IMF rule-change sustains lending to Ukraine

11 February 2016 by Bretton Woods Project

CC - Flickr - Juanedc

- IMF changes rule on lending to states in arrears to official creditors
- Russia to file court proceedings over $3 billion Ukraine debt
- Ukraine parliament approves 2016 national budget and tax reforms

In late 2015, the IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
’s $17.5 billion loan programme with Ukraine came under threat as it appeared the IMF’s “non-toleration of arrears to official creditors” was about to be triggered. The long-standing rule forbade the IMF from lending to countries in default for their debts to official or sovereign creditors, as opposed to private creditors. In mid-December, Ukraine failed to meet its final payment of a $3 billion debt to Russia’s Gazprom, causing Ukraine to be in default. Though Ukraine had contested the debt’s status as official, in December the IMF executive board recognised Russia as an official creditor. As a result, the entire loan package to Ukraine, approved in March 2014 (see Observer Spring 2014), could have been under threat of forced termination.

However, this situation was pre-empted as the IMF executive board revised its policy in early December by allowing lending to countries in default under certain circumstances, including when the IMF loan is considered “essential” and the debtor is making “good faith efforts” to reach agreement with the creditor. Relaxation of this rule permitted the Fund to continue lending to Ukraine despite Ukraine’s non-payment to Russia. Coincidentally, in February, Ukraine’s state monopoly agency imposed a $3.5 billion fine on Gazprom for allegedly abusing its monopoly control of Ukraine’s natural-gas transit system.

Bodo Ellmers of Belgium-based NGO Eurodad called the reform “an overdue change” and said that “countries must have the chance to stop debt service Debt service The sum of the interests and the amortization of the capital borrowed. to safeguard scarce public resources – whether to official creditors or not – and still get support from the IMF. It is worrying however that no clear criteria have been defined on the application of this rule. Decisions will be made on a case-by-case basis by the IMF’s executive board. This leaves a lot of room for political manipulation by the IMF’s major shareholders. The fact that the reform was hastily approved because Russia’s holdout strategy threatened the IMF’s Ukraine programme proves how political the game is.”

Making it possible for the IMF to lend into arrears was an overdue change

In response to Ukraine defaulting on its debt to Russia, Russian finance minister Anton Siluanov told reporters that legal proceedings would be filed in London “before the end of January”. Addressing these proceedings, Ukrainian prime minister Arseniy Yatsenyuk said in late December at a government meeting that “we are in full gear, ready for battle in court with the Russian Federation.”

IMF demands further conditions

The IMF announced in early December that the allocation of the third tranche of its loan agreement depended on Ukraine’s parliament approving the 2016 national budget and tax reform measures, including higher taxes on alcohol, tobacco and agricultural products. The news agency Agence France-Presse reported that the reforms were finally passed after an “acrimonious all –night debate”, with finance minister Natalie Jaresko posting on Facebook that “the process was long and painful”. The conditionalities of the loan package include redundancies in the public sector, deregulation, taxation of natural resources, freezing and reducing of pensions, privatisation, and education reforms that require closure of 5 per cent of Ukraine’s schools, according to Eurodad.

Vasyl Shilov of the Federation of Trade Union of Ukraine (PFU) wrote in October that the IMF loan has “supported the new government to devalue the hryvnia by 200 per cent, achieve 50 per cent inflation Inflation The cumulated rise of prices as a whole (e.g. a rise in the price of petroleum, eventually leading to a rise in salaries, then to the rise of other prices, etc.). Inflation implies a fall in the value of money since, as time goes by, larger sums are required to purchase particular items. This is the reason why corporate-driven policies seek to keep inflation down. rate, decline GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
by almost 50 per cent in comparison with 2013, increase unemployment, reduce the standard of living by a quarter, impoverish 80 per cent of the population, and bring the minimum wage and pension to a record low – $50-60 per month.” Reforms introduced since the bailout also increased utility tariffs threefold on average, and gas tariffs sevenfold in some areas.



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