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.