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

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]: https://ua.112.ua/mnenie/kredytna-holka-mvf-vladi–polehshennia-narodu–borhove- iarmo-419733.html
2. The state debt of Ukraine: the mechanism of management and service [Electronic resource]. – Mode of access: http://economyandsociety.in.ua/journal/8 ukr / 118.pdf
3. Default. What You Need To Know To Not Panic [Electronic Resource]. – Access mode: https://yoursite.com/default.asp
4. With or without the IMF tranche: the dollar exchange rate and the economy of Ukraine up to 2020 [Electronic resource]. – Access mode: https://fakty.com.ua/ru/ukraine/20180611-en-transhem-mvf-chy-bez-nogo-kurs-dolara-i-ekonomika-ukrayiny-do-2020/
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: http://www.nbuv.gov.ua/portal/ Chem_Biol / Agroin / 2010_4-6 / LOBAS.pdf
6. IMF and Ukraine: why we will definitely allocate the next tranche [Electronic resource]: https://ukr.segodnya.ua/economics/enews/pochemu-mvf-tochno-vydelit-ukraine-ocherednoy-transh-1172712.html
7. Mikhail O.M. Features of international lending: IMF and IBRD / O.M. Mikhail – Effective economy. – 2015. – No. 4. – [Electronic resource] – Access mode: http://www.economy.nayka.com.ua/?op=1&z=3962
8. International cooperation. IMF / Ministry of Finance of Ukraine. – [Electronic resource]. – Access mode: http://www.minfin.gov.ua/news/mizhnarodne-spivrobitnictvo/mvf
9. International Monetary Fund and Ukraine: the history of cooperation and the current state of relations [Electronic resource]. – Access mode: https://dspace.uzhnu.edu.ua/jspui/bitstream/lib
10. Causes of growth of public debt, its management and service, optimization of debt policy of ukraine [Electronic resource]. – Access mode: http://www.economy.in.ua/pdf/11_2018/10.pdf
11. Financial Security of Ukraine: Some Aspects of Assessing the Debt Status [Electronic Resource]: http://212.1.86.13/jspui/bitstream/123456789/3202/1/189-196.pdf

Long-term liabilities as an accounting objective

Annotation : The article deals with theoretical and practical aspects of accounting of long-term obligations. The relationship and influence on the financial condition of the enterprise are analyzed. Dependence of the financial condition of the enterprise on long-term obligations is determined.

       Key words: long-term liabilities, financial condition, resources, borrowed capital.

       Problem statement: Modern economic conditions generate an objective need of taking loans by entrepreneurs in addition to their own capital. This in the end leads to the formation of obligations. However, the presence of the latter in the enterprise is considered as a normal state since that is the basis of the relationship between economic entities. Commitments have a significant impact on the financial stability and solvency of enterprises, and therefore  the actual state of payments and cash flow management needs to be effectively monitored. The clear methodology and organization of accounting and auditing of commitments give an opportunity for obtaining objective information for debt management in order to make managerial decisions about the activities of the enterprise and maintain their financial stability and solvency at a high level.

       Analysis of recent researches and publications: The main aspects of the organization of accounting of long-term obligations and facilities, namely the question of essence, recognition, evaluation and classification were reflected in scientific works: F.F. Butynets, S.F. Holova, IV Orlov, V.F. Paliy, Y.V. Sokolov and other scholars. However, the problems of accounting of long-term liabilities and provisions require further research.

       The purpose of the study is to identify ways to improve the accounting of long-term commitments and facilities at the enterprise on the basis of studying the theoretical and practical aspects of the problem.      

       Description of the main material: Functioning companies always have a lower or greater share of loan capital in their liabilities because their own is not enough to expand the scale of production. Involved in the turnover capital is called commitment. It is believed that the presence of obligations on the enterprise is a normal state and indicates the full employment of the enterprise.

The notion of commitment had a long and complex evolution. Up to date there is no consensus on the definition of “commitment”. In general, this concept is treated as a debt, as a borrowed capital, as a sum of costs, as an indebtedness.

