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​Is there an alternative to the IMF lending?

April 3, 2017, Washington, the IMF Executive Board approved the question of granting Ukraine the next tranche amounting to USD 1 billion. The amount of tranche was decreased by USD 300 million in connection to the revised macroeconomic indicators forecast. This is due to the economic risks connected to blockage of the Donbas and slowed reforms.

The International Monetary Fund is the largest external creditor of the Ukrainian economy. As of the end of February 2017, the public debt to the IMF amounted to USD 11.4 billion, including USD 5.22 billion of the government debt, and USD 6.18 billion of the government-backed debt (or, 15.9% of the total amount of public and government-backed debt).

As of today and in a short-term perspective the loan proceeds of international financial institutions and the IMF in particular become a means of exchange rates’ stabilization and replenishment of the international official reserves by exchange earnings, as well as of covering other foreign liabilities.

In other words, according to the Extended Credit Facility, the funds received by the state should be steered into reforms implementation and economic development. In the Ukrainian realities the funds is used to fund current expenditures – such as partial debt restructuring, funds’ replenishment (including the Pension fund). In this case, there is nothing about the economic growth.

In a long-term perspective, accumulating of foreign debt will negatively affect the country’s macroeconomic stability and credit rating. The implications will include a decrease in import-export activity, and a negative impact on the investment attractiveness. As according to the Deputy Governor of the National Bank of Ukraine Oleg Churiy, Ukraine has to repay USD 12.5 billion of foreign debt over the coming 3 years.

In 2017 the amount of public debt repayment is UAH 129.6 billion, of which 76.1% is a domestic debt and UAH 30.1 billion (or 23.9%) is a foreign debt. The State Budget provides for repayment in 2017 to:

– IMF – USD 0.6 billion (UAH 16.8 billion.)

– World Bank – USD 0.27 billion (UAH 7.3 billion.)

– EBRD – USD 0.12 billion (UAH 3.3 billion.).

According to IMF calculations, as of February 28, 2017 the projected payments to the IMF till 2031 will amount to USD 12.29 billion.

The net official reserves, FX earnings from exports and investments are not enough to cover the foreign debt. In 2016, foreign direct investment amounted to USD 4.4 billion (6% of total debt), the share of external debt in exports was 50% (a country with a very high level of debt).

If a tendency remains, Ukraine will not be able to repay the debt, which will lead to failure to borrow and default. According to the estimations of the NBU Deputy Governor Oleg Churiy, without this IMF tranche Ukraine would have faced a default already in 2017.

Therefore, direct foreign and domestic investment is an effective tool for economic growth and an alternative to the loans from international financial institutions. Unlike a loan of USD 1 billion, an investment of the same amount will facilitate the opening of new production facilities, creation of new jobs (approximately 20000 in the industry, or approximately 7142 – in agricultural sector), and as a result it will facilitate the increase of productivity and the economic development.