Loans are the integral part of the economy of almost any state. Receiving money from international partners, the borrowing country attracts investments into its economy, solves problems with the implementation of the budget and reforms, controls the rate of the national currency. But if the state gets used to maintain its livelihoods at the expense of borrowed resources, it risks falling into the debt “hole” when it is no longer able to service a huge amount of foreign loans. And it is important to understand how serious such a threat for our country is.
Over the years of independence, Ukraine borrowed from various international financial institutions, primarily from the International Monetary Fund, the European Union, from national and international banks, such as the International Bank for Reconstruction and Development (IBRD) and the European Bank for Reconstruction and Development (EBRD), and directly from foreign countries - Russia, Japan, Germany, Canada, the United States. Target loans were also taken by state-owned enterprises, such as Ukrzaliznytsya, Energoatom, and state banks. The payment of such loans is guaranteed by the state, and if the company is not able to pay off the loan on time, the debt is paid from the budget of Ukraine.
For example, Ukraine’s debt on loans received from foreign countries amounts to $ 1.73 billion. In particular, we have to pay back $ 0.3 billion to the government of Canada, $ 0.26 billion to Germany, $ 0.61 billion to the Russian Federation, $ 0.01 billion to the United States, $ 0.55 billion to Japan.
The main institution providing financial support for Ukraine, of course, is the IMF. Most other organizations, world and European banks and funds agree to lend to any state, including Ukraine, only after the decision to open a loan program is made by the Board of Directors of the Fund.
International Monetary Fund
The largest creditor of Ukraine is a rather specific organization; it cannot be called a classic creditor. The main purpose of the creation of the IMF was to help countries overcome the balance of payments deficit, which was a destabilizing factor in the economy.
The IMF is often called the “lender of last resort”, because in the balance of payments deficit gold and foreign exchange reserves are depleted, which leads to the devaluation of the national currency and other troubles, the country worsens its credit rating. This increases the risk of lenders, they refuse to provide money or significantly increase the interest rate. The IMF is often the last instrument to maintain economic stability. And often an alternative to cooperation with the Fund is a default.
The interest rate of IMF loans for Ukraine does not rise above 3%, while the cheapest loans from other sources cost the country at least 7.5% per annum. That is, in fact, we are talking about the restructuring of the loan portfolio. This is the main advantage of the IMF loan program.
An important bonus of cooperation with the IMF program is a signal to other foreign lenders and, more importantly, investors. Here we are talking about the program requirements of the Fund, because external lenders and investors understand that if the IMF has given the money, then the changes necessary for stabilization are already underway. For the IMF it is not important where the country gets the money from, but whether there are guarantees that the situation will stabilize further and funding in such a format will no longer be needed. And if for creditors it is a signal that the money will be returned, then it is important for investors to be able to enter the promising markets first.
It should be understood that the Fund does not provide "real money", which can be spent somewhere, invested in production, infrastructure or stolen. The IMF provides loans only with a specific purpose; mainly the funds go to replenish the country's foreign exchange reserves, and partly to repay government debt with a higher interest rate. Understanding of this condition is very important, because the questions "where did the IMF money go?" are spreading among the population of almost all countries that cooperated with the Fund.
We recall, Ukraine began cooperation with the IMF back in 1994, when it received a very “modest” amount by today's standards - $ 763 million, which went to maintain the country's balance of payments.
From 1995 to 1998, there was a three-year Stand by (SBA) program, under which we received almost $ 2 billion to maintain the hryvnia exchange rate, pay off foreign liabilities and finance the payment deficit.
Almost $ 1.6 billion Kyiv received in the period from 1998 to 2002 under the EFF extended financing program. These funds went to the replenishment of foreign exchange reserves of the NBU.
In 2002–2005, Ukraine and the IMF cooperated on a credit-free basis under the “pre-emptive Stand by” program, under which the IMF reserved loan funds in the amount of $ 550 million in case of deterioration in Ukraine's balance-of-payments or currency reserves situation. But since March 2005, Ukraine has ceased to fulfill the conditions of the program for economic reform, and the IMF interrupted cooperation.
The largest loans in the history of our cooperation with the IMF fell in 2008–2013: in 2008–2009, under the new Stand By program, Ukraine received $ 10.6 billion. The first tranche, $ 4.5 billion, was immediately credited to the gold and foreign exchange reserves of the National Bank. The remaining two tranches went directly to the budget.
