IMF’s assessment of Ukrainian economy and governance — interview
Uma Ramakrishnan is the Deputy Director of the European Department of the International Monetary Fund (IMF) and oversees several countries, including Ukraine. Previously, she was Deputy Director of the Strategy, Policy, and Analysis Department, where she led non-concessional lending policy work, including the establishment of the IMF's new Resilience and Sustainability Trust (RST).
Gavin Gray heads the IMF mission in Ukraine from September 2022. Previously, he held senior positions in the Strategy, Policy, and Review departments, and prior to that in the Middle East and Central Asia Department of the IMF. His career at the IMF has focused on crisis management. Before the IMF, he worked as an adviser at the UK Treasury, and an emerging markets economist at HSBC
NV: How do you assess Ukraine's implementation of the structural benchmarks specified in the latest IMF memorandum?
Gray: We evaluate the implementation of the memorandum by assessing both quantitative performance and structural benchmarks. If we talk about quantitative parameters, then as of the end of June, they were all fulfilled. This is a signal that the leadership of Ukraine fulfills all the specified parameters and is moving along the defined trajectory. Now regarding structural benchmarks. The law on the declaration of assets, which should have been passed by the end of July, has now been completed. If we talk about the Budget Code, which paves the way for medium-term budget planning, it was adopted before the time that was set as a criterion. I also want to note the return to the simplified taxation regime that had been in place before the war. We consider this to be a very good achievement.
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What issues remain? First, it is necessary to adopt a new statute of the Gas Transmission System Operator. Second, the issue of business tax audits is still waiting to be resolved in new legislation. Third, the Ukrainian authorities need to develop a concept paper on the preferential lending program [to private businesses], known as 5-7-9, which should outline its vision for improving its monitoring and preventing negative consequences for the financial sector because of its implementation. This step is also pending. And fourthly, we are still waiting for the fulfillment of the commitments made as part of the changes that must be made to the law on combating money laundering and financing of terrorism. Issues relating to Politically Exposed People (PEPs) need to be resolved.
To summarize: significant progress has been made, but important work remains.
NV: Where do you see the most problematic issues regarding Ukraine's fulfillment of its obligations?
Gray: I wouldn't use the word problematic. The Ukrainian authorities have made commitments and are currently working on their implementation. These are rather challenges, because the country is at war, and some of these reforms raise technical challenges in certain areas, while others pose political challenges. And for some, there are both.
I would emphasize several issues. First is the restoration of tax audits, because this is important to ensure future fiscal revenues. And it is equally important from the point of view of strengthening governance.
Second, I would like to talk about the law on combating money laundering and terrorist financing. It is important that the law is fully aligned with the FATF [Financial Action Task Force] guidelines. And here it is very important to adopt a risk-weighted approach.
The third important issue is the changes that will be made to the legislation regarding the [Specialized Anti-Corruption Prosecutor's Office] (SAPO), namely giving it greater institutional autonomy. These are three structural reforms that I would like to emphasize.
Turning to the draft budget for 2024, which has already been submitted to the parliament. It is important that the budget, once it is finally adopted, meets all the goals that Ukraine has established within the framework of the [IMF] program. In addition, the budget must meet the parameters of debt sustainability and the available finances that can be raised to make this happen. Overall, as you can see, the agenda is quite substantial.
NV: And which reforms are critical for Ukraine?
Gray: By the end of this year, the government plans to launch the so-called National Revenue Strategy. Everyone understands that over time, international support for Ukraine will progressively diminish, so Ukraine needs to develop its own internal resources to finance itself. This should be taken into account, because, in particular, after the end of the war, the need to finance social expenditures will increase. Therefore, the authorities should focus on strengthening the opportunities to collect revenues, both through taxes and customs duties.
Second, I would emphasize the government’s plans to restructure Ukraine’s private debt, which should take place in the first half of 2024. It is necessary to restructure external private debts, so that sovereign debt remains at a sustainable level.
NV: To what extent do the demands of the United States, which were recently published in the media, coincide with IMF’s advice? Was this list agreed with the IMF?
Ramakrishnan: When we develop the program, we collaborate, consult and do it together with the government, particularly the Finance Ministry, the National Bank of Ukraine, and other relevant agencies that are typically responsible for the country’s economic and financial policies. There are many players, both external and domestic, who may be involved in developing reform ideas. In terms of our program objectives developed for use in the Extended Fund Facility (EFF), we focus on ensuring a stable macroeconomic environment, financial stability, and reforms to boost economic growth. Sometimes, the goals can overlap among various partners and institutions; so, we consult with our partners to avoid duplication of efforts. We aim to work out the most understandable, clear, and balanced program of reforms. The United States will indeed be a part of this discussion.
