Week’s balance: anticipation of IMF mission, gas purchases from Russia, and economy outlook
Postponement of IMF mission’s visit to Ukraine, growth of the country’s GDP and forex reserves, continuing gas confrontation with Russia and the new Labor Code - these are the main economic news of the past week.
Last week, Ukraine expected the arrival of the review mission from the country’s key creditor, the International Monetary Fund (IMF). The review is needed to decide on the allocation of the Fund’s next tranche for Ukraine. However, due to the failure to fulfill the tasks required, the visit has been postponed indefinitely. "The technical mission [at the expert level] has already arrived. Once we define the policy on the Tax Code and the budget, provide them to the IMF, they will study them, and then we will resume the negotiations," said Deputy Finance Minister Ihor Umanskiy.
The IMF explained its decision with the fact that the Fund can only work with country if its authorities fulfill the requirements for macro-economic stabilization and reform of the economy.
The Cabinet and the Parliament will have to draft a balanced budget for 2016 with a deficit of no more than 3.75% of GDP, and a new Tax Code providing for the optimization of the tax administration. Besides, an anti-corruption prosecutor must be appointed.
Finance Minister Natalie Jaresko said that the draft state budget for 2016 will be ready only in a few weeks. This means that Ukraine may see the IMF money no earlier than the first quarter of next year. NBU Governor Valeriya Gontareva really counts on this disbursement.
"We are planning to get the third tranche of the loan [before the end of the year], which will increase the international reserves of the National Bank to $15 billion," Gontareva said.
It is worth noting that the IMF initially planned to allocate four tranches in 2015, which would increase forex reserves up to $18 billion dollars. That’s given the government meets all required conditions.
Experts believe that it’s critical for Ukraine to get the IMF tranche, while the termination of the lending program would destabilize financial and economic situation and lead to tensions in the forex market.
"Getting the third tranche before year’s end is very critical for Ukraine,” said Vasyl Yurchyshyn, head of economic programs at the Razumkov Center. “It is clear that the disbursement may be delayed forever, and there will be no end of the world. But if the IMF doesn’t finance our reform program, it would be a very bad signal to other investors - especially the World Bank, EBRD, and the EU governments. In fact, Ukraine has no other creditors and investors but them."
The experts also noted the influence of local elections on the overall situation. "After the elections, we have a different political map in Ukraine. This creates additional stress, for example, in terms of decentralization," said Anatolii Huley, doctor of economic sciences and financial expert
He also noted that the Parliament will hear in December a government’s yearly report. This is yet another political risk as it can result in either reformatting of the Cabinet, or a total change of its composition. "It is clear that it will postpone the IMF disbursement. They also need to understand whom to give money to," said Huley.
Meanwhile, not everything is that bad with the economy. The Ukrainian government believes that there is a slight growth ahead. "I believe that together we will tackle the bureaucratic corruption component, which prevents business from developing, and we’ll positively see at least a 2% growth of the economy next year," said Aivaras Abromavicius, Ukraine’s Economy Minister.
Ukrainian government’s forecast for the next year was confirmed by representatives of the European Bank for Reconstruction and Development (EBRD). But their forecast for 2015 is rather disappointing - the fall in GDP will amount to 11.5%.
The EBRD, however, expressed cautious hope that the economy had already reached its bottom in mid-2015, and production volumes would stabilize in the second half of the year while local and regional risks would remain significant.
The government does not agree with such assessments and believes that Ukraine's GDP will show growth as early as in the third quarter of 2015.
"I’m waiting for the report of the Ukrainian statistics service. According to preliminary data, will have positive GDP growth. Yes, it’s insignificant. It’s within 1%. But this means that our forecasts for economic growth in 2016 will become reality," said Ukrainian Prime Minister Arseniy Yatsenyuk.
Experts agree, although they add that the Ukrainian economy has not yet overcome all of the negative consequences of destabilization.
"There are already signs of stabilization. Industrial dynamics is leveling: the fall is not pacing up, while September even saw growth in some indicators compared to August. This growth is seen in major industries: metallurgy and machine building. There has been a rise in lending to legal entities, growth of hryvnia deposits has also resumed timidly. There is a stable surplus in the treasury account, the target for budget revenues has been beat," said Yaroslav Zhalilo, expert from the Institute of Economics and Forecasting of the National Academy of Sciences of Ukraine.
The government continues the policy of reducing purchases of Russian gas getting closer to a complete halt. Head of Naftogaz Andriy Kobolev said that Ukraine had no plans to pump any more gas into its underground storage facilities before the end of the year, having already accumulated 17 billion cubic meters of gas, which is enough to live through the heating season.
In addition, the head of Naftogaz stated that the price of Russian gas for Ukraine, $227 per 1,000 cubic meters, remains high; and if Gazprom wants Ukraine to buy gas in 2016, it should reduce this price. "The issue of pricing offer the Russian side will give us is a matter of another negotiations. We expect and hope that our Russian gas sellers are rational and will offer us a competitive price,” said Kobolev. “If there is no offer, it will mean that we will purchase all of the gas in Europe."
The head of Naftogaz said that the price of the European gas will be declining both until the end of this year, and in 2016.
In addition to pricing issues, another lawsuit is brewing between Ukraine and Russia, regarding the return of the assets of Naftogaz in the occupied Crimea. For this case, Naftogaz wants to hire an American law firm to file a separate [from the Justice Ministry] suit in international court of arbitration.
"The Ministry of Justice is aiming at the ECHR [European Court of Human Rights], while we are considering several additional alternative tactics that will enable us as a company to go to court. The Ministry of Justice went on behalf of the state, and their claim more important because it covers all of the assets which we’ve never had rights for, for example, the shelf," said the head of Naftogaz.
In addition to drafting this suit, Naftogaz has filed a $16 billion claim against Gazprom. Ukraine wants to revise the overall conditions of the gas contract with Gazprom from 2009, and also make Russia pay bigger fees for gas transit to EU and compensate for Gazprom’s failure to fulfill the contractual terms regarding the volume of transit.
A new Labor Code
Last week, the new Labor Code passed the first reading in Parliament. That’s incredible news, indeed. After all, Ukraine was the last country of the former Soviet Union with the labor legislation unchanged since 1972.
The innovations primarily regarded by-laws that have long lost their relevance and have not gone in line with the newer laws.
According to co-author of a bill, MP Lyudmila Denysova, the main purpose of the adopted amendments was the alignment of relations between employees and employers. The amendments imply an employment contract enter into force only if drafted in writing. The provisions of the employment contract and the size of the salary shall not be changed without the employee's consent. The annual leave is extended from 24 to 28 days.
The new Code keeps a 40-hour five-day working week. The provision on probation term not to exceed three months has also remained unchanged. At the same time, the employees are to be paid overtime will be paid three times the amount, as opposed to the current standards - twice the size.
It is surprising that the Verkhovna Rada had not enough votes to pass one of the most significant amendments – on protection of sexual minorities.
117 out of 226 deputies have supported the motion despite this provision being required for Ukraine to obtain the visa-free regime with the EU.
It is unclear why this amendment became a stumbling block for the MPs. The thing is that the State Labor Inspectorate has not recorded a single fact, to date, confirming discrimination of sexual minorities during employment process.
Vladyslav Shvets (UNIAN)