Ukraine Budget Measures Raise Alarm With IMF as New Talks Begin

Ukrainian Prime Minister Yuliia Svyrydenko Photo by Olga Ivashchenko /Photographer: Olga Ivashchenko/B

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(Bloomberg) — The International Monetary Fund is raising concerns about a range of Ukrainian budget measures as the lender begins talks with the war-battered nation on a new four-year loan package. 

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Tax exemptions, including for Ukraine’s processing industry and for self-employed entrepreneurs, have raised concerns within the IMF, according to people familiar with discussions. The measures risk weighing on Kyiv’s already precarious fiscal position as Russia’s war with the country drags well into its fourth year, the lender has argued. 

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The fund has also taken issue with a proposal to grant Ukrainians free train travel for lower-priced fares for up to 3,000 kilometers (1,800 miles), according to one of the people, who spoke on condition of anonymity as talks take place behind closed doors. 

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Tension over policy between the IMF and Ukraine could cast a shadow over fresh talks with the Washington-based lender for a package that could total $8 billion. The fund last month persuaded Ukrainian officials to significantly increase projections for Kyiv’s funding needs. The lender put that figure at about $65 billion through the end of 2029, with most of it likely required in the next two years. 

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In August, the IMF raised concerns over tax legislation in a letter to the head of the parliamentary finance committee, Danylo Hetmantsev. Similar issues were taken to Prime Minister Yuliia Svyrydenko, who responded that the legislation under scrutiny hadn’t been finalized, one of the people said. 

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In response to a query about the tensions, the IMF told Bloomberg News in a statement that the new program will focus on “measures to maintain macroeconomic stability, mobilize domestic revenues, ensure that Ukraine’s debt remains sustainable, and preserve external viability over the medium term.” 

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The fund will seek to advance reforms on governance and fighting corruption to support growth, it said in the statement. A spokeswoman for Svyrydenko didn’t respond to a request for comment. 

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Intensified Attacks

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Ukraine’s economy has been jolted by intensified attacks on the country’s energy system as the country enters its next winter marked by war, with the public contending with rolling blackouts and air raids. The government has pushed forward a raft of measures to ease hardship, including the rail-travel proposal. 

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As negotiations move forward, one of the IMF’s demands on Kyiv will be to abandon a practice offering preferential price reductions for consumers as part of a move to liberalize the gas market, the person said. 

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Russia’s intensified onslaught has wiped out almost 60% of Ukraine’s domestic gas production, prompting Kyiv to seek an additional €1.9 billion ($2.2 billion) to boost imports over the winter. 

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The lender also wants Kyiv to shrink the shadow economy — estimated at roughly more than 30% of economic output — including by eliminating the scope for tax exemptions for businesses run by self-employed entrepreneurs.