NV: Recently, there has been a lot of talk about the fact that Ukraine should pay even more attention to the fight against corruption. Would you agree with that?
Gray: The task of combating corruption lies not only in Ukraine’s program with the IMF, but also in its commitments to other partners. Progress on this issue is very important if Ukraine is to continue receiving external financing, especially those directed to recovery. It is also very important if Ukraine plans to attract foreign investments. This is because foreign investors would like to be sure that there is a level playing field, with a single set of rules for both them and local players. Also, public opinion on this issue has intensified in recent days and weeks, as we saw when public discussion began that declarations [for public officials] should be reinstated. Overall, this is a very important issue on the agenda, and I can say that from our side we will also keep a close eye on Ukraine’s progress in combating corruption.
NV: What risks does the IMF currently see for Ukraine's economy, and how do you think they can be avoided?
Gray: The biggest risk, of course, stems from the war. When we began to develop the EFF, we knew that we were developing a program against the background of significant uncertainty. We therefore developed the program considering the basis scenario, when we assumed that the war would end by the middle of 2024. But we also developed a more negative scenario, where the war would last longer and, accordingly, more external funding would be needed. When we talked about the development of the program and consulted with our international partners, we highlighted that in this most negative scenario, then they should count on the fact that greater amounts of external financing will be needed.
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When we talked with the leadership of the country about the more negative scenario, we emphasized they will have to resort to additional political measures, and we discussed what those could be.
I would also like to recall one question that worries everyone: Ukraine's export prospects after the suspension of the Black Sea Grain Initiative. This is a risk that we calculated, and unfortunately it materialized. Therefore, now the authorities should resort to steps to minimize it and find other alternative ways to overcome this problem. I think these are the main, key points.
NV: You mentioned that in case of a negative scenario, additional political steps will have to be taken. Could you provide some examples?
Gray: It depends on exactly how that negative scenario unfolds. But generally speaking, additional fiscal policy steps would be required. I would note that the Ukrainian authorities already have the experience of working in extraordinary, critical conditions of 19 months of war, and at the same time take measured political steps. We have no doubt that they can develop appropriate policy actions in case such a negative scenario unfolds. But in any case, if such a scenario really materializes, then the significant funding gap will have to be covered largely by donor funds.
Ramakrishnan: I want to add to this that at the beginning of the war last year, when the international community was still pulling together the financing to help Ukraine, Ukraine had to go ahead and finance itself, and did so quite successfully. The authorities reacted very quickly to the situation, took fiscal, monetary, and exchange rate steps to prevent the economy from spiraling out of control. So, I can say that the ability to take politically balanced steps and make appropriate efforts has already been tested by time and war, and we are sure that the leadership will continue to take such balanced steps.
NV: You just mentioned that, perhaps, international aid will decrease and Ukraine will have to independently look for mechanisms to finance its budget deficit. In this case, would we be pressed into printing vast amount of hryvnia to cover our expenses?
Gray: To clarify: international financial aid would need to be higher under the negative scenario. In the basis scenario, we talked about $115 billion of financing, and in the negative scenario we have identified $140 billion of required influx. I just want to say that in addition to those funds that will come from outside, the Ukrainian leadership must take policy measures to balance all its necessary financial needs. But as Uma noted, we are sure that the leadership of Ukraine has the expertise to take these balanced steps.
NV: I’m asking this because the NBU recently decided to return to flexible foreign currency exchange rates. Does this indicate that Kyiv is preparing for the negative scenario you described?
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Gray: These two issues are not connected. It is true that the forms of providing international aid are likely to change over time, especially after the war ends. Instead of direct budget support, as now, a higher share of international financing will be provided for the reconstruction and restoration of Ukraine. By contrast, the recent move to managed-flexible exchange rates is part of a strategy under the program to gradually revert to pre-war policy frameworks, including eventual inflation targeting.
NV: The IMF has several permanent members (Egypt, Argentina, Pakistan) that constantly start reforms, but abandon them halfway and after some time to open a new program. Is there a feeling that Ukraine might follow the same path, given the delays with the benchmarks and the generally difficult situation in the country?
