Why Ukraine May Not Receive Another IMF Tranche, And What Will Thus Happen to the Hryvnia

Ukraine risks to be left without IMF money. Such forecasts were sounded by two authoritative sources at the same time – the “JP Morgan” bank and the “UBS” finance global company.

As a reminder, currently Ukraine cooperates with the International Monetary Fund within the framework of a stand-by program. It was approved quite recently – last autumn – and provides three tranches of $1.3-1.4 billion.

Ukraine received the first tranche in December 2018, having signed a Memorandum with the IMF that contains several structural bullet points that Ukraine must implement in order to apply for more money.

Among them there is, in particular, launching the Anti-Corruption Court, dividing the State Fiscal Service into Tax and Customs services, increasing domestic prices for gas, and others. The second tranche is supposed to be given in May, and the third one – in November 2019. But it’s still not clear if the money will be given or not.

The head of the Secretariat of the Council of Entrepreneurs under the Cabinet of Ministers Andrey Zablovsky says that it is early to panic.

“The IMF hasn’t refused, it’s just the forecasts of a third-party, though very authoritative experts. They are made, primarily, for potential investors. Analysts are reinsured. And first of all take into account the political risks in Ukraine,” assured Zablovsky.

However, according to the economist Aleksey Kushch, Ukraine already almost for certain will allocate a May tranche. The visit to Ukraine of IMF representatives is only planned for May-June. Even if their conclusions will appear in Ukraine’s advantage, the money will arrive no earlier than the autumn. Meanwhile, in May Ukraine has to make a large payment on its external debt – 51 billion hryvnia. 59 billion more will need to be paid in September.

“It total about $4 billion will have to be paid. The reserves of the National Bank total 20 billion, i.e., in principle, we will be able to repay debts without the IMF. But the big question is what will happen to the dollar exchange rate after this,” noted Kushch.

The Ukrainian “Strana” news agency understood why the loan from the IMF started being called into question and what will happen to the economy of Ukraine and the hryvnia if the IMF nevertheless does not give us money.

Privatbank, gas prices, hole in the budget

Although the conclusions of global financial analysts do not mean yet the final refusal of the IMF, they nevertheless can be considered to be a certain warning bell. In the report of “JP Morgan”, in particular, it is said that the Ukrainian authorities are too focused on populism. And this is difficult to argue with, especially if to remember the generous pre-election payments that the losing president Petro Poroshenko showered his electorate with.

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Analysts remembered to our authorities also refusal to raise gas prices. Since May 1st, according to the Memorandum about the IMF, tariffs had to grow by 15%, and instead, on the contrary, decreased by 30 kopeks for a cube – up to 8.24 hryvnia.

The Swiss global finance company “UBS” explained the risk of not receiving a tranche by referring to the lack of progress in anti-corruption reforms. Moreover, the article of the Criminal Code about illegal enrichment was repealed, and the parliament hasn’t even done anything to acquire a new legislative base.

“The stand-by program, unlike the former program, does not demand special reforms. For the IMF the most important thing is that we implement the structural bullet points stated in the Memorandum,” said Aleksey Kushch.

But violations have already happened.

“Firstly, there was a question of cancelling the nationalisation of Privatbank. It is known that the courts already made several decisions in favour of the former owner Igor Kolomoisky. Clarity in this question is very important for the IMF, and before giving to Ukraine the next tranche it, most likely, will prefer to wait for a total judicial verdict. Secondly, there was an interesting situation with domestic gas prices. It is clear that to increase them now is absurdity, because the purchase price in Europe is falling. But the IMF, in fact, also does not demand it. It suggests to completely liberalise the gas market, i.e., to introduce market prices. This means that if the purchase price of gas will rise, then for the population rates it will automatically rise,” said Aleksey Kushch.

