Week's balance: Ukraine reaches staff-level agreement on new IMF loan, NBU lowers its key rate, while inflation seen sliding at record pace
Ukraine and the International Monetary Fund have reached a staff-level agreement on a new three-year extended fund facility, the National Bank once again lowered the key rate, while the State Statistics Service said inflation was slowing to a six-year low – these are the main economic developments of the outgoing week.
The second week of December inspired optimism regarding the state of the country's economy. Thus, Ukraine and the International Monetary Fund reached a staff-level agreement on a new three-year extended fund facility worth $5.5 billion.
In a telephone conversation with President Volodymyr Zelensky, IMF Managing Director Kristalina Georgieva noted progress in reform and implementation of the government's economic policies. According to the Ukrainian president, the new program of cooperation with the IMF will accelerate economic growth, eradicate corruption, and improve well-being of every Ukrainian.
"We are not satisfied with the current pace of economic growth, and therefore, to accelerate economic growth, we, together with our international partners, will continue reform to catch up with our neighbors in terms of economic development and welfare" the head of state emphasized.
\Meanwhile, the decision on the new program is yet to be approved by the IMF Executive Board. The National Bank of Ukraine expects a "verdict" to be handed down in the first quarter of 2020.
"The schedule of meetings of the IMF Board is set up in such a way that this year there will be no decision on a new program. But, according to the schedule, it may be in the first quarter of next year," said NBU Governor Yakiv Smolii.
The IMF says the date for the Executive Board meeting on Ukraine will be set depending on how Ukraine fulfills "prior actions".
At the same time, the staff-level agreement with the IMF allowed Ukraine to agree on receiving macro-financial assistance from the European Union. Zelensky and President of the European Commission Ursula von der Leyen agreed on the steps necessary to allocate a second tranche of macro-financial aid in the amount of EUR 500 million. The President's Office says the country will receive the money "in the near future", but, obviously, not earlier than the first tranche of the new IMF program comes in.
Gas transit talks
The Normandy Four Summit held in Paris December 9, besides the main topic of Donbas settlement, saw the leaders of Ukraine and the Russian Federation discuss gas issues.
Following a bilateral meeting, Zelensky said Ukraine has a chance to sign a new transit agreement with Russia on better terms than his country had before these negotiations. According to him, this is not about a one-year contract, but rather a deal for several years.
"It is very difficult when one side insists on one year, while we insist on ten. I think we will find something in the middle. It seems we will," Zelensky said.
In turn, Naftogaz Executive Director Yuriy Vitrenko said Zelensky and Putin "agreed to continue to negotiate" and noted that negotiations would be conducted both in bilateral and trilateral formats.
On December 13, the next round of gas transit negotiations between Gazprom and Naftogaz was held in Vienna. Following the talks, Vitrenko wrote on Facebook that the parties had agreed to continue discussing options for extending transit.
"We agreed to continue to process options for continuing transit. It is too early to talk about an agreed option, but we are taking the most constructive position. Active work is underway," Vitrenko wrote.
The current transit contract between Naftogaz and Gazprom expires on December 31, 2019, after which the Russian monopoly could minimize or even halt gas transit via Ukraine.
An important economic news of the outgoing week was the report delivered by the State Statistics Service on a slowdown in inflation.
In November 2019, it amounted to 5.1% in annual terms on year – the best indicator over the last six years. For comparison: at the end of 2018, inflation in Ukraine in annual terms slowed to 9.8% from 13.7% a year earlier.
This year, the trend of a gradual decrease in inflation was observed from month to month: in September it stood at 7.5% in annual terms, while in October it slowed to 6.5%.
Following fresh statistics, the NBU published a more optimistic forecast, according to which inflation by the end of 2019 in Ukraine will stand at 5% +/- one percentage point, that is, consumer price growth will slow to a six-year low.
Earlier, the NBU predicted that inflation by the end of the year will slow down to only 6.3%, and the five percent level could only be reached in 2020.
Another key rate cut by NBU
Achieving the inflation target gave grounds for the central bank to soften its monetary policy. On December 13, the NBU lowered its key rate by two percentage points to a two-year low of 13.5% per annum. Moreover, the rate was reduced for the fourth time in a row – this has already happened in July, September and October. The last time the key rate dropped to 15.5 % per annum.
Prime Minister Oleksiy Honcharuk called another cut an indicator of economic stability: "This confirms that the economy is stable and strong, where citizens can safely save money in national currency – the hryvnia, while businesses can invest in the future."
According to Honcharuk, lowering the discount rate means that the National Bank sees no threat to low and stable inflation. He also emphasized that the record slowdown in inflation is not a one-time victory, but a predicted and expected trend.
The NBU believes that the rate cut was made possible not only due to improved inflation expectations, but also due to the strengthening of the hryvnia exchange rate. The main sources of excess supply of currency on the national market this year were revenues from Ukrainian exports due to a record grain and oilseed crops, as well as the sale of funds received from foreign currency borrowings by state-owned companies.
On Monday, December 16, the National Bank set the official hryvnia to dollar exchange rate at UAH 23.50/USD, which is the maximum value for almost four years – since January 2016. The previous four-year high at the official rate was set on December 13 at UAH23.56 to the dollar.
Among other important events of the outgoing week, it is worth noting the Verkhovna Rada adopting a law on an "industrial visa-free regime" with the European Union. In particular, the document will allow European certification bodies to recognize Ukrainian quality certificates.
The Ministry of Finance published the text of the law on the 2020 state budget with a deficit ceiling of UAH 94.3 billion, or 2% of GDP. According to the document, next year state budget revenues will amount to UAH 1,096 trillion, and expenses – to UAH 1,182 trillion.
The Ministry of Finance also launched the Open Budget portal with an interactive budget system that was not previously publicly available. Now, Ukrainians will be able to learn about the plans for the implementation of both state and local budgets, as well as receive data on internal and external debt.
As early as this week, the State Property Fund for the first time announced a complete list of all state facilities put up for "small-scale" privatization. It includes 187 blocks of shares and property complexes, 139 unfinished construction projects, 46 objects of socio-cultural purpose, and hundreds of other objects.
The penultimate working week of 2019 promises to be no less interesting as the parliament will hold the last sessional week this year, the State Statistics Service will publish a report on national GDP and population data, while the National Bank promises on December 20 to put into circulation an upgraded UAH 50 bill.