Kyiv has about a week to do a deal with the IMF or risk no donor money until the end of 2019

Kyiv has about a week to do a deal with the IMF or risk no donor money until the end of 2019
Ukrainian president Petro Poroshenko with IMF director Christine Lagrande
By Sergei Kuznetsov in Kyiv July 9, 2018

Ukraine has about a week left to placate its main international donor the International Monetary Fund (IMF) and persuade it to release another badly needed tranche of money or risk not being able to get anything from any of its donors until the end of 2019, say analysts in Kyiv.

The Ukrainian government is continuing negotiations with the Fund on revising natural gas prices for households, the Prime Minister Volodymyr Groysman said on June 6, but the talks have been bogged down for months.

Groysman admitted that he is not willing to hike gas prices, and would even like to reduce them, but he has to "consider such factors, as the need to make budget payments, service state debt and develop the economy," according to Interfax news agency.

Increasing domestic gas tariffs was the key element in Kyiv’s deal with the IMF, but having promised a hefty increase, the government reneged as last year’s heating season got under way. One of the perks of the Soviet Union was free power and heat in the icy winters so making people pay for utilities is politically very painful in all the countries of Eastern Europe.

In April, the IMF urged Ukraine prices.

“We are concerned that energy prices again have become a political issue, and we think that it is critically important that Ukraine return to this policy of depoliticising decision making regarding energy prices," the IMF's European Department Director Paul Thomsen told journalists.

"Now we are working with the IMF and our partners, and are discussing possible approaches to resolve the issue," Groysman told the nation's lawmakers, adding that he will inform them about progress as soon as it is reached.

Local analysts point out that Ukrainian officials are running out of time to implement minimum IMF demands for a new $1bn tranche from a $17.5bn support programme agreed with the multinational lender in 2015.

Alongside gas price hike, two other requirements are being demanded by the IMF - the nation's parliament should secure amendments to the law necessary to create an anti-corruption court in the country, as well as the nation's Finance Ministry should take measures to ensure that the 2018 budget deficit will not exceed the planned level.

"Failure to implement all three items [demanded by the IMF] by the end of this week will make it practically impossible for the IMF board to approve the fifth loans tranche by its August recess," Alexander Paraschiy at Kyiv-based brokerage Concorde Capital wrote in a note on June 9. "That means the tranche can be considered by the board only in September, at the earliest."

However, by that time, the IMF is likely to add a new requirement, as tradition: a 2019 Ukrainian state budget with a deficit in line with IMF commitments (the budgeting process starts in early September), Paraschiy believes. 

"If so, the IMF won’t provide any tranche before official approval of Ukraine’s 2019 budget (which, as tradition, is unlikely to be earlier than in December)," the expert added. "In turn, in December, it might be too late for the IMF to sign a memorandum with Ukraine’s top officials, given that many of them could be out of office by the end of March, when presidential elections are held. That would not be enough time to implement IMF requirements."

Bringing gas prices for households to import parity level (hiking the domestic prices to at least cover the cost of imported gas) is among the three remaining requirements from the IMF to approve the review of its $17.5bn support programme with Ukraine and provide a fifth loan tranche under the programme.

Ukraine promised to adjust gas prices a year ago, and in March 2017 the Cabinet even approved a resolution stipulating adjustment of prices to import parity as of October 2017, which enabled Ukraine to pass the IMF's programme review and receive a $1bn loan tranche from the IMF in April. Since then however, the cabinet in Kyiv has refused to implement its resolution, keeping gas rates for households unchanged up until now.

"If Ukraine does not reach any deal with the IMF staff this week (or next week, at the latest), the chance to get the IMF tranche under the existing programme (that officially expires in March 2019) will be very low," Paraschiy added. "The next program with the IMF (if any) will be possible only in very late 2019, after planned parliamentary elections in Ukraine."

Failure to get the tranche from the IMF will mean no complimentary loans from the EU from a new €1bn macro-financial assistance (MFA) programme (a €500mn tranche has been already approved, but its disbursement is conditional on the IMF loan tranche approval) and from the World Bank (up to $800mn loan, as estimated by Ukraine’s central bank).

Ukraine has received $8.4bn from the IMF so far under the lender's support programme, helping Kyiv to recovery from Russia's attempts to destroy its economy via Crimea annexation and military intervention in the Donbas region. Over the past years, Kyiv also issued a set of Eurobonds under US guarantees.