So Ukraine’s minister of energy and coal, Ihor Nasalyk, confirmed today what we all kind of had assumed: That the Ukrainian government is not going to hike gas prices as per the prior agreement with the International Monetary Fund, reached in April, during the third review of the $17.5 billion loan program through the end of 2018.
Nasalyk indicated that on the Ukrainian’s government’s calculation method – which seems to be different to that previously agreed with the IMF, there is no longer a justification for gas price hikes. This has been the message for some months now from various ministers in the government, and suggestive that the President Petro Poroshenko administration is increasingly focused now on elections due in 2019, or earlier, and less willing to toe the line on the IMF programme.
I doubt the IMF will be too thrilled with all this – nothing worse than going back on prior agreements, and having already drawn and spent the IMF cash “on a promise,” and this means little chance now of an IMF mission to start work on the fourth review of the loan program, under which more than $8.5 billion has been lent already, this side of the IMF meeting towards the end of next week.
This session in Washington, D.C., seems to be shaping up now to something of a high noon event, with the IMF likely wanting to know where all this leaves their program – is the government serious now of continuing with the reform effort, or just playing the IMF, and the markets, for fools? If no gas price hikes, what about pension reform, the anti-corruption agenda and also land reform, plus still no confirmation of a new National Bank of Ukraine governor, with Yakov Smoliy presumably still heading to Washington, D.C., in acting capacity?
Or maybe Poroshenko will throw a bone therein to IMF managing director Christine Lagarde, having dropped the previous “anointed” candidate, the IMF favorite, Volodymyr Lavrenchuk? Smoliy is a good guy, but not the “promised” Lavrenchuk.
I guess good context herein is provided by budget data for the period to the end of August.
This showed a record surplus of Hr 38.5 billion, up from the deficit of Hr 42.9 billion for the year earlier period. For the period January through August, revenues were 46.1 percent higher, and spending up by “just” 21.3 percent. Revenues seem to have been boosted by real GDP growth, above plan inflation, increased tax compliance and NBU profits, Naftogas dividend transfers, et al.
All this meant that the single treasury account had around Hr 60 billion in the bank, with another $1 billion at least at the NBU, plus proceeds of the recent Eurobond issue. This is a hefty war chest, and with the recent re-establishment of market access, Ukraine is no longer forced to go cap in hand to the fund – it has leverage, and I guess the risk is that the Poroshenko government no longer has to follow the IMF script.
It can play hard ball with the fund, and likely has the cash now to partake in some substantial fiscal pump priming this side of elections – or at least until the next crisis hits.
I think that is a shame, as it likely means that key structural reforms will be put on the back burner, in the short term electoral interests of the Poroshenko administration. It’s a shame here as: first there seems to be a window in the east, with Russia on the back foot, to push on with difficult reforms; second, these reforms should make a meaningful impact in the country’s long-term growth prospects, and particularly scope for inward investment.
But I guess we have been here many times before in the 26 years since Ukraine became independent.
Not sure what the IMF can do, when a member/lender is intent on just going through the motions, trying to keep the IMF and markets’ warm, but stalling on pushing on with reform. We have been there so many times in the past with Turkey in 2009-2010, Hungary 2011, Zambia now and Ukraine back in 2011-2013, et al, et al.
