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Why Ukraine borrows money from EU

Author : Pavlo Kukhta

Source : 112 Ukraine

European Parliament has approved the allocation of macro-financial assistance to Ukraine in the amount of 1 billion euros
11:24, 15 June 2018

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The money allocated by the European Union is macro-financial support, that is, it will go directly to the budget, into a common pool. These are not the earmarked funds, they are simply financing the budget. They finance the general expenses of the budget: pensions, military expenses, salaries and so on. Also, some purchases of goods and services by the state according to the monthly list of the state budget.

Related: European Parliament approves one billion euro of macro-financial aid to Ukraine

We take this money for two reasons. First, we have a budget deficit, that is, our expenses exceed our revenues. Accordingly, somehow one has to cover this difference, and this difference is covered by bonds, loans and the like. Secondly, we have accumulated in 2008-2013 huge debts that we now give or refinance. That is, we give the debt. We take some other debts and pay back the old ones, that is, we refinance. If we cannot fully pay off our debt, then at least we cover the old debt with a new one.

Related: First year of EU-Ukraine visa-free travel: Not everything in the garden is rosy

There are two ways to get out of this vicious circle. Firstly, one can repay debts, but this is really very expensive. Although, we can do it gradually. It would be rather difficult to do it for the country, which is in a state of war. Secondly, it is possible to achieve economic growth when the economy simply overgrows the debts. That is, debts are important not only in some absolute amount, but they matter in relation to how much we earn. If we earn twice as much, then the burden of this debt will be half as much for us. Thirdly, it is necessary to reduce the budget deficit to zero, perhaps then make it surplus to repay debts, and do so by reducing the gradual consolidation of budget spending, reducing them as much as possible. This would not be easy, and this should be done gradually. We do not want to cut people's pensions and salaries. We are somehow gradually reformed, perhaps we are removing the state from some sectors. These are certain structural heavy reforms that need to be done. If someone thinks that we do not need the macro-financial assistance, I want to look at those experts who would take 1 billion euros from nowhere and put it on the table.

Related: Finance Minister lists actions Ukraine needs to take for EU financial assistance

Now the European Parliament has voted for the EU’s readiness to allocate this money. Now the European Commission should detail, under what conditions, how this program works specifically. They write a special memorandum, agree it with our side. If we do not agree, we will say no. The already agreed memorandum is signed by both parties, and funds will be already allocated for it. And usually, the precondition for such macro-financial assistance to Ukraine was the fact that the IMF program has been successfully implemented. Accordingly, I think that receiving a tranche from the EU will become a clear signal and a prerequisite for obtaining a tranche from the IMF.

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

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