You're reading: Vacher: Too soon to say whether IMF will restart lending program to Ukraine

The International Monetary Fund talks a good game in telling Ukraine to combat corruption. But it may be a case of the bark being worse than the bite.

Anyone who expects the international lender of last resort to force out corruption in the law enforcement system, or order a badly needed overhaul of the general prosecutor’s office or the courts, would be mistaken.

Such requirements are simply not part of the IMF’s mandate or expertise, said IMF Country Representative Jerome Vacher in a May 27 interview with the Kyiv Post.

“We fully agree that these are key institutions in the fight against corruption. They are not the only ones,” Vacher said. “There is a need to more substantially improve rule of law in this country and these institutions are at the forefront of that. In order for Ukraine to grow in a sustainable manner, we need a substantial improvement in the business environment and need to see a substantial reduction in corruption.”

Other structural changes that the IMF seeks, Vacher said, are designed to reduce corruption, improve Ukraine’s overall economic health and, ultimately, the living standards of Ukrainians.

All eyes are currently on the IMF right now as it decides whether to restart lending to Ukraine. Lending was stopped at $6.7 billion last year out of a possible $17.5 billion after “vested interests” – often a euphemism for oligarchs and their friends in parliament – in February triggered yet another political crisis by obstructing anti-corruption initiatives.

The winter backlash “from some of the vested interests, particularly in parliament, means those (anti-corruption) policies are starting to have an effect,” Vacher said.

When the dust settled in April, Arseniy Yatsenyuk was out as prime minister along with a stable of reformers in the Cabinet of Ministers. In are Volodymyr Grosyman and new ministers who are being eyed warily. But with the Groysman government in place, the IMF could talk about restarting loans. An IMF mission came to Kyiv from May 10-18 to negotiate conditions.

Much more is at stake than just another $1.7 billion loan installment, most if not all of which will go to bolster Ukraine’s hard currency reserves that stand at $13 billion. Many other Western institutions and governments, including the United States, European Union and World Bank, condition their aid programs on Ukraine winning the IMF’s seal of approval.

Vacher said it’s too early to say whether the IMF’s 24-member executive board of directors, representing 189 nations, will approve the loan when it meets in July to decide the issue.

“There are a number of laws which are stuck in parliament and which aren’t moving very quickly or don’t make it to the agenda,” Vacher said. “They are stuck at first reading; some are blocked in committees.”

And exactly what are the IMF conditions?

Only the IMF – and perhaps some top government officials – know for sure. The full list of conditions are part of a draft memorandum that is not public yet and still under negotiation. Conditions that require a change in laws are known since they require approval by parliament. A final agreement with the IMF is signed by Ukraine’s president, prime minister, finance minister and central bank governor.

‘Capacity and willingness’ to reform

Whatever the detailed requirements, the IMF decision may rest on one simple and subjective assessment: Whether Ukraine’s political leaders have shown “the capacity and willingness to conduct reform,” as Vacher put it.
That is one of the four criteria that Ukraine must meet under the IMF’s “exceptional access policy.” Besides capacity and commitment to implement IMF requirements, the other three criteria relate to balance of payments, sustainability of debt and prospects for regaining access to private capital markets.

The conditions give rise to a debate over what the IMF – and the Western donors – will and should do about Ukraine.

Many people have come to the conclusion that Ukraine’s politicians are interested in undertaking only enough reforms to receive IMF loans. Some in this camp hope that the IMF, therefore, will impose stricter anti-corruption conditions and reject further lending until more progress is made.

Others, however, think that the IMF will wring whatever conditions it can get from Ukraine’s politicians and keep lending because the West simply doesn’t want to cut off Ukraine amid Russia’s war and economic hardship.

Ukrainian Prime Minister Volodymyr Groysman, then Verkhovna Rada speaker, speaks with International Monetary Fund Managing Director Christine Lagarde on Sept. 7 in Kyiv. (UNIAN)

Ukrainian Prime Minister Volodymyr Groysman, then Verkhovna Rada speaker, speaks with International Monetary Fund Managing Director Christine Lagarde on Sept. 7 in Kyiv. (UNIAN)

Repeat: Fight corruption

The IMF has tried this year to jawbone Ukraine’s recalcitrant authorities into fighting corruption.

On Feb. 10, IMF Managing Director Christine LaGarde issued this statement:
“I am concerned about Ukraine’s slow progress in improving governance and fighting corruption, and reducing the influence of vested interests in policy-making. Without a substantial new effort to invigorate governance reforms and fight corruption, it is hard to see how the IMF-supported program can continue and be successful. Ukraine risks a return to the pattern of failed economic policies that has plagued its recent history. It is vital that Ukraine’s leadership acts now to put the country back on a promising path of reform.”

On May 18, when the IMF mission left Kyiv after reaching a staff-level agreement with Ukrainian authorities on policies needed to restart lending, Ron van Rooden, the IMF mission chief, said in a statement:

“Steadfast implementation of structural and institutional reforms is now critical to turn the recent recovery into strong and sustainable growth, with unwavering determination in the fight against corruption emerging as a litmus test for the government’s ability to retain broad domestic and international support for its policies. It is therefore important that the authorities boost their efforts to entrench fiscal and financial stability, decisively enhance transparency and the rule of law, and reform the large and inefficient state-owned enterprise sector.”

Prosecutors, courts

Given the IMF’s tough and direct rhetoric on Ukraine’s need to fight corruption, it’s curious that the lender works around the edges – rather than, say, require Ukraine to rebuild its distrusted courts and prosecutorial system. One doesn’t have to look any further than the IMF’s home page to learn that one of its missions is to promote “sustainable economic growth.” Without rule of law, most economists say there can be no sustainable economic growth.

