7 Macro-financial assistance: Ukraine
| Committee's assessment
| Politically important |
| Committee's decision | Cleared from scrutiny; drawn to the attention of the Foreign Affairs Committee
|
| Document details | Draft Decision to allow further macro-financial assistance to Ukraine
|
| Legal base | Article 212 TFEU; co-decision; QMV
|
| Department
Document numbers
| HM Treasury
(36599), 5093/15 + ADD 1, COM(15) 5
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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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