Transcript

Transcript of Media Call at the Completion of 2016 Article IV Consultation with Ukraine and Third Review of Ukraine’s EFF

April 4, 2017

Participants:

Ron van Rooden, IMF Mission Chief for Ukraine
Wiktor Krzyzanowski, Senior Communications Officer, Communications Department

MR. KRZYZANOWSKI: Good afternoon to everybody joining us in Kyiv and good morning to all listening in from Washington D.C. My name is Wiktor Krzyzanowski and I am with the IMF Communications Department. We are happy to be able to present to you the reports for the third review of the IMF program with Ukraine as well as the 2016 Article IV consultation. You have seen those documents, which are embargoed until 11:00 a.m. Washington D.C. time, or 6:00 p.m. Kyiv time today. This conference call is on-the-record and embargoed until 11:00 a.m. Washington D.C. time and 6:00 p.m. Kyiv time today.

Let me introduce to you Ron van Rooden, who is the IMF mission chief for Ukraine and who will say a few words about the key findings of the reports. Then we’ll be happy to answer any questions you may have.

MR. VAN ROODEN: The IMF Executive Board yesterday completed the third review of the IMF-supported program with Ukraine and also the Article IV consultation with Ukraine. In the Board discussion, the directors noted that the Ukrainian economy is showing welcome signs of recovery. Growth is returning, inflation has been brought down and international reserves have more than doubled. This progress owes much to the authorities’ policy actions and sound macroeconomic policies. The recent stabilization provides a promising basis for further growth.

However, that being said, directors also emphasized that to achieve fast and sustainable growth, which is needed to lift incomes and enable Ukraine to catch up with its regional peers, structural reforms to improve the business environment and attract investments need to be substantially accelerated. A start really needs to be made with privatization and developing a market for agricultural land sales. Directors also noted that as regards corruption, despite the progress that has been made in setting up new institutions such as NABU and independent anticorruption prosecutors, that more progress needs to be made in tackling corruption decisively. Also, notwithstanding the very large fiscal adjustment, public debt remains high. The authorities have been able to reduce the overall fiscal deficit, particularly if you include also the quasi-fiscal deficit of the energy sector from about 10 percent of GDP to about 2 percent of GDP last year -- largely because of the increase in the energy tariffs, the gas and heating tariffs, but also because of tight fiscal policies more generally. However, to ensure fiscal sustainability over the medium-turn, a start needs to also be made with structural fiscal reforms to ensure that medium-term sustainability, especially that we see the pressures to raise wages and pensions are building.

We feel strongly that Ukraine cannot afford any longer to delay comprehensive pension reform, including by raising the effective retirement age. Further efforts are also needed to improve revenue administration and advance public administration reform as the size of the government is still very large in regional comparisons.

What we have also seen and what directors noted at the board is that the central bank has made very impressive progress in rehabilitating the banking system, but efforts need to continue further to restore bank soundness and reinforce the ability to support growth. The recent nationalization of Ukraine’s largest bank was an important step to safeguard financial stability, but it must now also be followed up by firm efforts to ensure the repayment of loans to minimize the cost to taxpayers.

And lastly I want to say a few words about the other aspects of the national bank’s policy. It has been very successful in bringing inflation down from the peak of over 60 percent in 2015 to low double digits. The latest inflation numbers were 14 percent and we expect inflation to come down further this year. Looking ahead, it will be important to safeguard the NBU’s independence and for monetary policy to remain focused on containing inflation and further rebuilding international reserves within a flexible exchange rate regime. This would also create, we hope, more room to further gradually reduce the exchange restrictions.

MR. KRZYZANOWSKI: Thank you very much. We are ready for questions now.

QUESTIONER: I wanted to ask you about the financing of the program where you say that for 2017, for the current year, the IMF is supposed to provide 5.5 billion dollars. I’d like you to confirm this figure and to talk a little bit about the payments that Ukraine needs to make to the IMF this year. Also, another figure from the same column, says for that iteration, 4.4 billion dollars, what does this mean and does this include any part of the Russian debt?

MR. VAN ROODEN: In terms of the financing, yes, the IMF would provide substantial financing during this year. Of course, conditional upon the ability to conclude further reviews this year as scheduled. We could have a fourth review, a fifth review and a sixth review this year if everything goes according to plan, but that of course depends very much on the authority’s ability to continue to deliver on their commitments under the program.

QUESTIONER: And from the amount that is mentioned here, 5.5, it means that you’ve just provided 1 billion?

MR. VAN ROODEN: Yes, exactly.

QUESTIONER: So until the end of the year, you expect to provide additionally 4.5, right?

