Ukraine's IMF deal in limbo as political crisis rumbles on

Ukraine's IMF deal in limbo as political crisis rumbles on
IMF director Christine Lagarde and Ukrainian President Petro Poroshenko.
By bne IntelliNews March 1, 2016

Ukraine's deputy minister of finance Artem Shevalyov on February 29 admitted to reporters in Kyiv that the $17.5bn extended funding facility agreed with the IMF a year ago is in limbo as a result of the country's political crisis.

Shevalyov said that he doesn't know when the next tranche of $1.7bn is coming. The money was due to be transferred in January or early February after the government passed an new tax code compliant with the IMF’s wishes at the end of last year, but Kyiv is still waiting.

But a series of problems since have lead the IMF director Christine Lagarde to take an increasingly hard line with the government in Kyiv. She warned in February that unless there is "significant progress on reforms", no more money would be transferred.

In the latest snafu, President Petro Poroshenko fluffed a reshuffle of the government that was supposed to end with the replacement of both the general prosecutor Viktor Shokin and the Prime Minister Arseniy Yatsenyuk. Shokin was eventually fired but Poroshenko reportedly cut a deal with his fellow oligarchs to  keep Yatsenyuk on and maintain the status quo, which benefits the oligarchs.

Even more worryingly, the government in February pushed through a controversial law 3755 that significantly waters down the new anti-graft laws put on the books last year. In effect the new law, which was rushed through the Verkhovna Rada in verbal form and broke many of parliament's procedural protocols in the process, allows officials to hide ill-gotten gains by transferring ownership to their children and other close relatives. The previous version of the law was much more stringent and closed these loopholes.

On the face of it the new tax code met the IMF's demands. But the international financial institution sent a team to Kyiv in February to go through the details and did not give the bill the thumbs up at the end of their visit, preferring to say nothing.

Now Ukraine is teetering on the edge of a political crisis that may end in new elections. The Western-orientated ruling coalition has already broken up following the failed vote of no confidence in Yatsenyuk and the government may fall soon, which could end in a new political constellation that is less Western-orientated.

In this context, the IMF and other international donors are sitting on their cash until there is some more clarity and obvious commitment to reform by the government.

The IMF was already unhappy with Kyiv last year thanks to the government's failure to make much progress with reforms and no progress with its fight against corruption.

The Fund already delayed allocating tranches totalling $3.3bn in 2015 from a total of $10bn that was supposed to be transferred due to holdups in tax reform and passing the 2016 budget. Further funding of $2.3bn from other donors is also tied to the IMF resuming payments. This year it is now uncertain if Ukraine will get any money at all from the IMF or anyone else.

"No agreement likely until Ukraine has a functioning cabinet in place again - hopefully this should happen over the next few weeks, barring early elections," Tim Ash, head of CEEMEA strategy at Nomura International, wrote in an e-mailed note. "Suffice to say, the IMF programme and continued macro-stabilisation is being held hostage now to domestic politics, so shame on Ukrainian politicians."

And to cap Kyiv's troubles, another prize it has long sought, visa-free travel to the EU for Ukrainians, has also been put on hold until laws passed by parliament meet criteria agreed earlier, said European Commissioner for Neighbourhood Policy and Enlargement Negotiations Johannes Hahn.

"I can assure you that we are ready to go ahead. Now everything depends on members of the Verkhovna Rada of Ukraine," Hahn said in comments reported by Deutsche Welle.