Posts

, ,

Ukraine Tries for Debt Relief

ukraine
This past March, Ukrainian Finance Minister Natalie Jaresko and Prime Minister Arseny Yatseniuk succeeded in securing an impressive amount of aid from the International Monetary Fund, but their work to bring Ukraine to financial stability has only just begun. The restructuring that the IMF and Ukraine agreed on calls for Ukraine to save $15.3 billion over the next four years, a number that would only be attainable if some of Ukraine’s creditors forgave a portion of their principle. So far, nobody seems willing.

After the violence last year sent Ukraine’s economy into a tailspin of high interest rates and dwindling federal bank reserves, the international community stepped in to lend Ukraine a hand – and several billion dollars.

Last April, the IMF approved a two-year loan of $17 billion to Ukraine, but soon deemed the plan insufficient to build reform while the government was busy fighting pro-Russia separatists in eastern Ukraine.

This March, the IMF approved a loan that would deliver $17.5 billion over the next four years, with $10 billion of the money being delivered this year. An official statement by IMF Managing Director Christine Lagarde in Berlin called the program “very strongly front-loaded during the first year.” She went on to express optimism about the plan, saying, “Ukraine has satisfied all the prior actions that were expected and required of it in order to start running the program. … We are off to a good start.”

‘Front-heavy’ loans like this are supposed to kick-start the rebuilding process and bring faltering economies out of their downward spirals. That money was combined with an additional promise of $7.5 billion from other international organizations and an expected $15.3 billion in debt relief.

Even with this assistance and the optimism of the IMF, the Ukrainian economy is expected to contract by 5.5 percent in 2015, before rebounding and growing by an estimated two percent in 2016. While the outlook of the IMF and the Ukrainian government is cautiously optimistic, their goal remains lofty. By 2020, they aim to reduce Ukraine’s debt down to $56.1 billion, from the estimated debt in 2015 of $74.9 billion.

Ukraine’s debt can be broken into four very rough categories: there is debt to international organizations like the IMF, which is unlikely to change. There is debt to friendly governments like the United States, which would also be hard to change. The remaining two kinds of debt are Ukraine’s $17.3 billion in sovereign Eurobonds and $31.4 billion in domestic debt. These are the debts the Ukrainian government has the best chance of re-negotiating, but simple interest alterations won’t be enough. To meet its goal, the Ukrainian government will have to reduce the principle of these debts.

This will not be a task for the faint of heart. The largest private bondholder, asset management company Franklin Templeton, has hired heavy-hitting consulting group Blackstone to advise them during talks, a sure sign that they don’t plan to surrender much. However, the toughest creditor is probably Russia, who holds $3 billion of Ukraine’s Eurobond debt, and has proven intractable to negotiation about restructuring so far.

If Prime Minister Yatseniuk and Finance Minister Jaresko can negotiate a manageable plan for debt repayment, Ukraine’s economy has the potential to make an impressive comeback.

– Marina Middleton

Sources: IMF, Bloomberg 1, Bloomberg 2, Reuters
Photo: Flickr

, ,

Croatia’s Debt Relief Offers Fresh Start

fresh start
For the past six years Croatia has been struggling to pull itself out of a severe economic downturn, one of the worst in the EU. The country’s unemployment rate stands at close to 20 percent, the average salary is just $852 a month and the country’s credit rating is below investment grade. Economic growth for 2015 is expected to be less than one percent.

In an effort to combat the crisis, the government has instituted a new program, known as “Fresh Start,” cancelling the debts of the country’s poor. The program is available to all Croatians who live below the poverty line of $138 a month and do not owe more than $5,100 in debt. In total it is estimated that 60,000 Croats can expect debt relief, and 20,000 have already applied.

The government hopes and argues that by cancelling the debt of its poorest citizens it will alleviate poverty and boost the country’s economy. Without the burden of debt repayments draining peoples’ finances, supporters of the program argue that it will enable the poor to spend more on basic necessities and that this increase in spending will help to pull the country out of the recession.

