The dramatic developments in Kiev have captured the world’s attention, and rightly so. But there is an economic debate underway that needs immediate attention as well.
Much of the public discussion of Ukraine’s financial needs is offtrack. Most of the focus is on whether the IMF will do a program, and of what size. But it will be some time before we have a government in place that can make the needed commitments (e.g., raising energy prices and putting fiscal policy on a sustainable track, reforming state enterprises and the energy sector, and addressing corruption), or sufficient clarity about the economic and political conditions that would allow a program to succeed. The transitional government talks of being a “kamikaze government”, taking tough and unpopular measures, but that could put extraordinary stress on an already fragile coalition. To try and rush a program would be a mistake, as it would likely be underfunded and subject to conditions the current government cannot or will not stick to. Meanwhile, the central bank continues to lose reserves (and we don’t know how much of what is left is liquid), the government is having trouble providing basic services, and the banking system is broken.
For me , the critical question is what financing can and should be assembled quickly and subject to light conditionality, as a bridge of sorts to a new government and full IMF program (EFF). A rapid financing package would address critical external and budgetary needs to allow the government to service a difficult political period. Such a package could include the following elements and provide net new financing of $4 to 8 billion, which would finance Ukraine’s government until the summer.
- IMF emergency disbursement under its Rapid Financing Instrument (RFI) for $1.1 billion.
- EU disbursement under its program of Macro-Financial Assistance for non-members (MFA) on the order of $2 to 4 billion.
- U.S. government loan guarantees totaling $1 to 3 billion.
- Heavy pressure on Western banks to stay in and maintain their exposure (modeled after the “Vienna initiative” that successfully encouraged banks to remain in Eastern Europe from 2009), coupled with commitments from the private sector. I have proposed a “Friends of Ukraine” meeting that would include prominent Ukrainian oligarchs; others have suggested a private placement of bonds sold to the oligarchs. More generally, it is not politically or economically sustainable for an official rescue package to finance private outflows. At some point, a reprofiling of the external debt looks likely.
I assume the U.S. piece is more possible now, but the fundamental question relates to the politics and whether intervention would help. Each of these pieces would require strong political will and take governments outside their comfort zone (especially Germans if they maintain their concern about moral hazard). But it is possible and the impact could be significant. Then, in stage two, a comprehensive IMF program could be agreed.
If stabilizing Ukraine is important for the West, as I believe it is, then this two-stage approach deserves our support.
This piece is cross-posted from Macro and Markets with permission.