Ukraine and the International Monetary Fund recently announced a staff-level agreement on a new $3.9bn stand-by arrangement through end-2019, replacing the current extended arrangement.
The Fund’s relationship with Ukraine has always been among its most high profile and difficult interactions. The US and Europe have consistently encouraged the IMF to remain engaged in Ukraine, viewing this as a means of laying a foundation for greater market orientation, integrating Ukraine with the West and diminishing Russia’s regional influence. Russia’s invasion of Crimea and the Donbass reinforced these views, and they will surely hold in the future.
Though the Fund has spared no effort, the relationship cannot be viewed as a success. According to IMF data, there have been nine programmes since 1995, and only one of them disbursed in full – in the mid-1990s.
The failures are largely rooted in Ukraine’s foundations. The country was born out of the Soviet Union’s collapse with weak institutions and a society that looked to the state for sustenance. Since then, widespread rent-seeking behaviour in governmental institutions, corruption in state enterprises and banks, populism and an oligarchic class seeking self-enrichment have conspired to impair the development of a modern state. Ukraine’s interactions with Russia – trade, debt and energy – reinforced these trends, even before Russia’s aggression against Ukraine in 2014.
With the 2014 Euromaidan revolution, Ukraine’s people and the international community sensed an opportunity for change. The Fund, with strong western backing, rushed in first through a stand-by and then a $17bn extended arrangement lasting until March 2019.
On its face, the effort might be viewed as failure, insofar as there have been no disbursements for one and a half years under the extended arrangement and it is now to be replaced. That judgment would be fallacious and overly harsh. In reality, more progress has been made in Ukraine in the past four years than in the previous decades.
A semblance of macroeconomic stabilisation has taken hold. Growth is returning after a deep recession. Through valiant efforts by the finance ministry, particularly in dealing with the parliament, greater budgetary realism has been achieved. Ukraine has far more realistic and market-orientated energy pricing – though more remains to be done – providing massive savings to the budget. These efforts, along with debt operations, curbed the general government’s debt load as a share of GDP, albeit to a still-too-high level around 70%. The central bank is a far more modern and independent institution. Inflation, which threatened to explode in early 2014, has been contained. The Hryvnia floats.
Ukraine’s largest and most corrupt bank was nationalised after a massive fraud. Many smaller banks, often used to finance oligarchs, have been closed. Pension reforms have been launched. Thanks to tremendous IMF efforts, Ukraine is tackling corruption through the National Anti-Corruption Bureau and passed a law to create an anti-corruption court.
Notwithstanding these gains, many structural reforms were either not taken or only delivered with long politically-inspired delays, calling into question Ukraine’s programme ownership. State-owned enterprise reform and privatisation, including land privatisation, languish. Establishment forces, oligarchs and the culture of corruption remain well entrenched. The significant gains on the stabilisation front, while highly welcome, are still reversible given Ukraine’s weak institutions and acrimonious politics.
Against this background, the Fund and Ukraine have agreed at staff level on a stand-by agreement through end-2019, subject to approval by the executive board. In so doing, the Fund is taking a significant risk, but an understandable one that merits support.
At its heart, the programme rests on the Ukrainian parliament’s prior approval of a realistic budget with a deficit slightly above 2% of GDP. It also rests on long-delayed increases in household gas and heating prices to better reflect market realities. Ukraine also faces large external financing requirements in 2019, giving the Fund substantial leverage to keep Ukraine on track.
Undoubtedly, the Fund is buying time, seeking to lock in the progress made over the last four years and help ensure that macroeconomic stabilisation remains in place through the 2019 presidential election in March and parliamentary elections in October. Absent a Fund programme, this is a period in which Ukrainian politicians would, if possible, disburse funds to the electorate regardless of the macroeconomic consequences.
What happens then in 2020 on the economic front will depend on the unknown 2019 electoral outcomes. It is a topic Ukraine and the IMF will need to address when the new political and economic teams are in place.
Despite welcome achievements over the past four years, due in no small part to the Fund’s role, Ukraine has not escaped its past and put itself on a strong and sustained upward track. Ukraine remains caught between West and East, past and future. The economic promise of the Euromaidan revolution is not yet close to fruition. With hope, one day it will be realised.
Mark Sobel is US Chairman of OMFIF. He is a former Deputy Assistant Secretary for International Monetary and Financial Policy at the US Treasury and until early 2018 was US representative at the International Monetary Fund.