Revealed: The Harsh, Agonizing Terms of IMF Ukraine Loans
Maidan promised convergence with standards of living in the EU but IMF is bringing agony and pain
Ivan Katchanovski is a lecturer at University of Ottawa. Author of The "Sniper's Massacre" on the Maidan in Ukraine
Leaked documents, which were previously kept secret by the leaders of Ukraine, show that as a condition of getting a new IMF loan, the Ukrainian government agreed inter alia to the following:
- raising prices for natural gas and heating to households to the level of prices for imported natural gas by April 2017, starting with the first increase in April 2015
- cutting 20% of state employees in 2015 reducing the number of higher education institutions from 802 to 317
- and raising the retirement age by 5 years.
Such economic policy would increase the household prices for natural gas by more than ten times and bring the combined utility payments for energy to the levels approaching or exceeding wages and pensions of a significant percentage of Ukrainians. Such price shocks would be coupled with expected continuation of the economic crisis, which has already resulted in three fold devaluation of the Ukrainian currency, significant declines in GDP, industrial output, real wages, and export and significant increases of inflation and unemployment.
The Ukrainian central bank has asked the IMF to maintain its current practice of parallel exchange rates and currency controls, which include an official lower rate set by the central bank and much higher black market exchange rate.
The agreement and the economic policy based on the Washington Consensus fail to address key institutional issues that would prevent such shock therapy from working in Ukraine, such as corruption, property rights, social capital, and oligarchic capture of the state. The current agreement with the IMF is likely to be only partially implement as was the case with previous such agreements. In either case, ordinary Ukrainians who were misled by the Maidan opposition leaders/current government leaders and the Ukrainian media with promises of EU standards of living, are likely to suffer the economic shocks without any prospects of reaching EU standards of living in the next years and decades.
This report is based on the March 3, 2015 news report in Glavcom.ua: ‘What Yatsenyuk and Poroshenko promised the IMF. The full package of documents‘. Below is a Google Translate of that article.
What Yatsenyuk and Poroshenko promised the IMF. The full package of documents
03/04/2015 was at 10:10 Fedor Orischuk, Katerina foot, Paul Wujec, “Commander in Chief”
At the disposal of “Commander” was the text of the Memorandum of the Ukrainian government with the International Monetary Fund, which should provide funding for large-scale Ukraine bailout
On March 11, the IMF Board of Directors will consider increasing funding for Ukraine, without which the state is facing bankruptcy. The decision to start a new four-year program of lending – Extended Fund Facility – international financiers will take, starting from the package of economic reforms of the government Yatsenyuk stated in the three documents: Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding. They have developed Cabinet and the National Bank, and at the end of last week approved the President Poroshenko, Prime Yatsenyuk, National Bank head Valery Gontareva, Finance Minister Natalia Yaresko.
Full content not yet made public – the right of publication of the Memorandum Ukrainian authorities have provided the International Monetary Fund. Yatsenyuk did not disclose its content to their party members, who asked about it at a meeting of last Friday. “Commander in Chief” managed to get a copy of the package of documents .
The new four-year program with the expansion of credit (Extended Fund Facility, EFF) should replace the existing «stand by» (was adopted for the period 2014 – 2016.). As noted by IMF Managing Director Christine Lagarde, the new project of cooperation should “support measures for the immediate macroeconomic stabilization, as well as broad and deep economic reforms for several years to ensure economic and financial stability and restoring sustainable growth.”
EFF is bigger and more durable than its predecessor. Instead of two years, the credit period grows to four, return of credit increased almost twice (up to 10 years).
Preliminary agreements Ukrainian authorities last week moved to the paper. Here’s how it formulated the Ukrainian government in the documents sent to the IMF:
1. Letter of intent to the International Monetary Fund.
“For the implementation of reform and adjustment of the economy Ukraine filed a request for a new four-year agreement under the Extended Fund Facility (EFF) amounting to the equivalent of 12,348,060,000. SDR (900 percent of quota and about 17.5 billion US dollars) and have the intention to abolish our agreement on “stand-by” 2014 – 2016 years. immediately prior to the conclusion of a new enhanced agreement. Our international partners have pledged additional funds to provide full funding. ”
Government guarantees with these tools:
– Recovery of the banking system,
– Strengthening of fiscal stability, while providing the capacity to finance spending on social protection and investment in infrastructure,
– The adoption of measures to eliminate the deficit “Naftogaz of Ukraine” until 2017.
A decisive role in this case will play large-scale structural reforms, first of all, strengthening the investment potential and economic growth through:
– Deregulation and tax administration reforms aimed at improving the business climate,
– Reform of state-owned enterprises, restructuring “Naftogaz of Ukraine” and the improvement of corporate governance.
