Ukraine’s largest foreign backers won’t lend to Ukraine without serious progress on key reforms, including the fight against corruption, the European Union and the International Monetary Fund have made clear in interviews with the Kyiv Post.
The EU will review the possibility of a new financial assistance program only after Ukraine fulfills the IMF’s longstanding conditions: Privatization and the creation of an independent anti-corruption court, changes to pension reform and the 2018 state budget and bringing Ukraine’s gas prices in line with global markets.
Since 2014, Ukraine has received $13 billion in low interest loans from the IMF and used them to reduce the budget deficit.
The National Bank of Ukraine has used much of the cash to replenish the country’s foreign currency reserves, raising them from $5.8 billion on the eve of the 2014 EuroMaidan Revolution, to $18.8 billion at the end of 2017. However, for stable economic growth, the amount needs to be at least $30 billion.
Since 2014, the EU has pledged more than 12 billion euros for Ukraine, including a 2.81 billion euro financial assistance program, more than 3 billion euro in loans and investments, and more than 879 million euros in grants. EU money was used for improvements in key sectors of Ukraine’s economy.
In 2018, Ukrainian government expects to get a new 1.8 billion euros financial aid package from the EU, as well as more tranches from the IMF.
Both the IMF and the EU have stated they are opened for reviewing their financial aid.
“The European Commission could present a proposal for a new macro-financial assistance for Ukraine in early 2018,” Jurgis Vilcinskas, head of the press and information section of the European Union mission in Ukraine told the Kyiv Post on Jan. 9.
The details of the new program would have to be still worked out in the next months and after that pass legislative procedures in the European Parliament and Council, Vilcinskas said.
While the EU is already in the planning phase for its financial aid package, the IMF has not yet decided whether to begin a review for the next loan in its long-term financial support package for Ukraine.
The fifth IMF review of Ukraine’s success in reforms, planned for July, is possible only after the implementation of prior conditions for it, reads a Dec. 14 IMF statement. No date has yet been set for a review visit for the potential fifth loan in the program.
The EU also said that to help Ukraine, it is important to ensure that the country’s IMF program remains on track.
During the Eastern Partnership Summit in Brussels in November, President Petro Poroshenko expressed interest in further financial assistance in 2018 to EU Commission President Jean-Claude Juncker.
But Junker replied that first, Ukraine must reinforce reform momentum and resist internal pressures for policy reversals over the coming months.
“Ukraine is not a failed state. But the Ukrainian government has lost the credit of trust of its international partners. No one will take hollow promises and excuses like it being hard to reform the country during the war with Russia,” Hanna Hopko, head of the foreign relations committee in the Ukrainian Parliament, told the Kyiv Post on Jan.9.
European Union leaders sit at the round table for an EU Eastern Partnership summit with six eastern partner countries at the European Council in Brussels on Nov. 24. (AFP)
Lost time, money
The halt in positive changes in key sectors of Ukraine’s economy and politics has led to a stall of international financial help in 2017.
Ukraine received the last $1 billion tranche from IMF’s total $17.5 bailout program in April, totaling $8.6 billion three years into the program, IMF Resident Representative to Ukraine Gosta Ljungman told the Kyiv Post on Dec. 4.
However, The IMF expected to disburse much more – about $14.5 billion by November 2017.
“The reason for the lower-than-expected disbursements has been the delays in the implementation of some reforms,” Ljungman said.
Out of the 3.4 billion euro assistance program from the EU, Ukraine already lost the last piece – a 600 million euro loan that was set to be delivered last year, but never came due to the government’s failure to fight corruption and implement other changes.
In particular: lift the ban on timber exports; launch the e-declarations verification process; adopt a law creating a loan registry with the ability to verify information on beneficiary company owners.
But today, Hopko said, such demands as timber trade ban, for example, are no longer a priority for the donors.
The government has made the maximum afford to fulfill all requirements to get the last international aid tranche in 2017, Ukraine’s Finance Ministry press service said in an email sent to Kyiv Post.
“From the total 21 demands Ukrainian government had to fulfill to get the full 1.8 billion euro of the third program, only four were found to be not fully complete,” the Finance Ministry press service said.
