Yatsenyuk and Poroshenko: who wins, or is it more fun together?
The “Commander in Chief” has at its disposal the text of the Memorandum of the Ukrainian government with the International Monetary Fund, which should provide Ukraine with large-scale financing to save the economy
On March 11, the IMF Board of Directors will consider increasing financing for Ukraine, without which the state faces bankruptcy. The decision to launch a new four-year lending program – Extended Fund Facility – will be made by international financiers based on the package of economic reforms of the government of Arseniy Yatsenyuk, stated in three documents: a Letter of Intent, a Memorandum of Economic and Financial Policy, and a Technical Memorandum of Understanding. They were developed by the Cabinet of Ministers and the National Bank, and at the end of last week they were approved by President Petro Poroshenko, Prime Minister Arseniy Yatsenyuk, Head of the National Bank Valeria Gontareva, and Finance Minister Natalia Yaresko.
The full contents have not yet been made public – the Ukrainian authorities have granted the right to publish the Memorandum to the International Monetary Fund. Yatsenyuk did not even disclose its contents to his fellow party members, who asked about it at a faction meeting last Friday.
The “Commander in Chief” managed to obtain copies of this package documents.
A new four-year extended lending program (Extended Fund Facility, EFF) should replace the existing “stand by” program (adopted for the period 2014–2016). As IMF Managing Director Christine Lagarde noted, the new cooperation project should “support immediate macroeconomic stabilization measures, as well as broad and deep economic reforms over several years, to ensure economic and financial stability and the restoration of sustainable growth.”
EFF is larger and longer lasting than its predecessor. Instead of two years, the loan term increases to four, and the repayment of loan funds is almost doubled (up to 10 years).
Lagarde also previously stated that Ukraine could count on attracting $40 billion from various sources. The International Monetary Fund’s share of this assistance will amount to SDR 12.35 billion.
The Ukrainian authorities transferred the preliminary agreements to paper last week.
This is how the Ukrainian government formulated it in documents sent to the IMF:
1. Letter of intent to the International Monetary Fund.
“In order to implement reforms and adjust the economy, Ukraine has requested a new four-year agreement under the Extension Financing Facility (EFF) in an amount equivalent to SDR 12.34806 billion (900 percent of the quota and about 17.5 billion US dollars) and we intend to cancel our stand-by agreement 2014 – 2016 immediately before the conclusion of a new expanded agreement. Our international partners have pledged to provide additional funds to ensure full funding is achieved.”
The government guarantees through these means:
– ensure a low and stable level of inflation in a flexible exchange rate environment, while promoting the stable accumulation of reserves,
– improvement of the banking system,
– strengthening fiscal stability, while ensuring the capacity to finance social protection spending and investment in infrastructure,
– taking measures to eliminate the deficit of Naftogaz of Ukraine by 2017.
Large-scale structural reforms will play a decisive role, primarily, strengthening investment potential and economic growth through:
– implementation of public administration reforms, including anti-corruption and judicial reform,
– deregulation and reform of tax administration aimed at improving the business climate,
– reforming state-owned enterprises, restructuring Naftogaz of Ukraine and improving corporate governance.
2.Memorandum on Economic and Financial Policy – the main document sent to the IMF, including a more detailed statement of the economic program that the government intends to implement with financial support from the IMF and other donors.
Below, the “Commander in Chief” provides the most important information from this Document:
Development of the situation and forecast. Economic activity in the country decreased by 6.9%. In December 2014, industrial production, retail trade, and construction volumes continued to fall. It could bottom out in mid-2015. At the same time, the government hopes that in 2016–2018. economic growth is expected to recover and increase, the rate of which will reach 4% in the medium term.
Inflationary pressure will fall. By the end of 2014, inflation reached 25% as the hryvnia lost half its value against the dollar. Forecasts for 2015: inflation will remain at the same level. In the future, it should slow down sharply: to 10% in 2016 and to 5% in 2018.
The pressure on the balance of payments will decrease. Export volumes will decline in 2015. However, the government is confident that the economic reform program will make Ukraine attractive for investment and will restore access to the capital market. According to the plans of the Cabinet of Ministers, the current account deficit in 2016 – 2018. will stabilize at 1% – 1.5% of GDP and reserves will “gradually recover to a comfortable level.”
