The $5 billion loan program from the International Monetary Fund expires in December and so far, Ukraine only got $2.1 billion.
Meanwhile, Ukraine’s deadline to pay $3.8 billion in public debt is approaching in September.
Ukraine now has a week to try to secure another tranche before the IMF leadership goes on vacation in August.
Ukraine has recently moved closer to meeting the IMF’s conditions. Officials have said they expect to receive the $700 million tranche any day now.
“All the conditions that were agreed on were fulfilled in a sense that the Verkhovna Rada passed them (the bills). We can now put a tick ‘okay’ near those questions on the list,” said Oleh Ustenko, an adviser for Ukraine’s President Volodymyr Zelensky.
The IMF does not see it that way.
“I can say we welcome the recent approval of laws that will strengthen the judicial system in Ukraine, but more progress is needed in several other areas to support completion of the first review, under the IMF supported program,” Gerry Rice, the IMF’s communication director said at a press conference on July 15.
This means Ukraine will not receive the second tranche, Serhiy Fursa, an investment banker at Dragon Capital, believes.
“I think that (another) tranche is impossible,” he told the Kyiv Post.
Ukraine got the previous tranche over a year ago. In June 2020, the IMF and Ukraine agreed that the country put in numerous reforms in exchange for $5 billion in cheap loans. The country then got $2.1 billion on the spot and was told to fix some of its most glaring problems.
Instead, it created new ones. In October, the Constitutional Court overturned some crucial anti-corruption reforms.
Since then, the IMF mission has been calling on Ukraine to bring things back to normal. This work is still in progress.
In the past 25 years, Ukraine has never managed to fulfill all of the IMF’s demands.
Ukraine’s high hopes
Kyiv aims to sign a so-called staff-level agreement with the IMF by the end of July. It would have to be approved by the Fund’s board of directors as recognition of the reforms’ success.
Such a paper is more important than the money itself, Ustenko said. “It is not just about the money.
The point is that we want to have the firm support of the IMF,” he said, “This will mean that the IMF acknowledges that we have made significant progress. And we have. And we want confirmation that we have made this progress.”
This agreement will define whether Ukraine receives money from the European Union and World Bank.
Meanwhile, Ukraine’s older debts are coming due. In September, the country must repay state debt and interest of almost Hr 105 billion ($3.8 billion) out of Hr 602.5 billion ($22.3 billion) it is set to pay in 2021, according to the Finance Ministry.
Kristalina Georgieva, newly selected Managing Director at the International Monetary Fund (IMF) walks out of a press conference along with the IMF Spokesperson Jerry Rice at the IMF headquarters on Sept. 25, 2019, in Washington. (AFP)
Economic experts say Ukraine’s authorities are too optimistic about getting the loans this summer.
“We believe that expecting money by September is optimistic because the IMF’s conditions for Ukraine have not yet been met,” said Elina Ribakova, deputy chief economist at the Institute of International Finance based in the U.S.
If Ukraine does not manage to secure the deal in the coming week or so, it’s unlikely to get the money at all.
“Should negotiations spill over into autumn, the IMF could also want to see the new budget passed before the disbursement. With the program expiring in December, we think it is likely the IMF would prefer to start new program negotiations at the same time,” Ribakova said.
In the worst-case scenario where Ukraine receives no money from the IMF by September, there is a plan B, Ustenko said, but declined to discuss it.
According to Fursa, Ukraine will manage to pay the debts even without the IMF’s tranche.
“On the one hand, we do need to remain in the program for confidence. On the other hand, we will be able to pay the September depts without the IMF tranche. We will be able to do so thanks to other IMF money,” he said.
The IMF is distributing a $650 billion allocation of Special Drawing Rights monetary reserves to member countries this summer and Ukraine is to get its portion of $2.8 billion with no conditions to meet.
What IMF wants
First, Ukraine must fix the crisis in the National Anti-Corruption Bureau.
In August 2020, the Constitutional Court ruled unconstitutional the 2015 appointment of bureau chief Artem Sytnyk, who is trusted by the West.
According to the court, hiring or firing the NABU chief is beyond the president’s jurisdiction. Sytnyk still has his job now.
