Flu, fear and finances weigh heavily as the nation slips from autumn into winter. Not even the Jan. 17 presidential election is expected to lift Ukraine out of what may be a prolonged period of uncertainty and stagnation ahead.
Ukraine is finding itself under pressure on several fronts, with much uncertainty ahead as the nation slips into winter.
The International Monetary Fund is threatening to pull the plug on lending, leaving the country with $3.8 billion less than anticipated – more than 10 percent of the entire national budget.
Politicians are sacrificing economic prudence to boost short-term popularity ahead of the Jan. 17 presidential election.
And a wave of flu has already claimed more than 200 lives since Oct. 29, becoming a major public health threat, a presidential campaign football and disrupting the economy. Experts also warn of a second wave of swine flu later this winter.
IMF to walk away?
The IMF has helped to stabilize Ukraine’s finances with almost $11 billion in loans since last fall.
But Dominique Strauss-Kahn, managing director of the IMF, raised fears in Kyiv that no more money would be forthcoming on Nov. 7 when Reuters quoted him as saying: “Now we are in a special period, so certainly we have to wait for the result of the election to be able to resume our work with the government.”
The IMF later clarified Strauss-Kahn’s remarks as meaning that the consensus required for further disbursements is lacking among Ukraine’s politicians. Deputy Prime Minister Hryhoriy Nemyria called a press conference on Nov. 9 after a telephone conversation with Strauss-Kahn in an attempt offer reassurance that the IMF had not walked away.
President Victor Yushchenko said in a television interview on Nov. 8 that he was “convinced the IMF will not provide [the next installment].” The president also made it clear that he is not ready to budge on his support for the social spending law. The law, which raises wages and pensions by budget-busting amounts, is the main impediment to further IMF lending. The Finance Ministry estimates that it will require additional budget spending of approximately Hr 8 billion this year and Hr 70 billion in 2010. Ukraine’s state budget for 2009 foresaw expenditures of almost Hr 270 billion, less than $35 billion at today’s exchange rate.
Prime Minister Yulia Tymoshenko said on Nov. 11 that the government would not implement the pay raises as the law is “not constitutional” and “impossible to finance.” She said she hoped that this move would convince the IMF to continue lending.
Analysts, however, predict the IMF will delay the $3.8 billion installment until March, after the second round of presidential elections. Ukraine received $4.5 billion in November 2008, a second installment of $2.8 billion in May, and a third tranche of $3.3 billion in July.
An uncertain future
Postponement of IMF lending will pose a lot of challenges, among them the financing of a growing budget deficit.
Acting Finance Minister Ihor Umanskiy on Nov. 11 played down the severity of the problems. “This tranche is not crucial for ensuring balance on the currency markets. I do not see any risks to the economy [if the IMF tranche is postponed],” he told reporters.
But with revenues down, the government is already struggling to fill the budget, even without the planned increases in wages and pensions called for in the social spending law. Paying wages and pensions is tough enough as it is, and tougher still without the IMF’s help. “The continuation of cooperation with the IMF is essential … for overcoming the financial crisis. Without the fourth tranche, this will be extremely difficult for Ukraine,” Tymoshenko said on Nov. 11.
The government faces two options: It will need to either cut spending, a politically unpopular move ahead of a presidential election; or the National Bank of Ukraine can print money, which could erode the hryvnia’s value. Tymoshenko’s government, moreover, is unlikely to get central bank cooperation since the institution is controlled by the president. The government, simply put, is “in a complicated and challenging situation,” says Anastasia Golovach, an analyst at Renaissance Capital.
Paying for Russian natural gas will also be difficult. January is shaping up to be a critical month for gas payments, according to Nemyria. He told Channel 5 on Nov. 9 that Ukraine would be able to settle its bills up to December by converting special drawing rights from the IMF into dollars. Ukraine received around $2 billion worth of this nominal monetary unit in August. “But if the [IMF] program is delayed until January, it will be very difficult” to pay, Nemyria said.
On the bright side, the cash-starved Tymoshenko government has managed to build up enough gas in its underground storage reserves to meet the country’s winter demands and ensure stable transit to Europe.
Swine flu second wave
Although the panic over swine flu abated somewhat this week, uncertainty and health threats remain ahead. Jukka Pukkila, head of the World Health Organization mission to Ukraine, said that a second wave of swine flu epidemic could hit the country and “last for several weeks or even several months.”
But no one knows for sure. “It is extremely hard to foresee the further development of the epidemic in Ukraine, as in other countries of the world,” Pukkila said.
The swine flu is not only taking lives, but bringing more political instability. Ihor Popov, deputy head of the presidential administration, wrote in an article for Ukrainska Pravda on Nov. 6 that the swine flu epidemic could result in a state of emergency and delay the presidential elections until May. After the trial balloon was shot down by a storm of criticism, Yushchenko on Nov. 8 said there was no reason to delay the vote.
The infighting over the response to the crisis also continued to flare this week. On Nov. 11, Yushchenko said he would veto the law assigning Hr 1 billion for fighting the swine flu epidemic “because the financing of this law will be through emissions [by the National Bank].” Tymoshenko said that not signing the law would mean that “the president is personally responsible for every person who falls ill or dies.”
The presidential ballot is seen by some as a possible turning point that could bring greater stability. But that may not come to pass as the winner is likely to have difficulty forming a solid majority in parliament. The inability to form a working coalition may trigger early parliamentary elections in May.
In other words, as UkrSibBank forecast on Nov. 9, the nation faces at least another “four to eight months of uncertainty.”
