Ukraine to get new IMF loans despite inability to repay private lenders

IMF Managing Director Christine Lagarde (Reuters / Mike Theiler)
Despite the grievous state of the Ukrainian economy, the IMF said it will continue to lend money to Ukraine, so Kiev can complete economic restructuring.

"In the event that a negotiated settlement with private creditors is not reached and the country determines that it cannot service its debt, the Fund can lend to Ukraine consistent with its Lending-into-Arrears Policy," IMF Managing Director Christine Lagarde said.

The IMF chief's comments come as Finance Minister Natalia Jaresko and Ukrainian Prime Minister Arseny Yatseniuk wrapped up their promotional trip to US, which also included pleading with the IMF. Kiev hopes to persuade the international lender to release a $1.7-billion tranche of aid in July, as part of a $40-billion aid package that the IMF and Ukraine's foreign allies have committed to.

READ MORE: Kiev hopes to sell state-run companies to US investors - PM

Ukraine's economic program (2015–18) seeks to implement macroeconomic and structural reforms. It’s designed to focus on fiscal consolidation and energy sector reforms as well as the banking system. Kiev hopes to generate $15.3 billion in public sector financing during the program period. Ukrainian authorities also aim to bring public debt to under 71 percent of the country's GDP by 2020. Finally, the country seeks to gain economic stability by balancing the budget’s gross financing needs to no more than 12 percent of GDP annually in 2019–25.

Yet Kiev's virtually bankrupt economy can’t make the debt payments, when a $500-million bond matures in September. Upon his return from Washington, Ukraine's PM threatened to freeze debt repayments if no deal is agreed with private lenders. Kiev claims its military campaign in the east of the country is draining internationally borrowed funds.

"Today, Ukraine spends as much on foreign and domestic debt servicing as it does on defense," Yatsenyuk told a government meeting. "The budget can no longer afford it -and not just the budget. The Ukrainian people can no longer live like this," he said.

"We will not take money out of Ukrainians' pockets to pay foreign debts," he warned.

Lagarde seems to agree that Kiev's "international reserves cannot be used for sovereign debt service without the government incurring new debt, which would be inconsistent with the objectives of the debt operation."

Yatsenyuk told the politicians that he expects the IMF board to meet in July, “so, all the preliminary conditions have to be agreed and approved by July."

READ MORE: Ukraine ‘blackmails’ creditors with moratorium on debt repayment

Earlier this week, while visiting the US, Finance Minister Jaresko said Ukraine can’t afford to wait until September to reach an agreement with its creditors. Unless the agreement is reached, Kiev might be forced to call a moratorium on debt payments. Last month, the Rada (parliament) passed a law allowing the government to do so.

"I don't think we have that much time," Jaresko said on Wednesday. "In that respect, I'd have to use other tools to reduce the pressure on the balance of payments, a moratorium."

"If we're not able to make progress, then the creditors will be provoking the use of that (moratorium)," Jaresko said. According to the minister, Kiev has already repaid some $2 billion.

The creditors' committee led by US asset management firm Franklin Templeton has proposed drawing some $8 billion from Kiev's central bank reserves as part of the restructuring plan, which Jaresko has called "unacceptable."

As the negotiations continue, creditors issued a statement blaming Kiev for a lack of action.

"Minister Jaresko has been in possession of a detailed IMF-compliant solution from the bond committee for over a month," creditors said on Thursday in an email statement. "We are deeply concerned about the stance the minister is taking, which is not in the interests of Ukraine. We are ready and willing to start talks at any time," Reuters reports.