The new law bill suggests granting the Cabinet of Ministers the power to appoint and dismiss the head of NABU selected by a special commission. The lawmakers approved it in the first reading but then went on recess. They will return to work in September.
Ustenko hopes the IMF will believe Ukraine’s promise that parliament will pass the bill.
“I understand that nowadays people do not have much trust in promises, but they have our word that the NABU issue will be solved after it is agreed within the country, then with the Venice Commission and international partners,” Ustenko said.
Fursa does not think the IMF will be convinced.
“The thing is that we have betrayed the IMF’s trust so many times that it is unlikely they will do it,” he said.
The bill in its current shape undermines NABU’s independence because it may be used to fire Sytnyk before his contract expires in April 2022. There are no legal grounds for this, according to the watchdog Anti-Corruption Action Center.
Artem Sytnyk, the head of the National Anti-Corruption Bureau of Ukraine (NABU) speaks at the event called “Democracy in Action: Zero Corruption Conference” in Kyiv on June 8, 2021.
The IMF also wants Ukraine to finally select a new head of the Special Anti-Corruption Prosecutor’s Office (SAPO) which has been absent since its previous head Nazar Kholodnytsky resigned in August 2020 amid allegations of corruption.
The process stalled. Some members of the selection panel have been backing government-favored candidates, according to the anti-corruption activists.
Corporate governance standards are another demand, following the sudden dismissal of Andriy Kobolyev, the CEO of Ukraine’s state-owned oil and gas company Naftogaz on April 28.
His controversial firing worried the IMF so much, it had recalled its senior economist from Ukraine, Novoye Vremya magazine reported on April 30, citing its sources.
What Ukraine fulfilled
There are a few major breakthroughs. One is judiciary reform.
Part of it is reforming the High Council of Justice, the judiciary’s main governing body. The parliament gave foreign experts a decisive role in firing tainted members and hiring new ones.
The parliament also gave foreign experts a crucial role in creating a new High Qualification Commission of judges, a body that hires and fires judges.
On July 22, parliament sent these bills to Zelensky’s desk.
But some judicial experts are concerned that the legislation will not be implemented, as has happened in the past. In 2019, Zelensky signed a similar judicial reform bill but the High Council of Justice refused to carry it out.
Another step forward is Zelensky signing a law that introduces prison terms for officials lying in mandatory asset declarations on July 16.
In October, the Constitutional Court destroyed asset declaration legislation and stripped the National Agency for Preventing Corruption (NAPC) — tasked with checking declarations — of most of its powers. NAPC got its powers back in December 2020.
An activist protests in front of Kyiv’s President Hotel during the Congress of Judges of Ukraine which is to elect members of the High Council of Justice and the Constitutional Court, whom demonstrators suspect of corruption, as law enforcement officers guard the site on March 9, 2021. (Volodymyr Petrov)
Ukraine kept a few more promises to the IMF.
On June 30, parliament approved the law on the National Bank, increasing the responsibility of the bank’s management board and supervisory council for the decisions they make. Among other things, it expands the powers of the NBU to implement risk-oriented supervision, ensuring prompt response to deteriorating solvency and liquidity of the bank.
However, since early July, the National Bank of Ukraine has been experiencing a wave of resignations.
Over a dozen of its employees, including several department heads, left the office. They accused the central bank’s leadership of usurping power and suppressing consensus. Financial Times reported that Zelensky’s office was considering firing NBU governor Kyrylo Shevchenko, citing anonymous sources.
The independence of the central bank is important to the IMF, which sees the regulator’s reform of the banking sector as one of Ukraine’s biggest success stories.
Besides, Ukraine moved closer to fulfill IMF’s demand to lower the fiscal debt.
Ukraine’s fiscal deficit has increased from 2% of GDP in 2019 to 5.2% of GDP in 2020. The planned deficit in 2021 will be 5.7% of GDP.
However, the Ministry of Finance approved a budget declaration on July 20 aimed to decrease the fiscal debt to 2.7% in 2024.
It is yet unclear whether approving a budget declaration on lowering the fiscal debt will be enough for the IMF to give a green light for a money transfer.
The IMF also praised the long-awaited opening of the land market on July 1.
Even so, the list of Ukraine’s commitments to the IMF has 30 bullet points. The country did not manage to check off all of them.