In 2010-2013, in the framework of the next cooperation program, the IMF transferred almost 3.4 billion dollars to the Ukrainian budget.
It is these loans that make up the lion's share of the national debt of Ukraine, which we will have to pay in 2019-2025.
Another $ 17 billion Kyiv expected to receive from the IMF in 2014-2015. This amount was reserved in the framework of the new Stand by loan. However, the treasury received only 4.3 billion dollars, and on March 11, 2015, the IMF replaced Stand by with a new four-year EFF program for 17.5 billion dollars. The first tranche of $ 5 billion was received immediately after the signing of the Memorandum, and in early August, Ukraine received another $ 1.7 billion. This money went to replenish the reserves of the National Bank. Then the IMF transferred $ 1 billion in September 2016 and in April 2017.
In the entire history of relations with the IMF, not a single credit program ended with Ukraine’s full fulfillment of its obligations and full payment of the entire amount stipulated by the program. As a result, we received less than half of the agreed amounts. Similarly, programs of cooperation between Ukraine and the IMF in 2008, 2011, 2015 were interrupted. However, each time it was possible to agree with the Fund on the next program.
If you do not take into account the December tranche, we received a total of 31.363 billion dollars from the IMF.
On December 18, 2018, the IMF Board of Directors decided to open the next 14-month Stand-by Arrangement (SBA) economic policy support program for Ukraine, totaling $ 3.9 billion. The first tranche of $ 1.4 billion has already been received, and the decision on further will be taken in May and in November 2019 while viewing the success of Ukraine in fulfilling the conditions of the Memorandum.
The program includes a number of key measures regarding the development of the country: the continuation of fiscal consolidation for the permanent reduction of public debt; maintenance of a flexible exchange rate and a tight monetary policy by the National Bank in order to reduce inflation and further accumulate international reserves; intensification of reforms in the tax sphere, in the financial and energy sectors, as well as strengthening the fight against corruption.
"The IMF is an anchor lender for other official lenders of Ukraine, who are already giving us loans on special conditions that are not available on the market. While IMF funds increase NBU reserves, WB and EU funds go to the Ukrainian budget and help us ensure macro-financial stability and this is especially important on the threshold of a difficult election year, "said the Minister of Finance of Ukraine, Oksana Markarova.
And if we talk about the requirements that the IMF puts forward at the same time, then in 1989 the Fund’s economists developed a standard list of reforms for all recipient countries, called the Washington Consensus. To achieve macroeconomic stability, curb inflation, regain market confidence, eliminate the balance of payments deficit, thereby achieving economic growth, it was necessary to implement many reforms. These are the reduction of the budget deficit, and reducing the tax burden on the business; reduced restrictions on foreign investment; deregulation of the economy; privatization; protection of property rights; priority education and health care; floating exchange rate; opening up the market to free international trade; and liberalizing financial flows.
It is known that in Ukraine inflation is rising against the background of stagnation of the manufacturing sector. We have a significant economic dependence on commodity exports, a chronic trade deficit and the resulting unstable exchange rate, which in turn negatively affects the balance of payments. Therefore, according to many economic experts, at the moment we cannot refuse to work with the IMF for the simple reason that in the absence of financial assistance we will quickly run out of international reserves due to the existing trade deficit and the need to pay off old debts. The currency rate, accordingly, will become uncontrollable, because the NBU regulates excessive currency fluctuations at the expense of its reserves.
According to the head of the budget committee of the public council under the Ministry of Finance Taras Kozak, the loan agreement between Ukraine and the IMF contains 95% of the requirements that Ukraine assumed and which were part of the 2014 coalition agreement.
Note that the stand-by program involves a much shorter loan repayment period. If under the EFF program the loan repayment period reaches 10 years, then under the stand-by program it is reduced to 5 years. At the moment, this fact will motivate our government not to forget about the reform program in favor of pre-election populism and continue to work on economic and political reforms.
"According to the rating agency Standard & Poors, the new program has a less reformed agenda. That is, it is more flexible for our government, will require less unpopular actions, and, therefore, is adequate to our political agenda and more feasible for the Ukrainian government. This, in my opinion, is its main positive side", said Olexander Parashchy, head of analytical department of Concorde Capital.
