Interview with International Monetary Fund Mission Chief for Ukraine, Ceyla Pazarbasioglu, by Myroslava Honhadze, Voice of America, Ukrainian Service. The interview was conducted at IMF Headquarters in Washington, DC, on November 10th, 2008.
MG: Today, Ukraine received the first installment of the IMF loan package. Why did the IMF decide to help Ukraine? Why was it important to help Ukraine?
CP: I think it was important for the Fund to be supportive because the Ukrainian authorities were very proactive. They looked at these issues and the shocks that are affecting the country right now, the terms of trade shocks, which is basically the price of steel, the global financial conditions. They are all affecting Ukraine. The authorities were very preemptive. They came to te IMF worried what could be happening going forward, and wanted to have the support of the institution, both in terms of the financial support in case things deteriorated, as well as technical support in terms of how to best put together policies to address these challenges. So I think the Ukrainian authorities have a very comprehensive program and the IMF is pleased to support these efforts.
MG: When did the Ukrainian authorities make their first move?
CP: We received a letter from the authorities in early October and then there were the meetings, the IMF-World Bank annual meetings. We had discussions with the authorities and soon after that a mission, a team of IMF experts went to Ukraine. We were there about two weeks, discussing with the Central Bank, with different ministries, the ministry of finance, the prime minister, the president, as well as other office holders, the key issues, the challenges that face Ukraine, what the policies should be to address those challenges and the authorities’ own programs that they were putting together. And then we presented this to our executive board on November 5 and there was support to work with Ukraine going forward. So that is what took place.
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MG: When did the Ukrainian authorities make their first move?MG: Ukraine is supposed to receive sixteen and a half billion dollars in the next the next two years. How was the amount decided on?
CP: The way the Fund works is, you talk to the authorities, you try to understand together with them what are the different factors affecting growth, incomes, as well as other important economic variables, and then you come up with something called ‘the financing gap,’ the amount of funding that would be required for Ukraine to be able to implement these policies and to have a such smoother adjustment. And this is how the discussions went. It’s quantitative. You have some projections – how real prices would evolve, what are the implications for income, and then you come up with a balance of payments statistics, and so on. It’s a lot of work, actually, analytical work, which we conducted together with the authorities. And that’s a projected amount that would be needed to provide, if you like, a buffer or a cushion to address the challenges that are facing the country.
MG: Does it mean that in two years Ukraine will need more money or that the IMF would be ready to help again? How does it work?
CP: The idea is that, depending on how global conditions evolve; obviously the whole reason why Ukraine came to the IMF has a lot to do with the current global conditions, because we face a global recession next year, global financial conditions, especially in industrial countries have been very difficult. So, it’s very different than the previous three to five years, where there was a lot of global liquidity, very easy credit conditions. The next three to five years are going to be different, for every country it’s going to be different, because what we call ‘deleveraging,’ which is the financial sector in the industrial world is working over its own issues and problems, which also has implications for global credit conditions, it has implications for global employment, global incomes, global output. So this all has implications for a country like Ukraine, which is a very open country. It has exports and it has financing from abroad. All of this was taken into account in designing a program together with the authorities. And the assumption is, the global recovery will take place towards the end of next year and this should help Ukraine go through this adjustment and stabilize.
MG: What is the requirement, what must Ukraine do to fulfill the promises it made in signing the agreement?
