Ukraine hopes to close IMF deal this month, but expects downgrade from EFF to stand-by agreement

Ukraine hopes to close IMF deal this month, but expects downgrade from EFF to stand-by agreement
Ukraine's president Petro Poroshenko and IMF's Christine Lagrande
By bne IntelliNews October 11, 2018

The Ukrainian government hopes to close a new deal with its biggest donor, the International Monetary Fund (IMF), this month and release some badly needed financial support after its $17.5bn extended fund facility (EFF) programme was effectively frozen for foot-dragging on reforms, the local press in Ukraine reported on October 10. However, the new deal is likely to be a downgrade to a stand-by agreement, which has a shorter duration and more strings attached to the loans. 

“Ideally, it should be done by October 18, but we hardly have enough time,” the news site reported, citing its sources familiar with the talks.

This deadline was prompted by the Cabinet’s decision to postpone the IMF-required adjustment of natural gas prices for households until October 18, one of several crucial reforms the IMF has been insisting on but the government has been reluctant to complete. Most likely, the government will have to postpone the gas price hike until the end of October, concluded.

The IMF is also insisting that the government pass the budget law for 2019 before the next tranche is released. The IMF issued its latest World Economic Outlook on October 8 that downgraded the outlook for Ukraine’s economy but also contained in effect the Fund’s demands for the budget.

According to IMF estimates, the budget deficit this year will amount to 2.5% of GDP, in 2019 — 2.6% of GDP. It then it is expected to decline to 2.3% of GDP in 2020, to 2.2% of GDP in 2021 and 2022, and to 2.1% of GDP in 2023. Those estimates are caps that the IMF will insist on as it has previously been reported the government was planning a bigger deficit.

The IMF estimates revenue to the consolidated budget in 2018 at 40.5% of GDP while spending is projected at 43% of GDP. The forecast for 2019 implies growth in budget revenues to 40.7% of GDP and at the same time expenditures to 43.3% of GDP, in 2020 it will decline to 40.2% of GDP and 42.5% of GDP, respectively, for 2021 — to 39.8% of GDP and 42.1% of GDP, respectively, for 2022 — up to 39.6% of GDP and 41.7% of GDP, respectively, after which, in 2023, a slight increase is expected: revenues to 39.8% of GDP and expenditures to 41.8% of GDP.

Besides the outstanding issues of gas pricing and parliamentary approval of a balanced 2019 state budget, there are also some anti-corruption issues to be agreed, the news agency reported.

In particular, the IMF wants to see progress in Ukraine's establishment of a fully functioning High Anti-Corruption Court, as well the initiation of an objective study of the work of specialised anti-corruption head prosecutor Nazar Kholodnytskiy.

An IMF deal would result in the initiation of a new stand-by arrangement, instead of the $17.5bn EFF programme that was launched in March 2015. Out of $17.5bn under the EFF programme, which was initially planned to be disbursed in 16 quarterly tranches till March 2019, Ukraine was able to receive only four tranches for $8.6bn.

The change to a stand-by arrangement from the EFF is a blow for Ukraine as it is a downgrade in confidence and puts even more constraints on the government to fulfil its promises. Stand-by agreements only run for a year or so and are constantly reassessed, while the volumes of money are similarly reduced, and the strings attached are increased.

“It still looks possible that Ukraine will resolve all the IMF-required conditions (including approval of the 2019 state budget) by October 18, but most likely, Ukraine will push back the deadline to end-October to resolve all the remaining issues,” Alexander Paraschiy of Concorde Capital said in a note. “In any case, it is highly likely Ukraine will see a positive decision from the IMF board on a new loan tranche in November, considering how critical a role it will play in Ukraine's economy in getting through the tumultuous period of 2019.”