International financial support and reforms in Ukraine

Reanimation Package of Reform«Open Dialogue» Foundation

International financial support and reforms in Ukraine

Victor Maziarchuk2014-09-18

Brussels

2

Funds recipients

Funds

Government

Budget deficit

Sectoral projects Ministries

Support of national bank

reservesNational Bank

Investment projects

(guaranteess)

Ministries

State enterprises

Municipal enterprises

Investment projects

Business

3

International Monetary Fund

Brief:17 bln. USDNational bank of Ukraine National bank reserveMore detail: http://www.imf.org/external/pubs/cat/longres.aspx?sk=41878.0

4

IMF

2014.04.30: IMF Executive Board approve new “Stand-by” program - $ 17.3 billion. (10.976 billion. SDR or 800% of quota).

2014.05.07: first tranche of loan $ 3.2 billion. NBU has received:- $ 2.16 billion. finance the budget deficit.- $ 1.00 billion. stay NBU reserve

IMF delay with monitoring and second tranche.

2014.08.29: The second tranche of $ 1.4 billion. approved by IMF:- $ 400 million stay NBU reserve- $ 1.00 billion. finance the budget deficit.

5

IMF monitoring summary:The first review discussions took place in a context of heightened geopolitical tensions and deepening economic crisis. Intensification of the conflict in the East and escalation of the gas dispute with Gazprom, two of the key risks identified at the time of the program request, have materialized. These developments have affected confidence, balance of payment flows, economic activity, and budget execution. The banking sector has had to cope with larger-than-anticipated deposit outflows, and the exchange rate has depreciated more than expected at the time of the program request. The authorities have implemented policies broadly as agreed, but significant pressures have emerged. All but one performance criteria for end-May were met and all structural benchmarks have been implemented, albeit some with a delay. However, the deterioration in the economic outlook, fiscal and quasi-fiscal pressures, and heightened balance of payment difficulties are putting the initial program targets in jeopardy. Two end-July PCs are estimated to have been missed; and the end-2014 targets are out of reach. All continuous PCs were met. Discussions focused on the appropriate policy response to these short-term pressures and on reforms to support sustained growth. There was agreement that the policy effort should focus on compensatory measures to meet key program objectives, while allowing some temporary deviations from the initial targets. In particular, the NBU will limit the decline in reserves through market purchases; the government will take additional fiscal measures to keep public finances sustainable; and Naftogaz will strengthen current and past gas bills collection. Discussions also focused on reforms aimed at modernizing the monetary policy framework, preserving financial stability, addressing governance issues and improving the business climate. Nonetheless, risks loom large. The program hinges crucially on the assumption that the conflict will begin to subside in the coming months. Should active fighting continue well beyond that, the small buffers under the revised baseline would be quickly exhausted, requiring a new strategy, including additional external financing. A further heightening of geopolitical tensions could also have significant economic consequences. Domestically, policymaking may become more difficult in case of early elections. Strong policy performance and adherence to the planned reforms is therefore critical. Staff supports the authorities’ request for completion of the first review and the waivers for nonobservance and applicability of performance criteria. The purchase released upon completion of the review would be in the amount of SDR 0.914 billion, of which SDR 0.650 billion will be used to finance the budget deficit.

6

Main

requirements from IMF:

7

New IMF structural benchmarks:

8

Next IMF tranches:

9

EU support package of Ukraine:

Brief:11 bln. Euro Ukrainian Government and state enterprisesState budgets More detail: http://europa.eu/newsroom/files/pdf/ukraine_en.pdf

10

EU:

2014.05.13 EC and Ukraine signed Financial support package of Ukraine.This paper sets out the main concrete measures that the Commission is proposing for the short and medium term to help stabilise the economic and financial situation in Ukraine, assist with the transition, encourage political and economic reforms and support inclusive development for the benefit of all Ukrainians.

These measures combined could bring overall support of at least €11 billion over the coming years from the EU budget and EU based international financial institutions (IFIs) in addition to the significant funding being provided by the IMF and World Bank.

11

EU:• €3 billion from the EU budget in the coming years, €1.6 billion in macro financial

assistance loans and an assistance package of grants of €1.4 billion;• Up to €8 billion from the European Investment Bank and the European Bank for

Reconstruction and Development;• Potential €3.5 billion leveraged through the Neighbourhood Investment Facility; • Setting up of a donor coordination platform;• Provisional application of the Deep and Comprehensive Free Trade Area when

Association Agreement is signed and, if need be, by autonomous frontloading of trade measures;

• Organisation of a High Level Investment Forum/Task Force;• Modernisation of the Ukraine Gas Transit System and work on reverse flows,

notably via Slovakia;• Acceleration of Visa Liberalisation Action Plan within the established

framework; • Technical assistance on a number of areas from constitutional to judicial reform

and preparation of elections.

12

EU 2014 - 2020:1.57

1.61

3.00

5.00

Billions Euro Techniacal support

Credits

EIB

EBRD

13

Main requests from EU:1) Improving public finance management : • Transparent, non-discrimination and competition among bidders of public procurement;• Approve the National Strategy for Preventing Corruption and State program of its implementation

and implement a comprehensive anti-corruption legislation (recommendations of GRECO); • In order to develop public internal financial control strategy to take training at various levels of

government; • Submit a draft law which will be clearly defined powers of the Accounting Chamber of Ukraine on

the audit of both expenditures and revenue to parliament; • New standards of public internal financial control2) Trade and Taxes:• Refrain from activities that violate international trade; • Implement in Ukraine's commodity nomenclature of foreign economic activity developed on the

basis of the Harmonized System Commodity Description and Coding 2007; • To ensure that customs valuation practices fully meet WTO standards according to the program of

economic reforms ; • Ensure the return of all VAT refund and that all legal requirements of VAT refunds are paid on time; • Enter the legislation on VAT provisions that the entire VAT refund arrears accrue interest relevant

penalties of at least 120% of the NBU discount rate; • Ensure timely VAT refunds through the automatic VAT refund system of risk-based auditing.

14

Main requests from EU:3) Energy sector:• Increase Naftogaz Ukraine revenues through better payment discipline, particularly in the business

of providing utility services; • To compensate the increase of gas prices for households vulnerable to strengthen the system of

targeted social assistance;• Significant progress in the implementation of Ukraine's commitments under the Treaty establishing

the Energy Community, which expressly provides for the delimitation of production, distribution and transport in the domestic gas sector;

• To achieve the status of "candidate" under the initiative of transparency in the extractive industries to maintain transparency in the energy sector;

• Achieve significant progress towards obtaining the "EITI compliance“ status within the extractive industry transparency initiative.

4) Financial sector:• Implementation of International Financial Reporting Standards; • Preparation to implementaation EU legislation relating to financial services as defined in the Annex

to the relevant section on cooperation in the Association Agreement.

Thank you for attention!

Victor MaziarchukOpen Dialogue [email protected][email protected]