Documents considered by the Committee on 28 January 2015 - European Scrutiny Committee Contents


7 Macro-financial assistance: Ukraine

Committee's assessment Politically important
Committee's decisionCleared from scrutiny; drawn to the attention of the Foreign Affairs Committee
Document detailsDraft Decision to allow further macro-financial assistance to Ukraine
Legal baseArticle 212 TFEU; co-decision; QMV
Department

Document numbers

HM Treasury

(36599), 5093/15 + ADD 1, COM(15) 5

Summary and Committee's conclusions

7.1 Macro-financial Assistance is an external instrument of the EU under which financial assistance is granted to third countries close to the EU to help them address acute balance-of-payments difficulties. Such assistance complements financing provided by the International Monetary Fund in the context of an adjustment and reform programme.

7.2 The EU has agreed macro-financial assistance for Ukraine three times, most recently in April 2014.

7.3 The Commission now proposes further macro-financial assistance of €1.80 billion (£1.40 billion) in the form of loans for Ukraine. It notes that this amount would be in addition to the €1.61 billion (1.25 billion) the EU has previously committed under the three previous loans decisions.

7.4 The Government tells us that it supports macro-financial assistance both generally and in this particular case. It notes the Ukrainian commitment to economic and political reforms and that the loans should be subject to proper sequencing and to links to reforms.

7.5 There is nothing out of the ordinary per se about these proposed loans and we clear the draft Decision from scrutiny. But, given the wider political context, we draw the document to the attention of the Foreign Affairs Committee and of the wider House.

Full details of the documents: Draft Decision providing macro-financial assistance to Ukraine: (36599), 5093/15 + ADD 1, COM(15) 5.

Background

7.6 Macro-financial Assistance (MFA) is an external instrument of the EU under which financial assistance is granted to third countries close to the EU to help them address acute balance-of-payments difficulties. MFA complements financing provided by the International Monetary Fund (IMF) in the context of an adjustment and reform programme. It can take the form of grants financed from the EU budget or loans, for which the Commission is empowered to borrow the necessary funds in capital markets (guaranteed by the Guarantee Fund for external actions) and to lend them on to the beneficiary country. MFA is exceptional in nature and is discontinued once the country can satisfy its external financing needs through other sources, such as the international financial institutions (IFIs) and private capital flows.

7.7 MFA is currently provided on a case-by-case basis where the launch of an individual MFA operation requires a separate legislative decision. MFA operations are based on a number of principles defined by the Council, the so called "Genval Criteria", which were last stated by the ECOFIN Council in October 2002. These stipulate the geographical scope, preconditions and principal modalities for implementation of MFA.

7.8 The EU has agreed MFA for Ukraine three times, most recently in April 2014.

The document

7.9 With this draft Decision the Commission proposes further MFA for Ukraine, saying that:

·  it assesses that the Ukrainian economy is experiencing a deep recession as a result of long-standing macroeconomic imbalances and structural problems;

·  the situation was "aggravated by the eruption of an armed conflict in the East";

·  Ukraine is currently undergoing an ambitious macroeconomic adjustment and structural reform programme;

·  the Ukrainian government, which took office in December 2014, has "committed itself to further resolute reforms";

·  in April 2014, the IMF approved a two-year Stand-By Arrangement for Ukraine amounting to approximately $17.1 billion;

·  the IMF's assistance has been complemented by support from other official and bilateral donors, including an existing EU commitment of €1.61 billion (£1.25 billion) in MFA loans;

·  other donors include the US, Japan, Canada and IFIs such as the World Bank, the European Bank for Reconstruction and Development and the European Investment Bank (EIB);

·  it is expected, however, that Ukraine's economy will face another year of contraction in 2015;

·  the Ukrainian economy has experienced a loss of export and tax proceeds due to the conflict in the East, a reduction in confidence due to the sharp depreciation of the Hyrvnia and a depletion of international reserves; and

·  as a result, a significant additional external financing gap has emerged estimated at $15 billion.

7.10 The Commission in saying that its proposal for further MFA loans to Ukraine would contribute towards the residual financing gap over 2015-2016, notes that MFA can only be disbursed alongside an on-track IMF programme and that the proposal would complement the assistance provided by other multilateral and bilateral donors as part of a wider international support package. It suggests providing up to €1.80 billion (£1.40 billion) of MFA in the form of loans, which would have a maximum maturity of 15 years and would be disbursed in three tranches. The Commission notes that this amount would be in addition to the €1.61 billion the EU has previously committed under the three previous MFA loans decisions.

7.11 In relation to conditions the Commission says that:

·  upon adoption of the Decision, it would negotiate a Memorandum of Understanding with Ukraine, subject to approval by an advisory committee of Member States, detailing the economic policy and financial conditions attached to the MFA;

·  the conditions would complement the agreements and understandings reached by Ukraine and the IMF;

·  the assistance would be exceptional, time limited and conditional on the satisfactory implementation of an IMF programme;

·  the second and third tranches of assistance would be subject to Ukraine complying with the conditionality set out in the Memorandum of Understanding and successful implementation of the associated IMF programme; and

·  possible areas of conditionality could include public finance management and anti-corruption, tax administration, reforms in the energy sector, financial sector reforms and measures to improve the business environment.

The Government's view

7.12 In his Explanatory Memorandum of 22 January 2015 the Financial Secretary to the Treasury (Mr David Gauke) says that:

·  the Government supports efforts to provide MFA to third countries under exceptional circumstances and on a temporary basis;

·  it has committed to supporting Ukraine through the EU and IFIs;

·  it welcomes Ukraine's commitment to carry out economic and political reforms;

·  it will continue to review and assess political and economic developments in Ukraine; and

·  it supports the use of MFA in the form of loans to provide additional financial assistance to Ukraine and will press for these loans to be properly sequenced and linked to reforms — it considers that MFA loans offer greater value for money than MFA grants.

7.13 On the financial implications of the draft Decision the Minister says that:

·  the MFA would be in the form of medium-term loans to be disbursed in three tranches across 2015 and 2016;

·  they would be guaranteed by the European Guarantee Fund for External Actions, a fund managed by the EIB;

·  in line with the Guarantee Fund Regulation, the provisioning of the Guarantee Fund, amounting to 9% of the proposed loans, would take place within the 2017 and 2018 EU Budgets, which will be negotiated in 2016 and 2017; and

·  the Commission has set out that it would finance the 9% guarantee provision in both 2017 and 2018 by reducing the level of MFA grants and by use of the margin under Heading 4 within the Multiannual Financial Framework.

Previous Committee Reports

None.


 
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