AnalyticsWeek’s balance: Postponed bailout tranche, central bank’s worsened macroeconomic forecast, and international partners urging Kyiv to speed up reform
The authorities announced the postponement of key reforms and, subsequently, of the next IMF bailout tranche, at least until autumn 2017; the National Bank of Ukraine worsened its outlook for the country’s economic growth and inflows of credit funds; while international partners called on the president, government and parliament boost reform - these are the main economic news of the past week.
In recent months, the government of Ukraine and other authorities have been tirelessly preaching the same mantra - key reforms designed to accelerate economic growth just cannot wait, they must be approved by the Verkhovna Rada and begin to be implemented as soon as possible. In particular, it was about land and pension reforms.
The first one provides for raising pensions for the majority of Ukrainian pensioners starting October, as well as reducing the deficit of the Pension Fund due to the de-shadowing of the economy. The latter one will allow Ukrainian citizens to sell and purchase up to 200 hectares worth of farmland per person. Thanks to the novelty, Ukraine will be saying goodbye to the Soviet-era atavism - the lack of the citizens' right to dispose of their land.
And although there is a broad expert consensus that these reforms have well over-ripened for several decades, there is no political will for their rapid adoption.
Initially, it was assumed that the pension and land reforms could and should be considered by parliament before the end of the session, that is before July 15, after which the deputies will go on long holidays until the beginning of autumn, and Ukraine would receive an important IMF tranche for enhancing macroeconomic stability and ensuring economic growth.
However, this week, Prime Minister Volodymyr Groysman suggested that the IMF would postpone the allocation of its financial aid to Ukraine because parliament was not ready to adopt land reform. "While the pension reform has been drafted on schedule and the necessary measures to create an anti-corruption court have been taken, the law on land reform will not be adopted on time. The delay will postpone the IMF's fifth tranche of up to $1.9 billion, although the government remains committed to the program," Groysman said.
The next day, Finance Minister Oleksandr Danyliuk said that there were problems with the adoption of pension reform, and as a result, the bailout tranche would be delayed until autumn.
"There are certain conditions that we must fulfill. As soon as we implement them, we will see the completion of the revision of the [EFF] program and the tranche as well. We expect this to happen this autumn. We had an ambitious plan to get a tranche in the summer, but the parliament took more time to consider the necessary bills. This is pension reform, which is number one priority for us. We will do everything we can to adopt it before the end of the parliamentary session. But it all looks like the issue is being postponed to autumn. This is a normal situation, at the end of the day, two months make little difference," the minister said.
And a day later, Groysman was speaking again, saying that the aid disbursement could be expected before the end of 2017.
Meanwhile, G7 Ambassadors also spoke of the importance of adopting pension reform before the end of parliamentary session.
"We, the G7 Ambassadors, wish to express our strong support for the pension reform plan proposed by the Ukrainian government, and we call on the Rada to adopt the legislation without delay during its plenary session next week. Pension reform is one of the greatest challenges for any government, the G7 ambassadors said. "And we commend Ukraine's leaders for undertaking this overdue reform with political courage and vision," the Ambassadors said in a statement.
Time will show whether the G7 statement actually encourages the people's deputies to reform the pension system, but the figures are adamant - without initiatives to reduce the deficit of the Pension Fund and the money of Western creditors, primarily the International Monetary Fund, it will be extremely difficult for Ukraine to secure payment of foreign debts, which in 2017-2019 are estimated at $14 billion. Delaying the start of reforms required and delaying the bailout disbursement contribute neither to economic growth nor to the country’s investment attractiveness.
NBU worsens economic forecast
The National Bank of Ukraine, following a regular meeting of its monetary committee, confirmed the existing anxiety regarding further cooperation with the IMF.
"Due to the fact that consideration of key bills required by the IMF program is being postponed, and sessional parliamentary activity will resume in the fall, we expect the transfer of one tranche for the next year," said acting head of the NBU Yakiv Smolii. According to him, as a result, the expected amount of financing from the IMF this year will be reduced from three tranches worth $4.5 billion to two tranches totaling $3 billion.
In parallel lines, the \regulator worsened the forecast for the Ukrainian economy growth by the end of the year from 1.9% to 1.6%. "The revision of the forecast was a result of the worse results of economic activity in the first half of the year, in particular, in the services sector, and because of the revision of estimates of the grains harvest," the NBU said.
