Transcript of Teleconference Call on Ukraine with Thanos Arvanitis, Mission Chief for Ukraine, and Max Alier, Resident Representative in Kiev

Washington, D.C.
Thursday, July 29, 2010

ALISTAIR THOMSON: Good morning to the journalists who are dialing in and also journalists in Kyiv in the office of our resident representative, Max Alier. I am Alistair Thomson of the IMF’s Media Relations office here in Washington, D.C., and with me is the Ukraine Mission Chief, Thanos Arvanitis. He’s going to be introducing the subject, which is the approval of the $15 billion Stand-By Arrangement which was approved by the Executive Board yesterday afternoon. He’s going to give brief introductory comments and then we’ll go into a question-and-answer session where hopefully we can respond to your queries. So I’ll turn the call over to Thanos now.

MR. ARVANITIS: Thank you, Alistair. Good morning to everyone. I think that probably you should have in front of you the press release that we issued last night. The Board met to consider the two-and-a-half-year Stand-By Arrangement with Ukraine. The program was approved. It is in the total amount of 10 billion SDRs, about $15 billion dollars, and will cover the period from end-July 2010 to end-December 2012. The objectives of the program are listed in our press release, and I’ll be happy to answer any questions that you may have.

QUESTIONER: Good afternoon. My question is if we can get any more detail on these pension reforms that have been agreed to as part of the deal?

MR. ARVANITIS: Yes, I will be happy to answer this question. As you know, at this moment the pension system in Ukraine has a large deficit. In 2009 the deficit of the pension fund was already about 7.5 percent of GDP (gross domestic product). Significant transfers from the budget to the pension system are required to be able to fulfill its spending commitments. Spending in the pension system has increased significantly over the last year and now represents almost 18 percent of GDP. This clearly is on a nonsustainable path. We think that this needs to be addressed. We have discussed it with the authorities and as you know, it is in the economic reform plan of the President to actually start tackling this problem and bring the pension system back into a sustainable basis. One of the big problems in Ukraine is, of course, that the dependency ratio—that is the ratio of pensioners to workers—is increasing over time. This reflects demographics. It is similar to what we see happening in almost all the countries in the region and in Europe, and as in many of the other countries, Ukraine needs to start taking measures to address the pension system deficit.

Here is what we have agreed as general guidelines. Basically what we need is to provide more incentives for people to stay in the workforce, reduce the age that people go into retirement, and reduce over time the ratio of pensioners to workers. The details of this pension reform need to be formulated, and we are going to be discussing this with the government at the time of the first review discussions which will be in September/October.

INTERPRETER: So there are already several questions from Ukrainian journalists. The first question is, “As far as what we know in the course of the mission the issue of the insufficiency of information was discussed. So what’s your opinion about the sufficiency or insufficiency of information about the decision-making process?”

The second question is, “As far as we know, 2 billion U.S. dollars shall be streamlined to finance the deficit of the budget against all the -- this is our question -- so what do you think about this?”

And the third question is, “What deficit will be envisaged for the next year’s budget?”

MR. ALIER: Okay, those are the questions from Kiev. Thanks.

MR. ARVANITIS: Max, do I understand the first question was referring to the data provision issue that we considered yesterday at the Board?

MR. ALIER: Exactly. That’s exactly what it is.

MR. ARVANITIS: The second one, can you repeat the second question, please?

INTERPRETER: The second question is, “As far as we know so the 2 billion U.S. dollars will be used to finance a budget deficit. So is this true?”

MR. ARVANITIS: Okay, and the third question is the deficit target for 2011?

INTERPRETER: “The deficit that is envisaged for the next year’s budget.”

MR. ARVANITIS: Very good. Okay, thanks. As we said in the press release, the Board also considered yesterday information that was provided during the course of 2009 on whether program targets were met. The Board decided that there is no need for any further action. I think the agreement that we have reached with authorities, including technical details on the provision of information, are sufficient to monitor the program as we go forward.

MR. ARVANITIS: Okay, let me move to the second question which was about the $2 billion. The program, as I mentioned in the beginning, is about 10 billion SDRs. That is about $15 billion. Out of the $15 billion, $2 billion will be allocated to the budget. $1 billion will be available today with the approval of the program -- the second billion will be available with the completion of the first review. The remaining $13 billion will be allocated to the central bank.

Okay, and the third question was, “What is the fiscal target under the program for 2011?” For the general government, the target is a deficit of 3.5 percent of GDP. In addition to that, for Naftogaz, the government plans to eliminate the deficit so Naftogaz next year will have a balanced budget.

