Foundation for Effective Governance 8 Illinska Str, 8th Entrance, 5th Floor, Kyiv, 04070, Ukraine

tel: +380 44 501 41 00, fax: + 380 44 501 41 05, feg@feg.org.ua www.feg.org.ua, www.debaty.org

Ukraine can do without financial help from the IMF

Macroeconomic indicators demonstrate a high level of risk for Ukraine’s economic situation. To maintain the country’s macroeconomic stability, the government needs funds to swing the balance of payments out of deficit, keep the hryvnia’s value within a predictable exchange rate, and gap the budget deficit. In this situation, the government can apply for financial help from the International Monetary Fund. However, the Stand-By Arrangement, which was achieved between Ukraine and the IMF in 2010, has been put on hold because the country has failed to perform its obligations. On the other hand, many economists criticize the IMF’s mission claiming that its programs do not help the loaners. For example, the Fund’s financing not only failed to solve the economic problems in Latin America (Mexico and Venezuela) and Asia (Thailand and Indonesia), it aggravated the economic situation in these countries. By way of contrast, many countries (such as Malaysia) succeeded once they rejected the foreign aid. Can Ukraine do without financial help from the IMF? What risks will be introduced along with the new loans?

To maintain its macroeconomic stability, Ukraine can ask for the IMF’s support (with the proviso that it complies with the IMF’s terms). On the other hand, the possibility remains that Ukraine could do well on its own

Arguments FOR the motion Complying with the preconditions of the IMF’s aid will slow down the country’s economic growth. The IMF demands that its borrowers fulfill a number of requirements, primarily aimed at curtailing their budget deficit. In Ukraine’s case, this will mean an increase in household tariffs for gas and heat supply up to their market price, limited growth of state wages, and frozen social payments. Another requirement, which entails cutting down the financing of budget-sponsored programs, deprives the government of an opportunity to support the economy during the crisis by subsidizing the domestic market. Put together, these factors will limit local demand and eventually slow GDP growth for many years.

Meeting the IMF’s requirements will limit the country’s economic growth

A refusal of the IMF’s aid will compel the government to conduct in-depth reforms, which would otherwise be put on hold once the tranche is granted. The IMF’s loans help governments combat crises which are often triggered by the inefficiency of their economies. If a government wants to stabilize the situation, serious reforms are inevitable. However, loans help these ineffective systems stay afloat, at the same time increasing the country’s foreign debt and eliminating the urgency to pursue reforms. Herewith the country may end up in a painful debt crisis, as has happened in several EU countries.

A rejection of the IMF’s help will force Ukraine to implement the reforms

Foundation for Effective Governance 8 Illinska Str, 8th Entrance, 5th Floor, Kyiv, 04070, Ukraine

tel: +380 44 501 41 00, fax: + 380 44 501 41 05, feg@feg.org.ua www.feg.org.ua, www.debaty.org

Arguments AGAINST the motion The IMF’s financial aid will secure the country’s macroeconomic stability. The reduction of Ukrainian exports and the need to buy expensive Russian gas, together with the lack of foreign investment and obligations to serve a considerable foreign debt (only this year the country has to pay back about seven billion US dollars) has thrown the balance of payments out of equilibrium. Coupled with a popular expectation of the hryvnia’s devaluation, this factor will seriously endanger the stability of the hryvnia. The IMF’s tranche will provide the money that will help the Ukrainian government make all the necessary payments, and in doing so, maintain the country’s economic stability.

The IMF’s money will guarantee the country’s macroeconomic stability

The resumption of the IMF’s loan program and the issue of a new tranche will fuel the confidence of foreign investors in Ukraine. By setting certain requirements for its loaners, the IMF guarantees the payback of its loans. At the same time, it assures the safety of other investors’ money. The working credit program of the IMF will send a positive signal to international investors that economic risks have subsided and in turn boost the influx of foreign investments in Ukraine.

A resumption of the IMF’s aid will increase the trust of investors

The problem of the necessity and expediency of the IMF’s financial aid will be discussed at the public debate to be held by the Foundation for Effective Governance in partnership with Britain-based Intelligence Squared on September 25, 2012. ________________________________________________________________________________________________________________________________

Statistics Fig. 1 State debt of Ukraine Fig. 2 Future repayments of external state debt of Ukraine

Source: Ministry of Finance of Ukraine Source: Ministry of Finance of Ukraine Fig. 3 Ukraine’s IMF debt Fig. 4 Balance of payments of Ukraine

Source: Ministry of Finance of Ukraine Source: Ministry of Finance of Ukraine