The European Union has approved 600 million euros in macrofinancial assistance for Ukraine. It’s money that couldn’t come too soon: Kyiv desperately needs help to plug a more than Hr 100 billion ($3.6 billion) hole in the national budget.
However, by being unconditional, the aid may send a questionable signal to Ukrainian officials about the country’s pace of reforms. Un-reformed Ukrainian courts recently delivered a potentially deadly blow to the country’s anti-corruption bodies. This provoked sharp criticism from European officials.
But it didn’t stop the aid.
“They took the humanist path,” wrote Sergey Fursa, head of fixed income at Dragon Capital. “And they gave Ukrainian authorities the opportunity to dodge, weave and pretend to act. Everyone says ‘we are for reforms’ while oligarchs continue to control lawmakers, ensuring the absence of any changes.”
“This may not be so good for reforms,” said Oleksandr Paraschiy, a financial analyst from Concorde Capital. It shows the government that “you can fulfill far from every condition, just show that you really need the money and ask very nicely.”
The Hr 600 million approved on Dec. 9 are the first part of a Hr 1.2 billion euro package, agreed upon in July. Initial conditions for receiving the package included strengthening public finance management, governance and rule of law; reforming the judiciary; increasing competition on the gas market; and improving the business climate and the governance of state-owned enterprises.
It’s also strongly tied to Ukraine’s continued cooperation with the International Monetary Fund’s reform agenda.
The IMF has made it clear that it wants Ukraine to show results before it sees even the first tranche.
The European Commission took a softer stance. It wrote that Ukraine’s “renewed engagement to continue cooperation under the IMF programme in recent weeks and commitment to the policy programme agreed with the EU” was enough to disburse the first 600 million euros.
“Given the emergency nature of this support, the first disbursement is not conditional on the fulfilment of any specific policy conditions,” according to the announcement.
Yaroslav Zheleznyak, deputy head of the parliament’s finance committee, said that the assistance is very good news for Ukraine right now.
But he added that this government is quick to declare that it wants to continue reforms when everything is bad and it needs money. When it’s out of danger, there’s a risk of returning to swamp-like conditions.
Daryna Marchak, a public finance economist with the Kyiv School of Economics, echoed that opinion. She said there’s a risk that the country will get the money, everyone will breathe a sigh of relief and then kick the can down the road.
“Next year, the problems will not show up right away, but without cooperation with international financial organizations, they will show up unequivocally,” she said.
Still, the macroeconomic assistance is exactly what the country needs right now. Marchak estimated that the budgetary hole in December is about Hr 135 billion ($4.8 billion). Paraschiy said it can be as high as Hr 180 billion ($6.4 billion).
Besides being a large influx of cash, equivalent to about Hr 21 billion, it also sends a message that Ukraine is on the path of cooperation with the IMF, which will help the country attract credit and issue bonds.
“It’s a sign for the market that one can invest in government bonds,” said Zheleznyak.
The Cabinet hopes to attract about Hr 50-60 billion ($1.8-2.1 billion) through bond sales. At the most recent auction on Dec. 8, the Ministry of Finance sold Hr 16 billion ($569.5 million) worth of bonds, although it had to hike the rate of return. This month, it will have to pay off previous debt to the tune of Hr 20 billion ($711.9 million).
Three auctions remain. The Ministry of Finance would have to raise about Hr 15-20 billion at each. Paraschiy said that the government has never sold that much in a single month before.
Prime Minister Denys Shmyhal also announced that Ukraine will issue eurobonds.
Marchak said that if Ukraine manages to raise Hr 50 billion from government bonds on the internal market, along with $1 billion from eurobonds, that combined with the EU’s assistance — a total of Hr 100 billion — can cover enough of this month’s budget.
Traditionally, the government doesn’t cover all of its expenses, she added, meaning that the remaining Hr 35 billion gap will be overlooked.
