Week’s balance: Satisfied IMF, punished Russia, and freedom-loving UK

Dmytro Sydorenko (UNIAN)

The Ukrainian Government has reported about the successful talks with the IMF on a new memorandum; Europe has extended sanctions against Russia; and Brexit supporters have won in a UK referendum – these are the main economic news of the past week.

Some very important news for the Ukrainian economy last week concerned the country’s international partners.  Finally, the situation was clarified regarding negotiations with Kyiv’s key creditor, the International Monetary Fund.

 It was announced that the IMF Board of Directors will convene in July to consider the issue of allocating the next tranche of financial aid for Ukraine.

"The Board of Directors will meet in July. I can’t name the date because it hasn’t been announced," said Valeriya Gontareva, the Governor of the National Bank of Ukraine. According to her, continued cooperation with the IMF is a key factor to achieve price stability in Ukraine in the medium term, that is why it is important that the government continue urgent reform and the Verkhovna Rada support them. The expected amount of the tranche, as noted by Gontareva, is $1 billion, although earlier, the sum of $1.7 billion was announced.

 But, according to Prime Minister Volodymyr Groysman, Ukraine still hopes to get the entire amount before year-end. Before the meeting of the Board of Directors of the IMF, the Government has to sign with the Fund an updated Memorandum of Cooperation. The Ukrainian ministers have repeatedly stated that there would be no fundamental changes to the document and all contentious issues had been resolved as the Fund's experts were satisfied with the government's proposals. One of the thorny issues that were a subject of lengthy discussion with the IMF was raising the retirement age.

The IMF insisted on this step in view of the huge deficit of the Pension Fund, which reached a staggering UAH 145 billion in 2016. The Government believes that it is not time yet to take such drastic measures, proposing instead to increase the minimum wage for the business area, which in turn will increase revenues from a single social contribution, as well as increase the number of SSC payers by cutting the list of those who are free from paying it today. In addition, it is proposed to reduce the list of jobs eligible for early retirement.

 Minister of Social Policy Andriy Reva has explained in an interview with UNIAN that the average retirement age of male workers in Ukraine is 49 years due to a large number of professions that provide for an early retirement.

According to Reva, the IMF was satisfied with the proposals of the Cabinet to reduce the deficit of the Pension Fund. Now the government will shape these proposals into the corresponding bills, which will be included in the budget package. The Cabinet is to submit them to the Rada early autumn.

Russia once again hit by sanctions

Ukraine’s important economic and political partner, the European Union, on June 21 prolonged for another six months the sanctions against Russia earlier imposed due to the Russian annexation of Crimea and the war in Donbas. The decision was taken by the Committee of Permanent Representatives in the EU (COREPER). 

"We can confirm COREPER has agreed to prolong the restrictive measures in view of Russia's action destabilising the situation in Ukraine to further assess the implementation of the Minsk agreements," the EU Council has told an UNIAN correspondent in Brussels. The sanctions were extended until January 31, 2017. At the same time, this decision must be sealed by the EU Council. It is expected that its meeting will be held before the end of July, but the exact date has not been announced. Had the decision not been taken, the period of sanctions would have expired on January 31, 2016. 

Meanwhile, the decision to extend the economic sanctions against Russia was not an easy one. Italy and France, as well as a number of other countries, were in favor of finding a possibility to review sanctions at the end of this year if the Donbas hostilities subside. Ukrainian President Petro Poroshenko has personally asked the EU to extend the sanctions. The issue was raised during his meeting with German Chancellor Angela Merkel. He declared his position in an interview with French TV channel ITele, saying that sanctions are an effective pressure on Russia and they should be prolonged. 

At the same time, the unity of the EU last week gave a crack, and it was not over the anti-Russian sanctions this time. The UK has long expressed dissatisfaction with the policies of the European Union, in particular on the issue of migration, and on June 23, it held a referendum to decide on their future relations with the Bloc. Brexit supporters have won with 51,9% of the votes.

This event has made global stock markets, currency markets, and oil quotations plunge. The sterling depreciated by 9.4% and traded at 1.3485 to the dollar, at its 30-year low. The euro also fell against the U.S. currency by 3.7%. Brent dropped by 6.52% to $47.58 per barrel, while the WTI crude oil was down 6.69%, to $46.75 per barrel. As for Ukraine, the NBU chief hastened to reassure that the dive of the starling will not have a significant impact on Ukraine’s international reserves.

"The pound has never been the main currency of our trade partners because we have very small reserves [of this currency]. Our reserves are in U.S. dollars, the euro and SDR. A very small amount, less than 2%, is in other currencies. There is a very small share of pounds," Gontareva said. Meanwhile, the executive director of the Independent Association of Ukrainian Banks Olena Korobkova said that the shock response of the international financial markets will have a negative impact on the hryvnia exchange rate. "We will see an increase in demand for U.S. dollars in the short term, which will certainly lead to a decrease in the hryvnia exchange rate," the experts said.

