Joint appeal to the deputies of the Verkhovna Rada of Ukraine on behalf of the eight largest business associations of Ukraine
Dear deputies of the Verkhovna Rada of Ukraine!
The devastating impact of COVID-19 acute respiratory disease caused by the SARS-CoV-2 coronavirus is unprecedented in the world.
Confirmed cases today account for nearly 550,000 infected people, with more than 24,000 fatal cases in 199 countries and territories all over the world.
The governments of different countries are taking swift steps to try to prevent their economies from collapsing, bankruptcy of companies, the loss of tens of millions of workplaces and the destruction of their citizens’ savings and livelihoods. Just yesterday, on March 26, the leaders of the Group of Twenty (G20) made a joint statement announcing their readiness to invest more than $ 5 trillion in the global economy to overcome the negative effects of the pandemic. Most economists agree that the world has already entered a recession, not being sure how long it will last and how deep the consequences for the economy will be. The economic downturn from the pandemic is likely to be one of the biggest upheavals for several generations.
According to various estimates, the collapse of the world economy will be as sharp as it was during the global financial crisis of 2009 and possibly even stronger depending on how quickly it will be able to cope with the rising number of incidence of infection and how severe quarantine measures the countries will have to take.
The threat of coronavirus to emerging markets such as Ukraine is even larger, both in the field of health care and in economic terms. The international capital markets have closed for this group of countries and the Institute of International Finance reports that since January 21 $ 80 billion has been withdrawn from developing countries.
Although Ukraine has entered a crisis, caused by the virus, with gold and currency reserves in foreign currency worth $ 27 billion the consequences of the crisis for Ukraine have already been having a serious economic effect that will only intensify in the coming days and months. The situation with the budget is critical. For the first two months of this year the revenues were underperformed by UAH 17 billion. If this trend is maintained the budget deficit in 2020 will exceed twice the planned UAH 96 billion. In addition, quarantine measures in Ukraine and the global economic crisis have already painfully hit the business and will result in a sharp reduction in production and taxes. Taking into consideration the expected 20-50% falling sales of companies, according to the latest business impact survey, the budget will receive significantly lower tax revenues in 2020 while social payments will continue to increase. Combating 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 payment of foreign and domestic debts. If the repayment of domestic debts can be refinanced, the repayment of foreign debts in the amount of $ 3.5 billion by the end of the year and doubling or even tripling the budget deficit to $ 7-10 billion mean the need for funding in the range of $ 10-13 billion (UAH 400-500 billion). Leading experts predict that if the quarantine is extended for several months and the International Monetary Fund (IMF) program is available 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 devastation of gold and currency reserves, high inflation and a significant rise in unemployment. Without the support of the IMF and other international organizations the budget gaps can be handled either by a sharp increase in taxes or a reduction in budget expenditures or by resorting to printing money probably in combination with a foreign debt default. In any case the cost of such an approach would be the collapse of the economy, impoverishment of the population and mass unemployment. Increasing taxes or reduction of budget expenditures in the current crisis will lead to an even greater suppression of domestic demand. Sequestration of the budget or increase in tax pressure will deepen the economic decline by at least 15% in annual terms and cause a wave of bankruptcies. This will result in permanent (not temporary) job losses for about 500,000 people and increase in unemployment to a record 12% in the history of Ukraine. At the same time the mass printing of money and default will destabilize the already tense situation in the foreign exchange market. The reserves of the National Bank of Ukraine (NBU) have already 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 emission of hryvnia in the equivalent of $ 7-10 billion to finance the budget deficit will be accompanied by an outflow of capital which in previous crises amounted to $ 11-13 billion per year. 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 crisis phenomena. Depreciation of the hryvnia will lead to an increase in inflation to 20-50% and a fall in real incomes of the population by at least 30%. The result will again be a profound 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.
Considering that the situation is continuing to unfold the money of the IMF and other international partners of Ukraine remains the only source of funding in the near future. Any calls to declare Ukraine’s default should be ignored because the long-term effect of such a decision is very dangerous.
The country needs capital and financial assistance from the world community to protect its citizens from COVID-19 and to promote mitigation of economic consequences of this global pandemic. The worst that can happen in the situation is losing any access to funding making the COVID-19 crisis even worse than it is. By declaring a default Ukraine will become an outcast in the world market and it will likely take decades before the country recovers. Any talk about default should end immediately and a clear message should be sent to the world community – Ukraine is a functioning part of the world economy and makes responsible decisions that protect its future.
Any politician who approves of a default will certainly be responsible for its consequences, for the hundreds of thousands of jobs and lives of people that will be obliterated by this default.
At the same time we welcome the official request of Ukraine for consideration in accordance with a joint appeal by the World Bank and the IMF to the G20 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 the bilateral credit agreements and called on the G20 to identify a list of countries with unfavorable debt situations and to make proposals to alleviate the debt burden for them.
Our eight business associations represent the largest employers in the country who pay most of the taxes to the state budget and unite to address every deputy of the Verkhovna Rada of Ukraine with a request to adopt the necessary laws in the near future so that the country could receive IMF funding.
We understand how difficult it is to hold sessions of the Verkhovna Rada during quarantine when several deputies of Parliament received a positive coronavirus test result. At the same time major businesses across the country employing millions of people continue to work daily to deliver products to store shelves, to ensure quarantined households with the necessary supplies for living, to assure masks and protective equipment production in factories etc.
We urge the Verkhovna Rada deputies to act decisively and to adopt urgently the laws necessary for providing Ukraine with the money of International Monetary Fund under the Extended Financing Program (EFF) as well as to obtain crisis funds aimed at supporting Ukraine in the fight against the coronavirus.
On behalf of:
The Federation of Employers of Ukraine (FEU),
the Union of Ukrainian Entrepreneurs (SUP),
the American Chamber of Commerce in Ukraine (AMCHAM),
the European Business Association (EBA),
Business 100,
the Ukrainian Agribusiness Club (UCAB),
the IT Ukraine Association,
CEO Club,
Ukrainian Association of Furniture Manufacturers (UAFM).
