Why Ukraine needs IMF more than the IMF needs Ukraine?

Author : Ukraine Vox

14:04, 25 April 2016

Why Ukraine needs IMF more than the IMF needs Ukraine?

Author : Ukraine Vox

Ukraine has a lot of programs with the IMF, but none of them has been fully implemented

14:04, 25 April 2016

Read the original text at Eurointegration.


History of Ukrainian authorities is a history of failure to implement reforms.

Indeed, even if the reforms were carried out, many of them would be abolished. We have already witnessed a lot of such examples.

The government has promised to reduce the regulatory burden on business. According to "Ease of Doing Business," this did not happen.

The government announced plans to reform the pension system in the three-tier. It did not happen.

The government has promised to set the market price of gas for households. Currently, it is not fulfilled. In early April, the Cabinet decided to postpone increase at least until May the next stage of tariff.

In a similar way, the government does not hesitate to radically change its policy in relations with foreign partners. We remember how unexpectedly Viktor Yanukovych rejected plans to sign a trade agreement between the EU and Ukraine, the preparation of which lasted for years.

Related: Hahn: “Government must further cooperation with IMF in order to receive €600 million tranche from EU”

Ukraine has a lot of programs with the IMF, but none (!) of them has been fully implemented. In most cases, the IMF-Ukraine programs were canceled after receiving the first tranche, because the authorities did not respect their promises.

There are many reasons for these joyful stories.

The transition from communism, its one-party system and command economy to multiparty democracy with a market economy did not create a stable political environment.

Often the parties, which participated in the elections, has not existed before these very elections. With such a rapid change of political brands, voters easily lose orientation among political actors that run across the new unit, movement or party (there are many deputies of previous convocations even in the current parliament).

In addition to this, weak protection of property rights and the raw nature of the economy “subsidize” shortsighted economic decisions. Whatever was the cause, it is clear that the Ukrainian government - and the whole Ukrainian political elite - are not willing to bear short-term losses in order to improve the long-term outlook.

Related: G7 Ambassadors encourage Groysman to further IMF program and fight against corruption

Ukraine is not the only country with inefficient, corrupt political class and crushed weak economy.

In many ways, Argentina is a sister Ukraine. After decades of populism and policy-based rule "divide and conquer," the country was in the midst of all possible crises: a default on public debt, the banking crisis, currency crisis, nationalization of companies owned by foreigners, street protests, hyperinflation, economic depression, conflicts with the IMF and other international organizations, unstable government.

The greatest concern is that the disorder can last very long, slowly - or sometimes quickly - putting the country on its knees.

Fortunately, these countries can get rid of ruling groups interested only in their personal benefit; they can modernize and get out on track.

Not only significant external threat might play a crucial role (e.g., Israel, South Korea, Taiwan), but also external "anchor." For example, the prospect of EU accession has become a key factor in the implementation of reforms in Poland, Hungary, Czech Republic, and other Eastern European countries.

We have already seen that the probability of a visa-free regime with the EU really helped to overcome the resistance of anti-corruption efforts in Ukraine. In other words, weak national institutions can be strengthened by the international institutions, which provide credible assurances that the temporary difficulties and sacrifices will turn better life in the future.

Related: Head of NBU: Ukraine stays in IMF program

IMF often plays a similar role to the EU: it is the guarantor of change in countries with weak institutions.

"Carrot" in the form of IMF loans encourages local elites to take up the mind and implement reforms (de-monopolization, privatization, deregulation, etc.).

Recently the IMF more stubbornly insists on implementing institutional reforms as the key condition for participation in the programs of the IMF in order to ensure the irreversibility of the changes and their sustainability in the long term. Country in crisis has a poor choice, and therefore has to meet certain requirements to receive funding, even if the IMF money leads to changes in the balance of interests in the country.

Equally important is that the IMF gives a signal to international investors that the country is on the right track. It becomes easier to cope with the challenges, as it is the right time and place for investment.

Ukrainian media and politicians often portray the IMF as a "bad cop," but a better comparison is with the "doctor," who must give the patient bitter pill to make him recover.

Some errors may occur, especially in difficult chronic cases.

Related: What threatens European economy: forecasts and warnings from the IMF

For example, not all of us agree that it is a good idea is to tax the salaries of pensioners, while the country is in a deep demographic crisis and with a population that is aging rapidly.

Yet most of the requirements of the IMF are not controversial. For example, subsidies for housing and communal services provide by Ukrainian government were unreasonably high (in Ukraine, which imports about 80% of its gas demand, gas tariffs for households were lower than in Russia, from where it was imported). This practice should be stopped long time ago, but it would lead to almost mortal crisis and the subsequent requirement IMF.

Moreover, even if the IMF demands are not ideal, the leaders of Ukraine are rarely offered a better alternative.

The above arguments had to prove that the cancellation of the agreement with the IMF would be a very bad step for Ukraine.

First, Ukraine needs a lot of money to rebuild the economy and to cover short-term deficits. It may seem that Ukraine's economy has stabilized, but the stability is still very fragile.

Related: Pyatt comments on IMF, fighting corruption and Ukraine-NATO cooperation

Ukraine needs international support, and now its main and the only creditor is the IMF and other international financial organizations, which mostly follow the IMF. Who else could provide billions of dollars to the Ukrainian government?

Second, Ukraine must gain the reputation of responsible partner. It needs a good "credit history." History of the country that meets its obligations.

Third, Ukraine needs foreign expertise and experience to strengthen its institutions. The IMF can assist in the transfer of "know-how" in this area (especially in banking, direct international investments, macroprudential regulation, inflation targeting, etc.).

Finally, and most importantly, it seems that changes in Ukraine can occur only if the government is under gunpoint. Sometimes literally.

Related: IMF: in 2016, Ukraine’s GDP to grow by 1.5 percent

A country with a corrupt and entrenched elites requires internal or external stimulus to ensure that the public interest will be put above the interests of the officials.

Once this role would belong to the civil society, but now it is not mature enough to force politicians to resign if the results of their work are bad. Government/Parliament are more likely to swallow "the pill" inresponse to the threat of non-receipt of billions from the IMF, rather than toanger society.

In short, Ukraine is no longer in the position to risk a conflict with the IMF.

IMF does not need Ukraine. This is Ukraine that needs an external support and expertise.

VoxUkraine believes that it is critically important to continue cooperation with the IMF and comply with obligations under the program.

Related: What IMF expects from Poroshenko and the new government

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