Why Ukraine failed to receive scheduled IMF tranche?

Author : Viktor Skarshevsky

Source : 112 Ukraine

In June 2020, the IMF Board of Directors approved a $ 5 billion cooperation program with Ukraine. The program is designed for 18 months
17:59, 26 February 2021

Open source

After signing, according to the agreements, the first part was immediately paid - almost half, or to be precise, 42%, only $ 2.1 billion out of $ 5 billion.

Further in this Memorandum there are many different directions, sectors, so to speak, chapters, what the government has already done, what it intends to do.

All of this is ultimately concentrated in the 9 structural beacons that are in this Memorandum.

Moreover, in 2020, a tranche was expected in September and December. The September tranche is tied to the implementation of one structural beacon - the first. And the December tranche is tied to three more (second, third and seventh).

After a month of negotiations and online consultations, the mission of the International Monetary Fund in Ukraine curtailed its work and paused the negotiation process on the further allocation of credit funds.

Related: Ukraine’s talks with IMF on cooperation, financing to continue, - official

Official Kyiv once again did not wait for a positive decision of the Fund regarding the provision of the long-promised tranches. Instead of money, the Foundation put forward several new conditions.

It is important to understand whether these two credit tranches were to be given to Ukraine in September and December or not. Has Ukraine fulfilled its obligations in this Memorandum, if you look at structural beacons?

So, if you look at the structural beacons, then Ukraine has fulfilled them, because in order to receive the second tranche in September (this is $ 700 million), it was necessary to fulfill only one point: to approve in the National Bank a plan to reduce problem debts in state banks by the end of June 2020.

This decree was adopted and it is also being implemented, that is, this structural beacon was completed on time and implemented in practical terms. Based on the logic of the Memorandum, the IMF had no reason to refuse to issue the second tranche in September in the amount of $ 700 million.

But since at that time (in the summer) the leadership of the National Bank was changing, informally they became attached to this, that something was wrong, that the National Bank should be independent. But this - that it is impossible to change the head of the National Bank - is nowhere in the Memorandum, especially since the new head continued in fact the same monetary policy that the previous one was pursuing. According to this Memorandum, they were supposed to give us $ 700 million in September. But for purely political reasons, I don’t call it otherwise, they didn’t give it out.

Related: Ukraine, IMF to sign new memorandum on cooperation, - Finance Minister

If the document has been signed, then why are our authorities not negotiating at least on the basis of the signed documents? It was necessary to clearly and explicitly state: we have fulfilled the terms of the Memorandum, so where is the tranche?

The third tranche of $ 700 was supposed to be in December 2020. It is tied to the implementation of the second, the third (to prepare new organizational structures and systems for tax and customs services), and the seventh (to strengthen corporate governance at Naftogaz) structural beacons, which Ukraine also complied with.


We also completed these three "beacons" in order to receive the third tranche in the amount of $ 700 million in December.

But they didn’t give it out either, because the IMF was purely politically attached to the situation with the Constitutional Court. But this has nothing to do with those structural beacons that are written in the Memorandum, after the implementation of which Ukraine, according to the logic of the document, should receive the next loan tranches. The IMF, as has usually been the case in recent decades, has worked more as a political institution than as a financial one. The points were fulfilled, even practically implemented. But Ukraine did not receive credit tranches, because there was always some kind of political justification.

The IMF voiced five key issues that remain unresolved and stand in the way of unblocking further cooperation of the Fund with Ukraine.

Let's start with energy and tariffs. This is the simplest question. The government has not changed the models, tariffs and pricing in the energy market. Everything was as it was and remained, just temporarily purely politically limited the upper limits of natural gas prices for the population - 6.99 UAH (0,25 USD) until March 31. These are temporary measures that do not require any additional decisions to be taken, it is simply that this Ordinance will expire with a cap on the upper price. In any case, based on this position, there should have been no positive decisions on the allocation of the next loan tranche until the end of March.

The IMF pointed to the point of reducing the budget deficit from 2022. This has nothing to do with the current tranche allocation. This was also recorded, by the way, in the Memorandum – on the subsequent reduction of the budget deficit to standard values.

Related: Ukraine considers changing format of work with IMF, - Finance Minister

At the beginning of 2021, the deputies of the relevant committee updated the text of the document (the role of international experts in the new edition decreased), but this did not suit Ukrainian anti-corruption officials and international observers. This law should place the selection of members of the SCJ under the control of "international experts" delegated by Western structures. Given that the SCJ is a key regulatory body for the judicial system, such a scheme means transferring it under the de facto control of foreign structures.

Also, the IMF proposed to the Ukrainian side to set the goal of the state budget deficit in 2022 at 3.5% of GDP. The Ministry of Finance insisted on 4–4.5% of GDP for the state budget deficit. How can we fulfill this commitment now? We can fulfill it only in accordance with the Budget Code, either by the end of November of this year, when the budget for 2022 is to be adopted or in September, when the government submits the draft budget to the Verkhovna Rada.

Indicators of the budget deficit for the next three years should be provided for in the budget declaration for 2022-2024, which should be submitted by the Ministry of Finance to the Cabinet of Ministers by May 15. The Cabinet should consider it by mid-June. In July, the Verkhovna Rada, according to the Budget Code, must adopt this budget declaration. Throughout the history of independence, there were 1 or 2 times when it was adopted. This document does not mean anything at all, because the same Budget Code says that if the Budget Declaration is not approved by the Verkhovna Rada, then it is simply not taken into account.

Related: Ukraine, IMF negotiated on gas price, PM claims necessity to find middle ground

The ninth paragraph of the Memorandum is the audit of the Anti-Coronavirus Fund, which should be completed by the end of March 2021. Back in November-December, they said that the IMF would not give money, because there were some problems with the Anti-Coronavirus Fund, since there was no audit. A significant part of the funds from this fund was used to build roads, around which many corruption scandals arose.

The IMF will not ask in where the money went - for roads or hospitals. He will be interested in the final beneficiaries of receiving this money, that is, whether the procedure was transparent and to whom they got.

I’ve read the opinions of various experts that there will be problems in September. I disagree. Gold and foreign exchange reserves are quite significant today. As of February 1, 2021, Ukraine's gold and foreign exchange reserves amounted to $ 28.8 billion in equivalent, which will make it possible to pay off debts in the near future. The volume of international reserves covers 4.7 months of future imports. Even the NBU notes that this is enough to fulfill the obligations of Ukraine and the current operations of the government and the National Bank. Also, the Ministry of Finance has good chances to find additional financing in the near future by placing Eurobonds.

Related: Zelensky explains IMF's refusal to provide Ukraine with the next tranche

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