Ukrainian officials believe that Ukraine is not threatened with default in case of failure to receive the long-awaited IMF tranche. The head of the National Bank, Yakiv Smoliy, is confident that Ukraine will be able to pay off its debt obligations by 2020 without external financing, including without IMF loans. The source of repayment of loans will be gold and foreign currency reserves, which, according to NBU representatives, should be technically enough to make payments in 2018. Sources of additional revenues, which hypothetically could be able to replenish the budget and gold and foreign exchange reserves, include the attraction of funds from external lenders through Eurobonds, active privatization, the fight against the shadow economy and large-scale international projects, in particular, with China. However, without cooperation with the IMF, it would be unlikely to count on the effective attraction of additional funds through the above tools in the short term.
The complexity of fulfilling the IMF’s requirements for the creation of the Anti-Corruption Court and raising gas price led to the fact that officials are considering the opportunity to act without the financial support of the IMF and make a planned payment of external loans in order to avoid default. The situation is complicated by the start of the electoral campaign in Ukraine which may result in a number of decisions to be postponed due to their low attractiveness to general public. Nevertheless, the NBU officials hope that it will not be necessary to implement alternative plans, and Ukraine will still receive the IMF tranche till the end of the year.
It is worth considering the most possible options for attracting additional funds.
External attraction of funds through the Eurobond mechanism
Previously, the NBU planned to attract $ 2.5 billion in 2018, and another $ 1.5 billion in 2019 (taking into account a cooperation with the IMF). In 2017, it managed to attract $ 3 billion at 7.375% without U.S. guarantees, which is a significant achievement. In 2014-2016, Ukraine annually placed 5-year Eurobonds worth $ 1 billion, debt securities were guaranteed by the U.S., which allowed the country to borrow at record-low rates – for example, in 2016, the yield of Eurobonds in Ukraine was only 1.471%. However, all these placements happened against the backdrop of cooperation with the IMF.
Therefore, the attraction of external resources through the sale of Eurobonds is possible only if the cooperation with the IMF continues. Otherwise, as a result of repayment of external debt at the expense of foreign exchange reserves, their level will be lower than the indicator in the three months of the forthcoming imports. This will lead to a decrease in Ukraine’s international credit ratings, and thus will negatively affect the ability to raise funds.
Privatization
The current implementation of the privatization plan in 2018 is in an unsatisfactory state – in fact, privatization has not started. Thus, launching privatization is not about the possibility of attracting additional income (beyond the planned budget level), but about planned budget execution in its best, and, less optimistically, minimizing the budget deficit due to lack of planned revenues through privatization. The planned revenues from privatization have already been reduced by UAH 1.2 bln. It should be noted that last year planned level of revenue from privatization amounted to $ 17.1 billion, but the state managed to get only UAH 3.4 bln. One year earlier, the situation was even worse: out of the declared UAH 17.1 billion the government collected only UAH 188 million.
Regulatory framework for launching privatization in Ukraine is ready. On March 7, a new privatization law entered into force in Ukraine. This law replaces the seven existing laws in the field of privatization. Officials hope that the law will enable to expand a circle of potential investors, as it strengthens the protection of their rights. On June 5, the rules of transparent sale of small state-owned enterprises and companies with a significant share of state capital were approved by the Cabinet of Ministers.
The start of small privatization is expected in July 2018. Small privatization will take place through the ProZorro electronic system. This is the sale of state or communal property, over 50% of which is owned by the state. In this case, the value of assets should not exceed UAH 250 million. Small privatization from financial point of view is unlikely to play an important role in filling the budget.
The possibility of large-scale privatization causes doubts. The list of state-owned enterprises subject to privatization has been reduced from 26 to 23 since the beginning of the year. In particular, the Agricultural Fund and the State Food and Grain Corporation of Ukraine have been removed.
