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Weekly Balance: Money from IMF, demarche of creditors, and showdown in Cabinet

17:20, 11 August 2015
6 min. 536

The Cabinet set up a energy crisis management headquarters to prepare for the winter, the IMF presented a new list of reforms for Ukraine, and creditors have postponed negotiations - these are the main economic news of the past week.

Last week, the IMF disbursed the second installment of the four-year program of reforming Ukraine’s economy. The National Bank of Ukraine received $1.7 billion. Thus, our foreign exchange reserves rose to $12 billion, which is pretty good, the experts say.

However, the Fund stated that the war in the east, sharp devaluation of the national currency, high inflation and a protracted decline in industrial production have significantly reduced economic activity and domestic demand, weakened the country’s banking system. As a result, the benchmark of the GDP fall in in 2015 has been lowered to negative 9%, and inflation rose up to 46%.

The IMF also downgraded the projections for the hryvnia rates. Despite the fact that the basic rate at the end of the year remains at UAH 22 UAH to the dollar, the Fund does not exclude that the hryvnia will fall to UAH 23.5 to the dollar.

At the same time, the IMF stressed that the measures taken by the Government and the National Bank for financial stabilization and recovery of the banking system should play their role. The Fund is convinced that Ukraine is already showing signs of economic recovery, and in 2016 they will become even more noticeable. We just need to keep up the pace of reforms.

This message is reflected in the figures of the State Statistics Service. Last week, for the first time since August 2013, a 1% deflation was recorded (compared to June). In annual terms, the rise in prices slowed down to 55%.

What is expected from Ukraine?

The IMF presented new requirements for Ukraine’s reforms / www.radiosvoboda.org

The list of reforms required by the IMF includes the transformation in the banking sector, tax and pension reforms, and a number of other innovations. In particular, the Fund insists on continuing diagnostics of major banks and recapitalization of the financial institutions. Further recapitalization will require a total of 9.5% of GDP, according to the IMF. The assessment of the banks, based on data from March 2015, must be continued to clarify not only the required volume of infusion, but the likely amount of losses due to the ongoing conflict in the east, says the IMF. In this regard, the twenty largest banks must submit plans on recapitalization by August-October 2015.

The new Tax Code will be a basic beacon for the Fund, as well as the start of pension reform. According to IMF estimates, the Code must be submitted to Parliament in September, and the pension legislation - in December. And the main message is that from January 1, 2016, Ukraine should implement the new tax rules, which involve reform of the single social contribution, reduced rental rates for mining companies, while the income tax must remain unchanged. The most controversial norm is the introduction of VAT to farmers. Until now, attempts to make agricultural companies become payers of value added tax were met with the most bitter disputes - both in parliament and in agricultural community. Certainly, this time the agrarian lobby show no support the IMF requirements, either, but the essence of reforms is mostly about receiving VAT payments from many agricultural holdings, which accumulate the country’s main export revenue, rather than from small farms.

Regarding pension reform, the IMF proposes to reduce the deficit of the Pension Fund through the gradual transition from a solidarity system to a funded pension scheme.

Among other basic beacons is the reform of the public sector – reshuffling the management of state enterprises and updating the principles of such management; privatization of state assets, including those already chosen for the sale; as well as enhancing the authority of the National Anti-Corruption Bureau.

Lenders say “no”, again

Ukraine is considering a moratorium on the payment of obligations / fdlx.com

Another important requirement of the IMF to Ukraine in the coming months is to complete the negotiations with the ad hoc creditors' committee for the restructuring of the public debt. Last week, Ukraine failed to conduct a meeting with the committee scheduled for August 6, as lenders considered Ukraine’s new offer “unacceptable”, as Bloomberg reported. The details of Ukraine’s offer on restructuring $23 billion of the $68 billion public debt were not disclosed. However, there was a number of media reports referring to their sources that the offer considered the volume of a so-called debt "haircut" – a write-off of a principal debt.

On Friday, August 7, the Ministry of Finance said that its chief Natalie Jaresko intends to meet with creditors on August 12. The meeting will be held in San Mateo (California, USA), where the office of the largest Ukrainian eurobonds holder Franklin Templeton investment fund is based.

In case the talks fail, Kyiv is considering to impose a moratorium on the payment of the obligations at the end of September.

