IMF-Ukraine cooperation as a national idea: How to avoid evolving debt crisis?

Author : Oleksiy Kushch

Source : 112 Ukraine

Cooperation with the IMF has long turned for Ukraine into a kind of sacred symbol or a semblance of a cargo cult
17:19, 18 November 2019

Open source

Cooperation with the IMF has long turned for Ukraine into a kind of sacred symbol or a semblance of a national idea, instilled by the authorities. A certain semblance of a cargo cult in relation to the foundation of our political "elites" has been formed.

The cargo cult is the holy faith of the Polynesian natives that containers with food during World War II were not dropped by American planes, but by some kind of “god”, and in order to bring this god back, you only need to imitate the USA military actions: to build a take-off strip, an airplane made of palm branches, put on the head a kind of helmet with antennae-walkie-talkies in the form of bamboo sticks.

Related: IMF expects growth of Ukraine's GDP growth by three percent in 2020

Just get yourself in the right space and wait. In Ukraine, the next tranche was “attracted” by the sign of the guarantor. For a long time, we have been talking about a few simple points: without cooperation with the IMF, we would face a default, a devaluation of the hryvnia rate, and an outflow of investments.

It was one extreme, something like "overpowering and the IMF." But there was another extreme - “betrayal in the face of the IMF.”

And this “betrayal” quietly transformed into a “modest, personal charm of the bourgeoisie” and sweet family happiness. In these proposals, the whole essence of the local policy is hidden: to frighten the people with a “betrayal” and earn money, to please the people with “a win” and earn money again.  In fact, all common theses about the IMF are stable cliches to justify the package of requirements of the fund that the government itself is devising.

IMF loans are taken by both the previous government and current power. In fact, we simply do not have appropriate Minister of Finance and the head of government, who could negotiate with the fund on rational positions and based on the strategic interests of the country. As the dynamics of recent years have shown, Ukraine can provide macro-financial stability even without IMF loans. In addition, the fact of signing a memorandum with the IMF did not lead to an increase in Foreign Direct Investments (FDI).

Related: IMF hopes for fast progress of its mission's work in Ukraine, - Thomsen

On the contrary, cooperation with the fund is like a bell of a leper for an investor: this economy is contagious by the crisis and it is better not to approach it. The IMF's umbrella is good news for external lenders rather than investors. What is the point of cooperation with the fund then? The current stability based on the mandatory convertible debenture pyramid is bought at the expense of future destabilization and at a very high price.

Instead of taking loans from the IMF in foreign currency for five years or more at 2-3% per annum, we attract domestic loans in hryvnia for 1-2 years on average at 15-16%.

The key challenge is to activate domestic investment potential. It can be generated either by the state as a system developer of a new economic project, as happened in China or South Korea, or international donors, as happened in neighboring Poland.

If we have a first or second source of internal development, this will become for us the very foothold with which Ukraine could launch an economic engine. It’s like starting a car with a pusher when the battery is dead.

Since 1994, we have not fully implemented any cooperation program with the fund, with the exception of the first one for $ 0.76 billion, which was implemented during the transition to a market economy from the post-Soviet planned system.

The second program, in 1995-1998, was implemented only by 54% due to violation of the IMF requirements in terms of money supply growth and the size of the budget deficit. In 1998-2002, a scandal with the manipulation of National Bank (NBU) data regarding the size of foreign exchange reserves arose. In 2002-2008, we did not cooperate with the fund and did not even use the working credit limit of $ 0.6 billion.

But the crisis of 2008 was minimized thanks to IMF loans: in total, we received 64% of the credit line in the amount of $ 16.5 billion, that is, $ 10.6 billion (three tranches). The reason for the suspension of the program is the failure to fulfill obligations to the fund. In this program, part of the credit tranches was credited directly to the budget, and not to the NBU reserves.

Related: Kolomoysky says it is necessary to restore relations with Russia, to turn away from IMF

In 2010, a new ambitious program was signed in the amount of $ 15.1 billion, but the percentage of its implementation was low – 22%. In fact, this program carried out the main function - not to allow Ukraine to "become dishonored" with Euro 2012. Its suspension caused a burning resentment among the pro-government elites of the “rotten West” and became the starting point of the “turn to the East” in 2013.

In 2014, the IMF signed an emergency stand-by lending program with us, the specificity of which is to provide loans to replenish the reserves of the country's central bank in the face of a catastrophic deterioration in the balance of payments. The program was suspended by agreement of the parties, as the IMF decided that Ukraine was ready for systemic reforms.

That is why the parties decided that instead of the "stand-by", the new format of cooperation would be more suitable for the EFF extended financing program, which, among other things, allows allocating tranches to replenish the state budget, but in return suggests a longer-term cooperation plan. The new program amounted to $ 17.5 billion and for the first time, Ukraine received four tranches, although the amount received was more modest than in the program of 2008: $ 8.7 billion.

