Ukraine, IMF reach staff-level agreement on first review of SBA

An IMF mission team and Ukraine’s authorities have reached
a staff-level agreement on policies under the Stand-by Arrangement, the IMF
reported in an Oct. 18 press-release. The head of the IMF mission, Ivanna
Vladkova Hollar, stated that the program’s focus is on: 1) sustainable fiscal
policy and reducing risks “from quasi-fiscal operations, including in the
energy sector”; 2) safeguarding NBU independence; 3) ensuring banks’ financial
health and reviving sound bank lending to the private sector; 4) tackling
corruption and pushing forward the judicial reform; 5) improvement of the
business environment and strengthening corporate governance.

Vladkova Hollar stated that “continued steadfast
implementation of strong policies” in the listed areas will allow the IMF
Executive Board to consider the first review under the SBA, expectedly in
November. Completion of the fist review would enable disbursement of USD 700
mln tranche. The IMF board will also consider Ukraine’s request for the
extension of the SBA program for six month (till end-June 2022).

Recall, the IMF started its remote review mission
under SBA on Sept. 21. The on-going SBA program was initiated in June 2020. It
foresees access to SDR 3.6 bln (USD 5.1 bln) funding in 18 months, split into
five tranches and four reviews. Thus far, Ukraine received only the initial
tranche of SDR 1.5 bln and passed no reviews under the program.

Alexander Paraschiy: The staff
mission’s review completion is encouraging, but not a surprising event. From
the fund’s press release, it is clear that Ukraine is yet to implement some of
the agreed tasks, including voting on some bills on the central bank, judicial
and anti-corruption reform, as well as on the state budget for 2022. Also, this
time, the IMF looks concerned about a potential quasi-fiscal deficit in the
energy sector, likely meaning prolonged imbalances in the electricity sector
and new risks for Naftogaz due to high gas import prices.

In addition to the execution risks related to
unfinished works, there is a risk that by November, the Ukrainian authorities
will make sharp moves to undermine the progress reached previously in key
IMF-sponsored reforms. That said, even though the staff-level agreement has
been reached, we see the likelihood of first review approval at the IMF board
level as slightly more than 50%.