The IMF and Ukraine

A version of this article was first published by OMFIF on October 29, 2018.

Ukraine and the International Monetary Fund (IMF) recently announced a staff-level agreement on a new $3.9 billion stand-by arrangement through end-2019, replacing the current extended arrangement. 

The IMF’s relationship with Ukraine has always been among its most high-profile and difficult interactions. The United States 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 IMF has spared no effort, the relationship cannot be viewed as a success. According to IMF data, there have been nine programs since 1995, and only one of them disbursed in full—in the mid-1990s.

The failures are largely rooted in the foundations of Ukraine’s creation and society. Ukraine was born from the ashes of the Soviet Union's collapse with weak institutions and a society that looked to the state for direction and sustenance. Since then, widespread rent-seeking behavior in governmental institutions, deeply-rooted corruption in state enterprises and banks, populism, and an oligarchic class interested in greed and self-enrichment have conspired to limit progress in developing 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 fundamental change. The IMF, with strong Western backing, rushed in first through a standby and then a $17 billion extended arrangement lasting till 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. However, 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 strong semblance of macroeconomic stabilization has taken hold. Growth is returning after a deep recession. Through valiant efforts by the finance ministry, particularly in dealing with the Rada, much greater budgetary realism has been achieved. Ukraine has far more realistic and market-oriented 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 percent. 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 nationalized 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 the 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 program ownership. State-owned enterprise reform and privatization, including land privatization, languish. Establishment forces, oligarchs, and the culture of corruption remain well entrenched. The significant gains on the stabilization front, while highly welcome, are still reversible given Ukraine’s weak institutions and acrimonious politics.

Against this background, the IMF and Ukraine have now agreed at staff level on a stand-by arrangement through end-2019, subject to approval by the executive board. By doing so, the IMF is taking a significant risk but an understandable one that merits support. 

At its heart, the program rests upon the Rada’s prior approval of a realistic 2019 budget with a deficit slightly over 2 percent of GDP. It also rests upon 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 IMF substantial leverage to keep Ukraine on track.

Undoubtedly, the IMF is buying time, seeking to lock in the progress made over the last four years and help ensure that macroeconomic stabilization remains in place through the 2019 presidential election in March and Rada elections in October. Absent an IMF program, this is a period in which Ukrainian politicians would, if possible, be more than happy to sprinkle 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 tackle 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 IMF’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 realized.

Mark Sobel is a senior adviser (non-resident) with the Simon Chair in Political Economy at the Center for Strategic and International Studies in Washington, D.C. and U.S. Chairman of OMFIF, an independent think tank for central banking, economic policy, and public investment with offices in London and Singapore. He was deputy assistant secretary for international monetary and financial policy at the U.S. Treasury from 2000 to 2014 and subsequently U.S. representative at the IMF through early 2018.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© 2018 by the Center for Strategic and International Studies. All rights reserved.

Mark Sobel
Senior Adviser (Non-resident), Economics Program