Macroeconomic situation improving 

The news of the last week regarding the internal economic situation were tacitly optimistic. The State Statistics Service released data on Ukraine’s GDP, which in 1Q 2016 grew by 0.1% compared with the same period last year. Nominal GDP for this quarter amounted to UAH 453.2 billion, or UAH 10,605 per capita. The country’s economic growth was below the forecast of the National Bank by 0.8%. "In the first half of the quarter, there was still a downward trend in world markets of raw materials. 

Although in the second half of the quarter, the economic environment has improved significantly as well as business expectations, the previous negative processes have affected the overall result of the quarter," the National Bank reported. 

The NBU explained the deviation from the forecast with the fall of the service sector. In particular, the gross value added in finances and insurance dropped 32%. The main drivers of GDP growth remained investments and net exports. According to the NBU, the positive changes in the external environment since the end of 1Q 2016, in particular, transit unlocking and growth of prices on global markets of raw material, have returned the Ukrainian economy onto a path of recovery. 

This is confirmed both by a significant improvement in business expectations and the actual production stats in basic sectors of the economy in April-May 2016. "Accordingly, the NBU forecast for real GDP growth by 1.1% in 2016 is still relevant," the National Bank reported. The government expects growth of the Ukrainian economy in the current year at 1.5%. "We expect a 1.5% growth this year. And our task is to maintain this growth and ensure stable economic development," Prime Minister Volodymyr Groysman told a news conference June 21.

At the same time, he noted that Ukraine has three systemic enemies today: the Russian aggression, corruption, and populism. "And I can’t which is a worse enemy. All three of these phenomena encroach on our independence, seeking to deprive us of our future," said Groysman. 

The Ministry of Economic Development announced its forecast for Ukraine’s economic growth in the longer term – in 2017 and 2018, GDP is expected to rise 3-3.5%. Against the background of positive macroeconomic data, the National Bank from June 24 lowered the key rate from 18% to 16.5% per annum. The NBU has taken such decision for the third month in a row – after a decline to 19% from April 22 and to 18% from May 27. According to the NBU, easing of monetary policy was possible due to the continuing trend of the decline in inflation, which as of late May amounted to 7.5% in annual terms. 

The regulator's decision meets the expectations of market participants. "Over the past three months, the National Bank for the third time declared its readiness to cut its key rates. We expect that it will fall by another one percentage point – down to 17%. We also expect a decline by one percentage point of the rates on its own operations," Executive Director of the Independent Association of Ukrainian Banks Olena Korobkova said ahead of the NBU’s announcement. The National Bank does not rule out another key rate cut after the next board meeting on monetary policy to be held on July 28. 

"For that, we need preconditions. But we believe that such preconditions will be in place because our goal for inflation is 12%," said NBU Governor Valeryia Gontareva.

Cabinet pledges to build new roads in 2017 Last week, the prime minister reiterated the need to create the Road Fund and reminded that starting next year, we will witness large-scale road construction works across Ukraine. "The key issue is the creation of the Road Fund of Ukraine, and we'll do it. It will become operational in 2017," said Groysman. 

The Road Fund is planned to be filled at the expense of proceeds from the excise duty on the import of petroleum products, which brings about UAH 40 billion annually. However, many MPs opposed the idea – a bill on the establishment of the Road Fund was "successfully" swamped by the Verkhovna Rada back in March. Not so willing to support the creation of a Fund is the Ministry of Finance, which is now puzzled over how to cover the reduction in revenue. 

The new bill on the establishment of the Road Fund, which the Government will have to push through the Rada this autumn, will most likely, the volume of the funds coming from the excise duty on the import of petroleum products will be cut for the fund. International donors may help raise the missing funds. According to the prime minister, besides the State, some international financial institutions may join this work – the World Bank, the European Investment Bank, and the European Bank for Reconstruction and Development. 

The prime minister said that the road management in Ukraine will be partially decentralized and handed over to the local authorities, "so that people could work on the ground instead of someone managing from Kyiv." Money from the fund would be distributed fairly according to the formula. "I am absolutely serious when talking about the fact that in 2017, there will be one of the most large-scale construction, not even in the history of Ukraine’s independence, but possibly since the 1980 Olympics," Groysman said at a cabinet meeting. 

It should be noted that this year, Ukraine has allocated a record sum for road maintenance, compared with the recent years – more than UAH 11 billion. But this is still not enough. Infrastructure Minister Volodymyr Omelyan in an interview with UNIAN said that only the repair works will be conducted on the Ukrainian roads in 2016 and no new roads would be built.

We will soon find out whether the Government will be able to convince the deputies of the need to set up the Road Fund, and then fill it with money.

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