IMF delays review of Ukraine funding amid anti-corruption system doubts

IMF delays review of Ukraine funding amid anti-corruption system doubts
Ukraine's credit flow from the IMF has been frozen since late 2015.
By bne IntelliNews August 22, 2016

The International Monetary Fund (IMF) will not this month perform an essential review of its credit arrangements with Ukraine, despite claims by officials in Kyiv that the cash will soon start flowing again under the country's stalled $17.5bn bailout programme.

Analysts say the delay is likely deliberate to underscore concern among Ukraine's Western backers at the government's failure to fully launch a new electronic asset and income declaration system that is primarily aimed at reducing corruption among state officials. 

Ukrainian Finance Minister Oleksandr Danylyuk said on August that the IMF's executive board will by the end of the month decide on the release of a new tranche of the extended funding facility (EFF) agreed in March 2015. However, no such meeting was included in an agenda of board sessions posted on the Fund's website, suggesting the resumption of credits  will be delayed for several more weeks.

The IMF had intended to release $1.7bn to Kyiv in the third tranche of funding in July after agreeing with the Ukrainian authorities on policies needed to complete the next review under the programme. However, the IMF board did not consider its Ukraine funding last month.

On August 19, Ukrainian President Petro Poroshenko had a telephone conversation with US Vice President Joseph Biden in which the sides "discussed the importance for Ukraine of getting the IMF tranche in the near future and provision of the US credit guarantees," Poroshenko's media office said after the call.

Earlier the same day, Poroshenko expressed confidence that Ukraine will also "in the nearest future" receive the next loan tranche of macro-financial support from the European Union.

It is "standard practice" for Poroshenko to promise the unrealistic, Alexander Paraschiy of the Concorde Capital brokerage in Kyiv wrote in a note, adding that there was no reason to share his confidence this time either. The government's failure to launch the electronic asset and income declaration system has become a key concern both for the IMF and the EU, the analyst said.

On August 15, the National Agency for Prevention of Corruption (NAPC) announced it had launched the new system. But the system has not received proper data protection certification, raising questions about its legal validity.

At the same time, civil rights activists accused the government of an intentional "fake launch", making it possible for civil servants to avoid being held liable for providing false information about their property and other assets.

The EU delegation to Ukraine and the embassies of EU member states in Kyiv issued a joint statement on August 17 saying the system has not been properly certified and therefore falls short of creating the key legal consequences for submitting false declarations. "An e-declaration system in test-mode therefore makes little sense and might actually be counterproductive," the statement said.

"Given that corruption concerns were the main reason for the IMF and EU to postpone their funding in early 2016, a perfectly functional e-declaration system will become the main precondition to resume any Western financing," Concorde's Paraschiy added on August 22. "To make matters worse, after the attempts of authorities to undermine the launch of e-declaration, Western observers might be inclined to take some additional time to be reassured that there is no reverse or derailment of this reform."

According to Poroshenko, the system will be launched on September 1. However, even if everything goes smoothly with the introduction of the e-declaration system, observers say October will be the earliest time any funding might arrive.

Meanwhile, the improving state of Ukraine's state finances could explain the absence of visible pressing concern among Ukrainian authorities. The country's international reserves increased by 0.7%, or $94mn, to $14.082bn in July, according to the National Bank of Ukraine (NBU), while the economy is currently growing at its fastest rate since 2013.

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