In Ukraine: IMF Mr Nice or Nasty?

Maidan Square, Kiev The Barricades in Maidan Square, the scene of months of protests

Is tough love from the West the right economic prescription for Ukraine, as the Russian bear consumes the Crimea and appears to be salivating over the prospect of consuming rather more of that turbulent country?

Or should the International Monetary Fund and other sovereign creditors be a little less insistent that Ukrainians should put on hairshirts as a condition of receiving vital official loans?

The IMF has announced it will provide between $14bn and $18bn over two years, and believes another $10bn or so will be "unlocked" from other international financial organisations and rich countries (such as the EU and Japan).

The provision of new credit is vital. Without it, Ukraine risks not being able to service its external debts in the coming year, of defaulting, and of running out of reserves to pay for imports.

That way lies penury, for a country whose economy has been limp for years.

IMF reforms necessary

Against that background, the IMF's imposed reforms - allowing the currency to float, inflation targeting by the central bank, strengthening banks, tax rises and public spending cuts, the elimination of expensive gas subsidies - are the conventional remedy.

And to demonstrate the wisdom of this prescription, the IMF points out that the deficit on the current account (the gap between Ukraine's income and outgoings with the rest of world) recently became an unsustainable 9% of GDP (high even by UK standards).

Also, the deficit on the budget combined with losses generated by the state owned energy company, Naftogaz, are heading for a high 10% of GDP (which is where the UK's public sector deficit was, ante austerity).

So the status quo is the road to ruin.

Pace of reform

But as ever the debate is all about the sensible pace for the acquisition of economic prudence and fiscal rectitude.

Now on this, the IMF's actions and statement are somewhat ambiguous (ahem).

On the one hand, the Ukrainian government yesterday said it would be whacking up the gas price paid by consumers by an eye-watering 50% (does that make you feel mellower towards British Gas?), citing the looming agreement with the IMF as cause.

On the other, the IMF insists that government spending cuts and tax increases will be "proceeding at a pace commensurate with the speed of economic recovery and protecting the vulnerable".

What does that mean in terms of numbers? Well the IMF wants the fiscal deficit - the gap between government revenues and expenditure - to be halved (more or less) to 2.5% by 2016.

Which is slower retrenchment than planned in the UK. But then the UK is considerably richer, and does not face elections - as Ukraine does - on May 25, which will determine (in part) whether the country has a stable democratic future.

So is this an occasion, where the West and its official financial institutions, could and should be a little more conspicuously generous - such that they (we?) should offer the Ukrainians more carrot, especially since there is little appetite to brandish an intimidating stick against the Russians?

Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 89.

    @88 empiredown
    IMF is a loan shark
    You have a point in the sense that the IMF enters the fray when all else has failed and as such is in a position to demand whatever it seeks in return for the desired "help".
    Often the IMF help is primarily to ensure that creditors are paid rather than on focusing on the local actors.
    Structural Adjustment Plan's made things worse.

  • rate this

    Comment number 88.

    IMF is always nasty. The ultimate loan shark.

  • rate this

    Comment number 87.

    @86 All for All
    relevant scales
    Each one is interesting.
    Just to take affinity or affinities -
    In the sense espoused by Goethe and then Weber where only in certain circumstances do particular reactions take place.
    And so it becomes necessary to facilitate the arrangement of these "elective affinities".

  • rate this

    Comment number 86.

    plotinus @85
    "mutual & equal respect"

    Need to distinguish 'mutual respect' as equal citizens (conscience & so trust protected by equal-income security, self and loved-ones; all-for-all representation securing values we can share), alongside our freedom to weigh respect in contexts personal & business (proposals & produce) on whatever scales we deem relevant (spirit & affinity, knowledge & wisdom)

  • rate this

    Comment number 85.

    @84 All for All
    stable currency depends on equal partnership
    Currency in it's broadest sense is the means by which we conduct exchange between each other, whether practical or theoretical, scientific or artistic, promissory or ready cash.
    For such exchanges to occur to their fullest without let or hindrance there needs to pre-exist a mutual and equal respect for each other.


Comments 5 of 89



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