Ukraine published on December 20 part of its memorandum with the IMF on its new stand by programme, revealing its commitments under the programme and structural benchmarks necessary for its successful completion. That document was almost immediately removed from MinFin’s website after its officials learned that the IMF had not published its version of the document, which should be published first. Therefore, the document can be only considered as a draft memorandum, but we believe the IMF’s version won’t differ.
In general, Ukraine has committed to continue implementing a weighted monetary policy with inflation targeting at flexible exchange rates, implying the National Bank's (NBU's) institutional independence. It sets annual inflation targets at no more than 7% in 2019 and 6% in 2020. It calls for continuing structural reforms, improving the business climate and continuing fiscal consolidation, with the budget deficit-to-GDP ratio not exceeding 2.25% in 2019.
Ukraine will have eight new structural benchmarks for securing the next loan tranches.
1) The state regulator will have to increase heating rates in line with rising natural gas prices for at least 95% of heating companies by the end of 2018.
2) The NBU is committed to amending the regulatory capital methodology for banks in order to eliminate excessive related party lending by the end of 2018.
3) The NBU should use the necessary measures to deal with banks whose CAR remains below the 10% norm by end-June.
4) MinFin should start regularly reporting on the progress of bad loan recovery of state banks, starting in March.
5) Parliament should approve a law to split the State Fiscal Service into a separate Tax Service and Customs Service, both to be subordinated to MinFin by April.
6) Parliament should approve a law designating all authority to regulate financial markets to the NBU and State Securities Commission.
7) At least 35 judges with perfect reputations should be elected to the High Anti-Corruption Court, by April.
8) An audit of the operations of the National Anti-Corruption Bureau should be completed by July.
The key prior action that Ukraine must remain committed to in order to maintain IMF cooperation is hiking natural gas rates for households and heating utilities by about 15% from May 2019.
Among other measures that are not structural benchmarks, the government committed to work on developing land reform, to complete the “big privatization” of three companies (the Indar pharmaceutical firm, the Krasnolymanska mine, and the President Hotel) in 1H19 and to privatize at least 500 “small privatization assets” by April.
The list of structural benchmarks and prior actions does not look difficult, so we see a high probability that Ukraine’s cooperation with the IMF will continue in 2019, and the country will receive at least one new tranche under the program next year.
“At the same time, we warn our clients that much in Ukraine’s cooperation with the IMF will depend on the results of the presidential elections this spring. If a liberal politician committed to Western cooperation wins the election (Petro Poroshenko or Sviatoslav Vakarchuk), further cooperation will very likely continue. If a populist candidate wins (Yulia Tymoshenko, Volodymyr Zelenskiy or Oleg Liashko), the chances for Ukraine to remain in the IMF program will be much smaller. Recent polls suggest the populist candidates have stronger electoral support right now, but in our view, the probability of a liberal president winning is still realistic,” Alexander Paraschiy of Concorde Capital said in a note.