Ukraine’s New IMF Loan, Explained.
What You Need to Know:
✓ Ukraine secured a $17.5 billion, multi-year loan agreement with the IMF;
✓The IMF already delivered $5 billion of the loan has already. $5 billion more is on the way, provided Ukraine keeps up with IMF recommended reforms;
✓IMF cash will help stabilize foreign currency reserves — a typical indicator of fiscal stability — which are down to very low levels;
✓Future disbursements of IMF loan money depend on the success of large, systematic reforms in Ukraine;
✓Domestic politics and public disapproval for some of the hard-hitting austerity measures may derail reforms and deepen the economic crisis;
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The Current Situation
On March 11th, the IMF announced that after months of negotiations it had reached an agreement with Kyiv that would provide Ukraine with $17.5 billion in loans over the course of 2015–2018. This is just part of an expected $40 billion support package to be offered to Ukraine over the same period. Of the $10 billion set to be delivered in 2015 alone, $5 billion have already been disbursed in order to help the government stay afloat after months of teetering on the brink of a possible default. The funds could not have come at a better time: the local currency has gone on a steep decline, halving in value in over January and February. Ukraine’s creditors are more anxious by the day as they watch the nation’s economy fall into deeper disrepair. The IMF deal also unlocks billions of dollars in funding from other donors, including the U.S., European Union and World Bank, whose support is contingent upon the IMF approving a support program for Kyiv.
The first round of loans have been divided between the central bank and the state. The central bank has received $2.2 billion to help it shore up its dangerously low foreign currency reserves and support the nation’s troubled banking sector. The remaining $2.8 billion has gone to the state’s coffers. While few doubted that Ukraine would secure the funding from the IMF, the terms and conditions of receiving the loans have been subject to much debate. Now that the details of the bailout package have emerged, it is clear that Ukraine will have to undertake the most ambitious program of reform in its history in order to receive the remaining funds.
Solutions Issues to Pressing Issues
According to the IMF, Ukraine needs $21.4 billion to pay its bills in 2015. This figure includes financial support for failing domestic banks, pending gas payments, support to the state budget and external debts due this year. There is also the ongoing war, which according to the Minister of Finance Natalie Yaresko, costs Ukraine roughly $7 million a day, or around $2.52 billion annually.
Problem 1: Potential Default.
Without international donor support to take care of these and other items, it is almost certain that Ukraine would tailspin into an involuntary default – an event that could have dire consequences for its beleaguered economy.
Problem 2: The Gas Contract.
Ukraine has been struggling in recent weeks to pay for Russian gas after their winter contract expired after winter, but loans from international are likely to insure that Ukraine can pay for Russian gas deliveries for the next few months. Russia claims Ukraine owes it $2.4 billion in gas debt. Until a new agreement is reached, Ukraine is paying a minimal week-to-week sum to keep gas flowing into the country.
Problem 3: The Exchange Rate
At home, news of Ukraine’s latest deal with the IMF has helped to instill some small measure of confidence in the country’s currency, the hryvnia. During February, the hryvnia hit historic lows, sinking to 34 UAH per $1 (a 200% increase from a year ago when the rate was ?? per $1), sending shockwaves throughout the economy and severely shaking consumer confidence. The latest influx of cash from the IMF along with a series of emergency measures taken by the government at the end of February, helped the hryvnia level out at roughly 22 per $1 in March.
Reforms for Cash
Negotiations with the IMF began back in January, following the Verkhovna Rada passing the first version of the annual budget. The initial budget drew the ire of many Ukrainian experts who criticized the increases in spending, the absence of any funding for items like the recently created Anti-Corruption Bureau, and what they viewed as the absence of meaningful reforms in key areas, such as spending. The IMF was equally critical and pushed for a much more aggressive series of reforms for healthcare, pensions, public wages, and social assistance. Talks between the Ukrainian government and IMF representatives produced a number of compromises such as the implementation of higher gas utility rates that will shift the burden of higher energy prices away from economically vulnerable groups. The IMF also acknowledged that the situation in eastern Ukraine leaves no choice but to be flexible on some of the loan’s conditions.
If Ukraine hopes to receive the other $5 billion from the IMF, huge reforms are still in order. Lawmakers will need to rework Ukraine’s fiscal policy, set up an effective system for combating corruption and the country’s energy sector needs to be completely overhauled. Serious cuts to the former soviet republic’s bloated bureaucratic system also on the agenda. Many of these reforms are tough sells to Ukrainians who worry that new measures such as energy and pension reforms will raise the cost of utilities and lower their government benefits. If the government does not do a good job of presenting the benefits of wide-sweeping economic reforms, populist politics could undermine the program’s success.
A Risky Endeavor
The IMF has no illusions about the nature of the Ukraine deal. “The program is ambitious and involves risks, notably those stemming from the conflict in the east of the country” notes Managing Director Christine Largarde in the organization’s official announcement about the bailout package. In addition to the war along the Ukraine-Russia border, there are a number of domestic factors that may influence the economic situation in Ukraine. Valeria Gontareva, the head of the central bank, has already become a scapegoat for Ukraine’s currency troubles. MP and Populist-extraordinaire Oleh Lyashko shouted at Gontareva during a session of parliament while she was trying to report on the central bank’s work.
Rising prices and a depreciated currency ensure that populist slogans and politics will remain a threat to reforms, especially if the reforms are not intelligibly communicated to the public. If the hryvnia were to plummet again, public dissatisfaction with the ‘pro-reform’ coalition government could quickly boil over. Cuts to social assistance programs and pensions, which account for a large share of government spending, are hot button issues that could lead to large-scale protests. There are external issues, other than fighting in the East, that could derail the government’s plans to stabilize the economy this year. Russia could refuse to negotiate with Ukraine and force it to make good on a $3 billion Eurobond, which it has already indicated it is going to do, depleting the state’s coffers once more. Creditors may not wish to negotiate Ukraine’s debts given that the current climate in the country makes it difficult for them to believe that Kyiv can make good on its debts.
Still, if Ukraine hopes to make it through the year and begin its gradual ascent back to a stable economy, it will need to follow the IMF’s cues and show a level of legislative and fiscal discipline it has seldom, if ever, shown before.