A few days ago, a staff level agreement was reached with the IMF regarding a new program of cooperation between the Fund and Ukraine for about $ 5.5 billion. What are the main components of this program?
The main thing we want to achieve with the help of this program is the stability of the Ukrainian economy. The objective is to make Ukraine richer and raise the standard of living of the Ukrainian people. These are the goals of our cooperation. How do we reach them?First and foremost, inflation should be low and stable, foreign exchange reserves should be sufficient to service FX commitments, the budget should be balanced, and the public debt is reduced.Banks must be sustainable, the savings entrusted to them by Ukrainians, must be safe and channeled to productive investments. All of the above is usually called “macroeconomic stability”, which is an important prerequisite for economic development.
At the same time, the IMF wants the Ukrainian economy to start working better. A main thing for this is to reduce corruption. Because when investors bring their money in Ukraine, they want to be sure that they will be treated fairly, that there will be a level playing field for all.
Another important area is to reduce the public sector in the economy, reduce the number and size of state-owned enterprises, because state-owned enterprises generally tend to be less efficient than private ones.
The IMF sees room for increasing the efficiency of the public administration. Therefore, we very much welcome the Government's intention to strengthen and modernize the state tax and customs services. This is a step in the right direction.
The government also announced its intention to implement land reform. The Fund also welcomes this measure and believes that it will make a significant contribution to the economic growth in Ukraine.
You have waged long negotiations with the new government of Ukraine and have studied it well. What are the risks to the implementation of the new program from the Ukrainian side?
We have now reached agreement on a new program at the IMF staff level. The so-called Staff-Level Agreement means that after three months of discussions, we have agreed with Ukraine the content of the program that the Fund will support. The next step is that the IMF Board of Directors will review this program and approve it. However, we have agreed with the Ukrainian leadership that before such an approval, Ukraine must implement a number of prior actions. With this, the key risks will be mitigated, and we will be ready to launch the program.
Now let’s return to your question about the risks. The new Ukrainian government has a very ambitious program for transforming the economy. It intends to do a lot, which is not an easy task. A political will and long-term public support for reforms are needed.
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At the same time Ukraine, like other countries, depends not only on the conditions inside the country, but also on the external environment, in particular the demand for commodities and their prices.So, if difficulties arise in the economies which are key trading partners of Ukraine, there will be a risk that it will also spill over into the Ukrainian economy. The best way to manage these risks is to make the Ukrainian economy sustainable. This is precisely the purpose of Ukraine's new program with the IMF – to strengthen the economy and to make it resilient to such emerging threats.
Are there any safeguards against the return of PrivatBank to its former owners?
Let me take a step back. Ukraine went through a very difficult financial crisis in 2014–2016. Total direct losses from it amounted to more than $15 billion or UAH 260 billion. For the sake of comparison, this is more than ten times bigger than the total budget allocations for road repair and construction in Ukraine in 2015, it is about seven times bigger than the defense budget of that year.
When the crisis began in the financial sector, the Ukrainian authorities acted swiftly and decisively to resolve the problem of insolvent banks and to ensure sufficiently strong balances of those financial institutions that remained in the market. Now we see the benefits of these actions: Ukrainian banks have become much stronger, they are increasing lending to the Ukrainian economy, and the banking sector as a whole is profitable.
Now the Ukrainian state faces a new challenge – to recover taxpayers' money spent to rescue problem banks. This means that those persons responsible for the downfall of financial institutions, that is, their former owners, must reimburse as much of these funds as possible.
As for Privatbank, its rescue cost Ukrainian taxpayers $5.5 billion. The state spent these funds on Privatbank to ensure that its depositors, more than 20 million people, and their deposits, which accounted for more than a half of all deposits in the banking system of Ukraine, would remain safe and that the bank would have sufficient resources to repay these deposits to clients. So now the challenge is to try to get that money back from the former owners.
Given the ambiguous attitude of society towards the land reform, what is the optimal model of its implementation for Ukraine?
Ukraine has unique arable agricultural land reserves with incredible potential. It is therefore important that the land reform model creates incentives for sustainable and efficient farming so that current and future generations of Ukrainian farmers can make a living working on the land.
The President and the government have declared that they want to introduce a land market. The IMF believes this is a good idea that will benefit Ukraine. But it must be implemented in the right way. The land market should be transparent and open. Those who want to sell the land should be sure that they will get the highest possible price for their land. Those who buy land should have confidence that the process of ownership transfer will be correct and that property rights will be protected.
Competition is important in any sector of the economy. This also applies to agriculture. Thus, when the land market starts working, it is important that it does not result in the concentration of land in the hands of a small group of owners. The proposed market model contains restrictions on the concentration of land in the hands of one person or company, meaning the government is trying to mitigate this risk.
Another aspect: small farmers should also be able to participate in the market. But usually they have no credit history. Therefore, financing mechanisms are needed to enable small farmers to buy land. And it is also part of the land reform.
Many analysts believe that due to the problems with the rule of law in Ukraine, the land reform might lead to massive land raiding. Are there any tools for solving this problem?
The government understands this problem. The proposed land reform contains measures that will enable to control for this risk.
How do you assess the current state of judicial reform? Is Ukraine’s judicial system ready for cases such as Privatbank or land raiding?
Judicial reform is a key component of the whole transformation of the economy. We think it is very important. Because when investors are asked why they do not invest more in Ukraine, they often respond that they are concerned about the shortcomings of the judiciary. Until they are sure that they will be treated objectively and fairly by the Ukrainian courts, they will be reluctant to invest their funds in the Ukrainian economy.
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The IMF conducted a study that systematically compared the quality of institutions in Ukraine with their counterparts in Central and Eastern Europe. It confirms what I said about the shortcomings of the Ukrainian judiciary. It is precisely in the sphere of judiciary that there is the biggest difference in the quality of work of institutions. This reiterates the need for judicial reform.
Mr. Goesta Ljungman is the IMF Resident Representative in Ukraine from 2017. In 1998 graduated from Uppsala University with a degree in Economics. In 1998-2007 worked for Ministry of Finance of Sweden. In 2007 joined the IMF working on fiscal reforms in Moldova, Montenegro, Ireland, Hungary, Serbia, Kyrgyz Republic, Kuwait, Oman and many other countries. During 2010-2012, Mr. Ljungman worked on the IMF's Ukraine team, with a special focus on fiscal issues.