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Successful IMF review unlocks USD 1.4 bln tranche for Ukraine

Successful IMF review unlocks USD 1.4 bln tranche for Ukraine

21 July 2014

The IMF mission to Ukraine concluded on July 17 its first review of the stand-by arrangement (SBA) with Ukraine, offering a positive assessment. Thissuccessful review at the staff level, which is still subject to approval by the executive board, unlocks the disbursement of the planned second tranche, worth USD 1.4 bln, IMF officials said.

 

“The mission found that policies have generally been implemented as planned and that all but one of the performance criteria for end-May have been met. All structural benchmarks for the first review have been met as well, although some of them with a delay,” Nikolay Gueorguiev, mission chief for Ukraine, stated on July 18..

 

The IMF revised its 2014 GDP forecast for Ukraine to -6.5% from -5.0% previously due to the war in the eastern regions. The conflict is also pushing fiscal and quasi-fiscal deficits and financing needs beyond the program, “notwithstanding the authorities’ continued commitment to the program and good record of implementation so far,” Gueorguiev said. The authorities decided to cut public spending further on and also committed themselves to limiting wage and pension increases to 2015 projected inflation levels. The IMF also agreed to ease program targets on state debt, gross reserves and the budget deficit in light of the ongoing war.

 

Alexander Paraschiy: We offer three major conclusions from this review. Firstly, it’s highly probable the IMF will provide the next USD 1.4 bln wire to Ukraine. Secondly, Ukrainian authorities did not ask for extra financial support but rather preferred to adjust state spending (the Cabinet is discussing a near UAH 40 bln spending cut). Thirdly, the IMF and Ukrainian authorities decided to protect themselves by amending program targets since the situation is poorly predictable in light of the war.

 

In general, the outcome is positive for Ukraine. The economic situation might worsen further on because of the war but cooperation will continue, the Cabinet has confirmed its commitment and the IMF even has noticed some progress in reforms.

 

The lowered GDP forecast might be a signal that the situation is worse than we expected. The Cabinet and the Fund should know more than other observers. However, so far the macro data we have access to does not look that pessimistic. In particular, to make GDP fall 6.5% yoy in 2014, the declining rates between 2Q-4Q14 should be more than 8% yoy on average, which is a very strong decline, especially in view of the fast-shrinking C/A deficit, which should prevent GDP from slumping too deep.

 

Against this backdrop, we are more inclined to see in the program target revision a preventative move in a volatile situation to minimize the risk of a further downward revision of macro indicators in the future. And this conservative approach is very positive, especially when it comes to achieving fiscal policy targets.

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