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Life without IMF loans: Three scenarios for Ukraine

Author : Olexandr Honcharov

Ukraine can hold out on the leaves of IMF loans and on new borrowings on the government bonds market until the autumn of 2019, and then it would face a dead end
09:55, 24 January 2019

Reuters

We can hold out on the leaves of IMF loans and on new borrowings on the government bonds market until the autumn of 2019, and then we would face a dead end. Such an economic model, based only on obtaining the loans and the sale of state-owned enterprises, is unpromising. We have to live on credit, and the creditors are ruthless. The only positive news of this week is Ukraine’s Free Trade Agreement (FTA) with Israel. At the same time, the head of Naftogaz Andriy Kobolev intimidates us again: if the gas price is reduced, then the exchange rate will be 60 UAH for one USD (now it is 28 UAH to 1 USD).

So, why do the Ukrainians continue to support the Cabinet of Ministers of Volodymyr Groysman if everything is so bad in Ukraine, especially, the level of salaries of laborers and public debt? And if everything is so good, why do more and more people leave the country as labor or political migrants. Let us remember Israel in this contest. According to various estimates, about 50,000 Ukrainian illegal immigrants work in Israel, and more than 15,000 people have applied for refugee status since 2014, whereas in 2013, only one such appeal was registered. I would like to believe that Petro Poroshenko and Israeli Prime Minister Benjamin Netanyahu have discussed the question of why Israel began to massively deny Ukrainians in the entrance and deport them. Only in the past 2018, they have deported about 5,000 imaginary refugees. Even some Ukrainian tourists are not allowed into the country, despite the visa-free regime.

Related: 11,000 illegal migrants from Ukraine annually come to Israel, - ambassador

When will we learn to be strong and independent? Groysman’s Cabinet has raised Ukrainians’ cost of living by 2,7 USD from January 1, 2019; so now it’s 66 USD. Let me remind you that the cost of living is the monetary evaluation of the consumer basket, which includes the minimum sets of food, non-food goods, and services necessary to preserve human health and ensure its vital activity. Well, the "minimum salary" in Israel is 5,000 shekels (1,325 USD), while in Ukraine it is 4,173 hryvnias (149 USD).

Here is the most accurate assessment of the actions of our legislators and the government; I mean the size of the subsistence minimum in Ukraine. One thing becomes obvious here, the greed of our authorities kills out their common sense and sense of proportion. To be honest, Groysman’s Cabinet, like its predecessors, is not able to solve a bunch of key problems to improve Ukraine’s investment climate, the ministers simply push them far into the background. And without these decisions, a new economic policy and a real increase in the incomes of the citizens of Ukraine is simply impossible. In the meantime, these critical factors make foreign investors leave our market.

Related: What hryvnia exchange rate we expect by the end of 2018

So Naftogaz head Andriy Kobolev has once again begun to intimidate both investors and ordinary Ukrainians that if the gas price is lowered, then the exchange rate will be 60 UAH for one USD. Frankly speaking, everyone fed up with these horror stories from the Naftogaz "geniuses." We seem to be powerless to the monopolists because we refuse to understand the current legal framework, we are overwhelmingly lazy and illiterate.

Kobolev draws us a quick "bright" future: "Any presidential candidate promising a reduction in gas prices understands that this would end with the collapse of the entire financial system. Then there would be no questions about the gas prices. Then there would be a question about dollar rate: it would be 40 hryvnias for a dollar, or 50, or 60..."  

Related: Big Mac Index: Ukrainian hryvnia underestimated by 65,2%

But still, what should we do? First of all, we should completely change the composition of the government, bring technocrats and form a new economic model. The new team should radically change the system management to prevent a sharp decline in GDP in 2019. This requires, first, additional measures, including budgetary incentives for small and medium-sized businesses; secondly, effective and strong monetary policy decisions; thirdly, the institutional and structural reforms are needed.

There are no soft options. In addition, foreign investors do not understand what is happening here. But in order for investors to believe us, one should not beg for loans, but present at least a two-year investment plan and report on the new tax rules. The great of the world do not like the weak and the poor. If we don’t find effective strategic investors, the threat of cascading bankruptcy following the example of the powerful surge in unemployment, when enterprises collapse one after another, it becomes more and more obvious by the end of this year 2019.

Related: National Bank explains low position of Ukrainian hryvnia in Big Mac Index

Finally, what are the scenarios for further developments, when the IMF's loan money runs out? So, the first one is an even greater devaluation of the hryvnia, which would mean life within our own means plus high inflation, waves of bankruptcies, destruction of citizens' savings, mass layoffs. The second is foreign investments, but it is unclear how to attract them in terms of obvious pre-default conditions. The third is the new IMF loan, and then it will be a net financial pyramid. From an economic point of view, these are all the possible variants.

And in conclusion, I want to remind everyone: we have refused from developing strategic industries, state administrating of enterprises of the military-industrial and mining-metallurgical complexes, agriculture, and so on. Then, in the successful 2000s, we ourselves began to abandon state regulation of macroeconomic proportions and financial and economic indicators. In fact, we have refused to regulate prices and tariffs of natural monopolies, allowing officials to cover their corruption schemes and mechanisms of kickbacks. But in reality, our economy was put in complete dependence on IMF loans.

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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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