Ukraine announces commitments under new IMF program

Ukraine published on Dec. 20 part of its memorandum
with the IMF on its new stand by program, revealing its commitments under the
program and structural benchmarks necessary for its successful completion. That
document was almost immediately removed from MinFin’s website after its
officials learned that the IMF had not published its version of the document,
which should be published first. Therefore, the document can be only considered
as a draft memorandum, but we believe the IMF’s version won’t differ.

In general, Ukraine has committed to continue
implementing a weighted monetary policy with inflation targeting at flexible
exchange rates, implying the National Bank’s institutional independence. It
sets annual inflation targets at no more than 7% in 2019 and 6% in 2020. It
calls for continuing structural reforms, improving the business climate and
continuing fiscal consolidation, with the budget deficit-to-GDP ratio not
exceeding 2.25% in 2019.

Ukraine will have eight new structural benchmarks for
securing the next loan tranches. 1) The state regulator will have to increase
heating rates in line with rising natural gas prices for at least 95% of
heating companies by the end of 2018. 2) The NBU is committed to amending the
regulatory capital methodology for banks in order to eliminate excessive
related party lending by the end of 2018. 3) The NBU should use the necessary
measures to deal with banks whose CAR remains below the 10% norm by end-June. 4)
MinFin should start regularly reporting on the progress of bad loan recovery of
state banks, starting in March. 5) Parliament should approve a law to split the
State Fiscal Service into a separate Tax Service and Customs Service, both to
be subordinated to MinFin by April. 6) Parliament should approve a law
designating all authority to regulate financial markets to the NBU and State
Securities Commission. 7) At least 35 judges with perfect reputations should be
elected to the High Anti-Corruption Court, by April. 8) An audit of the
operations of the National Anti-Corruption Bureau should be completed by July.

The key prior action that Ukraine must remain
committed to in order to maintain IMF cooperation is hiking natural gas rates
for households and heating utilities by about 15% since May 2019.

Among other measures that are not structural
benchmarks, the government committed to work on developing land reform, to
complete the “big privatization” of three companies (the Indar pharmaceutical
firm, the Krasnolymanska mine, and the President Hotel) in 1H19 and to
privatize at least 500 “small privatization assets” by April.

Alexander Paraschiy: The list of
structural benchmarks and prior actions does not look difficult, so we see a
high probability that Ukraine’s cooperation with the IMF will continue in 2019,
and the country will receive at least one new tranche under the program next
year.

At the same time, we warn our clients that much in
Ukraine’s cooperation with the IMF will depend on the results of the
presidential elections this spring. If a liberal politician committed to
Western cooperation wins the election (Petro Poroshenko or Sviatoslav
Vakarchuk), further cooperation will very likely continue. If a populist
candidate wins (Yulia Tymoshenko, Volodymyr Zelenskiy or Oleg Liashko), the
chances for Ukraine to remain in the IMF program will be much smaller. Recent
polls suggest the populist candidates have stronger electoral support right now,
but in our view, the probability of a liberal president winning is still
realistic.