2. Memorandum about economical and financial policy – the main instrument aimed at the IMF, including a more detailed description of the economic program, which the government is going to introduce with financial support from the IMF and other donors.
Here is the most important information from this document:
* Development of the situation and prognosis. Economic activity in the country decreased by 6.9%. In December 2014 continued to decline in industrial production, retail trade, construction volumes. It may reach the bottom in the mid-2015. The government hopes that in the 2016 – 2018 biennium. is expected to recover and build economic growth, which in the medium term will reach 4%.
* Inflationary pressure drops. By the end of 2014, inflation reached 25% due to the fact that the hryvnia has lost half its value against the dollar. Predictions for 2015: inflation will remain at the same level. In the future, it should be slowed down dramatically: up to 10% in 2016 to 5% in 2018.
* The pressure on the balance of payments will be reduced. Export volumes in 2015 will be reduced. However, in the government believe that the program of economic reforms will make Ukraine attractive for investment, to get access to the capital market. According to the plans of the Cabinet, the current account deficit in 2016 – 2018 years. stabilized at the level of 1% – 1.5% of GDP and reserves “gradually restored to a comfortable level.”
Monetary and exchange rate policies:
The government says it will stick to a flexible exchange rate regime as a buffer to the Exogenous Shocks Facility.
Government asks IMF to preserve the right to exchange restrictions and practice of parallel exchange rates, which are used now because of the difficulties in the balance of payments.
Sale of foreign currency by the National Bank will be limited in order to facilitate external payments of the government, as well as the financing of energy imports “Naftogaz of Ukraine” and the corporation “Energoatom”.
In this case, the text contains a reservation: at the request of the donor, the Ukrainian authorities are ready to abandon the practice of foreign exchange restrictions and multiple exchange rates.
If the WTO does not support a temporary surcharge on imports, introduced February 25, 2015, the government is also ready to remove it as soon as possible.
In addition, the IMF experts reported that the Ministry of Finance of Ukraine is working on a prolongation of the government domestic liabilities in foreign currency. And with the People’s Bank of China is now discussing the extension of the “swap” line.
Changes in the National Bank
Expected change in legislation that will do the job NBU more independent and transparent. Strengthen the role of the Board of the NBU. Provide increased autonomy Bank procedures for the appointment and dismissal of members of the Board and Vice Chairman of the Board.
Financial Sector Policy
Strengthen the regulation and supervision – to identify and reduce lending to related parties.
Introduced the unlimited liability of owners of banks for losses on loans granted directly or indirectly for the benefit of shareholders, who own 10 percent or more (including shareholders acting together) at the end of 2014. In addition, the NBU will have the right to admit the existence of cost-related relationship between banks and borrowers on the basis of objective criteria.
To eliminate the above-limit lending to related parties, before the end of the spring should be adopted legislative changes to eliminate loopholes that could leave the possibility of bypassing the credit limits for insiders.
Before the beginning of June 2015 the 10 largest private banks provide statements on the volume of lending to related parties. Next dozen financial institutions – by the end of July. The rest – until the end of September.
By the end of 2015, the NBU with the technical support of the four largest accounting firms will review the reports of the first twenty banks on the volume of lending to related parties. And by April 2016 will be ready to report on all banks.
The state and the NBU will not interfere with bilateral negotiations between borrowers and banks on the restructuring of foreign currency mortgages. In this case, if the law is passed, forces convert foreign currency mortgage loans in the hryvnia, the president will veto.
All major taxpayers will be transferred to the Inspection Service of large tax payers.
By 2017, will be phased out gossubsidirovanie “Naftogaz”.
Reduction in the combined deficit of the national management and “Naftogaz Ukraine” from 10.3% of GDP in 2014 to 7.4% of GDP in 2015. In 2018 – 2.6%.
As stated in the Memorandum, these figures are significant fiscal efforts, since the primary balance changed from a deficit of 1.2% of GDP in 2014, reaching a surplus of 1.6% in 2018.
Primary expenses decreased from 43% of GDP in 2014 to 39.2% in 2018. Deficit “Naftogaz” from the current 5.7% of GDP will fall to zero by 2017.
The budget for 2015
On July 1, 2015 introduced the mandatory use of cash registers FOPami.
Payroll and pensions
The number of wage earners from the budget will be reduced by 3% for 2015. In particular, 20% of civil servants. Last would be possible by reducing the regulatory authorities. This process begins on 1 March and will be completed before September 1.
In an effort to combat corruption will be lifted restrictions on wages in government and the NBU at 7 – 10 times the minimum wage.
