Explanatory Memorandum to COM(2022)597 - Instrument for providing support to Ukraine for 2023 (macro-financial assistance +) - Main contents
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| dossier | COM(2022)597 - Instrument for providing support to Ukraine for 2023 (macro-financial assistance +). |
|---|---|
| source | COM(2022)597  |
| date | 09-11-2022 |
1. CONTEXT OF THE PROPOSAL
• Reasons for and objectives of the proposal
Russia’s recent escalation of its brutal war of aggression against Ukraine confirms its resolve to violate the fundamental rights of Ukraine to independence, sovereignty and territorial integrity within its internationally recognised borders and destroy its viability as a State. The bravery, courage and determination shown by the Ukrainian people to defend their country deserve profound respect and gratitude.
In a Team Europe approach, the EU, its Member States and European financial institutions have since the beginning of Russia’s war of aggression mobilised EUR 19.7 billion for Ukraine’s economic, social and financial resilience. This combines the support from the Union budget (EUR 12.4 billion), including macro-financial assistance, support from the European Investment Bank and the European Bank for Reconstruction and Development, fully or partially guaranteed by the EU budget, as well as further financial support by Member States (EUR 7.3 billion).
The EU budget, in particular via the European Neighbourhood Instrument and the Neighbourhood, Development and International Cooperation Instrument, has been providing comprehensive reform and investment support to Ukraine since 2014. Since the beginning of the Russian war of aggression, this support has been reoriented especially to emergency assistance and, increasingly, rehabilitation of damaged/destroyed national and municipal infrastructure and housing. It is critical to continue this support in a complementary way through the MFA+ instrument, including by reforms linked to Ukraine’s European path.
In addition, the Council decided on assistance measures to support the Ukrainian armed forces under the European Peace Facility, amounting to EUR 3.1 billion, and a military assistance mission in support of Ukraine with EUR 0.1 billion for the common costs aiming at training 15.000 soldiers as a first start. The EU and its Member States have also delivered an unprecedented in-kind emergency response via the EU Civil Protection Mechanism, constituting the largest emergency operation since the creation of the Mechanism, and channelled millions of emergency items to Ukraine and the region.
The damage from Russia’s war of aggression on the Ukrainian economy, citizens and businesses is tremendous. In the short run, the International Monetary Fund predicts that the Ukrainian economy could contract by as much as 35% in real terms by the end of this year. Inflation has been accelerating and is set to reach 30% by the end of 2022, due to scarcities of goods, logistical challenges to supply and the financing of government needs by monetary creation.
Due to Russia’s ongoing war, the short-term funding needs of Ukraine for 2023 are expected to be significant. According to recent estimates by the Ukrainian authorities, in cooperation with the International Monetary Fund, there will be a continuous funding gap of between EUR 3 and 4 billion per month in 2023. Ukraine will continue to experience high funding needs in the short-term, to maintain essential state functions, ensure macroeconomic stability and rehabilitate critical infrastructure destroyed by Russia’s war. That is why it is critical that new support is mobilised as quickly as possible.
The coming months will be decisive to agree on additional support. This short-term support will require a coordinated international effort and close cooperation among international partners. The EU is steadfast in its support to Ukraine whose future lies within the EU. Continuing the support to Ukraine under an organised collective approach is a strong priority for the Union.
The Union’s macro-financial assistance to Ukraine in 2022 has been generous and effective. The Union has committed EUR 7.2 billion of highly concessional loans, including a subsidy on interest rate payments, under its emergency and exceptional macro-financial assistance packages, out of which EUR 4.2 billion were disbursed already by mid-October, with the remaining EUR 3 billion set to reach Ukraine by the end of the year. Yet, so far assistance has been provided on an ad-hoc basis, covering a few months at a time. It has required significant provisioning from the EU budget and national guarantees. Therefore, a more structural and efficient approach to the Union’s support to Ukraine in 2023 should be considered. This proposal sets an orderly and sustainable framework for the channelling of financial assistance to Ukraine, while offering sufficient flexibility to adjust the support to the evolving funding needs of the country and preparing the ground for a future ‘Rebuild Ukraine’ Facility, in line with the Communication of 18 May 2022 on “Ukraine Relief and Reconstruction” 1 and the principles agreed in the Lugano’s Ukraine Reform Conference of July 2022.