Ramakrishnan: I think we should really take into account Ukraine’s unique situation — the war. You may be aware that last year Ukraine and the IMF launched a four-month Program Monitoring with Board Involvement (PMB). This program was designed to explore Ukraine’s capacity to carry out reforms that could then pave the way to a full-fledged program with the IMF. We can say that the Ukrainian authorities have done an excellent job under the PMB, demonstrating their capacity and ability to make very difficult reforms in very difficult times. Likewise, under the first review of the current IMF-supported program, all the commitments were completed. Now we are preparing for the second review of the program, and based on our preliminary assessment, the Ukrainian authorities have met their quantitative commitments. Several other reforms are still underway, and we will continue to assess against their commitments under the program in the coming weeks. Based on what we have seen so far, the authorities remain strongly committed to implementing the measures for the success of their reform program.
I would also like to note that it is not uncommon that countries with IMF-supported programs sometimes miss reform benchmarks that are set under the program. As part of the program monitoring and review process, we assess the context for the deviations, and work with the authorities to develop corrective actions to resolve the underlying issue. We expect to do the same in Ukraine.
NV: How do you assess the state of Ukrainian sovereign debt? What percentage of debt relief does the IMF insist on? Some talk about writing off 50% of the external debts, but it seems that the IMF does not insist so much on this...
Gray: Whenever a country has an IMF program, sustainability of public debt situation is a key requirement. In the case of Ukraine, we assess that the debt situation is sustainable from a forward-looking perspective. Our assessment is based on four basic assumptions. The first is the Ukrainian authorities' commitment to maintaining a sound fiscal position. The second is the commitment of donors to continue supporting Ukraine on a concessional basis. Third, some official donors have agreed that they will not demand repayment of their debt until the end of the program. And the fourth is the commitment of the Ukrainian authorities to restructure external debts. This is a four-point package that ensures sustainability of the debt situation.
As regards your question, the role of the IMF in this process limited to outlining and defining those macro-financial parameters that would guarantee the sustainability of the debt. However, if we talk about how this will be achieved on a practical level, then this is a question to be decided by the Ukrainian government in consultation with its financial advisors.
In the case of Ukraine, we assess debt sustainability by examining gross fiscal financing needs in the period after the program ends. Gross fiscal financing needs are defined as the sum of the budget deficit and debt amortizations. To guarantee the stability of the debt situation after the end of the program, such gross financial needs should be from 8 to 9% of GDP on average during the period from 2028 to 2033.
The explanation for this approach is as follows. To ensure a debt burden that can be sustained after the end of the program, it is necessary that Ukraine’s financing needs should be sufficiently compressed that Ukraine can refinance its debt for further periods and has adequate resources to cover for its social and development needs.
NV: Is the write-off of Ukraine's debts by the IMF possible at all?
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Ramakrishnan: According to the IMF charter, we do not have the right to cancel or write off such debts. But what the IMF can do is to provide some relief for the servicing of loans that were granted to the poorest and most vulnerable countries that found themselves in a difficult situation. The IMF’s ability to provide such debt servicing relief on its loans is based on the availability of grants from donors for the repayment of those loans. For example, we have a fund called the Catastrophe Containment and Relief Trust (CCRT). This is a fund that was used during the pandemic and provided assistance to 29 countries that found themselves in the most difficult situation.
NV: From this fund, money can be provided to Ukraine to pay off debts to the IMF, right?
Ramakrishnan: The CCRT works like this: the IMF can mobilize grants from donors for the CCRT, which is then used to provide debt service relief on the IMF loans to the poorest and most vulnerable members; the grants are used for repayments of those loans. Middle income countries do not qualify for this mechanism.
NV: What is the debt amount we are talking about in Ukraine’s case?
Ramakrishnan: Currently, we are working with Ukraine only under the EFF program, we are not discussing any other mechanisms that are not related to the program.
NV: Our MPs are actively discussing a law that will introduce a tax on excess profits of commercial banks. Do you support this idea?
Gray: It's about developing a law that generates tax income on a temporary basis. This should be done while maintaining financial stability. Therefore, this is a priority task for the Finance Ministry, as the relevant branch of government, in consultation with the NBU.
NV: You came to Ukraine for the first time in the three years since COVID. How would you describe your impressions?
Ramakrishnan: This is my first visit, and I am very pleased to be here. I can say that I am positively impressed by the resilience of the Ukrainian people. During our visit, we have had a very busy schedule. We have met with stakeholders with whom we typically do not have a chance to engage when we work remotely. The wide range of discussions in Kyiv has improved our understanding of the situation on the ground. We had the opportunity to meet with the Prime Minister, our counterparts in the Finance Ministry and the National Bank of Ukraine, other ministers, MPs, civil servants, as well as the media.
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