New Ukraine-IMF memorandum: Servant to the new debts?

Author : Natalia Lebed

Source : 112 Ukraine

Ukraine and the International Monetary Fund have reoriented from the previously agreed three-year EFF extended financing program to the 18-month stand-by program
17:52, 5 June 2020

The International Monetary Fund (IMF)

In mid-May, the Verkhovna Rada adopted the so-called “anti-Kolomoysky” law in the second reading. This was the last condition of the IMF to provide Ukraine with a new financing program. And we reached the finish line in negotiations on a new tranche.

Related: IMF loan to let Ukraine cover up for budget deficit, - Finance Minister

However, Ukraine and the International Monetary Fund have reoriented from the previously agreed three-year EFF extended financing program to the 18-month stand-by program. It promises us 5.5 billion dollars, which would be divided into three tranches.

Given the unprecedented uncertainty about economic and financial prospects and the need to focus political priorities on short-term containment and stabilization, the negotiations have switched to an 18-month stand-by, which can provide support for the balance of payments,” Jerry Rice, IMF representative, commented.

Related: IMF to consider Ukraine's Stand-by loan application on June 9

At the same time, Mr. Rice did not mention one detail: loans of this type are given to countries that have just begun to leave the totalitarian system or the planned, socialist economy. At one time, Ukraine has already received and passed stand-by financing, so this kind of cooperation should be a passed stage. But we were rolled back again. However, even to obtain a stand-by, Ukraine must fulfill a number of conditions - in addition to the already adopted “anti-Kolomoysky” law and the land market law. Some experts consider this situation unacceptable.

Colonization of Ukraine?

Вirector of the Ukrainian Institute for Policy Analysis and Management Ruslan Bortnyk resents the memorandum with the IMF. According to him, the consequences of signing the memorandum might exceed the consequences of the adoption of the Ukrainian Constitution in 1996, since a different profile of the state will be formed.

According to Bortnyk, after the signing of the Memorandum with the IMF, the following will change for Ukraine:

  1. External management of the country's financial system is being introduced (the National Bank, according to the memorandum, is obliged to keep inflation at 5%, which will stop GDP growth).

Related: IMF to make final decision on allocation of tranche to Ukraine before June 10

  1. Medical and educational anti-reforms – here we are talking about the need to continue the unpopular reform of ex-acting healthcare minister Suprun, in particular with regard to the procurement of drugs through ProZorro systems; and reducing the network of primary and secondary schools, as the IMF insists on this).
  2. The retirement age will increase and spending on pensions and the social sphere will decrease (this, in fact, says it all, that is, no increase in pension payments can be expected).
  3. A “waiver of the domestic investor” will take place and bankruptcy of the banks will continue, Bortnyk says. (Those who were involved in the closure of almost a hundred "problem" banks in 2014-2018, that is, ex-head of National Bank Hontareva and Poroshenko, will not be responsible for their deeds).
  4. There will be external control over Ukrainian justice (more specifically, it will mean that the appointment of judges will be supervised by the foreign experts).
  5. Tariffs for housing and communal services will increase (rising energy prices on world markets will increase the numbers in payments, and there is no way out of this situation because Ukraine has pledged to apply a market-based gas pricing scheme).
  6. The privatization of the Odesa port plant and Centrenergo (major electric and thermal energy producing company in central Ukraine and eastern Ukraine) will take place (in fact, privatization will affect all large enterprises).
  7. External control over the land market will be established (Ukraine, according to the memorandum, undertakes to study the possibility of wider application of land reform. Simply put, raise the bar on the sale of more than 1000 hectares in one hand and allow foreigners to purchase allotments).
  8. The influence of the National Anti-Corruption Bureau (NABU) and its head Artem Sytnyk will increase (for example, NABU is also mentioned in the memorandum in the context of maintaining the National Bureau in its current format).
  9. There will be a rejection of state support for the national economy and industry.

This document cannot be signed in its current edition,” Ruslan Bortnyk summarizes. “It is necessary to continue negotiations, look for other sources of financing the budget deficit.”

Bortnyk’s colleague, political scientist Yevgeniy Bulavka, is developing his comparison of Zelensky with Holoborodko, the character he played in a Servant of the People TV show. But cooperation with the IMF is not cinematic here, the expert continues.

The opportunity to receive loans from the IMF opens the way to cooperation with other donors since many in the world are oriented specifically to the IMF. Only Russia could be an alternative here. We have already witnessed this scenario in 2013, that is, the issue here is not so much an economic one, how much political,” says Bulavka.

Other lenders, such as the EBRD or the World Bank, could become an alternative to both the IMF and Russia. But the problem is that Ukraine in their eyes does not look like a very reliable partner.

