IMF’s Ljungman leaves Ukraine with money not loaned | Kiev post
Since 1992, when Ukraine joined the International Monetary Fund, the country has borrowed about $ 32 billion out of a potential $ 74 billion in 11 separate programs.
These numbers alone tell an unflattering story. They show that Ukraine has not been able to put its economy back in order enough to live without the IMF’s low-interest loans with conditions of public policy. The record shows that Ukrainian leaders, facing financial emergencies, tend to agree to fund terms only to ignore them and abandon the programs once the financial storm clouds have lifted.
This long-standing dependence may be one of the reasons the IMF is the lender that some in Ukraine like to hate. Populist politicians regularly stoke public resentment by portraying the IMF as an organization of intrusive foreigners trying to dictate how Ukrainians should live.
President Volodymyr Zelensky, in a June 14 interview with foreign journalists, complained that the IMF was imposing unfairly harsh conditions on the warring nation Ukraine, with loans stuck at $ 2.1 billion of the possible $ 5 billion of the current program which expires at the end of the year.
Finance Minister Sergii Marchenko said that while IMF lending has been critical to Ukraine’s financial survival, its goal is to phase out these credits by 2023.
Sweden’s Goesta Ljungman, who is leaving this month as the IMF’s resident representative in Ukraine after four years, has heard it all before during his 14-year career with the fund.
To the statement that Ukraine’s goal is to stand on its own without the help of the IMF, its reaction is: âIt is also our goal, to make ourselves in some way useless in order to let Ukraine be like the vast majority of countries that do not have to turn to the fund to solve economic and financial problems.
Ukraine, he said, has made major macroeconomic achievements and adopted healthier public policies in many areas since 2014. He places particular high marks on the consolidation of the banking sector and macroeconomic policies of the National Bank of Ukraine who have brought inflation under control and stabilized the national currency, the hryvnia, among other strengths. In addition, Ukraine’s overall debt is lower than that of many countries.
Still, “the list of things to be sorted out in Ukraine is long,” Ljungman told the Kyiv Post in a farewell interview before returning to IMF headquarters in Washington, DC, for his next assignment. âSince independence in 1991, he has made slow progress in reorienting the economy from a planned economy to a free market economy. There is still a lot to change. “
The interview avoided the question of whether Ukraine is likely to qualify to tap the remaining $ 2.9 billion in loans under the current program which expires at the end of the year. But, given Ukraine’s long list of things to do, the advanced schedule and lack of financial urgency aided by an IMF allocation of Special Drawing Rights worth $ 2.7 billion per year. ‘Ukraine, most analysts bet that the program will expire without more loans.
In key areas, Ljungman offered his assessment of the status quo and some recommendations for healthier public policies.
Why the low wages
“What Ukraine needs to catch up are investments. This will generate higher productivity. Ukraine’s productivity right now is a fraction of what it is in Europe. Productivity decides wages. This is why wages in Ukraine are so far behind (at $ 500 per month on average). According to the latest Data from the International Labor Organization in 2019, labor productivity in Ukraine is 41% of that of Poland, 30% of the EU average and 28% of that of Germany.
Why a low investment
âTime and time again, potential investors are concerned about the rule of law, property rights, corruption and the overbreadth of government agencies. “Also:” The domination of oligarchs or business groups is a brake on investment … when there is domination, it starts to hamper competition. The first lesson in economics is that competition generates the best results. It drives productivity and innovation and offers consumers the lowest prices and the best products.
âAnother goal over the past seven years has been to strengthen the banking system and align it with the way banking systems are regulated and supervised in Western countries, so that they do not take too many risks and are well capitalized to channel savings into (loans for) the most productive investments.
Ukraine’s most recent banking crisis cost taxpayers $ 15 billion, largely due to bank frauds that went unpunished, leaving just 73 out of more than 180 banks in the market. âPeople ask: why aren’t pensions higher? Those $ 15 billion would have come a long way. “
Can it happen again? Nothing is certain. But Ljungman said most banks in Ukraine today “are well run and subject to a regulatory oversight framework modeled on the Western world.”
