The International Monetary Fund will prepare a new program of financial assistance to Ukraine, said fund’s head Christine Lagarde on Jan. 21 during the World Economic Forum in Davos. The price of more lending, however, will be more austerity and dramatic, painful changes in the way Ukraine’s government operates.
“President Petro Poroshenko informed me today that the Ukrainian authorities have requested a multi-year arrangement with the fund, supported by the Extended Fund Facility, to replace the existing Stand-By Arrangement,” she said. “The new arrangement would support immediate macroeconomic stabilization measures as well as broad and deep economic reforms over several years to ensure economic and financial stability and restore sustainable growth.”
The fund’s most recent mission to Ukraine started work on Jan. 8 and is expected to provide a prescription for spurring economic growth and cutting the budget deficit.
Having approved a $17-billion development loan in April, the fund is considering another $15 billion for the war-torn country.
Overall, Ukraine might need as much as $27 billion to cover the budget gap until mid-2016, according to Anders Aslund, an expert with Peterson Institute for International Economics. With $11 billion of foreign debt maturing this year, Ukraine might need to restructure some of its debt obligations.
Cutting the energy subsidies that were eating up to 7 percent of the nation’s gross domestic product and raising the gas prices to the market level are the most critical tasks for the Ukrainian government.
Subsidies for loss-making coal mines have already been cancelled, but the gas ones are still in effect.
Naftogaz, a huge deficit-generating oil and gas company controlled by the government, says the cost of domestic gas production is $319 per 1,000 cubic meters, while the commission on energy market regulation, the office that sets tariffs, still uses a price of $220 in its calculations. Moreover, Ukrnafta, a unit of Naftogaz, sells gas to the households at $30 per 1,000 cubic meters. This is something that Privat, Ukrnafta’s minority shareholder, has been unsuccessfully suing to stop in courts.
Households consume almost as much blue fuel as industrial companies. Last year, the nation consumed 42.6 billion cubic meters.
Ukraine’s Finance Minister Natalie Jaresko in a Jan. 18 interview with TSN, a news program, that she doesn’t know when Ukraine will get more tranches in the IMF loan, $4.6 billion of which has been disbursed already.
“Overall, the IMF wants to see structural reforms, that we are capable of leaving the history of unfinished reforms, corruption and bureaucracy behind,” Jaresko said.
Jaresko said the fund’s requirement to decrease social spending — particularly pensions — are the hardest ones because of public hardship, but “it’s the economically correct approach.”
Ukraine’s projected budget deficit of up to $4 billion this year — on spending of $34 billion is also criticized by the Western institutions.
Ukraine’s bloated public sector is another target for cuts.
The National Bank of Ukraine will lay off more than half of its 11,000 employees and transform 25 regional branches into four regional centers in Kyiv, Dnipropetrovsk, Lviv and Odesa. Moreover, the NBU will switch to inflation targeting rather than trying to regulate the hrvynia’s exchange rate.
The Ukrainian government has been procrastinating in implementing IMF in order to heal the woes of the oligarch-dominated economy, 85 percent of which are big businesses. Prime Minister Arseniy Yatsenyuk, in particular, has avoided raising gas prices.
Meanwhile, the Verkhovna Rada failed to pass Economy Minister Aivaras Abromavicius’s law to allow privatization of state assets.
Ivan Miklos, an architect of Slovakia’s reforms, said Ukraine’s government needs to clearly explain the reasons for reforms to get public acceptance.
Meanwhile, Andrius Kubilius, Lithiania’s prime minister in 2008-2012, says Ukraine has no option. “When we joined the European Union in 2004, our GDP per capita was 45 percent of the EU average and after the economic reforms, it’s 75 percent,” Kubilius says.
Kyiv Post associate business editor Ivan Verstyuk can be reached at [email protected].
