

4. 

BUDGETARY IMPLICATIONS 

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 
2018.4  

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. 

5. 

• 

OTHER ELEMENTS 

Review/revision/sunset clause 

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

4 

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. 

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2017/242 (COD) 

Proposal for a 

DECISION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL 

providing further macro-financial assistance to Georgia 

THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Article 212 (2) thereof, 
Having regard to the proposal from the European Commission,5  

After transmission of the draft legislative act to the national parliaments, 
Acting in accordance with the ordinary legislative procedure,6 

Whereas: 

(1) 

(2) 

(3) 

(4) 

Relations between the European Union (“the Union”) and Georgia continue to develop 
within the framework of the European Neighbourhood Policy (ENP) and the Eastern 
Partnership. Georgia joined the EU’s Eastern Partnership in 2009, which was followed 
by the negotiation of an EU-Georgia Association Agreement. This agreement, which 
includes  the  gradual  introduction  of  a  Deep  and  Comprehensive  Free  Trade  Area 
(DCFTA), was signed in June 2014 and entered into force on 1 July 2016. 

Georgia  continues  to  face  a  weak  external  environment,  which,  through  reduced 
exports  and  remittances,  has  contributed  to  the  relatively  subdued  GDP  growth  in 
2016. Whilst regional and global growth is expected to pick up in 2017, it will remain 
subject to downside risks. 

Georgia’s  fiscal  deficit  remains  significant,  and  its  public  debt-to-GDP  ratio  is 
increasing.  Georgia’s  balance  of  payments  position  also  remains  vulnerable  due  to  a 
very large current account deficit and high external debt. Georgia’s foreign exchange 
reserves have been stable in absolute terms, but – in the face of rising reserve needs – 
they have fallen below the level estimated by the International Monetary Fund (IMF) 
as adequate. Georgia also continues to adapt to the requirements of the DCFTA with 
the Union.  

In this context, the Georgian authorities and the IMF agreed, in April 2017, on a three-
year  (2017-2020)  Extended  Fund  Facility  (EFF)  arrangement  in  the  amount  of  USD 
285.3  million.  The  arrangement  was  approved  by  the  IMF  Executive  Board  on 
12 April  2017.  The  aim  of  the  EFF  arrangement  is  to  support  an  economic  reform 
programme  which  will  help  Georgia  reduce  economic  vulnerabilities,  and  promote 
higher and more inclusive economic growth. 

(5) 

In  view  of  Georgia’s  residual  external  financing  needs,  the  Georgian  authorities 
requested complementary macro-financial assistance from the Union in June 2017.  

5 
6 

EN 

OJ C […], […], p. […]. 

Position of the European Parliament of … and Decision of the Council of … . 

8 

  EN 

 
                                                 
(6) 

(7) 

(8) 

(9) 

Since the military conflict with Russia in August 2008, Georgia benefitted from two 
MFA  operations  pledged  by  the  Union  at  the  International  Donors’  Conference  in 
Brussels in October 2008. 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 Union has also made available EUR 
610-746 million to Georgia under the European Neighbourhood Instrument (ENI) for 
the  period  2014-2020,  including  budgetary  support  and  technical  assistance.  In 
addition,  Georgia  benefits  from  the  Neighbourhood  Investment  Facility  (NIF)  which 
contributed around EUR 86 million to projects in Georgia during the period of 2008-
2017. 

Given  that  Georgia  is  a  country  covered  by  the  ENP,  it  should  be  considered  to  be 
eligible to receive macro-financial assistance from the Union. 

The Union’s macro-financial assistance should be an exceptional financial instrument 
of untied and undesignated balance-of-payments support, which aims at addressing the 
beneficiary’s 
the 
implementation  of  a  policy  programme  containing  strong  immediate  adjustment  and 
structural  reform  measures  designed  to  improve  the  balance-of-payments  position  in 
the short term. 

immediate  external  financing  needs  and  should  underpin 

Given  that  there  is  still  a  significant  residual  external  financing  gap  in  Georgia’s 
balance  of  payments  over  and  above  the  resources  provided  by  IMF  and  other 
multilateral  institutions,  the  Union  macro-financial  assistance  to  be  provided  to 
Georgia  is,  under  the  current  exceptional  circumstances,  considered  to  be  an 
appropriate response to Georgia’s request for support to the economic stabilisation, in 
conjunction with the IMF programme. The Union’s macro-financial assistance would 
support  the  economic  stabilisation  and  the  structural  reform  agenda  of  Georgia, 
supplementing resources made available under the IMF’s financial arrangement. 

(10)  The  Union’s  macro-financial  assistance  should  aim  to  support  the  restoration  of  a 
sustainable  external  financing  situation  for  Georgia  thereby  supporting  its  economic 
and social development. 

(11)  The determination of the amount of the Union’s macro-financial assistance is based on 
a complete quantitative assessment of Georgia’s residual external financing needs, and 
takes into account its capacity to finance itself with its own resources, in particular the 
international  reserves  at  its  disposal.  The  Union’s  macro-financial  assistance  should 
complement the programmes and resources provided by the IMF and the World Bank. 
The  determination  of  the  amount  of  the  assistance  also  takes  into  account  expected 
financial  contributions  from  bilateral  and  multilateral  donors  and  the  need  to  ensure 
fair  burden  sharing  between  the  Union  and  other  donors,  as  well  as  the  pre-existing 
deployment  of  the  Union’s  other  external  financing  instruments  in  Georgia  and  the 
added value of the overall Union involvement.  

(12)  Taking into consideration Georgia’s residual external financing needs, the level of its 
economic and social development, as measured by per capita income and the incidence 
of  poverty,  as  well  as  its  level  of  indebtedness,  a  part  of  the  assistance  should  be 
provided in the form of grants. 

