Ukraine needs subsidies, budget reform to pave way for IMF deal, international aid - ex-IMF head

By bne IntelliNews March 20, 2014

WASHINGTON/WARSAW (IntelliNews) -- Ukraine needs devaluation, energy-subsidies reform, sustainable budget and banking system clean-up to secure support from the International Monetary Fund (IMF), the fund’s former acting managing director, John Lipsky told IntelliNews/Capitol Intel.

Agreement with the IMF is key to an international effort to provide financial support to the beleaguered Ukrainian budget, Polish finance ministry and central bank officials said. In the short term, the European Union is this month providing EUR 1bn to Ukraine, but the country needs financial aid to the amount of USD 35bn to the end of the next year merely to avoid default, according to the Ukrainian finance ministry.

Poland is keen to secure the necessary funds to support Ukraine and has been working with its EU partners to that end, the financial ministry official said. The EU will not, however, provide sufficient funds by itself.

The international effort will depend for success on cooperation from the IMF and the United State government, as well as other multilateral institutions, including the European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD).

EBRD is able to commit EUR 5bn to investments in Ukraine, the National Bank of Poland (NBP) official said. The IMF should be able to provide loans amounting to a multiple of that sum, but the significance of its agreement with the Ukrainian government will go beyond the money it will provide directly.

National governments of the richest EU member states, which are net contributors to the common budget and will thus shoulder most of the costs of the EU’s rescue effort, will not agree to an expansion of the financial-aid programme without the IMF stamp of approval.

The IMF’s conditions are likely to prove politically difficult, the central bank official said. It is, therefore, imperative that the agreement be signed by a government with a robust democratic mandate.

While the present interim government is in talks with the IMF and may hammer out many of the details before the Ukrainian parliamentary elections planned for 25 May, there would be no point in going public with the terms of the agreement before a new, democratically cabinet is in place.

An IMF source said that a proposed deal could presented during the G-20 meeting scheduled around the the IMF World Bank spring meeting to be held April 11-13 in Washington, DC.

The outlines of the deal are, however, clear, John Lipsky said. With Ukraine’s currency already losing much of its value amid political turmoil, the country must use its improved international competitiveness to put its budget on a sustainable footing. That will require reform of the costly energy subsidies, which currently gobble up as much as 8% of GDP. The Ukrainian government will also need to address the long-term health of the country’s banks with a purge of non-performing assets from the system.

Lipsky said he has not been approached by Ukrainian authorities as either advisor or to potentially become the country’s central bank governor.  Lipsky’s great grandparent came from the Ukraine and he noted he is younger than soon-to-be confirmed US Federal Reserve Deputy Chairman Stanley Fischer.

 Lipksy was speaking to IntelliNews/Capitol Intel at CSIS debate between former US National Security Advisors Gen. Brent Scowcroft and Zbigniew Brzezinski in Washington, DC.

He assumed the post of Acting Managing Director after Domnique Strauss-Kahn was arrested in May 2011 of sexual assualt.

by PK Semler in Washington, DC and Aleksander Nowacki in Warsaw.

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