The biggest lie of recent times, which turned into a political meme, is that cooperation with the IMF is a good signal for foreign investors. In fact, cooperation with the fund is a kind of leprosy stigma, a signal that this is a dangerous country, infected with the crisis. The largest inflow of foreign direct investment in Ukraine was observed in 2002-2007 when our country did not cooperate with the IMF, but since 2014, when relations with the fund became almost an integral part of the national idea, foreign direct investment (FDI) is at a freezing point: no more than 2, 3 billion USD a year. That's for whom our cooperation with the IMF is really important, so it is for portfolio investors, who are also called financial speculators. They are making “hot investments” in Ukrainian government debt. For them, the IMF loan allocated to Ukraine is a sure sign that they will be settled.
Few people thought about one simple fact, which is not particularly customary to spread: since 1994, we have not fully implemented any cooperation programs with the background, with the exception of the first one for 0.76 billion USD, which was implemented during the transition to a market economy from the post-Soviet planning system. The second program in 1995-1998 was implemented only by 54% due to the 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 erupted. In 2002-2008, we did not cooperate with the fund and did not even use the working credit limit of 0.6 billion USD. But the crisis of 2008 was minimized thanks to IMF loans: then we received a total of 64% of the credit line in the amount of 16.5 billion USD, that is, 10.6 billion USD (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. In 2010, a new ambitious program was signed in the amount of 15.1 billion USD, but the percentage of its implementation was even less - 22%. In fact, this program was designed to prevent Ukraine from disrupting preparatory activities for Euro 2012.
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 structural deterioration in the balance of payments. The program was suspended by agreement of the parties, as the IMF decided that Ukraine, after a series of crises, was already ripe 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 extended financing program, which, among other things, allows allocating tranches to replenish the state budget, but in return suggests a longer-term cooperation plan (while the “stand-by” is for a year or two), as well as deeper systemic reforms of the economy of the recipient country. The new program amounted to 17.5 billion USD, and Ukraine received four tranches for the first time, although the amount received was less than in the 2008 program: 8.7 billion USD. Finally, in 2018, the simplified format again replaced the extended lending program. Until the spring of 2020, Ukraine could receive up to 4 billion USD, and the first tranche was transferred at the end of 2018 in the amount of 1.4 billion USD.
Another two tranches of 1.3 billion USD were received by our country in 2019, but the second tranche, scheduled for May of this year, paused the judicial decisions on Privat Bank, adopted in the interests of its former owners in the interval between the first and second rounds of the presidential election, that is, in April 2019, when it became completely clear that Poroshenko resigns as president, and Zelensky comes to that. Just a few court decisions cost the country 2.6 billion USD, which had to be replaced with super-expensive private funding to receive peak payments on public debt in May and September. In total, we had to overpay approximately 100 million USD a year to service such a “replacement” of IMF loans with expensive private loans.
But the problem of paying public debts faces Ukraine just as acute next year. It will be necessary to attract 4.9 billion USD in the foreign market and more than 230 billion UAH (0,9 billion USD) in the domestic market to fulfill the plans for borrowing. IMF loans in most cases are not credited to the budget and cannot be used by the Ministry of Finance to pay off external debts.
They fall directly into the NBU's gold and foreign exchange reserves and can be used by the latter to conduct foreign exchange interventions, in particular, to sell foreign currency directly to the Ministry of Finance. This requires only the availability of hryvnia resources in a single treasury account, but even if there is no money in the required amount, the National Bank can replenish the TSA by transferring its profits to the budget or by quasi-fiscal domination. Thus, the use of IMF loans to pay off debts is indirect, but the very circuitry for transforming the NBU gold reserves into a resource in the foreign currency treasury account of the Ministry of Finance is quite simple.
In fact, the IMF is interested in continuing cooperation with Ukraine. There are several reasons for this. After Zelensky’s conversation with the head of the IMF, Kristalina Georgieva, the contours of the future program emerged. It will be a simple “stand-by” for three years in the amount of 4 billion SDR or 5.5 billion USD. It is worth noting that Ukraine owes the fund at the moment 8.78 billion USD, that is, more than three billion more, and we need to give them back in the coming years.
Thus, even after the signing of a new program of cooperation with the fund, the balance of financial flows will be in favor of the IMF, and we will not only refund the received, but also pay our 3 billion USD, plus we will remain under the new program. In addition, the IMF is a representative of external lenders, and he is interested in Ukraine repaying its debts to the “last Ukrainian.”
What is the key feature of the current negotiations? The fact is that, based on the government agenda, our country could not have had any problems getting new credit tranches. Our Cabinet tried to be “holier than the Pope”, that is, more toxic than the IMF itself: the government’s program includes land reform with a bunch of systemic risks, and a new Labor Code that destroys the rights of an employee, and “market” utility tariffs, and the sale of state property for “conditional hryvnia exchange rate.” The IMF could not even dream of such a thing. If not for one factor that impedes further movement. It's about PrivatBank. Back in September, the Ukrainian negotiators made timid proposals regarding the so-called zero option, in which the nationalization of PrivatBank would be considered illegal with accrual of compensation in favor of the former owners, which could be “offset” by the amount of credit debt of companies directly or indirectly related to former beneficiaries of the bank. Naturally, the IMF could not agree for the implementation of this scenario, and moreover, the factor of trust in the new government was undermined.