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

EN 

9 

  EN 

 
(14)  The  Union’s  macro-financial  assistance  should  support  the  Union’s  external  policy 
towards  Georgia.  Commission  services  and  the  European  External  Action  Service 
should  work  closely  together  throughout  the  macro-financial  assistance  operation  in 
order to coordinate, and to ensure the consistency of, Union external policy. 

(15)  The  Union’s  macro-financial  assistance  should  support  Georgia’s  commitment  to 
values shared with the Union, including democracy, the rule of law, good governance, 
respect for human rights, sustainable development and poverty reduction, as well as its 
commitment to the principles of open, rules-based and fair trade. 

(16)  A  pre-condition  for  granting  the  Union’s  macro-financial  assistance  should  be  that 
Georgia  respects  effective  democratic  mechanisms  –  including  a  multi-party 
parliamentary system – and the rule of law, and guarantees respect for human rights. 
In  addition,  the  specific  objectives  of  the  Union’s  macro-financial  assistance  should 
strengthen  the  efficiency,  transparency  and  accountability  of  the  public  finance 
management systems in Georgia, and promote structural reforms aimed at supporting 
sustainable and inclusive growth, employment creation and fiscal consolidation. Both 
the fulfilment of the preconditions and the achievement of those objectives should be 
regularly monitored by the Commission and the European External Action Service. 

(17) 

In  order  to  ensure  that  the  Union’s  financial  interests  linked  to  the  Union’s  macro-
financial  assistance  are  protected  efficiently,  Georgia  should  take  appropriate 
measures  relating  to  the  prevention  of,  and  fight  against,  fraud,  corruption  and  any 
other irregularities linked to the assistance. In addition, provision should be made for 
the Commission to carry out checks and for the Court of Auditors to carry out audits. 

(18)  Release of the Union’s macro-financial assistance is without prejudice to the powers 

of the European Parliament and the Council (as budgetary authority).  

(19)  The  amounts  of  macro-financial  assistance  provided  in  the  form  of  grants  and  the 
amounts of the provision required for macro-financial assistance in the form of loans 
should be consistent with the budgetary appropriations provided for in the multiannual 
financial framework. 

(20)  The  Union’s  macro-financial  assistance  should  be  managed  by  the  Commission.  In 
order  to  ensure  that  the  European  Parliament  and  the  Council  are  able  to  follow  the 
implementation  of  this  Decision,  the  Commission  should  regularly  inform  them  of 
developments relating to the assistance and provide them with relevant documents. 

(21) 

In  order  to  ensure  uniform  conditions  for  the  implementation  of  this  Decision, 
implementing powers should be conferred on the Commission. Those powers should 
be  exercised  in  accordance  with  Regulation  (EU)  No 182/2011  of  the  European 
Parliament and of the Council.7 

(22)  The  Union’s  macro-financial  assistance  should  be  subject  to  economic  policy 
conditions,  to  be  laid  down  in  a  Memorandum  of  Understanding.  In  order  to  ensure 
uniform conditions of implementation and for reasons of efficiency, the Commission 
should be empowered to negotiate such conditions with the Georgian authorities under 
the  supervision  of  the  committee  of  representatives  of  the  Member  States  in 
accordance  with  Regulation  (EU)  No 182/2011.  Under  that  Regulation,  the  advisory 
procedure should, as a general rule, apply in all cases other than as provided for in that 

7 

Regulation  (EU)  No 182/2011  of  the  European  Parliament  and  of  the  Council  of  16 February  2011 
laying down the rules and general principles concerning mechanisms for control by Member States of 
the Commission’s exercise of implementing powers (OJ L 55, 28.2.2011, p. 13). 

EN 

10 

  EN 

 
                                                 
Regulation.  Considering  the  potentially  important  impact  of  assistance  of  more  than 
EUR  90  million,  it  is  appropriate  that  the  examination  procedure  be  used  for 
operations  above  that  threshold.  Considering  the  amount  of  the  Union’s  macro-
financial assistance to Georgia, the advisory procedure should apply to the adoption of 
the Memorandum of Understanding, and to any reduction, suspension or cancellation 
of the assistance. 

HAVE ADOPTED THIS DECISION: 

Article 1 

1. 
The Union shall  make  macro-financial assistance  of a  maximum amount  of EUR  45 
million  available  to  Georgia  (“the  Union’s  macro-financial  assistance”),  with  a  view  to 
supporting  Georgia’s  economic  stabilisation  and  a  substantive  reform  agenda.  Of  that 
maximum  amount,  up  to  EUR  35 million  shall  be  provided  in  the  form  of  loans  and  up  to 
EUR 10 million in the form of grants. The release of the Union’s macro-financial assistance is 
subject to the approval of the Union budget for the relevant year by the European Parliament 
and  the  Council.  The  assistance  shall  contribute  to  covering  Georgia’s  balance  of  payments 
needs as identified in the IMF programme.  

2. 
In order to finance the loan component of the Union’s macro-financial assistance, the 
Commission shall be empowered on behalf of the Union to borrow the necessary funds on the 
capital markets or from financial institutions and to on-lend them to Georgia. The loans shall 
have a maximum average maturity of 15 years. 

The  release  of  the  Union’s  macro-financial  assistance  shall  be  managed  by  the 
3. 
Commission in a manner consistent with the agreements or understandings reached between 
the  International  Monetary  Fund  (IMF)  and  Georgia,  and  with  the  key  principles  and 
objectives of economic reforms set out in the EU- Georgia Association Agreement, including 
the DCFTA, agreed under the European Neighbourhood Policy (ENP). 

