Under the current agreement, Ukraine's USD 1.8 bn debt to the IMF is scheduled to be paid back by instalments up until 2009. Recently, the NBU and the President suggested that this debt should be repaid within the coming months. Two main arguments were put forward in favour of an early repayment. First, it is supposed to send a positive signal to international investors and second, it is believed to save money to the country.
If the entire IMF debt were to be paid back today, then gross official reserves would go down from USD 7.0 bn, which corresponds to 3.5 months of import coverage, to USD 5.2 bn or 2.6 months of imports. Thus, an early repayment would drive reserves down from an adequate level above 3 months of imports to an inadequate level below 3 months of imports. As a result of this critical reduction in reserves, the ability of the NBU to intervene at the foreign exchange market in case of emergency would be significantly diminished. This in turn would send a negative signal to international investors and increase the cost of foreign borrowing. Finally, an early repayment would hardly save any money to the country. For these reasons, we strongly advice the Ukrainian government to decide against an early repayment of the IMF debt.
Content:
- Introduction
- The economic role of official reserves and the criteria for judging reserve adequacy
- Which adequacy criterion is the most appropriate for Ukraine today?
- What level of reserves is appropriate, based on the import-covering criterion?
- The economic effect of an early repayment
- Conclusions
