Credit needle for Ukraine

Kherovymchuk Alla Sergiyvna,
student of the 4th year of economics faculty
National University of Ostroh Academy
Scientific supervisor : Kharchuk Yuliya Yurievna
associate professor of finance, accounting and audit department

Credit needle for Ukraine

The article reveals theoretical and practical aspects of relations between the state and lenders arising from the receipt of funds in the process of external borrowing. Public debt is an important component of the financial system. It acts as an effective tool in the mechanism of macroeconomic regulation, stabilization of the economy and the state of the country as a whole.

Key words: credit, debt, debt policy, external debt, state borrowing, International Monetary Fund, default.

Formulation of the problem: State debt – is the total amount of debt obligations of the state for the return of received and outstanding loans arising from the state borrowing. The main lender of Ukraine remains the International Monetary Fund. Other lenders include the European Union, the World Bank, the European Bank for Reconstruction and Development (EBRD), the European Investment Bank (EIB), Canada, Germany, the United States and Japan. Ukraine has to comply with a number of rules that are not always profitable in order to receive loans. Annual tranches are already firmly settled in the management system, each mode is paid on loans issued to its predecessors. The policy of living in debt is anti-state and anti-people. Moreover, the population is hostage to those requirements that dictate lenders.

Analysis of recent research and publications: Such modern scholars-economists such as K. Reinhart, K. Rogoff, T. P. Vakhnenko (Bohdan), L. Ya. Bench, V. M. Fedosov, A. I. Betz, V. M. Sotormin, S. S. Varnal, S. M. Marchenko, A. I. Baranovsky, V. V. Lisovenko and many others paid attention in their works to the definition of the nature, purpose and scope of foreign state borrowing, as well as the consequences of borrowing  – external public debt.

The purpose of the work is to study and characterize the essence and consequences of external borrowing. Identification of the current state and prospects of Ukraine’s cooperation with the International Monetary Fund on the basis of the study of the history of their interrelations.

The description of the main material: A credit needle is one of the key drivers of inhibition of Ukraine’s development. Ukraine has received $ 13.3 billion loan over the past 4 years only from IMF. The open question remains where to take money for repayment. After all, it is not necessary to count on the economy of the state for improvement of which loans are taken. Therefore, the only option is the new borrowing. However, Ukraine’s failure to comply with the rules of previous loan agreements raises questions for signing new ones.

The state debt of Ukraine is regulated by a number of normative and legal acts, the main of which is the Constitution of Ukraine, the Law of Ukraine “On State Internal Debt”, the Law of Ukraine “On the structure of the internal public debt of Ukraine”, the Budget Code of Ukraine, the Law of Ukraine “On the State Budget for 2017 year “, the Law of Ukraine” On the National Bank of Ukraine “, etc. [10]. In the study of the essence of external borrowing you should read more about the country’s debt policy and the strategy for managing public finances.

An important component of the Government’s Strategy for Reforming the Public Finance Management System for 2017-2021 is the Strategy of Debt Policy which should envisage the main milestones and measures in the field of debt policy in the medium-term perspective.

The debt policy of the state is directly related to state borrowings which is aimed at financing the state budget deficit, in particular in terms of financing current expenditures, repayment of past debts and state-guaranteed loans to enterprises, investment projects, especially in the construction industry and only a small part focused on supporting strategic sectors, in the real sector of the economy and in support of innovative projects that do not produce a positive impact on the efficient development of the economy. This is due to a fuzzy strategy of debt policy. Therefore, government borrowings have no positive effect on the country’s development [2].

The analysis of debt security indicators over the past five years in Ukraine has shown that a high level of debt security, a low level of gross domestic product and international official reserves and an increase in the ratio of the state, in particular public external debt, to macroeconomic ones constitute a significant threat to financial security, indicating the lack of effective use of attracted financial resources, the volume of which is constantly increasing [9].

