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Relations between Ukraine and the IMF have entered its traditional phase - "I will gladly pay you Tuesday for a hamburger today," or rather "reforms – on Tuesday, tranche – in the evening." Ukraine systematically does not fulfill certain requirements of the Fund, and it is typical practice. There are many reasons for this: the inconsistency of the positions of the branches of power (the Cabinet promises something, but the Rada is against it), unpopular nature of decisions, lack of political will, etc.
This time, the requirements-expectations are serious enough: most likely, there will be no indulgence. The reason is the almost complete lack of progress in the fight against corruption. The main requirements are the creation of the Anti-Corruption Court, taking into account the recommendations of the Venice Commission (the appointment of judges should be controlled by the independent experts, and the court should consider all the corruption cases, and only some of them) and the increase of the gas price for the population in accordance with the previously approved formula.
March 1, the Verkhovna Rada adopted the presidential bill No. 7440 "On the Supreme Anti-Corruption Court" in the first reading, which is not supported by the IMF and the World Bank. The profile committee of the parliament did not introduce a bill with recommendations of the Venice Commission.
The president wants to "take the roundabout way" and avoid adopting the IMF requirements. The last time, it worked. For example, the question of canceling the moratorium on the sale of agricultural land has been regularly postponed. Rada voted for the moratorium, and the president signed this law. That is, one of the key requirements of the IMF Ukraine successfully was swept under the carpet without question.
But in the case of the Anti-Corruption Court, President Poroshenko has "remembered" Ukraine's sovereignty; the international donors cannot dictate laws to Ukraine because of this violation of the Constitution. Although, the laws have been already changed under the requirements of the IMF, and no questions arose then. However, an independent Anti-Corruption Court might become a threat to many politicians and officials. Western partners mistakenly see in the Anti-Corruption Court a pledge to start a real fight against corruption. We can carry out reforms without changing anything; the authorities' ability to correctly "format" any reform and vividly demonstrate Ukraine’s good aspirations are just perfect.
Concerning the requirement to increase the cost of gas for the population, it is “unprofitable” during this pre-election year. Therefore, the government is struggling to postpone the increase by 1.5 years (quarterly by 2-3%), not forgetting to inform potential voters that the prices will not rise in the 2017/2018heating season.
However, not all these requirements belong to the IMF. Earlier, other ideas were voiced: large-scale privatization (the law was passed under this requirement), amendments to the law on pension reform, reform of the energy sector, and land reform.
Some time ago, the president initiated the replacement of the profit tax on the tax on the withdrawn capital, calling it one of the main priorities for 2018. The essence of the change is stimulation of companies' investments, which in the short term could lead to a significant reduction in the state budget revenues from income tax revenues. It was unprofitable for foreign companies, and it deduced dividends from Ukraine. The IMF opposed the tax on the withdrawn capital. However, the temporary abandonment of this initiative is the simplest and most predictable solution, because it will be much more difficult to meet the other requirements of the IMF. For its part, the Ministry of Finance plans to introduce this tax in 2019.
Of course, Ukrainian authorities regularly conduct a dialogue with the IMF on the implementation and "mitigation" of the claims, officials even talk about some progress in the negotiations, but, most likely, the Fund would not abandon the idea of the Anti-Corruption Court.
The issue of Ukraine's stability is connected with macroeconomics. The delay in obtaining the next tranche from the IMF is the main risk for the financial stability. In the short term, the situation is not as sad as it might seem to be.
According to Hryhoriy Pererva, General Director of the Euro Rating agency, the lack of IMF funds in the first half of the year will not affect Ukrainian economy. In the short term, Ukraine has a sufficient "financial cushion", i.e. the level of reserves of the National Bank is sufficient to provide insensitivity to the lack of funds of the IMF. Now it has more scope to defend its interests in the IMF negotiations. In addition, the government has a "plan B" - the Ministry of Finance intends to issue Eurobonds worth $ 2 billion in 2018.
