EU proposes EUR 1.8 bln in extra macro-financial aid

The European Commission has proposed a new round of macro-financial assistance (MFA) to Ukraine of up to EUR 1.8 bln in medium-term loans, the European Commission reported in its Jan. 8 press release. The new MFA program, which is to be approved by the European Parliament and the EU Council of Ministers, is intended to help the Ukrainian government address its weak balance of payments and fiscal situation. It’s also intended to help the new reform-oriented government strengthen the country and deal with economic and political challenges.

Once the MFA is approved, a prerequisite for disbursement will be the successful continuation of Ukraine’s current IMF program and implementation of economic and financial reform policies, the release said. The policies that the Commission considers to be important include further fiscal consolidation, continuing comprehensive reforms in the energy and banking sectors, as well as improving overall macroeconomic management. It will also be important to strengthen economic governance, transparency, judicial reforms and the fight against corruption in order to improve conditions for business activity and sustainable growth.

The proposed new EUR 1.8 bln programme can be implemented in 2015 and early 2016. It would be the third MFA program for Ukraine since 2010. In the course of 2014 alone, the Commission disbursed EUR 1.36 bln in support for Ukraine under existing programs. The disbursement of the final tranche of EUR 250 mln under these programs could be expected by the spring of 2015, subject to the successful implementation by Ukraine of agreed upon policy measures and a continued satisfactory track record with the IMF program.

Alexander Paraschiy: Unfortunately, we cannot view this commitment as a positive signal in the context of the current IMF negotiations. IFIs perfectly coordinate their actions with the IMF and in this case, the European Commission once again emphasized that compliance with IMF requirements is critical for this support. The IMF’s main demand currently is to see a realistic 2015 spending plan. Recall on Dec. 29, the authorities approved an overly optimistic 2015 budget, which heavily relies on hryvnia printing. The prime minister has promised to revise its spending plan according to recommendations offered by the IMF mission, which arrived in Kyiv on Jan 8. We believe the Fund will maintain its tough requirements on realistic revenue targets and substantial spending cuts to narrow the general fiscal gap to 5.8% of GDP, compared to the 8.8% of GDP target approved by parliament.