IMF's Lipton: it is not a moment to start thinking about elections.
An exclusive interview of IMF First Deputy Managing Director David Lipton with the Interfax-Ukraine News Agency.
It is a month has passed since your visit to Kiev.
Seems just like yesterday. Quick month.
Still, during this time the Rada has adopted pension reform. There were, however, concerns expressed by the IMF about the amendments made to the bill, as well as about other negative signals coming from Ukraine. So could you clarify the IMF's conditions for this review and comment on how well we move on in our commitments after your visit?
On the pension reform, we have agreed with the government the principles that the pension reform will be based on. Those included budgetary savings and making sure that the pensions for those who retire will really provide a decent standard of living. We had not a chance to look at the final legislation yet. What we will be looking at is whether the principles that we have laid down are reflected in the final bill.
The main objective of the program in Ukraine at this stage is to move from stabilization to structural reforms. For example, there is a benchmark on creation of the anticorruption court. Last week, the Venice Commission expressed a view about that and there has been some further discussion on that in Kiev. What is important for us and what was agreed during my visit was that there would be the creation of an anticorruption entity that satisfied key principles; that would be efficient and effective. For us efficiency and effectiveness means very importantly that the selection process for judges who will serve on that entity be sound, ensuring their integrity and professional quality.
There is also a benchmark that has to do with the privatization legislation and our people are looking at that legislation.
In addition to these reforms, to move forward, there are also some questions about whether past reforms are being maintained and carried through. One area is gas tariffs and the gas system.
There has been some discontent about the lack of progress in improving governance at Naftogas. One of the major accomplishments of the program has been that the gas system has been improved, the gas subsidies removed, and finances of the gas system normalized. Ukraine, for the first time in a very long period, has not imported gas from Russia and created better incentives for domestic energy production. We want to see that these very important steps that Ukraine has taken are maintained and built upon further.
Another part is about the routine adjustment of gas tariffs. Once you get the elimination of the implicit subsidies that were provided before, tariffs have to move with international market prices: when gas prices go up – tariffs go up; when gas prices go down – tariffs go down. A formula was agreed for that.
The budget has been submitted and we need to make sure we understand all the details. Hitting budget targets is not an easy thing and obviously depends also on how robust the economy is. We will be looking whether the budget is strong enough under these circumstances.
Regarding the budget, there is a risk that Ukraine may breach the fiscal deficit target for this year. If so, will it have implications to the program, in special to the IMF's budgetary proposals for the year 2018?
There are two aspects. One is what policy is embedded in the budget and the other is whether the economy is strong and as a result the tax revenue base is strong. We have to look at both of those issues. Over the last few years, the maintenance of budget discipline in Ukraine has been good and has been part of the substantial improvement in macroeconomic policies. It has helped Ukraine to move to a much more stable situation.
According to the projected payments to Fund the first large repayments on the EFF Arrangement come due in 2018. Taking into account some delay in withdrawing funds and in building up of the NBU's reserves, is this possible that these repayments will be offset by the next tranches?
The important thing for Ukraine is to carry forward with its economic reforms and reach agreement with the IMF on the next review so that we can continue to help Ukraine by disbursing more money and creating an environment, in which other money can flow in. The European Union is set to disburse money if the policy environment is satisfactory, the European Bank for Reconstruction and Development has a number of operations that would bring money to Ukraine. There are many other flows that might be available to Ukraine, not to mention just as the results of stronger economic activity. They would help create a stronger foundation for Ukraine going forward.
In general, how do you assess medium-term risks to the country against recent liability-management operation and upcoming pre-election year of 2018?
If Ukraine decides to pause in reforms or take a step back, it may lose the benefits of the progress that it has made so far. That is something that has happened before in Ukrainian history, more than once. If Ukraine pushes forward, there will be opportunities for liability management and to continue to strengthen the foundation of public finances. What is at stake is whether Ukraine can solidify the stabilization and begin a period of growth, which can help solve its problems. It is a key moment and it is not a moment to start thinking about elections. The elections are still very substantially in the future. This is a moment to try to press ahead and make more progress. Then everyone will be able to have an election period in the environment of a stronger economy.
There were some talks last month about drafting so called "Marshal Plan" for Ukraine. According to estimations of its initiators if Ukraine receives annual investment of $5 billion its economic growth will be 6-8% of GDP. Have you heard how realistic are these, let's say alternative to the EFF program, intentions?
I have never heard anything about that idea, and if there were some governments making such preparations, I would know about it.
It is nevertheless entirely realistic for Ukraine to believe that if it presses ahead with reforms, there can be very large-scale financial inflows, whether it is more borrowing from market or whether it is attracting investment. The greatest prospect for Ukraine is to start to attract investments into the country that will begin to create links in the European supply chain – the way German and Scandinavian firms have supply chain links in Poland and other Central European countries. With Ukraine's talented and educated workforce and wage levels, the future for Ukraine is to become part of Europe not by some negotiated agreements, but by investment that begins to link the economy of Ukraine with the economy of Europe. The benefits that could come from that would be very substantial in comparison with the numbers you are talking about.
And the last question to conclude: have you already the date for the next Mission coming to Kiev and some preliminary time horizon for the fifth tranche might be disbursed?
We have not discussed the date for the mission. Rather we have been focused on discussion of the policy steps needed to be able to move forward.