This happened because Ukrainian parliament failed to adopt certain laws on time, the ministry said.
Ukraine was able to replace some of the foreign aid it lost last year with a $3 billion Eurobond issuance in September, stoking fears that the country would drop foreign aid in exchange for financing on international capital markets.
But it’s not clear how long Ukraine can survive with no foreign help.
Elena Besedina, a senior researcher at the Kyiv Economics Institute, said that the cost of borrowing on capital markets was already high enough to be a significant burden, and that the government would not be able to rely on Eurobond financing alone without a significant breakthrough in foreign investment.
“At that moment, the capital markets believed that Ukraine would work with the IMF,” Besedina said of the Eurobond placement. “And I think if the IMF program is stopped completely, the capital markets would not be able to offer even 7.35 for Eurobonds.”
The yield on Ukraine’s September 2017 Eurobond issuance was 7.375 percent, compared to the IMF interest rate of around two percent. The Finance Ministry anticipates an additional $2 billion in Eurobond issuances in 2018.
But Besedina went on to say that 2018 could force the Ukrainian government to scramble for financing.
“By the end of the year, if nothing changes, if we don’t have money from the IMF and our economy is not growing as forecasted, and imports exceed exports, we may be in trouble by the third quarter,” she added.
Authorities act
In general, Ukraine has fulfilled a large share of its policy commitments, agreed with the EU and IMF. The Poroshenko administration has gotten farther along the IMF’s lending program than any Ukrainian government before it.
Both donors highlighted the parliament’s adoption of reforms in healthcare, education, pension, judiciary as the 2017 success of Ukrainian parliament.
The increase of transparency in public finance management, a launch of public administration reform, ongoing improvements in the energy sector, the adoption of business climate improvement laws were also seen by Western partners beneficial for all Ukrainian citizens.
However, Hopko said, many of the adopted reforms were stalled or even rolled back at the implementation stage.
Parliament made some last minute changes in the already adopted budget document and pension reform that didn’t satisfy the donors.
Only on Dec. 28 did President Petro Poroshenko signed healthcare reform, two months after parliament adopted it on Oct. 19.
He also waited nearly a year before submitting a bill on the anti-corruption court to the Rada on Dec. 22.
Civil society and the West have been demanding the launch of the independent anti-graft court since the end of 2016.
Also in December, lawmakers extended the agricultural land moratorium until 2019 and therefore violated the IMF condition to create an agricultural land market in Ukraine.
Key positions at the National Energy Regulator, National Bank of Ukraine and State Property Fund, NABU auditor, Security Service of Ukraine reform, anti-corruption court creation and many other long-promised laws still vacant, Hopko said.
“They postpone them to fire new “reforms” before the election (2019), in the right time as I was told. Unfortunately, Ukraine might lose unique opportunities while they are waiting,” Hopko said.
Where the EU and IMF money goes
The Ukrainian government said it has disbursed the international financial aid, it has got from 2014, mostly to refill the budget and the foreign currency deficit. Western donors also contributed to different improvements in Ukraine’s energy, public administration, education, infrastructure, state border management and much more.
The Finance Ministry press service said that since 2014 Ukraine has already got more than $13 billion in loans from IMF, and sent more than $5 billion to state budget deficit reduction, while the rest of the money was sent to NBU’s foreign exchange reserves refill.
The IMF approved the first $16 billion financial aid for Ukraine in 2014, the program was supposed to be valid for two years. Ukraine managed to get two tranches $5 billion total until the program was reviewed and canceled by IMF in 2015 when it approved the new $17.5 billion bailout program.
The rest of the $11 billion of the first program was returned to the IMF.
The 2.81 billion euros Ukraine got from the EU was used to increase the country’s balance payment and its budget needs, the Finance Ministry press service said.
In terms of Ukraine’s contract for reform support, signed in 2014, EU granted 305 million euro Ukraine has used to finance the general fund of the state budget spending.
In 2016 Ukraine got and spent another 8 million euro from EU for public administration reform, Finance Ministry said.
EU provided more than 97 million euro for Ukraine for improvements in different economy sectors: border management, infrastructure, and energy and others.
