Authorities promised IMF to raise tariffs: How much will Ukrainians pay for gas and heat?

Author : Olena Holubeva

Source : 112 Ukraine

According to the published text of the Memorandum with the IMF, the authorities promised to release gas and heat prices in free float in exchange for $ 2.2 billion in loan assistance from the Fund
22:00, 29 November 2021

Open source

The Ministry of Foreign Affairs published on the official website a letter of intent and a Memorandum on economic and financial policies that the government of Ukraine and the National Bank will adhere to in order to receive $ 2.2 billion from the IMF to ensure macroeconomic stability. It is noted that the paragraphs of these documents were approved by the IMF Board of Directors on November 8, 2021.

The Energy Sector Reforms section states that Ukraine will continue its efforts to prevent the return of quasi-fiscal deficits in the natural gas sector by setting tariffs above cost.

“We commit not to impose any price cap on gas supplied to households, and to ensure that wholesale prices are determined in a transparent and efficient market. We will also ensure that all heating tariffs that are set by local governments are reviewed and are officially approved to fully reflect all expenditures that are or are not associated with the gas price (including capital expenditures). Any deviation from the cost recovery level associated with an increase in gas prices will be covered by an explicit and transparent subsidy from the state or relevant local budget", the document says.

In simple terms, the authorities have promised to abandon the policy of artificial containment of gas and heat prices for the population, which they have been implementing for the last two years. An additional confirmation of this is the thesis of the document that, “as expected, in 2022, the liquidity situation of NJSC Naftogaz will improve, since its prices will again approach market prices, immediately after the completion of existing fixed-price contracts, as well as due to structural activities ".

According to the promises made by the authorities to the IMF already in 2022, Ukraine will return to the practice, according to which the gas tariff for the population will be determined by the free market. What the tariffs could be today, based on market gas prices, we can see on the example of monthly contracts (not subject to state regulation) offered by gas supply companies - from 15 to more than 30 UAH (1 USD) per cubic meter excluding the shipping rate. Of course, we do not know what the price of gas will be in 2022, but given that Ukraine provides itself with gas of its own production by no more than 60%, and while the volumes of the state-owned Ukrgasvydobuvannya are falling annually, it will not be possible to avoid the influence of import parity. Given the uncertainty of the situation with Nord Stream and the fact that Europe, like Ukraine, will come out of the heating season with empty storage facilities, no one is very enthusiastic about the significant collapse of prices in the spring.

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Heat tariffs directly depend on the price of gas, which occupies up to 80% of their cost structure. For the second year in a row, the authorities are holding them back from increasing, forcing the cities to sign memorandums, the strict implementation of which is being followed, according to rumors, even by the SBU. If the market price for gas remains at the current level, then in the next heating season the cities will have to increase tariffs for heat by 6-8 times. Payments can be multiplied by the same amount. Or the state will have to find hundreds of millions in the budget in order to fill the gaps with "an explicit and transparent subsidy."

In the memorandum, the authorities promised to ensure compliance with the payment discipline of the population and distributors. To fulfill this promise, it will be necessary to start massively disconnecting debtors from utilities.

It is worth noting that several paragraphs of the memorandum are devoted to promises to protect "vulnerable categories of the population through sufficient allocation of funds for social programs." The text of the document notes that financing of the subsidy program for paying for housing and communal services "is sufficient for the same number of participants in subsidy programs as this year, provided that tariffs remain unchanged. But after the revision of tariffs in the spring, the revised budget will provide the necessary resources for timely and complete providing the specified program ".

Again, in simple terms, in the event of an increase in tariffs, the authorities will be faced with the need to either increase the amount of funds allocated from the budget for subsidies, or look for ways to reduce the number of citizens who receive them by tightening requirements and conditions.

Will the authorities decide to take such radical steps, which will obviously finish off the remnants of Zelensky's rating, we will soon find out. The drafts of the relevant regulatory documents will be prepared in advance. Perhaps already in January-February we will have the opportunity to familiarize ourselves with them.

Is there any other way out? Let's be honest, Ukraine has repeatedly violated clauses of agreements with the IMF in the past. The Foundation has repeatedly demonstrated its readiness to close its eyes to principled positions. But how will it happen this time? Obviously, the IMF remains adamant about one thing - the demand to equalize energy tariffs for the population and industry runs like a red thread throughout the history of Ukraine's cooperation with the Fund.

Maybe next year will be the time when the IMF will be able to put pressure on Ukraine? We'll find out soon.

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