IMF reported to be unhappy with Ukrainian reform progress

By bne IntelliNews December 15, 2014

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An International Monetary Fund team will return to Kyiv in January amid suggestions that Kyiv has not done enough to get a second tranche of its $17bn stand by credit.

"I was impressed by their [Ukraine's government] vision for an economic transformation of Ukraine, and by their commitment to decisive, front-loaded implementation of their reform agenda," first deputy managing director of the International Monetary Fund David Lipton said in a statement on December 13, after a visit to Kyiv and meetings with top officials. Ukraine's parliament voted in a new government on December 2, including a raft of foreign specialist in key posts intended to ram through sweeping cuts and reforms. 

However, while the new government looks set to try to implement IMF demands in the future, the fund's review mission that visited Kyiv in November is reported as being dissatisfied with the current status of Ukraine's implementation of conditions, and thus not willing to disburse a third tranche.

Weekly newspaper Zerkalo Nedeli, claiming knowledge of the results of the IMF review, lists a number of still unimplemented Ukrainian commitments to the IMF that may be delaying the payment of the third tranche of a $17bn standby credit agreed, in April 2014. The first tranche of $3.19bn was paid out in May, and a second tranche of $1.7bn in August.

One key IMF condition for disbursal of further tranches, still unmet by Ukraine, is the removal of sweeping tax benefits provided to Ukraine's agriculture sector. Agriculture reportedly contributes only 1% of budget revenues, worth 0.4% of GDP, while comprising 10% of overall GDP, according to Zerkalo Nedeli. The IMF, demanding that Ukraine's agriculture sector pay the same taxes as the rest of the economy, made this a condition to be implemented by the end of September, according to Zerkalo Nedeli

Resistance from Ukraine's powerful agriculture lobby blocked implementation, according to analysts. Opposition to the move may have been spearheaded by former first deputy head of Ukraine's presidential administration, Yury Kosyuk, who is owner of one of Ukraine's biggest and most heavily leveraged agriculture holdings, grain and chicken producer MHP, listed on the London Stock Exchange. Kosyuk left the presidential administration on December 10 to return to managing MHP.

The second longstanding requirement of the IMF to Ukraine, likewise unfulfilled, is to eliminate the deficit of state energy company Naftogaz Ukraine. According to the report in Zerkalo Nedeli, IMF experts found that the deficit was set to increase to 5.7% of GDP by the end of 2014. The reason for this is the massive devaluation of  Ukraine's currency, which has meant the hryvnia value of energy imports doubled, nixing hikes in domestic tariffs already implemented. Ukraine already implemented an initial 50% hike in gas tariffs for the population and utilities in May 2014, as demanded by the IMF, but this increase has been effectively reversed by the hryvnia devaluation.

Now the IMF is calling on Ukraine to bring forward further hikes in the domestic price of gas, demanding a 40% hike in January 2015 and again in July. Ukraine wants to delay any price hikes until May 2015. The IMF also wants to force Naftogaz to call in debts by means of direct seizure of funds from bank accounts of debtors, according to Zerkalo Nedeli.

According to a report in the Financial Times on December 9, the IMF has identified a $15bn fiscal gap in Ukraine's finances, and is unwilling to disburse any more funds under the current program until international donors undertake measures to close the financial gap.

"It seems unlikely that further IMF credits will now be forthcoming until the end of January at the earliest (…) This all suggests that Ukraine will remain vulnerable and exposed in the interim, with official FX reserves expected to drop to around USD8bn or thereabouts by year end, just weeks of import cover," writes Standard Bank's Tim Ash.

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