The  Commission  shall  regularly  inform  the  European  Parliament  and  the  Council  of 
developments  regarding  the  Union’s  macro-financial  assistance,  including  disbursements 
thereof, and shall provide those institutions with the relevant documents in due time. 

4. 
The  Union’s  macro-financial  assistance  shall  be  made  available  for  a  period  of  two 
and a half years, starting from the first day after the entry into force of the Memorandum of 
Understanding referred to in Article 3(1). 

5. 
Where the financing needs of Georgia decrease fundamentally during the period of the 
disbursement  of  the  Union’s  macro-financial  assistance  compared  to  the  initial  projections, 
the Commission, acting in accordance with the advisory procedure referred to in Article 7(2), 
shall reduce the amount of the assistance or suspend or cancel it. 

Article 2 

1. 
A  pre-condition  for  granting  the  Union’s  macro-financial  assistance  shall  be  that 
Georgia  respects  effective  democratic  mechanisms  –  including  a  multi-party  parliamentary 
system – and the rule of law, and guarantees respect for human rights. 

2. 
The  Commission  and  the  European  External  Action  Service  shall  monitor  the 
fulfilment  of  this  pre-condition  throughout  the  life-cycle  of  the  Union’s  macro-financial 
assistance.  

EN 

11 

  EN 

 
Paragraphs  1  and  2  of  this  Article  shall  be  applied  in  accordance  with  Council 

3. 
Decision 2010/427/EU8. 

Article 3 

The  Commission,  in  accordance  with  the  advisory  procedure  referred  to  in 
1. 
Article 7(2), shall agree with the Georgian authorities on clearly defined economic policy and 
financial conditions,  focusing on structural reforms and sound public finances, to which the 
Union’s  macro-financial  assistance  is  to  be  subject,  to  be  laid  down  in  a  Memorandum  of 
Understanding  (“the  Memorandum  of  Understanding”)  which  shall  include  a  timeframe  for 
the fulfilment of those conditions. The economic policy and financial conditions set out in the 
Memorandum  of  Understanding  shall  be  consistent  with  the  agreements  or  understandings 
referred  to  in  Article 1(3),  including  the  macroeconomic  adjustment  and  structural  reform 
programmes implemented by Georgia with the support of the IMF.  

2. 
The  conditions  referred  to  in  paragraph  1  shall  aim,  in  particular,  at  enhancing  the 
efficiency,  transparency  and  accountability  of  the  public  finance  management  systems  in 
Georgia, including for the use of the Union’s macro-financial assistance. Progress in mutual 
market  opening,  the  development  of  rules-based  and  fair  trade,  and  other  priorities  in  the 
context of the Union’s external policy shall also be duly taken into account when designing 
the policy measures. Progress in attaining those objectives shall be regularly monitored by the 
Commission. 

3. 
The  detailed  financial  terms  of  the  Union’s  macro-financial  assistance  shall  be  laid 
down in a Loan Agreement and a Grant Agreement to be concluded between the Commission 
and the Georgian authorities.  

4. 
The  Commission  shall  verify,  at  regular  intervals,  that  the  conditions  referred  to  in 
Article 4(3)  continue  to  be  met,  including  whether  the  economic  policies  of  Georgia  are  in 
accordance  with  the  objectives  of  the  Union’s  macro-financial  assistance.  In  so  doing,  the 
Commission  shall  coordinate  closely  with  the  IMF  and  the  World  Bank,  and,  where 
necessary, with the European Parliament and the Council. 

Article 4 

1. 
Subject  to  the  conditions  referred  to  in  paragraph 3,  the  Union’s  macro-financial 
assistance shall be made available by the Commission in two instalments, each of which shall 
consist of a loan and a grant element. The size of each instalment shall be laid down in the 
Memorandum of Understanding referred to in Article 3.  

The amounts of the Union’s macro-financial assistance provided in the form of loans 
2. 
shall be provisioned, where required, in accordance with Council Regulation (EC, Euratom) 
No 480/2009.9  

The Commission shall decide on the release of the instalments subject to the fulfilment 

3. 
of all of the following conditions: 

(a) 

the pre-condition set out in Article 2; 

8 

9 

Council  Decision  2010/427/EU  of  26 July  2010  establishing  the  organisation  and  functioning  of  the 
European External Action Service (OJ L 201, 3.8.2010, p. 30). 

Council  Regulation  (EC,  Euratom)  No 480/2009  of  25 May  2009  establishing  a  Guarantee  Fund  for 
external actions (OJ L 145, 10.6.2009, p. 10). 

EN 

12 

  EN 

 
                                                 
(b) 

a  continuous  satisfactory  track  record  of  implementing  a  policy  programme 
that contains strong adjustment and structural reform measures supported by a 
non-precautionary IMF credit arrangement; and 

(c) 

the  satisfactory  implementation  of  the  economic  policy  and  financial 
conditions agreed in the Memorandum of Understanding. 

The  release  of  the  second  instalment  shall  not,  in  principle,  take  place  earlier  than  three 
months after the release of the first instalment.  

Where  the  conditions  in  paragraph 3  are  not  met,  the  Commission  shall  temporarily 
4. 
suspend or cancel the disbursement of the Union’s macro-financial assistance. In such cases, 
it shall inform the European Parliament and the Council of the reasons for that suspension or 
cancellation.  

5. 
The  Union’s  macro-financial  assistance  shall  be  disbursed  to  the  National  Bank  of 
Georgia.  Subject  to  the  provisions  to  be  agreed  in  the  Memorandum  of  Understanding, 
including  a  confirmation  of  residual  budgetary  financing  needs,  the  Union  funds  may  be 
transferred to the Georgian Ministry of Finance as the final beneficiary.  

