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Old May 5th, 2017, 02:37 AM   #1
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IMF Group Report: Ukraine cannot survive without increases in credits



Reports that Ukrainian economy's development has reached a level at which the IMF assistance could be minimized have proved to be, at least, premature. Financial affairs in the country, grandiosely described by Ukraine's Government as its positive financial success, may be considered as such only against systemic collapse of the country's economy in 2014-2015. That was illustrated by the report of economists from the IMF Group of Ukraine, who prepared it especially for the Presidential Administration, Cabinet of Ministers and Verkhovna Rada.

Translation:

Economy of Ukraine: development scenarios 2017
Subject: About necessity of attracting additional financing of Ukraine's economy by IMF

Addressees:
Presidential Administration of Ukraine
Government of Ukraine
The Verkhovna Rada Committee on Budget

The adverse trends in development of Ukrainian economy got most clearly marked out in late 2016, when national debt grew up by 22 percent and its growth rate was tenfold greater than the real GDP growth rate. Meanwhile, the National Budget 2016 was not executed either in terms of expenditures, or the income. The same is expected to happen in 2017. The GDP growth scheduled by National Bank of Ukraine will slow down to a half of its rate due to single economic blockade of Donbass. For instance, in the 1st quarter of the current year, the GDP grew up by 3 percent (per annum) as contrasted with the rate 4.8 percent in the 1st quarter of the last year.

The experts with the IMF group agree with the Energy research Institute that economic development of a country is impossible without additional electric power consumption, which is hampered by shortage of anthracite coal that occurred in spring 2017. For the current moment, industrial and economic growth requires additional 4 million tons of anthracite coal, which speaks for a mismatch of current energy policy to economic ambitions of the country. Late frosts also made it necessary to correct the expenditure budget. Regional centers received dozens of millions hryvnias to recover from weather beat that had done great harm to agricultural sector. Meteorological observers predict loss of 30 percent of fruit crop in the least, which brings serious loss of income for fruit processing companies. For the first time in seven months, in February, 2017, there was a drop in industrial production. Problems remain in banking sector. Despite enormous cash infusions, PrivatBank feels the need of extra 30 billion hryvnias. Also, EU-Ukraine Free Trade Area fully fell short of expectations, as well as trade preferences for Ukrainian producers - balance of merchandise trade with European countries stays unfavorable, volume of foreign trade keeps reducing. As this takes place, lack of foreign investments is a pressing problem. Ukraine's low rating at Fitch Ratings and Standard & Poor's deter investors from abroad. In order to provide stable economic growth and settlement of national foreign debts, it is necessary to improve business climate and find ways for annual money injections in economy in the amount of $6 billion to $8 billion. It is also required to increase the amount of personal remittances from Ukrainians who work abroad from the current level of $4 billion to $10 billion. Defence expenditures make budget deficit even greater. Over the last three years, military spending have grown tenfold making it impossible for other major sectors to develop. Judging by a survey among businesspeople, robust development of Ukraine's economy is hindered by complexity of tax regulations, non-transparent VAT refunding, corrupt practices of customs officers, fuel price runups. Combination of these factors impedes business activities of both importers and exporters.

Unsettled status of most economic issues, blockade of separate areas of Donetsk and Luhansk, raise of unbudgeted expenses in 2017 all these factors lead to reduction of welfare spending. Before the year is out, the Ministry of Social Policy plans to slash subsidies from 1700-2000 hryvnias down to 1030 hryvnias. This being done, 7.5 million people will forfeit the right to obtain a subsidy. Substantial deficit of Pension Fund remains. According to experts at Ukrainian Analytical Center, in as short period of time as 5 to 10 years, there will be difficulty in paying minimum pensions in the view of current demographic and economic trends in the country. Unpredictability of developments in separate areas of Donetsk and Luhansk aggravates the unstable economic climate in Ukraine; that demands urgent measures from the President Administration of Ukraine, Government of Ukraine and National Bank of Ukraine in order to recover economy.

Though the country's debt burden is already $113 billion, further cooperation with the IMF with the aim of gaining extra tranches in the sum of $6 billion to $8 billion annually would be the most advisable way to reduce economic and social tension. These tranches will be used to redeem previous loans and carry out the planned reforms. Compliance with new obligations to the IMF in social sphere, lifting the moratorium on the market for land, and pension reform are thought to be top-priority goals for receiving donor funding to the extent required. The IMF's extra tranches and macrofinancial support of the EU will facilitate the realization of structural changes in social and economic spheres, preserving political stability, and strengthening national security. We take special notice of the fact that there will be no background for private investors to show up, as well as economic activity of the population to increase in the near future. For five years to come, the economic policy should be based on cooperation with international financial organizations. Judging by the procedures that get more complicated to obtain an IMF tranche, there is a necessity for enforcement of negotiations to reach arrangements in boosting a loan program as soon as the second quarter of 2017, before Western partners make new conditions and restrictions for Ukraine.



In their report, the economic experts give a full account of the deepening systemic crisis in Ukraine. The country is sorely lacking in foreign investments, its agricultural industry is developing with weak speed, and industrial sector is only with great difficulty shifting between the brink of growth and decline. External trade continues to decrease. By contrast, the cost of operating the armed forces goes up every year. On the top of everything else, many unpredictable factors prevent the country's economy from growing. For instance, no one thought blockade of separate areas of Donetsk and Luhansk, which had changed in principle the economic situation in the country, would influence the implementation of the 2017 State Budget. As a result, the projected growth in GDP has slowed down by half. The deficit of energy resources, high levels of corruption and problems in the banking sector are serious risks that may result in the collapse of Ukraine's economy in 2017. Such disappointing forecasts are forcing the authorities to save on social expenses, to reduce subsidies and funding for the Ministry of Social Policy and the Pension Fund of Ukraine. In the current circumstances, the IMF Group of Ukraine recommends the urgent need to initiate a new negotiating process with the IMF for significant increases in all series of tranches, planned in 2017. The experts noted that only annual tranches in the sum of $6 billion to $8 billion could become the effective means of the country's saving.

It is rather difficult to disagree with highly qualified economic experts' conclusions. First of all, it is important for the investors to know that the IMF cooperates with Ukraine, which means that there is a guarantee of reliability and stability of this economic system. Secondly, there is nothing that motivates Ukrainian officials to reform the system more than the prospects for aid from the international community. To achieve qualitative changes in the energy and agricultural sectors they just need to take more credits for their implementation. Thirdly, it is no use looking at those, who are against measures aimed at contracting public expenditures. And tomorrow, thanks to the ones, who do not wish to pay market prices for gas or are hostile to the establishment of a land market, Ukraine risks being without any investments, with ruined infrastructure and industries.

Unfortunately, it is too early to set Ukrainian economy free in the market. Moreover, now there is no time to talk the pros and cons of external credits as they are an urgent necessity and a meal ticket for this country. According to the IMF officials, only by 2040, Kiev is expected to reach 30% of average per capita GDP in Europe. And that is if the latter does not increase, and Ukraine is not attacked by new blockades, Maidan protests and all that. According to the IMF recent reports on corruption in Ukraine, the creditors' confidence can be readily lost; therefore, the politicians better hurry, urgently requesting credit growth. The main objective of the negotiations with the IMF should be the replacement of four-year program of financial assistance to Ukraine in the amount of $17.5 billion by longer-term program that strengthens the package of support measures for the country to at least $25-30 billion.
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