Since 1992, when Ukraine joined the International Monetary Fund, the nation has borrowed roughly $32 billion out of a possible $74 billion in 11 separate programs.

Those numbers alone tell an unflattering story. They show that Ukraine has not been able to get its economic house in order well enough to live without the IMF’s low-interest loans that come with public policy strings attached. The record shows that Ukraine’s leaders, when confronted with financial emergencies, have a pattern of agreeing to the organization’s conditions only to ignore them and drop out of programs once the financial storm clouds have lifted.

This long-running dependency may be one reason why the IMF is the lender that some in Ukraine love to hate. Populist politicians routinely stoke public resentment by portraying the IMF as an organization of meddlesome foreigners trying to dictate how Ukrainians should live.


President Volodymyr Zelensky, in a June 14 interview with foreign journalists, complained that the IMF was imposing unfairly tough conditions on Ukraine, a nation at war, with lending stalled at $2.1 billion out of a possible $5 billion in the current program that expires at the end of the year.

Finance Minister Sergii Marchenko has said that while IMF loans have been essential to Ukraine’s financial survival, his goal is to do away with these credits by 2023.

Goesta Ljungman, who is departing this month as the IMF’s resident representative in Ukraine after four years, has heard all of this before during his 14-year career with the fund.

To Ukraine’s goal of standing on its own without IMF help, his reaction is: “That’s our goal as well, to in some ways make ourselves unnecessary so that Ukraine is like the vast majority of countries who don’t have to turn to the fund to sort out economic and financial problems.”

Ukraine, he said, has made major macroeconomic achievements and adopted sounder public policies in several spheres since 2014. He particularly gives high marks to the clean-up of the banking sector and the National Bank of Ukraine’s macroeconomic policies that have tamed inflation and stabilized the national currency, the hryvnia. Additionally, Ukraine’s debt is lower than that of many nations.


Yet “the list of things that are necessary to address in Ukraine is long,” Ljungman told the Kyiv Post in an interview before returning to IMF headquarters in Washington, D.C., for his next assignment. “Since independence in 1991, it’s made slow progress in reorienting the economy from a planned one to a free market one. There are still a lot of things that need to be changed.”

The interview steered clear of the question of whether Ukraine will likely meet conditions to tap the remaining $2.9 billion in lending under the current program. But, given Ukraine’s long to-do list and the lack of financial urgency helped by an IMF allocation of special drawing rights worth $2.7 billion to Ukraine, most analysts are betting the program will expire at the end of the year with no more lending.

In key sectors, Ljungman offered his assessment of the status quo and some prescriptions for sounder public policies.

Why low wages

What Ukraine needs to be able to catch up is investment. That is going to generate higher productivity. Right now, Ukraine’s productivity is a fraction of what it is in Europe. Productivity helps determine wages. That’s why wages in Ukraine lag so far behind (at $500 monthly on average).” According to the latest International Labor Organization data in 2019, Ukraine’s labor productivity is 41% of Poland’s, 30% of the European Union average and 28% of Germany’s.


Why low investment

“Time and again, potential investors are concerned about rule of law, property rights, corruption, and overreach by government agencies.” Also: “The dominance of oligarchs or business groups, that’s a deterrent to investment…when there is dominance, that starts to impede competition. The first course in economics is that competition generates the best outcome. It stimulates productivity and innovation and gives consumers the lowest prices and best products.”

Banking sector

“Another focus over the past seven years has been to strengthen the banking system and bring it into line with the way banking systems are regulated and supervised in Western countries, so they don’t take on too much risk and are well-capitalized to channel savings into (lending for) the most productive investments.”

Ukraine’s most recent banking crisis cost taxpayers $15 billion, much of it through bank fraud that went unpunished, leaving only 73 out of more than 180 banks on the market. “People ask: Why aren’t pensions higher? That $15 billion would have gone a long way.”


Can it happen again? Nothing is certain. But Ljungman said that most banks today in Ukraine “are well-run and subject to a regulatory supervisory framework that is modeled on the Western world.”