Article 5 

The  borrowing  and  lending  operations  related  to  the  loan  component  of  the  Union’s 
1. 
macro-financial assistance shall be carried out in euro using the same value date and shall not 
involve the Union in the transformation of maturities, or expose it to any exchange or interest 
rate risk, or to any other commercial risk. 

2. 
Where the circumstances permit, and if Georgia so requests, the Commission may take 
the steps necessary to ensure that an early repayment clause is included in the loan terms and 
conditions and that it is matched by a corresponding clause in the terms and conditions of the 
borrowing operations.  

3. 
Where  circumstances  permit  an  improvement  of  the  interest  rate  of  the  loan  and  if 
Georgia  so  requests,  the  Commission  may  decide  to  refinance  all  or  part  of  its  initial 
borrowings  or  may  restructure  the  corresponding  financial  conditions.  Refinancing  or 
restructuring operations shall be carried out in accordance with paragraphs 1 and 4 and shall 
not have the effect of extending the maturity of the borrowings concerned or of increasing the 
amount of capital outstanding at the date of the refinancing or restructuring. 

All costs incurred by the Union which relate to the borrowing and lending operations 

4. 
under this Decision shall be borne by Georgia. 

The  Commission  shall  inform  the  European  Parliament  and  the  Council  of 

5. 
developments in the operations referred to in paragraphs 2 and 3. 

1. 
The  Union’s  macro-financial  assistance  shall  be  implemented  in  accordance  with 
Regulation (EU, Euratom) No 966/2012 of the European Parliament and of the Council10 and 
Commission Delegated Regulation (EU) No 1268/2012.11 

Article 6 

10 

Regulation (EU, Euratom) No 966/2012 of the European Parliament and of the Council of 25 October 
2012  on  the  financial  rules  applicable  to  the  general  budget  of  the  Union  and  repealing  Council 
Regulation (EC, Euratom) No 1605/2002 (OJ L 298, 26.10.2012, p. 1). 

EN 

13 

  EN 

 
                                                 
The  implementation  of  the  Union’s  macro-financial  assistance  shall  be  under  direct 

2. 
management.  

The  Loan  Agreement  and  the  Grant  Agreement  to  be  agreed  with  the  Georgian 

3. 
authorities shall contain provisions:  

(d) 

(e) 

(f) 

(g) 

(h) 

ensuring that Georgia regularly checks that financing provided from the budget 
of  the  Union  has  been  properly  used,  takes  appropriate  measures  to  prevent 
irregularities  and  fraud,  and,  if  necessary,  takes  legal  action  to  recover  any 
funds provided under this Decision that have been misappropriated; 

ensuring  the  protection  of  the  Union’s  financial  interests,  in  particular 
providing  for  specific  measures  in  relation  to  the  prevention  of,  and  fight 
against,  fraud,  corruption  and  any  other  irregularities  affecting  the  Union’s 
macro-financial  assistance,  in  accordance  with  Council  Regulation  (EC, 
Euratom) No 2988/9512, Council Regulation (EC, Euratom) No 2185/9613 and 
Regulation (EU, Euratom) No 883/2013 of the European Parliament and of the 
Council14;  

expressly  authorising  the  Commission,  including  the  European  Anti-Fraud 
Office, or its representatives to carry out checks, including on-the-spot checks 
and inspections;  

expressly  authorising  the  Commission  and  the  Court  of  Auditors  to  perform 
audits  during  and  after  the  availability  period  of  the  Union’s  macro-financial 
assistance,  including  document  audits  and  on-the-spot  audits,  such  as 
operational assessments; 

ensuring that the Union is entitled to early repayment of the loan and/or to full 
repayment  of  the  grant  where  it  has  been  established  that,  in  relation  to  the 
management of the Union’s macro-financial assistance, Georgia has engaged in 
any  act  of  fraud  or  corruption  or  any  other  illegal  activity  detrimental  to  the 
financial interests of the Union. 

Before the implementation of the Union’s macro-financial assistance, the Commission 
4. 
shall  assess,  by  means  of  an  operational  assessment,  the  soundness  of  Georgia’s  financial 
arrangements, 
internal  and  external  control 
mechanisms which are relevant to the assistance. 

the  administrative  procedures,  and 

the 

11 

12 

13 

14 

Commission Delegated Regulation (EU) No 1268/2012 of 29 October 2012 on the rules of application 
of Regulation (EU, Euratom) No 966/2012 on the financial rules applicable to the general budget of the 
Union (OJ L 362, 31.12.2012, p. 1). 

Council Regulation (EC, Euratom) No 2988/95 of 18 December 1995 on the protection of the European 
Communities financial interests (OJ L 312, 23.12.1995, p. 1). 

Council  Regulation  (EC,  Euratom)  No 2185/96  of  11 November  1996  concerning  on-the-spot  checks 
and inspections carried out by the Commission to protect the Communities’ financial interests against 
fraud and other irregularities (OJ L 292, 15.11.1996, p. 2). 

Regulation  (EU,  Euratom)  No 883/2013  of  the  European  Parliament  and  of  the  Council  of 
11 September  2013  concerning  investigations  conducted  by  the  European  Anti-Fraud  Office  (OLAF) 
and  repealing  Regulation  (EC)  No 1073/1999  of  the  European  Parliament  and  of  the  Council  and 
Council Regulation (Euratom) No 1074/1999 (OJ L 248, 18.9.2013, p. 1). 

EN 

14 

  EN 

 
                                                                                                                                                         
Article 7 

The  Commission  shall  be  assisted  by  a  committee.  That  committee  shall  be  a 

1. 
committee within the meaning of Regulation (EU) No 182/2011. 

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

2. 
shall apply. 

