The International Monetary Fund (IMF) has cancelled its agreement with Ukraine for the extended $5.5bn Extended Fund Facility (EFF) and says negotiations must restart for a downgraded Standby agreement (SBA) due to “unprecedented uncertainty,” the fund said on May 7.
The IMF came to a principle agreement with Ukraine in December 2019 to sign off a new extended EFF that normally would run over at least three years in the wake of Ukrainian President Volodymyr Zelenskiy's election victory in April and the landslide victory of his Servant of the People (SOTP) Party in August.
In Washington, IMF spokesman Gerry Rice said talks with Ukraine switched tracks because of “the unprecedented uncertainty surrounding the economic and financial outlook, and the need to focus policy priorities on near-term containment and stabilization,” on May 8.
However, the deal was never finalised nor approved by the funds management board and so no money was disbursed. The IMF, Ukraine’s key donor, was waiting for Ukraine’s Rada to pass various key pieces of legislation, including a bill to create a land market and the so-called anti-Kolomoisky bill that would bar the state returning banks to their former owners if they have been nationalised.
The land market bill laws were passed in April but in a greatly watered down version that will have little economic impact in the short term. The banking bill has passed a first reading but still needs a second reading, which is slated for the next few weeks.
The IMF is clearly upset over the slow progress the legislation is making through the Rada and the obvious and visceral opposition these reforms are facing from deputies in the Rada who are associated with oligarch Ihor Kolomoisky, who is blatantly lobbying to have his PrivatBank returned to him with seeming impunity.
Moreover, as soon as the bank bill passed the first reading Rada deputies introduced a new bill that would give the Rada powers to sack the head of the National Anti-Corruption Bureau of Ukraine (NABU), part of the anti-corruption legal infrastructure that the IMF has insisted on.
Follow the submission of that draft legislation last week the IMF sent a letter to the government warning that the passage of the law would cause the IMF to reassess its commitments to Ukraine.
Clearly the IMF has had enough and decided that Zelenskiy has used up his benefit of the doubt.
Under the provisional deal agreed at the end of last year Ukraine was to receive a three-year EFF worth $5.5bn. Since then the IMF has also promised to pay out some $2bn from its Rapid Financing Instrument (RFI) to help the country cope with the coronavirus (COVID-19) epidemic.
The IMF deal is crucial to the country’s financial wellbeing. Loans from several other international financial institutions (IFIs) are linked to an IMF programme and Ukraine has some $2bn of debt obligations to repay within the next month that it will struggle to meet without the IMF’s help.
The IMF’s decision to reduce the programme from the EFF to a one-year Standby agreement (SBA) is a downgrade for Ukraine, as the supervision and stings that come with the shorter programme are more invasive and stringent.
Former President Petro Poroshenko suffered the ignomy of having his IMF programme downgraded from an EFF to an SBA after he bitterly resisted several IMF initiatives such as the establishment of the anti-corruption court (ACC).
IMF spokesman Jerry Rice said the decision to downgrade Ukraine was due to "unprecedented uncertainty surrounding the economic and financial prospects and the need to focus political priorities on immediate containment and stabilisation."