IMF remains firm on anti-corruption court, gas demands to Ukraine

After “a small staff team visit” to Kyiv last week,
the IMF issued comments to media highlighting the need to approve legislation
on creating the anti-corruption court in accordance to Western standards in
order to get the next tranche under the current program, the ukrinform.org news
site reported on Feb. 19. “It is now important that the authorities move
expeditiously with parliamentary consideration of the draft law on the
anti-corruption court, while ensuring that the necessary amendments are adopted
during the parliamentary process to make the approved law fully consistent with
[the IMF’s EFF] program commitments and the recommendations of the Venice
Commission of the Council of Europe,” the press release said, citing IMF
Resident Representative to Ukraine Goesta Ljungman. He said that other
outstanding issues remain in the energy sector and fiscal policy.
“Discussions will continue in the coming weeks,” he said.

Regarding energy sector issues, the IMF is referring
to the government’s unfulfilled commitment to adjust prices for natural gas for
households and heating companies in line with the import parity principle,
which should have happened in October 2017, based on the Cabinet’s resolution
adopted in March 2017. PM Volodymyr Groysman firmly opposes hiking natural gas
prices for households, according to the Ukrainian News agency, and the Cabinet
is now trying to offer the IMF some alternative proposal to price natural gas
that will avoid a significant (about 30%) one-time price hike required in the
coming month.

Regarding fiscal policy issues, the IMF is concerned
about the government’s ability to meet certain budget proceeds targets assumed
in the 2018 state budget, according to epravda.com.ua reports. Questionable
items include dividends from state companies (UAH 34.8 bln, or 3.8% of planned
central budget revenue and 43% of its planned deficit) and proceeds from
privatization (UAH 22.5 bln, 2.5% of revenues, 28% of deficit).

Another fiscal issue being considered is UAH 70.9 bln
in subsidies foreseen by the state budget, which the IMF is waiting for Ukraine
to verify, according to the rbc.ua news site. Such verification (optimization)
could become useful if Ukraine adopts higher gas prices for households, which
will raise the government’s expenditure on subsidies.

Alexander Paraschiy: The IMF’s
top priority is that Ukraine approve legislation to create an independent High
Anti-Corruption Court in line with the recommendations of the Venice Commission
of the Council of Europe. Natural gas pricing and related aspects of fiscal
policy are also important, but finding a compromise on these issues won’t be
worth anyting wihotut the court legislation.

The two core issues, court and gas, are under the
control of the president and PM, respectively, and both are avoiding them.
Therefore, there is a risk that they will not hurry to resolve these issues and
will blame another party in lack of progress with the IMF, which the president
started to do this weekend by shifting blame to the parliament. That may
eventually lead to the failure of the IMF program. So far, however, we remain
positive about politicians’ ability to find common ground with the IMF and pass
the fourth review under the Fund’s EFF program in 2Q18.