Cabinet gets prepared for heating season

Last week, the Cabinet of Ministers held a meeting of the energy crisis management headquarters, where a group of international experts presented the plan for the heating season, as well as a five-year plan of the development of the Ukrainian energy sector. The expert report was immediately approved by the government and was taken as a basis of the country’s energy balance. Its main message is that the coal reserves should amount to at least 4-5 million tonnes, and gas reserves – to 17-19 bcm. But the main thing is all tariffs must be clear, energy sources –defined, and the volume of purchases – contracted and delivered, while payments – must be totally transparent.

At the same time, Ukraine’s Energy Minister Volodymyr Demchyshyn and head of Naftogaz Andriy Kobolev noted the lack of money to purchase the necessary volumes of fuel. But while Kobolev had something to offer – Ukraine has a "winter gas package” from Russia in its pocket with the full support from the EU which is even ready to provide loans for the purchase of gas if needed, Demchyshyn looked very worried and pale.

Demchyshyn looked worried and pale at the Cabinet meeting / Photo from UNIAN

The issue of providing the Ukrainian coal thermal power plants with coal has been and remains very complex. Demchyshyn pointed out that, to secure heating season, there are a number of conditions to be met: a stable operation of the private energy holding DTEK and the organization of deliveries of coal from all possible sources. "We import from all sources - the United States, South Africa, Australia, and Russia," the minister said, adding that we would have to buy a lot. Currently, there is about 1.5 million tonnes of coal at the stations and warehouses. This is a third from the required volume.

The Prime Minister asked the Minister of Energy to draft the energy balance immediately and procide details on the coal imports.

Photo from UNIAN

Arseniy Yatsenyuk has become head of the Coordination center for the introduction of the new energy market model, instead of Demchyshyn. The inter-ministerial commission for preparation for the autumn-winter season will be headed by the Deputy Prime Minister Valeriy Voschevskiy. By the way, Voschevsky did not rule out that Demchyshyn’s resignation could become one of the results of such preparation.

Targeted ministers

Infrastructure Minister Andriy Pyvovarsky and Finance Minister Natalie Jaresko were also criticized this week.

The Head of the Ministry of Infrastructure was accused of inaction in the maintaining the checkpoints across the state border in the direction of the occupied Crimea / Photo from UNIAN

At the Cabinet meeting, the chairman of the Kherson Regional State Administration Andriy Putilov told that crossing points at the administrative border were not properly equipped. At the same time, conditions for travelling from the occupied territories are much better.

Head of the State Border Service, Viktor Nazarenko said that his office has arranged border control while the Ministry of Infrastructure had not performed well on its part.

The prime minister urged the officials to “drive there and find out what you need to do, how much money is needed,"- Yatsenyuk said.

Mikheil Saakashvili also had his say last week

Saakashvili has defined the next

Saakashvili has defined another “enemy of state”. This time it was the Finance Ministry headed by Natalie Jaresko. It turns out that her fault is that the Ministry of Finance increased the financial plan of revenues from Odesa customs in August - up to $1.5 billion compared to from $1.4 billion in July. And this, according to Saakashvili, "puts an end" to the reconstruction project of the Odesa-Reni road.

The connection between the customs and the roadworks is as follows. In June, the Cabinet of Ministers has decided, as an experiment, to allocate half the revenue that customs officers collect in excess of the financial plan to the local budget of Odesa region. This would allow the government to fulfill another IMF requirement and increase budget revenues from taxes and customs operations to 40% per year. In other words, the primary effect was supposed to be fiscal, rather than aimed at improving infrastructure. Moreover, financing the reconstruction of Odessa-Reni road with the help money acquired from customs operations was initially called just an example of the use of funds. However, the head of the Odesa governor presented the situation differently.

The Ministry of Finance swiftly responded to Saakashvili’s statement and recalled that the decision to involve customs in filling the regional budgets had issued in the form of a bill and would be supported by Parliament in the first reading. The second reading can be expected only in September. Also, the Ministry stressed that the new leadership of the State Fiscal Service was tasked to strengthen the fight against smuggling and thus, increase revenue.

This week, the Finance Ministry will also be one of the main newsmakers. The results of the next round of negotiations with creditors, along with the developments around the coal issue will remain on top of the information feeds.

Olesia Safronova (UNIAN)

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