Umesh payments will be working pensioners and limited the possibility of early retirement. Raising the retirement age for them for 5 years will be gradual (6 months each year). It will save 1.6 billion. Hryvnia in 2015.
It is assumed the payment of pensions to those who are outside the control of the authorities in the territories.
Since 2016 will be provided for the indexation of pensions (including pensions and civil servants spetspensy) to the level of prices.
Reform should open the sector to private funding and ensure a gradual transition to health insurance. By the end of March 2015 to the Parliament to act accordingly bills.
There will be a reduction in higher education institutions with 802 to 317-ti.
Reducing the number of secondary schools will reach 5% due to aggregation.
The level of capital investment will be increased from 1% of GDP in 2014 to 3% of GDP in 2018.
AIC – the most profitable industry. Therefore, in January 2016 the action mode VAT will expand to the entire agricultural sector.
There will be a “sharp increase in prices for end consumers.” The rise in price of gas and heat in late 2014 has already happened in the 56% and 40%, respectively. However, the subsequent depreciation of the hryvnia washed away profits, according to the text of the Memorandum. Therefore, the authorities substantially increase prices for consumers and will work on payment discipline.
On April 1, 2015 for households increase in gas prices will be 285%. This would correspond to the value of 3,600 USD. per thousand. cu. m (consumption less than 200 cu. m per month) and 7187 UAH (the consumption of more than 200 cu. m per month)
On April 1, 2015 will increase the price of thermal energy: 625 UAH / Gcal. In the future, the price will be attached to the gas: in April 2016 it will meet 75% of the price of imported fuel. In 2017 – 100%.
With the involvement of the EBRD will corporatization key state-owned companies, “Naftogaz of Ukraine” and its subsidiaries, “Energoatom” Ukrenergo.
Until June 30, 2015 will be held independent audit of accounts receivable company to identify debtors. Will lift the moratorium that protect such enterprises from the application of enforcement and disconnected from the gas supply system.
National Anti-Corruption Bureau
The creation of the anti-corruption bureau to be completed by the end of April 2015. By this time the director will NABA and budget.
Disclosure of assets
Until the end of March 2015 will be revised legal framework in relation to the disclosure of the assets of senior officials, which fall under the jurisdiction of the National Anti-Corruption Bureau. The law should appear requirement to disclose beneficiary owners and controllers of any funds or assets.
3. Technical Memorandum of Understanding provides a coordinated position of the Ukrainian leadership and IMF experts to identify modifiable parameters, which are set on the basis of quantitative indicators for the economic program. Here is a summary of methods for assessing the effectiveness of the program execution, requirements for the provision of information necessary for the monitoring of compliance with the targets.
Determined that for the purposes of the program, all exchange rates are used to assess the levels of reserves and monetary aggregates – is the official hryvnia exchange rate to the US dollar at 15.7686, established by the National Bank as of December 31, 2014.
Gross domestic product is calculated according to the System of National Accounts 2008 and does not account for the Crimea and Sevastopol.
In this appendix are also served quantitative performance criteria, indicative “ceilings” and operating performance criteria.
And also – put forward demands in the supply of the National Bank statements. NBU total incurs about 50 points, obligations to the IMF.
Deposit Guarantee Fund of individuals and the Ministry of Finance also undertake a number of obligations to international creditors. Office should be:
– Provide the IMF with information on monthly consolidated balances of other non-governmental legal entities, including SOEs that are not owned sector of national management accounts are opened in the State Treasury – not later than 25 days after the end of the month;
– Provide the IMF with daily reports on operational performance indicators of budget execution, the daily income of borrowed funds in the state budget and the embezzlement of debt service;
– Provide the Fund with monthly data on fund payment for the work of the public sector;
– Report to the IMF on a monthly basis, not later than 15 days after the end of the month, on the cash deficit of the national government;
– Apply on a monthly basis no later than the 1st day of the second month of the reporting data on all budgetary balances receivable;
– Provide monthly information no later than 25 days after the end of each month, the amounts and timing of all external to contract or guaranteed debt of the central government;
– Provide monthly amortization schedules debt (internal and external), which will be updated every week;
– Provide data on the external and internal credits main managers of budgetary funds and non-governmental entities (including “Naftogaz”), which are guaranteed by the government – on a monthly basis no later than 25 days after the end of the month, etc.
The document also spelled reporting obligations to the IMF, which lie, in particular, on the state fiscal service of Ukraine, as well as the Ministry of Economic Development, Ministry of Energy and Mines, the Ministry of Regional Development, Construction and Housing and Communal Services, NERC, National Commission for Regulation utilities and Public Administration of Statistics of Ukraine. Buy This game has all the combat aircraft, armored vehicles and navy! In this game there is everything .
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