The Memorandum with the IMF: what will change for Ukrainians

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A number of provisions of the Memorandum deals specifically with a wide range of people.

In recent time, the main intrigue of the question about the new loan IMF program for Ukraine was the text of a Memorandum of cooperation. That Ukraine will receive the loan, there was little doubt. Much more discussion was held on the topic of conditions that need to be done to the trenches was more than one. Before the meeting of the Board of Directors of the IMF and surfaced details about “draconian” clauses of the Memorandum according to which Ukraine allegedly will cut pensions and raised the retirement age, impose external management in a number of sectors and strengthen the tax pressure. The country’s leadership, the Charter to deny the speculation, promised to publish the full text of the document immediately after a decision is made regarding Ukraine. And on June 11 an official translation of the Memorandum appeared on the website of the Cabinet – it should be noted, for the first time in such a short time, reports the with reference for Today.

I have to say, this document is practically not revealed surprises – some planned changes, which would not been said before.

“This Memorandum was prepared very quickly, and there are a lot of terms that were used. He repeats the Memorandum, which was signed Groisman in 2018,” – says President of the Ukrainian analytical center Alexander Okhrimenko.

According to experts, most of the points of the Memorandum are generally little understood and of little interest to most people.

“There’s a lot of attention paid to changes in Bank supervision and justice. This is also a very old demand. There are many nuances relating to Bank capital – how to form, how to knock out debts with those banks that closed. This is something that the population does not regard”, – said Alexander Okhrimenko.

Nevertheless, a number of provisions of the Memorandum deals specifically with a wide range of people. Will tell you more about them.

Obligations in the communal

Basically, the Memorandum items that affect a wide range of Ukrainians, affected utilities and included in the section “energy sector Reform”. So, since July 1, has significantly changed the system of formation of tariffs for gas. The Ukrainian side undertakes to establish a population of the market price for gas, which will be formed “as the average of the spot prices of natural gas on day-ahead hub on TTF for the period from 1st to 22nd day of the month, plus the cost of transportation and import to Ukraine”. The price of gas will change each month depending on fluctuations in market prices.

“Within a few business days 22-th day of each month, “Naftogaz” will publish a wholesale price. We are committed to systematically apply this pricing scheme, which is based on market principles, without any upper limit of the price range” – said in a Memorandum.

“From 1 July will be cancelled the previous decree of the government, and the price of gas will be calculated at the average price in Europe. The tariff for the following month will be set, based on the average price of gas. Of course, will count in dollars, then converted into the hryvnia, add VAT, transport and other margins. And every month the price of gas will change. There will be no surcharges, no subsidies from the state. If the price in the world will fall, and in Ukraine, too, will fall, will rise in the world – will grow in Ukraine. It really is radically new for Ukraine”, – said Alexander Okhrimenko.

Another economist, President of investment company “Univer” Taras Kozak, believes such changes are logical.

“We in Ukraine have used that gas should be cheap. Although we import it. Somehow about gasoline no one questions no, gasoline is always sold at market price, and no one demanded that he was worth 20 cents. And gas should be. Therefore, the requirement about what gas must be sold at market price, is the normal requirement. Another thing that should be above the salary that people could pay the market price for gas,” he says.

In addition to the gas tariffs will change the tariffs for heating. However, they will change only once a year.

Until the end of August 2020, all heating tariffs, which are under the jurisdiction of the national Commission and local authorities will be revised and formally adopted for the full display of the cost of gas and non-gas costs… Starting with the heating season 2020-2021 years, tariffs for heating will be reviewed and determined at least once per year before the heating season to ensure adequate reflection of the cost of gas and non-gas costs (including capital costs) in rates for heating,” reads the Memorandum.

Given that gas prices in the world market are currently quite low, the biggest risk of higher prices lie in the refinement of capital expenditures. If we are talking about the modernization of networks in Ukraine are outdated, the tariff increase can be quite significant.

However, the Prime Minister of Ukraine Denis Shmyhal argues that the tariff revision does not necessarily mean an increase.

Also in the next heating season, we can expect higher fines for late payment of utility services. The Memorandum States the intention to solve the problem of outstanding utility bills and to increase payment discipline of households.

“We will develop adequate tools for heat supply companies to ensure the collection of payments from households (including higher fines and simplified legislation)”, – the document says.

“The Memorandum is really spelled out that the government undertakes to reduce debts for utilities. On the one hand, they want to strengthen the penalties are now not actually operating, on the other hand, the debtors will propose restructuring, and on the third hand, they want to expand the capabilities of collection agencies to, if they have an unsolvable situation, it was possible to beat debts”, – says Alexander Okhrimenko.

