If you want to see how flexible the IMF
can be with governments hard hit by the crisis, look at its
$16.4 billion Stand-By Arrangement (SBA) with Ukraine.
The governments lack of progress in
meeting commitments under the programme is palpable and
before the Fund disbursed the third tranche of $3.3 billion on
July 28, economists and bankers following the talks wondered
how it could be justified. Ukraine had already drawn down $7.6
billion since the SBA one of the largest ever,
proportionate to a countrys share in the Fund was
launched in November 2008.
By this summer, the budget deficit was
deepening, aggravated by accumulated debts of the oil and gas
company Naftogaz Ukrainy that the Fund counts as fiscal. The
banking sector restructuring agreed with the Fund was moving
painfully slowly. And fiscal information presented to the IMF
by the government was being questioned not least by the
former finance minister Viktor Pynzenyk, who quit in February,
and Ukraines president, Viktor Yushchenko, whose
secretariat published detailed allegations of book
Observers saw plenty of grounds to refuse
to extend the programme but the Fund moved ahead, on the
grounds that resolute action was needed to contain
fiscal deficits, and disbursed the third tranche on July 28.
That brought the total amount loaned to Ukraine under the SBA
to $10.9 billion. Another $2 billion has gone into the National
Bank of Ukraines foreign currency reserves under the
IMFs global SDR (special drawing rights) allocation in
The Funds Second Review under the
SBA, on the basis of which the third tranche was released,
justified its actions by pointing out that Ukraines
economic downturn has been more pronounced than
expected. GDP fell 20.3% year-on-year in the first
quarter, mainly due to a slump in export volumes followed by a
contraction of domestic demand. Industrial output has dropped
calamitously, by more than 30% in the first half of 2009.
The hryvna has depreciated by about 35% in
nominal effective terms over the year to August. Ukrainians
wary of further falls have withdrawn their savings and changed
them into cash dollars, and banks lost 20% of their deposits
between October 2008 and April 2009.
Soft shoe shuffle
The Funds dilemma is that factions
in Ukraines weak and divided government are in no mood to
undertake harsh fiscal measures required by the programme
which, in the run-up to the crucial presidential
election in January 2010, could alienate voters and annoy the
oligarchs (politically influential businessmen) on whose grace
and favour politicians depend.
Prime minister Yulia Timoshenko,
opposition leader Viktor Yanukovich and other less likely
presidential candidates are vying with each other to appear to
be protecting peoples living standards, rather than
discussing policy. In recent months the defence, foreign,
interior and finance ministers have resigned. In September,
parliament was again paralyzed by the latest opposition
boycott. In the Second Reviews official language,
effective policy implementation is constrained by the
fragile political consensus.
In other times and places, the Fund has
used its programmes as carrot and stick, to force governments
to take unpopular decisions. But now, the Funds critics
say, its own big-picture politics have led it to put the stick
aside and offer too many carrots.
Oksana Reinhardt, analyst at Deutsche
Bank, says that the Fund would seem to be overly positive
about the [Ukrainian] authorities actions. A source
close to the negotiation process says: Theres a
perception that the IMF has been supportive and flexible, and
that Ukraine has not reciprocated.
Behind the approach of the Fund, other
IFIs (international financial institutions) and the European
Central Bank has been a domino theory for eastern European
states: that a collapse of one would have serious consequences
for others, and for the international economy, and therefore
cannot be allowed. Furthermore, bankers and economists in Kiev
say, the IMF is influenced by American and western European
concerns about the geopolitical advantage that might accrue to
Russia by a Ukrainian economic collapse. Phone calls are
made, just as they were made to the IMF about Turkey when its
economy was wobbling and military conflict was underway in
Iraq, says a senior banker.
In an interview, Emerging Markets
asked Ceyla Pazarbasioglu, the Funds mission chief for
Ukraine, whether larger political concerns were overriding
standards normally applied to lending programmes.
Its too early to make such an assessment. It would
be wrong to assume what the IMFs stance will be,
The third review of the SBA will be
conducted in mid October, Pazarbasioglu added, before a
decision is made in mid-November on disbursement of the fourth
tranche. We will look at performance. There will be no
room to fudge things. We will see if targets were met, and if
not, what the reasons were. Was it discretionary?
The IMF has well-established
procedures, and these would be followed, Pazarbasioglu
said. Asked about concerns that politicians say one thing to
the Fund and do another in practice, she replied: I want
to underline that the authorities have been very, very
collaborative with us. A monitoring committee for the
programme that includes representatives from government,
presidential administration and national bank had worked
Nevertheless, big gaps remain between the
governments commitments to the Fund and its actions
and some in the Ukrainian government believe that the
IMFs patience could finally snap. As Oleksandr Shlapak,
deputy head of president Viktor Yushchenkos
administration and a member of the monitoring committee, told
journalists in September: The IMF will not give us
anything by year-end as we are not fulfilling our
obligations. The Fund is greatly disappointed with
Ukraines behaviour, Shlapak
The four largest bones of contention
Budgetary spending is running out of
control as the election approaches. Under the Second Review,
the IMF adapted its programme to allow for a fiscal deficit at
8.6% of GDP 6% for general government finances and 2.6%
for Naftogaz Ukrainy, the national oil and gas company
but few believe that even these guidelines will be met.
President Yushchenko says Prime Minister
Timoshenkos government is presiding over a
budgetary catastrophe, and that information
presented to IMF officials prior to the Second Review was
falsified. In May, Yushchenkos officials published
detailed claims that the government had boosted revenues by
delaying VAT rebates for exports, forcing companies to make
advance payments of taxes and of failing to make payments into
the state pension fund.
Economists agree that the size of the
mounting deficit is obscured by opaque reporting procedures.
Olga Pogarska, chief economist at Sigma Bleyzer in Kiev, tells
Emerging Markets: The government is being
economical with the truth. It has announced that revenues into
the budget are overexecuted by 3%, but has not stated what the
target was. We are working with various estimates that the
budget is underexecuted by 56%. In the first seven
months of the year, the governments general fund ran up
an 18 billion hryvna deficit, Pogarska adds.
The governments letters of intent to
the IMF have all included reference to natural gas sector
reform [see box]. In particular, the government during the
Second Review promised to raise gas tariffs for households by
20% on September 1 and by 20% for power generators on October
1. But on August 26, Prime Minister
Timoshenko announced in a speech in Chop, western Ukraine, that
there will be no hikes of gas prices for the
The September 1 deadline passed and the
increase got mired in legal action between trade unions and the
national electricity regulatory commission, which sets the
tariffs. At the time of writing, the issue of tariff increases
remains unresolved testimony to the governments
extreme nervousness at popular reaction to the collapse of
living standards precipitated by the crisis.
The Fund remains at
odds with the authorities over the National Bank of
Ukraines (NBU) reluctance to adopt a flexible exchange
rate policy. The hryvna, which had stabilized in the spring,
fell sharply during July and August, and foreign currency
purchases by households soared with the NBU making
limited interventions and an ill-managed sale of dollars to
households at a fixed rate.
Pogarska at Sigma Bleyzer estimates that
in the year to August the NBU had spent $19 billion to defend
the hryvna, and decided at that point to limit its
interventions. She points out, too, that the Bank has met all
the quantitative guidelines in the IMF programme.
While the situation in the banking sector
has improved and major bankruptcies avoided, bankers say the
programme has been insufficient to stimulate any lending.
Although the NBU claims that Non-Performing Loans are at 7%,
the real figure is regarded as at least double that.
The fourth tranche under the IMF Stand-By
Programme may be delayed. But the Funds influence on
Ukraines economic policies seems bound to grow over the