IMF to consider Ukraine reform progress in July before resuming funding

By bne IntelliNews May 19, 2016

The International Monetary Fund (IMF) has urged Ukraine to boost efforts to secure financial stability, enhance transparency and the rule of law, and reform large and inefficient state-owned enterprises to enable it to release more credits the currently frozen $17.5bn support package, the Fund said late on May 18 as it wound up a one-week visit to Kyiv.

The mission "reached staff level agreement with the authorities on policies needed to complete the second review" in July under the Extended Fund Facility (EFF) agreed in March 2015 to aid Ukraine's economic recovery, IMF mission chief for Ukraine Ron van Rooden said in a statement.

But there was no sign of a swift release of $3.4bn in credits held up since September, despite the country recently pushing through IMF-demanded higher utilities tariffs and new finance minister Oleksandr Danylyuk striking the right note on fiscal policy and fighting corruption in recent pledges.

With a new government now in place under Prime Minister Volodymyr Groysman, the Ukrainian authorities want to unfreeze badly needed IMF money withheld due to political instability of recent months. Since autumn, two tranches totalling almost $3.4bn were kept back, while other large foreign credits are tied to the resumption of IMF funding including $1bn in loan guarantees from the US, and additional assistance from the EU.

In April, the new government said it expected to receive the third tranche of some $1.7bn by end-June. Despite the further delay, the IMF noted improvements in the situation that could favour a resumption of funding.

"Ukraine has made considerable progress in restoring macroeconomic stability over the past year under difficult circumstances," van Rooden said. "Steadfast implementation of structural and institutional reforms is now critical to turn the recent recovery into strong and sustainable growth, with unwavering determination in the fight against corruption emerging as a litmus test for the government’s ability to retain broad domestic and international support for its policies."

"So essentially the IMF has left the Ukrainian authorities with a list of prior actions to be completed before the IMF board will sign off on the release of the latest $1.8bn credit tranche, which will then leverage the release of an additional $2bn or so in other IFI credits," commented Tim Ash, head of emerging market strategy at Nomura International.

Earlier in May, the Fund said it saw "very encouraging" signs coming from Groysman's government since it was appointed on April 14. However, it still has to get 19 IMF-required bills passed in the Verkhovna Rada parliament to secure a resumption of the cash flow.

The decision to delay the second review of the EFF until July probably allows for difficulties achieving this, given the slim majority the ruling coalition has mustered in the Rada, Ash added: "I think there is recognition that the Groysman government only has a situational majority in the Rada and it might still be challenging to get all the legislation on the statute book by end of June as had earlier been indicated as a time frame for completion of the review. The IMF is being realistic herein."

Implementation of prior actions is taking more time than initially planned, notes the Concorde Capital brokerage in Kyiv: "Recall, Ukrainian Vice Prime Minister Stepan Kubiv voiced his expectation last month that the third IMF tranche will arrive by the end of June. We continue to expect that August is the most realistic month for the new IMF funds to arrive. Statements by [Groysman] indicate that state authorities are determined to meet the requirements to get this wire."

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