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We borrow to repay
10 July 2014
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Without the external financing, Ukraine can neither pay to its creditors, not fulfil the budget. Whether the country will evade the default depends on the IMF and other international organisations.

The eternal public debt as at the beginning of the year was UAH 480 billion, now it has grown even further because of the currency rate fluctuations. The average debt repayment load in 2014-2016 reaches nearly 100 billion hryvnias. This is why, the new government conducts active negotiations with potential creditors. For now, Ukraine is not able to repay debts without their help.

Where is money from

Most likely, this year Ukraine will get roughly 12 billion dollars from various sources. This will be enough to make the necessary payments to creditors and cover the share of the budget deficit (for the year 2014 its has been planned at almost 60 million hryvnias). The main amount will be received from the International Monetary Fund (IMF). Over the two years, the Fund will provide Ukraine with 17 billion dollars. The first tranche of 3 billion dollars has been already received by the country, of which the major share went to the budget; though at their beginning, the negotiations were about the money transfer after the presidential elections.

Christine Lagarde, Managing Director of the Fund, announced all the lending conditions. The main elements of the lending programme are the regime for flexible hryvnia exchange rate, stabilisation of the financial system, gradual decline of the budget deficit, growth of the gas and heating fees for the general public with simultaneous strengthening of the social security, and firm abandonment of the “problematic practice of the public management, which used to be applied in the past”.

Nearly 4 billion dollars for Ukraine were promised by the World Bank, European Union, the governments of the USA and Japan. The European Commission has already approved the issuance of money for Ukraine to the total of 11 billion euros, of which the first tranche of 1 billion euros is to be paid in 2014. The European Bank for Reconstruction and Development (EBRD) has also promised to double its investment portfolio, providing the Ukrainian economy in the next five years with nearly 5 billion dollars. This year, of this money nearly 1 billion dollars will be received. The World Bank has approved the issue of 1.48 billion.

At the same time, the financial support from all additional sources has become possible only after approval by Ukraine of the plan for economic reforms with the IMF and receipt of the first amounts of money from the Fund.

What it will be used for

Firstly, the money from the creditors will be used to repay the earlier made borrowings. “Fist of all, these are the current contractual obligations of Ukraine, maturing this year. Second, the internal obligations on foreign currency borrowings, towards the repayment of which the external borrowings can be also spend,” Anton Stadnik, Head of Treasury of FUIB, explains.

The receipt of the money itself will revitalise the Ukrainian economy. The loans from the IMF always go the central bank of the borrowing country for replenishing foreign currency reserves and supporting the balance of payments. As it was in 2009, the IMF has agreed that some share of the money will be applied towards financing the deficit of the Ukrainian budget.

The risk of further devaluation remains even after the receipt of the money from the IMF, as the hryvnia rate depends on numerous factors.

In case of the sharp devaluation, the money may be also used to support the hryvnia rate. Now, the funds of the National Bank are insufficient for doing this, as the volume of foreign currency reserves, even taking into account the money of the first tranche from the IMF, amounts to only 17.3 billion dollars. It is considered that the reserves should be at least equal to the amount, using which Ukraine during three months could pay for goods and services from abroad. For now, the money is hardly enough for two months.



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