IMF money will come on the conditions of privatization and austerity
This article originally appeared at The Economist
This morning the International Monetary Fund (IMF) announced that it would probably grant Ukraine a new bail-out. How big is it? Some have reported a $17.5 billion bail-out; others a $40 billion figure. In fact, the "new" bail-out is only worth around $5 billion. That is because the IMF already pledged $17 billion back in April, of which only $5 billion has been actually disbursed. In other words, the fund is making good old promises, rather than offering any new cash.
Christine Lagarde, the head of the IMF, hopes that by the time other Western donors pile in, Ukraine will get about $40 billion-worth of cash. That is very optimistic. If the IMF disburses all the money it has promised, it will disburse about $18 billion over the next four years. America and the European Union have, vaguely, promised about $2 billion each.
That together leaves us a long, long way short of $40 billion. Tim Ash, of Standard Bank, is blunt:
This is NOT a significantly increased IMF programme, and Ms Lagarde should not try and sell it as such.
Traders seem to agree with Mr Ash. The hryvnia, Ukraine’s currency, fell today. It is now worth a third less than it was a few days ago.
For the extra cash, what is the IMF expecting in return? Understandably, the fund wants reform. Ukraine is horribly corrupt and inefficient. Improving the business climate is vital.
But the IMF’s medicine will not taste good for the average Ukrainian. Let’s go through what Ms Lagarde said in her statement. Ukraine will need:
front-loaded actions going forward
That is IMF-speak for a few things, including rapid reform of Naftogaz, the giant state gas monopoly. For years, Naftogaz supplied households with extremely cheap gas (at 20-30% of the cost of supplying it). The government made up the difference, to the tune of about 4% of GDP.
That’s going to change. The Ukrainian authorities, says the IMF, “have decided to implement front-loaded gas and heating-price adjustments aiming to reach full cost recovery by April 2017”.
So, if we go off 2013's figures, we can estimate that domestic gas prices will increase fivefold in four years.
What else? The IMF say that:
Monetary policy will be geared toward returning inflation to single digits in 2016 within a flexible exchange-rate regime.
Inflation is running at about 30%. It is about to get a whole lot higher, since in recent days the value of the hryvnia has plunged. The central bank has already raised interest rates to 20% from just 7% a year ago. Propping the hryvnia up, as well as counteracting the inflationary pressures within the economy (which are not helped by the gas-price rise), will need even bigger interest-rate increases. These higher rates will make it more difficult for Ukrainians to repay debt. That will hit the banking sector, which is already collapsing. Even if Ukraine were not at war, such big hikes would send the economy into a deep recession.
And finally, the IMF asks that “fiscal consolidation would continue over the coming years”. The IMF’s forecasts in October suggested that public spending, as a percentage of GDP, would fall by 4.8 percentage points over the next five years—a level similar to that implemented by the Greek government between 2010 and 2014.
“It is a tough programme”, said Christine Lagarde. It sure is. The risk is that the programme, which anyway is nowhere near generous enough, will mean that Ukraine’s economic situation gets even worse. What we argued in November still stands; Ukraine needs long-term investment in things like infrastructure. But it does not look like it will get it.