CP: The authorities’ program will be published in the next few weeks and it’s already in the public domain and it was discussed at the Parliament level with as far as I know by the finance minister and other officials. The program itself is actually very well designed and I must say it was very good to work with the authorities. They were very aware of the issues, the problems, the potential problems that were facing them. Obviously for the person on the street it a big change. Six-seven months ago the country was doing extremely well, and all of a sudden you’re faced with these great challenges and issues. You’re also not alone. Most countries are facing these difficulties. I must say I am impressed how quickly the authorities looked at these issues and came to the understanding of what could be facing them going forward, and took these steps, as we said before, to address these challenges. The key components of the program -- we have issued press releases, we had a press briefing once with the governor in Kyiv as well as here after the board meeting. It has four key components. One, to start with, is a flexible exchange rate regime and a monetary policy which is based on ensuring financial stability. So – initially liquid conditions, as in many countries right now and going forward, making sure that inflation is under control. The second component is prudent fiscal policies. The authorities have identified measures to make sure that financing for the budget will be there and necessary expenditures will be met with that financing. Also, the third component is the banking system, the financial sector. As we know from the rest of the world these issues will reflect on the banking system, because the repayment capacities of the borrowers with a slowdown in the economy get affected. So the whole idea of the program, and that’s why there’s a major component on banking recapitalization is to provide a cushion for the banks and, if necessary, public support, so that credit conditions are not so adversely affected. So that people who are borrowing, both corporate and households, can still borrow going forward, that they are not cut off from financing, which would create difficulties in terms of repayment and that their loans are not called early. So for that to happen it’s important that the banks have an adequate cushion. So that’s the third component. And the fourth component, which is very important for the authorities as well as for the IMF is social policy, social spending, because the adjustment, with the IMF or without the IMF, the adjustment to these difficult conditions are going to be tough for everyone. And it’s going to be even harder for the most vulnerable population in the society. And the Ukrainian authorities already have good targeted policies of income support, unemployment insurance and some other programs. We have been working very close with our World Bank colleagues, who are experts on these types of issues and our understanding with the World Bank is that there are some excellent programs, targeted programs. Some of them are underfunded. So the program with the authorities has components to make sure these policies will be in place, that society, the vulnerable part of the society, does not suffer from this adjustment process.
MG: For Ukraine, the IMF in this situation becomes a last resort. What do you think would happen had the IMF decided against the loan package for Ukraine?
CP: I think one has to think through, what are the challenges facing Ukraine. Why is the country at a very different juncture now as compared with, for example, a year ago, when things looked very good. So the first thing is that the recession has implications for the key export, the key commodity, which is steel. Steel prices are down sixty five percent. That has major implications on the key exports, the realty sector, and so on. Similarly, there are implications from the financial sector, when the global financial sector is in a retrenchment mode, when they are not providing enough credit to many different countries. What you see is financing conditions deteriorate. So the private sector is in a mode of retrenchment right now, where there is much less money or funding to the corporate or to the households through the banking system or directly in Ukraine. So what this means is that there has to be a policy adjustment, because you don’t have the same access to the same resources you had a year ago. And the whole idea is, those policies, the adjustment policies, are costly, are difficult and hard on everyone, including the corporate sector and the household sector, etc.. So what the IMF does is provide a buffer, to cushion that adjustment process. So that in place of a hard landing it tries to provide a more soft landing with these buffers. Because obviously right now it’s difficult for the private sector to be able to provide financing to many countries. Also as you know the wealth effects – the stock markets are down, the investments of many private sector people have taken a large hit. So, their ability to provide the needed cushion is limited. And the IMF is an institution which can mobilize its own resources, both staff, management, the executive board very quickly in these type of conditions. The institution has worked with very many countries before which were in a crisis or facing a crisis, or facing difficult stressful periods. And, therefore, the Fund has policies, and that was the whole reason to form the IMF – to cushion, or to bridge, if you like, these typea of difficult periods. And it will depend in large part on the implementation and good communication about the authorities’ program. And as long as that’s done, I think the implications should be hopefully limited for everyone concerned.
MG: How would you compare Ukraine’s situation with the conditions which other countries in Eastern Europe have faced?
CP: It’s very difficult right now to make comparisons, because I think there will be many studies going forward, which will look at different countries’ experiences. But we should think through, perhaps, is that the challenges facing Ukraine are challenges facing many countries right now. Many countries have gone through the last three, four, five years with very rapid credit growth, credit extensions to the households and the corporate sector. This happened across the board in emerging Eastern European countries. And the policies the authorities implemented in the past few years – some built up reserves, some used up these commodity booms or these extra revenues, if you like, in incomes policies, to bring up the income levels of real sector or the households. In making a good comparison you need to look at the conditions, how the authorities implemented the policies in the past few years in terms of where the starting point is and then going forward – how open the countries are, what are the key prices or the key shocks that will be affecting those countries. And also – which countries take preemptive measures to deal with these challenges, and they can benefit from private sector involvement going forward. And in this context I think it would be very important for Ukraine and other countries to take on the structural reforms that are necessary to have a good business environment, a good investment environment, to bring in the resources necessary for a quick adjustment and prosperity. Ukraine is a country with enormous potential, both in terms of human capital, it has very good education, good human capital, it has resources, it has incredible potential. And as long as good policies are implemented during this difficult period where, again, everyone is facing difficulties, I think the future should be quite bright.
