While confidence in Ukraine's finances increased with the Feb. 12 news of a $17.5 billion, four-year International Monetary Fund loan, the nation still has to come up with $40 billion to pay off debts by 2019.
The remaining $22.5 billion is expected to come from a combination of governments, international institutions such as the World Bank and hopefully the acceptance by Ukraine’s creditors of lower repayments.
The new loan replaces a two-year program and represents an additional committment from the IMF of only $5.1 billion more in additional financing. It is expected to be a low-interest loan in the range of 3 percent.
“The new program is focused on macroeconomic stabilization,” said Nikolay Gueorguiev, head of the IMF’s mission to Ukraine. “As usual, the agreement is a subject to approval of the IMF management and executive board.”
Money will come from the Extended Fund Facility, a framework for providing long-term financial assistance.
Gueorguiev emphasized that the new support package includes a social assistance program for poor households that will suffer from the rise in energy tariffs to market rates, one of the stipulations of the IMF loan. Another condition is the elimination of the deficit of Naftogaz, the state-owned energy behemoth, by 2017. It currently runs debts of up to $1 billion monthly.
The IMF also wants Ukraine’s annual inflation rate held to under 10 percent and genuine progress to curb corruption, on tax reform and on privatizing state-owned enterprises.
“The IMF supports our economic program, the reforms that the government wants to implement in the next four years,” Finance Minister Natalie Jaresko said during a Feb. 12 news conference. “We’ll be revising the budget to allow a budget deficit of 4 percent of gross domestic product. The increase in deficit is a result of increase in social subsidies to support the poor households.”
Additionally, Jaresko said that ousted President Viktor Yanukovych saddled the country with excessive debt before fled power last Feb. 22.
“Around $40 billion of debt was taken by the Viktor Yanukovych regime, while we are focusing on decreasing the public debt,” Jaresko commented. “We are going to consult with the debt-holders to negotiate the terms” of repayment.
The government also plans to eliminate “special” higher pension payments for citizens who are not needy, she said, calling them unjustified when most Ukrainians have to make due with a $40 monthly pension.
Moreover, the Cabinet intends to adopt a personal income tax that is more progressive, or based on the ability to pay. The size of the government and the number of its employees will also be cut.
National Bank of Ukraine head Valeriya Gontareva said the regulator remains committed to a flexible exchange rate as the best way to force the economy to overcome its problems, many exacerbated by Russia’s war against Ukraine and annexation of the Crimean peninsula. She also plans to gradually restore Ukraine’s depleted foreign reserves to an “adequate level.” Also, “together with the government we are committed to the rehabilitation of our banking system to return the confidence to the market,” Gontareva said.
Meanwhile, IMF managing director Christine Lagarde estimated Ukraine’s financing needs at $40 billion through 2019. That would leave the IMF loan $22.5 billion short of the mark. She expects the gap to be covered by the United States, European Union, European Investment Bank, World Bank and private sector.
This year, Ukraine has to pay off $11 billion in foreign debt, while the central bank expects the economy to shrink 5 percent this year.
The austerity policy that the IMF program brings is expected to be painful but, in the long run, bring Ukraine’s finances to a self-sustaining level. The risk of public backlash is high, just as in now left-minded Greece, which had to adopt a severe austerity program of cuts to public spending in exchange for a $300 billion bailout.
Kyiv Post associate business editor Ivan Verstyuk can be reached at [email protected].
