IMF assistance helps Ukraine avoid default
With Ukraine struggling to stabilise its economy after nearly a year of conflict with pro-Kremlin separatists, help is on the way from international lenders.
The IMF announced a funding package — including contributions from the EU, the United States, the World Bank and the private sector — worth about $40 billion. Approximately $17.5 billion of that aid will come from the IMF, the Fund’s chief Christine Lagarde confirmed on February 12th in Brussels. Lagarde said the financing package would be spread over a four-year period.
“It is an ambitious programme, it is a tough programme, and it is not without risk. But it is also a realistic programme and its effective implementation — after consideration and approval by our executive board — can represent a turning point for Ukraine,” Lagarde said.
An IMF mission has been working in Kyiv on the country’s fourth bailout in 10 years after the last aid programme in April 2014 failed to stabilise Ukraine’s finances.
A new staff-level agreement with the Ukrainian government includes “bold policy reforms.” Ukrainian Prime Minister Arseniy Yatsenyuk said the forthcoming IMF aid package presupposed “very difficult” reforms to fight corruption, overhaul the energy sector, cut state expenditures and reduce state bureaucracy.
The government is also seeking billions of dollars to cover debt redemptions and shore up foreign reserves. Meanwhile, the country also needs to boost the value of the hryvnia, which has fallen more than 100 percent against the dollar in the last six months. The currency’s value hit a new low against the dollar this week and has fallen more than 43 percent against the dollar this year.
“The aim is to stabilise the banking system and the currency rate … The situation is complicated. We have to pay back now $40 billion, which [ousted President Viktor] Yanukovych’s regime borrowed in the form of credit. And this is a huge burden on the economy,” Yatsenyuk said.
The prime minister added that the economic situation can be stabilised, but efforts are unlikely to be successful unless the conflict in the east is halted.
“We hope that the program gains success and Russia halts aggression, and that the Ukrainian economy will face growth in 2016,” Yatsenyuk said.
Ukraine’s National Bank forecasts that the economy will shrink as much as 5 percent in 2015, after a 6.7 percent decline in 2014.
“Ukraine will remain committed to a flexible exchange rate as the only way to adjust the economy to our problems because of wartime and because it’s an absolutely normal way,” Finance Minister Natalia Jaresko said. “That’s why the National Bank remains committed to a flexible gradual restoration of an adequate level of our reserves … together with our government we are really committed to help and rehabilitate our banking system. All our steps envisioned in the new program will help return confidence to our banking system and to our market … I truly believe that all of these difficult measures and difficult reforms are extremely needed.”
To demonstrate its commitment to front-loaded measures, the government will sharply increase energy tariffs — one of the stipulations of the IMF loan — by 280 percent for gas and by 66 percent for heat. Officials promise their support package will include a social assistance program for poor households that will suffer the greatest impact from the tariff hikes.
Dmytro Marunych, co-chairman of the Energy Strategies Fund in Kyiv, said the government’s move is too sharp, given the country’s current economic conditions. “Increasing household tariffs is inevitable, however for the moment this move will carry heavy social and economic consequences. Also it’s not clear whether it can reduce the Naftogaz Company’s deficit,” Marunych told SETimes.
Some experts point out that there is a difference between providing stability and a true reform programme.
“The programme itself is aimed at repairing public finances in order to ensure payments on Ukraine’s foreign debts. Indirectly it is aimed to stabilise the currency rate to get a sense of total debts,” Yaroslav Zhalilo, head of the Ukrainian Anti-Crisis Research Centre, told SETimes. “For this, for instance, Ukraine was supposed to cancel subsidy of utility rates which could lead to the elimination of the deficit of Naftogaz. This also concerns other government-owned corporations. We need to keep the state budget within borders. For this we have to launch budget savings.”
Meanwhile, economists recall that previous IMF programmes have fallen apart as Kyiv has failed to complete overhauls. Therefore, there will be no money in advance, ahead of the reforms.
Oleg Ustenko, executive director of The Bleyzer Foundation, an NGO that supports Ukraine’s transition to a market economy, pointed out that the IMF has had negative experiences in the past with Ukraine, Greece and Hungary.
“After receiving money these countries refused to conduct needed reforms,” Ustenko told SETimes. “This also outlines all the previous co-operation programmes between Ukraine and the IMF. I assure you there will be no up-front money.”
Ukraine’s government has asked the parliament to meet at the end of February to discuss budget changes vital for successful completion of talks with the IMF. If the state manages to push the matter through and reach structural benchmarks, the first tranche may reach Ukraine in March.
What steps should be taken to ensure that the government’s reforms satisfy the IMF’s requirements? Share your thoughts in the comments section.