Presidents come and go, but debts – particularly foreign debts – tend to linger.
So when Ukraine’s next president, either incumbent Leonid Kuchma or his Communist rival Petro Symonenko, is elected on Nov. 14, he will inherit around $12.5 billion in foreign debts racked up by the previous administration.
In the first year of the new president’s term in office, Ukraine will be expected to pay its creditors some $3.1 billion in principle and interest. To avoid defaulting on a least some of that sovereign debt, cash-strapped Ukraine will have to rely on the goodwill of its principle creditor – the International Monetary Fund. But that goodwill comes at a price.
Ukraine’s single biggest credit deal, the $2.6 billion Extended Fund Facility (EFF) from the IMF, was granted with several main requirements for the Ukrainian government, including the implementation of measures to:
• rationalize the tax structure and reduce the tax burden over time; • strengthen fiscal and monetary institutions;
• launch administrative reform and rationalize budget-funded institutions;
• adopt a transparent privatization process to further deregulate the economy and reduce government intervention in economic activities; – reform the energy and agricultural sectors.
So what are the two candidates’ prospects for meeting these conditions, and what would be the consequences if either of them fail to toe the IMF line?
Kuchma: more of the same
The present head of state has a poor record in meeting the key IMF demands, from tax reform to revamping the energy and agriculture sectors. Nevertheless, this did not prevent the IMF from issuing a $184 million EFF loan tranche in September.
As part of his election program, Kuchma has reaffirmed Ukraine’s commitment to repay its foreign debt and implement a tight fiscal policy, though he also hints that some restructuring of old debts may be required.
In the past, Kuchma has failed to implement core IMF demands, but always provided enough evidence of good intentions to keep the IMF money flowing. Analysts expect more of the same in a second Kuchma term.
‘[Of the two candidates] Kuchma is more ready to cooperate with the IMF,’ said Borys Zozulya of Ukrsberbank. ‘If a time comes when default is possible, Kuchma will be ready to dance to the IMF’s tune to avoid it.’
Evidence that IMF pressure is finally beginning to have an effect on Ukrainian government policy can be seen in the adoption of the privatization program for the year 2000, experts say.
‘Most of official Ukraine [the government] doesn’t want privatization to proceed in the manner outlined in the 2000 privatization program, but the need to raise money for the budget is forcing their hands,’ said Yury Hryshan, deputy director of the State Property Fund.
As for the foreign debt, if Kuchma wins a second term, he will be dealing with problems of his own making.
‘It’s not about the size of the debt,’ Zozulya said. ‘The worst thing is that most of the payments are due next year, and interest rates are very high. Unfortunately, we were slow to service the debt properly in the past.’
Symonenko: recognizing responsibilities
Next, a hypothetical President Petro Symonenko. How would he deal with the IMF?
Two months before the first round of voting in the presidential election on Oct. 31, Symonenko said he would, if elected, seriously reconsider cooperation with the IMF.
‘Symonenko never said he wouldn’t pay the foreign debt, but he did say Ukraine would not seek more financial aid from the IMF,’ Zozulya said. But as the election nears, Symonenko has softened his tone.
‘We’re not going to take any unpredictable steps,’ Symonenko said in a recent interview with the Post. ‘We understand that any country has financial commitments irrespective of the ruling regime.’
In a comment seemingly designed to appeal both to Ukraine’s impoverished and disgruntled electorate and the corruption-conscious IMF, Symonenko said he’d examine all credit tranches so far given to Ukraine, and find out where the money went.
‘If [the money] was stolen, we’ll punish the embezzlers,’ he said.
But economic realities – particularly the need to service the foreign debt – may force President Symonenko to look to the IMF for more funds, at least temporarily, analysts say.
Whoever takes charge after November 14, analysts agree that having engaged with the IMF, it would be economically painful – if not disastrous – for Ukraine to disengage.
‘They [presidential candidates] are highly unlikely to repeat the actions of the Bolsheviks in 1917, who refused to pay external debts,’ Zozulya said. ‘That led to total collapse and destruction. Even Symonenko wouldn’t want it on his conscience.’
‘The IMF worked out a scheme of cooperating with its debtors long ago,’ said another industry insider,’ speaking on the condition of anonymity. ‘It would be an exaggeration to say the Fund doesn’t care who will become the new president, but it’s so financially almighty, and Ukraine is in too deep a debt pit.’
The expert equated Ukraine’s continued need for IMF funding to its present reliance on Russian natural gas supplies.
‘Ukraine can turn either right or left, but it will get nowhere without gas.’