No one is happy with the Ukrainian pension system. Retirement costs make up a large chunk of the government’s $ 50 billion annual budget, while beneficiaries receive an average of just $ 126 per month. But Ukraine is moving in the right direction by finally raising the retirement age for men and women, among the lowest in Europe, to 60 this year.
âThere is relatively little influx of people who are working. People retire relatively early and live relatively long lives, which is great, but that means the cash flow you have is not enough to generate large pensions.
Would Ukraine not reduce tax evasion by lowering the payroll tax by 22% which, combined with the income tax of 18%, costs employers 40% for each official employee? “Unfortunately, there is little empirical evidence that this is the case.” That said, the IMF “has put a lot of effort and given a lot of advice and support” so that Ukraine can modernize and improve its tax collection to ensure that the nation collects “all the taxes that taxpayers owe. “.
Why change is not so bad
Ukraine regularly changes president, minister and government. âStability is good if you start with something that you want to preserve. It’s not good if you want to change things. It is the opposite of what you want.
Future of judicial reform
âThere is still a lot to do in the justice system and in the fight against corruption. To look at it in a positive light, fighting or turmoil or whatever word you want to use is probably a sign that those losing on court reform are feeling the heat blowing in their necks. They feel the need to fight back vigorously, to preserve all the advantages they have of the current order. It’s going to be a tough fight. It’s going to take a lot of support and a lot of political capital needs to be put into it. You face powerful interest groups.
Tangled energy policies
When the government keeps prices artificially low or uses state-owned enterprises to distribute subsidies or protect sectors from competition, “it benefits the rich and introduces corruption risks.” The long term solution is an open and competitive market. Ukraine has taken steps in this direction by removing public service obligations requiring state-owned companies to sell natural gas at below-market prices, for example, but there is still a long way to go.
Damage to public enterprises
Ukraine has about 3,500 companies owned by the national government and another 12,000 or more owned by local and regional governments.
“While others in Central and Eastern Europe took care of these businesses – shutting down those that had no future – many Ukrainian state-owned companies have not been reformed.”
Why is it so bad? “Regardless of the point of view, SOEs are not as efficient or as productive as their private counterparts for SOEs and SOBs (state banks).”
State-owned enterprises also implement public policies that distort the economy, including gas, electricity and subsidized transport.
They are, quite simply, a drag on the economy. “It is not a controversial statement that a large number of these state-owned enterprises should be privatized.”
Better governance of public enterprises
If the government does not sell SOEs, the least it can do is provide professional corporate governance. The government should delegate âmanagement and powers to an independent supervisory board with clear guidelines and responsibilitiesâ. Well-qualified boards of directors protect from short-term political pressures and help ensure that the business is run in the long-term national interest.
Billions lost to corruption
A lot of money in Ukraine is lost through corruption or misappropriated by bad public policies. âIt’s billions of dollars every year,â he noted, more than IMF loans.
âWhat impresses me are the unsung heroes in Ukraine, all the people who work in public administration, the people who work in difficult conditions, with low wages and who are very rarely appreciated. They get by and do their job. They are conscientious, âLjungman said. âUkraine today is still much better than it was at the end of 2013. It is important to recognize the work that has been done. It’s important because it shows that you can do things in Ukraine, that you can make a difference.
About Goesta Ljungman
Swedish Goesta Ljungman joined the International Monetary Fund in 2007, working on various issues in several countries. In Georgia, he helped negotiate and oversee the implementation of the nationally funded program. During the period 2010-12, Ljungman worked in the Ukrainian IMF team, focusing particularly on budgetary matters. Ljungman has also worked on tax reforms in Moldova, Montenegro, Ireland, Hungary, Serbia, Kyrgyz Republic, Kuwait, Oman and many other countries. He is a frequent lecturer at IMF training institutes in Europe, the Middle East and Africa. Before joining the IMF, Ljungman worked at the Swedish Ministry of Finance. He obtained his degree in economics from Uppsala University. He is married and the father of two children. He likes to run long distances.