Related: IMF reveals expectations from Ukraine for provision of another loan

Recently, Israel said that it would not rush and restore flights with Ukraine, because it does not trust our statistics on Covid-2019, so global financial donors have their own number of reservations. Our national currency does not seem stable to them, they are worried that state monopolies are not transparent and that a number of industries (for example, energy) are controlled by the oligarchy.

Bulavka agrees that a decrease in confidence in Ukraine belongs to the area of ​​responsibility of the current government. Just as getting a stand-by instead of a development program is the "logical outcome of Zelensky’s presidency.”

He created a number of problems himself, in particular, distrust of Ukraine - after his close ties with the famous oligarch, after pickets organized by this oligarch at PrivatBank, everything looks natural,” said Bulavka. But it’s hard to say whether these problems will hit the president’s rating.

Killing the clock

Meanwhile, the deputy director of the Ukrainian Institute for the Study of Extremism, Bogdan Petrenko, supports Ukraine’s cooperation with the IMF. The fact that the best intentions of international partners are turning into the opposite in Ukraine is not the fault of these same partners, he said.

The IMF would like us to have order in everything, but if we talk about some kind of state body that was imposed on us by the IMF or the West as a whole, then we need to understand that the ideal that is ‘kept in mind’ our sponsors, is faced with the Ukrainian practice of implementation, and in the end, it turns out not at all what was originally planned,” says Petrenko.

But, he adds, “even if you are not completely sovereign, that is, significantly dependent on external influences, you must be able to defend your positions. After all, it was previously agreed that we would get credit for certain requirements, in particular for the land law. And these requirements passed painfully, hit the president’s rating, but even after fulfilling all of them, we were faced with a new portion of conditions being thrown out to us. Our position in all these processes is too weak, and when you get a weak vis-a-vis, the temptation to put pressure on him is too strong. And this applies not only to, for example, the Russian Federation but also to the West too. And this will continue until we learn to defend our interests.”

Related: Ukraine to get first tranche from IMF in June, - Shmygal

Assessing the political consequences of signing the memorandum, Bogdan Petrenko dwells on three points. First, he notes, “the IMF is beneficial to the authorities, if only because you can always refer to the Fund by making unpopular decisions. That is, we have power for the people, but you can’t argue against the IMF. Moreover, you can interpret the Fund’s requirements as anything broadly. And making it a permanent object of hatred is very easy.”

In general, the expert notes, “we have a constant conflict between populism and tightening the screws.” And in order not to tighten these nuts right now, on the eve of the local elections, the Ukrainian authorities will try to delay the moment of fulfillment of their obligations. Especially if at least the first tranche of the loan will be in her pocket. That is, the second consequence will be that an ordinary Ukrainian will feel in his own skin the consequences of working with the IMF no earlier than the end of the year.

Related: First tranche of new stand-by program will be allocated to Ukraine in near future, - IMF head

Sale of sovereignty

In assessing the fact that it was Ukraine’s policy that led to creating dependent relations with the International Monetary Fund, economist Oleksiy Kushch, an expert at Growford Institute, assures.

This is the most disastrous memorandum of all that Ukraine has ever signed. Partially, the IMF can be blamed. But if the negotiators on the Ukrainian side behave so unconscionably, then it’s a sin not to take advantage of the situation,” he notes.

And, despite the inability to defend their interest, the personnel leapfrog, which has been taking place since the last presidential election, also affects.

Since September 2019, two governments and three finance ministers have been replaced. Under such conditions, it could have been expected that the Fund would pause cooperation with Ukraine. In the eyes of international partners, we are now a country of chaos. If we used to be a country of chaos managed, now uncontrollable. Naturally, the terms of any agreements with us will surround the most stringent requirements, and they themselves will be the most unprofitable for us,” Kushch continues.

Related: New IMF tranche: What results are we expecting?

And such conditions are really tough. “They are vague, but this is a massive press that the IMF will put pressure on our government. For example, obliged to continue medical reform, apply a shock tariff policy for the population. But there are no clear criteria for assessing whether the government continues to do this or not. Therefore, for any adjustments, for example, of medical reform, the Fund might say that it does not continue the cooperation.”

Another feature of the conditions is atomization,” the expert notes. “We have already fallen below the baseboard and have written requirements for specific changes to the charter of Naftogaz. We haven’t yet dropped to this in our relations with the Fund. This is a complete loss of the subjectivity of power if it cannot even independently draw up a charter for a state company.”

Everything is natural here,” Kushch sums up. “The more we lose our sovereignty, the cheaper it will be. Previously, our subjectivity was expensive, I mean, the programs for 16-17 billion dollars, and now we are talking about some 5 billion and numerous requirements. If this goes further, then the final balance of subjectivity and national assets will be given for 1 billion dollars.”


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