The hryvnia has stabilized and deposits are coming back to Ukrainian banks, but the country has a long way to go to achieve sustained economic growth.
The International Monetary Fund mission working
in Ukraine from Sept. 22 to Oct. 2 as well as an Oct. 5 World Bank statement
highlighted weaknesses in the nation’s sluggish reform process as they
downgraded macroeconomic forecasts for Ukraine.
The
international financial institutions acknowledge Ukrainian efforts in monetary
policy and rehabilitation of the banking system and satisfactory fiscal and
budget performance.
But the IMF
said that “considerable further efforts” in improving business environment,
governance and promoting privatization. The World Bank is on the same page.
“The
Ukrainian authorities have taken many important steps to stabilize and reform
the economy, but they represent only a meaningful start of the long and arduous
reform process,” Qimiao Fan, World Bank Country Director for
Belarus, Moldova and Ukraine said on Oct. 5, as stated in the Bank’s press
release. “Continued and faster reforms will help lay the foundation for
future growth and they are crucial for Ukraine’s survival.”
Vladimir
Dubrovskiy, senior economist at Centre for Social and Economic research,
explained that what the IFIs lack is radicalism in reforms, particularly on
privatization, deregulation and taxes.
“Some of
these are in the process, but it’s not enough: government refused the
regulatory guillotine, it’s dragging on public service reform,” he told the
Kyiv Post. Judicial reform is also not happening, while achieving functional
and independent courts to enable investors defend their rights in front of
other businesses and state is what the better business environment is all
about.
Weak rule
of law persisting in the country also signals that the property rights are not
well-protected, Dubrovskiy said.
“There are
areas we would like to see more progress, first of all anticorruption,” Jerome
Vacher, IMF resident representative in Ukraine, said at The
American Chamber of Commerce in Ukraine on Sept.16. Although, the recovery of
living standards for the population will take time, they “need to see some
systematic progress in the revamp of the prosecution and court system.”
The IMF also
praised a stable exchange rate over the last four months and increase in
national currency bank deposits that contributed to macroeconomic
stabilization, while emphasizing the need to retain the flexible rate policy
and further easement of monetary restrictions.
International Financial Institutions’ view on Ukrainian reforms
IMF | World Bank | |
Acknowledged achievements | Exchange rate has been broadly stable, hryvnia deposits are rising, and inflation is receding. rehabilitation of the banking system. | Country’s general fiscal and budget performance has so far been better than anticipated. current account saw declining pressures and reached a balance earlier this year, |
Reforms needed | Improving business environment and governance, promoting privatization. | They need to redouble efforts at fighting corruption and improving governance, reduce Naftogaz imbalances and strengthen the energy sector’s capacity, increase confidence in the banking system by recapitalizing the Deposit Guarantee Fund and state-owned banks |
Financial support, $ billion | 9.9* | 4.1** |
*Expected in 2015
**Received in budget support and investments in the last 18 months
Source: World Bank, IMF
In another
good sign, the National Bank of Ukraine decreased the refinancing interest rate
from 30 percent in July to 22 percent in September.
However,
the central bank worsened Ukraine’s macroeconomic forecast to 11.6 percent
decline in gross domestic product in 2015 from 9.5 percent drop expected
earlier this year amid on-going conflict in the east, tight fiscal and monetary
measures, exports decline and low world commodity prices.
Both IMF
and World Bank also expect up to 12 percent GDP decline, naming plunge in
metals and mining sectors, most affected by the conflict, and weak external
demand among the main factors. Timid growth prospects for 2016 vary from one to
three percent.
Macroeconomic forecast for Ukraine
IMF | World Bank | NBU | |
Inflation forecast, %, 2015 | 46 | 50 | 44 |
GDP growth forecast, %, 2015 | -11 | -12 | -11.6 |
GDP growth forecast, %, 2016 | 2 | 1 | 2.4 |
Sources for GDP growth in 2016 | Recovering consumer and investor confidence, improved export performance, and a gradual easing of credit conditions. | Net exports, capital investment and privatization | Successful completion of sovereign Eurobonds restructuring, restored investment demand amid conflict settlement |
Source: World Bank, IMF, NBU
With $6.6
billion support already received from the IMF, expected to be amplified to 9.9
billion by the end of the year, NBU’s international reserves grew to $12.6
billion in August, 22 percent higher than in July and almost twice from the
beginning of 2015. But only further changes in Ukrainian rules of the game will
ensure the sustainable stabilization and further growth, partners emphisize.
However,
this improvement is reflected in Ukrainian external debt obligations, currently
at Hr 1,438 billion ($65.4 billion) that will exceed 90 percent of the GDP by the end of the
year. Despite restructurization achieved by the Finance Ministry with external
creditors in August, the burden remains high and some of the lenders keep
questioning the deal.
Unlike
Ukraine and IMF, Russia considers the $3 billion bonds it bought from Ukraine in 2013 a sovereign, not a
private debt, and insists on their “special status”, therefore refusing to
accept the general conditions Ukraine has negotiated with other bond holders on
20 percent haircut and payment moratorium till 2019.
Instead,
Russia demands the due payments immediately, while suggesting IMF or EU helps
Ukraine out by paying its debt to Russia.
Dubrovskiy
doubts the reasonability of such claims, calling it “rather a rhetorical proposal, made out of
desperation.” According to him, there is not even a mechanism for IMF to compensate
someone’s credits in such way.
Ukrainian
side has repeatedly stated that there are no special conditions possible for
Russian bonds and that Moscow will have to accept the general terms. Finance
Ministers of the sides, Anton Siluanov and Natalie Jaresko, might meet for
further discussion in Lima, Peru, during the IMF, World Bank and G20 annual
meeting in October.
The IMF
also encouraged the broad participation of Eurobond holders in the debt
exchange, which they believe will ensure that public debt is sustainable with
high probability and the IMF program remains fully financed, Nikolay
Gueorguiev, mission chief for Ukraine, said in a statement on Oct.2 in Kyiv.
Kyiv Post staff writer Olena
Gordiienko can be reached at [email protected].