In addition, the National Bank retained the key rate at 12.5% after a two-month decline, which reflects the regulator's unwillingness to further reduce the rate due to inflation. Consumer prices in June accelerated to 15% from 13.5% in May, which is clearly above the forecast trajectory.
At the same time, the regulator announced its intention to facilitate early repayment of loans in favor of non-residents. "Firstly, banks will be able to repay such loans ahead of schedule. Secondly, businesses will be able to repay loans ahead of schedule if the international financial organization is the shareholder of such a borrower or non-resident," Smolii said.
Acting head of the National Bank noted that such liberalization would facilitate the attraction of financial resources from abroad, while at the same time will not affect the stability of the national currency.
In addition, the regulator promised to submit within a month a bill on currency, which presupposes foreign currency liberalization in exchange for transparency in conducting business and paying taxes in Ukraine.
The plans of the National Bank are somewhat overshadowed by the lack of an appointed new Governor. It seems that this problem will not be resolved quickly either. According to a source at the NBU, the authorities will return to the issue of appointing a replacement for Valeria Gontareva, who has filed for resignation, no earlier than autumn.
Against the backdrop of not very optimistic news about a low pace of reform, and also in the context of moderate steps in monetary liberalization, this week’s news about the completion of the draft law on privatization was a real ray of light.
In particular, the legislative initiative provides for the regulation of privatization by a single law (there are seven laws currently), according to which there will be only two types of privatization objects instead of five - large and small. Large objects of privatization will be sold exclusively with the participation of authoritative advisors, and small ones - through the Prozorro online platform. At the same time, appealing privatization results will be possible within three years after it is held. In addition, a moratorium on bankruptcy will be imposed on privatized objects. Privatization conditions will be approved by the Cabinet of Ministers and may include an auction with conditions and an auction without those. In the absence of a buyer, it will be possible to reduce the price of the object by 25-50%. Privatization will also be possible through the study of price proposals.
"Before submitting the bill to parliament, we will consider it at the National Reform Council. We also need to closely cooperate with the parliament’s corresponding committee," Groysman said.
The pace of adoption, as well as the quality of the bill, can become decisive for the process of privatization and attracting investment, which, according to the statements by both the government and the National Bank, is vital for economic growth. The question, as always, remains the same - is there a political will for the next round of reform?
This week, Ukrainian Government officials, at the invitation of the United Kingdom, participated in an international reform conference held in London. The Ukrainian authorities came to present a reform plan, including qualitative changes in pensions, the launch of a land market, conducting privatization, as well as reform of education and healthcare.
The conference’s headliner, Prime Minister Volodymyr Groysman, spoke about the Cabinet’s will and readiness to proceed according to the plan agreed with the IMF, and urged parliamentarians to support the relevant legislative initiatives.
At the same time, British Foreign Secretary Boris Johnson noted that although significant progress has been made, but there are signs reform is “faltering.”
UK Foreign Secretary Boris Johnson noted that Ukraine had seen “more reforms in three years since the Revolution [of Dignity of 2014] than in the previous two decades since independence.” “Significant progress has been achieved in banking reform but none of us would think… that the task is done. There are worrying signs that reform is faltering,” he said.
Even more categorical was U.S. Deputy Secretary of State William Brownfield, stressing that corruption remains the key problem of Ukraine. He repeated the remark by his boss Rex Tillerson who at the latest NATO ministerial meeting said: “It serves no purpose for Ukraine to fight for its body in Donbas if it loses its soul to corruption.”
The UK and Dutch ambassadors shared the thought, unanimously declaring that corruption and a weak judiciary and corruption in the first place harm Ukraine’s reputation among investors.
Representatives of international financial organizations also expressed their willingness to increase support for Ukraine in case Kyiv accelerated positive changes.
Thus, the conference in general showed readiness of Ukraine’s international partners to support Kyiv both on the path of internal reforms and in the geopolitical field. It seems though that any support from civilized democracies will be provided only if real changes have been carried out.
The key economic event of the upcoming week may be the last session of parliament before a long vacation. The session is expected to see legislative initiatives on pension reform and education submitted. A positive result of the bills’ consideration of will allow counting both on support of creditors, including the IMF, and on increasing the country’s investment attractiveness.