Ever since the independence of Ukraine the main creditors are the International Monetary Fund (hereinafter – the IMF), World Bank and European Bank for Reconstruction and Development. Of all possible lenders, they are the most loyal because of the low cost of borrowing, benefits and long history of lending to countries, and therefore reliability. Countries that co-operate with the IMF and the EBRD are considered to be creditworthy. In addition, the above institutions monitor the financial position of countries by providing them with loans, thus controlling the situation. In a modern globalized economy, when the policies of one country usually affect many other countries, international cooperation is of great importance. The IMF, whose members are 189 countries, that is, almost all countries of the world, contributes to this cooperation.

The IMF has the status of a specialized United Nations institution. The organization monitors the international monetary system, currency policy and international exchange policies. Provides assistance to member countries through short-term lending. It follows the compliance code of conduct behavior in international monetary relations. The IMF now has the following main functions:

– advising Member States on policy measures that can help achieve macroeconomic stability, thus accelerating economic growth and reducing poverty;

– temporarily providing Member States with funding to assist them in resolving their balance of payments problems, including circumstances when these countries are lacking in foreign currency, since their external payments exceed their foreign currency inflows;

– the offer of technical assistance and training to countries at their request, to assist them in acquiring the experience and knowledge and developing the institutions necessary for sound economic policy [8].

Cooperation between Ukraine and the IMF began in 1994 and over the next few years the Fund provides Ukraine with cheap loans that contribute to solving the balance of payments with the requirement to fulfill certain conditions. The stages of cooperation between Ukraine and the International Monetary Fund are presented in Table 1.

The peak payments for Ukraine’s external debt fall for 2018-2020 and the current four-year program with the IMF for a total of $ 17.5 billion (of which 8.7 billion was received in four tranches, the last – in the spring of last year) ends in the first quarter of 2019th During the 2018-2020, the government and the NBU will have to make external payments worth more than $ 16 billion. In addition, it should be added that in January 2019 Ukraine’s total public debt grew by 0.6%, or by $ 0.44 billion, and already reached $ 74.76 billion. Moreover, if one considers the growth of the national debt in national currency, he has already reaching 2.122 trillion hryvnas. The Ministry of Finance reports that the government debt in November increased by 1.89% to UAH 1.846 trillion (in dollars – by 1.08%, to $ 65.01 billion), including external ones – by 4.18%, to 1,104 trillion hryvnas (in dollars – on 3,35%, up to $ 38,91 billion). In the profile ministry also reported that the main amount of public debt is provided in US dollars. Another 29.26% – in UAH, 15.95% – in special rights of borrowing, 8.2% – in euro [8].

Stages of Ukraine’s cooperation with the IMF

The stage Period Contents of the stage, the program of cooperation
1 1994-1995 Collaboration under the program of a system transformation loan for the amount of SDR 498.7 million (US $ 763.1 million), the purpose of which was to support the balance of payments of Ukraine.
2 1995-1998 Within the framework of the “Stand by” three-year programs, Ukraine received loans from the IMF totaling 1,131.2 million SDRs. ($ 1,935 million). The main purpose of these loans was to support the national currency and finance the balance of payments deficit of Ukraine.
3 1998-2002 Ukraine cooperates with the Fund within the framework of the Enlarged Financing Program (EFF), which provides a loan of $ 2.6 billion from USA. Within the framework of this Program Ukraine received 1.193 billion SPP ($ 1.591 billion), which was aimed at replenishing the national reserves of the National Bank of Ukraine.
4 2002-2008 Collaboration on a non-lending basis within the framework of the annual “Preventive Stand by” program: a loan equivalent to SDR 411.6 million (30% of the quota of Ukraine).
5 2005-2008 Ukraine’s cooperation with the IMF is concentrated in the field of technical assistance. This approach corresponds to the ideas expressed by the President of Ukraine: “In the future – without debts,” which argued the need for gradual shift of the center of gravity in cooperation with the IMF in the area of uncrediting relations.
6 2008-2013 Cooperation with the “Stand by” program, totaling 802% of the quota of Ukraine in the IMF, or SDR 11 billion (approximately $ 16.4 billion). 3 billion SDRs were urgently credited to the gold and foreign exchange reserves of the National Bank of Ukraine.
7 2014-2015 Providing Ukraine with a new loan of “Stand by” amounting to 16.5 billion dollars. USA (SDR 10.976 billion). Under this program, Ukraine received two tranches of $ 3 billion. The US ($ 2.058 billion SDR) and $ 1.3 billion. The USA (914.7 million SDRs), but in the summer of 2014, the macroeconomic indicators included in the program were significantly corrected by the deployment of a large-scale economic crisis in Ukraine against the backdrop of hostilities in the eastern part of the country.
8 2015-2018 The Fourth Program of the Mechanism has expanded the “Extended Fund Facility” (EFF) to the amount of 17.5 billion dollars. USA to stabilize Ukraine’s economy and lay the foundations for renewal of its growth from 2016

