With the International Monetary Fund delegation visiting Kyiv in January, economists are wondering whether the government is likely to change its position on any of the key issues that led the IMF to freeze credit in 2011.
The mission, which usually arrives once a year, is expected to analyze the state budget for 2013, the currency exchange rate and policies in key sectors such as utilities.
The IMF, as one of Ukraine’s key external auditors, constantly monitors the economy, focusing on “whether there are risks to domestic and global stability that argue for adjustments in economic or financial policies,” said Olga Stankova, the fund’s spokesperson in Ukraine. “Discussions mainly focus on the exchange rate, monetary, fiscal and financial policies.”
In between missions, IMF economists regularly produce working papers that analyze various sectors of Ukraine’s economy. They also use research by other international organizations and Ukrainian scholars, such as the National Academy of Sciences of Ukraine. The IMF also works with big consulting and audit companies. For example, in 2011 Ernst & Young audited the finances of Naftogaz, the national oil and gas company.
The most recent working paper on Ukraine, published in October, focuses on gas price policy, the major stumbling block in relations between the IMF and Ukraine. Research by IMF’s economists shows how government subsidies for households for imported Russian gas are damaging the nation’s finances and economy.
“Ukraine remains one of the most energy-intensive countries in Europe, with annual gas consumption of about 50 billion cubic meters…Energy efficiency is only 60 percent of European Union averages,” reads the paper.
“While low tariffs support poor households, they disproportionately favor those who consume the most, typically wealthy households. The policy is also proving financially and economically unaffordable. It drains government finances, sustains energy overconsumption, dampens investment in delivery systems and undermines incentives for domestic production expansion into gas reserves that could significantly reduce Ukraine’s need for gas imports,” the study continues.
Reluctance to raise household gas and heating prices was a key problem that froze IMF assistance to Ukraine in 2011. Ukraine drew $10.5 billion from the IMF in 2008-2009 under an initial $12 billion standby program, and received $3.4 billion in 2010 under the second $15 billion 2.5-year standby facility that expires this month.
However, Ukraine’s officials didn’t take the unpopular step of hiking utility rates. The fund had also asked the government to allow more flexibility in the hryvnia exchange rate and to carry out other reforms aimed at improving the business climate and avoid a build-up of debt. The IMF suspended lending to Ukraine when the government did not deliver on these issues.
But as Ukraine is struggling to patch up its widening budget deficit, and with the economy underperforming, the need for cheap IMF loans is ever more urgent.
Next year, Ukraine will face record public debt repayment of $10.5 billion in principal and interest for the public sector as a whole, $6.1 billion of which is owed to the IMF.
Deprived of IMF loans, Ukraine’s government has been borrowing heavily and expensively on international markets. In November alone, the government raised $1.25 billion with a 10-year bond. A recent revival in interest for emerging market assets that caused rates to drop has led some to expect further issues in the near future.
Nevertheless, experts in Ukraine hope that IMF financing will be unlocked in the first quarter of 2013. The IMF mission headed by Christopher Jarvis was scheduled to arrive in Kyiv on. Dec. 7, but changed to January at the request of Ukrainian government. Meanwhile, the IMF office in Kyiv will translate the text of Ukraine’s budget and send it to Washington for analysis, says Max Alier, IMF representative in Ukraine. Ildar Gazizullin, senior economist at International Centre for Policy Studies, said that in 2012 the government postponed many of the major decisions needed for the IMF to unfreeze credit for a year. The main reason, he said, was the Oct. 28 parliamentary election.
“And it’s not clear how they’re going to cover up some of the holes,” Gazizullin added.
Finance Minister Yuriy Kolobov said in October there might be a compromise on the gas tariffs with the IMF. He said they can be increased gradually in the next five years “until we are able to provide households with domestically produced gas,” Kolobov told the Dzerkalo Tyzhnya newspaper.
It seems that the market is expecting the IMF mission to be a success.
“Despite a number of socially painful measures difficult for Ukraine’s authorities to adopt as mandated by the IMF, as they very well could be used against them by their political opponents in their ever-lasting battle for popular support, authorities are under serious economic and market pressure to strike a deal with the IMF,” said Investment Capital Ukraine on Dec. 4.
“Prospective IMF loans should refinance at least part of the redemptions due to the fund (though we assume 100 percent refinancing) and facilitate the government’s access to foreign markets to help roll over other redemptions,” another investment bank, Dragon Capital, said in its Dec. 3 note to investors.
Kyiv Post staff writer Svitlana Tuchynska can be reached at [email protected].
