Ukraine's new Finance Minister signalled his government's strong commitment to the privatisation plan, and lifting the foreign currency controls as early as August 2016.
IHS perspective | |
Significance | Oleksander Danylyuk, Ukraine's finance minister, iterated that the newly formed Ukrainian government is keen to meet the preconditions for IMF assistance. These include removing currency controls and fulfilling the privatisation plan. |
Implications | Danylyuk hinted that the current currency controls can be removed as early as August 2016. However, his comments contradicted a more cautious message by the National Bank of Ukraine governor, who suggested that these restrictive measures will only be removed once the hryvnia stabilises for a prolonged period of time. |
Outlook | Although the pace of reforms will remain a concern for Ukraine's international donors, Kiev is likely to unlock an IMF assistance credit line worth USD17.5 billion. This has been effectively frozen since August 2015 due to the controversial 2016 budget plan, followed by a three-month political standoff. |
Reassuring messages
Ukraine's newly appointed Finance Minister Oleksander Danylyuk stated on the sidelines of the annual meeting of the European Bank for Reconstruction and Development (EBRD) last week that his government was intent to start lifting the currency controls as early as August 2016. He was quoted as saying that "it is absolutely essential for the investment climate to lift FX restrictions including dividend restrictions," adding that this will be a gradual process. Additionally, Danylyuk clarified that Ukraine had met most of the preconditions set by the International Monetary Fund (IMF) to allow for the release of the next USD1.7-billion assistance credit, part of a multi-year USD17.5-billion assistance package by the Fund. Ukraine has already started the currency control easing: on 5 May the National Bank of Ukraine (NBU) scrapped some of the currency controls – businesses are no longer required to convert 75% of their foreign-exchange earnings into hryvnia (see Ukraine: 6 May 2016: Ukraine's central bank eases capital controls as hryvnia stabilises).
Danylyuk, who is replacing the architect of the USD15.5-billion private debt swap deal Natalia Yaresko, also stated his government's resolve to push ahead with completion of the privatisation plan slated for 2016. A total of 25 companies from the energy and chemical industries, as well as port infrastructure, have been slated for privatisation. The Minister mentioned that the state-run energy giant Naftogaz Ukrainy will also be privatised but did not disclose its timing. Ukraine has already indicated that Russian companies will be barred from participating in the privatisation plan, a decision heavily criticised by Russia as an infringement of competition rules.
Contradicting messages
However, in an apparent failure of co-ordination, Danylyuk contradicted the Ukrainian National Bank governor Valeriya Gontareva's earlier take on the process of easing the foreign exchange controls. Gontareva, who was also attending the EBRD event, stated that the removal of these restrictive measures will be based on facts, not a timeline. She admitted that the hryvnia has stabilised in recent months and the economy has turned a corner, but warned that the Ukrainian national currency may still face significant risks should the currency control measures be removed too quickly. She prioritised the strengthening of the NBU's foreign currency reserves, which have risen to USD13.4 billion as of May but are still short of reaching the target level of USD18.6 billion for the year. The central bank continues to focus on inflation targeting, with consumer price annual increases expected to average at 12% in 2016. The disinflation should allow the NBU to continue with its course of monetary easing. Gontareva also indicated that the banking sector still needs a clean-up, suggesting that around one-third of the Ukrainian banks were "money-laundering operations". The NBU governor, credited for her firm steering through the currency crisis of the past two years, also added that the NBU can only concentrate on the monetary policy issues, however wider economic stability and growth can be achieved if the political leaders pursue deeper reform roadmap. She also pointed out that at least three months were lost to political instability, which has delayed the economic recovery and hence the monetary stabilisation.
Outlook and implications
The IMF mission is currently in Kiev to iron out the details of the release of the next tranche of the Fund's assistance credit. The last instalment was released in August 2015, but since then Ukraine has been at odds with the Fund on a number of issues, including the budget law for 2016,the pace of reforms and the three-month political stalemate which ended with the resignation of former prime minister Arseniy Yatsenyuk in April 2016. Specifically, the Ukrainian parliament endorsed 50% cut to employers' social security contributions, and cancelled import surcharges in the 2016 budget. Considering that no countermeasures were taken to reduce the expenditure tab, Ukraine may miss the 3.7% budget deficit target set by the IMF.
Although the removal of the currency controls is critical to jump-start the inflow of foreign investment, they are only one of many barriers that curtail investment activity. Weak domestic demand, especially low consumer confidence, high levels of inflation, the still-troubled banking sector and uncertainty over the depth of the reforms remain drags on the business confidence. The new government is fully aware of the need to jump-start its co-operation with the IMF. However, both the IMF and the EU – which has committed an additional USD40 billion in financial assistance – are keen to see some real progress not only in terms of the macroeconomic indicators but also structural reforms, including a firmer commitment to rooting out corruption. For as long as Ukraine broadly remains on the track of reforms, the IMF and EU are expected to continue with their assistance. Some delays in the delivery of the credit are expected simply because the Fund has to use its leverage on Ukraine to ensure that the country delivers on the reforms.