After transferring the second tranche of the stand-by Ukraine loan, the IMF has decided to change the conditions of the program. IMF experts believe that the war in Eastern Ukraine may last until the end of the current year which requires certain changes to the original conditions of the financial aid agreement.
The first change is related to the activities of the National Bank of Ukraine. First of all, the IMF is requesting the National Bank to top-up its own reserves by purchasing 800 million US dollars via interbank foreign exchange. This requirement has been added due to shrinking Ukrainian BOP which has been greatly affected by the increased capital outflow, which, in turn, is a direct result of the war in Eastern Ukraine and worsening investment climate in the country.
Secondly, the National Bank of Ukraine must limit the sale of foreign currency to “Naftogaz Ukrainy” and the Cabinet of Ministers. “Naftogaz” is expected to buy approximately $7 billion. As a result of this, IMF is forced to limit Ukrainian foreign-exchange reserves at $16.2 billion (instead of the earlier expected $19.2 billion) at the end of this year, and $23.4 billion (instead of $26.7) at the end of next year.
For reference: since the beginning of this year, Ukrainian foreign-exchange reserves shrunk by 21%: from $20.7 billion to $16.07 billion.
Increasing foreign-exchange reserves is proving to be a tough challenge for Ukraine as the volume of foreign investments has dropped from $1.85 billion to $1.5 billion since the beginning of this year. Japan is investing less, the European Investment Bank has ceased all cooperation with Ukraine. There is information indicating that the European Bank for Reconstruction and Development is going to cut back on its investment programs in Ukraine.
One of the few remaining options for increasing foreign-exchange reserves is issuance of Eurobonds. The new conditions of the IMF agreement are requiring Ukraine to raise $2 billion through issuance of Eurobonds. However, experts agree that Ukraine will not be able to find willing investors independently as the war in the East of the country is undermining investor confidence and the situation in foreign markets does not favor placement of state-issued securities.
Several points in the IMF agreement are related to changes in the banking sector. As before, the IMF is insisting that the state regulator should have the ability to re-finance only those banks whose assets exceed 2% of total assets of the banking sector. Forthermore, the National Bank must provide the results of stress-tests of 15 largest banks which shareholders must then use to present a recapitalization plan for the financial institutions.
Experts are doubting that the National Bank of Ukraine will be able to adhere to IMF requirements related to increasing foreign-exchange reserves. For example, the new regulator requirements for banks to sell 100% of their foreign currency revenue and limit their foreign reserves at 1% are not enough to provide the National Bank with the $800 million it needs to increase the foreign-exhange reserves to the level required by IMF.
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