Will cooperation with IMF be put off pause

Viktor Suslov
20:30, 13 September 2017
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Opinion

All IMF missions come to Ukraine with a single goal - an analysis of the implementation of the program of cooperation between the country and the International Monetary Fund, which is signed and reflected in the relevant Memorandum, as well as the revision of this program. Following such visits, based on the mission’s recommendations, the IMF Executive Board decides whether to provide the next tranches of IMF loans or not.

As we know, now Ukraine is in a situation when cooperation with the IMF is once again put on pause. This is due to the fact that Ukraine does not fully implement the mentioned program.

There are several important issues that will obviously be discussed during the visit of the IMF mission to Kyiv.

The main one, undoubtedly, is the coordination of the main positions of the draft law on the state budget of Ukraine for 2018, which should be submitted by the government of Ukraine to the Verkhovna Rada until September 15, - from the agreement on macro indicators laid down in the budget calculations to the volume of the budget deficit, features of the fiscal policy and priorities of budgetary financing.

Now Ukraine is in a situation where cooperation with the IMF is put on pause

Another important issue on the agenda is the adoption of a law on farmland circulation. This law has long been mentioned in the program of cooperation with the IMF, and Ukraine had to adopt it until the end of last year, then the terms were postponed until the spring of 2017, and recently there have been reports that the IMF lifted the requirement to pass the law.

I think (it has not been formally announced, but it seems to be the case) that the IMF simply proceeds from the actual situation, namely, that the moratorium on farmland sale, which has been in effect in Ukraine for 16 years, ends on January 1, 2018. So the moratorium will soon exhausts itself. And, consequently, after January 1, the government will be able to make decisions to set up farmland sales. Apparently, in order not to create public tensions, they decided to choose the path providing for the problem to be resolved by itself. Although, of course, there are forces in the Verkhovna Rada that will be interested in extending the moratorium, but I think the IMF will warn all branches of the Ukrainian government that such a scenario would be unacceptable.

The rest of the reforms still need to be carried out, since Ukraine has undertaken such obligations. Thus, the pension reform was adopted in the first reading, and in the near future it should be adopted as a whole. The key issue here is the reduction of the Pension Fund deficit. According to data published and as the Minister of Finance said, the Pension Fund deficit is planned to be cut to UAH 141 billion. Frankly, I'm not sure that the IMF will accept such a result. It seems to me that the IMF will insist on a more stringent pension policy related to a clear perspective of pulling the Pension Fund toward deficit-free operations. It is clear that this will be done not at once and not within a year, but gradually. But the pace of deficit reduction should be higher. All this, for sure, will be subject to negotiations. In addition, the issue of the appropriateness of introducing a mandatory funded level of the pension system will also be discussed.

It seems to me that the IMF will insist on a more stringent pension policy related to a clear perspective of pulling the Pension Fund toward deficit-free operations

Also, the IMF is, of course, interested in and approves of Ukraine’s ongoing healthcare reform. The reform will ultimately also lead to budgetary savings and, most importantly, it should open for Western capital the market of healthcare services. That is, the sphere of paid services should be expanded. Actually, this is inherent in the very concept of healthcare reform, which has already been approved by the Verkhovna Rada. Starting with the level of specialized care, it is planned to introduce in Ukraine fully paid healthcare. All of this will also be discussed and clarified.

Education reform is also important in this regard, in particular, the adoption of the law on education, which should streamline budgetary spending on secondary education and, probably, to some extent lead to savings. In the sphere of higher educationб the IMF requirement to reduce the number of higher education facilities from more than 800 to about 300 was widely discussed a year ago. There will be discussion as to how effectively this is being implemented and whether the task will be completed.

The issue is not completely clear of further gas price increase for the households, but it will also be on the agenda. Such a decision was initially planned to be taken initially with reference to the IMF, but recently Prime Minister Groysman stated that the government would not take steps toward a further increase in gas prices for the population. But, obviously, this issue should be seriously discussed by the government and IMF.

Another important topic for discussion will be the implementation of the program of privatization of state-owned enterprises, which has been failing lately, causing significant losses to the state budget.

And, of course, IMF demands are important that are of a political nature. In particular, it’s about the creation of an anti-corruption court. The relevant projects are either being prepared or have already been, and, obviously, the condition for providing further financing will be the adoption of a law on anti-corruption courts.

I do not think that all decisions will be taken quickly. I suppose that they will be discussed more than once. And I do not expect that until the end of the year Ukraine will be able to receive at least a single IMF tranche. At least, this is hardly possible until the final adoption of the law on the state budget for 2018. However, it should be noted that the Minister of Finance in his recent interview stated that by the end of the year he considers it possible to receive as much as two tranches from the International Monetary Fund. In my opinion, the position of the Minister is excessively optimistic.

And, of course, IMF demands are important that are of a political nature. In particular, it’s about the creation of an anti-corruption court

In the near future, the Ministry of Finance should prove its effectiveness by whether it is able to place on the terms favorable to Ukraine the next batch of Ukrainian Eurobonds (Ukraine is trying again to switch to borrowing in foreign capital markets, which is very important given the increasing payments on external debts, especially in the next year). This issue is also expected to be discussed.

These are the main issues that will be on the agenda of the IMF-Ukraine talks, aimed to agree on Ukraine’s policies.

Meanwhile, it would obviously be appropriate to recall that the tensions in the foreign exchange market are growing. The hryvnia is subjected to very strong pressure. There has been quite a significant devaluation in recent weeks, and there is a high probability of further depreciation. If this is the case, then the inflation rate will be significantly higher than the forecasts told us. The budget is already seeing some growing imbalances. In general, in this situation, Ukraine will have to make further serious concessions and tighten its policies associated with additional pressure on the living standards of the Ukrainian population.

Viktor Suslov is a former Minister of Economy of Ukraine

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