IMF loan must wait until after the May election
Letter to the Editor

Article Highlights

  • Lachman: it's fanciful to think the IMF can save Ukraine's economy now

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  • Before a credible gov is in place in Ukraine, IMF can't do much to help

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Sir, It is not clear that Anders Aslund does us a service by minimising the magnitude of economic adjustment that Ukraine needs and by overstating what the IMF can reasonably be expected to do to support that country (“Ukraine can now fix its economy – if it moves fast”, February 26).

According to Dr Aslund, Ukraine’s economy could be turned around with a radical 12-month IMF-supported adjustment programme, with an IMF loan disbursement as early as March. In his view, a radical reform programme should be easier to undertake in Ukraine than in many countries that have faced similar crises since in Ukraine financial stabilisation primarily means an anti-corruption programme.

While Dr Aslund is correct to emphasise the need for improved governance, he glosses over the fact that the corruption issue has been a longstanding IMF concern that predates the Yanukovich government. This suggests that resolving this issue will be far from easy. More serious yet, given the country’s acute macroeconomic imbalances, it would seem that eliminating corruption is a necessary but not sufficient condition for stabilising the Ukraine economy.

According to a recent report by the Institute for International Finance (IIF), Ukraine suffers from a twin deficit problem of the order of 9 per cent of gross domestic product. In addition, the country’s banking system is grossly undercapitalised and the banks’ mismatched loan book will be further impaired by the collapse of the currency. In the IIF’s view, at a minimum Ukraine needs a 4-5 per cent of GDP budget adjustment and an 80 per cent increase in administered gas prices.

Particularly considering Ukraine’s very poor IMF record and the social and economic pain that will be associated with the required degree of adjustment, it is fanciful to think that the IMF can conclude a large-scale multiyear lending programme for Ukraine before an inclusive and credible government is in place.

In the context of the acute political uncertainty at present characterising the country, to suggest that the IMF can make large-scale disbursements before the scheduled May 25 election is simply to engage in wishful thinking.

Desmond Lachman, American Enterprise Institute, Washington, DC, US

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