New IMF Arrangement with Ukraine

Lagarde:  “Immediate Economic Stabilization“

Econintersect:  Ukraine has entered into a new four-year extended arrangement with the IMF that the organization says will:

… build on and deepen reforms launched under the SBA [previous IMF program for Ukraine].  The program aims to put the economy on the path to recovery, restore external sustainability, strengthen public finances, and support economic growth by advancing structural and governance reforms, while protecting the most vulnerable.

Click for large image and wider view at The Guardian.

Ukrainian demonstrators and riot police at Maidan square in December 2013.

The deal is heavily front-loaded with $10 billion being provided by the IMF over the coming year, $5 billion this week.  An additonal $7.5 billion in loans from “other international organizations”  and an “expected $15.4 billion in debt relief that Ukrainian officials hope to negotiate with bondholders“. (Quotes from Reuters.)

At the bottom of this new agreement is a bailout:  a bailout of the IMF.  GEI contributor Constantin Gurdgiev has some comments posted on his website, true economics:

Key points to the above: IMF came through just-in-time after seeing Ukraine going down to the last USD 4.5 billion in reserves and only barely enough time to pay the loans due to be repaid to… IMF. In a sense, IMF decision avoids the risk of IMF engineering the most pesky form of sovereign default known to the humanity: a default on IMF debt. Congratulations, IMF.

The hope-filled IMF statement is worth reading, but apparently, Ms. Lagarde sees Minsk 2 agreements as “largely holding for now”. Which is consistent with some reports but most certainly is at odds with the UK, US and Nato views.

Another part worth noting is IMF’s continued insistence that Ukraine’s economic collapse is just a temporary ‘balance of payments’ problem. And in line with delirium, IMF is lauding the Ukrainian authorities for allowing “the exchange rate to adjust”, as if Kiev had not thrown every last bit of meagre reserves and every possible bit of capital controls at defending the exchange rate in a futile attempt to prevent such ‘adjustment’.

That said, let us hope that Ukrainian economy is indeed provided some much needed support through this package and that the reforms, penned into the agreement, do not lead another Maidan.

Here is an annex to the press release announcing the new support package (emphasis added):

In the current difficult environment, real GDP is expected to contract by about 5½ percent in 2015. Inflation is expected to spike temporarily in response to the exchange rate depreciation and gas and heating tariff increases, before subsiding to about 27 percent at end-2015. The current account deficit should fall to about 1½ percent of GDP on the back of the exchange rate adjustment and subdued domestic demand. With sizable international assistance, gross international reserves will be gradually re-built, reaching around 3.3 month of imports coverage at end-2015. The currency devaluation and official borrowing are expected to push public sector debt up to 94 percent of GDP and external debt to 158 percent of GDP in 2015.

Ukraine’s economic prospects will improve in the medium-term. Real GDP growth is expected to rebound to 2 percent in 2016 and rise to 4 percent in the medium term. Buoyed by restored competitiveness, the current account deficit is projected to stabilize at around 1¼ percent of GDP in 2016-18. By end-2018, inflation will fall to mid-single digits and the NBU will build its international reserves to cover nearly 83 percent of short term debt. Following the debt operation and sustained fiscal adjustment, public debt is expected to decline to around 71 percent of GDP by 2020.

Econintersect would like to examine the focal acuity of the rose colored glasses worn by the author of this statement.

Written by John Lounsbury

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Sources:

IMF Executive Board Approves 4-Year US$17.5 Billion Extended Fund Facility for Ukraine, US$5 Billion for Immediate Disbursement (Press Release, 11 March 2015)

IMF aims for ‘immediate’ stabilization with latest Ukraine bailout deal (Howard Schneider, Reuters, 11 March 2015)

IMF Approves Bailout 3.0 for Ukraine (Constantin Gurdgiev, true economics, 11 March 2015)