Ukraine can receive a new consolidated installment of IMF aid package – about 2.8 billion dollars – before the end of this year. At least, this is what the Ukrainian leadership hopes for.
“We expect to receive the Board of Governors’ decision on a new funding program no later than in mid-December,” President Petro Poroshenko of Ukraine said on October 20. At the same time, the next monitoring mission is not exactly in a hurry and will only arrive after the new government is formed.
Meanwhile, experts are summing up Ukraine’s more than six-month-long work under an agreement with the key creditor. Since we signed the IMF Cooperation Memorandum, we have met a lot of the Fund’s demands. For example, Ukraine has passed a law on establishing the Anticorruption Bureau, given stress tests to banks, and restructured Naftohaz Ukrainy’s debts. Yet there still many unfulfilled commitments.
“In line with the IMF’s recommendations, our net gold and hard-currency reserves (without taking into account credit funds) should have risen by 300 million dollars by the end of September. But, instead, they have dropped by 2.2 billion,” says Oleksandr OKHRIMENKO, president of the Ukrainian Analytical Center.
Besides, our state budget deficit has gone up to 6 percent, while it should have gone down to 5.2 percent, as the IMF forecast. And, what is more, the creditor believed that foreign investments in this country would make up 35 billion dollars in April, which did not happen.
“Formally, we are trying to carry out IMF recommendations, but nothing is in fact changing. In other words, the NBU’s and the government’s ideology of actions remains unreformed,” says Oleksandr SAVCHENKO, former deputy chairman of the National Bank of Ukraine and minister of finance. As an example, he mentions the Fund’s demand to balance the budget. This can be done in two ways: by cutting expenditures or raising taxes. “Cutting expenditures is in fact a reform,” Savchenko says. “Instead, the government has increased [the existing] taxes and introduced new, totally mindless, ones, such as the so-called ‘tax on exporters,’ when hard currency sales are taxed. We are short of hard currency – so what’s the use of this tax? People usually withdraw their deposits, but our government is levying a tax on deposit-related incomes.”
The Cabinet and the president put down “deviations” from the plan to the war. They say Ukraine needs a special “wartime program” (Den has written about this before. See “What is an ‘IMF Wartime Program’?” of October 2, 2014). But experts are sure that the state of war in this country is not the root cause of an unstable economy.
“While the IMF is assigning macroeconomic tasks, the technique of their fulfillment by those in charge of the economy in the government is, unfortunately in the ‘traditional’ tones and ways. They will not lead to a radical change in the situation. So we have to ask to increase financial aid. At first glance, the war justifies these requests to international financial organizations, but things are a bit different,” the former NBU deputy chairman says. In his words, the government should change its rhetoric: instead of trying to secure larger loans from foreign creditor, it should focus on dynamic reforms in the economy. Otherwise the danger of a default in this country will be more realistic than in the headlines of the foreign media. “If we sun up our payments in this and the next years, we will be able, in theory, to find finances at the expense of those borrowings. But next year the public debt-to-GDP ratio will come to over 50 percent,” Savchenko says. In his words, this is the reason why reforms must not be delayed.
“First of all, we must cut the budget-distributed GDP by a third or so – from 50 to 33 percent. It is a colossal task, and it will not be easy to fulfill it,” the former NBU chair explains. Secondly, the GDP should be redistributed in favor of young people. “The pension system is now ‘eating away’ a colossal share of public resources. It would be right to cut down on all the special pension schemes and reduce the Pension Fund in favor of the low-income groups,” he adds. Thirdly, the GDP should be redistributed in favor of the regions. “For the local bodies of power, not for the cities and oblasts… At present, the state takes away 62-63 percent and leaves less than 40 percent locally. This proportion must be reversed,” Savchenko advises. At the same time, he points out that these measures are just preconditions for reforms. And the latter will only begin when there are direct foreign investments in and credits for the economy.
“The IMF is ‘financial emergency aid.’ It is common knowledge that ‘emergency aid’ does not in fact cure. It only tries to remove temporary difficulties. To be cured, one must act in an entirely different way,” says Viktor LYSYTSKY, former advisor to the National Bank chairman. In his words, it is necessary at least to create conditions for keeping business afloat – an inexistent thing so far.
It is important in this case to harmonize the monetary and fiscal policies. “Naturally, if we try to reduce the supply of money when the fiscal policy is becoming tougher, we will get a situation when both fiscal and monetary policies will be of a restrictive nature. This is a direct road to further degradation of the economy which will be increasingly sliding to recession and making it impossible to form new resources and trends for economic growth,” says Vasyl YURCHYSHYN, economic program manager at the Razumkov Center. In his words, we must switch from restrictive to stimulating monetary and fiscal policies – for example, in the way it was once done in Georgia, where they radically eased the pressure of the fiscal policy. Following a twofold reduction in basic tax rates, budget revenues rose almost fivefold.
Experts also advise paying more attention to business. “The private sector and investors have to shoulder a heavier burden now. There are attempts to strip them of as much money as possible,” says Vitalii SHAPRAN, chief financial analyst at the Expert Rating agency. In his words, if we increase the share of the state in the economy, we reduce the role of private business. “This may have a deleterious effect on the growth this year and calls into question the growth in the next year. We must focus on how to enable business to develop, not on how to build capitalism,” he points out. In the expert’s view, we must admit at last the fact that private business lays the groundwork for economic growth in the country and work hard to improve business conditions.
