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
    +7

    Comment number 9.

    . . . how about we mind our own business? what is the point in lending bilions of dollars to an economic and political basket case . . . how do the plan to pay it back?

  • rate this
    -2

    Comment number 8.

    There needs to be wholesale economic reform in the Ukraine or we will just be sloshing more funds into the hands of the oligarchs. They are the real problem and have been stirring up division in Ukraine for their own interests having already stolen Russia from the Russians.

    Putin is no more than the gamekeeper who has gone native when faced with an opportunity.

    The stealing of lives must end

  • rate this
    +7

    Comment number 7.

    Why is the IMF dealing with an interm government that might not be there in May? Seems like they are trying to get their foot in the door before it closes.

  • rate this
    +3

    Comment number 6.

    One might make the judgement call that the fervently pro-European will accept almost anything as long as it strengthens ties to the West, and the fervently pro-Russian will accept nothing, however gentle, that endangers their inefficient factories. In the middle will be those who are used to shrugging and trying to survive.

    Ukraine was once the USSR's technology hub. Maybe it stands a chance.

  • rate this
    +11

    Comment number 5.

    Ukraine may be in need of economic reforms but its political crisis is equally, if not more, dire. Austerity measures that bite too hard could drive Russian speaking people in the eastern region straight into the arms of Putin and lose Ukraine much of its industrial sector. The IMF's conditions are based on the needs of Ukraine'screditors, not ensuring it's survival as an independent nation.

  • rate this
    +5

    Comment number 4.

    The IMF will do what they normally do and demand that everything worth an iota is privatized!

  • rate this
    +4

    Comment number 3.

    Ukraine need some stong economic reform - as the potential bread basket of Europe it has the potential to be a developed country but is in a mess.

    In addition, to the painful adjustments in fuel costs and debt management, the whole issue of commercial law, criminal corruption law, transparency and accountability needs immediate resolution otherwise politicans and cronies only will benefit.

  • rate this
    0

    Comment number 2.

    Good to read that the IMF is so quick to deal with a non elected violently imposed government.

    Still not to worry as most of this money will flow immediately to Moscow - seems like only last week we were imposing sanctions on Russia.

  • rate this
    +1

    Comment number 1.

    Many people have complained about the Coalition`s "savage cuts". They do not seem to realise that if you do not get your own house in order someone else will do it for you and if it is the IMF it will not be pleasant. I can remember 1976 and what happened to the UK.

 

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