Setting the bar high…….or the deficit low actually.

April 3, 2010

Reuters – Ukraine expects to have a new International Monetary Fund programme in place in May and has agreed on the size of the budget deficit, seen as a key sticking point in talks, Prime Minister Mykola Azarov said on Friday.

An IMF mission visited Ukraine this week and said progress had been made in talks to resume a suspended $16.4 billion bail out for the cash-strapped ex-Soviet republic.

But the size of the state budget deficit had remained a key problem, with the IMF pressing for fiscal prudence and the government committed to social spending initiatives.

“We have reached an agreement on the key issue of the state budget. We have agreed that the state budget deficit could be within the limits of around 6 percent (this year),” Azarov told reporters.

“A memorandum will be prepared in April and then will be signed. After that the board of directors meeting on a new programme will take place. We expect that in May we will resume the cooperation with IMF,” he added.

Kiev officials have indicated they were seeking a deficit figure of 10 percent, suggesting the IMF was won concessions from the government on the headline number.

In 2009, the deficit was around 14 percent, Azarov said.

Some $6 billion of the suspended IMF package is yet to be distributed to Ukraine, whose economy shrank 15 percent in 2009. The programme was suspended late last year when then President Viktor Yushchenko approved a rise in minimum wages and pensions despite earlier undertakings to the IMF not to do so.

Negotiations resumed with the election of Viktor Yanukovich as President in February. Ukraine’s new leaders have signalled that resuming cooperation with the IMF — either by restarting the old programme or agreeing a new one — is a priority. But they also want to go ahead with social spending plans.

Hopes of more cash from the IMF have cheered investors, sending yields on Ukraine’s 2016 dollar bondbelow 7.5 percent — levels not seen since mid-2008 — and boosting demand at auctions of domestic debt.

Well 6% is a very tough ask from the 14% inherited.  NaftogazUkraine accounts for 2%, the pension deficit accounts for another 2%, leaving 2% for other things. 

Admittedly Ukraine wants to reap in $20 billion from privatisation this year, but it is already April and nothing has been sold yet and of course the opposition, even though it wanted to privatise many assets last year when in power, will automatically now oppose privitisations…….because they are naive politicians and think that being in opposition means opposing everything……..even if you supported it only last year.

I also hear rumour of a few more $billion from the World Bank and EBRD……even though, this is a really tough ask!

However as a friend of mine points out, Ukrainian economics works on the following principles…….

It is the month of April, on the shores of the Black Sea.  It is raining, and the little town looks totally deserted.  It is tough times, everybody is in debt, and everybody lives on credit.

Suddenly, a rich tourist comes to town.  He enters the only hotel, lays a 100 Euro note on the reception counter, and goes to inspect the rooms upstairs in order to pick one.

The hotel proprietor takes the 100 Euro note and runs to pay his debt to the butcher.

The Butcher takes the 100 Euro note, and runs to pay his debt to the pig grower.

The pig grower takes the 100 Euro note, and runs to pay his debt to the supplier of his feed and fuel.

The supplier of feed and fuel takes the 100 Euro note and runs to pay his debt to the town prostitute that in these hard times, gave her services on credit.

The prostitute runs to the hotel, and pays off her debt with the 100 Euro note to the hotel proprietor to pay for the rooms that she rented when she brought her clients there.

The hotel proprietor then lays the 100 Euro note back on the counter so that the rich tourist will not suspect anything.

At that moment, the rich tourist comes down after inspecting the rooms, and takes his 100 Euro note, after saying that he did not like any of the rooms, and leaves town.

No one earned anything.  However, the whole town is now without debt, and looks to the future with a lot of optimism.

One comment

  1. Hey, I read a lot of blogs on a daily basis and for the most part, people lack substance but, I just wanted to make a quick comment to say GREAT blog!…..I”ll be checking in on a regularly now….Keep up the good work! 🙂

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