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 be 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 Yankovich, 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. The U.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.
It seems like Ukraine is in an extremely tough scenario – they have a “market-unfriendly institutional base”, which makes outside investors uneasy about the republic’s economic stability while also having constant political unrest and corruption. As their past behavior seems to foreshadow, it seems unlikely that this program the IMF is trying to implement will be successful in providing the 14 billion in funds since it is contingent on (again) the political side of the country to take an aggressive attitude toward the economic trouble it faces and outside threats (Russia). Leszek Balcerowicz’s optimism shows the hope that the world has for Ukraine; however, true political reform is difficult to come by even with continuous protesting (as seen with Syria & Egypt). If true political reform is what Ukraine really needs to stabilize their economic problems and to encourage investors to believe in their economic system, then it looks like they have a long road ahead even with the IMFs help.
I am intrigued by the recidivism argument — not only the fact that Ukraine is a recidivist but also that the IMF continually cuts its program commitments short. I wonder if the two trends of repetition have any causality between each other…as in, Ukraine’s continual return to the IMF may be influence by the fact that none of the IMF’s previous programs for Ukraine seem to ever be fulfilled. Therefore, previous financial boost programs always gets cut short, preventing Ukraine from gaining full benefits and causing the country to return to the IMF again and again. Therefore, I may be so bold as to wonder if Ukraine’s recidivist behavior is not exclusively affected by internal factors such as current account deficits, technology adoption, lower reserve holdings, corruption, and less capital inflows.
So, perhaps we must take criticisms (such as Peter Boone saying “There is no point to bailing out Ukraine’s creditors and backstopping Ukrainian banks”) with a grain of salt — it’s not like the IMF has followed through either.
As for the US’s hypocritical response to Ukraine — between its hesitation to reform IMF quota rules versus criticism Russia’s involvement in Ukraine — that’s another story.
Ukraine has a rather weak financial institution which decrease investment significantly because of its economic instability and possible military and political unrest . Also, the IMF program is likely to fail because of its conflict with Russia. Furthermore, Ukraine’s political reform is difficult to be achieved by continuous protesting in recent events . In order to stabilize their economic, Ukraine needs to regain investors’ faith in this country. However, whether a political reform is going to help them is questionable.
With the IMF board meeting in a few days to review the 18 billion aid package, I’ve read some concerns about the negative impact the IMF aid will have on the Ukrainian government. Disregarding the explicitly biased Russian media, even the World Bank and some economic analysts around the world are voicing concern about the quid pro quo of the aid. In order to receive the financial aid, Ukraine would need to allow the currency to float(leading to devaluation), implement inflation targeting, collect more text and reduce public spending, etc. Although these are necessary measures to ensure Ukraine pay off its debt and stabilize its macroeconomic institutions, the inevitable reduction in output and soaring inflation (predicted to be 3% decrease in GDP and inflation rise of 12-14% ) that will follow are making some worry whether Ukraine will be on a “austerity death march.” There’s debate about whether this is harsh love for the recidivist Ukrainian economy or fatal blow to the much-too-fragile economy.
I would love to hear more opinions on this matter from Professor Joyce and my classmates!
The recidivism argument points to a cycle that will continue, Ukraine asking for help from the IMF and one of the parties not following through entirely. I would be interested in knowing the popular opinion of the IMF in Ukraine, and how that may affect policymakers’ decisions. The resistance of the U.S. to pass IMF reform is an important part of the story, as the quota does not lend the IMF credibility in the countries that may need it the most.
It will be really interesting to see how this $17 billion stand-by arrangement will fare out given the IMF’s history with reform pressure that for the most part has not been successful. It seems like so far with regards to Ukraine and its recidivist behavior, the IMF is playing the role of the parent who agrees to pay the credit card bill only to watch their child go on another shopping spree. It’s really hard to believe that Ukraine is willing to fulfill its promise of economic reform.
IMF loans are generally based on assumptions about economic growth and the level of political and economic stability. However, one cannot overlook the fact that none of these are predictable in Ukraine right now. Ukraine is faced with threats from Russia, where Russia’s state-controlled company Gazprom has raised the cost of gas to Ukraine by 81%, and domestic instability as nationalist protesters in Kiev’s Maidan have vowed to continue their revolution. What Ukraine needs at this point are short-term grants, and not long term loans with a string of conditionality attached. It is unrealistic for the IMF to expect that the Ukraine can pay this own back or abide by the conditions in the near future, and this expectation can potentially serve as a destabilizer in an already messy situation.