Oleksandr Klymenko Official website
Articles | 425 | 23.02.2015

The IMF loan: salvation, but not development

Klimenko believes that the new loan will not improve the situation in Ukraine, we need real reform

When Ukraine has carried out “draconian” requirements of the IMF, it has received only $4,6 billion out of promised $7,4 billion within the framework of the stand-by program.

Moreover, it has obtained nothing out of $10 billion, which were expected in 2015.

Instead of this, a new program of the IMF with even more severe requirements has been adopted. The lion’s share out of those $4-6 billion, which are expected in this year, will go to pay off previous debts and into the “black hole” of corruption schemes. Restart of the real economy sector remains entirely on the shoulders of private business and will last for 4 -7 years (according to the most optimistic scenario). Nowadays, plethora Ukrainians are ready to “tighten their belts” for the sake of future reforms. Will these changes actually happen?

An EFF applicant must prove to the IMF that he is on the verge of default. Ukrainian government managed to justify its request. It’s sad. Thus, the threat of default is really close and international donors are saving Ukraine from bankruptcy.

Nowadays, there are high expectations from the promised IMF assistance in Ukraine.

Providing the new loans is presented as the foreign policy victory and as a proof that Ukrainian authorities have managed to get on with international community. However, this holiday, like any other in our economy during last years – is “with tears in one’s eyes.” First of all, it comes about a loan, not about grant assistance. Thus, the country is again being driven into the debts, which we will have to repay with interest.

The official memorandum with the IMF has not been approved and published yet. However, we can make preliminary conclusions now.

No one had paid any attention to a little detail, which is really significant: change of the loan program. Until now Ukraine had been receiving tranches within the framework of the stand-by program, namely in the form of targeted loans. Nowadays, it comes about the EFF (Extended Fund Facility) program. These loans are extended upon request of a borrower, who has serious violations of payment balance, provoked by negative structural changes in national economy.

Easier speaking, an EFF applicant must prove to the IMF that he is on the verge of default. Ukrainian government managed to justify its request. It’s sad. Thus, the threat of default is really close and international donors are saving Ukraine from bankruptcy.

According to the IMF, Ukraine can expect for a loan of $17,5 billion during 4 years.

Other funds (Ukrainian government announced about $40 billion), which will be granted by foreign creditors, will be provided by the World Bank, European Investment Bank and other lenders. The exact amount will be known only after the donors’ conference, which is scheduled for the spring.

We can expect that the maximum sum of assistance to Ukraine in 2015 from IMF will be amounted $8,6 billion. At the same time, $4 billion we should return to the International Monetary Fund as disbursements for previous loans. In fact, Ukraine, has reborrowed in order to carry out current obligations to its own lender.

Let me remind, the IMF promised to provide Ukraine a $7,4 billion loan in 2014, and a $10 billion loan in 2015 within the framework of stand-by program. It was assumed that Ukraine would reimburse the loan during 5 years, and the interest rate would not exceed 3% per annum.

However, in reality, our country has received only $ 4,6 billion out of the promised 7,4 billion in 2014. In 2015 it has obtained nothing. Although we have fulfilled all obligations: we have devalued UAH, have “frozen” salaries and pensions, have increased of utility rates by 40-60%. As a result, we have received a new credit program with stricter circs.

In order to get IMF tranche within the new program, Ukraine has to carry out a “standard” set of recommendations, which roams as a declaration from one governmental document to another.  Even if it is executed, it will be only on paper. For instance, it comes about an anti-corruption and judicial reform, reform of NJSC “Naftogaz” and its achievement of the deficiency-free level in 2017, reducing the government official’s machinery by 20%, restructurisation of the banking system, privatization of lossmaking and non-strategic state-owned enterprises. At first glance, here is nothing new.

However, there are some conditions that can harm the ordinary Ukrainian person. Thus, the arrangement with the IMF, for instance, includes an increase of the retirement age, increase of taxes on the wages amounted more than UAH 15 thousand and preventing its withdrawal into the shade. These conditions are being discussed in public. Part of circs may remain behind the scene. We will be informed about it only ex post.

