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UPDATE 1-IMF warns domestic politics could derail key Ukraine reforms
April 4, 2017 / 4:11 PM / in 4 months

UPDATE 1-IMF warns domestic politics could derail key Ukraine reforms

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By Natalia Zinets and Alexei Kalmykov

KIEV, April 4 (Reuters) - The International Monetary Fund warned on Tuesday that Ukraine's domestic politics could derail vital reforms such as raising the pension age and tackling corruption that are needed to crank up economic growth and tame high public debt.

The Fund released $1 billion to Kiev this week as part of a $17.5 billion aid-for-reforms bailout for the Ukrainian economy, which plunged into recession following the Russian annexation of Crimea in 2014 and the outbreak of separatist violence.

The extra funds paved the way for the central bank to deliver an immediate boon to investors by cutting the amount of foreign currency businesses are required to sell to 50 percent of their overseas earnings from 65 percent.

Ukraine's international backers have mixed praise for the country's return to macroeconomic stability with criticism for Kiev's stop-start progress on tackling entrenched corruption and modernising its laws and institutions.

Prime Minister Volodymyr Groysman, who took power a year ago after the previous government collapsed, has a thin parliament majority and has been unable so far to pass pension and land reforms that are resisted by a noisy opposition.

Flagship anti-corruption schemes have also struggled to get off the ground or been sabotaged by vested interests, most recently in the case of a law forcing public officials and lawmakers to disclose their assets online.

"The main risks on the domestic side stem from reform delays due to the narrow majority of the governing coalition in parliament and possible policy reversals as key reforms face strong pushback from vested interests," said an IMF report.

Kiev expects three further aid tranches this year worth $4.5 billion in total. So far, counting the $1 billion disbursed on Monday, it has received $8.38 billion under the programme launched in March 2015.

Ukraine has one of the highest levels of pension spending in Europe, while having one of the lowest levels of average pension benefits, providing an old-age income of slightly more than $2 per day, the IMF said.

Ukraine has as many pensioners as workers who pay into the pension system and many people shirk paying pension contributions. That means Ukraine's pension deficit is estimated at 6 percent of GDP, the IMF said.

The government has asked for more time to implement pension reforms, promising to do so by January next year.

The IMF had delayed its decision on disbursing new aid from March to assess the impact of an economic blockade Kiev imposed on separatist-held territory. It now expects the economy to grow by 2 percent, down from an earlier estimate of 2.9 percent. (Writing by Matthias Williams; Editing by Hugh Lawson)

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