Monetary and exchange rate policy:
The government says it will stick to a flexible exchange rate regime as a buffer against external shocks.
The government is asking the IMF to maintain the right to foreign exchange restrictions and the practice of parallel exchange rates, which are currently used due to balance of payments difficulties.
The sale of foreign currency by the National Bank will be limited to facilitate external payments to the government, as well as to finance energy imports of NJSC Naftogaz of Ukraine and the Energoatom Corporation.
At the same time, the text contains a caveat: at the request of donors, the Ukrainian authorities are ready to abandon the practice of currency restrictions and the use of multiple exchange rates.
If the WTO does not support the temporary import surcharge introduced on February 25, 2015, the government is also ready to remove it as soon as possible.
In addition, IMF specialists are informed that the Ministry of Finance of Ukraine is working on prolonging the government’s domestic obligations in foreign currency. And the issue of extending the existing “swap” line is currently being discussed with the People’s Bank of China.
Changes in the National Bank
A change in legislation is expected, which will make the work of the NBU more independent and transparent. The role of the NBU Council will strengthen. The Bank’s autonomy will be ensured by strengthening the procedure for appointing and dismissing members of the Board and deputy heads of the board.
Financial Sector Policy
Strengthening the regulatory and supervisory system – to identify and reduce related party lending.
Unlimited liability of bank owners is introduced for losses from loans provided directly or indirectly to shareholders who own 10 percent or more (including shareholders who acted jointly) as of the end of 2014. In addition, the NBU will have the right to allow the existence of economically related relationships between banks and borrowers based on objective criteria.
To eliminate over-limit lending to related parties, legislative changes must be adopted by the end of spring to eliminate loopholes that could leave the possibility of bypassing credit limits for insiders.
By the beginning of June 2015, the 10 largest private banks will provide reports on the volume of lending to related parties. The next ten financial institutions will be listed by the end of July. The rest – until the end of September.
By the end of 2015, the NBU, with the technical support of the four largest audit firms, will analyze the reports of the first twenty banks on the volume of lending to related parties. And by April 2016, a report on all banks will be ready.
The state and the NBU will not interfere in bilateral negotiations between borrowers and banks regarding the restructuring of foreign currency mortgage loans. At the same time, if a law is passed forcing the conversion of foreign currency mortgages into hryvnia, the president will veto it.
Fiscal policy
All large taxpayers will be transferred to the Inspectorate for servicing large taxpayers.
By 2017, state subsidies to Naftogaz will be stopped.
Reduction of the combined deficit of the general government sector and NJSC Naftogaz Ukraine from 10.3% of GDP in 2014 to 7.4% of GDP in 2015. In 2018 – 2.6%.
As stated in the Memorandum, there are significant fiscal efforts behind these figures, as the primary balance will move from a deficit of 1.2% of GDP in 2014 to a surplus of 1.6% in 2018.
Primary spending will decline from 43% of GDP in 2014 to 39.2% in 2018. Naftogaz’s deficit will drop from the current 5.7% of GDP to zero by 2017.
Budget for 2015
From July 1, 2015, the mandatory use of cash registers by private entrepreneurs is introduced.
Payroll and pension fund
The number of people receiving salaries from the budget will be reduced by 3% during 2015. Including 20% of civil servants. The latter will be possible thanks to the reduction of regulatory authorities. This process begins on March 1 and will be completed by September 1.
As part of efforts to combat corruption, restrictions on wages in government agencies and the NBU at the level of 7–10 minimum wages will be lifted.
Payments to working pensioners will be reduced and opportunities for early retirement will be limited. The retirement age for them will be increased by 5 years gradually (by 6 months every year). This will save 1.6 billion hryvnia in 2015.
It is planned to pay pensions to those who are in territories not controlled by the authorities.
From 2016, pensions will be indexed (including pensions for civil servants and special pensions) to the price level.
Healthcare
The reform should open up the sector to private financing and ensure a gradual transition to health insurance. By the end of March 2015, relevant bills will be submitted to parliament.
Education
There will be a reduction in higher education institutions from 802 to 317.