By 30 June of each year, the Commission shall submit to the European Parliament and 
1. 
to the Council a report on the implementation of this Decision in the preceding year, including 
an evaluation of that implementation. The report shall: 

Article 8 

(i) 

(j) 

(k) 

examine  the  progress  made  in  implementing  the  Union’s  macro-financial 
assistance; 

assess  the  economic  situation  and  prospects  of  Georgia,  as  well  as  progress 
made in implementing the policy measures referred to in Article 3(1); 

indicate the connection between the economic policy conditions  laid  down in 
the  Memorandum  of  Understanding,  Georgia’s  on-going  economic  and  fiscal 
performance and the Commission’s decisions to release the instalments of the 
Union’s macro-financial assistance. 

2. 
Not  later  than  two  years  after  the  expiry  of  the  availability  period  referred  to  in 
Article 1(4), the Commission shall submit to the European Parliament and to the Council an 
ex-post  evaluation  report,  assessing  the  results  and  efficiency  of  the  completed  Union’s 
macro-financial  assistance  and  the  extent  to  which  it  has  contributed  to  the  aims  of  the 
assistance. 

Article 9 

This  Decision  shall  enter  into  force  on  the  third  day  following  that  of  its  publication  in  the 
Official Journal of the European Union. 

Done at Brussels, 

For the European Parliament 
The President 

For the Council 
The President 

EN 

15 

  EN 

 
LEGISLATIVE FINANCIAL STATEMENT 

1. 

FRAMEWORK OF THE PROPOSAL/INITIATIVE  

1.1.  Title of the proposal/initiative  

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

1.3.  Nature of the proposal/initiative  

1.4.  Objective(s)  

1.5.  Grounds for the proposal/initiative  

1.6.  Duration and financial impact  

1.7.  Management mode(s) planned  

2. 

MANAGEMENT MEASURES  

2.1.  Monitoring and reporting rules  

2.2.  Management and control system  

2.3.  Measures to prevent fraud and irregularities  

3. 

ESTIMATED FINANCIAL IMPACT OF THE PROPOSAL/INITIATIVE  

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

3.2.  Estimated impact on expenditure  

3.2.1. Summary of estimated impact on expenditure  

3.2.2. Estimated impact on operational appropriations  

3.2.3. Estimated impact on appropriations of an administrative nature 

3.2.4. Compatibility with the current multiannual financial framework 

3.2.5. Third-party contributions  

3.3.  Estimated impact on revenue

EN 

16 

  EN 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LEGISLATIVE FINANCIAL STATEMENT 

1. 

FRAMEWORK OF THE PROPOSAL/INITIATIVE  

1.1. 

Title of the proposal/initiative  

Proposal for a Decision of the European Parliament and of the Council providing Macro-
financial assistance to Georgia  
Policy area(s) concerned in the ABM/ABB structure15  

1.2. 

Policy area:  Title 01 – Economic and Financial Affairs 

Activity: 

03 – International economic and financial affairs 

1.3. 

Nature of the proposal/initiative  

X The proposal/initiative relates to a new action  

1.4. 

Objectives 

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

“A new boost for jobs, growth and investment: promoting prosperity beyond the EU” 

The DG ECFIN related activities pertain to:  

(a)  Supporting  macro-financial  stability  and  promoting  growth-enhancing  reforms 
outside the EU, including through regular economic dialogues with key partners and 
by providing macro-financial assistance; and  

(b)  Supporting  the  enlargement  process,  the  implementation  of  the  EU  Neighbourhood 
Policy  and  EU  priorities  in  other  third  countries  by  conducting  economic  analysis 
and providing policy assessments and advice.  

1.4.2. 

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

Specific objective: “Promoting prosperity beyond the EU” 

ABM/ABB activity(ies) concerned: 

(a)  Supporting  macro-financial  stability  and  promoting  growth-enhancing  reforms 
outside  the  EU,  including  regular  economic  dialogues  with  key  partners  and  by 
providing macro-financial assistance; and  

(b)  Supporting  the  enlargement  process,  the  implementation  of  the  EU  Neighbourhood 
Policy  and  EU  priorities  in  other  third  countries  by  conducting  economic  analysis 
and providing policy assessments and advice.  

1.4.3.  Expected result(s) and impact 

The proposed assistance consists of an EU loan of up to EUR 35 million and a grant of up 
to EUR 10 million to Georgia, with a view to contributing to a more sustainable balance of 
payments  situation.  The  assistance,  to  be  disbursed  in  two  instalments,  should  help  the 
country  overcome  the  difficult  economic  and  balance  of  payments  situation  it  is 
experiencing. It will also promote structural reforms aimed at raising sustainable economic 
growth, 
finance 
management.  

reducing  macroeconomic  vulnerabilities  and 

improving  public 

15 

ABM: Activity-Based Management – ABB: Activity-Based Budgeting. 

EN 

17 

  EN 

 
                                                 
1.4.4. 

Indicators of results and impact  

The authorities will be required to report on a set of indicators to the Commission services 
on a regular basis and provide a comprehensive report on the compliance with the agreed 
policy conditions ahead of the disbursement of all instalments of the assistance.  

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

An  annual  report  to  the  Council  and  European  Parliament  is  foreseen  in  the  proposed 
legislative decision, comprising an assessment of the implementation of this operation. An 
independent ex-post evaluation of the assistance will be carried out within two years after 
the expiry of the availability period. 

1.5. 

Grounds for the proposal/initiative  

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

The disbursement of the assistance will be conditional upon a satisfactory track record in 
the implementation of the economic programme between Georgia and the IMF, which was 
approved by the IMF Executive Board on 12 April 2017. In addition, the Commission shall 
agree with the Georgian authorities on specific policy conditions, listed in a Memorandum 
of Understanding, to be satisfactorily met before the second instalment is released by the 
Commission.  

