Editor's Note: The International Monetary Fund on Feb. 12 reached a staff-level agreement with Ukraine to extend the nation a $17.5 billion, four-year loan. The news led to several statements, including by IMF managing director Christine Lagarde, Prime Minister Arseniy Yatsenyuk, National Bank of Ukraine head Valeriya Gontareva and Ukrainian Finance Minister Natalie Jaresko.
Prime Minister Arseniy Yatsenyuk:
“One of the main points of the program with the IMF is to ensure stabilization of the banking system and the exchange rate. The Ukrainian government already completed the negotiations. I am sure that political forces that had formed coalition in parliament, are responsible for the effectiveness of the reforms. These are exactly those reforms which Ukraine needs, those reforms which are represented in the memorandum, according to which we received the money. The situation is complicated. We have to pay back now $40 billion, which (ousted President Viktor) Yanukovych’s regime borrowed in the form of credit. And this is a huge burden on the economy. 2016 year will become for Ukraine a year of stabilization. The program with the IMF will ensure not only the stabilization of hryvnia, but also the resumption of economic growth. the Cabinet of Ministers will implement a program of assistance to low-income segments of the population.”
National Bank of Ukraine head Valeria Gontareva:
Ukraine will remain “committed to a flexible exchange rate as the only way to adjust economy to our problems, because of wartime and because it’s absolutely the normal way. that’s why the national bank remains committed to ta flexible gradual restoration of an adequate level of our reserves…together with our government we are really committed to help and rehabilitate our banking system. All of our steps envisaged in the new program will help return confidence to our banking system and to our market… I truly believe that all of these difficult measures and difficult reforms are extremely needed by our country.
Ukrainian Finance Minister Natalie Jaresko:
“My colleagues in government today agreed on an ambitious reform program for Ukraine. We believe the IMF supports the program of reforms of our government. Fiscal policy will be the key to the success of our program. Here we are committed to several very ambitious steps. It’s important to note we will revise to budget (to have a deficit of more than ) 4 percent of gross domestic product. The increase in the government deficit is a result of the increase of social subsidies to be delivered to lower income households at a time when general household tariffs (on utilities) will be increased. We will be restarting government spending. We will be reducing the size of government We will begin reducing the so-called special pensions to increase fairness and justice in the pension system. On the revenue side, we will increase the progressivity of the income tax system and streamline and improve the effectiveness of the tax collection system. During this four-year program, the government will reform the pension and civil service, (provide financing for defense.) The $40 billion in debts were taken on by the Yanukovych regime. We will work to take on a steady reduction of public debt over the next four years. We will consult with our holders of sovereign debt. This program unlocks additional bilateral and multilateral support during this difficult time. The 17.5 billion is just the beginning, but not the end.”
Christine Lagarde, managing director of the International Monetary Fund, issued the following statement today in Brussels, Belgium:
“I am pleased to announce that the IMF team working in Kyiv has reached a staff-level agreement with the Ukrainian government on a new economic reform program that would be supported by an Extended Fund Facility of about $17.5 billion or €15.5 billion from the IMF, as well as by additional resources from the international community. I intend to recommend this program for consideration to the IMF Executive Board. This new four-year arrangement would support immediate economic stabilization in Ukraine as well as a set of bold policy reforms aimed at restoring robust growth over the medium term and improving living standards for the Ukrainian people.
“It is an ambitious program; it is a tough program; and it is not without risk. But it is also a realistic program and its effective implementation—after consideration and approval by our Executive Board–can represent a turning point for Ukraine.
“There are a number of reasons why this new program can succeed:
“First, demonstrated commitment to reform.
“Over the past year, despite the challenging environment, the Ukrainian authorities have clearly shown their commitment to ambitious reform on several key fronts. They have maintained strong fiscal discipline (a 2014 deficit of 4.6 percent of gross domestic product vs. a target of 5.8 percent); they have adopted a flexible exchange rate regime; and they have significantly increased household gas prices to 56 percent of the import price and heating prices to about 40 percent of the import price in 2014. In addition, in the first such move in many years, they have begun to strengthen the country’s anti-corruption and anti-money laundering framework.
