* This article was first published in the full version of the Monthly Economic Monitor Ukraine ¹8-9 (213) of August-September 2018.
Over the recent weeks, the discussions on the macroeconomic outlook for Ukraine were high on the agenda taking into account high external and domestic risks. The FX payments on state debt are high for next several years, while the NBU was not able to increase international reserves to more safe level. The Government liquidity was also low with UAH 13 bn on government accounts at the NBU in the end of July down from peak of UAH 105 bn in November 2017. Even though the fiscal revenues improved in recent months, lower than planned deficit financing resulted in the under-execution of expenditures. This raised concerns on the possibility of the Government to finance key liabilities timely and in full. However, the hottest debates were about the future relations the IMF and the needed revision in gas pricing for households to continue cooperation.
According to the initial plan, the Government expected to receive another tranche of loan from the IMF in March or April, which would help the planned placement of Eurobonds. However, the late approval of the law on the creation of the Anticorruption Court pushed back the timeline for negotiations. As a result, the IMF mission came to discuss the terms of the next loan installment only in September. Meanwhile, the Ministry of Finance postponed the issue of regular Eurobonds bud it has secured USD 0.7 bn through private placement of six month Eurobonds at a relatively high yield estimated at 9.1% p.a. Short-term Eurobond was likely meant as bridge financing until more long-term financing is secured after conclusion of talks with the IMF. Recently, the media announced that the current EFF program with the IMF might be substituted by the new USD 4-5 bn stand-by program with revised conditionalities. In any case, to receive a loan under either old or new programme the Government will definitely have to increase gas prices for population according to its commitments taken in 2016. At that time, the Government approved the import parity approach to set gas tariffs for population, but it repeatedly delayed its application. Over time, the difference between import parity rate and tariff for population increased substantially.
If received, the IMF loan will supplement the NBU international reserves but it will not contribute directly to fiscal deficit financing. However, the IMF deal will unlock significant donor funds and will ease access to private financing for the Government. For example, continued cooperation with the IMF is among key conditions for the latest loan from the EU (MFA-IV), recently signed between Ukrainian government and the European Commission. First tranche of the MFA at EUR 0.5 bn is expected to be received in autumn 2018. The second and the last tranche under this program in the equivalent amount is scheduled for spring 2019 if the Government approves the reforms of the SFS and the Customs, ensure progress with the minimum OECD requirements on fighting tax evasion, introduce automatic verification of e-declarations, etc. The World Bank is preparing USD 650 m in policy-based guarantees to Ukraine where cooperation with the IMF is again a key condition for support. Guarantees are expected to support USD 0.8 bn in external borrowing. The Government is also expected to proceed with Eurobond issue after the IMF deal under more favourable conditions than the August placement.
Under such scenario, the Institute expects real GDP to grow by 3.3% in 2018 and by 3.2% in 2019. Consumer price inflation is projected to decelerate to 9.3% yoy in the end of this year and 8.1% in the end of 2019. Domestic demand will remain a driver of economic growth. However, it will drive both consumption and investment imports. As a result, real net exports is forecasted to make a negative contribution to real GDP growth at 1.7 p.p. in 2018 and 0.7 p.p. in 2019. 
The IER forecast is close to the official forecast, which is taken as a base for the Draft State Budget Law for 2019. The Government submitted the Draft Law on September 15, which complies with the Budget Code. The fiscal indicators are mostly based on the effective legislation (accounting for usual increase in excise rates, rent payments and ecology tax and few other changes in taxation) and, thus, do not account for increase in gas tariffs, which will result in higher revenue from the Naftogaz but also will increase spending for housing and utility subsidies. The Draft also does not envisage the introduction of exit capital tax. Overall, according to the official forecast, consolidated fiscal revenues are expected to reduce by 1.1 p.p. to 32.8% of GDP. Fiscal deficit is planned at about 2% of GDP, which complies with current IMF program.
However, if Ukraine loses the chance to receive assistance from the IMF and other international donors the Government will be hard-pressed to execute planned fiscal expenditures in 2018. The fiscal indicators will be also revised for 2019 to take into account lower real GDP growth, higher inflation.
