The International Monetary Fund's (IMF) remote assessment ended on February 13, saying Ukraine must show more progress on reform to secure a new tranche under a $5bn stand-by agreement (SBA) with the international lender, according to the Fund's representative.

"Discussions will continue," representative Goesta Ljungman said in a statement, after the fund's mission held talks with Ukraine officials, as cited by RFE/RL.

The Fund restarted an assessment that would allow the next $700mn tranche of the SBA to be released that was delayed from the second half of last year, after the government reversed several key anti-corruption laws. The Fund was also upset by a government decision to temporarily reduce domestic gas tariffs. The raising of domestic gas tariffs has been a key demand of the fund, but the government decided to reduce them temporarily after prices during the winter rose sharply.

“Totally predictable – some of us were a bit surprised the review started in the first place given backtracking on the anti-corruption agenda,” Tim Ash, senior sovereign strategist at BlueBay Asset Management said in a note to clients. “Guess there was a desire at the Fund to “catch up” with the situation on the ground and virtual missions presumably reduce their cost.”

As bne IntelliNews has written about in “The Oligarch Problem“, the fund is concerned about the rising influence of the oligarchs, who are threatening the independence of the central bank of Ukraine.

Because of all these problems and others, the IMF has temporarily de facto suspended the SBA. Ukraine had already received $2.1bn last summer, but further disbursements are unlikely in the meantime and the fund is adding more conditionality to the agreement.

“It was already going to be challenging to complete the review and then the gas price cap must have put the nail in the coffin of getting to a staff level agreement on the sign-off for this review, which was always going to be a “to do” list anyway. The Fund now will likely wait for these gas price caps to lapse in April before moving ahead with completion of the review,” says Ash.

Ukraine struck a new deal with the IMF in October 2018, but saw its deal downgraded from an Extended Fund Facility (EFF) that runs over several years, to an SBA that has to be renegotiated every year.

The talks, which Ljungman said were productive, focused on strengthening governance of the National Bank of Ukraine (NBU), improvements to the legislative and regulatory framework for bank supervision and resolution, policies to reduce the medium-term fiscal deficit, and legislation restoring and strengthening the anti-corruption framework and the judiciary, as well as on energy policy.

Ukraine expects to receive $2.2bn in three equal tranches from the IMF in 2021, National Bank Governor Kyrylo Shevchenko told Reuters.

With a spike in debt redemptions due this year, the IMF money is crucial to Ukraine’s ability to fund its obligations. A total of some$ $16bn of debt matures this year, with $11bn coming due in the third quarter of this year alone, which the government will struggle to pay without help from the IMF. Ukraine's international reserves stood at $28.8bn in January, or about 4.4 months of import cover.

Several other loans from other international financial institutions (IFIs) will stay blocked unless there is a working IMF deal. Ukraine has also been promised €600m from the EU in macroeconomic aid and $750m from the World Bank, neither of which will be released until the IMF signs off on its SBA programme.

In the meantime, the government is relying on the international capital markets, where the excess of liquidity related to the coronavirus (COVID-19) pandemic stimulus programmes means yield-hungry investors are willing to buy Ukrainian bonds.

“Global liquidity is such though that the market does not seem to care about the state of IMF- Ukraine relations – with strong foreign portfolio inflows into Ukraine so far this year, plus still pretty cheap pricing at present on Ukrainian Eurobonds suggesting that Ukraine could fund itself relatively cheaply (6-6.5% for 10Y money) in the Eurobond market this year to make up for the gap in official financing,” says Ash.

“Perhaps the latter fact has ensured a lack of real impetus from the Ukrainian side to do whatever it takes to get IMF lending back on track. It’s always a frustration in Ukraine that in times of flush global market liquidity reform momentum stalls – it shows the unintended consequences of DM helicopter money as by providing cheap financing globally, in EM it has the result of very often slowing reform and continuing bad policy outcomes,” Ash added.