1.5.2.  Added value of EU involvement 

The  proposed  MFA  will  help  Georgia  overcome  the  consequences  of  a  weak  external 
environment which, through reduced exports and remittances, has contributed to relatively 
subdued GDP growth in 2016, as well as reduce the vulnerability of the country’s balance-
of-payments position and cope with the adaptation to the requirements of the DCFTA. In 
doing  so,  the  proposed  MFA  will  contribute  to  promoting  macroeconomic  stability  and 
structural reforms in the country. By complementing the resources made available by the 
international  financial  institutions,  other  EU  instruments  and  other  donors,  it  will 
contribute to the overall effectiveness of the package of financial support provided by the 
international donor community.  

The proposed programme will also  strengthen the government’s reform  commitment and 
its aspiration towards closer relations with the EU. This result will be achieved, inter alia, 
through  appropriate  conditionality  for  the  disbursement  of  the  assistance.  In  a  larger 
context,  the  programme  will  signal  to  the  other  countries  in  the  region  that  the  EU 
continues to support countries embarking on a clear path towards political reforms in times 
of economic difficulties. 

1.5.3.  Lessons learned from similar experiences in the past 

Since 2004, more than fifteen ex-post evaluations have been carried out on macro-financial 
assistance  operations.  These  evaluations  conclude  that  MFA  operations  contribute,  albeit 
sometimes  modestly  and  indirectly,  to  the  improvement  of  external  sustainability  and 
macroeconomic  stability  and  to  the  achievement  of  structural  reforms  in  the  recipient 
country.  In  most  cases,  MFA  operations  have  had  a  positive  effect  on  the  balance  of 

EN 

18 

  EN 

 
payments of the beneficiary country and helped to relax their budgetary constraints. They 
have also led to a somewhat higher economic growth. 

1.5.4.  Compatibility and possible synergy with other appropriate instruments 

Investment  Facility 

The EU is the biggest donor to Georgia. The EU’s assistance committed for Georgia under 
the  European  Neighbourhood  Partnership  Instrument  (ENPI)  for  the  period  2007-2013 
totalled EUR 452 million. For the period 2014-2020, under the European Neighbourhood 
Instrument  (ENI),  the  EU’s  assistance  to  Georgia  may  range  between  a  minimum 
allocation  of  EUR  610  million  and  a  maximum  allocation  of  EUR  746  million.  These 
funds  are  complemented  by  financing  from  other  EU  instruments,  such  as  the 
Neighbourhood 
to  bilateral  cooperation 
(NIF). 
programmes,  Georgia  benefits  from  various  regional  programmes  mainly  in  the  area  of 
transport, energy  and environment.  Georgia  also  participates  in  the initiatives  open  to  all 
Neighbourhood countries such as Erasmus+, TAIEX and SIGMA. In addition to the ENI, 
Georgia  is  eligible  for  funding  under  the  EU  thematic  instruments  and  programmes:  the 
European  Instrument  for  Democracy  and  Human  Rights  (EIDHR),  the  Instrument 
contributing  to  Stability  and  Peace  (IcSP),  as  well  as  the  programmes  on  Civil  Society 
Organisations and Local Authorities, Human Development and Migration & Asylum. The 
European  Investment  Bank  has  also  provided  loans  in  the  amount  of  EUR  1 267  million 
since 2010. 

In  addition 

The key value added of the MFA in comparison to other EU instruments would be to help 
create  a  stable  macroeconomic  framework,  including  by  promoting  a  sustainable  balance 
of payments and budgetary situation, and an appropriate framework for structural reforms. 
MFA  does  not  provide  regular  financial  support  for  the  long-term  economic  and  social 
development  of  the  recipient  countries.  It  is  to  be  discontinued  as  soon  as  the  country’s 
external  financial  situation  has  been  brought  back  onto  a  sustainable  path.  Afterwards, 
regular EU cooperation assistance instruments are meant to take over. 

MFA  is  also  meant  to  be  complementary  to  interventions  by  the  international  financial 
institutions,  in  particular  the  adjustment  and  reform  programme  supported  by  the  IMF’s 
EFF and the Development Policy Loans of the World Bank. 

1.6. 

Duration and financial impact  

X Proposal/initiative of limited duration  

X  Proposal/initiative  in  effect  for  two  and  a  half  years  from  the  entry  into  force  of  the 
Memorandum of Understanding, as stated in Article (1.4) of the Decision  

X The financial impact is expected to occur from 2017 to 2020  

1.7.  Management mode(s) envisaged16  

X Direct management by the Commission  

2. 

MANAGEMENT MEASURES  

2.1.  Monitoring and reporting rules  

This  assistance  is  of  macroeconomic  nature  and  its  design  is  consistent  with  the  IMF-
supported economic programme. The monitoring of the action by the Commission services 

16 

Details  of  management  modes  and  references  to  the  Financial  Regulation  may  be  found  on  Europa: 
http://ec.europa.eu/budget/explained/management/managt_who/who_en.cfm 

EN 

19 

  EN 

 
                                                 
will take place on the basis of progress in the implementation of the IMF programme and 
specific reform measures to be agreed with the Georgian authorities in a Memorandum of 
Understanding (see also point 1.4.4).  

2.2.  Management and control system  

2.2.1.  Risk(s) identified  

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

There is  a risk that  the macro-financial assistance  could be used  in  a fraudulent  way. As 
MFA is not designated to specific expenses by Georgia, this risk is related to factors such 
as  the  general  quality  of  management  systems  in  the  central  bank  and  the  ministry  of 
finance and the appropriateness of internal and external audit capabilities.  

