A few weeks ago, a delegation of the International Monetary Fund visited Ukraine with the purpose of assessing the conditions and requirements for a further $ 1 billion loan. A four-year program of financial assistance from the IMF is in place for Ukraine, for a total of $ 17.5 billion. In March 2015, the first tranche of $ 5 billion was transferred, in August of the same year – the second, which amounted to $ 1.7 billion. In September 2016, the Fund transferred the third tranche of the $ 1 billion. But in 2017 the IMF decided to revise the program of cooperation, arguing that Ukraine was not fulfilling the conditions for the loan. These conditions, however, which include a raise in the prices of gas and other government spending cuts, have proven almost too harsh for the current Ukrainian government to fulfill.
Ukraine had been a recipient of aid from the IMF since 1994, but until 2010 it was a question of relatively small amounts. By 2011, however, the country had become second in terms of total debt towards the IMF, with $ 14.2 billion in total. It was surpassed only by Romania, which owed to the Fund $ 15 billion. Greece, a country whose name had become a byword for financial catastrophe came third with $ 13.9 billion.
As of February 2018, Ukraine was still holding on to the second place in terms of total debt to the IMF and on the 1st place in terms of the size of the current financial aid program. Greece and Ukraine account for almost half of all loans issued by the IMF. 5 countries – Greece, Ukraine, Pakistan, Egypt and Portugal – for 80%. And if this year Ukraine receives another loan tranche, it has a good change of gaining the first spot.
As a rule, the terms of an IMF loan are determined by the countries that are the largest contributions to the fund. The largest number of votes in the IMF is held by the USA, which contribute for 17.1%, followed by Germany (6%), Japan (6.1%), Great Britain (5%), France (5%), Saudi Arabia (3.2%), China (2.9%) and Russia (2.7%).
$ 6 billion in one year
In 2017, Ukraine’s public debt increased by $ 6 billion, reaching a total of $ 77 billion, which amounts to 85% of Ukraine’s GDP. In 2013 total debt was 40% a mere of GDP. At the moment the largest expenditure item of the state budget is the servicing of public debt, which accounts for more than $ 3.5 billion a year.
In the period from 2018 to 2022, Ukraine will have to pay $ 64.2 billion for all state debt obligations (even without considering the debt to the Russian Federation). It is very clear that paying down previous loans and the interest on them will be possible only at the cost of new loans. International financial institutions may be less willing to allocate funds to Ukraine, taking into account its unfavorable economic situation, and if these funds are allocated, the interest on the loans may be high.
According to Ukrainian economist Vsevolod Stepanyuk: “If we are not able to receive further IMF tranches, then Ukraine will not be able to meet its obligations on existing debts, and let’s not speak about 2019 at all.”
Viktor Pinzenik, a deputy from the Bloc Peter Poroshenko, said pretty much the same in January: “You can love the IMF, you can not love it, you can hate it, but Ukraine needs it, because there is no alternative. The Ukrainian foreign debt is $ 115 billion, a nearly half of it must be returned within one year. Where from? What source? Without a roll-over of the debt, it will be impossible to service it”.
His words were confirmed by the IMF at the end of 2017: “Ukraine will be forced to negotiate the extension of financial assistance through the IMF for the next 10-15 years. Otherwise, the risk of its default on debts to Western financial structures will dramatically increase already in 2019-2020.”
However, to provide loans, the IMF requires Ukraine to allow the privatization of agricultural land, raise the retirement age, introduce an anti-corruption court and privatize the remaining large enterprises. The priority should be given to selling the Odessa oil refinery, as well as the Odessa port, and several branches of the state energy producer ENERGO in different towns. But there are fears that the privatization of these important enterprises will not only deprive the budget of a significant share of budget revenues, but also could lead to an huge increases in prices for gasoline, electricity and chemical fertilizers.
The cost of aid
Ukrainian economist Alexander Dudchak remarked: “The fulfillment of IMF requirements for the sake of minor financial handouts led to the expected result – the country’s complete submission to the Fund, reshaping many laws in the interests of global capital. And, as a result we have the impoverishment of our people, heavy debt dependence, the receipt of new loans not for development, but for servicing debt”.
In his view, the IMF implemented similar policies in many countries: “Ukraine is far from being the first country that has gone through the path of involvement in credit dependence and complete enslavement. These are technologies that have brought many states of Latin America, Africa, and Asia to their knees. Now it’s Europe. The Fund dictates increasingly harsh conditions for handing out the money”, says Alexander Dudchak, noting that Ukraine “is held by a tight financial collar, and the country will not be able to get rid of it on its own”.
Almost without exception the IMF policies follow a set of basic standard principles: freedom of movement of capital, privatization, a relaxation of environment protection law, some sort of anchoring of the national currency to the US dollar, controls on the real money supply, wage cuts and restriction of rights workers and trade unions, minimizing budget expenditures on social programs (for education, health care, social housing, public transport). The IMF sees itself as an aid institution, but its help has proven to be very costly at times.