Ukraine Expects a New Loan From the IMF

Kyiv has made every effort to qualify for a new $14.9 billion loan from the International Monetary Fund (IMF), which it expects the IMF board to improve at the end of July. With no parliamentary or presidential elections on the horizon, and a victory in the upcoming local elections almost guaranteed for the ruling party by a new election law (EDM, July 16), the government took the liberty of taking such unpopular steps as cutting budget expenditure and increasing domestic gas prices. The IMF had long insisted on both measures. The loan will be a green light to other creditors and foreign investors. Also, Kyiv should be able to repay a $2 billion Russian loan, borrowed in June, without issuing Eurobonds as planned.

An IMF mission completed its work in Kyiv on July 3, and said that an agreement was reached with the government on an economic program to be supported by a 2.5 year $14.9 billion loan. “The goal of the authorities’ economic program is to entrench fiscal and financial stability, advance structural reforms, and put Ukraine on a path to sustainable and balanced growth,” the IMF said (www.imf.org, July 3). The new loan is to replace the $16.4 billion loan approved in 2008 which helped the Ukrainian economy stay afloat in 2009 when GDP plummeted by 15 percent. The IMF board is expected to approve the loan on July 28, according to Deputy Prime Minister, Serhy Tyhypko, who liaises with the IMF (www.podrobnosti.ua, July 14).

In order to qualify for the loan, Ukraine was asked to cut the 2010 state budget, pass legal amendments aimed at diminishing political influences on the Ukrainian Central Bank (NBU) and improve the financial position of Naftohaz Ukrainy, the state-controlled oil and gas company whose deficit amounted to 2.5 percent of GDP in 2009 (www.imf.org, July 3). It is unclear whether the IMF continues to insist that Ukraine should increase the pension age for women from the current level of 55 to 60 years of age. The content of a new memorandum with the IMF, which the cabinet approved on July 14, remains undisclosed.

The cabinet enjoys the support of a solid majority in parliament, consequently it took the latter less than one week to approve the required measures. On July 8, parliament passed a cabinet-drafted plan to cut the 2010 state budget deficit to 5 percent from 5.3 percent. In particular, investment programs, spending on pensions and highways and the defense budget were cut (1+1 TV, July 15). On July 9, legal amendments increasing the NBU’s independence from political control were approved. As a result, the NBU council, which includes representatives from political parties, will be unable to veto the NBU board’s decisions. Moreover, the NBU will no longer issue loans to finance state budget spending, which the government obliged it to do last year (UNIAN, July 9).

Finally, on July 13, the National Energy Regulation Commission increased the price of gas for households by 50 percent from August (www.nerc.gov.ua, July 13). Other utilities, such as hot water, will also become more expensive. As a result, Naftohaz’s deficit should not exceed 1 percent of GDP in 2010, and fall to zero in 2011. In 2009, the government only grudgingly agreed with the IMF that domestic gas prices should be increased. Such an increase was viewed as damaging for the presidential campaign of the then Prime Minister, Yulia Tymoshenko. Eventually a planned increase in the gas price for households was opposed by trade unions and invalidated by the courts. This should not be repeated in 2010, as the court system is under the informal control of President, Viktor Yanukovych’s team.

Ukraine should now receive hundreds of millions of Euros in assistance from the EU, which was contingent on the IMF decision, and additional loans are expected from the World Bank. On July 6, the Fitch rating agency reacted to the news of the agreement with the IMF by upgrading Ukraine’s rating by one notch to “B.” Despite this, the Finance Ministry after conducting road shows in Europe and the US from July 6-13, dropped its plan to issue ten-year Eurobonds worth $2 billion. The original plan was to use the proceeds to repay a $2 billion loan which was received from Russia’s VTB bank in June. Tyhypko said that the Russian loan will be repaid from the IMF loan (Kommersant-Ukraine, July 5).

Reports of an accord with the IMF strengthened the national currency, enabling the NBU to continue buying on the foreign currency exchange market (forex). Therefore, its reserves reached $30 billion by July 16. Valery Lytvytsky, chief adviser to the NBU governor, Volodymyr Stelmakh, said the reserves should continue to grow in July (UNIAN, July 16). If Ukraine receives the IMF loan’s first tranche in August, as the government expects, the reserves should reach pre-crisis levels. This will depend on the size of the tranche, which is yet to be determined.