As of March 1, gold and currency reserves of the NBU amounted to 18.4 billion dollars, but the NBU predicts a decrease in reserves to $ 17.8 billion by the end of 2019 instead of the previously expected $ 21.1 billion. The reason is that in 2018-2020, the government and the NBU should make external payments totaling $ 20 billion.
However, Ukraine needs to continue to work with the IMF, because the foreign investors took into consideration the very fact of cooperation as Ukraine’s readiness to continue reforms and create a favorable investment climate. In addition, the receipt of a new tranche of the IMF is linked to the issue of Ukraine's macro-financial assistance to the EU and the continuation of lending programs for other international institutional investors.
According to Vitaly Shapran, the chief financial analyst of the Expert Rating agency, Ukraine does not care so much about the IMF's money, but rather about IMF’s attention to Ukraine and understanding of our other external creditors, that we are working with the Fund.
"Public breakdown of relations with the IMF would negatively affect the possibilities for obtaining external loans (including for the private sector), which does not necessarily apply to all international creditors, but for many, the Fund's position is indicative," adds Viktor Shulik, director of the market research department at IBI-Rating agency.
The European Commission approved a proposal for a new program of 1 billion euros macro-financial assistance for the country (to support economic stabilization and structural reforms). The first tranche of 500 million euros could come to Ukraine before the end of this year. The conditions are still under consideration, but since EU assistance is tied to an agreement with the IMF, there will be no surprises - Ukraine will require certain steps and further reforms. Ukraine already has some experience of unfulfilled promises to the EU (for example, automation of verification of electronic declarations and lifting of the moratorium on the export of roundwood), which caused 600 million euros of the third tranche of the previous macro-financial assistance program last year.
In addition, Viktor Shulik admits that the IMF acts as a kind of guarantor of protecting the interests of transnational corporations that work in our market and, in the long term, can become major investors in the economy (including energy, engineering).
The final price for failing to obtain the IMF tranche would be the investors' distrust, a downgrade of the country's credit ratings, the devaluation of the hryvnia, a decline in the gold and foreign currency reserves, which, given the high costs of state debt, could lead to a technical default and the need for another debt restructuring. But this is a completely pessimistic and unlikely scenario.
The IMF program was adopted in March 2015 and expires in the first quarter of 2019. Ukraine has received only four of the 12 planned tranches from the IMF. At the moment, Ukraine has obtained only $ 8.7 billion out of the planned $ 17.5 billion. Due to the failure of IMF requirements, the amount of the expected next tranche has already declined from $ 1.8 billion to 1 billion. The best Ukraine would be able to get before the expiration of the program is 2 tranches with a total size of 2 billion dollars.
The timing of the tranche is entirely dependent on the willingness of the Ukrainian authorities to comply with the requirements of the IMF. According to many statements and actions of the powers, one can understand that this desire is not that strong. IMF promises to prepare the fourth revision of the loan program by May 2018 if it sees some progress in the implementation of the required reforms in the next month or two. Could the authorities guarantee this? The question remains open.
Experts carefully assess the possible timing of obtaining the tranche. "The decisions, demanded by the Fund, are unpopular, so they could be implemented only if the people understand the hopelessness of the situation. The closer we approach to the elections, the less the government is willing to raise the tariffs and create a land market, not to speak about the Anticorruption Court and other bodies," says Viktor Shulik.
Hryhoriy Pererva is convicted that it is difficult to forecast the timing of the next IMF tranche, as it depends on the fulfillment of a number of requirements. There are no guarantees that the Verkhovna Rada is able to pass the necessary laws. Optimistic timing is the end of April, a realistic option is the beginning of summer. "I think that Ukraine will not receive the IMF tranche before the elections, and this is due to the lack of a stable coalition in Ukrainians Parliament," Vitaly Shapran adds.
This column does not necessarily reflect the opinion of the editorial board or 112.International and its owners.