Ukraine has received good news from the International Monetary Fund overnight between April 30 and May 1. Executive board of the fund has approved a two-year $17.01 billion stand-by arrangement for the country which urgently needs money to stabilize its financial condition amid ongoing political crisis.
Bailout package comes as a loan, however all the conditions of repaying it have not been disclosed yet. Analysts previously interviewed by the Kyiv Post have told that IMF lends money to Ukraine with a very attractive 4 percent interest rate, a bargain compared to the 15 percent rate for the Ukraine’s three-year internal bonds.
The program also is expected to unlock additional international assistance of around $27 billion from the European Union, the World Bank and other international creditors.
Ukraine will immediately receive $3.19 billion with $2 billion being allocated to budget support. “The second and third disbursements will be based on bi-monthly reviews and performance criteria, and the remainder of the program period will be subject to standard quarterly reviews and performance criteria,” reads the IMF statement.
“This is actually substantially front-loading disbursement – a surprise in my view given the torrid track record in terms of IMF-Ukraine relations. Indeed, note that various ex-post reviews of previous failed Ukraine programmes had strongly recommended the back loading of credit disbursements in any future programmes with Ukraine. Clearly this is something of a leap of faith for the IMF and is politically driven by key IMF shareholders to support the (Prime Minister Arseniy) Yatsenyuk “kamikaze” administration in its reform efforts,” commented Timothy Ash, head of emerging market research at the Standard Bank in London.
The provided package is 800 percent of Ukraine’s IMF quota – an indicator which determines country’s maximum financial commitment to the IMF, based on a weighted average of gross domestic product, openness, economic variability and international reserves.
“Deep-seated vulnerabilities—together with political shocks—have led to a major crisis in Ukraine. The economy is in recession, fiscal balances have deteriorated, and the financial sector is under significant stress,” said IMF managing director Christine Lagarde after the board discussion, explaining the reasons for providing such a substantial bailout package.
The IMF expects Ukraine to succeed in maintaining a flexible hryvnia rate, reducing the fiscal deficit, which includes eliminating oil and gas monopoly Naftogaz’s deficit by 2018, reforming the areas of public procurement and tax administration, rationalization of social assistance spending through better targeting.
Since May 1, gas tariffs for the population grew by 40 percent, according to the IMF requirements. “Energy prices in Ukraine are exceptionally low. Currently, the gas price for households in Ukraine is $85 for one cubic meter. In Russia—a gas producing and exporting economy—the price is $158 for one cubic meter. The regional differences are even larger with prices in Ukraine being 4 to 9 times lower than in neighboring gas-importing economies. In January 2014, Romania’s citizens paid about $ 414, Moldova’s $ 432, and Poland’s $ 687 for one cubic meter,” comments Reza Moghadam, director of the IMF’s European Department.
“Any IMF deal has two parts. Money is not the most important thing, the most important is economic policy advice and conditions to repair the economy, in this sense it would reduce the budget and current account deficits,” said Ricardo Giucci, team leader of the German Advisory Group, in an interview with the Kyiv Post. After the IMF program the country is fitter, he added.
Ukraine’s deficit in its current account — roughly, its balance of trade — reached over 9 percent of gross domestic product in 2013 and slowed economic growth. Public debt rose to 41 percent of GDP, while external debt remained elevated at 79 percent of GDP. The IMF expects its current account deficit to fall about 4.5 percent of GDP by the end of the year, while currency devaluation and continuous borrowing will push public sector debt to 57 percent of GDP and external debt to just below 100 percent of GDP.
The fund foresees the Ukrainian economy will shrink by 5 percent in 2014 and inflation will climb up by as much as 16 percent. However, GDP growth is expected to rebound to 2 percent in 2015, rising to 4-4.5 percent in the medium term. By the end of 2016, inflation will fall to about 6 percent.
The unemployment rate, which reacts to economic recovery with a lag, will gradually decline from 8.5 percent in 2014 to 7.5 percent by 2016, according to the IMF calculations.
Earlier Ukrainian Prime Minister Arseniy Yatsenyuk assessed country’s fiscal deficit at $24.7 billion, while country’s state budget for 2014 is only $31.5 billion. Ukraine has to repay $9 billion of external debt by the end of the year, while National Bank’s reserves are at $15.08 billion. Russia claims Ukraine owes it $17.9 billion which includes gas debt, penalty for not-executing current contract with Gazprom and eurobonds purchased by Russia in December.
Meanwhile, acting Prosecutor General Oleg Makhnitsky said that overthrown president Viktor Yanukovych took away more than $100 billion from the country with $32 billion being transferred in cash. Ukraine attempts to recover at least part of these assets which could definitely improve country’s poor financial state.
Kyiv Post associate business editor Ivan Verstyuk can be reached at [email protected].
