Groysman still struggling with IMF on demand for gas price hike

Ukraine’s PM Volodymyr Groysman told MPs on July 6
that the Cabinet is continuing negotiations with the IMF on revising natural gas
prices for households, Interfax-Ukraine reported the same day. Groysman
admitted that he is not willing to hike gas prices, and would even like to
reduce them, but he has to “consider such factors, as the need to make budget
payments, service state debt and develop the economy,” according to Interfax.
“Now we are working with the IMF and our partners, and are discussing possible
approaches to resolve the issue,” Groysman told MPs, adding that he will inform
them about progress as soon as it is reached.

Recall, bringing gas prices for households to import
parity level (hiking the price) is among the three remaining requirements from
the IMF to approve the review of its EFF program with Ukraine and provide a
fifth loan tranche under the program. Ukraine promised to adjust gas prices a
year ago, and in March 2017 the Cabinet even approved a resolution stipulating
adjustment of prices to import parity as of October 2017, which enabled Ukraine
to pass an EFF program review and receive a USD 1 bln loan tranche from the IMF
in April. Since then however, the Cabinet has refused to implement its
resolution, keeping gas rates for households unchanged up until now.

The other two requirements being demanded from the IMF
are a parliamentary amendment to the law on the High Anti-Corruption Court and
MinFin taking measures to ensure that the 2018 budget deficit will not exceed
the planned level.

Alexander Paraschiy: Almost
three weeks have passed since the announcement of a clear To Do list
from IMF Managing Director Christine Lagarde, and yet Ukrainian officials
managed to implement only one of four items from the list. Failure to implement
all three items by the end of this week will make it practically impossible for
the IMF board to approve the fifth loans tranche by its August recess. That
means the tranche can be considered by the board only in September, at the
earliest. However, by that time, the IMF is likely to add a new requirement, as
tradition: a 2019 Ukrainian state budget with a deficit in line with IMF
commitments (the budgeting process starts in early September). If so, the IMF
won’t provide any tranche before official approval of Ukraine’s 2019 budget
(which, as tradition, is unlikely to be earlier than in December). In turn, in
December, it might be too late for the IMF to sign a memorandum with Ukraine’s
top officials, given that many of them could be out of office by the end of
March, when presidential elections are held. (That would not be enough time to
implement IMF requirements.)

All this suggests that if Ukraine does not reach any
deal with the IMF staff this week (or next week, at the latest), the chance to
get the IMF tranche under the existing EFF program (that officially expires in
March 2019) will be very low. The next program with the IMF (if any) will be
possible only in very late 2019, after planned parliamentary elections in
Ukraine. Failure to get the tranche from the IMF will mean no complimentary
loans from the EU (a EUR 0.5 bln tranche has been already approved,
but its disbursement is conditional on the IMF loan tranche approval) and from
the World Bank (up to USD 0.8 bln loan, as estimated by Ukraine’s central
bank).

So what we had expected  – and still believe –
to be rather simple remaining IMF requirements (law amendment, gas price hike)
has instead become a renewed risk of losing international funding in the amount
of up to USD 3.3 bln in 2018, as well as the risk that gross international
reserves will fall below three months of future imports already by the end of
this year. In turn, this may trigger a downgrade of Ukraine’s sovereign rating
in the short term.