Bring back tax audits, reduce budget expenses. What does the IMF want and when will it provide the money?

The International Monetary Fund’s mission is currently working in Ukraine. The thing is that during the second review of the EFF program the status of Ukraine’s fulfillment of its obligations under the Memorandum on Economic and Financial Policy will be discussed. As reported by the NBU, the focus of the meetings will be on the situation in the country’s financial sector, the results of assessing the stability of the banking sector, the implementation of the Strategy for easing foreign exchange restrictions and the transition to greater exchange rate flexibility. and a return to inflation targeting. In addition, the consequences of the transition to the managed exchange rate flexibility regime, the introduction of risk-based supervision in the financial sector and the financing of the state budget deficit will be discussed with fund representatives.

Focus It was investigated what extremely important issues the IMF representatives discussed with the authorities and when Ukraine could receive the third tranche under the EFF program.

Implementation of “signs”: What is needed to allocate the next tranche to Ukraine

During the negotiations, IMF representatives and Ukrainian officials will primarily discuss Ukraine’s progress in fulfilling the program conditions and the results achieved within the framework of economic and financial policies. In this respect Focus said Central Electricity Grids economist Maxim Samoiluk.

“The large budget deficit in 2024 is no surprise for the IMF, as Ukraine is still at war and needs to finance significant military spending. The need for external financing, which is also included in the IMF program, is likely to be the focus of negotiations.“, says the expert. He recalled: The IMF EFF program contains “structural signals” – a clear list of reforms with certain deadlines that the country must fulfill. The first revision of the program in the Ukrainian summer was successful. But now, the fulfillment of obligations raises some concerns, because Some signals have not been completed fully or on time and are considered “incomplete” signals according to the IMF approach.

“The most problematic is the situation regarding the refund of tax audits. The relevant draft bill No. 10016-d, agreed with the partners, must be adopted in the second reading.”“, noted Maxim Samoiluk.

As a matter of fact, the draft law on the refund of tax audits is one of the “structural signs” within the framework of cooperation between Ukraine and the IMF. Just a few days ago, the Finance Committee of the Verkhovna Rada approved bill 10016 for consideration in the second reading. According to the first deputy chairman of the committee, Yaroslav Zheleznyak, some changes were made to the draft compared to the first reading, in particular: The deadline for the return of documented scheduled tax audits has been postponed from November 1 to December 1, and the moratorium on audits of individual entrepreneurs of the first and second groups remains in force until December 2024.. Now, obviously, while the IMF mission is working in Kiev, MPs need to speed up the voting process for this document, because this “structural sign” has an important role in the decision to provide the third tranche of the fund to Ukraine.

Ukraine’s state budget and debts: what does the fund deal with and when will Ukraine receive the funds?

Another important issue for the IMF is the government’s budget deficit. The Fund has repeatedly mentioned the need to reduce expenditures, but as far as is known from the draft state budget for 2024 prepared for the second reading, expenditures have increased even more compared to the original version of the document. However, experts believe that officials can convince the fund that the state budget is realistic and that there are resources to finance the deficit.

“I think the main topic of the negotiations will be the budget deficit and its closure through various means. How to close this deficit through additional financing as well as internal resources (government bonds, improvement of administration, tax) and customs payments… At least at this point, the Ukrainian side will lobby. I also do not rule out discussing the possibility of deleting some of the obligations. Now that there is a draft budget, the Ukrainian side will already try to justify its position,” explains financial analyst Andrey Shevchishin.

Important

interlocutors Focus Note: Although the negotiation process with the fund will not be easy, even the complex issue of resources to finance the state budget deficit will not prevent Ukraine from receiving the third tranche under the IMF program.

“The 2024 budget deficit is a real problem, but it is not the IMF’s responsibility. These are one of the puzzles of this picture, they do not affect the big picture and probably “pose” that we need to reduce costs because shooting resources are not guaranteed, will not happen. They were asked by “the powerful” to finance Ukraine, they are financing, they do not resist much and do not ask many questions,” says Dmitry Boyarchuk, general director of CASE Ukraine. According to him, there is a more important issue on the horizon – the restructuring of Ukraine’s commercial debt.

“Of course, the IMF will have an important role in this process. However, a full 6 months are allocated for this in 2024.”“, says Boyarchuk.

Andriy Shevchyshyn believes that the IMF will try to implement structural reforms for the medium and long-term economic growth of Ukraine, as well as the stability of the banking and financial system.

“Given the delay, I really hope that with the help of the US and Europe, a positive decision will be made on the language issue.” . At least in the current situation, the fund needs to show its support for Ukraine,” confident Andriy Shevchishin.

According to Dmitry Boyarchuk, Ukraine will definitely receive the third tranche from the IMF, since the fund is no longer aimed at promoting reforms. “They will hand over the constellation, they do not yet have a goal of promoting reforms, they are just used as a financing channel and they are actively dealing with this.”. Reforms are more of a background issue; these are not a priority of the IMF’s current work (although officially the opposite is true),” says Dmitry Boyarchuk.

It is possible that the IMF will transfer funds to Ukraine from the third tranche by the end of 2023. What is important for a country whose budget and macro-financial stability completely depend on the funds of foreign partners and international organizations.

Important

“It is vital that Ukraine receives all planned foreign aid. While the situation with US financing is still uncertain, receiving other tranches, including from the IMF, is indeed critical. In total, this slice is planned to amount to approximately 0.9 billion dollars. “The risk of not receiving this tranche is low, as Ukraine is trying to fulfill its obligations and its financing needs arise from the war,” summarized Maxim Samoiluk.