IMF welcomes Ukraine’s land and pension reforms

IMF welcomes Ukraine’s land and pension reforms

13 April 2017

Head of the IMF mission in Ukraine Ron van Rooden says the IMF welcomes pending land and pension reforms in Ukraine, press office of the Cabinet reports following the meeting between van Rooden and Ukraine’s PM Volodymyr Groysman.

“We welcome the fact that the land and pension reforms are among your priorities. We are always ready to help, so we are negotiating the implementation of these reforms with your colleagues in the government,” van Rooden said.

Source: www.rbc.ua

RESCUE comments:

Ukraine received its fourth tranche from the IMF with half a year delay and with new requirements on structural reforms. Now the Fund insist on launching the pension reform and opening the land market (lifting moratorium on land commerce, introduced in 2001) by 2018. Moreover, Ukraine is required to introduce a fee for gas distribution, to reorganize the debt to Russia ($3 bln) and to establish the anti-corruption court and finance police service.

Note: The fourth tranche was supposed to arrive on November 15, 2016, while the previous one, which Ukraine received in early autumn, was supposed to arrive in September of 2015, according to the schedule. 

Despite official statements to meet all IMF requirements, it is doubtful that such unpopular reforms will be carried out in time. It is a norm for Ukraine to miss deadlines and not to fulfil obligations. As of today, Ukraine has complied with only 38% of IMF memorandum.

The pension reform is aimed at reduction of Pension Fund deficit, which makes about 6% now. Reducing pension burden on the budget is important and necessary, but the price for impoverishing Ukrainians is too high to pay.

In 2016, it was decided to increase pensionable service. This year the authorities must develop a fast transition to the three-level pension system, which bears risks for people aged 35 to 50, who, according to new rule, will have no time to accumulate necessary experience and will have minimum pension. Among other aspects there is inflation. For the past three years hryvnia has depreciated three times, thus there is no guarantee that 20-25 years of savings will not turn to dust. 

Note: The first level of the new pension system is pay-as-you-go scheme (the same as today). The second level provides for funded pension, when an employer diverts 2% of salary into a special account of a half-private fund (additional 1% will be added every year through 2020 till the targeted amount of 5% is reached). The third level of the pension system includes private funds.

The launch of the land market has got a time frame in the new memorandum. However, lifting the moratorium right now may have negative impact, mostly due to lobbying activity, which may result into monopolization of the land. Thus, Ukrainian-style solution will never make the land market function.

Ukraine has little time to implement the required reforms. Already in 2018, the foreign debt service will start growing, reaching its peak in 2019 (more than $5 billion). By that time, Ukraine is expected to complete transformation, otherwise default and further talks on debt reorganization are inevitable.

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