In the near-term, Ukraine will have to raise loans to service existing debt liabilities, and loans from the International Monetary Fund (IMF) remain the best option for such financing, according to experts participating in debates arranged by the Foundation for Effective Governance (FEG) and Intelligence Squared in Kyiv on September 25.
“Ukraine will have to borrow funds, and there shouldn’t be any illusions about that,” said Ukrsotsbank Board Chairman Borys Timonkin during the debates.
He said that IMF financing was the cheapest, and that it provides the opportunity to reduce the costs of servicing loans taken from other sources, as investors and creditors pay attention to whether there is an ongoing IMF program in a country.
Timonkin expressed doubts that Ukraine would be able to raise cash from China, as Chinese banks are known for their complicated lending procedures.
Chairman of Investment Capital Ukraine’s Board of Directors Valeria Gontareva said that if China lends Ukraine funds, all of the money would be spent on buying Chinese goods.
Commenting on another alternative source of financing – Russian loans, Ukrsotsbank’s head added such borrowing would give Moscow a new lever of influence on Ukraine, with whom it already has difficult bilateral relations.
“Therefore short and expensive money will be borrowed,” the banker said.
The participants in the debates mentioned that the Finance Ministry has already been forced to borrow $2 billion at 9.25% per annum, which is much higher than the cost of IMF loans.
They said that among the other positive aspects of IMF financing is the presence of agreed requirements that reform should be conducted in the country.
“Populism is a major evil. The IMF is the only institutional enemy of populism today that is even ready to pay,” Timonkin said.
“The IMF program is the only working program [of reform] in the country”, Gontareva added.
Viktor Suslov, the former head of the Economy Ministry and the State Commission for Financial Service Markets Regulation, said that before a loan is provided, quite reasonable requirements are always agreed by the IMF with a borrower.
“The only condition from the fund is to fulfill the requirements signed by the central bank’s governor, prime minister and the finance minister,” he added.
All of the panelists agreed that either with the fund’s program or without it, Ukraine will have to resolve the problem of NJSC oil and gas giant Naftogaz’s deficit, which is caused by the gap between the price of gas imports and its price for households and heating companies, and which is blocking the resumption of financial cooperation with the IMF.
At the same time, former economy minister and opposition MP Serhiy Terekhin criticized the IMF for its policy of maintaining too high a value of the hryvnia, moderating domestic lending, and imposing excessively strict requirements on the size of the budget deficit.
“The compliance with the IMF requirements is austerity, which is now quite strongly criticized, because the reduction of the budget expenditures and deficit leads to lower consumer demand and, consequently, a decrease on the domestic market and stagnating economic growth,” Director of the Foundation for Effective Governance Natalia Izosimova said.
Terekhin also said that given the cooling political relations of the United States and the EU with the current leadership of Ukraine, Kyiv has failed to obtain new loans from the IMF, as the decision of the organization is made with an eye to the position of Washington and Brussels.
Ukraine after the 2010 presidential elections and its change of government decided to terminate the 2008 Stand-By Arrangement (SBA), according to which the country received $11 billion.
In late July 2010 the IMF decided to renew its loan partnership with Ukraine through a new SBA worth SDR 10 billion (about $15.6 billion). However, Kyiv received only around $5 billion because the new program was frozen at the stage of the second review in the spring of 2011. For over a year, Ukraine has been trying to persuade the IMF to drop its objections to the government’ subsidizing natural gas tariffs for households until the completion of its gas talks with Russia.
