Ukraine’s macroeconomic strategy should be based on cooperation with IMF and peculiarities of internal development – experts     


Kyiv, November 30, 2015.  Ukraine should develop its own macroeconomic strategy, based on cooperation with the IMF. The main efforts should be focused on building a capable economy which would be able to exist without constant financial support from the international donors, announced the participants of the discussion in Ukraine Crisis Media Center on topic “Does Ukraine need its own macroeconomic policy?” organized in partnership with the Center for Economic Strategy. “We need a basis for our future macroeconomic model. This model should be integrated into the world’s economy and self-sustainable, able to survive without constant support,” said Andriy Kyrylenko, Visiting Professor of Finance at the Brevan Howard Centre for Financial Analysis, Imperial College Business School (London).

Jerome Vacher, IMF Resident Representative for Ukraine, underlined that the Memorandum commitments are necessary for economic stabilization and further economic growth. “We need to see commitment from the authorities, basically the signatories of the Memorandum: the President, the government and the National Bank of Ukraine,” said Mr. Vacher. He added that reforms success depends on the Ukrainian parliament as well. The National Bank of Ukraine has already shown a good example as this institution was able to reform itself. “We do see some progress in terms of economic stabilization, we do see some progress on the fiscal front as well as monetary and financial fronts but this is clearly not apparent to the population, because the situation is very difficult”, said Jerome Vacher. “There is immense need for progress on the structural reform and put particular emphasis on fighting corruption, in order to make growth more sustainable”. However, he added, the situation will remain difficult for some time in the financial sector and more work should be done in order to transform it into financial system which is modern and which will be able to lend in a more sustainable manner to the economy in the future.

However, the participants of discussion expressed divergent views on the efficiency of Ukraine’s cooperation with the IMF. On the one hand, Ukraine has faced a number of risks and imbalances, the impact of which is complicated by the conflict in the east of Ukraine and the sharp reduction in exports to the Russian Federation. In this situation, there is no alternative to cooperation with the IMF, acknowledged all the experts. Moreover, this cooperation provides opportunity for Ukraine to implement the world’s best practices. “The most prominent example is the stress-test of the banking system by the National Bank of Ukraine that took place this year. In this sphere the IMF and World Bank assistance was really priceless,” underlined Dmytro Sologub, Deputy Chairman of the National Bank of Ukraine. According to him, despite the fact that sometimes during the negotiation process the IMF is seen by the Ukrainian side as a “strict policeman”, the experience of this institution is very useful for Ukraine that is now entering the “unknown waters”. Cooperation will be very fruitful if the sides find an acceptable balance of interests, believes Mr. Sologub.

On the other hand, explains Volodymyr Fedoryn, co-founder of Bendukidze Free Market Center, Ukrainian government should take a more pro-active position, avoiding relying only on the IMF recipes. “The international community has constructed a kind of “sarcophagus” over Ukrainian finance and budget system, but the life of this sarcophagus, unlike the one over the fourth Chernobyl reactor, is much shorter. Unless we learn to live at our own expense, we’ll have to sign 10th cooperation program, then 11th program and so on. However, the truth is that sooner or later people get tired of constant loser – and, unfortunately, Ukraine is this kind of loser – so perhaps we won’t be offered to sign anything,” assured Volodymyr Fedoryn.

The most sensible issue and one of the most criticized conditions of the IMF program for Ukraine is the cuts of public spending. “We have the lowest incomes of population. At the same time, the real tax burden for Ukrainian big businesses is one of the lowest in Europe and in the whole world,” underlines Zakhar Popovych, Deputy Director of the Center for Social and Labor Research.  Taking into account this situation, if the government increases the indirect taxes and loosens tax burden for big businesses, this approach is nothing but an approach like “let’s punish the poor”. “We need to increase taxes for big businesses. This would help not only to increase flow of tax revenues that the state actually is not receiving, but it would also contribute to more active investment in this sphere. This change would motivate businesses to reinvest their money instead of withdrawing it,” believes the expert.

According to Roman Sulzhyk, Chairman of the Supervisory Board of the National Depository of Ukraine, the country needs more economic freedom. The ideas declared by the participants of the Revolution of Dignity have proven that people are ready to assume responsibility, and this means they are ready to pay taxes too – of course, if the system becomes more transparent. “The financial industry is creating frictions in the market, such as currency controls and VAT management, this only contributes to corruption,” stated the expert. In his opinion, loosening currency control regulations and tax reform are necessary to encourage businesses to come out of shadow, improve investment climate and the economic situation in general.

At the same time Artem Shevaliov, Deputy Minister of Finance of Ukraine on European integration, states that the steps that Ukraine is required to make in the framework of the IMF cooperation program are absolutely necessary for achieving economic stability. The ongoing crisis is nothing but a result of the “absence of systematic development and self-sustainable economic system over the last 23-24 years” and there is no way out of this vicious circle without painful decisions. At the same time, such abrupt changes would be a significant blow to the vast majority of the population. Mr. Shevaliov noted that the IMF understands the situation, so the state budget for 2016 will embody “an attempt to find a balance between creating conditions for sustainable economic growth in order to return money into the real economy and assuring social protection for the most sensible groups (…), because the economic growth shouldn’t be achieved at their expense,” underlined Mr. Shevaliov.

In order to improve the economic situation in the country, according to the experts, it is important to stabilize inflationary indices (at the level of 5%) as well as fx rates forecast for the next year, which is necessary to increase the crediting of the economy. The list of necessary changes includes capital flow liberalization, aimed at ameliorating the investment climate, and introducing regulation of the banking sector with the relevant capitalization. In addition, it is important to delete barriers that are currently complicating trade operations and to reduce the state’s influence on the economy as much as possible by privatizing state enterprises. The pension reform is also an important element of the whole reform process contributing to the economic recovery. However, underlined the experts, the key to success is transparency and predictability of the whole system and the rule of law.