December 18, 2017 / 9:35 AM / a year ago

Freezing IMF deal a key risk to Ukraine next year: central bank

KIEV (Reuters) - Ukraine’s central bank said on Monday a failure to cooperate with the International Monetary Fund and the inefficiency of state lenders were among the biggest risks to the country’s financial stability next year.

Backtracking by the government on commitments under a $17.5 billion IMF program has delayed the disbursement of funding and raised concerns that a drive to modernize the economy and eliminate corruption has stalled.

“The key risks to financial stability include the suspension of cooperation with the IMF, the slow pace of structural economic reforms, the low efficiency of state-owned banks, and the weak legal system,” the central bank said in a statement.

It said it would be hard for Ukraine to refinance its sovereign and sovereign-guaranteed debt in 2018-2020 without support from the Fund.

“Ukraine should start talks on the launch of a new program of cooperation with the IMF before the end of the current one in early 2019,” it said.

Overall, the bank said the risks facing the banking system and the economy were moderate, but could rise in 2018.

“We do not expect any serious stresses or shocks to the banking system,” Deputy Governor Kateryna Rozhkova said in a briefing.

The level of non-performing loans remains high and accounts for 56 percent of the debt portfolio of the Ukrainian banking system, said Vitaliy Vavryshchuk, director of the central bank’s financial stability department.

Speaking at the same briefing, Vavryshchuk said 62 percent of these bad loans were on the balance sheets of state banks, with 35 percent belonging to PrivatBank, Ukraine’s largest lender that was nationalized last year.

“We can say that there will be a gradual fall in the share of non-performing loans due to the improving macroeconomic situation, but sharp changes are not expected without the activation of write-off instruments,” he said.

PrivatBank was taken under state control with the backing of the IMF after what the central bank has deemed risky lending practices left it with a capital shortfall of more than $5.5 billion.

Former owners Ihor Kolomoisky and Gennadiy Bogolyubov, Ukraine’s second and third-richest men according to Forbes Ukraine, contest the authorities’ assessment of the health of the bank’s loan portfolio. They have initiated or threatened legal action on several fronts.

Rozhkova said more than 400 cases had been launched against the central bank, PrivatBank and the finance ministry in connection with the nationalization.

She said this pointed to the former shareholders’ unwillingness to restructure and pay off the debt as promised.

“This is being done to destabilize the work of Privatbank, the central bank and the finance ministry, which are working on getting back these loans,” she said.

Bogolyubov gave notice of a claim against Ukraine in November seeking relief for the “unlawful expropriation” of PrivatBank and accused the authorities of a disinformation campaign to make the lender appear in trouble.

Reporting by Natalia Zinets; Writing by Alessandra Prentice; editing by Matthias Williams and Richard Balmforth

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