Groysman's choice: Gas price raise or default
This week is crucial for Ukraine, without any exaggeration. After overcoming the barrier with the Anti-Corruption Court, there is one more left - an increase in gas prices for the population. And it is this Wednesday when Volodymyr Groysman's government has to tackle this challenge. Or they may choose not to, opting for talking riddles and feeding everyone with news on ongoing negotiations with the IMF over the price of gas.
In both cases, Ukraine is facing certain consequences. In the first scenario, Ukraine will stand firm, although on the brink of the abyss, and, with the help of the IMF, World Bank, and EU it will at least be able to survive the peak of payments on external debt.
Until the end of 2019, Ukraine will have to repay more than $6 billion on debts
The latter path is less optimistic. Last week, it was clearly outlined by leading Ukrainian economists and key business associations: the American Chamber of Commerce in Ukraine, European Business Association, Union of Ukrainian Entrepreneurs, Independent Association of Banks of Ukraine, and the investment funds Horizon Capital and Dragon Capital). The path will see currency devaluation, inflation, job cuts, and loss of international support. In the end, the country is facing a default.
Why? It's simple. Until the end of 2019, Ukraine will have to repay over $6 billion on debts. Today, there is slightly over $1 billion in Treasury accounts. This money will have been spent by early November 2018. Already at the beginning of 2019, when the country's election campaign is in full swing, another $1.6 billion will be needed to continue payments. Before the inauguration of the new president, a huge amount of about $4 billion will be required, and then another billion "green bucks" at the end of the year...
The state has no such money. The budget is already bursting at the seams. Officially, the deficit in the first half of the year exceeded UAH 14 billion. And things might get worse...
Do we have the opportunity to replace cheap borrowing from the IMF, EU, and World Bank? Economists say, there are almost none. Of course, the government could dig into the reserves of the National Bank. But, firstly, there are not so many reserves left and, secondly, if the state encroaches on these reserves, the hryvnia will plunge so deep that it will be a nightmare.
There is an option to continue borrowing from private investors under domestic bonds at some crazy rate – from 8% to 12%, and, maybe, even more. But a debt choker is not really an option. The result is the same - a default. We can just delay it a bit more.
A default will multiply by zero all efforts and reforms over these several years
It is interesting that even the elementary delay with the voicing of the Cabinet decision on increasing gas prices will be just as damaging. Conventionally, Groysman might have matured morally for making such a radical decision, but he will announce it in August. But this means that the IMF mission will arrive only after the summer holidays – that is, in September. In this case, they will necessarily have one more condition - the preparation of the budget for 2019. It is easy to predict that the IMF will definitely set a strict condition: to reduce the deficit of the state budget, while the authorities (including the deputy corps) on the eve of presidential elections will necessarily seek to increase all sorts of social payments. And then the IMF will just wait whether the Rada do what they're told or not. It will become clear by New Year's eve because the state budget is traditionally adopted around that period.
With such a pace, we will wait for the next tranche for a long time. Can't the government get this? After all, a default will multiply by zero all efforts and reforms made over these few years. Not to mention the fact that any macro-financial destabilization will force people to take to the streets, of which Russia will certainly take advantage.
Judging by Groysman's latest statements, he is ready to increase gas prices to prevent an economic disaster and poverty. "I declare to you responsibly: I don't want to raise gas prices. I'm not willing to do it This can only be a forced step in order to prevent the economic disaster and poverty in Ukraine. And so, now we clearly stand firm along these lines... I will ask for consultations with the faction leaders on the issue, and I will show two scenarios, or three scenarios," the prime minister said last Friday, addressing the Parliament.
And what about the others? For example, Minister of Energy and Coal Industry Ihor Nasalik in the meantime is expressing his personal opinion that the gas price for the population cannot be increased, instead it should be reduced by 5-7%. "I believe that there is no reason to raise gas prices for the population ... If you count these two positions - profitability and investment component - the price for gas should not be increased, but reduced by 5-7%," the minister assures.
Ukraine will be able to prove to the IMF that it is not necessary to raise gas prices
We should agree that now the country is not in position for the profile minister to expresses his personal opinion on a very painful issue. Moreover, Ukraine signed a memorandum with the IMF, where it undertakes to establish a unified market price for gas: both for industry and population. If you signed it, please do as you've promised. You hastened a bit? You didn't think that the oil price would climb up? Well, then, tell me, who’s the fool now?
Two days ago, speaking on air of one of the TV channels, Nasalik uttered another strange idea: the negotiator with the IMF has changed, so Ukraine will be able to prove to the IMF that it is not necessary to raise gas prices. That's if to say that ex-finance minister Oleksandr Danyliuk was too weak on the topic of gas pricing.
This is just ridiculous. If Danyliuk at the talks with the IMS did not follow government instructions and did not explain to the IMF the position and arguments on the lack of reasons for the increase in gas prices for the population, it is now necessary to initiate a criminal case. Isn't it so? After all, he represented the state interests, not his own. Although, there might be no real surprise here as Danyliuk once openly admitted to Novoye Vremya Radio that his main task at the ministerial post had been the nationalization of Privatbank. That is, it was not negotiations on the price of gas, not a trial in London on Yanukovych's three-billion-dollar debt, not sanctions against Russian banks, but nationalization of the largest domestic bank. By the way, the question to our law enforcers is whether he could have fulfilled tasks set before him by someone else or was there any Russian trace here.
Besides, National Bank Governor Yakiv Smolii in mid-June at a meeting with bankers said that Ukraine would be able to repay its debt obligations until 2020 without external financing, including without IMF loans, that's like claiming that the NBU reserves would be enough.
That's some cognitive dissonance right here. In early June, leading economists (over 30 of them) wrote an open letter to the country's top officials, urging them to comply with IMF demands and resume cooperation with the Fund; otherwise, it would be a disaster. The Ukrainian state is on the verge of a deep economic crisis with unpredictable consequences, they said.
Even more sharp on the issue last week were the key business associations. Dragon Capital CEO Tomasz Fiala warns – don't you dare dig into the reserves of the National Bank, and he explains why. At the same time, the NBU head says there's nothing terrible and that we will survive. There are enough reserves, he says. Is this idiocy or criminal negligence?
Anyway, despite varying statements and positions, the country has its prime minister. And now it's up to him to decide what choice to make. As we can see, there are no real options or time left.