KYIV – Ukraine has tapped new funding from the International Monetary Fund (IMF) that could shore up its finances through 2019 while avoiding a liquidity crunch amid simultaneous presidential and parliamentary elections taking place next year.
A new lending program was brokered on October 22 with the Washington-based lender worth $3.9 billion. It replaces a previously existing agreement (that would’ve expired in March 2019) worth more than four times as much that stalled in April 2017 because Kyiv wasn’t meeting reform benchmarks.
Two billion dollars is expected by year-end, posited economist Anders Aslund in a blog for the pro-democracy policy center Atlantic Council that was published on the same day.
“This agreement is of vital importance and very much needed now. First, it will grant Ukraine sufficient international financing until the end of 2019,” Mr. Aslund wrote. “Second, it will help the Ukrainian government to pursue sound economic policies. Third, it will keep the Ukrainian economy stable during the 2019 election year with the presidential election slated for March 31 and parliamentary elections in October.”
An additional $1.2 billion most likely will be unlocked from the European Union as macro-financial aid. Another $800 million will come from the World Bank as loan guarantees. Both financing plans were contingent on Kyiv’s further cooperation with the IMF.
Ukraine’s Finance Ministry is already on a roadshow to offer five- to 10-year eurobonds to private creditors to raise another $2 billion, but at a dearly high rate of 9 percent.
“Thus, $8 billion or so of additional government borrowing is probable. Given that Ukraine’s public debt has shrunk to 62 percent of GDP [gross domestic product], the additional public debt raises no concerns…” Mr. Aslund said.
Before the new loan program, Ukraine worrisomely had only $16.6 billion in foreign currency reserves as of October 1 – enough to cover less than three months of imports.
To clinch the renewed IMF lending program, Kyiv had to raise household gas prices to cost-recovery levels, get a newly established anti-graft court functioning and pass a palatable national budget for 2019.
Ukraine will start enforcing the politically unpopular household gas price raise on November 1. It will spike only by 23.5 percent, which is still about twice lower than the 60-percent increase that would reach market levels.
“The hike was the product of a compromise with the IMF, which had reportedly demanded a 60 percent increase in view of a much higher market price level,” Kyiv-based investment bank Dragon Capital wrote in a note to investors.
At a Cabinet meeting this week, Prime Minister Volodymyr Groysman said there “was no alternative than for us to act absolutely responsibly. Without international partners, “we’ll be in
a situation where we can’t service the debts accrued by our predecessors.”
Given that the average monthly salary is less than $400, Mr. Groysman said this week that 7 million households, or nearly half the nation’s 42 million people, will receive subsidies for their new gas bills.
Speaking on local ICTV channel on October 22, he said the government couldn’t raise prices to market level “because it is unacceptable for Ukrainian citizens,” regarding low household income levels.
Mr. Groysman added that in the future “everything will depend on world prices for gas as a whole and on the import parity.”
Another lending pre-condition was to keep the nation’s GDP deficit at 2.3 percent in next year’s state budget. The Verkhovna Rada met the benchmark last week while voting for the financial plan in one of two required readings.
“The legislative deadline for the second reading is Nov. 20, but it could be delayed,” the Dragon Capital note read. “The budget draft may also undergo substantial revisions between the first and second readings…”
Still, Ukraine’s long-term fiscal outlook remains stable, said credit worthiness agency S&P in a report on October 19.
The agency said that its assumptions are based on Kyiv being able to draw on the $3.9 billion lending program, which has “a less demanding structural reform agenda” that should make it possible for “broad compliance with program requirements.”
In Kyiv-based investment bank Concorde Capital’s assessment, S&P’s statement is “supportive for the government’s intention to raise money from an international eurobond placement in the coming days.”
Ukraine is still Europe’s poorest country in GDP per capita terms. On that basis, each person’s economic output is worth almost $3,000 as part of a $128 billion economy, according to the latest IMF World Economic Outlook report that was released this month.
Later this year the IMF management and executive board will decide whether to approve the new $3.9 billion agreement with Ukraine.