IMF ENCOURAGED BY UKRAINE PM'S PROPOSALS

UNCLAS SECTION 01 OF 02 KYIV 000518 SENSITIVE SIPDIS DEPT FOR EUR/UMB, EEB/OMA E.O. 12958: N/A TAGS: EFIN EREL ECON ETRD PGOV PREL XH UP SUBJECT: IMF ENCOURAGED BY UKRAINE PM'S PROPOSALS REF: KYIV 515 SENSITIVE BUT UNCLASSIFIED, NOT FOR INTERNET DISTRIBUTION ¶1. (SBU) Summary. PM Tymoshenko has told the IMF that the GOU plans to put an anti-crisis package to a Rada vote on March 31, consisting of measures the IMF may consider satisfactory for the mission team's return. According to IMF resident representative Max Alier, "things have changed" between President Yushchenko and the PM, at least enough to build minimal consensus on needed legislation to reduce the budget deficit and tackle the mounting fiscal problems of the state energy company Naftohaz. However, Alier told G7 ambassadors that the IMF remains concerned Ukraine's leaders might see the reforms as simply "checking a box." The IMF is particularly wary about the lack of progress on bank restructuring, as a plan to address bank recapitalization and liquidation was not included in the PM's anti-crisis proposals. End summary. Rada to Vote on IMF Measures on March 31 -------------- ¶2. (SBU) On March 24, Ukraine's Prime Minister Yulia Tymoshenko told IMF resident representative Max Alier that the Rada will vote on a package of measures on March 31 that would cut Ukraine's budget deficit, estimated now by Kyiv-based World Bank officials to reach roughly 6 percent of GDP. The Cabinet of Ministers plans to push forward two excise tax bills, one of which (on tobacco) has already been adopted in the first reading. The second (on cars, alcohol, and gasoline) will be proposed in the coming days, according to Tymoshenko. Taken together, the GOU estimates the excise tax laws will generate UAH 10 billion ($1.3 billion) in revenues, equivalent to roughly 1 percent of GDP. Separately, social and economic advisor to the Presidential Secretariat Roman Zhukovskiy has more realistically projected that the excise taxes will provide a revenue increase of UAH 6-6.5 billion (between $780-850 million). ¶3. (SBU) The other three measures planned by the GOU deal with pension reform, Naftohaz financing, and public procurement. The pension-related legislation would differ from the final version of a bill (number 3556) that was recently defeated in the Rada. Its provisions would increase outlays to the Pension Fund from an existing agricultural fixed tax package. The legislation would also limit the maximum amount individuals can receive, thereby affecting public sector executives such as judges, prosecutors, and cabinet-level officials. These proposed caps, which would be tied to a multiple of the annually defined subsistence minimum, would not affect pensions for the most vulnerable segments of the population. Nonetheless, similar measures have been previously declared illegal by the Constitutional Court. Despite expected benefits up to UAH 6 billion ($780 million) that would accrue for the overall Pension Fund, analysts foresee that such reforms could lead to further legal quagmires. PM Promises Action on Naftohaz, Procurement -------------- ¶4. (SBU) The IMF told G7 ambassadors on March 24 that the PM has proposed amending the budget to implement state energy company Naftohaz's financial plan. Although the draft law has not been made public, it would essentially create a mechanism for offsetting Naftohaz's 2009 payments. The PM also intends to put forward a bill to reform the public procurement process. This has been a baseline condition for both the EU (related to its negotiations over a Ukraine-EU association agreement) and the World Bank (to release a $500 million DPL4 loan in 2009),though the IMF has never included it as a component of its loan conditionalities. Local IMF Rep: "Things Have Changed" with PM, Yushchenko -------------- -------------- ¶5. (SBU) Alier reported to G7 ambassadors that he believed "things have changed" with the Prime Minister and the President, perhaps related to pressure from the mounting crisis, the off-track IMF program, pressure from the international community and G7, and the importance of recent energy talks in Brussels (Ref A). He pointed to legislation that had passed in the Rada and been signed by the President, restoring independence to the National Bank KYIV 00000518 002 OF 002 (by overturning articles 84 and 86 in the 2009 budget law), and the formation of a still-nascent bank recapitalization committee, nominally chaired by the PM. But Alier commented that a mechanism to implement bank restructuring was far from resolved. At the same time, he was concerned that Ukraine's leaders are more interested in "checking a box" than taking responsibility for pushing needed reforms. His message to the PM, he told ambassadors, was that these proposals do not constitute a "one-off" solution. Nevertheless, they may be enough to bring Ceyla Pazarbasioglu and her IMF mission team back to Kyiv to review Ukraine's readiness to receive a second loan tranche of $1.8 billion. Comment -------------- ¶6. (SBU) President Yushchenko indicated in Prague on March 25 that the IMF team would return during the week of March ¶30. The President is jumping the gun, as the Rada must first pass a package of measures to cut the budget deficit and offset Naftohaz's fiscal problems. While the PM's proposals would fall far short of addressing Ukraine's total 2009 budget deficit, the IMF's signal that the mission team could return in the event the proposals are adopted indicates a softening of tone. Previously, the IMF had demanded implementation of a bank restructuring mechanism, seen by many as a lynchpin necessary to prevent broader corporate sector defaults. It had also sought an anti-crisis coordinator, as well as clarification of leadership uncertainties at the National Bank (NBU) and the Ministry of Finance. We continue to advocate for these additional measures, while supporting the IMF's efforts to concentrate on Ukraine's most immediately pressing (and most realistically resolvable) concerns. End comment. TAYLOR