The IMF will not allow itself to be cheated by the Kiev authorities

Ukraine hopes to receive USD2.7bn worth of support from the International Monetary Fund by the end of 2016. Kiev's efforts have stalled, however, because the declarations of the authorities are not matched by their actions.s.

Contrary to Kiev’s expectations, the Executive Board of the IMF did not address the issue of the credit tranche for Ukraine at its July meeting. “There is no specific date on the issue of the Ukraine aid program,” announced William Murray, a spokesman for the IMF.

Billions for reform and not for simulation

The International Monetary Fund approved the program of support for Ukraine in March 2015. At that time, Ukraine received USD5bn out of the USD17.5bn planned for 4 years, and then an additional USD1.7bn in August of last year. The future of the remaining sum of nearly USD11bn is uncertain ‒ the memorandum in which the Ukrainian authorities would commit to systemic changes intended to transform the corrupt Ukrainian economy into a modern market economy still has not been signed.

In June, the Ukrainian Minister of Finance Olexander Danyluk assured that the memorandum on the principles of cooperation with the IMF would be signed before the meeting of the Fund’s Executive Board. That didn’t happen. By the end of July, Danyluk admitted that the reason for the “halting” of cooperation with the IMF was Kiev’s failure to fulfil its commitments concerning genuine systemic change.

According to the chairman of the Committee of Economists of Ukraine, Andriy Novak, the IMF wants to take a look at the effects of work of the Ukrainian government formed in April. The suspension of negotiations is the result of the bad impression that the ruling team made on the Western partners.

“The IMF wants to understand the intentions of the new government and will therefore wait with the decision on the loan until the next year’s draft budget is presented,” believes  Novak.

Reputation more important than money

In accordance with the original plan, Ukraine was supposed to receive USD 1.7 billion in the fourth tranche, and a total of approx. USD4.3bn by the end of the year. Already in May, the Ukrainian President Petro Poroshenko announced a significantly reduced amount of the first of this year’s payments from the IMF ‒ it was supposed to only be USD1bn. This entire amount would increase the foreign exchange reserves of the Ukrainian central bank.

The head of the Ukrainian central bank Natalia Gontareva hopes the country will receive two instead of the previously planned three tranches of the IMF credit by the end of the year, which would reach a total amount of USD2.7bn. In this scenario, the first one would be made available to Ukraine in August. Gontareva announced her opinion at the same time when the IMF announced the suspension of its decision concerning the programme of macroeconomic support.

Andrey Vigirinsky, the deputy head of the association Public Audit, believes that Ukraine will eventually receive support from the IMF, but in his opinion it will be much lower than Kiev would like it to be. According to his assessment, the first of this year’s payments would reach USD500-600m, and further payments would reach approx. USD1.1bn by the end of the year.

In comparison with previous years we can see a shift in the approach of the Ukrainian government, which is trying to obtain some support from the IMF by any means possible. The team behind Ukraine’s president needs to show the citizens that the West supports Kiev’s policies. This would also be a signal for investors that despite the war and corruption, it is worth investing in Ukraine. “We are holding talks with investors and any possible failure could prove to be a huge blow,”  commented  an anonymous representative of the government, quoted by the news agency RBK.

“If the IMF disburses these sums, then that is a signal for the World Bank, the European Bank for Reconstruction and Development, the United States and private investors that the country is heading towards a change from a strictly corrupt economy to a market economy. That has an effect on the influx of investments, which we are currently missing,” commented Vigirinsky.

The comfort of the corrupt

Unfortunately, the authorities’ abilities and determination towards reforms end when their effects are no longer only painful to ordinary citizens, but begin to affect the personal interests of the people from the ruling party. Out of the 11 points concerning structural changes that Ukraine was supposed to implement in accordance with the plan agreed upon with the IMF, only five have been completed.

The bone of contention in this case is the IMF’s requirement concerning the introduction of the electronic declaration of income by public officials. Politicians and public officials, who officially earn several hundred dollars per month, are doing all they can to block the draft law, which obliges them to disclose their property, often reaching millions of dollars, and therefore raises the question of its sources and possible criminal liability for corruption.

They have already managed to block IMF’s requirement once ‒ at the beginning of the year, an MP from the president’s party, the Petro Poroshenko Bloc, submitted a last-minute amendment to the bill agreed upon with the Fund, delaying the requirement to declare assets until the end of the year. This provoked a sharp reaction from the IMF, which immediately froze the aid program for Ukraine.

Now the government is announcing that the system of electronic declarations will start operating on August 15th, initially covering 50,000 people ‒ the president, members of the government, members of the parliament and officials in managerial functions. The remaining hundreds of thousands of public officials are supposed to submit declarations by January 1st, 2017.

However, the economic portal “Law and Business” claims that the Ukrainian authorities still want to ensure that none of the corrupt wealthy people get hurt. Draft legislation on so-called “zero declarations” (prepared by the State Fiscal Service, regarded in Ukraine as one of the most corrupt state structures) was presented in the Ukrainian parliament in July.

The proposal provides that every person who unlawfully obtained wealth could legalize it by declaring its value to the tax office and making a one-off payment of 5 per cent of the declared sum, thereby obtaining a guarantee of impunity and free use of the held assets.

The applicant will estimate the value of the assets himself, and the tax authorities will not have the right to verify the real value of the declared assets or refuse to accept a declaration containing understated amounts.

The economist Sergey Fursa from the Kiev-based investment company Dragon Capital believes that even such a form of pressure as the pressure of the party which pays out the money is now ceasing to work in Ukraine.

“Ukraine hopes that the Fund will empathize with its situation and forget about our commitments. The last available way to push through reforms in Ukraine is the pressure of the lenders, but even that is no longer working. Some people are stubbornly trying to obstruct the programme of reforms because it would hurt many, including themselves. Dear Madam Lagarde, please do not empathize with their situation. Pressure them to fulfil their obligations ‒ deliver the goods, before you get the money,” he said when the Fund failed to decide on the matter of Ukraine in July.

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