Thus, Ukraine is being exposed to strict conditions. It will extremely complicated to comply with it. Therefore, the risks of termination of funding from the IMF, other creditors and donors are very high. A thin stream of foreign borrowings can dry up at any time without warning.

The saddest thing is even if Ukrainians agree to “tighten their belts” for a while (but in fact, they actually have no other choice) in order to do carry out current and previous requirements, received credit funds will not restart the economy. This is just another debt in order to reimburse the previous loan.

What that money will be spent for? Reimbursement of foreign debts, replenishment of gold and currency reserves, additional capitalization of banks and support of the Deposit Guarantee Fund.

Nowadays, the biggest governmental corruption exists in these areas! It is obvious that most of the IMF money will go nowhere and will “feed” shadow economy.

Meanwhile, expected incomes are minimal even for stabilization of UAH. The head of the NBU stated that by the end of 2015, gold and currency reserves of Ukraine after the implementation of the new IMF assistance package may increase up to $17 billion. This thesis is questionable. If one is fortunate, we should expect for a rate at least UAH23-24 per Dollar. This could be realized only in case of cease-fire and execution of all obligations, which are fixed in Minsk-2 agreement.

According the arrangements with the IMF, we can conclude that the government initially had no intention to invest these funds into the development of the real economy sector. This is due to the fact that these funds are not budgeted. We are saving ourselves, we are being saved, and nothing more. The country can no longer make ends meet without external support.

The contribution of the State can be amounted 3% of GDP, aimed at infrastructure projects (one of the requirements of international donors). However, it is a big question, whether it will be allocated.  The Prime Minister, for instance, has repeatedly stated that the funding of infrastructure projects has not been budgeted. If they are allocated, it is not the fact that it will be used for its intended purpose.  No one has defeated corruption in Ukraine so far.

Therefore, development of the country depends only on private investment. If it comes about domestic investors it can flow in Ukrainian economy not earlier than in one year. If it comes about international ones, it can flow not earlier than in two years.

War does not supplement investment attractiveness to the country. Constant changes in tax and regulatory systems discourage desire to consider Ukraine as a platform for investment.

What needs to be done in this situation?

There is only one option: it is necessary to stop encouraging imports, and on the contrary, lead domestic producers on the foreign markets via all possible ways. The principal difference from the economic policy of the 90s, when young Ukraine received foreign currency earnings from mining and metallurgical companies, must lie in the fact that this time a pool of high-tech industries (engineering, aircraft construction, electronics, etc.) must become the priority.

It is necessary to determine a pool of the largest engineering and technology-intensive industries that can compete in foreign markets and can be involved in government contracts (“Motorsich”, KMZ, “Azovmash”, “Antonov” and others). Otherwise, the industrial potential will be lost forever.

The head of the NBU stated that by the end of 2015, gold and currency reserves of Ukraine after the implementation of the new IMF assistance package may increase up to $17 billion. This thesis is questionable. If one is fortunate, we should expect for a rate at least UAH23-24 per Dollar.

What is left to do for the country – is only to stimulate domestic production. Poland started to go through this path in 90s. Synergy of state and private business in energy, logistics infrastructure, construction of real estate can become the engine of growth and stabilization.

In addition, it is necessary to focus on development and promotion of alternative energy sources: open-pit coal mining in western Ukraine, alternative sources: wind power plants, solar power plants, bio-gas installations, etc. Unfortunately, conducive years have not been used for a profound transformation of the national economy. We have to do it in a pre-default state.

Optimistic scenario that includes allocation of all planned international assistance and peace in Donbas, provides at least 4 to 7 years for it. Result that we will be able to achieve – is import substitution in the segment of small and medium-sized business, growth of GDP and investments, stabilization of inflation rate at a level below 10%.

Pessimistic scenario suggests that it will be extremely difficult even to hold the national currency rate. By late summer, UAH risks to exceed the mark of UAH 30 per dollar. On the other hand, critical times are perfect for real reforms. Just because there is nothing else to lose – it will not   become worse. The main thing is to have the political will and systemic statist thinking in order to implement these reforms.

Link to source: Forbes

Photo: Thinkstock

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