How can Ukraine untangle it from IMF's net

Author : Oleksiy Kushch

Source : 112 Ukraine

After the completion of the current stand-by credit program with the IMF, Ukraine will still need to continue cooperation with the Fund
19:16, 10 April 2019

In early April, the World Bank noted in its economic overview of the Europe and Central Asia region that after the completion of the current stand-by credit program with the IMF, Ukraine will still need to continue cooperation with the Fund.

The reason is quite simple: over the next three years, our country will be faced with the need to pay substantial sums on foreign debts, which will continue to be “taken” by the current government at record interest rates.

The recent borrowings of the Ministry of Finance on foreign markets in currency were made at a rate of almost 10%, which means that over ten years, such debts would just double.

Related: Ukrainians’ debt for public utility grew by 12,6% in January, only one solution is possible, - Medvedchuk

Speaking about the domestic capital market, debt obligations in hryvnia are generally placed under 20% per annum.

And these debts need to be repaid in 3-6 months, which motivated the Ministry of Finance to suddenly recalculate the planned amount needed to pay foreign and domestic public debt in 2019: it was increased to 16,4 billion USD, with an increase of more than 0,5 billion USD. Where would the additional 0,5 billion USD go?

Just to pay off the above mentioned very short government bonds issued from the beginning of the year for 3-6 months at 20% per annum. It is not difficult to track the “pocket” of this “cache” on the eve of the president’s elections...

According to the World Bank, our country needs about 11 billion USD annually (about 8% of GDP) to pay off sovereign debt and finance the state budget deficit.

Related: Moody's raises Ukraine’s sovereign rating, still assessing debt as risky

The growth of the external debt of any country occurs as a result of the excess of domestic expenditures over revenues; as a result, such a country buys more imported goods than exports its own, increasing the negative current account balance.

The trade balance deficit is compensated by a positive balance on the financial account, which is formed by attracting loans and selling national assets to non-residents.

As a result of the functioning of such a model, such a country becomes a net borrower.

The net debt formation model can have a productive and unproductive form. In the first case, expenses exceed revenues due to the investment boom, in the second, as a result of banal consumption.

Ukraine is experiencing the second option. In these conditions, the deficit trade balance is programmed, and its compensation is carried out through labor transfers from abroad and foreign loans.

Our situation could be described with the help of the two-period model of intertemporal limitation of external debt, developed in accordance with the Ricardian equivalence theory. So, the size of the external debt is determined by the intertemporal restrictions.

Related: IMF to lower forecast of world economic growth in 2019, 2020, - Lagarde

If a country gives priority to the current consumption, and not to the future one, it takes on more debts (the first period), forming a negative current account balance. During the second period, there is a sharp reduction in domestic consumption amid an increase in exports and the repayment of foreign debts.

Ukraine has used the first period for the usual consumption of its future and is now moving on to the second stage with significantly weakened export potential. The recipe for solving this problem from the World Bank is simple. Ukraine needs to carry out a structural transformation of the economy and build into global value chains for the development of resistance to external raw materials. That is, we need money, a lot of money, and rapid economic growth. But the World Bank did not specify how Ukraine could do this in the current debt situation.

Banks and financial companies will continue to buy government bonds at 20% per annum instead of taking risks in the real sector. In addition, under the terms of the restructuring of external debts, taken by former Minister of Finance Jaresko, in 2020 - 2040, Ukraine would have to pay so-called bonuses for its economic growth to foreign creditors: 40% of GDP growth if its dynamics amount to 4% +.

Related: Naftogaz, Finance Ministry to discuss gas prices with IMF

To grow rapidly, to pay back almost half of the gross domestic product to the external creditors ... What a tempting offer...

The only correct option for Ukraine is Iceland’s debt problem-solving scenario, modified for our realities. That is, holding a national referendum on a moratorium on the payment of external debts and holding on its basis new negotiations with external creditors: restructuring the amount of debt for 50 years and reducing the interest rate to 5% per annum with the right to revise if our sovereign obligations are at a lower rate.

It is just necessary to coordinate the credit programs of the development of the economy, and not the usual debt refinancing, when loans are given only for the return of the old debts, and even this money is not enough.


Related: Ukraine might lose visa-free regime with EU and support of IMF, - Transparency International

Here you should pay attention to a few key points. The first. Ukraine has a fairly low quota in the IMF - 2.01 billion SDR ($ 2.7 billion).

And only in 2016, it was increased by 46%, earlier, it was even less. The size of the quota affects the amount of credit and the frequency of tranches.

As a rule, the IMF provides the country with a loan that exceeds the quota size by 6–8 times: in our case, it is from 17 to 22 billion USD, which roughly corresponds to the largest anti-crisis programs of 2008 and 2015. In addition, the size of annual tranches, as a rule, is 5,5 billion USD.

Ukraine is now in the group of the poorest countries and the process of transition to a market economy is not complete yet, because our format is rather a quasi-market economic system with a high proportion of monopolies and the state’s share.

First, Ukraine needs... to give money to the IMF. We must increase our quota to 5 billion USD in order to qualify for a loan of at least 40 billion USD.

Related: Possible election of Zelensky not to influence economy quickly, - Moody’s

The rules of the IMF allows 75% of the quota to pay bills in national currency.

Getting from the IMF 40 billion dollars for ten years at 0,5% per annum is the real task for our country in terms of cooperation with the IMF.

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This column does not necessarily reflect the opinion of the editorial board or 112.International and its owners.  

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