If you want to see how flexible the IMF can be with governments hard hit by the crisis, look at its $16.4 billion Stand-By Arrangement (SBA) with Ukraine.
The government’s lack of progress in meeting commitments under the programme is palpable – and before the Fund disbursed the third tranche of $3.3 billion on July 28, economists and bankers following the talks wondered how it could be justified. Ukraine had already drawn down $7.6 billion since the SBA– one of the largest ever, proportionate to a country’s share in the Fund – was launched in November 2008.
By this summer, the budget deficit was deepening, aggravated by accumulated debts of the oil and gas company Naftogaz Ukrainy that the Fund counts as fiscal. The banking sector restructuring agreed with the Fund was moving painfully slowly. And fiscal information presented to the IMF by the government was being questioned – not least by the former finance minister Viktor Pynzenyk, who quit in February, and Ukraine’s president, Viktor Yushchenko, whose secretariat published detailed allegations of book cooking.
Resolute action
Observers saw plenty of grounds to refuse to extend the programme – but the Fund moved ahead, on the grounds that “resolute action” was needed to contain fiscal deficits, and disbursed the third tranche on July 28. That brought the total amount loaned to Ukraine under the SBA to $10.9 billion. Another $2 billion has gone into the National Bank of Ukraine’s foreign currency reserves under the IMF’s global SDR (special drawing rights) allocation in August.
The Fund’s Second Review under the SBA, on the basis of which the third tranche was released, justified its actions by pointing out that Ukraine’s economic downturn has been “more pronounced than expected”. GDP fell 20.3% year-on-year in the first quarter, mainly due to a slump in export volumes followed by a contraction of domestic demand. Industrial output has dropped calamitously, by more than 30% in the first half of 2009.
The hryvna has depreciated by about 35% in nominal effective terms over the year to August. Ukrainians wary of further falls have withdrawn their savings and changed them into cash dollars, and banks lost 20% of their deposits between October 2008 and April 2009.
Soft shoe shuffle
The Fund’s dilemma is that factions in Ukraine’s weak and divided government are in no mood to undertake harsh fiscal measures required by the programme – which, in the run-up to the crucial presidential election in January 2010, could alienate voters and annoy the oligarchs (politically influential businessmen) on whose grace and favour politicians depend.
Prime minister Yulia Timoshenko, opposition leader Viktor Yanukovich and other less likely presidential candidates are vying with each other to appear to be protecting people’s living standards, rather than discussing policy. In recent months the defence, foreign, interior and finance ministers have resigned. In September, parliament was again paralyzed by the latest opposition boycott. In the Second Review’s official language, “effective policy implementation is constrained by the fragile political consensus”.
In other times and places, the Fund has used its programmes as carrot and stick, to force governments to take unpopular decisions. But now, the Fund’s critics say, its own big-picture politics have led it to put the stick aside and offer too many carrots.
Oksana Reinhardt, analyst at Deutsche Bank, says that the Fund “would seem to be overly positive about the [Ukrainian] authorities’ actions”. A source close to the negotiation process says: “There’s a perception that the IMF has been supportive and flexible, and that Ukraine has not reciprocated.”
Behind the approach of the Fund, other IFIs (international financial institutions) and the European Central Bank has been a domino theory for eastern European states: that a collapse of one would have serious consequences for others, and for the international economy, and therefore cannot be allowed. Furthermore, bankers and economists in Kiev say, the IMF is influenced by American and western European concerns about the geopolitical advantage that might accrue to Russia by a Ukrainian economic collapse. “Phone calls are made, just as they were made to the IMF about Turkey when its economy was wobbling and military conflict was underway in Iraq”, says a senior banker.
In an interview, Emerging Markets asked Ceyla Pazarbasioglu, the Fund’s mission chief for Ukraine, whether larger political concerns were overriding standards normally applied to lending programmes. “It’s too early to make such an assessment. It would be wrong to assume what the IMF’s stance will be”, she replied.
The third review of the SBA will be conducted in mid October, Pazarbasioglu added, before a decision is made in mid-November on disbursement of the fourth tranche. “We will look at performance. There will be no room to fudge things. We will see if targets were met, and if not, what the reasons were. Was it discretionary?”
The IMF has “well-established procedures”, and these would be followed, Pazarbasioglu said. Asked about concerns that politicians say one thing to the Fund and do another in practice, she replied: “I want to underline that the authorities have been very, very collaborative with us.” A monitoring committee for the programme that includes representatives from government, presidential administration and national bank had worked well.
Nevertheless, big gaps remain between the government’s commitments to the Fund and its actions – and some in the Ukrainian government believe that the IMF’s patience could finally snap. As Oleksandr Shlapak, deputy head of president Viktor Yushchenko’s administration and a member of the monitoring committee, told journalists in September: “The IMF will not give us anything by year-end as we are not fulfilling our obligations.” The Fund is “greatly disappointed with Ukraine’s behaviour”, Shlapak claims.
The four largest bones of contention are:
• state finances:
Budgetary spending is running out of control as the election approaches. Under the Second Review, the IMF adapted its programme to allow for a fiscal deficit at 8.6% of GDP – 6% for general government finances and 2.6% for Naftogaz Ukrainy, the national oil and gas company – but few believe that even these guidelines will be met.
President Yushchenko says Prime Minister Timoshenko’s government is presiding over a “budgetary catastrophe”, and that information presented to IMF officials prior to the Second Review was falsified. In May, Yushchenko’s officials published detailed claims that the government had boosted revenues by delaying VAT rebates for exports, forcing companies to make advance payments of taxes and of failing to make payments into the state pension fund.
Economists agree that the size of the mounting deficit is obscured by opaque reporting procedures. Olga Pogarska, chief economist at Sigma Bleyzer in Kiev, tells Emerging Markets: “The government is being economical with the truth. It has announced that revenues into the budget are overexecuted by 3%, but has not stated what the target was. We are working with various estimates that the budget is underexecuted by 5–6%.” In the first seven months of the year, the government’s general fund ran up an 18 billion hryvna deficit, Pogarska adds.
• natural gas sector:
The government’s letters of intent to the IMF have all included reference to natural gas sector reform [see box]. In particular, the government during the Second Review promised to raise gas tariffs for households by 20% on September 1 and by 20% for power generators on October 1. But on August 26, Prime Minister Timoshenko announced in a speech in Chop, western Ukraine, that “there will be no hikes of gas prices for the people”.
The September 1 deadline passed and the increase got mired in legal action between trade unions and the national electricity regulatory commission, which sets the tariffs. At the time of writing, the issue of tariff increases remains unresolved – testimony to the government’s extreme nervousness at popular reaction to the collapse of living standards precipitated by the crisis.
• exchange rate regime:
The Fund remains at odds with the authorities over the National Bank of Ukraine’s (NBU) reluctance to adopt a flexible exchange rate policy. The hryvna, which had stabilized in the spring, fell sharply during July and August, and foreign currency purchases by households soared – with the NBU making limited interventions and an ill-managed sale of dollars to households at a fixed rate.
Pogarska at Sigma Bleyzer estimates that in the year to August the NBU had spent $19 billion to defend the hryvna, and decided at that point to limit its interventions. She points out, too, that the Bank has met all the quantitative guidelines in the IMF programme.
• bank restructuring:
While the situation in the banking sector has improved and major bankruptcies avoided, bankers say the programme has been insufficient to stimulate any lending. Although the NBU claims that Non-Performing Loans are at 7%, the real figure is regarded as at least double that.
The fourth tranche under the IMF Stand-By Programme may be delayed. But the Fund’s influence on Ukraine’s economic policies seems bound to grow over the long term.