MR. VAN ROODEN: That is what we assume, but then again, conditional on reviews being completed.

You will also find in the informational annex the numbers on the financial position of Ukraine with the IMF. That information also includes the repayments that are scheduled for this year.

QUESTIONER: Please talk a little bit about the debt operation -- the contribution to the overall financing of the program from the debt operation.

MR. VAN ROODEN: From the debt operation, from the overall financing of the program, there is indeed the assumption that Ukraine and Russia will be able to reach an agreement on the restructuring of this 3 billion Eurobond. The authorities continue to make good faith efforts in the discussions, trying to reach an agreement on the restructuring of this debt, and they very much encourage, and the Board yesterday too, encouraged the authorities to continue with these efforts.

QUESTIONER: You cannot provide something like a figure for how much of this is included in the finance for this year?

MR. VAN ROODEN: Not exactly in this year. It is included for the numbers of the program overall, for the entire program period.

QUESTIONER: I am trying to understand, where does this 4.4 billion come from?

MR. VAN ROODEN: I understand where your question comes from. You will see that the total in the table gives 15.7 billion, this is the rescheduling, the restructuring of everything that was included in the entire debt operation -- all the private creditors, the state owned guaranteed debt for the city of Kyiv for example that has been restructured. The numbers are included for individual years were the individual debt service obligations to these creditors that were envisaged before the restructuring. Since these have been restructured, this provides the financing. It includes not only the payments on the bonds to Russia, but also the other Eurobonds that have been restructured. This is the financing that was expected and that has now been largely provided as it was due or projected to be due prior to the restructuring operations.

QUESTIONER: I just wanted to know what is the assessment of the IMF on the so-called zombie banks and whether that problem has been taken care of by the Ukrainian authorities?

MR. VAN ROODEN: Sometimes the term “zombie banks” comes up. this is a term that has been used by the Ukrainian authorities. At the start of the program there were a large number of banks, about 180 banks operating in Ukraine. Some of them functioning, some of them pocket banks and some of them essentially already no longer functioning -- banks that didn’t have any real actions. This is what the authorities have been referring to as so-called zombie banks.

As you know, the central bank has already closed or revoked the license of more than 80 banks, including some of these banks that basically were not functioning and they didn’t have any assets and only liabilities. As part of this process, other banks have been resolved, including so called pocket banks that have been taking deposits from the public and have been using these funds to channel them for their own businesses and related-party landing. The central bank has been steadily working its way through these banks.

This is a process that is still ongoing, but we can say that the central bank has focused primarily on the largest banks to make sure that these meet minimum capital requirements. That process is not yet completed, there are still a number of smaller banks that need to be evaluated and may need to be recapitalized.

QUESTIONER: NBU Governor Gontaryeva is going to leave -- she said that publicly. Can you guys comment on how closely you are going to be following her replacement and generally how that replacement is going to affect the cooperation with the IMF?

MR. VAN ROODEN: We cannot comment on any speculations or rumors or stories about whether the Governor is going to leave or not. These stories have been going around for quite some time. As far as we can tell, the Governor has not submitted her resignation, so the Governor is the Governor.

QUESTIONER: A few weeks ago the central bank updated its forecast for Ukraine’s GDP growth in 2017 and they said to us that they projected 1.9 percent growth this year. Now we see from the memorandums that it is projected that Ukraine’s economy will grow by 2.9 percent. Could you explain please why is there such a difference?

MR. VAN ROODEN: Actually, if you look carefully, there is not much of a difference between us and the projections of the central bank. You have to look carefully and go through the entire report, because then you’ll see a supplement to the staff report and a supplementary Letter of Intent produced by the authorities. As you know, the Board meeting was initially scheduled for March 20. We had to delay that to factor in the most recent developments, including particularly the trade ban between the non-government controlled areas and the rest of Ukraine.

That is already an old number, if you look at the supplement, there is a new set of tables with our economic projections for this year and the medium-term. You will see that our forecast for real GDP growth for 2017 is 2 percent.

QUESTIONER: May I ask another question about pension reform? It is not very clear from the document if Ukraine’s government is committed to increase retirement age or is it just recommended to do such as step?

MR. VAN ROODEN: What we want to see and what we need to agree on is to make sure that the pension fund’s finances become sustainable, while at the same time being able to provide adequate pensions to pensioners. Right now, pensions are very low -- we also acknowledge that. Basically, Ukraine has too many people who are receiving pensions relative to the people who are contributing with social security contributions. For Ukraine, its ration is about 1:1, which is one of the worst ratios that you can find in the world. As a result, despite the low level of pensions, the pension fund deficit is among the highest in the world, with last year at close to 6 percent of GDP.

