US to provide $1bn loan guarantee to Ukraine if Kyiv agrees tax reform with IMF

By bne IntelliNews November 6, 2015

The United States will provide the Ukrainian government a third loan guarantee of $1bn if Kyiv continues to fight corruption and ensure the country's tax reform meets terms agreed with the International Monetary Fund (IMF), US Vice President Joe Biden told Ukrainian President Petro Poroshenko in a phone call on November 5.

"Regarding economic reforms, the Vice President reiterated the US willingness to provide a third $1 billion loan guarantee to Ukraine contingent on continued Ukrainian progress to investigate and prosecute corruption and ensure that Ukraine's tax reform is consistent with its IMF programme," the White House said in a statement.democratic development," the statement reads.

The US loan guarantee agreement is a part of support package for war-torn Ukraine that Kyiv secured with the IMF and other bilateral and multilateral partners earlier this year. The package should help the government stabilise the country's state finances, badly hit by the pro-Russian military uprising in the eastern Donbas region and the annexation of Crimea by Russia in March 2014.

However, the US guarantees worth $1bn and funding from other international donors ($670mn in macro-financial assistance from the EU and a $300mn loan from Japan) is tied to the next due $1.7bn IMF credit tranche. While the tranche is part of a $17.5bn bailoiut package agreed with the IMF in March 2015, it has been delayed amid disagreements with Ukraine over its tax reform plans.

In particular, the tax committee of the Ukrainian parliament submitted to lawmakers a tax reform plan based on radical tax cuts, which could lead to losses of some UAH150bn-UAH200bn ($6.5bn-$8.7bn). The IMF office in Kyiv already warned the author of the document and head of the parliament's tax and customs committee, Nina Yuzhanina, that the Fund did not support the radical reform proposals.

On November 4, Ukraine's deputy finance minister Ihor Umanskiy said the government’s negotiations with the IMF will continue only after it develops and submits its tax reform project and the 2016 draft budget for the multinational lender's review.

"The Fund will analyse them and we will resume our negotiations afterwards," Interfax news agency quoted Umanskiy as saying.

Alexander Paraschiy at the Kyiv-based Concorde Capital investment company believes the IMF informed Ukrainian officials that talks should be suspended "until the tax reform and formation of the 2016 budget play themselves out".

The analyst added in a November 5 note to clients that the IMF's key demand is a realistic spending plan for 2016 that complies with the budget deficit requirement of 3.7% of GDP.

"This task is quite challenging given that more than UAH60bn ($2.6bn) in state revenue collected in 2015 will not be available in 2016. To make matters worse, the tax reform proposals on the table could lead to even further decline in budget revenue," Paraschiy wrote. As well as these losses, more aggressive tax reform from the tax and customs policy parliamentary committee could lead to a UAH150bn-UAH200bn ($6.5bn-$8.7bn) revenue plunge, according to Finance Ministry estimates, he added.

Ukrainian Finance Minister Natalie Jaresko said previously that both tax reform and budget 2016 will likely be voted on in a single package.

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