The broad parameters of the Union’s relief and rehabilitation support should be decided for the whole of 2023 on basis of a stable framework. A unified and efficient system to secure the best borrowing conditions and extend market access for loan support has major advantages in a context of rising costs and interest rates.
To this end, the Commission proposes to create an instrument to provide support to Ukraine (macro-financial assistance +) for 2023. The instrument will provide short-term financial relief in the form of highly concessional loans in a predictable, continuous, orderly and timely manner, financing immediate needs, rehabilitation of critical infrastructure and initial support towards sustainable post-war reconstruction, with a view to supporting Ukraine on its path towards European integration. The EU will subsidise the interest rate costs of Ukraine, which will be financed by contributions from Member States in the form of external assigned revenue until the end of 2027. To ensure coverage of interest costs during the lifetime of the loans, contributions from Member States beyond 2027 should be renewed and continue as external assigned revenue unless covered through other means in future multiannual financial frameworks. Furthermore, amounts stemming from additional voluntary contributions from Member States and possible contributions from third countries and parties may provide non-repayable support.
Upcoming funding needs for Ukraine require mobilisation and disbursement in a cost-effective and agile manner. It is of paramount importance that this funding be organised under a single funding method alongside other EU funding in order to allow multiple policy needs to be met concurrently. For that reason, it is necessary to amend Regulation (EU, Euratom) 2018/1046, to establish the diversified funding strategy, currently implemented for borrowings under Decision (EU, Euratom) 2020/2053 2 as the baseline method for the implementation of borrowing operations.
To ensure a sound financial underpinning, loans to Ukraine should be backed up by a guarantee from the EU budget headroom, i.e. the budgetary space above the ceiling for payments of the multiannual financial framework (MFF) up to the limit of the own resources ceiling. It would provide a high degree of protection and reassurance to investors, avoid the need for provisioning of loans or establishment of national guarantees, without changes to the size or ceilings of the MFF. This necessitates a limited amendment of Regulation (EU, Euratom) 2020/2093 3 that will allow contingent liabilities stemming from financial assistance to Ukraine available for 2023 and 2024 to be treated in the same way as financial assistance for Member States.
Support under the instrument will require Ukraine to further enhance rule of law, good governance, anti-fraud and anti-corruption measures. Therefore, while taking into account the evolution on the ground, financial support should be framed by policy conditions, increasingly geared towards strengthening Ukraine’s institutions and preparing the ground for a successful reconstruction effort as well as supporting Ukraine’s efforts on its European path.
The future of Ukraine and its citizens lies indeed within the EU. The European Council has granted candidate status to Ukraine in June 2022. The immediate effort to sustain Ukraine’s financial resilience as well as the long-term reconstruction will require Union’s expertise, working with international partners, as well as transparency and monitoring.
• Consistency with existing policy provisions in the policy area
The support under this instrument will be consistent and complementary to activities financed under Regulation (EU) 2021/947 4 and Regulation (EC) No 1257/96 5 in line with the respective objectives, intervention logic and rules of these instruments.
• Consistency with other Union policies
The candidate status granted by the European Council on 23 June 2022 anchors Ukraine firmly on its European path. This is why the whole EU response in support of Ukraine’s resilience and recovery – including through this instrument – will also contribute to the early phase of Ukraine’s pre-accession process.
2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY
• Legal basis
Article 212 TFEU is an appropriate legal basis for financial assistance programme granted by the Union for third countries, which are not development countries. The continued unprovoked and unjustified military aggression by Russia requires granting of additional financial assistance to Ukraine in line with the objectives and modalities described under this proposal.
• Subsidiarity (for non-exclusive competence)
The subsidiarity principle is respected as the need for a common response in providing support to Ukraine on adequate scale cannot be sufficiently achieved by the Member States alone and can be better achieved by the EU. The main reasons are the fiscal capacity and budgetary constraints faced at the national level and the need for strong donor coordination in order to maximise the scale and effectiveness of the support, while limiting the burden on the administrative capacity of Ukrainian authorities, which is very stretched in the current circumstances.
• Proportionality
The proposed financial support to Ukraine is considered adequate in size, based on the best estimates of Ukraine’s funding needs, submitted by the national authorities and assessed in cooperation with the international community, including the International Monetary Fund. Such support does not go beyond what is necessary for the sought purpose to provide structured and predictable support to Ukraine in 2023 and its related financing.
