The mission of the International Monetary Fund, which arrived in Kyiv on June 24 to review the results of fulfillment of conditions of the stand-by loan in the amount US $17 bn, extended its visit for the second time. Initially, the IMF representatives headed by the Mission Chief for Ukraine Nikolay Gueorguiev were scheduled to leave the Ukrainian capital on July 4, but postponed their departure to July 10 referring to the “fast development of events and numerous issues that required discussion with the government”. On Wednesday, the mission extended its visit until July 13 “to wrap up talks with the Ukrainian government”. Upon the return to the U.S., the IMF will have less than two weeks to make a decision on allocation of the second tranche of the loan in the amount of US $1.4 bn planned for July 25.
The IMF mission remains in Kyiv longer not because of the problems of fulfillment of the conditions of the memorandum by Ukraine based on May results, assures CASE-Ukraine Director Dmytro Boyarchuk. Most likely, the talks are protracted due to the quick development of events, which requires revision of the conditions of the arrangement.
“It seems that due to the military aggression in the east of the country more time was required to conduct thorough macroeconomic and fiscal analysis and deliver more accurate assessments of the consequences of the conflict,” says Director of Economic Programs at the Razumkov Center Vasyl Yurchyshyn. Last year, the Donetsk, Luhansk and Kharkiv oblasts accounted for 21.5% of the GDP, 30% of industrial output, 28% of export and 1.3% of the GDP in net proceeds to the national budget.
According to estimates of Minister of Economic Development and Trade Pavlo Sheremeta, the Ukrainian economy will lose 3-4% of GDP due to the anti-terrorist operations (ATO) in the east regions of Ukraine. That is in addition to the 3% economic slowdown planned in the national budget for 2014. Apart from the new short-term outlook in view of the weakening of the economy, the government has obtained new quantitative assessments that should be taken into account, for example, the results of a Naftogaz audit and a stress test of banks of the first group, says Boyarchuk.
After calculating the “cost of the matter”, Kyiv needed to discuss with the IMF changes in several spheres, primarily updating the parameters of the 2014 National Budget. According to the data of the State Treasury, the Cabinet of Ministers fell 2.9% short of the planned proceeds in January – June. Moreover, the government actively used advanced payments in the first half of the year, which partially compensated for the shortcomings from the tax proceeds. In particular, the Finance Ministry received 78% of non-tax proceeds from the NBU in the first five months instead of the planned 20%. The NBU transferred the difference – UAH 16.3 bn – to the budget as an advance, basically turning on the printing press for that. In truth, it did so before May since the IMF is against such a practice and credit memorandum envisages its cessation. “Due to the shortcoming the government will be forced to reduce expenditures as the IMF is unlikely to support an increase in the budget deficit, even on conditions of an increase in defense expenditures,” says Yurchyshyn.
For this reason, the government needs to agree with the IMF on how to preserve the national budget deficit at 3.6% - either through cutting of budget expenditures or through hryvnia emission, says Boyarchuk.
Be that as it may, the Cabinet of Ministers has a third option to maintain the current level of the deficit without any cuts. For this, sources engaged in the talks reported that the government appealed to the IMF asking to increase the amount of the loan from the international organization or additional support for the Ukrainian economy by other foreign donors. If the government succeeds in receiving additional financial support, it may not need to introduce adjustment measures, namely curtailing of the current budget.