No IMF deal, new round in March
The International Monetary Fund’s mission to Ukraine has come and gone, and will return in March.
Experts, however, expect a deal no sooner than the end of April, when the end of the heating season will make raising gas tariffs – a key IMF demand – politically easier.
The IMF delegation has been in Kyiv since Jan. 29, discussing the possible renewal of a $15 billion lending program to help Ukraine deal with its record $9 billion debt repayments this year, two-thirds of which is owed to the international lender.
A previous $15 billion program was aborted in early 2011 after Kyiv failed to make good on its commitments, most importantly raising gas prices for household consumption.
This continues to be a sticking point, as the IMF has made clear that no new money will come unless Ukraine ends the expensive de facto gas subsidies to households. It is also asking for a liberalization of the currency regime (the hryvnia has been strongly pegged to the dollar), and more realism in macroeconomic planning.
There has been some positive news of late, most recently in the form of an announcement by President Viktor Yanukovych at the World Economic Forum in Davos that state gas behemoth Naftogaz will be unbundled and privatized.
Experts have for years complained about Naftogaz, which Andre Kuusvek, the European Bank of Reconstruction and Development Ukraine country director, once pithily described as “a huge drag on the state budget, a black hole in terms of where the financial management is concerned.”
The IMF did note that some progress is being made, with the mission chief Christopher Jarvis noting that “we have made significant progress toward reaching understandings with the authorities,” but adding that “important policy issues remain outstanding, and further technical work needs to be completed.”
He also pointed to the serious challenges facing Ukraine, which included a sharp slowdown in economic activity in the second half of 2012, a rapidly widening current account deficit and worsening fiscal account.
“Large subsidies on gas and heating for households continue to undermine Ukraine’s budget and its balance of payments. In the absence of corrective policies our forecast for 2013 is growth of 0-1 percent and a high current account deficit that leaves Ukraine vulnerable to shocks,” Jarvis wrote.
Timothy Ash, head of emerging markets research at Standard Bank, was blunter, writing that “there are still significant policy differences between the two sides … gas prices, foreign exchange policy and macro assumptions underlying the budget. The government is still banging the drum that real GDP growth can come in at 3 percent this year, which seems like ’pie in the sky’ at the moment, and the IMF at talking about nearer to 0-1 percent, which might even be a best case.”
The inconclusive results were expected by analysts after Ukraine hastily issued a $1 billion Eurobond in the middle of talks, enough to covering the bills falling due.
According to Olena Bilan, macro analyst at Dragon Caital, the lack of major redemptions until end-April (only $0.5 billion are due by that date), means talks and tough decisions could be further postponed.
“This gives the authorities some room for maneuver and suggests that the next round of negotiations with the IMF may be potentially postponed until early or mid-April,” she wrote in a note to investors, adding that the domestic heating season will be over by then, making a household gas tariff hike less painful for the population.