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. 

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 further 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. 

2.2.2.  Control method(s) envisaged  

The  macro-financial  assistance  will  be  liable  to  verification,  control  and  auditing 
procedures under the responsibility of the Commission, including the European Antifraud 
Office (OLAF), and by the European Court of Auditors.  

2.2.3.  Costs and benefits of controls and probable non-compliance rate 

The basic costs for the Commission related to the methods of verification and control are 
described  in  Table  3.2.1.  In  addition,  there  are  costs  for  the  European  Court  of  Auditors 
and  of  possible  interventions  of  OLAF.  The  Operational  Assessment  of  financial  and 
administrative circuits of Georgia, to be concluded by the Commission services – with the 
support of external consultants – in 2017, helps to assess risks of misuse of the funds and, 
as a collateral benefit, provides useful information on the necessary reforms in the area of 
public finance management, which can then be reflected in the policy conditionality of the 
operation. Regarding the probable non-compliance rate, the risk of non-compliance (in the 
form of non-repayment of the loan or misuse of the funds) is judged to be low, based on 
the experience with the MFA instrument since its creation.  

2.3.  Measures to prevent fraud and irregularities  

To mitigate the risks of fraudulent use several measures will be taken:  

EN 

20 

  EN 

 
First, the Loan Agreement and the 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, the Commission services, with the support of external consultants, are currently 
finalising a draft Operational Assessment on the reliability of Georgia’s financial circuits 
and administrative procedures that are relevant to this type of assistance. The consultants’ 
preliminary  findings  (as  received  in  September  2017)  conclude  that  the  current  status  of 
the administrative and financial circuits of Georgia is adequate for managing a new MFA 
operation although some weaknesses remain.  

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. 

3. 

3.1. 

ESTIMATED FINANCIAL IMPACT OF THE PROPOSAL/INITIATIVE  

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

  Existing budget lines 

01 03 02: Macro-financial assistance 

01 03 06 – Provisioning of the Guarantee Fund 

In order of multiannual financial framework headings and budget lines. 

Budget line 

Type of  
expenditure 

Contribution  

Heading of 
multiannual 
financial 
framework 

4 

4 

Number  
[Description………
………...……….] 

01 03 02 

Macro-financial 
assistance 

01 03 06  

Provisioning of 
the Guarantee 
Fund 

Diff./non-diff. 
(17) 

from EFTA 
countries18 

from 
candidate 
countries19 

from third 
countries 

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

Diff. 

NO 

NO 

NO 

NO 

Non-diff. 

NO 

NO 

NO 

NO 

The  Guarantee  Fund  for  external  actions  has  to  be  provisioned  according  to  the  Fund 
Regulation,20  using  the  appropriations  under  budget  line  01  03  06  (“Provisioning  of  the 
Guarantee  Fund”),  at  a  rate  of  9%  of  the  total  outstanding  liabilities.  The  provisioning 

Diff. = Differentiated appropriations / Non-Diff. = Non-differentiated appropriations. 

EFTA: European Free Trade Association.  

Candidate countries and, where applicable, potential candidate countries from the Western Balkans. 

Council  Regulation  (EC,  EURATOM)  No  480/2009  of  25  May  2009  establishing  a  Guarantee  Fund  for 
external actions, OJ L 145, 10.6.2009, p. 10. 

21 

  EN 

17 
18 
19 
20 

EN 

 
 
 
 
 
                                                 
amount is calculated at the beginning of the year “n” as the difference between the target 
amount and the Fund’s net assets at the end of the year “n-1”. This provisioning amount is 
entered in year “n” into the “n+1” draft budget and effectively paid in one transaction at 
the beginning of the year “n+1” from the budget line “Provisioning of the Guarantee Fund” 
(budget  line  01  03  06).  As  a  result,  9%  (i.e.  a  maximum  of  EUR  3.15  million)  of  the 
effectively disbursed amount will be considered in the target amount at the end of the year 
“n-1” for the calculation of the provisioning of the Fund.  

New budget lines requested: not applicable. 

3.2. 

Estimated impact on expenditure  

3.2.1. 

Summary of estimated impact on expenditure  

Heading of multiannual financial 
framework: 

4 

EUR million (to three decimal places) 

DG: ECFIN 

Year 
201721 

Year 
2018 

Year 
2019 

Year 
2020 

Year 
2021 

TOTAL 

 Operational appropriations  

Budget line 01 03 02 Macro-financial 
assistance  

Budget line 01 03 06 Provisioning of the 
Guarantee Fund 

Commitments 
Payments 
Commitments 
Payments 

(1) 

(2) 

(1a) 

(2a) 

Operational assessment and ex-post evaluation 

10 

10 

Budget  line  01  03  02  Macro-financial 
assistance 

Commitments 

(3) 

0.07 

3.15 

3.15 

0.15 

Payments 

(3a) 

0.07 

0.15 

TOTAL appropriations 
for DG ECFIN 

Commitments 

Payments 

(4) 
=1+1a 
+3 

(5) 
=2+2a 

+3 

0.07 

10 

3.3 

0.07 

10 

3.15 

0.15 

13.37 

10 

10 

3.15 

3.15 

0.22 

0.22 

13.37 

TOTAL appropriations  
under HEADING 4 
of the multiannual financial framework 

Commitments 

Payments 

=4 

=5 

0.07 

0.07 

10 

10 

3.3 

13.37 

3.15 

0.15 

13.37 

21 

Year in which implementation of the proposal/initiative starts. 

