IMF, Ukraine agree on 12 new structural benchmarks on Stand-By program

The IMF published on Nov. 24 an updated memorandum on
economic and financial policies following completion of the first review of the
Stand-By program. Recall, following the review, the IMF board decided to
provide a USD 700 mln loan tranche for Ukraine and extend the program from
December 2021 to end-June 2022. The published memorandum foresees that the
program will have two more reviews upon the completion of which Ukraine will be
able to count on loan tranches of SDR 500 mln (USD 700 mln) and SDR 1100 mln
(USD 1550 mln), respectively. Ukraine has taken 12 new commitments (structural
benchmarks), including six (with a deadline of end-2021) needed to complete the
next review under the program.

The structural benchmarks touch the fiscal area (2),
banking sector (6, including corporate governance, supervision and recovery of
NPLs/losses), electricity (1) and natural gas (1) markets, as well as the
judiciary (1) and anti-corruption (1).

In the fiscal area, those are: i) approval of next
year’s budget with a deficit of 3.5% of GDP, ii) completion of the audit of the
remaining portion of the funds spent out of the Covid-related spending program
(an unmet benchmark from the previous review).

In the banking sector: iii) design of an action plan to
improve the professional capacity of bank supervision by the central bank.
Also, two commitments have been taken on in attempts to recover the bank’s
assets and losses inflicted by failed banks: iv) adopting a comprehensive asset
recovery strategy and action plan involving assets of banks and the Deposit
Guarantee Fund, v) the Prosecutor General’s Office publishing a semiannual
report on the outcomes of criminal proceedings against former failed bank
owners, managers and other related parties. In addition, a lot of tasks are to
be implemented in regards to state-owned banks: vi) amending laws to “reverse
the relaxation of eligibility criteria for state representatives to supervisory
boards,” vii) adoption of a succession plans for the banks’ supervisory boards,
viii) developing of a roadmap to decrease state ownership in Privatbank and
Oschadbank.

In the energy sector: ix) developing a consumer
database with all the information necessary for a new natural gas supplier to
bill households, x) appointing a supervisory board of the biggest power
producer, Energoatom, with a majority of independent members.

In the anti-corruption and judiciary area: xi) improve
the selection procedures for the officials of the Specialized Anti-Corruption
Prosecutor’s Office, strengthen its capacity and independence, and xii) make a
one-off integrity check of existing members of the High Council of Justice, the
main courts’ oversight body.

Alexander Paraschiy: All the
provided structural benchmarks look adequate, while some of them look
surprising, e.g. the commitments taken by the Prosecutor General’s Office are
something new, as well as the IMF’s attention to corporate governance in
Energoatom. Also, is it surprising to see that the IMF is so straightforward in
declaring its dissatisfaction with the “professional capacity” of the central
bank’s supervision wing.

The action plan does not look impossible, but taking
into account Ukraine’s recent poor history of plan implementations, we are very
skeptical of the government’s ability to pass any of the next scheduled reviews
of the Stand-By program. Moreover, as we highlighted before, there is always a
risk that the government will undermine any of the multiple achievements under
the previous programs which will result in a delay with program reviews. All in
all, our base-case scenario is that Ukraine won’t be able to approve any new
tranche under the existing program before it expires in June.