• Choice of the instrument
A Regulation is the appropriate instrument as it provides directly applicable rules for the support.
3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS
• Ex-post evaluations/fitness checks of existing legislation
The proposal follows a series of macro-financial assistance operations provided to Ukraine since 2015. Past ex-post evaluations of previous MFA operations to Ukraine have shown that in general they were highly relevant in terms of their objectives, financial envelope and policy conditions. In particular, MFA operations proved crucial to support Ukraine in addressing its balance-of-payment problems and implementing key structural reforms to stabilise the economy and enhance the sustainability of its external position. They allowed for fiscal savings and financial benefits, and acted as catalyst for additional financial support and investor confidence. The conditionality attached to the MFA operations was found complementary to the related IMF programmes. It created a politically reinforcing effect that contributed to the mobilisation of the Ukrainian authorities around essential reforms, especially in structural policy areas that are less covered by other international donor programmes.
The one-by-one approach to financial assistance to Ukraine in 2022 has demonstrated significant drawbacks in the context of the war, however, in particular on agreeing on the financing side. It has required significant provisioning from the EU budget and/or national guarantees. To avoid having to repeatedly seize the EU and national legislators on financial support issues, the broad parameters of the Union’s relief and rehabilitation support should be decided for the whole of 2023 on the basis of a stable framework.
• Stakeholder consultations
The proposal delivers on the calls for stable and predictable Union support to Ukraine from the international community and the country itself. In the preparation of this proposal, the Commission services have consulted with international financial institutions and other bilateral (including Member States) and multilateral donors, with significant expertise, including as regards the Ukrainian economy. The Commission has also been in regular contact with the Ukrainian authorities.
• Collection and use of expertise
The proposal builds on thirty years long experience with macro-financial assistance as well as on experience with Union’s external action support.
The Commission based this proposal on a careful analysis, also building on inputs from international financial institutions and other competent international institutions, of the financial needs and broader macro-financial situation of Ukraine. This includes discussions on a regular basis of the latest projections of Ukraine’s funding needs within international fora, e.g. the G7, International Expert Conference on the Recovery, Reconstruction and Modernisation of Ukraine, as well as continuous direct contacts with the Ukrainian authorities.
• Impact assessment
The Union’s macro-financial assistance is an exceptional emergency instrument aimed at addressing severe balance-of-payments difficulties in third countries. 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. This MFA+ Instrument will help alleviate the short-term funding needs of Ukraine in 2023, given the current extraordinary circumstances. The reporting requirements and policy conditions linked to it aim to ensure the efficiency, transparency, and accountability of the support. This MFA+ Instrument should build upon the achievements of the seven MFA programmes since 2015, including the latest COVID-19, the early 2022 emergency and the 2022 exceptional MFA operations.
• Regulatory fitness and simplification
The proposal is not linked to regulatory fitness and simplification.
• Fundamental rights
A pre-condition for granting support under the instrument is that Ukraine continues to respect effective democratic mechanisms and its institutions, including a multi-party parliamentary system, the rule of law, and to guarantee respect for human rights.
The reform-commitment and strong political will by the Ukrainian authorities is a positive sign, in particular as evidenced by the European Council granting candidate status to Ukraine in June 2022 and by the renewed successful completion of the structural policy conditionality attached to the recent MFA operations to Ukraine. Since the Russian aggression, the Ukrainian authorities have shown an impressive degree of resilience and have remained committed to pursue these reforms in a transparent manner and working towards EU standards and in line with the country’s path towards EU integration.
To that end, the political pre-condition for an MFA operation is considered to be satisfied at present. At the same time, the continuous adherence to this political pre-condition will be further ensured by policy conditionalities as established in the future Memorandum of Understanding for this instrument.
4. BUDGETARY IMPLICATIONS
An overall envelope of up to EUR 18 billion in loans will be provided for a period of 12 months, corresponding to EUR 1.5 billion on average per month. This amount comes on top of the assistance provided via existing instruments.
