Ukraine’s New Program with the IMF: The First Tranche May Be the Last

Translated by Ollie Richardson & Angelina Siard


The International Monetary Fund approved a new program of cooperation with Ukraine. The incomplete Extended Fund Facility (EFF), which in 2015 was called a program of reforms of Ukraine, was terminated ahead of schedule. Instead, a rapid response program (Stand-by) came into force. It is calculated over 14 months, with a maximum possible completion term of 36 months. Before February inclusive, Ukraine will be able to receive a loan of $3.9 billion in three tranches – $1.4 billion, $1.25 billion, and $1.25 billion. In order to open a new credit line Ukraine satisfied two main conditions – raising gas prices for the population and approving the state budget for 2019 coordinated with the creditor.

The first tranche may arrive into the accounts of the National Bank of Ukraine already soon. There were significantly fewer conditions for the continuation of crediting in the Stand-by program than in the EFF, however, the implementation of some of them already looks improbable. In order to receive the second tranche gas prices for the population have to be raised by 15% in May 2019, and for the third tranche – by 22.7% from January 1st, 2020. It is unlikely that the government of
Vladimir Groisman or any other Prime Minister will take such a step before parliamentary elections. Thus, there is a probability that the first tranche of the Stand-by program will become the last, irrespective of the need for cheap borrowed funds.

On December 18th the board of directors of the International Monetary Fund approved the provision of a loan to Ukraine under the Stand-by program with a total amount of $3.9 billion. Ukraine can receive this money within 14 months – before February, 2020 inclusive.

The first tranche of the loan of $1.4 billion may arrive into the accounts of the National Bank of Ukraine in the next few days. According to the Minister of Finance Oksana Markarova – before December 25th [this article was written on December 19th; the tranche arrived on December 21st – ed]. It is planned to allocate the following tranches of $1.25bn in the middle and end of 2019. The Ministry of Finance expects that the revision of the program will take place in May and November. The allocation will depend directly on the implementation of the program’s conditions.

The new IMF program actually replaced the Extended Fund Facility (EFF) existing since March 2015. According to this program Ukraine was suppose to receive a $17.5m loan from the IMF over three years, plus loan packages from the World Bank, the European Bank for Reconstruction and Development, and the European Union. The total amount of financing was expected to reach $40 billion.

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“It is an ambitious, tough program that also contains certain risks. But it is a realistic program that, after consideration and approval by the Board of Directors, can become a turning point for Ukraine,” said the Managing Director of the International Monetary Fund Christine Lagarde in 2015 before the approval of the EFF program. In the government of Arseniy Yatsenyuk this program was even called the program of reforms of Ukraine. However, it didn’t have the expected effect.

What happened to the old EFF program

Since Ukraine delayed the implementation of conditions for crediting, only $8.7 billion was received from the IMF from the total amount, and the last tranche came more than one and a half years ago – in April, 2017.

The loans of other international financial organisations also didn’t arrive in full. Delays with financing were caused, first of all, by the unwillingness of Ukraine to raise household gas prices to the import level, and also by postponing decision making concerning the creation of a Supreme anti-corruption court, the nationalisation of Privatbank, and the implementation of pension reform.

As a result, almost everything was done, but later than planned. In addition, in 2015 within the framework of cooperation with the IMF Ukraine managed to restructure some of the external debt, having written off nearly $4 billion and having postponed the date of repayment of $15.6 billion for 4 years.

The main unfulfilled condition was increasing household gas prices from October by almost 60%, and from March 2019, according to the EFF program, this had to be equal to the import price that industrial enterprises buy at. Replacing the program with a new one actually made it possible to revise the schedule for raising the price of gas and to extend the timeframe of cooperation with the IMF for another year. The arrangements under the program practically lost force. The size of the gas price increase was reduced to 23% and the establishment of a new price became a preliminary condition for the approval of the program.

On December 19th the government made the decision to raise the price of gas to 8550 hryvnia per 1,000 cubic meters. The next increase, according to the new program, is expected in May 2019 – to the level of 80% of import price, and from January 1st 2020 the prices for the population and the industry must be equal. According to the forecasts of the government, in May 2019 the gas price for the population may grow by 15% – to 9,717 hryvnia per 1,000 cubic meters, and in January 2020 it may grow by 22.73% – to 12,000 hryvnia.

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It would be possible to coordinate and approve a new program with the IMF even in the summer if Vladimir Groisman’s government had raised the gas price in April. And then the price could’ve increased not by 23%, but by 18%. Then, after the adoption of the law on the anti-corruption court in early June, it would be possible to enter into negotiations with the IMF on immediately replacing the program. In such a scenario, Stand-by loans could be given in August-September, i.e., prior to the budgetary process for 2019, the Ministry of Finance wouldn’t have to raise funds in foreign markets at 8.99% and 9.75% interest rates – placement would’ve been cheaper.

Conditions for continued lending

In addition to raising gas prices, an indispensable condition for the allocation of a second tranche of $1.25 billion to Ukraine is the creation of the Supreme anti-corruption court. It is defined as a bullet point for March. It’s true that the President Petro Poroshenko at a press conference stated on December 16th that the court will be created before February. It will also be necessary to adopt a law on the division of functions of the National Commission for State Regulation of Financial Services Markets between the National Bank of Ukraine and the National Securities and Stock Market Commission. The corresponding draft law was adopted at the first reading even in the summer of 2016.

There are no strict conditions concerning the adoption of a law on the market of agricultural land in the new program with the IMF – it only stipulates the continuation of work in this area.

In general, there are significantly fewer conditions in the Stand-by program than in the EFF. The schedule of allocating tranches and their size is more flexible. If the macro-financial situation in the borrowing country is relatively stable, then the dates of receipt of the subsequent tranches – and thus the fulfilment of conditions for this purpose – may be postponed. The program itself, by definition, is intended for the IMF to respond quickly to the need of the borrowing country for external financing in order to be able to resume economic growth. I.e., if there is no urgent need for money, then the subsequent tranches will not be requested.

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The first tranche may become the last

In addition, staying in the program will in itself facilitate access to other external resources. After the statement of the IMF on October 19th about the possibility of giving Ukraine a new loan, the European Union made a final decision to allocate €500 million of the first tranche of macro-financial aid, with the second tranche of the same amount is expected at the beginning of 2019. The World Bank approved guarantees for a loan of $750 million.

Money from the EU and the World Bank will go to the budget, and from the IMF – to the reserves of the National Bank. The head of the National Bank of Ukraine, Yakov Smoly, already stated that it will be easier to repay almost $12 billion of external debts in 2019-2020 in cooperation with the IMF.

In 2019 there should indeed be no problems with external payments – the IMF program covers the whole year of double elections [presidential and parliamentary – ed] in Ukraine. But it isn’t yet clear how the situation will develop in 2020 after presidential and parliamentary elections.

In addition, it is improbable that the government will venture before parliamentary elections to once again significantly raise the price of gas in May 2019, but this will certainly not be possible to avoid for the second tranche, because an increase in the price of gas in May and January is already enshrined in resolution N867, and a refusal to carry it out will be considered as a violation of a previously accepted obligation. According to “UkraNews”, the government resisted enshrining further gas price increases in the resolution, however the IMF managed to insist on it nevertheless.

Thus, there is a probability that the first tranche under the Stand-by program will become the last, irrespective of the need for cheap borrowed funds.

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