Thursday, February 5, 2015

5/2/15: IMF and Ukraine: 'Scaling Back' Risk Is Real

Generally, I rarely comment directly on Ukrainian economy as was explained before on this blog. But the latest set of news is certainly falling into the category of 'big time news'.

As I noted before, IMF were in Kiev since mid-January and were going over the Ukrainian Government request for switching lending to Ukraine into a different facility (see In January, IMF head, Christine Lagarde gave an interview to Le Monde, saying that no partner of the IMF can participate in a funding programme when some 20% of the Ukrainian economy remains impacted by the conflict in the East.

So far, under stand by arrangements, IMF committed USD17 billion in funding for Ukraine, of which Kiev already received disbursements of USD3.2 billion in May 2014 and USD1.4 billion in September. Under stand-by arrangements, funding is provided for up to two years, so in 2015, Ukraine must redeem USD1.42 billion in IMF funding and some USD9.6 billion more in maturing government debt. Of this, more than USD4 billion is due in Q1 2015. Meanwhile, currency and gold reserves of Ukraine are down to USD7.5 billion - below debt maturity levels for 2015.

Now, IMF is reportedly (see here: "is seeking to limit its share of the aid burden in discussions on an expanded bailout for Ukraine, according to two people with knowledge of the institution’s stance, as a military conflict pushes the sovereign closer to default."

Note: IMF limiting new funding share to 2/3rds will mean that of USD15 billion that Ukraine wants to get over the next 2 years, USD5 billion will have to come from 'other' sources. If IMF were to restrict its total share to 2/3rds of all bailout money, then in the new funding, the non-IMF share will be USD4 billion. One might think that the funds can be provided by the EU - keen on partnership with Kiev. But EU talks a lot, yet delivers little. In 2014, EU Commission President, Barroso stated that the EU is willing to commit EUR11 billion to fund Ukraine over 2 years. So far, EU delivered only EUR1.4 billion in 2014 and committed to provide EUR1.8 billion in 2015. EBRD and EIB promised Ukraine EUR6.5-8 billion in funding, but delivered only EUR2.2 billion so far. Germany promised and delivered EUR1.6 billion to Ukraine in 2014 and in January this year committed to provide further EUR500 million.

The point is that absent IMF funding an entirely new programme, it is impossible to see how Ukraine can continue servicing and redeeming existent debts and cover current deficit that is expected to hit double digits in 2015. On the other hand, IMF is aware of this reality as well as of the lack of will in Europe and the US to fund Ukraine. Worse, stung by the 'partnership' with EU in funding euro area crisis-hit countries, the IMF is itching to cut back its engagements with difficult partners. Meanwhile, Ukraine has - completely understandable - difficulties pushing through IMF-mandated reforms. And to add to the complexity of the situation, the EU and US are nursing major differences in their respective objectives when it comes to what the two players want to see emerging from the current crisis.

In my view, Ukraine is now being played in the game of geopolitical chess by all sides, with the IMF struggling to remain independent (even pro-forma). The tragedy of all of this is that Ukraine is being prevented, by a combination of poor funders cooperation and ongoing conflict in the East, from actually engaging in reforming its economy, politics and society. My sympathies on this mess are with Ukraine and President Poroshenko - they got the short ends of all sticks.

Note: In my opinion, Ukraine needs a much more structured package of supports, including larger loans, on more benign terms, and grants, and over a longer horizon. In effect, it needs a Marshall Plan.

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