EN 

22 

  EN 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                 
If more than one heading is affected by the proposal / initiative: 

Heading of multiannual 
financial framework: 

5 

DG: ECFIN 

 Human resources 
 Other administrative expenditure  

EUR million (to three decimal places) 

‘Administrative expenditure’ 

Year 
2017 

Year 
2018 

Year 
2019 

Year 
2020 

Year 
2021 

TOTAL 

0.041 

0.058 

0.006 

0.010 

0.010 

0.010 

0.020 

0.125 

0.030 

TOTAL DG ECFIN 

Appropriations  

0.051 

0.078 

0.006 

0.010 

0.010 

0.155 

TOTAL appropriations 
for HEADING 5 
of the multiannual financial 
framework  

(Total commitments = 
Total payments) 

0.051 

0.078 

0.006 

0.010 

0.010 

0.155 

EUR million (to three decimal places) 

Year 
2017 

Year 
2018 

Year 
2019 

Year 
2020 

Year 
2021 

TOTAL 

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

Commitments 

0.121 

10.078 

0.006 

3.310 

0.010 

13.525 

Payments 

0.121 

10.078 

0.006 

3.16 

0.16 

13.525 

EN 

23 

  EN 

 
 
 
 
 
 
 
 
 
 
 
 
3.2.2.  Estimated impact on operational appropriations  

–    The proposal/initiative does not require the use of operational appropriations  

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

Commitment appropriations in EUR million (to three decimal places) 

Year 2017 

Year 2018 

Year 2019 

Year 2020 

Year 2021 

TOTAL 

Number  Cost  Number  Cost  Number  Cost  Number  Cost  Number 

Cost 

Total number 

Total cost 

 Indicate 
objectives and 
outputs  

 

Type22 

SPECIFIC OBJECTIVE NO 123 

- Output 1 

Grant disbursements 

2 

10 

- Output 2 

Provisioning of the 
Guarantee Fund 

- Output 3 

Operational 
assessment 

1 

0.07 

- Output 4 

Ex-post evaluation 

Subtotal for specific objective No 1 

TOTAL COST 

2 

2 

10 

10 

1 

3.15 

1 

2 

2 

0.15 

3.3 

3.3 

2 

1 

1 

5 

5 

10 

3.15 

0.07 

0.15 

13.37 

13.37 

22 
23 

EN 

Outputs are products and services to be supplied (e.g.: number of student exchanges financed, number of km of roads built, etc.).  

As described in point 1.4.2. ‘Specific objective(s)…’  

24 

EN 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                 
3.2.3.  Estimated impact on appropriations of an administrative nature 

3.2.3.1.  Summary  

–    The  proposal/initiative  does  not  require  the  use  of  appropriations  of  an 

administrative nature  

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

nature, as explained below: 

EUR million (to three decimal places) 

Year 
2017 

Year 
201824 

Year 
2019 

Year 
2020 

Year 
2021 

TOTAL 

HEADING 5 
of the multiannual 
financial framework 

Human resources  

0.041 

0.058 

0.006 

0.010 

0.010 

0.125 

Other administrative 
expenditure  

0.010 

0.020 

0.030 

0.051 

0.078 

0.006 

0.010 

0.010 

0.155 

Subtotal HEADING 5 
of the multiannual 
financial framework  

Outside HEADING 525 of 
the multiannual financial 
framework  

Human resources  

Other 
of 
an 
nature 

expenditure  
administrative 

Subtotal  
outside HEADING 5 
of the multiannual 
financial framework  

TOTAL 

0.051 

0.078 

0.006 

0.010 

0.010 

0.155 

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

24 
25 

EN 

Year in which implementation of the proposal/initiative starts. 

Technical  and/or  administrative  assistance  and  expenditure  in  support  of  the  implementation  of  EU 
programmes and/or actions (former ‘BA’ lines), indirect research, direct research. 

25 

  EN 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                 
3.2.3.2.  Estimated requirements of human resources  

–    The proposal/initiative does not require the use of human resources.  

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

Estimate to be expressed in full time equivalent units 

Year 
2017 

Year 
2018 

Year 2019 

Year 2020 

Year 
2021 

 Establishment plan posts (officials and temporary agents) 

01 01 01 01 (Headquarters and 
Commission’s Representation Offices) 
XX 01 01 02 (Delegations) 
XX 01 05 01 (Indirect research) 
10 01 05 01 (Direct research) 

0.30 

0.42 

0.04 

0.07 

0.07 

 External personnel (in Full Time Equivalent unit: FTE)26 

XX 01 02 01 (CA, INT, SNE from the 
“global envelope”) 
XX 01 02 02 (CA, INT, JED, LA and SNE 
in the delegations) 

XX 01 04 yy27 

- at Headquarters 
- in delegations  

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

10 01 05 02 (CA, SNE, INT - Direct 
research) 
Other budget lines (specify) 
TOTAL 

0.30 

0.42 

0.04 

0.07 

0.07 

XX is the policy area or budget title concerned. 

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

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

Description of tasks to be carried out: 

Officials and temporary staff 

HoU: Supervise and manage the operation, negotiate the Memorandum 
of  Understanding, 
lead  missions  and  assess  progress  with 
conditionality compliance.  

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

External staff 

N/A 

26 

27 

EN 

CA= Contract Agent; LA = Local Agent; SNE = Seconded National Expert; INT = agency staff (‘Intérimaire’); JED= 
‘Jeune Expert en Délégation’ (Young Experts in Delegations).  

Sub-ceiling for external staff covered by operational appropriations (former ‘BA’ lines). 

26 

  EN 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                 
3.2.4.  Compatibility with the current multiannual financial framework  

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

3.2.5.  Third-party contributions  

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

3.3. 

Estimated impact on revenue  

X 

Proposal/initiative has no financial impact on revenue. 

EN 

27 

  EN