QUESTIONER: Hi. Regarding the increase of natural gas tariffs, to be paid by households and utility companies, how many further increases do you think Ukraine will need and how big will the increases be this year and next year? And does the state energy company, Naftogaz, need any capital increase? Thank you.

MR. ARVANITIS: For this year the gas tariff increases have already taken place. It has been announced by the government last week. I think this will be sufficient for Naftogaz to raise, to strengthen, its financial position and meet the deficit target of 1 percent for Naftogaz for 2010. As you know, gas tariff increases also depend on international prices. It depends on the import price from Russia that Ukraine imports at and, therefore, gas tariff increases would need to continue to increase to go towards meeting the import price. This is important because Naftogaz finances need to be strengthened. Naftogaz needs to have resources so that it will be able to invest and to provide better services, and to be able to meet external and domestic obligations without the need to have access to budget financing. But that said, we don’t think at this moment that Naftogaz has any need for a capital increase.

INTERPRETER: Another question from a Ukrainian journalist: “So what do you think about the restructuring of loan from VTB, Russian National Bank?”

MR. ARVANITIS: Thank you. I don’t have much to comment on this. This is up to the government to decide on the terms of this loan.

QUESTIONER: Hi. Thanks for doing this. To follow up on the question about the gas sector. In the past you mentioned that additional financing will be attracted from other multilateral sources. What are those sources? And bilaterally, are you aware of people trying to help, especially the Russians?

MR. ARVANITIS: Thank you. Yes, other multilateral institutions are involved in the gas sector—it’s both the World Bank and EBRD--the European Bank for Reconstruction and Development. They are discussing with the government as I understand reforms, broad reforms, in the gas sector. As you know, the new gas law that was approved earlier in the month is an important condition for loans from these two institutions to continue. Loans from these institutions are to support broad reforms that allow more competition, new entrants, modernization of the sector, and more investment. So there is a mixed agenda that the authorities and other multilateral institutions are discussing. Bilateral institutions-- also the European Union--as you know has a significant interest in reforms in the gas sector and, as you said, Russia. I think all of these efforts go in the right direction which is to serve a more modern, more competitive, and more financially sound gas sector in Ukraine.

INTERPRETER: One more question from a Ukrainian journalist. “What do you think about foreign exchange rate for us in Ukraine and the fact that the exchange rate is not actually flexible, or is not as flexible as it should be?”

MR. ARVANITIS: Yes, thank you. We believe that Ukraine, given the structure of its economy, and given the nature of the external shocks that it’s facing, is best served by having a flexible exchange rate policy. This is something that the Central Bank also agrees with and, therefore, this is an area where we have an agreement, and we believe that the Central Bank should focus its efforts towards establishing a low-inflation environment. The new Central Bank law gives the Central Bank this mandate and the authorities I think operate within a framework to safeguard, to secure, a low-inflation environment within a flexible exchange rate regime.

QUESTIONER: Thank you. There have been some moves by local trade unions and some political parties to protest in courts the recent increase in natural gas rates. Do you think the government is going to be able to quell such local protests? Thank you.

MR. ARVANITIS: Yes, thank you. We have seen the news as well, but also we have seen the statements from the Prime Minister who believes, and the government believes, that the gas tariff increases are necessary and important to strengthen the financial position of Naftogaz. Therefore, I don’t have anymore comments beyond that.

INTERPRETER: Two more questions from Kyiv: Also one question is about the second tranche. “What will be the conditionality for the second tranche apart from budget deficit?” “And how much money will be disbursed in 2011?” And the second question is about credit line rates.

MR. ARVANITIS: Okay. Thank you. Let me start with the second part of the question. In 2011 the amount to be received by Ukraine is 4 billion SDRs and the current interest rate of our Stand-By Arrangement for Ukraine at this moment is about 2.5 percent. This, of course, is a variable rate. It depends on what the rates are in the market of what we call the SDR basket. It’s currencies that are in the SDR. It’s the euro, the dollar, the Japanese yen and the pound sterling. And the short term rates in these currencies determine the SDR rate and on top of that -- and on the basis of this, also determine the rate of our loans. So this is a variable rate, but at this moment Ukraine pays about 2.5 percent on its current credit outstanding.

MR. THOMSON: Are there any other questions waiting? In that case, we’ll give people an opportunity if they wish to pose any final questions. Otherwise, we’ll wrap up the call. And thank you very much for participating. Journalists who have dialed in, journalists who’ve assembled in the Resident Representative’s office in Kiev, and also Thanos Arvanitis, the Mission Chief here in Washington, D.C. If there are no final questions, then I wish you all a very good day. Thank you and goodbye.
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