You're reading: Ukraine’s economy worsens, pressure on IMF on rise

LONDON - The country's finances have worsened, raising pressure on the International Monetary Fund (IMF), The Financial Times wrote in an article on August 20. 

 “While the international focus in recent months has been on the armed strife in eastern Ukraine and the geopolitical stand-off with Moscow, another dilemma is looming large for Kyiv and its western backers: Ukraine’s economy is in tatters,” the article reads.

At best, the IMF and other Western sponsors are likely to have to step in with more loans to help the government staunch its fiscal deficit. At worst, the $17 billion IMF program signed in April could fall apart, possibly forcing the country to default and restructure its debts. “That would further deepen the economic turmoil in Ukraine and stain the reputation and credibility of the fund in the wake of its problematic Greek program,” the article reads.

This week Ukraine called for the next two IMF tranches of $2.2 billion to be paid together by the end of this year.

IMF experts earlier projected that Ukraine’s GDP in 2014 will shrink by 5% before bouncing back in 2015. Yet, last month the IMF adjusted its economic forecast to a more realistic 6.5% shrinkage for 2014.

Even this could be optimistic, says Gabriel Sterne, the head of macro research at Oxford Economics, who predicts the contraction will be at least 8%. According to his estimates, the cumulative effects of the crisis could shred Ukraine’s finances and debt-to-GDP is rising towards 87 percent by 2018 from 42 percent registered early in 2014.

Dragon Capital, a local brokerage, estimates that the loss of Crimea alone would cut Ukraine’s GDP by 3.7 percent. The eastern industrial base is even more important, as the restive provinces of Donetsk and Luhansk accounted for about 16 percent of GDP, and 25 percent of exports.

“Even if Kyiv reasserts full control of the eastern region and Russia backs off, the economic damage wrought by the conflict will be severe,” The Finance Times writes. “The trouble has destroyed much regional infrastructure in the industrial heartland, including roads, railways, utility lines and the airport at Donetsk that was upgraded when Ukraine co-hosted the Euro 2012 football championship.”

“Other complications are looming,” the article continues. “One $3 billion Ukrainian bond is owed to Russia as part of a support package for the previous pro-Moscow government of Viktor Yanukovych. Russia structured the loan as a normal eurobond with a significant tweak. If Ukraine’s debt-to-GDP goes above 60%, as is now inevitable, Moscow can demand immediate repayment. Because of cross-default provisions, Kyiv cannot renege on this bond in isolation.”

At the same time, the pace of the reforms Kyiv pledged to the IMF is extremely slow, as the government and parliament aren’t eager to use economic tools necessary to obtain a fresh portion of the Western aid.

“Of course I recognise the authorities are very busy with the war. But the situation is dramatic. The country is fighting for survival. Unfortunately so far there is not much change,” The Financial Times quotes Dmitry Sologoub, the head of research at Kyiv’s Raiffeisen Bank Aval, as saying.