- The independence of anti-corruption agencies, reforms in the judiciary and the phase-out of energy subsidies are among the main prerequisites for the renewal of IMF lending.
- Quick reform progress appears unlikely due to limited political will and capacity to advance difficult systemic changes as well as a manageable fiscal situation in the near term.
- The plummeting popularity of the ruling Servant of the People party could trigger cabinet changes in the coming months, but the risk of early election remains low for now.
The International Monetary Fund (IMF) on 13 February withheld a USD 700mn tranche to Ukraine due to insufficient reform progress following a six-week review of the 18-month USD 5bn Stand-By Arrangement signed in June 2020. The IMF’s decision came on the back of the European Parliament’s extensive resolution on Ukraine adopted on 11 February, urging the country to speed up reforms and “de-oligarchisation” of the country.
While the IMF did not provide details behind its decision, its further lending to Ukraine – as well as soft loans from the World Bank and the European Union (EU) – will likely depend on progress in tackling high-profile corruption, reforms in the judiciary, and the phase-out of the tariff caps on natural gas and electricity.
One of the main concerns is the independence of Ukraine’s key anti-graft agencies – the National Anti-Corruption Bureau (NABU) and the Specialized Anti-Corruption Prosecutor’s Office (SAPO). The reform-oriented NABU director, Artem Sytnyk, has been under pressure to resign after the country’s constitutional court ruled that his appointment back in 2015 was unconstitutional. On 15 February, Prime Minister Denys Shmyhal submitted amendments to the law on NABU aiming to resolve these issues of constitutionality for parliament’s consideration. The text of the bill is not publicly available yet, but an important signpost to watch is whether Sytnyk remains in office, and whether the proposed amendments ensure the agency’s effective operation. Similarly, NABU’s sister agency – SAPO – is carrying out a lengthy selection process of its new chief anti-corruption prosecutor, which is closely watched by Kiev’s Western partners.
With regards to judicial reforms, the focus is ensuring the integrity of the High Council of Justice – a constitutional body tasked to guarantee the independence and accountability of the judiciary. Given the tainted reputation of the council, the government aims to set up a vetting mechanism for its members. However, concerns remain about the actual functioning and effectiveness of such a mechanism.
More generally, a key question is whether President Volodymyr Zelensky’s administration still has political will and capacity to advance challenging systemic changes required by the IMF and the EU. With Ukraine’s international reserves standing at multi-year highs (around USD 29bn), favorable crediting conditions on financial markets and a manageable debt repayment schedule in the coming months, the need for IMF funding is not as urgent as in previous years.
Meanwhile, multiple divisions within the ruling Servant of the People (SN) party mean that Shmyhal leads a de facto a minority government, which is forced to seek ad hoc coalitions in parliament to advance its legislative proposals. The fact that many reformers have been forced out or have voluntarily left the cabinet or state-owned companies during the past year further lowers the probability of genuine and rapid reforms.
The extensive credit of public trust in Zelensky and his party following the 2019 presidential and parliamentary elections is rapidly depleting. The ruling SN now polls roughly on par with the pro-Russian Opposition Platform – For Life and Petro Poroshenko’s European Solidarity. The plunging approval ratings might lead to another cabinet reshuffle, particularly as the one-year immunity from no confidence votes in Shmyhal’s government expires in early March. Another risk is that declining ratings will further undermine the SN’s cohesion. Should its deputies start migrating to other parliamentary groups, the risk of an early general election would rise. However, given uncertain re-election prospects of SN deputies, the ruling party will likely stick together (at least formally) for now.