Walk this way: Ukrainian president Viktor Yanukovich and IMF managing director Dominique Strauss-Kahn
The IMFs ability to propel governments into making
structural reforms is being tested to the limit in Ukraine. On
July 28 the IMF approved a second, $15 billion, loan programme
which, broadly, doubles the chances that president
Viktor Yanukovichs government will stick to promises to
rein in spending.
At stake in this gamble is not only the IMFs
post-crisis credibility, but also the fragile recovery of
Ukrainians living standards, which has hung in the
balance since the 2008 financial crisis.
The IMFs measures are unpopular triggering
warnings of a resurgence of social protest [see box p. 27] and
leading sceptics to question whether Yanukovich will hit
numerous reform targets, in particular to overhaul pensions and
reform the energy sector. Some of the IMFs critics argue
that the pro-cyclical nature of the package will further damage
Ukraines stuttering economic rebound.
The package includes stringent fiscal and macroeconomic
indicators, and tight timetables for progress on structural
reforms mainly, raising gas and heating prices,
reforming the gas sector and the pension fund [see box below],
and completing bank restructuring.
For 2010, the budget deficit is set at 5.5% of GDP (compared
to 8.8% in 2009), plus a deficit for Naftogaz, the state-owned
gas company, of 1% of GDP (compared to 2.5% in 2009). Floors
have been set for net international reserves, publicly
guaranteed debt and other indicators.
A limit has been placed on the level of arrears for VAT
refunds an issue that has stoked friction between
successive Ukrainian governments and exporters of 3
billion hryvna ($380 million) in September, falling to zero by
the end of the year. Most of the 16.4 billion hryvna arrears
accumulated last year, and 9 billion hryvna this year, is being
repaid in the form of special Treasury bonds, the first of
which were distributed in August.
POOR BUDGET PERFORMANCE
Anastasia Golovach, economist at Renaissance Capital in
Kiev, says that budget performance remains poor and may
be the main challenge for the authorities. She believes
that the quantitative indicators used by the IMF are set up in
such a way that failure to meet one could trigger breaches of
others. There is also no room for Ukraine to manipulate
statistics on budget performance and government borrowings, as
was done last year, she says.
Even those observers who think Ukraine will fulfil the
fiscal requirements are doubtful about implementation of
Barbara Nestor, an emerging market analyst at Commerzbank,
says many of the toughest measures acceleration of gas
price rises for households, for example are already
timetabled for 2011, and with these structural issues
that are by nature long term, the government will delay
implementation wherever it can.
The government will hope to delay sufficiently that it
can move funding requirements to the markets, which are much
less rigorous than the IMF.
Andreas Schwabe, a research analyst at Raiffeisen
Zentralbank Austria, says: The fiscal deficit should be
controllable. But the long-term structural reforms will be much
more difficult, because they will be unpopular.
Raiffeisen sees the main potential risks in Ukraine as a
terms-of-trade shock brought about by unfavourable changes in
steel and other commodity prices, and a possible failure to
implement the IMF programme.
The IMF says government actions even before the programme
was adopted including a 50% increase in household and
utility gas tariffs from August 1, amendments to the 2010
budget and measures to reinforce central bank independence
show that Kiev is serious about implementing the
Thanos Arvanitis, IMF mission chief for Ukraine, tells
Emerging Markets: Yes, there was some scepticism
from the market about the authorities economic reform
plans before the loan programme. And now its up to the
government to stick to the timetables laid down. But the
markets were pleasantly surprised by the prior actions
Ukrainian officials met bankers in July, while the IMF loan
was awaiting final board approval, to discuss a possible
$12 billion Eurobond issue but were dissatisfied
with the pricing on offer and decided not to go ahead. At the
time, finance minister Fedir Yaroshenko said an 8.5% interest
rate was too high.
Arvanitis points out, There was no lack of supply:
investor interest was there. He believes that the IMF
deal in place improves Ukraines position with regard to
future market borrowing.
While the market is sceptical that Ukraine will be able to
implement the tough structural reform targets, civil society
critics of the IMF argue that it had no business setting them
in the first place.
Mark Weisbrot, co-director of the US-based Centre for
Economic and Policy Research and a long-time critic of
pro-cyclical lending by the IMF, says: Why should the IMF
be in the business of imposing structural reforms? Its
supposed to be concerned with balance-of-payments support and
Weisbrot says the programme is quite intrusive: it
seems like overkill, with Ukraines public debt at 39% of
GDP, half the European average.
The IMF says the only structural reform elements in the
programme (mainly gas sector and pensions reform) directly
affect the budget and the financial sector.
Arvanitis of the IMF says: Its not a wide
structural reform agenda covering, for example, industrial or
agricultural policy. Its very specifically on fiscal
issues and the banking sector. The steps to be taken were
set out by the government in April, but, says Arvanitis, during
talks with the IMF over the summer, the timing of some
measures was brought forward.
Ukraine, which last issued a Eurobond in November 2007, is
likely to return to international markets this year and next to
supplement borrowing from the IMF and other multilaterals.
The government projects a consolidated deficit (including
the budget, Naftogaz deficit, bank recapitalization bonds and
the VAT bonds) of about 9% of GDP (95 billion hryvna) this
year. Nestor at Commerzbank estimates that one-third of this
will be financed by the IMF, World Bank and other
But even with this help, and, lets say, a $1.3
billion Eurobond placement later this year, Ukraine would have
to continue to tap the domestic debt supply for about 24
billion hryvna in the second half of the year, including 16
billion hryvna in VAT bonds, says Nestor.
Nestor says the IMFs presence puts the
government in a better position to shift financing to external
markets. This is likely to be necessary to support solvency in
The IMF is centre stage but theres more than a
walk-on part for the markets. But whether the drama ends
happily, or in tragedy, will depend more than anything on
Ukraines economic recovery and how it is treated by