Kyiv Considers Unpopular Measures to Qualify for Additional Loans

As an International Monetary Fund (IMF) mission completed its work in Ukraine on April 2, Kyiv hopes to secure additional loans. The cabinet of Prime Minister, Mykola Azarov, badly needs such loans not only in order to fill gaps in the state budget, but also because a positive decision by the IMF would send a signal to other potential lenders and investors that it is safe to deal with Ukraine. However, the government faces a difficult choice: if it approves unpopular measures in the economy on which the IMF and other international financial institutions insist, it may lose the communists, as coalition partners, and its popularity ahead of local elections.

The IMF said in a statement issued after the mission left, that Ukraine’s economic outlook is “strengthening, with signs of a gradual resumption of growth” and that the local currency has been stable and inflation moderate. However, the IMF was noncommittal about when Ukraine can expect more loans, saying that “a number of outstanding issues remain,” especially in fiscal policy (www.imf.org, April 2). The key issue is the state budget for 2010. It has not been passed since Azarov’s predecessor, Yulia Tymoshenko, failed to submit the budget to parliament on time. Azarov pledged to submit his budget bill for approval by April 11, and the IMF expects it to be “realistic,” which means that the government will have to trim spending.

The IMF and Azarov apparently failed to agree on sources to finance the state budget deficit and on government plans to increase wages and pensions, which was among the main election promises made by President, Viktor Yanukovych. Azarov, speaking after the mission’s departure, said a 6 percent budget deficit was agreed, although earlier it was reported that Ukraine wanted the IMF to agree to 10 percent. This suggests that the IMF rejected Azarov’s initial budget draft. Azarov said cooperation with the IMF should resume in May. He noted that a new memorandum with the IMF would not stipulate precisely how the deficit should be financed as it is Ukraine’s “internal matter.” This is another sign of serious differences between the government and the IMF. Deputy Prime Minister, Serhy Tyhypko, will fly to the IMF headquarters in Washington on April 24 to finalize agreements (UNIAN, April 2).

The government hopes to receive $5 billion from the IMF in 2010. It expects another $2 billion loan to arrive from other international financial institutions, and that the EU will grant additional loans. In November 2008, the IMF approved a $16.4 billion loan for Ukraine and almost $11 billion was disbursed by last fall. Ukraine would have defaulted on its international obligations without that assistance. However a $3.8 billion tranche, expected in November, did not arrive due to the political uncertainty ahead of the Ukrainian presidential elections in January and February, and the government’s failure to cut social spending and increase domestic gas prices. Without the latter two measures, the budget deficit may grow out of proportion, the IMF believes.

The IMF and the World Bank consider that the government should abstain from increasing wages and pensions, and raise the pension age for women, who retire five years earlier than men, at 55. Azarov is reluctant to implement those recommendations; as such unpopular measures are sure to affect the popularity of his Party of Regions ahead of the local elections in the fall of 2010. The party hopes that it will prove possible to postpone the elections, in which case it will be easier to conduct unpopular reforms. Senior Regions member and Deputy Prime Minister, Borys Kolesnykov, opined recently that the local elections should ideally coincide with the next parliamentary elections in 2012 (Zerkalo Nedeli, March 27). However, this would contradict the constitution, according to which the local elections should be held in 2010.

Azarov also has to take into account the interests of the communists, who form part of the ruling coalition. The communists, given their popularity among the poor, oppose the IMF recommendations. They are categorically against abandoning the Regions’ plan to boost pensions and wages, and Symonenko said that it would be a “crime” to increase the domestic price of gas (Interfax-Ukraine, March 16). They hinted that if such unpopular measures are approved, this might precipitate their withdrawal from the coalition. Without them, Azarov’s cabinet, like Tymoshenko’s before him, will be backed by only a minority coalition.

Finally, Azarov hopes to avoid increasing gas prices at home by persuading Moscow to lower the price of gas for Ukraine. However, he returned from his gas talks in Moscow empty-handed on March 25, and Russia expects political and economic concessions in exchange for cheap gas, which Azarov and Yanukovych are reluctant to agree (EDM, March 31). If no deal is reached with Russia by the end of April, when the IMF is due to make its decision on Ukraine, Azarov will have to increase domestic gas prices. Currently, the difference between the high price of imported gas and the low price for which it is sold to consumers in Ukraine is subsidized from the state budget. Consequently, the deficit of the state-controlled oil and gas behemoth, Naftohaz Ukrainy, equaled 2.5 percent of GDP in 2009, according to the IMF.