The main reason for the lack of progress in the privatization of state-owned enterprises is political corruption. In addition to controlling financial flows, which allows politicians to launder public money, the social significance of many state-owned enterprises is important. Control over tariffs or prices for goods produced by certain state-owned enterprises can also be used as a tool of political influence. As the election campaign starts, it should be mentioned that the idea of selling state-owned enterprises to private capital is not popular among ordinary voters. In this way, the political will is key to the success in the sales of large enterprises. Another reason for the slowdown in privatization is a poor business climate and low investment ratings of Ukraine. At present, the prices of objects put up for privatization are much lower than the potential value that could be obtained earlier.
The Ministry of Finance will have to look for additional sources of funding for the state budget deficit by 2018 given that the plan for privatization at up to UAH 21.3 billion is actually disrupted. As a result, the state should either put other (additional) enterprises into privatization or make changes to the state budget to correct the plan of privatization revenues.
Fighting the shadow economy
Effective reduction of the shadow economy can be treated as a powerful source of additional financial revenues. According to the latest data from the Ministry of Economic Development and Trade, the level of the shadow economy in Ukraine in 2017 was 31%, which is 4% less than in 2016. However, according to expert estimates, the level of shadow economy in Ukraine exceeds the mark of 40%. In particular, the IMF estimated the size of the shadow sector in the structure of the Ukrainian economy at 44.8%. Thus, billions of dollars are in the shadow sector.
The government is trying to fight the shadow economy but it is unlikely to rely on success without large-scale reforms. Customs has become one of the priority areas for anti-shadow and anti-corruption. The Prime Minister Volodymyr Groysman said that the abolition of shadow schemes in customs authorities brought an additional UAH 70 billion to Ukraine last year. The government’s intentions to combat corruption at customs are observed this year. In particular, the Cabinet of Ministers approved a plan to combat smuggling. Also, the Cabinet of Ministers decided to launch an experiment on customs: from 21 June to 31 December, policemen will be able to stay round-the-clock in the customs control zones with the bodies of the State fiscal service in order to reveal the facts of smuggling. In addition, police officers and officials of the Ministry of Interior will have access to an automated customs clearance system. So far, only the Security Service of Ukraine, which belongs to the presidential vertical, has such a right.
Officials expect the successful implementation of the plan will bring the state $ 4 billion. Such intentions may indirectly indicate the search for alternative sources of revenue pending failure of cooperation with the IMF. Also, some experts believe that such government actions can be viewed as an attempt to redistribute control over financial flows from smuggling.
Large-scale international projects
The implementation of large-scale infrastructure projects involving international financing can be a hypothetical alternative source of funds. Since 1993, the EBRD has allocated nearly 12 billion euros for various projects in Ukraine, both in the private and public sectors. The IFC allocates the par value. The emergence of other players interested in implementing large-scale projects in Ukraine is primarily limited by the low attractive investment climate. However, at the beginning of this year, the Cabinet of Ministers of Ukraine announced its intention to conclude a framework agreement with China on a range of infrastructure projects worth $ 7 billion. However, it seems unlikely that these intentions will be implemented in the near future because of the expected elections.
Budget sequestration
Budget sequestration can be considered as an extreme measure, which the government decides in case of a critical situation. The causes of sequestration are non-fulfillment of income plans and exceeding the marginal level of the deficit. Budget sequestration in Ukraine was carried out in 2010 – in a post-crisis year in the framework of stabilizing the financial and economic situation. A large reduction in spending was also in 2014.
According to official statements, the sequester is still unlikely, even though the data from the State Statistics Committee show that from January to April the state budget of Ukraine is executed with a deficit of UAH 20.6 billion. However, the acting Minister of Finance of Ukraine Oksana Markarova does not see grounds for a budget sequestration. Ex-Minister of Finance Oleksandr Danylyuk was also quite critical of the feasibility of sequestration.
If sequestration happens, then it is expected to reduce spending on infrastructure projects, construction and ineffective programs, as well as on reform plans that require additional funding, for example, financing health care reform.