IMF says Ukraine needs extra $15bn

By bne IntelliNews December 10, 2014

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The International Monetary Fund (IMF) estimates that there is a $15bn shortfall in its bailout for Ukraine and has warned western governments that the gap will need to be filled as soon as possible to avoid a financial collapse, according to the Financial Times.

The $15bn now needed comes on top of an existing $17bn IMF bailout sealed in April 2014, which runs to 2016. The IMF itself is unable to fill the gap since its rules forbid it from lending when it is not certain that the recipient country can meet its financial obligations for the next 12 months.

Despite Western sanctions on Russia, Germany's finance minister Wolfgang Schäuble has now asked the Kremlin to help bail out Ukraine, by rolling over a $3bn Russian loan to Ukraine, FT reports.

EU finance ministers met on December 9 to discuss Ukraine's financial crisis. Pierre Moscovici, the EU economics chief, said the European Commission was weighing a third rescue programme on top of the €1.6bn ($2bn) it has already committed to Kyiv. But Pier Carlo Padoan, the Italian finance minister chairing the discussion on December 9, said EU resources should only be dispatched if Kyiv made a “stronger effort” towards implementing reforms.

The members of the G7 group of countries have also discussed the possibility of providing $4bn in financial assistance to Ukraine, the Wall Street Journal reported on December 9.

An IMF mission is currently in Kiev for talks with the government. Ukraine’s prime minister, Arseny Yatsenyuk, insisted that his government was prepared to put in place unpopular measures, including deep cuts in spending, a crackdown on the massive shadow economy and moves to deregulate the country’s uncompetitive economy.

The IMF’s calculations expose the state of Ukraine’s economy and point to the financial burden of sustaining Kyiv, as it continues to face Russian-backed separatist rebels in its eastern regions.  

The fiscal gap has occurred because of a 7% contraction in Ukraine’s GDP as well as significant reduction in exports to Russia, the country’s largest trading partner, which led to substantial capital outflows and decline in central bank reserves, according to FT sources. The eastern regions accounted for nearly 16% of Ukraine’s economic output before the start of hostilities.

Without additional aid, Kyiv would either be forced to default on its sovereign debt obligations or severely cut its budget. Since the bailout programme began in April, Ukraine has received $8.2bn in funding from the IMF and other international creditors.

The magnitude of the problem became apparent after Ukraine’s central bank announced that its foreign currency reserves fell to only $9.966bn in November, or six weeks import cover. Three months import cover is regarded by the International Monetary Fund as the critical threshold, under which a country becomes vulnerable to a balance of payments crisis.  Only $9bn of Ukraine's reserves are in liquid foreign currency, with the rest in bullion, according to the NBU.

The drop of $2.6bn compared to the October figure derives mainly from the $1.45bn paid by Ukraine's energy company Naftogaz to Russia's Gazprom for payment arrears from 2013, under a trilateral agreement between Ukraine, Russia and the EU signed at the end of October, according to the NBU. Another $1.6bn in arrears is due for payment by the end of the year.

Ukraine paid another $376m in advance payments for gas imports on December 5, government officials have said. Ukraine power stations have been forced to switch to importing gas, because of the  difficulties in sourcing thermal coal from East Ukraine.


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