Translated by Ollie Richardson for Fort Russ
23rd May, 2016
Kiev is pleased that it was able to negotiate with the IMF for new loans. However, it seems that there are few real reasons for joy. The amount of the next tranche is less than the one that the Ukrainian authorities originally hoped for. But most importantly, the government did not disclose the price that residents of the country will have to pay for the new loans.
The leader of the Ukrainian Radical party, Oleg Lyashko demanded that the Prime Minister of Ukraine Vladimir Groisman publish the “damning” text of the Memorandum on cooperation of Ukraine with the IMF.
“This morning I met with the Prime Minister and again demanded to immediately publish the damning text of the Memorandum, which they signed with the International Monetary Fund. I have seen these documents and know that the conditions include raising the retirement age and permission to sell land and strategic assets,” he wrote on his Facebook. “These steps will destroy our economy, and we will not retire, because people will not live to be 70 years old,” he added. According to him, it is necessary to refuse IMF loans.
Previously, the Minister of Finance of Ukraine Alexander Danilyuk said that Ukraine agreed on a new Memorandum of economic and financial policies with the IMF, but it will only be published after signing. The Ukrainian Minister confirmed that pension reform is an important part of the agreement with the IMF, however, he did not answer the question of whether the Memorandum will raise the retirement age.
The IMF mission had previously studied the situation in the country and finished the job in Kiev. According to its head, Ron van Ruden, Ukraine over the past few years managed to achieve significant progress in restoring economic stability. The Memorandum is needed to ensure that the IMF continues to lend to the country. Traditionally, the “indicators” that Kiev are expected to achieve are fixed.
The last time Ukraine received money from the IMF was almost a year ago, in August 2015, but the agreed third and fourth tranches of $1.7 billion each was not given by the IMF. The lending program is being revised for the third time. Now, Kiev hopes that the IMF will give credit at the end of June – early July. However, if earlier Ukraine expected to receive two tranches of $3.4 billion, now they can expect only one of $1.7 billion.
The main thing the Fund did to Kiev was reduce their costs and start to increase revenues, which over the past two years has been a failure. The parties had to solve a huge number of painful issues. In other words, the Memorandum laid down the price that the Ukrainian authorities were ready to pay for another $1.7 billion of credit money.
“We can only guess as the Memorandum has not been published. There will be new “indicators” or new directions. Most likely, it will be talking about a traditional reduction of the budget deficit, talk about the fight against corruption, and the reform of the gas market,” said the CEO of a Ukrainian analytical center Alexander Okhrimenko the newspaper “Vzglyad“.
Among the important issues is pension reform. The IMF requires a solution to the problems with the pension fund deficit. Apparently, they agreed to solve the problem of the pension deficit by raising the retirement age. Representative of the President of Ukraine in the Cabinet of Ministers Leszek Balcerowicz believe it was the right decision. Ukraine has the highest percentage of GDP that goes to pensions, which is a consequence of the low retirement age, says Balcerowicz.
“However, the author of Polish reforms only sees one side of the coin, and completely ignores the fact that life expectancy in Ukraine is one of the lowest in Europe,” retorted the leader of “Ukrainian choice” Viktor Medvedchuk on his page on Facebook. He recalled that in Ukraine, every fourth person dies just before retirement. “But that doesn’t stop “reformers”. There is a requirement from the IMF to raise the age of retirement, and the Ukrainian government is ready to implement it,” concludes Medvedchuk.
The second sensitive issue is privatization of state enterprises. In fact, the IMF has traditionally requested that the economy is saved from total privatization of enterprises. This requirement was issued in Russia in the 90’s, and Greece in the 2000’s. Apparently, the Fund also requires from Kiev to not be greedy and increase the list of state companies slated for privatization. In particular, among the 19 bills that the Parliament should adopt in the next two plenary weeks (that is, quickly, without thinking), there is a bill that proposes to allow privatization of as many as 391 state-owned enterprises in the transport sector and the agricultural sector, including Ukrspirt and Artemsol. They are enterprises that the government previously placed on a list as they are strategic for the country and therefore are not subject to sale. Another bill permits to privatize a number of enterprises in the fuel and energy sector. Kiev is ready to give their important assets for a new IMF loan.
“Sale of state property for a pittance – that’s the price Ukraine has to pay for a new handout from lenders,” said Medvedchuk.
The Minister of economic development and trade of Ukraine Stepan Kubiv believes the adoption of these 19 bills in the short term offers nothing other than “implementation before completing their homework” before they get a new tranche from the IMF in June – July.
The Memorandum also probably spelled out the reform of the gas market. In terms of an increase of tariffs for gas for the population, Kiev did what the Fund wanted – rates to be increased to the so-called market levels so it becomes comparable to the price of imported fuel. Another thing is that the economically sound arguments for an increase in gas tariff to the level of 3699 UAH, and 7188 UAH is still there, said Yuri Korolchuk. “Because Ukrainian gas production comes to the population (not imported), it’s worth remembering that the state Ukrainian gas production acknowledging that the company lacks 3500 UAH for each thousand cubic meter of gas produced is already taking into account capital investment, financial, and operating expenses and rents,” explains the expert.
Another question is related to Naftogaz. The IMF believes that the state spends too much on the support of this monopoly, therefore, the Fund insisted on the separation of Naftogaz in accordance with the energy packages of the EU.
The EC also requires that Kiev reform the GTS until the summer and to save Naftogaz from the function of transit. The Ukrainian authorities promised to do everything by the end of the year. This means that this year the Ukrainian state may even cease to have any relevance in the transit of gas. All of this will be transferred into private foreign hands. Most likely, the Europeans will acquire control of the Ukrainian GTS. For the Ukrainian budget, it would mean a loss of income, which today Naftogaz receives as payment for transit fees. By the end of 2015, Gazprom paid Ukraine 2 billion dollars for the transit.
Medvedchuk believes that the Ukrainian authorities are ready to pay a high price for IMF loans. He was confident that the Ukrainian authorities were supposed to put citizens on notice about the contents of agreements with the IMF. “Because the consequences of “reform” from the IMF will lay down a heavy burden on the shoulders of citizens, they should have their say regarding the terms of cooperation with the Fund,” says the Ukrainian expert.
Meanwhile, Ukraine’s state debt is only growing and has reached 65.2 billion dollars, or 1.71 trillion UAH. The UAH debt of the country increased threefold since the beginning of 2014, and paying the bill will involve more than one generation of Ukrainians.