Gunter Deuber, Head of Economics/Fixed Income/FX Research at RBI and Sergii Drobot, Senior Analyst at Raiffeisen Bank Aval  discuss the current status of relations between Ukraine and the International Monetary Fund (IMF).

Kiev. Ukraine.

There are countries that rarely turn to the IMF, others are serial borrowers. Ukraine belongs to the latter. Over the last 25 years, Ukraine received IMF disbursements in 15 years, which translates into an “IMF coverage ratio” (years with IMF disbursement/total number of years) of around 60 per cent.

Ukraine – a serial borrower

Hardly any European country had to turn to the IMF more often, a reflection of two major aspects. Firstly, Ukraine faced numerous existential economic crises driven by external shocks and an unsuccessful transition into a functioning market economy. Secondly, frequent IMF support was needed as previous agreements went off track habitually. Key (structural) reform conditions were not implemented. Therefore, the standing IMF support (signed 2015, running until 2019) represents a fundamental litmus test. A successful completion would be a signal that things are changing. Future turns to the IMF could be eventually avoided in such a scenario as well.

Although the current IMF programme is going into the third year and thus IMF cooperation is lasting substantially longer than observed in the past, Ukraine seems to be in a very hazardous phase at present. Economic indicators are improving; immediate external funding needs are moderate. This holds especially true in the aftermath of the most recent successful return to international capital markets (with an USD 3 bn placement), which has helped to smoothen the external debt redemption profile and has reduced near-term macro-financial risks substantively. As IMF support is not desperately needed there is definitely a risk that IMF cooperation may go off-track. Nevertheless, currently we still see policymakers working hard in fulfilling IMF conditions, while in some areas (energy, banking sector or central banking) we have already seen decisive restructuring since 2015.

Ukraine on track with current IMF programme

Moreover, in early October the Parliament approved a pension reform bill. However, hundreds of amendments were added to an IMF approved draft, partly diluting the attempt to overhaul the deeply loss making pension system. Nevertheless, with the pension reform advanced, Ukraine moved one step closer to the next IMF tranche – the fourth review may be accomplished and the fifth tranche could be released still in 2017, with a delay of several months to the schedule. Moreover, it seems that the IMF is not pushing Ukraine too hard. The topic of land reform has been shifted to next reviews. IMF clearly expressed its focus on pension reform, solid fiscal and energy sector policies, speeding up privatization and concrete results in anti-corruption efforts. Recently, the President signed a law “On the Constitutional Court” which may count as an anti-corruption step. Given experience with previous IMF reviews privatization seems not to be a condition, where swift progress is expected and in most other fields Ukraine seems to be on track currently. Most recently, some quarrels about the future calculation of gas prices between the Ministry of Finance and the IMF emerged and could be relevant for the next disbursement. With energy prices having been increased many times over in recent years, the issue is socially highly sensitive.

Still a long way to go

The topic of early elections remains and political rivalries are heating up. Usually such a situation does not bode well for structural reforms and we may also see some anti-IMF propaganda going forward, while the budget for 2018 has to be prepared in the months ahead. Hence, certain noise shall be expected in IMF relations, while it is hard to predict whether Ukraine will really manage to complete the full IMF programme. However, this time around we see strong self-interest of the IMF to stay on board. The Ukrainian programme is prominently highlighted in the context of an increasing IMF focus on governance issues (incl. corruption). Given the strong interest of Ukraine and the IMF to finish this programme there is a fair chance that the country may see some years without IMF support after 2019 and finally the “IMF coverage ratio” of Ukraine may gradually inch closer to a level of peers. However, no swift convergence should be expected here. In order to reach Romania’s IMF coverage ratio, Ukraine would need 15 years of no IMF support from 2019 onwards.

Gunter Deuber, Head of Economics/Fixed Income/FX Research at RBI

Sergii Drobot, Senior Analyst at Raiffeisen Bank Aval