And there is no rule of law in Ukraine, where prosecutors and judges are corrupt and politically subservient, where an estimated $100 billion – or 10 percent of the gross domestic product – has been spirited abroad in the last decade and where no convictions for major financial crimes have taken place.

While recognizing the importance of prosecutors and judges, Vacher said that the IMF simply doesn’t have the technical expertise or ability to monitor any overhaul of these institutions.

So the IMF focuses on anti-corruption initiatives on the periphery – such as ensuring the independence of the new National Anti-Corruption Bureau of Ukraine and the National Agency for the Prevention of Corruption, which will monitor the disclosure of financial assets of public officials due Aug. 1.

One problem with these two agencies, however, is that they remain subservient to the nation’s discredited General Prosecutor’s Office and courts.

But Vacher said the IMF supports a number of policy and legal changes to combat money laundering and in other areas to reduce corruption in Ukraine.

“It’s important to see a lot of the policies we support or that have been implemented actually have an inpact on corruption in other ways,” Vacher said. “Essentially in a number of sectors we have seen some policies that have been quite effective in reducing cash flows that have fueled corruption.”

IMF priorities

Among those areas:

Energy – The IMF backs the rise in energy prices to market levels, supports the dismantling or unbundling of state-owned Naftogaz and the creation of an energy regulator to oversee the sector. Yet, the reforms are only partially under way and the sector is “still full of corruption.” Even so, Ukraine has managed to cut its imports of Russian natural gas and cut the deficit of Naftogaz.

Banking – “We face a situation where there was no proper bank supervision” before 2014, Vacher said. The IMF has been a cheerleader of National Bank of Ukraine policies to crack down on related-party lending in banks, to close more than a third of the nation’s banks – the most corrupt and underfunded ones, to drop the fixed-exchange rate for the hryvnia, to impose controls to stabilize the currency and to force bank owners to identify themselves. “We had situations where some banks had two-thirds or three-fourths of loan portfolio to the owner, which in any country is not accepted and is a threat to financial stability,” Vacher said. The banking changes came at a big price – a steep devaluation in the currency and more than Hr 70 billion, or nearly $3 billion, paid out from a taxpayer-supported public deposit guarantee fund. Moreover, no one has been prosecuted for bank fraud and deadbeat loans weigh down bank balance sheets. The IMF wants to see a return to sound lending practices. Curiously, the IMF never insisted on proper regulation of this sector in pre-2014 loan programs to Ukraine.

State-owned enterprises – “We need to see a cleaning of the sector,” Vacher said. “It’s another area where nothing was done for many years.” The nation’s more than 3,000 state-owned enterprises are sources of corruption and misuse of funds. The IMF wants to see faster and more transparent privatization. The coming sale of the Odesa Portside Plant, a large chemical and fertilizer plant, will be a litmus test. Centrenergo, a power generator, will be another one. State firms also need to hire professional managers and undergo audits that meet international standards, he said.

State Fiscal Service – The agency oversees tax collection and customs services. It is widely viewed as corrupt and many are pushing for the firing of its head, Roman Nasirov. Three proposed laws to overhaul the service are blocked in parliament’s tax committee, Vacher said. Some blame the IMF for being part of the problem on taxes by not supporting deeper reductions in the payroll tax that supports the state’s pension fund. The theory is that a low payroll tax will cut tax evasion. But Vacher said there’s is no evidence that cutting the payroll tax in half – from 45 to 22.5 percent – led to any “significant de-shadowing” of tax payments and, in fact, worsened the pension fund’s financial health. Among other changes, Vacher said Ukraine should be “focusing on some particular key areas, particularly large taxpayers, for example, high net-worth individuals.”

Pension reform – Ukraine’s pensions suck up 14 percent of the nation’s gross domestic product, with deficits of 7 percent, compared to 2 or 3 percent deficits in most European countries. The deficit is financed by the state. This has to stop, Vacher said. Pensioners aren’t happy either – most getting pensions of $50 a month. Ukraine needs a remedy that improves the funding of pensions, eliminates fraud, cuts privileged categories and directs most of the money to those who truly need the support, he said. Additionally, he believes Ukraine needs to raise the retirement age – currently at 60 years of age for men and 57.5 years for women. “There are just too many pensioners in the system,” Vacher said.

Off and on lending

Ukraine joined the IMF in 1992. It’s even hard for many experts to keep track of all the times that Ukraine has tapped the IMF’s low-interest financing. This is the eighth program, by Vacher’s count. Ukraine has a history of getting some loan installments to get through economic crises, then going off track by not meeting its commitments and getting the loans cut off.

Whatever happens, however, the IMF almost always gets its money repaid – to default on IMF loans would be economic suicide for a nation.

The IMF has also refused Ukraine’s requests in the past. In 2013, for instance, Vacher said the IMF refused ex-President Viktor Yanukovych’s request for renewal of the lending program because “we didn’t see there was any sufficient capacity and willingness to implement reforms.”

If Ukraine didn’t lose billions of dollars a year corrupt and complex scheme by insiders, it wouldn’t need any IMF loans at all.

The nation should know by July what the IMF thinks of its leaders capacity and willingness to reform in order to approve another $1.7 billion loan.

“We have to judge by the actions,” Vacher said. “We can’t speculate. That is why essentially we discuss in tranches and that is why in the past, when we saw there was no capacity and willingness to deliver on reforms, the (lending) programs unfortunately went off track.”

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Source: United Nations Conference on Trade and development (www. Unctad.org/fdistatistics)
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