John Maynard Keynes famously remarked that “When the facts change I change my mind. What do you do, sir?” One has to wonder whether the same might not be asked of the International Monetary Fun (IMF) in relation to its Ukrainian lending program. For as each day passes, it appears that the basic economic and political assumptions underlying that program are far from being realized. This has to raise serious questions as to whether that program is now adequately financed. More fundamentally, it also has to raise questions as to whether the IMF might not be overstepping its mandate in supporting Ukraine on the scale that it has been doing.
In February 2015, the IMF announced a new four-year lending arrangement for Ukraine that amounted to $17.5 billion, or over 10 percent of that country’s gross domestic product (GDP). This was to be part of a $40 billion overall financing program for that country, of which as much as $15 billion was to come from private-sector debt restructuring. The program was premised on the basic assumptions that the Ukrainian economy would soon stabilize; that its government would make a serious attempt to root out corruption and reform its sclerotic economy; and that there would at least be a freezing of the Russian-Ukrainian conflict.
{mosads}Sadly, each of the assumptions underlying the IMF’s Ukrainian program now appears to be far from being realized. Rather than stabilizing, in the first quarter of 2015, the Ukrainian economy is estimated to have declined at an annualized rate of 17.5 percent. At the same time, largely reflecting a very much weaker currency, consumer price inflation has now exceeded 60 percent. This makes it highly implausible that the decline in the Ukrainian economy will be limited to 5.5 percent for the whole of 2015, as the IMF has been projecting. It also makes it all too likely that the country’s budget deficit will well exceed the IMF’s target, which will increase the country’s already high financing requirements. This would especially be the case if there were to be no improvement in Ukraine’s relations with Russia and if Ukraine were to default on its private-sector obligations if no agreement on debt restructuring is reached by the end of June.
An important justification of an IMF program on as large a scale as that agreed was that the new Ukrainian government would vigorously implement an economic reform agenda and would root out the corruption that has for so long plagued the country. However, despite the good intentions of Ukrainian President Petro Poroshenko, little headway appears to have been made in this area. As the chairman of the Ukrainian parliament’s Committee on Corruption Prevention and Counteraction, Egor Sobolev, has recently noted, the biggest problem in the country remains that it does not have a real judicial system, since most of the judges and prosecutors are still people from former President Viktor Yanukovych’s time. At the same time, it appears that the government is becoming increasingly internally divided, which has to raise questions as to its commitment to serious economic reform.
More troubling yet for the viability of the Ukrainian economy is the fact that there is little sign of stabilization of the Ukraine-Russia crisis. Indeed, while a cease-fire was agreed to in February, there are all too many indications that the cease-fire is in its final death throes and that, despite continued pressure from the West, Russian President Vladimir Putin is not backing down on his predatory designs on that country. This makes it difficult to see how the Ukrainian economy can possibly stabilize anytime soon and how Ukraine’s financing requirements are not going to continue to increase.
Despite all of Ukraine’s evident failings, a strong case can still be made on purely geopolitical grounds for continued large-scale Western financial support to prop up its economy. However, the question remains whether it is appropriate for the IMF to be used as a backdoor way to providing that support without the approval from interested legislatures. Not only does large-scale lending for purely political purposes threaten to further tarnish the IMF’s credibility as a financial institution and as a provider of a seal of good-housekeeping; it also circumvents the democratic process in deciding how taxpayers’ money is to be spent.
Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.