The International Monetary Fund and Ukraine agreed to conclude a short-term stand-by program for 18 months instead of the three-year EFF program, as previously expected. The reason for the possible replacement is a delay in the structural reforms that were planned to be carried out in the country, as well as an increase in the budget deficit due to the crisis caused by the coronavirus pandemic.
The Ukrainian Ministry of Finance says that the amount of financial support for Ukraine will not change, while negotiations with the IMF continue.
In early December 2019, President of Ukraine Volodymyr Zelensky, the National Bank of Ukraine and the previous government agreed with the IMF management to open a new three-year EFF program. This program was supposed to replace the stand-by program, which ended in February 2020.
At the end of 2018, Ukraine and the IMF signed a 14-month stand-by program for $ 3.9 billion. Then Ukraine received only the first tranche of $ 1.4 billion.
On Thursday, May 7, Ukraine and the International Monetary Fund (IMF), as part of negotiations on a new cooperation program, shifted from the previously agreed three-year EFF extended financing to an 18-month stand-by program.
"Given the unprecedented uncertainty about economic and financial prospects and the need to focus political priorities on short-term containment and stabilization, the negotiations have switched to an 18-month stand-by, which can provide balance of payments support to strengthen the reaction of the authorities," said IMF spokesman Jerry Rice.
According to him, the Fund is in close contact with the Ukrainian authorities to discuss the parameters of a new financing mechanism that would help the country effectively counter the pandemic in the economy and medicine.
Rice said that a permanent virtual mission discusses policies that can be supported through the stand-by program rather than through the EFF, despite the fact that a preliminary agreement was reached at the Foundation’s management level in December 2019 (staff- level agreement).
Representative of Ukraine in the IMF Vladyslav Rashkovan on his Facebook page spoke about the reasons for the possible change in the IMF program.
"The government’s priorities have changed in a certain way - for example, the law on the budget for 2020 does not provide for significant revenues from privatization in 2020, and this was one of the structural reforms that were planned to be carried out as part of the IMF program. Also, the start of the land reform was postponed a little, although this is not critical. At the same time, the budget deficit has grown as a reaction to the crisis," Rashkovan said.
He also drew attention to the fact that a new government was formed a few months ago, and under the influence of the pandemic, the macro forecast became different: the planned economic growth was replaced by a fall.
“In the current global environment of uncertainty, the IMF understands that it is difficult for countries to plan structural reforms for several years to come. This is a problem for many governments, not only for Denis Shmygal’s government. And the decision to change programs is not a specific decision of the Fund for Ukraine. At the moment, this is Fund’s position in many countries,” added Rashkovan.
EFF vs Stand-by
Vladyslav Rashkovan emphasized that from the point of view of programs, the IMF has various instruments of assistance to countries.
"In the context of the priority of structural reforms, the Fund offers countries expanded credit programs - EFF. It was this program that the fund proposed to Ukraine to discuss in mid-2019, after the formation of the new government of Honcharuk and parliament," said the representative of Ukraine in the IMF.
He added that over the past 2 months, the IMF has not approved a single new EFF program. It is noted that the Fund provided mainly emergency financing - in total, such financing under the Rapid Financing instrument or Rapid Credit Facility products was provided for 50 countries in the amount of $ 17.5 billion. According to Rashkovan, fund has other programs to prevent the negative consequences of the crisis.
"One of them is stand-by line. These are shorter programs that are more focused on anti-crisis measures. Funds for them are easier to receive. Funds can also be directed to the budget to partially cover the deficit. There are fewer conditions for obtaining financing for them. Such programs are not directed at the initial stage, they are aimed at helping countries to finance the costs of medicine, at formulating monetary and fiscal policies adequate to the crisis, at maintaining financial stability. They will be focused on reducing the budget deficit and overcoming from the crisis," Rashkovan wrote on his Facebook page.
He believes that the stand-by line is a more adequate product from the IMF in such a situation, the situation of overcoming the crisis caused by the pandemic. And not only for Ukraine - such a product is offered to other countries. The foundation is not currently discussing new EFF programs.
The Ministry of Finance of Ukraine noted that the issue of program modality (EFF or stand-by) is still being discussed. It is noted that the main difference between these programs is their implementation time: stand-by - 1.5 years, EFF - 3 years.
What will change for Ukraine
The Finance Ministry said that with the adoption of the new program, the volume of financial support for Ukraine from the IMF will not change.
This is also indicated by the representative of Ukraine in the IMF, Vladyslav Rashkovan.
"The EFF program that we discussed before was designed for 3 years and worth $ 8 billion. Under this program, over the next 18 months, until the end of 2021, we planned to receive $ 5 billion from the IMF, and the remaining 3 billion to be received in 2022-2023. In the framework of the new stand-by program, we are discussing the receipt of the same $ 5 billion from the IMF over the next 18 months," Rashkovan said.
He added that the conditions for obtaining these funds during 2020-2021 are easier than receiving the same $ 5 billion under the EFF program since they do not require "titanic" efforts to promote structural reforms.
According to Rashkovan, after the approval of the new IMF program, in 2020 Ukraine can receive the following amounts:
IMF stand-by program: $ 3.5 billion ($ 1.5 billion in 2021);
Bilateral funding from other countries linked to the IMF program: $ 0.4 billion;
World Bank DPL program: $ 1 billion;
World Bank funds to help the health care system: $ 0.15 billion;
Macro-financial assistance from the EU: the second tranche of $ 0.6 billion. New macro-financial assistance from the EU: $ 1.3 billion.
The representative of Ukraine in the IMF also believes that the hryvnia/dollar or hryvnia/euro currency swap lines can be added to these positions.
"Such an agreement has already been signed with the US EBRD in the amount of up to $ 500 million. At the same time, the hryvnia that the EBRD will receive will be directed to lending to the economy," Rashkovan said.
It is noted that negotiations between Ukraine and the IMF are ongoing and, according to the forecasts of the Ukrainian government, should be completed next week (until May 17).
"When the economy recovers, the focus of IMF support may shift back to solving the problems of long-term structural reforms in Ukraine in order to promote stronger and more inclusive growth," Jerry Rice quoted Vladyslav Rashkovan.
Rashkovan believes that under the SBA program this "when ..." will come in 12-14 months, in the summer of 2021. It is then that Ukraine will be able to begin preparations for a new EFF extended financing program to receive it at the end of the SBA. It is reported that Ukraine will receive not only more than $ 10 billion in assistance from international financial organizations in 2020 but will also return to discussing a larger amount of new financing.