IMF ON UKRAINE'S BUDGET AND BANKING BENCHMARKS

C O N F I D E N T I A L KYIV 000954 SIPDIS DEPT FOR EUR, EUR/UMB, EEB/OMA E.O. 12958: DECL: 06/02/2019 TAGS: EFIN EREL ETRD PGOV PREL XH UP SUBJECT: IMF ON UKRAINE'S BUDGET AND BANKING BENCHMARKS Classified By: A/DCM EDWARD KASKA, REASONS 1.4 (B) AND (D) ¶1. (C) Summary. Kyiv-based IMF resident representative Max Alier told us on June 2 that Ukraine remained far from completing structural benchmarks on bank reform, necessary for the disbursement of the IMF's third loan tranche. Ukraine was still saddled with an unfinanced budget deficit, the size of which cannot be precisely determined due to PM Tymoshenko's deliberate refusal to announce official economic data. Absent signals of support from potential foreign donors, Ukraine's authorities continue to press the IMF for budget financing in the next tranche. The IMF mission team is due to return to Ukraine in the second half of June, though an exact date has not yet been set. End summary. ¶2. (C) Alier commented to us on June 2 that structural benchmarks on bank reform set out by the IMF after its mission team's first review were still largely unmet, though quantitative performance criteria for the end of May had been realized. Alier suggested that the Ukrainian authorities would stall on bank reforms, waiting until after the mission team left Kyiv. Alier notably did not comment on a recent statement by Acting Minister of Finance Umanskiy that the Cabinet of Ministers could proceed with the recapitalization of Rodovid Bank, Ukrgazbank, and Bank Kyiv as early as the week of June 8. ¶3. (C) The IMF official criticized Tymoshenko's delayed release of official economic indicators. The Prime Minister's refusal to disclose first quarter GDP was "a serious mistake," Alier said, especially since she could have begun to take credit for an apparent stabilization of the exchange rate and the financial market. Instead, she will be forced to defend her decision to hide bad news while responding to the political fallout from first quarter GDP figures that Alier said would show declines "anywhere from 10 to 29 percent" (compared to the first quarter of 2008). Alier expressed concern that Ceyla Pazarbasioglu's mission team would not have access to official macroeconomic figures while in Kyiv, necessary for making accurate budget deficit forecasts. He was reluctant to pin down a date for the mission team's return, suggesting to us that he had told GOU authorities the next review would come in the latter half of June. ¶4. (C) Ukraine's fiscal gap remains large, Alier said, but the IMF cannot yet project whether or by how much tax revenues may ultimately fall. Nonetheless, the GOU continues to press the IMF to pour the entire third tranche into budget support. Alier said more IMF budget support would not be forthcoming without program revisions, and program revisions would require a credible interlocutor who "could not only promise but carry out" structural reforms. He stated that the World Bank would instead need to bolster its program to cover the budget gap, with the EU providing another 300-400 million euros. Alier put in a plug for U.S. bilateral financing, suggesting a figure of $300-400 million would be adequate. ¶5. (C) Comment. Alier's pointed statements confirm that the Ukrainian authorities remain unfocused on necessary actions for banks and the budget. With Alier suggesting that inevitable delays on structural benchmarks will further sully the NBU and GOU's reputation in the eyes of the international community, the IMF has given the impression that Ceyla Pazarbasioglu's mission team would attempt to hold firm with the GOU on its previously stated expectations. PETTIT