At the moment, we have failed the next stand-by program, activated a year ago. First of all, thanks to a series of court decisions between the first and second rounds of the presidential election in April 2019. These decisions were related to the nationalization of PrivatBank, which belonged to oligarch Koloomysky. Thus, the “Privat factor” was capitalized at a total minus, this time - by the size of the missed credit tranche of 2-3 billion dollars.

Related: IMF auditors arrive in Ukraine

Here it is worth paying attention to several key points. Ukraine has a fairly low quota in the IMF - 2.01 billion SDR (2.7 billion dollars). Moreover, only in 2016, it was increased by 46%, and before that, it was even less. The size of the quota affects the amount of lending and the frequency of tranches.

As a rule, the IMF gives a loan to the country, which exceeds the quota by 6-8 times: in our case, it is from 17 billion to 22 billion dollars, which roughly corresponds to the largest anti-crisis programs of 2008 and 2015. Of course, the rules of the fund allow “in special cases” to sharply increase this indicator, but extraordinary reasons are needed for this. In addition, the size of the annual tranches, as a rule, is a double amount of the quota, that is, for us - 5.5 billion dollars.

In the 2008 program, the first tranche amounted to 4.5 billion dollars, and in 2015 - 5 billion dollars.

The format of cooperation between Ukraine and the IMF all the time revolves around either "standby" or extended EFF. Loans are profitable but short. At the same time, a state with a low per capita GDP can apply for preferential financing: for 10 years at 0.5% per annum, that is, almost for free.

In addition, Ukraine, as a country that is excessively dependent on fluctuations in world commodity prices, could conclude an agreement with the fund to open a flexible credit line and a preventive line for providing liquidity. In the context of the crisis and the rapid development of destructive processes in the economy, the mechanism of accelerated lending is of particular importance.

Our economic “battery” is low, and government reserves are inadequate. That is why the role of the “pusher” should be performed by international donors. And the most important among them is the IMF, with all the shortcomings of its policy towards developing countries.

Related: PM Honcharuk discusses new expanded financing program with IMF mission

The toxicity of Ukrainian reforms, which have been going on with permanent success for more than 20 years, as well as the actual failure of cooperation with the IMF, suggests that Ukraine has also come to create its own endogenous model of economic growth based on the accumulation of human capital. And the one who interfered yesterday, that is, the IMF will help us in this.

We need to be able to formulate the right agenda for negotiations with the IMF. We must increase our quota to 5 billion dollars in order to qualify for a loan of at least 40 billion dollars. The IMF regulation allows paying 75% of the quota with bills in national currency.

Consequently, an increase in our quota by 2.3 billion dollars - up to 5 billion dollars, will require us to contribute just 0.5-0.6 billion dollars of "live" money. As the experience of two anti-crisis programs of 2008 and 2015 showed, the financial resources allocated to Ukraine are too small for systemic reforms and too much for patching holes in the balance of payments.

Obtaining from the IMF 40 billion dollars for ten years at 0.5% per annum is Ukraine’s key task for the coming years. And this should not be a loan to replenish the NBU gold reserves and not to help patch up the budget, but the money allocated to the fund for structural adjustment of the economy. And for this, we need a new endogenous model of economic growth, based on the development of human capital, because by this indicator we are in the top 50 world ratings.

Instead, the government is again trying to "re-pay" from the payday fund.  Here we have both “market” utility tariffs, = “market” gas prices for the population, and the new Labor Code, which reduces the rights of the employee by zero, and the promise to “open up” the land market in favor of speculative financial funds, and toughen up subsidiary policies.

The only thing that the authorities can’t do is to return the problem loans that were received by the former owners of PrivatBank.

Related: Servant of IMF: Ukraine under Zelensky remains a country with external governance?

The government is even ready to replace cheap and long-term IMF loans with expensive and short-term domestic loans, having overpaid billions of hryvnias to financial speculators. Naturally, the current "elites" will not be able to conduct a dialogue with the fund regarding structural loans for the "economic leap", knowing that such requests will only cause a sarcastic smile among the IMF functionaries.

And how would you react if you came to ask for a loan from a friend whose bank cells are bursting with cash? It is precisely this reaction in the West that our politicians and their sponsors provoke when they ask for a loan, while having billions of billions, villas on Lake Garda, and other pleasant things.

And the only debut idea is to borrow 100 billion dollars from the Russians, despite the fact that the Central Bank of Russian Federation foreign exchange reserves are just over 500 billion, and the assets of the Russian National Welfare Fund (the very one that lent ex-president Yanukovych a little more than 100 billion)... And in this is a certain trick of history - we started with a Russian loan in 2013, we can “finish” with a Russian loan in 2020.





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