This will help keep the nation financially afloat amid fiscal pressures that include paying back more than $10 billion in foreign loans coming due this year including interest. Most of that is owed to the IMF.
The questionable justification by the nation’s leaders is that it would be politically suicidal to do what the IMF is asking – mainly to let the overvalued hryvnia loose, reign in a bloated budget whose deficit is beyond 4 percent of gross domestic product, shore up its murky banking system and stop gas and heating subsidies to households.
In the long-run – a concept whose meaning is beyond Ukraine’s leaders – this kind of fiscal discipline would help the nation to better weather external shocks, give it financial flexibility and position it for additional structural streamlining.
The consequences of micromanaging Ukraine’s finances without a long-term strategy are taking its toll. Naftogaz, the state gas behemoth, posted more than $1 billion in net losses in 2012, partly because households don’t pay their fair share. Foreign reserves are dwindling to keep the hryvnia pegged to the U.S. dollar while little foreign investment isn’t replacing the lost hard currency. All this is compounded by an economic recession that is heavily dependent upon an undiversified economy that relies on external commodities markets.
Ukraine has already borrowed $4.75 billion since the beginning of the year. About $2.5 billion of that was on the local market, $2.25 billion through bonds.
This strategy of muddling through fails to anticipate market confidence shrinking or the economy deteriorating further. The flaw with day-to-day, quarter-to-quarter management is that Ukraine painfully reacts to events instead of taking charge of its destiny.
