Already scheduled IMF, World Bank money transfers to Ukraine have been postponed or made conditional. Both now acknowledge that Kiev is likely to default on its international debt
This is an excerpt from an article that originally appeared at Dances with Bears
Multi-billion dollar lending to Ukraine by the International Monetary Fund (IMF) and World Bank has stopped amid growing doubts among country board directors at the two international organizations that the Ukrainian Government can meet repayment commitments and loan covenants for 2015, or deliver on reform promises and budget financing targets tabled in Kiev this week.
For the first time since the change of government in Ukraine last February led to civil war in the east of the country, European bankers and multilateral fund sources acknowledge that Kiev is now likely to default on its international debts, and will seek a reorganization of its bond debt.
To date, converting Special Drawing Rights (SDRs) in the table into US dollars, $4.3 billion in IMF transfers scheduled between July 25 and December 15 have now been put off. Another $2.1 billion had been scheduled by the IMF for release by next March 15 on condition that the IMF staff and board agreed by the end of this month that Kiev was meeting the “performance criteria.”
Altogether, a third of the IMF’s financing agreement with Ukraine has now stopped because the Ukrainian Government is failing the “performance criteria”.
In IMF lingo, performance criteria, loan covenants, programme conditionality, and financing assurances are all synonyms for what staff and directors believe to be in violation right now.
At the World Bank, officials are clear that negotiations for a new $500 million loan to support failing Ukrainian banks through the Deposit Guarantee Fund (DGF) have been postponed until next February at the earliest. The officials are less certain about how much money has actually been turned over to date.
The so-called “technical discussions” by the IMF and World Bank have been analysed by Andrei Kirilenko, a well-known Ukrainian-American professor of finance at MIT’s Sloan business school. In September he illustrated the shortfalls in Ukrainian cash to meet IMF targets this way:
The tabulation shows that even drastic cuts to the government’s budget would cover just 88 billion hryvnia ($5.5 billion), substantially less than the shortfall of UAH115.2 billion ($7.3 billion) for the domestic energy source, Naftogaz.
“The financing needs of Naftogaz,” according to Kirilenko, “are nearly twice as large as the available financing capacity of the entire domestic financial system, including the National Bank of Ukraine.
Another domestic financial system of about the same size and capacity needs to be built just to finance Naftogaz.”
The combination of state budget and Naftogaz is dwarfed in Kirilenko’s display of the IMF technical estimates by the overall negative balance requiring external financing: that’s $13.2 billion.
“For now, it looks like the short-term solution is to patch up the Naftogaz financing gap using the IMF standby money.
In fact, the IMF standby program looks more and more like the bailout of just Naftogaz.