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Transcript of a Conference Call on Ukraine With Ceyla Pazarbasioglu, Mission Chief for Ukraine in the IMF's European Department
July 29, 2009
MS. GAVIRIA: Good morning, everyone and good afternoon to those in Europe. Welcome to this conference call on the completion of the Second Review of the Stand-By Arrangement with the Ukraine. Our press release related to this was issued yesterday, and it’s available on our web site. Here with me is Ceyla Pazarbasioglu, the Mission Chief for Ukraine at the IMF. She has some opening remarks, and then she’ll be happy to take your questions.
MS. PAZARBASIOGLU: Thank you. Hello, everyone. Thanks for joining this call.
I’m pleased to report that the Second Review has been completed. The Executive Board, yesterday, approved the completion of the Second Review of Ukraine’s IMF-supported two-year Stand-By Arrangement, and this means that the third tranche would be released. It’s about 2.12 billion SDRs, which comes to about $3.3 billion.
The discussions for this review were held in Kyiv in June, early July. And, as the Prime Minister and others have already noted, there were difficult decisions that needed to be made, given the ongoing difficult, challenging times in Ukraine. But we worked very closely with the President, his Secretariat, the Central Bank, the Ministry of Finance, and the Cabinet of Ministers to agree on a program that would meet the needs of Ukraine and bring the country back to economic growth in the coming year.
In terms of the key issues that were discussed and were influential in completing this review there was, of course, the meeting of the program targets. As you know from earlier published documents, the review documents will also be published probably within three to four weeks time.
In terms of the program targets, these include quantitative performance criteria on base money and net international reserves and on the general government balance. All these targets were met, and the authorities made progress in terms of structural reforms and strengthening the banking system, and passing the legislative amendments to the bank resolution framework, which should contribute in terms of helping the banking sector to return back to lending, which is very important in going back to growth.
In terms of the key issues going forward, there is the issue of fiscal prudence. With elections coming up, obviously, there will be pressures for expansionary policies, but, given the circumstances, it’s going to be very important to contain these pressures and make sure that fiscal sustainability is preserved.
In this context, also, the authorities have already taken some measures to reduce non-priority expenditures, to start reforms, and to bring efficiency to the gas sector. Domestic gas prices are increased by 20 percent, and there will be further 20 percent increases each quarter starting next January. This is very important in terms of making sure that the sector works efficiently and Naftogaz is put on a sound financial footing. But, of course, the implications of this on the vulnerable of the society have to be taken into account, and the government has formed a task force to look into making sure that the social safety net exists to protect the vulnerable groups of the society.
In our review, we revised the deficit to include also the Naftogaz deficit since this is an important company, and it’s guaranteed by the state. So this made us revise our deficit target.
In terms of next year, the authorities have already announced that they will target a 4 percent of GDP deficit, including Naftogaz transfers, and took further measures to restructure the company going forward.
In terms of monetary and exchange rate policies, the Central Bank policies are broadly appropriate. The bank stands ready to tighten policies if there are pressures on the exchange rate or inflation. They have already amended the regulations to make sure that there would be an efficient foreign exchange forward market in Ukraine, which should help hedging opportunities for the public and corporate sectors and, therefore, help make sure that there would be an efficient foreign exchange market.
In terms of the bank restructuring program, this is going in line with the program. There is the bank resolution bill, which was enacted last Friday, which gives the necessary instruments to the Central Bank and the government to have an effective resolution of the banks that may face problems and also make sure that the banking system returns to stability and, therefore, start lending again.
Obviously, the key issue going forward, as we usually note, is going to be ownership of the program and political consensus to remain faithful, or to remain close, to the spirit of the program. And, therefore, take the measures to reform the economy in terms of taxation, in terms of pension fund reforms, and make sure that it’s put on a sustainable footing so that growth going forward can be much more stable, rather than the ups and downs in the last 10 years. So we are in constant dialogue with the authorities.
The next review will mostly likely take place sometime in October, but in the meantime we will be in close contact regarding the formulation of the 2010 budget, which is going to be critical for the next review, and in terms of the continuation of the bank strengthening program. We will be in close contact, as we have always been, to assist the authorities as they make progress in these areas.
I’d like to stop here and take questions if you have any. Thank you.
QUESTIONER: Was repayment of Naftogaz eurobonds part of the agreement? Can a certain amount of IMF tranche be used for Ukraine’s external debt?
MS. PAZARBASIOGLU: Of the last disbursement, half went to the budget, and in this review, all of the tranche will go to the budget, basically to meet external obligations. Which external obligations the government decides to use this for is their internal decision. But, basically, the idea is that the government has external obligations, and that this disbursement would support the payment of those obligations, be it balance of payments needs, be it external debt payments, or otherwise.
QUESTIONER: My question also relates to Naftogaz. Does the IMF actually support the restructuring of Naftogaz debt, specifically this $500 eurobond coming in September? Do you think it’s a good idea? Do you think Naftogaz needs to restructure these debts?
