IMF to decide size of Ukraine's delayed loan tranche in July

By bne IntelliNews June 7, 2016

The International Monetary Fund (IMF) will set the size of its next tranche to Ukraine in July, news reports said on June 7, amid conflicting signals that the disbursement could either be cut from the expected $1.7bn or combined with another delayed payment to form a larger sum.

All contingencies, however, are understood to depend on the new government under Prime Minister Volodymyr Groysman delivering on pledges to drive forward reforms.

On June 6, the news site cited an anonymous source in the Ukrainian government as saying the IMF is considering reducing the next tranche to $1bn. The following fourth and fifth wires under Ukraine's $17.5bn Extended Funding Facility (EFF) with the IMF could be set at $1.3bn and $2bn, with "the main part of the assets arriving at the year's end", the source said.

According to Tim Ash, emerging markets strategist at Nomura International, "the IMF are mindful with Ukraine to use financing leverage to push the administration on as far as possible to deliver reforms, so the bias is towards backloading disbursements and trying to frontload reforms".

Although the Ukrainian government said in January there will be no fusion of the two delayed tranches, this might also be an option for the IMF, Ash added: "This would be positive, albeit it would require the Ukrainians to surprise positively in terms of delivering on the reform agenda."

Reeling from Moscow's annexation of Crimea in 2014 and the eruption of a pro-Russian separatist conflict in the eastern Donbas region, Ukraine turned to the IMF for help propping up its crumbling economy and agreed the $17.5bn bailout in March 2015.  

The initial IMF loan schedule planned for an immediate $5bn wire (which was fulfilled), followed by $1.67bn in every subsequent quarter in 2015 and $0.6bn in quarterly credits in 2016-2018. Instead, Ukraine has received only $6.7bn ($5bn in March 2015 and $1.67bn in August 2015) from the Fund.

On June 5, the IMF's representative in Ukraine, Jerome Vacher, told Ukrainian television that the country may receive $1.7bn in mid-July. However, the reported prospect of a lesser sum being disbursed appears to have taken analysts by surprise.

"Some kind of rescheduling of the IMF wires was inevitable taking into account that four tranches of [total] $4.5bn are already being delayed," Alexander Paraschiy, an analyst at the Concorde Capital brokerage in Kyiv, wrote in a research note. "Still, we did not expect this rescheduling would mean reductions in the loan amounts since this approach has never been applied to Ukraine."

According to Paraschiy, if the report is true, it might mean the IMF wants to encourage decision-makers to adopt a more assertive approach to reforms since larger initial loans (and smaller ones later on) cause bureaucrats to relax, especially when the economic situation is not that pressing, as is the case currently.

"But we don't advise drawing any conclusions based on this report or similar anonymous claims, prior to the official memorandum being released," Paraschiy concluded.

So far the Fund has said it is impressed with the commitment of the Groysman's government to refomr since it was appointed in mid-April.

In another positive shift in the country's finances, the Ukrainian government signed an agreement for $1bn in loan guarantees with the US administration on June 3.

The funds will be raised from the placement of five-year bonds guaranteed by the US, and will be transferred to Ukraine's state budget, with an expected interest rate below 2%. The funds will be used to aid the country's most vulnerable citizens to protect them from economic impacts, including hiked natural gas prices, the ministry said in a statement.

The agreement marks the third loan guarantee Ukraine received from the US. The previous two were worth $1bn each and were issued in 2014 and 2015.