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Blockade of IMF tranche for Ukraine: Why the Fund took a timeout

Author : Halyna Kalachova

14:23, 21 March 2017
Blockade of IMF tranche for Ukraine: Why the Fund took a timeout

Author : Halyna Kalachova

The IMF unexpectedly postponed the decision to allocate a tranche of $ 1 billion to Ukraine

14:23, 21 March 2017

Read the original text at epravda.com.ua.

Reuters

Such precedents did not ever happen in the history of Ukraine's cooperation with the IMF: in the last minute, Ukrainian question disappeared from the agenda. The IMF unexpectedly postponed the decision to allocate a tranche of $ 1 billion to Ukraine.

Literally, on the eve of the meeting of the IMF Board of Directors, the Ukrainian issue disappeared from the creditor's agenda. Its consideration was scheduled for March 20.

As a rule, information about the date of the meeting is kept in strict confidence. When the IMF officially announces the date and puts the country on the schedule, it means only one thing: everything is decided, and the creditor is set for a positive decision.

The official version from the Ministry of Finance is that the fund has postponed the consideration of the Ukrainian issue because of the transport blockade od Donbas.

Related: All IMF money used for forex reserves of Ukraine, - Poroshenko

The blockade would affect the macro forecast, and according to Finance Minister Olexander Danylyuk, clarifying the calculations is important "for maximum program effectiveness."

The representative of Ukraine in the IMF, Vladyslav Rashkovan, expects that the NBU and the Ministry of Finance would be able to provide the necessary macro payments within a few days, and the fund will soon return to consideration of the matter.

However, the blockade might not be the only reason for such IMF behavior. Our interlocutors in the Cabinet admit that the fund decided to take a time-out in anticipation of another round of political turbulence.

Blockade Troubles

The transport blockade of the railway tracks with the ATO zone began in December 2016. In this regard, the government introduced emergency measures in the energy sector, but all this time, it refrained from assessing the impact of the blockade on the economy.

In late February, the National Bank said that Ukraine would lose $ 2 billion in foreign exchange earnings.

In early March, Prime Minister Groisman voiced a more scarring figure: "As a result of the blockade, losses of the Ukrainian mining and metallurgical complex would amount to about $ 3.5 billion, which will lead to a reduction of up to 75,000 jobs in the industry," the prime minister said.

Related: IMF postponed its meeting in connection with Donbas blockade

Later, on March 15, after the statements of the militants’ leaders of the occupied territories on the "nationalization" of Ukrainian enterprises, Ukraine’s NSDC prohibited the cargo movement by road and rail between Ukraine and the occupied territories. Since that moment, the blockade has become an official position of the state.

Despite this, the country's top officials had no unity in their previous statements.

President Petro Poroshenko supported the blockade, and Prime Minister Groisman continued to insist that the blockade freezes the country's economic growth and causes huge losses to the economy.

The Ministry of Economy did not voice any evaluations. Finance Minister Olexander Danyluk said that the government forecasts two macroeconomic scenarios in connection with the blockade: optimistic and pessimistic.

According to our sources, the optimistic scenario assumes that the pace of economic development in 2017 would slow by 1.2%, nominal GDP would decrease by 25.8 billion UAH, and inflation would accelerate by 1.8 percentage points. In addition, the blockade will put pressure on the hryvnia. By the end of 2017, the national currency might weaken by another UAH 3 against the dollar.

Related: Ukraine will sign new memorandum with IMF in coming days

According to the pessimistic scenario, GDP would fall by 2.5%. The impact on the nominal GDP would be minus 39 billion UAH. Inflation would add another 8.5 pp. In this case, by the end of 2017, hryvnia would lose 5.6 UAH per dollar.

Exchange rate is the main unknown

The blockade would affect both incomes and budget expenditures. Exact influence is difficult to calculate, because it would depend on the exchange rate of the hryvnia.

If we talk about tax revenues, ERU might decrease by 1.4-2 billion UAH, the profit tax - by 0.7-1.2 billion UAH, the value-added tax from goods produced in Ukraine - by 0.7-1 , 1 billion UAH.

The reduction of imports of goods and services is expected in the range of 0.63-0.95 billion dollars and would result in a reduction in revenues from import VAT by 2.4-3.6 billion UAH. However, another factor would play a role.

Related: National Bank is ready to sign memorandum with IMF

Import VAT is quite sensitive to the devaluation of taxes. The blockade might put pressure on the hryvnia exchange rate, as a result of which the revenues from import VAT would block the expected tax shortage from the import reduction. A similar metamorphosis might occur with import duties.

It is expected that the fall of the hryvnia would be the main budget compensator.

Without taking into account exchange rate fluctuations, the budget would lose about UAH 10 billion, but if the hryvnia falls, according to the calculations of the government, the treasury will collect about 14.8 billion UAH. As a result, the revenue budget will be in positive territory at UAH 3.9-4.7 billion.

Each round of devaluation also entails an increase in costs. First of all, the state's expenses for servicing and repaying the state debt are growing. Expenses for the maintenance of diplomatic departments also increase.

In general, the gap in the balance of the treasury, depending on the hryvnia exchange rate, might amount to UAH 0.4-21 billion.

What is next?

Two scenarios are possible now.

The first, Ukraine's cooperation with the IMF would depend solely on recounting the macro-forecast and the budget in relation to the blockade factor.

Related: Vladislav Rashkovan appointed as new Ukraine Representative in IMF

In this case, there is a chance that the fund would consider the Ukrainian issue quite quickly. In this case, the NBU and the Ministry of Finance will promptly transfer the calculations to the IMF.

"The IMF mission does not plan to arrive, we want to coordinate everything in a telephone-electronic regime," a source in the government told.

According to him, the foundation cannot ignore the blockade as a state position.

The second option is that the IMF would use the blockade as an excuse for suspending cooperation with Ukraine to see how political actions would further develop and the program's requirements would be met.

The Fund has always paid special attention to the way Ukraine performs anticorruption points. Now one of them is under threat: the parliament cannot decide on the candidacy of an independent auditor of the NABU (National Anti-Corruption Bureau of Ukraine), as required by law.

Related: IMF asks to freeze minimum wages that will lead to Pension Fund deficit

For example, on Thursday, March 16, some members of the Anti-Corruption and Anti-Corruption Committee from Bloc of Petro Poroshenko, People’s Front and “Vdrodzhennia” recommended two candidacies for the NABU auditor: Nigel Brown, who is considered to be a man of the president, and Robert Storch.

There is one more factor. It will April 14 be one year since Groisman became the head of Ukrainian government. The closer to this date, the more conversations are about possible personnel reshuffles in the Cabinet.

Related: IMF asks to freeze minimum wages that will lead to Pension Fund deficit

Related: Ukraine, IMF almost complete talks on another loan, - Finance Minister

In addition, one of the signatories of the memorandum is the head of the NBU Valeria Gontareva - in the short term, she also might leave her post.

"The IMF cannot fail to take into account all these factors. The Fund wants to understand with whom it will have to deal in the future," says our interlocutor in the government.

Related: Gontareva expects IMF to allocate next tranche in near future

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