IMF loan for Ukraine faces delay over budget, media report

The IMF, which currently is in negotiations with
Ukrainian leaders to extend the next loan tranche, declined to comment on Sept.
20 on the progress of these talks, scheduled for Sept. 6-19.  The
negotiations are continuing between the mission and state officials in Kyiv,
IMF Communications Director Gerry Rice told his biweekly press briefing in
Washington on Sept. 20. “I don’t have any further details on the
discussion,” he said.

At the same time, local media provided worrying
details. Despite the IMF and Ukraine having nearly reached agreement on the key
outstanding issue, natural gas price hikes for households, a new issue has
emerged that may prevent the loan tranche from being extended this year.

Namely, IMF officials said the program’s successful
review must involve Ukraine’s full approval of the 2019 state budget, the
Ukrainian News agency reported on Sept. 20. That demand, unexpected by
Ukrainian officials, was confirmed by other local and international media the
same day. Approval of the budget is traditionally concluded in December, which
implies the IMF is unlikely to provide any tranche in the next three months, Ukrainian
News concluded.

Meanwhile, the agreement to revise gas prices involves
a 23.5% hike as of October, according to Ukrainian News, and “about 25% in
the current heating season,” according to the rbc.ua news site, without
offering details. Among other issues discussed with the IMF, the Ukrainian
government asked the fund for permission to use some of the proceeds from the
next tranches to finance the budget, rather than using them exclusively to
stabilize the nation’s gross reserves, Bloomberg News reported on Sept. 20.

Alexander Paraschiy: The IMF’s
demand to see the approved 2019 budget with an acceptable deficit is a newly
introduced requirement in the talks, but we warned about the risk of such a development
in case the next tranche is not approved by Sept. 15, when the budgeting
process starts. The requirement is fully logical, given that state deficit
parameters are of top priority for the fund’s loan program. It’s also logical
given Ukraine’s history of failure to fulfill commitments soon after receiving
IMF money.

Clearly, the budget requirement is negative news for
Ukraine, as much of government’s 2H18 foreign currency proceeds are linked to
the IMF’s program approval (including about USD 1.4 bln in loans from the EU
and the World Bank and about USD 1.5 bln in proceeds from sovereign Eurobonds).
In other words, without the tranche’s approval, Ukraine’s end-2018 foreign
currency reserves could be up to USD 4.8 bln below the National Bank’s plan and
significantly below the key threshold of three months of imports.

Under these new conditions, Ukraine must approve
the 2019 state budget quickly, possibly in October, in order to maintain
financial stability. Alternatively, President Poroshenko may try to persuade
IMF top management to ease the budget requirement at a possible meeting next
week when he visits the U.S. for the UN General Assembly.