Meeting the International Monetary Fund conditions is seen as crucial.
With billions of dollars in aid at stake, international pressure is mounting on Ukrainian leaders to get their very messy act together – and do so in a hurry.
If the money comes, Ukrainians may be shielded from the worst blows of what is expected to be a very nasty and prolonged global recession. If it doesn’t, the doomsday scenarios include: Government default on $24 billion in international debt, collapse of an indebted banking system and further devaluation of the battered hryvnia.
So what’s the problem?
Much hinges on whether the Ukrainian government can meet International Monetary Fund conditions for a $16.4 billion loan.
Valeri Lytvytsky, head of the central bank’s advisory group, said the success of “therapy” intended to cure Ukraine’s financial woes depends on “whether Ukraine gets the second IMF tranche, or if it gets delayed.”
The IMF wants Ukraine to adopt a low-deficit budget, gradually increase its retirement age (now 60 for men; 55 for women) or find other ways to balance the pension fund; and an end to subsidizing natural gas prices to customers. The international lending agency, financed mainly by the world’s richer governments, has already lent $4.5 billion to Ukraine. But the IMF has held up a nearly $2 billion second installment pending further talks in the next two weeks.
One of Ukraine’s bigger lenders, the European Bank of Reconstruction and Development, is willing to pump $1.3 billion into Ukraine. About half of this amount is earmarked for recapitalizing troubled banks. But the EBRD has conditioned assistance on Ukraine’s compliance with IMF requirements.
The lenders’ message is simple: We’re all in this economic mess together, but Ukraine has got to do its part. “The integration has also happened in a manner that has led to a greater degree of interdependence between East and West than perhaps ever before,” EBRD president Thomas Mirow said during a March 10 lecture at the London School of Economics.
Aside from average Ukrainians, much is at stake for foreign investors and banks as well. More than 30 percent of Ukraine’s banking sector is owned by Western banks. “We live in a global economy,” said economist Igor Burakovsky. “Problems in Ukraine and the rest of Central and Eastern Europe influence greatly Austria [for example] because Austrian banks are highly involved in the region.”
A Ukrainian financial meltdown could spill over beyond its borders, possibly bringing down some European banks that lent heavily to Ukraine in the recent boom years. “The biggest concern in the region [of Central and Eastern Europe] at the moment is Ukraine, which is confronted with a multitude of problems,” Mirow said. “An inherently instable political situation only exacerbates a grave economic situation.”
At the end of February, the World Bank, the EBRD and European Investment Bank launched a 24.5 billion euro rescue plan to support the banking sector in the region and to help stimulate lending to businesses hit hard by the crisis. Mirow said help will start to arrive to Ukraine “if there is an agreement with the IMF.”
Ukrainian officials are optimistic about swiftly reaching an agreement with the IMF.
On March 16, Oleksandr Shlapak, first deputy head of the Presidential Secretariat, said he is expecting resumption of IMF lending in the next three weeks if “everything goes smoothly.”
He said three pieces of legislation are being prepared to comply with IMF conditions. One bill, adopted on March 17, grants greater independence to the National Bank of Ukraine. Another bill in the pipeline would balance the budget of state energy company Naftogaz, burdened as it is by the difference between what it is forced to pay for natural gas (mainly Russian imports) and what it has been able to charge consumers. Other legislation would, repotedly, balance the country’s pension fund and bring the national budget of roughly $30 billion within deficit targets acceptable to the IMF.
Ukraine has asked the world’s richest countries, including Russia, for a loan of up to $5 billion to cover its budget deficit. Talks are still underway, but no deal has yet been reached.
For now, the IMF representative in Ukraine has said that the two sides have reached an understanding on the state budget deficit and insiders are talking positively, but not on the record.
In an apparent call for calm, President Victor Yushchenko on March 13 said his country has enough of its own central bank reserves to bear the burden of the financial crisis this year. But he also noted that renewing cooperation with the IMF would serve as a “green light to investors, telling them that it is safe to work here.”
“We now have $26 billion [of central bank reserves.] If we get $12 billion from the IMF, then we will not loose anything by the end of 2009.”
Without the IMF funds, “it will not be fatal. But the dwindling of our assets will be noticed by investors,” the Ukrainian president added.
However, Ukraine’s chaotic and disorganized politics during crisis has already damaged its international standing. “Ukrainians never miss an opportunity to miss an opportunity” is one unflattering phrase used to describe national leaders. Many others are expressing dismay and frustration with the unwillingness of Ukraine’s leaders to come together and solve the nation’s problems amid severe crisis.
The IMF loan is just a loan, in one sense. But, in the words of EBRD’s Mirow, the discussions are not “only about much needed finance, but also about restoring trust in the country.”