What is needed is a comprehensive pension reform and the authorities have started to work on that. One of the things that need to be part of that is making sure that the effective retirement age is increased. At the moment, the effective retirement age is well below 60, because with the statutory retirement age of 60 and still plenty of possibilities for early retirement, the effective average retirement age is well below 60. That needs to increase to make sure that the pension fund’s deficit is being reduced to ensure the medium-term sustainability and to be able to provide better pensions.

QUESTIONER: From what you just discussed, I wanted to ask in your estimates, how much has Ukraine lost or is losing in terms of the GDP, in terms of growth, from the recent development as you call them, the blockade of the Donbas and the restrictions on the banking?

MR. VAN ROODEN: If you compare the numbers that we had in the original staff report that we had sent to the Board earlier and compare that with our latest forecast in the supplement, we had a projection of growth of 2.9 percent for this year, and now 2 percent, so the difference is about 0.9 percent of GDP.

Part of that is directly because of the loss of output, of value added, that was still included in the numbers from the companies that were operating in the Donbas area and companies that were part of bigger, larger Ukrainian companies that had these units still operating in the Donbas area. Now with the blockade, we assume that these companies are no longer reporting to their headquarters and these numbers are therefore no longer included in the national accounts. That is one part of the 0. 9 percent of GDP less real growth for this year. The nominal number of course is a little bit higher.

Also, because companies in the rest of Ukraine, power plants and steel factories, will not be able to get the inputs that they were getting from the Donbas area, mainly coal and coke. They will now need to find supplies from elsewhere. We saw yesterday in the news that these companies are planning to import coal from as far as South Africa, and including from the US. That will clearly take some time, will be more costly. We do know that the steel companies and power plants also have some access capacity, so hopefully they can adjust, but we also expect that there will be some loss in production because these companies need to adjust. Hence we come to an overall reduction in our forecast of economic growth by 2017 by 0.9 percent.

QUESTIONER: When you say more privatization is needed with agricultural land, can you get into a little bit more detail with this? And does this also mean selling more natural resources, in particular gas rights?

MR. VAN ROODEN: Not so much gas rights or anything like that. What we have failed to see is progress with privatization of state-owned enterprises. Ukraine has a quite large universe of state owned enterprises, there are about 3,000 of them. About half of them are basically not even functioning anymore. There are still assets there, but there is no future for restructuring or anything. These are just companies where the assets need to be liquidated, need to be sold as quickly as possible. The rest of the companies, some of them may have a future, but there is a need to privatize them. Unfortunately, in the last two years we haven’t seen any success by the authorities of being able to sell any medium or larger state-owned enterprise. They tried to sell the Odessa port site land last year twice. Unfortunately, that didn’t work. So the process of privatization of these companies, putting them in private hands, that still is only just beginning and that process really needs to start up.

On land reform, there has been for a long time a moratorium on the sale of agricultural land. That moratorium was extended late last year for yet another year, so that moratorium runs until the end of this year. There it’s important that the authorities develop and get parliamentary approval of the so-called law on land circulation that allows for the sale of agricultural land, both private land but also remaining state-owned land.

QUESTIONER: I just wanted to clarify with regard to the Russian bond. Even the judgement is against the Ukraine, this matter is still regarded as being in good faith negotiations with Russia and therefore that fits with the criteria to continue to disperse funds?

MR. VAN ROODEN: What matters for the IMF’s Executive Board is whether the conditions under the policy of lending into arears to official bilateral creditors have been met and continue to be met. There, yesterday, the IMF Executive Board made the assessment that these conditions continue to have been met by Ukraine and thus allowing the Fund to continue to provide financing to Ukraine. These conditions, to summarize, that financial support from the Fund is considered essential; Another condition is whether the authorities indeed have been making good faith efforts in trying to reach and negotiate a solution on the restructuring of this debt; and whether continued Fund financing would have an undue negative effect on the Fund’s ability to mobilize official financing in future cases. Like I said, at yesterday’s meeting, the Board considered these conditions to have been met.

QUESTIONER: It was basically the same question. Has the IMF, regarding the Russia/Ukraine bond situation, the London high court. Is restructuring per se considered a condition for the IMF to continue the disbursement under the EFF?

MR. VAN ROODEN: What the IMF Executive Board will need to see and need to assess also at future reviews is whether these conditions of the Fund’s policy of lending into arears to official bilateral creditors will continue to be met. The Board will need to make that assessment every time. That also includes, as you say, that the Ukrainian authorities continue to make good faith efforts in trying to reach an agreement on the restructuring of this debt.