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Where there is no law, but every man does what is right in his own eyes, there is the least of real liberty
Henry M. Robert

Ukraine is heavily indebted

Ministry of Finance is blocking municipal attempts to patch up central budget to look better for IMF observers
14 February, 2013 - 10:01
ILLUMINATED INDICATOR BOARD OF DEBT IN THE MUSEUM OF GERMAN HISTORY IN BONN. FIRST NUMBER IS AGGREGATE DEBT, SECOND ONE SHOWS HOW IT INCREASES BY SECOND, AND THE THIRD LINE IS THE FRG SUM OF DEBT IN PER CAPITA TERMS / Photo by Kostiantyn HRYSHYN, The Day

The IMF mission left Ukraine on Feb. 12. No formal findings are available, although experts keep saying this country will have to acknowledge its default without renewing relations with the IMF. Oleksandr Suhoniako, president of the Association of Ukrainian Banks, recently stated: “Ukraine will have to pay some 6.5 billion dollars’ worth of previous debts to the International Monetary Fund, along with 58 billion hryvnias’ worth of domestic debt. Ukraine doesn’t have the money, which means that the current administration will have to ask the IMF for another loan.”

Ukraine’s public debt currently amounts to 400 billion hryvnias, a record sum plus UAH 116 billion worth of guaranteed debt, with central budget incomes showing UAH 361.5 billion this year.

Local municipal debts, compared to Ukraine’s public debt, amount to some 1.5 percent. Peanuts, but a major topic for the experts in 2012 who forecast the threat of such debts for Ukraine’s public debt.

Local municipal budgets are legally meant to provide for adequate living conditions, also for upgrading them. Upgrading is practically impossible because of the low level of financial autonomy, tangible budget appropriations for local infrastructures. All this broadens the gap between the big cities and small towns. Add here “active control” on the part of central authorities [all those ranking bureaucrats who go through the motions of keeping the situation under control while doing nothing save for pocketing envelopes bulging with hard cash]. The fact remains that such municipal loans may eventually add to the central budget and allow the local authorities to provide for important investment projects…

Ukraine’s local loan market emerged in the mid-1900s and flourished in 2003-08. During that period 15 Ukrainian towns issued internal loan bonds. Kyiv City Council managed to borrow $600,000 from the international market. Following the world’s worst crisis, the Ukrainian market showed signs of revival in 2011-12. There were 13 local borrowings, including five issues of municipal bonds in 2012. All this was in conjuction with the international soccer championship, but the debts must be paid, and paying them will take years.

Most Ukrainian towns appear to ignore the possibility of municipal loans, for a number of reasons and due to local circumstances. All decisions on such municipal loans are made by the Ministry of Finance of Ukraine. The latter has rejected most municipal bond applications over the past several years, to ease the IMF pressure on the Ukrainian administration to lower its public debt (including the money spent by local self-administrations).

Lviv, the “capital city” of western Ukraine has a diversified economy and was among the first operators on Ukraine’s loan market when it materialized. Its budget is currently on the verge of default [kaput]. The Economics Department under the auspices of Lviv City Council says Lviv’s public debt amounts to UAH 476.2 billion, including debt-service payments… and that it will owe the central budget a total of UAH 277.7 million.

Back in 2009, Lviv borrowed UAH 200 million (at 20 percent interest) for the construction of a stadium to host the Euro-12 soccer events.

I will not discuss the feasibility of this project. In 2011, Lviv paid back UAH 110 million, so it still owes 124 billion hryvnias to the National Bank of Ukraine, a sum that must be paid before May 14, 2014.

Also, a credit line worth UAH 275 million, started in 2011, meant to purchase public transport vehicles for Euro-12.

Lviv actually used UAH 16.5 million and returned UAH 4.8 million by the end of 2012. The credit line was closed.

UAH 11.7 million worth of the debt due the Savings Bank was restructured and made payable sometime in 2014.

By Iryna STORONIANSKA, Ph.D. (Economics) lecturer at the Institute of Regional Studies under the auspices of the National Academy of Sciences of Ukraine