Cooperation of Ukraine with International Financial Organizations (IFOs) in the Context ofTasks of Technological Modernization of the Real Sector
OnFebruary 26, theNationalInstituteforStrategicStudieshostedaroundtableon “CooperationbetweenUkraineandinternationalfinancialorganizations: problemsandprospects”.
Representatives of international organizations, the International Bank for Reconstruction and Development, the European Bank for Reconstruction and Development, the KfW Bank and the Nordic Environment Finance Corporation (NEFCO) Foundation, expressed their views on ways to improve the efficiency of the projects of international organizations in Ukraine, increase the level of selection of funds, strengthen the responsibility of project management groups and implement the assessment of completed joint projects with IFOs.
Participants discussed the need to establish closer coordination of IFOs with beneficiary ministries or project implementers, improve project initiation and planning procedures, create a specialized government agency for the implementation of self-sustaining IFO projects, address currency risks for borrowers on IFO projects.
Head of the Public Finance Department of the Institute Tetiana Bogdan took part in the discussion with a report “Cooperation of Ukraine with IFOs in the context of the tasks of technological modernization of the real sector”:
The priorities of Ukraine’s cooperation with IFOs should be based on the following:
1)Ukraine is one of the poorest countries in Europe in terms of GDP per capita (it ranks second only to Moldova), and Ukraine’s industrial base is constantly shrinking and losing competitiveness;
2)The percentage of depreciation of fixed assets in the economy of Ukraine is 60.6%, and in industry – 66.4%;
3) The share of gross fixed capital formation in GDP in recent years has varied from 15.5 to 17.7%, which is one of the lowest rates on the Eurasian continent;
4) Productive credit of Ukrainian banks is frozen, and credit resources of the international capital market can be attracted only by units of Ukrainian companies;
5) The “invisible hand of the market” in Ukraine forms the contours of the raw materials economy, which is characterized by high volatility and prevents a significant increase in per capita income.
Ukraine’s investment needs for the construction of modern infrastructure and modernization of production are estimated at up to USD 300 billion.
Therefore, the priority tasks of economic policy in Ukraine are a radical increase in the pace of investment activity, modernization of existing and creation of new industrial enterprises, renovation of infrastructure.
Hypothetically, foreign direct investment, credits of IFO and international technical assistance could become important tools to accomplish these tasks.
So far, Ukraine receives USD 2-3.6 billion of foreign direct investment per year, the most part of which goes to wholesale and retail trade, the financial sector, real estate and mining.
Over the last 3 years, Ukraine has received USD 700-950 million of international technical assistance (ITA) per year. About 70% of ITA goes to nuclear safety and defense. Only 2% of ITA are directed to energy and energy efficiency and 2% – to economic development and trade.
Over the last 3 years, net debt financing of Ukraine by official creditors (excluding the IMF) was negative: in 2016 it amounted to USD -0.4 billion, in 2017 – USD +0.9 billion and in 2018 – USD -0.6 billion. Since 2016, net World Bank funding has been chronically negative. The World Bank’s Partnership Concept with Ukraine identified only 1 priority objective, related to the outlined problem: “Improve infrastructure services, particularly in energy and transport”.
From a historical perspective, the Marshall Plan for Western Europe provided for the purchase of industrial equipment for Western European enterprises through loans from the International Bank. The Marshall Plan included financing of 143 industrial equipment supply programs. Moreover, revenues in national currencies to “counterpart funds” from the sale of imported raw materials, food, fuel were used for public investment and implementation of industrial development programs. In particular, the “Monnet Plan” was implemented in France and the Modernization Fund was established.
At present, the EU allocates EUR 52 billion annually from the EU common budget for industrial policy. In addition, expenditures from the national budgets of EU member states reach EUR 100 billion euros, which gives a total spending on industrial policy by member states and the EU amounts to EUR 150 billion, or 1.1% of GDP per year.
The main fields of EU industrial policy at the supranational level are listed in the table. About 2/3 of spending on industrial policy (excluding regional policy) accounted for research, development, technology and innovation (RDI). 13% of the total was infrastructure expenditures. The EU allocates 12% of its total industrial spending each year, or EUR 8.3 billion, to aircraft, space and electronics.
EU and member states’ spending on industrial policy, by policy field, 2014-2017 (annual averages), in EUR billion
In Ukraine, IFO credit programs aimed at modernizing Ukrainian enterprises are not numerous and voluminous. Thus, in 2020, according to official plans, the following projects are to be implemented:
• European Investment Bank (EIB) “Basic credit for SMEs and mid-cap companies”, EUR 400 million;
• EIB – “Hydropower Rehabilitation”, EUR 200 million;
• IBRD “Access to Long-Term Financing for SMEs”, USD 150 million;
• EBRD – “Purchase of overhaul machines and improvement of energy efficiency of Ukrhazvydobuvannia JSC”, EUR 51.9 million;
• KfW – “Refinancing of energy efficient investments of small and medium-sized enterprises of Ukraine through the financial sector”, EUR 7 million;
In ITA in Ukraine there are also examples of successful projects in the area of “technological modernization and development of the production base of Ukraine.” But such projects are rare and unable to launch a process of irreversible positive change at the macro level. These are the following projects:
• the US Government’s Competitive Economy of Ukraine project worth USD 42 million, which provides support to business incubators and IT clusters;
• 2 EBRD projects in Lviv for installation of a biogas production capacity based on rehabilitation and upgrade of the wastewater treatment infrastructure;
• project of the Government of Germany “Consulting enterprises on energy efficiency”.
Based on the above, it is vital for Ukraine to launch preferential credit programs for IFOs aimed at improving the technological level of production, renewal of fixed assets for medium and large enterprises. Such programs should be widespread and available to all potentially competitive businesses.
The international organizations such as the EIB, the EBRD, the IBRD, the IFC, the BSTDB, and the KfW could take an active part in lending to Ukrainian enterprises.
The main objectives of such loan programs could be:
a)increasing the competitiveness of Ukrainian production;
b)increasing Ukrainian exports and reducing the trade deficit;
c)introduction of energy-saving technologies at enterprises;
d)renewal and modernization of production infrastructure;
e)creation of technologically complex industries.
Borrowing companies should be able to obtain investment loans for a period of 4-15 years at low interest rates. The target group of enterprises could be exporters of food industry, mining and metallurgical complex (MMC), mechanical engineering, chemical industry, fuel and energy enterprises.
Implementation of credit programs for technological modernization of production will be possible only with a dramatic increase in funding limits to Ukraine by the international financial institutions. This requires greater political support for Ukraine by the West, as well as a real readiness of the West to promote the revival and development of Ukraine’s economy.
When designing such programs, it should be taken into account that Ukraine has an excessive amount of public debt, and therefore it is risky and economically harmful for our country to impose a burden on the state in the form of government guarantees for IFO credits. Therefore, within the framework of credit programs for the development of Ukraine’s production potential, it would be reasonable to move away from the practice of lending to IFOs of corporate entities of Ukraine under state guarantees.
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