But the program is not without critics. Some argue that it will make little difference in the long run and that beneficiaries will simply end up back in debt with very high premiums, assuming they can secure new loans at all. Other critics argue that the program is a short term solution that fails to tackle long term problems contributing to the recession and fails to create jobs or provide other means to lift people out of poverty.

Then there are other critics who argue that the program does not go far enough as it fails to help those who owe more than $5,100 or earn more than $138 a month. Many applicants have been turned away for owing too much money. Many others who earn too much to qualify still live in poverty and struggle with financial hardships caused by the burden of repaying debt to creditors.

Many critics also see this as an effort by the government to win votes in the upcoming elections set for later this year. But whatever the motivations behind Fresh Start, the real question is whether it will work. The government was successful at convincing the country’s top private and public sector creditors to agree to the program, which is expected to wipe out one to seven percent of Croatians’ debts. This in turn is expected to free close to 20 percent of Croatian debtors.

There is an ongoing debate about both the effectiveness and morality of debt relief. There are numerous organizations lobbying for debt relief to the poor both at home and abroad and numerous other groups opposed to it. But in Croatia, the idea is now being put to the test.

– Matt Lesso

Sources: Mic Network, The Financial Times, Washington Post, New York Times, RTE Dublin
Photo: Panteres

, , , , ,

North-African Economies

algeria_poverty
Rural poverty in North Africa is similar to rural poverty in South Africa, though the national poverty line varies dramatically. According to Rural Poverty Portal, this includes the differences between 6% in Tunisia and 90% in Somalia. North-African economies are in dire straits.

Poverty-ridden people, they said, “constitute about one third of Tunisia’s poor population, and about three fourths of Somalia’s poor.” However, poverty in Northern Africa is still concentrated in rural areas.

This has deep causes such as the limited availability of “good arable land and water,” and “the impact of droughts and floods.” Conflict has similarly disrupted agriculture and thus intensified poverty, especially in Somalia and Sudan.

Algeria is a country in Northern Africa whose economy is dominated by the state, according to the CIA World Factbook.

“Hydrocarbons have long been the backbone of the economy,” the Factbook explains, “Accounting for roughly 60 percent of budget revenues, 30 percent of GDP (gross domestic product) and over 95 percent of export earnings.”

This hydrocarbon exportation has brought relative “macroeconomic stability, with foreign currency reserves approaching $200 billion.”

Despite Algeria’s relative stability, things such as transportation and a stable social infrastructure remain obstacles for Northern Africa. High rates of illiteracy, especially among women, also negatively affect the economy.

Rural Poverty Portal furthermore illustrated that the northern region of the continent has “weak local institutions, poor integration with the national economy, and the migration of rural youth to urban areas.”

However, the urban areas in Northern Africa hold the most political influence. “Government policies and investments in the region tend to favor urban areas over rural areas,” they said.

Just south of Algeria lies Niger, a land-locked, Sub-Saharan nation. Though it shares a border with Algeria, a relatively stable African country, it has a very low income – less than $250 USD gross national income per capita, according to the World Bank Development Indicators as of 2005.

Moreover, CIA World Factbook states that Niger qualified for “enhanced debt relief under the International Monetary Fund program for Highly Indebted Poor Countries.” This significantly reduced Niger’s debt and annual obligations, and freed up funds for “basic healthcare, primary education, HIV/AIDS prevention, rural infrastructure and other programs geared at poverty reduction.”

The Factbook said that food security remains a problem in Niger, and is enhanced by refugees from Mali.

Sixty-three percent of the population lives below the poverty line, according to the most recent data which was gathered in 1993.

Northern Africa has a wide disparity between the very poor and the middle-class. Though some countries are more stable than others, education, food stability, access to clean water and social stability remain significant obstacles for the reduction of African poverty as a whole.

– Alycia Rock

Sources: Encyclopedia Britannica, BBC, Rural Poverty Portal, Central Intelligence Agency
Photo: Reuters