Structural beacons

As already mentioned, the new credit IMF program for 18 months. Funds – $ 5 billion – must go to Ukraine in four tranches. The decision on the next tranche of the IMF will take on the basis of how the recognition criteria of efficiency and structural beacons program. The monitoring of implementation scheduled for September 1, December 1, 2020, and then on 15 may and 15 October 2021-th.

Structural milestones in the program are marked 9. Briefly call them with the dates run in chronological order:

  • To develop plans for the reduction of “bad” loans of the state banks until the end of June 2020.
  • To revise the tariffs for heating and to develop a simplified procedure for the replacement of suppliers household– until the end of August 2020.
  • To form a new organizational structure and system for reforming the State tax service and State customs service until the end of September 2020.
  • Strengthen corporate governance of state-owned enterprises, including to adopt a new corporate Statute for the NJSC “Naftogaz of Ukraine”, in accordance with the corporate principles OECP – until the end of September 2020.
  • To amend the law on the guarantee Fund of deposits of physical persons, to improve the mechanism of liquidation of banks and return of assets – until the end of October 2020.
  • To amend the law on the High Council of justice, which will improve the process of selection of members of the VSP and ensure that their reputation and integrity – until the end of October 2020.
  • Make changes to the banking act that will fill gaps in the effectiveness of corporate governance in accordance with the Basel principles by the end of November 2020.
  • The state tax service and State customs service should act as two separate legal entities with the Central and territorial offices, and regional and other divisions of GNS, GTS, and the State fiscal service cease operations until 1 January 2021.
  • State audit service of Ukraine with the participation of external independent auditors will check the targeted use of budgetary funds by Fund to fight COVID-19 – until the end of March 2021. The Fund itself will last a maximum of until December 31, 2020.
  • Other reforms

    The Memorandum States, and other reforms that will be scheduled during the term of the IMF loan program. And also about what steps the government of Ukraine will be avoided during this period. Here are some of them.

    • Reform the tax system, particularly by broadening the tax base and reduce the possibilities of tax evasion. A further goal is the transition from direct to indirect taxation and the taxation of wealth. For the duration of the program of the Ukrainian party undertakes not to introduce new tax concessions (other than those associated with COVID-19), including free economic zones, preferential rates, etc.
    • Until the end of September 2020, together with the IMF experts to develop a scheme for voluntary Declaration of property status and undeclared income.
    • Not to introduce a new special pensions and benefits, to refrain from further discretionary increase in pensions (the”special pensions”), to refrain from lowering the effective age of retirement.
    • To consolidate existing programmes of care (social) in the scheme of guaranteed minimum income (GMI) while increasing the size of the program.
    • To pursue the purchase of key medications with the involvement of authoritative international organizations. In 2020 the purchase of medicines will be carried out centrally via a newly created state enterprise “the purchase of Health of Ukraine” with the use of ProZorro.
    • To further optimize the number of educational institutions primary and secondary education, increase capital expenditures to upgrade buildings and necessary infrastructure in schools. To reform the curriculum. To change the structure of teachers ‘ salaries. In universities, the salary of teachers will be tied to results.
    • To stimulate small and medium businesses to operate under a General regime of taxation. Not to expand the criteria of the simplified tax system. To develop methods of exchange of tax information with the local budgets to improve tax collection.
    • Until the end of September 2020 will be abolished and a system of scheduled audits, tax audit will be based on risk analysis.
    • Inflation will stay at 5% +/-1%.
    • To reduce the state share in the banking sector. The world Bank group has approved a loan to the UGB converted to equity. Until the end of October 2020 provides all conditions for the entry of EBRD in capital of the Bank.
    • To mitigate a portion of the old non-performing loans (NPLs) in state-owned banks.
    • Until the end of June will create a partial guarantee Fund for financial support of small farmers by providing loan portfolio guarantees. Will be developed the procedure for the transfer of state land to communal ownership.
    • Until January 1, 2021 will be a system of gasmonitoring, based on links to information from cadastre, registry, and fiscal services.
    • Until the end of November there will be changes in the law on privatization to extend a minimum of 3 years period by which large enterprises can be sold in accordance with the laws of the UK.
    • Until the end of 2020 will be announced tenders for the sale of at least 2 large SOEs.

    Economic expert Taras Kozak believes that the terms of the Memorandum, primarily in the interests of Ukraine itself.

    “Yes, Ukraine has never fully complied with the terms of the Memorandum, because we never had a long-term reform of the majority. The IMF just pushes us in the direction of reform. And the fewer conditions, so it’s getting worse for Ukraine. Because the smaller the number of IMF conditions we perform, the longer it will remain a “banana” country. There are conditions necessary to carry them out, you have to become a normal, civilized country. And the desire to “propetlyat between the drops” leads to the fact that we occupy the last place in Europe”, – said Taras Kozak.