MG: What are the key steps the Ukrainian government should take to weather this crisis quicker, and the easiest and safest way possible?
CP: As I said, the authorities’ program addresses many of the issues and we just discussed some of the key components of this program. And it will be very important to communicate these policies in a transparent way, to communicate the intentions of the authorities in an open way and to provide the society, the households, the corporate sector with the developments, so that they have a good sense of how the policies are implemented and how that can have implications and effects on them. I think that will be the key part going forward. Because the program they have designed is a very good one, a very preemptive one. So, as long as it’s implemented and as long as it’s well communicated, I think the results will be forthcoming – not very quickly, it’s a difficult road ahead. As I said – everyone is going through a hard time. The U.S. is going through a hard time, and the U.K. – all these countries are going through a difficult time. And everyone is adjusting. And I think the key will be to implement the right policies, which, I think, are in the authorities program and going forward communicating them in a way that increases confidence.
MG: Ukraine will be paying an interest rate of four percent. It’s a floating rate. Please explain what is meant by “floating” rate.
CP: This is a standard program. It is not specific to Ukraine. All of this is on our website. Our finance department works on the specifics of these agreements. It all depends on the quota of the country, what is the percentage of the quota the loan amounts to, and based on that there are certain fees. So instead of going through all these details it’s best to say that it is a standard IMF procedure and that the Ukrainian authorities will be subject exactly to what other countries with similar type of quota exposure would need to pay.
MG: The President of Ukraine has dissolved the Parliament and announced new elections. Was it an issue for the IMF to have to work with a country in which the political situation is not stable?
CP: The IMF has worked with many countries in the past, either right before elections, during elections, after elections. The IMF is not a political institution. It is a technical institution. So, the program is the authorities’ program, it’s discussed with them. We took also lot of effort to discuss the issues with other stakeholders, other political parties. We had a discussion at the Parliament, where we discussed the authorities’ program and the support the IMF would be providing. In terms of our engagement in going forward we would work with whichever government is in place, whichever technical expertise is there. And I think the country has an extremely capable technical staff and this is mainly our counterpart, the Central Bank governor, which I understand is not subject to political instability, and also the ministers with whom we have been working very closely. What I would like to say is that the objectives of the IMF and the authorities – and when I say authorities I mean in a bigger picture – the Ukrainian authorities, which could be any party, and the IMF. The objectives could not be different. The objectives are the same. Everyone wants the country to adjust as smoothly as possible and not to be affected by these difficult conditions. If the objectives are the same and the policies are designed to meet these objectives, I don’t see why it should matter who is actually implementing the policies, as long as it’s the policies that are being implemented. And I would think any implementing person, in a political or technical capacity, if they are thinking about the well-being of their country, they would implement these policies to meet those objectives. We are not concerned. We work with whatever authorities are working in the country. And we will also do our best to explain it to the opposition parties and I think, regardless of election or no election, this should be the case. They are important stake holders and they should be given the opportunity and we should have the opportunity to exchange views and understand the key elements that they think are important and from our perspective what we think are important.
MG: What is your prediction of what the next few years hold for Ukraine and for the world, considering the current crisis.
CP: This is not a question that can be answered. I can tell you what my wish is. Things change. What we thought three days ago or a month ago is different now. The global conditions are very fluid and things are changing. I think, as I mentioned before, it’s in everyone’s interest, especially obviously the Ukrainian public as well as the authorities and the IMF, which is supporting the country, to make sure the adjustment process is smooth and that it doesn’t have implications which would be difficult for the Ukrainians. So in that sense the objective of going forward or the wish of going forward is that these policies are taken and communicated in a way that the country reaches its potential as soon as possible.