An IMF Ukraine loan package stand-by arrangement worth between $14-$18 billion has been agreed (staff level agreement), after an IMF (International Monetary Fund) mission worked in Kiev from March 4th to 25th to assess the country’s current economic situation and talk about an economic reform program.
The IMF arranges standby credit for member nations that find themselves in trouble.
This is not the first time an IMF Ukraine deal has been agreed. Between 1995 and 2010 six standby loans had been negotiated and agreed, as well as a long-term credit line. However, this $14-$18 billion rescue package is the largest IMF deal in post-Soviet Ukrainian history.
The IMF Ukraine rescue package will unlock an additional $9 billion from the EU, US and Japan, and possibly more if other countries decide to join in and help the country out. The money will arrive just a few weeks after a popular uprising toppled a very corrupt but democratically elected president, and what most of the world considers as the illegal annexation of Crimea by Russia.
Nikolay Gueorguiev, IMF Mission Chief for Ukraine, said at the conclusion of the visit:
“The mission has reached a staff-level agreement with the authorities of Ukraine on an economic reform program that can be supported by a two-year Stand-By Arrangement (SBA) with the IMF. The financial support from the broader international community that the program will unlock amounts to US$27 billion over the next two years.”
“Of this, assistance from the IMF will range between US$14-18 billion, with the precise amount to be determined once all bilateral and multilateral support is accounted for.”
IMF Ukraine agreement requires approval
The agreement between IMF staff and Ukrainian authorities needs to be approved by IMF Management and its Executive Board. If Ukrainian authorities adopt a “strong and comprehensive package of prior actions,” the Executive Board of the IMF is highly likely to approve the package in April.
It is vital that Ukraine embraces specified reforms in order to stabilize its economy and created conditions where the economy may thrive, Gueorguiev explained.
Macroeconomic imbalances in Ukraine have become unstable over the last 12 months.
Ukraine current account deficit higher than 9% of GDP
Mr. Gueorguiev said:
“The (until recently) pegged and overvalued exchange rate drove the current account deficit to over 9 percent of GDP, and a lack of competitiveness led to the stagnation of exports and GDP. With significant external payments and limited access to international debt markets, international reserves fell to a critically low level of two months of import in early 2014.”
“The 2013 fiscal deficit was 4½ percent of GDP, and the government accumulated sizeable expenditure arrears. The 2013 deficit of the state-owned gas company Naftogaz reached nearly 2 percent of GDP, driven by the sharp increase in sales at below-cost prices. Without policy action, the combined budget/Naftogaz deficit would widen to over 10 percent of GDP in 2014.”
Ukraine has managed to achieve some stability after the intense political and economic turbulence during the last few months, but the country still faces difficult challenges, the IMF says.
The National Bank of Ukraine (NBU) floated the exchange rate in February, 2014, in order to safeguard reserves and address an overvalued hryvna (Ukraine’s currency). The NBU implemented some measures in February and March which helped stabilize financial markets and make sure that essential budget payments were made.
Even so, economic prospects look challenging, with the economy sliding back into recession. Hefty foreign debt payments loom this year and in 2015 and the country currently has no market access.
The authorities’ economic reform program aims to secure macroeconomic stability and put the nation on the road to sound governance and enduring economic growth, while at the same time protecting the most vulnerable groups in society.
Program to focus on 5 crucial areas
The IMF says the program will concentrate on the following areas of reform:
- Fiscal policies
- Governance, transparency, and the business climate
- Monetary and exchange rate policies
- The energy sector
- The financial sector
Mr. Gueorguiev said:
“Monetary policy will target domestic price stability while maintaining a flexible exchange rate. This will help eliminate external imbalances, improve competitiveness, support exports and growth, and facilitate the gradual rebuilding of international reserves. The NBU plans to introduce an inflation targeting framework over the next twelve months to firmly anchor inflation expectations.”
“Financial sector reforms will focus on: (i) ensuring that banks are sound, liquid, and well-capitalized; (ii) upgrading the regulatory and supervisory framework of the NBU, including complying with international best practice and supervision on a consolidated basis, and (iii) facilitating resolution of non-performing loans in the banking sector.”
Fiscal policies will focus on short-term priority spending and deeper medium-term adjustments. To start with, a mix of expenditure and revenue measures will focus on stabilizing the economy this year.
For 2015-2016, authorities will implement gradual expenditure-led fiscal adjustments – ‘proceeding at a pace commensurate with the speed of the economic recovery and protecting the vulnerable’ – the aim being to reduce the fiscal deficit to approximately 2.5% of gross domestic product (GDP) by 2016.
Energy reform
Regarding energy reforms, Mr. Gueorguiev said:
“Energy sector reforms will focus on reducing this sector’s fiscal drag, while attracting new investment and enhancing efficiency. A key step is the commitment to step by step energy reform to move retail gas and heating tariffs to full cost recovery, along with early action towards that goal. Importantly, this will be accompanied by scaled up social protection to mitigate the impact on the most vulnerable.”
“Over time, the program will focus also on improving the transparency of Naftogaz’s accounts and restructuring of the company to reduce its costs and raise efficiency.”
Central elements in the program include reforms to improve the business climate, enhance transparency and strengthen governance. A new procurement law needs to be implemented to close loopholes allowing evasion of a competitive procedure. Businesses also need to have prompt VET refund system, the IMF wrote.
The IMF wrote:
”The IMF will prepare a comprehensive diagnostic study that will cover the anti-corruption and governance framework, the design and implementation of laws and regulations, the effectiveness of the judiciary, and tax administration.”
“The authorities’ economic reform program is rightly focused on addressing the key economic challenges faced by Ukraine. Its success in achieving these important objectives will be steadfast implementation, which will enable these efforts to be supported by the international community.”
The Financial Times wrote in an Editorial “The true significance of the IMF rescue is that, if Ukraine’s political and business leaders fail to grasp the opportunity it offers of turning their country into a stable, prosperous European democracy, the chance may not return for a very long time.”
Video – IMF Ukraine rescue package
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