Additional amounts stemming from specific voluntary contributions from Member States (as external assigned revenue) would be used for the following purposes:
·Support to loans’ interest costs – no target volume can be set in advance as these costs will depend on the actual interest on the loans
·Non-repayable support for activities covered by the Memorandum of Understanding of the Instrument or
·To be channelled to the Neighbourhood, Development and International Cooperation Instrument – Global Europe (NDICI) and/or Humanitarian Aid for activities benefitting Ukraine.
Moreover, third countries and parties may make available extra resources to those described above, as external assigned revenue to contribute to the Memorandum of Understanding of the Instrument or to be channelled to NDICI and/or Humanitarian Aid for activities benefitting Ukraine.
The Commission intends to grant the loans under the Instrument with long maturities (with a maximum duration of 35 years) and with no repayment of principal before 2033. This will be coupled with the above mentioned interest costs to be covered.
Disbursements can be organised flexibly and swiftly in response to the needs of the Ukrainian authorities in the course of the year 2023. They could be envisaged in general, on a quarterly basis so as to minimise the administrative burden on the Ukrainian authorities. A review mid-way through the year will take stock of the evolution of Russia’s war of aggression and its implications on the funding needs as well as of the continued relevance and feasibility of the policy conditionality.
Further details on the budgetary implications and the human and administrative resources required are provided in the Legislative Financial Statement attached to this proposal.
5. OTHER ELEMENTS
• Implementation plans and monitoring, evaluation and reporting arrangements
The European Union should make this MFA+ instrument available to Ukraine for a total amount of up to EUR 18 billion in the form of highly concessional loans in a predictable, continuous, orderly and timely manner, contributing to covering its short-term funding needs, financing of rehabilitation of critical infrastructure and initial support towards post-war reconstruction, with a view to supporting Ukraine on its path towards European integration. The support will contribute to covering the residual external funding gap of Ukraine in 2023 and is planned to be disbursed in several instalments. The disbursements would further be conditional on the implementation of the reporting requirements and policy reforms as agreed in the MoU and referred to in this Regulation, including the report to be provided by Ukraine ahead of the disbursement of each instalment. The Commission will work closely with the national authorities to monitor relevant developments and the application of the requirements and policy conditions, as agreed in the MoU. The support will be managed by the Commission. Specific provisions on the prevention of fraud and other irregularities, consistent with the Financial Regulation, are applicable.
Finally, the Commission will submit to the European Parliament and to the Council an assessment of the implementation of the Union’s support to Ukraine under this instrument, including an evaluation. Not later than two years after the end of the availability period, 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 support under the Instrument and the extent to which it has contributed to the aims of the support.
• Detailed explanation of the specific provisions of the proposal
Chapter I of the Regulation concerns its general provisions.
Article 1 provides the subject of the Regulation, which is the establishment of an Instrument for providing the Union’s support for Ukraine.
Article 2 defines the general objective of the Instrument and lists its main specific objectives.
Article 3 describes the areas under which support may be provided in order to achieve the objectives of the Instrument.
Article 4 gives the amounts of support in terms of loans. It also provides for additional amounts for covering an interest rate subsidy and possible non-repayable support. Finally, the article sets the period of availability for the support.
Article 5 describes how Member States and interested third countries and parties may contribute to the Instrument.
Section 2 elaborates on the conditions of the support under the Instrument.
Article 6 sets the general precondition for granting the support under the Instrument.
Article 7 stipulates that the Commission will conclude with Ukraine a Memorandum of Understanding and provides information on its content, timing, and review.
Article 8 refers to the reporting requirements under the Memorandum of Understanding.
Section 3 gives provisions on how the support under the Instrument is released, on the assessment and information obligations.
Article 9 provides how the support under the Instrument is released.
Article 10 lays down the procedural steps for the release of the support.
Article 11 gives rules on the reduction, suspension and cancellation of the support.
Article 12 provides that the Commission shall assess the implementation of the support under the Instrument.
Article 13 defines how the European Parliament and the Council will be informed about the developments regarding the Instrument.
Chapter II of the Regulation gives specific provisions related to the implementation of the Instrument: Article 14 in regard to the borrowing and lending operations and derogations from Regulation (EU) 2021/947 with regard to the External Action Guarantee coverage and provisioning requirements, Article 15 – on the interest subsidy and Article 16 – on the financing agreement for the non-repayable support.
Chapter III of the Regulation describes the common and final provisions regarding comitology (Article 17), annual reporting (Article 18), and entry into force (Article 19).