The most successful theory of obligations was substantiated by Renee Savage. In his studies, the scientist deduces a general definition of accounting: “Accounting is mainly reflection of the dynamics of requirements and obligations.” Saying that the requirements are reflected in the asset, the liability – in the liability of the balance sheet, and the ratio of requirements and obligations is determined by the economic stability of the enterprise. The scientist also noted that the obligations arising from the contracts are not fully reflected [1].

Liabilities are recognized as debts to creditors in the following circumstances:

– the obligation is reflected in the present time and they are a consequence of past facts of economic life (received supplies, services, damages for which the company bears the responsibility);

– the enterprise recognizes the need for future payments to creditors to further maintain economic relations with them in accordance with the normal course of business activity;

– the obligation must be fulfilled indisputable, but future payments are in question because the company may have difficulties with payments;

– the terms of fulfillment of obligations can be determined, but the exact date is unknown;

– the entity against which the debt arose must be identified as a person or group of persons, although at the time of the obligation registration the entity could not be identified. In passive balance liabilities are divided into long-term and current ones. Long-term are defined as non-current, and current liabilities must be settled during the operating cycle or within twelve months from the balance date [6].

Objects of obligations – this is where rights and obligations of subjects are directed to. So the creditor is entitled to demand from the debtor certain actions. The debtor is obliged to make a certain action in favor of the creditor: to transfer the property, to perform work, to provide services. Any action of the debtor is due to one of the requirements of the creditor: give, provide or make [4].

According to NP (C) BO 1 “General requirements for financial reporting”, an obligation is the debt of an enterprise that arose as a result of past events and the future repayment of which is expected to lead to a decrease in the resources of an enterprise that embody economic benefits [3].

Long-term liabilities are a source of financing for long-term projects of an enterprise. Commitments of the company play an important role in its business activities.

Almost every major manufacturing enterprise has a commitment that is longer than one year.

There are accounts of the 5th form “Long-term liabilities” provided for accounting long-term liabilities. The accounts of this class summarize the information about the bank’s debt to banks for loans received from them, which is not a current liability (an indebtedness that cannot be repaid during the operating cycle of the enterprise or within twelve months from the balance sheet date); debt of the enterprise in relation to obligations with the attraction of borrowed funds (except for bank loans), which are accrued interest; the amount of income tax payable in future periods due to the temporary difference between the accounting and tax bases of evaluation; debt on issued long-term promissory notes and distributed bonds [6].

Correct reflection in accounting of long-term obligations of an enterprise allows to reliably estimate the financial condition of the enterprise, to determine its stability and independence. Automated accounting systems make it possible to carry out a quick and accurate accounting of the obligations of the enterprise, allows it to handle data processing easily and manage the migration of documents.

Automation of accounting affects the financial results of the enterprise. In particular, P. Pichugin highlights the following factors among the factors that would improve the quality of automation of the accounting process and, consequently, financial results:

  •        Arranging of accounting. Computer technology makes it possible to make certain arrangements in the system of accounting information, significantly accelerates its processing and improves the quality of input and output information [6, p. 25].

  •        Increase the amount of information received from the accounting. Automated processing of accounting information allows you to obtain detailed information about the status of assets and liabilities of the enterprise.

  •        Reducing the number of accounting errors. It is the computerized process of processing the accounting information to avoid most arithmetic errors, which manual method of data processing can have a subjective character and lead to negative consequences in the work of the enterprise. Thus, calculating the financial result for an automated form of accounting is purely a mechanical operation. An accountant does not form any postings or records [5, p. 436]. It only has the functions of the controller of the correctness of operations done by machine.

Accounting automation will make easier the work of the accountant, reduce the risk of error and lead to time and cost savings.

Enterprises are obliged to pay on time for their obligations. For untimely calculations they must pay fines and penalties. However, practice shows that the ability to avoid property liability for non-fulfillment of contractual obligations allows them to evade mutual settlements with their partners. Lack of payment causes financial complications from creditors, negatively affects their economic activity, and, ultimately, the economy of the country.

