IMF says arrears possible, expects reinstatement of Ukrainian Finance Ministry's authority to collect data

MOSCOW. Dec 27 (Interfax) - The Ukrainian authorities have taken urgent steps to close a general government financing gap that has emerged in the last few months of 2022 after a supplementary budget increased spending by 387 billion hryvni, but the residual general government financing gap is assessed at 67 billion hryvni (1.4% of GDP), Ukrainian media said, citing the International Monetary Fund's press release for the Program Monitoring with Board Involvement (PMB).

"Unless further financing can be identified before the end of the year, this could result in the accumulation of arrears, with carryover implications for 2023 and beyond. Confirmation of the full picture of arrears is complicated by the limitations under Martial Law on the Finance Ministry's (Treasury's) authority to collect data from all spending units in general government," according to the document.

The Ukrainian authorities are committed to restoring the Finance Ministry's authority to collect data, and to strengthen its ability to obtain data on arrears and monitor the financing gap-whose size is subject to considerable uncertainty, it said.

"Progress on this front is essential to improve monitoring and prepare for future engagement with the Fund," according to the press release.

Meanwhile, the memorandum presented by the Ukrainian side says that measures will be taken to enhance payment discipline in order to improve further budget processes from planning to procurement and execution.

"Subsequently, we will establish oversight over the budget arrears both on state and local level, as well as Social Security Funds to have a clear view of their stock on a monthly basis, with a clear monitoring mechanism aimed at preventing the accumulation of new arrears," according to the memorandum.

With due consideration of the martial law, the Ukrainian authorities will also take measures to settle the existing stock of such obligations in accordance with the requirements of budget legislation in a structured and transparent manner.

"Overall, we are committed to achieving the maximum transparency in data provision possible under Martial Law around all expenditures and on overdue financial obligations, which is also an important input into efficient treasury cash management and liquidity forecasting," it said.

When listing steps that were taken to solve the problem of the expenditure increase by 387 billion hryvni, the IMF pointed to expenditure items identified by the Ukrainian side, primarily in goods and services, that can be under-executed by postponing underlying contracts, totaling 145 billion hryvni (3.1% of GDP), while VAT refund claims are likely to be lower than previously estimated due to the impact of the crisis on export sectors, increasing the net VAT by 16 billion hryvni.

The authorities also plan to raise 13 billion hryvni through additional domestic borrowing and will draw resources from the Treasury Single Account as well as liquidity in local accounts, together amounting to about 120 billion hryvni.