According to the head of special projects of the scientific and technical center named “Psikheya” Gennady Ryabtsev, gas at the European hub will start to rise in price closer to the new heating season, when European users start to stock up on gas for the winter. And since Ukraine buys gas under spot contracts, i.e., it actually collects the remains from the market, and the prices for us are maximum. That’s why instead of the current 8.24 hryvnia per cubic meter, it can be 12–13 hryvnia in the autumn. And in order for the IMF to close the gas topic, the Cabinet of Ministers must either raise the price by 15% now and for as much by the beginning of the next heating season, or introduce market tariffs, and then now it will be cheap, but by the winter the price will soar. It is hard for the government to solve this dilemma, especially taking into account that the Prime Minister Vladimir Groisman already began the electoral campaign, and an unpopular decision on gas will anyway affect his approval rating. 

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There is also a third reason that isn’t voiced out aloud yet – the huge budget deficit. At the moment the budgetary hole totals 30 billion hryvnia, and if this trend remains, then by the end of the year it is unlikely that Ukraine will be able to keep the budget deficit within 2.5% of GDP, which is what it promised the IMF.

“In reality maybe it is more than 3%, but for the IMF it is a fundamental issue,” noted Kushch.

The huge budget deficit didn’t appear by magic.

Firstly, industry has sank by 2-3%. Secondly, the treasury receives less taxes, in particular, denominated in currency, for example, import VAT. Since the hryvnia became stronger recently, importers pay less to the budget than would be transferred with an expensive dollar.

It is clear that the considerable gap in the budget was created also by generous pre-election payments.

Give or not give?

According to Aleksey Kushch, Ukraine will almost for certain be allocated a May tranche. At best it will arrive with a delay, since as it’s only in May-June that the mission of the IMF will arrive in Ukraine.

“It will not only verify structural bullet points, but also analyse political risks. How the new president will behave, whether he will dissolve the parliament, what decisions can be expected from the government? All of this as a result will influence the final decision of the IMF,” said Kushch.

According to him, at best it is possible to count on an autumn tranche. But if the IMF decides to wait for political stability in Ukraine, then we will receive the next tranche after the parliamentary election, when the structure of the Verkhovna Rada becomes clear – i.e., in 2020, assured the expert.

However, the economist Viktor Skarshevsky considers that the IMF will not be so harsh.

“As practice shows, under the new president they give money in advance, closing their eyes to former unfulfilled promises. Or they even restart the program, as was the case, for example, in 2010 when Viktor Yanukovych became the president,” noted Skarshevsky.

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What will happen to the national debt and dollar exchange rate

According to Skarshevsky, even if now Ukraine doesn’t receive any money, there will not be a catastrophe. In May Ukraine needs to spend about 51 billion hryvnia on the external debt, but the Ministry of Finance still has money.

“Non-residents are actively buying up our domestic government bonds with record profitability under 20% per annum. This year receipts from sale of securities grew fivefold,” explained Skarshevsky.

For this reason, in fact, the hryvnia became stronger, and such idyll will last until the autumn – until foreign speculators will start to dump domestic government bonds and take the received profit outside of the country.

Until the autumn nothing threatens the exchange rate of the hryvnia – with the credit of the IMF or without it

Aleksey Kushch says that Ukraine will be able to cope with payments on the external debt even without an IMF loan – at the expense of the currency reserves of the National Bank of Ukraine.

But then the regulator will not be able to restrain the exchange rate via currency interventions any more, and the dollar will creep up

According to Viktor Skarshevsky, by the autumn, without IMF replenishment, the dollar will rise in price up to 28.5-29 hryvnia. And if the worst forecasts of international economists come true and a global crisis will erupt, then the devaluation of the hryvnia can accelerate even more.

“If I was the new government I would be more worried not about the current payments on the external debt, but about its increase and the deterioration of the structure. For the last five years the debt of Ukraine grew from $38 billion to $51 billion, at the same time we replace old debts with more expensive new ones. This creates big devaluation risks. And if there is a global crisis, then it is necessary to reach an agreement not about the loans any more, but about debt restructuring,” said Skarshevsky.

If Ukraine does not obtain another tranche, then external loans, which are periodically obtained by the Ministry of Finance, will become for us even more expensive, because the refusal of the IMF is a certain signal for other creditors.

“It will be possible to intercept some adventurous loans, but this is expensive – no less than 10% per annum,” considers Aleksey Kushch.

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