The IMF and Ukraine\'s Economic Crisis closing case Back in late 2013, the then-
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The IMF and Ukraine's Economic Crisis closing case Back in late 2013, the then-president of Ukraine, Viktor Yanukovych, sus In return for these funds, which were to be used to support the value of the pended preparations for the implementation of a trade agreement with the hryvina in foreign exchange markets, Ukraine had to agree to a raft of policies European Union, opting instead for closer ties with Russia. Yanukovych's imposed at the bequest of the IMF. The country agreed to maintain a free float- decision resulted in mass protests in the capital city Kiev and elsewhere in ing exchange rate and to pursue a tight monetary policy aimed at restoring western Ukraine, where closer ties with the West were seen as a necessary price stability. The state-owned natural gas company, Naftogaz, was also re- counterbalance to the growing influence of its powerful neighbor to the quired to increase its prices by as much as 200 percent. Naftogaz had been east, the increasingly autocratic Russia of Vladimir Putin. These protests buying natural gas at market prices from Russia and selling it at deeply subsi- ultimately led to Yanukovych's ouster from office in February 2014. Follow- dized prices to Ukrainians. This money-losing transaction had been financed ing his removal, unrest enveloped the largely Russian-speaking provinces by issuing debt, which the government could no longer service. Indeed, a of eastern and southern Ukraine from which he had drawn his support. In growing debt burden and excessive government spending were major prob- March 2014, the autonomous region of Crimea was annexed by Russia, lems facing the country. These problems only got worse as the economy con- while a civil war between the new Ukrainian government and pro-Russian tracted and the tax base contracted. At the insistence of the IMF, the Ukrainian separatists developed in eastern Ukraine. government also agreed to cut spending on unemployment and disability in- The result was an economic disaster for Ukraine. In 2014, the country's surance, to reduce the salaries of state workers, and to cut state pensions. GDP shrank by nearly 10 percent. The currency, the hryvina, fell by more The IMF believed that while these austerity policies would result in the than 50 percent against other currencies as capital fled the country. As the economy shrinking by a further 5 percent in 2015, the economy would start costs of imports rose, inflation jumped from 1 to 25 percent. In a desperate growing again in 2016. Unfortunately, conditions in Ukraine deteriorated fur attempt to support the value of its currency, Ukraine's central bank bought ther in 2015. After some initial success, the Ukrainian government pulled back hryvina on the foreign exchange market, selling its foreign currency re- from implementing the full raft of austerity policies proposed by the IMF. To serves to do so. Ukraine's foreign exchange reserves declined from more make matters worse, there was evidence that some of the IMF loans were be- than $16 billion in mid-2014 to under $6 billion by early 2015. Moreover, ing syphoned off or squandered by corrupt government officials. In October the country was facing debt repayments of at least $10 billion and gas im- 2015, the IMF responded by halting its dispersal of funds under the loan pro- nking system was shattered. gram and pressuring Ukraine to institute economic reforms and tackle govern- In an attempt to pull Ukraine out of an economic tailspin, in April 2014, ment corruption. With funds from the IMF on hold, the Ukrainian economy the International Monetary Fund (MF) pledged to contribute $17 billion in continued to decline, shrinking by an estimated 11 percent in 2015. Unem- loans to the country over two years, of which about $5 billion was disbursed ployment continued to rise, and the inflation rate jumped to around 50 percent in 2014. It wasn't enough. The currency continued to lose value, inflation increased, unemployment rose, and the economy shrank. In early March stated, "Without a substantial new effort to invigorate governance reforms 2015, the IMF deepened its involvement in the country, putting together a and fight corruption, it is hard to see how the IMF supported program can package of additional financial support. The IMF agreed to a four-year deal continue to be successful." Lagarde's comments followed the resignation o loan $17.5 billion to Ukraine. The deal was expected to unlock another Larry Elliott, "IMF Warns Ukraine It Will Halt $40 Billion Bailout Unless Corruption $20 billion in loans from the United States and the European Union. In February 2016, Christine Lagarde, the managing director of the IMF Stops," The Guardian, February 10, 2016.Explanation / Answer
1) The then President of Ukraine had a large voter base in the eastern part of the country, these regions of the country have the ethnic Russians and wanted a closer tie with Russia. having a trade deal with the European Union will certainly dilute the influence Russia have on Ukraine. The people living in the eastern part of the country didn't want to undermine Russia for a deal with the European Union.
The president whose support base was in the Eastern part of the country had to pull back to maintain his own reputation and prove his pro-Russia stand.
President Victor Yanukovych didn't gain anything from walking away from the trade deal, his main motive was to save his position and that was not possible without the backing of his supporters in the eastern region.
He lost his position as president and he threw his country in a civil war.
2) The root cause of Ukraine's currency crisis was the civilian unrest going in the country which induced the capital flight from the country to the destinations where the investors can have better opportunities. Excessive flight of capital reduced the demand for local currency and depreciated his value making its imports and debt servicing extremely costly.
Without help from the IMF Ukraine would have faced lot of challenges in the short run. They might have defaulted on their debt servicing, the price of necessary imports like crude and gas might have gone higher further fueling the inflation which was already 25%. To stop all this Ukraine central bank had to increase interest rates which would have further dampened investment activities in the war-torn nation and ultimately Ukraine would have gone into depression(very high unemployment very low demand).
3) IMF only advised the Ukraine government to cut its excessive expenditures which were putting excessive pressure on the public funds forcing the government to float more bonds and take credits. Apart from that, IMF also recommended the government to use a floating exchange rate and cut social security funds.
All the measure would have caused problems in the short run but in the long run, a depreciating currency and would have supported exports and reduced imports thereby increasing the employment and consumption in the country. Reduced government expenditure would have helped the government to spend the limited resources in capacity building and increasing demand in the country.
So, Yes, IMF recommendations were reasonable for the long-term welfare and stability of the country.
4) IMF policy no matter how reasonable they were had one problem. They were going to be extremely painful in the short run. Decreased pensions and social security program, expensive gas and austerity measures are not generally liked by the masses. This could have increased the unrest and social turmoil in the nation putting the present government in jeopardy.
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