Key reforms in Ukraine's energy sector expected in post-crisis phase of EFF program - IMF rep

MOSCOW. May 3 (Interfax) - The new Extended Fund Facility (EFF), like previous cooperation programs with the International Monetary Fund (IMF), will deal with reforms and projects in the energy sector, but major reform measures are expected to take shape during the second phase of the program once the crisis is over, IMF Resident Representative in Ukraine Vahram Stepanyan said.

"The authorities have expressed a commitment to implementing a timely and ambitious reform agenda aimed at tackling the long-standing structural challenges in the energy sector that have been compounded by the crisis. They realize that this will involve restoring and enhancing competition on the wholesale and retail gas markets," Stepanyan said in an interview with Ukrainian media.

Ensuring the system's sustainability and reducing quasi-fiscal liabilities will require a gradual increase in energy tariffs to recover costs, the official said. At the same time, it is important to allocate sufficient and well-targeted resources to protect vulnerable households, he added.

When commenting on the program's 60-billion-hryvnia limit on PSO compensation to the state-owned energy companies to allow them to provide energy resources to the population at a low price, Stepanyan said that it is not a rigid cap that would limit the authorities' capability to use the budget resource to finance gas imports if there is an acute need for them.

"This figure should be viewed as an adjustor to the fiscal balance target that would give the authorities space to accommodate potential spending pressure, including from gas purchases or PSO compensation, but conditional upon availability of financing," Stepanyan said.

As reported, the Ukrainian Finance Ministry in early April forwarded a letter to the government detailing fiscal risks to the country's budget. According to the letter, the 2023 financial plan of Naftogaz of Ukraine sets the goal of receiving 327.1 billion hryvni from the state budget to finance PSO compensation, including 116.5 billion hryvnia for 2022. The Finance Ministry has notified the Energy Minister of its complaints about the prices, insisting on the need to conduct all transactions based exclusively on natural gas market players' expenses verified by the State Audit Service.

Furthermore, the letter said that the 2023 budget does not contain programs to pay off 76-billion-hryvni debt on the gas market in accordance with the law adopted last year, and 36 billion hryvny in tariff compensation subsidies to the local budgets to help them maintain the current prices for heat and hot water.

The Finance Ministry said, citing the National Commission for State Regulation of Energy and Public Utilities, that if the PSO program for electricity market players is extended until the end of 2023, it will require the provision of a further 147.2 billion hryvni from the state budget, through such spending is not envisaged.

The conservative scenario of the EFF program expects the crisis in Ukraine to end in mid-2024, and in late 2025 under the program's worst-case scenario.