Ukraine, cooperating with the IMF, reduces the debt burden, because the IMF makes us live modestly, limiting the budget deficit. "As a result, the debt load, which is not an absolute number, but the ratio of public debt to GDP, is rapidly decreasing in Ukraine. We started 2017 with the level of public debt-to-GDP ratio - 80%, entered in 2018 with 73%, and by the middle of summer 2018 already had 63%, ”says Serhiy Fursa, investment banker at Dragon Capital.
According to the National Bank, Ukraine in 2019-2020 will have to pay about $ 12 billion in foreign debt, including interest payments.
“And without the IMF program, we do not have access to other funding channels: funds of the European Union, the World Bank. Therefore, the proposal to sign a new program with the IMF is economically justified,” said Yakiv Smoly, chairman of the National Bank of Ukraine.
There are other reasons, for example, support and continuation of reforms, but now debt is the main problem, especially since the situation in foreign capital markets has become more complicated, money is becoming more expensive. "Ukraine should continue cooperation with the IMF, because otherwise it will be very difficult to maintain payments on the state debt in this period and 2019-2020. The program will not exactly cover all the needs of Ukraine, but this will signal to private investors that the country is in the IMF program, plus it will open the way of financing for the European Union, the World Bank. That is, the IMF is not the only, but the key source from which Ukraine can take money, ”said Ivan Miklos, head of the advisory group of the Prime Minister.
Is it possible to refuse to pay the debts of the IMF? Unfortunately, this is impossible, because the debt to international financial organizations is practically not restructured.
"And the country's credit rating, and with it the profitability of new borrowing, depends almost entirely on cooperation with similar organizations. If Ukraine refuses to pay its bills, this may soon lead to complete international isolation and the closure of the country for foreign direct investment", said Oleg Pendzin, executive director of the Economic Discussion Club. At the same time, the expert notes that the funds for the repayment of already existing loans come mainly from new borrowings.
At the same time, it is naive to expect that the IMF loans will help us to get out of the economic abyss, because cooperation with the IMF does not eliminate the raw material specialization of Ukraine. "The Fund helps to stabilize the economy, but is not able to help increase industrial exports, this is the task of the country itself. And if you really set a goal to refuse IMF loans, then first you need to think about how to create industrial exports. Otherwise, we will depend on external creditors, and the country will suffer from changes in the international conjuncture in capital flows and commodity prices, "said economist Pavlo Vernivsky.
Some economists believe that the Ukrainian economy might well have been able to do without credits or at least reduce the amount of loans. For this, it is necessary to increase the volume of Ukrainian exports and reform the financial system. "For example, we do not have a free securities market. In addition, there are cases when several billion hryvnias hang on a treasury account while the government pays for debt servicing. If we had a financial market, like in other countries, this money could be placed at least for a certain percentage, so that they work for the economy. Then the need for IMF loans would decrease, "said Yuri Turyansky, a member of the Economic Discussion Club.
The amounts of tranches of the IMF go only to replenish the gold reserves, service and payment of public debt. So maybe Ukraine should completely abandon the IMF loans? But to raise the economy and exchange rate stability, we need new cash injections. However, in the current political situation, it is even harder to get them than two years ago. "Therefore, there may be two ways to attract funds. The first is through private large companies. The second is the creation of offshore companies in Ukraine. Now there is a tendency for European countries to abolish banking secrets. We could say that we have banking secrets. Plus to this, not to impose income tax on non-residents of Ukraine. Then big capital would flow here, the dollar and the euro would be cheaper,” Olexiy Luponosov, doctor of economics, head of the ua-banker.com.ua portal offers a solution.
And the Fitch rating agency still considers the IMF program a key factor in the creditworthiness of Ukraine, as it reduces refinancing risks. The agency’s press release notes that “the IMF program is key to preserving international reserves and the ability to cope with increasing payments on sovereign debt. Continued cooperation with the IMF and other international partners will be important for maintaining macro-financial stability, preventing reform rollback and ensuring access to financial markets. "
Thus, the IMF is a kind of “beacon” for other creditors.
