The IMF Memorandum has nominally light conditions for next review… but pitfalls

UKRAINE - In Brief 12 Jun 2020 by Dmytro Boyarchuk

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At the released IMF memorandum, we do not see heavy conditionality which have been discussed in media over the recent weeks. For the first review (to be finished by September 1st) only two light steps should be completed. They include approval of NPL reduction plan for the state-owned banks and full reflection of gas and non-gas costs in heating tariffs. With gas prices close to $100 per tcm it should not be a problem to reflect full gas and non-gas costs in tariffs, we believe. Another requirement presumes enhancing competition at household gas market by simplifying procedures for switching households for new suppliers. But it’s a long-playing story of creating competitive local gas market and some formal steps in this direction will be satisfactory for the Fund. In other words, nominally we do not see any big impediments for Ukraine to deliver the required actions by the time of next review. Further actions from the list of structural benchmarks also look feasible except for the point of assets recovery of bankrupt banks. Most likely the IMF anticipates Ukrainian authorities to make active moves to recover losses of Privatbank too. And this demand is apparently a troublemaking. All in all, nominally we do not observe any tough requirements at the memorandum and Ukrainian authorities are in good position to meet the demands. But apparently, the main risk is regular attempts of different players to reverse in some reforms. Also we have the issue of assets recovery for Privatbank. I would say that the IMF will see it as a success if president Zelenskiy just keeps the previous reform achievements intact. Compensations from Kolomoyskiy are unlikely. And we do not believe ...