A compulsory financing strategy is a prerequisite for the effective management of funding sources. However, there are conditions that do not depend on an enterprise. For example, only the development of the financial market will help to obtain credit and the availability of financial information and a favorable investment climate to attract investors. There are always money and the ability to take loans for the long terms in any bank. But the problem is that we live in a rapidly changing, volatile world where for the economy three or four years is a very long period. Bankers are already experiencing a growing need for long-term financing in Ukraine. Over the last three years businesses increasingly invest in fixed assets as business is growing and “courageous.” If in the world practice “long” loans are considered for a term from 5 to 10-15 years and 30 years, however for us these are the loans that last longer than a year. Although five-year loans still occur, a loan for three years is already sufficiently “tense” for domestic bankers and their clients. However, the share of such money in the total loan portfolio of Ukrainian banks is 25% [5].

One of the problems of domestic enterprises is the insufficient amount of capital sources to finance the business entity and low level of individual indicators of financial condition. Currently for the overwhelming majority of enterprises the urgent matter is the optimization of the structure of capital the main criteria of which is to maximize the level of predicted profitability and minimize the cost of commitments [2].

Among some problems concerning the accounting of long-term liabilities the most common need is the need for detailed accounts, meaning the creation of additional accounts in more rational analytical accounting. In world practice there are examples of different variants of names and appointments of similar accounts.

Thus, in addition to long-term loans and commitments, also belong long-term lease and lease obligations which have a different name: Long-term liabilities (Estonia, Republic of Tajikistan, Slovak Republic); Settlements for long-term loans and loans (Russia, Belarus); Long-term loans, loans (Israel); Long-term accrued liabilities (Republic of Moldova); Long-term loans (Ukraine, Great Britain, Moldova, Azerbaijan Republic); Long-term loans received (Bulgaria); Long-term debt (Czech Republic); Long-term legal obligations (Azerbaijan Republic) [8].

In our opinion, the experience of France in developing the Accounting Plan is interesting because Class 1 of “Capital Accounts” are shown long-term and medium-term debt, in addition, this type of commitment is taken into account as medium-term. Also noteworthy is the experience of Estonia and the Republics of Azerbaijan and Kazakhstan, where long-term accounts are taken into account: long-term debts to suppliers (Estonia); long-term payables to suppliers and contractors (Azerbaijan, Kazakhstan). In addition to the long-term accounting accounts used in many countries, there are countries with non-repeatable long-term accounts, for example: Postpaid payments in the next period for long-term debt claims; Discount of non-converted long-term debt receipts; Long-term debts incurred in the acquisition of enterprises, and others [8]. Consequently, we suggest taking into account the foreign experience in improving the domestic accounting of long-term liabilities in terms of information on: long-term debt of related and unrelated parties; long-term future income; long-term debts to suppliers and contractors; convertible and non-converted liabilities; long-term debt of participants; long-term commitment to the company’s social goals. The financial status of the enterprise is largely influenced by the presence and structure of its obligations. Effective management of it is one of the important directions of activity of the enterprise. Thus, we can make the following conclusions:

– Borrowed resources are an important and complex subject of accounting. Disclosure of their essence in the accounting lies in the thorough study of business processes since information about loan resources is scattered and unsystematized in the financial statements.

– Improving the accounting of borrowed resources requires an expansion of the regulatory framework in the field of regulation of financial activity which creates an economic-legal field for attracting new types of financing of the enterprise. In particular, it concerns the issue of debt securities and the provision of financial services.

– solving problems of recognition and assessment of obligations will enable modeling the future financial state of the enterprise and reduce the negative impact of various financial risks on its development.

Conclusions: Correct reflection in the accounting of long-term obligations of an enterprise enables us to reliably assess the financial position of an enterprise, determine its stability and independence, anticipate adverse changes in reporting and financial security risks in a timely manner. The attraction of long-term obligations of the company as sources of financing for its development and improvement of its accounting will lead to positive consequences, as it will allow to increase the capital of the enterprise and its assets, the enterprise will be able to cover the stocks due to its own working capital and long-term sources

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