Hope for an IMF lifesaver amid the COVID-19 storm
The headlines have turned apocalyptic in Ukraine: a global economic crash, the forests of Chornobyl burning, the nation in COVID-19 lockdown, and more stinky scandals in President Volodymyr Zelenskiy’s inner circle. Altogether very depressing.
By mid-March, Ukraine’s government had imposed strict quarantine restrictions, even though only one case of COVID-19 had been reported in the country. International borders were largely closed, and all public places were shut, except for stores selling food, and pharmacies, gas stations and banks. A ban was instituted on all public gatherings, and restrictions put on movement within the country. Numbers remain relatively low, with 4,662 known cases of COVID-19 and 125 deaths as of April 17, but the numbers should probably be treated with a grain of salt. The country has done no large-scale COVID-19 testing, and ordinary Ukrainians still cannot get tested upon request.
Quarantine restrictions have been put in place until April 24th, but expectations are that they will be prolonged. However, some easing of restrictions is expected as well, after harsh criticisms about the quarantine’s impact on the domestic economy, especially on the self-employed.
The global crisis has not yet reached Ukraine, but the overwhelming response to COVID-19 has already done its work: it has given Zelenskiy a strong push to move forward with an “anti-Kolomoyskiy” bill, and the bill establishing a farmland market, both of required for an IMF deal. The banking bill passed on its first reading, but over 16,000 (!) “amendments” were immediately submitted, meaning that final passage could be delayed. The land reform bill was passed with multiple restrictions, meaning that the farmland market is unlikely to become a driver of growth in the medium term.
New presidential Chief of Staff Andriy Yermak appears to be a troublemaker. In mid-March, a protocol signed in Minsk about setting up an Advisory Council with the participation of Russia’s proxies in ORDiLO was leaked to the press. Until now, Kyiv had always insisted that Russia was party to the conflict, and the militants in Donbas were not independent operators. Making these proxies a party to negotiations by including them on the Advisory Council strips responsibility from Russia and legitimizes the Donbas militants. The move triggered a scandal in Kyiv and Yermak had to walk it back. But it took only few weeks for new scandals involving Yermak to once again hit the headlines. His brother, Denis Yermak, was recorded negotiating personnel appointments for a “fee.” Yermak refused to take personal blame for his brother, and Zelenskiy supported him. Remarkably, top TV channels muted the scandal, and the story was reported only in online sources.
Macro statistics are still reflecting pre-COVID-19 conditions. Industrial output improved to -1.5% y/y in February vs. -5.1% y/y in January. Retail trade sped up to +14.5% y/y in February, from +10.8% y/y in the January. Inflation in March slowed to +2.3% y/y from +2.4% y/y in February, only partly reflecting the drop in the hryvnia. External accounts kept improving, with the CAD narrowing to $159 million in February, from $249 million in February 2019. Even budget collections increased in March by 2.4% y/y, modest but still growing.
So far, only the hryvnia exchange rate seems to be reflecting the COVID-19 crisis. The currency broke the UAH 28/dollar ceiling as soon as it was clear there was an unprecedented crisis. But the FX market eased shortly after the “anti-Kolomoyskiy” bill passed first reading, and the chances for an IMF deal improved. Still, the NBU spent $2.2 billion from gross reserves to defend the currency. Gross reserves dropped to $24.9 billion, or 3.7 months of imports in March.
On March 13th, the Verkhovna Rada voted on a revised spending plan for 2020, increasing the deficit to 7% of GDP from 2.1% of GDP originally or UAH 298.4 billion from the initial UAH 96.3 billion. The revenue plan was cut, but spending was increased: a COVID-19 Fund was established, with UAH 64.7 billion or 1.5% of GDP, in it. The fiscal gap is expected to be covered by the credit from the IMF.
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