“Second, front-loaded actions going forward.
“The government is committed to front-loaded measures under the new program—including further sizable energy tariff increases; bank restructuring; governance reforms of state-owned enterprises; and legal changes to implement the anti-corruption and judicial reform agenda. This program will require the authorities’ steadfast determination to reform the economy. To help cushion the adjustment, especially for the poorest groups, measures are being taken to strengthen and better target the social safety net.
“Third, increased external support.
“The change in the IMF-supported program (from Stand-By Arrangement to Extended Fund Facility) will itself provide more funding, more time, more flexibility, and better financing terms for Ukraine to implement its reform agenda. These IMF resources will be complemented by other bilateral and multilateral financing. In addition, as the Ukrainian government has previously announced, it intends to hold consultations with the holders of their sovereign debt with a view to improving medium-term sustainability. From these various sources taken together, a total financing package of around $40 billion is estimated over the four year period. “In short, this new program offers an important opportunity for Ukraine to move its economy forward at a critical moment in the country’s history. And yet, while this is a comprehensive and strong program, it is also subject to high risks. The main risk, of course, relates to geopolitical developments that may affect market and investor confidence. For this reason, the program is based on conservative macroeconomic assumptions to buffer further the impact of the conflict in the east.
The statement can be found here
An IMF representative in Kyiv:
At a press conference on Feb. 12, the IMF also highlighted the need to eliminate the $500 million – $1 billion per month deficit of state-owned Naftogaz by 2017, to reduce inflation, to deregulate and to conduct tax reforms and reform of state-owned enterprises, all aimed to improve the business climate and attract investment. Besides the IMF’s $17.5 billion, other multilateral institutions and individual governments are expected to help Ukraine get up to $40 billion in necessary financing over the next four years from a variety of sources, including the United States, the European Union, the World Bank, the Ukrainian govenrment and private sectors.
Snap analysis by Timothy Ash, head of emerging market research for Standard Bank in London:
The IMF is bringing $5.8 billion in new money to the table. There is $11.7 billion left undisbursed from the previous standby-arrangement, so that gets rolled in, to make $17.5 billion in an extended fund facility over four years. This is NOT a significantly increased IMF program, and Lagarde should not try and sell it as such. The problem has been that the fund has been reluctant to commit significant new funds to Ukraine given concerns over the conflict situation. As with the SBA the program has been shaped around how much money the IMF and the West has been willing to give.
“The US is talking about $2 billion in new loan guarantees, with $1 billion for the first half of 2015, and then a vague promise of another $1 billion some time after. The EU has promised $2 billion, but over two years. I would add in another $2 billion from the World Bank for budget support and some other bilaterals. So this gets to something like $23.5 billion in actual macro financial support – cash.
The IMF has identified a financing gap of $42 billion which has to be filled some way. The way it will be filled is by restructuring Ukraine’s debts, hence the need to start negotiations with creditors, but obviously the results are hard to be determined. Now Lagarde talks about Western financing being used to avoide default, but some would argue that restructuring is more or less the same thing, and with Russian creditors unlikely to be “helpful” holdouts are likely so at least some of Ukraine’s liabilities are likely to go into default as a result. This obviously creates further complications for the IMF given its rules about not lending into arrears.
All very complicated, but the plus is that at least the IMF is being more realistic about the need for PSI, which should have been part of the solution all along – a critical mistake was made last year, in not going down the PSI path earlier.
The good news is that this is a good program in terms of the structural benchmarks and the commitment of the government to reform. It could all work, but it is unlikely to be successful unless the conflict in the East can be halted. Hence the importance of the on going talks in Minsk. These talks are proving so painful though, and the two sides are still so far apart that my sense is now that whatever is agreed at Minsk will be unlikely to hold. Indeed, if the two sides feel so unhappy about any deal reached, they are unlikely to want to abide by the terms.”