The reduction in the number of secondary schools will reach 5% due to their merger.
Investments
The level of capital investment will be increased from 1% of GDP in 2014 to 3% of GDP in 2018.
Tax policy
The agro-industrial complex is the most profitable industry. Therefore, from January 2016, the VAT tax regime will expand to the entire agricultural sector.
Energy
There will be a “sharp increase in prices for end consumers.” The rise in prices for gas and thermal energy at the end of 2014 has already occurred by 56% and 40%, respectively. However, the subsequent depreciation of the hryvnia eroded profits, the text of the Memorandum says. Therefore, the authorities will significantly increase prices for end consumers and will work on payment discipline.
From April 1, 2015, gas prices for households will increase by 285%. This will correspond to a cost of 3600 UAH. per thousand cubic meters m (for consumption less than 200 cubic meters per month) and 7187 UAH (for consumption more than 200 cubic meters per month)
From April 1, 2015, the price of thermal energy will increase: 625 UAH/gCal. In the future, the price will be tied to gas: in April 2016 it will correspond to 75% of the price of imported fuel. In 2017 – 100%.
With the involvement of the EBRD, key state-owned companies will be corporatized: Naftogaz of Ukraine and its subsidiaries, Energoatom, Ukrenergo.
Naftogaz of Ukraine
Until June 30, 2015, an independent audit of the company’s receivables will take place in order to identify debtors. Moratoriums that protect such enterprises from enforcement and disconnection from the gas supply system will be lifted.
National Anti-Corruption Bureau
The creation of the anti-corruption bureau should be completed by the end of April 2015. By this time, NAB will have a director and a budget.
Asset disclosure
By the end of March 2015, the regulatory framework regarding the disclosure of assets of high-ranking officials who fall under the jurisdiction of the National Anti-Corruption Bureau will be revised. The legislation should require disclosure of information about the beneficial owners and controllers of any funds or assets.
3. The technical memorandum of understanding contains the agreed position of the Ukrainian leadership and IMF experts on the determination of variable parameters on the basis of which quantitative indicators for the economic program are established. Here is a statement of methods for assessing the effectiveness of program implementation, requirements for the provision of information necessary for monitoring compliance with target indicators.
It is determined that for the purposes of the program, all exchange rates that are used to assess the levels of reserves and monetary aggregates are the official exchange rate of the hryvnia to the US dollar at the level of 15.7686, established by the National Bank as of December 31, 2014.
Gross domestic product is calculated according to the System of National Accounts 2008 and does not take into account Crimea and Sevastopol.
This supplement also provides quantitative performance criteria, indicative ceilings, and operational performance criteria.
And also, requirements are put forward for the submission of reports by the National Bank. In total, the NBU assumes about 50 obligations to the IMF.
The Deposit Guarantee Fund and the Ministry of Finance also undertake a number of obligations to international creditors. The department is entitled to:
– provide the IMF with information on monthly consolidated balances in the accounts of other non-governmental business entities, incl. SOEs that do not belong to the general government sector, whose accounts are opened with the State Treasury – no later than 25 days after the end of the month;
– provide the IMF with reports on daily operating indicators of budget execution, daily receipts of borrowed funds into the state budget and debt servicing expenditures;
– provide the IMF with monthly data on the public sector payroll;
– report to the IMF monthly, no later than the 15th day after the end of the reporting month, on the cash deficit of the general government sector;
– submit on a monthly basis no later than the 1st day of the second reporting month data on the balances of all budget debt;
– provide monthly information, no later than the 25th day after the end of each month, on the volume and timing of all external contracted or guaranteed debt of the central government;
– provide monthly debt amortization schedules (internal and external), which will be updated every week;
– provide data on external and internal loans to the main managers of budget funds and non-governmental structures (including Naftogaz), which are guaranteed by the government, on a monthly basis no later than the 25th day after the end of the month, etc.
The document also spells out reporting obligations to the IMF, which fall, in particular, on the State Fiscal Service of Ukraine, as well as on the Ministry of Economic Development, the Ministry of Energy and Coal Industry, the Ministry of Regional Development, Construction and Housing and Communal Services, NERC, and the National Regulatory Commission utilities and the State Statistics Service of Ukraine.
