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.
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.
Full text of this article can be found at TheHill.com.
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