The World Bank
For 25 years, the World Bank has allocated more than $ 11 billion for specific investment projects in Ukraine. Including in 2014, the WB directed more than $ 5.5 billion to Ukrainian projects and provided $ 500 billion in guarantees for the purchase of gas. At the moment, Ukraine is implementing 7 joint projects with the World Bank totaling $ 2.3 billion in the areas of transportation, trunk grids, medicine, social assistance, water supply and energy efficiency.
On 18 December 2018, the World Bank made a decision to provide Ukraine with a financial guarantee of $ 750 million "to support important reforms in the banking sector, the fight against corruption, agricultural land management, subsidizing utilities, health care, and pension reform," says in the WB report.
The guarantee will be valid for 10 years and will allow Ukraine to receive international financing in the amount of about $ 1 billion on more favorable conditions than if you independently raise funds from the market. We recall, the last time Ukraine borrowed money at 9% for five-year bonds and 9.75% for ten-year bonds.
On December 11, the European Union transferred to Ukraine 500 million euros of macro-financial assistance. The Ministry of Finance of Ukraine reported that the funds were credited to the state budget. The exact cost of financing will be determined when the European Commission enters the foreign borrowing market, but will not exceed 2% per annum. The purpose of the EU funds allocation in 2018 is "economic stabilization and a program of structural reforms." Macro-financial assistance is tied to the implementation of the IMF program.
With this payment, the total amount of macro-financial assistance provided to Ukraine by the EU since 2014 has reached 3.3 billion euros, which is the largest amount of aid to a non-EU country. The funds are available as long-term low-interest loans, subject to the implementation of specific policy measures agreed in the Memorandum.
This was told by the head of the EU representation in Ukraine, Hugues Mingarelli. According to him, most of the money was allocated to the country to provide a number of programs to improve the fight against corruption, reform weak institutions, including the police and courts, reform government institutions, and organize and operate reform directorates. But Mr. Mingarelli is dissatisfied with the observance of laws in Ukraine, as it impedes the implementation of major reforms.
European Bank for Reconstruction and Development
The EBRD is investing in projects that promote the transition to an open market economy, the development of private business, the formation of a healthy investment climate and the creation of environmentally and socially healthy and sustainable development. The Bank's specialists participate together with the Ministry of Economic Development and the Ministry of Infrastructure in the development of some laws, the adoption of which creates good opportunities for investment in infrastructure. The EBRD works both with the government (for example, in 2016, the EBRD loan Ukraine spent on gas purchases), as well as with large public and private borrowers, such as, for example, PJSC Arcelor Mittal Kryvyi Rih or Kherson Commercial Sea Port , as well as small and medium businesses. Detailed financing conditions can be found on the EBRD website.
According to the director of the EBRD office in Ukraine, Sevki Acuner, investors are interested in projects in the field of renewable energy, in particular solar energy. But in November, a message appeared about the termination of projects in the field of solar energy before switching to a more rational method of supporting the development of renewable energy sources, such as auctions for the sale of green electricity. According to EBRD experts, “green” tariffs, which at one time played an important role in the development of renewable energy sources, have now become a brake on green energy, and sometimes a source of corruption.
And on December 20, the parliament adopted a bill on the introduction of auctions in the renewable power industry. Adoption of the law will reduce the cost of "green" electricity for consumers, create healthy competition in the energy market.
The director of the Ukrainian representative office of the EBRD announced that the bank is ready to finance several large projects in the field of infrastructure and transport development in the amount of 100-200 million euros. "In the case of their successful implementation, we will be able to achieve funding increased to 1 billion euros in 2018," said Sevki Acuner.
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So, after the tranches of the IMF, the EU and the WB received at the end of 2018, our country at least the next six months has been provided with a certain financial stability. The reserves of the NBU will amount to $ 19–20 billion, and the tension in the market will decrease.
It is unlikely that in the pre-election period deputies will go (or be able to go, on the basis of political expediency) to implement all the changes that have been made to the IMF Memorandum. Understanding this and realizing the challenges that Ukraine will face in the second half of 2019, we assume that the country's leadership will try to maximize attracting international credit resources to the country in the first half of 2019. Otherwise, after the next suspension of cooperation with the IMF (and this is more than likely), all the other “credit doors” will “close”. You should not rock the boat between the presidential and parliamentary elections, and all those in power should understand this. After 2019, the year 2020 will be no less intense in terms of the payment of external debts. And whether a country will be able to pass it without violating its debt obligations will depend on the new parliament and the new government.