Business appeal to the Verkhovna Rada of Ukraine
Dear deputies of the Verkhovna Rada of Ukraine.
The devastating impact of COVID-19, caused by the SARS-CoV-2 coronavirus, is unprecedented in the world.
As of today, the number of confirmed cases reach nearly 550,000, with more than 24,000 deaths in 199 countries and territories worldwide.
The governments of different countries are taking quick actions to prevent the collapse of their economies, bankruptcy of companies, the loss of tens of millions of jobs, and the destruction of their citizens’ savings and livelihoods. On March 26, the leaders of the G-20 made a joint statement announcing their readiness to invest more than $ 5 trillion in the global economy to address the negative effects of the pandemic. Most economists agree that the world has already entered a period of recession without assurances of how long it will last and how deep the consequences for the economy will be. The economic recession caused by the pandemic is likely to be one of the biggest upheavals over the previous decades.
According to various estimates, the fall of the world economy will be as sharp as it was during the global financial crisis of 2009, and, possibly, even worse, depending on how quickly countries will be able to cope with the rising cases of infection and how severe quarantine measures will be taken.
The threat of coronavirus to emerging markets such as Ukraine is even more tangible, both for the public health and the national economy.
International capital markets are now closed for this group of countries, and the Institute of International Finance reports that as of January 21, $ 80 billion has been withdrawn from developing countries.
Although Ukraine entered a crisis caused by the virus, with the foreign currency reserves worth $ 27 billion, the crisis has already imposed serious economic effect on Ukraine, and will only intensify in the coming days and months. The budget issue becomes a critical one. In the first two months of this year, there was the underperformance of UAH 17 billion in revenues, if this trend continues, the budget deficit in 2020 will double the planned UAH 96 billion. In addition, quarantine measures in Ukraine and the global economic crisis have hit business hard and will result in a sharp reduction in production and taxes. Given the expected 20-50% drop in business sales, according to the latest survey, the budget will receive significantly lower tax revenues in 2020, while social payments will continue to increase. Fighting the spread of COVID-19 requires at least over UAH 200 billion, although this amount may be much higher.
In addition, the government faces the issue of payments of external and internal debts. If the repayment of domestic debt can be refinanced, the repayment of external debt of $3.5 billion by the end of the year and doubling or even tripling the budget deficit to $7-10 billion requires the funding of $10-13 billion (UAH 400-500 billion). Leading experts predict that in case of the longer quarantine period and the approved IMF the program, Ukraine’s GDP will fall by 9% in 2020, and the hryvnia exchange rate may reach 35 UAH/USD.
However, without the IMF program, the preliminary forecast is even worse: a double-digit economic downturn, rapid depletion of foreign exchange reserves, high inflation, and a significant increase in unemployment.
Without the support of the IMF and other international organizations to replenish the budget, there remain a few solutions such as a sharp increase in taxes, a reduction in budget expenditures, money emission, probably accompanied by foreign debt default. In any case, the cost of such approaches would be the collapse of the economy, impoverishment of the population and mass unemployment. An increase in taxes or a reduction in budget expenditures in the face of the current crisis will lead to even greater suppression of domestic demand. Sequestration of the budget/increase in fiscal pressure will deepen the economic decline by at least 15% followed by a wave of bankruptcies. This will result in permanent (not temporary) job losses for around 500,000 people and increase unemployment to a record 12% in Ukrainian history. At the same time, the mass emission of money and the default will destabilize the existing tense situation in the foreign exchange market. NBU reserves have already been reduced to $ 24 billion, and they are unlikely to be enough to keep the exchange rate under control, as the pressure on the currency due to the hryvnia emission in the equivalent of $ 7-10 billion for the budget deficit funding will be accompanied by an outflow of capital, which amounted to $ 11-13 billion per year in previous crises. Hryvnia devaluation can reach 45-65% of the current level, up to 50-80 UAH / USD, and to stabilize the exchange rate, it will be necessary to impose tight currency restrictions that will exacerbate the crisis. Depreciation of the hryvnia will lead to increased inflation of 20-50% and a fall in real incomes of the population by at least 30%. Again, the result will be a deep economic downturn and rising unemployment, with no prospect of rapid recovery due to the lack of access to capital markets for the government and the private sector after the default.
Given the exacerbation of the situation, the money of the IMF and other international partners of Ukraine remains the only source of funding in the nearest future. Any calls to declare a default in Ukraine should be ignored since the long-term effect of such a decision will be devastating.
The country needs the capital and financial assistance of the global community to protect its citizens from COVID-19 and to help mitigate the economic impact of this global pandemic. The worst is to lose any access to finance, making the COVID-19 crisis more harrowing than it actually is. By declaring a default, Ukraine will become a rogue in the world market, and it may take decades for the country to recover. Any talks of default should be stopped immediately, and a clear message should be sent to the world community that Ukraine is a functioning part of the world economy and makes responsible decisions to protect its future.
Any politician who approves a default will certainly be responsible for its consequences, for the hundreds of thousands of jobs and lives of people destroyed by this default.
At the same time, we welcome Ukraine’s a formal request for consideration, in line with a joint call by the World Bank and the IMF to the G-20 countries unveiled on March 26. In particular, the World Bank Group and the IMF urged the governments of all creditor countries to suspend debt collection from the world’s poorest countries under bilateral credit agreements and called on the G20 to specify a list of countries with unfavorable debt situations and to submit proposals for debt relief for them.
Our eight Business associations represent the largest employers in the country, who pay the lion’s share of taxes to the state budget, have united to appeal to all the deputies of Verkhovna Rada with a request to pass the necessary laws shortly so that the country can receive IMF funding.
We understand how difficult it is to hold sessions in the Verkhovna Rada during the quarantine when several deputies had a positive coronavirus test. At the same time, major businesses across a country that employ millions of people, continue to work daily to deliver products to the stores, to provide households with the necessary supplies, to produce masks and protective equipment, etc.
We urge the deputies of Verkhovna Rada to act decisively and promptly adopt the laws required by the IMF for Ukraine to get the funding under the Extended Financing Program (EFF), and to obtain crisis funds aimed at supporting Ukraine in the battle against the coronavirus.
On behalf of:
European Business Association (EBA)
Federation of Employers of Ukraine
Union of Ukrainian Entrepreneurs
American Chamber of Commerce
Ukrainian Agribusiness Club
IT Ukraine Association