Ukraine and IMF: time to pay the debts
Following the last year, Ukraine started repayment of debts to the IMF. The repayment totaled $1.268 billion in 2017. Not a huge amount considering the gross debt to the IMF is only $12.1 billion according to the recent news. This amount ought to be repaid before 2021. Can Ukraine perform this liability? That is the question.
Can we settle it on our own?
Had Ukraine been on time with the performance of IMF requirements, settling debts would come much easier. All the changes that the IMF demands to adopt seek to surge Ukraine’s economic growth and increase the budget. Lower rates of corruption alone should add 2% to the GDP, and that’s a considerable boost.
However, reforms have been delayed for a number of reasons. In November, the IMF confined its 11 requirements to 4 key points:
- increase gas prices;
- implement a pension reform;
- privatize state-owned enterprises;
- create the Anti-Corruption Court.
No above requirement was met or implemented. The result is that there are no serious changes inside the country and the lack of lending.
Ukraine has lost two tranches by now. Odds are goods the third one goes out the window as well unless Ukraine meets at least half of the IMF requirements.
If so, our cooperation with the IMF can meet its end, thus, making the state of affairs even worse. Because those loans Ukraine obtains are used to repay debts. We take loans from international organizations and other countries to repay old debts. That said, new repayment dates get set as farther as possible to bide time and accumulate the hard currency.
Today, Ukraine’s external debt accounts for 80% of the GDP. What makes matters worse is that the external debt service is 32% higher than principal repayments on IMF loans, while the external debt service of 2018 will account for over 54% (₴35 billion) of the budget deficit. Repaying these debts through own efforts is impossible. At least without inflicting damage on our economy.
Where should we take the money then?
It goes without saying that in order to repay current loans we will have to obtain new loans from other lenders bypassing IMF. The National Bank of Ukraine should have resources too.
With the preferences provided by the IMF in 2015-2017, the National Bank had an opportunity to purchase enough hard currency on the interbank currency exchange to repay the external state loans and increase foreign exchange reserves.
According to the IMF, the increase is estimated to hit $30bn and more as soon as in 2018. Moreover, part of these funds will hardly be allocated to repay debts.
Ukraine has shown a foreign trade deficit for a long time. Last year, it declined even further down to $3.278 billion from January to August.
To compare, the trade deficit was $1.447 billion in the same period of 2016. This means that Ukraine will have to constantly allocate $3 to $6 billion from its foreign exchange reserves to support the foreign trade, thus, reducing its external debt solvency.
On the other hand, the deficit can be covered by personal transfers of foreign currency incoming to Ukraine from other countries. There is plenty of these transactions since many Ukrainians go abroad to work and send money to their families.
In 2016, these remittances went over $7 billion. 4 billion of that amount was converted to UAH. Then, the National Bank of Ukraine purchased $2.8 billion at the interbank exchange as reserves.
According to the NBU, 2017 marked a 30% increase in the cash inflow to Ukraine. If there are many remittances this year, they will allow increasing the reserves even more. Such outcome, however, means that the external debt problem will be solved at the taxpayers’ expense.
International investments can become another source of funds. They can become a solid support to repay debts, but the problem is that investments are few.
According to the IMF, Ukraine is estimated to receive $2.5 billion of investments in 2018, which is enough to repay only some of the debts.
How can repayments affect the economy?
The repayment period can create an additional pressure on the national currency. The more money Ukraine gives, the lower its national currency is expected to decline. There are two solutions to compensate the currency outflow: new tranches from IMF or a robust growth of Ukrainian exports.
On the other hand, if the forecasts turn out to be true and the foreign exchange reserves do increase, they can be used to support hryvna from shaking.
Money flow to the safest areas, and investments come where they are most secure. Ukraine needs transformations and reforms that can be used to retain the capital.
Therefore, it will be easier to repay the state debt, which will then result in more opportunities to replenish own reserves.
It is alright to have an external debt, but only if the economy is thriving. Alas, this is not the case for us at the moment. With no global reforms, there will be no global changes. And with no changes – Ukraine will forever remain a debtor to the EU, IMF, or some other organization.
Artem KovbelPartner, Head of Financial Investigations