Source: compiled by the author according to [8].

Over the past fifteen years, the IMF has introduced new lending programs to provide safe credit lines to predefined countries. In total, the volume of loans provided by the IMF since 1984 is increasing. The maximum loan amounts were granted during the period of acute global financial crises: 1998, 2008, and 2010. In the fiscal year 2017 the Executive Board of the IMF approved 15 arrangements under the IMF’s non-preferential financing arrangements totaling SDR 98.2 billion (134 , USD 7 billion for exchange rate on April 28, 2017, SDR 0.792382 for one dollar).

IMF loans are provided after a detailed examination and study of the financial condition of the country. If a country fails to fulfill all obligations and lending requirements it will not be provided with the next tranche.

Ukraine has never completely met the conditions for providing external loans. The only case of fulfilling all conditions was in 1996 and then Ukraine was provided with two loans worth $ 763.1 million. After that Ukraine does not fulfill the conditions entirely. This is an obstacle to obtaining new loans. An example of the past billion which Ukraine received in April 2017: out of 11 commitments, only three were completed, but not completely. However, the International Monetary Fund continues to lend to Ukraine. IMF is relatively “cheap” creditor. The funds through Eurobonds cost 7% per annum, while the IMF provides them with 1% per annum.

The development of the national economy can be negatively affected by both large-scale cooperation with the IMF and other lenders, as well as the breaking of relations with them. The refusal of new borrowings will have a detrimental effect on the national economy and the allocation of another loan to raise gas tariffs and reduce social costs will cause concern among citizens and will increase the social tension [9]. Unfortunately, in order to pay off the debt to the IMF Ukraine is forced to take new loans in sufficiently large amounts due to which the financial debt of the country will resemble the financial pyramid. Ukraine, through excessive external borrowing, is transformed into a state that is sitting on a “credit needle”. In addition, due to the attraction of external funds the economy will not develop and within a short period of time structural reforms can not be achieved. The state can not hope for a simultaneous balance of payments through a financial loan and sustainable economic growth can only be achieved with a positive foreign trade surplus and strong domestic production [7].

The option of “quick release” from all debts can become a default. In addition, most experts argue that if Ukraine does not receive a loan tranche, it will accelerate the depreciation of the hryvna and then it will already have to declare the default of the state budget. This is a credit situation in which the borrower does not pay his debts or payments, violates payment obligations to the creditor and is unable to timely pay off debt obligations or comply with other terms of the loan agreement [3].

However, if Ukraine defaults and debt relief, then the country will lose a functioning economy that can create added value. They will keep asking for money, only the conditions on which they will be lent will be even worse. Owners of accounts in banks abroad get rich because prices in dollars will fall and the statutes will become even larger in relation to the purchasing power parity in Ukraine. This will be a disaster for the population of the country.

