The IMF and Ukraine

The International Monetary Fund last week announced an agreement with Ukraine on a two year Stand-By Arrangement. The amount of money to be disbursed depends on how much other financial support the country will receive, but will total at least $14 billion. Whether or not this IMF program will be fully implemented (unlike the last two) depends on the government’s response to both the economic crisis and the external threat that Russia poses. There is also the interesting display of the use of the IMF by the U.S., the largest shareholder, to pursue its international strategic goals even though the U.S. Congress will not approve reforms in the IMF’s quota system.

Ukraine’s track record with the IMF is not a good one. In November 2008 as the global financial crisis intensified, the IMF offered Ukraine an arrangement worth $16.4 billion. But only about a third of that amount was disbursed because of disagreements over fiscal policy.  Another program for $15.3 billion was approved in 2010, but less than a quarter of those funds were given to the country.The recidivist behavior is the product of a lack of political commitment to the measures contained in the Letters of Intent signed by the government of Ukraine. Ukraine, like other former Soviet republics, was slow to move to a market system, and therefore lagged behind East European countries such as Poland and Romania in adopting new technology. Andrew Tiffin of the IMF attributed the country’s economic underachievement to a “market-unfriendly institutional base” that has allowed continued rent-seeking. Promises to enact reform measures have been made but not fulfilled.

Are the chances of success any better now? Peter Boone of the Centre for Economic Performance at the London School of Economics and Simon Johnson of MIT are not convinced that there has been a change in attitude within the Ukrainian government, despite the overthrow of President Viktor Yanukovych (see also here). Consequently, they write: “There is no point to bailing out Ukraine’s creditors and backstopping Ukrainian banks when the core problems persist: pervasive corruption, exacerbated by the ability to play Russia and the West against each other.”

Leszek Balcerowicz, a former deputy prime minister of Poland and former head of its central bank, is more optimistic about the country’s chances. The political movement that drove out Yanukovych, he claims, is capable of promoting reform. Further aggression by Russia, however, will threaten whatever changes the Ukrainian people seek to undertake.

The “back story” to the IMF’s program for Ukraine has its own intramural squabbling. TheU.S. Congress has not passed the legislation needed to change the IMF’s quotas so that voting power would shift from the Europeans to the emerging market nations. The changes would also put the the Fund’s ability to finance its lending programs on a more regular basis. Senate Majority Leader Harry Reid sought to insert approval of the IMF-related measures within the bill to extend assistance to the Ukraine, but Republicans lawmakers refused to allow its inclusion. While U.S. politicians expect the organization to serve their political ends, they reject changes that would grant the IMF credibility with its members from the developing world.

The Economist has called the failure of Congress to support the IMF “shameful and self-defeating.” Similarly, Ted Truman of the Peterson Institute for International Economics warns that the U.S. is endangering its chances of obtaining support for Ukraine. The Europeans, of course, are delighted, as they will keep their place in the Fund’s power structure while the blame is shifted elsewhere. And the response of the emerging markets to another program for Ukraine, despite its dismal record, while they are refused a larger voice within the IMF? That will no doubt make for some interesting discussions at the Annual Spring Meetings of the IMF and the World Bank that begin on April 11.

 

One Response to "The IMF and Ukraine"

  1. EzioP1   April 1, 2014 at 9:07 am

    No doubt that Putin is aiming to expand the Russian empire, he has as key reason the failure of the expansion plan of Europe, if Europe ever had one. The previous URSS countries were initially entusiast to join the European Union, but now they see only critical social and economic situation as: reduced investment, GDP reduction, rising unemployment, political break rather than a united one, German opportunism opposed to cooperation, and so forth. This make a good and easy job for Putin to convince the neighbouring countries to join again Russia. Putin is also going to gain should the IMF and other international organization provide to Ukraine funding to save its state balance as a matter of fact Putin already increased the gas price to Ukraine. The further risk is that the other Russian neighbouring countries seeing the bad Westner countries situation would most probably prefer to get back to the novel Russian empire. The only way to avoid such big Russian rebuild would be for the EU, USA and IMF to plan together a relevant political, economical and social expansion.