Pension reform 

Nobody is happy with Ukraine’s pension system. Pension costs are a big part of the government’s $50 billion annual budget, while recipients receive only $126 monthly on average. Ukraine has finally increased the required years of service for receiving a full pension, which creates incentives to work for longer. But the retirement age is 60, still lower than the United States and much of Europe. “There is relatively little inflow from people who are working. People retire relatively early and they live for a relatively long time, which is excellent, but that means whatever inflows you have aren’t enough to generate big pensions.”

Taxing situations

Wouldn’t Ukraine reduce tax evasion by lowering the payroll tax from 22 percent which, combined with 18 percent income tax, costs employers 40% for each official employee? “Unfortunately, there is little empirical evidence that is the case.” That said, the IMF “has put a lot of effort and given a lot of advice and support” so that Ukraine can modernize and improve its tax collection to ensure the nation collects “all taxes that taxpayers owe.”


Why change isn’t so bad

Ukraine changes its presidents, ministers and governments regularly. “Ultimately what is important is the outcome, and that the necessary reforms actually happen. Stability is good if you start out with something you want to preserve. It’s not good if you want to change things. For this reason, it is better to focus on the results, rather than individual personalities and changes in the administration.”

Future of judicial reform

“There is still a lot that needs to be done in the judiciary system and in fighting corruption. To look at it from a positive side, the fighting or the turbulence or whatever word you want to use is probably a sign that those who are losing from court reform feel the heat breathing down their necks. They feel the need to fight back vigorously, to preserve whatever advantages they have from the current order. This is going to be a tough fight. It’s going to require a lot of support and a lot of political capital needs to be spent on this. You’re taking on some powerful interest groups.”

Tangled energy policies

When the government keeps prices artificially low or uses state-owned enterprises to dispense subsidies or protect sectors from competition, “it benefits rich people and introduces corruption risks. The long-term solution is an open and competitive market.” Ukraine took steps in that direction by abolishing public-service obligations forcing state-owned enterprises to sell natural gas at below-market prices, for instance, but more needs to be done. 


Harm of SOEs

Ukraine has an estimated 3,500 businesses owned by the national government and another 12,000 or more owned by local and regional governments. “While others in Central and Eastern Europe got busy dealing with these enterprises — closing the ones that didn’t have a future — many of the state-owned enterprises in Ukraine keep existing unreformed.”

Why is that so bad? “Any way we look at it, SOEs are not as efficient or as productive as their privately owned peers for both SOEs and SOBs (state-owned banks).”

SOEs also deliver public policies that distort the economy, including subsidized gas, electricity and transport. They are, quite simply, a drag on the economy. “It’s not a controversial statement that a large number of these SOEs should be privatized.”

Better SOE governance 

If the government won’t sell state-owned enterprises, the least it can do is ensure professional corporate governance. Government should delegate “management and powers to an independent supervisory board with clear directions and clear responsibility.” Well-qualified boards insulate from short-term political pressures and help ensure that the business is run in the long-term national interest.

Billions lost to corruption

A lot of money in Ukraine is lost to corruption or diverted through bad public policies. “It’s billions of dollars each year,” he noted, more than IMF loans.

Overall assessment 

“Something that I’m impressed by are the unsung heroes in Ukraine, all of the people working in public administration, people who are working under tough conditions, with low pay and who are very rarely appreciated. They slog it out and do their work. They are conscientious,” Ljungman said. “Ukraine today is still a lot better than it was at the end of 2013. It is important to recognize the work that has been done. It’s important because it shows you can achieve things in Ukraine, you can change things.”

About Goesta Ljungman

Swedish national Goesta Ljungman joined the International Monetary Fund in 2007, working on diverse issues in several nations. In Georgia, he helped negotiate and oversee the implementation of the country’s fund-supported program. During 2010-12, Ljungman worked on the IMF’s Ukraine team, with a special focus on fiscal issues. Ljungman has also worked on fiscal reforms in Moldova, Montenegro, Ireland, Hungary, Serbia, Kyrgyz Republic, Kuwait, Oman and many other countries. He is a frequent lecturer at IMF’s training institutes in Europe, Middle East and Africa. Prior to joining the IMF, Ljungman worked in the Swedish Ministry of Finance. He received his degree in economics from Uppsala University. He is married with two children. He enjoys long-distance running.

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