It can not be argued that a default will lead to a complete collapse of the economy because history has examples of defaulting countries and, despite all the consequences and limitations, returned to the world arena after a while and restored economic activity.

Ukraine needs support from international institutions and new IMF lending. A cessation of cooperation may negatively affect the state’s solvency and increase the weakening of the hryvna. The authorities should create conditions for stable economic growth instead of putting the economy on a credit “needle”. Global transformations in the country are possible only when the law acts and not the will and the interests of the elect. No investor will agree to invest in the country until the authorities establish effective cooperation with international lenders in order to strengthen financial stability. One of the factors of stabilization is the establishment of production and support of domestic producers. Ukraine sells tons of raw materials by buying finished goods for borrowed money.

It should be noted that Ukraine’s cooperation with international monetary and financial organizations has a number of positive and negative consequences. Among the positive effects, the following should be singled out: creation of sufficient foreign exchange reserves to repay loans with interest, increase of the competitiveness of the national economy, increase of the country’s credit rating on the world financial market, promotion of improvement of the banking and monetary system of the state. The negative sides can include: the formation of the country’s financial dependence on external resources, the growth of the external debt of the state, the formation of a “consumer” type of economy, the transformation of the problem of debt servicing into the borrowing problem, the impoverishment of the population in the long run due to increased tariffs for gas and heating, freezing of social payments, etc. [5].

It is forecasted that by 2021 the level of government debt will fall to below 70% of gross domestic product with the successful and well-considered debt policy of the Ukrainian government and the growth rate of the country’s economic development [10]. But one should take into account the fact that Ukraine needs loans to repay the previous one, so it is impossible to get off the creedit”needle”, at least in the near future.

Conclusions: A sharp refusal to cooperate with the IMF will strike economics. Given the year 2018, the exchange rate – 30 USD per dollar, in the absence of new currency injections, will have to give as a third of the budget debt. In addition to the IMF, Ukraine is being provided with loans by the European Bank for Reconstruction and Development, the European Investment Bank, the International Bank for Reconstruction and Development and other international institutions, commercial banks and foreign governments. But the Foundation offers the right conditions for cooperation. Since a sudden refusal to cooperate with credit institutions is simply not possible Ukraine should improve the situation on its own and gradually reduce the size of borrowing. It is necessary to improve the business climate, create the necessary conditions for the improvement of domestic production and attract significant investments in order to reduce the national debt.

List sources

  1. “Credit Needle” IMF: For the authorities – relief, for the people – a debt yoke [Electronic resource]:–polehshennia-narodu–borhove- iarmo-419733.html
  2. The state debt of Ukraine: the mechanism of management and service [Electronic resource]. – Mode of access: ukr / 118.pdf
  3. Default. What You Need To Know To Not Panic [Electronic Resource]. – Access mode:
  4. With or without the IMF tranche: the dollar exchange rate and the economy of Ukraine up to 2020 [Electronic resource]. – Access mode:
  5. Lobas MG International Financial Organizations and their Importance for the Economic Development of Countries / M.G. Lobas // Agroincom. – 2010. – No. 4-6. – p.1-8. – [Electronic resource]. – Access mode: Chem_Biol / Agroin / 2010_4-6 / LOBAS.pdf
  6. IMF and Ukraine: why we will definitely allocate the next tranche [Electronic resource]:
  7. Mikhail O.M. Features of international lending: IMF and IBRD / O.M. Mikhail – Effective economy. – 2015. – No. 4. – [Electronic resource] – Access mode:
  8. International cooperation. IMF / Ministry of Finance of Ukraine. – [Electronic resource]. – Access mode:
  9. International Monetary Fund and Ukraine: the history of cooperation and the current state of relations [Electronic resource]. – Access mode:
  10. Causes of growth of public debt, its management and service, optimization of debt policy of ukraine [Electronic resource]. – Access mode:
  11. Financial Security of Ukraine: Some Aspects of Assessing the Debt Status [Electronic Resource]:

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