MS. PAZARBASIOGLU: We believe in good asset liability management, to make sure that the assets and liabilities of the company are properly designed and to ensure its profitability and financial soundness. We had a conference in Kyiv last Friday that was coordinated by the EC, and, earlier on, there were two more meetings in Brussels where Naftogaz issues were discussed. Obviously, it’s very important for the company to have good asset/liability management, and that may include discussions about some voluntary restructuring of its debt and so on. We would be in close contact with the authorities to look into details of any such proposals, but, at this current time, we have not seen any details and there is nothing concrete. Therefore, it would be too early for us to say anything, other than what I just said, which is the IMF’s policy of supporting the good management of debt, be it this company or any other private sector company. As you know, many of the private sector companies in Ukraine are discussing voluntary restructuring of their debt.
QUESTIONER: Does that mean this was something that you had already talked about with the government? Was it even a recommendation that the government restructure Naftogaz debt?
MS. PAZARBASIOGLU: No. Restructuring of Naftogaz debt was not necessarily a recommendation. The recommendation was, since the start of the program, to look carefully at the debt obligations of the government and any state-guaranteed debt, and to make sure that there is good asset/liability management, which can include voluntary restructuring of its debt.
If the debtholders want to increase the maturity with some other details, and if it makes sense for the company and the fiscal balances, than that would be something that we would look at carefully and we would welcome. But I think what I would like to stress here is that it should be a voluntary restructuring of debt.
QUESTIONER: Under this agreement, can Ukraine use part of its loan to pay Russia for gas, specifically the bill in early August?
MS. PAZARBASIOGLU: What the agreement basically says is that the government can use this tranche to honor its external obligations. Exactly for which purpose they use it is their own decision. The idea is that they have balance of payments needs, including gas purchases, including external debt payments, and these funds are available to help the government make those governments.
QUESTIONER: So would you expect them to use it? I mean, I guess their gas bill could be around $500 million to $100 billion. You would expect them to use it to pay down that kind of obligation, right?
MS. PAZARBASIOGLU: As far as we know the government stands ready to honor the external debt obligations of Naftogaz. But as I said, how they use different resources they have to make external payments is the government’s own decision. Whether they use their own funds or Naftogaz’s funds or some other ways, that’s an internal decision.
What we do in our work is to calculate the external needs and provide support based on that. And exact details of it, obviously as it becomes more concrete, we would discuss. But there are no specific details that we would provide to them other than saying this is earmarked or this is basically provided to meet external obligations, which is the role for the Fund, balance of payments support.
QUESTIONER: Is that gas bill taken into account for the size of the tranche?
MS. PAZARBASIOGLU: The program takes into account the calculated balance of payments needs. Of course, it takes into account imports and exports and debt payments because those are the foreign currency needs of the country. So, yes, it does take into account the relevant contracts the authorities have signed and the import gas bill that they need to pay.
QUESTIONER: I would like to ask if IMF is seeing any amendments to quantitative performance criteria, such as Central Bank reserves and money base? And the second question, is does the IMF see any need for increasing the total loan amount of $16.4 billion?
MS. PAZARBASIOGLU: In terms of the quantitative performance criteria, there was an amendment to the fiscal performance criteria, and you will see all these details once the documentation is published. There was no change to the Central Bank money base and the net international reserve targets, targets that have been met with very large margins. There was no need to change those targets based on our projections. Of course, with every review, we stand ready to look at these and make amendments as necessary.
In terms of the loan, the financing needs of the country is something we look at very carefully in each review. This review, according to our projections, which we agreed with the Central Bank and the Ministry of Economy, the program remained adequately financed, and there was no need to change the financing. However, we stand ready to look at this issue very carefully in the next review, especially in terms of 2010 needs. And, at that time, we would be in a better position to answer your question.
What I’m trying to say is that we are open-minded. We will look at it carefully, revise it if necessary, and discuss the options, but, at this point in time, the program is adequately financed.
MS. GAVIRIA: Is there, Ceyla, something that you would like to add to conclude?
MS. PAZARBASIOGLU: Basically, I would like to note that this is a difficult, very harsh crisis. The country was hit by multiple shocks at the same time, also in the context of a global economic crisis which hit exports, capital flows and so on. It has been difficult.
The country has remained resilient, but managing a crisis of such a severe magnitude requires implementation of good policies and, most importantly, political consensus and strong institutions. We are engaged with the authorities through this program and through intensive technical assistance in monetary policies, exchange rate policies, in fiscal policies, tax administration and so on to support them in many of these dimensions.
But, going forward, it’s going to be extremely important for all actors, all political parties to have ownership of the program and to have consensus. Otherwise, it would be difficult to manage the country out of this crisis and return back to sustainable growth. So, going forward, especially as elections are approaching, it’s going to be very, very important that all sides unite in their efforts to manage the country out of the crisis.
MS. GAVIRIA: Thank you, Ceyla, and thank you all for participating.
MS. PAZARBASIOGLU: Thank you. Bye.
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