KIEV, Ukraine – The International Monetary Fund (IMF) announced on Thursday, March 27 a $14 billion to $18 billion bailout for Ukraine to avoid bankruptcy but tied to painful and unpopular reforms amid the country’s escalating standoff with Russia.
The agreement in principle – worth the equivalent of 10.8 billion to 13.1 billion euros – imposes tough economic conditions on the crisis-hit country.
The reforms already outlined will have a huge impact on millions of Ukrainians who have grown accustomed to the comforts of Soviet-era subsidies and social welfare benefits.
But the agreement appears to herald a fundamental shift in Kiev from attempts to save a crumbling and outdated system through Russian assistance, to a commitment to the types of free-market efficiencies which could one day bring Ukraine far closer to the West.
“Ukraine’s macroeconomic imbalances became unsustainable over the past year,” the Fund’s Ukrainian mission chief Nikolai Georgiyev told reporters.
“The goal of the authorities’ economic reform program is to restore macroeconomic stability and put the country on the path of sound governance and sustainable economic growth while protecting the vulnerable in the society,” he said.
$27 billion in world aid
The IMF’s rescue will form the heart of a broader package released by other governments and agencies amounting to $27 billion (19.6 billion euros) over the next two years.
Georgiyev said the actual size of the “standby arrangement” would be determined only once the new Western-backed leaders in Kiev made the first firm steps to implement reforms the Fund had sought in vain from the cabinet of Kremlin-backed president Viktor Yanukovych.
That government was toppled in February by 3 months of deadly protests.
The unrest resulted in the Kremlin seizing Ukraine’s Russian speaking Black Sea peninsula of Crimea in a lightning offensive, which sparked the worst East-West crisis since the Cold War.
“The program will be approved by the IMF board when the steps that I mentioned are implemented,” Georgiyev told reporters after holding a decisive round of talks with Ukrainian President Arseniy Yatsenyuk on Wednesday.
“We expect (the approval) by the end of April.”
The package announced by the Fund is only slightly smaller than that $15 billion to $20 billion (10.9-14.5 billion euros) requested by the former Soviet state’s new leaders when Georgiyev’s mission first arrived in Kiev on March 4.
The Fund has made an immediate end to Ukraine’s costly gas subsidies its main condition for approval of the program.
It also wants the central bank to stop propping up the Ukrainian currency and for the government to cut down on corruption and red tape.
Georgiyev called these steps “the foundation for stable and sustainable growth.”
The IMF’s announcement came one day after Ukraine’s state energy company Naftogaz said it would increase domestic heating gas prices by 50% on May 1.
Ukraine’s central bank has already limited its currency interventions – a decision that has resulted in the hryvnia losing more than a quarter of its value against the dollar since the beginning of the year.
The IMF program’s formal approval in April will set in motion the release of further assistance from both Washington and the European Union.
Yatsenyuk said he expected European Union officials to send 1.6 billion euros ($2.2 billion) to Kiev within two months of approval of the loan deal.
The United States has also pledged $1 billion (720 million euros) in loan guarantees while Japan has promised up to $1.5 billion (1.1 billion euros).
Economist believe that the IMF may have speeded up its procedures because of concerns that the Ukrainian government could become insolvent within a matter of months.
Ukraine’s fast-depleting reserves – spent in previous years on propping up the currency at artificially high rates in order to avoid public discontent – had reached levels sufficient to cover just two months of imports.
It also owes billion of dollars in foreign debt payment coming due within the next few months.
‘No other choice’
Yatsenyuk later told lawmakers that despite their approval of the politically-sensitive measures sought by the Fund, the country’s economy would contract by 3% of gross domestic product this year.
“But there is no other choice,” Yatsenyuk argued. “Either we make this commitment or we go bankrupt and the country declares default.”
One of Yatsenyuk’s main worries is that higher gas prices and limited state subsidies will most dramatically impact the big steel mills and other heavy industries that dot the heavily Russified southeast of the vast nation of 46 million people.
Big eastern cities such as Donetsk and Kharkiv have recently witnessed bloody protests against the new pro-European authorities in Kiev which rely on political backing from the ethnic Ukrainian west.
“Some of the reforms will be painful,” Ukrainian central bank chief Stepan Kubiv acknowledged on Thursday.
“But the program … will provide an impulse for future development.” – Rappler.com
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