The IMF gave money. What should Kyiv do?
After the IMF decided to give Kyiv another position, the parties attached documents estimating that programs had taken place in Ukraine during the six months of the current cooperation program, and the government undertook to complete it, which was supported until June 2022.
The nearly $ 700 million tranche, which was announced the day before, is only different during the program.
The first – more than $ 2 billion – will be received in June 2020 after the start of programs.
Since the IMF estimates, the negotiation process has been hampered and complicated by Kyiv’s failure to comply with the Memorandum of Understanding, reforms have stalled, and surprises such as the COP’s decision to unconstitutionally punish officials for declaring it have been unconstitutional.
As of now, two of the previous nine main promises have not been fulfilled. However, life in a year and a half has made adjustments, and in the program of cooperation with new accents.
Energy
The report focuses on energy.
“Connecting free progress in structural reforms, weak governance of large state-owned corporations in the sector, record increases in gas prices” have created physical risks in the energy sector (read – already put pressure on the budget), confirmed the IMF.
High gas prices, and hence heat prices, are forcing the government not only to increase subsidy spending to support those who cannot pay market prices.
To avoid raising tariffs for heating and hot water, by the end of the year the government will allocate UAH 1 billion to support municipal heat supply companies. Another UAH 11.4 billion will be allocated in the budget for 2022.
But even this is not enough to cover the difference between market prices and fixed tariffs. Therefore, it will be necessary to support municipal heating companies from all budgets.
Financial support will also be needed for the state-owned Naftogaz, which has offered some of its resources to heating companies at a fixed price. The IMF urges not to hide these expenditures, but to finance them transparently through direct transfers from the budget.
There will be no major changes until the end of the heating season, but after that the government must ensure that market gas prices are fully taken into account in heat tariffs, and gas prices for the population are not limited by artificial “marginal prices”, as in early 2021.
“We undertake not to resume the establishment of maximum gas prices for the population… Heat tariffs held by local authorities will be revised and will fully meet both market gas prices and other costs (including capital) as of October 2021 . Any deviations from the cost due to rising gas prices will be revealed through full and transparent subsidies from the state or relevant local budget, “said a letter to the IMF leadership Kristalina Georgieva signed by the Ukrainian president, prime minister, finance minister and NBU chairman.
At the end of March, changes in gas suppliers should be further missed, and consumers should have access to a common supplier base and bids.
The IMF calls on the Ukrainian government to finally stand up for antitrust law and to pursue a real separation of gas supply from everyone.
From May 2022, Naftogaz’s subsidiary Ukrgazvy has access to the open market with 40-50% of its production, so that this gas is available to all market participants.
The government will solve the problem for the producers of “green energy” by raising the tariff for electricity transmission. For 2020-2021, this debt has grown by about UAH 30 billion.
Do not create new debts, Energoatom, which will not be able to sell its electricity at market prices to perform such functions as Naftogaz in the gas market.
In parallel, accepted by the IMF, it is necessary to strengthen the management of Energoatom. They expect corporatization by law, which has been approved in December this year. By May 2022, the company already has its own independent supervisory board.
NBU, independence and inflation
Much attention is also paid to the National Bank and the preservation of its independence.
The IMF approves changes to the law on the NBU, which strengthen this independence, but emphasize the importance of implementing this law, as well as draw attention to “important personnel changes at the highest level of the NBU, which created operational risks.”
They remind that it depends on the independence of the National Bank what will happen to the economic and financial stability in the country.
Now the bank faces the task of adjusting inflation, which due to rising prices on world markets – especially energy and food, and immediate domestic demand has exceeded 10%.
Budget and public finances
The IMF is still positive about the government’s draft budget for 2022.
It is especially welcomed that its losses, ie the excess of expenditures over revenues, should not exceed 3.5%.
But they also remind that in order to “expand financial opportunities” the government planned to make changes to the Tax Code through the parliament, which gave additional income of 0.5% of Ukrainian GDP – about 30 billion hryvnias. Even before the summer holidays, deputies approved this project in the first reading. More than 11,000 amendments were submitted to the law before the second reading, its consideration in the parliament was postponed many times, and finally it was decided to postpone the consideration.
Ukrainian business is negative about this bill, believing that it increases the tax burden on entrepreneurs.
Traditionally, the IMF also reminds the Ukrainian government of tax loopholes in the simplified taxation system. Therefore, further delays with the introduction of cash registers for private individuals or any other action in this direction should not be expected.
The IMF says there are “mixed” impressions that Kyiv has finally liquidated the tax police and set up an economic security bureau. “It has not yet started working and there is a risk of the old staff moving into a new structure,” the report said.
“Beacons” on before the New Year and after
“Problems with the rule of law are among the main obstacles to the business climate (in Ukraine),” the IMF said, citing a number of steps that would make the judiciary stronger and judges more honest.
The Foundation is set to monitor how to implement changes to the law on the High Council of Justice, in particular, how the ethics council works. This “beacon” should work until April 2022.
The agreements with the IMF also stipulate that by the end of December this year, the government will publish a report on the use of coronavirus control funds, which exists in Ukraine in 2020.
The report was originally scheduled to be published in March, but was postponed. So far, it is known that the costs amounted to UAH 44.5 billion out of the total amount of UAH 66.5 billion, as well as the fact that a significant part of the funds went to the construction of roads.
Funds from the co-fund went to “medicine and social support, as well as public investment in roads to create jobs and compensate for weak activity in the private sector,” the government explained.
Risks for the future
Among the risks for the future, the document mentions:
- spread of infectious strain Delta at low levels of vaccination in Ukraine,
- escalation of the conflict in eastern Ukraine,
- conditions of the world economy and trade,
- high gas prices, which increase inflation and respect economic recovery after a pandemic.
Among the immediate risks in the IMF also mention the decision of the British court 3 billion “debt of Yanukovych” for the Eurobond issued by Russia. This decision should be made by the end of this year.
There is also the launch of the Nord Stream-2 gas pipeline, which, according to IMF estimates, will reduce Ukraine’s revenues from gas transit to $ 1.2 billion by 2024.
Ukraine has received about $ 2.5 billion from the use of its pipelines by Gazprom. through Ukraine it may decrease even more, and its revenues will be reduced to $ 1.2 billion a year, ”the IMF reminds.
They also do not rule out that the launch of Nord Stream-2 “may increase the vulnerability of Ukraine’s energy system.”