Success at the next round of talks on an International Monetary Fund lending program for Ukraine, to take place on April 19-21 in Washington, could kick-start growth in the country, which entered the year in recession. In addition to improving the nation's dismal investment climate, a new deal would help pay for the roughly $3 billion in repayments to the IMF, falling due this year.
Increased gas prices for households and a flexible currency exchange
regime remain the IMF’s top requirements for a new deal to be inked.
“The government should start reforming, otherwise there will be no
economic progress at all,” Oleksandra Betliy, research fellow at Ukrainian
Institute for Economic Research and Policy Consulting said at an April 15 press
conference on Ukraine’s 2013 economic prospects.
But Ukraine isn’t planning to raise gas prices for its population, Prime
Minister Mykola Azarov has repeatedly stated. Indeed, the issue of hikes in gas
tariffs wasn’t even discussed during the recent talks with IMF, Energy Minister
Eduard Stavytsky said on April 10 after the mission left.
Moreover, government officials have claimed the country could handle its
foreign debts without an IMF loan as the country has already sold more than $2
billion of Eurobonds since February.
But with $7.4 billion in public sector foreign currency-denominated debt
left to pay in 2013, according to leading investment bank Dragon Capital,
experts are not quite so optimistic.
Moreover, a joint study by the Ukrainian Institute for Economic Research
and Policy Consulting and Swiss Institute for Economic Research shows direct
state debt could increase to 40 percent of gross domestic product this year.
Contributing factors include growth in public salaries, social spending and the
government’s policy of tax breaks and benefits. Meanwhile, official forecasts
put direct state debt at 30 percent of GDP in 2013.
Failure to get IMF credit might lead to a 3 percent decline in GDP,
according to the Ukrainian Institute for Economic Research and Policy
Consulting survey, while sealing the deal in April would secure 1.4 percent
growth.
The World Bank downgraded Ukraine’s real 2013 GDP growth to 1 percent
from 3.5 percent in April, noting tighter fiscal policy and renewed IMF support
as crucial conditions for economic growth. On the flip side, switching to a
flexible exchange rate policy would likely lead to hryvnia devaluation. The Ukrainian Institute for Economic Research
and Policy Consulting expects the national currency to drop by 10 percent
against the dollar by year’s end.
With recession in the euro zone weighing on Ukraine’s prospects,
domestic troubles need to be solved all the sooner, experts say.
“Internal factors complicate the outlook, as lending is still stagnant
due to very high interest rates. This is a side effect of the exchange rate
fixation, which should be changed, in our view,” says Robert Kirchner, a
researcher at Berlin Economics, an independent economic consultancy focused on
transition economies and emerging markets.
While noting that fiscal tightening could dampen
domestic demand in 2013, Kirchner said 2014 looks more optimistic, as “the global
situation will most likely be better.” Looking forward, he added, some fiscal
loosening can be expected before the 2015 presidential elections.
“The main message for policy makers is, in my view, to stress the need
for an IMF program, as this is the best way to deal with the economic
challenges Ukraine is facing at the moment,” Kirchner said.
Kyiv Post staff writer Anastasia
Forina can be reached at [email protected]
